Autodesk, Inc. (ADSK) Earnings Call Transcript & Summary

Excellent. Thank you, everyone, for joining us this morning. My name is Keith Weiss. I run the U.S. software equity research group here. And very pleased to have with us from Autodesk both Scott Herren, CFO; and Scott Reese, Head of Manufacturing and Cloud Products. So thank you, gentlemen, for joining us.

Maybe to start off the conversation that's kind of the prerequisite. There's a lot of uncertainty out there in the environment right now in terms of what's going on with COVID-19. The potential for not just supply chain impacts, but demand impacts. You guys do a lot of business overseas, you guys do a lot of business, including Asia Pac and the like. Anything of note in your business in terms of near-term caution that we should have about these impacts?

Yes. Thanks, Keith. And I think before we jump into the dollars and cents side of this, it makes sense to say, this is a human issue. And I think that's what makes it so hard for companies to figure out how to respond is it's the balance of trying to do the things you need to do to protect your team and to protect your employees, and kind of that side of everyone's responsibility with balancing the impact to your business. And so we're in the same moat as everyone else from that standpoint. We just came back from -- we had our sales kickoff earlier this week. I was in Las Vegas for 3 days, and thankfully, I didn't get quarantined there. 2 weeks in Vegas would kill me. But coming back from that, one of the things I got to do is spend time with a lot of the key principals, not just on our own sales team, but at our largest resellers. And really a cross-section of all geos, at the same time, not just the U.S. but also from Europe, from the Middle East and from APAC. And the consensus among everyone is that we're not seeing any impact. We continue to not see an impact at this point. And obviously, it's a fluid situation, and it's one that we're monitoring very closely. I know everyone, at this point, is kind of monitoring it very closely. So we're not seeing any impact. It's something that we'll continue to keep a sharp eye on as it goes forward. But there's 2 other things that I'd say. One is, from a resiliency standpoint, we've got a totally different business model than we had the last time there was a concern like this right back in 2008, 2009. Significantly more resilient business model that I think will help us, should there begin to be some significant headwinds. I think the other is, and talking this through, again, with the heads of our largest resellers, is there's -- if you're in the airline business, or in the restaurant business, if that table went unfilled for a night, and it's never coming back. If that plane flew with 50% occupancy rate instead of the 80%, you needed to get to breakeven. And that demand is not coming back. So there's demand that is going to be lost for good in certain segments. And there's the potential for an impact to delay in our industry. And I think that the general sense is, if there is any impact, what we would see is more delay than lost demand. I think the other thing to consider is what Andrew said on the call, and I know you were there and heard this, but it's worth repeating for everyone else, this is one of the advantages of having a reseller model, right? We still sell about 70% of our sales through resellers, and they are in location with all of our customers. And so the -- we're not reliant on sales guys being able to -- having to hop on a plane, get to a customer location to drive a sale. So it's one of the advantages we get out of that reseller model.

So if we think about sort of the forward look that you gave us on the last earnings call, have you changed your guidance velocity at all to sort of account for them more on certain macro?

Yes. I wouldn't say the philosophy has changed in terms of the balance that I tried to strike when we go out with guidance. I think you do see us putting a little bit wider range. If you noticed, our revenue range for the first quarter was a $15 million range. And what we had typically done, if you look through last year, until the fourth quarter of last year, was a $10 million revenue range. And so we -- and the full year range was $60 million. So we've ranged it a little wider. I'd say the overall philosophy stays fairly balanced, which is where we've been through the last couple of years.

Right. Got it. I'm going to start this conversation from kind of the very high level, and then we're going to go down below. Coming out of your most recent fiscal year, you guys had set a $6 free cash flow target several years back, and you hit it, right? $6.12 of free cash flow, congratulations.

Thank you.

And during that time period, there's been a lot of focus on maintenance to subscription and sort of how pricing changes and deferred revenues of sort of going from no multiyear contract to multiyear contracts. And I think part of what gets lost in that overall conversation is, how is the underlying business doing, right? So on the most recent conference call, you talked about, actually, you gave us core subscription growth. Core subscription growth was 10% growth, still growing double digits. That's a pretty solid number from my perspective in terms of sort of having followed Autodesk for a while. Can you talk to us about how should investors think about core growth in Autodesk? Like what can subscriber growth be like over time? What could cloud growth add to that? What could pricing add to that? In terms of what should we think about is like the durable growth for Autodesk over the next 3, 5 years?

