Autodesk Inc (ADSK) — Q1 2024 Earnings Call Transcript

Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss the first quarter results of Autodesk's fiscal '24. On the line with me are Andrew Anagnost, our CEO; and Debbie Clifford, 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 find the earnings press release, slide presentation, and transcript of today's opening commentary on our Investor Relations website following this call. During 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 judgment based on currently known factors. Actual events or results could differ materially. Please refer to our SEC filings, including our most recent Form 10-K and the Form 8-K filed with today's press release, 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 several numeric or growth changes as we discuss our financial performance. 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 Excel 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. Autodesk's strong financial and competitive performance in the first quarter of fiscal 2024 is again a testament to three enduring strengths: resilience, discipline, and opportunity. In a more challenging macroeconomic, policy, and geopolitical environment, our resilient business model and geographic, product, and customer diversification enabled us to deliver 12% revenue growth in constant currency, healthy margins, and record first quarter free cash flow. Leading indicators remained consistent with last quarter with product usage growing modestly, bid activity on BuildingConnected again at record levels, and continued cautious optimism from channel partners. Consistent with year-over-year economic momentum, we saw new subscription growth decelerate in North America and accelerate in EMEA. But our customers remain committed to transformation and to Autodesk, leveraging automation more as they see headwinds from the economy and supply chains. That commitment is reflected in larger, broader, and more strategic partnerships, improving renewal rates, consistent net revenue retention, and growing adoption and usage of our products within EBAs; all of which helped drive 12% growth in current RPO and 15% growth in total RPO. While macroeconomics are unpredictable in the short term, we are executing our strategy through the economic cycle with disciplined and focused capital deployment, underpinned by one of the best growth, margin, and balance sheet profiles in the industry. This enables Autodesk to remain well invested to realize the significant benefits of its strategy, while mitigating the risk of having to make expensive catch-up investments later. Discipline and focus also mean making sure we are investing in the right places. This is a constant process of optimization and improvement with increased vigilance during periods of macroeconomic uncertainty to prioritize investment and recruitment. As you heard at our recent Investor Day, we are deploying next-generation technology and services and end-to-end digital transformation within and between the industries we serve and, in so doing, shifting Autodesk from products to capabilities. Our AEC industry cloud, Forma, launched on May 8, is a great example of our vision. During pre-release trials, customers like CUBE 3 clearly saw how Autodesk Forma's intuitive user interface enabled rapid adoption by existing and new users; how bi-directional data flows enhanced the value of other Autodesk products like Revit; and how a single, integrated environment in the cloud, enhanced by AI, accelerated modeling and response times while significantly enhancing the value delivered to its customers. While using Forma during its trial, CUBE 3 delivered more creative and valuable designs to its customers while reducing the concept design phase by 50% or more. At Investor Day, I also talked about leveraging our key growth enablers, including business model evolution, customer experience evolution, and convergence between industries, to provide more and better choices for our customers. Our Flex consumption model is a good example of this. Flex's consumption pricing means existing and new customers can try new products with less friction, and also enables Autodesk to better serve infrequent users. Not surprisingly, the lion's share of the business has come from new customers or existing customers expanding their relationship with Autodesk. As Steve said at our Investor Day, we've also introduced a new transaction model for Flex, which will give Autodesk a more direct relationship with our customers and more closely integrate with our channel partners over time. During the quarter, Flex moved up into the top 10 products on our e-store, and we signed our first million-dollar Flex deal. Autodesk remains relentlessly curious with a propensity and desire to evolve and innovate. Our transformation from products to capabilities will enable us to forge broader, trusted, and more durable partnerships with more customers; gives Autodesk a longer runway of growth and free cash flow generation; and enables a better world designed and built for all. 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 update you on our strategic growth initiatives.

