Autodesk, Inc. (NASDAQ:ADSK)
Q1 2017 Earnings Conference Call
May 18, 2017 05:00 PM ET
David Gennarelli - IR
Amarpreet Hanspal - Co-CEO
Andrew Anagnost - Co-CEO
Scott Herren - CFO
Mark Grant - Goldman Sachs
Phil Winslow - Wells Fargo
Saket Kalia - Barclays
Jay Vleeschhouwer - Griffin Securities
Keith Weiss - Morgan Stanley
Gregg Moskowitz - Cowen & Company
Ken Wong - Citigroup
Steve Koenig - Wedbush Securities
Ken Talanian - Evercore ISI
Monika Garg - Pacific Crest
Good day, ladies and gentlemen, and welcome to the Autodesk First Quarter Fiscal 2018 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 floor over to David Gennarelli, Senior Director Investor Relations. Please go ahead, sir.
Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our first quarter fiscal year 2018. On the line are Co-CEO’s, Amarpreet Hanspal and Andrew Anagnost; 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 2018, our long-term financial model guidance, the factors we use to estimate our guidance including currency headwinds, our maintenance subscription transition, our customer value, cost structure, 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 2017 and our current reports on Form 8-K, including the Form 8-K filed with today’s press release and prepared remarks. Those documents contain and identify important risks and other factors that may cause 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 we 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 discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of our GAAP and non-GAAP results is provided in today’s press release, prepared remarks, and on the Investor Relations section of our website. We will quote a number of numeric or growth changes as we discuss our financial performance, unless otherwise noted each such reference represents a year-on-year comparison.
And now, I’d like to turn the call over to Amar.
Thanks Dave. We’re after an impressive start with the new fiscal year with broad based strength across all subscription types and geographies. These types of results are increasing our confident in the acceptance of the subscription model and our ability to achieve our goals. There are several areas to highlight in Q1 including, we added a record 186,000 total subscriptions.
Total ARR grew 20% at constant currency. Recurring revenue jumped to 90% of total revenue and we over-achieve on both our revenue and spend goal, leading to better than expected in EPS. As we’ve demonstrated over the past several quarters, we are executing well and making real progress on our two major initiatives, growing the lifetime customer value by moving customers to the subscription model and expanding our market opportunity with increasing adoption of our cloud based solutions.
Now let’s dive to our Q1 performance a little more. Before I get too far, I want to note a change in our terminology. New model is now known simply as subscription plan to synchronize with our new revenue reporting terminology. Just like new model, subscription plan consists of product subscriptions and end-of-life subscriptions and cloud subscriptions. We added 233,000 subscription plan subs in Q1, which is even higher, there are seasonality strong fourth quarter of last year.
Once more the net record 186,000 total subscription additions resulting from strength across all subscription plan types and a higher renewal rate for maintenance planned subs. One of the best signal with the health of our business with the strong demand for our core designing engineering product, which is reflected in impressive year-over-year growth of over 170% in product subscriptions even more pleasing was the strength in product subscriptions was broad based, with triple digit growth across all geographies and very strong growth in emerging markets. Once again, new customers represented about a third of our new product subscriptions for the quarter. These new customers come from a mix of market expansion, growing in emerging countries, unlicensed users and people who have been using an alternate design tool.
Subscription plans starts also had a strong contribution from our new enterprise customers. I mentioned on last quarter's call that in Q4, we had signed up a record number of enterprise customers for our token base of consumption style EDAs, and that because of the way we count our subscriptions, we see the benefit to net new subscriptions in Q1 just as we did in the first quarter of last 2 fiscal years. These EDAs contributed a record 44,000 subscription additions in Q1 of this year, 10% more than Q1 of last year. EDAs 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.
The third component of our subscription plan starts is our cloud products. This is the TAM expansion part of our business and we are building on our leadership in the cloud. Cloud subscription additions continue to show strong growth growing by over 4 times Q1 of last year, and these were driven by BIM 360, our BIM collaboration and construction management tool and closely followed by Fusion our cloud-based design and fabrication tool.
In addition to brand new customers to our cloud products, we are also doing a lot of add on business with our existing cloud customers. A great example of this was a large Australian construction company which had already deployed over a 1000 seats of BIM 360. The company is now expanding the deployment of BIM 360 and integrating it into their project management system which has resulted in the purchase of an additional 3000 seats of BIM 360 by that customer. BIM 360 goes beyond a typical product sale and has allowed us to develop much more strategic relationships with [indiscernible] and other companies as we kept into this huge potential TAM of the construction market, the fee in AEC.
Some of you may have seen that just last week there was a great story in the Wall Street Journal that highlighted that opportunity and prominently featured Autodesk.
Fusion 360 is also expanding our market opportunity. We had a great Q1 win with a UK-based engineering firm that is choosing to replace Team Center with Fusion Lifecycle. This customer also purchased product design collection, which includes Fusion 360 which successfully completed against DSO and PPP solutions. The more people used fusion, the more they are reinforcing our believe that Fusion is a game changer that's driving the future of making things at the expense of our competition.
Partially offsetting the growth in subscription plan subs was the expected decline in maintenance plant sales. However, maintenance planned subs declined less than what we experienced in Q4 through a combination of a higher renewal rate and a smaller pool of renewal opportunities. As we stated in the past, we expect to see ongoing declines in maintenance plan subscriptions going forward. The rate of decline will vary based on the number of subscriptions that come up for renewal, the renewal rate at the time and our ability to incest maintenance planned customers to switch over to EBAs or product subscriptions without maintenance to subscription program.
