Autodesk Inc (ADSK) — Q3 2024 Earnings Call Transcript

Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss the third quarter results of Autodesk's fiscal 2024. 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. Following this call, you can find the earnings press release, slide presentation and transcript of today's opening commentary on our Investor Relations website. During this call, we may make forward-looking statements about our outlook, future results and related assumptions, products and product capabilities, business models 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-Q 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. We will quote several numeric or growth changes during this call 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 are 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. Resilience, discipline and opportunity again underpinned Autodesk's strong financial and competitive performance despite continued macroeconomic policy and geopolitical headwinds. Renewal rates have remained strong and new business trends have been largely consistent for many quarters. Our subscription business model and our product and customer diversification enable that. It means that accelerating growth in Canada has balanced decelerating growth in the United Kingdom. The growing momentum in construction has balanced deteriorating momentum in media and entertainment. And that strength from our enterprise and smaller customers has balanced softness from medium-sized customers. Our leading indicators remain consistent with last quarter with growing usage, record bid activity on building connected and cautious optimism from channel partners. Disciplined and focused execution and strategic deployment of capital through the economic cycle enable Autodesk to realize the significant benefits of its strategy while mitigating the risk of having to make expensive catch-up investments later. As Steve said at Investor Day, we introduced a new transaction model for Flex, which gives Autodesk a more direct relationship with its customers and more closely integrates with its channel partners. We began testing the new transaction model across our product suite in Australia a couple of weeks ago. Assuming the launch proceeds as expected in fiscal '25 and '26, we intend to transition our indirect business to the new transaction model in all our major markets globally. In the new transaction model, partners provide a quote to customers, but the actual transaction happens directly between Autodesk and the customer. The new transaction model is an important step on our path to integrate more closely with our customers' workflows enabled by, among other things, Autodesk platform services and our industry clouds fusion, forma and flow. Autodesk, its customers and partners will be able to build more valuable, data-driven and connected products and services in our industry cloud and on our platform. The new transaction model is consequential. Many of you will have seen other companies adopting agency models and will already understand the math. In the near term, the new transaction model results in a shift from contra revenue to operating costs that provide a tailwind to revenue growth, while being broadly neutral to operating profit and free cash flow dollars and mechanically result in percent operating margins taking a step or two backwards. Over the long term, optimization enabled by this transition will provide a tailwind to revenue, operating income and free cash flow dollars even after the cost of setting up our building platform. Finally, there is opportunity from developing next-generation technologies and services that deliver end-to-end digital transformation of our design and make customers and enable a better world designed and made for all. I was at Autodesk University last week, alongside more than 10,000 attendees, where we announced Autodesk AI, a technology we've been working on and investing in for years. We showed how our design to make platform will automate noncreative work, help customers analyze their data and surface insights and augment their work to make them more agile and creative, but there is no AI without actionable data. And that's why we're also investing in Autodesk platform services, which are accessible, extensible and open via our APIs. Autodesk Platform Services offers several critical capabilities, but data services are the most impactful. These provide the tools that make data actionable. And at the core of our data services is the Autodesk data model. Think of the Autodesk data model as the knowledge graph that gives customers access to the design, make and project data in granular bite-sized chunks. The data chunks are the building blocks of new automation, analysis and augmentation that will enable our customers and partners to build more valuable, data-driven and connected products and services. Autodesk remains relentlessly curious with a propensity and desire to evolve and innovate. Time and again, well-executed transformation from desktop to cloud, from perpetual license and maintenance to subscription has added new growth factors, built a more diverse and resilient business, forged broader trusted and more durable partnerships with more customers and given Autodesk a longer run rate of growth and free cash flow generation. With our transformation from file to data and outcomes from upfront to annual billings and from indirect to direct go-to-market motion, we are building an even brighter future with focus, purpose and optimism. Our customers are also committed to transformation and Autodesk is deploying automation to increase their success in an environment with ongoing headwinds from material scarcity, labor shortages and supply chain disruption. That commitment was reflected in Autodesk's largest-ever EBA signed during the quarter and record contributions from our construction and water verticals to our overall EBA performance. I will now turn the call over to Debbie to take you through our quarterly financial performance and guidance for the year. I'll then come back to update you on our strategic growth initiatives.

