Earnings Season Recap #18

Macro uncertainties, the Autodesk flywheel, proof of resilience, capital allocation framework, growth opportunities, and more.

-> Building a flywheel of compounding growth: Next-generation technology and services, end-to-end digital transformation within and between the industries we serve and leveraging unique growth enablers will shift Autodesk from products to capabilities. As we make that shift, our TAM will expand towards $100 billion, which is going to enable us with our growing data ecosystem to build a flywheel of compounding growth. – Andrew Anagnost, CEO (08:38)

-> Manufacturing – a $42 billion opportunity: With an addressable market of $42 billion and 31 million professionals between design and make. Manufacturing is a broad surface area with that $42 billion opportunity spread across multiple industry segments, from automotive and transportation to aerospace and defense, to industrial machinery, building products and fabrication as well as consumer products. Further breaking this down, it's worth noting the addressable market is larger, and there are twice as many users on the make side of our industry. We've long touted the convergence of design and make as our future vision and the way manufacturers will see true breakthroughs in productivity. We view serving more of these make users as a growth opportunity for Autodesk. – Jeff Kinder, Executive VP of Product Development & Manufacturing Solutions (28:17)

-> Macroeconomic uncertainties: Many of the trends impacting our industry and shaping our strategy are not new. Products continue to get smarter and more connected, Macroeconomic uncertainty persists, including geopolitical tension and dated shop floor investments requiring more manual processes are squeezing margins from manufacturers due to inflation. The two trends on the right are interrelated. Macroeconomic uncertainty makes demand harder to forecast. When the topline is unpredictable, costs become even more of a focus. But with more expensive manual processes, there's only so much a manufacturer can do. This is why digital transformation is accelerating, and this is where Autodesk helps. Manufacturers need to invest more in software to make themselves more efficient and automated. In fact, given the higher cost of capital, manufacturers are more likely to delay multimillion dollar equipment upgrades than software purchases. Historically, Autodesk has gained share in manufacturing during volatile economic periods helped by our disruptive price points. We plan to lean into the face of any macroeconomic uncertainty and use that as an opportunity to continue our growth. – Jeff Kinder, Executive VP of Product Development & Manufacturing Solutions (30:07)

-> More efficient content creation: We've seen strong growth in our cloud products, ShotGrid and Moxion. Both products enable remote workloads and collaboration, which is becoming increasingly important to our customers as they juggle more projects and as productions get more complex. With Moxion, a producer who has to make an urgent trip to London can still check what is happening during a shoot in LA. Using the cloud, they can see a live stream from the camera and check that they are getting what they need. And if they're not getting the shot they want, they can tell someone on site to change it while it's happening without having to pay for expensive reshoots. And these days, a single production can involve multiple collaborators. So keeping track of things is getting harder. This is where ShotGrid shines. It keeps track of everyone, allowing rescheduling and reassignment of tasks while keeping everyone in sync with cloud collaboration. Issues arise all the time, impacting the production, but they are easier to manage with the cloud-based tools we have at Autodesk. When studios need to have more efficient ways to create content, Autodesk is the answer. – Diana Colella, Senior VP of Media & Entertainment Solutions (01:11:33)

-> Delivering great customer experiences: We expect to win as we are well positioned to deliver great customer experiences and drive long-term financial results. And our core areas of focus to drive growth include continuing to evolve the customer experience, targeting customer segments with the greatest growth potential, continuing our business model evolution and continuing to convert noncompliant users. By executing in these areas we are prepared to drive growth in FY '24 and beyond. – Steven Blum, COO (02:39:24)

-> No normal is the new normal: The new normal is that there is no normal. Macroeconomic uncertainty is being compounded by geopolitical, policy, health and climate uncertainty. I'm thinking here of generational movements in monetary policy, fiscal policy, inflation, exchange rates, politics, geopolitical tension, supply chains, extreme weather events and, of course, the pandemic. These increased number of factors outside of our control and the range of possible outcomes, which makes the operating environment harder to navigate both for Autodesk and its customers. With the benefit of hindsight, setting fiscal '23 financial goals way back in 2016 created a challenging path for us. Cast your mind back to 2016. The U.K. voted to leave the European Union. The number of people using mobile devices to access the Internet overtook desktop for the first time. And the Chicago Cubs won the World Series for the first time since 1908. A lot has happened since then, which resulted in us falling short of our goals even while growing our revenue, margins and free cash flow significantly. – Deborah Clifford, CFO (02:40:56)

