In this podcast, Motley Fool senior analysts Asit Sharma and Tim Beyers discuss topics including:
- Questions about Autodesk's capital allocation strategy.
- Nordstrom's plans for a tough retail environment.
Plus, Motley Fool engineering manager Tim White joins Tim Beyers for "This Week in Tech." They discuss the fundamentals of software platforms, and how they could change over the next five years.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Nov. 23, 2022.
Asit Sharma: Autodesk faces a problem on Wall Street, and Nordstrom faces a problem with its shoppers. You're listening to Motley Fool Money. I'm Asit Sharma and joining me from Colorado senior analyst and advisor and my good friend, Tim Beyers. Tim, how are you?
Tim Beyers: I'm well, sir, fully caffeinated ready to go, good to see you, Asit.
Asit Sharma: Autodesk earnings, the stock is down about six percent as we're taping here around noon on the 23rd of November. Looks like to me, Autodesk had a pretty decent quarter. Revenue was up, billings were up double-digits, but the market didn't like something that management had to say about the revenue composition going forward. What exactly didn't the market like Tim, and what do you make of it?
Tim Beyers: Well, they expect full-year billings, so billings is a deal you just alluded to it is what you might expect in revenue to come. These are billings that are to be expected, so the guidance is for between 5.57 billion and 5.67 billion, and that's down from their own guidance of 5.71 billion to 5.81 billion. Anytime you lower the guidance, that smells like a warning sign and I can see investors responding to that, I can see the logic of it. Apparently, according to Barron's analysts surveyed by FactSet, we're expecting on the order of 5.74 billion. It's not only shorting their own guidance, which I think is the bigger concern, Asit, it's shorting the street's guidance as well. There's a concern that Autodesk just isn't growing as fast. Now, to be fair, this is a very well-heeled company, certainly well-positioned.
It has an incredibly strong market in computer-aided design. It's been that way for decades. It is the dominant player in this area. It's a cash-flow generator. If there's something in this report that I don't like, Asit, it's not the billing guidance. It's the five billion dollars in buybacks. Maybe I would have said if you're going to buy back shares in your Autodesk and you already have a gross three billion dollars in debt on your balance sheet, and you have a net debt balance of well over a billion dollars, so you're already in the hole. Why are you going to add five billion dollars? You're not going to be able to fund all of that through existing free cash flow. If they wanted to send a strong signal that look, this is temporary, I could've seen, you know what? We'll take the billion dollars and cash flow that we generate every year, and we'll put that toward buying back shares. The five billion dollars feels like overkill. It feels reckless Asit, and that's the thing I don't like.
Asit Sharma: Yes, sometimes I wonder about this Tim when companies that are maturing throughout these large authorizations, where it almost seems that to complete the authorization, they'd have to lever up some more at some point. This is something that I used to see in the consumer packaged goods world when I spent a lot of time researching in that area, I don't like to see it so much with tech stocks. I want to ask you one more question about what you just went over and then we'll move on to our next topic. This idea that Autodesk is seeing less demand for multiyear contracts and more customers coming to it saying, hey we would like to get on annual contract plans. This is something larger and external that we're seeing with many companies.
Tim Beyers: Yeah.
Asit Sharma: You and I were in the analysts meeting yesterday and we were talking about something similar with a large market capitalization tech company. Are you seeing this for more than just Autodesk and Zoom, which is a company I was just alluded to?
Tim Beyers: Yeah, and so you want to see longer-term deals, and so you're right, that's another warning sign here. The billings guidance and some of the softness that they're seeing is like, look, we're hearing from customers that they want to be on annual plans. They do not want to sign up with us for, a three-year plan, a five-year plan. As an investor, I personally prefer to see a company make a multiyear commitment to a software platform. That's usually a good sign, look, we're in, we're committed, we're staying with this. The yoke back to look, we only want to go on an annualized basis. The presumption underneath that is, we want to be able to get out at any time.
It's a little bit like, you refuse to sign the year lease with your landlord, you'd rather go month-to-month, even though it's not quite like that, it feels a little bit like that. That lack of commitment may have some investors a little bit skittish but it's not surprising, if you are in a recessionary environment or if you are looking to optimize your capital spend in your company of any size, one of the first places you'll go is to your agreements. What do we need? What do we not need? What can we renegotiate? Is this a bad sign for Autodesk? Not necessarily, feels fairly normal Asit. I think what you want to see is, once this maybe moves to year-to-year, annualized contracts persist, does that billings number keep going up, or does it retrace, or do you see Autodesk perpetually changing its guidance because customers are just refusing to commit to the platform, that's what you want to watch. Billings guidance next quarter, and billings growth, next quarter and beyond.
