Autodesk, Inc. Q1 2010 Earnings Call Transcript

May.19.10 | About: Autodesk, Inc. (ADSK)

Autodesk, Inc. (NASDAQ:ADSK)

Q1 2010 Earnings Call

May 19, 2010 5:00 pm ET

Executives

Dave Gennarelli – Director Investor Relations

Carl Bass – President, Chief Executive Officer

Mark Hawkins – Chief Financial Officer

Analysts

Brent Thill – UBS

Michael Olson – Piper Jaffray

Brendan Barnicle – Pacific Crest Securities

Derek Bingham – Goldman Sachs

Sterling Auty – J.P. Morgan

Keith Weiss – Morgan Stanley

Ross MacMillan – Jefferies & Co.

Heather Bellini – ISI

Kash Rangan – Merrill Lynch

Steve Koenig – Longbow Research

Daniel Cummins – Thinkequity

Israel Hernandez – Barclays Capital

Sasa Zovarich – Janney Montgomery Scott

Operator

Welcome to the Q1 2011 Autodesk, Incorporated earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Dave Gennarelli, Director of Investor Relations.

Dave Gennarelli

Good afternoon. Thanks for joining our conference call to discuss our first quarter fiscal 2011. 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 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 future performance of the company such as our guidance for the second quarter of fiscal 2011, remarks about fiscal 2011, factors we used to estimate our guidance, our future business prospects and financial results, our marketing opportunities and strategies and trends for our products and trends for various geographies.

Because 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 fiscal year 2010 and our periodic 8-K filings including the 8-K filed in 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 played 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’ll 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 GAAP to non-GAAP results in provided in today’s press release, prepared remarks and on our website.

And now I’d like to turn the call over to Carl Bass.

Carl Bass

Good afternoon everybody. What a difference a year makes. Our fiscal 2011 is off to a better start than last year. Financial highlights in the first quarter include strong revenue results of $475 million, revenue from commercial new licenses grew over 20%, strong subscription revenue and billings, significant operation margin improvement, increases EPS, excellent operating cash flow and a strong balance sheet.

First quarter revenue included a one-time benefit of approximately $15 million in upgrade revenue related to a promotional program that was run in advance of an increase in upgrade pricing.

From a geographic perspective, our international geographies provided all of the growth this quarter. Asia Pacific grew by double digits sequentially and year over year with particular strength in Japan. EMEA posted strong revenue growth as well with a one-time increase in upgrade revenues supplementing the strong core demand.

While both the U.S. and America’s are not recovering as fast, the America’s had tough comparisons due to several large deals in the prior year periods. I believe the America’s is making progress and I’m optimistic about the geographic returning to growth this year.

During the first quarter we launched our 2011 portfolio of design software products. Autodesk best in class products have been enhanced with powerful new features for 3D design, visualization and simulation for engineers, architects and other creative professionals.

The revised user interface provides a more consistent experience across our key products that make it much easier for our customers to move between multiple Autodesk products. This is our most compelling product release ever and our customers and partners are excited as well.

We’ve been building our brand with end users who have not historically been Autodesk customers. During the quarter we launched the Sketch Book Pro app for the I-pad good for both the occasional doodlers and professional artists, Sketch Book Pro transforms the I-pad into the ultimate digital sketchbook.

This app was an immediate hit and similar to our Sketch Book Mobile app for the I-Phone, it quickly became one of the top apps downloaded.

We also launched AutoCAD Freestyle, an easy to use application for drawing and sketching geared toward specialty contractors and do-it-yourselfers and Autodesk Home Styler, free online home design software.

These products are making design technology accessible to a new audience for whom our professional products have been out of reach, and they’re exposing the Autodesk brand to a larger group of potential customers.

Our solid first quarter results are further illustrated by strong financial metrics such as low inventory in the channel, low DSO, a strong cash and investments position of $1.2 billion and no outstanding debt.

Last year we took significant action to reduce our operation expenses and improve efficiencies. The leverage of those actions is now starting to materialize as we start to experience annual revenue growth again.

Going forward, our enthusiasm is tempered somewhat by the de-valuation of the Euro and the general instability of the European economy. We have experience a solid rebound in the global demand environment. Our business has gained momentum and we’ve improved efficiencies within Autodesk.

While it is difficult to gauge the slope of the recovery, we’re confident about our business, our market position and about executing through the recovery and beyond. We will continue to focus on opportunities to drive growth and revenue margins and profitability.

