Autodesk Inc (ADSK) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Autodesk Q2 FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would like to introduce your host for today's call, 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 second quarter of FY16.

Also on the line is Carl Bass, our CEO, 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 our website in advance of this call.

Those remarks are intended to serve in place of extended formal comments, and we will not repeat them on this call.

During the course of this conference call, we will make forward-looking statements regarding future events and the anticipated future performance of the Company, such as our guidance for the second quarter and full year FY16; our long-term financial model guidance; the factors we use to estimate our guidance, including currency headwinds; 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 FY15, or Form 10-Q for the period ended April 30, 2015, 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 risk factors and other factors that may cause our actual results to differ from those contained in the forward-looking statements.

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

If this call is replayed or reviewed after today, the information presented on 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 and non-GAAP results is provided in today's press release, prepared remarks, and on the Investor Relations section of our website.

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

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

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

Thanks, Dave, and good afternoon everyone.

We continue to be pleased with the progress of our business model transition.

Strong billings, deferred revenue growth, and recurring revenue growth were highlights in the second quarter.

55% of the second-quarter revenue was recurring, compared to just 44% in Q2 last year.

What's more, our ARR, or annualized recurring revenue, increased 23% year-on-year in constant currency.

That's real progress on the business model transition, ahead of what will be the bigger transition period, when we discontinue selling new perpetual licenses.

We'll talk more about ARR and its importance at our Investor Day event next month.

We're also pleased with the growth of new model subscription types.

They continued to show strong year-over-year and sequential growth.

Subscription business in Q2 was led by desktop subscriptions, again, comprising more than half of our total subscription adds for the quarter.

Since we launched desktop subscriptions last year, we have seen the steady increase in volume, and an increase in the percentage of annual contracts, which is now approximately 80%.

As expected, AutoCAD LT continues to lead all desktop subscription products, which is important, since LT has historically been our highest-volume product, and represents the biggest opportunity to convert non-subscribing LT customers.

Our channel partners have also been steadily increasing their desktop subscription business.

In Q2 of last year, approximately 40% of our desktop subs came through our channel partners, and that has increased to approximately 60% this past quarter.

Total maintenance subscription additions for the quarter were lower than expected.

Despite strong attach and renewal rates, we no longer offer upgrades for non-subscribing customers, and we simply have fewer opportunities to attach a maintenance subscription.

Our focus for the rest of the year will continue to be on converting non-subscribers to subscribers.

One area that helped drive billings, but was neutral to the subscription channel, was an uptick in multi-year maintenance subscriptions.

We removed the discount for multi-year maintenance subscription, and that prompted a surge of activity, the upside for Autodesk securing the relationship with the customer for multiple years, and collecting the cash up front.

We are quickly approaching the end of this fiscal year when we stop selling new perpetual licenses for standalone products.

We started the process in Q2 when we stopped selling new perpetual licenses for AutoCAD LT in Australia and New Zealand.

The results were very much in line with our expectations.

We experienced a surge of buying perpetual LT licenses prior to the cut-off date.

Combined seat volume in perpetual LT and desktop subscription LT grew on a year-over-year basis.

This is clearly a positive data point, as we look ahead to the end of sale of perpetual licenses for most individual products at year-end.

Looking at the AEC industry, BIM adoption continues to fuel our business, in addition to the general strength of the commercial construction market.

We're excited about our cloud-based products like BIM 360, and the recently introduced A360 collaboration for Revit, which connects building project teams with centralized access to BIM project data in the cloud.

This new product had a great win in Q2, where it displaced a competitor on a major US airport project.

On the structural engineering side, our new offering, Advance Steel, gained momentum with numerous competitive displacements in the quarter.

Looking at our manufacturing business, our automotive solutions continue to lead the way.

We can count almost every car company in the world as a customer.

There is broad use of products from conceptual design all the way through manufacturing, and we've seen substantial expansion in the use of our products throughout the auto industry.

And we're really encouraged by what we're seeing with the adoption of Fusion 360, the first cloud-based 3D CAD system.

Fusion 360 connects the entire product development process for use in design, test and fabricating a single cloud-based tool.

Usage is growing quickly, and we're delighted to see that the majority of our customers are switching from legacy desktop systems, such as SolidWorks.

We will talk more about how engineering software is moving from the desktop to the cloud at our upcoming investor meeting.

Our simulation portfolio experienced strong growth in the second quarter, with new business centered in automotive, industrial machinery, and consumer products.

Simulation provides key insights for our customers to design and manufacture better products.

We also saw continued investment from large automotive supply chain customers, investing in solutions for advanced materials.

Our new NASTRAN-based solutions had wins in many new and existing accounts.

From a geographic standpoint, it continues to be an uneven environment.

Strength in the US is being tempered by continued weakness in Japan.

Japan impacts both our APAC revenue, as well as our PSEB revenue line, as Japan has historically been a significant market for LT.

We also saw weakness in most of the emerging economies, and despite recent news to the contrary, we saw strength in China last quarter.

Following my comments last quarter, others in the industry had been talking about the approach to the Internet of Things.

