Autodesk, Inc. (NASDAQ:ADSK) Q2 2024 Earnings Call Transcript

Autodesk, Inc. (NASDAQ:ADSK) Q2 2024 Earnings Call Transcript August 23, 2023

Autodesk, Inc. misses on earnings expectations. Reported EPS is $1.03 EPS, expectations were $1.72.

Operator: Thank you for standing by, and welcome to Autodesk’s Second Quarter 2024 Earnings Call. [Operator Instruction] I would now like to hand the call over to Simon Mays-Smith, Vice President, Investor Relations. Please go ahead.

Simon Mays-Smith: Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss the second quarter results of Autodesk’s fiscal ’24. On the line with me are Andrew Anagnost, our CEO; and Debbie Clifford, our CFO. Today’s conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com/investor. You can find the earnings press release, slide presentation and transcript of today’s opening commentary on our Investor Relations website following this call. During this call, we may make forward-looking statements about our outlook, future results and related assumptions, products and product capabilities, business models and strategies. These statements reflect our best judgment based on currently known factors.

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Actual events or results could differ materially. Please refer to our SEC filings, including our most recent Form 10-Q and the Form 8-K filed with today’s press release for important risks and other factors that may cause our actual results to differ from those in our forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward-looking statements. During the call, we will quote several numeric or growth changes as we discuss our financial performance. Unless otherwise noted, each such reference represents a year-on-year comparison.

All non-GAAP numbers referenced in today’s call are reconciled in our press release, or Excel financials and other supplemental materials available on our Investor Relations website. And now I will turn the call over to Andrew.

Andrew Anagnost: Thank you, Simon, and welcome, everyone, to the call. Resilience, discipline and opportunity again underpinned Autodesk’s strong financial and competitive performance despite continued macroeconomic policy and geopolitical headwinds. Resilience provided by our subscription business model and our product and customer diversification discipline and focus in executing our strategy and deploying capital through the economic cycle and opportunity from developing next-generation technology and services which deliver end-to-end digital transformation of our Design and Make customers and enable a better world designed and built for all. Our leading indicators remained consistent with last quarter with growing usage and record bid activity on BuildingConnected and cautious optimism from channel partners.

Customers remain committed to transformation and to Autodesk leveraging automation more where they are seeing headwinds from the economy, labor shortages and supply chains. That commitment was reflected in our Q2 performance, growing adoption and token consumption within Enterprise Business Agreement and strong renewal rates. Autodesk remains relentlessly curious with a propensity and desire to evolve and innovate. We were delighted that Autodesk was recently highlighted as a Best Workplace for Innovators by Fast Company. I will now turn the call over to Debbie to take you through our quarterly financial performance and guidance for the year. I’ll then come back to provide an update on our strategic growth initiatives.

Debbie Clifford: Thanks, Andrew. Overall market conditions and the underlying momentum of the business remained similar to the last few quarters. Despite a tough macroeconomic backdrop that continues to drag on the overall rate of new subscriber acquisition and the forward momentum of the business and may continue to do so. Our financial performance in the second quarter was strong. We said last quarter that we had a strong cohort of EBAs renewing in the second half of the year that last renewed three years ago at the start of the pandemic and that subsequent adoption and usage has been strong. Some of that strength came through in the second quarter, which was earlier than we were expecting and which boosted billings, free cash flow and subscription revenue.

Total revenue grew 9% and 12% in constant currency. By products in constant currency, AutoCAD and AutoCAD LT revenue grew 9%, AEC revenue grew 14%, Manufacturing revenue grew 9% and in double digits, excluding a headwind from variances in upfront revenue, and M&E revenue grew 10%. By region in constant currency, revenue grew 15% in the Americas, 11% in EMEA and 6% in APAC. Direct revenue increased 18% and represented 37% of total revenue, up 3 percentage points from last year, benefiting from strong growth in both EBAs and the eStore. Net revenue retention rate remained within the 100% to 110% range at constant exchange rates. The transition from upfront to annual billings for multiyear contracts is proceeding broadly as expected. We had a full quarter impact in the second quarter, which resulted in billings declining 8%.

