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

Okay. Excellent. Well, hey, good afternoon, everyone. Welcome to the Barclays TMT conference. My name is Saket Kalia. I cover software here at Barclays. Very happy to have with us the team from Autodesk. We've got Stephen Hooper, General Manager of the Fusion 360 business at Autodesk as well as Simon Mays-Smith, Head of Investor Relations. We also got Abhey Lamba and the finance team here on as well. We've got about 25 minutes. Let's take maybe the first 15 or 20 minutes to do some fireside chat here with Steve and Simon. And then we'll take some Q&A from the audience. We won't do that live, but if you've got a question, just feel free to shoot me an e-mail at [email protected]. Happy to try to weave in your questions here towards the end. So with maybe that as a framework, Steve, Simon, thanks so much for being with us here today.

You're welcome. Saket, if I may, I have a short thing I have to read, and then we'll sort of dive into it, looking forward to it. Just to say, we may make forward-looking statements during the course of this presentation. Please refer to our SEC filings for information on risks and other factors that may cause our actual results to differ materially from these statements. And let's crack on with it. Thank you.

Got it. Very helpful. Thanks, Simon. So Stephen, welcome. I believe this is the first opportunity that we've had to host you here at the Barclays conference. Just for those folks that haven't gotten a chance to spend as much time with you, can you just give us a little bit of background on your career at Autodesk and before as well as what are some of the key areas of the Fusion 360 business that are sort of in your wheelhouse, if you will?

Sure, no problem. So yes, I'm based in San Francisco. You can probably tell from my accent, I originated from the U.K., originally qualified as a mechanical engineer, but I worked in mechanical engineering for a while, migrated into the software business. And I've been at Autodesk now for the last 20 years. So I've worked in a range of positions since I've been at Autodesk. I actually joined our support organization. I've worked in sales, business development, marketing, product development, our industry strategy group. And most recently, I've been leading product development and go-to-market for our Fusion 360 business. So as the Vice President and General Manager of Fusion 360, I'm responsible for product development, which includes all of the software engineering, user experience, design, everything that goes along with building out the Fusion 360 platform as well as making sure it's set up for success in the market through its go-to-market motion, our internal sales team and, obviously, what we do with our partners there in the field. Of course, I don't do that alone, there's a great leadership team that I work with. And we're also responsible for the rest of our manufacturing portfolio. So for all of our specialty products that cut, print and fabricate macros as part of our customers' production process. So that's pretty much what I'm focused on. My main area of focus is Fusion 360 as a platform as I say. Some of the other areas of responsibility around the rest of our broader manufacturing portfolio play into that because, obviously, the people and the technologies in those areas lend themselves to building out the platform for Fusion.

Got it. Got it. That's a really helpful start there. It's going to maybe help us kind of delve into some questions on Fusion 360. But maybe before we do that, Simon, I'd actually love to loop you in here since this is your first time at the Barclays conference as well. I'd love if you could just give us a quick intro and just as importantly, recap some of the most important points you want to make sure investors saw in the last quarter that you just reported.

Saket, thank you. Great to be here. I think the Q3 results largely speak for themselves. Obviously, revenue up 13%, operating margins up 3 percentage points, and the current RBO growth rate picked up to 16%. And all of that was underpinned by very strong free cash flow. So I think that was all sort of pretty self-evident. For me, as a sort of newcomer into the business, I think there were 3 things that really stood out. The first one was the enormous opportunity ahead of us to become a broader and deeper strategic partner with our enterprise customers as they undertake their own digital transformation. And you saw that evidenced in the quarter with a 9-digit deal, which is a very significant size deal for us. And actually, that wasn't the only one. We signed a very large 8-figure deal 3 weeks earlier, which was until the one came along 3 weeks later, the largest. So that was really the first thing that was interesting, becoming a much more strategic partner for the industry. The second one, and Steve is going to talk about this, is just the traction that Fusion 360 is getting. We've got 120,000 commercial customers in Q3. And with the launch of extensions, which Steve is going to talk about, that gives us premium functionality and the ability to charge across the demand curve. But Steve is going to talk a lot more about that. And then really, the sort of final thing is just the acceleration of the SaaS business model and the secular shifts that are underpinning it and also the competitive advantages that it gives us set us up really nicely for the sort of double-digit growth we've been talking about beyond our 2023 guidance. So those were the 3 things that sort of caught me as a newcomer to the business.

