Elizabeth (Betsy) Rafael
Interim Chief Financial Officer and Board Director at Autodesk
Thanks, Andrew. Q2 was a strong quarter. We generated broad-based growth across products and regions in AEC and manufacturing, which was partly offset by softness in media and entertainment, primarily due to the lingering effect of the Hollywood strike. Our Make business continues to enhance growth driven by ongoing strength in construction and Fusion. Overall, overall, macroeconomic, policy and geopolitical challenges and the underlying momentum of the business were consistent with the last few quarters and included strong renewal rates, but softer business -- new business in China and Korea. The new transaction model did not make a material contribution to our second quarter results.
In his opening remarks, Andrew discussed the benefits we expect to derive from our go-to-market initiatives, which support our growth and ongoing margin improvement. Before I discuss revenue, billings, deferred revenue, RPO, and free cash flow, let me remind you of how these metrics naturally and mechanically evolve during the shift to annual billings for most multi-year contracts as well as the new transaction model.
The shift to annual billings for most multi-year contracts moves billed deferred revenue into unbilled deferred revenue in our financial reporting. Unbilled deferred revenue would then not be included in deferred revenue on our balance sheet, but would be included in our remaining performance obligations disclosure. Initially, this reduces billing, deferred revenue, and free cash flow as you saw in fiscal '24, but is gradually becoming a tailwind to billings and free cash flow as our annually billed multi-year cohorts rebuild. Metrics that include unbilled deferred revenue, like RPO, give a better view of performance during our transition to annual billings for most multi-year contracts. And as we have said before, we will continue to offer multi-year contracts billed upfront in certain circumstances, such as in emerging countries where there is increased credit risk if not received upfront, on the Autodesk doors until we enable system changes to offer annual billing, and of course on an exception basis when it is driven by customer preference, such as for our non-cloud-enabled offerings. Just to give you some context on scale, multi-year contract billed upfront incrementally contributed less than 5% of total billings in the second quarter.
The new transaction model also has mechanical and timing impacts on billings, deferred revenue, revenue, and operating cost. The amount of impact is determined by the pace of the model rollout. In addition, channel partner and customer behavior can also impact the results. The mechanical impact is due to the way channel partner payments are recognized and accounted for in the P&L. Under the old or the buy-sell model, channel partner payments are deducted from gross billings and revenue. We then report net billings and net revenue.
Conversely, in the new transaction model, we record channel partner payments in sales and marketing expense. So as we shift from the old model to the new, there is an increase in billings, deferred revenue, revenue, and sales and marketing expense. That increase in revenue and operating costs, resulting from the change in the way that channel partner payments are recognized and accounting for, flows ratably through revenue and cost in the P&L over time. And the overall pace of that transition is determined by when we launch the new transaction model into each geography. In the short term, moving the P&L geography and channel partner payments from contract revenue to sales and marketing expense creates a headwind to the operating margin percentage, but it's really broadly neutral to operating profit and free cash flow dollars. 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 and deliver GAAP margins among the best in the industry on mechanically higher revenue and despite mechanically higher costs.
Channel partner and customer behavior during the rollout of the new transaction model are much harder to predict and model. For example, with channel partners better prepared ahead of launch, more customers in North America and Australia co-termed their contract expirations to align the timing of renewals across their business. This had a negative impact on the timing of billings and deferred revenue. And as we've seen many times before, co-termed contracts actually create an opportunity for larger contracts on renewal as we elevate our relationship with customers from subsidiaries to company-wide.
Along with more self-service functionality, it also enabled us to reduce administrative costs and serve our customers more efficiently. While activity in the second-quarter was probably more tactical in nature, co-terming is one of the expected benefits of the new transaction model and will be one of the drivers of our margin momentum over the coming years. As I'll discuss, this creates timing headwinds, but is not a change in the underlying momentum of the business. We'll give you much more details about the impact of the new transaction model on fiscal '25 results and the expected impact on fiscal '26 when we report our full year results next February.
So now let's move on to the results. Total revenue grew 12% and 13% in constant currency. By product in constant currency, AutoCAD and AutoCAD LT revenue grew 8%, AEC revenue grew 15%, manufacturing revenue grew 17% and in the low-teens excluding upfront revenue. M&E grew 5%. Revenue grew 13% in all regions on a constant currency basis. Direct revenue increased 21% and represented 40% of total revenue, up 3 percentage points from last year, benefiting from strong growth in both EBA and the Autodesk doors.
Net revenue retention rate remained within the 100% to 110% range at constant exchange rate. Billings increased 13% in the quarter, reflecting a modest tailwind from the prior-year shift to annual billings for most multi-year contracts, and a mechanical tailwind of approximately 2% from the transition to the new transaction models. Billings were also negatively impacted by more co-termings. Total deferred revenue decreased 13% to $3.7 billion and was again impacted by the transition from upfront to annual billings for multi-year contracts. Total RPO of $5.9 billion and current RPO of $3.9 billion grew 12% and 11%, respectively.
