Autodesk Inc (ADSK) 2004 Q4 法說會逐字稿

Welcome to the quarter four 2004 Autodesk Inc. earnings conference call. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Ms. Sue Pirri, Senior Director of Investor Relations.

Please proceed.

Thanks, operator.

Good afternoon, everyone, and thank you for joining us as we report results for our fourth quarter and fiscal 2004.

With me today are Carol Bartz, Al Castino and Carl Bass.

Today's conference call is being broadcast live from an audio Webcast.

In addition, a replay of the call will be available by Webcast on our website, www.Autodesk.com/investor.

During the course of this conference call, we will make forward-looking statements regarding future events and performance of the Company.

We wish to caution you that such statements reflect our best judgment based on factors currently known to us, and that actual events or results could differ materially.

We would like to refer you to the documents we file from time to time with SEC, and specifically our 10-K for fiscal year 2003, and our 10-Q for the quarter ended October 31, 2003 and our periodic 8-K filing.

These documents contain and identify important factors that may cause the actual results to differ from those contained in our forward-looking statements.

As a reminder, inherent to regulation for disclosure, Autodesk will provide quarterly information and forward-looking guidance in its quarterly financial results press release and this publicly announced financial results conference call.

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

During the call, we will discuss non-GAAP financial measures.

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

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures are set forth in our press release issued today, February 26, 2004, and are made available on our website.

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

Today, I'm pleased to announce outstanding fourth-quarter performance.

Revenues were $295 million.

Earnings per share were 48 cents on a GAAP basis and 45 cents on a pro forma basis.

For the year, revenues were 952 million.

EPS was $1.04 on a GAAP basis, and 83 cents on a pro forma basis.

Before I turn the call over to Al for a detailed financial review of the quarter, I would like to highlight some key themes.

We had an outstanding quarter.

We saw strong growth across all markets and all divisions.

Revenues increased 26 percent sequentially.

Consistent with typical product retirement patterns, we saw significant growth in upgrade revenue, as resellers concentrated their efforts and customers concentrated their budget dollars around the retirement of the Autodesk 2000 base product.

Our subscription offerings continue to be a great success, as customers recognize the value of our subscription program.

Finally, we continue to deliver on our commitment to improve profitability.

Pro forma operating margins reached 21 percent in the quarter, up 9 percentage points, sequentially.

Pro forma EPS increased 125 percent sequentially, and our restructuring efforts are just getting underway.

Now I would like to turn the call over to Al.

I will start with a review of the financials and then turn to guidance.

As Carol said, revenues in the quarter increased 26 percent sequentially and 51 percent over the prior year to 295 million.

Earnings per share were 48 cents on a GAAP basis.

Pro forma EPS was 45 cents, excluding a $3 million restructuring charge and a positive $7 million tax benefit from the successful completion of a prior year IRS audit.

Earnings per share were 20 cents per share on both a GAAP and pro forma basis in the prior quarter.

In the same quarter of the prior year, GAAP EPS was 6 cents and pro forma EPS was 7 cents, excluding the $4 million tax benefit and $7 million in restructuring charges.

Starting this quarter, we are (inaudible) reporting revenue and cost of revenues from our subscription program, which is called "maintenance" in our financial statement.

DUG (ph) subscription revenue increased and impressive 10 percent sequentially, and represents 12 percent of DSG revenue, in a very high license revenue quarter.

With our fourth quarter results, we're changing our allocation of certain costs, primarily information technology costs, which were previously included in G&A to align the presentation used by most technology companies.

We have reclassified these costs to other functional areas that benefit from these services.

We (technical difficulty) regarding the reclassification.

We're making this change to better reflect how we run the Company, and we believe that it is also consistent with other software companies, who traditionally have allocated most IT costs across all functions.

This change has no impact, whatsoever, to margins or profits.

It simply moves costs across categories' costs and expenses to align with most other technology companies' presentations.

And finally, this is not a correction of an error, nor is it a change we are required to make.

Our past SEC filings noted that we did not allocate these costs.

There are various methods of allocating costs, which are acceptable within generally accepted accounting principles.

We are moving from one acceptable method to another.

As a result of this change, an amount equal to about 5 percent of annual revenue moves out of G&A to the other costs and expense category.

Our historical results are updated to reflect this change in allocation methodology, and are included on our website.

Our discussion today will focus around the new allocation model.

Let's move onto the rest of our financial results.

Gross margins were 87 percent of revenue, higher than our normal range, due to product mix and volume.

Pro forma operating expenses were 197 million compared to $169 million last quarter.

The majority of the increase was related to our revenue growth, accrual for bonuses, commission and billed (ph) awards club increased, including year-to-date catch-ups that (ph) expected full-year payout levels.

As you'll see from our guidance, pro forma operating expenses in Q1 will drop to levels approximating prior guidance.

Pro forma income from operations totaled $61 million.

Our pro forma operating margin improved substantially in the quarter to 21 percent, demonstrating a significant leverage in our operating model, and the progress we're making toward our annual operating margin target of 18 to 20 percent.

Our annual operating margin was 11 percent on a GAAP basis and 12 percent on a pro forma basis, excluding the impact of the $3 million restructuring charge.

Other income increased to $9 million.

We received $4 million of accrued interest from the IRS related to a $20 million tax benefit we recorded in the second quarter.

As you will recall, this related to the favorable resolution of an industry-wide issue regarding foreign sales corporations.

And we had $2 million of foreign exchange gains in the quarter.

On a pro forma basis, income before taxes was $70 (ph) million, and net income was 53 million.

Our income tax rate was 24 percent.

There were 119.8 million shares used in calculating diluted net income per share, up 5 million shares from the prior quarter.

There is virtually no change in outstanding shares this past quarter, while diluted shares outstanding increased due to our higher share price.

Compared to last quarter, foreign currency impact was favorable $9 million in revenue and unfavorable $3 million on expenses.

We're also very pleased with our annual performance, looking to the year, revenues increased 15 percent to 952 million.

