Autodesk Inc (ADSK) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2011 Autodesk, Inc.

earnings conference call.

My name is Jennifer and 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) As a reminder this call is being recorded for replay purposes.

I would now like to hand the call over to David Gennarelli, Director of Investor Relations.

Thanks, operator.

Good afternoon.

Thank you for joining our conference call to discuss our third quarter fiscal 2011.

Joining me today are Carl Bass, our Chief Executive Officer, and Mark Hawkins, our Chief Financial Officer.

Today's 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 of this conference call, we will make forward-looking statements regarding future events and the future performance of the Company, such as our guidance for the fourth quarter of fiscal 2011 and fiscal 2012; our five-year financial targets; the factors we use to estimate our guidance; our future strategic transactions, business prospects, and financial results; our market opportunities and strategies and trends; and sales initiatives for our products and trends in various geographies and industries .

We caution you that such statements reflect our best judgment 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 10K for fiscal year 2010, our Form 10Q for the quarters ended April 30 and July 31, 2010, and our periodic Form 8K filings including the Form 8K filed with today's press release, and prepared remarks.

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

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

If the 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 prepared in accordance with generally accepted accounting principles .

A reconciliation of GAAP and non-GAAP results is provided in today's press release, prepared remarks, and on the investor relations section of our website.

In addition, on this call, we will discuss our five-year non-GAAP operating margin target.

Autodesk is not able to provide a five-year GAAP operating margin target or reconciliation at this time because of the difficulty of estimating certain items that are excluded from the non-GAAP measure that affect operating margin, such as charges related to stock-based compensation expense and amortization of acquisition related intangibles.

Now, I would like to turn the call over

Thank you and good afternoon.

We are pleased with our third quarter results, which reflect the progress we have achieved in a number of key categories.

Year-over-year highlights included 14% growth in total net revenue, 33% growth in revenue from commercial new licenses, double-digit revenue growth in all of our geographies, revenue growth in all of our top countries, 23% non-GAAP EPS growth, and strong growth and cash flow from operating activities.

It's the first time in the three years that all of our geographies recorded double digit year on year growth and we were especially pleased to see the Americas return to this level of revenue growth.

We continue to experience our strongest year on year growth rates from our international geographies with APAC leading the way.

Growth in APAC was highlighted by strong performance of our model-based design products for both the AEC and manufacturing markets.

Our manufacturing business experienced significant global growth.

We continue to gain market share by winning new customers, deepening account penetration, and displacing our competitors with our digital prototyping portfolio including Autodesk Inventor at the core.

Our products offered an outstanding and easily understood value proposition for customers enabling them to bring better products to market, thereby giving them a real competitive advantage in their markets.

Accelerating progress in our largest addressable market has been very gratifying.

In the AEC market, building information model, or BIM continues to be a business driver.

The adoption of BIM is increasing.

And we are seeing more and more instances in both the public and private sectors of BIM being mandated in the US and abroad.

Jurisdictions are learning that permitting and sustainability requirements are much more easily generated in a BIM process.

Government agencies are discovering that they can have more successful projects and better return for their ongoing investment in infrastructure.

This year we have been increasing our focus on major accounts, and we are seeing those efforts bear fruit.

We have good quarter-over-quarter growth in our direct business.

In fact, we recently signed the second largest transaction in Autodesk history with a global engineering company.

This new multiyear transaction significantly deepens and broadens our present at this Company.

This type of transaction represents exactly what we are trying to accomplish with major accounts as we outlined at our Investor Day back in June.

Autodesk has the world's broadest and deepest offering of design and engineering software and we continually strive to enhance this portfolio.

For example, this past quarter, we launched AutoCAD for the Mac.

AutoCAD is one of the most widely used applications for professional design and engineering, and now it is available for customers that choose to work natively on the Mac.

What's equally exciting to me is our launch of AutoCAD WS, which is a mobile application enabling AutoCAD users to edit and share AutoCAD files on their mobile devices and tablets.

With over 0.5 million downloads in the first five weeks of its release, this truly brings our software into the field and to the factory floor.

We also launched new sketchbook products for professional designers and updated our wildly popular sketchbook mobile applications.

The sketchbook mobile apps have been lauded with industry accolades and downloaded more than 2 million times.

The mobile market is very interesting, and we are putting more effort behind opportunities we see in the mobile market for both professional users and consumers.

Turning towards our outlook for the fourth quarter, I think it is important to look back a year when the economic picture was less clear than it is today.

The exercise of forecasting our growth for FY '11 was difficult as most global economies had not started to recover yet.

As such, we started FY '11 with much more modest assumptions for revenue growth and margin expansion.

As we near the end of our fiscal year, it is clear that through a combination of strong revenue growth and continued cost controls, we have generated significant operating leverage.

We now anticipate our FY '11 non-GAAP operating margin improving by 430 to 460 basis points compared to last year.

This is well beyond our initial forecast of a 200 to 300 basis point improvement and a great start to our five-year target to increase margins to at least 30%.

