Autodesk Inc (ADSK) — Q2 2022 Earnings Call Transcript

Good afternoon. Thank you for joining our Conference Call to discuss the results of our Second Quarter of Fiscal Year 2022. On the line with me are Andrew Anagnost, our CEO, and Debbie Clifford, our Chief Financial Officer. Today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com/investment. You can find the earnings press release, slide presentation, and transcript of today's opening commentary on our investor relations website following this call. During the course of this call, we may make forward-looking statements about our outlook, future results, and related assumptions, acquisitions, products and product capabilities, and strategies. These statements reflect our best judgments based on our currently known factors; actual events or results could differ materially. Please refer to our SEC filings, including our most recent Form 10-K for important risk factors and other factors, including developments in the COVID-19 pandemic and the resulting impact on our business and operations 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 viewed 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 numerical 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 our press release or EXL financials and other supplemental materials available on our Investor Relations website. And now, I will turn the call over to Andrew.

Thank you, Simon, and welcome everyone to the call. I hope you and your family remain safe and healthy. As we anticipated when we set out our guidance at the beginning of the year, unwinding uncertainty resulted in increased business confidence, investment, and economic growth during our second quarter. This is reflected in strong product usage, which returned to pre-COVID levels across the globe, increasing bid activity on Building Connected, which reached all-time highs, and greater channel partner confidence. When combined with strong execution, a resilient subscription business model, and the continued secular shift to the cloud, our growth accelerated again in Q2 and generated further momentum. RPO and billings grew 24% and 29% respectively, driven by strong new product subscription growth, renewal rates, and revenue retention. I am proud of what the team has accomplished so far this year, and again, I thank all of our employees, their families, our partners, and customers for their continued dedication, patience, and commitment. I will now turn the call over to Debbie to take you through the details of our quarterly financial performance and guidance for the year. I'll then come back to provide an update on our strategic growth initiatives.

Thanks, Andrew. As Andrew mentioned, second-quarter results were strong. Several factors contributed to that strength, including robust growth in new product subscriptions, accelerating digital sales, and improving subscription renewal rates. In addition, foreign exchange rates provided a modest tailwind for the quarter. Total revenue growth in the quarter accelerated to 16%, 14% in constant currency, with subscription revenue growing by 21%. Looking at revenue by product, AutoCAD and AutoCAD LT revenue grew 12%, AEC revenue grew 21%, and manufacturing revenue grew 12%. Excluding the impact of moving our bulk products to ratable revenue recognition, manufacturing revenue grew in the mid-teens percent, M&E revenue grew 10%. Across the globe, revenue grew 14% in the Americas, 16% in EMEA, and 21% in APAC. Direct revenue increased 31% and represented 34% of our total revenue, up from 30% last year due to strength from both enterprise and e-commerce. About three-quarters of new customers Autodesk is now generated through our digital channels, reflecting our efforts to enable a simplified buying experience. Our products' subscription renewal rates remain strong, and our net revenue retention rates remained within the 100% to 110% range. Billings accelerated 29% to 1 billion, reflecting strong underlying demand and an easier comparison versus last year. Total deferred revenue grew 15% to 3.3 billion. The total RPO of 4.14 billion and current RPO of 2.85 billion both grew 24%. Current RPO growth was driven by strong new product sales during the quarter and the ongoing benefits from the record number of EVAs signed in the second half of last year. Excluding the contribution from Innovyze, current RPO grew approximately 23%. Non-GAAP gross margin remained broadly level at 92%, while operating margin increased more than two percentage points to 31%, reflecting strong revenue growth and ongoing cost discipline. We delivered a healthy free cash flow of 186 million during the quarter, primarily driven by strong billings growth. Consistent with our capital allocation strategy, we continued to repurchase shares with excess cash to offset dilution from our equity plans. During the second quarter, we purchased 164,000 shares for 46 million at an average price of approximately $283 per share. Year-to-date, we have repurchased 679,000 shares at an average price of approximately $278 per share for a total spend of $189 million. Now, I will turn to guidance. Consistent with the previous quarter, we expect that an improving economic environment during the year will result in strong growth in new business over the course of fiscal '22. We expect product subscription volume and renewal rates to continue to be healthy, and our net revenue retention rate to remain between 100% and 110%. With our strong start to the year, we are raising the low end of our full-year revenue guidance to a range of 4.345 to 4.385 billion, with the midpoint growth rate of 15% year-over-year. We're also raising our non-GAAP operating margin outlook to approximately 31%, an almost 2-point improvement from last year. Our strong start to the year means we're also shifting more of our EVA customers from multi-year paid up-front to annual billings, which is good for them and good for Autodesk. Our EVA customers retain price certainty with a multi-year contract term, but annual billings give them a more predictable annual cash outlay. For Autodesk, we generate a more predictable cash flow and remove the discounts to generate upfront cash collections. While we had already assumed this change in fiscal '23, it has a modest impact on fiscal '22 billings and free cash flow. However, we expect it to drive more predictable free cash flow growth and better price realization over time, which will make Autodesk a more valuable company. As we look ahead, we're anticipating revenue growth to accelerate in Q3. Strong upfront revenues in Q4 last year, and with Vault now ratable, a smaller pool of non-ratable products create a tougher comparison in Q4 this year, which will reduce revenue growth a bit when compared to the third quarter. Also, our EVA strength in the second half of last year, including two of our largest-ever deals in Q3, will impact RPO growth comparisons in the second half of our fiscal '22. The slide deck on our website has more details on modeling assumptions for the third fiscal quarter and full-year fiscal '22. As I shared last quarter, my initial focus after rejoining Autodesk was digging into our fiscal '22 budget and fiscal '23 financial goals. The strength we've seen in fiscal '22 combined with the significant cohort of multi-year product subscription contracts that we expect will renew in fiscal '23 set us up nicely to achieve our fiscal '23 revenue growth potentials and free cash flow goal. This past quarter, I turned my attention to our long-range financial plan with a particular focus on fiscal '24 and beyond. You'll hear more at our Investor Day next week, but to set the stage today, our long-term strategic growth drivers and our flexible subscription business model give us the confidence we can achieve our goal of sustainable double-digit revenue and free cash flow growth beyond fiscal '24. Now, once we've achieved our fiscal '23 goals, we'll give you more details on our financial ambitions for fiscal '24 and beyond. But on the whole, we believe we have many exciting opportunities to drive growth by further expanding our addressable market into areas like construction and infrastructure, as well as by deepening the monetization of our user base. And we look forward to sharing more specifics with you at our Investor Day next week. Andrew, back to you.