Thanks, Andrew. Amidst a more challenging macroeconomic environment and ongoing headwinds from currency and Russia, Q1 was strong. The overall momentum of the business was similar to last quarter with new subscriber growth decelerating a bit and renewal rates improving a bit quarter-over-quarter such that current remaining performance obligation growth was the same as last quarter. Strong renewal rates demonstrate existing customers are committed to, and investing in, their long-term strategic partnerships with Autodesk. Some customers are also elevating their relationships with Autodesk from subsidiaries to companywide. When this happens, it can sometimes cause quarterly timing differences for the renewal as multiple contracts are co-termed to a single renewal date. We saw an instance of that in Q1 and, as a result, some of the up-front revenue we expected to hit in Q1, we now expect later in the year. Q1 revenue would have been toward the top end of our guidance range if adjusted for this up-front revenue. Total revenue grew 8%, and 12% in constant currency. By product in constant currency: AutoCAD and AutoCAD LT revenue grew 10%, AEC revenue grew 11%, manufacturing revenue grew 13%, and M&E revenue grew 9%. By region in constant currency: revenue grew 14% in the Americas, 11% in EMEA, and 8% in APAC. Direct revenue increased 15% in constant currency and represented 35% of total revenue, up 1 percentage point from last year, due to strength in both enterprise and e-commerce. Net revenue retention rate remained the same as last quarter and within 100% to 110% at constant exchange rates. As we flagged in our annual guidance given last quarter, our transition from up-front to annual billings for multi-year contracts impacts our billings growth this year. That transition started on March 28, so we had about one month of headwind in the first quarter. Billings increased 4% to $1.2 billion, primarily reflecting growing renewal rates and early renewals, partly offset by about one month of annual billings for most multi-year contracts. Total deferred revenue increased 20% to $4.5 billion. Total RPO of $5.4 billion and current RPO of $3.5 billion grew 15% and 12%, respectively. Turning to the P&L, non-GAAP gross margin remained broadly level at 92%, while non-GAAP operating margin decreased by 2 percentage points to approximately 32%. This reflects ongoing cost discipline, including the expected Q1 cost of repurposing approximately 250 roles to invest in our strategic priorities, as well as the impact of exchange rate movements. GAAP operating margin decreased by 1 percentage point to approximately 17% for the same reasons. Free cash flow was $714 million in the first quarter, up 69% year-over-year. In addition to the underlying momentum of the business, there were three factors that provided a tailwind in the first quarter: first, cash collections from the last month of billings in fiscal '23 were strong; second, we saw favorable linearity and early renewals in the first quarter, driven by the end of our multi-year billed up-front program; and third, after the winter storms in California, we received a federal tax payment extension to the third quarter. Turning to capital allocation, we continue to actively manage capital within our framework. Our strategy is underpinned by disciplined and focused capital deployment through the economic cycle. As Andrew said, we are being vigilant during this period of macroeconomic uncertainty, paying close attention to attrition and recruitment rates, and the increased upward pressure on costs from a weakening dollar. We will continue to offset dilution from our stock-based compensation program and to opportunistically accelerate repurchases when it makes sense to do so. During Q1, we purchased 2.7 million shares for $534 million, at an average price of approximately $199 per share, reducing total shares outstanding by about 3 million shares. Now, let me finish with guidance. The overall headlines are: the expectations embedded in our guidance range for the full year remain consistent with the underlying momentum in the business; and, we expect a tailwind in the second half of the year from a strong cohort of Enterprise Business Agreements. These EBAs last renewed three years ago at the start of the pandemic, and subsequent adoption and usage have been strong. Let me summarize some key factors we highlighted last quarter. First, foreign exchange movements will be a headwind to revenue growth and margins in fiscal '24. Revenue headwinds from Russia and FX peak in the first half of the year. Margin headwinds from FX will persist throughout the year. Second, switching from up-front to annual billings for most multi-year customers creates a significant headwind for free cash flow in fiscal '24 and a smaller headwind in fiscal '25. Given this transition started on March 28, this will become more apparent from the second quarter onward. Our expectations for the billings transition are unchanged. And third, it's possible that during the transition to multi-year contracts billed annually, some customers may choose annual contracts instead. We haven't seen much evidence of this in the limited time since the annual billings program started on March 28, but it's early days and we'll keep you updated as the year progresses. All else equal, if this were to occur, it would proportionately reduce the unbilled portion of our total remaining performance obligations and would negatively impact total RPO growth rates. Deferred revenue, billings, current remaining performance obligations, revenue, margins, and free cash flow would remain broadly unchanged in this scenario. Annual renewals create more opportunities for us to drive adoption and upsell, but are without the price lock embedded in multi-year contracts. We still expect our cash tax rate will return to a more normalized level of approximately 31% of GAAP profit before tax in fiscal '24, up from 25% in fiscal '23 for the reasons we outlined last quarter. As I mentioned earlier, a federal tax payment extension after the winter storms in California means cash tax payments will shift from the first half of the year to the third quarter, reducing third quarter free cash flow. The tax payment extension will change the first half/second half free cash flow linearity a little bit. But we still think we'll generate roughly half of our free cash flow in the second half of the year, with second half free cash flow generation significantly weighted to the fourth quarter. We still anticipate fiscal '24 to be the free cash flow trough during our transition from up-front to annual billings for multi-year contracts. Putting that all together, we still expect fiscal '24 revenue to be between $5.36 billion and $5.46 billion, up about 8% at the mid-point, or about 13% at constant exchange rates and excluding the impact from Russia. Normal seasonality, peak second quarter currency and Russia headwinds and, as I mentioned earlier, a strong second half pipeline of enterprise agreements last renewed three years ago in the immediate aftermath of the onset of the pandemic, mean we expect reported revenue growth to accelerate in the second half of the year. We expect non-GAAP operating margins to be similar to fiscal '23 levels with constant currency margin improvement offset by FX headwinds. As I said earlier, in a more challenging macroeconomic environment, we are being vigilant and proactive to sustain our margins. We expect free cash flow to be between $1.15 billion and $1.25 billion. The mid-point of that range, $1.2 billion, implies a 41% reduction in free cash flow compared to fiscal '23, primarily due to the shift to annual billings, a smaller multi-year cohort, FX, and our cash tax rate. The slide deck on our website has more details on modeling assumptions for Q2 and full year fiscal '24. We continue to manage our business using a rule-of-40 framework with a goal of reaching 45% or more over time. We think this balance between compounding growth and strong free cash flow margins, captured in the rule-of-40 framework, is the hallmark of the most valuable companies in the world. And we intend to remain one of them. As we said last quarter, the rate of improvement will obviously be somewhat determined by the macroeconomic backdrop. But let me be clear, we're managing the business to this metric and feel it strikes the right balance between driving top-line growth and delivering on disciplined profit and cash flow growth. We intend to make meaningful steps over time toward achieving our 45% or more goal, regardless of the macroeconomic backdrop. Andrew, back to you.

