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

Great. Hi, everyone, and thank you for joining today. I'm Joe Vruwink from the vertical software team here at Baird. And our next presentation comes from Autodesk. Autodesk is one of the leaders in design, engineering, entertainment software serving AEC, manufacturing, digital media. Joining us today from the company, we have Stephen Hooper, he's Vice President of Design and Manufacturing; and Simon Mays-Smith, Vice President of Investor Relations. We're going to have a fireside chat. Let me turn it over to Simon. I think we have some initial words, and then we'll go from there. Thank you.

Great. Thanks, Joe. Firstly, the usual statements. 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. Do you want me to sort of start a bit about the sort of company, Joe? Or do you want to go straight into questions?

No, I think an overview and the key highlights of Autodesk, that'd be a good place to start.

Yes. So Autodesk is the sort of global leader in design software for -- in AEC and manufacturing. What we're trying to do is to provide software end-to-end for our customers to enable them to drive greater efficiency and sustainability in their process. And we're doing that by enabling -- by having, first, best-in-class vertical software to enable our customers to do their job best-in-class. But then underneath that, having horizontal functionality that enables data and collaboration to flow to realize the value between the silos for our customers. We've been driving that for a number of years now, have made good progress, and we're hoping today to jump in a bit more into our manufacturing business where Steve operates, but I'll leave it there.

Great. I just want to say for those in the audience, if you have a question, you can use the prompt in the webcast. Those will get e-mailed to me, and I can filter those in. I'm really looking forward to this because AEC for Autodesk, that's the lion's share of the business. It's been the lion's share of growth. But the company has communicated that, at some point in time, manufacturing is going to be the greater incremental contributor to how Autodesk grows. And so just to give kind of a better foundation for even today, Autodesk is outperforming peers in the manufacturing segment. I wanted to start with the desktop products because we lose sight of things like AutoCAD Inventor. I mean those in their own right are strong. Can we maybe just discuss the breadth of offering starting with kind of the traditional applications? And then that will lead us into what Autodesk is doing in the cloud.

Yes, of course. So like you mentioned a couple right there. So AutoCAD, fairly ubiquitous across nearly all of our industries. What a lot of people don't realize is that there are verticalized versions of AutoCAD that are included as part of our subscription entitlement. So for example, there's an AutoCAD electrical and there's an AutoCAD mechanical, which are optimized for our industry. Of course, there are also versions of AutoCAD optimized for other segments like architecture and several. And one of the things I think that you asked, which was what was unique about our position in design is not only do we have great vertical solutions, but we can also help companies with the convergence, not only of design and make, but between industries. So industrialized construction, the use of manufacturing technology in the construction sector is also a great opportunity for us. But for the rest of the desktop products, we have a huge investment in Inventor. It's an organically grown product that we've worked on now for 25-plus years, actually launched back in 1999, commercially in Europe in 2000. So a wealth of product expertise on that side, very strong in the industrial machinery segment, which is the largest vertical of all subsegments within the manufacturing sector. So exceptionally good growth there for that product line. Now you also asked about our other desktop products, what makes us kind of unique there in the manufacturing space. So we did a number of acquisitions over the last 12 years, and that built out our portfolio to include important technologies like PowerMill, which is dominant in the subtractive machining space, particularly focused on high-end applications like aerospace, think of jet turbine blades or the mold and tool die industry, where there's extremely complex surface geometry that you need to be able to machine for mold and tool dies. But you also have another branch of computer-aided manufacturing called FeatureCAM. That's used for the sort of broader industrial machinery segment. So think of that as more of the kind of automated machining. We invested in netfabb, which is a metals-based additive manufacturing technology. So if you're bridging the divide between additive and subtractive, we provide an ideal tool set. We've also included versions of PowerMill, which support additives. So additive with robotics. If you're following organizations like Relativity, for example, who are making 3D-printed rockets, that type of technology is powered by PowerMill robotics. So it's another area of additive large-format printing, which we cater for. And then on top of that, we're a leader in the Moldflow injection, plastics injections molding business with Moldflow. So there's pretty much no application certainly in the automotive segment where we don't get involved to help customers analyze [ polymer ] flow, could also be more advanced materials with like long fiber-filled polymers for composites. We're able to provide analysis for extremely complicated applications like the interior car dashboards, that sort of thing. On top of that, we have a number of simulation technologies ranging from CFD to structural analysis. Most of those were purchased with the kind of goal of not serving so much the analyst. That's where we partner with ANSYS, but really empowering designers with early-stage insight as to performance characteristics. So we also acquired a number of other technologies for that express purpose, which -- tools like HSM, which enabled us to embed CAM directly in the design environment. So Inventor also has integrated simulation and integrated CAM. Now of course, they're all desktop products. So it doesn't enable us to execute some of the strategy that we're pursuing in the cloud. But it does provide a full in-canvas experience for somebody who wants to go through design, simulation and manufacturing all on the same platform. And I'd say that's one of the things that makes us unique. I'd say the other thing is We have such a pedigree with design documentation in AutoCAD that a lot of that transposed across to Inventor. So it's incredibly strong from that point of view.

