Andrew Anagnost
President and Chief Executive Officer, Board Director at Autodesk
Thank you, Simon, and welcome, everyone, to the call. As I'm sure you can appreciate with legal matters like this, I'm restricted in what I can say regarding the Audit Committee investigation but let me say what I can. The summary findings of the Audit Committee investigation are in our May 31 press release and recently filed Form 10-K. Please refer to those documents for details. We don't have further commentary beyond what we have described there.
Regarding the process, we also covered that in detail in our press release. The investigation took time to complete because it was rigorous and covered all three years included in the 10-K. Betsy Rafael has been appointed by the Board as Interim Chief Financial Officer. We have initiated the selection process for a new Chief Financial Officer. The Board and I are very focused on finding the right candidate. In the interim, we are in great hands with Betsy, and Debbie will continue to contribute to the business in her new capacity as Chief Strategy Officer.
With the conclusion of the investigation, we have determined that there will be no restatement or adjustment of any audited or unaudited filed or previously announced GAAP or non-GAAP financial statements. And we'll discuss in more detail shortly, we are already underway in the transition to annual billing with the trough in free cash flow behind us.
The mechanical stacking of multiyear contracts, a larger enterprise cohort and our largest product subscription cohort will provide a tailwind to free cash flow in fiscal '26. We appreciate your patience as we work through this important process. We take situations like this very seriously and are grateful to put the investigation behind us.
Now let's move on to our strong first quarter results. Autodesk's resilience, discipline and opportunity again underpinned our robust financial and competitive performance. Our resilience is fortified by our subscription business model and our diversified product and customer portfolio. Renewal rates remain solid and the momentum of new business growth and key performance indicators are consistent with the previous quarter, evidenced by increased product usage, record bid activity on BuildingConnected and cautious optimism from our channel partners. Our disciplined and focused approach in executing our strategy and deploying capital throughout the economic cycle empowers Autodesk to realize the significant benefits of its strategy while mitigating the risk of expensive catch-up investments in the future.
As our customers migrate to our industry cloud and utilize our high-value AI products and services, our investments in the cloud will continue to grow. At the same time, the new transaction model will allow us to optimize our sales and marketing and we expect Autodesk platform services will, over time, boost the velocity and efficiency of our R&D. By optimizing the allocation of our resources, we can invest to compound revenue growth and market share gains while also driving margin improvement and free cash flow growth over time. Reductions in stock-based compensation, as a proportion of revenue, will provide an additional tailwind to GAAP margins, while our transition to annual billings from multiyear contracts will amplify free cash flow growth over the next few years.
We believe that constant resource optimization and our long-term investment horizon has positioned us ahead of our peers in cloud, platform and AI. We intend to retain and extend that lead while also driving to an industry-leading rule of 40 ratio of 45 or more. Our Project Bernini announcement on May 8 is a great example of what I mean. Bernini uses Generative AI to quickly generate functional 3D shapes from a variety of inputs, including 2D images, text, voxels and point cloud. Bernini is different from other AI models in five important ways.
First, Bernini is trained on 3D data rather than commoditized external imagery and it's, therefore, capable of reasoning on the internal structure of an object.
Second, Bernini generates shape and texture separately and does not confuse or meld those variables.
Third, Bernini can be conditioned on multiple types of input data and is, therefore, applicable across a much greater spectrum of workflow.
Fourth, Bernini generates many design options from a single set of inputs, which better serves the creative process of designers.
And fifth, Bernini can be quickly and cost effectively fine-tuned on a customer's existing 3D repositories to align to the unique creative needs of a particular organization.
Autodesk AI will enable Autodesk its customers and partners to create more valuable, data-driven and connected products and services. It will automate low-value and repetitive tasks and generate more high-value complex design more rapidly and with greater consistency. Over time, Autodesk platform services will enable greater engineering velocity and efficiency and support a much broader developer ecosystem and marketplace. Autodesk is ahead of its peers in 3D AI and industry cloud, platform and business model evolution that will be needed to deliver 3D AI products and services at scale. We are well on the way to reasoning about all CAD geometry. We will update you as we make further progress.
Let's move on to our quarterly financial performance and guidance for the second quarter and the full year. Q1 was a strong quarter. We generated broad-based growth across products and regions in AEC and Manufacturing, which was partly offset by softness in China and in Media and Entertainment, the latter being primarily due to the lingering effects of the Hollywood strike. Overall, macroeconomic policy and geopolitical challenges and the underlying momentum of the business were consistent with the last few quarters. If we compare first quarter revenue with guidance, the outperformance was mainly due to that broad strength with the timing of price increases also improving revenue linearity during the quarter. The impact of the new transaction model was immaterial in the first quarter.
Total revenue grew 12% and 13% in constant currency. By product in constant currency, AutoCAD and AutoCAD LT revenue grew 10%. AEC revenue grew 17%. Manufacturing revenue grew 11% and M&E grew 3%. By region in constant currency, revenue grew 12% in the Americas, 14% in EMEA and 14% in APAC. Direct revenue increased 20% and represented 38% of total revenue, up 3 percentage points from last year, benefiting from strong growth in both EBAs and the Autodesk store. Net revenue retention rate remained within the 100 to 110 percentage range at constant exchange rates.
