Autodesk, Inc. (ADSK) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Autodesk First Quarter Fiscal 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the floor over to David Gennarelli, Senior Director, Investor Relations. Please go ahead, sir.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our first quarter of fiscal year 2018. On the line are our co-CEOs, Amar Hanspal and Andrew Anagnost; and Scott Herren, our CFO. Today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com/investor. As noted in our press release, we have published our prepared remarks on our website in advance of this call. Those remarks are intended to serve in place of extended formal comments, and we will not repeat them on this call. During the course of the conference call, we'll make forward-looking statements regarding future events and the anticipated future performance of the company, such as our guidance for the second quarter and full year fiscal 2018; our long-term financial model guidance; the factors we use to estimate our guidance, including currency headwinds, our maintenance to subscription transition, ARPs, customer value, cost structure, our market opportunities and strategies and trends for various products, geographies and industries. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, specifically our Form 10-K for the fiscal year 2017 and our current reports on Form 8-K, including the Form 8-K filed with today's press release and prepared remarks. Those documents contain and identify important risks and other factors that may cause our actual results to differ from those contained in our forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but we'll not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. During the call, we will also discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of our GAAP and non-GAAP results is provided in today's press release, prepared remarks and on the Investor Relations section of our website. We will quote a number of numeric or growth changes as we discuss our financial performance and, unless otherwise noted, each such reference represents a year-on-year comparison. And now I'd like to turn the call over to Amar.

Thanks, Dave. We're off to an impressive start to the new fiscal year with broad-based strength across all subscription types and geographies. These kinds of results are increasing our confidence in the acceptance of the subscription model and our ability to achieve our goals. There are several areas to highlight in Q1, including we added a record 186,000 total subscriptions. Total ARR grew 20% at constant currency; recurring revenue jumped to 90% of total revenue; and we overachieved on both our revenue and spend goals, leading to better-than-expected EPS. As we've demonstrated over the past several quarters, we are executing well and making real progress on our 2 major initiatives: growing the lifetime customer value by moving customers to the subscription model and expanding our market opportunity with increasing adoption of our cloud-based solutions. Now let's dive into our Q1 performance a little more. Before I get too far, I want to note a change in our terminology. New model is now known simply as subscription plan to synchronize with our new revenue reporting terminology. Just like new model, subscription plan consists of product subscriptions, enterprise subscriptions and cloud subscriptions. We added 233,000 subscription plan subs in Q1, which is even higher than our seasonally strong fourth quarter of last year. What's more, we netted a record 186 total subscription additions, resulting from strength across all subscription plan types and a higher renewal rate for maintenance plan subs. One of the best signals for the health of our business was a strong demand for our core design and engineering products, which is reflected in impressive year-over-year growth of over 170% in product subscriptions. Even more pleasing was the strength in product subscriptions was broad-based with triple-digit growth across all geographies and very strong growth in emerging markets. Once again, new customers represented about 1/3 of our new product subscriptions for the quarter. These new customers come from a mix of market expansion, growing in emerging countries, unlicensed users and people who have been using an alternate design tool. Subscription plan subs also had a strong contribution from our new enterprise customers. I mentioned on last quarter's call that in Q4, we had signed up a record number of enterprise customers for our token-based or consumption style EBAs. And that because of the way we count those subscriptions, we'd see the benefit to net new subscriptions in Q1 just as we did in the first quarter of the last 2 fiscal years. These EBAs contributed a record 44,000 subscription additions in Q1 of this year, 10% more than Q1 of last year. EBAs with our large enterprise customers have been a very successful component of our transition, leading to both increased subscriptions and account value while creating increased flexibility for our customers. The third component of our subscription plan subs is our cloud products. This is the TAM expansion part of our business, and we are building on our leadership in the cloud. Cloud subscription additions continue to show strong growth, growing by over 4x Q1 of last year. And these were driven by BIM 360, our BIM collaboration and construction management tool, and closely followed by Fusion, our cloud-based design and fabrication tool. In addition to brand-new customers to our cloud products, we're also doing a lot of add-on business with our existing cloud customers. A great example of this was a large Australian construction company which had already deployed over 1,000 seats of BIM 360. The company is now expanding the deployment of BIM 360 and integrating it into their project management system which has resulted in the purchase of an additional 3,000 seats of BIM 360 by that customer. BIM 360 goes beyond a typical product sale and has allowed us to develop much more strategic relationships with this and other companies as we tap into the huge potential TAM of the construction market, the C in AEC. Some of you may have seen that just last week there was a great story in The Wall Street Journal that highlighted this opportunity and prominently featured Autodesk. Fusion 360 is also expanding our market opportunity. We had a great Q1 win with a U.K.-based engineering firm that is choosing to replace Teamcenter with Fusion Lifecycle. This customer also purchased product design collection, which includes Fusion 360 which successfully competed against Dassault and PTC solutions. The more people use Fusion, the more they are reinforcing our belief that Fusion is a game-changer that's driving the future of making things at the expense of our competition. Partially offsetting the growth in subscription plan subs was the expected decline in maintenance plan subs. However, maintenance plan subs declined less than what we experienced in Q4 through a combination of a higher renewal rate and a smaller pool of renewal opportunities. As we've said in the past, we expect to see ongoing declines in maintenance plan subscriptions going forward. The rate of decline was varied based on the number of subscriptions that come up for renewal, the renewal rate at the time and our ability to incent maintenance plan customers to switch over to EBAs or product subscription with our maintenance to subscription program. I'll now turn it over to Andrew to provide more details on the great results we saw in Q1.

