David Gennarelli - Senior Director, Investor Relations Andrew Anagnost - Chief Executive Officer Scott Herren - Chief Financial Officer.

Jay Vleeschhouwer - Griffin Securities Saket Kalia - Barclays Rob Oliver - Baird Keith Weiss - Morgan Stanley Michael Barrett - Wells Fargo Matt Hedberg - RBC Capital Markets Mark Grant - Goldman Sachs Sterling Auty - JPMorgan Gregg Moskowitz - Cowen & Company Ken Wong - Citigroup Ken Talanian - Evercore ISI Shankar Subramaniam - Bank of America/Merrill Lynch.

Good day and welcome everyone to the Autodesk Second Quarter Fiscal Year 2018 Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to David Gennarelli, Senior Director, Investor Relations. Sir, you may begin..

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our second quarter of fiscal year 2018. On the line is Andrew Anagnost, 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 on our press release, we have published our prepared remarks on the 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 third quarter and full year fiscal ‘18, our long-term financial model guidance, the factors we use to estimate our guidance including currency headwinds, our maintenance to 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, our Form 10-Q for the periods ended April 30, 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 would like to turn the call over to Andrew..

Thanks, Dave. Our strong Q2 results are a continuation of the broad-based strength across all subscription plans and types and geographies that we experienced last quarter.

As we demonstrated over the past several quarters, we are executing well and making real progress on our two major initiatives, growing lifetime customer value by moving customers to subscription and expanding our market opportunity with increasing adoption of our cloud-based solutions.

These consistent results increased our confidence in the model transition and our ability to achieve our goals. There are several areas to highlight in Q2, including the fact that total ARR grew 23% at constant currency that we added 153,000 total subscriptions.

The recurring revenue has increased to 91% of total revenue that we have overachieved on revenue and we have coupled that with strong spend control, which has led to better than expected EPS performance. In addition, the maintenance to subscription program, what I will refer to later as M2S, is off to a great start.

Now, let’s take a closer look at our Q2 performance. The trends we are seeing in annualized recurring revenue are clear signals that the transition is working. Subscription plan ARR nearly doubled on a constant currency basis driven by the strong uptake of all of our subscription plan offerings.

Subscription plan ARR now represents 43% of total ARR, and we still anticipate it will become the majority component by the end of this fiscal year. I would also like to share with you another piece of data that really provides us with confidence in our ability to grow ARR going forward.

If we isolate ARR growth rates for AutoCAD LT and our animation products, which are further along into the transition and the rest of the products, we saw total ARR growth in the mid-30% range for these products. A year ago, the growth rates for these products were similar to those we are reporting for our overall business.

The same effect can be seen in our reported revenue for these products and it’s a great leading indicator as we continue to move to the transition. We added 270,000 subscription plan subs in Q2, led by continued strong adoption of product subscription. 63,000 of these subscriptions were generated from our maintenance to subscription or M2S program.

Even when normalizing for M2S, total product subscriptions more than doubled year-over-year with triple digit growth in each major geography including emerging countries. New customers continue to makeup a meaningful portion of product subscription additions and represented close to 30% of the mix for the quarter.

These new customers come from a mix of market expansion, growth and emerging, converting unlicensed users, and people who have been using an alternate design tool. Some of you noticed that we started out Q3 – our Q3 promotion targeting legacy users a couple of weeks early. Now this led to some conspiracy theories about our Q2 performance.

You should know that the timing of these global promotions is set months in advance. Our rationale for starting early was the result of our experience from Q3 of last year.

Starting the promo a couple weeks early allow us for greater absorption of our communications to our partners and customers, which tends to take longer in the summer months due to vacations. The mission was to get the promo detailed out to the channel rather than driving subs in Q2.

And as expected, an immaterial number of subs, about 2,000 were generated from this promo in Q2, but we positioned the promo for success here in Q3. Subscription plan subs also had strong contribution from our new enterprise customers via enterprise business agreements or EBAs.

As expected, our net EBA sub adds were not nearly as much as the seasonal strong Q1. EBAs with our large enterprise customers have been a successful component of our transition leading to both increased subscriptions and account value, while providing increased flexibility for our customers.

This increased flexibility has led many of our EBA customers to increase their usage as they adjust to the new licensing system. This is a win-win situation, but it does create a short-term drag on ARPS.

For example, if we isolate just the population of EBA customers from June 2016, the monthly average usage for these accounts increased 10% in the last year. However, we don’t see a corresponding revenue increase until the customer does a true-up or uplift upon renewal.

This year, we have the opportunity to renew the first wave of token flex EBA contracts that we signed 3 years ago. Its early days so far, but we are seeing on average that contract size is increasing by over 30%. In Q2, we renewed two very large EBA deals worth over $10 million each.

In one of these deals with a European based global engineering consulting firm, the renewal contract value was 150% greater than the original value. This company’s engineers are spending roughly 5 million hours a year using Autodesk products and the EBA contract gives them access to our entire product portfolio.

The third component of our subscription plan subs is our cloud products. This is the TAM expansion part of our transition and we are extending our leadership in the cloud.

Total subscriptions grew by 200% and continue to be driven by BIM 360, our construction management and collaboration tool followed by Fusion our cloud play based design and manufacturing tool.

