Autodesk Inc (ADSK) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter FY15 Autodesk earnings conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded.

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

Please go ahead, sir.

Good afternoon.

Thanks for joining our conference call to discuss the results of our first 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 second quarter and full year FY15; long term financial model guidance, including billings, subscriptions, and recurring revenue growth; 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 prospects and financial results; our market opportunities and strategies, including our desktop subscription offering plans; 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, and are 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 FY14, 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 viewed after today, the information presented during the call may not contain current or accurate information.

Autodesk disclaims any obligation to update or revise any forward-looking statements.

We will provide guidance on today's call, but will not provide any further guidance or updates on our performance during the quarter, unless we do so in a public forum.

During the call, we will also discuss our 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 growth changes, as we discuss our financial performance, and unless otherwise noted, each such reference represents a year-on-year comparison.

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

Thank you, Dave.

Good afternoon, everyone.

Building on the momentum we generated last quarter, we're off to a positive start to FY15.

Strength in our core business led to better than expected billings, revenue, operating margin, and EPS.

We also made excellent progress on our business model transition, by adding over 89,000 subscriptions in the quarter.

These results, coupled with the significant increase in backlog and record deferred revenue, left us pleased with the overall results.

In Q1, we introduced our new 2015 line of design and creation suites, as well as updated products across our portfolio.

Our 2015 portfolio offers best-in-class desktop products and powerful cloud services that are being adopted by a growing number of our customers around the world.

Customer reaction to the 2015 suites has been positive, and revenue from suites posted strong growth once again.

I really can't emphasize enough the success we've had with our suites initiative, and the value that suites have contributed to Autodesk over the past three years.

Our customers value the diverse functionality they provide, and it's worth repeating that suites remain one of the pillars of our growth strategy, and support our long-term goal of generating 20% more value from our subscription customers.

Our AEC results continue to be driven by the ongoing recovery in the commercial construction market, coupled with a customer excitement for our desktop and cloud-based BIM tools.

Continued adoption of BIM in the building and infrastructure industries drove growth in our AEC suites and our cloud-based BIM 360 offering.

Cloud and mobile are really resonating with our customers, which is an important step in realizing the potential of BIM in construction, as we increase our ability to provide the industry with in-the-field access to realtime design information.

We closed several large AEC transactions in the quarter, including a significant win with a transportation agency for one of the largest cities in Europe.

This agency has been a competitor stronghold for many years.

They will now be implementing an array of our products, including the infrastructure design suite, BIM 360 and PLM 360, for use in some of their highest profile road, rail and infrastructure projects.

Importantly, our AEC solutions will help the agency become compliant with expanding government BIM mandates.

Our manufacturing business continues to perform well on a global basis.

We experienced solid demand in both mature and emerging markets, as we continue to expand our business with industrial machinery, consumer products, and automotive customers.

We continue to make investments in our portfolio, and recently expanded our solution to include new functionality, like composite analysis technology for our simulation offering.

As a result of these investments, we are seeing greater penetration in industries like aerospace and automotive.

We continue to make progress with our 100% cloud-based PLM 360, and we're seeing some great trends there.

What's really telling about the strength of the product is that shortly after their initial purchase, many customers come back to us wanting additional seats.

That's the beauty around the ease of deployment with PLM 360, and illustrates how users value the product and its potential in multiple PLM initiatives.

We're also seeing more and more companies that are religious about the cloud.

We closed a number of them in Q1, and we think those types of customers will only grow as we go forward.

As a large enterprise company, Autodesk has wholeheartedly embraced the cloud.

We closed the Delcam transaction early in Q1.

Delcam's business in Q1 was healthy, but after applying the typical acquisition accounting treatments, the revenue we recognized was immaterial to the quarter.

We are very excited about the early stages of our collaboration, which will help extend Autodesk much deeper into the manufacturing process, with industry-leading technology for CAM.

It's great to have the Delcam team on board, as we further broaden our already strong manufacturing solutions.

From a geographic perspective, we experienced continued strength in APAC, led by strong demand in Japan and South Korea.

The results in EMEA continue to be mixed by country.

In the Americas, we're pleased with the trends we're seeing.

When considering the growth in our backlog, our year-on-year growth in all major geographies was much better than was reported.

We're still at the very beginning of our business model transition, and we're seeing growth across the board in adoption of our cloud and mobile solutions.

We're receiving positive feedback from customers, which is a clear indication that the cloud is changing the way the world is designed and made.

Customers are changing their mindset to adopt a more collaborative, connected environment, so teams can now be more integrated and efficient.

We were really pleased with the increase in subscriptions in the quarter.

As anticipated, the vast majority were maintenance subscriptions, but we are encouraged with what we're seeing in both desktop subscription and cloud subscription.

After running a pilot project in France for the past two quarters, we launched the global availability of AutoCAD LT as a desktop subscription last month, and it looks to be off to a great start.

