Autodesk Inc (ADSK) — Q3 2019 Earnings Call Transcript

Thanks, Sonia. Good afternoon. Thank you for joining our conference call to discuss the results of our third quarter of fiscal 2019. 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 on our website. 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. We will also post a transcript of management’s opening commentary at the end of the 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 fourth quarter and full-year fiscal 2019, our long-term financial model guidance, our revenue and cash flow expectations, our expectations regarding the acquisition of PlanGrid and anticipated benefits and impacts on our short-term and long-term guidance, the factors we use to estimate our guidance, our maintenance to subscription transition, our expectations regarding product mix and pricing, 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, which contain 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 under ASC 606. And now, I would like to turn the call over to Andrew.

Thanks, Abhey. I have two exciting things to share with you today. First, we closed another fantastic quarter with strong performance across all key metrics. Second, we are expanding our capabilities in the construction space by acquiring PlanGrid to complement our construction portfolio as well as to enhance our reach within the industry. Looking first at our Q3 performance. We built upon the strength of our Q2 results by posting accelerated growth driven by strength across all product families in major geographies. We generated 33% growth in total annualized recurring revenue or ARR with both product and cloud offerings delivering great performance. There are several key areas that I want to highlight on the call today. We had record growth in total ARR and total ARPS. In fact, this is the highest growth quarter for both since we started our business model transition over four years ago. We experienced strong growth in our enterprise business during the quarter which speaks to the strategic importance of our products and a healthy demand environment. We hit a milestone of four million total subscriptions. The maintenance-to-subscription program continues to perform well and we’re seeing an increase in the adoption of collections. BIM 360 delivered broad-based strength driving cloud ARR growth in the quarter, and we are enhancing our construction offering with the acquisition of PlanGrid. First let’s look at ARR, which is the best proxy for measuring progress in our business model transition and the overall health of our business. The strength in ARR was a result of accelerated growth in all geographic regions and across all product families. All geographic regions posted revenue growth of at least 25%. Subscription plan ARR has more than doubled on a year-over-year basis for seven out of the last eight quarters. Growth in ARR was driven by strength across all subscription plan types and once again product subscription led the group while EBAs also accelerated meaningfully. ARR for our core business, which represents the combination of maintenance, product subscription, and our EBA sales also grew at 33%, in line with total ARR, as our core business drives the overwhelming majority of our revenue, ARR, and billings growth. Now as you know, I have made construction one of the company’s critical near-term priorities and that’s why I’m incredibly excited to talk about the acquisition of PlanGrid which expands our expertise, presence, scale, and reach in the construction space. You have heard me say many times that the construction industry was a key focus area for us in becoming a design and make company. It’s hungry to deploy more technology and we're ready with compelling solutions. At PlanGrid, Tracy Young, Ralph Gootee, and the rest of the management team have built a leading construction tech company, and we look forward to welcoming them back to the Autodesk family. PlanGrid has built an innovative mobile SaaS solution that’s focused on document-centric workflows for field execution and project management. This is an excellent complement to our focus on model-centric workflows through Revit and BIM 360. On the field side of construction management, PlanGrid enables those working on the sites to make firm decisions with real-time information. PlanGrid’s Solutions also empower project managers to ensure jobs are delivered within scope and on budget. The company currently serves 12,000 customers and has around 120,000 paid users. Its products have been used on over one million construction projects. PlanGrid’s quality and value are reflected by the many large customers it serves, such as LPR Construction, Devcon, Granite, Nvidia, and Target. And we intend to capitalize on its strength to further advance the state of the art in construction technology and better meet the needs of our customers. The combination creates a more comprehensive cloud-based construction platform for general contractors and will expand our relationships with subcontractors and building owners. Over time, we will integrate workflows between PlanGrid software and our BIM 360 construction management platform for a seamless exchange of 2D and 3D project information. Additionally, we will be able to leverage our global reach to accelerate the adoption of PlanGrid Solutions. There are many GCs who have deployed both solutions; for example, DPR Construction is a commercial GC using Autodesk BIM 360 and PlanGrid software. Atul Khanzode, DPR’s CTO said, 'One of the biggest challenges in the construction industry is data flow, how you get the most current and accurate information to the right people at the right time. We’re excited about this acquisition because it will improve the way information can be shared on projects and that leads to greater productivity and predictability. Using BIM 360 has made our project planning better. We’re able to reliably plan, forecast, and measure project tasks that will support lean construction practices and reduce waste. And we’re using PlanGrid to help everyone in the field build off the most current data set.' We’re tremendously excited about joining forces with PlanGrid and I believe this will further position us for success as we move further into the $10 billion construction opportunity. Scott will cover financial details of the transaction in a few minutes, but I would like to turn our attention back to Q3 performance, particularly, I’d like to highlight the performance of our BIM 360 portfolio. We had a strong showing for the entire offering, which helped us post 36% growth in cloud ARR in the quarter. Customers are deploying all modules of the BIM 360 platform, and I am excited to share that large customers like AECOM, Arcadis, Swinerton, and Layton have already started adopting our new platform, and we look forward to more customers doing the same. A great example of the convergence of design and make was a significantly expanded deal we signed with Daiwa House industries, one of the largest construction companies in Japan. They sell prefabricated homes in the region and are working to expand globally. Their processes are a clear example of how manufacturing and construction are converging. They utilize a wide range of our product portfolio from AutoCAD and Revit to BIM 360 and Inventor. Our new EBA with them is one of the largest we have signed and it increases the account value by 16 fold. We now have three of the largest five general contractors in Japan on EBAs and we are not done. These transactions also highlight the progress we have made in Japan as a region where we saw broad-based strength across all customer types. On the manufacturing side, our growth rate for the product family accelerated to 20% from 10% in the second quarter. During the quarter, we transitioned a major customer, Ford, to an EBA. It is yet another example of how our relationship has expanded with our large enterprise customers where we’ve evolved from a vendor to a collaborative thought leader. We are partnering with Ford to help them explore new workflows utilizing our most advanced software functionality, such as generative design, and our flexible token-based EBAs. This will allow them to benefit from the breadth of our product portfolio. We expect a fourth quarter increase in subscriptions as a result of our new EBA contract. In summary, I am extremely pleased with the progress we’ve made with the transition, and I believe we’re positioning the company to expand our technology leadership in the construction space. Many of you attended Autodesk University last week, and I think you could feel the buzz and excitement in the air around both our core offerings and our cloud technologies like BIM 360 and Fusion. We are making terrific progress while remaining committed to our FY 2020 goals. In particular, I am also excited to see that we crossed the 30% mark for the sum of revenue growth and free cash flow margin. We look forward to nearly doubling that in the next few years. Now I’ll turn it over to Scott for more details on the financials.