To give you more insight, I want to spend a little more time on the massive construction opportunity which is where our cloud based BIM 360 has gained an early leadership position.

We are utilizing the cloud to allow our customers to take their BIM models all the way into the field giving building owners and general contractors a digital platform for collaboration, coordination, and visibility. This is a really big deal because it’s something that has been sorely lacking in the past.

And when it comes to the world of building, we have a powerful brand and a powerful reputation. We are making significant penetration with the biggest general contractors in the world and with building owners and doing this by driving the value of the building information model into their project ecosystem.

The result is we are both expanding BIM 360 deals after successful initial implementations and we are signing new deals with companies and organizations that we have never worked with previously. Building owners are starting to mandate BIM 360 to gain competitive advantage in project efficiency.

One Q2 deal was an international airport that is investing in thousands of BIM 360 subscriptions as part of a multibillion dollar renovation project. Their goal is to use BIM on all suitable projects to inform and enhance future facilities management. They even wrote BIM 360 into the process for all future development projects at the airport.

Another great example is with the general contractor that influenced a large state university and a large municipality to write BIM 360 requirements into their specifications and permitting process. This is the kind of success that builds on itself over time.

Now, partially offsetting the growth in subscription plan subs was the expected decline in maintenance plan subs.

As we have said in the past, we expect to see ongoing declines in maintenance plan subscriptions and the rate of decline will vary on the number of maintenance plan subscriptions that come up for renewal, the renewal rate and pace of the M2S program.

A little more than half of the decline in maintenance subs was a result of fast start to the M2S program. In fact, nearly a quarter of all maintenance renewal opportunities migrated to subscription. Of those, that migrated nearly 10% upgraded from an individual product to higher value industry collections.

M2S is yielding some early data that is very encouraging and very interesting. I would like to share a few other points with you. Specifically, some customers are doing partial conversions of their maintenance fees, but if you look at it overall, the participating accounts are growing their total subscriptions and growing their spend with Autodesk.

In other words, account that participate in M2S are purchasing net new product in cloud subs and we are seeing this behavior across all geographies. Keep in mind that it reflects only 6 weeks worth of data, but these early figures are better than expected and bode well for the next few quarters of execution.

As I said, we would like these maintenance customers to move sooner rather than later as product subscriptions provide the greatest value and increased flexibility, supports and access to our cloud products. Moving to a single model makes the most sense and will immensely simplify our business and how our customers transact with Autodesk.

Now, let’s talk a little bit about ARPS. For the third consecutive quarter, we experienced a small sequential increase in total ARPS. It’s worth repeating that there are many things that will influence the short-term performance of ARPS, including product mix, geo mix and timing.

Another example is that the M2S program is having a near-term impact on ARPS. M2S is having a positive impact on maintenance due to the price increase for those that stayed on maintenance and a negative impact on subscription plan ARPS due to the discount offered for conversion.

Product subscription ARPS grew year-over-year, but if we normalized for the effect of M2S, it would have grown about 10% year-over-year and had its third consecutive quarter of sequential growth. As expected, subscription plan ARPS is being negatively impacted in the near-term by cloud subs as well as the increased usage in EBA accounts.

I spoke about these influences at Investor Day last year, so it shouldn’t be surprising that the more successful we are with cloud products and increased usage with our EBAs, the more it will be a near-term drag on ARPS.

Of course, the flipside of faster than expected M2S conversion is that the more people that take the offer here in FY ‘18 the smaller the price increases we will realize in FY ‘19. We will moderate that impact by continuing to focus on the upsell to collection.

Having said all that, we remain confident that overall ARPS will be positively influenced going forward by less discounting and promotions to our legacy users, the price increase for maintenance customers and the migration to higher value products. We still expect to see ARPS inflect up by the end of the year.

Now, I will turn it over to Scott for a few more details on the financials..

Thanks, Andrew. Driving more users to subscription aligns with another one of the transition-related initiatives, which is to drive more direct business. Total direct revenue for the second quarter was 29% of total revenue, that’s up from 25% in Q2 last year and just 20% 2 years ago.

We continue to generate strong growth in the volume of business we are doing with our large enterprise customers and we are experiencing exceptional growth with our e-store. Over 30% of our North American product subscriptions have been generated through our e-store.

We expect to continue to meaningfully grow both our direct enterprise and our e-store business as we go forward. We are pleased by the broad-based strength we are experiencing from a geographic and product family perspective. Each major geography, including emerging markets reported sequential revenue growth.

And for the second consecutive quarter, we experienced a marked improvement in our performance in Japan, an encouraging sign as we have made some changes there. We also experienced sequential revenue growth in each product family. Moving to spend management, we have been able to execute and drive results while firmly controlling our spend growth.

Non-GAAP spend increased by 1% in Q2 as expected. We remain committed to keeping spend flat this year and next year although we are seeing an increased FX headwind to our expenses. We are achieving this through divestments and reallocation of those dollars to initiatives that drive our transition.

Looking at the balance sheet, reported deferred revenue grew 17% against the tough compare last year when we had the end-of-sale event for the last perpetual licenses of suites. We also stopped selling multiyear maintenance renewals earlier this year in conjunction with the M2S program, which adds to the headwind.

