Autodesk Inc (ADSK) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Autodesk, Inc.

earnings conference call.

I will be your operator for today.

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

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

(Operator Instructions).

I would like to turn the call over to Mr.

Dave Gennarelli, Director Investor Relations.

Please proceed sir.

Thanks, operator.

Good afternoon.

Thank you for joining our conference call to discuss our second quarter of fiscal 2010.

With me today are Carl Bass our Chief Executive Officer and Mark Hawkins our CFO.

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

In addition a replay of the call will be available at autodesk.com/investor.

As noted in our press release we have published our prepared remarks on our website in advance of this call.

Those remarks are intended to serve in place of extended formal comments and we will not repeat them on this call.

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

Our guidance for the third quarter of fiscal 2010, the factors we use to estimate our guidance our future business prospect and financial results, our market opportunities and strategies, transfer our products and trends in various geographies and the anticipated benefit 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 fiscal 2009 our Form 10-Q for the first quarter of fiscal 2010 and our periodic 8-K filing including the 8-K filed with today's press release and prepared remarks.

These documents contain and identify important risks and other factors that may cause 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 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 any further guidance or updates on our performance during the quarter unless we do so in a public forum.

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

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

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

And now I would turn the call over to Carl Bass.

Thank you.

Good afternoon, everybody.

We received great feedback on our new process of posting the prepared remarks with our press release, so like last quarter I am just going to say a few quick comments on the quarter and then we'll jump into Q&A.

Let me start with the economy because I know that is the first thing you'll want to talk about.

We've all seen the decidedly mixed US economic reports that have been published recently.

Some are simply less bad relative to expectations, so I think it's unclear that a sustainable global recovery is underway.

That said, relative to what we experienced late last year and early this year our business was less volatile as we exited the second quarter.

The environment is still challenging but it feels like global demand for our products is showing signs of stabilizing.

Revenue in the quarter was consistent with our expectations at $415 million which was a decrease of just 3% sequentially.

Within total revenue it was encouraging that we delivered sequential revenue growth in several parts of our business including emerging economies, manufacturing, Asia Pacific, model based 3D design solutions, 3D animation software and government sales.

We also made strong progress reducing costs.

Through our restructuring activities we have significantly reduced operating expenses.

Everyone involved with us has really embraced these saving initiatives.

Last quarter we said that our goal was to reduce our pre-tax spend by $250 million year-over-year.

However, based upon the success we've had in reducing cost, the first half of the fiscal year, we now anticipate reaching nearly $300 million in pre-tax cost savings in fiscal 2010 versus fiscal 2009.

Of course we'll continue to examine our business on an ongoing basis for more ways to improve our long term efficiency.

You should keep in mind that while the vast majority of the anticipated savings are costs that have been eliminated there is a component we would classify as cost suppression.

These costs would naturally come back in fiscal '11 and beyond and relate to such things as payroll, employee incentives, travel and entertainment and mandatory vacations among other things.

Even with some of these costs coming back in fiscal '11 we have made substantial reductions in our cost base and improved our efficiency.

So it feels like business is regaining some stability and our business visibility has improved.

The caveat is that our business has been reset at a lower level.

So whether this economic cycle is going to be U shaped or L shaped or any letter or number or hieroglyphic, our financial condition is solid with over $1 billion in cash and no debt.

We are going to the third quarter confident that Autodesk is well positioned for the markets eventual recovery.

Operator, we would now like to open up the call up for questions.

(Operator Instructions).

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

Baird.

Please proceed.

Hi.

My question is about maintenance revenue.

I see that deferred maintenance declined a little bit sequentially for the second quarter and I wonder what the prospects are for maintenance revenue.

Maybe you can talk about that on a sequential basis.

Is it possible we could see that cascade down a little bit in the future quarters?

Thanks.

As far as the maintenance revenue, Steve, this is Mark, yes, that is possible.

I think you could potentially see that.

I think the driving factor with the maintenance revenue has to do with the number of people in seats basically.

People see a lot of value in our maintenance offering.

Just that you have to be in a seat to see that value.

So I think that is possible.

Great.

And as we look at R&D it's 24% of revenue.

You've talked about the business being reset.

Is that a level, expense level that you are comfortable with going forward?

I think, let's look at it this way, Steve.

Obviously there was a reset in the marketplace in general from a revenue standpoint.

When we look at our R&D we have a good level of investment today.

We are planning for the future, and as far as the ratio, we'll be thinking about it in terms of our long term model over time.

