Autodesk Inc (ADSK) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-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, Senior Director of Investor Relations.

Please go ahead, sir.

Thanks, operator.

Good afternoon.

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

Also on the line today is Carl Bass, our Chief Executive Officer, and Scott Herren, our CFO.

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 fourth-quarter and full year FY15; long-term financial model guidance, including billings, subscriptions and recurring revenue growth; the factors we used to estimated our guidance; new business model introductions; new product and suite releases; market adoption and expected growth rates; business execution; business prospects and financial results; our market opportunities and strategies, including our desktop subscription offerings plan; our transition to cloud and mobile computing; trends and sales initiatives for our products; and trends in various geographies and industries.

We caution you that such statements reflect our best judgment based on factors 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 the FY14, our Form 10-Q for the periods ended April 30 and July 31, 2014, 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 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 numerical or growth changes as we discuss our financial performance, and unless otherwise noted each such references represents a year-on-year comparison.

Now I would like to turn the call over to Carl.

Thanks, Dave.

Good afternoon, everyone.

Much like last quarter, our third-quarter results reflect strength across industries, geographies and products.

We continue to make meaningful progress in our business model transition to a more recurring subscription-based business, adding approximately 121,000 subscriptions, which includes 25,000 Delcam subscriptions that were not previously captured.

As a result, the third [quarter] revenue increased significantly to a record $1 billion, a milestone for Autodesk.

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

Similar to last quarter, the areas in which we are seeing weakness are those affected by geopolitical turmoil.

We also experienced strength in transaction greater than $1 million.

These large deals were spread across all the major geographies and fairly evenly split between AEC and manufacturing.

While the number of these large transactions increased nearly 60%, the total value of these large transactions increased over 200%.

Our investments in enterprise sales and consulting services have directly led to the increase in large deals and the size of these transactions.

Many of these large deals were flexible enterprise licensing agreements.

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

These agreements are also contributing to our subscription growth as we are experiencing increased use of our cloud services.

Third-quarter license revenue would have been approximately $26 million higher before the impact of flexible enterprise license agreements.

The environments for global construction, coupled with the continued customer excitement for our desktop and cloud-based BIM tools resulted in a strong Q3 for our AEC business.

Anchored by Revit, our BIM portfolio continues to resonate with customers across segments, but especially in construction.

We quoted several large deals with construction companies that included BIM 360, which continues to be one of Autodesk's fastest growing products ever.

AEC Suites grew 23%.

The large AEC deals that we closed during the quarter were across all geographies, including deals with 4 of the top 25 E&R design firms.

Our manufacturing team delivered strong growth of 20% in Q3.

Growth was driven by wins in large verticals including industrial machinery, consumer products and automotive.

Strength in our core product Design Suite is leading the growth.

But we are really encouraged by what we are seeing with our cloud-based products.

We are particularly pleased with the customer response to Fusion 360.

It is the next-generation cloud-based CAD system for mechanical engineers and industrial designers.

We put Fusion 360 on the Mac app store last quarter and within a few days there were over 100,000 downloads.

Not only are small customers using it, but we are increasingly seeing large customers adopt it, often replacing their traditional desktop tools.

With PLM 360, we added many new customers.

And perhaps even more encouraging, we continue to the customers returning to purchase additional seats.

Three of our top five PLM 360 deals were based in EMEA where we are showing a lot of progress.

We also closed our largest-ever manufacturing deal in Q3.

This was an eight-figure transaction covering design, simulation, data management and consulting.

It was also our biggest PLM 360 win to date.

The customer is a Fortune 500 industrial and technology company.

It's a story we've heard for years.

They've been struggling with their legacy PLM system and began looking for a cost-effective scalable alternative that would integrate easily with their other business systems.

Rather than spending millions more dollars on their old PLM system, they are using PLM 360.

We believe this is only the beginning of the cloud-based PLM revolution.

It is easier to deploy, easier to configure and a lot less expensive than legacy PLM systems.

This quarter we announced our plan to introduce cloud-based data management to complement the existing cloud-based PLM.

Our business model transition is gaining momentum.

We've added 285,000 subscriptions through the first three quarters of this year.

This has been a fantastic start that is well ahead of our initial expectations.

The discontinuation of the upgrade program at the end of this fiscal year is helping drive our medium subscriber [count].

It's not surprising that we are seeing a lot of customers take advantage of the upgrade program.

And we are experiencing a higher maintenance subscription attach rate with these upgrades.

