Lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the call over to David Giannarelli, Senior Director, Investor Relations. Sir, you may begin.
Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our Q2 of fiscal year 2018. On the line is Andrew Adagnost, our CEO and Scott Aaron, our CFO. Today's conference call is being broadcast live via webcast.
In addition, a replay of the call will be available at autodesk.com/investor. As noted in our press release, we have published our prepared remarks on the website in advance of this call. Those remarks are intended to serve in place of extended formal comments and we will not repeat them on this call. During the course of this conference call, we will make forward looking statements regarding future events and the anticipated future performance of the company, such as our guidance for the Q3 and full year fiscal 2018, our full our long term financial model guidance, the factors we use to estimate our guidance including currency headwinds, our maintenance to subscription transition, ARPS, customer value, cost structure, our market opportunities and strategies and trends for various products, geographies and industries. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially.
Please refer to the documents we filed from time to time with the SEC, specifically our Form 10 ks for the fiscal year 2017, our Form 10 Q for the period ended April 30, 2017 and our current reports on Form 8 ks including the Form 8 ks filed with today's press release and prepared remarks. Those documents contain and identify important risks and other factors that may cause our actual results to differ from those contained in our forward looking statements. Forward looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward looking statements.
We will provide guidance on today's call, but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. During the call, we will also discuss non GAAP financial measures. These non GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of our GAAP and non GAAP results is provided in today's press release, prepared remarks and on the Investor Relations section of our website. We will quote a number of numeric or growth changes as we discuss our financial performance.
Unless otherwise noted, each such reference represents a year on year comparison. And now
I'd like to turn the call over to Andrew. Thanks Dave. Our strong Q2 results are a continuation of the broad based strength across all subscription plans and types and geographies that we experienced last quarter. As we demonstrated over the past several quarters, we are executing well and making real progress on our 2 major initiatives, growing lifetime customer value by moving customers to subscription and expanding our market opportunity with increasing adoption of our cloud based solutions. These consistent results increase our confidence in the model transition and our ability to achieve our goals.
There are several areas to highlight in Q2, including the fact that total ARR grew 23% at constant currency, that we added 153,000 total subscriptions, that recurring revenue has increased to 91% of total revenue, that we've overachieved on revenue and we've coupled that with strong spend control which has led to better than expected EPS performance. In addition, the maintenance to subscription program or what I'll refer to later as M2S is off to a great start. Now let's take a closer look at our Q2 performance. The trends we're seeing in annualized recurring revenue are clear signals that the transition is working. Subscription plan ARR nearly doubled on a constant currency basis, driven by the strong uptake of all of our subscription plan offerings.
Subscription plan ARR now represents 43% of total ARR and we still anticipate it will become the majority component by the end of this fiscal year. I'd also like to share with you another piece of data that really provides us with confidence in our ability to grow ARR going forward. If we isolate ARR growth rates for AutoCAD LT and our animation products, which are further along into the transition than the rest of the products, we saw total ARR growth in the mid-thirty percent range for these products. A year ago, the growth rates for these products were similar to those we're reporting for our overall business. The same effect can be seen in our reported revenue for these products and it's a great leading indicator as we continue to move through the transition.
We added 270,000 subscription plan subs in Q2 led by continued strong adoption of product subscription. 63,000 of these subscriptions were generated from our maintenance to subscription or M2S program. Even when normalizing for M2S, total product subscriptions more than doubled year over year with triple digit growth in each major geography, including emerging countries. New customers continue to make up a meaningful portion of product subscription additions and represented close to 30% of the mix for the quarter. These new customers come from a mix of market expansion, growth and emerging, converting unlicensed users and people who have been using an alternate design tool.
Some of you noticed that we started out Q3 our Q3 promotion targeting legacy users a couple of weeks early. Now this led to some conspiracy theories about our Q2 performance. You should know that the timing of these global promotions is set months in advance. Our rationale for starting early was the result of our experience from Q3 of last year. Starting the promo a couple of weeks early allows for greater absorption of our communications to our partners and customers, which tends to take longer in the summer months due to vacations.
The mission was to get the promo details out to the channel rather than driving subs in Q2. And as expected, an immaterial number of subs, about 2,000 were generated from this promo in Q2, but we positioned the promo for success here in Q3. Subscription plan subs also had strong contribution from our new enterprise customers via Enterprise Business Agreements or EBAs. As expected, our net EBA sub ads were not nearly as much as the seasonal strong Q1. EBAs with our large enterprise customers have been a successful component of our transition, leading to both increased subscriptions and account value while providing increased flexibility for our customers.
This increased flexibility has led many of our EVA customers to increase their usage as they adjust to the new licensing system. This is a win win situation, but it does create a short term drag on ARPS. For example, if we isolate just the population of EBA customers from June 2016, the monthly average usage for these accounts increased 10% in the last year. However, we don't see a corresponding revenue increase until a customer does a true up or uplift upon renewal. This year, we have the opportunity to renew the 1st wave of TokenFlex EBA contracts that we signed 3 years ago.
It's early days so far, but we're seeing on average that contract size is increasing by over 30%. In Q2, we renewed 2 very large EBA deals worth over $10,000,000 each. In one of these deals with a European based global engineering consulting firm, the renewal contract value was 150% greater than the original value. This company's engineers are spending roughly 5,000,000 hours a year using Autodesk products and the EBA contract gives them access to our entire product portfolio. The 3rd component of our subscription plan subs is our cloud products.