Thank you, Debbie. Let me finish by updating you on our progress in the first quarter. Our strategy is to transform the industries we serve with end-to-end, cloud-based solutions that drive efficiency and sustainability for our customers. We continue to see good growth in AEC, fueled by customers consolidating on our solutions to connect previously siloed workflows in the cloud. HNTB, an employee-owned infrastructure solutions firm that serves public and private owners and contractors, expanded its EBA with Autodesk to help achieve its goals around design modernization, digital transformation, and digital infrastructure solutions. The ability provided by our EBA means that HNTB can easily consolidate more workflows to Autodesk. For example, in addition to adopting and integrating Autodesk Build and Innovyze, HNTB has been prototyping Autodesk's immersive collaboration platform. By leveraging VR collaboration, it has been able to help transportation agencies like Florida's Turnpike Enterprise use digital twins to train facility management and first responder teams on real-life scenarios from the safety of their offices instead of on busy interstate highways. HNTB sees the potential of further applications in its work on complex bridges and tunnels, as well as its work with airports and state departments of transportation across the country. In construction, we continue to benefit from our complete end-to-end solutions which encompass design, preconstruction, and field execution, through handover and into operations. DPR is among the top 10 largest general contractors and construction management firms in the U.S. and specializes in technically complex and sustainable projects. In the first quarter, DPR expanded and extended its partnership with Autodesk and unified on Autodesk Construction Cloud, our construction platform that connects stakeholders throughout the project lifecycle. In moving away from point solutions and onto Autodesk's common data environment and cloud, DPR aims to connect all workflows, centralize communications, and improve project management and operations across the office and job site. We continue to see significant opportunities to grow our construction platform outside the U.S., benefiting from our strong international presence and reputation. In Singapore, Autodesk Build was selected over three competitive offerings as the construction management platform for what will be Singapore's tallest skyscraper. When awarding the contract to our partner, China Harbour, the project owners chose Autodesk Build because it connected the design and make processes in the cloud, centralized project schedules, and generated automated clash reports to reduce risk during construction. Of course, these stories have a common theme: managing across the project lifecycle to increase efficiency and sustainability, while decreasing risk. And this means our customers are renewing and expanding their relationships with us. Over time, we expect the majority of all projects to be managed this way and we're getting ready today to scale to serve that demand. Jim talked at our Investor Day about how product innovation, go-to-market expansion, and customer success are helping us get ready. In the first quarter, we took another important step by integrating our construction sales force into our worldwide sales team. While integrations of this scale inevitably cause some short-term disruption, combining the two teams will allow us to expand the scale and reach of our construction business, particularly in our design customer base, and our ability to serve our customers across the project lifecycle. Moving on to manufacturing, we made excellent progress on our strategic initiatives. Customers continue to invest in their digital transformations and consolidate on our Design and Make Platform to grow their business and make it more resilient. For example, Rittal is a leading manufacturer of electrical enclosure systems. It uses Inventor, Vault, and Moldflow to optimize and manage its product manufacturing to produce thousands of customized and configured switch cabinets daily. Rittal is focused on maximizing internal automation to accelerate its speed to market and respond more nimbly to changes in demand. In Q1, it increased its EBA with Autodesk to include Fusion to serve as its central data management system, build a more resilient supply chain, and drive competitive advantage through quicker turnaround times. Using Fusion, Rittal will be able to automatically route online customer orders through to its engineers and integrated production line and make deliveries in as little as one or two days. In the U.K., a precision engineering firm was looking to update its CAM workflow to increase engineering efficiency and optimize costs. After a competitive evaluation, the customer migrated from its existing provider to Fusion with the Machining Extension because of Fusion's intuitive UI, cloud capabilities, and simple integrations with its existing software and machines. Realizing the opportunities to drive breakthrough efficiency by consolidating all workflows on a single Design and Make Platform, the customer is now also evaluating the migration of its CAD workflows from a competitor to Fusion. Fusion continues to grow strongly, ending the quarter with 231,000 subscribers, as more customers connect more workflows in the cloud to drive efficiency, sustainability, and resilience. In partnership with higher education providers across the globe, we continue to invest in the workforce of the future. We recently partnered with the Tamil Nadu Skill Development Corporation and Anna University in India to integrate Fusion into its 20 mandatory product engineering courses and launched the Fusion Design Challenge to showcase the skills of 20,000 students. Fusion's intuitive UI and cloud-based data management make it easy for students to learn and collaborate on class projects. Autodesk is also investing in a new Technology Engagement Center at California State University, Northridge, that will promote interdisciplinary collaboration in engineering and computer academic programs and house the Global Hispanic Serving Institution Equity Innovation Hub, which aims to build a more diverse and inclusive engineering workforce. And finally, we continue to work with non-compliant users to ensure they are using the latest and most secure versions of our software. In the first quarter, we made substantial progress on two initiatives we outlined at Investor Day: further hardening our systems by significantly tightening concurrent usage of named user subscriptions, and significantly expanding the precision and reach of our in-project product messaging. We expect both initiatives to drive further conversion and growth in the second half of the year and beyond. Let me finish where I started. Autodesk remains relentlessly curious with a propensity and desire to evolve and innovate. With our AI infused industry clouds, Fusion, Forma, and Flow, scaled on Autodesk Platform Services, our customers will be able to leverage their large, domain-specific, inter- and intra-industry data sets to deliver further breakthrough productivity, operations, and sustainability gains. And with intuitive UIs and the application of multi-modal AI models that move beyond language models to capture sketches and reality directly into accurate 3D models, we will be able to accelerate the transition from products to capabilities that I talked about at our recent Investor Day. Our transformation from products to capabilities will enable us to forge broader, trusted, and more durable partnerships with more customers; give Autodesk a longer runway of growth and free cash flow generation; and enable a better world designed and built for all. Operator, we would now like to open the call up for questions.