Thanks, Andrew. Digging deeper into the numbers for the third quarter, I’ll start with a few more details on our strong ARR performance. ARR benefited from a 17% increase in ARPS, a 14% increase in subscriptions, and 30% growth in billings for the quarter. Looking at subscriptions, we added 143,000 subs in the quarter and hit a milestone in total subscriptions as we crossed the 4 million mark, which is nearly twice the number of maintenance seats we had at the peak of the previous business model. Subscription plan subs grew by 252,000 led by product subscriptions. Core sub ads once again increased by 3% sequentially, and we also added 53,000 cloud subs which is a nice step up from the 31,000 we added in Q2, and 18,000 in Q1. Strength in cloud was led by broad-based adoption of the BIM 360 family. Moving to the maintenance for subscription program, we continue to make solid progress. In Q3, customers migrated 71,000 maintenance subs to product subscription, while the number of them to our subscriptions was down sequentially, the conversion rate remains strong with approximately one third of the maintenance renewal opportunities migrating to product subscriptions. Of those that migrated, over 30% of eligible subscriptions upgraded from an individual product to an industry collection. We expect the number of M2S subs to increase in Q4 as our maintenance renewal opportunity is higher. The renewal rates for both maintenance and product subscriptions picked up slightly from Q2 and were in line with our planning assumptions. Helping to bolster renewal rates for product subscriptions are the M2S related subs, which have very high renewal rates, because the program was designed to be sticky. We expect the renewal rates for product subscriptions to continue to increase as the product mix shifts toward higher value products. Now let’s talk a little more about annualized revenue per subscription or ARPS. Total ARPS posted another quarter of strong growth, as it continued to benefit from the same drivers we discussed at Investor Day and that we saw in Q2. These drivers include the growth of the renewal base, the ongoing strength of industry collections, and various pricing adjustments we made earlier in the year and are now having a greater influence on ARPS. The pricing adjustments included the price increase associated with the M2S program, lower channel discount on AutoCAD LT and an increase for multi-user subscriptions. Long term ARPS drivers will continue to be the growing renewal base which comes at a higher net price to Autodesk, the increase in digital sales also at a higher net price to Autodesk, the product mix shift to Industry Collections, the maintenance price increase for those customers who don’t take advantage of the M2S program, and less discounting and promotional activity. We expect total ARPS to continue to increase for all the reasons I have just discussed as we progress through the transition and well beyond fiscal 2020. Our eStore, which is like a bigger part of our digital sales grew over 65% year-on-year. For the past five quarters, our eStore has generated over 20% of the product subscriptions. Q3 also marked the eighth consecutive quarter of greater than 30% growth in our EBAs. In fact, our EBAs posted over 50% growth in the quarter, highlighting strong execution as well as adoption and expansion of EBA contracts. What’s interesting is that while the growth of our total direct business accelerated even from the record levels in Q2, our indirect business expanded even faster. We continue to believe that over time the mix of direct business will outpace the growth of indirect, leading to a more even split between direct and indirect revenue. Moving to spend management, our total non-GAAP was up 5% and was slightly higher than expected as we’ve done a nice job filling the open positions created by last year’s resource rebalancing. However, if we normalize for ASC 340 and foreign exchange rates, the year-over-year growth in total spend would have been less than 2%. The sequential increase in spend was related to the continued hiring ramp that we’ve been calling for the past few quarters as we near the completion of the resource rebalancing; call costs are higher year-on-year due to the impact of ASC 340 which requires us to capitalize sales commissions. Normalizing for ASC 340, growth in total spend would have been less than 4%. Looking at the balance sheet, total deferred revenue grew 17%, unbilled deferred revenue increased by $45 million sequentially to $451 million due to a strong EBA performance. We expect unbilled deferred revenue to increase meaningfully next quarter with seasonally strong enterprise transactions. While we continue to experience and expect a decrease in long-term deferred, our short-term deferred revenue grew by 14% due to strong billings in the quarter. Looking at cash flow, we generated $39 million in operating cash flow as we benefited from the growth in billings and strong cash collections. We expect our cash flow to accelerate in the fourth quarter. We used $103 million in the quarter to buy back roughly 800,000 shares at an average price of $131.42. Year-to-date we have repurchased 2.1 million shares for $270 million, an average price of $129.86. We continue to be committed to managing dilution and reducing shares outstanding over time. Before I turn to the outlook, let me run through some details about our acquisition of PlanGrid. As announced this afternoon, we are paying $875 million net of acquired cash. We will finance the deal with cash on hand and a short-term pre-payable loan. The transaction is expected to close during our fiscal Q4. Since we cannot be sure of the exact timing, we have not included any impact in our guidance. That said, we would expect it to contribute slightly to revenue growth and be modestly negative for profitability and cash flows for the quarter. For fiscal 2020, we expect PlanGrid to contribute approximately $100 million in ARR, which will create a slight headwind for our profitability. The transaction and associated financing costs will have some dilutive effect on our cash flow, but we believe we can achieve our goal of $1.35 billion in free cash flow for the year. There are more details about the company and our rationale behind the acquisition in a slide deck on our Investor Relations website. Now let’s turn to the discussion of our outlook. I’ll start by saying that our view of the global economic conditions remains mostly unchanged from the last few quarters, but we’re monitoring the potential macroeconomic impacts from various trade and tariff disputes. There’s been some foreign exchange volatility, but our hedging program has succeeded in smoothing out the bigger swings. As we look at our outlook for Q4, we expect to see continued sequential increases in most metrics, including ARR, ARPS, Billings, Revenue, Spend, and Earnings. We are raising our outlook on all of those key metrics for the year. We expect our hiring ramp to continue as we finish the rebalancing of resources to the most strategic projects, and as such we expect our spend to increase slightly sequentially. However, the sequential uptick in total operating expense in the fourth quarter will be lower than previous years due to the adoption of ASC 340 that requires capitalization of commissions, which historically has been very heavy during Q4. Given our full year expenses are moving up modestly, our operating margin for the year will be higher by one percentage point versus our previous target. Also, our new margin forecast for the year represents nearly 17 points of improvement over last year, and we expect a sizable uptick in cash flow in Q4. Regarding subscriptions, I’ll reiterate that next quarter will be the last time we report on subs and our ARPS on a quarterly basis. After that, we will use events like our annual Investor Day to report on important metrics that will help you build your long-term models. For fiscal year 2019, we continue to expect subscription additions to end up at the low end of our guidance range, primarily related to the success we’re having with the adoption of industry collections and the consolidation we’re experiencing with the M2S program. Before we start the Q&A part of this call, I want to summarize by highlighting the great progress we have made on driving the sum of our revenue growth plus free cash flow margin, which is a key metric for driving shareholder value under the rule of 40 framework. We ended the quarter with the sum of both metrics at 32%, a level we have not seen for four years. And as Andrew said, we plan to nearly double this metric in the next few years.

