Autodesk, Inc. (ADSK) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining us on day 2 of our Sustainable Futures conference. My name is Elizabeth Elliott, I'm an equity research analyst on the U.S. software team, and I'm joined today by Jess Alsford, Morgan Stanley's Head of Global Sustainability Research and the team at Autodesk. Simon, VP of Investor Relations; Srinath, VP of Design and Manufacturing Strategy; and Ben Thomas, Director of Sustainability and Foundation. Thank you all so much for joining us today. Before we begin, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that, I'm going to turn it over to Simon for some opening remarks.

Yes. Thank you very much. Just 2 things for me. One is also some disclosures from us. We 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 just wanted to sort of open the discussion, just talking about how Autodesk looks at ESG. We talk about sort of ESG 360, the sort of internal 180 degree, which I'd call traditional ESG around governance, human capital management, cybersecurity, privacy, et cetera. But the bit that we're also excited about is the external 180 degrees. And that's how we are serving our customers and helping them achieve our sustainability goals. So really, that entire 360-degree is something we'd love to have the debate about.

Awesome. Thank you so much, Simon. So just given some of the investors here may be new to the Autodesk story, can you provide a brief overview of the company, kind of the markets you operate in and how you're helping customers?

Sure. So we provide end-to-end software in the construction industry, architectures, engineers and construction and also in the manufacturing sector and also media and entertainment. And what we provide is best-in-class vertical tools to enable our customers to achieve their design and make ambitions. But important that we also connect them with horizontal data and collaboration tools that enable them to realize much greater efficiency and sustainability and really sort of build that across their supply chains into their processes. And really, if you think about construction and manufacturing being 2 of the largest sources of carbon and also things like waste in the economy, if those sectors are going to achieve their sustainability goals, they really have to implement end-to-end computing to do that. And we'll be the largest global provider doing that sort of thing. So that's why we're pretty excited about the opportunity ahead of us.

Great. And within kind of the manufacturing area, particularly in some of the engineering, can you just dig in a little bit more into exactly how are the products the customers using kind of these end-to-end solutions to drive energy efficiency in their process?

Yes. So let me take that, Elizabeth. One of the things that we are very conscious of is the environment in which our customers operate. Our customers are dealing with very complex environments. They're having to deal with shorter product life cycles. They're having to deal with product -- increasing product complexity, growing customer expectations. And at the same time, in the recent times, we've seen supply chain pressures. Our customers are having to reconcile all these, requirements and at the same time, reduce their footprint on the planet. And this is where our software comes in. Our software is helping our customers make these very complex trade-offs and decisions with up-to-speed kind of algorithms that factor in all things: materials, supply chain constraints, cost pressures, and give the customers a set of options that they can consider as they evaluate the outcomes that they're looking to achieve in the market. The final output that the customer puts out in the market is going to be factoring in all these things that I just mentioned. And as a result, the competitiveness, of course, is much greater than what it was before. But at the same time, they're now able to factor in the sustainability aspects as well. So this is one of the critical things that we are doing in the manufacturing software. In addition to that, Simon mentioned this, the collaboration aspects. In the current virtual world, as the supply chain and also the ecosystem of all the things that need to happen in product development and manufacturing are distributed, it becomes increasingly important for our customers to have the transparency and line of sight into all the things that they do and their suppliers do. And this is another thing that we have been doing, just like in the construction space where we are connecting the headquarters to the construction side, we're also connecting the top floor to the shop floor and also to the entire ecosystem so that we are able to deliver this type of transparency, so that again, our customers can make intelligent decisions that factor in all these things.

Now maybe digging in now in a bit more detail on some of the more specific sustainability topics. Clearly, sustainability, ESG covers a whole range of different areas. By far, the #1 area that we see investors focused on is net zero emissions. And I think from your perspective, it seems to be very relevant, both in terms of, as you put it, the internal as well as the external. Maybe starting with the external. We've seen a lot more net zero ambitions and strategies coming through from corporate. Is that what you're seeing amongst your customers as well? And how is this helping to drive demand for your products?

