Autodesk Inc (ADSK) — Q4 2018 Earnings Call Transcript

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our fourth quarter and full-year fiscal year 2018. On the line is Andrew Anagnost, our CEO; 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 this conference call, we will make forward-looking statements regarding future events and the anticipated future performance of the Company such as our guidance for the first quarter and full-year fiscal 2019, our long-term financial model guidance, the factors we use to estimate our guidance including assumptions regarding ASC 606 and tax reform, our maintenance to subscription transition, our customer value, cost structure, 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, our Form 10-Q for the periods ending April 30, July 31, and October 31, 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 will 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 would like to turn the call over to Andrew.

Thanks, Dave. Q4 was another milestone quarter for our subscription transition. Key to the quarter was the strong growth in both ARR and ARPS even as subscription additions fell below expectations. We finished the year with better than expected performance on many of the traditional financial metrics, such as revenue, deferred revenue, EPS and cash flow, all of which are becoming more relevant again as we pass the inflection point on our business model transition. Overall, these results bolster our belief in our ability to achieve our fiscal ‘20 goals around ARR and free cash flow. There are several key outcomes of Q4 that I want to highlight. Total annualized recurring revenue or ARR grew 25% in subscription plan ARR more than doubled again. Both ARR and subscriptions for subscription plan are now greater than the ARR and subscription base for maintenance, which is a significant milestone and in line with our projections when we began the transition. Annualized revenue per subscription or ARPS inflected up in Q4, also in line with our projections. Recurring revenue has increased to 93% of total revenue, and we continue to see faster than expected migration of maintenance customers to subscription with the maintenance-to-subscription program for M2S. Beyond that, we remain enthusiastic about our long-term market expansion initiatives in both manufacturing and construction, as we continue to introduce new technology that brings design and make closer together, and drives the convergence of manufacturing and construction. Now, I know you want to hear what’s going on with subscription adds, and I will get to that. But, let’s first start by talking about ARR. The continued positive trends we’re seeing in ARR are clear signals that the transition is working. I’ll stress once again that ARR is the most important metric when evaluating the health of the business at this stage of the transition. The strength in total ARR was broad-based with all three major geographies growing ARR at 20% or more. Subscription plan ARR more than doubled, driven by growth in all subscription plan types but led by product subscription. We continue to drive tremendous growth in product subscription ARR on both the year-over-year and sequential basis. Now, let’s talk about subscription additions. To provide you more insight into the subscription dynamics, we need to break out core and cloud subscriptions. To be more explicit, the core business represents the combination of maintenance, product subscription and EBA subscriptions, while the cloud business represents all the results generated by standalone cloud offerings. When you break these two views out, our core business which drives the overwhelming majority of our revenue, ARR and billings growth is performing quite well. Our cloud business performed up to our reset expectations for the quarter. We added 45,000 cloud subscriptions in Q4, which represented nearly a 50% decrease against the tough compare to Q4 last year, when we ran a seeding program for a component of BIM 360. However, from a billings perspective, cloud had the biggest quarter ever, fueled by several large wins, including six of the top-ranked construction companies. We see continued momentum in terms of customers moving to higher value products, BIM 360 Docs and Field. We remain very enthusiastic about the opportunity with our cloud products but keep in mind that the cloud is still a small contributor to our overall business. ARR for standalone cloud grew 23% in Q4 but contributed less than $100 million of our total $2.05 billion in ARR. So, while the cloud will not be a major driver of our FY20 performance, we remain confident it will be a major component of our business in the years beyond FY20. This brings us to the question, why did the net subscription additions fall short for the quarter? The answer is that we experienced greater than expected subscription consolidation as customers are reducing their total subscriptions in favor of collections. We’re seeing this reflected in the general adoption of collections with a mix of collections within the product subscription base more than doubled year-over-year, and now represents over 20% of the product subscription base. The good news is that most of these customers are increasing their total spend with Autodesk, contributing to solid increases in ARPS and ARR. So, our core strategy of driving upsell to industry collections is working better than we anticipated. We’re also seeing the impact of collections upselling with both regular renewals and with customers participating in the M2S program. And the upsell effect related to M2S is happening across all geographies. To give you an idea of how this works, I’ll give you a real example of a Canadian engineering firm and their M2S transaction from Q4. They had 42 maintenance subscriptions up for renewals, 20 AutoCADs, 21 Navisworks and one Premium Suite. They migrated to 19 subscriptions of the AEC collection and one AutoCAD subscription, a net reduction of over half their seats. However, the account value for this customer increased by over 10%. This happens enough times and you get a depressive impact on our net subscription additions, as a result of collections upselling, but a pronounced increase in overall ARR. So, that should help you understand what’s happening. This is a positive outcome for ARR and ARPS, but it negatively impacts our net subscription additions. Beyond that, we believe this issue will work itself out over the course of the year as most of our largest customers complete their maintenance to subscription migration. Despite the impact from collections upsell, net subscription additions in our core business increased 14% year-over-year and accelerated from the prior three quarters, led by a record number of product subscription additions. Even when normalizing for M2S, the base of product subscriptions nearly doubled year-over-year, and EBA subscription additions increased over 30%, fueled by the strong Q3 EBA deal activity. The core business drove more than $1.9 billion of our total ARR in Q4, and grew more than 25%. Another consistent attribute of the transition is that new customers continue to make up a meaningful portion of product subscription additions, representing close to 30% of the mix for the quarter. These new customers come from a mix of market expansion, growth in emerging markets, converting unlicensed users and people who have been using an alternative design tool. We will go into much greater subscription results and modeling details at our Investor Day in a few weeks. But there wasn’t anything in these numbers that alters our conviction in our ability to drive ARR and cash flow. Now, I’ll turn it over to Scott for a few more details on the M2S program, ARPS, and other financials.

