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Autodesk, Inc. (NASDAQ:ADSK)

Q4 2010 Earnings Call

February 23, 2010 05:00 p.m. ET

Executives

Dave Gennarelli - IR

Carl Bass - President & CEO

Mark Hawkins - EVP & CFO

Analysts

John Byun - UBS

Jay Vleeschhouwer - Ticonderoga Securities

Heather Bellini - ISI Group

Phil Winslow - Credit Suisse

Steve Ashley - Robert Baird

Brendan Barnicle - Pacific Crest Securities

Sterling Auty - JPMorgan

Richard Davis - Needham

Sasa Zorovic – Janney

Derek Bingham - Goldman Sachs

Kash Rangan - Bank of America/Merrill Lynch

Keith Weiss - Morgan Stanley

Steve Koenig - Longbow Research

Ross MacMillan - Jeffries & Company

Mike Olson - Piper Jaffray

Blair Abernethy - Thomas Weisel Partners

Greg Dunham - Deutsche Bank

Israel Hernandez - Barclays Capital

Ben Rose - Battle Road Research

Operator

Operator: Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Autodesk Incorporated Earnings Conference Call. My name is [Evat] and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator instructions). I would now like to turn the call over to Mr. Dave Gennarelli, Director of Investor relations. Please proceed, sir.

Dave Gennarelli

Thank you for joining our conference call to discuss our fourth quarter fiscal 2010. With me today are Carl Bass, our Chief Executive Officer and Mark Hawkins 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 posted 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 future performance of the company such as our guidance for the first quarter of fiscal 2011, remarks about fiscal 2011, and factors used to estimate our guidance, our future business prospects and financial results, our market opportunities and strategies and trends for products and trends in various geographies.

We caution you that such statements reflect our best judgment based on factors currently known to us and that actual results or events could differ materially. Please refer to the documents we file from time to time with the SEC, specifically the Form 10-K for our fiscal year 2009, our Forms 10-Q for the first, second and third quarters of fiscal 2010 and our periodic 8-K filings including the 8-K filed with today’s press release and prepared remarks.

Those documents contain and identify important risk factors that may cause our results to differ materially from those contained in the forward-looking statements. Forward-looking statements made during today’s call are being made as of today. If this call is replayed or viewed after today, the information presented during the call may not contain current or accurate information.

Autodesk disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but we 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 GAAP and non-GAAP results is provided in today's press release, prepared remarks and on our website.

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

Carl Bass

Thank you. Good afternoon, everybody. I'll give you a quick overview and then we'll jump right into Q&A.

I think we can all agree that we are happy to have calendar 2009 and our fiscal 2010 behind us. Navigating our business through the worst economic recession of our time was challenging to say the least. Despite the challenges, there were a number of notable highlights in the fourth quarter and throughout the year. For example, our software was a critical component in the success of Avatar, the highest grossing movie of all time. The market for 3D films and now television is getting a lot of attention and we believe this represents an excellent opportunity for our media and entertainment business segment over the next few years.

This year we launched Autodesk University Virtual extending the AU learning experience to Autodesk users worldwide and we had over 20,000 participants virtually this year. We also launched SketchBook Mobile, an iPhone app. This has helped drive awareness of Autodesk and was an instant success in the app store surpassing one million downloads only two months after being introduced.

Over the course of FY '10, we further strengthened our technology portfolio through a few highly focused M&A transactions. It was also encouraging to see large deal volume experience a notable uptick in each geography in the fourth quarter. We closed 22 deals greater then $1 million, doubling the total from the first three quarters of the year. These large deals were driven in part by pent up demand and end of year budget spending.

We ended the year with stronger than anticipated fourth quarter results and several encouraging signs as we head in to fiscal 2011.

Revenue for the fourth quarter increased 9% sequentially to $456 million. Highlights in the fourth quarter include a strong sequential increase in revenue from commercial new seat licenses. We also posted sequential revenue growth in all of our geographies including an 18% sequential increase in EMEA. Our Asia-Pacific geography grew on a sequential basis and posted a small year-over-year increase as well. It was also encouraging to see the Americas grow sequentially for the second consecutive quarter.

Our manufacturing AEC and PSEB business segments each grew sequentially led by a robust 20% sequential growth in manufacturing. For the third consecutive quarter, we delivered a sequential increase in profitability. This quarter, however, the sequential improvement was driven by revenue growth rather than expense reductions. We are pleased to see this progress but also mindful there is more work to do in FY11 and beyond.

Speaking of expense reductions, our cost control efforts in FY10 yielded excellent results. We achieved a reduction of $312 million in non-GAAP total spend in fiscal 2010 compared to fiscal 2009, significantly exceeding our initial goal of $250 million. Our success with expense reductions in fiscal 2010 will help us achieve modest non-GAAP operating margin improvement in fiscal 2011.

