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

Hello, and welcome, everyone, to the Fourth Annual Wells Fargo TMT Summit. Very excited to have one of our favorite companies here today and one of our favorite executives, Scott Herren, Chief Financial Officer of Autodesk. Scott, thank you for joining us.

Hey, thanks, Phil. Thanks for having me again. And it's nice to not have to travel to Las Vegas to participate, at least.

Thank you. Took out all the friction with the video conference.

Well, first off here, congratulations on your new role at Cisco. That's very exciting news. And then obviously, you reported solid Q3 results last week as well in addition to that news coming out. And you mentioned that Autodesk is "stronger than ever" and that "it's a good time to go out," I think, was your line. Could you walk us through some of the puts and takes in the quarter? And what also gives you just that confidence in your statement there?

Yes. Yes. Thanks for that, Phil. It's never easy to leave a role like this, and it's particularly hard to leave a company like Autodesk. It is -- the last 6 years at Autodesk have been by far the most enjoyable of my entire career. So it's hard to leave. I'm excited about the opportunity at Cisco, very excited about a chance to kind of do some of the same things we did here all over again at a bigger scale and with even greater complexity. So that's kind of what was behind the motivation. As I look back on the quarter, I think our company is stronger across the board. So let me talk about the company first, and then we can kind of pick at some of the nuances of Q3. Product competitively. I think our competitiveness has never been better than it is today in all of our core markets. You look at kind of AEC going from strength to strength and the way we've built out the Construction portfolio, which has taken a lot of discipline actually to get it to this level. Fully integrated from just a product competitiveness standpoint. I think we're the product to beat in that construction space now. So not just given the breadth of our portfolio, but best-of-breed in the various elements. So that feels quite good. Manufacturing has had a little bit of a tougher go. Overall, the industry has had a little bit of a tougher go. I think we're outgrowing our key competitors there. In particular, the success of Fusion 360, and then we should probably cycle back and do a deeper dive on Fusion 360 later, has been a real bright spot for us as a company. And as I look ahead, there's no question that, that industry is going to make the transition to the next platform, which is the cloud. And as it does, Fusion 360 is extremely well positioned. And then it's very hard to catch up once you get behind in that space. So I feel good about our competitiveness. The executive team is as strong as I've ever seen. We've executed extremely well coming through the business model shift. That team is very tight. We've been through a lot of ups and downs together as a group. And I think that team is very strong, talented and tight. And then I look at my own team. The finance team is super strong. And my job, my seat could sit empty for 3, 6 months and the company won't miss a beat, right, because of the strength of my direct report team. So if there's ever a good time to leave, it's a time when you feel like the company is super strong, is not going to miss a beat when I'm not here. And I'm not a child anymore. I hit 59 this year, 59 years old, which I kind of feel like father time just saying that. At the -- it's kind of like this is the time. You're going to do one more, now it's the time to go do one more. And so it's really the strength of the company across the board that's enabled me to consider another opportunity.

Looking great for 59, brother.

It doesn't look quite as good from this side looking out.

So we need the -- what it was like, the touch-up function on the video chat. But joking aside, the thing for that answer is, obviously, we'll miss you, but it's an exciting opportunity. And as you said, Autodesk is in a great, great, great spot. Now let's dive into some more questions here. I mean, obviously, we're now 10-plus months into the COVID-19 pandemic. And we've seen CIOs across really all industries reevaluate their strategies. And the line we've been using is that sort of no-cloud is officially a no-go going forward. And that the need for, call it, digital transformation, but also digitization of processes, has never been more important. Can you talk about what this sort of prominent digitization and shift to the cloud has meant and means for Autodesk ant its customers?

