Simon Mays-Smith:

Thanks, operator. And good afternoon. Thanks for joining our conference call to discuss the fourth quarter and full year fiscal 2024 results. On the line with me are Andrew Anagnost, our CEO; and Debbie Clifford, our CFO. During this call, we will make forward-looking statements including outlook and related assumptions, products and strategy. 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 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 or Excel financials and other supplemental materials available on our Investor Relations website. And now, I will turn the call over to Andrew.

Debbie Clifford:

Thanks, Andrew. Our financial performance in the fourth quarter and for the fiscal year was strong, particularly in our enterprise business. Early renewals and strong upfront revenue from enterprise business agreements or EBAs and federal governments drove some of the outperformance relative to our expectations in both Q4 billings and revenue. Overall market conditions and the underlying momentum of the business were consistent with the last few quarters. Total revenue grew 11% and 14% in constant-currency with upfront revenue driving 2 percentage points of that growth. By products in constant currency, AutoCAD and AutoCAD LT revenue grew 7%, AEC revenue grew 18%, manufacturing revenue grew 16% and M&E revenue was up 8%. AEC and manufacturing benefited from EBA true-up and upfront revenue. By region in constant currency, revenue grew 19% in the Americas, 11% in EMEA and 8% in APAC. Direct revenue increased 19% and represented 39% of total revenue, up 3 percentage points from last year, benefiting from strong growth in both EBAs and the Autodesk's store. Net revenue retention rate remained within the 100% to 110% range at constant exchange rates. Billings declined 19% in the quarter, resulting from the transition from upfront to annual billings for multiyear contracts as expected. So, slightly offset by some early renewals in North America. As part of our implementation sequencing for the new transaction model, we shifted our North American price increase from the end of March to the beginning of February. This resulted in some renewals moving from Q1 fiscal 2025 to Q4 fiscal 2024 which modestly boosted billings in January. Total deferred revenue decreased 7% to $4.3 billion and expected result of the transition from upfront to annual billings for multiyear contracts. Total RPO of $6.1 billion and current RPO of $4 billion grew 9% and 13% respectively. Early renewals drove about 1 percentage point of current RPO growth. Total RPO growth decelerated in Q4 when compared to Q3 when we closed our largest-ever EBA. The year-over-year deceleration was due to the lower mix of multiyear contracts in fiscal 2024 when compared to fiscal 2023, which I mentioned last quarter. In line with recent quarters and our expectations, we again saw some evidence of multiyear customers switching to annual contracts during the quarter. Turning to the P&L, GAAP and non-GAAP gross margin were broadly level, while operating margin was modestly lower in the fourth quarter, primarily due to the timing of Autodesk University costs shifting from Q3 to Q4, which we flagged last quarter. As expected, full-year non-GAAP operating margin was level year-over-year but up about one 1 percentage point at constant exchange rates. Fourth-quarter GAAP operating margin was up 40 basis points year-over-year and about 1 percentage point at constant exchange rates, partly due to a reduction in stock-based compensation as a percent of revenue. At current course and speed, the ratio of stock-based compensation as a percent of revenue peaks in fiscal 2024. We expect it to fall to 10% or lower over time. Free cash flow for the quarter and full year was $427 million and $1.28 billion respectively with early renewals, providing a modest tailwind in the fourth quarter. The most significant free-cash-flow headwinds from our transition from upfront to annual billings for multiyear contracts are now behind us, which means our free-cash-flow through during fiscal 2024 and will mechanically rebuild over the next few years. Turning to capital allocation. We continue to actively manage capital within our framework and deploy it with discipline and focus through the economic cycle to drive long-term shareholder value. As you heard from Andrew, we continue to invest organically and through complementary acquisitions to enhance our capabilities and the industry clouds and platform that underpin them. During the quarter, we purchased approximately 300,000 shares for $63 million at an average price of approximately $217 per share. We have now offset estimated dilution from our stock-based compensation program well into fiscal 2026. We will continue to repurchase shares opportunistically to offset dilution from stock-based compensation when it makes sense to do so. Now let me finish with guidance. Overall, end-market demand has remained pretty consistent over the last few quarters. Macroeconomic and one-off factors like the Hollywood writer strike dragged on the new business growth rate during fiscal 2024 and will modestly drag on revenue growth in fiscal 2025, but Autodesk's resilience and robust underlying demand for its products and services reinforce its long-term growth potential. Turning to revenue. I want to highlight four key puts and takes impacting growth in fiscal 2025. First, let me talk about the new transaction model. We've added some slides to the earnings deck to help illustrate how to think about this shift, which I'll briefly summarize. The new transaction model enables Autodesk to build closer, more direct relationships with its customers and partners and to better understand and serve them with more data, more self-service and greater predictability. It will be a cornerstone of the data services that Andrew talked about earlier. As you can see from Slide 11, the transition mechanically drives higher revenue and costs is broadly neutral to operating profit and free-cash-flow dollars and is a headwind to operating margin percent. About $600 million of payments made the resellers and developed markets in fiscal 2024 were accounted for as contra-revenue. As this business moves to the new transaction model, these payments will shift to marketing and sales expense over the next few years, all else equal, with the timing of cost recognition not materially different than before. The change affects a substantial majority of our business, but note that emerging markets and our federal government business will remain on the buy-sell model for the foreseeable future. The pace of the shift will primarily be determined by the mechanical build from ratable subscription revenue accounting and the rate of regional rollout of the new transaction model. While the former is relatively easy to predict given the ratable revenue recognition of our subscription business model, which fills over time, the latter will in part be determined by what we learn as we roll out the model further. We gained useful insights from the successful rollout in Australia, and we're expecting to learn more as we roll out with much higher volumes in North America this year. We will be able to apply those learnings when we launch in EMEA. Our fiscal 2025 guidance assumes the new transaction model is deployed in North America in Q2 of fiscal 2025 and provides about a 1 percentage point tailwind to Autodesk's revenue growth and a 3 points to 4 point tailwind to billings growth. Second, the acquisition of payouts, which closed on February 20th, is expected to contribute about 0.5 point of revenue growth in fiscal 2025. Third, token consumption for the fiscal 12021 EBA cohort exceeded consumption predictions made during the pandemic which resulted in true-up payments in fiscal 2024. Token consumption and the smaller post-pandemic fiscal 2022 EBA cohort is tracking more in line with predictions, which means we expect fewer true-up payments in fiscal 2025. This pandemic echo effect is about a point of headwind to fiscal 2025 revenue growth. And fourth, our rolling four-quarter foreign-exchange hedges means that FX is expected to be about a 1 percentage point headwind to reported revenue growth in fiscal 2025. Bringing this altogether, we expect revenue of between $5.99 billion and $6.09 billion in fiscal 2025, which translates into a revenue growth of about 9% to 11% compared to fiscal 2024. Adjusting the midpoint of our guidance to exclude noise from the new transaction model, acquisitions, the absence of EBA true-up revenue and FX, we expect underlying revenue to grow more than 10% in fiscal 2025. Moving on to margins. We're going to manage our non-GAAP operating margins between a range of 35% and 36% in fiscal 2025, with the goal of keeping them roughly level with fiscal 2024. This means we expect a roughly one-point underlying margin improvement will be broadly offset by the margin headwind from the new transaction model. As we transition to the new transaction model, we'll see operating margin headwinds from the accounting change of moving reseller costs from contra-revenue to sales and marketing expense. We'll also have incremental investment in people, processes and automation. But over the long-term, we expect that this transition to the new transaction model will enable us to further optimize our business, which we anticipate will provide a tailwind to revenue, operating income and free-cash-flow dollars, even after the incremental costs we expect to incur. Moving on to free cash flow, we expect to generate between $1.43 billion and $1.5 billion of free cash flow in fiscal 2025. In Australia, some channel partners accelerated renewals ahead of the transition to the new transaction model to derisk month one of the transition. Because the new transaction model will be rolled out in Q2 in North America, it may be that the behavior we saw in Australia occurs also in North America, which may accelerate billings and free cash flow to earlier quarters, but should not materially change the outlook for the year. Excluding $200 million from fiscal 2024 free cash flow from multiyear upfront billings, which are now billed annually, in fiscal 2025, we expect free cash flow growth of about 35% at the midpoint of our guidance. We expect faster free-cash-flow growth in fiscal 2026 because of the return of our largest multi-year renewal cohort, the mechanical stacking of multiyear contracts billed annually and a larger EBA cohort. As we navigate the new transaction model transition, the pace of the rollout will create noise in the P&L. So we think free cash flow is the best measure of our performance. At current course and speed, our free cash flow estimate for fiscal 2026 at the midpoint is approximately $2.05 billion, which is in line with consensus estimates. In the context of significant macroeconomic, geopolitical, policy, health and climate uncertainty, the mechanical rebuilding of our free cash flow as we transition to annual billings for multiyear contracts gives Autodesk an enviable source of visibility and certainty. We continue to manage our business using a Rule-of-40 framework with a goal of reaching 45% or more over time. We are taking significant steps toward our goal this year and next. 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. The slide deck on our website has more details on modeling assumptions for Q1 and full-year fiscal 2025. Andrew, back to you.

Operator:

[Operator Instructions] Our first question comes from the line of Saket Kalia of Barclays. Your question, please Saket.

Debbie Clifford:

Thanks, Sakit.

Saket Kalia:

Hey, guys. Andrew, maybe just to start with you, you talked a little bit more about generative AI on this call, which was great to hear. Maybe just to make sure the question is asked, can you just talk about what your sort of core engineering customers are saying about generative AI? And I'm sure it's a very long discussion, but how do you think about the value that Autodesk can provide sort of on that journey?

Saket Kalia:

Got it. That makes a lot of sense. Debbie, maybe for my follow up for you, Autodesk obviously provides a lot of value to its customers, which you're also able to capture as well. Maybe the question is, can you just talk a little about some of the recent pricing actions that have been out there? And what sort of customer behavior that might drive as a result? I think there was a little bit of difference in pricing, sort of between one year and multi-year subscriptions. How do you think about that impacting the model, if at all, going forward?

Saket Kalia:

Got it. Very helpful. Thanks, guys.

Adam Borg:

Great. And thanks much for taking the question. Maybe on the transactional model and thanks guys for all of the disclosures around it. Maybe talk a little bit more about the learnings you have from the early customer and partner feedback in Australia and even now that you have the early days of this direct relationship, anything interesting there that you're learning from your more direct relationship with customers, be it usage or adoption or expansion that you clearly didn't have before with the prior model? Thanks.

Adam Borg:

That's great. And maybe just as a quick follow up, you talked about some success with state DoT, as you think about kind of the infrastructure bill and the stimulus that continues to be deployed. Maybe just give a quick update on Innovyze and just a quick State of the Union there and the opportunity as part of the broader infrastructure push. Thanks so much.

Adam Borg:

Great. Thanks for all the details.

Jay Vleeschhouwer:

Thank you. Good afternoon. Andrew, first question concerns the transaction model and what I'd like to ask about is relating the operational and transactional and accounting systems and compensation systems that you've put in place relative to the scale of your volume. You added well over 700,000 subscriptions in fiscal 2024, more than you added in fiscal 2023. You've spoken of certain growth expectations for volume over time. So, maybe help us understand the capacity that you have in place now to support the long term volume growth expectations that you have, because undoubtedly you're looking to do substantially more subscription additions than you did in fiscal 2024.

Jay Vleeschhouwer:

Yes. Understood. Second question concerns products and technology. When we think back to the various product sessions and roadmap sessions that you talked about at AU a few months ago, what do you think are the critical executables -- product deliverables that you're aiming for, for this year either in terms of improving upon or expanding the existing products, such as Revit or other new tools?

Jay Vleeschhouwer:

Very good. Thank you Andrew. Thank you Debbie.

Operator:

Thank you. Our next question comes from the line of Joe Vruwink of Baird. Please go ahead Joe.

Debbie Clifford:

Thanks. So, we continue to target that 10% to 15% revenue growth algorithm and you're right, the midpoint for fiscal 2025 was right at that 10% coming off a year where we did 13% growth in constant currency. And really what we've said is that where we end up in that 10% to 15% range is going to be contingent upon the macroeconomic backdrop that we operate in, as well as our ability to harvest the opportunities that we have before us across AEC, manufacturing and so on. And so, the things that we're watching as we proceed through this year with that 10% midpoint are some of the things that we've been talking about for a while now. So, new business growth is really important indicator of future revenue performance for the company and we said in this last quarter that new business growth grew, but it was relatively soft, consistent with what we had seen over the previous several quarters. So, definitely being impacted by macro and that's one of the factors that's driving the 10% revenue growth midpoint in fiscal 2025, so we'll continue to watch that closely. We also watch product usage, we watch bidding activity on our BuildingConnected platform, and we stay close to our channel partners, try and understand what they're seeing in terms of their demand. So those are the things that we're going to be watching to see how this year progresses and beyond.

Debbie Clifford:

Nothing's changed Joe. So we said that we anticipate that cash flow would grow greater in fiscal 2026 than what we saw in fiscal 2025. And when you think about modeling the growth rate, just remember that you have to remove the $200 million in fiscal 2024 before we stopped selling multi-year contracts upfront.

Operator:

Thank you. Our next question comes from the line of Jason Celino of KeyBanc Capital Markets. Your line is open, Jason.

Andrew Anagnost:

Yes. All right, so since you opened up the door there, let's talk a little bit about construction in general, because I think it's important to kind of highlight what's been going on there. We had a great EBA quarter for construction. Construction saw strong growth in our largest accounts, which is really important for the long term health of construction. And at a really high level we also saw an increase in $100,000 deals and $1 million deals both in the US and internationally and that's really important. And this is where -- one of the things where Payapps comes in, right? Remember, we're going end-to-end with our solutions here from design all the way to make. And we want to make sure that we get into the preconstruction planning and other types of our customers processes. It takes 83 days for our customers to process payments in their environment that's just too long. Now, we're not getting into the transaction business. What we're doing is, we're getting into the business of helping them automate and track those payments across their entire life cycle so that they can get, quicker return, reduce that 83 days to be faster, and increase their cash flows. This has to be something we tightly integrate into our solution. So, we intend to tightly integrate this in just like we rebuilt some of the other solutions we acquired previously into what is today Autodesk Build, which is a new modern platform for doing some of these things. So we thought it was very important to own this so that we can integrate it. And then we went out there and we bought a premium asset. It's a leader. It's a global leader in payment processors. It's not a small company, it's not what we could afford, it's what we needed. And I think that's really important. So, when we look forward at construction right now, we see tools like this being critical as well as our pre-construction tools and we actually see the deal cycles maybe getting a little longer, but we're competing head-to-head a lot more. And I want to again highlight that Fortis deal out of Oregon, which was a head-to-head competitive deal with a pilot period that ended up going fully to Autodesk. So what we see right now in our business is building momentum driven by the end-to-end solution and kind of acquisitions, like Payapps as well. So, when we look forward into next year, we don't see deceleration of the business, we see acceleration.

Debbie Clifford:

Yes. So the early renewal cohort didn't have any impact to revenue really, that had more of an impact on billings than it would have on revenue. And then the strength that we saw in enterprise represented about 1 point of growth.

Operator:

Thank you. Our next question comes from the line of Tyler Radke of Citi. Please go ahead Tyler.

Andrew Anagnost:

Yes. So, as you know, last year was the full year of integrating the sales force back into the mainline sales force. We went through some of the integration efforts to do that. There were obviously some slowdowns in the business related to integration of those things. Those things are past us now, the business is fully integrated. It's starting the year off, not only fully integrated from the get-go, but with all of the processes, plans and capabilities all lined up according to how we want to grow the business heading into the year. And one of the things I wanted you to notice in my previous commentary is that, we're seeing deal activity going up. So, the pipeline is actually firming up really well and we're in more deals and some of these deals are more competitive, but we embrace that because when we're in a competitive deals, that means we're showing up in places we weren't showing up before because people are calling us in. That's a really important part of this whole entire process. People are starting to ask themselves what solution do they need for the next 10 years, 15 years versus what's available out there today. And the end-to-end capabilities we're delivering, especially leaning more heavily into our preconstruction capabilities, which lock in a lot of the cost and complexity and risk of a construction project, this is where we're leaning into this year and this is where we're going to be driving the growth. So I think we're past integration issues moving forward into pure execution at scale inside the mainline salesforce. The EBA success is a great example of that.

Debbie Clifford:

Sure. So, we typically are trying to target roughly 50-50 split of growth coming from volume and it's either price mix or margin basically, partner margin is how we think about it. So, across volume and price, again, our target is to do roughly 50-50 in fiscal 2025 that would continue to be our goal. Now there's certainly years where it's going to vacillate between one or the other and we've talked about how this past year our new business was growing slower than we would anticipate in a more normal macroeconomic environment. As we look ahead, we're hoping to get that growth coming from roughly equally across those two, volume and price. So that's how we're thinking about it.

Operator:

Thank you. Our next question comes from the line of Michael Funk of Bank of America. Your question, please, Michael?

Andrew Anagnost:

We are not seeing a decline in our growth rates because of any pressure out there associated with engineers. As a matter of fact, one of the things that's really important because we're moving into design and make processes, we have a pretty broad swath of people that we're able to touch. Also, we continue to displace competitive products, especially with Fusion in the manufacturing space. So, we're not seeing that kind of effect declining bases. We do see customers at times optimizing their installations with Autodesk to try to right size things, but not because they're downsizing their employment base.

Debbie Clifford:

So what we talked about was a point of headwind from FX, a point of headwind from the absence of EBA true-ups, half a point of tailwind from acquisitions, and a point of tailwind from the new transaction model. So the net effect of that is half a point. So, yes.

Operator:

Thank you. Our next question comes from the line of Stephen Tusa of JP Morgan. Your question please, Stephen.

Debbie Clifford:

We'll continue to watch that new business grow. That's something that we're laser focused on and if macroeconomic conditions were to shift, then that would be probably one of the first things that we'd be impacted and that can take us to the lower end of the range. We're watching end market demand pretty closely so that's why we talk about bid activity on BuildingConnected and it continues to be at record highs. But of course, if that were to take a turn, that can have an impact on us. And then we monitor these sentiment that we're hearing from our channel partners to understand how they're seeing end market demand and what the impacts might be for our business. So, those are the types of things that could inform whether or not we would be at the lower end of the range.

Debbie Clifford:

Yes. And sorry to go back to the last question, because there's a lot of moving parts here, and it has been confusing. So for revenue in the guide, it's 1 point of headwind from FX, 1 point of headwind from the absence of EBA true-ups, 0.5 point of tailwind from the acquisitions, and 1 point of tailwind from the new transaction model, which is a net negative. So net 0.5 negative headwind as we look into the guide for fiscal 2025.

Debbie Clifford:

Yeah, there's definitely mix effects. And like I said, our target is to have it be roughly 50-50 between volume and price. But in any given year, we're going to have some puts and takes between that. But when we think about our guidance for fiscal 2025, we're targeting that 50-50 mix again.

Operator:

Thank you. Our next question comes from the line of Nay Soe Naing of Berenberg. Your question, please Nay.

