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

Good morning and good afternoon, everyone. I'm Jeff Thomas, Head of Western U.S. Listings and Capital Markets here at NASDAQ. I'm pleased to be joined by the team from Autodesk. We'll kick off today with a safe harbor statement from Simon Mays-Smith, the Vice President of Investor Relations.

Thanks, Jeff. Just quickly 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 materially differ from those -- from these statements. I will pass it back to you, Jeff.

Fantastic. Thanks, Simon. Well, I'm joined today, in addition to Simon, by Jim Lynch, VP -- Senior VP and GM of Autodesk Construction Solutions. [Operator Instructions]

Now Simon, I thought maybe we could start with you, if you could provide a brief overview of the company for those that may be less familiar and a quick update on your most recent results.

Yes. Just apologies, Debbie will be with us soon. She's having some connectivity issues. It's the Zoom world. She'll be with us as soon as possible, and so she will be answering these questions. But just to sort of briefly explain what we do, our customers in construction and manufacturing and media and entertainment are trying to improve their efficiency and sustainability by connecting their workflows across their supply chains in processes, which have traditionally been very siloed. But by connecting them with software, which is what we do, we're enabling them to take out the efficiencies, particularly between the different silos. So really, what we're doing is providing best vertical -- best-in-class vertical software across their supply chain but then, importantly, connecting it in the cloud to enable data to flow and collaboration to flow to boost efficiency and sustainability. In terms of our sort of Q1 results, I think a few things I'd call out. Firstly, that we're seeing an improvement in our end markets. Big picture, you can see that in the reacceleration in our billings and current RPO growth rates. We're also seeing a good competitive performance in our markets as well. And finally, Fusion 360 in our manufacturing business has taken on sort of momentum of its own. So even without systemic promotional support, we're continuing to see strong growth in that part of our market against competitors who are promoting -- store promoting quite heavily. But all in all, in good shape and on track to achieve our fiscal '22 goals.

Fantastic. Well, I appreciate that update, Simon. Jim, I'd like to now turn to you. Could you give a quick overview of the full breadth of capabilities in the Autodesk Construction Cloud?

Yes. I'd love to, Jeff. Let me talk for a minute about the breadth and, in fact, the depth of the Autodesk Construction Cloud. So for those that are not aware, Autodesk Construction Cloud really combines next-generation technology, a robust network of professionals and firms that's powered by the BuildingConnected network. And it also includes powerful predictive analytics that really helps our customers move their business forward across really all phases of construction. A step deeper, the Construction Cloud -- the Autodesk Construction Cloud connects workflows, teams and data at every stage of construction. But not just that construction, it really includes design, preconstruction planning, what happens on the jobsite and out to operations and maintenance. And our customers tell us, and we see this, that it reduces risk for them, it maximizes efficiency and it increases profits. Now if you take a look at our preconstruction jobsite, our project management offerings, on the preconstruction side, our preconstruction offering includes BIM coordination, both 2D and 3D quantity takeoff, bidding capabilities, subcontract qualification capabilities and, of course, we link to the industry-leading estimating and scheduling tools that are out there as well. And it's also important to point out when you think about our preconstruction offering how deeply integrated and connected it is to our industry-leading design tools, both Revit and AutoCAD. Now the other exciting -- sorry, there's a lot to talk about, as I say, when I think about the breadth and the depth. But now we move to project management on the jobsite. Autodesk Build, which is our new capability that -- new offering that we introduced in February, we're already seeing that change the way construction projects operate. It combines robust project management capabilities, flexible cost controls and really powerful and easy-to-use field collaboration tools. A lot of these ideas and a lot of these core technologies came from the acquisitions that we did. Now we don't stop there. So we have best-in-class preconstruction, best-in-class project management. Construction Cloud also delivers a common data environment, which is built on Autodesk docks, which many people have heard about. It really enables project teams to store and access and manage their project documents and the data from their projects, again, not just in construction, but from design through construction out to operations and maintenance. And now because Autodesk Construction Cloud is built on that single platform, is built on that common data environment, we have the ability to offer insight capabilities for our customers. So we have machine learning that helps our customers extract key learnings, key insights to drive better outcomes on projects. So really, when we think of Autodesk Construction Cloud, we really feel like we're defining what connected construction really means. So the last other thing I would say about -- actually, I'll stop there, Jeff, because I can keep...

