Autodesk Inc (ADSK) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by, and welcome to the Autodesk Q4 FY15 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to turn the conference to our host, Mr. David Gennarelli, Senior Director of Investor Relations.

Sir, you may begin.

Thanks, operator.

Good afternoon.

Thank you for joining our conference call to discuss the results of our fourth quarter and FY15.

Also on the line 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 first-quarter and full-year FY16; our long-term financial model guidance; the factors we use to estimate our guidance; our transition to new business models; our market opportunities and strategies; and trends for various products, 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; Form 10-Q for the periods ended April 30, July 31, and October 31, 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 our forward-looking statements.

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

If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information.

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

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

During the call, we will also discuss non-GAAP financial measures.

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

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

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

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

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

Thanks, Dave, and good afternoon, everyone.

FY15 was the first year of our business model transition, and we are really pleased with the results.

In addition to the strong financial performance, we are particularly pleased with the rollout and acceptance of our new cloud-based products like Fusion 360, BIM 360, and PLM 360.

As the world moves to cloud and mobile products to get their jobs done, we are being rewarded with thousands of new customers.

Our fourth-quarter results continue to show strength across industries, geographies, and products.

Key metrics like billing, subscriptions, and deferred revenue showed strong year-on-year growth.

Cash flow from operations for the quarter was a record.

And we increased our recurring revenue base by adding 100,000 net new subscriptions in Q4, bringing our full year to 385,000 net new subscriptions.

Subscriptions processed with the Autodesk eStore increased more than 150%.

And we experienced strong sequential growth from non-maintenance subscriptions.

All in all, it was a terrific quarter, and a strong close to the year.

From a geographic perspective, strength was again broad-based in Q4.

Anchoring this strength was large deal activities, which are transactions with a deal value greater than $1 million.

Q4 was a record for large deals, with the number of transactions increasing more than 50%; and the total deal value increasing more than 40% over the fourth-quarter last year.

That's another sign that we are becoming a more strategic partner to our largest customers.

Many of these large deals were flexible enterprise licenses, or EBAs, which create a recurring revenue stream, and are recognized ratably.

These EBAs drive deeper account penetration, and reach parts of the enterprise that we just weren't getting to previously.

And these large deals also tend to influence buying decisions across the supply chain, as customers look to align their design software for increased efficiency and compatibility with their suppliers.

Fourth-quarter license revenue would have been approximately $48 million higher without the impact of flexible enterprise license agreements.

For the year, we transitioned close to $90 million in enterprise license revenue to these recurring revenue streams.

From an industry perspective, our strong Q4 results in AEC can be attributed to the continued adoption of BIM in the building and infrastructure industries.

We experienced strong growth in AEC suites, as well as our cloud and mobile products.

These new technologies support access to infield and realtime information.

Our manufacturing team delivered strong growth in Q4, driven by large deals, strength in our product design suite, and the addition of Delcam.

We are really encouraged by what we are seeing with our cloud-based products like Fusion 360 and PLM 360.

For the first time in a long time, we are seeing fundamental changes in the competitive environment in manufacturing.

The way products are being designed and built is changing, and customers are looking for tools to support these changes.

Our cloud-based products, Fusion 360 and PLM 360, are leading the market.

Fusion 360 is a complete product development system that allows distributed teams to work together on a project from concept through manufacturing.

Bringing together design simulation, visualization, and fabrication tools into one product is key for our products bringing better products to market faster.

In terms of collaboration, the closest analogies for Fusion are GitHub for software development or Google Docs for office documents.

The range of customers and the work they're producing is really inspiring.

We estimate that 90% of our Fusion accounts are new to Autodesk; so, it's another way that we're expanding our user base.

PLM 360 is also bringing new users to Autodesk, and expanding our presence within existing accounts.

We added over 50 new PLM logos in FY15, and many of these customers have already come back to us to expand their usage.

While some of our PLM accounts are enterprise customers, the vast majority are SMB, which is a large greenfield opportunity.

We were the first cloud-based PLM solution to the market over two years ago, and we've built a sizable technology [read], which now includes cloud-based data management.

In Q4, we continued to see an increase in upgrade activity, as legacy customers took the last opportunity to upgrade.

And a high percentage of the upgrades attached maintenance subscription.

This is all good news, as the end of life for upgrades resulted in converting tens of thousands of customers to the latest version of our products, and bringing them with us into the future.

And we still have a huge opportunity to convert nearly 3 million customers to subscription offerings.

Now, I'd like to talk more about our model transition.

At the heart of this transition is the dramatic shift in the software industry towards subscription, and a technology platform shift to the cloud.

Our customers are already seeing the benefits of the shift to the cloud, and turn-based offerings, with many of their other software applications, such as CRM or HR apps, and they are embracing the change.

Our subscription offerings provide a simplified product management and deployment experience.

They also make it easier to introduce new tools and technology into the workflow, with lower up-front costs.

This is changing how our customers use our products to solve design challenges in ways that just weren't previously possible.

