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

Okay. Great. Well, hey, good afternoon, everyone, and welcome to day 1 of the Barclays TMT conference. My name is Saket Kalia. I cover software here at Barclays. Very happy to have with us the team from Autodesk. We've got Sid Haksar, Senior Director of Strategic Business Development and the Construction Strategy. We also have Theo Agelopoulos, Senior Director of Infrastructure, Industry and Business Strategy, as well as my buddy, Simon Mays-Smith, Head of Investor Relations. We've got about 30 minutes together. So maybe we'll do -- I'll lead some fireside chat for maybe the first 15 or 20 minutes. And then anyone that's got any questions, feel free to shoot me an email at [email protected]. I'll be sure to ask it and make sure we get through as many as we can in the time that we've got. So maybe with that, all as a foundation, the first thing I want to do is, thank you all, all you, gents for being with us here today. And then the second thing I'm going to do is, give it to Simon to maybe read a short disclaimer here. So take it away, Simon.

Thanks, Saket. It's often my surname is easy, just want to pronounce. But let's start with -- 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. Saket, back to you.

Excellent. Thank you. Sid, Theo, first of all, thank you so much for being with us here today. I really appreciate you taking the time. Since this is the first time that we've had the opportunity to host the 2 of you here at the Barclays Conference, just to level set for everyone, can each of you just maybe give us, just 30 seconds, a minute, just on your background, on your respective roles at Autodesk, just for us to kind of get to know you a little bit.

Sure. So Saket, I'll go first. So, I'm, as you said, Sid Haksar. I've been at Autodesk now over 7.5 years. I joined the company to really lead our corporate development activities for our AEC business. So all the acquisitions that we've done to this point that have culminated into our Construction Cloud were done during my time in that role. At the start of this year, I took on a new role where I now lead strategy for ACS or Autodesk Construction Solutions. And yes, a pleasure to be here with all of you.

Yes. Thanks, Sid. Yes, Theo Agelopoulos. I've been with Autodesk for about 13 years. Prior to that, I spent also another 13 years at Intergraph that got acquired by Hexagon several years ago. So I've spent the last 26 years, I would say, on the engineering, geospatial and architecture design space. Similar to Sid, I laid out business and industry strategy for our design business, which is for AEC, which is one of the largest parts of Autodesk's business and also, obviously, work closely with Sid on M&A strategy as well.

Got it. Got it. Very helpful. Simon, always good to have you at a Barclays Conference. You're pro here. I mean, maybe just to level set before we kind of dive in with Sid and Theo, maybe you could just help us recap a few of the most important points from Autodesk's most recent quarter, again, just to sort of help us all kind of start from the same page.

Yes, really sort of sort of 3 things. Firstly, the business is performing very well. We had mid-20s growth in our new product subs, one of our best quarters ever. We had renewal rates, our highest ever rates, renewal rates in the third quarter. And we're also seeing that revenue retention tick up towards the top end of our sort of 100% to 170% range. And also competitively, we're performing strongly competitively pretty much across the playing field. So in an absolute terms, and relative terms, a great quarter. The second point, though, is that it wasn't quite as good as we were expecting it to be, given the velocity of the business in the first half. Maybe we can get into the details a bit later. But we saw 30% sub growth about in the first half. That decelerated to the -- in Q3. Still pretty good growth. But not quite as good as we're expecting. That's really to a combination of supply chain, labor shortages and the ebb and flow of COVID, resulting in our customers and not able to finish as quickly as they expected existing projects or start new projects at the rate that they were expecting. And then just sort of finally, really just for long-term drivers is notwithstanding that really the long-term drivers of the pandemic, which is to drive distributed workforces and the need for labor productivity. Everything that's happened from the pandemic is reinforcing those 2 megatrends, so which is why we feel still very optimistic about the long-term potential of the business.

Absolutely. That's a helpful foundation. Sid, Theo, maybe just to dive into some of the fun stuff. Maybe a question for both of you just to start with, is the infrastructure bill here in the U.S.? I think we all know some of the high-level numbers from the bill. But I just wonder if you can talk about what parts of the bill you think could be particularly beneficial for Autodesk construction as well as infrastructure businesses? And maybe just go one level deeper into why? And why you feel it that way?

