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

I'm going to get this out of the way because they've asked me to say the safe harbor. So I'm going to read the safe harbor because they wanted me to. We, referring to Autodesk, 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. I've always wanted to do that, so -- all right. I was about to start telling jokes. But...

We have a built-in joke. We have a built-in joke. My partner in crime left his credit card at a restaurant last night. He had to race over and pick it up. I'm like, what a rookie mistake.

Well, we've -- you guys have killed 4 minutes of the presentation, so it's a new form of playing out the clock.

He will be joining us.

Okay. Great. By the way, I just read the safe harbor, so we're out of the way on that. You're allowed to make forward-looking statements now.

Since I'm unchaperoned by the investor relations.

Yes, let's -- how's the quarter? No, I was kidding. So we have Jeff Kinder from Autodesk. Jeff runs the manufacturing side here or VP, product development of -- what's the official title here?

I'm the EVP of Design and Manufacturing.

Design and Manufacturing. Okay, great. So we're going to talk all about manufacturing software here.

So maybe if you could start, it's very topical at this conference. How are you guys integrating AI into what you do? And how is that playing out? How does it differentiate you from your competitors?

Sure. I love when the AI question comes up, by the way.

It's all about AI. I mean, as an industrial analyst, it's really all I think about.

I mean I love it because it gives me a chance to -- it allows me a chance to remind everybody that Autodesk introduced AI into manufacturing more than 10 years ago with generative design. So we rolled out generative design in the early days of Fusion under the kind of premise that the machine should be able to create more options and designs than a team of 5 or 10 people will be able to come up with. And so that was our early kind of foray. We set up an AI team in our research group 7 or 8 years ago. We were early in our industry to move to the cloud, which, as many of you know, like having data in the cloud is critical to be able to train AI models. We introduced the consumption model, in addition to subscription. We migrated to subscription. We also introduced a consumption model, which is also critically important. Many of the AI services we can provide will drive compute costs and that we need to be able to charge for that consumption. If you try to -- how would Simon say this, if you try to use a fixed-price subscription and run this variable compute cost through that, it's a quick way to hurt your margins. So the fact that we've invested in building a consumption model -- and by the way, this stuff takes years. This is not stuff that you just fix in quarters. So we invested in that 4 or 5 years ago. And then we've been working for the last 4 years on granularizing our data, so taking data out of files, putting it into a cloud database. And the net effect of that is it actually lowers our data extraction costs for training AI models. So I'd like to tell my team, while we didn't predict the exact date that ChatGPT was going to take off, we've been actually marching in that direction for almost 10 years. It's like we had a plan.

Right. What inning do you think we're in on this -- in the more broad adoption by your customers?

Early. I mean, well -- those are 2 different questions. What inning are we in? Very early innings. In fact, we're still in that -- I mean, you live and breathe it. We're in the hype cycle more than anything right now. In fact, a lot of folks can talk about AI. They can talk about how they might leverage off-the-shelf AI tools. But actually, in terms of driving productivity improvements for customers, that's going to take them a while to show up. But we actually have AI in products already. So we've had our Construction IQ products, which helps bring AI to the construction site. We do some work with generative scheduling to help align projects and tasks in a project. And in manufacturing, in my world specifically, we talked about at our customer conference last fall automated drawings and automated tooling. So 30% to 40% of a skilled engineer's time is typically used on very low value-added tasks, such as taking a 3D model and converting that to 2D and then putting the dimensions on there or generate -- manually generating tool path strategies. All that can be done by AI. And if we can take that, those productivity gains, or solve for that, customers can then use that for whatever outcome they want. They can use it for -- they get more creativity, more throughput, faster time to market, or in some cases or maybe in all cases, drop in some of those savings to the bottom line.

So let's take a step back because there are -- I'm an industrial analyst who covers a bunch of industrial software companies, and it's a lot of fun learning about all this stuff. There may be some people in the room who don't know exactly where you fit into the equation here. Autodesk is thought of that with -- on the construction side, the bigger business. So when you look at the CAD and PLM space and the big players like PTC, Siemens, Dassault, where does -- where do your solutions bump up against those guys? And how do you differentiate versus them?