We exited FY15 with even more conviction in our transition.

In many ways, FY15 was the setup for the net couple of years, in which we will move a larger portion of our Business to subscription and recurring revenue.

Earlier this month, we announced that we would stop selling new perpetual offerings for most of the stand-alone products, such as AutoCAD and AutoCAD LT, on February 1 next year; after which, they will be available only through desktop subscription.

We expect that this may lead some customers to buy new perpetual licenses before the change, while others will willingly choose the more flexible subscription offerings that provide increased functionality and new benefits.

Throughout the course of the year, we will be working with our customers and channel partners to help them make the choice that's best for them.

Because 100% of desktop and cloud subscription revenue is deferred, and recognized ratably, this will naturally put downward pressure on traditional income-statement metrics like revenue, operating margin, and EPS through the transition.

This pressure will increase as the remaining perpetual license offerings are discontinued next year.

At that point, nearly all revenue will come from ratably recognized offerings, including maintenance, desktop and cloud subscriptions, and EBAs.

Also keep in mind there will continue to be pressure on gross margin, as we invest in our cloud infrastructure, and our sales of cloud services ramps up.

On the flip side, the model transition will positively impact deferred revenue and subscription additions, which we expect will continue to have healthy growth rates.

The traditional income-statement metrics will start to rebound at the anniversary of the quarter in which we discontinue perpetual offerings.

From there, we would expect a material rebound in financial performance.

Those considerations are factored into our guidance for FY16, which calls for 3% to 5% growth in both billings and revenue.

Our FY16 guidance also reflects 6 points of currency headwinds for billings, and 4 points of currency headwinds for revenue.

In other words, our guidance for billings growth at constant currency would be 9% to 11%, and our guidance for revenue growth at constant currency would be 7% to 9% -- healthy growth rates over strong performance in FY15.

To wrap things up, we're really pleased with the direction of the Business.

This past year shaped up to be much 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.

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.

Lastly, I want to thank our employees and partners for their outstanding efforts and contributions over the past year.

It was a great team effort.

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

(Operator Instructions)

And our first question comes from Keith Weiss from Morgan Stanley.

Please go ahead.

Excellent.

Thank you, guys, for taking the question, and very nice quarter.

Can you give us a little bit of color about how we're looking for this sort of transition from perpetual [subscription] to unfold?

You give us a very impressive subscriber guidance for FY16.

Can you give us a little bit of understanding, namely, how you're going to try to incent customers to act -- whether you're going to be trying to push them more towards subscribers or desktop subscriptions in the near term?

Or is it going to -- or is the pricing going to be equivalent between perpetual and professional desktop [subscription]?

Yes.

Keith, thanks.

Two things in the way that we are thinking about moving customers more towards desktop subscription.

We would like them to move there.

One is, certainly, as you suggest, through price.

The other way to do it is, we will make sure that the offerings on desktop subscription have more value for the customers than the other.

We will put things in those products that are not available in the traditional way.

Having said that, I think, even last quarter, I said the same thing.

A customer who is happy buying perpetual licenses and subscriptions, we will -- yes.

We're going to continue to allow them to do it and move at their own pace.

What we're going to try to do is incent them to do it, rather than beat them with a stick to do it.

Got it.

What would be some of those incentives, outside of pricing?

As an example, some of the other cloud-connected services.

Okay.

So you will have access to them in one product but not in the other -- would be an example of something like that.

So a desktop subscription would have it, but the maintenance --

Traditional one would not.

Okay.

And we can do this differentially.

You know how we're applying these consumption-based models around things like cloud credits.

So we can vary how many they have, we can vary what services they have access to.

There are actually a fair number of knobs and dials in there.

We're a little bit [loathe], at this point, to say exactly what they are, partially because we don't fully understand.

And we want to understand our customers' reactions to the incentives as we put them in place.

Got it.

Thank you.

Our next question comes from Steve Ashley of Robert W Baird.

Please go ahead.

Great.

I'd just like to ask about AutoCAD LT.

I know that you were thinking of transitioning the pricing there from licensing to subscription.

Just wondering where we are with that.

And if there is a transition to subscription, is that having an impact on the revenue growth in that product group?

Yes.

We've started making desktop subscriptions available.

Customers are definitely taking advantage of it.

LT is one of the places where it's a natural for a certain class of customers, particularly those who are price-sensitive or up-front -- the amount of up-front they have to pay.

And, yes, every customer who tried it, who moves to desktop subscription affects revenue in the short term.

Yes.

And my other question was just around the EBA business.

How did the amount of business you did in the fourth quarter compare to the amount you had done in the third quarter?

Substantially higher.

Almost half of it was done in the fourth quarter.

Yes.

Sequentially, Steve, it was more than double, quarter-on-quarter, the number of transactions greater than $1 million.

So it was strong growth.

Perfect.

Thanks so much.

And I'd just say, in general, I mean, we have been -- I can't say strongly enough how great the EBA business has been, just in general, the investment we made in working with our large customers.

