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

Great. Good afternoon, everyone, and thank you so much for joining. My name's Adam Borg, and I'm an analyst on the software team here at Stifel. I'm really excited to have Autodesk help close out day 1 of the conference. And joining us from Autodesk is the CFO, Scott Herren. In terms of the format, I'm going to kick it off with some questions. And if anyone in the audience has a question, you could submit it through the webcast page as well, and we'll look to get to those questions throughout. So with that, Scott, thank you so much for being here. I really, really appreciate it.

My pleasure, Adam.

Great. So big picture, Autodesk hosted Analyst Day last week, reported earnings a week before that. Maybe just to set the stage, could you spend a minute on the big opportunities that Autodesk is going after?

Sure. Now there's a couple. We've -- obviously, we've got a thriving kind of core business, and one of the things that we've seen coming for quite some time is the platform shift from the CAD software and the design and make software, moving from being licensed to a CPU and a powerful endpoint machine, to something that's much more cloud-based. And so what we've done, systematically over the last 5 to 6 years, is build out a native cloud set of capabilities. It's to add cloud capabilities to our existing core products. AutoCAD, Revit, et cetera, have quite a bit of cloud-based capability built into them. And then as we see the shift happening toward companies that are far more interested in digitizing, and again, no one would have hoped for obviously, the events of the last 90 days, but if anything, it's been a catalyst for people to much more quickly look to digitize their own businesses. So we've been building that out, and we'll continue to pursue that opportunity. I think related to that is the opportunity we see in construction. We've always had a strong position in AEC, architecture, engineering and construction, but it's been mostly on the AE side and not so much on the C side. You saw the acquisitions we did a little more than a year ago, about 1.5 years ago now, to build out our construction portfolio. Construction business is a -- I think, will be a secular driver for quite some time. It's one of the most under-digitized industries that there is. I think only farming and hunting -- if you knew hunting was an industry, only farming and hunting are less digitized according to McKinsey. So I think there's a big opportunity that we've been actively pursuing in construction. And I think there's a -- secondarily, a bigger opportunity, and it's perhaps not as near term, but it's a bigger opportunity long term, for product design and manufacturing to move from the way it's traditionally been done with a separate CAD product, again, run on an endpoint, to a set of simulation products or engineering products run on an endpoint, to the set of CAM products, et cetera. And so we've built out Fusion to have that entire workflow, and it's all cloud-based, and that gives us some unique capabilities in terms of the elasticity of the CPU cycles you have access to but also the ability to give very granular access to that data. So manufacturing becomes a significant opportunity for us perhaps behind construction in the short term but a significant opportunity longer term. And then, ultimately, the convergence of those 2. And you see that happening today with more prefab going into construction, where it's less of -- building a building is less a case of a bunch of raw materials show up at a site and you create a building out of those raw materials, and it's becoming more a case of assembling a building on the job site because of the amount of prefab that's done off-site. And that requires both an understanding of manufacturing and construction, and that convergence is a space that I think we uniquely can take advantage of. So if I were to sort the big opportunities, that -- those are the ones that I see that we're pursuing.

Great. And that's a really nice overview. So as we go from the high levels down to the current macro environment, which you touched on a little bit, we're about halfway through the July quarter, and hopefully, you could update us to the extent possible on current demand trends and any observations, either by geography, vertical product or even by customer size, I think would be really helpful.