At this time I’d like to acknowledge the great work of our Autodesk employees through this challenging recession. It is through their hard work and contributions we have made the progress to date and are positioned to further improve going forward.

We would now like to open the call up for questions. While the operator is polling for questions, I want to note that Autodesk investor activity this quarter will be at the UBS conference in New York on June 8. And as a reminder, we’re hosting our annual investor day on June 24 at our gallery in San Francisco, and please email me if you have not already signed up.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brent Thill – UBS.

Brent Thill – UBS

Just a quick question on the guidance. I think you’re guiding down roughly 6% sequentially in Q2 and if you look at the last five years, I think you’ve been up about 2% sequentially Q1 to Q2 so can you help us understand how much of that is Europe and how much of that is just general caution on the other side of the business.

Mark Hawkins

I think we’re all reading a lot of the same documents and materials and the fact is there’s a fair amount of uncertainty in Europe. We think that that’s pervasive for people that are looking at the business going forward. That’s the single biggest thing that we’re looking at.

The second thing I would call out that Carl touched on briefly is that we had in Q1, keep in mind, we had about a $15 million one-time benefit from our simplified upgrade pricing. And whereby there will be a little bit of residual benefit for people who did upgrade who do subscription, that’s fundamentally that’s kind of a one off that we need to adjust for.

The third thing I would call out is the foreign exchange headwinds. Of course you know we’re hedged to a good proportion, but not 100% and therefore there are some headwinds we have to look at as well.

We think it’s prudent with all things considered to take this approach and obviously time will tell, but this is our best comprehension of all the facts as of today.

Brent Thill – UBS

On the America’s business, can you give us a sense of what you think actually needs to happen for you to return to growth?

Carl Bass

Like we tried to call out, I think excepting a couple of very unusually large deals a year ago which we talked about then, America’s would already be back to growth. Those were fairly exceptional. One of them was the largest deal in the company’s history. So it was really just going against those comparisons.

Operator

You're next question comes from Michael Olson – Piper Jaffray.

Michael Olson – Piper Jaffray

Did the upgrade pricing change have the intended effect? In other words, did most people shore themselves up to the latest version and get on subscription or were there users who decided they’ll just wait longer between upgrades and are there other actions that you’re going to take going forward to continue to push customers towards subscription?

Carl Bass

I think we’ve demonstrated a good track record of making our subscription program more valuable over time and both our renewal rates and our attach rates are a demonstration of that. By no stretch of the imagination would I say most people got on the latest release. That just never happens.

But we did also call out, we think upgrades will be down next quarter, but if you just look at a three year to five year trend, upgrades have been coming an inconsequential part of the business, but we will continue to do things like look at the pricing on them. We continue to run legacy promotions. We’re always looking at ways to make sure that our customers have the latest software and we continue to run those kinds of promotions.

Mark Hawkins

I might add, I do think that in addition to what Carl said, we really are viewing this volume as something that’s good for the customer. It’s good to have that ongoing strategic relationship with them, and also you can just tell by the nature of the simplified upgrade pricing that they are encouraged to stay within subscription so our renewal rates I think is a good thing over the long term.

Michael Olson – Piper Jaffray

What do you expect interest and other expense to look like over the next few quarters?

Mark Hawkins

It’s tough. We don’t typically guide that. There’s a lot of puts and takes on that to be honest with you. It’s typically not highly material. I look back historically and try to use that as a reference. There’s just a lot of puts and takes all the way down to some detail that you wouldn’t even care to get into honestly. My best sense for you honestly is look at an average and make a call on that.

Operator

You're next question comes from Brendan Barnicle – Pacific Crest Securities.

Brendan Barnicle – Pacific Crest Securities

In the prepared comments, you write in here that you’re focused on controlling expenses while balancing investment in the business. Can you talk about where you’re investing in the business during the quarter?

Carl Bass

I don’t think there were any particularly unusual investments this quarter. I think if you look out over the last few quarters, our biggest investments have been in kind of retooling our sales and marketing efforts. Most of the things that we talked about all through last year as we were cutting expenses was to make sure that we were executing much better on our go to market strategies and places where we thought it would drive revenue more quickly.

So most of our investment has been there. I think in other places it’s less a put and take on expenses, but we re-jiggered our portfolio of investments in terms of R&D to places where we thought they would be more fruitful.