This came about a number of years ago, where we recognized that we'd really built an incredibly strong portfolio of products, and even some of our best customers didn't know about it.

And in many ways, some of our more traditional channels were not in a position of convincing the largest companies in the world of what we actually had.

And so we made a fairly large investment in selling direct or selling in conjunction with our best partners.

And it has made a huge difference, and I think, as we outlined at analyst day, we still think there's a lot more there.

So we still think this is a big source of growth over the next few years.

And each quarter keeps proving it.

Great.

Thanks.

Our next question comes from Brent Thill of UBS.

Please go ahead.

Thank you.

Carl, on manufacturing, it was surprisingly strong, versus what some of your competitors have said.

I'm curious what you're seeing, in terms of share gains versus your peers.

Combined with execution, what would you say that you're seeing there?

And I had a quick follow-up for Scott.

Sure, Brent.

I think there's two aspects.

One, I'm a little bit more bearish -- I think I have fall into the same category of some of our competitors around the worldwide economy.

And in that way, there's a little bit of noise in the emerging economies.

I think for manufacturing, the place that probably gives all of us the most concern is Japan.

Despite all their efforts, they just can't seem to jump start the economy.

So there's a little bit of macroeconomic concern.

On the much more bullish side, I think there are two things going on right now.

I think we've had solid execution.

As I said in the previous answer to Steve, I think we have great offerings for our customers that we've built over a long period of time.

The second thing that's adding to this is what we're doing on the cloud.

A number of our competitors have just chosen, at this point, not to do anything substantial there.

And I think this will change over time; I don't think this is an advantage that we will have forever.

But we invested heavily in PLM 360.

We just brought the part of PLM that most people think of as PLM -- really, data management or document management -- to the cloud, which greatly expands the opportunity there.

What we're doing with Fusion 360 is really reinventing how CAD will be used in the future, and I think people are recognizing it.

The reason why I led in about our estimate of 90% new users is both in PLM and in Fusion, those are all share gains.

Every one of those is not a new CAD or PLM customer.

They've been using previous things, and as we've surveyed what they're using, they're coming from the very traditional legacy products.

And so we're really pleased with that.

And so that's certainly helping our growth.

Okay.

And just as a quick follow-up for Scott on operating margins -- 13% to 15% guided.

It seems fairly conservative, assuming that you still want to hit your 30% ramp.

Maybe if you could just walk through that progression and what you think is going to be the big impact this year on margins, given your size.

I think everyone was hoping for a little bit more.

Sure, Brent.

If you look at our Q4 results, you see [op] margins that are in the -- just below 13% range.

But we are looking for improvement year-on-year, and I think there's a couple of things that are driving that.

One is, obviously, top-line growth, albeit muted by some of the FX impacts.

The second is we are -- I think the team has done a really nice job of looking to rebalance and reprioritize everywhere they can so that, as we make some of these [re-fired] investments to make the business model transition, whether it's investments we have to make in the sales team or inside the R&D teams or back office systems and cloud infrastructure, we're doing a lot of that by rebalancing internally.

So you see the implied [stim] growth for FY16 is quite a bit lower than the [stim] that you saw in FY15.

And those are the things that are contributing to the [op] margin for next year.

And just in general, as you think about the transition, Brent, the more successful we are at transitioning quickly, [then] it's just arithmetic that revenue and EPS and margin get affected by it.

And I think we looked at this quite closely, and we decided that, on balance, the best thing we can possibly do is move as quickly as we can, mostly modulated by our customers' needs.

And so that's really been driving it.

And so we want to move quickly.

And to the extent that we're more successful at it, it has an arithmetic impact.

On the other hand, every one of those dollars that you see on the booking side is money in the bank that comes back as operating margin in EPS.

Understand.

Thanks.

Our next question comes from Heather Bellini of Goldman Sachs.

Please go ahead.

Great.

Thank you.

I have two quick questions.

One, Carl, I was wondering if you could share with us -- I know you've had some initiatives underway where you were trying to reduce your churn rate in Q4 and focus on trying to drive higher renewal rates.

I was wondering if you could share with us some of the success you might have seen from some of the initiatives you've been put in place.

And the second question just follows up on what Brent was asking.

If we look beyond this year, at analyst day, you talked about how you thought you could keep OpEx growth sub 5%, as you look out.

And that last year was a [year in] investment, and it seems like this year you're getting some investment.

Obviously, we get the model transitions.

But is there -- can you give us some clarity as how you see the Company growing OpEx as you look out beyond this year?

What's required, in terms of investments?

Thank you.

Yes.

I think both Scott and I can jump in on both of these.

A bunch of positive stuff about making sure that more customers attached and renewed.

And this was in the camp of simple execution.

We just started paying attention to it and measuring it and putting people -- giving it to people as a day job -- working closely with our partners, and we've done much better.

Yes.

And the results, Heather, on the renewal rates -- we obviously don't quote that.

