Autodesk Inc (ADSK) 2003 Q1 法說會逐字稿

Hello, participants.

Good afternoon and welcome to the Autodesk first quarter financial 2004 conference call.

There will be a question-and-answer session.

Instructions will be given at that time for anyone who wishes to ask a question.

I will turn the call over to [Sue Carey] to introduce today's hosts.

Good afternoon, everyone.

Thank you for joining us as we report our first quarter results for 2004.

With us on the call today are Carol Bartz, Al Castino, and Carl Bass.

Today's conference call is being broadcast live through an audio web cast.

In addition, a replay of the web cast will be available on our website for 12 months, autodesk.com/investor.

During the course of the conference call we will make forward-looking statement regarding future events and the future performance of the company.

We wish to caution you such statements reflect our best judgment and actual events and results could differ materially.

We would like to refer you to the documents we file from time to time with the SEC and specifically our 10-K for fiscal year 2003.

This document contains and identifies important factors that may cause the actual results to differ in our forward-looking statement.

As a reminder, in adherence to Fair Disclosure, Autodesk will provide quarterly information and forward looking guidance in its quarter end guidance press release and this publicly announced conference call.

Autodesk will not provide further guidance or updates on the performance for the quarter unless it does so in a public forum.

During the call, we may discuss non-GAAP measure.

These non-GAAP financial measures are not prepared with generally accepted accounting principles.

A reconciliation of the non-GAAP financial measures to the most directly comparable to the GAAP measures are set forth in our press releases, issued on May 22, 2003 and February 2, 2003 and made available on our website.

Now I would like to turn the call over to Carol Bartz.

Good afternoon and thanks for joining us.

Today I'm pleased to announce a solid set of results for the first quarter.

In spite of a number of negative factors impacting the market including the economy and the geopolitical situation, Autodesk has strong financial performance and accomplished a significant achievements during the quarter.

We shipped new releases for the entire family of AutoCAD products.

And Discreet rolled out new color grading product.

The feedback on the products from customers, press and analysts have been terrific.

Next, we completed the rollout of our subscription program in Asia Pacific.

They are available to our customers around the globe.

The program continues to drive customer acceptance.

As a result, deferred subscription revenue grew to $61 million during the quarter.

And finally, our Discreet division had a fantastic quarter growing revenue 28% sequentially and returning to operating profitability after 7 quarters.

I will talk more about these positive things later.

First let me turn the call over to Al Castino for a detailed review our financial results.

Thanks, Carol.

First of all all I'm pleased to say we achieved our guidance for the quarter despite the economical environment.

You should note, we have no pro forma adjustments so the GAAP numbers are the ones we are discussing.

I will reference the pro forma numbers we referenced in prior quarters.

Our worldwide revenues totalled $211 million and earnings per share were 7 cents in comparison to $196 million and 7 cents per share on a pro forma basis and 6 cents per share on a GAAP basis in the prior quarter.

This quarter's results still reflect a very difficult physical business environment as evidenced by the comparisons to the first quarter last year when revenues totalled $249 million and EPS was 15 cents on a GAAP basis and 16 cents in a proforma basis.

Our ending head count for Q1 was 3550 regular staff and increase from last quarter.

The increase included head count acquired in the acquisition of Lynninous Technology and conversions of temporary contractors to regular positions and timing of replacement hires.

Gross margins were 82% of revenues, equivalent to Q1 last year and slightly down from 83% in the prior quarter.

The decline from last quarter was due to the Discreet advance systems contributing a higher percentage of revenue this quarter.

Advance system revenue carried the lower growth margin due to significant hardware components.

Operating expenses were in our guidance range and totalled approximately $167 million compared to $161 million from the prior quarter on a GAAP basis.

Expenses were higher as anticipated for the reasons we said last quarter including bonus accruels, normal uptick of first quarter payroll tax expense, accounting fees, cessation of software development capping will from the release of any products and one time cost to support new product releases, development, marketing and sales area.

The nonrecurring new product related costs amount to $5 million as expected.

Income operations totalled $6.6 million.

And interest in other income totalled $3.3 million.

Leaving us a pretax income of $9.9 million.

A net income of $7.5 million.

Income tax rate from Q1 was 24% or estimate for the full year rate.

There were 113.4 million shares using calculating alluded in the income per share.

Current impact on the revenues this past quarter was $4.9 million in comparison to the rates we experienced in the prior quarter.

The favorable impact was primarily due to appreciate United Nations of the Euro and the Yen.

Operative expenses were negatively impacted by $2.4 million.

In comparison to the year earlier quarterly period, current impact was primarily due to the Euro.

The impact on revenues was favorable by $16 million while impact on expenses was unfavorable by $6.7 million.

Channel inventory was at the high end of our 5 to 6 week target range while at the end of last quarter the inventory was at the bottom end of this range.

They followed the expected pattern with the channel reducing inventory in anticipation of an end product release and restocking the higher level.

