Autodesk's (ADSK) CEO Carl Bass on Q1 2017 Results - Earnings Call Transcript

| About: Autodesk, Inc. (ADSK)

Autodesk, Inc. (NASDAQ:ADSK)

Q1 2017 Results Earnings Conference Call

May 19, 2016 05:00 PM ET

Executives

David Gennarelli - Senior Director, IR

Carl Bass - CEO

Scott Herren - CFO

Analysts

Saket Kalia - Barclays Capital

Jay Vleeschhouwer - Griffin Securities

Sterling Auty - JPMorgan

Keith Weiss - Morgan Stanley

Phil Winslow - Credit Suisse

Richard Davis - Canaccord

Steve Ashley - Robert W. Baird

Shateel Alam - Goldman Sachs

Anil Doradla - William Blair

Kash Rangan - Bank of America/Merrill Lynch

Kenneth Wong - Citi

Brent Thill - UBS

Operator

Good day ladies and gentlemen. And welcome Autodesk First Quarter Fiscal Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to hand the meeting over to David Gennarelli, Senior Director, Investor Relations. Please go ahead.

David Gennarelli

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our first quarter fiscal 2017. Also on the line are Carl Bass, our CEO; and Scott Herren, our CFO. Today’s conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com/investor.

As noted in our press release, we have published our prepared remarks on our website in advance of this call. Those remarks are intended to serve in place of extended formal comments, and we will not repeat them on this call.

During the course of this conference call, we will make forward-looking statements regarding future events and the anticipated future performance of the Company such as our guidance for the second quarter and full year fiscal 2017, our long-term financial model guidance, the factors we use to estimate our guidance including currency headwinds, expectations regarding our restructuring, the various anticipated benefits including greater predictability of revenue and reduced cost structure from our transition to new business models, our market opportunities and strategies and trends for various products, geographies and industries. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, specifically our Form 10-K for the fiscal year 2016 and our current reports on Form 8-K including the Form 8-K furnished with today’s press release and prepared remarks. Those documents contain and identify important risks and other factors, and may cause our actual results to differ from those contained in our forward-looking statements.

Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today’s call but will not provide any further guidance or updates on our performance during the quarter, unless we do so in a public forum.

During the call, we will also disclose non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of our GAAP and non-GAAP results is provided in today’s press release, prepared remarks, and on the investor relations section of our website. We will quote a number of numeric or growth changes as we discuss our financial performance. And unless otherwise noted, each such reference represents a year-on-year comparison.

Now, I’d like to turn the call over to Carl.

Carl Bass

Thanks Dave. We had a terrific start to FY17 with more proof points that the transition from perpetual licenses to subscription and cloud offerings is going well. We are moving steadily ahead on our two big initiatives: First, we’re increasing lifetime customer value; second, we’re driving increased adoption of our cloud-based solutions to better serve existing customers as well as expand into new segments. I will share more details on our Q1 results and then talk more about our view around long-term shareholder value creation before getting into our outlook for the rest of the year.

As I mentioned the last quarter, the primary focus for us through the transition is driving subscriptions and annualized recurring revenue or ARR. In total, we added 132,000 net new subscriptions in the quarter. New model subscription additions more than doubled to a 140,000. And while we expected maintenance subscriptions to decline, in conjunction with the end of sale of perpetual licenses on individual products, at the end of Q4, total maintenance subscriptions declined by only 8,000, as our renewal rates on maintenance continues to increase. Q1 was the first quarter where customers no longer had the option to buy a perpetual license for individual products such as AutoCAD or AutoCAD LT. As a result, additions from product subscription, formerly known as Desktop subscription, jumped dramatically by 125% sequentially and by nearly 350%, year-over-year. Helping drive product subscription growth in Q1 was a promotion targeted at converting our legacy non-subscriber base to new product subscriptions.

This promotion captured legacy non-subscribers, who are customers that purchased a perpetual license sometime in the past and wanted to trade in their old perpetual license for a product subscription at a discount. It turned out to be one of the most successful promotions we’ve ever run and contributed over 25,000 net new model subscriptions to the quarter. As we annualized the data, the really interesting part was that over 50% of those taking advantage of the promotion were using versions from seven years back or older. We have talked about the opportunity to convert a portion of the estimated 2.8 million non-subscribers, which captions a five-year look back. We knew there was meaningful number of active users beyond that five-year look back, and this was a great validation of that point.

New model subscriptions also got a strong contribution from our enterprise flexible license, or EBA customers. I mentioned on last quarter’s call that in Q4, we signed up a record number of enterprise customers who are these token based or consumption style EBAs. And while because of the way we count those subscriptions, we’ve seen the benefits in net new subscriptions in Q1 as we did in the first quarter of last year. These EBAs contributed more than 25,000 subscription additions in Q1 this year. EBAs with our large enterprise customers have been a very successful component of our transition, leading to both increased subscriptions and account value while creating increased flexibility for our customers.

We also had a record quarter for cloud subscription additions in Q1, which increased nearly 50% sequentially. BIM 360 and PLM 360 continued to lead the way. We are also having success with our other cloud products, such as Shotgun, A360 and Fusion 360. Our cloud-based products continue to bring in new customers to Autodesk. Our newest cloud product is our IoT platform, Fusion Connect, formerly known as SeeControl, a service that helps manufacturers and system integrators connect, analyze, control, and manage things remotely, which is gaining traction. Just as we changed the CAD/CAM and PLM markets with cloud-based products, we are doing the same with the Internet of Things, enabling our customers to easily incorporate IoT capabilities into their projects.