Thanks, Andrew. Overall, market conditions and the underlying momentum of the business remained similar to the last few quarters. Our financial performance in the third quarter was strong, particularly from our EBA cohorts, where incremental true-up and upfront revenue from a handful of large customers drove upside. As expected, the co-termed deal we called out in our Q1 results renewed in the third quarter with a significant uplift in deal size. Total revenue grew 10% and 13% in constant currency. By product in constant currency, AutoCAD and AutoCAD LT revenue grew 7%, AEC revenue grew 20%, manufacturing revenue grew 9% and in double-digits, excluding variances and upfront revenue, and M&E revenue was down 4% and up high single-digits percent, excluding variances in upfront revenue. By region in constant currency, revenue grew 19% in the Americas, 11% in EMEA and 3% in APAC, which still reflects the impact of last year's COVID lockdown in China. Direct revenue increased 19% and represented 38% of total revenue, up 3 percentage points from last year, benefiting from strong growth in both EBAs and the eStore. Net revenue retention rate remained within the 100% to 110% range at constant exchange rates. The transition from upfront to annual billings for multiyear contracts is proceeding broadly as expected. We had the second full quarter impact in our third fiscal quarter, which resulted in billings declining 11%. Total deferred revenue increased 6% to $4 billion. Total RPO of $5.2 billion and current RPO of $3.5 billion both grew 12%. Excluding the tailwind from our largest-ever EBA, total RPO growth decelerated modestly in Q3 as expected when compared to Q2, mostly due to the lower mix of multiyear contracts in fiscal 2024 when compared to fiscal 2023. Turning to the P&L, non-GAAP gross margin remained broadly level at 93%. GAAP and non-GAAP operating margin increased driven by revenue growth and continued cost discipline. I'd also note that costs associated with Autodesk University have shifted from the third quarter last year to the fourth quarter this year due to the timing of the event. Free cash flow was $13 million in the third quarter, primarily limited by the transition from upfront to annual billings for multiyear contracts and the payment of federal taxes we discussed earlier this year. 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. We remain vigilant during this period of macroeconomic uncertainty. As you heard from Andrew, we continue to invest organically and through acquisitions in our capabilities and services and the cloud and platform services that underpin them. We purchased approximately 500,000 shares for $112 million, at an average price of approximately $206 per share. We will continue to offset dilution from our stock-based compensation program to opportunistically accelerate repurchases when it makes sense to do so. Now, let me finish with guidance. The overall headline is that our end markets and competitive performance are at the better end of the range of possible outcomes we modeled at the beginning of the year. This means the business is generally trending towards the higher end of our expectations. Incrementally, FX and co-terming have been slightly more of a headwind to billings than we expected. EBA expansions have been slightly more of a tailwind to revenue and interest income has been slightly more of a tailwind to earnings per share and free cash flow. Against this backdrop, we are keeping our billings guidance constant while raising our revenue, earnings per share, and free cash flow guidance. I'd like to summarize the key factors we've highlighted so far this year. The comments I've made in previous quarters regarding the fiscal 2024 EBA cohort, foreign exchange movements, and the impact of the switch from upfront annual billings for most multiyear customers are still applicable. We again saw some evidence of multiyear customers switching to annual contracts during the third quarter, as you'd expect, given the removal of the upfront discount. We're keeping an eye on it as we enter our significant fourth quarter. All else equal, if customers switch to annual contracts, it would proportionately reduce the unbilled portion of our total remaining performance obligations and negatively impact total RPO growth rates. Deferred revenue, billings, current remaining performance obligations, revenue, margins, and free cash flow would remain broadly unchanged. Annual renewals create more opportunities for us to drive adoption and upsell and are without the price lock embedded in multiyear contracts. Putting that all together, we now expect fiscal 2024 revenue to be between $5.45 billion and $5.47 billion. We expect non-GAAP operating margins to be similar to fiscal 2023 levels with constant currency margin improvement, offset by FX headwinds. We expect free cash flow to be between $1.2 billion and $1.26 billion. To reflect higher revenue guidance, we're increasing the guidance range for non-GAAP earnings per share to be between $7.43 and $7.49. Our billings guidance remains unchanged, given incremental foreign exchange headwinds and the potential for further EBA co-terming in the fourth quarter. The slide deck on our website has more details on modeling assumptions for Q4 and full-year fiscal 2024. 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've been saying all year, the path to 45% will not be linear. We've talked about all of the factors behind that over the last three quarters, and I think it's useful to put them all in one place here, particularly as we look into fiscal 2025 and 2026. First, the macroeconomic drag on new subscriber growth, a smaller EBA renewal cohort with less upfront revenue mix, and the absence of EBA true-up payments are headwinds to revenue growth in fiscal 2025. Slightly offsetting that, we expect our new transaction model, which Andrew discussed earlier, to be a tailwind to revenue growth in fiscal 2025 and beyond. Assuming no material change in the macroeconomic, geopolitical or policy environment, we'd expect fiscal 2025 revenue growth to be about 9% or more. In other words, at least around the same or more growth as we are now expecting in fiscal 2024. And second, the transition to annual billings means that about $200 million of free cash flow in Q1 fiscal 2024 that came from multiyear contracts billed upfront will not recur in fiscal 2025. This will reduce reported free cash flow growth in fiscal 2025 and make underlying comparisons between the two years harder. If you adjust fiscal 2024 free cash flow down by $200 million to make it more comparable with fiscal 2025 and fiscal 2026 on an underlying basis, the stacking of multiyear contracts billed annually will mechanically generate significant free cash flow growth in fiscal 2025 and fiscal 2026. The progression from the adjusted fiscal 2024 free cash flow base will be a bit more linear, although fiscal 2026 free cash flow growth is expected to be faster than fiscal 2025 as our largest renewal cohort converts to annual billings in that year. As you build your fiscal 2025 quarterly and full-year estimates, please pay attention to what we've said each quarter during fiscal 2024. As Andrew said, our new transaction model will likely provide a tailwind to revenue growth, be broadly neutral to operating profit and free cash flow dollars, and be a headwind to operating margin percent. The magnitude of each will be dependent on the speed of deployment. Excluding any impact from the new transaction model, we are planning for operating margin improvement in fiscal 2025. Overall, we expect first half, second half free cash flow linearity in fiscal 2025 to be more normal than in fiscal 2024. And we still anticipate fiscal 2024 will be the free cash flow trough during our transition from upfront to annual billings for multiyear contracts. Per usual, we'll give fiscal 2025 guidance when we report fiscal 2024 results, so I don't intend to parse these comments before them. As I said at our Investor Day last March, the new