Autodesk, Inc. (NASDAQ:ADSK) Q3 2023 Earnings Conference Call November 22, 2022 5:00 PM ET
Company Participants
Simon Mays-Smith – Vice President, Investor Relations
Andrew Anagnost – Chief Executive Officer
Debbie Clifford – Chief Financial Officer
Conference Call Participants
Saket Kalia – Barclays
Jay Vleeschhouwer – Griffin Securities
Phil Winslow – Credit Suisse
Adam Borg – Stifel
Stephen Tusa – JPMorgan
Michael Funk – Bank of America
Gal Munda – Wolfe Research
Matt Hedberg – RBC
Tyler Radke – Citi
Jason Celino – KeyBanc
Keith Weiss – Morgan Stanley
Operator
Thank you for standing by and welcome to the Autodesk Q3 Fiscal ‘23 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now turn the conference over to your host Mr. Simon Mays-Smith, Vice President, Investor Relations. Please go ahead.
Simon Mays-Smith
Thanks, operator and good afternoon. Thank you for joining our conference call to discuss the third quarter results of our fiscal ‘23. 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 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
Thank you, Simon and welcome everyone to the call. We again reported record third quarter revenue, non-GAAP operating margin and free cash flow. Encouragingly, the business is performing as we’d expect given secular growth tailwinds and macroeconomic, geopolitical policy and COVID-19-related headwinds. Subscription renewal rates remain resilient. Our competitive performance remains strong. Outside of Russia and China, new business growth slightly decelerated in the quarter, most notably in Europe, but overall growth remains good. And we see less demand for multiyear upfront and more demand for annual contracts than we expected. We are hopeful this is a positive signal for our transition next year to annual billings for multiyear contracts.
Overall, our leading indicators are consistent with these trends. Channel partners remain optimistic, but with hints of caution. Usage rates continue to grow modestly in the U.S. and APAC, excluding China, but are flat in Europe, excluding Russia. And bid activity on BuildingConnected remains robust as the industry continues to work through its backlog. We are reinforcing the secular tailwinds to our business by accelerating the convergence of workflows within and between the industries we serve, creating broader and deeper partnerships with existing customers and bringing new customers into our ecosystem.
Our strategy is underpinned by disciplined and focused investments through the economic cycle, which enables Autodesk to remain well invested to realize the significant benefits of its strategy while mitigating the risk of having to make expensive catch-up investments later. In September, we hosted more than 10,000 customers and partners at Autodesk University. There was incredible energy, excitement and optimism for being together in person for the first time in 3 years. There was also palpable momentum behind the digital transformation of the industries we serve. At AU, we announced Fusion, Forma and Flow, our three industry clouds, which will connect data, teams and workflows in the cloud on our trusted platform. By increasing our engineering velocity, moving data from files to the cloud and expanding our third-party ecosystem, they will enable Autodesk to further increase customer value by delivering even greater efficiency and sustainability.
I will now turn the call over to Debbie to take you through our third quarter financial performance and guidance for the fourth quarter and full fiscal year. I’ll then come back to provide an update on our strategic growth initiatives.
Debbie Clifford
Thanks, Andrew. In a more challenging macroeconomic environment, Autodesk performed in line with our expectations in the third quarter, excluding the impact of in-quarter currency movements on revenue. Resilient subscription renewal rates, healthy new business growth and a strong competitive performance were partly offset by geopolitical, macroeconomic, policy and COVID-19-related headwinds, foreign exchange movements and less demand for multiyear upfront and more demand for annual contracts than we expected.
Total revenue grew 14% and 15% at constant exchange rates. By product, AutoCAD and AutoCAD LT revenue grew 10%. AEC and manufacturing revenue both grew 13% and M&E revenue grew 24%, partly driven by upfront revenue growth. By region, revenue grew 17% in the Americas, 10% in EMEA and 14% in APAC. At constant exchange rates, EMEA and APAC grew 12% and 18%, respectively. By channel, direct revenue increased 14%, representing 35% of total revenue, while indirect revenue grew 13%.
Our product subscription renewal rates remain strong, and our net revenue retention rate was comfortably within our 100% to 110% target range. Billings increased 16% to $1.4 billion, reflecting continued solid underlying demand, partly offset by foreign exchange movements and a shift in mix from multiyear upfront to annual contracts versus expectations. Total deferred revenue grew 13% to $3.8 billion. Total RPO of $4.7 billion and current RPO of $3.1 billion grew 11% and 9%, respectively. At constant exchange rates, RPO and current RPO grew approximately 15% and 13%, respectively.
Turning to the P&L, non-GAAP gross margin remained broadly level at 93%, while non-GAAP operating margin increased by 4 percentage points to approximately 36%, reflecting strong revenue growth and ongoing cost discipline. GAAP operating margin increased by 3 percentage points to approximately 20%. We delivered robust third quarter free cash flow of $460 million, up 79% year-over-year reflecting strong revenue growth, margin improvement and a larger multiyear upfront billing cohort.
