Q3 2024 Autodesk Inc Earnings Call
Okay.
Thank you for standing by and welcome to Autodesk third quarter fiscal year 'twenty 'twenty four earnings conference call. At this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session.
I ask a question during the session you will need to press star one one on your telephone to remove yourself from the queue. You May press Star one one again.
I would now like to hand, the call over to VP of Investor Relations Simon Mays Smith. Please go ahead.
Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss third quarter results.
Fiscal 'twenty fall on the line with me are Andrew ANAC, Nostoc, PEO and Debbie Clifford our CFO.
Today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available at Autodesk Dotcom Ford class Investor.
During this call you can find the earnings press release slide presentation and transcript of today's opening commentary on our Investor Relations website.
During this call we may make forward looking statements about our outlook future results and related assumptions products and product capabilities.
Business models and strategies.
These statements reflect our best judgment based on currently known factors.
<unk> events or results could differ materially.
Please refer to our SEC filings, including our most recent Form 10-Q, and the form 8-K filed with today's press release.
Important risks and other factors that may cause our actual results to 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 repaid or reviewed after today. The information presented during the call may not contain current or accurate information Autodesk.
<unk> disclaims any obligation to update or revise any forward looking statements.
We will quite several numeric or growth changes during this call as we discuss our financial performance.
Otherwise noted each such reference represents a year on year comparison.
All non-GAAP numbers referenced in today's call are reconciled in our press release, <unk> financials and other supplemental materials.
<unk> on our Investor Relations website.
And now I will turn the call over to Andrew.
Thank you Simon and welcome everyone to the call Brazil.
Resilience discipline and opportunity again, underpinned, our strong financial and competitive performance. Despite continued macroeconomic policy and geopolitical headwinds.
New rates have remained strong and new business trends have been largely consistent for many quarters, our subscription business model and our product and customer diversification enabled that it means that accelerating growth in Canada has balanced decelerating growth in the United Kingdom, the growing momentum in construction has been deteriorating.
Momentum in media and entertainment and that strength from our enterprise and smaller customers has balanced softness for medium sized customers are.
Our leading indicators remain consistent with last quarter with growing usage record bid activity on building connected and cautious optimism from channel partners.
Disciplined and focused execution and strategic deployment of capital through the economic cycle enabled autodesk to realize the significant benefits of our strategy, while mitigating the risk of having to make expensive catch up investments later.
Steve said on Investor Day, we introduced a new transaction model for flex, which given the autodesk a more direct relationship with its customers and more closely integrate with this channel partners. We began testing the new transaction model across our product suite in Australia, a couple of weeks ago.
Filming of large proceeded as expected in fiscal 'twenty five 'twenty six we intend to transition our indirect business to the new transaction model in all of our major markets globally.
In the new transaction model partners provide a quote to customers, but the actual transaction happens directly between autodesk and the customer.
The new transaction model is an important step on our path to integrate more closely with our customers workflows enabled by among other things our this platform services and our industry cloud fusion format and flow.
Autodesk is customers and partners will be able to build more valuable data driven and connected products and services in our industry clouds on our platform the.
The new transaction model. It consequential. Many of you will have seen other companies adopting agency model and we're already understand the math in the near term the new transaction model resulted in a shift from contra revenue to operating cost that provide a tailwind to revenue growth, while being broadly neutral to operating profit.
Free cash flow dollars and mechanically result in percent operating margins, taking a step or two backwards.
Over the long term optimization enabled by this transition we will provide a tailwind to revenue operating income and free cash flow dollars, even after the cost of setting up our building platform.
And finally, there is opportunity from developing next generation technologies and services to deliver end to end digital transformation of our design and make customers and enable a better world designed and made for all.
I was at Autodesk University last week alongside more than 10000 attendees, where we announced Autodesk AI technology, we have been working on and investing in for years, we showed how our desire to make platform or automate non creative work help customers analyze their data and surface insights and augment their work to me.
They're more agile and creative.
But there is no AI without actionable data.
That's why we're also investing in Autodesk platform services, which are acceptable extensible and open via our API.
Rguest platform services offer several critical capabilities with data services are the most impactful.
These provide the tools that make data actionable.
The core of our data services is the audited data model.
Can be audited data model is the knowledge graph that gives customers access to the design make and project data in granular bite sized chunks. The data chunks are the building blocks of new automation analysis, and augmentation that will enable our customers and partners to build a more valuable data driven and connected.
Products and services.
Autodesk remains relentlessly curious with propensity and desire to evolve and innovate.
Time, and again, well executed transformation from desktop to cloud for perpetual license and maintenance to subscription.
<unk> added new growth vectors build a more diverse and resilient business towards broader trusted and more durable partnerships with more customers and given autodesk a longer runway of growth and free cash flow generation.
With our transformation from file to data and outcome.
Front to annual billings and from indirect to direct go to market motion. We are building, an even brighter future with focused purpose and optimism.
Our customers are also committed to transformation and Autodesk is deploying automation to increase their success in an environment with ongoing headwinds from material scarcity labor shortages and supply chain disruption.
That commitment was reflected in all of its largest ever Eva sign.
Signed during the quarter and record contributions from our construction and water verticals to our overall EBITDA performance.
I will now turn the call over to Debbie to take you through our quarterly financial performance and guidance for the year I will then come back to update you on our strategic growth initiatives.
Thanks, Andrew.
Overall market conditions and the underlying momentum of the business remain similar to the last few quarters.
Our financial performance in the third quarter was strong, particularly from our EMEA cohort, where incremental true up and upfront revenue from a handful of large customers drove upside.
As expected the co term deal we called out in our Q1 results renewed in the third quarter with a significant uplift in deal size.
Total revenue grew 10% and 13% in constant currency <unk>.
Byproduct and constant currency auto CAD and Autocad LT revenue grew 7%.
<unk> revenue grew 20% manufacturing revenue grew 9% and then double digits, excluding variances in upfront revenue.
And <unk> revenue was down 4%.
High single digits percent, excluding variances and upfront revenue.
By region in constant currency revenue grew 19% in the Americas, 11% in EMEA and 3% in APAC, which still reflects the impact of last year's Covid Lockdown in China.
Direct revenue increased 19% and represented 38% of total revenue up three percentage points from last year benefiting from strong growth in both <unk> and the E store.
Net revenue retention rate remains within the 100% to 110% range at constant exchange rates.
The transition from upfront to annual billings for multiyear contracts is proceeding broadly as expected.
We had the second full quarter impact in our third fiscal quarter, which resulted in billings declining 11%.
Total deferred revenue increased 6% to $4 billion.
Total <unk> of $5 2 billion and current <unk> of $3 5 billion both grew 12%.
Excluding the tailwind from our largest ever EMEA total RPM growth decelerated modestly in Q3 as expected when compared to Q2, mostly due to the lower mix of multiyear contracts in fiscal 'twenty four when compared to fiscal 'twenty three.
Turning to the P&L non-GAAP gross margin remained broadly level at 93%.
GAAP and non-GAAP operating margin increased driven by revenue growth and continued cost discipline.
I'd also note that costs associated with Autodesk University has shifted from the third quarter last year to the fourth quarter. This year due to the timing of the event.
Free cash flow was $13 million in the third quarter, primarily limited by the transition from upfront to annual billings for multiyear contracts and the payment of federal taxes, we discussed earlier this year.
Turning to capital allocation, we continue to actively manage capital within our framework.
Our strategy is underpinned by disciplined and focused capital deployment through the economic cycle, we remain.
Vigilant during this period of macroeconomic uncertainty.
As you heard from Andrew we continue to invest organically and through acquisitions, and our capabilities and services and the clouds and platform services that underpin them.
We purchased approximately 500000 shares for $112 million at an average price of approximately $206 per share.
We will continue to offset dilution from our stock based compensation program.
<unk> accelerate repurchases when it makes sense to do so.
Now, let me finish with guidance.
The overall headline is that our end markets and competitive performance or at the better end of the range of possible outcomes, we modeled at the beginning of the year.
This means the business is generally trending towards the higher end of our expectations.
Incrementally FX and co terming has been slightly more of a headwind to billings than we expected.
EBITDA expansions have been slightly more of a tailwind to revenue.
Interest income has been slightly more of a tailwind to earnings per share and free cash flow.
This backdrop, we are keeping our billings guidance constant while raising our revenue earnings per share and free cash flow guidance.
Yeah.
I'd like to summarize the key factors, we've highlighted so far this year.
The comments I've made in previous quarters regarding the fiscal 2020 for EMEA cohort foreign.
Foreign exchange movements and the impact of the switch from upfront annual billings for most multiyear customers are still applicable.
We again saw some evidence of multiyear customers switching to annual contracts during the third quarter as you'd expect given the removal of the upfront discount.
We're keeping an eye on it as we enter our significant fourth quarter.