That's great. That's great. That's all really helpful, and so interesting tidbit on that other deal as well. Stephen, let's maybe -- let's try to dig into the Fusion 360 business a little bit because I've always found this one interesting. Maybe high level, we've got AutoCAD. You've got LT, and you've got Inventor, and all that could be used by a very broad spectrum of engineers. I guess the question is where does Fusion 360 fit in based on -- I mean, 120,000 subs is a pretty material number. That's really grown very quickly. What's sort of the profile of a targeted subscriber here for Fusion 360? How does that differ from some of those other kind of more established Autodesk products, if you will?

Yes, sure. I think to answer that question, it's by taking a step back and just thinking about what sorts of problems we're trying to solve for customers with Fusion. So there are kind of 3 secular trends that we see our customers grappling with. The first is the products are getting smarter. You're seeing more and more integrated control systems as part of product development, which leads to a multidisciplinary product development process, which is more challenging than conventional [ accounting ] side. It's prevalent in consumer products, obviously, with things like wearables, but you're seeing it happen in automotive with companies like Tesla and Rivian. And you're starting to see it in industrial machineries [ no one ] is immune from this trend. So that sets up problems for customers. I think the second piece is that processes are starting to digitize more. They haven't designed to a large degree, but you're starting to see that across the actual production process as well. And you need a more consolidated data model that everyone has access to. And then the third thing is that everyone is grappling with how to manage and reconfigure supply chains more flexibly. It's been exacerbated by the pandemic, but I think it was a trend that was already prevalent way before that. So those are the kind of the 3 challenges that we're trying to solve with Fusion. As a result, we're focused on converging design and our manufacturing disciplines together in a single solution. Once you do that, you set yourself up for a couple of opportunities. The first is with our fully integrated digital pipeline that has electronics, mechanical, simulation and manufacturing all integrated together. You can automate that process with things like generative design, which leverages AI and machine learning. The second is that with a single cloud-based digital model, you can digitize a broader cross-section of the product development process, both in your company and across the supply chain. So when I look at technologies like AutoCAD and Inventor, they fall mainly into the sort of traditional paradigms and product categories like computer-aided design, computer-aided manufacturing, FEA and simulation, computer-aided engineering, data management, PLM. And most of our customers are really looking on how they can bridge those different traditional paradigms, those traditional categories together to form a more integrated horizontally integrated product development process that helps them move to more of an agile product development methodology. That's something that Fusion can really help with. And in certain industry segments, that is more prevalent than others right now. So if you think about consumer products and medical devices as verticals, those are areas that are heavily reliant on integrated multidisciplinary design, and that has a heavy influence on convergence with manufacturing. And so we're seeing a tremendous amount of success with Fusion in those industry verticals. We're also seeing Fusion employed in specific areas like machine shops, job shops, contract manufacturers. And we're seeing some of those automation technologies like generative design are gaining a lot of traction. So to answer your question, so people like, perhaps, in consumer products industry, this is a brand-new platform approach that helps them get to market faster with higher quality results. We see a lot of traction there. Now for existing customers that are perhaps working with Inventor or AutoCAD, they see Fusion as a complement to what they already have. It integrates things like electronics design, machine with CAM technologies. It offers them the opportunity to integrate generative design as part of their process. And so they have access to the Fusion as part of our collections offering. So you can think of it as both complementary for our existing users as well as very disruptive and allows us to gain new net users and subscribers through market share acquisition in areas like consumer products and machine shops, job shops, service providers. So a good mix of the 2. And I think also stepping back on that a little bit, people might have said when we launched Inventor, "Will it replace AutoCAD?" I think over its performance in time we've seen Inventor actually complements AutoCAD, and that's why it's also part of the collection. The same thing is true here for Fusion.

That's really interesting. That's almost -- feels like Fusion 360 just has a lot of value to offer just in terms of a lot of functionality. And I think you touched on this, but I just -- I want to focus on one particular difference with Fusion 360, which is cloud delivery, right? And maybe the question is how differentiated is that versus other CAD, let's call it, mainstream CAD players, like a SolidWorks, for example? What sort of capabilities can a Fusion 360 do that maybe on-premise tools can't do?