In line with typical seasonality, we expect revenue in the fourth quarter to be our strongest of the year.

We expect our revenue for the full year to increase 12% to 13%, which significantly exceeds our initial targets.

Another indication of our business strength is that we anticipate total billings for the entire year to grow significantly faster than revenue.

As a result, we expect our annual performance related variable expenses such as sales commissions, commission accelerators and employee bonuses to be higher than originally anticipated as we reward our employees for strong FY' 11 results.

This will result in increased operating expenses in the fourth quarter, however these expense levels are non-recurring and these incentive plans will reset as usual in FY '12.

Controlling cost remain a focus area and we continue to look for ways to improve our cost structure and efficiencies.

We also felt it would be helpful to share with you our initial thoughts about FY '12.

We are modeling revenue growth of approximately 10% and non-GAAP operating margin improvement of approximately 200 basis points year-over-year.

Our business is having a nice rebound off of the bottom of the recession this year, but there are real and potential economic uncertainties and headwinds to keep us cautious when forecasting more than a year in advance.

Our recent performance, coupled with our revenue outlook for FY '1,2 reinforces our confidence in achieving our long-term five-year target of growing revenue by 12% to 14% compounded annually.

Overall, we are pleased with the results this quarter and look forward to growing our revenue and profitability going forward.

We remain highly confident in our market position, our product portfolio is the most compelling it has ever been, and we remain well-positioned the expand our business and better serve our customers.

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

(Operator Instructions) Our first question comes from the line of Brent Thill of UBS.

Thanks.

Carl, just on the revenue improvement.

What confidence do you have that this is a permanent improvement and that you are seeing ongoing success here, and that this isn't just a temporary snapback.

Is there anything you can point to help us continue to believe in the long-term trajectory of this improvement?

I think the thing that gives me the most confidence, Brent, is kind of the broadness of the improvement.

We saw it across all the geographies, we saw it across all of the market sectors, and in the places where would we would have expected it.

As we have talked about for many quarters now, manufacturing has led the way, construction had been the slowest to come out of the rebound.

That is reflected in our results results.

I think probably two things that give me the most confidence.

One is just the breadth of the recovery.

And that's coupled with--we've probably learn better how to deal with this environment, which is one of the things I said going into this.

Ever company becomes more resourceful, better optimized to go attack the opportunities that are present whatever the current market conditions are.

We probably learned a bunch about what we are doing.

As well as I think, we are still going through that slow and steady rebound.

Maybe just to complement Carl's point, Brent, really not only are the 3 Geo growing, they are growing double digit, and it is the first time in the three years that we've said all the Geos are growing.

And they are growing double digits to reinforce Carl's point on breadth.

The other thing I might share with you is we track a series of top countries.

Every single country, the top countries that we track is growing year on year in this period.

So I think it adds to this breadth point that was being made.

Thank you.

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

Please proceed.

Hi guys, good quarter.

In terms of your outlook when you are thinking about next year year, Carl, you mentioned the manufacturing coming on stronger than the construction vertical.

When you are thinking about that 10% growth next year, when you actually do think about it by vertical segment, how would you sort of expect commercial construction versus manufacturing as we come out of the recession here?

Thanks.

The first thing I say, a little bit sharing this year, I think, we really just wanted to share our thoughts.

A lot of people have been in speculating, so we just wanted to give you our best ideas.

We're going through all of our planning activities.

Right now as I think about the 10%, it kind of contemplates the environment we're in.

I am not imagining a worldwide rebound in construction.

And so right now, all our forecasts are kind taking in the relative strength and weakness of our end-user markets.

So I don't see it very different.

Should one of those markets, like construction start improving more dramatically, that would be fantastic.

But we are not anticipating that as part of our planning.

Got it.

Then also can you comment from a geographic perspective along those terms too of that 10% the US versus international and then I will go back in the queue?

Thanks.

Yes, sure.

The growth by geography has been relatively stable.

Asia-Pacific leads the way.

It is the fastest growing region in the world.

EMEA has been strong and steady and it is our biggest region.

And in some ways the most pleasing this time is to see the improvement in the Americas, which went into the dip first and was slower coming out of it.

I am kind of thrilled to see that.

The other way to kind of slice and dice the Geos is by just looking at the emerging markets.

And in the countries that Mark talked about that we really monitor closely, there's a combination of developed and emerging economies, and the emerging economies continue to do really well.

So I expect those kind of patterns to continue.

As has historically been true, our developed countries are more stable.

Quarter by quarter revenue is a little bit more volatile in the emerging economies.

I don't count on that quarter by quarter, but over the period of a year, it tends to even itself out.

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

Please proceed.

Hi, great, thank you,.

I was wondering if you could share with us how we should think about growth and maintenance revenue as we look out to fiscal '12.

You had a good rebound in maintenance over the past couple of quarters, and then from April we are now flat with what you reported in April, the April '10 quarter.

