Q3 2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Autodesk third quarter fiscal year 2020 earnings conference call. At this time, all participants' lines are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during that session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star Zero I would now like turn the conference over to you Speaker today, Mr. Rob Hey drama Vice President of Investor Relations. Please go ahead Sir.

Thanks and.

Good afternoon. Thank you for joining US conference call to discuss results. So far third quarter fiscal 2000 on the line is Andrew Anagnost CEO and scar setting our CFO Today's conference call is being blood test like yeah lift as in addition, he feels the Paul will be available on our list Dot Com slash investor.

You can also find our phones because to me and a slide presentation on our Investor Relations website.

We will also closer transcript of todays opening commentary on our website. Following this call. During the course of this conference call. We may make forward looking statements about our outlook who comes out and strategies. These statements reflect our best judgment based on that is currently known to us that somebody brings our results could differ materially.

Please refer to our SEC filings quote important risks and other factors that may cause our actual results could differ from those in our forward looking statements forward looking statements made during the call are being made as of today. If this call is deeply into reviewed after today. The information presented during the call may not contained current accurate information.

Autodesk disclaims any obligation to update or revise any forward looking statements. During this call will quote a number numerical go changes as we discuss our financial performance and unless otherwise noted each subscriptions have good year on year comparison, all non-GAAP numbers, there Princeton todays call.

He concerns in the press release, a slide presentation on our Investor Relations website.

Now I would like to turn the call over to Andrew.

Thanks, Bye-bye building on our strong performance in Q2, we delivered another quarter of solid execution and results with revenue billings Air our earnings and free cash flow coming in ahead of expectations for the first time, we delivered over 1 billion in quarterly billing is outside of a fourth quarter and our last 12.

Free cash flow came in at nearly $1 billion breaking yet another company record broad based strength across our entire product portfolio in all geographic regions drove these results.

We have strong momentum in construction are gaining share in manufacturing and we continue to make strides in converting the non paying user base.

Before we dig into details from the quarter I want to recognize the hard work put in by the entire Autodesk team, especially our colleagues in the Bay area, who ensure that our business did not experiencing any disruptions. Despite our Sandra Bell office, and many employees homes being without power due to wildfires in the fine.

I will days of the quarter, our business continuity planning was flawless and the entire team went the extra mile to ensure that we did not miss a beat under very difficult circumstances now let me turn it over to Scott to give you more details on our third quarter results as well as details of our fiscal 2000 guidance. I'll then return with insights on key drivers of our business and provide.

An update on the progress of our strategic initiatives before we open it up for QNX.

Thanks standard.

As Andrew mentioned revenue billings air or earnings and free cash flow. All performed ahead of expectations during the third quarter.

Revenue growth of 28% was driven by strength across the board with subscription revenue was the biggest driver.

Acquisitions from the fourth quarter of last year contributed four percentage points of growth.

The revenue upside versus our guidance was largely driven by deals with upfront revenue recognition, including those with the federal government or that include certain products like vault in DRAM.

Some of these transactions were targeted for the fourth quarter closed early overall, we're very pleased with strong execution in the quarter.

Total layer or grew by 28%, which is impressive in light of a tough year on year compare the cloud air all grew 164% tied to strong performance in construction.

Excluding the $114 million they are far from acquisitions growth in our organic cloud portfolio came in at 35%.

Intrinsically design was once again, the biggest driver of our organic cloud revenue growth with strength across all regions.

Indirect and direct revenue mix remained at 70% and 30% respectively.

Revenue for from our Autocad and Autocad LT products grew 29% in the third quarter.

You see revenue increased 36% and manufacturing rose 15%.

Geographically, we saw broad based strength across all regions revenue grew 30% and Americas and APEC, while EMEA grew by 24%.

Our maintenance the subscription program or into US now in its third year continue to yield great results.

The interest conversion rate increase when all time high of 40%.

The uptick in the conversion rate was expected as our maintenance renewal prices increased by 20% in the second quarter, making it more cost effective for customers to move to subscription.

Those have migrated upgrade rates came in at 21% inline with expectations.

Net revenue retention rates continued to be within the range of 110% to 120% during the third quarter and we expected to be within this range in Q4.

Similar to Q1 some of the deeply discounted three year subscriptions from a previous promotion came up for renewal. This group of customers renewed closer to list price and we're pleased to see the total value from the entire cohort growth.

Billings grew 55% to more than $1 billion.

The growth was driven by our organic business contributions through construction and return of multi year contracts closer to historical levels.

We believe our customers' willingness to make long term commitments to our solutions underscores the business criticality of our products and we're closely monitoring the rate of multi year buying to ensure a doesnt create a headwind to future cash flows.

Remaining performance obligations or ARPU, which is the sum of billed and unbilled deferred revenues rose, 32% and 6% sequentially to almost $3 billion.

Current ARPU, which represents the future revenues under contract expected to be recognized over the next 12 months was $2.1 billion an increase of 23%.

So solid leading indicator of the strength of our business.

On the margin front, we realized significant operating leverage as we continue to executing the growth phase of our journey.

non-GAAP gross margins were very strong at 92% slightly up quarter over quarter and up two percentage points versus last year.

Revenue growth combined with our disciplined approach to expense management enable us to expand our non-GAAP operating margin by 13 percentage points to 27%.

We are on track to deliver further margin expansion in Q4, and approximately 40% non-GAAP operating margins in fiscal 2003.

Moving to free cash flow generated 267 million in Q3 over the last 12 months, we generated a record $972 million of free cash flow demonstrating the power of our subscription model and the strength of our products.

