Autodesk Inc (ADSK) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Autodesk Q3 of FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Sir, please begin.

Thank, operator.

Good afternoon.

Thank you for joining our conference call to discuss our results for the third 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 on our website in advance of this call.

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

During the course of this conference call we will make forward-looking statements regarding future events and the anticipated future performance of the Company, such as our guidance for the fourth quarter and full year FY16, our long-term financial model guidance, the factors we use to estimate our guidance including currency head winds, 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 the FY15, our Form 10-Q for the periods ended April 30 and July 31, 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 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.

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

Thanks, David, and good afternoon, everyone.

At our Investor Day in late September, we laid out the vision and course for our business model transition.

Overall, this quarter was in line with the plan we outlined.

The performance of traditional P&L metrics like revenue, operating margin, and EPS, most of which were ahead of our expectations, were driven by slightly more perpetual licensed sales than expected.

Metrics like billings and total subscription additions were below our expectations.

We'll be in this hybrid model for the next few quarters.

As a reminder, we'll stop selling new perpetual licenses for individual products on February 1, and most of the rest of the products, including suites, on August 1 of next year.

At that point, metrics like subscription additions and ARR will begin to be more predictable.

Most importantly, we are pleased with the total unit volume of licenses sold in the quarter, which was in line with historical ranges, and we're on track to add approximately 600,000 or more units for the fiscal year.

This number is critically important for two reasons.

First, it is the best indicator of the health of the business while customers have two different ways to buy our products.

Secondly, it drives new subscription additions starting in Q3, where perpetual licenses are no longer offered.

We were also pleased with the continued growth of our desktop subscription sales and growth in new model ARR.

From an operational perspective, we continue to make critical investments.

Infrastructure from the business model transition and our cloud platform and services remain the top priorities.

At the same time, we've been focused on managing our overall spend, and creating increased efficiencies throughout the organization, which led to only 1% growth in total spend for the quarter.

This is part of a much larger plan to ratchet down expenses as we move through the transition.

One particular cost saving action we have taken recently is our decision to exit the hardware business at the end of this quarter for our creative finishing products within our media and entertainment group.

This is a small portion of our overall business, but comes with substantially lower margins.

It's really a win-win, as customers have been asking for hardware freedom, channel partners have wanted to sell it, and it will benefit our margins over time.

Another area where we expect to achieve cost savings and margin benefits is with our e-store.

We just launched our new North American e-store this month, after years of it being hosted by a third party.

The new site creates a better customer experience and reduces the cost of these online transactions.

This is important, because we believe we can meaningfully increase the volume of business we do online.

Finally, during Q3 we opportunistically took advantage of the low stock price to increase our stock buy-back.

We purchased 3.2 million shares at an average cost of $46.33, bringing our total buy-back to 6.9 million shares year to date.

Now let me spend a little time on subscriptions.

Once again, subscription additions were led by new model types, which increased over 130%, and represented over half of the subscription additions.

Desktop subscriptions led the new model type additions.

The volume of desktop subscriptions coming through our channel partners continued to increase.

In Q3, channel volume of desktop subscriptions was over 60% of total desktop subs.

That's up 44% in the third quarter last year, so it's clear that our channel partners are actively engaged with us through this transition, and are making desktop subscriptions an important part of their business mix.

Looking ahead, we remain focused on driving new business, as well as converting the sizable base of non-subscribers to subscribers.

Recall that in the second quarter we discontinued selling perpetual license of LT in Australia and New Zealand, and the results were positive.

We took that a step further in Q3 when we discontinued selling perpetual licenses of LT in the rest of Asia Pacific, with the exception of Japan.

Once again, we experienced an increase in the unit volume of LT.

It's another data point that gives us confidence going into the next few quarters.

Attach and renewal rates for maintenance subscription remain strong.

Last year's highly successful upgrade program made comparisons for new maintenance subscriptions challenging.

Total ARR increased 18% in constant currency, with maintenance ARR growing 9%, and new model ARR more than doubling year on year at constant currency.

Total recurring revenue increased to 56% of revenue, compared to 48% in the third quarter last year.

Taking a closer look at our industry statements, let's start with AEC.

We continue to win new business in AEC.

One of the most prestigious architectural companies in the world just decided to standardize on Revit, the world's leading DIMM software.

This particular firm has been using competitive products for the past 20 years.

We are encouraged by the continued adoption of our cloud-based AEC tools.

BIM 360, our cloud-based software for construction management, continues to grow rapidly.

We recently signed an agreement with one of the top international contractors, where BIM 360 won out over competitive on-premise software.

BIM 360 is being established as the primary construction field reporting and management tool for this firm's construction business units.

A360 collaboration for Revit also experienced strong sequential growth in subscribers.

Turning to our manufacturing business, we continue to gain ground in all sectors, but particularly in automotive, aerospace, and industrial machinery.

Inventor, Alias, and Fred continue to be very strong performers.

Fusion 360, the first cloud-based 3D CAD system, experienced strong growth in adoption and usage.