Great question. So we think about the 4 of us, right, Dassault -- you nailed it, Dassault, Siemens, us and PTC. At Investor Day -- our Investor Day last year, I kind of laid out a framework where we broke the market into mid-market and below to small and medium-sized businesses and then enterprise. And we think that market breaks out into roughly half of the TAM is in the medium -- mid-market down to the small, medium-sized business, and half is in the enterprise.

How do you define SMID versus enterprise?

Our definition within Autodesk is 5,000 employees, but it varies. We talk to different companies who have a different -- they draw the line differently. It was a 2 by 2. You can tell at one point, I was a consultant. I'm now reformed. So we had the enterprise and the mid-market SMB, and then design and make were the 2 columns. And look, we play in the mid-market. And really in the mid-market, it's just us and SolidWorks, which is a division of Dassault. And we think there's a tremendous opportunity that's going to be there for a long time for us to continue taking share from SolidWorks. Let me talk a little bit though about the differences in those segments because this actually gets to the full competitive set. In the enterprise space, which is largely Siemens, Dassault and PTC, it's characterized by large, highly customized on-premise solutions. Very expensive, and you have to kind of maintain those. It's hard to keep up. The data is on-premise, and it's actually hard to keep up when you're highly customized with changes in the underlying technical capabilities. What we're working to solve is, I would describe it as a harder problem, and that is building scalable cloud-based solutions that serve the mid-market and also serve design and make. So both sides. That's the vision we've had for years is when you bring design and make together, you can actually achieve more breakthrough productivity gains than if you just had a bunch of point solutions.

And you're talking about the design of a product. And then when it goes in the manufacturing floor and how -- and while it's being made, you also want to participate at that level, right?

And that's the vision for Fusion. It's like end-to-end design and make processes that come together in the cloud and with connected teams as well as connected data. And it's -- I say it's a harder problem because you're trying to take something that is inherently complex and make it simple. What gets us -- what motivates us in examples we look to in the market that are -- we find exciting, we look at close to us, Salesforce, right? I mean -- we think they were competing with Oracle. Think back 20 years. They're competing with Oracle, largely on-premise, highly customized solutions. And they came out with a cloud-based solution, and it was -- frankly, Oracle dismissed it as that's only for small customers. Like that's not -- that's never going to take off, and Salesforce has proven that hypothesis wrong. Another one, not even in our space, but near and dear to my heart because I worked at Yahoo! at one point. Yahoo! focused on building these high-profile flashy ad campaigns. Google came along and said, we're going to do something simple. We're going to create Adwords, and it's going to be easy for everybody. And it's going to -- and once it gets that momentum, it's going to be unstoppable, which actually proved to be the case. So we look at things like that for inspiration and our belief that building that scalable, cloud-based solution, it will then start to move up-market. It will start to disrupt -- the path of disruption goes upward. It's much harder to take an enterprise solution and bring that down-market and serve the large customer base.

And so when you're competing with SolidWorks, what -- how do you win? How do you -- what is kind of the key reason why a customer would say, I'm going to pivot over to you, guys? I mean, what are you seeing out there day to day on that front?

Yes, a couple of things. One is we have a modern kind of easy-to-use interface. A lot of -- some of our legacy products, but a lot of our competitor products including SolidWorks, they're really cumbersome. I mean they feel like you step back in time and you're looking for the DOS prompts to make it operate. So we focused on modern and easy to use. Another difference is we're design and make, so SolidWorks is design. And so you end up paying for -- and not only do you need SolidWorks to do everything Fusion does, but you need some sort of CAM solution like Mastercam, so you're paying for those 2 solutions. And Fusion can actually do more, so you might be paying for multiple solutions. So it's a simpler seamless integration into one industry cloud. Another thing is Fusion is consciously priced at a disruptive point. So we -- when we rolled out Fusion, we priced it low. We kind of had this product-led growth mindset, where we wanted to price it low under a freemium model. We wanted to use a lot of e-commerce and wanted to build a strong community that would both support each other, train each other as well as be advocates. And that has paid off. It were -- even Fusion versus SolidWorks alone is a price advantage. And when you start taking those other solutions, it's even a greater price advantage.

