Autodesk Inc (ADSK) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome me to the third quarter 2009 Autodesk Incorporated earnings conference call.

My name is Eric, and I will be your coordinate for today.

At this time all participants are in a listen-only mode.

We will conduct the question-and-answer session toward the end of the presentation.

(OPERATOR INSTRUCTIONS) I would now like to turn the your presentation over to Dave Gennarelli, Director of Investor Relations, please proceed.

Thanks, operator.

Good afternoon.

Thank you for joining our conference call to discuss our third quarter of fiscal 2009.

With me today is Carl Bass, our Chief Executive Officer, and Sue Pirri, Vice President of Finance.

Today's conference call is being broadcast live via webcast and in addition a replay of the call will be available by webcast at Autodesk.com/investor.

During the course of this conference call we will make forward-looking statements regarding future events and the future performance of the company, our guidance for fiscal 2009, the factors we use to estimate our guidance, our future business prospects and financial results, our market opportunities and strategies, trends for our products and trends in various geographies and anticipated benefits of acquisitions.

We 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.

Please refer to documents we file from time to time with the SEC, specifically our Form 10K for fiscal 2008 and our 10Qs for the first and second quarters of fiscal 2009, and our periodic 8K filings include the 8K filed with today's press release.

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

forward-looking statements made during the call are being made as of today.

If the call is replayed or reviewed after today, the presentation presented during the call may not contain current or accurate information.

Autodesk disclaims any obligation to update or revise any forward-looking statements.

We will provide guidance on today's call but will not provide further guidance or updates on our performance during the quarter unless we do so in public forum.

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

These non-GAAP measures are not prepared in accordance with generally accepted accounted principals, a reconciliation of the GAAP to non-GAAP results is provided in today's press release and on our website.

In addition we will quote a number of percentage increases as we discuss our financial performance, unless otherwise noted each percentage represents a year-over-year growth rate showing the third quarter of fiscal 2009 as compared to the third quarter of fiscal 2008.

And now I'd like to turn the call over to Carl Bass.

Good afternoon, everyone.

And thank you for joining us.

Today we reported the financial results for our third quarter of fiscal 2009.

Revenue for the quarter increased 13% over the last year to $607 million.

As we previously stated the sharp downturn in the global economy had a substantial impact on our results for the quarter.

The economy is impacting our customers in various way, many are unable to secure credit financing.

Construction and median entertainment projects of all sizes are being delayed or canceled.

Lack of credit for small and medium size manufacturing firms is making it difficult for them to invest in their businesses.

Even large manufacturers are cutting spending significantly in response to lower end user demand and their inability to secure financing or issue debt.

As we discuss the details of our results this quarter I will talk about some of the actions we are taking in an effort to stimulate demand in this environment.

I will also go over the actions we are taking to better align our cost structure with the reality of this difficult operating environment.

As we look at our business by geography, revenue performance in the Americas declined 1% and was more significantly impacted by the US market than in previous quarters.

Canada and Latin America continued to be relative bright spots for the Americas.

As the financial crisis spread globally, we started to experience economic headwinds in some our international markets.

We saw growth rates slow in many of our Asia Pacific countries as compared to growth in the same quarter last year.

Despite that, revenue in Asia Pacific increased 12% as reported and 9% constant currency.

Performance in EMEA remained healthy despite some pockets of weakness.

EMEA revenue increased 27% as reported and 20% constant currency.

Revenue from emerging markets grew 25%, and represented 19% of our total revenue for the quarter.

Revenue growth from emerging markets should continue to outpace that of developed countries.

Now let's take a look at performance by product category.

Our model based 3D design solutions, Inventor, Revit, Civil 3D, NavisWorks, Robobat and Moldflow increased 26% to $163 million.

3D revenue was 27% of total revenue for the quarter.

Excluding revenue of $12 million from Moldflow our 3D solutions grew 16% to $151 million.

We shipped approximately 41,000 commercial seats of these products.

As we mentioned last quarter, we expect to see less correlation between revenue growth and seat growth as we experience changes in our geography mix, product mix, maintenance base, currency exchange and average selling prices.

Turning to our 2D AutoCAD grew 10% and we saw a bounce-back of LT which grew 12%.

Revenue from 2D vertical products decreased 6%, as we experienced particularly weak sales of AutoCAD architecture on a global basis.

We attribute the weakness of stand-alone AutoCAD architecture to the slowdown in building world wide, and the recent launch of Revit architecture suite which includes AutoCAD architecture.

Now let me talk about actions we're taking to help stimulation demand for our products.

We realize there's no quick or easy response to the current economic environment, but we are focused on serving our customers and helping our channel partners in these challenging times.

As always we are focused on license compliance, as piracy of our software is still pervasive on a global basis.

In addition we are running a number of targeted promotions in an effort to stimulate demand, such as product retirement programs.