This is a TAM expansion part of our transition and we are extending our leadership in the cloud. Total subscriptions grew by 200% and continue to be driven by BIM 360, our construction management and collaboration tool followed by Fusion, our cloud based design and manufacturing tool an opportunity, which is where our cloud based BIM 360 has gained an early leadership position. We're utilizing the cloud to allow our customers to take their BIM models all the way into the field, giving building owners and general contractors a digital platform for collaboration, coordination and visibility. This is a really big deal because it's something that has been sorely lacking in the past. Now when it comes to the world of building, we have a powerful brand and a powerful reputation.
We're making significant penetration with the biggest general contractors in the world and with building owners and doing this by driving the value of the building information model into their project ecosystem. The result is we're both expanding BIM 360 deals after successful initial implementations and we're signing new deals with companies and organizations that we've never worked with previously. Building owners are starting to mandate BIM 360 to gain competitive advantage and project efficiency. One Q2 deal was an international airport that is investing in thousands of BIM 360 subscriptions as part of a multi $1,000,000,000 renovation project. Their goal is to use BIM on all suitable projects to inform and enhance future facilities management.
They even wrote BIM 360 into the process for all future development projects at the airport. Another great example is with a general contractor that influenced a large state university and a large municipality to write BIM 360 requirements into their specifications and permitting process. This is the kind of success that builds on itself over time. Now partially offsetting the growth in subscription plan subs was the expected decline in maintenance plan subs. As we've said in the past, we expect to see ongoing declines in maintenance plan subscriptions and the rate of decline will vary on the number of maintenance plan subscriptions that come up for and the pace of the M2S program.
A little more than half of the decline in maintenance subs was the result of the fast start to the M2S program. In fact, nearly a quarter of all maintenance renewal opportunities migrated to subscription. Of those that migrated, nearly 10% upgraded from an individual product to a higher value industry collection. M2S is yielding some early data that is very encouraging and very interesting. I'd like to share a few other points with you.
Specifically, some customers are doing partial conversions of their maintenance seats. But if you look at it overall, the participating accounts are growing their total subscriptions and growing their spend with Autodesk. In other words, accounts that participate in M2S are purchasing net new product and cloud subs and we're seeing this behavior across all geographies. Keep in mind that it reflects only 6 weeks worth of data, but these early figures are better than expected and bode well for the next few quarters of execution. As I've said, we'd like these maintenance customers to move sooner rather than later as product subscriptions provide the greatest value and increased flexibility, support and access to our cloud products.
Moving to a single model makes the most sense and will immensely simplify our business and how our customers transact with Autodesk. Now let's talk a little bit about ARPS. For the 3rd consecutive quarter, we experienced a small sequential increase in total ARPS. It's worth repeating that there are many things that will influence the short term performance of ARPS, including product mix, geo mix and timing. Another example is that the M2S program is having a near term impact on ARPS.
M2S is having a positive impact on maintenance due to the price increase for those who stayed on maintenance and a negative impact on subscription plan ARPS due to the discount offered for conversion. Product subscription ARPS grew year over year, but if we normalized for the effect of M2S, it would have grown about 10% year over year and had its 3rd consecutive quarter of sequential growth. As expected, subscription plan ARPS is being negatively impacted in the near term by cloud subs as well as the increased usage at EBA accounts. I spoke about these influences at Investor Day last year, so it shouldn't be surprising that the more successful we are with cloud products and increased usage with our EBAs, the more it will be a near term drag on ARPS.
Of course,
the flip side of faster than expected M2S conversion is that the more people that take the offer here in FY 2018, the smaller the price increases we will realize in FY 2019. We'll moderate that impact by continuing to focus on the upsell to collections. Having said all that, we remain confident that overall ARPS will be positively influenced going forward by less discounting and promotions to our legacy users, the price increase for maintenance customers and the migration to higher value products. We still expect to see ARPS inflect up by the end of the year. Now I'll turn it over to Scott for a few more details on the financials.
Thanks, Anber. Driving more users to subscription aligns with another one of the transition related initiatives, which is to drive more direct business. Total direct revenue for the Q2 was 29% of total revenue. That's up from 25% in Q2 last year and just 20% 2 years ago. We continue to generate strong growth in the volume of business we're doing with our large enterprise customers and we're experiencing exceptional growth with our e store.
Over 30% of our North American product subscriptions have been generated through our e store. We expect to continue to meaningfully grow both our direct to enterprise and our e store business as we go forward. We're pleased by the broad based strength we're experiencing from a geographic and product family perspective. Each major geography, including emerging markets, reported sequential revenue growth. And for the 2nd consecutive quarter, we experienced a marked improvement in our performance in Japan, an encouraging sign as we've made some changes there.
We also experienced sequential revenue growth in each product family. Moving to Spend Management. We've been able to execute and drive results while firmly controlling our spend growth. Non GAAP spend increased by 1% in Q2 as expected. We remain committed to keeping spend flat this year and next year, although we are seeing an increased FX headwind to our expenses.
