Autodesk Inc (ADSK) 2013 Q3 法說會逐字稿

Good afternoon, My name is Alaya, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Autodesk third quarter fiscal 2013 financial results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you, I will like to now turn the call over to our host, the Director Investor Relations, Dave Gennarelli.

Thanks, Operator.

Good afternoon.

Thank you for joining our conference call to discuss the results of our third quarter fiscal 2013.

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

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 will not be repeated 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 and full-year 2013, long-term financial model guidance, factors we use to estimate our guidance, new product and suite releases and expected growth rates, expected cost savings from our restructuring and other cost management efforts, hiring plans, business execution, certain future strategic transactions, business prospects and financial results, our market opportunities and strategies, including our transition to cloud in mobile computing, trends in sales initiatives for products and trends in various geographies and industries.

We caution you that such statement 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 year 2012, our Forms 10-Q for the periods ended April 30 and July 31, 2012 and our current reports on Form 8-K, including the Form 8-K filed today press release and prepared remarks.

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

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

If this call is replayed or reviewed after today, the information presented during the call may not contain 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 will also discuss non-GAAP financial measures.

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

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

We will quote a number of numeric or growth changes as we discuss our financial performance and unless otherwise noted, each such reference represents a year on year comparison.

And now, I would like to turn the call over to Carl.

Thanks, Dave, and good afternoon, everyone.

Our overall revenue results were disappointing.

Revenue was lower than expected and stemmed from a weakening demand environment.

The positive news is that our ongoing cost control helped us exceed our EPS goal.

It was clear to us that our second quarter's revenue performance was mostly due to our own execution challenges, with the uneven global economy as a secondary factor.

It was almost the inverse during the third quarter with a weakening economy taking the lead.

Our sales execution improved relative to the organizational realignment we implemented earlier this year.

There is still some work to do in this area, but we have made a lot of progress with the new organizational structure.

When looking at our revenue results for the quarter, recall that we had a one-time $10 million license compliance transaction in Japan in the third quarter last year.

So, normalizing for that, Asia-Pacific would have been up lately and we would also be showing better results in our PSEB and flagship categories.

Superstorm Sandy hitting the Northeast US in the final days of our quarter also had a negative impact on our third quarter revenue results.

While we experienced pockets of relative strength in the US, northern Europe and Russia, most of the markets around the world slowed during the quarter, most notably in emerging markets.

We remain pleased with the overall progress and adoption of suites.

Customers are seeing the value in a rich array of design features and improved workflow.

And we continue to benefit from higher subscription attached an overall revenue per user.

Our AEC suites performed particularly well this quarter with strong growth in our building design suite, infrastructure design suite, and plant design suite.

Looking longer term, I am extremely pleased with our customers' early adoption of our cloud technologies.

Autodesk is the leader in cloud -based designing engineering software, and our customers are tapping into the power of the cloud to do things they couldn't do previously.

Autodesk customers have used our cloud platform, Autodesk 360, to perform nearly 1 million visualization jobs over the last year, which amounted to more than 3.5 million hours of rendering.

In addition, in October, AutoCAD WS, which is a mobile version of our flagship software, surpassed 10 million downloads.

Our BIM360 cloud platform has seen strong adoption since it launched in June with more than 21,000 users leveraging BIM360 services.

We're adding more new users of BIM 360 field everyday, and our customers are very excited about this offering.

Autodesk Simulation 360, which debuted in September, is a powerful cloud -based simulation solution and has been recognized by industry analysts as changing the simulation market.

Customers are responding positively to the productivity gains and cost savings offered by Simulation 360.

In its first month, the Autodesk Simulation 360 trial registered more than 10,000 simulation jobs.

We're especially pleased with the first couple of quarters of Autodesk PLM 360, the industry's first cloud -based PLM solution.

Autodesk is transforming the PLM industry with an affordable easy to use and simple to deploy PLM solution that makes the benefits of PLM available to anyone, anytime, anywhere.

Autodesk PLM 360 is now being used by more than 350 companies.

Our acquisition strategy is also centered on adding cloud and mobile technologies to our portfolio.

During the quarter we closed six transactions for a cumulative investment of $135 million.

These transactions include context, social collaboration technology which we will use with Autodesk 360 and Informix, which is focused on SaaS solutions for PLM.

We continue to repurchase stock under our ongoing buyback program with the goal of reducing our total shares outstanding over time.

We have strong cash flow from operations for the quarter.

Our cash and marketable securities balance was approximately $1.7 billion.

Like many tech companies, the vast majority of this cash is offshore.

Over the past few years, it has been typical for 80% or more of our cash balance to be offshore at any given quarter.