I’ll now turn it over to Andrew to provide more details on the great results we saw in Q1.
Thanks, Amar. The strong growth in total subscription is fueling growth in ARR. Subscription plan ARR surged 105% on a constant currency basis and reflect the strong uptake of all our subscription plan offerings. Total ARR grew by over 100 million quarter-over-quarter and 20% over Q1 last year on a constant currency basis. And I’ll point out this 40% of our total ARR is now driven by [technical difficulty] that’s up from just 23% in Q1 last year and a clear indicator of significant progress we're making. When we accelerated the transition away perpetual licenses two years ago. We projected the subscription plan ARR with maintenance plan during this fiscal year and we are well on the way to making that happen.
For the second consecutive quarter, we experience the small sequential increase in total ARPS, primarily driven by ARPS growth in product subscription. It's still a little too early to project what ARPS will grow sequentially in Q2 and ARPS is still sensitive to short-term shifts and term length, geo mix, product mix and promotions. Having said that, we remain confident that ARPS will be positively influence in the second half of the year by less discounting and promotions to our legacy users, as well as the impact of the maintenance and subscription program. Each quarter, the vast majority of the subscription plan subs are added through traditional maintenance.
However, we continue to make meaningful progress in converting non-paying users into subscribers. In Q1, we added 26,000 product subscriptions to another successful promo target in our legacy users. The Q1 promo offer 30% discount on a three-year subscription is they turn in their old perpetual licenses. It's the same type of promo that added 28,000 subs in Q1 last year with 70% discount. We’re still finding that more than half of those particularly in the promo are turning in licenses seven years back or older. This is further reinforcing our view, that there are meaningful number of active users whose licenses are more than five years old and are interested in moving to latest software.
They are continuing to be over 2 million of these legacy users that are actively using our all perpetual license. Overtime, we will convert a large portion of these users either through promotions like this, compelling new product introductions or traditional means as their product becomes increasingly update overtime, we’re beginning to see this happen already. The other large cohort non-paying users, the non-compliance or piracy based of roughly 12 million worldwide. We’ve made significant gains and being able to more accurately identify these non-compliance users and we’re just getting underway with systemically pursue convergence to subscription. Driving more users to subscription directly aligned with another one of our transition related initiatives to drive more business direct.
Total direct revenue for the first quarter was 30% of total revenue, that's up from 25% in Q1 last year and just 19% two years ago. We continue to grow the volume of business with our large enterprise customers and we’re experiencing exceptional growth of over 300% with our e-store. We expect to continue to meaningfully growth both our direct to enterprise and our e-store business as we go forward.
Now I'll close my section by talking a little bit more about the maintenance and subscription program, because it was easily the most asked about topics over the past quarters. At the end of the Q1, we had nearly 2 million maintenance planned customers and we're going to encourage these customers to move to product subscriptions. We'd like them to do so sooner rather than later as product subscription provides them the great value with increased flexibility support and access to our cloud products.
Moving to single model makes the more sense and we'll immensely simplify our customer's transactions with Autodesk. The M2S kicks off with maintenance planned customers that come up for renewal starting on June 1 which is just a couple of weeks away. Along with greater value, loyalty pricing will be a big driver. As I discussed last quarter, all maintenance customers will be subject to a 5% price increase when they come up to renewal and they can choose to move to product subscription for a loyalty discounts of 60% less than the cost of a new product subscription and lots of pricing for the following two years.
With this discount will decreased by 5% for each of the following 2 years, so the earlier customers wish the more they'll save. The maintenance planned customer can choose to stay on maintenance, but they will be subject to a 10% increase next year and 20% increase the year after that. As such, we believe that there will be a relatively small number of maintenance planned customers by the end of FY'20 and we'll be determining the best course of actions for the subsequent renewal periods.
Since we announce this program a couple of months ago, we have been working with our partners to help them better understand the program. We've also provided them with some extra tools that help drive positive conversations with customers and we are incentivizing the channel partners to up sell collections, which would further enhance their cash flow. We're not making projections [technical difficulty] will move over this year or next, but believe we will have a smaller pool of maintenance customers by the time we get to the end of our fiscal year '20.
Now I'll turn it over to Scott for a closer look at some of the financials.
Thanks Andrew. Once again, all of you should have the prepared remarks document, which is the best source for our financial details. So I'm not going to walk through all of them, but if you want to hit on a couple of noteworthy items, and then talk about our business outlook for fiscal 18.
Before I get into the numbers, I want to draw your attention to our new format for revenue reporting which greatly improves transparency. You'll now see 3 revenue lines, one for subscription, one for maintenance and one for license and other revenues. In this format, you'll no longer need the reconciliation table in our prepared remarks doc as all subscription revenue which we used to call new model will be reported in the subscription line and all maintenance revenue will be recorded in maintenance line. All remaining non-recurring revenue will be reported as license and other revenue.
In this new format, quarterly subscription revenue times four equals subscription ARR and quarterly maintenance revenue times four equals to maintenance ARR and you'll be better able to isolate non-recurring revenues that will flow into the license and other revenue line. Note that one side effect in this change results in additional small legacy products being added into the ARR calculation. As a result, we have slightly adjusted the historical figures for ARR, so that you have an apples-to-apples comparison for our Q1 results in going forward.