But I will tell you the results year-on-year, both in the Q4 and for the full-year, attach rate and renewal rate are both up materially, year-on-year.

I think some of the discipline and some of the increased focus that we've put in place is clearly paying dividends.

And as we see people making final purchases on upgrades, I think the same phenomenon will continue on final purchases on perpetual license.

We see a very high attach rate that also will bring along with it a high renewal rate.

Yes.

And on the OpEx spend, what we see is slightly higher than 5% growth in OpEx for this year, but that's the area where we've been looking over the next 3 years -- that kind of growth rate.

Some of it is coming back from last year.

We had built a hole, in some of the ways and some of the compensation programs, that really filled back in.

The other thing is, again, as we've decided -- as we've seen such success and wanted to accelerate the transition, there are two things that are consuming some of that -- is building out the cloud infrastructure to support that, in terms of the stuff that supports actual customers.

And the other is the back office infrastructure, which needs to change fairly dramatically, in order to support a very new business model.

And so those are the places to really think of it.

A lot of the rest looks like cost of living, and Scott already mentioned we're doing a lot to move expenses from one part to the other.

It's opaque from your point of view, but there's a lot of movement of expenses from one place to the other.

Thank you.

Welcome.

Our next question comes from Jay Vleeschhouwer from Griffin securities.

Please go ahead.

Thanks, good evening.

Carl, I'd like to ask about the composition of your subscriber ads, that is to say, the sources of those numbers.

Back at the analyst meeting, you talked about 2.9 million active users who were not, however, paying maintenance or subscription.

It looks to us like the largest piece of that -- or at least as large -- is the [BLP] piece is what you've called upgraded but not attached.

And that works out to at least 1.3 million.

And what do you think the conversion rate could be of that very large base of non-subscribers, as part of your guidance for this year?

And then secondly, with respect to the constant currency billings growth for FY16, that's a couple of points better than we had assumed.

And yet, you've got at least a 10 point headwind for billings growth from the absence of upgrades, given that you seemingly had record upgrades in FY15.

So perhaps, you could rank the sources of billings growth from the other components.

For example, perpetuals, rentals, EFLAs.

How are you thinking about the build to the billings growth from the various sources?

Yes.

Two things about it, Jay.

So on the first one, I think your model might be more detailed than ours.

I'm not sure if I could actually tell you exactly -- I'm being slightly facetious here.

But some of the customers actually, kind of putting a tag on them and realizing which bucket they're coming from -- it's a little bit hard because of the way they may have been a customer and then reenter with a new one or the way they have switched.

So it's a little bit harder to tag precisely than you might imagine.

When you get to looking forward, the big question mark that I try to outline in the prepared remarks was we're not quite sure.

We did a number of experiments, but there are really two possible behaviors, going forward, as we get rid of perpetual licenses.

Some of our customers will definitely choose to hoard those licenses, if you will.

They like the way they buy it now.

They'd like to buy more of those.

And others will see the advantages with the new model and move to flexible licensing.

That's one of the big variables out there.

We've modeled, primarily, on the overall number -- the number of people that will get new licenses.

And most of the variability in our modeling is around how much is in the first pile versus how many people are in that second pile.

And as we see the year play out and as we move into the first and second quarter, we will be able to give you a little bit clearer guidance on what we are seeing.

But right now, we're shooting a little bit in the dark to know which group they exactly fall into.

Jay, this is Scott.

The only thing I would add to that is what we saw with the end of life of upgrades this year is very high attach rate on maintenance.

And so, of course, we'll get that tail through next year on the revenue stream.

On the billing side, I think we expect to see that same kind of high attach rate to the customers that decide to buy perpetual and hoard.

So I think there's -- besides the mix of which way they buy, I think we'll also see a very high--

Yes.

I mean, I think if you look, really, the gauge we've set up is that, in the end, regardless of the way they buy, they end up as a subscriber.

Thank you.

You're welcome, Jay.

Our next question comes from Phillip Winslow, Credit Suisse.

Please go ahead.

Hi, guys.

Thanks, guys.

Congrats on a great quarter and outlook.

I want to focus in on vertical by industry because, Carl, I know you talked a lot about -- you can't talk about by geography -- just geographies, or industries.

When you think about what led to the improving growth that you guys have seen, does any vertical by geo stand out to you that has gotten better versus what you saw in the past?

As you all contemplate the billings guidance for this year, how did you incorporate some of those changes versus, let's say, what verticals by geo were running at previously?

Yes.

I'll give you my impression.

Scott, feel free to jump in.

I'd start out with the US was strong.

And I mean the US was strong all through the year, and that made a big difference.

I think there have been some nervousness around northern and central Europe.

That did pretty well.

And for much of the year, many parts of Asia did well, like I said.

The places that are on my radar right now, in terms of the ones I'm more worried about, are Japan and, obviously, Russia.

Russian business has been reduced dramatically, and I worry on an ongoing basis.

And in Japan, despite all the economic stimulus and government action, they seem somewhat unable to jump start more growth.