During the third quarter we ran a program that offered small rebates on LT and AutoCAD.

The real value of this program was to increase the dialog between our channel partners and customers and it was successful in doing just that.

Additionally both LT and AutoCAD experienced good growth in the quarter so we were pleased with the results of this program and have extended it into the fourth quarter.

To assist our end user customers we are experiencing diminished cash flow and limited financing options, we recent launched a program to offer customers in the United States and Canada financing consisting of deferred payment plus 0% interest.

The program is being provided by key equipment finance and others, not by Autodesk.

Now let's talk about our expense structure.

We recognize that we have to adjust our cost base appropriately for today's environment.

In the third quarter, we began taking actions to reduce our spend, such as implementing a hiring freeze and reducing our discretionary spending.

We have extended these actions into the current quarter.

We are implementing additional changes in an effort to reduce our operating expenses by approximately 5% in fiscal 2010 as compared to fiscal 2009.

You should note that this is approximately 9% off our expected fourth quarter run rate.

Before we take a closer look at the financials I will give you another update on our CFO search.

The process is certainly taking longer than originally expected.

And we are still interviewing candidates.

If there's one side benefit to the current economic environment, it is that the pool of interested CFO candidates has been getting larger by the day.

As I mentioned last quarter we have a very deep edge of highly experienced people in our finance organization to bridge this transition.

Now I will turn the call over to Sue for a more detailed discussion of the results.

Thank, Carl.

Net revenue was $607 million an increase of 13% as reported and 9% constant currency, revenue from new seats grew 6%, total upgrade revenue cross grades decreased 4%.

Maintenance revenue increased 31% to $186 million.

Breaking revenue down by segment, platform solutions increased 11% to $269 million.

Revenue from our manufacturing solutions division increased 22% to $124 million.

Moldflow contributed approximately $12 million in the quarter.

Revenue from our inventor family of products increased 8%, during the quarter we shipped approximately 9,000 commercial seats of inventor and Moldflow and approximately 44,000 seats of our manufacturing products in total.

Our AEC segment increased 8% to $134 million.

Revenue from our Revit family of products grew 23%.

We shipped approximately 32,000 commercial seats of Revit, Civil 3D, Navisworks and Robobat.

Sales of Civil 3D have been greatly impacted as the AEC market has been hit hard in this environment.

Revenue from our median entertainment segment was $73 million, an increase of 9%.

Revenue from advance systems is flat, animation revenue increased 16%, driven by continued strong demand for our 3D Max product.

Moving to the rest of the income statement, gross margins were 91% on a GAAP basis, and 93% non-GAAP.

Our operating margin was 23% GAAP and 29% non-GAAP.

During the quarter, we adjusted accrual for our annual performance based incentive plans to reflect our current performance.

In addition, as Carl mentioned, we reduced our operating expense run rate by implementing a hiring freeze in October as well as by reducing discretionary spending.

These actions resulted in lower expenses and higher operating margins, net income, and earnings per share than we originally expected.

Our tax rate in the quarter was 23% GAAP and 25% non-GAAP.

The lower than expected tax rate is due to a foreign tax refund related to prior years.

GAAP diluted earnings per share increased 29% to $0.45.

Non-GAAP diluted EPS was [$0.66], an increase of 14% over the third quarter of last year.

The impact of foreign currency exchange rates was $18 million favorable on revenue and $3 million unfavorable on expenses compared to the third quarter of last year.

The impact was $14 million unfavorable on revenue and $7 million favorable on expenses, when compared to the second quarter of this year.

Turning to the balance sheet, cash and investments were $941 million, at the end of the quarter, more than 80% of our cash was offshore.

During the quarter, we paid down most of the outstanding balance on our lines of credit, but we will continue to utilize our lines as needed.

Deferred revenue was up 18% year-over-year and down 11% sequentially to $499 million due to the impact of the strengthening dollar and lower subscription billing.

Cash from operating activities was $107 million, and was lower sequentially due primarily to the increase in deferred revenue as well as other accruals.

Unshipped product orders or shippable backlog decreased by $23 million sequentially to $6 million.

Total backlog included deferred revenue and unshipped product orders was $505 million an increase of $65 million over last year.

Our channel inventory was approximately three weeks, DSOs were 44 days this quarter, decreasing sequentially primarily due to lower billings.

Now let's talk about our outlook.

As you know, the global economic environment is extremely difficult right now.

There is great uncertainty about how much further the problems will spread and how long this will last.

As a result our forecast has been volatile.

Our guidance is based upon our current expectation and the information we have available today.

For the fourth quarter we now expect revenue be in the range of $525 million to $550 million.

GAAP earnings per diluted share are expected to be in the range of $0.13 to $0.19.

Non-GAAP EPS is expected to be between $0.28 and $0.34, excluding $0.07 related to stock-based compensation, and $0.08 for the amortization of acquisition-related intangibles.

