Autodesk Inc (ADSK) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter Fiscal Year 2019 Autodesk Earnings Conference Call. (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 of 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 transfer of 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 2018 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 will not provide any further guidance or updates on the 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'd 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 -- 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 3 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 expectation, and cloud billings remained 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, a 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 through manual processes or their old digital document management software. But Miron resolved 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 5 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 that is happening, from design to prefabrication, to on-site assembly and to 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 GM 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, such as required connection points, strength and mass. They zeroed in on the 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 8 different components into 1 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 upsell to collections is resulting in a consolidation of subscriptions in many of our accounts, but at 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 adds 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 3 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.

Collections subscription additions increased over 30% sequentially and now make up 1/4 of the base of product subs. The adoption of collections is happening through the regular run rate of new business, through the renewal process, the legacy promo and the maintenance-to-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 upsell 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 product subs, and over 30% of those were collections. And we're still finding that the average age of the licenses that are turned in with the promo are 7 years behind the current release, indicating there is 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 in line 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 that 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 1/3 of all 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 are now entering year 2 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 increase 10% if they choose to stay on maintenance. It's easy 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 continued 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 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 eStore 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 eStore 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 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 define 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 a diminishing impact as we move through the rest of the year. And note, the deferred revenue impacts due to the adoption of ASC 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 intent for fiscal '19 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 2 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, as expected. As we move through the year, we expect operating cash flow to turn back positive and remain there.

With the significant price appreciation of our stock since the last 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 was already factored into our guidance for the quarter and the year.

It's also 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 mature markets performing relatively well and emerging markets showing improvement, although we're 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 proud of the results we achieved in Q1 and are confident that we'll see the benefit from the changes we 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 in profitability in Q1 was primarily related to not meeting our hiring projections during the quarter. We expect the hiring ramp 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 costs 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 '19, but want to note that we provided full year guidance for billings under ASC 606, which we had not provided earlier. The initial impact of the adoption of 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.

Really want to focus in on ARPS because that upsided again this quarter versus what The Street was looking for. When I really zone in on things, it looks like that core number that you mentioned really drove that. More than anything, wondering if you can 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 this thing about ARPS up sequentially, but as you think about Q2, Q3, Q4, what are the puts and takes to keep driving that ARPS up here? Because obviously some of it's mix, some is these promotions, et cetera. Maybe kind of walk us through that. And 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 of those come into 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 on renewals than there is on net new sales. And as that renewal base gets bigger, that accretes 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 salesforce. 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 it takes -- 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 some slightly less promotional activity. Those are the trends. And so we do expect to see sequential increase in ARPS certainly next quarter, and ARPS to end the year at a higher point than it ends next quarter.

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

Yes, 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 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 it inorganically. But we intend to touch just about every part of that process. We'll probably stay clear of the ERP-like side of the business, but every other part of it, from pre-construction all the way to field operations, we're going to be involved. We already are.

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

First, maybe for you, Andrew, thanks for reminding us about the collections impact on that net add 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 spoke of? And relatedly, when do you think we'd see the impacts of those perhaps normalize? If that makes sense.

Okay. So Saket, let me kind of like address the question a little bit, and then I'm going to let Scott dig in on the EBA stuff a little bit, too. I'm going to just go a little high level here. So first off, the number -- the net adds 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 fairly 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 -- why we modified some of the things. Another thing that you also see is in the core side, you're seeing an ongoing continual growth of the core net adds, right? But there is a difference in how the EBA is 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 them at the same rate 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 9 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've seen some of the bleed 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 move to the cost side of the equation. A 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 rightsizing of the cost structure that we've done last year? Of course, I'm sure part of it is related to no more perpetual sales. And how sustainable, I guess, are these levels? Just a little bit more color on that nice cost of goods sold line would be helpful.

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, we went through several divestments, and that has -- that accreted some benefit into our cost of goods sold. 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 to the channel and having them deliver a lot of that. They can do it a higher margin, frankly, than they can make on product markup. 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's the other thing that's contributed to a lot of that improving gross margin and reduced COGS.

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

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 any way to think about maybe the average number of products the collections people are using versus, say, before. If there's any way to kind of have a rule of thumb. I know it wouldn't be perfect. And then I wanted 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 was wondering if there was anything regarding piracy in the quarter -- piracy reduction in the quarter that might have helped.