Thanks, Andrew. Subscription plan subscriptions grew by a record 371,000 during Q4, with growth in net subscriptions coming in all three categories: cloud, enterprise, and product subscriptions. Partially offsetting the growth in subscription plan subscriptions was the expected decline in maintenance plan subscriptions, primarily related to the M2S program. M2S program continues to progress faster than expected, especially in the Americas. In Q4, customers migrated 168,000 maintenance subscriptions to product subscriptions. Similar to last quarter, approximately one-third of our maintenance renewal opportunities during Q4 migrated to product subscriptions. Those who migrated over a third of eligible subscriptions upgraded from an individual product to an industry collection, which is the highest upgrade rate we’ve seen yet and relates to the collections upsell effect that Andrew just spoke about. The renewal rate for maintenance customers held steady in Q4. However, remember that Q4 has the biggest pool of maintenance plan renewal opportunities, and consequently the decline in maintenance subscriptions is always greatest in Q4. We’re very pleased with the M2S program to date and we’ll continue to encourage maintenance customers to move sooner rather than later. We expect fiscal '19 to be the biggest year for M2S migrations. It makes more economic sense for our customers as the cost of staying on maintenance will be higher than the cost to migrate. And product subscription provides them the greatest value with increased flexibility, support, and access to our five products. Now, let’s talk a little bit more about annualized revenue per subscription or ARPS. This is the anticipated quarter where we saw ARPS inflect up for all the reasons we’ve been calling out including improvements to the product mix and the geographical mix and the base of our product subscriptions, the price increase for the M2S program, less discounting and promotional activity, and selling more directly to our customers through our e-store. Collections upsell is having a positive impact on ARPS. Our total ARPS grew 5% year-over-year and 4% sequentially. Breaking it down, maintenance plan ARPS continues to grow as expected, driven by mix and the annual price increases we rolled out as part of the M2S program. Product subscription plan ARPS showed a 6% sequential growth. If we exclude the effect of M2S, the product subscription ARPS grew 8% sequentially, had its fifth consecutive quarter of sequential growth and grew 20% year-over-year. That meaningful growth in ARPS was the largest component of our core business. Further, if we isolate our core business, which again is maintenance plus product subscriptions plus EBA subscriptions, core ARPS grew 10% year-over-year and 5% sequentially. These are the ARPS trends we’ve been predicting since the start of the transition, and I know have been a source of questions for many of you. Looking at our business mix, once again, total direct was 30% of the Q4 mix. One of the key investment areas for Autodesk has been our digital infrastructure, with the goal of making it easier for our customers who choose to do business directly with Autodesk. Our e-store is a big part of that and we’re very pleased that we’ve already grown that channel to nearly $100 million in fiscal 2018 revenue. In addition, our e-store generated approximately 20% of the product subscription sales in Q4 and close to 50% of long-term subscriptions in the Americas came through the e-store in Q4. That’s tremendous progress in a short amount of time, and we expect to see this continue to grow. The biggest component of our direct mix is still the business we do with large enterprise customers. Q4 is always our biggest quarter for large deal activity, and we signed a record number of $1-million-plus deals in Q4, over 70 of them, including 14 contracts valued at $5 million or more. Most of these large deals were EBAs, and on average the contract value for EBA renewals increased over 40% compared to the original EBA contract value. For those of you who might not be as familiar with the history of Autodesk, these large deal stats are quite remarkable, even compared to just 5 or 10 years ago. For our product innovation and forward thinking, Autodesk has evolved to become a trusted partner and thought leader with our customers. Many are now coming to us seeking our guidance on how to prepare for the convergence of design and make, which is already happening in certain industries. Moving to spend management, we continued to execute well while keeping spend flat on a constant currency basis for both Q4 and fiscal 2018. The restructuring actions we initiated last quarter are allowing us to reallocate our spend to increase investment in areas that drive long-term value while reducing spend and making targeted divestments in other areas. We also remained committed to keeping fiscal 2019 non-GAAP spend flat at a constant currency relative to our fiscal 2018 budget at about $2.2 billion. Looking at the balance sheet, reported deferred revenue grew 9%. At the same time, unbilled deferred revenue increased by $178 million sequentially, bringing total unbilled deferred revenue to $326 million. As a reminder, this completes the first full year of moving our enterprise customers to annual billing terms. If we consider total deferred revenue as reported deferred plus unbilled deferred, which is a fair comparison for last year, deferred revenue grew by more than 25%. Since most of our enterprise customers are on three-year contracts, an entirely new group of enterprise customers will come up for renewal this year and next year. So, the amount of unbilled deferred revenue will continue to grow meaningfully. Q4 cash flow was stronger than expected, driven by good billings linearity in the quarter. The strength of the Q4 cash flow allowed us to finish the year just in the black, which is also better than expected. When it comes to capital allocation, our stock repurchase program continues to be the primary use of cash and we opportunistically accelerated that program in Q4, buying back roughly 2.4 million shares. At our last investor day, I indicated that we would use the majority of the $1.7 billion cash balance we had available at that time for stock repurchases. Since then, we spent over $900 million on share buybacks. In fact, over the past few years, we’ve reduced our absolute share count by close to 3% and we remain committed to managing dilution and reducing shares outstanding over time. Before getting into our outlook, I want to touch on two high-profile items that are impacting every company: tax reform and ASC 606. With the start of the new fiscal year, we’ve adopted the new revenue accounting standard, ASC 606, and we will be applying the modified retrospective transition method. The new standard will not result in a change in timing or amount of the recognition of revenue for the majority of our product subscription offerings and enterprise agreements. In fiscal '19, the estimated impact will be a net reduction to revenue and EPS of approximately $40 million and $0.15, respectively, compared to what would have been recognized under ASC 605, and a reduction of approximately $20 million in ARR. We will be required to capitalize and amortize sales commissions under the new standard. While we do not expect a significant impact on reported expenses for the full year, the timing of when we recognize the deferred commissions by quarter will vary compared to historic seasonality. 606 impacts are greatest in Q1 and then dampen as we move through the year and become nominal by fiscal '20, and of course none of the 606 impacts affect cash flow. Regarding the impact from tax reform, saying it’s complex may be an understatement. Clarifications from the IRS seem to come out daily. But we have enough information to provide the following: all-in-all, U.S. tax reform is good for Autodesk, whereby the lower U.S. tax rate and the ability to access foreign cash in the future will increase our profitability and help us manage capital more efficiently. We will utilize our deferred tax assets to offset the cash costs of the one-time transition tax. We’re still analyzing the full impact of tax reform but we currently estimate our fiscal '19 non-GAAP effective tax rate at 19%. For fiscal '20 and beyond, we estimate our non-GAAP effective tax rate to be between 17% and 18%. Now, I’ll turn the discussion to our outlook, and I’ll start by saying that our view of the global economic conditions remains unchanged from the last few quarters, with most of the mature markets performing relatively well and little change in the emerging markets. We’re providing guidance this quarter under both ASC 605 for comparison to our historic financials and 606. I would expect the Street to model us using the 606 numbers. We recognized as we introduced guidance for fiscal 2019, you will be able to fill in the blanks for several fiscal '20 metrics based on our stated fiscal '20 goals. As Andrew said at the top of the call, we are confident in our ability to achieve our important goals around ARR and free cash flow. As we head into the growth phase of the model transition, we’re bringing back annual guidance on billings, defined as reported revenues plus the change in deferred revenue, which should be helpful for modeling our cash flow. I’ll note that while we expect billings to increase by approximately 26% at the midpoint for the full year, billings growth in Q1 will be much more modest due to a tough compare against strong billings in Q1 last year. Another thing to keep in mind as we model out free cash flow is that there are a couple of one-time impacts to fiscal '19 cash flow that total about $130 million, pertaining to charges for the restructuring and the exit tax from moving our European operations center from Switzerland to Dublin, Ireland. These one-time items together with the strength of our Q4 cash flows will have an impact on the strength of cash flow for Q1, which is likely to be negative. As we emerge from the inflection in our business model transition, cash flow ramps up quickly through fiscal '20. A significant part of the ramp is driven by the increase in billings, primarily from what will be a much larger renewal base of product subscriptions and multi-year subscriptions returning to the historic levels we used to see with maintenance. In addition, in fiscal '20, we’ll then have two years worth of unbilled deferred revenue flowing into billings, following our transition to annual billings for enterprise customers. The underlying positive trends in our business give us confidence in accelerating ARR growth to approximately 30% for fiscal '19. This growth will be driven by fewer subscriptions and higher ARPS which reflects the trends we’re seeing with both our cloud products and collections upsell. As such, we’ve revised our outlook for subscription additions for the year. As Andrew mentioned, our next Investor Day event is just about three weeks from today. We’ll use that opportunity to do another deep dive on the model and provide more details on the recent numbers and the path ahead. We’ll also go into greater detail on subs and ARPS modeling that gets us to the fiscal '20 goals and we’ll revisit our five-year model. Now, I’ll turn the call back over to Andrew.