And both of those are important markets for us, so that's the part I worry about.

I think what's -- if you look more broadly, I think there's three things going on in different industries.

I think the adoption of BIM in Asia is still a big thing.

It's not nearly fully adopted.

I might even guess that it's half.

There's still a lot of way to go.

We're seeing a lot more government initiatives.

We're seeing a lot more projects beginning to adopt it.

So we're still in the middle of a very strong technology transition, within the AC industry, that's actually, in many ways, getting broader, as it reaches out to construction companies.

We talked about through mobile technologies, it gets the delivery of realtime information in the field.

On the manufacturing side, I think there's, as has been historically true, lots of pressure on manufacturers.

They're looking for better ways to develop products.

They're looking for new answers.

Many of our traditional competitors have turned their back on the meat and potatoes, if you will, of the industry -- of giving people CAD software that actually gets their job done and making better software.

And they've gotten interested in other parts and other ways of serving customers.

And we've been happy to fill in that void, and I think that's going to continue.

The second thing is, particularly the companies that are under a lot of pressure, in terms of product innovation and reducing their time to market, they're really looking for new technology.

They're looking how to figure out how to manage distributed teams, building products -- much more willing to break the norms, look at cloud and mobile technology for both PLM and for CAD.

And I think we're clearly the leader there.

We've been out there with both of our CAD and PLM products for two years, and that's making a huge difference.

Yes, Phil.

The only thing I would add is, Carl touched on a lot of the bright spots, geographically.

US was bright, Germany was bright, across northern Europe was bright.

I think the other one that -- not quite at the same scale, but was particularly strong, in terms of growth rate, was China in Q4.

So, you know, you see the overall AIPAC growth rate, and it's definitely down by what's happening in Japan.

What might be a little bit easier to point out is the places that things didn't go well, and Japan was one of those.

Russia was one of those.

And on a much smaller scale, Brazil was one of those where we had a little bit of a tough quarter.

Got it.

Great, guys.

Thanks a lot.

Our next question comes from Matt Hedberg of RBC Capital Markets.

Please go ahead.

Yes.

Thanks for taking my question.

Carl, what percentage of your business goes through the online store today?

And what might that look like, once we get through this transition?

And maybe as a follow-up to that, how does the channel feel about this move to the online store, over time?

So right now, it's relatively small.

The online store is a negligible part.

The place where it has any is in the US -- is certainly the largest proportion of that.

The other thing that we have talked about for a long time, we've always used the E store as a way to base the prices.

So everything there is at list price, and we don't control end user pricing, but that is the one place where we do.

So people tend to look at our E store; they get reference prices from there.

But more often, the smaller customers transact in one of two ways, with our more traditional partners or with some of the larger volume partners -- think CDW or Dell or Amazon.

So it's much more a price reference.

Now, I think as you go through this transition, I think there can be some change there, on some of the things.

And in particular, I actually think this can be a win-win for us and our partners.

The places where I'm most interested in seeing business go through the E store are for the transactions that are not cost-effective for our partners.

And I don't want to see our partners wasting their times on thing where they don't make money.

And if we can provide electronic ways to do that, that's great.

Second thing I'd say is, we're starting to see electronic outlooks pop up through our partners and distributors.

And it's clearly the way some of our customers want to buy.

So I think there will be a greater variety choices out there, but for all of us, it's driving greater efficiency in the business.

That's great.

Very helpful.

Thank you.

You're welcome, Matt.

Our next question comes from Richard Davis of Canaccord.

Please go ahead.

Thanks.

Carl, I have my own opinions, but I was curious what your thoughts are.

A lot of your competitors are not aggressively switching to cloud.

You guys are.

Look, I mean, I think you're on the right side of history.

Are you seeing any -- I mean, you see it in the numbers, but how do you think about -- would people just go -- Oh, man, I don't want to do this cloud stuff.

It's CB radio with more typing -- or whatever?

And would you lose people in that?

Is there any risk of that, or how do you triangulate around that?

Thanks.

Sure.

That's a funny question, Richard.

But it's a serious question.

So let me answer it this way.

There are, certainly, customers now who don't see the cloud as the inevitability that I see it.

And for them, we continue to offer desktop products.

There's the intermediate ground of desktop connected products, so you can continue to work like you did behind the firewall, relatively isolated.

You can also work in ways that allow you to take advantage of cloud services.

So you get some but maybe not all of the benefits.

So you can kind of modulate your behavior, you know, according to your tolerance.

On the other hand, it's -- I guess I've been around long enough and watched enough of these transitions to recognize the inevitability.

And I was around when people said CAD will never be done on a PC; it has to be done on a mainframe.

I was there when they said you could never design a car on a PC; it had to be done on a workstation.

Every car in the world today is designed on a PC.

And in the same way, every bit of enterprise software is moving to the cloud.

You've already seen it happen with ERP and HR and CRM.

So you look at what's going on, and it's very hard to imagine a world in which all of your IT is cloud-based except, somehow, some part of product development.