We clearly have the pole position in terms of bringing engineering software to the cloud.

We're particularly encouraged by the use of Fusion in large companies switching from legacy systems such as SolidWorks.

We're very encouraged by strong adoption in Enterprise accounts, even in industries that have been more cautious about use of cloud-based product design software.

This comprehensive functionality built into a cloud-based platform has proven to be very compelling for companies looking for the next-generation product development software.

The strength of our simulation portfolio was evidenced this quarter by competitive wins at several high-profile enterprise accounts that have long been strongholds for the competition.

These customers are focused on simulation early in the design process, and close alignment to design tools has proven to be a unique value driver.

Our move to the cloud has proven to be a differentiated competitive advantage, especially with our SMB customers.

We had another solid quarter with POM360.

Speed and scale for deployment gives us competitive differentiation versus legacy on-premise solutions.

Both new logos and total POM deals increased 50% in the quarter, and we continue to have a steady stream of existing POM customers come back to expand their original contracts.

Going forward we're excited about scaling this business, starting with its strong pipeline going into Q4.

Now turning back to our model transition.

I want to revisit the main themes we spoke about at our Investor Day last quarter.

We're now a little over two months away from a major milestone in our transition -- the end of sale of perpetual license offerings for individual products.

We're targeting a 20% compound annual growth rate in subscriptions, and a 24% compound annual growth rate of ARR from the end of this fiscal year to the end of FY20.

As we indicated, the model hinges on growth in subscriptions, so it's helpful to talk about what we expect to be the four primary drivers of subscriptions.

First, starting in the third quarter of next year, virtually every license that we sell will be a subscription, as we end-of-sale all new perpetual licenses.

As you may recall from our disclosures a few years ago, the typical run rate of licensed unit volume has ranged from 500,000 to nearly 800,000 per year.

On top of typical run rate of licenses, we are seeing a multiplier, as customers move from perpetual to subscription.

This multiplier ranges anywhere from a 10% to 30% up-lift in units.

These tend to be companies that were previously sharing licenses among their users, and the subscription price point makes sense for them to purchase additional seats.

Second is converting a minimum of 30% of the 2.8 million users out there who are active but not on subscription.

The third piece is capturing a larger share of casual pirates.

Finally, the TAM expansion of cloud-based products and services, which brings in new users.

The 20% subs CAGR will drive the 24% ARR CAGR.

We also talked about a 3% CAGR in annualized revenue per subscription.

That number is heavily influenced by the mix of subscriptions.

LT and cloud subs have a lower ARPS relative to our other offerings, and will depress total ARPS, but are great for total ARR growth.

I also want to be clear that these CAGRs anchor on the end of FY16, and we expect some bumpiness over the next three quarters as we end the sale of new perpetual licenses.

This does not change our conviction in our assumptions or the end state of this transition one bit.

In fact, the early proof points around subscription adoptions have been very encouraging.

I alluded to this at the beginning of the call, and I'll reiterate here.

Our business model transition will not be perfectly linear, and the amount of business that we will transition, the number of subscription additions, and the mix of subscription additions will fluctuate.

The fourth quarter is always the biggest quarter of the year for us.

Gauging the level of activity around customers buying the last perpetual licenses for individual products is particularly difficult to project.

As such, we've taken a more conservative view and reduced our billings and subscriptions outlook for the remainder of the year.

This is partially related to our Q3 results, and partially related to our revised Q4 outlook.

We're also factoring in about a $10-million reduction in billings related to exiting the creative finishing hardware business.

Global economic conditions remain uneven, with strong head winds continuing in most emerging markets.

FX head winds remain persistent, but they haven't gotten much worse than the first three quarters of the year.

To wrap things up, we're really excited to being one step further along, and maintain our strong conviction in the model transition.

We're heading down a path that will provide our customers with greater flexibility and a better user experience, while creating a more predictable, recurring, and profitable business for Autodesk in the years to come.

Operator, we're now ready to take questions.

Thank you.

(Operator Instructions)

Our first question is from Keith Weiss of Morgan Stanley.

Your line is open.

Hi, guys.

Good afternoon.

This is actually Stan Zlotsky sitting in for Keith.

Thank you for taking my question.

I wanted to kick it off with the long-term model.

You're saying that nothing has changed, but we're essentially taking down subscriber targets for this year, so we're lowering the starting point.

Does that implicitly say that you are saying that the growth rate in subs will be unchanged, but the end point will be different?

Hi, Stan.

It's actually a really small amount we're taking it down, if you project it down over the year.

This is just a timing adjustment from where we started.

The important thing to look at here is to remember that what we talk about here in those numbers is net subscriber adds.

The number of subscriptions we added was in keeping with exactly what we wanted -- the net was different.

I expect there will be a bunch of questions.

I'll go into this more deeply.

But to answer your question directly, the net's down, and for a number of reasons.

But in general we were right on track.

That's why I gave the unit numbers about licenses, so you could gauge it.

