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The Sage GroupMay 1, 2017 07:54 AM GMT Autodesk Autodesk Clear Path to Higher Value Emerges; Upgrading to OW Stock Rating Overweight Industry View Attractive Price Target $115.00 The path to yielding more FCF off a sticky customer base has become clearer, in our view, as the subscription model transition progresses. As investors gain more confidence in this path, multiples have room to move higher, in-line with peers. We upgrade to OW, with a $115 PT. WHAT'S CHANGED Autodesk Rating Price Target To From Equal-weight Overweight $69.00 $115.00 Driving More FCF from the Base. Autodesk's dominant positioning in their core Architectural, Engineering and Construction (AEC) business has not been a debate amongst investors, what has been debated is the company's ability to effectively yield FCF off of that base. With the path to an all subscription model now clear, we see multiple avenues for Autodesk to better yield off of that sticky customer base and reduce the volatility in earnings, a combination which should drive the multiple and stock price higher. Our revised transition model conservatively forecasts ~$5 in FCF/share by FY20 and ~$9 by FY23, applying a 20X EV/FCF multiple (a discount to peers) against this FCF and discounting back at 12.5% drives $115 price target – 30% potential upside from current levels. We would note, our bull case scenario of $11 in FY23 FCF/share, which aligns to management's long-term targets, implies a $141 NTM valuation. What Drives the Increased FCF Yield? Better Monetizing the 20+ Million Installed Base: Autodesk has detailed several initiatives intended to yield more dollars from existing users, including: higher pricing for the existing 2M maintenance customers, pushing the 2.2M active users not paying maintenance into a subscription, reducing piracy among a base of 12M users not paying Autodesk at all and enticing previously engaged users back to Autodesk with lower-priced subscription offerings. However, our forecast conservatively looks for core gross subscription adds to remain within the historical range of 700-800K per year, with Average Recurring Revenue (ARR) per subscriber increasing at a 4% 5-year CAGR. Growing the Customer Base: Autodesk's newer cloud-based offerings in areas such as collaboration, product lifecycle management, and construction bring them into new markets and enable upsell of additional MORGAN STANLEY & CO. LLC Keith Weiss, CFA EQUITY ANALYST Keith.Weiss@morganstanley.com Stan Zlotsky, CFA EQUITY ANALYST Stan.Zlotsky@morganstanley.com Hamza Fodderwala RESEARCH ASSOCIATE Hamza.Fodderwala@morganstanley.com Autodesk ( ADSK.O, ADSK US ) Software / United States of America Stock Rating Industry View Price target Shr price, close (Apr 28, 2017) Mkt cap, curr (mm) 52-Week Range +1 212 761-4149 +1 212 761-1204 +1 212 761-1083 Overweight Attractive $115.00 $90.07 $19,895 $90.94-49.82 Fiscal Year Ending Fiscal Year Ending ModelWare EPS ($) Prior ModelWare EPS ($) P/E Consensus EPS ($)§ Div yld (%) 01/17 01/18e 01/17 01/18e 01/19e 01/20e 01/19e 01/20e (1.63) (1.71) (1.87) (0.94) (0.30) 1.35 NM (0.56) 0.0 NM (0.60) 0.0 NM 1.17 0.0 1.64 - 55.0 3.14 0.0 Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare framework § = Consensus data is provided by Thomson Reuters Estimates e = Morgan Stanley Research estimates QUARTERLY MODELWARE EPS ($) Quarter Quarter Q1 Q2 Q3 Q4 2017 2017 (0.38) (0.25) (0.46) (0.55) 2018e 2018e Prior Prior (0.21) (0.22) (0.23) (0.28) 2018e 2018e Current Current (0.57) (0.51) (0.44) (0.35) 2019e 2019e Prior Prior 0.17 0.29 0.39 0.49 2019e 2019e Current Current (0.24) (0.18) (0.02) 0.15 e = Morgan Stanley Research estimates Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. 1 functionality into existing customers. Autodesk management points to >200M potential global users, while we model 2.2 million gross Cloud subscription adds over the next 5 years. More Efficiently Selling into the Base: Moving to a subscription licensing model and cloud based applications allows Autodesk to shift sales towards a more direct (and efficient) distribution model. We think the company can shift direct sales from ~20% of total in FY16 to 50%+ by FY23. Along with a more focused development effort, Autodesk aims to maintain <1% expense CAGR through FY20. Lower Earnings Volatility Should Drive the Multiple Higher. While demand trends in Autodesk's core AEC and Manufacturing markets will remain cyclical, a subscription model should significantly dampen the volatility of earnings. Through their transition, we expect >90% of Autodesk's revenue base to become recurring in nature versus ~25% when we last entered a recession. The '08/'09 recession saw Autodesk license revenues drop 39% YoY and EPS fall ~50% YoY. If gross subscription adds saw a similar 40% decline in FY20, our EPS estimate only falls by 11%. Through the last cycle, ADSK traded at an average EV/FCF multiple of 17X – our $115 price target affords them a ~20% premium to this multiple due to the lower volatility. However, this 20X multiple remains 10% below their comp group despite a similar FCF growth profile. Where Could We Be Wrong? 1) Cloud 360 and EBA subscriptions fail to gain meaningful traction; 2) the reduced expense growth envelope limits the company's ability to invest in new products, slowing the pace of innovation and gross sub adds; 3) pressure applied to convert maintenance users to new model subscriptions drives higher than expected attrition within the customer base and 4) an economic recession could reduce the level of gross subscription adds below our forecasts – however, even in a downturn similar to '02/'03, our model still suggests a value of ~$93, limiting downside risk. 2 Risk Reward Risk Reward New Products & Model Transition Should Support Higher Sustained Growth at New Products & Model Transition Should Support Higher Sustained Growth at Autodesk Autodesk $ 160 140 120 100 80 60 40 20 $90.07 $141.00 (+57%) $115.00 (+28%) $64.00 (-29%) 0 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Price Target (Apr-18) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~ADSK.O~ Price Target Price Target Derived from base case scenario $115 $141 BullBull Discount of 20x EV/FCF CY22e FCF/share of $11.26 Discount of 20x EV/FCF CY22e FCF/share of $11.26 Management Executes Transition Inline with Plan. Subscription transition occurs inline with management plan, as subscriptions reach 7.9M in FY23, while expenses grow at 3% CAGR, resulting in FCF of $11.26/share in FY23. Applying a 20x EV/FCF multiple to the rapidly growing cash generation profile and a 12.5% discount rate yields a value of $141/share. $115 BaseBase Discount of 20x EV/FCF CY22e FCF/share of $9.21 Discount of 20x EV/FCF CY22e FCF/share of $9.21 Smooth Transition to Subscriptions. Autodesk is successful in smoothly ramping to a base of 7.4M subscriptions by FY23, while expenses grow at a 3.5% CAGR, yielding FCF/share of $9.21. 