Lastly, we continue to repurchase shares of our excess cash which is consistent with our capital allocation strategy. During the third quarter, we repurchased 856000 shares for $124 million at an average price of $144 of 49 cents per share.

Year to date, we have repurchased 1.7 million shares for $264 million at an average price of 156016 cents per share.

In addition, we pay down another $100 million on the term loan associated with the fourth quarter fiscal 19 acquisitions and intend to repay the remaining 150 million by the end of fiscal 2000.

Now I'll turn the discussion to our outlook.

Our view of global economic conditions and their impact on our business remains unchanged from last quarter.

As you assume here from Andrew customers continue to increase their spending on our products even in segments experiencing some near term headwinds.

Full year revenue outlook has been updated for the upside we experienced in third quarter, partially offset by the early signing of some transactions initially targeted for the fourth quarter.

At the midpoint of our updated guidance, we're calling for revenue and air our growth to be approximately 27% and 25% respectively.

Additionally, currency is now expected to drive an incremental headwind of about $5 million to our full year revenue.

We're adjusting our air our outlook as some of the expected Q4 upfront subscription revenue was recognized in the third quarter.

Additionally, fourth quarter air ours being impacted modestly by the currency headwind.

As a reminder, we calculate air or by multiply our reported quarterly subscription and maintenance revenues time score.

Our building forecast as an updated to reflect our strong performance and the momentum behind multiyear deals.

We expect long term deferred revenue to be in the mid 20% range of total deferred revenue at the end of the year.

Strong billings and operational execution are driving the upside to our free cash flow outlook for fiscal 2000, which is now expected to be 1.3 to 1.34 billion.

Looking at our guidance for the fourth quarter, we expect total revenue to be in the range of 880 to 895 million and we expect non-GAAP EPS of 86 cents to 91 cents.

The earnings slide deck on the Investor Relations section of our website has more details as well as modeling assumptions.

Looking out to fiscal 21, we expect continued strength with revenue and free cash flow growing in the low 20% range.

In line with our normal practice will provide a more detailed fiscal 21 forecasts on our next earnings call.

In summary, I'll remind everyone that since our business model shift we have moved to a much more resilient business model that generates a very steady stream of revenues less exposed the macro swings and when we were selling perpetual licenses.

We're committed to driving revenue growth, while expanding operating margins, we delivered revenue growth plus free cash flow margin of 62% in the last 12 months and plan to end the year at around 67%.

Overall, I'm proud of our performance and confident of delivering on our near term and long term targets.

Now I'd like to turn it back to Andrew Thanks, Scott as you heard resiliency of our business model combined with strong momentum in our products and great execution by the team helped delivered another outstanding quarter. Despite continued uncertainty in some parts of the world in terms of the macro conditions demand remained relatively in line with the second.

Quarter, the business environment, and our results improved slightly in the UK and central Europe , and our commercial business in China continues to perform well despite a slowdown in state owned enterprises.

During the quarter Robertson group, one of the largest independently on construction companies in the UK to cover the entire construction lifecycle significantly increase their adoption of our Bim 350 portfolio. The company deployed our software on over 60 projects over the last three years and estimate a 28% increase in.

Activity. This is an incredible return on investment we're thrilled to be partnering with a company prioritizing such impressive continuous improvement in another example, one of the largest automotive parts supplier incident in central Europe , nearly doubled their EPA commitment with us this quarter with the move to electric vehicles the customer.

With innovation is needed to stay ahead of the competition. So they are investing in retooling their factory and migrating from Twod to Threed, our customers understand the benefit of investing in growth opportunities under all kinds of economic conditions.

These examples underscore the importance of our products, regardless of the macro environment as well as our customers commitment to investing in technology to stay ahead of competitors.

Last week, we hosted 12000 people at Autodesk University and customers walked away excited about our current products and our vision for their industries. In fact, 32% more customers attended the conference this year than in the previous year across the board customers are looking to audit asked to help them digitally transform their businesses.

As and make them more competitive.

Before I go into that strategic updates for the quarter. Let me also acknowledge that for the fifth consecutive year 80, Las Vegas with a carbon neutral event. This sustainable effort is reinforced and expanded by audit has commitment to achieve company carbon neutrality. In 2020, we're also delivering and continuing to investigate ways to help.

Customers realize their sustainability goals to automation and insights in our technology in fact over the next few years, we intend to ramp up our financial commitment to this work by investing approximately 1% of operating profit profit in the Autodesk Foundation.

Now let me give you an update on some of the key initiatives specifically our continued traction within construction gains in manufacturing and success in monetizing our non paying user base. These are the initiatives that continued to be key drivers of our business.

In construction, the breadth and depth of our product portfolio continues to make our offerings more compelling for our customers in the last two years. The number of participants from the construction industry had artist University increased over seven fold to approximately 3500 at eight new this year, we announced our it as construction cloud, which combined our.

Advanced technology with the Industrys largest network of builders and powerful predictive insights to drive more productivity predictability and profitability for companies across the construction lifecycle Argus construction cloud is comprised of our best of breed construction solutions assemble building connected Bim 360, and planned grid and connects diesel.

And with Autodesk unmatched design technology, such as Autocad, and our Threed modeling solutions revenue and civil Threed.

The announcement included more than 50, new product enhancements across the portfolio and deeper integration, including powerful new artificial intelligence that helps construction teams identify and mitigate design risks before problems occur.

Autodesk construction cloud is being well received by customers and supports our long term plan.