I think if you looked at every one of our ratios, I don't think any of them are exceptional.

Unless we were to believe that long term operating margins should be in the teens, every one of the ratios is off.

So I think R&D is off, I think G&A is off, sales and marketing are way off.

So we'll be driving to a long term over time and Carl's called that before to get to a higher level of operating margin and the key thing is over time.

Thanks.

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

Please proceed.

Thank you for taking my question.

I was wondering if you can help us perhaps try to quantify those costs that are suppression costs versus what is a reduction in the cost base?

So Keith the way I think about this is as Carl called out, we are nearly $300 million year-over-year savings.

Of that if you think bit from an 80/20 approach, the 80% is really structural costs that are gone, and figuratively speaking but there is some that will snap back with the release of cost suppression things like sabbaticals and things of that nature but if yo think about the big end of the wedge, the 80% is structurally gone.

That 80/20 rule would be a good way to apply.

If I could follow up, you guys had a really nice job of taking expenses out of the business, and your run rates in R&D are definitely much lower than they had been.

Particularly on the R&D side, can you talk to us about perhaps what are some of the programs that got sidelined or put off to the side in order to achieve those kinds of cost savings?

One of the things we did when we looked at our portfolio rather than sidelining things I think there were a number of projects that we decided that we would bring to market more slowly.

That was the way we went about it.

One of the tendencies during a downturn is to get rid of your new initiatives.

Companies sometimes reflexively do that and I think it is the wrong answer and we carefully worked to make sure that the new initiatives that we thought were promising were actually funded and some of the things that were more mature products which we were going at a certain rate.

Just imagine slowing those down.

I think along with that there were a handful of projects that we didn't think they would actually bear fruit in any reasonable time frame.

So I think down economy is -- make it easy to make those decisions.

There was some projects that we killed, but we were very careful to make sure we had a balanced portfolio coming out of this and that our mature products generate lots of revenue.

Lots of the profit.

We are still being funded at good levels as well as some of the newer initiatives.

When you slow down a project, does that mean you put less people on it?

Yes.

Keith, it means you have less people working on it it's the simplest way to do that.

Excellent.

Thank you very much guys.

Your next question comes from the line of Brendan Barnicle with Pacific Crest Securities.

Please proceed.

Thanks so much.

Mark, I wanted to follow up on a question about the maintenance revenue decline.

We saw the year-over-year decline on billing, and I think it was about the same numbers as we saw last quarter.

So we have seen six months of the decline but we haven't seen any decline in the revenue there yet.

How long is that lag?

Is that something we should start to expect to see an impact next quarter and then it will roll over the next 12 months?

Can you give us a little more color on how those two correlate?

Sure.

You are right in terms of the maintenance billings they were down 11% compared to 14% in the prior quarter so directionally a similar dynamic.

In terms of the maintenance revenue, as you know, the revenue that we have in maintenance is ratably recognized over a 12 month period for prior billings if you will, so there is a lag effect.

We don't give guidance on specific line items if you will, but you can anticipate there will be a lag effect over time.

There's a 12-month dynamic that goes on there.

The vast majority of our subscription contracts are for 12 months.

We have some longer ones but it's not a material amount.

Exactly.

Another way to ask that you've only given us the billings number the last two quarters.

So were billings down year-over-year in quarters prior to this last six months?

Prior to the last six months billings in Q4 were down, yes.

That's correct.

And Q3 last year?

They were not.

Okay.

Great.

That's helpful.

You're welcome.

Your next question comes from the line of Ross MacMillan with Jefferies & Company, please proceed.

This is Horatio for Ross, thanks.

I wanted to focus about on a license line in terms of what we are seeing there, a little bit less of a moderated decline on a quarter-over-quarter basis.

As you guys look to the back half of the year are you still thinking that you'll see some sort of typical seasonality in Q4 which has traditionally been up from Q3?

I think this year a lot depends on what the overall economy is doing.

I think we are seeing some signs of usual seasonality in all aspects of our business but I do think the greatest influence is going to just be the overall economy.

So I think if things keep kind of bumping along as they have been going, I would expect an uptick but I think that is all caveated by the fact whether or not -- where we really are in this economic recovery.

In terms of linearity or transactional linearity in the quarter, or month to month, are you still seeing an on and off strength or is it building consistently?

What have you seen in August?

Let me just speak to that.

We went and tracked our linearity over last several years, and it's really I would say normal by month.

So there's really no news there.

We looked at that within this quarter by month, and no news there to speak of.

Very normal.

