This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk16: Thank you for standing by, and welcome to Autodesk's second quarter 2024 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. To remove yourself from the question queue, you may press star 1-1 again. I would now like to hand the call over to Simon May-Smith, Vice President, Investor Relations. Please go ahead.
spk07: Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss the second quarter results of Autodesk's fiscal 24. On the line with me are Andrew Adignost, our CEO, and Debbie Clifford, our CFO. Today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available at Autodesk.com forward slash investor. You can find the earnings press release, slide presentation, and transcript of today's opening commentary on our investor relations website following this call. During this call, we may make forward-looking statements about our outlook, future results and related assumptions, products and product capabilities, business models and strategies. These statements reflect our best judgment based on currently known factors. Actual events or results could differ materially. Please refer to our SEC filings, including our most recent Form 10-Q, and the form 8K filed with today's press release for important risks and other factors that may cause our actual results to differ from those in our forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward-looking statements. During the call, we will quote several numeric or growth changes as we discuss our financial performance. Unless otherwise noted, each such reference represents a year-on-year comparison. All non-GAAP numbers referenced in today's call are reconciled in our press release or Excel financials and other supplemental materials available on our investor relations website. And now, I will turn the call over to Andrew.
spk24: Thank you, Simon, and welcome everyone to the call. Discipline and opportunity again underpinned Autodesk's strong financial and competitive performance despite continued macroeconomic policy and geopolitical headwinds. Resilience provided by our subscription business model and our product and customer diversification. Discipline and focus in executing our strategy and deploying capital through the economic cycle and opportunity from developing next generation technology and services which deliver end-to-end digital transformation of our design and make customers and enable a better world designed and built for all. Our leading indicators remained consistent with last quarter, with growing usage and record bid activity on building connected and cautious optimism from channel partners. Customers remain committed to transformation and to Autodesk. leveraging automation more where they are seeing headwinds from the economy, labor shortages, and supply chain. That commitment was reflected in our Q2 performance, growing adoption and token consumption within enterprise business agreements and strong renewal rates. Autodesk remains relentlessly curious with a propensity and desire to evolve and innovate. We were delighted that Autodesk was recently highlighted as a best workplace for innovators by fast companies. I will now turn the call over to Debbie to take you through our quarterly financial performance and guidance for the year. I'll then come back to provide an update on our strategic growth initiative.
spk41: Thanks, Andrew. Overall market conditions and the underlying momentum of the business remain similar to the last few quarters. Despite a tough macroeconomic backdrop that continues to drag on the overall rate of new subscriber acquisition and the forward momentum of the business and may continue to do so, Our financial performance in the second quarter was strong. We said last quarter that we had a strong cohort of EBAs renewing in the second half of the year that last renewed three years ago at the start of the pandemic, and that subsequent adoption and usage has been strong. Some of that strength came through in the second quarter, which was earlier than we were expecting, and which boosted billings, free cash flow, and subscription revenue. Total revenue grew 9% and 12% in constant currency. By product and constant currency, AutoCAD and AutoCAD LT revenue grew 9%. AEC revenue grew 14%. Manufacturing revenue grew 9% and in double digits, excluding a headwind from variances and upfront revenue. And M&E revenue grew 10%. By region and constant currency, revenue grew 15% in the Americas, 11% in EMEA, and 6% in APAC. Direct revenue increased 18% and represented 37% of total revenue, up three percentage points from last year, benefiting from strong growth in both EBAs and the eStore. Net revenue retention rate remained within the 100 to 110% range at constant exchange rates. The transition from upfront to annual billings for multi-year contracts is proceeding broadly as expected. We had a full quarter impact in the second quarter, which resulted in billings declining 8%. Total deferred revenue increased 14% to $4.2 billion. Total RPO of $5.2 billion and current RPO of $3.5 billion grew 11% and 12% respectively. Turning to the P&O, non-GAAP gross margin remained broadly level at 92%. GAAP and non-GAAP operating margin remain broadly level, with revenue growth and cost discipline offsetting the impact of exchange rate movements. Free cash flow was 128 million in the second quarter, which was a bit better than we'd been expecting, primarily due to the timing of EBAs, but also due to some favorable in-quarter linearity. Turning to capital allocation, we continue to actively manage capital within our framework. Our strategy is underplanned by disciplined and focused capital deployment through the economic cycle. We are being vigilant during this period of macroeconomic uncertainty. During Q2, we purchased approximately 400,000 shares for $87 million at an average price of approximately $200 per share. We will continue to offset dilution from our stock-based compensation program and to opportunistically accelerate repurchases when it makes sense to do so. Now, let me finish with guidance. The headline is that overall, the underlying momentum in the business remains consistent with the expectations embedded in our guidance range for the full year. Our sustained momentum in the second quarter and early expansion of some EBAs expected to renew later in the year reduced the likelihood of our more cautious forecast scenarios. Given that, we're raising the lower end of our guidance ranges. Let me summarize some key factors we highlighted earlier in the year. First, we have a strong cohort of EBAs renewing in the second half of the year, although, as I mentioned earlier, some of that benefit was billed in the second quarter. Second, foreign exchange movements will be a headwind to revenue growth and margins in fiscal 24. The revenue headwind will moderate a bit in the second half of the year. Third, switching from upfront to annual billings for most multi-year customers creates a significant headwind to free cash flow in fiscal 24 and a smaller headwind in fiscal 25. Our expectations for the billings transition are unchanged. Fourth, as we thought might happen, we saw some evidence of multi-year customers switching to annual contracts during the second quarter. It wasn't big enough to be called a trend, but we're keeping an eye on it. It's still early days, and we'll keep you updated as the year progresses. All else equal, if customers switched to annual contracts, it would proportionately reduce the unbilled portion of our total remaining performance obligations and negatively impact total RPO growth rates. Deferred revenue, billings, current remaining performance obligations, revenue, margins, and free cash flow would remain broadly unchanged. Annual renewals create more opportunities for us to drive adoption and upsell and are without the price lock embedded in multiyear contracts. And fifth, we expect our cash tax rate will return to a more normalized level of approximately 31% of GAAP profit before tax in fiscal 24, up from 25% in fiscal 23. The federal tax payment extension after the winter storms in California means cash tax payments shift from the first half of the year to the third quarter, reducing third quarter free cash flow. Second half free cash flow generation will therefore be significantly weighted to the fourth quarter. We still anticipate fiscal 24 will be the cash flow trough during our transition from upfront to annual billings for multi-year contracts. Putting that all together, We now expect fiscal 24 revenue to be between 5.41 and 5.46 billion. We expect non-GAAP operating margins to be similar to fiscal 23 levels with constant currency margin improvement offset by FX headwinds. We expect free cash flow to be between 1.17 and 1.25 billion. We're increasing the guidance range for non-GAAP earnings per share to be between $7.30 and $7.49 to reflect higher interest income on our cash balances in addition to the reduced likelihood of our more cautious forecast scenarios. The slide deck on our website has more details on modeling assumptions for Q3 and full year fiscal 24. We continue to manage our business using a rule of 40 framework with a goal of reaching 45% or more over time. We think this balance between compounding growth and strong free cash flow margins captured in the Rule of 40 framework is the hallmark of the most valuable companies in the world, and we intend to remain one of them. As we said back in February, the path to 45% will not be linear given the macroeconomic drag on revenue growth from the rate of new subscriptions growth and the drag to free cash flow as we transition away from multi-year contracts paid upfront. But let me be clear, we're managing the business to this metric and feel it strikes the right balance between driving top line growth and delivering disciplined profit and cash flow growth. We intend to make meaningful steps over time toward achieving our 45% or more goal, regardless of the macroeconomic backdrop. Andrew, back to you.
