Autodesk Inc (ADSK) — Q3 2020 Earnings Call Transcript

Thanks, Operator, and good afternoon. Thank you for joining our conference call to discuss the results of our third quarter of fiscal 2020. 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. You can also find our earnings press release and a slide presentation on our Investor Relations website. We will also post a transcript of today's opening commentary on our website following this call. During the course of this conference call, we may make forward-looking statements about our outlook, future results, and strategies. These statements reflect our best judgment based on factors currently known to us. Actual events or results could differ materially. Please refer to our SEC filings for important risks and other factors that may cause our actual results to differ from those 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. During the call, 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. All non-GAAP numbers referenced in today's call are reconciled in the press release or slide presentation on our Investor Relations website. And now, I would like to turn the call over to Andrew.

Thanks, Abhey. Building on our strong performance in Q2, we delivered another quarter of solid execution in results, with revenue, billings, ARR, earnings, and free cash flow coming in ahead of expectations. For the first time, we delivered over $1 billion in quarterly billings outside of a fourth quarter, and our last twelve months' free cash flow came in at nearly $1 billion, breaking yet another company record. Broad-based strength across our entire product portfolio and all geographic regions drove these results. We have strong momentum in Construction, are gaining share in Manufacturing, and we continue to make strides in converting the non-paying user base. Before we dig into details from the quarter, I want to recognize the hard work put in by the entire Autodesk team, especially our colleagues in the Bay Area who ensured that our business did not experience any disruptions despite our San Rafael office and many employees’ homes being without power due to wildfires in the final days of the quarter. Our business continuity planning was flawless, and the entire team went the extra mile to ensure that we did not miss a beat under very difficult circumstances. Now, let me turn it over to Scott to give you more details on our third quarter results as well as details of our fiscal 2020 guidance. I’ll then return with insights on key drivers of our business and provide an update on the progress of our strategic initiatives before we open it up for Q&A.

Thanks, Andrew. As Andrew mentioned, revenue, billings, ARR, earnings, and free cash flow all performed ahead of expectations during the third quarter. Revenue growth of 28% was driven by strength across the board, with subscription revenue as the biggest driver. Acquisitions from the fourth quarter of last year contributed four percentage points of growth. The revenue upside versus our guidance was largely driven by deals with upfront revenue recognition, including those with the federal government or that include certain products like Vault and VRED. Some of these transactions were targeted for the fourth quarter and closed early. Overall, we’re very pleased with our strong execution in the quarter. Total ARR grew by 28%, which is impressive in light of a tough year-on-year compare. Our Cloud ARR grew 164% tied to strong performance in Construction. Excluding $113 million of ARR from acquisitions, growth in our organic cloud portfolio came in at 35%. BIM 360 Design was once again the biggest driver of our organic Cloud revenue growth, with strength across all regions. Indirect and direct revenue mix remained at 70% and 30% respectively. Revenue from our AutoCAD and AutoCAD LT products grew 29% in the third quarter. AEC revenue increased 36% and Manufacturing rose 15%. Geographically, we saw broad-based strength across all regions. Revenue grew 30% in Americas and APAC, while EMEA grew by 24%. Our maintenance to subscription program, or M2S, now in its third year, continued to yield great results. The M2S conversion rate increased to an all-time high of 40%. The uptick in the conversion rate was expected as our maintenance renewal prices increased by 20% in the second quarter, making it more cost-effective for customers to move to subscription. Of those that migrated, upgrade rates came in at 21% in line with expectations. Net revenue retention rate continued to be within the range of 110% to 120% during the third quarter, and we expect it to be within this range in Q4. Similar to Q1, some of the deeply discounted three-year subscriptions from a previous promotion came up for renewal. This group of customers renewed closer to list price, and we were pleased to see the total value from the entire cohort grow. Billings grew 55% to more than $1 billion. The growth was driven by our organic business, contributions from Construction, and the return of multi-year contracts closer to historical levels. We believe our customers’ willingness to make long-term commitments to our solutions underscores the business criticality of our products. And we are closely monitoring the rate of multi-year buying to ensure it doesn’t create a headwind to future cash flows. Remaining performance obligations, or RPO, which is the sum of billed and unbilled deferred revenues, rose 32% and 6% sequentially to almost $3 billion. Current RPO, which represents the future revenues under contract expected to be recognized over the next 12 months, was $2.1 billion, an increase of 23%. This is a solid leading indicator of the strength of our business. On the margin front, we realized significant operating leverage as we continue to execute in the growth phase of our journey. Non-GAAP gross margins were very strong at 92%, slightly up quarter over quarter and up two percentage points versus last year. Revenue growth, combined with our disciplined approach to expense management enabled us to expand our non-GAAP operating margin by 13 percentage points to 27%. We are on track to deliver further margin expansion in Q4 and approximately 40% non-GAAP operating margin in fiscal 2023. Moving to free cash flow, we generated $267 million in Q3. Over the last twelve months, we generated a record $972 million of free cash flow, demonstrating the power of our subscription model and strength of our products. Lastly, we continue to repurchase shares with our excess cash, which is consistent with our capital allocation strategy. During the third quarter, we repurchased 856,000 shares for $124 million at an average price of $144.49 per share. Year-to-date we have repurchased 1.7 million shares for $264 million at an average price of $156.16 per share. In addition, we paid down another $100 million on the term loan associated with the fourth quarter fiscal 2019 acquisitions and intend to repay the remaining $150 million by the end of fiscal 2020. Now I’ll turn the discussion to our outlook. Our view of global economic conditions and their impact on our business remains unchanged from last quarter. As you will soon hear from Andrew, customers continue to increase their spending on our products even in segments experiencing some near-term headwinds. Our full-year revenue outlook has been updated for the upside we experienced in the third quarter, partially offset by the early signing of some transactions initially targeted for the fourth quarter. At the midpoint of our updated guidance, we are calling for revenue and ARR growth to be approximately 27% and 25%, respectively. Additionally, currency is now expected to drive an incremental headwind of about $5 million to our full year revenue. We are adjusting our ARR outlook as some of the expected Q4 upfront subscription revenue was recognized in the third quarter. Additionally, fourth quarter ARR is being impacted modestly by the currency headwind. As a reminder, we calculate ARR by multiplying our reported quarterly subscription and maintenance revenues times four. Our billings forecast has been updated to reflect our strong performance and the momentum behind multi-year deals. We expect long-term deferred revenue to be in the mid-20% range of total deferred revenue at the end of the year. Strong billings and operational execution are driving the upside to our free cash flow outlook for fiscal 2020, which is now expected to be $1.30 billion to $1.34 billion. Looking at our guidance for the fourth quarter, we expect total revenue to be in the range of $880 million to $895 million, and we expect non-GAAP EPS of $0.86 to $0.91. The earnings slide deck on the investor relations section of our website has more details as well as modeling assumptions. Looking out to fiscal 2021, we expect continued strength, with revenue and free cash flow growing in the low 20% range. In line with our normal practice, we will provide a more detailed fiscal 2021 forecast on our next earnings call. In summary, I want to remind everyone that since our business model shift, we have moved to a much more resilient business model that generates a very steady stream of revenues, less exposed to macro swings than when we were selling perpetual licenses. We are committed to driving revenue growth while expanding operating margins. We delivered revenue growth plus free cash flow margin of 62% in the last twelve months and plan to end the year at around 67%. Overall, I'm proud of our performance and are confident of delivering on our near-term and long-term targets. Now, I’d like to turn it back to Andrew.

