Autodesk Inc (ADSK) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Autodesk Second-Quarter of FY15 Earnings conference call.

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

Later, we will conduct a question and answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, David Gennarelli, Director of Investor Relations.

Please go ahead.

Thanks, Operator.

Good afternoon.

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

Also on the line is Carl Bass, our Chief Executive Officer, and Sue Pirri, VP of Finance.

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.

In 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 and full year FY15; long-term financial model guidance including billings, subscriptions and recurring revenue growth; the factors we use to estimate our guidance; new business model introductions; new products and suite releases.

Market adoption and expected growth rates; our expectations concerning large deal activity in the fourth quarter; business execution; business prospects and financial results; and market opportunities and strategies, including our desktop subscription offerings, our planned transition to cloud and mobile computing, trends and sales initiatives, more products, and trends in various geographies and industries.

We caution you that such statements reflect our best judgment based on factors currently known to us, and that actual events or results could differ materially.

Please refer to the documents we file from time to time with the SEC, specifically our Form 10-K for FY14; our Form 10-Q for the period ended April 30, 2014; and our current reports on Form 8-K, including the 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 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 now prepared in accordance with the 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.

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.

Good afternoon, everyone.

Building upon the momentum we generated in the last two quarters, we are pleased with our results for the second quarter.

The results were consistently good across geographies, industries and product offerings.

Strength in our core AEC and Manufacturing businesses led to better-than-expected results, including record revenue and deferred revenue.

We advanced our business model transition with strong subscription additions and continued adoption of our enterprise license agreements.

If you also consider the $26 million backlog balance at the end of the quarter, our total business capacity for the quarter was exceptional.

From a geographic perspective, we experienced broad-based strength.

All three of our major geographies grew double digits on a constant currency basis, led by growth in EMEA.

The areas in which we're seeing weakness are those affected by geopolitical turmoil.

Our strong results in AEC and outstanding growth in our AEC suites can be attributed to the continued adoption of BIM in the building and infrastructure industries.

BIM is now not just limited to desktop products, but is available in cloud and mobile technologies that support access to infield and realtime information.

We closed several large AEC transactions in Q2, including a nice win in a competitive stronghold, with Autodesk Advance Steel, a technology we acquired with the acquisition of Graitec a few quarters ago.

We also landed meaningful wins with our structural detailing and fabrication offerings.

We continue to steadily grow our user base in each of our AEC cloud-based technologies, including BIM 360.

AutoCAD 360 and InfraWorks 360.

BIM 360, in particular, continued to grow at a rapid rate.

We had numerous wins, including one with a large European construction firm.

Proving once again that the construction market is primed to embrace the full benefits of BIM.

Our Manufacturing team delivered very strong results, driven by growth in industrial machinery, consumer products and automotive.

Acquisitions we've made in both plastics and composite simulation are particularly significant for the Aerospace industry.

In Q2, we closed deals with three major aerospace engine manufacturers.

The Delcam business is performing well and contributed almost $11 million in revenue to Q2.

We're pleased with the early results from this business and look forward to advancing our position in the CAM market.

Our cloud-based PLM 360 product nearly doubled its billings compared to Q2 last year.

We also launched the PLM 360 mobile application in Q2, making PLM 360 the first truly mobile PLM solution.

As I mentioned earlier, we had another strong quarter, with 74,000 subscription additions.

As expected and similar to last quarter, the majority of the subscription additions were maintenance subscriptions.

With the discontinuation of the upgrade program at the end of this fiscal year, we are seeing a lot of customers take advantage of the upgrade discount one last time.

And we are experiencing a higher-than-average maintenance subscription attach rate.

The desktop subscription offering for AutoCAD LT had its first full quarter of availability and has performed well out of the gate.

What is fantastic is that we also experienced solid growth in perpetual licenses for AutoCAD LT.

So it's clear in the case of AutoCAD LT that the desktop subscription program is expanding our reach and bringing new customers to Autodesk.

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

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

In Q2, we doubled the number of large, million-dollar-plus transactions compared to Q2 last year.