Unbilled deferred revenue increased by $33 million sequentially, which would have added another 2 percentage points of growth to deferred revenue. Total unbilled deferred revenue now stands at $63 million and we expect it to continue to grow meaningfully as we move more of our enterprise customers to annual billing terms.

I will also note that during the second quarter, we issued $500 million in 10-year notes taking advantage of the current low interest rate environment and we have redeemed $400 million of debt that was due to mature in December. That’s a good lead in to our capital allocation strategy.

We repurchased 1.2 million shares in Q2 for a total of $119 million. That averages out to $102.71 per share.

During the quarter, we rebalanced our buying strategy by putting more weight on opportunistic versus systematic buying and we will continue to make adjustments to this program as we go forward recognizing our ongoing commitment to share buybacks.

Turning to our outlook, our view of the global economic conditions remains consistent with our view over the past several quarters, with most of the mature markets relatively well and little change in emerging markets.

As we look at our outlook for Q3 and the second half of the year, we expect seasonal patterns generally consistent with the last 2 years. As I mentioned, we have made some targeted divestments that allowed us to reallocate that money, but it also created a slight headwind to reported revenue, both of which are incorporated in our annual guidance.

Q3 will be the first quarter, where the year-over-year revenue comparisons or apples-to-apples compared back to our first quarter of subscription-only sales, but remember that our Q3 fiscal ‘17 results included $38 million of licensed backlog that rolled over from the end-of-sale of suites perpetual licenses in Q2 ‘17.

Normalizing for that, the midpoint of our Q3 revenue guidance range represents year-on-year growth of 13% as reported revenues now begin to inflect upward. Based on our year-to-date performance, we are increasing the midpoint of our guidance range for revenue and we increased the range for net subscription adds for the fiscal year.

Overall, our strong first half results increased our confidence that 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 on our fiscal ‘20 targets.

We have executed well over the past several quarters and we are looking forward to building on the success as we progress through the rest of fiscal ‘18 and work toward our fiscal ‘20 goals and beyond. Before we open it up for questions, I am going to turn the call back over to Andrew for a few closing comments..

Thanks, Scott. Obviously, one big change this past quarter was that I was appointed CEO. I am humbled by the Board’s decision and I want to thank my friend and longtime associate, Amar Hanspal for all his work and dedication to Autodesk over the past 20 years.

Secondly, I want to assure you that we remain fully committed to the FY ‘20 goals around ARR, subs and cash flow that we put forth 2 years ago. Finally, while the near-term and long-term goals remain clear, I thought I’d share with you my focus areas for driving success in achieving these goals.

First, we are hyper focused on enhancing the subscriber experience and delivering more value to our customers. It has to be frictionless for our customers to manage their subscription with Autodesk and it has to be obvious to them, what is driving value from subscription.

Second, we are going to continue investing in our own digital infrastructure and creating opportunities for our customers to transact and engage directly with us. We have made nice progress in this area over the past couple of years and I want to further enhance and accelerate these advancements.

Third, I am absolutely committed to winning the construction space and winning in the new world of digital manufacturing. The opportunity is enormous for Autodesk and our customers. We have done well to establish an early leadership position and we are not going to slowdown. I hope that gives you a better idea of how I am approaching my new job.

The next year of Autodesk will not be defined by simply product or business innovation, but in their combination. We must excel at both, all in the service of our customers. I couldn’t be more excited about the opportunity to leave such a great company and I look forward to reporting on our progress as we go forward.

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

[Operator Instructions] Our first question comes from the line of Jay Vleeschhouwer with Griffin Securities..

Thank you. Good evening Andrew and Scott.

Two questions, one to start longer term, Andrew how reasonable is it to expect or when would you expect that your direct business would become the majority of the business and/or that the e-store would become the majority of the direct, at any point so that of course, you are having the requisite back office and infrastructure which you just alluded to a moment ago.

And then secondly, you talked in your prepared remarks around large customer, EBA customer usage, and mix issues, could you address that more broadly in terms of wider customer base in terms what you are seeing so far in terms of usage of products and specifically your confidence that in fact the mix will go more and more towards collection from standalone than we might have seen to-date?.

Alright, Jay, so first thank you. So let me address the first question and then I am going to ask for clarification on the second one. So with regard to the first question, I am not going to give you a timeframe, but I will kind of down [ph] the problem a little bit more for you.

In terms of a steady state for us, it’s probably more like a 50-50 split between our direct efforts and our partner efforts, and we think that’s the right steady state for us not only from serving our customers well, but also basically from the structure of the business in terms of what the right kind of profitability mix is.

And when you look at that moving forward, the percent of the business that actually comes from direct high touch, the major accounts subs probably won’t change that much over time. All of that growth is going to come from the digital direct piece. So actually roughly speaking, digital direct and physical direct will split that 50% another 50-50.

So you could kind of see a 25-25-50 type model for our business moving forward. Timeframe wise, I don’t want to give a timeframe for that, but it’s definitely going to be over a relatively narrow time horizon.

Now, your second question, I just want to make sure I understood you were asking, what is the mix of usage within our EBA accounts or just clarify your question a little bit for me, so I make sure I answer the right question..

Sure. So, you have in the past been able track usage of the suites for example, because they were instrumented for that, and I imagine you should be able to do the same now under subscription for all products, standalone and collections.