Asit Sharma: Nordstrom reported earnings yesterday. Headline, net sales decreased a bit, three percent, and our producer, Ricky Mulvey, exerted a few quotes from the earnings call, which I want to put in front of you Tim, for some commentary. Ricky points out that Nordstrom Rack sales also declined two percent. Here's the first quote, "Across both banners, the softening trend was more significant in customer segments with the lowest income profiles, while we saw greater resilience in the higher income cohorts." What do you make of this quote from management Tim?
Tim Beyers: This makes sense too, doesn't it? I have fewer dollars, I want to be judicious and I actually want to put, let's say holiday spending dollars because this is coming. The holiday shopping season is coming, Black Friday is coming. I want my dollars to go further, and which makes a lot of sense in a market where you could see recessionary forces coming, inflation is there, the people getting laid off. I would fully expect, and they just said it. At the lower income portion of the spectrum, they're seeing a bit of softness. Of course, they are. You're going to have people who have their dollars not going further than they used to, making choices about where they want to spend money.
Nordstrom is traditionally a high-end brand, it's not necessarily a universal brand, and if you were lower income, it may be an aspirational brand, but your aspirations change, Asit when your income changes. I don't think this is all that surprising. If there is a surprise here, it's that the part of the business that is also seeing some weakness is the one where it is actually catered to the lower income side of Nordstrom business, which is Nordstrom Rack, the outlet portion where you can get the aspirational wear but at the discounted price, and that's not happening either is a little bit concerning. It may speak to the broader environment. It may also speak to the mix of inventory that Nordstrom's got. But whatever it is right now, they don't have the right mix in order to scale up and meet these customers where they are.
Asit Sharma: The plan being to give Nordstrom Rack some more premium brand offerings and clear that lower-price-point inventory by the end of this year. Tim, we're seeing a lot of this in the retail space. We've seen companies load up on inventory only to find that they're overstuffed and need to clear it out with promotions. We've seen some companies that are able to manage through this, but not knowing where the consumer is still having some hiccups left in the supply chain. It's been a very difficult season for retailers like Nordstrom in just trying to gauge where inventory should be, what type of mix they should have and what the price points should be.
Tim Beyers: They're gearing toward more higher-end offerings, which is Know Your Customer, like when your customer has less to spend and they're going to make choices, go back to your core customer. Who is your core customer? It's the one that is not suffering nearly as much right now, has more disposable income, might be a little more frugal, might be tightening their belt a little bit, but doesn't mind, like instead of buying the polo shirt at Nordstrom proper, buying it at Nordstrom Rack. Hey, you know what? You're still appealing to your core buyer. I think that's smart. I think that makes a lot of sense. The economics of the environment we're in have just changed. So Nordstrom recognizing that I think is a good thing.
Asit Sharma: Tim, before I let you go, tomorrow's Thanksgiving.
Tim Beyers: Yes.
Asit Sharma: I would be remiss not to ask about favorite Thanksgiving traditions. I will start with one of my favorites, which is doing something stupid on the grill. Every year, we have this plan for Thanksgiving. It's well organized, it could be well executed. I start looking out this door I have onto my deck and the grill that's sitting out there, and inevitably, I wanted to do something on the grill which throws a kink into the works. Sometimes I burn something, sometimes it's like 35 degrees outside. Luckily, we're going to have a warmer Thanksgiving here in North Carolina. But that's one of the traditions my family so fondly looks forward to. How about you?
Tim Beyers: I am 100 percent going to be watching the Detroit Lions on Thanksgiving Day. I've always loved that. I'm not a Lions fan. But on Thanksgiving Day, I am all in on watching the Detroit Lions. I think they are the team that gets adopted every year by those of us who like the NFL and American football in addition to world football. I love both. I'm all in. I want to see this adorable little team do something amazing on Thanksgiving. I never quite, like the cowboys, they always plan Thanksgiving too, whatever. But the Lion's, give me more Detroit Lions. I love that. The Detroit Lions plus stuffing my face with pumpkin pie and coffee on Thanksgiving Day, I'm all in, I'm all in Asit, can't wait.
Asit Sharma: As always, your optimism and enthusiasm are infectious. So nice to be able to chat with you right before Thanksgiving, buddy.
Tim Beyers: You too.