Yes. We've seen it, I'd say, more pronounced in AEC simply because there was more room to run into. There was less adoption of technology, particularly in the C, in the Construction part of AEC. And we've seen a huge uptake in our cloud-based collaboration products that we talk about, most notably BIM 360 Design and BIM 360 Docs. And we ran a special -- as the pandemic set in, and I confess, I was late to recognize just how broad spread the business was going to be. So it was probably late February before the magnitude of it really set in on me. And so one of the things, obviously, consider the safety of our employees first, but then very quickly looked at our partners and customers and said, "What are the things we should be putting in place now to support them through this?" Because it was clear that there was going to be a lot of economic dislocation. And one of those was to help them very seamlessly move to a collaborative work environment where you couldn't get to the office. And so that's where Design and Docs fits very nicely. We extended no-charge access to that for up to 60 days; allowed them to use it for commercial purposes, which we had not done previously with our trial usage; and then ultimately added another 30 days to that so that we could get them converted from a trial product to a full-fledged product. And the number of projects running in BIM 360 Design and on Docs are at all-time highs. And even after the free trial program ended, we continue to see growth in the projects that are enabled on those 2 platforms. And so it was definitely good for the adoption of those products, but also good for our customers and helped them very seamlessly move to a kind of an abrupt shift to work from home, which we all felt. I'd say on the manufacturing side, the uptake of Fusion 360 has been phenomenal. We gave you the stat on our Q3 call that we added 25,000 net, added 25,000 more commercial subscribers to Fusion 360 in the last 90 days, right? So Fusion 360 is also growing rapidly. It's cloud-based. It can also be a seamless collaboration platform. People can be anywhere and collaborate on that. And that uptake, while it's probably less material from a revenue standpoint, that uptake has been huge and is the leading edge of where I see manufacturing going longer term. So that -- you're right, the digitization mandate that went from, yes, that's important, we need to do that sometime; to, hey, we've got to do it now because it's the only way we can get our jobs done, has, there's no question, accelerated across all of our customers.

Yes. No, a lot of talk about sort of digital transformation always focuses on, call it, customer-facing applications. But yes, to your point, sort of those back office sort of internal processes that also need to be digitized as well. And obviously, you've mentioned some industries like construction that sort of call it -- we'll call it, on the earlier stages of the curve and adoption of technology, but now you sort of have to.

Yes. No, it's right on. And it's interesting when you watch where they're adopting and how they're adopting in construction. As they shut down job sites, they needed to secure those sites. As they reopened in a COVID world, where they had to have physical distancing and limited number of people, the checklist capabilities so that every job, every project was actually going through the right safety protocols. So it wasn't just adopted in the design and in the back office and in the trailer, it was adopted out on the job site, too, the cloud-based products were. So it's -- no one wished for this, obviously. It's been a horrendous human toll that the pandemic has taken. But if you're looking for some kind of what's the upside on this, it certainly has accelerated the adoption of our products and the adoption of digital products across the board.

The -- just a follow-up on that and talking about sort of just the economic cycle and the impact on Autodesk. Obviously, there's some positives in terms of digitization of processes in maybe industries have lagging in terms of technology adoption. But I guess, historically, people have thought about Autodesk's core business, call it the core design functions, as being quite cycle -- though obviously, everybody remembers the financial crisis. But how would you describe sort of what's different about Autodesk today than, let's say, 10-plus years ago? How is the shift to the subscription business model impacted how you think about the cyclicality of your business? Then I'll follow-up on that in terms of, call it, way out.

Yes. If you look back at '08 and '09, calendar '08 and '09, our -- we were almost exclusively perpetual license with a small amount of maintenance. That -- those new perpetual license sales dropped 40% on a seat basis year-on-year, 40% drop in perpetual licenses. And then by the way -- and that was largely as companies went into a reduction of force and didn't need to buy the same number of new licenses. And by the way, as they hired people back, they could pull those licenses back off-the-shelf and put them to use. Before, they had to actually come back to us, and only when their workforce got above where it had been pre the global financial crisis, so they have to start buying more from us. That was a pretty profound impact. Our revenues declined 27% year-on-year at that point. Compare that to where we are today, we're 97% recurring at this point. The big variable when you've got that kind of a recurring revenue base is what's happening on renewal rates? And our renewal rates held pretty steady through this. There's no question we felt that impact in new product subscription sales, not nearly down as far as perpetual licenses had been historically, but we felt an impact there and we continue to feel that. But the size of our renewal base and the resiliency of those renewal rates have continued to allow us to grow in double digits all the way through this. And you see we forecasted that again for next year. So it's -- we're in a completely different place. And we've talked about it, Phil. You and I talked about this, what, for 5 years, that it's a far more resilient model. I'm thankful that we got through it before the pandemic set in. But having gotten to this point, I hope we finally -- I used this phrase earlier, exorcize the demons, exorcize with an O, the demons of '08 and '09. Because I think we've not only talked about it and everyone sees it in their spreadsheet, but they've now seen it in action.

