Autodesk Inc (ADSK) — Q1 2018 Earnings Call Transcript

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our first quarter of fiscal year 2018. On the line are our co-CEOs, Amar Hanspal and Andrew Anagnost; and Scott Herren, our CFO. Today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com/investor. As noted in our press release, we have published our prepared remarks on our website in advance of this call. Those remarks are intended to serve in place of extended formal comments, and we will not repeat them on this call. During the course of the conference call, we'll make forward-looking statements regarding future events and the anticipated future performance of the company, such as our guidance for the second quarter and full year fiscal 2018; our long-term financial model guidance; the factors we use to estimate our guidance, including currency headwinds, our maintenance to subscription transition, ARPs, customer value, cost structure, our market opportunities and strategies and trends for various products, geographies and industries. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, specifically our Form 10-K for the fiscal year 2017 and our current reports on Form 8-K, including the Form 8-K filed with today's press release and prepared remarks. Those documents contain and identify important risks and other factors that may cause our actual results to differ from those contained in our forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but we'll not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. During the call, we will also discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of our GAAP and non-GAAP results is provided in today's press release, prepared remarks and on the Investor Relations section of our website. We will quote a number of numeric or growth changes as we discuss our financial performance and, unless otherwise noted, each such reference represents a year-on-year comparison. And now I'd like to turn the call over to Amar.

Thanks, Dave. We're off to an impressive start to the new fiscal year with broad-based strength across all subscription types and geographies. These kinds of results are increasing our confidence in the acceptance of the subscription model and our ability to achieve our goals. There are several areas to highlight in Q1, including we added a record 186,000 total subscriptions. Total ARR grew 20% at constant currency; recurring revenue jumped to 90% of total revenue; and we overachieved on both our revenue and spend goals, leading to better-than-expected EPS. As we've demonstrated over the past several quarters, we are executing well and making real progress on our 2 major initiatives: growing the lifetime customer value by moving customers to the subscription model and expanding our market opportunity with increasing adoption of our cloud-based solutions. Now let's dive into our Q1 performance a little more. Before I get too far, I want to note a change in our terminology. 'New model' is now known simply as 'subscription plan' to synchronize with our new revenue reporting terminology. Just like the new model, the subscription plan consists of product subscriptions, enterprise subscriptions and cloud subscriptions. We added 233,000 subscription plan subscriptions in Q1, which is even higher than our seasonally strong fourth quarter of last year. What's more, we netted a record 186 total subscription additions, resulting from strength across all subscription plan types and a higher renewal rate for maintenance plan subscriptions. One of the best signals for the health of our business was a strong demand for our core design and engineering products, which is reflected in impressive year-over-year growth of over 170% in product subscriptions. Even more pleasing was the strength in product subscriptions was broad-based with triple-digit growth across all geographies and very strong growth in emerging markets. Once again, new customers represented about 1/3 of our new product subscriptions for the quarter. These new customers come from a mix of market expansion, growing in emerging countries, unlicensed users and people who have been using an alternate design tool. Subscription plan subscriptions also had a strong contribution from our new enterprise customers. I mentioned on last quarter's call that in Q4, we had signed up a record number of enterprise customers for our token-based or consumption style EBAs. And that because of the way we count those subscriptions, we'd see the benefit to net new subscriptions in Q1 just as we did in the first quarter of the last 2 fiscal years. These EBAs contributed a record 44,000 subscription additions in Q1 of this year, 10% more than Q1 of last year. EBAs with our large enterprise customers have been a very successful component of our transition, leading to both increased subscriptions and account value while creating increased flexibility for our customers. The third component of our subscription plan subscriptions is our cloud products. This is the TAM expansion part of our business, and we are building on our leadership in the cloud. Cloud subscription additions continue to show strong growth, growing by over 4x Q1 of last year. And these were driven by BIM 360, our BIM collaboration and construction management tool, and closely followed by Fusion, our cloud-based design and fabrication tool. In addition to brand-new customers to our cloud products, we're also doing a lot of add-on business with our existing cloud customers. A great example of this was a large Australian construction company which had already deployed over 1,000 seats of BIM 360. The company is now expanding the deployment of BIM 360 and integrating it into their project management system, which has resulted in the purchase of an additional 3,000 seats of BIM 360 by that customer. BIM 360 goes beyond a typical product sale and has allowed us to develop much more strategic relationships with this and other companies as we tap into the huge potential TAM of the construction market, the C in AEC. Some of you may have seen that just last week there was a great story in the Wall Street Journal that highlighted this opportunity and prominently featured Autodesk. Fusion 360 is also expanding our market opportunity. We had a great Q1 win with a U.K.-based engineering firm that is choosing to replace Teamcenter with Fusion Lifecycle. This customer also purchased product design collection, which includes Fusion 360 which successfully competed against Dassault and PTC solutions. The more people use Fusion, the more they are reinforcing our belief that Fusion is a game-changer that's driving the future of making things at the expense of our competition. Partially offsetting the growth in subscription plan subscriptions was the expected decline in maintenance plan subscriptions. However, maintenance plan subscriptions declined less than what we experienced in Q4 through a combination of a higher renewal rate and a smaller pool of renewal opportunities. As we've said in the past, we expect to see ongoing declines in maintenance plan subscriptions going forward. The rate of decline was varied based on the number of subscriptions that come up for renewal, the renewal rate at the time and our ability to incent maintenance plan customers to switch over to EBAs or product subscriptions with our maintenance to subscription program.

