Autodesk Inc (ADSK) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Autodesk, Inc.

earnings conference call.

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

We will conduct a question-and-answer session at the end of this conference.

(Operator Instructions).

I will now turn the call over to Mr.

Dave Gennarelli, director, investor relations.

Please proceed, sir.

Thank, operator.

Good afternoon.

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

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

Today's conference call is being broadcast live via webcast.

In addition, a replay of the call will be available 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 the first quarter of fiscal 2010, 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 the 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 the documents we file from time to time with the SEC, specifically our Form 10-K for the fiscal year 2008 and our 10-Qs for the first three quarters of fiscal 2009, and our periodic 8-K filings, including the 8-K 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 contained in our forward-looking statements.

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

If this call is replayed or reviewed after today, the information presented during the call may not contain accurate or 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 any 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 Accounting Principles.

A reconciliation of GAAP and non-GAAP results is provided in today's release and on our website.

In addition, we will quote a number of percentage changes as we discuss our financial performance.

Unless otherwise noted, each percentage represents a year-over-year percentage change showing the fourth quarter of fiscal 2009 as compared to the fourth 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.

The results that Sue and I will outline today are not what we've been accustomed to over the past several years and we are disappointed by them.

The global economic downturn is now significantly impacting each of our major geographies and all of our business segments.

It's evident that the current global economic malaise is unlike any downturn we've experienced in the past.

Jobs are being lost across all industries, businesses around the world are still finding it difficult to secure credit financing, construction and media and entertainment projects are being delayed or canceled.

Manufacturers are slashing spending in response to lower end-user demand.

As a result, total revenue for the fourth quarter was $490 million, a decrease of 18%.

License and other revenue decreased 30% due to a 33% decline in new seat license revenue.

As we look at our business by geography, revenue performance in the Americas declined 17%.

Weakness was seen across the entire region.

The Americas has experienced weakness for five quarters now, and it's not yet clear if it has hit bottom.

On the positive side, we continue to make strong in-roads with our government sales.

Our government business has been on the upswing over the past four quarters, and we believe we are positioning ourselves well for increased infrastructure spending that may result from the recently-signed economic stimulus package.

Turning to our international business, although we started to experience some economic headwinds in international markets in our third quarter, our overall results during that period were relatively strong.

Global conditions have worsened since then and the economic downturn significantly impacted our international business during the fourth quarter, particularly the robust business we had been seeing in emerging countries.

Revenue from Asia-Pacific decreased 25% as reported and 28% in constant currency, as a result of economic headwinds in large developed markets, like Japan, Korea, and Australia.

We also experienced significant year-over-year declines in emerging countries, such as China and India.

Most of the APAC counties are now facing a decrease in building and manufacturing production, resulting from reduced trade with areas like the US and Western Europe.

EMEA revenue decreased 16% as reported and 8% constant currency.

Similar to APAC, the growth rates in emerging countries decreased more dramatically than developed economies.

We remain confident that emerging economies will be a key growth area for Autodesk once we get past this downturn.

In total, revenue from emerges countries declined 31%, and represented 16% of our total revenue for the quarter.

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

Our customers continue to tell us that they need to differentiate their products in order to gain and maintain a competitive advantage.

Our design solutions are key to helping them do just that.

As a group, our model-based 3D design solutions fared better than our 2D products.

Our model-based 3D design solutions decreased 1% to $144 million and represented 29% of our total revenue for the quarter.

We shipped approximately 30,000 commercial seats of these products in the fourth quarter.

Our 2D horizontal products, AutoCAD and AutoCAD LT, declined 29%.

Revenue from 2D vertical products decreased 21%.

Clearly, all aspects of our business are being impacted by the slowdown.

To address our lower expectations for sales, last month we announced a restructuring plan, which will reduce our operating expenses by approximately $130 million annually.

Some savings will be generated in the first quarter, but we expect to realize the full quarterly impact of the reductions starting in the second quarter.

The savings are being achieved through headcount reduction of approximately 10%, facilities consolidations, a hiring freeze, travel restrictions, and a variety of other cost-reduction initiatives.

In addition, we are making significant adjustments as part of our ongoing effort to size our business correctly.

Before Sue provides a closer look at the financials, I'll give you another update on our CFO search, as this remains a top priority.

As I mentioned last quarter, the pool of potential candidates has grown considerably.

