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

All right, welcome, everyone, and good afternoon. Very excited to have obviously what's been one of my long-time favorite stocks, Autodesk. Andrew, first off, thank you for the -- coming for the first in-person investor conference...

First in-person event, period, since...

Wow. [ It wasn't ] even an investor conference...

Yes, I know. [ And it's first ]...

[indiscernible]. Well, we appreciate it. And so the -- so very excited, I'm sure, as you see people piling in, very excited to talk with you, but let's start with the Q3 results.

[ I know you're shocked ] I'm going there first, but the -- one of the things you said was the destination hasn't changed.

No.

But obviously one of the things you called out was some new term, sort of bends in the road. I wonder if you can just kind of walk through those again with us; and sort of where you are, I guess, at this point in the journey.

Yes. So I can kind of help you understand it from some customer anecdotes and some other things as well. So obviously we grew very well, all right? I mean we -- but we saw less lift in new business in the second half and heading into Q3 than we expected, a few points off. And it was you actually saw it in our monthly active usage numbers and the things associated with that. Net revenue retention was really strong. And here is what our customers are telling us: Their book of business is huge, all right, which is all good news for the future, right, but they're falling into like 3 categories. 1 category is the AEC customer that can't hire enough people to hand over their projects and close them out. And they're struggling and slipping their closeout dates, which hits their margins, by the way. These are all fixed-bid contracts that go back, hits their margins and doesn't allow them to get into the new project backlog. So that's 1 class of customers. That customer is kind of hesitant, trying to heads down looking at operations. The other classes, they got the employees, but their total costs on the project went up. They bid it 12 months ago. Their material costs have changed, so they got margin pressure there. So they got a little margin pressure. And then the other class of customers is customers that were in manufacturing and in construction that were doing just in time. Now they're stocking. All of a sudden, they're stocking kind of widget A and B that would have taken 3 months to get in. They said, "Look, we can't wait. We're going to stock widget A and B. And the ones that show up on time, we're going to just buy." So now they're spending money on stock, and they haven't done that for years. So all of them are looking at their spend and saying, "Look, I might just defer that a little bit." And we saw some of that softness.

Yes, yes. That makes sense. I mean one of the things you talked about was just sort of the backlog because -- I'd argue that, coming in -- AEC in the U.S., we had a backlog coming into '19 -- I'm sorry, from '19 to '20. Then '20 obviously created -- there's like this compounding effect now of sort of the backlog going out.

It -- well -- and I think that's the kind of good news hidden in all of this, all right? So yes, we were over aggressive in our assumptions about how we were going to do in the second half, my bad, but there's a huge book of business for our customers. All of our customers are seeing a backlog in their book of business. This will eventually work its way out. I don't worry about the inflationary pressures because, as long as customers can start pricing those pressures into their new bids, then that's not a problem. It's when it was baked into bids they made 6, 12, 18 months ago that is a problem for them. So you're going to kind of see this [ according out of things ], and I'm pretty confident about that. So the business hasn't gone away. Some of it might have shifted out a quarter or 2, but we'll just see how this plays out. But there's good news behind...

Yes, yes, yes. [ I think ] backlog eventually has to come out. [ It's not -- it's like -- well, it will not go, at least ], theoretically...

Well -- and also remember it's not like the supply chains aren't working. They're actually delivering goods at or above pre-COVID levels. It's just the demand is exceeding the size of the pipe.

Yes, exactly, exactly. So let's switch gears a little bit and we'll move away from Q3 -- and kind of sort of a 25,000-foot view. One of the things that we've been talking about is sort of like no-cloud strategies or officially a no go...

Yes, even in Germany.

Even -- [ exactly, even there ]. And so -- but when you think about sort of your customer base, digitization of processes, transformation of your customers that you're seeing, how is Autodesk helping those customers in this process?

