Autodesk Inc (ADSK) — Q4 2019 Earnings Call Transcript

Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss the results of our fourth quarter and full year 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 at autodesk.com/investor. As noted in our press release, we have published our prepared remarks and a slide presentation on our website in advance of this call. The prepared remarks document is intended to serve in place of extended formal comments and we will not repeat them on this call. Going forward, we will replace the prepared remarks with the slide presentation; lastly, we will post a transcript of today’s opening commentary on our website following 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 2020, our long-term financial model guidance, our revenue and cash flow expectations, the factors we use to estimate our guidance, our maintenance to subscription transition, our expectations regarding product mix and pricing, ARPS, customer value, cost structure, our market opportunities and strategies, and trends for various products, geographies and industries. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time-to-time with the SEC, specifically our Form 10-K for fiscal year 2018, our Form 10-Q for the period ending October 31, 2018, 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 under ASC 606. And now, I would like to turn the call over to Andrew.

Thanks, Abhey. I am excited to share with you our impressive close to fiscal 2019 and the strong momentum we experienced closing the year. Consistent with the prior two quarters, we experienced strong personal performance across all geographic regions and in all product categories. In fiscal 2019, we achieved multiple milestones putting us in an excellent position to deliver on our fiscal 2020 targets and advance the company to the next chapter of growth. Here are some of the key accomplishments we achieved this year. Recurring revenue was 95% of total revenues for the full year and has reached a steady state. Our total revenues of nearly $2.6 billion were the highest ever in the company's history. Our total subscription plan subscribers are now greater than total maintenance subscribers were at the peak of the prior model. We returned to positive free cash flow and earnings; we significantly expanded our operating margin, and we strengthened our construction portfolio and now have an unrivaled breadth of construction solutions. Beyond that, I couldn't be prouder of the Autodesk team that delivered these results. They worked hard and they deserve all the credit, and it’s my honor to represent them. Now before I dig deeper into our successes in the quarter, let me take a step back and revisit the five key priorities I laid out for the company at the beginning of last year. Our top priority entering fiscal 2019 was the continued execution of the business model transition. We now have less than 20% of our revenues coming from maintenance agreements, and I'm happy to report that we were effectively finished with the model transition and look forward to executing on our growth strategy. We continue to invest in digitizing the company to provide our customers with a better experience as they grow through their own digital transformations, which is a recurring theme we hear from all of them. We have a focus on driving the building information modeling process in AEC, and during the year we highlighted several customer wins that are using BIM to manage their design and make processes in the AEC industry. We look forward to executing on that theme further in fiscal 2020 as BIM momentum remains strong. We are continuing to invest in automating the process of design to manufacturing, and we are seeing early signs of the convergence of construction and manufacturing processes. Looking at our Q4 performance, we built upon the broad-based strength of the last couple of quarters by achieving 34% growth in annualized recurring revenue or ARR, which remains the most important metric for us. We are becoming a more strategic partner for all of our customers, particularly for our larger customers, as reflected in the strong growth of our enterprise business. Within product categories, we continue to see greater adoption of industry collections in our BIM 360 solutions. In line with our expectations, our free cash flow has accelerated in a meaningful way as our billings topped $1 billion for the first time in the fourth quarter. Scott will walk you through more of the financials, but I want to spend a little bit more time talking about our progress in various areas. Expertise in our products remained in high demand and is growing rapidly. According to Indeed hiring lab, AutoCAD expertise is featured among the top 10 fastest growing skills in technology job searches. In addition, according to Upwork’s latest quarterly index, Revit expertise is featured among the top 15 hardest skills for freelancers in the U.S. job market. These are important indicators of the ongoing opportunity we have to grow our subscription base and to convert more and more of our users into subscribers. During the year, we strengthened the foundation of our construction business with both organic and inorganic investments. In addition to investing in our BIM 360 portfolio, we purchased Assemble Systems to bolster our preconstruction capabilities, PlanGrid for document-centric workloads and field execution, and BuildingConnected for bidding and risk management. This year, our focus is on integrating these businesses to deliver even greater value to our customers. The broadened product portfolio will help us expand our presence with general contractors, subcontractors, and building owners. The feedback from our customers regarding these acquisitions has been overwhelmingly positive, and they’re excited about the expansion of our portfolio. For instance, Clayco, a leading construction design firm based in Chicago, has been an Autodesk customer for many years. As they use BIM 360, Assemble, PlanGrid, and BuildingConnected, they have fully embraced the digitization of construction. They rely on the breadth of our portfolio to deliver value to their customers by automating their design and make activities throughout the preconstruction and construction processes. We look forward to strengthening our relationship with Clayco by investing in solutions that expand their workloads. Additionally, we see opportunities to expand our relationships with other leading companies in the space. Beyond that, BIM adoption remains one of the key drivers of investments in the infrastructure space. Mandates for using BIM drove another seven-figure enterprise agreement with a large European infrastructure provider during the quarter. We doubled our contract with the customer as they look to expand the adoption of BIM for building and managing their infrastructure projects. Our unique portfolio of design tools is allowing them to expand from products like AutoCAD and Inventor into Revit, the world’s leading BIM design tool, BIM 360 for site execution, and other advanced analysis tools. We look further to strengthening our partnership with them and many other organizations that are looking to rely on advanced technologies to drive efficiencies. On the manufacturing side, generative design and our investments in Fusion continue to attract global manufacturing leaders to partner with us. During the quarter, we signed an enterprise agreement with Hyundai Motor Group, who plans to leverage our technologies to create innovative designs. Hyundai is very interested in utilizing our capabilities in generative design, and we look forward to partnering with them to drive innovation in the automotive space. In summary, I am extremely pleased with our fiscal 2019 performance and I'm excited about the future. We are entering fiscal 2020 with strong momentum in every geographic region and across all product categories. This sets us up well to achieve our target of $1.35 billion of free cash flow this year. We also expect to see acceleration in our construction business this year and beyond. When combined with continued execution in the quarter, this will drive strong ARR growth into the future and help us reach our FY2023 goals. Now, I'll turn it over to Scott for more details on the financials.