So just wondering if you could add some color there.

And then I was also wondering if you could share with us what else you could do?

You mentioned you're going to still be focused on the cost line and being more efficient?

What else is left that you guys could do to ensure that you do that?

Thank you.

Sure, Heather.

Let me just give you a little bit of an overview and maybe Mark can give you more details on the maintenance.

Overall, the first thing I would say about maintenance, probably two things.

One is it's following the usual seasonality.

so it's not much different.

We have always had big quarters in maintenance in the fourth quarter.

It's longstanding.

It has a little bit to do with the end of fiscal year for our customers as well as when we have introduced and retired products, and so because it is on an annual contract, we continue with strong seasonality in Q4.

That is one trend that I expect to continue.

Other than that, I'm pleased with what we are seeing in--

Carl, anything about the renewal rates specifically that you've noticed especially versus last year?

I can certainly speak to that.

I think the renewal rates has been encouraging point there.

From that standpoint we've seen really the renewal rates are now back to a zone that was totally pre-recession.

We are actually happy to see that.

That gives you a little color on that, Heather.

Also, in terms of the efficiencies, there is a lot of opportunities that we constantly look at.

I hope we never approach you without looking at efficiencies.

We look at things as basic as looking at our channel partner framework and continue to evolve that in a way that's efficient across the organization.

We look at things that are just general process improvements, procurement improvements, information systems improvements.

There's a variety of things that are operational opportunities over a long, long period of time.

So there's still room to go, I guess is what I was trying to see.

I would say there is room to grow.

And the way I look at it is as companies evolve and as companies grow, the most important thing in making sure you keep your costs in control, is you stop doing the old stuff and you do new stuff that is appropriate.

That is why it tends to be across the board, and you can get rid of the old stuff and move to the new stuff that you can tune.

Great.

Thank you, guys.

Our next question comes from the line of Derek Bingham with Goldman Sachs.

Please proceed.

Hey, gentlemen, thanks for taking my question.

Question is on expenses in the quarter and just curious, you had some nice upside to your revenue targets, not as much on the EPS.

Just a little more granularity on your third quarter spending.

Specifically how that ended up relative to what your spending plans were going into the quarter.

I think what you see is just if you look at it from both Q3 and our forecast for Q4, revenue exceeded our plan by quite a bunch.

And that the extra expense you're seeing is really tied to employee compensation whether in the form of commission and accelerators or just the overall bonus plan for employees, which are all programmatic things.

Have those already started to show up in third quarter?

Yes, they start showing up in the third quarter.

We accrue for some items during the course of the year, some we book just totally in the fourth quarter.

I kind of said in the prepared remarks, one of the things that you will start to see as you go to next year is those plans reset.

So those expenses could come out of the run rate for next year.

A follow-up on the emerging economies.

Is anything changing on the margin in terms of your ability to capitalize on the activity there, probably mostly speaking to piracy and how you're pricing those products there?

I think it is a non-stop evolution of what we do in the countries.

There are a number of places where different country's willingness to enforce intellectual property protection rises and wanes depending on how the economy is.

And so that changes over time as well as our own activities change over time.

A number of countries we have taken pricing actions that have resulted in slightly more revenue and a lot more seats.

And we continue to move that around to try to find the best mix of what is going on.

That continues to change, but it is a much more dynamic environment than what we see and I think it attributes for some of the volatility that I talked about before of the emerging economies relative to the developed ones.

Great.

Thanks, Carl.

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

Please proceed.

Thanks.

Good afternoon.

A couple of quick ones here.

Based on the information from the new segment classifications that you talked about, it looks like revenue from suites was about 22% of the overall.

Can you just talk about the long-term goals for suite -based revenue?

What percent of customer-base could realistically be on suites in a couple of years?

And will you incentivize customers to move in that direction?

Yes.

So I am pleased with where we are with suites.

They have not been completely launched.

We kind of outlined in June for you what we are doing with suites, and the real full launch comes next spring.

So I'm really pleased where we are today.

The best guesstimates I could give you at this point is over a period of time, think about it as a three to five year timeframe.

I think the vast majority of our customers will buy through suites.

I think it will be the primary way our customers get our products.

I think if you look at others in our space or similarly related technical software, office productivity software, people like Adobe and Microsoft, you can see the same kind characteristic there.

So I expect that to be the major way, and if you look at the offerings, you can see that customers are incentive to go there.

They are a great value for customers.

They're good for our channel partners to sell.

So I think this is a win all around around.

Cool.

And then I guess on the manufacturing side, who do you think you are gaining share against most?

And is your digital prototyping putting you in closer competition with Ann Cisco and forward?

I think the company we compete with most more is Dassault, and I think we are doing well against Dassault.

Dassault seems to have a growth strategy by (inaudible).

They're trying to grow by (inaudible) financial results.

They are not really growing.

They are kind of losing in the market.

I think that is the place where we are really doing the best.