All right. So Heather, 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 -- when we talked about the engineering service company in Canada and gave you that example. So I'd encourage you to go back and look at that example because that is a common scenario, and 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 effective 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. If you remember 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, in effect 19 collections and 1 AutoCAD subscription. And in the process -- so their sub count went from 42 to 20. In the process of that, their ARR went up more than 10%, right? It's one of the reasons why I think focusing less on subs -- subs are not irrelevant, 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 look ahead.

Not to drive this home over and over again, but remember, the result we saw this quarter is 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 in the business and the things that we watch. So we're actually feeling pretty good about the outcome right now. Now with regards to your question about piracy, I sometimes feel like everybody expects like at some quarter I'm going to declare, "There's 50,000 net subscriber adds from piracy in this quarter." You might be waiting a long time to hear that declaration. This move, with regards to how we address nonpaying users in our market, it's an ongoing process of basically keeping the run rate at a relatively nice clip quarter after quarter after quarter, well beyond even the FY '20 goals. That's what some of the companies that have engaged in this, like Adobe and Microsoft, have 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 to pirates in AutoCAD, and we're going to continue to roll that out worldwide as time progresses. We've also lit up some things in our sales force with new lead generation and new teams. But there's no like headline around how piracy gets added into our business. It's going to be one of these things that actually maintains the business as we move forward. And like I've said many times before, pirates don't declare themselves at the door, so it's very difficult to count some of this stuff.

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

Andrew, first for you, and then a 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, too, 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, there were even indications that civil, of all things, was an indicator for the business, at least for AEC. So in that respect, maybe you could talk about how you're 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 paying for outcomes, usage and adoption. So maybe you could update us on the progress you're making in terms of those evolutions vis-a-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 eStore than any other segment. So I would actually say, in terms of leading indicators, although we haven't actually institutionalized all of this yet, we have more knowledge and more access to some of these leading indicators as we move fully through 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 around the channel, it's still really early days. I think if you peel back the strategy behind that, it is about driving more direct touch, first of all, with the mid-market account, account base. So field-based, account level assigned salespeople below the named account tier that we already have. That will be sell with the channel, by the way. So we'll have direct touch. We'll also have channel partners involved. We're increasing the level of support we've got in our inside sales, which, again, is a direct touch play. And then you 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 when we built incentives in our channel partners, incentive program around driving adoption. A first pass at that this year, and we'll get more refined at it 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 beginning to come into play in the second half of this year.

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

The first one is just on the -- I've heard about some of the changes that have been rolled out in terms of the U.S. sales, especially when we're talking about 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 adds played out in the quarter maybe in terms of how the channel is prepared for that? And could that take maybe a quarter or 2 for them to get on board with it?

So first off, I just want to make sure I clarify what you're asking about, Gal, because we did 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 it pushes more business to the eStore and actually allows us to make more on LT. Had absolutely no impact on volume at all. And these changes are going to be cascading through Europe and APAC this quarter and into the next quarter. And we similarly do not expect any impact on volume.

So that should impact -- that should actually be beneficial to that price realization, right?

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

On the LT piece. And frankly, part of the goal of that, too, is to focus the channel in on 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 new 1 AutoCAD or up into collections.

Okay, perfect. Can we just talk a bit about the cloud ARPS and how -- maybe just a comment on the churn -- on the core churn on the cloud, what you talked -- you obviously don't disclose that directly, but just in terms of the trends now that you've been, slightly on one side, basically saying you're being slightly more cautious about the pricing, trying to support that. On the other side, we're still seeing ARPS trending down on cloud. So how can we reconcile those 2 data points? Maybe if you can just help us understand, that'd be very helpful.

Yes. There's kind of 2 effects -- there's actually 3 effects here in many respects. So the first effect is, as we've told you previously, we've rotated away from some of these really low-end, down-market-type ARPS that -- I mean, applications that we were selling, like the BIM 360 team application. They've rolled up into the consolidated suite. Those continue to turn out of the run rate, and that's fully expected. We actually expect them. We're not chasing those, okay. The other thing is, is in terms of new packs, we sell lots of user packs. So a company might buy 1,000 user packs into their project space. That number of users obviously starts to dilute 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 the 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 from BIM 360. That ARR sits in the enterprise ARR and not in the cloud ARR. And that also has an impact on how these numbers roll out. I think one of the things that you -- 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 -- more attention to that. And these trends that we're talking about will settle out. Scott, you want to add anything?

No, I think you said it.

