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

Great. Good morning, everyone, and thanks so much for joining. My name is Adam Borg, I'm an analyst on the software team here at Stifel. I'm really excited to have Autodesk at the conference. And joining us is Stephen Hooper, who's the GM of Fusion 360; and Simon Mays-Smith from IR. In terms of format, I'm going to kick it off with some questions. And if anyone in the audience has a question, you could submit it through the webcast page, and we'll look to get to them as well. So with that, Stephen and Simon, thanks so much for being here. I really appreciate it.

Thanks for having us.

You're welcome. I'm just going to start off with the usual disclaimer, but let's get crack on with questions as soon as I've done that. So 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.

Okay.

Beautiful. So Stephen, so yes, I think a lot of the investor focus for Autodesk has been on the AEC side. But manufacturing has been an important part of the story, and is expected to take an even bigger part of the role beyond fiscal '23. And obviously, news from this past weekend suggests manufacturing continues to be an important focus. We'll look to discuss Altium a little bit later, but perhaps we could just start with what are the unique assets that Autodesk brings to the manufacturing world? And where is Autodesk seeing increasing success?

Sure. Sure. Thanks, Adam. So yes, I mean, the unique assets that I think we bring to the manufacturing industry center around our production knowledge, our deep knowledge of design. So we have a substantial user base of Inventor and Fusion 360 customers now. We also have a number of assets in the manufacturing space, so technologies like PowerMill, FeatureCAM, as part of our acquisition of Delcam. We also had manufacturing simulation technologies like Moldflow, as another example, as well as being heavily invested in additive manufacturing. So if we combine those assets together, alongside our design tools, we can create a pretty powerful unique platform for manufacturers to take product concepts all the way through into physical production. So what we've been focused on is actually transitioning those individual specialist categories of technology into a fully integrated cloud-based manufacturing solution. So that offers a number of benefits to our customers. And I think that's probably the strongest asset we bring is our investment knowledge around cloud. So if you combine that with our manufacturing assets that we've either acquired or grown organically in-house, put that on our cloud platform, then you have a pretty unique combination of assets to satisfy manufacturers' needs, especially in these kind of trying conditions, with the pandemic and people having to work remotely and collaborate digitally. So I'd say those are probably the set of assets that we bring most to our industry, and we're pretty confident that puts us in a leadership position for the future.

That's great. It's probably a great natural segue into just talking about the cloud in general. So obviously, certain areas of software have been later adopters. Design has been one of the laggards to the cloud. And obviously, that's been changing over the last year. So maybe you can just help us talk through 2 things. One, why was CAD slower to the cloud to begin with? And two, why is now the right time for this accelerating adoption?

Sure. So I think one of the reasons that CAD, not just CAD, but computer-aided manufacturing and simulation, one of the reasons that they were later to the cloud than you've seen in some other sectors is purely down to the complexity of the types of information we're trying to process, calculate and distribute. So if you think about an average CAD model for something fairly complex like automotive vehicle or a piece of industrial equipment in a factory, these machines, these products, they have hundreds of thousands of components in them. The geometry that they represent is very sophisticated. And the types of tools that we provide to engineers in order to design those definitions and then update them have a pretty complex compute pipeline. So unlike, I guess, numerical-based data or text-based information that you might see in a CRM system and an ERP system, the math that we use to calculate that geometry and the process we use to update it and manage it is much, much more complicated and sophisticated. So it's taken a little time for a few factors to catch up. One, to transpose that type of technology to a service side deployment method; and then two, things like bandwidth have been important. So as you start to see things like 5G proliferate, increased broadband speeds of up to 1 gigabyte available to the majority of users, those sorts of changes in the market have enabled us to move that technology to the cloud more effectively. So I think that probably answers why we've been a little slower than some of the other industries to move our digital information to the cloud. You can see the same problems in other sectors, if you think about entertainment and media, for an example, again, tremendously large data sets and complex compute pipelines. To answer your second question, like, why is now the right time? I think now is definitely the right time. I mean the obvious answer is the pandemic and people having to work remotely. But I think there's a couple of other macroeconomic trends that also impact this, which is you see the changing nature of supply chains, more flexibility required, not just because of the pandemic, but also because of political and economic environments in various countries with onshoring, reshoring, offshoring, moving supply chains around with more flexibility. You see all sorts of problems that manufacturers are having at the moment. I've just been dealing with a bicycle company, and they source their frames from Taiwan, for example, and they're having great difficulty in getting those frames across. So being able to have a more flexible digital supply network is obviously advantageous when you're encountering those sorts of problems.