We believe that capitalizing on this opportunity will require more than applying yesterday's technology.

To bolster our efforts in this area today, we announced an agreement acquire SeeControl, the innovative developer of enterprise IoT cloud-based platform.

The SeeControl service helps manufacturers and system integrators to net, analyze control, and manage things remotely.

Just as we have changed the CAD, CAM and PLM markets with cloud-based products, we are doing the same with Internet of Things, enabling our customers to easily incorporate IoT capabilities into their projects.

This is an exciting area, and we are looking forward to developing it.

Now, let me get back to the business model transition.

I will reiterate that this transition is not just about moving to a subscription model.

We are transforming our business and the products that our customers use.

The cloud is enabling our customers to think differently about how they approach design, simulation, production and collaboration.

I will also review once again that our business model transition will not be perfectly linear, and the amount of business that we transition, the number of subscription additions, and the mix of subscription additions will fluctuate from quarter to quarter and year to year.

Our transition will not look identical to some of the other high-profile software company transitions for many reasons, including a significant difference in our customers, price points, competitive position, our channel, and the fact that we already had a maintenance subscription business that represented approximately 40% of our revenue before we started the transition.

We have made good progress in the transition to date, and we are now ready to accelerate the process.

We'll start by ending sales of perpetual licenses of AutoCAD LT in APAC, with the exception of Japan, at the end of this quarter.

Next week, we'll announce the date of when we will stop selling new perpetual licenses for suites, but I'll say that we are accelerating our plans that substantially move up that date.

At our Investor Day event on September 29, we will provide you with our updated view of our model transition, and our enthusiasm about the steady state.

In the meantime, new disclosures that we made today around ARR, the percent of recurring revenue, and the change in end of sales dates for perpetual licenses illustrate progress we made so far, and our plans to capitalize on and accelerate this early success.

As we look at the second half of FY16, we remain confident in our billing systems and subscriptions network.

We've updated our revenue outlook, based on a greater than expected portion of our sales shifting from perpetual licenses to new subscription types, which are deferred and recognized ratably.

FX headwinds remain persistent, but they haven't gotten much worse than the first half of the year.

We continue to believe that FY16 will be more back-end loaded than usual, given the deadlines for end of sale for new perpetual individual product offerings.

To wrap things up, our strong conviction in the model transition is supported by our results.

Undergoing this transition will provide our customers with greater flexibility, and embedded user experience, while creating a more predictable recurring and profitable business for Autodesk in the US economy.

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

(Operator Instructions)

Brent Thill of UBS.

Carl, I just wanted to clarify comment you made.

The lowering of revenues really is related to the business model transition, not a material change in the actual core operations, or traction you're seeing, with your solutions in the market?

Yes.

Let me try to be as clear as possible.

Scott, feel free to jump in.

It is really just a transition from -- so, no change in volume, in business.

This is really about how we are going to recognize the revenue that comes in, and what we saw in this quarter and we are predicting, and in some cases programmatically accelerating, is that more of the revenue is going to move to ratable, which is just arithmetic to get to the fact that revenues are lower, even though there is no change in the fundamental business.

Okay.

Just to your comment in Japan, it's been an issue for many vendors.

But, there is also another issue, which I think Adobe has highlighted, that Japan really hasn't made the move to cloud.

I'm curious, as you move the transition to more subscription cloud, how do you think that market reacts, as you start to remove the core?

It seems like that may pronounce the weakness there for a little bit longer than, perhaps, than we think.

I'm curious if you could just provide any comments on how you think that all will play out?

Sure, Brent.

First of all, I think it is true that as we've seen over the years, and adopting new technology and business models, Japan has never been the leader.

I don't expect that to change.

One of the ways we are doing this transition that does give our Japanese customers a way to change, is people who have perpetual licenses and maintenance can continue to stay that way.

So, we will have avenues for people to continue buying that way.

For the majority of customers, it will change, but they can control it to some degree.

The second thing that's interesting is what I am seeing, which is more anecdotal at this point.

There is a slowing of the Japanese market.

So on many of the new things we're doing, so like these new products like Fusion, which is a cloud-based CAD product, we're having dramatically better results in Japan.

We're just releasing the Japanese version of the product, because it's been so successful.

That kind of runs counter to what we're seeing in the mainstream.

I wouldn't say that the enthusiasm for the cloud trumps what will be traditional customer's way, but there is a new generation that is looking at doing things differently and there's definitely, at least, an undercurrent in Japan on that.

Philip Winslow of Credit Suisse.

I just had a question on the subscriber mix that you saw this quarter.

If I just compare the press releases over the past couple of quarters here, in Q4, you talked about the majority of the subscriber additions being maintenance subscriptions.

In Q1, you said half were traditional maintenance, half were new type.

This quarter, you talked about the majority of subscriptions being the new subscription types.

Just wondering what trend you are seeing there, and also maybe help us think through the ARPU of a traditional maintenance sub versus the subscription subs.

Thanks.

Sure, Phil.

As we look at the trend on subscriber adds, we saw in Q1, previous quarter, for the first time, roughly a balance between the net subscriber adds that was coming in for maintenance versus those coming in from the new model.