Thanks, Amar. The strong growth in total subscriptions is fueling growth in ARR. Subscription plan ARR surged 105% on a constant currency basis and reflects the strong uptakes of all our subscription plan offerings. Total ARR grew by over $100 million quarter-over-quarter and 20% over Q1 last year on a constant currency basis. And I'll point out that 40% of our total ARR is now driven by [indiscernible]. That's up from just 23% in Q1 last year and a clear indicator of the significant progress we're making. When we accelerated the transition away from perpetual licenses 2 years ago, we projected that subscription plan ARR would surpass maintenance plan during this fiscal year, and we are well underway to making that happen. For the second consecutive quarter, we experienced a small sequential increase in total ARPS, primarily driven by ARPS growth in product subscription. It's still a little too early to project whether ARPS will grow sequentially in Q2 as ARPS is still sensitive to short-term shifts in term length, geo mix, product mix and promotions. Having said that, we remain confident that ARPS will be positively influenced in the second half of the year by less discounting and promotions to our legacy users as well as the impact of the maintenance to subscription program. Each quarter, the vast majority of the subscription plan subs are added through traditional means. However, we continue to make meaningful progress in converting nonpaying users into subscribers. In Q1, we added 26,000 product subscriptions through another successful promo targeted at our legacy users. The Q1 promo offered a 30% discount on a 3-year subscription if they turned in their old perpetual license. It's the same type of promo that added 28,000 subs in Q1 last year with a 70% discount. We're still finding that more than half of those participating in the promo are turning in licenses 7 years back or older. This further reinforces our view that there are a meaningful number of active users whose licenses are more than 5 years old and are interested in moving to the latest software. There continues to be over 2 million of these legacy users that are actively using our old perpetual license. Over time, we will convert a large portion of these users either through promotions like this, compelling new product introductions or through traditional means as their product becomes increasingly outdated over time. We're beginning to see this happen already. The other large cohort of nonpaying users is the noncompliance or piracy base of roughly 12 million worldwide. We've made significant gains in being able to more accurately identify these noncompliant users, and we're just getting underway with programs to systematically pursue conversion to subscription. Driving more users to subscription directly aligns with another one of our transition-related initiatives to drive more business direct. Total direct revenue for the first quarter was 30% of total revenue. That's up from 25% in Q1 last year and just 19% 2 years ago. We continue to grow the volume of business with our large enterprise customers, and we're experiencing exceptional growth of over 300% with our eStore. We expect to continue to meaningfully grow both our direct enterprise and our eStore business as we go forward. Now I'll close my section by talking a little bit more about the maintenance to subscription program because it was easily the most asked about topic over the past quarter. At the end of Q1, we had nearly 2 million maintenance plan customers, and we are going to encourage these customers to move to product subscription. We'd like them to do so sooner rather than later as product subscription provides them the greatest value with increased flexibility, support and access to our cloud products. Moving to a single model makes the most sense and will imminently simplify our customers' transactions with Autodesk. The M2S program kicks off with maintenance plan customers that come up for renewal starting on June 1, which is just a couple of weeks away. Along with greater value, loyalty pricing will be a big driver. As I discussed last quarter, all maintenance customers will be subject to a 5% price increase when they come up for renewal, and they can choose to move to product subscription for a loyalty discount of 60% less than the cost of a new product subscription and lock the price in for the following 2 years. This discount will decrease by 5% for each of the following 2 years, so the earlier a customer switches, the more they'll save. A maintenance plan customer can choose to stay on maintenance, but they will be subject to a 10% increase next year and a 20% increase the year after that. As such, we believe that there will be a relatively small number of maintenance plan customers by the end of FY '20, and we'll determine the best course of action for the subsequent renewal periods. Since we announced this program a couple of months ago, we have been working with our partners to help them better understand the program. We've also provided them with some extra tools to help drive positive conversations with customers, and we are incentivizing the channel partners to upsell Collections, which would further enhance their cash flow. We're not making projections on [indiscernible] will move over this year or next but believe we will have a much smaller pool of maintenance customers by the time we get to the end of our fiscal year '20. Now I'll turn it over to Scott for a closer look at some of the financials.