Total deferred revenue increased 14% to $4.2 billion. Total RPO of $5.2 billion and current RPO of $3.5 billion grew 11% and 12%, respectively. Turning to the P&L. Non-GAAP gross margin remained broadly level at 92%. GAAP and non-GAAP operating margin remained broadly level with revenue growth and cost discipline, offsetting the impact of exchange rate movements. Free cash flow was $128 million in the second quarter, which was a bit better than we’ve been expecting, primarily due to the timing of EBAs, but also due to some favorable in-quarter linearity. Turning to capital allocation. We continue to actively manage capital within our framework. Our strategy is underpinned by disciplined and focused capital deployment through the economic cycle.

We are being vigilant during this period of macroeconomic uncertainty. During Q2, we purchased approximately 400,000 shares for $87 million at an average price of approximately $200 per share. We will continue to offset dilution from our stock-based compensation program and to opportunistically accelerate repurchases when it makes sense to do so. Now let me finish with guidance. The headline is that overall, the underlying momentum in the business remains consistent with the expectations embedded in our guidance range for the full year. Our sustained momentum in the second quarter and early expansion of some EBAs expected to renew later in the year, reduce the likelihood of our more cautious forecast scenarios given that, we’re raising the lower end of our guidance ranges.

Let me summarize some key factors we highlighted earlier in the year. First, we have a strong cohort of EBAs renewing in the second half of the year, although, as I mentioned earlier, some of that benefit was billed in the second quarter. Second, foreign exchange movements will be a headwind to revenue growth and margins in fiscal ’24. The revenue headwind will moderate a bit in the second half of the year. Third, Switching from upfront to annual billings for most multiyear customers creates a significant headwind to free cash flow in fiscal ’24 and a smaller headwind in fiscal ’25. Our expectations for the billings transition are unchanged. Fourth, as we thought might happen, we saw some evidence of multiyear customers switching to annual contracts during the second quarter.

It wasn’t big enough to be called a trend, but we’re keeping an eye on it. It’s still early days, and we’ll keep you updated as the year progresses. All else equal, if customers switch to annual contracts, it would proportionately reduce the unbilled portion of our total remaining performance obligations and negatively impact total RPO growth rates. Deferred revenue, billings, current remaining performance obligations, revenue, margins and free cash flow would remain broadly unchanged. Annual renewals create more opportunities for us to drive adoption and upsell and are without the price lock embedded in multiyear contracts. And fifth, we expect our cash tax rate will return to a more normalized level of approximately 31% of GAAP profit before tax in fiscal ’24, up from 25% in fiscal ’23.

We the federal tax payment extension after the winter storms in California means cash tax payments shift from the first half of the year to the third quarter, reducing third quarter free cash flow. Second half free cash flow generation will, therefore, be significantly weighted to the fourth quarter. We still anticipate fiscal ’24 will be the cash flow trough during our transition from upfront to annual billings for multiyear contracts. Putting that all together, we now expect fiscal ’24 revenue to be between $5.41 billion and $5.46 billion. We expect non-GAAP operating margins to be similar to fiscal ’23 levels with constant currency margin improvement, offset by FX headwinds. We expect free cash flow to be between $1.17 billion and $1.25 billion.

We’re increasing the guidance range for non-GAAP earnings per share to be between $7.30 and $7.49 to reflect higher interest income on our cash balances in addition to the reduced likelihood of our more cautious forecast scenarios. The slide deck on our website has more details on modeling assumptions for Q3 and full year fiscal ’24. We continue to manage our business using a rule of 40 framework with a goal of reaching 45% or more over time. We think this balance between compounding growth and strong free cash flow margins captured in the rule of 40 framework is the hallmark of the most valuable companies in the world, and we intend to remain one of them. As we said back in February, the path to 45% will not be linear, given the macroeconomic drag on revenue growth from the rate of new subscriptions growth and the drag to free cash flow as we transition away from multiyear contracts paid upfront.