Planned great and building connected continued their momentum delivering 113 million in AMR with growth coming from new customers as well as adoption by existing autodesk customers during the quarter, one of Australia's largest construction and infrastructure companies expand its relationship with us by adding plan grid and Bim 362 with exists.

Products that the transaction resulted in the largest new product agreement for planned grid globally and the largest regional enterprise deal to date, we are helping the company adopt cloud based technologies to improve project delivery and safety.

The depth and breadth of our solutions that many other vendors in the space cannot deliver is very appealing to our customers. For example, we enhanced our relationship with NBC one of Canada's leading construction companies focused on infrastructure buildings and natural resources by adding building connected to their existing portfolio of.

Assemble and Bim 360 solutions, our sales team demonstrated how we could help manage their systems more effectively and prepare them better for the future we were able to meet their needs for the design and construction phases, one building lifecycle for both the commercial and infrastructure industry segments.

We continue to focus our investment on infrastructure, which has performed well in prior downturns. This focus could offer us greater resiliency should the macro environment weekend, we recently announced availability of collaboration for Civil Threem, which has now included with Bim 360 design and enables teams to collaborate on complex infrastructure.

<unk> projects, we also continue to gain market share in the infrastructure space. This quarter, we significantly expanded our relationship with Jr. Group made up a seven company is responsible for operating almost all of Japan Inter city and convener commuter rail services as part of our strategic collaboration all seven of the group's companies will you.

As our tools, such as rabbit civil three D and autocad over competitive offerings to develop a nationwide been rail standard.

Moving manufacturing the business is performing extremely well as we continue to gain share from competitors with steady innovations in generative design and fusion 360.

We believe a large number of small and medium sized businesses, we'll look to upgrade their vendor stack over the next few years, which is a clear opportunity for us to grow market share.

Similar to last quarter, we had a number of competitive displacements of Solidworks Master Cam and PTC Creo for instance, a three display designer and manufacturer in North America replaced Solidworks and Master Cam with fusion 360, because it's integrated design and camp capabilities.

Another instance, a manufacturer of plastic machine components in the UK display solidworks and another cam vendor with fusion 360 in their design and manufacturing workflow. The company was attracted to fusions cloud based collaboration capabilities. In addition to the integrated functionality and price point, our success in manufacturing as not limited.

To small and medium sized businesses, we are making inroads in larger organizations as well during the third quarter type who chose autodesk as the best design software partner to move from Twod to Threed solutions based in Japan died who is the world's leading material handling system supplier, serving a variety of industries, including the manufacture.

During distribution airport and automotive sectors with its new EPA. The company has standardized on adventure that Threed platform and is also considering rabbit for future building initiatives.

We continue to invest in our manufacturing solutions. In fact, some of you might have seen the exciting news coming out of Autodesk University last week, we announced a partnership with assets and our customers will soon have an option to use and simulation solutions, while running our industry, leading gener design workflows in fusion 360, we also announced the introduction of a new.

End to end designed to make workflow for electronics infusion, providing key capabilities such as integrated PCB design and thermal simulation. This is something our customers have been asking for as the market for smart products continues to grow.

With fusion 360 users can take those electronic ideas and physically produce them in the same product development environment bypassing the current disconnect between design simulation and manufacturing that make data importing and translation necessary. Lastly, we're looking forward to meeting some of you at our manufacturing event with the Autodesk Technology Center.

In Birmingham UK on Monday December 2nd at that time, you'll learn even more about our solutions and strategy in the space.

Now, let's close with an update of our progress with digital transformation and how it is allowing us to monetize the noncompliant user base.

Our investments in our digital infrastructure have given us unprecedented access to noncompliant users product usage patterns. We continue to learn more about these users and are in the process of expanding our compliance programs and additional regions.

During the quarter, we signed 19 license compliance deals over $500000, including three over $1 million the mix of deals over $500000 was equally distributed by region and one of the $1 million plus transactions was with the commercial entity in China.

Our approach to creating positive experiences for our customers as they become compliant is paying dividends for instance, one large manufacturer in central Europe was paying for less than 10 manufacturing collections and had some old perpetual licenses our data indicated much higher usage, we worked closely with our partner and senior management at the company.

Need to identify and fix and noncompliant usage, resulting in almost a million dollar contract.

The experienced provided during the process has opened the door for us to discuss competitive displacement to further expand their usage and they now view us as a true partner rather than a software vendor.

I am excited about our year to date performance and looking forward to a strong close to the year, we continue to execute well in construction and are making competitive inroads and manufacturing with our innovative solutions.

I'm also proud of the strides we are making and converting the current non paying users into subscribers.

20 years ago, our desk was known as the Autocad company today to the rapidly growing installed base of Threed products like Revett inventor Maya and fusion 360, we lead the market and bringing the power of Threed modeling and the cloud to all the industries. We serve we're highly confident in order this ability to capitalize.

As on not only our near term market opportunity, but also our long term opportunity connected to the rise of AI driven threed modeling in the cloud because of this we remain committed to delivering on our fiscal 2003 goals with that operator, we'd now like to open the call for questions.

Thank you as a reminder to ask a question you would need to press star one on you touched on telecom. So it's Roger question press the pound key we ask that you limit yourself to one question.

One follow up and then re queue.

Our first question comes from Keith Calia with Barclays. Your line is open.

Hi, Andrew Hey, Scott Thanks for taking my questions here.

Okay, Secondly, hey.

Scott, maybe maybe just to start with you just on on the or our guide and the adjustment sounded like there was a little bit of a tie in with the upfront deals.