Thanks, Andrew. Once again, all of you should have the prepared remarks document which is the best source for our financial details. So I'm not going to walk through all of them, but I do want to hit on a couple of noteworthy items and then talk about our business outlook for fiscal '18. Before I get into the numbers, I want to draw your attention to our new format for revenue reporting which greatly improves transparency. You'll now see 3 revenue lines: one for subscription, one for maintenance and one for license and other revenue. In this format, you'll no longer need the reconciliation table in our prepared remarks doc as all subscription revenue, which we used to call new model, will be reported in the subscription line, and all maintenance revenue will be reported in the maintenance line. Our remaining nonrecurring revenue will be reported as license and other revenue. In this new format, quarterly subscription revenue times 4 equals subscription ARR and quarterly maintenance revenue times 4 equals maintenance ARR. And you'll be better able to isolate nonrecurring revenues that will flow into the license and other revenue line. Note that one side effect of this change results in additional small legacy products being added into the ARR calculation. As a result, we have slightly adjusted the historical figures for ARR so that you have an apple-to-apples compare for our Q1 results and going forward. This is an improvement we've been working on and many of you have been asking for, for quite a while, and I think we can all agree this is clear and more transparent. Moving to spend management. We're proud that we've been able to drive strong growth in all of our important transition metrics while reducing our Q1 non-GAAP spend by 3%. We know that some of you have been skeptical of our ability to grow our business while keeping spend flat this year and next year, and we continue to achieve our goals by making sure that we're investing in critical elements of our transition while reducing spend in other areas, driving efficiencies throughout the company and divesting small noncore products. During this stage of our transition, deferred revenue is a better measure of our business than reported revenue. Deferred revenue grew 18% against a really tough compare last year, when we were still selling multiyear maintenance contracts. As you know, we've discontinued multiyear maintenance sales in conjunction with the launch of the maintenance to subscription program. You'll notice another new disclosure that we added this quarter for unbilled deferred revenue which we define simply as revenue that has been contractually committed by our customers but not yet billed and not included on our balance sheet. This is typically driven by our multiyear, large enterprise business agreements or EBAs. Historically, unbilled deferred revenue was an immaterial number but, as we move forward this year, we're planning on moving more of our enterprise customers to annual billings for their contracts which are typically 3-year commitments. We are providing visibility to our unbilled deferred revenue to give you a more holistic view of our quarterly results. We remain aggressive with our stock buyback plan in Q1 and repurchased 2.2 million shares for a total of $192 million. That averages out to a little over $85 per share. The downside of our stock price at this level is we're not able to buy back quite as many shares, but we remain committed to offsetting dilution from equity plans and reducing our share count over time. Overall, our strong Q1 results increased our confidence that the transition is working for our customers and our partners. It also sets us up for success for the rest of the year and reinforces our conviction in our fiscal '20 targets. Turning to our outlook. Our view of the global economic conditions remains consistent with our view over the past several quarters, with most of the mature markets performing relatively well and little change in the emerging markets. As we look at our outlook for the second quarter, we expect a seasonal decrease in subscription additions in Q2, consistent with what we've seen in the last 2 years. Remember that Q1 sub adds have the added benefit from a seasonally strong EBAs sold in the prior quarter and the legacy promo. While we're pleased with our execution of the current business trends and have confidence in our ability to drive results, we're taking an appropriately conservative approach and leaving the full year fiscal '18 outlook unchanged at this point. Finally, I want to provide an update on our CEO transition. The board is currently in the process of vetting external candidates as well as both Andrew and Amar. We don't have any other updates on the CEO selection process other than to say it's a top priority for the board and is progressing as planned. In the meantime, we continue to execute very well through the transition. And Andrew and Amar have the board's full confidence to lead the company to ongoing success. To wrap things up, we've executed well over the past several quarters, and we're looking forward to building on this [ success ] through fiscal '18 and work toward our fiscal '20 goals and beyond. Operator, we'd now like to open up the call for questions.

[Operator Instructions] Our first question comes from the line of Heather Bellini with Goldman Sachs.

This is Mark Grant on for Heather, just a quick one from me. You mentioned that the maintenance renewals were a little better in the quarter than you've seen in recent trends. Was there a possibility in the quarter that you had maintenance renewal kind of pull-forward, customers coming forward and trying to renew maintenance ahead of the maintenance-to-subscription transition? And then a quick follow-up to that is, on the full year guide, the reason for not raising the full year guide after such a great quarter.

Yes, so on the maintenance question, maintenance was better than expected really. I think kind of -- we had a small pool of renewals, and I think most of our customers who renewed were really trying to line up with the maintenance-to-subscription transition, and we didn't see any unnatural pull-forward into the quarter. And it was better than expected, and we expect to continue to do well with the renewal rates because we are paying a lot of attention to it.

Yes, and on the second part of your question on the full year guide, we've executed well over the last several quarters and certainly executed well in Q1. And it's given us increased confidence as -- that both the transition is working for our customers but it's also working for our partners, and we feel good about where we are at this point in the year. But there's a long way to go. It's 90 days into a full year. At this point, I think it's appropriate to be prudent with the guide for the full year.

[Operator Instructions] Our next comes from the line of Phil Winslow with Wells Fargo.

A question for Andrew and Scott. Going back to the maintenance because, obviously, just overall subscriber comp growth was way ahead of people's expectations, and the maintenance decline was definitely less than what we were expecting. Curious because obviously there were a lot of changes going on, on pricing but wonder if you can comment on just the feedback you're getting from customers and sort of the early thoughts on sort of how you expect this to play out? I know you're not giving specific guidance but maybe kind of help us, walk us through what you're hearing and how you're thinking about that.