Okay. Great. Hey, Andrew. Hey, Debbie. How are you doing? Thanks for taking my questions here. Andrew, maybe just for you. Appreciate the macro commentary, very helpful. I think we all try to speak to at least a subset of your partners through the quarter. And frankly, through the quarter, some of those checks, albeit limited, were mixed or soft, right, of course, reflecting the macro. Maybe the question that I have for you is, I was wondering if you saw that as well. And if you did, whether some of those trends have maybe continued here through the second quarter?

Yes, Saket. It's great to see and talk to you. Let me share what we observed, which aligns with what our partners mentioned. During significant events, like wrapping up multi-year engagements, teams often consolidate deals around that timeframe. They might even push deals forward to finalize them during the event, allowing for alignment around closing. This pattern has been consistent during past events. This is one of the reasons we schedule these events to coincide with the end of the quarter, to avoid these discussions. Following such events, we typically expect business to bounce back to normal levels, which is exactly what is happening. We're seeing a return to our anticipated performance at the start of the quarter. Debbie, do you have anything to add about the macro environment or insights that could clarify how the quarter has unfolded?

Sure. So, overall, our leading indicators remain broadly the same as what we saw last quarter. We saw usage grow modestly. We saw record bid activity on BuildingConnected. We continue to see cautious optimism from our channel partners. New subscriber growth decelerated a bit quarter-over-quarter, but renewal rates improved. Also like last quarter, Europe was a bit better, the U.S. was a bit worse, Asia was about the same. So, net-net, the overall momentum of the business was somewhat similar to what we saw last quarter with some puts and takes. It's all in line with the guidance expectations for the year and it's consistent with macro trends. Current RPO growth is a good forward indicator for you. It was the same as last quarter at 12% growth. And as we've said before, the business is going to grow faster in better environments and slower in more uncertain environments, but our goal continues to be to set ourselves up for success in fiscal '24 and beyond.

Got it. That's really helpful, Debbie. Debbie, maybe for my follow-up for you. Great to see the cash flow strength this quarter, well ahead of what we were expecting. I was just wondering if you could just zoom into what drove that. And maybe just looking forward, how you're sort of thinking about the shape of cash flow this year, particularly where we trough here in fiscal '24? Does that make sense?

Yes. So, Q1 free cash flow was strong for a couple of reasons. First, cash collections from the last month of billings in fiscal '23 were strong. Second, we also saw favorable linearity and early renewals in Q1 that were driven by the end of multi-year billed up-front. And then, third, as I mentioned on the call, after the winter storms in California, we received a federal tax payment extension for the third quarter. Our overall expectations for free cash flow on the year, including linearity, are unchanged. We still expect that we're going to generate about half of our free cash flow in the second half of the year, with heavier weighting to Q4. Some of the factors to think about across Q2, Q3, and Q4, we have the full quarter impact from the switch to annual billings. In Q2, remember that we had some early renewal billings that were pulled into Q1. And then with that tax payment extension to Q3, that has a positive impact to free cash flow in Q1 and Q2, but a negative offset in Q3. But overall, I just would reiterate that our expectations are unchanged and that we expect to generate about half of that free cash flow in the second half of the year.