And we transitioned approximately $10 million in enterprise license revenue to deferred revenue.

Given our strong Q2 performance and our optimistic view of the macroeconomic environment, we've raised our FY15 guidance ranges for billings, revenue and subscriptions.

We also narrowed the operating margin range, keeping the high end of prior guidance.

As you can see in the numbers, margin upside is muted this year for a number of reasons.

This year's operating margin assumption includes the impact from the business model transition, investment in our cloud infrastructure, the dilutive effect of the Delcam acquisition, as well as the incremental investment spending on key initiatives.

Additionally, commission and our employee incentive program are volume-related and increased based on our better-than-expected billings performance.

It's worth repeating 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 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.

Lastly, I'll give you an update on our CFO transition.

We have started to interview candidates.

In the meantime, we have a strong finance organization, filled with talented people to bridge the transition.

I think most of you know Sue Pirri, who has been with the Company for over ten years.

She is leading our Finance team and is here to participate in the Q&A.

So to wrap things up, we were really pleased with our overall results in Q2 and the first half of the fiscal year.

We continue to feel great about our opportunities and the direction of the Company.

It is rewarding to see our mobile and cloud-based products adopted by our customers.

These products solve important customer problems and clearly position us as the industry leader, as the engineering inevitably moves to a cloud and mobile computing infrastructure.

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

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

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

(Operator Instructions)

Brent Thill, UBS.

On EMEA, you had meaningful improvement in the growth rate.

And I'm curious in terms of what you're seeing in that region, given the growth has really been lackluster and you're your finally seeing that return to healthy growth.

I think over the last couple years, it was certainly the southern part of Europe we talked about repeatedly, as northern and central Europe was doing well, but was being dragged down by southern Europe.

In some ways, we hit the bottom in southern Europe.

In other ways, we are starting to see a consistent rebound.

So EMEA did well, but as I noted in the remarks, the only places where we saw geographic weakness was in EMEA.

And that was due to what was going on in Russia and the Ukraine and what's going on in the Middle East.

Other than that, EMEA did great.

Okay.

And just a quick follow-up.

You mentioned construction.

And I believe that this has been one of the bigger net inflows of money, when you look at the new revenue inflow into the Company.

Correct me if I'm wrong, but give us a sense of what you're seeing there in terms of the sustainability, as well, what you're seeing on the construction segment.

Sure, Brent.

Some of it is driven by increased business activity in construction.

But some of it also was that more secular move to seeing more money within the AC industry spent by construction companies on technology.

That's been going on for a long-term.

There is this other, more cyclical thing that goes with the economic activity.

And that's been good across geographies.

But I think as much as anything, it's just the adoption of technology by construction companies; and as they realize the benefits, they've historically been severely underinvested in technology.

Gregg Moskowitz, Cowen & Company.

This is actually Matt [Primo] on for Greg.

Thanks for taking my questions.

So despite the huge licensed revenue upside, it was a bit surprising to us that subscription revenue was generally in line with consensus expectations.

Could you comment on renewal rates this quarter?

Attach and renewal was really high.

Everything about subscription was good.

Okay.

Great.

And do you still expect the geo and bus core adoption of desktop and cloud subscriptions to be pretty broad based by Q4?

I think you'll start seeing -- they're doing well, but being overwhelmed by the maintenance subscriptions.

I think you'll see it Q4 and throughout next year and beyond.

So what's going on with the desktop stuff is good.

Cloud subscriptions are good.

They're just being overwhelmed a little bit by the maintenance subscriptions.

It's a good problem to have.

Jay Vleeschhouwer, Griffin Securities.

Carl, I'd like to ask you a longer term question about your operations and your corporate infrastructure, meaning how are those operations and infrastructure being prepared?

Or are they prepared, for the new increasingly hybrid business model that you're going to have over the next number of years?

In effect, what I'm asking is, are you going to have the capacity and the efficiency that you'll need for bigger channel engagement, improved order processing.

I know that all sound very dull, but I think it's very important for the Company -- and improve your systems for customer engagement, especially as the volume of your deliverables will likely increase materially over the next number of years?