We expect the tax rate to be approximately 26%.

It has been our practice over the past few years to provide guidance for the first quarter and the next fiscal year at this time.

The uncertainty of the current markets has made the forecasting process extraordinarily difficult so we will refrain from providing specific guidance past the fourth quarter.

However we want to provide insight into some significant factors we are considering for fiscal 2010.

In addition to the impact of the global economy, foreign currency exchange rates have been highly volatile recently.

We continue to expand our cash flow hedge program to manage our foreign currency risks as we plan for fiscal 2010.

However, if today's exchange rates were to hold through next year, we would experience a significant currency headwind.

In this scenario, the conversion of the Euro would be approximately 14% lower than the average for this year.

As Carl mentioned, to offset this overall environment, we are implementing additional l changes in an effort to reduce our operating expenses by approximately 5% in fiscal 2010 compared to fiscal 2009.

This represents a reduction of approximately 9% off our expected fourth quarter run rate.

Now I will turn the call back to Carl.

Thank, Sue.

While the turbulence in the global economy has slowed our business, we are focused on trying to stimulate demand while adjusting our cost structure appropriately.

In the process, we will balance these actions with investing in our future.

Slow down such as these present an opportunity for us to realign our business, investments become more targeted, divestments occur, efficiency rises and resources get realigned.

We are already working on many initiatives, including pricing, bundling and portfolio management to improve our business and strength in the company.

Autodesk has navigated through several economic downturns and its 26 years of existance, and has emerged better from each stronger and better positioned competitively.

I am confident that however long or deep this global economic downturn is, Autodesk will remain the world leader for 2D and 3D design software and the company will be even stronger, more efficient and more competitive when markets turn around.

With close to $1 billion in cash and virtually no debt our balance sheet is very strong.

Our solid financial position and long standing market leadership will serve us well as we work with our customers and partners to navigate through this economy together.

With that, I'll turn it back over to the operator so we can take your questions.

(OPERATOR INSTRUCTIONS) Stand by for your questions.

While the operator is polling for question, I'd like to announce that we will be at the Credit Suisse conference in Phoenix on December 3rd and the Barclay's conference in San Francisco on December 9th.

And now I'll turn the call back over to the operator for the first question.

Thank you.

Your first question comes from the line of Steve Ashley with Robert W.

Baird.

Please proceed.

Thanks.

My first question relates to the guidance for the next quarter.

Obviously below what the consensus was looking for.

Is there any extenuating circumstances related to that guidance for instance, in terms of the pipeline that might need to drain itself?

Just wondering how indicative that quarter is of us looking out beyond it and representative of what we can expect or was there anything one-time in nature about, of the guidance?

No, I don't think, Steve, there's any particularly one time about the guidance.

What we see in terms of demand out there, this is where we forecast rather than anything peculiar about this quarter.

I mean I think the most important thing is what we have seen, and to give you any indication of when things turn around, I think what we feel is we need see functioning financial markets.

We need to see liquidity in the system.

Our customers depend upon it.

Truthfully, if you look right now we don't have functioning financial systems to the level that allow normal businesses to do their job.

And in an environment in which people can't get credit, first thing on their minds is not how much more software do I need to buy.

And then, in terms of the restructuring that it sounds like it will take place during the fourth quarter, is there any benefit from the expense savings baked into the earnings guidance into the margin of the fourth quarter, or is that -- just trying to understand the timing of when the benefits will be realized.

You'll most likely see more expense in the fourth quarter as we go about cutting expenses, you always see a spike before you see the realization.

I think you'll start to see it in the first quarter and then throughout the rest of the year.

So just to clarify there could be some costs associated with severance or associated with this that would be one time that would --

Yes.

For example getting out of leases and things like that.

There's, there could be lots of one-time charges associated.

And was that in the non-GAAP earnings guidance?

No.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Phil Winslow with Credit Suisse.

Please proceed.

Hi guys, you mentioned that the backlog was $6 million at the end of the quarter down $23 million.

Just want to get a sense of where your targeting that next quarter.

Do you expect to build that up back to the previous levels next quarter or is this going to take a couple of quarters?

We don't do a lot of forecasting around backlog, Phil, to tell you the truth.

So it will really depend upon end user demand for the products where it comes, the nature of the product, the timing of the quarter, there are a lot of thing that is affect actually what ends up in backlog at the end of the quarter but we really don't spend a lot of time trying to forecast backlog.

Okay.

Great.

When you do look at your maintenance stream there, it's a little different than other software companies.

Going into a downturn, obviously license revenue is effected, but how do you think of the growth rate of that maintenance stream?.

I mean I think because the nature of our maintenance revenue are more shorter contracts than many others have relies on several things, it relies on new license sales and then attaching renewal rates.

