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

All right. Good afternoon, everybody. My name is Tyler Radke. I cover the data and analytics and vertical software space here at Citi, and we're really happy to have -- Autodesk is our next presentation. We have both the CEO, Andrew Anagnost; and the CFO, Scott Herren. And before I dig in, I have been getting some questions just on the decision to drop coverage and just want to put it out there that it was nothing against the company, but actually, my wife ended up taking a great job at Autodesk, and we decided in the best interest that it makes sense that I no longer cover the company, but we do appreciate Autodesk's continued support of the Citi Conference, and Andrew, Scott, Abhey, really appreciate you joining us today.

Happy to be here, Tyler. Thank you.

Great. So Andrew, I thought we'd just start off on second quarter results, which you reported a couple of weeks ago. And I think the message was that you saw a continued recovery in many parts of the world, although you remain somewhat conservative on the demand trends in the U.S. and the U.K. Maybe just give us some of the highlights for the quarter and level set where your expectations are for the back half of the year?

Yes. So we grew revenue 15%. So it was a nice year-over-year growth. We delivered positive free cash flow in an environment where we weren't sure we were going to be able to do that. Another positive sign that we talked briefly about in the quarter is that some of the customers, where we extended our terms, our payment terms to give customers a buffer, fewer customers took advantage of those payment terms than we expected, which indicates to you that there were people that were willing to use their cash even in a challenging environment. I think the kind of the most important takeaway from all of this, and I think it's important to reinforce this is right now, the way that we're seeing things play out is really right down the middle of all the models we did in terms of what the potential trajectories of the business could be. We're seeing the recovery in APAC. It continues as we progress into this quarter. We're seeing mild recoveries in daily active usage in Europe. There was some dip for the vacations, for the holiday vacations, but that's seasonal, and we expect that, and -- but it's trending back up. And we're still seeing a stubborn U.S., U.K. trend for daily active usage. Not declining but it's not growing robustly. And I think a lot of the uncertainty, especially in the U.S. is contributing to that. Some of that uncertainty unlocking would help a lot, but it definitely contributes. But down the middle, in terms of what we were expecting, so in terms of looking at the second half, we're feeling pretty good based on what we expected to happen.

Got it. And I think we're clearly not through the end of this COVID-19 pandemic, especially in the U.S. It sounds like from your commentary though, that hopefully, the worst should be behind us. You've obviously been with Autodesk for a while even before you were CEO, and you've seen the company through multiple downturns. Maybe just kind of compare and contrast Autodesk performance thus far through the COVID-19 pandemic relative to other downturns? Understanding you're in the subscription model now, but I guess, any areas that have surprised you to the upside or downside thus far?

Well, first off, let me give Scott and his team kudos for doing a brilliant job of predicting how our business would respond to an economic shock, okay? It is responding as we expected. If you remember, Scott's been very direct about the dynamics in '08 and '09 versus what we expect going forward. And as you recall, in '08, '09, we saw a 40% decrease in our new business, right? Just evaporated, okay? And some downward pressure on renewal rates. So you saw revenue evaporate fairly quickly in the '08, '09 downturn, right? What we're seeing now is a much more resilient business, all right? Renewal rates are staying very steady, even better than we expected in some respects. We expected more downward pressure. New business hasn't declined anywhere near 40%, all right? And that's a lot, in part, due to the lower upfront cost of a subscription model. They create tailwinds when there's an economic pressure. So what we're seeing is performance, really, basically, what Scott's team said, it was going to be like, and I think that's a great outcome. We didn't want any near-term proof of the resiliency of our business model. We got it, all right? And here it is. Now it doesn't mean there weren't some surprises, okay? And I think one of the biggest surprises, and it's a positive surprise, but it is a surprise is that because of the nature of the pandemic and the nature of this downturn, we saw a bit of a shift towards some of our cloud-based offerings. And there was an early scramble actually for certain companies who hadn't gotten on things like Fusion or BIM 360 Design to get on it and start using these tools in a distributed environment. That was something we never predicted heading into a downturn was the diaspora to work from home and all the pressure that was going to put in our customers. But that will actually -- nobody wanted it to come this way through a pandemic, certainly nothing that resulted in death and is the economic destruction we're seeing. But the truth of the matter is this is going to accelerate the digital transformation in some of our end markets.