Brendan Barnicle – Pacific Crest Securities

As you think about the remainder of the year, are there any new areas you see where you’d like to put some more investment particularly given some of the revenue outperformance you’re seeing in this first half of the year?

Carl Bass

I think there are a bunch of opportunities that we think are important. We’ve talked about our simulation and analysis, what we’re doing with that. We’ve seen some interesting things in terms of these consumer low end products.

But I think a lot of really in the core business and figuring out which parts are yielding results as we bring on more sales people, run more programs and really figure out the yields from the investments that we’ve already made.

The other thing I’d say is as we get to investor day in June, there’s a bunch of things that given more time, we’ll lay out more fully about where we think the best opportunities are.

Brendan Barnicle – Pacific Crest Securities

On the Europe side, you hit a little bit on the hedging that you’re doing and how you’re thinking about that. Obviously that’s sort of changing real time on a day-to-day basis. How do you try and model that given how volatile that environment seems to be right now?

Mark Hawkins

Basically, we try to be as transparent as possible in terms of this four-quarter rolling hedge and just for everybody on the phone, there’s an opportunity, as you get closer in, you should have the majority of your revenues and also your local expenses. You net out that and get a total exposure and you try to hedge that.

And then you layer it each quarter and in the second quarter out, it has a little bit less coverage and in the third quarter out it has a little less coverage and the fourth quarter has a little less coverage. It’s a fairly traditional approach called a four-quarter rolling hedge. So we take that and do that with the goal of simply muting the variation versus plan and that’s what corporations do.

I think in terms of the real time adjustments that are happening to FX, we have to look at that. We comprehend the best data we have. We have some ways to integrate this information and to model it and we make assumptions for the current period as well as planning for the year.

So there’s nothing more in detail I can really share with you. It’s a complicated topic, but we certainly try to factor in the hedges that we already have that are layered in that address both revenue and local expenses, and then we also factor in the unhedged portion with the spot rates and everything that we can comprehend there to come up with an assessment.

Carl Bass

We talked about this probably a year to a year and a half ago when we had a more simplistic hedging method that was really for most of the quarter in the revenue and as we recognized the volatility in many of the world’s currencies, we talked about introducing a slightly more sophisticated program like Mark just described.

In some ways it’s having an effect. We watch the Euro constantly. The effect is easily calculated and is less important in the quarters near in and more of that volatility plays out in the long term, but we have less certainty of where it will be.

Brendan Barnicle – Pacific Crest Securities

I was actually asking more about the demand side.

Carl Bass

On the demand side, I think we’re watching. It’s three weeks into the quarter. It’s obviously a way bigger concern for us, the demand than the actual FX. So far we haven’t seen anything unusual in terms of the demand in Europe or even as you read about it spreading around the world, we haven’t seen any difference in demand.

We factor that in, just knowing that we’re three out of twelve weeks into the quarter and that’s about as far as we can see.

Operator

You're next question comes from Derek Bingham – Goldman Sachs.

Derek Bingham – Goldman Sachs

I was wondering if you could give a little more color. Beyond the difference in what you’re seeing in manufacturing versus AEC. I know we’ve got the numbers in front of us, but just wondering if there’s any more color you could add. Generally I think people are thinking manufacturing is really strong, but the construction is still very worrisome and there’s not a lot of activity going on. I’m wondering what you could add to that.

Mark Hawkins

A couple of things here, one for manufacturing we continue to see headroom in manufacturing. We’ve talked about that as being an area that we think we can continue to make progress on. It will be a driver for us this year and beyond.

You can see the nominal growth rates as you called out, on a year over year basis about 15% year over year for manufacturing and about 7% AEC. We’re pleased that both are growing double digit. This completes the cycle that we talked about the reset, stabilization and sequential growth and year over year growth, and it’s really pretty much portrayed as we’ve been talking about for the last year.

But I think the manufacturing we see headroom. We continue to win specific deals with specific customers. I’d say in some cases, Katia would be a more likely area that we might win an account on. I think we have a strong product set with Venture.

Carl talked about investment in simulation. I think that our digital prototype in simulation, I think more and more people are really looking at the value of that offering and its really opening doors because we really have a strong offering as Carl talked about in our openings comments.

So I just think competitively we’re well positioned. I think the market is kind of listening our pitch and I think you’re seeing some progress.

Carl Bass

What I would say is it’s slightly counter intuitive. No doubt if you look at the worldwide economy, manufacturing recovered more quickly, but the counter intuitive part is that many of the companies in the construction industry are being forced to go to more direct measures.