In the quarter we just closed, it continued to be strong.

The new model sub adds that are just two big elements inside our subscription adds, new model and maintenance.

The new model sub adds continue to be strong, both year on year and sequentially.

When you look at the maintenance adds for the last quarter, they actually come into two pieces, too.

Renewals, so existing maintenance, and new maintenance sold attached to new perpetual license sales.

Renewal rates stayed strong, and then on the new sales, the attach rates stayed strong, but we are seeing that little bit of downward pressure on the new maintenance adds is really a different pattern this year versus what we saw last year.

Last year, when we announced the end of the sale of upgrades, we saw a pretty linear path of customers buying those upgrades throughout Q2, Q3, and Q4.

About the same each quarter.

What we are seeing this year is, the customers that are going to buy perpetual license at the end of the sale are more back-end loaded.

We saw this with the test that we ran in ANZ, where it was closer to the end of the actual end of sale in Australia and New Zealand, that buying activity took place.

We have said all along we think this is going to be a back-end loaded year because of that, and that's really the trend that we're seeing inside the subscriber adds.

Talk about the difference in --

In ARPU?

Yes.

When you look at ARPU, the overall blended ARPU of those two types is quite different.

Even within each type, it's very sensitive to whether you are talking a desktop subscription for LT versus the desktop subscription to PrDS.

So, it's blended to such a level that it's hard to glean a lot of intelligence at the summary level.

But when you look between just the average price of a desktop versus the average price of maintenance, a good example of it would be AutoCAD.

And annual maintenance there sells for between 15% and 20% of the SRP of the new license, versus a desktop license for a year, would sell at about 40%.

We're using that as an example, it is roughly half.

Got it.

So in other words, you got a higher mix of your higher ARPU to subscribers, as far as the new adds this quarter?

Yes, that's correct.

Got it.

Cool.

Thanks.

Steve Ashley of Robert W. Baird.

Terrific.

I wonder if you could go back through -- you talked about the growth in long-term deferred revenue, and you had talked about seeing some long-term contracts with maintenance, and something about some dynamic around the renewal of maintenance.

Can you just walk us through what drove that growth in long-term deferred revenue and maintenance?

Sure.

We had, Carl mentioned in his opening commentary, we had a strong quarter for multi-year maintenance sales.

So, what drops into long-term is anything that's deferred beyond 12 months, and when you sell multi-year, it's a bigger component of that than normal.

So that's what's driving a bit of an outsized growth.

The deferred revenue in total was quite strong, up about $80 million sequentially, quarter on quarter, driven by what we just said, a higher mix of our sales coming in ratable models versus up front, and within those ratable models, multi-year maintenance was strong.

That dropped an element in the long-term versus current.

Steve, what really drove it was, we offered a discount for people who were paying upfront for multiple years before.

We announced the elimination of that discount, and people wanted to get in on it, at least some did, before that offer expired.

It drove a little bit of business.

A bump in multi-year.

Yes.

It just got multi-year, it didn't drive subscriber count, it had no effect revenue, essentially.

That's the other interesting point.

When you add a multi-year, it is still just one subscriber.

Boost the billing line; it doesn't necessarily bump the subscriber line.

Okay, and then I was going to ask about the desktop subscription traction you are getting in the channel.

What percentage of that is LT?

I'm not looking for a number.

It's the largest individual piece.

It matches the product mix.

The one thing I'd say about adoption of desktop subscription, just to step back a little bit, is I won't particularly say any industry or product line is any more inclined to do it or not.

It seems like our customers are endorsing the move to the new model, and it's pretty consistent across the board.

Thank you.

Heather Bellini of Goldman Sachs.

I had two questions, if you don't mind.

The first one, I'm just trying to reconcile, again, the comments about the transition accelerating with subscription adds showing up of only 61,000 in the quarter.

I know we don't have a ton of history with that, but I'm just trying to reconcile those -- that comment, if you could give some color, there.

Secondarily, I know obviously you started giving out annualize recurring revenue, and I know that the definition of that is in the glossary.

The 55% that you are showing, the recurring revenue, and the table that you have, could we just take subscription revenue, I think, and divide it by your total revenue, that's about 52%, I think, of revenue.

Is that ARR, if we were to try and translate that into numbers?

Is that about, I don't know, $18 million or $20 million higher than what your subscription revenue line is showing?

I'm trying to get a sense of what you want us to do with that number besides look at a percentage that's growing?

I want to make sure I'm translating it into dollars appropriately.

Thank you.

Sure, Heather.

Sure.

On your second point, the reason we start to give that is as we go through the transition and we are in this somewhat hybrid state, where we are selling new model types and perpetual license types, obviously, the faster we make the transition, the more people that buy the new model types, the faster recurring revenue, both an annualized basis, and in any given quarter will trend.

So that's the point of providing that.

And we will spend more time talking about this.

I know why you are providing it.

It's not about why you are providing it.

How are we supposed to interpret the 55%?

Is that annualized recurring revenue, the 55% you're pointing to, I'm just trying to confirm.