But I think if you look at it and I have talked about this for a while in the long run.

Gravity is kind of on our side in the market.

I think we have better products at better prices and more compelling value to customers generally.

And it is certainly taken a while for us to get that message in the market, but we are seeing great success with it, and we are going to continue it.

I think in some ways kind of our single focus on helping customers build better products is really working where I think others are a little more scattered.

I think Ansys continues to be a great company.

They are doing really well.

In many ways we're much more complementary than we are competitive with Ansys.

I think as many companies in this space are on the margin, do we have some offerings that compete against them?

Absolutely.

As simulation is part of digital prototyping, but I see us as being less competitive and really serving different parts of the market.

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

Baird.

Please proceed.

Thank you.

I would just like to drill down the manufacturing of a very strong 30%.

Was there anything in terms of pricing or promotions or changing your message or anything you did on your end to really accelerate that growth?

No.

We have not really.

There are a couple of things that we have done slowly.

There was no dramatic change this quarter.

As we have looked over our investments over the last couple years, we have invested much of our direct sales force investment has been targeted manufacturing.

A slightly disproportionate amount of our R&D has gone into manufacturing.

We think it is the biggest addressable market for us.

We think we are also incredibly well-positioned compared to the legacy providers.

It fits into the wheelhouse of what we do, which is provide better functionality, much better value against older, entrenched competitors.

I give us credit more for sticking with the same strategy even through the downturn and in some ways increasing our investment on it more so than any particular thing we did this quarter.

I am really pleased.

It is really gratifying to see the results.

Even as you drill down into more details about it, almost every aspect of it and all the products that are part of the product portfolio manufacturing did really well and it did well across geographies.

That's what I was going to say, really nicely across the geographies.

But I think it is more consistency of execution than any really new thing we did this quarter.

Then at your analyst day, you were kind enough to break your business out for us by customer size, and then in your prepared remarks today, you talked about really stepping up your direct effort.

I'm wondering if you're seeing any bifurcation of performance between your enterprise business and your SMB business?

Thanks.

Not a lot of divergence.

The one thing I would say that is always worth keeping in mind, just as I pointed out, a little bit more volatility in emerging markets versus developed economies.

I would say the same thing about the large accounts.

As we've often talked about the linearity of our business that really comes from the large volume of transactions we do.

That continues to be relatively stable.

I think the direct business is a little bit more volatile quarter by quarter in terms of the number of deals we bring in.

Because many of them are multi-year deals or have a recurring revenue aspect to it.

It does not affect the results that much, but the actual billings quarter by quarter or the winning of the deals is a little bit more volatile.

But I did not see any real strong difference in performance.

Our next question comes from the line of Walter Pritchard with Citigroup.

Please proceed.

This is Tim Long for Walter Pritchard.

Carl, you mentioned that one big deal earlier, is there any other color you can provide in terms of big deal activity versus last year, last quarter, and perhaps what the pipeline for big deal looks like?

We don't try to break it out quarter by quarter.

In fact, that deal that I talked about had no influence on the revenue for this quarter.

Or almost no influence on the revenue for this quarter.

Right now what I see is a pretty strong pipeline of large deals.

It's a combination of our focus on it and our increasing investment over the last year and a half has allowed us to do that.

Some of it is coming in government sector where we've seen some good results in government, and we've talked about those the last couple quarters.

A lot of it is in the private sector.

The thing that I guess has surprised me, is while the manufacturing deals haven't surprised me given the rebound there.

What has surprised me is a number of these large deals have come in the AEC space.

So despite the fact that the smaller or medium-size business in AEC have been hard hit by the recession, we've continued to do large deals.

So I am very optimistic about what we are doing.

The thing that we believed and is turning out to be true is that it's very synergistic with our channel business.

This is not a zero-sum game that has our major account business has done well, our channel businesses continued to grow.

And they really work hand-in-hand rather than against each other.

Great.

Thanks, guys.

Our next question comes from the line of Steve Koenig with Longbow Research.

Please proceed.

Hi, guys.

Thanks for taking my question.

The first question and I will do a quick follow-up.

I'd like to revisit your long-term 12% to 14% over the next five years.

Can you remind me, what is this based on?

Is it a top-down approach, is it a bottom-up approach, any assumptions about market growth or share?

And how do you square that against your 10% growth guidance for next year?

A couple of things, Steve, that I'll call out and Carl I'm sure will add in.

In terms of the long-term, we do both a bottoms up and a tops down.

We spend time with our organization and really harness a lot of insight across the organization to come up with a detailed plan.

We also try to integrate that with everything we are seeing from a tops down standpoint.

So the answer to that is in fact both.

The other thing that I would say to you is one thing we tried to call out at the IR day is the fact that this is not like a perfectly linear equation in terms of exactly when we expect to fully fulfill that and that was something that was envisioned from the very beginning whereby people would like perfect quarterly linearity.

It never quite works that way.