Turning to capital allocation, we continue to actively manage capital within our framework. As Andrew said, our organic and inorganic investments will remain disciplined and focused through the economic cycle. We will continue to offset dilution from our stock-based compensation program and to accelerate repurchases opportunistically when it makes sense to do so. Year-to-date, we purchased 4.4 million shares for $873 million at an average price of approximately $200 per share, which compared to last year contributed to a reduction in our diluted weighted average shares outstanding by approximately 5 million to 217 million shares. We also announced today that the Board has authorized a further $5 billion for share repurchases. And in December, we plan to retire a $350 million bond when it comes due. Recall that we effectively refinanced this bond last October at historically low rates when we issued our first sustainability bond. And related to that new sustainability bond, we published our first sustainability bond impact report about a month ago, which updates our progress. You can find the report on our Investor Relations website.
Now let me finish with guidance. Andrew gave you a readout on the business and our markets at the beginning of the call. Our renewal business continues to be a highlight, reflecting the ongoing importance of our software in helping our customers achieve their goals. New business growth continues to be relatively stronger in North America with growth in EMEA and APAC outside of Russia and China, slightly decelerating, but overall growth remains good. And we’ve seen less demand for multiyear upfront and more demand for annual contracts than we expected. As we look ahead and as we’ve done in the past, our Q4 and fiscal ‘23 guidance assumes that market conditions remain consistent with what we saw as we exited Q3. The strengthening of the U.S. dollar during the quarter generated slight incremental FX headwinds, reducing full year billings and revenue by approximately $10 million and $5 million, respectively, for the remainder of fiscal ‘23.
Bringing these factors together, the overall headline is that our fiscal ‘23 revenue, margin and earnings per share guidance remained close to the previous midpoint at constant exchange rates and comfortably within our previous guidance ranges. Our lower fiscal ‘23 billings and free cash flow guidance primarily reflects less demand for multiyear upfront and more demand for annual contracts than we expected. We’re narrowing the fiscal ‘23 revenue range to be between $4.99 billion and $5.005 billion. We continue to expect non-GAAP operating margin to be approximately 36%. And we expect free cash flow to be between $1.9 billion and $1.98 billion. The slide deck and updated Excel financials on our website have more details on modeling assumptions for the full year of fiscal ‘23.
The challenges our customers face continue to evolve that reinforce the need for digital transformation, which gives us confidence in our long-term growth potential. We continue to target double-digit revenue growth, non-GAAP operating margins in the 38% to 40% range and double-digit free cash flow growth on a compound annual basis. These metrics are intended to provide a floor to our long-term revenue growth ambitions and a ceiling to our spend growth expectations.
Andrew, back to you.
Andrew Anagnost
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. Fusion, Forma and Flow connect data, teams and workflows in the cloud on our trusted platform, making Autodesk rapidly scalable and extensible into adjacent verticals from architectural and engineering to construction and operations, from product engineering to product data management and product manufacturing. Our platform is also scalable and extensible between verticals with industrialized construction and into new workflows like XR. By accelerating the convergence of workflows within and between the industries we serve, we are also creating broader and deeper partnerships with existing customers and bringing new customers into our ecosystem.
In AEC, our customers continue to digitally transform their workflows to win new business and become more efficient and sustainable. For example, to support the city of Changwon smart city ambitions, the Changwon Architectural Design Institute, which operates across architecture, municipal engineering and city planning is standardizing on AEC collections and developing features to Revit APIs, which automate modeling, drawings and specification inspection. These will leverage the design institute’s expertise in BIM and enable faster and higher quality design, reduce error and waste during construction and build the digital twins for post-construction operation and maintenance. In a challenging market environment, the design institute has been able to win new business and capture new market through digital transformation.
In construction, we are seeking to eliminate waste at the source rather than simply automating the process around it. By seamlessly connecting construction data and workflows both upstream with preconstruction and design and downstream to hand over, operations and maintenance bases to our digital twin, we are enabling a more connected and sustainable way of building. For example, after a leading mechanical contractor in the United States purchased a competitor’s construction management product a few years ago, communication and workflows between the design and field teams were disconnected, resulting in data fragmentation, less insight, more complicated reporting and ultimately low adoption of the process. To resolve these issues, it chose to consolidate all of its design to build workload on the integrated Autodesk platform, turning to Autodesk Build to streamline handoffs between detailing, the fab shop and the field.
Our momentum in construction continues to grow. Across construction, we added almost 1,000 new logos with Autodesk Build’s monthly active users growing more than 60% quarter-over-quarter and becoming Autodesk’s largest construction products. In infrastructure, we see greater appetite from owners to accelerate their digital transformation to connect workflows from designed to make on the Autodesk platform. For example, to transform the speed, efficiency and sustainability of its network, one of the leading electricity network operators in Europe is accelerating its transformation from 2D to BIM and digital twins. In the third quarter, it signed its first EBA with Autodesk, adding Revit and Docs to enable it to upgrade the capacity of its substations and incorporate renewable power generation rapidly and safely. To accelerate maintenance workflows and reduce costs, the customer is in-sourcing the production of maintenance parts and using Fusion 360 as a platform for 3D printing.
Turning to manufacturing, we have sustained good momentum in our manufacturing portfolio this quarter as we connected more workflows from design through to the shop floor, developed more on-ramps to our manufacturing platform and delivered new powerful tools and functionality to Fusion 360 extension. We continue to drive efficiency and sustainability for our customers and provide further resilience and competitiveness in uncertain times. For example, De Nora is an Italian multinational company specializing in electrochemistry and is a leader in sustainable technologies in the industrial green hydrogen production chain. It has been a longtime user of AutoCAD and Revit. Over the last few years, it accelerated its cloud strategy by replacing a competitor’s on-premise PLM solution with an integrated Vault and Fusion 360-managed solutions and improve the security of its data, enables seamless collaboration between product design and manufacturing and more easily onboard and integrate acquisitions.