All else equal if customers switch to annual contracts it would proportionately reduce the unbilled portion of our total remaining performance obligations and negatively impact total RPM growth rates.
Deferred revenue billings current remaining performance obligations revenue margins and free cash flow would remain broadly unchanged.
Annual renewals create more opportunities for us to drive adoption and upsell and without the price lock embedded in multiyear contracts.
Putting that altogether, we now expect fiscal 'twenty for revenue to be between $5 45, and $5 47 billion.
We expect non-GAAP operating margin to be similar to fiscal <unk> levels with constant currency margin improvement offset by FX headwinds.
We expect free cash flow to be between one two and $1 6 billion.
To reflect higher revenue guidance, we're increasing the guidance range for non-GAAP earnings per share to be between $7 43, and $7 49.
Our billings guidance remains unchanged given incremental foreign exchange headwinds and the potential for further EBITDA co terming in the fourth quarter.
The slide deck on our website has more details on modeling assumptions for Q4 and full year fiscal 'twenty four.
We continue to manage our business using a rule of 40 framework with the goal of reaching 45% or more over time.
We think this balance between compounding growth and strong free cash flow margins captured in the rule of 40 framework is the hallmark of the most valuable companies in the world and we intend to remain one of them.
As we've been saying all year, the path to 45% will not be linear.
We've talked about all of the factors behind that over the last three quarters and I think it's useful to put them all in one place here, particularly as we look into fiscal 'twenty five 'twenty six.
First the macroeconomic drag on new subscriber growth.
A smaller EMEA renewal cohort with less upfront revenue mix and the absence of EPA true up payments are headwinds to revenue growth in fiscal 'twenty five.
Slightly offsetting that we expect our new transaction model, which Andrew discussed earlier to be a tailwind to revenue growth in fiscal 'twenty five and beyond.
Assuming no material change in the macroeconomic geopolitical or policy environment, we'd expect fiscal 'twenty five revenue growth to be about 9% or more in other words at least around the same or more growth as we are now expecting in fiscal 'twenty four.
And second the transition to annual billings means that about $200 million of free cash flow in Q1 fiscal 'twenty for the came from multiyear contracts build upfront will not recur in fiscal 'twenty five.
This will reduce reported free cash flow growth in fiscal 'twenty, five and make underlying comparisons between the two years harder.
If you adjust fiscal 'twenty four free cash flow down by $200 million to make it more comparable with fiscal 'twenty five in fiscal 'twenty six on an underlying basis.
The stacking of multiyear contracts billed annually, while mechanically generate significant free cash flow growth in fiscal 'twenty five in fiscal 'twenty.
The progression from the adjusted fiscal 'twenty four free cash flow base will be a bit more linear although fiscal 'twenty six free cash flow growth is expected to be faster in fiscal 'twenty five as our largest renewal cohort converts to annual billings in that year.
As you build your fiscal 'twenty, five quarterly and full year estimates please pay attention to what we've said each quarter during fiscal 'twenty four.
As Andrew said, our new transaction model will likely provide a tailwind to revenue growth be broadly neutral to operating profit and free cash flow dollars and be a headwind to operating margin percent the.
The magnitude of each will be dependent on the speed of deployment.
Excluding any impact from the new transaction model, we are planning for operating margin improvement in fiscal 'twenty five.
Overall, we expect first half second half free cash flow linearity in fiscal 'twenty five to be more normal than in fiscal 'twenty four.
And we still anticipate fiscal 'twenty four will be the free cash flow trough during our transition from upfront to annual billings for multiyear contracts.
Per usual, we will give fiscal 'twenty five guidance when we report fiscal 'twenty four results. So I don't intend to parse these comments before then.
As I said at our Investor Day last March the new normal is that there is no normal <unk>.
Macroeconomic uncertainty is being compounded by geopolitical policy health and climate uncertainty.
I'm thinking here of generational movements and monetary policy fiscal policy inflation exchange rates politics, geopolitical tension supply chains extreme weather events and of course the pandemic.
These increase the number of factors outside of our control and the range of possible outcomes, which makes the operating environment harder to navigate both for autodesk and its customers.
In this context, the mechanical rebuilding of our free cash flow as we transition to annual billings for multi year contracts gives other desks and enviable source of visibility uncertainty.
I Hope this gives you a better understanding of why we've consistently said that the path to 45% will not be linear.
But let me also reiterate this we're managing the business to this metric and feel it strikes the right balance between driving topline growth and delivering disciplined profit and cash flow growth.
We intend to make meaningful steps over time toward achieving our 45% or more goal regardless of the macroeconomic backdrop.
Andrew back to you.
Thank you Debbie let me finish by updating you on our progress in the third quarter. We continue to see good momentum in AUC, particularly in transportation water infrastructure and construction fueled by customers consolidating our solutions to connect and optimize previously siloed workloads to the cloud.
Market conditions remained similar to previous quarters.
In Q3, WSB, one of the world's leading professional services firms closed at six EBITDA with Autodesk, a testament to our strong and enduring partnerships.
Leveraging the breadth of our portfolio WSB has delivered a comprehensive range of services demanded by its clients generate millions of dollars in pipeline across the AUC and manufacturing industries.
<unk> bridge and groundwork contracts through automation capabilities reduce cost through increased efficiency and most importantly delivered impactful results for its customers.
Tusa, our global engineering, and consulting firm, which support all types of infrastructure is harnessing rguest solutions defaults or its sustainable development goals around clean water and sanitation industry innovation infrastructure and responsible consumption and production utilizing autodesk Bim collaborate pro pizza.
<unk> plans to improve team collaboration through easier data exchange fewer crashes and more effective design reviews.
All of these solutions are empowering keeps it a manage coordinate and execute projects more efficiently, thus contributing to a better quality of life through improved infrastructure.
We are seeing growing customer interest in our complete end to end construction solution, which encompass design preconstruction and field execution through handover into operations Encouragingly artist construction cloud meus were again up well over 100% in the quarter.
In Q3, <unk>, Inc, and <unk>, our top 200 general contractor based in Ohio selected Autodesk construction cloud over directly competitive offerings as its end to end construction platform with our pre construction and cost capabilities that standout differentiators and ultimately chose <unk> based on our level.
Partnership are aligned vision and commitment to serve the annul the evolving needs of the construction industry and the momentum our solution as demonstrated in the marketplace.
Again these stories have a common theme managing people processes and data across the project lifecycle to increase efficiency and sustainability, while decreasing risk.
Over time, we expect the majority of all projects to be managed this way and we remained focused on enabling that transition through our industry clouds.
Moving on to manufacturing.
We made excellent progress on our strategic initiatives customers continue to invest in their digital transformations and to consolidate on our design and make platform to grow their business and make it more resilient for example, a global industrial company based in the U S is partnering with Autodesk to innovate more rapidly in this business.
The customer had already standardized on artist obtaining a streamlined its data and process manage it within their molding technology solution and modernize its cam process by adopting fusion to significantly reduce programming time and eliminate risks from legacy software.
During Q3, it renewed its EPA with Autodesk and plans to broaden its use of upstream volt infusion. It is exploring fusion's ability to enhance process management and its digital thread initiatives, which focus on product lifecycle management closed loop quality sustainability design service lifecycle management and.
Higher insight.
Fusion continues to provide an easy on ramp into our cloud ecosystem for existing and new customers for example.
<unk> manufacture for the agriculture industry is migrating from network licenses to named users and complementing those subscriptions with flex tokens to maximize value and access for occasional users at the Digitizes factories and create digital twins for its global facilities.
We'll use flex to explore autodesk, most advanced technology fusion for camp tool automation in generative design.
<unk> provides the customer with the flexibility to scale its usage based on its knees.
Sure its users have access to the right product at the right time.
Fusion continues to grow strongly ending the quarter with 241000 subscribers as more customers connect more workloads in the cloud to drive efficiency sustainability and resilience in automotive we continue to grow our footprint beyond the design studio in the manufacturing and connected factories in Q3, a leading automotive.
Manufacture a renewed and expanded EBITDA by more than 50%. In addition to its existing usage of alias for concept design modeling and design evaluation the customer, it's replacing an internal tool with DRAM for lighting simulation in the future. It will implement flow production tracking to improve and accelerate project communicate.
<unk> and collaboration across departments and expand its use of Autodesk integrated factory modeling to optimize factory layouts and enhanced operational performance.
In education, we are preparing future engineers to drive innovation through next generation design analysis and manufacturing solutions for.
For example, our partnership with Penn State is making a positive impact in design classes and camp CMC activities across the Pan State Barron's FERC Harrisburg in University Park campuses PSU Harrisburg has recently adopted fusion in this core design class implant the integrated into its mechanical engineering curriculum.
Futures acceptable platform, allowing students to seamlessly transition from cash to CAE and cam, enabling them to make a difference outside the classroom and in industrial applications.
I've already collaborate with NASA on a generative design projects for spaceflight application inspiring numerous projects that naphtha.