Hi, guys. It’s Saket from Barclays. Thanks for taking my questions here. First, maybe for you Andrew on PlanGrid, nice additions to the construction portfolio. I guess, longer term as you think about the construction software market, how important is it going to be that Autodesk has both the underlying BIM data as well as the PlanGrid capabilities versus others in the space that maybe don’t have that underlying BIM data?

Yes, that’s an excellent question, Saket. So let me kind of give you a sense for where we are right now. Right now, a lot of the projects out there in the construction ecosystem are very document-centric and that’s where PlanGrid plays a very strong role. But there’s a growing percentage of projects that are very BIM-centric. And these projects start with BIM data and move BIM data throughout the entire process. Over time, you'll see us be able to capture both BIM-centric and document-centric projects and bring the two together. PlanGrid really understands the document-centric and sheet-centric workflow, and they really have the hearts and minds of the end users in that space. We really understand the BIM data. So if those two things come together over time, and over a five-year period or more, where more and more projects are BIM-based, it is obviously going to allow us to cover almost 100% of the project ecosystem.

Got it. That’s super helpful. Maybe staying on PlanGrid, would you Andrew, can you just talk a little bit about the pricing model and maybe how it compares to others in the industry? I know you talked about general contractors and subcontractors, and we’ve heard others in the industry that perhaps base pricing on seat versus the total value of a particular construction project. So can you talk a little bit about PlanGrid’s pricing model?

Yes, so PlanGrid, like us right now, is predominantly a named user model. Now as you probably know, we have experience in all the model types here. We have a named user model, we have a pay-per-use consumptive model, and we have a project-based model. And what we found over time is that the models that are tending to be the predominant play are going to be named user and consumptive or pay-per-use. The project-based models help in the short term, they allow you to kind of land an account and provide short-term growth, but long term, the customers basically push back on this whole percent of turnover model. It’s not an attractive model to customers. So we absolutely see the pendulum swinging towards named user and pay-for-use, and PlanGrid is well aligned with that.