That's great. So let's talk about the cloud strategy and convergence is going to be a theme of, I think, this discussion today. One thing Fusion is trying to do is converging the design applications, manufacturing applications, doing that through one common cloud-based data model. I guess maybe I'll pose a simple -- not simple, but high-level question, why is Fusion unique? Why is this a unique approach relative to what customers are typically doing today?

Definitely. So this is kind of the heart of our strategy. So we see the cloud as another platform shift. So we've seen a platform shift from kind of mini computers, Unix boxes across to a Windows open architecture. When that platform shift happened, you saw, like an order of magnitude in terms of price reduction, which dramatically increased the addressable market. So prior to that, you may have seen like 5% of the engineering community adopted some of that high-end technology outside of aerospace and automotive. Windows opened up that platform for everybody. We see the cloud as the same. But just transposing or porting the existing technology from a desktop product into the cloud completely misses the point. So just running CAD in a browser doesn't solve any problem for a customer that they haven't already solved. So where we see the opportunity in the cloud is kind of twofold. And these are progressive in terms of benefit. The first one is if you create a centralized data model, it means that everyone in the organization can act on the same data and enrich it on behalf of the organization as a whole. Today, with desktop products, that information is locked in proprietary files, which are really only accessible by individual departments. So if you want to process a change, you need the client application to open the file, perform the calculations, update the data, save the file and then you can pass that information onto the next application in the workflow, usually through some sort of interchange, which loses a lot of the design intent or data. So the problem with that is, firstly, it's time-consuming. It increases your time to market as a manufacturer. Secondly, there's a lot of rework and lost productivity. And probably the biggest problem is the change can only propagate in one direction. You have to make the change in design and cascade it to sim and then manufacturing. If you build a completely singular centralized cloud data model, it means anyone in the organization can access it and act on it. But when they act on it, they're contributing information that everyone else can see and benefit from. It also means that you can propagate change from any direction. So if you do something as simple as change in tooling on the shop floor that might have an implication on some interior structure in your product design, you can push the change back in the other direction if you want to do that. So that's the first benefit. Many analogies to this. Think of Salesforce in CRM. Traditionally, CRM locked away in the sales department. Now anyone from customer -- anyone that touches the customer from support all the way through to sales, if they record that information, everyone else gets a benefit from it. Workday's done it in the HR environment. You don't have tools for just payroll or performance management or talent acquisition. They're all integrated. And that means that anyone that enriches their information allows everyone else to benefit from it. But the next level of advantage comes from automation. And that's the real reason to converge all the processes together. If you can create that singular digital thread through the business, you can then act on it to automate things that today are manual and costly. So two examples. If you create a digital representation of your model, of your product in its entirety like a digital twin, you won't be able to use cloud side automation to automatically produce any derivative required throughout the rest of the product development process. So for example, drawings. Today, drawings are rules-based. There's no reason that you shouldn't be able to automate the production of drawings from the model. So that hasn't successfully been done yet because you can't do all of that client side, you need cloud side automation and machine learning. Another example would be manufacturing instructions for machine tools. Again, there's no reason that you can't take the model and start to automate the process of producing them. Think of the dramatic productivity cost savings that creates for a business. At the moment, production engineers are spending days producing manufacturing instructions for models, engineers are wasting time producing procedural documentation. So that's where we see the advantage in the cloud.

We'll come back to cloud. But maybe in terms of the individual product applications, another convergence that is happening as we see more smart products, electromechanical products within the same account taking MCAD tools, which I think a lot of the industry associate Autodesk with, but then wanting greater integration, convergence with your ECAD tools. The question would be -- and Autodesk has been moving this way, and there was clearly a big announcement this week about maybe more aggressively moving this way. Let me just start, what gives Autodesk the inside avenue to bring MCAD and ECAD together as opposed to someone that's traditionally strong in PCB design and maybe picking up manufacturing capability? Why is this Autodesk better opportunity?