Thanks, Scott. I’ll reiterate what Scott just said and assure you that we are confident in our ability to accelerate ARR growth to achieve our fiscal '20 ARR and free cash flow goals. And we have a realistic plan in place to achieve those goals. Given the changes we’ve seen at the end of this year, it shouldn’t come as a surprise that we’ll be reducing the subscription CAGR and increasing the ARPS CAGR, consistent with the move to fewer, higher-value subscriptions in both the core business and in our cloud business. The transition is on track and these model adjustments are happening for the right reasons. We’ll go into all the details at our Investor Day on March 28th. Now, if we look back at the year, we’ve taken significant action to realign our investments and position Autodesk to meet our long-term goals. We are investing in building and expanding the digital infrastructure of the Company, increasing go-to-market and development spend for the construction opportunity, and maintaining development of our core products. I’ll finish by repeating these three strategic priorities that will drive long-term success at Autodesk: completing the subscription transition, digitizing the Company, and reimagining manufacturing, construction, and production. We have already made significant progress in addressing the tremendous new market opportunity in the construction market and we will continue to pursue that market aggressively. In addition, some of you may have noticed that we are increasing our efforts in the manufacturing space as we just opened the new advanced manufacturing facility in Birmingham to highlight the work we’re doing to move product design and manufacturing companies to a new hybrid, additive and subtractive future. You’ll see more of that over the next couple of years and you’ll also begin to see the first results of our efforts to reimagine production. To wrap things up, I want to thank our customers but especially recognize our employees and partners who’ve worked so hard to make last year a success. We’re excited to be now in the growth stage of the transition to see accelerated growth in ARR and to be another step further along the journey of our transition. We’re confident in our long-term plans and ability to execute while providing our customers with greater ability, more compelling products, and a better user experience. Operator, we would now like to open the call up for questions.