If you put this over the total days, the number really makes no difference in the model as you project it out any number of years.

Okay, fair enough.

Then follow-up --

Remember, we're talking about tens of thousands versus millions.

Got it.

Does that mean that you saw a slightly higher churn in the quarter than you were expecting?

That's it from me.

Thank you.

Yes.

I didn't even get to the next questioner before we got more questions about it, so we might as well just walk through it.

The first thing is, let's just remember that the 80,000 is net adds.

The unit volume was nearly twice that in terms of subscriptions.

There are two things that go to it.

One is a maintenance base that is now very big, approximately 2.1 million subscribers, and a renewal rate that's less than 100%.

Any small change there, or any change in timing, or any change in buying behavior, even in a small amount, changes the reading at this moment in time when we measure it.

The other thing is the attach rates are less than the renewal rate, as we've disclosed over the years.

A little less influential, but it did come from a little bit from the tax rate and a little bit from churn in the maintenance base on the existing model.

Thank you, guys.

Let me just finish on the other part of it is, if you don't see the net of it, subscription adds were just where we anticipated they would be.

Thank you.

Our next question is from Saket Kalia of Barclays.

Your line is open.

Hi, guys.

Thanks for taking my questions here.

Might as well stay on the subscription line of questioning here, Carl.

The reduction for the year, I guess that 310 to 330, versus the 375 to 425, maybe you can walk us through where the lion's share of that reduction is coming from.

Is that coming from -- to your point that lower attach and renew rate than maybe you expected in the maintenance base, or is the new model base maybe a little bit less than what you expected as you wrap up the year?

It's about 50/50.

At least this quarter it was.

Once again, I try to highlight it in my remarks.

I can tell you exactly what happened in Q3, and in that case it's 50/50.

If you look going forward, because of the difficulty in projecting our customer behavior precisely about whether they'll choose to stock up on perpetual licenses or move to desktop subscription, it's a little bit harder to project.

We just thought we'd be a little bit more cautious and conservative, particularly with the mix.

I want to draw two pictures.

We're more cautious about the net adds.

We gave you the other facts and figures to show really that the unit volume is steady and that the demand is high.

I don't want to confuse those two issues, but I can tell you Q3, really 50/50.

Q4 and going to next year, a little bit harder to be precise about.

Yes, Saket, if all you're trying to bridge is the mid-point of the previous guidance for the full year to the mid-point of the current guidance for the full year, what I'd tell you is a big chunk of that is where we see ourselves coming out of Q3.

If you just add the numbers up this year, we've added about 236,000 net subs.

When you peel back how that compared to where we thought we'd be at this point, the bigger driver of the delta is what you said.

It's on the maintenance side versus on the new model side.

The new model growth has been good.

We continue to see it looking strong, particularly year on year, but it continues to grow strongly sequentially, as well.

When you look at Q4, I think what Carl said is spot on.

What we're trying to do is take a somewhat conservative view of what we think the net adds will be.

There's significant opportunity as we hit the first milestone, or the next milestone, in our business model transition, and end-of-sale perpetual licenses for individual products, and trying to gauge what that does in terms of driving additional demand relative to a very large maintenance base.

If you go back several years, Q4 has always been our biggest quarter for perpetual license sales, which means it's also our biggest quarter for renewals.

There's an enormous maintenance renewal amount that gets done during the quarter.

It's balancing those two off that's what led us to where we are.

Got it.

Then the follow-up, maybe if we shift over to the creative finishing part of the business.

Carl, I think you said roughly a $10-million impact, I think in the fourth quarter on billings.

Is it fair to think about that as maybe a $40-million-a-year revenue run rate?

What's the gross margin on that, that you're now going to be off-loading?

Yes, Saket, that's right.

To be clear, what we did in creative finishing, to this point we sold that product on hardware.

It's software license, then we built it -- we actually packaged it on the hardware, and shipped it out.

What we did in Q4, or at the end of Q3, is based on, really, feedback from partners and customers that wanted the flexibility to use their own hardware, is converted creative finishing software to a software-only offering.

What that pulled out of our revenue stream is the hardware that was effectively a pass-through.

We bought it, packaged the software on, and passed it through.

As you would imagine, it's a pretty low margin business.

Now Q4 is the biggest quarter for that, as well.

I wouldn't take the $10 million we see the impact in Q4 of this year and just multiply it by four.

But it's somewhere between $25 million to $40 million, is what would come out.

Low-margin business, but all hardware only mark-up.

Very helpful.

That's it from me.

Thanks.

Thank you.

Our next question is from Heather Bellini of Goldman Sachs.

Your line is open.

Hi, this is [Shateel Alam] in for Heather Bellini.

Just one question on maintenance and what you're seeing there.

You added 33,000 maintenance subscribers, but ARR stayed flat.

Is that what you were expecting?

Could you comment on the attach rate you're seeing on maintenance versus prior quarters?

For next quarter with license ending, are you expecting a strong maintenance ARR up-tick while this is the last chance to buy stand-alone licenses?

