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

Great. Good afternoon, everyone. For those of you that don't me, I'm Bhavin Shah, I'm a member of the software research team at Deutsche Bank. I'm pleased to be hosting Autodesk here today for a fireside session. [indiscernible] Theo Agelopoulos, Vice President of AEC Design Strategy; and Simon Mays-Smith, VP of Investor Relations. Theo, Simon, great to have you with us.

Thank you.

I guess before we start, Simon, do you want to kick off with Safe Harbor?

Yes. Good job with the name, by the way. 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 guess, before we dive into the business, can you just provide us a brief background on yourself and your key responsibilities in an Autodesk.

Yes, happy to. So I've been with Autodesk roughly 13 years. Last 8 years I've worked primarily in our AEC strategy team. So we basically set one range industry strategy, lead M&As, partnerships and go-to-market.

One of interesting things there that I want to dive into. But I guess to start with near term, you guys reported 2Q results last week. And can you just maybe talk about what you're seeing in the demand environment for infrastructure software? And what you're seeing as you talk to customers?

Yes. So I would say just in our engagement with customers, there's lots of demand. A lot of our customers continue to win projects. They're winning new projects. There was recently an ACEC report that came out, which is the Association of Engineering, like all the consulting engineering companies are part of this. And the 2 areas of most positive influence is actually transportation and water. So we definitely see a lot of pent-up demand. We're beginning to see some of the money flow from a government perspective and not just in the U.S. but globally. So I think just in general, there's a lot of positive sentiment, a lot of demand of our customers to implement and go digital faster. So all very positive, I would say.

And thinking what you're seeing near term and maybe thinking longer term, bigger picture, like -- can you just talk about the overarching strategy that you're thinking about over the next 5, 10 years for that group?

Yes. I would say, I mean, our strategy is, I think, pretty simple is obviously, we want to continue to grow in our core design business by targeting more architects and engineers to grow the adoption of digital technologies. In addition, it's to move digital transformation downstream into construction and then into operations. And that in turn opens up a lot more TAM for us as a company. But underlying all of that is to provide kind of a digital backbone to connect the complete asset life cycle, regardless of whether it's a building asset or an infrastructure asset or an industrial asset.

And then on that point, I guess [indiscernible] and some of that stuff like what is the architecture and engineering industry look like last 10 years? You talked about completing that life cycle. But how do you kind of get there? Like what do you need to do? And what are the milestones that [indiscernible]?

Yes. So I think from an architecture and engineering perspective, what we see is architects and engineers spending a lot more time on higher-value activities, making better decisions earlier that ultimately drives more sustainable, better outcomes. So if you think about what's driving our industry, there's a big pivot towards sustainable solutions, 80% -- 80-plus percent of the long-term operating cost of an asset is generally in operations and maintenance which means we have to design and build better assets, more resilient assets. So a lot of the emphasis, I think, is going to be around making -- using analysis simulation earlier to drive better long-term outcomes. And underlying all of that, I think one of the key statistics that you see in the industry is 95% update that goes unused as you progress through the digital -- the asset life cycle. So our goal is to eliminate redundancy of data, reduce risk, reduce costs, produce higher quality, more resilient and more sustainable outcomes as a result. So our goal is to obviously continue to grow the markets we're in but expand and then really ultimately connect the asset life cycle.

That makes sense. And I guess, compared to where we are today in A&E, when you speak to customers and look at customer journeys like what do you think are some of the catalysts to get people to adopt fully the workflows and adopt more of that data that you talked about that's required?

So I think it's multiple things. I think one thing we definitely see is more owners regards of public or private owners beginning to kind of think about for sustainable outcomes. So that's, in turn, driving them to kind of request or I don't want to use the mandate it was, but in some cases, mandate digital -- digital technologies to achieve those outcomes. In some cases, I think what we're seeing also is as we move to the cloud, adoption of technology, which has been a big barrier is being wallet. So it's easier for a lot of our customers in the industry to adopt digital technology. And then I think the other thing is a lot of the young engineers and architects coming out of the workforce are more open to using 3D modeling technologies, more innovative technologies. So the gap to onboard them and get them to use a lot of these technologies is much smaller than in the past. And then I think the final one is we're seeing kind of a change in the types of business models and funding models, especially in the infrastructure space as we move from traditional design bid, design-bid-build to private and public partnerships to alliances. So once you move into these different business models, it kind of breaks down some of the artificial silos of risk and reward. And so all of those collectively, I think, is what we see happening.

There's also an element of sort of lived experience in the same way that sort of COVID forced people to enable distributed working through the cloud. Because you couldn't work unless you did that. Similarly, in construction, it's something like 30% of the project cost is waste. And that becomes a lot more important when those waste materials are suddenly cost you 10% more in an inflationary environment. The lived experience also sort of reinforces the need to digitize and generate efficiency and sustainability.

