Autodesk Inc (ADSK) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Autodesk second-quarter FY17 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to hand the conference over to David Gennarelli, Senior Director of Investor Relations.

Please go ahead.

Thanks, operator.

Good afternoon.

Thank you for joining our conference call to discuss the results of our second quarter of FY17.

Also on the line is Carl Bass, our CEO, and Scott Herren, our CFO.

Today's 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 third-quarter and full-year FY17; our long-term financial model guidance; the factors we use to estimate our guidance, including currency headwinds, expectations regarding our restructuring, our transition to new business models, 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 FY16, our Form 10-Q for the period ending April 30, 2016, and our current reports on Form 8-K, including the Form 8-K furnished with today's press release and prepared remarks.

Those documents contain and identify important risks and other factors that may cause our actual results to differ from those contained in our forward-looking statements.

Forward-looking statements made during the call are being made as of today.

If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information.

Autodesk disclaims any obligation to update or revise any forward-looking statements.

We will provide guidance on today's call, but 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.

Those non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles.

A reconciliation of our GAAP and non-GAAP results is provided in today's press release, prepared remarks, and on the Investor Relations section of our website.

We will quote a number of numeric or growth changes as we discuss our financial performance, and unless otherwise noted, each such reference represents a year-on-year comparison.

And now I would like to turn the call over to Carl.

Thanks, Dave.

We had a terrific quarter, and we reached a very important milestone with the end of selling perpetual licenses.

Our Q2 results mark another solid quarter of execution, and progress on our two big initiatives -- increasing lifetime customer value, and secondly, driving increased adoption of our cloud-based solutions.

I will share more details on our Q2 results, and then update you on what we have been doing around creating long-term shareholder value, before getting into the current quarter and our outlook for the rest of the year.

Starting with subscription numbers, we added 109,000 net new subscriptions in the quarter.

We are really happy with the growth of new model subscription additions, which more than doubled year over year to 125,000.

It was a strong quarter for product subscriptions, which drove the vast majority of the new model sub additions.

And it is a clear sign of the progress on the transition with our customers and partners.

Keep in mind that we did not have any big promotions going on like we did in Q1.

Product subscriptions had strong sequential growth and dramatic year-over-year growth of over 3 times.

Product subscriptions come to us from a number of sources.

We are really pleased to see that one of the primary sources continues to be net new customers, which accounted for approximately one-third of product subscription additions in Q2.

It is impossible to get perfect clarity on these new customers, but it is likely that a portion of these people were previously pirating software, and now have a much more affordable option with our subscription.

Still others have been using an alternative design tool, and can now get access to better software.

Looking at the other new model subscription types, our token-based EBAs experienced good year-over-year growth, but added fewer than we did in our seasonally high Q1.

And once again, we had a record quarter for cloud subscription additions.

BIM 360 and Fusions 360 are leading the way, and we continue to have success with our other cloud products, such as Shotgun, and Fusion Lifecycle, formerly known as PLM 360.

We continue to build on our leadership in the cloud, and our cloud services play an increasingly important role in our transition.

Maintenance is our other primary subscription bucket.

The renewal rate for maintenance subscriptions increased significantly year over year, and remain near historic highs.

Keep in mind that as we go forward, we will start to experience larger decreases in maintenance subscriptions since we are no longer selling perpetual licenses.

We will also be incentivizing customers on maintenance to switch to a product subscription.

As we've outlined in the past, by the end of next fiscal year we expect to have more customers on our new model subscriptions than maintenance subscriptions.

We are adamant about supporting our maintenance customers.

And at some point in the future, these programs will converge into a single subscription offering.

As we have indicated before, growth in subscriptions will drive growth in ARR.

The strong growth in new model subscriptions in Q2 fueled an 86% year-on-year constant-currency increase in new model ARR.

Total ARR growth was 14% in constant currency year over year.

Total recurring revenue was 67% of our total reported revenues.

That is a big jump compared to 55% in Q2 last year, and a slight decrease from last quarter due to the surge in perpetual suite sales.

With just a few exceptions, we are now in a subscription-only model.

So you can expect another jump in the percentage of recurring revenue starting in Q3.

Our Q2 revenue results were well ahead of expectations, and were influenced primarily by a larger-than-expected surge in last opportunity buying of perpetual licenses for suites.

Recall that in Q4 we had a 10% increase in unit volume related to the end of sale of perpetual licenses for individual products.

Our analysis of Q2 suggests that just under 20% of our unit volume was related to end-of-sale activity for suites.

This was bigger than expected, and I would like to give you some insights on what we saw.

It was only over the last two weeks of the quarter that we started to experience a surge in demand for suites perpetual licenses, almost entirely driven by the channel.

What was really interesting is that at the same time we experienced the uptick in perpetual license sales, we also saw an acceleration of product subscription sales.

The unique aspect of this activity relative to what we experienced in Q4 is that roughly half of the volume for suites came from customers cross-grading from an individual product.

This is neutral to the subscription count, since a customer has to be on maintenance in order to cross-grade.

But it is absolutely positive for in-period revenue and ultimately ARR, since the customer will be paying more annually for their maintenance plan.