Thanks, guys for taking my question. Obviously, we’ve been focused on ARPS since mid-2015. So, it’s really exciting to see the inflection here in that number in Q4. So, congratulations on that. And my question is on ARPS. Obviously, you said you are going to give us more details in terms of just the framework for the long-term guidance at Analyst Day but wonder if you could talk about sort of ‘19 and ‘20, the puts and takes that you see because there are a lot of things going on. Obviously, the price increase is on maintenance, less discounting on the M2S as well as just discounting overall. Just help us kind of frame out the puts and takes here of ARPS, as you think about it to 2020.

Certainly. Let me provide some insight into what's driving our performance. First, I want to highlight the overall situation. Our core business is performing exceptionally well, with a subscription base that grew 14% year-over-year last year. We expect this growth to continue, at least at that pace, which aligns with historical trends. Looking ahead, you may have noticed changes in our guidance, largely due to our adjusted expectations in the cloud sector. You're focusing on the right aspect concerning ARPS. So, what specifically is influencing ARPS? We're observing an acceleration in some of the strategies we've previously discussed. One key factor is the upsell of our collections. As mentioned in the prepared remarks, we're seeing more customers transitioning from M2S to collections, which is increasing our core business's run rate. This trend will carry into next year and beyond. Another aspect that's gaining momentum is our efforts to improve price realization, which is driven by three main factors. First, we're executing better with our e-store, which is a channel that achieves high price realization. Second, we're modifying our renewal base, particularly in how we manage the costs associated with renewing product subscriptions. We've implemented changes that impact the low-end margins of our business, especially concerning LTs. Lastly, we're more effectively managing promotional discounts across our products. All these elements are contributing to an increase in ARPS as we move into the next year and beyond.

Thank you, Andrew, for providing the example of the Canadian engineering firm to illustrate the dynamics of net adds and ARR. To clarify, are customers purchasing for fewer engineers? Why is it that a collection can handle fewer seats if we assume seats are a good indicator of employee numbers? We recognize the ARR growth you’re experiencing, but could you explain your perspective on this situation regarding seat share within your customer base?

Yes. Saket, I’m really glad you asked this question. So, this is the dynamic of subscription versus users, and this is an anomaly of how we’re counting our business. So, what you saw in that example is each user actually had two subscriptions. So, the number of users in this company did not change at all; it just so happened that each user had a seat of AutoCAD and a seat of Navisworks Manage seating on their desktop. So, what happened is, is the customers said, well, I can now take this M2S offer, move all of those seats to the collection, not only do they get AutoCAD, Navisworks Manage, but they get Revit as well, and that’s what the customer did. So, the number of engineers sitting there exactly the same, the number of subscriptions sitting on each engineer’s desktop goes from two to one. Makes sense?

That does. That makes a lot of sense. Got it. Maybe for my follow-up, just a little bit of an expansion of Phil’s question. Could either you or Scott just maybe talk a little bit about the shape of M2S in fiscal '19? I guess it feels like we saw a nice reaction to some of the pricing strategies here in fiscal '18. I believe the next action will build on that. Can you just maybe walk us through, how you’re thinking about the maintenance base by the end of fiscal '19? And target back to ARPS, how should we think about the impact that could have on ARPS?