What we are really encouraged about is the contribution we're getting from both desktop and cloud subscriptions.

AutoCAD LT has quickly become our leading desktop subscription offering.

As we mentioned at our Investor Day event last month, a meaningful portion of our desktop subscription customers are new to Autodesk, and about half are subscribing by purchasing through our eStore.

Those are great early trends.

Cloud subscriber growth remains very high and similar to desktop subscription.

It's bringing a significant number of new users to Autodesk.

Our cloud-based project collaboration tool, A360, is still in limited release.

And we are very encouraged by some of the early indicators for that product.

Our mobile and cloud-based products are being adopted by our customers, which validates the investments and focus we've put into these products.

Autodesk has moved quickly to establish a leadership position in cloud and mobile.

And in many ways, we're just getting started.

The early success we've experienced with our business model transition has, in part, led us to accelerate the process.

As we outlined last month, we plan to stop selling new perpetual offerings over the next 12 to 24 months.

Stay tuned for more details around this over the coming months as we start to discuss specifics with our customers and channel partners regarding these plans.

Given our strong Q3 performance, we've raised our FY15 guidance ranges for billings, revenue and subscriptions.

The advances we've been making in cloud and mobile are just beginning to show up in these metrics.

Earlier this year I called out that operating margin is muted for a number of reasons, including the impact from the business model transition, investments we're making in our cloud infrastructure, the dilutive effect of the Delcam acquisition, as well as incremental investment spending on key initiatives.

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

Lastly, I'm very pleased that earlier this month Scott Herren joined Autodesk as our CFO and is joining me on this call.

Scott brings with him a broad mix of financial, sales and product management experience.

His leadership experience at Citrix will benefit Autodesk in our model transition over the coming years.

I'd like to thank Sue Pirri who did a great job leading our finance organization during the interim, as well as the rest of the finance team.

To wrap things up, we were really pleased with our overall results in Q3.

The year has shaped up to be stronger than our initial view, and we remain confident in our long-term business model transition goals of 12% billing CAGR, 20% more customer value, 50% more subscriptions, and 30% operating margins.

As you know, a key element of our model transition is ending perpetual offerings over the next 12 to 24 months.

While we are not providing FY16 guidance at this time, keep in mind that doing so will impact the top line and profitability in the short term.

As always, we will monitor global economic conditions as well as currency movements as we head toward FY16.

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 would now like to open the call up for questions.

(Operator Instructions)

Brent Thill from UBS.

Scott, welcome.

Carl, the last couple quarters on the billings you've obviously done really well, mid 20% growth.

Yet, the fiscal guide at 15% to 17% would just imply a stronger falloff in the next quarter.

What's your sense in terms of, is that just a conservative view on your behalf for the fourth quarter?

I'm just curious if that eight-figure deal, how that is going to be recognized.

Yes.

We think the deal is a ratable deal.

So, it will be taken over a longer period of time.

The one thing we said about the changing model during this year is that the promotional incentives got weaker towards the end of the year.

So, while we've exceeded it for all the quarters so far, we're always a little bit cautious because the incentives to do so go down.

As we get to the fourth quarter, the incentive is eliminated, except for the fact that it's expiring.

There's less financial incentive, there's greater time-based pressure.

Trying to wrap those two together, that's where we ended up as guidance.

Thank you.

Keith Weiss from Morgan Stanley.

Really impressive quarter.

It looks like really strong progress in the business model transition.

I was wondering if we could cut off at the head what it's going to be, probably the biggest barricades out there.

How do we know that we are not pulling forward a potential demand out of FY16 with this strength this year?

How do you get comfortable with that you're going to be able to sustain the pace of maybe, like, billings growth, if you will, as we go through further into this business model transition?

The first one for me, Keith, is getting more people on maintenance subscription is not a pull through.

I've actually had a little bit of a hard time just reckoning about that, because we customers who were not on maintenance who are now on maintenance.

It's a big thing.

Any way I look at it, I think that's the best possible outcome for us, to get a non-subscriber on subscription.

We've also talked about, as we're moving forward, that, while this is a promotion for this year, we've talked a lot about what we're going to do next year in terms of ending perpetual licenses.

In many ways, that's probably a bigger incentive for our customers to do something differently.

I don't know if I can help you take the bear and put it up on the wall, mount it and stuff it, but I think some of the arguments out there are trying to extrapolate from too few facts, or to take this one thing and say -- this is the only incentive program that will work with our customers.

I don't really think that's true.

Got it.