Overall, the increase in volume related to the end of perpetual suites was greater than we anticipated.

But we are very pleased with how product subscriptions performed in the quarter, and the overall net result is positive for Autodesk.

Our total unit volume in the second quarter increased compared to Q2 last year, and was in line with our expectations.

Even when normalizing for the increased activity related to the end-of-sale for suites.

It is not surprising that the end-of-sale for suites drove a sequential uptick in license revenue.

What might be surprising is that we are not seeing faster growth in our as-reported subscription revenue line.

There are two things that are inhibiting that growth.

The first is FX, which is causing about a 4-point headwind.

The second is the accounting treatment of product subscription and EBA revenue.

While our new model subscriptions are deferred and recognized ratably over their contract length, a sizable portion of both our product subscription and our EBAs are recognized as license revenue.

In fact, roughly 80% of product subscription and roughly 55% of EBAs get recorded as license revenue.

Cloud is the only new model subscription type that gets 100% recorded as subscription revenue.

If all the new model subscriptions were recognized 100% as subscription revenue, that line would show 10% year-over-year growth as reported, and 14% growth adjusted for currency.

We are currently working towards providing a clearer breakout of our reporting so that our total subscription revenue can be seen directly in our reporting disclosures.

Now let me get into a few more details of our Q2 results.

By now, it should be very clear that our channel partners are fully engaged with our subscription model.

68% of new model subscription additions came through our channel partners, compared to just 47% in Q2 last year and 63% last quarter.

The volume of subscriptions coming through our E Store also continues to gain momentum, and nearly doubled from Q2 last year.

Total direct revenue was 25% in the second quarter, despite most of the surge from the end-of-sale of suites coming through the channel.

That is up from 20% in Q2 of last year.

On the expense side, our total spend decreased by almost 4%, as we continue to diligently control our spending.

We are continuing to make structural changes that allow us to spend less, yet focus on our key initiatives.

While we are being very disciplined about our spending, we are doing it without compromising the long-term health of the Company.

We also increased our stock buyback in Q2 to $170 million in light of the dip in the stock caused by the temporary panic around the Brexit vote.

Overall, we were very pleased with the Q2 results.

All of the trends we saw reinforce our confidence that the transition is working for our customers, our partners, and Autodesk.

That is a good segue into what I have touched on in the last couple of earnings calls about what we're doing to create long-term value for our shareholders.

We continue to get many questions in this area, so I am happy to talk about it.

If you have been around the tech industry as long as I have, you have no doubt seen the carnage of once-great technology companies that ultimately failed to innovate and keep their competitive advantage.

Autodesk has been a leader in the world of design and engineering software for over 30 years, and what we're doing with this transition is positioning Autodesk to lead the next generation of this kind of software.

Our transition happens on two fronts.

We are currently in the midst of a business model and pricing transition, where our customers are moving to term-based subscriptions.

This will lead to a highly predictable model over time, and a significant increase in the value our customers get from our products.

The best indicator for this is the rapid growth we are experiencing in new model subscriptions and new model ARR.

In support of this model change, we are simplifying our entire go-to-market strategy and reducing our cost structure, while we increase our ability to more effectively serve our customers.

The second front of our transition is how we are building platforms to exploit the cloud and dramatically expand the size of our market opportunities.

We are well ahead of our traditional competitors on this front, and we are investing to secure the future of Autodesk.

These mobile and cloud technologies are opening up significant opportunities in the areas of construction and manufacturing, that are completely new to Autodesk.

These new platforms offer a once-in-a-generation opportunity to redefine the competitive landscape.

Our cloud-based products continue to gain momentum, and are already the undisputed leaders in their respective categories.

So this is how I would summarize how we are building long-term shareholder value in three simple bullets.

One, we are increasing the lifetime value of every customer.

Two, we're changing our cost structure by focusing our product portfolio and go-to-market strategies.

And three, we are building the best cloud and mobile-based products and services in the industry, which significantly expands our total available market, as the underlying technology platform shifts to the cloud.

Now, let's take a look at what's going on here in the current quarter, Q3.

Our newly introduced collections are a great example of increasing lifetime customer value.

On August 1, we launched collections, which is our next generation of suites with the addition of our cloud services.

Suites were tremendously successful for Autodesk.

But with collections, we're significantly reducing complexity by offering just three collections -- one for AEC, one for manufacturing, and one for M&E -- making them easier to sell and consume.

We're offering single-user and multi-user access, and choices of different term lengths to fit their needs.

The value of our customers is tremendous, and well exceeds the premium suite.

We have priced collections so that the average customer value to Autodesk will increase as well.

We are only 25 days into selling collections, but we are very happy with the start.

Despite the strong performance of suites at the end of Q2, in their first few weeks we're seeing the same volume level for collections that we experienced for suites in the same period a year ago.

From a tactical standpoint, some of you have been asking about pricing and promotions.

We are currently running another promotion aimed at our legacy customers.

It is similar to the very successful promotion that we ran in Q1, but the discount is smaller.

You can expect us to continue to work to convert these legacy customers with various promotions and incentives as we go forward.

Like I have said before, running a business is different than running a spreadsheet.