spk24: Thank you, Debbie. Let me finish by updating you on our progress in the second quarter. Our strategy is to transform the industries we serve with end-to-end cloud-based solutions that drive efficiency and sustainability for our customers. We continue to see good growth in AEC, fueled by customers consolidating on our solutions to connect and optimize previously siloed workflows through the cloud. And as we talked about in February, digital momentum is also building among asset owners in infrastructure and other areas. This momentum is expected to accelerate with infrastructure investment programs like the US Advanced Digital Construction Management System program, which launched during our second quarter. Canon Design is a global design practice encompassing strategy, experience, architecture, engineering, and social impact. It is driving forward its digital transformation and embracing the cloud to increase operational efficiency, enhance security, establish a single point of truth, and enable more seamless end-to-end collaboration. During the quarter, it expanded its investment with Autodesk by leveraging Autodesk Docs as a common data environment, adopting FORMA, and is exploring opportunities to integrate Autodesk's XR and asset management capabilities to its design portfolio. Outside the U.S., our construction platform is benefiting from our strong international presence and established channel partner networks. During the quarter, a property developer and transit network operator based in Asia needed to simplify operations across its many infrastructure projects with a wide range of contractors and subcontractors. To manage this complexity, it needed a single source of truth for its project data and a way to streamline workflows on a single platform. In Q2, it leveraged support from our local channel partner and standardized on one platform by adding Autodesk Construction Cloud to its existing portfolio of Autodesk AEC design tools to gain visibility into contractors' and subcontractors' workflows and the potential to unlock breakthrough productivity gains. Shook Construction, an ENR 400 general contractor based in Ohio, made the decision to standardize on Autodesk Construction Cloud to better streamline their operational workflows. After evaluating many competitive options, Shook Construction chose Autodesk Construction Cloud as the best fit for driving consistent workflows, creating high-impact collaboration with their construction partners, and eliminating cumbersome manual workflows. We continue to benefit from our complete end-to-end solutions which encompass design, pre-construction, and field execution through handover and into operations. Again, these stories have a common theme, managing people, process, and data across the lifecycle to increase efficiency and sustainability while decreasing risk. Over time, we expect the majority of all projects to be managed this way, and we remain focused on enabling that transition through digital transformation. We talked last quarter about the short-term disruption from integrating our construction and worldwide sales teams. I'm pleased to report that things began to settle in the second quarter. We believe that combining the two teams will allow us to expand the scale and reach of our construction business, particularly in our design customer base, and our ability to serve our customers across the complete project lifecycle. Encouragingly, Argus Construction Cloud MAUs were up over 100% in the quarter. Moving on to manufacturing, we made excellent progress on our strategic initiatives. Customers continue to invest in their digital transformations and consolidate on our design and make platform to grow their business and make it more resilient. For example, a multinational manufacturer which serves the construction industry as both a building product manufacturer and through tools and construction processes has been leveraging the Autodesk portfolio to connect workflows across the AEC and manufacturing industries. It's expanded its commitment to BIM using Revit, Navisworks, and Construction Cloud, which has enabled the customer to adopt a collaborative and data-driven approach across design, construction, and maintenance services, which minimizes clashes and rework and culminates in more efficient and successful building projects. In the second quarter, the customer grew its EBA with Autodesk ahead of its Q4 renewal date to accelerate its adoption of BIM and facilitate the design of its products and materials directly within MEP models. Fusion continues to provide an easy on-rape into our cloud ecosystem for existing and new customers. In Europe, an appliance manufacturer who is already an existing user of our manufacturing collection and AutoCAD Mechanical purchased additional seats of Fusion for PCB design. Its heating systems division will leverage Fusion's electronic design automation capabilities quickly and seamlessly connect more of its design to manufacturing workflow to drive greater efficiency. Fusion continues to grow strongly, ending the quarter with 236,000 subscribers as more customers connect more workflows in the cloud to drive efficiency, sustainability, and resilience. At Investor Day, I talked about leveraging our key growth enablers, including business model evolution, customer experience evolution, and convergence between industries to provide more and better choices for our customers. Our Flex consumption model is a good example of this. Flex's consumption pricing means existing and new customers can try new products with less friction and enables Autodesk to better serve infrequent users. Not surprisingly, the lion's share of the business has come from new or existing customers expanding their relationship with Autodesk. During the quarter, we signed three more million-dollar Flex deals. As Steve said at our investor day, we've also introduced a new transaction model for Flex, which will give Autodesk a more direct relationship with our customers and more closely integrate with our channel partners over time. We will begin testing our new transaction model more broadly in Australia later this year. And finally, We continue to work with non-compliant users to ensure that they are using the latest and most secure versions of our software. For example, after identifying and alerting a Chinese-based automobile designer about non-compliant usage, and despite working through ongoing challenges from the pandemic, the customer eventually committed to three-year VRED and Alias subscriptions. As expected, our initiatives to tighten concurrent usage of named user subscriptions and expand the precision and reach of our in-product messaging to help incremental growth during the quarter. Now let me finish with a story. According to the National Oceanic Service, coral reefs are some of the most diverse and valuable ecosystems on Earth. While they take up less than 1% of the ocean floor, their extraordinary biodiversity supports about 25% of all marine life. Healthy coral reefs support fisheries, as well as jobs and businesses through tourism and recreation. It also buffers shorelines against 97% of the energy from waves, storms, and floods, helping to prevent loss of life, property damage, and erosion. It can take 10,000 to tens of millions of years for a coral reef to form and just weeks for it to die. Rising ocean temperatures can cause coral to bleach and die. Half of living coral reefs have died since the 1950s. Without intervention, we're on track to lose 70% to 90% of the remainder by 2050. That is, unless we find a faster way to bring coral reefs back from the brink. With support from Autodesk and the Autodesk Foundation, a company called CoralMaker is using our digital tools, artificial intelligence, and robotics to deliver coral reef restoration at scale. with cloud collaboration to keep the global team connected across oceans and time zones. As Dr. Taryn Foster, CoralMaker's founder, says, the partnership with Autodesk has empowered us to develop new technologies to restore reefs at a rate unimaginable a few years ago. Current restoration projects can deploy about a hectare of coral per year. With CoralMaker's technology, it's possible to deploy 100 hectares per year. From the oceans to the earth and sky, augmented design powered by Autodesk will enable our customers to go further and faster to design and make a better world for all. We've been laying the foundation to build enterprise-level AI for years with connected data, teams, and workflows in industry clouds, real-time and immersive experiences, shared extensible and trusted platform services, innovative business models, and trusted partnerships. Autodesk remains relentlessly curious with propensity and desire to evolve and innovate. We are building the future with focus, purpose, and optimism. Operator, we would now like to open the call up for questions.
spk16: As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Again, that's star 1-1 on your telephone to ask a question. To remove yourself from the question queue, please press star 1-1 again. Please stand by while we compile the Q&A roster.
spk14: Please stand by for our first question.
spk16: Our first question comes from the line of Sackett Kalia of Barclays. Please go ahead, Sackett.
spk28: Okay, great. Hey, Andrew. Hey, Debbie. How are you guys doing? Thanks for taking my questions here.
spk42: We're doing great. How are you?
spk28: Doing all right. Doing all right. Debbie, maybe for you, just a quick housekeeping question here. Great to see the revised range on a lot of metrics, particularly revenue. And so when I think about the midpoint of the revenue guide going up by about $25 million, first of all, great to see the impact of FX start to lighten. But could you just maybe walk us through a broad brush How much of this year's raise on revenue is from FX versus maybe some underlying fundamentals in the business?
spk41: Yeah, so we had a small increase in the midpoint of the guide. The dollar change was immaterial. It's tough, really, to come up with a mix of assumptions that get us to the low end of our previous guidance range. So the midpoint increase reflects a mix of both organic and FX assumptions. Overall, the business is tracking generally in line with our expectations.
spk28: Okay, got it, got it. Andrew, maybe for you, this is an open-ended question, but I guess now as you've completed the first quarter of this transition to a new billing model, is there anything that's surprising you about maybe how customers or how partners are behaving? Again, open-ended.
spk24: Yeah, no real big surprise this second. I mean, Debbie flagged last quarter that we might see some customers reverting back to annual contracts as a result of the change. We did see that. Nothing really out of bounds, though. Nothing really surprising. Debbie, do you want to add anything to the details?
spk41: Yeah, I would say the initial rollout of the new billings model is going well. The systems are working. Customer and partner behavior is pretty much as we expected. As Andrew mentioned, we are seeing a small proportion of our customers choose annual contracts versus multi-year contracts billed annually. But generally, we expected a bit of that, and the performance has been in line with our expectations. And remember, if customers choose annual contracts, it doesn't impact the P&L. It only impacts unbilled and total RPO. It's still early days. We're monitoring it closely, and I think it just continues to be a good example of how we're working to optimize the business. It's about reducing the volatility of our cash flow while simultaneously giving our customers the purchasing pattern that they want. And then finally, I'd say that there's no change in how we expect the transition to impact our cash flow outlook.
spk14: Got it. All very clear. Thanks, guys.
spk16: Thank you. Please stand by for our next question, which comes from the line of Jay Vlieschauer of Griffin Securities.
spk30: Thank you. Good evening. Andrew, for you first, you made some constructive comments about what you're seeing in the AEC business. But more broadly, and as you're well aware, there's quite a bit of ferment going on in that market right now in terms of references to what's come to be called BIN 2.0. As you know, just a couple of months ago at an AEC conference, a customer group launched a new customer-developed design specification for software. You yourselves are working on the dual track of enhancing Revit but focusing on Forma. So a lot's going on in terms of various currents in that industry or part of the industry. Help us understand how you're thinking about managing through all those different dynamics that are going on in the AAC industry, and then a follow-up.
spk22: Yeah, so thanks, Jay.
spk24: There's three threads to this, all right? One is kind of the core platform thread around data and data flow. At the root of all of this, we need to make sure as much of the data that we have locked inside Revit files and locked in other types of files that our customers have gets turned into APIs wherever possible. This is a lubricant to the workflows that people are worried about, and a big part of really what underpins the whole concept of BIM 2.0. So that's one of the things. The second piece is you've got to make sure that their ability to do detailed, in-depth, complicated, sophisticated BIM models gets more performant, more productive, and faster. That's core to kind of building up and improving Revit in some significant ways, which we're absolutely looking at. But the third point, which I think is more important, is you really need to reimagine how BIM is being done. The paradigm needs to shift, and it needs to shift to the world of not only being cloud-enabled, but also being what we really like to call augmented design-enabled or outcome-based in whatever language we use, so that you can actually change the way people do BIM. And that's one of the big things that we're focusing on with Forma. And that's very different than, you know, we have certain types of competitors. It's in line with what the spec is from the customers. But when you talk about data, Revit improvements, and the move to what we call augmented design or outcome-based design, those are the big thrusts in terms of what we're trying to do to bring the industry to a better way of doing this.
spk30: Okay. Second question refers to the comment you made about a new transactional model and a pilot you're going to be undertaking in Australia. So maybe you could elaborate on that. When I hear that, it sounds to me like there's potentially going to be some further change to channel economics. You've just completed the move to back-end only margins. Are you thinking about perhaps taking the the flex commission model more broadly across the rest of the business or what exactly you're looking to accomplish with that?
spk24: So let me, let's talk about the flex experiment and the things you were doing with flex. First off flex, because it's like a consumption based model and it involves usage of various different products. it's really incredibly helpful for the customer for us to be able to have a much more direct relationship with the customer with regards to that offering. Because that way we're able to offer a lot more visibility to how they're using the offering, what they're using, when they're using it, how much they're consuming, and actually help them get the most out of the offer. So what we've done over the last year is we've proved out a new transaction model, working with our partners and rolling out across various regions that is supporting Flexx. And that is a much more direct transaction model. Through that process, we've learned a lot. We've gained a lot of knowledge. We've addressed a lot of issues, both systems-wise and process-wise. And we are now in a position with Flex to start growing and expanding that model at greater and greater volume. And that's exactly what's happening with Flex. The volume of Flex is increasing, increasing. And we're doing it reliably, repeatedly, and in a pretty positive way. Where we go from here depends solely on how we watch these things evolve and what the benefits of this transaction model are. And all options are open to us in the future, but that's where we are right now. We've perfected what we've done with Flex.
spk14: Thank you.