Given the amount of cash used on M&A transactions closing this quarter, coupled with the cash used for our stock buyback program, we elected to utilize our existing line of credit tapping $110 million.

Looking forward, we will believe the long-term potential of our market opportunity remains intact.

We are focused on growth in demand generation, but today's mixed economic environment keeps us cautious on our near-term outlook and makes it difficult to provide long-term revenue projections at this time.

It's clear by our actions that we remain committed to operating margin expansion.

Despite our lower revenue outlook, we believe we can still achieve year-over-year operating margin expansion of between 80 to 140 basis points for fiscal 2013.

We'll come back to you on our next earnings call in February with our projection for FY '14.

We are also reassessing our long-term financial model but believe we can achieve a 30%-plus run rate as we exit fiscal 2015.

Operator, let's open the call up for questions.

(Operator Instructions) Brent Thill, UBS.

Maybe if you could compare and contrast the last downturn to what you are seeing now.

You mentioned most markets are starting to slow, maybe if you could talk to some of the defenses that you are seeing and if you could also comment on what you're seeing in terms of the renewals, that would be helpful.

Thank you.

Sure, Brent.

I would characterize it very differently than 2008.

My characterization would be that not nearly as deep, not seeing the level of despair almost or hopelessness that we saw during 2008 and the complete freezing of pocketbooks.

Instead, it looks like people are being far more cautious, deals are getting delayed, but they are not getting canceled.

And I would say it is broader.

I don't think it's nearly as deep, but broader.

I think for the first time what we started to see is while our results in the Americas were reasonably good or relatively good to the other places, it is no secret about business' consternation about the fiscal cliff.

You saw the news, obviously, about Europe this morning and we've certainly seen slowing in Europe.

With Southern Europe certainly being the worst, and as you move north, the economic condition's improving.

And there are some spillover into Asia in some of the emerging economies.

I think it is broader but not as deep as what we saw in 2008.

Just on the renewals, any meaningful change?

No, actually, building on Carl's points, the renewals and attached actually were either even or up, basically, in terms of year-on-year comparison.

They look solid, and that's one of the things I think that really reinforces Carl's point that we are just seeing more caution around business and deals and such.

But actually, once people decide to buy, it's a good attribute that they see a lot of value in our subscription, and we like that.

Great, thank you.

Jay Vleeschhouwer.

Carl, you alluded in the end of your prepared remarks to reconsidering your long-term financial model.

By that, did you mean what you talked about at the analyst meeting in June about an evolution to a mostly per user subscription model and usage metering or usage-based model?

And if that's what you meant, why not accelerate that process?

Particularly given current market conditions and the change of your portfolio?

And then a follow-up.

So Jay, what I was really talking about there, you can -- in your follow-up you can ask about the other thing, but the thing I was really talking about is our long-term guidance that we had given for 12% to 14% growth and 30%-plus operating margin.

I think it's clear to us, I don't think the arithmetic works given at least one downturn and one maybe minor downturn in five years to achieve that.

I think what we have demonstrated is during normal economic periods we can certainly grow in the teens.

What I think we have demonstrated better over the last two quarters than during 2008 is a degree of resiliency around our earnings power.

And I think we managed to do that.

What we have to really recalibrate, I think if you look now for the period in which we gave the 12% to 14% growth, we'd have to grow it 30% or 40% next year to get there.

Something that is not reasonable.

What we were asking, give us some time, we are going to recalibrate, we'll watch as the fourth quarter proceeds.

And then I think the thing is, we'll give you growth rates for next year, but despite that, we still think we can maintain our projections around operating margin.

Okay.

You said as well that you are getting past some of these sales execution issues from the reorg that you had experienced in the second quarter that got better in the third.

Could you talk about other longer-term implications of the industry alignment that you have now put in place?

For instance, what it means ultimately not just for sales coverage, but for things like the suites, packaging of products, overall coverage of the marketplace as you build out this industry alignment.

And just a clarification for Mark, in the prepared remarks, you talked about increasing revenues per user, I think in the context of maintenance.

And so did you mean by that that you are reversing the declining revenues per maintenance seat that you had in the first half?

Let me go first, and then Mark.

Okay, so on the -- just on the industry alignment, what I think industry alignment is really helping us with is our go to market activities.

I think it really helps particularly well is in tailoring messages that make sense and resonate with our customers.

It's also very good on two parts of our Business.

One is certainly the major accounts, and you have seen increasingly large deals.

Not only this year, but over the last couple of years, and greater penetration into really large accounts.

If you recall back to the many times we have shown our curvaceous pyramid where less than 1% of our customers generate about 30% of our revenue.

We are continuing to do that.

