Autodesk Inc (ADSK) 2014 Q2 法說會逐字稿

I will be our conference operator for today.

At this time, I would like to welcome everyone to the second quarter 2014 Autodesk earnings 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)

I would now like to turn the conference over to Dave Gennarelli, Director, Investor Relations.

Please go ahead, sir.

Thanks, operator.

Good afternoon.

Thank you for joining our conference call to discuss the results of our second quarter.

Joining me today are 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 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 anticipated future performance of the Company such as our guidance for the third quarter, long-term financial model guidance, the factors we use to estimate our guidance, new business model introductions, new product and suite releases, market adoption and expected growth rates, cost management efforts, hiring plans, business execution, business prospect and financial results, our market opportunities and strategies including our plan to roll out rental license offerings, our transition to cloud and mobile computing, our educational vertical strategy, trends in sales initiatives for our products and trends in various geographies and industries.

We caution you that such statements reflect our best judgment based on factors we 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 2013, Form 10-Q for the period ended April 30, 2013, and our current reports on Form 8-K,including the Form 8-K filed with today's 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 the 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 call -- 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 our GAAP and non-GAAP results is provided in today's press release, prepared remarks and on the Investor Relations section of our website.

We will quote a number of numeric or growth changes as we discuss our financial performance.

Unless otherwise noted, each such reference represents a year-on-year comparison.

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

Thanks, Dave, and good afternoon, everyone.

I will start today's call with a discussion of our second quarter performance.

Later, I will talk about the exciting changes that are under way at Autodesk and how we believe our business model will evolve, more quickly than some have anticipated.

Looking at the second quarter, total revenue came in above the middle of our range with the backdrop of some challenges in our end markets.

Similar to what other enterprise software and PLM companies have reported recently, we experienced a mixed demand environment despite more positive macroeconomic data that would suggest a stronger market.

On the positive side, our AEC business segment performed well with strong growth in the Americas and APAC.

Our suites continue to have strong performance and Japan experienced strong growth on a constant currency basis.

Conversely, variances in some of our end markets influenced our run rate products like AutoCAD and AutoCAD LT this quarter.

On the product side, we continued to see steady customer adoption of our cloud and mobile solutions during the quarter.

Our performance in EMEA remains mixed by country, while APAC revenue was down as reported.

It posted decent growth on a constant currency basis led by strong growth in Japan and solid growth in China.

Within the Americas, we experienced modest growth.

Growth in emerging countries remains challenging.

While recent economic forecasts indicate that growth in emerging countries may lag developed economies, it continues to be a focus area for improvement and future growth.

At the start of the fiscal year, we made a strategic decision to begin shifting our education business from selling to granting our software licenses in select regions and key partners.

This is an investment in the future for Autodesk.

It will also benefit the industries we serve by having a greater number of design and engineering graduates fluent in Autodesk tools.

Today, tens of millions of students and educators are using our products.

The net impact of the change in our education strategy is a drag of approximately two percentage points of revenue growth for the quarter primarily coming out of the Americas.

And we anticipate about the same impact for our full-year results.

This impact was contemplated in our previous guidance.

Consistent with the past few quarters, our AEC segment delivered solid results.

The green sheets are building and construction activity that we started to see a few quarters ago continue to grow.

Aiding our growth in AEC is our leadership in BIM.

We continue to add to our extensive portfolio of BIM solutions in both our AEC suites and BIM 360, our cloud offering.

Within our manufacturing segment, we saw solid growth in suites.

Last quarter I mentioned the success we're having in the automotive industry.

That success has continued in the second quarter as we notched significant wins with global manufacturers as well as key suppliers.

We are seeing the expanded adoption of our design, engineering, visualization and simulation products throughout the automotive industry.

Our arsenal of solutions for manufacture is growing stronger, as earlier this month we added two new products to our simulation portfolio, one for composite design, one for composite analysis.

The addition of these new products helps us reach new markets and assist our customers in developing the next generation of lighter, stronger, safer and more energy-efficient products.

In total, our suites continues to grow faster than our overall business, as customers realize the value and power of our suites.

Suites have grown to represent 34% of total revenue for the quarter, up from 23%, just three years ago.

Our AEC suites had a particularly strong quarter and we are experiencing strong momentum of our AutoCAD design suites.

Turning to our cloud products, Fusion 360 made its official debut in the quarter.

Fusion 360 is the world's first cloud-based software that combines industrial and mechanical design.

It enables people to fuse stunning aesthetic design with great product engineering.

It brings together capabilities typically found in separate mechanical, industrial and conceptual design tools into one easy-to-use cloud-based service.

It has had hugely enthusiastic reception by customers and industry watchers, and we are very excited about its future.

More and more, engineers, architects and designers took advantage of our cloud-based services during the quarter.

POM 360 continues to gain customers.

A common occurrence is that customers come back to us shortly after the initial sale and order more seats, which is a great sign.

PLM 360 is going head to head with traditional PLM players and customers are selecting PLM 360 because it's not only solving their core PLM business issues, but because it's cloud based, it's easy to use, and it is more flexible and scalable.