spk16: Thank you. Our next question comes from the line of Adam Borg of Stifel.
spk32: Awesome. And thanks so much for taking the questions. Maybe just for Andrew on the infrastructure opportunity, I know you've been calling out increasing traction with State Department of Transportation, and you even referenced some grants in the quarter in the script. So maybe just talk a little bit more about how you think about the infrastructure opportunity overall and really what separates Autodesk from competitors in going after it.
spk24: Yeah. So look, at a high level, one of the things I'm really excited about the thing with the really long name, the Advanced Digital Construction Management System program that the U.S. government rolled out, that is the program related to the money that's designed to help Department of Transportation look at their infrastructure, look at their processes, and start modernizing their digital processes around design and construction of infrastructure. That's an important step in getting a lot of these Department of Transportation to really start thinking about how they get ready to spend more money on infrastructure and do it better and address the serious capacity challenges we have around materials, manpower, and dollars with regards to what we have to do. So pretty excited about that because that's an open door to having new conversations with these departments about how they do things. Our focus has not changed. We are very much focused on water and road and rail, and we continue to innovate and drive improvements in those areas. I think our biggest differentiator is what we bring to market as a modern architecture. We bring to market more cloud-based solutions, more owner-based solutions for managing the infrastructure once you have it, and really just more technology that's stitched together in different ways. So we're looking forward to having that discussion with the Department of Transportation over the next months and coming years. And I think you're going to start to see real change in some of those organizations.
spk32: That's really helpful. And maybe just as my follow-up, just on the earlier than expected EVA renewal pool in the quarter. So maybe just talk about, just given the software macro, obviously, that our checks have been suggesting, and you talked about no real change sequentially, but just what's leading the customers to choose to renew early? And maybe just as a quick follow-up to that, as we think about the guidance for the year, Any way to quantify the type of expansion opportunity embedded from these EBAs? Thanks so much.
spk41: I think I got the – Adam, you were coming in and out a little bit, but I think I got the bulk of what you were saying, so just stop me if I'm missing something. But in terms of the EBA behavior, really what we saw was driven by them. Our customers were managing their own budgets and cash flow, and so they Their desire to get early billings for, frankly, higher usage of their tokens was driven by their own behavior, which we see as a real positive sign for us in engaging with those enterprise customers. They're seeing strong usage of our portfolio, and they're continuing to invest in their relationship with us. And those billings boosted our total billings, revenue, and free cash flow during the quarter. So overall, I think it's a win-win. There was a second part, I think, to your question?
spk32: Yeah, I'm just curious, and so thanks for that. I was just curious, any way to quantify kind of the type of expansion opportunity from the big EBA renewal pool in the back half of the year as you think about full year guidance?
spk41: That's something we can quantify for you, Adam, but I would just reiterate the fact that we do see it as a real positive, but for the first two quarters of the year to date that we're seeing strong usage, and that's already leading to early billing. So a positive from our standpoint overall.
spk05: Awesome. Thanks so much.
spk16: Thank you. Our next question comes from the line of Joe Runk of Baird.
spk35: Great. Hi, everyone. Maybe I wanted to revisit your AEC exposure. I know you've discussed this in the past and just how there's offsets, you know, should commercial markets see pressure, institutional or infrastructure fare better, so you have diversification there. I guess when you think about the current business composition and how the different sub-sectors are faring, do you think the nature of Autodesk and AEC is any better or worse than would have been the case in past cycles? And I'm asking less about Autodesk just as a subscription model now versus a licensed model in the past and more about Autodesk and things like Revit adoption or reliance on the cloud. which might create a different dynamic for the business, this down cycle versus past down cycles.
spk24: I think one of the things that you said, and I want to reinforce it, is that we are diversified across all sectors of making things. Everything that gets made, we're involved in. It's not just AEC. It's buildings. It's bridges. It's cars. It's it's electronics, and of course, it's film and games. So just remember, we're diversified across all of those segments. What's different now, and I think it's important to recognize this, is that the AEC industry as a whole is chasing productivity and digitization gains, the entire industry, from construction all the way through to any design and every part of the process in between engineering and all the things associated with that. So that fundamental change is creating long-term pull for what we're doing. And what we're doing is we're connecting the design and make processes across that industry together in the cloud in unique and highly integrated ways so that people can do things faster, more sustainably, and with lower risk and better outcomes. That fundamental shift is very different than what we've seen before. And we're going to be riding that fundamental shift for quite a few years.
spk33: Okay, great, Andrew. That's hopeful.
spk35: And then second question, wondering if you can comment on how you see the writers and actors strike potentially impacting business and media and entertainment, particularly, you know, if this goes on for a while and your customers are finishing what's in post-production with, I suppose, a lack of new things coming in, what that might mean towards the end of the year.
spk24: Yeah, so you hit one thing right there, right? People are still in post-production right now for the existing book. That post-production overhang will continue for a little while. If the strike continues for months on end, we will likely see an increased impact on our media and entertainment business. It's still growing now. It definitely slowed down in Q2, but it's still growing. So as we look forward... Your guess is as good as mine about how long this strike will go on. But I do remind you, our exposure to media entertainment is relatively small compared to the other parts of our business. But there's no doubt that an extended strike could have an impact on that business.
spk06: Okay. Thank you very much.
spk16: Thank you. Our next question comes from the line of Tyler Radke of Citi.
spk15: Yeah, thanks for taking the question. So I wanted to just go back to the commentary on kind of the puts and takes on the quarter. So you talked about seeing some early expansions on some of the multi-year EBAs, and I just wanted to clarify, was that also a stronger expansion, or was it more of a timing factor? And then, Debbie, this might be a bit of a nitpicky question, but just as I look at the constant currency revenue guidance, I think the high end of the guide says 12% plus versus 13 last quarter. I just wasn't sure, you know, if there was a change there, if you could just kind of comment on the puts and takes on that too. Thank you.
spk02: Sure.
spk41: Thanks, Tyler. So the EBA usage was strong and we've been tracking it for the year to date. It wasn't necessarily stronger than our expectations, however. So to clarify, it really, more than anything, it's a timing difference. We were expecting that the revenue would hit in Q4 and it hit in Q2. But the fact that our customers are using more than they had anticipated the onset of the contracts is a good thing. It's just that we've been tracking it. We've known about it for the year to date and we just saw the invoices in Q2 versus Q4. In terms of the content currency guide, the range, it was impacted really by rounding. The dollar change was immaterial, and overall the business is tracking generally in line with our expectations.
spk15: Okay, great. And a follow-up for Andrew. So you talked about some encouraging signs on the Autodesk construction side, you know, given the reorg, talked about it kind of settling in. Maybe just remind us kind of what were the big changes in What are you hoping to accomplish? And should we start to see the make revenue begin to accelerate throughout the rest of the year? Thank you.
spk24: Yeah, Tyler, happy to clarify that. So look, what we did in Q1 is we merged the Autodesk Construction Solutions Salesforce with the Mainline Salesforce. This was with the objective of long-term accelerating business growth in that area. particularly in our design-centric accounts. So we wanted to keep the subcontractor and subcontractor power of the ACS team and combine it with the teams that are focused on some of our design accounts as well. We expected some bumps in doing that because you have to realign count assignments, you have to realign players and who's in charge of what. We've seen a lot of those bumps get smoothed out into Q2, so we're seeing a return to expected patterns. We've lost no business during the process. As I told you earlier in the opening commentary, when I talked about things like Shook, the general contractor in Ohio, we're winning – We're continuing to win these contractors. Primarily, one of the things we hear a lot is the pricing predictability associated with our offering and the ability to show them a path not only to a stable pricing model, which customers really like and increasingly see a viable and strong alternative to project management and what ACS offers, but also in terms of the integration between design and make. I expect the consolidation of the sales forces to continue to further accelerate the construction business moving forward as we continue to work this through. So progress in the right direction, and we can expect to see more progress.
spk14: Great to hear. Thank you. Thank you.
spk16: Our next question comes from the line of Jason Salino of KeyBank Capital Markets.
spk10: Great. Thanks for taking my question. This is a spin on Saket's very first question, but it relates to the quarter and not necessarily the guide. But when we look at the performance in the quarter, it's the biggest beat on a percentage and an absolute basis we've seen in many quarters. Can you just help us unpack maybe what the magnitude of the EBA strength was or the FX kind of benefits, if there were any?
spk39: The biggest driver of the beat came from the EDAs.
spk10: Okay, perfect. And then, Andrew, I'm curious on updates on Innovize. At the beginning of the year, I think there was this view that funding for sewer projects and water projects hadn't quite started to flow, you know, no pun intended yet, but that maybe we would see things, you know, start to open up in the second half or next year. Is that still the case? I guess, what are you seeing?
spk24: Yeah, I mean, look, you know, look in the news, right? All you get is increasing evidence that most regions and municipalities need to reevaluate their water management, both at a sewage level and a treatment level infrastructure. So that has fundamentally not changed. And We haven't yet seen the increase in project, actually starting projects in that area. But what we are seeing is people buying ahead of demand. So we actually saw a lot of strength with Inovize in our EBAs and in our large accounts, which is an important precursor to some of the larger efforts that might go on moving forward. But no floodgates have opened up yet, no pun intended from my side. But we still see the exact same pattern we've talked about.
spk10: Okay, great, appreciate it, and I like the puns.
spk16: Thank you. Our next question comes from the line of Michael Funk of Bank of America.
spk21: Yeah, thank you all for the questions tonight, a couple if I could. So, on the EVA renewal comments that you made earlier, Can you give us a sense of the like-for-like change there, whether or not customers on balance were upsizing, increasing the duration of the contract, what that looked like?
spk41: So to clarify, these contracts, they were not contracts that were renewed. We're expecting that these contracts will be renewed in Q4 per our normal cycle. What happened is that these customers have been using ahead of the usage that was built into their original contracts. And so what we saw in Q2 was billings for the overuse versus their original contracts.
spk40: But we still expect the renewals will occur in Q4.
spk21: I understand. I must have misheard you earlier. So for the overuse then, do you expect that trend to continue for the remainder of the year? And what do you think is driving that overuse?