Thanks, Amar. The strong growth in total subscriptions is fueling growth in ARR. Subscription plan ARR surged 105% on a constant currency basis and reflects the strong uptakes of all our subscription plan offerings. Total ARR grew by over $100 million quarter-over-quarter and 20% over Q1 last year on a constant currency basis. And I'll point out that 40% of our total ARR is now driven by subscriptions. That's up from just 23% in Q1 last year and a clear indicator of the significant progress we're making. When we accelerated the transition away from perpetual licenses 2 years ago, we projected that subscription plan ARR would surpass maintenance plan during this fiscal year, and we are well underway to making that happen. For the second consecutive quarter, we experienced a small sequential increase in total ARPS, primarily driven by ARPS growth in product subscription. It's still a little too early to project whether ARPS will grow sequentially in Q2 as ARPS is still sensitive to short-term shifts in term length, geo mix, product mix, and promotions. Having said that, we remain confident that ARPS will be positively influenced in the second half of the year by less discounting and promotions to our legacy users as well as the impact of the maintenance to subscription program. Each quarter, the vast majority of the subscription plan subscriptions are added through traditional means. However, we continue to make meaningful progress in converting nonpaying users into subscribers. In Q1, we added 26,000 product subscriptions through another successful promo targeted at our legacy users. The Q1 promo offered a 30% discount on a 3-year subscription if they turned in their old perpetual license. It's the same type of promo that added 28,000 subscriptions in Q1 last year with a 70% discount. We're still finding that more than half of those participating in the promo are turning in licenses 7 years back or older. This further reinforces our view that there are a meaningful number of active users whose licenses are more than 5 years old and are interested in moving to the latest software. There continues to be over 2 million of these legacy users that are actively using our old perpetual license. Over time, we will convert a large portion of these users either through promotions like this, compelling new product introductions, or through traditional means as their product becomes increasingly outdated over time. We're beginning to see this happen already. The other large cohort of nonpaying users is the noncompliance or piracy base of roughly 12 million worldwide. We've made significant gains in being able to more accurately identify these noncompliant users, and we're just getting underway with programs to systematically pursue conversion to subscription. Driving more users to subscription directly aligns with another one of our transition-related initiatives to drive more business direct. Total direct revenue for the first quarter was 30% of total revenue. That's up from 25% in Q1 last year and just 19% 2 years ago. We continue to grow the volume of business with our large enterprise customers, and we're experiencing exceptional growth of over 300% with our eStore. We expect to continue to meaningfully grow both our direct enterprise and our eStore business as we go forward. Now I'll close my section by talking a little bit more about the maintenance to subscription program because it was easily the most asked about topic over the past quarter. At the end of Q1, we had nearly 2 million maintenance plan customers, and we are going to encourage these customers to move to product subscription. We'd like them to do so sooner rather than later as product subscription provides them the greatest value with increased flexibility, support and access to our cloud products. Moving to a single model makes the most sense and will imminently simplify our customers' transactions with Autodesk. The M2S program kicks off with maintenance plan customers that come up for renewal starting on June 1, which is just a couple of weeks away. Along with greater value, loyalty pricing will be a big driver. As I discussed last quarter, all maintenance customers will be subject to a 5% price increase when they come up for renewal, and they can choose to move to product subscription for a loyalty discount of 60% less than the cost of a new product subscription and lock the price in for the following 2 years. This discount will decrease by 5% for each of the following 2 years, so the earlier a customer switches, the more they'll save. A maintenance plan customer can choose to stay on maintenance, but they will be subject to a 10% increase next year and a 20% increase the year after that. As such, we believe that there will be a relatively small number of maintenance plan customers by the end of FY '20, and we'll determine the best course of action for the subsequent renewal periods. Since we announced this program a couple of months ago, we have been working with our partners to help them better understand the program. We've also provided them with some extra tools to help drive positive conversations with customers, and we are incentivizing the channel partners to upsell Collections, which would further enhance their cash flow. We're not making projections on how many will move over this year or next but believe we will have a much smaller pool of maintenance customers by the time we get to the end of our fiscal year '20.

