Good day, ladies and gentlemen and welcome to the Autodesk Third 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 and good afternoon. Thank you for joining our conference call to discuss the results of our third quarter of fiscal year 2018. On the line today is Andrew Anagnost, our CEO and Scott Herren, our CFO. Today’s conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com/investor. 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 this conference call, we will make forward-looking statements regarding future events and the anticipated future performance of the company such as our guidance for the fourth quarter and full year of fiscal 2018, our long-term financial model guidance, the factors we use to estimate our guidance including expectations regarding our restructuring, our maintenance to subscription transition, our 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, our Form 10-Q for the periods ending April 30, July 31 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 this 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 will 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 the financial performance, and unless otherwise noted, each such reference represents a year-on-year comparison. And now, I would like to turn the call over to Andrew.

Thanks, Dave. I just got back two weeks ago from the largest Autodesk University in our history. There were over 10,000 design, engineering construction, manufacturing and film production professionals in attendance. And as usual, their enthusiasm for and dedication to our products is absolutely inspiring. Now, I know several of you were able to attend the event and I'm sure you felt some of the same level of excitement I did. And before we get started with the details, I want to point out that after we review our Q3 results, I'll discuss the restructuring that we announced in today’s earnings release, which now brings me to our Q3 results. I'm pleased to announce that Q3 marks our return to revenue growth and we continue to make excellent progress on our two major initiatives, completing the subscription transition and expanding beyond design with cloud based solutions for construction and manufacturing. The consistent performance we've delivered over the last several quarters increases our confidence in our ability to achieve the goals of the subscription transition. Now, here are some key outcomes of Q3 that I want to highlight. Total annualized recurring revenue or ARR grew 25% at constant currency. Recurring revenue had increased to 92% of total revenue. Approximately a third of the eligible customers are choosing to migrate to subscription with the maintenance to subscription program or M2S. We added 146,000 total subscriptions driven by 307,000 subscription plan sub additions, making the base of subscription plan sub bigger than the base of maintenance plan subs. That is a great milestone. Now, let's take a closer look at our Q3 performance. I think it's important to first note that Q3 represents our return to revenue growth. It's the first quarter where the year-over-year revenue is comparing back to our first subscription…

Thanks, Andrew. I’ll start with subscriptions, and our maintenance to subscription or M2S program. Partially offsetting the strong growth in subscription plan subs was the expected decline in maintenance plan subs. It’s worth repeating that we expect to see ongoing declines in maintenance plan subscriptions and the rate of decline will vary based on the number of maintenance plan subscriptions that come up for renewal, the renewal rate and the pace of the M2S program. 110,000 of the decline in maintenance subs was a result of the fast start to the M2S program. It was the first full quarter of availability for the program and we again experienced better than expected results. Approximately one-third of all maintenance renewal opportunities during Q3 migrated to product subscription, which is even better than the early data we got from Q2 results. And of those that migrated, over 25% of eligible subscriptions upgraded from an individual product to an industry collection. Once again some customers are doing a partial conversion of their maintenance seats, but we’re especially pleased that overall participating accounts are growing their total subscriptions and growing their spend with Autodesk. In other words, accounts that participate in M2S are purchasing net new product and cloud subs and we're seeing this behavior across all geographies. It's still early days for the M2S program, but as we've said, we'd like these maintenance customers to move 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 immensely simplify our business and how our customers interact with Autodesk. Now, let’s talk a little about annualized revenue per subscription or ARPS. We spent a lot of time on ARPS on last quarter's call…

Thanks, Scott. I’ll reiterate what Scott just said and assure you that we remain fully committed to the FY20 goals around ARR, subs and cash flow, which brings me to the restructuring. Some of you may recall that last quarter I outlined the three strategic priorities that I believe will drive long term success at Autodesk; completing the subscription transition, digitizing the company and reimagining manufacturing, construction and production. The next era of Autodesk will not be defined by simply product or business innovation, but in their combination. We must excel at both and we must do that all in the service of our customers. Restructuring actions like we are announcing today are usually taken when the company is under an external pressure, such as a prolonged economic downturn or when there is a need to significantly cut expenses. In contrast, this action is being taken to support our evolving company strategy by rebalancing our investments, divesting in some areas and investing in others. By realigning our investments, we are positioning the company to meet our long-term goals. We will be investing in building and expanding the digital infrastructure of the company, increasing go to market and development spend for the construction opportunity and maintaining development on our core products. To fund these growth areas, we must rebalance resources and divest where it makes sense. We will therefore divest in some research and development activities that are not well aligned with reimagining construction, manufacturing and production. We will also close some Autodesk sites that are no longer aligned with our global location and talent acquisition strategy. I want to reaffirm what Scott said earlier, our flat spend goals for this year and next are not changing. To wrap things up, we're excited to be another step further along in our transition. We've been able to consistently execute on our long term plan while providing our customers with greater flexibility, more compelling products and a better user experience. Operator, we’d now like to open the call up for questions.