So I would see a slowing, I think you will see less slowing, generally speaking of maintenance than you would of new licenses.

A lot of people recognize that there's no economic advantage to getting off maintenance that they have to make up the difference when they come back on.

And so, unless people are really strapped for cash, they wouldn't generally make those choices.

Your next question comes from the line of Jay Vleeschhouwer with Merrill Lynch.

Please proceed.

Thanks.

Carl, I would like to follow up on that last comment with respect to maintenance, you had a pretty significant decline sequentially in deferred maintenance which is now back to what it was at the end of fiscal '08, in terms of absolute level.

So what did you actually see in terms of maintenance declines, refusal to sign up maintenance at the time of new license sales?

I mean at least one of core competitors has been able to hold maintenance pretty constant if not improve.

So, in your case this was certainly a pretty significant reversal at least this quarter.

The biggest change in there is FX.

So the big change in there is currency not actually attached renewal rates.

Okay.

On the other hand, the number of new customers taking on maintenance has continued to slow year round.

The number of new signings has less than half of the previous several quarter average.

So that would seems to be some indication of obviously weakness in the new license businesses, but do you think that number of new signings, new subscribers is going to continue to tail off significantly from here?

I think to tail off significantly from here is a little bit hard to say, but definitely a decline in the rates.

Whether it stays at that level or not, can't really provide much guidance on that.

Okay.

Just a couple of last things, in terms of visibility we noted at CAD and PLM users a couple of months back is that, your customer base in particular has fairly short procurement cycles, shorter than the group on average, most of your customers of course took the survey seem to be within a three month procurement cycle, maybe three to six months.

So is that something that you actually see yourselves and can manage too, given that your customers do tend to have fairly quick turn around time normally in terms of buying?

Yes, I mean there's no doubt that our customers have shorter buying cycles.

I mean particularly when you throw in PLM people are buying $20 million three or five year implementations with my opinion on the subject with no visible return on investment.

It doesn't surprise me much that it takes a long time to make that decision in my opinion, the time should be almost infinite.

But people going out and buying design and engineering software do actually -- it is one of the requirements for an engineer or architect doing their job.

So a lot is tied to just the number of people employed doing those jobs, and most of our customers, as they hire new engineers and architects, as they come on staff, they're handed new copies software.

The converse is obviously true as well.

Right.

And then finally, how will the environment or your new cost reduction plans have an effect if any at all, and direct or indirect sales capacity expansion plans?

So, we would like to maintain -- I think one of the most important things in this downturn is that we continue to work on our channel capacity.

The real shame of this would be coming out of the downturn with any reduction in channel capacity.

As you saw there's still some parts of the world where business is phenomenally good, our emerging markets are continuing to grow.

We've talked about the fact we don't believe we have adequate coverage there, more coverage will lead to greater sales, so we are really regenerating where we do that expansion and capacity and capability to meet today's economy, but I would like to see us continue to expand that within reason, much more tempered certainly given the environment.

Okay.

Thanks, Carl.

Thanks, Jay.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Richard Davis with Needham.

Please proceed.

Thank, guys, a quick question, with regard to the payables, the financial market being kind of (inaudible -- audio trouble).

Richard, you sound exactly like you are in an airport and the speaker announcement for boarding is plan which I think is only appropriate for you.

But I can't understand a word you said.

Okay.

Sorry.

I will circle back and reconnect.

Okay.

The connection is awful.

Operator, next question.

Your next question comes from the line of Mike Olson with Piper Jaffray.

All right.

Thanks.

A couple of real quick ones, would you say that your paying customers actually slowing down the number of purchases and upgrades customers are just downgrading their purchases by buying lower cost offerings or is it a combination of the two?

We have seen the numbers go down, we certainly haven't seen people choosing different products, as a matter of fact, if you look at the numbers around 3D products more sophisticated complex products actually did really quite well.

So I think what you are seeing is the people choosing to buy new tools are looking for the best tools to make them the most competitive.

We are not really seeing a movement within our range toward lower price products.

Okay.

And then, second, as far as EMEA held in there in Q3, but America is obviously declining Q3 and I think it is pretty clear the economic situation EMEA seems to be falling to a similar path to what we have been seeing here.

So is there any reason not to expect in EMEA that we will see a year-over-year revenue decline in the coming quarters?

A revenue decline, I'm certainly not seeing anything resembling that.

Whether or not it falls, what we saw during what where there were small pockets particularly in places like the UK that seemed to be a mirror reflection of what's going on in the US, going through the bursting of a real estate bubble, heavy reliance on financial markets as part of the economy, what we found striking and continuing through today is how resilient and the growth in the other parts of Europe, so emerging parts of Europe, obviously eastern Europe, Russia.

A lot of Russia, a lot of Europe was a particularly strong in the quarter and doesn't show signs.