spk41: We're certainly hopeful that that trend continues. We see it as a very positive sign that our customers are asking for early billings because they're using our products more than they anticipated and they're using the broad breadth of the portfolio. The other thing I would say is that the usage that was built into these contracts when they were originally signed, remember this was three years ago at the onset of the pandemic, and so the usage in those contracts might have been a bit lower, just given the environment in which those contracts were renewed. And so as we start to come out of the pandemic, we're seeing more and more usage. We've talked about usage being, broadly speaking, for Autodesk, but also for our EBAs being a good leading indicator, and that usage continues to increase. I don't have a crystal ball, Michael. I wish I did. I could tell you for sure that the usage would continue to go up in the back half of the year, but we're certainly hopeful, and all signs are leading in that direction.
spk21: Okay, so I interpret that to mean the trends so far this quarter to date are consistent with 2Q.
spk02: Sorry, I didn't hear.
spk21: I think your last comment about kind of, you know, trends continuing is the interpretation there that the trend has continued from 2Q into this quarter of increased usage.
spk41: We're not commenting on Q3 at this point. Overall, the performance that we saw from our EBAs in Q2 is really strong, and we're hopeful that it will continue.
spk09: Great. Thank you, Debbie.
spk16: Thank you. Our next question comes from the line of Matt Hedberg of RBC Capital Markets.
spk27: Great, guys. Thanks for taking my questions. Congrats on the stability here. Really, really good to see. Maybe, Debbie, for you, maybe I missed it, but cash flow was, free cash flow was significantly better than we thought this quarter. I know you don't guide quarterly. So maybe just, again, maybe I missed it, but a little bit more on sort of why free cash flow is so strong this quarter. And as we think about Q3, Q4, kind of the linearity there, you took the low end of the full year up a little bit. How should we kind of think about that split and, you know, sort of between 3Q and 4Q? Yeah.
spk41: Yeah, so Q2 was strong primarily because of the timing of the EBA billings that I've been talking about, as well as some favorable in-quarter linearity. So the linearity that we saw was better than we had expected. And then when we look at the back half of the year, second half free cash flow will be significantly weighted to the fourth quarter. I've called out the federal tax payment extension. That positively impacted the first half free cash flow, and it will negatively impact Q3. Overall, we still anticipate that fiscal 24 is going to be the free cash flow trough during this transition from upfront to annual billing.
spk27: Great, thanks. And then, Andrew, for you, following up on earlier questions, kind of on the split of your business, obviously an extremely diversified model. But I guess regarding commercial real estate exposure, I know it's difficult to give an exact percentage of your exposure there, but just broadly speaking, we get asked all the time, what's out of this exposure to the category? How should we think about you know, kind of Autodesk and the CRE market?
spk24: To be honest, you shouldn't, okay? You know, this is some of the conversations we had during the housing crisis. It's like, well, how should we think about Autodesk relative to housing? And the question is you shouldn't, all right? The amount of things that need to be built and rebuilt in our customer base is ginormous, all right? They don't have current capacity, either people-wise, dollar-wise, or capability-wise to actually work through all the things that are going on. So the momentum of the industry pivots to other areas. Now, even if you look at commercial real estate, People are still reconfiguring commercial real estate within the segment in order either to make it more attractive to a shrinking pool of renters or to repurpose that space to other uses. But in terms of exposure to auto theft, you've got to be careful about overblowing that because the money always goes somewhere else. There's always a lot of work to be done in other sectors. That just means that people that were traditionally bidding on commercial real estate projects are now bidding and engaging on other types of projects.
spk27: Super helpful. Thank you for that.
spk16: Thank you. Our next question comes from the line of Bob and Shaw of Deutsche Bank.
spk03: Great. Thanks for taking my question.
spk20: Andrew, we continue to hear good things from your customers and partners regarding your ability to innovate and enhance many of your acquired assets, whether it's Innovize, PlanGrid, et cetera. Can you just remind us of your views on Go Forward M&A and your M&A philosophy? And maybe kind of what are some of the lessons learned from prior deals?
spk24: Yeah. So we are an acquisitive company. We will continue to be an acquisitive company. We always like when the environment gets more attractive for acquisitions. but we are always looking to make sure that a potential acquisition is strategically aligned with our priorities. That means that it's either accelerating an effort that we're currently working on or bringing us into an adjacency that we weren't working on but that we see as an attractive place. Timing matters as well in terms of what timing's right for us to do these things so that we keep the business reasonably focused on the things that are important and don't try to juggle 18 balls at once, all right? But we will continue to be acquisitive And we have the cash flow and balance sheet ability here to do whatever we need to do in terms of strategic fit and expansion that we're interested in moving forward. So don't expect any change. In terms of learning, look, you always learn. You can integrate some of the back office faster. All right? Key learning in all these things is integrate sales and back office infrastructure quicker, and you go faster.
spk19: Super helpful there. Just on another topic, can you just talk about what you're seeing with A&E customers as it relates to hiring?
spk20: I know many of these customers have dealt with talent shortages over the past few years. Are you seeing any easing here or any kind of other general commentary in terms of hiring within A&E customers?
spk04: Thanks so much for taking my question.
spk24: Yeah, it depends on the sector, but honestly, in construction and manufacturing, they're still seeing challenges with hiring. It's one of the big things we hear from them is their ability to not only find but retain talent, especially qualified talent. So hiring continues to be an issue on the execution side of our customers, you know, primarily towards the make side.
spk14: Thank you.
spk16: Our next question comes from the line of Ken Wong of Oppenheimer and Company.
spk17: Great. Thank you for taking my question. Just a quick one for me. As we think about, I think, Debbie, you mentioned new customer softness, kind of consistent with what you guys are seeing, but just wanted to make sure relative to last quarter, I think you guys had called out a bit of an air pocket that normalized. How should we think about the way that played out this quarter in terms of adding new subs?
spk41: The overall market conditions, new subs, momentum in the business was similar to last quarter. We talked about leading indicators being consistent with last quarter, growing usage, record bid activity on building connected, cautious optimism from our channel partners. Beyond that, I would just add that our regional performance was broadly similar to what we've seen for several quarters. The direct business, including enterprise and e-store, as well as India, actually were bright spots for us, but they were offset by some tougher patches like China, as well as the softer performance that we talked about in M&E.
spk17: Got it. And then I realize maybe it's a very small nuance, but I think last quarter you guys saw a little bit of a dip and then it recovered in terms of new sub-ads. I guess when you're saying it's consistent with last quarter, would it be more consistent with that exit or kind of full quarter dynamic where we're, you know, averaged out maybe a little lighter than anticipated?
spk41: Well, so remember what we said last quarter was that we saw a slight dip after we stopped selling the multi-year contracts up front, but then it recovered as we exited the quarter and as we got into early Q2, and we saw that consistently throughout Q2.
spk14: Okay, perfect. Thank you, Debbie. Thank you.
spk16: Please stand by. Our next question comes from the line of Naing of Barenburg.
spk11: Hi, thank you for screwing me in. Just got a quick question for me. Coming back to the early was better than better than expected or earlier than expected EPA renewals. I was wondering if we were to exclude that impact in the quarter. The performance in AEC, would we have seen an inflection in terms of the growth levels? Because what we've seen in the past couple of quarters is the gradual decline in growth rates. So I was wondering, you know, if we didn't have these early renewals and EBAs, would the AEC segment would have seen a further deceleration in growth rates, or would we see a bit of an uptake compared to Q1? Thank you.
spk41: So the early billings that we talked about for EBAs are what drove the revenue beat versus our guide. But when you think about that beat on a dollar basis in comparison to the totality of our AEC business, the AEC business is vastly, vastly larger. So it's not a big driver of the overall trend that we're seeing in AEC, but it was the driver of the beat.
spk14: Thank you.
spk16: Thank you. Our next question comes from the line of Patrick Bowman of JP Morgan. Please go ahead, Patrick.
spk29: Oh, thank you. This is Pat. I'm for Steve, too. So just a couple probably for Debbie. You touched on sales in terms of the moving parts of the guide raise there. I guess in terms of the free cash flow midpoint, I know it was a small number, but what was the driver of the raise there? And then on the EPS side? the adjusted EPS guidance raise, there's like 25 million of other income.
spk13: Is that simply the benefit from the interest on cash that you mentioned in the preamble?
spk41: Yeah, so starting with cash, it's due to the performance that we saw in Q2. So I talked a little bit earlier in this Q&A session about the EBA billings that we saw in Q2 as well as the favorable in-quarter linearity. So those were drivers of the difference that you saw in our cash flow guide. And then in terms of EPS, the other income is due to higher interest income from our cash balances.
spk13: Does that flow through to cash flow?
spk14: In part, it will, yes.
spk13: Okay.
spk29: And then, sorry, one more on cash flow for my second question. Is the... Do you think is the third quarter going to be negative or positive on free cash flow? You said, I think, significantly weighted to the fourth quarter in the second half, which I think is similar to your prior commentary from last quarter. But I think you also thought at that time that maybe second quarter and third quarter could be negative. Is your view that free cash flow will be negative in the third quarter, given the impact of this cash item that was pushed from the first half to the third quarter?
spk41: We're not going to guide on a quarterly basis for free cash flow, but to try and be helpful, I just want to reiterate some of the comments. So remember that second half free cash flow is going to be significantly weighted into the fourth quarter, and the biggest driver of that is the extension of our federal tax payments that have a positive impact on the first half but are going to negatively impact Q3. So think about that as you put your model together.
spk13: Okay. Thanks so much. Best of luck.
spk16: Thank you. That is all the time we have for Q&A today. I would now like to turn the conference back to Simon Mays-Smith for closing remarks. Sir?
spk07: Thank you, Steve, and thank you, everyone, for joining today. We'll look forward to updating you on our progress in November on our Q3 earnings call. I look forward to speaking to you then. Thanks so much.
spk16: This concludes today's conference call.
spk14: Thank you for participating. You may now disconnect. Goodbye. Music Playing Bye. Thank you. Thank you. Thank you.