[Operator Instructions] And our first question for today comes from the line of Sterling Auty with JPMorgan.

Let's hit the 625 to 650 net adds for the year, down from the 625 to 675. Scott, you gave us some color, but some of the discussions having with investors looks like the maintenance to conversion program is working really well, getting more subs from that component would seem to indicate that you're getting the lower organic net adds since that subscription program, is it just cloud or is there anything else that you're not getting quite the traction that you thought at the beginning of the year.

It really is cloud, our cloud assumptions and what we see in cloud in Q3. So the core business is still strong, in fact, our core business subs are up sequentially Q2 to Q3 and they'll grow again from Q3 to Q4. That's what delivered the strong quarter that we just announced with ARR up 25%. That's what underpins the guidance that we gave, the slight uptick in our guidance on the financial metrics at least for Q4. So the core business is strong, but as we look at cloud, the slight guide down that we've got there at the midpoint is really a function of continuing to see good traction. We're pleased with the growth. We're seeing our overall cloud subscription base just to give you a sense of it is up 150% year-on-year. So, the cloud base continues to be strong, but it's still a relatively new business and it's still fairly choppy. We also have a really big renewal opportunity on cloud in Q4. Remember cloud Q4 a year ago, we talked about how big a quarter we had on cloud sub adds, many of those come up for renewal this quarter. So we're trying to be conservative on our expectations on that cloud business but it's in effect moving from a little bit what I talked about during the script a seeding strategy with promotional activity that drove a lot -- high volume at a low price to a more mature market that we see now that is likely to have slightly lower volume in cloud, but at a higher price.

This is Andrew. I want to jump in too just before you do your follow-up questions. So first, one of the things that I want to reiterate that Scott said is the core business is doing awesome. The net adds for product subscription are up quarter over quarter, year over year, they are robustly heading in the right direction and let's remember that's the key driver to the financial metric. That's why you see us with a slight uptick in the guide around some of the core financial metrics. When you look at cloud, the construction business is doing awesome right now and one of the reasons why I highlighted those large deals we were talking about in both EMEA and APAC is I am trying to give you a sense for where that business is trending right now. Last year, we were doing a lot of work seeding the business, injecting things like BIM 360 team into various accounts through promos and other types of activities to try to get people exposed the offering. Now, what we're seeing is people are stepping up and making large investments in the BIM 360 offering. So I think what you're going to see and we kind of started to feel it in Q3 is you’re going to see lower volume in things like BIM 360 but at higher prices, because we're actually making bigger deals and going deeper into accounts. So the cloud is on fire. Construction is on fire. It's just in a different mix than we were expecting earlier in the year. We expected a mix like this, further down in the maturation cycle.

And then glad to hear the reiteration of the fiscal long term goal, especially on cash flow, which brings up the point, cash flow I think was negative again in the quarter, getting questions from investors, when do we start to see that inflection in cash flow to get positive and start to trend towards those long term goals?

Yeah. I mean it’s consistent with what the cash flow slide that I laid out back in December a year ago, at our -- almost a year ago at our Investor Day that showed fiscal ’18 as the trough. Certainly when we get to fiscal ’19, we expect for the full year of fiscal ’19 to see positive cash flows. Frankly, we’ll continue to see in fiscal ’19 revenue growth that you've now seen for the first time in Q3 as we've compared back to a quarter that was a full subscription quarter. We'll see that revenue growth continue and we’ll see earnings per share term positive next year. But I think while we don't guide cash flow as a metric, it's not surprising at all that cash flows are negative this quarter and it wouldn't surprise me to see the negative again next quarter.

And our next question comes from the line of Heather Bellini with Goldman Sachs.

This is Mark Grant on for Heather. Just wanted to dig into some of those large deals a little bit, you mentioned most of those are EBA, cited the two largest contracts in history, but in the prepared remarks I look and I see that you called out a decline in EBA ARPS. Can you give us a sense of kind of what that sales cycle is looking like in those EBAs? Is there any kind of incremental promotion that you might be doing that’s having a negative near term impact on the ARPS there?