Yes, that's a great question. We expect to see more maintenance subscribers transitioning to product subscriptions as they come up for renewal. This shift has happened faster than anticipated, with 110,000 migrations in Q3 and 168,000 in Q4 of fiscal '18, both exceeding our expectations. Looking ahead to next year, the economics will change again, with renewal prices increasing by 10% while conversion prices rise by only 5%. This shift favors conversion even more strongly. Additionally, product subscriptions provide greater value to our customers through improved access and management. We anticipate this trend will continue to accelerate. While we haven't forecasted specific subcomponents, we believe fiscal '19 will be a significant year for maintenance-to-subscription conversions. Given the rapid progress in fiscal '18, we expect further acceleration in fiscal '19. Regarding ARPS, I don't foresee a significant impact either way, as the renewal and conversion prices remain relatively close. While it's slightly more expensive to renew maintenance, I don't think that alone will create a major effect. A more substantial impact is likely to come from those migrating from maintenance to subscription, particularly those who upgrade from individual licenses to the full collection.

Based on the positive comments that you made around the number of users eligible to move to subscription that did and some of the other elements, is there a read-through on churn? So, in other words has churn actually improved over the last couple of quarters?

So, in fact, Sterling, what we’ve seen is there’s absolutely no change in the churn rate of the maintenance base. So, the maintenance base quarter-over-quarter, year-over-year is holding solidly at the same kind of renewal rates we’ve seen historically. What you just see is more people are deciding to take the maintenance to subscription offer and of those people even more and acceleration over the previous quarter are choosing to go to collections. But the actual renewal rate of that base has remained solidly intact on a quarter-over-quarter and year-over-year and even trend wise.

In response to your question, Sterling, regarding the aggregator renewal, we currently base it on seat counts. This means that due to consolidation, we are actually experiencing a slight increase in the renewal rate because some subscribers are dropping off. As we mentioned in the example, they are eliminating certain subscribers as they consolidate up into collections. Overall, we are very pleased with the renewal rates we are seeing collectively.

And then follow-up on the EBAs, did you measure the subscriptions in arrears? I think that’s an element that can cause noise within the net subscriber count, if you will. Wonder if you can give us some insight into maybe some previous cohort. So, in EBA from three, four quarters ago, how does that number of subscriptions contribution into the total count fluctuate?

The biggest impact we see is on the first measurement of monthly active users. When a customer purchases an enterprise business agreement, they typically transition from a larger number of perpetual licenses under maintenance to an EBA. As a result, we observe a decrease in maintenance subscriptions and an increase in enterprise subscriptions. Since everyone in the company now has access to the license, we count monthly active users rather than just those who had access prior to moving to an EBA. After 90 days of measuring the monthly active users, they are added to the subscriber count. What we commonly see is a significant increase at that initial measurement. Furthermore, we continue to experience growth driven by volume and usage, which contributes to the statistic mentioned earlier about several EBAs renewing in the fourth quarter. On average, the renewal amounts to 40% more than the original EBA, driven more by usage than by price. There is a considerable increase in the first measurement followed by minor increases throughout the remaining three years.

I was wondering how we should think about the timing and magnitude of the EBA billing cycle change to deferred revenue for fiscal '19 and '20. And then, the second question, what’s been the feedback from customers on the new features and functionality with the new model subscription versus legacy licenses, is the features, new function that's driving the migration of license all users or is it more a financial decision given the upfront cost?

I'll take the front end of that and let Andrew talk about the value proposition of moving to subscriptions. This is the first year where we migrated the overall majority of our EBAs over to annual billing, so it’s still a three-year commitment but billed annually. So if you notice one of the stats that we're providing now is unbilled deferred. What that represents almost entirely is year two and year three of EBAs that we signed this year. A few other small components are in there, but almost all of that $326 million is the second and third year of the EBAs we signed this year. So you can tell half of that $326 million will come out in fiscal '19, the other half will come out in fiscal '20. Fiscal '19 we'll sign another whole cohort of EBAs and in each case those will also be on annual billing, so I expect to see that $326 million balance grow this year as we add two more years of unbilled deferred to the balance but only bill one year out of that $326 million. So the $326 million will be something higher at the end of fiscal '19, I think it's pretty straightforward and we'll provide you those stats for you each quarter. It's pretty straightforward for you to set up a waterfall model that will help you understand how that's going to accrete into future billings.

This is Andrew. With regards to the other question about what’s driving their motion right now? If you're looking at a standalone product right now, the financial incentive is probably the key thing that is driving the momentum in terms of maintenance to subscription moves because they're essentially seeing the same product with a cloud wrapper around it. We are getting a lot of feedback that the inclusion of some of the new cloud wrappers we put in with the product around collaboration and sharing in conjunction with the support offering we entangled with the subscription is adding a lot of value. When you look at collections and the increase in people choosing the collection, that's more than just the financial incentive. The collections have actually been beefed up progressively; for instance, in the product design and manufacturing collection, we've added machining capabilities into the collection and people are noticing that and choosing the options. Same with the AEC collection, we've added some core capabilities that are making it more attractive for people to decide to take the collections option as they move. So, it's kind of bifurcated in terms of standalone products and what we're seeing with collections. Everybody likes the support; I said everybody likes the support, the added support.