One area that we constantly evaluate is how we use pricing to drive subscriptions and ARR growth.

Having said that, we would not make significant decisions around packaging or pricing without first testing in certain markets.

This is especially true when it comes to our flagship products like AutoCAD and LT.

In early September, pricing changes will go into effect that will rationalize the pricing of AutoCAD LT, AutoCAD, and the AutoCAD verticals.

We believe these moves will drive customers to the right product for their needs at higher billings and ARR for Autodesk.

Now, turning to our outlook for Q3 and the full year, our view of the macroeconomic environment's impact on our Business hasn't changed over the past several quarters.

The global conditions have remained uneven, with most of the mature markets performing relatively well, while most of the emerging markets have been challenged.

As we evaluated our strong Q2 results, we did not see any meaningful change in the demand environment.

And as I indicated earlier, we do not see any immediate fallout from the Brexit vote.

As always, it is impossible to say what the long-term impact might be, but we don't see any near-term risk.

Our strong Q2 results likely pulled forward some demand from the second half of the year, but we are comfortable with bringing up the bottom end of our previous ranges for both revenue and EPS for FY17.

We are also lowering our spend projection for FY17 based on the better-than-expected progress we have made on this front.

We remain confident in our long-term goals of growing our subscription base by a 20% CAGR through FY20, which will drive a 24% CAGR in ARR.

We also remain committed to keeping spend growth flat in FY18.

The lower spend projection also enhances our projected path to free cash flow of roughly $6 per share in FY20 and $11 per share in FY23.

So to wrap things up, we are very pleased with the consistent execution over the past few quarters.

We're really excited to be another major step further along in the transition, and now fully in the subscription-only model.

We have a clear vision and plan for creating a more predictable, recurring, and profitable business in the years to come.

We are focused on driving higher lifetime value, simplifying our offerings in our go-to-market activities, and significantly increasing our market opportunity as we lead the next wave of design and engineering software to the cloud.

Operator, we would now like to open the call up for questions.

Thank you.

(Operator instructions)

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

Thank you, Carl, good evening.

Good evening, Scott.

Carl, let me ask you first about the pricing that you plan to take next month.

Could you give some specifics as to how you are thinking about what the changes might be?

And is this part of what you have referred to in the past as SRP realization as a concept for you to help improve pricing and margin?

Secondly with respect to the decay of classic maintenance over time, how are you thinking about the rate of that decline?

When we look at one of your competitors, PTC, which is moving mostly but not entirely to subscription, the stated rate of decline for their maintenance is low to mid-single digits.

So would you anticipate going fully to subscription that your decay of maintenance might be somewhat faster than that?

Yes.

So let me start with the pricing, and then Scott and I can tag team the one about the maintenance decline.

So starting with the pricing, what we wanted to do was, as I said, rationalize the three different price points of AutoCAD LT, AutoCAD and the AutoCAD verticals.

Whenever possible, we would like customers to get the right product.

More often than not, that is on AutoCAD vertical, particularly tailored to the discipline that they are in.

On the other side, for the more casual users, LT is clearly the more appropriate product.

What we were trying to do is move the price points apart, get the appropriate separation.

And what we saw, and I referred to in the remarks, in our testing is that we can with the right pricing move more LT customers to AutoCAD and AutoCAD customers to the vertical.

And so this is a part of the overall pricing, I wouldn't say it's particularly what I would refer to as the SRP realization.

It is just increasing total pricing, but it is part of a pricing optimization strategy.

And let me take the first pass.

A couple of things will contribute to the maintenance decline, as you said, classic maintenance.

One is going to be the falloff from people who just choose not to renew for all of the usual reasons.

The second one will be the conversion of the maintenance customers onto the subscription side.

And on the first one, we talked a little bit about it, in that we said that we expected the subscription base to be larger by the end of next year.

We gave you some hints, or at least we gave you an algebra problem you could work on tonight, Jay.

And then on the second one, we also talked a little bit about programmatic ways of doing that over time.

How we will continue to encourage customers to move from classic maintenance to the new subscriptions.

Scott, do you want to add something?

No, I think you said it right.

It is the decay rate which will vary within that pool of maintenance subscribers, by the way, between low-end LT customers that have a slightly lower renewal rate.

Versus suites maintenance customers which have a much higher renewal rate.

So as that pool moves over, the maintenance pool will go continually down from this point basically one minus our churn rate.

And at that point, what you will see is the mix will shift inside that pool.

So if you think of maintenance revenue as a P times Q, think of the price, the average price inside there beginning to shift more toward suites customers out through time.

But the overall decline being driven by the low-end LT customers.

I think the other way to peg this, Jay, as you sit down and do your modeling is what we've said.

And I think we showed you these curves back at investor day that our expectation is by the end of next year, the number of maintenance subscribers and the maintenance ARR will be below the new model subscribers and new model ARR by the end of next year.

(Operator Instructions)

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

Hello, guys.

Thanks for taking my questions here.

Maybe first to start off, I know ARR -- maybe this is for you, Scott.

But I know ARR is the better metric to look at.

But for those of us that still look at billings, can you just give us a sense for how billings are maybe trending for those new model subscribers or new model billings versus maintenance billings?