You asked a lot of questions, Shateel.

Let me jump in, and if I miss one remind me.

The first question of 33,000 net new maintenance adds for the quarter but billings being effectively flat sequentially, I think the thing you've got to bear in mind is that 33,000 on a base of about 2.1 million.

The overall growth -- the growth of the overall base, which of course is what drives that, is not nearly as big at the 33,000 would sound.

On the attach rates, what we are seeing though is we continue to see attach rates growing.

Now, not -- it still is below the overall renewal rate for maintenance, but the attach rate's growing.

It's growing on LT, which is still a step function below the other products; but it's growing on the other products, as well.

Renewals continue to be strong through the quarter, so we're not seeing any significant change there.

Then for 4Q are you expecting an up-tick in maintenance ARR?

Yes, the hard part about calling that is calling the number of customers during Q4 that actually take advantage of the last chance to buy perpetual license.

To the extent that's a big number, that a lot of people look at this and say hey, I want to buy my perpetual license while I can, with the attach rates we're having, that will drive a significant up-tick in maintenance ARR.

To the extent that we continue to see -- what we're beginning to see is a lot of customers saying okay, now I've gotten comfortable with desktop subscription.

We see it growing at substantial rates year on year, but growing sequentially as well.

To the extent that more people say I'm ready for -- ready to make that shift, that would again drive desktop subscriptions, but only when they actually need it.

There's no end of sale on desktop subs.

Better news for us long term, the more people that accept the shift over to desktop subs, but there's no compelling event in Q4 for that set of customers.

It's really trying to predict the mix of people that want to take advantage, versus the mix of people who say not ready to make the shift.

Got it, thank you.

Thank you.

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

Your line is open.

Hi, it's Dan Bergstrom for Matt Hedberg.

Could you talk a little bit about bringing the e-store in-house?

What is -- how does that enable you to increase the volume of the business you do online?

Thanks.

Yes, I think there are two different dynamics going on.

I think customers, particularly small customers, are choosing to buy more and more online as they get more comfortable with it.

The factor that we get to influence is the experience.

Outsourcing it has its limitations in terms of the experience you're giving customers in buying and maintaining their things online.

We felt like we had grown that business to a point where we needed to control it ourselves.

Second important thing about it is we felt like we were paying too much money for the service to do that.

We wanted to bring it in so we could lower the cost of the transactions and improve the experience.

Thank you.

Our next question is from Sterling Auty of JPMorgan.

Your line is open.

Yes, thanks.

Carl, you had an activist investor actually file recently.

I'm curious if you had any conversations with them, and what's going to be your approach?

Will you be open to discussions and to suggestions they might have to improve shareholder value?

Yes.

I probably found out about the filing the same way you did.

I happened to be in Japan at the time.

Somebody sent me a news article.

When I saw that, part of the filing was that Sacham -- I'm not sure if I'm pronouncing it correctly -- Sachem Head had filed.

I reached out.

I spoke with Scott.

We didn't say anything of substance, but we agreed to get together, just as I've done with many investors.

We continue to be open to talk to all of our investors, whether they file or not.

Got it.

Then Scott, I hate to do this to you, but back to maintenance.

I guess I wasn't clear.

It sounded like you said that attach rates are continuing to improve and renewal rates are steady.

But I thought in an earlier comment that when we look at the change in the net subscription expectations for the year, that the maintenance was definitely 50% of the component.

I guess I'm still missing which component is coming in less than what you expected.

Is it the churn or is it the attach?

No, it's actually neither.

In order to attach a maintenance agreement you need a new licensed sale.

When we looked at new licensed sales for the year, this year as we were laying out the plan, it's a little bit like doing a channel check, where you look at a small sample size and try and extrapolate to the rest of the world.

What we had based that -- what our expectations on the end of sale of perpetual, and what that would do in terms of driving new license sales, is we based it on some of the tests that we had done, and we based it on the experience we had with the end-of-sale of upgrades.

What we've seen is attach rates continue to be strong and strengthening, and renewal rates have stayed strong for maintenance.

But the number of people who are buying that last perpetual license are less than we expected when we set out the plan for the year.

That makes sense.

Maybe just to put a finer point on that, do you think that's macro, or do you think it's still understanding the model transition, or some other factor?

I think there's two things going on.

I think macro is relatively steady.

We have not seen a dramatic change.

I know this will come up, so we might as well just cover it now.

The Americas, US in particular, continues to be relatively strong, as does central and northern Europe.

We see weakness in Brazil and Russia and the Middle East.

China, I actually feel is slightly stronger than I think generally people are giving it credit for.

Japan is weaker than I think anybody would want.

I think that's the round-up of what the macro looks like.

In general, I think macro is not a huge factor.

It's neither particularly positive, nor particularly negative.

FX continues to be negative, as it is for everybody.

It really looks like it might continue for a while.

But that's the round-up of what I would see about macro.

I don't think the competitive situation has changed very much in the mainstream businesses.