Yes. We gave you a little bit of insight into this last week. For those that couldn't join the -- our Investor Day presentation, and I not only showed you what we saw by week during the first quarter, because it was kind of a tale of 2 half quarters for us. The year began very strongly, and then right around the first or second week of March, we began to see some slowdown. And so I showed you what that trend looked like. And then overlap that into the first couple of weeks of this quarter, to give you a sense of what we're seeing there. I think when you think about it by geography, what we've seen is exactly what you'd expect. There is -- we initially saw a slowdown in new product sales and a couple of other metrics that we track, Adam, that I know you're aware of: weekly active usage, which gives us a good sense of not just what's out there but what's actually being used; and partial renews, which gives us a sense of the -- as a renewal event comes up, and let's say there were -- to make the math easier, there were 10 subscriptions that were coming up for renewal, a partial renewal would say they're only going to renew 9 or 8 or some subset of 10, which is an indication to us that the company is downsizing in some way. So we've been watching both of those metrics very carefully as well as our new product sales, and we've seen what I don't think is totally surprising as company -- as countries went into shutdown early on. So early on, Korea, China, a lot of our customers in Asia, went into lockdown. First, we saw weekly active usage decline there. As the virus spread to Western Europe, we saw the same event happen in Western Europe and, ultimately, to the U.S. But then as they started to reopen, we see the weekly active usage actually returning to where it had been previously. We've seen that in Asia. We're beginning to see that in Western Europe and haven't yet seen that in the U.S., although what we have seen is stabilization. So the decline has stabilized at this point. And the next phase that I'd expect to see is a little bit of an uptick here in the U.S. And so that gives you a sense of what we're seeing by country. I think the 2 other interesting points. Renewal rates have not changed materially throughout this. They've stayed relatively steady, as have the partial renewal rates. There's always a certain amount of partial renewal. So what we look for is the change in the percent of renewals that were only renewed partially, and we haven't seen any change there either. It's been pretty steady. So I think in each of those cases, that's what's informed the way we think about the shape of the second half of the year.

Great. That's really helpful. And one of the things that we've talked about in the past is this idea that Autodesk is exposed to some of the more cyclical end markets relative to potentially other software companies. But one of the things I don't think that investors fully appreciate are some of these countercyclical trends that you guys have talked about in the past. I want to dig a little bit deeper into the opportunity around infrastructure spending. So I know this is an area that, over the last few years, you've been really investing more heavily. There's a recent partnership announced in the space. So even given the macro gyrations, hopefully, you could give some observations around some of the countercyclical opportunities and especially around infrastructure.

Yes. Infrastructure in the space that I think everyone expects, given the state of economies around the world, one of the areas that governments typically try to get the economy re-going, is to invest in infrastructure, everything from roads to airports to railways, et cetera. And if you look at our AEC business, infrastructure is a material piece of that. So we've always had a relatively good business in infrastructure, not just AutoCAD, but Civil 3D plays well there. The relationship that I think you're referring that we have with the SRI in that space is focused on infrastructure. And we've -- a couple of times in previous Investor Day, Lisa Campbell has walked through some of the infrastructure projects that we've been involved in around the world, the airport projects that are going on around the world, which will be interesting to see how that -- how those pan out over time, but also what we see in rail and light rail, which I think will become even more important now through time. So we've always had a fairly significant business in infrastructure, and it's continued to do well. And I think that's something that I would expect to be a little bit more countercyclical as we come through the -- kind of the economic impact of the shutdowns in the wake of COVID.

Great. And maybe 1 more macro question, and then we'll jump into construction. One of the things that you guys highlighted last week, and I think is super interesting, is around how the world looks post COVID. And no doubt, there's some short-term demand disruption in certain markets, but there is some demand creation. How is -- what kind of impact beyond some of the changes you talked earlier in usage and renewal, but kind of bigger picture, when you think about the impact that COVID is having on AEC and manufacturing longer term? And where are you best positioned to capitalize in those bigger trends that are potentially being accelerated here?