Because you obviously have headwind for maintenance in that deferred revenue account, so any color on how new model billings are doing would be helpful.

Yes, Saket, one of the reasons that I don't think billings are the best indicator of our progress of course is they are term specific.

And if I sign a new customer but they only sign up for one year, that's a third of the billings if I sign that same customer for three years.

So I think it's a little bit less of an indicator than things like ARR, which are annualized, and of course the overall subscription growth.

But if you do the quick math, deferred revenue changed by $3 million during the quarter.

So our billings track pretty much to our reported revenues.

And when you peel back billings, at a high level, they tracked very much in line with what you see on subscription versus license.

Got it.

That's helpful.

And then for my follow up, Carl, I think you mentioned you saw good cross grade activity from maintenance to product subscriptions, which of course is a net neutral to the subs count.

Can you just give us a sense for how many of those cross grades you saw this quarter?

And then more broadly, are you still seeing customers from product versions older than five years make that cross grade?

Thanks very much.

Yes, so let me go backwards.

We did not see customers from very far back because we didn't run any of the promotions, so the typical legacy promotion where people had to be on subscription already.

What I did mention is that in Q3 we were running a similar promotion to the one that we ran in Q1.

So again, we will talk about that 90 days from now and see how many of the legacy customers we can attract.

We didn't break out the number on your other question of people who converted, but it was a substantial number.

I will leave it to Scott if he wants to give a number.

Yes, the color I would add to that is if you think of the quarter that we just closed, we actually saw two end-of-sale surges at the same time.

There was the normal end-of-sale surge like we saw in Q4, where it was the last chance for a customer who wanted to buy a suite perpetual license and there's some buy ahead activity some pull ahead of future demand for that set of customers.

And by the way, we predicted that I think pretty accurately versus what the results were.

The piece that also happened was of course when you sell your last perpetual license, you also sell your last cross grade.

And we saw a lot of the same behavior that we saw at the end of -- if you remember when we stopped selling upgrades on our FY15, so more than a year ago.

We saw a big spike in demand for people who were already using our product, but decided they wanted to upgrade to a more full-functioned product.

They're willing to pay more for it.

We saw some of that same upgrade-like behavior happen within our cross grades, and I think that is the piece that surprised us a bit and it is a positive for ARR.

It is in neutral for subscribers, because you had to be on maintenance to be eligible for the cross grade.

But it is a positive for ARR, and it is a positive for total revenue going forward.

So that's the way I would think about the surge we saw at the end of this quarter.

Thank you.

Our next question comes from the line of Richard Davis from Canaccord.

Hey, thanks.

So it sounds like -- you're getting good growth as you pointed out, reduced piracy and also changed vendors.

The question that I hear when you hear from people thinking about changing vendors is a big hurdle is just the data migration and things like that.

Have there been any -- have you done anything technologically to make that less painful?

Because if I have model set in a different vendor, I am terrified that if I move it over to you guys it will incinerate me or something like that.

And so that's really -- help me understand how you can make that less fearful for these folks trying to -- (multiple speakers).

Despite the advice of our legal counsel, I can guarantee you it won't incinerate you, Richard.

Let me just divide the markets and talk about the dynamics slightly differently.

In AEC market which is more project based, it comes up for a building or a roadway or a bridge.

There is more willingness, there is slightly more willingness to shift with new projects as new teams come together.

I think the place where you hear even greater reluctance is in manufacturing.

And there we have done a number of things that we have rolled out across our product portfolio that allow customers to work in new software, and access the data that they created over the last couple decades.

So they can work with the native data.

Obviously, as always, we can translate it and convert it.

But even more importantly, we now let customers leave their data in the native format and work on it whether they are doing modeling or visualization or simulation.

So that has been over the last two years.

A pretty big breakthrough in giving people a much smoother ramp to go from one of the legacy products to a new one.

And at a certain point, one of the other things that has to happen in motivating people to move to something is the new stuff has to be that much better.

If you think about it, particularly in manufacturing, many of the products that people are using are more than 20 years old.

And we would like to think in the industry that we can do better than having 20-year-old products be state-of-the-art.

So part of it is making the new products and the new product experiences much more compelling.

The other is to reassure people about being able to migrate their data, or to use all their data and access it for as long as they need to.

That's super helpful.

Thanks.

Yes.

Thank you.

Our next question comes from the line of Heather Bellini from Goldman Sachs.

Hello, this is Shateel in for Heather.

Thanks for taking my question.

The first one is on expenses.

So your expenses were down 4% this quarter and you lowered guidance for the year.

Can you talk about some of the actions you've taken that are driving this spend to be lower than you were expecting?

In the past you talked about discontinuing some non-core products and creative hardware, just wondering if we could see more of that or are you done with that type of product streamlining?

The two biggest places have clearly been on of consolidation of the product portfolio, and the second place is in I would just say overall in our go-to-market activities.

As it refers to the product portfolio, we are on a multi-year transition to a much more streamlined portfolio.

Including making the end of life of certain products.

But also as you look at collections as a big simplification from suites, all across the board, we are trying to simplify the portfolio.