Thank you, Debbie. Now, let me turn to our strategic growth initiatives. Sustained and purposeful innovation to enable digital transformation in the industries we serve is changing our relationships with our customers, from software vendor to a strategic partner. And that is enabling us to create more value through end-to-end cloud-based solutions that connect data and workflows and business model evolution. By helping our customers grow, we will grow too. In AEC, digitalization trends are accelerating the need to connect all phases of design and construction with end-to-end cloud-based solutions. A great example this quarter was with an Asia-Pacific semiconductor manufacturer which is rapidly expanding its manufacturing capacity around the world and looking for help to drive more efficient collaboration across project stakeholders, as well as shorter design and delivery cycles. It invested in AEC collections to accomplish this goal and is now leveraging the power of BIM and our digital AEC workflows to achieve its expansion plan. This is a prime example of how Autodesk is positioned to help our customers as industries converge. In construction, we believe the Autodesk construction cloud is the best end-to-end offering across all phases of the construction lifecycle. Starting with our industry-leading pre-construction offerings, we help our customers seamlessly convert data into a construction plan, allowing our customers to condition and coordinate models early to aid clash detection, easily quantify the materials required for future construction, and leverage our Building Connected community to power the bidding process. As we turn to the field, Autodesk Build provides a single integrated solution for project management, field collaboration, quality, safety, and cost control, which is easier to deploy, adapt, and use. We just launched it in February, but we've already seen Autodesk Build in use on more than 11,000 customer projects around the world by connecting project information and the team in one Common Data Environment and enables efficient collaboration while providing predictive analytics and insights that increase quality and safety while decreasing risks. As I mentioned earlier, we've transitioned to being a strategic partner to our customers, and in construction that means evolving our business model. We provide customers with more choice in how they buy. We offer both user and account-based pricing, which gives our customers the flexibility to decide how they want to engage with us on their digital journey. With our account-based pricing model, we're seeing significant benefits, driving as many users as possible to our construction platform. Once installs have been deployed on a project, we've made it frictionless for anyone involved in the project to get access to our platform. This pattern is not unlike the evolution of Fusion 360 over the last few years. The more users we see on our platform, the more we learn, the better we make our products, and the more value we add to our customers. This quarter, Metric construction, a top ENR 400 general contractor in the U.S., selected Autodesk Build for project management over competitive offerings. Autodesk Build's momentum is growing internationally as well. Stamm House is a leading retail shop construction and renovation company in the Netherlands, which had already used AEC collections to optimize client retail space, reduce design and construction errors by 15%, and improve its ROI by 10%. This quarter, it invested in Autodesk Build to further increase efficiency, reduce waste, and add value for its clients by converging workflows from conceptual design to engineering and fabrication while seamlessly collaborating with its clients. Our relationship with Stamm House demonstrates the value that digital construction processes can bring to customers around the world. With our significant international experience and resources, we're well-positioned to capitalize on this large growth opportunity. And we continue to invest to connect and converge adjacent industries to create value and help our customers achieve greater efficiency. During the quarter, we launched a beta version of Info 360 assets, a cloud-based tool for the water industry focused on condition and performance monitoring and risk management processes. We also launched the Tandem digital twin program focused on harnessing the data from the design and construction process to create a repeatable and dynamic process with digital handover being the natural output of the project lifecycle. Turning to manufacturing, we continue to see strong momentum with our manufacturing portfolio this quarter, and we also saw the inclusion of Upchain in its first enterprise business agreement or EVA which was one of our larger