Autodesk Inc

NASDAQ:ADSK

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by and welcome to the Autodesk Fourth Quarter and Full Year Fiscal 2023 Results Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions].

I would now like to hand the call over to Simon Mays-Smith, Vice President, Investor Relations. Please go ahead.

[Simon Mays-Smith, VP, IR]

Thanks, operator and good afternoon. Thank you for joining our conference call to discuss our fourth quarter and full year fiscal ’23 results. On the line with me are Andrew Anagnost, 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/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, acquisitions, products and product capabilities 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 10-K and the Form 8-K filed with today’s press release for important risk factors 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 numerical 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 XL Financials and other supplemental materials available on our Investor Relations website.

And now, I will turn the call over to Andrew.

[Andrew Anagnost, CEO]

Thank you, Simon, and welcome everyone to the call. Autodesk’s strong financial and competitive performance in fiscal 2023, despite macroeconomic, policy, geopolitical and pandemic headwinds, is a testament to three enduring strengths: resilience, opportunity, and discipline. While we fell short of the fiscal ‘23 goals we set in 2016, our resilient business model and geographic, product, and customer diversification enabled us to deliver strong growth and report record fourth quarter and full-year revenue, GAAP and non-GAAP operating margin, and free cash flow. The sum of our revenue growth and free cash flow margin, a hallmark of the most valuable companies in the world, was 55% for the year.

As we deliver next-generation technology and services to our customers, the transformation within and between the industries we serve will accelerate, generating significant new growth opportunities for Autodesk. We started seeing the shift towards connected digital workflows in the cloud in product design and manufacturing, then in architecture, followed by building engineering, and more recently construction. And we are now seeing growing momentum with owners.

For example, in Q4 our partner, BLA-BIM Launch Alliance, was selected by a consortium of 20 U.S. states, led by the Iowa Department of Transportation, to facilitate the migration from legacy 2D project delivery processes to data-rich BIM delivery processes, which are more efficient and sustainable. In anticipation of this, the departments of transportation involved are also completely reimagining project delivery and developing open standards for all infrastructure projects.

Together, these 20 states encompass more than 60% of the U.S. population. Over time, we expect more states, and more owners across the globe, to connect more workflows in the cloud.

Finally, our strategy is underpinned by disciplined and focused capital deployment through the economic cycle. This enables Autodesk to remain sufficiently well invested to realize significant benefits of its strategy while mitigating the risk of having to make expensive catch-up investments in the future. Of course, discipline and focus mean not only consistent investment, but also constant optimization to ensure investment levels remain proportionate and directed at our largest opportunities.

For example, Autodesk BIM Collaborate Pro for Civil 3D, which enables much more efficient collaboration on civil infrastructure projects, saw further significant enhancements in Q4. To support our work with public sector owners in the United States, Autodesk

for Government expects to achieve FedRAMP Moderate Authorization soon, meaning that, through our partnership with the General Services Administration, customers will be able to start using our industry leading cloud collaboration and document management tools that meet key security standards for U.S. Government projects.

I’m also pleased to report that Innovyze had a record quarter driven by adoption in a growing proportion of our Enterprise accounts which contributed over a million dollars in four deals.

Infrastructure is but one part of an expanding opportunity for Autodesk. There are so many more. And we’ll tell you about them at our Investor Day on March 22. But you can see some of the fruits of that opportunity already. We signed our largest-ever EBA in the fourth quarter, encompassing more personas and connecting more workflows in the cloud to drive efficiency and sustainability.

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 initiatives.

[Debbie Clifford, CFO]

Thanks, Andrew. Our fourth quarter and full-year results were strong. Overall, the demand environment in Q4 remained consistent with Q3. The approaching transition from up-front to annual billings for multi-year contracts, and a large renewal cohort, provided a tailwind to billings and free cash flow.

As Andrew mentioned, we continue to develop broader strategic partnerships with our customers and closed our largest deal to date during the quarter. The nine-digit deal is a multi-year commitment, billed annually, and did not have a meaningful impact on our financials during the quarter.

Total revenue grew 9% as reported and 12% in constant currency, with subscription revenue growing by 11% as reported and 14% in constant currency. By product, AutoCAD and AutoCAD LT revenue grew 9% and AEC revenue grew 11%. Manufacturing revenue grew 4%, but was up mid-teens excluding foreign exchange movements and upfront revenue. M&E revenue was down 10%. Recall that in Q4 last year, M&E won its largest-ever EBA, which included significant upfront revenue. Excluding up-front revenue, M&E grew 4%. Across the globe, revenue grew 13% in the Americas, 7% in EMEA and 4% in APAC. At constant exchange rates, EMEA and APAC grew 12% and 10% respectively.

Direct revenue increased 5% percent and represented 36% of total revenue. Strong underlying enterprise and e-commerce revenue growth was partly offset by foreign exchange movements and lower up-front revenue.

Our product subscription renewal rates remained strong, and our net revenue retention rate remained comfortably within our 100% to 110% target range at constant exchange rates.

Billings increased 28% to $2.1 billion, our first quarter over $2 billion, reflecting continued solid underlying demand and a tailwind from both our largest multi-year renewal cohort and the pending removal of the discount for multi-year contracts billed up front.