Yes. So look. One of the things that is kind of the silver lining of the pandemic and now actually the silver lining of these labor shortages is that the demand, the forward-looking demand, for digital tools and digital processes is only going up. So what we are in is in the productivity business, especially when you start moving downstream and into some of the preconstruction and construction planning [ in ] AEC and downstream in that last mile between design and manufacturing in the manufacturing sector. So we're all about driving productivity increases there. And given what we're seeing with the customer base -- look. The first wave of the pandemic brought the distributed work buying. So we bring distributed work to our customers. And they -- the -- some of our customers discovered these tools for the first time during the pandemic, but now we're, you're looking at customers. And they're saying, "Look. I can't get enough people on the construction site. I can't get enough people in the factory." Guess what, we got a solution for that. We got productivity tools that can make the existing workforce you have more efficient. Let's deploy the tools everywhere. So this is why I remain very optimistic about the digitization tailwinds that are coming, because we've only gotten these double sets of shocks that are kind of showing people like, hey, digital wins.

Yes, yes. It's like you -- the -- it's no longer a nice-to-have anymore...

It's not a nice to have. The -- a matter of fact, you're going to see the nondigital players out there kind of getting into problematic situations. If you're competing against someone whose bid accuracy is within 2% and your bidder -- bid accuracy is 8%, guess what. You're going to over-underbid.

Yes, exactly. Now let's stick with manufacturing because obviously that's been a highlight for the company; Fusion 360, huge success. Can you just talk about the momentum that you're seeing there? And what is really enabling you to capture share here?

Yes. So there's 2 things that are really driving this. One, Fusion is the only professional-grade cloud-based tool that allows remote groups to work together. So it's got everything. And it's also -- it's not only cloud-based collaboration and all the great things about remote collaboration and simultaneous work and all that stuff, but it's also offline, online fault tolerant, so that's made it incredibly popular. So that's driven a lot of adoption during the pandemic and even before the pandemic, but the other thing that's important to know about Fusion is we focused really intensely on that last mile, that last mile between the engineering team and the manufacturing process. And that last mile has been heavily underserved. And we've invested a lot in automating a lot of things about that last model -- mile, sorry. And that's where we're starting to gobble up the competitors is where people were working in that last mile and working our way up into the rest of the process. So we've got some pretty good tailwinds there. We've always said the real visible materiality comes later with Fusion out in FY '24 and beyond, but you can see the momentum. We got 170,000 subscribers. We've got 1 million monthly active users. Those numbers are the envy of any new business in this space.

Yes, totally, yes. So -- I know that's been like a -- sort of one of the big success stories. It's like -- it's kind of funny that you saw -- I'd say you saw it, but then at the Analyst Days, in the past couple of Analyst Days, you really saw the numbers. It was like whoa. It's not just doing the checks and hearing about it, to your point. You actually see the numbers...

They're there. The numbers are there, so we just have to keep executing and keep delivering; and you're going to see that start converting more and more. And we're growing faster than our competition for the first time ever in that space.

Yes, exactly. The -- now let's talk about some sales channels for a minute. I mean direct sales, the digital channel. Obviously that's becoming an increasingly important part of Autodesk, this new customer acquisition strategy. Can you just walk us through what's changed, how you sort of see this evolving?

Yes. So actually Fusion is a great example of what's changed. Fusion is sold through, a great percentage, direct online, digital direct. It's these new offerings, these cloud-based offerings; the move to subscription, cloud-based products. The customers want to have a direct relationship with Autodesk, so you're seeing a lot more customers going up, buying online. Our online channel is our fastest-growing channel, which is interesting because, even at the same time, our partner channels are growing fast too. It's just the online channel is growing faster, yes.

Faster, yes, yes. No, it's been amazing. And obviously, I mean, how do you think about that? I mean because you actually talked about this on the call, sort of the channel check, so to speak, but how -- put this in the context of just a channel strategy, the indirect side. What do you want them sort of focusing on versus what you want to do?

Yes. So we talk to our channel partners a lot. One of the things we've been doing with our channel partners over time is we've been moving their incentives from the front to the back, meaning that we've been moving away from buy, sell discounts to back-end payments. And the reason we're doing that is we're focusing our channel partners on 2 things: one, keep the customer success with the product because we'll reward you for that. So renewal rates, customer success. And two, we want them to be the engine of the platform ecosystem we're building in the future. So we want them to invest in services, development resources that help kind of stitch our products into customer environments and create custom software on top of the white space that we don't service. And they're moving in that direction. And if you look out to the channel partner of the future, they're going to be all about customer [ success ], customer engagement, integration and custom app development.