We continue to see growth across all areas of the PLM business and the pipeline continues to grow.

Just yesterday we introduced the newest addition to our BIM portfolio with Autodesk Point Layout for layout at construction sites.

This product underscores our efforts to transform the construction industry using BIM from the earliest stages of design all the way through project delivery and building operations.

Many of you have shown a great deal of interest in our consumer business and how things are going there.

Though only a few years old, we've made incredible progress to date.

We finished the quarter with more than 136 million users and have surpassed 50 million monthly active users.

These 50 million users have used our consumer products more than 220 million times in the last 30 days.

The sheer size and uniqueness of our Creative platform is attracting brands from around the world to partner with us.

While the challenges in some of our end markets have led us to lower our third quarter revenue forecast, we are taking action to rekindle growth.

At the same time, the investments we have made in new products, our cloud platform and new businesses such as simulation are seeds of future growth.

Now let's get into our business model evolution.

It's clear that the software industry is changing in terms of the technology platform and the business model.

Several years ago, we made the decision to lead this change by delivering cloud-based distributed applications and services for the design and engineering market.

We've also worked hard to provide our customers with more flexible licensing models.

I'm very pleased with what we've accomplished.

Our cloud offerings are unmatched in the marketplace and customer acceptance and feedback has been enthusiastic.

I mentioned last quarter that we would start rolling out more term-based flexible license offerings to our customers.

During the second quarter, we offered some of our products on a rental basis.

With the introduction of these flexible plans, our customers now have access to high-quality solutions from Autodesk that may have been out of reach in the past due to up-front licensing costs.

The project-based nature of freelance work also means the software may only be needed temporarily for short-term staffing needs and rental license offerings provide flexibility to pay only when it's needed.

This foray to flexible license options is just the beginning.

Later this year you can expect to see more flexible offerings from us.

These offerings will be designed to give our customers even more flexibility with how they utilize our products and will provide the Company with new ways to address new market opportunities.

The addition of these ratable revenue streams and other business decisions will significantly increase the percentage of our ratable revenue, making for a more predictable business over time.

We now believe this model transition will happen faster than previously expected.

We are currently working through our plans for this business model transition.

At our Investor Day event on October 2, we will be better able to provide you with more details around our assumptions for the magnitude and timeline for changes related to this model transition.

In our 30-plus year history, this is not our first business model transition.

Recall that just 10 years ago we added subscription maintenance to our revenue stream.

That was a big change at the time and there was no shortage of skeptics.

Today, that's a $1 billion business and represents over 40% of our revenue.

Suffice it is to say, that transition was a huge success.

Going forward, we will build on that success.

Our customer base, portfolio design and creation tools, and our cloud and mobile offerings is unmatched.

We are excited to move forward on this business model transition and give our customers even more flexibility with how they utilize our products.

I want to thank our employees and partners who have created this opportunity and are driving these important changes in the industry.

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

(Operator Instructions)

Steve Ashley with Robert W Baird.

Thank you very much.

I guess I would just like to go back to the business model transition.

You called it out, obviously, here in your remarks but also called it out in the press release.

And you've been talking about changes relative to more flexible licensing.

But is it also possible that part of the business model transition could include changes to the cost structure or other operational aspects to the business?

You know, Steve, the way I think about it is mostly in terms of the customer facing choices, what the offerings are and how they are delivered.

As a more marginal part of that, certainly, each one of those involves a difference in margin structure.

For the most part it hasn't been particularly material and I don't see that as being either the driving force behind it or a big byproduct.

The more important things that I think you really should look at is the offerings for customers and how we change them as well as -- as we talked about the accounting impacts in terms of ratable revenue.

Perfect.

Your education business, the third quarter is the biggest seasonal quarter.

You called out that the impact in this recent quarter was 2% but in the full-year will 2%.

But in that peak seasonal quarter, the next quarter, how much might the absence of educational revenue be impacting that period?

I put it in line with the others.

Again, marginally higher but not enough to matter.

When you look at the buying patterns around the world, it kind of washes out.

So I would think it is 2%.

Perfect.

Thank you.

You're welcome.

Jay Bushower with Griffin Securities.

Thanks.

Good afternoon.

Carl, on the model change you mentioned that it was going to occur faster than some [pre moving] outside of the Company had anticipated.

But is it happening faster than you might have thought even just a few months ago?

Over the course of the summer, the Company suggested that this was indeed one of the bigger or biggest things that you need to figure out.

But what changed in your thinking in terms of market conditions or anything else that perhaps induced a somewhat faster change?

Related to that, you have a pretty complex product line, over 20 suites, for example.

Some are more complicated than Adobe's when they began to make their change.

So how do you think about the metrics or pricing criteria in terms of handling a fairly complex product line in terms of moving it towards more flexible terms and licensing?

Yes, okay, Jay.

By the way, I just have to say one thing.

I'm so glad I have a name that's easier to pronounce than yours.

(laughter) [That's] a little bit of getting mangled every time.

So here's what happ -- and it must have been much harder to fill out in those standardized tests.