Got it. And just maybe shifting to the bigger picture, hopefully post-COVID and hopefully soon, I wanted to kind of talk about both your strategies in construction and manufacturing. Obviously, in the U.S., there's a big election coming up. And one of the things we often get asked by investors is how potential changes in policy could impact Autodesk's business. So first, I guess, the first thing I wanted to talk about was on infrastructure. If we were to get a meaningful infrastructure bill passed in the coming years, how does that benefit Autodesk? What are some of the things that you're doing potentially in anticipation of that? And, like, where would the specific products that you'd see the uptake in, and maybe if you could quantify those?

Yes. So look, we anticipate that infrastructure spending is going to increase at some point during the cycle. We believe it's a great time for it. Just to put things in context, our infrastructure business is performing right now as well as the rest of our AEC business, which is a great positive place to be starting from. But what we expect to happen is our investment in road and rail, which we've been doing deliberately with a lot of our infrastructure portfolio, will provide a lot of important help in terms of capitalizing on infrastructure spending. But we did something else that had nothing to do with our products that I think is really important. I want to make sure people pay attention to it. We invested in and partnered with a company called Aurigo. And the reason that partnership is so important in an infrastructure spending environment is because Aurigo has a portfolio of solutions that works incredibly well in the capital planning phase of any kind of infrastructure projects. They have the perfect cloud-based solution for the owners, the Department of Transportation, the counties, the people that actually own and develop infrastructure. The partnership between our design preconstruction tools, their early planning tools is a great way for us to bring that whole industry, that whole process to the cloud. And that's part of what we're going to be doing. We think as people see increased infrastructure dollars coming their way, they're also going to take this as an opportunity to modernize their tool set. And let's face it, some of the tool sets in this space are not all that modern. So we feel ready for it, and we do feel it's coming.

Got it. The second topic related to the potential policy changes is just on the manufacturing side of your business. Like, how do you think about the potential for -- or reshoring or increased domestic manufacturing, how would that benefit Autodesk, if that were to play out?

Yes. So that's something we've been talking about for a long time and been, frankly, preparing for. I mean the whole Fusion tech stack has, as part of its core ethos, this notion of shorter supply chains, more advanced manufacturing, more highly automated manufacturing facilities, the ability to deal with highly networked processes for designing and engineering things. If anything, what's happening now is going to accelerate that trend. It was a decade-plus trend for onshoring to happen. It's less than a decade-plus trend now. Supply chain resiliency has been a big issue during this, supply chain disruption, sustainability issues, the cost of manufacturing onshore as factories get highly automated. There's lots of start-ups now in the area of automating -- highly automating existing factories and producing new types of micro factories. This is fundamentally going to change things, and people are looking very carefully at their supply chains and how things worked and didn't work. And let's face it, it doesn't matter what administration gets in, there is going to be tension between the U.S. and European markets and the Chinese government. And that tension isn't going away, no matter what. And that tension is going to put some pressure on the balance of supply chains. People are going to have backup plans for local supply chains at the very least. Some people might pull their supply chains back in as locally as they can or shift them over to more mature markets in other parts of the world. So it's happening. We've been preparing for it for a while, and we think we're ready. This is another opportunity, just like what I talked about in infrastructure, where people are going to be reevaluating their tool sets.

Got it. And before I get into some other topics, I just want to remind investors, if you do have a question, feel free to use the chat function through Zoom or shoot me an e-mail at tyler.radke@Citi.com, and we'll try to make this interactive. So going back to the Construction business, I wanted to talk about one of the recent acquisitions you made, Pype, which I believe is kind of in the construction workflow and management space. And that acquisition follows a pretty acquisitive past in the Construction Cloud. Maybe just talk about where the Construction Cloud portfolio is today? How far are we through the integration process? Like, are customers able to kind of have this, like, seamless end-to-end experience? And how are you thinking about just the time line on that?