That decline in the EBA ARPS is what we typically see actually every Q2 and every Q3. So if you think about the way our enterprise business agreements work, they are three year commitments with an annual payment. That's what we see in the cash flows now. But that revenue is fully ratable over the three year time frame. So we lay it out and the revenue then is unchanged, but the denominator in ARPS and subs and for EBAs, it’s a token base, right? It's a consumption based offering. So what we use for subscriptions is monthly active users and what we see in all of our EBAs is from the time they sign, the monthly active usage continues to increase, right? They access more and more of our products, so the numerator of the EBA equation stays flat on an account by account basis, but the denominator grows and so we typically will see that aggregated result in enterprise ARPS for both Q2 and Q3 every year and then they’ll begin to tick up a little bit in Q4 and then of course it gets much bigger in Q1 when we get the full quarter, the full benefit of all the revenue from the Q4 EBAs that we’ll sign. That's just the normal seasonality trend. It's not about any additional promos or discounting into those accounts.

Thank you. Our next question comes from the line of Philip Winslow with Wells Fargo.

This is actually Michael Barrett sitting in for Phil. Wanted to touch on the two thirds of maintenance customers who are up for renewal who decide not to migrate, do you have a sense of their thinking about the timing of migration? Are they just waiting until next year? Are they going to ride out the price increase as long as they can any sense of that that you could give would be great?

Yeah. Look, I think what's really kind of straight forward here is that the small price increase this year. So when you're looking at a 5% price increase, you say okay, look, I'm going to ride this out probably to the 10% price increase and reevaluate my option at my next renewal cycle. And if you're really concerned about holding on to your perpetual rights as long as possible and locking into release at some point, you're going to do that. That's really what's happening. What’s interesting is we actually didn't expect to see as much front loading as we're seeing right now. So we're way ahead of our expectations. We expected the surge to start next year as we got close to the 10%. So this gives us a lot more confidence in terms of how this program is going to play out over the next two years, but really 5% price increase, if you wanted to hedge your bet, you just wait until the next renewal cycle.

Michael, the other interesting point there that -- and we've talked about this in the past is, we also look at the migration rate by customer size and what you see is the smallest customers are the most reluctant to give up their perpetual license and the biggest customers, they're ready for subscriptions and in many cases, they're already buying a lot of products from those subscriptions, so they're moving the most quickly. They’re also moving to EBAs.

And then just one quick follow-up, what impact on subs did the migration to industry collection among those M2S customers have on sub adds if any. I imagine there was some consolidation of numbers?

So whenever you have the customers moving to an aggregate offering, there is always some consolidation associated with that, but remember that the price of the industry collections is significantly higher, but what we did see in these M2S accounts is all of these accounts when the renewal cycle was over, they were actually higher value accounts than when they started. So in some cases, they may have consolidated some of their offerings around industry collections, but at the same time, they actually bought additional cloud subs and additional other types of subs that actually made them -- value of the account to actually increase over time, which is what we were expecting. So it's no surprise if you see some, we saw the exact same thing when we rolled out Suites.

Our next question comes from the line of Gal Munda with Berenberg.

I just have a question about the impact of the EBAs in the Q4 new subs, you said that you’re expecting some tailwind, can you quantify how much compared to last year you’re expecting if you have any visibility on that.

Yeah. Gal, what we typically see in EBAs is a one quarter lag from when we see a big amount of sales. So we did have a good quarter for EBA, a surprisingly good quarter or I guess it wasn’t surprising, a good quarter for EBA sales in Q3, bigger than what we normally would see in Q3. We expect another big quarter of sales for EBAs in Q4. Most of those Q4 EBA sales will accrete to subscribers to monthly active users, beginning in Q1 of next year. So the impact we'll see in the coming quarter will be the impact from the sales we had in Q3 and that is already baked into the guidance that we gave. It's not something that I want to break out, but it's baked into the guidance that we gave you.

Okay. And then just as a follow-up, you said that the guidance implies lowering yields and the cloud on the other side. Does that imply considering cloud consistently lower ARPS, does that imply a significant improvement in ARPS you expect in Q4?

I’m sorry Gal. Can you restate the question?

Sure. So in terms of your guidance, is that that your guidance implies in terms of net new subs, lower additions in the cloud coming from lowering yields in the cloud, does that mean because the cloud is lower ARPS that there should be a positive impact on overall ARPS in Q4?

We do expect that. We said all along, I mean, that's only one effect that I think will cause ARPS to tick up in Q4. We do expect to see ARPS pick up in aggregate and between maintenance and subscription plan.

Yeah. The obvious behavior we're seeing right now is exactly the kind of behavior we expected. We fully expect to see the ARPS tick up in Q4 just as we said it was going to tick up in the second half. We're well on our way to getting there.

Thank you. Our next question comes from the line of Saket Kalia with Barclays.

