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

That's a good one. I think I would have seen it coming before -- I would have known that it was going to -- it's hard. I think we actually did everything we needed to do. If there's one thing that I look at this year that I would have not done, it would have been probably the 2-for-1 trade-in that we did around the named users. I think that was ill-timed in terms of our customers, everything that our customers were dealing with. And I think we really needed a 2-year program there. So if I look back and I ask myself, okay, how could I have made it that much easier and more fluid on our customers, I would have been more cautious on that program and I would have taken a totally different approach than we did. Now we've adapted. We've moved forward. But since you're pushing me, that's the place where I would have said, you know what, our customers didn't need that confusion this year.

Fair enough. And I appreciate the candor. Maybe for Scott, given COVID's impact on fiscal '21 revenue and cash flow, how, if at all, does it change the composition of the company's fiscal '23 targets?

Not at all, interestingly, Brad. Now so I should preface that by saying when we put those targets out there for fiscal '23, you remember, it was several years ago. And what I didn't want to do as CFO is put out a case that was, every time you step to the plate, you can hit a home run, so we're going to go 4-for-4 with 3 home runs and a triple kind of thing. So we obviously had a plan that was going to something higher and put out the targets that we put out there for fiscal '23. I've been running multiple scenarios, as you can imagine, since -- and I'm like Andrew, I didn't appreciate the severity of the pandemic until late in the process, really until late February, early March, is when it first became clear to me that this isn't another SARS, which is going to be kind of localized and stay in one part of the world, that this was actually going to sweep the globe and have the impact that it did. Since that realization, I've been driving my FP&A team probably crazy. Hopefully, they got some sleep over the Thanksgiving break because we've continued to run scenarios. And we run them in a good, better, best, kind of 3 scenarios each, through the really sophisticated modeling that we've built up over the -- of the company over time. And then each month, we get a new set of actuals because there's an enormous number of assumptions that go into this, this sophisticated model. We tweak it. We lay in the actuals. We look and say, is there a discontinuity now from that actual to what we thought the next quarter was going to be and the next, and smooth those trends out and run the scenarios again. And it's on the back of that, that I still feel quite comfortable with the fiscal '23 targets that we've got out there. We said all along, from a free cash flow basis, that more of that cash was going to come from the P&L in terms of net income than from the buildup of deferred. Unlike when you look at fiscal '20, a lot of that free cash flow build was more of the reversion to the mean on multiyear, longer duration, which led to a more deferred revenue. Looking ahead, there will be a small amount. There will be an echo effect to that -- those multiyear deals that we signed in fiscal '20 that will come back in fiscal '23. But more is going to come from the P&L. And most of that gets driven by growth in the top line. And we've given you a lot of the reasons why I'm quite bullish and we are quite bullish on how that top line grows out through fiscal '23. So more of the -- long way of saying more the same than different, Brad.

Yes. Brad, I would just like to reemphasize this point about maybe some CEOs and CFOs can make 3- to 5-year plans and not assume a wobble is in there somewhere. We're not those people. We definitely -- when we made our plans, we thought something over that kind of time period is going to wobble. We don't know what it is. We don't know where the wobble is going to come from. It turns out, we weren't way wrong in terms of where the wobble was going to come from, but we knew there was going to be something over that kind of time frame. And that's just good discipline. Now I think the other thing that's important to notice, the story isn't just about FY '23, right? One of the things we talked about at our Investor Day was continued double-digit growth past FY '23. And I want to make sure that we stay focused on that as well so that we don't make it all about an FY '23 kind of goal.

That's what I wanted to ask you about, actually. Andrew, you spoke about double-digit growth beyond '23. Innovation, I imagine, is important to enable Autodesk to actually achieve that. What gets you comfortable that you can grow at that rate at that scale as you look well beyond '23?