Is at 55% of the $613 million that you reported, which compares to your subscription revenue, which is about 52%, I think, off the top of my head of the total?

I'm just trying to get behind the number.

You're not giving us the dollar amount, you are giving us the percentage.

I want to make sure I'm thinking about the percentage the right way.

You are.

It's actually 55% of the $610 million that we reported.

But that's right you're thinking about it correctly.

Okay.

Perfect.

Then, to the first question?

The first question, I'm sorry --

Go ahead.

The acceleration that we're talking about, again, it's the acceleration of the transition, and so what you see within the subscriber adds is both new model ads and old model adds, if you want to think of maintenance that way.

The new model adds continue to accelerate, and so the growth rate there, both year on year, it's huge.

It's strong sequentially for the new model adds.

That's why you see us taking actions, like going to end of sale in LT and APAC at the end of this quarter, everywhere except Japan.

We'll announce next week when we hit end of sale for perpetual Ensuite.

That's acceleration, and that's what is showing up in the subscriber adds.

The one other comment we put in there that may have been slightly too obtuse, was this idea that what we're seeing with these end of sales, is that people are not taking advantage of it until late in the promotion.

For example, the opportunity of some of these things to attach maintenance to, they are not availing themselves of it.

I think we will see some unevenness in these numbers, on both the maintenance -- old maintenance and new subscription, as we go through the next two quarters and into next year, before we terminate the program.

There will be a little bit of volatility there.

It's behavior that we're at this point, truthfully, really not that good at predicting.

We've never gone through this transition of doing the end of sale of either the individual licenses or the suites.

This is a one-time phenomenon.

I think all of this will be slightly imperfect.

I'm predicting that.

Thank you.

Jay Vleeschhouwer with Griffin Securities.

Carl, with respect to the termination of the suites, just to be sure we understand what you're saying, you are moving it up from the end of FY17, as previously planned, and so, in effect, you decided to have a lift the Band-Aid moment off, the way Adobe decided to do three years ago?

They originally started with a longer transition period in mind and of course, they went to do it much more quickly.

You are, in effect, doing something similar, now?

Is that what you mean to do next week?

Yes.

In essence, you are right.

I'm not sure we've ever exactly announced what it was.

But I think we certainly intimated clearly enough, and I think what we saw, we wanted to make sure that both our customers and our channel partners were ready for this transition.

We started out with a model of this that enabled us to take longer to do it, than folks like to do it.

What we've seen is a willingness -- a huge willingness on the part of our customers to use this new model.

In many ways, it's much more favorable for them.

Secondly, our channel partners, which we told you were always very vulnerable if we did rip the Band-Aid off in the beginning, are successfully transitioning their businesses and their customers through this.

So, just like many of you, I can't tell you how many have you have told me, why don't you rip off the Band-Aid?

Yes, we are going to have a rip the Band-Aid off moment, and we will give you the details on it next week, and then we can certainly talk about it a month from now, when we all get together.

That was exactly what it was about.

In many ways, this is really beneficial for us.

It is non-trivial to run the two things simultaneously.

I know, also, just in terms of reporting financially, it makes some of the results somewhat confounding.

How does this go up, and not this go up?

All this does is it accelerates that transition for customers, resellers, and certainly for the financial community.

So earlier next year than we previously planned we come out of that, and start seeing also the economics of that, as well.

You've alluded, now, a couple of times, to the readiness of the channel.

To the extent that you do accelerate the business model transition, would you necessarily accelerate the change in the channel model, itself?

In other words, the agency or fee model that we have talked about a number of times, would the two, necessarily, go hand-in-hand, as you've also alluded to in the past?

As you know, we are constantly adjusting the channel model.

At the very least, it's an annual phenomenon around here.

Much of it is carefully planned with the other programs that are in place, and in consultation with our partners, and so we've worked really closely with them, and many of the things that we think are appropriate for the beginning of the transition we put in place, and we've talked about them before.

As we get towards the end of the transition, we'll move through to those things that we said were coming.

I think every part of it has to move together, to make sense.

So, with the acceleration of the announcement of the sale, along with the go channel programs and a number of other things.

All right.

If I could maybe squeeze one more in.

You alluded to focusing --

Who would stop you, Jay?

Maybe Scott.

Thanks.

So, you alluded, Carl, that in the second half you would focus on unattached or non-maintenance paying customers.

Setting LT aside, are you referring, specifically, to the upgraded but not attached base that was part of the $2.9 million, that famous number from the analyst meeting last year?

That's the famous number.

Right.

But of that, $1.3 million was upgraded, not attached, not counting LT.

So, that's the number you are going to be converting?

Yes.

Well, both, Jay.

We'll focus on an LT base, as well.

The goal will be to -- in addition to acquiring new customers with the new models, which we're doing nicely, will be to progressively go after that legacy base.

LT and non-LT.

One of the things that has been a very pleasing upside is, just because of the price points and the differences, characteristics amongst our LT customers, we were more anxious about them and the new model transition.

If anything, the adoption there has been as strong as in any other part of the portfolio.