There’s been more consolidation. There’s been more trouble in the business. They’re moving into different kinds of building types. And with that, comes an adoption of technology to change the cost structure and efficiency of their business. So I think at some point as we start coming through it and we see some demonstration of that already, is that you’ll probably see an even greater adoption because they are going through this technology transition as people start building new information modeling that we talked about.

It has now taken on the proportions of a worldwide shift in how the industry does its business. So manufacturing is no doubt better, and as we’ve talked about, our competitive position is very different, but they were both good this quarter.

Mark Hawkins

It was nice to see growth 13% year over year. Again, a key product to Carl’s point, so good results overall in those two areas.

Derek Bingham – Goldman Sachs

The platform strength, that saw the big sequential jump and was a lot of that related to the promotion or what else are you seeing there?

Carl Bass

A lot was related to the promotion. The other thing is, in some ways we’re starting to look at keeping a mirror image as we went into the downturn. So what you’re seeing is the symmetry. As we talked about going into it, we talked about one was we were able to have large deals, customers who were buying 3D model based products continued to buy as we went into the downturn.

What we saw was a fall off in the one and two seats and primarily in the horizontal products like AutoCAD and AutoCAD LT. Those were the people who were much more hard hit. As we come out the other side, we’re starting to see that recover more quickly. I don’t think there was much more to it than that.

Derek Bingham – Goldman Sachs

On maintenance renewal rates at this point, have they completely normalized in your view or are there still some more points to be had on recovery?

Mark Hawkins

I think the good news is that we have seen improvement both year over year and sequentially, so that’s positive. We’re still not at what I would say is the level that we’ve been at historically but we’re approaching that. There’s still headroom on this area. We’re making real progress toward that but there is still headroom compared to historical rates that we’ve been at beyond more than just a year back.

Operator

You're next question comes from Sterling Auty – J.P. Morgan.

Sterling Auty – J.P. Morgan

I didn’t get a chance to go through the prepared remarks. You talked about the tough compare on the large deals last year. Last quarter was a good large deal quarter. Can you talk about what large deal environment was like during this quarter?

Carl Bass

Large deals were definitely down from last quarter and more in line with historical norms. As you know, we’re not typically a large deal company as you think about it. We don’t have that linearity in our revenue, proportion of revenue. It doesn’t look like that. We don’t have those characteristics.

We just thought was kind of unusual last quarter and so we called it out, but we’re kind of back to normal seasonal and normal number of deals. I think if we see anything different going forward, we’ll call it out at the time.

Sterling Auty – J.P. Morgan

We talked about coming into the year, the cost cutting you did last year, but then the cost suppression. Obviously the margins have been much better than expected. Do you feel like we’ve felt all the impact of the cost suppression coming back in whether it be merit increases of the sabbaticals or something like that? So in other words, is this the type of operating leverage that we could expect moving forward?

Mark Hawkins

I think the way we’re thinking about this is look at our operating margin focus. It’s all in; all costs considered including all the dynamics we talked about earlier even including FX. But I think it’s fair to say that there’s been some costs that were suppressed in the prior year that we have seen some impact on in Q1 for example.

I’d almost shift the topic from cost suppression to say that all in, when we look at our costs, that’s factored into our operating margin expansion.

Operator

You're next question comes from Keith Weiss – Morgan Stanley.

Keith Weiss – Morgan Stanley

You saw a very nice increase in the number of net new maintenance customers in your subscriber base. I think it was like 133,000, which I believe, is the biggest sequential increase I’ve ever seen. Could you talk to us a little bit about the source of all those new sales because this is a not of new sales compared to the amount of overall net new products if you look historically. Is that more people in the base coming over or how much is net new customers coming onto subscription?

Carl Bass

I think along with the simplified upgrade pricing is people got the message that the most cost effective way to buy our software, and the way to get the most value is through the subscription program. As we’ve always talked about, these two things are really zero. You can buy through upgrades or you can buy through subscription, and it’s been a long-term trend.

More and more people are going to subscription. I think this just continues it. I think with simplified upgrade pricing, and just to be clear about what that was, it was going to one price for upgrades. You may remember us talking about our one X and two X and three X pricing which was overly complicated both for us and our partners.

And as we saw less people utilizing the various levels, we decided to simplify that. As you went to one price people are getting that there are certain places you don’t want to be because it’s no longer economically advantageous to be there, and they recognize that we’re really shifting the focus to being a subscriber is really the best way to do business.