The question is really two-fold, one how confident are you that customers are in fact going to mix up towards more collections from standalone in terms of initial licenses, and then once they have a collection that the usage of enough products will be there for them to want to continue renewing the subscription on a collection that there is enough indispensable products, let’s say within the collections that basically your ARPS it must go higher over time?.

Alright, great. So thank you for clarification. I always want to make sure I am answering the right question for you Jay. So first off, let’s – let me kind of break the question up into some pieces. Right now, the run rate for collections is already up to what our historical suites run rate is.

So we are already back to where we were with suites in terms of collection up-tick. The other little piece of information I want to give you, and it’s kind of some additional color on the M2S program. If you heard the earlier comments, we said that 10% of the customers moving from maintenance to subscription were up-selling the collection.

That’s 10% of the total customer is moving. If you look at those who are actually eligible when you subtract out people that are by default going from suites to collections or people that actually don’t have the option to move from a standalone to collection, it’s almost 25%.

So what you are seeing is not only a run rate that’s up to our historical suites level, but in acceleration in the M2S migration that’s looking really solid in terms of getting people to collection. So it’s looking good right now Jay, and it’s heading directionally in the right direction. So that’s kind of the current state.

Now to your next question about how confident are we with the product usage within a collection and the things associated with that. So there is a couple – I will answer the question by bounding it in two ways.

One, historically with suites, we have known that it only takes two or more products of usage for people that really just continue with the value proposition of the suites. We see no reason at all why that should change in the collection paradigm. So we expect to see the exact same behavior for the people that have chosen to move to collection.

The thing that actually gives us even more confidence is the fact that unlike suites, we’ve blended more of the cloud into the collections. So there is actually more extension from the collection into other types of capability that provide value than there was in the suites, that’s one.

The other thing that bounds it is you are looking at our experience with EBAs and what happens when we provide more portfolio access. It just inevitably drifts over time to broader product usage. We see on average quite significant increases in the breadth of products that are being used.

So there is nothing right now that indicates that we are going to see any kind of different behavior than what we have seen in the past..

Thank you very much..

You’re welcome..

Your next question comes from Saket Kalia with Barclays..

Hi guys. Thanks for taking my questions.

Can you hear me okay?.

Yes, we can Saket..

Okay, great. Well, first off congrats Andrew on the permanent appointment.

First for either of you, could you maybe describe the mechanics of the M2S impact on ARPS this quarter, you said in the prepared remarks that subscription ARPS would have been I think about $509, so is this the impact of the discounts to convert, I remember kind of hearing that the discount would be the sweetest [ph] now and decline over time, so is that what we are seeing or did you maybe see a different mix of conversions perhaps than you were originally expecting?.

Saket, we saw all the above. We did see as people converted from maintenance to subscription. You remember the attraction was they get a significantly discounted product subscription if they turn in their perpetual license that they have.

So an existing maintenance customer that converted was able to buy that product subscription at a significant discount that obviously pulls down the ARPS on product subs.

The faster we can make that transition move, the faster we can move people off of maintenance and over to product subscription, of course faster the transition works and the better off we all are. But it does have a short-term effect on ARPS.

If you just isolated product subscriptions for a minute and said let’s net the M2S impact out of it, that’s the statistic that we gave in the opening commentary. Product subscriptions by itself without M2S the ARPS increased 10% year-on-year and it was the third consecutive quarter of product subscription ARPS growth.

So part of what you are saying is just the M2S effect that’s kind of a bucket shift that people moving from maintenance mid-quarter up into subscription, all 63,000 subs moved, but only a fraction of the ARR was accumulated in the product subscriptions bucket. We also did see mix and we always see mix a little bit in Q2.

So our historical trend is that ARPS comes down a bit Q1 to Q2 because both cloud and we talked about the success we have success with cloud 200% growth in our cloud substantial. We know cloud subs have the lowest ARPS that has weighted averaging effect on the overall subscription plan ARPS.

The second is enterprise where we don’t get a lot of new enterprise sales during the quarter, but we continue to drive usage. So we continue to drive net mostly active users into the denominator of that ARPS equation.

So as we accumulate more users into the denominator and don’t move the numerator that has a negative effect on the ARPS for enterprise sub. So we actually saw both. M2S had an impact on product subs and mix had an impact on the overall subscription plan sub ARPS..

That’s great. That’s really helpful.

And for my follow-up maybe for you Andrew, I believe you said you are converting about one in four maintenance subs up for renewal, is there a change in the portion of the remaining 75% that’s churning off versus let’s say accepting the price increase if you will?.

Saket, when we first constructed this program, remember the whole thing was to balance churn associated with price increases. We always knew there would be some incremental churn resulting from increasing prices. It’s very modest.

So, what we are seeing is well within the bands of what we expected and yes, actually in that 75%, you do see a little bit of extra turn as a result of the price increase. But again, that’s why we constructed the program the way we did to make sure that we actually minimize the churn. But right now, it’s well within the bands we expected..

Yes. And Saket, you have got the data to do the math, right. We told you what the maintenance plan subs are and what the sub ads were. So, it’s minus 117,000 maintenance sub adds for the quarter and 63,000 of those left maintenance and dropped into converting over to product subscription.

So, you can see what the remainder is and divide that by the base that would have come up for renewal during the quarter. So, it’s right in line with expectations..