No, Jay.

You're absolutely right.

There's actually two parts of operations and infrastructure I'll just take a minute to touch on.

The first one is just the increased amount of order processing, because of the nature of these subscriptions being term-based.

Some of them are for a shorter period of time than the perpetual licenses.

So there's a huge effort underway to make sure that we can handle the financial transaction aspect.

But there's also a customer-facing aspect of this.

There's a sales engagement part and there's a marketing effort, as well, that really are all tied together that define the overall customer experience with what we're doing also.

Because as you know, such a huge amount of our business goes through our channel partners.

It is having our channel partners engaged, as appropriate, in some of those activities.

So the operations and infrastructure is big on that.

The second part is just in terms of providing cloud-based engineering and design services.

We've been building out cloud infrastructure, as well.

So both of those things are critically important for the future.

Okay.

My follow-up is on the new cloudy parts of the business.

As of the data available in the first quarter 10-Q, only 5% of your subscriptions revenue was noncommercial maintenance.

In other words, a run rate of somewhere between $55 million and $60 million was from non-classic maintenance, let's call it, for the new subscription services.

Could you talk about the growth of that business in the second quarter?

And more importantly, what has to happen for that to become a multi-hundred million dollar business over time instead of a mid-eight figure kind of a business, like today?

One thing I'll say is in October, at our Analysts Day, we'll give you a lot more detail on this.

Right now, what's going on with our cloud subscriptions, they're exceeding all the projections we had.

The business is doing well.

There's a lot more stuff coming online.

Some came on in Q2.

There's a lot in Q3 and Q4.

So these are growing businesses.

And so far, I'm happy with the results.

As to it becoming a multi-hundred dollar business, I think both our desktop and our cloud businesses will become that, and it's kind of inevitable.

I think we're right on track to do that.

Matt Hedberg, RBC Capital Markets.

Congrats on the quarter.

Certainly, even this year seems to be seeing a benefit from the elimination of upgrades next year.

Carl, I'm wondering, when might you eliminate perpetual sales?

And maybe more generically, what is the framework for eventually pulling this license option?

Well, I'll ask you, what do you think's a good time frame to do it, Matt?

(Laughter) I would -- It would certainly probably depend on the products, but the market generally wants it -- seems to be wanting it sooner than later.

I'm half joking.

We've been looking and considering it seriously.

And we'll talk again a little bit more about this in October, what our plans are.

Right now, we have a fair amount of transition going on in the business, with the elimination of the upgrades; and that is certainly spurring people to action.

But as we move into next year, we'll have more to say on that.

That's great.

And maybe dovetailing on that same question.

Obviously, you're seeing some early success on the subscriptions side, the cloud subscription side.

I think you've talked in the past about seeing a 20% or more value from those customers.

Is that still the case, or in some cases do you see even more value from those types of deals?

Some are more.

And what's been interesting to me and somewhat surprising is the number of cloud subscribers, and some of our cloud-based products, are just attracting new people to Autodesk.

It was interesting.

I was with a customer the other day and asking them why they chose, in this case, PLM 360.

And they said they just wanted -- they said, we're a 21st century company.

We're building.

We're building new kinds of products.

And our entire infrastructure's going to be in the cloud.

And so our first decision point was, who has a cloud-based PLM system?

And second, what was the best?

So we are finding companies that weren't our national customers before.

And so that's happening.

And in addition, very specifically to your question, yes, some people are moving more quickly to the cloud than were in our forecasts.

Walter Pritchard, Citi.

In the prepared remarks, you talked here about the growth in licensed revenue primarily related to upgrade revenue increase that you saw in the quarter.

Can you quantify that, and what licensed did on an apples-to-apples basis if you wouldn't have been as promotional on the upgrade side as it appears you were in the quarter?

So first of all, I'll let Sue jump in.

But what I would say is generally speaking, our promotions have been going down as the year has progressed.

So compared to Q1, the promotional activity is going down.

The timeframe is getting shorter.

