Autodesk, Inc. (NASDAQ:ADSK) J.P. Morgan 2024 Industrials Conference Call March 13, 2024 1:30 PM ET
Company Participants
Jeff Kinder – Executive Vice President, Product Development & Manufacturing Solutions
Simon Mays-Smith – Investor Relations
Conference Call Participants
Charles Tusa – JPMorgan
Charles Tusa
I am going to get this out of the way, because they have asked me to say the Safe Harbor. So I am going to read the Safe Harbor, because they wanted me to. We, referring to Autodesk, 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 have also wanted to do that. So, alright, I was about to start telling jokes, but we have a built-in joke. My partner in crime left his credit card at a restaurant last night and had to race over and pick it up. I like older 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.
Jeff Kinder
He will be joining us.
Charles Tusa
Okay. By the way, I just read the Safe Harbor. So we we’re out of the way on that. You are allowed to make forward-looking statements now.
Jeff Kinder
So since I am unchaperoned by the…
Charles Tusa
Yes, let’s – how is the quarter? 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?
Jeff Kinder
I am the EVP of Design and Manufacturing.
Charles Tusa
Design and Manufacturing. Okay, great. So we are going to talk all about manufacturing software here.
Question-and-Answer Session
Q – Charles Tusa
So maybe if you could start very topical at this conference, how are you guys integrating AI into what you do? And how is that playing out? How does that dictate you from your competitors?
Jeff Kinder
Sure. I love when the AI question comes up, by the way.
Charles Tusa
It’s all about AI. I mean, as an industrial analyst, it’s really all I think about.
Jeff Kinder
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, and 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 until we setup 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 data like 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.
Charles Tusa
Right. What inning do you think we’re in on this in the more broad adoption by your customers?
Jeff Kinder
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 that 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, wow, 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 brings 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, where we talked about at our customer conference last fall, automated drawings and automated tooling. So 30% to 40% our skilled engineers 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 that 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.
Charles Tusa
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 has thought of 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?
Jeff Kinder
Great question. So we – we think about the 4 of us, right, so you nail it – so Siemens 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.
Charles Tusa
How do you defines mid versus enterprise?
Jeff Kinder
Our definition within Autodesk is 5,000 employees. So, but it varies, we talk to different companies and different – they draw 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 in the mid-market SMB and then design and make were that 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 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.
Charles Tusa
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. And that’s the – that’s the vision for Fusion.
Jeff Kinder
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 and examples we look to in the market that are exciting. We look at close to Salesforce. 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 a 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 upmarket. 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.
Charles Tusa
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?
Jeff Kinder
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, that really cumbersome. I mean they feel like you step back in time and you’re looking for the dos prompt to make it operate. So we focused on modern and easy to use. Another difference is we’re designed to make – so SolidWorks is design. And so you end up paying for – and not only do you would get SolidWorks to do everything Fusion does, but you need some sort of CAM solution like Mastercam. So you’re paying for those two solutions. And Fusion can actually do more. So you might be paying for mobile 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, never a freemium model. We want to use a lot of e-commerce and want 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.
Charles Tusa
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. So at least that’s how 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?
Jeff Kinder
We – it probably is more fragmented than. 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, our industrial machinery, building products and fabricators and automotive, including supply chain. And we see emerging strength in verticals like consumer products and factories.
Charles Tusa
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?
Jeff Kinder
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 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 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 of that are, one, from just pure storage, like 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, 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, a 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 two 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.
Charles Tusa
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. Where are you in that process?
Jeff Kinder
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 Power Mill or feature CAM. I’m sure you guys all use these all the time. Power Mill, feature Cam, Eagle, which is for electronics, we integrated those into or unified those into the Fusion Cloud. So now not only are they standalone products, but we’ve actually brought them into the cloud. And so the effectively the same capabilities are available when you get Fusion.
Our plan is then to the 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.
Charles Tusa
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?
Jeff Kinder
Yes. I mean it’s like look, Fusion is an earlier is not as mature as AutoCAD or Inventor or some of our other products. So we’re still in very much in an investment mode, you’d expect from a margin 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.
Charles Tusa
And is that a 5 to 10-year journey? Or is that like a 3 to 5-year journey?
Jeff Kinder
The growth that we are – I’m not going to get into a target, so I’m not going to get into a target or get your Simon’s voice in the back of my head. 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 is amortizing every investment
Charles Tusa
Do. Right, right. When it comes to the smarter side, and you said on the make front, I 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?
Jeff Kinder
Is one of those areas we bought a company there a couple of years ago. We bought a company called FlexSim, it 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, was created to connect the design 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.
Charles Tusa
Well – so who are you bumping up against there? I mean it’s a pretty fragmented space. right Rockwell bought CLX 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…
Jeff Kinder
I see some because – PTC bought ServiceMax last year and then they bought ThingWorx before that. Some of those are hard, I got. I’m not sure ThingWorx was that great that’s a great example. – is a great example of – for those thing work says IoT, did maybe IoT. Like some of those fees are hard to be smart about the bets that you’re going to make. We like to 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 I think.