No, that's very helpful. Let's switch to Fusion 360. So obviously, you've been seeing a lot of success in recent years. Help us understand what's the competitive differentiation here? And obviously, what's also the benefits of it being built on the Autodesk Forge Platform?

Sure. I mean from a competitive differentiation perspective, I mean, there are 3 key issues, 3 key friction points that we see from customers. So the first one is data. So when you go through a product development process, there are many different assets that you create and have to manage. So if you think about the average sort of smart product, there are electrical components, PCB boards. We'll probably talk a little bit more about that later on. There's also a wealth of physical product geometry and data. And sometimes that's represented in schematic form, which is a logical 2D representation. Sometimes it's quite a sophisticated 3D model. Obviously, the information for PCB electronic boards is completely different to what you see for physical manufacturing 3D geometry. And then you've got to carry all the sorts of information, simulation, behavioral characteristics or G-code, which drives machine tools on the shop floor. So the problem with that is all that data is in different formats. It's stored in different proprietary systems, and it makes it very difficult for a smooth contiguous flow throughout the product development process. The other problem it introduces is it kind of forces manufacturers to work in a very old waterfall methodology. So you can't really start to do any simulation until you CAD your entry stage. We can't start to do any manufacturing processing until you're done with CAD and simulation. And what we really wanted to introduce was the ability to be able to make a change anywhere in the process and have that change propagate throughout. You can only do that if you have a single common cloud data model in the middle that everyone's contributing to. And if you think about the benefit of that, it's very similar to what you see with other industry leaders like Salesforce or Workday, as an example, because everyone's contributing to the same centralized data model, information plays more freely, you have a single digital pipeline so you can process updates and introduce automations. And it also means anyone, anywhere in the company that's touching that digital data is increasing that asset's value for the rest of the organization, not just their 1 department. So that's the first reason. The second reason is a little more user-centric, persona-focused. And that is most of us who are engineers typically end up having to use not just 1, but maybe 2 or 3 different pieces of software in order to complete our part of that product development process. And if those 3 different pieces of software have completely different user interfaces and experiences, it makes it very time-consuming for people to learn and mentally, cognitively make the switch between these different products. So the second thing that we focused on was building a completely unified user experience across the whole product development process. And then I think the third advantage is that, typically, you have to have like a PhD in all the brands, all the technologies and vendors that span across that product development process in order to be able to put together a digital thread across your organization. So of course, something like Fusion enables you to do that seamlessly. It's not a close system. We intentionally engineered it on our Forge Platform to make it as open as possible. Because I think my last point would be, whilst it's nice to have a completely integrated solution from 1 vendor, if there's any problem in that process, you know who's accountable, it's not always feasible. Many of our customers have incumbent solutions, and they can't afford to switch everything out on day 1. So we've introduced a data model infusion that's based on Forge that allows us to integrate other incumbent solutions and provide a more flexible approach for customers to progressively adopt the solution. So just to summarize, I'd say the 3 kind of key benefits are: one, single centralized data model hosted on the cloud enables information to flow freely and bidirectionally, and it also can be accessed from anywhere in the world by pretty much anyone in your organization securely; second one is consistent experience; and then the third one is you don't have to navigate this confusing wealth or swath of different technology out there. You know you can put a seamless solution together end-to-end.

That's really helpful. And just something that's really unique also about Fusion is its pricing. So disruptive base pricing, then extensions and usage-based pricing, especially with general design. Help us understand a little bit how this pricing structure works, the opportunity with extensions, as well as the consumption-based pricing?