In Q1, we landed a six-figure IoT deal with an industrial manufacturing company and [indiscernible] competing head-to-head against other well-known competitors. This is an exceptional win because the customer’s considered a pioneer in IoT and has been making connected products as part of their core business strategy for several years. It’s important to note that our channel partners are fully engaged with our subscription model. 63% of new model subscription additions came through our channel partners compared to just 27% in Q1 last year. We’re also excited about the number of subscriptions coming through our eStore which more than doubled from Q1 last year. Our total direct sales increased to 25% in the first quarter that’s up from just 15% two years ago, and it’s still in the early days for our eStore.

The growth in new model subscriptions fueled a 76% year-on-year constant currency increase in new model ARR. Total recurring revenue jumped to 70% of our total reported revenues compared to 53% last quarter. Total ARR growth was 12% at constant currency year-on-year. Remember, when evaluating total ARR growth relative to our long-term targets that this number will build over the next three quarters as new model becomes an increasingly large component of total ARR. So, we’re very comfortable with the growth we experienced here in Q1. Another metric that we talked about in the recent quarters is the unit volume. When comparing our unit volume to the first quarter last year, it was in line with our expectations.

On the expense side, we are diligently controlling our spending. As a result of the restructuring action we took earlier in quarter, our total spend decreased more than 2 percentage points year-on-year. We are continuing to make structural changes that allow us to spend less, yet focus on our key initiatives. We are carefully balancing the need for financial discipline with the need to invest to drive the long-term health of the Company. Overall, we are very pleased with the Q1 results, which are a great start to the year and reinforce our confidence that the transition is working for our customers, our partners and Autodesk.

We are eagerly looking forward to the end of Q2 when we start selling perpetual licenses for suites and become fully immersed in the subscription model. Another exciting factor about Q3 is that we’ll begin selling what can be thought of as our next generation of suites called collections. We won’t officially launch it with our customers until next week, but I’ll give you a little preview. Collections will be the most convenient way for customers to access a wide selection of both our desktop software and our cloud services. We’re significantly reducing complexity by offering just three collections, one for AEC, one for manufacturing, and one for community. [Ph] The value for our customers is tremendous and well exceeds the premium suite.

We are offering single user and multi-user access, and choices of different turn rates that fit their needs. Suites have been a tremendous success since we launched them over five years ago and collections will take it to the next level by giving greater flexibility to our customers and increasing the lifetime value for us. That’s a good segue to what I touched on last quarter and that’s about what we’re doing to create long-term value for our shareholders. I am [indiscernible] because I feel that what we’re ultimately aiming to accomplish, which is positioning Autodesk to lead the next generation of design, is being somewhat lost in the noise of quarterly financial results.

Our transition is really happening on two vectors. The first is the business model and pricing transition that is happening now where our customers are moving to churn-based subscriptions. Over the next three years, we expect this process to lead to a highly predictable model and a significant increase in the value our customers get from our products. In support of this model change, we are simplifying our entire go-to-market strategy to align with the concept of being an all subscription company. The result will be meaningful increases in the business we do directly with our customers at the enterprise and e-commerce levels. In turn, these changes ultimately reduce our cost structure and increase how effectively we serve our customers.

The second vector of our transition is how we are building platforms to exploit the cloud and dramatically expand the size of our market opportunities. Investments we have made in this area, which started over three years ago have allowed us to get a sizable lead on our current competitors as well as the many well-funded startups. We’ve seen the platform shift moving before. Incumbents will slowly become less relevant while the world changes around them. We’re investing to secure the future of Autodesk and our new cloud-based products are really the undisputed leaders in their respective categories.

It’s not just about making browser-based design tools, it’s about market expansion. Mobile and cloud technologies are opening up significant opportunities in areas of construction and manufacturing that are completely new to Autodesk.

Again, our framework for building long-term shareholder value is to increase the lifetime value of every customer, change our cost structure and the means by which we reach customers, and finally to build the best cloud and mobile-based products and services in the industry as the underlying platform shifts to the cloud. While many people are focused on the business model shift, winning the leadership position in the cloud leads to a long-term, sustainable competitive advantage.

Now, turning to our Q2 and full year outlook, I mentioned on last quarter’s call that the current fiscal year is the most unique in the Company’s history as we complete the transition from perpetual licenses to subscriptions at the end of Q2. None of the traditional seasonality patterns for sales metrics will be applicable. Year-over-year growth rates of traditional and financial metrics will be helpful in understanding how we are performing through the transition. Similar to Q1, hitting the lower end of our revenue range while exceeding our subscription guidance is a desirable outcome for the year.

Our view of the macroeconomic environment’s impact on our business hasn’t changed since last quarter or for the past several quarters for that matter. The global conditions have been uneven. Most of the emerging markets have been difficult but most of the mature markets have been relatively good. As we evaluated our strong Q1 results, we didn’t see any meaningful change in the demand environment.

For the end of sale of suites here in Q2, we expect the dynamics will resemble what we saw in Q4 with the end of sale for individual products. In other words, we’re expecting some surge activity but not a lot. Remember that our unit volume and revenue contribution from suites is much lower than our individual products, and we’ve already seen a significant shift in suites customers to the new model. While this is good news in terms of moving them to a higher value offering now and not having to convert them later, it tamps down our expectations for a surge in volume at the end of this quarter. Also while the promo targeting legacy customers were successful in Q1, we will not be running that promo here in Q2.