normal is that there is no normal. Macroeconomic uncertainty is being compounded by geopolitical, policy, health and climate uncertainty. I'm thinking here of generational movements in monetary policy, fiscal policy, inflation, exchange rates, politics, geopolitical tension, supply chains, extreme weather events and, of course, the pandemic. These increased the number of factors outside of our control and the range of possible outcomes, which makes the operating environment harder to navigate both for Autodesk and its customers. In this context, the mechanical rebuilding of our free cash flow as we transition to annual billings for multiyear contracts gives Autodesk an enviable source of visibility and certainty. I hope this gives you a better understanding of why we've consistently said that the path to 45% will not be linear. But let me also reiterate this. We're managing the business to this metric and feel it strikes the right balance between driving top line growth and delivering 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 third quarter. We continue to see good momentum in AEC, particularly in transportation, water infrastructure and construction. Fueled by customers consolidating on our solutions to connect and optimize previously siloed workflows to the cloud. Market conditions remain similar to previous quarters. In Q3, WSP, one of the world's leading professional services firms closed its sixth EBA with Autodesk, a testament to our strong and enduring partnership. Leveraging the breadth of our portfolio, WSP has delivered the comprehensive range of services demanded by its clients, generated millions of dollars in pipeline across the AEC and manufacturing industries, secured bridge and groundwork contracts through automation capabilities, reduced costs through increased efficiency and most importantly, delivered impactful results for its customers. TCE, a global engineering and consulting firm, which supports all types of infrastructure is harnessing Autodesk solutions to bolster its sustainable development goals around clean water and sanitation. Industry innovation, infrastructure and responsible consumption and production, utilizing Autodesk's BIM Collaborate Pro, TCE plans to improve team collaboration through easier data exchange, fewer clashes and more effective design years. Autodesk solutions are empowering TCE to manage, coordinate and execute projects more efficiently, thus contributing to a better quality of life through improved infrastructure. We are seeing growing customer interest in our complete end-to-end construction solutions, which encompass design, preconstruction and field execution through handover and into operations. Encouragingly, Autodesk Construction Cloud MAUs were again up well over 100% in the quarter. In Q3, LFD, Inc., an ENR top 200 general contractor based in Ohio, selected Autodesk Construction Cloud over directly competitive offerings as its end-to-end construction platform. With our preconstruction and cost capabilities of standout differentiator, it ultimately chose Autodesk based on our level of partnership, our aligned vision and commitment to serve the evolving needs of the construction industry and the momentum our solution has demonstrated in the marketplace. Again, these stories have a common theme: managing people, processes and data across the project lifecycle to increase efficiency and sustainability while decreasing risk. Over time, we expect the majority of all projects to be managed this way, and we remain focused on enabling that transition through our industry clouds. Moving on to manufacturing. We made excellent progress on our strategic initiatives. Customers continue to invest in their digital transformations and to consolidate on our design and make platform to grow their business and make it more resilient. For example, a global industrial company based in the U.S. is partnering with Autodesk to innovate more rapidly in its business. The customer had already standardized on Autodesk's up chain to streamline its data and process management within their molding technology solutions and modernize its CAM process by adopting Fusion to significantly reduce programming time and eliminate risks from legacy software. During Q3, it renewed its EBA with Autodesk and plans to broaden its use of up chain, vault infusion. It is exploring Fusion's ability to enhance process management and its digital thread initiatives, which focus on product life cycle management, closed-loop quality, sustainability design, service life cycle management and supplier insight. Fusion continues to provide an easy on-ramp into our cloud ecosystem for existing and new customers. For example, a leading manufacturer for the agriculture industry is migrating from network licenses to named users and complementing those subscriptions with Flex tokens to maximize value and access for occasional users. As it digitizes its factories and creates digital twins for its global facilities, it will use Flex to explore Autodesk's most advanced technology for Fusion, for CAM tool path automation and generative design. Flex provides the customer with the flexibility to scale its usage based on its needs, making sure its users have access to the right products at the right time. Fusion continues to grow strongly, ending the quarter with 241,000 subscribers as more customers connect more workflows in the cloud to drive efficiency, sustainability and resilience. In automotive, we continue to grow our footprint beyond the design studio into manufacturing and connected factories. In Q3, a leading automotive manufacturer renewed and expanded its EBA by more than 50%. In addition to its existing usage of alias for concept design modeling and design evaluation, the customer is replacing an internal tool with Red for lighting simulation. In the future, it will implement flow production tracking to improve and accelerate project communication and collaboration across departments and expand its use of Autodesk's integrated factory modeling to optimize factory layouts and enhance operational performance. In education, we are preparing future engineers to drive innovation through next-generation design, analysis and manufacturing solutions. For example, our partnership with PanState is making a positive impact in design classes and car CMC activities across the PanState, Barron's, Burks, Terresburg and University Park campuses. PSU Harrisburg has recently adopted Fusion in its core design class and plans to integrate it into its mechanical engineering curriculum. Fusion's accessible platform allows students to seamlessly transition from CAE to CAM enabling them to make a difference outside the classroom and in industrial applications. They have already collaborated with NASA on a generative design project for spaceflight applications, inspiring numerous projects at NASA. And finally, we continue with our customers to ensure they are using the latest and most secure versions of our software. A publicly traded construction company in Japan sought to streamline software management processes and minimize compliance risks by leveraging single sign-on and directly sync features available in our premium plan. Through a collaborative analysis of the client software usage logs, we identify instances of non-compliant usage and recommended an appropriate number of subscriptions based on usage frequency and actual requirements. This proactive approach ensures that the client has the necessary access to meet their needs while maintaining compliance. We've been laying the foundation to build enterprise-level AI for years with connected data, teams and workflows in our industry cloud, real-time and immersive experiences, shared extensible and trusted platform services and innovative business models and trusted partnerships. Autodesk remains relentlessly curious with a propensity and desire to evolve and innovate. We are building the future with focus, purpose and optimism. Operator, we would now like to open the call up for questions.