We're achieving this through targeted divestments and reallocation of those dollars to initiatives that drive our transition. Looking at the balance sheet, reported deferred revenue grew 17% against the tough compare last year when we had the end of sale event for the last perpetual licenses of suites. We also stopped selling multi year maintenance renewals earlier this year in conjunction with the M2S program, which adds to the headwind. Unbilled deferred revenue increased by $33,000,000 sequentially, which would have added another 2 percentage points of growth to deferred revenue. Total unbilled deferred revenue now stands at $63,000,000 and we expect it to continue to grow meaningfully as we move more of our enterprise customers to annual billing terms.
I'll also note that during the Q2, we issued $500,000,000 in 10 year notes, taking advantage of the current low interest rate environment and we redeemed $400,000,000 of debt that was due to mature in December. That's a good lead in to our capital allocation strategy. We repurchased 1,200,000 shares in Q2 for a total of $119,000,000 That averages out to $102.71 per share. During the quarter, we rebalanced our buying strategy by putting more weight on opportunistic versus systematic buying and we'll continue to make adjustments to this program as we go forward, recognizing our ongoing commitment to share buybacks. Turning to our outlook.
Our view of the global economic conditions remains consistent with our view over the past several quarters, with most of the mature markets performing relatively well and little change in emerging markets. As we look at our outlook for Q3 in the second half of the year, we expect seasonal patterns generally consistent with the last 2 years. As I mentioned, we've made some targeted divestments that allowed us to reallocate that money, but it also created a slight headwind to reported revenue, both of which are incorporated in our annual guidance. Q3 will be the 1st quarter where the year over year revenue comparisons are apples to apples comparing back to our Q1 of subscription only sales. But remember that our Q3 fiscal 2017 results included $38,000,000 of license backlog that rolled over from the end of sale of Suite's perpetual licenses in Q2 2017.
Normalizing for that, the midpoint of our Q3 revenue guidance range represents year on year growth of 13% as reported revenues now begin to inflect upward. Based on our year to date performance, we're increasing the midpoint of our guidance range for revenue and we increased the range for net subscription adds for the fiscal year. Overall, our strong first half results increase our confidence that the transition is working for our customers and our partners. It also sets us up for success for the rest of the year and reinforces our conviction in our fiscal 2020 targets. We've executed well over the past several quarters and we're looking forward to building on this success as we progress through the rest of fiscal 2018 and work toward our fiscal 2020 goals and beyond.
Before we open it up for questions, I'm going to turn the call back over to Andrew for a few closing comments.
Thanks, Scott. Obviously, one big change this past quarter was that I was appointed CEO. I'm humbled by the Board's decision and I want to thank my friend and longtime associate, Amar Hanspal for all his work and dedication to Autodesk over the past 20 years. Secondly, I want to assure you that we remain fully committed to the FY 2020 goals around ARR, subs and cash flow that we put forth 2 years ago. Finally, while the near term and long term goals remain clear, I thought I'd share with you my focus areas for driving success and achieving these goals.
First, we are hyper focused on enhancing the subscriber experience and delivering more value to our customers. It has to be frictionless for our customers to manage their subscription with Autodesk and it has to be obvious to them what is driving value from subscription. 2nd, we are going to continue investing in our own digital infrastructure and creating opportunities for our customers to transact and engage directly with us. We've made nice progress in this area over the past couple of years and I want to further enhance and accelerate these advancements. 3rd, I am absolutely committed to winning the construction space and winning in the new world of digital manufacturing.
The opportunity is enormous for Autodesk and our customers. We've done well to establish an early leadership position and we are not going to slow down. I hope that gives you a better idea of how I'm approaching my new job. The next era of Autodesk will not be defined by simply product or business innovation, but in their combination. We must excel at both, all in the service of our customers.
I couldn't be more excited about the opportunity to lead such a great company and I look forward to reporting on our progress as we go forward. Operator, we'd now like to open the call up for questions.
Our first question comes from the line of Jay Vleeschhouwer with Griffin Securities.
Thank you. Good evening, Andrew and Scott. Two questions. 1 to start longer term. Andrew, how reasonable is it to expect or when would you expect that your direct business would become the majority of the business and or that the e store would become the majority of the direct at any point subject of course to you having the requisite back office and infrastructure which you had just alluded to a moment ago.
And then secondly, you talked in your prepared remarks around large customer, EBA customer usage and mix issues. Could you address that more broadly in terms of your wider customer base in terms of what you're seeing so far in terms of usage of products and specifically your confidence that in fact the mix will go more and more towards collections and stand alone than we might have seen today?
All right, Jay. So first, thank you. So let me address the first question, and then I'm going to ask for clarification on the second one. So with regards to the first question, I'm not going to give you a timeframe, but I will kind of bound the problem a little bit more for you. In terms of a steady state for us, it's probably more like a fifty-fifty split between our direct efforts and our partner efforts.
And we think that's the right steady state for us, not only from serving our customers well, but also basically from the structure of the business in terms of what the right kind of profitability mix is. Now when you look at that moving forward, the percent of the business that actually comes from direct high touch, the major account stuff probably won't change that much over time. All of that growth is going to come from the digital direct piece. So actually roughly speaking, digital direct and physical direct will split that 50% another fifty-fifty. So you could kind of see a 25%, 25%, 50% type model for our business moving forward.