20X that FCF, discounted back at 12.5%, yields a one-year value of $115/share. Our 20X FCF multiple is a premium to Autodesk's historical FCF multiple, but below peer average of 22x. $64 BearBear Discount of 17x EV/FCF CY22e FCF/share of $6.01 Discount of 17x EV/FCF CY22e FCF/share of $6.01 Prolonged Macro Downturn Delays Transition. In our bear case, we include the risk of prolonged recession around the half-way point of the transition with modest recovery thereafter, which pushes out the FY20 goal posts by three years as subscription acquisition CAGR slows. End result would be $6.01/share in FY23 and a 17x EV/FCF with 12.5% discount rate, arriving at a $64 value. Investment Thesis Accelerated shift to recurring revenues in ADSK’s business model transition is likely to fuel optimism in the long-term story as investors focus on billings as a gauge of business momentum, in light of possible near- term revenue declines. Cloud 360 offerings have been gaining feature maturity and are starting to see wider adoption. Customers realize product value of subscription, which drives model transition and forward billings/ARR CAGRs. Success of ADSK’s desktop subscription adoption strategy will be important to increasing ARR and sustaining long-term growth. At 20X our FY23 FCF/share and discount rate of 12.5%, we arrive at our one-year base case PT of $115/share. Our 20X FCF multiple is a slight premium vs. ADSK's 17x historical average, but still at a discount to peers like ADBE at 22x. We feel that a slight historical premium is warranted considering Autodesk's higher value recurring revenue streams post transition. Key Value Drivers Business model transition. Broadening product line - specifically into vertical-focused products and 3D. Strong exposure to emerging markets. Leveraging direct distribution channel. Risks to Achieving Price Target Ability of management team to navigate model transition and drive the necessary conversion of customer base to recurring. High correlation to the macro environment. High dependence on construction and manufacturing industries, with competitive pressure in the latter. 3 Executive Summary Any Way You Slice It, We See a Positive Risk-Reward Skew. After restructuring our model and digging into the updated metrics and path of the subscription transition, we take a more bullish view on Autodesk heading into FY18. Our analysis indicates that even if management's long-term goals prove too aggressive, there should still be upside to ADSK's stock. Further, at current levels investors appear to be already pricing in a recession within the next 5 years. We are encouraged by the levers that are fully within management's control, and could drive this model transition – maintenance price increases, expense structure focus and capital returns – smoothing out the path through FY20 and beyond. We have revised our subscription transition model to better align with Autodesk's evolving strategy and to enable investors to assess potential outcomes of various scenarios. An accelerated ramp to recurring subscriptions along with improving profitability drives our $115 price target and implies ~30% upside from current levels. Given the macro sensitivity of Autodesk's business, we continue to acknowledge the likelihood of adoption disruptions between today and FY23. Therefore, we extend our scenario analysis to introduce the risk of a mild recession in the next several years, which pushes out management's FY20 goal posts by roughly two years. Applying a "macro adjusted" scenario to our base case numbers (which are already below management's long-term targets), we arrive at $93/share - still slightly above current levels. While the potential for a prolonged macro downturn drives our Bear Case $64 and ~30% potential downside from current levels, we believe this sets up favorably against ~60% upside under our Bull Case value of $141, which implies achievement of management's long-term targets. Given the attractive risk-reward skew, we upgrade our rating from Equal-weight to Overweight with $115 PT. What's Changed Our View? Increased Confidence in Subscription Adds Driven By Cloud Adoption: We see Autodesk's push to the Cloud democratizing their product set and bringing them into markets that could previously not afford them (reducing piracy) or reengaging with inactive users. Our model points to gross sub adds of 870K in FY18 ramping to 991K in FY19 and 1.1M in FY20. However, excluding cloud-based subscriptions, we see core gross desktop subscription adds between 700-800K per year through FY20, inline with the historical average range. (Exhibit 2) Ability to Better Monetize the Base: In order to accelerate its shift from maintenance to recurring subscriptions, we've seen management present further levers in its ability to monetize the base with the most direct impact coming from expected price increases within the maintenance base from FY18 thru FY20. Pushing the maintenance base to a higher price point likely suggests pricing power above management's targeted 3% ARPS CAGR from FY16-FY20, We could also see potential upside to our ARPS estimates, as the company enables a growing share of its business to be driven directly (allowing Autodesk to keep more of the end user revenue). 