enterprise accounts. The convergence of design and manufacturing is accelerating, and we are seeing larger companies expand on our platform. For example, after using Fusion 360 and Moldflow to develop accurate digital manufacturing trends for injection molded parts, one of the largest American multinational medical devices and pharmaceutical companies renewed and expanded its EVA with us this quarter. They were able to significantly reduce the time and rework costs because they could anticipate, predict, and correct manufacturing issues before moving into production. We continue to see subscription growth for Fusion 360, with paying subscriptions now at 165,000. The Fusion 360 extensions are helping to increase our average revenue per subscriber and capture more potential opportunities. During the quarter, a U.S.-based global leader in the design, engineering, and manufacturing of woven wire mesh products transitioned to Fusion 360 as their main design tool and invested in our manage extension. The combination of Fusion 360 and manage extensions has largely automated their design and change workflows, bringing a new level of organization and efficiency from product design all the way through delivery. Our presence in education continues to expand to address the critical shortage in skilled labor. For example, a growing number of large German companies are replacing competitive solutions and using our training there to prepare them for the future of work. In the second quarter, Energie Baden-Württemberg AG, EnBW, one of the biggest utility companies in Germany with 25,000 employees, adopted Fusion 360 to train its 600 apprentices. EnBW and its apprentices will benefit from the Fusion 360 cloud collaboration platform serving all their CAD, CAM, and CAE needs while they are either on-site or remote. Education remains an important market for us. We continue to broaden our reach with more than 43 million Tinkercad and Fusion 360 education users. We continue to make progress, transitioning all of our users to named users, giving customers more visibility into their usage data, and allowing us to better serve our paying customers while also making it harder for non-compliant users to access our software. The Level Group is a full-cycle developer specializing in business-class complexes. During the quarter, it increased investment with Autodesk by consolidating all of its single and multi-user subscriptions and permanent licenses to collect trends with our premium plan and Autodesk Docs to enable more efficient collaboration and license management. With the help of 24/7 technical support and a single sign-on capability, Level Group expects to reduce design costs in the future. As our existing paying customers navigate the complexity of digital transitions, we can help them manage that complexity, improve efficiency and sustainability, and remain in license compliance. For example, one of the leading construction civil, industrial, and infrastructure service contractors in Vietnam invested in AEC collection and audited bills to balance project safety, efficiency, and quality while also reducing environmental impact and waste. Our license compliance team helped them identify licensing gaps and ensure the installation of compliant software. We estimate that there are about 2 million non-compliant users within our paying customer base. During the quarter, we closed 11 deals over $500,000 with our license compliance initiatives, 6 of which were over a million dollars. At the end of September, we will launch a new pay-as-you-go consumption model called Flex. It matches the customer's cost with their usage. Flex is an important new way to purchase from us as we evolve our business models to offer more choice and flexibility. It serves the long tail of customers who want an option for occasional users that do not use subscriptions every day. It also lowers the barrier to entry for existing and new users to explore new products with minimal risk and upfront costs. And back to where I started. Sustained and purposeful innovation to digitally transform the industries we serve is also transforming our relationship with our customers. From software vendor to a strategic partner, and enabling us to create more value for them through end-to-end cloud-based solutions, business model evolution, and connected data and workflows. By helping our customers grow, we will grow too. The pandemic has accelerated these trends, and climate change is increasing the urgency. We will continue to invest to rise to the challenges ahead and seize the opportunities they present. In the meantime, we remain on track to achieve our fiscal '23 goals. Please join us at our virtual Investor Day next week, where we will have more time to share our strategic initiatives with you.