Here's what I -- here's what we've been thinking about this.

As you know, we've talked about this for a while.

We started looking at some of the rental opportunities.

We see those as being important to actually capture parts of the market that currently aren't paying us for the use of this software -- people in peak demand situations, freelance work.

So we got really interested in that.

Then we started looking at our enterprise customers and we've talked about some of the things with more flexible licensing for our enterprise customers in which there are, in essence, true ups at the end of the year based on usage as opposed to negotiations upfront.

We saw an opportunity and we described at least one or two of these in detail, how we both increased the amount of money the customer is paying and increased their satisfaction with the use of those products, a real win-win.

Then we looked at the middle part of our market, the place where we sell suites and subscriptions, the mainstream part of our business, the majority of our channel partners.

We saw opportunities to deliver things more easily, more flexibly and all those contributing to say we saw a way to move the business more quickly.

One of the things that happened to us along the way is recognizing the difficulty of both running but forecasting and communicating a mixed-model business.

We really began to appreciate that many of the dynamics about this financial model were going to be at odds with each other.

So for everything that went well on one, it was going to take away from the other.

It was going to be difficult internally to run that way, just provide the right incentives and stuff as well as communicate externally so people understood what was going on with the business.

The other thing that happened is we've been running these probes or science experiments and the results of what we have done have been very positive.

The next part, I would say, and because you brought up Adobe -- and we're -- with respect to the complexity of the product portfolio, the other thing that we saw, is Adobe introduced a business model transition without much of a technology transition but really just changed the way that people pay for it and do it rather successfully.

It became more clear to us that the customers were willing to accept and some even wanted this new opportunity.

Because we are starting in a different place than Adobe, we don't feel the need to force people to the degree they did to go to these new license models and perpetual licenses.

So we saw just a really good opportunity to a way that was economically beneficial for us and a benefit for the customers.

As regards to the portfolio complexity, what we have, 20 or so suites, if you look, it's really seven categories by three offerings in each of these.

The price points are very similar and have been -- because it's a relatively recent offering, they've been rationalized and harmonized over time.

I think we are going to be able to introduce pricing that makes a lot of sense and we can deal with it consistently across those products.

When we get to the first week in October and we get together, we will detail a lot more of this for you.

But obviously in order to go out with this kind of message we've been thinking a lot about it and have done extensive planning and we think it makes sense.

Okay.

Quick follow-up.

Is it too soon to start talking about how indirect and direct, but particularly indirect, works through this transition in light of the comp changes you made 1.5 years ago on (unintelligible) -- you get 85% of your revenue from the channel.

Yes.

I see our channel partners, both the value-added resellers and the volume resellers, continuing to play an important role.

It's kind of interesting.

Since I've referenced it in my remarks, about the business model change we went through about 10 years ago, just to remind everyone, not only were people skeptical, many people read that to be something of the death of the channel or us fueling business from the channel.

There were lots of conspiracy theories running around at the time.

I continue to see partners playing an important role as we go forward.

We are not anticipating a big change in the mix between channels and I think partners will continue to play the same role they did -- they have.

Our business, while in many ways similar to Adobe, I think when it comes to channel mix, has always been somewhat different, particularly if you look a little bit under the covers.

Thanks, Carl.

You're welcome, Jay.

Heather Bellamy with Goldman Sachs.

Great, thank you.

Can you hear me okay?

Yes, we sure can, Heather.

Okay, great.

Thank you.

Carl, just wanted to touch base with you on you mentioned moving the subscription maybe faster than some other people thought.

I'm just wondering, as you move to the cloud, is there anything you could share with us in terms of kind of in three years what you think the mix of the business might be?

What percentage of revenue you could be getting from that?

The second part of the question is I know you're going to give us more detail on how you plan to roll this out in early October, but is this something where we might see you do it product line by product line instead of doing that big forced shift like Adobe just did?

Yes.

So I will reiterate.

We will give you more details in October.

But if you look out a handful of years, I can easily imagine the vast majority of our revenue coming from ratable revenue streams, just to try to draw an envelope around all of them, the vast majority.

It's easy to imagine and we will detail how that would happen.

As for product lines or some of the other ways that we might do it by geo, I think it's unlikely.

The cost and complexity of doing this one by one is really probably too difficult for us like I said both internally to manage and externally to communicate.

I think it will be very confusing certainly for the financial community, but also for our customers.

Many of our customers, particularly the largest ones, buy products across our product lines and so I think we need to be more consistent for that for all kinds of reasons.

The changes we are contemplating and the plans we have in place enable us to do this across the product line.

Okay.

Then I just had one follow-up, if you don't mind.

In regards to your guidance and knowing that you have a headwind related to the educational transition you are making, can you walk us through the end market?

Why you are seeing seasonality be maybe a little bit worse than what people were expecting, if the environment, from what we are hearing from other people, seems to have stabilized and isn't necessarily getting worse.

You're actually getting improving data points, macro data points, in places like the US and EMEA in particular for the first time in a while.

I'm just wondering how you contrast that with the seasonality that you're looking for?

Yes, no.

Good question.