-> A resilient business: Our industry-leading products are highly valued by our customers and embedded in their workflows. They generate large recurring subscription revenue streams, which have strong retention rates and give us some visibility into the future. It provides us with a resilient foundation, which is more valuable in uncertain times. You can see evidence of the resilience of our business model if you compare our financial performance during the global financial crisis that started in 2008 and the recent COVID-19 pandemic. During the global financial crisis, we were selling perpetual licenses, and our revenues declined around 30% during the midpoint quarters. In contrast, during the pandemic, we saw sustained growth throughout, with the 12% revenue growth we reported in Q1 fiscal 2022. This resilience was not a surprise to us. During the global financial crisis, recurring maintenance payments, which then made up only around 40% of our revenue, grew each year. – Deborah Clifford, CFO (02:43:05)

-> Reinvestments and buybacks: We will continue to return capital to shareholders through share repurchases, which offsets stock-based compensation dilution. But we are deploying that framework flexibly buying more shares below the cost of issuance and fewer above the cost of issuance. Put another way, the cash expenditure on stock-based compensation as a percentage of revenue is lower than the GAAP stock-based compensation expenditure as a percentage of revenue. As you can see on this slide, the flexible application of our strategy has actually resulted in a short-term reduction in our share count. For the foreseeable future, we believe that the framework of investing organically and through acquisitions, while buying back shares to offset stock-based compensation dilution, will maximize the returns for shareholders. If at some point in the future, it makes more sense to shift the mix of capital deployed towards larger share repurchases or dividends, then we will do so. – Deborah Clifford, CFO (02:56:51)

-> A best-in-class Rule of 40 company: Autodesk is a high-quality, resilient business with industry-leading products that are highly valued by our customers and embedded in their workflows. We have a high volume of unique growth vectors, which gives us a large and expanding TAM and a compounding growth profile. We are deploying capital and executing with discipline and focus, generating strong operating margins with the opportunity to expand over time. As a result, we are consistently a best-in-class Rule of 40 company. balancing revenue growth and free cash flow margins to generate compounding returns. – Deborah Clifford, CFO (02:58:30)

-> Key takeaways from the Investor Day: One of the things that I think it's really important that people remember is, first and foremost, Autodesk is a technology company, and next-generation technology is going to play a critical role in our growth and our product strategies, moving forward. This notion of connecting data, projects and teams together in new ways in the cloud with immersive and highly real-time experiences, all powered by algorithms and machine learning algorithms and artificial intelligence is core to what we're trying to do. The next thing that's really important is that we're driving digital transformation within and between the industries we serve. So we are on a multiyear journey to connect, design and make together in the cloud. And we're doing that by bringing the existing products into the cloud ecosystem, but also building out the new industry cloud environments, Fusion, Forma and Flow, so that we can change the way our customers work, not just evolve it to some kind of new cloud-based process. And our customers need this, they're looking for it, and they're looking for new ways to digitize their businesses. And the last bit around the unique business drivers that we have. Look, we have our business models and our business model evolution. We offer more ways for people to incrementally engage with sophisticated and complex technology than anybody else in the industry. We move from subscription all the way to consumption and even consumption plans that go all the way down to the smallest user in our business. And I think it's a really important differentiator. – Andrew Anagnost, CEO (03:02:35)

-> Focus areas: For us right now, the focus is speed, value and adoption. Speed for our internal employees because a lot of the platform services are the same ones we used to build our customer innovation, and we see productivity in being able to do that through the common shared capabilities. And then value. I think when customers see value, I mean, there's definitely going to be that ability and sort of ultimate -- over time, we can monetize that. But for that, we are watching adoption. We want to make sure that value is sort of something that a customer sees and our partners feel. And I think that is key for us. So this is the kind of stuff that actually sets us up and -- from our success through our platform, and we see our partners getting excited about it. We see our customers excited about this as well. 35 years ago, Autodesk became an ecosystem player by people customizing AutoCAD to various capabilities and turning it into things that we never imagined, and connecting processes in ways we never imagined. That same motion now is being moved to the cloud at a much higher velocity and with a much more broad and deep portfolio of capabilities. So this isn't something that's unfamiliar to us. We've been doing it for years, and now we're just doing it in the cloud with a much more powerful portfolio of capabilities to do it with. – Venmal Arasu, CTO (03:10:19)

Scaling fast while staying profitable, margin opportunity, capital allocation framework, market share gains, competitive strengths, and more.

