Autodesk, Inc. (ADSK) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter Fiscal Year 2019 Autodesk Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] And as a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Dave Gennarelli, Investor Relations at Autodesk. Sir, you may begin.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our first quarter fiscal 2019. 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 second quarter and full-year fiscal 2019, our long-term financial model guidance, our cash flow expectations, the factors we use to estimate our guidance, including assumptions around ASC 606, 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 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 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 our financial performance, and unless otherwise noted, each such reference represents a year-on-year comparison under ASC 606. And now, I would like to turn the call over to Andrew.

Thanks, Dave. Q1 was a good start to our fiscal 2019, with continued solid execution leading to strong growth in key metrics, such as ARR and ARPS. We also realized strong growth in billings, revenue, total deferred revenue and better than expected EPS resulting from lower spend in the quarter. Overall, these results keep us confident in achieving the financial targets we’ve laid out this year and beyond. There are several key areas that I want to highlight. Total annualized recurring revenue, or ARR, grew 22% under the new revenue recognition standard, ASC 606, and 25% on an apples-to-apples basis under ASC 605. Annualized revenue per subscription, or ARPS, continued to operate its upward trajectory, both year-over-year and sequentially. Recurring revenue increased to 95% of total revenue. We continue to see rapid migration of maintenance customers to subscription with the maintenance-to-subscription program, or M2S, and customers continue to engage with our solutions for reimagining construction and manufacturing. First, let’s dig into ARR a little bit more. As we’ve been highlighting since we started the transition, the Autodesk machine has been geared towards driving ARR and we continue to see great results. Subscription plan ARR more than doubled, driven by growth in all subscription plan types, but led by product subscription. We continue to drive impressive growth in product subscription ARR on both a year-over-year and sequential basis. The strength in total ARR was once again broad-based with all three major geographies showing strong growth led by APAC. Last quarter and at our recent Investor Day, we started breaking out results of our core business, which represents the combination of maintenance, product subscription and EBA subscription. While our cloud business represents all the results generated by standalone cloud offerings, it’s not surprising that core ARR grew in line with total ARR, as our core business drives the overwhelming majority of our revenue, ARR and billings growth. Our cloud ARR performed up to expectations and cloud billings remain strong, growing nearly 50%. I also want to provide you with a little more insight into our cloud business, because our pure cloud ARR and cloud subscription totals don’t tell the entire story of the success we’re having. Our cloud products have become an integral selling point for our EBA customers and usage within our EBA customer base has really taken off. For example, in Q1, just over half of the monthly active users for BIM 360 were in EBA accounts. This really validates our relevancy at the top of the general contractor market, which is where we focused initially. That success is a strong foundation to build on and we’re now leveraging it in the mid-market contractors. For example, Miron Construction, an U.S.-based construction company is deploying some of the most advanced technology available in the construction industry. They use the new BIM 360 project delivery platform to process a change to their building project that added up to 70 design documents and the potential to add almost 1 million in project costs. The 70 documents needed review by everyone in the project, which would have taken hundreds of hours to resolve to manual processes with their old digital document management software. But Miron resolve the issue in just a fraction of that time with BIM 360. The project manager also found several additional issues, which never would have been caught with their old document management tool. Now that’s real value delivered on real projects. Beyond that, as I said at our Investor Day, we expect in five years, Autodesk will have moved the building information model across the entire construction process from start to finish. BIM will become the record of everything it is happening from design to pre-fabrication to on-sites assembly into the final handover of the building to its owner. BIM will become the single source of truth across the full spectrum of design and make processes. On the manufacturing side, our cloud-based Fusion 360 is also enabling customers to bring design and make closer. Generative design is now available in the ultimate version of Fusion 360 and uses AI-based algorithms to simultaneously generate multiple valid solutions based on real-world manufacturing constraints and product performance requirements, such as strength, weight, materials and more. Some of you may have noticed that earlier this month, we announced a project with TM using our generative design technology to lightweight their vehicles and reimagine a small, but important vehicle component. The software produced more than 150 valid design options based on parameters the engineers set, which is required connection points, strength and mass. They zeroed in on a new design, that is 40% lighter and 20% stronger than the original assembly. It also demonstrated another major benefit of generative design part consolidation. The new design consolidates an assembly of eight different components into one 3D printed part. That’s the kind of game changing technology that really gets customers excited about the future of making things and Autodesk is clearly leading the way. Finally, I want to quickly comment on our net subscription adds and remind you of some of the key factors we discussed last quarter. First, the M2S driven up-sell the collections is resulting in a consolidation of subscriptions in many of our accounts. They had a higher total account value. Second, cloud subscriptions will continue to consolidate as the new packaging for BIM 360 works its way through the market. These factors are as expected and will continue to impact net subscription ads for the next couple of quarters. However, we continue to expect strong ARR growth resulting from the higher ARPS. Now, I’ll turn it over to Scott for a few more details on subscription, ARPS and other financial metrics.