Going forward, we will continue to make the essential investments in Autodesk to ensure long term growth. At the same time, in the spirit of continuous improvement, we will continue to seek to optimally align our investments to improve our growth, productivity cost structure and operational excellence.

These actions are focused on increasing productivity across the organization and optimizing our investments. While we are pleased with the progress we made this quarter, the recession’s effect on customer demand can be seen clearly in our full year results.

Despite the decreasing revenue and profitability compared to fiscal 2009, we believe we have improved our efficiency and our channel and our continued investment in R&D has resulted in a product portfolio that has never been stronger.

As we enter fiscal 2011, the shape of this economic recovery remains unclear, so we focus on things within our control. Investing in growth opportunities to drive revenue and improving our profitability. With an unmatched portfolio of design engineering and entertainment software solutions, a strong balance sheet, outstanding employees and an unparallel channel, we believe we are well positioned for the future.

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

Question-and-Answer Session

Operator

(Operator instructions). And please stand by for your first question.

Dave Gennarelli

While the operator is polling for questions, I want to note that Autodesk will be attending the following investor conferences this quarter: the Goldman Sachs technology conference in San Francisco this Thursday the 25th, and the Morgan Stanley conference in San Francisco on March 4. And I’ also want to note – to say the date for our Annual Investor Day which we will be holding at our gallery here in San Francisco on June 24. And now I'll turn the call back over to the operator.

Operator

Your next question comes from the line of Brent Thill with UBS.

John Byun - UBS

This is actually John Byun on for Brent Thill. Just two questions, one on the guidance for Q1 which seemed to imply about a 6% sequential decline, which is much lower than historical averages. And if you could maybe talk about the key factors behind that? And then in Europe if you could maybe go into, a little bit more into what drove the outside strength?

Mark Hawkins

So let me, John, take that question. This is Mark Hawkins. In terms of the Q4 to Q1, obviously looking at the sequential pattern, we’ve taken a look at everything we can see in the economy, everything we can see about our business. As you know, visibility is not as clear as it was certainly pre-reset. With all that comprehended, this is our view of the revenue growth for the particular quarters. So that's, we think this is a solid set of range of guidance for revenue to give you from that standpoint, so that's the first part of your question.

The second part of your question?

John Byun – UBS

It was related to the European region.

Mark Hawkins

In terms of -- if there is any additional…

Carl Bass

I think what we saw was a rebound in EMEA. I mean we detailed some of the stuff around the effects of currency. I think currency continues to remain volatile and we watch it both ways and so we were mindful of it for the year going forward, going down. It had help from much of this year. And other than that I think we are at that stage of the recovery where we've seen a stabilization over the last quarters and now we're starting to see increases, even if small ones, in terms of the business in end user demand.

Operator

Your next question comes from the line of Jay Vleeschhouwer with Ticonderoga Securities.

Jay Vleeschhouwer - Ticonderoga Securities

Mark, in light of the maintenance billing strength in the quarter, particularly sequentially, would it be fair to say that your renewal rates are now on average back into the normal 80% plus kind of a range? Would you expect them to stay there if so and any comments you can make on idle capacity being reactivated would be helpful? And secondly for Carl, with regard to the channel, at last year’s analysts meeting and in light of today’s announcements from CRN, I thought it would be helpful if you could comment on any particular new programs or economics you might be putting in place for the channel for fiscal ’11.

Mark Hawkins

Okay let me jump into this Jay, the first two parts of it and then let Carl take the third. In terms of the renewals, again we don’t speak on specific renewal rates. What I would say to you is you are correct in that sequentially our renewal rate is up from that standpoint and that’s factual and it’s largely flat year-on-year in terms of the renewal rate.

So that was a tick up for sure. In terms of idle capacity, I think perhaps you're alluding just to clarify things like shelf ware as one of the things that you've addressed. Just want to call out again, our view historically is that we have seen the thesis that have been put out on the wire and such on that, that’s not something that we’ve actually experienced a lot. Historically, that's not been a factor. I am sure technically somewhere there is a “shelf ware” but our business experiences has not been an impact on our business.

Carl Bass

Actually I would go further Jay. I actually think there is anti shelf ware out there right now that I think that if you were to net it all out, that there is more pent up demand than there is excess capacity sitting around. But there are a number of factors that have led people to not upgrade or not renew their subscription over the years. There have been technology changes as well in terms of computing platform, operating systems and so people are starting to find themselves out of date. So I think when you net it all out, anti shelf ware outweighs shelf ware.

Jay Vleeschhouwer - Ticonderoga Securities

All right, then on the channel.