I guess the bottom line is it certainly grounded in a detailed plan with an overlay tops down, and Carl, I don't know if you have any other adds to that.

I would agree with Mark that it will not be consistent.

I would also say that kind of gave you the caveats that we saw in forecasting that goes out 13 to 14 months.

And look, we do our best job we possibly can to give you the insights that we have and try to share them with you to try to understand our thinking about what we see in the future.

In some ways, I am gratified to say that our keen insights of 12 months ago weren't so correct.

If you'd asked us 12 months ago, we would have been much more pessimistic than where we anticipate ending the year.

We try to do the best job we can can.

Just as an example, you understand the difficulty in doing this forecasting.

I, for the life of me could not possibly tell you what the euro's going to be next year.

I would have thought I knew two months ago which direction it was going and I would have thought something different two weeks ago, and I think something different a week ago.

When you sum up all those things, it is hard to have a perfect picture of the future and we try in some ways just do the best job we can in sharing our insights at the time that we give them to you and try to adjust as we go forward.

Okay.

That's great.

One follow-up with, again, another one about the forecast, which I'm sure you'll appreciate is on you margins.

What are the prospects for driving margin upside next year?

What things could drive that?

And your internal plans, your comp plans assume your 10% growth as a baseline.

Yes.

So I think the easiest thing that will drive upside, as you saw this year is revenue growth in excess of the 10%.

That is the easiest way for us always to drive it.

As we highlighted during the opening comments and Mark talked about, we are continuing to focus on cost.

I think there's a number of things that we can do in the cost side that could add.

But if you were to weigh them, we would get much more leverage on what we can do with revenue than what we can do with cost alone.

Anyone who has followed this business for a while sees the difference of what we are able to do with revenue upside versus revenue downside or just pure cost control.

So that's the biggest upside I'd see next year.

I think the opportunities are that we either forecasted too conservatively or that some of the things that we are anticipating kind of extrapolating the current trends for example, around construction change more quickly and for the better.

So if you saw an improving worldwide construction spend, you would see much better results and much better operating margins.

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

Please proceed.

Thank you, guys.

I want to ask you more of a big picture question.

Really, why did you guys decide to change the product categories now?

Anything in -- is it changing your product marketing or any particular catalyst that led you to change the focus towards suites and flagship products and new and adjacent?

I said there are a couple of things going on.

The first one was really just to be consistent with how we think about the business internally.

In some ways, some of the categorization that we had used before had evolved.

It was historical thing that evolved over time, and as any framework does, you continue to try to shove stuff into it until at a certain point it makes no sense.

For example, one of the things we had is we had some of our products that are clearly 3D products, not categorized as such.

It made no sense to talk about it that way.

Truthfully, we didn't internally think about it that way.

So it was trying to get those two things in synch as much as possible.

The second thing is with such an emphasis on suites and you see what a big contributor to revenue it currently is, and our anticipation on how quickly it will grow.

We felt like we needed to bring a focus on that and we've really evolved the internal organization and our internal measuring systems to look at those kind of things.

Maybe Mark has some.

I think that's exactly right.

I see this same point.

We looked at it and just tried to really reflect the way we're thinking about the business in the future.

And I think as Carl called out and when you look at the IR day, Keith, and you were there, basically we talked so much about suites and that opportunity, we thought this would be a great way to look at it.

It just reinforces that.

If I could sneak one last one in.

I just want to ask you about growth in the subscriber base, 2.8 million by my count that's up like 26% year on year.

What is driving that strong growth in the subscriber bid?

And at the same time, billings growth, I think you guys remarked was up 11%.

Why is that, that variance between the billings growth and the subscriber growth?

First of all, I think you are getting the right stats.

I think the 11% billing is up.

We are really pleased about it.

We like the growth.

There's always a little bit of a difference, this mix, to some degree, but there's no big headliner in there from our standpoint.

I think you just have to -- when you go through this and it changes quarter by quarter, it's geographic mix mix, it's product mix.

Broadly speaking, we have seen greater adoption of the program worldwide.

That is kind of what is driving it.

I think what you are seeing short-term is people coming back into the subscription program.

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

Please proceed.

Thanks for taking my questions.

One for Mark and then one for Carl.

Mark, as we look into next year, can you just remind us what other -- I understand what you're saying about resetting the plan for comp and so forth.

What other costs are going to flow into next year that maybe don't exist this year such as any kind of standard merit raises or anything else that you will reimplement next year?

Thanks.

Ross, first of all, you're absolutely right, we reset the plan each year, our variable comp plan based on performance standards.

You hit that one right on the head, that is an important one where we try to reward the employees, but obviously we always set the bar based on next year's goals.

In terms of other costs, there are some things that are happening.

Without getting into too much deal on how we are going to look at our wages or anything like that that you referred to, I would say everything we are doing is comprehended within the guidance.

I think that is the big point.

There's a lot of little pluses and minuses, but that's the overarching thing that I think is important to call out.

Okay.

That's great.