Well, I do have a couple of follow-up questions that I'm kind of curious to dive in on. So during the pandemic, what parts of your business were negatively impacted and which parts did well? What kind of -- how did that shake out?

Yes. It's a great question, Jeff, and it's an important question. Certainly, in the heart of the pandemic, which I always say Q2 last year was where we saw it most prominent, I think that's when construction sites were shut down pretty much around the globe, certainly across the U.S. The place where we saw a slowdown at that time was our on-site collaboration tools. That said, our office collaboration tools, our design collaboration technology, which, by the way, calling it design collaboration is a bit of a misnomer because it's really [Audio Gap] exponential growth in those tools during the pandemic. Now fast-forward to where we are today, it's really exciting to see that our usage is back to where it was prepandemic. And I think, listen, this is a really resilient industry that we support. And I've been super inspired watching our customers apply technology to address safety on the jobsite and ultimately drive more predictable outcomes. So hopefully, I answered your question.

Absolutely. I guess the follow-up to that really is how has recent performance been? And how are you guys thinking about being positioned competitively? And what is the most exciting aspect...

Yes. So of course, Jeff, we don't call out our construction results specifically. But what I can tell you is that we're extremely, extremely bullish about the future. I think about -- and I talk about this all the time, 2 billion more people on the planet by 2025, the industry understands they need a better way of working, they need to drive more safety, more predictability and really more sustainability as well in order to meet those aggressive growth goals of the future. So I'm really bullish about the future. I'm excited about our connected construction offering that we call Autodesk Construction Cloud. And I think when I think about positioning relative to the competition, I think there are 3 or 4 things that really position us to win, honestly. The first is the breadth and depth of Autodesk Construction Cloud that I just talked about. I think it's unmatched in the industry. I think -- and it's only going to get stronger. I think the second area is our Autodesk leadership in design. We are the leading BIM design provider with Revit, but we also, of course, have the world's leading design tool in AutoCAD. So I think our leadership in design positions us to win. I think our global reach positions us to win, right? We have a global business, and we're able to utilize that global business for our construction efforts. And as part of that, and I'm super excited about this, this year, we're engaging our channel partners to also sell our construction portfolio, Autodesk Build. And so we've just started that. We spent Q1 enabling the channel partners and they're really starting to sell now. So I think that's a huge differentiator. And the last one I would talk about, Jeff, is -- and this is another topic that I'm super passionate about. I talked earlier about how the industry needs to look for new ways to build. And one of the things we're seeing, we're hearing from our customers is, "Hey, there are things that the manufacturing industry does that we need to be doing." So what we call it at Autodesk as the convergence of manufacturing and construction, we also refer to it of the -- as the industrialization of construction. And I think Autodesk, if you consider our portfolio not just across AEC, but also across manufacturing, we are well positioned to help the industry move to the future of construction, move to this industrialized construction world because of that strong offering. And as you can imagine, we're working today to really bring those 2 worlds together. So that's why I think we're positioned to win in the future.

Well, I think that's a great lead, and we're going to move on now to talk a little bit about both the infrastructure as well as the manufacturing segments. So I want to -- I see somebody dialed in. Debbie, is that you?

I'm here. Can you hear me?

Fantastic. Yes, we can hear you, Debbie. Thanks so much. So we have Debbie Clifford, Chief Financial Officer of Autodesk, struggling through some of the classic Zoom challenges of our days. But, Debbie, thanks for joining us.

Yes. Thank you for the invitation. I apologize for that. The Internet is down. So I'm on the phone, but thank you. I'm glad to be here.