Thanks, Andrew. Before digging into the numbers, I would echo Andrew’s excitement entering fiscal 2020 as we are experiencing great momentum in our business driven by strong execution. Record billings of just over $1 billion in the quarter, coupled with better than expected cash collections drove free cash flow of $294 million. For the year, we ended up generating free cash flow of $310 million; this kind of powerful leverage and the model drives our confidence in achieving our fiscal 2020 cash flow target. Before discussing more detailed financial metrics for the quarter, let me highlight the impact of the fourth quarter acquisitions on our results. The acquisitions contributed $27 million to ARR, $7 million to total revenue, and $43 million to billings for the quarter. Recall that we calculate billings by adding the change in deferred revenue from the balance sheet to our reported revenues. The acquisition contributed $36 million to deferred revenue on the balance sheet and $61 million to unbilled deferred for a combined contribution of $97 million to total deferred revenue. The acquisitions also increased our total expenses by $12 million, resulting in a negative impact of $5 million to our operating income or 85 basis points to our non-GAAP margin for the quarter. The acquisitions negatively impacted our non-GAAP earnings per share by $0.03. Lastly, they contributed 127,000 subscriptions that are included within our recorded cloud and total subscription numbers. Please refer to the earnings slide deck on our website for more information on the contribution from acquisitions and our adjusted results for the quarter. And I'll discuss the remaining financial metrics excluding acquisitions as our fourth quarter 2019 guidance did not include their contributions. Our Q4 ARR growth of 33% benefited from a 17% increase in total ARPS and a 13% increase in subscriptions. Our strong performance across all product lines and geographic regions drove the results for the quarter. There was approximately a 1 percentage point benefit to the ARR growth related to upfront revenue recognition of some products such as VRED and Vault that do not incorporate substantial cloud services and are recognized upfront. Before I go into more details about our subscriptions and ARPS, let me reiterate that this is the last time we will be disclosing subscriptions and ARPS on a quarterly basis. Going forward, we will use events like our annual Investor Day to report on these metrics that will help you build your long-term models. Looking at subscriptions, we grew total subscriptions by 13% to $4.2 million. In the quarter, our subscription plan subs grew by 291,000 organically, led by growth in product subscriptions. We added 51,000 cloud subs driven by the continued adoption of the BIM 360 solutions. For core subscriptions, our net additions of 74,000 were driven by strong adoption of our industry collections, which continue to grow as a percentage of net new product subscriptions sold. Industry collections now represent approximately 28% of our total subscription install base. Moving to the maintenance to subscription program or M2S. We continue to make solid progress. In Q4, our 110,000 customers migrated from maintenance to product subscriptions. We now converted nearly 800,000 maintenance customers to subscriptions since the inception of the program. Similar to the last few quarters, the conversion rate remains strong, with approximately one-third of the maintenance renewal opportunities migrating to product subscriptions. Of those that migrated, upgrade rates among eligible subscriptions remain within the historical range of 25% to 35%. We expect the number of M2S interest migrations to moderate in fiscal 2020 as we have less than 800,000 maintenance subscriptions remaining. Maintenance renewal rates experienced a modest decline versus a year ago, which is as expected. Product subscription renewal rates ticked up year-over-year. Overall, we continue to experience very high renewal rates for M2S-related subscriptions, and industry collections continue to command higher renewal rates. We expect the renewal rate for product subscriptions to keep increasing as the product mix shifts towards higher value products. Now, let's talk a little bit more about annualized revenue subscription ARPS. Total ARPS posted another quarter of strong growth as it continues to benefit from the same drivers we discussed at last year's Investor Day and that have manifested in the previous few quarters. These drivers include continued growth of the renewal base, which comes at a higher price to Autodesk, the increase in digital sales, also at a higher net price to Autodesk, the product mix shifts toward industry collections, the maintenance price increase for those customers who don't take advantage of the M2S program, and less discounting and promotional activity. Contributions from our direct business raised by 2 points sequentially to 30%. Our eStore, which is a bigger part of our digital sales, grew by more than 50% in fiscal 2019. For the past 6 quarters, our eStore has generated over 20% of the new product subscriptions. Q4 also marked the 9th consecutive quarter of more than 30% growth in our enterprise business, demonstrating greater adoption within the largest customers. In fact, our EBAs posted over 60% revenue growth in the quarter. Looking at the balance sheet, total deferred revenue grew 13%, which also includes the unbilled amount. Unbilled deferred revenue increased by $80 million sequentially to $530 million due to strong EBA performance. Our long-term deferred revenue posted sequential growth for the first time in the second quarter, driven by multi-year subscriptions, which we expect to normalize back toward historical norms during fiscal 2020 and beyond. While our stock repurchases slowed down in Q4 as we are conserving cash for the acquisitions, we used $293 million in fiscal year 2019 to repurchase 2.2 million shares at an average price of $130.15. We remain committed to managing dilution and reducing shares outstanding over time. 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 for the last few quarters and we continue to monitor the potential macroeconomic impact from Brexit and the various trade and tariff disputes. There have been some foreign exchange volatility, but our hedging program has succeeded in smoothing out the bigger swings. We are reiterating our fiscal 2020 free cash flow outlook of approximately $1.35 billion. Our across-the-board strength and momentum exiting fiscal 2019 will help us drive ARR growth in the range of 27% to 29%. On an organic basis, we expect our total non-GAAP expenses to grow by only 2%, while the acquisitions will drive another 7 points of growth. In line with our initial plans, we expect billings growth to accelerate to about 50% due to continued normalization of our multi-year billings, flow through from unbilled deferred, strengthened renewals, new subscription growth, and acquisitions. Recall that our fiscal 2019 billings were negatively impacted due to the adoption of the ASC 606 accounting standard, which, combined with the recent acquisitions, is offering a little over a 10 percentage point tailwind to our billings growth in fiscal 2020. Looking at the quarterization of free cash flow for fiscal 2020, given normal seasonality and strength of payment collections, and large deals signed in the fourth quarter, we expect about three-fourths of our free cash flow to be generated in the second half of the year. Lastly, the non-GAAP tax rate for fiscal 2020 is expected to be 18% or a point lower than fiscal 2019. Looking at our guidance for the first quarter, our strength in the fourth quarter presents a tough sequential comparison, given normal software seasonality. Other revenue in Q1 is expected to be about half as much as we experienced in Q4. Normalizing for the upfront revenue recognition in the fourth quarter, subscriptions, and contributions from recent acquisitions, our expected sequential change for the first quarter revenue growth is in line with our historical trends. The slide deck on our website has more details on modeling assumptions for the fiscal first quarter and full year 2020. Before we start the Q&A part of the call, let me summarize by highlighting that fiscal 2019 was a year of milestones for us. We exited the year with strong momentum in our free cash flow that drove our revenue growth plus free cash flow margin to 37% for the year. Going forward, we continue to focus on driving our free cash flows driven by ARR growth and margin expansion. I could not be prouder of the accomplishments of the Autodesk team, and I want to acknowledge our fantastic employees, customers, and partners around the world. We look forward to seeing most of you on our Analyst Day on March 28, where we'll discuss our plans in more detail.