Turning to the balance sheet, we finished a quarter up $402 million cash and investments down from $411 million in the prior quarter.

That was after using $30 million to buy back 2 million shares of stock, 3 million for the quarterly dividends and 5 million for acquisitions.

The current revenue grew to $96 million, up $3 million from the prior quarter as we continue to grow our subscription business.

Days sales outstanding was within the normal range of 50-60 days at 58 days, down four days from the first quarter and up 6 days from last year.

Prescription bookings and other deferred revenues did not affect our quarter standard DSO calculations.

Let's cover our revenues in more detail, starting with the divisions.

We have two business segments.

Discreet and design solutions.

I will start with Discreet.

Our Discreet division had an excellent quarter gaining traction with advances of new products and at NAB show.

Revenues are up 28% versus the January quarter and 8% versus the prior year quarter to $38 million.

Discreet showed growth in both the animation and advance business systems.

Animation grew by 5% sequentially.

Advance systems advanced by 44% from the prior quarter.

In addition, we are seeing signs of recovery in the television advertising business.

A leading indicator for the Discreet business.

Now turning to the Design Solutions Group, overall revenues were $173 million, up 4% sequentially.

Within DSG, the platform technology division benefit from Euro released of AutoCAD.

Revenue was $104 million.

Up 11% over the prior quarter .

AutoCAD LT revenues increased 25% versus the prior quarter.

AutoCAD revenues increased over 5% of the prior quarter.

Manufacturing revenues were up 10% sequentially to $30 million.

Strong product portfolio including adventure series and new version of AutoCAD mechanical provided relief from the continuing difficult manufacturing environment.

Building solutions to date was down 14% over the January quarter to $16 million and down 27% from the prior year as the commercial construction market continues to be depressed.

Infrastructure revenues were down 14 % sequentially to $23 million as new products were released in the last few weeks of quarter.

Let's quickly look at the geographic split of our revenues.

America's revenue totalled $92 million, up nearly $5 million compared to the prior quarter.

AMIA revenues were up slightly in the January quarter to $68 million.

Asia Pacific region posted the highest sequential growth, 23% for the quarter.

Revenues totalled $51 million.

Now let's turn it over to Carol to talk more about the business.

Thanks, Al.

I would like to start the business review with Discreet.

As Al mentioned, Discreet had an outstanding quarter.

Revenue increased 28% sequentially to $38 million.

After seven quarters, Discreet has returned to operating profitability based on its strong revenue growth.

After the TV advertising market, which is the most largest and segment Discreet served, collapsed two years ago, Discreet took action to position itself for profitability, by cutting head count, upgrading key management positions and creating its best product portfolio ever.

We streamlined the organization in anticipation of the return to growth and it is working.

Our financial performance is improving and our product lineup is strong.

At NAB last month the feedback was growing.

Our color grading product, Luster was awarded the premier product award in its category.

We saw strong interest in prospects, clients and journalists in Luster in our finishing systems and new versions of our existing products, Inferno, Flame and Flint. 3D F-Max, the world's best selling 3D animation and modeling solution also drew a lot of attention and there was excitement around our desktop media products.

Discreet's products are hitting the market as we were beginning to see signs of recovery in the media and entertainment space and substantial increase in demand for HDTV programming.

According to Creativity Magazine, industry production of commercials increased slightly in the March quarter and is predicted to grow 3 to 6% this year.

In HDtV, a recent sample of 20 Discreet worldwide customers revealed that over 1,000 hours of prime time HDTV content was produced this year.

This market improvement together with our new product, translated into strong revenue growth for Discreet.

New orders from post production facilities grew increasing advance systems revenue 44% sequentially.

The Australian broadcast corporation was a key win for advance systems during the quarter.

They moved their production research department into high definition production with the purchase of a full range of Discreet on-line editing and visual effect system. 3 smoke HD finishing system and other licenses have been ordered in a recent round for HD post production equipment.

The animation business saw 5% sequential growth on strong sales in all key market segments including game, design visualization and film animation.

A key win during the quarter came from UB Soft, a leading video game developer.

After purchasing licenses for their Montreal base development studio, they standardized their European development studios on the 3D F-Max software which will resolve in approximately 200 licenses through upgrades and new seat purchases.

Now I would like it turn your attention to the Design Solutions Group.

Before we move in to a detailed discussion of the division, I want to note a few key trends we are seeing across all divisions.

New releases of our software across the division is driving growth in new seats.

Design solutions revenue from new seats grew 10% sequentially despite many of the new releases shipping late in the quarter.

Growth in the AutoCAD basis slowed lightly due to small migration to Inventors.

In the Americas we successfully launch of the AutoCAD product family with a 23 city AutoCad solution tour and hosted over 30 industry specific solution web casts for manufacturing, building and infrastructure. 21,000 people registered for these events generating more than 10,000 leads.

Subscriptions continue to appeal to customers.