Okay, great. Hey guys, thanks for taking my questions here. Maybe just to start with you, Debbie, I'd love to dig a little deeper into the changes to billings and free cash flow this year. And maybe specifically, I was wondering if you could just help frame the size and impact of that change to EVA billings. And maybe as part of that, just talk about what sort of gives you the confidence in what's maybe just a little bit of a steeper ramp in cash flow growth now, implied for next year. Does that make sense?

It does. Thanks, Saket. Thanks for the questions. So, we're seeing overall strength in the business and we continue to demonstrate discipline with our spending. So, that's what's driving us to raise our guidance for revenue and margin for the year. For billings and free cash flow, I have covered the specifics in the opening commentary. The key point to take away is we're focused on making changes that are good for our customers and good for us, and shifting more EVA to annual billings helped us achieve that goal. Now, it makes sense. Customers because they retained price certainty by signing multi-year contracts, that by moving to annual billings, they get a more predictable annual cash outlay. Of course, the change is good for us too. We generate more predictable annual cash flows and we remove the discounts we see today to generate cash collections upfront. Most EVAs are already on annual billing terms. And also, we had already assumed that would all be on annual billing terms starting next year in our fiscal '23. We're making the change now because with the strong start to fiscal '22, we decided to get moving earlier to execute on the shift. But the overarching driver is that we're focused on optimizing our business and the change, as we said, is good for both our customers and for us. As a side note, the impact on our billings guidance is also pretty small. It's around a 1% point of impact to the total billings outlook. Now, if I shift attention to the ramp to fiscal '24, we do see accelerating momentum and multiple drivers of growth regarding multi-years. I want to break it down a bit. We have two main pools of multi-years one for our EVAs and one for our base products subscription business. What I've talked about today so far is EVA and the ongoing shift to annual billings for that cohort. As we look ahead to next year, as I mentioned in the opening commentary, we have a material cohort of multi-year contracts that are coming up for renewal in our base products subscription business, renewing those contracts is one factor that drives us to 2.4 billion in cash flow next year and year-to-date this year, the proportion of multi-year renewals that we're seeing in that cohort is in line with our expectations. To that plus the strength in our topline year-to-date gives us confidence in the path to the 2.4 billion free cash flow target next year.

Okay, got it. That's very helpful. Andrew, maybe for you, just zooming out a little bit, a little bit more broadly. You talked a little bit about, in your prepared remarks and the press release, I think you talked about sort of growing as your customers grow as well. And I think you've talked about some examples in your prepared remarks also but I was just wondering if you can expand on that a little bit and maybe just connect it back to the flexibility of the business model if you will.

Saket, specifically, what I did say was as we help our customers grow, we will grow. And the reason I want to highlight that particular point here is a lot of the things that are going on with regards to us growing with our customers is their increasing investment in digitalization. This is here to stay; it's continuing to accelerate. It's going to move forward next year and continue to accelerate. So, the digitization engagement with our customers is why we grow as we help them grow because digitization is going to help them grow. It's going to help them be more responsive. It's going to help them win more business. It's going to help them do a whole bunch of things that they were struggling to do previously, which is great for them and great for us. Now, the other thing I'd add there is we are also responding to the way they want to buy. I mean, I think you've noticed that we introduced Flex. We haven't rolled it out yet; customers can't yet buy it, but we introduced the concept of Flex. And Flex is something that a lot of our customers have been waiting for as we've been moving away from our old multi-user paradigm to single-user. They've been waiting to see something that allows them to manage occasional use and maybe dive deeper into some of our more advanced digital technologies and integrate some of those things into their workflow. So, we're going to offer them the flexibility they've been looking for and we're going to mainstream it across a lot of our customer base in the mid-market. But the other piece I want to highlight about Flex, in particular, is that it's also a tool for reaching the long tail of our customers. Flex is going to allow us to not only help with smaller businesses that knew some of our tools only a couple of times a month, but it's also going to help us with smaller customers or departments within larger customers that want to use a particular advanced tool on an occasional basis. It used to be back in the '90s when books like the long tail first came out that you'd attack the long tail with a set of discrete products—tons of little products. The 2020 way of approaching that is having a business model that allows people to get access to a set of capabilities in an ever-growing platform of products, like what we're doing with Fusion. So, look for those things long-term can be important tools as we see forward. Things like Flex are not going to be short-term revenue drivers but they will be long-term enablers. Digitization is the key underlying thing here. Our business models, and the way we are approaching some of our advanced platforms are the enablers that allow our customers to digitize faster.

Got it, makes sense, thanks, guys.

Hey guys, and thanks so much for taking the questions. Maybe for you, Andrew. So, I'm sure we'll talk more on the broader strategy next week, but you've been very clear around this idea of convergence for some time, and earlier in the quarter there was the idea of converging mechanical CAD and electro CAD. How should we think about that going forward? And are we looking to do that more on the organic front with Eagle or potential strategic partnerships or acquisitions, how should we think about that?