GAAP basis earnings per share were $1.04, an increase of 271 percent compared to 28 cents in the prior year.

Pro forma EPS was 83 cents compared to 41 cents in the prior year, an increase of 102 percent.

Compared to last year, foreign currency impact was a favorable 58 (ph) million (ph) on revenue and unfavorable $23 million on expenses.

Turning to the balance sheet, closing cash and investments increased to 530 million.

Fourth-quarter cash from operations increased 124 percent sequentially to $119 million, which included the refund of $24 million from the IRS for the tax benefits mentioned earlier.

We used 97 million of cash to buy back stock over 4 (ph) million shares of stock and 3 million to pay our normal quarterly dividend.

We received 55 (ph) million in cash from employee stock purchase plan and from stock option exercises.

You should note that year-to-date, we have repurchased over 9 million shares of stock, primarily to offset employee stock program dilution.

With a higher stock price, we're seeing more exercise of options.

Over 4 million shares were exercised last quarter.

We remain committed to buying back shares in the market to offset the exercises.

Deferred revenue grew to $127 at quarter end, up 20 million from the prior quarter.

Deferred subscription revenue increased to 84 million, up 17 million from last quarter.

The atypical (ph) Q4 pattern was both large renewals and new subscriptions.

Days sales outstanding remained at 51, at the low end of our normal range.

Higher than normal levels of sell-through in the quarter led to lower than normal channel inventory levels, thus channel inventory was below our normal range, at slightly more than three weeks.

We built some backlog last quarter beyond the levels we normally see in our business.

Our backlog takes several forms, including deferred revenue, orders of Q4 requested (ph) ship dates which were not shipped by the end of the quarter; and orders (ph) with requested ship dates beyond Q4.

We have backlog in each of these categories in both quarters, but the amount, as we entered fiscal 2005, were higher the normal.

We are extremely pleased with the (indiscernible) results this quarter.

Now let's turn to guidance.

Fiscal 2004 was a great year.

We're beginning fiscal 2005 with a better product lineup than ever, and higher backlog than normal.

But there's lingering uncertainty about both the sustainability of current foreign exchange rates and the ongoing strength in the economy on a worldwide basis.

With our strong results this year, we will have very challenging comparisons in the second half of fiscal 2005.

In this environment, we are more committed than ever to our cost reduction.

As I said last quarter, most of the reductions are planned to occur in the second and third quarters, and, therefore, you will see most of the cost impact in the second half of the fiscal year.

Nearly all of our reductions should be completed by the end of the third quarter, so operating margin guidance for Q4 of fiscal 2005 provides a clear picture of our expense levels after the reduction.

Our guidance assumes that the number of fully diluted shares outstanding remains similar to this quarter.

We did not attempt to take into account the impact of fluctuations in share price.

In considering these various factors, we now expect revenue for the first quarter of 240 million to 250 million.

When you're comparing Q1 to Q4, remember that Q4 had an unusually high cost for bonuses, (indiscernible), and commissions.

But Q1 does have the normal seasonal costs related to product launches, payroll taxes and other costs, leaving us in an EPS range of 16 to 21 cents.

For the full year, we expect revenue growth of approximately 5 percent over fiscal 2004 from 990 million to $1,010,000,000; and pro forma EPS in the range of $1.15 to $1.25 per share, a growth rate of approximately 40 percent.

In order to give you better visibility into the timing of our cost reduction, we're updating our fourth-quarter 2005 operating margin guidance, as we continue to believe that operating margins will be at least in the mid 20 percent range.

We remain committed to an operating margin of 18 to 20 percent for full year results, starting with fiscal 2006.

In that model, which incorporates a reclassification we talked about earlier, we target the following -- gross margins in the 84 percent to 86 percent range, with a wide variance depending on product mix, particularly Discreet versus DSG;

R&D, between 21 percent and 23 percent; sales and marketing between 34 percent and 36 percent; and finally, G&A between 8 percent and 9 percent.

Autodesk begins the new fiscal year with an outstanding balance sheet, improving margins and improving revenues.

We are on track financially.

Now let's go back to Carol for a review of the business.

Before I get started, I would like to make some general observations about this quarter.

First, the worldwide economy is showing improvement, with the U.S. and Japan particularly strong.

As we have said before, the level of improvement varies by industry.

While construction spend is mixed, the manufacturing, media and infrastructure sectors continue to gain strength.

We are very pleased with upgrades, subscription and new seat (ph) revenue this quarter.

Total upgrade revenues were $100 million, a 73 percent sequentially increase.

Subscription bookings increased over 60 percent sequentially and drove a 13 percent sequential increase in subscription revenue.

And finally, even with the focus on operating (ph) and subscriptions, we saw new commercial seat revenues grow 12 percent sequentially.

Now let's look at performance by geography.

EMEA had an outstanding quarter.

Revenues grew 45 percent sequentially and 68 percent year-over-year to 112 million.

Operating revenues increased 82 percent sequentially and 266 percent over the prior year.

And subscription revenue gained significant traction, more than 25 percent sequentially.

While EMEA always sees the largest Q4 growth of any geo, FX rates provided substantial incremental benefit this year.

The Americas had another outstanding quarter, growing revenue 22 percent sequentially and 46 percent year-over-year to 128 million.

The U.S. economy continues to expand and customers are freeing up spending as they are seeing improvements in their own businesses.

Consistent with trends noted throughout the business, operating revenue grew 63 percent sequentially and 181 percent year-over-year, with strength in all major products.

Revenues in Asia Pacific increased 7 percent sequentially and 34 percent year-over-year to $55 million.

We saw particular strength in Japan, where the economy has been picking up since the middle of the year; and Australia also showed strong growth.

Revenue from Inventor series increased more than 30 percent sequentially in the region, and over 40 percent in China.

Turning to the divisions, I would like to start with Discreet, which turned in a strong Q4 performance.

Revenues increased 11 percent sequentially and 25 percent over the prior year to $37 million, allowing them to turn a slight profit.

In Asian and desktop video revenue -- grew 33 percent sequentially and 21 percent over the prior year on record sales of the latest version of 3DS (ph) Mac (ph), which was released at the end of Q3.