Our customers understand the value that the AutoCAD provides.

Our deferred revenue balance increased this quarter as we continue to grow subscription.

Additionally, we believe that our plan to add a support component to the subscription offering later this year will increase customer value and drive revenue growth over time.

The number of users on AutoCAD 2004 based products at the end of the first quarter was the highest we ever seen for a product lunch.

By fulfilling delivery of new versions of our product to subscribers immediately we began creating a buzz among users, which is the most powerful and pervasive marketing.

In addition to the buzz, customers will begin to drive sales downstream.

As expected, subscriptions are particularly appealing to customers who are early adopters of new releases.

We saw few traditional upgrades this quarter.

This change is having a desired effect to having predictability to our revenue stream, by amortizing the subscription to our revenue over 12 months.

At the same time, it is allowing the channel to concentrate on driving new seats rather than selling upgrades for the installed base.

Now let's turn to the platform technology division which increased growth sequentially due to the success of the new releases.

Our users can never get enough performance.

They spend 20 to 40 hours a week using AutoCAD, as their primary software program.

To them, performance improvements result in increased productivity and profitability.

During the quarter, the platform group released the strongest version of AutoCAD ever and feedback on the product ranges from positive to glowing.

For example, the review in the most recent issue of PC magazine said, "if you are a current AutoCAD user or contemplating a switch to it, if you share files outside your enterprise extensively or work a numerous drawings every day, the speed and file size improvements in AutoCAD 2004 are worth the investment".

As a result of strength of this product, total AutoCAD revenue increased 5% sequentially.

We were especially pleased with the performance of AutoCAD commercial new seats in the quarter.

We sold more seats at higher ASPs than last quarter.

Commercial new licenses have sequential revenue growth of 14%.

Reflecting a very good start for our new AutoCAD 2004 software release.

Some examples of the success we saw with AutoCAD during the quarter include, one of this country's largest retail chains is in the process of standardizing the product and asking their suppliers to do so as well.

As a result, their suppliers are moving to our products purchasing over $100,000 of AutoCAD 2004 and ADT this quarter.

And a leading commercial architectural firm upgraded 170 seats of AutoCAD and bought subscriptions for all in a contract valued at over $180,000.

They are evaluating for their clients, like Akia, Target and Costco.

Our upgrades decreased by 26% sequentially.

This should not be taken as a indication the product is weak.

We believe this is the best version of AutoCAD we ever released.

In fact, Catalyst Magazine, a leading industry publication, conducted a survey in which nearly 30% of our participants said they were eager to upgrade to AutoCAD 2004 immediately.

However, as we have seen the historical early adopters begin to migrate to subscription, it has impacted the amount of traditional upgrade revenue we've seen this early in the cycle.

LT sales were strong in the quarter led by Arab Pacific where LT the sales grew over 72% over historical performance in Q4.

Based on the continuing strength, we have seeing across in the Asia Pacific and AMIA with LT, we planning a price increase during the year.

Moving to manufacturing, customers are clearly turning to Autodesk for increased efficiency, and the quick ROI associated with our product.

Revenues include 10% sequentially, despite the difficult manufacturing spending environment.

Inventor series continues to gain market share as a manufacturing industry top selling 3D modeling solution for the 5th consecutive quarter selling 7300 commercial seats during the quarter.

First is the closest competitor that sold System Solid Works which sold a reported 6,043 seats last quarter.

Manufacturing benefited from compelling new releases of Autodesk Inventor Series 7 and AutoCAD Mechanical 2004.

And within the new version of AIS, Inventor 7 now allows surfaces to be trim, supports DWF publishing and most importantly includes major new enhancement for larger assembly performance.

AIS also included a strong new version of Autodesk Mechanical Desktop 2004.

We continue to strengthen our 2D league within the manufacturing arena as well, with an important release of AutoCAD Mechanical 2004.

AutoCAD Mechanical got off to a great start with revenue increasing 8% over last quarter.

Key wins during the quarter include;

Shang High Economic and Trade Commission, distributor to 100s of state owned enterprises purchased 400 new state seats of inventor series bringing their total AIs seats to over 900 and Toastem, the number one supplier of windows and bath fixtures in Japan is a large user of Autodesk manufacturing solutions.

Purchasing 50 seats of AIS and moving an entire division to a network software license this quarter.

Toastem has over 900 AIS seats and 1600 total seats of Autodesk software.

Next month we will advance the manufacturing strategy by introducing a higher price 3D design product, called Autodesk Inventor Professional Seven.

This advanced 3D design software eliminates the guesswork and effort needed to configure, implement and manage a complete machine design solution.

Based on inventor series, the Autodesk Inventor Professional Seven will include task specific applications for electrical, mechanical cap controls engineer.

Like tools for designing 3D tube and pipe, and tools for importing printed circuit board geometry.

Later this year,the capabilities for wire harness and cable design as well as schematic design will be added.