Finally, we continue with our customers to ensure they are using the latest and most secure versions of our software.
We traded construction company in Japan thought to streamline software management processes and minimize compliance risks by leveraging single finite SFO and directly sync features available in our premium plan.
Through a collaborative analysis of the client software usage logs, we identified instances of Noncompliant usage and recommended an appropriate number of subscriptions based on usage frequency and actual requirements. This proactive approach to ensure that the clients have the necessary access to meet their needs while maintaining compliance.
We have been laying the foundation to build enterprise level AI for years with connected data teams in workflows and industry clouds real time, and immersive experiences shared extensible and trusted platform services and innovative business models and trusted partnerships.
<unk> remains relentlessly curious, where the propensity and desire to evolve and innovate.
We are building the future with focused purpose and optimism operator, we would now like to open the call up for questions.
Okay.
As a reminder to ask a question you will need to press star one one on your telephone to remove yourself from the question queue. You May Press Star one one again, please standby, while we compile the Q&A roster.
Our first question.
Comes from the line of socket Kalia Barclays.
Yes.
Great Hey, guys. Thanks for taking my questions here how are you.
Great. Thank you.
Andrew maybe maybe for you.
Lots to talk about here right, particularly with with the new transaction model.
Maybe the right first question here would be.
Why is this new model I guess that's consequential.
As you said in your prepared remarks any color there you can add.
Yes, absolutely, let me start by saying.
First the business is super resilient when we're built for resilience and this is really showing up in these results. This round as well and that's going to continue into the future. When we talk about this new transaction model I think it's important to back up and talk about what we're trying to do with our customers and the journey we've been on.
We are we are trying to do no less and move all of our customers to cloud based lifecycle solutions powered by AI connect their design and make processes.
Way that they've never had connected before not to do that you absolutely cannot use 40 year old systems and business models. So we've been on this relentless journey to modernize the company, we started moving from developing cloud based products to subscription model to.
Billings are in <unk>.
<unk> seen journey after journey here to modernize the company. This is the next step and one of the most important steps in modernizing the company. So that we have the kind of relationship with our customers that actually matches the kind of technology, we're delivering to them.
Through this we're not only going to have direct engage with our customers through the products. They are using the cloud we're going to have direct engagements with them as a customer as an account we're going to understand them.
<unk> level and as a as an entity not just as a collection of transactions pass through several tiers and that's really important because that will not only give us more information about our customers. It will help us give more information to our partners about our customers and understand them significantly better and it will wrap up the whole solution and business model.
<unk> capabilities in one package. The other really consequential thing here is our partner network has to move from transaction focused partners to solution focused partners. They are going to be incredibly important on the frontline and helping our customers deploy and integrate new designed to make solutions.
In the cloud and this is going to be part of that transition for them. So yes. It is.
Is very consequential and it's part and parcel of a long string of modernization, we've been working on for a while and I do think it's very significant.
Got it no absolutely it sounds very strategic Debbie maybe for my follow up for you.
Yes.
Hi.
I know you said you wouldn't parse out your comments on fiscal 'twenty five but.
Could we maybe parse out those comments for fiscal 'twenty five just a bit.
Some of the moving parts sorry to ask but.
Our R&D a lot of moving parts.
So thanks for the question I know that's the question that everyone wants to ask.
Im not going to parse all the details, but I will just highlight some of the things that we called out in the opening commentary.
Things are the non recurrence of EMEA upfront in true up revenue.
<unk>.
And the macro drag on new subscriber growth. These are all things that are headwinds to revenue growth next year.
We also talked about the impact depending on the timing of this move to a new transaction model, that's going to be a tailwind to revenue it will be margin and cash flow dollar neutral and as a headwind to margin percent.
We will give you all the details on this in February per the usual, but remember what we're really trying to do is set ourselves up for success over the long term.
It makes a lot of sense, thanks, guys I'll get back in queue.
Thank you.
Please standby for our next question.
Our next question comes from the line of Jay really shower umbrella securities.
Thank you good evening.
So on fiscal 'twenty five following up on <unk> question.
At the analyst meeting earlier this year Debbie you showed a chart depicting.
Sustainable double digit growth for Autodesk.
10% to 15% based on a combination of various price and volume.
Components.
Are you still adhering to that plethora of price.
Price and volume sources of growth or have you changed your thinking.
In terms of the magnitude or mix of those sources of growth overtime.
We are still targeting those sources of growth J as well as targeting the growth parameters of 10 to 15 points of revenue growth really what we're dealing with is this uncertain environment and based on what we know today and assuming that market conditions are similar to what we've seen over the last several quarters, we do see revenue growth next year.
About 9% or more.
What's driving that is really all those puts and takes that I talked about in the opening commentary, it's really important to remember that what we're trying to do is set ourselves up for success over the long term.
Okay.
Andrew for you following up on <unk> last week, there were a number of quite interesting and useful sessions on.
Roadmaps and product plans, particularly on AUC.
And more broadly with regard to the data model. So let me ask you.
Avoidable complex question about that so when you sorry, when you think about.
The role would you call granular data.
Does that ultimately affect as you implement that.
The packaging or composition or consumption of the software.
And.
You also gave quite detailed description of where youre going with ACC and build an AUC generally, but there was no timeline in any of those presentations.
So how are you thinking about.
The GAA of much of what you talked about last week and are you in terms of making.
Making commercial.
The very large set of new technologies and features particularly for AUC.
Yes, Okay. So let me, let me tackle that with the <unk>.
First thing around the granular data. So ultimately as you journey down this path what does happen is the way the product operates the all the products.
Former in particular in terms of how it interacts with rabbit and ultimately how those two blend together they do become an environment that looks very much like the fusion environment and that environment is very different as you know than what it currently exist in most in most of the wipes may.
Extreme usage of our agency products. So yes granular data ultimately leads to a different way that people consume and use the products in a different paradigm for which they actually engaged with the product everyday.
That's clear okay timeline.
I don't know exactly which presentation you were in I suspect given your questions you were in the more longer term timeline presentation. So a lot of stuff you saw there was over a two to five year timeframe, but a lot of that is going to show up in the two to three year timeframe.
<unk> with some of the things you heard and I think it's kind of obvious to tell which ones were towards the earlier part of that spectrum, rather to the later part of that spectrum.
Turning to some of these solutions over to infrastructure solutions and combining them with some of our infrastructure stuff probably towards the later end.
Getting the data more granular.
Detailed design and conceptual design informa, probably much more closer that kind of that kind of expectation you can help with those roadmaps.
Okay, great. Thank you both.
Yeah.
Thank you.
Our next question.
Comes from the line.
Adam Borg of Stifel.
Awesome. Thanks, so much for taking the question.
For Debbie just on the multi year to annual billings transition, maybe just if you could just remind us kind of where we are overall in the process relative to expectations and I do know that there are still some smaller cohorts that have yet to transition and just curious kind of where we are for those and that's going to take.
Take place next year or is that still kind of in process.
Yeah.
Sure. Thanks, the rollout is going well, we're a couple of quarters in the systems are working customers and partners are behaving pretty much as we expected. So overall the performance is in line with our expectations.
I think the key thing is remember we're kind of at the beginning of this journey. This is going to be a three year journey. So we're gonna have a mechanical rebuild and free cash flow as we get into next year in fiscal 'twenty five and also in fiscal 'twenty six so some of the comments that I made on the call are important and that is helping helping you think about how to normalize.
Fiscal 2000 and for cash flow headed into fiscal 'twenty five.
So removing that 200 million at the beginning of fiscal 'twenty four as we head into fiscal 'twenty five and then broadly the fact that well have bigger cohorts coming up for renewal in fiscal 'twenty with stripes.
Faster growth in free cash flow in that period. So overall things are going going well and we're at this interesting point, where we expect to see mechanical rebuilding our free cash flow from here.
Got it and maybe just a quick question interesting AI announcements with Autodesk AI back at Au last week.
The commentary of how to think about any price uplift from out from those solutions. Thanks again.
Yeah, So I'll take I'll take that one Adam.
Some of these features are already and will be delivered through our existing products.
However, there are new models will be exploring with some of these capabilities. Obviously, it's a little too early to talk about actual monetization, but I do think some of the things you're seeing with Microsoft right now are quite interesting where higher.
Highly highly evolved large models, which we have not yet deployed out in the market.
Our offered up to individual customers as a here's your model now you're training your customer training and extend it with your data those kind of models are going to be very interesting in the future and really looked like possibilities that will probably explore and look at as we move forward, but for now a lot of this functionality is going to end up integrated with the <unk>.
Listing products as it has been for the last several years.
Great. Thanks again.
Yes.
Thank you.
Our next question.
It comes from the line of Joe rank up Baird.
Okay great.
Great Hi, everyone, maybe just to follow up on that last question.
Andrew or like you said AI and automation of Autodesk.