Debbie Clifford:

So a couple of things. So first sorry, you were a little bit garbled and coming through, so we didn't quite get the first question and we'll go ahead and try and take those in the callbacks. But when we think about the new transaction model and the $600 million, I think the most important things to take away are the $600 million is a good number to model with. As you think about how to model the business during the transition and the pace at which you'll see the new transaction model cost, that $600 million bleed into revenue and expense over time is really going to be dictated by the pace of the rollout. And so, think of it as something that's going to be bleeding into revenue and expense over the next couple of years.

Debbie Clifford:

So the act of transitioning, the invoicing will take approximately two years to complete. But remember that we recognize revenue over approximately one year. So it's going to be a little past that when the invoices at the higher amount bleed into revenue.

Debbie Clifford:

Our goal would be to drive greater growth from the make revenue line. That's going to be an important aspect of our ability to achieve our target 10% to 15% growth algorithm over time and it's an area where we've been making incremental investments. So, we anticipate that, that revenue growth rate is going to be higher than the core business.

Simon Mays-Smith:

Thank you everyone for joining us. We look forward to seeing many of you on the road over the coming weeks and at our Q1 conference call later in the year. Thanks very much.

Simon Mays-Smith:

Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss the third quarter results of Autodesk's fiscal 2024. On the line with me are Andrew Anagnost, our 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.com/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, business 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 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 or Excel Financials and other supplemental materials are available on our Investor Relations website. And now, I will turn the call over to Andrew.

Debbie Clifford:

Thanks, Andrew. Overall, market conditions and the underlying momentum of the business remained similar to the last few quarters. Our financial performance in the third quarter was strong, particularly from our EBA cohorts, 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. By product in constant currency, AutoCAD and AutoCAD LT revenue grew 7%, AEC revenue grew 20%, manufacturing revenue grew 9% and in double-digits, excluding variances and upfront revenue, and M&E revenue was down 4% and up high single-digits percent, excluding variances in 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 3 percentage points from last year, benefiting from strong growth in both EBAs and the eStore. Net revenue retention rate remained 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 RPO of $5.2 billion and current RPO of $3.5 billion both grew 12%. Excluding the tailwind from our largest ever EBA, total RPO growth decelerated modestly in Q3 as expected when compared to Q2, mostly due to the lower mix of multiyear contracts in fiscal 2024 when compared to fiscal 2023. 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 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 in our capabilities and services and the cloud and platform services that underpin them. We purchased approximately 500,000 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 to 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 are 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 have been slightly more of a headwind to billings than we expected. EBA expansions have 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. 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 2024 EBA 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 RPO 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 all together, we now expect fiscal 2024 revenue to be between $5.45 billion and $5.47 billion. We expect non-GAAP operating margins to be similar to fiscal 2023 levels with constant currency margin improvement, offset by FX headwinds. We expect free cash flow to be between $1.2 billion and $1.26 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 EBA co-terming in the fourth quarter. The slide deck on our website has more details on modeling assumptions for Q4 and full year fiscal 2024. 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 2025 and 2026. First, the macroeconomic drag on new subscriber growth, a smaller EBA renewal cohort with less upfront revenue mix, and the absence of EBA true-up payments are headwinds to revenue growth in fiscal 2025. Slightly offsetting that, we expect our new transaction model, which Andrew discussed earlier, to be a tailwind to revenue growth in fiscal 2025 and beyond. Assuming no material change in the macroeconomic, geopolitical or policy environment, we'd expect fiscal 2025 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 2024. And second, the transition to annual billings means that about $200 million of free cash flow in Q1 fiscal 2024 that came from multiyear contracts built upfront will not recur in fiscal 2025. This will reduce reported free cash flow growth in fiscal 2025. And make underlying comparisons between the two years harder. If you adjust fiscal 2024 free cash flow down by $200 million to make it more comparable with fiscal 2025 and fiscal 2026 on an underlying basis, the stacking of multiyear contracts build annually will mechanically generate significant free cash flow growth in fiscal 2025 and fiscal 2026. The progression from the adjusted fiscal 2024 free cash flow base, will be a bit more linear, although fiscal 2026 free cash flow growth is expected to be faster than fiscal 2025 as our largest renewal cohort converts to annual billings in that year. As you build your fiscal 2025 quarterly and full year estimates, please pay attention to what we've said each quarter during fiscal 2024. 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 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 2025. Overall, we expect first half, second half free cash flow linearity in fiscal 2025 to be more normal than in fiscal 2024. And we still anticipate fiscal 2024 will be the free cash flow trough during our transition from upfront to annual billings for multiyear contracts. Per usual, we'll give fiscal 2025 guidance when we report fiscal 2024 results, so I don't intend to parse these comments before them. 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 in monetary policy, fiscal policy, inflation, exchange rates, politics, geopolitical tension, supply chains, extreme weather events and, of course, the pandemic. These increased 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 Autodesk an enviable source of visibility and certainty. 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 top line 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.

Operator:

[Operator Instructions] Our first question comes from the line of Saket Kalia of Barclays.

Andrew Anagnost:

Great, Saket.

Andrew Anagnost:

Yes, absolutely. Let me start Saket by saying First, the business is super resilient where we're built through 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 talking about what we're trying to do with our customers and the journey we've been on. We are trying to do no less than move all of our customers to cloud-based life cycle solutions powered by AI that connect their design and make processes in a way that they've never had connected before. Now 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 models, to annualized billings. I mean you've 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 engagement with our customers through the products they use in 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 an entity, not just as a collection of transactions passed 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 and capabilities in one package. The other really consequential thing here is our partner network has to move transaction-focused partners to solution-focused partners. They are going to be incredibly important on the front lines in helping our customers deploy and integrate new design 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 stream of modernizations we've been working on for a while, and I do think it's very significant.

Debbie Clifford:

There are indeed a lot of moving parts, Saket. 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. Those things are the non-recurrence of EBA upfront and true-up revenue, FX 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 is a headwind to margin percent. We'll give you all the details on this in February for the usual. But remember, what we're really trying to do is set ourselves up for success over the long term.

Operator:

Thank you. Please standby for our next question. Our next question comes from the line of Jay Vleeschhouwer of Griffin Securities.

Debbie Clifford:

We are still targeting those sources of growth, Jay, 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 of about 9% or more. And 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.

Andrew Anagnost:

Yes. Okay. So, let me tackle that with the first thing around the granular data. So, ultimately, as you journey down this path, what does happen is the way the product operates all the products Forma in particular in terms of how it interacts with Revit 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 of the wide -- the mainstream usage of our AC 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 engage with the product every day. So. that's clear, okay? Timeline, I don't know exactly which presentation you're in. I suspect given your questions, you are in the more longer term timeline presentation. So, a lot of stuff you saw there was over a two to five-year time frame, 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. Now, I think it's kind of obvious to tell which ones we're towards the earlier part of that spectrum rather to the later part of that spectrum. Turning some of these solutions over into infrastructure solutions and combining them with some of our infrastructure stuff. Probably towards the later end, getting the data more granular, uniting detailed design and conceptual design in Forma, probably much more closer. That kind of expectation you can have with those road maps.

Operator:

Thank you. Our next question comes from the line of Adam Borg of Stifel.

Debbie Clifford:

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 of free cash flow as we get into next year, fiscal 2025 and also in fiscal 2026. So some of the comments that I made on the call are important, and that is helping you think about how to normalize our fiscal 2024 cash flow headed into fiscal 2025. So we're moving that $200 million at the beginning of fiscal 2024 as we head into fiscal 2025. And then broadly, the fact that we'll have bigger cohorts coming up for renewal in fiscal 2026, which drives faster growth in free cash flow in that period. So overall, things are going well, and we're at this interesting point where we expect to see mechanical rebuilding of free cash flow from here.

Andrew Anagnost:

Yes. So 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 evolved large models, which we have not yet deployed out in the market are offered up to individual customers as a here's your model. Now you train it, you custom train it and extend it with your data. Those kind of models are going to be very interesting in the future and really look like possibilities that we'll 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.

Operator:

Thank you. Our next question comes from the line of Joe Vruwink of Baird.

Andrew Anagnost:

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 look, it's 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's 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 that does not become part of the entire ecosystem. So this is a conversation I have with many, many customers most obviously recognize the trade-off 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 make sense for them and that maintain the trust and integrity that we're looking to do. So look for us to handle this in exactly that matter as we move forward.

Debbie Clifford:

Sure. Thanks, Joe. So on the first question, I think you're 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 2025 and beyond. And then on currency, is it's really been all over the place. I think everybody has been seeing 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.

Operator:

Thank you. Our next question comes from the line of Tyler Radke of Citi. Please go ahead, Tyler.

Andrew Anagnost:

Yes. No. What's interesting is. We're not seeing the softness in construction that others may have highlighted. In fact, we have incredibly strong performance at the top end of our business. We saw strong growth internationally. And we're seeing growth in the U.S. And a lot of things are going on in the construction business right now. And whereas you see some sectors slowing down retail warehouse office things like that. You're seeing other things offsetting it. Again, the dynamicism of Autodesk business, manufacturing, industrial, lots of 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, we look at the indicators that we have, bid board activity was at record highs again. So we saw a good strong bid activity there. While construction backlog may have declined a bit, it's still high, all right? And the number one thing that I heard from general contractors at Autodesk University was still can't hire enough. So they're still going to be working through that backlog at a relatively slow pace. Also, what's really interesting is we're seeing ourselves in more deals down market now more competitive deals, and frankly, we're winning some of them. And I think that's 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 deal activity.

Debbie Clifford:

Yes. Sure. So remember, you got to be thinking about the non-recurrence of the EBA upfront and true-up revenue that we've been talking about all year. FX, as I just mentioned, could be a factor right now, 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 than for revenue today. So those three factors are the biggest factors driving our estimate of 9% or more as we head into next year.

Operator:

Thank you. Our next question comes from the line of Jason Celino of KeyBanc Capital Markets.

Debbie Clifford:

Thanks, Jason. So the EBA cohort has been performing really well all year, which has been great. 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 customers 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 EBA upside as the year has progressed. We've continued to update our outlook, which is each quarter of the renewals and the true-ups. And as we look at Q4. We've got our eye on the remainder of this large EBA cohort and the signs continue to be strong. We factored all of this into our latest estimates, and that's what drove the top line upgrade that we communicated today.

Andrew Anagnost:

Yes. Jason, one of the things that you may have heard is that some of that money from the infrastructure bill that was targeting modernization of departments of transportation was really, it's about $34 million that's significant in that not only it starts these DOTs on their process of modernization and evaluating the modernization, but it also was directed at several DOTs that we have relationships with and where we've actually displaced competitors and engaged with the infrastructure. So that's pretty exciting stuff. That shows money starting to flow to the projects. As I've always said, it takes time to release this money from the flood gates of Washington into the places floodgate of Washington, that's kind of an oxymoronic comment. But it takes time to get there. And that -- these -- this money is going to kind of again, build up 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's more hope in the future for even more projects.

Operator:

Thank you. Our next question comes from the line of Michael Funk of Bank of America.

Andrew Anagnost:

Yes. So obviously, we invest a lot in bringing our partners along on this. It doesn't mean all partners are going to be happy with these changes. Okay? It's just that is not an outcome that we're 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 led them along, showed them the way. You might recall, we started the new transaction model with Flex, close to about 1.5 years ago in Australia, then we rolled it out to the broad-based partner network and everybody got experience with it. Now we're testing in Australia. Again, we take our partners along on these journeys in very deliberate ways. And frankly, the credibility we have with our partners in terms of making their businesses more consequential and significant and, frankly, larger over time has really created an environment where there's a lot of trust. And there's a lot of discussion about what's the best way to do this. What this means for them and where it's going to take their business. And this will make the partners ultimately more consequential in 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 in the services and support that.

Debbie Clifford:

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 in future periods, unless over the next three-year contract term, they utilized more than the tokens allotted in their contract again. So, that's why it's something that is sort of a one-off -- a good one off, 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 benefit to fiscal 2024, we haven't gotten 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.

Operator:

Thank you. Our next question comes from the line of Matt Hedberg of RBC.

Debbie Clifford:

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. But 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 -- right now. And then as we look ahead to next year, we intend to go global with this, but we need to make sure that 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.

Debbie Clifford:

We continue to perform well with our non-compliant conversions. So, 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 that's driving more conversion. That's on a smaller scale in terms of deal sizes, but is driving significant volume for Autodesk. So, over time, you're going to see us continue to flex different means of driving more compliance from non-compliant users, and it continues to be a steady drumbeat contributor to our revenue growth over time.

Operator:

Thank you. Our next question comes from the line of Bhavin Shah of Deutsche Bank. Please go ahead, Bhavin

Andrew Anagnost:

Well, one of the things that we're trying to make sure that we see is how do the partners line up their deals so that they're able to enter them into the system and make sure they get their pipeline lined up with the new way of doing things because they're going after directly enter them into the system. Some of these services used to be taken over by distributors for some of 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 experience, but we know we want to stress test these things. We want to make sure that it works for all the product offerings that there's no issues or hiccups with particular things 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 a partner entering the deal, all right, and having those things actually function. We just want 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.

Andrew Anagnost:

Yes. So Bob, what we're doing there is the price increase in Fusion is directly connected to the value we're delivering Fusion we're making sure some of the customers who have been with us for a long time are treated appropriately and fairly. So we're paying attention to all those things to customer dynamics. But what we saw is that the value in base Fusion has just increased to high level that we should be looking at the price more carefully. The value is going to continue to increase. And what we saw is that some of the extensions would probably see better adoption in some of the base -- the value was shifted to the base offering and the price of the extensions were contracted a little bit. So it's all this kind of balancing the overall cost of ownership for particular types of customers. And it's an appropriate time to do it.

Operator:

Thank you. Our next question comes from the line of Steve Tusa of JPMorgan. Your question please, Steve,

Andrew Anagnost:

Yes. So Steve, let me take the first question a little bit. I won't answer the specific question. What I want to say is our business is incredibly resilient. You have to really pay attention to that, we're built for resilience. And I want to highlight some of the differences in puts and takes here. For instance, you probably noticed that AEC grew 20% in the quarter. And that offset some of the headwinds from media and entertainment due to wider strikes and after strikes. Regionally, India and Canada offset the U.S. and the U.K. Market segment-wise, EBAs and small businesses offset the mid-market. You have to think of the business through this built for resilient framework. And so I want to shift your lens a little bit, and then I'll let Debbie comment on the second part of your question.

Steve Tusa:

Okay. Great. Thanks a lot.

Simon Mays-Smith:

Thanks, everyone, for joining us. Wishing those who celebrate 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, Latif. Handing back to you.

Simon Mays-Smith:

Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss the second quarter results of Autodesk's fiscal '24. On the line with me are Andrew Anagnost, our 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.com/investor. You can find the earnings press release, slide presentation and transcript of today's opening commentary on our Investor Relations website following this call. 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. 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 disclaims any obligation to update or revise any forward-looking statements. During the call, we will quote several numeric or growth changes 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, or Excel financials and other supplemental materials available on our Investor Relations website. And now I will turn the call over to Andrew.

Debbie Clifford:

Thanks, Andrew. Overall market conditions and the underlying momentum of the business remained similar to the last few quarters. Despite a tough macroeconomic backdrop that continues to drag on the overall rate of new subscriber acquisition and the forward momentum of the business and may continue to do so. Our financial performance in the second quarter was strong. We said last quarter that we had a strong cohort of EBAs renewing in the second half of the year that last renewed three years ago at the start of the pandemic and that subsequent adoption and usage has been strong. Some of that strength came through in the second quarter, which was earlier than we were expecting and which boosted billings, free cash flow and subscription revenue. Total revenue grew 9% and 12% in constant currency. By products in constant currency, AutoCAD and AutoCAD LT revenue grew 9%, AEC revenue grew 14%, Manufacturing revenue grew 9% and in double digits, excluding a headwind from variances in upfront revenue, and M&E revenue grew 10%. By region in constant currency, revenue grew 15% in the Americas, 11% in EMEA and 6% in APAC. Direct revenue increased 18% and represented 37% of total revenue, up 3 percentage points from last year, benefiting from strong growth in both EBAs and the eStore. Net revenue retention rate remained 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 a full quarter impact in the second quarter, which resulted in billings declining 8%. Total deferred revenue increased 14% to $4.2 billion. Total RPO of $5.2 billion and current RPO of $3.5 billion grew 11% and 12%, respectively. Turning to the P&L. Non-GAAP gross margin remained broadly level at 92%. GAAP and non-GAAP operating margin remained broadly level with revenue growth and cost discipline, offsetting the impact of exchange rate movements. Free cash flow was $128 million in the second quarter, which was a bit better than we've been expecting, primarily due to the timing of EBAs, but also due to some favorable in-quarter linearity. 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 are being vigilant during this period of macroeconomic uncertainty. During Q2, we purchased approximately 400,000 shares for $87 million at an average price of approximately $200 per share. We will continue to offset dilution from our stock-based compensation program and to opportunistically accelerate repurchases when it makes sense to do so. Now let me finish with guidance. The headline is that overall, the underlying momentum in the business remains consistent with the expectations embedded in our guidance range for the full year. Our sustained momentum in the second quarter and early expansion of some EBAs expected to renew later in the year, reduce the likelihood of our more cautious forecast scenarios given that, we're raising the lower end of our guidance ranges. Let me summarize some key factors we highlighted earlier in the year. First, we have a strong cohort of EBAs renewing in the second half of the year, although, as I mentioned earlier, some of that benefit was billed in the second quarter. Second, foreign exchange movements will be a headwind to revenue growth and margins in fiscal '24. The revenue headwind will moderate a bit in the second half of the year. Third, Switching from upfront to annual billings for most multiyear customers creates a significant headwind to free cash flow in fiscal '24 and a smaller headwind in fiscal '25. Our expectations for the billings transition are unchanged. Fourth, as we thought might happen, we saw some evidence of multiyear customers switching to annual contracts during the second quarter. It wasn't big enough to be called a trend, but we're keeping an eye on it. It's still early days, and we'll keep you updated as the year progresses. 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 RPO 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. And fifth, we expect our cash tax rate will return to a more normalized level of approximately 31% of GAAP profit before tax in fiscal '24, up from 25% in fiscal '23. We the federal tax payment extension after the winter storms in California means cash tax payments shift from the first half of the year to the third quarter, reducing third quarter free cash flow. Second half free cash flow generation will, therefore, be significantly weighted to the fourth quarter. We still anticipate fiscal '24 will be the cash flow trough during our transition from upfront to annual billings for multiyear contracts. Putting that all together, we now expect fiscal '24 revenue to be between $5.41 billion and $5.46 billion. We expect non-GAAP operating margins to be similar to fiscal '23 levels with constant currency margin improvement, offset by FX headwinds. We expect free cash flow to be between $1.17 billion and $1.25 billion. We're increasing the guidance range for non-GAAP earnings per share to be between $7.30 and $7.49 to reflect higher interest income on our cash balances in addition to the reduced likelihood of our more cautious forecast scenarios. The slide deck on our website has more details on modeling assumptions for Q3 and full year fiscal '24. 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 said back in February, the path to 45% will not be linear, given the macroeconomic drag on revenue growth from the rate of new subscriptions growth and the drag to free cash flow as we transition away from multiyear contracts paid upfront. But let me be clear, we're managing the business to this metric and feel it strikes the right balance between driving top line 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.