spk37: Thank you.
spk16: Thank you for standing by, and welcome to Autodesk's second quarter 2024 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. To remove yourself from the question queue, you may press star 1 1 again. I would now like to hand the call over to Simon May Smith, Vice President, Investor Relations. Please go ahead.
spk07: Thanks, Operator, and good afternoon. Thank you for joining our conference call to discuss the second quarter results of Autodesk's fiscal 24. On the line with me are Andrew Adignost, our CEO, and Debbie Clifford, our CFO. Today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com forward slash investor. You can find the earnings press release, slide presentation, and transcript of today's opening commentary on our investor relations website following this call. During this call, we may make forward-looking statements about our outlook, future results and related assumptions, products and product capabilities, business models, and strategies. These statements reflect our best judgment based on currently known factors. Actual events or results could differ materially. please refer to our SEC filings, including our most recent Form 10Q and the Form 8K filed with today's press release for important risks and other factors that may cause our actual results to differ from those in our forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward-looking statements. During the call, we will quote several numeric or growth changes as we discuss our financial performance. Unless otherwise noted, each such reference represents a year-on-year comparison. All non-GAAP numbers referenced in today's call are reconciled in our press release or Excel financials and other supplemental materials available on our investor relations website. And now I will turn the call over to Andrew.
spk24: Thank you, Simon, and welcome everyone to the call. Resilience, discipline, and opportunity again underpinned Autodesk's strong financial and competitive performance despite continued macroeconomic policy and geopolitical headwinds. Resilience provided by our subscription business model and our product and customer diversification discipline and focus in executing our strategy and deploying capital through the economic cycle, and opportunity from developing next-generation technology and services which deliver end-to-end digital transformation of our design and make customers, and enable a better world designed and built for all. Our leading indicators remained consistent with last quarter, with growing usage and record bid activity on Building Connected. and cautious optimism from channel partners. Customers remain committed to transformation and to Autodesk, leveraging automation more where they are seeing headwinds from the economy, labor shortages, and supply chain. That commitment was reflected in our Q2 performance, growing adoption and token consumption within enterprise business agreements and strong renewal rates. Autodesk remains relentlessly curious with a propensity and desire to evolve and innovate. We were delighted that Autodesk was recently highlighted as a best workplace for innovators by Fast Company. I will now turn the call over to Debbie to take you through our quarterly financial performance and guidance for the year. I'll then come back to provide an update on our strategic growth initiative.
spk41: Thanks, Andrew. Overall market conditions and the underlying momentum of the business remained similar to the last few quarters. Despite a tough macroeconomic backdrop that continues to drag on the overall rate of new subscriber acquisition and the forward momentum of the business, and may continue to do so, our financial performance in the second quarter was strong. We said last quarter that we had a strong cohort of EBAs renewing in the second half of the year that last renewed three years ago at the start of the pandemic, and that subsequent adoption and usage has been strong. Some of that strength came through in the second quarter, which was earlier than we were expecting, and which boosted billings, free cash flow, and subscription revenue. Total revenue grew 9% and 12% in constant currency. Byproduct in constant currency, AutoCAD and AutoCAD LT revenue grew 9%, AEC revenue grew 14%, manufacturing revenue grew 9%, and in double digits, excluding a headwind from variances in upfront revenue. And M&E revenue grew 10%. By region and constant currency, revenue grew 15% in the Americas, 11% in EMEA, and 6% in APAC. Direct revenue increased 18% and represented 37% of total revenue, up three percentage points from last year, benefiting from strong growth in both EBAs and the eStore. Net revenue retention rate remained within the 100 to 110% range at constant exchange rates. The transition from upfront to annual billings for multi-year contracts is proceeding broadly as expected. We had a full quarter impact in the second quarter, which resulted in billings declining 8%. Total deferred revenue increased 14% to 4.2 billion. Total RPO of $5.2 billion and current RPO of $3.5 billion grew 11% and 12% respectively. Turning to the P&O, non-GAAP gross margin remained broadly level at 92%. GAAP and non-GAAP operating margin remained broadly level with revenue growth and cost discipline offsetting the impact of exchange rate movements. Free cash flow was $128 million in the second quarter, which was a bit better than we'd been expecting, primarily due to the timing of EBAs, but also due to some favorable in-quarter linearity. Turning to capital allocation, we continue to actively manage capital within our framework. Our strategy is underplanned by disciplined and focused capital deployment through the economic cycle. We are being vigilant during this period of macroeconomic uncertainty. During Q2, we purchased approximately 400,000 shares for $87 million at an average price of approximately $200 per share. We will continue to offset that dilution from our stock-based compensation program and to opportunistically accelerate repurchases when it makes sense to do so. Now, let me finish with guidance. The headline is that overall, the underlying momentum in the business remains consistent with the expectations embedded in our guidance range for the full year. Our sustained momentum in the second quarter and early expansion of some EBAs expected to renew later in the year reduced the likelihood of our more cautious forecast scenarios. Given that, we're raising the lower end of our guidance ranges. Let me summarize some key factors we highlighted earlier in the year. We have a strong cohort of EBAs renewing in the second half of the year, although, as I mentioned earlier, some of that benefit was billed in the second quarter. Second, foreign exchange movements will be a headwind to revenue growth and margins in fiscal 24. The revenue headwind will moderate a bit in the second half of the year. Third, switching from upfront to annual billings for most multi-year customers creates a significant headwind to free cash flow in fiscal 24 and a smaller headwind in fiscal 25. Our expectations for the billings transition are unchanged. Fourth, as we thought might happen, we saw some evidence of multi-year customers switching to annual contracts during the second quarter. It wasn't big enough to be called a trend, but we're keeping an eye on it. It's still early days and we'll keep you updated as the year progresses. All else equal, If customers switched to annual contracts, it would proportionately reduce the unbilled portion of our total remaining performance obligations and negatively impact total RPO growth rates. Deferred revenue, billings, current remaining performance obligations, revenue, margins, and free cash flow would remain broadly unchanged. Annual renewals create more opportunities for us to drive adoption and upsell and are without the price lock embedded in multi-year contracts. And fifth, we expect our cash tax rate will return to a more normalized level of approximately 31% of GAAP profit before tax in fiscal 24, up from 25% in fiscal 23. The federal tax payment extension after the winter storms in California means cash tax payments shift from the first half of the year to the third quarter, reducing third quarter free cash flow. Second half free cash flow generation will therefore be significantly weighted to the fourth quarter. We still anticipate fiscal 24 will be the cash flow trough during our transition from upfront to annual billings for multi-year contracts. Putting that all together, We now expect fiscal 24 revenue to be between 5.41 and 5.46 billion. We expect non-GAAP operating margins to be similar to fiscal 23 levels with constant currency margin improvement offset by FX headwinds. We expect free cash flow to be between 1.17 and 1.25 billion. We're increasing the guidance range for non-GAAP earnings per share to be between $7.30 and $7.49 to reflect higher interest income on our cash balances in addition to the reduced likelihood of our more cautious forecast scenarios. The slide deck on our website has more details on modeling assumptions for Q3 and full year fiscal 24. We continue to manage our business using a rule of 40 framework with a goal of reaching 45% or more over time. We think this balance between compounding growth and strong free cash flow margins captured in the Rule of 40 framework is the hallmark of the most valuable companies in the world, and we intend to remain one of them. As we said back in February, the path to 45% will not be linear, given the macroeconomic drag on revenue growth from the rate of new subscription growth and the drag to free cash flow as we transition away from multi-year contracts paid up front. But let me be clear, we're managing the business to this metric and feel it strikes the right balance between driving top line growth and delivering disciplined profit and cash flow growth. We intend to make meaningful steps over time toward achieving our 45% or more goal, regardless of the macroeconomic backdrop. Andrew, back to you.