Great. We're glad you could find another way to get connected. Simon gave us a great overview, and we talked through construction with Jim. Now we'd love to dive in a little bit on the topic of infrastructure. So obviously, a lot of discussions in DC these days around infrastructure stimulus. Of course, there's always the political divide there. But regardless, what -- regardless of what form it takes, what would infrastructure stimulus -- how would that benefit Autodesk?

And Debbie, do you want me to take these, Debbie? I think that's mostly...

Yes. Why don't you -- yes, Jim, go ahead and talk about infrastructure and then when you shift to manufacturing, I can dive in.

That's great. So Jeff, the stimulus is really interesting. And I think the one thing people get tripped up on a bit is people think stimulus, they think the U.S. government. But as I -- as we look, many countries around the globe are actually looking at stimulus programs to help restart their economies post pandemic. So listen, I think the industry is really well positioned to benefit, I guess, from these initiatives. Both road, rail, water, institutional buildings, these represent significant opportunities for the future. And I'm excited about it. I think our recent acquisition of Innovyze positions us well there. I think our partnerships with companies like Aurigo position us well. And of course, our core offering around Civil 3D, InfraWorks and, of course, our construction portfolio positions us well for the future as those stimulus programs come into play, which we expect to see happen in the not-too-distant future. But obviously, people are talking about $12 trillion in global stimulus programs. That is really significant, of course. And a lot of it is tied to architecture, engineering and construction around road, rail and water. So I think it will benefit Autodesk greatly and others, by the way.

Well, and I think that's a good follow-up. So how are you competitively positioned as you think of that big opportunity?

Yes. I mean -- and by the way, it's important to point out, there's a large spend on infrastructure even without these stimulus programs. So this is something we didn't just start thinking about this a couple of months ago and decided to buy Innovyze. Of course, we've been playing in the infrastructure space in the real road and rail market for some time. And with the addition of Innovyze, it really allows us to extend and expand into the water segment. But I think we've got the core portfolio. And again, it's similar to the construction story because -- and construction is a part of this. But it's about end-to-end life cycle and workflows. It's not just about design of the infrastructure. It's not just about the engineering of the infrastructure. But it's about the design and engineering of those assets connecting to what happens out in the field with our construction portfolio and then pushing it out to operations. And again, whether it's a water project, a rail project, a highway project, I think Autodesk is really well positioned competitively to play and win in those sectors for sure.

Sounds great. I appreciate that perspective, Jim. So Debbie, I guess turning to you to kind of think about the competitive position. Can you talk about your strategy in manufacturing and how that compares to your competitors?

Sure. So like what we're doing in AEC, our strategy in manufacturing is really to create end-to-end solutions that maximize both efficiency and sustainability for our customers. We've been challengers in manufacturing. So what we're seeing is a format change happening that really has been accelerated by the pandemic where customers are going more and more from the desktop to the cloud, and we're leading in that format change with our Fusion platform. And we believe that we're ahead of our competitors. The key, the absolute key is in driving efficiency and collaboration. We're also benefiting from secular trends where our products are getting smarter, supply chains are getting disruptive and we're taking advantage of what the cloud can do to help our customers make better products. Like I said, our primary product is Fusion. With Fusion, we're converging design and make in the cloud, so the data can flow seamlessly throughout the manufacturing process. Today, what happens with legacy processes is that they involve different point solutions that hinder innovation and speed to market. One person will do one thing, they'll hand it off to the next person, and then they sometimes find out, at the end of the process, that they can't even manufacture what it is that they've been designing at the end of the process. That's expensive, it's inefficient and it increases the time to market. These are all pressures that our customers are seeing right now. Fusion is one tool and one workflow for manufacturing in the cloud. Our users can see what others are doing. They can capture issues earlier. They can understand whether something can be manufactured as they design it. No surprises at the end of the process. Fusion increases collaboration, increases efficiency and sustainability throughout the manufacturing process. It's also one single data model in the cloud that every department can contribute to and it enriches the overall manufacturing processes. Fusion for us also has a disruptive business model with a base price and extension for vertical specialization. So the legacy model out there for most customers is that they spend a lot of money upfront on a software license in the hope of recovering value over an extended period of time. So most of the time, what those people are buying, they only use a tiny sliver of the capabilities. Frankly, they're just overserved. And those higher price points limit the technological reach of those offerings. We want the masses to have access to our core manufacturing capabilities. For just under $500 a year, our customers have access to the Fusion platform. This creates network effects in our ecosystem, it enables more users to be working on the same model, more collaboration, more enriched data, and it makes the model much more valuable. Now that doesn't mean that the story ends with simply a $500 product. We are offering more advanced users the ability to subscribe to extensions. This gives everyone the base, but then also the availability of the specializations that they may need to get their jobs done. So examples of those extensions include machining, nesting and fabrication, additive and generative design. We're really pushing out the demand curve and then monetizing more of that opportunity through these extensions. Overall, we're targeting a share shift over time to position ourselves to achieve our long-term growth goals in manufacturing.