We are obviously being cautious.

We are monitoring the situation closely.

But we are not actually seeing that.

It is one of the things that is truthfully, a little puzzling as we try to parse what went on during the quarter.

Same things in parts of Asia, there's parts that are really strong, other parts showing signs weakness and patterns are not exactly clear yet.

All right.

Thanks.

Next question comes from Ross MacMillan with Jefferies.

Please proceed.

Thanks.

Quite a few have been answered here, but maybe just on the other income line, that's negative I presume because of the hedging strategy.

Should we assume because of the hedging cost you are going to have negative interest and other income over the next few quarters?

I wouldn't presume that.

Sue, do you want to --

I don't think you should -- some of the loss there was from hedging and some of was from the revaluation of the balance sheet due to FX.

So I think as we see it is going to be mostly because of the balance sheet revaluations related to currency.

Yes.

And that will cause the fluctuation more than anything about the hedging necessarily.

Yes.

The announcement on hedging is relatively small.

Yes.

And will be small regardless given the kind of conservatism of our hedging strategy.

So it will always be dwarfed by the other thing.

Certainly the volatility and currency rates in the last quarter was higher than we have seen in a long time and made that, the cost of the hedges fluctuate quite, and hopefully we won't see that in the future.

Okay.

And then just on the 5% run rate cost production, I guess two questions, one is how did you, why did you choose that kind of level of production?

I am just trying to understand the thinking behind that.

And then secondly, what area will you see the head count reduction, where can you trim back?

Thanks.

So, we looked and modeled many, many scenarios for next year taking into account lots of things include what we perceive to be volume based on end user demand, lots to do with currency.

One thing we feel like is in our control is our costs.

So we looked at it and thought how do we get ahead of the costs if business stays at this level or even deteriorates.

We want to make sure we were ahead of the curve, we'd done a number of things starting last quarter.

We with certainly didn't feel those were enough given what we have seen out there.

And let me reiterate, what we keep looking at for the signs of something, is for liquidity being back in the credit markets.

At the point in which banks are exchanging money, banks are lending money to businesses, that's when some of the construction projects, some of the median entertainment projects will move forward.

It is when manufacturers have enough money to build up inventory to make payroll, so that is where we are really looking.

When you look at the cost reductions, we are looking across a broad range of things, obviously starting with the discretionary spending programs, lots in travel and entertainment.

Re-evaluation of our product portfolio.

If you look we are like many companies we have the 80/20 in the 80% of our revenue comes from 20% of the products or something in that neighborhood.

We are looking at the other 80% of the portfolio and how important is that to the ongoing health of the business.

We also have a very large temporary workforce where we go use professional advisor, have outside consultants as well as a temporary work force.

So obviously we are reducing things there.

In many places we have facilities where we're looking at consolidation.

So there's a number of initiatives across the board that we think will be will be able to accomplish this kind of reduction in expenses, and really what I see right now, this is the balance act for us.

I think I'd love to do a pool of where you think GDP growth is next year.

We are uncertain about it and we are doing our best to try to guess where it is and we want to be ahead of that curve, and we thought this was certainly at this point in time the appropriate balance between maintaining the health of particularly our channel partners, being able to serve our customers well, and the other time preserving margins and running a profitable healthy business.

Thank you.

Your next question comes from the line of Heather Bellini with UBS.

Please proceed.

Hi.

Thank you.

I'm Carl, I apologize if someone has asked this I am jumping back and forth between calls but essentially --

Is the other call better?

No, they're both, I have seen better news from both companies.

How about that?

My question for you guys would be what type of churn are you factoring in, or when you look at to next year are you expecting?

And what I am referring to is customers who maybe customers could renew fewer seat, what are you expect to go see whap given that the work force is shrinking and a lot of the industries you serve not just those, others as well?

And also the average upgrade cycle for those on maintenance, what would you expect to happen to the upgrade cycle?

Would you expect people to delay purchases?

And can you giver us some sense there as to every three years now, could it go to four years, etc.?

Yes.

So what I would say is first of all, we are very tied to the number of employees in the industry.

Certainly with the specific job functions, like mechanical engineer, designers, architects that will continue to be the primary driver.

Often when we see people failing to renew their subscriptions, it is because the total work force, the total head count requiring the tools has gone down.

If you think about it our correlation will be with our work force, there are a couple of mitigating factors, there are certainly places in the world we talked about a little bit in prepared remarks where license compliance, because piracy is still a huge issue.

We have many more users in word who use our software who don't pay for it.

That's one of the offsets there.

The other places, in tough economic times, the value of our offerings is very attractive.

And so I didn't think it was a particularly appropriate call to spend a lot of time on color commentary about particular wins in the quarter, but particularly like in our very competitive markets like manufacturing, many people using high priced software are converting to much lower priced software.