Thanks guys for taking my question, and congrats on a great close of the year. Andrew, I just wanted to focus in on the ton of business. Obviously, Scott mentioned that your view of the economic conditions was still positive and unchanged for the last couple of quarters. If you drill down into the industries, AEC and manufacturing, what's the feedback that you're hearing from customers about their spending intentions, anything that you want to call out there? And then just one follow-up for Scott on that.

Yes. All right, Phil thanks. Look, like we said, we're seeing strength across all the geographies and all the industries; everyone's growing well, and everyone is signaling an intention to keep buying. So right now we don't see signs of a slowdown in anyone's purchasing activity. And we probably told you previously many times that we watch the AutoCAD and LT revenue streams fairly carefully to see if we see any signs; those grew 36% year-over-year. So they're still robust and strong. So right now all the industries we look at, Phil, they're all showing signs of continued growth. So nothing slowing down right now.

Yes, Phil, from a revenue standpoint, AEC growth was 35% for the quarter, that’s quite sequentially. So AEC has been strong for us all year and continues to be strong; manufacturing growth actually picked up from 20% in Q3 to 29% in the quarter we just closed. So, if anything, we're seeing it staying hard and get stronger.

Got you. And then Scott, follow-up on your comments on ARPS. Just wonder if you could help us frame this coming fiscal year, obviously you had a lot of positives in fiscal 2019, maintenance pricing, M2S collections. How are you thinking about just ARPS this coming year and maybe kind of walk us through the puts and takes this year compared to fiscal 2019?

Yes, so I think we'll continue to see the same trends that we’ve seen in ARPS. The long-term drivers of our ARPS growth are still in place. That’s the continued shift to industry collections, obviously driving our subscriptions. We gave you some stats in the opening commentary that the industry collections are now 28% of our total product subscription base which is huge. So that's driving ARPS subscriptions. I think that trend continues. We'll see higher net revenue from continuing growth in the renewal base, and renewals come to us at higher net prices. We’ll see the continued shift to direct sales, which also comes to us at a higher price. And then smaller pricing changes and less discounting. So some of the core trends that we saw driving it and we talked about it last Investor Day are manifesting in the previous few quarters. Those things will continue in fiscal 2020.