We've been talking with a lot of your channel partners throughout the quarter and there's obviously a shift occurring in the channel's involvement in your new product sales. How, Andrew, how do you view the channel's role in new product sales over the next couple of years and what are you expecting from them?

So I think I've stated pretty emphatically over time that channel one is still an important part of our business, as we move out to steady state we expect our business to be a 50-50 split between direct and indirect with everybody seeing a larger business, we'll have a larger direct business, they'll have a larger indirect business. So, channel is a strategic component of our execution moving forward. In the new businesses, when it comes to booting up new business, a lot of the hard work has to be done by Autodesk first. Channel partners really, really want to get engaged in new businesses early on, and we do engage them at various points in new business. But it's better if we do some of the early market seeding and market development efforts and then start to migrate the business more over into the channel. We've been doing that with BIM 360 and some of the new application, but we kind of try to take a measured approach. One area where we really engaged partners in the future is the Forge platform and building out customization on top of our cloud platform. That’s an area where we are encouraging partners to step out and get engaged really early because that allows them to stitch together our solutions for their customer and really drives this services business, which we think is not only important for us long-term but the fact that we’re going to miss new types of customer solutions built on Forge it's important for them.

I was just wondering, Andrew. How do you feel about cloud as you look further out as being a TAM expander? There has been a lot of questions talking through kind of how you get here to $6 in free cash flow, and by the way I’m assuming you guys didn’t explicitly state that, but I guess people are asking about still your target. And then when you look at your further target of fiscal 23, how important is cloud as a TAM expander to get to that level and what do you see as being a driver for that to drive adoption?

First off, let's be very clear: we’re affirming the $6 and we’re committed to that, so let me be super clear on that one. So now, when we look at the cloud, let’s be super clear on a few facts. First off, in Q4, we added 45,000 cloud subscriptions in the quarter. A lot of people would love to have that number. So that’s a net add; it’s a robust add with record billings, robust billings growth. The cloud is right where we expect it to be at this point. What we decided to do strategically, and I think it was appropriate, is we deemphasized and moved away from the super low-end cloud subscriptions we had. They came under the guise of BIM 360 team and Fusion 360 team, and moved much to our portfolio strategy around things like docks and field and higher value fusion offerings. That was a very deliberate choice, and that’s why you see some of these subscription guidance’s that are being heavily impacted by the change in the way we’re executing on cloud. But now as you look forward in terms of our business development efforts in the cloud, we’re exactly where we should be in the cycle as we move to fiscal '23. So one more fact just to comment on fiscal '23 before I talk about the cloud is the business model transformation, the move to subscription to core business doesn’t just suddenly run out of steam as we move to fiscal '23. It provides a solid growing foundation that we build upon, but to get those fiscal '23 targets, you’re definitely going to see us find a lot more cloud businesses as we get to fiscal '23. It's not necessary for fiscal '23; it's absolutely part of the fiscal '23 plan, and you’re going to see us grow at those organically and inorganically like we’ve done with any new business in the past.

First question, Andrew, you touched on this is the role of eStore. I think you said about $100 million for fiscal '18 and at some point you would expect it to be at least half of the direct business which would be a quarter of the total business. So if I would say fiscal 22, 23, you are a $12 billion plus company, you are looking at potentially roughly $1 billion eStore business. So if that is all totally, but could you talk about infrastructure scaling requirements or mixed expectations you have to get that kind of multiplier of your eStore business from fiscal '18? And then last question has to do with your product roadmap or product development execution. You did that very well starting 15 years ago with the maintenance program moving for annual release in that first engine flywheel to recurrent revenue. Given all the changes in the Company you talked about a year in terms of core products and changes in R&D to R&D management and all the rest, could you talk about your execution plans for development not just in cloud for the next year or two to make sure that you keep that flywheel going for recurring revenue?

Let me start with the infrastructure question. We've been approaching nearly a $1 billion eStore business, and infrastructure investment is essential to managing that base effectively. I’ll discuss our efforts in digitizing the Company; we are allocating resources toward this aim. We already have the infrastructure in place to reach that figure, enabling us to process orders and manage entitlements. However, we need additional infrastructure to support a $1 billion base, which likely includes millions of subscribers. It's important to engage with this base and gather insights about our customers to understand their interactions with us. We're building an inward-facing infrastructure to analyze customer engagement electronically, along with a customer-facing infrastructure that empowers users to manage their relationships with Autodesk independently. You will see the development of both types of infrastructure over time. Right now, we have the core transactional framework necessary to drive our results. Regarding R&D, we have divided our development efforts into core business areas—designing products like Venture, AutoCAD, Revit, Max, and Maya—and new business areas focused on cloud-based, construction-related, and advanced manufacturing products. A significant change occurring within the design organization is the implementation of a rapid cadence of minor additions and upgrades to keep customers witnessing progress. In the next 12 to 18 months, users managing large installations will also notice improvements in how easily they can oversee those installations with Autodesk. Over this period, there will be a significant amount of new functionality available. We aspire to deliver an experience similar to Office 365, where users receive continuous updates that enhance their experience without overwhelming them with large releases. We are making excellent progress in this direction, enabling our customers to easily adapt to a steady flow of upgrades.