Carl Bass

On the channel, one of the things that we've learned over the years was the wisest way to work together with our channel partners is to give lots of directions about where we're headed, not making sharp changes in direction. It’s a very difficult thing when you're working with thousands of partners around the world and so I would say we're really working on a continuation of trying to tune the business and as you know we did a number of things this year, both long term things as well as many short term things because of the economic situation, and going forward, we continually what I would refer to as tweaking the model and continue to work with ways that strengthen their business and our business but I don’t see any really dramatic changes there.

Jay Vleeschhouwer - Ticonderoga Securities

All right. Just if I could squeeze one last one. For fiscal '11 and beyond, what are your thoughts on the possible upside to Autodesk from redoing your suites offering? By our calculation, your suites, all of them together are less than half of what Adobe gets just in Creative suite alone. So many products versus one product in their case, and so the question is, do you see much potential for substantially scaling up your suites business?

Carl Bass

Yeah, I'm very jealous of both Adobe and Microsoft Suite business. I think they've both done a great job with suites, I think it’s a very effective strategy for the company and I think it’s very cost effective for the customer and so we’ve talked about it. We'll probably talk a lot more about what we're doing at analyst day in June and we'll give you more details but I think there is great potential in suites.

Operator

Your next question comes from the line of Heather Bellini with ISI Group.

Heather Bellini - ISI Group

Carl, I had a question. I don’t know if this is for you or Mark. Two questions. One, what type of benefit if any did you see from people trying to get ahead of the price increase in March and I guess going back to the question that someone asked for Brent, is that maybe reason for the magnitude of sequential decline given I think we probably all thought that you would be at least flat at the mid point. And then the second question would be back on the fiscal 3Q call, you guys mentioned that the definition of modest for operating margins was in the 200 to 300 basis point range. I just wanted to make sure that that definition of modest still holds?

Carl Bass

Yeah, so two things. One is, it’s hard to pin point exactly but I would not anticipate that much of the business we saw was anticipation of the price increase. I would say it’s a very, very small effect, if any at all, and I didn’t see that. I think when you look at Q1 guidance as Mark referred to, I think we're just being cautious. Visibility is limited. We continue to have concerns about volatility in currency. Unemployment still hasn’t picked up. The credit situation hasn’t improved dramatically. So I think there's still enough dark clouds on the horizon just in terms of the economy. We're just being cautious about what we see out there.

Mark Hawkins

Yeah, I would add in color from that standpoint. When you look at what was happening with billings and such, if you ignore what happened from Q3 to Q4 last year because of the economy and you look back further, I think there is a large component of this is just purely seasonal and you can see it. And as far as the modest range on the operating margin, we continue to view the range that we discussed is a reasonable range.

Heather Bellini - ISI Group

Okay, so that’s 200 to 300 bps, right?

Mark Hawkins

That’s correct.

Operator

Your next question comes from the line of Phil Winslow with Credit Suisse.

Phil Winslow - Credit Suisse

You showed a nice sequential uptick in the maintenance revenue quarter-to-quarter in the January quarter. Are we mostly behind call it flushing through the tough renewal seasons there and going forward do you actually expect to start growing again quarter-to-quarter and basically making Q1 beginning of that trend?

Carl Bass

Yeah, I think what we’d like to say is, we think it’s a good indicator, it’s a good data point, it doesn’t make a trend yet, we’ll continue to watch, I think truthfully we were a little bit surprised by it, we had indicated that we might see lower renewal rates in the fourth quarter, so we were pleasantly surprised by that, I wouldn’t go too far out on that limb until we see it continue into the first or second quarter, certainly won’t make projections about what that revenue line is going to do.

Mark Hawkins

I agree, and I think you just want to look at the data that Carl talked about and then also factor in the history of the prior three quarters or fourth quarters and model that into your total view of revenue going forward for maintenance.

Operator

Your next question comes from the line of Steve Ashley with Robert Baird.

Steve Ashley - Robert Baird

Yeah, my question is really just around building activity, I mean we read a lot about construction being very distressed. Are you seeing any pockets of building activity taking place either by geo or by vertical?

Carl Bass

I mean I think this is an interesting question. I think if you look in the United States commercial construction, there are a lot of issues with it, and I think that a lot of questions remained unanswered going forward about commercial construction. I think on the other side, what you see is there still continuous to be construction in things like institutional and I think there is a move where you will see a lot more renovation.

There are a number of factors that will drive a lot more renovation work than has previously been done including things like energy legislation. I think when you look more broadly across the world, I think it varies a lot by geography. One of the things that intrigued us was, amongst the large deals that I mentioned, were the number of those large deals that were in the AEC space and were in places like the Americas, in places like Northern Europe, which just won't sound like the places where you’d expect these kind of deals at this time.