When they recognize the value they can get from our products in comparison there's no doubt that we continue to win business there.

Just looking at the raw numbers we continue to gain market share on an absolute basis and when you look below you realize in units we do even better than on revenue.

So there are a number of offsets, but I think your thesis is absolutely right the best predictor of where our business is, is really tied today the number of people employed in the industries using the tools.

Okay.

And then, can you also comment for those not on maintenance what the average upgrade cycle is right now for say AutoCAD users?

Heather, it's Sue, the customers that are not on maintenance, I mean the amount of revenue from that is so small, it is not worth you really spending a lot of time.

Okay.

It is just really isn't.

You have got to remember that now it is such that if they don't upgrade after the third year, they will their license expires and they have to purchase a new seat.

So there's not a lot f of flexibility for them to let it go a whole lot longer before they have to buy a new seat and there's significant economic penalty for that.

Okay.

So head count is the key metric.

Thank you very much.

Your next question comes from the line of Donovan Gow with American Technology Research.

Please proceed.

Hi.

So with the downturn, could you comment a little bit on your appetite for share buy backs at all particularly given or even your ability to buy back shares given that offshore?

And then also you look to next year cost reduction, do you have any particular margin targets still in mind?

So as it relates to buy backs we have always said that we will buy back stock to offset employee stock programs.

We made a big purchase this year of about eight million shares, we We have not nearly had that number of shares exercised through any of our programs.

I am very mindful of cash these days.

I think as I am seeing from our customer, as I am seeing from the banks out there, I think this is a time in which hoarding cash is not a bad strategy.

And I think that I want to do everything we can possibly do to preserve our cash positions.

It is one of our strengths and should the economies of the world get any worse, I think it is going to become an even more precious commodity.

So with little money in the US or with more money offshore and the penalty for bringing that money back, it is a very inefficient use of our cash to buy back stock.

And so I would not do that I think.

If we have to, we will re-evaluate as we see how the economy goes as well as when people look probably not until the new congress, new tax laws including repatriation.

Okay and on the margin front?

I won't to give any specific guidance at this point obviously.

What we have try to go do is make matters in our own hands in terms of the expenses.

Revenues we are trying to do everything we can to really stimulate demand, but really at this point it is really just a mathematical by-product of how much revenue is there.

And so at this point I wouldn't want to give targets around margins.

Okay and then a last question, if we can just circle back on Europe for a second.

I mean what gives you confidence there in particular that Europe as a whole is not going to follow what you have seen in the Americas?

I wouldn't go so far as to say confidence, what I was willing to say is, I explained what we saw in the third quarter and leading up to today, I think our sales teams remain confident about that.

But I think if there's anything we all should have learned over the last three to six months, all of our abilities to predict has been pretty limited.

And so if we saw certain portions of Europe decline, it would not surprise me terribly.

The best I can do right now is report, here is what we have seen, here is what the teams on the ground are seeing.

And we are monitoring the situation closely.

I think one things, Donovan, to remember is that there are areas in our territory that we call EMEA that are still essentially greenfield for us, where we don't have sales presence of resellers.

So we can go into an environment that is essentially new to us, and by adding resources in these areas like Russia or the Middle East, it is incremental revenue to us despite the fact that the economy there may be a little slower, we haven't had a presence there at all.

And just to be clear, I mean when we look at many of our regions, even in the developed economy, I mean to post those kind of results, Europe stayed strong, and so I feel like the best I can do is tell you what the facts are.

You guys have all the access to the economic data we do in terms of trying to project what that's going to look like going forward.

Okay.

Great.

Thank you, guys.

There really were some regions that were surprising strong, certainly they don't correlate closely with what you read in the newspaper.

Your next question comes from the line of Sterling Auty with JPMorgan.

Please proceed.

Yes, thanks.

As you look at the next quarter guidance, can you give us an indication of how much of that fall-off sequentially is directly attributed to your assumptions for FX?

So we do have a hedge in place for FX which limits the down side.

So a fair amount of it is due to volume and the rest is due to FX.

But aren't you hedging the net exposure, or are you actually hedging revenue directly?

What we -- the hedge actually, if effective, goes into revenue.

Okay.

And then as you were talk about running the different scenarios and models which of the revenue segment do you think is hardest hit as you look both to next quarter or just qualitatively into next year from the economic situation?

I will give you a direct answer in a second, but I will repeat myself.

The problem our customers are experiencing is a lack of access to credit and financing and that's across the board.

Businesses for different reasons rely on access to those credit markets.

Having said that I think the one that you see most directly impacted in the building industry.

That's the one where projects have been delayed and you're even seeing the mothballing of projects in process.

People are sealing them off and waiting until there's more money to continue those projects.

The interesting thing about building, even the largest institutional builders rely on financing to make those projects go forward.

So I would see it as building and then manufacturing, both about the same, but the building is the one that kind of turns off the fastest with the lack of project financing.