But my experience in the years of doing this is when we have a strong program, like generated by the removal of the upgrades, you're not going to see a wide disparity of activity amongst our channel partners.

They are very focused on this and bringing in this business, because it expires.

That's right.

We don't actually break out upgrade portion of license from the rest of license.

But I think Carl's right.

The important part -- the important goal for us is to get as many of our customers onto current versions before upgrades go away.

And the channel partners tend to focus on the most compelling offer in a quarter, and that's really where people are focused right now.

And then just a follow-up related to that.

did talk about, there was an impact on subscribers from the promotional activity.

And I guess if I look at the pace you're on track to add subscribers during the year, you're talking about 200,000 to 250,000 this year.

If I go back to FY13, you added about 250,000, the high end of what you're adding this year, really without any help from significant amount of promotional activity like you have this year.

And so I guess when I look at those two numbers, I'm trying to understand why we're convinced here that there is a significant amount of demand for subscription if you're not back at where you were in 2013 levels, while driving promotions pretty aggressively.

The way I look at it is first of all, I'm not sure exactly what time period you're looking at, but all through there, there were significant promotions with our suites.

We were making very attractive offers and moving our customers from their point products to suites.

We always have promotions going on.

I think it's just the nature of the business.

And promotions give a small financial incentive for the customers, but they're also a way to focus our entire go-to-market activity amongst our sales and marketing teams, as well as those of our partners.

So in some ways, to look at it is, it's less -- the incentives -- it's more the goals of what we're trying to accomplish.

And what we're seeing is moving lots of people onto subscription that weren't on subscription.

We also noted in the remarks that the attach rate saw a big bump, as well.

So we're happy with where our subscriptions are going.

Brendan Barnicle, Pacific Crest.

Carl, I wanted to follow-up on your comment to Matt about the new subscribers, people who are new to Autodesk.

Do you have any numbers on what percent of the subscriber base you think are generally new users that weren't previous Autodesk customers?

No, we certainly have numbers.

We haven't been disclosing it.

And in particular, let me separate.

It's not the maintenance subscriptions that are capturing those.

I was talking more about what we're seeing it is in the desktop subscriptions, and particularly, I called out LT.

And while historical rates of LT are being maintained, we're also now have this new category of desktop subscriptions.

And that's going well.

And plus, what I was noting is in a number of our cloud-based offerings, BIM 360, PLM 360, some of the others, we're seeing customers who just weren't there before.

We'll try to give a little bit more color about that.

But it is certainly attracting new customers.

And as I pointed out last year at Investor Day, I thought in some cases, in some of the markets we're engaged in, the terrestrial battle was at a standstill, with minimal amounts of marketshare shift.

As we are offering a new technology platform, we are finding people who really like being on cloud and mobile and are selecting us, where before, they may have been happy with another vendor.

We'd heard anecdotally from some of the folks in the channel that it could have been as much as 20% of the subscribers are generally new people.

Does that seem like a ballpark number?

I'd hate to guess, but I will go do a little bit more work on this.

Terrific.

And then just following up on Walter's question on the maintenance subs, obviously, you've had good attach there.

Any sense of where we are within the install base, the number of folks who've done upgrades to get to subscription now and what percent may remain, and what kind of a market size that looks like?

Our best indications are in our guidance and the revised upward guidance.

We see continued strength.

As I talked about on the last call, we said that Q3 may be the weakest of the quarters, but we thought Q4 would be a big quarter.

The hardest part of actually figuring this out is there's way more subscribers left, and we know we will leave some behind.

The real question is just how many.

So we can meet every one of the expectations we've set and still leave people behind, and we're trying to minimize that as much as possible.

But when we look at that base, it goes back -- we think of going back about in the 3- to 5-year category.

And when you go back 5 years, there may be people and companies, companies have gone out of business, they may have consolidated, they may have shrunk.

So it's a little bit hard to put your exact hand on how many of those seats are active today.

It's a problem we'll be able to know the answer to much better in the future.

Keith Weiss, Morgan Stanley.

Very nice quarter.

I'll keep on track with the very hard questions to answer.