Thanks, guys.

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

Please proceed.

Hi guys.

Carl I just wonder if you can give us a feel what you are seeing despite geography?

You mentioned an expectation for a lag recovery over in Europe.

Do you think it's bottoming over there and how do you think about the geographies in Asia Pacific, in EMEA and the Americas?

I think Americas has just about hit bottom.

I think we are bumping along the bottom in the Americas.

I think if you look at Asia Pacific, I think there are several areas of strength, several question marks in my mind.

I think Europe is decidedly mixed.

I think you see places like the UK that seem to be a reflection of what is going on in the US even if there's a lag built in.

As you guys saw news out of Germany and France it was pretty good this morning.

So I think there are parts of Europe that are doing well.

I think there are others that look more like the United States, and I think what you are seeing is a recovery, a recovery in the emerging markets--.

There's a recovery in the emerging markets basically that you are starting to see with sequential growth from that standpoint.

So I think that's a good sign from that standpoint but I do think Europe is the spot where it is decidedly mixed.

It went into the recession later than some of the other geographies and will likely come out later.

That being said in aggregate I think you are starting to see signs of stabilization.

I would agree.

My area of concern is Europe.

If you were to look at the emerging economies, I think the difference between now and a year ago is there are some of the emerging economies that came out of this fairly quickly at fairly healthy rates and I'm thinking about China, India, Brazil.

I think there are ones that have more structural problems that I've talked about before like Russia that aren't improving at the same way and then there are ones that may have long term structural problems.

Places like Dubai.

I'm not sure will ever recover, ever back to the levels it was at.

Your next question comes from the line of Greg Dunham with Deutsche Bank.

Please proceed.

Yes.

Thank you.

On the emerging markets note, part of the growth historically has been compliance initiatives but looking back for the past six months those were not -- countries were not helpful in pushing those yet you saw a bounce this quarter.

Would you characterize the bounce this quarter more as demand driven and yet and we are still seeing not seeing the willingness from countries to implement combined initiatives?

There's always an element of compliance that goes on in every country around the world including developed economies clearly more so in emerging markets, but I think governments are still at the stage where they are much more concerned about the economic health of the country than they are agreeing by trade packs or intellectual property agreements that go cross border.

So I didn't think we got much help from that, but obviously there's a fraction of our business that is driven by license compliance.

Thank you.

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

Please proceed.

Thank you very much.

Carl, I was wondering if you can talk to some of the leading indicators just a little bit more.

You mentioned the words stabilizing, visibility improved, and you're confident.

I was just wondering if you can talk to a little bit more the pipeline indicators what are some of the projects you are seeing in different geographies, be it stimulus driven or absent the stimulus that causes you to at least look like you may be getting more positive bent than you did the last couple of quarters?

Then I have a follow up question as well.

Sure.

I think there's a couple of thing out there.

All the indications of stabilization I am really just looking at the numbers.

It's purely numbers driven less than the anecdotal.

The declines we've experienced over the last few quarters have now been moderated in a number of places.

I picked out places where we've seen sequential increases.

So that's what gives me the sense of this bouncing along the bottom is where we are at.

Then there are a number of things that I find encouraging.

On the one hand you are seeing some of the stimulus project, but only a fraction of the stimulus money is being spent.

So we see infrastructure projects on a worldwide basis being invested in although certainly we know there's a lot more money to come there.

I think the other dynamic that we've seen that has helped us is generally speaking we are a lower cost provider of design and engineering tools than anyone else.

In really good economic times, we may not be in the consideration set.

People are not willing to change.

Having gone through this downturn there's almost no company that went back and didn't do the cost examination we did and said what can I do to come out of this structurally different with a lower cost basis, more efficiency and the ability to build better projects or products.

And that favors us.

So when I look, we haven't really seen the benefit economically of people selecting new tools, but we've seen lots of small wins where we have pilot projects and people who have chosen our software who never were customers before or never would have considered us, and that to me is the most encouraging because I see, as they come out of this, as people come up to full speed they will ramp-up with our software.

If I may add to, Kash, just to complement the points Carl made, you can see in some of our disclosed comments the sequential growth in a number of different areas but we also are seeing things like sell through data sequentially growing.

We are not going to get into too much details in the various geographies but that is a data focused item that we take into consideration.

Our government vertical is another example that reinforces the point Carl had talked about.

We are seeing growth there.

So I think some of those things are just adders to the points that Carl made.

Kash, the other thing is we started with the indicators.

Place I look is we look at overall construction spend.