Keith Weiss – Morgan Stanley

Could you give a subscription on maintenance billings growth number in the quarter? It looks like it was very high. How much of that $15 million upgrade revenues, is there a simplified pricing impact number on that subscription billings number?

Mark Hawkins

Let me talk about the billings in general, grew 26% year over year so I think that’s a fair commentary in terms of it was high. In terms of the second part of your question was?

Keith Weiss – Morgan Stanley

If you were able to come with a number like the $15 million impact to upgrade revenues from the pricing change. Do you have a similar sense of what the impact on subscription billings was?

Mark Hawkins

We don’t because you kind of have to start to get into the mind of the customer when you think about it from that standpoint. So the one-time simplified upgrade pricing is what it is. You can see that in the cross grade upgrade data that we put on the fact sheet. I think the actual billings growth for subs is just hard to get in the minds of the customer.

But I think it’s fair to say that they see value in this product and I think they are incented to stay close to us and really get the value of those current releases and all that benefit, and it’s a good economic thing for them to do so.

Operator

You're next question comes from Ross MacMillan – Jefferies & Co.

Ross MacMillan – Jefferies & Co.

On the guidance if I took out the $15 million that obviously implies flat sequential hit the high end. You commented the majority of the Euro and the Yen has been hedged for Q2. So are the other factors really just demand uncertainty?

The second question just from the mechanics of the hedge, I understand that it’s a rolling four quarters but would I be right in thinking that if I took for example failing rates today and I basically thought about the percentage impact that rolls through over the next four quarters, that would effectively grow linearly or non-linearly? In other words, you might have a 10% of the total impact next quarter and then 25% and then 40% and whatever the case may be. Is it a normal relationship such as that becomes a bigger impact as you go further out the curve?

Carl Bass

First, in terms of the guidance, it’s really demand uncertainty in terms of Europe. I don’t think we have any of that uncertainty around the rest of the world, but events are changing day to day so it’s really demand uncertainty in Europe. I outlined that we haven’t seen any yet, but we’ll see.

In order to solve the FX hedging equation, we’d have to give you more information. We really haven’t gotten into details about telling you how much we hedge each quarter.

Operator

You're next question comes from Heather Bellini – ISI.

Heather Bellini – ISI

How much of a benefit do you think you’re seeing from projects that were put on hold last year or pent up demand if that’s what you want to call it and where do you think we are in satisfying the appetite for that?

Carl Bass

I think we’re at the beginning of things coming back online. I don’t think everyone’s back to work yet. I don’t think most firms are running at full bore. I think to the previous question, it’s a little bit better in manufacturing than it is in construction, and there’s definitely differentials around the world.

But I’d say we’re still early in it. I think the real difference maybe is almost psychological and attitude in which people have started to make investments in their business going forward. They’re out of the deep depths of kind of depression as they were not willing to make any kind of investments and had certainly more pressing issues than upgrading their technology, and we’ve now really kind of crossed that barrier where more people are making more technology investments, assuming a more level business they’re seeing today.

Heather Bellini – ISI

Was the biggest impact in that this quarter where you saw that inflection where people were feeling comfortable or was that also in the January quarter as well?

Carl Bass

I think we talked about that a little bit in the January quarter, small improvement. But I think if you look this quarter, it’s a little bit more broad based in terms of product categories, individual products, license type, geography. So it’s back to a much more broad based kind of diversified revenue stream that we’re used to.

Operator

You're next question comes from Kash Rangan – Merrill Lynch.

Kash Rangan – Merrill Lynch

It looks like Europe did a little bit better than America’s. I’m just wondering if you could give us a little bit more color. I know that certainly so far this quarter you’ve not seen any signs of weakness, but what drove the strength in Europe? It looks certainly to be surprising also. If you X out the promotion the results are relatively flat for the January quarter, so I’m wondering what gives you the confidence about growing at this level and beyond for the next few quarters?

Mark Hawkins

The one thing I would add immediately is that in terms of Europe, the broad base that Carl touched on was certainly there in Europe. We saw good growth across a variety of countries in Europe so that was one thing that was certainly there. To give you a little bit more color, this was not driven just by the north or just by the south or one area or the other. We saw a good level of broad based from that standpoint.

In terms of other elements of the growth, as we called out, there was some benefit from the simplified upgrade pricing. That certainly impacted Europe as well. We’ve talked about the FX in terms of the year over year growth effect. Those are a few thought to consider.