When you break down the market here, you talked about the mid-market being a focus as far as the end market verticals you're serving. What -- how does that break down between things like -- it seems like the industry is some collection of 25%, aero; 25%, high tech; 25%, auto; and then a lot of different little ones. At least that's how Ansys gives us good visibility in that every quarter as a bellwether. So is that -- how does your pie chart compare to that kind of breakout? Or are you looking at -- in the mid-market, it's a bit more fragmented maybe?

We -- it probably is more fragmented. But we don't break out our kind of percentages. Unlike Ansys, we don't break out our percentages by sector. Our biggest sectors though are industrial machinery, building products and fabricators and automotive, including supply chain. And we see emerging strength in verticals like consumer products and factories.

Got it. You guys talk about your data model, the manufacturing data model. How is that different than others? And why is that an advantage to you?

Yes. I mean again, we -- as I said earlier, we were early to the cloud. And then we've embarked about starting 4 years ago on this -- on a manufacturing data model, which is taking the data out of what are massive files, right? I mean they're bigger than spreadsheets in terms of the overall size and it contain all kinds of metadata and geometric data. We pull all of that out, we put it into this cloud data model. So the advantage to that are, one, from just sheer storage. Like if you -- typically, when you build a product, you'll have version 1, 2, 3, 4. And then you also -- many customers have configurations, so slight variations on any one product. Every one of those are massive files. So you're now lugging around these cumbersome files. They're hard to keep track of. Version control becomes an issue. Data fidelity or model fidelity starts to become an issue. And so we think this is -- frankly, imagine if you're doing a configuration, then you say, okay, I want to change this one aspect of a product. All we do is we track that one aspect change. You don't have to recreate the file. It's just one aspect that changed. So that's one piece. Second is our cloud data models are open and API accessible. So you're not necessarily dependent on a format and other partners that a customer might have. You can start to tap into it. We see this with ERP systems. Like they'll want to send their data out to an ERP system, easily done through APIs. And then lower data extraction cost. I guess that's the other advantage to our cloud data model. By putting all our data in the cloud, it lowers that extraction cost. When you invest in AI, there's 2 really big costs. One is the data extraction and the second one is the compute for training the model. The compute is making the folks at Microsoft and Amazon very happy. The data extraction is something that we can control and help to lower the cost.

And where are you when it comes to converging your products into Fusion 360? I think there were some end-of-life products that were coming along. How are -- where are you in that process?

Yes. So for those of you that aren't as familiar, what we've done over time is we bought a series of products and companies, and they may have had different products. We're unifying those into our Fusion industry cloud, so we're integrating those capabilities. So -- and manufacturing was the first area. So we think CAD and CAM, bringing those together. And we have a best -- we now have best-in-class kind of CAM capabilities. But that means like products that have been stand-alone products like PowerMill or FeatureCAM, I'm sure you guys all use these all the time. PowerMill, FeatureCAM, EAGLE, which is for electronics, we integrated those into or unified those into the Fusion cloud. So now not only are they stand-alone products, but we've actually brought them into the cloud. And so effectively, the same capabilities are available when you get Fusion. Our plan is then to then end of life those stand-alone products, and you just get that -- when you subscribe to Fusion, you get those capabilities. What we've seen thus far, which has actually been exciting, is we're kind of in the -- back to your innings question, we're maybe in the sixth or seventh inning on this front and -- because we've announced the end of sale of some of our products. We're seeing really strong renewal rates in all of those stand-alone products, yet the -- we're expanding the people that are signing up for Fusion manufacturing. It's bringing new customers into Fusion and expanding that manufacturing extension that we offer. So thus far, it's actually going quite well. And that's the same playbook, by the way, we're going to follow in data management. We're going to follow as we buy more factory capabilities like factory planning, factory simulation, as we bring some of those MES, manufacturing execution systems. As we bring all of those in-house, we'll fold those also into Fusion over time.