If I could potentially sneak one last one in -- just in terms of the mix of subscriptions that we are seeing, is it remaining relatively constant with the strong heavily weighting towards the maintenance subscriptions?

Or are you starting to see a richer mix of desktop subscriptions in there?

It's richer, but it's still heavily subscription, because that's the one being promoted.

And the others are off small bases.

We like the trajectory of the other ones, but in terms of meaningful financial contribution, it's maintenance.

While we've said it may slow down going into the fourth quarter, I think the proportion will remain somewhat constant.

Got it.

Excellent.

Nice quarter.

Walter Pritchard from Citi.

Just a question as it relates to the token-related deals.

It sounded like in the first couple quarters of the year you didn't have as much business go that way.

In the third quarter, you had about $26 million that was a headwind.

And then it sounds like last year you had some impact.

And I'm wondering if you could help us understand how you expect that business to ramp in the fourth quarter.

And then do we expect to see a more significant uptick in that revenue stream as you go into FY16?

Walter, let me start at the back end of that questions.

I think we've demonstrated over the last few years that this investment in enterprise sales and consulting services has really paid off.

And we tried to demonstrate a little bit at Investor Day, where we showed you not only our customers paying more, they are using more.

This has been a truly win-win situation.

We're going to continue to invest in it.

And even to our channel partners, the thing I say all the time is, when we win these big enterprise accounts, it's good for the whole ecosystem.

So, this is not at the expense of our channel partners.

Quite the contrary, it is reinforcing business for our channel partners.

We're going to continue to invest in it.

We think we've barely tapped into it.

We outlined that we've had in the dozens of accounts that we are talking to with this.

There's probably upwards of 1,000 customers who will eventually move this way.

We are going to keep doing it.

One of the things, also, about it, just to the timing that you talked about, we have always had a lot of these deals in Q4.

Last year we made a conscious effort to move some of them into Q3.

For a number of reasons we would like to spread it more fully throughout the year, but it is not fully within our control.

So, I suspect it will always be a little bit back end loaded throughout the year.

But, just in general, the two takeaways are we are going to continue to invest because we think it's really good business.

And the second thing is this level of flexibility with products is something we hope to offer to a broader range of our customers, not just the top 1,000 accounts.

Thanks, Carl.

Then just a question for Scott.

Welcome aboard -- and it may be too early to ask you this question and you don't have all the history.

But, you raised the revenue guide range for the year, and the operating margin guide for the year is the lower half of where you were talking before.

You mentioned that you have more commissions being paid out.

And we've seen this over time with Autodesk, where if the performance is good, it impinges on the margin in the near term.

Can you talk about how much of what's going on on the incremental expense side here in the guide now has to do with that versus investments that you have to make more for the longer term?

Walt, thanks.

It's both.

We are investing in cloud infrastructure buildout for the business model.

We're investing in the back office system so it can handle the higher volume of transactions.

Delcam is in there, which is hitting the off margin year on year.

I think the one unique thing that we see in Q4 is some of the volume-related things that hit Q4 around both commissions and variable comp for the year.

So, I don't think it makes sense to break that out, but I think the way you need to think about it is it's a combination of both.

The volume-related things in Q4 and some of those investment in the business model transition, frankly, will continue in the next year.

Okay.

Thank you.

Brendan Barnicle from Pacific Crest Securities.

Scott, just following up on Walter's question, can we assume that margins have bottomed here?

Or, given the model transition, particularly the end of perpetual coming sometime over the next 12 to 24 months, should we expect the margins still go lower still?

Brendan, we're not giving guidance right now for FY16 and beyond.

As you can appreciate, we are in the midst of our FY16 planning right now.

So, I'm not at liberty at this point to talk about some of the longer-term trends.

As I think about how we think about modeling licenses, and the perpetual potentially going away, is there a point next year that we may have a quarter where that license line just is at zero, and so we should be preparing the models for that?

I'll start and then I'll hand back off to Carl on this.

Whether it's next year or beyond, I think what we've said is we're planning to end of life perpetual license in the next 12 to 24 months.

And that, of course, is a big driver of that license line.

Yes.

And the only thing I would add and try to give you a little bit more color when a number of you were here during investor day is, one of the variables that we have, the knobs and dials around this, are whether we do all products at the same time or stagger it, and whether we do all geographies at the same time or not.

So, we do have some level of control over those things.

What we were more indicating is directionally by the end of the 24 months.

So, I think in some ways it would just be unusual operationally to drive to a place where we get to zero license revenue in a quarter.