Thanks, Andrew. I’ll start with a closer look at subscriptions. Subscription plan subs grew by 307,000 in Q1, with growth coming in all three categories, cloud, enterprise, and product subs. As Andrew noted, net subscription additions continue to be impacted by product consolidation from the adoption of collections and the product consolidation associated with our recently launched simplified BIM 360 offerings. Collection and subscription additions increased over 30% sequentially and now make up a quarter of the base of products subs. The adoption of collection is happening through the regular run rate of new business through the renewal process, the legacy promo and the maintenance of subscription program. Again, the good news is that many of these customers are increasing their total spend with Autodesk, contributing to solid increases in ARPS and ARR. So we continue to execute well on our core strategy of driving up-sell to industry collections. Each quarter, the vast majority of the new subscription plan subs are added through traditional means. However, we continue to make progress in converting legacy users into subscribers. In Q1, the legacy promo added another 24,000 products subs and over 30% of those were collections. And we’re still finding that the average age of the licenses that occurred in with the promo are seven years behind the curve release indicating there’s still a very long tail of legacy customers to convert. There continues to be over 2 million of these legacy users that are actively using an old perpetual license without a maintenance plan. Over time, we expect to convert a large portion of these users through promotions like this, through compelling new product introductions and through traditional means as the product becomes increasingly outdated through time. Core subscriptions grew between 12% and 13% in Q1, slightly below our recent history, but was inline with our expectations. Subscription consolidations are creating a near-term headwind. But as Andrew stated earlier, core ARR still grew 25%. A consistent attribute of the transition is the new customers continue to make up a meaningful portion of product subscription additions and represented 25% of the mix for the quarter. These new customers come from a mix of market expansion, growth in emerging markets, converting unlicensed users and people who have been using an alternate design tool. Partially offsetting the growth in subscription plan, subs was the expected decline in maintenance plan subs, primarily related to the M2S program. The M2S program continues to progress faster than expected, especially in the Americas. In Q1, customers migrated 154,000 maintenance subs to product subs that brings the total M2S conversions to $0.5 million since we started the program middle of last year. The conversion rate remains strong with approximately one-third of our maintenance renewal opportunities during Q1 migrating to product subscription. Of those that migrate, over 30% of eligible subscriptions upgraded from an individual product to an industry collection. We’re now entering year two of the M2S program and we expect this to be the biggest year for M2S migrations. Effective earlier this month, for all maintenance contracts up for renewal, the price to move to subscription increases 5% and maintenance plan prices increased 10% if they choose to stay on maintenance. It’s easier to see that it makes more economic sense for our customers to migrate and product subscription provides them the greatest value with increased flexibility, support, continuous updates and access to our cloud products. The renewal rate for product subscription experienced a small increase sequentially and we expect it to continue to rise as the product mix improves. The renewal rate for maintenance was flat sequentially. Now let’s talk a little bit more about annualized revenue per subscription, or ARPS. ARPS continue to inflect up in Q1 for many of the reasons we’ve been calling out, including the growing renewal base at a higher net price to Autodesk, the increase in digital direct sales, the price increase from the M2S program and less discounting and promotional activity. Looking at an apples-to-apples comparison on ASC 605 basis, total ARPS grew 7% year-on-year and 3% sequentially to $569. While core ARPS grew a 11% year-on-year and 3% sequentially to $624. We expect total ARPS to continue to inflect up for all the reasons we laid out at Investor Day, as we progress through the transition. Our e-store continues to play a bigger part of the digital direct business and grew nearly 90%, while achieving record revenue in the quarter. In addition, our e-store generated over 20% of the product subs in Q1, and our direct business to enterprise increased by over 30%. So looking at our total business mix, total direct grew a 11% and was 29% of the Q1 mix. The growth in total direct was partially offset by some of the divestitures announced last November as part of the restructuring. Now let’s talk about billings. Since we moved to a point in the transition, where we are comparing back to a prior year that is also subscription-only sales. Billings growth has become a relevant metric again. As we noted in our last earnings call, when we reintroduced guidance for billings. To be clear, we now defined billings as reported revenue plus the change in deferred revenue. Using that definition, billings for Q1 decreased year-over-year under ASC 606, primarily due to the write-off of previously deferred revenue, but increased 12% when comparing more apples-to-apples on a 605 basis. The impact from the adoption of ASC 606 is greatest in Q1, and we’ll see diminishing impact as we move through the rest of the year. And note the deferred revenue impacts due to the adoption of 606 do not impact cash flows. Moving to spend management. Our total non-GAAP spend came in at $531 million for the quarter, leading to better than expected profitability. Driving the lower spend result was our continued focus on cost management and the hiring ramp associated with filling the new roles we created as a result of the recent restructuring. We do expect to see hiring increase as we go forward. Our intend for fiscal 2019 remains to keep non-GAAP spend flat at constant currency relative to our fiscal 2018 budget at about $2.2 billion. Looking at the balance sheet. Total deferred revenue grew 21% as reported and 24% under ASC 605. Unbilled deferred revenue increased to $412 million. I want to note that the adoption of ASC 606 also required a change to the definition of unbilled deferred revenue to include certain early renewals. We’re not breaking out the two components, but the overwhelming majority of unbilled deferred revenue still relates to the move to annual billings with our large EBA customers. Q1 operating cash flow was slightly negative expected. As we move through the year, we expect operating cash flow to turn back positive and remain there. With the significant price appreciation, our stock since the earnings report, we did not trigger the opportunistic buying within our stock repurchase program. In Q1, we bought back roughly 200,000 shares at an average price of $113.31. As always, we remain committed to managing dilution and reducing shares outstanding over time. And lastly, before we get to the business outlook, we’re pleased to have reached another milestone in the transition with the return to non-GAAP profitability. It’s important to note that with this milestone, about 3 million shares are added back into the non-GAAP diluted share count, and this has already factored into our guidance for the quarter and the year. It’s important to note that non-GAAP earnings per share under ASC 605 and Absent ASC 340, which is what requires the capitalization of commissions, would have been $0.16, a significant uptick in earnings as we continue along the transition. Now I’ll turn the discussion to our outlook and I’ll start by saying that our view of the global economic conditions remains mostly unchanged from the last few quarters with two markets performing relatively well and emerging markets showing improvement although we are watching the emerging markets closely. As you know, we launched a significant restructuring last November, which was really a rebalancing of our investment areas. This touched our entire global organization, especially around changes we made with our sales team and the move to increase our direct touch business. Overall, we’re really product of the results we achieved in Q1, and are confident that we’ll see the benefit from the changes we’ve made as we move through the year. As we look at our outlook for Q2, we expect to see sequential increases in most metrics, including billings, ARR, ARPS, revenue, spend, profitability and subscription additions. The better than expected profitability in Q1 was primarily related to not meeting our hiring projections during the quarter. We expect the hiring rev to increase in Q2, and as such, expect our sequential spend to increase more than usual. Also note that, we’re now required to capitalize commission cost and amortize them back into our operating expense versus expensing them as incurred, which we did previously. This will have the effect of leveling off our commission costs and will change our historical spend patterns throughout the year. We remain confident in our previous guidance for fiscal 2019. But want to note that we provided full-year guidance for billings under ASC 606, which we have not provided earlier. The initial impact of the adoption of ASC 606 reduced previously deferred revenue on the balance sheet and consequently reduces calculated billings. This update is not driven by a change in our underlying business and you can see there is no change to our 605 billing guidance. And again, it has no impact on cash flow or subscriptions. Operator, we’d now like to open up the call for questions.