Total deferred revenue grew 21% to $4.6 billion. Total RPO of $5.6 billion and current RPO of $3.5 billion grew 19% and 12% respectively. About two percentage points of that current RPO growth was from early renewals.

Turning to the P&L, non-GAAP gross margin remained broadly level at 92%. Non-GAAP operating margin increased by 1 percentage point to approximately 36%, with ongoing cost discipline partly offset by revenue growth headwinds from foreign exchange movements. For the fiscal year, non-GAAP operating margin increased by 4 percentage points, reflecting strong revenue growth and ongoing cost discipline.

GAAP operating margin increased by 9 percentage points to approximately 21%. Recall in Q4 last year, we took a lease-related charge of approximately $100 million. That was part of our effort to reduce our real-estate footprint and to further our hybrid workforce strategy. For the fiscal year, GAAP operating margin increased by 6 percentage points.

We delivered record free cash flow in the quarter and for the full year of more than $900 million and $2 billion, respectively, reflecting our strong billings growth.

Turning to capital allocation, we continue to actively manage capital within our framework. As Andrew said, our strategy is underpinned by disciplined and focused capital deployment through the economic cycle. We will continue to offset dilution from our stock-based compensation program and to opportunistically accelerate repurchases when it makes sense. During Q4, we purchased 1.1 million shares for $210 million at an average price of approximately $193 per share. For the full year, we purchased 5.5 million shares for $1.1 billion at an average price of approximately $198 per share, and reduced total shares outstanding by 4 million.

We retired a $350-million bond in December. Recall that we effectively refinanced this bond in October 2021 at historically low rates when we issued our first sustainability bond. Our average bond duration is now almost seven years.

Now, let me turn to guidance. Our strong finish to fiscal ‘23 sets us up well for the year ahead. Overall end-market demand in Q4 fiscal ‘23 remained broadly consistent with Q3 fiscal ‘23. Channel partners remained cautiously optimistic, usage rates grew modestly, excluding Russia and China, and bid activity on BuildingConnected remained robust.

As we said last quarter, foreign exchange movements will be a headwind to revenue growth and margins in fiscal ‘24. We expect FX to be about a 4-percentage point drag on reported revenue.

We continue to expect the absence of recognized deferred revenue from Russia will be about a 1 percentage point drag to revenue growth. As we’ve highlighted before, most recently on our Q3 earnings call, the switch from up-front to annual billings for most multi-year customers creates a significant headwind for free cash flow in fiscal ‘24 and a smaller headwind in fiscal ‘25. You can see the impact on fiscal ‘24 in slide eight of our earnings deck.

Change in deferred revenue increased fiscal 23 free cash flow by $790 million, but will reduce fiscal ‘24 free cash flow by approximately $300 million. The switch to annual billings for multi-year customers and a smaller multi-year renewal cohort are the key drivers of this $1.1 billion swing. The transition will also affect the linearity of free cash flow during the year, with Q1 fiscal ‘24 free cash flow benefiting from the strong billings in Q4 fiscal ‘23, and our largest billings quarters in the second half of the year proportionately more impacted by the switch to annual billings.

While we expect many customers to switch to multi-year contracts billed annually, some may choose annual contracts instead. All else equal, if this were to occur, it would proportionately reduce the unbilled portion of our total remaining performance obligations and would negatively impact total RPO growth rates.

Deferred revenue, billings, current remaining performance obligations, revenue, margins, and free cash flow would remain broadly unchanged in this scenario.

Annual renewals create more opportunities for us to drive adoption and upsell, but are without the price lock embedded in multi-year contracts. We'll keep you updated on this as the year progresses.

Our cash tax rate will return to a more normalized level of approximately 31% in fiscal ‘24, up from 25% in fiscal ‘23. We accrued significant tax assets as a result of the operating losses we generated during our business model transition. Growing profitability and, more recently, rising effective tax rates across the globe, have accelerated the consumption of those tax attributes. Absent changes in tax policy, we expect our cash tax rate to remain in a range around 31% for the foreseeable future.

Putting that all together, we expect fiscal ‘24 revenues to be between $5.36 billion and $5.46 billion, up about 8% at the mid-point, or about 13% at constant exchange rates and excluding the impact from Russia. 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 $1.15 billion and $1.25 billion. The mid-point of that range, $1.2 billion, implies a 41 reduction in free cash flow compared to fiscal ‘23. As I outlined earlier, the key drivers of that reduction are: changes in long-term deferred revenue as a result of the shift to annual billings for multi-year customers and a smaller multi-year renewal cohort, FX, and our cash tax rate.

The slide deck and Excel financials on our website have more details on fiscal ‘23 results and modeling assumptions for the full-year fiscal ‘24.

At investor day, we’ll be looking beyond this year. As Andrew noted earlier, we remain in the relatively early innings of a transformational shift to the cloud to drive efficiency and sustainability. This is generating demand for cloud-based platforms and services, which break down the silos within and between the industries we serve.

Autodesk is uniquely well-positioned to seize these opportunities and we will continue to invest with discipline and focus to realize that growth potential.

While our subscription business model and geographic, product, and customer diversification give us resilience when compared to many other companies, we’re mindful that generational macroeconomic, policy, geopolitical, climate, and health uncertainty make the world more volatile and less predictable than in the past. Our business will grow somewhat faster in less volatile environments and somewhat slower in more volatile environments.