This was nice to see, when you consider we also posted growth in perpetual AutoCAD LT licenses.

Both desktop subscription and cloud subscription, namely Autodesk PLM 360, continue to expand our reach, and bring new customers to Autodesk.

Another element of our business model transition is offering our enterprise customers more flexible licensing options.

In addition to being of a great benefit to our customers, these contracts create a larger recurring revenue stream, which is recognized ratably.

In the fourth quarter, we transitioned $30 million in license revenues to deferred revenue.

As expected, the amount transitioned in Q1 was small, and similarly expect to see a small amount transitioned in Q2.

I'll reiterate that our business model transition will not be perfectly linear, and that the amount of business that we transition and the number of new subscriptions we add will fluctuate from quarter-to-quarter and year-to-year.

We are expecting the transition to progress gradually in FY15, and then ramp more significantly by the time we get to FY17 and FY18.

Given our strong Q1 performance, and our optimistic view of the macroeconomic environment, we've raised our FY15 guidance ranges for billings and revenue.

So to wrap things up, we were pleased with our overall results in Q1, and we continue to feel great about our opportunities and the direction of the Company.

It's still very early in our business model transition, but we are encouraged by what we experienced in the first quarter.

We look forward to building on these early successes, and transitioning Autodesk to a more profitable and recurring subscription-based model over the next four years.

Let me take a minute to talk about what we announced yesterday at MakerCon.

Over the past few years, I've been frequently asked about Autodesk rolling opportunity in 3D printing, and I've been fascinated by the promise, and frustrated by the reality of 3D printing.

So we're developing an open software platform for 3D printing called Spark, which will make it more reliable, yet simple to print 3D models, and easy to control how that model is actually printed.

Spark will be open and freely licensable to hardware manufacturers and others who are interested.

Same for our 3D printer.

The complete design of the printer will be made publicly available, to allow for further development and experimentation.

We'll also introduce our own 3D printer as a showcase and reference implementation for Spark.

We'll have more to say on this later in the year, but wanted to let you in on this exciting development.

To be clear, this does not impact our four-year financial targets of 12% billings CAGR, 20% more annual value from our new and existing subscriptions, and a 50% increase in subscriptions, while getting to a 30% non-GAAP operating margin by the end of FY18.

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

(Operator Instructions)

The first question comes from Raimo Lenschow from Barclays.

I just wanted to ask quickly: On the subscriber count -- obviously much better than we were expecting.

Can you talk about what -- were there any promotions during the quarter that might have driven that?

And the guidance for the full year wasn't moved.

Can you talk about, with the strong performance, why didn't the full-year range move at all?

First, let me just give you the answer on the promotion.

I think the thing that's probably the most important in figuring out what went on was the fact that we announced the elimination of upgrades next year.

So, that's probably the driving force, more specifically than any promotion.

There were actual promotions tied to it, and different opportunities for our customers to pick up on subscriptions, but that was really the motivating factor there.

On the guidance for the year, our feeling was: It was a really good quarter -- exceeded our expectations.

We'd like to give it another quarter to understand it.

And if we were to have another quarter like this one, we'd already be there.

So, we understand how it pinches our guidance for the year, but we figured we'd wait one more quarter, since we're pretty new to some of these metrics, and the conditions under we're operating in.

Once we get a better handle on them, we'll most likely update you after Q2.

And just to build on Carl's comment, exactly, and obviously, we're pleased out of the gate, for sure.

I'd just add in addition to the normal promos that we run to drive things, which were pretty much normal activity, I was also pleased just to see the desktop subscriptions are growing, albeit it's a smaller number.

The growth rate was attractive, and the same with the cloud.

And with our enterprise customers as well; we're seeing contributions across the board.

but, of course, to Carl's point, maintenance would be the biggest at this stage, as expected.

Great, guys.

That's helpful.

Thanks a lot.

The next question comes from Brent Thill from UBS.

Carl, the majority of the upside in your guidance, at least in our model, was in AEC.

Can you give us a sense of where you outperformed?

Yes.

The first thing I would say is: What we're seeing is a worldwide recovery in commercial construction.

So, it's a combination of several factors; the same factors around what's going on with the upgrades affects AEC.

We've seen a rebound across the globe in terms of AEC.

It's also -- I think we're into that next stage, where, in the beginning, we were really talking about early adopters of BIM.

We're no longer talking about early adopters.

BIM has gone mainstream, and now it's moving out to the field.

And so, we're getting to the next part where we're seeing much larger deployments within firms, as well as we're seeing the new opportunity in the construction part, as people take this information to the field.

On a geographic basis, Brent, it was really good all over.

And just a follow-up on the geo: Asia-Pacific up 15%, constant currency.

What are you seeing there?

I think you called out Japan, which has been weak for a lot of other tech companies that we all interact with.

Are you starting to see a broader turn there?

Yes.