But directionally, yes, I think you clearly understand where we're headed.

Great.

And one last one, Carl, as you have more of these eight-figure deals, like that large on that you mentioned that you will be recognizing over time, does it make sense at some point to share off-balance sheet bookings type number?

I'll let Scott -- welcome, Scott.

(laughter).

Yes, thanks for that.

Brendan, I think it's fairly straightforward.

I know it's a calculation that gets done today and I think it's not that difficult to pull it right out of the change in deferred revenue plus the announced revenue.

So, I don't know that it's that difficult a metric.

It is something that we will talk about, if it makes sense, besides guiding to a growth range to start to guide to an absolute number and then report on that.

No, Scott, I was referencing those deals where you don't bill all in advance, so we don't see it on the deferred revenue.

You have some that's off balance sheet.

Oh, I'm sorry.

You are talking about the enterprise agreements, specifically?

Right.

As you do more of those and they become more material, is that going to be a metric we should start to look at, like we do for Salesforce or for Microsoft's contact on build?

I don't actually have a plan, I would say.

It feels to me it's a bit awkward to announce that because all the revenue is there.

All those enterprise agreements are captured, or most of them are captured, in the deferred revenue balance.

So, it feels a bit awkward that we split it out today.

But I don't have a plan to either start tp continue to be more explicit on that are not.

If it turns out that it's somehow so opaque that you are having trouble understanding it, then we will provide some clues to how to do that.

I hope it becomes a problem.

Great.

Thanks a lot.

Heather Bellini from Goldman Sachs.

Carl, at the Investor Day last month, you mentioned that in FY16, you thought that you could add at least as many subs in that period as you would add in FY15.

I'm just wondering, would you still say that's possible given your significant outperformance and your new sub guidance for this year?

And then I just had a follow-up.

I know what you are trying to do.

You're trying to trick me into giving guidance for next year.

(laughter)

We would not do that.

You know what?

I feel really good about the trajectory of the subs.

I'd be a little hesitant to start guiding for subs for next year.

But right now, all I would say is all the curves on the subs look really good.

Three months from now, in February, we'll start trying to break it out.

There's nothing here that I see going in the wrong direction, but we'll just wait the three months.

Okay.

And then the follow-up question was, I know you all have been working on some initiatives to help drive renewal rates higher.

And I'm just wondering, if you could share with us, are you seeing some of those initiatives start to pay off, and as a result how have your renewal rates been trending, because I know that's big for Q4?

The renewal rates are definitely being driven higher.

Some is being driven programmatically, like we talked about with the end of upgrades, and some is just more attention to detail, if you will, about the nonrenewals.

So, we've done a better job.

We've put more systems in place to track that.

We've incented our partners and ourselves to do it.

We are seeing it, it's edging up in small numbers, because we are at a relatively high number, but it's still a good direction and material.

Great, thank you.

Gregg Moskowitz from Cowen and Company.

First question is for Carl.

Just wondering if you saw any change this quarter with regard to the mix of new versus existing subscribers across both desktop, as well as cloud.

No.

A lot of the trends we outlined in October are continuing.

I think they'll be relatively stable.

But we will update them and if we see a material change we'll talk about it.

But we're learning as we go, too.

Okay, perfect.

And, Scott, welcome to Autodesk.

I wanted to ask where we are right now when it comes to the investments that you alluded to in back office and cloud infrastructure.

When we look out over the next, call it, 12 to 18 months, how much of this lies ahead versus what you have done already?

It's day 14 for me today.

So, what I'd say on that front is, obviously, those investments didn't start just this quarter.

They've been in flight.

But I think it's a significant transition, both in building out the cloud infrastructure for the world that we envision around desktop subscriptions, as well as building out the back office systems to handle the significantly higher volume of transactions.

It's still early innings on those investments.

Okay.

Thank you.

Saket Kalia, Barclays.

Scott, look forward to working with you.

First, I realize it's still early to provide guidance for FY16, but just given the moves that we've had in the euro and yen, can you just talk about how FX exposure might look next year compared to what you've hedged?

As we talked about, we always have the rolling hedge.

We continue to have that.

But FX will definitely be a headwind next year, (inaudible) moves the other way.

If it just stays where it is today, it's definitely a headwind.

It gets more significant as we go out to the end of next year versus Q1 of next year.

Yes, if you look at our hedge program, it is layered out in time.

So, obviously as the year goes on, the exposure from today goes up.