Hey guys, thanks for taking my questions here. Maybe just to shift gears to construction and start with you, Andrew. Realizing it's still early for PlanGrid, can you just talk about how you're thinking about pricing strategies here down the road? I know that we've talked about the benefits of the per user model. But if I think about other packages like EBAs, which have been so successful as of late, I'm curious how you're thinking about PlanGrid pricing strategy with what you’ve learned with some of the innovations with Autodesk pricing strategy down the road?

Yes, Saket, that's a really good question. I mean, I think you probably know that PlanGrid's current pricing strategy is basically packets that have unlimited project access and unlimited number of sheets that are being accessed. So they have a nail gun, dozer, and clean kind of purchase level. We have named user models. We also have a project-based model and then we have the pay-per-use EBA model. One of the things that's important to recognize about the construction ecosystem is projects involve multiple people participating in trying to create an outcome. Generally speaking, what people want to do is get as many people into the project using the software as possible, and they want to do it in a predictable and economical way. So you've seen lots of models being played within the space. One is the project-based model where people charge you as a percent of the project value; and every project they add, they keep charging you more. We found that model to be very problematic as you get deeper and deeper into your customers’ business because the customers basically start to push back on this idea of paying more and more based on the number of projects you're putting into the ecosystem. Named user bundles are attractive because you can essentially pay a discounted price for thousands of users at once. You'll probably see that showing up in the PlanGrid model moving forward. And you mentioned lastly, the notion of pay-per-use pricing. So imagine being able to sign up for a project and just pay for what you use as you go along through the project. You'll probably see us start to experiment with those things as we move out in the later years. At the very least, PlanGrid over a period of time, will start integrating with our EBA model, and our EBA customers will be able to utilize it and do pay-per-use models. So looking forward, start to imagine the PlanGrid models lining up with some of the models we already have and start seeing us looking at more kind of pay-per-use type models as we move into bigger project ecosystems.

Got it, that's really helpful. And maybe on that same topic for you, Scott. Can you just remind us how the billings work for PlanGrid and BuildingConnected? And similarly, how that could change over time just as those businesses become more integrated with Autodesk?

Yes, initially with PlanGrid and BuildingConnected, we are keeping the sales teams in place to sustain the momentum in both businesses. They will be included in our overall results, but they will still operate through their own sales teams. For the full year, I anticipate those billings to contribute to mid-single digits growth in our year-on-year billings. This represents a significant amount of billing growth for the year. The exception is that the PlanGrid sales will also be included in our named accounts, where our sales team sells to our largest customers. They will also be selling PlanGrid. Therefore, a portion of the sales will come from our own team, while the rest will continue through the established sales teams. Additionally, we are investing to expand those sales teams following the acquisition.

Great, thank you so much for taking the question. I had two just related to collections and then on the construction side. You guys have obviously seen a pretty steady mix shift over to collections skews and I'm just wondering if you could share a little bit with us, what's driving those conversions? And specifically, are you doing anything to help incentivize that with maybe special promotions around collections? And is there any change in terms of the mix? I think you used to say it would be expected to be 30% of the mix? Any update on that would be helpful. And then, I had a follow up on the construction side, which obviously now you've got a more robust offering. I'm just wondering what you're seeing if anything different from a competitive standpoint. Thank you.

All right, Heather. So I'll start make a comment on the collections thing and I'll let Scott weigh in as well, and then we can come back to the construction point. So real quick, what's happening with collections is kind of what we expected as customers are looking at their options. They're looking at upgrading from maintenance to subscription; they're looking at how they move their new suites into new types of mixes. They're just looking at the collections and saying, hey, what, this is a better way for me to consolidate my offering. My typical user uses this application and this application. I'm just going to true up on collections. We saw a similar phenomenon with suites. We're just seeing it accelerated at a somewhat larger scale with collections. And we expect that to continue as we move forward, which is a good thing. One, it simplifies our relationship with the customer. It increases the value of the account on an account-by-account basis. And it gets more of our technology on our users' desktops. So it’s all goodness from our perspective. Scott, do you want to add something?

The only thing, Heather, to the question of what's driving that? Why is it going faster than suites? So we've talked in the past about a lot of work that was done to simplify from suites that were several different suites and each had three different versions, a good, better, best version, down to three. I think that simplicity has made it not only easier to sell and more efficient for our sales team and our channel partners; it has made it easier to buy on the buy side. So I think that's the biggest driver behind it. There's always an occasional promo; there's nothing we've done explicit to try to drive this much faster. I would say at the point of conversion, as Andrew just talked about, when you convert from maintenance to product subscription, that is a very attractive price point. At that point to go from individual products over to collections. That's why we're seeing that upgrade hitting that next 25% to 30% of those eligible actually taking advantage of it and going into a collection from a single call.