Thanks, Scott. As you heard, the resiliency of our business model combined with strong momentum in our products and great execution by the team helped deliver another outstanding quarter despite continued uncertainty in some parts of the world. In terms of the macro conditions, demand remained relatively in line with the second quarter. The business environment and our results improved slightly in the UK and central Europe, and our commercial business in China continues to perform well despite a slow down in state-owned enterprises. During the quarter, Robertson Group, one of the largest independently owned construction companies in the UK, significantly increased their adoption of our BIM 360 portfolio. The company deployed our software on over 60 projects over the last three years and estimates a 28% increase in productivity. This is an incredible return on investment. We are thrilled to be partnering with a company prioritizing such impressive continuous improvement. In another example, one of the largest automotive parts suppliers in central Europe nearly doubled their EBA commitment with us this quarter. With the move to electric vehicles, the customer knows innovation is needed to stay ahead of the competition. So they are investing in retooling their factory and migrating from 2D to 3D. Our customers understand the benefits of investing in growth opportunities under all kinds of economic conditions. These examples underscore the importance of our products regardless of the macro environment as well as our customers' commitment to investing in technology to stay ahead of competitors. Last week, we hosted 12,000 people at Autodesk University and customers walked away excited about our current products and our vision for their industries. In fact, 32% more customers attended the conference this year than in the previous year. Across the board, customers are looking to Autodesk to help them digitally transform their businesses and make them more competitive. Before I go into strategic updates from the quarter, let me also acknowledge that, for the fifth consecutive year, AU Las Vegas was a carbon neutral event. This sustainable effort is reinforced and expanded by Autodesk’s commitment to achieve company carbon neutrality in 2020. We’re also delivering and continuing to investigate ways to help customers realize their sustainability goals through automation and insights in our technology. In fact, over the next few years, we intend to ramp up our financial commitment to this work by investing approximately 1% of operating profits in the Autodesk Foundation. Now, let me give you an update on some of the key initiatives, specifically our continued traction within Construction, gains in Manufacturing, and successes in monetizing our non-paying user base. These are the initiatives that continue to be key drivers of our business. In Construction, the breadth and depth of our product portfolio continues to make our offerings more compelling for our customers. In the last two years, the number of participants from the Construction industry at Autodesk University increased over seven-fold to approximately 3,500. At AU this year, we announced Autodesk Construction Cloud, which combines our advanced technology with the industry’s largest network of builders and powerful predictive insights to drive more productivity, predictability, and profitability for companies across the construction lifecycle. Autodesk Construction Cloud is comprised of our best-of-breed construction solutions, Assemble, BuildingConnected, BIM 360, and PlanGrid, and connects these solutions with Autodesk’s unmatched design technology, such as AutoCAD, and our 3D modeling solutions Revit and Civil 3D. The announcement included more than 50 new product enhancements across the portfolio and deeper integrations, including powerful new artificial intelligence that helps construction teams identify and mitigate design risks before problems occur. Autodesk Construction Cloud is being well received by customers and supports our long-term plan. PlanGrid and BuildingConnected continued their momentum, delivering $113 million in ARR, with growth coming from new customers as well as adoption by existing Autodesk customers. During the quarter, one of Australia’s largest construction and infrastructure companies expanded its relationship with us by adding PlanGrid and BIM 360 to its existing product set. The transaction resulted in the largest new product agreement for PlanGrid globally and the largest regional enterprise deal to date. We are helping the company adopt cloud-based technologies to improve project delivery and safety. The depth and breadth of our solutions, that many other vendors in the space cannot deliver, is very appealing to our customers. For example, we enhanced our relationship with EBC, one of Canada’s leading construction companies focused on infrastructure, buildings, and natural resources, by adding BuildingConnected to their existing portfolio of Assemble and BIM 360 solutions. Our sales team demonstrated how we could help manage their systems more effectively and prepare them better for the future. We were able to meet their needs for the design and construction phases of the building lifecycle for both the commercial and infrastructure industry segments. We continue to focus our investments on infrastructure, which has performed well in prior downturns. This focus could offer us greater resiliency should the macro environment weaken. We recently announced availability of Collaboration