4 Attractively Valued Against the Peer Group: An ongoing shift to recurring revenue is likely to narrow the valuation gap vs. ADSK's peer group average at ~22x EV/CY18 FCF (Exhibit 8). Our base case $115 PT implies a 20x EV/FCF multiple, which could prove conservative as the subscription transition continues ahead of management plan. Assessing the Scenarios: Base Case ($115/share) = A Smooth Transition, But Below Management Plan: Our base case estimates imply a successful transition with 5.2M total subscriptions by FY20, slightly below management's targeted 5.4M, and ~7.4M subscriptions by FY23. With overall expenses largely flat through FY20, we expect expense growth to pick up with ~8% CAGR from FY20-FY23, resulting in FCF/share of $4.94 in FY20 and $9.21 in FY23, below management's targeted FCF/share of $6+ in FY20 and $11 in FY23. At 20X our FY23 FCF/share and discount rate of 12.5%, we arrive at our one-year base case PT of $115/share and ~30% potential upside. Our 20X FCF multiple is a slight premium vs. ADSK's 17x historical average, but still at a discount to peer average at 22x (Exhibit 8). We believe that a premium is warranted considering Autodesk's move to higher value and more durable recurring revenue streams. Exhibit 1: Our Base Case Looks for 5.2M Subscriptions in FY20 and $4.93 in FCF per Share in FY20 Base Case Price Target: $115 Subscription Base (M) Gross Subscription Adds (M) FY22e FY19e FY21e FY20e FY16 FY17 2,584 651 7% -5% 9% $2,866 $2,223 4.4% 10.6% $1.49 230 3,113 760 17% -3% 17% $2,299 $2,157 -3.0% -6.2% $0.42 224 FY18e 3,742 870 15% 4% 25% $2,214 $2,157 0.0% -6.5% $0.39 222 4,435 991 14% 8% 28% $2,790 $2,161 0.2% 11.9% $2.55 217 5,204 1,100 11% 9% 28% $3,532 $2,226 3.0% 27.4% $4.94 209 5,985 1,150 5% 1% 16% $4,070 $2,404 8.0% 35.0% $6.71 203 6,708 1,173 2% 0% 12% $4,560 $2,620 9.0% 38.0% $7.93 201 FY23e 7,362 1,185 1% 1% 11% $5,053 $2,830 8.0% 40.0% $9.21 200 YoY Growth ARPS YoY Growth ARR YoY Growth Billings (M) Total Expense (M) YoY Growth Operating Margin FCF/Share Share Count (M) Source: Company Data, Morgan Stanley Research Estimates Bull Case ($141/share) = Management Executes Transition Inline with Plan. Our bull case scenario assumes the subscription transition plays out inline with management expectations outlined during 2016 Investor Day. This implies a 20% subscription CAGR from FY16-FY20, reaching a base of 5.4M in FY20 and 7.9M in FY23. A accelerated transition to recurring subscriptions combined with a relatively flat expense base drives further upside to operating leverage, resulting in 33% op margin in FY20 and 44% in FY23. FCF per share comes inline with management targets at $6.11 in FY20 and $11.26 in FY23. Applying a 20x EV/FCF multiple (above historical avg but below peer ADBE at 22x) to $11.26 FY23 FCF/share yields our bull case PT of $141 and ~60% potential upside from current levels. Exhibit 2: Our Bull Case Assumes Management Executes Transition Inline with Plan. Resulting in 5.4M Subscriptions in FY20 and $11+ in FCF/Share in FY23 Bull Case Price Target: $141 Subscription Base (M) Gross Subscription Adds (M) FY19e FY22e FY20e FY21e FY17 FY16 2,584 651 7% -5% 9% $2,866 $2,223 4.4% 10.6% $1.49 230 3,113 760 17% -3% 17% $2,299 $2,157 -3.0% -6.2% $0.42 224 FY18e 3,781 889 17% 4% 26% $2,232 $2,135 -1.0% -5.2% $0.58 221 4,570 1,057 19% 8% 30% $2,861 $2,118 -0.8% 14.8% $3.05 215 5,450 1,227 16% 9% 30% $3,680 $2,118 0.0% 33.0% $6.11 204 6,336 1,282 5% 0% 17% $4,271 $2,309 9.0% 40.2% $8.25 196 7,154 1,307 2% 0% 13% $4,812 $2,562 11.0% 42.3% $9.73 191 FY23e 7,895 1,321 1% 1% 12% $5,356 $2,819 10.0% 43.5% $11.26 187 YoY Growth ARPS YoY Growth ARR YoY Growth Billings (M) Total Expense (M) YoY Growth Operating Margin FCF/Share Share Count (M) Source: Company Data, Morgan Stanley Research Estimates 5 Bear Case ($64/share) = Prolonged Economic Downturn With Modest Recovery Thereafter: In our bear case, we include the risk of potential prolonged recession, which pushes out FY20 targets by three years as gross subscription adds decline by 20% in FY19 with a modest recovery to 11% growth the year after. This drives a 15% subscription CAGR thru FY20 and 20% ARR growth during the same period. While management keeps expenses flat thru FY20, our bear case FCF/share comes to $3.18 in FY20 and $6.01 in FY23 (3 years behind management plan). Applying ADSK's historical average 17x EV/FCF multiple on FY23 FCF/share and 12.5% discount rate, we arrive at our bear case $64 PT. Exhibit 3: Our Bear Case Assumes a Prolonged Economic Recession Beginning in FY19 and Pushes Out Subscription and FCF Goalposts By Roughly 3 Years Bear Case Price Target: $64 Subscription Base (M) Gross Subscription Adds (M) FY19e FY22e FY21e FY20e FY17 FY16 YoY Growth ARPS YoY Growth ARR YoY Growth Billings (M) Total Expense (M) YoY Growth Operating Margin FCF/Share Share Count (M) Source: Company Data, Morgan Stanley Research Estimates 2,584 651 7% -5% 9% $2,866 $2,223 4.4% 10.6% $1.49 230 3,113 760 17% -3% 17% $2,299 $2,157 -3.0% -6.2% $0.42 224 FY18e 3,695 832 10% 4% 23% $2,190 $2,178 1.0% -7.9% $0.16 222 4,050 665 -20% 9% 19% $2,587 $2,204 1.2% 7.2% $1.48 219 4,500 739 11% 9% 21% $3,109 $2,226 1.0% 20.4% $3.18 215 4,979 772 5% 2% 13% $3,495 $2,338 5.0% 27.6% $4.38 212 5,426 787 2% 1% 10% $3,834 $2,478 6.0% 31.3% $5.16 213 FY23e 5,832 795 1% 2% 9% $4,181 $2,602 5.0% 34.1% $6.01 214 Realizing the Value - What We're Looking For. Heading into FY18, we expect a faster subscription model transition than in prior years with likely conservative targets for net adds and ARR growth. We expect the primary near-term catalyst to be expected maintenance price increases, which take effect beginning in June, and drive accelerated adoption of new model subscriptions as customers take advantage of loyalty subscription discounts. With higher pricing on the maintenance base, we expect ARPS to trend upwards and return to positive YoY growth in 2HFY18. Lastly, with the resignation of CEO Carl Bass in February, we expect a relatively smooth management transition with the new CEO likely sourced from within the company on or before the June shareholder meeting. 