Thats signed in the quarter I guess the question is.

Upfront deals that were originally expected to come in us as subscription, but then came in as upfront I guess Rene our perspective, I just I imagine signing it in Q3 is a subscription wouldn't make as much of a difference to the Q4, but I would like to just understand that dynamic there around the upfront deals this quarter and how what sort of.

Impacted the arrow air our outlook for the year.

Yes, Great question second thanks for thanks for putting it out there is I think you're probably not the only one scratching their heads here's the way you got to think about it the.

If you step back and take of the way we define a ARR is actual reported subscription plus maintenance revenue for the quarter and then we annualize about multiplying by four so we'll give you a full year air our number what we're really saying is this what we think our Q4 subscription revenue numbers to subscription and maintenance revenue number will be comscore.

What you saw in Q3 is we had a suit us a fair amount of upside on the revenue line versus the midpoint of guidance revenue was 18 million hires in the mid point some of what drove that was upfront revenue, we always have a little bit of upfront revenue. So we have a couple of products smaller products that.

Under AOCI six so six don't qualify for ratable treatment.

So we sell them just like a subscription they look the economics of them look like a subscription the customer buys that they have to renew in 12 months, but under six so six you have to claim although revenue upfront since it's small product like ball that fall in this category.

What happened in Q3 is we have a handful of deals. So this the small product sets that we thought we are coming in in Q4 and actually we got close in Q3, and because theyre upfront that revenue moved out of Q forward into Q3, and there's no Taylor Theres no ongoing all of their revenue is recognized upfront. This happens every quarter, but.

This was particularly magnified, where we had a handful of these deals that we thought were coming in Q4 actually came in Q3. Instead. So good news is Q3 look super strong. The downside is that creates a headwind to the Q4 subscription and maintenance revenue and therefore to the Q4 air our calculation. So it's kind of the combination of.

Hey, Assi six so six in the way it treats and just a small subset of our products and then how that gets rippled through in the way, we calculate a ARR, which is actual reported revenue at times for what's important to remember as a couple of things one is the way the Rev. Rec works is not necessarily it doesn't refer.

Like the economics of the transaction, we sell these on a subscription basis. They look just to our customers just like any other subscriptions. So this change there are really reflective of any kind of change and the overall economics of our business.

I think the second is when you Peel back the the growth that we're going to see a subscription revenue. This year and you can you can derive this from the guidance. We just gave you second we see we see subscription revenue continuing to growth for the full year right. Because that's an accumulated metric its Q1, plus Q2, plus Q3, plus Q4 revenue.

As a cross border lines it doesn't matter when you aggregate to the full years for the full year, we see subscription revenues growing in the 29% to 30% range. So still feel strong about that we just got this anomaly between kind of the waste six so six treats a small subset of products and how that gets reflected in our a our that's what you're seeing the our our guidance change.

Yeah sure that makes sense it sounds like those both deals from maybe terms subscriptions, which under six so six kind of requires that upfront crude oil and has more to do with the product socket them. The way we sell that we sell it just like we sell every other product 12 months, you that pass up front, they get access to the product at the end of that 12 month period, they either renew.

And continue to use the product or they don't renew in the news access to the product. So it's really transparent to a customer it's more the some of the details of the offering itself under six so six don't qualify for ratable treatments.

Got it if I can if I can ask a quick follow up for you Andrew.

When we get off the accounting I mean.

Really interesting development of the CAD market, just more talk about about SaaS adoption. Obviously, we saw on shape got acquired and clearly you compete here with tools like fusion 360, but curious how you think about SAS adoption in CAD and what if anything that deal can mean for autodesk competitively.

Yes.

First off let me just trying to say that I have a lot of respect for charter Hearst pig in the work that he's done over the years I respect for Jim Heppelmann, an work you've done in the past.

And I think they're important forces in this industry, but the way. This is all coming down and characterize is just off okay. So so let's talk about what we all agree on and what's happening what's really happening in the market nearly all agree on Multitenant SaaS is the future of our business. It's just it's the future of the entire.

First off of has always been saying this for seven years now okay seven years and we've been executing on it for seven years fusion 360 is a multitenant SaaS offering okay with over the past business model here. The other thing we agree on what are the SaaS mean, it means three important things alright data.

The cloud is going to revolutionize data flow in in the manufacturing and product development and it's just going to revolutionize it multi disciplinary dataflow data flow across various parts. Despite its just going to revolutionize data flux compute compute power, we're able to deploy compute power through decline.

Runways, you've never mailed report, where we do agenda of design, that's all computed off the desktop. It's all that is all a cloud compute exercise in the last thing I think we all agree on that we don't I'll talk about the equally and some of its are actually executing on it is that we can layer machine learning on top of this data layer and with this compute and we can start doing predictive analytics and also.

With that predictive and insight and insightful study is on top of what people do what some of our general design programs already incorporate machine learning with regard to how they integrate camp. So we all agree on that all right. It's uniform agree and we're all building that to some degree we're I think quite a bit ahead and I'll get to that in a minute.

But here's what we don't agree on is how you doing.

Alright, and there's a big demonstrating the way fusion and on shapeless fusion has taken the strategy, where we have a same client which is a browser and we have a sick clients, which is which installs in the desktop and work on that cloud data later this decline a bit clients see the world exactly the same they can't operate without the cloud behind it there are dead without it.

The reason we have the FICC client as we're solving an additional problem. If this end to end workflow all the way from design to camp electronics and all these things. So we're pretty huge amount of power in there that you wanted to what you want to get in there in order to solve a bigger problems.