Yes. Yes. The thing I talked about, obviously, this is my, I guess, fifth year anniversary on the note that we were out in a prior bank talking about this transition. And I think I always said, it's like, we need to get to that one sort of magical year, sort of 2019, when the model inflects because that's when you'll actually have cash flow and the company will be a lot more resilient if that much of the business has flipped over. So thankfully, I guess, timing-wise, this happened in...

First time I'd ever seen the word octuple was in that...

Octuple-desk. I'm still sticking to it. The -- but let's talk about shape to 2020 and '23 because that's another question I get on this. Obviously, you all have fared way better in terms of the business during this economic downturn than a lot of people were worried about. Obviously, you gave color commentary on next year and then the fiscal 2023 guidance. But help me about the path out, the path back and that path to '23. Maybe just provide some more color there.

Yes, sure. We -- one of the reasons that I wanted to give a little bit of insight on the Q3 call into fiscal '22 is we had said all along it's not linear. Even before the pandemic, I said like, hey, going from '20 to '21 to '22 to '23, that's not going to be just a straight-line path. We told you what the compound annual growth rate would be, but don't expect it to be straight line. And what we have seen a lot in some of the published models was kind of a straight-line connecting '21 to '23. So I wanted to give you a sense of that. And the mechanics behind it are not that complex. There's a couple of things you got to understand. One is we are seeing economic recovery, frankly less so in the U.K. and the U.S. right now, but we're seeing it in the rest of the world, and sequential improvement. And I expect that sequential improvement, in aggregate now, to continue through Q4. The first half of next year is a little more difficult to predict for me right now, given this current wave and what that's going to mean in terms of the mortality rate, and therefore, in terms of the way governments respond to it. But there's no question that there's been kind of this unwinding of uncertainty that you heard Andrew talk about. I think that's a really important phrase to come back to. And so our expectation is we begin to see continued improvement through the year next year, but probably a more back-end loaded year. I think the second half is going to be more robust in terms of recovery than the first half of the year with a subscription model, and all ratable, 97% ratable revenue, that means a lot of the second half sales. We won't see the benefit of revenue in fiscal '22. A lot of the second half sales, we'll see the benefit of it in fiscal '23. So there's a little bit of a back-end loaded that's a headwind to the revenue growth in '22, but obviously then flips around and becomes a tailwind to revenue growth in fiscal '23.

All right. That makes sense. I'm going to ask you about, obviously, one of my favorite topics, and that's the non-pirate but active non-subscriber metric, the 1.8 million entering this year is split 50-50. Obviously, we're a believer that all those people were at some point converted to subscription. But a question that I often get is, how long can a customer, lack of a better term, like, sweat a perpetual license without upgrading? And then how do you think about the conversion of this non-subscriber user base?

I think that we've had that phenomenon. We call them legacy customers, right? [ It's a borrowed ] you actually -- legacy customers because they are -- they've got a legitimate perpetual license. It's perpetual, so they can use it as long as they want. But they haven't either didn't have patch maintenance or didn't renew maintenance somewhere along the line. So they just sweat this older and older and older version. Every year, obviously, a new release comes out. Every 3 to 4 years, the product has moved far enough that we have to actually make changes to the way the data is stored. It gets too clunky, and so there's a new file type. Those file type changes then become incompatible if you're using an older version of the software. And in each of our core markets, you have to -- they're ecosystem markets, whether it's AEC and you're working with architects, general contractors, subcontractors, it's a whole ecosystem of people that need to exchange design class. Same in manufacturing, right? It's -- the easy example is constructing an automobile. You're working with tons of different suppliers, vendors that are providing parts. So the utility of the product declines over time because your ability to exchange files and to understand the latest and greatest goes less and less. I think probably the best data point that I can give you on, so how soon do people really have to come back and buy a more modern version, a subscription, a more modern version of what they're using? When we ran those legacy promos, you remember that when we first phased out selling perpetual licenses and wanted to go after that legacy base, what we saw was, typically, we had seen it could be about a 5-year cycle at the midpoint. What we saw with those promos was actually it was a 7-year cycle. So the midpoint of the licenses that were turned in to take advantage of the promo and get on to product subscription was 7 years old. That feels a bit too long, and I think we probably swept out all the corners and all the cobwebs of everyones' license file through those promos. But somewhere in that 5- to 7-year range is the right way to think about it.