Yes. So excellent question. This convergence piece between mechanical design and electrical design is something we've absolutely had our eye on for quite some time. As you know, we bought Eagle several years back and we have now tightly integrated it into the Fusion platform. And we're doing some very, very interesting things around automation and integration between electronic PCB design and the associated mechanical designs that either contain it or actually interact with it in a smart product. So, we're already attacking that convergence organically with our products. You saw us look externally as well because we saw an opportunity. Did you accelerate the industry change? We believe these positives are going to converge. We believe the leading-edge customers are going to be driving and using converged processes. And we saw a vision match out there and we engaged in discussions around accelerating this change in the market. We're still going after that market with Fusion with Eagle and we have, and we're already moving up into the mid-market with some of these tools. So, this vision is not going away. This is a continuing and ongoing place for us to focus. And look for us to continually increase what we're doing with Eagle to make those convergences between mechanical and electrical design more fluid, more integrated, and frankly, more automated.

That's really helpful. And maybe just a quick follow-up. So just staying on the Fusion 360 in the manufacturing front. You've talked about in the past, a lot of success with Fusion 360, even in the CAM space, replacing vendors like Master CAM, and just curious if today's announcements of that getting acquired can help accelerate the opportunity or change the dynamics competitively in some way. Thanks again.

I think one of the things you also saw is that the company that got acquired had a lot of visibility into the Master CAM business. And I think you can see that the business was not growing robustly as say Fusion is growing both from a user and billing standpoint. So, we're pretty confident that in the manufacturing side and the CAM side, we're doing a great job with Fusion. But we're also reaching deeper and deeper into people's entire process. A lot of the customers we're talking about publicizing are people that have rolled out Fusion across the entire process. One of the things that's also exciting is you're seeing these large subscription counts, breaking 11,000 again this quarter, but one of the other exciting aspects here is that our billings growth is actually growing faster than our subscribe growth, which is a result of the new extension strategy, which has continually added more advanced capabilities that people can buy on a pay-per-use basis or on a subscription basis to one of these extensions. So, we're continuing to see really good traction with Fusion. We're continuing to roll out new extensions. You will see more extensions coming out this year into next year, and you will also see us start to do some interesting new ones. Things from a platform perspective with Fusion as well. So, we're pretty bullish on Fusion. We feel pretty good about our position right here and we're continuing to see growth. And you're right, I think the acquisition of Master CAM just shines a light on where the action is right now in this space.

Excellent, thanks a lot for the color.

Thank you. Good evening, Andrew. You mentioned that

Got to get my pen ready for the three-part question. Okay. Pen's ready.

Okay. So, you mentioned that usage is now at pre-pandemic levels. And the question has to do with new products of volume. It's an easy comparison year-over-year versus last year. But would it be reasonable to say that the new products sub volume through the core of the business excluding EVA, excluding cloud products, excluding Manage is above levels of two years ago? And that our expectations for the remainder of this year, and I assume into next year, is that that will remain the case that you're now well above where you were two years ago in terms of that core product volume. And then similarly, for many years, LT was considered to be a good leading indicator, or barometer of the business. Given the change in the profile of your product mix, your portfolio, plus the fact that orders there seem to be encouraging full AutoCAD adoption in lieu of LT, you're clearly not encouraging LT. Is there some change in the barometers or indicators that you look to for the business?

Yeah. Okay. Great question. So let me address the first part. I was only a two-part question, Jay; you've disappointed me.

I knew you'd say that.

So new product revenues have gone up significantly. I'm not going to give you a specific; I'm not going to tell you if it's exactly back up to two years, but let's just say it's up significantly. We couldn't be delivering the kind of performance we are if it wasn't. It's been significantly higher than the overall growth of the business in terms of new products out and it's continued to robustly grow moving forward, and we expect it to continue. So, you can imagine that our volumes are getting back up to the places we would have expected them to be before COVID ever hit, which is a good sign and a good outcome. And more and more, as you can see in this quarter, we generated a lot of that new volume through digital direct channels and channels that are direct to us, which is another interesting factor here. You are absolutely right. It used to be that LT, because of the price point and because of its exposure to small businesses, was a barometer of the health of our business. But the move to the subscription model scrambled that out a little bit because people may have been buying LT exclusively for something or buying different products and other things like that. So that's why we began tracking in a deep way the monthly active, daily active users of our products in various countries, which has become, frankly, our core barometer. And I think you can agree that that is a much more robust indicator of the health of our business than, for instance, looking at LT sales and LT transactions.

Okay.

And it's also interesting to note, as commercial usage surges forward, non-compliant users decrease.

You mentioned a semiconductor facility in Asia that has become an AEC customer. And so the question there looking ahead is, when you think about what Intel's going to be doing, and others in the semi-industry. If you looked at data center build-out and electric vehicle build-out, those are all mega commercial facilities. What is your pipeline looking like for any or all of those?