Yes..

Which kind of reinforces the point is pay attention to the net adds. The net adds tell the real story..

Understood. Thanks very much..

Thanks, Saket..

Your next question is from Rob Oliver with Baird..

Yes, thank you for taking my questions.

Just on that 25% number, how did that align with sort of your internal expectations? And then what sort of feedback have you gotten kind of early on from the channel as to what makes people kind of jump, but I know Andrew you talked about your primary goal here as you know kind of ease of use in the product and getting people to understand the implicit value of subscription.

So, can you talk a little about some of the feedbacks you are getting? And then I just had a very quick follow-up. Thanks..

So, first off, I want to make sure I reiterate exactly what that number is. So, we are all on the same page. Remember in the prepared remarks, we said about 10% of the total people moving from maintenance to subscription were choosing to migrate. As a subset of that, that we are actually eligible to migrate it all.

So, of the subset that we are already on suites that default went to collections, of that subset almost 25% are moving. That is above what our original expectations were with that base. So, this is a good result. We view it positively. Now, let’s be clear though, half a quarter does not a trend make, but it’s certainly a gratifying result to see.

Right now, in terms of the value proposition the customers are buying on, I suspect the majority of the conversations are hey, if I get on the collection now, wow, this is the best place I will ever get for a collection. I should probably get on that boat right now.

And some customers are quite frankly in a wait-and-see mode, how is Autodesk going to increase the value of the subscription offering, where are they working on we have been very transparent with some of our plans.

But I honestly think right now they are just looking at a strategic choice and saying, I should go with the collection right now, because that’s just – this is the best price I’ll ever get..

Great. That’s helpful. And then any update you guys to the thoughts around piracy that you gave on last year’s Analyst Day, I think you said 1.3 million actives as you mined through the users and any thought on an update to that number or any trends? Thank you very much..

So, first off, the numbers holding the trends, the trends aren’t changing. We are absolutely increasing our effectiveness in targeting that piracy base. I think I have told you guys previously in the past this year, it’s all about increasing the quality of the leads that go into the existing machinery for piracy.

Next year, it’s all about automating our communication with the customers that are actually using pirated software and supplementing the existing resources that are focused on piracy, but no change in the trends.

We are piloting the automation that’s going to communicate to customers directly in the product with regards to their usage of pirated applications. That will be rolled out sometime next year. So, we are continuing to head in the right direction there..

Your next question comes from Keith Weiss with Morgan Stanley..

Thank you, guys for taking the question and very nice quarter. Two questions. One relating to maintenance ARPS sort of taking the other side of the equation, you guys actually saw a nice increase there.

Is that related primarily or solely to sort of the price increases that come, what if they don’t take the test part of the M2S subscription or are there kind of mix shifts going on there that perhaps higher priced guys tend to stay on maintenance as other guys are attriting? And is that trend line of increasing ARPS and maintenance, is that something that we should be looking to continue in our model?.

Yes. Keith, it’s the flipside of what I was talking about earlier to Saket. So, as people move from maintenance to subscription, let’s say they move on July 1 which is the beginning of the third month of the quarter for us, so upon maintenance for two months, I converted on July 1 in the third month.

The way that that gets recorded is I have got two months of maintenance revenue and one month of product subscription revenue, right. But the entire sub dropped down to the product subscription level. So the impact – there is actually impact in both places.

There is, if you will a tail of revenue left behind in maintenance that has no sub attached to it that drives up the maintenance ARPS. And then there is a partial quarter of revenue showing up in the product subscription side, so you get this understated ARPS.

So the increase that you see in maintenance, the biggest driver of that is the flipside of what we talked about as the headwind on subscription plan.

There are a couple of other changes, pricing maintenance agreements have gone up to 5% in price and there are some mix shifts by products and by geo, but the biggest driver is just the compounding effect of maintenance to subscription. So as we – we will be in this mode.

We will be in this maintenance to subscription mode now for the next several quarters, certainly through fiscal ‘19 and into fiscal ‘20. And I think that it probably it will – this bucket shifting will continue to make it difficult to look at products of maintenance sub-ARPS versus subscription plan APRS.

And probably the better way to gauge our overall progress on ARPS is going to be look at the total ARPS. That will net up the effect of this tail of revenue left behind in a partial quarter where they landed..

Got it. That’s helpful.

And if I could just one about OpEx, you guys went through several quarters of basically total expense declined this quarter, you saw some slight growth, is that an indication that sort of the expense reduction programs will kind of run its course and from here it’s more about holding steady, was there more room to run in terms of taking actual expense out of the equation here?.

Yes. Keith, we have continued to focus on that. Now, we are flat from ‘16 to ‘17, flat again this year, flat again next year. Obviously, each year we give a – basically a merit increase in salaries.

So we are continually looking at where we are spending money and using the portfolio management approach to sharpen the things that we have to continue to focus on to be able to live within a flat spend envelope and still drive the transition and drive the most important things.

So I talked a little bit when we gave guidance for the year and you will see a little bit of it in the prepared remarks. We had a couple of divestments.

Those are – those were expected through the year, but that’s an example of the kind of things we are doing as we manage the portfolio to reduce spend in some areas so that we can afford to continue to increase in other areas and still stay flat in aggregate..