Operator:

[Operator Instructions] Our first question comes from the line of Saket Kalia of Barclays. Please go ahead, Saket.

Debbie Clifford:

We're doing great. How are you Saket?

Debbie Clifford:

Yes. So, we had a small increase in the midpoint of the guide. The dollar change was immaterial it's tough really to come up with a mix of assumptions that get us to the low end of our previous guidance range. So, the midpoint increase reflects a mix of both organic and FX assumptions. Overall, the business is tracking generally in line with our expectations.

Andrew Anagnost:

Yes. No real big surprises. Saket I mean - Debbie flagged last quarter that we might see some customers reverting back to annual contracts as a result of the change. We did see that. Nothing really out of bound zone, nothing really surprising. Debbie, do you want to add anything to the details or...

Saket Kalia:

Got it. All very clear. Thanks guys.

Jay Vleeschhouwer:

Got it. Thank you. Good evening. Andrew, for you first, you made some constructive comments about what you're seeing in the AEC business. But more broadly, and as you're well aware, there's quite a bit of ferment going on in that market right now in terms of references to what's come to be called BIM 2.0 as you know, just a couple of months ago at an AUC conference, a customer group launched a new customer-developed design specification for software. You yourselves are working on a dual track of enhancing revenue, but focusing on format. So lots going on in terms of various currents in that industry or part of the industry. Help us understand how you're thinking about managing for all those different dynamics that are going on in the AEC industry. And then a follow-up.

Jay Vleeschhouwer:

Okay. Second question refers to the comments you made about a new transactional model and a pilot you're going to be undertaking in Australia. So maybe you could elaborate on that. When I hear that, it sounds to me like there's potentially going to be some further change to channel economics. You've just completed the move to back-end-only margins. Are you thinking about perhaps taking the flex commission model more broadly across the rest of the business? Or what exactly you're looking to accomplish with that?

Jay Vleeschhouwer:

Okay. Thank you.

Adam Borg:

Awesome. And thanks so much for taking the questions. Maybe just for Andrew on the infrastructure opportunity. I know you've been calling out increasing traction with State Department of Transportation, and you even referenced some grants in the quarter in the script. So maybe just talk a little bit more about how you think about the infrastructure opportunity overall? And really what separates all of that from competitors in going after it?

Adam Borg:

That's really helpful. And maybe just as my follow-up, just on the earlier-than-expected EBA renewal pool in the quarter. So maybe just talk about - just given the softer macro obviously, that our checks have been suggesting, and you talked about no real change sequentially. But just what's leading to customers to choose to renew early and - maybe just as a quick follow-up to that, as we think about the guidance for the year, any way to quantify the type of expansion opportunity embedded from the EBA? Thanks so much.

Adam Borg:

Yes. Just curious. And so thanks. I was just curious, any way to quantify kind of the type of expansion opportunity from the EBA renewal pool in the back half of the year as you think about full year guidance?

Adam Borg:

Awesome. Thanks so much.

Joe Vruwink:

Great. Hi, everyone. Maybe I wanted to revisit your AEC exposure. I know you've discussed this in the past and just as there's offsets, so commercial market see pressure, institutional or infrastructure far better. So you have diversification there. I guess when you think about the current business composition, and how the different subsectors are faring, do you think the nature of Autodesk and AEC is any better or worse than would have been the case in past cycles? And I'm asking less about Autodesk just as a subscription model now versus a license model in the past. And more about Autodesk and things like Revit adoption or reliance on the cloud which might create a different dynamic for the business this down cycle versus past down cycles.

Joe Vruwink:

Okay. Great. Andrew, that's helpful. And then second question, wondering if you can comment on how you see the writers and actors, strike potentially impacting business in media and entertainment, particularly if this goes on for a while and your customers are finishing what's in post-production with, I suppose, a lack of new things coming in, what that might mean towards the end of the year?

Joe Vruwink:

Okay. Thank you very much.

Tyler Radke:

Yes. Thanks for taking the question. So I wanted to just go back to the commentary on kind of the puts and takes in the quarter. So you talked about seeing some early expansions on some of the multiyear EBAs. And I just wanted to clarify, was that also stronger expansion? Or was it more of a timing factor? And then Debbie, this might be a bit of a nitpicky question. But just as I look at the constant currency revenue guidance, I think the high end of the guide says 12% plus versus 13% last quarter. I just wasn't sure if there was a change there. If you could just kind of comment on the puts and takes on that, too? Thank you.

Tyler Radke:

Okay. Great. And follow-up for Andrew. You talked about some encouraging signs on the Autodesk construction side, given the reorg, you talked about it kind of settling in. How - maybe just remind us kind of what were the big changes? What are you hoping to accomplish? And should we start to see the make revenue begin to accelerate throughout the rest of the year? Thank you.

Tyler Radke:

Great to hear. Thank you.

Jason Celino:

Great. Thanks for taking my question. This is a spin on Saket's very first question, but it relates to the quarter and not necessarily the guide. But when we look at the outperformance in the quarter, it's the biggest beat on a percentage and an absolute basis we've seen in many quarters. Can you just help us unpack maybe what the magnitude of the EBA strength was or the FX kind of benefits, if there were any?

Jason Celino:

Okay. Perfect. And then, Andrew, curious on updates on Innovyze. At the beginning of the year, I think there was this view that funding for sewer projects and water projects hadn't quite started to flow, no pun unintended yet, but that maybe we would see things start to open up in the second half or next year. Is that still the case? I guess what are you seeing?

Jason Celino:

Okay. Great. Appreciate it. and I like the puns.

Michael Funk:

Yes. Thank you all for the questions tonight. A couple if I could. So on the EBA renewal comments that you made earlier, can you give us a sense of the like-for-like change there, whether or not customers on balance or upsizing, increasing the duration of the contract, what that looked like.

Michael Funk:

Understood. I must have miss heard you earlier. So for the overview then, do you expect that trend to continue for the remainder of the year? And what do you think is driving that over use?

Michael Funk:

Okay. So, in terms of trends so far this quarter to date are consistent with 2Q?

Michael Funk:

Your last comment about trends continuing is the interpretation there that the trend has continued in - from 2Q into this quarter of increased usage.

Michael Funk:

Great. Thank you, Debbie.

Matt Hedberg:

Great. Thanks for taking my questions. Congrats on the stability here. Really, really good to see. Maybe, Debbie, for you, maybe I missed it, but cash flow was - free cash flow was significantly better than we thought this quarter. I know you don't guide quarterly. So maybe just - again, maybe I missed it, but a little bit more on sort of why free cash flow is so strong this quarter? And as we think about Q3, Q4 kind of the linearity there, you took the low end of the full year up a little bit. How should we kind of think about that split sort of between 3Q and 4Q?

Matt Hedberg:

Great. Thanks. And then, Andrew, for you, following up on earlier questions kind of on the split of your business, obviously, an extremely diversified model. But I guess regarding commercial real estate exposure, I know it's difficult to give an exact percentage of your exposure there. But just broadly speaking, we get asked all the time, what's Autodesk's exposure to the category. How should we think about kind of Autodesk in the CRE market?

Matt Hedberg:

Super helpful. Thank you for that.

Bhavin Shah:

Great. Thanks for taking my question. Andrew, we continue to hear good things from your customers and partners regarding your ability to innovate and enhance many of your acquired assets, whether it's Innovyze, PlanGrid, et cetera. Can you just remind us of your views on go-forward M&A and your M&A philosophy. And maybe kind of what are some of the lessons we learned from prior deals?

Bhavin Shah:

Super helpful there. Just on another topic, can you just talk about what you're seeing with A&E customers as it relates to hiring. I know many of these customers have got talent shortages over the past few years. Are you seeing any easing here or any kind of other general commentary in terms of hiring within A&E customers. Thanks so much for taking my question.

Operator:

Thank you. Our next question comes from the line of Ken Wong of Oppenheimer & Company.

Debbie Clifford:

The overall market conditions, new subs, momentum in the business was similar to last quarter. We talked about leading indicators being consistent with last quarter, growing usage, record bid activity on BuildingConnected ,cautious optimism from our channel partners. Beyond that, I would just add that our regional performance was broadly similar to what we've seen for several quarters. direct business, including enterprise and eStore as well as India actually were bright spots for us, but they were offset by some tougher patches like China as well as the softer performance that we talked about in M&A.

Debbie Clifford:

So remember what we said last quarter was that we saw a slight dip after we stopped selling the multiyear contracts upfronts, but then it recovered as we exited the quarter and as we got into early Q2, and we saw that consistently throughout Q2.

Operator:

Thank you. Please standby. Our next question comes from the line of Nay Soe Naing, Berenberg.

Debbie Clifford:

So the early billings that we talked about for EBAs are what drove the revenue beat versus our guide. But when you think about that beat on a dollar basis in comparison to the totality of our AEC business, the AEC business is vastly larger. So it's not a big driver of the overall trend that we're seeing in AEC, but it was the driver of EBA.

Operator:

Thank you. Our next question comes from the line of Patrick Baumann of JPMorgan. Please go ahead, Patrick.

Debbie Clifford:

Yes. So starting with cash, it's due to the performance that we saw in Q2. So I talked a little bit earlier in this Q&A session about the EBA billings that we saw in Q2 as well as the favorable in core linearity. So those were drivers of the difference that you saw in our cash flow guidance. And then in terms of EPS, the other income is due to higher interest income from our cash balances.

Debbie Clifford:

In part, well, yes, yes.

Debbie Clifford:

We're not going to guide on a quarterly basis for free cash flow, but I'll try to be helpful. I just want to reiterate some of the comments. So remember that second half free cash flow is going to be significantly weighted into the fourth quarter. And the biggest driver of that is the extension of our federal tax payments that had a positive impact on the first half but are going to negatively impact Q3. So think about that as you put your model together.

Operator:

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. Sir?

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Simon Mays-Smith:

Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss the first quarter results of Autodesk's fiscal '24. On the line with me are Andrew Anagnost, our 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.com/investor. You can find the earnings press release, slide presentation and transcript of today's opening commentary on our Investor Relations website following this call. During this call, we may make forward-looking statements about our outlook, future results and related assumptions, acquisitions, products and product capabilities 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-K 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 disclaims any obligation to update or revise any forward-looking statements. During the call, we will quote several numeric or growth changes 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 or Excel financials and other supplemental materials available on our investor relations website. And now, I will turn the call over to Andrew.

Debbie Clifford:

Thanks, Andrew. Amidst a more challenging macroeconomic environment and ongoing headwinds from currency and Russia, Q1 was strong. The overall momentum of the business was similar to last quarter with new subscriber growth decelerating a bit and renewal rates improving a bit quarter-over-quarter such that current remaining performance obligation growth was the same as last quarter. Strong renewal rates demonstrate existing customers are committed to, and investing in, their long-term strategic partnerships with Autodesk. Some customers are also elevating their relationships with Autodesk from subsidiaries to companywide. When this happens, it can sometimes cause quarterly timing differences for the renewal as multiple contracts are co-termed to a single renewal date. We saw an instance of that in Q1 and, as a result, some of the up-front revenue we expected to hit in Q1, we now expect later in the year. Q1 revenue would have been toward the top end of our guidance range if adjusted for this up-front revenue. Total revenue grew 8%, and 12% in constant currency. By product in constant currency

Operator:

[Operator Instructions] Our first question comes from the line of Saket Kalia of Barclays. Your question please, Saket.

Andrew Anagnost:

Yes, Saket. Good to see you by the way. Good to talk to you. So, yes, let me tell you what we saw and consistent with what people heard from the partners. So, whenever we have a large event like ending multi-year, what happens is partners and teams tend to pack up deals into that event, they even pull pipeline forward to try to get it into the event, so that they can kind of close their deal, get things trued up around the event. This happens every time consistently when we have event like this. It's one of the reasons why we try to align these events with quarter-end, so we don't have conversations like this. So, if that was the case, what you would have expected is that business would rebound to kind of expected levels post the end of the quarter, which is exactly what happened. It's exactly what we're seeing at the beginning of the quarter [indiscernible] and we're back to what we would expect to be [indiscernible]. Debbie, you want to add anything about the macro environment that we haven't said already or anything -- any commentary that might help understand how the quarter progressed?

Saket Kalia:

Got it. That's really helpful, Debbie. Debbie, maybe for my follow-up for you. Great to see the cash flow strength this quarter, well ahead of what we were expecting. I was just wondering if you could just zoom into what drove that. And maybe just looking forward, how you're sort of thinking about the shape of cash flow this year, particularly where we trough here in fiscal '24? Does that make sense?

Saket Kalia:

Got it. Very helpful, guys. Thank you.

Jay Vleeschhouwer:

Thank you. Good evening. Andrew, you referenced the effect on channel behavior in the quarter as a result of the billing change. But more broadly, there are some other evolutions that your sales model is going through affecting not just the VARs but also the VADs. And I'm wondering how you're thinking about the operational or execution risks associated with that evolution which certainly goes beyond Q1 in terms of perhaps either demand generation, fulfillment of which you'll be doing more of on your own, perhaps the elements of channel comp as they change with the back end change. So maybe just let's talk about some of those ongoing executables that you need to get right vis-à-vis the sales model. Then, I'll ask my follow-up.

Debbie Clifford:

Sure. Yes. So, as Andrew mentioned, we launched this Flex agency model in Q1. We have learned a lot. Some of the things that we've been learning are things like the importance of driving a seamless vendor setup process. These are situations where customers will have to set up Autodesk as a vendor as opposed to a partner. We're getting insights and learnings around -- by having access to more data, and we're able to better forecast with having that access to better data. So, like Andrew mentioned, as with anything in this area, we're focused on testing and learning as we go. We want to make sure that we have scalable processes for all stakeholders and the ecosystem, and we'll continue to keep doing that.

Debbie Clifford:

That's an excellent question, Jay. I mean, the view that I talked about from Investor Day hasn't changed much, granted our Investor Day wasn't very long ago, so that's a good thing. But we're going to be looking to continue to drive volume from all the different areas or growth vectors that we have. So, things like our investments in AEC, the proliferation of BIM, expansion and infrastructure, driving more growth from construction. I think what was interesting for us this quarter was really seeing continued strengthening of our renewal rate, because, ultimately, with higher renewal rates, that becomes a net volume driver for us. And that really goes down to the investments that we've been making in our customer success teams, who are really doing an excellent job of driving those renewal rates up, driving success with our customers, because that's a really important part of keeping the volume engine going at Autodesk. So, those are some initial thoughts, Jay.

Andrew Anagnost:

Thank you, Jay.

Adam Borg:

Great, and thanks so much for taking the questions. Maybe for you, Andrew, I know at Analyst Day, you talked a lot about the broadening opportunity around serving the owner market and not just in conceptual design, but during operations. So, I know it's still early in this journey. Maybe you could share with us how that message is resonating and as you look to expand into AEC and obviously [indiscernible]?

Adam Borg:

That's really helpful. Thanks for that. And maybe, Debbie, as a quick follow-up. I think you've mentioned in the script about repurposing 250 roles in the quarter. Maybe you can provide a little bit more detail there? Thanks, again.

Adam Borg:

Excellent. Thanks again.

Joe Vruwink:

Great. Hi, everyone. Maybe just a bit of clarification on near-term performance and reconciling, just the comment. I think, leading indicators around product usage, that's fairly consistent. But then, the new sub growth decelerating in the Americas. I guess, normally, I think the leading indicators kind of predict that. So was this something around new subs that just kind of popped up in the quarter?

Joe Vruwink:

Okay. Great. Thanks for that. And then, just, I guess, I get the AI question. Just in terms of capabilities that already exist on the platform, thinking about things like Space Maker or the Generative Extension on Fusion, have you started to see kind of an uplift in interest just as more industries are studying adoption around AI? And is there anything you've seen to this point maybe specifically around video, media content where you start thinking about maybe changing product road maps, or all just based on kind of the pace of innovation that's coming out?

Joe Vruwink:

Okay. Thank you, Andrew.

Michael Funk:

Yes, thank you for the questions. So, Debbie, you mentioned you highlighted the slowing sub growth and usage has been strong. Can you help me understand the relationship if any between those two? And is the sub growth simply a factor of customers tightening their belts more due to the uncertain macro that you highlighted a few times, or is there some other -- something else behind that?

Michael Funk:

Okay. Great. And then one more. Debbie, you also mentioned tailwind in second half, one being the EBA renewal pattern, adoption and usage has been strong there, I think you noted. Can you give us some more detail just on the moving pieces around the EBA renewals? Is it contract changes, pricing changes, what will be driving that tailwind in the second half of the year around the renewals?

Michael Funk:

Great. Thank you for the questions.

Matt Hedberg:

Great. Thanks for taking my questions, guys. Andrew, in your prepared remarks, you talked a lot about AEC and obviously construction. This is an area obviously as we all know that's been sort of laggard to adopt SaaS and cloud. Can you talk about sort of where we're at in this evolution? The pandemic is behind us now, I think. But like, are you starting to see some of these field workers, some of the folks that are sort of like behind the scenes on construction starting to sort of embrace the technology more so? Is it a generational thing? Just any sort of like incremental sort of catalyst for further construction cloud adoption?

Matt Hedberg:

Super insightful. No, that's great. Thanks again for the time tonight, guys.

Tyler Radke:

Yes, thanks for taking the question. So, just a couple of questions on the indicators that you saw in the quarter. Andrew, you talked about bid activity at record levels in BuildingConnected. I guess, should we be thinking about that as a sign of health in the end markets or more of a function of buildings connected, strong competitive position and digitization tailwinds? And then, just curious if you could talk about the slowdown in new subscriptions or deceleration that you saw. Was that more on the AEC side or any end market or where -- the segment where you saw that?

Tyler Radke:

Great. And then, just on the EBA renewals for the second half, are you expecting those to renew at kind of the typical net expansion rate that you see for the broader company? Or are you expecting anything different just given the environment?

Debbie Clifford:

Yes, I mean, I would say that in terms of what we're baking into our guidance, we're assuming that these customers renew at reasonable levels. I'm not going to get into more specifics beyond that. What's key is that they renew and we feel good about that happening given the fact that there has been high adoption and usage across these EBAs. It's a big cohort for us. We saw that performance back in fiscal '21. It was also an equally unusual economic time at that point. And so, I don't see this situation as any different. I think we've set the guidance at a reasonable point.

Operator:

Thank you. Our next question comes from the line of Bhavin Shah of Deutsche Bank. Your question please, Bhavin.

Andrew Anagnost:

Yes. So let me talk a little bit about [FedRAMP] (ph) here. So we've submitted all our paperwork. Our systems are ready. Autodesk systems are already for FedRAMP. We're just waiting for the government to come back and give us the approval and move forward. So, that's all proceeding ahead for us. We're waiting for the government to respond now at this point. With regards to the debt ceiling, I'm not really going to speculate on the debt ceiling. I would say that I think the things that impact us are bipartisan priorities. These are things that both parties want. Infrastructure and the things associated with that, they all want this. So, I would suspect the things that matter a lot to Autodesk and to Autodesk business are probably not going to be impacted by all the activity going on in D.C. right now.