In terms of the business model transition, we're seeing really good evidence of the net new subscriber add.

We're seeing good evidence you guys on target to the long-term billings targets.

One of the things that's helpful for us to get visibility into is that the target of uplift in customer value.

I was wondering if you could give us your view of how you're doing on that metric of whether you're seeing that movement, that upward movement in customer value that you guys were looking for?

What I would say is, I think the base is too small to know over the whole thing.

Remember, a lot of the guidance we gave around this was over a 5-year plan, and we're just at the very beginning of that.

So I'd say the anecdotal evidence is strong, but it's certainly not on a big enough sample size.

So I don't think we need any course correction.

I don't think it's anything different.

I just don't think it's big enough to really be certain.

Again, when we get to Investor Day, in October, be happy to try to detail some more of that about how we're doing according to plans.

Got it.

And then as a follow-up, at the end of last year, when we were first talking about the business model transition, you guys actually broke out in the guidance how much license revenue you thought was going to move into those term contracts and go onto the balance sheet.

This quarter, you called out what happened in the quarter that just passed, $10 million.

Do we have a better handle on what the cadence of that movement's going to be on a going forward basis?

Have you guys been able to get a little bit more visibility into the accounting there?

Yes.

We know a little bit more.

We certainly know on the enterprise side what's going on there.

And as we always say, just as a matter of historical fact, a lot of the contracts come up in Q4, so we'll see more move in Q4, just like we did in the prior Q4.

So there is going to be a seasonality to that.

As we get to the accounting on moving other parts of our business that were recognized upfront to a more ratable business model, we'll fill you in more as we go.

And yes, we have gotten a handle on that.

And in addition, there's been some complication, in that there have been some new accounting guidelines issued at the same time.

So they work together and we'll describe more of that.

Sue, you have anything you want to add there?

No.

I think you're right.

We will talk more about it at Investor Day, and we continue to do -- with our Finance team and the auditors to refine the understanding of that accounting around that ability.

Steve Ashley, Robert W. Baird.

I'd like to drill down on the AEC business.

To Brent's question earlier, you talked about that being strong, but really being two parts to it.

One, cyclical recovery, and two, just greater adoption by the contractors' part.

Just the cyclical part, wondering if you could talk about what you're seeing across the major geographies, the US, Europe and AsiaPac, and where are we in the cyclical recoveries in AEC by geography?

So what I would say, I think in all three geographies we are seeing strength.

A very informal way is just look at the cranes in every city you travel to.

Everywhere you go, you can see rather large commercial building going on, as well as a big investment in infrastructure.

I don't think we're at the top of the cycle yet.

We're somewhere on the way up.

It's been building for a while.

It continues to build.

I have no better way to forecast how long the uptick is going to be.

But it's been sustained, and right now, it seems strong and consistent across geographies.

Compared to last time, it feels healthier.

It doesn't have some of the bubble aspects as last time.

And so right now, we're feeling really good about what's going on.

And because it's been one on the coming after the 2008, 2009 downturn, and it hasn't gotten too hot too quickly, what we're seeing is companies' willingness to invest in retooling.

They recognize, in places where they haven't used technology and they're willing to spend money to really get on board.

And it's nice when it comes slowly enough that they can invest in new technology, train their teams, start to see the benefits, come back and reinvest again.

And that's what we're seeing this time.

And then with respect to Delcam, just wondering what kind of geographic breakdown that $11 million of revenue might have?

Not looking for exact numbers, just looking for some kind of subjective commentary on how that might have broken down by geo.

We weren't breaking it down.

And one thing to remember about when we look at things like acquisitions, the thing you have to remember about it is you also have the deferred revenue write-down, which may not be consistent across geographies.

But if I just want to speak more generally, the Delcam business is really strong in Europe.

And probably a better way to look at it Delcam is by the industries it serves.

And it really does well in aerospace and automotive.

There's certainly parts of industrial machinery and others, but the way to think about Delcam is competing on the very high end in automotive and aerospace machining.

Heather Bellini, Goldman Sachs.