Let me just back off the AEC, so we're not doubly segmented here.

Just in general, if you just look by countries, Asia has been good for us.

It continues to be strong.

Japan, for us, has been strong for a while now.

We keep scratching our head, because we pay attention, too, to what the other companies are reporting, but Asia has been good.

When we look globally, the only places that I still scratch my head about a little bit are some of the emerging countries.

We were just joking about -- southern Europe is finally growing, but it's maybe because it shrunk for so long, that we knew there was a bottom somewhere.

But we already have been seeing life come back to a number of countries in southern Europe.

So, the only ones that are a little bit of the volatility, that's generally tied to some of the BRICs countries, and particularly with some of the geopolitical stuff going on in places like Russia.

Great, thank you.

The next question comes from Heather Bellini from Goldman Sachs.

Great, thank you, Carl; just a couple questions for you.

I was wondering if you could help us out with -- of the strong subscriptions that you signed this quarter, can you give us a sense for how many of those -- what percentage were the 360 club type offerings, versus your traditional customers who were attaching maintenance?

Also, if you could also then talk a little bit about your cloud offerings, and share with us which one of those are you seeing the fastest uptake in?

Thanks.

Yes.

So, we haven't broken out the subscriptions, but I would tell you, this quarter, the majority, a large majority, Heather, were actually maintenance subscriptions.

That's where we focused a lot of our attention.

When it gets to the cloud, there are a couple things that are doing really well.

BIM 360, we talked about a lot last quarter.

It was down quarter over quarter, but still has a great year-over-year growth rate.

So, BIM 360 is doing really well.

I'm really pleased with PLM 360; I talked about it a little bit in the prepared remarks.

One of the things we are liking about PLM 360, and this is always a great sign of a product that is well liked, is that the customers start with a small thing, and then they come back and they want more, and then they come back again.

And so, we're starting to see large deployments of PLM 360.

Those are the big ones for right now, as it affects revenue; there's lots of other positive signs.

We've certainly seen trends change in terms of our customers' preferences.

And while there's still some reluctance to the cloud in our customer base, for many use cases, companies are getting certainly more tolerant.

And for some of the forward-looking companies, they're getting aggressive about demanding cloud solutions.

So, that's a little bit of change in the selling environment we're seeing.

Great.

Thank you.

The next question comes from Steve Ashley from Robert W. Baird.

Wondering if you have any metrics around larger deals, and how they're flowing?

You've kind of referred to it a couple times here.

I don't know if you have anything you can put your hands on, or maybe just qualitatively talk about what might be happening with that?

Sure, Steve, happy to do so.

Every quarter we don't disclose the number of deals that are what we call large deals -- greater than a $1-million deal.

This quarter, I can just say that it was up year on year modestly, but we were pleased to see that.

The number of large deals were up year on year.

Right.

The forgotten child here is the M&E business.

I know it's just 6% of total.

When might we hope that that business might flatten out?

So, there is two parts, and the thing to remember about the M&E business is there are really two parts to it.

There's that creative finishing part, and then there's the animation software business.

We've repeatedly said the animation software business is a good business, good margins, continues to grow, we're happy with that part of the Business.

For a long time, we've talked about how the creative finishing business was going to shrink.

Remember: A lot of the -- in that number is also hardware that we've been pulling out over time, and it continues to go down.

So, it continues to be the creative finishing business, more so than the overall M&E.

The animation business we like, and it really has great synergy with the rest of our Business.

The creative finishing business is really a changing and relatively small market.

Thanks very much.

The next question comes from Kash Rangan from Merrill Lynch.

Just wanted to get a little bit more color.

You talked about 89,000 new subs, and you also, Carl, talked about how the majority of that was maintenance subs.

So, when I look at the expense growth in the quarter on a year-over-year basis, I'm trying to understand: Where did that expense growth -- understanding that you're going through this model transition, and you're investing to get sub growth at the same time.

I was just curious to find out if there's anything else off the balance sheet that explains the investment to ramp up your subs, since, if I add back the growth to the backlog and the amount of deferred license revenues, I can get a pro forma margin of about 22% or so, which is still a little bit below last year.

So, I'm trying to understand what are we not seeing in the income statement that helps us to understand the pace of these investments, if the majority of the subs that you added -- 89,000 -- was indeed maintenance subs.

Thank you very much.

Sure.

Let me take a shot at this, Carl, maybe you could follow up.

There's a lot in that question, so, Kash, I'm going to try to parse that and make sure we cover all the ground, but help me if I miss something.

The first thing, just building on Carl's comment, absolutely -- of the 89,000, as planned, and again, we talked about this gradual ramp with the desktops and the gradual ramp with the cloud.

This is playing out exactly as planned.

In fact, I would say even a bit -- we're pleased with the way that we're coming out of the gate in total with the 89,000, but I just want to be clear: The majority are maintenance, but we also had nice growth rates in the smaller numbers of cloud and desktop, per plan.