It makes very little sense.

And particularly, I think there's a better reason other than just this inevitability argument, that I think is important.

If you think of the challenges that most companies are wrestling with, they build these products in large distributed teams.

Many of them will tell you, whether this is the supply chain and manufacturing or the companies that come together in construction, that the biggest problem is in communication and coordination.

So in some ways, there's nothing particularly rational about having a behind-the-firewall solution for a constellation of companies and people that need to work together.

That what you really want is the IT structure to mirror the structure -- the economic structure of the people participating, and I think the cloud serves that.

I've outlined this before but, if you just want to get down to brass tacks with the cloud for our customers, there's two big things it does for them.

It gives them the ability to do large, on-demand computing for their most difficult engineering problems.

And whether that's analysis and simulation or visualization, that is an important part.

The second one is a less compute-intensive task, but really critical to what they do every day, which is this coordination and collaboration.

And the cloud is a central coordination point.

And as you watch many of the other companies in the different parts of the industry gain these advantages, it all comes about by having the centralized coordinating point.

So three or four years ago, when we started on this journey, I think it was a lot more suspect.

As the days go by, I get more and more convinced that we're certainly on the right side of history on this one.

Got it.

Thanks.

You're welcome.

Our next question comes from Sterling Auty from JPMorgan.

Please go ahead.

Yes, thanks.

Hi, guys.

I was wondering -- I think you pushed back the actual elimination of the upgrade price by 30 days, if I'm not mistaken.

Yes.

Any sense of what that actually did to the subscriber count in the quarter -- meaning, obviously, that spilled it over into the first quarter.

But any way to quantify that?

No.

It's really hard for us to tell.

All we saw was that there was a huge rush at the end.

And because of that, we wanted any of our customers, who wanted to take advantage of it -- we just gave a little bit of an outlet to it so that they had a little bit more time.

For whatever reason, they weren't able to process the orders in that timeframe.

But it's hard for us.

I mean, we will see the spike -- at the end of the quarter, we'll know much more about it, but it's really hard for us to predict, right now, what it is.

Okay.

And then, in terms of the transition, you mentioned a year from when you eliminate perpetual, you'll start to see the rebound.

What I'm curious about is, what do you anticipate being the end of the transition?

In other words, is it three years until you go through the customer base and get back to the point where the income statement would be, quote unquote, normalized?

Yes.

Sterling, this is Scott.

I think the -- thinking through the elimination of perpetual, which we've already announced for stand-alone products -- we still have perpetual licenses out there for suites and haven't made an announcement there yet.

But have said the 12 to 24 months from the time that was announced, that all perpetual new license sales would end.

At that point, you anniversary the date of the last sales of perpetual license, and that's when some of the traditional metrics that are in the P&L, like reported revenues and down the stream into op margin and EPS, will also begin to get back to a steady state.

I think it's exactly what Carl said in the opening commentary.

It's -- at the point that we anniversary the quarter, where there's no more perpetual license sales, is where we start to steady state again.

Yes.

The only thing I'd remind everyone -- because we've had lots of questions on this -- is during that period, it doesn't have to be blind faith.

I mean, as we've shown, is that billings and subscriptions both matter.

And they will be going -- we've talked about how they will rise substantially, and you can track that.

And--

Deferred revenue.

And deferred revenue, certainly.

And so as you watch those other metrics -- and so, in some ways, what we are saying is, the metrics change, really, around just the calculations involved.

But they are almost perfect proxies for the health of the business, so I think you can look at that.

When we come out of it, I think it may be in a different place.

Again, we'll go back to revenue and op margin EPS being more normalized.

But there still may be more interest in billings and subs and deferred revenue, just because of the model transitions.

So if anything, I think at the end, there will be more metrics that give an indication of the health of business.

But through the transition, there's plenty to look at to gauge our progress.

No, that's certainly the case.

And we saw that with Cadence Design and Aspen Technology and Ariba and a number of others that have gone through this.

But one of the questions that always comes up -- and we're seeing this more recently with Aspen technology, that's finishing their transition -- is where you come out.

So when you eliminate perpetual, you're going to have the inevitable dip in that first year.

That second year, your revenue, probably, doesn't make it back to where it was previously because the layering effect, I wouldn't imagine, unless there's going to be something different here.

So that's why I'm asking when do you get at least back to where you started before the elimination of perpetual -- maybe use that as the gauge?

Yes.

It's really, Sterling, a question of the rate and pace that our customers move from traditional licensing over to desktop -- our desktop subscription license -- or to cloud.

And we are working that process, beginning this year, to try and move people as quickly as we can over to some of the newer subscription and ratable revenue model styles.

But the rate and pace that they adopt that will really dictate what the shape of the curve is when it's finished.

Yes.

And like you saw this year, I'm really pleased with the results, but we were imperfect in our projection of what would happen this year.

We didn't truly understand it at the beginning, and it turned out to be very good.

And we certainly, of course, corrected along the way.