Got it. Very helpful. Thanks for taking my questions.

Hi, guys, thanks so much for taking my question, and congrats on a great quarter. As you mentioned, this is probably the strongest quarter that I can think of with both net add growth as well as a pretty impressive ARPS increase. What do you think about sort of what’s driving that even in the context of higher cloud subs, typically lower ARPS? Can you walk us through sort of where we are and sort of the ARPS lifecycle? Obviously, you’ve given your guidance for next year that implies increased versus what you guided to this year, but kind of help us through what are the drivers that were there this year, which one of those you’ll continue into 2020, and then just have one follow-up to that?

Yes, Phil, this is Scott. I think on the subs, you touched on we had another good quarter of sub ads for core and cloud had a – we’re accelerating the sub ads with the cloud business, so really driven by BIM 360. 53,000 cloud sub ads for the quarter, so that’s on the subs front. On the ARPS front, we’re continuing to see the trend that we saw initially that we talked about in Investor Day back in March and that we saw in Q2. There’s some effect from the change in channel discounts for AutoCAD LT that rolled out at the beginning of the year. We’re seeing a slight adjustment to our multi-user product pricing at the beginning of this year, and that’s coming through as well. More importantly, we’re seeing a bigger renewal base, which, you know comes at a higher net price to us. You’re seeing an increase in direct sales at the e-store. It’s one of the stats I gave on the opening commentary was that e-store grew 65% this quarter, so that drives higher ARPS, and the move to collections continues to be strong. Collections are a notable percent of our total base both for new and for conversions on M2S and less discounting over time. So all those factors drove ARPS last quarter, and again this quarter, and almost all those will continue out not just into fiscal 2020 but out into fiscal 2023 as well.

Great. Awesome. And then a follow-up for Andrew on PlanGrid. And first off, congratulations on that deal, really reinforcing your leadership position defining construction lifecycle management as a market here. What do you think about PlanGrid and sort of the idea of construction lifecycle management? Where do you kind of put the dividing line between sort of where Autodesk is going to play versus, call it, traditional more financial applications, budgeting, etc. Is that where you kind of separate how deep Autodesk wants to go in construction? Or is it eventually going to be someone that says, hey look, we’re going to be a player in the entire lifecycle?

Yes, Phil, I think you are absolutely touching on something that’s important here. If you look at the way this evolved in the manufacturing space, what happened was, there was a rise of what were called product lifecycle management systems. They basically handled the entire data flow from the design phase all the way through to the delivery of the products on the manufacturing floor, but ERP systems continued to fill the void in terms of the whole financial planning and budgeting aspects and some of the financial aspects. That’s the way we see this unfolding in the future. We’re not going to go into the ERP space of construction. We’re going to stay on the whole lifecycle from design all the way through to site execution, and we think that’s well aligned with our vision of how construction is going to industrialize over the next 10 years. So don’t look for us to get into construction financials and budget management and those kinds of things in the future.

This basic idea is just sort of like PLM evolved from the design software players becoming the leaders in PLM, similar idea with you guys here, your design, and the construction lifecycle management, but financials being a separate area. Is that a fair?

Absolutely. I see it playing out exactly the same way. And there is really no reason right now not to see it playing out the exact same way.

Great guys. Thanks a lot.

Thank you. Andrew, let me start with you on this big dose of vitamin C that you’re buying with PlanGrid. Could you talk about two things? One, how do you foresee the integration into the portfolio? And then maybe talk about the technology roadmap here. And also what connection do you see, if any, of this acquisition to the manufacturing side of the portfolio? In other words, as we heard last week at AU, there’s a growing connection with manufacturing to ADC and construction? Does this have any bearing on that? And could this also lay the groundwork or does this imply a future construction collection? Then a follow-up.

All right. So let me start. There are actually three questions Jay. So I’ll answer all of them, okay? First off, let’s talk about the product integration strategy. Let’s pause and talk about what each product family is good at. PlanGrid has built an excellent SaaS mobile-native platform for document-centric workflows and sheet-centric workflows, project management layers. They capture issues, change orders, and things in these document-centric workflows. They have done an exceptional job, and you can tell by how far they’ve reached down into the construction ecosystem, and their products are beloved by the end users. So they’ve really nailed the notion of document-centric flow. On the BIM 360 side, we have always been very BIM-centric. We’ve focused on how to get BIM data deeper into the construction process. How to explode it so that it can be useful to more teams. I think what you’re going to see us doing with this portfolio integration, especially over the next year and a half or so, is we’re going to pull their document-centric view up into BIM 360, and they’re going to pull our model-centric view down into their application. So basically, you’re going to see as close the loop between the document flows that go on in PlanGrid and the BIM data flows that go on in BIM 360. Hardly each team will double down on what it’s best at. You’ll see the BIM 360 team continue to move further upstream in its efforts on preconstruction and the PlanGrid team continue to execute more deeply on the document-base closing and gaining insights from those flows. Now in terms of the manufacturing integration, one of the things you’re probably aware of is as manufacturing industrializes more and more, what we classically call building product manufacturers are going to show up more and more in the construction world. They’re going to be delivering products into the construction space. They are probably going to be one of the larger pre-fabricators out there in terms of what we think. These are companies right now that build things like adopting systems, air conditioning systems, curtain walls, prefabricated buildings, modular buildings, and they are going to get more and more important. As such, they will be a trade quote in the workflow, and they’ll likely be consuming some of these applications too as the owners propagate their construction flows into these applications. So you’ll absolutely see an overlap between what we classically call our product data management applications and these construction lifecycle applications. Now your last point on a construction collection, I wouldn’t look for anything like that soon. The collections have primarily been targeted at the desktop products and integrating cloud-based capabilities with a desktop product. We think we have the appropriate layer of overlap there. Right now, we’re just going to keep rolling these products out separately and satisfy the needs of individual products in the construction ecosystem one at a time.