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

Scott, ARR was certainly strong, as you pointed to, but it was a little surprising to see maintenance plan ARPS decline by $24 sequentially. And I just wanted 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-up activity?

Yes, it's not entirely, 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 a headwind on ARPS.

Got it. And then Andrew, you gave that example, I believe, of Miron 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, I think what you'll start to see, as we start to penetrate the mid-market, you'll see more and more of these packs start to get sold. And I think that's -- the packs absolutely target the mid-market. So I don't -- I'm not going to give you a specific time line in terms of when you'll start to see more robust growth in the mid-market, 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 these successes we've had upmarket, 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.

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

Could you give us a sense for the blended maintenance price increase you realized in the 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 impact. So you can see it in aggregate. I'd say, on an apples-to-apples, same maintenance before to same maintenance after, it's really just a 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 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 multiyear 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 multiyear product subs. It's just back to part of the presentation that I gave at Investor Day. We are seeing some multiyear activity in that. We haven't really done anything to incentivize it. So it's not -- it's kind of churning along at that double-digit rate that it had 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.

And our next question comes from the line of Richard Davis with Canaccord.

I'll change it up from a model-building question to a product question. Look, we talked to some of your customers, and they agree that this kind of Generative Design stuff is a big improvement over what used to be called topological optimization. So basically, the question is, should we think of this generative functionality as an increment to ARPS, increment to customer accounts, reduced churn, all 3? Or -- and then I would assume that it'll take probably a year or 2 before we kind of get any kind of measurable ramp in financials. It just -- it would be helpful.

Well, Richard, that is definitely not a boring question. So look, I don't want to dilute the power of the answer here, but almost all of the above are true in some respects. So for instance, some of what you're seeing with our Fusion Ultimate rollout of the generative capability is it's included in the Ultimate subscription, but buried inside the Ultimate subscription is an allocation of consumption that's built into the 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 you saw in Fusion Ultimate, that's the way you're going to see some of these things roll out into the business. There will be some level access to generative capabilities, because remember, this is an AI-driven, supercomputing-type application delivered to the customer because we can do it with the 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 impacts of that, the positive impact. And then you'll see also people will be buying more consumption in the future as they buy more outcomes from the generative results. So it's kind of all 3, but I hope that gives you a little bit more color on why it's sort of all 3. Hopefully, that would help.

And our next question comes from the line of Monika Garg with KeyBanc.

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 3 quarters will have to ramp significantly. Now of course, I'm comparing 605 to 606, because last year, we have only 605 numbers. So ARPS was 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 could lead to the ramp in ARPS growth?

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 was 25% in Q1. And honestly, it's a great result. Looking ahead, it's not just ARPS that's going to grow, right? We've talked about what the subscription count looks like. We've got -- there is some improving ARPS for all the reasons that we've talked about. But we also have sub count going up. And it's the combination of both of those that drives the ARR growth out through the end of the year. So separate the onetime effect. And by the way, the effect of 606 is greatest in Q1. If you noticed, that's why in the prepared remarks, we tried to give you both sets of numbers so you can trend it out. But it was almost a 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 an exaggerated effect in Q1 just driven by the onetime write-down of the deferred revenue caused by 606.

Then just strong growth in all the geographies, but revenue growth was kind of lowest in Americas compared with other geos: 13% in Americas, whereas greater than 20% in all other geographies. Maybe could you kind of walk through the reasons?

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'll -- 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, were even behind on the subscription transition. So Americas is where it should be at this point in the cycle, and I think it was a really great result from the Americas. Do you want to add anything, Scott?

No. I think you said it right. The only other small thing I would point to is Americas did have the toughest compare point year-on-year. They had 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, pretty good growth.

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

It seems like the subscription transition and the business model change is solidly on track. So I want to dive a little bit more into the second pillar of your 5-year strategy via the company's efforts in your own internal digital transformation. Could you give us an update on how that's going? And you talked about AVA, the Autodesk virtual assistant, at your Analyst Day and highlighted that. But aside from that example, could you maybe give us a couple of other examples of initiatives that you're working on as part of that second pillar? And then lastly, it seems like this is probably a multiyear effort. 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.