That's a very excellent point, Jay. All right. So, we're already big in the data-center pipeline. I have personally engaged with customers that I will not name and see some amazing things they are doing with our tools in the data center front and on the factory front. So, we are actively engaged with deepening the penetration of them in all of those areas where people are standing up new factories and people are building new capacity. And you're right to talk about fab capacity for Intel and other places like that, which has matured to a point where when you combine especially not only with the capabilities of design and build, but ultimately, you will see Tandem play a role in that space as well because Tandem as a digital twin allows us to do a handover long-term, not yet; Tandem's relatively new to the market, but a digital handover to the owner for doing the lifetime management of the asset as well. So, look, that pipeline is robust and strong where we're already a big player in data centers and new style factory stands up in several sectors.

Great. Thank you very much.

Thank you for taking my question. My first inquiry is about your approach to multi-year offerings moving forward. As we near the end of the year, particularly on the product side, are you considering reducing discounts? Could this potentially affect not just the EVA, but also product subscriptions with lower multi-year offerings in the future, or is this more about managing cash flow as you mentioned with your significant cohort of renewals?

Thanks, Gal. I'll say again, our goal is to do what's best for our customers and what's best for us. You're right that we recently announced that we're reducing the discount on product subscription multi-year contracts from 10% down to 5%. And we're doing it because we feel that the higher discount is not necessary. The value proposition of a multi-year contract to our customers is the price certainty, not the discount. Of course, we benefit from the lower discount because we get higher price realization. But at the end of the day, the multi-year contracts reflect the strategic longer-term partnership with our customers. Now, we make small price changes like that all the time in order to optimize our business and to maximize the value for both our customers and for us. And this is just one example of that.

I understand. That's very useful. For my second question, I would like to know more about the status of the network licenses and how the transition is progressing. Over the past year, the initial entities that transferred their licenses had entitlement arrangements that provided them with more licenses than they required under the 2-for-1 or 1-for-2 programs. Others will follow later. Are we beginning to see a shift where those now returning their network licenses are adhering to the exact 2-for-1 arrangement, or are they needing additional entitlement to ensure compliance?

Gal, we are absolutely starting to see the tip of the iceberg on that part of the transition. And also Flex, which is something that a lot of those customers were waiting for because those customers were heavy users of our network licensed model, Flex in one of its forms replaces that old model. So, as Flex starts to reach the channel and reach the customers more directly, you're absolutely going to see a greater acceleration of that. Because they do have to ultimately transfer a name to every user to use Flex. But we're seeing the tip of the iceberg on that right now. Flex's broader availability as we move to the end of this year and into early next will also accelerate that trend as well, which will help us retire that old business model and get our customers on the more advanced management systems that underpin Flex.

Got you. That's really helpful. Thank you so much, I appreciate it.

Great, thanks guys. Andrew, I want to start with you. Given the U.S. federal infrastructure spending bill, one of the most often asked questions I get is really your exposure to infrastructure spending. I'm wondering is there any way that you can help, just roughly frame up the magnitude of that business. Or even perhaps how fast is it growing relative to your overall portfolio of businesses?

Yes. So, we don't break out the infrastructure of a business, so I can't give you a specific. But here's one of the things; here are the philosophical statements I can make enough. One, we do not have any impact from a federal infrastructure bill built into our financial models, okay? So, the numbers we've given you, the concept, they're all business as usual based on our normal course and speed. So, I want to be super clear about that so we're all on the same page. However, we are big proponents of infrastructure spending and the need for infrastructure spending. And I think you're getting a sense just over the last few weeks and the last month, some of the critical drivers around how serious it is when you have a decaying infrastructure. Look at California, right? California built water infrastructure for slow snow melts to catch water and have it dribble down from the melting snow and runoff to the coast and everybody was happy. That world is likely gone. What people need to focus on is more reservoirs, different types of infrastructure to capture rainwater rather than rely on snow melt. These were things that in some cases were predictable 10 years ago, but we haven't made progress on. Also, look what's happening in Tennessee. Just last week, the horrible tragedies with these flash floods in the middle of Tennessee. Unprecedented levels of speed and severity of floods are all related to water infrastructure. All of these things are related to climate change. Some of them were predictable, some of them not. All of them are a 10-year backlog now in many places. We have to build better across the board and we believe that our tools, our capabilities, the digital platforms we're deploying are going to help people build better. And when you look at how we're positioned to capitalize on this, which I can talk about, look, we have got the solution that goes from end-to-end with capital planning engagement all the way to the user engagement with the vertical and horizontal components of construction and is in between. I want to point to you some of our recent partnerships and acquisitions. On-road and rail, we partnered with Orgo to go after the Department of Transportation to help with capital planning. We brought in a device that has the capital planning tool upfront in the water infrastructure process. And we also have a space maker, which we haven't talked a lot about, which helps in the real estate development side from the capital planning and allocation there. So, we're actually building out capabilities upfront through partnership and through technology. And then we have all this capability that we've integrated into the construction cloud as well to help with vertical and horizontal construction. So, we're ready. We've invested in the places that we think are critical, and we think people need to invest in digital technology not only to build what needs to be built but build it back better and build it back cheaper so that we can start closing out the backlog, because there is a big backlog. So, there will be an opportunity here. It will be a long-term opportunity for the company. It won't be short-term, but there will absolutely be an opportunity as people start to spin up these infrastructure projects.