If I just try to step up back from it a little bit, Steve, what I see happening is, just like many other businesses, our customers have readjusted to the current economy and they've all gone from a state of a year ago, people were really in panic about what was going to go on. They were very uncertain about the future. They’ve recalibrated their businesses, and along with that, they are looking to invest in the future. Once they stabilize their business, they need to invest and they want to move it forward and they want to be more productive and efficient than before, so we're seeing things that are moving in lockstep with the traditional economic indicators.

Mark Hawkins

Steve, I might add too that AEC actually was a leading business segment in Asia Pacific on top of all of the stuff that Carl said, so it just gives you a lens.

Operator

The next question comes from the line of Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

I had two quick ones. On the large deals, can you give us the breakdown there between the indirect and the direct channel, and if you have it in the press release I missed what the upgrade revenue was during the quarter?

Carl Bass

Okay, on the large deals, I don’t actually have the breakdown, but most of our large deal business goes through our channel partners to one degree or another. We work with our channel partners. I don’t have the specific number on the large deals. One other thing I would say, Brendan, is, I think if you look at this quarter our proportion of business that went direct and indirect is right in line with historical norms. There’s really no difference. We’ve often talked about kind of an 80-20 between the indirect business and the direct one. We are right within that range.

Mark Hawkins

On the upgrades it’s $37 million.

Operator

Your next question comes from the line of Sterling Auty with JPMorgan.

Sterling Auty - JPMorgan

Can you give us some more color on what you saw on the media and entertainment business in the quarter and what we should think about going into the New Year, the drivers and may be the trajectory?

Carl Bass

All I saw during the quarter was Avatar. I think like everybody else. I mean I think it seems to have dominated, not only dominated the headline, it dominated the box office, but I think it’s also kind of dominated the mind share of the industry about that large a blockbuster hit, and so I think for many people it’s making them reexamine what their plans are and where they are headed and the viability of 3-D and I think it was a good injection into the entertainment market. We are continuing to invest, and despite terrible economy, they were still able to break all time records. So that’s what I see there, I mean we are really proud of the part we played in Avatar and what we see is there's a lot of more 3-D films coming, there is a lot of investment in 3-D TV, as well as you know the more traditional gaming segment and the mobile games continue to grow through the down turn.

Operator

Your next question comes from the line of Richard Davis with Needham.

Richard Davis - Needham

Apparently after two years of work, NVIDIA is going to incorporate mental images into their rendering engine, into the NVIDIA upcoming Fermi GPU. Is that all a competitor to you guys, do you think of it that way, because when you listen to them, I don’t follow the company specifically but they talk about being a software company and they’re kind of vaguely entering into your space, how should we think about that or is it just interesting but not relevant?

Carl Bass

First thing, they are a software company like we are a hardware company. You see our software is really not useful unless you have a piece of hardware to run it on. One of the things as we used their product mental ray, our customers used their product mental ray, so for the most part it is something that we collaborate on and our customers choose it. Many of customers choose to use mental ray as the renderer, many of them choose to use other solutions out there. You know there is no shortage of rendering solutions out there and customers use them for a variety of reasons, so I think it's interesting.

Generally speaking, anytime the hardware, or the hardware-software platform increases in capability in ways that benefit our customers, it’s a good thing. So more capable 3D hardware, faster CPUs, better connectivity, all that’s generally good because we are always at the end of the spectrum, where we were like -- we have compute intensive, graphics intensive applications and anything that’s catered to that end of the market rather than to the email end of the market is a good thing for us.

Operator

Your next question comes from the line of Sasa Zorovic with Janney.

Sasa Zorovic – Janney

Have you notice any or could you tell us about competitive changes in the quarter that may be would be notable to talk about?

Carl Bass

Yeah, I think one of the things that we saw a lot of a fair number of competitive swap outs, I mean particularly in manufacturing. Our manufacturing business did particularly well. We have held the opinion for a long time and I have been eager to voice it that a lot of manufacturing customers, particularly larger ones, are working on old antiquated systems. They running these legacy systems that are complex and expensive and no longer the best tools to do the job. And so we were very successful in either wholesale replacements or in many places getting pilots in order to replace these old expensive systems. So that’s one of the dynamics that’s changing and I think in some ways it’s been a long term trend; we’ve certainly spoken about it for the last three years. But I think one of the things that happened during the economic down turn, every company including large manufacturing companies examined their cost structure, and I say what can I do to be, a, more efficient, more cost effective, but also more importantly how do I get my products to market faster and better when I come out of this. So many of them were just trying to create a different profile as they emerge both from a cost basis and the ability to bring high quality products to market. When you look at some of the stuff that we have done over the last few years, we believe we have the most complete portfolio for people to bring manufacturing products to market, so that’s the place where I saw the biggest difference.