Yes. There's a couple. Obviously, as construction sites shut down in local -- very localized markets, we saw the usage of our site execution piece of our construction pool. So that's planned grid and, to some extent, docs, BIM 360 Docs. We saw that have an impact. On the flip side, everyone was very rapidly forced into working from home and needing digital collaboration tools to keep work going, to keep projects going. And so what we saw kind of offsetting the drop in usage at the job site was a significant increase in usage for BIM 360 Design and for BIM 360 Docs, which tends to be -- it has a foot on the job site, but it also tends to be more office-focused. And so we've seen both of those, and we gave you some of the stats on the earnings call of new project starts up 200%, eventually tripling for BIM 360 Design and doubling for BIM 360 Docs. And those are -- that's paid usage, by the way. That's not growth driven by our extended access program. So we've seen that. I think longer term, if you think of some of the implications of this, I know there's a debate on what does this mean longer term for commercial real estate, and this is a topic that Lisa Campbell, our Chief Marketing Officer, hit pretty head on in her presentation last week as well, which is population is going to continue to grow. Businesses are going to continue to grow, if you just extrapolate now into the distant future. If you believe -- and there's an active debate on does this mean fewer people want to live in big cities, or not. But let's assume the worst case, fewer people do want to work in big cities. Cities are still going to have an attraction. And so what you're likely to see is more what she called suburbanization. There's urbanization and then suburbanization. You'll still have a demand for office space. Instead of being a 40-storey building in Central Chicago, it might be 4 10-storey buildings kind of out on the perimeter. And then you'll need infrastructure to connect those, et cetera. The other thing that strikes me in this space, Adam, and it's something that we're dealing with today as we think about reopening our office, and I'll just use San Francisco as an example. We're looking at how do we reconfigure the office such that as we reopen it, and before there's herd immunity or a broad spread of not just the availability of a vaccination, but a lot of people are vaccinated, we have to reconfigure our office space such that we can have people come in and work at some level, but still have the safe physical distance from one another. And so we're doing a lot of work on thinking about how do we reconfigure that office space and the flows. Everyone is going to need to do that same work, right? So there's going to be a catalyst short-term for AutoCAD, Revit. We've got this generative design capability now built into Revit that will actually -- you give us the constraints, and it will use generative design to come up with what that office space design ought to look like. And I think there's a demand for the foreseeable future in office reconfiguration space that is going to -- that we see as a user of office space and that our customers are going to see as well that's going to drive demand for some of our products.

That's great. And maybe even just talking about generative design for a minute then. So as I thought about generative design historically, especially given its history in Fusion 360, I thought a bit more of a manufacturing opportunity. But like you mentioned, there's some really interesting use cases on the AEC side, such as the office retrofitting. How should we think about generative design in both of those contexts? And where is the larger opportunity longer term?

So if you peel it back to its core, generative design is constraint-based optimization, right? Something we all studied back in school. So you give it the set of constraints, and then because it learns in the cloud, it can run multiple iterations of a design that will meet that set of constraints and then you can optimize on different ones. So you could say I've got a constraint around space. I've got a -- here's what the floor plate looks like. I need this much relative 6-foot arc around every position. I've got lighting constraints. Some people want a lot of light. Some people want less light. And then I want -- what I want to optimize around is the lowest cost, right? And you can run generative design and have it, and it will just generate tens and hundreds and thousands of designs that meet all those constraints in various ways. And you can select from that set of designs the one that you want to go off and implement. So it is -- that ability to think in a constraint-based way, enter those constraints, leverage the CPU cycles of the cloud to do the actual work on the back end and test to make sure you're meeting those constraints and then output thousands of designs from which you can select the one you want. It's applicable not just in manufacturing, for example, optimizing around lightweighting. It can be used in Revit for optimizing office layout. It can be used -- we have customers that use it for site layout. I've got a piece of land, and I want to put multifamily housing on here. What's the best way to position those houses so that I get the optimum lighting for the houses. So it ends up being broadly applicable across multiple spaces. Ultimately, they could be used in M&E as well as a way of generating -- here's an explosion. What do you think the various capabilities and how that should be rendered and will look.

Great. And then just on the pricing around generative. So at last week's Analyst Day, you talked more about this idea of introducing consumption-based or new types of revenue models over time, consumption-based being one of them. Generative is a good opportunity to do that. Could you just remind us, how are you exactly pricing generative design for value? And how should we think about consumption-based revenue in the context of the model going forward?