And Jim, we did have a question come in. I think it's relevant to ask it now. But so can you talk a little bit on the back of Debbie's comments around the pricing for Fusion around just kind of the pricing strategy in general for Construction Cloud?

Yes. Great question. I was hoping somebody was going to ask. I almost -- when I gave the intro around Autodesk Construction Cloud, I almost said we also have what we believe is the most flexible business model in the industry. But we put together -- as we were building out Autodesk Construction Cloud, we really did a lot of analyses, spoke to a lot of customers about what they wanted to see in a business model. So what we think we've done is we've put a business model in place that really allows our customers to buy the way they want to buy, right? We believe that Autodesk Construction Cloud really offers the most flexible business model around construction management. So let me give you a couple of examples. So if a small team, for example, wants to make their life easier in the field, they can easily buy Autodesk Build for the collaboration piece with a credit card and get up and running in minutes. Now when other teams on the jobsites see them using Autodesk Build, see what they're doing with it, they can easily transition to invoice, either through Autodesk or through one of our partners, as I talked about earlier. Now it gets exciting, right? Because as more teams in the company start to see what other teams are doing and how they are standardizing on Autodesk Construction Cloud, the C-suite can take notice and ultimately, they want to find cost efficiencies. So we can then move that entire customer onto an account-based model and which really gives them that predictable pricing and access to all those great products. So with each job, we have another opportunity for additional subscriptions, of course, as you consider the subcontracted network coming on. So we think we have the most flexible business model, and our customers are certainly embracing that.

And Debbie, a question for you on that. In your investor presentation last fall, you talked about monetizing noncompliant legacy users. How is that initiative going? And what gives you kind of -- how positive do you think that's going so far?

We've made great progress in converting our noncompliant users, and this is going to be a growth driver for us over the long term. We've made it harder to pirate our products. We've added some product capabilities to attract usage. We're also engaging more with users when we sought noncompliance sometimes by e-mail, sometimes through human contact, depending on the size of the opportunity for us. Now we slowed down our noncompliant conversion efforts during the pandemic, we wanted to be sensitive to world events. But as we emerge from the COVID-19 pandemic, we're increasing our activities in line with the overall improvement that we're seeing in the economic environment. We said in our Q1 call that conversion of noncompliant users, the billings associated with that effort almost doubled year-over-year in Q1. The way to think about it over the short and long-term is that it's going to be a steady pace. It's going to be a gradual contributor to our growth over time. We've talked about it being kind of a steady drumbeat. We want to make sure that we strike the right balance. We don't want to upset our customers. Audits can sometimes not feel great. So we want to strike that right balance between monetizing, of course, but also creating and forging long-term relationships with our customers so that they can also be satisfied customers. Finally, I'd say we expect that we're always going to have some kind of pirates. They're our Premium base. And we'd rather that they use us than some other offering, and we're going to gradually engage with those users over time to convert them to some form of paid plan.

Great. And I think a related question, you recently said that direct revenues grew at 33% of total revenues in Q2 fiscal '22, up from 30% in Q1 fiscal '21. What's driving the strength in direct revenues?