I think we mentioned the one place that we are nervous, which is Japan, which is certainly meaningful in terms of LT.

When you look at, for example, the other industrialized countries, Western Europe, United States, we don't see much difference there.

Fortunately, that simplifies the programs and allows us to do more things holistically, and in a way that makes sense, and is easier to communicate to everybody.

We are just going to continue to do that, and we are really pleased to see the LT customers coming along.

The upside there, of course, is LT had the lowest attach rate.

Previously, when we sold our perpetual, it had the lower attach rate on maintenance.

Seeing that LT customer set move to desktop gives us a chance to bring them along with us and pull them in as subscribers.

Thank you.

Gregg Moskowitz of Cowen and Company.

Thank you very much and good afternoon.

So you had a pretty big uptick, a very big uptick in subscription billings, up 52% year-over-year.

I was hoping, Scott, that you could parse this a little more for us.

Can you tell us how much of this growth, roughly, came from greater end market customer acceptance of your subscription program as opposed to a lengthening in terms, just by virtue of the increase in multi-year subs that you referenced?

It was both, but of course, the size of our maintenance base was so much bigger, it's a base that we've built up over the last two years.

The number, from a pure numbers standpoint, it overwhelms, but we saw strong growth, both crazy growth year on year in the new models, but strong growth sequentially.

But multi-year maintenance also drove a big chunk of that subscriber billings upside, and that's just a function of the size of that installed base moving.

Okay.

Thanks.

Maybe one for Carl.

If you could talk about what you're seeing in terms of activity levels on your e-store?

Just when you expect that e-store could become material for you.

Thanks.

The e-store, at this point, is becoming material.

We're getting to the point where we will start reporting, maybe we'll start giving you some insight into it.

But it is becoming a sizable portion of the business.

And, one way to think about it, there's already a store, but it's just electronic distribution and sales that includes many partners all the way from folks like TDW, Dell and Amazon, all the way to our traditional partners doing online distribution.

Electronic sales and distribution is becoming more important.

Already showing though, we continue to sell at list price.

So, it is a reference marker out there.

Many people just buy for convenience through there and it's growing substantially.

The main point to take away as we prepare for Investor Day, talking a little bit more about the electronic channel.

But they're clearly the wave of the future, and particularly as we look at many of our new products, many of them are almost exclusively through our electronic channels or at least starting out, more even with our traditional channels.

Great.

Thank you.

Walter Pritchard of Citi.

Scott, I wondered if you could talk about the rental uptake you're seeing, and how that may differ or not in the manufacturing vertical versus the AEC space?

Walter, we're not seeing a big -- Carl touched on this earlier, we're not seeing a big difference in the uptake rate by either product or by industry vertical, at this point.

If you looked at it by geo, you might see a slightly slower uptake of the new model types in Japan.

But, holding that aside, we really are seeing a pretty consistent uptake in the new desktop subscription model, which is the rental model, across product lines and across segments.

Got it.

Carl, you are buying the Company on the Internet of Things side.

It seems like if I put myself in your place, you have quite a bit going on.

How do you avoid getting distracted here with a big business model transition, and now, you are entering a new market.

It seems like that could be a risk.

Yes.

One is, I'd say, we do acquisitions all the time, routinely.

If you want to step back for a minute and just look at Autodesk, in general, there are two big things we're doing.

The first one is business model transition.

We spent a lot of time in prepared remarks, as well as already on the Q&A talking about lots of that, and so, we will continue for the next number of months.

What sometimes gets lost with all of the conversation about that, is that we are probably in the biggest transformation in the engineering and design software space we've ever seen.

As big as mainframes to workstation or workstation to PC, the shift of engineering software moving to the cloud is as big, and more inevitable than any of those other transitions.

The alternative to doing acquisitions like SeeControl is to miss out on big parts of the market.

We just look and say, what we want to come out of this is not only a more sustainable, less volatile model on the business we have today, we fully expect to be the leaders in cloud computing for engineering and design.

One of the ways to do that is to continue to develop stuff internally.

The other is through acquisitions.

Whether it is stuff we're doing with PLM 360 or BIM 360 or what we'll do with the Internet of Things on the cloud, we think that's really important.

I would, at least, urge you to look at both the lack of competitive movement there.

Most of our competitors don't think the cloud is that important for their customers.

They are making a half-hearted to nonexistent attempts to do anything about it as though -- . It's a bury your head in the sand of strategy.

When you look at it, they are protecting the legacy business, whether PLM or anything else.

So we look at things like the Internet of Things or moving CAD or PLM or CAM to it as being a critical part of what Autodesk looks like a handful of years from now.

Walter, the other thing I would just add to that, since your question was about distraction, I don't see Internet of Things as a net new segment for us.

It fits very much hand in glove with where we are headed in manufacturing, and where we are headed in AEC.

It's more of an adjunct to a couple of pretty strategic segments we are already in than it is something that is net new that we are adding to the plate that we now have to build an entirely different structure to support.

I think some others in the market have positioned it as a new segment.

I think Scott is absolutely right.