How do you manage such a disruptive price point? I mean, there's a reason why things are priced the way they are. You guys have -- it's pretty staggering how attractive that is. How is that -- how does that work out on the bottom line?

Yes. I mean it's like -- look, Fusion is an earlier -- it's not as mature as AutoCAD or an Inventor or some of our other products. So we're still in very much in an invest mode. You'd expect, from a margin, it might be a little bit less. That said, I mean, it's priced where it is in part to drive penetration. But as you gain scale and the kind of scale that we're gaining, scale will make it as profitable as our other products.

And is that a 5- to 10-year journey? Or is that like a 3- to 5-year journey?

The growth that we are -- well, I'm not going to get into a target. So I'm not going to get into a target or a -- I can hear Simon's voice in the back of my head.

He isn't here yet.

It's ongoing. And it's actually -- I mean if you've seen -- we report out. We've been reporting out our commercial subscription numbers for Fusion, and it's growing dramatically. Think about every one of those as amortizing every investment that we do.

Right, right. When it comes to the smart factory side, you said on the make front and you mentioned MES. I get the design side, CAD, PLM, all those products. So what exactly -- what types of applications on the floor are you talking about? So MES is a place that you want to prioritize?

MES is one of those areas. We bought a company there a couple of years ago. We bought a company called FlexSim that does factory -- discrete event simulation in a factory. So imagine modeling people, products, processes moving around machines, moving in your factory, helps with the factory layout, helps to kind of simulate jobs themselves. Look, Fusion was designed to or was -- I shouldn't use that term. She was created to connect the design and make processes all the way end-to-end and to take things that you learn on the shop floor, feed those back into the design process, kind of circulate that through. So the more we add in the factory in smart factories, the more we bring that data back and help to optimize the design process as well.

So who are you bumping up against there? I mean it's a pretty fragmented space, right? Rockwell bought Plex, and it's not a place where you see your traditional peers going that far down. They have PLM, obviously, as the overlay, but who...

You see some because think -- PTC bought ServiceMax last year, and then they bought ThingWorx before that. Some of those are hard, they got to be. I argue...

I'm not sure ThingWorx was the...

It's a great example. It's a great example of -- for those, ThingWorx does IoT or does or did maybe IoT. Like some of those things are hard. You have to be smart about the bets that you're going to make. We like to play in areas that are going to bring data back to inform the overall process.

Yes. Yes. So there is merit. I mean that's the ServiceMax deal for PTC. Obviously, they're trying to connect that loop a bit from a services perspective, but less on the plant floor.

Yes. And also less on the -- well, I mean, the software side versus services side is the question there.

Right. Right. Yes, that's the challenge I've seen. A lot of my traditional companies that I cover, these capital goods companies that make the control systems had all these ideas of shop floor to the top floor data. And it's so -- the manufacturing environment is so fragmented. How have you guys overcome or are you still overcoming that, where I mean every plant, even in the same verticals, can be different? And varying degrees of risk aversion with customers, has it been a challenge to penetration and scale? So how are you guys -- or are you not seeing that? Is the product just different?

We see it. The way we've combated it is, again, Fusion was created at the outset to connect design and make processes. The manufacturing process were always intended to be part of Fusion, and so we have a lot of integrations on the shop floor where we can pull that data back in. Is it 100% covered yet? No. But it's -- we would say we're in the lead.

What do you make of the consolidation activity that's going on out there, whether it's Synopsys and Ansys or Cadence buying a smaller simulation company? It seems like there's a lot going on.

Lots of excitement.

What do you -- does this influence you guys at all? I know you have a partnership where you -- Ansys is a big supplier of yours. How do you look at all this that's happening out there?

We're partners with both Ansys and with Cadence, which we've announced in the last 15 months. And we talk to them regularly. We like the excitement. We have our vision. Our vision doesn't change with consolidation. We'll continue to execute against that. On -- Ansys has already reached out and said, they -- we want to stay your partner. We want to work closely together. We don't really compete with Synopsys, so I think that's probably easy. And we're increasingly doing more and more with Cadence, for example. So it's exciting, I mean, seeing movement in this space.