Thanks, Andrew. Once again, all of you should have the prepared remarks document which is the best source for our financial details. So I'm not going to walk through all of them, but I do want to hit on a couple of noteworthy items and then talk about our business outlook for fiscal '18. Before I get into the numbers, I want to draw your attention to our new format for revenue reporting which greatly improves transparency. You'll now see 3 revenue lines: one for subscription, one for maintenance and one for license and other revenue. In this format, you'll no longer need the reconciliation table in our prepared remarks document as all subscription revenue, which we used to call new model, will be reported in the subscription line, and all maintenance revenue will be reported in the maintenance line. Our remaining nonrecurring revenue will be reported as license and other revenue. In this new format, quarterly subscription revenue times 4 equals subscription ARR and quarterly maintenance revenue times 4 equals maintenance ARR. And you'll be better able to isolate nonrecurring revenues that will flow into the license and other revenue line. Note that one side effect of this change results in additional small legacy products being added into the ARR calculation. As a result, we have slightly adjusted the historical figures for ARR so that you have an apple-to-apples comparison for our Q1 results and going forward. This is an improvement we've been working on and many of you have been asking for for quite a while, and I think we can all agree this is clear and more transparent. Moving to spend management. We're proud that we've been able to drive strong growth in all of our important transition metrics while reducing our Q1 non-GAAP spend by 3%. We know that some of you have been skeptical of our ability to grow our business while keeping spend flat this year and next year, and we continue to achieve our goals by making sure that we're investing in critical elements of our transition while reducing spend in other areas, driving efficiencies throughout the company and divesting small noncore products. During this stage of our transition, deferred revenue is a better measure of our business than reported revenue. Deferred revenue grew 18% against a really tough compare last year, when we were still selling multiyear maintenance contracts. As you know, we've discontinued multiyear maintenance sales in conjunction with the launch of the maintenance to subscription program. You'll notice another new disclosure that we added this quarter for unbilled deferred revenue which we define simply as revenue that has been contractually committed by our customers but not yet billed and not included on our balance sheet. This is typically driven by our multiyear large enterprise business agreements or EBAs. Historically, unbilled deferred revenue was an immaterial number but, as we move forward this year, we're planning on moving more of our enterprise customers to annual billings for their contracts, which are typically 3-year commitments. We are providing visibility to our unbilled deferred revenue to give you a more holistic view of our quarterly results. We remain aggressive with our stock buyback plan in Q1 and repurchased 2.2 million shares for a total of $192 million. That averages out to a little over $85 per share. The downside of our stock price at this level is we're not able to buy back quite as many shares, but we remain committed to offsetting dilution from equity plans and reducing our share count over time. Overall, our strong Q1 results increased our confidence that the transition is working for our customers and our partners. It also sets us up for success for the rest of the year and reinforces our conviction in our fiscal '20 targets. Turning to our outlook. Our view of the global economic conditions remains consistent with our view over the past several quarters, with most of the mature markets performing relatively well and little change in the emerging markets. As we look at our outlook for the second quarter, we expect a seasonal decrease in subscription additions in Q2, consistent with what we've seen in the last 2 years. Remember that Q1 subscription additions have the added benefit from a seasonally strong EBAs sold in the prior quarter and the legacy promotions. While we're pleased with our execution of the current business trends and have confidence in our ability to drive results, we're taking an appropriately conservative approach and leaving the full year fiscal '18 outlook unchanged at this point. Finally, I want to provide an update on our CEO transition. The board is currently in the process of vetting external candidates as well as both Andrew and Amar. We don't have any other updates on the CEO selection process other than to say it's a top priority for the board and is progressing as planned. In the meantime, we continue to execute very well through the transition. And Andrew and Amar have the board's full confidence to lead the company to ongoing success. To wrap things up, we've executed well over the past several quarters, and we're looking forward to building on this success through fiscal '18 and work toward our fiscal '20 goals and beyond.

This is Mark Grant on for Heather, just a quick one from me. You mentioned that the maintenance renewals were a little better in the quarter than you've seen in recent trends. Was there a possibility in the quarter that you had maintenance renewal kind of pull-forward, customers coming forward and trying to renew maintenance ahead of the maintenance-to-subscription transition? And then a quick follow-up to that is, on the full year guide, the reason for not raising the full year guide after such a great quarter.

Yes, so on the maintenance question, maintenance was better than expected really. I think we had a small pool of renewals, and I think most of our customers who renewed were really trying to line up with the maintenance-to-subscription transition, and we didn't see any unnatural pull-forward into the quarter. And it was better than expected, and we expect to continue to do well with the renewal rates because we are paying a lot of attention to it.