Yes. The way it works in Fusion 360. So you're using generative design for part design within Fusion 360 or for product design. The way it works there is you can run the back end process and have it generate designs. You can view those designs. You can look at kind of a spider graph if you've got 5 different constraints, which are optimized on which constraints. When you want to select one and say, okay, this is the one I want to pull down now, and I need it to be an active design because I'm going to tweak the color or I'm going to tweak something here or there, that's when you pay, right? So the -- and ultimately, we can price that based on a whole different set of factors that have to do with the savings that come from that. But initially, you pay at the point that you've done the work and you've selected a design, and now, I want to take it and go to the next clip, whatever that next clip looks like.

Got it. Got it. Maybe just one more on manufacturing. So this is an area you mentioned earlier is more of a medium term opportunity. But by our count, Autodesk has done a really nice job gaining share in the manufacturing space in recent years. So what is leading to the success? You talked a little bit about Fusion 360, but maybe you could just talk a minute more about what is actually leading to the success you're seeing in manufacturing.

I think just a couple of things. I think it's -- you look at Fusion 360, it is a modern -- on the front end, it's a modern CAD tool. And one of the stats that we gave last week that Scott Reese walked through the Fusion 360 is the huge success we're having with students. And you compare a modern cloud-based tool to -- my kids are in their 20s -- to someone that age versus, hey, here's a piece of software that was written 30 years ago and it's called SolidWorks or it's called Inventor, to just to use our own product as an example. They kind of look at it, "Daddy, like, why would you ever use the old stuff? Why wouldn't you use a more modern interface that's easier to use, that's more intuitive, that's got built-in help. You can click here and you can figure out what we need to do next." So part of it is just it's a modern design, it's a modern tool set. Part of it is it's a full workflow. It's not just CAD or just CAM or just simulations. It has all of that built into 1 workflow. And so it's very easy to go from, hey, I designed it to I'm designing a car. Is the 8-pillar strong enough to withstand the force of this car going 80 miles an hour and still keep the windshield from falling in? So that capability is built into the tool itself, and then it goes from there to CAM and, ultimately, to a PLM-like capability where you can store the various engineering change levels of the parts inside of it. The end-to-end workflow that it provides is very attractive not just to millennials and to kids the age of my kids. They're very attractive to companies too, and in particular, startup companies. They look at that and go, "I can buy this. I can get all this capability instead of having to weave together myself a very extensive CAD tool, a very expensive simulation tool, a very expensive CAM tool. Maybe that CAM tool doesn't speak well to the CNC machines I've got, so now I've got to have 2 different CAM tools." It ends up being a very easy-to-use product as well. It handles the complete workflow. And we hear this a lot. We -- Scott highlighted a couple of competitive wins -- Scott Reese, a couple of competitive wins that we have with this product. You hear a lot companies that are saying, yes, we're a big x ticket house, but our newer product -- our newer projects, we want to start using Fusion 360 on that. It's how we see the future developing.

Makes sense. Switching to nonpaying users. So I'm still always fascinated by this, that round numbers, Autodesk has 5 million paid subscriptions. And then you recently commented how there are 14 million nonpaying customers, including 12 million who have never paid Autodesk for the solution. So first, can you just remind us why is there such a large population of people using but not paying for Autodesk products to begin with? And now that you're really mature down the path of identifying and engaging with these noncompliant users, how much of this is truly addressable in coming years?