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 AVA's capabilities in other areas of support to our customers. So we continue to evolve that capability simply to make it easier. The satisfaction levels with that capability are pretty high because it just solves the problem very quickly. AVA's very good at some of these things. The other area 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 this fairly liberating capability as it matures over the next few quarters because it just allows them to understand what they're using, who is using what and actually respond more quickly in 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 engagements as some of this capability matures. In the second half of the year, we'll actually start doing some major cutovers as we start moving all of our orders that come into the system into our new back office, which actually is what powers our eStore, which has a much more robust, simple, seamless, manageable experience than what they get through our current partner system. So the partner orders are going to start coming to that same system as we move into the end of this year and into the beginning of next year. All of 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 upsell 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 inside teams. We're seeing those benefits right now. Those are going to continue to ramp up throughout the year. But you'll also see more benefits next year where customers simply upsell 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 of insight into some of those things and some of the potential upside benefits that we're going to start to see from that.

That's fantastic. That's really helpful. And just really quickly, I want to verify that it is the correct assumption that we should only expect ARR, rather than subs and ARPS, starting in fiscal '20, is that correct?

Well, we haven't formalized that, Zane, but that's certainly where I think we need to get to. I think there's been an outsized 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 irrelevant; 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're at that -- we're probably pressing that point as well. And so it's entirely possible that when we get to next year, we will stop talking about subs externally, perhaps just a once-a-year update at Investor Day, as opposed to the focus we put on it in each of our calls.

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

This is Shankar on for Kash. Just on the legacy users, you've mentioned they were -- 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 upgraded to collections? Like what do they use after they upgrade to collections?

What we are seeing is a pretty significant uptake, as we talked about, more than 30% that are moving from single product to collections. Once they make that shift, of course, they have access to anything that's in the collection. So what they're actually using is much more dependent on the persona, on the person and on what market they're in. I'm not sure there's a good rule of thumb for you to go by on that. I think the underlying theme, though, that's 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, at a price point that's attractive both for us in driving up our ARPS, but for our customers in getting greater value. And we're seeing great success with that.

Got it. And just a quick question on the BIM side. Can you comment on the competition you're seeing, especially from Procore? 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 wait and see more on what you're doing? And when they expect to get onto your platform? Just want to understand on that front.

Yes. So by the way, Procore 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's not so much who the competitors are in the ecosystem. I want to take us back to what's actually going to happen over the next 5 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 were providing access to the models ultimately owned the end-to-end process in terms of the optimization and the software that digitized 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 stages 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're also focused on the then problem, the future problem. And that's really more of the dynamic that 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.

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

I was just curious, how much of the maintenance-to-subscription conversions are taking place through direct sales versus the eStore versus the channel?

Well, Sterling, so the short answer is I don't know. It's not available on the eStore, 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 at my fingertips.

Okay. And then just one quick follow-up. I wasn't clear, you mentioned the promotional activity a couple of times. How should we think about the impact -- if we 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 phenomenon?

Well, most of those early promos, if you remember, were multiyear, right? So the -- if you're talking about the legacy promos that we ran. Is that what you're 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 was the cloud promos as well where you were bundling in some of the cloud seats.

Got it. So let's take them in 2 cases because it's 2 different things. On the legacy promos, for the first 2 years that we ran those promos, we ran them twice a year for the first 2 years. And in each case, the discount was tied to, a, the customer forfeiting their perpetual license and buying a sub; but b, for those first 2 years, it was a multiyear buy. They paid for 3 years upfront. So none of them have come up for renewal at this point. The last 2 times we ran it, 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's 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 -- 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.

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

I guess, as a follow-up to the question on collections a couple of questions ago here. You're clearly having success there, providing a lot of value. 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 when some of these collections come up for renewal and likely price points move higher. Is it a function of continuing to provide additional value? I'm sort of wondering just kind of your high-level thoughts there.

So first off, let me correct a misstatement you made there. 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 moved to the M2S. Super important. There's no price increase cliff that they're going to see. Now if you're talking about the end of the M2S program, when their 3-year period runs out and they do see that price increase, one, that's a couple of years out, and there's a couple of things that we're doing to ensure satisfaction. First off, our experience from Suites shows that if a customer uses 2 applications, they're highly satisfied with what they get from these aggregated applications. It's really just 2 applications that drive satisfaction. We've actually stood up a whole new team inside our sales organization that's a customer 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. Did you want to add something, Scott?

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

That's super helpful, Andrew, and that's exactly what I was trying to get at, not necessarily these initial price increases but more so upon looking 2 to 3 years out. But I think that's a great way to think about it, and I think it's a super helpful context.

Yes, they're very sticky. The Suites were very sticky. The collections are very sticky. That has been something we've seen consistently.

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.

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