Okay. Great. Hi guys, thanks for taking my questions here. How are you?

Great, Saket.

Andrew, maybe for you. Lots of talk about here, right, particularly with the new transaction model. Maybe the right first question here would be. Why is this new model, I guess, as consequential as you said in your prepared remarks. Any color there you can add?

Yes, absolutely. Let me start Saket by saying First, the business is super resilient where we're built through resilience, and this is really showing up in these results this round as well. And that's going to continue into the future. When we talk about this new transaction model, I think it's important to back up and talk about what we're trying to do with our customers and the journey we've been on. We are trying to do no less than move all of our customers to cloud-based life cycle solutions powered by AI that connect their design and make processes in a way that they've never had connected before. Now to do that, you absolutely cannot use 40-year-old systems and business models. So we've been on this relentless journey to modernize the company. We started moving from developing cloud-based products to subscription models, to annualized billings. I mean you've seen journey after journey here to modernize the company. This is the next step and one of the most important steps in modernizing the company so that we have the kind of relationship with our customers that actually matches the kind of technology we're delivering to them. So through this, we're not only going to have direct engagement with our customers through the products they use in the cloud, we're going to have direct engagements with them as a customer as an account. We're going to understand them at the account level and as an entity, not just as a collection of transactions passed through several tiers. And that's really important. Because that will not only give us more information about our customers, it will help us give more information to our partners about our customers and understand them significantly better. And it will wrap up the whole solution and business model and capabilities in one package. The other really consequential thing here is our partner network has to move transaction-focused partners to solution-focused partners. They are going to be incredibly important on the front lines in helping our customers deploy and integrate new design to make solutions in the cloud. And this is going to be part of that transition for them. So yes, it is very consequential. And it's part and parcel of a long stream of modernizations we've been working on for a while, and I do think it's very significant.