Well, I think the first thing is that you need to have a platform that's capable of it. So we have invested heavily in our cloud platform, forged now for the last 8 years. So that's reached the stage of maturity now where it can support service side computation unlike any other platform publicly available. So I think having the infrastructure to support that vertical segment is really important because without it, you can't execute the strategy. The second thing is we've already invested in electronics some time ago. I think it was at least 4 to 5 years ago that we acquired EAGLE. EAGLE was our first foray into integrated electronics. So we already converged that as part of the Fusion offering. So now it's the world's only seamlessly integrated MCAD, ECAD modeling environment available. And we've made it available at a very compelling disruptive price point of $495, you can actually build today a converged digital model. And I'd say like I think most people acknowledge the benefit of a single digital twin. And I would argue that you cannot produce the digital twin that represents the behavioral characteristics of the product unless you integrate the control system and the electronics as part of that. I think we have a deep understanding of that. So we see 3 areas of convergence really: disciplined convergence between things like MCAD and ECAD; design and make convergence between the conceptual ideation and production; and then later on, the convergence between industries. So that's why we think we're fairly uniquely positioned to capitalize on this opportunity. And we think that it brings a tremendous amount of value to customers. So I guess that's why we would say that we were uniquely positioned. The transition means that we can maximize the value of the integration. So I think most customers would acknowledge that, and we're starting to see the secular trends in play. So it started with consumer products. First example, things like smartphones. Then you start to see consumer products like Pelotons, Nest thermostats, that's now making its way into the sort of industrial machine segment. You see customers like Haas or partners like Haas and Mazak starting to employ it in their machine tools. It will become prevalent across all segments. A great example that I was working with recently is SRAM. They make high-end bicycle componentry, gear shifters, brake levers, that sort of stuff, even they're starting to integrate electronics and their eTap product lines, and they require custom-printed circuit boards because they're constrained by the space envelope and the weight. We see nearly all manufacturers moving in this direction.

At risk of pushing my luck, and I know we have to be delicate on this, but what does Altium bring to Autodesk? And what are the virtues of having that under the Autodesk umbrella?

So I really can't comment anywhere beyond what was already publicly available in the press release at the weekend. But I'd say just in general terms, if you think about strength in electronics and PCB design specifically, that's the brains and the guts of any integrated smart products. So strengthening our position in that side of the market is an obvious advantage for our customers.

And also just a couple of other things to add, Joe, is that Fusion sort of core market is in the mid-market, and Altium is there, too. And so the customer base is very similar. And secondly, in terms of distribution, our distribution capabilities with enterprise and channel, et cetera, offer us a significant reserve, something we can bring to the party uniquely there. And thirdly, the business model transition that we've been through. We know that once you've been through that transition, you come out the other side as a more valuable business. And again, that's something that's unique to us. There's lots of perpetual sales with maintenance payments out there. And we can add value to those by helping them, particularly smaller companies that might have a bumpy ride in that transition because it's hard, we can help them make that transition made more smoothly and come out the other side as a bigger and better business as part of Autodesk.

That's great. You brought up, Stephen, I mean, part of the Fusion strategy is viral adoption, and the price point is a contributor to this. Folding EAGLE into the Fusion subscription, so you get both for $495, that's remarkable relative to what you're paying elsewhere in the industry. I just want to spend a bit of time on this because you have a unique approach at the starting point. And then can you speak to the extension strategy? Because that's where you start to build up and Autodesk does become more of a tailored solution, specifically to what a customer might be doing as opposed to paying $30,000 for a seat license and you get a lot of capability you might not use.