There's different dynamics in some of our cloud businesses.

We're kind of leading the way, but other than that, not a huge amount of change.

Okay, thank you guys.

You're welcome.

Thank you.

Our next question's from Brent Thill of UBS.

Your line is open.

Hi, Carl.

On the channel, many of the channel partners we speak with, it seems like there's a divergence.

The larger ones get it.

They want to be on board.

They understand the power of it.

The smaller ones are still struggling, which you would expect, given this.

Do you feel like you've got the channel guys now really ready to go, or they're on board?

Can you give us a sense of how that education process is going at a high level?

A follow-up, too, is on the deal you mentioned, nice to see a 20-year competitive switch.

Are you -- what drove that in terms of their decision making?

Do you see other deals like that in the queue that are ready because of either an architectural limitation or -- just give us a little more color would be helpful?

Okay.

First channel partners, and then the switch.

If you look at channel partners, let's back up for a second and maybe have a little discourse on channel partners and checking with channel partners.

The first thing, just to remind everybody, is if you look at it broadly, 30% of our business, 20% to 30%, is the very top tier, less than 0.1% of our customers.

At the so-called bottom of the pyramid, people going through lower-cost channels like the e-store, that's 20% to 30% of business.

When you get to the middle part of our business, that is our traditional good partners, one of the things also is that business is geographically aligned like the rest of our revenue, with about 25% in the US, and 75% outside.

It's one of the reasons, on an aside, why often the channel checks don't correlate as well.

If you're only starting with 40% of the business, or 50% of the business, and you talk to a sampling of 25%, you're sampling 12.5% of the people that you would like to.

Overall, we have more than 2,000 channel partners.

Use that as a backdrop to this.

I would totally agree with what you're saying, Brent.

I think the larger partners understand the transition better, have moved more quickly, have prepared their business as you would expect, but I wouldn't say it's uniform.

There are also smaller partners, who are some of our best partners, who have understood this, who have always had really healthy businesses that provide great services.

But if I look by and large, I think your characterization is correct.

If you look at it from the business point of view, we gave you all kinds of metrics during my remarks about why the channel partners are selling it.

If anything, I would say our channel partners, the traditional channel partners, are more enthusiastic than desktop subscription than we originally planned.

We knew from the beginning that this is a tough transition for cash flow sensitive businesses.

We've tried to do our best to ease it.

We gave plenty of warning.

When others were urging us to make the transition happen faster, we thought this was the prudent thing to do -- not only getting a Company with our kind of balance sheet through it, but most importantly getting those 2,000 channel partners through it.

Having said that, I don't think every channel partner will make it through in an identical form.

There will probably be some consolidation out there.

There will be some change in business, slightly more than the natural churn that we see there.

But I would just generally say channel partners get it.

They've gotten on.

It reminds me a little bit when we first brought out subscription, and as I listen to the names who have asked questions so far, many of you were there when we did that.

Our channel partners thought subscription, if you had listened to them in the moment, was the end of their business.

I think almost everyone you ask today they would say it is the best part of their business.

I think in the same way we have been very considerate and deliberate in how we move not only our business, but an important part of moving their business, as well.

The second thing was, yes, it was really gratifying.

This was a very prestigious firm.

What has happened around the world, where we have -- we have a strong market position in architecture, engineering, and construction software.

But people don't realize there are many competitive products.

There are strong local products.

There are many reasons why people choose other things.

We have been working on the periphery with this firm for a while.

The thing that put them over the edge is really how prevalent building information modeling, and particularly as Revit is the tool of choice is for building information modeling.

Let me just digress for a second.

People don't realize this about our business sometimes, but while we are in a very complex technology business, technology adoption doesn't happen overnight.

For those who may have forgotten, we bought Revit back in 2002, I believe.

We're 14 years later, and we still think there's lots of market penetration.

If you were to look at a graph of the revenue, the first five years would not have impressed you.

It's really gratifying to see how long this is, and that at this point in time we are winning the business of some of the best and most creative firms in the world.

I expect that trend to continue.

As you've seen, it's not only in the architectural space but in the construction space.

We continue to gain market share.

We think it's an important part of what we're doing investing in our cloud-based businesses, where really the future of this industry is.

Thanks, Carl.

You're welcome, Brent.

Thank you.

Our next question is from Philip Winslow of Credit Suisse.

Your line is open.

Hi, thanks for taking my question.

Carl, I know you touched from a geographic perspective on macro.

But when you look at the industry verticals that you guys service, commercial, construction, civil, different parts of manufacturing, obviously the media side, but when you look by vertical, is there any sort of tone change across those vertical industries?

Who hasn't changed?

Who maybe is changing, and how you're contemplating that or thinking about this over the next few quarters here, what you're keeping your eyes on?

It's surprising little change in the business environment around those.

I don't see dramatic changes.

I think there's a lot of ticking and complaining about interest rates, even though I think it's fully baked into the market for the most part; people doing things like development projects or capital improvements in manufacturing have figured this in for a while.