6 Macro Sensitivity Analysis What Happens in a Mild Recession? In our "macro adjusted" scenario, we include the risk of a mild recession in FY19 (CY18), which pushes out management's FY20 goal posts by two years. Historically, Autodesk faced economic recessions in FY03 and FY10, with the former being a less severe downturn and the more likely scenario, in our view. In FY03, license revenues declined 17% YoY, while management cut expenses by 3% and in the following year license revenues rebounded by 12%. In our "macro adjusted" model, our forecasts for FY19 and FY20 assume a mild recession similar to the one Autodesk saw in FY03, as gross subscription adds decline by 20% in FY19 before rebounding to 40% growth in the following year. This results in our FY20 FCF/share moving to $3.95 from $4.94 in our base case (mgmt. target at $6+/share) and FY23 FCF/share to $7.40 from $9.21 (mgmt. target at $11/share). Applying a 20x EV/FCF multiple to FCF/share of $7.40 in FY23 and 12.5% discount rate, we arrive at $93/share under mild recession, which is still ~4% above today's levels even with FY23 FCF/share estimate being 33% below management's target. Exhibit 4: In Case of a Mild Recession in FY19 (CY18) We Could Still See Upside as Model Transition Unfolds Base Case FY23 Model Mild Recession Scenario Bull Case FY23 Model Bear Case FY23 Model FY23 Subscription Base (M) FY23 FCF/Share FY23 Revenue ($M) FY23 % Recurring Revenue FY23 OM% margin FCF FY16-23 CAGR EV/FCF Multiple Implied NTM PT Upside / (Downside) % Source: Morgan Stanley research 7,362 $9.21 $4,720 93% 40% 14% 20x $115 29% 6,725 $7.40 $4,375 93% 35% 12% 20x $93 4% 7,895 $11.26 $4,988 94% 44% 16% 20x $141 58% 5,832 $6.01 $3,951 92% 34% 9% 17x $64 (28%) Lower Earnings Volatility from Subscription One of the main benefits of Autodesk's transition to a subscription model is lower earnings volatility - which is also an important factor why recurring revenue models carry premium valuation vs traditional license/maintenance (we dig further into this in the next section). Using the mild recession scenario outlined above, we see a meaningful difference in the EPS growth profile under the subscription model vs the legacy Autodesk. In a similar exercise for a more severe macro shock, during the '08/'09 recession Autodesk's license revenues dropped 39% YoY and EPS fell ~50% YoY. If gross subscription adds saw a similar 40% decline in FY20 (as the subscription transition enters a more mature phase), our EPS estimate only falls by 11%. 7 Exhibit 5: EPS Volatility is Reduced in a Subscription Model - One of the Key Benefits of a Recurring Business YoY Change: License FY03 FY10 FY19e Mild Recession FY20e Severe Recession Source: Company Data, Morgan Stanley Research -17% -39% EPS -62% -49% Subscriptions EPS Delta vs No Recession -20% -40% -18% -11% 8 What Do We Pay for It? Valuation: Our ADSK transition valuation is based on discounting FY23 FCF/share to a base case 12-month target. Our base case is based on 20x EV/FCF, a slight premium versus the 17.2x average that Autodesk traded during the last mid-cycle expansion period in U.S. (2003-07), see Exhibit 6 below. We feel that a slight premium is warranted, considering the higher value of recurring revenue streams post transition versus the less durable perpetual license revenues that historically made up the bulk of Autodesk revenues. We would also note, 20x represents a slight discount to the peer group average at ~22x EV/CY18 FCF (Exhibit 8). In our bull case, we apply the same 20x EV/FCF multiple to ADSK, but assume management achieves their targeted FY23 FCF/share of $11, yielding our bull case price target of $141 and ~60% upside from current levels. Exhibit 6: During the Most Recent Mid-Cycle Economic Expansion (2003-2007), ADSK Traded at an Average 17.2x EV/NTM FCF ADSK Mid-Cycle EV/ NTM FCF, CY03-CY07 30x 25x 20x 15x 10x 5x 0x Source: Company Data, Morgan Stanley Research, Thomson Reuters ADSK Average EV/NTM FCF, CY03-CY07 = 17.2x 9 Exhibit 7: ADSK Peers Traded at an 15x EV/NTM FCF During the Same Mid-Cycle Expansion Period, With the High-End Peers (ADBE) at 20x and Low-End (CDNS) at 10x 30x 25x 20x 15x 10x 5x 0x Peer Group Mid-Cycle EV/ NTM FCF, CY03-CY07 High-End Avg EV/NTM FCF (ADBE) = 20.1x Peer Average EV/NTM FCF, CY03-CY07 = 15.3x Low-End Avg EV/NTM FCF (CDNS) = 9.7x Source: Company Data, Morgan Stanley Research, Thomson Reuters ADSK ADBE CDNS DSY PTC SNPS Exhibit 8: Our Applied 20x FCF Multiple Remains at a Discount to Peer Average at ~22x Based on EV/CY18 FCF Company Based on Calendar Year-End Adobe Dassault Synopsys Cadence Systems ANSYS Average Median Price 4/28/2017 Shares Out. Market Cap. Ent. Value $133.38 $81.93 $73.66 $32.04 $110.15 500.9 270.4 150.5 278.8 87.8 $66,805 $22,150 $11,086 $8,932 $9,672 $64,039 $20,720 $10,439 $9,078 $8,850 FCF 2018E $2,777 $832 $616 $432 $395 2017E $2,347 $731 $519 $401 $368 % FCF CAGR 2019E 16-'18E 17-'19E 2017E EV/FCF 2018E 2019E EV/FCF/Growth 2018E 2019E Operating Margin 2017E 2018E 2019E $3,405 $905 $677 $480 $494 17% 18% 4% 8% 8% 11% 8% 20% 11% 14% 9% 16% 14% 14% 27.3x 28.4x 20.1x 22.6x 24.0x 24.5x 24.0x 23.1x 24.9x 17.0x 21.0x 22.4x 21.7x 22.4x 18.8x 22.9x 15.4x 18.9x 17.9x 18.8x 18.8x 1.38x 1.42x 4.37x 2.78x 2.86x 2.56x 2.78x 0.92x 2.03x 1.09x 2.03x 1.13x 1.44x 1.13x -4% -3% -13% -9% 8% 8% -3% -3% -16% -15% 1% -1% 9% 0% -9% -5.9% -4.3% 0.1% -4.4% -3.5% 0.2% Source: Company Data, Morgan Stanley Research, Thomson Reuters 10 Model Restructuring Our Base Case Estimates Remain Below Management Targets: After Autodesk's Analyst Day and additional detail provided on converting the existing maintenance base to subscription, we took time to dig into the updated metrics and drivers through FY20 and beyond. While company's long-term targets haven't changed meaningfully over the past year, our analysis indicated that even if management's goals are not achieved, there could still be upside to ADSK's stock. Specifically, we are encouraged by the levers that could drive this model transition that are fully within management's control – maintenance price increases, expense structure focus and capital returns – making the path to $6 FCF per share in FY20 appear smoother. Our base case estimates point to FCF per share of $4.94 in FY20 and $9.21 in FY23, below management's targeted $6 per share in FY20 and $11 in FY23. The delta between our estimates vs. management is primarily driven by assumptions around operating margin, number of subscriptions and total revenue/billings by FY20 (see