Charles Tusa
Right. Yes, that’s the challenge I have 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 that customers has been a challenge to penetration and scale. So, how are you guys – or are you not seeing that the product is different?
Jeff Kinder
We see it – the way we have combated it is, again, Fusion was created at the outset to connect design and making process. So, the manufacturing processes 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. I mean but it’s – we would say we are in the lead.
Charles Tusa
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 is a lot going on what do you – does this influence you guys at all? I know you have a partnership or Ansys is a big supplier of yours. How do you look at all of this that’s happening?
Jeff Kinder
We are partners with both Ansys and with Cadence, which we have 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 will 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 Synopsis. So, I think that’s probably easy, and we are increasingly doing more and more with Cadence for example It’s exciting, I mean I have seen a movement in the space.
Charles Tusa
It is. So, it’s interesting like going on. These are big deals, too. I mean these are a lot of deals has…
Jeff Kinder
A lot of debt to take on.
Charles Tusa
And stock. So, on just the – a little bit more along the near-term trends, one of the things we are 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 and software verticals. Your revenue growth has 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 – I know your subs growth has been pretty good too?
Jeff Kinder
Yes. We watched all the manufacturing indices. Some of them have kind of been jumpy, bouncing around. We have not seen now 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 are going after in those segments. I – everybody is yet to show your credit card with a raise your hand and showing. Yes, so yes, I mean our close rates…
Charles Tusa
We are always talking about trends in the last week, very strong.
Jeff Kinder
I have already given guidance. Yes, so, I don’t think we have seen really. And then people have asked between other different parts of the business, CAD, CAM or 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.
Charles Tusa
Right. And the revenue has accelerated pretty nicely. I mean what has been the driver there of the revenue acceleration?
Jeff Kinder
Revenue acceleration in manufacturing?
Charles Tusa
Yes, in the manufacturing side, yes.
Jeff Kinder
Yes. We have been driving more subs growth, so that always helps. And then with Fusion, I will 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 are getting to a point where Fusion is – the capabilities within Fusion are increasing and we look a lot at value for price, and we have increased price. So, we have 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 you get one person who says, hey, I think the price just went up. We get four other people who say, do you realize how much of a great value this is. And so they have actually been in 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 big, 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 get that extension. So, let’s say somebody has 100 Fusion subscriptions, they might say, 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 is what I need from a basic and then from a base subscription and then here is 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 have actually increased these attachments of these extensions and all of that is driving…
Charles Tusa
What penetration do you think you are – what’s the penetration rate of customers with those extensions, do you think?
Jeff Kinder
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 the low base, right. So, the growth numbers are probably not artificial to look at.
Charles Tusa
Expectations are everything. The subs growth you mentioned has been pretty strong. I know that you guys don’t disclose manufacturing. Specifically, we 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?
Simon Mays-Smith
So, we disclose Fusion subs, so you can tell what that is and they are up in the sort of teens as you can see. The make growth includes the largest competitor growth is Autodesk Construction Cloud. You have also got Fusion in there, and you have got things like shop grid and other things where we do [indiscernible] from that. There is a methodological driver of that growth, which is that within Autodesk Build, which is our construction unified products, 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 contractors, employees 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, methodological tailwinds to the subs growth. So, the subs growth is still growing nicely. It’s not quite as far, though, on an underlying basis as the headline number would suggest.
Charles Tusa
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 are using, or how is it different or the same?
Jeff Kinder
Yes. I don’t think are good – I don’t think if there are major differences in our go-to-market models. We are not – our go-to-market teams are not structured by industry. Now, there is 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 some of their own methods. But now we have actually brought that back into our larger Autodesk sales force. 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 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.
Charles Tusa
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 we are rolling out?
Jeff Kinder
In manufacturing, we are absolutely part of that, but it’s in the same way that all the other parts of that company. It’s really that’s more of a cross for all the go-to-market teams, and frankly, a very exciting change.
Simon Mays-Smith
And we will 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 to 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 have 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 that still will be savings from that as well.
Charles Tusa
Yes. So, that cuts across the whole Autodesk portfolio is the point, right? Any questions out there, we have time for a question? Are you seeing any – with these big mega project loss, mega product 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?
Jeff Kinder
It feeds into two trends that we have noticed. One is the 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, near-shore. 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 as to be constructed, our Autodesk Construction Cloud. Often, they will simulate how the factory will work on the inside. That’s FLEXIm, the product we bought last year and 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 we are not the only provider, right.
Charles Tusa
Okay.
Simon Mays-Smith
And there is 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 are underpenetrated.
Charles Tusa
Got it. Great. Thanks guys. Appreciate it.
Jeff Kinder
Thank you.
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