for Civil 3D, which is now included with BIM 360 Design, and enables teams to collaborate on complex infrastructure projects. We also continue to gain market share in the infrastructure space. This quarter we significantly expanded our relationship with JR Group, made up of seven companies responsible for operating almost all of Japan’s inter-city and commuter rail services. As part of our strategic collaboration, all seven of the group’s companies will use our tools such as Revit, Civil 3D, and AutoCAD, over competitive offerings to develop a nationwide BIM rail standard. Moving to manufacturing, the business is performing extremely well as we continue to gain share from competitors with steady innovations in generative design and Fusion 360. We believe a large number of small and medium-sized businesses will look to upgrade their vendor stack over the next few years, which is a clear opportunity for us to grow market share. Similar to last quarter, we had a number of competitive displacements of SolidWorks, MasterCAM, and PTC Creo. For instance, a 3D display designer and manufacturer in North America replaced SolidWorks and MasterCAM with Fusion 360 because of its integrated design and CAM capabilities. In another instance, a manufacturer of plastic machined components in the UK displaced SolidWorks and another CAM vendor with Fusion 360 in their design and manufacturing workflow. The company was attracted to Fusion’s cloud-based collaboration capabilities in addition to the integrated functionality and price point. Our success in Manufacturing is not limited to small and medium-sized businesses. We are making inroads in larger organizations as well. During the third quarter, Daifuku chose Autodesk as the best design software partner to move from 2D to 3D solutions. Based in Japan, Daifuku is the world's leading material handling systems supplier serving a variety of industries, including the manufacturing, distribution, airport, and automotive sectors. With its new EBA, the company has standardized on Inventor as its 3D platform and is also considering Revit for future building initiatives. We continue to invest in our Manufacturing solutions; in fact, some of you might have seen the exciting news coming out of Autodesk University last week. We announced a partnership with ANSYS, and our customers will soon have an option to use ANSYS’ simulation solutions while running our industry-leading generative design workflows in Fusion 360. We also announced the introduction of a new end-to-end design-through-make workflow for electronics in Fusion 360, providing key capabilities such as integrated PCB design and thermal simulation. This is something our customers have been asking for as the market for smart products continues to grow. With Fusion 360, users can take those electronic ideas and physically produce them in the same product development environment, bypassing the current disconnects between design, simulation, and manufacturing that make data importing and translation necessary. Lastly, we are looking forward to meeting some of you at our Manufacturing event at the Autodesk Technology Center in Birmingham, UK, on Monday, December 2nd. At that time, you'll learn even more about our solutions and strategy in the space. Now, let’s close with an update of our progress with digital transformation and how it is allowing us to monetize the non-compliant user base. Our investments in our digital infrastructure have given us unprecedented access to non-compliant users’ product usage patterns. We continue to learn more about these users and are in the process of expanding our compliance programs in additional regions. During the quarter, we signed 19 license compliance deals over $500,000, including three over $1 million. The mix of deals over $500,000 was equally distributed by region, and one of the million dollar-plus transactions was with a commercial entity in China. Our approach to creating positive experiences for our customers as they become compliant is paying dividends. For instance, one large manufacturer in central Europe was paying for less than 10 manufacturing collections and had some old perpetual licenses. Our data indicated much higher usage. We worked closely with our partner and senior management at the company to identify and fix the non-compliant usage, resulting in almost a million-dollar contract. The experience provided during the process has opened the door for us to discuss competitive displacement to further expand their usage as they now view us as a true partner rather than a software vendor. I am excited about our year-to-date performance and looking forward to a strong close to the year. We continue to execute well in Construction and are making competitive inroads in Manufacturing with our innovative solutions. I am also proud of the strides we are making in converting the current non-paying users into subscribers. Twenty years ago, Autodesk was known as the AutoCAD Company; today, through the rapidly growing install base of 3D products like Revit, Inventor, Maya, and Fusion 360, we lead the market in bringing the power of 3D modeling and the cloud to all the industries we serve. We are highly confident in Autodesk’s ability to capitalize on not only our near-term market opportunity but also our long-term opportunity connected to the rise of AI-driven 3D modeling in the cloud. Because of this, we remain committed to delivering on our fiscal 2023 goals. With that, Operator, we'd now like to open the call up for questions.