Q3 will be our first quarter of subscription only sales across the board and we’ll likely experience sequential slowdown. That’s when you can expect to see promotions aimed at our legacy customers again. If you are not modeling a sequential decline for Q3 already, you should be. And it’s consistent with our expectations for the full year, which are unchanged. And Q4 should be due to show more normal sales trends in our new subscription only model. We made a slight adjustment to our FY17 outlook for EPS, based on our revised tax rate assumption for the year. Otherwise, we remain comfortable with our full year outlook for FY17 and our long-term goals of growing our subscription base by a 20% CAGR over the next four years, which will drive a 24% CAGR in ARR. We remain committed to keeping spend growth roughly flat to slightly down this year and flat in FY18. And coupled with our top line projections, we see a path of free cash flow of roughly $6 per share in FY20 and $11 per share in FY23.

To wrap things up, our business model transition is in full swing now and exceeding expectations. We are really excited to do another major step further along in the transition; and by the second of half of this year, we will fully be in the subscription only model. Customers and partners are embracing the new model, both subscriptions and the cloud. At the same time, we’re driving higher lifetime value, simplifying our offerings and our go-to-market activities, and significantly increasing our market opportunity as we lead the next wave of design and engineering software to the cloud. We have a clear vision and plan for creating a more predictable, recurring and profitable business in the years to come.

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

Question-and-Answer Session

Operator

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

Saket Kalia

First, maybe to start off for you Carl; obviously, a nice start to the year for subscription additions. Can we just go back to the 650,000 to 800,000 units that we’ve sold in any given year? And can you just talk about the seasonality of that in a typical year, as well as how much of that might be suites versus standalone?

Carl Bass

Yes, let me give you a little bit. I mean, generally speaking, much more Q4 -- it’s always been, as far as I can remember, back-end loaded, surprisingly heavy in Q4. Q1 is usually up a drop; Q2 and Q3 go to [audio gap] and then Q4 comes out as the usual seasonality pattern. When we go back and look at unit volumes with just in mind of everything we’ve seen historically as well as all of our projections for the quarter.

Scott Herren

Yes. In fact in terms of the split between products and suites -- I know you know this, but the AutoCAD and AutoCAD LT are by far the highest volume. So, we look at unit volumes. They dominate that as well. Suites are higher priced, but significantly lower volume.

Saket Kalia

And as my follow-up, Carl, one of the interesting things that you mentioned was, a fair number of the non-subscribers that converted this quarter were on tools that were older than seven years; and I think the 2.8 million that we’ve talked about historically is for non-subscribers that are on tools five years or less. So, I guess the question is what that number looked like if you included a couple more years of non-subscribers? And as you built a couple more data points, how do you feel about that 30% conversion that you’ve talked about within that base?

Carl Bass

That’s a great question. And I know it’s got a lot of attention. So, let me just back up a little bit and give you a more holistic view of moving people to subscriptions, and then try to place the 2.8 million into context. So, as we were looking at building out the new model that would be subscription-only, we basically said that there were three pools of people that we could draw from, one were the non-subscribers; the second were the non-payers or the pirates; and the third I’ll just call the non-users, basically people who are either not using software or using competitive software and then share shift, we would move them over. So, there were three different distinct pools with different dynamics.

One of the questions came up frequently was okay, what is the size of the people who have bought products but aren’t on subscription? And what we said is our new model -- when we built out our model, we were looking to add about 800,000 subscribers to the total from this collection of sources.

People wanted to know the size of each of these relative segments. Here is a way to think about it. On the non-subscribers, one data point we gave you, it was only just one, was that in the last five years, and it remained relatively constant, which is why we chose it as a convenient data point, there were 2.8 million people who had bought but had an attached subscription. We put a caveat around that that said some of those people may no longer be users; they may no longer be actively using it; they may have come back in by buying a new license; they may have joined a different firm; they could have passed away for all we know. But, we wanted to give a size to it. There are clearly people beyond that, five years, who are still using software as evidenced by that. So, it’s just an indication. And if you look, it’s interesting and somewhat obvious in at least retrospect. But if you look at the legacy promo results, there are more people that bought that were back six and seven years than were maybe years one, two and three. And the mean is around seven years and it is a bell-shaped distribution. So that should give you an indication of what goes on in that base. So, it is bigger. And what we had said is, we thought we could convert 30%. So, taking into account how many people were no longer active or the new model would not appeal to them, we thought we could convert 30% of the base. And that’s what we were indicating was our assumption in the model.

The second one is -- and I think people overlook this and miss out on the dynamics as we move to a more connected experience from our customers is that right now somewhere around half or slightly more than half of the usage of our products in the world is by people who do not pay for it. Once again, you’ve got to put a discount on how many people will actually pay for it when they are forced to. But, at least as many people don’t pay for the software they use as the ones who do.

And then the third one which I would not rule out as an important contribution to the subscription additions are the people who are using competitive products. I think much of what we’ve done to lead the way in cloud-based engineering software is going to be very attractive and will be a source of moving customers from namely the legacy providers who have felt kind of dropped the ball on moving their software to the cloud. So, sorry for the really long-winded answer to your question, but I thought it -- I knew that really would come up and I just wanted to try to put it in a broader context.