Got it. No, absolutely. It sounds very strategic. Debbie, maybe for my follow-up for you. I know you said you wouldn't share details about fiscal 2025. But could we maybe discuss those comments for fiscal '25 a bit, considering some of the moving parts?

There are indeed a lot of moving parts, Saket. So thanks for the question. I know that's the question that everyone wants to ask. I'm not going to parse all the details, but I'll just highlight some of the things that we called out in the opening commentary. Those things are the non-recurrence of EBA upfront and true-up revenue, FX and the macro drag on new subscriber growth, these are all things that are headwinds to revenue growth next year. We also talked about the impact depending on the timing of this move to a new transaction model. That's going to be a tailwind to revenue. It will be margin and cash flow dollar neutral and is a headwind to margin percent. We'll give you all the details on this in February for the usual. But remember, what we're really trying to do is set ourselves up for success over the long term.

Makes a lot of sense. Thanks, guys. I’ll get back in queue.

Thank you. Good evening. So on fiscal 2025, following up on Saket's question, at the analyst meeting earlier this year, Debbie, you showed a chart depicting sustainable double-digit growth for Autodesk of 10% to 15%. And based on a combination of various price and volume components, are you still adhering to that plethora of price and volume sources of growth? Or have you changed your thinking in terms of the magnitude or mix of those sources of growth over time?

We are still targeting those sources of growth, Jay, as well as targeting the growth parameters of 10 to 15 points of revenue growth. Really, what we're dealing with is this uncertain environment. And based on what we know today and assuming that market conditions are similar to what we've seen over the last several quarters, we do see revenue growth next year of about 9% or more. And what's driving that is really all those puts and takes that I talked about in the opening commentary. It's really important to remember that what we're trying to do is set ourselves up for success over the long term.

Okay, Andrew, following up on AU last week. There were several interesting and useful sessions regarding our roadmaps and product plans, particularly on AUC and more generally concerning the data model. So, let me ask you a complex question about that. When you consider the role of what you refer to as granular data, does it ultimately impact the packaging, composition, or consumption of the software as you implement it? You also provided detailed descriptions of the direction of ACC, Bill, and AC in general, but there was no timeline in any of those presentations. How are you approaching the general availability of much of what you discussed last week at AU in terms of commercializing a large set of new technology features, especially for AC?

Yes. So, let me address that by starting with the details regarding granular data. As we progress along this path, it becomes clear that the way the product functions, especially Forma, in its interaction with Revit, creates an environment that resembles the fusion environment. This new environment differs significantly from what is currently prevalent in the broader use of our AC products. Granular data will ultimately alter how people engage with and utilize the products, leading to a new paradigm in their daily interactions. Regarding the timeline, I'm not certain which presentation you attended, but it seems like you were looking at the longer-term timeline presentation. Much of what was showcased there spans a two to five-year timeframe, although many developments will emerge within the two to three-year range that relate to what you’ve heard. It’s fairly easy to identify which initiatives are planned for the earlier part of that spectrum compared to the later. Transitioning some solutions to infrastructure and merging them with our existing infrastructure efforts is likely on the later end, while enhancing data granularity and integrating detailed and conceptual design in Forma is much closer on the timeline. This is the sort of expectation you should have concerning those road maps.

Great, great. Thank you both.

Awesome. Thanks so much for taking the question. Maybe for Debbie, just on the multiyear to annual billings transition. Maybe just if you could just remind us kind of where we are overall in the process relative to expectations. And I do know that there are still some smaller cohorts that have yet to transition and just curious kind of where we are for those and if that's going to take place next year? Or is that still kind of in process?

Sure. Thanks. The rollout is going well. We're a couple of quarters in the systems are working. Customers and partners are behaving pretty much as we expected. So overall, the performance is in line with our expectations. I think the key thing is, remember, we're kind of at the beginning of this journey. This is going to be a three-year journey. So we're going to have a mechanical rebuild of free cash flow as we get into next year, fiscal 2025 and also in fiscal 2026. So some of the comments that I made on the call are important, and that is helping you think about how to normalize our fiscal 2024 cash flow headed into fiscal 2025. So we're moving that $200 million at the beginning of fiscal 2024 as we head into fiscal 2025. And then broadly, the fact that we'll have bigger cohorts coming up for renewal in fiscal 2026, which drives faster growth in free cash flow in that period. So overall, things are going well, and we're at this interesting point where we expect to see mechanical rebuilding of free cash flow from here.

Got it. And maybe just a quick question. Interesting AI announcements with Autodesk AI, back at AU last week. Any commentary on how to think about any price uplift from those solutions? Thanks again.