The second thing I want to get to is your question around the year-on-year spend.

One of the things that we try to be really clear on is that there's fundamentally four things that we're investing in.

Let's just start at the top.

We're investing in the cloud to make sure that we have undisputed leadership in the cloud -- full stop for this whole next generation of offerings.

That's being acted out.

The second thing we've been investing in is to ensure the business model transformation is successful, including retooling of the back office, the infrastructure, and so on and so forth.

Those are not insignificant investments that we're making.

We're pleased that we're making those.

We're absolutely -- it's consistent with our strategic plan that we even talked about at the IR day.

The other cost that we should note, of course, are employee-related costs, including, Kash, some cost suppression.

If you recall last year, being below plan, our incentive for the employees was obviously less than 100% target.

This year, we need to plan for it to be up at 100%.

So, there's that natural release of cost suppression, and merit and such.

And then the last thing that is not insignificant is the fact that we have done some significant M&A, of which is dilutive this year, but of course, accretive next year.

And you saw a portion of that in Q1 -- a month of that in Delcam.

You'll see a full quarter, for example, in Q2, because of the consolidation lag effect.

So, boil it down to employee-related costs, with the unfolding of cost suppression year on year; M&A, Delcam being the headline; cloud investment; BMT investment, and there you go -- very consistent with our plan.

The most important thing that I would call out, Kash, is absolutely reaffirming our commitment for the plan for the year, that we talked about at the beginning of the year, and absolutely reaffirming our four-year plan.

So -- (multiple speakers)

Great to hear that.

Yes.

Go ahead.

Great to hear that.

And also, by token, I should deduce that your 150,000 to 200,000 sub additions are going to be more back-end weighted?

Because if I just look at the license revenue, and ballpark the number of maintenance subscriptions you'd be pulling in just with your licenses, that alone should be equal to that 150,000 to 200,000 net new subs, right?

So, I'm just wondering if your four-year plan really calls for a lot of the rental, if you will, net new seats are going to be really weighted towards the second half of that time period.

The maintenance adds don't seem to jive up with the license, then, to explain a more back-end loaded scenario, which is perfectly fine, but just wanted to clarify that.

Kash, I think it would certainly be clear to say that we're growing our desktop subscriptions, and our cloud offerings are a gradual ramp, as we talked about at IR day back in the October time frame.

And we talked about in Q1, it's just a consistent building the ramp.

I mean, we're really pleased at the way things are coming out of the gate.

As you would expect, when you have a program for 10 years that's been the maintenance subscription, that that number is going to be bigger than the first quarter or so of growing your other one.

But the growth rates we're pleased with.

It's unfolding nicely.

And, Kash, the only last thing I would throw out at you is: In addition to looking at the deferred revenue, which I think you addressed appropriately, and is a record for the Company, up 13% year on year, a good sign for the transition, don't forget, our backlog is up $30 million year on year.

And that backlog is not billed or shipped, and so, that's an indicator also of demand that you should think about.

Yes.

Just one small piece of color I'd add on the maintenance subscriptions.

Given the programs that's driving people to maintenance subscription, in addition to our increased emphasis on it, I really expect to see that to continue to grow through the year.

So, certainly in the fourth quarter, you can imagine it being large because it's going to be right up against the deadline.

Can't understand quite the shape of the curve, but the first quarter was strong, going into the second quarter, the momentum continues, and the fourth one will be strong.

There's still a little bit of unknown in the middle, but I would not expect that to slow down at the end of the year at all; exactly the contrary.

Wonderful.

Thanks so much, and see you at our conference in a couple weeks in San Francisco.

The next question comes from Brendan Barnicle from Pacific Crest.

Carl, I was really interested in maybe talking a little bit about the pilot you were in, in France.

And I know you rolled that out globally now with AutoCAD LT, and what you saw in terms of maybe new users who hadn't previously been on AutoCAD.

Can you give us any color about what kind of growth you saw there, or percentage, or anything more in terms of genuine new use cases you were seeing on that individual cloud-based version of AutoCAD LT?

What we saw in France, and what we saw in the first quarter was that we had an almost identical amount of perpetual [seat] sales as the prior period; plus we added a substantial number of desktop subscriptions.

It's just the behavior we wanted.

So, probably it moderates the growth a little bit in perpetual; but in total, it's a much bigger number.

And that same dynamic is playing out as we roll it out in other places.

We've done a little bit of survey work.

What it seems to be is: There are people who are price sensitive to the upfront costs.

There are people who have peak demand loading issues.

Their workforce changes in size, and having a more flexible way to get access to the software is good.

And truthfully, I suspect there were some people who formerly didn't pay for the software, who would have liked to but couldn't afford it or some other reason, who are now actually -- given an affordable option, are choosing to pay for it.

So, if you looked at that, that group that's either new because of the price point or piracy or whatever, what percent do you think they represent of that total number of folks who had bought it as a perpetual, and now bought it in the cloud?