Scott, maybe for you. Just kind of thinking about subs a little bit higher level, can you just talk about any commonalities that you're seeing from the first couple of slugs of M2S conversions and I guess what I mean by that, are the first slug of M2S conversions, maybe coming in focused on any particular product family or any particular vertical, any commonalities that you're seeing in the first couple of quarters of M2S.

So, it's going to be Andrew and then we'll probably bounce back and forth to Scott. Look, one thing you're seeing is a large -- it is dominated by the Suites customers. The Suites customers are moving the fastest because they have this one path to collections and they see themselves, I think as basically locking in the lowest possible price for collections. So you definitely do see a slight Suites bias in some of the migrations and that’s evident. One of the stats though, I think it's important for us to reiterate is that when you look at the percentage of people, when you look at the people who are eligible to move to something else, 25% of them are opting to move to a collection. So, you might be seeing a budget sweep, people moving to collection, you're seeing a very large percentage of people who are non-Suites that move to a collection, which is great and above our original expectations.

Actually Andrew, maybe just to stay with you, again kind of even going higher level than kind of the M2S, which of course is the focus here, but even more strategically, is it kind of getting to your first couple of quarters as CEO, just maybe longer term around the business, how do you think about M&A strategically?

Well, so I’m going to pass that one to Scott. No. I’m just kidding. No, look, I think when you look at yourself entering new markets like when we talk about reimagining construction, manufacturing production, you're going to be looking at M&A as a major part of that re-imagination. We're going to be bringing in not only technology, but whole businesses that increase our effectiveness, not only from a technology and product side, but also from a go to market side and market knowledge side. So I think M&A is important part of the strategy moving forward, especially in these reimagining exercises we have in the new markets in construction and manufacturing. So I see it as a super critical element.

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

Andrew, let me start with you with a longer term question stemming from a couple of things you said at AU. You made the pretty interesting comment or observation that you think that eventually if I'm quoting you correctly that all subscription companies will eventually be consumption model companies. With respect to you specifically, how do you see effectuating that, what do you see as the intersection of your business model with your technology platform, enabling a broad consumption model, not just for the EBAs as today, but more broadly. Secondly, the near term question for Scott vis-à-vis the restructuring for you. You mentioned some product rationales or R&D rationalization there. I assume it has to do largely with what you call your horizon three designations, but anything on the sales and distribution cost side, anything baked into the restructuring from channel management or any cost of that kind, not specifically related to products.

Sure. So I’ll go first. So Jay, thank you for asking that question. First, let me explain it for the other people who weren't there for my comments. What I said exclusively, I said, look, the cloud is turning every software company into a subscription company and I said machine learning and artificial intelligence is going to turn every subscription company into a consumption company. And what I mean there is the value of the automations that are being created on top of cloud platforms is so large that people are going to pay for an outcome. We're talking out in the future and I'll give you some examples of some of the outcome that we might deliver in the future. So one of the things we've been talking a lot about is pushbutton manufacturing and this idea that I come up with an idea, I come up with the design of my design is instantaneously informed by the type of manufacturing methods I'm going to be using and when I'm done with my design, I push a button, not today, but in the future and that the design is immediately turned into a stream of bits that go to a configurable micro factory that makes it. Pushing that button Jay is incredibly valuable. When you go from having a design to instantaneously turning into a stream of bits that you can then manufacture without any intervention by a human being, that's worth a lot. People are going to push that button. Now, we've already been experimenting in consumption in numerous ways. The EBAs are a consumption model, so that allows people to consume all of our portfolio and by the way, it’s how a lot of our largest customers are getting access to BIM 360. But we've also experimented with pure consumption models in the pushbutton sense. One of the most successful offerings we have right now is a rendering service for consumption. That’s one of our most successful consumption offers. People push a button and they get an outcome. They either get a incredibly large pixel that high resolution or they get a lower number of pixels at lower resolution and they pay for that outcome. You're going to see us deliver numerous type of outcomes in the future. Some of the outcomes may be, I want to know what the energy consumption of this building design is, push a button, you know what the energy consumption of the business is. I want to know what it's going to cost me to manufacture this particular, push a button, you get the answer. That's where we're going to be going over the future and as we mature and develop these machine learning based algorithms and these artificial intelligence based algorithms, you're going to see more and more of their things show up as consumption offerings and that's where the future is going. No, it’s not tomorrow. It's the five to ten year horizon, but that's where we're heading.