I tried to refer to that in my remarks.

I said we are certainly seeing sustained macroeconomic data that is definitely pointing to improvement in many parts of the world, particularly in the building industry worldwide.

We started to -- we hinted at that last quarter.

We saw more of it this quarter.

We are actually really pleased with what we are seeing.

We've also seen and are taking a little caution from both some of the peer companies, particularly the technology industry, as well as some of our customers who have been in a little bit more modest in their forecast going forward where there is an appearance of at least portions if not a large part of the technology industry being laggards in this recovery.

So we are being a little bit cautious right now.

We also understand -- there is the education thing we talked about, currency has been a little bit of a headwind.

We are also anticipating that we might have a slight, a relatively modest, but still I don't want to quantify it at this point, kind of slowdown as a result of announcing business model changes.

People may pause a little bit.

So we were doing -- overall, we are just being a little bit more cautious about what's out there.

But like I said, there are lots of sides that we saw were improving.

We saw lots of stuff we liked in the construction industry, individual markets like our PLM markets, simulation markets, I felt good about.

Question mark that remains for us is more the emerging economies and our run rate business.

I would just say, Heather, to build on Carl's point, it's when the economic data starts to translate into goodness in the marketplace, we definitely have seen this lag.

I know you have seen it as well.

It's been pretty consistent.

Thank you very much.

Brendan Barnicle with Pacific Crest Securities.

Thanks so much.

Carl, I was wondering how the direct sales effort went this past quarter?

I know last quarter that was a disappointment.

Did you see some improvement there?

Any change in deal sizes?

I know that's typically where you see you larger deals.

Yes.

We saw lots of improvement this quarter.

I was very pleased with our major cat -- [tutu] isn't a big major account thing but compared to historicals, compared to the previous quarter, I actually felt very good about it.

The truth is that the two things that we saw, and despite what others, some on the phone, have written about, what we saw this quarter was we saw generally good major account activity, good business through our value-added resellers, and the softness was in isolated portions of the world and through some of the volume channels.

Great.

I would also -- you had asked for big deals in particular, Brendan.

They're on a similar pace.

We are not going to get into specifics but it was on a similar pace to a year ago, slightly more.

Great.

That's helpful.

Mark, you've been consistently talking about this 30% margin goal.

Should we put all that stuff on the side now that we are going to see these changes to the model going forward?

Here's the way I would think about this, Brendan is that we were -- we are committed to operating margin expansion.

I think what's important for you to see is to have the full picture when we get together for the business model, a discussion.

And in that context, that will provide helpful context.

But the long-term notion of margin expansion we are committed to.

Yes, I would just reinforce Mark's point that from the point of view of profitability and a simplistic view -- notion of revenue and cost, we are totally committed to increasing the profitability.

As you look at some of the model changes, there really are accounting differences that will impact how we measure that.

So that's why we want to just try to provide the full context.

As you imagine, for example, a particular revenue stream today is recognized upfront and moves to more ratable.

It's going to affect the numbers, but we believe and what we are asserting is it's better for the business.

So you just have to get the complete context to get the numbers right.

But our commitment to improving profitability has not changed.

Lastly, Carl, we talked about Adobe earlier and one of the things that helped them with this transition was they tested it for a couple of years over on Australia.

Would you look at just doing the -- rolling this out like in a specific geography as a way to test it?

Or would that really not make much difference for you guys given the diversity of the products?

You know, I think it's in -- I think the testing is an interesting idea but if you look at the Adobe case specifically, they tested in Australia and I think that's good for making sure the mechanics of your business function well.

As you can tell, they obviously didn't gauge end-user demand as well they would've liked to, because they had to put in a pretty radical policy change in order to drive more adoption.

So I think these kind of limited geographical tests have limited value.

Most of the things we've talked about we've have tried in one way or another.

Certainly what we were talking about in the enterprise space, we have been piloting it.

And when you look at some of the things that we are talking about in the more run-rate parts of our business, like the rentals, we are also gaining experience.

So I feel pretty confident about what we're going to do there.

Great.

Thanks a lot guys.

You bet.

Phil Winslow with Credit Suisse.

Just a couple questions.

First, in terms of just your October quarter guidance.

How much are you baking in for some of those headwinds that you talked about from the actual business fundamentals versus any of the accelerated change in the business model?

Also, Carl, back to the business fundamentals.

If that is the primary reason, which it does sound like for the guide down, which of the areas are you most enthusiastic about when you look into the second half and which are the ones that are creating some of the caution?

Thanks.

Sure.

I'll give a little answer and you, Mark, can some provide color.

Like you point out, the education is still going to be a drag.

I'm still worried about FX.

It looks like it's changing right now but we just have to see how that plays out.

When I look at our markets, I feel very good about the AEC market.

That just continues to get stronger and that's really fairly broad based.

The only exceptions there are a couple of the weak geographies, southern Europe and some of the emerging economies.

But, generally, about our mean businesses I feel pretty good.

I'd like to see an improvement in our run-rate businesses in order to feel fully enthusiastic.

At this point, I think we have a question mark rather than a big deficit being created by the uncertainty of the business model change.