It's Heather Bellini.

I have a couple questions for you, Carl and Sue.

The first one would be, you mentioned that maintenance attach has been higher than -- has been running, I guess, even higher than you expected.

I'm just wondering if you could give us an idea, in percentage terms, how much higher you've seen it thus far this year for the first half versus what you saw the last fiscal year.

And then the second question would be related to, can you give us rank order for us, top three things that drove the deferred upside?

It was much higher than the Street.

And then I guess the last question is more of a capital allocation question, Carl.

You have been very successful in the transition thus far.

And I know you have very big plans as for how you're going to exit a few years from now.

What's the current thought around being more aggressive and issuing debt or something of that nature in order to really take out a big plug of your stock, given you're executing on your plan so well?

Okay.

So I don't want to break out the percentage upside.

Sue, you want to break it out?

I can tell you the categories.

The categories in deferred are obviously maintenance, there's --

I'm sorry.

I was talking about the upside and attach rate first.

I'm sorry.

We don't break that out.

It's -- (multiple speakers).

Is it running like 20 points higher, is it running 10 points higher?

It's more -- it's not a specific number that we're looking for.

So what I'm going to say, Heather, it's meaningfully more.

We've seen it a couple quarters in a row.

But with the kind of attach rates we have, it's not going to be 20 points more, obviously.

Okay.

And then the other two questions, on what drove the deferred upside, if you could rank order?

So we don't break down the specifics of where the increase in deferred came from.

But the things in deferred, obviously consulting plays a part in it.

The maintenance is in there.

There's some support.

There's a variety of things in deferred.

And one of the big movers is consulting during the quarter, some of the deferred consulting services.

If I had to put the two things, I'd put it one, as consulting, and the other one is from regular maintenance, just the upside in maintenance drove that, as well.

On the capital allocation -- we've been working on a capital allocation plan.

We did an offering, it's probably a year or two ago now.

And we are always -- we just reviewed it with the Board, as well.

And we have nothing to announce at this point, but we're certainly looking at it and making some decisions about capital allocation.

Thank you.

Sterling Auty, JPMorgan.

Wanted to actually ask about suites.

It's been a while since we talked about the idea of what kind of average uplift are you getting out of suite sales versus a point product?

And more specifically, where are you seeing the strength in the suites, whether it's the highest end suite, the midrange or the low end?

All through this, it's really been the midrange suites that have done the best, which is where we want it to.

I would say we overestimated the people who would go to the low-end suites and we underestimated the two other categories of both, the medium and the high.

And we've seen more consistently going there.

We are getting the uplift.

It's one of those times in which our modeling ended up being very spot on.

And it's been very consistent over the last few years.

So we're seeing the uplift.

The strategy around the suites has worked really well and really according to plan.

And the follow-up is actually in the media and entertainment.

In the prepared remarks, you talked about some of the impact is end market demand.

Some of it is on the move to subscription.

How should we think about where the media and entertainment revenue line goes from here?

Is this something that actually could start to fade away?

No.

I think as we always try to distinguish in media and entertainment, there are two different parts of the businesses.

There is the creative finishing.

Creative finishing has been diminishing.

Some of it is just the nature of the market, and some of it has to do with the hardware component in there, which we no longer sell.

And then there's the other part, which is the software part of the business.

The software part of the business is good and healthy.

And we like all the dynamics in that part of the business.

What we see in the other part, less happy with.

But that's been going on for the last half-dozen years in the creative finishing part.

[Vicki Tella], Barclays.

One question and a follow-up, if I can.

First, Carl, nice growth in subscription billings.

As you think about the total billings guide for 10% to 12% growth this year, how do you think about the relative growth profiles between license billings and subscription billings?

I think what we're going to see in the short term is just because of, as we talked about, the activity in the channel, I think we will see subscription billings grow faster.

I think what you saw in the first two quarters is a good indicator.

As I pointed out 90 days ago, that Q3 may be the anomaly in the year.

And I think Q4 will be very strong in maintenance subscriptions once again.

Got it.