→ Scaling fast with consistent profitability: We've been profitable since 2019 on a group level and in a lot of our different geographies since 2016. So very long track record of consistent profitability in those markets where we have operated for a long time. [...] If you look at that strong financial profile, coupled with a culture here that we pride ourselves on, which is about execution excellence, which is about detail orientedness and cost consciousness, then you'll see why we continue to be bullish about the long-term opportunity. [...] Our group revenues have expanded from EUR 1.8 billion in 2019, and more than 4x to EUR 7.6 billion in fiscal 2022. Just to put things into perspective, it took us 8 years to grow to the first EUR 1.8 billion in revenue. And last year alone, we added about in broad terms, the same amount of revenue on top after a massive COVID uplift in 2020 and 2021. During that same 3-year period, we've also almost quadrupled the number of meals that we ship through our supply chains, which was about EUR 1 billion by 2022 and just around EUR 280 million by 2019. That's a pretty insane scaling challenge. – Dominik Richter, Founder & CEO (06:05)

→ Huge opportunity to increase margins: If you think that we have a time-critical perishable and very sensitive product that needs to go through our supply chains all across the world. During that time, especially during 2020 and 2021, we've made a number of conscious decisions to actually deliver orders at lower profitability and lower margin than we did pre-pandemic. Because we wanted to be in a position to capture as much of that latent demand that was provided during COVID. And every single order was very, very profitable. As we're now basically rightsizing the network, investing into procurement and fulfillment productivity. There's a huge opportunity to actually expand our margins again. [...] We've also invested significantly into the customer experience. And as a result, the average order rate has actually increased by about 14% over that period. One of the biggest drivers of that order rate increase has been the fact that we've been investing into bringing a lot more meals to the menu per week. So the weekly available recipes that the customer can choose from are actually up over 70%. So a customer in 2022 had about 70% more choice than a customer in 2019. This has resulted in our customers being happier than ever. – Dominik Richter, Founder & CEO (08:32)

→ Market share gains: If you take together higher order rates, larger number of meals per order, and also a lower cancellation rate, you can actually see that customers are happier and that we're also monetizing each single customer better today than we did over the last couple of years. The improved customer experience has also translated into very strong market share gains. In the U.S., we're up about 11 points since 2019 to about 75% of the meal kit market today. In international, from a slightly higher baseline we expanded our leads by about 9 points and are currently trading around 80% overall market share in our international markets. At the same time, as we went into RTE, we've really been able to capitalize on the great meals that the Factor team has perfected over the last 6, 7 years that they've been in business. And put the full weight of our direct-to-consumer growth engine and fulfillment engine behind it to grow market share in the U.S. – Dominik Richter, Founder & CEO (11:15)

→ Net revenue retention: Our net revenue cohorts are very stable, are very predictable and very sticky. And if you look at the cohorts from 2015, 2016 or 2017, you can see that long-term revenue retention converges to meaningfully above 30% of the first year spent in year 7, which I think is really best-in-class for e-commerce or marketplace businesses. If you look at more recent cohorts, such as the 2018, 2019 or 2020 cohort. You can actually see that with the increase in order rates, lower cancellation rates, higher prices, we're actually monetizing customers even better. And we expect that those cohorts will actually by year 5, 6, 7 settle at higher net revenue retention than our 2015 '16 or '17 cohorts did. It's also a great reminder of the predictability of revenues that we have from our existing base. So the difference between the different cohorts is actually not that large. This gives us high confidence about future revenues that we can generate with the customers that we already have today. – Dominik Richter, Founder & CEO (13:28)