Yes, Phil. This is Andrew. Let me talk to it. So first off, let me remind you how we structured this program so we can put some of the feedback in context. It's a multiyear program. We rolled out 3 years' worth of changes in the customer base so that they could actually get a lot of visibility to what they could expect over the next few years. The first year is modest price increases. The program starts June 1, and they're going to see a 5% price increase. So whether you're a maintenance customer that really wants to stay on maintenance or wants to move to subscription now, you're really going to renew and move forward and take -- you're going to take an action, a positive action, because you've got a year to think about it. And what we're going to be doing in that year is we're going to be collecting the customer reaction, and we're also going to be demonstrating to the customers more explicitly why there is more value in the subscription world. The value is going to show up just in the nature of the offering, we've talked about the access control and insights. We're also going to be adding a lot more value related to bringing the cloud much closer to the subscription offering. So we've given the customers lots of runway. We expected there was going to be different types of reactions to the program, which is one of the reasons why we built in this year for people to digest what we're doing. So as we've rolled it out, we've gotten reaction from some of our larger customers where they're just looking at it and they're going, "We were going to move to subscription anyway," or "We're going to move to an EBA, so we're going to probably move forward with the lowest price possible." Our smaller customers are where we've gotten the most noise. And essentially, they're concerned about losing access to their perpetual software. That's why we've got the 1 year cooling off period for us to absorb this feedback, for us to engage with these customers and for us to really prove to them that not only are they moving to a better, higher-value offering but we're going to protect them as they move forward. So that's where we're at right now, and I wouldn't expect anything else to change.

And our next question comes from the line of Saket Kalia from Barclays.

Actually, maybe I'll start with you, Scott. So subscription ARPS, to the point earlier, saw a second quarter of sequential growth here. You've talked about this being a little bit of a volatile metric because of the mix in the past. Do you feel like we're getting to a point where some of the higher-priced subscriptions are really having a structural impact on that ARPS number where we could see a little bit more stability in that metric going forward?

This is Andrew. I'm going to take that one, all right? As we've said, this metric is highly, highly sensitive to mix. It's highly sensitive not only to product mix but also the geo mix whether it's emerging or mature markets. And what we said consistently, and we're sticking to it, is as we move into the second half of the year, we're going to start to see that metric trend up. And we're not changing that assessment, we're not changing that guidance. I want to remind you, though, about some of the things that are going to keep pushing that up. One, we're going to be absorbing that maintenance-to-subscription price increase, the 5% that pushes into the ecosystem, so that's going to trend that up a bit. You're also going to see some core price increases, and the move to collections is going to put upward pressure on that. We're also going to see the decrease in discounts. Remember, with a discount this round, it was a fraction of what it was in previous years on our legacy programs, you're going to see that. But you're also going to see the mix in mature and emerging change which is going to -- have put some positive pressure. As we're more successful in the cloud, you're going to see downward pressure. So those are the factors that are going to be affecting this as we move into the second half of the year, but we're holding to the statement we made previously, you're going to see a trend up as we move through the second half.

Got it, that's very helpful. And then maybe for my follow-up, maybe for you, Amar. It felt like in some of your prepared commentary that some of the competitive wins sounded just a little bit stronger this quarter. Can you just talk, maybe qualitatively, about any competitive metrics that you look at, whether that's win rates or competitive conversions, talk to us a little bit about maybe how you felt competitively this quarter maybe versus others.

Yes, Saket, great question, thanks. We definitely are feeling very positive about how we are positioned in this industry and how we are driving change. Our investment, our strategy of using the cloud to drive a new paradigm in both the billing industry as well as the manufacturing industry is really paying off. In manufacturing in particular, with Fusion and the changes we are driving in getting industrial additive manufacturing and concepts like generative design, the customers are really paying a lot of attention in adopting those ideas from us in a big way and, in many cases, at the expense of our competition. In fact, many of our Fusion 360 wins this quarter, in fact, in an increasing rate, are coming at the expense of our competition. They're leaving their sort of old, 20-year-old CAD systems and starting to adopt the paradigm we are putting forward with Fusion, which connects CAD to CAM to CAE with data management built in. So in manufacturing, we really feel like the customer base is searching for the next paradigm, and they're starting to really turn to Fusion and adopt it in response to that. Likewise, in the building industry, the big sort of competitive push and success that we're seeing is really in construction, where I would say actually a major competitor has been paper in some ways; that they are moving from an analog to a digital way of working. And we've been leading the way in using cloud and mobile to drive a construction management and BIM management process for this customer. So we're definitely feeling both those vectors of manufacturing and construction growing at a really fast pace, and we feel very good about where we are positioned in both industries.

Our next question comes from the line of Sterling Auty with JPMorgan.

It's Jackson Ader on for Sterling tonight. A couple of questions from us, the first being in the revenue by product family, it looks like AutoCAD and AutoCAD LT actually grew year-over-year as far as the major segments are concerned. Any particular reason that, that returned to growth in the quarter whereas AEC and Manufacturing are still down year-over-year?

Yes, Jack, when you look at that, you got to reflect back on what was happening in Q1 a year ago. It was our first quarter without selling any perpetual licenses on AutoCAD and LT. And you'll remember, when we ended that sale at the end of the prior quarter in Q4, there were some buy-ahead activities we had with AutoCAD and LT Q1 a year ago, so the compare point was a little bit artificially low with some demand pulled backward into the prior year. That's part of what contributed to it. I would say we're seeing very strong uptake, though, for both AutoCAD and AutoCAD LT and the LT family with product subscriptions, so it's a combination of both.