If you just break it down a little bit, I don't know anyone building commercial buildings nowadays who are not thinking about instrumenting and monitoring buildings to improve the efficiency of running their operations.

Whether that's in commercial real estate or industrial space, in terms of a factory or a power plant, everybody's doing it.

I think very few people are designing new products that aren't, number one, enhanced by the Internet of Things technology, and most everybody is trying to collect data and analyze it so they can build better products for the future.

This is really the foundation technology to get that started and we certainly have more work to build into the business, but I think it dovetails exactly with our already existing businesses.

Great.

Thank you.

Anil Doradla of William Blair.

This is Maggie Nolan in for Anil.

My first question is on the new incentives.

You mentioned that had been a discount for customer-signed subscriptions up front, and I'm wondering, are there any other incentives that you will be rolling out to help accelerate the transition to the subscription base, and how you hope to achieve that subscription that we'll need to see in the second half, given that the full-year guidance has remained consistent?

Let me just be clear on this one.

The first one was what we're talking about with the multi-year subscriptions was the removal of a promotion, and people buying ahead of that removal.

Okay.

That was just the discounts going away and people just saying I want to buy now and pay less.

What I think you'll see going forward, is we will continue to promote the move to desktop subscriptions.

We'll talk more a little bit more it about it next week and beyond that.

I think, if anything, the bias right now is to accelerate that and promote it more.

Having seen the success we saw was to double down on that, and encourage people to move more quickly.

I think it serves all of us well to do that.

Okay, makes sense.

And then, my second question was, you mentioned that China wasn't much of a headwind in the second quarter.

I'm hoping you can give a little more color around your view of that going forward, and what limited that headwind in the second quarter?

I wish I could.

That is one of the confounding things amongst many.

Yes, there are certain places in which the economic reports coincide nearly perfectly.

We are seeing really strong business in the US, and all the economic reports out in the US, including the one this morning, continue to be strong.

Actually, it lines up with everybody's impressions.

You walk around major cities, and there are cranes everywhere.

The job market is tight, unemployment is low.

China, always, on the reporting side, is a little bit of trickier place to actually understand.

I don't really understand to what degree, and the flip side of that is Japan, is where there is definitely some distance between our results and the overall economic one.

We're digging into it a little more to understand.

I'd say, at this point, we have an imperfect understanding.

And just for everyone, we spend a little bit of time trying to understand it.

But in some of these things, when it goes beyond what is actionable and what we would do differently as a result of understanding it, it starts being diminishing returns for us to play macroeconomists.

Maggie, maybe the better way to think about China is to step back and say, what drove the growth in the quarter?

Obviously, China is a very active construction market.

I've been there.

As Carl said, you see cranes everywhere.

BIM is actually taking off in China, you look at major projects like the new Shanghai Tower, and it's being built with BIM start to finish.

So that's what's fueling the growth.

The second part of your question, what to expect, given the events of the last five or six days, that's the one where its kind of -- who knows, at this point.

Some of our peers include things like the government has been putting a lot of money into infrastructure projects, and some of the injections into the economy, I think they generally benefit our kinds of customers.

That's a little bit of speculation on our part, but it is possible.

Once again, it's one quarter data point.

Now that we are lined up, we will see going forward what we're seeing in the next quarter.

Sure.

Great.

That helps.

Thanks for taking my question.

Sterling Auty of JPMorgan.

I've gotten a few emails from investors.

There's a lot of terms being floated around during the call, and I think there's some confusion.

Can you clarify for investors, when you talk about the new model, how much of that are you talking about in terms of pure product subscription versus maintenance, versus anything else?

Just clarify the term for some of the investors?

Sure, Sterling.

We started talking about this last quarter, as well.

When I say new model, I'm thinking of certainly desktop, cloud, and our enterprise business agreement.

So, anything that is ratable and subscription-based is what I would drop into the new model, and then, if you look at what's not there, obviously, the biggest chunk is our maintenance business that's tied to our professional licenses and there is a smaller consulting and smaller CFIN and some others.

Think of the new model as desktop, cloud, and EDA, largely.

Okay.

Great.

The other big topic the last couple of weeks for investors is, Carl, go back to that analyst day, when you talked about the 12% billings CAGR, 20% uplift in customer value, 50% increase in subscribers.

Especially, that 12% CAGR in billings has been the one that's been on investors minds.

Can you either comment tonight or at give us some idea if you are going to talk about how that actually shakes out under the new accelerated transition, when we get to Analyst Day?

Yes.

Probably the best thing to do is to tell you that we will talk about it at the Investor Day, and what we will do is we will update the financial model, and our understanding of how the transition continues.

We'll show you lots of detail about that, and hopefully, remove some of the confusion that exists about how we go about it.

What we did, a little bit as a preview, is to start pointing at some of the metrics that we think are more appropriate to understand the transition.

We told you at the time, some of these were our best guess, and math moves easily to the history before it.

We said, as we learned more about it and understood it better, and were better pinpoint things that we're looking at, I think we did that today, and we'll do more of it at the upcoming Investor Day.

Yes.

Your notes have actually touched on a lot of the key dynamics in that transition.