It is. It's interesting. A lot going on. These are big deals, too. I mean these are huge deals.

That's a lot of debt. It's a lot of debt to take on.

And stock. So on just the -- a little bit more along the near-term trends. One of the things we're seeing out there, obviously, is the funnels are good. Conversations are there. The close rates are just not when it comes to some of this more design -- some of these more design software verticals. Your revenue growth has just been actually pretty good, accelerated a bit here in the last quarter. What are you guys seeing out there as far as -- how would you describe the macro environment for you as far as funnel and close rates and what your -- and I know your subs growth has been pretty good too.

Yes, the -- we watch all the manufacturing indices. Some of them have kind of been a little jumpy, bouncing around. We have not seen though really an impact on our close rates. And so I don't know if it's different in the enterprise space. But I would say, we have not seen discernible kind of change in close rates for the customers, at least the target markets that we're going after in those segments. I -- welcome, Simon. Everybody said you have to show your credit card. You have to raise your hand and show your credit card. Yes. So yes, our close rates, we're...

We're just talking about trends in the last week. Very strong.

I've already given guidance.

That's called [ fair ] guidance.

Yes, so I don't think we've seen really a discernible -- and then people have asked, between other different parts of the business, CAD, CAM, what do you see differently there? Look, data is one of the fastest-growing areas. We see that. Our competitors report that out too. I think the importance of data in manufacturing is -- just continues to be highlighted.

Right. And the revenue has accelerated pretty nicely. I mean, what has been the driver there of the revenue acceleration?

The revenue acceleration in manufacturing?

Yes. In the manufacturing side, yes.

Yes. We've been driving more subs growth, so that always helps. And then with Fusion, I'll just give you a case study in Fusion. So I said earlier, Fusion was disruptively priced right out the gate to kind of drive -- to build momentum. That's actually worked quite well. But we're getting to a point where Fusion is -- the capabilities within Fusion are increasing. And we look a lot at value for price, and we've increased price. So we've increased price in Fusion, I think, 38% in the last 18 months. And we have a really strong and passionate community out there, and the interesting thing is they have been supportive. In fact, if we get one person who says, hey, I think the price just went up, we get 4 other people that say, do you realize how much of a great value this is? And so they've actually been advocates. Our philosophy is we just want to keep value aligned with price and keep it disruptive, so that we can maintain momentum but realize increased price. The other thing that we do is we offer -- we have extensions. So you get the -- you subscribe to the base. You subscribe to the base Fusion cloud. And then if you need more sophisticated capabilities in any certain area, you can add extensions. So let's say somebody has 100 Fusion subscriptions. They might say, okay, 20 -- I need 20 manufacturing extensions. So we tried to create a flexible business model that allows customers not to overpay for things that they don't need, but to pay for -- here's what I need from a basic and then -- from a base subscription, and then here's the extensions that I need that add to it. That's great flexibility for customers, way more flexibility than they would get with any of our competitors. But it also increases our price realization, so we have increased the base price. We've actually increased these attachments of these extensions and all of that is driving [ productivity ].

What penetration do you think you are -- what's the penetration rate of customers with those extensions, do you think?

It's early, I would say, so it's a low penetration rate. I mean the growth numbers are astronomical. But as one of my old bosses said, happiness is a low base, right? So the growth numbers are probably not artificial to look at.

Expectations are everything. The subs growth you mentioned has been pretty strong. I know that you guys don't disclose manufacturing. Specifically, you do disclose make subscriptions and those are up really strongly. Where do you land in that data? I think it's up like 20% or something.