Yes. When you go back to why is there some of the actively used pirated or what we now call noncompliant licenses in the world, I think it speaks to a couple of things. First is the predominance -- AutoCAD is the most pirated of all of our products, and it's a design exchange standard AutoCAD. And so I think the predominance of AutoCAD in the design market is one factor. The second is before we made the shift to subscription, in U.S. dollars anyway, a license -- a perpetual license for AutoCAD sold, round numbers, for $5,000. That's a big bite for a lot of people to take. And so when you've got that combination of I have to have it, and the only way to get it is to fork out $5,000, that drove a lot of the piracy that we saw. I think it also drove a whole set of people who wanted to sell pirated licenses, to find a way to crack it and to say, okay, it's not free, but instead of $5,000, I'll sell it to you for $1,000, right? And that became -- even though the buyer should have known better, because if the deal seems too good to be true, it probably is, they created a market for people who would pack the license and then turn around and sell pirated licenses. So as a result, we have a lot of customers who have an estate of licenses or subscriptions that they're paying us for and an estate of pirated licenses, which they continue to use that are active. And of course, when you call them and say, "Hey, it looks to us like you're using 13 pirated licenses of AutoCAD, " the initial action is, "That's impossible. We would never do that." Right? We want to be compliant with all of our licenses. We have a self-compliance tool they can run, and then they -- we ship it to them and they come back and say, "Yes, I don't know how this happened, but you're right. We do have 13." And then I'm just making these numbers up. But we have a set that we haven't paid for. And it typically happens. When a purchasing agent gets the order from the engineering team, I just hired 10 new people and I need AutoCAD for each of them along with other things. And then the agent goes, "That's expensive. I get paid on discount. Let me see if I can get a better deal,". And they fire up Google and go cheap AutoCAD, and a set of sites pop up. And so they end up buying pirated licenses from this kind of secondary market that's been created. As we -- I mean, we do go through, by the way, and identify those sites and try to shut them down, but you can imagine that's a leaky process. So that's -- that combination of a very valuable product that many people need and what had been a very high price, drove this big base of pirated licenses out into the marketplace.

Great. Switching to some financial questions now. So last week, Autodesk reaffirmed healthy fiscal '23 targets, revenue growing in the high teens and free cash flow growing in the low 20s. We talked a little bit about this last year, but maybe to -- last week, but maybe you can remind us, how much confidence do we have in these targets given the macro backdrop? And any comments you can make on the linearity of both revenue, free cash flow as we look out to fiscal '23?

Yes. So I don't want to get into giving you a fiscal '22 guidance number at this point. I think the confidence that we have and the reason that we've made the statement about our confidence in the fiscal '23 targets comes from a very detailed financial model that we've been working on and refining and adding layers of sophistication through for the last 5 years, to the point where it outgrew Excel. And we no longer run it in Excel. We run it on a web-based product. So we have a very sophisticated model. We -- it has literally hundreds of variables inside of it. And I've been doing -- as you would imagine, for the last 90 days, I've been doing an enormous amount of scenario analysis. We've picked some really dire scenarios. We've picked some less dire scenario. Let's run these out, not just through fiscal '21, but out through fiscal '23 and beyond, and see what the effect looks like. And then it does assume that we see some level of economic recovery this year. And so one of the questions that I've been getting is, well, why would you assume that? Why wouldn't you assume that this recession goes on? And it's -- that assumption is informed by what we've seen in markets where they shut down, as almost every market did for some period of time, but they've come back online. And so you think about China. You think about Korea. To some extent, Japan. And what we see is, as those markets come back online, we see a significant uptick in both weekly active usage and in the new sales that happened in the wake of them coming back to the office. And so one of the statistics we gave you on the earnings call is a license compliance deal, but we've already -- as Wuhan came back online, we already closed a fairly significant license compliance deal at Wuhan, right? So what we're seeing is a trend that's not just demand is destroyed and it's not coming back. What we're seeing is there's a pause, but then the weekly active usage comes back. And as it begins to come back, we start to see the market come back for new demand as well. So we listed on our website the core assumptions behind what would drive us to the low end versus the high end of our guidance for fiscal '21, and then we trended those things out through fiscal '23. That's what underpins the confidence that we have in the targets. I think the 2 other kind of quick points on that, Adam, one is, and you and I have talked about this, more of our free cash flow out through time comes from the P&L as opposed to the buildup of deferred revenue. And so as we continue to scale, that obviously drives more of the $2.4 billion of free cash flow. The second is some of the trends that we've seen as companies have gone into this on multiyear sales, and as -- but we did see a slowdown in the percent of transactions that went out as multiyear buys in the second half of Q1. It didn't fall off the table. It didn't go from x to 0. There was a moderate downtick. I've assumed that in the assumption that we continue to see a moderate downtick. But what we're not seeing is that go to 0. So I think both sides will continue to contribute.