Make it easy on customers, make it easy on our Partners.

So you will continue to see the folding in of certain functionality into the products that we keep going forward, the elimination of some of the older and less important ones.

And we are constantly pruning for the things that work and do not work.

So I would not at all expect to see, or said more positively, I would expect to see that same proactive management of the portfolio for the next couple years.

Got it.

That's helpful.

And then for my follow up, you model subs the additions of 125,000 was higher than we were expecting.

Can you just give some color on the mix that was traditional desktop and EBA versus new cloud offerings?

And are we starting to see new cloud subs become a higher portion of the adds now?

Shateel, this is Scott.

We had a record, I think Carl mentioned this actually in the opening commentary, we had a record quarter for cloud sub adds.

So it continues to move along nicely.

But that new model space will continue, it did this quarter and will continue into the future to be dominated by product subscriptions, so term licenses.

In fact for the first time, we had more inventory of product subscriptions within the new model type than of enterprise coming out of the EBAs.

So think of it as being dominated by product subscriptions, EBAs would be next, cloud would be next.

Great.

Thank you, that's helpful.

Thank you.

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

Thank you very much and good afternoon.

Carl, if you look at Asia-Pac, customers there have historically moved more slowly to adopt your subscriptions in the Q1, however you did reference I think an uptick in new model subscriptions towards the end of that period.

Can you give us an update on what you saw out of Asia in Q2?

Yes.

I would continue to say that parts of Asia are slower to adopt the new model.

We have had some pockets of success with some of our traditional partners and some of the electronic channels that have been more positive.

But overall, slightly slower adoption with a handful of countries.

As you do the analysis, it is a little bit hard to dissect exactly what is going on.

Since up until now, the preference of the channel partners have shown through in that they were able to exert certain forces on the customers.

Moving forward, that goes away so hopefully everyone will be aligned.

It is a great relief to make it to August 1 and get into the new model, and I suspect going forward we'll see more normalization.

But given that there were two choices, Asia-Pac certainly lagged a little bit.

Okay, that's helpful.

And then just for Scott, based on where you are at this point in the year, you're calling for about 260,000 or so net subscribers in the second half, at least at the midpoint of the range.

And I know you don't guide quarterly of course, but maybe you can just share with the group your high level of thoughts around net adds in Q3 as compared with Q4 as you see it today.

Thanks.

Sure, Gregg.

We always have seasonal pattern of demand.

If you think of where the subs will come in in the second half of the year, there will be more than 100% of what we add will be new model.

Maintenance will be on a continual -- slow but on a steady decline.

So all of the new adds will come from new model types.

New model types tend to have the same seasonality as a lot of our previously our perpetual license did.

So heavier in Q4 than in Q3 would be the normal demand pattern.

We also see Q4 typically heavy on EBA sales, although as you have seen the last couple of years we sell a lot of them in Q4 in the EBAs, we pick up those subs in Q1.

So think of this as being driven -- the Q3 versus Q4 driven by our normal seasonality pattern first.

And then secondarily we do think there was some demand pulled forward from some of the end of sale of suites at the very end of Q2 that probably makes Q3 from a sub add standpoint a little bit more challenging than what we'd normally expect with normal seasonality.

Thank you.

Our next question comes from the line of Ken Wong from Citigroup.

Great, thanks for taking my question.

My first question for you, Carl, with collections now it's been out in the market for about a month.

How should we think about the customers you're attracting here?

Is it customers that are using a few products moving up to collections, or are you seeing your traditional suite customers recognize the incremental value with this comprehensive bundle and those are the ones that are primarily moving towards collections?

Yes, Ken, it's probably just a little too early to know for sure.

And it's almost like, give us the two more months.

In this first month, we have certainly seen some of the suites customers move over.

Some of the buying at the end of the quarter was anticipation of being able to move from suites to collections.

So there is certainly some of that in there, but we will be able to do a little bit better breakdown of the customers when we get a little bit more traction there.

It's just a little bit premature.

Got it.

And then earlier in your prepared remarks, you mentioned at some point convert to a single subscription offering.

Is this just consistent with what you have said in the past where just a natural bleed off of maintenance and then you'll eventually just be all new model subs?

Or is there something more specific that you are looking to do to try to converge that process sooner?

Two things, I think we're being more direct in a general sense, but it is probably at this point we don't want to give more details.

But we do know and we have talked about the complexity and the expense that comes with multiple models, and so we will continue to look at ways to just simplify all of the offerings and merge the programs into one as it makes sense.

But I think we were at least hinting at more proactive behavior on our part.

Ken, the only color I would add to that is you've seen us do some of this already.

First was suites, and now with collections.

You see us bundling together to ease the ramp from you see us bundling the Windows based whether it is perpetual license or product subscriptions with cloud to try to ease that on ramp.

And I think you'll see us continue to see us do more of that to make it easier to consume, to give customers a choice within what they've bought to execute whichever product type that they like.

That was one of the guiding tenets with the way we designed collections, and I think you will see that continue.

Thank you.

Our next question comes from the line of Steve Ashley from Robert W. Baird.

Hello, most of my questions have been asked.

But let me ask about Japan, color on what's going on there and is there trend wise any hope?