Exhibit 9). Below we dig into the details of our revised model and underlying assumptions: 1) Building the Subscription Base; 2) Pricing / ARPS (Average Revenue Per Subscription) and 3) Operating Margin and FCF. Exhibit 9: Our Base Case Estimates Remain Below Management's FY20 Targets FY16-20 ARR CAGR FY16-20 ARPS CAGR FY16-20 Subscriptions CAGR FY20 FCF (M) FY20 FCF/Share FY20 Revenue (M) FY20 % Recurring Revenue FY20 OM% margin Source: Morgan Stanley Research, Company Data MS Base Case FY20 Model 24% 4% 19% $1,033 $4.94 $3,065 88% 27% Mgmt Goals by FY20 24.0% 3% 20% $1,400 $6.00+ $3,500 >90% 32-34% 1. Building the Subscription Base: Gross Subscription Adds: Our model starts with gross adds of new subscriptions to the installed base. Historically, Autodesk has added between 500-800K seats per year on a gross basis, but this was prior to the ramp in adoption of their Cloud360 offerings. As the current pool of 2.2M of active maintenance subscribers is converted, we see potential for attach of additional Cloud subscriptions, such as Fusion 360 and BIM 360 alongside the desktop-based software. In addition, we see Autodesk's push to the Cloud democratizing these products and bringing them into markets that could previously not afford them (reducing piracy) or brand new markets (millions of workers in construction and manufacturing). We model gross sub adds of 870K in FY18, 991K in FY19 and 1.1M in FY20. This is driven by Cloud and EBA (enterprise business agreement) subscriptions ramping from 6% of the installed base in FY17 to approximately 25% of the subscription base by FY20 (15% Cloud and 10% EBAs). Excluding cloud-based subscriptions, we see gross sub adds between 700-800K per year through FY20, which is at the high-end of the historical average range. 11 Exhibit 10: While Gross Adds Ramp to >1M in FY20-FY23, Non-Cloud Gross Subscription Adds Remain Within Historical Ranges Gross Additions (Subscriptions in K) 1,400 1,200 1,000 800 600 400 200 - 13 638 596 53 130 248 385 437 469 486 706 739 744 715 713 704 699 FY15 FY16 FY17 FY18e FY19e FY20e FY21e FY22e FY23e Gross Sub Adds (ex. Cloud) Cloud Subs Source: Morgan Stanley Research Estimates Exhibit 11: We Estimate Cloud Subs to Ramp from 3% of the Base in FY16 to 15% in FY20 and ~24% in FY23, While Maintenance Subs Are Close to Zero By FY20 % of Subscription Base Desktop Subs Maintenance Subs Cloud Subs EBA (Enterprise Subs) FY17 (Current) 27% 67% 3% 3% FY20 74% 1% 15% 10% FY23 65% 0% 24% 11% Source: Morgan Stanley Research Estimates, Company Data Conversions Among the Base: To accelerate the shift from maintenance to new model subscriptions, management announced plans to roll out higher pricing on the legacy maintenance base, with increases planned to take effect beginning in FY18 thru FY20 (Exhibit 13). Maintenance customers will have the option to either bear the increased maintenance costs thru the three-year cycle or switch earlier to a subscription at a lower locked-in discounted loyalty rate for three years. This is expected to drive maintenance subscriptions close to zero by FY20, as conversions begin to ramp in the 2HFY18. Among the ~2M maintenance customers ending FY17, we expect 30-35% to convert to desktop subscriptions in FY18 and FY19, to take advantage of early loyalty discounts and avoid compounding maintenance price increases, while 20-25% convert in FY20 and the remaining ~10% are lost due to attrition. Net, we model ~19.1% CAGR in total subscriptions from FY16-FY20, which yields ~5.2M subscriptions in FY20 vs. management guidance of 20% CAGR and 5.4M subscriptions. Our forecast assumes that the majority of the estimated 2.2M active non-subscribers adopt desktop subscription and adjacent cloud-based offerings, adding to the base of ~3.1M subscriptions ending FY17. We expect slower subscription growth at ~12% CAGR from FY20-FY23 with total subscriptions reaching ~7.4M by FY23, as loyalty discounts on desktop subscription roll off and the maintenance base fully converts to subscription. Exhibit 12: Net New Subscriptions Become More Meaningful to the Overall Base in FY20 and Beyond, as Maintenance Conversions Have Fully Taken Place Subscriptions in 000s Existing / Converted Subscription Base % of Total Net New Subscriptions % of Total Total Subscription Base FY16 2,162 84% 423 16% 2,584 FY17 2,117 68% 996 32% 3,113 FY18e 2,012 54% 1,731 46% 3,742 FY19e 1,944 44% 2,491 56% 4,435 FY20e 1,893 36% 3,311 64% 5,204 FY21e 1,889 32% 4,096 68% 5,985 FY22e 1,889 28% 4,818 72% 6,708 FY23e 1,889 26% 5,473 74% 7,362 Source: Morgan Stanley Research Estimates, Company Data 12 2. Pricing / ARPS (Average Revenue Per Subscription) Driving Higher Pricing on the Maintenance Base: Beginning in June 2017, maintenance customers will have the option to trade in their perpetual license for product subscription at a 60% loyalty discount vs cost of a new product sub, which is locked in for three years. This discount will decrease by 5% in the following two years, which incentivizes an earlier shift to subscription. Assuming the customer remains on traditional maintenance, a 5% pricing increase applied in FY18 steps up to 10% in FY19 and 20% in FY20. While management reiterated their targeted 3% ARPS CAGR thru FY20 at Analyst Day, we believe pushing the maintenance base to a higher price point could be a nice tailwind to this metric. We model 4.2% CAGR in ARPS from FY16-FY20 and 2.7% CAGR through FY23, which is above management's targeted 3% APRS CAGR from FY16-FY20. We expect ARPS to decline thru 1HFY18, but trend up in 2HFY18 as maintenance price increases take effect in July. We could see potential upside to our ARPS estimates, as the company enables a growing share of its business to be driven directly (allowing Autodesk to keep more of the end user revenue). Net, our model looks for ARR CAGR of 24% from FY16-FY20 and 19% through FY23, inline with management's targeted ARR CAGR from FY16-FY20. Exhibit 13: Annual Maintenance Price Increases Take Effect in June FY18 to Facilitate Shift to New Model Subscriptions Source: Autodesk 2016 Investor Day Presentation 3. Bringing it to the Bottom Line: Operating Margin & FCF Operating Margin: Management has demonstrated a sharper focus on cost