This is an improvement we've been working on and many of you've been asking for the quite a while and I think we can all agree this is clear and more transparent.
Moving to spend management, we're proud that we've been able to drive strong growth in all of our important transition metrics while reducing our Q1 non-GAAP spend by 3%. We know that some of you have been skeptical of our ability to grow our business while keeping spend flat this year and next year, but we continue to achieve our goals by making sure that we're investing in critical elements of our transition while reducing spend in other areas, driving efficiencies throughout the company and the best thing smaller non-core products.
During the stage of our transition, deferred revenue is a better measure of our business than reported revenue. Deferred revenue grew 18% against the really tough compare last year, when we were still selling multi-year maintenance contracts. As you know with discontinued multi-year maintenance sales in conjunction with the launch of the maintenance subscription program.
You’ll notice another new discloser we added this quarter for unbilled deferred revenue, which we define simply as revenue that has been contractually committed by our customers, but not yet billed and not included on balance sheet. Specifically driven by our multi-year large enterprise business agreements or EBAs. Historically, unbilled deferred revenue was an immaterial number, but as we move forward this year. We’re planning or moving more of our enterprise customers to annual billings with the contract, which are typically three-year commitments.
We are providing visibility for unbilled deferred revenue to give you a more holistic view on our quarterly results. We remained aggressive with our stock buyback plan in Q1 and repurchased 2.2 million shares for a total of $192 million and that averages out to a little over $85 per share. The downside of our stock price at this level is we’re not able to buyback quite as many shares, but we remain committed to offsetting dilution from our equity plans and reducing our share count over China. Overall, our strong Q1 results increased our confidence with the transition is working for our customers and our partners, it also sets us up for success for the rest of the year and reinforces our conviction in our fiscal ’20 targets.
Turning to our outlook our view of the global economic conditions remains consistent with our view of the past several quarters, but most of the mature markets performing relatively well and little change in emerging markets. As we look at our outlook for the second quarter, we expect a seasonal decrease in subscriptions additions in Q2 consistent with what we’ve seen in the last two years. In the Q1 sub ads have added benefit from a seasonally strong EBAs solid prior quarter and the legacy promo. However, we're pleased with our execution in the current business trends and have confidence in our ability to drive results, we’re taking appropriately conservative approach and leaving the full year fiscal ’18 outlook unchanged at this point.
Finally, I want to provide an update on our CEO transition. The board is currently in the process of vetting external candidates, as well as both Andrew and Amar. We don’t have any other update on the CEO selection process, other than to say it's a top priority for the board and is progressing as plan. In the meantime, we continue to execute very well through the transition and Andrew and Amar have the board’s full confident to lead the company to ongoing success.
To wrap things up, we’ve executed well over the past several quarters and we are looking forward to building on this through fiscal 2018 and work toward our fiscal ’20 goals and beyond.
Operator, we’d now like to open up the call for questions.
Thank you. [Operator Instructions]. Our first question comes from the line of Heather Bellini with Goldman Sachs.
Hi, thanks. This is Mark Grant on for Heather. Just a quick one for me. Are you mentioned that the maintenance renewals were a little bit better in the quarter than you’d seen in recent trends? Was there a possibility in the quarter that you had maintenance renewal kind of pulled forward customers coming forward and trying to renew maintenance ahead of the maintenance to subscription transition? And then quick follow-up to that is on the full year guidance of, reason for not raising the full year guidance for such a great quarter?
Yes. So on the maintenance question, maintenance was better than expected really. I think we had a small group of renewals and I think most of our customers who renewed were trying to line-up with the maintenance to subscription transactions. We didn't see any unnatural pull forward into the quarter. And it was better than expected and we expect to continue to do well with the renewal rates because we paying a lot of attention to it.
Yes, and on the second part of your question the full year guide. we've executed well over the last several quarters and certainly executed well in Q1. That's giving us increased confidence as both the transition is working for our customers, but it's also working for our partners and we feel good about where we are at this point in the year, but there is long way to go. It's 90 days into a full year at this point, I think it's appropriate to be prudent with the guide for the full year.
Great. Thank you very much.
Thank you. [Operator Instructions]. And our next question comes from the line of Phil Winslow with Wells Fargo.
Hey, thanks guys and congrats on a what was at those Q1. Question for Andrew and Scott, going back to the maintenance because, obviously, just overall subscriber count growth was well ahead of people's expectations and the maintenance decline was definitely less than what we were expecting. Curious [technical difficulty] obviously, there are a lot of changes going on pricing, but wondering if you can comment on just the feedback you're getting from customers and sort of the early thoughts on sort of how you expect this to play out. I know you're not getting specific guidance, but maybe kind a help us walk us through and how you're hearing and how you're thinking about that?
Yeah Phil, let me talk to it. So first off, let me remind you how structured this program so we can put some of the feedback in context. It's a multi-year program, we've rolled out 3 years' worth of changes in the customer base, so that they could actually get a lot of visibility to what they could expect over the next few years. The first year is modest price increases, the program starts June 1 and you're going to see a 5% price increase.