Or any color on that would be great?

I would say flatlined.

It is what it is.

It hasn't gotten better and it hasn't gotten worse.

Scott, would you want to -- ?

No, I think that's right.

I think the year-on-year impacts in Japan are probably more pronounced than elsewhere, because they were slower last year to adopt the new model types.

So the falling off a cliff from going from perpetual license to new model types is more pronounced in Japan than it is elsewhere, I think that is part of what we're seeing.

Part of it is just the continuation of the trend that we've seen where it has been a tough economy in Japan, and we feel some of that.

I think -- no change is what I would say, Steve.

But I think part of what we're feeling from a year-on-year standpoint is just the difference in the adoption model.

And then in terms of the promotions you're running, you have been great about calling out the fact that you are running a fairly aggressive promotion, less discounting that we saw in the first quarter.

But in terms of digital marketing in how much wood you're putting behind the arrow, is there any difference in how visible you will be with this promotion versus the one you ran in the first quarter?

Steve, what I said, last time we thought the promotion was generous, but not well known by all of our customers.

And after having run it in that one quarter, we thought we could turn the two knobs and turn down the discounting and turn up the awareness.

As we said a quarter ago, we were extremely pleased and surprised by the results and how far back into the legacy user base we could reach and that was with I would say minimal awareness.

And so we would like to promote that more heavily going forward, and we thought we could accomplish both goals of greater SRP realization and a good response by just turning up the awareness.

So you should see a little bit more of it, and as we indicated in the opening commentary, even see more of it going forward.

Thank you.

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

Thank you for taking the question.

Given the fact that suites were a bigger part of what was going on in this quarter, you talked a lot about a lot more new model subscription types coming from suites.

I would've expected the ARPs number, the pricing side of the equation [on its traditions] start to improve.

But by my math, it's still down sequentially a little bit both on maintenance and new model subs.

One, it's a two-part question.

One, why has that continued to decline?

And two, when should we expect that to turn back up and start being one of the drivers of ARR growth?

Yes, Keith, we talked about this I think last quarter as well.

Part of what is going on there is just the math.

When you do the ARPs calculation, you're taking a quarter average ARR and dividing it by a quarter end sub count.

So if you go back and say, quarter average ARR divided by quarter average sub count, you'll get a different answer on that.

But I think overriding longer term, you do need to expect for some period of time that to continue to come down, and it will come down simply driven by mix.

We've talked about ARPs being very mix sensitive, it will continue to be mix sensitive.

And as we get further out and layer on more quarters of selling suites and collections and our higher-priced products only in a new model way, you will begin to see that ARPs rebound.

But short term, we will continue -- that pool will be more heavily dominated the lower-priced LT and AutoCAD, the things that have been out there only as product subs for the last six months.

That's the way you ought to think about it, very mix sensitive.

And to be a little bit more quantitative about it, I would look out about three quarters before we probably saw the collections.

Okay.

And that's just because that's when it's going to -- how long it will take for the demand on the suite side of the equation or now the collections side of the equation to really ramp up and normalize that mix?

I always thought once you end perpetual for suites in all the new buying for those high-end products becomes new model, that that should start inflecting that number upwards.

But you've got to layer in multiple quarters of that ARR, Keith, before it becomes as representative of the total new model ARR as the things that have already been out there for two or three quarters selling it only in a new model way.

So that's the reason you see the lag.

It starts now, but there will be a lag effect before you get to that entire pool properly representing what the new sales look like.

Thank you.

Our next question comes from the line of Brent Thill from UBS.

Thanks.

Scott, the midpoint of the guide looks like there is little sequential growth from Q3 to Q4.

Can you just explain why that is?

One of the benefits of the shift that we are taking is we have a lot more clarity on day one of a quarter of what the reported revenues are going to look like.

So as we look at both what we already have in deferred revenue for Q3 and what is sitting in backlog, we've got very high coverage of the number that we forecast for Q3 and obviously a higher degree of certainty on that.

As we get closer to Q4, we will be in that same position on Q4 and we can evaluate if it makes sense to go up at that point.

Okay.

And just a follow up on the ARPs question, it was down 7%.

Should we continue to expect over the next couple quarters that to be down mid-single-digit?

Is that a good way to think of it, or should we think on the higher end of this?

Let me start, Carl, and you can add color.

So think of ARPs at a minimum in the two line items, maintenance separate from new model.

New model will have the trend that I just talked about to Keith on the prior question.

It will take a couple of quarters for that entire pool of new model ARR to be representative of the new sales that are going on.

On the maintenance side, I think you will see the ARPs there rebound a little bit quicker.

We will continue to see higher renewal rates on suites, and the suites will become a bigger part of the pool faster.

So it may be a quarter out, it may be two quarters out, but I think you can expect to see ARPs rebound a little bit more quickly on the maintenance side than on the new model side.

I would agree directionally with Scott, and I would say back to the mix.

I think as we gauge the success of legacy promotions and just the cloud services, that will affect the mix as well.

So we will be able to give a little bit more clarity as we go there.

Thank you.

Thank you.

Our next question comes from the line of Sterling Auty from JP Morgan.