So, it works really well for the major accounts than that business that we do directly, as well as the ones where we work with our partners on specific named accounts.

That's where it really has the strongest resonance.

As you get into our more horizontal products, it is less effective.

So, we feel really good about that alignment in terms of tailoring the messaging and the coverage models and understanding what we need for each of the geographies, and I think this is natural course correction.

I think we will continue to course correct.

I think we have found in some places where we made some mistakes or we went a step too far, and we are figuring those things out and rejiggering it.

We saw that already with improved performance in some places.

In other places, some things take longer than a quarter to get better.

And Jay, just to the second point, in terms of maintenance, perceived basically, one of the things that we are actually pleased to see, we saw it and talked about it at the IR day, and we continue to see that and validate that is that for suites, the actual subscription quotient per seat is actually going up.

And so we actually like that trend in macro there.

So, I think one of the things that we have to be careful of when you look at the seats is excluding education from commercial, which can throw these things little bit.

The other point that I would throw out for consideration is that Q3 marks -- just eclipse the anniversary for suites, we are in the second quarter of anniversary in the suites.

And you are starting to see this longer-term effect of people renewing suites at a slightly higher revenue quotient for the subscription, so we actually like that trend.

Brendan Barnicle.

Focus in on two areas of strength, but AEC strength and the suite strength seem surprising given the overall macro.

What specifically do you think was accounting for that outlier?

I am chuckling, Brendan.

In some ways I am more prepared to talk about the things that went badly than the things that went well.

Truthfully, that surprised us a little bit too.

If I have to look at the AEC, there has been some improvement in the AEC markets from the depths of the recession.

We also talked about things like bama reaching the tipping point.

And with the place we're doing particularly well with our AEC products is in the engineering part, the E part and in the C part in construction, and I would emphasize the construction part.

And I think what we saw is that contractors realize that in order to be competitive coming out of the downturn, they need to adopt these new technology platforms.

Some of the stuff we are doing, particularly on cloud and mobile, is probably the best suited technology for that part of the AC market than we have had in 30 years.

For the first time, we have solutions that people can take to the field and get their work done.

And that makes a huge difference.

And so, I think it's really the retooling of the construction industry that as long as they're willing to invest, they recognize this is just a critical thing.

I totally agree, Carl, and I think the -- one of the things was just the resounding response to the building design suites, nice, really nice, I think we said 26% growth there.

Was great to see, and it echoes the kind of comments you are making.

People see the --

We are tracking it across the world.

And there are places where it has become the standard, governments across the world are mandating it,.

If governments are not mandating it, the owners and operators are.

So, we're at that point in the market where it takes many years to build that demand.

But I feel like we are on the backside of having to build the demand, and we're just reaping the benefits of all that effort.

And then Mark, on the negative interest income in the quarter, was that related to the line of credit that you mentioned that you'd used for the stock buyback in the quarter?

Actually, the -- Brendan, that's a good question.

The other expense, other income is a combination of dynamics.

The biggest thing that really affected us there was foreign-exchange.

The gains and losses for the hedging that is not cash flow hedging shows up there, and that's what it, is FX fluctuation.

Should we expect that going forward?

I would actually, because it's really hard to predict the currency markets.

I -- you would have to make the call and that, but I think it is tough to expect that one, I would say.

It is tough to project that one, put it that way.

Okay, Brendan?

You are welcome.

Philip Winslow.

Hi, guys.

Thanks for the time, just have a question here on margins.

Obviously you had better than expected margins this quarter, but in the guidance you talked about almost regardless of the revenue growth over the next couple of years here through 2015, you're still committing to a 30% plus margin exiting fiscal '15.

How should we think about that getting there?

How much of your business -- because I often think of it as somewhat fixed versus variable.

Is that wrong versus what I expect?

And then also, is there some excess spending that you think that is going on that you could target further from here?

Let's say if revenue doesn't -- isn't worse than what you might be expecting versus your previous long-term growth rates, does that mean we could actually get above 30%?

I'll take a shot and then Mark, feel free to add any color commentary.

What I would say is that the way to think about our Business is that there is a strong component of fixed cost.

That when you look particularly on the R&D and go to market, at least the marketing side of go to market, those are relatively fixed.

Once we get above that, when we get marginally above it, it becomes marginally profitable, if we hit it out of the park, it gets very profitable.

I don't think it's fair to think of it is as purely fixed or purely variable.

Once you get past that initial development and bringing products to market, and as we have even talked about in areas where we are really successful like BIM, it takes years to become that successful.

When we first mentioned those three letters, nobody even knew how to spell it.

They had no idea what we were talking about when we talked about BIM, and you see it being written into government contracts around the world.

There is a fair degree of investment.