So I was wondering if you could give us a sense of what kind of uptake you've seen from non-subscribers during the year and then any plans to address that base going into fiscal '19?

Historically, the nonsubscribers are kind of absorbed into our run rate. We run promos; we've been running promos on a case about twice a year, so you saw that we did fairly successfully in the promos. I can't remember exactly the number of nonsubscribers we brought in through promos last year. We did two promos, one in Q1 and one in Q3. What we're doing this year as we move forward, one of the non-paying, nonsubscriber sides is this year we're kind of instrumenting our license compliance efforts. So we are actually putting out more intelligence and capability that actually tells the customer in the product that they're working with a non-compliant copy and maybe they might want to investigate how they got there and also allowing them to contact us quickly and buy. If you look at what we did with the legacy wing, where we're doing the legacy base, the nonsubscribers that have fallen off maintenance and are sitting on all perpetual licenses, we're actually rolling out a new set of promos at a lower discount but actually has some insurance policies built into it where if the customer moves and falls off two years from now, they can default back to the old perpetual release they had at the time they moved. They don't get the latest; they just get their old way, so it's like an insurance policy to provide even more attraction to that base to come and move forward. We're going to see how that works as we move into this year. This past year I've got the number in front of me, we moved 50,000 users into our paying base from promotions like this. We actually expect this new promotion to do as well, if not better than some of those past promotions.

Yes and Ken, promotions are one way that we go after the legacy base, as you know in many cases they end up coming back to us as the product they're using ages out and as it gets older and older their ability to communicate with other partners around them, whether they're manufacturing and part of the supply chain or it's in their contractor on ASC, as their version becomes more and more down level their ability to exchange files becomes harder and harder. So, promos are one way—kind of a financial lever to pull; the other is they, since all of these are network-type used products—in other words, they’re used in conjunction with other companies—they end up needing to get the latest release just to stay compliant.

Great, and I guess just a bigger picture question, could you rank order what factors might cause you to exceed your current ARR growth targets for fiscal '19?

Yes, I mean that's a little bit of a loaded question. What I'd say, what we've seen so far is faster progression in ARPS growth than we had previously anticipated, a lot of it based on the factors that again Andrew talked about earlier. Some of it’s coming from the consolidation of subscriptions where people are moving up to the collections that are faster paced than we saw. The uptick of maintenance of subscription has been a bit of a catalyst for that. The e-store has been bigger than we expected and we'll continue to drive that faster. Our renewal base, remember when we sell a new product through the channel, there's a higher margin for the channel partner than we saw a renewal through a partner. And as our renewal base grows out through time, the lower channel cost has an effect that accrues to us as well; that's also driving ARPS as well. So there's a whole set of things that are driving ARPS growth even faster than we had expected; I'd say that's probably been the bigger upside, and you've seen subs in particular around cloud, subs are coming at slightly lower level but at a higher price point.

We've seen two horizontal rows where the net subscriber count came in sort of below people's expectations and you guys have taken the targets down. And if I’m not mistaken, there are two different explanations for why that has been—last quarter is more about sort of heavily promoted classification not being in the going forward basis and this quarter is more about the difference between what our subscriber is and what our subscription is in—subscriptions more sufficient to come into one support, getting into one collection. How do we garner confidence that this is the last kind of take down in terms of our net subscription additions estimates on a going forward basis? Is there any kind of visibility you give us into sort of any, sort of excess that might be in that base on a going forward basis that you feel comfortable that this number is not coming down again?

First, let me acknowledge your frustration then you might be having with the way that has played out over the last two quarters; I just have to acknowledge that, I mean it doesn’t help you with your modeling. It doesn’t help you with some of your core effort, so I absolutely want to acknowledge. I wanted to go back to some fundamentals here, so we get kind of level set, and then I will answer your question specifically about that. So first off, remember we broke out the core and we file deliberately, now so you can start seeing dynamics. The core grew 14% for the year, so the subscription base in the core grew 14% for the year; that’s in line with historical behavior. We’re going to see that same number moving forward. The core shows some nice strength and stability. What we did see this quarter that was not anticipated right was just acceleration in the collections activity associated not only with the run rate with M2S, and it wasn’t an acceleration, it was off the trend of the previous two quarters in terms of how fast people are moving. Yes, that did result in this consolidation resulting from upsell, but for the right reason, we saw the appreciation of ARR associated with that. So when you look forward to what we’ve done with the guide, I got to say earlier; the vast majority of it is due to our cloud reset expectations and the majority of that cloud reset is due to simply not driving the super low value cloud subscriptions. When you look at the core, our CAGR for FY20 is essentially unchanged for the core business. So what can guard your confidence here is we understand a lot more what’s going on with the cloud; we’re not prepared for more acceleration around consolidation as we see it move forward. We know how to play out through FY19, and we’re holding to the CAGR for the core business that we expect to have in fiscal '20 and that’s where we’re at. Do you want to add anything else, Scott?