Mac's strength and versatility are demonstrated by its continued use in the game and feature film markets.

Advances (ph) systems revenue was flat sequentially and up 27 (ph) percent over the prior year.

But the story is much more interesting than that.

We saw good momentum in revenues from Inferno, Flame and Fire; customers recognize the importance of digital workflow to drive deficiencies and profitability.

This was offset by a decrease in revenue for Smoke, as customers waited for a new release.

Design solutions revenues grew 29 percent sequentially and 56 percent over last year to 258 million.

Before we dive into divisional discussion, I want to touch on a few key themes.

As I noted earlier, upgrades accounted for much of the strength this quarter.

Cross (ph) grades increased significantly in the quarter as well.

In fact, cross grades accounted for nearly 40 percent of non AutoCAD upgrade revenue.

This sets us up for a higher future higher future upgrades or subscription ASPs.

More importantly, this support our strategy of moving customers to model-based platforms, that are key to lifecycle management.

We were pleased that new seat revenue grew 12 percent sequentially, and we are very encouraged by new seat revenue growth in some key strategic products, particularly Inventor and Revit.

Our subscription base continues to show strong growth.

As we enter the fiscal 2005, our product lineup is stronger than ever.

We have significant new releases of all major products at the same time earlier than they released in 2004.

In addition, we are planning to introduce three new products to our Civil engineering market in the fall.

Our Civil 3D is currently available for subscribers only, and the feedback has been exceptional.

Finally, in January 2005, we will retire our AutoCAD 2000 I-based (ph) products.

That release has about the same size install base as AutoCAD 2000 had at this time last year.

Now let's discuss the divisions.

Platform technology showed solid growth again this quarter, increasing revenue 24 percent sequentially and 56 percent compared to last year.

AutoCAD revenues increased 26 percent in the quarter.

AllKey (ph) showed strong growth as new seat revenue increased 15 percent sequentially, and upgrades increased over 180 percent.

PTD (ph) has evolved into a highly-tuned product development engine.

Dramatic releases with dramatic increases in functionality in a few key areas and seamless migration makes annual product releases compelling and easy for customers to deploy.

The first product of our annual release cycle, the AutoCAD 2005 based family of products, will launch next month.

AutoCAD 2005 advances our customers life cycle management capabilities by providing improved efficiencies of the digital workflow process.

AutoCAD 2005 allows users to better manage and publish sheet (ph) sets and to communicate project information for markup and review.

This product went into beta in the fourth quarter with over 800 customers, and the feedback has been terrific.

According to one beta user, and I quote, "This next release of AutoCAD is one of the best releases to date.

The sheet set manager and the field features are robust and just plain well-thought out.

By utilizing these features, as well as the table objects, users will see tremendous productivity gains.

I don't know that I have seen a release whose new features have the potential to impact such a large segment of the AutoCAD user base across all disciplines in such a huge way."

Another critical element to design life cycle management is the ability to review drives (ph) and communicate across entire project teams.

For the first time, AutoCAD 2005 incorporates Auto desk design Web format, or DWF for an easy and cost-effective way to distribute and communicate digital design data throughout all product life cycles.

According to one of our customers, "by using DWF on our plan books, our architects are able to quickly search and find a better plan, make the changes necessary and get moving with that new model.

We can save as much as 10 months on the development of our plan.

It is incredible what can be done."

In tandem with the release of AutoCAD 2005, we introduced Autodesk Swift (ph) composer yesterday.

Thrift composer kicks up where AutoCAD leaves off by improving project team sharing of design throughout the entire review process.

It is the only application available with a complete workflow to review, markup and revise drawing sets, which is done primarily on paper today.

Swift Composer now lets project teams shorten cycle times, minimize errors and reduce costs by keeping the entire process digital.

This product extends our reach to nontraditional users and is a key component of our life cycle management strategy.

More specific detail on the AutoCAD 2005 family of products is included in our press release dated February 17.

Now I would like to turn to manufacturing, where we are strengthening our position as the industry leader.

Small to medium manufacturing firms have similar requirements around process and efficiencies as fortune 500 companies.

But they have lower tolerance for costly time-consuming implementation.

Our solutions are addressing our customers' paying points, providing a majority of the functionality and other manufacturing solutions with an ease-of-use and price point that are attractive to the mainstream market.

The improved performance and efficiency of a 3D model, built-in Inventor allows customers to reduce cycle time and cost.

Currently, only between 10 and 20 percent of our manufacturing customers are on 3D, representing a significant growth opportunity for the Company.

During the quarter, manufacturing grew revenues 41 percent sequentially and 72 percent over the prior quarter to $47 million.

We shipped over 38,000 new commercial seats of 2D and 3D products to our customers.

Revenue from our 3D products, Inventor and Inventor Pro, increased 41 percent sequentially, as customer reaction to release date has been extremely positive.

Release date, which hit the market in late November, is quickly gaining a reputation as a game changer in terms of functionality improvement.

We saw a substantial increase in new commercial seats during the quarter, to 8,250 compared to the 7100 seats of our closest competitor.

We shipped over 26,000 Inventor and Inventor Pro seats in the year.

As a result, we have the top-selling 3D manufacturing solution for the third straight year.

Our 3D ASPs are at their highest levels ever.

And they are continuing to invest in manufacturing.

Tuesday, we announced the acquisition of the (indiscernible) of MechSoft, who provide tools and enable users to invest engineering calculations, engineered designs from the start.

This strategic acquisition advances our goal of helping customers build products based on the concept of functional design, which is a new and more direct way to designing 3D.

Functional design moves beyond 2D drafting and 3D modeling, enabling users to work in terms of mechanical relationships rather than simply parametric descriptions for geometry.

This engineering functionality means users can speed (ph) their design cycles and optimize as they design.

We intend to integrate key components of MechSoft's technology into future versions of Autodesk Inventor series, allowing us to deliver even more value to our manufacturing customers.

Streamline, our collaboration solutions for the manufacturing market, continues to grow.