Finally, we're not just looking to have industry-leading growth although we often do. Nor are we just looking to have industry-leading margins, although we often do. On average and over time, we are looking to have an industry-leading balance between growth and margins. And we often do.

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. With all this in mind, our target planning parameters over the next several years will be to grow revenue in the 10% to 15% range and generate free cash flow margins in the 30% to 35% range with a goal of reaching a "Rule of 40" ratio of 45% or more over time. The path to that 45% ratio will not be linear given the drag in fiscals ‘24 and ‘25 to long-term deferred revenue and free cash flow from the shift to annual billings of multi-year contracts.

The rate of improvement will obviously also be somewhat determined by the macroeconomic backdrop. 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 on disciplined profit and cash flow growth. We intend to make meaningful steps over time toward achievement of this rule-of-45 goal, regardless of the macroeconomic backdrop.

While macroeconomic and FX headwinds, along with sustained but disciplined investment in our products and platforms, will slow the rate of margin improvement, we continue to expect non-GAAP operating margins to be in the 38% to 40% range by fiscal ‘26, albeit more likely now in the lower half of that range. We continue to see scope for further margin growth thereafter.

GAAP margins will further benefit from stock-based compensation as a percent of revenue trending down towards 10% and beyond over time.

Andrew, back to you.

[Andrew Anagnost, CEO]

Thank you, Debbie. 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’ll tell you more about our long-term vision and plans at our investor day on March 22. But let me finish by updating you on our progress in the fourth quarter.

We continued to see strong growth in AEC, fueled by customers consolidating on our solutions to connect previously siloed workflows in the cloud. Sweco, Europe's leading architecture and engineering consultancy, is connecting our portfolio of products, from Spacemaker and Revit to Autodesk Construction Cloud and Innovyze, to streamline everything from transport and energy usage to lighting and water flows to ensure better transparency through the project lifecycle.

Sweco has a thriving sustainability practice. Its new digital service, Carbon Cost Compass, which is built on Autodesk Platform Services, helps its customers model and calculate the carbon footprint and cost of different types of buildings. For our construction customers, we continue to benefit from our complete end-to-end BIM solutions which encompass design, preconstruction and field execution.

In Q4, a mid-market general contractor in California, specializing in design-build projects, chose to replace a competitive project management offering with Autodesk Build as it looked to improve integration further and minimize conflict with their design processes. While highlighting Build’s cost management functionality as a differentiator, the customer ultimately chose Autodesk because of our long-standing and trusted partnership and shared vision on the future of construction.

We continue to make excellent progress on our strategic initiatives which is driving accelerating adoption of Autodesk Construction Cloud. We added almost a thousand new logos again, drove continued rapid growth in Autodesk Build’s MAUs, and generated 3x quarter-on-quarter growth in our construction bundles, which combine multiple Autodesk Construction Cloud solutions and enable customers to standardize more rapidly on one platform.

Outside the U.S., enabling our international channel partners to sell our construction portfolio continues to drive strong growth. We still see strong growth potential in construction and Autodesk remains uniquely well positioned to capture it.

In manufacturing, Tata Steel, one of the world’s leading steel manufacturers, has used our solutions to increase efficiency and reduce costs in setting up new operations. To optimize effectively between its equipment, civil, structural, and plant infrastructure teams, Tata Steel uses Autodesk AEC and Manufacturing collections and Vault. Through the integration of data from various vendors on a single platform, Tata Steel leverages simulation and clash detection in a virtual environment, eliminating potential conflicts that can have a huge impact if they occur during physical installation.

In Automotive, we continue to strengthen and expand our partnerships, both within and beyond the design studio, as OEMs transform and connect factories. A leading manufacturer in the U.S. expanded its EBA in Q4, leveraging the cutting-edge visualization technology in VRED Pro to more effectively process executive design reviews and reach final designs more quickly. Autodesk is now partnering with the customer as it renovates its factories for its new fleet of electric vehicles, ensuring it controls the construction flow and owns its own data by standardizing on Autodesk Construction Cloud.

Customers are also beginning to merge their design, manufacturing and production management workflows with Fusion and Prodsmart. In Q4, a manufacturer based in the U.K., which has more than doubled in size in the last 18 months, switched from a competitor’s CAD tool to Fusion 360 and extensions for its integrated CAD and CAM capabilities. With Prodsmart as part of its connected platform, the customer can instantly generate a bill of materials after creating a design and link directly to inventories, eliminating tedious work and saving time for higher-value opportunities.

We ended the quarter with 223,000 Fusion 360 subscribers, a number which does not include extensions where units increased more than 100% year-over-year. During the quarter, we launched the Signal Integrity Extension for Fusion, powered by Ansys, which enables designers to analyze their PCB electromagnetic performance, ensure compliant products and power a faster development cycle at lower costs.

We continue to see strength in PLM, signing our largest-ever cloud data management deal and growing more than 30 percent in the quarter.

In education, leading universities continue to modernize their courses ensuring students will learn the in-demand skills of the future. At Northumbria University, the prestigious “Design for Industry” program's students are now choosing to use Fusion 360 within their design process and across many of their modules along with real-world live projects led by industry partners. Their switch is primarily down to its ease of use and cross platform availability. While our software remains free for educators and students, tomorrow's design leaders are bringing Fusion 360 to new and established manufacturers.