Andrew Anagnost:

Yes. So, first, let me kind of clarify exactly what we did. So, we merged the independent construction team with the mainline sales team inside the company. And we had kind of a few goals in mind there. One, we wanted to get a little bit more emphasis on the territory business that covers all of our business. And we wanted to make sure that we were focused not only on pure construction accounts, but design and construction accounts where we actually have pretty significant competitive advantage and there's a lot of opportunity. So this just kind of sharpened the pencil on kind of pursuing those opportunities in kind of a concerted way and kind of getting all the energy behind one effort. And we're pretty confident that, that's exactly what we're going to get. But of course, when you do that, sales reps get new accounts, people get moved from accounts, so they'll get new responsibilities. So it creates a little bit of short-term disruption. We absolutely expect that to work its way out over the next quarter or two. And we expect it to kind of compound benefits from doing us moving forward.

Operator:

Thank you. Our next question comes from the line of Steve Tusa of JPMorgan. Your question please, Steve.

Andrew Anagnost:

I'll let Debbie answer the second half of that, but let me talk more broadly about what's going on in the AEC sector. With everything in these sectors, there's always puts and takes, right? And what you see is one sector sees some kind of decline in activity, nobody is building new office buildings or whatever. And in other cases, some people are seeing increases in activity. And that's exactly what we're seeing. I'll give you a classic example of what goes on in this environment. So, people are pulling back from office space right now, pretty significantly downsizing their offices. And as a result, what's happening is that there's more competition for getting people to sign leases for new office space. So what that's leading to is a kind of modernization of office space to accommodate new ways of working or to attract the best renters. And people are spending money on that, which is offsetting money being spent in other places. And we've taken all of this into account as we look forward into our business throughout the year. So that kind of gives you a sense for how billings shift around and how money moves around and what our relative sensitivity as to some of these things. A lot of these indicators you talked about, they kind of tell you what's already happened, not what's going to happen necessarily. That's why we like to pay attention to kind of our leading indicators around monthly active usage of the products. Now, I'll turn it over to Debbie to discuss the other part of your question.

Steve Tusa:

Yes, great. Thanks for the details. Thank you.

Sterling Auty:

Yes, thanks. Hi, guys. So, just wondering, given the comments about the second half acceleration, does that mean that you're expecting the peak of the macro impact to really hit next quarter? Or is some of that acceleration more just due to improvement in Autodesk execution based on some of the changes that you had mentioned during the prepared remarks?

Sterling Auty:

That makes sense. And then Andrew, one for you. When you think about the long-term opportunity for generative AI, LLMs, conversational interfaces, et cetera. Do you view this as something that's going to ultimately raise the ARPU and/or prices for Autodesk solutions, given the additional value add? Or is it going to be more differentiation at the current price levels just so you can drive more market share?

Sterling Auty:

Got it. Thank you.

Simon Mays-Smith:

Thank you, Latif, and thanks, everyone, for joining us on the call. We look forward to catching up with you next quarter. If you have any questions, please just e-mail us on [email protected]. Latif, back to you.

Simon Mays-Smith:

Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss our fourth quarter and full year fiscal ’23 results. On the line with me are Andrew Anagnost, our 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.com/investor. You can find the earnings press release, slide presentation and transcript of today’s opening commentary on our Investor Relations website following this call. During this call, we may make forward-looking statements about our outlook, future results and related assumptions, acquisitions, products and product capabilities 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 10-K and the Form 8-K filed with today’s press release for important risk factors 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 disclaims any obligation to update or revise any forward-looking statements. During the call, we will quote several numerical growth changes 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 or XL Financials and other supplemental materials available on our Investor Relations website. And now, I will turn the call over to Andrew.

Debbie Clifford:

Thanks, Andrew. Our fourth quarter and full-year results were strong. Overall, the demand environment in Q4 remained consistent with Q3. The approaching transition from up-front to annual billings for multi-year contracts, and a large renewal cohort, provided a tailwind to billings and free cash flow. As Andrew mentioned, we continue to develop broader strategic partnerships with our customers and closed our largest deal to date during the quarter. The nine-digit deal is a multi-year commitment, billed annually, and did not have a meaningful impact on our financials during the quarter. Total revenue grew 9% as reported and 12% in constant currency, with subscription revenue growing by 11% as reported and 14% in constant currency. By product, AutoCAD and AutoCAD LT revenue grew 9% and AEC revenue grew 11%. Manufacturing revenue grew 4%, but was up mid-teens, excluding foreign exchange movements and upfront revenue. M&E revenue was down 10%. Recall that in Q4 last year, M&E won its largest-ever EBA, which included significant upfront revenue. Excluding up-front revenue, M&E grew 4%. Across the globe, revenue grew 13% in the Americas, 7% in EMEA and 4% in APAC. At constant exchange rates, EMEA and APAC grew 12% and 10%, respectively. Direct revenue increased 5% and represented 36% of total revenue. Strong underlying enterprise and e-commerce revenue growth was partly offset by foreign exchange movements and lower up-front revenue. Our product subscription renewal rates remained strong, and our net revenue retention rate remained comfortably within our 100% to 110% target range at constant exchange rates. Billings increased 28% to $2.1 billion, our first quarter over $2 billion, reflecting continued solid underlying demand and a tailwind from both our largest multi-year renewal cohort and the pending removal of the discount for multi-year contracts billed up front. Total deferred revenue grew 21% to $4.6 billion. Total RPO of $5.6 billion and current RPO of $3.5 billion grew 19% and 12%, respectively. About 2 percentage points of that current RPO growth was from early renewals. Turning to the P&L, non-GAAP gross margin remained broadly level at 92%. Non-GAAP operating margin increased by 1 percentage point to approximately 36%, with ongoing cost discipline partly offset by revenue growth headwinds from foreign exchange movements. For the fiscal year, non-GAAP operating margin increased by 4 percentage points, reflecting strong revenue growth and ongoing cost discipline. GAAP operating margin increased by 9 percentage points to approximately 21%. Recall in Q4 last year, we took a lease-related charge of approximately $100 million. That was part of our effort to reduce our real-estate footprint and to further our hybrid workforce strategy. For the fiscal year, GAAP operating margin increased by 6 percentage points. We delivered record free cash flow in the quarter and for the full year of more than $900 million and $2 billion, respectively, reflecting our strong billings growth. Turning to capital allocation, we continue to actively manage capital within our framework. As Andrew said, our strategy is underpinned by disciplined and focused capital deployment through the economic cycle. We will continue to offset dilution from our stock-based compensation program and to opportunistically accelerate repurchases when it makes sense. During Q4, we purchased 1.1 million shares for $210 million at an average price of approximately $193 per share. For the full year, we purchased 5.5 million shares for $1.1 billion at an average price of approximately $198 per share, and reduced total shares outstanding by 4 million. We retired a $350-million bond in December. Recall that we effectively refinanced this bond in October 2021 at historically low rates when we issued our first sustainability bond. Our average bond duration is now almost seven years. Now, let me turn to guidance. Our strong finish to fiscal ‘23 sets us up well for the year ahead. Overall end-market demand in Q4 fiscal ‘23 remained broadly consistent with Q3 fiscal ‘23. Channel partners remained cautiously optimistic, usage rates grew modestly, excluding Russia and China, and bid activity on BuildingConnected remained robust. As we said last quarter, foreign exchange movements will be a headwind to revenue growth and margins in fiscal ‘24. We expect FX to be about a 4-percentage point drag on reported revenue. We continue to expect the absence of recognized deferred revenue from Russia will be about a 1 percentage point drag to revenue growth. As we’ve highlighted before, most recently on our Q3 earnings call, the switch from up-front to annual billings for most multi-year customers creates a significant headwind for free cash flow in fiscal ‘24 and a smaller headwind in fiscal ‘25. You can see the impact on fiscal ‘24 in slide eight of our earnings deck. Change in deferred revenue increased fiscal 23 free cash flow by $790 million, but will reduce fiscal ‘24 free cash flow by approximately $300 million. The switch to annual billings for multi-year customers and a smaller multi-year renewal cohort are the key drivers of this $1.1 billion swing. The transition will also affect the linearity of free cash flow during the year, with Q1 fiscal ‘24 free cash flow benefiting from the strong billings in Q4 fiscal ‘23, and our largest billings quarters in the second half of the year proportionately more impacted by the switch to annual billings. While we expect many customers to switch to multi-year contracts billed annually, some may choose annual contracts instead. All else equal, if this were to occur, it would proportionately reduce the unbilled portion of our total remaining performance obligations and would negatively impact total RPO growth rates. Deferred revenue, billings, current remaining performance obligations, revenue, margins, and free cash flow would remain broadly unchanged in this scenario. Annual renewals create more opportunities for us to drive adoption and upsell, but are without the price lock embedded in multi-year contracts. We'll keep you updated on this as the year progresses. Our cash tax rate will return to a more normalized level of approximately 31% in fiscal ‘24, up from 25% in fiscal ‘23. We accrued significant tax assets as a result of the operating losses we generated during our business model transition. Growing profitability and, more recently, rising effective tax rates across the globe, have accelerated the consumption of those tax attributes. Absent changes in tax policy, we expect our cash tax rate to remain in a range around 31% for the foreseeable future. Putting that all together, we expect fiscal ‘24 revenues to be between $5.36 billion and $5.46 billion, up about 8% at the mid-point, or about 13% at constant exchange rates and excluding the impact from Russia. We expect non-GAAP operating margins to be similar to fiscal ‘23 levels with constant currency margin improvement offset by FX headwinds. We expect free cash flow to be between $1.15 billion and $1.25 billion. The mid-point of that range, $1.2 billion, implies a 41 reduction in free cash flow compared to fiscal ‘23. As I outlined earlier, the key drivers of that reduction are

Operator:

[Operator Instructions] Our first question comes from the line of Saket Kalia of Barclays. Your question please, Saket.

Debbie Clifford:

Sure. Thanks, Saket. So first, the overall demand environment in Q4 was relatively consistent with what we saw in Q3. If I drill first into the specifics on the guide for billings, of course, we have multiyear to annual billings transition, that's creating a headwind as expected. The transition doesn't have an impact on revenue. It's just a change in billings frequency. On revenue, as we outlined last quarter, we're seeing a negative impact from FX and the Russia exit. Together, that represents 5 points of headwind to growth. If we normalize for that, the revenue growth range would be in the low teens. On margin, we're managing the flat margins on an as-reported basis year-over-year. That's consistent with what we said on the last call. We have a strong balance sheet. We have conviction in our strategy. So we want to continue to invest during the cycle so that we can maintain our momentum, but not so much so that we see a detriment to our margin outlook. And I want to point out that our margin guide on a constant currency basis represents improvement year-on-year. And then finally, on cash flow, the headwind to billings from the transition to annual billings has a downstream effect on cash flow, of course. As I mentioned in the opening commentary, the swing in long-term deferred revenue is having a negative impact of around $1.1 billion to $1.1 billion to fiscal '24 cash flow. That headwind is driven primarily by that switch to annual billings for multiyear customers. And if we take that with other factors like a lower multiyear renewal cohort and higher cash taxes, we get to that $1.2 billion guidance midpoint. Our goal is to set ourselves up for success in fiscal '24 and for the long-term. And it's that same sort of thinking that's driving how we're thinking about the longer-term financial model. On revenue, our target planning range of 10% to 15%, it remains in that double-digit territory. On margin, we're targeting a margin in the 38% to 40% range in the fiscal '23 to '26 window. But we said that because of the macro and FX headwinds that we're seeing, we think it's more likely now that it's going to be in the lower half of that range. And then on cash flow, we'll still work towards double-digit CAGR growth through fiscal '26, but it looks less likely though, given the impact of cash taxes, FX volatility and a stronger-than-expected fiscal '23 finish. As we look ahead, we're focused on managing the business to a Rule of 45 ratio or better, which after we get through this multiyear to annual billings transition, we think strikes the right balance between driving top line growth and delivering on disciplined profit and cash flow.

Debbie Clifford:

Yes. It has finally arrived. It's nice to finally be having these conversations, Saket. So the transition to annual billings, the rollout is happening on schedule, our systems will be ready. We're assuming that we sell multiyear upfront through March 27. And then at the March 28 go-live that we only sell multiyear with annual billing terms in mature countries for our platinum and gold partners. That represents a significant majority of the eligible population. There's going to be some remaining multiyear upfront in the forecast beyond March 27. That's going to be coming primarily from eStore and emerging countries, but it's relatively small in comparison to the volume that we saw in fiscal '23. And as we move those populations to annual billings, we'll see a follow-on headwind to free cash flow in fiscal '25. It's consistent with what I said in the opening commentary that the past is not going to be linear. We're assuming that the same proportion of our business that's been multiyear remains multiyear. We think that the price lock that you get in a multiyear contract will entice our customers to continue to buy multiyear, especially in the inflationary environment that we're in. But of course, it's possible that some of our customers choose annual contracts rather than multiyear contracts with annual billings. That wouldn't impact billings or most other financial metrics in fiscal '24, but it would negatively impact the total RPO growth rate. At the end of the day, it's a win-win for us. If our customers choose to go with annual contracts, it gives us an opportunity to engage with them upon renewal to drive adoption and upsell and our renewal rates are strong. So this is something we'll keep you posted on as the year progresses.

Operator:

Our next question comes from the line of Jay Vleeschhouwer of Griffin Securities. Your line is open, Jay.

Andrew Anagnost:

Okay. Great. So I like the way you highlighted. This is an evolution. We've been evolving in a particular direction over time. Obviously, several years back, I talked about the 50-50 mix of direct and indirect and we've been driving a lot of growth in direct channels. We've been driving a lot of growth in direct enterprise business, and all of these things kind of like weave together into a longer-term plan. And now what you're seeing is doing is we're driving a lot more direct engagement with some of our value-added resellers. So some of the changes that you saw in there are preset staging more and more direct engagement with our value-added resellers and less, but smaller engagements and fewer engagements between intermediates and our value-added resellers, which makes total sense between the systems evolutions we've been executing on in the direction we're going. So long-term, we're still driving towards that same type of balance that we've been talking about. But as our systems improve, we're looking for different types of engagement models with our value-added reseller channel.

Debbie Clifford:

Sure, I'll take that one, Jay. So we start at the top. Yes, subscriptions grew in a healthy way. I just want to remind, however, that there's a lot of variability in that metric, given that we have such a wide diversity of business models in play, things like Flex, EBAs, accounts pricing and so on and so forth. So it does make it less and less of a relevant metric for us to manage business performance. We're more focused on new and renewal ACV. They both posted solid growth in Q4. As we think about new ACV. That's the proxy for, I think, the spirit of your question. We generated across both volume and also stronger unit economics, things like price mix and partner margins. In general, historically, we've seen it come from roughly equally across those sources, and it kind of flexes up or down depending on the demand environment that we're in. We could see some puts and takes like when COVID hit, we saw more growth from volume because volume versus price because we were more sensitive to price increases at the time that the pandemic hit. And then obviously, when we're in a situation where we change prices at all, we might see more growth coming from price. But all in all, as we think about achieving some of the long-term growth parameters that I talked about, we're thinking about it as a roughly equal split across volume, price mix, ASP over time. Andrew, did you want to comment on the segment?

Jay Vleeschhouwer:

Very good. Thank you, both.

Adam Borg:

Great. Thanks so much, for taking the question. Maybe Andrew, on Innovyze, it was interesting to hear and great to hear about the record quarter. We picked up some growing traction in our check. I'd love to hear a little bit more about what's driving this and where we are in the migration more broadly to subscription, given its more legacy business model? And then I have a follow-up.

Adam Borg:

Maybe just a quick follow-up on the macro. You guys are clear that things seem to be consistent quarter-over-quarter. I'd love to maybe just try go down one step deeper. Any observations around customers switching more to point solutions from collections or anything around RT or perhaps even more interest in Flex given the macro? Thanks so much.

Adam Borg:

Great. Thanks again.

Joseph Vruwink:

I wanted to go back and give more detail on what you're doing with the public sector around project delivery. And I guess I'm curious how this compares to the evolution of the commercial side of your business. So maybe the analogy use, I think, BIM360 launched and 2012, and we got Construction Cloud in 2019 and here we are today is what you're announcing now or kind of the conversations you're having in the public space with owners it closer to 2012? Or is it kind of further along and has the potential to progress more quickly?

Joseph Vruwink:

Yes, great. That's helpful. And then, just on the 10% to 15% growth parameter, I guess, as I think about the backdrop in fiscal 2024, I wouldn't label it as easy. And yet the guidance, I think, calls for something closer to 12% organic. So I guess the question is what happens incrementally in kind of a planning scenario relative to a challenging backdrop in 2024, where 10% type growth becomes a plausible outcome?

Debbie Clifford:

Yes, sure. A couple of things I would say. First, overall, I mean, we're watching the macro backdrop closely, and I said that it was broadly unchanged. Europe was a bit better or U.S., a bit worse. Asia, about the same. So overall, on the whole, the demand environment was broadly similar. We've reflected all of that into our guidance. The leading indicators remain strong. And another way to think about it would be that if you look at revenue, the implied growth rate in Q4 of our fiscal '23 is 9%. If you extend that into fiscal '24 at another point of currency headwind, you're squarely at the guidance midpoint for fiscal '24. So we're kind of already at that rate. And we feel comfortable with the guidance that we've set.

Operator:

Our next question comes from the line of Michael Funk of Bank of America. Your question please, Michael

Andrew Anagnost:

Yes. So there's no change in our approach to non-compliance, right? As I've said in many times, and I want to keep reinforcing, we continue to develop efficiencies. We continue to be able to identify to higher precision, who is actually non-compliant and who actually isn't and we're building up a steady base of business as we move forward. But we're not looking to accelerate it or push it harder or drive it in any particular direction. We're just allowing it to be kind of a steady incremental growth engine within our business and kind of continue to deliver year after year after year. And that will continue to be our strategy. One, we think it's the right thing to do for the company, the right thing to do for our customers. It gives our customers time to get themselves compliant because just the fact that we're out there engaged in compliance activity encourages people to ask themselves if they should be compliant there's other business levers here. And the more carefully we do this and the more incrementally, we do this, the better the outcome is for the entire ecosystem. So no real change in how we're approaching that.

Debbie Clifford:

It doesn't in any meaningful way, as I said. It's really a win-win for us because with annual contracts, we get an opportunity to engage with our customers upon renewal to drive upsell and make sure that there is adoption. Obviously, with a price lock and our customers signing on the multiyear contracts, we have a 100% renewal rate in any given period, but there's less of that opportunity to engage. So from our standpoint, it's a win-win.

Operator:

Our next question comes from the line of Matt Hedberg of RBC Capital Markets. Please go ahead, Matt.

Andrew Anagnost:

Yes. So ChatGPT has obviously given a massive amount of validation to the potential of AI. It is a particular horizontal solution, and we intend to leverage that horizontal solution in some of our solutions. In fact, you're probably aware that Microsoft and Satya Nadela himself demoed a natural language processing tool for generating manuscripts for both direct to my and for Fios, and it works fabulously, right? These are things that provide real leverage to our customers. However, one of the things I really want you to be aware of, Matt, is that the real vertical value comes when we start training on data that is directly used by our customers to do particular things or design or build something. And that comes at the user productivity level, the company productivity level and the ecosystem productivity level. And that's going to unlock a lot of potential as we develop things that cut across all of what our customers can do like generative design, by the way, but probably heading in even other directions. And that's going to take time to develop. It's going to take opportunities for us to engage with customers in terms of using some of their data. But I want you to pay attention to that long-term horizon on doing real training on customer data, which will be where the revolution comes from.