Maybe it's gotten slightly more certain.

Surprisingly in our end markets, we're not seeing huge amounts of change either geographically or by industry.

It's steady as she goes.

Certainly sitting here in San Francisco, I have a little bit of concern about bubble valuations in down-round IPOs.

But that may be a much more local phenomenon.

I wouldn't extrapolate from there, that feels to me like a bad channel check.

I would say business is pretty steady as she goes.

We're monitoring it.

I think the other indicator for me was the demand that we talked about in the total unit volume indicates to me the same thing.

So no big change.

Scott?

Yes, Phil, I was going to say the same thing.

When you look at the underlying demand, in other words the units that we sold during the quarter, it's right in line with what our expectations were and where it's been historically Then if you slice it the other way, by industry vertical, and I think we've got this -- I'm sure we've got this in the prepared remarks.

The revenue growth rates in AEC were around 4%, but in manufacturing it was the same, about 3% to 4%.

We're not really seeing any bifurcation by vertical at this point.

Got it.

Then actually just a quick follow-up for Scott.

Carl mentioned, as he did back at the analyst day a couple years ago, the 500,000 to 800,000 licensed units.

I was wondering if you could give us a sense for what last year was, or maybe this past couple years if you have that, so we can get a sense for -- because that 500,000 to 800,000 range is pretty wide, what the most recent cadence was like?

Sure.

Last year would have been toward the higher end of that, because we had a very successful upgrade set of sales last year.

It's a bit of an anomaly.

It definitely would have been at the high end of that range.

I'd say if you go back before that, and really before we in earnest got into the business model transition, it was right around the mid-point of that range, between $500,000 and $800,000, and that's what we're seeing again this year -- in terms of net demand.

In other words, net sales end of the market, right about the mid-point.

Got it.

Thanks, guys.

Thanks, Philip.

Thank you.

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

Your line is open.

Thank you very much.

Carl, wondering if you could just give us a little color on the sort of activity meaning perpetual and subscription that you saw this quarter in Asia-Pac, ex-Japan, and ANZ?

How did that change as the quarter progressed and as the deadline for buying perpetual license approached?

Yes, Gregg, we saw what you'd expect to see.

To be clear, we didn't end of sale all perpetual licenses in APAC this quarter, ex-Japan.

It was only LT, only the low end, so very similar to what we had done in Australia, New Zealand, in the prior quarter.

We saw the same thing you would expect.

We saw an increase in the volume of LT sales as we approached that end of sale.

It was right in line with our expectations.

The one thing I'd say we're seeing with these end of sales is they are definitely more back-end loaded in the quarter than our traditional run rate.

It makes a little bit more challenging in forecasting.

I used to talk about or almost brag about, you could look at the first three weeks and it was a statistical phenomenon to predict week 13.

These promotions -- and I expect them to continue through the next three quarters, and possibly four -- are just a little bit harder because we really are creating these events.

It's just human nature not to act until the last moment.

Okay, that makes sense.

Just for Scott, Carl made a comment that you're looking to ratchet down expenses as you move through the transition, exiting the hardware business for creative finishing being an example of that.

Are you still expecting a spending increase of 5% to 6% per year going forward, or has your view on that changed to some degree?

Thanks.

Yes, Gregg.

I'll start and then actually let Carl jump in on this, too.

If you look at the quarter we just announced, the total spend growth was 1% if you looked at just OpEx, because COGS is obviously going up as we build out the cloud infrastructure.

If you just narrowed in from total spend to OpEx, the quarter we just announced was flat in OpEx year on year.

If you look at the guidance we've given for Q4, and back into the spend growth that would equate to, it's in that same 1% to 2% range in Q4.

We are -- we have really put a lot of focus into effectively managing down spend, and becoming more efficient across the board.

Carl, you want to --?

Yes, I'd say two things.

One is the plan is to continue to ratchet it down going into next year.

There's a little bit of the effect of currency, but on a constant-currency basis, I'd say it would be coming down into the range we mentioned.

The other thing was it was definitely a change, and certainly a change from Investor Day.

Truthfully, we've been speaking a lot over the last six months with many of our long-term constructive investors.

They totally understand and certainly believe in the model transition and the strength of the franchise, but there was definitely a hankering for greater cost control.

We listened carefully.

We saw -- we put plans into place earlier.

We did something in Q3, doing the same kind of thing in Q4.

Some things take a little longer to put in play.

It's a combination of ongoing operating expenses and structural things like we did with the e-store, which again ironically, sometimes take an investment in order to do that.

That one in particular is an investment in our IT infrastructure to do it.

In the long run it pans out, but some of the fluctuation you see in costs are due to things like that, that have a benefit over a longer time horizon.

But we're continuing to make some of those changes.

Let's just back up on the expense question a little bit to look at -- there are really two things that we're doing in parallel right now.

In each of those cases we're running dual models.

On the business model, we really have business systems from front to back end that are for the old traditional model.