We look at overall manufacturing spend, and those are pretty good indicators of what is going on.

We've talked about countervailing factors recently.

The two things that are important for us are the availability of credit where I think there's a decidedly mixed picture out there, about the availability of credit for different size businesses and I think in the second one is unemployment.

At a certain point people need to go back to work in order for us to enjoy a full recovery.

That was the second part of my question, Carl, that you talked about how the AEC firms have cut back employment.

Are you starting to see them resume headcount additions and even if that's not happening, when that happens, do you think there's a chance we might have to wait for year demand because there's still inventory of unused software that these folks still have based on the layoffs that they have done?

I was just wondering if you could talk about any potential lag effect at all?

Or maybe that's not the case I just wanted to get your commentary there.

That's it for me.

The first I'd tell you is I've seen hiring back in manufacturing firms.

Some of them made drastic reductions early on.

I've seen improvements in manufacturing firms, I've seen less so in AEC firms, although there are some stand out companies that have come back to life faster who are reporting really good earnings and their pipelines are pretty full but I'd say I've seen more of a recovery in terms of jobs in manufacturing than AEC.

I think when you think about the dynamics of people coming back, I think there are a number of things that play into it.

Generally speaking our sales cycle is short, and I would expect as people come back one of the things you'll see is you'll see a PC cycle with a PC cycle people would be buying new software.

I don't expect people to try to recycle much or take much off the shelf.

I think some of the things we've already seen in a decline in new seat sales and subscription renewals means that there is not much sitting on the shelves.

The other thing to keep in mind is our channel is down a bit.

So that's another way to think about things as well.

Your next question comes from the line of Israel Hernandez with Barclays Capital.

Please proceed.

Hi guys.

A question here on the competitive environment.

Are you seeing any change in the major vendors here, your competitors in terms of how they do business, are they trying to get dirty here to compete with fewer deals?

And Carl last quarter you talked about you are seeing benefit from vendor consolidation as some of the larger customers begin to choose fewer vendors.

Can you talk about some of those trends this quarter?

I'd say more dramatic changes in competition.

I think the behavior out there is the same.

I don't think any one has been particularly opportunistic nor has anyone behaved particularly stupidly.

People are working their way through the downturn.

I think the one thing I already pointed out was I think there are places where we are advantaged just by where we are in the market.

Generally speaking we have newer offerings, lower priced offerings, more complete offerings, and I think that has helped us in a number of cases.

So that's really kind of the big change that I see.

But other than that, I see some competitive swap outs.

I think there is going to continue to be vendor consolidation as long as their are cost pressures.

That is a natural thing that happens at every downturn, and I see some of the large players where our big customers are going from three vendors down to two and I certainly see consolidating on a single vendor in some of our smaller customers and generally speaking I think we are winning our own fair share of those.

Thank you.

Your next question comes from the line of Richard Davis with Needham & Company.

Please proceed.

Thanks.

It's actually DJ for Richard.

Carl, I was wondering if you have any commentary around direct versus channel sales.

Last quarter you were pleased with direct sales performance.

So any additional color there and then second question would be you touched on it a little bit earlier about new customers coming and signing off for smaller pilots.

Instead of 20 seats maybe taking 5 seats.

Have you seen any traction and upsales there?

Customers coming back for a lot of your performance or is it still a little too early on that front?

Just for variety last quarter we were thrilled with direct and less thrilled with indirect.

This quarter we are thrilled with channel and less thrilled with direct.

It may be too short a sample time to know.

Overall I don't see a big shift in our business.

These two quarters were decidedly different and that our channel business did much better this quarter relative to last, and our direct business did proportionally worse.

In terms of new customers, no, we are still seeing more of the small deals.

People aren't coming back yet.

Like I said I'm seeing inklings of increased employment at manufacturing, I think it's too early to take stuff to the bank.

Depending on the industry, there's still a lot of people that don't have availability credit or are still anxious out there.

So I don't want to be ringing the bell saying the recovery is over here.

I think there's still a lot of hard work to go out there.

What is true is visibility is better as you saw, we came well within our guidance range.

We were able to see that.

Six to nine months ago that just wasn't the case.

We like many other companies didn't really know where the bottom is, and I think this is a very different environment, and it just makes running a business and planning for it that much easier.

Got it.

Okay.

Thanks.

Your next question comes from the line of Sasa Zorovic with Janney Montgomery.

Thank you.

My question would be specifically regarding the language that is used in your prepared remarks regarding the business being less volatile.