Yes. I mean, I can take it maybe an initial pass. So if you look at the bill itself, obviously, it's $1 trillion. But of that $1 trillion, about $373 billion is actually an uplift. So there's the renewal part of what the -- of the bill and the new part. So there's $373 billion uplift. And there's also -- and when you break it kind of down into the different markets, roads and highways is the largest, roughly 20%. Airports, is it 5%, rail 12%. So if I look at -- if we deconstruct by all the subsegments, roads and bridges, rail, water infrastructure, water storage transit, there's about $373 billion worth of opportunity that we directly have products and offerings that service those subsegments. So that's in addition to, as I mentioned earlier, the existing spend that you see in the U.S. on an annualized basis. So products like Symphony, which is our hero product for designing for civil engineering assets. Revit, obviously is a big investment on vertical infrastructure around stations and facilities for a lot of these infrastructure assets. So -- and then obviously, our $1 billion acquisition of Innovyze earlier this year opens up a whole new total addressable market in the water space. So we now have the opportunity to service the water utility owners, not just the architects and engineers and contractors that deliver those projects. So it's a pretty exciting, I would say, opportunity for us across the board.

Maybe I'll just add to what Theo said, on the construction side, we have been pursuing departments of transportation. So if you think of the bill and Theo can talk about it, but the bulk of it is going to be roads and highways. And so today, on the construction side, we are serving DoTs like Virginia DoT, New Mexico, Tennessee DoT. We also made an investment in a company called Aurigo, which effectively serves the public sector owners, and they have a pretty big footprint across DoT. So on the construction side, we feel we're not modeling in numbers as we think into our forecast about the impact we want to get from the infrastructure bill. But we have been addressing and servicing these markets. If anything -- once it happens, it will be a tailwind to our numbers.

And just to sort of reiterate, infrastructure as a business as ever where we are, are very competitive. The reason being is that having end-to-end software to enable our customers to become more efficient and more sustainable helps customers when they're billing to build more efficiently and sustainably, but also our ability to integrate both horizontal and vertical infrastructure is important, too. So if you're building a railway, you need a train station, if you're building a road, you need bridges. So integrating the horizontal and vertical, again, is a USP for us. So those are 2 things, end-to-end software and the ability to integrate horizontal and vertical makes us enormously competitive in infrastructure.

That's a great point, Simon. I haven't thought about that. Very interesting. I guess, maybe before we kind of dig into each of the individual businesses here, Simon, maybe you could just frame this for us a little bit from a financial perspective. What have you said about the size -- the relative size of Autodesk construction and infrastructure businesses, respectively. Again, just to help us sort of touch and feel sort of how big these businesses could be or how big they are?

So we haven't precisely said, Saket, and it's really an allocation issue is that, we have a customer doing construction or design or engineering. They're not just doing infrastructure, they're not just doing construction. They're typically doing a bunch of stuff. And so they may be doing multiple different projects within it. Suffice to say, therefore, that we think we have in terms of scale, significant scale in all of these markets, both in absolute terms and relative to our peers, and that gives us the ability to project ourselves and go-to-market in a sustainable way. But we haven't split out the precise size, mainly because it's tough to know, if somebody has a subscription to Revit, how much of it are they using for infrastructure versus downtime real estate, et cetera, it's a bit tough to note.

Yes. Fair enough. That makes sense to me. So Sid, maybe just to dig a little deeper into the construction business a little bit. I mean, one of the things you said at the outset, right, is that you've been involved with the construction side of the business from both an organic and an inorganic perspective. As we sort of zoom out, how do you sort of segment your tools into different construction processes, right? Like you've got pre-construction, you've got project management, you've got financials, you've got different sort of phases of construction. How do you sort of take the tools that Autodesk kind of has in this portfolio and kind of align them, right, around different sort of construction phases, if you will. And again, I think a lot of us are familiar with tools like BIM 360. So maybe you could go one level deeper into sort of how these tools sort of align to construction processes?