Sure. I'll jump in on that. We're seeing a huge groundswell in these sorts of commitments. Over half of our customers have explicit sustainability goals. And when we look at our largest customers, that number begins to approach 90%. And it's through initiatives like Architecture 2030 and AIA 2030, where the entire industry is beginning to commit to things like net zero energy or even net zero carbon in their projects. One example from our most recent impact report that we launched a couple of weeks ago is the Kendeda Building, which is part of Georgia Tech. And that building is Living Buildings-certified. And Skanska helped to bring that building to that high, high level of certification, reduce the energy material and emissions that come from that building, thanks to the types of 3D modeling and cloud collaboration that Srinath was speaking to just now. And it's really only through that high level of coordination that can be created through this end-to-end software that you can begin to manage these really complex goals. One topic that we talk about quite a bit here is this concept of total carbon. You can bring down the operational energy and emissions of your building, but that might have trade-offs with the emissions that you lock up in your building materials. If you put in, say, a triple glazing window, yes, that will reduce your cooling loads, but it will increase your embodied carbon. And so these are too many variables for the human brain to handle, and you really need this kind of assist from software to help you thread that needle and hit those goals.

And what's driving the change, do you think? Is it just general awareness and it's the right thing to do? Is there a regulatory aspect? Is there a cost-saving aspect? What are customers saying to you about why they're paying more attention to this?

Yes. Well, a lot of incentives are beginning to align on these important issues. And it's about time, frankly. But first, it starts with changing customer demand. So many of our customers are talking about these goals because their customers are asking them about them. In areas where they may not be, there's definitely regulatory pressure in regions like Europe. You see more mandates that require not only levels of efficiency, but even certain approaches for achieving those levels of efficiency. But then further, with all the stimulus spend that we're seeing happening right now across buildings, infrastructure and manufacturing, you're actually beginning to see positive regulatory incentives that are encouraging businesses to prioritize these types of goals, and then opening new opportunities for financing to fund these types of projects. So you're seeing it from many different angles. And I would say perhaps interestingly, especially for Autodesk is given the pace of technology and automation, meeting these goals are easier than it's been before. So these businesses are able to embed it into their basic processes. And you're not just seeing goals like, oh, we're going to be net zero on this project. You're seeing goals of, we're going to be net zero on 50% of our projects; 75%, 100% of our projects. And it's all enabled by those different pressures.

I'll jump in on this one. I'll just add to what Ben is saying, and I want to reinforce one thing. Our customers have always had a tough time reconciling the innovation pressures with rapid time-to-market requirements. That's been a constant. That's not new. What's changing now is that they're actually starting to see that they have to accommodate supply chain shocks. On top of that, they also have to start thinking about precious resources because that's actually going to be one of the critical things that makes them competitive. And as they start to think about this, this is about doing more with less. When they start thinking about doing more with less, this is where they're looking to extend and augment their current capabilities with technology so that they can achieve the sustainable outcomes, but at the same time, be competitive. And we are best positioned to help our customers on this journey. Our technologies and the investments we've made have really been to further this effort. So that's why while the awareness is picking up, there's also a match between what our customers are seeking versus what they're building, yes?

It's a basic resiliency issue for them. So well said.

And we'll come to, I guess, your resiliency and how it impacts your company internally as well. But I just wanted to remind the investors that have dialed in that you can also ask questions to Autodesk. So there is at the bottom of your screen, a text box. So please do type in any questions and we can make sure we have time for them at the end. But maybe just turning into the internal element. I was really impressed to see your own ambitions reducing your emissions, and in fact, not just Scope 1 and 2, but also looking at Scope 3. Could you maybe elaborate a little bit more on how you intend to achieve these targets in terms of absolute emissions reduction and also how you think about using carbon offsets and carbon removal projects as well?

Sure. So this has been a long journey for Autodesk. We set our first science-based target almost 10 years ago, and that was actually a really important tool for us to talk to customers about their greenhouse gas emissions goals. And so we reached that target last year. And this year, we announced that we are setting a second science-based target for the end of this decade. And as of this year, are now a net zero company across our operations and value chain. And so we do that by first investing in efficiency in our business, building inefficiencies into our offices and in our supply chain. And that is intelligence that we can bring to the marketplace with our customers. Secondly, it's investing in renewable energy for our operations, our cloud. And finally, it's investing in high-quality gold-certified carbon offsets and removals so that we can bring whatever is left of our footprint at the end of the year down to nothing. And really, it's -- we prioritize the work in that order, and we feel that, that helps us run a more agile business, but also have the credibility needed to partner with our customers on their similar goals.

Elizabeth, I hand over to you now.

Yes. So you mentioned a little bit about just using software more and especially doing some of these complex issues between connecting a headquarters with a factory plan and just using technology more to streamline operations. And one of the things that we're seeing across tech broadly is this acceleration of digitalization due to the pandemic. So can you help us frame today that opportunity and providing me examples of how COVID's been impacting how customers are increasing adoption of your software technology.

So yes. So let me take this one.