Debbie Clifford:

Thanks, Matt. Look, I'd say that I don't have much to add versus what I've said already. The macro is broadly unchanged. Those leading indicators remain strong. Our business is going to grow faster and better environments and somewhat lower and worse environment. Our goal is to set ourselves up for success in fiscal '24 and for the long term.

Operator:

Our next question comes from the line of Jason Celino of KeyBanc Capital. Please go ahead, Jason.

Debbie Clifford:

Yes, the linearity of our business was not dissimilar to what we've seen in previous periods.

Debbie Clifford:

So what I said was we have target planning parameters of 10% to 15% revenue growth and 30% to 35% free cash flow margin, all in pursuit of our goal of achieving a rule of 45-plus ratio over time. It's not time specific. If you look at our guidance for fiscal '24, that's at the trough of the transition for multiyear to annual billings, we'd be in the low 30s. And what we're saying is that we're going to go from the low 30s as we normalize over time towards our goal of achieving that 45% plus and that we intend to make meaningful progress against achieving that goal regardless of the macroeconomic backdrop.

Operator:

Our next question comes from the line of Steve Tusa of JPMorgan. Your line is open, Steve.

Debbie Clifford:

If you look at -- yes, if you look at Slide 8 of the deck that we put on our website is the move from multiyear upfront annual billings is the lower cohort. We have a lower cohort of multiyear contracts that come up for renewal, just cyclically in fiscal '24. It's FX movements and it's cash taxes. Those are the 4 drivers of the decline.

Debbie Clifford:

We're not going to get into that level of specificity, I would say. I mean, as I mentioned when Jay was asking the question earlier, we kind of look at it as our goal be to drive a mix of volume and price mix, partner margin type contributions to growth. And so you can loosely consider that, that would be how we're thinking about it as we look at growth next year, too.

Operator:

Our next question comes from the line of Sterling Auty of SVB MoffetNathanson. Your question please, sir.

Andrew Anagnost:

Look, it's a hard question to answer because all of those segments are growing, all right? And the new business is growing in all those segments. So it's a nuanced question. One thing I will say is there's a different character of pushback from each one of those segments in terms of what they're seeing. What we're seeing in manufacturing is my costs are going up, my costs are going up and the costs are going up, right? And that is impacting their ability to deliver, frankly, on some impact on demand because they can't pass it all to the customers. They have trouble kind of fulfilling the demand with the cost factor. So I would say right now, the inflationary environment is putting more pressure on our manufacturing customers than it is on our ADC customers. So that's just one piece of color. In the AEC space, obviously, the material costs are a big issue for them. But they are continuing to struggle with labor shortages, capacity problems, the ability to kind of clear out the book of business, which is great because there's an overhang there's an overhang of business for them right now, and there still is. And that's true in manufacturing, too. There's still an overhang of delivery that has to happen. I'm still waiting for a part from my repaired car and it's maybe my cars bus has been months, can't get the part. All right. There's plenty of capacity challenges there as well. But in AEC, generally, there's still a backlog of book of business, labor shortages, capacity within some of these institute companies and construction firms, architecture firms, is getting in the way. So I hear capacity problems much more in the AEC segment which, by the way, is going to continue into time. Eventually, the capacity will clear out. And I hear inflationary pressures much more from our manufacturing customers. M&A, they don't care, it's all digital anyway. People are watching more and they're happy.

Operator:

Our next question comes from the line of Steve Koenig of SMBC Nikko America. Your question please, Steve.

Andrew Anagnost:

Yes. So that was a multilayer question. And now I have to remember the first part of the question, which was related to -- remind me about what your part A was?

Andrew Anagnost:

Yes. Okay. So this is the -- always the question about which parts of the AEC ecosystem are we sensitive to. And here's the thing, and I always answer the question this way. The dollars always go somewhere, all right? So people were very concerned about 1.5 years ago, I was getting lots of questions about what's your exposure to commercial real estate, commercial real estate is going to slow down what happened in commercial real estate? It moved a retrofit and reconfigure all right? And a lot of commercial real estate spend is in is going on in retrofit and reconfigure. A lot of architecture firms are completely involved in that. And also, it's moved to multifamily residential and things associated with that due to other pressures inside the economy and inside municipalities. So the money shifts around all the time, right? And in terms of which segment is getting lit up. So we're not seeing any particular exposure in terms of slowdown to any particular segment because of the way this activity shifts, all right? And it's just one -- it's one of the interesting things about the ecosystem. There's always something that wasn't getting built or worked on that starts to get built or worked on when something else is out of the way, it's out of the queue, all right? And the commercial office of space is somewhat out of the queue and other things are moving into the queue and getting more attention. Now with regards to '08, it was a very different type of situation. If you recall what we thought in '08 was a massive slowdown at the low end of our business. And a matter of fact, it was a precipitous slowdown in the low end of our business with smaller firms not being able to get enough work. We don't see anything on the horizon that looks like that because of the backlog of business that's out there right now, there's just more people wanting to get things done than there is capacity to get the thing done in the ecosystem. So it's a very different situation where there was a kind of like the valve is shut off. There was no backlog, which to bleed through. Now we're in a world where we've got a lot of project backlog, a lot of pent-up demand, and it's just not the same situation that you saw in '08. It was very different world. And we're a very different company.

Operator:

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. Sir?

Operator:

And this concludes today's conference call. Thank you for participating. You may now disconnect.

Simon Mays-Smith:

Thanks, operator and good afternoon. Thank you for joining our conference call to discuss the third quarter results of our fiscal ‘23. On the line with me are Andrew Anagnost, our 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.com/investor. You can find the earnings press release, slide presentation and transcript of today’s opening commentary on our Investor Relations website following this call. During this call, we may make forward-looking statements about our outlook, future results and related assumptions, acquisitions, products and product capabilities 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 risk factors 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 disclaims any obligation to update or revise any forward-looking statements. During the call, we will quote several numerical growth changes 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 or XL Financials and other supplemental materials available on our Investor Relations website. And now, I will turn the call over to Andrew.

Debbie Clifford:

Thanks, Andrew. In a more challenging macroeconomic environment, Autodesk performed in line with our expectations in the third quarter, excluding the impact of in-quarter currency movements on revenue. Resilient subscription renewal rates, healthy new business growth and a strong competitive performance were partly offset by geopolitical, macroeconomic, policy and COVID-19-related headwinds, foreign exchange movements and less demand for multiyear upfront and more demand for annual contracts than we expected. Total revenue grew 14% and 15% at constant exchange rates. By product, AutoCAD and AutoCAD LT revenue grew 10%. AEC and manufacturing revenue both grew 13% and M&E revenue grew 24%, partly driven by upfront revenue growth. By region, revenue grew 17% in the Americas, 10% in EMEA and 14% in APAC. At constant exchange rates, EMEA and APAC grew 12% and 18%, respectively. By channel, direct revenue increased 14%, representing 35% of total revenue, while indirect revenue grew 13%. Our product subscription renewal rates remain strong, and our net revenue retention rate was comfortably within our 100% to 110% target range. Billings increased 16% to $1.4 billion, reflecting continued solid underlying demand, partly offset by foreign exchange movements and a shift in mix from multiyear upfront to annual contracts versus expectations. Total deferred revenue grew 13% to $3.8 billion. Total RPO of $4.7 billion and current RPO of $3.1 billion grew 11% and 9%, respectively. At constant exchange rates, RPO and current RPO grew approximately 15% and 13%, respectively. Turning to the P&L, non-GAAP gross margin remained broadly level at 93%, while non-GAAP operating margin increased by 4 percentage points to approximately 36%, reflecting strong revenue growth and ongoing cost discipline. GAAP operating margin increased by 3 percentage points to approximately 20%. We delivered robust third quarter free cash flow of $460 million, up 79% year-over-year reflecting strong revenue growth, margin improvement and a larger multiyear upfront billing cohort. Turning to capital allocation, we continue to actively manage capital within our framework. As Andrew said, our organic and inorganic investments will remain disciplined and focused through the economic cycle. We will continue to offset dilution from our stock-based compensation program and to accelerate repurchases opportunistically when it makes sense to do so. Year-to-date, we purchased 4.4 million shares for $873 million at an average price of approximately $200 per share, which compared to last year contributed to a reduction in our diluted weighted average shares outstanding by approximately 5 million to 217 million shares. We also announced today that the Board has authorized a further $5 billion for share repurchases. And in December, we plan to retire a $350 million bond when it comes due. Recall that we effectively refinanced this bond last October at historically low rates when we issued our first sustainability bond. And related to that new sustainability bond, we published our first sustainability bond impact report about a month ago, which updates our progress. You can find the report on our Investor Relations website. Now let me finish with guidance. Andrew gave you a readout on the business and our markets at the beginning of the call. Our renewal business continues to be a highlight, reflecting the ongoing importance of our software in helping our customers achieve their goals. New business growth continues to be relatively stronger in North America with growth in EMEA and APAC outside of Russia and China, slightly decelerating, but overall growth remains good. And we’ve seen less demand for multiyear upfront and more demand for annual contracts than we expected. As we look ahead and as we’ve done in the past, our Q4 and fiscal ‘23 guidance assumes that market conditions remain consistent with what we saw as we exited Q3. The strengthening of the U.S. dollar during the quarter generated slight incremental FX headwinds, reducing full year billings and revenue by approximately $10 million and $5 million, respectively, for the remainder of fiscal ‘23. Bringing these factors together, the overall headline is that our fiscal ‘23 revenue, margin and earnings per share guidance remained close to the previous midpoint at constant exchange rates and comfortably within our previous guidance ranges. Our lower fiscal ‘23 billings and free cash flow guidance primarily reflects less demand for multiyear upfront and more demand for annual contracts than we expected. We’re narrowing the fiscal ‘23 revenue range to be between $4.99 billion and $5.005 billion. We continue to expect non-GAAP operating margin to be approximately 36%. And we expect free cash flow to be between $1.9 billion and $1.98 billion. The slide deck and updated Excel financials on our website have more details on modeling assumptions for the full year of fiscal ‘23. The challenges our customers face continue to evolve that reinforce the need for digital transformation, which gives us confidence in our long-term growth potential. We continue to target double-digit revenue growth, non-GAAP operating margins in the 38% to 40% range and double-digit free cash flow growth on a compound annual basis. These metrics are intended to provide a floor to our long-term revenue growth ambitions and a ceiling to our spend growth expectations. Andrew, back to you.

Operator:

Thank you. [Operator Instructions] Our first question comes from Saket Kalia of Barclays. Your line is open.

Debbie Clifford:

Hi, Saket. Hope you are doing great. So we will give formal guidance for fiscal ‘24 in February when we report on next quarter’s results. But here are some things to think about. First, on revenue. At this point, we expect some exogenous headwinds out of the gate. We will have about a 5-point-or-so incremental FX headwind. That’s because of the continued strengthening of the U.S. dollar and then another point of incremental headwind from exiting Russia. That’s going to make it tough for us to grow revenue beyond double digits. On margin, the revenue headwind creates margin growth headwinds, which likely means limited progress on reported margins in fiscal ‘24. Put another way, margins will look better at constant exchange rates. And then on free cash flow, FactSet consensus right now is a range of $1.2 billion to $1.7 billion. There is a couple of important things to consider. The first is the rate at which our customers transition to annual billings. And the second is the overall macroeconomic environment. We continue to be focused on executing on that transition as fast as possible because while the change is good for us, and it’s good for our customers, from a financial standpoint, we really want the noise behind us. So remember, the faster that we move the multiyear based annual billings, the greater the free cash flow headwind we will see in fiscal ‘24. On macro, we will, as usual, give our fiscal ‘24 guidance based on the macro conditions that we see as we exit fiscal ‘23.

Andrew Anagnost:

Yes. Saket, good to hear from you. Alright. Look, Q3 was very much like Q2 and that the quarter was fairly consistent, right? What was different between Q3 and Q2 was the slowing down in Europe taking Russia out. And that was definitely something that was different about the quarters. But that was consistent across the entire quarter. There was no acceleration or change of that as you proceeded across the quarter. Europe was weak throughout the quarter. As were – some of the preferences with regards to multiyear billings, there was no kind of trend of more and more reluctance as you headed further and further down the quarter. So it’s a fairly consistent quarter with regards to all of those things and fairly consistent performance of the business across the quarter. So nothing that fundamentally changed in the quarter. Look, one of the things – another thing that was different about Q3 over Q2 is that we had some currency fluctuations towards the end. And that really is probably the only thing that was different, and those currency fluctuations were responsible for the majority of the small revenue miss.

Operator:

Thank you. Our next question comes from the line of Phil Winslow of Credit Suisse. [Operator Instructions] Our next question comes from the line of Jay Vleeschhouwer of Griffin Securities. Your line is open.

Andrew Anagnost:

Alright, Jay. So I’ll start with regards to the Forma evolution. It’s going to be kind of similar to what happened with Fusion, all right? And I’ll kind of tell it this way. When we started Fusion, we actually anchored Fusion on two things. We started Fusion upfront in the design process. You probably don’t remember the early days of Fusions, Fusion was actually a conceptual design application. It was highly focused on consumer products design and upfront design processes. And we started to bolting onto it the downstream processes close to the [indiscernible] manufacturing, and we started building cloud-based connections between those two and basically filling off the middle between those two bookends of manufacturing and conceptual design. Think of the evolution of Forma is very similar to that, right? The cloud – the Forma cloud is going to start off focusing on the upfront conceptual phases of design, helping architects, planners, developers, all types of people that have to deal with early conceptual decisions about utilization, space utilization, aligning and distributing various aspects of development or an individual building and helping them make some better decisions far upfront in the design. But it’s also going to work to integrate downstream to what we’re doing in Construction Cloud. So Construction Cloud will start getting very close to some of the early bits of what Forma does. And over time, what’s going to happen is Forma and Construction Cloud, Construction Cloud representing the downstream example of manufacturing, all the bits in between are going to be filled out on the same platform, similar to the evolution that we walked through with Fusion. And that will basically bring the entire process to the cloud over time, but continuously adding value to what our customers are doing today throughout the entire development and evolution of that cloud.

Jay Vleeschhouwer:

Thank you.

Phil Winslow:

Hi, thanks for taking my question. I should have one earlier. But Andrew, a question for you, then a follow-up for Debbie. One of the questions I think is about the cyclicality of the AEC industry. And as you mentioned, the industry entered this year with a backlog from 2020 and frankly, even 2019. But as you pointed out, the macroeconomic environment has obviously deteriorated. So my question is what are you seeing and hearing from this vertical, especially about sort of the go-forward pipeline, as you think about the software that Autodesk sells in the various spaces here, the design, plan, build and maintain? And then I’ll just wait to ask the question to Debbie. Thanks.

Phil Winslow:

Awesome. Thanks for that color. And then Debbie, just a follow-up on billings, at the beginning of the year, you talked about long-term deferred revenue, I think, being in the high 20s as a percentage of toll as you exit this year. I wonder if you could give us an update on that. And then in terms of next fiscal year, as you move towards 1-year billings, help us maybe quantify sort of the drawdown of long-term deferred revenue and the impact of that? Because obviously, you flagged the sell-side range right now of $1.2 billion to $1.7 billion, but obviously, that’s pretty broad. So maybe some color on the impact of long-term deferred next year would be helpful, too. Thanks.

Phil Winslow:

Great. Thanks a lot.

Adam Borg:

Hey, guys. Thanks for taking the questions. First, for Andrew, and then a follow-up for Debbie. So just given the macro, are you seeing any trends of customers either – not necessarily upgrading to collections that otherwise or doing so earlier in the year? Or conversely, any trade downs from collections to point solutions or even LT? And then I have a follow-up.

Adam Borg:

Awesome. And maybe just for Debbie. So – and I don’t know if this is a harder question to answer, but if the multiyear mix came in line with your original expectations, how we think about the billings guide or even the billings results in the year, right? If it was the original mix that going into the quarter. Thanks again.

Adam Borg:

Super clear. Thanks again.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Stephen Tusa of JPMorgan. Your line is open.

Andrew Anagnost:

Good.

Debbie Clifford:

The faster the transition, well, first, I want to continue to characterize that the impact of the numbers is relatively small, and it would have a minor follow-on implications to next year. But ultimately, what was built into our guidance was an expectation of a certain proportion of the business that was going to be multiyear upfront. A small portion of those customers have elected to be annual. So rather than it being a negative impact to next year, it would be a very slight positive impact to next year because we would have annual billings next year that weren’t in the form of a multiyear upfront transaction this year. But I want to continue to reiterate that the impact is relatively small. The impact to our billings guidance this year is relatively small. And if you think about the scale of the free cash flow number next year, I want to go back to that range that I was talking about that FactSet consensus range of $1.2 billion to $1.7 billion. And our goal really is to move the totality of the multiyear base to annual billings as fast as possible. And the faster we go, the greater that headwind is going to be to free cash flow next year.

Debbie Clifford:

Okay. Great.

Debbie Clifford:

Correct. Yes.

Debbie Clifford:

No. I think you are thinking about it in a directionally accurate way. The billings reduction then has a follow-on implication to the free cash flow reduction. There is nothing else going on there.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Michael Funk of Bank of America. Your line is open.

Debbie Clifford:

Okay. So let’s – taking detailed note. So in terms of the incentives, the incentives for both our channel partners – well, for our channel partners are still in place. So that’s part of the programmatic details that we are working through right now as we engage with our partners and we execute on the transition. Remember, a substantial majority of that transition is going to be next year in our fiscal ‘24, and that’s why those details are still in flight. On the customer side, what they have historically had a discount of anywhere from 10% to 5% to have a multiyear contract that’s invoiced and collected upfront and that discount goes away. So the incentive is not there necessarily in the future for those customers to be trying to pay for upfront. And we think based on the feedback that we have been getting from our customers that they want to have multiyear contracts with annual billings. It’s good for them in managing their cash flow just like it’s good for us. It removes the volatility that we see and as you can see from our guidance this quarter, the volatility that we see with those multiyear upfront contracts. In terms of what drove the behavior that we saw this past quarter, well, the end of the multiyear discount is coming at the start of next year. And so we were anticipating more demand for multiyear upfront contracts. And in the end, we are seeing slightly less demand than we expected. In the current macroeconomic environment, that’s not surprising. The trade-off of the discount versus the cash upfront, it’s not as enticing for some customers right now. We have assumed that the behavior that we saw with respect to the multi-years in Q3 persists through Q4. And that’s what’s built into our guidance. It’s consistent with our overall guidance philosophy. And we really think that it reinforces our strategy to move to annual billings. We are hopeful that it’s a positive sign for the transition next year. And then finally, in terms of what we can do in order to drive the pace, well, a lot of that’s going to come down to our internal capabilities being available. I have mentioned before, that we are investing in systems to set us up to manage all these contracts at scale, and we are on pace. With those system changes, ultimately, it’s going to come down to what’s on our price list and how we work through these programmatic details with our partners. And these are all decisions that are very much under discussion right now, and that you will hear more from us over the next couple of months.

