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Autodesk, Inc. (NASDAQ:ADSK)

F1Q 2015 Earnings Conference Call

May 15, 2014 17:00 ET

Executives

David Gennarelli - Director, Investor Relations

Carl Bass - Chief Executive Officer

Mark Hawkins - Chief Financial Officer

Analysts

Raimo Lenschow - Barclays

Brent Thill - UBS

Heather Bellini - Goldman Sachs

Steve Ashley - Robert W. Baird

Kash Rangan - Merrill Lynch

Brendan Barnicle - Pacific Crest

Keith Weiss – Morgan Stanley

Jay Vleeschhouwer - Griffin Securities

Gregg Moskowitz - Cowen and Company

Walter Pritchard - Citigroup

Matt Hedberg - RBC Capital Markets

Steve Koenig - Wedbush

Matt Williams - Evercore

Sterling Auty - JPMorgan

Richard Davis - Canaccord

Operator

Good day, ladies and gentlemen and welcome to the First Quarter Fiscal Year 2015 Autodesk Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to turn the call over to David Gennarelli, Director, Investor Relations. Please go ahead sir.

David Gennarelli - Director, Investor Relations

Thanks, operator. Good afternoon. Thanks for joining our conference call to discuss the results of our first quarter. Joining me today are Carl Bass, our Chief Executive Officer and Mark Hawkins, our Chief Financial Officer. Today’s conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com/investor. As noted in our press release, we have published our prepared remarks on our website in advance of this call. Those remarks are intended to serve in place of extended formal comments and we will not repeat them on this call.

During the course of this conference call, we will make forward-looking statements regarding future events and the anticipated future performance of the company, such as our guidance for the second quarter and full year fiscal 2015, long-term financial model guidance, including billings, subscriptions, and recurring revenue growth. The factors we use to estimate our guidance, new business model introduction, new product and suite releases, market adoption and expected growth rates, cost management efforts, hiring plans, business execution, business prospects and financial results, our market opportunities and strategies, including our desktop subscription offering plans, our transition to cloud and mobile computing, our educational vertical strategy, trends and sales initiatives for our products, and trends in various geographies and industries.

We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time-to-time with the SEC, specifically our Form 10-K for the fiscal year 2014 and our current reports on Form 8-K, including the Form 8-K filed with today’s press release and prepared remarks. Those documents contain and identify important risks and other factors that may cause our actual results to differ from those contained in the forward-looking statements.

Forward-looking statements made during the call today are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today’s call, but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum.

During the call, we will also discuss our non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of our GAAP and non-GAAP results is provided in today’s press release, prepared remarks, and on the Investor Relations section of our website. We will quote a number of numeric growth changes as we discuss our financial performance, and unless otherwise noted, each such reference represents a year-on-year comparison.

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

Carl Bass - Chief Executive Officer

Thank you, Dave and good afternoon everyone. Building on the momentum we generated last quarter, we are off to a positive start to FY ‘15 strengthening our core business led to better than expected billings revenue, operating margin and EPS. We also made excellent progress on our business model transition by adding over 89,000 subscriptions in the quarter. These results coupled with the significant increase in backlog and record deferred revenue left us pleased with the overall results.

In Q1, we introduced our new 2015 line of design and creation suites, as well as updated products across our portfolio. Our 2015 portfolio offers best-in-class desktop products and powerful cloud services that are being adopted by a growing number of our customers around the world. Customer reaction to the 2015 suites has been positive and revenue from suites posted strong growth once again.

I really can’t emphasize enough the success we have had with our suites initiative and the value that suites have contributed to Autodesk over the past three years. Our customers value the diverse functionality they provide. And it’s worth repeating that suites remain one of the pillars of our growth strategy and support our long-term goal of generating 20% more value from our subscription customers. Our AEC results continue to be driven by the ongoing recovery in the commercial construction market coupled with the customer excited for our desktop and cloud based BIM tools. Continued adoption of BIM in the building and infrastructure industries drove growth in our AEC suites and our cloud based BIM 360 offering.

