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Autodesk (ADSK) Stock | NASDAQ: ADSK

Designing The Modern World

Autodesk is an application software company that serves industries in architecture, engineering, and construction; product design and manufacturing; and media and entertainment. Autodesk software enables design, modelling, and rendering needs of these industries. The company has millions of paid subscribers across 180 countries.

Autodesk makes software for people who make things.

Growth

57

Valuation

21

Quality

85
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Where Are We Now

Updated on: 11/12/2021

Conviction Score

9

Autodesk is one of those companies that many don’t hear about but wish they did (as investors). Interestingly, Autodesk’s role for its clients is shifting from a mere vendor to a strategic partner. We think this shift opens tons of opportunities as Autodesk gets integrated into rising numbers of end-to-end processes. What’s expensive today may seem cheap tomorrow. Autodesk shares today fit this bill.

  • Commensurately, this newfound relationship with customers is showing up in the numbers. Revenue is up 16% and bookings swelled 29% in the latest quarter.

  • Customers stick with Autodesk. Don’t believe us? Net retention rates are between 100 – 110%.

Investment Thesis

  1. Autodesk offers a suite of software in Computer Aided Design (CAD) for various industries that have been market-leading in their categories for decades including well-known design software, AutoCAD.

  2. The business has a deep moat in serving the Architecture, Engineering and Construction (AEC) industries. A growing opportunity for Autodesk is arising in manufacturing, media and entertainment.

  3. The software products are very sticky and billed on a recurring subscription to customers. It can take decades to fully master their software including flagship products, AutoCAD and Revit. Skilled professionals like engineers often learn the software in post-secondary education and further their knowledge with the products after entering the industry creating very low churn.
    This transition to a recurring subscription to Autodesk’s products in the cloud, or Software as a Service (SaaS) created short term pain for the business. Now that the transition is complete, growth and margins have been excellent.

  4. Autodesk has millions of non-compliant users who are using the software for free. Autodesk believes they can convert a good amount of users in the 7 million group that are using new versions of the software (last 5 years) and have more than 4 active sessions on the product in the last 90 days. Long term, Autodesk is in a position to convert many of these millions active users as they will require an ongoing subscription to receive the most up to date product versions. The completed SaaS transition helps with this as new versions can be deployed to existing customers easily.

  5. Autodesk is in a position to capture secular global growth in infrastructure, computer aided design across new industries and the increased trend of CAD in manufacturing.

The Basics

“Autodesk makes software for people who make things.”

Autodesk has a suite of software offerings in CAD (computer aided design) for various industries.

What makes the business special is how reliant some industries are on their software. CAD software years to master, allowing Autodesk to not only offer very sticky products, but also dominant for decades.

These products are offered on a subscription model in which users are required to pay a monthly fee to access the applications.

Autodesk’s main revenue streams come from:

  • Architecture, Engineering and Construction (AEC)

  • AutoCAD Product Family and AutoCAD LT

  • Manufacturing

  • Media, Entertainment, and Other

Autodesk Revenue by Industry (Q2 2022)

Source: Autodesk Investor Relations

Autodesk currently generates almost 100% recurring revenue.

This now subscription Software as a Service (SaaS) in the cloud was a (temporarily) painful transition from the traditional software licensing model. Recurring revenues were only 40% in the license model.

Now, with the new model, new sales are layering on top of a very high renewal rate for a net revenue retention rate exceeding 100%.

Autodesk Revenue Graph

Sticky Products with a Long History of Dominance

The year is 1982, AutoCAD was released as a desktop app for microcomputers with graphics controllers internal to the machine. Prior, the CAD (computer aided design) products ran on a mainframe computer with external graphics terminals.

A game changer for drafting (the verb for creating technical drawings), AutoCAD remains a flagship product for Autodesk decades later.

Mastering the software offerings takes years creating a stickiness for architecture, engineering and construction.

Autodesk is no rookie on public markets either. The business went public in 1985 just a few years after releasing AutoCAD.

From there, Autodesk has continued to advance it’s software suite including Revit, a building information modelling (BIM) software for architecture and engineering applications.

Autodesk has also made acquisitions to boost their offering, for instance the purchase of PlanGrid, the construction management software in 2018 for $875M. Their acquisitions bolster the ecosystem of software products to better serve their verticals.

Autodesk has a lot of products. 74 to be exact right now according to their website to serve the exact needs of their customer with many different capabilities and price points.

This introduces more users into their ecosystem and works as an important long term strengthening of their position and sales pipeline.

Autodesk's Product Line Source: Autodesk Official Website

Autodesk is very good at cornering every process in their industry verticals.

For example, here is a list of products that serve the construction vertical at various stages of the process.

Design

  • AutoCAD

  • Revit

  • BIM 360

  • Assemble

Pre-construction

  • Forge

  • Building Connected

Construction

  • BIM 360

  • PlanGrid

Converting Non-Compliant Users to Subscriptions

Unfortunately, with Autodesk’s long history of dominance in AEC design software, there are millions of users who currently use the software without paying.

In fact, Autodesk says there are 12 million of them.