Yes, and on the second part of your question on the full year guide, we've executed well over the last several quarters and certainly executed well in Q1. And it's given us increased confidence that both the transition is working for our customers but it's also working for our partners, and we feel good about where we are at this point in the year. But there's a long way to go. It's 90 days into a full year. At this point, I think it's appropriate to be prudent with the guide for the full year.

A question for Andrew and Scott. Going back to the maintenance because, obviously, just overall subscriber comp growth was way ahead of people's expectations, and the maintenance decline was definitely less than what we were expecting. Curious because obviously there were a lot of changes going on, on pricing but wonder if you can comment on just the feedback you're getting from customers and sort of the early thoughts on sort of how you expect this to play out? I know you're not giving specific guidance but maybe kind of help us, walk us through what you're hearing and how you're thinking about that.

Yes, Phil. This is Andrew. Let me explain. First, I want to remind you of how we set up this program to provide context for some of the feedback we’ve received. It's a multiyear initiative. We introduced three years' worth of changes in the customer base so they could see what to expect in the coming years. In the first year, there will be modest price increases starting June 1, with a 5% increase. Whether customers wish to continue on maintenance or switch to subscription, they will have a year to make a decision. During that year, we will collect customer feedback and clearly demonstrate the added value of the subscription model. This value will come through the nature of the offering, such as access control and insights. We will also enhance the subscription offering by integrating more cloud features. We provided customers with plenty of time to adjust, anticipating various reactions to the program. So far, we’ve heard from some larger customers who seem ready to switch to subscription, while some smaller customers are expressing concerns about losing access to their perpetual software. This is the reason for the one-year cooling-off period, allowing us to gather feedback, engage with these customers, and reassure them that they are transitioning to a higher-value offering while we protect their interests. That’s our current position, and I do not anticipate any changes to this outlook.

Actually, maybe I'll start with you, Scott. So subscription ARPS, to the point earlier, saw a second quarter of sequential growth here. You've talked about this being a little bit of a volatile metric because of the mix in the past. Do you feel like we're getting to a point where some of the higher-priced subscriptions are really having a structural impact on that ARPS number where we could see a little bit more stability in that metric going forward?

This is Andrew. I'm going to take that one, all right? As we've said, this metric is highly, highly sensitive to mix. It's highly sensitive not only to product mix but also the geo mix, whether it's emerging or mature markets. And what we said consistently, and we're sticking to it, is as we move into the second half of the year, we're going to start to see that metric trend up. And we're not changing that assessment, we're not changing that guidance. I want to remind you, though, about some of the things that are going to keep pushing that up. One, we're going to be absorbing that maintenance-to-subscription price increase, the 5% that pushes into the ecosystem, so that's going to trend that up a bit. You're also going to see some core price increases, and the move to collections is going to put upward pressure on that. We're also going to see the decrease in discounts. Remember, with a discount this round, it was a fraction of what it was in previous years on our legacy programs, you're going to see that. But you're also going to see the mix in mature and emerging change which is going to have put some positive pressure. As we're more successful in the cloud, you're going to see downward pressure. So those are the factors that are going to be affecting this as we move into the second half of the year, but we're holding to the statement we made previously; you're going to see a trend up as we move through the second half.

Got it, that's very helpful. And then maybe for my follow-up, maybe for you, Amar. It felt like in some of your prepared commentary that some of the competitive wins sounded just a little bit stronger this quarter. Can you just talk, maybe qualitatively, about any competitive metrics that you look at, whether that's win rates or competitive conversions, talk to us a little bit about maybe how you felt competitively this quarter maybe versus others.

Yes, Saket, great question, thanks. We definitely are feeling very positive about how we are positioned in this industry and how we are driving change. Our investment, our strategy of using the cloud to drive a new paradigm in both the billing industry as well as the manufacturing industry is really paying off. In manufacturing in particular, with Fusion and the changes we are driving in getting industrial additive manufacturing and concepts like generative design, the customers are really paying a lot of attention in adopting those ideas from us in a big way and, in many cases, at the expense of our competition. In fact, many of our Fusion 360 wins this quarter, in fact, in an increasing rate, are coming at the expense of our competition. They're leaving their sort of old, 20-year-old CAD systems and starting to adopt the paradigm we are putting forward with Fusion, which connects CAD to CAM to CAE with data management built in. So in manufacturing, we really feel like the customer base is searching for the next paradigm, and they're starting to really turn to Fusion and adopt it in response to that. Likewise, in the building industry, the big sort of competitive push and success that we're seeing is really in construction, where I would say actually a major competitor has been paper in some ways; that they are moving from an analog to a digital way of working. And we've been leading the way in using cloud and mobile to drive a construction management and BIM management process for this customer. So we're definitely feeling both those vectors of manufacturing and construction growing at a really fast pace, and we feel very good about where we are positioned in both industries.