We have been building out a complete set of front end and back end to service new customers in new ways.

On the technology side, while most of our revenue is on traditional Windows-based machines with installed software, by far the fastest growing and certainly the future of the Company is on cloud computing.

We've been building out not only infrastructure, but products and services for that, and we strongly believe in the future there.

The reason why we have confidence to not only do it during the transition but beyond is that some of those costs will, obviously, go away.

They are necessary now, but they become redundant over time.

We took strong action to do it, and we'll be doing more and talking about it more.

But for now that's probably enough.

Very helpful.

Thank you.

Sure.

Thank you.

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

Your line is open.

Thanks so much.

Carl, you know you should never let us know you're not going to tell us enough.

I have to ask more about this expense piece.

I was still modeling, I think a lot of people were still, that 5% that you guys had been talking about.

As we think about more of a 1% to 2%, where should we be looking for that leverage to come from?

As we talked about before, we think there are couple areas.

In general, I would look across the board, and I would look at -- but if you peel that back, what you would see is some of the investments we made -- the e-store is like a perfect example of where, those were expenses that were in there.

Now that we're rolling it out, we will see the benefit of it in lower cost structure for people who transact that way.

We've done it in North America.

We will continue to do it in other geos over time and lower the cost structure there.

As these places where we made investments for the health of the future of the business come to fruition, we'll start doing it.

In some ways looking at it by function -- I know that's the convenient way for you, it is easier.

In some ways it's chunkier, because a lot of it is around initiatives, whether it's the creative finishing hardware, what we're doing there.

But the bulk of it will come from redundant stuff we're doing as we're able to move more activity to the new models in both the business transition and the technology transition, and invest less in the traditional things.

That's all I have to say on the subject, Brendan.

You (multiple speakers) do now.

Thanks for helping us out.

At the Analyst Day you pointed out the -- I think it was like 40% of desktop subscribers were new to Autodesk.

I was wondering if you had any new stats on those net new customers that you've been picking up in the model transition?

No, Brendan, we're not seeing any significant change in that yet.

The one update that I would give -- and Carl actually had it referenced, at least, in his opening commentary, if you remember in that same set of slides that Steve Blum went through, he talked about the percent of our total desktop sales that are being driven by the channel.

We showed what that trend had looked like over the last six quarters.

We did see that.

It gets at the question earlier that Phil had about what we're seeing in the channel -- or Brent asked about the channel.

We are seeing that continue to grow.

If you remember that slide, we said at the end of Q2, 58% of our desktop subscription sales came through the channel.

In the quarter we just closed, that was up about 2 to 3 more points.

It's the majority of our desktop sales now that are coming through channel partners, and it's continuing to increase.

Are those channel partners generally bringing you net new Autodesk customers?

It's a mix of both.

Being your installed base.

It also varies by product.

You remember, we also went through for some of the cloud products, Fusion in particular, the statistic of new customers that product -- of all the customers they brought in, what percent are new, I think it was north of 85% on Fusion.

It's less whether it's coming from the channel, or is it just desktop.

It's more, are these products actually getting to increasing the TAM that Amar talked about, and really getting to a new customer set?

There hasn't been any change from all the data that we just showed you about six weeks ago, but we are continuing to see a very positive trend of new customers coming in.

We rightfully have spent a lot of time on things like subscriptions, but let me just take a moment here and go through where these new customers are, because I think sometimes we lose track of the health of the business is going to be about these new customers.

When you look at most of our cloud-based offerings the first thing I'd say is that we're way ahead of the competition, and the customers are coming along quickly.

We might have been ahead of the customers slightly, but not for very long.

When you look at things like BIM 360, these are either brand-new customers to Autodesk or new parts of the Company that had no use for our other kinds of tools.

If you look at things like POM360, almost entirely these are new customers to Autodesk.

Our new Internet of Things, the IOT product, is almost all new customers to Autodesk.

As Scott referenced, and we've talked about repeatedly, fusion is clearly one where we're winning market share from existing competitors.

Those are all places that are bringing in new customers.

I expect that trend to accelerate as we continue to gain ground, and the world moves towards more cloud-based tools.

Carl, I totally agree.

That's where we want to focus.

I'm wondering if there's any way we could get some quarterly metric around that to reinforce that point, because I thought it was a compelling one at the Analyst Day, and certainly one we'd continue to hear more about?

Damn, I never should have gotten into that speech, should I?

Yes, let us go back and figure out how we can best convey what we're doing.

I think both in two things.

Tell me if this would be helpful, is the number of units and something about the percentage of new customers.

That would be -- I think that would be very valuable, yes.

Okay, thanks.

Thanks, guys.

Our next question is from Jay Vleeschhouwer of Griffin Securities.

Your line is open.

Thanks, good evening.

Carl, I'd like to ask a question that gets to both the cost structure of the Company and the salability of the products.

At the analyst meeting you mentioned that one of your opportunities is dealing with the complexity of the portfolio.