Operator:

Thank you. One moment please. Our next question comes from the line of Gal Munda of Wolfe Research. Your line is open.

Andrew Anagnost:

Yes. So, first off, Gal, manufacturing grew 13%, 14% on constant currency, that’s still best-in-class for our space. So, we continue to believe that we are taking share in that respect. Look, you can’t have a slowdown in Europe, where we are very strong, without seeing some slowdown in new Innovyze [ph] acquisition with regards to Fusion. However, we still continue to acquire more new users than any of our competitors in the space. So, even in the face of some headwinds where we see some slowing, we are outpacing our competitors, which is kind of the important metric here in terms of the appetite and desire for Fusion. It continues to be the disruptive player, the disruptive price point, the disruptive capabilities. And our customers continue to embrace the solution even in the environment of headwinds. So, we are not concerned because customers really need the efficiency of an end-to-end connected solution, and they really want what they get at the kind of price points that we deliver with Fusion. So, we continue to be the preferred solution. I continue that – I expect that to continue, and I expect our relative performance to remain strong.

Andrew Anagnost:

Yes. I think we have got a good rhythm in our compliance business right now. I mean I think COVID was a very unique situation where there was a sudden and precipitous impact on our customers. I think we are heading into kind of a different environment in many respect. Of course, manufacturers are seeing increased costs in terms of energy and material costs and things associated with that. So, the pressures are real. But I think the rate and pace that we are on right now with regards to license compliance makes sense. Like I have always said, this isn’t something that we are going to slam the accelerator on and try to move faster. But right now, I don’t see us actually changing our pace or slowing down in any kind of way. I think we are at a nice clip right now, and I think that we will be able to maintain it through any kind of bumpiness that we might see as we head into the winter.

Operator:

Thank you. One moment please. Our next question comes from the line of Matt Hedberg of RBC. Your line is open.

Debbie Clifford:

Thanks Matt. So, we are not guiding on the call today. We are trying to provide some insight into how to think about it. And that range is in the realm of possibility, and there are a couple of factors that we want to continue to emphasize that are going to impact that. And that is the rate at which our customers transition to annual billings and the overall macroeconomic environment. But as I have said, we will provide specifics on the next earnings call.

Debbie Clifford:

Thanks. So, first, I want to say that we have been focused on ensuring that we don’t spend ahead of top line growth. We have delivered considerable operating margin expansion over the last couple of years. We have exhibited a spend discipline that we now benefit from as the market conditions continue to evolve. If we focus on the near-term, we have delivered on our margin goals for the year-to-date. We are on track to do so through the end of the year. You can see that from no change in our operating margin guidance. Our hiring plans at the beginning of the year reflected really what is a solid balance between proactive investment and the discipline required to achieve our margin targets. As we look ahead to next year, we are in the planning process right now, but we are focused on ensuring that we continue this pattern of disciplined spend. We are looking to ensure that we can invest in the right areas to drive the strategy. So, things like purposeful and strategic rather than broad-based investing in areas like our industry clouds and shared services, but all against a backdrop of delivering a healthy margin. And I also want to say that we want to ensure that we are not too short-term in our thinking. We have a strong balance sheet. We want to make sure that we strike that right balance as we navigate these macro waters. We want to capitalize on the downturn to continue to invest, but all while keeping that watchful eye on operating margin. And as we said before, we are committed to achieving a margin target in the 38% to 40% range in that fiscal ‘23 to ‘26 window.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Tyler Radke of Citi. Your line is open.

Andrew Anagnost:

Yes. So, first off, one of the things we did to just start Forma, as you might recall at the beginning of the pandemic, we acquired a Norwegian company called Spacemaker. And we have continued to invest in that team, and we will continue to expand that team either by repurposing existing resources to work with that team or by adding additional resources to that team to make sure that we are on track. But one of the foundational investments that supports all of the things we are trying to do with our investment in data. And that’s an ongoing investment in trying to break up Revit files and make them more accessible in the cloud as granular data. Forma and – by nature is built net native on the cloud and it has granular data at its core. So, that’s one of the kind of core vectors that we will be doing. But we will be incrementally investing to ensure that we are heading on the right path with this solution. But we have done some of that already. And we have kind of absorbed some of those investments today. Now, I think the question about timeline is a really good one because these kind of transformations – what we are doing with Forma is different, right. What we are doing with Revit to improve its performance and improve its capabilities based on what our customers are asking us to do is making their current tools better. But what Forma is doing, especially with its connection – its native connections to downstream process is different. It takes time for different to penetrate the industry, just like different took time with Fusion. It was – we have been working on Fusion for over a decade, alright, roughly speaking a decade. So, you can expect that it’s going to take 5 years for Forma to mature and even longer for it to totally replace what our customers are doing. However, our goal is to incrementally add value to the process as time goes on, just like we did with Fusion. Fusion, we added incremental value with the connection to downstream manufacturing. In Forma, we are going to add incremental value with regards to the data platforms and the connection to the downstream construction processes. So, that’s all connected, but it is going to take time similar to what we saw with Fusion.

Debbie Clifford:

Yes. Sure. So yes, I mean current RPO is a very important metric in monitoring our business performance. And you are right, particularly when you normalize for the currency impacts that growth was in a healthy zone. So, I want to just continue to stress that FX has been really volatile, and that’s going to continue to impact the growth rate. So, definitely look at the constant currency growth rates over time. Also, the timing and volume of our EBAs impacts the growth rate period-to-period. And so sometimes what you see is that when we have large cohorts of our EBAs coming up for renewal, it tends to be back-end loaded in our fiscal years and most often in our Q4, we start to see growth impacts as the year progresses, in many cases, deceleration Q1 to Q3 that would tick back up as those cohorts for EBAs come back up for renewal. So, growth rate should tick back up over time, given consistent historical – given patterns consistent with our historical patterns. But again, remember the constant currency has just been a zinger that’s going to impact growth rates for quite a while here. So – but it is an important metric for us, and we monitor it closely.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Jason Celino of Key. Your line is open.

Debbie Clifford:

Yes. So, Jason, the biggest impact is currency. We have seen a growing currency headwind during the year, and that’s gradually showing up in the growth rates as the year progresses. It’s about a 3-point headwind in Q4. It was a 1-point headwind in Q3 and was neutral in the tailwind at the beginning of the year. So, you can see that it’s gradually having a significant impact on our growth rate. That’s the biggest driver of the implied growth rate that you are talking about. Also, to a lesser extent – but Andrew did mention that we saw a modest deceleration in our new business, particularly in Europe during Q3, that does have a slight follow-on impact to revenue in Q4.

Debbie Clifford:

Yes. It tends to be larger deal sizes, not surprisingly. I think that when our customers start to exhibit cash conservation behavior, that behavior does tend to be more prevalent with some of the larger deal sizes. And remember, they are still signing multiyear contracts, they are just signing multiyear contracts and asking for annual billings, which for those larger deals, we are willing to accommodate while we continue to invest in the back-office infrastructure to be able to handle the totality of the multiyear base with annual billings at scale.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Keith Weiss of Morgan Stanley. Your line is open.

Andrew Anagnost:

So with regards to retention rates, look, retention rates continue to be strong and maintain steadiness. I think we are going to continue to see that steadiness into next year. The one area where we expect to see softness with macro headwinds is at the low end of our market. So the low end of the market is low ASPs, but high volume. So, the retention rates can move around on a volume basis when there is headwinds like this. But generally speaking, broadly across our business, we see retention rates holding up. Our products are mission-critical to what our customers do. They need them. But at the low end of our business, we will probably see some headwinds there, but they won’t be material to the larger business.

Keith Weiss:

Great. And then just following up on kind of the comments about the strong balance sheet and willing to invest, wanted to see if you are seeing any change in behavior in the competitive landscape, especially from some companies that may not have as strong a balance sheet? So any changes you are seeing in the behavior overall? Thank you.

Keith Weiss:

Yes, sure. So you guys have a strong balance sheet kind of willing to invest in the current environment, just even though there maybe some macro headwinds. But you likely have some peers out there that may not be as well funded or has strong balance sheets. So curious if you are just seeing any sort of changes in behavior across the competitive landscape?

Operator:

Thank you. That is all the time that we do have for question. So I’d like to turn the call back over to Simon Mays-Smith for any closing remarks.

Operator:

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect. Have a great day.

Simon Mays-Smith:

Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss the second quarter results of our fiscal 2023. On the line with me are Andrew Anagnost, our 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.com/investor. You can find the earnings press release, slide presentation and transcript of today's opening commentary on our Investor Relations website following this call. During this call, we may make forward-looking statements about our outlook, future results and related assumptions, acquisitions, products and product capabilities 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-K 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 disclaims any obligation to update or revise any forward-looking statements. During the call, we will quote several numeric or growth changes 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 or Excel financials and other supplemental materials available on our Investor Relations website. And now I will turn the call over to Andrew.

Debbie Clifford:

Thanks, Andrew. Q2 was a strong quarter across products and channels. Our end markets were broadly consistent with last quarter, with our strongest growth in North America and growth in Europe and APAC impacted by the war in Ukraine and COVID lockdowns in China. Total revenue grew 17%, both as reported and at constant currency. By product, AutoCAD and AutoCAD LT revenue grew 13%, AEC revenue grew 18%, manufacturing revenue grew 16% and M&E revenue grew 20%. By region, revenue grew 22% in the Americas, 15% in EMEA and 10% in APAC or 13% at constant currency. By channel, direct revenue increased 18%, representing 34% of total revenue while indirect revenue grew 16%. Our product subscription renewal rates remain strong, and our net revenue retention rate was comfortably within our 100% to 110% target range. Billings increased 17% to $1.2 billion, reflecting robust underlying demand. Total deferred revenue grew 12% to $3.7 billion. Total RPO of $4.7 billion and current RPO of $3.1 billion grew 13% and 10%, respectively, reflecting strong billings growth and, as we've highlighted in the last two quarters, the timing and volume of multiyear contracts, which are typically on a three-year cycle. Multiyear contract volume remained strong during the quarter, as expected and as you can see from the uptick in long-term deferred as a percent of total deferred. Turning to the P&L. Non-GAAP gross margin remained broadly level at 92%, while non-GAAP operating margin increased by 5 percentage points to approximately 36%, reflecting strong revenue growth and ongoing cost discipline. GAAP operating margins increased by six percentage points to approximately 20%. We delivered record second quarter free cash flow of $246 million, up 32% year-over-year, reflecting strong billings growth in both Q1 and Q2. We continued our accelerated share repurchasing during the quarter. We purchased 1.4 million shares for $257 million at an average price of approximately $182 per share, which, when compared to last year, contributed to a reduction in our weighted average shares outstanding by approximately three million to 270 million shares. While our capital allocation strategy remains unchanged, you can expect that we will continue to invest organically and inorganically to drive growth. We've proactively used our strong liquidity to repurchase 3.5 million shares in the first half of this year, front-loading the offset of next year's dilution. Now let me finish with guidance. The underlying business conditions we've been seeing are broadly unchanged. As I mentioned earlier, we're seeing strength in North America and continued healthy growth in Europe and Asia, outside of Russia and China, due to the geopolitical situation in both regions, as well as the COVID lockdowns in China. Our renewals business continues to be a highlight, reflecting the ongoing importance of our software and helping our customers achieve their goals. As we look ahead and as with previous quarters, our fiscal 2023 guidance assumes that market conditions remain consistent for the remainder of fiscal 2023. The strengthening of the US dollar during the quarter generated slight incremental FX headwinds, which reduced full year billings, revenue and free cash flow by approximately $20 million, $5 million and $5 million, respectively. Bringing these factors together, the overall headline for guidance is that it is unchanged at the midpoint across all metrics, with the underlying momentum of the business offsetting those incremental FX headwinds. We are narrowing the fiscal 2023 revenue range to be between $4.99 billion and $5.04 billion. We continue to expect non-GAAP operating margin to be approximately 36% and free cash flow to be between $2 billion and $2.08 billion. The slide deck and updated Excel financials on our website have more details on modeling assumptions for Q3 and full year fiscal 2023. While the challenges our customers face are changing, the growth drivers underpinning our strategy have only been reinforced, which gives us confidence in our long-term growth potential. We continue to target double-digit revenue growth, non-GAAP operating margins in the 38% to 40% range and double-digit free cash flow growth on a compound annual basis. These metrics are intended to provide a floor to our revenue growth ambitions and a ceiling to our spend growth expectations. Andrew, back to you.

Operator:

[Operator Instructions] Our first question comes from the line of Saket Kalia of Barclays. Saket Kalia, your line is open.

Andrew Anagnost:

How are you, Saket

Andrew Anagnost:

Yes. I want to be careful not to give away all the AU tidbits in some of those discussions. But it's an important question. Saket, I -- to put it in perspective, right now, we sell literally hundreds of products. And the challenges for our customers is trying to find out which one of these products solve which problems for them and also the fact that a lot of these products don't talk to each other very easily. So when you're selling hundreds of products, it's really difficult to connect data flows across all those capabilities. It's also really difficult to uniformly deliver multi-platform support, multi-device support, cloud computing and AI automation, which is really challenging. So what we're doing is we're moving away from this kind of disconnected portfolio of products to really a set of platforms to target each one of our industries with some underlying core technologies that support all of it. That will enable us to actually deploy capabilities to our customers as they need them for particular types of process, right, advanced manufacturing capabilities on a time-bound basis or a consumption basis, accumulation capabilities on a time-bound basis or a consumption basis. So they get access to what they need, when they need it, and it's all unified from a data flow point of view. This is kind of going to be revolutionary for a lot of our customers in terms of the evolution and where we're taking them. So it's really valuable for our customers in terms of connecting how they work and the value they get from each one of our products. And it's really important to us in terms of delivering more layers of automation and power to them to the cloud. So it is a journey. It's not going to happen overnight, but Fusion is an excellent example of where we're going and how we could deploy some of these things to our customers, especially when you look at the way extensions work, consumption works on top of the Fusion platform. It's a good model for where we're taking industry platforms for each one of our industries.

Debbie Clifford:

Sure. So we continue to track the multiyear cohort closely. Our proportional volume for multiyear has been in line with our expectations for the first half of fiscal 2023, so that gives us confidence in our fiscal 2023 outlook. We also saw long-term deferred revenue as a percent of total deferred revenue tick up. That, too, was in line with our expectations. As we look ahead to the transition from upfront to annual billings, well, it hasn't started yet. We anticipate that the transition's going to start in early fiscal 2024, and we continue to work through the programmatic and operational details to get there, things like a partner transition plan, back-office system upgrades. But I'll say again, it's our bias to go as quickly as possible. In the meantime, obviously, we're focused on closing out this year, making sure that those multi-years come in consistent with historical patterns. And the fact that they are is giving us that confidence as we look to achieve our goals for this year.

Operator:

Thank you. Our next question comes from the line of Phil Winslow of Credit Suisse. Phil Winslow, your line is open.

Andrew Anagnost:

Thanks Phil.

Andrew Anagnost:

Okay. That was a multi-part question. I will address it. So first off, let's talk about what we're hearing from design customers. The number one thing we're hearing from the design segment is the backlog of business, right? They have more business right now than they're able to effectively execute on. And the requirements of that business are increasing in terms of what kind of tools they need to use, how they need to approach the problems, owners, municipalities, all sorts of customers they deal with are putting more requirements on how they have to work. So they're all looking to up their game in digital tools. The biggest challenge we hear from these customers is hiring, frankly. We were hearing last year a lot of conversations about, oh boy, fixed bid contracts and inflationary pressures and all these things. As I've said previously, they bake these things now into their business bids and they're able to capture those costs in their contracts. But what they're struggling with is hiring. We're still growing even if they struggle to hire because they're getting people in but they have more demand for manpower and person power than they actually are able to capture at this point, okay? So that's something we're hearing really robustly. Now let's go to the growth in construction. First off, I want to give you my quarterly disclaimer. When you look at the construction business, the make number does not capture the full story in the construction business. The EBA growth is hidden in the design bucket. So when you count how we're doing with our enterprise business agreements and the overall territory business, that we grew close to 30% in that business. So that's really quite nice growth. And what we're hearing, and I'm glad you picked up on the 45% growth on monthly active users, we're hearing a couple of things. One, first off, we've lit up our territory business, our partners in the territory. This is driving a lot of really nice growth in the US and in Europe, and it's going to continue to drive that growth. And that's bringing us closer to certain customers lower down in the market, the mid-market and below, which I think is a really important point in our journey, okay. The other thing I want to talk about is when customers are starting to realize is they need a lot more than just a project management or a construction site management tool. They really are looking to their future, where they're trying to connect the design and the build all the way together continuously. And one of the big linchpins in all of that is preconstruction planning. The vast majority of the cost and complexity of a construction project is built in during the preconstruction planning phase. You get that wrong, you bid wrong, you come in with lower margins, you have more churn and complexity in your project. So this connection between design, preconstruction all the way to build is increasingly really important to their customers. So customers are taking a lot more time to evaluate what they're trying to invest in. And I think you also probably noticed, at least a little bit in the introductory commentary, that infrastructure is a big play for us here. So Department of Transportation, and you saw Indiana, the Indiana Department of Transportation lean into our portfolio for looking at their future needs. We're hearing more and more from Departments of Transportation that are really looking to upgrade and modify their stack to be much more designed to build on a much more modern cloud infrastructure. So there's a lot going on in construction, Phil, and it's coming at us from multiple directions, and right now, it's all positive.

Andrew Anagnost:

Thanks, Phil.

Jay Vleeschhouwer:

Good evening, Andrew, Debbie and Simon. Andrew, you have, by our calculation, the largest R&D budget in your peer group, but you don't necessarily have the largest headcount in R&D. And so the question is, particularly given your earlier comment about the large number of products that you're currently developing and having to manage, how you see or how are you working on improving your R&D productivity or effectivity, if you will, in terms of your core platform, your applications technology and ultimately, product usability to drive MAUs and further enlarging the installed base? And then for Debbie, you commented earlier with respect to your back-office as part of your initiatives over the next number of years. On that point, could you comment on where you are in terms of your operational capacity for the new licensing model and deliverables that you're going to have as you have an increasingly complex offering to customers in terms of Flex and everything else you're doing, the platform Andrew mentioned? Are you, in fact, going to have the requisite back office to handle all of that?

Debbie Clifford:

And then Jay, to answer your question about operational capacity for things like new business model, I would say that we are well on our way on this journey but we still have some ground to cover in order to be where we need to be. And I think that, that's an appropriate place to be at this stage of the journey. Now of course, we don't launch new business models without the ability to support them, which is why, as one example, we are delaying the shift to annual billings until next year, so that we can spend the time that we need to be able to invest in our back-office systems to make sure that we have a good customer experience and that we have the right controls and automated capabilities in the back office. I mean, ultimately, this is something that we focus on not only to make sure that we have the capacity to support new business models but also so we can scale. If we want to achieve our long-term growth aspirations, we need to continue to invest in our back-office infrastructure in order to be able to scale efficiently, effectively and in an automated way to do it.

Andrew Anagnost:

Thank you Jay.

Matt Hedberg:

Hey, thanks guys. Andrew, for you, the growth in Fusion 360 was really fantastic to hear. Can you talk about where those subs are coming from? Are these greenfield? Are they replacements? And maybe just a little bit more on with a lot of alternatives, why Fusion 360?