Time frame wise, I don't want to give a time frame for that, but it's definitely going to be over a relatively narrow time horizon. Now your second question, I just want to make sure I understood. You were asking what is the mix of usage within our EBA accounts or just clarify your question for me so
I make sure I answer
the right question. Sure. So you've in the past been able to track usage of the suites for example because they were instrumented for that. And I imagine you should be able to do the same now under subscription for all products standalone and collections. The question is really controlled.
1, how confident are you that customers are in fact going to mix up towards more collections from standalone in terms of initial licenses. And then once they have a collection that the usage of enough products will be there for them to want to continue renewing the subscription on a collection that there's enough indispensable products let's say within the collections that basically your ARPU must go higher over time?
All right, great. So thank you for the clarification. I always want to make sure I'm answering the right question for you, Jay. So first off, let's just let me kind of break the question up into some pieces. Right now, the run rate for collections is already up to what our historical suites run rate is.
So we're already back to where we were with suites in terms of collection uptake. The other little piece of information I want to give you and it's kind of some additional color on the M2S program. If you heard my the earlier comments, we said that 10% of the customers moving from maintenance to subscription were upselling to collections. That's 10% of the total customers moving. If you look at those who are actually eligible, when you subtract out people that are by default going from suites to collections or people that actually don't have the option to move from a standalone to collection, it's almost 25%.
So what you're seeing is not only a run rate that's up to our historical suites level, but an acceleration in the M2S migration that's looking really solid in terms of getting people to collections. So it's looking good right now, Jay, and it's heading directionally in the right direction. So that's kind of the current state. Now to your next question about how confident are we with the product usage within a collection and the things associated with that. So there's a couple I'll answer the question by bounding it in 2 ways.
1, historically with sweets, we've known that it only takes 2 or more products of usage for people to really just continue with the value proposition of the suites. We see no reason at all why that should change in the collection paradigm. So we expect to see the exact same behavior for the people that have chosen to move to collections. The thing that actually gives us even more confidence is the fact is unlike suites, we've blended more of the cloud into the collections. So there's actually more extension from the collection into other types of capability that provide value than there was in the suites.
So that's one. The other thing that bounces it as you're looking at our experience with EBAs and what happens when we provide more portfolio access, it just inevitably drifts over time to broader product usage. We see on average quite significant increases in the breadth of products that are being used. So there's nothing right now that indicates that we're going to see any kind of different behavior than what we've seen in the past. Thank you very much.
You're welcome.
Your next question comes from Saket Kalia with Barclays.
Hi, guys. Thanks for taking my questions here. Can you hear me okay?
Yes, we can, Saket.
Okay, great. Great. Well, first off, congrats, Andrew, on the permanent appointment. First, for either of you, could you maybe describe the mechanics of the MTS impact on ARPS this quarter? You said in the prepared remarks that subscription ARPS would have been I think about $509 So is this the impact of the discounts to convert?
I remember kind of hearing that the discount would be the sweetest now and decline over time. So is that what we're seeing? Or did you maybe see a different mix of conversions perhaps than you were originally expecting?
Yes, Saket, we saw all the above. We did see as people converted from maintenance to subscription, you remember the attraction was they get a significantly discounted product subscription if they turn in their perpetual license that they had. So an existing maintenance customer that converted was able to buy that product subscription at a significant discount that obviously pulls down the ARPS on product subs. The faster we can make that transition move, the faster we can move people off of maintenance and over to product subscription, of course, the faster the transition works and the product subscriptions for a minute and said let's net the M2S impact out of it, that's the statistic that we gave you in the opening commentary. Product subscriptions by itself, without M2S, the ARPS increased 10% year on year, and it was the 3rd consecutive quarter of product subscription ARPS growth.
So part of what you're seeing is just the M2S effect of kind of a bucket shift, the people moving from maintenance mid quarter up into subscription, all 63,000 subs moved, but only a fraction of the ARR was accumulated in the product subscriptions bucket. We also did see mix, and we always see mix a little bit in Q2. So our historical trend is that ARPS comes down a bit Q1 to Q2 because both cloud and we talked about the success we had with cloud, 200% growth in our cloud subs. We know cloud subs have the lowest ARPS that has a weight averaging effect on the overall subscription plan ARPS. The second is enterprise where we don't get a lot of new enterprise sales during the quarter, but we continue to drive usage.
So we continue to drive net monthly active users into the denominator of that ARPS equation. So as we accumulate the more users into the denominator and don't move the numerator that has a negative effect on the ARPS or enterprise subs. So we actually saw both. M2S had an impact on product subs and mix had an impact on the overall subscription plan sub ARPS.
That's great. That's very helpful. And for my follow-up, maybe for you Andrew. I believe you said you're converting about 1 in 4 maintenance subs up for renewal. Is there any change in the portion of the remaining 75% that's churning off versus, let's say accepting the price increase if you will?
Saket, when we first constructed this program, remember the whole thing was to balance churn associated with price increases, we always knew there'd be some incremental churn resulting from increasing prices. It's very modest. So what we're seeing is well within the bands of what we expected. And yes, actually in that 75%, you do see a little bit of extra churn as a result of the price increase. But again, that's why we constructed the program the way we did to make sure that we actually minimize the churn.
But right now, it's well within the bands we expected.