The way we are rolling this out is rather than being a forced migration, this will be a choice for our customers.

We will give you more details in October about that.

Thanks, guys.

You're welcome.

Matt Hedberg with RBC Capital Markets.

Thanks, guys.

Thanks for taking my questions.

Suites continue to do very well.

I believe, Carl, you mentioned they were 34% of revenue this quarter.

Can you remind us again on the ASP uplift there and maybe how penetrated the actual install base is?

Good questions.

I think that's a perfect one for Mark to answer.

The ASPs, I think we had talked about, Matt, before being on track for 20% uplift to the ASP in total.

We've been tracking at or above that from an ASP standpoint for suites.

So that's actually materialized.

We are actually thrilled with the way suites have been going.

The response from the customer has been very positive.

So the ASP in particular, very much on track.

The one other thing we saw that was a positive sign this time and I tried to call out in the remarks, is that the AutoCAD design suites, which we had said from the very beginning was the only part of the suite strategy that had been below our expectations.

Actually, it did relatively well.

As I'm always willing to point out, one quarter doesn't make a trend.

But we've seen some steady improvement.

I think it's sustainable.

I'd really like to see that because that really completes the picture around our suites.

Great guys.

Thanks.

Looking forward to October.

Gregg Moskowitz with Cowen and Company.

Thank you very much.

Carl, just getting back to the AutoCAD design suite and the strength that you called out, if I'm not mistaken the pricing for that recently came down by I think about 20% to 25%.

I was just wondering if the elasticity of demand was such that you saw meaningful net revenue increase versus the prior quarter and also if you are considering doing anything similar with regard to some of the pricing on the other suites as well?

Thanks.

One of the things I would just say in general, let me just frame this question just in terms of pricing elasticity.

The place where we see the greatest elasticity is in our products that are AutoCAD and LT or verticals that are built on AutoCAD.

The least is with the other suites.

So I don't imagine anything different.

You may see one-off promotions or regional promotions, but our ASPs on suites have been holding pretty steady.

I imagine that continuing through the end of the year.

The place where we always get the biggest response to this kind of stimulus is in things related to AutoCAD and AutoCAD LT, including those AutoCAD design suites.

So I think you will see us continue to turn the knobs and dials there, but I think the rest of the pricing for the rest of the portfolio will remain relatively stable.

That's helpful.

Thanks, Carl.

Walter Pritchard with Citi.

Hi.

Thanks.

Not to beat this transition horse dead here, but we did want to try to get to the bottom of this.

You do have about 70% of your customers, by our estimate -- I think the last time you disclosed it it was about 55%, which was 18 months ago, on an annuity buying program already, which is effectively lower ongoing costs, an annuity type almost rental model.

And I'm wondering are we talking about the other 30% here and trying to move them to a new model?

Or are we talking about taking that base that has already transitioned with you as you've alluded to over 10 years and moving them to a new economic model?

Go ahead, Mark.

I think from a -- Walter, certainly, you got a lot of the math right if you think of our subscription business today.

We have 40% roughly of our revenue comes in on a ratable basis already.

I think as Carl talked about, some of the things that we've announced and are already in the marketplace will increase that ratability.

We've talked about that percent going up over time.

You can imagine rentals, the fact we are acquiring new customers, that in fact adding to that percent of recurring revenue, you can imagine us covering new platforms with the cloud and that's all additive and that's going to be ratable revenue.

So you can imagine that going up.

There's other decisions and stuff that we are not going to get into today, but we really look forward to having a discussion with you on October 2 about other things that we are going to do that are going to continue to step up.

Carl talked about the enterprise, where we have some ways to make our customers even happier and flexibility and to enhance our competitive position with great products, being even more flexible with them but also to be able to generate more money.

Stay tuned.

These are some of the things that all together are going to add to ratability and then other decisions that we will talk about later.

Carl?

No, I think that covers it.

Maybe one follow-up for you or one related question here.

On the macro side, you have, I guess we've seen -- we've become accustomed to when the macro is reasonably healthy, Autodesk was showing high single-digit, maybe low double-digit growth and when the macro was tough, you would see 20%, 30% declines.

We just haven't seen a period before where the Company has been sort of flat.

It's either pretty good or tough.

I'm wondering, it does seem like the macro is better.

It does seem like your position in the markets are at least reasonably good.

The question we are getting from clients is just why the disconnect between what appears to be an improving macro over where things were a year ago and still the flattish to even down revenue that you are reporting?

I think that's a great question.

What I would tell you right now is give us a quarter or two and we will have better answers about what's going on.

Like I said, for a while, it had been diff -- last year we talked about some things that we internally created problems.

Up until last quarter, we really hadn't seen the improving macro turning to more business in our largest segment, which is AEC.

Manufacturing was holding serve.

For the first time we're really started to see that many of the metrics we track internally in our AEC industry for the first time started to hit double digits again.

Let's wait 90 more days and we will have a conversation about it.

Okay.

Thanks.

Look forward to it.

Keith Weiss with Morgan Stanley.

Excellent.