Yes. It's a really good question. Thanks for bringing it up, by the way, because it did get lost in some of the other Q&A that went on around the corner. We only do that once a year now. So I appreciate that you dug into the data and are highlighting that. What I'd add to the 10% growth in core that you just talked about is, bear in mind, that we also had, remember those 2 big promotions that we ran back in fiscal '17, we first stopped selling perpetual licenses. At first quarter, we put out a, hey, if you want to make the -- if you want to buy a subscription, you get 3 years upfront at a 70% discount, and we had a fairly good uptake on that, again, in the third quarter with a 50% discount. Both of those 3-year promos came due in fiscal '20. And what we saw is, from a dollar standpoint, we made more dollars out of that cohort in that because they renewed at a much higher price. But we saw a higher churn, as expected, in each of those, and even still grew the core sub count by about 10%. So the fundamentals of the business continue to be strong in terms of volume growth. I think as you look ahead, if you're trying to say, what's the balance between -- that I should be thinking about in my model between price growth and volume growth? It's pretty balanced. You saw it was very balanced last year. Our expectation is it keeps a pretty good balance between those 2 into fiscal '21 and out through fiscal '23.

Got it. And then you guys have after $6 is the $11 free cash flow...

By the way, I can't say $6. You know that. I have to talk about it in absolute terms. I'm not allowed to do it on a per share basis.

I could say whatever I want. So you've talked about an $11 for free cash flow target in the past, right? And so in FY '23, how should investors think about the linearity of getting to that level of free cash flow? Is it going to be a straight line? Or is that going to be more back-end loaded?

Yes, it's also a really great question. And we've put out guidance for this year that says it grows in that low 20% range coming off of the -- I'll do it in total dollars standpoint, $1.36 billion last year going to $2.4 billion in fiscal '23. That's the way I have to talk about it.

Okay. Thank you for doing that.

Yes. Yes. And so it's going to grow in the low 20% range this year, if we pick the midpoint of our guide. It's not going to -- the compounded annual growth rate from the $1.36 billion to $2.4 billion is just short of 21%. It's not going to be 21% every year, right? And one of the things that will happen in fiscal '23 is we'll have almost the echo effect of the reversion to the mean in multiyear that we saw in fiscal '20. So most of that multiyear was 3-year multiyear.

So that comes up.

Those renewals will come up again in fiscal '23. So I wouldn't expect it to be linear. There's going to be annual growth in free cash flow, by the way. We've talked about it this year. It will grow again in fiscal '22 and in fiscal '23. I wouldn't expect it to be linear through that time.

That's super helpful. Digging into the subscription growth. Can you talk to us about some of the major drivers there? How much of it is just kind of underlying growth in the industry? You guys have been working really hard to sort of reduce noncompliant usage, aka piracy. There's the potential for share gains, and we'll get into that on the manufacturing side of the equation. Can you help us rank order kind of what's driving that 10% core growth?

Yes. The biggest is we're just -- we see growth across the board. We see growth in all product families, and we see growth in all geos. And that's a volume statement as well as a revenue statement. So we're seeing steady growth across the board. We are making good inroads on -- I don't talk about piracy anymore, we call it noncompliant users. And we're making really good inroads on that front, running the play that we've talked about for the last couple of years, and we continue to get better at the data science side of understanding where those noncompliant users are, to the extent they're in an account that we have contact details because they're an existing customer, obviously, that's the low-hanging fruit. And so as we've gotten better on the data science side, we're giving higher-quality leads to our license compliance team. Think of this as an inside sales team, right? So these are -- we're calling out to customers, and we're doing it as a sales approach, not a heavy-handed legalist approach. I know you've heard me say that a few times. And we're making good progress. You heard some of the stats that we gave. We've given a couple of stats throughout the year. As the productivity of those license compliance teams have gone up because the data science has gotten better, we're also investing more bodies there. So we've grown that team pretty significantly last year. And my expectation is we grow that team again this year. So monetization of noncompliant users continues to be a trend that not only helped us in fiscal '20, there's a part of fiscal '21 and all the way up through fiscal '23 and beyond. There's an enormous space of noncompliant users out there for us to go get.

Got it. I think you've talked to us about 12 million global noncompliant users, 4 million in developed markets. Are they still the right kind of levels to think about? And how long would it take to get through that like 4 million in developed markets?