spk24: Thank you, Debbie. Let me finish by updating you on our progress in the second quarter. Our strategy is to transform the industries we serve with end-to-end cloud-based solutions that drive efficiency and sustainability for our customers. We continue to see good growth in AEC, fueled by customers consolidating on our solutions to connect and optimize previously siloed workflows through the cloud. And, as we talked about in February, digital momentum is also building among asset owners in infrastructure and other areas. This momentum is expected to accelerate with infrastructure investment programs like the US Advanced Digital Construction Management System program, which launched during our second quarter. Canon Design is a global design practice encompassing strategy, experience, architecture, engineering, and social impact. It is driving forward its digital transformation and embracing the cloud to increase operational efficiency, enhance security, establish a single point of truth, and enable more seamless end-to-end collaboration. During the quarter, it expanded its investment with Autodesk by leveraging Autodesk Docs as a common data environment, adopting FORMA, and is exploring opportunities to integrate Autodesk's XR and asset management capabilities to its design portfolio. Outside the U.S., our construction platform is benefiting from our strong international presence and established channel partner networks. During the quarter, a property developer and transit network operator based in Asia needed to simplify operations across its many infrastructure projects with a wide range of contractors and subcontractors. To manage this complexity, it needed a single source of truth for its project data and a way to streamline workflows on a single platform. In Q2, it leveraged support from our local channel partner and standardized on one platform by adding Autodesk Construction Cloud to its existing portfolio of Autodesk AEC design tools to gain visibility into contractors' and subcontractors' workflows and the potential to unlock breakthrough productivity gains. Shook Construction, an ENR 400 general contractor based in Ohio, made the decision to standardize on Autodesk Construction Cloud to better streamline their operational workflows. After evaluating many competitive options, Shook Construction chose Autodesk Construction Cloud as the best fit for driving consistent workflows, creating high-impact collaboration with their construction partners, and eliminating cumbersome manual workflows. We continue to benefit from our complete end-to-end solutions, which encompass design, pre-construction, and field executions through handover and into operations. Again, these stories have a common theme, managing people, process, and data across the lifecycle to increase efficiency and sustainability while decreasing risk. Over time, we expect the majority of all projects to be managed this way, and we remain focused on enabling that transition through digital transformation. We talked last quarter about the short-term disruption from integrating our construction and worldwide sales teams. I'm pleased to report that things began to settle in the second quarter. We believe that combining the two teams will allow us to expand the scale and reach of our construction business, particularly in our design customer base, and our ability to serve our customers across the complete project lifecycle. Encouragingly, Argus Construction Cloud MAUs were up over 100% in the quarters. Moving on to manufacturing, we made excellent progress on our strategic initiatives. Customers continue to invest in their digital transformations and consolidate on our design and make platform to grow their business and make it more resilient. For example, a multinational manufacturer which serves the construction industry as both a building product manufacturer and through tools and construction processes has been leveraging the Autodesk portfolio to connect workflows across the AEC and manufacturing industries. It's expanded its commitment to BIM using Revit, Navisworks, and Construction Cloud, which has enabled the customer to adopt a collaborative and data-driven approach across design, construction, and maintenance services, which minimizes clashes and rework and culminates in more efficient and successful building projects. In the second quarter, the customer grew its EVA with Autodesk ahead of its Q4 renewal date to accelerate its adoption of BIM and facilitate the design of its products and materials directly within MEP models. Fusion continues to provide an easy on-rape into our cloud ecosystem for existing and new customers. In Europe, an appliance manufacturer who is already an existing user of our manufacturing collection and AutoCAD Mechanical purchased additional seats of Fusion for PCB design. Its heating systems division will leverage Fusion's electronic design automation capabilities quickly and seamlessly connect more of its design to manufacturing workflow to drive greater efficiency. Fusion continues to grow strongly, ending the quarter with 236,000 subscribers as more customers connect more workflows in the cloud to drive efficiency, sustainability, and resilience. At Investor Day, I talked about leveraging our key growth enablers, including business model evolution, customer experience evolution, and convergence between industries to provide more and better choices for our customers. Our Flex consumption model is a good example of this. Flex's consumption pricing means existing and new customers can try new products with less friction and enables Autodesk to better serve infrequent users. Not surprisingly, the lion's share of the business has come from new or existing customers expanding their relationship with Autodesk. During the quarter, we signed three more million-dollar Flex deals. As Steve said at our investor day, we've also introduced a new transaction model for Flex, which will give Autodesk a more direct relationship with our customers and more closely integrate with our channel partners over time. We will begin testing our new transaction model more broadly in Australia later this year. And finally, We continue to work with non-compliant users to ensure that they are using the latest and most secure versions of our software. For example, after identifying and alerting a Chinese-based automobile designer about non-compliant usage, and despite working through ongoing challenges from the pandemic, the customer eventually committed to three-year VRED and Alias subscriptions. As expected, our initiatives to tighten concurrent usage of named user subscriptions and expand the precision and reach of our in-product messaging to help incremental growth during the quarter. Now let me finish with a story. According to the National Oceanic Service, coral reefs are some of the most diverse and valuable ecosystems on Earth. While they take up less than 1% of the ocean floor, their extraordinary biodiversity supports about 25% of all marine life. Healthy coral reefs support fisheries, as well as jobs and businesses through tourism and recreation. It also buffers shorelines against 97% of the energy from waves, storms, and floods, helping to prevent loss of life, property damage, and erosion. It can take 10,000 to tens of millions of years for a coral reef to form and just weeks for it to die. Rising ocean temperatures can cause coral to bleach and die. Half of living coral reefs have died since the 1950s. Without intervention, we're on track to lose 70% to 90% of the remainder by 2050. That is, unless we find a faster way to bring coral reefs back from the brink. With support from Autodesk and the Autodesk Foundation, a company called CoralMaker is using our digital tools, artificial intelligence, and robotics to deliver coral reef restoration at scale. with cloud collaboration to keep the global team connected across oceans and time zones. As Dr. Taryn Foster, CoralMaker's founder, says, the partnership with Autodesk has empowered us to develop new technologies to restore reefs at a rate unimaginable a few years ago. Current restoration projects can deploy about a hectare of coral per year. With CoralMaker's technology, it's possible to deploy 100 hectares per year. From the ocean to the earth and sky, augmented design powered by Autodesk will enable our customers to go further and faster to design and make a better world for all. We've been laying the foundation to build enterprise-level AI for years with connected data, teams, and workflows in industry clouds, real-time and immersive experiences, shared extensible and trusted platform services, innovative business models, and trusted partnerships. Autodesk remains relentlessly curious with propensity and desire to evolve and innovate. We are building the future with focus, purpose, and optimism. Operator, we would now like to open the call up for questions.
spk16: As a reminder, to ask a question, you will need to press star 11 on your telephone. Again, that's star 11 on your telephone to ask a question. To remove yourself from the question queue, please press star 11 again. Please stand by while we compile the Q&A roster.
spk14: Please stand by for our first question.
spk16: Our first question comes from the line of Sackett Kalia of Barclays. Please go ahead, Sackett.
spk28: Okay, great. Hey, Andrew. Hey, Debbie. How you guys doing? Thanks for taking my questions here.
spk42: You're doing great. How are you?
spk28: Doing all right. Doing all right. Debbie, maybe for you, just a quick housekeeping question here. Great to see the revised range on a lot of metrics, particularly revenue. And so when I think about the midpoint of the revenue guide going up by about $25 million, first of all, great to see the impact of FX start to lighten. But could you just maybe walk us through a broad brush How much of this year's raise on revenue is from FX versus maybe some underlying fundamentals in the business?
spk41: Yeah, so we had a small increase in the midpoint of the guide. The dollar change was immaterial. It's tough, really, to come up with a mix of assumptions that get us to the low end of our previous guidance range. So the midpoint increase reflects a mix of both organic and FX assumptions. Overall, the business is tracking generally in line with our expectations.
spk28: Okay. Got it. Got it. Andrew, maybe for you, an open-ended question. But I guess now as you've completed the first quarter of this transition to a new billing model, is there anything that's surprising you about maybe how customers or how partners are behaving? Again, open-ended.
spk24: Yeah, no real big surprise this second. I mean, Debbie flagged last quarter that we might see some customers reverting back to annual contracts as a result of the change. We did see that. Nothing really out of bounds, though. Nothing really surprising. Debbie, do you want to add anything to the details?
spk41: Yeah, I would say the initial rollout of the new billings model is going well. The systems are working. Customer and partner behavior is pretty much as we expected. As Andrew mentioned, we are seeing a small proportion of our customers choose annual contracts versus multi-year contracts billed annually. But generally, we expected a bit of that, and the performance has been in line with our expectations. And remember, if customers choose annual contracts, it doesn't impact the P&L. It only impacts unbilled and total RPO. It's still early days. We're monitoring it closely, and I think it's just continues to be a good example of how we're working to optimize the business. It's about reducing the volatility of our cash flow while simultaneously giving our customers the purchasing pattern that they want. And then finally, I'd say that there's no change in how we expect the transition to impact our cash flow outlook.
spk14: Got it. All very clear. Thanks, guys.
spk16: Thank you. Please stand by for our next question, which comes from the line of Jay Vlieschauer of Griffin Securities.
spk30: Thank you. Good evening. Andrew, for you first, you made some constructive comments about what you're seeing in the AEC business. But more broadly, and as you're well aware, there's quite a bit of ferment going on in that market right now in terms of references to what's come to be called BIM 2.0. As you know, just a couple of months ago at an AEC conference, a customer group launched a new customer-developed design specification for software. You yourselves are working on the dual track of enhancing Revit but focusing on Forma. So a lot's going on in terms of various currents in that industry or part of the industry. Help us understand how you're thinking about managing through all those different dynamics that are going on in the AAC industry, and then a follow-up.
spk22: Yeah, so thanks, Jay.
spk24: There's three threads to this, all right? One is kind of the core platform thread around data and data flow. At the root of all of this, we need to make sure as much of the data that we have locked inside Revit files and locked in other types of files that our customers have gets turned into APIs wherever possible. This is a lubricant to the workflows that people are worried about and a big part of really what underpins the whole concept of BIM 2.0. So that's one of the things. The second piece is you've got to make sure that their ability to do detailed, in-depth, complicated, sophisticated BIM models gets more performant, more productive, and faster. That's core to kind of building up and improving Revit in some significant ways, which we're absolutely looking at. But the third point, which I think is more important, is you really need to reimagine how BIM is being done. The paradigm needs to shift, and it needs to shift to the world of not only being cloud-enabled, but also being what we really like to call augmented design-enabled or outcome-based in whatever language we use, so that you can actually change the way people do BIM. And that's one of the big things that we're focusing on with Forma. And that's very different than, you know, we have certain types of competitors. It's in line with what the spec is from the customers. But when you talk about data, Revit improvements, and the move to what we call augmented design or outcome-based design, those are the big thrusts in terms of what we're trying to do to bring the industry to a better way of doing this.
spk30: Okay. Okay. Second question refers to the comment you made about a new transactional model and a pilot you're going to be undertaking in Australia. So maybe you could elaborate on that. When I hear that, it sounds to me like there's potentially going to be some further change to channel economics. You've just completed the move to back-end only margins. Are you thinking about perhaps taking the the Flex commission model more broadly across the rest of the business, or what exactly are you looking to accomplish with that?
spk24: So let's talk about the Flex experiment and the things you were doing with Flex. First off, Flex, because it's a consumption-based model and it involves usage of various different products, it's really incredibly helpful for the customer for us to be able to have a much more direct relationship with the customer with regards to that offering. Because that way we're able to offer a lot more visibility to how they're using the offering, what they're using, when they're using it, how much they're consuming. It actually helps them get the most out of the offer. So what we've done over the last year is we've proved out a new transaction model working with our partners and rolling out across various regions that is supporting Flex. And that is a much more direct transaction model. Through that process, we've learned a lot. We've gained a lot of knowledge. We've addressed a lot of issues, both systems-wise and process-wise. And we are now in a position with Flex to start growing and expanding that model at greater and greater volume. And that's exactly what's happening with Flex. The volume of Flex is increasing, increasing, and we're doing it reliably, repeatedly, and in a pretty positive way. Where we go from here depends solely on how we watch these things evolve and what the benefits of this transaction model. And all options are open to us in the future, but that's where we are right now. We've perfected what we've done with Flex.