Yes. So Brad, I'm going to take you back to some of the things we said at our IR day, our Investor Day a while back, and kind of guide you through a little bit of that stack. But you're absolutely right, innovation plays a role. In our space -- and by the way, this is true of any technologically intensive market, but it's even more true in our market. Long-term technology investments pay off in our market. So for instance, we've been, at Autodesk, investing in SaaS, SaaS infrastructure, SaaS platforms for over -- about 8 years now, okay? So I mean, you look at that, that investment pays off later downstream as the customers start to embrace the technology that we were building on top of. It's been almost a decade since Autodesk built a new desktop product, okay, which is pretty amazing. It doesn't mean we won't build desktop products here and there or we won't buy a desktop product here and there. It's just interesting to know that we've been focused on this for a while, and those investments do pay off. So if we look at the post FY '23 period, I kind of highlighted several buckets where incremental growth were going to come from. One, I said, look, ongoing subscription models and premium subscriptions and some new businesses we inject in will provide some aspect of the incremental growth. But one of the other areas we said is, look, noncompliant users are going to be the gift to keep giving. It's going to be less important as we move past FY '23, but it's not going to go away. We're going to continue farming that activity for years to come. But what I also highlighted was the ongoing flow of digitization in AEC and how that was going to be pretty important heading into FY '23, continue to be important heading out of it. But beyond FY '23, you're going to see much more activity in our manufacturing business coming from rising ASPs associated with Fusion, around all the extensions that we're adding and other things that we're doing with the Fusion base to capitalize on our end user, our end-user leadership, which we absolutely have at this point, especially with net adds. So look for us to continue to add new types of subscription models out there that our customers want to purchase. Our business is going to be much more flexible as we move forward. Look for us to enter a couple of new businesses, all right? Those are not going to be critical over the next 5 years, but look for us to do that. And look for us to capitalize on this ongoing trend of digitization in AEC and also accelerate the revenue contribution associated with some of the things we're doing around Fusion 360 and our manufacturing solutions. And layered on top of all of that, the gift that keeps giving is the convergence -- the conversion of noncompliant users, which will just provide a nice steady layer to what we do.

I really appreciate that multidimensional answer because I think that's what investors are looking and expecting of you going forward. And we're optimistic you're going to be able to deliver it. So we're excited to see how all this opportunity unfolds. We're with you.

So are we.

We're with you. Maybe, Andrew, if I could ask about Autodesk University. At AU, just a couple of weeks ago, you mentioned innovation in AEC will enable real-time collaboration across all involved parties. When will this vision really become reality? And why is Autodesk best positioned to capture it?

Yes. In AEC, in particular, and I'll get to manufacturing as well. But in AEC, in particular, all of this real-time collaboration is going to be based on some form of the building information model moving fully to the cloud, all right? You're already seeing that, what you saw was a rapid acceleration of BIM 360 Design now renamed with the rollout of the new Construction platform and how people were using Revit models in the cloud to work collaboratively. But if you combine the power of the Building Information Model with what we did with Autodesk Tandem, which is a 3D digital twin, those 2 combined together provide an unprecedented flow of detailed information about a building that can be moved to real-time in the cloud. So think of the digital twin as capturing all this information from different Building Information Models, maybe from the construction professional, from the engineering professional, from the architect, or from products that aren't even Autodesk products and showing it up in real-time, in its current state, out in the cloud so that the owner can see it, the capital project manager can see it, so that everybody can see what's going on, and it's all happening in real-time powered by a fluid layer of data flow underneath. That's coming and evolving right now rapidly. And over the next 2 years, it's going to become more and more real. All the building blocks that we've been talking about for years, that we've been building behind the scenes are now starting to show up as technology and product. Now in manufacturing, because we've been working on the cloud stuff for so long, you're seeing the exact same thing showing up in manufacturing. We rolled out publicly the cloud data service that was sitting behind the scenes that's allowing simultaneous collaboration around electrical models, mechanical models, manufacturing representations of how something is going to be built all in real-time simultaneously. All of this stuff is popping up. For some people, it seemed like it popped out of nowhere. I don't think they were paying attention maybe to what we were doing. And because you're seeing all these building blocks show up, look for them to accelerate rapidly over the next couple of years. And I think you're going to start to see more and more proof. In every AU, we're going to have something exciting to say about where the portfolio is going and the new technology we're rolling out. We are now an R&D powerhouse in our space, and that's the real return on investment of doing the business model transformation. We're rolling all of that back into our R&D efforts, and every AU is going to be exciting for the next couple of years.

Awesome. We will look forward to it as we do every year. In respect to time, I think maybe we could just fit in 1 or 2 more questions. And I don't mean to make this about fiscal '23, but just to reference again, the '23 targets imply margin expansion to near 40% from 29% today. Given the importance of innovation, how do you ensure you're investing enough in the long-term opportunity?