Right. And what I'd add to what Scott just said, it's one of the -- we are seeing subscription working everywhere around the world. One of the geographies which really did well for us sequentially is APAC. And APAC has always been a strong contributor to the AutoCAD and LT result, and that's sort of reflected in the numbers you're seeing. The other thing I would say, you made a comment about AEC and Manufacturing, I'll just take this opportunity to say, in Manufacturing, one other thing that is going on is that our Delcam business moved from a perpetual license business to a subscription business over these quarters, and that's sort of reflected in those numbers. So I would say the Manufacturing numbers, the downward trend of that is exaggerated because of that shift of revenue from upfront to ratable, but I think we're performing strongly across all industries and feel very good about where we are.

Okay, great. And then, actually, since you mentioned geographies, for my follow-up, it appears that at least on a revenue basis, year-over-year Americas did a little bit better than the other major geographies. Is that also true as far as bookings are concerned? Or was there just a little bit of some noise in the revenue for the regions?

Yes, Jack, we actually did well in all regions. I think that it's one thing to look at it year-on-year, if you look at it sequentially, we actually did well in Americas, in Europe and in APAC. And as Amar just pointed out, actually, seemed to have at least found the bottom in APAC and don't have the same headwinds that we had for most of this year last year there. So it didn't -- there's nothing that stands out that was particularly strong or particularly weak in any of the 3 geos. It was good performance across the board.

Our next question comes from the line of Jay Vleeschhouwer with Griffin Securities.

Question #1, perhaps for Andrew and Amar, is if you could talk about the role of distribution or distributors in your future -- how do you see their role in terms of fulfillment, license management, et cetera. And as well, could you talk about the effects of any past or prospective pricing changes that you've put through distribution? In other words, you've changed the pricing for VARs, looking to purchase directly from the company versus perhaps more favorable pricing if they buy through distribution instead. And then, secondly, in the first quarter, it would appear that Collections, at least in the indirect business, were a smaller percentage of the business than the former Suites had been. Could you verify that? And how are you thinking about the progression of Collections as a percentage of your business as you go through the rest of the year?

All right. So Jay, that was a multipart question, so let me kind of approach each one of these one at a time. So look, when it comes to VARs and distribution in our future, let's be very clear, our business is going to be bigger and the size of the pie that the VARs are going to get, the size of the business that they're going be able to participate will be bigger as well. We are going to be doing more business direct through major accounts and direct through the eStore, but we are absolutely going to be providing a bigger business to our indirect partners as well as we move forward. Now your question with regard to pricing to VADs and VARs and things of this -- we are constantly evolving and changing our frameworks and changing the pricings and the things that go through the framework to optimize what things are going on. I'm not going to comment on any specific pricing strategy we put out there in the system, but we're always doing that to optimize how we distribute and deliver the software to the customers. And your last question about Collections. So first off, let's talk about where the overall strategy is going with Collections. It's absolutely our goal to ensure that our new customers are moving to Collections versus buying standalone products. And as you know, as we light up the maintenance-to-subscription program in June, there's going to be a major push to move those customers over to Collections. Those activities are brewing and gestational right now. But with regard to the Collections result, we're actually really happy where we're at. The volume runway in Q1 is equivalent to the Suites runway in the same period a year ago, and that's exactly where we want to be. And in a short period of time, we basically dialed back up to that run rate, and that's right where we should be. But as we move forward into the year, you're going to see Collections contributions go up more and more throughout the year. But right now, we're exactly where we expect to be.

And our next question comes from the line of Keith Weiss with Morgan Stanley.

I was wondering if you could -- you talked a little bit about sort of better renewal rates on the NIM side of the equation. I wonder if you can give us any sort of a viewpoint on sort of the renewal rates on the new model subs or the subscription subs, if you will? You have a little time under your belt. How would those come in? And in particular, how do those look relative to sort of what you see in your maintenance base?

Yes, Keith. Look, renewal rates were strong across-the-board. I mean, the product subscription rates were right in line with our expectations. In terms of comparing maintenance to product subscriptions, I mean one thing to keep in mind is one of the benefits of the product subscription is customers can switch things on and off, and some are monthly and some are quarterly product subscribers. So we don't really break the renewal rates out by subscription type, but we are pleased with where product subscriptions ended up, and this continues to be a big focus area for us for the remainder of the year.

Got it. And then for my second question, and then to continue the line of questioning that Jay was drilling down on the reseller channel. Now that we're fully on a subscription model, can you tell us a little bit about sort of what the incentives are? Like what does the incentive program look like for the channel in broad strokes? Is it on ARR? Is it on subscription? Can you give us some kind of indication of where you took that now that it's not going to be kind of a revenue-based model anymore?

Actually, you know what -- this is Andrew. So you know what, the incentives we put into the system for partners are aligned with the kind of outcomes we want with subscription. So first off, we're obviously going to incent them to encourage a customer to look at a collection because, obviously, that's something we really want the customer to consider, and we think that's the right path for them moving forward and the best path to the future. But we also want to incent adoption and renewal activity. So we actually put incentives into the system to ensure that the partners are making sure that the customers are actually using the software because like Amar said, when you're on a subscription model, you can turn -- you can start and stop if you want. So we want the partners to guarantee that the customers are actually adopting things. So we're putting incentives into the system like that to drive that kind of behavior.

Yes, I agree. And Keith, I'll just add that, over time, you'll see us continuing to optimize our incentive structure to drive the kind of results and outcomes that we want. Subscription is obviously the big focus for us right now, driving Collections is a big focus for us right now and certainly making sure that our renewal rates are right where we want it to be in. I think we are using our classic combination of front- and back-end discounts to get those results. To Jay's earlier comment with the distribution channel, that's another place where we've been sort of just optimizing our relationships and our incentive structure to get the right results, again, to drive this overall recurring revenue and subscription business that we're getting the channel oriented around.