Our shape put cat in the browser a thin client we knew from our thin client experiments early on which like seven years ago that don't work, Okay that both don't slopes and one thing. We've just seen from this acquisition is we were right what was on shapes installed base eight years in.

Into this this experiment 5000 subscribers, we did more than that we added more subscribers to the fusion base in Q3 than that entire installed base.

So we're talking tens of thousands of paid students subscribers and we're talking about 5000 subscribers per on shape, we know exactly why because that that thin client only solution doesn't work you need a same client and estate client showed a decline are probably gefinor overtime, but thats, what you need today and you also need to new business model with that.

Different prices and the different options. So we didn't have a different view of how to do it and were pretty convinced we're way ahead I think the data now now that we can see the data. We are now confirming that we're way ahead, but that's kind of where we're out we all see the world. The same way, we're executing on it differently and the markets voting with its with wallet.

Very helpful guys. Thank you.

Thanks Saket.

Our next question comes from Sterling Auty with Jpmorgan. Your line is open.

Yes, Thanks, Hi, guys Im wondering at this part of the transition you mentioned the increase in the maintenance pricing what are the additional levers that you have to drive increases in.

Our growth on a dollar basis moving forward.

Certainly its along the same factors that we've talked about right. So obviously the renewal base continues to grow that renewal base comes to us at a better.

But price realization than a net new does we continue to drive growth out of construction. You saw we gave you some of the data points. Both me opening commentary in the press release construction business drove $113 million. They are our third quarter. So we continue to see strong growth there as well.

Will the core basically grows it to a certain degree every year.

Say, 6% to 8% growth from the core every year. So same factors, we've always talked about that we'll continue to drive that growth I think one thing to bear in mind. We now are in year three immune to US program is really the very first cohort of into US customers. We signed we locked in their price for three years within at the end of that time, we said.

They revert to the terminal price, which for that set of customers will be about 11% price increase we begin to see the front edge of that even for the M. S. Based it's been Lockdowns, we'll start to ripple in in the second quarter of next year. So will there. Besides just our annual price increase rhythm that we've gotten on there's a few embed in price increases that will be coming through over the next few years as well.

Well, so piracy recapture constructions renewal base growth and some embedded price increases was as well drive longer term.

Got it and then the one follow up would be you kind of surpassed already what you expect in terms of long term deferred as the mix you talked about the percentage of multiyear deals what I'm kind of curious about is what did the collection terms that you're offering.

To drive some of the collection of these multi year deals.

It's a standard three years up from 10% discount I think you see most companies that sell on an annual subscription basis will offer that kind of about 10% those obviously a bit better than the cost of money over three years, but not a whole lot more.

And there is no expended a our terms or something else that goes with what I'd say just to perhaps get it what's underneath your question Sterling is we're monitoring that very carefully and one of the reason said I went ahead and gave you some headlights on fiscal 21, both revenue growing in the low 20% range and free cash flow growing in the low 20% range.

As I Didnt want there to be this building perception that because multi years reverting to the mean, but that was somehow creating a headwind that we wouldn't be able to see the same kind of free cash flow growth next year. Obviously, it's an outsize growth. This year going from 300 million of free cash flow in fiscal 19 to 1.3 to 1.34 billion. This year, we see that growing another 20%.

Next year's fiscal 21, so we're monitoring the multi year the percent of sales multiyear very closely and if we see it begin to run through hardware, we think it's not sustainable and it will begin to create a headwind will modify the offerings.

Got it thank you.

Thanks Sterling.

Our next question comes from Phil Winslow with Wells Fargo. Your line is open.

Hey, Thanks for taking my question on your.

Quarter.

Just a question on Mega next year's Adler just building on your comments just now would you think about.

The macro comments that you've made in terms of just geographies as well as the different verticals. How are you thinking about the puts and takes four for 2021 and then just one quick follow up for that.

Yes. It did you say for 21 Wieland, yes, so first off let me comment on kind of.

How we do think since we talked last quarter. This there really hasn't been a fundamental change in our view.

The market right now in fact, a few things got a little bit better alright that the UK and Germany are still performing below our expectations, but they are growing and they showed a slight improvement in Q4 relative I mean, Q3, I can't see that part in the future yet.

In Q3 relative to what we saw in Q2. The same goes for China, We're still not doing any business with the state owned enterprises, but the business continued to grow just below our expectation. So we actually saw a little bit of a firming up not a deterioration in the business, which which is which is a good sign now as we look into next year.

We're not seeing any fundamental change in the places, where we've seen weakness, but more importantly.

That does theres, a trend going on that I want you to pay attention to which which is a tailwind for us as we move into any situation that we see into next year and how we feel about next year.

People are moving more and more rapidly to the model based solutions, we're deploying in the cloud based solutions, we're deploying because they see those is fundamental to their competitive shift there a competitive dynamics. We're seeing continued acceleration of ban that is going to continue into next year, then mandates being project specs, especially going to continue inventor infusions.

260, or growing as we head into next year and Pete the momentum on construction is solid in addition to that one of the things that we always see as anti cyclical as we head into any kind of environment is infrastructure and over the last year, we've been investing in infrastructure capabilities in our product and a lot of those are going to show up next.

At year end, there theyre going to show at both with regards to some of our construction portfolio and some of our our design portfolio. So we feel pretty good heading into next year and Thats one of the reasons why in the opening commentary we affirmed this low single digits growth in free cash flow for next year, we pursue low twentys Thats. What were 20 did did I say sociallinks.