In Q3, it took another step in its digital transformation by firstly transitioning to named users and adding premium for better usage reporting, insights and single sign on security and secondly, by adding Flex to optimize consumption for its occasional users. Heineken is on a mission to become the best connected brewer as part of its evergreen strategy and is undergoing a digital transformation to ensure is prepared for the unforeseen challenges in an ever-changing world. To help, Autodesk has been supporting Heineken’s 3D printing initiative with an expanded adoption of Fusion 360 across a number of breweries. By designing and manufacturing their own equipment parts in-house, Heineken has been able to see a reduction in the replacement times of a number of parts from over 6 weeks to just 4 hours, significantly reducing downtime and lessening the carbon impact of shipping new parts when necessary.
Scanship AS, a Vow Group company is a great example of how our customers are using our Fusion platform to generate sustainable outcomes efficiently and transparently for customers. It has developed technology that processes waste and purified wastewater providing valuable, sustainable and circular resources and clean energy to a wide range of customers. By consolidating on Fusion 360 managed with Upchain, Scanship AS will be able to connect data and workflows in the cloud to manage processes and collaborate more easily and efficiently, while also gaining greater transparency on its supply chain to deliver decarbonized products to its customers.
Fusion 360’s commercial subscribers grew steadily, ending the quarter with 211,000 subscribers, with demand for extensions continuing to grow at an exceptional pace. Outside of commercial use, a rapidly growing ecosystem of students and hobbyists learning next-generation technology and workflows will take those skills with them into the workforce. We would like to congratulate students from over 57 countries who recently competed in the finals of the WorldSkills competition, aptly referred to as the Olympics for vocational skills. Students used the latest workflows and technologies from Fusion 360 and Autodesk Construction Cloud to compete in vocational disciplines such as mechanical engineering, additive manufacturing and digital construction. Sit Shun Le from Singapore, who won the gold medal for additive manufacturing, used Fusion 360 to find the optimum structure and then minimize the amount of materials used through additive manufacturing. All participants were able to hone their skills using next-generation technology. I am inspired by their ingenuity and optimistic about the innovation they will bring to the workforce of the future.
And finally, we continue to work with customers to provide access to the most current and secure software through our license compliance initiatives. For example, we worked collaboratively with a large multinational manufacturing company seeking to adhere to the same software standards and ensure access to the latest and safest software for all its employees across the globe. We helped customers conduct a self-audit that identifies gaps in its operations in China and then crafted and optimized a bespoked subscription plan. As a result, we agreed to an approximately 5 million contracts in Q3, our largest ever license compliance agreement. During the quarter, we closed eight deals of $500,000 and four deals over $1 million.
To close, subscription renewal rates and net revenue retention continue to compound. New business growth remains good, and our competitive performance remains strong. The business is performing as we’d expect given secular growth tailwinds and macroeconomic, geopolitical, policy and COVID-19 headwind. Our capital allocation will remain disciplined and focused through the cycle with organic investment and acquisitions accelerating our growth potential and competitive intensity and share buyback offsetting dilution. The breadth and depth of the market opportunity ahead of us is substantial, and our platform investments will expand that opportunity and realization of it.
Operator, we would now like to open the call for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Saket Kalia of Barclays. Your line is open.
Saket Kalia
Okay. Great. Hey, Andrew. Hey, Debbie. Thanks for taking my questions here. Debbie, maybe we will start to start with you. I don’t want to put you on the spot here. But I guess just given the evolving macro and some of the other factors that we spoke about, is there anything that you want us to know high level on kind of how you’re thinking about fiscal ‘24 as we maybe fine-tune our models looking out?
Debbie Clifford
Hi, Saket. Hope you are doing great. So we will give formal guidance for fiscal ‘24 in February when we report on next quarter’s results. But here are some things to think about. First, on revenue. At this point, we expect some exogenous headwinds out of the gate. We will have about a 5-point-or-so incremental FX headwind. That’s because of the continued strengthening of the U.S. dollar and then another point of incremental headwind from exiting Russia. That’s going to make it tough for us to grow revenue beyond double digits. On margin, the revenue headwind creates margin growth headwinds, which likely means limited progress on reported margins in fiscal ‘24. Put another way, margins will look better at constant exchange rates.
And then on free cash flow, FactSet consensus right now is a range of $1.2 billion to $1.7 billion. There is a couple of important things to consider. The first is the rate at which our customers transition to annual billings. And the second is the overall macroeconomic environment. We continue to be focused on executing on that transition as fast as possible because while the change is good for us, and it’s good for our customers, from a financial standpoint, we really want the noise behind us. So remember, the faster that we move the multiyear based annual billings, the greater the free cash flow headwind we will see in fiscal ‘24. On macro, we will, as usual, give our fiscal ‘24 guidance based on the macro conditions that we see as we exit fiscal ‘23.
Saket Kalia
Got it. Got it. That makes a lot of sense. Andrew, maybe for my follow-up for you, a lot of helpful commentary just on retention rates and sort of the pace of new business, I was wondering if you could just go one level deeper. And maybe we could just talk about how demand fared through the quarter? Most of the business, as I think we all know, is pretty high velocity. But I’m curious if you saw changing trends in pipeline or close rates or duration preferences towards the end of the quarter versus earlier? Any commentary there would be helpful.