Yes. And Keith one of the questions we always get on this, it’s, how are you able to continue the execution you are doing when you are looking in this expense control environment. This is really all about picking the most important things to work on. Obviously, we are doing well in our net adds, so we are focusing a lot on that.

And by the way another area where we focused on is BIM 360 in the construction space, it’s going so well that we actually shifted money during an expense constrained environment to accelerate future development in that space.

So it’s just a matter of picking your priorities and over time you will expect us – continue to expect to see us to divest from things that just simply aren’t aligned with where we need to focus over the next few years..

Helpful guys. Thanks..

Thanks Keith..

Your next question is from Philip Winslow with Wells Fargo..

Hey, this is actually Michael Barrett on for Phil. Thanks for taking my question and congrats on the quarter.

Just want to circle back to the maintenance plan decline, obviously 63,000 of those 117,000 directly moved over from the maintenance subscription plan, did the rest – are the rest of those all just sharing off the platform completely, was there any shelfware in there, are there customers who had moved over prior to the promotion that just simultaneously had a maintenance plan and the subscription plan or should we really think of that as all just turning out of the base?.

Yes. Michael I will start and Andrew if you want to add color you can. It’s 117,000 minus 63,000, 54,000 churn on 1.8 million sub base. Not all 1.8 million came up for renewal during the quarter, but that’s a pretty normal churn rate for our maintenance plan. So we really saw nothing extraordinary even in the face of an announced 5% price increase.

We really saw nothing extraordinary in the churn rate within maintenance. So there is nothing – there is no other moving parts under the covers if that’s the question you are trying to get at..

Great. Yes, thanks. That was what I was trying to clarify.

And then just on the move to collections what sort of impact to subs if any have you seen from that move? I know, you have called out, at your, I believe your Analyst Day in the past if you have a customer who has two subscriptions per subscriber and they move to a collection that’s minus one subscription even though it’s ARR accretive, has there been any impact on total subs or is it too early to tell at this point?.

Well, we have lots of data from the suites days that the effect is consolidation effect kind of range from 2% to 5%. If you look at what’s going on with the maintenance to subscription moves and some of the term we are seeing as people move from maintenance subscription, it’s right in line with those exact same numbers.

We see consolidation, but it’s incredibly modest. You have to remember, people need to use the software. They need the software for themselves individually. So, when you consolidate products, yes, you do see some modest consolidation. It’s right in line with the kind of consolidation we saw with suites..

Great, thanks..

You are welcome..

Your next question comes from Matt Hedberg with RBC Capital Markets..

Hey, guys. Thanks for taking my questions. Congrats on the results. I believe you guys implemented a file format change at the end of March.

Can you talk about the mechanics of this and if any impact on quarterly sub adds? And I guess secondarily, you have done these in the past can you sort of remind us historically that the impact of something like this converting non-maintenance paying active users?.

Yes. So, first off, just to give you context, every 3 to 5 years, we actually do one of these file format changes, because what happens is we start to accumulate technical debt inside the file format and we have to do these things that prevent bloat. So, yes, we did one of those in this round.

What you generally see is an initial decline in the number of active legacy seats, the non-subscriber seats, we saw that, but then it takes a year or two to diffuse through the entire ecosystem. So, what you get is an initial chunk associated with the release of the product, where legacy users shift up to the new product.

And then over time, as people are integrating with the ecosystem, you see more and more attrition out of this non-subscriber base. So, we expect to see the exact same pattern. It’s happened historically over and over again. So, we are right on track with that right now..

Yes, that’s helpful. And then you have commented in the past you, coming once these 3-year M2S conversions come up, there is going to be a price increase that’s sort of I think if it’s well-documented, at least you have talked about it.

Is this a once – like a one renewal cycle trend to kind of get back to sort of normal discount rates or might this be a couple of cycles.

I was sort of trying to give out the magnitude of that price increase?.

You want to take this?.

Yes. Matt, we have also tried to articulate that. When we get to the end of the 3-year period, so someone coverts from being a maintenance subscriber to a product subscription, they give up their perpetual license. They get this reduced price for product subscription.

And without having to pay for all 3 years upfront, they are grandfathered at that price for 3 years. At the end of that – and that’s for people who convert this year and next year fiscal ‘18 and ‘19.

At the end of that 3 years, they revert to what we have been calling the terminal price, which is the price of conversion compounded over 3%, 5% increase, so in effect the 16% price increase from where we started the entire process. So, they will snap up to that level. So, they took a 5% increase.

If they convert this year, that’s roughly a 10% increase at the end of their 3-year grandfathering. And then it’s going to take time for that pool.

So that will create a pool of product subscribers that are at significantly lower price than a new product subscription and it’s going to take time to migrate that pool up to the price of a net new product subscription. That’s not going to happen in 1 year or 2 years and that would be too big a step..

Got it. Thanks, guys..

Thanks..

Your next question comes from Heather Bellini with Goldman Sachs..

Hi, this is Mark Grant on for Heather. Thanks for taking the question. Saw the disclosures around the M2S program with the subscription plan ARR and the net subs coming from that program.

One, are those metrics that you plan to disclose on an ongoing basis? And then just second on maintenance renewals realizing that, that M2S program might create some noise in the seasonality of renewals this year, can you give us a sense of the split of contracts coming up for renewal between the fiscal 3Q and fiscal 4Q? Thanks..