Asit Sharma: Tim Beyers is sticking around. He joins Tim White, his co-host on "This Week in Tech," to discuss the fundamentals of software platforms and give some reckless predictions on how they could change over the next five years.
Tim Beyers: Let's talk some platforms.
Tim White: Yes. Platforms, meaning enterprise software that you can build on top of.
Tim Beyers: Right. In order for something to be a platform, it has a series of tools. It has a interface. It has some way to say, Hey, here are the guidelines. Basically, this is the playground that you're in. If you want to do something, if you want to make a game, or build something of some sort, here are the tools you have. Go crazy. Classic platforms would be the Macintosh Operating System, the Windows operating system, things that are fundamental building blocks that are required for software. Software runs on a platform. In the Cloud, there are some common platforms. Probably the biggest one Tim would be, let's say AWS, has a whole bunch of tools.
Tim White: Amazon Web Services.
Tim Beyers: Amazon Web Services.
Tim White: Essentially they provide a number of different tools that companies can use to deploy their software into the AWS environment, which sometimes we call the Cloud. The Cloud having the colloquial definition of just someone else's computer.
Tim Beyers: Right.
Tim White: Right. In this case, it's Amazon's computer that you will be deploying your code onto. They have a huge number of offerings of different ways for you to get your software into their environment, which then they turn around and expose that out for your customers to connect to directly.
Tim Beyers: So the prevalence of these platforms, particularly in the Cloud. So AWS is probably the biggest one, it's not the only one. There's Azure, there's Google Cloud Platform. There's purpose-built platforms like Twilio or even some automation platform, say like ServiceNow. Why do you think there's so much interest now in letting other people provide the platform in the Cloud, and then letting developers just like, Hey, we'll write some software and let somebody else run it in their Cloud environment? What makes it so attractive to do that?
Tim White: Let's use the example of Salesforce, which is ticker CRM. Salesforce is a customer relationship management product. Essentially, it lets you have a database of your customers. But early on, they opened themselves up as a platform for other companies to build on top of. If you need a specialty solution to manage your relationship with a particular kind of customer. Let's say you're a surgeon and you need to have specific information captured about patients who are coming in for surgery, there are folks who can build an add-on for Salesforce that rides on top of that Salesforce platform and provides that additional functionality. The reason that's attractive is as the company building the surgery-specific product, you don't have to reinvent all of the whole idea of how to capture customers and all the things that Salesforce does out of the box.
You also can advertise on Salesforce's marketplace and get a leg up there for people who might want to use Salesforce and just want a few add-ons. Much like the whole idea of with iOS, you can have an iPhone and add apps to it. Platforms like Salesforce, like Twilio have add-ons, they go on top of them. HubSpot is another good example of a platform that has core functionality that other companies can add on to. Those companies have to write a relatively small amount of software to just add little extra features. From like Salesforce or HubSpot's perspective, they get a whole bunch of other people developing software for their platform. They get a small cut of other people buying the core product as well, and so everybody gets benefits there.
Tim Beyers: Is part of the allure here on the developer side, having been a developer for so many years yourself, is the process fundamentally different? Like, let's say you're writing software for say the Windows operating system or for iOS or for Android. Then you're tapping into that operating system versus writing some software that might exist in a Cloud platform. Like how different is that process?
Tim White: The whole idea of adding onto any stack of software, whether that stack is an operating system or a platform like Salesforce or a Cloud platform like AWS, is you have to learn how they do business. The way they do business is typically some set of APIs; application programming interfaces. They'll give you a set of things like, if you just want to add an extra field for every customer, here's how you do that. If you want to deploy your software for Cloud to make a web service, here's how you do that. If you want to be able to send people text messages in the case of Twilio or send emails. Here's how you do that.
You go and learn their way of doing things and then you write your software to take advantage of that. In the case of a full operating system installed products like an app for an iPhone or an app for an Android phone or windows or macOS. That ends up with a packaging step where you have to package the whole thing into an app. It didn't do an app store or all that. Typically with Cloud things and whatnot, you're doing all that yourself internally and pushing it out into their deployment. You don't have to package it up into something that someone can buy and sell individually. I think that packaging step is where things differ primarily. Otherwise, it's really just about learning the set of APIs of how that particular platform does business.
Tim Beyers: It becomes more attractiveness of the Cloud model is the scale because the Cloud it's so pervasive around the world and it scales very quickly because there are millions of other people's computers that exist that are running software. Going global is a little easier in the Cloud. But let's talk about where things go wrong here. In a Cloud platform, generally, these things have a few purposes. You talked about the stack or how the platform does things. In the case of some platforms, they can be very focused. Like there was a point at which, for example, Twilio is a very focused platform. It was a Cloud communications platform.