[Operator Instructions] Our first question comes from the line of Phil Winslow with Wells Fargo. Your line is now open.

Hey, thanks, guys, for taking my question and congrats on a good start for the year. Really want to focus in on ARPS, because that upsided again this quarter versus what the Street was looking for. When I’m really zone in on things, it looks like that core number that you mentioned really drove that more than anything. Why don’t you just help us through sort of the flow of the year, because obviously, there are lots of moving parts, and Scott, I know you just said just think about ARPS subsequently. But as you think about Q2, Q3, Q4, what are the puts and takes to keep driving that ARPS up here, because obviously, some it’s mixed, some of these promotions, et cetera, maybe kind of walk us through that? And then I just have a quick follow-up?

Sure, Phil. The first thing – if you remember the factors that I talked about that will drive ARPS from back in our Investor Day, all those come and play and actually increasingly so throughout the year. So the first is grow renewal base, which has a higher net to us, right? We talked about – there’s a lesser channel margin and renewals and there is on net new sales. Now the renewal base gets bigger, that equates to us as a higher ARPS. We’ll sell more direct. And frankly, a lot of the changes that we put in place as a result of the rebalancing, the restructuring that we announced back at the beginning of Q4 are increasing our direct touch across the sales force. So as direct goes up, we get a higher yield out of our direct sales. The next step function in the pricing on M2S comes into play more and more as the year goes on, right? As we sell those conversions, they go into deferred revenue and they accrete out through the year. So I think it’s a little bit of a dampened effect, it doesn’t happen as sharply as it did in the past. And just ongoing less promotional activity and you’ve seen us have slightly less promotional activity, those are the trends. And so we do expect to see sequential increase in ARPS certainly next quarter and ARPS end the year at a higher point than it ends next quarter.

Got it. Awesome. And then follow-up to Andrew on your comments there about them and penetrating into the construction market. We’ve seen over the past 12 to 18 months here and as recently just think about a month ago some consolidation in the construction management software market. How do you think about Autodesk positioning in there? Where are their natural adjacencies versus things that you’d actually just partner up with people for.

Yes. So, we’ve said over and over again, we intend to go deep on the entire process. We do believe just like what’s happened in manufacturing where the model has become the record of the entire process. That’s what’s going to happen in the construction space as well. So we intend to touch every piece of that process. We’ll do some of that organically with internal development. We’ll do some of that inorganically. But we intend to touch just about every part of that process. We’ll probably stayed clear of the ERP right side of the business. But every other part of it from preconstruction all the way to field operations. We’re going to be involved. We really are.

Thank you. And our next question comes from the line of Saket Kalia with Barclays. Your line is now open.

Hey, guys, thanks for taking my questions here. How are you?

Hey, Saket, good. How are you?

Good, good. Hey, first, maybe for you, Andrew, and thanks for reminding us about the collections impact on that net ad number. Typically, we would see a seasonal uptick from the EBAs we sold in Q4 that get turned on in Q1. So just to confirm, did we see that bump, but maybe that’s perhaps getting hidden by some of the collection impact and the flushing out of the BIM 360 team item that you’ve spoken? And relatedly, when do you think we see the impacts of those perhaps normalize, if that makes sense?

Okay. So Saket, let me try to break – address the question a little bit and then I’m going to let Scott dig in on the EBA subs a little bit, too. I’m going to just go a little high-level here. So first off, the number of – the net ads we saw is what we expected to see, right? So we’re seeing what we expect to see and I want to peel it back a little bit and then I’m going to let Scott comment a little bit more. So when you peel it back, right, we broke out core and cloud on purpose. And what you see is a very significant decline in what’s happening with the cloud subscriptions. And that’s to be expected that’s exactly what we were telegraphing to you and exactly how we modified some of the things. The other thing that you also see is in the core side, you’re seeing an ongoing continual growth of the core net ads, right? But there is a difference in how the EBAs kind of rolled in this year into the core and I’m going to let Scott comment on that real quick.

Yes, Saket, and just to be super clear, I think you know this. We still added cloud subs, net added cloud subs during the quarter. We just aren’t adding with the same way we did a year ago. On the EBA business, if you remember back in Q3, we had a really strong Q3 of last year in EBAs. So what normally happens is, we sell the majority of our EBAs during Q4 and then we count those monthly active users nine days later and we get a big slug of additional EBA subs in Q1. Last year, we actually had a strong Q3 in addition to a strong Q4. So we saw – we’ve seen some of the lead back from the EBA sales already coming in, into Q4 and then slightly lesser amount as the quarter-to-quarter impact going from Q4 to Q1.