And then Carl, it's maybe a bit technical but I will ask it anyway.

One of your competitors is talking about bringing together parametric and direct modeling as a kind of innovation around mechanical CAD.

I noticed on your labs you actually have a similar product I think called Inventor Fusion.

I'm just trying to understand how big a deal this is.

Is it a big innovation?

Or can you maybe frame that for us, how important this is?

Thanks.

This is mostly in the manufacturing market, and we do have Fusion, which is a great product.

We've kind of led the way here.

As often happens when you innovate in a competitive market, people follow you.

So we have a bunch of our competitors trying to do the same stuff.

We feel really confident about the technology we do -- that we have.

I think the important thing is with any kind of modeling system, there are certain things that are really easy to do.

Parametric modeling has stood the test of time.

There are certain things where direct modeling is better.

What we really did in Fusion was get this hybrid in which you can get the best of both and that they interop seamlessly together.

I think some of the innovation is in each of the individual systems, but I think what we have done particularly well is a combination of the two.

Do I think it is a big deal in that I think a lot of companies offer something like that?

Obviously that's not -- I think our implementation is better.

I think we have been in the leadership position with it.

And I think what gets interesting in markets as you look at them over time is that innovation is coming from the volume provider.

We are the ones doing the innovator as opposed to people who used to like to segment this market as high end and midmarket, or whatever euphemism they like to use.

The innovation is coming from the volume provider.

And I think that's just the nature of software, and about returns going to the volume provider.

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

Please proceed.

Good afternoon, everyone, and congrats on the quarter.

Carl, just a question around the BIM, which you referred to in your remarks.

Can you talk about what that opportunity could entail here over the next 12 to 24 months?

Is this something that all of your customers are eventually going to migrate to?

And that could be pretty significant catalyst for read it?

Maybe just talk about and frame the opportunity there?

Because it looks like --

Yes.

Happy to do so.

BIM is a big deal.

Like many technologies in this business, they're overnight successes that take five or 10 years to develop.

And BIM is not very different than that.

We have been developing it, trumpeting it for a long time.

Our customers have become aware of it.

Certainly the most progressive customers have all adopted it.

It is an enormous opportunity.

And I think the vast majority of buildings and infrastructure will be built using building information modeling.

What it really allows people to do is get better control of their projects in terms of cost and schedule.

And it opens up the biggest opportunity that we see in the AEC markets, which is really the construction.

The vast majority of the money spent in the AEC market is spent during construction.

And there's always a fair amount of disconnect that what happens in the design part versus what happens in the build.

Through a combination of what is going on in the industry, plus this introduction of a new technology, we are beginning to bridge the gap, or bridge that discontinuity between designing and building.

So I think it is enormous in terms of allowing people to deliver better projects; but I think it's also because it opens up a new part of the market to us, and which truthfully our presence there was relatively small.

And overall use of technology has been relatively small.

Thank you.

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

Please proceed.

Thanks.

That is Thinkequity.

I just found out you were on our payroll.

This is a whole new twist for a call.

I am going to start with a follow-up softball.

I finally get to ask a question about the BIM world acquisition, which I guess I got too excited about.

But the seek database, that looks very interesting.

It says on your website you've got 37,000 products there and participation by, I think, 1,000 manufacturers .

I guess following metrics related to the use of that asset, I think that would be interesting if you have any color on that.

And then specifically on the fourth quarter given that you have said that the sales and marketing spends and the comp expenses will be up, I thought your overall FY '11 improvement range was a bit better than you published last quarter.

Does that specifically mean that the other non-comp stuff you're running below your prior internal

Why don't we do this.

I'll let Mark answer the second question first, and then I will jump into BIM world.

Dan, even though you are not in the Autodesk payroll here.

All joking aside, as far as the comp expense based on the fact that we've overperformed for the year and we're rewarding the employees, you are absolutely right in picking up the fact that last time we talked, we said 400 to 450 basis points is improvement for the year was our anticipation.

And this year -- or this period, when we talk about the full year, we are talking about 430 to 460 basis points.

So I think you picked up the right point that we comprehended a lot of different things in there, in addition to the rewards for our employees, but we continue to make improvement in other areas as well.

So net-net, that total math is the math that you are picking up.

What we are doing with products in terms of BIM, I think it is really interesting when you look at building products.

So much of what is built today comes from manufactured product.

We have always wanted to make this connection, and allow our customers access to the products that really get to build with.

So we're happy with the traction we have to date.

Happy with the idea of 37,000 products.

The only thing I kind of put out there is there are tens of thousands, if not hundreds of thousands of building products when you look around the world.

I think we have made a great start.

Certainly, we're going at it is trying to find the ones that are the most important, most frequently used, have the greatest impact in terms of the costing of a project, and I think we have done a good job.

I think this will open up new business opportunities.

And at the very least, it serves a much felt pain point for our design and engineering customers, who need access to those products during the design process.

We'll give you more updates as the business proceeds, and we figure out more about how to monetize this going forward.