Carl Bass

I think there may have been some slightly better execution when it came to the upgrade pricing, probably contributed to it to a small degree. As you know with our business, we do so many small transactions that it becomes statistical in nature and I’ve always said don’t go extrapolate from one data point too far.

As we start seeing more of what goes on over the next few quarters, I think we’ll have a more evolved sense of what happened and I think that same question I often ask of you, I’d say of us, is we don’t know enough from just looking at the one quarter to say. But what we can say is it was the diversity.

Kash Rangan – Merrill Lynch

When you talk to customers, what is the employment cycle looking like? Are people downward trenching or are they actually a little bit more advanced than that? Are they looking to hire? Are they actually started hiring? If you could comment on that and then inventory should roughly stay at this low level or should we expect it to build back up to normal levels?

Carl Bass

I would say hiring; we’re on the beginning of the slope up. There are clearly people who are hiring for the first time. Talking to customers, I’ve heard people say I can’t hire or I can’t hire fast enough, so we’re in a very different place than six or nine months ago in terms of that.

I don’t think we’re up at all to the staffing levels, and you can look at the worldwide employment data to see that. So I don’t think we’re up to levels of two years ago, but I think we’ve definitely hit the inflection point where employment is recovering in the industries we serve.

Mark Hawkins

In terms of inventory channel, it is to be clear at the low end of what we’ve seen and it’s a little bit lower than we historically have had in terms of the channel inventory. So we have typically thought about it in terms of the two to four week range. It’s really at more of the bottom of the low end of the range. I don’t think it’s a big factor, but that is actually where we’re at.

Carl Bass

I would just say it’s probably just a drop lower than we’re comfortable with. At a certain point, we’ve talked about this before, it become hard to service our customers well, and we’re probably at that point. So I wouldn’t be surprised to see a small build during the quarter.

Operator

You're next question comes from Steve Koenig – Longbow Research.

Steve Koenig – Longbow Research

I wonder if you could comment on adjusting for the outperformance this quarter, do you still see the possibility that 200 to 300 points margin expansion is the right way to think about this year or could we even expect better than that?

Mark Hawkins

I would say that given what’s happened in the first quarter and the way we’re thinking about the second quarter, I think you should think about it more approximately 300 basis points, so more at the high end of that range based on what we’re seeing, factoring in everything we can see as of today. So I think that would be where I would encourage you to think about.

Steve Koenig – Longbow Research

If we see revenue upside like we did this quarter, it looks like most of the revenue upside this quarter fell straight to the bottom line once you tax it. Would you expect that, if you had upside surprise in revenue, would you accelerate hiring as the year progressed or accelerate investment in channel or would most of that fall to the bottom line? How should we think about that?

Mark Hawkins

I think you could see the benefits of leveraging. We experienced the pain of de-leverage, the economy and the companies in it. But you’re now seeing the benefit of leverage, so I think it’s fair to say that revenue over performance is something that will generate good bottom line performance.

I do though want to underscore that we’re making select strategic investment and we’re going to constantly be walking that balance to both continue on our progression towards our long term operating margin of north of 30% over our long term plan, and at the same time sow the seeds of investment that are going to propel growth over the long term

Operator

You're next question comes from Daniel Cummins – Thinkequity.

Daniel Cummins – Thinkequity

I wonder if you talked at all about the sluggish American business. Have you adjusted your expectations up or down recently and if so, why? If you could give us an update on your opinion on credit access in your channel and also sales headcount in your channel.

Carl Bass

I don’t think we’ve seen much difference in our American business. It’s kind of going right according to plan and I don’t think we’ve seen any real differences in terms of access to credit. I think business in the America’s is tracking according to plan. I think as we pointed out a couple of times, it’s just hard because of the comparisons because of those abnormally large deals last year.

Mark Hawkins

One thing you can see in our particular DSO, certainly after adjusting for billings, linearity and such, but in general, we talked about it last quarter, we’re not having channel partners who are asking for extended terms. We’re seeing some level of normalization there and so from that standpoint, I think we’re really more in terms of back to normal in terms of what they’re asking for in terms of credit terms. So that’s another micro bit of data for you to think about.

Daniel Cummins – Thinkequity

On Rivet, I felt last year was a good year I guess incrementally speaking the state level mandates around building info modeling. Do you think this year; we’re apt to see anything significant on the commercial side with respect to BIM and the possibility of exclusively Rivet in some cases?