All right.

Thank you.

Sure.

Your next question comes come from the line of Sanil Daptardar with Sentinel Asset Management, please proceed.

Yes.

Thanks.

Carl, you had pretty good growth in the European markets and Asian markets especially emerging markets.

The crisis is globally basically the bigger crisis.

Those customers were not hit by the crisis, are they paying with cash, or how about they paying you guys?

One thing to remember just generally, we are fortunate we don't have to talk about this.

In many parts of the world we do two tiers of distribution.

Our end users buy from value added resellers and they the resellers in turn buy from distributors and much of the stock for the distributors comes from us.

We get paid by distributors.

There's at least one and sometimes two intermediaries between us and the end user customer.

It depends a lot on local market conditions how they're actually paying for this.

But generally speaking our distributors are large organizations that it's a business to business transaction of fairly large numbers.

And you are not facing any problems from the distributors in terms of your payments specifically?

No, most of our distributors first of all handle product for multiple company, they're very large company, many of the distributors are much larger than we are.

Where I think you would expect to see payment problems first is resellers collecting from end users and then distributors collecting from the resellers.

We are pretty far up the food chain from that.

So we haven't seen it.

Okay.

I think there's other businesses in the world that will be more effected by that sooner than we would be.

Okay.

On the fourth quarter guidance in terms of the revenues, you just mentioned about the main reason for the down side is the volume.

How much of the down side is because of the discounting and because you are engaging into offerings, rebates and [mentioned] so forth?

So how much of the down side factored by the promotional effect here?

The promotions have not been a big part of it.

In fact the retirement programs, legacy programs are things we run on a regular basis.

So that wouldn't be any different than any other third quarter.

Okay.

On the [orders you talked about the overall new growth, when you look at the world it was just about 7% also, most of the growth looks like come from the 3D.

Could I comment on what was the 2D growth, it looks like it was negative probably?

If we can just give color on that.

Yes, the seat numbers that you see include the educational units, and the commercial -- there was growth in commercial too.

There was growth in commercial.

There was growth.

Okay.

And on the expense side --

Next question.

Thank you.

Your next question comes from Atul Bagga with Think Equity.

Please proceed.

Hey, guys, thank you for taking my question.

So you highlighted a couple of pockets of growth in Q3 you talked about median entertainment.

Some parts of emerging market, when you looking for fourth quarter guidance are you baking any contribution from these pockets or are you expecting decline in these markets as well?

I mean we are trying to factor in the fact that all of these markets may slow down.

I would expect to do it on a relative basis, that some of those pockets are going to continue.

I believe and just said comparable, I think the emerging economies are absolutely going to continue to grow.

We have all seen the announced slow downs in terms of GDP growth in places like China and Middle East, but they're still growing, and as Sue pointed out, many of those places were under represented and that those represent new opportunities for us.

I think we saw strong 3D growth, we have talked about 3D growth over the years, that's about our products being compelling for people getting to new technology.

There's still an aspect of -- people just like we do and we talked about retooling during this downturn to more competitive as we come out of it, our customers are doing the same thing.

They're looking for high value tools, they're looking for high productivity tools, which we provide.

But, so you are seeing a lot of people move to 3D tools, as a matter of fact, when I answered the previous question, we didn't see a move to 2D, people are regressing, people recognize the need to go to more high performance tools.

I expect the 3D to continue to be relatively shrunk.

So in terms of the conservatism that you bake in your guidance, would you say fourth quarter guidance, you have been more conservative than you have been in the previous guidances?

Rather than characterize conservatism, what I'd really say is, we believe it's a much more volatile environment to which we usually give guidance.

We've widened the range.

Usually we look out and we can look out quarters and have a high degree of accuracy.

We've already seen enormous volatility in the past, there's a lot of fluctuations in currency going on and every day brings with it new news.

At this point in time what I'd say is, we certainly see a very volatile environment and an unpredictable environment, rather than saying it is conservative guidance.

(OPERATOR INSTRUCTIONS) Your next question come ins the line of Daniel Cummins with Lime Rock Research.

Thanks.

Can you hear me?

Yes.

Okay.

I am thinking back to the analysts day maybe the past few years, where Al had that slide that had the 45-degree line and represented your week over week linearity, your performance against that line.

And I am curious whether the guidance of the January quarter reflects the week over week performance recently, I'm thinking the last three to four to five weeks, are you sticking closer to that line moving through time here or are you getting a little bit further apart.

Really are things really worsening week over week or not right now?

What I would say is what we saw is the slope of the line changed, right around when Lehman Brothers failed.

So if you think as the news really got out late September, early October, we saw the slope of the line change dramatically.

I'd say since then we haven't seen much change.

But there was clearly an inflection point right around when the -- when credit tightened as you -- I don't need to go into all of it of what happened then, but that's the point in time in which we saw a shift.

