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

Yes. So first off, let's talk about what Forma is. So Forma is an end-to-end Design and Make system on a single database, granular data, cloud native, agent-ready, agents can talk to it, use it. It's basically a next-generation environment that goes all the way from design through to construction, okay? And that's really important because it's how we create value in the future. Revit is a modeling application for 3D design that is almost entirely focused on the design phase and building a model that can be used in the future. What we do is we make sure we build a bridge between where the customer is at and where they need to be in the future. Forma is obviously the future. It's where everything is connected on a single database. It's where the project intelligence sits. It's where things can be connected in highly granular ways and in real time. But we've set up Revit in such a way with Forma, we call it a Connected Client so that the user can start in Forma and go out of their workflow, if Forma has a gap today, they can go out and execute in Revit and then go back into Forma and continue the workflow down into preconstruction and construction planning. So we make sure that the 2 environments work together because our customers move gradually. One of the things that's important to know about our ecosystem is that they don't adopt technology as fast as some other ecosystems. They're complex industries, accuracy is at a premium, projects last sometimes years to decades. They don't change in the middle of projects. They're regulated industries. Some of them are really regulated, some of them lightly regulated. They're highly fragmented. So that the ecosystems adopt technology over a gradual period of time, no matter how advanced the technology is, it diffuses in over a gradual period of time. So it's hyper-important that we connect where they're at today with the future we want them to be moving to. And that's what we're doing. We're doing that also. We're connecting AutoCAD into Forma in interesting ways, but Forma is absolutely the future.

And then I guess maybe if we take that to Fusion because this is one of the clearest examples of Autodesk's broader platform strategy actually starting to take hold. What do you think -- why do you think that approach has worked so well there? And what lessons can Autodesk apply to the rest of the portfolio?

Yes. Again, it comes down to -- so what we've done with Fusion is we've converged Design and Make in a single environment. And we've made it easy in a cloud-based granular data, simultaneous collaboration environment to basically move from Design to Make and make Design to Make decisions that are connected and do it packaged up in a way that the mid-market likes. So we're actually taking share with that product. It's growing rapidly. It's actually proving out the whole strategy of the new industry clouds and what they do. We've also introduced a lot of the AI capabilities. First in Fusion. Fusion has more AI capabilities actually than some of the AEC products because we want it to be a demonstration of what's possible.

Okay. That's great. This one is for both of you guys. I guess when you think about more innovation happening through APIs, agents, external applications, how do you think about building an open ecosystem while still ensuring Autodesk remains a central part of that value creation?

Look, I think you need to meet the customers where they are. It's good to have connections to everything that's going on in the ecosystem because we want customers using our tools no matter how they're accessing the tools and how they're approaching them. It's always very valuable for us for our tools to be everywhere in the process. Ultimately, to get the project intelligence we want, they want to be centralized in. But the whole point of moving to granular data and moving to the industry cloud is to create an open ecosystem where anyone can plug in where they're at to the environment. We'll make sure that we charge them for that access. I mean we charge for all the points of access in that ecosystem. But openness is better. You want to be everywhere where the customer is at, but you want to bring them into the high-value project intelligence environment because that's where they get the biggest bang for their buck over time.

And then, Janesh, maybe just ground us in sort of how that open platform ultimately gets monetized through Autodesk.

Yes. It's -- like Andrew said, it's about meeting customers where they are and giving them a choice. We give them the choice of commercial models that they can use as they think about the various technologies from Autodesk that they deploy, whether that's existing subscriptions, whether that's Flex tokens that we have today, in the future hybrid subscriptions. So there's a variety of different choices that we give them, and we meet them where they are. That also means, by the way, thinking about the size of the transactions and thinking about the size of the transaction, and thinking about how they consume and how much they consume. So for example, for many of our small business customers, we used to have Flex packs that were $300 in size, and we lowered that barrier to -- or that threshold to about $100 in size. So people can adopt at much more granular levels if they choose to.

Okay. And then maybe sticking with you, Janesh. Autodesk has already navigated one major business model transition from license to subscription. The next evolution is toward consumption and machine-driven usage, but it's early, right? Flex is 2% of revenue. I think EBAs are 15%. So how do you see a path toward a more blended model? And what ultimately becomes the right unit of value as more of the workflow is automated?

Yes, it's a great question, Matt. But maybe for starters, I would be careful not to describe it as a transition because we internally don't see it as a transition. We see it as giving customers choice. And in terms of how that shows up in the financial model for a number of investors is you won't see any of the kinds of noise that we historically had with the perpetual to subscription transition or more recently with the new transaction model that we introduced. So those are, for the most part, behind us. But as I think about the ultimate evolution of the monetization streams, as I said earlier, consumption is already a significant portion of the business today. It's about 16%, 17%. I see that gradually increasing over time, both as enterprises continue to adopt more at the high end, but also as we think about giving customers choice around subscriptions versus consumption-oriented models, the consumption-oriented models will increase. But on a business that's operating at scale like we are north of $8 billion in revenue, those mix shifts take a long time to drive. So we will see strong growth in these consumptive models, but I'm not expecting a big step function change in the composition of the business overnight.