Operator

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

Jay Vleeschhouwer

Carl, with you and then finish with Scott for the follow-up; I thought it was very useful that you highlighted the technology and product vector of the strategy and not just the model change. So, on that point, could you talk about how you’re thinking about the timing of delivery of new technology over time? In other words for example, Inventor is being updated seemingly on a quarterly basis; go back in December in AU, we heard about AutoCAD may go to a more than 12-month cycle for major releases. Could you talk about what you think the relevance is of the schedule of various products is to sustaining the flywheel of the subscriptions model? And one almost obviously, missing brand in your portfolio is let’s call it, Revit 360. You’ve got all kinds of other 360s but you don’t have a Revit 360. Is that something that would make sense for you?

Carl Bass

Yes. So generally, the frequency of updates is inversely proportional to the maturity of the product, just broadly speaking that if you were to look and say a very mature product like AutoCAD needs at least frequent updates; products like maybe Fusion 360 gets updated relatively frequently; if you follow Fusion, there’s weekly and biweekly small updates and certainly every month, there is an update with significant functionality. We’ll continue that. In some ways, it’s not the overall quantity of steps delivered. One of the things that changes in this new model is really the frequency. And what I think it changes is also the digestibility. It’s like getting one big roll a year versus having dozens of small snacks. And a little bit what this allows us to do with our newer products is have not only us deploy the software more effectively but our customers more easily discover what’s in it and put it to use as quickly as possible. So, we are going to continue on that cadence of the newer cloud-based products will be frequently updated. The other ones will be a little bit slower. But, both the traditional products and the new cloud services really need to be thought of differently as connected experiences, which now allow us to do things in the ongoing use and in the update that were just not possible before. As a matter of fact, even when we look at some of the data, I was just reporting on in the answer to Saket’s question, a bunch of that comes from frequent connectivity.

Jay Vleeschhouwer

Okay.

Carl Bass

Let me just interrupt. Yes, there is a bunch of work going on online stuff for the AEC industry. The first thing we are doing we have talked about being incredibly successful is what we’re doing with BIM 360. Where we’ve gone most recently is we brought out BIM 360, in the beginning was more enterprise and for the more sophisticated users, but there is a huge demand in the market for the less sophisticated users and distribution of plans and stuff like that. We just did -- we’re just in the process of doing updates to BIM 360 Docs that addresses this much broader need. And you’ll see more of the design and analysis for AEC coming online during the next year.

Jay Vleeschhouwer

For Scott, could you give us an update on the capacity additions you have put in place for what you’ve called your entitlements and transactional engines, your back office for the new model? And just a quick clarification, to-date you had the somewhat odd situation of splitting your subs billings between license revenue and subs revenue, could you foresee taking the subs revenue -- billings, rather only into the subs reporting line, so we don’t have to mix and match the two kinds of reporting lines?

Scott Herren

Yes. Let me answer that and the second part first, Jay. I am working on that. I realize that the way we do it is accurate in terms of accounting standards, the way we do it today but confusing from a modeling standpoint. So, one of the things that we are working on is trying to simplify the way we categorize revenue as it comes out of deferred and hits the P&L such that either we can keep maintenance separate from what I’ll call new model subscription separate from license and other. That’s not ready yet but that’s something that is implied and I think it will be a very investor friendly move when we can make that. To your first question on capacity, we see the -- so, we’ve built the entitlement engine. As you think about, it’s a multi-phase process. You have to build capability on the back-end, then each product has to build in the capability to recognize the new back-end and use that as a way of turning it on, so that they can get access to it. And then as those products ramp up, the capacity on the back-end gets tested. So, we haven’t had any problems at this point, as we ramp up the new model subscriptions fairly rapidly. I think it’s now a question of absorption and adoption of the new models.

Operator

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

Sterling Auty

Looking at the maintenance, the decline of 8,000 seats, so I was curious if you saw any of those maintenance seats actually transition over to subscription; if so, why did they do it and what kind of uplift did you see?

Scott Herren

Sterling, we’re not seeing a lot of that activity right now. We’ve talked about the path that we’ll head down to make that happen. As you know, it’s a higher price to convert; if you’re an existing maintenance customer, it’s a higher price to convert over to the new model offerings. So, what we’ve talked about is driving higher value into the Desktop subscription offerings that make that something that besides being required to do it as you buy additional capacity, is attractive even when you’ve got already got the existing perpetual license and maintenance attached to it. So, the reduction is not driven by conversions. And by the way, the reduction of 8,000 subs, the net reduction of 8,000 subs on maintenance was fewer than we’d expected. It’s more driven by just taking a very high renewal rate, the one that’s not 100% and multiplying it times a very big number of maintenance install base.

Sterling Auty

And then as a follow-up, looking at the sequential change in revenue by the areas, it looks like AEC did not get impacted as much as some of the others. Is that just a natural fact of maybe there is more suite revenue in AEC versus the other two buckets or the other couple of buckets?

Carl Bass

I think that’s a fair evaluation.

Operator

And our next question comes from the line of Heather Bellini from Goldman Sachs. Heather, your line is open. Our next question comes from the line of Keith Weiss from Morgan Stanley.

Keith Weiss

I was looking at the ARR numbers and the subs numbers, and it was a really nice quarter as you guys have noted in terms of adding those new model subs. But one of the things I noticed is that -- since the growth in sub numbers is so much higher than the ARR number, the ARPS, if you will, the average recurring revenue per subscription is going down for the new model subs. And I think it’s down something in the order of about 20% year-on-year. Can you talk to us a little about what’s driving that down; is it mix shift; is it promotional pricing? What should we expect on a going forward basis; is that going to settle out at some time; is that going to turn up once we have the suites go fully to subscription? How should we be thinking about that trend line on ARPS on a go-forward basis?