Is there a way to look at that metric at all?

You mean the amount of cannibalization, is that what you're trying to get at?

(multiple speakers)

I'm trying to get at what's actually net new.

What percent of all those do you think are net new, as opposed to transition?

So, what I think is -- I don't have a great number.

It's a little early, but I would say probably 20%, 30%.

Terrific.

And then, as you take this out globally, anything that you'll be doing differently that would make you think you wouldn't get that same sort of adoption?

Or are markets just so different, it's hard to tell at this point?

No.

I mean, our sense is it will be the same.

Having said that, and having done this job long enough, you're always surprised by behavior in a given country.

There's always individual dynamics about the markets.

But generally speaking, we've now proven it to ourselves in enough places that we expect, for the most part, the rollout to be identical.

Terrific.

Thanks so much for that additional color.

The next question comes from Keith Weiss from Morgan Stanley.

Very nice quarter, guys, and thank you for taking my question.

When you were at the analyst day, you talked about this base of non-maintenance paying, but active, customers.

Can you give us a sense of, the 89,000 subs, or the good progress you had in subs, how much of that was new seats, new-customer driven?

How much of that was going after that base of non-maintenance paying subs, so it's just guys carrying on, upgrading, and getting on board with the maintenance program?

Don't have the exact number.

It's a little bit hard for us to get it perfectly, but I suspect a fair number is out of the base of non-maintenance paying customers.

Got it.

And then, on a different tack, when it comes to the 3D printer and the reference architecture -- so, you have a reference architecture for other people to make clone 3D printers, there's a open source Spark software, can you walk us through what's going to be the longer term?

How does Autodesk eventually get paid on this?

Where do you see the path to monetization for you guys, or the advantage of you guys going forth and proselytizing this, if you will?

I think there are really two things.

One is easy to understand today, and one will play out over the year [the year and so].

First one is: Our customers make more 3D models than anybody -- more 3D printed models come from our software.

So, to the extent that we increase the demand for 3D modeling software, we think we will get our fair share of people who now want 3D modeling software.

And we've seen that play out, and what we're really trying to do is make that whole work flow smoother.

I'll date myself here a little bit, but remember there was a period of time in which Apple felt the need to have a LaserWriter of its own?

Yes.

Good, you dated yourself.

I'm glad I sucked you in on that one.

Yes, and so, it's like that.

The second part is a little bit more complex, but we have been doing a lot of modeling software that relies on intimate knowledge -- in order to produce the parts, relies on intimate knowledge of the 3D printers.

And we wanted a really close, tight connection, and demonstrate how good the experience could be when you get the hardware, software, and material sciences right.

And so, we'll be introducing more software this year, and potentially more hardware, to take advantage of that.

So, stay tuned to that part.

But I think the simple straightforward one is: Everything that's 3D printed is generally 3D modeled, and we're the largest supplier of 3D modeling software.

Got it.

The Spark software -- that's just about the interface between the design software and the printer itself.

It's not the design software -- ?

Yes.

Keith, a good analogy on this, that I've been using to try to explain it: Think of the Spark software as a little bit like Android.

If Android is the OS for mobile phones, this is an OS for 3D printing.

And think of the printer -- and by the way, just to make sure that we're speaking the same language, we're not really giving you a reference architecture.

We're actually producing a printer.

Right.

So, we will have a reference implementation that we will manufacture, and think of that machine as a Nexus 1. Google continues to produce cell phones, even though the success of them really depends on companies like Samsung and HTC producing way more than they do.

Excellent.

Very helpful.

Thank you, guys.

The next question comes from Jay Vleeschhouwer from Griffin Securities.

Carl, Mark, I'd like to ask first about your licensing model for token- or usage-based consumption.

Of the kind, for example, that you did with the large contract in Q4.

The question is: Can that kind of token-based model be implemented or offered beyond just the large or largest project-oriented customers, as an AEC in particular, or is it the sort of thing that could potentially be offered to the SMB customer base?

Additionally, is it possible that this model, if broadly adopted by large and SMB customers, could turn out to be a larger source of repeatable revenue for you than either rentals or even the 360 services?

So, before we get to the more speculative part of your question, Jay -- [you're paddling there] -- let me answer the factual one, which is yes.

We can actually -- we're doing it in some places, and it can be done in more.

So, the flexible license that allows people access to more software is a great model.

I think it is a win/win here; it's good for the customers, it's good for us.

We've demonstrated it over and over again in the large enterprise accounts.

And I think it's true, almost all the way down through the pyramid of size of customers.

And so, there's a little giggle here because we've just spent the last couple hours here talking about doing that more broadly.

So, you're on to something there.

It could be a big source of revenue, when you get to the more speculative one.

The one I want to throw in: It certainly could be bigger than the desktop subscriptions.

I'm not sure it will be bigger than the cloud subscriptions.