Yes. So one of the major efforts going on in the Construction Cloud team right now is the integration of the portfolio. The important piece about all of this is that we have a piece of technology that is the foundational integration point, it's called the BIM 360 Docs. It's essentially becoming the common data environment for our AEC portfolio. And everything is integrating on top of that. So the team under Jim Lynch has been super focused on bringing those products together and bringing the technology together in a way that the customer sees a seamless flow of information across the entire process. That process is underway. It's getting -- the customers have seen incremental progress. They're going to see even more progress over the next 6 months. We just recently did do the Pype acquisition. That was targeted at machine learning from the submittal process. And what they're able to do is they're able to automate submittals by using a layer of machine learning that actually gathers and pull together the right kind of information immediately or in very short order. And what that provides is not only more rapid creation of the submittal, but a more accurate submittal, which is super critical because when the submittal is wrong and the change order that's generated from it is wrong, that just creates more changeovers, more submittals and more churn. So the Pype acquisition is kind of a natural extension of the portfolio, easier to integrate in than some of the bigger acquisitions we did previously.

Yes. And sticking on construction, I think one of the tailwinds that we've heard from Autodesk for many years has just been around the lack of digitization and digital technology used in the construction industry, especially relative to the rest of the economy. I think there was a PwC study that said it was, like, one of the least digitized industries. But I guess, specifically, I mean, how does Autodesk benefit from digitization from a product perspective? Like what products, I mean, obviously, you have a really strong heritage on the design side, which is digital, I guess. But, like, how do you benefit from that digitization from a product perspective?

Well, there's 2 places that we benefit, okay? One is it offers an adjacent opportunity for us in construction workflow management, preconstruction, site execution and hand-off to owners. But the other thing is digitization also favors BIM. It's really hard to have a full digital pipeline in the modern world without having it based on a 3D BIM technology. So what you see is the increasing trend towards digitization in the space is going to increase the adoption of 3D. And I know Revit is a very successful product for us, but penetration of BIM in the full market, even in the U.S., is still in the early stages. So it's going to accelerate the penetration of BIM. A 3D modeling technology is more expensive than 2D technologies. So you're going to see some acceleration in that space. But more importantly, bringing that building information model down to the rest of the construction process through what we're doing with the Construction Cloud offers a huge opportunity for us. And you know as well as I do, and we've talked about this a lot, the construction industry is struggling to become more like the manufacturing industry, but the gap between IT spend for manufacturing and what AEC spends on IT is huge. Now they'll never close that gap. I mean it's going to be probably not in my lifetime that AEC spends as much as manufacturing on a percent of turnover, but that gap is going to close. And it's going to close quicker than we expected, and that's going to represent significant opportunity.

Got it. Got it. So we've had a few questions come in. I guess one kind of relates to the overall industry and how you're thinking about it. But an investor asked, how would a combination of Bentley with Siemens impact the industry in your view?

Well, you've all seen Bentley's S-1. It's a very uninteresting business. A matter of fact, really, their business is probably tied to organic growth in the accounts they already have. And the Bentley portfolio is not a modern portfolio. They have not invested in cloud. They have not invested in some of the tools that we have. And remember, we have partnered deliberately -- we've acquired best-in-class cloud tools like PlanGrid, which we're making lots of headroads into the Departments of Transportation, which was like Bentley's home turf. The partnership with Aurigo is another factor here. Remember, they're born in the cloud, too. And people in these industries and in these Departments of Transportation and other parts of the supply chain are already seeing if they want to be fully digital, they want to get on the cloud and cloud-based tools moving forward. So while Bentley being acquired would -- may give them access to certain things, it doesn't change the fundamental position of Bentley in the market. They're a replacement target as far as we're concerned.

Yes, yes. Okay. And Andrew, I think one of the first things you communicated when you were first CEO was that you were focused on making the Construction Cloud, I think, a $1 billion business at Autodesk. And I think, clearly, you're probably not done there. At the Analyst Day, you did allude to the fact that manufacturing might be the next focus area, maybe -- especially in 3 to 5 years from now. Maybe just talk about Autodesk positioning in manufacturing? And how does Autodesk take on this market that some would argue is relatively well established with large incumbents?