Got it. Just to be clear, I mean, is it fair to say that in terms of whether or not a partner hit plan or not hit plan -- kind of their quota, if you will, does ARR replace revenues? Or is it just -- there's a whole collection of things they got to [ page in there ] ?

Keith, can you say that again? You said ARR, and then we lost the second part of the question.

So in terms of sort of like from a headline number for partners, you guys sit down and do your business reviews, is there a version of a quarter? Like when they hit plan, does ARR replace what revenues used to be? They used to have to hit a revenue target, now they have to hit an ARR target or is it a little more complicated than that?

Keith, our engagement with VARs is very simple. We talk about billings numbers with them and the billings outcomes with them and the annualized contract value. We don't try to do ARR compensation models with our partner channel, that would be far too complicated for them to not only engage with but actually for them to measure and react to. So we keep that very simple because we want to grease their transactional ability.

And our next question comes from the line of Gregg Moskowitz from Cowen and Company.

Wondering if you could add any commentary on the mix of LT subscriptions this quarter as compared with both AutoCAD and the AutoCAD vertical subscriptions?

Yes, Gregg, LT continues to be the volume part of the business. It was in the perpetual license world, it is in the product subscription world. We're not seeing a significant shift in the mix of LT either going as a higher percent on a volume basis or a lower percent. LT and AutoCAD kind of continue to hold serve at the level they were.

Sorry, Amar. Go ahead.

I was just going to say I mean I think we saw a strength across all products, including the verticals as well as -- the vertical products and 3D vertical products. So there wasn't a single standout product that was driving subs, we saw strength across the board.

Okay, perfect. And then just a question for Andrew. I find it really interesting that you got essentially the same amount of legacy nonsubscriber conversions this quarter at a 30% discount as you did a year ago at a 70% discount, and that you're still seeing half of the conversions at an aging that is 7 years or older. So the question is, in the past, you've spoken about a 30% conversion rate on licenses that were 5 years old or less. Is there any reason why the conversion percentage can't be a lot higher than that?

Look, we're going to continue to convert at very high rates. Let's make sure that we're clear on exactly how we're going to be converting the customers. The promos are only one measure of our conversion success. It's a 3-pronged strategy we're looking at to bring these customers in. One is the pace of functionality that we update in the existing product so that the ecosystem becomes very much out-of-date very quickly for a customer that stays off the current release. The other aspect of the things that we're doing is entangling the cloud value so deeply into the subscription offering that the customers are really compelled to get that value captured and integrated in their processes. More and more, the cloud offerings are going to become supercritical to what our customers do, and that's going to get deeply entangled into the subscription offering. The last bit was these legacy promos and these offerings that we use. These are not the -- that's not the absolute measure of legacy conversion we do; just the fact that we're doing the kinds of net adds that you see here means that we're dipping into these nonsubscriber bases. We're going to continue to do it, and we're going to continue to do it at reasonable rates. And I think the program's working exactly as we expected it to.

Yes, Gregg, one of the things that we are pleased with is that we didn't have to discount aggressively to get the kind of subs result that we saw. And as Andrew mentioned, I mean, I think, in some ways, the net adds number is becoming a better indicator of how well we are converting our overall opportunity than any individual promotion to reach this legacy base because, as Andrew said, at some level there's a network effect being built as our new products roll out and customers want to be current, and many of them self-select into the buying a new subscription to be current. So I think overall, we're seeing the promo work, we're seeing new net subs go up because of the new product subs rising. So I think we're doing well with that opportunity.

And our next question comes from the line of Ken Wong with Citigroup.

Scott, I know you guys mentioned flat total spend for the year. But how should we think about the trajectory of sales and marketing once you guys launch the maintenance to subs program? Will that tick up meaningfully?

I don't think so, Ken. I mean you saw that for the first quarter, we actually posted a decline in spend of about 3% during Q1. Obviously, for us to be flat for the year, it's not going to stay at minus 3% throughout the year. So I would expect to see slight increases going forward but that still comes in at flat for the year. There's no particular swing between categories as we roll out maintenance to subscription. Maintenance to subs is obviously a huge focus, both for our sales team and for our channel. I don't see that driving any particular bump in expense.

Yes, got it. And then just a follow-up on just receivables. So it was -- I guess, it was down a pretty good amount from what it was last year. Could you remind us if something last year drove up accounts receivable collections much more than typical?

Yes. What drives receivables, of course, is linearity in the quarter, right? It's what gets sold during the quarter, in the last month because we -- in most cases, we bill in that 30. So we had a very linear quarter this quarter. If you look at our DSOs this quarter, they were below 45 -- I think, 43 days -- whereas the last quarter, it was a much more back end-loaded quarter. So just think of linearity during the quarter, there's nothing else that's happening that would skew that one way or another.

And our next question comes from the line of Kash Rangan from Bank of America.

This is [ Shankar ] for Kash. I have a question on the maintenance conversion. So my understanding is that if a maintenance customer is currently using an LT or AutoCAD product, he would most likely shift to an LT or AutoCAD product in subscription if and when the customer converts. So in that context, can you elaborate how -- also with the discount you are offering, how else are you incentivizing the customer to adopt collections? Geography and mix as well, how customers...