Sasa Zorovic – Janney

Now, in manufacturing specifically, is there a sort of specific part to it where you would say that you have been particularly gaining share or that you could share with us?

Carl Bass

I think it’s right in the center, it’s kind of hardcore manufacturing. Things like industrial machinery, automotive, making something related to aerospace, those are the places. We have done a fair amount stuff in consumer products, I think it’s just the heart of manufacturing and where we have done a really good job throughout the supply chain, I think when you look some small shops up to people tier one, tier two to the large OEMs, I think we have done as good a job as anybody in covering that broad spectrum.

Sasa Zorovic – Janney

Given that you have gotten so many large deals this past quarter, would you say that maybe your larger customers have more appetite than smaller ones, or could one not sort of say that given the quarter?

Carl Bass

Again I wouldn’t draw too many conclusions from it yet about the large deals. It was certainly a good indicator compared to the beginning of the year. I said this quarter the large deals outnumbered all the other quarters combined, I’d wait to see more about any trajectory, I think there are a number of factors like pent up demand, end of the year spending, so I don’t have a lot of certainty around that yet, Sasa.

Operator

Your next question comes form the line of Derek Bingham with Goldman Sachs.

Derek Bingham - Goldman Sachs

Hey, guys. Congratulations. Carl, you talked a little bit about pent up demand and I was wondering what you have thought about the new product releases coming out in the early part of this year, could they have more of an impact than usual given some of that pent up demand?

Carl Bass

So I think the products that are coming out in the beginning of the year are fantastic products. We've just gone through that last stage of releasing products and I think we have this awesome collection of products. One of the things that we did is we worked really hard to preserve our investment in technology through the downturn and so I think the products are great.

On the other hand I'd say commercially, we've tried to mute the impact of any particular release through changes in business model and so I don't expect a lot. I think more business will be driven by what goes on overall with the economy than specific to any particular release of software.

Derek Bingham - Goldman Sachs

Okay. And Mark, on the maintenance renewable rate, I wonder if you could characterize just in a little more granularity, when you saw that renewal rate bump up, was this just a very modest bump up or was it more significant than that?

Mark Hawkins

I would put it as a kind of a decent bump up. That's probably where I would characterize it. Again it's up sequentially. It's pretty much in line year-on-year. So that's maybe the way to kind of triangulate on that. I don't want to overstate it or understate it. It's kind of a middle of the road bump up in renewals. But we're pleased to see it for sure. And I think what it does, Derek, is it just kind of reinforces the value that people see in our offering and I think they just leave it at that. It's a good offering.

Operator

(Operator instructions). Your next question comes from the line of Kash Rangan with Bank of America/Merrill Lynch.

Kash Rangan - Bank of America/Merrill Lynch

Looking at the regional breakout, Carl, it looks like America seems to be still looking at a range somewhat pretty close to where you did in Q1, start of the year and looks like the improvements have really come in Europe and also looking at the product breakout of the company, it looks like the improvement has been relatively significant on the manufacturing side rather than on the core AEC although you're certainly up relative to what you did in Q1. Any thoughts there, you've used the expression bumping along the range here and there. It looks like Americas and AEC, the two biggest constituents still seem to be bumping within that range. Any thoughts there, maybe I'm misinterpreting that but I just wanted to get your thoughts on the trajectory of these two significant pieces of your business.

Carl Bass

I think you have a charitable memory. I talked about bouncing along the bottom. I think it was more like it. What I would say is all through this, we have seen manufacturing be stronger. I think we continue to see manufacturing be stronger. I was pleased with the change in direction we saw in the Americas business, just more fine grain detail than we report on. So I was very pleased. I think we’ve gotten to that place where we’ve not only stabilized but we're starting to see sequential increases, and barring anything unforeseen, I think the trajectory is good there.

Overall, I think the AEC business is doing well. We will have no doubt a drag from commercial construction in the U.S. but I think there are many other factors going on and that’s commercial new construction whereas I think there will continue to be lots of commercial construction and many people are adjusting to kind of the new levels that we see in the economy. So overall I was really pleased with it.

Kash Rangan - Bank of America/Merrill Lynch

And also one follow up thought, maybe a question on shelf ware? I don’t know if my voice can still get through at this point but if one were to subscribe to the view that if the AEC firms that laid off people started to hire these or at some point start to hire these folks back again and therefore are going be using that old shelf ware, even if you believe that for a second, I know you don’t really believe that, but even if someone were to take that position, what kind of impact can the new release on the horizon have on that? Do you think in other words a new release might spur people to pass up on the option to use the unused shelf ware and instead go for the new licenses just because there is so much new incremental functionality in the upcoming version?