And Jay to your second question on restructuring, it will have an impact on our sales organization as we continue to evolve that sales model. It’s consistent with what we've talked about moving to subscription, almost by definition will put us in a position of having more direct touch with our customers. The subscription model lends itself to that kind of direct touch, whether it's through an e-commerce channel, whether it's through customer success, whether it's through kind of an inside sales, direct touch, we'll continue to invest in direct touch and so I don't want to -- I don't want this to sound like it's the depth of the channel, it's not. We've been very upfront with the channel that we'll continue to move this needle, but we also -- based on our modeling, believe the channel business in absolute dollar terms grows. So it's a smaller piece of the pie, but it’s more dollars. So I think that the restructuring clearly will have an impact across sales. There will be some disinvest and some reinvest in that space. Consistent with the plans we have talked about, I just don’t want you to misinterpret that as to somehow the death of the challenge. I don't think that makes sense.

No. And as I've said previously when I talked about investing and digitizing the company and a large chunk of the investment is going to go into that, that is all about providing self service to the set of customers that work with us directly either EBAs or digitally direct through e-stores or hub sales. That’s absolutely going to be valuable to the customer, but at the same time, we're going to be able to provide more account insight to our internal sales force and our partners as well so that they can better serve those customers, do better crosssell, upsell and engage with those customers. So it's going to work both ways. We're going to have a healthy 50-50 mix of channel indirect as I’ve said before and yes, a big part of this investment is going into that digital infrastructure to enable that.

And our next question comes from the line of Zane Chrane with Bernstein Research.

I just want to dig into the 30% metric of the subscribers being at, 30% being net new customers, pretty impressive considering Adobe at this point of their transition I think was only adding 20% net new customers. Can you just talk a little bit about the composition of that 30% net new customers, how much is coming from the new emerging products such as cloud and BIM 360, et cetera versus how much is coming from customers buying the product offerings.

Yes. So the vast majority of that is coming from the existing offerings, all right and it's a mix of several things. In some way, it’s customers who are -- remember for a lot of customers, they've never seen a price like this before for the kind of sophisticated software that we deliver. They’ve never imagined themselves buying Revit, for instance, because it always looked outside of their initial cash flow capabilities. So now they can and they may have been using some kind of alternative method, either a free piece of software or something that maybe not necessarily the professional grade stuff we deliver and they've decided now is the time to invest in Autodesk. We're seeing a lot of customers. The one thing that is hard to know is how many of those customers that are coming in for the first time were users, but were never payers, the people we like to euphemistically call pirates. We can't tell -- they don't declare themselves at the door. We do know that some of those people are actually pirates and they have come in and they've bought the software for the first time, which is great, but we're happy to see them come in. I think Adobe was seeing some of the same phenomenon when they rolled out their initiatives as well. The other piece of customers that we see are just people that are starting new businesses up for the first time. They're basically net new, but it goes in those free kind of categories. They're moving from something else either nothing to us, they're moving from user to actual customer, they were never a customer before or they're starting up a business from scratch and yes we have been -- we've been delighted with the fact that that number has stayed as constant as it stayed throughout this experience and when you look at our cloud business, especially on the fusion side, the percentages are even larger.

Just a quick follow-up, how do you think about when you could if or when revised upward your cost guidance. It seems like the opportunity construction ends in the collaboration tools and the cloud, the massive potential tam which was pretty underpenetrated. How do you think about when you might want to actually revise upward your cost guidance to just capture that land grab or drive greater growth in some of these emerging products?

Yes. And we’ve talked about that. We’ve committed to flat spend this year, which is almost at the end of and flat spend again next year, but after that, we do see total spend and when I say total spend, by the way, it's not just OpEx, it's COGS plus OpEx. But we expect to see it begin to trend up in fiscal ‘20 in a single digit kind of way, but I think you can expect to see spend trend up in fiscal ’20 and then beyond.

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

Starting out on the restructuring side of the equation, how should we think about the timing? There is actually a lot of heads coming out of the organization, how should we think about the timing in terms of when those guys are coming out of the equation sort of coming out of our models and then vice versa what’s the expense ramp on the other side and then maybe you can give us a little bit of color in terms of what types of stuff that investment will come in to, so where and when does the expense ramp on the other side of that restructuring.

This is Andrew. I’ll start and then I'll turn it over to Scott for any additional color. So most of that is very front end loaded. We're going to see a lot of that, those -- that expense, and that operating lease has come out of system fairly quickly, right? The ramp up to higher, look, if I could do it all in two months, I would, perfectly honestly, because I’m in a big hurry to ramp up that investment in construction in in particular because we're seeing so much success there. I want to keep turning that wheel. I am very interested in the digitization, so it shouldn't matter when you try to hire back that many people, it takes time. So they'll probably be a lag as we head in to Q1 and Q2 of next year in terms of the ramp up but our overall goal is to get that money invested back in the business as quickly as we possibly can. Scott, do you want to add any color?