When you cross that you start gaining the rewards from it.

Then there is a second component to our Business, where many of the costs are variable.

Some of the fluctuation you see quarter to quarter are more related to things like compensation.

Sales compensation varies with it.

COGS varies.

COGS didn't vary that much this quarter, but it was actually the result of three or four different effects being mushed together in a way that showed no net movement.

But there was actually quite a bunch of movement there.

There are variable aspects to our business that are volume related, but there is a large fixed component.

And then the other part we talk about, just to try to give you the whole dynamics around the business, is that in any short period of time, our biggest expenses are people-related.

Our ability to change that in the short-term is very limited.

But over any period of time, we can adjust to that.

I think on your question about 30%, we are comfortable with the guidance we have given for a number of years, and we are comfortable with it going forward, and that's why we really reiterated it.

Yes, I just -- I think spot on, I think we are -- there's not a lot to add to that, Carl.

I think that gives the full picture, really.

Great, thanks, guys.

Steve Ashley.

Great.

Carl, you alluded to the fact that execution got a little bit better.

I wonder if you could specifically speak to central Europe and Brazil, which were two markets that were challenged in the second quarter.

Yes, so I would say we saw much -- we saw reasonable improvement in Central Europe.

Central Europe is one of our biggest markets.

I was really pleased to see that.

Brazil started to turn around.

I think its one of the areas we still have work to do.

Some of the things we saw, we have a number of big deals that pushed out of the quarter in Brazil.

I just heard today that will one closed yesterday, another one is being worked.

We are making our way through that.

But I would say Central Europe is really back on track, I think there is more work to do in the Americas outside the United States.

And then I would just like to ask about the share buyback.

You spent, I think it was $130 million, you put $110 million of line of credit on your balance sheet.

What is your just appetite and willingness to continue to add debt to your balance sheet to more aggressively be buying your stock in the future?

So Steve, I think we are constantly looking at our capital structure, and we are constantly trying to look at the overall opportunity with share buyback, obviously, and trying to do the right thing for the shareholder long-term.

I think it's a given that we are going to take whatever actions we think are in the best interest of the shareholder.

You are absolutely factually correct in that we have raised the level of share buyback as we said we would do.

At the IR day, we're starting to take shares out, as you can see for the last couple of quarters since we said we would.

And I think -- I'm not going to extrapolate or forecast exactly how we're going to shape the capital structure, but I think there is a reason to believe that we are constantly looking at it and we have never ruled out the notion of taking on debt, for example.

I would just reiterate, we were very clear that we said we would do share buybacks that exceeded dilution.

We specifically did it, and we have been doing that since we announced it to you.

And I would reiterate, we have been considering our capital structure and we certainly have been contemplating things like that to continue being able to maintain that level of buyback that would continue to offset the dilution from employee stock per [rooms].

Absolutely.

Thank you.

The other part of it really to remember, and we try to address a little bit in the, certainly in my remarks, is if you looked at our cash positions and how geographically off-balance they are, it is one of the things that also drives us.

Not only the need to do buybacks, our need for cash for acquisitions, but also rejiggering geographically to get money in the places where we actually need it.

All of those are conspiring for us to be spending a lot of time looking at capital structure options.

Steve Koenig.

Hi, gentlemen, thanks for taking my questions.

I want to see, Carl, can you comment at all on the potential impact of promotional activity in Q4?

And in particular, any thoughts on your upgrade pricing going forward and the potential for increasing that and that potentially having a positive impact on promotional activity?

We have definitely -- first of all, we are not happy with Q2 or Q3 results, so you can imagine we spent a lot of time trying to figure what to do.

We are willing and able to do more promotional activity in Q4 as long as it is consistent with the long-term health of the business.

And we have looked at it, there are certainly things that we are going to do, there are things that we have already announced, programs we've put in place in the channel.

We are taking a more centralized hand in running promotions probably than we have before.

There used to be a little bit more left to the various geographical areas, the sales regions to do it, and we have been much more centralized in our control over that.

But it is certainly one of the knobs and dials that we can turn.

Carl, how would you mitigate any impact on pulling forward revenue from capping your base in a bigger way than you have capped it in the past?

That's what I said, everything we do around promotional activity is contemplated in the context of the longer-term.

If you look historically, we haven't run stupid promotions.

We give promotions, we adjust to competitive activity around the world, we react to pricing changes due to currency fluctuations.

We also sometimes can stimulate demand by upcoming pricing changes or we can include more things in a particular offering.

We try to do things that are really consistent with the long-term health and the direction we want our customers to move as opposed to taking turns.

And as I said before, our Business is primarily a channel business.

It requires a coordination of us with thousands of partners.