Yes. And Saket, you've got the data to do the math, right? We told you what the maintenance plan subs are and what the sub adds were. So it was minus 117,000 maintenance sub adds for the quarter and 63,000 of those left maintenance and dropped into converted over to product subscription. So you can see what the remainder is and divide that by the base that would have come up renewal during the quarter.
So it's right in line with expectations. Yes. Which kind of reinforces the
point of pay attention to the net adds. The net adds tell the real story.
Understood. Thanks very much.
Thanks, Saket.
Your next question is from Rob Oliver with Baird.
Thank you for taking my question. Just on that 25% number, how did that align with sort of your internal expectations? And then what sort of feedback have you gotten kind of early on from the channel as to what makes people kind of jump? And I know, Andrew, you talked about your primary goal here is kind of ease of use in the product and getting people to understand the implicit value of subscription. So can you talk a little bit about some of the feedback you're getting?
And then I just had a very quick follow-up. Thanks.
So first off, I want to make sure I reiterate exactly what that number is, so we're all on the same page. Remember in the prepared remarks we said about 10% of the total people moving from maintenance to subscription were choosing to migrate. There's a subset of that that we're actually eligible to migrate at all. So of the subset that weren't already on suites that default went to collections, of that subset, almost 25% are moving. That is above what our original expectations were with that base.
So this is a good result. We view it positively. Now let's be clear though, half a quarter does not a trend to make, but it's certainly a gratifying result to see. Now right now in terms of the value proposition the customers are buying on, I suspect the majority of the conversations are, hey, if I get on the collection now, well, this is the best price I'll ever get for a collection, I should probably get on that boat right now. And some customers are quite frankly in a wait and see mode, how is Autodesk going
to increase the value of
the subscription offering, what are they working on. We've been very transparent with some of our plans. But I honestly think right now they're just looking at a strategic choice and saying I should go with the collection right now because that's just this is the best price I'll ever get.
Great. That's helpful. And then any update you guys to the thoughts around piracy that you gave on last year's Analyst Day? I think you said 1,300,000 actives as you mine through the users and any thought on an update to that number or any trends? Thank you very much.
So first off, the numbers holding, the trends aren't changing. We are absolutely increasing our effectiveness in targeting that piracy base. I think I've told you guys previously in the past, this year, it's all about increasing the quality of the leads that go into the existing machinery for piracy. Next year, it's all about automating our communication with the customers that are actually using pirated software and supplementing the existing resources that are focused on piracy. No change in the trends.
We're piloting the automation that's going to communicate to customers directly in the product with regards to their usage of pirate applications. That will be rolled out sometime next year. So we're continuing to head in the right direction there.
Your next question comes from Keith Weiss with Morgan Stanley.
Excellent. Thank you guys for taking the question and very nice quarter. Two questions, one relating to maintenance ARPS, so to take the other side of the equation. You guys actually saw a nice increase there. Is that related primarily or solely to sort of the price increases that come on board if they don't take the S part of the MTS subscription?
Or are there kind of mix shifts going on there that perhaps higher priced guys tend to stay on maintenance as other guys are treading. And is that trend line of increasing ARPS and maintenance, is that something that we should be looking to continue in our model?
Yes. Keith, it's the flip side of what I was talking about earlier to Saket. So as people move from maintenance to subscription, let's say that they move on July 1, which is the beginning of the 3rd month of the quarter for us. So I'm on maintenance for 2 months, I convert on July 1 and the 3rd month. The way that gets recorded is I've got 2 months of maintenance revenue and 1 month of product subscription revenue, right?
But the entire sub dropped down to the product subscription level. So the impact there's actually impact in both places. There's, if you will, a tail of revenue left behind in maintenance that has no sub attached to it, so that drives up the maintenance ARPS. And then there's a partial quarter of revenue showing up in the product subscription side. So you get this understated ARPS.
So that the increase that you see in maintenance, the biggest driver of that is the flip side of what we talked about as the headwind on subscription plan. There is there are a couple of other changes, pricing maintenance agreements have gone up 5% in price and there's some mix shifts by product and by geo, but the biggest driver is just the compounding effect of maintenance to subscription. So as we we'll be in this mode. We'll be in this maintenance to subscription mode now for the next several quarters, certainly through fiscal 2019 and into fiscal 2020. And I think that probably it will this bucket shifting will continue to make it difficult to look at product maintenance sub ARPS versus subscription plan ARPS.
And probably the better way to gauge our overall progress on ARPS is going to be to look at the total ARPS. That will net out the effect of this tail of revenue left behind in a partial quarter where they landed.
Got it. That's helpful. And if I could ask one about OpEx. You guys went through several quarters of basically total expense declines. This quarter you saw some slight growth.
Is that an indication that sort of the expense reduction programs to kind of run its course and from here it's more about holding steady? Or is there more room to run-in of taking actual expense out of the equation here?
Yes. Keith, we continue to focus on that. Now we're flat from 2016 to 2017, flat again this year, flat again next year. Obviously, each year we give a basically a merit increase in salary. So we're continually looking at where we're spending money and using a portfolio management approach to sharpen the things that we have to continue to focus on to be able to live within a flat spend envelope and still drive the transition and drive the most important things.
So I talked a little bit when we gave guidance for the year and you see a little bit of it in the prepared remarks. We had a couple of divestments. Those are those were expected through the year, but that's an example of the kind of things we're doing as we manage the portfolio to reduce spend in some areas so that we can afford to continue to increase in other areas and still stay flat in aggregate.