Yes. So I'll take that one, Adam. Look, some of these features are already and will be delivered through our existing products. However, there are new models we will be exploring with some of these capabilities. Obviously, it's a little too early to talk about actual monetization. But I do think some of the things you're seeing with Microsoft right now are quite interesting, where highly evolved large models, which we have not yet deployed out in the market are offered up to individual customers as a here's your model. Now you train it, you custom train it and extend it with your data. Those kinds of models are going to be very interesting in the future and really look like possibilities that we'll probably explore and look at as we move forward. But for now, a lot of this functionality is going to end up integrated with the existing products as it has been for the last several years.

Great. Thanks again.

Great. Hi, everyone. Maybe just a follow-up on that last question. Andrew, like you said, AI and automation is not new at Autodesk. But I did think the messaging was maybe a little more exact and pointed just as it pertains to the cloud data strategy and how that really is the gateway to future AI capabilities that Autodesk how customers need to be thinking about this. So my question is just curious to hear any feedback from customers on this approach. And maybe levels of resistance or buy in, you've started to hear just pertaining to customers kind of pooling their data and Autodesk ends up being the aggregator of industry information?

Yes. So look, we have a very strong point of view on ethical and high trust use of data, and we intend to continue to pursue that with our customers and take a broad and strong stance around look, it's your data. We're going to work with you to use it appropriately for things that make the whole ecosystem better. We're going to do it in a way that's trusted. And we're also going to work with you in a way that allows you to preserve the IP that you think is important to you that does not become part of the entire ecosystem. So this is a conversation I have with many, many customers most obviously recognize the trade-off between massive amounts of productivity in terms of automating model creation and some of the benefits there. So they want to participate in ways that actually make sense for them and that maintain the trust and integrity that we're looking to do. So look for us to handle this in exactly that matter as we move forward.

Okay. Great. And then I'm going to take my best shot at FY 2025 question as well. But I think maybe 2 points of clarification or additional information. So Debbie, just on kind of the known headwind to free cash flow next year because of the long-term deferreds that happened to hit in this year. Can you reconcile that with the normal seasonality comment? Should we be removing that and then thinking about modeling normal seasonality, part A? Part B, you've talked about currency a lot is having impacts on some of these numbers. And I would imagine just given what's on the balance sheet, you probably have a good sense of what currency will be next year. How does currency factor into that 9% plus revenue growth rate you provided?

Sure. Thanks, Joe. So on the first question, I think you're thinking about it in a reasonable way. So take out the $200 million and then it should have a more reasonable that will give you more reasonable modeling expectations as you think about modeling fiscal 2025 and beyond. And then on currency, it's really been all over the place. I think everybody has been seeing that. What we see right now is that it would be a headwind for us as we head into next year. But given the volatility, I think it really could go either way. But based on what we're seeing right now, it is a headwind to revenue growth next year.

Okay. Thank you very much.

Okay. Great. Thanks for taking the question here. Andrew, you talked about some record contribution from the construction side of the business, I think, broadly, but also within the EBAs. Could you elaborate within Autodesk Construction Cloud. What are the strongest areas you're seeing customers about?

Yes. No. What's interesting is we're not seeing the softness in construction that others may have highlighted. In fact, we have incredibly strong performance at the top end of our business. We saw strong growth internationally. And we're seeing growth in the U.S. And a lot of things are going on in the construction business right now. And whereas you see some sectors slowing down retail warehouse office things like that. You're seeing other things offsetting it. Again, the dynamicism of Autodesk business, manufacturing, industrial, lots of factory construction going on, data centers, healthcare, infrastructure, all of these things are picking up. So we've got a lot of dynamics that are playing well with regards to our construction business right now. When we look at the business, we look at the indicators that we have, bid board activity was at record highs again. So we saw a good strong bid activity there. While construction backlog may have declined a bit, it's still high, all right? And the number one thing that I heard from general contractors at Autodesk University was still can't hire enough. So they're still going to be working through that backlog at a relatively slow pace. Also, what's really interesting is we're seeing ourselves in more deals down market now more competitive deals, and frankly, we're winning some of them. And I think that's interesting. I think that probably results in slowing down deals for some of our competitors in various markets. But we're actually seeing a lot more interesting deal activity.

That's helpful. And a follow-up for Debbie. I appreciate you getting a lot of questions on FY 2025. And I'm not going to ask you to dissect it further. But if I think about just trying to bridge the 9%, which seems like it does have some tailwinds from the transactional changes relative to that 10% to 15% framework that you gave, it doesn't seem like macro has worsened relative to a few quarters ago or a year ago when you gave that out based on your commentary. Just help us understand that bridge. Is it mostly conservatism or maybe currency or some of the other headwinds are larger than we're thinking about? Thank you.