Yes, got it. Now let's switch gears a little bit to infrastructure. [ So it's always been ] one of my favorite businesses of yours [indiscernible] 3D, et cetera, but the infrastructure bill, you talked about this a little bit on the Q3 call. I think there's sort of -- sometimes a lot of misunderstanding about sort of the what and the when in this, but what sort of potential does this create for Autodesk? And the kind of the question within that is sort of the where and the when.

So the good news is we don't put any of this into our models because you never put anything that's relying on government action [ and tender in your ] business models, all right, but what's really exciting here about this is built into the bill, and we've talked about this, is $100 million of spend that's targeted department of transportations to help them digitize. Now that's not the money that's totally going to be spent. That's the seed funds that get some of these department of transportations investing in digital technology so they can become more efficient. So not only is there money in this bill to actually build physical infrastructure, a lot of which is water-based, okay, and flood control and all the things associated with that, but there is also money in there to start kickstarting just digital processes in general and some of the consulting fees and all the things associated with planning out their digital transformations. So that's all good news for us long term. Now the money will trickle out over several years, which is great because it will give us an opportunity to start partnering with some of these firms, but we're pretty bullish on this. We're excited about it. It's showing up in a lot of the places we invested, road, rail and water. The other one is power, but that's not quite as interesting as road, rail and water in terms of impact on our business.

Actually let's touch on water because, honestly, at the Analyst Day, that was one of the things that really stood out at me, the acquisitions you made there. I guess maybe I didn't have perspective until it's -- frankly, until that Analyst Day. When you looked at acquiring into this space, what stood out to you as the reason that Autodesk need to be a player here?

Well, look, one of the things that we saw moving forward was water scarcity, water -- the water re-management in a climate-changing world and water purity were big issues heading out 10, 20, 30 years. So we saw this a while ago and we wanted to get involved in it in a big way. That's why we participated in the Innovyze deal and we acquired the company. And you can kind of see some of these things playing out in the world. I mean you probably saw what happened in Germany with the floods in Germany. These things are going to become more commonplace, and it's not that you can't manage those things. It's just that the flood control infrastructure wasn't in that place. It was somewhere else, just like what we saw in Tennessee in the United States. Flood infrastructure was in the wrong place, so guess what, they're going to have to rebuild all that infrastructure to manage these things. That's the tools we bought. Plus also you saw in the infrastructure bill there's clean water initiatives there. So we're big in water pipe now and water -- clean water piping and piping analysis, piping management, all of these things. And we're also big within the Innovyze acquisition in the owner-operator part of it because we've got Info360, which is the online tool for managing the actual water management assets. So it was an important buy. It was a strategic buy and we think it's a big 5- to 10-year opportunity for us.

Yes. Well, living in Colorado, I definitely agree with the water. It's -- scarcity aspect...

Living in California, I definitely agree. I mean California needs to build more reservoirs and possibly a desalinization plant.

Yes, exactly. We both feel the pain where we live, but the -- let's keep going [ down in your businesses ], construction. And obviously you've historically known -- been known for the A, E; and then obviously acquired -- and actually organic development too; and the [ C space ], yes.

Built and acquired.

So the -- I guess, where are we now, I guess, is sort of the question because we've been talking a lot about sort of digitalization of construction. What are you hearing from people now, especially with like you talk about, sort of the change in where we are with supply chains, et cetera?

Yes. So I mean this is all accelerating. You can see that from how we're growing. And by the way, not all of our growth in construction is captured in the make part because some of it shows up in design because of our enterprise business agreements. So it's our actual real proxy is more like 30%, just to be clear about some of that so that we all get on the same page there, but we're seeing growth everywhere in the sector with regards to construction solutions. We're being particularly successful at the top of the pyramid. We think that's important because, like in the early days of CAD in manufacturing, the OEMs drove the supply chains. The top large GCs drive the subs. And then what we're doing is we're starting to light up our partners in the subcontractor market. I mean the -- not the subcontractor -- in the mid-market GC market. So look for our partners to start engaging in the mid-market pretty soon, which is going to be a large army of people going and engaging with customers at that level. So we're -- we think this is a big market. We think there's plenty of room for lots of players. Over a 5-year period, there'll probably be more consolidation in that space, but there is plenty of opportunity here and it's early days. We're probably maybe third inning, okay, but that's good because that's lots of runway.