With the continued trend toward outsourced manufacturing, our strategy of retaining design information in digital format is resonating with our customer.

Westinghouse Nuclear, window manufacturer, Pella, and food manufacturer, Kraft, are all users of Streamline now.

While worldwide construction spending has lulled, building solutions had a very, very strong quarter, growing revenue 31 percent sequentially to $27 million.

As building projects become more complex and demanding, customers are requiring better information.

Increasingly, they're recognizing the value of the building information model.

Revenues from new commercial (indiscernible) of architectural desktops increased over 40 percent sequentially.

And Autodesk's building systems, which is designed specifically for mechanical, electrical and plumbing engineers, had its best quarter to date.

During the quarter, we launched Revit 6, as well as Revit series, which (indiscernible) Inventor series allows customers to migrate to 3D on their own schedule.

Revit had its strongest quarter with 120 percent increase in new commercial seats (technical difficulty).

Let's move to Buzzsaw, which is rapidly becoming the construction industry standard for managing projects.

Last quarter, we shipped two new products, Buzzsaw 5 and Buzzsaw Professional 5, which enhance support for global project teams.

Buzzsaw continues to see strength in the residential construction market.

And our particular focus on the retail sector resulted in wins at Coles Meyer, one of Australia's largest retailers;

Petco, the large pet food supply company, and Shaw's Supermarket, a grocery chain on the East Coast.

Construction in the New York Jets' stadium is being managed with our service as well.

It's important to note, Buzzsaw continues to bring a new type of customer to Autodesk.

And our sign (ph) collaboration strategy continues to gain acceptance and momentum in the market.

As the leader in digital design data, Autodesk is uniquely qualified to provide an open, secure file format to share engineering design data.

Our DWF format allows designers, engineers and their colleagues to communicate design information and intent to anyone needing to view, review or print sign information.

Our free Autodesk DWF viewer is extending our reach into new customers.

Demand for it continues to accelerate, with over 11,000 daily downloads in the fourth quarter and over 2 million total users.

Our new DWF composer priced at $199 has the ability to review files exactly as they are in AutoCAD, make markups and integrate them back into the original AutoCAD drawing, allowing users to complete the digital round tripping of their design data.

This product will appeal to many of the 2 million users of our free viewer.

Our infrastructure solution division turned in an excellent performance.

Revenues increased 32 percent sequentially and 45 percent over the prior year to $38 million. (Indiscernible) manufacturing, the value chain for our infrastructure customers, governments, utilities, communication companies and civil engineering firms is already integrated.

Customers are demanding solutions to drive productivity and efficiency, and Autodesk is the only vendor that can provide integrated solutions across all stages of their projects.

In the U.S., we saw continued strength in federal spending as the Department of Defense and other agencies are aggressively spending new fiscal year funds.

In addition, at the state and local levels, we saw significant activity in the area of emergency response where we continue to absolution.

Consistent with other trends, infrastructure customers are focusing on upgrades before purchasing additional seats.

AutoCAD Map upgrade revenues increased nearly 90 percent sequentially, while land desktop operating revenues increased nearly 40 percent sequentially.

Civil is the latest market for which we have introduced a model-based design offering.

Last quarter we released a preview of Autodesk Civil 3D, the only the only Civil engineering tool in the market that creates intelligent relationships between objects.

The design changes are dynamically updated.

Civil 3D is currently available only to Civil series and Civil design subscription customers, and the response continues to be terrific.

Before answering your questions, I would like to summarize a few key points.

By all measures, we had an outstanding quarter.

We saw strong upgrades in advance of our product retirements and were pleased with the growth in new seat revenue.

Subscription bookings increased substantially as customers continue to see the value in our subscription plan.

We continue to make improvements in our profitability, increasing operating margins significantly.

As we look forward, there are a number of positive factors impacting our business.

Our strategy is working.

Autodesk solutions are the worldwide design standard.

Most of our customers are still using 2D.

Even in manufacturing, between 10 and 20 percent of our customers currently use 3D.

The move to 3D presents enormous revenue growth opportunity with significantly higher ASPs.

To support downstream users of digital design data, the desktop has to continue to be smarter.

Customers operate for their productivity and process improvements of our latest desktop tool, enabling us to offer better design information.

The desktop provides a platform from which to implement our life cycle management solutions, which provide the tools and functionality to meet the needs of the increasingly globalized worldwide economy.

In addition to life cycle management, we continue to focus on geographically based initiatives that present significant long-term growth opportunities.

Our present in China is a most significant example.

Our product offerings have never been better.

We have established an annual product release cycle, that focuses on dramatic releases, providing significant improvements and functionality and seamless integration.

Starting with the launch of the AutoCAD 2005 family products next month, through the new releases of Inventor and Inventor Pro mid summer, and 3DS (ph) Map in the fall, we have significant new releases of all major products coming at the same time or earlier than they released in 2004.

And we have the most important new release of Civil 3D as well as new Linux-based products for our efforts for our media customers.

The subscription program continues to be successful.

We saw record increases of subscription bookings this quarter.

The success of our subscription program will be a key factor in improving the predictability of our business model in the future.

We generate significant cash from operations with upside potential as we reach our target model.

Our balance sheet is strong at $530 million in cash and securities and no debt.

Finally, while we made substantial improvements in our profitability this quarter, we are not in our target operating margin range of 18 to 20 percent on a consistent annual basis.

Our guidance provides for significant increase of operating margins in EPS and the entire company will not be satisfied until we reach that goal.

We are all committed to reaching that goal.

To summarize, we have a great growth strategy, a fantastic product cycle coming in 2005, and we are moving to a stronger and more profitable business model.

With that, we are ready to take your questions.

Operator?

(OPERATOR INSTRUCTIONS).

Tom Berquist, Smith Barney.

Congratulations on a great quarter.

Thank you.

I heard your commentary on the cost shifting out of the G&A.

Can you talk about what the components of those costs are that are moving?

The majority of the costs are IBE (ph) costs.

And we allocate those to the user division based on different allocation basis that measure for uses.