Correct. Yes. So I guess the first place to start is Fusion is really not $495. That's really the cost of entry. The extensions allow us to monetize some of the higher value workflows that individual personas have and nearly every persona has one. So I'll come on to that in a moment. I think the other important distinction to make here is that it's not just the single centralized data model that's important, it's the consistent user experience. Again, just what you would see with Workday or Salesforce. And if you think about it, that means the TAM actually increases because now we can address many, many more users than we would have done before. So part of the onboarding strategy for an acquisition is to make sure there's a smooth transition for existing users. So EAGLE is a good example. EAGLE is actually integrated fully into the same Fusion experience. So you get exactly the same UI and experience that you would do if you're a mechanical designer. But we're also cognizant of the fact that many existing users are deep into the product as it was pre-acquisition. So what we do is from an entitlement point of view, we still give you access to the old product, while we make sure that we're finishing the availability of every workflow that a customer needs to support their product development process. So that's kind of like a transitionary mechanism to help customers cross the boundary between the stand-alone product and the actual platform. So the platform itself at $495 was priced intentionally to be disruptive. Our belief is with the platform change, the accessibility basically increases by an order of magnitude. At $495, you can change your sales motion. So you can move away -- if you think from the sort of Unix-based workstation, it was all direct sale, very costly, high margin. Then you move to a Windows open platform, the margins aren't there to support it because you come down on an order of magnitude on costs. So you have to reimagine your go-to-market motion. And in that case, it was through channel partners. When you move to $495, again, you're going through another platform transition. The order of magnitude comes down again. And of course, the scale needs to go up. So your sales motion changes in that to one where you use more predominantly e-commerce and in-site tele hubs, which has been incredibly successful for us. You can imagine through the pandemic, being able to sell digitally through eStore as well as reaching customers through tele hubs has been an absolute advantage for us in the markets where we've continued to see robust growth throughout the pandemic. But we do also see a role for our partners, and that's where the extensions come in. So think about the product development process, think about a specialist like a machinist. They want access to the generic data model, but they also want an extra set of depth in terms of capabilities without changing UI. So an extension allows that customer to turn on that functionality directly inside of the product. So it lowers the barrier to entry, and it means they get the specialist tools that only they need, so they're not paying for stuff they don't require. And of course, with subscription, they cannot only pay for it when they need it, not all the time. So it's uniquely flexible for the customer, but it allows us to realize the value of that technology. So for a machinist, for example, the extension costs $1,600. So combined with the base $495, you're up at $2,100 for an annual subscription for that specialist, which is very similar to what you see from something like our design and manufacturing collection. So it allows us to realize the value of the tag. It also means we can maintain our ARR or ARPS for individual personas. But it means that the customer pays for a specialist set of tools, which are far more powerful, can integrate with the rest of the business. We have a number of extensions available ranging from things like sheet metal and fabrication to additive simulation metals-based printing, which is pretty sophisticated across the machining. We're working on a design extension. We have a generative design extension. So the intent here is that you can pay for an annualized subscription on that or for some of the compute services, things like generative or simulation. You can even move to a pay-as-you-go. And we kind of drew on the philosophy here that you see pursued by entertainment technologies like Hulu, for example. So you can subscribe to the base of Hulu. If you want to watch NFL for the whole season, you can add that subscription. But if you want a onetime transaction, you want to just watch a movie and then move on, you pay on demand. That's the consumption-based economics. So that's exactly the strategy we've employed for Fusion, base subscription plus specialist extensions plus pay on demand for compute services as and when you need them. So hopefully, that explains a little bit about the extension strategy and why it helps us monetize effectively.

Now as you said earlier, the strategy right now, it's about growing the audience, establishing the installed base and price-generative design. So some -- I think it was just this week where even there, the strategy changed and now it's a very affordable entry point, fixed pricing for unlimited usage. I think it's worth touching on because it kind of speaks to the Autodesk approach, but maybe you can also speak too from a technical end, how Autodesk is able to do something like that when that -- the approach is still pretty uncommon in the industry, what Autodesk announced.