That's a great question. So historically, Autodesk, prior to the acquisitions, so call it circa 2018, early 2019, BIM 360 was really a big foray into construction. And it was a point solution, did a great job at what it did in the field. What we did was, as part of the acquisition that was part of Andrew's push into driving investment there, we made these acquisitions. The way we think of the world and the workflows is really around design, plan, build and operate. And so on the planning side, it's all about pre-construction, which specifically with -- if you think about the supply chain disruptions, labor shortages, it's really important to be really short out there. So with pre-construction, some of the solutions that we have there today is Autodesk collaborate, BIM Collaborate, which effectively, what that does is, it enables engineering firms, design firms and contractors to really work together, collaborate on both design and constructability intent. So this is before you actually go out there and put stuff in the ground, you want to make sure that it's a lot expensive to do it after the fact. So that's one important piece. Along with that, we've got Autodesk Takeoff. So this is about how do you end up pricing the project, how do you cost the project and bid it out. So that, again, dollars and sense, your margins are made in the pre-construction process. So that is again something that we offer today as part of our planned process. Then we get to what we call the bill process, and that's where we have project management, we have cost management and then we have field management. And so if you think about it, that's our product called Autodesk Build. And so what we did was when we acquired PlanGrid, we rationalized BIM 360 and PlanGrid so that they're one and the same now. It's -- we've taken the best of both and made it as part of Autodesk bill. It's part of the underlying platform of Autodesk Construction Cloud. And then finally, we've got the handover, our turnover piece. So if you think of it, we really today are able to offer our customers really an end-to-end solution. And then the only other thing that we don't talk as much about is our builders network. So this was the acquisition of building connected. And we have over 1 million construction professionals that are on this network. So think of it almost like the LinkedIn for construction. And this, again, is extremely critical because with labor shortages, not only are you winning work as a general contractor, but now you need to bid it out and get the right subs to actually execute on your work. And so we're seeing a lot of our customers really lean into our bid management or our builders network capabilities here. Does that give you a sense of the way we're structured?

Yes, that does. Yes, that's really helpful, Sid. Maybe Theo a similar sort of line of question for you. And you mentioned this a little bit in your prior answer, but I think we often think of tools like Civil 3D here. I guess, can you just maybe flush out for us kind of what the infrastructure portfolio it kind of looks like a little bit more? And maybe give us some qualitative color on which ones are maybe most meaningful to the business. I mean, not getting too specific on numbers, obviously, right? But what -- if you had to sort of rank order kind of the tools in there, which ones are kind of the most meaningful for the infrastructure business?

Yes. I mean, there's probably 3 primary tools. It's Civil 3D for a lot of our linear infrastructure, so roads, highways, pipes, those kinds of things. It's Revit for a lot of vertical infrastructure, to Simon's point. The new Innovyze portfolio around design simulation, operations and maintenance, and then actually, there's 4. And kind of the red thread that connects it all together is really our digital delivery platform, which is all built on top of that Autodesk Construction Cloud. And that is really how we connect design and construction. It's how we integrate horizontal and vertical assets into a unified digital workflow. And that's really the platform that we're building all our tools on top of going forward. So they're the primary offerings that we sell into our key infrastructure markets.

Yes, absolutely. Sid, maybe back to you since you talked about the product a little better. Maybe we could just dig into the competitive landscape a little bit. I think most of us think of vendors like maybe like a Procore, Oracle or -- like a Trimble, for example. I guess the question is, where do you think Autodesk kind of fits here competitively in the construction market? And what do you feel like are the reasons why Autodesk will win versus some of those other players?

Sure. So I think, it's a great question. So I think, first of all, the market opportunity is vast enough for all the vendors out there. I think there's enough runway there, right? It's still an industry that's digitizing. It's still very early in that regard. However, what gives us a lot of confidence is, one is our leadership in design and then. So today, we've got majority of construction companies using our design roles, right, in one shape or form, whether it's AUTOCAD, whether it's Revit, whether it's Civil 3D, they are already Autodesk customers. So we have an installed base there. So that's number one. Number two is our breadth and depth of our portfolio. So as I talked about, we probably are the only company that can truly connect design all the way to construction and then unto our handover. So -- and we -- continuing to invest whether it's going to be organically or even inorganically, you obviously have a bias coming from the M&A background. And there is a lot of opportunities. We see interesting companies and areas that we think are exciting for us. But then the third part about it is really our global presence and resources. So for us to actually expand internationally because we do believe the challenges that you see and the opportunity in the North Americas is very much the same internationally. And the good news for us here is, we have an installed base of channel. We've got channel partners. Again, we've got customers internationally again. It's not a cold start problem for us to go and find customers. They are, again, using our design tools. But the only difference is, we've got a robust ecosystem of channel partners as well as boots on the ground in terms of sales resources. So for us to expand internationally is a lot easier and a lot less, I would say, expensive. So I think combination of those 3 gives us excitement about the opportunity going forward.

Yes. Absolutely. I think that's a really important point, by the way, just the breadth of the channel here, right, that historically has been used for the design part, right, which arguably can be an asset, right, as you sort of expand the construction piece as well. So point well taken. Theo maybe for you on the similar topic of competitive backdrop. I think when people think about software for infrastructure projects, many people will think of certainly Autodesk, but also Bentley. I'm wondering if you could just talk to us about what are you sort of seeing in the infrastructure market competitively? Is that a market that's changed a bit over the years? Or has it been largely the same? And what do you feel like Autodesk wins here compared to some of those other vendors that we mentioned?