Got it, got it. Let's stick with the idea of also of recovery in sort of a post-pandemic world. I mean, there's been a lot of discussion about the potential for de-urbanization as a result of this. And how do you think about the evolution of cities and infrastructure requirements and the role that Autodesk can play in this new area? And what sort of new and interesting opportunities does a more decentralized, let's say, society present?

Let me step back first and talk about what I think it means to have an office anymore. Because one of the things that we've all learned extremely well through this time is you don't need an office just to have a desk to come in and work by yourself all day, right? I think we've proven you can do that effectively whether you're home or wherever you are. But I can't wait to get back to the office. I really miss that, I miss the camaraderie. I miss the ease of having -- just have a 2-minute conversation. I don't want to have to schedule a WebEX call to have a 2-minute conversation, I want to just walk next door and have that conversation. So the what -- the meaning of why you have an office is changing. And by the way, I think it's going to continue to be changed post when the world gets back to whatever the next normal looks like. So what we see is companies not necessarily taking down their footprint of space as much as they are reconfiguring what they have. We have been on -- I'll just give you our example. We had been on a mission to increase the density, meaning people per square foot in our San Francisco office for several years, largely because real estate in San Francisco is ridiculously expensive. And more people, it was easier to hire there. We wanted more people in that office. And so rather than rent more space, we just made it denser and denser and denser. And what -- and I think most of my peers did the same thing. What you're going to see happen is a de-densification of those offices rather than taking down of footprint. Longer term, let's talk about how development is going to go. I don't have a crystal ball that's any clearer than yours, but here's what I think will happen on this, Phil. Is you may see less a 50-story new office buildings being built in the central business district, downtown Manhattan, downtown Chicago, downtown San Francisco, and more on 5-, 10-story buildings being built more out on the perimeter, in the suburbs. That still drives business for us. That still drives the demand, not just for building construction but also for infrastructure that may not exist there, light rail or roads or the ability to get people in and out of those offices. And so the population of the world is going to grow. And as the population of the world grows and the economy grows, you're going to need more office space. And so it's a question of where does it get built? And what are the implications of that?

Yes. And the way I thought about it is even that idea of, okay, 50-story building or 5, 10 stories. And sort of like, hey, is the number of architects, engineers in the world going up or down? And I think the reality, to your point is, is that it's up. Because it's sort of like you just have more buildings, just maybe distribution. But it doesn't change sort of Autodesk unit economics too largely, which is the person. Because Autodesk is the productivity suite for these individuals.

Yes. Totally agree.

So another question I get a lot about is government infrastructure bill, and sort of what that means for Autodesk. Maybe you could elaborate that. I know you touched on it on the Q3 call, but maybe just drill in that for a minute.

Yes, we have a sizable infrastructure business today, where people buy our software and use it to build infrastructure, roads, bridges, highways, et cetera. We don't break it out, but it's part of our AEC business. And we haven't talked about it much mainly because all the air in the room has been consumed by our focus on Construction. We've been talking about Construction so much that it's, when we move away from that, I want to talk about manufacturing instead of another element of AEC. But we have a sizable piece of our AEC business that's built in infrastructure today. It seems to be one of the few areas that both sides of the aisle can agree needs to be done in this country. And frankly, not just here, there's an aging infrastructure around the world. We've talked about it at our Investor Day in the past and the investments we've made in infrastructure and kind of the size of the TAM there. And we can see, now that Bentley has gone public, we can see what their financials look like and what their growth rates look like. And we know that we're competing quite well head-to-head against them at this point. So I feel good about our infrastructure business longer term. In terms of when a bill actually gets passed, who knows? While they can agree on the need, I think there's going to continue to be political infighting on what's the size of the bill and where do the projects actually get funded. So I think it will take some time, a, to get a bill passed in this country; and then to have that turn into real projects that then start to drive business for us. So think of there being an offset from the time that's passed before we start to see the tailwind. But there's no question. We've got a super-competitive play in this space and a pretty sizable business in infrastructure today. So it will be a beneficiary. We will be a beneficiary of that bill when it gets done.