We have narrowed the field to several highly-qualified candidates, and are actively working through the process.

I will not compromise simply to fill the vacancy.

In the meantime, I cannot stress enough that we have a deep bench of highly-skilled and experienced people in our finance organization who are doing a great job bridging this transition.

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

Thanks, Carl.

Net revenue was $490 million, a decrease of 18% as reported and 15% constant currency.

Revenue from new seats decreased 33%.

Total upgrade revenues, including cross grades, decreased 32%.

Maintenance revenue was $180 million, an increase of 17% compared to the fourth quarter of last year.

This was a slight decline sequentially due to lower year-over-year maintenance billings.

Breaking revenue down by segment, Platform Solutions decreased 24% to $201 million.

Revenue from our Manufacturing Solutions division decreased 6% to $115 million.

Revenue from our Inventor family of products decreased 21%, as demand was particularly weak in Asia-Pacific.

During the quarter, we shipped approximately 6,100 commercial seats of our 3D manufacturing products, and approximately 39,000 seats of our manufacturing products in total.

Our AEC segment decreased 14% to $118 million.

Revenue from our Revit family of products decreased 6%.

We shipped approximately 24,000 commercial seats of our 3D products in AEC.

Going forward, we will no longer provide this level of seat detail on a regular basis.

Revenue from our Media and Entertainment segment was $53 million, a decrease of 26%.

Revenue from Advanced Systems decreased 36% to $20 million.

Animation revenue decreased 18% to $33 million.

Moving to the rest of the income statement, gross margins were 90% on a GAAP basis and 92% non-GAAP.

Our operating margin was significantly impacted by the drop in revenue.

Our non-GAAP operating margin was 16%.

Our GAAP operating margin was negative 27%.

The significant difference between our GAAP and non-GAAP operating margin was principally due to an impairment charge of $129 million related to the write-down of goodwill in our Media and Entertainment segment, as well as a $40 million restructuring charge.

Our tax rate in the quarter was 22% for our GAAP results and 7% for our non-GAAP results.

The difference between these rates is primarily due to him packet of the goodwill impairment charge and stock-based compensation expenses.

The tax rates were lower than expected due primarily to discreet tax benefits recognized in the fourth quarter and the geographic mix of earnings.

GAAP diluted loss per share was $0.47.

This includes $0.56 pretax from the goodwill impairment charge and $0.18 pretax for the restructuring charge.

We will incur additional restructuring charges in the first quarter as part of the cost savings initiatives we announced last month.

Non-GAAP diluted earnings per share were $0.31, which is higher than previously expected, primarily due to better-than-expected cost reductions during the quarter and a lower tax rate.

The impact of foreign currency exchange rates was $19 million unfavorable on revenue, and $17 million unfavorable on expenses compared to the fourth quarter of last year.

The foreign currency impact was $23 million unfavorable on revenue and $15 million favorable on expenses when compared to our third quarter.

Turning to the balance sheet, cash and investments were $989 million.

At the end of the quarter, approximately 80% of our cash and investments were offshore.

Deferred revenue grew 9% year over -year, and 11% sequentially to $552 million.

Cash from operating activities was $86 million, and was lower, primarily due to the decline in revenue.

Unshipped product orders, or shippable backlog increased by $11 million sequentially to $17 million.

Total backlog, including deferred revenue and unshipped product orders, was $569 million, an increase of $47 million over last year.

In absolute dollars, channel inventory declined in the quarter and was approximately four weeks.

DSO was 59 days in the fourth quarter.

The sequential increase is due primarily to the seasonality in subscription billing.

Now let's talk about our outlook.

The global economic environment has impacted our business visibility and forecasting accuracy over the past two quarters.

As a result, we are providing just one quarter of guidance today, which is based on our current expectations and the information we have available today, including currency exchange rates.

At current exchange rates the Euro is on average 14% weaker than the average rate we used in fiscal year 2009, the Yen is on average 5% stronger.

For the first quarter we now expect revenue to be in the range of $400 million to $440 million.

GAAP loss per diluted share is expected to be in the range of a $0.20 loss and an $0.08 loss.

Non-GAAP EPS is expected to be between zero and $0.12 per share, excluding $0.07 related to restructuring charges, $0.08 related to stock-based compensation expense, and $0.05 for acquisition-related charges.

The GAAP EPS range assumes a tax rate of $0.31 -- 31%, and the non-GAAP EPS range assumes a tax rate of 27%.