Got it. Very helpful, guys. Thank you.

Thank you. Good evening. Andrew, you referenced the effect on channel behavior in the quarter as a result of the billing change. But more broadly, there are some other evolutions that your sales model is going through affecting not just the VARs but also the VADs. And I'm wondering how you're thinking about the operational or execution risks associated with that evolution which certainly goes beyond Q1 in terms of perhaps either demand generation, fulfillment of which you'll be doing more of on your own, perhaps the elements of channel comp as they change with the back end change. So maybe just let's talk about some of those ongoing executables that you need to get right vis-à-vis the sales model. Then, I'll ask my follow-up.

Yes, Jay, that's a great question. So, one of the things that I'll say like first upfront is why are we exploring some of these things? And it's a great example of what we're doing with Flex in particular. We're doing these things because our customers get a much more instant on self-service like experience kind of more like an e-store experience from all their transactions. But they also get the added bonus of support that local and connected to them through their VARs. They get service and other types of support from their VARs locally. It also allows us to really get a lot of visibility about what their usage patterns are, how they're using the product, and then also share that visibility with our partners and other people so that we can understand these customers better. So, there's lots of great things about it. But more importantly, rolling out kind of changes like that and exploring these kinds of new models and something like Flex, which is a lower volume offering right now, those doing quite well, gives us a lot of opportunity to learn a lot of things and work through a lot of things. Debbie, why don't you talk specifically about some of the things that we've been learning from Flex as we've been working through all of these new transaction models.

Sure. So, as Andrew mentioned, we launched this Flex agency model in Q1. We have learned a lot. Some important insights include the need for a smooth vendor setup process, as customers need to establish Autodesk as a vendor rather than a partner. We're gaining insights from having access to more data, which helps us improve our forecasting. As Andrew noted, in this area, we focus on testing and learning continually. Our goal is to create scalable processes for all stakeholders and the ecosystem, and we will keep pursuing that.

Okay. As a follow-up, Debbie, at the meeting two months ago in your slide with regard to double-digit growth or what you called sustainable double-digit growth, you had eight different line items referring to volume as a component of your growth. When you look out over the balance of the year, what do you think might be of those perhaps the two or three most important volume drivers to the business?

That's an excellent question, Jay. I mean, the view that I talked about from Investor Day hasn't changed much, granted our Investor Day wasn't very long ago, so that's a good thing. But we're going to be looking to continue to drive volume from all the different areas or growth vectors that we have. So, things like our investments in AEC, the proliferation of BIM, expansion in infrastructure, driving more growth from construction. I think what was interesting for us this quarter was really seeing continued strengthening of our renewal rate, because, ultimately, with higher renewal rates, that becomes a net volume driver for us. And that really goes down to the investments that we've been making in our customer success teams, who are really doing an excellent job of driving those renewal rates up, driving success with our customers, because that's a really important part of keeping the volume engine going at Autodesk. So, those are some initial thoughts, Jay.

Okay. Great. Thank you, both.

Thank you, Jay.

Great, thank you for taking the questions. Andrew, during Analyst Day, you discussed the expanding opportunities in serving the owner market, not just in conceptual design but also in operations. Since it's still early in this journey, could you share how that message is resonating as you look to broaden your presence in AEC?

Yes. Currently, our entry into that market is through Tandem. The best way to highlight this is by noting the rise in the number of users utilizing more modeling assets in Tandem and the increasing monthly active usage rates associated with that. We are starting to see significant growth in this area. We are collaborating directly with various owner-level customers to understand how Tandem can meet their needs and identify additional development requirements. The level of customer engagement is strong, which is encouraging at this stage of the process. We are pleased with the progress and the level of interaction with Tandem. It is gaining considerable visibility, interest, and focus not only from owners but also from those serving owners who are interested in digital twins and related offerings from other vendors.

That's really helpful. Thanks for that. And maybe, Debbie, as a quick follow-up. I think you've mentioned in the script about repurposing 250 roles in the quarter. Maybe you can provide a little bit more detail there? Thanks, again.

Sure. So, uncertainty really just is the new normal. I think we're all living this. Since we last reported earnings, we've seen a bunch of stuff happen. There was a major regional bank crisis. We're seeing deadlock discussions about the debt ceiling in Congress. The Fed, just a few weeks ago, acknowledged that those things could have an impact on the economy, but so they didn't know how. We're in the same boat. But it's very important to us to deliver on our margin goal. So, it's against that backdrop that we're taking a prudent approach to how we manage the business, that means tightening the belt a bit. So, in Q1, we did some repurposing of roles to allow us to reinvest. And in Q2 and onward, we've proactively taken steps to slow the pace of our hiring to ensure that we don't get ahead of ourselves on spend in light of this continued macro uncertainty. And we think that slowing spending earlier in the year provides more investment flexibility versus trying to slow spending later in the year. Again, our goal continues to be to set ourselves up for success since fiscal '24 and the long term.