Yes. And Keith, one of the questions we always get on this is how are you able to continue the execution you're doing when you're looking in an expense controlled environment. This is really all about picking the most important things to work on. Obviously, we're doing well in our net adds, so we're focusing a lot on that. And by the way, another area where we focused on is 360 in the construction space.
It's going so well that we actually shifted money during an expense constrained environment to accelerate feature development in that space. So it's just a matter of picking your priorities. And over time, you'll expect us continue to expect to see us to divest from things that just simply aren't aligned with where we need to focus over the next few years.
Excellent. Super helpful, guys. Thanks.
Thanks, Keith.
Your next question is from Philip Winslow with Wells Fargo.
Hey, this is actually Michael Baricich on for Phil. Thanks for taking my question and congrats on the quarter. Just wanted to circle back to the maintenance plan decline, obviously, 63,000 of those 100 and 17,000 directly moved over from the main subscription plan. Did the are the rest of those all just churning off the platform completely? Was there any shelfware in there?
Are there customers who have who had moved over prior to the promotion that just simultaneously had a maintenance plan and a subscription plan? Or should we really think of that as all just churning out of the base?
Yes. Michael, I'll start. And Andrew, if you want to add color, you can. 117,000 minuteus 63,000, 54,000 churn on a 1,800,000 sub base. Now not all 1,800,000 came up for renewal during the quarter, but that's a pretty normal churn rate for our maintenance plan.
So we really saw nothing extraordinary even in the face of an announced 5% price increase. We really saw nothing extraordinary in the churn rate within maintenance. So there's nothing there's no other moving parts under the covers if that's the question you're trying to get at.
Great. Yes. Thanks. That was what I was trying to clarify. And then just on the move to collections, what sort of impact to subs if any, have you seen from that move?
I know you've called out at your I believe your Analyst Day in the past, if you have a customer who has 2 subscriptions per subscriber and they move to a collection that's minus 1 subscription even though it's ARR accretive. Has there been any impact on total subs or is it too early to tell at this point?
Well, we have lots of data from the suites days that the effect of consolidation effect kind of range from 2% to 5%. If you look at what's going on with the maintenance to subscription moves and some of the churn we're seeing as people move from maintenance subscription, it's right in line with those exact same numbers. We see consolidation, but it's incredibly modest. You have to remember, people need to use the software. They need the software for themselves individually.
So when you consolidate products, yes, you do see some modest consolidation. It's right in line with the kind of consolidation we saw with suites.
Great. Thanks.
You're welcome.
Your next question comes from Matt Hedberg with RBC Capital Markets.
Hey, guys. Thanks for taking my questions. Congrats on the results. I believe you guys implemented a file format change at the end of March. Can you talk about the mechanics of this?
And if it had any impact on quarterly sub ads? And I guess secondarily, you've done these in the past. Can you sort of remind us historically the impact of something like this converting non maintenance paying active users?
Yes. So first off, just to give you context, every 3 to 5 years, we actually do one of these file format changes because what happens is we start to accumulate technical debt inside the file format and we have to do these things to prevent bloat. So yes, we did one of those in this round. What you generally see is an initial decline in the number of active legacy seats, the non subscriber seats. We saw that.
But then it takes a year or 2 to diffuse through the entire ecosystem. So what you get is an initial chunk associated with the release of the product where legacy users shift up to the new product. And then over time, as people are integrating with the ecosystem, you see more and more attrition out of this non subscriber base. So we expect to see the exact same pattern. It's happened historically over and over again.
So we're right on track for that right now.
Yes, that's helpful. And then you've commented in the past coming once these 3 year MTS conversions come up, there's going to be a price increase that's sort of I think sort of it's well documented, at least you've talked about it. Is this a once like a one renewal cycle trend to kind of get back to sort of normal discount rates or might this be a couple of cycles? I'm just sort of trying to think about the magnitude of that price increase.
Do you
want to take this?
Yes. Matt, we've also tried to articulate that. The when we get to the end of the 3 year period, so someone converts from being a maintenance subscriber to a product subscription, they give up their perpetual license, they get this reduced price for product subscription and without having to pay for all 3 years upfront, they're grandfathered at that price for 3 years. At the end of that and that's for people who convert this year and next year, fiscal 2018 2019. At the end of that 3 years, they revert to what we've been calling the terminal price, which is the price of conversion compounded over 3%, 5% increase.
So in effect, a 16% price increase from where we started the entire process. So they will snap up to that level. So they took a 5% increase. If they convert this year, that's roughly a 10% increase at the end of their 3 year grandfathering. And then it's going to take time for that pool.
So that will create a pool of product subscribers that are at a significantly lower price than a new product subscription. And it's going to take time to migrate that pool up to the price of a net new product subscription. That's not going to happen in 1 year or 2 years. That would be too big a step.
Got it. Thanks guys.
Thanks.
Your next question comes from Heather Bellini with Goldman Sachs.
Hi, this is Mark Grant on for Heather. Thanks for taking the question. Saw the disclosures around the M2S program with the subscription plan ARR and the net subs coming from that program. One, are those metrics that you plan to disclose on an ongoing basis? And then just second on maintenance renewals, realizing that that M2S program might create some noise in the seasonality of renewals this year.