Autodesk, but.
I did think that the messaging was maybe a little more exact than pointed just as it pertains to the cloud data strategy and how does that really is the gateway future AI capability is that auto does.
Customers need to be thinking about that so.
Question is just curious to hear any feedback from customers on.
This approach and maybe levels of resistance or buy and you started the year just pertaining the customers kind of pooling their data and autodesk ends up being the aggregator.
Industry information.
Yes. So look we have a very strong point of view on ethical and high trust use of data and we intend to continue to pursue that with our customers and take a broad and strong stance around.
If your data we're going to work with you to use it appropriately for things that make the whole ecosystem better we're going to do it in a way that is trusted and we're also going to work with you in a way that allows you to preserve the IP that you think is important to you, but does not become part of the entire ecosystem. So this is a conversation I had with many many customers.
<unk>, most obviously record recognize the tradeoff between massive amounts of productivity in terms of automating model creation and some of the benefits. There. So they want to participate in ways that actually makes sense for them and maintain the trust and integrity that we're looking to do so look for us to handle that and exactly that manner as we move forward.
Yes.
Okay great.
And then I'm going to take my best shot at FY 'twenty five question as well, but.
I think.
Maybe two points of clarification or additional information so Debbie just on kind of the.
Known headwind to free cash flow next year because of the long term deferred that's happened to hit them. This year.
Can you reconcile that with the normal seasonality comment should we be removing that and then thinking about modeling normal seasonality part a and part b.
You've talked about currency a lot of us having impacts on some of these numbers and I would imagine just given what's on the balance sheet you probably have a good sense of what currency will be in next year, how does currency factor into that 9% plus revenue growth rate you provided.
Sure. Thanks, Joe So on the first question.
I think youre thinking about it in a reasonable way so take out the $200 million and then it should have a more reasonable.
That will give you more reasonable modeling expectations as you think about modeling fiscal 'twenty five and beyond.
And then on currency gosh, it's really been all over the place I think everybody has been saying that what we see right now is that it would be a headwind for us as we head into next year, but given the volatility I think it really could go either way, but based on what we're seeing right now it is a headwind to revenue growth next year.
Okay. Thank you very much.
Thank you.
Our next question.
Comes from the line of Tyler Radke of Citi.
Please go ahead Tyler.
Yeah.
Okay, great. Thanks for taking the question here.
You talked about some record contribution from the construction.
Out of the business I think broadly, but also within the <unk> could you elaborate.
Autodesk construction cloud what are the strongest areas youre seeing customers adopt.
No. What's interesting is we're not seeing the softness in construction that others may have highlighted the fact, we had an incredibly strong performance.
Top end of our business. We saw strong we saw strong growth internationally and we're seeing growth in the U S and <unk>.
A lot of things are going on in the construction business right now.
As you see some sectors slowing down retail warehouse office things like that Youre seeing other things offsetting it again, the dynamicism of auditor business manufacturing industrial losses.
Factory construction going on data centers health care infrastructure. All of these things are picking up so we've got a lot of dynamics that are playing well with regards to our construction business right now when we look at the business.
Look at the indicators that we have bid board activity was at record highs again. So we saw good strong bid activity there well construction backlog may have declined a bit.
It is still hot alright, and the number one thing that I heard from general contractors that Autodesk University was I still can't hire enough. So can't hire enough. So there is still going to be working through that backlog at a relatively slow slow pace also what's really interesting is we're seeing ourselves in more.
Deals down market now more competitive deals frankly, we're winning some of them and I think thats interesting I think that probably results in slowing down deals for some of our competitors.
In various markets, but we're actually seeing a lot more interesting to you bought Henry.
Okay.
That's helpful.
And a follow up for that.
It would be.
Appreciate you getting a lot of questions on on FY 'twenty five.
I'm not going to ask you to dissect it further but if I think about just trying to bridge.
The 9%, which seems like it does have some some tailwind from.
The transactional changes.
Relative to that 10% to 15% framework that you gave.
It doesn't seem like macro his worsened.
Relative to a few quarters ago or a year ago. When you gave that out based on your commentary just help us understand that bridge is it is it mostly conservatism or or maybe currency or some of the other headwinds there are larger than we're thinking about thank you.
Yeah sure. So remember you got to be thinking about the non recurrence of the EPA upfront in true up revenue that we've been talking about all year.
FX as I, just mentioned could be a factor right now, whereas we're assuming that it is a headwind to revenue growth.
And then finally, we have been talking about the macro drag on new subscriber growth all year and remember given the ratable revenue recognition model that we have what we're seeing with new subscriber growth. This year has more of an implication for revenue growth next year for revenue today.
Those three factors are the biggest factors driving.
Our estimate of 9% or more as we head into next year.
Okay. Thank you.
Okay.
Thank you.
Our next question.
Comes from the line of Jason <unk> of Keybanc capital markets.
Great. Thanks for taking my questions here, maybe one on the E D A's so.
So in Q3 did.
Did you see any of these renewals maybe happened earlier than expected.
Overall, it sounds like you're still seeing some timing true ups, but also some pretty big expansion.
Overarching takeaway that the cohorts expanding maybe better than what you had anticipated.
Thanks, Jason.
The EMEA cohort has been performing really well all year, which is which has been great and remember this is a cohort that last renewed in late 2020 that was at the height of the pandemic and back then they made more conservative assumptions about usage because of the uncertain environment at that time fast forward to today these customer.
We are continuing to manage through a high demand for projects, that's led to higher overall usage on their contracts.
And as we've mentioned before we do monitor the usage. So we've had insight into the potential EBITDA upside as the year has progressed, we've continued to update our outlook, which is each quarter of the renewals and the Trups and as we look ahead to Q4, we've got our eye on the remainder of this large EMEA cohort and the signs continue to be strong with <unk>.
And all of this into our latest estimates.
And that's what drove the top line upgrade that we communicated today.
Okay.
Great and then I asked this question last quarter, but it sounds like that your competitors might be starting to see some of the water infrastructure funding starts to flow.
Unintended this time.
Are you seeing this too and then is this the strength you're already seeing or could this be an additional opportunity for for maybe next.
Sure.
Yes, Jason.
One of the things that you may have heard is that some of that money from the infrastructure Bill. It was targeting modernization of departments of transportation was released about $34 million.
That's significant in that not only it starts.
<unk> on their process of modernization and evaluating their monetization, but it also was directed at several dot's that we have relationships with and where we would actually displace competitors are engaged with deeply so that's pretty exciting stuff that shows money starting to flow to the project and I've always said it takes time to release.
This money from the flood gates of Washington into the into the places Floodgate of Washington, that's kind of an oxymoron.
Comment but.
It's it takes time to get there and that debt.
This money is going to kind of.
Again buildup momentum for the rest of the projects and help us move forward. So I would say it continues to be an emerging opportunity projects are getting started but there is more hope in the future for even more project.
Okay, great. Thank you.
Yes.
Thank you.
Our next question.
Come from the line of Michael Funk of Bank of America.
Yes. Thank you for thanks for the questions two if I could so FERC first for you Andrew a number of changes with partner relationships and last year, you mentioned, the new transaction model.
I think earlier you also changed the commission structure to more back end versus front end loaded.
So curious what kind of reaction you're hearing from your partners and how you expect these changes to impact that relationship.
Yes, so obviously, we invest in lot and bringing our partners along on this that doesn't mean all partners are going to be happy with these changes okay.
That that is not an outcome that were looking for or is likely but many partners are going to be happy with these changes because we've been very clear about what the path is to growth for them beyond that we've taken a really kind of incremental approach to these things with our partners, we kind of let them along.
Showed them the way you might recall, we started the new transaction model with flex or close to about a year and a half ago in Australia, and we rolled it out to the broad based.
Partner network and everybody got experience with it now now we're testing in Australia again, we take our partners along on these journeys and very deliberate way and frankly, the credibility we have with our partners in terms of making their business is more consequential and significant and frankly larger over time.
Is really creating an environment, where there's a lot of trust and Theres a lot of discussion about what this means for them and where it's going to take their business and this will make the partners ultimately more consequential and some of the business discussions with their partners with their customers by bringing them closer to the design and make infrastructure work that needs to happen to the services and support that.
Perfect. Thank you Andrew and one for you Debbie raw sanity check on on the accounting of the map.
<unk> E B a revenue.
Nonrecurring.
<unk> 25, a few times so two pieces first accounting.
Talk that the true ups, sorry, with upsides in EMEA I thought that was recognized ratably over the term of the contract just trying to think how bad.
Mike Carryover impact 25, if I'm correct them on accounting and then second if you can just remind me on the actual benefit to fiscal year 'twenty four from various items. So we can pull that out of the fiscal year 25 number.
Sure so from an accounting standpoint, the true ups, we recognize upfront so think of it as an enterprise customer signs up for X number of tokens and when they exceed X number of tokens, we build them for the differential and we recognize that revenue upfront and it doesn't recur and fewer.