Carl Bass

That is my thesis of the anti shelf ware is really that that if you're sitting two releases back, there are business reasons that you want to be on the latest. There are technical reasons. A technical reason could be anything like compatibility with your suppliers or your vendors. It could be something like running on the latest operating systems like Windows 7. It can be running on the latest hardware like 64 bit. So there's technological reasons, there are business and commercial reasons that you would not stay there. Also even during some of the darker quarters, I talked about what saw with many, many companies doing pilots or other kinds of small test trials in smaller amounts that we're used to seeing.

So if they did have a 100 employees and they were going to swap something out, in the past, they might have bought more. Maybe this time they just did a trial with five licenses. So that’s why I believe when you net it all out, there is more demand either because new releases, new technology, economic motivation to get up on the latest release. as well as when you look out there, in terms of people who have already made the decision to switch, they may not have had the budget or the projects in place yet, and now they're getting ready to do that. I think when you look at some of the large deals we saw, many of those deals just didn’t get created in this quarter. They have been worked on for a while. What happened is the budget money became available, they saw enough light at the end of the tunnel for their business to decide to make those kind of investments. So no, I mean it's hard to get me in the place of believing in the shelf ware argument although I know it’s one some people believe in.

Operator

Your next question comes from the line of Keith Weiss with Morgan Stanley.

Keith Weiss - Morgan Stanley

Thank you guys, very nice quarter. I want to ask you in terms of the new commercial seat growth that you are seeing, perhaps you can help us characterize where those new seats are going, because you said in your earlier comments that employment really hasn’t turned around, so it’s not an employment driver. Can you give us some sense of where you are seeing new seats being created in the most recent quarter?

Carl Bass

So, I would say I don’t think it’s changed substantially from historic places, a number of things I think about, just because in aggregate, employment’s not changing doesn’t mean that there is not a lot of flux in the workforce. Firms are growing, others are shrinking, people are moving, M&A is happening. So there is still a lot of movement and remember there is not a liquid market in licenses, so just movement in and of itself means people go out and buy seats. One other things that I think is also true during a downturn is there are two things that go on, one is customers tend to consolidate around their preferred vendors.

So we often operate in heterogeneous environments. During good times, the heterogeneity tends to get larger; people have three, four, five vendors. When times get tough they get down to one or two and I think in many cases we have been beneficiaries of them narrowing their selection of vendors. The other thing is tough economic times make people make tough business decisions and one of the things is that we have always tried to stress is that the value of our software was much greater. And I talked about how we are manufacturing, there is no reason to be buying a $25,000 CAD system when a $7,000 CAD system is a better tool, and people are coming to that awareness particularly as you look at other companies and they have gone through this thing up, okay I’m paying a $1 million or $2 million in maintenance, so it’s not just the initial purchases, people are looking at this ongoing pricing and they are going this doesn’t make any sense for my business. And they are saying I have a better tool over here, I have a trusted relationship with this vendor, and I have already used it in portions of my facility, and now I’m going to switch over.

So I think that’s one thing that goes on. We have also talked about emerging markets, one of the things that we did see was a rebound in our emerging markets where there are certainly people entering the workforce and so I think some of the dynamics have changed, maybe the motivation why people bought new commercial licenses this quarter maybe different than if we had talked about this two year ago. But the places you would find them are very similar.

Keith Weiss - Morgan Stanley

If I could squeeze one last one in, maintenance billing is I understand being very positively impacted by renewal rate. In terms of the actual maintenance revenues, were there any one time items in there that causes sequential growth or perhaps any catch up on maintenance revenues in that figure that were out of the sort of the ordinary catch up?

Mark Hawkins

I would say no, not at all. Just the basic business here, renewals were really the driver.

Operator

Your next question comes from the line of Steve Koenig with Longbow Research.

Steve Koenig - Longbow Research

Just one tactical question and one kind of longer-term oriented follow-up. Tactical question, so the unshipped orders looks like they billed pretty well in the quarter? What caused that and then where should we expect as a trend in Q1, should it stay the same, go down, et cetera?

Mark Hawkins

I think the comment I recall is backlog was $26 million. You can see historically how we've disclosed that, it's a little bit on the high side of the range, but not completely out of the norm, but on the higher side for sure. I think you would really look at that and then the channel inventory together; their channel inventory is as we said below three weeks and I think those two kind of play hand-in-hand. I don't think there is any real special story there other than that.

Steve Koenig - Longbow Research

Okay. Let me move to the follow-up question then. I've heard some channel partners concerned around, they love to increase functionality of the products, the products are just getting better and better all the time. They deliver a lot more productivity to customers. But I've also heard a concern that down the road customers are going to be able to do a lot more with in fact fewer people and that there could be -- the concern being there could be an adverse revenue impact. Is that a factor, is that for real or is that something that shouldn't be a concern at all?