control over the past year with commitment to keep expenses flat in FY18 and FY19. However, as we move beyond the transition in FY20, we believe lack of incremental investment could hamper the company's ability to drive subscription growth and expand within new target markets. During its 2016 Analyst Day, management also spoke of significant investments in the business to 1) drive more value for subscription customers – including more R&D spend and broader customer support capabilities and 2) enable a growing share of business to be driven directly. Our model looks for operating margin of 27.4% in FY20 and 40% by FY23. Our FY20 estimate is inline with Autodesk's peak op margins in FY08 but below management's FY20 guidance of 32-34%, given the company's plan to 13 increase investments in direct sales and support capabilities without discretely identifying cost cuts to fund these investment. Free Cash Flow: On Analyst Day, CFO Scott Herren bridged the FY20 target for net income ($800M with 32-34% op margins) to the targeted $1.4B in FCF. One of the main drivers of the bridge was a $600M YoY working capital benefit from deferred revenue, which remains well above our current estimate of $467M. Absent changes in invoice duration, the increase in deferred revenue should be a function of billings growth in the model – a $600M deferred revenue increase YoY represents 15% of billings and implies ~40% billings growth in FY20, based on our estimates. For reference, high-growth software names including CRM, WDAY and NOW have seen deferred revenue increases at an average ~16% of total billings over the past three years, while sustaining over 40% billings growth on average. Our estimate for YoY deferred revenue increase of +$467M implies 27% billings growth in FY20 and accounts for 13% of billings during the year. Net, we model FCF of $1.03B in FY20 and $1.84B in FY23, below management's targeted FCF of $1.4B in FY20 and $2.4B in FY23. Exhibit 14: Our FY20 Net Income to FCF Brige Implies A Less Meaningful Ramp In Deferred Revenue vs. Management's Targeted +$600M Taxes, depreciation & other Change in Deferred Revenue Change in A/R CapEx $467 ($139) ($72) $175 $603 MS FY20 Net Income Source: Morgan Stanley Research $1,033 MS FY20 FCF Share Count: With unrestricted access to ~$1.7B in cash formerly held overseas and ongoing focus on capital return to shareholders, we see potential for accelerated share repurchases through FY20. Coupled with our estimate for >$1.6B in cumulative FCF generated from FY18-FY20, we see plenty of room for an accelerated share buyback to more than offset 5-6M of annual share dilution from management stock comp plans. Assuming the price at which shares are repurchased increases by the cost of capital (12.5%) and 80% of future FCF generation redeployed to shareholders, we estimate an average ~2% net decline in share count annually from 224M in FY17 to 209M in FY20, well below the 225M basic shares assumed in management's targeted $6+ FCF/share. 14 Exhibit 15: ADSK: Long Term Model Transition Changes New Subs Adds Old Subs Adds % Change Guidance New Billings YoY Growth Old Billings YoY Growth % Change ARR YoY Growth Old ARR YoY Growth % Change Guidance ARPS YoY Growth Old ARPS YoY Growth % Change New Total Revenue YoY Growth Old Total Revenue YoY Growth % Change Guidance New Op Margin Old Op Margin % Change Guidance New FCF YoY Growth Old FCF YoY Growth % Change New FCF/share Old FCF/share % Change FY17 529 529 0.0% $2,299 -19.8% $2,299 -19.8% 0.0% $1,604 17% $1,604 16.5% 0.0% $515 -3.3% $515 -3.3% 0.0% $2,031 -18.4% $2,031 -18.4% 0.0% -6.2% -6.2% 0.0% FY18E 630 595 5.9% 600-650 $2,214 -3.7% $2,407 9.1% -8.0% $2,001 25% $2,110 38.1% -5.2% 24-26% YoY $535 3.8% $571 15.9% -6.4% $2,025 -0.3% $2,145 6.2% -5.6% 2000-2050 -6.5% -1.1% -5.4% (8)-(5)% FY19E 692 683 1.3% FY20E 770 789 -2.4% FY21E 781 676 FY22E 723 645 15.4% 12.1% FY23E 655 $2,790 26.0% $2,986 24% -6.5% $2,556 28% $2,645 25% -3.4% $576 7.8% $604 5.8% -4.6% $2,452 21.1% $2,745 28% -10.6% $3,532 26.6% $3,612 21% -2.2% $3,275 28% $3,222 22% 1.6% $629 9.2% $624 3.2% 0.9% $3,065 25.0% $3,332 21% -8.0% $4,070 15.2% $4,123 14% -1.3% $3,792 16% $3,676 14% 3.2% $634 0.7% $629 0.9% 0.7% $3,699 20.7% $3,896 17% -5.0% $4,560 12.0% $4,558 11% 0% $4,265 12% $4,088 11% 4.3% $636 0.3% $630 0.2% 0.9% $4,229 14.3% $4,351 12% -2.8% $5,053 10.8% $4,740 11% $644 1.3% $4,720 11.6% 11.9% 21.1% -9.2% 38.0% 35.0% 27.4% 34.3% 43.3% 48.7% -8.2% -10.7% -6.9% 40.0% $86 -9% $291 $94 -72% $94 $1,598 17% $1,905 -72.5% 113.1% 133.1% 77.7% 30.9% 20.8% -70.4% -18.5% -14.2% -13.6% -16.1% 0.0% $1,362 32% $1,576 $1,033 87% $1,204 $553 542% $678 $1,840 15% $0.42 $0.42 0.0% $2.55 $0.39 $3.03 $1.30 -70.1% -15.9% $4.94 $5.39 -8.4% $6.71 $7.06 -5.0% $7.93 $8.53 -7.0% $9.21 Source: Company data, Morgan Stanley Research 15 Financials Exhibit 16: Income Statement ($ Millions, Except Per-Share Data) FY13 FY14 FY15 FY16 4/16 7/16 10/16 1/17 FY17 4/17e 7/17e 10/17e 1/18e FY18e FY19e FY20e 2017 2018e License & Other Y.Y Q.Q Subscription Y.Y Q.Q Total Revenue Y.Y Q.Q Cost of Revenue License & Other Revenues License Margin Subscription Subscription Margin Total Cost of Revenues Gross Income Gross Margin Operating Expenses S&M R&D G&A Stock Option Expense (FV) Special Charges 1364 0.5% - 948 10.5% - 2313 4.4% - 153.3 89% 40.4 96% 193.7 2118.9 92% 812 539 182 156 124 1341 1227 1255 6.9% -8.5% -8.0% - - - 1277 1171 1019 9.1% 7.5% 14.9% - - - 2274 2504 2512 -1.7% 10.5% -0.3% - - - 156 170 186 229 741 -43.1% -21.3% -39.4% -52.5% -39.6% - -43.5% 23.0% -25.6% -8.1% 1290 323 1.0% 0.9% - 0.9% 2031 479 -20.8% -9.6% -18.4% -26.1% -18.9% - 7.6% -11.1% -2.2% -21.0% 320 322 326 1.9% 0.2% 0.9% 2.0% -1.2% -0.8% 490 551 512 134.8 89% 89.3 91% 224.1 2049.8 90% 155.3 88% 124.7 89% 280.0 2232.2 89% 162.4 87% 147.5 88% 309.9 2194.2 88% 784 567 188 131 94 926 669 255 166 96 930 720 264 197 82 40 78% 38 88% 78.1 433.8 85% 219 175 67 57 71 35 85% 36 89% 71.0 479.7 87% 220 173 61 54 35 34 80% 33 90% 67.6 422.0 86% 231 172 62 57 20 35 78% 36 89% 71.1 407.7 85% 259 166 65 59 26 144.2 81% 143.6 89% 287.8 1743.2 86% 928 685 256 227 152 149 160 -20.0% -30.0% 7.6% -4.8% 330 322 2.5% -1.2% 2.4% -0.1% 490 471 -8.0% -11.0% 4.1% -1.7% 30 80% 30 