And in order to do that, we need a steady hand on the rudder.

It's not a business where we -- it's not let's make a deal and we get up one morning and do something radical.

It requires a steady hand and consistent communication about what we are trying to do in order for these things even to be effective.

Okay, great and then one more question if I can, for really either Carl or Mark.

I'm wondering if you can talk a little but more than you did in the prepared remarks about linearity in the quarter.

Your comments on DSOs sounds like you may have seen a bit of an uptick in October.

Can you tell us more about that?

Sure, yes.

I think one of the things that we saw in linearity for the quarter is it got more difficult as time went on.

And so it was more of a gradual stiffening of the headwinds, if you will, and so that is one of the dynamics that was signaling to us that something broader was happening, and so that would be one of the things, Steve, that I would say.

And then in terms of DSO, I was actually pleased to see the sequential improvement in the DSO, and you could see us bringing it into the 40s range, 49 -ish.

And so from that standpoint, I think we have made improvement.

There are still more improvement to make, obviously, in the cash conversion cycle.

We try to run it tight, but you can see with this quarter, the cash flow from operations was solid.

I think that's -- those are the two dynamics that were going on, Steve.

Got it, okay, thanks for getting me straightened out on that.

Thanks again.

Keith Weiss.

Excellent, thank you, guys, for taking my question.

I wanted to ask Mark a question about expenses.

Second quarter in a row you did a remarkably good job at sustaining margins with revenues coming in below your expectations.

I was wondering if you could help us figure out really two things.

One, place the reduction in expenses that we saw this quarter in context to the restructuring that you talked about last quarter.

And two, give us a sense of how much dry powder do you have left there?

How -- is there still more expenses that you can take out to the same degree if macro gets worse per se?

Well Keith, a couple things here.

One is, I really credit our whole Company.

I think people really instill a really sensible way to spend money.

I think people, our whole Autodesk team has done a good job, and I think you are seeing that in the numbers today.

And people really get it.

They spend it like it's their own money.

It's one of the things I love about our culture.

In terms of the restructuring,you are absolutely right, we created some room, if you will, to invest and really critical things like cloud social and mobile.

And I think what's interesting is as Carl opened up today, you saw with context on the social, we did some mobile video, we did Informix.

We are doing things that actually -- we are investing in just like we said we would, at the same time we are trying to scale everywhere we can.

Just to give you context, A, I think people have a good sense of spend management, B, we are investing where we said we would, C, we still have had some headroom and we, obviously, manage on the fly to be responsible.

We're very committed, as Carl said, to the margin, we have come up from the trough.

Just to be clear, this quarter is over 1,300 basis points up from the trough in the cycle.

We are -- hopefully, that is evidence over multi- years that we are serious about this and we have made progress.

In terms of the dry powder, I hope I never tell you a day where there is not room for improvement.

We certainly expect that from ourselves.

We're always looking for ways to scale.

And at the same time, Keith, we know how important it is to invest in our long-term future, so we make those balances.

Those will be my comments.

I think there's room for the long-term.

Carl, I don't know if you would add something there.

First of all, I would second what Mark said.

This was a team effort.

Everybody understood the need to do it, and what I feel most pleased about is we were able to control spending without really impacting anything for the future.

People were able to continue to invest and move their initiatives forward regardless of where they worked in the Company.

And I think that is a testament to really everybody at Autodesk.

The second thing I would say, while it's not necessarily a muscle I was looking to develop, we have developed a pretty good muscle at looking for the opportunities on spend management.

And we have done a really good job at finding things and going forward.

I would say I think there is plenty of opportunity.

There's markets championed in effort within the Company for doing that, and there are things in place for next year.

And to Mark's point, I think many of the things that we are doing to improve our expense management is going to be done regardless of what the revenue environment is.

Regardless of the demand, we have a number of things there, and we will either take them or drop them to the bottom line or invest as appropriate.

But, we feel there is our a lot of areas of opportunity to continue to improve how we spend our money.

Got it, and just to clarify, I think last quarter we were talking about reducing heads by about 500 and potentially hiring back 250.

To what degree was that executed on in this quarter?

Do we go down 500 and hire back some or all of the 250?

We don't give out headcount by quarter, we do it annually.

But let me directionally address that, Keith.

We did go down by a little more than 500.

You got that accurately corrected, and we have done some hiring that tipped up the number up from that decrease of 500, so we're summer in the middle there.

I don't want to get more precise than that, because we're not trying to establish quarterly headcount reporting.

But the reality is we are pretty much executing what we said we would execute.

And the other thing is, just to put a finer point on it, one of the things that companies do I think during periods in which they are being super vigilant about their expense management is there are things that you move inside and outside the Company.