We will continue to evolve our business model offerings to match customer needs and enable users to participate in our ecosystem more productively. For example, a European manufacturer which operates in over 100 countries and six R&D facilities worldwide, transitioned to our Named User model with Premium Plan providing enhanced security from single sign-on and improved efficiency from 24/7 technical support.

Our partners at Mensch and Maschine supported the transition with detailed knowledge and analysis of the customer usage behavior, resulting in an optimized flex token package for its occasional users; providing them with ongoing software access without requiring a full-time subscription.

And finally, we continue to work with non-compliant users to find flexible and compliant solutions that ensure they have access to the most current and secure software. During the quarter, we closed nine deals over $1 million and 23 deals over $500,000 with our license compliance initiatives.

Returning to where I started – resilience, opportunity, and discipline were important contributors to our fiscal ‘23 results and will remain the key drivers of our future success. We’re excited to share our plans with you at our investor day on March 22.

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

[Operator]

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

[Saket Kalia, Barclays]

Okay, great. Good afternoon guys. Thanks for taking my questions here. Debbie, maybe for you. I was wondering if you could just give us a little bit more context about how you're thinking about fiscal '24 and beyond from a guidance perspective?

[Debbie Clifford, CFO]

Sure. Thanks, Saket. So first, the overall demand environment in Q4 was relatively consistent with what we saw in Q3. If I drill first into the specifics on the guide for billings, of course, we have multiyear to annual billings transition, that's creating a headwind as expected. The transition doesn't have an impact on revenue. It's just a change in billings frequency.

On revenue, as we outlined last quarter, we're seeing a negative impact from FX and the Russia exit. Together, that represents 5 points of headwind to growth. If we normalize for that, the revenue growth range would be in the low teens.

On margin, we're managing the flat margins on an as-reported basis year-over-year. That's consistent with what we said on the last call. We have a strong balance sheet. We have conviction in our strategy. So we want to continue to invest during the cycle so that we can maintain our momentum, but not so much so that we see a detriment to our margin outlook. And I want to point out that our margin guide on a constant currency basis represents improvement year-on-year.

And then finally, on cash flow, the headwind to billings from the transition to annual billings has a downstream effect on cash flow, of course. As I mentioned in the opening commentary, the swing in long-term deferred revenue is having a negative impact of around $1.1 billion to $1.1 billion to fiscal '24 cash flow. That headwind is driven primarily by that switch to annual billings for multiyear customers.

And if we take that with other factors like a lower multiyear renewal cohort and higher cash taxes, we get to that $1.2 billion guidance midpoint. Our goal is to set ourselves up for success in fiscal '24 and for the long term. And it's that same sort of thinking that's driving how we're thinking about the longer-term financial model.

On revenue, our target planning range of 10% to 15%, it remains in that double-digit territory. On margin, we're targeting a margin in the 38% to 40% range in the fiscal '23 to '26 window. But we said that because of the macro and FX headwinds that we're seeing, we think it's more likely now that it's going to be in the lower half of that range.

And then on cash flow, we'll still work towards double-digit CAGR growth through fiscal '26, but it looks less likely though, given the impact of cash taxes, FX volatility and a stronger-than-expected fiscal '23 finish. As we look ahead, we're focused on managing the business to a Rule of 45 ratio or better, which after we get through this multiyear to annual billings transition, we think strikes the right balance between driving top line growth and delivering on disciplined profit and cash flow.

[Saket Kalia, Barclays]

Got it. Got it. That's very helpful. Maybe a follow-up for you, Debbie, if I may. I guess now that the fiscal 2024 has finally arrived, if you will. Could you just maybe walk through a little bit of detail just on that impact of switching from upfront to annual billings for those multiyear contracts?

[Debbie Clifford, CFO]

Yes. It has finally arrived. It's nice to finally be having these conversations, Saket. So the transition to annual billings, the rollout is happening on schedule. Our systems will be ready. We're assuming that we sell multiyear upfront through March 27. And then at the March 28 go-live that we only sell multiyear with annual billing terms in mature countries for our platinum and gold partners. That represents a significant majority of the eligible population.

There's going to be some remaining multiyear upfront in the forecast beyond March 27. That's going to be coming primarily from eStore and emerging countries, but it's relatively small in comparison to the volume that we saw in fiscal '23. And as we move those populations to annual billings, we'll see a follow-on headwind to free cash flow in fiscal '25. It's consistent with what I said in the opening commentary that the past is not going to be linear.

We're assuming that the same proportion of our business that's been multiyear remains multiyear. We think that the price lock that you get in a multiyear contract will entice our customers to continue to buy multiyear, especially in the inflationary environment that we're in. But of course, it's possible that some of our customers choose annual contracts rather than multiyear contracts with annual billings. That wouldn't impact billings or most other financial metrics in fiscal '24, but it would negatively impact the total RPO growth rate.

At the end of the day, it's a win-win for us. If our customers choose to go with annual contracts, it gives us an opportunity to engage with them upon renewal to drive adoption and upsell and our renewal rates are strong. So this is something we'll keep you posted on as the year progresses.

[Saket Kalia, Barclays]

Got it. Very clear. Looking forward to the Analyst Day, guys. Thank you.