Heather, you actually hit on something. Back in the suites days, we did lots of cross-selling promotions around suites. We've done very few if any around collections, which is a really big difference between that program and what we're doing now. And I think it talks to the maturity of the model and its connection with subscriptions. Now on your construction comments with regards to competitive dynamics, we’ve kind of surged into these acquisitions, and I'm really pleased with what we're seeing. We feel like we've consolidated a pretty broad and exceptional solution. It’s right on track with some of our long-term strategic objectives. So when we go and talk to customers right now, the conversation isn’t really about competitors; it’s about okay, what’s going to happen with the PlanGrid roadmap, what’s going to happen with the BIM 360 roadmap? How are you going to get the building information more entrenched into my processes? So our conversations with customers are excitement about what we’re doing, not about what our competitors are doing, which is a really great conversation to have. And I just want to remind you a couple of things so that you kind of get a good sense of what we’re doing here with regards to both PlanGrid and BuildingConnected. We acquired these companies, and we did not change their run rate with regard to R&D; we didn’t change the run rate at all. In fact, we’ve layered more R&D investment into PlanGrid and into BIM 360. So what we’re doing is we’re accelerating the roadmaps of both of those products with much more targeted effort. So PlanGrid is going to focus a lot more on site execution and the things associated with that execution. BIM 360 is going to focus a lot more on project management and project flow; these are two incredibly sharp teams that are just going to excel with what we’ve been able to do with the acceleration we’re layering in. That’s why you’re seeing things like construction IQ coming out right now, which we’re really excited about because it’s completely differentiated in the market. That’s using data that only we have to aggregate and layer machine learning on to provide predictive outcomes of what could possibly happen in a construction project moving forward. Nobody has that kind of stuff. So you’re seeing a surge ahead of the competition, not lose any momentum at all. This is a big area for us and we’re taking it really seriously and we’re investing more.

Thank you. Andrew, for the six quarters, as you've been highlighting your own internal digital infrastructure, can you characterize or quantify or if otherwise describe how that infrastructure, particularly in terms of transactional and license activation capabilities has evolved? I mean, it’s clear that your intuitive license volume is already well above where it was before the model transition; you’ve got some pretty ambitious plans for multiplying the size of the eStore. So in terms of what’s occurred and what still has to occur, could you talk about that infrastructure? And then a follow-up.

Yes, so Jay, this is actually something really exciting I can comment on regarding infrastructure. It doesn’t get a lot of news, but what’s happening now is that every new purchase of a single user license that happens out there in the market, whether it happens from a partner or directly to us, is going into a completely new backend that is serial number-free. So all of our customers that buy these single user licenses that used to manage large spreadsheets for serial numbers, that is all gone. So they are actually buying licenses that are completely identity-based, and that is a powerful lubricant to how our customers manage and use Autodesk software. Now at the same time, the existing licenses they have that are sitting on the old model serial number base are being progressively migrated over to the new system. So by the end of the year, every single user license is going to be sitting on this new system, and serial numbers will be gone from our single user business. Now if you know anything about how people manage our software, this is a non-value-added activity that drains time and resources away from managing a relationship with Autodesk; that is getting removed. And that is a direct result of the investment we’ve made in the digital infrastructure. You’re going to see similar moves as we look at how we do multi-user licensing in the future; that’s something I’ll save for another day. Now the other thing that we’re able to do, and you’re going to see it coming out more and more, is usage analysis; it’s not just for our EBAs, but we’re actually going to be projecting usage behavior back to our customers so they can see who’s using what and to what degree the software is getting utilized. Now that will allow them to better control their relationship with Autodesk; it will allow us to better understand what they’re using and what we can recommend to them next. So this year is a big year for lighting up infrastructure changes that we’ve been investing in over the last 18 months, and customers are going to see real benefits. Jay, these are not trivial changes in the way they manage their relationship with Autodesk. So we’re actually pretty excited about it.

Okay, thank you for that. The follow-up is, as you know, we track pretty closely your headcount, your open registrations, and where you’re investing in sales and R&D and so forth; you have quite a number of very interesting sounding senior management positions which you are looking to fill, and maybe you could talk about the thinking behind some of those. For instance, a Head of Building Design Strategy, a Chief Data Architect, Head of Brand Strategy, Brand Activation, a Head of Self-Service Transactions, and multiple things that sound pretty interesting, and maybe just put that in the context of where you're going this year and beyond.

Yes. So look, we are dead serious about having every aspect of Autodesk be completely digital; end-to-end, from the customer’s first touch to when they get the product, to when they use the product and when we provide layered automations on top of them. We manage and deal with mountains of data from our customers. So for instance, what you heard about the chief architect role there, that’s all about making sure that the infrastructure we’re building behind the scenes takes that data from cradle to grave, so it adds value to the customer in every single touchpoint. And does it in such a way that it’s highly trusted, with high integrity; the data is used in the service of the customer, not in the service of anyone else. So those roles, what you're seeing is basically how we're translating the maturity of our investment into new types of automation activity. And we're just looking at, hey, we need this talent set, we need this talent set, in order to layer on this automation. So we're hiring to our roadmap is what we're doing. And you're going to see more of that, and frankly, we're getting really interesting people coming on board that are interested in some of these positions. So very astute observation, and yes, you are correct that it pre-stages other types of automation and activities that are yet to come from us, which we believe are kind of game-changing in our industry.