Sure. No problem. So the thing about the pricing is it's kind of closely linked to that strategy around data model. So for that single centralized data model to work, you have to provide ubiquitous access to everyone across the organization. And of course, all of their needs are very different. So that, coupled with the fact that we wanted to be very disruptive in the market, and we believe in democratizing access to this type of technology, we introduced the base of Fusion at $495 per year subscription, which is an order of magnitude cheaper than any of our competitors. You might look at that and say that's crazy. You're undervaluing the technology you're delivering. But our belief is this is just another example of the technology platform shift. So we saw this happen when our industry moved from sort of centralized UNIX across to Windows. Before the move to Windows, those proprietary systems could command a price point of anywhere between $30,000 and $50,000, and they were over-the-rack sale as a result. When we moved to Windows, that reduced by an order of magnitude somewhere in the region of $5,000 for a perpetual license. And of course, at those margins, you really needed to move to a channel model, which, of course, Autodesk did very successfully. We see this as another platform shift. The move to the cloud means ubiquitous access. It means the addressable market has increased as a result. And that means that we need to consider bringing our price point down again by an order of magnitude to reach the volume of customers that are out there. So that's the baseline. It also means that everyone in the organization can gain access. So it's not just for the specialized view in a very high-end department like R&D, for example. That means everyone in the organization can gain access. And that's important if you want everyone to contribute to that centralized data model. But we do know, obviously, there are personas with very specialized requirements. So for example, if you're into metals-based 3D printing, and perhaps you're probably working in aerospace or automotive, obviously, that technology requires a much higher price point due to the investments it takes to maintain it and develop it. And because you're specialized the same, we don't want to overwhelm everyone else with that -- on that kind of capability, or we'd be building a monolithic product. So that's where extensions come in. They provide a persona-focused access to higher-value technology. So we have about 5 of those available today: machinists, things for the additive manufacturing, engineer, Generative Design. There's a number of different extensions also, including data management. So those extensions allow us to maintain the base, but extend the capability in terms of that for a particular persona. But just like you see in other sectors, and we kind of lifted this idea from places like Hulu and other vendors of media, we don't change the UI. So if you subscribe to that extra extension capability, we just turn on a deeper set of tools for that particular persona. The last part of our business model is casual usage. So you may want to use Generative Design, but not on a regular basis. And again, if you kind of think about media example with Hulu, it's a bit like watching a movie. So you might want to subscribe to NFL consistently, that's an extension. You might want to just watch a movie one time, and that's equivalent to our consumption-based charging. So if you wanted to produce a Generative Design, you just pay a onetime charge via cloud credits to access and use that technology. And again, the whole model is aimed at making access to this technology as ubiquitous as possible and really democratizing it for the masses because we see that way, we can increase the addressable market rather than just being a specialized few. It also means we can transition our customers from our specialized products across into this new business model without devaluing the assets that we acquired in order to make that technology available. So If you think about high-end tools like PowerMill for machining, it means that the extension can carry the value of that technology into the future.

Stephen, that's really helpful. That's great. Obviously, there's a lot more I want to talk on Fusion, but just in the interest of time, let's move to Upchain, and then we'll try to talk on Altium a little bit. So on Upchain, recent acquisition, just closed last month. Help us understand exactly what you're doing here. Why acquire it? And what's the strategy?

Sure. So Upchain brings an amazing amount of talent with it into the organization. I always believe, like with an acquisition, the technology, obviously, is a prime driver, but the core asset is the human capital because they're the people who develop that technology. And of course, technology moves quickly, so you need those people in your organization to continue to push the envelope. But Upchain itself brings a wealth of technology to manage data more agnostically. So as I mentioned earlier on, most organizations have some sort of incumbent system within their organization. What Upchain brings us is the ability to manage what we call cloud Product Data Management, CPDM, as well as PLM. Now CPDM enables us to ingest information from sources like SolidWorks or PTC. And it enables us to manage that information across the organization without forcing a user to move from that primary incumbent CAD system, for example. So it gives us a lot more flexibility to place our Fusion Platform into an organization, manage the customers' existing information and data, and that makes it more accessible to Fusion. So if you've adopted Fusion, perhaps, for the purpose of machining in your machine shop, but you still have SolidWorks in your design office, Upchain gives us the greater capability to be able to imagine, ingest that information without forcing the transition for the user. It enables us to manage that information associatively so if that there's a change in the process, we can process that change across the product development life cycle. It also enables us to manage a range of different assets. So as we get into electronics, for example, it means that we can converge not only design, physical design and mechanical parts and their manufacture, but we can also converge the world of mechanical design and electronics design, which we believe is particularly important because we're interested in pursuing a secular trend that we see around smart product development. So you can imagine, it's not just consumer devices like cell phones or exercise machines that are starting to integrate smart control, we see this happening in every industry, including industrial machinery. So having an asset like Upchain enabling us to manage the convergence of electronic data, alongside mechanical data, was particularly important. But of course, just being able to manage any type of asset from any competitor, to be able to bring that data into the cloud so customers can communicate and collaborate more effectively across their supply chain, is a huge boost for the Fusion Platform, and it also makes that information accessible to the core Fusion offering as well.

That's great. So you kind of talked a little bit about electrical. So maybe let's segue a little bit into some of the news from this past weekend. Help me understand what exactly does Altium do? How does that -- how would a potential opportunity like that accelerate your position into the growing smart products segment?