Hey, Andrew, hey Scott; thanks for taking my questions here.

Hey, Saket.

Hey, Scott, to start with you on the ARR guide and the adjustment, it seems like there was some connection with the upfront deals that were signed in the quarter. Were these upfront deals originally expected to be recognized as subscription revenue but ended up being recorded as upfront? From an ARR perspective, I would think that signing it in Q3 as a subscription wouldn't significantly impact Q4 ARR. I would really like to understand how the upfront deals this quarter influenced the ARR outlook for the year.

It's a great question. You're not the only one trying to understand this. To clarify our definition of ARR, it consists of actual reported subscription and maintenance revenue for the quarter, which we then annualize by multiplying by four. What we're indicating is our projection for Q4 subscription and maintenance revenue multiplied by four. In Q3, we experienced a significant revenue increase, exceeding the midpoint guidance by $18 million. Some of this was due to upfront revenue from smaller products that didn't qualify for ratable treatment under ASC 606, meaning we had to recognize that revenue upfront even though they operate like subscriptions. In Q3, we closed several deals for these products sooner than expected, which moved the anticipated Q4 revenue into Q3. This situation is common but was more pronounced this quarter. While Q3 appears very strong, it creates a headwind for Q4 subscription and maintenance revenue, affecting the ARR calculation. It's important to note that revenue recognition doesn't always reflect the actual economics of the transaction. These products are sold on a subscription basis and function similarly for customers. Regarding subscription revenue growth, we anticipate it will continue to rise for the full year, as it's an accumulated metric across all four quarters. Even with the quarter-to-quarter revenue shifts, we expect annual subscription revenue to grow in the range of 29% to 30%. The ARR guidance change is due to the way ASC 606 impacts a small subset of products.

Yes. Sure. That makes sense. It sounds like those Vault deals were maybe term subscriptions which under 606 kind of require that upfront…?

It is more about the product than how we sell it. We sell it similarly to all our other products. Customers pay us upfront for 12 months. At the end of that period, they can choose to renew and continue using the product, or they don't renew and lose access. This process is very clear for the customer. The specifics of the offering don't qualify for ratable treatments under 606.

Got it. If I can ask a quick follow-up for you, Andrew, just to get off accounting. I mean really interesting development in the CAD market. Just more talk about SaaS adoption. Obviously, we saw Onshape got acquired. And clearly, you compete here with tools like Fusion 360. But curious how you think about SaaS adoption in CAD? And what if anything that deal can mean for Autodesk competitively?

First, I want to express my respect for John Herstig and Jim Heppelmann and their contributions over the years. They are significant players in this industry, but the way things are being portrayed is incorrect. Let's discuss what we can all agree on regarding the current market situation. It is clear that multi-tenant SaaS represents the future of our business and of software as a whole, a fact I've been sharing for seven years now. We have been implementing this strategy with Fusion 360, which is a multi-tenant SaaS offering. There are three key implications of SaaS that we agree on. First, the cloud will transform data flow within the manufacturing and product development sectors, enhancing multidisciplinary data flow across various supply chain components. Next, the ability to deploy compute power through the cloud is unprecedented, enabling advancements in generative design reliant on cloud computing. Lastly, we can apply machine learning to this data layer and computational power, leading to predictive analytics and insightful studies based on user interactions. Some of our generative design algorithms already integrate machine learning for CAM processes. However, we differ on implementation approaches. Fusion employs a strategy that combines a thin client accessed via a browser with a thick client installed on desktops, both reliant on cloud data. These clients function similarly and depend on the cloud infrastructure. The thick client addresses a broader workflow, encompassing design, CAM, and electronics, providing substantial capabilities for users aiming to tackle larger challenges. On the other hand, Onshape focused on a thin client by using CAD directly in the browser. Our early experiments indicated that this model is not viable. We’ve observed through this acquisition that our assessment was correct. After eight years of Onshape's efforts, they had 5,000 subscribers, while we gained more new Fusion subscribers in just the third quarter. We are talking about tens of thousands of paid Fusion subscribers compared to Onshape's limited base. The thin client-only approach has proven ineffective; a combination of thin and thick clients is essential. While the thick client may become lighter in the future, it remains crucial at present, along with a new pricing model and various options. We have a distinct perspective on execution and are confident we are ahead of the curve. The data we have now backs up our position. We all recognize the same trends but are implementing them in different ways, and the market reflects this through its financial choices.