Carl Bass

It kind of reminds me of the conversations around the paperless office. I mean we are 25 years past the idea of the paperless office, I'm sitting at a table with more paper than I would have had 25 years ago. I think there is always this idea that you will do more with less employees and to some degree efficiencies, productivity measures by traditional economic measures do go up. But what you find is that in a competitive environment, people still need to produce the best projects or the best products and more often than that, they reinvest the time in savings into producing the best product. So I still need a cell phone that out competes the other guy. I need a more fuel efficient car than my competitors, or I need a better more aesthetic and energy efficient building than somebody else. So what we see over time is there is always -- this thought underlies lots of people when they look at long term trends. It’s never played out and they don’t really see it playing out in the future.

Operator

Your next question comes from the line of Ross MacMillan with Jeffries & Company.

Ross MacMillan - Jeffries & Company

Mark, you mentioned 22 deals over a $1 million or Carl, can you just put that into reference relative to last year in your fiscal fourth quarter?

Mark Hawkins

Let me give it to you in the context of the entire year. We are pleased with the sequential tracking of the big deals within FY10 as we talked to you about compared to last year of course, we said it’s probably down about 50% year on year. The trajectory obviously is the key point that we were calling out in terms of Q4.

Ross MacMillan - Jeffries & Company

Absolutely. Just a quick one on the maintenance from my side as well. You obviously you’ve seen basically maintenance billing I think now on average for the last fourth quarters be around flat or just modestly down. Was that a good starting point for us to kind of work from when we think about how we should think about maintenance growth may be in the fiscal first quarter of 2011.

Mark Hawkins

I think from that standpoint, Ross, I look at a couple of things. One is the billings that we had this period that we talked quite a bit about, and as Carl said, you know certainly seasonally what you would normally see a seasonal up tick but maybe better than we expected a bit and that was driven by the renewal rates. So the way I think about this is take a look at the prior three quarters in terms of the data that we shared with you, look at what’s going on in this quarter and the data we have shared with you, and then make a view on the renewal rates. And that will be the key drivers to get you to Q1 and beyond. Our renewal rates, as you can see, has a fairly important dynamic.

Carl Bass

Let me just take a step back for a second. I think what happened to our business as with many is we were most gravely affected by the overall economy. In response to it, we changed the way that we go about doing our business; hopefully, we made some smart decisions during that, focused our energy on things that mattered, got rid of some of things that didn’t matter. Right now, we are sitting here, we are very pleased with the quarter. It’s one data point that there is more work that needs to be done and we hope that many of the things we laid in that were of our own doing turned out to be successful going forward. And of course, we hope the economy continues to improve, and this time we think we got a little bit of benefit from both as we go forward and we see more quarters hopefully the same, we will be able to put a little bit more, greater ability to identify how much comes from things of our own doing and how much comes from just the rising tide of an improving economy.

Operator

Your next question comes from the line of Mike Olson with Piper Jaffray

Mike Olson - Piper Jaffray

Quick one here with the total upgrade pricing change towards putting anyone behind the current version in a position where they need to pay 50% of a new seat price, what do you expect the impact will be on subscription attach rates and what do you think subscription will be as a percentage of the user base over the next couple of years?

Carl Bass

I think in some ways if you look historically we have talked about this for a long time since the program has been in place. Upgrades have become a smaller and smaller portion of our business. Right now, they’re a fairly small portion of the business. I think there is a small amount of the people involved in that, that will choose to go on subscription. My guess is -- certainly they hold for both attach and renewal rates, they will go higher, but I think it is much driven by the value that we are putting in the program by any of the economic motivation. On other hand, it is more likely than not change in pricing. We will move people towards subscription. Generally speaking, what we looked at is, it became a small enough portion of our business, that we were really interested in was in the business model simplification that came from doing that and not needing to manage all that complexity, both from our point of view and the point of view of our partners and certainly on behalf of our customers.

Operator

Your next question comes from the line of Blair Abernethy with Thomas Weisel Partners. Please proceed.

Blair Abernethy - Thomas Weisel Partners

Thanks very much, and nice quarter guys. Wonder if you can just expand a bit on Autodesk Vault and how you are positioning that on the market and what you see for that over the next couple of years?

Carl Bass

We are tremendously excited about what we are doing with our vault, which is our data management product. We rolled it out to a broader audience, it’s a product that started in manufacturing, we are using it in broader ways right now. I mean it’s one of untold kind of stories in the business. People often see us not in this very kind a heavy iron expensive enterprise PLM market and we are not, and we are happy not to be there. But when it comes to data management, we think it’s a real issue for our customers and we had amazing success with the product. One of the things I was going to do in June is kind of detail more about it, tell people what’s going on with the business because I think it’s been a great success story and we given it enough time to gestate. There is meaningful success in it and we really understand the pain points that sell through our customers.