Hey, thanks for taking my questions. The first one I just have for Scott, maybe on the cost side. The guidance for the next fiscal year is kind of a high-single digit growth in terms of the cost base. Is that something we should be thinking is more sustainable going forward considering the fact we've had a few years of kind of a flattish cost base, or is that something that's more of a one-off?

Yes, Gal, that's a great question. The guidance indicates a 9% total spend growth for the year, with about 2 points being organic. We're maintaining the cost discipline we've had. Additionally, as Andrew mentioned, there will be investments in those businesses, which contributes another 7 points of overall spend growth. So, that's a reasonable range to consider. Looking ahead to fiscal years 2021 through 2023, a rate in the high-single digits seems appropriate, depending on the opportunities available and what will drive the long-term top-line growth for the company.

That makes sense. Thank you so much. If I may shift the focus to manufacturing, construction has been receiving a lot of attention lately. Could you provide any insights on the adoption of Fusion 360? When you compare it to competitors, they seem to be experiencing healthy growth in that area. How is the business growth? Perhaps you could compare 2018 to previous years since the product has become more mature and has seen several iterations. What are your thoughts on it?

So, Gal, let me say a couple of things. Nobody's growing at 29% in the manufacturing segment right now. That kind of growth is certainly happening beyond us. The reason you're seeing that growth is due to the year-over-year comparisons that were in question for a while because we were retiring some manufacturing products. We were actually taking revenue out of the system as we retire and consolidate some products, mostly merging them into the Fusion stack and platform. Now, what you're seeing is those comparisons show what was underneath all of that, and there is strong growth in our manufacturing segments. Additionally, Fusion is really thriving. In terms of user growth, it is likely the fastest-growing platform in the industry right now, and we're pleased with its current status. The exploration of what we’ve integrated into the platform with generative design is being utilized in ways we didn't anticipate. Traditional hardline manufacturers are leveraging the generative capability within Fusion to explore design options that would typically have been 3D printed. They realize these options are better than what they had before, turning that exploration into actual use. They are using the Fusion capabilities to investigate design spaces they hadn't explored previously, while considering constraints in their manufacturing methods and creating solutions they can implement with their existing traditional methods. It's presenting really unique workflows. We've been clear that construction was our first priority, and we’ve established a strong construction portfolio, which we're satisfied with. We’re done with major acquisitions, but as you look ahead to the next 12 to 18 months, keep an eye on this space. You'll witness organic and inorganic developments in the manufacturing sector that will enhance the leadership position we already believe we have.

Excellent, thanks so much, and congrats on great results, guys. I've got one for Andrew and a follow-up for Scott. So firstly, something that came up in our conversations with partners this quarter was some confusion about the go-to-market strategy with PlanGrid. Can you just remind us of your strategy for integrating it into the broader construction portfolio, whether we should expect PlanGrid to continue being sold standalone or perhaps bundled with Build or ultimately integrating it with the BIM 360 platform longer term?

Yes, for the foreseeable future, PlanGrid will still be sold as a standalone product. We are introducing a program where partners who identify deals can earn a commission as a finder's fee for their involvement. However, PlanGrid will continue to sell directly. We are also exploring ways to develop offerings that combine features from BIM 360 and PlanGrid to help clarify which solution is optimal for customers, so stay tuned for that. For the most part, we are allowing this solution to operate independently. It's important to note that PlanGrid has enabled us to engage more deeply in areas of the construction ecosystem that previously received little attention from us or our partners. We are committed to supporting their efforts to renew existing deals and secure new ones. Additionally, we want our partners to inform us about any opportunities they uncover, ensuring they benefit financially from those efforts.

Great. And just for Scott, cloud subscriptions by my math grew about 35% organically. Can you maybe rank what are the different drivers there? And I think organic cloud ARPS was up only about 4% year-on-year; was that in line with your expectations? And can you remind us of the levers that drive confidence in ARPS growth? Thanks.

On the cloud side, the main drivers of organic cloud subscriptions are BIM 360, which is the largest contributor to that growth, followed by Fusion 360, and then several smaller products. Shotgun and AutoCAD 360 are included in that mix, but the majority of the new cloud subscriptions come from those two. The growth in average revenue per subscriber aligns with our expectations for the BIM 360 product line. We also recently adjusted the pricing for BIM 360 and Fusion 360, so you can expect to see that price increase reflected in the cloud ARPS moving forward. Overall, I feel optimistic about our position in the cloud segment, and you can observe the positive impact on cloud ARPS in the slide deck we released for the quarter.

Thanks, hi guys. I guess, I missed it, but I'm going to ask the question anyway. What is PlanGrid and the other acquisitions actually going to contribute in terms of this fiscal year’s guidance because I didn't see it anywhere?

We didn't spend much time discussing that. When we acquired PlanGrid, we anticipated it would generate approximately $100 million in annual recurring revenue this year, which aligns with the guidance we provided. The combined spending from both acquisitions contributed to a 7-point growth in spending year-on-year, which you can calculate. That's about the extent of our analysis. Additionally, as you perform your own calculations, keep in mind the impact of interest, particularly the interest on cash spent and the added interest expense from the $500 million short-term loan agreement we secured. Overall, this presents a slight headwind on earnings per share for fiscal 2020, but we are confident in our ability to manage it.