Can you give us a sense of the split of contracts coming up for renewal between the fiscal 3Q and fiscal 4Q? Thanks. Yes, Mark, to your first question, we
will continue to provide that visibility. I think because it's fairly disruptive between the 2 big pools of subscription plan and maintenance plan, we'll continue to provide the same metrics that we gave this quarter. So the impact on where they landed in product subscription in terms of how much revenue accumulated there and the number of subscriptions that moved. I still think it's going to be difficult for you to sort out at a more granular level what's happening inside ARPS because those transitions take place during the quarter. And so that given if you go back to the example I talked about earlier, if they move at the beginning of Q3, there's a tail of revenue left behind on the maintenance side that will not move over.
And so it's I would encourage you to try to model ARPS if that's important to you, I'd encourage you to try to model it at the total level. In terms of the number of maintenance agreements that come due in the second half of the year, we haven't given that kind of seasonality metric historically. But what you see is as with most enterprise software companies, we do see a bigger second half than we do the first half. And so you could expect to see it be slightly more opportunities for conversion in the second half of the year than what we would have had in the first half.
Great. Thank you.
Your next question is from Sterling Auty with JPMorgan.
Yes. Thanks. Hi, guys. I apologize if you covered this in prepared remarks and I missed it. But of the users that chose to make the move over to subscription from maintenance, Can you give us a sense of what products were most popular that actually chose that switch?
Well, so first off, if you're on a suite, it's kind of a no brainer for you to do this. So we saw a lot of people on suites making the move to subscription and taking up the offer pretty quickly. And then it kind of follows from there to products like AutoCAD naturally is the next biggest product up there. So it's pretty straightforward. Okay.
And then Scott on to a different area on the FX side, I know you guys know your hedging program, but just want to make sure how with the recent moves that we've seen included with your hedging program, is that impacting the outlook here for the back half?
Yes, it's a great question. The interesting part about FX and particularly in a subscription model where a lot of the revenue that we report in a given quarter was actually sold in a prior quarter, right? So as we open the quarter, we've got a very high percentage of the reported revenues for Q3 sitting on the balance sheet at exchange rates that are commensurate with when those were actually sold. So there's a lag effect in revenue, really independent of the hedging. Whenever it's sold, we have the hedge benefit, but then it goes in deferred.
So the benefit of the weaker dollar will take a lot longer to show up in revenue simply because a lot of reported revenue is coming off the balance sheet before the FX rates change. We'll see it much more immediately on the expense side. We hedge the net exposure, but we'll see the impact of FX hit much more immediately on the spin, both COGS and OpEx side.
Got it. Thank you.
Your next question comes from Gregg Moskowitz with Cowen and Company.
Okay. Thank you very much. Good afternoon, guys. So the cloud subscription growth again was very impressive and it sounds like you're really starting to see BIM 360 construction related activity ramp up as well. On the other hand, I believe the comps on cloud subs may get a little tougher later this fiscal year given the acceleration that we saw in that year ago period.
So just kind of curious how we should generally think about cloud subs growth over the balance of the year?
You're right. In BIM 360, we're seeing a view of a really good acceleration of cloud growth. We see nothing that would indicate that that's going to slow down as we head throughout the year. And the only thing about is to highlight anything, as you grow the base larger, the base you have to renew gets larger as well. So we'll be watching that very closely.
But the momentum, there's really nothing out there right now that would slow the momentum, particularly on BIM 360.
Okay, perfect. Thanks, Andrew. And then with respect to EBAs, I know Q2, obviously, not a seasonally strong quarter for you there, but your unbilled deferreds were up significantly again on a sequential basis. How is the EBA uptake tracking relative to your expectations both in terms of number of customers signing on as well as the degree of ARR spending increases? Thanks.
Yes, Craig. The EBAs are tracking right in line. EBAs are always heavily weighted into the second half of the year. And so if you go all the way back to our Investor Day last year, when I made sure everyone understood that we were going to move many of our EVAs from build upfront to annual, I said I thought the impact on deferred revenue by the end of the year would be $300,000,000 or more of unbilled deferred that would accrue and that's still our expectation
on the unbilled deferred by year end.
So expect to see the unbilled deferred grow more heavily in the second half of the year as we sign more of those EBAs. But in general, the EBA business is tracking right in line with our expectation.
That's great. Thank you.
Your next question comes from Ken Wong with Citigroup.
Hey, guys. When looking at your sub guide, I guess the midpoint is around $650,000,000 and you guys are already kind of halfway there. And correct me if I'm wrong, but usually in the second half, you add a lot more. Can you help us understand some of the dynamics that are going into your guidance and the thinking for the second half?
Yes, Ken. We shifted the entire range up by $25,000 So prior guide on subs was $600,000 to $650,000 We shifted it up to $625,000 to $675,000 And a lot of that's based on the strength that we've seen in the first half of the year. And we touched a little bit on this in the opening commentary. We it was a very strong first half. Our net sub adds coming from the enterprise business outpaced our expectations in Q1.
The legacy promo continued to be strong and cloud in the quarter we just closed, our cloud sub adds grew 200% year on year as Andrew said. So we had a very strong sub add first half of the year. The second half of the year is right in line with our expectations. So it's not there's nothing there's no difference in what we expected in the second half built into that guidance. What you see in the guidance range shifting up is the strength of the first half.