It's exceptionally well differentiated. So I think that the first most obvious one that everyone would go to is that with the current situation we have with lockdowns, it's exacerbated the need for people to be able to work and collaborate remotely. So of course, if you host the data in the cloud, you set yourself up with a greater degree of flexibility to be able to integrate both the departments within your own organization, who are now all homebound, but also across your supply chain. So it has an excellent networking effect for Autodesk and a great value for our customers to be able to connect that disparate supply chain together and reconfigure it, if necessary. We saw that happening before the pandemic, a lot of the macroeconomic and political factors in play. A lot of people were looking to move production around onshore, offshore, reshore. These are trends that we've seen going on for a number of years. They've just been capitalized by the pandemic. So that's the obvious bandit. The secondary thing that I would talk about is when you have a single data model that represents all aspects of the product definition and its manufacturing process and you host that in the cloud, you start to unlock a lot of other potential opportunities for customers. So obviously, there's collaboration, but there's also automation. So once everyone's contributing information to a singular data model, you can start to automate things on the service side in the cloud on behalf of the customer. So we can start to process updates to geometry or manufacturing instructions. We can also start to employ things like generative design, which leverages AI and ML, to come up with suggestive product designs, understanding the constraints that your design needs to conform to in terms of manufacturing capabilities and the requirements that you have that that design is trying to service. So there is also that kind of opportunity for automation. And then the last thing I would touch on here, which I think is probably most important, is when you use these individual specialized products in the classical categories like CAD, CAM, CAE, data management, in order to process a change, you have to have access to and own a proprietary license of a particular technology to open up a file and process the update. And what that does is it locks most of our customers into a waterfall product development process, where to process any sort of change, change can only happen in one direction from design forward and people have to have access to all these different pieces of software to process that change. When the data model is in the cloud, it turns into more of a system. You can think of something like Salesforce, for example. Anyone, anywhere in the organization, any change they make to the data is automatically propagated everywhere else in the business. And any value that they contribute to that data is automatically available to everyone else in the business as well. So everyone's contributing and enriching the same source of information, whether they're in your company or across your supply chain. And that's a enormous benefit to our customers.

Yes, absolutely, kind of like a single source of truth, if you will.

Yes.

And just to add to that, that's exactly the same thing we're doing, that 360-degree view on data moving up and down in AEC as well. And it also is what then allows us to leverage that data and our core strength in digital twin as well. So you can then get into sort of the operations side of the business, too. So there are that strength in data, 2-way flow of data is critical.

Yes. Got it. Got it. Steve, I guess, without getting too -- maybe just -- we've talked about the product, and it's been super educational about the product. I'd love to maybe just dig into the Fusion 360 business sort of stand-alone, obviously, to the extent that you can talk about it. But maybe from a high level, without getting too specific, are there any differences in the profile of the Fusion 360 business in terms of either geographic or vertical exposure? Any sort of broad-based comments on kind of how the Fusion 360 business sort of differs from, let's call it, the rest of the manufacturing business at Autodesk? Does that makes sense?

Yes, absolutely. I think first, you have to think about Fusion's kind of journey that it's been on over the last 5 years or so. So it started off, as most disruptions do, in the low end of the market. And we were heavily focused on working with the student community. The big reason for that was most of the undergraduate programs that people are working with today aren't materially limited to just building pretty 3D models. They have to be able to demonstrate fundamental understanding of manufacturing and chemical design, electrical design principles. They also have to physically produce those products. So as a result, a lot of students work with Fusion because it served that need very well. And of course, those students are now graduating and taking that technology into market with them. So we began that focus in North America. And as a result, you see a concentration of that upsell in North America as well as in Mainland Europe as well. The second thing I would say is that some of those trends I spoke about, those secular trends that are impacting all manufacturers to a degree, some manufacturers experienced those trends with more severity earlier. So for example, that trend towards smart products and multidisciplinary design is something that we're seeing as particularly prevalent in consumer products and medical devices. So as a result, we see quite a strong adoption of Fusion in that profile of customer. We've also focused heavily on our Fusion platform on integrating and consolidating, unifying, if you will, all of our manufacturing capabilities. So instead of having to have 1 tool for subtractive machining, 1 tool for additive manufacturer, another tool for sheet metal fabrication, another tool for quality inspection, we've unified all of those technologies on Fusion. And as a result, we've seen a really big uptick in adoption of Fusion across what we would call machine shops, job shops and contract manufacturers. So that's lent itself really well to a high rate of adoption in an area, which has been net new growth for Autodesk in the business. So it's been very good for us to be able to expand into that area. And of course, we're now picking up adjacent usage. So we're finding that a number of customers, that maybe adopted Fusion in their machine shop but had SolidWorks in design, are now starting to explore expanding the use of Fusion across into their design environment. And that's a natural sales motion for Fusion. I think that probably gives you some idea of our adoption profile in the market right now.

Yes, absolutely. Absolutely. I'd love to maybe sort of doubling -- double-clicking on the business aspect of Fusion 360. I'd love to maybe talk about pricing a little bit. You mentioned something particularly interesting at Autodesk University a few weeks ago, and that was this idea of extensions. It almost sounded like an App Store, right, for Fusion 360, where inside the core Fusion 360 app, you can add sort of industry customizations. So maybe 2-part question. First, can you maybe give us a sense for what extensions are currently available? That's the first one. And the second one is can you just talk about how that can sort of impact base pricing for Fusion 360?