Got it. Now sticking with sort of the theme of recovery and, call it, path to '23. Let's focus on products. I mean, you'd mentioned Fusion 360 earlier. And obviously, there's been a lot on of buzz about that. And some of them -- honestly, at the Analyst Day, some of the user metrics, like a new Fusion was doing well, Fusion 360 was doing well. But I was like, wow, okay, that's a bigger unit number than I expected. I mean, obviously, maybe drill into Fusion 360 for a minute. But also what other products are you mostly excited about?

So Fusion 360, I'm very excited about. It's something that I've been talking about for 5 years. And you guys were -- have been pretty patient with me, by and large, but are kind of like rolling your eyes thinking, will you stop talking about this tiny nib of your business and get back onto something important? But now you start to get it, right? You start to see like, hey, this is a real -- that platform shift is going to happen. And when it happens, there's no question we've got a technology lead in that space and a better opportunity to monetize that lead at this point. So we give you some of these metrics. And those are just commercial users, by the way, that we're giving you. So those are paid users. If you added in the students, there's orders of magnitude more. And we'll have shown you those graphs in the past. There's orders of magnitude, more users of Fusion, which bodes well for the future of Fusion as well as they're coming out of university with experience, hands-on experience using Fusion. So I think it's -- that platform shift will happen. It -- as it does happen, I think our ability to be the prime player in that space is better than anyone else in the marketplace today because of the breadth of our offering and the depth of the technology that we've built out. So it's a real opportunity for us. It's probably a more material opportunity in terms of showing up in spreadsheet better '23 -- fiscal '23 and beyond, than it is between here and there just because we've priced it at such an attractive price point. But it's a very exciting opportunity for us, longer term.

Yes. That's great. Let's drill into the Construction for a little bit. I mean, obviously, this has been a focus for -- to your point, it's multiple quarters, multiple years, the organic and inorganic development. How do you think about sort of just adoption? I know we talked about it a little bit, but this is one of the questions I get is, sort of the Construction, as I mentioned before, sort of very early on the adoption curve of technology. Who is driving the change? Is the question that I often get. Is it the person that's got a team delivery of the project, of the building? Is it the builders themselves? Like who's driving the adoption? And sort of why now?

It's -- typically it's in the general contractor. In some cases, the subs or the trades. You'll hear us call them both, say the kind of the people that are doing the plumbing or doing the drywall or doing the acoustical ceiling tile, et cetera. But it typically is within the GC community that's driving the adoption of the site execution piece. If you look at our broader construction portfolio, BIM 360 Design picks up right where Revit leaves off, right? So it's the ability to have kind of Google Docs for our Revit design, for a building information model with multiple authors all in making edits and modifications at the same time. So I think the breadth of that portfolio, it is one of the key strengths of our play. When you add to it the site execution capabilities and the way we've integrated that now with the launch of Project Golden Gate, which is our internal name for getting this all, not just having the same look and feel but the data flows to be seamless across products. That's a huge opportunity. And then over -- so think of it as the GCs, and to some extent, the trades driving it. And then overlay the competitive nature of that business. These are huge, gigantic companies that are running on 2%, 3%, 5% bottom line margins, right? Very competitive against one another. If you and I are in that kind of a battle with each other and you adopt technology that gives you better visibility, better timing, better understanding of what's happening in the project, less scrap, less rework, I have to adopt. I don't have a choice, right? Or you're just going to -- you're going to eat my lunch on a competitive basis. And so the competitive nature of that business, it's a different kind of viral adoption, but it's a viral adoption within construction as well because of the uber-competitiveness of that space.

Yes. And I think one of the things -- other things, too, is called the, like sort of the aging out of maybe sort of the not as technically savvy members of that industry and sort of the younger blood coming in. The thing I heard, even at sort of like Autodesk University last year, was sort of like these new folks that are getting in the industry are sort of digital natives themselves and sort of want to bring that into the office. And so it almost seems like you have a couple of, like, I don't want to do it in a spreadsheet. No, I want an automated system to handle this.