You go to outside providers and you use less of it or more of it, so there are a number of those things.

While headcount is a good indication, there are also a lot of other things that you really need to get a complete picture.

In some ways, the best thing to do is just to look at the overall number because there are a fair number of moving pieces that underlie those results.

Thank you very much, guys.

Thanks.

Walter Pritchard.

Thanks.

Mark, I think two questions for you here.

First on the, I think you said 30% -- or a goal of 30%, believe you can get to 30% margins by fiscal '15, which is more than 200 basis points a year.

And it is more aggressive than you committed to when you had higher revenue growth, which I would assume higher revenue growth would make it easier to do the margins.

I'm just wondering how we should think about the path to get to that kind of margin expansion in what seems fair to be a new normal that probably has a lower growth rate than you were thinking about when we came out of the last downturn.

Sure, a couple things, Walter.

One of the things we try to be really explicit on is that we -- you are absolutely right, the revenue growth is mitigating the ability to go even faster with our revenue -- or our operating margin expansion, as you would expect.

And at the same time, what we've said is we are reiterating 30% as the exit rate, so in Q4 of '15, that's what we are driving to as it is called out.

That is a little different than saying for the entire FY '15 that we are at 30%-plus, and we try to be very explicit on that.

And so that takes a little bit -- gives us a little bit of additional runway in the face of a little bit of stiffening in the environment in terms of revenue growth opportunity.

That is the first point, I think is really important to clarify, Walter.

I think the second thing is, as Carl was calling out and I'm touching on, we have a number of initiatives to just drive and scale the Company that are just good things, and I really like what Carl said.

We will do those if whatever reason the economy got on fire hot, we still want to do these things to help ourselves fully create the fuel that we can for the Company's long-term well-being.

I'm not going to articulate all the different pathway that, which you can imagine, we've been thinking about it.

And you can see the real progress we have made.

We are not going to say it's not hard work, Walter, we are not going to say that there could be challenges and such, but we try to be clear that we are not wavering from the intention to keep driving this thing up.

Carl?

No, I agree.

And then -- great.

And then Mark, I think just another question for you.

On the upgrade revenue stream, there's been some talk of promotions and so forth there, and you've typically had quite a strong, even though upgrade is becoming a smaller part of your Business is declining pretty meaningfully year over year.

I'm wondering if we should expect that the upgrade and cross grade stream within Q4 here shows a typical sequential -- the typical sequential increase that we have been accustomed to seeing with that business.

I think the tricky thing about that one, Walter, is that we don't pre-signal our promotional plans.

And you're hitting a really good question, which is cross grade upgrades are a function of promotional plans, so that one I wouldn't want to guide to specifically.

I'm sure you can appreciate why we wouldn't want to do that right now.

But I would say -- here is what I would tell you, is that we certainly wouldn't take appropriate promotional plans off the table for driving the well-being of the business.

Carl, and other comments?

I agree.

Okay, great, thanks a lot.

(Operator Instructions)

Sterling Auty.

Thanks.

Carl, I wonder if you could give us a little bit more detail about, you said you saw some improvement in Central Europe.

I think there were some questions over the structure of the product design suite in consideration.

How did resellers react this quarter, and what else helped drive that improvement?

Your recall is perfect, Sterling.

We spent a bunch of time working with resellers -- with our partners in Central Europe just cooperating on account management and interacting with customers.

We feel we have done a number of things to work on the offerings, particularly around product design suite for both fourth quarter and what is coming next year.

And like I said at the time, our partners realized that they can do well in the short term by just driving subscription and services.

But over any medium period of time, new license growth is actually as important to them as it is to us.

And so, I think they felt like they weren't being heard about the changes.

And remember, there was an odd thing here in which we essentially lowered the prices and our partners were upset because they wanted the prices higher.

It's a little bit of an inverse of what you usually expect, and they were upset with us for giving away more value for less money.

We had a number of reasons to do this.

We put our heads together, we have come up with a plan and we have started working on it.

I think they feel better about the future and they understand what the plan is.

Better communication and we actually took a bunch of input from them and we rejiggered our plans.

At what point do you think would you be able to communicate some more details around the plan, and how does that effect the other geographies?

It's a global plan.

We been working on the standardization of a global plan.

Like Mark said, it is particularly ineffective for us to talk about promotional -- promotions and packaging ahead of when we otherwise want to release it.

I can assure you right now that we have done a bunch of work on it and worked with them on it.

And I have met with several of our Central European partners over the last few weeks, and they feel good about it.

In two weeks, I will see a lot more of the partners at Autodesk University in Las Vegas, but I think we are on track there.

And as it comes out, we will talk about it and be happy to explain what we did, looking retrospectively.