[Operator]

Our next question comes from the line of Jay Vleeschhouwer of Griffin Securities. Your line is open, Jay.

[Jay Vleeschhouwer, Griffin Securities]

Thank you. Good evening. Andrew, let me start with you. Your 10-Q for the third quarter had some new and intriguing language with regard to how you foresee the evolution of your sales model, specifically, your relationship with VARs and VADs and there's a lot of complexities in the language there.

So perhaps you could talk about how you envision the evolution of your business in terms of the operational or fulfillment or license management effects that you foresee over time or the margin effects over time. And where you think your sales mix ultimately goes over the next number of years in terms of direct versus indirect? Then a follow-up.

[Andrew Anagnost, CEO]

Okay. Great. So I like the way you highlighted. This is an evolution. We've been evolving in a particular direction over time. Obviously, several years back, I talked about the 50-50 mix of direct and indirect and we've been driving a lot of growth in direct channels. We've been driving a lot of growth in direct enterprise business, and all of these things kind of like weave together into a longer-term plan.

And now what you're seeing is doing is we're driving a lot more direct engagement with some of our value-added resellers. So some of the changes that you saw in there are preset staging more and more direct engagement with our value-added resellers and less smaller engagements and fewer engagements between intermediates and our value-added resellers, which makes total sense between the systems evolutions we've been executing on in the direction we're going.

So long term, we're still driving towards that same type of balance that we've been talking about. But as our systems improve, we're looking for different types of engagement models with our value-added repower channel.

[Jay Vleeschhouwer, Griffin Securities]

Okay. Second question, the slide deck gives us the annual update on your installed base of subscription. The net increase was about $600,000 for the year, net of trade-ins. Looking ahead, how does your long-term growth model foresee the contribution of volume growth and particularly the effect as well of improving the richness of the mix, perhaps to more collections and so forth? And perhaps by end market. When you think about manufacturing, that volume looks like it's maybe 10th of your net new volume per year. So you have a lot of volume that has to come from other segments outside of manufacturing. So perhaps you could talk about that.

[Debbie Clifford, CFO]

Sure, I'll take that one, Jay. So we start at the top. Yes, subscriptions grew in a healthy way. I just want to remind, however, that there's a lot of variability in that metric, given that we have such a wide diversity of business models in play, things like Flex, EBAs, accounts pricing and so on and so forth. So it does make it less and less of a relevant metric for us to manage business performance.

We're more focused on new and renewal ACV. They both posted solid growth in Q4. As we think about new ACV. That's the proxy for, I think, the spirit of your question. We generated across both volume and also stronger unit economics, things like price mix and partner margins. In general, historically, we've seen it come from roughly equally across those sources, and it kind of flexes up or down depending on the demand environment that we're in.

We could see some puts and takes like when COVID hit, we saw more growth from volume because volume versus price because we were more sensitive to price increases at the time that the pandemic hit. And then obviously, when we're in a situation where we change prices at all, we might see more growth coming from price.

But all in all, as we think about achieving some of the long-term growth parameters that I talked about, we're thinking about it as a roughly equal split across volume, price mix, ASP over time.

Andrew, did you want to comment on the segment?

[Andrew Anagnost, CEO]

Thanks. Jay, your comment on statements, all right? As you know, and I know you're aware, as we look at the various segments you do business in, we're moving in a situation where we're getting deeply entrenched in both the design and make side of our customers' business. So we also pay attention to the fact that even within manufacturing and AEC and all these things, we're going to be adding a lot more subscribers in some of the downstream processes in other parts of the process, which is going to be an important engine even within some of the segments that you discussed. And I know you're aware of that. I just wanted to reinforce it a little bit.

[Jay Vleeschhouwer, Griffin Securities]

Very good. Thank you, both.

[Operator]

Our next question comes on the line of Adam Borg of Stifel. Your question please, Adam.

[Adam Borg, Stifel]

Great. Thanks so much, for taking the question. Maybe Andrew, on Innovyze, it was interesting to hear and great to hear about the record quarter. We picked up some growing traction in our check. I'd love to hear a little bit more about what's driving this and where we are in the migration more broadly to subscription, given its more legacy business model? And then I have a follow-up.

[Andrew Anagnost, CEO]

Yes. So it's very early in the migration. But in general, Innovyze had a record quarter. And the biggest thing that was driving some of that record growth is that now Innovyze can be incorporated into a lot of our enterprise business agreements and in some of our engagement with our largest accounts. And guess what, there's a hunger for the solution. So there's a lot more direct engagement with customers around Innovyze that's really propelling the growth right now.

We're still very much in the early stages of activating our channel. So we've activated our major accounts team, and we're still working to activate our channel. And the subscription transition, super early stages just starting, and that we'll give you updates on that as time goes on.

[Adam Borg, Stifel]

Maybe just a quick follow-up on the macro. You guys are clear that things seem to be consistent quarter-over-quarter. I'd love to maybe just try go down one step deeper. Any observations around customers switching more to point solutions from collections or anything around RT or perhaps even more interest in Flex given the macro? Thanks so much.