As expected, billings declined 5% in the quarter as a result of the transition from upfront to annual billings for multiyear contracts. For the same reason, total deferred revenue decreased 12% to $4 billion, total RPO of $5.9 billion and current RPO of $3.9 billion grew 9% and 12%, respectively, which continued to benefit from the EBA strength we saw in the second half of fiscal '24 and current RPO also benefited by about 1 point from early renewals.
Turning to our P&L. GAAP and non-GAAP gross margin were broadly level while GAAP and non-GAAP operating margin increased by 4 and 3 percentage points, respectively, in part reflecting the absence of costs we incurred last year to repurpose roles. At current course and speed, the ratio of stock-based compensation as a percent of revenue peaked in fiscal '24 will fall by more than a percentage point in fiscal '25 and will be below 10% over time. Free cash flow for the quarter was $487 million, driven by collections of prior quarter billings and strong results in the current quarter.
Turning to capital allocation. We continue to actively manage capital within our framework and deploy it with discipline and focus through the economic cycle to drive long-term shareholder value. In the quarter, we acquired Payapps and PIX for a total of $653 million, which with late filing of our Form 10-K, meant we only purchased approximately 30,000 shares for $9 million at an average price of approximately $255 per share during the quarter. We will continue to repurpose shares opportunistically to offset dilution from stock-based compensation when it makes sense to do so.
Moving on to guidance. Overall, end market demand has remained pretty consistent over many quarters. Macroeconomic and one-off factors like the Hollywood strike have dragged on new business growth and continue to drag on revenue growth. But Autodesk's resilience and robust underlying demand for its products and services reinforce its long-term growth momentum and potential. With regards to revenue guidance, we highlighted some puts and takes last quarter that impacts fiscal '25 revenue growth and refer you back to our comments then. The new transaction model implementation is on track. Australia and New Zealand are performing in line with our expectations. North America went live yesterday.
As we said last quarter, our fiscal '25 guidance assumes the new transaction model is deployed in North America and provides about a 1 percentage point tailwind to Autodesk's revenue growth and a 3% to 4% tailwind to billings growth. Once the North America launch is successfully underway, we will likely start communicating our plans to channel partners and customers in parts of EMEA and Japan. We modeled various possible scenarios at the start of the year, reflecting different potential launch dates channel partner behavior ahead of launch, the mechanics of the transition and a host of other factors, and we are executing within our model scenarios.
Longer term, we remain excited by the benefits of this more direct relationship with our customers and partners offer, an ability to understand and serve them, enrich by data with more automation and self-service and greater predictability. Our fiscal revenue guidance between $5.99 billion and $6.09 billion is unchanged and still translates into revenue growth of about 9% to 11% compared to fiscal '24. Our strong start sets us up well to achieve our goals for the year.
Moving on to margins. We still expect non-GAAP operating margins between the range of 35% and 36% in fiscal '25 and roughly level with fiscal '24. This includes a roughly 1 point underlying margin improvement we expect will be broadly offset by the margin headwinds from the new transaction model. As a reminder, as we transition to the new transaction model, we'll see operating margin headwinds from the accounting change of moving reseller costs from contra revenue to sales and marketing expense. We'll also have incremental investment in people, processes and automation. But over the long term, we expect that this transition to the new transaction model will enable us to further optimize our business, which we anticipate will provide a tailwind to revenue, operating income and free cash flow dollars, even after the incremental cost we expect to incur.
Moving on to free cash flow. We still expect to generate between $1.43 billion and $1.5 billion of free cash flow in fiscal '25. Excluding $200 million from fiscal '24 free cash flow from multiyear upfront billings, which are now billed annually, in fiscal '25, we expect free cash flow growth of about 35% at the midpoint of our guidance. We expect faster free cash flow growth in fiscal '26 because of the return of our largest multiyear renewal cohort, the mechanical stacking of multiyear contracts billed annually and a larger EBA cohort. As discussed last quarter, the transition and rollout will create noise in the P&L, making free cash flow the best measure of our performance.
With our current trajectory, we estimate free cash flow in fiscal '26 to be around $2.05 billion at the midpoint. In the context of significant macroeconomic, geopolitical, policy, health and climate uncertainty, the mechanical rebuilding of our free cash flow as we transition to annual billings for multiyear contracts gives Autodesk an enviable source of visibility and certainty. We continue to manage our business using a rule of 40 framework with a goal of reaching 45% or more over time. We are taking significant steps towards our goal this year and next. We think this balance between compounding revenue 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. The slide deck on our website has more details on modeling assumptions for Q2 and full year fiscal '25.
Let me finish by updating you on our strong progress in the first quarter. We continue to see good momentum in AEC particularly in infrastructure and construction, fueled by customers consolidating onto our solutions to connect and optimize previously siloed workflows through the cloud. The cornerstone of that growing interest is our comprehensive end-to-end solution encompassing design, preconstruction, field execution through handover and into operation.