So whether you are a maintenance customers that really wants to see in maintenance or wants to move to subscription now, you're really going to renew and move forward and take -- you're going to take an action, a positive actions. Because you got a year ahead to think about it. And what we're going to be doing in that year is we're going to be collecting the customer reaction and we're also going to be demonstrating to the customers more explicitly why there is more value in the subscription world. The value is going to show up just the nature of the offering, we just talk about access controlling insights. We're also going to be adding a lot more value related to bringing the cloud much closer to the subscription offering. So we give the customers lots of runway.
We expected there was going to be different types of reaction at the program, which is one of the reasons why we built in this year for people to digest what we're doing. So as we've rolled it out we've gotten reaction from some of our larger customers whether we're just looking at it and they're going, we were going to move to subscriptions anyway or we're going to move to an EPA. So we're going to probably move forward with a lowest price possible. Our smaller customers are where we've gotten the most noise. And essentially, they're concerned about losing access to their perpetual software.
That's why we got the one year cooling off period for us to absorb this feedback, for us to engage with these customers and for us to really prove to them that not only are they moving to a better higher value offering but we're going to protect them as they move forward. So that's where we're at right now, and I wouldn't expect anything else to change.
Thank you. And our next question comes from the line of Saket Kalia from Barclays.
Actually, maybe I'll start with you Scott. So, subscription ARPS, to the point earlier saw at second quarter of sequential growth here. You've talked about this being a little bit of a volatile metric, because of the mix in the past. You see like we’re getting some point, where some of the higher price subscriptions or really having a structural impact on the ARPS number. Where we could see a little bit more stability in that metric going forward?
This is Andrew, I’m going to take that one.
As we said, this metric is highly sensitive to mix, it’s highly sensitive not only in the product mix, but also the geo mix, whether it’s emerging in mature markets. And what we’ve said consistently and we’re sticking to it, is that we move into the second half of the year, we’re going to start to see that metric trend up. And we’re not changing, we’re not changing that guidance. I want to remind you thought about some of the things that are going to keep pushing that up. One, we’re going to be absorbing that maintenance to subscription price increased, the 5% that pushes into the ecosystem, so that’s going and trend that up a bit. You’re also going to see some core price increases and the moved to collections, it’s going to put upward pressure on that.
We’re also going to see the decreasing discount, remember with the discount just around a fraction of what it was in previous years on our legacy programs, you’re going to see that. But you’re also going to see the mix in mature and emerging change, which is going to puts some positive pressure. As we’re more successful in the cloud, you’re going to see downward pressure. So those are the factors that are going to be affecting this, as we move it to the second half of the year, but we’re holding to the statement we made previously, you are going to see a trend up as we move to the second half.
Got it. That’s really helpful. And then my follow-up, maybe for you Amar. It sounds like in some of your prepared commentary, that some of the competitive wins, sounds like just a little bit stronger this quarter. Can you just talk maybe qualitatively about any competitive metrics that you look out whether that's win rates or competitive conversions? Talk to us a little bit about maybe how you feel competitively this quarter maybe versus others?
Saket, great question, thanks. We definitely feeling the positive about how we’re position in the industry and how they driving change. Our investment of strategy of using the cloud to drive a new paradigm and look billing industry, as well as manufacturing industry is really paying off. In manufacturing in particular with Fusion and the changes we’re driving and getting industrial additive manufacturing and causes by genetic design, customers are really paying a lot of attention and adopting those ideas from us in a big way. And in many cases at the expense of our competition, in fact many of our Fusion 360 wins this quarter, in fact in an increasing rate are coming and the expense of our competition. Leaving sort of old, 20-year old [indiscernible] CAD systems and starting to adopt the paradigm we've putting forward with Fusion, which connects CAD to CAM to CAE [ph], with data management build-in.
So in manufacturing we really feel like the customer is searching for the next paradigm and they’re starting to really turn to Fusion and adopt it in response to that. Likewise, in the building industry, the big several competitive push that in success that we’re seeing is really in construction. I would say, actually a major competitor has been paid for in some ways that they are moving from an analog to a digital ways of working, and we've been leading the way in using cloud and mobile to drive a construction management and BIM management process for those customers. So definitely we’re feeling both of those factors and manufacturing construction growing at a really fast pace, we feel very good about where we're positioned in both industries.
Thank you. And our next question comes from the line of Sterling Auty with JPMorgan.
Thanks guys, it's Jack [indiscernible] on for Sterling tonight. Couple of questions from us, the first being in the revenue by product family, looks like AutoCAD and AutoCAD LT actually grew year-over-year as far as the major segments are concerned. Any particular reason that that return to growth in the quarter whereas AEC and manufacturing are still down year-over-year?
Yeah, Jack. When you look at that you've got to reflect back what was happened in Q1 and year ago. It was our first quarter without selling any perpetual licenses on AutoCAD and LT. And you remember when we ended the sale at the end of the prior quarter in Q4 there were some buy ahead activities. So with AutoCAD and LT Q1 a year ago, so the compare point was a little bit artificially low with some demand pulled backward into the prior year. That's part of what contributed to it, I would say we're seeing very strong uptick though for both AutoCAD and AutoCAD LT, and the LT family with product subscription. So it's a combination of both.