Okay. So I'm just making the notes, so I don't forget the second part of base pricing. Okay. Let's start, with the extensions that are currently available, there are 5 of them. There's one for generative design, which is the automation technology that we mentioned earlier. There's one for life cycle management. So it's called the managed extension, and it handles things like engineering change orders, release management, bills and materials and part numbering. There is one that's focused on more sophisticated machining for personas that operate in the machine, dropping machines, et cetera. There's one that's focused on sheet metal fabrication, welding, and there's one that is focused on -- at its manufacturing. Now it is worth knowing that for each one of those capabilities, this cut some base level of those capabilities in the $495 core platform. What these extensions do is target the needs of specialist personas. And so they do that in a way that doesn't compromise the brand promise of Fusion. And now there are 3 things we're trying to solve for with Fusion. One, we're trying to make sure that there's a consistent single cloud data model, that one single source of truth you mentioned. Two, that there is a consistent user experience across the board. And three, that there is just one brand and it becomes very simple for customers to understand how to implement that across the product line and process. So these extensions, what they do is they don't break any of those promises. There is still a single data. Well, if you turn on the machining extension, it doesn't create a new data type. It just adds extra information to the data model. It doesn't change the user experience. It just adds extra capabilities, extra buds to your existing user interface, and the brand remains the same. So it's very simple for a customer to basically be able to identify what they need based on their persona and turn it on. And the important thing is they turn it on just for the duration that they require it. So it becomes very targeted for the customer in terms of their persona. They only buy what they need, and they also only buy it for the duration of time they need it, a day, a month or a year. So it becomes very, very flexible from a customer's point of view, and that allows us to price more efficiently across the demand curve, which is something that Simon mentioned earlier on. Now you mentioned base pricing. The base pricing for Fusion is $495. What I'd like to do is clear up the misconception that Fusion is a $495 product. It isn't. That is the base level. So if you think of something like Salesforce, of course, there's a base level of access. We use -- I use Salesforce in my group. I can tell you I spend a lot more than that base level of access because of the different personas that are working in my organization. The same thing is true here. $495 gives everyone ubiquitous access to the same core data model that everyone can contribute to and everyone can access. The extensions allow us to price effectively for specific personas, who can turn on what they need just as they need it for the duration of time that they need it. So great value to a customer. They only pay for what they need when they need it, hugely differential for us. And it allows us to price accordingly without eroding the value of some of the technology that we have in the portfolio.

Got it. Got it. That sounds really interesting, very flexible for sure for a customer. I have so many more questions on Fusion 360. But in the couple of minutes that we've got left, I want to try to take advantage of the amount of time that you spend with customers, right, which I sense is a lot. And one of the questions that we're trying to ask all of our management teams at this conference is sort of what they're hearing from their customers about 2021, right? And specifically, their willingness to spend and invest, right? I mean obviously, 2020 has been a very different year. Who knows what 2021 will bring? But curious in the conversations that you've kind of had with customers, broad brush, of course, what are they saying?

They're saying there's a lot of optimism now. I think as you start to see the first round of vaccinations going out across the world, I think there's a lot of optimism. But I think mixed to that optimism was also a recognition that we just can't get back to the way things were before. Certainly, it caused a lot of disruption for us as a business. Fortunately, for Fusion, with the pricing model that we've got, the business model that we've got, we were well set up with our go-to-market sales motion to be able to sell remotely through e-commerce and hub sales and then use local resources with our partners to actually go in and sell those vertical extensions. So we don't have any intention of going back to the old way of doing things. We think that this has acted as a catalyst to demonstrate the need to accelerate that need towards the cloud, to build greater flexibility so that you have the contingents to handle disruptions like the pandemic. And I think the sentiment I'm hearing from most customers is this is the catalyst that they needed to really accelerate digitization across their process, adoption of cloud and ensuring they have greater flexibility to be able to deal with these types of market disruption. So we're seeing a big uptick in adoption. I think that's been driven by this catalyst, but I'm pretty confident that we're going to see -- continue to see it expand over the coming years.

Got it. Got it. Well, Stephen, I've got so many more questions that I would have loved to ask about Fusion 360, but unfortunately, not enough time to ask them. Maybe with that, I'll thank you for taking the time to be with us here today, and same for you, Simon, as well as Abhey on the line. Hopefully, in 2021, we can be back in San Francisco at the conference and doing this in person and learn even more.

We look forward to it.

Excellent, excellent. Well, Stephen, Simon, thank you so much for the time, again, today. We really appreciate it.

Thank you for having us.

Thank you, Saket.

Okay. Take care, folks. Have a good one.