Yes. So remember, the main -- the way the program is structured is that the customer that's moving at the time can move like-for-like, they can move LT to LT or AutoCAD to AutoCAD, but they're never going to get a better price to move to a collection than they will at that point. The discount on collection that they get is the same 60% discount they get moving like-for-like. So there's a strong incentive in the system, especially for an AutoCAD customer, to consider a collection -- probably less so for an LT customer but definitely for an AutoCAD customer. And what we've done is we've armed our partner channels all across the world with basically a tool that lets them sit down with a customer and say, hey, here are your options. Here's what happens if you move now. Here's what happens if you move next year. And by the way, if you move to a collection, this is the price you lock in and this is the value you get with regards to the product offerings. So we've put a lot of work into educating the channel in particular, in how to have a conversation with the customer in terms of moving up to a collection.

And what I'd add to that, this is a play our partners know how to do. And this is a -- it's not just an incentive for the customers; our partners really take advantage of this one-time opportunity to move their customers to a higher recurring revenue base. And I think they're really focused on that opportunity right now.

Got it. Just a follow-up question, you mentioned about the smaller customers having an issue with the subscription plan, and you're working with them. Could you elaborate the feedback you've received on potential price increases that could happen post fiscal '20? Is there any pushback in there, or what's the strategy?

Look, like I said, the feedback, the negative feedback we got was exactly what we've expected. Look, when you announce to a customer that their maintenance prices are going to be going up over a 3-year period, you expect to get some feedback that's not necessarily positive. It has primarily been from the smaller customers. And when you look at their main issue, it doesn't come down to maintenance versus subscription. They recognize that the program we put in place puts reasonable price increases in for them and they get -- they love the loyalty program. What they're worried about is giving up their perpetual license. So what we over this next year -- and by the way, it is over this next year because they're obviously going to renew at a 5% increase -- is essentially show the customers in these small accounts that moving to subscription is a more valuable path for them and something that helps them accomplish what they need to do more effectively. We're committed to doing that, and that's really going to be the essence of our response to these customers, is delivering the value they're expecting to see and helping them understand exactly what they get when they move to subscription.

I mean I think one thing you'll notice in talking to our partners, when we first announced this program and got a bunch of reaction and then as our customers started talking to our partners, I mean a lot of that concern has started to die down because of all the things that Andrew said; is that our customers are starting to understand better the value proposition of subscription and the kind of pricing model that we're putting in. So I think that there was a little bit of a kerfuffle when we made the announcement but that is really starting to mute, and customers are much more comfortable with the path that we have put forward.

If I may just ask one more just as a follow-up to that, is there any difference in the geography, call it, the U.S. versus Europe versus Asia, is there any difference on how customers reacted?

No. The reaction is fairly uniform. I mean, obviously, you get some small variations, but it's really uniform. And it's very similar to the reaction we got when we announced the end of perpetuals. It's playing out exactly the same way, and we're going to go through the exact same process. But there's no particular geography or country that's showing any more propensity to be concerned.

And our next question comes from the line of Steve Koenig from Wedbush Securities.

I'm going to try to bunch the 2 questions maybe at once because they're kind of related. So I guess, first, to what extent are your -- are your plans for the discounts that you'll offer on subscriptions under the M2S program next year and the year after, are those pretty much hardwired? Or might you change those? And kind of a related question is, I understand you're not prepared to give the guide yet on the M2S program, the volumes that you'll get out of the M2S program, and that's sensible that you're not ready yet to do that. But to what -- can you give us color on to what extent do your fiscal '20 targets depend on the price increases that you'll effectively get from the maintenance customers and the converting customers?

So I'm going to answer part of that, and then I'm going to let Scott speak to the other part of it. So with regards to the maintenance to subscription program, look, we've rolled out the program, we've created visibility, we told them they're getting a 60% discount, that discount goes down by 5% every year as they -- depending on what year they move. It's our intent to stick to that program and stick to that -- I think, we think it's an excellent program, it's an excellent level of discount. There's really no reason to change that. So I don't anticipate any change in the actual rules of the program.

Yes, I agree with that, Steve, and to your second question, there's an interesting effect. If you look at the price increases built into maintenance to subscription, the longer someone stays on maintenance, of course, they incur higher price increases, the more they contribute to ARR. So there's a bit of a reverse -- it's a bit counterintuitive. So there's no dependency on a very rapid shift over. In fact, the slower it goes, actually, it boosts ARR a bit as it moves along. So there's no significant dependency on the model on them.

Well, may I clarify then, Scott: Have you assumed in your long-term guide a rapid -- a fairly rapid shift over, so that there's a fairly minimal price boost? Or does the long-term guide require that a significant number of customers stay on maintenance?

Yes. Our long-term targets -- not guide, our long-term targets do assume that it shifts over and that the majority do shift over. But I don't want to get into any of the details on what that looks like. There's -- like I said, there's an interesting play in terms of the rate and pace that they move and the effect that has on the model. And we've -- as with most of the metrics in the model, Steve, we try to be somewhat conservative on those.

Steve, we have a clear goal to get as much of that maintenance base moved over to subscription by FY '20 as we possibly can.

And our next question comes from the line of Ken Talanian from Evercore ISI.