But I'd say you can look at our revenue mix, you can see where we are.

Obviously, the euro is a significant currency for us, the yen is a significant currency for us.

It's something that we'll take into account when we do provide guidance for FY16.

Got it.

And then, Carl, I think you said last quarter that the third quarter was a little bit slower in terms of subscribers coming from maintenance renewals compared to the fourth quarter.

Is that still the case?

No, I don't think I said that.

If I said that, maybe I misspoke.

I thought it was the other way.

Yes.

What I said, generally speaking, what I thought is we would see in Q3 more subscribers in the small, medium part of our business.

And what we would see is more enterprise agreements in Q4.

That was really our best guesstimate, as I said, on those two factors of the time-based nature of the expiring, yet the financial incentives were going to zero.

Okay.

Got it.

Thanks for clarifying.

Sterling Auty from JPMorgan.

On the enterprise flexible licensing agreements that you've got, can you give us a sense, what's the average duration on those types of deals?

So, in other words, when would we expect the deals you did this quarter to start coming back up for renewal?

I'm not sure if I can give you the average but typical is a three-year agreement.

That's a very typical agreement, is a three-year.

And I think, Sterling, bear in mind, these deals are largely ratable in terms of revenue.

So, they will drive a bit of lumpiness in the billing stream, it will be a little bit smoother on the revenue stream.

Sure.

Then can you give us a sense of the linearity of the subscribers that you added through the quarter?

Was it fairly linear or did you see any particular pattern through the quarter?

I didn't see anything that substantially -- if you take out the Delcam one, which is a one-time thing.

But if you look at the organic, it tracks pretty closely to the way you would have seen with seasonality around revenue, historically.

So, a little bit heavier in the last month of the quarter, but not tremendously so.

Okay.

And then last question -- I know you're not giving us when in the 12 to 24 months you are going to eliminate the perpetual licensing, but can you give us some of the factors that are going into your decision process?

Yes.

We're looking at a number of things.

We are working the program with our customers.

We've engaged them and are talking heavily with them.

We're working with our partners.

What we intended to do, as opposed to the rip off the band-aid strategy, was we were going to work through this slowly and deliberately.

We're making sure we keep the business as intact as possible as we move through what's a fairly big transition.

Got it.

Thank you.

Jay Vleeschhouwer from Griffin Securities.

Carl, I'd like to ask first about the famous $2.9 million active base number from the analyst meeting -- that is, customers who've purchased product but haven't gone on maintenance.

By our math the largest piece of that, the three main buckets, is customers who upgraded since FY10 through this year but didn't, for some reason, take maintenance, as well.

Could you talk about why those customers would not have taken maintenance in spite of all the promotions and inducements you've had over the years for them to do so when they upgraded?

And how do you now get them to convert?

Then a follow-up.

When you go to Best Buy do you buy that service contract, Jay?

I think there are a lot of things that we do.

If they ask me one more time at checkout if I want that service contract, I'm going to shoot them.

I think it's the same thing.

Some people -- remember -- and we've talked about this since we introduced these programs -- many of our customers have been buying for decades.

They have a certain buying behavior.

We also, we've talked about, depending on the product they may feel like the maintenance subscription is more or less valuable.

The two biggest factors we see are the lower-cost products generally have lower attach and renewal rates, and the other one is geographically there's wide variance between, generally speaking, developed countries and emerging economies.

So, those are the two biggest differences.

As we move forward, we hope to eliminate that choice.

By the combination of this year's program and next year's program, or over the next two-year program, we're going to get to a place where customers are on a program with us.

Okay.

The follow-up is, at the analyst meeting you mentioned value per account as an important metric.

That's come up in some conversations since then.

Would a corollary to that be that at some point Autodesk would introduce a single, quote, Autodesk account, end quote, as a kind of uber suite for access, and particularly for driving the flex licenses down market into SMB?

Would that be some way that you could approach combining flex licenses with making it more broadly available or appealing to the smaller accounts?

Let me break those two questions, which somehow you managed to put into one.

I'm still looking for the connection.

Let me just separate it so that it helps my feeble mind process it.

On the ARPU conversation, we talked about value per account.

There's been some people have asked us about ARPU.

What we've said about ARPU, because of the A in there, is it's going to be really mix sensitive, and we have a wide range that's going into that.

We do think the distribution of it will be more helpful, or some categorization or bucketing of it is better.

And that I think if you do it by account, it's a way of normalizing that is not nearly as mix sensitive.