spk14: Thank you.
spk16: Thank you. Our next question comes from the line of Adam Borg of Stifel.
spk32: Awesome. And thanks so much for taking the questions. Maybe just for Andrew on the infrastructure opportunity, I know you've been calling out increasing traction with State Department of Transportation, and you even referenced some grants in the quarter in the script. So maybe just talk a little bit more about how you think about the infrastructure opportunity overall and really what separates Autodesk from competitors in going after it.
spk24: Yeah. So look, at a high level, one of the things I'm really excited about the thing with the really long name, the Advanced Digital Construction Management System program that the US government rolled out, that is the program related to the money that's designed to help Department of Transportation look at their infrastructure, look at their processes, and start modernizing their digital processes around design and construction of the infrastructure. That's an important step in getting a lot of these Department of Transportation to really start thinking about how they get ready to spend more money on infrastructure and do it better and address the serious capacity challenges we have around materials, manpower, and dollars with regards to what we have to do. So pretty excited about that because that's an open door to having new conversations with these departments about how they do things. Our focus has not changed. We are very much focused on water and road and rail, and we continue to innovate and drive improvements in those areas. I think our biggest differentiator is what we bring to market as a modern architecture. We bring to market more cloud-based solutions, more owner-based solutions for managing the infrastructure once you have it, and really just more technology that's stitched together in different ways. So we're looking forward to having that discussion with the Department of Transportation over the next months and coming years. And I think you're going to start to see real change in some of those organizations.
spk32: That's really helpful. And maybe just as my follow-up, just on the earlier than expected EVA renewal pool in the quarter. So maybe just talk about, just given the softer macro, obviously, that our checks have been suggesting, and you talked about no real change sequentially, but just what's leading the customers to choose to renew early? And maybe just as a quick follow-up to that, as we think about the guidance for the year, Any way to quantify the type of expansion opportunity embedded from these EBAs?
spk41: Thanks so much. Adam, you were coming in and out a little bit, but I think I got the bulk of what you were saying, so just stop me if I'm missing something. But in terms of the EBA behavior, really what we saw was driven by them. Our customers were managing their own budgets and cash flow, and so their desire to get early billings for customers frankly, higher usage of their tokens was driven by their own behavior, which we see as a real positive sign for us in engaging with those enterprise customers. They're seeing strong usage of our portfolio, and they're continuing to invest in their relationship with us. And those billings boosted our total billings, revenue, and free cash flow during the quarter. So overall, I think it's a win-win. There was a second part, I think, to your question?
spk32: Yeah, I'm just curious, and so thanks for that. I was just curious, any way to quantify kind of the type of expansion opportunity from the big EBA renewal pool in the back half of the year as you think about full-year guidance?
spk41: That's something we can quantify for you, Adam, but I would just reiterate the fact that we do see it as a real positive, but for the first two quarters of the year to date that we're seeing strong usage, and that's already leading to early billing. So a positive from our standpoint overall.
spk05: Awesome. Thanks so much.
spk16: Thank you. Our next question comes from the line of Joe Runk of Baird.
spk35: Great. Hi, everyone. Maybe I wanted to revisit your AEC exposure. I know you've discussed this in the past and just how there's offsets, you know, should commercial markets see pressure, institutional or infrastructure fare better, so you have diversification there. I guess when you think about the current business composition and how the different sub-sectors are faring, do you think the nature of Autodesk and AEC is any better or worse than would have been the case in past cycles? And I'm asking less about Autodesk just as a subscription model now versus a licensed model in the past and more about Autodesk and things like Revit adoption or reliance on the cloud. which might create a different dynamic for the business, this down cycle versus past down cycles.
spk24: I think one of the things that you said, and I want to reinforce it, is that we are diversified across all sectors of making things. Everything that gets made, we're involved in. It's not just AEC. It's buildings. It's bridges. It's cars. It's it's electronics, and of course, it's film and games. So just remember, we're diversified across all of those segments. What's different now, and I think it's important to recognize this, is that the AEC industry as a whole is chasing productivity and digitization gains, the entire industry, from construction all the way through to any design and every part of the process in between engineering and all the things associated with that. So that fundamental change is creating long-term pull for what we're doing. And what we're doing is we're connecting the design and make processes across that industry together in the cloud in unique and highly integrated ways so that people can do things faster, more sustainably, and with lower risk and better outcomes. That fundamental shift is very different than what we've seen before. And we're going to be riding that fundamental shift for quite a few years.
spk33: Okay, great, Andrew. That's hopeful.
spk35: And then second question, wondering if you can comment on how you see the writers and actors strike potentially impacting business and media and entertainment, particularly, you know, if this goes on for a while and your customers are finishing what's in post-production with, I suppose, a lack of new things coming in, what that might mean towards the end of the year.
spk24: Yeah, so you hit one thing right there, right? People are still in post-production right now for the existing book. That post-production overhang will continue for a little while. If the strike continues for months on end, we will likely see an increased impact on our media and entertainment business. It's still growing now. It definitely slowed down in Q2, but it's still growing. So as we look forward... Your guess is as good as mine about how long this strike will go on. But I do remind you, our exposure to media entertainment is relatively small compared to the other parts of our business. But there's no doubt that an extended strike could have an impact on that business.
spk06: Okay. Thank you very much.
spk16: Thank you. Our next question comes from the line of Tyler Radke of Citi.
spk15: Yeah, thanks for taking the question. So I wanted to just go back to the commentary on kind of the puts and takes on the quarter. So you talked about seeing some early expansions on some of the multi-year EBAs, and I just wanted to clarify, was that also a stronger expansion, or was it more of a timing factor? And then, Debbie, this might be a bit of a nitpicky question, but just as I look at the constant currency revenue guidance, I think the high end of the guide says 12% plus versus 13 last quarter. I just wasn't sure, you know, if there was a change there, if you could just kind of comment on the puts and takes on that too. Thank you.
spk02: Sure.
spk41: Thanks, Tyler. So the EBA usage was strong and we've been tracking it for the year to date. It wasn't necessarily stronger than our expectations, however. So to clarify, it really, more than anything, it's a timing difference. We were expecting that the revenue would hit in Q4, and it hit in Q2. But the fact that our customers are using more than they had anticipated the onset of the contracts is a good thing. It's just that we've been tracking it. We've known about it for the year to date, and we just saw the invoices in Q2 versus Q4. In terms of the content currency guide, the range, it was impacted really by rounding. The dollar change was immaterial and overall the business is tracking generally in line with our expectations.
spk15: Okay, great. And a follow-up for Andrews, you talked about some encouraging signs on the Autodesk construction side, given the reorg, talked about it kind of settling in. Maybe just remind us kind of what were the big changes What are you hoping to accomplish? And should we start to see the make revenue begin to accelerate throughout the rest of the year? Thank you.
spk24: Yeah, Tyler, happy to clarify that. So look, what we did in Q1 is we merged the Autodesk construction solution sales force with the mainline sales force. This was with the objective of long-term accelerating business growth in that area, particularly in our design space. So we wanted to keep the subcontractor and subcontractor power of the ACS team and combine it with the teams that are focused on some of our design accounts as well. We expected some bumps in doing that because you have to realign count assignments. You have to realign players and who's in charge of what. We've seen a lot of those bumps get smoothed out into Q2. So we're seeing a return to expected patterns. We've lost no business during the process. As I told you earlier in the opening commentary, When I talked about things like Shook, the general contractor in Ohio, we're continuing to win these contractors. Primarily, one of the things we hear a lot is the pricing predictability associated with our offering and the ability to show them a path not only to a stable pricing model, which customers really like and increasingly see a viable and strong alternative to project management and what ACS offers, but also in terms of the integration between design and make. I expect the consolidation of the sales forces to continue to further accelerate the construction business moving forward as we continue to work this through. So progress in the right direction, and we can expect to see more progress.
spk14: Great to hear. Thank you. Thank you.
spk16: Our next question comes from the line of Jason Salino of KeyBank Capital Markets.
spk10: Great. Thanks for taking my question. This is a spin on Saket's very first question, but it relates to the quarter and not necessarily the guide. But when we look at the performance in the quarter, it's the biggest beat on a percentage and an absolute basis we've seen in many quarters. Can you just help us unpack maybe what the magnitude of the EBA strength was or the FX kind of benefits, if there were any?
spk39: The biggest driver of the beat came from the EDAs.
spk10: Okay, perfect. And then, Andrew, I'm curious on updates on Innovize. At the beginning of the year, I think there was this view that funding for sewer projects and water projects hadn't quite started to flow, you know, no pun intended yet, but that maybe we would see things, you know, start to open up in the second half or next year. Is that still the case? I guess, what are you seeing?
spk24: Yeah, I mean, look, you know, look in the news, right? All you get is increasing evidence that most regions and municipalities need to reevaluate their water management, both at a sewage level and a treatment level infrastructure. So that has fundamentally not changed. And we haven't yet seen the increase in project, actually, you know, starting projects in that But what we are seeing is people buying ahead of demand. So we actually saw a lot of strength with Inovize in our EBAs and in our large accounts, which is an important precursor to some of the larger efforts that might go on moving forward. But no floodgates have opened up yet. No pun intended from my side. But we still see the exact same pattern we've talked about.
spk10: Okay, great. Appreciate it. And I like the puns.
spk16: Thank you. Our next question comes from the line of Michael Funk of Bank of America.
spk21: Yeah, thank you all for the questions tonight. A couple if I could. So on the EVA renewal comments that you made earlier, can you give us a sense of the like-for-like change there, whether or not customers on balance were upsizing, you know, increasing the duration of the contract, what that looked like?
spk41: So to clarify, these contracts, they were not contracts that were renewed. We're expecting that these contracts will be renewed in Q4 per our normal cycle. What happened is that these customers have been using ahead of the usage that was built into their original contracts. And so what we saw in Q2 was billings for the overuse versus their original contracts.