Got it. Got it, that makes sense. Maybe for my follow-up for you Scott. Just to the costs out of equation, really nice decrease in the cost of goods sold driving one of the higher gross margins that I think we’ve seen. The question is, is this coming from sort of the right-sizing of the cost structure that we’ve done last year, of course, I’m sure part of it’s related to no more perpetual sales. And how sustainable, I guess, are these levels? Just a little more color on that, that nice cost of goods sold that will be helpful?

Yes, yes thanks for that question. And you’re right, it is a nice trend on gross margins. There’s a couple of things driving that. One is, as we’ve gone through and become more focused in certain areas and we went through several divestments and that has – that’s accreted some benefit into our cost of goods sold. The second is, we have also been really active with the channel taking a lot of what previously was consulting business that we had done and having – giving the intellectual property, giving the best practices for the channel and having BIM deliver a lot of that. They can do it at a higher margin frankly, that they can make on product mark up. For us, that’s a lower-margin business. So we pushed a lot of the consulting business outside of the big EBAs, where the customers really want us in there to our channel partners. It’s a win for them and it’s a win for us. And that few I think has contributed to a lot of that improving gross margin and reduced COGS.

Thank you. And our next question comes from the line of Heather Bellini with Goldman Sachs. Your line is now open.

Great. Yes, and I wanted to follow-up a little bit on Saket’s question about the collections versus the suites that you would have sold. Is there any sense to give us or any way to give us a sense of the type of – we still get a lot of questions about what that – how that might be impacting the actual sub number in the quarter? And I know it might be hard. But if there’s anyway to think about maybe the average number of products, the collections people are using versus, say, before if there is anyway to kind of have a rule of thumb? I know it wouldn’t be perfect. And then I want to – just touch on one other thing, which is in relation to piracy, which I know you guys have always kind of been focused on and trying to cut back on. But I was wondering if there was anything regarding piracy in the quarter – piracy reduction in the quarter that, that might have helped? Thank you.

Right. So I’ll start. There’s no real magic rule of thumb on the collections consolidation. Last quarter, we tried to give you a really nice example that kind of showed you the extreme case of what can happen in terms of the consolidation and not that what – when we talked about the engineering service company in Canada and gave you that example. So I encourage you to go back and look at that example, because that is a common scenario, it does happen. But I don’t have a rule of thumb for you with that respect. Now on your second question, but one thing I will say is, we expect the effect of consolidation to continue in kind of a consistent manner as we move forward through the next few quarters, all right?

Yes, Heather, if I could just add to that. You’re familiar with that example, it was 42 – it was a company that had 42 individual products on maintenance, consolidated at the point they moved from maintenance-to-subscription consolidated down to 20 and, in fact, 19 collections in one AutoCAD subscription and in the process of – so their sub count went from 42 to 20 and the process of that their ARR went up more than 10%, right? So it’s one of the reasons why I think focusing less on subs. The subs are not relevant by any stretch. But focusing less on the sub count and more on the outcome, which is the growth of ARR is going to make sense for this quarter and then actually as we as we look ahead.

Just not to drive this home. Remember, the result we saw as far as the result we expected and we’re not changing our outlook for the year. So we’re seeing what we expect given all the factors we see that – in the business and the things that watch. So we’re actually feeling pretty good about the outcome right now. Now with regard to your question about piracy, I sometimes feel like everybody expects like some quarter I’m going to declare 50,000 net subscriber ads for piracy in the score. You might be waiting a long time to hear that declaration. This move with regard to how we address non-paying users in our market. It’s an ongoing process basically keeping the run rate at a relatively nice clip quarter-after-quarter after quarter well beyond even the FY 2020 goals. That’s what some of the companies that have engaged in this like Adobe and Microsoft has seen it’s been an ongoing return to the business. So we have done some new things this quarter. We rolled out the in-product messaging, the pirate in AutoCAD and we’re going to roll that out worldwide as time progresses. We’ve also let up some things in our sales force with new lead regeneration and new team. But there’s no like headline around how piracy gets added into our business. It’s going to be one of these thing that actually maintains the business as we move forward. And like I said many times before, pirates don’t declare themselves at the door. So it’s very difficult to complement the stuff.

I appreciate it. Thank you very much.

Thanks, Heather.

Thank you. And our next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Your line is now open.

Thank you. Good evening. Andrew, first for you and then follow-up for Scott. So the question is, as your business has evolved over the last number of years, both in terms of technology and model and channel and so forth and externally two for that matter. How are you thinking differently if at all about the leading indicators of the business? In other words, for a long time, we were told that LT was perhaps the broadest indicator of the business if we go back far enough, let’s say, a decade, even indications that civil of all things was an indicator for the business or [indiscernible] see. So in that respect maybe you could talk about how you are thinking about leading indicators? And then the follow-up at the Analyst Meeting, Steve talked about a couple of changes you’re making with respect to the channel moving an account-based approach that you are taking from EBAs into the mid-market. And then similarly, this year you’re going from paying for actions for like activation and onboarding to next year you’re going to go to more pain for outcomes usage and adoption. So maybe you could update us on the progress you’re making in terms of those evolutions vis-à-vis the channel?