<unk> periods unless over the next three year contract term they utilize more than the tokens allotted in their contract again. So that's why it's something that is sort of a one off.
Good one to ask but a one off nonetheless that could only recur three years from now for these contracts. If we found ourselves in the same situation and then in terms of sizing the benefits in fiscal 'twenty four we haven't gotten them.
Into into exact numbers, but you can think about the overall guidance upgrade that we talked about today is largely being driven by the strength that we're seeing from the enterprise business. This year.
Great. Thank you both.
Thank you.
Our next question comes from the line of Matt Hedberg of RBC.
Great. Thanks for taking my questions I guess for either of you maybe thinking longer term I'm curious if you could help us with maybe just moved from Contra revenue what is the impact of sort of like pro forma revenue growth once the business is.
Great and more so to the flex model.
Matt it's going to be.
Revenue growth will accelerate.
And the pace at which it accelerates is going to be determined based on how we go about the rollout and as we mentioned we're working on that now we launched flex last year, We just launched Australia. We're learning from Australia. As we are right now and then as we look ahead to next year, we intend to go global with us, but we need to make sure.
We are set up for success, which is why we're watching Australia closely but when we execute finally on all aspects of this transition it will be an accelerator to revenue growth.
Got it. Thank you and then I know last quarter you saw some pretty good noncompliant conversions I don't think you mentioned in the Ocean where call Youre talking about that was there any this quarter.
That you'd call out.
We continue to perform well with our Noncompliant conversions I think you've heard us talk about a couple of things I think historically, we have talked about some of the larger deals that we've closed and those types of deals are still happening.
But as I recall on last quarter's earnings call Andrew was talking about some of the stuff that we've been doing in product.
Driving more conversion that's on a smaller scale in terms of deal sizes, but it is driving significant volume for autodesk. So over time youre going to see us continue to flex different means of driving more compliance from noncompliant users and it continues to be a steady drumbeat.
Contributor to our revenue growth over time.
Got it thanks.
Yes.
Thank you.
Our next question.
It comes from the line of Bobbin Shah of Deutsche Bank. Please go ahead Bob.
Great. Thanks for taking my questions just kind of following up on that last one on the new transaction model like what kind of learnings are you looking to see from Australia for a kind of rolling out more broadly and kind of any disruption that we should think about from a corporate perspective.
Yeah.
Well one of the things that we're trying to make sure that we see as part of the partners lineup their deal so that theyre able to enter them into the into the system and make sure. They get there they get their pipeline lined up with the new way of doing things because they are going after directly enter them into the system. Some of these services used to be taken over by.
Boris I mean by distributors for some of our or our partners, we're going to make sure that we want to make sure that large volumes work well with the systems, we're pretty confident at this point because of the flex experienced but we know we want to stress test. The thing we want to make sure that it works for all of all the product offerings that theres no issues or hiccups with particular thing that when people try to.
True up.
Renewal dates or line them up there's not issues with those things. It's all the things that go into the mechanics of our partner entering the deal alright, and having those things actually function. We just wanted to make sure. It all works again, we have a lot of confidence because of the flex work, but those are the things we're going to be testing for.
In the Australia pilot.
That's helpful. There and just kind of following up on fusion 360, I know you guys are making some pricing adjustments coming into next year kind of raising the list price on fusion 360, but kind of rationalizing and lowering the price on the extensions.
What's the kind of the rationale behind this is to drive kind of further extension adoption down the road and kind of how does this inform your views on as you think about rolling this out to the.
For them.
And the like Devon, Yes.
Yeah, So Bob of what we're doing there the price increase infusion is directly connected to the value we're delivering infusion, we're making sure some of the customers who've been with us for a long time are treated appropriately and fairly so we're paying attention to all of us and the customer dynamics, but what we saw is that the value of the value of any base.
<unk> increased two high level that we should be looking at the price more carefully designed to continue to increase and what we.
What we saw is that some of the extensions would probably see better adoption. If some of the debates about what the value was shifted to the based offering and the.
The price of the extensions where contracts are a little bit. So it's always kind of balancing the overall cost of ownership for particular types of customers and it's appropriate time to do it.
Very helpful. Thanks for taking my questions.
Thank you.
Our next question.
It comes from the line of Steve Tusa of Jpmorgan. Your question. Please.
Hey, guys. Thanks for taking my question.
Just on the.
Subscriber growth.
Are we talking like you mentioned the macro impact several times or what are we kind of talking about what kind of rate. This year is that like in the low to mid single digit range and then what would it take for that to go flat what kind what type of macro do you think it would take to go flat and then secondarily just on the free cash flow side.
I think at the Investor Day, you had put a chart in there that insinuated that cash would still grow from 23 through the news.
Number and 26 are we still on track for that kind of longer term view are.
Just to level set us on the longer term cash outlook.
Yeah, So Steve let me take the first question a little bit I wont answer the specific question, but I want to say is our build business is incredibly resilient and you have to really pay attention to that we're built for resilience and I want to I want to highlight some of the differences and puts and takes here for instance, you probably noticed that ADC grew 20%.
In the quarter and that offset some of the headwinds from media and entertainment due to writers strikes in astra's strikes regionally, India, and Canada, offset the U S and the UK market segment wise EPA is in small businesses offset.
The mid market.
You have to think of the business through this this dose per resilient framework and so I wanted to shift your lens, a little bit and then I'll, let Debbie comment on the second part of your question.
Yeah, I would say look outside of the new transaction model nothing has changed and we're on track to achieving our goals, but this is a pretty big decision for us to transform our go to market that I think is really beneficial to the company, it's going to drive greater free cash flow and greater revenue growth over the long term.
I'm not going to parse comments about fiscal 'twenty six in addition to fiscal 'twenty five on this call. What we're really trying to do is set ourselves up for success over the long term and make smart decisions for the business and for our shareholders.
Okay, great. Thanks, a lot.
Thank you.
That is all the time, we have for Q&A today I would now like to turn the conference back to Simon Mays Smith for closing remarks.
Thanks, everyone for joining us switching those who celebrates a happy Thanksgiving and looking forward to catching up with you on the road over the coming weeks and at next quarter's earnings. Thanks, So much low hanging back to you.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Okay.
[music].
Yes.
[music].
Yeah.
Yeah.
Yes.
Yes.
[music].
Okay.
[music].
Okay.
[music].
Yeah.
[music].
Yes.
[music].
Okay.
[music].
Yes.
Okay.
[music].
Yes.
[music].
Okay.
[music].
Okay.
[music].
Yes.
[music].
Sure.
[music].
Okay.
Yes.
Okay.
[music].
Okay.
Yes.
[music].
Sure.
Sure.
Okay.
Okay.
[music].
Okay.
Okay.
[music].
Yes.
Okay.
[music].
Sure.
Okay.
Okay.
Okay.
Okay.
Yeah.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Yes.
[music].
Right.
[music].
Sure.
[music].
Okay.
Thanks.
[music].
Okay.
[music].
Okay.
[music].
Okay.
[music].
Yes.
Okay.
Yes.
Yes.
Yes.
[music].
Thank you.
Thanks.
Yes.
[music].
Okay.
Yes.
Okay.
Yes.
Yes.
Yes.
Okay.
Okay.
Okay.
Right.
Yes.
Okay.
Okay.
Yes.
[music].
Okay.
Okay.
Thanks.
Yes.
Okay.
Yes.
Thank you.
Yes.
Okay.
Okay.
Thank you.
Okay.
Yes.
Okay.
Okay.
Okay.
Sure.
[music].
Okay.
Yes.
[music].
Okay.
Okay.
Okay.
Thanks.
Yes.
Okay.
Okay.
Yes.
[music].
Yes.
Yes.
Okay.
Okay.
Okay.
Yes.
[music].
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
[music].
Yes.
Okay.
<unk>.
Okay.
Okay.
Okay.
Yes.
Yes.
[music].
Yes.
Okay.
Okay.
[music].
Yeah.
Okay.
Okay.
Yes.
Right.
Yes.
Okay.
Okay.
Okay.
Sure.
Yeah.
Okay.
Okay.
[music].
Okay.
Okay.
Yes.
Okay.
Sure.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
[music].
Thanks.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
Okay.
Okay.
Great.
Okay.
Yes.
Okay.
Please.
Great.
[music].
Sure.
Sure.
Yes.
Okay.
Okay.
Sure.
Okay.
Okay.
Okay.
Okay.
Thank you for standing by and welcome to Autodesk third quarter fiscal year 2024 earnings Conference call. At this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone to reach.
Move yourself from the queue you May press Star one one again I would now like to hand, the call over to VP of Investor Relations Simon Mays Smith. Please go ahead.
Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss the third quarter results of Autodesk fiscal 'twenty fall on the line with me are Andrew <unk>, CEO and Debbie Clifford our CFO.