As Carl mentioned, the full benefit of our restructuring won't be evident until the second quarter.

In addition, certain operating expenses in the first quarter experience a natural uptick sequentially, as we incur higher expenses related to our annual product launch, as well as higher payroll taxes.

In addition, operating cash flow for the first quarter is expected to be negative as a result of lower revenues combined with cash outlays in the quarter for payments of the annual employee incentive plan, and payments related to the restructuring plan.

While we are not providing revenue or EPS guidance for the full year, we believe that if the economic environment stays the same, our operating margin will increase through the year as our restructuring actions begin to have a greater impact.

In addition, we are taking further actions to reduce our cost structure, which will further benefit our operating margins.

Lastly, we made some organizational changes to better align with our customers and accelerate product innovation in February.

As part of this change, there will be some product movement between business segments, and we will provide revised historical results with our earnings release in May.

Now I'll turn the call back to Carl.

Thanks, Sue.

As I look back on our results for fiscal 2009 it was defined by two very distinct halves.

The first half of the year was a continuation of the strong growth we experienced over the past five years.

The second half clearly reflects the global economic downturn.

As we look out at the start of our fiscal year 2010, our visibility is severely impaired.

It's difficult to gauge how close we are to the bottom and when things will start to turn around.

Like you, we are diligently looking for signs.

Because we serve a diverse set of markets and industries, we monitor a myriad of data points, including AEC and manufacturing data by region, such as the total value of building and construction permits and manufacturing GDP by country.

In particular, two items we view as very important to our business are reduced job losses and the increased availability of credit.

During this downturn we remain focused on our structure.

We have already removed approximately $130 million in annual operating expenses and we continue to remove additional costs.

Over the years we have invested strategically in R&D and channel development as a means to strengthen our position in the marketplace.

The strength of our technology and our channel will help us maintain our leadership throughout the downturn.

We have launched our family of 2010 products over the next couple of months and they are filled with new and innovative features coming from these R&D efforts.

Additionally, as we are expanding our portfolio of product suites that will deliver better experiences to the customers we serve.

The overall health of our channel partners remains vitally important to Autodesk.

We have an active partner assistance program in place on a global basis, and we will continue to work closely with our partners in a collaborative effort to fight through these economic headwinds.

So as we navigate through this environment we remain focused on serving our customers and working with our channel partners.

We also remain focused on delivering the word's best design solutions and bringing best-in-class technology to our customers.

Autodesk technological leadership, brand recognition, breadth of product line and large install base will help us weather this storm and position us well for an eventual recovery.

We believe that significant long-term opportunities exist for Autodesk to grow and lead in our respective markets.

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

(Operator Instructions).

While the operator is polling for questions, I'll inform you of our upcoming investor events.

We'll be attending the Morgan Stanley tech conference in San Francisco on March 2nd, and the Jefferies technology summit in Chicago on March 10th.

Additionally, we'll be hosting our annual investor day on April 2nd.

This year's event will at our gallery in San Francisco.

It promises to be an informative day and we hope you'll be able to join us.

And with that, I'll turn it back over the operator.

Our first question comes from the line of Greg Dunham with Deutsche Bank.

You may proceed.

Yes, thank you.

I guess the first question is, when you look at the guidance that you provided for Q1, are you expecting the same kind of linearity throughout the quarter looking to Q1 as you experienced in Q4?

I think roughly speaking I would say yes.

The only caveat I give is we've now seen a couple of quarters where external events have dominated what happened.

I don't think any of us expected to be sitting here with Lehman Brothers out of business or any of the other failures in the banking system and so I'm unprepared to speculate on any of those things and how they might impact it.

If you exempt those from consideration, I think linearity will be more or less the same.

Q1 does have a slightly different linearity than the rest of the year because of the product launches, but that would -- as Carl said, exempting other external factors would likely mimic previous years.

And one quick follow up.

The deferred maintenance, that was actually up 9%, I know that had some contribution from acquisition, but was that better than the overall revenue growth?

I know you mentioned the deferred billings were less than expected, but that seems a little more stable than I would have imagined.

Greg, the one thing about maintenance is that customers see the value in the program and will continue to renew those contracts provided they have people in those seats, so we have continued to think that our maintenance revenue will grow well and that there -- that we'll see good bookings on that as long as there are people in those seats.

So the job losses affect that.

I don't think it was tremendously different than we expected.