Turning to margins. GAAP and non-GAAP gross margins were broadly leveled, while GAAP and non-GAAP operating margins increased by 4 percentage points and 1 percentage points, respectively. At current course and speed, the ratio of stock-based compensation as a percentage of revenue, which peaked in fiscal '24, will fall by more than 1 percentage point in fiscal '25 and will be below 10% over time. Free cash flow for the quarter was $203 million. As we said, might happen back in February, some channel partners in North America booked business earlier in the quarter ahead of the transition to the new transaction model to de-risk month one after the transition. This accelerated free cash flow to the second quarter, which was partially offset by the negative impact of more co-termings.
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. During the second quarter, we purchased approximately 471,000 shares for $115 million, which is an average price of approximately $245 per share. We do expect the pace of buybacks to pick up during the second half of the year as we had very minimal purchases in the first half. We will also continue to deploy capital to offset dilution into fiscal '26 as our free cash flow grows from the fiscal '24 trough generated by the transition from upfront to annual billings, again, for most multi-year contracts. We will continue to buy forward dilution, which we expect to result in a further reduction in shares outstanding over time, continuing the capital return trends of the last few years. We have reduced our share count by about 5 million shares over the last three years with an average percentage reduction of about 70 basis points per year.
Now let me finish with guidance. As we said in February, the pace of the rollout of the new transaction will create noise in billings and the P&L. So we think free cash flow is the best measure of our performance. Taking out that noise, the underlying momentum in the business remains consistent with the expectations embedded in our guidance range for the full year. Our sustained momentum in the second quarter and the smooth launch of the new transaction model in North America reduced the likelihood of our more cautious forecast scenarios. Given that, we're raising the midpoint of our billings, revenue, earnings per share, and free cash flow guidance ranges.
Let me give you a little bit more detail. The underlying momentum of billings is in line with our expectations, but two of our modeling assumptions have changed. First, the new transaction model is expected to launch in Western Europe in September rather than in early fiscal '26, which was our modeling assumption at the start of fiscal '25. This is a tailwind to our reported billings. Second, more customers have co-termed contracts in North America than we modeled, and we've assumed the same thing will happen in Western Europe. This timing effect is a headwind to reported billings in fiscal '25. The net effect of the is a 5-percentage point to 6-percentage point tailwind to billings from the new transaction model in fiscal '25, which includes a 3-percentage point to 4-percentage point tailwind from North America specifically. We've raised our fiscal '25 billings guidance to a range between $5.88 billion and $5.98 billion.
The underlying momentum of revenue is also in line with our expectations. The $40 million increase to the top end of revenue guidance reflects the expected launch of the new transaction model in Western Europe in September as well as acquisitions and think about those in roughly equal measures. The $90 million increase to the bottom end of the guidance range includes that $40 million with the remainder of the underlying increase due to the reduced likelihood of our more cautious forecast scenarios. At the midpoint, we are increasing revenue guidance by $65 million, or $25 million excluding the impact of acquisitions and the new transaction model. Our fiscal '25 guidance range is now between $6.08 billion and $6.13 billion, translating into revenue growth of around 11% at the midpoint when compared to fiscal core, and includes 1 percentage points to 1.5 percentage points from the new transaction model.
Underlying margins are slightly better than our previous guidance, and that enables us to offer -- offset higher expected cost from the earlier launch of the new transaction model in Western Europe. While we still expect non-GAAP operating margins between the range of 35% and 36% in fiscal '25, that now includes a 1-point to 1.5-point underlying margin improvement that is broadly offset by the margin headwinds from the new transaction model and the incremental investment in people, processes, and automation.
The underlying momentum of free cash flow is in line with our expectations as well. The headwind to billings from co-terming that I mentioned earlier is largely being offset by faster collections and improved underlying margins. We've raised the lower end of our fiscal '25 free cash flow guidance, resulting in a range between $1.45 billion and $1.5 billion. We expect strong free cash flow growth in fiscal '26 because of the return of our largest multi-year renewal cohort, the natural mechanical stacking of multi-year contracts billed annually, and a larger overall EBA cohort. With our current trajectory, we still estimate free cash flow in fiscal '26 to be around $2.05 billion at the midpoint.
While the transition to annual billings for multi-year contracts and the deployment of the new transaction model creates noise and billings in the P&L, they do provide a natural tailwind to revenue and free cash flow over the next few years. Combined with a resilient business model and sustained competitive momentum, Autodesk has enviable sources of visibility and certainty given the context of significant macroeconomic, geopolitical, policy, health, and climate uncertainty. 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 toward 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 both Q3 and full fiscal year '25.
Andrew, back to you.