Thank you, guys, for taking the question.

I'm going to fully beat this dead horse here.

Just to be clear, in not having a full-year guide anymore, is that in relation to the business model change?

Or is it just basically we have got to wait until October 2 to hear what's going to be going on and there's going to impact from that business model chain on FY '14?

Yes.

Got it.

The simplest thing I can say is the answer is yes.

That works.

I like the definitive answers.

In terms of in the current quarter, the one number that ticked down pretty significantly was the deferred revenue balance.

You called out in the prepared remarks some of it due to long-term contracts.

We also saw the short-term deferred revenue line down sequentially, which is a little bit surprising given more stuff is going ratable.

Can you help walk us through what's going on there and how we should think about the deferred revenue billings metrics?

Keith, glad to do so.

First of all, as I think everyone knows, the deferred revenue, what's interesting about it is it's a rolling balance, so it's a little different than a lot of indicators.

It's a rolling balance sheet going forward.

It's actually up year on year 7%.

But, it is down.

It is exactly as you describe, it's down 5% quarter on quarter.

Now, there's really, I would say, two things that are going on if you dissect deferred revenue.

There's subs, related to subscription, and then there is licenses.

The license and other portion of it is exactly identical in terms of the sequential pattern that we had last year.

The difference that's caused a little bit of a down tick quarter on quarter has to do with subs and there's one single reason for it.

It has to do with in Q1 we increased the price for sub renewal.

What that does, it creates -- and it is a modest increase as part of a broader plan that we've done.

What it does is it has a little bit of a compelling event that pulls things in.

On a sequential basis, you see a little bit of movement there.

It's really, I think on a normalized basis, it's proceeding exactly as we would expect.

It just so happens that Q1 price increase for renewals, in particular, created a little bit of a sequential dynamic, exactly as we would have expected.

Is there any impact from the educational pricing change in there in that there's people who -- I'm assuming there were some educational subscriptions, if I'm not mistaken.

Do those start to go away as you move from licensing to grants?

I think that's pretty minor.

The education side is not a big dynamic in this.

Got it.

And then if I could squeeze in one last one.

By the way, some education is on subscription, by the way.

Yes, there is a bunch on subscription, but --

Haven't quantified the exact amounts.

Exactly.

Got it.

And then if I could squeeze one last one in on operating expenses.

I believe this quarter you were able to squeeze some further efficiencies out of the model versus what was in the guide from the kind of implied OpEx guidance and OpEx is down sequentially again.

From the 3Q guide it seems like that's not implied on the guidance on a go-forward basis in terms of taking any further expenses out of the equation.

How should we think about the flexibility or the leverage you have to pull further expense out of the business on a go-forward basis or should we think of this more add to the baseline on a going-forward basis and mostly we will be building up from there?

I would think of this as the baseline to give you the simplest answer.

To add a little bit more nuance to it, we've demonstrated repeatedly that we were forced to take expense out.

We certainly have the capability of doing that.

The -- philosophically where I'm at right now is we are interested in driving the technology change to the cloud and mobile devices and the business model change.

I'd like to do that within a relatively tight envelope.

So I'm not willing to do that at all cost.

We've tried to be pretty cautious all through the year.

It feels like we've had one foot or half a foot on the brake the whole time.

But, I feel like we are accomplishing the things that we need to accomplish and I'd hate to break that dynamic.

I'd like to continue to move forward.

I think the changes we're making and the products we are bringing to market put us in a leading position and we want to make sure that we can capitalize on that.

On the other hand we don't want to expenses to get out of whack.

Richard Davis with Canaccord.

You talk about AutoCAD and LT being saturated.

But when I think of an area where you have a chance to accelerate and grow, I think of your efforts in simulation.

Maybe if you have a second or two to talk about your opportunities and penetration so far, both on the disruptive pricing basis and even some of your cloud efforts on the SVA and the computational fluid dynamics, where that is now, where you think it could be over the next quarters or I guess even years.

Thanks.

What I see right now is I think there are two areas in that realm, Richard, that it makes sense to see growth in.

Because of the different approach we are taking, both for the business model as well as the technology, one is simulation, one is PLM.

It's actually a lot about PLM.

Just to give you a little bit of color, getting just a great response to PLM.

There are days I wish we were only a PLM Company, because in today's environment we'd be worth $1 billions for just our efforts in PLM.

Our PLM business is doing well.

It's being really well received.

Most of our challenge in that part of the business is getting enough salespeople, enough consultants in place, having enough people to support our partners with the PLM business, because it really is meeting the need of PLM customers and it offers all the attractiveness of what you see in many of the other cloud-based companies, a sales force, a [net] suite, a workday.

So, we really feel good about that.

Simulation, we are having -- we have more of a mixed business there, both a desktop business as well as a cloud-based business.

Really happy with the response to the cloud-based business.

Desktop business is marching along.

We obviously are really bullish about it.

You saw the investment that we made in composite analysis.

We think this is important in terms of material science and where our customers are going for designing their next generation of products.

Across the board, I'd say the most successful product we have in simulation right now are our CFD products.