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

You may proceed.

Hi.

Thanks, Sue and Carl.

I just had two quick ones.

Carl, just to follow up on you commented that you weren't sure if the Americas has hit bottom yet.

It seems like the other regions around the world are a little bit behind the US so I was wondering if you could say where you think we are, because I think what we're all trying to figure out is, is your April quarter in revenue the bottom, or if the other regions are starting to accelerate do we potentially see that happen in the July quarter a sequential decline as well?

And then I had a question -- I'm not sure, this might be better for Sue.

The last time you were doing the type of revenue that you're guiding to was in fiscal year '06 and your expenses for that year were just under $1 billion, so even with the $135 million reduction in expenses you're guiding to, I guess I'm wondering how much more should we be assuming that you're going to take out, because it would imply you're still going to have OpEx of about $1.4 billion if we just take that $135 million off of what you did last year.

So I guess we're also all trying to figure out, you guys probably have a pretty good idea of what your expense level's going to be for fiscal year '10 but can you size the business that quickly back to fiscal year '06 or fiscal year '07 on the OpEx line?

And that's it, thanks.

Okay, Heather, so let me just start.

I would like to be able to add more clarity around what's going on.

It does look like -- just not looking at us, but looking more broadly the Americas led us into this and some of the international markets are following.

I'm not -- I don't feel enough conviction to say that the length of the downturn in each place will be the same.

I think that's hard to say.

I think what we did see is an acceleration that was more unexpected in the emerging economies.

We tried to call that out in the script.

We saw that fall off more dramatically.

Other than that, I think we look every day for signs that tell us where we are in this.

Yes, but there's no signs that we've bottomed then is what you're saying?

No, I don't really see any signs and what I'm really looking is it broadly -- is the broad economic indicators, things like job loss, construction starts, or things like foreclosures.

All of the typical economic data that everybody's looking at.

Right.

I think with it, the other thing that's a big deal for us -- and I've talked myself blue in the face about this -- but credit financing is a big deal for our customers.

We have many small and medium customers, and even our largest customers generally rely on credit to finance products and projects, and until there's more liquidity back in the system, until people are really able to get credit, it's going to be difficult for many of these businesses to return to the levels that they're used to.

Heather, with regard to your question, you're right, we've been doing benchmarking against our historical performance on revenue rates that we're anticipating for this year.

We're not prepared to give you a forecast of what we think revenue will be for this year because it's been rapidly changing, but as we look at the cost base there's reason for us to think that if it continues to change we will have to take further action and we're currently assessing what those actions might be.

I would just add one thing, Heather.

I think the framework you outlined is exactly the one that we're looking at.

You're saying if we were able to do this level of business with this kind of cost structure we should be able to do it again.

Our next question comes from the line of Steve Ashley with Robert W.

Baird.

You may proceed.

Thanks.

Sue, first of all maybe I could start with some housekeeping.

I was wondering if you could actually give us the revenue numbers for what the new seat business was and then what the subscription and upgrade business was?

You know what, Steve, let me do that offline.

We've got them.

I don't have it right in front of me.

Upgrades is on the fact sheet, you can back into it from that.

Okay.

And then just in terms of subscription, maybe you could talk qualitatively around renewals and what you're seeing people do in terms of deal sizes when they do renew some of their subscription deals?

So I -- what I would say about the subscription renewals, which we are monitoring closely, I think we're not seeing dramatic changes in subscription renewal by firm.

I think where the changes are coming are where people have less employees, and so, for example, if a firm has a 1,000 engineers last year and they only have 950 this year, they're renewing 950 seats.

So, qualitatively most of the renewals that are not being made are due to job loss.

There's the usual flux in the system that goes both ways, as well, more people added and more people off, but if you wanted to look at what the principal vector was in there, I would say it's caused by whether or not people are -- whether there are jobs and whether people have their butts in seats.

Okay, great.

Thank you.

Our next question comes from the line of Brent Thill with Citi.

You may proceed.

Thanks.

Carl, just a follow up to Heather's question.

Are you evaluating the business and running it to a minimum operating margin this year so that if things do get worse you're using that as your floor and how you're managing the expense structure, or is there some other metrics internally that you're looking at the Company and running the Company to in probably one of the worst downturns we've seen in a long time?

I think the operating margin one is difficult, because there's that natural lag built into it as you're seeing right now.

You have two complications.