Blair Abernethy - Thomas Weisel Partners

Two more quick things. Just again on the large deals, can you give us a break out or give us some sense of how many of the 22 deals fell into manufacturing versus AEC or other areas?

Carl Bass

Two things, one is that, I don’t really want to break it out. And number two is, some of the deals are not that easy. When we get to our larger deals, there is a lot of cross pollination between the two and so we have a lot of those.

Blair Abernethy - Thomas Weisel Partners

Fair enough. One last, if I can, Mark, just your tax rate, 27% for Q1 next year. What should we be thinking about for the full year?

Mark Hawkins

From that standpoint, Blair, the 27% you get (inaudible) up a bit because basically the R&D tax credit has not been renewed, and so at this stage, that’s our best view of the world. We're are not giving guidance for the full year. As that tax law changes or potentially changes, we'll obviously update our projection each quarter. But that’s our current view right now.

Operator

Your next question comes from the line Greg Dunham with Deutsche Bank.

Greg Dunham - Deutsche Bank

Yes, just one quick question. Was the linearity in the quarter in line with historical Q4 pattern?

Mark Hawkins

I think there was no major change in the linearity from that standpoint, Greg. No big story to tell there.

Operator

Your next question comes from the line of Israel Hernandez from Barclays Capital.

Israel Hernandez - Barclays Capital

In some of our checks, we're finding that business information modeling, BIM requirements are becoming more pronounced in the competitive bid process, particularly in some of the federal government initiatives that are coming out of the stimulus. Can you comment on these BIM requirements and do you see as a driver of some of the 3-D products like Revit?

Carl Bass

That's actually a good pickup. We certainly see it. It's one of the things I was kind of referring to slightly obtusely before about some of the things that we put in place during the downturn. We worked really hard with governments around the world, particularly in Americas with the stimulus money to help make sure that when the stimulus money was spent, people were getting the most for their money and we believe the way to do that is through BIM modeling. And so I think it’s made its way into many of the programs that are being launched by federal governments. It's going on in some of the state and local governments and we're seeing more of a trend internationally around it.

I think the other thing that's really important is, so on one hand it’s being driven just by mandate by being part of the legislation. The other place is, I think many people are underestimating the magnitude of change that's coming with the legislation around energy. It's a much bigger deal than many people have really accounted for and so I think some of the ways that building information modeling is getting built into the standards and the codes is in order for people to really understand carbon footprints of the buildings that they're making going forward. So I think both those factors play into it. Both of them play to our strength and we believe revenue is the strongest end product in the market.

Operator

Your next question comes from the line of Ben Rose with Battle Road Research.

Ben Rose - Battle Road Research

A question for Carl. I was curious to know a little bit more about the performance of the mechanical simulation products during the quarter. I know that over the last couple of years, you've made a number of acquisitions there and was curious how those products are playing out? And I guess a follow-up question would be to what extent are you seeing synergy between those products and the inventor product?

Carl Bass

Yeah, so we worked hard to make sure our simulation products work really well with our inventor product. What I would say at this point is, I'm really pleased with how far we’ve gotten with the simulation products. This is both Moldflow and the stuff we did with Algor.

I think they’ve had great success in terms of what I would really look at is those early stage pilots. So I think we’ve been able to get it into a lot of places, seat it and test it. I don’t think it had a big impact on revenue this quarter. This is another one of these areas that I think we would be wise to detail a little bit more for you in June, we will have a little bit more traction there with what we're actually doing.

But in terms of people who want to lower the cost of production, they want to simplify the process and the time it takes to bring products to market and there is no doubt that the integration of design and engineering tools with simulation tools is the way to do it.

And what’s interesting for us, it’s certainly true in manufacturing where it’s a long established technique, but we're also seeing it in some of the things I referred to in the AEC markets where those same kind of needs are there. As people understand that regardless of what you're building, if you model it rather than just draw it, if you have a 3-D model based design, you're able to do analysis and simulation.

One of the places we've seen it really clearly is in road design, an area where people don’t really think of analysis and simulation, but equally important there. So we really think it's the next step and it really fulfils the promise of what model based design tools are really about so that you can really understand the thing you're building in a more complete way than you're otherwise capable of.

Operator

Your next question comes from the line of Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

I was just checking the tax rate. That’s been answered.

Operator

With no further question in the queue, I would now like to turn the call back over to Dave Gennarelli for closing remarks. You may proceed, sir.

Dave Gennarelli

That concludes our formal remarks today. If you have further questions, you can reach Investor Relations at 415-507-6033. Thank you.

Operator

Thank you for your participation at today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Autodesk, Inc. Q4 2010 Earnings Call Transcript
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