Carl Bass

I would say we’re in that really nice position of where you’re starting to see national standards in professional organizations recommending BIM. In some places, they stop short of naming actual products, not being allowed to do so. But in many cases, really the only product on the market that fits the bill in Rivet.

We’ve continued to invest in Rivet. It’s moved far ahead and I’m really happy with the progress that we’ve made on the development, and I’d say even happier with the adoption around the world. You know see it’s being used on projects of every size and every geography and there’s no doubt that these government mandates certainly help.

Operator

You're next question comes from Israel Hernandez – Barclays Capital.

Israel Hernandez – Barclays Capital

Can you talk about as we move into kind of a global recovery assuming Europe doesn’t melt down here, how you think the pace of 3D adoption will be on some of your products? Do you think some of your customers are now using this pause over the last couple of years to rethink their technology platform? Do you think you’re well positioned coming out of the recession? And also, I’d like to get a comment on the anti shelf ware issue.

Carl Bass

I would say on the technology adoption, we’ve talked about this a lot. I think many, many of our customers have done more than just rethink. I talked about a lot of pilots being run. There’s usually this period of taking out software and then they pilot it before putting it into production.

What I think that doing this extended downturn, you saw a lot of piloting going on and in some ways that leads into the anti shelf ware. Is that what we would have seen before is a firm buying 100 seats of software, during the downturn they might have only bought 10 or whatever was sufficient in order to run their pilot project, but now have figured out that word processes and integration with their systems so that when they adopt it, they’re still looking to purchase those 90 other seats.

I think that’s where really some of the pent up demand comes from, being on the older technology, and some of it comes from being just time has passed and people are sitting back on old releases. I talked about this a little last quarter.

One of the things is, if you saw a side by side demonstration of our products running on Windows 7 on today’s kind of commodity desktop computer, with typical kind of graphics hardware, and you went and saw the same thing on some older version of Windows, on a 32 bit operating system with old graphics, it’s a night and day experience.

So even without changing the technology platform, just moving to the latest hardware and software, gives people unbelievable productivity benefits. So I think some people are just going through that upgrade and as you see a PC refresh cycle, we’re kind of tied to that in some ways.

Operator

You're next question comes from Sasa Zovarich – Janney Montgomery Scott.

Sasa Zovarich – Janney Montgomery Scott

If you could comment a bit on what kind of competitive change if any you have seen through the quarter here.

Carl Bass

Could you repeat the question please?

Sasa Zovarich – Janney Montgomery Scott

What kind of competitive changes if any you have seen in the quarter.

Carl Bass

I don’t think there was anything. I don’t think there’s anything notable. I think competition continues to remain the same throughout the markets and geographies that we’ve historically talked about. Nothing special to call out.

Sasa Zovarich – Janney Montgomery Scott

So specifically that strong performance that you had in the quarter here was basically that the markets was coming back. The demand was coming back but not that there were any meaningful share gains that you have been able to point to for that.

Carl Bass

I wouldn’t get too excited about share gains in a single quarter.

Sasa Zovarich – Janney Montgomery Scott

If you could comment on the linearity. Your quarters have always tended to be very linear. Has it also been the case here or did you see an acceleration through April or was it again, fairly linear?

Mark Hawkins

I think two points; one is that I think it’s quite linear again. That’s a pattern that we’ve seen and we’d even say as Carl touched on earlier, even for the first couple weeks of this quarter, it’s been reasonably linear thus far.

Operator

You're next question comes from Ross MacMillan – Jefferies & Co.

Ross MacMillan – Jefferies & Co.

It was just a real simple one on the $15 million benefit from the promotion. Is that something, which you’ve been able to pin down accurately, or is that just kind of a good estimate of what you think the impact was?

Mark Hawkins

We’ve spent a bit of time on this one for sure trying to make sure we validate the data. I think it’s like anything. It’s an estimate with our judgment around it, but I think there’s some good fact underpinning on this one.

Carl Bass

As Mark talked about, some of it involves trying to determine by behavior, but there are some historical patterns and I think we at least triangulated it. We came at it from many different directions, and that’s our best guess.

For some of you who asked about it last quarter, and some of you had maybe even seen some early signs at the end of last quarter or certainly when we reported, this time we’re absolutely able to say it was some substantial amount and $15 million centers around our best guess.

Ross MacMillan – Jefferies & Co.