It's Jackson Ader on for Sterling tonight. A couple of questions from us, the first being in the revenue by product family, it looks like AutoCAD and AutoCAD LT actually grew year-over-year as far as the major segments are concerned. Any particular reason that, that returned to growth in the quarter whereas AEC and Manufacturing are still down year-over-year?

Yes, Jack, when you look at that, you got to reflect back on what was happening in Q1 a year ago. It was our first quarter without selling any perpetual licenses on AutoCAD and LT. And you'll remember, when we ended that sale at the end of the prior quarter in Q4, there were some buy-ahead activities we had with AutoCAD and LT Q1 a year ago, so the compare point was a little bit artificially low with some demand pulled backward into the prior year. That's part of what contributed to it. I would say we're seeing very strong uptake, though, for both AutoCAD and AutoCAD LT and the LT family with product subscriptions, so it's a combination of both.

Right. To add to what Scott just mentioned, we are seeing subscription success worldwide. One region that performed particularly well for us is APAC, which has consistently been a strong contributor to our AutoCAD and LT results, as reflected in the numbers. Additionally, regarding your comment about AEC and Manufacturing, I want to highlight that our Delcam business transitioned from a perpetual license model to a subscription model over these quarters, which is evident in the figures. Therefore, I believe the downward trend in Manufacturing numbers is somewhat exaggerated due to the revenue shift from upfront to ratable. Overall, we are performing strongly across all industries and feel very positive about our position.

Okay, great. And then, actually, since you mentioned geographies, for my follow-up, it appears that at least on a revenue basis, year-over-year, Americas did a little bit better than the other major geographies. Is that also true as far as bookings are concerned? Or was there just a little bit of some noise in the revenue for the regions?

Yes, Jack, we actually did well in all regions. I think that it's one thing to look at it year-on-year; if you look at it sequentially, we actually did well in Americas, in Europe, and in APAC. And as Amar just pointed out, actually, seemed to have at least found the bottom in APAC and don't have the same headwinds that we had for most of last year. So there's nothing that stands out that was particularly strong or particularly weak in any of the 3 geographies. It was good performance across the board.

Question for Andrew and Amar, could you discuss the future role of distributors in terms of fulfillment and license management? Additionally, how have any past or planned pricing changes affected distribution? Specifically, have the changes in pricing for VARs purchasing directly from the company compared to more favorable pricing through distribution had any impact? Also, it appears that Collections in the indirect business were a smaller percentage of the overall business in the first quarter compared to the previous Suites. Can you confirm this? How do you foresee the progression of Collections as a percentage of your business for the remainder of the year?

All right. So Jay, that was a multipart question, so let me kind of approach each one of these one at a time. So look, when it comes to VARs and distribution in our future, let's be very clear, our business is going to be bigger and the size of the pie that the VARs are going to get, the size of the business that they're going to be able to participate will be bigger as well. We are going to be doing more business direct through major accounts and direct through the eStore, but we are absolutely going to be providing a bigger business to our indirect partners as well as we move forward. Now your question with regard to pricing to VADs and VARs and things like this; we are constantly evolving and changing our frameworks and changing the pricing and the things that go through the framework to optimize what things are going on. I'm not going to comment on any specific pricing strategy we put out there in the system, but we're always doing that to optimize how we distribute and deliver the software to the customers. And your last question about Collections. So first off, let's talk about where the overall strategy is going with Collections. It's absolutely our goal to ensure that our new customers are moving to Collections versus buying standalone products. And as you know, as we light up the maintenance-to-subscription program in June, there's going to be a major push to move those customers over to Collections. Those activities are brewing and gestational right now. But with regard to the Collections result, we're actually really happy where we're at. The volume runway in Q1 is equivalent to the Suites runway in the same period a year ago, and that's exactly where we want to be. And in a short period of time, we basically dialed back up to that run rate, and that's right where we should be. But as we move forward into the year, you're going to see Collections contributions go up more and more throughout the year. But right now, we're exactly where we expect to be.

I was wondering if you could elaborate on the improvement in renewal rates on the NIM side. Can you provide any insights into the renewal rates for the new model subscriptions? With some time behind you, how are those performing? Specifically, how do they compare to what you see in your maintenance base?

Yes, Keith. Look, renewal rates were strong across the board. I mean, the product subscription rates were right in line with our expectations. In terms of comparing maintenance to product subscriptions, I mean one thing to keep in mind is one of the benefits of the product subscription is customers can switch things on and off, and some are monthly and some are quarterly product subscribers. So we don't really break the renewal rates out by subscription type, but we are pleased with where product subscriptions ended up, and this continues to be a big focus area for us for the remainder of the year.

Got it. And then for my second question, and then to continue the line of questioning that Jay was drilling down on the reseller channel. Now that we're fully on a subscription model, can you tell us a little bit about sort of what the incentives are? Like what does the incentive program look like for the channel in broad strokes? Is it on ARR? Is it on subscription? Can you give us some kind of indication of where you took that now that it's not going to be kind of a revenue-based model anymore?