Okay. So Jay I’ll start with the first question. We are absolutely starting to look at leading indicators differently. I think in the past it would have been easy to pin a particular product as a leading indicator. I think the way we’re kind of framing this as we look forward, it’s really this idea of the low-end of our business, the VSB business, the chunk that comes in from what we call very small businesses. That is the indicator moving forward that we will watch as a leading indicator in terms of economic activity. Classically, that space bought LT a lot. Now because of the subscription transition, you’re actually starting to see a mix in that base around what they actually buy, because the upfront costs are lower. So instead of pinning it to a particular product what we’re doing more and more is we’re looking at that VSB segment and tracking its behavior. It just so happens that that segment is more likely to buy direct from us in the East or in any other segment. So I would actually say in terms of leading indicators although we haven’t actually institutionalized all this yet. We have more knowledge and more access to some of these leading indicators as we move fully to the subscription transition. So that’s how we’re thinking about it moving forward, Jay.

And Jay on the second part of your question around the changes that Steve talked about at Investor Day, but I would say, it’s still really early days. I think that, if you peel back the strategy behind that, it is about driving more direct touch. First of all, with the mid-market account base. So field-based account level assigned salespeople below the named account here that we already have, that will be settled with the channel by the way that. So I have direct touch with outside channel partners involved. We are increasing the levels for we’ve got in our inside sales, which are going to as a direct touch play. And they talked about the formation of a new group called customer success. And the customer success team is all about driving adoption internally also through the channel and we’ve built incentives and our channel partners incentive program around driving adoption, the first-half of this year we’ll get more refined at next year. So the customer success team and the channel incentives are around adoption as opposed to just making sure that they get the sale done. So a lot of – I expect to see a lot of uptick in both our – the engagement, the direct customer engagement that we have. And I think we’ll see some of the benefits of that really begin to come into play in the second-half of this year.

Thank you.

Thanks, Jay.

Thank you. And our next question comes from the line of Gal Munda with Berenberg. Your line is now open.

Hey, thanks for taking my question. The first one is just on the – I heard about some of the changes that have been rolled out in terms of the U.S. sales, especially when we’re talking about the discounting philosophy in terms of the channel. Can you talk a bit more about that? And do you think that, that had any impact on in terms of how the net new ads played out in the quarter maybe in terms of how the channel is prepared for that? And could that take maybe a quarter or two for them to get onboard with it?

So first off, I just want to make sure I clarify what you’re asking about, Gal. We do some margin changes in the U.S. specifically related to AutoCAD LT and AutoCAD that had absolutely no impact on the volume in the U.S. markets whatsoever. It certainly is accretive to our total realization of the business, because of the new idea pushes more business to the e-store and actually allows us to make more on LT had absolutely no impact on volume at all. And these changes are going to be captivating through Europe and APAC this quarter and into the next quarter. And we don’t – we simply do not expect any impact on volumes.

So that should impact – so that should actually be beneficial to that price realization?

Yes, we expect the outcome here to be beneficial in terms of price realization.

On the LT piece. And frankly, part of the goal there too is to focus channel and selling the higher-value products, right? I think one of the places the channel can add the most value is moving upstream either to the – one AutoCAD or up in the collections.

Okay, perfect. And can we just talk a bit about the cloud and ARPS and how maybe just the comment on the churn on the core churn on the cloud what you talk, you obviously don’t disclose that directly. But just in terms of the trends now if you’re being slightly on one side basically saying, you’re being slightly more cautious about the pricing, I’m not trying to support that. On the other side, we’re still seeing ARPS trending down in cloud. So how can we reconcile those data points maybe if you can just help us understand that would be very helpful?

Yes, so there’s kind of two effects. So there’s actually three effects here in many respect. So the first effect is, as we told you previously, we’ve rotated away from some of these really low-end down-market type ARPS that I mean application that we were selling BIM 360 team application. They’ve rolled up into the consolidated suite. Those continue to churn out of the run rate. And that’s fully expected. We actually expect that we’re not we’re not chasing those, okay. The other thing is, in terms of the new pass we sell lots of user packs. So, a company might set by a 1,000-user pack into their project space that that number of users obviously starts to go over the ARPS over time. However, it’s really good for the business, because basically what they’re doing is they’re buying future capacity. So, they’re buying and expanding into our bucket with what they’re purchasing. In another respect too, especially on the ARR side. The ARR side for cloud right now doesn’t actually reflect a full ARR impact of say BIM 360 right now, because so much of it is contained within the EBAs that’s one of the reasons why I made that point about 50% of the monthly active use coming from EBA customers for BIM 360. That ARR sits in the enterprise ARR and not in the cloud ARR and that has – that also has an impact on how these numbers roll out. I think one of the things that you did in terms of looking at this in the short-term. Remember the core is going to drive the big ARR outcomes over the next 18 to 24 months. So, we want to pay a little bit attention, more attention to that. And these trends that we’re talking about would settle up. Scott you want to add anything.

Nothing so.

Perfect. Thank you.

Thanks, Gal.

And our next question comes from the line of Gregg Moskowitz with Cowen. Your line is now open.

Okay thank you very much. Scott, ARR were certainly strong as you point to but it was a little surprising that he made it into plan ARPS declined by $24 sequentially. And I just want to clarify a comment from your prepared remarks, would you say that the decline there was entirely due to the linearity of the M2S sign of activity?

Yes, it’s not entirely them Gregg, but it is largely based on not just the linearity just based on M2S. There is a 605 to 606 impact in maintenance as well. So, as we implemented 606 at the beginning of this quarter we wrote off a fair amount of previously deferred revenue. Some of that hit the maintenance line and of course that then becomes headwind on ARPS.