Yes. Let me start, and then Andrew can add color to the second part of that because a lot of this is arithmetic, Brad. It's the -- we get leverage from the growth in the top line. And we will grow spending in absolute dollar terms, both next year into fiscal '22 and the following year into fiscal '23. We have to, to be able to continue to invest in that long-term double-digit growth that we see. So it's not a question of either grow margins or invest for the future. We're at a point where we can do both, we can grow margins and invest for the future at the same time. The growth in the top line, as you know, is largely fueled by the enormous renewal base we've built up, now having gone through this for 5 or 6 years. And we talked about the net revenue retention rate historically being in that 110% to 120% range. Even through the pandemic, even through the difficult times that our customers have been in, it's still greater than 100%. It's in that 100% to 110% range. So that base growing at that level fuels a lot of growth for us longer term. And then it's the noncompliant users. It's the secular growth opportunity in construction that is right there in front of us. And we've grown in construction this year. We don't break it out. But I'll tell you, we've grown this year even in the face of the shutdowns that went on many job sites that largely have come back. So secular growth there, the enormous opportunity that you see in Fusion 360. And we give you some of the user stats now. But what we announced last week, we probably don't have time to really dig into it today. There's a much better way to monetize Fusion 360 through the extensions that we've rolled out. And so there's a number of things. And then add in that the overall industry grows at somewhere between 5% and 8% per year. That's what drives the long-term double-digit growth for us. And that's what drives our growth between now and fiscal '23.

Yes. And Brad, it's so important to recognize that 5% isn't what 5% used to be, right? If you're talking about 5% spend growth for Autodesk 5 years ago, it's not the same bucket of money. It's a much bigger bucket of money now that we're talking about. So we feel the money is there. We're in an enviable position where we can grow margin a bit and grow our OpEx. So we're focused on the future. So I guarantee you, we're going to make the balanced trade-offs between revenue growth and the margin growth so that we get the right amount of OpEx in there and really make sure that we accelerate our R&D efforts. But I'll also add to this. We've inserted a lot of discipline into the company. We don't spread the bets too wide. We know we're going to fail on a few things. But rather than spreading the bet across 15 things, we probably spread the bet across 5 or 6 things, knowing full well that a couple of those aren't going to do it. Will we miss one? Probably, all right? That's okay though because it gives us a chance to really, really win big on the 3 that we felt were probably the closest opportunity. We're not omnipotent. We'll get a few things wrong. But we have injected discipline around incubating new projects, new businesses in a way that maybe the company wouldn't have done in the past.

Fair enough. We're just about out of time, but if I could sneak in one more. And Scott, you referenced non-genuine users. Can you remind us from here what are the different types of non-genuine users and how you're engaging these folks? Like why do you feel better about your opportunity to convert these users today versus a year or 2 ago? And how important is this, is converting this space to achieving the long-term targets?

Yes. I'll -- again, I'll start, Andrew, and let you jump in because I know this is an area we both feel pretty passionate about. The short answer to why we feel better about it, Brad, is we've continued to take all the methodical steps that we laid out 2 or 3 years ago, right? This isn't a one-and-done, hit it, scorched earth way to grow revenue quickly and piss off all of our customers. We're doing this in a much more thoughtful -- it's taken more time, but a much more thoughtful way in our -- the telemetry around where those noncompliant users are has gotten significantly better. As it has, the productivity of our -- it's an inside sales team largely that's chasing these license compliance transactions. And it's a sales team. It's not a bunch of very legalese-based, sharp-elbowed, jump-in-the-water-type people. We handle it as a sales process. We've gotten better at that. As their productivity has gone up, we've added more resources into that space. So we -- this is an opportunity that will be with us for quite some time. And I feel better, not just about our capacity and our capability to go about it. But I feel good about the way we're going about it and not -- and trying to ensure we don't alienate our customers in the process. I want to get paid for every version of our software that's being used, let's just be clear. But I also don't want to do it in a way where they go, you know what, this is the last dollar I ever want to send these guys.

Yes, exactly, which I'll just add on and say, we've always been really clear that this was not going to be some big pop in any one of our fiscal years. It was going to be a steady, well-executed, balanced approach to converting those customers and helping them understand what compliant looks like, what it doesn't look like, so that, one, we move forward with our customer base happy, but we keep bringing in this usage. So I'll say it again, it's the gift that we'll keep giving for years to come. And we're going to do it in a balanced way so that we actually maintain our brand and our integrity with our customers.

Awesome. With that, we're out of time. And gentlemen, as always, it's great to see you but even better to have seen you at the CS Tech Conference, this year's 24th annual. And thank you very much, everybody, very much, and have a great day.

Thanks, Brad.

Sure, Brad.