Cloud and mobile are really resonating with our customers, which is an important step realizing the potential of BIM in construction as we increase our ability to provide the industry with in the field access to real time design information. We closed several large AEC transactions in the quarter including a significant win with a transportation agency for one of the largest cities in Europe. This agency has been a competitor stronghold for many years. They will now be implementing an array of our products including the infrastructure design suite BIM 360 and PLM 360 for use in some of their highest profile road, rail and infrastructure projects. Importantly our AEC solutions will help the agency to become compliant with expanding government BIM mandates.

Our manufacturing business continues to perform well on a global basis. We experienced solid demand in both mature and emerging markets as we continue to expand our business with industrial machinery, consumer products and automotive customers. We continue to make investments in our portfolio and recently expanded our solution to include new functionality like composite analysis technology for our simulation offering. As a result of these investments we are seeing greater penetration in industries like aerospace and automotive.

We continue to make progress with our 100% cloud based PLM 360 and we are seeing some great trends there. What should really tell you about the strength of the product is that shortly after their initial purchase, many customers come back to us wanting additional (suites) that’s the beauty around ease of deployment with PLM 360 and illustrates how users value the product and its potential and multiple PLM initiatives. We are also seeing more and more companies that are religious about the cloud. We closed a number of them in Q1 and we think those types of customers will only grow as we go forward. As a large enterprise company Autodesk has wholeheartedly embraced the cloud.

We closed the Delcam transaction early in Q1. Delcam’s business in Q1 was healthy, but after applying the typical acquisition accounting treatments, the revenue we have recognized was immaterial to the quarter. We are very excited about the early stages of our collaboration which will help to extend Autodesk much deeper into the manufacturing process with the industry leading technology for CAM. It’s great to have the Delcam team onboard as we further broaden our already strong manufacturing solutions.

From the geographic perspective we experienced continued strength in A-Pac led by strong demand in Japan and South Korea. The results in EMEA continued to be mix by country. In the Americas we are pleased with the trends we are seeing. When considering the growth in our backlog, our year-on-year growth in all major geographies was much better than was reported. We are still at the very beginning of our business model transition and we are seeing growth across the board in adoption of our cloud and mobile solutions. We are receiving positive feedback from customers which is a clear indication that the cloud is changing the way the world is designed and made. Customers are changing their mindset to adopt to more collaborative connected environment so teams can now be more integrated and efficient.

We are really pleased with the increase in subscriptions in the quarter. As anticipated the vast majority were maintenance subscriptions, but we are encouraged by what we are seeing in both desktops subscription and cloud subscription. After wining a pilot project in France for the past two quarters, we launched the global availability of AutoCAD LT as a desktop subscription last month and it looks to be off to a great start. This was nice to see when we consider we also posted growth in perpetual AutoCAD LT licenses. Both desktop subscription and cloud subscription namely Autodesk PLM 360 continued to expand our leads and bring new customers to Autodesk.

Another element of our business model transition is offering our enterprise customers more flexible licensing options. In addition to being of great benefit for our customers these contracts create a larger recurring revenue stream, which is recognized ratably. In the first quarter we transitioned $30 million from license revenue to deferred revenue. As expected, the amount transitioned in Q1 was small and similarly expect to see a small amount transitioned in Q2.

I will reiterate that our business model transition will not be perfectly linear and that the amount of business that we transition and the number of new subscriptions we had will fluctuate from quarter-to-quarter and year-to-year. We were expecting the transition to progress gradually in FY ‘15 and then ramp more significantly by the time we get to FY ‘17 and FY ‘18. Given our strong Q1 performance and our optimistic view of the macroeconomic environment, we have raised our FY ‘15 guidance ranges for billings and revenue.

So to wrap things up, we were pleased with our overall results in Q1 and we continue to feel great about our opportunities in the direction of the company. It’s still very early in our business model transition, but we are encouraged by what we experienced in the first quarter. We look forward to building on these early successes and transitioned Autodesk to a more profitable and recurring subscription-based model over the next four years.