Today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available at Autodesk dotcom forward Slash investor.
Following this call you can find the earnings press release slide presentation and transcript of today's opening commentary on our Investor Relations website.
During this call we may make forward looking statements about our outlook future results and related assumptions products and product capabilities.
<unk> models and strategies.
These statements reflect our best judgment based on currently known factors.
Actual events or results could differ materially.
Please refer to our SEC filings, including our most recent Form 10-Q, and the form 8-K filed with today's press release for important risks and other factors that may cause our actual results to 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 replayed or reviewed after today. The information presented during the call may not contain current or accurate information Autodesk.
<unk> disclaims any obligation to update or revise any forward looking statements.
We will quote several numeric or growth changes during this call as we discuss our financial performance.
Unless otherwise noted each such reference represents a year on year comparison.
All non-GAAP numbers referenced in today's call are reconciled in our press release <unk> financials in the other supplemental materials are available on our Investor Relations website.
Now I will turn the call over to Andrew.
Thank you Simon and welcome everyone to the call.
Resilience discipline and opportunity again, underpinned, our strong financial and competitive performance. Despite continued macroeconomic policy and geopolitical headwinds.
Neural rates have remained strong and new business trends have been largely consistent for many quarters, our subscription business model and our product and customer diversification enable that it means that accelerating growth in Canada has balanced decelerating growth in the United Kingdom, the growing momentum in construction has been deter.
<unk> momentum in media and entertainment and that strength from our enterprise and smaller customers has balanced softness from medium sized customers.
Our leading indicators remain consistent with last quarter with growing usage record bid activity on building connected and cautious optimism from channel partners.
Disciplined and focused execution and strategic deployment of capital through the economic cycle enables the autodesk to realize the significant benefits of our strategy, while mitigating the risk of having to make expensive catch up investments later.
Steve said on Investor Day, we introduced a new transaction model for flex, which gives the autodesk a more direct relationship with its customers and more closely integrate with its channel partners. We began testing the new transaction model across our product suite in Australia, a couple of weeks ago.
Assuming the launch proceeds is expected in fiscal 'twenty five 'twenty six we intend to transition our indirect business to the new transaction model in all of our major markets globally.
In the new transaction model partners provide a quote to customers, but the actual transaction happens directly between autodesk and the customer.
The new transaction model is an important step on our path to integrate more closely with our customers workflows enabled by among other things Rguest platform services and our industry cloud fusion forma in flow.
Autodesk is customers and partners will be able to build a more valuable data driven and connected products and services in our industry clouds and on our platform.
New transaction model its consequential.
Many of you will have seen other companies adopting agency model and we're already understand the math in the near term the new transaction model resulted in a shift from contra revenue to operating cost that provide a tailwind to revenue growth, while being broadly neutral to operating profit and free cash flow dollars and mechanically result.
Percent operating margins, taking a step or two backwards over.
Over the long term optimization enabled by this transition we will provide a tailwind to revenue operating income and free cash flow dollars, even after the cost of setting up our building platform.
Finally, there is opportunity from developing next generation technologies and services to deliver end to end digital transformation of our design and make customers and enable a better world designed and made for all.
I was at Autodesk University last week alongside more than 10000 attendees, where we announced Autodesk AI technology, we have been working on and investing in for years, we showed how our desire to make platform or automate not creative work help customers analyze their data and surface insights and augment their work to.
Make them more agile and creative.
There is no AI without actionable data and that's why we're also investing in Autodesk platform services, which are accessible extensible and open via our API.
Artist platform services offer several critical capabilities with data services are the most impactful these.
These provide the tools that make data actionable.
The core of our data services is the audited data model.
Of the audited data model is the knowledge graph that gives customers access to the design make and project data in granular bite sized chunks. The data chunks are the building blocks of new automation analysis, and augmentation that will enable our customers and partners to build a more valuable data driven and connected.
Products and services.
Autodesk remains relentlessly curious propensity and desire to evolve and innovate.
Time, and again, well executed transformation from desktop to cloud for perpetual license and maintenance to subscription.
<unk> added new growth factors build a more diverse and resilient business towards broader trusted it more durable partnerships with more customers and given autodesk a longer runway of growth and free cash flow generation.
With our transformation from file to data and outcome.
Front to annual billings and from indirect to direct go to market motion. We are building, an even brighter future were focused purpose and optimism.
Our customers are also committed to transformation and Autodesk is deploying automation to increase their success in an environment with ongoing headwinds from material scarcity labor shortages and supply chain disruption that commitment was reflected in all of its largest ever Eva signed during the quarter and record contributions from our construction and water versus.
Nichols to our overall EBITDA performance.
Now I'll turn the call over to Debbie to take you through our quarterly financial performance and guidance for the year I will then come back to update you on our strategic growth initiatives.
Thanks, Andrew.
Overall market conditions and the underlying momentum of the business remains similar to the last few quarters.
Our financial performance in the third quarter was strong, particularly from our EMEA cohort, where incremental true up and upfront revenue from a handful of large customers drove upside.
As expected the co termed deal we called out in our Q1 results renewed in the third quarter with a significant uplift in deal size.
Total revenue grew 10% and 13% in constant currency.
The product in constant currency auto CAD in auto CAD LTE revenue grew 7%.
<unk> revenue grew 20% manufacturing revenue grew 9% and then double digits, excluding variances and upfront revenue.
<unk> revenue was down 4% and up high single digits percent, excluding variances and upfront revenue.
By region in constant currency revenue grew 19% in the Americas, 11% in EMEA and 3% in APAC, which still reflects the impact of last year's Covid Lockdown in China.
Direct revenue increased 19% and represented 38% of total revenue up three percentage points from last year benefiting from strong growth in both <unk> and the E store.
Net revenue retention rate remains within the 100% to 110% range at constant exchange rate.
The transition from upfront to annual billings for multiyear contracts is preceding broadly as expected.
We had the second full quarter impact in our third fiscal quarter, which resulted in billings declining 11%.
Total deferred revenue increased 6% to 4 billion.
<unk> <unk> of $5 2 billion and current <unk> of $3 5 billion both grew 12%.
Excluding the tailwind from our largest ever.
Total RPM growth decelerated modestly in Q3 as expected when compared to Q2, mostly due to the lower mix of multi year contracts in fiscal 'twenty four when compared to fiscal 'twenty three.
Turning to the P&L non-GAAP gross margin remained broadly level at 93%.
GAAP and non-GAAP operating margin increased driven by revenue growth and continued cost discipline.
I'd also note that costs associated with Autodesk University have shifted from the third quarter last year to the fourth quarter. This year due to the timing of the event.
Free cash flow was $13 million in the third quarter, primarily limited by the transition from upfront to annual billings for multi year contracts and the payment of federal taxes, we discussed earlier this year.
Turning to capital allocation, we continue to actively manage capital within our framework.
Our strategy is underpinned by disciplined and focused capital deployment through the economic cycle.
We remain vigilant during this period of macroeconomic uncertainty.
As you heard from Andrew we continue to invest organically and through acquisitions, and our capabilities and services and the clouds and platform services that underpin them.
We purchased approximately 500000 shares for $112 million at an average price of approximately $206 per share.
We will continue to offset dilution from our stock based compensation program.
Opportunistically accelerate repurchases when it makes sense to do so.
Now, let me finish with guidance.
The overall headline is that our end markets and competitive performance or at the better end of the range of possible outcomes, we modeled at the beginning of the year.
This means the business is generally trending towards the higher end of our expectations.
Incrementally FX and co terming has been slightly more of a headwind to billings than we expected.
EBITDA expansion has been slightly more of a tailwind to revenue.
And interest income has been slightly more of a tailwind to earnings per share and free cash flow.
Against this backdrop, we are keeping our billings guidance constant while raising our revenue earnings per share and free cash flow guidance.
Okay.
I'd like to summarize the key factors, we've highlighted so far this year.
The comments I've made in previous quarters regarding the fiscal 2020 for EMEA cohort.
Foreign exchange movements and the impact of the switch from upfront annual billings for most multiyear customers are still applicable.
We again saw some evidence of multiyear customers switching to annual contracts during the third quarter as you'd expect given the removal of the upfront discount.
We're keeping an eye on it as we enter our significant fourth quarter.
All else equal if customers switch to annual contracts it would proportionately reduce the unbilled portion of our total remaining performance obligations and negatively impact total RPM growth rates.
Deferred revenue billings current remaining performance obligations revenue margins and free cash flow would remain broadly unchanged.
Annual renewals create more opportunities for us to drive adoption and upsell and are without the price lock embedded in multiyear contracts.
Putting that altogether, we now expect fiscal 'twenty for revenue to be between $5 45, and $5 $47 billion.
We expect non-GAAP operating margin to be similar to fiscal <unk> levels with constant currency margin improvement offset by FX headwinds.