Yes. No, the -- actually I want to go back to the analogy you made, sort of the top of the pyramid, because that's a question I often get from investors because the idea is, okay, you're -- like the A, E side. You just kind of own that market. It's like -- so you're almost [ the de facto standard ] is the way I describe, but then when you think about sort of construction, like what is the thing, to your point, that flips that next buyer to say like, "No, I want to be part of the Autodesk life cycle here?" Help us through that process; and how being such a strong player in the A, E side can influence the C.

Yes. So first off, this end-to-end connection between the A and E side, down to the construction side, is going to be critical for having this kind of high-speed digital thread back and forth because, let's face it, the highly digitized player in this space -- let's just look at the design-build firm, which is a model -- people are either becoming design-build firms or they're moving to design-build ecosystems, right, where there's a set of build partners that work very closely with an -- A and E partners, okay? So they're either building ecosystems or they're becoming design-build firms. They need this digital thread from design all the way to construction because they need to understand what the construction impacts are early on. And also they need to understand how to modify the design so that they can, one, bid more accurately because you live or die by your bid accuracy; and two, also minimize the waste and other problems associated with the design because, frankly, all of these firms are under pressure to design more sustainably. They're getting under pressure about waste disposal. They're getting under pressure around regulations and permitting requirements that are more stringent than ever. They need to be able to capture these things quickly, and they need to be able to understand it from design all the way to construction. You can only do that if you unify the whole thing together. That's why unification will ultimately be the big goal here.

Do you think there's an aha moment? Because I remember back -- gosh, this is like -- I'm going to date myself, like 15 years ago when the U.S. government said, okay, if you're going to bid on any project, it's got to -- you've got to deliver a BIM model. And I'd say that actually changed the game. [ You're going to do great when you have ] such a big kind of owner-operator, so to speak, put that mandate out. What sort of -- is there something like that, a spark? Or is it the big guys getting bigger? What is it?

Yes. It's -- look. There is going to be continuing BIM mandates and things associated with that, but there is also going to be this, I think -- look. The regulatory pressure to build more sustainably and the constraints there are going to change these firms. They are going to have to industrialize, all right? And you cannot industrialize without unified digital systems, all right? You just can't do it. So this move to industrialization, it's going to take a while, but it's going to be pushed by owners. It's going to be pushed by regulatory pressures. It's going to be pushed by costs. At some point, the costs of certain goods will go up or will be forced to go up simply to drive the right behavior in these chains. So I think that the tipping point is some of these sustainable construction challenges that you're going to see.

Yes, yes. Actually a very good friend of mine [ is in commercial ] -- huge commercial engineering firm. And it turns out there was this small tweak that they made in the design, but it was the wrong tweak. And then suddenly it was -- the building is no longer be -- LEED certified, and it was this whole just ripple-down effect. And it was like, oh, my gosh...

They need to know that early and often, yes.

Yes, yes. And so -- and it cost a lot to fix it on the back end. It's a lot more than if they got it right on the front end.

It's like any of these things. Any mistake you discover later in the process is 10x or 100x more costly to solve when -- if you don't -- if you find it early in the process.

Yes. And so I think we've hit on almost all of the components, except for media and entertainment. And so walk me through that because we're kind of in an interesting, I guess, inflection -- or inflection point is not the right word but change, I guess, in the media and entertainment space. How do you think about just the outlook for that business?

So first off, we love that business, okay? I mean I know probably people in this room are wondering why. Why don't we sell that business? Let me tell you why we don't sell that business. That business puts us deeply in the world of virtual worlds, okay? It is the tool set, the capabilities that is tightly connected to virtual worlds, virtual engagement, virtual paradigms and all the things associated with that, okay? That technology bleeds into everything we do. We love that business. What's exciting about that business right now is that finally, and I think COVID had something to do with this, the studios who were very reluctant to engage with the cloud are now absolutely engaging with the cloud. Whereas we were trying to pull customers, the customers are now pulling us, so you'll see us invest a little bit in this production pipeline in the cloud in media and entertainment and integrating the existing portfolio of media and entertainment tools more deeply into the cloud, all right, which will strengthen our position there and also kind of help the studios move more of their production processes to the cloud.

Yes, even in media and entertainment, to your point, the synergy with the rest of the portfolio. I remember one of the best examples I heard is they were like, if you're trying to bid for a football stadium to a billionaire, you better have a helicopter flyby in that pitch. Otherwise, you're not winning it. It's...