It's such an interesting phenomenon because there has been a demographic shift in the workforce, particularly at the people that walk onto the job site with a hard hat and a tool belt, right? There has been a real demographic shift. And so what you see is apprenticeships going both ways, where a more skilled craftsman is teaching the craft to the younger people, and the younger digital natives are teaching the use of the technology to the older ones. So it's a really interesting phenomenon.

Got it. I've actually got a couple of write-in questions here, or actually e-mail in, technically, put in for you. The first one's on spending intentions for '22 and '23. How do you think about OpEx growth from here over the next couple of years? Where are you making investments? Particularly, what do you need to do to capture the Construction opportunity?

We continued to invest right through the pandemic. And you've seen that by the growth in our -- what our OpEx looks like year-on-year. There will be -- if this is what's behind the question, there will be a slight amount of spend increase next year over this year as the world starts to get back to normal, right? We had a huge windfall of savings this year in travel and entertainment expenses dropping dramatically from where they've been historically. It's not going to go back to where it was. I don't see T&E going back up anywhere close to the level it was in 2019, as an example. And so we're going to force the issue a little bit with budgeting. But also, I think there's a lot of people that just don't want to get on a plane and don't want -- and aren't going to want to get on a plane and make that travel. And a lot of customers who are going to say, "I'm not allowing people onto my site," right, for quite some time. So that small amount of year-to-year increase where some of the windfall savings that we got this year goes away, but it's not big. So it's much more about where we want to invest. We'll continue to drive our investment in Construction. That's a long, multiyear opportunity for us, and it's one where I think we've taken the lead from a technology standpoint. And once you got the lead, you can't let up, right? So we'll continue to invest there. We're investing in sales and sales capacity, as you'd expect. And we're focusing in on continuing to drive renewal rates even higher through our customer success organization. We're focusing on internal -- or investing on our internal digitization efforts. For a long time, we were like the shoemaker's kids running around with no shoes on. We sold digitization to our customers, and then you looked at our back office and went, "Oh my god, you're still doing that?" So we've been investing in that for a couple of years. And that will enable some of these new business models that we talk about. Those are probably the biggest. There's others, but I think those are probably the big areas to think about where we're investing year-on-year. We're at a point, by the way, where we can both grow spending and increase margins year-on-year, given the growth of the top line. So that's what you should expect next year.

Yes. The joke I have been using with Autodesk is just a problem of too much revenue.

That's not a problem.

It's like that's uptown problems, and uptown problems aren't really problems at all. The last question, I've been asking this to everyone. Would you look -- assuming we're sitting up on stage. Obviously, you'll be at Cisco at that time, but in 5 years, what do you think you'll look back on in Autodesk and think maybe, "Wow, this trend or this technology happened faster. It's more widespread and more transformative than maybe I thought back in 2020."

Well, that's a great question. I feel super bullish about where we are with the C part of AEC and the competitiveness of our offerings and the way we stitched that together. And I think Jim Lynch has done a phenomenal job leading that effort across the board for us. That's one that, as the world begins to return to normal, could really be a material contributor to revenue and faster growth for us, even faster than are currently modeled out. The one that would probably surprise me more is if Fusion 360 becomes a more material contributor to our revenue sooner than I think. Right now, I'm viewing it as a '23 and beyond contributor. That could accelerate. We certainly are adding commercial users at a rapid pace. And our ability to monetize that platform with what we've just done with the extensions, which are kind of in-app purchases that give you added capability above the core Fusion 360 platform, that monetization capability could really begin to accelerate for us because there's no question the platform is seeing huge adoption. So that's probably the 2 areas that I feel the most bullish about.

all right. Awesome. Well, our 30 minutes is up, my friend. And Scott, I just want to say again, it's been a genuine pleasure working with you, not just at Autodesk, but back at Citrix. I mean, you're one of my favorite execs, you're a good person; you're a great, just man. So yes, I want to wish you the best luck at Cisco. And it's really been a pleasure.

Yes. Thanks, Phil. I appreciate it. I've enjoyed our work together, too. And you just got to pick up Cisco now.

Is that -- I'll tell Aaron Rakers that. I'm sure -- i don't if people will let me do that, though. That's awesome. Well, thank you, Scott. Thank you, everyone.

Bye, thanks.