Yes, Srinath, let me just start quickly from our results, and then -- if you look at our Q4 results, we said we signed as many new enterprise agreements in Q4 as we did the entirety of the previous year. So that really speaks to the rate of change of large enterprises adopting and doing computing across their organizations. And in Q3, we said we signed 2 of our largest ever enterprise agreements. And so what that tells you is as they're adopting enterprise-wide technology, we're doing more business with them. But, Srini, sorry for interrupting you. I think you can speak to some of the details.

Yes. I mean I was going to get into the specifics of why we are seeing this big pickup in digitization from our customers. Our customers are increasingly aware that they have to move from disparate siloed processes to synchronous bidirectional data flows across all parts of their value chain. I'm talking about all aspects, from product development, to manufacture, to operation. They know this because this is the first step for eliminating and -- reducing and elimination unwanted friction in the system. Once they've done this, they see bigger gains with automation, right? So this is the journey that we are taking our customers on. We're helping them first remove the friction in their ecosystem by connecting all the data flows. And once they do that, they're able to give them more and more automation capabilities with computer as a collaborator. And this is where tedious tasks, repetitive tasks, routine tasks can be automated with the cloud. And then finally, all of these gains from data flows and automation ladder up to the big benefit, which is about predictive maintenance and even autonomous course correction. Our customers are increasingly interested in systems that are able to anticipate failures and shocks and just autonomously in the face of these events. I'll give you a great example. This is an example of a big company that's leading in its space, [ DC Consult ]. They're a world-leading manufacturer of industrial x-ray equipment. And they have started the digital transformation journey with us. They make this massive equipment for nondestructive inspection of parts. First step for them was to move from analog to digital. They're currently -- they were currently -- they work based on paper processes for IS0 9001. And they moved those processes to digital using our connect and collaboration software. And as a result, their employees can quickly get up to speed. And more importantly, they have full visibility into their supply chain, and also what the customers are doing with their equipment. As you can imagine, this is a durable good, what they produce. It's in the market for 8 to 10 years. And they need to make sure that they're not only aware of all the manufacturing design and servicing information, but they also need to have up-to-speed information on all aspects of the life cycle. And this is the kind of stuff that we're able to help our customers with. By giving them access to the software that records all this information, with the customers like [ DC Consult ] are able to create digital trends to monitor their entire system through its life cycle. And this is where they can get the transparency and line of sight. The second customer that I'd like to talk about is SRAM. They make bicycle components and they've done a remarkable job of being very competitive in their industry by making incremental improvements in bikes, both for competitive as well as for mainstream. What they're finding is that there is a limit to what they can do with the traditional design methods and manufacturing methods. And that's where they look to us, they've partnered with us on these cutting-edge algorithms like generative design that are able to make trade-offs on performance, cost, weight and speed to market. And as a result, we were able to help them with next-generation crank arm that is 20% lighter and is using new age materials that will preserve the objectives of the strength and longevity requirements. The point here is they're able to cut down the carbon footprint, they're able to cut down the material use, and at the same time, gain efficiencies with their supply chains. And as a result, it's a really great impact for the bottom line, of course, their competitiveness, of course. But at the same time, this advances their sustainability goals. And all of this is possible because of these kind of algorithms that we have produced like generative design.

And what I would add there is that sustainability is now embedded into that core process. You don't need orthogonal processes anymore that require specialists to break out spreadsheets or open the filing cabinet on material databases. Instead, it's part of their typical process, and therefore, is not going to cost more for the customer. And just as Srinath said, whether it's sustainability or another one of the complex criteria that they're designing and making for, it's all embedded.

Great. And then you mentioned kind of this process of attaching manufacturing and design and service and having this whole kind of complete, unified workflow. And Autodesk has been active in acquisitions for Pype, Spacemaker, Innovyze or some of these new businesses that you've acquired that provide new capabilities kind of across the work stream. So could you kind of dig in a little bit more on how these acquisitions particularly fit into the portfolio and support the broader ambition of just helping customers achieve their sustainability goals?

Yes. So I mean it's really -- and I sort of said this at the beginning, it's sort of embedding sustainability of our strategy so that our acquisition strategy is not different from what we're trying to do in our market. So by enabling our customers to achieve end-to-end sort of productivity and by connecting different silos together and improve efficiency, as Srinath was saying, and then sustainability. What the acquisitions are doing is furthering that goal. So actually, our strategy and sustainability, they're actually -- there's 100% overlap between them.