Right. So again, I come back to the extension strategy as part of this. Some of these more sophisticated tools, they really do require support, services and implementation around them. And that's not something you can deliver through a tele hub or digitally. You can do some of it, but not as much as typically required. And that's where our VARs come in. And with the price point of $2,100, you've got the margins to support the VARs. And they're offering real value-added services around implementing post-processes, machining, et cetera. Generative is very similar to that. But to price it at like $17,000 is again missing the point of the platform shift to the cloud. What we need to do is to democratize that technology to increase the addressable market. So it's true that generative design is very sophisticated at this stage, and you could lean towards making it a tool for the high end that really is applicable just in aerospace and automotive. But if you do that, you push yourself into the top of the pyramid. And really, you're missing the point on the platform transition. Our goal is to democratize the tech and dramatically increase the addressable market. If you think if you go to the high end of aerospace and automotive, your customers or your users are in the thousands. If you go for the mid-market and open up that technology to everyone, your addressable market is in the hundreds of thousands, if not millions. And we see this as the next paradigm shift, right, in terms of computation. If you think about manual processes for definition of shape in a mechanical design, very slow, time-consuming. They don't always explore the optimum solution. Generative allows you to do that. But if you peel back the covers, generative is basically a multi-objective optimization based on whatever parameters you want to prioritize. So for physical design, it might be weight or cost or manufacturability. We can optimize the design with a range of solutions for you. But you can apply the same algorithms to any multi-objective optimization. It could be factory layout for throughput of inventory or it could be something like laying out the components on a PCB board to make sure that you've got the best thermal dissipation or the best signal integrity. So there are a lot of applications for generative. To your question about how do we do that, because with a fixed cost envelope and all that compute -- cloud compute cost in terms of COGS, how do we make sure that it's viable as a business? The reason that we're able to do this is because of our expertise on the cloud platform. So we've actually implemented machine learning in the background, not what the customer sees, but what it allows us to do is optimize the spot instancing on AWS. We can even pause calculations and pick them back up again, which allows us to make the optimum use of the available compute on AWS and use the cheaper compute services, still delivering the same results to our customers. So that optimization with machine learning allows us to provide a fixed cost envelope to an engineer, so they don't have to worry about overages on cloud compute consumption. So our belief is that, that will unlock it tremendously. Just having the fixed cost envelope and then reducing the initial price to entry to $1,600, we think that makes a very compelling value proposition for anyone in the mid-market. And of course, laying the groundwork to do that opens up the opportunity for all the other applications like PCBs and factory layouts. And you've already seen us deliver it on the AEC side of the business, too.

Maybe a question just on more recent results. So Fusion is up to 152,000 commercial subscribers. That's 80% growth year-over-year. Is there a typical customer profile at this point? Are these inevitably conquest wins against an incumbent? Just your thoughts there.

Yes. So a couple of points there, I guess, that are good to make is that we see this as a progressive strategy. Disruption typically happens from the bottom of the market, right? So you saw us start in the early phase of Fusion with a very heavy focus on education in the maker market. It's not because we wanted to develop a toy. It's because we wanted to harden the capabilities and really work to promote from the ground up. So things like our personal entitlement and education create huge groundswell within the sort of social communities. And that, for us, is worth its weight in gold when it comes to marketing, customer support and training because those communities help build like a grassroots movement that we haven't seen since the early days of something like SolidWorks. So that's been an incredible benefit to us. Then as we started to mature, we shifted our focus from monthly active users to active subscribers commercially. That's what you're referring to. We've seen tremendous growth in that over the last 2 years. And now we turn our attention to making the business material through things like extensions. Can you just remind me of the second part of your question there?

Is there a typical customer profile? Is this one department within a broader product org or -- yes.

Yes. So a combination of two things. As the product matures, so do the industry segments that we address. So today, we have a particular strength in an underserved community, which is the machine shops and manufacturing production facilities. In those environments, unlike computer-aided design, there's been very little consolidation of vendors. There's still something like 27 different OEMs in the software side serving that community. And as a result, there's no consistent workplace. So if you're doing hybrid manufacture with additive, subtractive and you're using maybe 5 or 6 different machine manufacturers, chances are they're employing 5 or 6 different bits of software from 5 or 6 different vendors. So being able to consolidate that together in a single manufacturing environment that does machining, subtractive, additive, inspection, everything together, that basically opens up a huge opportunity in production side. So we've seen really big success there. The next community is basically the vertical subsegments that have the highest propensity to change platform quickly. So at the extreme end of the spectrum is jewelry. People can shift platforms. They don't have to worry about migrating legacy data. Seasonality of their products is constantly changing. So adopting new technology is not a problem. Next up is consumer products and medical devices, a little more legislation, still seasonable. So you don't have to worry about migrating legacy data and you can migrate over a year. Then you start to get into industrial machinery. And the last segments to go are things like aerospace that's heavily regulated with vehicles in flight for maybe 40 years. So you've got to maintain all that data. And so as a result, as a consequence, you see Fusion now really starting to enter into the consumer products market. Hence, our interest in building a complete product definition with things like electronics as well. So big opportunities there. It's not binary. We see adoption of Fusion in industrial machinery and auto supply chain, too. But those are a couple of our kind of particular areas of strength that we're focused on right now. Historically, Autodesk hasn't been super successful in consumer products we have in industrial machinery. So starting there with Fusion enables us to build out that book of business for Fusion without kind of disrupting our inventory base at the same time.

That's great. Unfortunately, we're out of time, but thank you both for joining. Thanks, everyone, for listening in today, and I hope you all have a good rest of your conference.

Thanks for having us.