No. You said it exactly right. The only other comment I would add Keith is if you do the math on our EPS guide, you can see there's a couple of pennies of benefit that we're expecting to accrue to Q4. That's built into our guide.

And then one follow-up on, going back to the subscriptions number, can you remind us, is there any sort of impacts that we should be aware of in terms of like a year-over-year compare, in terms of promotions you're doing where you attached cloud subscriptions to collections.

Yeah. That’s part of -- as we talked about the subs guide change that we made in Q4, that was part of the cloud impact that we saw as we had two things that drove a really big quarter for cloud sub adds in Q4 a year ago. One was we launched user packs for the first time and there was some pent up demand for that. But the second one was we did have some promotional activity around, specifically around a really low end member of the BIM 360 family called Team and a lot of those Team subs come up for renewal in Q4. And so that's part of what's factored into our -- the way we're thinking about cloud. You’re pointing exactly to what we were talking about earlier.

And so we shouldn’t expect a similar type of promotion this year to attach Team subs to collections?

No. We don't, one, we don't need it. All right. Those promotions were seeding efforts, they were brand building efforts, they were trying to get the message out there. Here's BIM 360, welcome to me. We don't need those right now. The brand is carrying itself. You're not going to see that kind of promotional activity.

Our next question comes from the line of Rob Oliver with Baird.

Scott, you mentioned that a lot of the timing on the conversions is going to depend upon just when maintenance subs are up for renewals. Is there anything just to keep our eyes open for there in terms of seasonality, just wondering on seasonal trends there and when we might, how we might think about that? And I had one quick follow-up, you did talk about some customers doing partial conversions and I was wondering if you could just add a little bit more color on that?

Sure. Yeah. Rob, the seasonality -- so the customers are eligible to take part in the maintenance to subscription program, only when their maintenance sub expires and we have the heaviest quarter for maintenance subs renewals in Q4, which makes sense because historically that was our heaviest quarter for perpetual license sales. So it makes sense if that would be the heaviest quarter for subs renewal. I think beyond that, there's not a lot of other seasonality. Q1 surprisingly also has a fair amount of maintenance subs that come up for renewal, but I’d say the bigger effect is in Q4. And I'm sorry Rob, remind me of your second question.

It was just on the, you mentioned I think it was in reference to larger or EBA customers doing some partial conversions and I just [indiscernible]

Sure. We do have -- I think it's one of the questions that's come up is and it comes through channel checks that some customers are doing, partial renews or partial conversions as they moved from maintenance over to subscription. Partial renews are nothing new. It’s something that we've had for quite a while, ever since we've had even before we announced product subscription, we would have customers who do partial renews. For example, when they were moving from standalone products into Suites, right, so it's not a new phenomenon. We are seeing it now. I think we've kept a sharp eye on that though. And some of the interesting stats that we see on the customers that are moving from maintenance to subscription and doing just a partial move is there also, we see them adding more new subs, either cloud subs or other product subs, so that the net total subscriptions are increasing in those accounts and the net total revenue is increasing in those accounts. So it's -- even though there's only a partial renew, I think that the immediate thing that people run to as well I must mean, subs are coming down and revenues coming down. We're actually seeing the exact opposite behaviorally.

And our next question comes from the line of Matt Hedberg with RBC Capital Markets.

Hi. It’s Dan Bergstrom for Matt Hedberg. So you mentioned piracy in an answer to a question, a couple of questions ago. That was something you talked about at last year's Analyst Day and since then and the strategy is to communicate more with customers pirating the software next year. As we approach that point, could you talk a little bit more about that strategy and then maybe how we should think about that unfolding through next year.

Yeah. Dan, let me kind of reiterate what we've said in the past. So this year, what we're doing is we're providing higher quality leads and insights to the existing capacity we have, targeting piracy. We're doing that through analytics and through dashboards and help people understand where in particular areas piracy is happening. As we move into next year, they'll be much more in product communication that will be rolling out and piloting in various places so that we can not only provide better lead quality to existing capacity, but we can also provide more capacity through automated fulfillment to some of these piracy activities through direct digital engagement with some of these customers. So that’s rolling out. We expect that to increase some of our volume of piracy conversion and we expect that to be a continuing ongoing thing for years to come. Given the number of pirated usage -- number of users who aren’t paying out there, it's going to be years and years of bringing those users into the paying community, but next year, yes, we're moving to more automation and more direct communication with those customers. I expect that to be more fully operational as we had in to second half of next year and have an ongoing impact beyond them.