Got it. And then Andrew you hear that example I believe of Myron construction and that was helpful, but when you look out at the construction vertical. When do you expect that your enhanced focus on the mid-market will begin to really show up in the numbers?

Yes, well I think what you’ll start to see is, we start to penetrate the mid-market you’re seeing more and more of these pack start to get sold. And I think that’s the pack absolutely target the mid market. So, I don’t I’m not going to give you a specific timeline in terms of when you’ll start to see more robust growth in the mid-markets, but what I can say is our focus has been the top of the pyramid for almost the entire existence of BIM 360. And it’s only now that we’re starting to move deeper into the mid-market and these early successes, frankly driven by some of the successes we’ve had up market are indicative of what I expect you’ll see over the next few quarters as we start to penetrate the mid-market more and more.

Great. Thank you.

Thanks, Gregg.

Thank you. And our next question comes from the line of Ken Talanian with Evercore ISI. Your line is now open.

Thanks for taking the question. Could you give us a sense for the blended maintenance price increase you realized in a quarter and then some of the moving pieces we should consider around maintenance ARR for the remainder of the year?

Yes, it’s hard to do that on a blended level Ken, I mean you can see the ARPS and you can calculate the ARPS, and we do provide you the details to be able to sort out the 605 impact, as well as the M2S impacts. So, you can see it in aggregate. I’d say on an apples-to- apples same maintenance before to say maintenance after it’s really just the 5% price increase up until the beginning of this quarter that was put in place as part of the M2S program. And as you know beginning of this quarter that maintenance price went up apples-to-apples 10%. So, it’s – you the blending shows up in the ARPS. And I think when you dig through the prepared remarks you’ll see enough detail to be able to peel out the effects of both 606 and M2S.

Okay. And could you talk about the uptake you saw in multi-year product subscriptions in the quarter. And your expectations for the remainder of the year?

Yes, we’re not doing anything right now Ken to incent multi-year product subs as it’s back to part of the presentation that I gave at Investor Day. Now, we are seeing some multi-year activity in that. We really haven’t done anything to incentivize it. So it’s not – it’s kind of turning a lot of that double-digit rate that have been. I do expect to see that pick up later this year and into next year, but we’re not – at this point, we’re not doing anything to really encourage that.

Thank you. And our next question comes from the line of Richard Davis with Canaccord. Your line is now open.

Thanks. I’ll change it up from a model building question to a product question. Look, we talked to some of your customers and they agreed that this kind of generative design stuff is a big improvement over like what used to be called the topological optimization. So basically, the question is, should we think of this generative functionality as an incremental to ARPS, increment to customer counts, reduce churn, all three, or – and then I would assume that it would take probably a year or two before we kind of get any kind of measurable ramp in financials, just that would be helpful? Thanks.

Well, Richard, that is definitely not a boring question. So look, I don’t want to dilute the part of the answer. But the – almost all of the above are true in some respects.

Okay.

So, for instance, some of what you’re seeing with our Fusion Ultimate roll out of the generative capability is included in the ultimate subscription, but buried inside the ultimate subscription is a allocation of consumption that’s built into subscription. So there’s an amount of consumption that is available to the user. Once that consumption is burned down if like, for instance, if they were a massive generative user and they just kept generating designs over and over again. They’re going to have to reload that consumption outside of their normal subscription. That kind of blending that, that you saw in Fusion Ultimate, that’s the way you’re going to see some of these things roll out into our business. There will be some level access to generative capabilities, because remember the – this is a – this is an AI driven supercomputing type application delivered to the customer, because we can do it with a low price of compute from the cloud. So we’re going to blend some of it in. So it will be accretive in subscriptions in terms of the fact that it just redefines us in the market and it makes us more competitive. And you can see we’re already seeing some of the impacts of that, the positive impact, and then you’ll see also people will be buying more consumption in the future if they buy more outcomes from the generative results. So it’s kind of all three, but I hope that gives you a little bit more color on why it’s sort of all three.

That’s helpful. Thank you very much.

Hopefully, that would help.

That was great. Thanks.

Thank you. And our next question comes from the line of Monika Garg with KeyBanc. Your line is now open.

Hi, thanks for taking my question. The first question on the ARR side, under ASC 606, you posted 22% ARR growth, target is 29% at the midpoint. So to achieve that it seems ARPS for the next three quarters will have to ramp significantly now, of course, I’m comparing 605 with 606, because last year we have only 605 numbers. So ARPS is 5% year-over-year in Q1, it seems like they will have to ramp to like low teens by the end of the year. So maybe could you talk about factors that it could lead to the ramp in AutoCAD.

Yes. Monika, first of all, I think the way you need to think about the growth in Q1 is really back – to make it apples-to-apples back to the 605, which is – which was 25% in Q1, and it’s a – it’s – honestly, it’s a great result. Looking ahead, it’s not ARPS, that’s going to grow, right? We’ve talked about what the subscription count looks like. We’ve got – there’s some improving ARPS for all the reasons that we’ve talked about, but we also have sub count going up. But it’s the combination of both of those that drives the ARR growth out through the end of the year. So separate the one-time effect, and by the way, the effect of 606 is greatest in Q1. If you noticed, that’s why in the prepared remarks, we try to give you both sets of numbers, so you can trend it out. But it was almost the 40 – a little bit more than a $40 million hit to ARPS just driven by the implementation of 606 in Q1. That diminishes out through the year. So there’s a little bit of a – of an exaggerated effect in Q1 just driven by the one-time write-down of the deferred revenue caused by 606.

Got it. Thanks, helpful. And then just strong growth in all the geographies, but revenue growth was kind of lowest in Americas compared with other geo is 13% in Americas there greater than 20% in all other geographies. Maybe could you kind of walk through the reasons? Thank you.