It wouldn't make any sense -- I'm not trying to obscure, but it really undercuts the work of our partners out there everyday if we preannounced things like promotions and packaging.

Understood, maybe one last question.

When you did the restructuring, you had the reduction in headcount.

How should we think but when you said you would hire back?

How does acquisition headcount fill that need?

Meaning, would you hire back some portion of that 500 just direct, or do you include the heads that come in through acquisition as part of that net add back?

We have included the heads that come from acquisition.

We think when people join Autodesk, it really doesn't matter if they join through acquisition or we hire them off the street.

Okay, thank you.

Operator, next question.

Operator?

I think we lost our operator.

Hello, operator?

Mr. McMillan, your line is open.

Ross, stop typing.

(Laughter) I'm creating some problems in the system.

You were caught with your hand in the cookie jar.

Exactly.

Thanks a lot for taking my questions.

Maybe the first one, I'm just going back to this question on rehiring.

Obviously, you have hired back some of the planned rehiring post the restructuring you did.

I am just curious as to whether, now that you are resetting the revenue run rate again, whether that is actually leading you to a different conclusion on your hiring plans that you had 90 days ago.

In other words, is the current plan to hire back less than you were going to?

And I have one follow-up.

Yes, it's definitely less.

We'd be disingenuous to say otherwise.

I think there are two things that add into.

We did a reduction in force, plus there is a natural attrition.

What I would say is what we have done so far is we have probably filled the jobs that were made available by attrition and we have added some through M&A, but we have clearly slowed down our overall hiring plan.

And we will continue to titrate as we watch revenue in the coming quarters.

And I was curious, obviously, your fiscal fourth quarter is normally the quarter were you have a seasonally strong Direct business.

Have you recalibrated your thoughts around the Direct business, just given the environment?

You know what?

We have certainly thought about it a lot, we have spent a lot over the last two weeks probing on this.

Despite the overall weak results, our Major Account business did particularly well.

It was particularly strong, forecasts continue to be particularly strong, the pipeline is strong.

I think we have probably applied some management judgment to more conservatively guide and to build ourselves a buffer should the economy worsen.

But I just wanted to leave you with two things.

Yes, we think there'll be a strong fourth quarter in our Named Account business and the fact that even during Q3, our Named Account business did particularly well.

Great, and maybe one very last one.

Slightly different topic.

But obviously, if we look at maintenance billings, those were down but we are comping, I think, the challenge of the multiyear promotion, if you will, last year, or the incentive, if you will, to sign early.

Is it possible to adjust for that and give us a sense for what the true like for like maintenance billings growth was?

Well, you know what we were able to do, and I'll let Mark jump in.

One of the things we were able to tell you is that the attaching renewal rates were even to slightly higher.

That was the good thing.

It was less than we expected, but in line with usual seasonality.

Q3 is odd, mainly because of when we started this program.

There was a seasonality when we introduced the program.

I think it would actually be better to -- I will let Mark answer, but it will certainly be better when we finish the fourth quarter, probably to look at the year in total and certainly the last three quarters.

And then we will have a better handle on exactly what went on, but the individual rates did go up or go

Yes, I agree the attach and the renewals went up, and that was a good sign for us, especially as we look at the nature of the economy as such.

I think Carl is right, the preponderance of our maintenance opportunity in terms of new maintenance opportunities comes in the fourth quarter.

I think it would be interesting for you to look at that and have a complete triangulation on that versus the prior-year.

That will give you a better feel.

I think it's a great way to do it.

Okay, great, thank you.

You are welcome.

Heather Bellini

-- so much.

I had a couple of questions.

One, I was just wondering if you could give us some sense of how much Sandy impacted your Business in the quarter, given that your Business has always been fairly linear.

And then I also -- going back to two things that you mentioned before, the Named Account business you said did well in the third quarter.

So, can you give us a sense of where you saw weakness being more pronounced?

And then I have two more follow-ups, if that's okay.

Sure, Heather.

So, the first thing is, Sandy is a little bit hard.

We can directly attribute a few million dollars.

We can look and say $2 million or $3 million, there's a direct deal that didn't close before the quarter that would have.

There are a number of deals in which the paperwork was not completed and we couldn't recognize the revenue.

So, we could probably get to $3 million there.

I would probably add a couple more million dollars in business that just doesn't happen.

As you know, tragically, both our customers and our partners were greatly affected by it.

I wouldn't make too big a deal about the weather.

That would be a whole new area of exploration for us in our Business.

But it was particularly poorly timed for our quarter.

Yes, no, definitely.

And then the Named Account business?

If that was strong, where was the weakness more pronounced?