But let me be clear, we’re managing the business to this metric and feel it strikes the right balance between driving top line growth and delivering disciplined profit and cash flow growth. We intend to make meaningful steps over time toward achieving our 45% or more goal regardless of the macroeconomic backdrop. Andrew, back to you.

Andrew Anagnost: Thank you, Debbie. Let me finish by updating you on our progress in the second quarter. Our strategy is to transform the industries we serve with end-to-end cloud-based solutions that drive efficiency and sustainability for our customers. We continue to see good growth in AEC, fueled by customers consolidating on our solutions to connect and optimize previously siloed workflows through the cloud. And as we talked about in February, digital momentum is also building among asset owners in infrastructure and other areas. This momentum is expected to accelerate with infrastructure investment programs like the U.S. Advanced Digital Construction Management System program, which launched during our second quarter. Cannon Design is a global design practice encompassing strategy, experience, architecture, engineering and social impact.

It is driving forward its digital transformation and embracing the cloud to increase operational efficiency, enhance security, establish a single point of truth and enable more seamless end-to-end collaboration. During the quarter, it expanded its investment with Autodesk by leveraging Autodesk Docs as a common data environment adopting Forma and is exploring opportunities to integrate Autodesk’s XR and asset management capabilities to its design portfolio. Outside the U.S. our construction platform is benefiting from our strong international presence and established channel partner network. During the quarter, a property developer and transit network operator based in Asia needed to simplify operations across its many infrastructure projects with a wide range of contractors and subcontractors.

To manage this complexity, it needed a single source of truth for its project data and way to streamline workflows on a single platform. In Q2, it leveraged support from our local channel partner and standardize on one platform by adding Autodesk Construction Cloud to its existing portfolio of Autodesk AEC design tools to gain visibility into contractors and subcontractors workflow and the potential to unlock breakthrough productivity gains. Shook Construction, an ENR 400 general contractor based in Ohio made the decision to standardized on Autodesk Construction Cloud to better streamline their operational workflows. After evaluating many competitive options, Shook Construction chose Autodesk Construction Cloud as the best fit for driving consistent workflows, creating high-impact collaboration with their construction partners and eliminating cumbersome manual workflows.

We continue to benefit from our complete end-to-end solutions, which encompass design, preconstruction and field execution through handover and into operations. Again, these stories have a common theme: managing people, process and data across the lifecycle to increase efficiency and sustainability while decreasing risk. Over time, we expect the majority of all projects to be managed this way, and we remain focused on enabling that transition through digital transformation. We talked last quarter about the short-term disruption from integrating our construction and worldwide sales teams. I’m pleased to report that things began to settle in the second quarter. We believe that combining the two teams will allow us to expand the scale and reach of our construction business, particularly in our design customer base and our ability to serve our customers across the complete project life cycle.

Encouragingly, Autodesk Construction Cloud MAUs were up over 100% in the quarter. Moving on to manufacturing. We made excellent progress on our strategic initiatives. Customers continue to invest in their digital transformations and consolidate on our Design and Make platform to grow their business and make it more resilient. For example, a multinational manufacturer which serves the construction industry on both a building product manufacturer and through tools and construction processes has been leveraging the Autodesk portfolio to connect workflows across the AEC and manufacturing industries. It’s expanded its commitment to BIM using Revit, Navisworks and Construction Cloud, which has enabled the customer to adopt a collaborative and data-driven approach across design, construction and maintenance services.

which minimizes clashes and rework and culminates in more efficient and successful building projects. In the second quarter, the customer grew its EBA with Autodesk ahead of its Q4 renewal date to accelerate the adoption of BIM and facilitate the design of its products and materials directly within MEP models. Fusion continues to provide an easy on rate into our cloud ecosystem for existing and new customers. In Europe, an appliance manufacturer who was already an existing user of our manufacturing collection and AutoCAD mechanical, purchased additional seats of Fusion for PCB design. It’s heating systems division will leverage Fusion’s electronic design automation capabilities to quickly and seamlessly connect more of its design to manufacturing workflow to drive greater efficiency.