Excellent. Thanks again.

Great. Hi, everyone. Maybe just a bit of clarification on near-term performance and reconciling just the comment. I think, leading indicators around product usage, that's fairly consistent. But then, the new sub growth decelerating in the Americas. I guess, normally, I think the leading indicators kind of predict that. So was this something around new subs that just kind of popped up in the quarter?

No, it was consistent with what we were seeing in our monthly active user trends. That's how the monthly active user trends are so good at predictive behavior. We kind of expected a slight decrease in velocity in the Americas and more of an increase in Europe. So, it's consistent with the indicators we see and it's consistent with the indicators moving forward as well.

Okay. Great. Thanks for that. And then, just, I guess, I get the AI question. Just in terms of capabilities that already exist on the platform, thinking about things like Space Maker or the Generative Extension on Fusion, have you started to see kind of an uplift in interest just as more industries are studying adoption around AI? And is there anything you've seen to this point maybe specifically around video, media content where you start thinking about maybe changing product road maps, or all just based on kind of the pace of innovation that's coming out?

So, first let's be clear. We've been discussing AI for a while and have been integrating machine learning models into our applications for some time now. There's already significant momentum in Autodesk conversations. What has changed is that ChatGPT introduced a version of AI that everyone understands, leading to a common discussion about what AI can do and how it operates as a co-creator in these processes. It's important to emphasize that we have been working on these technologies for a considerable time; this isn't a sudden shift for us. As mentioned, we've been involved in Construction IQ, and Space Maker has evolved into Forma, which we recently launched with enhanced machine learning capabilities. If you keep up with our AI Lab, you'll notice we've published a lot of advanced work on large models and how to create 3D models and representations using machine learning. We've been active in this area for some time. This allows us to have meaningful conversations with our customers, explaining that we always viewed this as a co-creation technology. They can now see how the large language models and offerings from OpenAI can evolve into creating complex 3D building information models, intricate designs, and sustainability considerations associated with what we are doing in Forma. Our customers now understand the connection between our efforts and the future we envisioned, thanks to examples they can relate to. This is empowering for us. We're maintaining our current trajectory, and while we may accelerate our work on larger and more complex models, this has been part of our strategy for some time.

Okay. Thank you, Andrew.

Thank you for your questions. Debbie, you mentioned the slowing subscriber growth while usage remains strong. Can you clarify the relationship between these two? Is the subscriber growth decline merely a result of customers being more cautious due to the uncertain economic conditions you’ve mentioned several times, or is there something else influencing this trend?

Yes, thanks. So, the biggest factor driving the sub growth that we saw in Q1 was actually the end of sale of the multi-year upfront contracts. So, Andrew mentioned it at the top of this Q&A session, but remember that the demand pattern that we saw during the quarter was impacted by that end of sale. Before the launch, we saw higher volume. And then, post launch, demand was lighter. That's typical of what we see when we launch programs like this to the market. But what it meant was that, on a net basis, the new piece of our business decelerated as we headed out of the quarter. So, Andrew also mentioned that over the last several weeks in May, we've seen that demand bounce back a bit. And it's generally in line with our expectations at this point.

Okay. Great. And then one more. Debbie, you also mentioned a tailwind in the second half, one being the EBA renewal pattern, adoption and usage has been strong there, I think you noted. Can you give us some more detail just on the moving pieces around the EBA renewals? Is it contract changes, pricing changes, what will be driving that tailwind in the second half of the year around the renewals?

Sure. I'll take a moment to discuss overall revenue trends and then focus on EBAs. To summarize, we anticipate a slowdown in revenue growth during Q2, followed by a rebound in the latter half of the year, which aligns with our historical seasonal trends. This expectation was included in our initial annual guidance. In Q2, we expect to face significant impacts from foreign exchange rates and the situation in Russia, which will hinder our revenue growth. However, in the second half of the year, the challenges from leaving the Russian market will be mitigated, and the effects of currency fluctuations will diminish as the year goes on. We also anticipate a substantial number of EBAs, especially in Q4, which are deals that were renewed three years ago at the onset of the pandemic and have shown strong adoption and usage since then. This deal activity is what is expected to drive our seasonal growth acceleration, particularly in Q4. You can refer back to our comments from fiscal '21 regarding Q4, where we mentioned that these deals were predominantly in the automotive sector. We expect these transactions to materialize, and the positive adoption and usage trends suggest that we will see the anticipated outcomes in Q4. Overall, our business momentum remains consistent with previous trends, and the assumptions in our guidance reflect this. We are on track to meet our financial objectives for the full year, and I want to emphasize that we are committed to positioning ourselves for success in fiscal '24 and beyond.