Scott Herren

It really is mixed revenues. As you know, with the end of sale of perpetual licenses at the end of Q4, a lot of the new model subs that we added this quarter of course are the low end models; so, it’s LT and AutoCAD. And so, as those come on line -- and remember the way we measure ARR is we sum the recurring revenue for the entire quarter, multiply that by four and that’s what becomes the ARR. So the linearity in the quarter is one effect but mix is a bigger effect. Actually, you see the same thing in maintenance going the reverse direction, as there are fewer AutoCAD LT and AutoCAD maintenance subs; obviously you probably have already done the math. You see the ARPS is actually going up slightly on the maintenance side but coming down on new model; strictly a matter of mix. That will reverse of course when we get to the second half and into the next year, and we return to a mix that has an equivalent representation of suites as what we’ve seen historically.

Carl Bass

Remember, if you just look at it -- if you go back to what we did around the long-term model, we’ve always said that the current year mix was going to drive this over a longer period of time and particularly as we add the cloud subscriptions, we’ve always kind of suggested that low to mid single digits was the increase that you’d see in ARPS along a longer period of time. So, I wouldn’t say there’s anything there that’s out of the ordinary or outside the bounds of the model what we have right now.

Operator

Thank you. And our next question comes from the line of Phil Winslow from Credit Suisse.

Phil Winslow

Carl, just help me double click on the macro comments that you made there and obviously sort of no change. But, I wondered if you could just comment about what you’re seeing by vertical, by geography, anything standing out. And as you’re kind of putting your forward guidance here, any sort of major assumptions that you’d highlight that would be very helpful.

Carl Bass

I gave you the general outlook which I would broadly characterize as unchanged. Probably the headline is that it’s unchanged and it continues to be soft in a handful of mostly developing markets and pretty robust across the more mature markets. We paid special attention this time. And you guys have noted and as you noted in your reports. I would say three of our competitors, mostly in the manufacturing space but also one or two in the construction space, seem to have a little rougher time of it this time. And what we were trying to do was just parse how much was self-induced versus macroeconomically driven. I think at the end, I think most of the shortfalls or stubbed toes seem to be mostly self-inflicted. So, we’re pretty comfortable. I just talked to our sales leaders the other day. Yesterday, I met with some of our channel partners who represent a huge percentage of our [indiscernible] channel. And they’re feeling relatively bullish. So, there’s nothing in our guidance or the forecast that would suggest any big change one way or another. Also across industry segments relatively healthy across the board. If I wanted to put a like a little gold star next to anything, I would say AEC seems to be just a little bit stronger on a worldwide basis. Once again, maybe better than the maybe value index is that informal green [ph] count. There are just cities in the world where it’s hard to make green [ph] right now, there’s just so many in use. So, that to me would be a little bit of a bias towards the upside is just strength in AEC. But otherwise stable, healthy, relatively unchanged.

Scott Herren

Keith, when you look at it by geo and you see some of this in the results, we really haven’t seen a change in the demand environment overall. We continue to have obviously the biggest headwind in APAC and within that as we pointed out a couple times, Japan continues to be the biggest challenge for us. But beyond that, Americas looks strong. EMEA’s doing well, particularly on a constant currency basis and the place that we see the biggest headwind right now as we’ve seen for the past several quarters has been APAC, and in particular, in Japan.

Operator

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

Richard Davis

If you fast forward a year from now and you’ll be through your product transition, at least in terms of end-of-life and I’ve seen this kind of with Kronos. How do you think about mix? I guess with the mix model, how do you think about kind of making the cloud version of the software more attractive than the perpetual license maintenance accounts because I presume you would prefer people to kind of move to that side of the subscription docket? And how do you think about comparatively making those things better and at what pace do you want to try to do that?

Carl Bass

First of all, Richard, I need to congratulate anybody from Davidson. We all are very happy here in the Bay area. [Multiple speakers] Here’s the way I think about it. First of all, as I said before, customers who are on maintenance are historically our best customers. They can stay there as long as they want to stay there; it’s okay. Secondly, I would prefer to move them to one of the new product subscriptions, hopefully one of the industry collections as what will do better for them and more valuable to us. That would be a nice move. Collections going forward will have a fair number of cloud services including the consumption-based models built into them. So that will be a way for customers to become more familiar, more comfortable, and hopefully more desirous of more cloud functionality. The other thing we are dealing with a lot of the cloud stuff is we’re really reaching new segments. It’s this cloud-mobile combination for example that’s allowing us to do -- if you look at the products, BIM 360 and PLM 360 I mean reaching large parts of the enterprise or large parts of an industry that were not otherwise accessible to us. In the frame of timing of three-year to five-year period, I think almost all of the software will run online and will really just have different versions and people will be able to run it in a browser, on a mobile device or as an installed application on their desktop. That’s just going to become par for the course that they will get their tool of choice on their device of choice.

Operator

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

Steve Ashley

I would just like to ask about this, continue on this line of thought of product transformation. I am assuming that part of the game plan or roadmap here would be to introduce some mobile applications to some of your desktop subscribers. When might we start to see timing wise some of that incremental functionality being offered from the cloud to desktop subscribers?