Thanks, hello.

Given the perpetual sales of suites were higher than you expected in the quarter, is there a way to quantify the unit volume beyond the items you gave earlier?

And specifically what I'm looking for is, is there any chance that that has an impact on your full year 475,000 to 525,000 subscription and addition number because of that pull forward?

One is, we have raised the bottom of the range which is our indication that we don't think it has any effect.

We remain confident in that, and I would say increasingly confident about it.

It was interesting to see, and as I try to highlight in the remarks, as we saw the surge in the perpetual suites what we also saw was the new model stuff also take off in the last couple weeks.

So we saw obviously higher than anticipated volume, and when we back out the extra buying of perpetual suites it was the volume of activity that we would have expected for this quarter.

It slightly exceeded our expectations, and then on top of that we also had whatever pull forward.

So I think you may see some shifting between quarters on the margin.

But we're comfortable with the guidance for the rest of the year, and that is why we are willing to bring up the numbers.

Got it.

Yes, Sterling, sorry just on that last one, a little more context for you around the new model sub adds of 125,000 in the quarter.

If you remember back in Q1, new model sub adds were 140,000.

But buried in there were two things that didn't recur in Q2.

One was promo.

We didn't run that legacy focused promo in Q2.

We will do that again, as Carl said, in Q3.

The second is, we had a big catch up of the EBAs that rolled in in Q1 and were a little bit more than 25,000 of that 140,000 we had in Q1.

If you net those two out, Q1 without those two is in the, call it, 90,000 range.

That grew to 125,000 new model sub adds in Q2.

So there's certainly the pull ahead I do not think signals any weakness in where we are headed on the new model side.

The other thing to bear in mind is, a part of the pull ahead that we saw, a significant part, was driven by cross grades.

And to be eligible for a cross grade, you had to already be a customer with a maintenance agreement attached.

So all that pull ahead business was really neutral to the subs.

They already had a sub and they have sub now, so it's not a -- a big piece of that pull ahead really doesn't affect the subs growth.

That makes sense.

And then the follow up, Carl, the comment you said that the subscriptions accelerated at the same time as the perpetual.

Were you suggesting that you had customers that were buying both perpetual and subscriptions, or do you think it was more coincidental to see both accelerating some at the same time?

Now I'm speaking a little out of school, and we've got to do a little bit more work on this, but I do not think it was customers buying both.

That is just a little bit of an awkward purchase.

I think it was the outreach from our channel partners created demand, and when people decided to buy then they made the choice.

But more likely is they chose one or the other, not both at this point.

Thank you.

Our next question comes from the line of Matt Hedberg from RBC Capital Markets.

Sure, thanks for taking my questions, guys.

Scott, I have got a modeling question.

Now that you're done with the license option for software, how should we think of the trajectory of the run rate of that license line going forward.

I think you do allocate some of the subscription sale to license.

Is that correct?

That is right, Matt.

So if you look at that line, there is three components to it.

One is perpetual license sales that get immediately recognized, and of course that piece goes to zero.

The second is, that line is actually license and other, so there's a grab bag of smaller items in there, some legacy products, a little bit of consulting in there.

So that piece, we have talked about that historically if you go back a few quarters when we were selling perpetual licenses, that piece being about 10% of the total.

That other piece will continue, the perpetual license piece goes to zero.

The third piece is what you just said.

Both the product subs and the EBAs, of course when we sell it, it goes immediately into deferred revenue and gets recognized ratably.

But as it comes out of deferred, a portion of it, because if you think of a term license, the customer is buying two things.

They're buying access to the license and there buying maintenance.

So a portion of that deferred revenue accretes back into the license line, and a portion of it accretes back into the maintenance line.

I know it is confusing, I would love to say that I'm changing that today.

We are working on changing that so that it's much clearer for you to be able to see how subscription revenue comes back into a line called subscription.

Maintenance is in the maintenance line, and then what's left in license and other really is mostly other at that point.

As I said, it is roughly 80% of the product subscriptions and 55% of the EBAs, they've recorded as license revenues.

So it is way more than I think many people have in their models.

And we are doing everything we can to change it and try to clarify it, so that it is much clearer in terms of what I think everyone would just affectionately refer to as subscription.

We will try to make this as clear as possible, but hopefully with those two pieces of data it is a little bit easy for others to model what's going on.

Thank you.

Our next question comes from the line of Kash Rangan from Bank of America Merrill Lynch.

Sorry about that.

Thank you so much.

Sorry about that.

I wasn't sure if this question has been asked earlier.

But more appropriate for Scott, what is your view on the new accounting standard that is being proposed by the FASB, being reviewed by the SEC.

I think they call it the ASC 606, particularly applies to software companies that are trying to move into a more ratable model.

How much of it does apply to Autodesk, how much of it does not apply to Autodesk?

Just curious about your thoughts, thank you.

Sure, Kash, it applies to everyone.

It's not just Autodesk or non Autodesk, it applies to everyone who's selling software.

But what we have been doing on that front, and I think we talked about this when you were in town a couple months ago, we have been very actively engaged on this.

As we have done everything that we have to shift to a ratable revenue model, the last thing I want is to have that shift back based on the new rev rec guidelines.