Fusion continues to grow strongly, ending the quarter with 236,000 subscribers as more customers connect more workflows in the cloud to drive efficiency, sustainability and resilience. At Investor Day, I talked about leveraging our key growth enablers, including business model evolution, customer experience evolution and convergence between industries to provide more and better choices for our customers. Our Flex consumption model is a good example of this. Flex’s consumption pricing means existing and new customers can try new products with less friction and enables Autodesk to better serve infrequent users. Not surprisingly, the lion’s share of the business has come from new or existing customers expanding their relationship with Autodesk.

During the quarter, we signed 3 more million dollar Flex deals. As Steve said at our Investor Day, we’ve also introduced a new transaction model for Flex, which will give Autodesk a more direct relationship with our customers and more closely integrate with our channel partners over time. We will begin testing our new transaction model more broadly in Australia later this year. And finally, we continue to work with noncompliant users to ensure that they are using the latest and most secure versions of our software. For example, after identifying and alerting a Chinese-based automobile designer about noncompliant usage and despite working to ongoing challenges from the pandemic, the customer eventually committed to three year VRED and Alias subscriptions.

As expected, our initiatives to tighten concurrent usage of named user subscription and expand the precision and reach of our in-product messaging drove incremental growth during the quarter. Now let me finish with the story. According to the National Oceanic Service, Coral reefs are some of the most diverse and valuable ecosystems on earth. While they take up less than 1% of the ocean floor, their extraordinary biodiversity supports about 25% of all marine life. Healthy coral reefs support fisheries as well as jobs and businesses through tourism and recreation. It also buffer shorelines against 97% of the energy from waves, storms and floods, helping to prevent loss of life, property damage and erosion. It can take 10,000 to tens of millions of years for our coral reefs to form, and just weeks for it to die.

Rising ocean temperatures can cause coral to bleach and die. Half of living coral reefs have died since the 1950s. Without intervention, we’re on track to lose 70% to 90% of the remainder by 2050. That is, unless we find a faster way to bring coral reefs back from the brink. With support from Autodesk and the Autodesk Foundation, a company called Coral Maker is using our digital tools, artificial intelligence, and robotics to deliver core restoration at scale with cloud collaboration to keep the global team connected across oceans and time zones. As Dr. Karen Foster, coral makers founder says, the partnership with Autodesk has empowered us to develop new technology to restore reef at a rate unimaginable a few years ago. Current restoration projects can deploy about hectare of portal per year.

With coral makers technology, it’s possible to deploy 100 sectors per year. From the oceans to the earth and Sky augmented design, powered by Autodesk will enable our customers to go further and faster to design and make a better world for all. We’ve been laying the foundation to build enterprise level AI for years with connected data, teams and workflows in industry cloud. real time and immersive experiences, shared extensible and trusted platform services, innovative business models and trusted partnerships. Autodesk remains relentlessly curious with a propensity and desire to evolve and innovate. We are building the future with focus, purpose and optimism. Operator, we would now like to open the call up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Saket Kalia of Barclays. Please go ahead, Saket.

Saket Kalia: Okay. Great. Hi Andrew. Hi, Debbie. How are you guys doing? Thanks for taking my questions here.

Debbie Clifford: We’re doing great. How are you Saket?

Saket Kalia: Doing great, doing great. Debbie, maybe for you, just a quick housekeeping question here. Great to see the revised range on a lot of metrics, particularly revenue. And so, when I think about the midpoint of the revenue guide going up by about $25 million, first of all, great to see the impact of FX to start to lighten. But could you just maybe walk us through a broad brush how much of this year’s raise on revenue is from FX versus maybe some underlying fundamentals in the business?

Debbie Clifford: Yes. So, we had a small increase in the midpoint of the guide. The dollar change was immaterial it’s tough really to come up with a mix of assumptions that get us to the low end of our previous guidance range. So, the midpoint increase reflects a mix of both organic and FX assumptions. Overall, the business is tracking generally in line with our expectations.

Saket Kalia: Okay. Got it. Got it. Andrew, maybe for you, of an open-ended question. But I guess now as you’ve completed the first quarter of this transition to a new billing model. Is there anything that’s surprising you about maybe how customers or how partners are behaving, again, open ended?