→ Free cash flow and reinvestments: During the last 3 years, we've also generated a lot of free cash flow in the business from operations. Outside of very resilient revenue retention, I think the strong cash flow generation inside of our business is really one of the most prominent features of the business model. Over the 3-year cumulative period, 2020, 2021 and 2022, we generated around EUR 1.4 billion in revenue from internally generated cash flows. We used the bulk of that to reinvest it back into the business to extend our growth runway, and become active in a number of very exciting verticals, which we think will drive long-term value. – Dominik Richter, Founder & CEO (15:30)

→ CapEx investment cycle and cash flows: We put around about EUR 800 million into expanding our fulfillment network over the last 3 years to be able to capture that significant upside in demand that we've seen during COVID and also after COVID. We're now nearing the end of that CapEx investment cycle, which really should be completed over the course of the first half of 2023. And which then gives us sufficient capacity to grow to beyond EUR 10 billion in revenue as a company. It will also mean that in the second half of the year, we should start to produce free cash flow again, given that a lot of that cash flow at the moment has been invested back into expanding our fulfillment center network. – Dominik Richter, Founder & CEO (17:35)

→ Capital allocation and first-ever buyback: We've conducted our first share buyback in early 2022. In the rearview mirror, probably slightly ill-timed, but at the same time, I think the objective of that was to offset dilution for shareholders that comes from share-based compensation. Over that entire 3-year period, share count is actually broadly stable to down over that 3-year period, much unlike other e-commerce or marketplace companies, technology companies that dilute shareholders every year by 10% or more. – Dominik Richter, Founder & CEO (18:45)

→ Tough comps and outlook: So it might seem like in the distant past, but last year, at this point in time, COVID search volume on Google was at all-time highs. You had Omicron rampaging throughout the world. Most offices, including this office here, were basically standing empty, and all of our consumers were working from home and spending more time at home. And we actually had a number of governments trying to mandate sort of like vaccinations on their entire populations at this point last year. So I think that contributed to a pretty outsized quarter in Q1 last year. We're still going to beat that quarter this year. but it's going to be a very tough benchmark and hence, our year-over-year growth will not be double digit in the first half of the year. As those COVID comps then lapse towards the second quarter, we think that we will return to double-digit growth in H2 for the business, and we very strongly believe in the long-term opportunity that meal kits and RTE still provide, given the TAM penetration of those at the moment. – Dominik Richter, Founder & CEO (22:45)

→ Synergies and competitive strengths: When you look at our manufacturing footprint, by summer, we will be in a position to deliver meaningfully above EUR 2 billion in revenue from our RTE segment with the footprint that we have put in place by then. Just building out that footprint has taken a number of years, and there have been a number of other providers that have all failed to produce ready meals at scale and at this quality level. So we think this is one of the strongest moats we have in the ready-to-eat business as of today. Secondly, by being integrated with HelloFresh, we already today benefit from much lower logistics costs, lower procurement costs and lower fulfillment costs than any potential entrant in the space could actually have. Factor today has some of the economies already of a much larger business by being part of the overall HelloFresh Group. And then thirdly, when we actually became interested in the ready-to-eat segment, we diligence sort of like the quality of meals of all of the different players in the space. [...] So it's very hard to compete with that. [...] Some of those moats have already allowed us to increase market share very significantly to about 60% of RTE market share today. And it's very hard to see how potential future entrants into that space want to compete with us, given those moats that we have in the business today. – Dominik Richter, Founder & CEO (52:43)

→ Customer acquisition cost: In every single market that we've operated, we've consistently grown market share over the long term, including the most competitive market that we've been in and are now our largest market, the U.S. business, which continues to grow in market share today. [...] One of the key things driving that market share evolution is the fact that we've been able to grow the customer base in a very efficient way, much more efficient than any of our competitors. What's really exciting is it seems that those capabilities that have driven success in the meal kit space are just as powerful outside the meal kit space. When we acquired Factor and we shared this statistic in last year's Capital Markets Day, we massively reduced our customer acquisition costs. So customer acquisition costs came down by 50%. That was the single biggest thing that changed in the unit economics of Factor post acquisition, and it led to us being able to massively grow market share in that business. – Edward Boyes, Chief Commercial Officer (01:50:46)

Raised guidance, long-term thinking, the value of exclusivity, and the importance of being family owned as a luxury brand.