Yes. I'll add to what Simon is saying. The keywords here are efficient utilization of resources. And the other thing that I mentioned, I'll repeat, I'll come back to this, it's about cutting-edge algorithms, facilitating multivariate optimization and complex trade-offs. That is very applicable and apropos in the context of precious resources like water and real estate. So if you look at what they're doing with Innovyze, what they're doing with Spacemaker, that's pretty much it. They're taking the space that a real estate company has to manage, and they're giving them all the options that they can consider while factoring in the environmental impact, and that's what Spacemaker does, right? So giving all these options. And then if you look at Innovyze, it's 100% about utilization of water. And that's being on a lot of people's minds. And Innovyze has pioneered in modeling the usage of water and also the management of water. And that's what we're able to produce for our customers with these cutting-edge algorithms.

Maybe we could just stick with Innovyze for the moment on the water. I think that's a nice segue into another important sustainability topic. Could you maybe just go into a little bit more detail about how it is helping you on the technology side from the smart water infrastructure? I feel it's a topic that has been sort of rumbling along in the background for sustainability for some time, but it's been without maybe some of the catalysts of carbon, but nevertheless, is incredibly important and indeed linked to climate change.

Yes. I mean -- and so your setup is entirely correct, Jess. Water is a sort of decades-long problem in the making because of underinvestment in water infrastructure. But what climate change is doing is making that problem more acute. You have too much water turning up in some places, too little water turning up in other places. Or just to use a lot of British phrase, the wrong type of water relative to the infrastructure that's been -- that has been built is the main problem. So that's the sort of the problem that we're trying to solve. It's a decades-long problem in the making, and it will take a long time to fix because it requires significant investment across the globe. So that's the sort of the problem, and for us, the opportunity. What we're doing is really extending with Innovyze our presence in the sort of supply chain. We [ have shared ] design with our Revit product and InfraWorks. We've also more recently built out our capabilities in infrastructure construction, with the development of our Autodesk Construction Cloud. And those are really the sort of 2 middle bits of the supply chain in construction. What Innovyze does is really bring us into the beginning of the process and the planning and the end of the sort of process. So the beginning of the process is sort of planning. And what Innovyze does there is hydraulic modeling. When you're putting in or planning some water infrastructure, it allows you to model water within the sort of planning process. And then at the back end of the process, what Innovyze allows you to do is to analyze the -- and sustain the efficiency of the operations of the site. So once you build these plants or whatever it is, you need to make sure that you're sustaining the efficiency of the plant during its operational phase. And the reason that -- so that's important for 2 reasons. One is from a sustainability angle. It enables you to realize synergies, both efficiency synergies and sustainability synergies. So building in sustainability right at the beginning of the process and then flowing that through right across the sort of value chain. So that's important from a sort of an efficiency perspective. But it's also important from a sustainability perspective as well, is that not just in terms of the sort of operations and maintenance side, but also for planning things like end-of-life. What do you do with the asset when it gets to the end of life and recycling, et cetera, as well. So it's really sort of end-to-end across the life of the product is what we're looking at.

We've got some other questions that we'd like to ask, but we've only about 10 minutes left, and we've had some questions coming in from investors. So maybe we just take a pause and make sure we cover some of these. So first of all, could you talk about the financial materiality of these net zero emission tailwinds? What specific products are customers procuring to help meet these goals? And what percentage of Autodesk customers have projects that help achieve these goals?

Sure. So I'll just say that this is becoming a more common conversation that we're having with customers across the board. And depending on their industry, there are going to be solutions that I think to Srinath's example, help improve their entire process to manage the complexity of this in addition to their other goals. And then there are individual capabilities within our collections that will equip them with automation or insights that will make these processes more streamlined or give them a specific leg up on a given challenge. Revit, for example, has energy optimization and carbon optimization capabilities that will help solve their challenges in the built environment. Combined with our Construction Cloud, that will bring those same types of savings to the construction site. And in manufacturing capabilities that are embedded in our Fusion platform or specific capabilities like generative design is going to lead to the material savings that many of our customers are using to redesign electric vehicles or airplanes to use less fuel and help accelerate the transition to these low-carbon solutions.

I'll add to what Ben said, one of the critical things, and Simon brought it up at the very beginning, it's about using cloud to connect all the data silos that are currently in customers' environments. We recently closed an acquisition Upchain. And the fundamental reason why we did this is because it's important for our customers to have line of sight into all aspects of their operations and also for their suppliers. And when they do this, again, it comes back to achieving the superior outcomes more -- being more but less, they can actually start to figure out what is the shortest path for them to get to market, and at the same time, use the most efficient resources. And also choose the vendor, choose the suppliers that give them the most amount of like benefit in the market, but also reduce the carbon footprint. All of these things are possible only when you have the line of sight and transparency, and that's what Upchain is able to provide.