That is super comprehensive. And as a sidebar, yes, it does feel like your acquisition of Innovyze given the wording of the bill on the water was certainly timely. I wanted to go back to manufacturing just with another question. You noted in prior calls that Fusion 360 is near a tipping point, and then another question on M-CAD and e-CAD. I'm just curious though, from a philosophical perspective, what's left for you to do within your manufacturing portfolio? In other words, is there much more white space left beyond what you've got, to sort of kind of getting a sense of where we're at in that sort of platform maturation?

Yes. So, there's always a little white space, okay? I think one of the things that are really important in terms of things we have to do. We have to finish integrating all the end-to-end capabilities, all right? We have to make sure that we've gotten all the capabilities completely integrated in a way that makes sense. We have to continue to dial down on things like general design and cloud-based and machine learning-based automation that automates workflows between some of these things. So even less sophisticated companies can take full advantage of highly sophisticated capabilities, which is a goal for us. Now, there's going to be another white space as we move down with regards to connecting to production planning. But on the shop floor, not just moving geometry directly to the machine through general design, but actually managing production flow and some of the things associated that in highly automated facilities. So, we'll probably explore some of those areas as we start building out the platform. But really, in terms of what things have to happen to continue to accelerate Fusion's growth, it's all about building out the core design capabilities because you've got a lot of touch points in there. We've got ReCap, we've got some really great partnerships around simulation which will deepen over time, and we've also got excellent manufacturing capabilities. As we deepen in to professionalize the design capabilities, you'll start to see more and more purchasing of sophisticated extensions on top of Fusion. So, look for Fusion to become a more significant revenue driver as we move beyond FY '23. Right now, we're focused on making sure that the platform's best-in-class, that its cloud independence is strong, that we build off the strong foundation we have right now, and that we build out some of these core design capabilities. But there are little bits of white space in there around production management, around some of the integrations with other types of capabilities, around costing and estimating that are going to be interesting as well in the future.

Super helpful, thanks guys.

Great. Hi everyone. I wanted to start with the performance and the direct channel efforts. Obviously, you've had a goal to achieve 50% revenue share, but it seems like in the last several quarters, just the movement to that level has accelerated a bit. Are there specific things you would maybe point to recently that help explain some of the acceleration? You've brought up enterprise and the e-store, is maybe one response more than the other? And how much is this factoring into the confidence you speak to entering the second half of this year?

Yeah. So, I think Debbie and I will both tag team just a little bit okay. So let me just talk about this at a high level. Some of these things are cyclical, by the way, okay? So, there will be quarter-to-quarter variations here. The fastest-growing channel we have in our business is the digital channel, all right. And more and more of our products, especially new products, especially for small businesses, are being distributed as that channel. It's a big driver, and we've seen some acceleration there and we continue to see acceleration there. It's a very healthy channel and this is what we expected. We're certainly also being successful in our EVA business, which is driving up the percentage in certain quarters. But don't look for that to be a linear transition. We're going to get to the 50%; it's going to take time. But there will be some quarters where we're trending up, other quarters where we're trending a little bit down. But overall, as you fit the line through over multiple years, it's going to be heading up in the right direction. There are some countries where we're getting very close to 50-50, and other places where we're very far away from it. So, you have to look at the business a little bit more discreetly as we get there, but don't look for this to be a straight line. Debbie, did you want to add anything?

Sure. I think you captured it well, Andrew. As you said, there are two main parts. There's the enterprise or EVA business and there is our e-commerce channel. Now, the enterprise business is at a seasonal low in Q2, but we do have a strong pipeline. Andrew mentioned that it was the first quarter that we saw Upchain included in an EVA. So we are building momentum and we anticipate that the bulk of our EVA selling will be in the back half of this year, like previous years. So, things are looking good there. On the e-commerce side, lots of growth there, we've been investing heavily. Last quarter, we talked about different things that we added, like more out of age capabilities, more calls to action across the site. We continued to invest this quarter. Some examples of the changes that we made were our one-step resubscribe capabilities, so that expired customers can easily resubscribe. We have even more places for add-a-seek capabilities throughout the site; we launched a new Middle East site in June. So, a bunch of things and you'll just see us incrementally add more functionality, more ways to engage with Autodesk so that it's easier to do business with us. And that's going to be part of our success to drive growth through that channel.