So, let me take a minute to talk about what we announced yesterday at MakerCon. For the past few years, I have been frequently asked about Autodesk rolling opportunity in 3D printing. And I have been fascinated by the promise and frustrated by the reality of 3D printing. So, we are developing an open software platform for 3D printing called Spark, which will make it more reliable, yet simple to print 3D models and easy to control how that model was actually printed. Spark will be opened and freely licensable to hardware manufacturers and others who are interested. Same for our 3D printer, the complete design of the printer will be made publicly available to allow for further development in experimentation.

I will also introduce our own 3D printer as a showcase and reference implementation for Spark. We will have more to say on this later in the year, but wanted to let you in on this exciting development. To be clear, this does not impact our four-year financial targets of 12% billings CAGR, 20% more annual value from our new and existing subscriptions and a 50% increase in subscriptions while getting to a 30% non-GAAP operating margin by the end of FY ‘18.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Raimo Lenschow from Barclays.

Raimo Lenschow - Barclays

I am sorry there, sorry there, we just couldn’t hear you. I just wanted to ask quickly on the subscriber count, obviously much better than we are expecting, can you talk about what – were there any promotions during the quarter that might have driven that and the guidance for the full year wasn’t moved? Can you talk about with the strong performance, why didn’t the full year range move at all?

Carl Bass

Yes. So, first let me just give you an answer on the promotion. I think the thing that’s probably the most important figuring out what went on was the fact that we announced the elimination of upgrades next year. So, that’s probably the driving force more specifically than any promotion. There were actual promotions tied to it and different opportunities for our customers to pickup on subscriptions, but that really the motivating factor there. On the guidance for the year, our feeling was it was a really good quarter exceeding our expectations. We would like to give another quarter to understand it. And if we were to have another quarter like this one, we would already be there. So, we understand how it changes our guidance for the year, but we figured we’d wait one more quarter since we are pretty new to some of these metrics and the conditions under we are operating in. Once we get a better handle on them, we will most likely be after Q2.

Mark Hawkins

Yes. And just to build on Carl’s comment exactly. And just obviously we are pleased out of the gate for sure. I just add in addition to the kind of the normal promos that we run to drive things which were pretty much normal activity I was also pleased just to see the desktop subscriptions are growing, albeit it’s a smaller number, the growth rate was attracted in the same with the cloud. And with our enterprise customers as well, we are seeing contribution across the board, but of course to Carl’s point maintenance would be the biggest at this stage as expected.

Raimo Lenschow - Barclays

Great, guys. That’s helpful. Thanks a lot.

Operator

Your next question comes from Brent Thill from UBS.

Brent Thill - UBS

Good afternoon, Carl, the majority of the upside in your guidance at least in our model was in AEC, can you give us the sense of where you outperformed?

Carl Bass

Yes. I mean the first thing I would say is what we are seeing is a worldwide recovery in commercial construction, so it’s a combination of several factors, the same factors around which you will remember the upgrades affects AEC. We should – we have seen a rebound across the globe in terms of AEC. It’s also I think we are into that next stage where in the beginning we are really talking about our early adopters of BIM. We are no longer talking about early adopters. BIM is our mainstream and now it’s moving out to the field. And so we are getting to the next part where we are seeing much larger deployments within firms as well as receiving the new opportunity in the construction part as people take this information to the field. On a geographic basis, Brent I mean it was really good all over.

Brent Thill - UBS

And just a follow-up on the geo Asia-Pacific up 15% constant currency, what are you seeing there and I think you called out Japan which has been weak for lot of other tech companies that we all interact with, are you starting to see a broad return there?

Carl Bass

Yes. Brent, so let me just back off the AEC, so we are not doubly segmented here. Just in general if you just look by countries, Asia has been good for us, it continues to be strong. Japan for us has been strong for a while now. And we keep scratching our head because we pay attention to what the other companies are reporting, but Asia has been good. When we look globally the only place is that I still scratch my head about a little bit or some of the emerging countries. We were just joking about Southern Europe is finally growing, but it’s maybe because it shrunk for so long that we knew there was a bottom somewhere. But we already have been seeing lights come back to a number of countries in Southern Europe. So the only ones that are a little bit about only generate high to some of the BRIC countries in particularly with some of the geopolitical stuff going on in place like Russia.

Brent Thill - UBS

Great. Thank you.

Operator

The next question comes from the Heather Bellini from Goldman Sachs.