Streamline, a key component continues to provide value throughout the life cycle by helping customers share instant design data across their extended supply chain.

This quarter HMS products, a press automatic manufacturer purchased Streamline to better communicate their designs down the chain to suppliers, as well as demonstrate their solution to customers eliminating time consuming and expensive prototype which costs $250,000 and up.

HMS was up and running within the quarter.

Again, demonstrating the quick implementation and fast ROI associated with Autodesk LM solutions.

Turning to building solutions, the sluggish economy continued to have an impact on the building industry.

Where construction activity remained flat in most major markets worldwide.

Nonresidential construction in the U.S. continued to decline down over 14% since last year with the industrial commercial office and hospitality sectors particularly hard hit.

While building revenues were down 14% sequentially Autodesk continues to win share in this market and promote customer awareness.

In construction with the AutoCAD 2004 launch, BFD released strong new version of Architectural desktop 2004 and 5.1.

It shift to the end of March is interoperable with the product family providing full support for import, export and linking of file.

ADT 2004 had a fabulous new user interface that significantly increases customer's ease of use.

We also integrated advance design visualization and communication directly into the ADT 2004 allowing designers to easily visualize and more accurately communicate their design intent.

BFC had great customer wins this quarter including the China Ministry of Construction which continues to promote Autodesk design software to the Chinese building and construction industry and strongly encouraged their members to use legal software.

During the quarter, Chinese design institutes contractors and interior design firms purchased over $2 million of AutoCAD, Architecture Desk Top, Land Desktop, Revit and VIZ.

And finally, CPG corporation, one of Asia's leading development and management companies upgraded 315 seats to ADT 2004 and put all licenses on subscription.

Moving on to Buzzsaw, an integral part of our building life cycle management solution that increases process efficiency through better use of design information.

We continue to see a higher line of new sales renewals and upgrades.

In the smaller company segment, we were seeing some delay in renewals as a reflection of the slow down in the construction market.

During the quarter, Buzzsaw benefited from the strength of the residential construction market and ongoing business in retail health care, government and manufacturing facilities.

Key wins included, Casas, the largest home builder in Mexico which builds about 25,000 homes per year.

Casas purchased Buzzsaw to collaborate in the design of the homes.

In the retail segment, Barnes and Noble, who operates over00 bookstores in 49 states purchased Buzzsaw to manage 30 to 40 new store projects in 2003 and to manage any remodels to their existing stores.

In addition to facing industry conditions similar to BFC, new products from the infrastructure division shipped late in the quarter. 7 new products including [INAUDIBLE] shipped in the last two weeks of the quarter.

Revenues were down by 14% as customers awaited the new releases.

There are some positive underlying trends in the performance this quarter.

We are starting to see traction in a few federal agencies that have historically been locked up by the competition.

A number of pilot project have begun in the military, natural resources and other large federal agencies.

We look forward to sharing more about these customers later in the year.

At the state local government spending, of course, is tight.

Even so, Autodesk had key wins in major cities like Seattle, New York and Los Angeles.

Other key wins includes one of the world's largest water and waste water companies purchasing map guide to increase web access to design and mapping information across their entire organization.

And Pacific Gas and Electric renewed their subscription for 1200 seats of map and 900 seats of design for a total of half a million dollars.

Infrastructure released several new products in Q1.

For civil engineers and surveyors, Land Desktop 2004, Civil Design and Survey all offer the speed and enhancement of AutoCAD 2004.

Including new road design tools and important new functionality that helps customers to move data more smoothly from one agency to another to Autodesk LAN XML support.

Autodesk Map 2004 includes a robust set of geospacial analysis tools, including cartography, topological analysis and enhanced support of Oracle databases.

Customers in both civil engineering and mapping are increasingly interested in tools to take their map and designs into the field where the work is actually performed.

Our new envision 8 release supported Microsoft Tablet PC devices providing customers the mobility they are looking for during construction and maintenance.

To summarize, we were pleased with the solid performance in the first quarter.

We successfully ship new releases to the entire family of AutoCAD base products.

Our subscription program continues to build momentum.

And our Discreet division had a fantastic quarter and returned to operating profitability.

Now let me turn the call back to Al.

Thanks, Carol.

While the first fiscal quarter exceeds our guidance, there are several factors that call for caution.

The economic environment remains uncertain with times of significant weakness reported every week.

Commercial construction and manufacturing investment are both areas of particular weakness.

The only bright spot we currently see across the industry we serve is the meeting and entertainment space.

Little impact in our first quarter results from SARS, we believe it presents a clear risk to our Asia Pacific results in Q2.

We are seeing significant impact to our second quarter results from SARS, a important China market.

Beijing, our sales can't make a sales call and we had to cancel all of our product introductory events across the region.

As a result, we estimate that SARS will reduce our Asia Pacific revenue by as much as $7 million.

Lastly, Discreet had great first quarter due to timing of its new releases and a strong performance.