The weakness was much more pronounced than the Channel business.

The named account business, what we saw, and this is what has led us to believe -- let me step back a second, Heather.

If you look more broadly, we certainly looked at the results of our competitors.

We looked at the financial results of peer companies, as well as we looked at the kinds of companies that are typically our customers, and many of them reported weaker results, and most of them are on a calendar schedule that is a month ahead of us.

The first thing we saw was that.

Our Major Account business did relatively well, but what concerned us a little bit, for the first time we probably had more big deals leaking over into another quarter in which we couldn't close, and that was independent of the storm.

There were just more big deals that didn't get closed in the quarter.

And when we dug down into them a lot, we can't identify ones that have gone away, but we've certainly ones where management of our -- of the companies of our customers, in which they've said let's reevaluate, let's look at the ROI on this, has to go through another round of approval.

So, we saw some slowdown there.

We are really happy with our performance relative to that, but we did see some slowing.

When you look at the place it slowed down, it is the Indirect business.

In particular, we called out several geographies and most importantly, it was the emerging countries, places like Southern Europe and parts of the Americas outside the US.

Okay, and then just two follow-ups.

Can you comment on Federal and local spending that you saw, given you have an October quarter end and they obviously Federal spend on the September cycle.

And then how are you feeling about that for next year?

And then I've got a follow-up to that.

Sure, Heather.

So just -- this is Mark.

Just to give you a sense, you know that our Government business is not a big business per se.

But at the same time, we are pleased we set a record for the quarter.

It was up, we saw real growth.

It was good to see.

The team works it well.

It is not a big part of our Business at all, but it absolutely grew.

One of the things to know but our Government business, while I'm really pleased with the results of the Government per se, most of our Business is in civil infrastructure is related to the private sector that is tied to Government spending.

It's a little but more interesting to look at a broader results around it.

Oftentimes, even when a department of transportation decides to make a purchase, it ends up being spent in the private sector.

We tend to look at it by industry, but our Government results per se were good.

Okay, and then the last question I have is it goes back to the a lot of the other questions were around the 30% margin goal for fiscal '15.

I just want to make sure I'm thinking about it the right way.

Given your uncertainty about revenue growth and given the fact that in the past you were forecasting higher top line growth levels, is what you are trying to say is regardless of the top line environment, we'll make this a 30% margin Company, even if we have to cut to get there, regardless of the top line?

Are you solving for margins?

It's hard to know margins if you don't know revenue, unless you tell me that come hell or high water, you are going to get to that margin number, regardless of what the revenue number is.

I think if you look over, certainly the last couple of years and specifically the last two quarters, we demonstrated in an environment in which revenue is far below our expectations, that we were still able to drive margins.

And while I won't go so far as to say we are trying to do -- we're solving for margins, because I think that might indicate too short-term a view of what we think the opportunity in our Business is.

We think there is plenty of opportunity to invest and to drive more to the bottom line and maintain that commitment about margins.

Okay, so when we think about the progression of margins, it is not like -- I think Walter asked the question before that basically to get there, you would have to be doing more than the type of margin bump you've been seeing the last few years.

It doesn't necessarily have to be a linear progression, meaning 250 bps, et cetera, per year, that it could be more of a hockey stick.

Is that fair?

I think it will be a little bit more steady than that.

We won't be looking out to -- hoping some magic happens at the end of FY '15.

I don't think that's a realistic way to run the business, but we do think there is opportunity to expand margins along the way, even in a lower growth environment.

Having said that, our goal is to drive to higher revenue growth.

We're doing lots of things to do that, and it would certainly make the job much easier to do that.

But I think we've demonstrated even without that, we're capable of expanding margins.

Okay, great, thank you very much.

You are welcome Heather.

Brendan Barnicle.

Thanks so much, guys.

Quickly following up, we did see subscription revenue gross in its typical seasonal pattern.

Any reason that that would change going into the fourth quarter?

Brendan, I agree with you that it was a typical pattern.

I think you can -- we would confirm that.

It's in that range.

In terms of going forward with the projection of it, we don't guide that one per se.

But I think you have got the right read on where we are at today.

Just to be a little bit more specific, we don't see any reason that that would not be true.

Perfect, thanks for that clarity.

There are no further questions.

I'll now turn the conference call over to the host.

Thanks, operator.

So lastly, we're going to be -- we have two things going on this quarter.

November 27 we have our Autodesk University event.

I know many of you have already signed up for it.

If you'd still like to, please e-mail me or call me at (415)699-0143.

We will also be at the Credit Suisse conference on November 28, the following day.

That concludes our call.

Thank you.

Thank you.

This will conclude today's conference call.

You may now disconnect your line.