And its use spans both your manufacturing franchise and your AEC franchise, correct?

Is more around AEC right now.

It is this interesting thing in almost all the products in there and are made by manufacturers.

The end customer is generally in the construction of buildings.

It is this interesting thing in which two of our mostly distinct businesses come together.

We serve the business -- the building product manufacturer is the person putting their products up there.

The consumer of that information would be architects, engineers and designers.

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

Thanks.

Hi, guys.

Just wondering prior to the recession, the move to 3D was a key driver to why customers were buying new seats.

With the change in the revenue and the focus on suites, should we now think about post-recession that the main driver is going to be purchase of products and suites as a core driver?

The way to think about it is at the heart of all of the suites are 3D products.

I think rather than thinking this is a shift left or changing direction, it is more of an evolution.

So that if you were to look at the building design suite, or the product design suite, at the heart of one would be Revit, at the heart of the other would be Inventor.

What we recognized is customer's design problems are broader than that of what's served by a single product.

That is why we are combining the products into a single offering.

It allows them to complete these workflows.

But if you think about the flagship products, the flagship products are really at the heart of all the suites, whether it's in building or manufacturing or entertainment.

Okay.

The follow-up would be, Carl, you made the comment about not knowing to predict the exchange rates.

My question is when you talk about 10% revenue growth for 2012, should we just basically assume that is based on the current level of exchange rates and then volatility from here would have whatever impact depending on the direction.

Sterling, this is Mark.

First of all, I think one of the things we predicate our long-term model on and certainly even our guidance for FY '12 on is we take a view that -- where exchange rates are.

We take a few certainly a year ahead, we look at some of our exchange hedging programs and that type of thing.

But we're not going to get into much detail.

The most important point to mention to you is that things were dramatically different.

It's the same way with the economy if it's dramatically different, to Carl's point we would have to revisit that.

That is the main message that we would send to people both for '12 and beyond.

But in a pretty broad range, we have contemplated like I said, given our uncertainty we've contemplated it going considerably lower and considerably higher.

Exactly.

It would have to be very unusual.

It is out there.

Last I checked we are not currency traders.

I agree.

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

Please proceed.

Thanks very much.

I think you are right that you have closed the gap on functionality.

The question that I have is the end market, i.e., the customers and secondarily your product line, is it to the point where you can use your rendering visualization tools as a competitive weapon?

In other words, say look, not only do we have some cool parts of the core CAD business, but we also have some visualization rendering.

Is that at a point where that makes a decision easier for the buyers?

I would broaden it slightly, Richard, to say I think you are on the right track.

I think we've exceeded -- this is particularly in the manufacturing markets.

We have exceeded the capability of our competitors, and the performance of the competitors in terms of the core products.

What we have invested in over the last few years have been technologies like visualization.

We focused on conceptual design.

We focused on things like analysis and simulation.

That was the small overlap I was talking about before.

But we recognized that our customers work is often broader than what is done with a single tool.

And that leads us to two things.

Having broaden our portfolio to encompass the scope of work that they actually do, and then packaging those offerings together in a suite to make it convenient and valuable for them to buy.

I would think your general thesis is right, but I would make sure that depending on the user, for example, the visualization capability may be important for different customers.

The conceptual design capability might be important for another it will be the simulation and analysis.

Each one has a slightly different mix of those kind of peripheral products that are important to them.

Got it.

Then follow-up.

Can we finally put to bed the zombie seat fear, so when we talk to people that may have laid off people in the recession, when they hire people back, they don't give them two year old software, two year old computers.

Does that correspond with what you've seen as well?

In other words, if your customers rehire, they buy new product from you guys ?

I don't I am not sure I have to put it to bed since I never woke it up.

I think I have been quite clear on my viewpoint about it all through the last two years.

So while there were certainly challenges over the last two years, I am not sure that is the one that kept me up at night.

So I can put myself to sleep peacefully.

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

Thanks so much.

Carl, your comments and you had some press releases out about it in the quarter about the movement to Mac.

Can we quantify that at all?

What does that do to the TAM, and the opportunity given the number of design folks who use that?

I'd love to know the answer to that question.

Let me give you a little speculation.

The really hard thing for us to know is look, there's a huge -- one thing is there's a huge demand amongst our customers for products that run natively on the Mac.

That much we know.

What we can tell and we're trying to gauge in the first few months in which there has been good success with it is how much of that is just moving things from the PC to the Mac versus winning share from people who offer their products on the Mac or Mac alone.

That is the part that is not clear yet.

There is no doubt we are making customers much happier by offering our products on a broader range.

I think we'll be able to update you a little bit more as we go forward and understanding yes, we are making customers happy but is it merely cannibalization of PC sales.

Do you have any numbers on that Mac only opportunity?

No.

We are not going to break out, but I will tell you that in many of our professions and certainly in the subdisciplines, there's a huge number of people who use Macs.