As we move into the second quarter, advance systems may begin to encounter a pending SGI hardware upgrade this summer that could cause customers to delay purchases.

We expected Discreet will have a good year.

But, Q1 was an unusually strong one and we may see a sequential dip in our Q2 revenues.

Based upon these factors we forecast it to be in the range of $207 million to $212 million.

We expect EPS to be in the range of 7 cents per share to 10 cents per share.

Our expenses would be lower than the first quarter with product introduction related costs will not carry over.

For the full year, we don't see clear catalyst positive or negative for dramatic change to the economic environment.

However, there are a number of factor we believe will help our business in the second half of the year as Carol will discuss later.

Therefore, we were not changing our full year guidance of $875 million, $900 million for revenues and 50 cents per share EPS.

We recognize that the operating margins we were achieving at revenue levels are not acceptable over an extended period of time.

We were determined to return to our normal operating margins of 18 to 20% in the next fiscal year.

As the year progresses, we will manage our costs according to anticipated revenue level.

Now let's turn the call back to Carol for closing remarks.

Before we take your questions, I would like to say a few things this closing.

While the April quarter was very strong for us, as Al mentioned, we were cautious about Q2.

The worldwide economy continues to languish and SARS constricting business in Asia Pacific, it would be imprudent of us to give second quarter guidance for performance stronger than Q1.

We remain confident of our annual guidance, however for a number of reasons.

We strongly believe that the business community will find a way to manage around SARS over time.

While we noted that the spending environment remain tight in the first quarter, companies do have capital spending budget for the year.

We were committed to taking our disproportionate share.

With our quick time to implementation and rapid return on investment, we believe we will be able to capture significant budget dollars by the end of this fiscal year.

We are finally beginning to see the power of our subscription program worldwide.

As a result of the subscriptions, AutoCAD 2004 space products got into the hands of users faster than we had ever seen.

We believe this will help drive adoption rates over time.

With the addition of a support offering later this year, the offering will be even more compelling.

And finally, we have a strong product lineup and will be adding to it during the year, advancing toward our goal of offering a full suite of life cycle management solutions in each of our key design industries.

All in all, two key words describe us.

Conservative and confident.

Now we are ready to take your questions.

Thank you.

Participants, if you would like to ask a question press star one on your phone key pads.

If you hear your question answered and wish to withdraw, you can do so by pressing star 2.

Our first question comes from Gibboney Huske from Credit Suisse First Boston.

Great, thank you very much.

Trying to get a sense of SARS, how much information do you have to kind of build up to that $7 million estimate and how much is just kind of maybe applying a percentage to your Asia Pacific revenue.

And since that wasn't on the horizon when you initially gave the full year guidance and you are presumably adding caution in the second quarter, when you adjust for the full year by that amount and particularly given it seems like the upgrade on the AutoCAD side seem light relative to expectations.

Let me take this in two spots.

I will do upgrade second and SARS first.

That forecast is coming from the China region.

That is not a corporate forecast.

We had to cancel as I said in the script all of our launch activities and right now we can't call on our customers.

Full belief that as quickly as possible we will get back in the field.

It's really going to goof up Q2.

You have to be able to make sales calls and you have to be able to have your seminars.

We typically have pretty good launch events in the China region with fabulous attendance.

It looks like we are hoping it's just a Q2 phenomenon.

And we were hoping ourselves and our marketing efforts and customers get their sea legs under them.

This is a field forecast.

Who are we to say in corporate that they are wrong because they are in the middle of living it day by day.

As far as the upgrades are concerned, we took a look Gibboney, at the number of units in the field and the numbers that shipped with subscription and the upgrade units and we are on our adoption curve that we should be sort of 45 days into a cycle.

What we said and obviously what we believe is those people that got on subscription first, those folks that just, you know, died to get a release right away and they did.

I think -- like I said, add them up and we were on pace.

Secondly, I think Q1 budgets in general people weren't letting go of them.

We are still feeling very good with all the pulling are doing and sensing we are doing that this upgrade cycle will be normal for us.

Follow-up, you implemented a price increase in change some of the dynamics around upgrades.

How is the reaction been in the channel among your customers?

Is that causing them to take longer in thinking about how they want to buy your software, whether it's via a subscription or upgrading in a certain period of time.

I don't think the increase in January had anything to do with this.

I have been out personally with -- on several customer seminar groups and they would have plenty of time to talk to me if that was bothering them.

I don't think that's it at all.

It's a matter of when they want to let loose of their budget money.

And I do believe it's a when, not if.

I don't think that's an issue.

I do think and we have been saying this all along that having to upgrade and buy subscriptions might cause people in this climate to upgrade now instead of paying that second pop for subscription.

What could have been a better pace for subscription could be slowed by the economy.

I don't think people will slow to upgrade.

Thank you very much.

And our next question comes from Gene Munster of Piper Jaffray.

Hey Carol, if you could talk about -- you said the total number of upgrades is consistent with the last cycle based on subscriptions and actual number of upgrades.