Great. Thank you for the questions.

Great. Thanks for taking my questions, guys. Andrew, in your prepared remarks, you talked a lot about AEC and obviously construction. This is an area obviously as we all know that's been sort of laggard to adopt SaaS and cloud. Can you talk about sort of where we're at in this evolution? The pandemic is behind us now, I think. But like, are you starting to see some of these field workers, some of the folks that are sort of like behind the scenes on construction starting to sort of embrace the technology more so? Is it a generational thing? Just any sort of incremental sort of catalyst for further construction cloud adoption?

Yes, it's a good question the way you phrased that around incremental catalysts. I think actually the rising adoption is becoming its own catalyst in many respects. I mean, obviously, we're continuing to see good growth in construction. We're seeing solid adoption. We're seeing really significant adoption in our EBA account. And adoption tends to lead to more adoption, because the people who adopt these technologies and start using these technologies on a regular basis tend to have higher bid precision, higher bid accuracy, tend to be able to execute more effectively during the projects, manage costs better, and all things associated with that. And that's a flywheel effect, because if you're better able to manage the cost of the project, you're better able to estimate the next project, bid on that project, and win an envelope that preserves your margins. So that is kind of the biggest thing that's going on right now out there in the industry is the flywheel effect. There's no kind of generational catalyst that's yet coming in here. But I will tell you there's one other thing that's persistently out there that's driving people to look towards technology, and it's they can't hire people, all right? More and more, they are not able to fully staff their sites and their jobs to the level that they were in the past. So, they need these productivity gains from technology. And it's between that and the flywheel of competition, there's kind of a momentum here that I don't see slowing down.

Super insightful. No, that's great. Thanks again for the time tonight, guys.

Thank you for addressing my question. I have a couple of inquiries about the indicators you observed this quarter. Andrew, you mentioned that bid activity was at record levels in BuildingConnected. Should we interpret this as an indication of health in the end markets, or is it more reflective of BuildingConnected's strong competitive position and the positive effects of digitization? Additionally, can you discuss the slowdown in new subscriptions or the deceleration you noticed? Was this primarily on the AEC side or across another segment?

Okay. So, let me address the next part of the question. Kind of the answer to your BuildingConnected question kind of both, all right? BuildingConnected certainly active. There's lots of activity going on there. But remember, it's the trend that matters. So, if the trends continue to indicate a large degree of bid activity, that means there's a large degree of bid activity out in the ecosystem. And what also is important to recognize is, our customers and especially in the AEC land, they're still working through backlogs. I mean, every customer I talk to has the same issue or same opportunity, however you want to look at it, that they still have to work through their backlog, they're still having trouble getting enough people to get the projects moving at the right kind of pace and so on and so forth. So there's still a backlog out there. But the trend on bid activity is real and it absolutely represents what's going on in the U.S. market in particular. Now with regards to deceleration and rebound in Q2 around volume, there was no hotspot, right? It was kind of uniformly the same across the board, right? So, it was more kind of dynamics of the business rather than any kind of particular hotspot.

Great. And then, just on the EBA renewals for the second half, are you expecting those to renew at kind of the typical net expansion rate that you see for the broader company? Or are you expecting anything different just given the environment?

I'll let Debbie elaborate on this. One of the points she made was that many of the EBAs coming due were renewed during the pandemic when there was a decline in activity and usage. Things have changed significantly since that time. So, Debbie, could you share your thoughts on the average relative difference with this cohort compared to the company overall?

Yes, I mean, I would say that in terms of what we're baking into our guidance, we're assuming that these customers renew at reasonable levels. I'm not going to get into more specifics beyond that. What's key is that they renew and we feel good about that happening given the fact that there has been high adoption and usage across these EBAs. It's a big cohort for us. We saw that performance back in fiscal '21. It was also an equally unusual economic time at that point. And so, I don't see this situation as any different. I think we've set the guidance at a reasonable point.

Alright. Thank you very much.

Great. Thanks for taking my question. Andrew, just given what's going on with the debt ceiling, any sort of impact that we should think about regarding federal deals and the pace of that business? And then, kind of related point, can you give us an update on where we are into the FedRAMP Moderate for Docs and BIM 360, Collaborate Pro?

Yes. Let me discuss FedRAMP. We have submitted all our paperwork and our systems are prepared for FedRAMP. We are currently awaiting the government's approval to proceed. Everything is moving forward on our end, and now we are just waiting for a response from the government. Regarding the debt ceiling, I won't speculate on it. I believe that bipartisan priorities are what really affect us. Both parties are focused on infrastructure and related issues, which are important to us. Therefore, I expect that the matters crucial to Autodesk and our business will likely remain unaffected by the current activities in Washington, D.C.