Okay. Andrew, let's go back to just the private ecosystem and some of the innovations there. There's a growing number of companies exploring how AI can reshape design and engineering. As you watch these new entrants emerge, what do you think they're underestimating about these markets? And what will matter most in sustaining Autodesk's leadership for the next decade?

Yes. So first off, there's a couple of things like I said earlier about our markets. Our markets transition slowly over time, and that's important. Some aspects of the market move faster than others, but they transition slowly over time. Proprietary data because of the accuracy that's required in our space, the accuracy of getting it right, making it buildable, making it safe, making it actually validatable and sign-offable. You need a moat of proprietary data that you can use to train some of your models for validation on. So it's really important to this flow of data context and the ability to craft an experience that's tailored towards designing and making. And that's kind of where we're focused internally is doing that for the broader markets that we serve, the mid-market in manufacturing and the broad AEC ecosystem. Other players are going to come in. We embrace that. We embrace the competition. Most of them are either going to end up in the high end of manufacturing, where there's highly specialized workflows. Very few of them have the proprietary data set we have in AEC that's required to kind of get the accuracy we need. So in terms of where we're going to execute, we're going to focus on our data context and our experience advantage in terms of getting the right kind of levels of project intelligence to our customers.

Okay. Now let's shift to MaintainX. You recently made a big bet on operations with that acquisition. I guess as Autodesk extends further across the asset life cycle, where do you see the first really compelling opportunities to connect operational data back into design and construction workflows?

Yes. So first, let's go back to the thesis of moving into operations. This is something strategically Autodesk has been looking at for some time. And the reason that we want to move into operations are twofold. One is we want to get into the real operational data that shows how an asset is performing in the real world because that data can be used to inform how something is designed or redesigned in the future. But also, we want to engage the owners deeper into a model-based ecosystem, where the flows are driven by a model-based flow that's flowing on the project intelligence that we're trying to create with our industry clouds. The reason we want the owners involved in this is because we believe that these processes are much more efficient. They're a big capacity unlock for the ecosystem, and they're also beneficial to the owners because they're ultimately the ones writing the check. They want the maximum value from their investment, and they want to be able to execute more projects. So we're getting into operations for all of those reasons. The reason we started with MaintainX is we began a project several years ago called Tandem. We've been working on it for about 5 years. And Tandem was about building an informational digital twin. And we always have the goal to move from an informational digital twin to a predictive digital twin to an operational digital twin because that's how you move up the value curve for digital twins. When we began that journey, it was quickly apparent to us that the first place you want to get in there in terms of a predictive digital twin and an operation, is in maintenance. Because that's where you collect the failure modes of what's going on in the facility. It's where you get live data on how the machines are being used. So we had a real sense to go in and go after the maintenance space. Now there's other spaces that we want to go to in operations as well, but maintenance is the key anchor space. And when we looked at the space, there was one player that was the next-gen technology player with the best SaaS tools and the best AI tools and the fastest growth, and it was MaintainX. And they bring us now into this market of actually collecting data on the real-time performance of built assets in the manufacturing space. We're going to bring them into the built space and into the infrastructure space and into the international space. But this helps us close this loop from design, make to operate and gives us the entire life cycle context of the built world. And I think that's a great place for Autodesk to be in the future.

And so what else is left to sort of round out the operate portfolio? Like what are the product gaps that you're looking to fill to sort of drive the value?

You'll learn more about those in the future as we go along. There are some product gaps we'll want to fill, but I don't want to kind of preannounce any of those areas.

Janesh, how should we think about then, I guess, just broadly capital allocation philosophy? Obviously, Autodesk has been very acquisitive over the last several years. So just help us think about that.

Yes. I mean both from the standpoint of M&A philosophy and capital allocation. From an M&A standpoint, as Andrew was just saying, our goal is to make sure we're pulling the future into the present by rounding out the portfolio. We'll build where it makes sense to build. We'll buy where it makes sense to buy. On operations, in particular, the playbook is going to be very similar to the playbook that we followed in construction, where we laid down a cornerstone acquisition. And then we built around that with smaller acquisitions as well as organic investments that we made. So expect the same in operations. But all of that is against the backdrop of capital allocation where we laid out that subject to M&A needs in the business, we expect that we will return about 50% of our free cash flow to shareholders every year. And we've been able to do that. We did that despite the maintenance -- the MaintainX acquisition, we are sustaining our share buyback program this year as well. But that's the way we're fundamentally thinking about it. But it's a balanced view. We'll save room to invest in the business. But at the same time, return capital to shareholders every year as well.