As we move from a hybrid cloud model to one that is much more pure subscription model.

I appreciate that.

Last quick one.

As you look at the last two quarters and subscribers, is there anything, in terms of seasonality or dynamics that would change one quarter versus the other in terms of total number of subscribers that we might expect?

Or the mix, in terms of those that are pure product subscription -- desktop subscription customers?

I think, obviously, the big effect that we'll see on total subscriber adds in the second half will be the attach rate, which we have set our attach rate of maintenance has grown materially over the last four quarters.

It continues to be strong.

So, as we see that end of sale of professional licenses at the end of Q4, a lot of those perpetual licenses that occur in attach rate, that will drive a subscription uptake in subscribers in Q4.

For the new model types, they continue to grow.

We're not seeing any seasonality in the new model types, yet.

They are growing year on year, and they are growing sequentially, at this point.

I think we need to understand the seasonality later, but right now, there are overwhelmingly affected by our promotions and the timing of an announcement like end of sales, that I would say that's certainly the first order effect, any seasonality is a second order that won't get sorted out till later.

Great.

Thank you.

Keith Weiss of Morgan Stanley.

Maybe, to dig in on that subscriber count a little bit.

Last year, you saw big seasonality into the second half of the year, and upgrades went out.

I think it was up, like, 36% from the first half into the second half.

This year, to get to the midpoint of your guidance, you're looking for an even bigger seasonality, and it seems like the answer of how you get at bigger seasonality is the expiration of perpetual licenses on a significant part of your product portfolio.

So two-part question.

One, is that the right view?

That is primarily what gives you bullishness into the back half, and two, maybe a little bit more philosophical, how do we understand the true level of underlying demand when the past two years have been heavily influenced by these expirations?

Or, how do you get confidence to that level of underlying demand?

The first -- the answer to your first question is yes.

You are fundamentally thinking about it correctly.

We do expect it to be much more back-end loaded, because of the size and the importance of the products that will no longer be sold beyond the end of the year.

But, for a bit of an order of magnitude on that, we talked about it being roughly half of our new model types.

So, not maintenance attached to perpetual.

The new stuff, being roughly half of Q1, and better than half of our Q2.

You can start to get a sense of, it's not new material, it's not a huge revenue driver at this point, in terms of our subscriber adds.

It is a pretty significant chunk of our subscriber adds, the new model types.

But yes, fundamentally what will drive the significant uptick in the second half is the end of sale of perpetual at the end of Q4.

Secondarily, just on more philosophical, when we keep on emphasizing, and we'll give you more insight to in a month, is that the business model remains where we expected it.

The big difference is the way people are choosing to buy the products.

It's not about the underlying business demand.

It is fundamentally about the way they choose, and therefore with the way they choose, the way we account for that.

That's why we, as well as you, I'm sure, are looking forward, too, and it all comes back to a single model.

We told you at the very beginning of this that the hardest part was going to be running a hybrid model where you have two, because goodness in one model looks like badness in the other and vice versa.

They just eat away at each other, and so getting back to more of a holistic single model will be good.

That's back to Jay's comment about ripping off the Band-Aid.

What we said, and we'll give details next week is we're going to do that sooner than we were otherwise planning on doing.

Got it.

On this SeeControl acquisition, I think Walter was talking about the potential for distraction coming from SeeControl.

I think the other risk that investors see is OpEx growth coming from it.

The longer-term target is assumed that relatively muted OpEx growth over the next couple of years.

Is SeeControl or acquisitions of this type, is that putting that as far as mid-single digit OpEx growth profile for the next couple of years, does that put that at risk?

Not at all.

Acquisitions like SeeControl and the others are all within the same envelope, when we give that guidance and as we move through it.

We're consistent to that.

We presumed it in the beginning, even though we didn't know which acquisitions.

As we considered them internally, they are all within that.

You saw the OpEx growth this quarter that aligned, I mean, it's right in line with everything we told you would be the OpEx growth.

So, no, these acquisitions are not at all -- and as we said before, both the small and this would get into a medium-size, wouldn't do that.

The only exception I would ever say is if there happened to be a large one.

I'm not saying there is one.

We're not contemplating it at any time.

As you know, large acquisitions and the costs they bring in the first year would effect that.

That is not in the plans and we're holding true to the mid-single digits OpEx growth.

Got it.

One last one for me.

In terms of free cash flow growth, you had talked about free cash flow growth being in line with billings growth.

Mix shift is taking the revenues down a little bit, but I won't expect that to -- that should not probably impact, since billing expectations stay the same, that billings in free cash flow model should stay roughly aligned?

That's right.

The top line of -- so free cash flow, the way I would define it is cash flow from ops minus CapEx.

There is no significant changes coming in CapEx.

The top line of cash flow from ops is net income.

That will flow off of billings.

Got it.

Excellent.

Thank you.

Steve Koenig of Wedbush.

Gentlemen, thanks for taking my questions.

Just focused on the new model subscriptions here, I'm trying to rationalize some of the commentary with what we heard from the checks.

In which, the desktop subscriptions, that promotion didn't seem to be doing nearly as well as the license plus extended maintenance promotion.