Helpful there. And then just maybe a quick pivot to Construction Cloud. I know you mentioned combining sales within the organization. Can you elaborate on some of the assumptions regarding the expected disruption, how long you anticipate it will last, and when you believe the merging will take place to enhance productivity?

Yes. So, first, let me kind of clarify exactly what we did. So, we merged the independent construction team with the mainline sales team inside the company. And we had kind of a few goals in mind there. One, we wanted to get a little bit more emphasis on the territory business that covers all of our business. And we wanted to make sure that we were focused not only on pure construction accounts, but design and construction accounts where we actually have pretty significant competitive advantage and there's a lot of opportunity. So this just kind of sharpened the pencil on kind of pursuing those opportunities in kind of a concerted way and kind of getting all the energy behind one effort. And we're pretty confident that, that's exactly what we're going to get. But of course, when you do that, sales reps get new accounts, people get moved from accounts, so they'll get new responsibilities. So it creates a little bit of short-term disruption. We absolutely expect that to work its way out over the next quarter or two. And we expect it to kind of compound benefits from doing us moving forward.

Makes a great sense. Thanks for taking my questions.

Good evening, everyone. If there were to be a continued decline in factors like the ABI or a specific downturn in new office markets, could you clarify if that poses a significant risk for your business? Additionally, can you outline which parts of your business are affected by these macro trends? Also, based on my calculations regarding half-over-half free cash flow, it suggests negative free cash flow for the second quarter to align with the first half of the year. Is this correct? Thank you.

I'll let Debbie answer the second half of that, but let me talk more broadly about what's going on in the AEC sector. With everything in these sectors, there's always puts and takes, right? And what you see is one sector sees some kind of decline in activity, nobody is building new office buildings or whatever. And in other cases, some people are seeing increases in activity. And that's exactly what we're seeing. I'll give you a classic example of what goes on in this environment. So, people are pulling back from office space right now, pretty significantly downsizing their offices. And as a result, what's happening is that there's more competition for getting people to sign leases for new office space. So what that's leading to is a kind of modernization of office space to accommodate new ways of working or to attract the best renters. And people are spending money on that, which is offsetting money being spent in other places. And we've taken all of this into account as we look forward into our business throughout the year. So that kind of gives you a sense for how billings shift around and how money moves around and what our relative sensitivity is to some of these things. A lot of these indicators you talked about, they kind of tell you what's already happened, not what's going to happen necessarily. That's why we like to pay attention to kind of our leading indicators around monthly active usage of the products. Now, I'll turn it over to Debbie to discuss the other part of your question.

Yes, in terms of free cash flow, I'm not going to get into specific guidance by quarter, but I would say directionally, I think you're thinking about it in a reasonable way. And just to recap some of the things, remember, with the tax payment extension to Q3, we'll have a negative also in Q3. And some of the things that I outlined in terms of the linearity of free cash flow on the year are the things that you should be thinking about. So, I recommend going back and listening to some of those points because that will help you model free cash flow by quarter.

Yes, great. Thanks for the details. Thank you.

Yes, thanks. Hi, guys. So, just wondering, given the comments about the second half acceleration, does that mean that you're expecting the peak of the macro impact to really hit next quarter? Or is some of that acceleration more just due to improvement in Autodesk execution based on some of the changes that you had mentioned during the prepared remarks?

So, Sterling, what I would say is we're not assuming any peak or trough in macro. We have a range for our guidance in our 7% to 9% range for revenue. We have the ability to address whatever macroeconomic situation that we see. And what we saw in Q1 was consistent with our general expectations on the year, and we've continued those expectations as we think about our outlook for the rest of the year. And you can see that our outlook is in line. What's really driving the change in linearity in our revenue growth is some of the things that I talked about, so seasonality, the acceleration that we expect from EBAs in the back half of the year, the impact from FX, and not having the drag from the exit of Russia anymore. So it's more about those things than it is about any fundamental underlying changes in our assumptions related to macro.

That makes sense. And then Andrew, one for you. When you think about the long-term opportunity for generative AI, LLMs, conversational interfaces, et cetera. Do you view this as something that's going to ultimately raise the ARPU and/or prices for Autodesk solutions, given the additional value add? Or is it going to be more differentiation at the current price levels just so you can drive more market share?

I think it's going to be a little bit of both, all right? In some cases, we're going to be delivering significantly more value to certain types of customers and we expect to charge for that value. In other cases, it's going to be a massive productivity enhancement for customers, and those customers are going to use that productivity to get more business, increase their book of business and it will be a competitive advantage for Autodesk. So it's a little bit of a mix of both, all right? But either way, we're going to be helping customers be a lot more efficient in one area and be much more creative in other areas in terms of designing what they need to do and how they need to design things.

Got it. Thank you.

Thank you, Latif, and thanks, everyone, for joining us on the call. We look forward to catching up with you next quarter. If you have any questions, please just email us at simon@autodesk.com. Latif, back to you.