Andrew Anagnost
Yes. Saket, good to hear from you. Alright. Look, Q3 was very much like Q2 and that the quarter was fairly consistent, right? What was different between Q3 and Q2 was the slowing down in Europe taking Russia out. And that was definitely something that was different about the quarters. But that was consistent across the entire quarter. There was no acceleration or change of that as you proceeded across the quarter. Europe was weak throughout the quarter. As were – some of the preferences with regards to multiyear billings, there was no kind of trend of more and more reluctance as you headed further and further down the quarter. So it’s a fairly consistent quarter with regards to all of those things and fairly consistent performance of the business across the quarter. So nothing that fundamentally changed in the quarter. Look, one of the things – another thing that was different about Q3 over Q2 is that we had some currency fluctuations towards the end. And that really is probably the only thing that was different, and those currency fluctuations were responsible for the majority of the small revenue miss.
Saket Kalia
Got it. Very helpful, guys. Thanks a lot for taking my questions here.
Operator
Thank you. Our next question comes from the line of Phil Winslow of Credit Suisse.
[Operator Instructions] Our next question comes from the line of Jay Vleeschhouwer of Griffin Securities. Your line is open.
Jay Vleeschhouwer
Thank you. Good evening. Andrew, for you, first, to follow-up on some comments you made regarding your strategy at AU and then allow a follow-up for Debbie. So at AU, you made some comments with regard to the various clouds that you’ve introduced, and you made an important distinction between the AEC cloud and the manufacturing cloud, namely that manufacturing cloud is more mature. It’s been out in the market perhaps longer. So what is your expectation for the maturity or development of the AEC cloud to get it to where you think it needs to be so it’ll be comparably mature or capable, the way the manufacturing cloud is, the way you described it at AU?
And then for Debbie as a follow-up since the door was open to an FY ‘24 discussion, apart from everything else you’re doing programmatically, could you talk about some of the things that you’re going to be doing with regard to channel compensation in terms of margin structure, comping on annual versus multiyear and all those various things that you’re planning to implement and if those are going to have any effect on your margins and your cash flow?
Andrew Anagnost
Alright, Jay. So I’ll start with regards to the Forma evolution. It’s going to be kind of similar to what happened with Fusion, all right? And I’ll kind of tell it this way. When we started Fusion, we actually anchored Fusion on two things. We started Fusion upfront in the design process. You probably don’t remember the early days of Fusions, Fusion was actually a conceptual design application. It was highly focused on consumer products design and upfront design processes. And we started to bolting onto it the downstream processes close to the [indiscernible] manufacturing, and we started building cloud-based connections between those two and basically filling off the middle between those two bookends of manufacturing and conceptual design. Think of the evolution of Forma is very similar to that, right? The cloud – the Forma cloud is going to start off focusing on the upfront conceptual phases of design, helping architects, planners, developers, all types of people that have to deal with early conceptual decisions about utilization, space utilization, aligning and distributing various aspects of development or an individual building and helping them make some better decisions far upfront in the design. But it’s also going to work to integrate downstream to what we’re doing in Construction Cloud. So Construction Cloud will start getting very close to some of the early bits of what Forma does. And over time, what’s going to happen is Forma and Construction Cloud, Construction Cloud representing the downstream example of manufacturing, all the bits in between are going to be filled out on the same platform, similar to the evolution that we walked through with Fusion. And that will basically bring the entire process to the cloud over time, but continuously adding value to what our customers are doing today throughout the entire development and evolution of that cloud.
Debbie Clifford
And Jay, to your second question, channel compensation, the details, they are still in the works. But ultimately, how we think about engaging with our channel partners, engaging with our customers, how we think about the compensation programs, everything is about delivering value to our customers, driving adoption, driving customer satisfaction. So, examples of some of the things that you’ve seen us do historically are things like moving more front-end incentives to back-end incentives that mandate some kind of adoption metrics, things like that, again, all in service of trying to deliver value. And in terms of the impact on margins, well, we haven’t guided to margins next year, we haven’t guided specifically to anything next year other than some of the breadcrumbs that I just left you guys. But I would say that as we’ve said before, we’re committed to achieving our margin target in that 38% to 40% range in the fiscal ‘23 to ‘26 window.
Jay Vleeschhouwer
Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Phil Winslow of Credit Suisse. Your line is open.
Phil Winslow
Hi, thanks for taking my question. I should have one earlier. But Andrew, a question for you, then a follow-up for Debbie. One of the questions I think is about the cyclicality of the AEC industry. And as you mentioned, the industry entered this year with a backlog from 2020 and frankly, even 2019. But as you pointed out, the macroeconomic environment has obviously deteriorated. So my question is what are you seeing and hearing from this vertical, especially about sort of the go-forward pipeline, as you think about the software that Autodesk sells in the various spaces here, the design, plan, build and maintain? And then I’ll just wait to ask the question to Debbie. Thanks.
Andrew Anagnost
Yes. So first off, one thing continues to pressure the industry more than the demand, and it is the labor shortages and the capacity to execute. Construction companies still have a backlog of business. They are still struggling to execute through the business that they have. I’m sure you saw that some of the leading indicators of architectural buildings have gone or entered into a shrinking territory, which means that architects are going to see some decline in some of their buildings moving forward, but they also still have a backlog of business.