So that is the majority.

There are some other small costs, but most of it is IT.

Would that include Telco as well?

Yes, it does.

Can you talk a little bit about the competitive environment in the quarter, especially with the other PLM vendors; if you could just walk through what you saw?

The competitive environment -- so let's start with manufacturing -- I think the -- one of the most important visible metrics is our 8,250 Inventors (ph) versus our closest competitor of 7100.

So that is a third straight year that we have outshipped them.

I don't think the competitive environment changed that much from what we had seen the quarter before.

I think we are continuing to make strides in going sort of up market, if you will.

Inventor is increasingly doing a good job of larger assemblies; it's faster; and it's just getting into places that, frankly, I don't think many of our competitors really ever get.

As well, we are starting to get traction in people understanding how serious we are with Inventor Pro; that we believe we have to round out our offering to have much better design coverage, if you will, with wiring, with tubing, a balance (ph) of that sort of thing.

Also, the Vault (ph) is increasingly becoming important, because folks want to understand how they can improve workflow and security downstream.

So in fact, I would say what is getting kind of interesting is, our lifecycle management or engineering data management, whatever you want to call it, strategy, is actually starting to pool (ph) Inventor.

Because there is not a customer that comes in here that somehow doesn't have some kind of global nature.

So they now see if I really am going to communicate, I call it the four F's, funds (ph), facts (ph), FedEx, and phone -- that is the fake F. It isn't good enough any more.

And you can't set up operations around the world or even across the state using that old-fashioned methodology.

So I would say from a competitive standpoint, the manufacturers, we're getting stronger and stronger.

In the building area, I think that the rev up period is going to be very important, because our customers are seeing 3D, but they don't want to make the bet on it get.

This is way behind obviously, manufacturing, which as I said on the call, is in itself only 10 to 20 percent 3D.

Think of almost no penetration yet in the architectural construction world.

And that is -- (indiscernible) by the way of the building model is construction, not that architecture, if you will.

Infrastructure, a big competitor, philadessory (ph), but doing a lot better with our solutions.

Discreet is the same, neck to neck with Abbott (ph).

So I would say, nothing dramatically has changed.

We're doing better.

Just as a follow-up to your question about the collaboration stuff in general -- some of the other vendors have stated that they are able to find customers outside of traditional markets, that are interested in that technology as well.

Have you seen that at all inside of your base?

When we consider lifecycle management, we consider that in all of our markets.

In fact, I thought I made great examples even with Streamline with Kraft foods.

Who would think of them -- we call them a food manufacturer, for instance.

So that is not a natural customer for us.

Petco is not a natural customer for us.

So we are definitely seeing folks outside of -- definitely outside the traditional design department.

But anybody that has to productize (ph) something -- so anything except the services business, if you will, is a natural customer for the life cycle or PDM or EDM offering.

On the distributor side, have you seen distributors start to hire people again?

Absolutely.

They are definitely feeling confident.

Listen, if we put these numbers up on the board, they put the numbers up on the board first.

That is the flow.

And I would say they're downright deity.

Do you have any way to quantifying the rate of hiring, or the amount of hiring that they have been doing?

No.

Eugene Munster, Piper Jaffray.

Congratulations, which I think it's safe to say is an understatement.

Carol, can you talk a little bit about the subscription side, just in terms of -- I know you throw out a lot of metrics out there.

But in terms of just the installed base that is not (ph) on subscription?

I know you have given us kind of a long-term target to what (ph) a (ph) subscription.

Can you remind us of how you're thinking about that?

Long term, what we announced (ph) at analyst's day last year was about 400,000 users would be on subscription.

And we are basically over 400,000, so we beat that target.

So we are very, very pleased with that.

Kind of a way to think about it is our installed base is 5 million.

Some of that is LT (ph), of course, which is not as natural for subscription.

But 400,000 was a statement we put out there last April, and we did beat that.

As we have said, Eugene, manufacturing continues to be the largest users of subscription naturally, because I think that product has been on the fastest churn.

AutoCAD as an installed base is the lowest, because it has the biggest installed base.

But new AutoCADs seats have a very high attach rate for subscription.

So in general, I think we are on the way to the commitment we have been making, which is between 25 and 30 percent of the revenues being subscription-based revenues, which to me is kind of the complete story.

That is sort of on an average basis when you average out the quarters like this quarter, what upgrades are.

So we look at to 25 or 30 percent of our base being subscription.

I'm sure it's embedded in all the numbers you went through, but what percentage of the new seats are actually have subscription on them?

We don't announced that.

But we are beating our target.

So we are at a high enough number that we think this is all very sustainable.

In terms of 2005, just pricing on that, any sort of early thoughts on how price is going to date?

I don't see any -- no changes in SRP.

And we have been very happy with what has happened with ASPs.

As we mentioned, I know there always have been little jabs out there.

ASPs for instance in our mechanical products, manufacturing products, have never been higher.

So ASPs are definitely trending up.

SRPs will not change.

So the upgrade price for AutoCAD 2005 is going to be the same as 2004?

Exactly.

Plus the same as (indiscernible) one release behind, two releases behind.

So think of it sort of as 500,000 and 1500, depending on where you are in the cycle.

From a big picture, obviously, January is phenomenal for a lot of reasons.

How do you think about going forward in terms of modeling the business?

Is there one side of you that says a lot of people are already upgraded, and we might hit a wall here?

Or do you look at the installed base that has and the percentage that hasn't upgraded and you feel pretty confident?

Talk a little bit about how you -- (indiscernible) a simplified picture?

You guys had a great quarter and how you follow it up, just kind of walk-through that.

I think the important thing -- and let me talk you through this -- is you guys used to think about cycles before.

If you still cannot get the word cycle out of your brain, think about the fact that the cycle now is inside (ph) the year.

And so we are having annual product releases and annual product retirements.

We have the same historical penetration of the 2004 based products as we've seen going backwards.

We have the same basic needs to upgrade next January as we saw this January.

So this now is a more predictable business, which I believe is affected more by economy and not affected by our product cycle.