So you had a nice downtick in expenses in this quarter, and I was wondering if you could walk us through some of your key initiatives to continue to contain expenses. And what elements might cause you to perform better than your current guidance on that front?

Sure, Ken. Just to be clear, we typically always see a sequential downtick in spend from Q4 to Q1. Q4, as the year ends, there's a lot of true-ups that happen on variable compensation plans, on commissions. It's the quarter that we have our AU event which also drives some expense. So normal seasonality, you'd expect a decline from Q4 to Q1. The rate of that decline, in some ways, depends on how successful we were in the prior year because commissions are not an insignificant part of that decline. So it's not a -- while it is a sequential decline, it's not an unexpected sequential decline from Q4 to Q1. Amar, if you want to touch on how we're managing spend.

Yes. So Ken, what I'd add is, look, our outlook for the year on spend remains unchanged because we've instituted operational rigor and discipline and continue to make very hard choices in investing in the right areas to drive the transition and divesting sort of noncore projects and noncore activities and just keep a tight focus on managing spend. So our outlook for the year is unchanged, and I think we're making all the right decisions in terms of ensuring that the transition remains on track. And some of the things that we've decided to divest, we had a bunch of consumer products, for example, last year, that are not material to the transition. We make choices like that to divest, and that's given us some of the fuel we need to keep driving the transition forward.

Okay, great. And as a follow-up, I realize it's early, but could you give us a sense to how to think about what the price increases might look like in the years following the initial 3-year subscription discount that folks will be locking in? Will it -- I mean, directionally, could you expect it to be on par with the subscription price absent that discount, or might it even be more?

Ken, we've been very explicit in the program where the customer pops up to the terminal discount price of the program. So the maintenance subscription program lasts 3 years and, at the end of that third year, there's a particular discount. That's the price that everybody trues up to when they exit the program -- which, by the way, is the right thing to do with regard to incenting the customer to not only give up their perpetual license but feel comfortable with the move to subscription.

And is that for EBAs as well or just product and collections?

EBAs are a totally different process. So when a customer moves to an EBA, they've moved off of maintenance to a consumption model. And remember, for all of these things, with regards to the way we rolled out the prices, the way we manage the price increases at the terminal point, our goal is to maximize the value of that maintenance base. And that is all about minimizing the churn out of those customers that are in that base. We feel like we've created a program that balances both the price uplift and the churn factors that guide us in maximizing the value of that base. That's what's driving all of this.

Our next question comes from the line of Monika Garg with Pacific Crest.

I guess, first question, one question which we get quite often is that CAD seems like a low-growth market but your target of 20% subscription growth means you need to add somewhere between 850,000 to 900,000 new subscriptions every year. So can you maybe walk through the math to achieve that?

There's a fundamental thing we've been telling people over and over again with regard to how this is sort of going to work. First off, the move to subscription has reset the price points for design software pretty dramatically. So what we're seeing is we're seeing increased demand for our offerings just by virtue of the fact that the upfront costs are so much lower. Then there's a couple of other factors that play out here in terms of hitting those long-term subscription targets; one is the nonsubscriber base we've been talking about over and over again throughout the last few years, those customers moving forward, the other -- which is a 2 million-plus base of people. The other base is the 12 million pirate base that is going to move from pirated software to subscriptions. We know -- we understand that base, we know how to move them forward. But the more important factor as we look over a 5-year period is the market expansion we're going to see with the delivery of the cloud application in both construction and manufacturing. The move to the cloud, especially in the manufacturing space, is starting a share shift away from our competitors to our offerings. When you add all of those things together, the 20% subscription growth target is quite achievable, and it's achievable not only from growing off our existing core but expanding into these new markets in construction and manufacturing.

Yes, Monika, I'd just also take this opportunity to say we've always been the volume leader in the industries that we serve, and we continue to do that. We continue to drive, as Andrew said, share shift now increasingly in manufacturing from traditional CAD CAM systems over to new cloud-based disruptive systems like Fusion. And with the adoption of BIM, the adoption of construction solutions, they all expand our opportunity. And so in combination with the license compliance, the legacy opportunity and just the organic volume we see through job growth in the industries, I think we feel -- we remain confident in our goals that we set ourselves.

Okay. Then as a follow-up, could you share the split of subscriptions between EBAs, cloud and product subs?

Well, the one -- so I'd say we don't give it at that level of granularity. The one number we have shared is the number of EBA subscriptions in this quarter was 44,000. And that's really -- we sold a bunch of EBAs in Q4, we watch how they get used and adopted or how many users in those accounts adopt our EBA solutions. And then -- so then 90 days later, we count the subscriptions. So that number was 44,000. At this point, we're not prepared to sort of break out cloud and product subs. But look, as we've said, our strategy is working, our business model transition, platform transition is working, subscription is working everywhere, so we saw strength across all those product -- all those subscription types.

And that concludes our question-and-answer session. I would like to turn things back over to Dave Gennarelli for any closing comments.

Thanks, operator. We'll be at the JPMorgan conference in Boston next Tuesday and the Canaccord one-on-one conference in Toronto next Thursday. We'll be at the Berenberg and the NASDAQ conferences in London on June 14 and 15, respectively. And lastly, we're holding investors and analysts at AU London on June 21. So please let me know if you'd like to be attending that event as well. So for anything else, you can reach me at (415) 507-6033. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.