So we’re still seeing customers saying, look, you know what, I have a pretty big pipeline of business that I haven’t executed on a queue of projects, and I still have capacity problems of getting through it. They are labor-related, they are material related, they are execution related. So we still have an overhang of backlog that’s going to continue into next year for a lot of our customers, and that’s what we’re hearing from our customers. That’s not to say they are not seeing pressure, and that’s not to say that they are not seeing some pressure in various segments. But they are still seeing a pretty good book of business for the next 12 to 18 months. Now as things continue, they’ll start to see kind of downward pressure in some of that backlog. But right now, they are all much more concerned about their ability to execute than they are about the book of business that they are accumulating.
Phil Winslow
Awesome. Thanks for that color. And then Debbie, just a follow-up on billings, at the beginning of the year, you talked about long-term deferred revenue, I think, being in the high 20s as a percentage of toll as you exit this year. I wonder if you could give us an update on that. And then in terms of next fiscal year, as you move towards 1-year billings, help us maybe quantify sort of the drawdown of long-term deferred revenue and the impact of that? Because obviously, you flagged the sell-side range right now of $1.2 billion to $1.7 billion, but obviously, that’s pretty broad. So maybe some color on the impact of long-term deferred next year would be helpful, too. Thanks.
Debbie Clifford
Yes. So overall, our messaging in these two areas hasn’t changed. So we were talking about long-term deferred as a percent of total deferred in that 20s range, and it’s going to continue to be there. The impact of our guidance adjustment for billings, a little over $100 million on a $5 billion number is not significant. And so we’re not anticipating that they will have a major impact on the metrics that you described. As we think about next year, I don’t have anything additional to share on how to think about the decline or what have you, other than to reiterate what I said before, and that is to think about the FactSet consensus that’s out there right now, that range of $1.2 billion to $1.7 billion. And then to reiterate that it’s really our goal to move as fast as possible because we really like to get this financial noise behind us.
Phil Winslow
Great. Thanks a lot.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Adam Borg of Stifel. Your line is open.
Adam Borg
Hey, guys. Thanks for taking the questions. First, for Andrew, and then a follow-up for Debbie. So just given the macro, are you seeing any trends of customers either – not necessarily upgrading to collections that otherwise or doing so earlier in the year? Or conversely, any trade downs from collections to point solutions or even LT? And then I have a follow-up.
Andrew Anagnost
Yes. Okay. Great. Adam. No, actually, there is no change in those demand preferences with regards to collections and what people are buying. The mix of state essentially is same, the renewal rate of the states pretty steady. If anything, what we’re seeing is softness in the low end of our business, which is what you would expect in a climate like this. LT growth has lowed, LT renewal rates have seen some pressure. That’s where we’re seeing things. The collections percentages, the collections renewal rates, these have remained steady throughout the year and throughout the quarter.
Adam Borg
Awesome. And maybe just for Debbie. So – and I don’t know if this is a harder question to answer, but if the multiyear mix came in line with your original expectations, how we think about the billings guide or even the billings results in the year, right? If it was the original mix that going into the quarter. Thanks again.
Debbie Clifford
If I understand your question correctly, if the proportion of our business that had been multiyear was in line with our expectations then we would have hit our original guide. And the fact that we’re seeing some in that cohort choose to move to annual billings or annual contracts, that’s making it so that we’re reducing the billings and free cash flow guide. But maybe – did I understand your question correctly?
Adam Borg
Super clear. Thanks again.
Debbie Clifford
Okay.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Stephen Tusa of JPMorgan. Your line is open.
Stephen Tusa
Hi, good evening, guys. How are you?
Andrew Anagnost
Good.
Stephen Tusa
Thanks. So I’m just – maybe I’m an idiot, but just like reading between the lines, the faster you guys move in the transition, all else equal, the lower the free cash flow next year will be, correct? Or are there other things moving around?
Debbie Clifford
The faster the transition, well, first, I want to continue to characterize that the impact of the numbers is relatively small, and it would have a minor follow-on implications to next year. But ultimately, what was built into our guidance was an expectation of a certain proportion of the business that was going to be multiyear upfront. A small portion of those customers have elected to be annual. So rather than it being a negative impact to next year, it would be a very slight positive impact to next year because we would have annual billings next year that weren’t in the form of a multiyear upfront transaction this year. But I want to continue to reiterate that the impact is relatively small. The impact to our billings guidance this year is relatively small. And if you think about the scale of the free cash flow number next year, I want to go back to that range that I was talking about that FactSet consensus range of $1.2 billion to $1.7 billion. And our goal really is to move the totality of the multiyear base to annual billings as fast as possible. And the faster we go, the greater that headwind is going to be to free cash flow next year.
Stephen Tusa
Yes, I was – yes, exactly. I was asking about ‘24. Basically, you’re kind of telling us $1.2 billion to $1.7 billion and then you’re reiterating that you’re going to try and move as fast as possible. So it was just much more of a ‘24 question, which you just, I think, answered.
Debbie Clifford
Okay. Great.
Stephen Tusa
Right. The faster you move, the more impact you have next year?
Debbie Clifford
Correct. Yes.
Stephen Tusa
Yes. Okay. That’s super helpful. And any color on kind of the I guess, the drop-through on bookings – or sorry, billings when I look at free cash flow it’s like 85% to free cash flow, That’s, I guess – just it drops through with your gross margin. I would assume you don’t really manage that on a quarterly basis. So it makes some sense. I am I looking at that the right way? Or is there something on the cost line that moves around and mitigates that decline in billings?