Very helpful guys. Thank you.

Thanks, Saket.

Yes. Thanks. Hi guys. I'm wondering at this part of the transition you mentioned the increase in the maintenance pricing, but what are the additional levers that you have to drive increases in ARR growth on a dollar basis moving forward?

It's a lot of the same factors we've discussed. The renewal base continues to grow, and it delivers better pricing compared to new contracts. We're seeing growth in our construction segment, which generated $113 million in annual recurring revenue in the third quarter. Our core business also grows consistently, typically by 6% to 8% each year. The same factors will persist in driving this growth. We are currently in the third year of the M2S program. The initial cohort of customers we signed will see their prices locked in for three years, after which they will revert to the terminal price, resulting in about an 11% increase for them. We'll start to notice the effects of this for the M2S base next quarter. In addition to our annual price increases, we have some embedded price increases on the horizon over the next few years. Factors like piracy recapture, growth in the construction segment, and the renewal base will contribute to our long-term growth.

Got it. And then the one follow-up would be your kind of surpassed already what you expect in terms of long-term deferred as the mix. You talked about the percentage of multiyear deals. What I'm kind of curious about is what is the collection terms that you're offering to drive some of the collections of these multiyear deals?

It's standard to offer three years upfront with a 10% discount. Most companies that operate on an annual subscription model typically provide this type of 10% discount, which is slightly better than the cost of capital over three years, but not significantly more. There are no extended ARR terms or additional offerings associated with this. To address your question, Sterling, we are closely monitoring this situation. One reason I provided guidance for fiscal 2021, indicating revenue and free cash flow growth in the low 20% range, is to prevent any misconceptions that the shift towards more multi-year deals would negatively impact our ability to sustain free cash flow growth next year. This year, we experienced significant growth, increasing from $300 million in free cash flow in fiscal 2019 to between $1.3 billion and $1.34 billion this year. We anticipate further growth of about 20% next year in fiscal 2021. Therefore, we are keeping a close eye on the percentage of multi-year sales, and if we notice it starting to trend unsustainably high, potentially creating a headwind, we will adjust the offering.

Got it. Thank you.

Thanks, Sterling.

Hey, thanks guys for taking my question and congrats on a good quarter. Just question on the next year's outlook; it's building on your comments just now. When you think about the macro comments that you've made in terms of geographies, as well as the different verticals, how are you thinking about the puts and takes for 2021? And then just one quick follow-up to that?

Yes. Did you say for 2021?

Yes.

Yes. So first off, let me comment on kind of how we view things since we talked last quarter. There really hasn't been a fundamental change in our view of the market right now. In fact, a few things got a little bit better, right? The UK and Germany are still performing below our expectations, but they're growing and they showed a slight improvement in Q4 relative – I mean Q3. I can't see that far in the future yet. In Q3 relative to what we saw in Q2. The same goes for China. We're still not doing any business with the state-owned enterprises, but the business continued to grow just below our expectations. So we actually saw a little bit about firming up not a deterioration in the business, which is a good sign. Now as we look into next year, we're not seeing any fundamental change in the places where we've seen weakness. But more importantly, there's a trend going on that I want you to pay attention to which is a tailwind for us as we move into any situation that we see in the next year and how we feel about next year. People are moving more and more rapidly to the model-based solutions we're deploying and the cloud-based solutions we're deploying, because they see those as fundamental to their competitive shift. There are competitive dynamics. We're seeing a continued acceleration of BIM. That's going to continue into next year. BIM mandates, BIM project specs are going to continue. Inventor and Fusion 360 are growing as we head into next year. And the momentum on construction is solid. In addition to that one of the things that we always see as anti-cyclical as we head into any kind of environment is infrastructure, and over the last year we've been investing in infrastructure capabilities in our products and a lot of those are going to show up next year and they're going to show up both with regards to some of our construction portfolio and some of our design portfolio. So we feel pretty good heading into next year. And that's one of the reasons why in the opening commentary we affirmed this low single-digits growth in free cash flow for next year.

Low 20.

Yes. It's in the low 20s. Thank you for the correction. I meant to say that we're expecting a cash flow increase of low 20% year-over-year.

Great. That's great color. Thank you. And then just a follow-up on that for Scott obviously you're not guiding to operating income or operating expenses, but also just help me think about sort of the framework for next year, because obviously this is an investment year plus acquisitions, just high level, give us your thought process on the expense side. Then I will get back into queue.