We expect free cash flow to be between one two and $1 $2 6 billion.
To reflect higher revenue guidance, we're increasing the guidance range for non-GAAP earnings per share to be between $7 43.
$7 49.
Our billings guidance remains unchanged given incremental foreign exchange headwinds and the potential for further EBITDA co terming in the fourth quarter.
The slide deck on our website has more details on modeling assumptions for Q4 and full year fiscal 'twenty four.
We continue to manage our business using a rule of 40 framework with a goal of reaching 45% or more over time.
We think this balance between compounding growth and strong free cash flow margins captured in the rule of 40 framework is the hallmark of the most valuable companies in the world and we intend to remain one of them.
As we've been saying all year, the path to 45% will not be linear.
We've talked about all of the factors behind that over the last three quarters and I think it's useful to put them all in one place here, particularly as we look into fiscal 'twenty five 'twenty six.
First the macro economic drag on new subscriber growth a smaller EMEA renewal cohort with less upfront revenue mix and the absence of EPA true up payments are headwinds to revenue growth in fiscal 'twenty five.
Slightly offsetting that we expect our new transaction model, which Andrew discussed earlier to be a tailwind to revenue growth in fiscal 'twenty five and beyond.
Assuming no material change in the macroeconomic geopolitical or policy environment, we'd expect fiscal 'twenty five revenue growth to be about 9% or more.
In other words at least around the same or more growth as we are now expecting in fiscal 'twenty four.
And second the transition to annual billings means that about $200 million of free cash flow in Q1 fiscal 'twenty for that came from multiyear contract build upfront will not recur in fiscal 'twenty five.
This will reduce reported free cash flow growth in fiscal 'twenty, five and make underlying comparisons between the two years harder.
If you adjust fiscal 'twenty four free cash flow down by $200 million to make it more comparable with fiscal 'twenty five in fiscal 'twenty six on an underlying basis.
The stacking of multiyear contracts billed annually, while mechanically generate significant free cash flow growth in fiscal 'twenty five in fiscal 'twenty.
The progression from the adjusted fiscal 'twenty four free cash flow base will be a bit more linear although fiscal 'twenty six free cash flow growth is expected to be faster in fiscal 'twenty five as our largest renewal cohort converts to annual billings in that year.
As you build your fiscal 'twenty, five quarterly and full year estimates please pay attention to what we've said each quarter during fiscal 'twenty for <unk>.
As Andrew said, our new transaction model will likely provide a tailwind to revenue growth to be broadly neutral to operating profit and free cash flow dollars and be a headwind to operating margin percent.
The magnitude of each will be dependent on the speed of deployment.
Excluding any impact from the new transaction model, we are planning for operating margin improvement in fiscal 'twenty five.
Overall, we expect first half second half free cash flow linearity in fiscal 'twenty five to be more normal than in fiscal 'twenty four.
And we still anticipate fiscal 'twenty four will be the free cash flow trough during our transition from upfront to annual billings for multi year contracts.
Per usual, we will give fiscal 'twenty five guidance when we report fiscal 'twenty four results. So I don't intend to parse these comments before then.
As I said at our Investor Day last March the new normal is that there is no normal.
Macroeconomic uncertainty is being compounded by geopolitical policy health and climate uncertainty.
I'm thinking here of generational movements and monetary policy fiscal policy inflation exchange rates politics, geopolitical tension supply chains extreme weather events and of course the pandemic.
These increase the number of factors outside of our control and the range of possible outcomes, which makes the operating environment harder to navigate both for autodesk and its customers.
In this context, the mechanical rebuilding of our free cash flow as we transition to annual billings for multiyear contracts gives out would ask an enviable source of visibility uncertainty.
I Hope this gives you a better understanding of why we've consistently said that the path to 45% will not be linear.
Let me also reiterate this we're managing the business to this metric and feel it strikes the right balance between driving topline growth and delivering disciplined profit and cash flow growth we.
We intend to make meaningful steps over time toward achieving our 45% or more goal regardless of the macroeconomic backdrop Andrew.
Andrew back to you.
Thank you Debbie let me finish by updating you on our progress in the third quarter. We continue to see good momentum in AUC, particularly in transportation water infrastructure and construction fueled by customers consolidating our solutions to connect and optimize previously siloed workflows to the cloud.
Market conditions remained similar to previous quarters.
In Q3 W. Asps, one of the world's leading professional services firms closed at six EBITDA with Autodesk, a testament to our strong and enduring partnership.
Leveraging the breadth of our portfolio WSI has delivered a comprehensive range of services demanded by its clients generate millions of dollars in pipeline across the AUC and manufacturing industries.
<unk> bridge and groundwork contracts through automation capabilities reduce cost through increased efficiency.
Most importantly delivered impactful results for its customers.
<unk>, a global engineering and consulting firm, which supports all types of infrastructure is hardest thing rguest solutions to bolster its sustainable development goals around clean water and sanitation industry innovation infrastructure and responsible consumption and production utilizing autodesk bim collaborate pro tips.
<unk> plans to improve team collaboration through easier data exchange fewer crashes and more effective design reviews.
<unk> solutions are empowering keeps that advantage coordinate and execute projects more efficiently, thus contributing to a better quality of life through improved infrastructure we.
We are seeing growing customer interest in our complete end to end construction solutions, which encompass design pre construction and field execution through handover into operations Encouragingly August construction cloud meus were again, well over 100% in the quarter.
In Q3, Elkhorn, Inc, and Ian our top 200 general contractor based in Ohio selected Autodesk construction cloud over directly competitive offerings as its end to end construction platform with our pre construction and cost capabilities that standout differentiators and ultimately chose <unk> based on our level of.
Partnership are aligned vision and commitment to serve the evolving needs of the construction industry and the momentum our solution as demonstrated in the marketplace.
Again these stories have a common theme managing people processes and data across the project lifecycle to increase efficiency and sustainability, while decreasing risk.
Over time, we expect the majority of all projects to be managed this way and we remain focused on enabling that transition through our industry clouds.
Moving on to manufacturing.
We made excellent progress on our strategic initiatives customers continue to invest in their digital transformations and to consolidate on our design and make platform to grow their business and make it more resilient for example, a global industrial company based in the U S is partnering with Autodesk to innovate more rapidly in this business.
The customer had already standardized on artist obtaining a streamlined its data and process manage it within their molding technology solution and modernize its cam process by adopting fusion to significantly reduce programming time and eliminate risks from legacy software.
During Q3, it renewed its EPA with Autodesk and plans to broaden its use of obtain vault infusion. It is exploring fusion's ability to enhanced process management and its digital thread initiatives, which focus on product lifecycle management closed loop quality sustainability design service lifecycle management and.
Prior insight.
Fusion continues to provide an easy on ramp into our cloud ecosystem for existing and new customers for example.
<unk> manufacture for the agriculture industry is migrating from network licenses to named users and complementing those subscriptions were flex tokens to maximize value and access for occasional users at the digitizes factories and create digital twins for its global facilities.
We'll use flex to explore autodesk, most advanced technology fusion for camp tool cap automation in generative design.
<unk> provides the customer with the flexibility to scale its usage based on needs.
Sure its users have access to the right product the right time.
Fusion continues to grow strongly ending the quarter with 241000 subscribers as more customers connect more workloads in the cloud to drive efficiency sustainability and resilience in automotive we continue to grow our footprint beyond the design studio in the manufacturing and connected factories in Q3, a leading automotive.
Manufacture a renewed and expanded EBITDA by more than 50%. In addition to its existing usage of alias for concept design modeling and design evaluation the customer, it's replacing an internal tool with viera for lighting simulation.
In the future it will implement flow production tracking to improve and accelerate project communication and collaboration across departments and expand its use of Autodesk integrated factory modeling to optimize factory layout and enhanced operational performance and.
In education, we are preparing future engineers to drive innovation through next generation design analysis and manufacturing solution.
For example, our partnership with Penn State is making a positive impact in design classes and camp CMC activities across the Pan States Barron's FERC Harrisburg in University Park campuses plc.
PSU Harrisburg has recently adopted fusion in its core design cloth and plan to integrated into its mechanical engineering curriculum fusion.
Could you just accessible platform, allowing students to seamlessly transition from cash to CAE and cam, enabling them to make a difference outside the classroom and in industrial applications. They are already collaborating with NASA on a generative design project for spaceflight application.
Hiring numerous projects that naphtha and finally, we continue with our customers to ensure they are using the latest and most secure versions of our software a publicly traded construction company in Japan thought to streamline software management processes and minimize compliance risks by leveraging single finite SFO and directly sync fee.
<unk> available in our premium plan through a collaborative analysis of the client software usage logs, we identified instances of Noncompliant usage and recommended an appropriate number of subscriptions based on usage frequency and actual requirements. This proactive approach ensure that the clients have the necessary access to meet their needs while maintaining.
Clients.