Debbie Clifford
No. I think you are thinking about it in a directionally accurate way. The billings reduction then has a follow-on implication to the free cash flow reduction. There is nothing else going on there.
Stephen Tusa
Yes, okay. Great. Thanks a lot for the color. Really appreciate it.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Michael Funk of Bank of America. Your line is open.
Michael Funk
Yes. Thank you for the questions. So you mentioned a few times trying to incentivize the shift from multiyear to annual. So first, what are you doing to incentivize that? I guess second, what drove the different customer behavior this quarter than expected with the shift? And I guess third part, same question, is how quickly do you believe that you can transition your base over to annual as we think about trying to model out the free cash flow impact?
Debbie Clifford
Okay. So let’s – taking detailed note. So in terms of the incentives, the incentives for both our channel partners – well, for our channel partners are still in place. So that’s part of the programmatic details that we are working through right now as we engage with our partners and we execute on the transition. Remember, a substantial majority of that transition is going to be next year in our fiscal ‘24, and that’s why those details are still in flight. On the customer side, what they have historically had a discount of anywhere from 10% to 5% to have a multiyear contract that’s invoiced and collected upfront and that discount goes away. So the incentive is not there necessarily in the future for those customers to be trying to pay for upfront. And we think based on the feedback that we have been getting from our customers that they want to have multiyear contracts with annual billings. It’s good for them in managing their cash flow just like it’s good for us. It removes the volatility that we see and as you can see from our guidance this quarter, the volatility that we see with those multiyear upfront contracts. In terms of what drove the behavior that we saw this past quarter, well, the end of the multiyear discount is coming at the start of next year.
And so we were anticipating more demand for multiyear upfront contracts. And in the end, we are seeing slightly less demand than we expected. In the current macroeconomic environment, that’s not surprising. The trade-off of the discount versus the cash upfront, it’s not as enticing for some customers right now. We have assumed that the behavior that we saw with respect to the multi-years in Q3 persists through Q4. And that’s what’s built into our guidance. It’s consistent with our overall guidance philosophy. And we really think that it reinforces our strategy to move to annual billings. We are hopeful that it’s a positive sign for the transition next year. And then finally, in terms of what we can do in order to drive the pace, well, a lot of that’s going to come down to our internal capabilities being available. I have mentioned before, that we are investing in systems to set us up to manage all these contracts at scale, and we are on pace. With those system changes, ultimately, it’s going to come down to what’s on our price list and how we work through these programmatic details with our partners. And these are all decisions that are very much under discussion right now, and that you will hear more from us over the next couple of months.
Michael Funk
Okay. Great. Thank you for the question.
Operator
Thank you. One moment please. Our next question comes from the line of Gal Munda of Wolfe Research. Your line is open.
Gal Munda
Thanks for taking my questions. The first one is just around Fusion 360 and what you guys are seeing there. I know that when we visited Autodesk University with us, really, really good feedback. At the same time, the macro environment in manufacturing is kind of going a little bit slow. Is there anything particularly that makes you potentially see any sort of slowdown in that, or do you think your Fusion 360 throughout the cycle is going to perform better than what you have seen in the past in your manufacturing portfolio? Thank you.
Andrew Anagnost
Yes. So, first off, Gal, manufacturing grew 13%, 14% on constant currency, that’s still best-in-class for our space. So, we continue to believe that we are taking share in that respect. Look, you can’t have a slowdown in Europe, where we are very strong, without seeing some slowdown in new Innovyze [ph] acquisition with regards to Fusion. However, we still continue to acquire more new users than any of our competitors in the space. So, even in the face of some headwinds where we see some slowing, we are outpacing our competitors, which is kind of the important metric here in terms of the appetite and desire for Fusion. It continues to be the disruptive player, the disruptive price point, the disruptive capabilities. And our customers continue to embrace the solution even in the environment of headwinds. So, we are not concerned because customers really need the efficiency of an end-to-end connected solution, and they really want what they get at the kind of price points that we deliver with Fusion. So, we continue to be the preferred solution. I continue that – I expect that to continue, and I expect our relative performance to remain strong.
Gal Munda
That’s perfect. Thank you. And then just as a follow-up, thinking about the opportunity. I know when COVID happened and we talked about the non-compliant user opportunity, you kind of posed a little bit everything, and you said we are going to come back when the environment, especially macro, is a little bit stronger. You have done that over the last year. If I am thinking about heading into another macro weakness, how much of an opportunity is coming from the non-compliant users, or how much more lenient you might be maybe for a year or 2 years until that plays out? Thank you.
Andrew Anagnost
Yes. I think we have got a good rhythm in our compliance business right now. I mean I think COVID was a very unique situation where there was a sudden and precipitous impact on our customers. I think we are heading into kind of a different environment in many respect. Of course, manufacturers are seeing increased costs in terms of energy and material costs and things associated with that. So, the pressures are real. But I think the rate and pace that we are on right now with regards to license compliance makes sense. Like I have always said, this isn’t something that we are going to slam the accelerator on and try to move faster. But right now, I don’t see us actually changing our pace or slowing down in any kind of way. I think we are at a nice clip right now, and I think that we will be able to maintain it through any kind of bumpiness that we might see as we head into the winter.
Gal Munda
Thanks Andrew. Appreciate that.