Yes. And sometimes you might want explosions and special effects, not often, though.

Exactly. And so it was like -- and the idea was like, hey, look, that's why we buy the whole thing from Autodesk. I was like, okay, I get it now. It makes sense.

Yes.

And so the -- let's talk about some of my favorite topics, noncompliant users. Like, well, we'll start with noncompliance then we'll go to compliant but nonsubscribers but start with noncompliant. What success have you been having there? I know there were some metrics at the Analyst Day of something like the early wins there, but how do you think about that user base?

Yes. So look. We said at the Analyst Day there's about 15 million out there that are actively using the product that are available to us. We don't expect to ever capture all of those, but even if we capture 10%, 15%, 20% of that, that's a lot of users to capture over the next several years. So we view that as a long-term building opportunity that kind of provides a nice, steady floor on our business above the normal organic growth in the sector, okay? So you take the organic growth in the sector. You take our noncompliance conversion, and then you've kind of created a floor on our business which is excellent. It's a nice, solid, stable floor. We're not looking to accelerate or pull that forward, but you've seen what we've done in terms of, one, creating technology that allows us to understand those users better and identify them; and two, blocking their ability to pirate our latest releases of software. So one of the curves that we showed at the Analyst Day showed that with the latest release there was barely any piracy, all right? That pressure creates opportunity for us 3, 4 years out because eventually, those people, if they're real productive users in our ecosystem that would have -- that pirated previous releases, they have to get into the ecosystem someway. So we see the opportunity out there in FY '24 and beyond to be stable, ongoing. And remember we're constantly creating new pirates, so as we capture new ones, we're constantly creating other ones, all right? So I think the opportunity is paying off the way we expected, but again as I always say, don't look for us to try to pull that forward. We never pull the noncompliant lever in any quarter because we're just letting it kind of steady drumbeat up.

Yes. I think one of my favorite data points you said a couple of years ago was that the mix of the skews of the noncompliant users were higher end than the compliant ones because it makes sense. I was like, if we're going to pirate something...

Why would you pirate the cheap stuff?

[indiscernible]. I was like, oh -- I'm like -- I was like, "Actually it makes total sense," so it's like -- so there is a lot of [ dollars ] there, but now the -- my truly favorite number, the non-pirates but nonsubscribers, those 2 million users. And I think, the last time you gave the stat, the last Analyst Day, not the most recent one, it was 50-50, less than 5 years and north of 5 years. How do you think about that base? Because I know we all talked in the past [ when you did traded ones ] -- like the median age was 7 years. How do you think about converting those final ones, sort of the non-pirates...

You're talking about the 2 million noncompliant licenses in our existing customers.

Exactly, yes.

So those are customers we have relationships with. So frankly, a lot of our compliance activity that's going on right now is going on with that base. I mean that's our #1 engagement point, okay? We do absolutely go after the other ones, but the low-hanging fruit is that base, and that's where we're spending a lot of our time. It's working with those customers, hopefully, in a way that we all come together as happy people and move forward, but that's the #1 target for us. It's those 2 million. And that's where we spend a lot of our time and energy.

Got it. Now let's switch gears to probably what is obviously your favorite topic, billing cycles. It's -- and so moving to annual billing. So maybe just level set for everyone sort of the why the shifting because obviously you do multiyear. I think you still offer multiyear on the website. Shift to annual, what's the sort of just the thought process behind this...

Yes. So frankly, if I could do it right now at this moment, I would just -- I would flush out all of the upfront multiyear from our business right this very minute, okay, and take whatever free cash flow hit we take next year because it -- that upfront billing is the biggest piece of volatility in our free cash flow, all right? And it's one of the reasons why people discount the free cash flow [ as they go out in the year ]. I want to eliminate that, clean up the business. And it's what our customers want too. Everybody wants to -- wants the protection of a multiyear contract, but they want to pay for it annually, all right? Now why don't we just pull off, rip off the Band-Aid and do it, okay? There's 2 reasons why we don't rip off the Band-Aid. One is our partners, okay? Our partners are cash flow sensitive. They love multiyear billings upfront. A matter of fact, they -- some of them will even add to our discount from -- with -- from their margins to kind of pull the deal in, all right? So we need to give our partners a 2-year runway, which is basically what we're giving them. We told them last year and we're ending -- basically ending the discounts next year. So we're giving them a runway to transition. So we're going to work with them to make sure that they're paying attention and they have time to adjust their cash flow. Otherwise, we'd seriously damage some of our partners' business. The other thing, to be perfectly frank, is that our back-office systems are not set up to do multiyear billed annually at scale. They will be next year. It's one of those long-tail things in the digitization transformation that I was doing for the back ends -- back office of the company. That will get completed next summer, so we'll be able to do it, but if I could, I'd pull that lever right now.