Matt Hedberg:

That's super, super helpful. And then Debbie, the consistency is obviously really good to see. The macro environment, this is not easy, clearly, but the consistency was great. I'm wondering if you could talk a little bit about the linearity in the quarter. And maybe what are you seeing thus far in August?

Matt Hedberg:

Thank you.

Adam Borg:

Guys, and thanks so much for taking the question. Maybe just first for Andrew on the Infrastructure Bill. I know that's something we talked about in the past and the positive tailwinds that could have for Autodesk. So maybe just a quick update here. And then as I think about the recently passed Inflation Reduction Act, there's a lot of language in there about clean energy and sustainability. I'd love to hear how you think about that impacting Autodesk over time as well.

Adam Borg:

That's great. And maybe just a quick follow-up, even on Matt's question on Fusion 360. Just on manufacturing more broadly, we'd love to hear more about Upchain and how that fits in the broader strategy you've been talking about here with Fusion 360 today? Thank you guys.

Adam Borg:

Excellent. Thanks again.

Operator:

Thank you. Our next question comes from Joe Vruwink of Baird. Your question please, Joe Vruwink.

Andrew Anagnost:

Yes. So you picked up on something, we're growing faster than any of our competitors, so we continue to take share in manufacturing. And yes, you're right, it's our whole portfolio that's continuing to grow the share in manufacturing. And why is that? So there's a couple of reasons. One, we keep introducing new technologies, all right? And we bring these new technologies to our customers in a way that if you buy the present, you get the future, right? So if you're buying and better, you get Fusion. And that allows you to not only feel good about the product you're using today but know that you're hooked up to where the company is going over the next five to 10 years. And I think that's a real competitive advantage for us in terms of how we bring technology to market. But you're also seeing us blend new types of technologies into the workflows that our customers are trying to do in automotive and other places. I think one of the things that was interesting about what I said in my opening commentary was the blending of both The Wild and VRED, which is -- The Wild was a very early acquisition and then we have VRED, which is an existing mature technology. People are exploring the intersections of various technologies that we have. And you've probably picked up on the fact that our strength in manufacturing has extended more into facilities management with large manufacturers and looking to manage their actual factory assets. So there's overlap associated with those things and there's some overlap with our AEC business with regard to that. But those are the things that are driving our growth in manufacturing. You're right, it's the whole portfolio. The whole portfolio is moving forward and you're also seeing obviously tremendous growth with Fusion, right? We have to maintain that. We like what we see, but customers like what we're doing.

Debbie Clifford:

Ultimately, it is about execution but it's the momentum in the business that we saw, particularly as we exited Q2. So here's how we're thinking about guidance. We had that slight lead in Q2. But of course, we kept our full year guidance flat now at the currency headwinds. The guidance does reflect the demand environment that we saw as we exited Q2. That's consistent with what we've done with previous quarters. The business continues to perform strongly. We have that resilient subscription business model, which is durable during a potential economic downturn and we exited Q2, as I said, with strong momentum. So these are all the factors that are baked into our guidance. I also want to point out that we did retain a range of $50 million on revenue. That gives us some flexibility, especially with that subscription business model, which is more predictable and a significant portion of our future revenue is already on the balance sheet.

Operator:

Thank you. Our next question comes from Jason Celino of KeyBanc Capital Markets. Jason Celino, your line is open.

Andrew Anagnost:

You know what, that is an excellent question. I'm not sure I can answer it in a satisfying way. But here's what I will say. Current bidding activity is a predictor of future build activity, right? Bidding with contractors and other things is an early process in actually executing a project. So when you see an increase in bid activity on BuildingConnected, what you're actually seeing is an increase in the book of business of projects that will actually get executed downstream, right? So this is a good predictor of ongoing activity as you close a bid, you actually then move into execution with that particular subcontractor and some of the things associated with that. So it does give us a forward indication of how much site activity is going to be happening and how much actual real building is going to be going on. And that's one of the reasons why we highlighted one of the reasons we value that connection to the bid activity so much. Not exactly what you asked but that's the depth that I can answer at this point.

Andrew Anagnost:

Yes. So Innovyze continues to perform well. It's doing particularly well in terms of our EBA businesses. A lot of our enterprise business agreement customers are looking to incorporate Innovyze into their contracts with us, which is exactly one of the big synergies we expected when we acquired Innovyze. They have begun their business model transformation. They're in the throes of that right now. It's going quite well. We expect to finish that in a reasonable amount of time. So that's going quite well. But the business is doing well, and we continue to get a lot of interest not only in water in general from our customers, but also in the owner side of Innovyze where they're building solutions that actually manage the operation of the water facilities.

Andrew Anagnost:

Thank you, Jason.

Michael Funk:

Yeah. Thank you for the question this evening. A couple if I could. Just back to the comments of the uniformity of products as you move to a platform or saying you don't want to tip your hand here. But how heavy of a lift is this? And what is the timing involved? And then in addition to the increased attractiveness for customers, are there efficiencies that will accrue to Autodesk as well by adding more uniformity across the platforms?

Michael Funk:

Understood, yeah. Long-term complex project. And then the earlier comments on the delay and shift to annual billing. Just want to make sure I completely understood. Was the comment that you wanted to make sure that the processes were better than they are now and the back office is better than it is right now? And if that's correct, I guess what were the issues that you were seeing that you wanted to streamline just to make that a more enjoyable process for the customers?

Michael Funk:

Yes, that’s pretty helpful color. Thank you.

Bhavin Shah:

Andrew, we continue to hear very good things about BIM Collaborate Pro within the architecture and engineering customer base. Can you maybe better help us understand where we are in terms of adoption of Collaborate Pro within like the Revit customer base? And how we should think about the adoption curve going forward?

Bhavin Shah:

Makes a ton of sense. And I guess along those lines and you kind of intimated at this a little bit, like in terms of adoption here, have you seen that accelerate customers' journeys towards some of your other cloud-based solutions that you guys offer?

Operator:

We'll go to our next question, which comes from the line of Gal Munda of Wolfe Research. Gal Munda, your line is open.

Andrew Anagnost:

Yeah. So actually, Gal, you're picking up on something that was implied in the opening commentary that Flex is a highly valuable tool when you go and you reach the noncompliant users. In a lot of cases, what you're finding in a noncompliant usage situation is it's a multi-user situation gone bad, all right, where they've over-installed software or they've tried to use software in unlicensed ways. And what they're really trying to do is distribute usage, enable occasional usage and some of the things associated with that. Flex is an excellent way to walk into some of those accounts, and in a collaborative manner get them exploring other ways of engaging with Autodesk. And it absolutely will have some positive impacts on how we do license compliance business. Now as we look broadly at Flex, again, it's still really early days with Flex. We continue to see growth and we continue to see a lot of new users coming in with Flex. One of the growth vectors for Flex that I'm particularly excited about is in the long tail of our business. Because what Flex allows you to do, if you're in a smaller company, say you're in a five-person company and you want to occasionally use Revit for some of the projects you bid on, but the vast majority of your projects are AutoCAD or you want to engage in structural simulation for a particular product, the Flex model lets people dabble. It lets people engage with advanced functionality and advanced capabilities on a pay-per-use basis. And they don't have to commit to an annual subscription or a multiyear subscription to get some of these capabilities. So I think there's a lot of long-term growth capabilities built into the long tail of our business that Flex will likely unlock. The jury is still out. We're early on the journey so we'll see where that heads. That's one of the areas that I think is very interesting for Flex.

Simon Mays-Smith:

Thanks, everyone, for joining us. We'll look forward to seeing, we hope, many of you at AU, Autodesk University, in a few weeks' time in New Orleans. I'm sure, I’m pronouncing the name correctly. Thanks, everyone. Thank you, Latif.

Simon Mays-Smith:

Thanks, operator and good afternoon. Thank you for joining our conference call to discuss the first quarter results of our fiscal ‘23. On the line with me are Andrew Anagnost, our 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.com/investor. You will find the earnings press release, slide presentation and transcript of today’s opening commentary on our Investor Relations website following this call. During this call, we may make forward-looking statements about our outlook, future results and related assumptions, acquisitions, products and product capabilities 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-K 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 disclaims any obligation to update or revise any forward-looking statements. During the call, we will quote several numeric or growth changes 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 or Excel financials and other supplemental materials available on our Investor Relations website. And now, I will turn the call over to Andrew.

Debbie Clifford:

Thanks Andrew. Q1 was a strong quarter driven by broad-based strength across products and regions. If we compare the revenue result versus guidance, the outperformance was due to that strength as well as the upfront revenue in a large EBA, which we had forecasted would close later in the year. Total revenue grew 18% and 17% in constant currency. By product, AutoCAD and AutoCAD LT revenue grew 21%; AEC revenue grew 17%; Manufacturing revenue grew 14%; and M&E revenue grew 24%. By region, revenue grew 24% in the Americas, 17% in EMEA, and 10% in APAC. Direct revenue increased 22% and represented 34% of total revenue, up 1 percentage point from last year due to strength in both enterprise and e-commerce. Our product subscription renewal rates remained at record highs and our net revenue retention rate was comfortably within our 100% to 110% target range. Billings increased 16% to $1.1 billion, reflecting robust underlying demand. Total deferred revenue grew 12% to $3.7 billion. Total RPO of $4.7 billion and current RPO of $3.1 billion grew 11% and 10% respectively, reflecting strong billings growth, and as I flagged last quarter the timing and volume of multiyear contracts, which are typically on a 3-year cycle. Turning to the P&L, non-GAAP gross margin remained broadly level at 92%, while non-GAAP operating margin increased by 6 percentage points to approximately 34%, reflecting strong revenue growth and ongoing cost discipline. GAAP operating margins increased by 4 percentage points to approximately 18%. As Andrew mentioned, we delivered record first quarter free cash flow of $422 million, up 34% year-over-year, reflecting strong billings growth in both Q4 and Q1. With the broad equity market pullback in Q1 and our strong cash position, we again accelerated our share repurchasing during the quarter. We purchased 2.1 million shares for $436 million at an average price of approximately $212 per share, which contributed to a reduction in our weighted average shares outstanding of approximately $2 million. While our capital allocation strategy remains unchanged, you can expect that we will continue to invest organically and inorganically to drive growth. Over the last two quarters, we have proactively used our strong liquidity to accelerate repurchasing and will continue to be opportunistic in doing so when market conditions allow for it. Now, let me finish with guidance. The overall headline is that the underlying business conditions that we’ve been seeing are unchanged save for Russia and the continued strengthening of the U.S. dollar. Our business continues to perform well and to post top line growth ahead of our peers. As you can imagine, we are keeping a close eye on the geopolitical, macroeconomic, and policy environments. But against that backdrop in Q1, renewal rates remain strong; multiyear billings were in line with our expectations; and we exited the quarter with strong momentum. As we look ahead and as with previous quarters, we are assuming that market conditions in fiscal ‘23 are consistent with recent quarters. The decision to halt our new and renewal business in Russia had a direct impact on our outlook. Billings decreased by approximately $115 million, revenue by $40 million and free cash flow by $80 million. Of course, we are not satisfied with that outcome, and we will work hard to mitigate the impact by accelerating our channel evolution, customer retention and digital growth initiatives and by doubling down on early successes from recent acquisitions like Innovyze. Beyond Russia, the U.S. dollar continued to strengthen during Q1. While we benefit from a robust hedging program, the pace of FX volatility has been incredibly rapid, and it’s having an impact on our fiscal ‘23 outlook, reducing billings, revenue and free cash flow by approximately $80 million, $20 million and $50 million, respectively. Bringing these factors together, we expect fiscal ‘23 revenue to be between $4.96 billion and $5.06 billion. We expect non-GAAP operating margin to increase 400 basis points year-over-year to approximately 36%, reflecting 1 point of impact from removing Russia from our forecast. We expect free cash flow to be between $2.0 billion and $2.08 billion. The slide deck on our website has more details on modeling assumptions for Q2 and full year fiscal ‘23. The volatile global environment has reinforced the structural growth drivers underpinning our strategy give us confidence in our long-term growth potential. We continue to target double-digit revenue growth, non-GAAP operating margins in the 38% to 40% range, and double-digit free cash flow growth on a compound annual basis. These metrics are intended to provide a floor to our revenue growth ambitions and a ceiling to our spend growth expectations. Andrew, back to you.

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Phil Winslow of Credit Suisse. Your line is open.

Andrew Anagnost:

Yes. So Phil, I think somebody wrote a report about us not being a cyclical business anymore. I can’t remember who it was.

Andrew Anagnost:

Probably an incredibly bright analyst. So look, a couple of things happened in the quarter, and we’re projecting those forward through the year just consistently. And I think it’s important to kind of just talk about this notion of diversification not only of geographical spread of our business but disciplined spread and also business model spread, and I’ll talk about that on a couple of vectors . So first off, let’s just talk about what kind of highlighted in resiliency around our business. Throughout the quarter, the monthly active usage that we track regularly continued to strengthen throughout the entire quarter. It continued to strengthen right up to the end. Yes, we absolutely saw a pullback during the early part of the invasion of Ukraine in Europe, but that rebounded as the quarter progressed. So one, we have a strong demand environment, and we’re selling into that demand environment from multiple vectors, construction, infrastructure, and general building design as well as manufacturing. So we’re working across these things. And what was happening at the same time, and I think this is an important point about the underlying kind of health and resilience in our business, is even when we saw dips in our new business growth in Europe during – just as the invasion in the Ukraine started, which, by the way, recovered as the quarter progressed, renewal rates strengthened broadly. So we saw a broad strengthening in renewal rates. So that broad strengthening in renewal rate actually was able to offset some of the slowness in the new businesses. All of these things are things that we expect to see continue throughout the year and provide durability and stability for our business. Now, the U.S. was strong during the year as well. We did see some softness early on in APAC because it was most sensitive to the currency effects, but if you take out some of the COVID-effective regions like Japan and China, or just Japan specifically, we saw much higher growth rates in APAC than are indicated by the overall results. All of this is a balance between new business and offsetting impacts from renewal businesses. So between the diversity of – our geographic diversity where we’re kind of distributed across multiple spaces, the vectors of diversity we have around selling into infrastructure, construction, core design, manufacturing and the offsetting of really strong renewal rates – increasing renewal rates even in areas of weaker or at least some weakness in new business, that gives us confidence in terms of the durability for the rest of the year.

Andrew Anagnost:

Thank you, Phil.

Jay Vleeschhouwer:

Good evening. Looking ahead into next year, first fiscal ‘24 cash flow, a question as to how you’re going to work with the channel to get through that? 5 or 6 years ago when you went through your first multiphase transition in the model, you were very conscientious about making sure you’ve got the channel through all the changes in terms of upfront, upgrades, maintenance, and so forth. And so, when you look into next year and beyond, how are you thinking about preserving or managing channel margins, their cash flow, their recurring revenue streams as you go through that valley of your own cash flow next year and then look through a rebound in fiscal ‘25? That’s the first question.

Jay Vleeschhouwer:

Okay. Thank you for that. Shorter-term question, you mentioned a couple of times so far on the call usage rate, which is always useful to hear about. Could you speak about that, Andrew, in terms of vertical or end markets? You spoke about it by geo and generally, but could you speak about it in terms of AEC including, in particular, ACC manufacturing and perhaps even what are you seeing in terms of standalone apps versus collection usage?

Jay Vleeschhouwer:

Understood. Thank you, Andrew.

Operator:

Thank you. Our next question comes from Saket Kalia of Barclays. Your line is open.

Debbie Clifford:

Sure. Thanks, Saket. So before I say anything, I want to let all of you guys know that I have a terrible cold. I say this now because I know my voice sounds gravelly. So I just figured I’d be upfront about it, so there weren’t any questions. I also – I don’t want you to interpret my unusual sounding voice as a lack of enthusiasm. Unfortunately, it’s just a garden variety cold, not COVID that I’m struggling with. So anyway, just wanted to be upfront about it.

Debbie Clifford:

On to your question, at the end of the day, the biggest driver of margin improvement over time is going to be revenue growth. And it’s that revenue growth combined with our continued discipline with spend that’s going to deliver that leverage. For this year’s guide, the ramp to 36% is a little less peak because of the impact to the top line that we saw from Russia, and we had that impact flow through to the margin. We think it’s important to continue to invest to further our strategy. We don’t want to be doing any kind of knee-jerk reaction on spend because of Russia. Yes, the inflationary pressures that you mentioned are there. We’re monitoring them closely. But right now, we feel it’s all manageable. I’d also point out that the margin target at 36% represents a 4 percentage point improvement year-over-year. So we’re delivering considerable operating margin leverage at our scale. As we progress through fiscal ‘23, we’re assuming a gradual improvement in margin as the revenue grows and as we continue to tightly manage our spend. That’s a similar pattern to what we saw in fiscal ‘22.

Andrew Anagnost:

Yes. So the new business trended pretty consistently in the U.S. throughout the quarter. It trended fairly consistently in APAC throughout the quarter. There was a slowdown during the Ukrainian invasion at the beginning that recovered as the quarter progressed. And what we’re doing right now is we’re looking at those new business trends, and we’re essentially carrying them forward into the year, expecting it to continue at kind of similar levels as we go through the year. Obviously, we saw a complete evaporation of new business in Russia and some impact in Belarus. But like I said, Europe recovered after – shortly after the invasion progressed. So that’s the way we’re viewing these. That’s the way they played out throughout the quarter, and we’re assuming similar performance throughout the year.

Andrew Anagnost:

Thank you, Saket. Have a good one.

Adam Borg:

Great. Thanks so much for taking the question. Maybe just for Andrew, you spent a good – as a matter of time in your prepared remarks talking about infrastructure, including the largest EBA deal and just the breadth of your portfolio. So I’d love to just get an update on your conversations with the industry, how you’re thinking about the upfront or the existing infrastructure bill, latest thoughts on the impact to the industry and ultimately the impact of Autodesk, any such timing there?

Adam Borg:

That’s really helpful. And maybe just a real quick follow-up on the macro, obviously, you guys are very clear about the diversity of the strength that you’ve seen. And maybe I’ll just ask the diversity question slightly differently. In the past, you talked about a small end of the market, the mid-end and the larger end by different customer sizes, by employees or seats. I’m just curious, any differentiation you saw across the installed base, looking that way in terms of macro, both the installed base and new business there? Thanks again.

Adam Borg:

Excellent. Thanks again for the time.

Matt Hedberg:

Great. Thanks, guys. Hey, Andrew, maybe for you first. Obviously, I think we all understand at least that this business is not as cyclical as Autodesk of old. And I think that’s clear through the subscription transition here. Now if the global economy works is slow, I just wanted to double-click on really the value of your subscriptions and why these renewal rates could be better than a lot of investors perceive even if there is a slowing.

Matt Hedberg:

That’s super helpful. Thank you for that. And then, Debbie, we will see if your voice can hold up here. Obviously, a big year for multiyear renewals that ramps throughout the year, but I am wondering, was there anything that surprised you about billings duration in 1Q? And maybe how might that progress as the year unfolds?

Matt Hedberg:

Got it. Well done guys.