91% 60.0 410.9 87% 244 168 62 64 20 32 80% 31 91% 63.0 427.1 87% 245 169 59 64 11 950 184 170 1384 663 0.0% 18.0% -10.5% 43.2% 45.8% - 8.4% 6.3% - - 1680 369 341 1502 1362 5.6% 10.3% 11.8% 6.7% 14.4% - - 8.2% 3.3% 511 3065 2025 553 4.3% 15.6% -0.3% 21.1% 25.0% - 4.3% - 2452 8.3% - - 34 80% 32 91% 66.0 444.9 87% 241 170 59 64 9 37 80% 34 91% 71.5 481.8 87% 252 172 56 64 9 134.4 80% 126.0 91% 260.5 1764.6 87% 173.5 82% 109.0 93% 282.5 2169.7 88% 225.2 84% 121.9 93% 347.1 2717.7 89% 981 679 236 257 50 929 710 239 262 37 971 657 248 262 37 Excluding Stock Option Expense and Special Charges Total Operating Expenses 1532.3 1539.3 1849.8 1913.5 460.8 453.8 464.9 489.2 1868.7 473.3 473.4 470.0 479.6 1896.3 1878.7 1875.8 Total Expense Y.Y. Q.Q. Operating income Operating margin incremental margin Interest and Other Income Income Before Taxes Income Tax Expense Tax Rate Net Income EPS (Diluted) - Operating Y.Y EPS (Basic) - Operating 2223 4.4% 1763 2% 1726 3% 2130 21% -25% 510.5 280.7 382.4 586.6 25.4% 22.5% 15.2% 11.2% 54.8% 196.6% -53.8% 1256% -26.5 255.4 61.3 24% 194.1 9.2 595.8 145.8 24% 450.0 -14.4 368.0 95.7 26% 272.3 -3.1 507.4 121.8 24% 385.6 539 -2% 533 -2% 1.5% -42.9 560 2157 -4% -3.0% 5.2% -81.5 525 -4% -7.4% -2.6% 25.9 -27.0 -125.5 -5.3% 4.7% -8.8% -17.0% -6.2% 90.0% 66.8% 88.9% 87.2% 85.9% -24.5 -150.0 -39.0 26% -111.0 -0.8 -82.3 -21.4 26% -60.9 -4.1 -31.1 -8.1 26% -23.0 -9.8 -52.7 -13.7 26% -39.0 -9.8 16.1 4.2 26% 11.9 1.94 12% 1.99 1.68 -13% 1.72 1.17 -30% 1.20 0.84 -28% 0.86 -0.10 -134% -0.10 -0.18 0.05 -0.50 -72% -221% -232% -159% -0.50 0.05 -0.28 -0.28 -0.18 -131.7 536 2% 2223 2.9% 2161 0.2% 2157 0.0% 551 -2% 2.8% 2.2 533 -1% -4.8% -62.4 536 1% 0.6% -0.1% 841.9 -46.3 -25.2 -13.3% -9.5% -4.9% 0.4% -6.5% 11.9% 27.5% 86.2% 119.1% 83.3% 112.4% 104% 99.0% 89.9% -25.0 -10.9 816.9 -8.7 212.4 -2.3 26% 26% 604.5 -6.4 -43.7 -175.4 -45.6 26% -129.8 -25.0 266.0 69.2 26% 196.9 -10.9 -73.3 -19.1 26% -54.2 -10.9 -57.3 -14.9 26% -42.4 -10.9 -36.1 -9.4 26% -26.7 291.1 -0.25 -0.19 141% -463% -0.19 -0.25 -0.12 -30% -0.12 -0.03 -89% -0.03 -0.59 2.89 0.91 19% -254% 216% 2.87 0.91 -0.59 Source: Company data, Morgan Stanley Research Exhibit 17: Balance Sheet ($ Millions, Except Per-Share Data) 2017 FY13 FY14 FY15 FY16 4/16 7/16 10/16 1/17 FY17 4/17e 7/17e 10/17e Assets Cash and Equivalents Marketable Securities Accounts Receivable, Net Inventories Deferred Income Taxes Income Taxes Receivable Prepaid Expenses and Other Current Assets Total Current Assets Marketable Securities PP&E Purchased Tech and Capitalized SW, Net Goodwill Deferred Income Taxes, Net Other Total Assets Liabilities Accounts Payable Accrued Compensation Accrued Income Taxes Deferred Revenue Litigation Accrual Borrowings Under LOC Other Accrued Liabilities Total Current Liabilities Deferred Income Taxes Deferred Revenues Litigation Accrual Other Liabilities Long-Term Notes Payable Minority Interest Total Liabilities Common Stock & Additional Paid In Capital Accumulated and Other Comprehensive Loss Deferred Compensation Retained Earnings Total Stockholder's Equity 1612 342 495 0 42 0 61 2552 411 115 76 872 123 160 4308 94 190 14 647 0 0 99 1044 0 188 0 288 746 0 2265 1450 -6 0 599 2043 1853 414 424 0 57 0 87 2835 277 130 63 1010 131 148 4595 85 181 24 696 0 0 85 1072 0 204 0 311 746 0 2334 1637 -1 0 625 2262 1411 616 459 0 85 0 101 2671 273 159 87 1456 100 168 4914 101 253 28 901 0 0 117 1400 0 256 0 291 747 0 2695 1773 -53 0 499 2219 1353 898 654 0 0 0 89 2993 532 169 71 1535 9 206 5515 120 243 29 1069 0 0 130 1591 63 450 0 299 1488 0 3891 1822 -121 0 -76 1624 1223 1044 256 0 0 0 105 2629 539 175 70 1581 10 203 5206 107 133 25 1092 0 0 118 1475 78 432 0 297 1488 0 3770 1866 -122 0 -308 1436 1467 598 307 0 0 0 115 2487 506 173 67 1597 10 209 5047 110 160 54 1107 0 0 128 1560 67 413 0 187 1489 0 3716 1857 -130 0 -396 1332 1437 532 260 0 0 0 103 2332 455 168 54 1557 50 213 4829 103 188 86 1099 0 0 122 1598 76 434 0 171 1490 0 3769 1883 -188 0 -635 1061 1213 687 452 0 0 0 110 2462 306 159 46 1561 62 202 4798 94 238 47 1283 0 399 135 2195 92 505 0 178 1092 0 4061 1876 -179 0 -961 737 1213 687 452 0 0 0 110 2462 306 159 46 1561 62 202 4798 94 238 47 1283 0 399 135 2195 92 505 0 178 1092 0 4061 1876 -179 0 -961 737 1145 687 239 0 0 0 113 2184 306 174 56 1561 62 130 4474 89 122 47 1280 0 399 169 2106 92 504 0 178 1092 0 3972 1775 -136 0 -1136 503 908 687 277 0 0 0 114 1986 306 176 55 1561 62 135 4282 101 142 47 1326 0 399 171 2187 92 522 0 178 1092 0 4070 1620 -125 0 -1284 212 692 687 246 0 0 0 114 1740 306 181 54 1561 62 150 4054 89 196 47 1289 0 399 172 2191 92 508 0 178 1092 0 4060 1515 -115 0 -1405 -5 2018e 1/18e 547 687 493 0 0 0 118 1844 306 183 53 1561 62 161 4171 104 275 47 1419 0 0 233 2078 92 559 0 178 1092 0 3998 1377 293 0 -1497 173 FY18e FY19e FY20e 547 687 493 0 0 0 118 1844 306 183 53 1561 62 161 4171 104 275 47 1419 0 0 233 2078 92 559 0 178 1092 0 3998 1377 293 0 -1497 173 359 687 524 0 0 0 117 1687 306 214 48 1561 62 170 4049 135 339 47 1661 0 0 169 2352 92 654 0 178 1092 0 4367 896 330 0 -1543 -318 667 687 676 0 0 0 136 2165 306 246 44 1561 62 152 4536 110 363 47 1997 0 0 113 2629 92 786 0 178 1092 0 4777 429 367 0 -1036 -241 Total Liabs & Stockholder's Equity 4308 4595 4914 5515 5206 5047 4829 4798 4798 4474 4282 4054 4171 4171 4049 4536 Source: Company data, Morgan Stanley Research 16 Exhibit 18: Quarterly Cash Flow Statement ($ Millions, Except Per-Share Data) Operating Activities: Net income (loss) FY14 FY15 FY16 4/16 7/16 2017 10/16 1/17 FY17 4/17e 7/17e 10/17e 1/18e FY18e FY19e FY20e 2018e 229 82 -326 -173 -93 -143 -171 -579 -175 -147 -122 -91 -535 -46 507 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Stock-Based Compensation Expense Tax benefits from employee stock plans Restructuring Related Charges, Net Charge for acquired IPR&D Write-down of purchased technology Other operating activities 129 132 -9 13 0 0 -16 146 166 -1 3 0 0 16 Changes in operating assets and liabilities and other Net Cash Provided by (used in) Operating Activities 86 564 296 708 146 197 0 0 0 0 -25 422 414 Cash Flows From Investing Activities Net sales and maturities of available-for-sale marketable securities65 Capital and other expenditures -64 Purchases of software