So, that's what we've thought about there.

Second question, in my mind, is about -- what I said is we've seen tremendous reception from the enterprise licenses.

Customers truly appreciate the flexibility and the access to pieces of software they might not have had.

We think many of our small and medium business customers will want the same thing.

You mentioned the uber suite.

I think we will introduce something that is similar to giving people access to the portfolio for a fixed price.

We're not going to announce anything today, but it's certainly directionally where we're headed.

Again, we think that this is a win for everyone involved.

And at least what we've been able to manage more closely in the enterprise space, we will first broaden it there and then secondarily introduce it to the more general population.

Okay.

Thank you.

(Operator Instructions)

Steve Ashley from Robert W Baird.

I'd just like to go back to the success you're having with the large deals and just maybe try to get some more color on how you're driving that.

I think you mentioned that some of it is your consulting services.

But if you could just maybe walk us through how you are having success in driving those here with this go-to-market, that would be great.

Sure, Steve.

I scratch my head, too -- if you are having such great success with it now, what took you so long?

One thing that we have seen very clearly is the buildout of capabilities of our consulting services have mattered a lot.

It's one thing to provide access to people, but if you really want to drive usage and adoption, we need people on-site to do that, particularly in large, complex organizations.

So, it's large complex organizations that already have complicated business processes in hand, or in ones like, for example, in some of the engineering construction firms where they are going through a transformation adopting BIM and they need help understanding how to best bring that into their business.

The difference is in places where we have consulting versus we don't are dramatic in terms of their adoption and in terms of the increase in value of those contracts when they get renewed.

The second thing is, I think this is just one of those things, as we began to have a bigger major account presence and listened to our customers, we realized that that was happening simultaneously with the buildout of a much bigger and broader product portfolio.

So, if you were to roll this back five years, part of the thing was we just didn't have as rich a set offerings to go in with.

We now have a much richer set of offerings.

That's true both in our AEC, our RM&E and our manufacturing products.

And we have the people who can deliver what's really needed for the customer to be successful.

Probably the third factor is slightly more environmental, in which there has been a conditioning in the buyers of software to look at more term-based models, to look at more consumption-based models.

People are much more comfortable with that.

I think when we first started there was a little bit of a negative reaction in certain accounts.

I think what's happened, just to give you the insight and the color commentary here, is that what has happened in a number of these accounts is that people are happier, they're okay paying more if they feel like the software is really being used.

There was always this suspicion that they were buying things that were not being fully utilized.

But now, because of the tokens, they feel like it's being used.

The secondary dynamic that goes on within these accounts is that they can do some kind of an internal accounting about it and charge back to the cost centers using it.

I think the combination of those two things plus the accessibility of the broader portfolio is winning over.

Like we showed you at Investor Day, it's pretty dramatic, the increase in usage and of accompanying satisfaction as a result of the customers who have done this.

And just a quick follow-up to Sterling's earlier question on the enterprise flexible license agreements.

He asked about the duration.

He said that while you didn't have it at your fingertips, but a lot of the deals are three years.

Is the mechanics here that after a year you go in and do a true-up, and there is some maybe adjustment made, or remuneration to you from these contracts?

Essentially, there's just a constant accounting in which people have tokens that they burn off.

They buy what they think they need and they eventually run out and have to buy more, a little bit more than a true-up.

It's better just thinking of it as you just bought a bunch of tokens.

I would say most people so far have guesstimated on the low side of what they need.

And the reason why they guesstimated on the low side is they go out, they make the software available to the broader community, there's more usage of it, and they end up having to go back and buy more tokens sooner than they would have otherwise thought they needed to.

Very helpful.

Thank you.

Matt Hedberg from RBC Capital Markets.

I wanted to ask about the geographies here.

Obviously EMEA was your strongest geo.

Carl, I'm wondering, was the strength there Autodesk-specific with the transition ongoing here, or are you seeing a different environment there than what some of the macro indicators might imply?

And then also APAC, obviously grew 10%, too, in constant currency.

Maybe a little additional color there.

Let me just use this to riff on the broader thing I'm seeing geographically, which is the Americas is strong.

There are a lot of good secular trends in the US.

They remain strong.

The places like the Middle East and Russia, Russia, particularly, might even be down by half in Russia over comparable periods.

Just to put it in perspective, we've always been very interested in the emerging economies.

But none of them are bigger -- they're in the low single-digit percentages -- none is bigger than 3% of our revenue.

But Russia and the Middle East have been clearly weak.