Okay. Great. Let's stick with you, Janesh. Autodesk is balancing significant investment in AI, platform, MaintainX. You're still committed to reaching the 41% non-GAAP operating margin in fiscal '29. I guess the question here is where do you see the biggest sources of leverage? And which investments are most important to protect going forward?

Yes. There's inherent leverage in the business model itself as there are with many software companies, for every dollar that we produce on the top line and revenue, we don't need to necessarily reinvest a full dollar back into the business to secure future growth. So those are conscious trade-offs that we make. If I think about within R&D, we are shifting investments within the portfolio more towards areas of growth and continuing to shift towards areas best positioned to drive growth in the future. You've seen us do that for many years with all the investments we've made in AI, all the investments we've made in our platform strategy, all of those have been by shifting from the past to the future. And then on the sales and marketing side, we continue to get terrific operating leverage from the overall sets of changes that we made, starting with all of the go-to-market structural changes that we made with the new transactional model leading up to the 2-year go-to-market optimization program that we had, the reorganization that we did at the start of this year. So those things have given us a fair amount of operating leverage. And beyond this, we will continue to get some degree of leverage from all the different areas. And we will consciously choose where we invest back in the business, absorb dilution from future acquisitions where we need to. But all of that in terms of working towards the 41% non-GAAP gross margin for '29.

And just on the transaction model change, like we talked about sort of the cost advantages like renewals automation, for instance. But there's another side of this, too, right, just in terms of the high fidelity data that you're capturing with your customers. Are you actually starting to see some of the benefits of that come through the model today?

We are starting to see some of those benefits quite naturally. The model was intended to focus on new business and expansion and help both our partners as well as our direct sellers drive new business and more expansion, while at the same time, driving a highly automated and highly efficient renewals machine. So we're seeing benefits on both of those. On the renewal side, you're already seeing that in the form of savings that we took through the actions that we had taken at the start of the year. And despite that, we actually have very strong renewal rates and renewal rates that have improved over the course of the past couple of quarters. And if I think about the new business productivity, that's what the reorg was intended to do. And the best indication of that is how well sellers are achieving their quotas. We knew there would be some disruption in the earlier part of the year that played out in the range of expectations that we had. But ultimately, we set the plans higher and sellers are on track to achieve that. So we are starting to see the benefits for sure.

Okay. Great. And Andrew, maybe back to you to close out in the last 2, 3 minutes that we have here. You've been living and breathing design and engineering for your entire career, right? And so -- when you look out 5 years from now, I mean, what do you think will change most fundamentally about how the world designs and makes things? And what role does Autodesk need to play in bringing that future about?

Yes. I think things are going to be much more hyperconnected than they are today. We've been talking about this notion of convergence for some time, converging Design and Make together. Now we're talking about converging design, make and operate together. And we've been also talking about the industrialization of construction, which really means the industrialization of the AEC ecosystem. So our goal is not just to provide technology, but to actually transform the ecosystems we serve. We believe deeply that there needs to be a capacity unlock. So when we look forward to 5 years, I think you're going to find small groups of people working intensely on Design and Make problems in real time, where they're getting real-time feedback about what a decision in an early design process, how it impacts how something is made, how it impacts the cost in real time instantaneously so that they can actually make better decisions early on to get better outcomes later in the process. And it really is going to be a small group, not isolated, not divided by contractual things, but they're going to be working off a single model, highly granular in the cloud, telling them exactly what they need to work on, where they're getting it wrong and how they should proceed forward. I think that's going to be revolutionary in many respects. It's already common practice in manufacturing, but it's going to get much more hyperautomated in manufacturing and taking that all the way to operate and being able to design something and then immediately have it go into a factory that knows exactly what to do with the model once it arrives there is going to be really powerful. And I think that's within our grasp in 5 years. For AEC, this whole industrialization concept, this whole notion of using industrial processes for tracing who did what, how things are done, making sure that one model is continuously flowing through the process end-to-end is just going to be revolutionary to eliminating waste in this ecosystem. Now, again, the ecosystem changes slowly. The technology to enable this change will exist in that 5-year time frame, all of it. Will the ecosystem have adopted it all fully? I would likely say probably not, given the history of the ecosystem. But the technological platform, the ability to do that is going to exist, and it's going to have a level of fidelity and project intelligence that we just can't imagine today.

Fantastic. Well, that's a great place to leave it. Andrew, Janesh, thank you for joining us.

Thanks for having us.

Yes. Thank you.