I think there's a huge amount of value tied up in delivering services through the cloud that we're just beginning to tap into.

And I wouldn't venture that this is bigger, but it's certainly a meaningful and an important way that customers can get access to more software, in a more convenient and affordable way.

I think what you're pointing out, Jay, is there's multiple levers for us to get to the north of 70% recurring revenue, and I think that's a good point.

Okay.

My second question is the obligatory channel question.

First, could you talk about the results so far of having re-implemented the earn-back comp model versus what you had previously for the last couple of years?

Could you talk about how that's influencing channel productivity, channel behavior, having gone back to that?

Also, the Company has talked about, for example, at AU the last couple of years, about the prospect of channel consolidation.

Any signs of that, and is that the sort of thing that you would watch passively occur, let's say, or is that the sort of thing that perhaps you might encourage or otherwise get involved in?

I think the answer to the first part of your question is: It seems to have worked quite well in Q1.

The model seems to be working.

When it comes to channel partners, these are independent businesses.

We're keenly interested, but I don't think we would take an active hand.

We haven't seen any signs of consolidation.

I think most of our comments about consolidation have generally been over the long term when people ask speculatively: What do you think will happen?

I mean, we've speculated that it will get bigger.

We don't see any real signs of it.

The only times that we saw consolidation happening or a winnowing of the channel, was really during like 2008, 2009, during the really hard economic times.

We saw a little consolidation there.

But on an ongoing basis, the channel seems to be doing well, and I think in particular, over the last few quarters, they've done very well.

Thanks, Carl.

Thanks, Mark.

The next question comes from Gregg Moskowitz from Cowen and Company.

Carl, you mentioned that the revenue impact from the business model change was less this quarter than in the Q4.

Can you tell us if that was, again, concentrated in AEC in the Americas, or was the shift to subscription somewhat meaningful or starting to get somewhat meaningful in other verticals or geos as well?

It was small enough to hardly matter.

I think, Gregg, the time to really look is in Q4 this year, when those contracts come up for renewal again.

That's really the time to look at it.

I think you will see it in Q4 of this coming year being more broad based, both by industry and geo.

As we talked about at the time, a number of the deals that were on the docket in Q4 didn't close.

And in the end, we decided to close them as is, rather than introduce the business model change.

It just got hard, and we recognized that it was probably best for everyone just to take the business off the table.

But I think in Q4 this year, where there's more preparation with our account managers working with our large customers, I think you'll see a more broad-based switch.

Okay.

That's helpful.

Just one follow-up: So, after some pretty lean quarters, AutoCAD LT has been doing better recently.

And putting aside the desktop subscriptions for a moment, can you talk about what's driving the improvement in perpetual licenses?

I think one is the desktop.

The desktop subscriptions are definitely helping.

You'd see much more modest growth in that number, if it wasn't for that.

I think the other thing was, as we said at the time, is we took our eye off the ball a little bit.

When we paid more attention to it, we could actually drive the results.

Perfect.

Thanks very much.

The next question comes from Walter Pritchard from Citigroup.

Thanks.

Two questions.

First, on the upgrades, you talked about seeing some strength there, and you talked about it possibly strengthening as you get towards the back half of the year.

Could you talk about, qualitatively, are you seeing growth in upgrades year over year, how much, and any sense as to where we might see that as we exit the year?

One thing, Walter, I'd say, is: We don't break out the upgrades specifically, but I think building on Carl's comment, certainly we saw nice performance in Q1.

And I think, just by the definition of the fact that the upgrades are going away, and just the go-to-market plans that we have, we would expect it to spike in Q4.

So, that won't be a shock to us, to see that happen.

And then, Mark, there's a quote in the prepared remarks talking about being committed to returning excess cash.

And I'm wondering if you can just give us some framework around how much cash you feel like you need to run the Business and, therefore, deduce how much is excess?

Sure.

Well, a couple things here.

First thing I would say is just historical facts, Walter.

In the last couple of years, we have returned 70% of our operating cash flow back to the shareholders vis-a-vis the share buyback, and about 80% of our free cash flow, roughly speaking, in the last couple years.

So, we certainly have shown evidence of doing that, number one, to back up that fact.

The second thing, as you know, the vast preponderance of our cash is offshore.

It's roughly about 75% of our cash is offshore, and so we try to keep a balance in terms of the US cash from that standpoint.

So, I haven't given an exact number out.

There's a number that we look at that we talk with the management team and the Board about, and I'm not wanting to disclose the specific number.

But obviously, we need to keep some flexibility in US cash.

That's the thing I'm most sensitive to, for lots of reasons, ones that you can appreciate, whether it's M&A or other strategic reasons.

Okay.

Great.

Thank you.

The next question comes from Matt Hedberg from RBC Capital Markets.

I know at this point you're not breaking out the split between maintenance and cloud; and certainly on a quarterly basis, subs can be lumpy.