Yes. Sure. So remember, you got to be thinking about the non-recurrence of the EBA upfront and true-up revenue that we've been talking about all year. FX, as I just mentioned, could be a factor right now, we're assuming that it is a headwind to revenue growth. And then finally, we have been talking about the macro drag on new subscriber growth all year. And remember, given the ratable revenue recognition model that we have, what we're seeing with new subscriber growth this year has more of an implication for revenue growth next year than for revenue today. So those three factors are the biggest factors driving our estimate of 9% or more as we head into next year.

Okay. Thank you.

Great. Thanks for taking my question. Maybe one on the EBAs. So in Q3, did you see any of these renewals maybe happen earlier than expected? Overall, it sounds like you're still seeing some timing true-ups, but also some pretty big expansions. Is the overarching takeaway that the cohort is expanding maybe better than what you had anticipated?

Thanks, Jason. So the EBA cohort has been performing really well all year, which has been great. Remember, this is a cohort that last renewed in late 2020. That was at the height of the pandemic. And back then, they made more conservative assumptions about usage because of the uncertain environment at that time. Fast forward to today, these customers are continuing to manage through a high demand for projects. That's led to higher overall usage on their contracts. And as we've mentioned before, we do monitor the usage. So we've had insight into the potential EBA upside as the year has progressed. We've continued to update our outlook, which is each quarter of the renewals and the true-ups. And as we look at Q4. We've got our eye on the remainder of this large EBA cohort and the signs continue to be strong. We factored all of this into our latest estimates, and that's what drove the top line upgrade that we communicated today.

Okay. Great. And then I asked this question last quarter, but it sounds like a few of your competitors might be starting to see some of the water infrastructure funding start to flow as intended this time. Are you seeing this, too? And then is this the strength that you're already seeing? Or could this be an additional opportunity for maybe next year?

Yes, Jason, one thing you might have heard is that some of the funds from the infrastructure bill aimed at modernizing departments of transportation amount to about $34 million. This is significant because it not only initiates the modernization process for these DOTs but also targets several that we have relationships with, where we've managed to displace competitors and engage with the infrastructure. This is quite exciting as it indicates that money is beginning to flow to the projects. As I've mentioned, it takes time for funds to be released from Washington to the necessary areas. However, this funding will create momentum for future projects and help us progress. I would say this remains an emerging opportunity. Projects are beginning, but there is also hope for even more projects in the future.

Okay, Great. Thank you.

Yes. Thanks for the questions. Two, if I could. So first for you, Andrew. A number of changes with partner relationships from last year, you mentioned the new transaction model I think earlier you also changed the commission structure to more back end versus front-end loaded. So curious what kind of reaction you're hearing from your partners and how you expect these changes to impact that relationship?

Yes. So obviously, we invest a lot in bringing our partners along on this. It doesn't mean all partners are going to be happy with these changes. Okay? It's just that is not an outcome that we're looking for or is likely. But many partners are going to be happy with these changes because we've been very clear about what the path is to growth for them. Beyond that, we've taken a really kind of incremental approach to these things with our partners. We kind of led them along, showed them the way. You might recall, we started the new transaction model with Flex, close to about 1.5 years ago in Australia, then we rolled it out to the broad-based partner network and everybody got experience with it. Now we're testing in Australia. Again, we take our partners along on these journeys in very deliberate ways. And frankly, the credibility we have with our partners in terms of making their businesses more consequential and significant and, frankly, larger over time has really created an environment where there's a lot of trust. And there's a lot of discussion about what's the best way to do this. What this means for them and where it's going to take their business. And this will make the partners ultimately more consequential in some of the business discussions with their partners with their customers by bringing them closer to the design and make infrastructure work that needs to happen in the services and support that.

Thank you for that, Andrew. And one for you, Debbie, will see a check on the accounting of the math. You mentioned EBA revenue, non-recurrence in fiscal 2025 a few times. So, two pieces. First, accounting. I thought that the true-ups with upsizing in EBA, I thought that was recognized ratably over the term of the contract. Just trying to think how that might carry over and impact 2025, I'm correcting that accounting? And then second, if you can just remind us on the actual benefit to fiscal year 2024 from those items so we can pull that out of the fiscal year 2025 number?

From an accounting perspective, we recognize true-ups upfront. When an enterprise customer signs up for a certain number of tokens and exceeds that number, we bill them for the difference and record that revenue immediately. This revenue does not recur in future periods unless, over the next three-year contract term, they utilize more tokens than originally allotted again. Therefore, this situation is essentially a one-time occurrence that could only happen again in three years for these contracts if the scenario repeats itself. Regarding the benefit to fiscal 2024, we haven't provided exact figures yet, but the overall guidance upgrade we discussed today is primarily due to the strength we are observing in the enterprise business this year.