Well, so Americas saw double-digit growth. So we saw a very strong number in the Americas. So I don’t really look at it as weaker growth. I think, one of the things that you need to understand about the Americas is, they’re way ahead on the M2S program relative to other geographies. Other geographies are just starting to ramp up on the M2S program and in some respects, we’re even behind in a subscription transition. So, Americas is where it should be at this point in the cycle. And I think it was a really great result for the Americas. You want to add anything, Scott?

No, I think you said it right. The only other small thing I would point to is, Americas has been one of the toughest compare point year-on-year. They have the strongest Q1 last year. So that’s a little bit of a factor, but 11% growth even with 606 and 13% growth on an apples-to-apples basis is pretty good growth.

Got it. Thank you so much.

Thank you. And our next question comes from the line of Zane Chrane with Bernstein Research. Your line is now open.

Hi, gentlemen, thanks for taking my question. It seems like the subscription transition in the business small change is solidly on track. But I want to dive a little bit more into the second pillar of your five-year strategy via the company’s efforts to their own internal digital transformation. Could you give us an update on how that’s going? And you talked about AVA the Autodesk Virtual Assistance at your Analyst Day and highlighted that. Aside from that example, could you maybe give a couple of other examples of initiatives that you’re working on as part of that second pillar? And then lastly, it seems like there’s probably a multi-year efforts. I’m wondering how we should think about the timing in which we would start to see maybe cost reduction or operating leverage or incremental revenue opportunities created by this internal digitization effort? Thank you.

Okay. So let me give you some color on some of the things we’re working on with regard to digitization. So first off, we’ve actually rolled out the AVAs capabilities in other areas of support to our customers. So we continue to evolve that capability simply to make it easier. The satisfaction levels and capability are pretty high, because it just solves the problem very quickly. AVA is very good at some of these things. The other area we’re – that we’re looking at is, what we like to call the administrator or CAD manager persona. I think administrator is probably a better word. This is the person that has to actually manage all the assets somebody owns from Autodesk and make sure the right user gets the right access to the right kind of capabilities. What we’re doing is, we’re doing a set of ongoing capability dumps, very much targeted at this particular buyer and our customers are going to find it fairly liberating capability as it matures over the next few quarters, because it just allow them to understand what they’re using, who’s using what and actually respond more quickly and self-service ways to, hey, add a seat, do some of these things. So you’ll start to see incremental kind of direct-to-customer engagement when some of these capability matures. In the second-half of the year, we’ll actually start doing some major cut overs as we start removing all of our orders that come into system into our new back-office, which actually is what powered our e-store, which has a much more robot, simple, seamless, manageable experience than what they get through our current partner system. So the partner orders are going to start coming through that same system as we move into the end of this year and into the beginning of next year. All these things are actually pretty big, heavy-lifting projects, but they make a big difference in terms of what the customer is able to do on their own, including our ability to recommend things to them. The other thing we’re doing on the digital back-end is, we’re providing simpler front ends and more intelligence to our inside sales teams. So our inside sales teams are now able to see more about what’s going on with the customer and actually take actions quicker in terms of satisfying the customer in the moment. That’s already starting to pay real dividends to the company in terms of renewal activities, in terms of our ability to up-sell and cross-sell an account and actually in terms of our ability to help people move from maintenance-to-subscription when they call in and work with some of our insight teams. We’re seeing those benefits right now. Those are going to continue to ramp up throughout the year. But you also see more benefits next year with customers simply up-sell and cross-sell themselves, because we’re going to start recommending things to them over their account management tool. So that gives you a little bit insight into some of those things and some of the potential upside benefits that we’re going to start to see from there.

And it’s perfect that’s really helpful. And just really quickly, I wanted to verify that it is the correct assumption that we should only expect ARR rather than subs and ARPS starting in fiscal 2020, is that correct?

Well, we haven’t formalized that, Zane, but that’s certainly where I think we need to get through. I think there has been a outside focus externally on subs. What we’re really trying to drive is, of course, ARR and cash flow. And the way you get there, I’m not saying subs are relevant, they’re not. Subs are important, we’ll obviously continue to track that. But I think like we’ve seen others who have gone through this transition get to a point where focusing just on the subs count as opposed to focusing on the outcome and the result is distracting and I think we are probably pressing that point as well, and so it’s entirely possible that when we get the next year we will stop talking about subs externally, perhaps just the once a year update at Investor Day as opposed to the focus we put on in each of our calls.

Thank you. And our next question comes from the line of Kash Rangan with Bank of America/Merrill Lynch. You line is now open.

Hi, thanks for taking the question. This is Shankar on for Kash. Just on the legacy users you’ve mentioned that some of them upgraded to collections. Can you comment on what they were using before and have you kind of tracked the usage trends as they upgrade to collection, like what do they use after they upgrade to collections?

Yes, Shankar, what we are a seeing is a pretty significant uptake as we talked about more than 30% that are moving from a single product to collections. Once they make that shift, of course they have access to anything that is in the collection. So, what they are actually using is much more dependent on the persona, on the person and on market they are on. I am not sure there is good rule of thump for you to go by on that. I think the underlying theme though that is driving that is we’ve put a lot of focus on making those collections simple to consume, easier to select which one they want, easier to sell, and frankly a price point that is attractive both for us and driving up our ARPS before our customers and getting greater value, and we are seeing great success with that.

Got it. And then just a question on the BIM side, can you comment on the competitions which you seeing, especially from Pro 4 and can I compare, the strategy you have is to provide the end-to-end solution, but from a customer perspective is what your competition providing is that sufficient or do they kind of, in a wait and see mode on what you are doing and when they expect to get on to your platform. Just want to understand on that front?