Autodesk Non Compliant Users graphicSource: Autodesk 2021 Investors Day

Autodesk believes they can convert a good amount of users in the 7 million group that are using new versions of the software (last 5 years) and have more than 4 active sessions on the product in the last 90 days.

Currently, Autodesk offers a free one-year educational access to Autodesk products for students and educators. This is a great opportunity as there is a much higher chance these users will convert to paying subscriptions when they finish school and are more familiar with the product.

Mastery takes time and Autodesk is willing to give students the opportunity to learn.

Adobe has a very similar strategy by offering free access to learn the product in hopes these users will convert down the line. (Read our report here Adobe: Unlocking Creativity)

Non Compliant Users around the worldSource: Autodesk Investors Day

Fusion360: Putting it Together

In 2013, Autodesk released a new software called Fusion360. This was a new kind of release as the application took inspiration from a variety of different preexisting Autodesk applications and mashed it into one. Imagine AutoCad and Inventor combined together, that's Fusion360.

The application has the capability to design and simulate 3D models based out of 2D drawings. It is an extremely powerful tool for those in manufacturing and product design.

More and more people are switching to Fusion360 because of how efficient it is to use compared to individually using Investor and AutoCAD. It takes the important functions from both and puts them together.

Fusion360 Exponential GainsSource: Autodesk Investor Presentation

To date, Fusion360 has almost 650,000 Monthly Active Users (MAUs). With the platforms versatility, it is projected to continually grow.

Fusion360 MAUs graphedSource: Autodesk Investor Presentation

An Acceleration in Growth and Cash Flows

Industry Overview

Continued growth in AEC and manufacturing will be important for Autodesk’s long term vision.

The convergence of design and manufacturing by shifting to cloud solutions provides the opportunity for automation, process digitization, smart products and supply chain optimization.

Autodesk SVP, Scott Reese, says the convergence of design and manufacturing is a $33B total addressable market for the business by 2025.

Their product, Fusion360, is powerful 3D CAD that integrates tons of features from competitors for a fraction of the cost.

Growth Markets by Total Addressable Markets FY25 ($B)

Infrastructure

The Infrastructure sector is interesting as it covers such a wide variety of projects such as railways, buildings, and facilities. In today's day and age, CAD products are needed in order to plan out and design projects.

Autodesk offers customers a basket of applications to get the job done including Revit, Inventor, and AutoCAD. These different applications all serve different purposes but come together to complete one project.

Autodesk capitalizes on this opportunity to cross-sell their products as they are able to sell more products under one roof.

Autodesk Infrastructure ModelSource: Autodesk Investor Presentation

Construction

Just like Infrastructure, Autodesk users have been using CAD softwares for decades.

But now, Autodesk is pushing for their new product called the Construction Cloud. This kind of software is to help accelerate projects and assist with tasks.

Autodesk Construction Cloud is split into four different applications: Design, Plan, Build, and Operate.

The goal is to provide users, primarily project managers, with the tools they need to ensure the project is successful. From design software to cost analysis and workflow management, the Construction Cloud has it all.

This is an amazing opportunity for Autodesk as it consolidates a handful of applications into one branch while also providing new services. Instead of scrambling to different softwares for different jobs, the Construction Cloud is the one stop shop for any project manager.

Autodesk Construction CloudSource: Autodesk Investor Presentation

Next-Gen Manufacturing

Up until this point, Autodesk has provided the manufacturing sector with a variety of Computer Aided Manufacturing (CAM), Computer Aided Engineering (CAE) , and Product Lifecycle Management (PLM) software. Some examples include Inventor, Fusion360 and Product Design Suite.

Autodesk has shifted their focus and are looking into next-gen manufacturing software. This kind of software is intended to use artificial intelligence and intelligent automation to generate smart designs based on certain parameters.

This is a massive opportunity for Autodesk as there has to yet be intelligent design software of this caliber on the market. This kind of disruption is set to be worth over $14 billion.

Autodesk Next-Gen Manufacturing DisruptionSource: Autodesk Investor Presentation

The Best Part About SaaS Businesses

Looking forward on the financials side, software as a service (SaaS) provides investors sustainable and predictable revenues, impressive margins and ultimately growth of free cash flows.

The best part of software businesses like Autodesk?

Fat gross margins and recurring revenue.

Autodesk has both recurring revenues and gross margins >90%. This ultimately turns into a free cash flowing machine. Its numbers are nothing to sneeze at.

Autodesk Free Cash Flow ($M) (Q2 2022)

Bottom Line

Autodesk makes software for people who make things.

Their long history of developing CAD (computer aided design) software has created a strong ecosystem of software offerings that serve their industrial vertical markets.

Creating sticky software for AEC (architecture, engineering and construction), manufacturing and other smaller verticals positions them with a strong moat and a long runway for growth into the future.

Autodesk management in the medium term will be working on the execution of their main growth levers:

  • Monetizing non-compliant and legacy users

  • Massive growth opportunity in Infrastructure, Manufacturing, and Construction

  • Continued growth in AEC

Autodesk investors can look for growth acceleration post-SaaS transition from the old licensing model in addition to their rapidly growing application Fusion360.

Autodesk investors can now also expect wonderfully juicy software margins and a recurring subscription revenue business model.

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