Operator
Thank you. One moment please. Our next question comes from the line of Matt Hedberg of RBC. Your line is open.
Matt Hedberg
Great. Thanks for taking my question guys. Debbie, I wanted to come back to the cash flow breadcrumbs that you gave. Sort of – you keep talking about the range of $1.2 billion to $1.7 billion and wanting to progress as fast as possible. I mean does that effectively imply that, that low end of FactSet consensus is at play? Just sort of curious on why phrase it as a range like that?
Debbie Clifford
Thanks Matt. So, we are not guiding on the call today. We are trying to provide some insight into how to think about it. And that range is in the realm of possibility, and there are a couple of factors that we want to continue to emphasize that are going to impact that. And that is the rate at which our customers transition to annual billings and the overall macroeconomic environment. But as I have said, we will provide specifics on the next earnings call.
Matt Hedberg
Got it. Thanks. And then maybe just one on the expense side, I appreciate the currency headwinds next year and sort of the reiteration of kind of the long-term margin framework. Are there things that you guys are doing right now from a spend perspective, whether it’s hiring or just sort of like general cost consciousness as we get into more economic uncertainty?
Debbie Clifford
Thanks. So, first, I want to say that we have been focused on ensuring that we don’t spend ahead of top line growth. We have delivered considerable operating margin expansion over the last couple of years. We have exhibited a spend discipline that we now benefit from as the market conditions continue to evolve. If we focus on the near-term, we have delivered on our margin goals for the year-to-date. We are on track to do so through the end of the year. You can see that from no change in our operating margin guidance. Our hiring plans at the beginning of the year reflected really what is a solid balance between proactive investment and the discipline required to achieve our margin targets. As we look ahead to next year, we are in the planning process right now, but we are focused on ensuring that we continue this pattern of disciplined spend. We are looking to ensure that we can invest in the right areas to drive the strategy. So, things like purposeful and strategic rather than broad-based investing in areas like our industry clouds and shared services, but all against a backdrop of delivering a healthy margin. And I also want to say that we want to ensure that we are not too short-term in our thinking. We have a strong balance sheet. We want to make sure that we strike that right balance as we navigate these macro waters. We want to capitalize on the downturn to continue to invest, but all while keeping that watchful eye on operating margin. And as we said before, we are committed to achieving a margin target in the 38% to 40% range in that fiscal ‘23 to ‘26 window.
Matt Hedberg
Alright. Thanks.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Tyler Radke of Citi. Your line is open.
Tyler Radke
Thanks for taking my question. Andrew, so at AU, you obviously announced the product announcements on Forma and Flow. I am curious how, if you could talk a little bit about the plans to accelerate the engineering velocity, specifically, is this is going to require more hiring, or is it just kind of re-prioritization of your engineers? And then just kind of comparing it to the timeline that you saw Fusion play out in that monetization cycle, just help us understand how you are expecting kind of the product to roll out and the monetization trend over time? Thanks.
Andrew Anagnost
Yes. So, first off, one of the things we did to just start Forma, as you might recall at the beginning of the pandemic, we acquired a Norwegian company called Spacemaker. And we have continued to invest in that team, and we will continue to expand that team either by repurposing existing resources to work with that team or by adding additional resources to that team to make sure that we are on track. But one of the foundational investments that supports all of the things we are trying to do with our investment in data. And that’s an ongoing investment in trying to break up Revit files and make them more accessible in the cloud as granular data. Forma and – by nature is built net native on the cloud and it has granular data at its core. So, that’s one of the kind of core vectors that we will be doing. But we will be incrementally investing to ensure that we are heading on the right path with this solution. But we have done some of that already. And we have kind of absorbed some of those investments today. Now, I think the question about timeline is a really good one because these kind of transformations – what we are doing with Forma is different, right. What we are doing with Revit to improve its performance and improve its capabilities based on what our customers are asking us to do is making their current tools better. But what Forma is doing, especially with its connection – its native connections to downstream process is different. It takes time for different to penetrate the industry, just like different took time with Fusion. It was – we have been working on Fusion for over a decade, alright, roughly speaking a decade. So, you can expect that it’s going to take 5 years for Forma to mature and even longer for it to totally replace what our customers are doing. However, our goal is to incrementally add value to the process as time goes on, just like we did with Fusion. Fusion, we added incremental value with the connection to downstream manufacturing. In Forma, we are going to add incremental value with regards to the data platforms and the connection to the downstream construction processes. So, that’s all connected, but it is going to take time similar to what we saw with Fusion.
Tyler Radke
That’s helpful. And Debbie, maybe a question for you. So, just on current RPO, it looked like that did pick up a bit quarter-over-quarter if you back out the currency. Can you just help us understand I guess first, do you kind of view that as the best leading indicator given the headwinds in billings? And just remind us how you are thinking about the puts and takes on that just as you do – renew these large EBA customers in the coming quarters. Just anything we should be mindful of there? Thank you.