Sure. Yes. I mean I think -- so I think we have -- where we see Bentley, it's historically been on the transportation side, where we've been pretty successful over the years has been on the public works and morale in transit and aviation side. So when you think about those markets primarily because you're talking about integration of linear and vertical assets. And a lot of -- especially on the government side, a lot of those customers traditionally started with AUTOCAD, right, which is basically kind of the, I would say, the industry standard when it comes to 2D CAD design. So one of those customers in public sector started adding products like Civil 3D to add 3D modeling and pack design and all those other things. But quite frankly, we've started to see a lot more success. We recently had a win at Montana DoT, which transitioned to Autodesk. We're starting to see numerous examples where different cities are migrating away to Autodesk. So we're starting to see a lot more momentum where, especially on the public sector side, and then with the acquisition of Innovyze, Innovyze is by far, I would say, the global leader on the water infrastructure side. So when you think about water sustainability, you think about pipes, asset management, operational analytics of water -- wastewater treatment facilities, combined with our construction portfolio and our broader civil design solutions, we're kind of pretty uniquely positioned in that market now going forward. But we continue to grow in the transportation space. And if you go to Europe, in particular, you'll notice that a lot of the spend in Europe is wrapped around rail and transit, and we -- you see a lot of adoption of Autodesk solutions in the rail and transit space.

Got it. Got it. That's very interesting. Simon, maybe to bring you in here, you called this out in one of the earlier questions. The team talked about the supply chain constraints in the market on the last call, kind of having -- the way that I interpreted, it was sort of having a trickle-down effect, right, on Autodesk. I'm just wondering, I mean, supply chain [ contingencies ] have been used for so many different industries, whether it's component shortages or shipping delays, I mean, it's been sort of a little bit of an umbrella term. I'm wondering if you could just maybe just expand on this a little bit by kind of giving us an example and Sid, maybe because it sounded like a little bit of this was in construction, and you correct me there, by the way, if I'm wrong, but maybe you could give us some anecdotes from your customers as well that kind of speak to the supply issues or challenges that they're facing. Sorry, there was a lot there. Does that make sense, Simon?

Yes. So I'll start and forgive my dog yapping in the background. Zoom life. The -- so I'll start and then hand over to Sid, yes, really it was a sort of combination of things. There's no sort of one thing, which is, it's sort of the confluence of supply chain, the sort of ebb and flow of COVID and then labor shortages. And then sort of give you a back in the cost of shipping a container across the globe, it would spike up to $12,000 or so by the time you got to end of September. It's still about $9,500. But even if you could get that carton on the ship, the ship was then stuck off LA for weeks waiting to bring it onshore. Then even if you get a boat onshore, you've got problems finding drivers to take the stuff from the ports to the warehouse or to the building sites. And then even if you get it on to the building site, you've got problems finding workers to complete the projects. And really, it's a confluence of those factors that mean our customers are struggling to finish existing projects and to start new projects. To say the same thing a different way, it's really a supply issue rather than a demand issue. There's lots of demand to get stuff done, but really the tools to enable you to do that in terms of materials and people are really the constraint to trade. And that's what we mean by Q3, when we're talking about mid-20s sub growth, it's still great sub growth in one of our best quarters ever. It just wasn't as fast as we'd seen in the first half of the year. So I didn't want to sort of diminish the fact that the underlying business is doing great, both in absolute terms and relative to peers. But Sid, do you want to talk to some of the examples you've heard from your world.

Yes. I'll just add a couple of things. I mean, first of all, the raw materials, the input prices have really increased, right? I mean, to just put it in perspective, steel products are up. I think if you look at it, September 21 -- September 2021 over September 2020, I mean, it's up over 134%, asphalt was up 50%, aluminum was up 35%. So it goes across the board. So when you talk to customers, what they're seeing and what is unequivocal is, backlogs are actually really strong. In fact, they are at pre-COVID levels, right? However, what they're finding is, projects are getting delayed because of raw materials and the products being available to them. That's one piece of it. The other piece -- and those delays can go anywhere from like a few months to almost a year. And which is really causing -- that's kind of causing the delay. I think the second piece is really around labor shortages. So if you talk about construction companies, they're all hiring. I mean they've got tons of jobs that are open right now, [ job rights ] open. And so I think everyone is waiting in anticipation for when the supply chain issues ease. And I think there's just going to be this flood of activity that's going to start happening. And so they're all just waiting with bated breath, and backlogs are still -- it's still very busy. People are still bidding a building connected network. The data that's generated from that shows bid activity is very robust. It's as it was prior to pre-pandemic levels. And so all in all, things look good. It's just there's a bottleneck or a log jam right now that people are dealing with.