I'm wondering if the success you are having in the new model adds -- could it be that given the lower ARPUs for the cloud products, is that -- is that helping significantly?

Then, maybe one follow-up on that, as well.

No.

It's not about the cloud subscriptions.

This is really comparing maintenance subscriptions to desktop subscriptions.

Answering -- I don't know how to answer -- resolving with the checks.

That's always been a riddle beyond my pay grade.

But, don't think that it's something else, and there something not to understand.

This is exactly people moving to desktop subscriptions for the kinds of products you would imagine.

That is exactly right.

The checks are -- I think everyone knows this -- it's very difficult to extrapolate from a small subset to worldwide growth.

It's always subject to variability.

Just from your point of view, because of our interactions with the channel are a little different, we are always somewhere between bewildered and bemused at reading the notes on channel.

For sure.

Sometimes, they are strikingly accurate, uncannily so.

Other days, we're like, did they talk to someone who had a bad day?

I mean, we can tell you what we know about it.

Just to be very clear about that, think of that as maintenance versus desktop subscription.

Okay.

That's helpful.

For the follow-up, related, it's not fair to ask you what's different about my checks.

But, I guess going back to the mix, maybe the mix of people selling the desktop subscriptions, I would just comment, we heard that most of the resellers were well short of the goal that Autodesk had set for them for the year.

And there was a lot of consistency around what that goal was.

Go ahead, sorry Carl.

Sorry.

Go ahead.

Okay.

Just to close that off, we are guessing that it seems the larger resellers are doing better.

Is there mix differences across the size of the resellers?

You're clearly concentrating your efforts on making life better for those large resellers.

Maybe any insight there, or further commentary?

First of all, sorry for trying to cut you off, there.

No problem.

What I would say is, as we get deeper into this, we will do more analysis on it.

Right now, we don't have any distribution that looks dramatically different, there.

It is certainly an interesting question, as to whether or not we are seeing anything, there.

I would say, for the most part, we did not see any of that.

Yes.

We haven't structured the back-end incentives to be different for large versus small.

Any more so than the normal channel structure would dictate.

So, is nothing there that would favor that.

Okay.

Sorry, Carl, go ahead.

I was just thinking of the mix of distributors and stuff out there, and just going -- what we will try to do is a month from now, we will try to give you a little better insight into whether we see any variability, in terms of the performance.

There's nothing that jumped out at us through the analysis of the quarterly results that give us any indication about that.

The one thing I would say, though, about goals, -- and I think sometimes this is misconstrued, in terms of people doing channel checks.

It is true that sometimes our sales management team gets aggressive when we want to do programs.

We're just trying to send the message of what's important.

I think in more steady-state businesses where we really understand the performance, you might set your overall target at 102% of what you expect, and the 2% on, for example, a $600 million quarter, when it is relatively steady state is understandable.

When we want to new things, sometimes we get aggressive and sometimes there is a little bit of a signs from the channel partners.

Directionally, this is where we expect you to head, and we think this is what we think is important.

Sometimes, some of the sales targets out there are more aggressive, and they're definitely not consistent in terms of targets, relative to what we think we want to change.

Got it.

Okay.

Thank you very much for taking my questions.

Richard Davis of Canaccord.

I know the cloud helps you compete better.

But, one of the hardest parts that I hear from guys that are thinking about switching, or companies that are thinking about switching from one vendor to another, is the fear that the engineers have with regard to their old models, won't translate over seamlessly.

How are you handling that concern?

Is that still an issue?

Is that a legacy issue?

Is that a data issue?

Or, is that not an issue at all?

Thanks.

I think it used to be a huge issue in the industry.

One of the things we've done with both our cloud and desktop products is hopefully, made it more of a non-issue.

But, we will read in models from almost any vendor.

Dozens and dozens of different formats and operated on almost as if they are natively.

Look, I would be worried if I had a 77 set of plans with 12 million parts in it, because the question is not does it translate, but how do you check that it's translated 100% correctly.

I think there are some industries that will be slow in adopting this, but I think we're getting to the point where the majority, the mainstream of customers deal with files that come from heterogeneous systems every day, and have worked through that and have come to trust that the translation of these things just works well.

The one thing that's really good is moving this to the cloud has, digging a little bit deeper on the technical side, two nice benefits.

Number one, is the translations that existed in desktop products, we were not able to see -- we could not see the failed results.

When they're on the cloud, you can look at the failures.

The second thing is, as you recognize whatever shortcomings there are in the translation process, you can update those translations instantaneously.

There is a lot of benefits.

While fully protecting the customer's data in IP, you can actually give them a much better experience.

So, it's one of the many benefits of doing this cloud-based engineering.

Right.

Thanks so much.

At this time, I'd like to turn the call back to Mr. Gennarelli for any closing remarks.

That includes our call today.

As Carl mentioned, we have our Analyst Day September 29 here in our Gallery in San Francisco.

If you're interested in attending, please email or call me.

You can get my contact information on the press release.

Thanks.

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

This concludes your program.

You may now disconnect.