This breadth of connected capability enables us to extend our footprint further into infrastructure and construction and also expand our reach into the mid-market. As a sign of that growing momentum, our construction business had one of its best net new customer quarters. Let me give you a few examples. BL Harbert International provides design-build construction management and general contracting services to national and international clients. It leverages advanced technology to maintain its most crucial customer and partner relationships and enhance its in-house capabilities.
We have built a trusted partnership with the company over many years and share its integrated platform vision for the industry. In the first quarter, it decided to standardize on Autodesk Construction Cloud across all regions for its design, build process, signing its first EBA and increasing its investment in Autodesk.
Meriton designs, develops and builds residential apartment towers and is the largest residential apartment developer in Australia. After a competitive process, it chose Autodesk to replace six-point solutions and unify its operations from design through to maintenance and asset management. This comprehensive solution will enable Meriton to have one common data environment, streamline its workflows and have access to real-time insights. State Window Corporation offers complete design, engineering, manufacturing and installation of custom window wall systems. It is standardizing on Autodesk AEC and Manufacturing products so that it can effectively manage inventory levels, improve cash flow and reduce waste caused by silo data and disconnected workflows.
Leveraging Revit for 3D design, our manufacturing collection for PDM and PLM and Autodesk build for installation, State Windows will have an end-to-end solution, connecting data and workflow across design, manufacture and build. Again, these stories are common theme. Managing people, processes and data, across the project life cycle to increase efficiency and sustainability while decreasing risk. Over time, we expect the majority of all projects to be managed this way, and we remain focused on enabling that transition through our industry cloud.
Moving on to manufacturing. We made excellent progress on our strategic initiatives. Customers continue to invest in their digital transformations and consolidate our Design and Make platform for both products and factories to grow their business and make it more resilient. A multi-format packing solutions manufacturer in Europe had been leveraging our advanced manufacturing portfolio, including Inventor and Vault for its machine design and product data management.
In the first quarter, it expanded its partnership with Autodesk to include factory design, which digitizes complete factory layout to reduce the potential for delays in rework during the delivery process. As an existing FlexSim customer for factory simulation, the manufacturer will now have a comprehensive connected end-to-end solution that helps increase efficiency, throughput and quality. A major multiproduct maintenance, repair and overhaul, or MRO provider, began using Fusion to convert and visualize 3D models of third-party files.
With those files now in the Fusion ecosystem, it added the Fusion manufacturing extension in the first quarter to leverage Fusion for light repair and part testing. Fusion remains one of the fastest-growing products in the manufacturing industry with double-digit commercial subscriber growth, driven by the growing number of customers who recognize the value of cloud-based workflows and enhancing efficiency, sustainability and resilience within their organization. With over a million monthly active users, a vast amount of contextual data is generated within Fusion.
For example, on average, 33 million new component designs were being produced in Fusion each month over the last 12 months. This data can help us train the next generation of Generative AI products and services. For example, our recently launched strong automation tool in Fusion, which is powered by AI, has generated 2.7 million automatic dimensions since its launch earlier this year.
In education, we are preparing future engineers to drive innovation through next-generation design, analysis and manufacturing solutions. The Katayanagi Institute in Japan is a leading provider of technical education that equips its students with industry-relevant education that helps address the growing skills gap across the design and make industries.
In the first quarter, it made Fusion the standard Design and Make solution for its 5,000-plus students, faculty and affiliated institutions, replacing twin legacy solutions to leverage Fusion AI design and cloud collaboration capabilities. And lastly, we continue to work with our customers to ensure they are using the latest and most secured versions of our software. Through a collaborative process, we helped a large European infrastructure and railway operator achieve compliance, providing visibility into existing usage and by understanding its true needs, delivering a tailored solution that included upgrading to newer versions of our software and the addition of more subscription licenses.
Let me finish with a story. The opening ceremony of the Summer Olympic Games will take place from the banks of the river Seine in Paris on the evening of July 26. Over the following months, many of the approximately 10,500 athletes and 8,000 pair athletes will reside in the Athletes' Village on the Seine-Saint-Denis, a suburb of Paris. This is in part a story about innovative architects, engineers and construction professionals collaborating efficiently and effectively in the cloud, enabled by open file formats and using modularized industrial construction techniques to seamlessly expand AEC and Manufacturing.
It is also a story about embracing complexity, managing wastewater and risk in a sensitive ecosystem of the river Seine and change by minimizing embodied carbon today and creating a built environment that embraces a warmer climate tomorrow. But it's also a story about regeneration and hope. The Seine-Saint-Denis suburb of Paris is one of the poorest in France, with a young, diverse population with higher-than-average unemployment rate. After the games, the village will become a neighborhood with new homes and social housing, offices, neighborhood shops, a student residents and a hotel enveloped within gardens and parkland.
Two years ago, I told you about Autodesk role in the reconstruction of Notre-Dame Cathedral, which will be completed on schedule later this year. I share the Athletes' Village story because I'm reminded again of Autodesk's purpose, to design and make a better world for everyone. That purpose has never been more important or urgent.
Together, we can meet the generational challenges closed by carbon, water and waste. Our essential role in meeting these challenges underpins my confidence this year and my optimism for the future.
Operator, we would now like to open the call up for questions.