Yes. So there's something different about the AEC market and the manufacturing market. The manufacturing market, especially on the design and data management side, has a long history of displacement, right? Technologies come along that are different, differentiated, better and they replaced the existing incumbent technologies. This happens about every decade or so in the manufacturing space. That happened to Autodesk. Autodesk had a tough battle with SolidWorks, where SolidWorks grabbed some market share from Autodesk in the manufacturing space. We held on to certain aspects of it. PTC was before that, where they took a lot of market share from companies like Unigraphics and I-DEAS and some players that don't exist anymore. This is an ongoing process in the manufacturing industry. Right now, the new technology platform of the future for manufacturing is the cloud. And it's not just the cloud as a data layer, it's the cloud as a machine learning layer, it's the cloud as a process flow layer. And that is the new frontier, and we're well positioned for competitive displacement right now. As a matter of fact, we are gaining market share against our most significant competitor in the space at this point, and that's going to continue. And that is part of the long history and legacy in this industry of new technologies refreshing the industry over and over again. And we're now out in front of the wave, whereas before, we were a little bit behind the wave.

Right. And I guess a follow-up. As we try to triangulate the timing on that. Obviously, it's tough to predict exactly when we see replatforming. But relative to what -- I think what we see in terms of growth rates in AEC, it still seems like manufacturing, at least from a growth rate, isn't quite growing as fast. But when do you kind of think we see this bigger replatforming play out in the manufacturing space?

Yes. Well, it's already starting, and I want to make sure that you know it that our manufacturing business is growing faster than our largest competitor in the space, okay? And you know who they are and what application that is, which is an important point at this point, all right? We believe the current environment is going to accelerate this transformation. We're very deliberate in what we're doing with regards to the Fusion business and how we approach the market. It takes a long time to replace incumbent solutions. That's why we've been very clear that this transformation isn't going to happen overnight, but it is going to have a 5 year -- a significant 5-year impact on Autodesk's business.

Got it. If we talk a little bit about the go to market, Andrew, be interested to see what you're seeing from your largest customers in this environment. I think on the call, you talked about the second half of this year being pretty heavy from an EBA renewal perspective. So obviously, it's a tough environment, especially in the U.S. where you have some big customers. But how are you thinking about the propensity for those customers to expand? And maybe as you think about those customers, like, how much of the portfolio are they using? And what would drive those expansions?

Yes. So interestingly enough, even in accounts where we're seeing usage slightly depressed because of the COVID environment, customers are still looking to invest more in us because most of our customers understand that the current cycle is kind of more like this than it is like this long protracted thing. And they recognize that their usage, which was already trending up over multiyear periods, is going to continue to trend up over the next multiyear period. So the negotiations we're having right now are for larger token pools for the EBAs. And what's the price you're going to give me on the tokens and how am I going to get this? So we're actually having a lot more strategic discussions with customers about taking a bigger deal with Autodesk so that they're ready for the next 3 years because they knew where their usage was trending. So what they want to do is lock in that usage now rather than wait to kind of negotiate add-on tokens later. So that -- some of our customers are saying, "I'm in a better negotiation -- negotiating position right now with Autodesk in terms of pulling -- looking for what my future needs are and getting it into the renewal I do this year." So it's quite interesting that even companies and customers that have seen downward pressure are having these kind of conversations with us. So we're still really bullish about our EBAs heading into the second half of the year.

Got it. And we've had some financial questions come in. So I won't put Andrew on the spot on these if you want to jump in, Scott. But just a couple of questions on, I guess, free cash flow and margins. I guess, first, is you did have a decent beat on free cash flow in Q2, at least relative to the Street? I guess why doesn't that roll through on the guide? And then just any high-level commentary on confidence in FY '22 margin expansion despite maybe a products mix shift to the cloud.