You have the expenses involved in reducing your expenses, plus you have the natural lag.

I think the framework that Heather outlined is actually a more reasonable one and the one that we've been looking at is, as we look at our revenue for the year, even as it changes, we look back historically to figure out what was the cost envelope that we had at a time that we did that with much higher margins.

And I think that's a more reasonable way to look at the problem.

So there's no reason, we believe, regardless of the external factors that we can't operate at the same levels we were at before.

How you get there is actually trickier and the timeframe it takes and how that averages out in a year, which is part of the reason why we felt it was best not to give guidance around things like operating margin for the year.

Okay.

And just a quick follow up.

In terms of your go-to-market this year with the new product cycle, is there any changes that you're making considering the environment we're in?

I think most of the changes we've made in how we go to market are independent of it, and then I'll get back to the couple of changes that we are making.

The biggest change I think we made this year, because it was mostly a very normal product release cycle, was this idea of having more bundles or suites, and so we've introduced twi of them.

There'll be more throughout the year.

We think in an environment where people are very value sensitive that's a way to provide more value to our customers and we're going to continue to roll those out through the year.

I think the change you see is there's parts -- these are small bright spots and so I don't want to over do it, but there are some areas where you can see -- for example, we believe that there'll be money coming into the US economy through the infrastructure, spending that's in the stimulus package.

You see countries like China that are probably even more effective at directing money towards infrastructure build out, so we're focusing efforts on places like that, and in general, we're just looking for the places where our business is better.

One of the interesting things we saw throughout the quarter was that our direct business held up much better than our business through our channel partners.

And so not only direct to government, but just direct in general we had almost as many large deals this fourth quarter as we had the fourth quarter of the previous year.

So there are places when we're able to be in front of customers and have conversations where we're actually very effective at selling.

The dynamic there tends to be around companies who are also looking to save money, who are looking to consolidate, and generally speaking choose a lower cost -- a lower total cost of ownership provider.

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

You may proceed.

Yes, thanks.

Hi, guys.

Just wondering, based on the restructuring plan that you've currently announced, which quarter should be the bottom in expenses?

And then just the follow on in a different area, Carl, can you talk about -- you mentioned the credit, have you changed any terms in terms of how you're dealing with the channel in terms of what credit you might be extending to them?

Yes, so I'm not sure what the top or the bottom in expenses is, but let me -- I think this is going to be a year of constant rejiggering and titrating expenses so I think from the reconstructing we previously announced by the third quarter you'll see the full effect.

You may see even the full effect in the second quarter, but certainly by the third.

I think the complication will be is that we're continuing to lay in expense reductions, so I think the $130 million annualized is not the right number to look at, because we're going to continue to reduce our expenses throughout the year.

And, think as we get either further in this quarter on the next call we'll be able to give you more detail about further expense reductions.

Sterling, as far as partners go we are looking at what we can do to help them in this time.

Obviously keeping the channel healthy is a primary importance to us so we are going back and looking at credit limits, making sure that they're the right levels, that to the extent we can get payments to them in a timely -- more timely manner around incentives and things like that, we're doing that.

Anything that we can do to help their capital we know is very important at a time like this.

So we are loo -- we've began looking at number of different things that we can do and we'll continue to assess that throughout the year.

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

You may proceed.

Great, thanks.

Good afternoon.

Just want to ask the geography question a bit differently.

What do you think is currently the strongest geography for the business, and do you feel that there are any geographies left to crack that have, at this time, been immune to the broader slowdown?

Well, I think Antarctica as been relatively immune, maybe Greenland, as well, although not Iceland as we all found out.

(LAUGHTER) More seriously, Mike, I think we've seen it across really all of the regions by now.

I think the one that's more variable, one because of the growth we experience there are really the emerging economies and because they just didn't seem to have this huge dependence on what's going on in the more developed countries.

So I think it's hard to know.

You still see some pretty bullish outlooks, I would say, for China and India.

Obviously much less so for Russia.

So I think the most volatile parts are certainly the emerging economies, but at this point I haven't seen really an unscathed territory out there.

All right.

Thanks a lot.

Our next question comes from the line of Keith Weiss with Morgan Stanley.

You may proceed.

Hi, guys.

I guess my question is similar along the lines of what's holding up relatively better than others and from your (inaudible) there's two areas that I see.

One is it looks like manufacturing relatively outperformed some of the other areas, as well as EMEA held up pretty well.