By the way Pro 4 is a great competitor. I think they have a great product and I think they have shown early success in the mid-market. We compete with them all the time in the high-end of the market. We’re much more successful there and I expect that to continue. Long term it is not so much who the competitors are in the ecosystem. I want to take this back to what is actually going to happen over the next five years. The big driver here is the move of the BIM data through the entire process. That’s what’s going to happen. What you’ve seen over time in the manufacturing space is, the companies that we’re providing access to the models ultimately owned the end-to-end process in terms of the optimization in the software to digitize that process. This is going to happen as well in the construction space. The long-term trend is the building information model, is the communication vehicle that passes through the various stage of the construction process. We’re very much focused on that long-term outcome and the reason you’re starting to see us consolidate our position more and more in the larger accounts and start to move mid-market is people are actually trying to use our tools to do the now problem. But they see that we are also focused on the then problem, the future problem, and that’s really more of a dynamic we’re paying attention to. We have some great competitors in this space. Love competing with them. They make us all better, but the long game swings in our favor.

Thank you. And our next question comes from the line of Sterling Auty with JP Morgan. Your line is now open.

Thanks. Hi guys. I was just curious. How much of the maintenance to subscription conversions are taking place through direct sales versus the e-store versus the channel?

Well Sterling, the short answer is, I don’t know. Well it is not available on the e-store at this point. I think we’re just enabling that either this quarter or next. So, it’s all happening either direct or through the channel, but I don’t actually have that split in my fingertips.

Okay. And then just quick follow-up. I wasn’t clear you mentioned the promotional activity a couple of times. How should we think about the impact, go back a couple of quarters, talked about the renewals from that early promotional activity and what it did to the net additions. What was the impact this quarter from that phenomena?

Well most of those early promos, if you are a member were multi-year. Right. So, the – if you’re talking about the legacy promos that we ran, is that what you are referring to, where we went after legacy customers with a discounted price if they turned in an old perpetual license?

Well not only that but I think there is the cloud promos as well in terms of where you are bundling in some of the cloud seats.

Got it. So, let’s take them in two cases because it is two different things. On the legacy promos, for the first two years that we ran those promos, ran them twice a year for the first two years and in each case the discount was tied to, A, the customer forfeiting their perpetual license, and buying a sub; B, for those first few years it was a multi-year buy. They paid for three years upfront. So, none of them have come up for renewal at this point, but the last two times we ran we did give them the option of a single year and we haven’t seen any of those come up for renewal at this point. On the cloud side, it is a different answer, right? This was the shift that we talked about back in November when we were announcing our Q3 of last year results and we really moved away from very deep promotions as I called it seeding promotions where we really pushed a lot of low cost cloud subs out into the market with the goal of seeing, which ones that would land and with the understanding that many of them would not be put into use and if they were put into use they wouldn’t be renewed that headwind we still deal with, right. We did that, we ran through those seeding programs. We continued with that seeding program strategy in both Q1 and Q2 of last year. So, that’s a headwind that we’re feeling right now as many of those come due and if they didn’t they weren’t being adopted, they’re not being used. So, that’s part of why you see the cloud we’re still adding net subs to our cloud business. But you see those cloud net adds coming down.

Thank you. And our last question comes from the line of Matt Hedberg with RBC Capital Markets. Your line is now open.

Hey, thank guys. Thanks for the question. I guess as a follow-up to the question on collections a couple questions ago here, you are clearly having success there providing a lot of value. And I guess I’m wondering can you help us think about customer satisfaction when they move to a collection. And I guess in the context of thinking about maintaining renewal rates on some of these collections come up for renewal and likely price points move higher. Is it function of continuing to provide additional value, I’m sure you want to just need kind of your high-level thoughts there?

And so first of let me correct a misstatement you made that the price points don’t go up. When they move to collections as part of M2S they’re actually capturing a highly advantaged price. But they’re actually paying more at that moment of move, all right. So, let’s be very clear here. When the renewal comes up, they’re paying the same price that they paid when they move to M2S, super important. There’s no price increase clip that they’re going to see. Now, if you’re talking about at the end of the M2S program when they – their three-year period runs out and they do see that price increase Well one that’s a couple years out. There’s a couple of things that we’re doing to ensure satisfaction. First off, our experience in suites shows that if a customer uses two application they’re highly satisfied with what they get from these aggregated applications. It’s really just to two applications that drive satisfaction. We’ve actually stood up a whole new team inside our sales organization that the customers success organization and its mission is to help customers extract value from some of these higher end offerings that we’ve deployed into the market. So, they’re spending a lot of energy helping customers understand what they own, how they can use the products together. And what return they get from using the products together. So, I think we’ve got a real focus on this and history says from our suites experience that these are very, very sticky offerings. Do you want to add something?

No, the only other point I’d make on collections and customer sat as we do see the highest renewal rates of all of our product subs on the collections.

That’s super helpful and that that’s exactly what I was going to trying to get at, not necessarily these initial price increases, but not more so upon looking two to three years up, but I think that’s a great way to think about it. And I think it’s a super helpful…

Yes, they’re very sticky. The suites were very sticky, the collections were very sticky that has been something we’ve seen consistently.

Okay. Thanks, well done guys. Thanks.

Thanks, Matt.

Thank you. And that does conclude today’s Q&A session. And I’d like to return the call to Mr. Dave Gennarelli for any closing remarks.

That does conclude our call. If you have any follow-up questions you can reach me at 415-507-6033. Thank you.