So it's going to take some time to get through this. I don't -- one of the things that I think everyone would love to see, myself included, is that there's a big step function in 1 quarter and 1 year, where suddenly, like lemmings over the cliff, people are running at us with money in their hands. That's not going to happen. I do think this is an opportunity for us well beyond fiscal '23 that we'll continue to go after it. We'll update the data, by the way. As our data science has gotten better, our ability to give you an update on that number has gotten better. And we'll do that -- so this is a bit of a teaser, I guess. We'll do that at our Investor Day at the end of this month.

Got it. One of the areas of share gain has been manufacturing. Maybe to bring Scott into the conversation as well. Can you talk to us about sort of the competitive dynamics going on there for the manufacturing product? Most people perceive the market as kind of like you and SolidWorks kind of going head-to-head. What's enabled that recent share gain that you guys have seen?

Yes. If you look at what's going on with manufacturing companies, just in general, they're under a tremendous amount of pressure to work differently. As consumers, all of our expectations and demands on them have changed. We want more products. We want them more rapidly. Manufacturing techniques have changed, robotics, additive printing. So I put manufacturing companies in 1 or 2 categories. They're either disrupting the market or they're being disrupted and maybe they just don't realize it. And so that's caused a lot of companies to really change the way that they think about how they build these products. And if you look at kind of historically how manufactured products come to be, it's a very serial process. It takes a long time to develop a product. The later in the process you discover either maybe we have the wrong product or we need to make a change, the more expensive it is to make that change. And of course, we have a good position in manufacturing today. But it's really the forward-looking investment that we've made that we're most excited about, and that's what customers are starting to see and experience for themselves. And that more forward-looking process is where you don't have as many point tools, you have capabilities all built into a common application. More importantly, I'm talking about a common data model in the cloud that enables that rapid iteration. And ultimately, the ability to deliver more innovation to the market more quickly.

Got it. Manufacturing has been, I would say, like, it's one of those areas that is harder to see sort of strong technology adoption. They tend to be pretty slow in terms of their technology adoption. On the other side of the fence, you guys have been one of the first movers in terms of moving to the cloud and kind of using that data model in the cloud. You've been really aggressive about talking about new concepts like generative design. Where are we in terms of industry actually adopting those capabilities?

Yes. It's super fascinating. So what is generative design? So a few years back, we really invested heavily in the cloud. And one of the things we realized is that so much of what our customers do has been limited historically by the amount of compute available. So when we kind of changed the focal on that and go, okay, well, you have as much compute as you want, what would we do? And that's where we come up with generative design where instead of having our users design or draw effectively an idea that's already in their head, generative design lets them frame the problem and then let the cloud explore literally thousands and thousands of valid options and then come back and bring those to the user. So we've started exploring generative design, kind of what you might call the high end of the market. So companies like Airbus, we have a very public example of what we did with Airbus. General Motors was another one. And so on average, kind of what those companies saw there was that we were able to take roughly half of the weight out of the component, while actually making it more performant, right? So a lot of that is just science and letting the computer actually compute all of the scientific possibilities led to a better outcome. Now the thing that slows it down, if you will, from mass adoption is that, that comes -- that ideal outcome looks pretty organic, and organic things kind of have to be 3D printed, and 3D printing isn't really where we needed to be from an accessibility perspective. So what we've done now, taking those learnings, is that we've retrained the algorithms to understand kind of more common manufacturing techniques, milling, machining, molding, casting. And you're starting to see those algorithms start to show up in Fusion 360 now, and that's why you're starting to see a little bit more mass adoption of companies moving. So we look forward to seeing that kind of addressed.

So that's the industry view. From an Autodesk perspective, you guys -- the entry point into manufacturing over the past decade or so has been sort of the low end of the market working its way up into the mid-market. Are these new capabilities, sort of the cloud-based data model, the generative design, starting to pull you up further and further into larger enterprises?

Yes, no question. And if you look at some of the acquisitions we've done over the past several years, things like Moldflow, that is at the high end of the market, right? Things like power mill, you're making turbine blades with some of the most complex math. And so we have the intellectual property that we're able to leverage to build out infusion and able to leverage the generative design algorithms to you, which naturally makes those super high-end capabilities accessible to the masses.

Got it. I want to shift gears a little bit to field construction. The field construction in the broader cloud business is, in our model, going to be a bigger and bigger contributor to ARR in the long term. The -- I was just hoping to start out with kind of this competitive dynamic that you see out there, it's going to be top of mind for investors because a big competitor in that space just filed to go public. How should we think about sort of Autodesk positioning versus the competitors? And how that's going to evolve over the next couple of years?