Sorry, Thank you for correcting that would have been that would it that would have definitely upset somebody say low 20, it's below 20%.

Cash flow increase year over year.

Great Thats great color. Thank you then just a follow up on that for for Scott, Obviously, you're not getting to operating income or operating expenses, but also just help me think about sort of the framework for next year. We've obviously this is investment year plus acquisitions, just high level give us your thought process on the expense side, then I'll go back into queue. Thanks, Okay. All right. Thanks, Phil on that one.

Of the things that we've said as we expected growth suspend growth, though so cogs plus opex between 20 and 23 to be on this high single to low double digit range.

If you look at the growth we had this year spend growth in the in the guidance will be about 9%, but the overwhelming majority of that came via acquisition. So the organic business has been roughly flat now for about four years and there is some pent up demand for increasing capacity for continued investment in digitization, So what I would.

What I would model for fiscal 2001 is something towards the higher end of that low single to.

Double digits, sorry, and high single to low double digit ranges, so closer to the low double digit range for fiscal 21 within averaging out in that high single to low double throughout fiscal 2003.

Does that get out what you were asking about thats perfect. Thank you very much.

Hi, Thanks, so are experiencing some some digit dyslexia here.

Thank you and our next question comes from Heather Bellini with Goldman Sachs. Your line is open.

Great. Thank you I guess, just two quick ones, but one just following up on on.

What Phil was just talking about it if you look out to next year would you say that the environment that you're expecting the environment to be stronger or weaker or the same then what you had this year when you're when you're thinking about the puts and takes if everything you were just talking about and then.

Just was wondering how do you think about in the context. What you were just saying about expense growth. How do you think about managing operating margins. If the macro environment did start to go against you I'm just trying to think about the trade off between driving growth versus versus protecting margins. If you could just share with us here.

Philosophy there. Thank you. So so we absolutely expect things to stay fairly consistent heading into next year I like to highlight the counter cyclical aspects of our business right now.

With regards to been mandates, which for cars to the momentum around displacing Solidworks Master Cam and smaller accounts were fusion with regards to Digitization and construction with regard to infrastructure. Because these are important things to keep in mind, but our assumptions in the next year is this places where we saw a soft are to continue to be soft relative.

Expectations, and we're going to continue to see kind of the same thing heading into the rest of the markets I'll, let I'll, let Scott.

Comment on the investment the only thing I'd add to what Andrew just said before I jump in on spend management as we do think by the way there continues to be an accelerating opportunity that's not necessarily tied to overall macro spend environment in areas like construction and the momentum that you see a standing and piracy recaptured.

And manageable question, how early I think you've seen us really exercise good spend management muscles for four consecutive years at this point.

I feel good about our ability to do that I've mentioned that there is pent up demand for spend there is but to the extent that we see the business beginning to trend lower than what we expected of course will tighten up on that front I think it's a it's a muscle that we built.

That doesn't it's taken time and doesn't go away overnight. So I think you can expect us to continue to be diligence in management that said with the revenue growth we're expecting.

Next year, we will not only grow revenues will be able to gross spend and expand margins. We are expecting expanded operating margins each year versus this year. So I think we're pretty well positioned from a spend management standpoint next year.

Great. Thank you.

Thanks Heather.

Our next question comes from Jay only showered with Griffin Securities. Your line is open.

Thank you good evening.

Andrew I was pretty intrigued by your several references to infrastructure, which is a business that as you know on time.

The company broke out and it looks as though it's still about a quarter two third of your totally see business, even after including SCS and I'm wondering if that's a business that you might revert to reported out in some way in.

So just talked about what you think the growth potential is.

Infrastructure as a proportion of the.

Certainly see revenue and follow up longer term question is regarding your sales mix.

That is to say you were 50, 50 mix expectation and indirect could have direct potentially being the store.

On that point.

Could you talk about whether you're still confident in.

Streams, becoming half of half a quarter of the total.

What are the limitations, you think or risks to that trajectory of growth for the store and if it doesn't come through how are you thinking about reverting spending or redirecting spending.

Sales development back towards named account direct and the channel.

Yes, Okay. So you asked a couple of questions. There. So let me let me start on let me start to on.

On the infrastructure question. So no we're not going to be breaking out the business are providing any more color on whats percentage, but what I can tell you is that we've made some deliberate.

Investments in rail and road.

Some of those have already showing up this year more are going to show up early next year that our targeted at where we believe some of the sweet spots in spending are going to be in areas, where we have strength you might have also notice that we moved civil three d. into the Bim 360 design environment. So now the same collaborative power that we have on.

Revett models is available for civil three D. model Thats important that was that was something that customers were looking for and another thing we're doing that that you'll start to see progress on is this notion of a common data and data environment, which is really important to infrastructure projects and it's important to particularly infrastructure projects in Europe .

But even in the in the USA people are really really interested in these ISO compliant common data environment, that's going to be showing up really as soon as well. So we've we've made some clear targeted investments that we believe our allow us to go where the real opportunity is in that space and at top of that if you've been following what's happening with him for work that part.

It's really growing up and it's it's integration with as Rory and some of the things. We've done there are actually pretty compelling and pretty interesting.

Now with regards to the long term targets all right. So you're right right now that were at 30%.

Between direct and indirect and the reason for that is is not say it into into the stores in growing the story is growing our water.

It is still our fastest growing channel in the company. Okay. So our digital direct channel is still the fastest growing talent accompanies the harvest the fastest growing why isn't it why isn't it showing more progress physical but through the matter is is this the channel grew well to all right. It's it grew robustly and and I think I think we should also.