Our next question comes from the line of Steve Koenig with Wedbush Securities.

I wanted to ask you Scott a little bit more on cash flow here. So it looks like the cash flow result was pressured by two main components. One is the, it looks like maybe the move to annual billings is what's hurting your billings and then collections meaning DSO, not the product suite were also pretty weak. So can you give us more color on those factors and were there other things that were responsible for the weak cash flow result this quarter? And how -- I know you're not guiding for cash flow, but how should we think about how to model that going forward? Is there any way to think about it?

It's clear that you're digging into the numbers. I would say that if you look at our DSOs, you can see they were up slightly during the quarter, up to the mid-50s, which means we had a little bit more back end loading, it just means that the linearity was more toward the end. The quality of the receivables is unchanged. We have a very high percentage of on time receivables. So there's no change in the quality, but when those come in later in the quarter, of course, they sit in receivables and not in cash as the quarter closes. So a little bit of a shift in linearity is part of what drove that. The other is the shift to annual billings for EBAs, but remember also as part of the maintenance to subscription program, we shut off multi-year sales for maintenance as well and so the people couldn't front run the series of price increases that we had laid out there. And so there's actually two effects that you're seeing in the -- on the long term deferred. One is the reduction of multi-year maintenance and the second is moving to annual Billings for EBAs.

So Scott, how do we think about -- well how long, does the [indiscernible] does that anniversary say in Q1 and that subsides or how should – and more generally then, how should we think about that cash flow?

Yeah. The unbilled deferred is strictly driven -- the number that I gave you, so we had 148 million of unbilled deferred during the quarter. So add that to the deferred revenue, if you're trying to do an apples-to-apples kind of how much the deferred revenue grow year on year, that number will grow again in Q4 and that's strictly driven by EBAs that are three year commitments with annual billings. That phenomenon will continue, we’ll continue to build unbilled deferred throughout fiscal ’19, but of course, at the same time, we'll start to see some of the unbilled deferred from prior years bleed back out, right, because we’ll continue to have annual billings on that. I think the whole system gets to a more steady state by the time we get the late fiscal ‘20. You can waterfall it out just by looking at the growth in unbilled deferred, which is the number we’ll give you each quarter. You can start to waterfall out when that’s going to come back.

Our next question comes from the line of Gregg Moskowitz with Cowen & Company.

Just getting back to the restructuring, you're planning to reduce staffing levels by 13%, so obviously a material number, given what will be some degree of transition in go to market. Can you just expand on why you have confidence this will not impair your ability to execute your fiscal 2020 plan.

Yeah. First off, we were very selective in where we divest. We actually looked at project areas and functional areas that were not contributing to either our long term strategic goals around reimagining construction, manufacturing and production. So that’s where we're actually seeing permanent removals in cost. So those areas are not aligned with any of the goals or with the subscription transition and they're not going to affect any of our ability to achieve those goals. In fact, the money we’ve taken out of those areas, we’re reinvesting in areas that are absolutely going to allow us to achieve our goals. Now, on the sales side, what we're doing is we're moving away from some of the things that we were using to focus on the territories and other parts of the organization to move more into the inside sales structure. We've already been doing this for a while, so we have nice machinery in place to actually manage these moves. So this is actually in line with actions we've already been taking. So it has absolutely no material impact on our ability to hit our goals. In fact, what it’s doing is it's reinforcing our ability to hit these goals, especially when you look at the digital infrastructure side.

And then Scott, so the unbilled deferred, obviously grew very nicely this quarter. We assume you’re still on track to be over 300 million by year end.

So it continues to grow, rather than make that a metric that I try to forecast each quarter and update guidance because there's a lot of variables in that number. It's driven by EBAs and both the size and the timing of the EBAs have an impact on that number, but we continue to expect that to grow strongly, not just in Q4, but throughout fiscal ’19 as well.

Our next question comes from the line of Ken Talanian with Evercore ISI.

I wanted to hop back and talk about this net subscription adds. I was wondering if you could give us a sense for which elements within that mix you have the least amount of visibility and if you could give us a sense for, if there's a baseline of net subscription adds that we can think about as sort of being your floor on a quarterly basis or even an annual basis if that's easier to predict.