Okay.

Al seemed to think there really aren't any short-term tools at your disposal to help the dealers come back into line there with week over week linearity, and you indicated that is really not your balance sheet at work here.

That's Keybanc.

But do you think in the short run there might be other things you could do to put more money to work there to help the channel?

I think we are evaluating it day by day.

In some ways our distributors actually play that function certainly in the worlds that are two-tier distribution, and I would imagine distributors or resellers are already having this has conversations about extending payment terms and things like that.

I mean our ability to effect end user demand on a very short term basis is small and there's -- answered Heather's question, if you don't have a new user, or you already have laid off 20% of your work force, you don't need new software.

So a lot of it is really just tied to the work force and need to do it.

I think that's probably more accurate.

When you look at the leverage we have, there's some things we can do around pricing and promotion.

And we've talked about that.

I spent some time at this analysts day in New York talking about bundling, and there's things you will see from us in Q4 and Q1 around bundling we think will trigger more demand.

There are some things although I don't think there's much to do on a weekly basis, but we are in really, really close contact with our resellers and distributors watching not only our business but understanding what others are doing in this environment as well.

Your next question comes from the line of Richard Sanders with Clovis Capital.

Please proceed.

Hi.

I wanted just to quickly some more information on your hedging policies.

I didn't understand the response to the question before.

You said you hedge the top line of our foreign revenues.

Is that correct rather than the spread between the cost and revenue?

Yes.

We are hedging the revenue, not entirely all of it, and for us it is principally in the Euro denominated and the yen denominated currency.

How far out do you hedges go for 2010?

We're in the process of implementing 2010 right now so we are just beginning that process.

Generally speaking ours were for the next quarter.

Yes.

Okay.

So 2009 will be more current exchange rate.

Yes.

In term of your --

2010 will be whatever 2010 turns out to be.

I meant hedge.

And then on the sales and marketing expense line, how much variability is there to revenues to that?

I mean more how much of that goes to kind of the commission accelerated for the channel when it hits certain targets etc.?

So how much will that decline with revenues or go up?

Commissions and accelerators are a descent size piece and typically you see it is in the fourth quarter where accelerators -- in a time frame we are well above our plans for the beginning of the year which obviously is not the case this fourth quarter.

So you shouldn't see lots of variances as a result of changes there.

We did point out already that across the company we made accruals to -- made adjustment for accruals for all of the performance-based plans.

It is not just something that affects sales and marketing in fact it is every expense line.

Your final question comes from Sterling Auty of JPMorgan.

Please proceed.

Yes.

Just wanted to go back, Carl, to a comment you made, you said just didn't see the European revenue declining year-over-year.

And I just wondered is that just here in the fourth quarter or you don't think the economic environment would deteriorate to a point where we would see year-over-year declines from that geography moving forward?

Let me just leave it at that.

The most straightforward I can be about this, Sterling, is, we saw 20% constant currency growth during the quarter, that's a long ways from going negative.

Could Europe unwind in the way the America has?

Without speculating on that, what I'm saying is through now we saw really strong growth in many places across product lines.

We did see some of the places that you would expect, like I mentioned the UK where noticeably weaker and reflects what you hear and read and know about their economy.

There are other places that were counterintuitive in terms of their really strong performance and what I'd say right now our sales force and sales management teams, our distributors and resellers on the ground, while not overly optimistic about next year's prospects, still see, I mean, they would still see strong growth out there.

When people have got and are talking with them as others have gone out and surveyed them, they continue to see growth strong and they have been particularly resilient out there.

So even just looking at the next quarter then, as you look at the guidance that is given, you're basically indicated that a further precipitous fall off in North America and other the regions to get down did the [525 or 550] or is it more concentrated within North America?

I would say we are allowing for the possibility of pockets.

There's some in Asia some in the Americas, there could be some in Europe.

I don't think you will see declines year-over-year certainly in Europe which was the question, but we are saying that given the deterioration in the economy we could imagine there pockets in various places.

Okay.

Certainly as you look out, we have read the reports, many companies reporting, they'retalking about weaknesses in Japan, you're seeing a slowdown in China and other places.

So we can certainly imagine slowdowns in those places.

What I was really try to reflect was what we have seen in Europe, this is our opportunity to give you the best possible insight into what we saw during the quarter.

That's what we saw in Europe, that's, as we sit here today, the insight we get from our sales team looking forward.

Ladies and gentlemen, this concludes our Q&A session.

I would like to turn the call over to Mr.

Dave Gennarelli for closing are remarks.

Thanks, operator.

That concludes our call this afternoon.

If you would like to speak to investor relations you can reach me at 415-507-6033.

Thanks.

Thank you for your participation in today's conference.

This concludes our presentation.

You may now disconnect.

Have a good day.