Okay. Alright. Thanks, Phil on that. One of the things that we've said is we expected growth – spend growth and also COGS plus OpEx between 20 and 23 to be in this high single to low double-digit range. If you look at the growth we had this year spend growth and the guidance will be about 9%. But the overwhelming majority of that came via acquisition. So the organic business has been roughly flat now for about four years and there is some pent-up demand for increased sales capacity for continued investment in digitization. So, what I would model for fiscal 2021 is something towards the higher end of that low single to double-digit – sorry, high single to low double-digit range. So closer to the low double-digit range for fiscal 2021, but then averaging out in that high single to low double throughout fiscal 2023. Does that get what you're asking about that?

Yes. That's perfect. Thank you very much.

Thanks, Phil.

We're experiencing some digital dyslexia here.

Great. Thank you. I guess just two quick ones, but one just following up on what Phil was just talking about. If you look out to next year would you say that the environment that you're expecting to be stronger, weaker, or the same than what you had this year when you're when you're thinking about the puts and takes of everything you were just talking about? And then just was wondering how do you think about in the context of what you were just saying about expense growth. How do you think about managing operating margins if the macro environment did start to go against you? I am just trying to think about the trade-off between driving growth versus protecting margins, if you could just share with us your philosophy there? Thank you.

So we absolutely expect things to stay fairly consistent heading into next year. I like to highlight the counter-cyclical aspects of our business right now with regards to BIM mandates, with regards to the momentum around displacing SolidWorks and Mastercam and smaller accounts for fusion with regards to digitization and construction, with regards to infrastructure because these are important things to keep in mind. But our assumptions into next year are places where we saw our soft already continued to be soft relative to our expectations. And we're going to continue to see kind of the same thing heading into the rest of the markets. I'll let Scott comment on the investment model.

Yes. I would like to add to what Andrew mentioned before discussing spend management. We believe there is an accelerating opportunity that is not entirely linked to the overall macro spend environment, particularly in areas like construction and the progress we're making in piracy recapture. Heather, regarding management, we have effectively practiced good spend management for four consecutive years now, and I feel confident in our ability to maintain that. There is indeed pent-up demand for spending, but if we observe the business trending below our expectations, we will tighten our approach. We've built this capability over time, and it won't disappear overnight. You can expect us to remain diligent in our management. With the revenue growth we anticipate, not only will we see revenue increase next year, but we will also be able to grow spending and expand margins. We expect our operating margins to improve next year compared to this year, so I believe we are well-prepared for spend management moving forward.

Great. Thank you.

Thanks, Heather.

Thank you and good evening. Andrew, I was pretty intrigued by your several references to infrastructure which is a business that as you know once upon a time the company broke out, and it looks as though it's still about a quarter to a third of your total AEC business even after including ACS. And so I'm wondering if that's a business that you might revert to reporting out in some way and also just talk about what you think the growth potential is of infrastructure as a proportion of the total legacy revenue? And then as a follow-up longer-term question as well regarding your sales mix. That is to say your 50-50 mix expectations direct and indirect we'd have to wreck potentially be in the store. On that point could you talk about whether you're still confident in the stores becoming half of half or a quarter of the total. What are the limitations you think or risks to that trajectory of growth for the store? And if it doesn't come through how are you thinking about reverting spending or redirecting spending and sales development back towards named account direct and channel?

You asked several questions, so let me address the infrastructure aspects first. We will not provide detailed breakdowns or percentages, but I can say that we have made specific investments in rail and road. Some of these have already shown results this year, and more will come early next year, aimed at areas where we see potential for spending where we excel. Additionally, we have integrated Civil 3D into the BIM 360 design environment, allowing the same collaborative capabilities we have with Revit models to be used for Civil 3D models, which was highly requested by our customers. We're also working on a common data environment, which is crucial for infrastructure projects, especially in Europe, and there's strong interest in ISO-compliant common data environments in the U.S. too, so we expect that to be available soon. We've made strategic investments that we believe will help us take advantage of real opportunities in that sector. Moreover, InfraWorks is developing well, and its integration with Esri is proving to be exciting. Regarding our long-term goals, you are correct that we are currently at about a 30% mix between direct and indirect. This is not because store growth has slowed; in fact, it's our fastest-growing channel. The digital direct channel is still outperforming within the company. However, the strong growth from our other channels is also contributing to this mix. The store primarily operates as a long-term channel, although we do sell a full portfolio and capture many construction solutions directly, maintaining margin neutrality. I remain fully committed to the goal of a 50-50 split, with half of that coming from digital direct channels. This remains a long-term target, and there are many initiatives over the next few years that will positively influence this balance, including strategies around piracy recapture and construction. We are confident in our economics and our pricing realization, especially regarding products likely to go through digital direct channels. Therefore, we remain dedicated to achieving that mix in the long term.