It is affected positively by our products cycle, not negatively, because the product cycles stay within a year.

And so I think that is the answer right there.

The same number of uptake; so we are happy with 2004.

Actually, many -- I give you only one quote, but many of these users believe that AutoCAD 2005 is even a better product than 2004.

What it does was just that sheet set manager -- they are doing back flips over it.

Because it just saves them so much time.

So when you consider the fact that you have the new products and a retirement in the same fiscal year; yes, a better economy; and I would say, and let's not underestimate this, we now have a predictability for a stable (ph) channel in our customers that is starting to work for them.

And so it's not -- they know how the year will unveil; it is not a surprise they are going out to talk about a product retirement or when these new products are coming.

We have gotten very predictable as a Company.

And I think we work so close with our customers that these products coming out -- and I have not even talked about what is happening in Inventor 9 and Inventor Pro 9 -- these are really good products.

So I am feeling good.

If you looked at the operating margin for overall (ph) Autodesk, backing out Discreet, I know, Carol, you said it was slightly profitable.

Probably some easy math to do.

But can you give us a ballpark of what that is, Al?

You can get it all from our fact sheet.

Discreet, again, about 15 percent of the business.

And last quarter, they had a contribution margin of $5 million.

So if you take that out, you will quickly get to it.

Jay Vleeschhouwer, Merrill Lynch.

I would like to follow-up with some questions on your subscription business.

In fiscal '04, it looks like your total subscriptions revenue for the year was just over 110 million.

Your AutoCAD based upgrades revenue were about 160, which by the way, seems to have been lower than two years ago with the R-14 upgrade.

How do you see this developing in fiscal '04?

Do you think that this could be the year in which your subscriptions revenue will for the first time exceed upgrades revenue?

Or could that be more likely next year in fiscal '06?

I think it's next year, but let me pontificate on this a little bit.

First of all, we are totally committed to getting subscription of 25 to 30 percent.

But I would tell you that it almost does not matter right now because even if we get more money off operating subscriptions -- so let's talk about AutoCAD as a basis.

Every product has its own numbers.

But we have $400 million on subscription; we get $500 a year on upgrades.

So letting this upgrade to subscription thing feather in over a couple of years is just fine with me.

But more to the spirit of your question, as I said to most of you when I meet with you, this is really about an economy thing.

Because for someone to subscribe, they have to upgrade and subscribe.

So they have to give me $500 and $400.

They have to give me $900 versus 500.

And they will do that only if their budgets are more flush.

So whether that's this year or next year --because once they get on the 400 they are better off, just like we are better off if they don't, in a way.

So it's all about whether they feel the economy is strong enough that they want to double down and do subscription right now.

The other way I would look at it, and what I tell people internally, is the key to our financial model is not to how we sell our product.

The key is frequent strong product releases.

That is what drives the revenues, that is what avoids the up and down cycles of revenue.

Speaking of products, product cycles, you had, I think, awhile back, saw perhaps that once a year might have been too fast.

At least it's unusual in the packaged software industry to do once a year versus similar kinds of companies.

So what do you think or how do you think customers can continue to absorb once a year cycles, when in most other packaged software models, it's more of a 15 to 18-month cycle?

First of all, I think technology does tend to go in sort of fits and spurts, if you will.

We are in one of these sprinting times, where there's so much that we need to get in our desktop products, that we will support much, much stronger downstream process.

There is so much that needs to go in, again, whether it's getting DWF into AutoCAD, whether it's just getting better management of the data, so whether it's a supplier downstream or manufacturing or whatever, they can do something more with the original design information.

So we are in a real-time where we have got a few years where these desktops have got a lot to do.

But in support of that, we have made sure that there really is seamless deployment; that what the customer has to do the switch over is a lot less problematic than it used to be.

And we have this idea of formatic (ph) releases, which is we will take certain areas of what someone has to do, for instance whether it's AutoCAD or manufacturing, architectural, and we will focus on that it, so that it's real simple to explain to the customer what their productivity is going to be.

It's not like here is 200 random features and kind of figure out if it is interesting or not.

They get right away, for instance, what the sheet set manager does and what the field function does.

And they will take the bit, when it's that straightforward.

Now ask me five, six years from now whether we still have enough going on to do it ever year, I do .

Know but right now, we have got the next -- I think in AutoCAD alone, we have the next four releases planned; know what's in it; and frankly are excited about the functionality that is coming, four years from now.

To follow-up to that, at what point do you think you can -- it may be years away, but do you entirely dispense with upgrades?

Can you comment at all on what you're seeing in terms of renewal rates for subscriptions?

Are you seeing sequential quarter-to-quarter improvements in renewal rates?

In fact, are you expecting that to occur through fiscal '05?

I think ever is a long time.

I am not sure for instance -- we'd ever have AutoCAD be subscription only.

But you'll see our new products like Pro -- (inaudible) Pro is subscription only.

We have a lot of loyal customers that have been with us now 22 years.

And we just want to be careful and sensitive to their needs.

I think there you'll see most new products coming out that way.

We have seen increasing both penetration and attachment.

So we feel really good that the theme is making sense, that they do understand these annual relates; that they do understand there is a lot going on.

And like I said, I think that is pretty darn good even in this economy.

The other thing that is interesting is when we went out and did a poll with the customers on subscriptions, the number one and two things they asked for is online learning or e-learning, if you will, and support.

And both of those offerings are getting stronger.

So again, not so much that we are looking at this from additional revenue, as we are from just getting that sort of hook in if you will to get that subscription attachment and sort of visible support from our customers and to our customers.

When you look at the data sheet that you put out for year-end installed base numbers, you updated the numbers for products like Map and ADT and so forth.

If our calculation is right, it looked as though the amount of new units for each of Map at LT and ADT were smaller than the number of new units you shipped in fiscal '03 for each.

What is your reading of that?

And would you expect that new unit momentum for any of or all of those would perhaps do better this year?

It is interesting when you look at absolute new units this was -- last year, not '04 but '03 was not an upgrade year.