Carl Bass

So, by the way, it’s starting right now. I would say Q2 through the end of the year you will increasingly see cloud services that are available to all of our subscribers. They’ll be packaged differently; many of them will be done on a consumption basis. So for example, you will be able to either buy consumption plans or pay as you go models in order to tap in the power of the cloud. So for example, visualization, analysis, being able to run; many of these compute intensive jobs, on the cloud side, is going to be a part of the rest of the year. And we’ll continue to roll it out. We’ve already seen really good pick up in this. People are hugely appreciating this footing -- sometimes people forget how compute intensive our ops are. So, instead of setting off a job and going for a cup of coffee, people are now able to set off a job on our cloud and then continue working. And so, this has been a big productivity boost. Customers have really liked it; we’re already doing a fair amount of visualization and we’re really starting to see it pick up in analysis and simulation. And I think that will continue.

The other place where we’ve seen a fair amount of cloud-based stuff that’s really important is the second axis that’s important about the cloud, which is all around collaboration and coordination. And those are services that are not only available for just the new cloud-based products, they are actually available for the desktop products as those people have kind of the same kinds of communication needs as anyone else trying to build products.

Scott Herren

And to the point on mobile in particular, Steve, we’ve got BIM 360 Docs out there. And so, if you think of a job site, what you don’t see anymore is the guys walking around with a big bundle of blueprints under their arms; they are using ruggedized mobile devices on the site to do both view capabilities to look at the logistics programs to understand what needs to get done when, to do work flow around conflicts that come up in the field that may not have been envisioned during the design phase. So, we already have apps out there that are leveraging mobility in particular. And as we think about the TAM expansion and construction in particular, I think it goes heavily toward that space, toward the mobile space.

Steve Ashley

Just a quick follow-up; it’s early days on subscription renewals, are those renewal rates on the subscriptions running higher than what you’ve historically seen with maintenance?

Scott Herren

We actually see subscription -- both attach rate where we still have remaining perpetual license sales going up and the renewal of those going up. And it makes sense given that if you have decided you want a perpetual license and you want to stay on a perpetual license -- if you fall off of maintenance, you can’t get back on. So, as you know, you’ll need to update that; you’ll know you’ll want to make it compatible with the latest peripherals with newer versions of companion software that you’re working with. So, we’re seeing both attach rates and renewal rates on maintenance improve.

Carl Bass

One thing you’ll see going forward and we report on it as new data comes in is on the new product subscriptions. I think you will see and this is my best guess at the time, you will see differential rates between the differing term lengths that we have because I think some people choose the term length based on a desire of how they want to pay, but maybe it’s because of a spike in demand. And so I think we will see differential rates for example between annual and quarterly. And as we get data that makes it statistically significant, we’ll report out on that.

Operator

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

Shateel Alam

Hi. This is Shateel Alam filling in for Heather. Thanks for taking my question. So, you had your biggest increase in new model ARR this quarter at over 50 million. You mentioned a few things that helped, like the channel contribution. Just wondering what clicked in the channel this quarter and overall what would you call the top drivers of new model ARR this quarter that may have not been helping in the past?

Scott Herren

Shateel, I’ll start and Carl, you can jump in. Obviously, the first biggest driver of new model ARR for the quarter was the end of sale of perpetual at the end of the prior quarter. So, we talked about unit volume being right in line with our expectations. To the extent that those customers were looking for AutoCAD or AutoCAD LT that drove a huge amount of the increase of 140,000 new model sub adds. I’d say the other piece that Carl’s already talked about but also factored in, in particular on Desktop is the success of the promo that we had targeted legacy users of the software that didn’t have a subscription attached. Those would be the two biggest drivers of the new model subs for the quarter.

Shateel Alam

And then I had one, Scott, for you on your balance sheet. You have over $2 billion in cash, just bought back $100 million in stock. What’s keeping you from buying more stock and how should we think about you balancing share repurchases versus doing acquisitions?

Scott Herren

As I think we called out in the -- I’m sure we called out in prepared remarks, roundabout 80% of that cash of course is offshore. And given our tax structure, it would be quite expensive to get our hands on that and bring it back home but we’d have to get it to do a share repurchase. I think we mentioned in the past that as our business model changes and as tax legislation around the world is somewhat in flight, we are looking at our overall operating structure and that will have an impact on tax structure. But as we stand today with that cash trapped offshore and the current tax structure that we’ve got, I’d say would be a very expensive proposition to bring it home.

Operator

And our next question comes from the line of Anil Doradla from William Blair.

Anil Doradla

Carl, I had a couple of questions. I think you said something like a 50% sequential increase in the 360 products. Now, was that kind of spread around all the products or was it more BIM focused or more Fusion 360 focused?

Carl Bass

They are in slightly different stages of maturity. But, we saw good growth in all of the products. We’re in the really early stages and by comparison, it’s explosive growth. Each one of these is taking off. But, to look at it a little bit more fine grain, a handful of 360 products are targeted at collaboration and those we have users in kind of clumps as company or company in its ecosystem come on or some of the design engineering products are more -- small teams get at it at a time. But across the board, we’re seeing good adoption of the cloud products and a great response from customers. If anyone wants to do kind of the equivalent of channel checks on the product side, there’s a huge amount of information out there on social media about the acceptance and how people are just becoming aware that there is a whole new generation of products out there.