With those areas do you find that to be sustainable?

If you look at EMEA negative 8% constant currency growth it does look like they are following the Americas, is that level sustainable, or is that -- are those relatively better numbers, the stuff that you're expecting to follow the course of some of the less-performing regions or less-performing parts of your product portfolio?

Yes, so a couple of ways to go with this.

I think just looking at our guidance you can see that we're anticipating something that's very different that the seasonable equivalence between Q4 and Q1.

I think that's mostly taking into account what's going on in places outside the Americas.

If you look at EMEA during the quarter, the second half of the quarter was considerably worse, if you look at the emerging economies, they were worse.

I think Asia has been bad all along.

So I think in some ways our guidance is already taking into account what we were seeing in the daily run rates of the business.

Like I said, I think the other things where you look at the performance, I expect the channel business to be weaker as compared with comparable companies.

Channel business in this environment seems to be harder in smaller or medium business.

Direct businesses seem to be holding up better and so I expect that trend to continue.

I think that's right.

With regard to your question about the split by industry, certainly the economic data that we see shows that the AEC industry has been hit much harder thus far than manufacturing.

As we think through it over the longer term and see it, the first quarter is considerably worse than the fourth.

We don't break down our forecast by industry, really, or GL, but we are expecting that all of them will continue to deteriorate into the first quarter.

Our next question comes from the line of Richard Davis with Needham.

You may proceed.

Okay, thanks.

A question for you, Carl.

There's some large firms out there -- those headquartered in maybe Redwood Shores or what have you -- are going out actually and auditing their customers to find out -- to make sure that they're paying for all of their seats or CPU usage and things like that.

Obviously the latter's not relevant to you, but the former might be.

Have you thought about doing that as a means to drive revenues, because obviously the flip side is you could anger your customers at the same time they're struggling, too?

So it's a thought with regard to driving revenues.

Obviously, you can run the business by cost controls, but that was the question.

Yes, so, Richard, what I would say is, this is the delicate balance that we live with all the time, and I would say in some ways we have a lot of experience with it, as piracy is so rampant in desktop software compared to enterprise software and we're always trying to weigh these two things between it.

I think we're in slightly different realm than one of the companies you mentioned in that I think it's particular -- I think we will continue to do license compliance; I think we'll continue to do license compliance on a worldwide basis.

I think there is a risk if you -- you can really anger your customers if you go out of the way to track down every last seat, particularly in the emerging economies.

I think the other thing to wrestle with -- and that's somewhat the nature of the difference in our customer base between us and large enterprise players -- is some of the small/medium companies that we would go after don't actually have the money to pay and so we can hand them bills for things that they can't even pay, so I don't at all want that to be -- I'm not giving anyone a license to steal our software and we'll continue to be vigilant about it, but we certainly haven't built into our model anything about increased license compliance revenue.

I think the other trick, just as a backdrop for them if they should be listening, is some of the help that you get in other countries -- we've talked about how sophisticated you need to be in terms of getting all of the things lined up in order to do good license compliance, is that some of the governments of developing economies, which are a crucial component in being able to enforce it, are not as willing to go after their companies given the economic situation they find themselves in.

So particularly those emerging economy country -- governments are really not as cooperative as they sometimes are.

Our next question comes from the line of Steve Koenig with KeyBanc Capital Markets.

You may proceed.

Hi, thanks for taking my question.

I'm wondering if you can give any idea on -- or thoughts on how you might look to use your cash at this point, basically keep your cash, do any acquisitions, or buy backs at the point, et cetera?

So I think what we're looking at is we're trying to preserve cash as much as possible as -- just remind you of what we said in the script -- 80% of it continues to be offshore.

Unfortunately some of the repatriation legislation didn't make it through.

Despite handing out trillions of other dollars, they couldn't find their way to actually allow companies to repatriate money.

I would say our tolerance for acquisitions has gone way down in this environment, and I would say just the M&A market in general I feel is going to go down because I think there's going to be a difficulty in aligning the expectations of buyers and sellers.

We've seen this already.

So the only acquisitions I can imagine making are really small tuck-in technology ones and even those I'm not sure we'll be able to come to agreement on them.

At the current stock prices we constantly consider stock buy back, it's there and it's available to us and I think we'll continue to monitor it, certainly throughout the first part of the year.

Our next question comes from the line of Ross MacMillan with Jefferies.