It was only partial, it was like midyear.

And so we did not have a retirement in '03.

So when we see a retirement and a tight budget year, you are going to see people making sure they get upgrades first.

So it's just natural that when they weren't, if you will, kind of forced to upgrade or retire, that they spend their money on seats.

We are not -- we like this 12 percent increase in commercial seats.

To be honest, I felt it might even be lower.

I was really pleased when I saw the numbers come out.

First they (indiscernible) and send (ph) their budgets so they did not get penalized and have to pay the 1000 or 1500 versus 1000.

So we are very pleased with what's happening to these seats.

Lastly, how do you see your sales and distribution structure evolving over the course of '05?

What is your comment on how it evolved over the last year?

You now have about a fourth fewer resellers in the U.S. than you had a year ago.

I know you don't particularly focus on that number as we talked about a couple of weeks ago.

But how do you see that structure or number evolving over the course of the rest of the year?

I don't see any change that's significant this year.

We are always looking to make sure that our resellers are capable and strong.

And if they lose the focus or the momentum, then they are cut.

Hopefully new ones are added, and there is not any change at all in '05.

I told you this before.

I know this sounds paradoxical to you, but I don't think the number of resellers is an indication of the capacity of the channel.

In some ways, there's sort of an inverse relationship there.

But proving the channel of the weaker players, we actually make the stronger ones stronger.

And there is a greater carrying capacity in the channel under those circumstances.

So we are going to do everything we can to ensure that our reselling partners are as strong as possible by getting the others out of the channel.

So I think you'll continue to see both the same structure, the same general structure, as well as our same kind of management techniques in managing the channel.

Gibboney Huske, Credit Suisse First Boston.

Two very quick questions, I know you are running out of time.

As you look at the leverage that you saw in Q4 and just the general momentum of the business, it seems like clearly you are ahead of where you thought you'd be.

Does that imply kind of we are looking at the high end of things continue to go well, of your sort of your margin goal of 18 to 20 percent; and is there a scenario as all these things play out, subscriptions, kind of increase the predictability of your business, that you could manage to sort of a higher operating margin?

Given your cash balance has continued to build, you seem to be gaining momentum in the mid range in mechanical and other areas.

Are there any kind of meaningful acquisitions you guys are looking at right now?

Let me do the last one first.

We like acquisitions like MechSoft, where we get some really good functionality and small engineering teams.

And I think that's what you'll see us continue across all our markets, that kind of acquisition.

I don't think you'll see us do anything large.

As far as the operating margin is concerned, listen.

My fondest dream is an operating margin somewhere in the '20s and growth somewhere 15 to 20, if I say I like those two numbers to sort of add up to 40 somehow.

But we won't let operating margins float too high if we believe we can invest to get stronger growth in the Company.

And that is the message we will talk to you about at the analysts' meeting in April.

But we are a software company.

You saw what happened this quarter; margins popped to 21 percent on that revenue.

And we continue to perform like we think we can and all that is possible.

Eric Wanger, Barrington Research Assoc.

Two questions, one thing I wanted to talk about is it looks like you are going to be up against some pretty tough comps next year.

Did I read it correctly that you guys were guiding to about 5 percent revenue growth for next year?

Yes, that's correct.

How much of that is just tough comps?

And what would be kind of the other factors in there?

Yes, we have tough comps especially in the second half of the year, especially Q4.

I think the other factor is, sure, the economies look better.

But I think everybody believes there is error (ph) we're off the ground.

But I don't know anybody knows what the slope is.

And the other thing is FX.

We had nice help from currency.

We have been very upfront about what that has been every quarter.

And you guys can all see that everybody is nervous about the dollar being so weak, in especially Europe.

So we want to make sure we are prudent in our guidance.

As far as the rationalizations going on, what is the stage and status of the rationalization, the staffing rationalizations?

We announced last quarter that we would have about 37 million in restructuring.

We have taken three of it.

So that alone tells you it's not even 10 percent yet.

Most of it as we said will be Q2, Q3.

A lot because (indiscernible) finance; we have a lot of work to do with systems and so forth before they can get to their restructuring.

It will be done by the end of Q3 because we want to have the operating expense line where it needs to be, so it's sustainable for '06.

So there's still a lot to do.

I think the way to think of it is a latency between our actions and your visibility.

But it will be totally visible to you by Q4.

And that is all consistent with what we said last quarter.

So the overall message is, we are on track; we are doing exactly what we said we're going to do.

Absolutely.

Yes, it seems like things are going well.

One other question.

This may be a qualitative question, but in terms of China, can you give us a feel for how the China opportunity is going, continues to play out?

And also I know you discussed piracy in the past, how that fits into the China puzzle as well?

Piracy always fits into China.

But I would say we are making good inroads with the ministers.

We are getting, obviously, business from them, not as much as we would if there was not piracy of course, because it is still in the '90s or higher.

I think the most important thing about China is, we are seeing 3D in China.

Inventor increased 40 percent.

We are investing our sales force in China.

We opened our China application development center.

We have fabulous hopes for China.

I think the piracy side, that is on the strength of our shear management, sales management and added salespeople and just gaining traction with our partnerships in China.

Fabulous, thank you very much.

Sasha Zorobich (ph), Oppenheimer.

My question is building up and now here, regarding your 5 percent growth credits for next year, basically on the face of it, if I am looking at it -- you have been so bullish and positive across the various segments that you are after, but then it really seems as if then, according to your guidance, almost I would say your prospects have dimmed.

(inaudible).

So I am trying to reconcile on one hand this really bullishness across the underlining growth of the various segments and then all that resulting in a just 5 percent growth in fiscal '05.

I am trying to reconcile where is then the weakness?

Is what I am missing out of this excitement.

We want to make our commitment.

We have got a lot we have to do this year to get our operating margins in line.

As I said, we got our economy (ph).

We are not exactly sure, we think it's going to be great.

We want to give ourselves a little room.

We want to give ourselves a little room on this currency issue.

We just don't want to miss this number, so you can go figure that out.