I'm wondering: Is there a time frame that we can think about when cloud will be a majority of the sub adds in quarter, as you think about attaining your longer-term both billings and margin targets?

We're not sure -- and while we have a model that says when it is, we don't really know.

The one thing we did say in the fourth quarter is that we would start giving you more metrics on this as we went through the year.

So, we're going to continue to look at it, and try to give you a little bit more visibility.

We didn't want to promise it every quarter.

We knew it would be lumpy, but probably give us a quarter or two more under our belt, and we'll start breaking out more of the metrics around subscription.

That's great.

And then, a question about Fusion 360; sounds like there's some good success there.

I'm wondering: What does the typical customer look like for that product?

And potentially, how do you think about adding functionality to expand its usage?

If you think about a more fully functioned desktop CAD solution?

The way I think about it is: Fusion's about form, function, and fabrication.

So, the kind of people who are using it tend to be small companies, tend to be at the cutting edge.

And they're interested in products that -- mechanical products that are aesthetic, where form actually matters, and they might actually really be interested in how it's fabricated.

So, 3D printed machined.

So, it tends to be the kinds of products you see, like consumer products, medical devices, more in that category, than you would see big, heavy, industrial equipment.

We're going to continue to add functionality to it.

The trick with it is: We want to keep it being the easiest-to-use product out there.

We want it to be simple and complete in a different way than some of our other offerings, like Inventor, or some of the competitive offerings.

So, we're really pleased with the progress it has.

And the one thing about it is it's really attracted a different kind of customer.

Unlike other times where we've introduced new products, and there's a lot of consternation amongst our customers and our partners and, therefore, us, about should I buy A or should I buy B?

I think it's pretty obvious to everybody involved which one to buy.

We're bringing in lots of new customers.

And the premium for them is on things like collaboration, it's working in the cloud, it's sharing models.

It's really about a different way to work, than I would see in many of our larger manufacturing customers.

Great, thanks.

Very helpful, Carl.

The next question comes from Steve Koenig from Wedbush.

I was curious to get your thoughts qualitatively on this.

As your license upgrades go away at the start of next year, but you're still only -- you're a year into your model transition, so you haven't gotten maximum traction yet probably on cloud and desktop subscriptions.

What's the shape of that subscription add curve next year?

In other words, should we expect a bit of a lull or valley next year, before things pick up and [you're shooting your four]?

And I guess the related question I'll just add now, and that's all I have, which is just your thoughts qualitatively on the kind of subscriptions that you have, which ones will become important, following the good results in maintenance subscriptions.

Is it the desktop subscriptions next or the cloud subscriptions?

How do you expect the composition of your subscription additions to change over time?

Okay.

Let me answer the first question, because it informs the second.

I think if we did nothing different from where we are today, if we introduced no program changes or policy changes for next year, you would see a lull in the curve.

You would see something downward.

I'm not wanting to have that happen.

We have a number of knobs and dials we can turn programmatically, and through our different offerings and promotions, to change the shape of that curve.

I hope that makes sense.

Left without us doing anything, it goes down.

We believe we have a number of things we can do to change that, so that it goes up.

When you move to your second question, clearly maintenance subscriptions, because of the size of it, will be the most important for a long time.

There are a number of things we can do around desktop subscriptions to make them more attractive.

If you remember how we made the transition from upgrades to maintenance subscription over the last decade, one of the strongest ways was to provide financial incentives for customers to move.

We can do the same thing with desktop subscriptions.

And then the last part is: I think, for the future, the most important are the cloud subscriptions.

The cloud subscriptions in the long term will be the most important, but we will never get there from here unless we start with a really strong base in maintenance subscriptions.

I would just add to Carl's point, too.

I agree with all that, and then also, he talked about the levers that we can put the bit on -- the enterprise is the last point that we also have the levers to be able to flip significantly, just to add that in.

Okay, great.

Thanks for your color on that.

The next question comes from Matt Williams from Evercore.

Carl, just one for you, maybe more macro related.

You spoke some about conditions in the commercial construction market.

I'm just wondering if you can provide us a little bit of an update around what you're seeing in the manufacturing vertical.

Some of the data points we've seen point to -- if nothing else, increased stability there.

I'm just curious, from a growth standpoint, what you're seeing in that vertical.

Yes.

So, I'm a little bit confused, truthfully, by some of the economic data out there.

Sometimes I think the needle is too sensitive, and it's bouncing too much, with some of the manufacturing data out there.

What we're seeing from our Business is relatively stable; it's been stable, it's growing.

It's relatively healthy across the globe.

Again, I'd add the one caveat: There are a couple geographies I worry about a little bit.

The only one I really worry about is Russia right now.

But we've seen relative stability -- just healthy, steady growth everywhere.

So, a little bit of the economic data coming out is a little bit surprising.

And like I said, we may be looking at a little bit too much perturbation of a needle that is a little too sensitive.