You may proceed.

Yes, thanks.

Carl, have you guys tried to size the impact to the AEC industry and infrastructure industry from what's been announced vis-a-vis the new funds?

And maybe, also, for other countries, have you tried to think about that?

Thanks.

Yes, what we've done is we've spent a large amount of time looking where governments are spending money -- and the US and China are the two that are doing it -- and we've spent a lot of time working on getting ourselves into that flow.

Because I think one of the important things is to remember for all of the governments that are spending money, it's not just building infrastructure, it's building smart infrastructure.

There's a lot of ways of building bridges to nowhere and I'd say in the US when 535 people get involved in it, it become more likely, and so the trick is figuring out ways that we can help through the use of technology build better infrastructure.

I think what you'll see if you look and you do the math on the plans that have been announced so far in China and the US, it's relatively small related to the overall GDP.

So with -- construction, infrastructure spend worldwide in normalized times it's approximately $4 trillion, and so you're thinking about a couple hundred billion dollars here and a couple hundred billion dollars there.

I think the really important thing is to help restore confidence and that people start believing that the government's investing and they can invest and companies can start hiring is really what it is.

I think the name says it all, it's a stimulus.

It is not going to be the funding for it; it's just going to be the catalyst, hopefully, to get business rolling again.

Our next question comes from the line of Dan Cummins with Lime Rock.

You may proceed.

Thanks.

I'm curious if there are people in your boardroom, or CFO candidates for that matter, who are coming at you with the idea that you ought to be resizing Autodesk for the world as it was in 2002, let's say, or something a little more radical than 2006.

You're doing, I think, $250 million annualized business in emerging markets right now.

That certainly doesn't look like it's sustainable anywhere near that level, maybe half of that as they reform.

So I'm just curious if there's really radical medicine that's coming or that's needed, how frank is the dialogue right now?

All of your end markets are credit sensitive.

Yes, I wasn't implying 2006 was the right number.

I don't think 2002 was the right number either.

We just finished the quarter at $490 million, which would have probably in 2002 been two quarters almost, but I take the gist of your argument, which is we are doing our best to try to figure out what the size of it is and trying to do it in an expedited but reasonable fashion.

And I think that's the balance, is you want to get ahead of it, you don't want to destroy a company in doing it.

And so I don't know if 2006 is the right number, I don't know if 2004 is.

There are many things that have happened that are stranger than us being at a 2002 level.

Half the analysts that used to be on the call, the institutions no longer exist.

So stranger things have happened, and so I think we continually look at this, we think it's important.

I think we try to stress throughout the call that we went forward with the restructuring plan.

It's already obvious to us that we need to size this business considerably smaller, and we're taking steps to do that, and I think as we go throughout the year we will figure out what that size eventually is.

Our next question comes from the line of Phil Winslow with Credit Suisse.

You may proceed.

Hi, guys, I've just got a quick question on your expectations on that subscription and maintenance line.

I am wondering if you've got a sense for what churn rate you've seen recently, and just what you are anticipating for next quarter and for the next fiscal year?

Generally we don't forecast it.

Let me just give you qualitatively and Sue can chip in, is I think it's really -- I think it's particularly difficult right now to forecast.

I think a lot depends on how much are customers tighten down their spending.

As Sue said, right now customers find this to be a very valuable program.

They think it's important; they're paying for the seats that they use.

I think there's some potential going forward that things could get so bad that people start stop paying for maintenance, and that's not just for us, but it's for other software companies, as well.

That's why I think there's a lot of unpredictability in the model.

I think if things are where they are now or they get better, I think you'll see rates similar to what we saw this quarter.

Yes, I think that's right.

We haven't built in significant deterioration in our renewal rates or our attach rates.

Obviously the number of new seats has changed so that impacts the change in the revenue line and the bookings line.

We have seen a slight drop in renewal rates that we attribute to having fewer workers in the industries, but there may be a point where there's a complete paradigm shift where people just say I'm not going to renew anymore going forward.

There's a big financial penalty for them to get off maintenance.

It costs them about 50% more to do an upgrade and get current at some point in time.

On the other hand, if they don't have the cash that's a choice they're going to begin to make, so we'll have to continue to monitor that as we go forward.

Our next question comes from the line of Kash Rangan with Merrill Lynch.

You may proceed.

Hi, thank you very much.