Quick follow-up on M2S. Could you talk about, this one for Scott. Any material differences you’re seeing in adoption or conversion by deal for example within Europe. Are you seeing any notable differences there or Asia or here in terms of rates of adoption of M2S?

Yes, Jay, we are. Let me start by stating the conversion rate on M2S was unchanged this quarter. It’s still staying at about one-third maintenance agreements that came up for renewal that converted. So even though the number in absolute terms is smaller, just means that the number that came up for renewal is small, so no change in conversion rate. There is a difference for geos as you just pointed out. It’s less so at the country level, it’s more of what we typically see as new technologies roll out. North America seems to be the earliest adopters followed by Continental Europe and then some of the emerging markets in Europe, and then APAC comes in after Europe. So that’s exactly what we’re seeing with our Maintenance to Subscription. We’re furthest along in the U.S., we’re about where the U.S. was within the last two or three quarters in Europe at this point, and APAC is behind.

Thank you. I have a follow-up on collections. You mentioned that a significant percentage of your total base is involved. Are collections progressing faster than expected, and what do you believe is driving existing customers to show more interest in collections compared to previous suites? Also, could you provide an update on your eStore progress? Is it advancing more quickly than you initially anticipated? Thank you.

Yeah, Heather, I’ll start on the eStore. It’s progressing right along with what our expectations are. We gave this data where it grew 65% year-on-year during the third quarter. The eStore continues to drive 20% or so of all our products’ subscriptions. So the eStore is progressing nicely. I think there’s more ground to cover there, but the eStore is progressing nicely. On the collections, they have moved faster than we had initially planned. And I think it’s all upside. It’s definitely good news. We’ve spent an enormous amount of time ensuring that we put the right content in those collections that we simplified it. We went from seven suites, which each had good, better, best versions of 21 suites down to just three collections. So it’s easier to sell, easier to buy, and easier to pay and consume. But we also spent a lot of time getting the product mix inside those collections right. It’s moved faster both for new customers and certainly it’s moved fast on people converting from maintenance over to product subscription and stepping up at that point of collection. It’s been quite an upside.

And Heather, one of the things that’s very different about the collections from the suite day is the integration with multi-platform in the cloud is a pretty significant delta from what we had in the suite days. So for instance, the AutoCADs you get in the box with a collection have a mobile version, they have a web version and also they’re all integrated with a common data platform in the cloud so people can share their data. So it’s a very different offering than what we had during the suite days.

Great. Thank you so much.

Thanks, Heather.

Hey, thanks for taking my question. The first one I have is about PlanGrid. Can you talk a bit about the growth profile of the business and the way you expect maybe the contributions of sales to come into FY 2020? When you look at that, how does that contribute to your target for FY 2023? That’s my first question. Thanks.

Yes. I’ll start and then let Andrew chime in. They are running on a $60 million to $70 million revenue run rate right now and growing about 50% year-on-year. So that’s what underpins one of the comments that I gave in the opening script and we expect it to contribute around $100 million in ARR next year. There’s likely to be some small haircut, deferred revenue haircut as we work through all the purchase accounting, but that will drive a small amount of upside in ARR for fiscal 2020 and actually between that and the small amount of headwind on profitability, a small amount of financing cost will be a little bit of headwind on cash flows. We think we can contain that and still achieve for fiscal 2020 the $1.35 billion in free cash flow we put out there. Andrew, you want to talk about longer term?

Yes. So now, if we look out at the FY 2023 targets, Gal, remember one of the things we said very explicitly when we talked about this target was that the cloud and specifically construction was one of the things that was required to hit those targets. So what you’re seeing us do right now is executing on the strategy that allows us to hit those numbers we put out there for FY 2023. So organic and inorganic tactics are actually how we’re getting those numbers we’ve put out there and that’s how we’re going to succeed in construction.

Perfect. And just if I think about the customer overlap and the way you guys and they go to market today, first, maybe if you think about the U.S., that’s where they’re mainly based in, how much customer overlap is there? And in the past, you talked a bit about the stages of adoption in BIM. You start with the project and expand into division, maybe go company-wide, entity-wide, where is PlanGrid as compared to BIM 360 today? Thank you.