[Andrew Anagnost, CEO]

Yes. So actually, there's pretty consistent customer behavior across segments and sizes of customers. So there's not any kind of switching behavior or downgrading behavior. And Flex tends to be to a large measure, and its very early days with Flex, tends to be incremental to our business rather than detrimental to our business. So in general, we're not seeing any kind of changes in mix as things go on. I will say, from a segment perspective, while all the segments grew, our larger customers grew faster than our smaller ones, but everybody was growing.

[Adam Borg, Stifel]

Great. Thanks again.

[Operator]

Our next question comes from the line of Joe Vruwink of RW Baird. Your line is open, Joe.

[Joseph Vruwink, Robert W Baird]

I wanted to go back and give more detail on what you're doing with the public sector around project delivery. And I guess I'm curious how this compares to the evolution of the commercial side of your business. So maybe the analogy use, I think, BIM360 launched and 2012, and we got Construction Cloud in 2019 and here we are today is what you're announcing now or kind of the conversations you're having in the public space with owners it closer to 2012? Or is it kind of further along and has the potential to progress more quickly?

[Andrew Anagnost, CEO]

Joe, I think that's a very astute question. And I think you're pointing to some of the important things about what we're doing with public sector in general. You probably noticed in the opening commentary, our comments about FedRAMP things associated with that. All of these things, FedRAMP, are engagement with the infrastructure partner and DOTs that I talked about in the opening communicator, all of these are part and parcel of laying the groundwork for more and more modernization inside of these department of transportation and larger owners in terms of infrastructure, federal owners, European owners as well.

All of that will continue to build out in a way very similar to what you described in terms of entering into construction. It's a longer-term play. It will take time. So it's still early innings in all of these things. But you can see increasing activity specifications coming out more and more within the Department of Transportation community and a desire to modernize the stacks.

And that's a big push right now. A lot of these DOTs they're stuck in a different era of software and solutions, and they're looking to modernize and this isn't just true in the U.S. It's also true in Europe. We're engaging in more and more discussions with countries in the European Union about some of the BIM standards they're trying to drive into their infrastructure projects. And that's going to have a compounding effect on how people want to engage with different kinds of solutions in the infrastructure space, but still early journey.

[Joseph Vruwink, Robert W Baird]

Yes, great. That's helpful. And then, just on the 10% to 15% growth parameter, I guess, as I think about the backdrop in fiscal 2024, I wouldn't label it as easy. And yet the guidance, I think, calls for something closer to 12% organic. So I guess the question is what happens incrementally in kind of a planning scenario relative to a challenging backdrop in 2024, where 10% type growth becomes a plausible outcome?

[Andrew Anagnost, CEO]

Yes. So look, first off, let's comment about how resilient our business is and how we demonstrate that resilience over the last few years. We believe we've put everything in the right kind of scope, and we've aligned things pretty carefully. If we saw an environment where we saw downward pressure on our margin expectations for the year, we have levers within the company that we can pull that has nothing to do with layoffs or any of the things you're seeing in the rest of the tech sector that we could pull to ensure that we hit those targets. So we feel pretty confident about what we've laid out and how we could hit it even if there were changes in the economic environment.

Debbie, do you want to add some commentary?

[Debbie Clifford, CFO]

Yes, sure. A couple of things I would say. First, overall, I mean, we're watching the macro backdrop closely, and I said that it was broadly unchanged. Europe was a bit better or U.S., a bit worse. Asia, about the same. So overall, on the whole, the demand environment was broadly similar. We've reflected all of that into our guidance. The leading indicators remain strong.

And another way to think about it would be that if you look at revenue, the implied growth rate in Q4 of our fiscal '23 is 9%. If you extend that into fiscal '24 at another point of currency headwind, you're squarely at the guidance midpoint for fiscal '24. So we're kind of already at that rate. And we feel comfortable with the guidance that we've set.

[Joseph Vruwink, Robert W Baird]

Great. Thank you very much.

[Operator]

Our next question comes from the line of Michael Funk of Bank of America. Your question please, Michael

[Michael Funk, Bank of America Merrill Lynch]

Yes. Thank you for questions today. A couple if I could. So First, the noncompliant transition during the quarter was greater than we expected, a very strong rate. Just curious to kind of change in push versus pull strategy there? And then how additive type of growth that might be in fiscal '24 and beyond?

[Andrew Anagnost, CEO]

Yes. So there's no change in our approach to non-compliance, right? As I've said in many times, and I want to keep reinforcing, we continue to develop efficiencies. We continue to be able to identify to higher precision, who is actually non-compliant and who actually isn't and we're building up a steady base of business as we move forward. But we're not looking to accelerate it or push it harder or drive it in any particular direction.

We're just allowing it to be kind of a steady incremental growth engine within our business and kind of continue to deliver year after year after year. And that will continue to be our strategy. One, we think it's the right thing to do for the company, the right thing to do for our customers. It gives our customers time to get themselves compliant because just the fact that we're out there engaged in compliance activity encourages people to ask themselves if they should be compliant there's other business levers here. And the more carefully we do this and the more incrementally, we do this, the better the outcome is for the entire ecosystem.

So no real change in how we're approaching that.

[Michael Funk, Bank of America Merrill Lynch]

And then Debbie, you mentioned that the inflationary environment might affect how customers think about the shift for multiyear to annual. Just curious if the rising rate environment affects how you think about that shift from upfront payment for multiyear to annual bill. Does it change the math for you?