technologies, capitalization of software costs0 Business combinations, net of cash acquired Other investing activities Net Cash Used in Investing Activities -176 -19 -194 Cash Flows From Financing Activities Proceeds from issuance of common stock, net of issuance costs288 Repurchases of common stock -424 Tax benefits from employee stock plans 9 0 Repayments on borrowings -127 Net Cash Provided by Financing Activities Exchange Rate Impact -2 Change in Cash and Cash Equivalents Cash, Beginning of Period Cash, end of period FCF Source: Company data, Morgan Stanley Research -196 -76 0 -630 -4 -906 135 -372 1 -3 -240 -5 -442 1853 1411 -544 -72 0 -149 -45 -810 111 -510 0 742 343 -5 -58 1411 1353 241 1612 1853 499 633 342 37 57 6 52 0 0 8 176 164 -147 -22 0 -60 -1 -230 51 -118 0 0 -67 3 -130 1353 1223 142 33 49 -15 16 0 0 -15 7 -18 482 -20 0 -26 -6 431 3 -152 -20 0 -169 0 244 1353 1467 34 57 -30 3 0 0 10 77 8 116 -23 0 0 -8 85 48 -128 -39 0 -119 -5 -31 1353 1437 35 59 40 9 0 0 -11 55 16 -4 -11 0 0 1 -14 17 -300 59 0 -224 -1 -223 1353 1213 139 222 0 81 0 0 -8 315 170 447 -76 0 -85 -14 272 120 -698 0 0 -578 -3 -140 1353 1213 -38 -15 5 94 25 64 0 10 0 0 0 192 116 0 -19 1 0 0 -18 56 -222 0 0 -166 0 -68 1213 1145 97 24 64 0 2 0 0 0 54 -3 0 -17 1 0 0 -16 3 -222 0 0 -219 0 -237 1213 908 -20 24 64 0 0 0 0 0 5 -28 0 -20 1 0 0 -19 53 -222 0 0 -169 0 -216 1213 692 -48 24 64 0 0 0 0 0 76 73 0 -16 1 0 0 -15 19 -222 0 0 -203 0 -145 1213 547 97 257 0 12 0 0 0 328 158 0 -72 4 0 0 -67 132 -888 0 0 -756 0 -666 1213 547 57 86 77 262 0 0 0 0 0 329 622 0 -71 4 0 0 -67 145 -888 0 0 -743 0 -188 547 359 551 77 262 0 0 0 0 0 258 1105 0 -72 4 0 0 -68 159 -888 0 0 -729 0 308 359 667 1033 17 Disclosure Section The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. 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LLC makes a market in the securities of 8x8 Inc, Adobe Systems, Akamai Technologies, Inc., Ansys Inc., Atlassian Corporation PLC, Autodesk, Barracuda Networks Inc, Bazaarvoice Inc, Box Inc, Cadence Design Systems Inc., CDK Global Inc, Check Point Software Technologies Ltd., Citrix Systems Inc, CyberArk Software Ltd, Ellie Mae Inc, Endurance International Group Holdings, Inc., FireEye Inc, Five9 Inc, Fortinet Inc., GoDaddy Inc, HubSpot, Inc., Instructure Inc, Intuit, Microsoft, MINDBODY INC, New Relic Inc, Nuance Communications Inc., Oracle Corporation, Palo Alto Networks Inc, Proofpoint Inc, Q2 Holdings Inc, Qualys Inc, Rapid7 Inc, Red Hat, Inc., RingCentral Inc, Sabre Corp, Salesforce.com, ServiceNow Inc, Shopify Inc, Splunk Inc, SS&C Technologies Holdings, Inc., Symantec, Synopsys Inc., Tableau Software, Travelport Worldwide Limited, Varonis Systems, Inc., Veeva Systems Inc, VMware Inc, Workday, Zendesk, Inc. 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Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC) STOCK RATING CATEGORY COUNT % OF TOTAL COUNT % OF TOTAL IBC % OF RATING CATEGORY OTHER MATERIAL INVESTMENT SERVICES CLIENTS (MISC) COUNT Overweight/Buy Equal-weight/Hold Not-Rated/Hold Underweight/Sell TOTAL 1167 1403 59 624 3,253 36% 43% 2% 19% 297 311 8 87 703 42% 44% 1% 12% 25% 22% 14% 14% 563 677 8 270 1518 % OF TOTAL OTHER MISC 37% 45% 1% 18% Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. 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Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. 21 INDUSTRY COVERAGE: Software COMPANY (TICKER) Brian Essex, CFA AppFolio Inc (APPF.O) CDK Global Inc (CDK.O) Descartes Systems Group Inc (DSGX.O) Ellie Mae Inc (ELLI.N) Endurance International Group Holdings, Inc. (EIGI.O) GoDaddy Inc (GDDY.N) Instructure Inc (INST.N) MINDBODY INC (MB.O) Q2 Holdings Inc (QTWO.N) Sabre Corp (SABR.O) Shopify Inc (SHOP.N) SS&C Technologies Holdings, Inc. (SSNC.O) Travelport Worldwide Limited (TVPT.N) Keith Weiss, CFA Adobe Systems (ADBE.O) Akamai Technologies, Inc. (AKAM.O) Autodesk (ADSK.O) Check Point Software Technologies Ltd. (CHKP.O) Citrix Systems Inc (CTXS.O) Intuit (INTU.O) Microsoft (MSFT.O) Oracle Corporation (ORCL.N) Palo Alto Networks Inc (PANW.N) Red Hat, Inc. (RHT.N) Salesforce.com (CRM.N) ServiceNow Inc (NOW.N) Symantec (SYMC.O) VMware Inc (VMW.N) Workday (WDAY.N) Melissa Gorham Barracuda Networks Inc (CUDA.N) Box Inc (BOX.N) CyberArk Software Ltd (CYBR.O) FireEye Inc (FEYE.O) Fortinet Inc. (FTNT.O) Imperva Inc. (IMPV.O) Proofpoint Inc (PFPT.O) Qualys Inc (QLYS.O) Rapid7 Inc (RPD.O) Secureworks Corp (SCWX.O) Splunk Inc (SPLK.O) Varonis Systems, Inc. (VRNS.O) Meta A Marshall 8x8 Inc (EGHT.O) Five9 Inc (FIVN.O) RingCentral Inc (RNG.N) Sanjit K Singh Atlassian Corporation PLC (TEAM.O) New Relic Inc (NEWR.N) Nuance Communications Inc. (NUAN.O) Tableau Software (DATA.N) Stan Zlotsky, CFA Bazaarvoice Inc (BV.O) Coupa Software Inc (COUP.O) HubSpot, Inc. (HUBS.N) Jive Software Inc (JIVE.O) Veeva Systems Inc (VEEV.N) Workiva Inc (WK.N) Zendesk, Inc (ZEN.N) RATING (AS OF) PRICE* (04/28/2017) E (05/13/2016) E (02/03/2017) E (11/25/2014) E (01/12/2017) U (02/21/2017) O (05/11/2015) E (12/08/2015) E (09/28/2015) E (07/22/2016) E (04/06/2017) E (09/28/2016) O (09/27/2016) E (01/23/2017) E (09/10/2010) U (04/27/2017) O (05/01/2017) E (04/18/2017) U (01/19/2016) U (09/13/2016) O (01/13/2016) E (11/11/2015) E (03/01/2017) E (07/07/2016) O (05/23/2011) O (09/18/2013) O (08/15/2016) O (07/25/2016) E (11/06/2012) E (01/08/2016) E (02/17/2015) E (03/30/2017) E (10/15/2013) O (11/15/2016) U (04/21/2016) O (09/10/2015) O (03/30/2017) E (08/11/2015) O (05/17/2016) O (10/06/2014) U (09/10/2015) E (04/11/2017) E (04/11/2017) O (04/11/2017) E (01/04/2016) O (09/10/2015) E (05/01/2013) E (02/08/2016) E (09/02/2015) E (10/31/2016) O (09/10/2015) U (09/10/2015) O (04/02/2014) E (01/23/2017) O (09/10/2015) $26.55 $65.01 $23.15 $101.76 $7.60 $38.92 $23.90 $28.35 $38.15 $23.41 $75.95 $36.74 $13.17 $133.74 $60.94 $90.07 $104.01 $80.94 $125.21 $68.46 $44.96 $108.41 $88.08 $86.12 $94.48 $31.63 $94.12 $87.40 $20.33 $17.24 $52.91 $12.51 $39.00 $44.45 $75.37 $38.40 $16.95 $8.65 $64.31 $31.40 $14.55 $18.25 $31.95 $34.48 $39.98 $17.89 $53.68 $4.70 $27.75 $67.05 $5.05 $53.62 $16.80 $28.75 Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted. 22 © 2017 Morgan Stanley 23
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