I think our FEA is comparable, but the market for FEA, as you well know, is not the fastest-growing part of the market.

But our computational fluid dynamics are doing well and I'm really pleased with people's willingness to adopt a new way of working.

One of the things about the cloud is it just makes so much sense for simulation.

The response is good and I just looked just before the call started, I was just looking at even this quarter.

There were a bunch of product lines where I was seeing double-digit growth in simulation.

So really pleased with what we are seeing there.

Great.

Thanks.

You're welcome.

Stirling Audi with JPMorgan.

Yes, thanks.

Hi, guys.

Can you review for us at this point what products are actually on a rental pricing or in a cloud option that are available to customers?

So there's a couple that are out there.

You have the, for example, the inventor LT suite and rental.

You'd have the Revit LT suite and rental, those would be a couple of examples.

And you had mentioned I think on the last call about looking at media and entertainment as an area to trial that as well.

Did that happen?

We did do some trials and 90-day offerings and things of that nature.

So, yes.

And we are continuing with rentals there.

As regard to our rentals, we are just adding to it.

That was one of the ones as opposed to pulling the switch all at once.

We've been entering the market on a rolling basis and we are going to continue to do that.

We think all of our products should be offered on a rental basis.

I can't say without exception but in my mind I don't see any products that won't be offered that way going forward.

When you look at the model transition, especially for the things that you are going to put on a cloud platform, how much of that investment in infrastructure is already done?

What should we expect to happen in terms of additional investment?

A couple things here.

One is that right now we have been investing and building out a combination of some data centers, which as one would expect it, when that's in place where you can see that our CapEx is not hugely stepped up.

It's still in the envelope of around 3% of revenue.

The other thing that I would say is that we also have first capacity that we use third parties that can help us with that and that is also evident in some of the -- when people use that and we need that first capacity.

So some of that is happening.

There are other infrastructure and what I would say back-office things that are underway and that are either -- have been constructed or will to be constructed.

So, Stirling, some of its done and some of it is to go.

Last question.

You mentioned AutoCAD LT as an area where the end market is suffering.

I apologize if you answered it, but I wasn't clear, what is it in terms of what end markets or what geos are suffering around the AutoCAD LT business?

We saw pretty consistently none of the trends around LT were particularly good this quarter.

What we've seen in the past is that because this is a product that responds to demand generation activities as well as promotional activities, we just need to increase what we are doing there.

So the plans are already in place and being carried out.

But there's nothing in that part of the business that I'd really want to celebrate this quarter.

Thank you.

Ross MacMillan with Jefferies.

Thanks a lot.

Many of mine have been answered.

But maybe one for you, Mark.

Going back to the subscription deferred balance and there's a lot of puts and takes on that in the quarter.

You mentioned the pull forward in Q1.

I think there is also FX impact.

Could you just maybe take a step back and describe how, let's say in the first half, subscription billings grew, either relative to plan or if you have absolute numbers on an adjusted basis, that would be really helpful.

You are looking at billings or you are looking at revenue?

Billings.

So I think we had talked about for the quarter the dynamics that are going on there.

So when we come down to the maintenance billings, basically had a decline of about 20% and that would have been on a -- if you look at it from a year-on-year basis.

If you normalize, again, for the multi year, keep in mind Q2 of '13 you can go back and look at it.

We drove the price change for the multi-year subscription.

And for everybody that doesn't recall, it went -- there was a three-year price, a two-year price.

We took the discounts for three year and two year and cut them in half.

That created quite a compelling event.

If you normalize that basically on a maintenance basis, we are basically -- we are in a good mode from that standpoint.

That's just one of the attributes that I talked about from a normalization standpoint.

So that would be on the maintenance billings.

So it's growing?

It's growing adjusting for the multi year, foreign exchange and the Q1, the Q2 kind of sequential impact?

You would say that in aggregate the subscription billings are growing year over year?

In fact, it is.

The thing that I didn't even try to normalize for is don't forget, we talked about in Q4, we changed the price of upgrades.

That had an affect of pulling revenue in.

We talked about that, of the $24 million that we strongly advertised and dialoged about.

That also has an impact on sub billings on a year-on-year basis.

Actually, not even normalizing for that last point, I think we are just fine if you normalize for what's going on there on a maintenance basis.

That's helpful.

I guess I'm just trying to understand if the subscription billings, once you normalize all these items, are tracking to your expectation or if there's anything that's materially different from your expectation.

It sounds like it's tracking to your expectation?

I think on the maintenance basis, it really if you normalize it.

It's pretty clean.

Great.

Maybe just on the implied operating expense for the current quarter, fiscal Q3.

At least by my math, it would look like it would be up a little bit sequentially.

Are there any operating expenses, any of the increase around the business model change, so marketing spend, ramping or any other one-time spend around some of the changes that are coming?

Generally, the answer is no.

Put a finer point on it, there has -- we've continued over the last year to two years make increasing investments in delivering cloud-based products and moving expenses away from some of the more traditional activities.

We've generally kept it out of your eyesight.

But that continues to go on to a small degree.

But there's nothing major that is going to change about that.