Okay. Thank you.

You're welcome.

Thanks, Jay.

Hi guys. Thanks for taking my questions. The results of converting non-compliant users were impressive. I guess, first of all, was this the best quarter for converting these non-compliant users? And then on a go-forward basis should we expect more of the same as this cadence or are there additional steps that can, in fact, convert even more of these users?

So, Matt, I wanted to share a few key points. Firstly, we are definitely following the plan we had for this model from the beginning. Each year, we are taking steps that we believe will significantly enhance our ability to reach the non-compliant users. Additionally, each year we introduce new initiatives that we think will further boost our efforts in this area. This year, we implemented improved communication and tracking related to the user journey for non-compliant users, outlining how they progress from realizing their non-compliance to exploring their options. We have rolled out these initiatives across more countries throughout the year, and we are seeing the anticipated results primarily through two avenues: we are generating better leads for our internal license compliance teams, and we are successfully converting users digitally through enhanced communication strategies. This digital outreach is also helping to create these stronger leads. For context, last year we completed 21 deals exceeding $500,000 for the entire year; in just Q3, we achieved 19 such deals. This demonstrates that we are indeed gaining momentum. There are numerous additional strategies we’ll discuss later that should not only enhance our understanding of this area but will also make it harder for users to switch to pirated solutions. We will cover that in future discussions. Overall, this aligns with our plan. Each year we roll out new initiatives, and we continue to see the desired outcomes from this program. Based on our plans for next year, we are confident we will maintain this positive trajectory and achieve our expected results.

Super helpful, Andrew. And then maybe, Scott just a quick one for you. On the multiyear renewals, it's good to hear that, these are renewing closer to list price. Just a quick question, I wonder if you could comment on the churn you're seeing for these? Is it about what you expect? That piece would be helpful.

Yes. Matt it is. And to be clear what I was talking about it is if you remember in Q3 of fiscal 2018, as we started down this path of selling nothing but subscriptions, we offered a promotion for legacy customers turning in your perpetual license. And for a 50% discount you can get three years of the same product on product subscription. That was actually quite successful. If you remember we got over 40,000 of those. That three-year term came due during this last quarter. While we saw, we expected there to be a higher than normal churn rate and we didn't see that. But the aggregate value of that customer set actually grew. So I think the promotion was quite successful. I've got people to try to move over to the product subscription and the aggregate value after renewal, and they renewed closer to list, not in a 50% discount grow over that timeframe. So it was successful, but it did create a little bit of a headwind on our volume renewal basis.

On a unit basis.

On a unit basis, we previously discussed renewal as the net revenue retention rate, and for the quarter, that rate continued to stay within the 110% to 120% range overall. This was beneficial to that metric.

That's great. Well done, guys. Thanks.

Thanks, Matt.

Hey guys. It's Hamza Fodderwala in for Keith Weiss. Thank you for taking my question. I just wanted to go back to the fiscal 2020 ARR outlook. So it looks like it was lower by about a 0.5 at the midpoint; part of that was FX. And some of that was upfront revenue. Any sense that we could get for the magnitude of the greater upfront revenue because I mean to me it seems like the macro situation in Europe and North America was sequentially better. So I guess why wouldn't that carry forward into Q4 and reaffirmed the 25% to 27% growth outlook that you gave last quarter?

Yes, Tom, the amount of upfront revenue that shifted from Q4 back into Q3 was approximately $5 million, which contributed to the increase in Q3 revenue. However, keep in mind that our annual recurring revenue is calculated as subscription revenue times four. This alone resulted in a $20 million negative impact on ARR in the fourth quarter. It's important to note that this is upfront revenue, so there are no deferred earnings once we account for that. Due to the revenue recognition standard, we recognize all that revenue upfront, meaning there is no effect on Q4 from that revenue; it simply shifted back to Q3. Consequently, when looking at our full-year revenue guidance, we adjusted that upward since float revenue is an accumulated measure, encompassing Q2, Q3, and Q4. ARR, on the other hand, reflects a snapshot of subscription and maintenance revenue in Q4 multiplied by four. The midpoint of that ARR guidance adjustment was $30 million, with $20 million attributed to this effect, alongside about $5 million from foreign exchange and a similar amount due to product mix variations. Does this clarify the transition from Q4 to Q3 and its impact on ARR?

Yes. So I guess ex those changes, would ARR growth have been sort of reiterated if it wasn't for those one-time impacts?

Absolutely. Exactly. And the interesting thing about this Tom is the economics of our business by the way are completely divorced from the revenue ramp issue that we're talking about. The economics of the business are unchanged. It just between having the claim that as non-ratable upfront revenue and moving it back into Q3, and the way we define ARR as quarterly revenue. It's that combination that drove the change in Q4 ARR.

Yes. This is an interesting collision between the way we define ARR and the 606 accounting rules.