So Altium is like a clear standard amongst the PCB industry. So if you think about any smart product, it includes some form of printed circuit board. Many of these PCB designs are unique and vary between products. They're an integral part of any smart product. So if I go back to that kind of theme of the secular trend that I spoke about, think about any industry. Typically, some industries lead others because of their rate of change. So if you think about consumer products or automotive, the life cycle and turnover of new product introductions is pretty rapid, probably within the 12- to 36-month time frame. So the rate of introduction of new technology is much faster. However, we see that trend proliferating across to other industries. So you've seen smart control devices now introduced in consumer products pretty much ubiquitously. If you think about like a Peloton or a NordicTrack, or if you think about a Nest Thermostat or your cell phone, all of these tools have integrated computing. And that integrated computing not only allows that technology to connect so it can consume updates remotely, but it also enables that technology to react to its surrounding environment. And to do that, it needs to process information through a CPU and using software and, of course, key to that is printed circuit boards. Now the reason we're interested is we saw it in consumer products first, then it moved into automotive. Think about Tesla as an example. We see that type of technology now moving into machine tools. So we have partners like Mazak, for example, who are revolutionizing machine control. Haas are doing the same. We're also very closely partnered with Haas. We believe that, that's the future of machine tool technology. And now we're starting to see that move, of course, into industrial machines, too. So if you believe that secular trend is a reality, which, I think, there's convincing, compelling evidence that it is, then you have to make some investments in order to ensure that you're capturing and supporting the entire product development process, not just mechanical parts or the parts that form a shell around the product, but the actual intelligence within the product itself. So that's where we believe working with Altium brings a unique benefit in that convergence between mechanical and electronics design, and that's why we think it's important in the market.

Great. And maybe just building off that last point. So what -- maybe just dive a little bit deeper on the synergies that you'd see between like an Autodesk and an Altium that would help accelerate both businesses. And conversely, what benefits could customers see with something like that?

There's a number of things...

Steve, I think let's answer that question in the benefits to the customers, I think.

Yes, absolutely. So if you think about any of these customers that are embracing the trend that I just spoke about, they have to work with disparate technologies today. So we know that this is a benefit to them because we've already introduced a certain amount of electronics into Fusion via our acquisition of EAGLE. So that, for a customer today, means that they can use a single digital environment in order to manage all that information. So if I go back to what I've said about Fusion's kind of core strategic benefit at the beginning, it's a single centralized data model where we can process change across the product's definition. Now if that doesn't include electronics, a customer is left in a situation where they basically have 2 sets of design that they've got to manage, 2 sets of design that they've got to update. So if you imagine, even a simple change, like you change the styling to a product, and it reduces the internal footprint available for a printed circuit board. Today, you have to export that information to go across your electronics package and import it. You then have to propagate the change manually across the electronics environment. These all introduce stoppages for the customer. It reduces innovation. And probably, most importantly, it lengthens their time to market. So by bringing these technologies together and converging them in a single data model, we believe that we can create an accelerated and smoother design process for our customers.

Got it. And just trying to maybe answer a few questions that have come in from the audience.

Well, actually, if you don't mind, there's one other thing I would add to that. So if you think about our partnership with ANSYS as well, it means that we can start to introduce simulation that accounts for the entire product. So you actually get a true digital twin, not just the mechanical pieces, but you get to understand the entire behavior of the product digitally. And that's why we believe these partnerships are so important.

Super clear. So I'd love to maybe just hit on a couple of questions that have come in from the audience. So on this topic of PCB design, along this trend of smart devices, how much of your typical, call it, SMB and mid-market customers today touch the PCB design portion versus that part being outsourced and designed outside of the supply chain? Just trying to understand kind of what's this opportunity that's really in-house in your existing customer base? Or is this something that exists, that they're outsourcing themselves?

That really depends on the segments, so I couldn't give you a hard answer across our entire base. But if you think of the consumer products segment, nearly all of them have some interaction with that. So yes, it's difficult for me to give you a hard and fast answer as to what percentage of the base we could apply that to. All I would say is that it's prevalent in consumer products, and it's certainly starting to become a trend in the machine tool industry. So it's probably about as much as I could give you with an accurate answer today.

Totally fair. Another question is probably more for Simon. Just talking on the competitive landscape more broadly, and this is more on the AEC side, but worth exploring here. Talk a little bit about Bentley and the competitive landscape there? And kind of why do you win against them? And just kind of help us understand that aspect.