And you talked about cloud and how it makes it easier for that. But have you seen that also kind of accelerate the network effects and go into it and drive more people to the product versus maybe the way you guys sold products and the way you guys have sold products few years ago?

Yes, absolutely. I would say -- and I think to Simon's point, what we saw with COVID, a lot of our customers in the industry were already on a digital transformation journey. And actually, while COVID did was really accelerate that journey. And there's some interesting research out there by BCG and KPMG that says, it accelerated for many of our customers by 4 to 6 years on average, right? So customers are going faster. But I also think the fact that we can rapidly deploy a lot of our solutions in the cloud. It makes it easy for a lot of our existing customers to attach a lot of those cloud offerings and ultimately help them be more optimized in how they deliver projects, reduce risk. And one of the biggest benefits is collaborate better with the broader ecosystem of stakeholders on the projects. So that's been some of the immediate benefits, I would say.

Makes sense. And maybe just getting into some of the subverticals, when we think about vertical construction and transportation, water, can you just break down how the categories with the subcategory -- excuse me, can you break down to subcategories within A&E and how the workflows in the competitive landscape kind of change the system?

Yes. So when we think about the AEC industry, we kind of think of it in kind of a couple of different buckets. So we think of it from a design perspective, we think of it as buildings, civil infrastructure and then, I would say, utilities, mining, et cetera, right? So most of our focus has been around building and civil infrastructure because it represents the biggest opportunity. We think the building space, we kind of look at it as there's an architecture discipline and then a structural and MEP discipline. The architecture discipline is where we've seen the most maturity over the last 15 years. But now we're seeing kind of the building engineering space rapidly pick up and primarily because now we have an integrated way to deliver a complete project. On the infrastructure side, which has been predominantly, I would say, historically more of a lagger. In the last several years, we've seen them really follow kind of the same kind of trajectory, especially on the transportation side. And a lot of that has been driven around the fact that if you think about transportation is really built around 3 primary markets, airports, rail, and roads and highways. And if you start with airports, it's very much vertical infrastructure. And then rail projects are a combination of vertical and linear infrastructure and then roads and highways was a primary linear. So the benefits of doing -- being very strong and bringing a lot of the value of vertical infrastructure has helped us go faster in the infrastructure space, starting with airports and then rail and now into roads and highways. So that's kind of how we think about market segmentation.

And then in terms of market leadership and the competitive landscape, how do you kind of think about the go-to-market strategy, does that differ between these different categories?

I think underlying for us, I think we look at digital delivery as a common managed process all the way through regards of the asset type. So our goal to allow architects and engineers to kind of better collaborate, deliver projects faster, better, cheaper, et cetera. Definitely, in the building space, we've always been very strong, I would say, in that market. It's been generally a lot more competitive in the infrastructure space, and we have other companies that we've historically competed with like Bentley and others. But I'd say the benefits we've had of being a leader in BIM, has helped us tremendously grow faster in that space than in other markets because we've been able to bring a lot of best practices from building infrastructure.

Then I guess from a market opportunity standpoint, is there any way you think with the relative size of each of those markets in terms of TAM and I guess where we are in terms of that penetration journey? I think you talked about vertical being [indiscernible].

Yes. Vertical is the biggest. I mean, so I mean so you can look at it -- when you think about TAM, planning is probably the smallest TAM around [ 2 ] billion. I think if you move into design, it's around 7 to 8 constructions like more like 15 and you get into the operations space is like, I think, 13, right? So from an asset life cycle perspective, that's what it looks like. We've seen -- I would say the design space, the building design space is by far the largest TAM, followed by transportation and then water, I would say, obviously some of the -- more of the [indiscernible].

That's the same way we should think about where we are in terms of penetration in terms of [indiscernible].

Yes, I think so. I mean I think the building industry in general is, I would say, I don't want to give you a time frame, but it's further ahead in general. But even within the building space, geographic adoption is different depending on what market you're talking about. So we've generally seen Northern Europe, the U.K. have historically been the fastest adopters. I'd say in the last several years, Germany and France have really accelerated their adoption. The U.S. is one of the early adopters as well. And now we're starting to see a lot of the emerging markets, India, ASEAN, Brazil really beginning to go faster as well. So we're seeing kind of an on-ramp, I'd say more broadly, but most mature, it's generally [indiscernible]

Just on the water side. Can you just talk about the integration with the Navis where are we in terms of that product portfolio? And can you just maybe give us some customer examples that highlight the longer term?