Heather Bellini - Goldman Sachs

Great. Thank you. Carl, just a couple questions for you. I was wondering if you can help us out with of the strong subscriptions that you signed this quarter, can you give us a sense for how many of those, what percentage were sort of 360 club type offerings versus your traditional customers who were attaching maintenance. And also – if you could also then talk a little bit about your cloud offerings and share with us which one of those are you seeing the fastest uptick in? Thanks.

Carl Bass

Yes. So we haven’t broken out the subscriptions, but I would tell you this quarter is the majority or a large majority Heather, were actually maintenance subscriptions. That’s where we focused a lot of our attention. When it gets to the cloud, I mean there are a couple of things that are doing really well. BIM 360, we talked about a lot last quarter and it was down quarter-over-quarter, but still has a great year-over-year growth rate. So BIM 360 is doing really well. I am really pleased with PLM 360 I talked about it a little bit in the prepared remarks. One of the things we are liking about PLM 360 and this is always a great sign of product that is well liked is that the customer start with the small thing and then they come back maybe one more and then they come back again. And so we are starting to see large deployments of PLM 360. Those are the big ones for right now which affects revenue, there is a lots of other positive signs and we certainly seen trends change in terms of our customers preferences. And while there is still some reluctance to the cloud in our customer base, there are many use cases. Companies are building certainly more tolerant and where some of the forward looking companies are getting aggressive about demand in cloud solutions, so that’s a little bit of change in the selling environment we are seeing.

Heather Bellini - Goldman Sachs

Great. Thank you.

Carl Bass

You’re welcome.

Operator

Your next question comes from Steve Ashley from Robert W. Baird.

Steve Ashley - Robert W. Baird

Hi, thank you very much. Wondering if you have any metrics around larger deals and how they are flowing, you kind of referred to it a couple of times here, I don’t know if you have anything you can put your hands on maybe just qualitatively talk about what might be happening with that?

Mark Hawkins

Sure. Steve happy to do so. Every quarter we don’t disclose a number of deals that are – what we call large deals greater than $1 million deal. This quarter I will just say that it was up year-on-year modestly, but we are pleased to see that. There has been a number of large deals were up.

Steve Ashley - Robert W. Baird

Right. Kind of forgotten child here is the M&E business I know it’s just 6% of total, when we might we hope that that business might flatten out?

Carl Bass

So I mean there are two parts, I mean a thing to remember that the M&E business are really two parts to it is that creative finishing part and then there is the animation software business. We have repeatedly said the animation software business is a good business, good margins, continues to grow, we are happy with that part of the business. For a long time we have talked about how the creative finishing business was going to shrink. Remember a lot of in that numbers is also hardware that we have been pointing out over time and it continues to go down. So it continues to be the creative finishing business most of the overall M&E. But the animation business we like and really has great synergy with the rest of our business. The creative finishing business is really a changing model – it’s changing and relatively small market.

Steve Ashley - Robert W. Baird

Thanks, very much.

Carl Bass

Sure Steve.

Operator

Your next question comes from Kash Rangan from Merrill Lynch.

Kash Rangan - Merrill Lynch

Hi, thank you very much guys for taking my question. I just wanted to get a little bit more color, you had talked about 89,000 new subs and you also Carl talked about how the majority of that was maintenance subs. So when I look at the expense growth in the quarter on a year-over-year basis I am trying to understand where did that expense growth – understanding that you are going through this model transition, and you are investing to get sub growth at the same time I was just curious to find out if there is anything off the balance sheet that explains the investments to ramp up your subs since I have add back the growth to the backlog and the amount of deferred license revenues I can get a pro forma margin of about 22% or so which is still a little bit below last year. So I am trying to understand what are we not seeing in the income statement that helps us understand the pace of these investments, if the majority of the subs that you added 89,000 was indeed maintenance subs? Thank you very much.