Keith, the only other thing I'd say is even in those two quarters, as you point out with subs something in, perhaps certainly lighter than everyone externally expected in Q3, lighter than our own expectations in Q4 in each quarter ARR performed nicely. And they really have been—a long-term goal of ours has been to drive ARR and to drive cash flow out of that ARR. Do you remember, in Q3, ARR grew 24%, so that’s been before that actually allowed us to have seven consecutive quarters of increasing growth rate in ARR and again 25% in the quarter we disclosed. So ARR continues to perform nicely even as subs have been a little bit lower than our expectations in the last quarter.

I definitely understand that ARR is the key number you are looking at, but also want to have confidence in the components as it's building as ARR, sort of there's a trend line there going on in line with my model?

I get that. I totally get that.

I want you to go back to that core strength that we are talking about here because that's the important driver. The layer on top of that, the factors we are talking about around ARPS appreciation; that’s associated with upsell collections. The price utilization and the reduced thermo activity; and by the way, don’t underestimate how the acceleration of price utilization is going to affect the year moving forward. Those are things you want to pay attention to in the core. That's why we are trying to help by breaking out the two.

And longer term, I mean do you think there's any chance that you'd have a view on subscribers versus subscriptions?

It's a conversation we have a lot. Part of the investment, Andrew has talked about three big priorities that we are investing in. One of them is digitizing the Company; part of the effort there in digitizing the Company is to be able to count users as opposed to subscriptions. Historically, we sold shrink-wrap products that had license numbers with them. So you can track license numbers, but you can't always track on a one-to-one basis who the actual user of that license is. Part of the investment that we are making in digitizing the Company will give us much better insight into account level metrics. And within that, usage metrics, so yes we may get to that point; we are not there today.

So, I'd like to go back to the ops point; if you look at your fiscal 2019 guidance, you are guiding ARR to 30%, but your net subscription adds go to about 14%, that means you are guiding ARPS growth of some mid-60ish percent, just to give walk within that end factors kind of how we achieve this kind of pricing increase?

Monika, it sounds you are looking at the 605 guide, the midpoint of the guide to ARR; under 606 which is really what I'd like everyone to adjust their models to is 29%, but your math is still directionally right. And I think the ARPS growth drivers will be the components that we talked about is continuing upsell to industry collections and particularly as maintenance to subscription accelerates. What we are seeing is as people make that choice of those who are eligible to upgrade. More than a third are taking that, so that's going to push more people to industry collections and that obviously drives ARPS up. These will continue to grow; the renewal business is a big part of the ARPS curve, and so significantly higher yield to Autodesk when the channel partner itself are renewed versus selling a new product. And so as renewals become a bigger part of our overall revenue, obviously the cost of selling through the channel comes down; that drives up our price realization. And we have made some very specific changes on partner margins around the low end, specifically AutoCAD LP and what those margins look like. So, you add those factors together along with kind of reduced promotional activity and discounting—that's what drives—that's going to drive ARPS growth. And if anything, what we've seen is it moved up faster than we expected. Yes. Saket, it’s a great question. And I think we are expecting to see an acceleration of people, maintenance subscribers that as they come up to the point of renewal, seeing them move to product subscription. It’s already moved faster than we expected, as you know in fiscal ‘18, 110,000 migrations in Q3, 168,000 in Q4. Both of those numbers were higher than expected. As we look at next year, the economics change again. And the price to renew goes up 10%, the price to convert only goes up 5%. So, the economics actually swing in favor of conversation even more strongly. And of course, product subscription provides them the greatest value with increased flexibility, support and access to our five products. Now, let’s talk a little bit more about annualized revenue per subscription or ARPS. This is the anticipated quarter where we saw ARPS inflect up for all the reasons we’ve been calling out including improvements to the product mix and the geo mix and the base of our product subs, the price increase for the M2S program, less discounting and promotional activity and selling more direct to our customers through our e-store. Collections upsell is having a positive impact on ARPS. Our total ARPS grew 5% year over year and 4% sequentially. Breaking it down, maintenance plan ARPS continues to grow as expected, driven by mix and the annual price increases we rolled out as part of the M2S program.

Thanks everybody and as Scott just mentioned, we have our Investor Day coming on up on March 28th here in our office in San Francisco. We'll also be at the Bernstein Conference on April 10th in Boston. We’re going to follow that up with an NDR in Boston on April 11th and in New York on April 12th. If you have any questions in the meantime, you can reach me at 415-507-6033. Thanks.