Yes. Yes, absolutely. I mean if I were to put a bow on this topic, right, just based on what you folks have said, maybe a little bit of a what Procore said earlier in the day as well, it feels like this is not a demand issue, but there are certainly supply constraints, right? Like I mean you folks throughout several steps, whether it's the cost of a shipping container, whether it's the cost of raw materials, whether it's just the open racks, and actually really interesting stat as well Sid from you just around building connected still showing healthy bid activity. So I think we can say with some confidence that this is not a demand issue, but the supply issues are very real.

Yes. Correct.

Got it. Got it. Very interesting, very interesting. Simon, maybe we'll wrap up with some financial questions with you, just being mindful of the time that we have left. I guess, foreign currency has been a -- I've got some choice words with volatility in foreign currency. But I'll just say, it's just been very volatile, right, particularly lately. And I guess maybe the question is, can you just remind us a little bit about how Autodesk translates some of its most important metrics like revenue and billings? And whether there's any hedging that we should think about as we sort of continue to watch that volatility or assess it. Does that make sense?

Yes. So the problem, and I won't be an FX strategy just although I'm actually married to one. So I've been having a lot of conversations on this, but inflation -- differential inflation expectations leads to differential interest rate expectations, which leads to difference in exchange rate. And what that meant is a strengthening of the dollar at an accelerating rate relative to other currencies. What does that mean in terms of numbers for us? If you look at our $2.4 billion free cash flow target for next fiscal year, about -- we had about a $55 million headwind from currency strengthening during the first half of our fiscal year. And then there, we added another -- almost doubled it and [ another $55 million ] in the Q3. So the rate of change of the currency accelerated in Q3, which is why we pulled it out at the end of Q3 to create a $100 million headwind to our free cash flow next year. In terms of how we hedge it, we essentially hedge our forward billings on a sort of on a sort of 4 quarter basis rolling forward. [indiscernible] effect of it on as it comes through the P&L. But there's nothing we can do about the sort of movements in currency as it affects our free cash flow. So we're sort of -- we try and smooth it as it goes through the P&L. But as it comes through the balance sheet, it's harder to do.

Yes. Absolutely. And certainly, one of the benefits of Autodesk's business, I think, is just having such a global business, right? But of course, any price in local currency, it's just a reality of having that sort of global business model. Simon, maybe just another question and maybe last question, just given the time. I think on the call, and actually you touched on this a little bit, we said that the current supply chain constraints in the FX environment could be $100 million to $200 million headwind to next year's free cash flow target, right, that $2.4 billion. Again, we've talked about how FX is very difficult to predict. But can you talk anecdotally about how the team is just -- and Theo and Sid, feel free to chime in here, but with respect to guidance, how has the team sort of thought about supply chain issues? I'll put it in "normalizing a bit". I mean, that's just as hard to sort of forecast. How has the team sort of thought about that?

Yes. And I've got connectivity issues. So I hope you can hear me, if not, see me.

I can hear you fine.

Okay.

No, I can hear you fine.

The short answer is, Saket, we've called it how we've seen it, which is we called the currency as of the end of the quarter, October 31st. And we've called the performance of our markets as we saw it in Q3, i.e., we haven't assumed any recovery in -- from the supply chain issues during our fourth quarter nor a meaningful recovery next year. So we've essentially flowed through what happened in Q3 into Q4, and then that rolls over into the FY '23 impact of FY '23. So that's really our assumption. And to be honest, what the pandemic is doing is creating sort of a planning difficulty. To your earlier question, if it suddenly unblocks, could that provide a tailwind to us? Obviously, yes. But similarly, if Omicron or something else causes things to come up even worse because does that create risk? Yes, it does. So it just makes it harder for us to call. So always assumed is that the trends that we saw in Q3 essentially continue.

Okay. Got it. That's really helpful context. Well, as always, Simon, you could appreciate as a former sell sider, I mean, always a lot more questions to ask, but limited time, Sid, Theo, Simon, thank you so much for the time today. This has been a really, really helpful session and look forward to having you at future Barclays conferences as well.

Enjoyed it. Thank you for hosting us.

Thank you.

Excellent. Thanks, folks. Enjoy the rest of your day.