So our he's now our controller, has actually been a part of the IACPA task force that's working on clarifying the guidelines for FASB on how that will work.

And if you think of a lot of our offerings, they are actually hybrid offerings.

There is some term license in there, but there is a lot of cloud-based offering inside there.

So we're committed to continuing to maintain ratable revenue for our products sales for both the product subscription sales going forward, obviously cloud is pretty straightforward and for EBAs.

We are staying very actively in touch with the group as those rules get clarified.

One follow up, if I could, for Carl, and apologies if this question has already been answered.

If yes, you don't need to.

Any impact that you see from fiscal stimulus of the next presidential cycle brings that forth, do you think there is any pent-up demand for infrastructure build out globally and in particularly the United States that could help you?

Thank you.

Anything that's spurs a larger infrastructure spend will be good.

I would say just generally speaking if you look across industries right now, seems strong in all the countries we talked about where the economies are good.

Construction in the US is really strong, and northern and central Europe is really healthy.

If through the political changes there is more infrastructure spend, that would all be to the good side.

We are not counting on it.

We've heard that promise before.

But it would certainly be to our advantage.

Wonderful.

Thanks so much.

Thanks, Kash.

Thank you.

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

Hello, thanks for taking my question.

First on the ARR, the ARR growth here is close to 10%.

But your long-term target is 24% CAGR.

So this quarter, yes, of course, perpetual is impacting it, but for the next quarter as you're not selling any more perpetual licenses, so should the ARR growth start trending towards 24% CAGRs that you've talked about?

It will, Monika.

That is not intended to be every single year and every single quarter will be 24%, obviously I know you know that.

That's a CAGR over that timeframe.

You will see ARR growth rates accelerate in the second half of the year, partly because you see the divergence in the ARR growth rates between maintenance on a slight decline and new model growing 86% year on year at constant currency.

As new model becomes a bigger piece of the total, that drives it up.

But also as we go forward, there will be a higher and higher mix of new model subs and within that of the subscriptions growth that will continue to drive new model to a significantly higher level.

So you will see that begin to accelerate in the second half and continue.

Thanks.

On the follow-up side, if you look at the revenue on the platform solution PSEB segment, that has come down year over year.

Is there any reclassification in that segment?

There is.

It's a continuation of what we've seen over the last several quarters, actually since we launched suites three years ago, three plus years ago since we launched suites.

Because what drives the vast majority of that PSEB segment is AutoCAD and LT, and of course AutoCAD is included in almost all of our, in fact it might be in all of our suites that get sold.

And so what's happening is it's not that there is less AutoCAD going out into the world, what's happening instead is there's less of it being sold standalone.

And therefore dropping into that PSEB segment, and more of it being sold as a component in the suite and in the future as a component in collections.

Thank you, and we have time for one more question today.

Our final question comes from the line of Steve Koenig from Wedbush.

Thanks for squeezing me in, I appreciate it.

Apologize if this question has been asked, I just wanted to maybe understand, probe a little bit your thinking behind collections and your designed philosophy for it.

My background for this question was, we were looking for an offering other than desktop subscription that might be a little bit more appropriate for the mid market.

I am seeing some resistance in the mid market to the subscriptions.

More so than for AutoCAD and LT being sold at DTS in the lower end of the market.

And yet, collections, it looks very much like the desktop subscription, it is a larger bundle at a slightly higher price point.

Maybe the question besides your intent behind it is, where will the dividing line be in the market between your T-FLEX and your EBAs versus collections when it comes to consuming the suites?

In terms of company size, is that how we should think about it, and what might that size be?

So the first thing I would say is, so far, we gave a lot of proof points hopefully tonight.

We have not seen the resistance.

As a matter of fact, many of the new products and desktop subscription for both suites and collections is being sold through our channel partners, which serves the broadly speaking the mid market.

So we think collections are a nice way to both simplify and give people the easy ramp to the new cloud services.

So what they are familiar with, plus the new stuff.

Let me jump to the other side of it is our EBAs and as you mentioned the technology behind it the T-FLEX, is really in less than the top 1% of our accounts.

So it has a lot of room to grow before these two things run into each other.

And what I would add is I would expect to see more flexibility in our product offerings going forward.

Collections is really just the first step in the door of what we're going to do in terms of making sure the customers have more flexibility, and that is regardless of how it will be sold.

At the same time, we've documented and we've talked about how we really want to see our EBAs go out to a broader audience and how that will grow over time.

So we think there is a lot of room between the two right now, and there is actually an opportunity to introduce other offerings that have that level of flexibility from T-FLEX, but for example, can easily be sold by our channel partners.

Got it.

Great.

Thank you very much, Carl.

Thanks a lot.

Yes, sure, Steve.

Thank you, and that concludes our question-and-answer session for today.

I would like to turn the conference back over to Autodesk for any additional comments.

Thanks, operator.

That concludes our call today.

If you have any follow-up questions, you can reach me, Dave Gennarelli, at 415-507-6033.

We will also be at the Citi conference in New York on September 8. Thanks for joining us.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the program, and you may now disconnect.

Everyone have a great day.