spk40: But we still expect the renewals will occur in Q4.
spk21: I understand. I must have misheard you earlier. So for the overuse then, do you expect that trend to continue for the remainder of the year? And what do you think is driving that overuse?
spk41: We're certainly hopeful that that trend continues. We see it as a very positive sign that our customers are asking for early billings because they're using our products more than they anticipated and they're using the broad breadth of the portfolio. The other thing I would say is that the usage that was built into these contracts when they were originally signed, remember this was three years ago at the onset of the pandemic, and so the usage in those contracts might have been a bit lower just given the environment in which those contracts were renewed. And so as we start to come out of the pandemic, we're seeing more and more usage. We've talked about usage being, broadly speaking for Autodesk, but also for our EBAs being a good leading indicator, and that usage continues to increase. I don't have
spk21: crystal ball michael i wish i did i could tell you for sure that the usage would continue uh to go up in the back half of the year but we're certainly hopeful and all signs are leaning in that direction okay so i interpret that to mean the trends um so far this quarter to date are consistent with 2q sorry i didn't hear uh i think your your last comment about kind of you know trends continuing Is the interpretation there that the trend has continued from 2Q into this quarter of increased usage?
spk41: We're not commenting on Q3 at this point. Overall, the performance that we saw from our EVAs in Q2 is really strong, and we're hopeful that it will continue.
spk09: Great. Thank you, Debbie.
spk16: Thank you. Our next question comes from the line of Matt Hedberg. of RBC capital markets.
spk27: Great, guys. Thanks for taking my questions. Congrats on the stability here. Really, really good to see. Maybe, Debbie, for you, maybe I missed it, but cash flow was, free cash flow was significantly better than we thought this quarter. I know you don't guide quarterly. So maybe just, again, maybe I missed it, but a little bit more on sort of why free cash flow is so strong this quarter. And as we think about Q3, Q4, kind of the linearity there, you took the low end of the full year up a little bit. Yeah, how should we kind of think about that split and, you know, sort of between 3Q and 4Q?
spk41: Yeah, so Q2 was strong primarily because of the timing of the EBA billings that I've been talking about, as well as some favorable in-quarter linearity. So the linearity that we saw was better than we had expected. And then when we look at the back half of the year, Second half free cash flow will be significantly weighted to the fourth quarter. I've called out the federal tax payment extension. That positively impacted the first half free cash flow, and it will negatively impact Q3. Overall, we still anticipate that fiscal 24 is going to be the free cash flow trough during this transition from upfront to annual billing.
spk27: Great. Thanks. And then, Andrew, for you, following up on earlier questions, you know, kind of on the split of your business, obviously an extremely diversified model. But I guess regarding commercial real estate exposure, I know it's difficult to give an exact percentage of your exposure there, but just broadly speaking, we get asked all the time, what's Autodesk exposure to the category? How should we think about, you know, kind of Autodesk and the CRE market?
spk24: To be honest, you shouldn't, okay? You know, this is similar to the conversations we had during the housing crisis. It's like, well, how should we think about Autodesk relative to housing? And the question is, you shouldn't, all right? The The amount of things that need to be built and rebuilt in our customer base is ginormous, all right? They don't have current capacity, either people-wise, dollar-wise, or capability-wise to actually work through all the things that are going on. So the momentum of the industry pivots to other areas. Now, even if you look at commercial real estate, People are still reconfiguring commercial real estate within the segment in order either to make it more attractive to a shrinking pool of renters or to repurpose that space to other uses. But in terms of exposure to auto theft, you got to be careful about overblowing that because the money always goes somewhere else. There's always a lot of work to be done in other sectors. That just means that people that were traditionally bidding on commercial real estate projects are now bidding and engaging on other types of projects.
spk14: Super helpful. Thank you for that.
spk16: Thank you. Our next question comes from the line of Bob and Shaw of Deutsche Bank.
spk03: Great. Thanks for taking my question.
spk20: Andrew, we continue to hear good things from your customers and partners regarding your ability to innovate and enhance many of your acquired assets, whether it's innovized, playing grid, et cetera. Can you just remind us of your views on Go Forward M&A and your M&A philosophy? And maybe kind of what are some of the lessons learned from prior deals?
spk24: Yeah. So we are an acquisitive company. We will continue to be an acquisitive company. We always like when the environment gets more attractive for acquisitions. but we are always looking to make sure that a potential acquisition is strategically aligned with our priorities. That means that it's either accelerating an effort that we're currently working on or bringing us into an adjacency that we weren't working on but that we see as an attractive place. Timing matters as well in terms of what timing's right for us to do these things so that we keep the business reasonably focused on the things that are important and don't try to juggle 18 balls at once, all right? But we will continue to be acquisitive And we have the cash flow and balance sheet ability here to do whatever we need to do in terms of strategic fit and expansion that we're interested in moving forward. So don't expect any change. In terms of learning, look, you always learn. You can integrate some of the back office faster, all right? Key learning in all these things is integrate sales and back office infrastructure quicker, and you go faster.
spk19: Super helpful there. Just on another topic, can you just talk about what you're seeing with A&E customers as it relates to hiring?
spk20: I know many of these customers have dealt with talent shortages over the past few years. Are you seeing any easing here or any kind of other general commentary in terms of hiring within A&E customers?
spk04: Thanks so much for taking my question.
spk24: Yeah, it depends on the sector, but honestly, in construction and manufacturing, they're still seeing challenges with hiring. It's one of the big things we hear from them is their ability to not only find but retain talent, especially qualified talent. So hiring continues to be an issue on the execution side of our customers, you know, primarily towards the make side.
spk14: Thank you.
spk16: Our next question comes from the line of Ken Wong of Oppenheimer and Company.
spk17: Great. Thank you for taking my question. Just a quick one for me. As we think about, I think, Debbie, you mentioned new customer softness, kind of consistent with what you guys are seeing. But I just wanted to make sure, relative to last quarter, I think you guys had called out a bit of an air pocket that normalized. How should we think about the way that played out this quarter in terms of adding new subs?
spk41: The overall market conditions, new subs, momentum in the business was similar to last quarter. We talked about leading indicators being consistent with last quarter, growing usage, record bid activity on building connected, cautious optimism from our channel partners. Beyond that, I would just add that our regional performance was broadly similar to what we've seen for several quarters. The direct business, including enterprise and e-store, as well as India, actually were bright spots for us, but they were offset by some tougher patches like China, as well as the softer performance that we talked about in M&E.
spk17: Got it. And then I realize maybe it's a very small nuance, but again, I think last quarter you guys saw a little bit of a dip and then it recovered in terms of new sub-ads. I guess when you're saying it's consistent with last quarter, would it be more consistent with that exit or kind of full quarter dynamic where we're, you know, averaged out maybe a little lighter than anticipated?
spk41: Well, so remember what we said last quarter was that we saw a slight dip after we stopped selling the multi-year contracts up front, but then it recovered as we exited the quarter and as we got into early Q2, and we saw that consistently throughout Q2.
spk17: Okay, perfect. Thank you, Debbie.
spk14: Thank you.
spk16: stand by. Our next question comes from the line of Naing of Barenburg.
spk11: Hi, thank you for screwing me in. Just got a quick question for me. Coming back to the early was better than better than expected or earlier than expected EPA renewals. I was wondering if we were to exclude that impact in the quarter The performance in AEC, would we have seen an inflection in terms of the growth levels? Because what we've seen in the past couple of quarters is the gradual decline in growth rates. So I was wondering, you know, if we didn't have these early renewals and EBAs, would the AEC segment would have seen a further deceleration in growth rates, or would we see a bit of an uptake compared to Q1? Thank you.
spk41: So the early billings that we talked about for EBAs are what drove the revenue beat versus our guide. But when you think about that beat on a dollar basis in comparison to the totality of our AEC business, the AEC business is vastly, vastly larger. So it's not a big driver of the overall trend that we're seeing in AEC, but it was the driver of the beat.
spk14: Thank you.
spk16: Thank you. Our next question comes from the line of Patrick Bowman of JP Morgan. Please go ahead, Patrick.
spk29: Oh, thank you. This is Pat. I'm for Steve, too. So just a couple probably for Debbie. You touched on sales in terms of the moving parts of the guide raise there. I guess in terms of the free cash flow midpoint, I know it was a small number, but what was the driver of the raise there? And then on the EPS, the adjusted EPS guidance rate? There's like 25 million of other income.
spk13: Is that simply the benefit from the interest on cash that you mentioned in the preamble?
spk41: Yeah, so starting with cash, it's due to the performance that we saw in Q2. So I talked a little bit earlier in this Q&A session about the EBA billings that we saw in Q2 as well as the favorable in-quarter linearity. So those were drivers of the difference that you saw in our cash flow guide. And then in terms of EPS, the other income is due to higher interest income from our cash balances.
spk13: Does that flow through to cash flow?
spk14: In part, it will, yes.
spk29: Okay. And then, sorry, one more on cash flow for my second question. Is the... Do you think is the third quarter going to be negative or positive on free cash flow? You said, I think, significantly weighted to the fourth quarter in the second half, which I think is similar to your prior commentary from last quarter. But I think you also thought at that time that maybe second quarter and third quarter could be negative. Is your view that free cash flow will be negative in the third quarter, given the impact of this cash item that was pushed from the first half to the third quarter?
spk41: We're not going to guide on a quarterly basis for free cash flow, but to try and be helpful, I just want to reiterate some of the comments. So remember that second half free cash flow is going to be significantly weighted into the fourth quarter, and the biggest driver of that is the extension of our federal tax payments that have a positive impact on the first half but are going to negatively impact Q3. So think about that as you put your model together.
spk13: Okay. Thanks so much. Best of luck.
spk16: Thank you. That is all the time we have for Q&A today. I would now like to turn the conference back to Simon May Smith for closing remarks. Sir?
spk07: Thank you, Steve, and thank you, everyone, for joining today. We'll look forward to updating you on our progress in November on our Q3 earnings call. I look forward to speaking to you then. Thanks so much.
spk16: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer