Autodesk, Inc. (NASDAQ:ADSK) Wells Fargo 6th Annual TMT Summit November 29, 2022 4:10 PM ET
Company Participants
Debbie Clifford – Chief Financial Officer
Jeff Kinder – Executive Vice President, Product Development and Manufacturing Solutions
Conference Call Participants
Michael Turrin – Wells Fargo
Michael Turrin
Everyone, thanks for joining, busy day for everyone across software at Day 1 of Wells Fargo TMT Summit. Michael Turrin, Software Analyst. Very pleased to have Autodesk with us. Debbie Clifford, CFO of the company since 2021, longtime finance member of the team; and then Jeff Kinder, EVP of Product Development, Manufacturing Solutions, previously Chief Digital Officer, helped work on a few key initiatives, which we’ll talk about here in a moment. But thank you both for joining today. I appreciate the time.
Debbie Clifford
Thanks for having us. We’re happy to be here.
Michael Turrin
Excellent. I think, I mean, it makes sense to start – obviously, there’s a lot to – we can go into the gist with last week and the earnings results, I think, you had a lot of useful context in unpacking some of the drivers, some of the impacts that you’re seeing on multiple sides. So maybe you can just start with the highlights for those who aren’t necessarily as familiar up to speed and then I can ask some follow-ons from there.
Debbie Clifford
Sure. So – yes, we reported our Q3 results last week. And overall, our Q3 results were strong. We then also talked a little bit about the macroeconomic backdrop that’s impacting our business. The business is performing as we would expect in this kind of environment, solid overall results, but we did start to see some deceleration in our new business growth during Q3. That’s different than what we had seen in the previous four quarters. It was most notably in Europe and predominantly in manufacturing within Europe. And that had a nominal follow-on implication to our Q4 revenue guide, where we moved the midpoint at single-digit million midpoint adjustment. So not huge, but wanted to be transparent about the slight shift that we saw in the macroeconomic situation for us at Autodesk. But overall, the business continues to be resilient, it’s performing as we would expect in this kind of environment, and we’re bullish about the long-term growth opportunities for the company.
Michael Turrin
That’s great to hear. I think maybe that’s a bit of a contrast to what we’re hearing across technology, where there is a lot of commonality around sales elongation some things that almost feel more tech-centric than maybe what your customer base is seeing. But Autodesk I think is generally viewed as somewhat of a macro bellwether, someone that has unique insights into what’s happening. So what do you attribute the resilience? You had some good renewal commentary on the call. To what do you ascribe that so far? And what informs your guidance in that context as well?
Debbie Clifford
Sure. So for those of you that may not be as close to our story, we embarked on a business model transition from perpetual software licenses to subscription. We completed that transition a couple of years ago, and there are many benefits to that transition. But being a 100% subscription model at this point gives us a resiliency that we’re really benefiting from now as the macroeconomic conditions evolve. We also benefit from very strong renewal rates. We’ve had consistently strong renewal rates, and it’s that renewals business that’s fueling us through slightly choppier economic water. So that combined with the fact that our software is highly sticky, our customers need our software in order to get their jobs done, and that’s evidenced by those renewal rates and some of the metrics that we talked about.
The last thing I would say is that one of the other benefits of being in a subscription business model versus where we had been before in a perpetual license model and that perpetual license model, customers could purchase a perpetual license and continue to use the software even without paying us anything in a subscription business model, a customer needs to be paying us on an annual basis in order for us in order to be able to use their software, which, as I said, is software that they need in order to get their jobs done. So it’s that stickiness. It’s that need to be using our software that shields us a bit more in this macroeconomic context versus what we might have seen back in the global financial crisis.
Michael Turrin
Yes. And that’s great. Jeff, correct me if I’m wrong, but you were a key architect in this as Chief Digital Officer as well and transitioning some of the business model towards subscription. So just playing out as you would have expected? Maybe you can just provide some context around that transition and now the stress test that you’re seeing? Is it giving you confidence in the direction that you’ve taken there?
Jeff Kinder
Sure. The – as Chief Digital Officer, I oversaw business models. So, one of the areas was our transition to subscription, which had begun before I even took on that role. So I got to carry that through it. It is playing out. It’s playing out how we had expected and described it. And then we added in this notion of consumption, right? So what we think really gives our customers flexibility, which helps in any kind of macroeconomic downturn is flexibility. We want to align value with usage and the customer outcomes that they see. And that combination of the two is we think serving customers very well.
Michael Turrin
That’s great. One more on just the macro and then I promise I’ll move on. But you’re also...
Debbie Clifford
It’s syllabu du jour.
Michael Turrin
Sure, you’re well versed...
Debbie Clifford
Yes, we’re very ready to talk about.
Michael Turrin
I mean, you’re also a company that has the advantage of having seen cycles before. So does that give you confidence in the signals that you’re looking at? Can you just describe some of the inputs that you look at that inform your forecasting process and just historical context that maybe you have that is helpful in a time like this?
Debbie Clifford
Yes. So there’s a number of leading indicators in our business that we monitor to give us insights into our future outlook. A number – if not, we talk about on our earnings calls on a regular basis. So the first is product usage worldwide. So the more users on our platform, the more that our products are being used the more likelihood that the economic situation is positive for us. And obviously, the inverse is true. To the extent we see product usage start to drop off, that can be indicative of less projects or less business activity on the part of our customers. So that’s something that we monitor quite closely.
Similar is our new business results. So we look at new business for us, that’s both a volume and a price mix, partner compensation metric for us. So we define it as our annualized contract value and how much of that new business how much it’s growing. And so that’s why when we were talking about it on this last earnings call, we saw a slight deceleration, as I mentioned before, but it was still growing. So overall, signs are good. They were just slightly less good than what we had seen in previous periods.
In our Construction business, specifically, in preconstruction, we have an offering called BuildingConnected where we get insight into bidding activity with general contractors and their subs. And bidding activity is a good indicator for us of downstream construction volume when [indiscernible] will become shovel ready. And so we continue to see record high bidding activity on our BuildingConnected platform. That’s something that we that we continue to watch.
So there is a number of things that give us insight. Obviously, nothing is as good as a crystal ball. We don’t have a crystal ball, but we do monitor a lot of these indicators to give ourselves a sense of how we should be thinking about the overall outlook for the company.
Michael Turrin
Very helpful. Jeff, I’m going to give you a couple on the product side. There’s a lot that you’ve been working on. Maybe we can start with Fusion and just the overall move towards cloud. What are just some of the key attributes you’d highlight for those that aren’t as familiar benefits from a customer perspective? And then just any comments around adoption trends you’re seeing there currently?
Jeff Kinder
Sure. So Fusion, for those of you who may not be familiar, that is our industry cloud for manufacturing. And we’ve been at Fusion for ten years. The vision that we had and have had for a long time, is this convergence of design and make. You think about manufacturing process, you design products and then you manufacture them. Historically, those have been point solutions, different software solutions along the way. We see a world where through the cloud, all of this comes together and the data flows seamlessly throughout the process. We think that unlocks efficiency, productivity, fewer errors in the overall production process.
And so that’s been our vision for Fusion and it’s somewhat flattering, we see some of our competition starting to mimic that as well. But design and make, convergence of design to make. That brings it up, automation, it allows for collaboration, so folks in different locations, remote locations as we’ve all lived can collaborate more easily. All of that has to happen when this is connected through the cloud. So that’s the premise behind Fusion.
The other thing that’s interesting is we priced Fusion in a way that is disruptive. And it serves customers who want to come in like SMB customers end-to-end conserve their end-to-end needs to design and make products. We’ve also set it up to where if you have more sophisticated needs as your needs become more sophisticated, and say, designing or machining, you can buy an extension. So we see greater monetization. And actually, that’s been playing out.
To your question on adoption, our growth rates have been fantastic in leading the industry in terms of adoption of the Fusion platform. What we’re also starting to see now as we’ve rolled out extension is we’re increasing the monetization per user, and that has been part of the vision from the get-go.
We’ve had a machining extension. We also just launched a signal integrity extension in partnership with Ansys for us to get into consumer electronics, you need to look at the interference that’s in the PCB. And so this extension, anybody who is building consumer electronics with our software who wants to use that extension, ends up paying us for it.
Michael Turrin
And can you just expand on the visibility you have into, you mentioned monetization and the different levers that you have in place, is the move towards Fusion and just a bigger focus on cloud giving more visibility into customer usage patterns? And does that help fuel just some of the monetization that you have in front of you?
Jeff Kinder
Yes, I mean we have greater visibility into kind of usage across the products. That’s something that folks in the cloud as opposed to on-premise perpetual license that we had before, we get much greater visibility into overall usage. It helps give us indications where we should be adding extensions, where customers will most demand. That also, by the way, sits alongside us talking to customers. So we look at segments that seem underserved, we talk to customers and we add capabilities in those areas.
Michael Turrin
You renamed Forge Platform Services.
Jeff Kinder
We did.
Michael Turrin
Platform services is something...
Jeff Kinder
Yes, Autodesk Platform Services.
Michael Turrin
Yes. I think we all have intuition of what that means as from a software-centric viewpoint that – maybe you can talk more about the business model there and how that extends your reach and creates more customization potentially?
Jeff Kinder
Sure. I lobbied for calling an Autodesk web services, but somebody told me AWS was taken. Yes, so it’s Autodesk Platform Services, formerly known as Forge. And look, what we find is our customers and developers want to build on top of our software. And we love that because it just expands our ecosystem. And what they are doing is they are creating customizations or capabilities or integrations that wouldn’t be scalable for us to do ourselves.
So, what we do is we expose these robust APIs, data and capabilities to customers. And then they go build capabilities on top of that. I will give you a couple of examples. We had a partner in Europe that tapped into our cloud information model for manufacturing. They basically pulled manufacturing data out. They built an integration into SAP for the end customer and did it in record time. We also bought a company that does production planning on the shop floor, and they were able – something it would have taken months to do, within days they were able to take that tap into that same API for cloud integration model and then create a production plan for the shop floor.
So that just makes it our products more sticky and more integrated into our customers’ workflow. We do think there’ll be opportunities around business model as non kind of direct users of the product start to tap in, but we’re really trying to help drive usage of the APIs and of the platform services at this time.
Michael Turrin
No, it all makes sense. I guess, a question for you then is how this informs your growth algorithm with perspective on what you’re forecasting for the future? How much of it comes from some of the new product innovations that you’re working towards versus opportunity for price and retention? You have, I think, the true north of sustaining double-digit revenue growth even beyond the $5 billion run rate the business is currently operating at. So maybe you can just speak to the growth perspective on some of the new product initiatives.
Debbie Clifford
Yes, sure. I just want to qualify – I apologize for my froggy voice. And I have – I’m getting over a lingering cold. So I don’t normally sound like this. So thank you for your patience. And if it sounds like I’m eating...
Michael Turrin
It’s an important footnote.
Debbie Clifford
Yes, if it sounds like I’m eating candy, it’s because I have a cough drop. So the alternative is better or is worse if I didn’t have cough drops. So again, thank you for your patience. Well, maybe I’ll start by extending from where Jeff was and talking about the industry clouds and Autodesk Platform Services. First, this is a vision that we have about driving the capabilities and customer outcomes that Jeff described, but not something in the short and medium-term that we’re anticipating is going to be a significant contributor to our growth.
We believe this is something that we need to be doing from a technical standpoint. It’s a long journey for us. We’ve talked about our need to invest. So there are margin implications that we’ve been vocal about, where we feel the need to invest, which will limit the operating margin expansion over the next couple of years, while we invest to further this strategy, but we think it’s very important for us to do this work.
At our Autodesk University, Andrew, our CEO, talked about the need for us to disrupt ourselves and that’s what we’re trying to do is to disrupt ourselves. But I want to make it clear that we don’t have any assumptions baked into our long-term growth projections that that’s going to be a material contributor to revenue. Over the long-term, yes, when we have a broader developer ecosystem and things like that, we’ll be able to monetize in more ways. But right now, that’s not part of our short-term plans.
What is part of our short-term plans? Well, let’s think about the different industries that we operate in. we operate in Architecture, Engineering and Construction, Manufacturing and Media and Entertainment predominantly. In Architecture, Engineering and Construction, our growth levers start with the proliferation of building information modeling, or BIM, mandates around the world.
There is a 100% saturation of BIM use around the world. So that continues to be a growth driver for us as we see more and more countries and customers expand their usage of them. We invented them, that is a growth driver for us. We’ve been investing in adjacent market opportunities like water infrastructure with our acquisition of Innovyze that got us into the design phase for water infrastructure specifically. And given the water waste that is happening around the world from aging infrastructure, we believe that this is a real opportunity for us to capitalize on a growth lever for the company, but also to drive more sustainable outcomes for the world in the form of less water waste. I’m really happy to get into sustainability at any point, but it’s really a big part of what we do.
In construction, we’ve been actively investing. So we were highly acquisitive over the last five years in construction. We invested in our own digital capabilities in construction. And as we think about our journey there, we have been working for some time on creating our vision of seamless interoperability across all stages of the construction life cycle from design to pre-construction to field management solutions to owners and operations. And you can see that we have offerings across each of those stages of the life cycle, it’s more nascent in owners and operations at this point. But we have an offering there with our tandem digital twin offering.
And our goal is to drive digitization of the entirety of the workflow, and we continue to see success there, and we’re pleased with the momentum that we’re seeing in construction. That’s some examples in AEC. Jeff talked about the growth drivers and some of the things that we’re seeing in manufacturing. I can turn it over to him if you’d like more information there. I think I would just close by saying Media and Entertainment, it’s interesting. It’s a part of our business, but it’s a dark course growth area.
For us, it’s been exhibiting hyper growth in comparison to the rest of Autodesk. And this is because we are running the same play effectively, which is to leverage the technical capabilities of the cloud capitalize on distributed workflows, users working around the world, needing to leverage cloud capabilities to get their jobs done. The same happens in AEC. I talked about that workflow. The same happens in manufacturing. The same too is happening in Media and Entertainment.
When you think about film production, we’ve long had a position in post production and special effects. What we’ve been doing is making small acquisitions to get us upstream and onset, but it’s effectively the same play, where the content is being created, how you manage that content, the digital workflows, all the way to finished product, and then management of that finished product, it’s a digitization of that workflow. And so these are some examples of the drivers of growth that we see at Autodesk.
Michael Turrin
Super comprehensive. I want to go back to sustainability, but I also want to give Debbie a chance to take a breath. Given the context and just let Jeff on the manufacturing side, is there anything you would add based on what she said.
Jeff Kinder
I’ll add two things to manufacturing. First is data – data products. I mean, the data in the manufacturing system is very complex and historically, I mean, people will take a thumb drive from one machine to the next machine. And so there’s a lot of investment we’re seeing in data and our customers – the demand is high, it’s growing faster than any of our other manufacturing products. Our portfolio of data products are growing faster than our design products, for example.
And so we think that’s going to continue and that’s one of the reasons that we’re investing in these cloud information models and then further integrating the design and make. The second piece – and this is – maybe less obvious, but in a softening manufacturing economy, what we’ve seen historically is we tend to take share. And so partly that is – partly that’s our price point, our disruptive kind of price points.
The second piece is, when you think about it and talking to some of our customers, what they do is they tend to inflation – not that we’ve been inflation environments in a long time, but what they pull back on when the cost of capital goes up is buying new equipment. So the software in a manufacturing environment is a much lower percent of the overall cost. So capital outlays for big new equipment, they might delay buying a new machine, but they’re still going to need the software. And in fact, when wages go up and they get squeezed more, they need efficiency that our software brings. They need that more than ever. So we are not immune, but we are – we get a little bit of softer impact.
Michael Turrin
That’s great. Going back to sustainability for a moment. It’s something that comes up a lot, but it’s very core to what you’re enabling and the water example is very tangible. And so maybe from the CFO perspective, you can talk more about the sustainability focus and what that – the takeaway is what the benefits are from the investors side, given this is an investor conference and there’s a lot of cohesion there.
Debbie Clifford
Yes. So sustainability is in infused into everything that we do at Autodesk. It’s very much a part of our values and it’s a part of how we think about developing our software, selling our software, and making an impact. We believe that our software truly will have a positive impact on the world and driving more sustainable customer outcomes. What does that actually mean? Well, first, if you think about the industries that we operate in, let’s just take AEC and manufacturing as the two primary examples.
These are two of the most wasteful industries on the planet. They create a lot of waste that contributes to carbon in the atmosphere. If you digitize those workflows, you reduce waste. If you find out on the construction site as one example that something doesn’t fit or that you’ve purchased the wrong component or things like that, you can avoid it by having the right design decisions upstream.
You can avoid it by having a direct connection between what you’re seeing on the field, on the construction site and connecting it back to the design. That’s just one example. But digitizing these workflows reduces waste and reducing waste drives more sustainable outcomes for the planet. We also have technology that gives our customers insight into the environmental impact that their designs could or will have on the planet. So things like our insights carbon calculator, when they’re – when a customer is creating a design in the AEC space, they can get estimates around what the carbon output would be from a particular design, and make design decisions at the beginning that would reduce the downstream carbon footprint.
These are some examples of things that we do to focus on sustainability and sustainable outcomes. Obviously, we’re very serious about what we do around sustainability and ESG, broadly speaking as a company that like most companies, but the distinguishing factor for us is really this connection that we have to our customers and to particular industries and driving more sustainable outcomes for the planet and we’re very passionate about it.
Michael Turrin
Great. Five minutes left. I want to spend one more kind of focused on the near-term and some of the indicators that you’re seeing, and then we’ll zoom out big picture. But you provided some context on the call, in the earnings call just around fiscal 2024 and a few things to think about in the context of the growth margin tradeoffs. And so just thinking about the near-term obvious growth opportunities you have in front of you and the margin profile you have today versus the target levels. Can you just put a little bit more context around how you’re thinking about that trade-off both now and into the upcoming year?
Debbie Clifford
Yes. So to reiterate some of the things that we said on the call last week, first, I mean it’s an interesting world in particular with FX. So we highlighted the fact that all else remaining equal, we see, at this point, a 5 percentage point revenue growth headwind next year from the continued strength of the U.S. dollar. So that’s out of the gate. That’s an exogenous factor outside of our control out of the gate.
The second is that from our exit of the Russia market, we see a follow-on incremental 1 point headwind to our revenue growth next year from that exit. So out of the gate, we have 6 percentage points of headwinds for our revenue growth next year. We wanted to be transparent about that. We’re in the planning process as we speak. So how that plays into where we ultimately guide is work that we’re doing now, and we’ll talk more about on our February call. But as you can imagine, against that backdrop with those kinds of headwinds and it will make it difficult for us to grow much beyond double digits as we get into next year on the top line.
Now on margin, we’re also in the planning process and seeing through some of the trade-offs there. I think the key, and I mentioned some of this on the call, we want to make sure that we keep an eye on delivering a healthy margin, but also not be too short-term in our thinking. We have a strong balance sheet – the business is performing well. It’s resilient in this environment. We feel like it’s important that we continue to invest, we believe in our strategy, we believe in the long-term growth prospects of the company. So we want to continue to invest in the midst of that strategy versus the alternative, which could be reducing our cost structure to offset FX volatility.
We don’t think that, that makes sense in the short-term, and that’s more than anything else what we wanted to signal. Obviously, we’ve demonstrated a track record of delivering on our operating margin goals and are – it’s important to us to continue to demonstrate that we deliver on those goals. So that’s something that we’re thinking through as we think about our margin target for next year. But there’s a lot of trade-offs here, and we just want to make sure that we’re not being too short term in our thinking, I’ll also be transparent about what we’re seeing today.
Michael Turrin
It’s well appreciated. Jeff, the closing question for you, and then I’ll come back to Debbie with a similar line of thinking, is just – a lot of change in the air. 2023 planning cycle is upon us. What are some of the key points of focus that you’re thinking about and what are the key priorities that you’re focused on that you would expect if we’re having this conversation next year, we’d be touching on, that are incremental and different than maybe what we’ve touched on here today?
Jeff Kinder
Yes, a couple of things. I mean, we continue to see healthy growth in the products that have been leading our markets for years. And so we’ll continue to invest in those products and delight the customers of those products. At the same time, we are really focused on our industry cloud, which we unveiled at Autodesk University as well as our cloud formation models and data seamlessly flowing through those. And what we do is we strike the balance in those investments to keep customers happy and like I said, delighted and renewing with our market-leading products, offer market-leading products and then investing in the future because, as Debbie said earlier, like we think that long-term, that’s where customers need to go and we want to lead the way for them.
Michael Turrin
Great. Debbie, key focus areas for next year? Any last minute takeaways you’d like for investors to take away from the conversation here today?
Debbie Clifford
I think, I mean, if you take away anything, I think, take away this that Autodesk is a resilient company with strong growth prospects over the medium- and long-term. We are well positioned to execute in the midst of virtually any macroeconomic cycle, but certainly the one that we find ourselves in now. And one of the things that we didn’t talk about a whole lot is the transition that we’re executing on starting next year to move our multiyear contract base to annual billings.
And I won’t get into too much of the details except to say that if you believe in that vision, and we believe in that vision, what it means is that one of the outcomes over the medium- and long-term is that as we normalize our free cash flow pattern, today we believe we’re trading at a discount on our free cash flow multiple because of the volatility that we see in our free cash flow, and ultimately we are looking to remove that volatility. It’s easier for us to manage the business, our customers want it, and it should make it so that over time, Autodesk becomes a more valuable company.
So next year is the trough year when we think about the free cash flow during that transition, all else being equal, it should be by years of successive growth, all in these – in service of delivering on our growth objectives, which for free cash flow were to deliver double-digit compound annual growth through the period of fiscal 2026. So if you believe in that vision, that’s a good time to be thinking about the long-term.
Michael Turrin
Very well said. A lot to go through, I promise I have that on my list, but I’m glad you brought that up. I appreciate you both making the time today, spending some time with us in Vegas. Thank you. Thank you, both.
Debbie Clifford
Thank you very much.
Question-and-Answer Session
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