Twilio is a good example of a company that was very focused at one point and then became unfocused and is now trying to focus again. I think this is one of the ways Tim, where a platform can go wrong. If I'm thinking about it right, and you tell me how you think about this. It should be very focused. Like I should be able to know exactly what I need to do without any hesitation whatsoever. The guide should be really simple. My process of getting software on your platform ought to be easy. But if it gets confused, if there's a lot of things going on, it gets a little more complicated, which corrupts the platform.
Tim White: I agree. I think there's a point at which a platform can shift into just being a toolbox. Instead of being something that you're standing on top of, so you don't even have to think about what's below you. Instead, you have to route around through the toolbox of different options. In the case of Amazon Web Services, there's hundreds of options now or things you have to rummage around between to figure out what you want to use. When there's so many options, it starts to become less of a platform and just more of a toolbox, which I think does diminish the value.
Tim Beyers: That maybe you, tell me, but that's where I think Twilio has gone. Twilio has become more of a toolbox, less of a platform, and now because it made that shift and it was a lot of things to a lot of people, lot of acquisitions, lot of money spent on a whole bunch of different things. It's now had to come back and refocus. Now the focus is on customer data and first-party customer data. But it seems to have corrupted that thesis just a little bit. Now we're waiting to see whether or not the refocusing will get people back to the simplicity of the platform that was originally very elegant, Twilio.
Tim White: Let's talk about an incredibly focused platform which would be something like MongoDB. Which is essentially a specific database that has no schema inside of it. But they have added onto that the MongoDB Atlas product, which lets you then host that database and some code that runs on top of it and deploy that. You essentially have that core platform that you're standing on top of the MongoDB database. Then you can stand up on top of that with your own code and deploy it. They've got a very narrow platform, but it is one that millions of developers are finding very useful.
Tim Beyers: Fair, and then there's a third way, which is the platform that does start very focused, but then strategically branches out, which would be more like a Salesforce or a HubSpot. But there's a very standard way in which you know how to address and integrate with HubSpot. If you're using it, you may be using it for inbound marketing, or you may be using it for sales, or you may be using it for support, or you may be using the operations hub. But that hub interface is still very common.
Tim White: The interoperability of these things, I think, is where you start to see the difference between a toolbox and a platform. If everything is very inter-operable like I can get to my customer data from anywhere within Salesforce and everything is inter-operating between passing that data around versus a toolbox like AWS where I just have a whole bunch of different things that I have to pull together and connect. That's, I think what the difference is between that toolbox and platform model.
Tim Beyers: It's really interesting. Enterprise software platforms, if I had to ask you to handicap it and I won't leave you hanging and just make you handicap, but I'll make a prediction here too. But since we tend to be in the business of reckless predictions here, enterprise software platforms over the next five years, do you think greater commitment in the Cloud enterprise Cloud platforms creates a commitment to those enterprise Cloud platforms, or maybe a bit of a normalizing and pulling back over the next five years?
Tim White: I think there will be an overall greater commitment by the industry. But what you're going to see is a lot of these platforms have a per-seat license model. Each person who uses them has to pay essentially for a chance to use that software. I think those seats will probably have a short-term decline over the next year, which will probably lead to a decline in revenue for a little bit. But I think from a developing perspective, you'll see that pushing forward overall.
Tim Beyers: I agree with that and where I'll fine-tune the prediction that you just made and where I think this is heading is more toward some real experimentation and pricing models. I can easily see there being some hybrid modeling around not just, per-seat licenses, but usage-based bursting or maybe even some prepayment along adopting the Snowflake model, where you have a certain amount that you're buying and then drawing down over time. I think that's a very efficient way for a developer to actually have access to tools that they know they're going to need, but then have them available on their terms. But I agree with you. The combination of pricing, pressure, prevalence of tools, and maybe some normalizing around, do we want to go all Cloud or maybe some more hybrid Cloud will create some creativity among some of these enterprise software platforms.
Tim White: I also think that we had a big push the last couple of years to get the best tool regardless of integration, you might have 20 different tools that you're working with on a daily basis. I think all those tools have caught up to each other a little bit in many of the segments of this market. It would not surprise me if we saw some serious consolidation over the next couple of years where either acquisition happens or people just decide, you know what? I can use the second-best tool here because this one is better integrated with something else or either.
Asit Sharma: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Asit Sharma. Thanks for listening. We'll see you tomorrow.