And I expect, through the next year or two, we will be doing the same, as we gauge the behavior of our customers and partners, relative to the offerings we are putting out there.

All right.

Super.

Thank you.

Our next question comes from Saket Kalia from Barclays.

Please go ahead.

Hey, guys.

Thanks for squeezing me in, here.

First, maybe for Scott, in terms of license revenue this year, you've obviously got a headwind from the discontinuation of the upgrade program, perhaps some headwind from proactive customers ahead of your perpetual license deadline, and then, maybe a little bit of tailwind from perpetual license hoarding.

So a lot of moving parts.

How should we think about where license revenue ultimately ends up this year, with all those different moving parts?

Yes.

Saket, we're not going to, obviously, provide guidance at that level of granularity.

But I will tell you that what's going to drive the growth of perpetual this year is the announcement around [end of life on] standalone products.

So if you look at the prepared remarks, the document with all the 17 pages worth of data, one of the statistics in there is 37% of our revenues are suite-based, right?

So you can begin to, then, peel back to what is standalone product-based.

And on the license side, it's probably a little bit higher than that 37% number.

So think of that chunk of our license revenues and that customer set having a last opportunity to buy perpetual license.

That's what's going to drive the license line.

On the subscription line, it's the same trends that we saw this year.

It's a high attach rate on the upgrade sales that will continue through the year and turn into maintenance revenues.

Also, a high attach rate, we expect, on perpetual license sales, as we hit that end-of-life toward the end of the year.

So those things will drive the subscription line.

Got it.

And then, for my follow-up, you said that perpetual will, effectively, be gone in the next -- in roughly 24 months.

Have you thought about -- or, rather, how have you thought about the behavior of your customers that are buying perpetual license for suites, in terms of your guidance?

Do you think they pause for a potentially similar change, maybe seeing the writing on the wall, or how have you thought about that for 2016?

I think there are a handful of customers who are following this very closely.

I think many customers, actually, contemplate these things on an as-needed basis.

We certainly -- you, to some degree -- follow this much more closely than most of our customers.

I think the customers who are paying really close attention can -- we've more than telegraphed, we've explicitly said what the plan has been, and we've talked about it for at least a year.

So I think they understand it.

And like I said before, I think there are two behaviors that it will drive.

Some people will decide to buy ahead of the announcement, and others will decide to move to a more flexible offering.

And as we go through this year, we'll be able to figure out what's there.

I think the other thing we're able to do is, I think we are able to turn the dials to adjust what we'd like to see.

Very helpful.

Thanks.

Our next question comes from Brendan Barnicle of Pacific Crest Securities.

Please go ahead.

Thanks so much.

Carl, following up on Sterling's question about these model transitions, as he said, we've seen them a few times.

And one of the things that we have looked at has been free cash flow in lieu of EPS.

As we think about this model transition, would free cash flow be likely to bottom next year?

And when might we start to see that inflection in turnaround in free cash flow, knowing that's going to come, probably, ahead of the changes in the more traditional revenue and EPS metrics.

Yes.

We're not going to, obviously, forecast FY17, at this point.

I would tell you, though, the free cash flow and the operating cash flows will follow closely along with the billings, as opposed to anything in the reported revenues in the P&L.

Okay.

Great.

Thanks, guys.

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

Please go ahead.

Okay.

Thank you very much.

Carl, you mentioned that you saw a strong consequential growth from non-maintenance subscriptions, which I think is a little different than what you've called out before.

Can you elaborate what you saw on that front?

Was that strength really from the EBAs, or was there a change, as well, with [regards to] desktop subscription and [your] cloud?

Both.

It's both.

Both things strongly grew.

And like I said, I think desktop subscriptions will have a more consistently increasing profile, whereas I think EBAs will still be subject to that seasonality.

But I think both will continue on an upward trend.

But what I was referencing -- both of those substantially grew.

Okay.

Terrific.

And then, just a follow-up to Brent's question earlier.

Just wondering if you're still comfortable with reaching 30% operating margins by FY18.

It would seem pretty difficult to get there if you only end up doing 13% to 15% this year.

Yes.

One of the things I would say is that, as you work your models, it's very different when you're at 13% or 15% because your expenses and revenue aren't aligned.

When it comes about -- because of the way we account for it, in some ways you're putting money in the bank.

And so the growth rate you can see in EPS or operating margin is dramatically different than happens under normalized conditions.

In some ways, the dollar you put away today that you don't recognize comes back, even though, to some extent, most of the expense of that is already -- we've already spent that money.

So I think we've spent a lot of time looking at this.

And what you get, as you come out of this, is dramatic increases unlike increases we've seen in any other year.

And that speaks to the -- how well we will do in that year.

What we're really doing is, we're just putting money in the cookie jar right now.

So I think, if you look at it through that lens -- kind of simplistic corner store mentality lens -- you get it.

The only reason it's not dropping to the bottom line now is through the accounting rules, not due to the fundamental economics of the business.

Great.

Thank you.