The question I'd like to ask is, how are you thinking or planning around simplifying the portfolio, given the large number of SKUs that you have, particularly in terms of suites, just as a matter of improving sales efficiency and cost?

Versus, on the other hand, your need to maintain some kind of segmentation of the product line, particularly for the different verticals?

Yes.

This can -- it's a place where we've been spending a lot of time thinking and planning for it, because you're absolutely right.

Complexity and particularly unintended complexity drives costs.

This is a huge opportunity for us to simplify and reduce the cost.

It also makes for a better experience for our customers.

We think we can make our customers get more value and pay us more.

We've talked about this a lot with our enterprise customers.

When we've given them a more flexible licensing mechanism, they use more software.

They paid us more per year.

I would say, at least anecdotally, they're happier about it because they really understand where the use is.

I think at the last two Investor Days, we've talked about that dynamic.

The biggest thing in my mind we can do is extend that flexibility that we now have, really only sold directly by us to our largest customers, to the bulk of our customers in the part that's serviced by our traditional channel partners.

We really want our mid-tier customers, the smaller medium businesses, to get that same kind of flexibility.

You're absolutely, right, Jay, we need to make sure.

Handing them all of our products is not particularly helpful, but also breaking it down into 10,000 SKUs is not helpful, either.

We're looking at the minimal set that we need so they can pay an appropriate price, and get the set of tools that they might need.

In addition, what we're going to do with that, is layer in cloud services, so that they can really pay on demand for the things they may or may not need.

But it's really about that flexibility, which is where we feel the way to simplify it, and to make it a better experience for them, and to make it more lucrative for us.

To the second part of your question there, if you're getting at, are we still going to have a differentiation between AEC and manufacturing and M&E, that's clearly part of the thinking.

Andrew was getting a little bit of this in his presentation at Investor Day of how do we simplify that, by continuing to have something that is targeted.

It makes sense for a use case in the various verticals.

We'll continue to maintain that at some level, but greatly simplify the way we give it to them.

Sooner or later, and hopefully sooner, you'll deploy what would be in effect a creative cloud-like sign-on for the SMB market, with what you've been calling anyway to date, Subscribe to Autodesk.

You have to come up with a better name than that.

Is that a FY17 objective, still?

First of all, Jay, we appreciate the suggestions that you've published.

We've rejected them all, first of all.

Thank you.

But -- stick to your day job.

But yes, it's an important thing for us to offer, and we will be offering it.

Whether it stays that name or not, stay tuned.

But yes, it really is that flexible offering.

Remember, it's not only just simplifying and the cost structure, we also -- this is slightly more complicated, but the question has come up, so what do you do about the 2.1 million users, and do they move to desktop subscription?

I'll reiterate here, those 2.1 million customers have historically been our best customers.

They still are our best customers today.

We think the way to move them over so that they get more value and pay more is to move them to flexible license offerings at their discretion.

We have a number of knobs and dials to do that.

What we really believe is the essence of it is having a more compelling offering.

Everything we've been shown to date is some combination of access to more desktop products and access to the cloud services is the thing that is compelling.

You'll hear more about it.

We'll introduce it.

At this point, I feel like we have enough moving parts in the model that we don't need to introduce a lot more, but you will hear more about it during the year.

Lastly if I may, in the future of Autodesk-land, once the model gets steady state and so forth, what do you think would the role of your rebate promotions, PLOs, and so forth will be?

Do you think you'll have to employ those kinds of levers as often as you've done in the past under the old model?

I have a point of view.

It is not widely shared by my Executive Management team.

I feel like promotions are important for one reason, and that is to create a compelling event for people to choose to buy.

For the most part, us as well as our competitors, we sell on the value of the offerings, the quality of the offerings, the suitability of the offerings, the completeness of the offerings, is what make people buy it.

When they buy is influenced by everybody likes a deal.

If you look around the world, the number of companies who never sell with a discount, is tiny in the technology business.

It might be non-existent, with the exception of Apple.

I see this as being a way to control the timing.

But of course in the -- you want to minimize this as much as possible, and only do it to create compelling events.

We have a disciplined approach to promotions.

They're centrally controlled.

We're trying to influence behavior.

We're trying to influence behavior, not only of our customers, but of our partners.

I think it is one of the tools we have.

I would be reluctant to give it up.

You need to use it judiciously.

There's an art to using it.

I think the more dogmatic point of view, in which there's never a promotion and you only sell at list price, doesn't fit reality.

I think it takes one of the valuable tools out of your hand.

Thank you.

You're welcome, Jay.

Thank you.

At this time, I'd like to turn the call over to David Gennarelli for any closing comments.

Thanks, operator.

Well, that concludes our call today.

We also have our Autodesk University event coming up on December 1. If you'd like to attend that and you're not signed up yet, please e-mail or call me.

We'll also be at the Credit Suisse conference on December 2, and the Barclays conference on December 9. You can reach me at.

(415) 507-6033.

Thank you.

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

This concludes your program.

You may now disconnect.

Everyone have a great day.