Yes. So I mean, one of the first things we focused on I mean just to kind of set up a little context, I mean probably half of the Navis's business is around analysis and simulation. So think of engineers doing water analysis. The other half of their business is around asset management and operational analytics of [ plants ] and water infrastructure. So the acquisition helped us not only grow our portfolio and be able to access more TAM on the design side. It also opened up a whole new market opportunity around servicing owners, primarily water utilities. One of the first things that we focused on in here, one, was really about moving them to the new business model that Autodesk [ enterprise ] subscription. So the good news is we've completely moved all their offerings over to a subscription model. We've reduced the complexity of the portfolio from 35 to 7 -- and we've had -- we started to have some really good synergy, especially in our enterprise accounts, operating the enterprise portfolio as part of our enterprise business agreement. So that's already kind of happened. Some key value props for our customers has been around the fact that we now can -- for the water market, we actually have a full asset life cycle solution because we have enterprise solutions from a planning and design perspective, a lot of our core traditional design tools of designing pipes in the ground and stuff, we've always done at Autodesk. Our ACC, our Autodesk Construction Cloud can service a lot of the construction projects for water infrastructure. And now we're also, obviously, as I mentioned, in the asset management operation analytics space. So right now, I'd say we are probably the most complete end-to-end solution -- digital solution provider in the water market.

And are you seeing just accelerating adoption of ACC within just that water market? And like what are kind of some of the drivers that [indiscernible]?

We're just starting, I'd say, early stages on the ACC side. where we are starting to see some new adoption is on Innovyze as developing their own digital twin platform for asset owners. That product just launched recently, and we're already seeing some early uptake of customers trying to move away from on-prem solutions to cloud and then using more of the digital twin kind of front end and how they operate and maintain a lot of the physical.

And then you talked about and kind of reducing the product portfolio, which is kind of similar to the transition audit that took. What were some of the -- what was the feedback from customers? And did that differ than the feedback you got just your traditional product?

I think the feedback, I mean change is always hard. So -- but I think on the commercial side for a lot of our engineering customers, they're well trained. So for them, that will very positive on the change because it simplifies what they buy from what it is, how they manage it, how they deliver and deploy to their users. So I'd say very much a very positive thing. I think on the public sector side because a lot of water utilities, it's still early. So we're still trying to train them. Even though a lot of those owners have been using all of this technology, it's just new. So still early, but I wouldn't say it's been negative. It's just more about educational.

And then I guess more broadly on M&A, can you just help us understand the framework which you and Autodesk assesses, potential acquisitions. What are kind of the key qualities that you look at in assets? And maybe how does Innovyze or change your thinking in terms?

So I mean, let me start sort of broadly across Autodesk as a whole and then Theo maybe talk a bit to it. So the whole strategy has been something out is we're trying to connect workflows, which have historically been siloed. And by connecting together, you increase the efficiency and also the ability to build or manufacture more sustainably as well. And so what we're doing when we add adjacent workflows and we can either do it through organically internally, we can do it through acquisition or we can do it through partnerships. So there's always that build, buy or partner sort of decisions is we are adding sort of new potential customers to the business, and that allows the new customer base to sell into [ and tie value ] too. But also by connecting those new customers to our existing customers, we bring incremental value to our existing customers as well. And that grows our sort of total market opportunities. We have new customers and we have ability to add new value to our existing customers as well. So that's what we're trying to do and then sort of buy, build or partner, but as it relates to sort of see as well.

Yes. I mean we -- our long-range plan that we are religious of that. And a lot of the decisions we make around priorities and the build, buy or partner decisions. And so as an example, on the partner side, we've been fostering for the last 5 years, a close relationship with Esri, which is the world's largest provider of GI solutions because GIS generally feeds our BIM process and ultimately also ends up in GIS from asset management and operational management perspective. Schneider is another example where we're trying to move electrical engineers to building information modeling and this data partnership allows us to go deep into the electrical space and get faster. And then obviously, acquisitions like Innovyze, where we make -- made a very deliberate decision where we were already in the water market, but it was primarily around designing water assets. Now we actually are full life cycle, right? So that was kind of very much a market expansion as well as asset life cycle M&A decision. But in general, I would say, when we think about the investments from an acquisition perspective, a lot of the decisions are can we open up more servers for TAM in the markets we're already in. Can we geographically expand to get that more serviceable TAM or are we going into an adjacent space. So for example, when we made the PlanGrid acquisition, it was a very deliberate decision to downstream and take digital transformation into construction. And then we make investments. As you know, we've made some investments in third-party companies in the operations space like SpaceIQ. And that is again about connecting the BIM process all the way through.

Got it. That's helpful there. And then Autodesk was early to capitalize on the conversions of [indiscernible]. What inning do you think we're in, in terms of just that process? And how it's coming oriented itself to take advantage of?

Yes. So I think -- how to give you like an inning as the inning depends on what subsegment you're in?

The company within the sector.