Andrew Anagnost: Yes. No real big surprises. Saket I mean – Debbie flagged last quarter that we might see some customers reverting back to annual contracts as a result of the change. We did see that. Nothing really out of bound zone, nothing really surprising. Debbie, do you want to add anything to the details or…

Debbie Clifford: Yes. I would say the initial rollout of the new billings model is going well. The systems are working, customer and partner behavior is pretty much as we expected. As Andrew mentioned, we are seeing a small proportion of our customers choose annual contracts versus multiyear contracts billed annually, but generally, we expected a bit of that, and the performance has been in line with our expectations. And remember, if customers choose annual contracts, it doesn’t impact the P&L. It only impacts unbilled and total RPO. It’s still early days. We’re monitoring it closely. And I think it just continues to be a good example of how we’re working to optimize the business. It’s about reducing the volatility of our cash flow while simultaneously giving our customers, the purchasing pattern that they want. And then finally, I’d say that there’s no change in how we expect the transition to impact our cash flow outlook.

Saket Kalia: Got it. All very clear. Thanks guys.

Operator: Thank you. Please stand by for our next question which comes from the line of Jay Vleeschhouwer of Griffin Securities.

Jay Vleeschhouwer: Got it. Thank you. Good evening. Andrew, for you first, you made some constructive comments about what you’re seeing in the AEC business. But more broadly, and as you’re well aware, there’s quite a bit of ferment going on in that market right now in terms of references to what’s come to be called BIM 2.0 as you know, just a couple of months ago at an AUC conference, a customer group launched a new customer-developed design specification for software. You yourselves are working on a dual track of enhancing revenue, but focusing on format. So lots going on in terms of various currents in that industry or part of the industry. Help us understand how you’re thinking about managing for all those different dynamics that are going on in the AEC industry. And then a follow-up.

Andrew Anagnost: Yes. So Jay thanks. Jay, there’s three threats to this, right? One is kind of the core platform threat around data and data flow. At the root of all of this, we need to make sure as much of the data that we have locked inside Revit files and lots of other types of files that our customers have gets turned into APIs wherever possible, right? This is a lubricant to the workflows that people are worried about. And I think a part of really what underpins the whole concept of BIM 2.0. That’s one of the things. The second piece is you’ve got to make sure that their ability to do detailed in-depth complicated, sophisticated BIM models gets more performant, more productive and faster. That’s core to kind of building up, and improving Revit in some significant ways, which we’re absolutely looking at.

But the third point, which I think is more important is you really need to reimagine how BIM is being done. The paradigm needs to shift, and it needs to shift to the world of not only being cloud-enabled but also being what we really like to call augmented design-enabled or outcome-based in whatever language we use, so that you can actually change the way people do BIM. And that’s one of the big things that we’re focusing on with Forma. And that’s very different than – we have certain types of competitors. It’s in line with what the spec is from the customers. But when you talk about data revenue improvements, and the move to what we call augmented design or outcome-based design. Those are the big thrust in terms of what we’re trying to do to bring the industry to a better way of doing BIM?

Jay Vleeschhouwer: Okay. Second question refers to the comments you made about a new transactional model and a pilot you’re going to be undertaking in Australia. So maybe you could elaborate on that. When I hear that, it sounds to me like there’s potentially going to be some further change to channel economics. You’ve just completed the move to back-end-only margins. Are you thinking about perhaps taking the flex commission model more broadly across the rest of the business? Or what exactly you’re looking to accomplish with that?

Andrew Anagnost: So let’s talk about the Flex experiment and the things you were doing with – I think with Flex last. First off, Flex because it’s like a consumption-based model, and it involves usage of various different products – it really – it’s really incredibly helpful for the customer for us to be able to have a much more direct relationship with the customer with regards to that offering. Because that way we’re able to offer a lot more visibility to how they’re using the offering, what they’re using, when they’re using it, how much they’re consuming, and actually help them get the most out of the offer. So, what we’ve done over the last year is we’ve proved out a new transaction model working with our partners, and rolling out across various regions that is supporting Flex, and that is a much more direct transaction model.