→ Raised revenue growth guidance: I thought long and hard about this quote. But you see, I really wanted to tell you something interesting. So the year 2022 was for our fashion house, a year that we defined as one of high inspiration of consistent growth, but above all of striking recognition of our brand for its identity in style, craftsmanship, exclusivity and in the way it presents itself with respect to creation. So how we behave with the world. We view this year 2023 as the beginning of a new time. With the awakening of great values and ideas, and perhaps it is time to come up with up-to-date solutions for blue collar workers, restoring moral and economic dignity to the craft trades are Italy being a manufacturing country that is well loved by the entire world. So after the lofty noble international Neiman Marcus Fashion Award 2023 received a few days ago in Paris which represents some sorts of Academy Awards of fashion, and given the excellent sales in the first quarter almost ended and the sizeable Fall/Winter 2023 orders for men and women, we have decided to raise our estimates to a plus 15% growth in revenues, whilst assuming a healthy increase of around 10% for 2024.

→ The beginning of an 11th 5-year plan: So we can say a very special year. So first of all, I’d like to dwell on our 5-year project because with 2022, our 45th year has come to a close. And we define this year as a year of total full rebalancing for our industry. You see, not just for a company, perhaps the same will be true for many companies in 2020, 2022. You see there were companies that really were at loss in 2020. From 2023, well, this year marks the beginning of an 11th 5-year plan, ’23-’27. And as Riccardo was saying, we like this idea of having a 5-year plan. Well, and we also have a pretty good visibility in the next 10 years. If we had to say something special about this plan, we would hope that business in China, which today accounts for about 12% of the total, well, we’ll come closer to that of the Americas to reach a balance like the following: Americas, 30%, Europe, 35%, Asia, 35%. So this is what we envisage for the future. For the rest, we would like everything to flow with normality in healthy growth, fair and balanced profit, very rigorous in our style, which is what we have built over the years with daily patience and dedication because style and product are key.

→ The value of exclusivity: So this brand, we started with a turtleneck at the beginning of the year 2000. So we – the brand is turtleneck and are said to have a little more than 15 years of history. The time we dedicate this past year – well, you – I would like to dwell only on the great contemporary themes. The first theme is the great value of exclusivity. This is what we think, obviously. This is not what the market thinks. For us, exclusivity has a very high value. This team is increasingly felt and strong in all markets. You see I have always believed that the truly elegant do not want items that are too widely distributed and mystified even if they are very much cherished and sought after. This has always been the case also starting from Emperor Hadrian. Many customers are buying special items well made, durable, expensive and exclusive that can be reused and re- paired. I saw an ad on TV of a company that sells cars in Europe, and they talk about the value of repairing and I liked it. So this is generally happening very strongly in many markets and out of all, we would say America. So the average price is growing, not due to price increase, but because they buy pricey items. So exclusivity and then taste. Well, there are usually 7 years of one taste and 7 years of another one. The taste has turned towards elegance, refinement, cleanliness. And we saw the fashion shows, and this is the case both for ladies, but especially also for men. There is a great comeback to wearing very chic, refined outfits. And this is in line and in keeping with our taste and thought. Hopefully, we can ride the wave of these 7 years.

→ True luxury brands have families behind them: We were saying this morning that the true luxury brands, they have always had a family behind them. Ferrari and all the rest, the Patek Philippe, Hermès- Duma. So this morning, we submitted to the Board that the last addition to the family that was not a member of the Board, Piastrelli Alessio, husband of Carolina, my daughter. [...] So we have – I really like this idea that the whole family is within the company, where there is myself, the Executive Chairman and Creative Director; Riccardo, CEO. Luca is not part of the family, but actually he’s a little bit part of the family. Then we have Camilla, my eldest daughter, in charge of ladies' style. Alessio, men’s style. Carolina is with me, Co-President and Creative. So there is the family in the company.

→ A company does not survive being arrogant: We feel that this is a very favorable time for special taste, special luxury. Therefore, for our enterprise too. This is what we feel. And before goodbye, I’d like to say that I am putting together some sort of 10 rules. So I’d like to write down 10 rules about our idea of longevity for the coming 2 centuries. And once it is over, we will show it to you, and you will tell us what you think. For example, the fact that the company is not greedy might make a company live longer. The fact that you do not decide alone because sometimes being alone does not bring good decisions. Then arrogance, a company does not survive with that and then some others.