[Debbie Clifford, CFO]

It doesn't in any meaningful way, as I said. It's really a win-win for us because with annual contracts, we get an opportunity to engage with our customers upon renewal to drive upsell and make sure that there is adoption. Obviously, with a price lock and our customers signing on the multiyear contracts, we have a 100% renewal rate in any given period, but there's less of that opportunity to engage. So from our standpoint, it's a win-win.

[Michael Funk, Bank of America Merrill Lynch]

Great. Thank you, both.

[Operator]

Our next question comes from the line of Matt Hedberg of RBC Capital Markets. Please go ahead, Matt.

[Matthew Hedberg, RBC Capital Markets]

Great. Thanks for taking my questions. Andrew, kind of a high-level one for you. You guys have been focused on generative design for a while now. And with all the news on AI recently, I'm wondering if you can kind of give us your perspective on how Autodesk plans to leverage AI and sort of the impact on design?

[Andrew Anagnost, CEO]

Yes. So ChatGPT has obviously given a massive amount of validation to the potential of AI. It is a particular horizontal solution, and we intend to leverage that horizontal solution in some of our solutions. In fact, you're probably aware that Microsoft and Satya Nadela himself demoed a natural language processing tool for generating manuscripts for both direct to my and for Fios, and it works fabulously, right? These are things that provide real leverage to our customers.

However, one of the things I really want you to be aware of, Matt, is that the real vertical value comes when we start training on data that is directly used by our customers to do particular things or design or build something. And that comes at the user productivity level, the company productivity level and the ecosystem productivity level. And that's going to unlock a lot of potential as we develop things that cut across all of what our customers can do like generative design, by the way, but probably heading in even other directions.

And that's going to take time to develop. It's going to take opportunities for us to engage with customers in terms of using some of their data. But I want you to pay attention to that long-term horizon on doing real training on customer data, which will be where the revolution comes from.

[Matthew Hedberg, RBC Capital Markets]

Got it. Got it. And then Debbie, sort of the question that I think a lot us are getting on from folks is the levels of conservatism in the guide? And I'm sure it's based on what you see today is how you're sort of building the forecast. But maybe just a little bit more granularity on how you're thinking about sales productivity, pipeline discount rates? Anything that sort of like provide a little bit more color there?

[Debbie Clifford, CFO]

Thanks, Matt. Look, I'd say that I don't have much to add versus what I've said already. The macro is broadly unchanged. Those leading indicators remain strong. Our business is going to grow faster and better environments and somewhat lower and worse environment. Our goal is to set ourselves up for success in fiscal '24 and for the long term.

[Matthew Hedberg, RBC Capital Markets]

Thank you.

[Operator]

Our next question comes from the line of Jason Celino of KeyBanc Capital. Please go ahead, Jason.

[Jason Celino, KeyBanc Capital]

Great. Thanks. Can you hear me. So actually, one question on the quarter. So it sounds like there was -- well, I guess, did you see strength in the business at the end of January? I'm just trying to understand how business was after that multiyear discount went away at the beginning of the month.

[Debbie Clifford, CFO]

Yes, the linearity of our business was not dissimilar to what we've seen in previous periods.

[Jason Celino, KeyBanc Capital]

Perfect. And then on the free cash flow commentary you gave, the 30% to 35% margin. That was for 2026 period, the period of '23 to '26. And does that include the headwinds you talked about, including the FX, the cash taxes, et cetera?

[Debbie Clifford, CFO]

So what I said was we have target planning parameters of 10% to 15% revenue growth and 30% to 35% free cash flow margin, all in pursuit of our goal of achieving a rule of 45-plus ratio over time. It's not time specific. If you look at our guidance for fiscal '24, that's at the trough of the transition for multiyear to annual billings, we'd be in the low 30s. And what we're saying is that we're going to go from the low 30s as we normalize over time towards our goal of achieving that 45% plus and that we intend to make meaningful progress against achieving that goal regardless of the macroeconomic backdrop.

[Jason Celino, KeyBanc Capital]

Perfect. No, that's very helpful. And I guess we'll learn more at the Analyst Day in a couple of weeks. Thanks.

[Operator]

Our next question comes from the line of Steve Tusa of JPMorgan. Your line is open, Steve.

[Sam Yellen, JPMorgan]

Hi, it's Sam Yellen on for Steve Tusa. So in terms of the free cash flow bridge for next year, I know you guys have the deferred revenue and cash taxes. But is there anything else moving around maybe in working capital that we should considering the bridge?

[Debbie Clifford, CFO]

If you look at -- yes, if you look at Slide 8 of the deck that we put on our website is the move from multiyear upfront annual billings is the lower cohort. We have a lower cohort of multiyear contracts that come up for renewal, just cyclically in fiscal '24. It's FX movements and it's cash taxes. Those are the 4 drivers of the decline.

[Sam Yellen, JPMorgan]

Got it. Thanks. And then in terms of the high single-digit revenue guidance for next year, how much of that is driven by price?

[Debbie Clifford, CFO]

We're not going to get into that level of specificity, I would say. I mean, as I mentioned when Jay was asking the question earlier, we kind of look at it as our goal be to drive a mix of volume and price mix, partner margin type contributions to growth. And so you can loosely consider that, that would be how we're thinking about it as we look at growth next year, too.