Carl, I was just curious, I know your propensity to do large deals is probably very low right now, but you commented that the AEC vertical is a lot more fragmented that the manufacturing vertical and that there's an opportunity to sort of grow the pie.

I'm just wondering if you have any thoughts on how you could get more customer wallet share within that vertical and making small tuck-in acquisitions, or perhaps even to extend beyond the domain of design and move into other adjoining areas, like project management, et cetera.

Just wondering how you think about gaining share in a tough environment dramatically over the next few years?

That's it.

Yes, I think the answer is here, I do think there are a number of structural impediments to M&A.

I think companies like us are preserving cash and I do think that the small companies, except for the ones who are facing near-death experiences, are not going to appreciate the valuations that we would be willing to pay at this point.

Private companies, unlike public ones, get to exist under the delusion of what they're worth for much longer and so I think many of them still think they're worth what they were worth two or three years ago and so I think there's a difficulty in doing those deals.

Having said that, I don't think it's difficult to gain market share.

One of the things that's important about us is the price point we occupy in the market and the value we deliver for it.

And so I think one of the really critical ways in which we can continue to gain share is when you see companies consolidating.

The conversations we're having, certainly with our large customers, are mostly places where they have heterogeneous use of design and engineering tools.

In this environment every company's looking to save cost.

They're looking for the vendors who provide them with the most value, with the lowest total cost of ownership, with the easiest access to a trained workforce.

All of those are criteria that we end up on top when people rank it.

And so in most of the places where consolidation is going down in the name of cost savings, we're coming out on top.

So I think we'll be able to do that.

I think we have a number of initiatives.

One of the things from our investment in R&D over the last number of years is we still continue to have a number of projects that are there that are incubating, and I think -- I can't imagine during a downturn new product launches are going to be at all meaningful to revenue, but they can continue to incubate through this period and two to three years from now they can be meaningful, back to the question of not just taking market share but how do you grow the pie.

(Operator Instructions).

And our next question coming from the line of Sanil Daptardar with Sentinel Investments.

You may proceed.

Thanks.

In the first month of this current quarter, have you seen any changes in terms of your selling cycle or in terms of the demand for the product pick up, or you haven't seen any kind of changes here?

Yes, as you can tell by our guidance that the average daily rate we're expecting is considerably lower than what we experienced in the fourth quarter, so the environment has continued to change and our guidance reflects that.

And it's primarily coming from the emerging markets that the environment continues to deteriorate there, or it's all everywhere?

No, it's been pretty widespread.

I would say we've seen less deterioration in the Americas this quarter than we had, and again, I think a lot of that has to do with the fact that they're -- the Americas are five quarters into a slowdown and in the other geos it's much newer, but it's fairly widespread.

It's certainly not just limited to emerging.

Our next question comes from the line of Blair Abernethy with Thomas Weisel Partners.

You may proceed.

Thank you.

I just want to see, Carl, if you could expand a little more on the channel, and how they're fairing during this time.

Maybe you could expand a bit more on some of the things that you're doing to support them, but also what are some of the risks that you see in the channel being able to cope with the situation?

So I'd say -- I think like every business, and particularly small business, this has to be a really hard time on our channel partners, as well as everyone else's channel partners.

These tend to be small businesses.

They're cash flow sensitive businesses.

They have a small number of employees and one geographic location is the makeup of those.

What we've been trying to do is put some programs in place that allow them to get cash flow earlier, so trying to move -- sometimes when things are going well, we really try to manage behavior in terms of how much of each product or product category they sell.

Sitting here today you say you're almost too clever by half during the good types.

Right now we've removed many of those restrictions or incentives, and said, look, if you can sell in this environment, we'll pay you for that.

We've also tried to move those payments forward in a way so that they're not waiting for back-end payments, looking for the business throughout the quarter because that's what that required previously.

So a number of programs like that we've put in place.

We've talked at other times about working with partners to put in 0% financing options so that if they do have customers who want to buy but they certainly can't extend them credit, they have facilities available to them.

So a number of measures working with them and just trying to simplify things on the back end, lowering the cost of doing business with us, we continue to invest in that.

It appears at this time there are no additional questions.

I would now turn the call back over to Mr.

Dave Gennarelli for closing remarks.

That's all we have for this afternoon.

We'll be available for call backs.

You can reach me at 415-507-6033.

Thank you.

This concludes today's conference.

You may now disconnect.

Good day.