Right, and what I'd actually was Scott you said it's one of the, we're seeing subscription working everywhere around the world. One of the geographies which really did well for us sequentially is APAC. And APAC has all is been a strong contributor to the AutoCAD and LT results and that's sort of reflected in the numbers you're seeing. The other thing I would say, you made a comment about AEC and manufacturing, I would just take this opportunity to say, in manufacturing one other thing is going on is a [indiscernible] business moved from a perpetual license business to a subscription business over these quarters and that sort of reflected in those numbers.
So I would say that manufacturing numbers be a downward trend of that is exaggerated because of that shift of revenue upfront from readable, but performing strongly across all industries, we feel very good about where we are.
Okay, great. thank you. And then actually since you mentioned geographies for my follow up, it appears that at least on revenue basis year-over-year Americas did a little bit better than the other major geographies. Is that also true as far as bookings are concerned, or was there just a little bit of some noise in the revenue for the regions?
Yeah Jack, we actually did well in all regions. I think it's one thing to look at it year-over-year, if you look at it sequentially, we actually did well in Americas, in Europe and in APAC and as Amar just pointed out, actually it seem to have at least on the bottom in APAC and don't have the same headwind that we had for most of the year last year there. So it does nothing that stands out that was particularly strong or particularly weak in any of the 3GOs, it was good performance across the board.
Thank you. And our next question comes from the line of Jay Vleeschhouwer from Griffin Securities.
Question number one, perhaps for Andrew and Amar is, if you could talk about the role of distribution or distributors in the future. Have you see their roles in terms of fulfillments license management, et cetera? And as well could you talk about the effects of any past or perspective pricing changes if you put through distribution. In other words, you've changed the pricing for bars looking to purchase directly from the company versus perhaps more favorable pricing let's say, big buy to distribution instead. And then secondly, in the first quarter, it would appear that collections, have you seen in the direct business where a smaller percentage of the business than the former suites had been. Could you verify that and how are you thinking about the progression of collection as percentage of the business as you go through the rest of the year?
All right. So Jay, that was a multi-part question. So let me go through each one of these, one at a time. So look when it comes to bars and distribution in our future, let's be very quick. Our business is going to be bigger and the size of the pie that the bars we’re going to get the size of the business, if they're going to be able to participate will be bigger as well. We are going to be doing to be doing more business direct through major accounts and direct to the e-store, but we are absolutely going to be providing a bigger business to our indirect partners as well as we move forward. Now your question with regarding the pricing to [indiscernible] things like that. We are constantly evolving and changing our frameworks and changing the pricing and the things that go through the framework to optimize where the things are going.
I'm not going to comment on any specific pricing strategy we put out there in the system, but we’re always doing that to optimize how we distribute and deliver the software and the customers. I mean your last question is about collections. So first, I would talk about where is the overall strategy going with collections. It’s absolutely our goal to ensure that our new customers are moving to collections versus buying standalone products. And as you know we light up the main subscription program in June, there is going to be a major push to move those customers over that collections. Those activities are brewing and gestational right now. But with regards to collection results, we’re actually really happy where we’re at.
The volume runway in Q1 is equivalent to suites run rate in the same period a year ago and that’s exactly where we want to be. In the short period of time, we basically gotten back up to that runway and that’s like where we should be. But as we move forward into the year, you’re going to see collections contribution go up more and more and throughout the year. But right now we’re exactly where we select to these.
Thank you. And our next question comes from the line of Keith Weiss with Morgan Stanley.
Excellent. Nice quarter guys and thank you for taking the questions. I just wondering if you could talk a little bit about better renewal rates on the main side of equations. I wondering if you could give us any sort of viewpoint on sort of the renewal rates on the new model such as the subscription subject if you will, get a little time under your belt. How are those coming in and particularly how to those look relatively to sort of what you’d see in your maintenance is?
Yes. The renewal rates was strong across the board, I mean the product subscription rates were right in line with our expectations. It doesn’t compare maintenance to product subscriptions, I mean, one thing that keep in mind is, one of the benefits of the product subscription is customers switch things on and off and some on monthly and some on quarterly subscribers. So you don’t really get the new rates of by subscription types, but we are pleased with where product subscriptions ended up and this continues to be a big focus area for us for remainder of the year.
Got it. And then my second question. I mean to continue in the line of question that Jay was going down on the reseller channel. Now they were fully on a subscription model. Can you tell us a little bit about sort of what the incentives and what is the incentive program look like for the channel and broad stocks? Is that on ARR, is it on subscription. Give us some any indication of where you took that now that it's not going to be kind of a revenue base model anymore?
Actually no. This is Andrew. So the incentives we put into the systems for partners are aligned with the kind of outcomes we want with subscriptions. For example, we're obviously going to incent them to encourage the customer to look at collection, because obviously that's something we've really want the customer to consider and we think that's the right path for them moving forward and best path for the future. So we also want them send adoption and renewal activity, so we actually putting incentives into the system do ensure that the partners are making sure that the customers are actually using the software because like Amar said, when you're on a subscription model, you can start and stop if you want, so we want the partners to guarantee that the customers are actually adopting things. we put incentives into the system like that to drive that kind of behavior.
Yeah I agree and keep that just add to that overtime, you see us continuing to optimize our incentive structure to drive the kind of results and the outcomes that we want. Subscriptions obviously is a big focus for us right now driving collections is a big focus for us right now. And since I've been making sure that our renewal rates are right where we want it to be in and then we're using our classic combination of front and backend discounts to get those results. And as Jay's earlier comment with the distribution channel that's another place where we've been sort of just optimizing our relationships and our incentive structure to get the right results again to drive this overall recurring revenue and subscription business that we are getting the channel oriented around.