What do you really mean by that?

I specifically want to refer to that, to what you used to indicate your business being very linear.

Is your business very not really linear to the quarter anymore?

What specifically do you mean actually with that volatile?

I think volatile translates to like explosive.

What I would say is what happened in September to me seemed explosive and it was truly nonlinear.

If you were to look at our -- you know our famous graphs we've shown year after year that it really is linear.

Something happened in the middle of September last year that made it non-linear.

Just fell off the cliff.

We are now back to linear at a reduced level.

That is exactly what I mean by, that is why Mark talked about the seasonality there, about the linearity through the quarter.

Business is being transacted on a normal basis albeit right now at a normal level than it was at the same period 12 months ago.

My sort of a follow-up would be specifically to the continuation of your competitive question previously.

(Inaudible) the downturn what you consider an opportunity to waste really so you obviously do a great job with costs and cutting those, but competitively really how can you -- what are some of the things that you are taking advantage of so that once the business does start to truly roar to grow better than your competitors?

I think there are all kinds of things.

It's across the board, there's almost every business, every part of the business where there's something to do.

If you were to start with products, we believe we have the best and most complete product portfolio.

We are continuing to develop that.

We are continuing to expand that.

We have new product offerings.

We have new ways of bringing products to market.

We are doing that.

As we talked about the cost cutting, some of the cost cutting is merely cutting cost and some of it on a temporary basis, we talked about, but some of it is about streamlining operations and making things more efficient and making more effective.

That is great for when the economy rebounds.

Our ability to transact business better more smoothly, provide a better experience to our customers and resellers in doing that all comes about because we've improved both the systems and processes around doing that.

So I think we've taken this as an opportunity to say look we are going to do the best job we can selling and marketing our products during this downturn but it is also a great opportunity to clean up the things and improve the areas of the business that were truthfully hard to pay enough attention to while we were growing so quickly.

So we've gone about, made a lot of changes to clean up the business all in preparation for the upturn and in the meantime we've been making sure that we do the best job e can managing the cost through this.

And also keep in mind all the way through this cycle we are adding to our cash balance to position to fund the business as we continue to go forward into the eventual recovery as well.

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

Please proceed.

Thanks, guys.

First administrative one.

Mark, can you give us a little color as to what happened in other income, maybe break it down?

It looks like there's a big change sequentially there.

I sure can.

We had a couple of things that were going on here.

One is we had the gain on the sale of a business for a location based services and so think about that more in in terms of a $0.01.

We had some investments that were mark-to-market you don't want to plan on that every period.

We picked up maybe $0.01 and then there was some other normal activity in foreign exchange and whatnot.

There were a couple of items there that were specialized as you might imagine.

Okay.

Q1 was unusually low too.

If you look at it from a year-on-year compare you can see a pretty sensible kind of compare and you can understand some of these anomalies.

So what should we be thinking about for the next quarter in terms of where your guidance is?

Again, I think you would not want to plan on this to one off kind of things if you will.

I wouldn't think about it that way.

I would normalize for that and make a call from that standpoint.

We don't give targets at that level but certainly I would break out those two anomalies.

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

Please proceed.

Thanks very much.

Carl, I wonder if you can just expand for a bit for us on the government stimulus opportunity for Autodesk at this point and how are you approaching that, how can we start to see some, when are you going to get some benefit there?

The first thing you have to do is you have to look at the stimulus country by country.

We've kind of prioritized based on what, first of all the size of the program.

There's a bunch of countries that have really large stimulus programs.

There's a lot of other ones.

So we have to prioritize just on the magnitude.

Once you get beyond that level, you actually have to look at where they are spending the money.

There are certain kinds of projects that we would benefit from stimulus spend.

There's other ones that just have absolutely nothing to do with it.

So then try to pull out which ones are the ones that we have an ability to play a role in .

And then beyond than it's a little bit more tactical in the places where we compete effectively, have the best products, possibly already have a foothold Obviously the US is one of the big markets where we've been participating.

There are others like Germany, China, other places in the world where there's a large stimulus packages and we've gone around and looked.

If you look at it slightly differently most of the money is coming, the relevant part of the budgets and just to break it down like in the United States where you have a $900 billion package there's probably somewhere north of 100 billion but less than $200 billion that is applicable for the kind of things we do.

Breaking that down, a lot of it is around practices things like roads, highways, bridges and then there's a fair amount and a little bit less visible around buildings.

Government facilities, army bases and things like airports and other big projects.