Yes. It's always exciting. So I guess just one quick follow-up. So the billings obviously came in much stronger than expected. To what extent is the shift to multiyear deals performing better than you expected coming into the year? And should we expect that long-term DR mix to continue trending higher because it's already kind of around the mid-20% range of total that we've seen historically? That's it for me.

Okay. Thanks for that too. Billings growth at 55% and over $1 billion of billings in Q3 super strong. And the biggest factor driving that is the growth of our renewal base. That has nothing to do with multi-years. It's just the overall growth of the renewal base. Beyond that the contribution from our construction business, construction continues to perform really well. With the noise around the ARR guide, we haven't really focused on the success of our construction business as much as we probably should have. It continues to perform really well, and it's driving upside to our billings as well. Multi-year is part of it and you're right, we're already at long-term deferred at about 25% of total deferred. If you go back historically, by the way, back into fiscal 2017 and 2018 before we began this transition, by long-term deferred ran as high as 30% of total deferred at one point. I don't think it gets back to that level. I think we keep it in this low to mid-20% range in terms of long-term as a percent of total. To the extent that it ran hot, and I said this earlier in other words we were selling more multi-year than I thought we could sustain longer-term, I'd like to make a change in the offering. What I don't want to do is drive volatility and free cash flow because of the offering we've got out there for multiyear. At this point, I don't think we've done that. But if it continued to accelerate that something we take a look at.

Thank you very much.

Sure.

Great. Thanks so much for fitting me. Andrew, you highlighted the launch of Autodesk Construction Cloud at AU this year. What excites you most about the offering? How is the customer feedback into the launch? And how do you see it driving growth next year?

Yes. What excites me a lot about this is the way we are unifying the entire stack around this common data environment, and it's a real great return on the investment we made in BIM 360 docs, because that entire environment is becoming the common data environment and PlanGrid integrating into it, BuildingConnected integrating into it. The existing BIM 360 stack has already integrated into it. And everybody is looking at this insight internally within the development saying wow this is an amazing opportunity for us to bring these things together so that they actually communicate. So the whole ability to have a conversation with the customers about here's the umbrella brand and how we're bringing all these things together so that they actually communicate is a really exciting part of this. And I think it's going to come rapidly and customers are going to be delighted. When we rolled it out, there were 50 new enhancements and there's a reason why those 50 new enhancements were in there; it's because we invested in acceleration of the integrations with respect to some of these things moving faster, not slowing down. I'm really excited about the pace of what's going on. I'm excited about what the team has been doing. And I'm frankly excited about how well we're winning in the market. People look at what we're doing; they look five years out at the landscape, and they say okay I'm going to place my bet with Autodesk. And I think that's a credit to the team. I guess, credit to the momentum they've kept in here. And I think the whole story around construction cloud and the way they rolled it out and told you it is really a great piece of work by the team. So I'm really proud of them.

Awesome. And Andrew, if I could just add another one for you. Your results seem to demonstrate continued success in executing on M&A. How should we think about your appetite for additional deals in both construction and manufacturing?

Well, we've always said that as we look out to the business we will continue to be acquisitive as we were in the past at the very least. We always look at the market for organic and inorganic opportunities. Right now, we feel like our construction portfolio has most of what it needs. We're partnering aggressively. We could potentially do tech tuck-ins around the construction solution. As we look into other parts of the market, you know we'll just have to wait and see. What you see as we've demonstrated an ability to capture significant inorganic targets, integrate them and turn them into results. And I think that's one of the things you should notice regardless of whatever we do in the future that we become a serious machine around focusing on what are the real inorganic opportunities, how do we bring them in, and then how do you make them successful. And that's our commitment to our customers and to the market.

Excellent. Thanks so much.

Thanks, Brad.

Hey guys. Thanks for taking my question. Building off the last question about the construction cloud announcement, sounds like it's more of a branding grouping all your portfolio products. But what was some of the initial customer feedback that you've heard?

Yes. The customer feedback has been really solid, and here's why, because if the customers don't react to the branding, they don't spend a lot of energy on that, but they do is they react to what we do. Alright. So we like the branding because it helps us communicate simply. We were not propagating multiple brands out there. It allows us to focus our go-to-market efforts and communicate more precisely at the company. The customers pay attention to what have you done for me. And what they were excited about at the Connect and Construct Event and all the discussions there is the feature velocity. Alright. They're seeing us delivering on the integrations that we said we were going to deliver, and there are watching us closely. Every quarter they're going to see, do we do we say we're going to do? Do we do we said we were going to do? So that's what the customers are excited about. They really loved the fact that we're integrating to a common data environment, and we're building an ISO standard accepted common data environment. That's something that everybody gets us sums up on. They're really excited about the increased scalability and performance on BIM 360 design, which was an area where they were kind of pushing on us a little bit. So those are the kind of things that customers are paying attention to. The branding makes it easier for us to tell the world what we are doing, so that you're going to see us basically amplify that, but the customers care about what we do, not what we say.

Great. Appreciate the color. Thank you.

Thanks, Jason.