Sure. And we talked about this a little bit on the call, Tyler, the -- we had a pretty significant beat in free cash flow in Q2 relative to what we expected coming into the quarter. The biggest contributor to that was we had -- when the pandemic hit and we saw the impact it was having on our customers and their -- they went into cash conservation mode in many cases and ended up with some liquidity or some concerns about liquidity anyway. It didn't actually pan out that way, but they had concerns as it started. And so we've launched several programs to help our customers, right? We gave extended pre access to all of our cloud-based collaboration products. That actually became a great seeding program for things like BIM 360 Design and BIM 360 Docs. But we also extended payment terms. And we extended payment terms from what averages at about 30 days for a standard payment to 60 days. And our expectation was that was going to push a lot of the collection of Q2 sales out into Q3. And that's why we expected cash flow to be significantly lower. We ended up having a lot of customers not take advantage of that. In some cases, it was driven by a weak dollar, and they would like to go ahead and pay because they could translate their cash at a better exchange rate. In some cases, it's just they stuck with their standard routine and paying us at 30 days. And so it wasn't necessarily an impact for greater cash flow for the year as it was more like they ended up getting collected in the second quarter of the full year cash flow that we expected. So that's the beat in Q2 and why it doesn't roll through. As you look out our fiscal '22, I don't want to back into giving your fiscal '22 guidance sitting here on September 9. But we've talked about the path between fiscal '20 and fiscal '23 not being a straight-line linear path, right? It was never our expectation, and still not our expectation. But we're at a point in the transition where we can both grow spend as we need to, to invest in continued growth of the business and improve our margins. And so I do expect margins to increase. Obviously, revenue will grow next year in fiscal '22. I expect margins to increase again, but not on a linear path, between where we ended this year and the 40% that we've talked about in fiscal '23.

Okay, okay. That's helpful. And just another follow-up on that, that we got is, to what extent is there risk to long-term target? Should we see any more kind of COVID flare-ups?

As you can imagine, I'm sure you've been doing the same from your standpoint. I've been modeling scenarios and probably killing my team modeling scenarios over the last 6 months. And the way we do it is we have a fairly sophisticated model, obviously, that predicts the path of our business. And we ran a 3-level case, a best case, a low case and a mid-case and then we've continually updated that. As another month would close and we'd see how the various variables were tracking, we lay those in, we then trend those out, run it through, and we're running that through not just the end of fiscal '21, but all the way out, actually even beyond fiscal '23 to understand the impact of various scenarios on what that looks like and what the path looks like on the top line, what that implies for spending, what that implies for net income and obviously, what that implies for cash flow. And I feel confident in our fiscal '23 targets in all those scenarios. So it's not a case where if one little thing goes wrong, suddenly, we're going to be significantly off in fiscal '23. I feel good having done all of the scenario modeling we've done, and we're on track for the fiscal '23 targets we've laid out.

Got it. That's super helpful. So Andrew, I think going back to the go to market and obviously, this is a lot different than the EBA renewal side. But I wanted to talk about noncompliant usage, and I think this has been a pretty solid area of success and kind of ongoing driver for the company. But I think over the past few quarters, you've announced several 7-figure deals actually coming from China. And at least the way the company has talked about it, it seems like the contribution from this initiative seems to have picked up, at least relative to a year ago. Maybe just talk to us around the relative momentum of the noncompliant usage monetization? What's driving the success? And how should we think about that going forward?

Yes. So I've always told people there was never going to be any kind of hockey stick associated with noncompliant businesses. There's always going to be a steady kind of growth vector for Autodesk, kind of the gift that keeps giving for years to come, okay? That positioning is unchanged right now. Now if anything, you are seeing, where we have doubled down our efforts, increased success. We have pulled back a little bit this year, and we've been very clear about that, and that's deliberate. So what you're seeing right now is robust license compliance activity going on in places where the economy is recovering. So Asia Pacific in particular is where we're seeing the big deals and where we're seeing a lot of activity and a lot of action and you'd expect that to continue. We're being cautious and measured in Europe where we're seeing some economic growth, but we don't want to tip the scales over to getting into our customers' environment right now where they're struggling. So we're being prudent, targeted and cautious in there. And we're kind of really slowing down in the U.S. and the U.K. in particular, all right? And that's a temporary thing, but it's appropriate given the environment we're in. As those economies improve and as we see usage improve in these various places, we're going to then start moving progressively to more strict enforcement. So there's a little bit of a pause this year, even though you're seeing some of these great indicators of what we do when we focus, but those indicators, you see what we do when we focus, those are, like, carry on moving forward into the other geographies. But right now, it's a more cautious approach, but the long-term outlook on license compliance is unchanged.

And just as you think about the opportunity, obviously, a license compliance deal in the U.S. or Western Europe, maybe it's even a company that doesn't realize they're using unauthorized licenses where, maybe over in Asia, it might be more intentional. But I guess how are you thinking about the relative opportunity of those 2 bases?