Excellent. And then just one quick follow up, Scott, just as we think about the cash flow guide, I think multi-year agreements were going to be a decent contributor to that. What's been your experience? Remind us when you put the multi-year back into place? What's your experience, and what does it need to do to hit that 1.35?

Yes, it is one of the contributors. There are several factors that drive cash flow growth year-on-year. We posted $310 million in free cash flow this year, but it's important to note that this included about $130 million in one-time cash outflows related to the restructuring we announced a year ago, as well as the exit tax and the move of our European hub from Munich to Dublin. The three candidates actually reflect that $130 million in one-time payments will not recur in fiscal 2020. The main growth is driven by two elements: net income, which you can deduce the year-on-year increase from the guidance we provided, grew strongly due to top-line growth. Additionally, billings growth will increase for various reasons we've discussed regarding ARPS; part of it is multi-year, which you're mentioning. We have reintroduced a 10% discount for upfront payments on three-year multi-year product subscriptions, which we hadn't previously offered, although we still had some multi-year sales without a discount. We reintroduced that in Q4. If you look at our balance sheet, you’ll see that our long-term deferred revenue actually grew for the first time in seven quarters, indicating strong uptake from customers buying into the three-year product subscription deal. We expect this to continue growing next year and return to the range it has historically occupied. In terms of what long-term deferred revenue will represent of our total, we anticipate it will return to the 20% to 21% range that we discussed at Investor Day last year.

Hi, thanks for fitting me in, congrats on a great quarter, gentlemen. I was speaking with developers in one of the new skyscrapers in New York. And they were telling me how adopting Revit recently they're expecting that to generate a 3x return on the multimillion-dollar contract they signed with you guys. That wasn't so much surprising so much as the fact that it sounded like a fairly recent decision. It made me wonder how penetrated do you think your customer base is in terms of Revit adoption for those customers that may potentially use it or could benefit from it?

I think, Zane, you're actually hitting on something that's important to discuss. People think that Revit is already like fully matured and penetrating the market; it's actually still very much the early kind of majority type market for Revit adoption. We are actually seeing massive growth in Revit usage, Revit adoption. That's why I highlighted the increasing visibility of Revit skills as one of the skills that’s important moving forward into the years. Revit has got a long way to go in terms of growth. And it really is the new engine of how architecture and building design is going to be done. And it’s not even begun its journey into the infrastructure space. So look for Revit to keep going and going and going, and watch how the skills referenced on Revit climbs up that list from where it is today well into the top 10. That's just to be expected, especially in Europe where Revit adoption is taking off from the very early stages; it was much more mature in the U.S.

That's helpful. And as far as the adoption, do you think that it will be driven more by the adoption of collections or do you see a lot of enterprise customers buying it standalone?

Our enterprise customers almost all buy it through EBAs. So they get access through the EBAs. It doesn't hurt that the collections have Revit insight so the users can immediately start moving projects to Revit. But frankly, the big driving force for Revit has a little to do with how we package our software. There are a couple of things that are driving it. One, the return; you heard from those customers in New York. They basically see a fairly significant return. Owners in particular see a significant return and are more and more starting to mandate BIM for particular projects. Governments are doing it; owners and developers are doing it; people are just starting to expect BIM to be part of the process because they're seeing the ROI. That is more of a secular driver in terms of where things are going, this kind of digitization of the whole design to construction process, than how we package our software and sell it.

Hi, this is actually Matt Swanson on from Matt, thanks for taking my question. Just one for me. In our survey work this quarter, we had a reseller bring up a large deal that came from previously pirated software. I know before, at one point you had mentioned 4 million pirates in mature markets. Could you just remind us what this opportunity is, just kind of how you go about identifying and pursuing it?

We currently have 18 million users of our products globally, with 4 to 5 million of them being subscribers. There's a significant difference between users and subscribers. In mature markets, we analyze how people are using the software, including those who may have some illegal copies. We engage in discussions with these individuals. Large deals often involve customers who have likely been using our software in ways that stretch legal boundaries. Over the long term, we expect this process to continue, but I want to emphasize that we should not anticipate a sudden surge in subscribers. If we tried to create that surge, it could lead to a backlash instead. You will observe a steady increase in our user base as we enhance our products to better identify valid license users and as more users realize the advantages of being part of the legitimate ecosystem over the illegal one. This growth will take time, so please don't expect sudden spikes; the types of deals mentioned are not common. As we approach fiscal 2021 and 2022, transitioning from our last perpetual release and shifting to named user licensing, we will increasingly see more individuals joining the paid ecosystem.

And Matt, we have our Investor Day at the end of March, actually a month from today, March 28 here in San Francisco. This is what obviously one of the topics that we’ll update everyone on and give you a sense not just for the numbers, but more importantly the things we're doing, the changes we're making in both process and in the product to go after chasing that opportunity.