The other places have been okay.

There's a little bit of weakness that we've detected in Japan, coupled with a weakening of the currency.

The currency is as big an effect right now as the actual business.

Europe in the middle of this quarter it seemed like there was a lot of consternation about Europe.

I put it in not the strength of the US, but relatively strong, and even some signs of increasing strength in Southern Europe, which I don't think I've been able to say for probably seven years.

That's very helpful.

Then maybe a quick follow up.

At analyst day you talked about instituting a new campaign to lower the margin dollars on license sales, increase them on a desktop sub.

I'm curious, you're 20 days into this, what's been some of the initial feedback from the field on some of these changes?

We're just beginning and we said we would just start with LT.

One of the things, just in general, that people should think about with this, LT is a very different product than our other products.

It's a good experimentation, it's a high-volume products for us.

And so far, so good in terms of the reception to it.

But also, it goes through, at least on a mix basis, a different channel than some of our other products.

Just in general, when people look at this, I would say what people have to understand is that there is a difference in products between LT and others.

The other thing I would say, is that we do this, just to keep in mind, the programs you put in place, either when the programs are new or the products are new, are considerably different than what you do as they mature.

So, there's a fair amount of flexibility.

There are a number of degrees of freedom, depending on the product and the channel and the maturity of the product.

Right now -- long-winded answer -- the short answer is that the LT one is fine and you will see us continue to do this as we work our way through the entire portfolio.

Very helpful.

Congratulations on the quarter.

Richard Davis from Canaccord.

You bought, I was trying to remember, Moldflow back in, I think, 2008, Blue Ridge back in 2011, and I can't remember if Delcam had much simulation.

Anyway, what are your thoughts with regard to organic and even inorganic growth in simulation, because it's a less iterative design tool and it works perfectly, I would think, with that burst capacity relationship you have with Amazon Cloud.

Thanks.

Two things there.

One is, we've always talked about the cloud being good for two reasons.

One is for these computational intensive tasks and the other is really as the central coordinating hub for collaboration.

Things like finite element analysis, computational fluid dynamics are perfect for cloud-based computing.

It works really well for those, as you say, burst, high peak demand needs.

We see it as being really good for that.

It's also particularly, as you move from the desk of the analyst to that of the engineer, in many large companies they build out computing centers for the analysts, but not for every engineer.

So, it gives the access for the average engineer to much more computing capability.

We're really happy with what we've seen.

And I think the big difference when you look at us versus other company in analysis and simulation is we're just much more focused on the engineer than the analyst.

And some of the things we're doing with the products should be viewed through that lens.

Got it.

Thanks.

Kash Rangan, Merrill Lynch.

Carl, when I look at your business model transition and follow along the commentary over the last couple of quarters, it feels like a lot of the upside in deferred revenue seems to be predominantly coming from flexible licensing agreements and also catch up maintenance.

So, where is the real business model transition happening here with respect to this Adobe-like desktop subs that you would like to pursue?

And as it relates to that, when you look at FY18, if the Company is going to be ending perpetual licenses, which is perfect, how should we think about how you get to 30% non-GAAP operating, because it feels like the license is going away.

That seems like a steep target.

Two things, Kash.

On your first question, I would say, for example, forgetting everything else about the business model transition, I can't think of a healthier way to grow your business than selling more value to your best customers.

It's just as straightforward as that.

Call it token-based or flexible licensing.

Just the idea that your best customers are buying more products from you seems like everything about it is good.

In some ways, it answers your question because it's the most sustainable thing, is having these customers who want more products from you and are paying you more money for it.

The second thing is, I think a number of people have looked and tried to draw conclusions too early in terms of the business model transition.

What you saw this year was the end of a multi-year program to eliminate upgrades.

What we are heading into is a multi-year program to end perpetual licenses.

At the end of that, the Company is in a distinctly different place than it was when entering, where the primary need for your customers to buy things were perpetual licenses with upgrades.

And you come out the other end and everyone is in a recurring, ratable relationship with you.

So, I see that is fundamentally changing it.

The difference -- and I've said this -- whether it's Adobe or Microsoft or anyone else, or any of the born-in-the-cloud SaaS companies, we all end up in an identical place.

You roll out three, four years and there will be virtually no difference whether you are talking about Salesforce or NetSuite veiled forth or NetSuite or Workday or Autodesk or Intuit or Adobe or Microsoft.

It's the software industry that's changing.

We are all delivering software on the same platforms in the same way.