Okay. That's helpful. And then I wanted to maybe reconcile what sounds like a lot of strong trends and higher confidence in the second half, and still have the same high end of the revenue guidance, 16% growth intact for fiscal '22. Are there certain areas of the business where you look and it's still a bit held back, so it could be an opportunity for improvement over coming quarters, but maybe still not the full contributor that it could be?

Oh, sorry, Andrew. And then you can chime in. I would say that, overall, we had a strong Q2 and we ended the quarter with strong momentum. And we raised our revenue guidance on the year to reflect that ongoing strength and what we've seen in the business for the year to date. Andrew mentioned all the leading indicators were strong, usage returning to pre-COVID level, the construction backlog is back online. So, all we're seeing at this point is accelerating momentum. The only kind of knit piece that I would highlight in the back half of this year is that typically in our Q4, we do see a bit more upfront revenue recognition for some of the products that we typically sell cyclically in that period, and that's a little bit of what you see in both Q3 and Q4 as we get to the back half of the year. But overall, just broad strength that we're seeing in the business and that led to the increase in the revenue guidance on the year.

Okay. Great. Thank you.

Yeah. I think Debbie said it all.

Hi, this is Elizabeth Elliot on for Keith Weiss. Thank you so much. I just have a few questions on the current RPO-based bookings growth; it looks like year-over-year growth slowed a bit from last quarter. So, wondering if you could just highlight some of what could be driving that and some of the trends that you are just seeing in new business demand versus what you saw maybe in the prior quarter. Thank you.

So, thanks, Elizabeth. RPO growth was strong at 24% year-over-year, and we really do see that as the leading indicator of what's happening in our overall business. Now, typically we see RPO, or what we see right now is that RPO growth shot up in Q4 because we had a very strong enterprise business agreement quarter. And so gradually, we're seeing that taper down over time. But overall, 24% growth is really solid performance in RPO when you'll start to see that bleed into revenue on the back half of the year.

Got it. And then just one more ABI data for June noted some firms just weren't able to find enough workers and the challenges they've had talked about 60% of firms not being able to fill openings in the architectural staff. I was wondering if any issues in employment are a headwind for Autodesk, or is that a tailwind for you guys as firms just need to digitalize faster and improve productivity?

Sorry, can you repeat that question?

The Architectural Billings Index data for June indicated that some architectural firms were struggling to fill positions, which is impacting sales as employment challenges affect their capacity to meet demand. I'm curious if these employment issues in the overall market are a challenge for Autodesk, or could they actually be beneficial as firms seek to digitalize more quickly and enhance productivity by using Autodesk software tools?

Okay, thank you. It's actually more of a tailwind because what our customers are struggling with is they're trying to do more with a smaller staff. And the more digital firms are able to do that, the fewer digital firms are struggling. The scarcity of labor is pervasive across multiple industries and multiple sectors. But we believe this is just another driver with regards to people adopting deeper digitization and digital technologies. And as you can see from the factor, some of our results and some of our new subscription volume. While you're hearing some of that in the ABI pressure with regards to their book of business, you're not seeing any kind of depressive impact in our new subscription volume. So, we expect long-term this is going to be a tailwind around digitalization and not any kind of headwind for us.

Okay. Thank you.

Hey, guys. Thanks for taking my questions. Nice acceleration on the mixing segment this quarter. And you mentioned that it was an all-time high for bid activity with Building Connected. Since Building Connected is kind of at the tip of the spear in terms of where they see visibility into the construction cycle, how should investors think about this engagement activity flowing through to the revenues?

I think you should view it just as you described. It serves as a leading indicator of future on-site construction activity. Not all of that activity will lead to sales of our construction tools since some may not be suitable, but it definitely indicates that work is getting started. That's how we interpret it and how we think you should consider it. As we continue to explore Building Connected and understand the bid board, we'll be developing more internal metrics to monitor these trends. Your observation is accurate; it does indicate future activities, and some of that will result in purchases of on-site construction software tools.

When we consider the timing aspect, could you provide any insights on the types and timing of projects?

No, I can't. I can't give you a lag indicator between increased bid activity on the bid board and the starting of new projects.

No worries, but thank you.

Thank you, Latif. And thank you everyone for joining our Q2 fiscal '22 conference call. If you have any follow-up questions, please do contact the investor relations team, and we look forward to seeing you all with our Investor Day on Wednesday, next week. Thanks very much. Goodbye.