Scott Herren

Yes. And Anil, what I’d say is it’s the usual suspects; it’s BIM, it’s PLM, it’s Shotgun, and it’s 360, as we pointed out in the opening commentary.

Anil Doradla

And as a follow-up, Carl, you talked about BIM 360; you’re talking about some of the addressable markets which are significantly above the non-subscriber base and all that kind of stuff, so if I fast forward and look at BIM 360 in three years or four years from now, first of all, when do you think you’ll hit the sweet spot or inflection point on BIM 360, and how big could this be in five years?

Carl Bass

This is -- I mean what you can look at out there. And look, it’s very hard when a market doesn’t exist to size it, but you can already see startups out there that are trying to serve some of the markets as well as some of the other incumbents and in total, there is probably a couple of hundred million dollars already being sold in the area of collaboration and coordination software. I think that market is going to grow tremendously. And that’s what’s available to us. It’s really critical that we get out the BIM 360 Docs, like I said. We had incredible success with our enterprise, architecture engineering, construction customers. But we were missing out on the smaller parts of the market and that’s where it really gets the scale. But these are opportunities that are certainly in the hundreds of thousands of potential users and in some cases possibly in the millions. But, if you want to just look more specifically, for example, many of the people on the construction site who will use BIM 360 were not a user of our designer engineering products. If you look at PLM 360, it broadens the use of our manufacturing products throughout the whole enterprise, as opposed to just the people that are involved in design and engineering. So, it’s a very different use profile. It’s also why we’ve said just tying it back to some of the other comments, when you look at some of these cloud subscriptions, when you include these, these will be lower price products, and that’s what kind of dampens the ARPS growth. So, just trying to tie that together, but these are really new users that haven’t been available whereas before I talked about those three pools of users who can come and use the desktop or the new cloud-based design products.

Operator

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

Kash Rangan

One thought is that I would assume that the geographies, the products that are going through the model transition would show the steepest revenue decline. I’m just trying to get your analysis into what to make of the fact that Asia Pac decreased faster than EMEA and Americas. That would seem to suggest that if you didn’t know a whole lot that that’s the region that’s going through the model transition, but clearly that has historically not been the case with model transition. So, I’m trying to get your view on that. And also from a product perspective, it would seem that PSEB is going through the sharpest decline trends. Therefore, the model transition is more prevalent there, but again that would not make sense. I’m trying to get some sense and your perspective as to what to make of the disparity in the growth rates of these geographic and product cuts.

Scott Herren

Kash, I think you are thinking about it in the right way, but let me put a little bit of a different distinction on it. The places where the year-on-year growth is less impacted by the model transition are the places where they were earlier to adopt the new model. So, the compare point a year ago already had a reasonable mix or a growing mix of new model subs built into it. That was not the case in APAC. APAC has been the slowest to adopt the new models. So, the compare point for our APAC revenues for the quarter compares back to a quarter that had very little new model mix inside there. So, it’s more impacted in terms of the year-on-year growth rate.

Carl Bass

Yes. One of the encouraging signs we saw this quarter was the proportion in APAC of new model subscriptions for the suites. So, there are portions of Asia that are moving; it’s not uniform. But, we were very surprised and pleasantly so to see such a large percentage, and it exceeded the other geos in terms of new model subscriptions. So, we’re seeing some traction there. Also, a lot of it, just so you understand it and maybe can reconcile it as some of you who are doing things like channel checks, one of the biggest factors affecting the uptick is actually the sentiment of the reseller. Resellers have a huge impact in what they present to your customers. Our best resellers are all on-board with the new models; some of the ones that are staying behind are influencing it. And sometimes that carries over into geographic distinctions that are actually big enough to be called out.

David Gennarelli

Right, but as Carl said, we did see an encouraging uptick. And despite the fact that APAC had the biggest year-on-year impact from the transition, we saw a really encouraging uptick toward the end of the quarter in the new model subs there.

Scott Herren

To your point on PSEB, Kash, what you are seeing there is just the continuation of what we’ve seen all along is suites, because so what’s in PSEB, it’s dominated by AutoCAD and AutoCAD LT and those products are included in the suite. So as the suites continue to grow and gain traction, fewer people are buying just the standalone version. So, a lot of what’s happening in that PSEB segment is simply mix of customers, getting AutoCAD and getting LT, but getting it inside their suite instead.

Carl Bass

And I think as you see the Collections roll out, you’ll see the same phenomena; it’s going to continue because it’s down the same lines.

Kash Rangan

And also philosophically, when are we going to see the clear distinction in the product roadmap between the licenses and the desktop versions, that somebody that is inclined to stay on maintenance actually says, you know what, I’m not going to pay maintenance; I’m just going to jump over to the subscription. When is the product road map going to be clearly delineated into two separate points?

Carl Bass

I think as soon as you start seeing the collections, it will become clear. I think that will begin to have an impact in Q3. Collections are one of the vehicles to move our customers from maintenance to product subscription; it is more valuable; it is more valuable; it is way more flexible than anything they’ve had; it gives them broader access to a wider set of products. That will be one of the tools that we use to encourage our customers to look and consider the new offerings.

Operator

And our next question comes from the line of Kenneth Wong from Citi.

Kenneth Wong

Carl, I wanted to touch a little bit on what you just mentioned about collections. Is that something you feel that you guys have circled up with some of your larger customers and partners in terms of talking about the value of collections and you get a better sense that that’s a product that could potentially pivot them over to buying kind of a higher value pull from you guys?