Yes. Beyond just the size of the opportunity, which I'm sure you've modeled, and the thing that we're super excited about is our position kind of, from -- as an end-to-end provider, right? So we're not looking at part of the process, and our customers aren't looking at part of the process. They have to build the whole building, not part of the building. And then ultimately, they have to operate it at some capacity. So with our position with BIM, the natural progression of taking BIM data, letting that flow in and inform the whole process is pretty exciting. And ultimately, I think that's what differentiates us in the customers' mind and certainly in the market.

Yes. And we see competition in every -- the company you're referring to, we see them in every account that's at scale, and of course, they see us in every account that's at scale. I think the -- as I think about the longer-term play for each of us, I think one of the opportunities we have that's going to be pretty tough for anyone else to get at is significant growth in international. And I think in the -- when you talk about the opportunity for site execution, software internationally and, of course, the entire workflow from design all the way up to the endpoint, a little bit bluer ocean when you get into the international. And that's a space where, as you know well, more than 60% of our revenues come from outside the U.S. So we've got offices. We've got a footprint. We've got contact with all those customers or many of those customers. We've got a brand that they're aware of and that they understand. And so I think we've got a real opportunity to scale, not just head-to-head here in the U.S., where most of the opportunity is today, but at a much more blue ocean opportunity to expand internationally.

Got it. So you guys have a sort of differentiated offering in terms of that you could go from the sort of design, to sort of analyze, to build an advantage on -- from a macro perspective. Even within the field construction opportunity, you guys have been looking to integrate various components, PlanGrid, Assemble or BuildingConnected, all into 1 construction cloud. Can you talk to us about, one, where are you in kind of integrating those assets? And two, what's the customer reception been to construction cloud versus the underlying pieces that you guys have assembled over time?

Yes. So when you think about all that integration, there are kind of 2 things. One, top priority is momentum for those businesses, right? So that's been a big area of focus for us. But of course, the ultimate opportunity is that integration. We think about that integration. For us, it's more about data flow, and that's where we build out the Autodesk Forge kind of data backbone, if you will. And connecting those applications to that common data backbone is what enables that data to kind of flow from the BIM process or the design process into the field and ultimately, owner operators. So that work is underway, but certainly not at the risk of losing momentum. Momentum is key there. And I would say that, that same focus carries across all of our industries, right? Same thing for manufacturing, and that's where it gets even more excited when you think about the intersection of what we're doing in manufacturing with the intersection of construction, it gets super interesting because construction companies are trying to become more like manufacturing companies, bring predictability, profitability. Manufacturing companies are trying to become more like construction companies, where you have -- you're faster, agile, you're nimble. And we have a good position on both sides of that. And this data backbone is what's really going to help us bridge that.

Yes. Just a little bit more on that point because I think it's really important, and I know it's one of the key pieces in a lot of people's investment thesis as they think about Autodesk. I'm really pleased with and proud of the results that our Autodesk construction solutions team made last year. So if you think about it, we entered the year last year, we just spent about -- more than $1 billion on acquisitions, 2 very successful but founder-led companies. We had an organic business that was at some level of scale. That team had to come together. We had to build a single kind of a team out of what was really 3 teams at the beginning of the year. We had to not lose momentum on the sales front. And you saw, we said we expected about $100 million of ARR coming out of PlanGrid. We overachieved against that. So from a business standpoint, they've not only maintained momentum, they accelerated. That led to an acceleration in our BIM 360 business as well. Which except the growth was super strong for that as well last year. At the same time, there was overlap in some of the products in there. So they've worked through where the overlap is. There was outstanding commitments on future around kind of things that we wanted to deliver inside each of those to our customers. They met all those. They've come up with a long-term integration road map, and that's the Autodesk Construction Cloud is the way we've articulated that. And delivered more than 300 product enhancements last year. So it was -- we sort of checked every box in terms of the momentum that we've got there. And I think the strength of our story now in the construction space relative to anyone else in this space is the broad end-to-end. Everything that's built starts with the design. And a lot of those designs get done in Revit, and creates a building information model. So the strength of the end-to-end story is also a significant advantage for us. And I couldn't be happier, frankly, with the way things have progressed for us in that space.

Got it. I want to shift gears a little bit to pricing and 2 of the sort of new announcements that have come out. One is the end of maintenance plans. So maintenance plans get another 20% increase this year, and then you're going to retire them by May 21. How should we think -- so you have a little over 400,000 people left on maintenance. How should we think about the balance between the positive impacts that we'll get from the increase in pricing or them coming over to subscription versus the potential for increased churn?