Great. And on investments, Autodesk has demonstrated some really good cost discipline going through the model transition, and you've mentioned multiple times this idea of pent-up demand to invest across the business. And just where are the top areas you're investing today? And conversely, has COVID opened up the opportunity for some longer-term efficiencies potentially, even on the sales and marketing side, as things potentially stayed virtual or reduced travel, et cetera?

Yes, for sure. So the areas that we continue to invest in, R&D, broadly. So across all product lines. Construction, which I see as a secular grower for the foreseeable future. It doesn't make -- and I feel like we've made great progress there. We've done a really good job integrating the acquisitions that we did. We've made huge strides there, and this is not the time to take the foot off the gas in construction. And then in our internal digitization efforts, which Jeff Kinder kind of highlighted in his presentation at Investor Day last week. So we continue to invest in those cases. The pent-up demand for sales capacity is still there. I will tell you, in some cases, we have moderated the growth in this -- in inside sales, in both the broader sales team and the inside sales for the construction space, because one of the key metrics we look at there is what is the contact rate, right? So inside sales, person sitting in front of the phone, they've got a set of leads. As they reach out, they'll make -- let's start with a phone call. If the person answers, that's a contact. If they don't, they leave a voice mail. They call back. That's a contact. If that doesn't happen, they follow-up with an e-mail. If they get a feedback on the email, that's a contact. So you add all those up and say, what's happened to the contact rate? And what we saw in the second half of Q1 is the contact rate declined, not surprisingly. Those people shifted to working from home. And so in the face of declining contact rates, we've moderated the growth of inside sales in both the main sales force and in our construction sales force. I think what you pointed to in terms of efficiency longer term is spot on. If the last 90 days has taught us anything, it's that we can be effective working from home, and that means we can also be effective selling from home, supporting our customers from home. And so I do think there are longer-term savings that we'll see, particularly in travel and entertainment, longer term.

Got it. And maybe one last question as we wrap up. Autodesk been through a number of cycles in its over 40 years as a company. And I know you weren't with Autodesk back during the Great Recession, but maybe you could talk about some of the insights of the lessons learned that Autodesk went through at that time and how that's shaping your decision-making right now?

Yes. I think the -- we were a totally different company back when the great financial crisis hit. What we saw then was our recurring revenues continued to grow, albeit modestly. But if you remember, those recurring revenues back then, we hadn't launched subscription. So all that recurring base, which is only about 40% of our revenues, was maintenance. So maintenance grew modestly through that time frame. We did see a little bit of a downtick in renewal rates, but it didn't fall through the floor. The bigger hit was on new demand. That led us to do a couple of things. A couple of the metrics that I've talked about earlier that we have access to now that we didn't have access to then. One was being able to monitor the weekly active usage and see what's happening and see who -- how is the product being used, where is the product being used and get a sense of activity market by market. That's super helpful to us. We can do that this time, and we could not do that previously. The second is the partial renewal rate, which is an indication of -- so partial renew is I've got 10 annual subscriptions coming up to a renewal and I only renewed 9 or 8 or some subset of 10, and that is an indication of a reduction in force in the customer side, not all, but typically. And so we demonstrated very [ quickly ] the partial renewal rate. And there's always a certain amount of that. There's a base level of partial renews. So what we've been looking there -- looking for there is the change in the partial renewal rate, and it really has stayed very steady, so we're not seeing that either. And I think that each of those gives us a sense of then, and watching how markets come back online has given us a good sense of where we think the second half of the year is headed.

Great, Scott. Well, I think with that, we're out of time. So thanks so much for being here today. I really appreciate it. And thanks to everyone for joining, and have a great rest of the day.

My pleasure, Adam. Thank you.

All right. Take care.

Bye now.