Brent Thill with UBS.

Carl, last quarter you mentioned the transition that Adobe went through and that Autodesk wouldn't hit the approach trajectory at the same rate that Adobe did.

I guess investors are concerned that maybe in this proposed plan would be a hybrid which would include a lot of perpetual and subscription, therefore, continuing this choppy top-line and bottom-line approach.

I'm just curious if you could comment on your thoughts on that and is this a wholesale switch where perpetual goes away?

Or is perpetual part of your model going forward?

I think you have to look at two different parts.

We will try to give you much more clarity when we get to October.

I think you have to -- there are really two issues that are going on here.

One is about flexible licensing, termed offerings, either the way we go to market and how we deliver customers -- deliver products to customers, including the web services.

All of that is increasing.

The other one is more on the accounting side.

It's really the ratability of that.

So I think you see two different things going on.

We will be able to give you a little bit more detail when we outline the plans for what we are doing and I think it will make a lot more sense.

In some ways, I think all the comparisons to Adobe are fine.

Adobe is a great company.

I like the comparisons.

But at a certain point, we diverge.

We are starting at the point where we have 40% recurring revenue.

We have a different product mix, we have a different customer base.

So given where our starting point is and the number of enterprise customers, I think we really have to lay out the different buckets for you and how they move, how the offerings progress over time, as well as how we will account for those and therefore what the impact is to the more traditional metrics like revenue and operating margin, as well as -- I think it's incumbent upon us to start to finding some new metrics that will give you more insight into how our business is going.

The decision to revoke guidance for the year is more based on the new transition rather than any deterioration of your pipeline or ability to forecast?

The business is the business.

We've described it.

We've described it quarter after quarter.

Just hypothetically, if we made a change in which we took a portion of revenue and because of the way we offered it to customers, we had to account for it ratably.

If we were to have to describe the revenue impact of that today without the context of what's going on, the tone of this conversation I'm sure would be completely different.

Does that make sense?

I'm not trying to be too cryptic, but if we had to go from recognized upfront revenue to ratable revenue, we'd have a significant impact on whatever quarter we introduced these policy changes.

If you didn't have the context to interpret, it would make little sense to you.

Makes sense.

Thanks.

Okay.

I'm glad it does.

Thanks, Brent.

Steve Koenig with Wedbush Securities.

Hi, thanks for taking my questions.

Maybe one easy one and one a little more involved question.

The easy one is how did linearity go on your licenses in July compared to the, say, the first two months of the quarter?

The linearity was actually just fine.

In fact, it was slightly -- our total -- let me just speak to it, Stephen, in a broader way.

Our billing and revenue linearity was just fine and slightly more linear than it was a year ago.

Let's put it that way for both billings and revenue in total.

Yes.

Okay.

Then I want to ask do you expect the improvement in some of the manufacturing macro steps to help the manufacturing business?

I do want to ask a question as well, if I may, about your comments on the last call.

You talked about -- I don't remember the exact words -- but the idea was having some tactical revenue drivers in the back half of the year and how that would help you achieve some -- the guidance that was looked fairly back-end loaded.

Understand there's a model transition going on, but I'm wondering are those tactical revenue drivers still present?

We are doing it.

The things that we talked about to drive revenue are still in place.

Most of the stuff you will hear is incremental, is about new kinds of offerings.

It's about adding this flexibility.

But all the things that were in place and that we talked about on the last call are actually, almost all of them, are in motion now.

Some of the price promotions, some of the pricing changes, some of the stuff that we did within the sales organization.

All of that is all in-flight right now.

Marketing-led initiatives [four] demand gen.

Demand gen around some of the products.

The two things are kind of independent of each other.

Okay.

And then just that other question then, the improvement in the manufacturing (unintelligible) other indicators that you've seen in the last few months, can that help you guys or?

Look, I always like when PMI goes up, I always like when the ABI goes up.

I like even more when the GDP goes up.

That's what we've seen.

We've repeatedly said that good GDP numbers seem to be more correlated with our business than any individual one.

But every time one of the particular industries does that or -- it's only to the good for us.

It's a combination when we do our forecasting.

So, for example, we tried to give some hints last quarter.

We saw an improving environment in the construction industry.

We weren't willing to stick our necks out very far about it, but it's started to materialize.

I'm hopeful that that's going to continue into the second half of the year and next year.

I hope the same thing happens in manufacturing.

Even this quarter, we did see some really good business in our manufacturing suites and the one thing that I also called out is really -- some really good work in particular segments where we focused like automotive.

Historically, that hasn't been a strong seat for us.

We continue to do better and better in that industry.

So I'm really pleased with the progress we are making there.

Great.

Thank you very much.

At this time, we have reached the allotted time for questions.

I'd like to turn it back over to management for closing remarks.

That concludes our call today.

As I mentioned, we have our Investor Day on October 2. If you haven't registered yet, please send me an e-mail or call me at 415-507-6033.

It's going to take place here at our San Francisco office and we look forward to talking to you then.

Thank you.

Thank you.

This concludes today's conference.

You may now disconnect.