Yes. So let's talk first about try to characterize that 400,000 that's left. We've had the -- we're coming up this quarter is the end of a 3-year program of maintenance to subscription. And that program has been super successful. We've migrated more than 1 million customers over -- under that program over the last 3 years. So then you say, well, so who's left? And what's the mindset of the people who are left? And it does tend to be -- we've had great success, certainly in larger companies, more -- and it works its way down to the smaller companies. By geography, we've had more success in the Americas. And then in EMEA, with APAC being the slowest to make that conversion rate. So when you start to characterize the base of what's left, they tend to be smaller and in areas that have lower price. Maintenance, as you know, is less than 10% of both our subs base and less than 10% of our revenue at this point. So it's kind of the starting point of that 400,000 that we talked about. I expect 2 things to happen as we progress through the end of M2S at the end of this quarter, and then the 1 year of, hey, last chance, if you want to renew one more time, it's a 20% increase. I think we'll see both the conversion rate increase. We already saw that in fiscal '20. It went from -- and by that, I mean, someone's got a maintenance that comes up -- a maintenance agreement that comes up for renewal, what percent of those convert to a product sub? It had been running in the 30% to 35% range. It's up to 40% now. So we're already seeing an increase. That was as of the end of last quarter. I think that actually probably ticks up another point or 2 over the next 4 quarters. And I think, churn, to your point, I think churn also ticks up. And that's what's built into our expectations at this point.

Got it. And then the other change or the pricing increase was in multiuser license. You took pricing there up about -- or you took pricing up there pretty significantly. It makes up about 20% of the sub base. What was -- what are you looking to do with that? It seems like there's -- you're trying to incent your customers to head in a certain direction. Can you talk to us about what the intended results were besides just getting more dollars out of your customers? What the intended results were of those price increases?

Yes. So let me clear up what I think there -- I think there is some confusion, not with you, but in others, about what that price increase represents. That's not a price increase for multiuser customers' renewal, that price increase that we did was only on new. And we're only going to sell new multiuser subs between now and May 7, when we start the 2-for-1 trade-in. So it's a pretty small window, and we took it up from what had been 1 multiuser, pick a collection as an example. One multiuser annual sub for a collection was 1.5x what a named user is sold for, right? But we announced this trade-in program that was going to be 2-for-1 trade-in. And we got to the 2-for-1 because that's what the data shows is the actual number of named users being served by a given multiuser. It's a bell curve, to be clear, but that's the midpoint. Knowing that we were going to trade in 2 for 1 but keeping the price at 1.5:1 for the next 3 months just created a price arbitrage that we closed. So it's not that there's a significant financial upside from that change. It was really the goal is to move people off of multiuser and on to a named user as every modern SaaS company is, but we needed to close that short window of what would have been a price arbitrage. That's what was behind that pricing.

Got it. I hogged the whole session. I just want to real quickly see if there's any questions from the audience before we wrap up. A question in the back.

One question on the construction space. You were mentioning end-to-end is super important for you. When you look at the development around smart cities and what Singapore is doing here, I mean, I -- maybe you see it different, but maybe your product portfolio is not as strong in that part of the market as of today? And how do you see the need to get more into the certain subsegment of the construction space?

Yes. I'll start, Scott, and you can jump in. To be clear, our construction focus is not on smart cities today, our construction focus is on the construction opportunity that's right ahead of us. It's a gigantic opportunity. I'll just refer to the recent S1 filing, it's a multibillion-dollar opportunity. And so -- and it's a largely unserved or underserved market today. So job one for us is really to automate that and get the plans in the hands of the actual workers on the job sites that are building those buildings and using the design data that we already have access to, in many cases because it starts in Revit and our 3D building design product creates a building information model. So that's really been our focus. In terms of the long-term opportunity for smart cities, Scott, I don't know if you've got any thoughts on that?

Yes. I would just say, pay attention to everything that we're doing kind of from a broad perspective, the relationship that we have with Esri, everything that we're doing with products like InfraWorks, where it's not just about a building, but a collection of buildings. And so the technology, the capability is there, it just hasn't been the biggest area of focus for us yet.

Any additional questions? All right. We are at the end of our allotted time frame. So thank you, Scott.

Thanks. Yes. I'm not going to do the handshake in deference to the current environment, but thank you. Thanks for having us.

Excellent. Thanks for coming.