Those are the places that we are looking, and we've taken an approach that is somewhat different than we have in the past because in many of these stimulus packages the government is not going to directly spend this money.

So a lot of it is how you go about influencing the policy of the government in terms of doing it.

Now our most effective thing in most of these places and certainly in places like the US is trying to ensure that the government officials feel like they are getting the best for the money they spend.

There is a lot of public scrutiny about all this, regardless of how you feel politically about it.

There's a tremendous amount of public scrutiny and our whole angle with government officials is making sure that if you want to build 21st century infrastructure, that you use 21st century technology to design it.

And that's really the goal.

And it is very effective in trying to convince government officials that they need to put policies and specifications in place and make sure they use the latest and most up to date engineering

Okay.

Great.

Thank you.

Mark, a question for you.

On the maintenance renewals, do you have, can you give us a little more granularity in terms of what sort of patterns you've been seeing in what product lines or what verticals might be faring better than others?

I don't know that I would distinguish from that standpoint, Blair, between the ones that are doing better than others.

I think the bigger, broader pattern really for the maintenance activity has to do with where the seats are.

If there's a person in a seat people like the offering, it's a good high value offering, we have to have a seat in there to get the renewal.

Our renewal rates are pretty stable across most of the geographies, pretty stable across most of the businesses, and I think the bigger sound byte is seats, basically people in the seat.

Blair, hopefully that helps.

(Operator Instructions).

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

Please proceed.

Sorry about the background noise here.

(Inaudible) with demand rebound.

If we see revenue growth in fiscal would we also see OpEx growth year over year next year?

How should we interpret the comments you made?

That we could see some expenses coming back in the model with the rebound?

First of all, Mike, we are not giving guidance for next year and so I totally understand your line of question, but I just want to be clear on that.

I really think the best way to think about this is that if you think about $300 million year on year, you got a clean view of our view of the finished ref why can't it compare to FY '09.

If you think about applying the 80/20 principle, you know that like 80% of that, I'm just talking directionally, of the concept is structural cost that is gone and then there are some suppression cost pressures that we'll deal with.

Again we are not at that stage.

We'll approach that stage at some point but we are not at that stage.

We're going to get projections.

One thing you should keep in mind though is we are going to make the strategic investments we need to grow the business long term but we are going to be relentless on costs that are discretionary and not related to driving the channel, the sales and the new product generation.

So Carl, I don't know if there's further--?

Maybe, Mike, one way to think about it is there is some suppressed costs so for example asking people to take salary cuts.

As soon as we feel it's prudent we would like to restore salaries to the prior levels.

That is a cost that will come back in the business.

We haven't said when we will do that, could be later this year, could be next year, but that cost will come back in the business and that's the cost that was there.

The second cost if you were to model in the out years, there are some amount of costs that come back with increased revenue, things like commissions and bonuses, that's the second -- and then there's a third category that you think about, which is places where we would make investments.

We haven't talked about any of that because like we said at the very beginning of the call we still think a bunch of the ratios are out of whack so you won't see us doing any of that for a while.

And finally, there's a bunch of costs that are just gone hopefully forever.

Thanks a lot.

Maybe that categorization helps.

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

Please proceed.

I thought I'd reload.

Carl you answered this but I wanted to ask it this way.

Again looking at the language that you talked about in terms of the business feels better than it did a the end of last year, beginning of this year, and some of the other terms that you used.

If that is the case, why is the mid point of the guidance range for next quarter actually showing a sequential decline?

I think we just looked at a number of factors and we said giving all the factors out there, that's where we felt comfortable.

And then the follow-up question is actually for Mark.

In terms of the expense savings, the expense savings to get to you $300 million lower than where you were last year, how should we think about that savings being split between the third and the fourth quarter because that can make a case for the $0.18 to $0.23 looking actually a little low unless more of the expense savings is actually back end loaded for the fourth quarter.

Sterling, it's a good question.

First of all we don't usually give OpEx guidance per se, we're just doing the year on year to give you guys a refresh and update.

I think the one thing that might help you a little bit is to think about historically there is some seasonality in Q4 naturally.

It being a bit higher than Q3, and that is a natural progression in our business, and so that is something that you should at least keep in mind and be aware of.

But hopefully that gives you a little bit of color there.

With no further questions in the queue I would now turn the call back over to Mr.

Dave Gennarelli, Director Investor Relations for closing remarks.

Please proceed sir.

That concludes our call today.

Thanks for joining us.

If you have any further questions you can reach me at 415-507-6033.

Thanks.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.