Debbie Clifford
Yes. Sure. So yes, I mean current RPO is a very important metric in monitoring our business performance. And you are right, particularly when you normalize for the currency impacts that growth was in a healthy zone. So, I want to just continue to stress that FX has been really volatile, and that’s going to continue to impact the growth rate. So, definitely look at the constant currency growth rates over time. Also, the timing and volume of our EBAs impacts the growth rate period-to-period. And so sometimes what you see is that when we have large cohorts of our EBAs coming up for renewal, it tends to be back-end loaded in our fiscal years and most often in our Q4, we start to see growth impacts as the year progresses, in many cases, deceleration Q1 to Q3 that would tick back up as those cohorts for EBAs come back up for renewal. So, growth rate should tick back up over time, given consistent historical – given patterns consistent with our historical patterns. But again, remember the constant currency has just been a zinger that’s going to impact growth rates for quite a while here. So – but it is an important metric for us, and we monitor it closely.
Tyler Radke
Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Jason Celino of Key. Your line is open.
Jason Celino
Hi. Thanks for taking me in. Just two quick ones. So, when we look at the fourth quarter guidance, it looks like you will exit the year at 8% growth at the midpoint, pretty big decel from third quarter. I guess what is the FX headwind built into here? And are there any other factors that we should think about for Q4?
Debbie Clifford
Yes. So, Jason, the biggest impact is currency. We have seen a growing currency headwind during the year, and that’s gradually showing up in the growth rates as the year progresses. It’s about a 3-point headwind in Q4. It was a 1-point headwind in Q3 and was neutral in the tailwind at the beginning of the year. So, you can see that it’s gradually having a significant impact on our growth rate. That’s the biggest driver of the implied growth rate that you are talking about. Also, to a lesser extent – but Andrew did mention that we saw a modest deceleration in our new business, particularly in Europe during Q3, that does have a slight follow-on impact to revenue in Q4.
Jason Celino
Okay. Great. Thank you. And then the last multiyear appetite, it sounds like, to some extent, some of this is macro related. I guess where do you see that dynamic most prevalent? Was it with your larger customers, your smaller customers, international versus domestic? Just trying to understand kind of the puts and takes. Thanks.
Debbie Clifford
Yes. It tends to be larger deal sizes, not surprisingly. I think that when our customers start to exhibit cash conservation behavior, that behavior does tend to be more prevalent with some of the larger deal sizes. And remember, they are still signing multiyear contracts, they are just signing multiyear contracts and asking for annual billings, which for those larger deals, we are willing to accommodate while we continue to invest in the back-office infrastructure to be able to handle the totality of the multiyear base with annual billings at scale.
Jason Celino
Okay, perfect. Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Keith Weiss of Morgan Stanley. Your line is open.
Keith Weiss
Hi, thank you so much. The comments on the stable renewal rates, and I’d just like to dig into the expansion motion and it’s not like never tension stayed within the historical range, but curious if you are seeing any changes on just the expansion behavior with the shift in macro and should we expect a similar range into 2024? Is there any risk that we could fall outside of those ranges just given the broader macro headwinds? Thank you.
Andrew Anagnost
So with regards to retention rates, look, retention rates continue to be strong and maintain steadiness. I think we are going to continue to see that steadiness into next year. The one area where we expect to see softness with macro headwinds is at the low end of our market. So the low end of the market is low ASPs, but high volume. So, the retention rates can move around on a volume basis when there is headwinds like this. But generally speaking, broadly across our business, we see retention rates holding up. Our products are mission-critical to what our customers do. They need them. But at the low end of our business, we will probably see some headwinds there, but they won’t be material to the larger business.
Debbie Clifford
I would just add that our net revenue retention rate was comfortably within the target range of 100% to 110% and in the short-term, our expectation is that it will stay in that range.
Keith Weiss
Great. And then just following up on kind of the comments about the strong balance sheet and willing to invest, wanted to see if you are seeing any change in behavior in the competitive landscape, especially from some companies that may not have as strong a balance sheet? So any changes you are seeing in the behavior overall? Thank you.
Andrew Anagnost
So with regards to – I just want to give a clarification on that question. With regards to the competitive environment in what way in terms of how that – how does it – just give me a clarification on your question a little bit there. I didn’t quite understand.
Keith Weiss
Yes, sure. So you guys have a strong balance sheet kind of willing to invest in the current environment, just even though there maybe some macro headwinds. But you likely have some peers out there that may not be as well funded or has strong balance sheets. So curious if you are just seeing any sort of changes in behavior across the competitive landscape?
Andrew Anagnost
Yes, okay. Okay, good. I just wanted to make sure that I was in it. So look, we are in better shape than some of our competitors that are not profitable. In certain situations, people are going to be chasing, I think long-term things that kind of boost revenue or pull revenue forward. They will be doing customer unfriendly things to try to pull things forward. We are not in that position right now, especially in certain types of sectors. We are maintaining customer-friendly practices. We are focusing on the long-term. We’re investing in the long-term. And that will actually provide competitive advantage as we move out of the slowdown. And it’s always great to be in a position to invest during a slowdown and to not have to pull short-term levers to try to achieve profitability, maintain profitability or get in the way of things. We will probably have more dry powder for inorganic activity than some of our competitors as we head through this. So yes, strong balance sheet actually helps us invest ahead of the curve while we go through these things. So I am pretty confident that we are ahead of the game in a lot of places.
Operator
Thank you. That is all the time that we do have for question. So I’d like to turn the call back over to Simon Mays-Smith for any closing remarks.
Simon Mays-Smith
Thanks everyone for joining us. I hope the call was useful. For those of you that celebrated happy Thanksgiving and happy holidays and we’ll look forward to catching up with you again at conferences and in the New Year at our fourth quarter earnings. Thanks very much.
Operator
Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect. Have a great day.
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