Our customers, truthfully, are pushing us to buy it in the same way.

I think some of the distinctions in the transition may be trying to put too fine a filter on it, and try and understand things that may not look identical in year two, or year two and a half versus something else.

But if you just step back and look at the long term and you say, companies end up in the same place, we're all selling enterprise applications that are centered around cloud, social and mobile, and the business relationship with the customer will be a long-term subscription model.

So, in that way, I think is the easiest way to see the similarities.

And on the implication for margins, Carl, certainly this is (multiple speakers) transition.

But what I struggled with is as licenses fall off, the subscriptions, you have to cut a lot of costs to get to 30% non-GAAP margins versus the 13%.

Just wondering what drives that.

Thank you so much.

The first thing is, I think if you look over any period of time, I would say there are two different things.

One I'll get to, where costs have to change.

But the first one is, the amount of revenue over time is the same, if not more.

We saw that with the enterprise licenses.

Customers are paying us more even though there are no more upfront licenses.

And, so, the lifetime value or the value over a fixed period of time is actually higher.

I think that same trend that we see with our enterprise customers, we'll see with our other customers.

As I've been very willing to say repeatedly, I think the two areas where we will see a change is, one is our R&D spend is relatively high right now.

We are supporting two different technology models -- a traditional desktop model and we're building out for a SaaS infrastructure.

So, we're doing development infrastructure costs on both simultaneously.

The second one is our sales and marketing is high when you consider the total between what we spend and our various channel partners spend on sales and marketing.

So, I think if you combine those two, both of those as a percentage, and certainly if you do the calculation on the overall eco system, as opposed to us, goes down over time, and that's how you get to 30%-plus.

Matt Williams from Evercore.

Scott, welcome aboard.

Carl, just quickly, on the partner side of things, I'm just wondering if you could give us an update on partner interest around rentals and cloud.

I saw a press release earlier today around the PLM business and a partner that was announced there.

And I'm just wondering what sort of traction you're seeing within the partner base around the PLM 360, BIM 360, some of the cloud offerings, and how they are adopting to the desktop subscription offering, as well?

I see more traction amongst our traditional partners around desktop subscription because it's the same products licensed differently.

The pickup amongst our traditional partners has more variants when you get to these offerings like PLM 360 and BIM 360.

Some partners have been greatly involved with it, but in other cases we have actively gone out and recruited new partners whose business is already much more aligned with this.

So, some of our existing partners are much more willing to make the transformation.

Others -- some of these, like the PLM deals, involve large amounts of services.

As we've talked about, they are million-dollar deals.

For some partners, that's a little bit much.

Others are reacting really well.

But, I would say in some of our newer offerings like BIM and PLM you will see a higher proportion of new partners entering the mix.

And in desktop subscription the bulk of that work will be covered by our existing partners.

Great.

Thanks for taking the question.

Steve Koenig from Wedbush.

I joined the call a little late, so I apologize if this has been asked.

I wanted to go to the subscriber additions for next year where you are expecting fairly similar level to this year, in light of maybe an update after the Q3, now.

Any thoughts on where these subscribers will be coming from?

Are you still thinking about desktops subscribers as being the priority for next year?

If that's true, maybe just a little bit of color on what kind of people would you be targeting in that 3 million base of active but not really paying users that haven't chosen the upgrade this year, but might go to a desktop subscription next year.

Or am I thinking about this wrong?

I think if you look at next year, without getting too quantitative about it, I think with the end of perpetual licenses, you will see a large number of people going to desktop subscription as a result of recognizing as they get nudged towards doing that.

You'll also see, just based on the maturing of the products, more people going to cloud-based subscriptions.

The last one is, I think there will be a substantial number of people who move to maintenance along with perpetual licenses for those who want to continue to buy this way.

And as that's removed they will go buy perpetual licenses with maintenance to stay in that mode.

So, I think you'll see a substantial portion of maintenance subscribers next year, but you'll see an increasing number of desktop and cloud.

That makes sense.

Thanks.

That's very helpful.

I'm showing no further questions.

I would now like to turn the call back over to the presenters for closing remarks.

Thanks, operator.

As a reminder, Autodesk University is coming up in a couple of weeks in Las Vegas.

If you would like to join us in the investor relations track on December 2, please contact me.

We will also be at the Credit Suisse conference in Scottsdale on December 3 and the Barclays conference in San Francisco on December 9.

That concludes our call today.

You can reach me at 415-507-6033 if you have any further questions.

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.