Yes. Mark, to your first question, we will continue to provide that visibility. I think because it’s fairly disruptive between the two big pools of subscription plan and maintenance plant, we will continue to provide the same metrics that we gave this quarter.

So, the impact on where they have landed in product subscription in terms of how much accumulated there and the number of subscriptions that moved. I still think it’s going to be difficult for you to sort out at a more granular level. What’s happening inside, it’s because those transitions take place during the quarter.

And so, if you go back to example I talked about earlier and moving to beginning of the third quarter, there is a tale of revenue left behind on the maintenance side that will not move over. And so it’s – I would encourage you to try model ARPS if that’s important to you, I’d encourage you to try to model at the total level.

In terms of the number of maintenance agreements that come due in the second half of the year, we haven’t given that kind of seasonality metric historically, but what you see is as with most enterprise software companies, we do see a bigger second half than we do in the first half.

And so you can expect to see it be slightly more opportunities for conversion in the second half year than what we would have had in the first half..

Great. Thank you..

Your next question is from Sterling Auty with JPMorgan..

Yes, thanks. Hi, guys. I apologize if you covered this in the prepared remarks, I missed it, but of the users that chose to make the move over to subscription from maintenance.

Can you give us a sense of what products were most popular that actually chose that switch?.

Well, so first off, very good on a suite, it’s kind of a no-brainer for you to do this. So, we saw lot of people on suites making the move to subscription and taking up the offer pretty quickly. And then it kind of follows from there to products like AutoCAD naturally is the next biggest product up there. So, it’s pretty straightforward..

Okay. And then Scott on to a different area on the FX side, I know you guys your hedging program, but just want to make sure how with the recent moves that we have seen included with your hedging program.

Is that impacting the outlook here for the back half?.

Yes, it’s a great question. The interesting part about FX and particularly the subscription model where a lot of the revenue that we report in a given quarter was actually sold in the prior quarter right.

So, as we opened the quarter, we have got a very high percentage of the reported revenues for Q3 sitting on the balance sheet at exchange rates that are commensurate with when those were actually sold. So, there is a lag effect in revenue, really independent of the hedging. Whenever it’s sold, we have the hedge benefit, but then it goes in deferred.

So, the benefit of the weaker dollar will take a lot longer to show up in revenue simply because a lot of reported revenue is coming off the balance sheet before the FX rates change. We will see it much more immediately on the expense side.

We hedged the net exposure, but we will see the impact FX had much more immediately on the spend both COGS and OpEx side..

Got it. Thank you..

Your next question comes from Gregg Moskowitz with Cowen & Company..

Okay, thank you very much. Good afternoon, guys. So the cloud subscription growth again was very impressive and it sounds like you are really starting to see BIM 360 construction and related activity ramp up as well.

On the other hand, I believe the comps on cloud subs make it a little tougher later this fiscal year given the acceleration that we saw in that year ago period? So I was just kind of curious how we should generally think about cloud subs growth over the balance of the year?.

You are right in BIM 360 we are seeing a really good acceleration of cloud growth. We see nothing that would indicate that, that’s going to slowdown as we head throughout the year. And the only thing above is to highlight anything as you grow the base larger, the base you have to renew gets larger as well.

So, we will be watching that very closely, but the momentum – there is really nothing out there right now that would slow the momentum, particularly on BIM 360..

Okay, perfect. Thanks, Andrew. And then with respect to EBAs, I know Q2 obviously is not a seasonally strong quarter for you there that your unbilled deferreds were up significantly again on a sequential basis.

How is the EBA uptake tracking relative to your expectations both in terms of numbers of customers signing on as well as the degree of ARR spending increases? Thanks..

Yes, Gregg. The EBAs are tracking right in line. EBAs are always heavily weighted into the second half of the year.

And so if you go all the way back to our Investor Day last year when I made sure everyone understood that we were going to move many of our EBAs from billed upfront to annual I said I thought the impact on deferred revenue by the end of the year would be $300 million or more of unbilled deferred that would accrue and that’s still our expectation on the unbilled deferred by year end.

So expect to see the unbilled deferred grow more heavily in the second half of the year, as we sign more of those EBAs. But in general the EBA business is tracking right in line with our expectation..

That’s great. Thank you..

Your next question comes from Ken Wong from Citigroup..

Hey guys, when looking at your sub guide, I guess the midpoint is around 650 and you guys are already kind of halfway there and correct if I am wrong but you are saying the second half you add a lot more, can you help us understand some of the dynamics that are going into your guidance and thinking for the second half?.

Yes. Ken, we shifted the entire range up by 25,000, so prior guide on subs was 600 to 650. We shifted it up to 625 to 675. And a lot of that’s based on the strength that we have seen in the first half of the year. And we have touched a little bit on this in the opening commentary. It was a very strong first half.

Our net sub adds coming from the enterprise business outpaced our expectations in Q1. The legacy promo continued to be strong and cloud in the quarter we have disclosed our cloud sub adds grew 200% year-over-year as Andrew said. So we had a very strong sub add in the first half of the year.

Second half of the year is right in line with our expectations. So it’s not a – there is nothing – there is no difference than what we expected in the second half built into that guidance. What you see in the guidance range shifting up is the strength of first half..