Great that at the same time, what happened is because right now the store is essentially majority and LT channel and it's not totally true because we sell the whole portfolio there and we capture a lot of construction solutions is redirect the its margin neutral right now because the margin we make up of LT through the channel into the story of the same so we.

During the same economics that said im not backing away at all from the from the 50 50 split or the 25 per at the half of that direct being from the digital direct channels. We're still we're still going to achieve that if you remember I always characterized that as a long term targets and there is lots of things that havent lit up yet that are going.

To help with that things associated with tiresome recapture things associate with construction as a whole set of things over the next few years that are going to its going to tip. The balance on that number. So we're still confident we're getting the economics. We want so we're getting the price realization, we want especially on the things that would most likely go digital direct so we are still.

We're committed to that mix long term.

Okay. Thank you.

Well thanks, Jay Thank you.

Our next question comes from Matt Hedberg with RBC capital markets. Your line is open.

Hey, guys. Thanks for taking my questions.

The results of converting Noncompliant users was impressive I guess first of all was just the best quarter for converting these noncompliant users and then on a go forward basis should we expect more the same of this cadence or other effect either additional steps that can that can affect convert even more of these users.

So Matt here, Here's a few things I want to kind of characterize our first off we're absolutely on the plan that we always intended for that for this model every year, we're taking a set of steps that we believe we're going to materially improve our penetration into the noncompliant base and every year there'll be a set of new steps that we believe will.

Provide some additional ramp up in that space as well. So what did we do this year, we rolled out in part of communication and tracking of how the pirated user journey.

The noncompliant user journeys through the lifecycle of learning their non compliant and what options. They take as they travel through that cycle, we introduce those things we rolled it out throughout the year across more and more countries and yes. We're seeing results that we expected primarily through two things one we're increasing better leads to our to our inside.

License compliance teams and we are converting people digitally as well through some of the digital communication, but the digital communication also create these better leads to putting contacts we as you kind of get a sense for what happened last last year.

We did 21 deals over 500 came parsees whole entire year 21 deals in Q3.

Alone, we Didnt 19 deals over 500, Okay. So you can see yes, we are seeing.

Increases and momentum and there's a whole slew of things that will talk about layer. There will be doing next year that will provide us to not only get even more intelligence on this space, but.

Make it make it more challenging for the base to to jump to another pirated solution, okay, and and that will be a discussion for later, but this is to plan every year. There is something that rolls out and every year, we seem to be getting the results that we want from this program and given what we know were due.

During next year, we feel confident we're going to continue to get the results we expect together.

Super Helpful. Andrew and then maybe Scott just a quick one for you on the multiyear renewals. It's good to hear that these are renewing closer to list price. Just quick question I Wonder if you could comment on the churn Youre seeing for these is about what you expect.

Just the piece would be helpful.

Yes, Matt is an end to be clear what I was talking about as if you remember in Q3 fiscal 18, we had as we started down this path of selling nothing but subscriptions, we offered a promotions for legacy customers turn into or perpetual license and for a 50% discount you can get three years of the same product.

On product subscriptions that was that was actually quite a successful fro. If you remember we did over 40000 to those that three year term came due during this last quarter. What we saw we expected there to be a higher than normal churn rate and we did see that.

But the aggregate value of that customers.

Actually group. So I think the promotion was quite successful got people to try to move over to the product subscription and the aggregate value after renewal they renewed closer to list not of the 50% discount grew over that timeframe. So is it was successful, but a big create a little bit of a headwind on our volume renewal basis I remember, we spent a unit basis on a 10 basis through.

Sort of talking about renewal also as net revenue retention rate or sometimes I'll call. It in our three and are in our three for the quarter continue to run in that one tend to 120% range. Overall. So this was a it was accretive to that metric.

That's great well done guys.

Thanks, Matt.

Keith Weiss with Morgan Stanley Your line is open.

Hey, guys.

Okay. Thank you for taking my question.

So I just wanted to go back to the.

Fiscal 2000 air our outlook. So it looks like it was lower by about pointing to have.

At the midpoint part of that was FX and some of that was upfront revenue.

Since that we could get for the magnitude of.

The great upfront revenue because I.

I mean to me it seems like.

The macro situation in Europe , and North America was sequentially better. So I guess why wouldn't that carry forward into Q4 and reaffirmed the 25 to 10, 27% growth outlook that you gave last quarter.

Yes, Tom the the amount of upfront revenue that moved from Q4 back into Q3 was about 5 million.

So that was that contributed to the upside in Q3 revenue, but remember the way we do air our subscription revenue times four that's that by itself was a 20 million dollar headwind to a or are in the fourth quarter two factors, but remember those thats upfront revenue. So there is no tale of deferred once we put that in and because of six.

Six we have to claim although revenue upfront. There is no Q4 impact of those just moved from Q4 back into Q3 that you see the full year revenue, we see we've guided that point up it goes float revenue as an accumulated metric as Q1, plus Q2, plus Q3, plus Q4 air ours, just take those snapshot.

Out of Q4 subscription and maintenance revenue and multiply by four so 20 million the midpoint of that air our guidance change was $30 million 20 of it was just driven by this effect was about 5 million of incremental headwind from FX and about the same amount of just product mix.

Does that does that clear up them does that clear up in your mind. The move from Q4 back to Q3 and why why it's an impact the arrow.

Yes, so I guess ex those changes.

Our growth have been sort of reiterated if it was in four of those onetime impact.

Absolutely, yes, absolutely.