Our next question comes from Walter Pritchard from Citi.

Please go ahead.

Hi, thanks.

I'm wondering -- there's a lot of moving parts in the driver numbers.

And I'm wondering when you think you'll be in the position, or what are you looking for to take place before you're going to start to give us more visibility into the composition of the subscribers that you have and that you add every quarter?

Yes.

Walter, the subscriptions numbers are still overwhelmingly driven by maintenance subscriptions.

And so while we're seeing strong growth in both cloud and desktop -- certainly strong growth, year-on-year, but sequentially, very strong growth -- in those numbers, they're still small.

And so we're still overwhelmingly driven by maintenance subscriptions.

As the other two become material and we think there's a benefit in breaking that out, of course, we'll do so.

And then, Scott, I guess related to that -- we've noticed on your website, you're doing a pretty significant discount for the desktop subscription on an annual basis.

And should we start thinking about the desktop subscription pricing and the maintenance pricing coming together and, ultimately, the offerings also coming together?

To some degree that, once somebody is on them, they have the same value.

I guess you've talked about providing maybe some more value on the desktop side.

But should we start to think about those two coming together, in terms of --

No.

I wouldn't think about it that way.

As we talked about before, we've said, in the first year, we can provide incentives for folks to get there.

There's nothing that says we need to do that in subsequent years.

And I really think of the economics of each of these customers differently.

The other customers have paid a large, up-front amount and, to some degree, deserve to pay less per year, whereas the ones who get this lower, up-front cost can pay more over time.

But I think, in terms of getting people into the system, we will definitely continue to experiment with different price points and see what the results of that are.

And that's one of the things that we've talked about.

But if I read through the lines in what you're saying, I would not model these two things as identical.

I think that would be a large mistake.

Okay.

Thanks very much.

Yes.

The other lever there, Walt, of course, is to use value to attract customers to the cloud and desktop offerings, based on the value they provide and differentiate the value of those offerings versus maintenance.

Okay.

Understood.

Thanks.

Our next question comes from Kash Rangan from Merrill Lynch.

Please go ahead.

Hi.

Thank you very much.

Can you give us a quick update on the folks that have installed licenses but are not on maintenance?

I think there was an emphasis on getting as many of them as possible on subscription maintenance or pure subscription.

And I believe that program also had a finite time period.

Can you give us an update on how that is coming along?

And also, with respect to the variability of customers falling under either a subscription -- the different kinds -- how confident are you in your targets?

Because the targets seem to be fairly firm in FY18 -- of a certain level of billings and operating margin implying a certain level of earnings.

There feels like there is a fair amount of variability between the two buckets.

Just wanted to get your comments on that because that was said about a year back, but obviously, things have come together in a different way.

Just wanted to get your feel for that.

Thank you.

Yes.

So what I would say in the short term -- I think, looking at the short term, of moving the millions of people who are non-subscribers on, I think this will be an ongoing thing.

I don't think there's any short-term phenomena there.

I think there will be incentives; there will continue to be incentives.

The places that we encourage them to move will change as the programs change.

But many of the 3 million customers are happy, loyal customers.

And what we're trying to do is change the commercial arrangement between us.

And we will continue to do that by making a variety of offerings.

So there's nothing like -- that ended or expired.

There's still a lot of options, in terms of how we go addressing ways to get those customers into the new model.

Our next question comes from Steve Koenig of Wedbush Securities.

Please go ahead.

Hi.

Thanks, gentlemen, for taking my question.

You know, you spoke a little bit about the experiments you've run and how the different types of new flexible offerings might play out.

I'm curious to get a little bit more color, perhaps, on subscribe to Autodesk, given that's more of a -- maybe it could be seen as a replacement for the suites -- a little bit more holistic approach to using a broad range of Autodesk products.

Is that more impactful next year, as those licenses for other products besides the standalone products get curtailed, or does that have traction this year?

How important is that in the next, say, 12 to 18--

Yes.

Steve, I think you hit the nail on the head.

I think it's a really important point.

Yes, what we've seen is subscribe to Autodesk, which is a flexible licensing program for everyone from our smallest to our mid-sized customers -- the people who aren't involved in like those EBAs -- those are mostly replacements, in our mind, for suites.

Certainly, some people that have single products will also find that attractive.

It also starts to deal with some of the network licensing things.

Even on our single products, there's a network licensing component.

Many of our customers, even on LT deploy, these in groups, and subscribe to Autodesk begins to address that as well.

We haven't announced detailed plans.

But just to answer your question more pointedly, it will have a bigger impact the following year than it will this year.

Great.

Thanks a lot, Carl.

That's all I got.

Okay.

Got it.

This concludes our Q&A session.

I'll now turn it back to David Gennarelli for closing remarks.

That clouds our call today.

If you have any follow-up questions, you can reach me at 415-507-6033.

Thanks.

Ladies and gentlemen, that does conclude today's conference.

Thank you for your attendance.

You may now disconnect.

Everyone have a great day.