Great. Thank you both.

Thank you for taking my questions. For either of you, I'm interested in understanding the long-term impact of shifting from contra revenue. How will this affect pro forma revenue growth after the business has transitioned more to the Flex model?

Revenue growth will accelerate, and the speed of that acceleration will depend on our rollout strategy. We launched Flex last year and recently introduced it in Australia, where we are currently gathering insights. Looking ahead to next year, we plan to expand globally, but we need to ensure we are prepared for success, which is why we are closely monitoring Australia. When we fully implement all aspects of this transition, it will significantly boost our revenue growth.

Got it. Thank you. And then I know last quarter, you saw some pretty good non-compliant conversions I don't think you mentioned the other side - recall you're talking about that. Was there any this quarter that you called out?

We continue to perform well with our non-compliant conversions. So, I think you've heard us talk about a couple of things. I think historically, we have talked about some of the larger deals that we've closed, and those types of deals are still happening. But as I recall, on last quarter's earnings call, Andrew was talking about some of the stuff that we've been doing in product that's driving more conversion. That's on a smaller scale in terms of deal sizes, but is driving significant volume for Autodesk. So, over time, you're going to see us continue to flex different means of driving more compliance from non-compliant users, and it continues to be a steady drumbeat contributor to our revenue growth over time.

Got it. Thanks.

Great. Thanks for taking my question. Just kind of following up on that last one on the new transaction model. Like what kind of learnings are you looking to see from Australia before kind of rolling the app more broadly and kind of any disruption kind of that we should think about from a pointer perspective?

One of our key focuses is understanding how partners structure their deals to ensure they can efficiently input them into our system and align their pipelines with the new processes. Previously, distributors handled some of these services for our partners. We are determined to ensure that large volumes integrate smoothly with the systems. Given our experience with Flex, we feel fairly confident, but we recognize the need to conduct thorough stress testing. It's crucial that our product offerings function seamlessly, particularly when it comes to adjusting renewal dates without any complications. We are looking to ensure that all aspects involved in a partner entering a deal operate effectively. We are committed to validating that everything works as it should. Our confidence stems from the Flex project, and these are the elements we will be focusing on during the Australia pilot.

That's helpful there. And just kind of following up on Fusion 360. I know you guys are making some pricing adjustments going into next year, kind of raising the list price on Fusion 360, but kind of rationalizing and lowering the price on the extensions. What's the kind of rationale behind this? Is this to drive kind of further extension adoption down the road? And kind of how does this inform your views on as you think about rolling this out to the form and the like?

Yes. The price increase for Fusion is closely tied to the value we provide. The value of Fusion is significant, and we should examine the pricing more closely. We believe that the value will keep rising. We've noticed that some extensions may experience better adoption within the core offering, which has led to a slight reduction in the price of the extensions. We're working to balance the overall cost of ownership for different customer segments, and this feels like the right time to make these adjustments.

Very helpful. Thanks for taking the question.

Hi, everyone. Thank you for answering my question. Regarding subscriber growth, can you clarify what kind of growth rate we should expect this year? Are we looking at a low to mid-single-digit range? Also, what conditions do you think would cause the growth to flatline? Lastly, on the free cash flow front, at the Investor Day, you indicated that cash would continue to grow from 2023 to 2026. Are we still aligned with that long-term cash outlook?

Yes. So Steve, let me take the first question a little bit. I won't answer the specific question. What I want to say is our business is incredibly resilient. You have to really pay attention to that, we're built for resilience. And I want to highlight some of the differences in puts and takes here. For instance, you probably noticed that AEC grew 20% in the quarter. And that offset some of the headwinds from media and entertainment due to wider strikes and after strikes. Regionally, India and Canada offset the U.S. and the U.K. Market segment-wise, EBAs and small businesses offset the mid-market. You have to think of the business through this built for resilient framework. And so I want to shift your lens a little bit, and then I'll let Debbie comment on the second part of your question.

Yes, I would say, look, outside of the new transaction model, nothing has changed, and we're on track to achieving our goals. But this is a pretty big decision for us to transform our go-to-market. But I think is really beneficial to the company. It's going to drive greater free cash flow and greater revenue growth over the long term. I'm not going to parse comments about fiscal 2026 in addition to fiscal 2025 on this call. What we're really trying to do is set ourselves up for success over the long term and make smart decisions for the business and for our shareholders.

Okay. Great. Thanks a lot.

Thanks, everyone, for joining us. Wishing those who celebrate a happy Thanksgiving and looking forward to catching up with you on the road over the coming weeks and at next quarter's earnings. Thanks so much, Latif. Handing back to you.