Yes. So here’s what’s really exciting about this. We do have quite a bit of customer overlap, not a lot. They go deeper down into the system than we do. But what we don’t have is project overlap, right? What happens in the construction space is technology is sold on a project-by-project basis. For instance, in accounts where we do overlap, BIM 360 is on a completely different project and PlanGrid is used on another project. You see, PlanGrid is built to go-to-market machine; it’s very good at selling on a project-by-project basis. We’ve had a lot of success with BIM 360 selling to the IT departments in the large and mid-sized GCs. So, there is a really great complement between their project-centric go-to-market approach and our IT or top of the market go-to-market approach and you can see it’s actually coming at some of our companies in different ways. The other growth synergy we’re obviously going to see is taking the PlanGrid technology international into EMEA and into APAC. So, yes, there is an overlap but the overlap is by account, not by projects. We do not share any projects.

Perfect. Thank you so much.

Yes, thanks. Hi guys. You mentioned in the prepared remarks talking about the outlook and your commentary on macro is that it hasn’t changed. But ahead of the G20 and a lot of concerns over trade discussions, what are you hearing specifically from customers in EMEA and APAC and what are your thoughts here going into next quarter from a macro perspective?

Yes, Sterling, we are not seeing any impact on macro at this point, it’s something that obviously I think everyone is looking very closely for. We’ve been watching since the beginning of the year, frankly, to see if there’s any effect in the UK or across northern Europe from Brexit. We’re not seeing that, we’re not seeing it in demand. We’re not seeing it in pipeline build. We’ve also been watching very carefully with the trading tariff situation, the way it’s escalated over the last couple of months, we’re not seeing any impact there. There is the anecdotal here and there, we’re not seeing any impact on demand and we’re not seeing any impact on pipeline build at this point. So, to this point the demand environment still remains robust and from what we can see it will continue that way through the end of the year.

Yes. I just came off of Autodesk University, and I spent a lot of time with construction and manufacturing customers and yes sure some of them are seeing increases in material costs, but they are all seeing increases in material costs. So really it’s not affecting their ability to execute on projects relative to their competition. So they’re still investing in technology from our side because they are all seeing the same kind of small impact in their material costs, but it’s not translating into any impact on our business because the people have to get their job done.

That makes sense. And then my follow-up on PlanGrid, as you look at that space given the number of competitors that are in it, can you help us by comparing and contrasting what you think PlanGrid’s particular strengths were versus the other competitors in that space?

Yes, it is indeed a highly competitive area. There is significant competition in this field. One of the key factors we focus on is that PlanGrid developed an excellent SaaS-native application, which aligns with our emphasis on the BIM 360 portfolio. They started with a technology stack that is highly scalable, SaaS-focused, and mobile-centric, which is crucial moving forward. It's vital to avoid needing to modify the foundational architecture to be more SaaS or mobile-friendly. Another important aspect is that PlanGrid addresses project requirements that we don't cover as effectively with BIM 360. They have a very strong document-centric workflow, while we excel in the BIM-centric workflow. Additionally, their proximity in San Francisco enables us to better leverage the local talent pool, which aligns well with our strategy for growth in the construction sector here. Lastly, there is significant alignment between our business models. We believe that the named user and pay-per-use models are the most effective, while project-based models face challenges. This alignment was crucial in guiding us toward this direction, as PlanGrid has the right application for the current market.

Thank you.

Hey guys, thanks. I’ll offer my congrats as well. Scott, can you help us understand how we should consider the impact of multi-year contracts on your fiscal 2020 free cash flow targets? Is the plan to return to more historical levels primarily driven by channel incentives to encourage that behavior?

Matt. It’s a great question. Remember this is one thing that I talked about as we were laying out the road to the $1.35 billion free cash flow for fiscal 2020 when I walked through that back at our Investor Day. And it really is about seeing multi-year sales kind of revert to its historic mean. We artificially depressed multi-year sales, we launched the Maintenance to Subscription program because we shot up all multi-year maintenance. We had to give three years of visibility to price increases that were going to happen there. So I’d say it’s more about returning to the norm that it has been, which if you recall, I said is about 20% of our sales. And that is focused on product subscription getting to that multi-year point. What that will mean is long-term deferred will get up to less than it has been historically but probably into that 15% to 20% range, below where it had been historically closer to 30% of our total deferred revenue, so it really is just about reverting that and that’s both a channel play and through our mid-market team.

That’s great. And then just maybe just a quick one. As we think forward to Q1, what’s the right way to think about sort of like a cost of living price increase across the subscription portfolio of products? Is that kind of the right way to think about on an annual basis, just kind of like a cost of living increase?

It is, Matt. That’s not a decision that we’ve made or rolled out yet, but what we’ve said is over the long term expect to see us have annual price increases that are in that low-single digit kind of cost of living range longer term. We haven’t talked through or made the decisions on what kind of a price increase to look like beginning of next year.

Now as you know, we have published long-term price expectations for our M2S customers. So anyone who has taken the M2S offering has a 10-year visibility to how the cost of their subscription is going to trend over time, which is something we felt was really important to do for some of our best customers.

Absolutely. Thanks again guys. Congrats.

Thank you.

Thanks so much and congrats as well on PlanGrid and on a great quarter. I wanted to ask about the strength in EBAs and also if you can comment about where we are in the shift to annual billings for EBAs and on penetrating within the enterprise?