And then for those customers that are buying an upgrade while they can, before the deadline, can you remind us at what point will those same customers be forced to come back and either buy another perpetual license at full price, or maybe finally cave in for maintenance in order to stay current?

They really have to do -- if they buy an upgrade now, along with maintenance, they're on.

If they don't, they only have 'til the end of the year.

Well, so just to clarify that, so a customer --

The only other choice they have is just to buy-- if you don't want to get on maintenance, you buy a perpetual license now, you do not buy maintenance.

And then some number of years from now, when you're comfortable with the new product, you buy another perpetual license.

Okay.

I wasn't sure if there was a time period where Autodesk would stop supporting -- I think maybe in the past, it was after three years Autodesk would stop supporting some number of versions of its software?

But it sounds like it's more customer-based as to when --

And the truth of it is, there is a half-life to software, given the integration with enterprise systems and the data and the training.

The software becomes less valuable over time.

If you're not on the latest releases, it just becomes difficult to communicate with those folks in your ecosystem, and it just becomes difficult overall.

So the value of that license definitely diminishes over time.

Being more than three years back is not practical for most companies.

Steve Koenig, Wedbush Securities.

I've got one short question, then a slightly longer follow-up.

On the short question, could you give any color on that Q3 EPS guide looked a little light?

Yes.

So we tried to cover it a little bit.

At least in my opening commentary, I listed a whole host of reasons that are in there.

Some of it is the return of some expenses due to the over-performance.

So compared to last year, there's more in bonuses and other compensation-related expenses.

There's also continued investment in building up the infrastructure relationship, to Jay's question.

We talked about building back office systems, as well as a cloud infrastructure.

So we've been investing in that.

And then I detailed a number of other ones, but they're continued investments that we believe are really important for the future of the Company.

Okay.

That's great.

And I wanted to ask, as well, concerning Europe, if I had any concerns, it would be about recent data points out of Europe, where things seems to be weaker, not only in Eastern Europe, but even in Germany and Italy, et cetera.

And I'm wondering, you did make some comments that you saw weakness in certain parts of Europe.

Was this -- and obviously, this was offset in Q2.

Is this because license upgrades were strong, or were other regions so strong that they negated that?

And then I guess the other part of that question is, did you see anything changing there?

Did your linearity suggest anything, or in addition, how do you factor the recent macro data points in your guidance for Europe?

So a couple things.

So the only parts of Europe that I really called out as weak were Russia and the Ukraine.

And then the other part of EMEA was what's going on in the Middle East.

So those were the two areas.

What you would think of most of traditional Europe actually was performing strongly.

Just like you, when I saw the numbers out of Germany, I was surprised by it.

We don't see anything that suggests -- we haven't seen that at all.

So it was a little bit surprising to me, but we've generally taken it into account.

Kash Rangan, Merrill Lynch.

Carl, how confident are you that having a very limited window for selling upgrades may not -- and the strength, as impressive as you're seeing in the quarter -- is not coming at the expense of what would have been licensed business next year, or perhaps even subscription business?

Because I would assume that this getting on the update and getting on maintenance would certainly take the pressure off of the customer to consider a new license or a subscription.

And as a follow-up, I think it's almost a year since the launch of the subscription initiative.

Is it because the Company is still in a dual-mode, selling licenses and subscription, that we're not -- as happy as you are with the subscription update, clearly it's doing better than your internal forecast.

But I would assume that, given such a big change, that we would see Adobe type of a whiz bang effect right out of the gate.

But is it because you're selling the license and the subscription that we've not seen that big break out this year?

Thank you.

Actually, all of the guidance that we did, we talked about five years.

And as you just referenced Adobe, I've said this before, while there's certainly similarities between Autodesk and Adobe, there's also a big difference.

Adobe went and made the more dramatic step of eliminating perpetual licenses for most of their desktop products.

And I think that accounts for the difference on one side.

On the other side is, we had already a very large installed subscriber base, as it relates to maintenance, relative to what Adobe had.

So the starting points are a little bit different, and the actions we've taken.

We are still selling perpetual licenses and they're not.