Got it.

And then maybe in term s of just renewal rates, I know in the past few quarters it’s kind of across the different subscription lines maintenance product, etcetera, you guys have seen always kind of close to peak, if not peak, how are those tracking in Q2 here?.

Our renewal rates are tracking exactly the place the way we were expecting to track right now. So we are right in line with everything – all of our expectations..

And Ken the place to look to get a feel for that is again look at the net sub adds. And we have given you the visibility of maintenance and you can get a real sense of the – what the renewal rates look like there, because we told you how much of the 117,000 that went away were conversions over the product substantial.

You can do the same math on subscription plan and look at what the net adds are there and that gives you a sense of not just what the volume is or it’s the combination of what the new volume is and what the renewal rates are.

And so and back to your earlier question at the midpoint of our guidance by the way 625 to 675, so the midpoint is 650, that’s 21% growth year-on-year. So it’s right in line with our expectations..

Got it, great. Thanks a lot guys. Good quarter..

Thanks Ken. Thank you..

Your next question comes from Ken Talanian with Evercore ISI..

Hi guys. Thanks for taking the question.

So you mentioned earlier that you had reinforced conviction in the fiscal ‘20 targets, given the better than expected results, do you think it’s reasonable to assume there is upside to those targets?.

Yes. Ken, I will start and I see Andrew smiling. I know he can’t wait to add some color to this. One of the things that we have done – those targets of course we put up a little more than a year ago at this point.

And the goal in setting that out was not to say this is guidance that we are going to update it every quarter, it was to say this is where we see ourselves headed as we work through this transition.

One of the things we spend a lot of time on back in December at our last Investor Day was talking about the various steps we had taken, the leverage we have pulled to in effect de-risk that set of targets and to provide some buffer between where we think we are going to land and what those targets are. And we continue to do that.

We continue to pull those levers and continue to drive for those targets. I don’t think it would be wise for us to try to continually update what that number looks like..

It’s good to see you asking questions like this. I mean I think right now all of us being on the same page that it’s looking more and more likely that we are heading in exactly the right direction for our FY ‘20 targets, I think it’s a good place to be. There is no reason for us to revise those targets right now..

Okay.

And I guess just more specific question, can you talk about the mix of products that you are seeing transact through the e-store?.

Yes. When you look at the e-store, the e-store really dominated the low end of our offerings. We actually did you see almost every type of product type that we sell going through the e-store. But if you look at what the majority is, a lot of it’s going to be LT and then the next largest chunk is going to be AutoCAD.

And that’s basically the majority of the e-store traffic that’s totally what you would expect from e-commerce transactions, the lower end of our value spectrum..

Great. I have just one quick follow-up to that one. Do you know if you are seeing any pirates essentially transact for the e-store..

We know the pirates don’t announce themselves when they arrive at the e-store. However, it’s highly likely that some of them do show up there.

Alright, especially if they are buying LT or something like that, but like I said pirates don’t declare themselves, but it’s probably likely especially given some of the digital related targeting efforts we are doing work with piracy. But some of them show up buying there..

Great. Thanks very much..

Thanks Jim..

Your next question is from Shankar Subramaniam with Bank of America/Merrill Lynch..

Hi, I am asking the question on behalf of Kash.

I have a quick question on what can be the churn rate of the current renewal base for the subscribers for next year, so the question I have is so most – some of the projects that the construction engineers use would be a short-term project or some can be a long-term project, so if the subscriber growth in the current year is driven by short-term projects, is likelihood the next year they might drop out, but can you talk about what the mix is, I don’t know if you know this or not, but when you talk about the mix between subscribers who are using for a short-term basis versus a long-term basis?.

So the pattern you are talking about if no projects were in the pipeline at all then I would probably worry about that. But for every project that drops off another project shows up. So that’s just the wrong way of looking at it. There is a steady state of projects within the ecosystem, projects retire, new projects ramp up.

So there is really no material change in the run rate because of the cyclicality of a particular set of projects. There is always new projects in the pipeline..

Got it.

And one on the digital manufacturing strategy you talked about the focus area for that, can you talk about is there any particular segment you are focusing on the 3D printing, IoT or not and where are you in that strategy implementation and when do we see the benefit of it, is it more beyond fiscal ‘19?.

So the opportunity that we are dealing with right now where the market is fully ready and the technology is fully aligned with the market rate [ph] is in construction. When we look at the digital manufacturing opportunity, the market is still coming to terms with okay.

What does it mean for us to be using solutions in the cloud when I am a product manufacturing, how much of the 3D printing capability is actually going to be practical for my applications.

So what you are seeing right now is in low volume manufacturing aircraft components and things like that, greater adoption of 3D printed workflows and some of these more automated workflows that’s eventually moved down, so the bet on digital manufacturing is like the next long-term bet after the construction bet there we are playing right now.

So we are actually – what you are seeing in the series of bets that provide a very strong path for long-term growth for the company..

Got it. Thanks..

And we have reached our allotted time for questions. And I would like to turn the call back over to David Gennarelli..

Great. Well that concludes our call today. We will be at the Citi Conference in New York City on September 6. For any other follow-on questions, you can reach me at 415-507-6033. Thank you..

Thank you for your participation. This does conclude today’s conference call. And you may now disconnect..