[Sam Yellen, JPMorgan]

Thank you.

[Operator]

Our next question comes from the line of Sterling Auty of SVB MoffetNathanson. Your question please, sir.

[Sterling Auty]

Thanks guys. Just one question from my side. Can you guys help me understand which end market segments, manufacturing versus architecture, et cetera, are you seeing the biggest cyclical impact today? And what did you factor in on those trends into the guidance? Thank you.

[Andrew Anagnost, CEO]

Look, it's a hard question to answer because all of those segments are growing, all right? And the new business is growing in all those segments. So it's a nuanced question. One thing I will say is there's a different character of pushback from each one of those segments in terms of what they're seeing.

What we're seeing in manufacturing is my costs are going up, my costs are going up and the costs are going up, right? And that is impacting their ability to deliver, frankly, on some impact on demand because they can't pass it all to the customers. They have trouble kind of fulfilling the demand with the cost factor.

So I would say right now, the inflationary environment is putting more pressure on our manufacturing customers than it is on our ADC customers. So that's just one piece of color.

In the AEC space, obviously, the material costs are a big issue for them. But they are continuing to struggle with labor shortages, capacity problems, the ability to kind of clear out the book of business, which is great because there's an overhang there's an overhang of business for them right now, and there still is.

And that's true in manufacturing, too. There's still an overhang of delivery that has to happen. I'm still waiting for a part from my repaired car and it's maybe my cars bus has been months, can't get the part. All right. There's plenty of capacity challenges there as well.

But in AEC, generally, there's still a backlog of book of business, labor shortages, capacity within some of these institute companies and construction firms, architecture firms, is getting in the way. So I hear capacity problems much more in the AEC segment which, by the way, is going to continue into time. Eventually, the capacity will clear out. And I hear inflationary pressures much more from our manufacturing customers. M&A, they don't care, it's all digital anyway. People are watching more and they're happy.

[Sterling Auty]

Thank you.

[Operator]

Our next question comes from the line of Steve Koenig of SMBC Nikko America. Your question please, Steve.

[Steven Koenig, SMBC Nikko Securities America]

Great. Thank you. Hey Andrew, hey Debbie. Thanks for taking my questions. I want to build just a little bit more on Sterling's question here. I'm wondering, can you remind us in AEC, if you look across upstream and downstream. What's your kind of complexion related to commercial versus industrial versus residential design and construction?

And then I'm really curious, given those interesting comments you just had, Andrew, about how you're seeing demand and capacity problems in that segment. What did you see in '08 when kind of the AEC activity slowed down? Was it more intense in one of those kind of sub-segments? And how do you think about how that could unfold over time? Is that as those capacity is just clear out and interest rates could begin to affect that sector broadly?

[Andrew Anagnost, CEO]

Yes. So that was a multilayer question. And now I have to remember the first part of the question, which was related to -- remind me about what your part A was?

[Steven Koenig, SMBC Nikko Securities America]

Yes. Sorry, it was a little long winded. The complexion of your AEC.

[Andrew Anagnost, CEO]

Yes. Okay. So this is the -- always the question about which parts of the AEC ecosystem are we sensitive to. And here's the thing, and I always answer the question this way. The dollars always go somewhere, all right? So people were very concerned about 1.5 years ago, I was getting lots of questions about what's your exposure to commercial real estate, commercial real estate is going to slow down what happened in commercial real estate?

It moved a retrofit and reconfigure all right? And a lot of commercial real estate spend is in is going on in retrofit and reconfigure. A lot of architecture firms are completely involved in that. And also, it's moved to multifamily residential and things associated with that due to other pressures inside the economy and inside municipalities.

So the money shifts around all the time, right? And in terms of which segment is getting lit up. So we're not seeing any particular exposure in terms of slowdown to any particular segment because of the way this activity shifts, all right? And it's just one -- it's one of the interesting things about the ecosystem. There's always something that wasn't getting built or worked on that starts to get built or worked on when something else is out of the way, it's out of the queue, all right? And the commercial office of space is somewhat out of the queue and other things are moving into the queue and getting more attention.

Now with regards to '08, it was a very different type of situation. If you recall what we thought in '08 was a massive slowdown at the low end of our business. And a matter of fact, it was a precipitous slowdown in the low end of our business with smaller firms not being able to get enough work.

We don't see anything on the horizon that looks like that because of the backlog of business that's out there right now, there's just more people wanting to get things done than there is capacity to get the thing done in the ecosystem.

So it's a very different situation where there was a kind of like the valve is shut off. There was no backlog, which to bleed through. Now we're in a world where we've got a lot of project backlog, a lot of pent-up demand, and it's just not the same situation that you saw in '08. It was very different world. And we're a very different company.

[Steven Koenig, SMBC Nikko Securities America]

Yes, for sure. That’s helpful. I really appreciate the color. Thanks so much.

[Operator]

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?

[Simon Mays-Smith, VP, IR]

Thanks, everyone. Sorry about that, having trouble finding my button. Looking forward to seeing you all the Investor Day in just in a month's time. If you have any questions, please e-mail me at [e-mail]. Look forward to catching up again soon. Bye-bye.

[Operator]

And this concludes today's conference call. Thank you for participating. You may now disconnect.