Exactly and the interesting thing about this Thomas the economics of our business by the way are completely divorced from the Rev. Wraps issue that we're talking about the economics. The business are unchanged just between having to claim that as non ratable upfront revenue and moving it back into Q3 and the way we define our Rs quarterly revenue Im store.

It's that combination that drove the change in Q4, Yeah. This is an interesting collision between the way, we define EMR and the six so six accounting rules.

Yes, so exciting.

So I guess, just one quick follow ups so.

The billings, obviously came in much stronger than expected.

So to what extent is the shift to multiyear deals performing better than you expected coming into the year and should we expect that long term VR mix to continue trending higher because it's already kind of around.

20% range.

Total that we've seen historically that's it for me you.

Okay. Thanks for that too.

This growth at 55% over a billion dollars of billings in Q3 Super strong.

Biggest factor driving that is the growth of our renewal base that has nothing to do with multi years. It's just the overall growth of renewal base beyond that the contribution from our construction business construction continues to perform really well with the noise around the or guide we haven't really focused on on the success of our construction business as much as as we probably should have.

It continues to perform really well and it's driving upside to our billings as well both year as part of it and you're right. We're already at long term deferred at about 25% of total deferred if you go back historically by the way back into fiscal 17 and 18 before we began this transition by long term deferred rent as high as 30% of total differ.

At one point I don't think it gets back to that level I think we keep it in this low to mid 20% range in terms of long term as a percent of total.

To the extent that are Grand Hot said this earlier in other words, we were selling more multiyear that's all we can sustain longer term I'd like to make a change in the offerings. What I don't want to do is drive volatility of free cash flow because of the offer we've got out there for multi year at this point I don't think we've done that but if it continued to accelerate.

So can we take a look at.

Thank you very much.

Sure.

Our next question comes from Brad Zelnick with Credit Suisse. Your line is open.

Great. Thanks, so much for fitting me in Andrew.

I'd like to the launch of Autodesk construction cloud I know you. This year, what excites you most about the offering how is the customer feedback into the launch and how do you see driving growth next year.

Yes, we know what excites me a lot about this is the way worries unifying the whole entire stack around us common data environment and it indeed, it it's a real great return on the investment we made and Bim 360 dock because that entire environment is becoming the common data environment and planned grid.

Degrading into it building connected integrating into it the existing Bim three stat 60 stack is already integrated into it and everybody is looking at this insight internally within the development as a while this is this is an amazing opportunity for us to bring these things together so the whole ability to have a conversation with the customers that here's the umbrella brand and how we're bringing all the things together.

There are so that they actually communicate the really exciting part of this and I think it's going to come rapidly and customers going to be delighted when we rolled it out there were 50, new enhancements and there's a reason why those 50 new enhancements. We're in there is because we invested in acceleration of the integrations with respect to somebody things were moving faster not slowing down I'm really excited about the pay.

Most of what's going on I'm excited about what the team has been doing and frankly excited about how well we're winning in the market people look at what we're doing they look five years out at the landscape and they say, okay, I'm going to placement that with Autodesk and I think thats a credit to the team I guess credit to the momentum they've kept in here and I think the whole story.

Around Mark construction cloud and the way they rolled it out and told at you as is really a great piece of work by the teams I'm really proud of them.

Awesome and Andrew if I could just add another one for you your results seem to demonstrate continued success and executing on M&A, how should we think about your appetite for additional deals in both construction and manufacturing.

Well, we've all we've always said that as we look out to the business will continue to be is acquisitive as we were in the passcode very least.

We always look at the market per organic and inorganic opportunities right now we feel like our construction portfolio has.

Most of what it needs were partnering aggressively we could potentially do tech tuck ins around around.

Around the deconstruction solution as we look into other parts of the market analysts have to wait and see what do you see as we've demonstrated an ability to.

Capture significant significant inorganic targets integrate them and turn them into results and I think that's one of the things you should notice regardless of whatever we do in the future that we're we have become a serious machine around focusing around what are the real integrated opportunities how do we bring them in and then how do you make them successful and.

And that's that's our commitment to our customers into the market.

Excellent. Thanks, so much.

Thanks, Brett.

Thank you and our last question comes from Jason Salinas with Keybanc capital. Your line is open.

Hey, guys. Thanks for taking my question Youre building off the last question about the construction cloud announcement.

It sounds like it's more of a branding.

Grouping all your portfolio products as well as some of the initial customer feedback.

You heard.

Yes. It did the customer feedback has been really solid here's why are we getting the customers don't react to the branding it will spend a lot of energy on that what they do they react to what we do all right. So we like the branding because it helps us communicate simply we we were not propagating multiple brands out there. It allows us to focus our go to market efforts allows us to communicate more precise.

Through the company the customers pay attention to what have you done for me and what they were excited about at the connect an extra construct event and all that US all the discussions there is the feature velocity all right, they're seeing us delivering on the integrations. We said we were going to deliver and they're watching us closely alright every quarter, they're going to see do we do.

We never had to do we do we said we're going to do so that's what the customers are excited about they really love. The fact that we're integrating to accommodate environment and we are building an ISO standard excepted common date environment, that's something that everybody gets us sums up on there really excited with the increased scalability and performance on going through six.

Redesign, which was an area, where they were kind of pushing on us a little bit. So those are the kind of things that customers are paying attention to the branding makes it easier for us to tell the world. What we're doing so that you're going to see it's basically amplify that but the customers care about what we do not what we say.

Great appreciate the color. Thank you.

Thanks, Jason.

Thank you and that is our Q and they session for today, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

Good bye.

Hi.