This is Andrew. The incentives we have implemented for our partners are designed to align with the outcomes we seek from our subscription model. Primarily, we want to encourage partners to prompt customers to explore our collection, as we believe this is a beneficial direction for them and crucial for our future. Additionally, we aim to promote adoption and renewal efforts. Therefore, we have established incentives to ensure that partners facilitate actual software usage among customers. As Amar mentioned, in a subscription model, customers have the option to start and stop their service. Hence, we want partners to ensure that customers are genuinely engaging with the products. We are incorporating incentives to promote this behavior.

Yes, I agree. And Keith, I'll just add that, over time, you'll see us continuing to optimize our incentive structure to drive the kind of results and outcomes that we want. Subscription is obviously the big focus for us right now, driving Collections is a big focus for us right now and certainly making sure that our renewal rates are right where we want it to be. I think we are using our classic combination of front- and back-end discounts to get those results. To Jay's earlier comment with the distribution channel, that's another place where we've been sort of just optimizing our relationships and our incentive structure to get the right results, again, to drive this overall recurring revenue and subscription business that we're getting the channel oriented around.

Got it. Just to be clear, is it fair to say that in terms of whether or not a partner hit their plan or quota, does ARR replace revenues? Or is there a whole collection of achievements they need to accomplish?

Keith, can you say that again? You said ARR, and then we lost the second part of the question.

So in terms of sort of like from a headline number for partners, you guys sit down and do your business reviews, is there a version of a quarter? Like when they hit plan, does ARR replace what revenues used to be? They used to have to hit a revenue target; now they have to hit an ARR target or is it a little more complicated than that?

Keith, our engagement with VARs is very simple. We talk about billings numbers with them and the billings outcomes with them and the annualized contract value. We don't try to do ARR compensation models with our partner channel; that would be far too complicated for them to not only engage with but actually for them to measure and react to. So we keep that very simple because we want to grease their transactional ability.

Wondering if you could add any commentary on the mix of LT subscriptions this quarter as compared with both AutoCAD and the AutoCAD vertical subscriptions?

Yes, Gregg, LT continues to be the volume part of the business. It was in the perpetual license world; it is in the product subscription world. We're not seeing a significant shift in the mix of LT either going as a higher percent on a volume basis or a lower percent. LT and AutoCAD kind of continue to hold serve at the level they were.

I think we observed strong performance across all products, including the vertical and 3D vertical products. There wasn't one specific product that was leading the subscription growth; rather, we saw strength throughout the entire range.

Okay, perfect. And then just a question for Andrew. I find it really interesting that you got essentially the same amount of legacy nonsubscriber conversions this quarter at a 30% discount as you did a year ago at a 70% discount, and that you're still seeing half of the conversions at an aging that is 7 years or older. So the question is, in the past, you've spoken about a 30% conversion rate on licenses that were 5 years old or less. Is there any reason why the conversion percentage can't be a lot higher than that?

We will continue to achieve high conversion rates. It's important to clarify how we're converting customers. Promotions are just one indicator of our conversion success. We have a three-pronged strategy to attract customers. One aspect is the rapid updates to our existing product, making older versions quickly outdated for anyone not using the latest release. Another is integrating cloud value deeply into our subscription offerings, creating a strong incentive for customers to capture and incorporate that value into their operations. Our cloud services are becoming essential for our customers, increasingly intertwined with their subscriptions. Finally, our legacy promotions are not the sole measure of conversion; the fact that we are still seeing significant net additions indicates we are reaching those who are not subscribed. We will keep pushing in this direction at sustainable rates, and I believe the program is performing as we anticipated.

Yes, Gregg, one of the things that we are pleased with is that we didn't have to discount aggressively to get the kind of subscriptions result that we saw. And as Andrew mentioned, I mean, I think, in some ways, the net adds number is becoming a better indicator of how well we are converting our overall opportunity than any individual promotion to reach this legacy base because, as Andrew said, at some level there's a network effect being built as our new products roll out and customers want to be current, and many of them self-select into the buying a new subscription to be current. So I think overall, we're seeing the promo work, we're seeing new net subs go up because of the new product subscriptions rising. So I think we're doing well with that opportunity.

Scott, I know you guys mentioned flat total spend for the year. But how should we think about the trajectory of sales and marketing once you guys launch the maintenance-to-subs program? Will that tick up meaningfully?

I don't think so, Ken. I mean you saw that for the first quarter, we actually posted a decline in spend of about 3% during Q1. Obviously, for us to be flat for the year, it's not going to stay at minus 3% throughout the year. So I would expect to see slight increases going forward, but that still comes in at flat for the year. There's no particular swing between categories as we roll out maintenance to subscription. Maintenance to subs is obviously a huge focus, both for our sales team and for our channel. I don't see that driving any particular bump in expense.