Hi, this is Hamza Fodderwala for Keith Weiss. Thank you for taking my questions. I wanted to follow up on an earlier question asked about the integration between PlanGrid and the core BIM 360 product. What's the timeline for that? And is there any risk of customers perhaps being more cautious on purchasing BIM in advance of that integration since there have been a lot of changes with that product in recent years, mostly positive, but just wondering if you're seeing any of that?

Yes, so one of the areas we're paying attention to is moving very quickly and making it clear where the focus areas of those two products are. We've already kind of internally established that. PlanGrid is absolutely focused on site execution and all the things that make site execution just awesome, and they are incredibly talented at, as Tracy likes to say, beautiful, simple software that helps people be more productive, and we're doubling down on that for them. So all of the additional R&D investments we’ve put in there is all going to accelerate their site execution roadmap. Customers are going to start to see that very quickly and start to understand, okay, so the site execution stuff that I saw in BIM 360, I am going to see more of it in PlanGrid and I'm going to see these things kind of expand out. What we've done on the BIM 360 side is we've been very focused with that team of aligning them around project management and project management capabilities. And there have been gaps that our customers have been asking for, for quite a while around project management and project flow capabilities. And they're going to see an acceleration of those capabilities inside of BIM 360. So we move very, very quickly based on our own analysis, pre-acquisition and some of our post-acquisition moves to be very clear with the R&D organizations where they should run and how fast they should run in those areas. Customers will start to see that, and we're already starting to communicate some of this to our customers. I think they're starting to understand it as being not only the right thing to do but intuitively makes sense.

Got it, that's helpful. And a follow-up question perhaps for you, Scott. It looks like ARR growth is pretty strong, sustained in the low-30%, but the subscription adds were a bit below that of the original guidance, at least on an organic basis. Is that just the continued migration to collections, or is there any other factors behind that?

No, as we have mentioned previously, we are focusing much more on driving top-line growth and annual recurring revenue rather than on the individual components of that. I feel very positive about the ongoing strength in collections, not only during the transition from maintenance to product subscriptions, which remains robust, but also in new sales. Currently, industry collections represent 28% of our total product subscription install base. It has progressed more quickly than we anticipated to reach that level.

Hi, thanks for taking the question. I was wondering if you could give us a sense for the percentage of your existing customer base that you're targeting for construction-related sales in fiscal 2020. And then, what if any level of cross-selling success you're factoring into the fiscal 2020 guidance?

Well, anyone who works in the AEC space is a target for our construction portfolio. Our strategy is to connect the entire flow from the early design phase to site execution, ensuring that the building information model and the associated data move seamlessly throughout the process. Essentially, our entire AEC ecosystem is open to various parts of this construction staff, from BIM 360 design to PlanGrid and BuildingConnected on the bidding side. We perceive a broad market regarding our target audience. What was the second part of your question?

What you’re factoring into the fiscal 2020 guidance?

Yes, Ken, what we all talked about is we expect ARR to be in that $100 million range, and that is what's factored into the guidance for fiscal 2020. I think what I'd add though to the first part of your question about who are we targeting, one of the things that we're excited about when we got PlanGrid was not just the technology, which is beautiful, simple, easy to use, which is what's required in that site execution phase. They also have a strong base and a part of the ecosystem, the construction ecosystem that we didn't have a lot of touch points to, which were the subcontractors and the trades. So it’s not just selling to our existing customer set in construction, which we obviously will continue to do. We also got a nice beachhead with PlanGrid into a part of the construction ecosystem we didn't previously touch. And BuildingConnected, by the way, brings that same thing; if you look at what BuildingConnected does, it connects general contractors to trades into the subcontractors and the people below them. So it's actually a nice expansion of the people that we can target with our construction solutions.

Great. And if I can follow up quickly, could you give us a sense of how to think about the adoption rate of construction software in the event that we see an economic slowdown? Are you having the kind of high-level conversations that suggest that this is a top priority regardless of sort of the backdrop?

Yes, so excellent point, Ken. So look, what I'll do is I'll tell you about what happened in the last downturn, and I'll tell you about the sense of urgency that construction customers have around digitization. So in the last downturn, construction IT spending continued to increase even though that downturn hit construction incredibly hard. And the reason for that is very simple; the most digital vendor or the most digital contractor won because they were able to predict more accurately what their total costs were going to be able to do. They were able to get their bids in tighter; they were able to manage their costs better. So digitization wins. The whole ecosystem in construction understands this right now. It's an imperative across almost all of our customers at this point. They're all looking to figure out how they can digitize their workflows, how they can extract more efficiency, how they can get more accuracy, reduce project risk, manage the timelines, reduce safety risks, that continues to be a highly visible aspect of this. So we anticipate that even in a downturn construction IT spending is going to go up. And we're super excited about things like what we're doing with Construction IQ, where we're actually using some of the data that we collect from our customers to provide predictive outcomes, which is going to become more and more valuable. So digitization wins; all of our customers know that, and we anticipate that spending can continue even in a downturn.

Thanks, operator, and thanks everyone for joining us today. I want to remind you that we are hosting our Investor Day on March 28 in San Francisco, where we will discuss our business in detail. Please reach out to us if you would like to attend or have any questions from today's call. Thanks.