To be absolutely clear, I mean, is it fair to say that in terms of whether or not a partner hit plan or not point quarter if you will. Did ARR reached base revenues or is it just there is a whole collection of things they [indiscernible].
Can you say that again ARR and then we lost the second part of the question.
So in terms of sort of like from a headline number per partners you guys have done do business reviews. Is there a version of a quarter, like when they hit plan does ARR replace whether revenue used to be, they used to have to hit the revenue target, now they are at ARR target or is it little bit complicated in that?
Our engagements with partner is very simple, we talk about billings numbers with them and building outcomes with them and the annualized contract value. We don't try to do ARR compensation models with our partner channel, that would be far too complicated for them to not only engage with, but actually for them to measure and react to. So we keep that very simple because we want to their transactional ability.
Thank you, and our next question comes from the line of Gregg Moskowitz with Cowen & Company.
Okay thanks very much and good afternoon guys. Wondering if you could add any commentary on the mix of LT subscriptions this quarter as compared with both AutoCAD and the AutoCAD Vertical subscriptions.
Yeah hi Gregg. LT continues to be the volume part of the business, as it did was in the perpetual license world it is in the product subscription world. We're not seeing a significant shift in the mix of LT either going at a higher percent on a volume basis on a lower percent, LT and AutoCAD kind a continue to hold serve at the level they were.
Go ahead sorry.
Sorry Amar, go ahead.
I think we saw product strength across all products including the Verticals as well as the Vertical product the two new Vertical products, there wasn't a single standout product that was driving -- these all strength across the board.
Okay, perfect. And then just a question for Andrew, find it’s really interesting that you got essentially the same amount of legacy on subscriber conversions this quarter, at a 30% discount as you did a year ago at 70% discount and that you’re still seeing half of the conversions at an aging that in seven years or older. So the question is in the past you’ve spoken about a 30% conversion rate of licensees that were five years older or less. Is there any reason why the conversion percentage can be a lot of higher than that?
Look, we’re going to continue to convert very highly rates, let's make sure that we’re clear on exactly how are going to be converting the customers, because the promo are only one measure of our conversion success. It’s a three pronged strategy we are looking at to bring the customers in. One is the pace of functionality that we update in the existing products, so is the ecosystem become very much out of date, very quickly for the customers that stay off the current release. The other aspects of the things that we’re doing is entangling the cloud value so deeply in the subscription offering, that the customers are really compelled to get that value captured and integrated in their processes. More and more the cloud offerings are going to becomes super critical to what our customers do and that's going to get deeply entangling into the subscription offering.
The last bit was these legacy promos and these offerings that we use. These are not the -- that’s not the absolute measure of legacy conversion, just the fact that we’re doing the kinds of net ads, but you see here means that we’re dipping into these non-subscriber's basis. We’re going to continue to do it and we’re going to continue to do it at reasonable rates and I think the program is working exactly as we said that it will.
One of the things that we have peace with is that, we didn’t have to discount aggressively to get the kind of sub results that we saw. And as Andrew mentioned, I mean, I think as some ways the net as number is becoming a better indicator, how where we are converting our overall opportunity than any individual promotion to reach the second [indiscernible] base. As Andrew said, at some level there is a network affecting being built as our new products rollout and customers want to be current and many of the sales select into the buying and use subscription to be current. So I think overall, we’re seeing the promo work, we’re seeing usually net sales is go up, because of the new product subscribing. So I think we’re doing well with that opportunity.
Okay. That’s great. Thank you.
Thank you. And our next question comes from the line of Ken Wong with Citigroup.
Scott, I know you guys mentioned flat total spend for the year. But how should we think about the trajectory of sales and marketing, once you guys launch the maintenance to subs program. Would that tick up meaningfully?
I don’t think so, Ken. You saw that for the first quarter, we actually posted a decline in spend of about 3% during Q1. Obviously for us to be flat for the year, it’s not going to stay minus 3% throughout the year. So I would expect to see slight increases going forward, but that still comes in flat for the year. And there is no particular swing between categories as we rollout maintenance to subscriptions. Maintenance to subs is obviously a huge focus, both of our sales team for our channel. But I don’t see that driving any particular bump and extends.
Okay. Got it. And then just a follow-up on just receivables. So it was, I guess it was count pretty good amount from what it was last year. Can you remind us something last year drive up accounts receivable collections much more than typical?
Yes. What drives receivables of course is linear in the quarter. What get sold during the quarter in the last month because we in most cases, we bill in that 30. So we had a very linear quarter this quarter if you look at our DSOs this quarter, they were below 45, I think 43 days, whereas last quarter it was a much more backend loaded quarter. So you just think of linearity during the quarter as nothing else that's happened that would skew that one way or the another.
Thank you. And our next question comes from the line of Kash Rangan from Bank of America. Your line is now open.
Hi, this is Shanker for Kash thanks for letting me ask question, and congrats on the good results. I have a question on the maintenance conversion. So my understand is that if the maintenance customers currently using LT or AutoCAD product, he would most slightly shift to an LT or AutoCAD products in subscription it's in the customer convert. So in that context if you can you elaborate how -- discount you're offering, how else are you incentivizing the customer to adopt collections? From a geographical mix as well how customers.