We have been laying the foundation to build enterprise level AI for years with connected data teams in workflows and industry clouds real time, and immersive experiences shared extensible and trusted platform services and innovative business models and trusted partnerships.
Autodesk remains relentlessly curious with a propensity and desire to evolve and innovate.
We are building the future with focused purpose and optimism operator, we would now like to open the call up for questions.
Okay.
Thank you as a reminder to ask a question you will need to press star one one on your telephone to remove yourself from the question queue. You May Press Star one one again, please standby, while we compile the Q&A roster.
Our first question.
It comes from the line of <unk> Kalia of Barclays.
Okay, Great Hey, guys. Thanks for taking my questions here how are you.
Great. Thank you.
Andrew maybe maybe for you.
Lots to talk about here right, particularly with with the new transaction model maybe.
Maybe maybe the right first question here would be what why is this new model I guess, that's consequential as you said in your prepared remarks any color there you can add.
Absolutely let me.
It starts by saying.
Firstly on the business is Super resilient, we're built for resilience and this is really showing up in these results this round as well.
We're going to continue into the future when we talk about this new transaction model I think it's important to back up and talk about what we're trying to do with our customers and the journey. We've been on we are we are trying to do no less and move all of our customers to cloud based lifecycle solutions powered by AI connect their design and make processes.
A way to save never had connected before not to do that you absolutely cannot use 40 year old systems and business models. So we've been on this relentless journey to modernize the company. We started moving from developing cloud based products to subscription model to Andy.
<unk> billings.
<unk> seen journey after journey here to modernize the company. This is the next step and one of the most important steps in modernizing the company. So that we have the kind of relationship with our customers that actually matches the kind of technology, we're delivering to them. So through this we're not only going to have direct engage with our customers who the products there.
Using the cloud, we're going to have direct engagements with them as a customer as an account we're going to understand them at the account level and as a as an entity not just as a collection of transactions pass through several tiers and that's really important because that will not only give us more information about our customers. It will help us give more information to our.
Our partners about our customers and understand them significantly better and it will wrap up the whole solution and business model and capabilities in one package. The other really consequential thing here is our partner network has to move from transaction focused partners to solution focused partners they are going to be.
Incredibly important on the frontline and helping our customers deploy and integrate new designed to make solutions in the cloud and this is going to be part of that transition for them. So yes. It is very consequential and it's part and parcel of a long string of modernization, we've been working on for a while and I do think.
It's very significant.
Got it no absolutely it sounds very strategic Debbie maybe for my follow up for you.
Yes.
I know you said you wouldn't parse out your comments on fiscal 'twenty five but.
Could we may be parse out those comments for fiscal 'twenty five just a bit.
Some of the moving parts sorry to ask but.
Our R&D a lot of moving parts.
So thanks for the question I know that's the question that everyone wants to ask.
I'm not going to parse all the details, but I'll just highlight some of the things that we called out in the opening commentary.
Things are the non recurrence of EBITDA upfront in true up revenue.
<unk>.
And the macro drag on new subscriber growth. These are all things that are headwinds to revenue growth next year.
We also talked about the impact depending on the timing of this move to a new transaction model, that's going to be a tailwind to revenue it will be margin and cash flow dollar neutral and as a headwind to margin percent.
We will give you all the details on this in February per the usual, but remember what we're really trying to do is set ourselves up for success over the long term.
It makes a lot of sense, thanks, guys I'll get back in queue.
Thank you.
Please standby for our next question.
Our next question comes from the line of Jay really shower Umbrian Securities.
Thank you good evening.
So on fiscal 'twenty five following up on <unk> question.
At the analyst meeting earlier this year Debbie you showed a chart depicting.
Sustainable double digit growth for Autodesk.
10% to 15% based on a combination of various price and volume.
Components.
Are you still adhering to that plethora of.
Rice and volume sources of growth or have you changed your thinking.
In terms of the magnitude or mix of those sources of growth overtime.
We are still targeting those sources of growth J as well as targeting the growth parameters of 10% to 15 <unk>.
The revenue growth really what we're dealing with is this uncertain environment and based on what we know today and assuming that market conditions are similar to what we've seen over the last several quarters. We do see revenue growth next year of about 9% or more.
What's driving that is really all of those puts and takes that I talked about in the opening commentary, it's really important to remember that what we're trying to do is set ourselves up for success over the long term.
Okay.
Andrew for you following up on <unk> last week, there were a number of quite interesting and useful sessions on.
Roadmaps and product plans, particularly on AUC.
And more broadly with regard to the data model. So let me ask you.
Unavoidably complex question about that so when you <unk> sorry, when you think about the the role would you call granular data.
Does that ultimately affect as you implement that.
The packaging or composition or consumption of the software.
And.
You also gave quite detailed description of where youre going with ACC and build an AUC generally, but there was no timeline in any of those presentations.
How are you thinking about that.
The GAA of much of what you talked about last week and are you in terms of.
Making commercial.
They're very large set of new technologies and features particularly for AUC.
Yeah. Okay. So let me let me tackle that first thing around the granular data. So ultimately as you journey down this path what does happen is the way the product operates the all the products.
<unk> in particular in terms of how it interacts with rabbit and ultimately how those two blend together they do become an environment that looks very much like the fusion environment and that environment is very different as you know than what it currently exists in most in most of the whites the mainstream usage of our agency product.
So yes granular data ultimately leads to a different way that people consume and use the product and a different paradigm for which they actually engage with the product everyday.
That's clear okay timeline.
I don't know exactly which presentation urine I suspect given your questions you were in the more longer term timeline presentation. So a lot of stuff you saw there was over a two to five year timeframe, but a lot of that is going to show up in the two to three year timeframe.
Associated with some of the things you heard and I think it's kind of obvious to tell which one were towards the earlier part of that spectrum, rather to the later part of that spectrum.
Turning some of these solutions over to infrastructure solutions and combining them with some of our infrastructure so probably towards the later end.
Getting the data more granular.
Detailed design and conceptual design inform us probably much more closer that kind of that kind of expectation you can help with those roadmaps.
Okay, great. Thank you both.
Yeah.
Thank you.
Our next question.
Comes from the line.
Adam Borg of Stifel.
Awesome. Thanks, so much for taking the question.
Maybe for Debbie just on the multi year to annual billing transition maybe just if you could just remind us kind of where we are overall in the process right relative to expectations.
That there are still some smaller cohorts that have yet to transition and just curious kind of where we are for those and that's going to.
Take place next year or is that still kind of in process.
Okay.
Sure. Thanks, the rollout is going well, we're a couple of quarters in the systems are working customers and partners are behaving pretty much as we expected. So overall the performance is in line with our expectations.
I think the key thing is remember we're kind of at the beginning of this journey. This is going to be a three year journey. So we're going to have a mechanical rebuild and free cash flow as we get into next year in fiscal 'twenty five and also in fiscal 'twenty six so some of the comments that I made on the call are important and that is helping helping you think about how to normalize.
Our fiscal 2000 and for cash flow headed into fiscal 'twenty five.
Removing that 200 million at the beginning of fiscal 'twenty four as we head into fiscal 'twenty five and then broadly the fact that well have bigger cohorts coming up for renewal in fiscal 2000 and Swift strives.
Faster growth in free cash flow in that period. So overall things are going going well and we're at this interesting point, where we expect to see mechanical rebuilding our free cash flow from here.
Got it and maybe just a quick question interesting.
AI announcements with Autodesk AI back at Au lastly, any commentary on how to think about a price uplift from out from those solutions. Thanks again.
Yes, so I'll take I'll take that one Adam look some of these features are already and will be delivered through our existing products. However, there are new models will be exploring with some of these capabilities. Obviously, it's a little too early to talk about actual monetization, but I do think some of the things you're seeing with Microsoft right.
Now are quite interesting where.
Highly highly evolved large models, which we have not yet deployed out in the market.
Our offered up to individual customers as a here's your model now you're training your customer training and extend it with your data those kind of models are going to be very interesting in the future.
Looked like possibilities that will probably explore and look at as we move forward, but for now a lot of this functionality is going to end up integrated with the existing products as it has been for the last several years.
Great. Thanks again.
Yeah.
Yeah.
Thank you.
Our next question.
It comes from the line of Joe Rock Baird.
Okay.
Great Hi, everyone, maybe just to follow up on that last question.
Andrew like you said AI and automation of Autodesk.
Autodesk, but.
I did think the messaging was maybe a little more exact than pointed just as it pertains to the cloud data strategy and how that really is the gateway future AI capability is that auto does.
Customers need to be thinking about that so.
My question is just curious to hear any feedback from customers on this approach and maybe levels of resistance or buy and you have started the year just pertaining the customers kind of pooling their data and autodesk ends up being the aggregator industry information.
Yes. So look we have a very strong point of view on ethical and high trust use of data and we intend to continue to pursue that with our customers and take a broad and strong stance around us.
Your data.