Thanks for that. So the next question is thinking about new construction and just any more detail that you can give about the type of new construction that you are most focused on helping from a CO2 reduction perspective?

Well, I'd say across the board, we look at the construction industry, and there's a lot of opportunities for efficiency. Whether it comes to the amount of productivity that they could find improvements on in their businesses, to the specific amounts of waste. Some estimates show that about 40% of global waste in the West comes from the construction site. And that's money lost. And a lot of that comes from the rework that is happening because of a lack of coordination from headquarters to the construction site. As things change, you need to be able to communicate those design choices or those on-site changes quickly so that everyone can be aligned so that you can reduce that rework and reduce those material and time wastes. I would say that some of the large commercial infrastructure size projects are where you're going to see the most of those savings, but the opportunities there really extend across the industry.

And just wanted to add to that a sort of strategic points, which is you've got convergence is happening, as Ben said, to sort of break down the sort of silos between the different parts of the construction and manufacturing process. And you've also got a sort of format shift from sort of on-prem to the cloud. And the cloud is what enabled that. And something we feel very strongly about is that if you're just trying to replicate on-prem functionality in the cloud, you're kind of missing the point of going to the cloud. The point of the cloud is to use the cloud to enable yourself to do something new. And the key, I think, the cloud enables us to do is that sort of horizontal collaboration functionality across the supply chain. And if you're not taking advantage of that, you're not maximizing the opportunity or just replicating the on-prem business model in the cloud. And secondly, it's enabling you to utilize the data that's generated across the supply chain to create more efficiency for your customers. And I think that's something that, again, is pretty unique to Autodesk with our Forge platform, is our ability to leverage that horizontal functionality against peers who are very much still focused on vertical functionality.

Thanks, Simon. Another question in terms of global BIM mandates by region. Where do you see the biggest opportunity for incremental adoption? And what does that mean for your business?

Shall I take that, Ben? So BIM, again, so I'm quoting something. If you look at our Investor Day presentation from last year, the BIM penetration across the globe is highest in North America, Northern Europe and Australia. It's something that we expect to -- sorry, BIM is Building Information Modeling. It's basically embedding data in the construction process and is the key to driving these efficiencies that we've been talking about. And it's an area where Autodesk is the global market leader in that area. So it's really something that we believe in. It's being driven by a number of things, consumer demands, being driven by government regulation, and also by our customers wanting to, as we've been talking about, drive efficiency. So lots of different factors driving it. We're very much at the heart of that effort globally.

And then one more in terms of looking at global tax reform. Clearly, it's been in the news quite a lot recently. The tech sector, particularly in focus. Any thoughts about how potential tax changes could impact your business?

One thing I've learned is with anything related to regulation is to wait and see what the final thing looks like. The truthful answer is we don't know, and we'll have to wait and see what it looks like. But clearly, as a responsible system, we will pay off our share.

We've got a couple of minutes left. So maybe just picking on that more sort of social governance theme. I think for us, a topic that became a lot more important over the last 12 months, has been diversity and inclusion. You've announced new goals relatively recently around diversity. Could you expand a little bit on that, why diversity is so important for Autodesk and how you're trying to implement these goals?

Sure. Well, first off, I'll just say that we are supporting customers around the globe on complex innovation challenges, and we want to make sure that our workforce reflects the diversity of our customer base. And that studies have shown that teams come to more innovative conclusions and set more innovative goals when they have diverse perspectives weighing in. And so this is a really important priority for Autodesk and one that I'm pleased that we're progressing on compared to our industry. And our priorities, you can see the recent goals that we just launched a couple of weeks ago in our latest impact report. But our priorities are really around addressing our pipeline for diverse talent, leading by example by expanding our diversity within our leadership and at the Board level. And then really making sure that as we -- are intentional about our culture, that we create a workplace that is belonging and welcoming of people of all backgrounds, perspectives and abilities. And a lot of work has gone into here to train managers in the hiring process to address the pipelines that are filling those candidate pools. And then training and activities for all of our employees to think about the different types of soft and hard skills that we all need to develop to ensure that we are building an attractive environment to attract and retain this important talent.

Fantastic. Well, that brings us to the end of the session, I'm afraid. It's definitely flew by us. But on behalf of Elizabeth and myself, thank you to all 3 of you for joining us today and for your insights into Autodesk's work. To the investors on the line, please stay with us for a panel discussion with Chevron and also NextEnergy, which will be beginning in the next 10 minutes. Thanks, everyone.

Thanks for having us.

Thank you.