So the mainly, the way the program is structured is that, the customer that's moving at the time can move like-for-like they can move LT to LT or AutoCAD to AutoCAD but they're never going to get a better price to move to a collection than they will at that point. The discount on collection that they get is the same 60% discount they get moving for like-for-like. So there is a strong incentive in the system especially for an AutoCAD customer to consider a collection. Probably less so for an LT customer but definitely for an AutoCAD customer.
And what we've done as we've armed our partner channels all across the world we basically tool that let them sit down with the customers and say hey, here are your options, here is what happens if you move now, here is what happened if you move next year. And by the way, if you move to a collection this is the price you lock in and this is the value you get with regards to the product offerings. So we put a lot of work into educating the channel in particular and how to have a conversation with the customer in terms of moving up to a collection.
This is simply our partners know how to do, and this is a one -- it's not just incentive for the customers, our partners really take advantage of this one-time opportunity to move their customers to a higher recurring revenue base, and I think they're really focused on that opportunity right now.
Got it. Just a follow up question, you mentioned above the smaller customers having an issue with the subscription plan and you're working with them. Could you elaborate the feedback they received on potential price increases that could happen post fiscal '20? Are there any pushbacks on that or what the strategy there?
Like I said, the feedback the negative feedback we've got was exactly what we've expected. When you announce to a customer that their maintenance prices are going up over a three-year period. You expect to get some feedback that's not necessarily positive. It has primarily been from the smaller customers and when you look at their main issue, it's doesn’t come down to maintenance versus subscription.
They recognize that the program we've put in place puts reasonable price increases for them and they get they love the royalty program. What they are worried about is giving up their perpetual license. So what we are just we're just next year and the by the way it is over this next year. Because they're obviously going to renew at a 5% increase is essentially show the customers that they need small accounts, that moving to a subscription is a more valuable path for them and something that helps them accomplish what they need to do more effectively. We're committed to doing that and that's really going to be the essence of our response to these customers is delivering the value they're expecting to see and helping them understand exactly what they get when they move to subscription.
Well I think one thing you noticed in talking to our partners. when we first announced this program and like got a much of reaction And then as our customers started talking to our partners. I mean a lot of that concern has started to going down, because of all the thing that Andrew said, that our customers are starting to understand better, the value proposition or subscription and kind of pricing one that we're putting in. And so I think that there was a little bit of component, we maybe an upstream, but that is really starting to new and customers are much more comfortable with the path that we have put forward.
If I may just ask one more, this as a follow-up to that. Is there any difference in the geography versus U.S. versus Europe versus Asia is there any difference and how customers reacted?
No. The reactions fairly uniformed. I mean, obviously you get some smaller variations, but it’s really uniform and it’s very similar to the reaction we got when we announced the end of perpetual. So it’s playing out exactly the same way and we’re going to go to the exact in process. But there is no particular geography or country that show any propensity to be concerned.
Thank you. And our next question comes from the line of Steve Koenig from Wedbush Securities.
I’m going to turn to bunch the two questions maybe at ones, because they're kind of related. So I guess first, to what extent are your plans for the discount that you'll offer on subscriptions done at the M2S program next year and the year after. Are those pretty much hard wire or might you change those? And kind of the related question is, I understand you’re not prepared to give the guide yet on the M2S program, the volumes that you will get out of the M2S program and that sensible that you’re not ready yet to do that. But to what extent -- can you give us color on to what extent to your fiscal ’20 targets depend on the price increases that you will effectively get from the maintenance customers and the converting customers?
So I’m going to answer part of that and then I’m going to let Scott speak to the other part of it. So with regard to the maintenance subscription program, look we’ve rolled out the program. We created visibility, we’ve told them, they’re getting a 60% discount, that discount goes down by 5% every year as they -- depending on what year they move. It’s our intend to stick to that program and stick to that program, we think it’s an excellent program, it's an excellent level of discount. There is really no reason to change that. So I don’t anticipate any change in the actual rules of the program.
Yes. I hear you that Steve. And so your second question, there is interesting effect, if you look at the price increases filled into maintenance to subscription. The longest someone stays on maintenance, of course they incur higher price increases, the more they contribute to ARR. So there is a bit of a reverse, it’s a big counter inclusive. There is no dependency on a very rapid shift over, in fact the slower it goes actually boost ARR a bit as it moves along. So there is no significant dependency model on that.
May I clarity than Scott. Have you assumed in your long-term guide, a rapid, fairly rapid shift over, so there is fairly minimal price boost, or there is the long-term guidance require that significant number of customers stay on maintenance.
Yes. Our long-term targets do assume that it shifts over and that the majority do shift over, but I don’t want to get into any of the details on what that looks like, I said there is an interesting play in terms of the rate and pace, that they move in the effective house [ph] in the model. As with most of the metrics in the models, Steve, we try to be somewhat conservative on those.
We have a clear goal to get as much of that maintenance phase moved over to subscription by FY '20 as we possibly can.
Sounds good. Thank you.
Thank you. And our next question comes from the line of Ken Talanian from Evercore ISI.
So you had a nice down tick in expenses in this quarter, and I was wondering if you could walk us through some of your key initiatives to continue to contain expenses. What elements might cause you to perform better than your current guidance on that front?