Yeah. Ken, there is not -- unfortunately there is not an easy rule of thumb on this, even within, so if I just look at a category like maintenance, even within maintenance, there are different rates of renew and migration to subscription by major product family, in other words, AutoCad versus LT versus Suites versus other standalone. So unfortunately, I can’t give you an easy kind of a rule of thumb on that. I think the thing I would tie it back to though is the strength of the core business. So when I say the core business, it's the sum of maintenance plus product subscription plus enterprise business agreements, right. If you add those three together, that's the core business. We continue to see nice growth in the core business and subscriptions and that's what's driving the result. That's what's driving the ARR that we just posted in Q3 at constant currency, 24% as reported, 25% at constant currency. It’s the sum of those three and if you want to focus your model, focusing on those three.

Okay. And just as a point of clarification on an earlier comment, I think you said that linearity was a bit different this quarter. I wanted to confirm, one, is it different from what you've seen in the past and was there a substantial impact on ARR in the quarter because of that.

No. I mean obviously a later linearity in a subscription model does have an impact on ARR. I don’t think it was significant. I think the change in DSOs was from the mid-40s to the low to mid-50s. So I'm trying to find it on my chief sheet here. Yeah. It went from 48 days to 54 days. So it wasn’t a big swing, but it was a little bit later. It doesn't make a big difference in ARR, but the question that that was asked in relation to was what’s happening to cash flow. It does make a difference on cash flows, right, those six additional days sitting, not collected and sitting in cash, but sitting in receivables make a difference when you're talking about a cash flow number that’s as small as our cash flow number is right now.

And we have time for one more question. Our final question comes from the line of Kash Rangan with Bank of America Merrill Lynch.

My question tends to do with the restructuring. Andrew, you said that typically these things are done when there's an adverse business condition, clearly, business is going really well for you guys. I'm thinking through your goals to keep the spend flat next year and the year after and if you're cutting 13% of your headcount, it's going to take some time to rehire back. So how realistic is your plan going to be to reabsorb that 13% back, the workforce and also to an earlier question, these kinds of moves can be somewhat disruptive, how much of a buffer have you provided to Wall Street with respect to your financial plans as you go through this restructuring.

So first off, let me make sure we're all clear on what our stated goals are. So we're flat next year. We are not flat the year after that and we do not intend to be, all right. We intend in fiscal ’22 to ramp up our investment especially in some of the areas that we think are important in expanding our business. So, that goal is all that flat on OpEx next year. So with regards to your other question, yes, there's always a ramp in terms of rehiring some of these people. So you're not going to immediately rehire them. But remember, we’ve divested from areas that are not right now aligned to some of our critical key goals like for instance completing the subscription transition, digitizing the company and reimagining construction in particular right now. So we've been very deliberate in how we've actually executed this restructure to create a pool of money that we're going to be able to execute on, but we're reaffirming the goals for next year in terms of the total spend for the years. Scott, do you want to add anything?

Yeah. Kash, just to address your last statement about buffer, what I'd say is these things are never easy and there's no question that it'll be a rocky couple of days, but what I'd say is we didn't -- this wasn't a -- some kind of across the board peanut butter method type restructuring. It was a very targeted set of divestments that were focused on a few areas. So I don't think it's going to have the same disruptive effect overall certainly to the overall core business that it might have been if we had done something that's a little bit more, hey, everybody, take out X percent, which I think is a far more disruptive path. So I don't want to minimize it. This is a tough day and it's going to be a tough couple of days, but I don't think it's going to have the same kind of disruptive impact or execution.

Yeah. And frankly, peanut butter cuts are actually, as Scott said, more disruptive to the execution and actually more demoralizing to the teams, because everybody feels like we're all getting squeezed but we're being asked to do the same thing. When you actually stop doing something, although it's hard for the team that was on the projects or initiatives that are being shut down, it’s more motivating for the other people because they say, wow, okay, we're getting investment over here and we're not being asked to do two things with less money again and I think that's something you have to pay attention to.

Wonderful. And is it fair to say that you're reiterating your long term fiscal ’20, what we laid out at the Analyst Day, the ARR, the revenue, the earnings and free cash flow, is it fair to say that you still are reiterating that and that's it for me. Thank you so much.

Absolutely Kash. We are reiterating our FY ’20 goals. The 24% CAGR in ARR, the free cash flows targets, all of that it completely reiterated. As a matter of fact, the restructuring is aligned to increase our confident and our ability to execute on those goals and actually deliver results beyond FY ’20, especially when we look at what's going to happen with construction as we move forward.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the floor back over to David Gennarelli for any closing comments.

Thanks, operator. That concludes our call today. Just by reference, we will be at Credit Suisse Conference tomorrow in Scottsdale. After that, we’ll be at the Wells Fargo Conference in Deer Valley on December 5 and at the Barclays Conference in San Francisco on December 6th. If you have any questions in the meantime, you can reach me, Dave Gennarelli at 415-507-6033. Thanks.

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.