Joe Vruwink:

Great. Hi everyone. One thing that stood out this quarter was the accelerating growth from the partner channel. How much would you credit some of the recent initiatives like opening up Construction Cloud or being able to get in front of customers with some of the new commercial formats as opposed to just kind of the general trends in the business that you have been talking about?

Debbie Clifford:

Not at this point, I would say. I mean we saw broad-based strengths through the channel – through our channel partners during the quarter outside, of course, of Russia. And then that immediate slowdown that we talked about in Europe that then picked back up as we exited Q1. And we did see that momentum as we exited Q1. But I wouldn’t highlight anything specific. Certainly the success that we are seeing in Construction is helping. But remember, Construction, while it’s an explosive growth area for us, on the whole, it’s still a smaller part of our business. So, that strength is contributing to overall partner strength, but we are also seeing just broad-based strength through the core of our business as well.

Andrew Anagnost:

Yes. Well, if you remember back in the fall, I talked a lot about some of our customers being caught off-guard by the rapid inflation and supply chain difficulties. So some of our customers were on fixed bid contracts. And fixed bid contracts, when your cost of goods are going up, are really a serious issue for their businesses. So, their businesses were feeling a lot of pinch. Manufacturers were able to pass the cost through to their customers directly, AEC customers less so. So, manufacturers suffered more from some of the supply chain things. What you are seeing now is customers – they are not surprised by this. They know how to bid the contract. So, there is a general kind of bidding parity out there, and people are building in inflationary impacts into their bids and into their projects. So, that creates a much more stable environment for them with regards to having a book of projects that are – having their margins deteriorate rapidly and some that you want to get to that have better margins. So, what they are seeing right now is just a better spectrum of margins across the projects. That’s one key thing that contributes to the stability. Does that make sense?

Andrew Anagnost:

And we fully expected them to do that.

Keith Weiss:

Hi. Congrats and thanks for taking the question. Very nice quarter. Maybe following on that last question, really a two-parter. One, Debbie, when you are talking to us about the full year guidance, it seems like we are adjusting for currency. That’s just about it. It doesn’t sound like we are adjusting the forecast down for anticipation of any macro weakness or any further weakening of demand trends. So, one, I just wanted to clarify that side of the equation. And then two, if demand does weaken and you do see the macro impacts kind of catching up with all – in software land, what’s the reaction on sort of the spending side of the equation? Is the philosophy that we are looking to protect free cash flows, or is it the market opportunity is too big and we really need to keep investing for growth, and we are going to look to sustain and take advantage of your balance sheet to be able to sustain that investment and get ahead of your competitors? I am trying to understand kind of your philosophy on how you view potential demand slowdown. Thank you.

Andrew Anagnost:

And this is absolutely the right time to invest in the business. When you are a business of our size with our resilience and our footprint, and you are up against smaller, less resilient, more challenged competitors, you invest. You invest. You pull ahead of the competition. You keep focused on the things you are trying to do. You expand your category leadership. You solidify category leadership in other places. We have got category leadership in 3D for BIM, which is a very important growth segment in AEC. We have got category leadership for design through Construction, in the Construction space, deals like deals like Bravida, AECOM, BESIX. These are all people trying to buy into this connected AI-driven cloud-based design through construction environment. That’s the category we are in, and we are kind of already the king. So, this is the perfect time to continue to invest. It helps you lap the competition. The competition will be able to invest to the same degree. I think this is not the time you pull back, right, especially given the underlying strength of our business. It’s solid. You can see it. We have got the multiple vectors of resiliency here and the kind of nice portfolio of options that we can leverage. I am definitely in a mindset that investment is good for us.

Operator:

Thank you. Our next question comes from Steve Koenig of SMBC Nikko. Your line is open.

Andrew Anagnost:

Yes. Actually, it was fairly short-term after the initial invasion. It was within weeks, alright. It wasn’t like it was a long thing. It fell off. It slowed down a bit as the invasion started. And then within a few weeks, it was rising back up again and back up to where it had started. So, it didn’t take that long. It surprised us, honestly.

Andrew Anagnost:

Renewal stayed strength – strong throughout the entire cycle, alright. So, renewals kept building as the quarter progressed. There was never a slowdown in renewal momentum. A matter of fact, if anything, it just kept strengthening and strengthening, alright. It was only in the new business part that we saw a slowdown post invasion that recovered. So, no, renewals just kept building.

Andrew Anagnost:

Yes. So let me – because there is two questions there. First, let me comment on the price increases so that we are all on the same page here. The price increases were highly targeted to certain parts of the world where we had artificially suppressed the price below our long-term goal of having standard euro, U.S. and yen-denominated pricing. So, what you are seeing is, in certain places, we are raising prices to equalize so that we can get to this kind of standard-based pricing that simplifies some of our go-to-market practices. So, we had some artificially suppressed prices in regions, and that’s what was going on there, okay. It’s – there is no change in our standard pricing policy. In fact, places like Europe did not see a price increase, alright. So, I just want to be clear, we are all on the same page with regards to pricing and the things associated with that. Now, with regards to inflationary pressures and uncertainty in employment area [ph], but we are no different, alright. We see pressure in terms of employee compensation and trying to help our employees navigate an increasingly inflationary environment. We increased our raised pool. We increased our bonus this year. And equally important, we are increasing our stock-based compensation, and you will probably see us continue to increase our stock-based compensation for our employee base. So, these moves were made and baked into the year well ahead of the start of the year to ensure that we were able to meet our employees or at least try to meet our employees where they were at. But we will certainly continue to look at our pay position. We will probably continue to see some pressure there in terms of staying competitive. We are retaining employees at high rates. We will also continue to use stock-based compensation more robustly and more broadly within the organization, which we think is good for the company, good for investors and good for employees.

Operator:

Thank you. Our next question comes from Bhavin Shah of Deutsche Bank. Your line is open.

Andrew Anagnost:

Yes. Well, it’s basically every sector. I mean every one of our industries, we are growing faster than our competitors, alright. So, we are taking share as we are selling more seats in some highly competitive industries. So, you are seeing us doing well in AEC. You are seeing us doing well in manufacturing, both on seat counts and revenue counts, which I think is really important because you want to watch both of those performances. We even did quite nicely in media entertainment year-over-year. So, we are absolutely seeing broad-based competitive performance. I mean obviously, one of the places that we all watch is Construction, too. In Construction, if you look at the kind of the raw make numbers, we grew 24% year-over-year. But you got to remember, some of that construction that make opportunity is actually in the EBAs, which are counted a design. So, when you look at our total make performance and taking that – those EBA impacts where we kind of put – make components into the EBAs, we grew into the mid-30s. And Construction Cloud monthly active usage grew slightly north of 30%. This is all great, solid competitive performance. AEC – Construction Cloud of its best new business growth quarter. International growth for Construction Cloud was significantly higher than its regular growth. We are lighting up the channel in the mid-market. We are kind of solidifying our category leader position in this design through construction position. Essentially, anybody else in this player – this space is kind of outside that category, they are very niche or there is being waiting for the industry to move on and move past them. So, I think we are in a very strong competitive position right now. I think it’s our job to continue to maintain that. But it was across all the industries we serve.

Andrew Anagnost:

Yes. Look, we have made really great progress integrating Innovyze in. The company was fairly similar to us when we bought them. So, there is a lot of things that are rapidly getting integrated. Of course, there are some product integration pieces and some back-office systems that are still kind of working through some of the integrations. But in terms of integration, that’s not a barrier right now to where we are at with Innovyze. One of the things that’s exciting about what Innovyze does is it’s already kind of fulfill the end-to-end vision for water that we have for construction and manufacturing. It goes everywhere from design all the way to operate. And it has some fairly sophisticated cloud-based tools for water infrastructure operators, sewage treatment operators, other water infrastructure operators that allow them to actually manage the facilities once they have been put into operations. So, it’s a very robust solution. It covers a very broad piece of it, and it fits incredibly nicely into our portfolio, both story-wise, strategy-wise, and frankly, sales motion-wise.

Simon Mays-Smith:

Thanks, operator and good afternoon. Thank you for joining our conference call to discuss the fourth quarter and full year results of our fiscal '22. On the line with me are Andrew Anagnost, our CEO; and Debbie Clifford, our Chief Financial Officer. Today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com/investor. You can find the earnings press release, slide presentation and transcript of today's opening commentary on our Investor Relations website following this call. During this call, we may make forward-looking statements about our outlook, future results and related assumptions, acquisitions, products and product capabilities 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-K for important risks and other factors, including developments in the COVID-19 pandemic and the resulting impact on our business operations 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 disclaims any obligation to update or revise any forward-looking statements. During the call, we will quote a number of numerical growth changes 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 or Excel Financials and other supplemental materials available on our Investor Relations website. And now I will turn the call over to Andrew.

Debbie Clifford:

Thanks, Andrew. In an extraordinary year, we performed strongly across all metrics, perhaps best summarized by the sum of revenue growth and free cash flow margin for the year which was 49%. Our fourth quarter results were strong. Several factors contributed to that, including robust renewal rates, strong growth in subscriptions and rapidly expanding digital sales. Total revenue grew 17% or about 2 percentage points less in constant currency, with subscription revenue growing by 18%. Looking at revenue by product; AutoCAD and AutoCAD LT revenue grew 20%, AEC revenue grew 17% and manufacturing revenue grew 4%. Recall that Vault became ratable in fiscal '22 and that manufacturing also benefited in Q4 last year from a strong performance in automotive EBAs which included significant upfront revenue. Excluding these impacts, manufacturing revenue grew in double digits in Q4. M&A revenue grew 38% which included some upfront revenue from its largest ever EBA. Even if you exclude upfront revenue, M&E grew more than 20% in Q4. Across the globe, revenue grew 18% in the Americas and 16% in both EMEA and APAC. Direct revenue increased 27% and represented 38% of total revenue, up from 34% last year due to strength from both enterprise and e-commerce. We had our best ever revenue quarter for digital sales which helped annual e-commerce sales surpass $0.5 billion for the first time. Our product subscription renewal rates remained at record highs. And our net revenue retention rate remained strongly within our 100% to 110% target range. Billings increased 13% to $1.7 billion, reflecting robust underlying demand but also a tough EBA comparison from last year. Total deferred revenue grew 13% to $3.8 billion. Total RPO of $4.7 billion and current RPO of $3.1 billion grew 12% and 15%, respectively and as expected, reflecting billings growth and the timing and volume of multiyear contracts which are typically on a 3-year cycle. Turning to the P&L. Non-GAAP gross margin remained broadly level at 93%, while non-GAAP operating margin increased by 5 percentage points to approximately 35%, reflecting strong revenue growth and ongoing cost discipline. GAAP operating margins declined by 6 percentage points to 12%, primarily due to lease-related charges of approximately $100 million which reflects the progress we've made to reduce our real estate footprint and to further our hybrid workforce strategy as we announced on our last call. We delivered record free cash flow in the quarter and for the full year of $716 million and $1.5 billion, respectively. Having completed our first sustainability bond last quarter at historically attractive rates, we continued to optimize our capital structure in Q4 by accelerating our share repurchase activity. Given the recent pullback in our share price, we opportunistically repurchased shares at a higher rate than previous quarters which allowed us to offset dilution in fiscal '22 and to get ahead of a sizable amount of our estimated dilution in fiscal '23. The net result was a slight reduction in our weighted average shares outstanding at the end of the year. During Q4, we purchased 2.3 million shares for $613 million at an average price of approximately $267 per share. For the full year, we repurchased nearly 4 million shares at an average price of approximately $276 per share for a total spend of just over $1 billion. You'll see us continue to be opportunistic with share buybacks but our capital allocation strategy is unchanged. We'll invest organically and inorganically to drive growth as well as purchase shares to offset dilution from our equity compensation plans over time. Now let me finish with guidance. On our last call, we signaled that we saw FX headwinds and macroeconomic uncertainty due to supply chain challenges, labor shortages and the ebb and flow of COVID. That perspective hasn't changed. So the risk we highlighted 3 months ago is now incorporated into our fiscal '23 outlook. Beyond that, we did see further strengthening of the U.S. dollar, resulting in a slight incremental FX headwind to our fiscal '23 expectations. To put it in numerical terms, our fiscal '22 revenue growth reflects a 2 percentage point currency tailwind which with FX movements in the last quarter, becomes a roughly 1 percentage point headwind to fiscal '23 revenue growth. Similarly, FX moves during the fourth quarter resulted in an approximately $30 million incremental headwind to fiscal '23 free cash flow. Beyond FX, we are obviously keeping a close eye on the geopolitical macroeconomic and policy environment. But having said all that, our strong momentum and competitive performance in fiscal '22 set us up well for fiscal '23. And we've assumed that market conditions in fiscal '23 are consistent with what we experienced in the second half of fiscal '22. We expect fiscal '23 revenue to be between $5.02 billion and $5.12 billion with growth of approximately 16% at the midpoint and which reflects an incremental 1 percentage point FX headwind, as I mentioned earlier. We expect non-GAAP operating margins to be approximately 37% and free cash flow to be between $2.13 billion and $2.21 billion. The midpoint of that range, $2.17 billion, implies 47% growth and reflects the incremental $30 million FX headwind that I mentioned earlier. The slide deck on our website has more details on modeling assumptions for Q1 and full year fiscal '23. The pandemic has reinforced the structural growth drivers underpinning our strategy and we remain confident in our long-term growth potential. We continue to target double-digit revenue growth, non-GAAP operating margins in the 38% to 40% range and double-digit free cash flow growth on a compound annual basis. These metrics are intended to provide a floor to our revenue growth ambitions and a ceiling to our spend growth expectations. Andrew, back to you.

Operator:

[Operator Instructions] Our first question comes from the line of Phil Winslow from Credit Suisse.

Andrew Anagnost:

Yes. Thank you, Philip. Good to hear from you. So yes, so first, let me kind of frame it this way. What we saw was the kind of improvement we expected to see when we talked to you about this in Q3. So we saw some nice improvement. Our customers are saying they're feeling like they're coming out of some of these supply chain constraints. Our partners are echoing some of these things. We didn't see the off too much stick expectations we had at the beginning of the fiscal year when we expected to see acceleration in the second half. But what we saw was consistent with what we told you in Q3 in terms of the improving climate, all right? So I think with regards to AEC, in particular which, by the way, I highlighted last quarter as being the key place that was feeling the most supply chain and cost pressure in terms of in-flight projects, that's where we saw the improvement. And yes, we did have a record quarter in construction and we did end the quarter with some nice acceleration and momentum heading into next year. But consistent with what we said in Q3, all right?

Andrew Anagnost:

Yes. So what I can tell you is that we monitor bid board activity and we monitor the growth in active projects on Construction Cloud and BIM 360 Docs. And what we're seeing in bid board is we're seeing consistent growth in bidding activity and we're seeing an increasing number of monthly active projects on our cloud applications around Construction Cloud and BIM 360 Docs. Those are usually leading indicators of project activity and backlog getting turned into active projects. So we consider those good signs, all right, in terms of how the environment is moving.

Saket Kalia:

Andrew, maybe for you, a big renewal year here in fiscal '23. As we start to see maybe some more of those 3-year product subscriptions come up for renewal this year, what's the data sort of showing, the preliminary data maybe, on sort of customers' willingness to renew at that same duration. And perhaps just as importantly, their willingness to sort of expand their usage from prior levels. Does that make sense?

Debbie Clifford:

No, I think you covered it, Andrew.

Debbie Clifford:

Yes, sure. So we aren't giving specific guidance today for fiscal '24 and beyond as you know. But as you can imagine, it's a big area of focus for us. And we are retaining the framework that we set out at Investor Day, so let's just recap that again. It is double-digit revenue growth through fiscal '26, non-GAAP operating margins in the 38% to 40% range and double-digit compound annual growth in free cash flow through fiscal '26. Now that's after that expected decline in fiscal '24 when we institute our transition to annual billings for multiyear contracts. And as I mentioned in the prepared remarks, these metrics are intended to provide a floor to our revenue growth ambitions and a ceiling to our spend growth expectations. Now in terms of the decline for free cash flow, specifically in fiscal '24, I know there's a lot of interest in both the magnitude of it and the slope of it. And while we're not providing specifics today, here's how I think you should think about it. If I start with the slope, the slope of the free cash flow decline and then its recovery is going to depend on the pace at which our customers adopt annual billings. Right now, we intend to offer our customers a choice but we're still working through the programmatic details. Our bias is going to be to go as quickly as possible. But we have customer, partner and operational constraints that we're working through as we navigate the transition. And then to give you an order of magnitude, I'd say, look at long-term deferred as a percent of total deferred back in fiscal '20. It was in that high 20s percent zone and we should see something similar in fiscal '23 because it's that same cohort that's coming up for renewal. And so then as we move to annual billings, eventually that long-term deferred will go away. And again, our bias is to move as quickly as possible but we're still working through the operational details. We'll give you updates on all of this as we progress through fiscal '23.

Saket Kalia:

No, no, no. Please go ahead, Andrew. No, please.

Operator:

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

Andrew Anagnost:

Yes. All right. So first, let me address your first question. As you recall last year and this was on me, we had those up too much stick assessments of accelerating new business growth into the second half of the year, right? We're not assuming any of that moving into this year. We're assuming things stay exactly as they are and as the conditions that we see right now are. The exception I'll give to that is that in our guidance, we did not factor in war in Ukraine, how that might affect our business is completely unclear. I mean, I thought -- probably all of you heard President Biden's speech earlier today about some of his positions on this. But when it comes to looking at next year, we're assuming that current things move forward the way they are, right? And also, just remember, that some of those subscriber increases that you saw were a result of multiuser trade-ins as well, okay? I just want to make sure that we factor some of those things. But current course and speed is the general assumption here, right? Now with regards to digital sales. Digital sales is -- it's a great example. It's our fastest-growing channel. It's not growing at the expense of our partners. Our partners are growing robustly as well. It's also a great example of what we're doing with digital productivity for ourselves and for our sales force. The digital channel reaches customers that we believe we have not historically been serving well. And they have -- they are not only finding us and buying our existing offerings, they're also engaging on some of our more forward-looking offerings like Fusion 360. So that channel is going to continue to become more powerful. And as I've said many times before, as we look out to our long-term goal of half of our revenue being direct, half of that direct revenue is going to come from this digital channel. And clearly, you can see from the way -- what we've disclosed and the growth rates here, there is line of sight to those numbers over multiple years. And that channel is going to continue to help us reach deeper into the long tail. It's going to continue to benefit from the digital productivity tools we're building just to make our general overall sales force more productive. And I have high hopes for that channel in the future. Now Debbie, did you want to add anything about, for instance, since I mentioned the Ukraine situation, anything around the specifics about our exposure there? Or anything related to that? Or anything about the digital channel?

Andrew Anagnost:

The net headline is, Jay, we've assumed that things are going to continue as they are current course and speed. There's no accelerations, no anticipated uplift or anything that we were looking for in the coming guidance or moving forward guidance.

Adam Borg:

Maybe just on the new product subscription growth in the quarter. Last quarter, you talked about that moderating to the mid-20s after kind of being in the 30% range in the first half of the year. I guess, how did that play out in 4Q? And I'm assuming, based on your prior comments Andrew, that whatever you saw in the back half of the year, you're assuming that going forward. But I'd love to hear a little bit more color, if you can, about how that played out in 4Q?