Yes.

If we do units to units -- in other words, and again we are talking percentages, not actual units.

So we really do mark our penetration by units and the cycle is right on if you add the combination.

And did the promotion that you did back in January 15th, that didn't kind of skew the comparisons a little bit in terms of the number of subscribers coming on board?

Gene, I don't think so.

Could it have a little bit because we were ahead the pace.

The point of the matter is those folks probably decided they wanted to upgrade anyway they just upgraded in January rather than March. [INAUDIBLE]

-- flavor in terms of how the upgrades were from the time you ran your promotion in -- new subscription from mid January to I guess current time.

Has that been tracking on time and maybe just a back of the envelope in terms of percentage of your business.

I think last quarter was 10 to 12% overall business subscription.

Has that inched up a little bit from here?

We haven't -- as we said on the analyst day in April, we won't give out subscription information on a quarterly basis until we get APEC with some history behind them.

So, we won't comment on that.

We don't look at -- when we look at our graph, we actually start those graphs from the point of a new release shipping.

There wouldn't be a reason to go back into January and add those in.

It would make us farther ahead.

That's not kind of relevant data for us if that makes sense.

Yeah.

And in terms of I guess your subscription program there, any updates?

Oh, Europe?

No.

Europe is doing well with subscription.

Actually, we are just as pleased as could be with the customer reaction to subscription.

There is nothing new geography except that Asia Pak just came in.

One question for Al, in terms of channel inventory, you said inventory was consistent to the high end of the range.

Could you compare it to how that fit in.

I have the numbers in front of me but it's roughly similar.

The pattern I described where the channel cut the inventory prior to release and restocked and the lease comes out, very similar.

So we have the pattern as in the past.

And everybody, you have to understand what happens is they have to carry for every one of the product another release.

They are carrying essentially actively two releases and some of them for customers back on 2000-i.

So we really encourage them to believe leave that inventory out so there is room to carry the new one as well as the customers still on 2002.

On all the products.

Not just AutoCAD and the languages.

So this is very normal.

Thanks.

Our next question, comes from Jay Vleeschouwer from Merrill Lynch.

Thanks, a few questions for you Carol.

In lieu of giving us the actual subscription revenue amount, could you at least rank the subscriptions by attach rate to the specific products.

I assume the Inventor has the best attach rate of subscriptions.

How would you rate the products after that and in terms of where you are seeing the attach rate improving or what that percentage is?

Similar question around subscriptions and you are trying to induce customers to move to that, since you going to an annual release of AutoCAD with 2005 coming next spring for instance, you will have an EOL every fall for the next two to three years.

Is that one of the principal ways you see of seeing customers go into new subscriptions or talk about perhaps reasons that it might not make sense for you to have end of life program like that on an annual basis.

First of all, on the attach rate, Jay, we had the largest attach rate on Inventor.

The Inventor has the largest attach rate over the install base.

The rest of the products are clumped together as far as attach rate of new products going out.

Obviously when you go back over install base, AutoCAD would be the lowest because it has the biggest installed base with the exception of LT.

Because it doesn't have people tend to -- there is only subscription on LT if it's a major CAD that bundled into all their products.

You are right about the Inventor being the highest attach rate.

As far as EOL, yes, there will be our same systematic retirement, like we have done for I guess five or six years, and it's totally systematic.

It's a process that we do the current release on two back and that's on all of our products.

Whenever a product shifts and we talk about yearly shipping of AutoCAD the base product, your assumption is correct.

Now, as far as the driver of subscription, yes, it is.

To the extent that people say there is a lot happening with these products and I want to stay current, of course it is.

Those people again, we do not force our customers to subscribe, if they want to go the upgrade path, they are welcome to do that as well.

Just as a follow up in that, how much of the base is still back on 2000?

I don't have that in front of me. 2000 was a nice release.

We are definitely going to see life out of that, that's your ultimate question.

So, I don't have that in front of me and we will see if we can make that public.

Turning to the sales and distribution and channel issue, couple of things, been a few months since you implemented the vertical approach with your direct sales force.

Is it premature to talk about how well that's beginning to work out in terms of having made that change or put the preferred accounts back to the channel in terms of helping those resellers with exposure to those accounts picking up new business?

The accounts go back to the channel May 19th.

That's very premature except for the fact that the channel is very appreciative of that.

As far as the vertical solution sale force, you know, I would say premature they only have a quarter under their belt.

What I would say is not premature is the fact that the sales management and the focus sales force I think feels much more enthused about the strategy, about knowing that they are carrying their quota in their bag for only one division.

They can really target their customers and really penetrate.

So the morale around that is excellent.

It's just first quarter so we have to go from here.

With respect to the channel itself, could you talk about any programs you may be planning to implement later in the year with respect to improving the performance standard of requirements that you apply to the channel in terms of potentially weeding out the underperformers or any financial assistance, loans, anything of that kind that you may provide to the channel presuming that the recipients of that help perform.