So we disclose Fusion subs, so you can tell what that is. And they're up in the sort of teens as you can see. The make growth includes -- the largest competitive growth is Autodesk Construction Cloud. You've also got Fusion in there, and you've got things like ShotGrid and other things when we do in [ terminals ] in there. The -- there is a methodological driver of that growth, which is that within Autodesk Build, which is our construction unified product, we count subscribers based on MAUs because it's sold using account-based pricing. So it's a single subscription point for a general contractor, but then all of those general contractor's employees are on that project and the subs use that. So we don't think it makes sense to count that as one. So we count it based on MAUs. And as Build has grown, that gives a tailwind, a methodological tailwind to the subs growth. So the subs growth is still growing nicely. It's not quite as fast though on an underlying basis as the headline number would suggest.

Got it. When you think about the differences between the go-to-market models versus the other parts of the Autodesk portfolio, is there any major difference in the transaction models that you're using? Or how is it different or the same?

Yes. I don't think our good -- I don't think there are major differences in our go-to-market models. We're not -- our go-to-market teams are not structured by industry. Now there's a couple of exceptions to that. When we were incubating construction and really growing it, we had a dedicated sales force. And so they had probably some of their own methods. But now we've actually brought that back in to our larger Autodesk sales force. And it's -- their methodologies are all consistent.%. The only other thing I would say that could be is a little bit different or an exception is Fusion, as I said earlier, really, its growth started through product-led growth. So we had a high degree of e-commerce and marketing-driven -- bringing leads in through marketing and closing them in e-commerce. And product-led growth is something that we like. And as we nurture new parts of our business, we want to emulate that.

Got it. And then the new transaction model, I mean, are you guys a part of -- were you already there? Or are you part of that transition? Where do you sit in that continuum of how you guys are changing the new model that you're rolling out?

In manufacturing, we're absolutely part of that. But it's in the same way that all the other parts of the company are. It's really -- that's more of a cross for all the go-to-market teams. And frankly, a very exciting change.

And we'll benefit from the same things across the company, which is greater visibility in data on the customers and better customer experience, which drive volume opportunity for us within the customer as it lights up opportunities, which we can't currently see. It also drives pricing opportunities as the -- we will be setting the price to the customer rather than the channel partner setting the price to the customer, so that helps raise average pricing for us. And on the cost side, we will have, for the first time, all of our sales and marketing in one place, which is quite exciting. And we think that will drive operational efficiencies for us over time. And also, because we've in-sourced the distribution and the billing platform, specifically in-house, we will be paying gross less to the distributors. Obviously, net of the cost of setting up and running our own platform, but there still will be savings from that as well.

Yes. So that cuts across the whole Autodesk portfolio is the point. All right. Any questions out there? Got time for a question. Are you seeing any -- with these big mega project -- with all this mega project activity that's happening in the U.S., are you -- how does that influence your business in any way, when you see semiconductor plants coming here and EV facilities being put up? How is that kind of making its way into your domain?

It feeds into 2 trends that we've noticed. One is a shift to EVs in the automotive sector. And the second one is we see customers and we hear a lot from customers who are trying to rebalance their offshore, onshore, nearshore. That's all music to our ears because every time a new factory is planned, it has to be designed, which would use our Revit products, going to be -- it has to be constructed, our Autodesk Construction Cloud. Often, they'll simulate how the factory will work on the inside. That's FlexSim, the product we bought last year, the company we bought last year. And it has to be populated with software like Fusion, so we love when we see those. What we might do on the inside of the factory will vary by what sector it's in. So if it's in semiconductors, we can certainly do some things in there, but not -- we're not the only provider.

Right. Okay.

One more thing. And there's also an adjacent thing happening with the infrastructure bill, which is the federal government is incentivizing federal and state departments of transportation to become more digital and move their workflows to the cloud. And as they do that and also adopt building information modeling, that means that more of the infrastructure dollars are becoming addressable for us. So a good example of that last quarter was the Pennsylvania Department of Transportation adopting Autodesk Construction Cloud as its future platform, a cloud-based platform for all of its future projects in the state. So as that happens, that will open up more of the infrastructure market in the U.S. as it has already done outside the U.S. And that's a market relatively where we're underpenetrated.

Got it. Great. Thanks, guys. Appreciate it.

Thank you.

Thanks for coming along, everyone.