Obviously the AEC business, you’re seeing right now is less driven by architects and more by different players within the AEC segment whether it be contracting engineers or building owners or facilities managers. What’s your view as to when however far down the line it is, do you envisage a kind of refresh within the architectural segment when whatever it is in the future we start to see construction projects coming back on line more meaningfully.

Carl Bass

I think you will certainly see, the architecture one, the easiest way to look at it is probably through the employment numbers. That’s one of the big macro drivers. I think you can look at some smaller elements like we talked about with technology refresh that will play a part regardless of the overall growth of the industry.

In addition, I do think there are a fair number of trends going on in the industry that are causing an economic disruption. So you’re seeing things that we talked about like design build and integrated product delivery, which is just new mechanisms for delivering projects. And when you think about those, some of the financial and legal relationships change and then some of the buyers, so that’s certainly going on.

So we’ve historically had a bit architecture business, a smaller engineering and a really small construction business. I think we can see those disciplines get to parity and maybe even reverse themselves. Certainly when you’re talking about a long-term trend, and we think one of the really big opportunities is in the construction part of the market.

Operator

You're next question comes from Sasa Zovarich – Janney Montgomery Scott.

Sasa Zovarich – Janney Montgomery Scott

If you comment please on business in Japan specifically that has been sort of one of the areas that has been difficult in the past and what you’re seeing there to the extent of a turn around. If you could comment on that please.

Carl Bass

I would say less of a problem I would say. Japan is even more volatile than other large countries large countries for us. It’s been less consistent, but we certainly if you look back over the last few years, we have good quarters and bad quarters, and I’ll just caution again, let’s just see as the year continues to play out how it goes. But we actually had a very good quarter this time.

Operator

You're next question comes from Kash Rangan – Merrill Lynch.

Kash Rangan – Merrill Lynch

If you look at the last quarter to this quarter, if you exclude the promotion stuff, it looks to have been sequentially flat. I know that is entirely within the norms of seasonality. However, you also have an easy comparison against your earlier, so you’re obviously putting up good growth against the depths of the depression. Absent of Europe distortion, which certainly is a big factor on everybody’s mind, what are the derivatives or things that you’re watching in your distribution. What gives you the confidence that you can actually grow your business on top of the base that you actually delivered this quarter which certainly growth with easy comparisons, but from this point onwards, what are the drivers that can help you grow your business fundamentally and gain share. If you can also talk about any advantage on the pricing standpoint, margin standpoint, that would be good.

Carl Bass

What I would say is kind of a summary of what we’ve said all day is, I think the thing that gives us the greatest confidence is the broad based nature of the improvement that we saw and it’s not just sequential improvement, it’s year over year improvement across geographies, across product lines and against license types. So almost everywhere we looked the numbers were good and the results were very good.

I think if you look at what you call the second derivatives, even some of the things as we talked about, channel inventory and backlog and DSO’s and even down to some of the small detail about interactions with the partners, they all suggest good things. And it’s that combination of good top line.

I think we have our cost structure in line right now from all the hard work that we’ve done over the last 18 months. And one of the points that I made all along is that despite a lot of the hard work in cost studying, we continued to invest in our product portfolio, because at the end of the day, what customers get from us is our products, and that’s what enables them to drive their business and I feel really good about the products we’ve been releasing.

We just had a fantastic release of software. I can’t think of a year in which we’ve gotten better reviews from both the customers and the press. And nowadays, with blogging and tweeting, the feedback is instantaneous.

And so I feel really good about our products. I think our channel came through, certainly a difficult time for our channel partners. And our employees, I think people came though it and I think we’re just in a better position, and I think this was the first quarter in which we got a broad indication of the improvement.

Kash Rangan – Merrill Lynch

The new release, what can it do for your business? New seeds or getting higher penetration with existing customers, quicker upgrades. What are the vectors that can go right for you with the new release?

Carl Bass

I think it’s all those things. You’ll start seeing return to normalized rates in subscription. You’ll see deeper penetration into existing accounts. We continue to win new business all the time, so I answered the question before. I don’t think there’s a great change in competitive strategy, but I think if you look at the vectors over time, they’ve been favoring us and we continue to win share from all of our major competitors, and that’s particularly true in manufacturing where I think we just have a much better product and a much better position and gravity is on our side in that market.

Operator

There are no further questions. I would like to turn the call back over to Mr. Dave Gennarelli for any closing remarks.

Dave Gennarelli

That concludes our call today. If you have any further questions, you can reach me at 415-507-6033. Thanks.

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