Yes. Brad, thanks for that question. The EBA business continues to grow strongly. As you remember the stat we gave and we have updated this at our midyear point, I expect to update that penetration rate when we come to the next investor day last year and we’re about 45% penetrated through our base of EBA-eligible customers. Obviously we made a little more progress on that. I expect to update that penetration rate when we come to the next investor day next March. What I’d say is we’ve seen great benefit, as do our customers see great benefit as they convert over to EBAs; usage goes up significantly at that renewal point because of the increased usage of that first renewal point we see anywhere from 40% to 45% higher renewal at the first renewal point because the usage goes up so much during that period. So the EBA business continues to grow strongly. I think the statistic we gave earlier was that the enterprise business grew about 50% during the quarter we just closed and it continues to be a focus area for us.

Excellent. If I could just follow-up on PlanGrid, you said that you expect it will be dilutive to fiscal 2020 cash flow, but yet good to see you maintaining your fiscal 2020 target, but I guess it’s fair to assume it’s going to be accretive to fiscal 2023. Any way to quantify that?

Yes, so it doesn’t make sense for us to update those fiscal 2023 targets at this point. We haven’t even closed the transaction yet. So I don’t want to get into addressing fiscal 2023. It clearly is a part of the strategy we have laid out to get to our fiscal 2023 targets. In terms of fiscal 2020, to back up to that piece, they are bringing along a fairly robust revenue stream in addition, so it will be slightly dilutive to profitability in fiscal 2020 and slightly dilutive to free cash flows, but we think we can contain it within our fiscal 2020 target of $1.35 billion of free cash flow.

Yes, Brad, one of the frequent questions I get when I am now talking to the investment communities, they ask us also how are you going to get to those construction numbers in the fiscal 2023 target. Well, now you know it’s going to be a combination of organic and inorganic actions like what you just saw.

Excellent. Thank you.

Yes. Hi guys. Thanks for taking the question. Congrats on the quarter. Just firstly, on the BIM side and kind of more the concept of BIM, are you seeing any more government or agency mandates coming through that might act as sort of general catalysts for the BIM market and your attack on the market? And then on the manufacturing side, you mentioned the interesting Ford example and how this was at least driven in part by generative design. We’ve also got concepts like digital twin and IIoT getting a lot of attention on the manufacturing side. But do you maybe see these initiatives in manufacturing as a little bit further out than the construction opportunity? Just your thoughts there on kind of how quickly those opportunities are developing relatively speaking. Thanks.

Right. So, Alex. Remind me what your first question was because I got the BIM mandate, okay. Thank you. Yes. Because I got – I started taking those. All right. Let me talk about the BIM mandate. So we’re absolutely seeing more momentum around governments and owners mandating BIM as part of their building process and as part of their specification process. We expect this to continue as time goes on. You remember what happened with the UK mandates and how that drove some pretty intense adoption of Revit in the UK markets and surrounding markets. You’re going to see more and more of those. It’s just part of what’s going to happen. We are very interested in seeing BIM based permitting processes, getting the government entities as well. That’s going to be something that we’d like to be part of helping people understand and do. Now, regarding the manufacturing opportunity, what you said there about it being somewhat further out, I think what you’re seeing right now, especially with our execution is on the construction side you’ve got this perfect storm of technologies ready, the mobile platform as it is today, and the cloud is absolutely 100% suited to what the construction industry needs. The customers are ready. They know they have to digitize and the products are ready. That’s why you see this intense doubling down on the construction opportunity in the near-term right now. You look at manufacturing, tools like generative and some of these other tools, IoT, by the way, we just see IoT as an input to generative, that’s how you collect data, and you use it to put information in. It’s something we pioneered with the Hack Rod initiative a couple of years back. These initiatives are all very much in the exploratory stages of manufacturers, large and small. And what they’re doing is they’re sitting there going, 'Well, I know that these technologies, the cloud, high-performance computing in the cloud, connected workflows generative, all of these things are going to have a big impact on my business. I just don’t know how I am going to deploy them yet.' So, you’ll see those start to get much more traction over an 18 to 24-month horizon whereas construction is kind of a now opportunity.

Great. Thanks.

Hey, thanks. Maybe a longer-term question. You may or may not want to name names, but when we think about kind of how the growth, the unit growth will come as you kind of go through your transition, subscription in cloud, how should we think about the mix of you guys chipping away market share from your competition versus kind of acquiring because we’ve talked about this before, acquiring pirate and/or kind of getting people that are laggards to pay, become more sustainable but paying customers, is that 50-50, is it 60-40, or how do you think about that?

All right. Richard, I can’t give you a percentage, but here’s the philosophical answer I’ll give you. In the short-term what you’re going to see is piracy or what we call non-genuine users, piracy, non-genuine users and legacy users are going to be a more important driver, but in the long-term as you head out three to five years you’re absolutely going to see us chipping away at competitors in this space, especially in the manufacturing space. The growth in Fusion is prefacing what’s going on in terms of our ability to execute in that space. There’s an absolute change in the manufacturing market and that change favors the cognitive, and we’ve invested, we’ve been patient. We worked hard on that, and it’s going to pay off in terms of share shift long-term. So the way I have you think about this is, the one to three-year horizon you’re going to see a lot of these non-genuine users and legacy users coming in. When you look out two to three, to five-year horizon you’re going to see some share shift coming into the mix.