When you get at it qualitatively, or anecdotally from talking to customers, there seems to be a general comfort amongst most of our manufacturing customers that their businesses are doing well.

They're investing for the future.

They're focused these days.

They've moved on from being driven purely by quality and cost, to they're really interested in innovation and agility.

How do I get better markets -- better products to market more quickly?

How do I differentiate my products?

And they're willing to invest in retooling.

They're doing it in healthy, thoughtful ways.

I feel really good about what's going on in manufacturing, and we'll see how the data plays out over the next couple quarters.

Great.

That's helpful.

And maybe just one follow-up along the same lines there.

In the past, you've talked about PLM 360 really opening you up to net new customers.

I was just curious if you could provide any update on trends you're seeing there?

And if that is starting to move maybe beyond just the departmental sort of deployment, or is it moving up market at all?

Just any color on the PLM 360 business would be helpful.

PLM continues to be -- most of the customers are either new to Autodesk entirely, or they certainly aren't primarily an Autodesk shop.

That continues to be true.

The other profile about many of the PLM 360 customers: They're companies who have made a decision that their IT strategy revolves around cloud deployments.

So, they're frequently deploying other cloud-based products like NetSuite, Salesforce, Workday.

And they've made a decision: This is the way we go about business.

So, when they go out there looking, we're obviously the leading, or one of the leading choices there.

So, what we're seeing, and I kind of referenced it a couple times.

What we're seeing is increased size of the deployments, and that's the healthiest sign.

People start with numbers in the dozens, and now they're getting up to the hundreds.

What I like most of all that I'm seeing in the PLM 360 business is more small deals and more repeat deals.

So, we're broadening the number of deals in the quarter, and we're starting to see the repeat deals, and both, to me, are indicators of a healthy, growing business.

Great.

Thanks so much for the color.

The next question comes from Sterling Auty from JPMorgan.

Carl, you touched upon this a little bit in one of your last answers.

So, Russia, ANSYS actually called out specifically, saying it had an impact on the business in the quarter.

Are you saying that you're keeping an eye on it, but you haven't seen any impact thus far?

No, we've seen impact.

We heard what Jim said, and we've certainly seen an impact.

And if I had to guess, I'd suspect it's going to get worse before it's going to get better.

There's little on the horizon that says people are about to invest more in Russia.

So, I think it will get worse.

It definitely was not a bright spot for us this quarter.

It's a small part of our Business.

I think part of it was whether it would have spill-over effects into more of core continental Europe, which is a big part of your Business.

I haven't seen that.

Obviously, it's a big economy.

It's a big economy, but generally speaking, the rest of Europe looks reasonably healthy to us.

We didn't pick up anything during the quarter that would change that opinion.

Got you.

On a different topic, can you remind us what in this year's suite of products, in terms of feature functionality, is there to help motivate the adoption of subscription?

And maybe what you've talked about, at least at this point, in terms of what might come in the next round of upgrades that, again, where it's feature functionality that would only be available if you had some sort of subscription attach?

I think there are a number of things that are doing, but I think the primary one is just the fact that the upgrades are going away.

I can tell you all kinds of wonderful things on the other side, but I think the truth of the matter is: People right now are making a decision how they want to buy for the future.

We've told them that perpetual licenses and buying a new one every five years is still an option, but there is no way to buy an upgrade.

What I think people are doing is they're deciding between getting on maintenance subscription or getting on desktop subscription.

And that's probably the primary driver of the behavior and all the upside you saw.

Makes sense.

Thank you.

The next question comes from Richard Davis from Canaccord.

Hey, thanks.

One question I've mulled a little bit, and I can't even remember if I wrote it in the notes, the other day.

Have you been able to encourage what I would call unaided downloads on the web, so that -- not that we don't love salespeople and things like that, but there's no friction with regard to that?

At some point, down at the low end of the market, you might be able to have an easy enough brain-simple download that would allow you to get revenues without a lot of cost of goods or sales and marketing expense?

Thanks.

One of the things we've done extensively is try to ease the download and trial process.

We've done it, as we've talked about, in education, and we see now millions of downloads in education.

We also see thousands and thousands of trials.

And the difference between a trial and a buy is really the exchange of payment method; you need a credit card.

So, what we see a lot of is people -- most of our sales, and particularly online sales, start with a trial download.

And we're getting better at doing it, and I think customers are getting much more comfortable downloading and paying for software online.

Got it, great.

Thanks.

I'm showing no further questions.

I would now like to turn the call back over to Dave Gennarelli.

All right.

Thanks, everybody.

That concludes our call.

Lastly, we're going to be at the B of A, Morgan Stanley conference on June 3. And if you need to reach me, you can reach me at 415-507-6033.

Thanks.

Ladies and gentlemen, that does conclude the conference for today.

Again, thank you for your participation.

You may all disconnect.

Have a good day.