Just to give you two examples, one is in the architecture community.

It has been a long desired product requirement to run on the Macs.

The other one that is equally true is in things like industrial design.

So that conceptual design part of the process I was talking about in the answer to Richard's question, same thing going on there.

Huge usage of Apple products.

I think the other interesting thing and maybe as equally interesting to just running on the Mac, is the thing that we have done around the mobile devices.

Much of our mobile activity at this point has been focused on iPhones and iPads.

But it's just a specific instance of smart phones and tablets that will be coming and we'll have a greater support for Android going further.

But this idea of taking design engineering information and bringing it to the field is a really important one.

I think while the -- just the presence on the Mac is already included in our contemplation of the TAM, I think moving it to the field, the mobility applications, whether this is on the tarmac and the factory floor, or on the construction site actually increases the TAM.

So I'm as excited about that.

Although I must say we got a note from Steve Jobs who was pleased to see that it was on the Mac.

So if Steve thinks it is a good idea, I think it is a good idea.

Mark, when we look back historically when you go Q4 to Q1, the licensing numbers typically have a little bit of a sequential decline although we haven't this most recent year.

Any guidance you can give us on around seasonality.

Should we be expecting that to take some seasonal dips in normal periods or not?

I don't know that I would give you guidance on licensing per se at that level of detail.

I probably would not go that level of detail at this stage.

What seasonally -- what has it been?

Because as I look back, it looks like it's been all over the map over the last few years?

I think that's part of the issue is that it's hard to look when you look at this.

I think the bigger, broader thing is to think about the revenue in aggregate.

You also heard that we are going to have strong billings in Q4, our maintenance billings are going to be up, and that's a very seasonal pattern that's predictive here.

So, maybe think -- the total revenue, think of the billings for subscriptions, maybe that will give you a hint.

There are probably two things that complicate or kind of camouflage the pattern.

One has been product offerings, product introductions or new product offerings.

Second, along with it had been the promotions that have sometimes accompanied them.

They kind of make the statistics haywire.

But as I often say, if you look at our business over a little bit longer period of time, it kind of averages out; but doing it quarter to quarter is a little too specific without knowing the individual events that catalyzed each of those numbers.

Our next question comes from the line of Blair Abernethy with Stifel Nicolaus.

Please proceed.

Thank you.

Just quickly, Carl, follow-up on once more.

Can you give us a sense in your AEC vertical now, how much of your new license revenue there is being driven by what you could classify as a BIM related sale?

I don't have an exact number for you, but it is increasing.

You can see and you can look directly at things like Revit seats or Revit suites.

You will be able to see it there.

But I would also say what I am seeing increasing are the use of other products in a BIM context.

Things like Navisworks are much more meaningful in that context.

And so while the product was introduced to help solve some of the problems of a non-BIM world, it is much more valuable to our customers in a BIM world.

So you are starting to see other products, whether it's our QTO product or Navisworks or Buzzsaw construct wear being increasingly used in BIM environments.

Like I said, one of the things to remember is BIM is a technology, but it has been accompanied by changes in the actual end-user market in the way companies are going about building and financing projects; and the way teams of people who come together for these projects are contractually relating to each other.

I think this is a nice synergy between a technology change along with an industry change.

In some ways it is being catalyzed by the need to get more efficient because of the downturn.

So if there's any silver lining in the AEC market or construction market at large, it's that people are no longer willing or able to live what traditionally has been 20% to 30% of the project being inefficiency.

That's great.

That's very helpful.

Thanks.

One quick one because you have not mentioned it today is the median entertainment vertical for you.

Sort of the growth there has lagged your other segments this year.

How are you feeling about that business?

One of the things that depresses the appearance of our MNE numbers is that we have a long stated goal of increasing our software component in that business while ramping down our hardware.

So we don't break it out for you, but there's always this big headwinds.

So the software business is doing quite well.

What you don't get to see is the drag created by the reduction in hardware sales.

It's somewhere reflected.

You can back into some of it by looking at the COGS.

Some of the improvement you see in COGS come because we're selling less and less hardware every quarter.

But I am very happy with the progress in the group and the moving, the transition to software and our competitive position is good there and how our products are used.

It is used in many of the most important median entertainment projects.

I am happy with that, but there is financial implication in this transition from what was primarily a bundle business of hardware and software to eventually a software only business.

We have a follow-up from the line of Dan Cummins.

You may proceed.

He got bored.

At this time we have no further questions.

I would like to hand the call back over to David Gennarelli.

Thanks, operator.

That concludes our prepared remarks and Q&A.

Just one last note about our investor activity this quarter, we've got Autodesk University coming up on November 30th.

And please contact me if you like to attend that event.

On December 1st, we will be at the Credit Suisse conference in Scottsdale.

On December 8th, we'll be at the NASDAQ conference in London.

And on January 11th, we will be at the Needham conference in New York.

If you have any other follow-up questions, please let me know at (415) 507-6033.

Thanks.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.