Yes. And what I’d add to that, Richard, is on the construction market, we stated a $10 billion opportunity over time, but it’s probably less than a million today. The last time we did our own survey, we thought it was around the $500 million market today. So I think a lot of its growth going ahead is not necessarily reclaiming non-paying users, laggards or share gains frankly in that space, and where we have to take it from someone else. I think in the construction market, that’s just an enormous amount of growth that’s going to happen in that marketplace; so ahead of us, we’re really well positioned. But it’s a big market and there are a lot of competitors in that space. I think there’s an upmarket there for all of us to grow.

Yes. I agree. That’s a good thought. Thank you so much.

Hi, guys. This is Stan Zlotsky sitting in for Keith. Just a quick clarification. When we think about the fiscal 2023 targets and the M&A, the inorganic, I guess, contributions to get there beyond PlanGrid, should we be expecting similar type of transactions in the future? And then a quick follow-up on the cloud part of the business in the quarter?

We have always been a company that pursues acquisitions. The past two years were unusual, but now we are returning to a phase where we will be making acquisitions again. Over the next five years, we will carefully choose between inorganic and organic growth as we enter new markets, starting with construction, and we will not overlook manufacturing either. You can expect to see us engaging in the right organic and inorganic activities. What was your second question?

I didn’t originally state it. The official question, so the 53,000 cloud subs that we just saw in the quarter was a nice uptick versus the trend that we saw in Q1 and Q2 and you specifically mentioned that it came from BIM 360. But maybe just digging into that one, what is it about BIM 360 that really drove such a strong result within the cloud, a portion of the product? Was it better renewal rates, maybe just help us to unpack that number a bit? Thank you.

There are two factors. First, you might remember that about a year ago, we had ceased promotions that were pushing lower-end BIM 360 products through our channel. We now have clear year-over-year comparisons from that time. As a result, the year-over-year comparisons are more indicative of our current business trajectory. The second important element to note is that six to nine months ago, we launched the new platform for BIM 360, which integrates our field and planning functionalities into a single platform. This platform is now beginning to gain traction with some of our largest customers, leading to an increase in the BIM 360 business.

Perfect. Thank you so much.

You’re very welcome.

Great. Thanks for fitting me in and congrats on a great quarter guys. You had really strong growth in EMEA and APAC, and that’s really impressive given the fact that these regions tend to lag in cloud and subscription adoption versus North America. I’m just wondering is the strong growth you’re seeing in those regions being driven more by customers getting more comfortable with these types of deployment models, or is it more macro-driven such that there’s maybe an uptick in construction or manufacturing demand? Thank you.

Yes, I think it’s a little bit of both. And it’s a little bit of a different story between APAC and EMEA. I think in EMEA we are seeing better penetration. We’re seeing better uptake, both of the new model types and of cloud across EMEA. I think in APAC what you see is more than the fast growth rate we’re seeing there is more common on the year earlier quarter where, as you recall, we’ve struggled for a couple of years in Japan, made several changes there, changes in our market structure, and changes in our own team, frankly to drive execution, and we’re really seeing Japan turnaround very nicely, and that’s fueling a lot of the growth that we see in APAC. So it’s a little bit of a different story between the two.

That’s great. And just a quick follow-up: any difference in the macro outlook in those regions versus North America?

No, not at this time.

Got it. Right. Thanks very much guys.

You’re very welcome.

Hi, thanks for taking the question. So first off, when you look at the construction opportunity, what if anything do you need to do to better address the building owner constituent who may not be as familiar with Autodesk as they are with say a traditional ERP vendor?

Yes, so we actually have a very quiet product that we have out there in the market already called BIM 360 Ops. And one of the big value propositions of BIM in general is that it leaves behind a 3D model that is a huge asset to the owner in terms of managing, maintaining and using their assets as time progresses. So we’ve been experimenting in that space. What you’re going to do is see us getting deeper penetration there from a couple of fronts frankly. Some of our lead customers are actually starting to become more owners because they see opportunity for them in managing building spaces. There are some of the customers that are using BIM 360 Ops now, BIM 360 Ops are in that category. So you’ll see us getting more awareness in that space simply because some of our customers are starting to participate more in that part of the market.

Okay, great. And another question, could you give us a sense for some of the factors that drove your renewal rates up and what levers you might have going forward?

Yes Ken, we continue to see maintenance efforts from our subscription products. Maintenance rates have remained stable despite the shift from maintenance to subscription. I mentioned that over 30% of those eligible transitioned from an individual product to a collection, indicating they likely have more maintenance subscriptions and fewer industry-specific collections subscriptions. Despite this and the price increase, our maintenance renewal rates are still holding up well. This is a positive surprise. We are not observing a rapid migration from maintenance to product subscriptions. Currently, the price difference between the two is relatively small, but it will increase next year. Product subscription adoption is ongoing, and as users integrate it into their workflows, it becomes essential, similar to how products functioned in a perpetual license environment. Each of these aspects is progressing, showing modest but consistent quarter-on-quarter growth.

Yes, thanks. This concludes the conference call. Thanks for joining us this afternoon. If you have any follow-up questions, please reach out to us. Thank you.