Got it. All right, we've got 3 minutes left. I'll pause. I've -- we've got a bunch more questions to go, but I figure I'd pause if there are any from the audience. Otherwise, I'll keep going. Yes?

So what is initial customer reaction with flex? [ Has it enabled you to capture the incremental buyer? What are some of the existing customer reaction ] [indiscernible]?

Yes. So I want to tell you it's early days, okay. So I'm just going to qualify these things, as it's really early. The good news is, even in the early days, we're seeing the behavior we want to see. Because there were several targets we had for flex. One of the targets was the occasional-use customer, the customer that's trying to manage occasional use and used to buy multiuser licenses from us. So we see a big chunk of flex customers doing that, but the other thing we're seeing a big chunk of flex customers do is -- customers out on our long tail that are trying some of our higher-end products. So maybe you're a small architecture firm. You maybe get requirement for a Revit model for maybe 2 or 3 projects a year. You're not going to buy a Revit subscription, but you are going to buy a flex pack for that. And we're actually seeing that. And the other thing that we're seeing is a chunk of net new customers; customers that are just, "Okay, this is the way I'm going to buy for Autodesk because I only use Autodesk occasionally." So that's some small customer that's using it, right, net new out of the gate. That's the kind of mix we want for this, okay, because we want flex to cover the occasional use, but we also want flex to help us monetize the long tail. And ultimately flex becomes build your own collection.

Yes.

So you could see over time, over 5 more years, flex eats collection, which is exactly what we want to do, but it's early days. We'll keep everybody apprised of the progress there and help everybody know what we're doing.

Cool, awesome. I'm going to take the last question here. I mean obviously a lot of -- you're in a lot of different markets, a lot of transformative things happening. When you -- let's say we're sitting here 5 years from now. And you look back and say, "Hey, look. This technology or this trend was more widespread, more transformative than we thought in 2021." What do you think that will be?

Look. I think people underestimate the convergence of data, machine learning and virtual design creation -- and not virtual design creation. New use paradigms, okay? I think you're going to see us moving to a world where this kind of computer is assistant to the designer; and the designer able to virtually create something, not just look at something. Because they put on those nasty goggles now and they look at something. I'm actually talking about someone not wearing goggles and actually creating something from scratch and doing it through an orchestrated coordination with a computer that's crunching lots of data, has machine learning layers. I think people are underestimating how much that's going to transform the way people design lots of things, all right? We've all been waiting for the headset technologies to -- stopping nausea-inducing huge things. I think, over the next 5 years, you're actually going to see the first set of usable hardware that actually isn't vomit inducing and doesn't leave the big lines around your face like you just went skiing but didn't.

[indiscernible], so yes, no -- and one of the things I've [ thought ] about with Autodesk, especially like Fusion 360, is what -- like this term we've been using, like data at cloud scale, where it's like, to your point, with these cloud offerings you see so much data that you can then actually help the user perform their function better, but it's only because [ of the cloud ]...

I -- it's because of the cloud. And it's we like -- what we'd like to call it is it's the computer-assisted designer, all right? There's the level of -- right now people use our tools to kind of input stuff.

Yes.

It's going to move from input to input-output kind of working together with the computer. That is going to be revolutionary. And it's going to change the way we deliver value because right now we deliver value by helping them get their ideas into the computer. We're going to be pushing ideas out of the computer, towards them. That's incredibly valuable to them.

Yes. And I've been a big believer in this too because I describe it as like also that, when you get that virtuous sort of AI or just data product cycle flywheel going, suddenly your moat gets really wide.

It does.

And so I'm excited and look forward to seeing that.

So am I.

All right, thank you, sir. [ It was a blast ]...

Philip, pleasure.

Yes. The -- it's all right. Thank you.