Got it. And then maybe in terms of just renewal rates, I know in the past few quarters kind of across the different subscription lines, maintenance, product, etcetera, you guys have seen always kind of close to peak, if not peak. How are those tracking in Q2 here?
Our renewal rates are tracking exactly the place the way we would expect them to track right now. So we're right in line with everything we are all of our expectations.
Yes. And Ken, the place to look to get a feel for that is again, look at the net sub adds. And we've given you the visibility of maintenance and you can get a real sense of what the renewal rates look like there because we told you how much of the 117,000 that went away were conversions over to product subs. You can do the same math on subscription plan and look at what the net adds are there. And that gives you a sense of not just what the volume is or the combination of what the new volume is and what the renewal rates are.
And so in fact to your earlier question, at the midpoint of our guidance, by the way, 6.25 to 6.75, so the midpoint is 6.50, That's 21% growth year on year. So it's right in line with our expectations.
Got it. Great. Thanks a lot guys. Good quarter. Thanks,
Ken. Thank you.
Your next question comes from Ken Talanian with Evercore ISI.
Hi guys. Thanks for taking the question. So you mentioned earlier that you had reinforced conviction in the fiscal 2020 targets. Given
Given the
better than expected results, do you think it's reasonable to assume that there's upside to those targets? Yes, Ken, so I'll start. I see Andrew smiling.
I know he can't wait to add some color to this. One of the things that we've done, those targets, of course, we put out a little more than a year ago at this point. And the goal in setting that out was not to say this is guidance and we're going to update it every quarter. It was to say this is where we see ourselves headed as we work through this transition. One of the things we spent a lot of time on back in December at our last Investor Day was talking about the various steps we had taken, the levers we have pulled to in effect derisk that set of targets and to provide some buffer between where we think we're going to land and what those targets are.
And we continue to do that. We continue to pull those levers and continue to drive for those targets. I don't think it would be wise for us to
try to continually update what that number looks like. It's good to see you asking questions like this. I mean, I think right now, all of us being on the same page that it's looking more and more likely that we're heading in exactly the right direction for our FY 2020 targets, I think is a good place to be. There's no reason for us to revise those targets right now. Okay.
And I guess just more specific question. Can you talk about the mix of products that you're seeing transact through the e store?
Yes. When you look at the e store, the e store really dominates at the low end of our offerings. We actually do see almost every type of product type that we sell going through the e store. But if you look at what the majority of it is, a lot of it's going to be LT and then the next largest chunk is going to be AutoCAD. And that's basically the majority of the e store traffic.
That's totally what you would expect from e commerce transactions, the lower end of our value spectrum.
Great. Just one quick follow-up to that one. Do you know if you're seeing any pirates essentially transact through the e store?
Well, you know the pirates don't announce themselves when they arrive at the e store. However, it's highly likely that some of them do show up there, all right, especially if they're buying LT or something like that. But like I said, pilots don't declare themselves, but it's probably likely, especially given some of the digital related targeting efforts we're doing with piracy that some of them show up buying there.
Great. Thanks very
much. Thanks, Ken.
Your next question is from Shankar Subramanian with Bank of America Merrill Lynch.
Hi. I'm asking the question on behalf of Kash. I have a quick question on what can be the churn rate of the current renewal base for the subscribers for next year. So the question I have is, so most some of the projects that the construction engineers use would be a short term project or some can be a long term project. So if the subscriber growth in the current year is driven by short term projects, there's likelihood that next year they might drop out.
But can you talk about what the mix is? I don't know if you know this or not, but can you talk about the mix between subscribers we're using for a short term basis versus a long term basis?
So the pattern you're talking about, if no projects were in the pipeline at all, then I'd probably worry about that. But for every project that drops off, another project shows up. So that's just the wrong way of looking at it. There's a steady state of projects within the ecosystem. Projects retire, new projects ramp up.
So there's really no material change in the run rate because of the cyclicality of a particular set of projects. There's always new projects in the pipeline.
Got it. And one on the digital manufacturing strategy, and you talked about the focus area for that. Can you talk about is there any particular segment you're strategy implementation? And when do we see the benefit of that? Is it more beyond fiscal 2019?
So the opportunity that we're dealing with right now where the market is fully ready and the technology is fully aligned with the market readiness is in construction. When we look at the digital manufacturing opportunity, the market is still coming to terms with, okay, what does it mean for us to be using solutions in the cloud when I'm a product manufacturing? How much of the 3 d printing capability is actually going to be practical for my applications. So what you're seeing right now is in low volume manufacturing, aircraft components, things like that, greater adoption of 3 d printed workflows and some of these more automated workflows. That's going to eventually move down.
So the bet on digital manufacturing is like the next long term bet after the construction bet that we're playing right now. So we're actually what you're seeing is a series of bets that provide a very strong path for long term growth for the company.
Got it. Thanks.
And we have reached our allotted time for questions. And I would like to turn the call back over to David Generali.
Great. Well, that concludes our call today. We'll be at the Citi Conference in New York City on September 6. For any other follow on questions, you can reach me at 415 507-6033. Thank you.
Thank you for your participation. This does conclude today's conference call and you may now disconnect.