Yes, I understand. I have a follow-up regarding receivables. It seems to have decreased significantly compared to last year. Can you remind us if there was something last year that caused accounts receivable collections to be unusually high?

Yes. The key factor affecting receivables is linearity within the quarter. It relates to what gets sold during the quarter, particularly in the last month, as we typically invoice within that 30-day period. This quarter was very linear. Our days sales outstanding were below 45, around 43 days, compared to last quarter, which was more back end-loaded. So, it's important to focus on the linearity for this quarter; there are no other factors influencing it in any significant way.

This is Shankar for Kash. I have a question about maintenance conversion. My understanding is that if a maintenance customer is currently using an LT or AutoCAD product, they will likely switch to a subscription for an LT or AutoCAD product when they convert. In that context, could you elaborate on how you are incentivizing customers to adopt collections, particularly with the discount you are offering? Also, I'm interested in how geography and mix play a role in this.

Yes. The program is designed so that customers who are transitioning can switch to a like product, moving from LT to LT or AutoCAD to AutoCAD, but they will not receive a better price for moving to a collection than what is offered at that moment. The discount for moving to a collection remains at the same 60% they receive for like-for-like transitions. This creates a strong incentive for AutoCAD customers to consider switching to a collection, although it may be less appealing for LT customers. We have equipped our partner channels worldwide with tools that enable them to engage with customers effectively, explaining their options, the benefits of moving now versus later, and the locked-in price for moving to a collection along with the value of the product offerings. We have invested significantly in training the channel on how to communicate these points to customers looking to upgrade to a collection.

What I would add is that our partners know how to handle this situation well. This is not just an incentive for customers; our partners really leverage this one-time opportunity to elevate their customers to a higher recurring revenue model. I believe they are currently very focused on capitalizing on that opportunity.

Got it. Just a follow-up question, you mentioned about the smaller customers having an issue with the subscription plan, and you're working with them. Could you elaborate on the feedback you've received on potential price increases that could happen post fiscal '20? Is there any pushback in there, or what's the strategy?

The feedback we received was what we anticipated. When we inform customers that their maintenance prices will increase over three years, we expect some negative reactions, particularly from smaller customers. Their main concern is not about maintenance versus subscription; they appreciate the reasonable price increases and value the loyalty program. Their worry lies in potentially losing their perpetual license. Over the next year, as we prepare for a 5% increase upon renewal, our goal is to demonstrate to these smaller accounts that transitioning to a subscription model provides them with greater value and better supports their needs. We are dedicated to showing them the benefits of this move and ensuring they understand what they gain by choosing a subscription.

I mean I think one thing you'll notice in talking to our partners, when we first announced this program and got a bunch of reaction, and then as our customers started talking to our partners, a lot of that concern has started to die down because of all the things that Andrew said; is that our customers are starting to understand better the value proposition of subscription and the kind of pricing model that we're putting in. So I think that there was a little bit of a kerfuffle when we made the announcement, but that is really starting to mute, and customers are much more comfortable with the path that we have put forward.

If I may just ask one more just as a follow-up to that, is there any difference in the geography, call it, the U.S. versus Europe versus Asia, is there any difference on how customers reacted?

No. The reaction is fairly uniform. I mean, obviously, you get some small variations, but it's really uniform. And it's very similar to the reaction we got when we announced the end of perpetuals. It's playing out exactly the same way, and we're going to go through the exact same process. But there's no particular geography or country that's showing any more propensity to be concerned.

I'm going to combine the two questions because they are related. First, how fixed are your plans for the discounts on subscriptions under the M2S program for next year and the following year? Is there a possibility of changes? Additionally, while I understand you're not ready to provide guidance on the M2S program's volumes, can you share how much your fiscal '20 targets rely on the price increases from maintenance customers and those transitioning to the new system?

I will address part of that, and then I will let Scott discuss the other part. Regarding the maintenance to subscription program, we have implemented the program and ensured transparency; we informed them about the 60% discount, which decreases by 5% each year based on when they convert. We plan to maintain that program and believe it offers a great discount. There is really no reason to alter it, so I don't expect any changes to the program's rules.

Yes, I agree with that, Steve. Regarding your second question, there's an interesting effect. If you examine the price increases associated with moving from maintenance to subscription, it becomes clear that the longer someone remains on maintenance, they face higher price increases, which in turn contributes more to annual recurring revenue. This is somewhat counterintuitive. Therefore, there isn't a strong need for a rapid transition. In fact, a slower transition can actually enhance annual recurring revenue as time passes. Thus, the model does not depend significantly on a quick shift.

Steve, we have a clear goal to get as much of that maintenance base moved over to subscription by FY '20 as we possibly can.