Yeah.

Don't anticipate anything abnormal.

We are always working with the channel to help there become stronger and at the same time that means people that fall out the other end.

As far as loans, those incentives, absolutely do not anticipate anything like that.

Okay.

One last one.

You mentioned that you will put in a price increase on LT.

You have done that once or twice at least in the past.

When you introduced new releases of LT before.

I think $100 per revision.

Can you talk about the amount you are planning to increase the LT price and part of the thinking there to make it somewhat less price attractive in comparison to full AutoCAD to perhaps reduce on the margins some of the cannibalization of the AutoCAD.

What's interesting is that we catch cannibalization closely is that it hasn't changed at all.

What it really says to us is that we are leaving money on the table.

That folks that are attracted to LT and truly they are attracted to LT differently than AutoCAD, because it's not expandable, it doesn't have solutions and applications on top of it and so on and so forth.

The separation of it in 2004 is even greater than it has been in the past.

So we think we are leaving money on the table.

As far as the pricing is concerned, we are looking principally at Asia and Europe and that would be different, depending on the geography and so we won't make those prices known until it actually goes into the market later in the year, mid to late of the year.

Thank you.

You're welcome.

Thank you.

Our next question, comes from Craig Ellis of Salomon Smith Barney.

Thank you.

First question, can you take us through in the first quarter what some of the prices were both on the positive side and the negative side versus your expectations going into the quarter.

Actually, as you know we guided you guys to 2/5 and 2/10.

We were happy to see Discreet strong performance.

We knew they would be up, but having the Advance Systems up 44% was very pleasantly good for us.

When you ask about good surprises, that was a very nice good surprise.

I would say on the down side -- let me think about it.

I guess I would think ISB wasn't going down as much as it went down.

We knew the releases were late in the quarter.

I would expect it instead of a 14% decline maybe a little less than that.

That market had been going fairly nicely.

These new releases are pretty strong one for them.

They are important ones and I think that word got out there.

I guess I'm not that surprised about -- I know one.

This is a good one.

I think the U.S. could have been stronger.

It was up $5 million.

When we gave the forecast, we really didn't believe there would be that much geopolitical effect and I don't know if it was that or people didn't want to spend money in Q1.

I could have seen a few more million from the U.S.

Nothing from a competitive share loss?

No, no.

Really not.

We have competitors.

I don't mean that.

This is not about share loss.

This is just about dragging money out of customer's hands.

And looked like all of the applications came out per your expectations from a timing standpoint in the first quarter.

You mentioned Inventor Pro in the second quarter.

Can you remind --

First of all, I want to remind you that we only had two weeks and in some of the products about two days of our infrastructure products shipping.

So they get legs in this quarter.

Secondly, most of the localization hit either late in the quarter or is hitting about right now.

There is still things happening in Q2 from that standpoint.

As far as Inventor Pro, that will ship in June.

There clearly are customers waiting for the whole mechanical design solution.

So we do expect over time -- I say over time, that we should have an attach rate of Pro and maybe the 40% range.

We got to get out there.

We got to get people using it.

We got to make sure.

It's software and that it's working right and that sort of thing.

Give us a few quarters but we were excited about -- and by the way, our customers are excited about what this means.

As well, I will tell you, we told you on analysts day, we will have vaults in these products like in Inventor.

We did a vault gun slinger up in our manufacturing head office and I have to tell you they are excited about what they are seeing.

Pro, vaults, there is good stuff coming later in the year.

And Al, clarifying on the operating expense, you did see the full $5 million in product launch expenses so we can take that out and give us a reasonable second quarter number.

That's right.

Seems like you hinted at the potential perhaps later this year for further operating expense reduction.

Can you go further on those comments?

I will tell you about that as you watch our revenue levels and we aren't happy with keeping the margins where they are for long.

If the revenues and expenses don't come into line we will take another hard look at our costs.

And then just lastly on China, it seems like what you might be saying with $7 million from China in a quarter is that China is 3% of revenues and not counting on any of that, is that correct?

We aren't saying that at all.

We are absolutely not saying that at all.

There will be business in China.

Please don't try and do any inferring about the China revenues.

We are being out there that that is the number and the DSG and Discreet people down forecast.

It wasn't just China.

It was for Asia-pac.

Taiwan, Singapore, the group.

Alright Al, thanks too Carol.

Participants, if you wish to ask a question, simply press star-1 on your phone key pads.

Our next question comes from Keith Gay from Thomas Weisel.

Just trying to get a little more clarity on the guidance for 875 for the year, that would imply 30 million more revenue in the second half.

Now the fourth quarter typically stronger and there will be an OBIT.

Can you give more color on where that incremental 30 comes from to get to the low end of that guidance.

Yeah, you do the same kind of math we do.

And Q4, you can look back at even last year and see the uptick you get from Q4.