Sure just to be clear, we typically always see a sequential down tick in spend from Q4 to Q1. Q4, as yearend, there is a lot of the true ups that happened on variable compensation plans on commissions. It’s a quarter that we have our AU events which also drives our expense. So the normal seasonality you'd expect to decline from Q4 to Q1, the rate of that decline in some ways depends on how successful we were in the prior year because submissions are not an insignificant part of that decline. So it's not a -- while it is a sequential decline and it's not unexpected sequential decline from Q4 to Q1. Amar if you want to touch on how we're managing spend?
So Ken, what I'd add is that outlook for the year on spend is being unchanged because we've instituted operational rigor and discipline and continue to make very hard choices in investing in the right areas to drive the transition and divest in sort of non-core projects and non-core activities and just keep a tight focus on managing spends. So our outlook for the year is unchanged and I think we're making all the right decisions in terms of ensuring that the transition remains on track. And some of the things like we decided to divest, we had a bunch of consumer products for example last year, that are not material to the transition we make choices like volume [ph] divest, and that's giving us some of the fuel we need to keep driving the transition forward.
Okay, great. And there is a follow up, I realized it's early, but could you give us a sense to how to think about what the price increase is might look like in the years following the initial three-year subscription discount that folks will be locking in? Will it mean -- directionally could you expect it be on par with the subscription price, absent that discount or might it even be more?
Ken, we've been very explicit at the program where the customer pops up to the terminal discount price of the program. So the main subscription program lasts three years, and at the end of that third year, there is a particular discount. That's the price that everybody trues up to when they exit the program. Which by the way is the right thing to do with regard to incenting the customer to not only give up their perpetual license, but feel comfortable with the move to subscription.
Okay. And is that for EBAs as well or just product in collections?
EBAs are a totally different process. So when customer moves to EBA, they've moved off of maintenance to a consumption model. Remember, when you go for all of these things, with regards to the way we've rolled out the prices, the way we manage the price increases at the terminal point. Our goal is to maximize the value of that maintenance base and that is all about minimizing the churn out of those customers during that base. We feel like we've created a program that balances both the price uplift and the churn factors that guide us and maximizing the value of that base, that's what's driving all of this.
Thank you. And our next question comes from the line of Monika Garg with Pacific Crest.
I guess first question, one which we get quite often is that. Looking at it, it seems like a low gross market, but your target of 20% subscription growth means, you need to add somewhere between 850,000 to 900,000 new subscriptions ever year. So can you maybe walk through the math to achieve that?
Yes. There is a fundamental thing we've been telling the people over and over again with regards to how this [technical difficulty]. First off, the move to subscription is reset the price points for design software pretty dramatically. So what we’re seeing is, we’re seeing increased demand for our offering, just by virtue of the fact that upfront costs are some much lower. Then there is a couple of other factors that play out here in terms of hitting those long-term subscription targets. One is the non-subscriber base we’ve been talking about over and over again throughout the last few years, those customers are moving forward. The other, which is a 2 million plus based of people.
The other base is the 12 million pirate based that is going that move from pirated software to subscriptions, we know, we understand that base, we know they're moving forward. But the more important factor as we look over a five-year period. Is the market expansion, we’re going to see with the delivery of the cloud applications in both construction and manufacturing. The move to the cloud, especially in the manufacturing space starting to share shift away from our competitors to our offerings.
When you add all of those things together, the 20% of subscription growth target is quite achievable and is achievable not only from growing off our existing core, but expanding into these new markets in construction and manufacturing.
Monika, I just [indiscernible], we’ve always been the volume leader in the industries that serve and we continue to do that, we continue to drive as Andrew said share shift now increasingly manufacturing from traditional CADscan [ph] systems over to new cloud based disruptive system like Fusion and with the adoption of construction solutions they all expand our opportunity. And so in combination with the [indiscernible] compliance, with legacy opportunity and just the organic volume we see through job growth in the industries, I think we feel, we remain confident in our goals that we set ourselves.
Perfect. Thanks. And then as a follow-up. Could you share the split of subscription between EBAs, cloud and product subs? Thank you.
The one, so I could say we don’t give it at that level of granularity, the one number we have shared is the number of EBA subscription in this quarter was 44,000. And that’s really -- we sold above EBAs [ph] in Q4, you watched how they get used and adopted, or how many uses in those accounts adopt are EBA solutions and then sort of 90 days later we count the subscription. So that number was 44,000. At this point we’re not prepared to breakout cloud and product subs. But look as we’ve said, our strategy is working, our business monetization, platform transition is working, subscription is working everywhere. So we saw strength across all of those subscription types.
Thank you so much.
Thank you. And that concludes our question-and-answer session. I would like to turn things back over David Gennarelli for any closing comments.
Thanks, operator. We’ll be at the JP Morgan conference in Boston next Tuesday and the Canaccord one-on-one conference in Toronto next Thursday. We’ll be at the Berenberg and the NASDAQ conferences in London on June 14th and 15th respectively. And last we will be hosting investor and analyst at AU London on June 21, so please let me if you'd like to be attending that event as well. So for anything else you can reach me at 415-507-6033. Thank you.
Ladies and gentlemen, thank you for your participation for attending today's conference. This does conclude the program. And you may now disconnect. Everyone have a great day.
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