So I don't think looking directly -- of laying one graph over the other -- does much good.

On the other hand, I think the general trends that both us and Adobe -- and I think others in the traditional desktop software business are looking at -- are all the same things.

So if you just step back for a second and say, what's this going to look like in the future?

Three years from now, it'll be surprising to me if anybody's really running very much perpetual desktop software.

And the impact of the upgrades, Carl, to what extent do you think it might have been at the expense of next year's demand for licenses and subscriptions, or maybe not, but maybe strong cost --

I don't think the upgrades have much to do with next year's subscriptions.

Some of the people are certainly deciding now to upgrade and buy their licenses ahead of that change.

There's always a small effect.

But as we talked about before, there will be a new emphasis next year on something else.

And it's a large installed base, and we'll tap into a different part of it and hopefully motivate it appropriately.

The other thing that I would add is as we're seeing the folks upgrading, we are seeing higher attach rates for these customers.

And getting closer to Autodesk through being on a maintenance subscription is a good lean in for us marketing other products for them and eventually priming them for the desktop subscriptions and the cloud.

(Operator Instructions)

Matt Williams, Evercore.

Most of my questions have been answered at this point.

But Carl, I'm just wondering if you could provide a little bit of color on maybe what you're seeing out of the consumer?

I know a lot of the focus has been on the enterprise with what you're doing, but I think longer-term you guys have highlighted quite an opportunity on the consumer side.

And I was just wondering if you could give an update there?

Sure.

What's going on with the consumer is really exciting.

We're getting close to more than 200 million users in the consumer space and over 50 million monthly unique users in the consumer space.

So this is turning into something substantial.

We continue to do more in that market and we're succeeding with that.

We're also bridging the gap between some of the consumer stuff.

or some of the things that have been delayed in the consumer market and what's going on in the more industrial markets.

One of the things I didn't touch upon but we did talk about, we did announce that we were doing a 3-D printer, that Autodesk was actually designing and manufacturing a 3-D printer.

That's going really well.

I'm very pleased with the progress that we've had to date.

I'm sure we'll be showing you the 3-D printer in October.

Prints are coming out of it all day long and it's really exciting.

So while I'm excited about the consumer opportunity in and of itself, and we've just spent the last 50 minutes talking about the more industrial part, I think there's this interesting segment in the middle, as well, that we see developing on the small new industrial that transitions out of the consumer.

But all signs are really positive with the consumer; and in many ways, they've been a great leading indicator of the other stuff, much more willing to adopt cloud and mobile stuff ahead of the enterprise.

Great.

That's helpful.

I appreciate it.

And maybe just one quick follow-up.

I know the channel's been focused on really getting customers current on subscription.

As we start to look into next year, when the upgrade option goes away and the focus shifts a little bit more towards the desktop subscription and the cloud offering.

What work or investment do you need to do to make sure the channel's ready to really help drive growth in those areas, as well?

I don't think there's anything dramatic going on that needs to happen with the channel.

I think we work really closely with our channel partners.

When I'm able to report really good results like this quarter, it is the result of the combined activity of all our great channel partners.

So they're doing really well.

They're really optimistic.

One thing that did surprise me this quarter was, I did notice in your guys' channel checks not actually picking up on the strength in the quarter.

So there's some level of disconnect that I don't quite understand yet that I'm looking to probe into a little bit more.

But our channel partners are really optimistic about the rest of the year and going into next year.

I'm surprised that didn't come through in some of the conversations with you, but it certainly came through in the results.

So I think you'll see only small incremental changes in how we work with our channel partners.

Great.

Thanks, and congrats on the quarter.

Okay.

Thanks very much.

Thank you.

And I'm not showing any further questions.

I would like to turn the call back to David Gennarelli for any further remarks.

Okay.

Well, that concludes our call today.

As Carl mentioned, we have our Investor Day coming up this October 1 at our gallery in San Francisco.

If you have not signed up for that already, please send me an e-mail or call me at 415-507-6033.

And that concludes our call today.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program.

You may all disconnect.

Everyone, have a great day.