That was sitting right smack at a new product wall.

You got an OBIT, we didn't have an OBIT last year.

We have the products we are talking about.

It's way too early to give up on this year.

We can make our numbers work.

Make them work in your model.

Okay.

Also, with regard to SARS, you had operations over in Singapore.

Any disruption there?

Is that anything material that we need to think about?

Well, we have operations in Singapore, but as far as getting our stuff out of the factory?

No.

A lot of the problem with SARS is you can't travel between -- people can get to their job.

In Beijing they were locked out of their offices.

Locked out they didn't want people in their offices.

But the problem you have is you can't go from town to town in China because you to go into that ten-day quarantine thing.

It affects sales more than people trying to go to work to get products shipped out of the doors in

Were you happy with Apeck?

Very happy with the revenue during the quarter.

I will tell you we were sitting on pins and needles.

When they started to cancel all of their seminars.

They had these things all scheduled.

We had to cancel a big major account seminar that we were bringing folks in from all over the region and our customers said, are you crazy?

We aren't going Shanghai.

So it's pretty strange when the only new product rollout you can have are in India.

And some in Australia and we had them in Japan, but we missed Taiwan, Hong Kong, Singapore and we missed Beijing, Shanghai and they get some really great attendance at those things.

We are hoping to be able to roll them out.

Then you have the summer coming.

To be honest, you aren't going to roll those out until the September time frame.

And Al, just to clarify, you said 24% tax rate, I believe that's an improvement from last quarter and you are saying to use that going forward and can you also give a little more color on what you are doing to bring that down.

That's the rate for the full year.

That's our estimate.

It's a geographic mix equation.

That's how the rate is being managed down.

And that's something that you can plan for and keep at those levels going forward?

We believe after this year we aren't forecasting rate for future fiscal years.

Thanks.

Our next question comes from Dennis Wassung from Adams Harkness.

Two quick questions.

First, on Inventor Pro, give us more detail about this in terms of potential target price for this product and curious if the product is going upstream or adding applications specific capabilities that you talked about and specific disciplines and also will there be an upselling opportunity to your existing base?

We haven't done the price yet.

But the strategy is to include these applications in a bundle.

So that it's not like pay $500 for piping and another $500 for this.

It's going to be an Inventor Professional bundle.

And the idea, of course, is to upsell.

Upsell existing Inventor Pro users from people who said they can't do piping and tubing and so forth.

We will be making Professional series richer and richer as time goes on.

Which is why perhaps this 40% penetration is where we are talking this time next year or several quarters out.

Maybe we can get higher than that.

The idea is to start moving deeper into the manufacturing design cycle, if you will.

So more than anything, it's sort of adding capability to your users?

Not really targeting new users?

No, no.

That's not true at all.

There are users now -- let's look at pro E. Pro E is a great set of applications as well as they sell systems.

A great set of applications they added on to the basic modeling capability.

There are accounts that we haven't been able it get because we don't do electrical harness layout.

Any machine has to be plugged in some where, had to have electrical somewhere.

Or because we don't have piping and tubing and et cetera, et cetera.

This is definitely after new business.

But the good news is, some of our accounts have been kind of doing this either with 20s, or -- and in other words doing it the hard way.

We can upgrade as well as absolutely get new business.

Any idea in terms of available market in terms of number of seats that this kind of expands it to and where it is today?

Well, sure.

Our marketing folks have done all that.

I think what's important about this is as much as anything as you look at Inventor 7 like we talked about trimming surfaces and large assemblies.

We are getting closer and closer to the big guy stuff here.

We are getting closer and closer to -- if you look at what Pro E ships and what's out there with K's ATIA 5.

That's a half million seats with customers that want to do these types of things.

That's not expanded view of the 3D market.

There is business out there for us to get.

I mean, we aren't yet talking about car bodies and air frame assemblies, but we are damn well talking about everything else.

Ok.

Excuse me, darn well talking about everything else.

and that one question for Al, you mentioned currency effects.

Can you go over that a little more in terms of how they corresponded to what you saw last quarter and pretty much as expected and how they really affected the numbers this quarter.

I can't say that I expect it.

I'm not good at forecasting currency like Warren Buffet.

It's primarily from the Euro and secondarily from the Yen and the rates from favorable.

The average rates for the first quarter versus the fourth quarter, the Euro was stronger and the Yen was stronger.

Those are how we got that $4.5 million increased revenue.

There is an offset of the expense side about half that.

Revenues were $4.5 million higher than that due to the currency effects and the same on the expense side, or roughly -- sorry?

Compared to the Q4 rates, that's correct.

Everybody remember, when you get a positive hit on revenue you get a negative hit on expenses.

Vice versa.

Great.

Thank you.

This concludes our question and answer session.

At this time I would like to turn the call back over to our host for closing remarks.

I would like to thank everybody for joining us and as usual we will be available if you have questions at another time.

So thank you and look forward to seeing you throughout the quarter.