Keith Gay, Thomas Weisel Partners.

Congratulations also.

A question on Revit.

Can you just talk about how that is now doing versus expectations?

It sounds like building information modeling is gaining traction.

And also more detail there on what percentage of sales for Revit are subscription.

And how does that change over from -- occur for customers who are on architectural desktop?

How tough is it to switch?

What is the economics to you as you do get customers to change over?

Revit is doing well; it is on plan.

We introduced the Revit series, which we think is a big step and it's going to really help with the adoption.

As far as subscription goes, the Revit series is not subscription, but Revit itself is entirely subscription based.

So we think people will continue.

I think the third question that you had wrapped in there was around EDT, and the migration.

I think we are seeing migration both from vanilla AutoCAD customers as well as ADT.

I think it's really different firms are looking at it differently.

Some are willing to take -- the AutoCAD-based firms that really what process change, want those efficiencies, are moving to building information modeling -- are willing to take that step and invest and are doing it.

Others in some ways are using things like architectural desktop; this may not be the right word, but almost as training wheels.

It's a start.

And getting familiar with building information modeling, in a context they already understand with all the supporting infrastructure in place.

So some firms are choosing to go a much more evolutionary approach.

And others are a little bit more going for the big bang.

As you ship the AutoCAD family at the end of March, similar timing, as you said earlier, than this fiscal year.

Should we expect a similar pattern in upgrade revenue, where this year, it looked like it continued to sequentially gain?

Is that the pattern you are expecting?

Also, will all of the vertical products shift with that in the April quarter?

Or will some of those also be coming in the July quarter?

Let me start with the second part of your question.

Both the vertical products and the local language versions will mostly ship in Q1, but there will be some that hang out until Q2.

So some of them will spread over the quarter boundary.

And by the middle of Q2, you'll both have geographic coverage as well as vertical coverage.

And then Inventor Pro is later in Q2.

So pretty much by the end of Q2, everything is out there.

But earlier than last year, I think that is important.

As far as --

The timing of the upgrades, the thing about that is if you look at where we are at this point in the cycle versus the prior two or three releases, it's fairly similar.

We cannot say for sure how it's going to look quarter by quarter.

But I can tell you at the end of almost 3/4 since we introduced the product, it looks fairly similar.

Again, I would expect Q4 to be the largest always because of budgets and retirements and so forth and so on.

Finally, were there any really large deals during the quarter?

Or did deal sizes pick up?

Obviously, you saw a pickup in overall business.

Were there any large deals that contributed?

A very, very broad base of orders that came in, exceptionally broad.

I would say the usual pattern in terms of size of deals.

The only exception I would note is that we did introduce multi-year subscription contracts.

That's one of the things that our customers asked for in the subscription program.

And we saw very few.

That would not be revenue --

That would be in the bookings number.

You'll see it show up in deferred.

So we saw a few of those which were nice deals for us.

I will tell you, the good news about that is, we are not a company depending on big deals closing to make quarters (ph).

That is always an ugly environment.

We don't deal with that here.

Dennis Wassung, Adams, Harkness & Hill.

Two very quick questions.

First off, could you repeat the foreign exchange effect in Q4?

Just that number.

What is your other question?

We will get that.

The second question is, Carol, you talked a lot about the manufacturing space, we've got roughly 10 to 20 percent of your installed base today on 3D.

I am curious what that number was a year ago.

And I'm also curious as to what your thoughts are as to how that number will change over time.

Obviously, I would think it will go higher.

But what is the momentum of that number, if you will?

And are people increasingly looking to make that change?

Let Al answer first then I'll --

The foreign currency impact -- the comparison to last quarter, sequentially, foreign currency impact is favorable 9 million in revenues, and 3 million unfavorable (ph) line of expenses (ph).

So that is versus the third quarter.

Then versus the same quarter last year, foreign currency impact -- I'm sorry -- in comparison to full year, foreign currency impact was a favorable 58 million in revenue and 23 million on expense.

As far as the 3D penetration, I don't have last year's numbers in front of me.

But from what I recall, we probably grew a percent or so.

The reason I am talking about this 10 to 20, because I think it is very interesting.

Most people sitting back, if you have heard of 3D for years, somehow -- (technical difficulty) --

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Are we on?

Yes.

Yes, you are on.

What I was saying is, our opportunity in 3D with this low (ph) penetration is enormous.

I can sit here and say gee, 89 percent over a few years, I am not ready to say that yet.

But it is very clear 3D becomes approachable like it is, much easier to learn, and you get much more efficiency out of it.

This is an area just ripe for us to take share here.

So that is why I am really focusing on letting you know how low that penetration is and, therefore, how much there is opportunity ahead of us.

Does that answer your question?

I am just trying to get a handle on whether or not there's sort of a -- is there a large reluctance in a big chunk of that installed base to make that change?

Obviously, old habits die hard.

The reluctance, it's not so much reluctance as it has been -- it has really been hard to learn.

And it's really been expensive.

And people have not quite seen what the necessity is.

I think what is happening is people are trying to shift these models over to Asia and whatever, that there isn't enough information in that 2D design, in that 2D drawing; that they get a much higher rate of manufacturability, much higher rate of being able to source, in other words, get the products (indiscernible) correctly, and therefore, people can bid on it.

And that's why these numbers that are coming back, saying, I got my product out 40 percent faster, 50 percent faster.

It is because of that 3D fidelity, if you will.

The reluctance has been, it's hard and it's been expensive.

Now, however, the return on investment is big enough, in other words the need, competitive need, for them to be able to get their products to market faster, is big enough that they will go through the cycle, if you will, of getting over to 3D.

That's what we are starting to see.

Great, that helps.

Thanks, great job.

Operator, is that the last question?

That is the last question.

Feel free to continue with your closing comments.

Everyone, we would like to thank you for listening.

Both Al and I will be available for calls afterwards.

My member is 415-507-6467.

Thanks.

Thank you.

Ladies and gentlemen, thank you for your participation on today's conference.

This concludes today's program.

You may now disconnect.

Have a good day.