So you had a nice downtick in expenses in this quarter, and I was wondering if you could walk us through some of your key initiatives to continue to contain expenses. And what elements might cause you to perform better than your current guidance on that front?

Sure, Ken. Just to clarify, we generally see a sequential decrease in spending from Q4 to Q1. In Q4, as the year concludes, there are many adjustments related to variable compensation and commissions. It’s also the quarter when we hold our AU event, which adds to our expenses. Therefore, it's normal for there to be a drop from Q4 to Q1. The extent of that decrease can vary based on how well we performed in the previous year since commissions contribute significantly to that decline. So, while it is a sequential decline, it’s not an unexpected one. Amar, would you like to discuss how we are managing our spending?

Yes. So Ken, what I'd add is, look, our outlook for the year on spend remains unchanged because we've instituted operational rigor and discipline and continue to make very hard choices in investing in the right areas to drive the transition and divesting sort of noncore projects and noncore activities and just keep a tight focus on managing spend. So our outlook for the year is unchanged, and I think we're making all the right decisions in terms of ensuring that the transition remains on track. Some of the things that we've decided to divest, we had a bunch of consumer products, for example, last year that are not material to the transition. We make choices like that to divest, and that's given us some of the fuel we need to keep driving the transition forward.

Okay, great. And as a follow-up, I realize it's early, but could you provide some insight into what the price increases might look like in the years after the initial 3-year subscription discount that people will be committing to? Would you expect it to be comparable to the subscription price without that discount, or could it potentially be higher?

Ken, we've clearly outlined the program where customers transition to the terminal discount price. The maintenance subscription program lasts for three years, and at the end of that period, there’s a specific discount that everyone will adjust to when they exit the program. This approach is designed to encourage customers to transition from their perpetual license and feel confident about moving to a subscription model.

And is that for EBAs as well or just product and collections?

EBAs are a totally different process. So when a customer moves to an EBA, they've moved off of maintenance to a consumption model. And remember, for all of these things, with regards to the way we rolled out the prices, the way we manage the price increases at the terminal point, our goal is to maximize the value of that maintenance base. And that is all about minimizing the churn out of those customers that are in that base. We feel like we've created a program that balances both the price uplift and the churn factors that guide us in maximizing the value of that base. That's what's driving all of this.

I guess, first question, one question which we get quite often is that CAD seems like a low-growth market but your target of 20% subscription growth means you need to add somewhere between 850,000 to 900,000 new subscriptions every year. So can you maybe walk through the math to achieve that?

We have consistently communicated a key aspect of how this is going to evolve. The transition to a subscription model has significantly lowered the price points for design software, leading to an increase in demand for our products due to significantly reduced upfront costs. Additionally, there are other factors influencing our long-term subscription goals. One factor is our nonsubscriber base, which includes over 2 million potential customers. Another factor is the approximately 12 million users who are currently using pirated software and are likely to transition to subscriptions. We are familiar with this group and have strategies to engage them. However, the most crucial factor over the next five years will be the market growth driven by our cloud application launch in the construction and manufacturing sectors. The shift to cloud solutions, particularly in manufacturing, is beginning to attract customers away from our competitors and towards our products. When considering all these elements, our target of 20% subscription growth is quite attainable—not just through expanding our existing customer base but also by tapping into new markets in construction and manufacturing.

Yes, Monika, I’d like to take this opportunity to emphasize that we have always led in volume within the industries we serve, and that continues to be the case. As Andrew mentioned, we are witnessing a shift in market share from traditional CAD CAM systems to innovative cloud-based systems like Fusion, particularly in manufacturing. The adoption of BIM and construction solutions further broadens our market opportunities. When we combine this with our focus on license compliance, legacy opportunities, and organic growth driven by job increases in the industry, we feel confident in achieving the goals we've set for ourselves.

Okay. Then as a follow-up, could you share the split of subscriptions between EBAs, cloud and product subscriptions?

We do not provide that level of detail. The only figure we have shared is that we had 44,000 EBA subscriptions this quarter. We sold many EBAs in Q4 and monitored their usage and adoption over time to see how many users in those accounts utilize our EBA solutions. After 90 days, we tally the subscriptions, and that number was 44,000. Currently, we are not ready to break out the cloud and product subscriptions. However, as we mentioned, our strategy is effective; our business model transition and platform transition are successful; subscription services are performing well across all types.

Thanks, operator. We'll be at the JPMorgan conference in Boston next Tuesday and the Canaccord one-on-one conference in Toronto next Thursday. We'll be at the Berenberg and the NASDAQ conferences in London on June 14 and 15, respectively. And lastly, we're holding investors and analysts at AU London on June 21. So please let me know if you'd like to be attending that event as well. So for anything else, you can reach me at (415) 507-6033. Thank you.