Carl Bass

So Ken, you sound a little bit like you are under water. I’m not sure I was able to -- were you able to? Scott understands you much more clearly…

Scott Herren

The sound quality wasn’t great, Ken. But, I think I got your question on collections. It is the case where we have as Carl said in the opening commentary, we haven’t formally rolled this out worldwide but as we do think of it is as sort of the follow-on to suites, as the next iteration of what suites look like. It will be greatly simplified; the pricing model will be greatly simplified. It will bring along with it substantial additional value in terms of the number of products that are included. It also will begin to form the on ramp from desktop execution software to cloud software. We’ll incorporate a lot of our cloud properties inside there to make it something that’s not a separate buying decision to go out and have our customers test out and try out the cloud product. So, we’d look at it as not just the next step in adding value and driving our customers to see the higher value of the new subscription models, but also as an on-ramp to the cloud.

Kenneth Wong

Got it.

Carl Bass

The other thing I’d add, because we’ve been slightly oblique about this is one of the other things to remember is our ability to consolidate the product portfolio, shrink the product portfolio. This is the first step towards doing it. So, people have asked about the product portfolio. Collections are the vehicles that allow us to simplify the product portfolio, focus on the important ones, trim the parts of it that make less sense and have much more discipline around the R&D expense. So, we are really excited about concentrating the offerings for the different industries with only these three collections.

Kenneth Wong

And then, in terms of the channel, I mean clearly you guys are getting more volume there. How should we think the contribution from the channel trends over time; does that get closer to the 80% that you guys…

David Gennarelli

I’m sorry, Ken. Can you repeat the question? We are having trouble picking you up here. You are coming through very softly, like...

Kenneth Wong

Sure. Just simply, does the channel contribution trend closer to your 80% as the processing forward…

Carl Bass

This time, you were even softer.

David Gennarelli

Operator, we’re going to have to go to the next question.

Operator

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

Unidentified Analyst

Hi. This is Xiaoming [ph] for Brent Thill. Can you hear me okay?

David Gennarelli

Yes, we can.

Unidentified Analyst

So, just two questions, one, with the Q2 revenue outlook being a little bit lower than consensus but the year the same. Should we think of that -- I mean would it be that just you are seeing the Street just miss-modeling the seasonality or was there any change in your expected path or as you go through the end of perpetual and suites for the rest of the year, what would be the best way to think about that?

Scott Herren

I recognize that the guide we gave for the quarter is not where consensus was but, of course, we hadn’t guided Q2 before. And what we’re seeing in our guidance is in sync with what our expectations were. So, it’s not a question of a change in seasonality pattern versus what had been expected previously. If you just look at coming to the end of sale of suites during Q2, we talked about earlier, we are expecting really a bit of a muted buy ahead versus what we saw on individual products. On the standalone products, remember we sized that at the end of Q4 there was only about a 10% increase in volume that came through. Suites to begin with are a much lower volume product than standalone products are. We are also seeing and have seen a really steady increase in the uptake of customers already buying the new model on suites. So, not waiting for it to hit end of sale; there has been a lot of interest in suites customers buying the new model. So, you add those two together, we are expecting a small amount of buy ahead activity in Q2 on suites but not a huge amount. If it’s bigger than we think, will be toward the high end of the range and if it’s less than we think, which would be a good thing because those are customers we don’t have to convert off of perpetual in the future, the customer we think will be in the low end of the range.

Carl Bass

One of the things that I’d just outline two things about it, one is just general; we’re seeing greater support amongst customers and our partners in the new model. So, that is running ahead of plan. But it was interesting, like I said, I was just with our largest North American resellers or many of our largest North American resellers and just going around the room, there’s some good betting going on about how much buy ahead there would be of suites at the end of the quarter. Like we said, the best we can say about this is we’ve never experienced this before; it’s different; and this is really our best estimate of what’s going to go on. The more important news for us is that whatever happens, we’re done with it at the end of this quarter. And so whether we’re at the low end of the range and we’re happy or it’s the high end of the range, it doesn’t matter because we move on to a world that we’ve been waiting for, I am talking about for awhile and which we’re just really selling only -- we’re only selling new model and that greatly simplifies so much stuff. So, I will be thrilled when we’re here three months from now.

Unidentified Analyst

Just one more question on the new collections and I guess we’ll get details pretty soon. But, what’s the philosophy around setting the pricing for those versus the old suites or the individual product subscription or desktop subscription? And maybe also think of in terms of LTV for those versus the other choices? And that’s it from me.

Carl Bass

Over the next couple weeks, we’ll be rolling out the prices and what’s included in the collections. Probably best to do it then and look at it holistically; the information’s not far behind, and so you’ll all get to see it soon. We just felt like we wanted to share it because it seemed like if we’re announcing it in 10 days, it was best to give you guys a preview. But probably best digest it with full collection of information.

Operator

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to David Gennarelli for any closing comments.

David Gennarelli

That concludes our call today. This quarter, we’ll be at several conferences. Next week on May 24th, we’ll be at the J.P. Morgan Conference in Boston; on June 2nd, we’ll be at the BAML Conference in San Francisco; June 14th, at the Berenberg Design Software Conference in London; and also that same week on June 16th, the NASDAQ Conference in London. In the meantime, you can reach me, Dave Gennarelli, at 415-507-6033. Thanks.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. And you may now disconnect. Everyone, have a good day.

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