There's really 2 vectors that are driving that growth in our direct revenue. The first is our success in selling enterprise business agreements or you'll hear us call them EBAs. Those are the agreements that we sell to our largest customers. And the second is the strength that we're seeing through the eStore channel. We've been really pleased with the strength that we've seen in enterprise over the last several quarters and years. As a matter of fact, our EBAs are all-you-can-eat contracts where our customers pay for what they consume. Of course, our customers like it because there's a direct connection between what they use and what they pay for. And then we like it because it helps us establish stronger relationships with our customers. And the better we know our customers, the more value we can provide to them over time. In our eStore channel, we've been investing in enhancements to drive more traffic and business through it. We've added new Autodesk capabilities. We've put more calls to action throughout the website. And we've also simplified the checkout process from 5 steps to 2. It may not seem like rocket science, but simplifying that process, making it easier for our customers to do business with us is really yielding positive results for us, and it's showing up in the contribution to our total revenue through the direct channel. If I take a step back, we continue to anticipate that enterprise and our eStore will both be important growth drivers for us going forward.

Well, so let's move from the top line to the bottom line. Your fiscal year '22 guidance implies a steep ramp in growth to hit your fiscal '23 targets. What gives you confidence in your target of $2.4 billion?

Yes. Thanks. Great question. The way that I think about it, first and foremost, is starting with when I rejoined Autodesk just about 3 months ago. I've been focused on 2 primary things. The first is reappointing myself with everything Autodesk, the team, the company's strategy and how the company has evolved when I was away for 2 years. And the second is digging deep to gain a solid understanding of both the fiscal '22 budget and the fiscal '23 financial goals. On the second point, to your question, I see significant opportunities for growth, including a growing TAM that's showing up through the accelerating digitization in AEC, the convergence of design and manufacturing and the expansion into adjacent verticals, like you saw to -- recently by getting into water infrastructure with the acquisition of Innovyze. We're also focused on monetizing the TAM more in a variety of ways. Some examples include what we just talked about, the conversion of noncompliant users. As I mentioned, we saw strong billings activity in the conversion of noncompliant users in Q1 and more direct selling that results in greater price realization for Autodesk and therefore, more growth. This is all against a backdrop of an improving macroeconomic environment. And it's because of all these factors that we're confident and I'm confident in the fiscal '23 revenue growth potential as well as the free cash flow target of $2.4 billion.

Great. And so then looking out beyond '23, you talked about double-digit growth. So kind of back to that top line. What gives you the confidence? And how are you thinking about achieving that level of growth moving forward?

It's really all the same factors that I just described. I'd also say that really next up for me is more work on the long-range financial plan and gaining a deeper understanding of our path in fiscal '24 and beyond. Our goal is to drive double-digit growth using some kind of rule-of-40-type framework.

Great. And Jim, I think one of the key drivers is -- the question in, from the audience, why has the construction industry been underdigitized historically?

Well, I think -- by the way, I don't know that it's the case anymore, but I think the -- because of the complexity of the industry, which, of course, that still exists, the complexity of the industry, the fact that you have disparate teams from different companies come together on a project, do their part and then leave, it's just -- I think it's a complex environment. And I think the industry has now realized that they just can't do it without technology. They can do it, but it won't be efficient. They won't win more work because it's -- they won't be able to be predictable, they'll have safety challenges and they'll have sustainability challenges. So to me, I think it's a realization that if the industry has looked at what is to come in terms of what the world population needs, both in terms of horizontal construction and vertical construction, that technology is so key to future success. I think that's really what it is in a nutshell.

Well, if the pandemic has shown us all anything, it's that accelerating digital transformation that's going to yield better results. So...

Absolutely.

Jim, Simon, Debbie, thank you all for the time. I really appreciate sharing your insights. And thank you to everybody who tuned in to join our little chat today. Thanks so much.

Thank you, Jeff.

Thanks, Jeff.

Thank you.