Yes. So we compete against Bentley mainly in infrastructure across the globe. They -- we do both sort of vertical and horizontal infrastructure, and that's sort of one of the key differentials between the 2 of us. The question maybe around Innovyze and water, and specifically -- and if it is, I can sort of talk to that. And really, the sort of key differential there is that we offer an end-to-end service, from planning, design through construction and operations and maintenance, and they don't. And secondly, the Innovyze technology is sort of next-generation technology, whereas sort of Bentley's, the base of that technology is quite old. So I think we're feeling pretty good about our sort of competitive position in water and sort of more broadly across infrastructure. You can see that in our last quarter with the, I think, the Montana bridge contract that we were awarded, which we announced last quarter. So making good progress, and we compete hard against them. They're a good competitor.

That's great. And we have about 4 minutes or so left. So any other questions? I'd look to try to see if we get them. Let me see if I could go back to something on Fusion, and then maybe you could talk a little bit about Generative. On the competitive front, I guess, building off the last question on competition, how should we think about Onshape? That's obviously another cloud-based vendor. And I'd love to hear kind of how you think about the competitive landscape broadly, and Onshape in particular.

I know you had quite a lot of questions, so I'll try and give you quick-fire answers. So what I would say about Onshape is it solves no new problem for a customer. It just moves CAD into a browser. That's really not any problem that many customers had. The key problem they've got is collaboration. We've solved that with Fusion in the cloud. The other problem they've got is convergence across their processes. So if CAD remains separate, you really don't solve any problem for the customer. You don't help them move away from a waterfall process to something more agile and iterative. You don't help them reduce their time to market by converging the various processes of the design, product development. So that's why we believe we're in a much better position than Onshape. They've just pretty much moved what was already existing into a browser. It doesn't solve any extra problems for the customer in our point of view.

Great. Maybe we can talk about Generative in our remaining minutes. I've always found that to be super interesting technology. And maybe you could talk about where are customers actually seeing success in production? And it seems like there's potentially a slower ramp of Generative adoption than, maybe a few years ago, we would have thought so. So help us understand where are customers actually using it today? Why has there been like a slower ramp? And how could that change over time?

Sure. So like -- look, a great example we've just been working with it is SRAM. So SRAM is a high-end provider of powertrain groupsets for mountain bikes and road bikes. Another good example of smart products, by the way, because they've introduced software control in order to actually have eTap changing for their groupsets. So you can see the introduction of custom PCB boards there as well. But on your question of Generative, they've employed it to explore lightweighting across that product range. So specifically, cranks is what they're looking at, at the moment. Now what I would say is, probably the adoption rate on Generative was a little slower because, in its early days, it was implying you had to adopt metals-based additive printing or polymer printing. So not something that people could use in mass production, often used as a kind of source of inspiration to map out the key stress points in the design, which would then be redesigned to make it more manufacturable. Since then, we've introduced a lot of manufacturing constraints. So for example, you can tell the system that what you're designing has to be manufacturable with a traditional CNC subtractive process. That makes it much, much more effective in other industries like industrial and machinery, for example. So we're starting to see the rate of adoption go up as we increase the number of manufacturing processes you can use as a constraint to the process. It's probably why it was a little slow to begin with.

Great. I say we're abutting up against the clock, so maybe 1 last question. So from my -- what I understand, generative design started in Fusion 360. You've then rolled it out to Revit. Are there other areas of the portfolio that could benefit from kind of adding this generative technology?

Yes, I mean, pretty much anywhere, where you have a problem, which has multiple inputs and multiple constraints. So any area of our business where that's a reality. So for example, if you're laying a factory out, you have 20 different machines that can be placed in different orders. You can run inventory at different rates. It's a simultaneous equation. So generative design becomes an option for you to explore multi-objectives and optimize for whatever it is that you see as the most valuable objective. So it could be factory layout. It could be an electronics design, where you're trying to position components on a printed circuit board, and you want to optimize those positions for signal integrity or thermal dissipation. So there are many, many different application areas. It's not really limited just to mechanical design of parts. And that's really what we're focused on right now is exploring where we expand generative design next in the product development process.

That's great. Well, I think, gentlemen, with that, we're out of time. So Stephen and Simon, thank you so much for being here. I really appreciate it. Enjoyed the conversation. Thanks to everyone else for joining, and hope you have a great rest of the conference. Thanks again guys.

Thanks. Thanks, Adam.

Thank you.