Mark Hawkins

Sure. So let me take this – Carl maybe you could follow-up. There is a lot in that question, so we will catch and then try to post that make sure recover all the ground. But help me I miss something. The first think just building on Carl’s comment absolutely of 89,000 as planned and again we talked about this gradual ramp was with the desktops and the gradual ramp with the cloud. This is playing out exactly as planned in fact I would say even a bit – we are pleased with the way that we are coming out of the gate in total with the 89K, but I just want to be the clear the majority are maintenance but it was of cloud and desktop we planned. The second thing I want to get to is, your question around the year-on-year spend, one of the things that we try to be really clear on is there are fundamentally four things that we are investing in. Let’s get start with the top, we are investing in the cloud to make sure that we have undisputed leadership in the cloud, full start for this whole next generation of offerings that’s been (acted out). The second thing we have been investing is to ensure that is just not a transformation of successful including retooling in the back half that’s being disruption and so on and so forth. Those are not insignificant investments that we are making. We are pleased that we are making those. We are absolutely as consistent with our strategic plan that we have even talked about at the IR Day.

The other costs that we should know that of course pointed out maybe cost including cash some are cost of question if you recall last year being below plan, our incentive for employees was obviously less than 100% target. This year we need to plan for it to be up at 100%. So there is that natural release of cost suppression (indiscernible) such. And then the last thing that is not insignificant is the fact that we have done some significant M&A of which is diluted this year but of course accretive next year and you saw a portion of that in Q1 a month of that in Delcam you will see a full quarter, for example in Q2, because of the consolidation in later part. So (more down) the employee related costs with the unfolding of cost suppression year-on-year, M&A Delcam being the headline, cloud investment being to investment and there you go, very consistent with our plan. The most important thing that I would call out Kash is absolutely reaffirming our commitment for the plan for the year that we talked about at the beginning of the year and absolutely reaffirming our full year plan. So…

Kash Rangan - Merrill Lynch

Great to hear that and also by token I should reduce that 150,000 to 200,000 sub additions are going to be more back end weighted because if I just look at the license revenue and ballpark the number of maintenance subscriptions, you would be pulling in just with your licenses, that alone should be equal to that 150,000 to 200,00 net new subs, right. So I am just wondering if four-year plan really cost for a lot of the rental if you will net new seats are going to be really waited towards the second half of the time period because the apps don’t seem to jive up with the license then to explain the more back in loaded scenario, just perfectly time, but just want to clarify that?

Carl Bass

Kash, I think it would certainly be clear to say that we’re growing desktop subscriptions and our cloud offerings at a gradual ramp as we talked about higher that at IR day back in the October timeframe. We talked about in Q1 it’s just a consistent building I mean we really pleased at the way things are coming out of gate. Where you would expect we have a program for 10 years that’s been maintenance subscription with that numbers going be bigger than the first quarter or so up going the other one.

But the growth rates were pleased with. It’s unfolding nicely and Kash only last thing I would throw out at you is. In addition to looking at deferred revenue which I think you addressed appropriately and as a record for the company up 14% year-on-year I did find for the transition don’t forget our backlog is up $30 million year-on-year and that backlog is not billed or shipped. And so that’s an indicated also demand you should think of us.

Mark Hawkins

Yes. I just one small piece of total idea on the maintenance subscriptions, given the programs in driving people in the subscription. In addition to our increase emphasis on it, I would expect to see that to continue to grow through the year. So, certainly the fourth quarter you can imagine being large because it’s going to be right up against the deadline. Can’t understand quite the shape, but the first quarter was strong, go easy in the second quarter in momentum continues in the fourth one will be strong. There is still little bit about but I would not expect that to slowdown at the end of the year at all, exactly the country?

Kash Rangan – Merrill Lynch

Wonderful, thank so much. And see it our conference in couple weeks in San Francisco.

Carl Bass

Good, thanks

Operator

The next question comes from Brendan Barnicle from Pacific Crest.

Brendan Barnicle - Pacific Crest

Hi, thank so much, Carl. I was really interested and maybe a talk a little bit about the pilot you were in France. You’ve rolled that out globally now with autoCAD LT and what you saw in terms of the new users you hadn’t previously been on autoCAD. It gives any color about what kind of growth you saw their percentage or anything more in terms of genuine new users cases you’re saying on that individual in the cloud based version of AutoCAD LT?

Carl Bass

Yeah. What we saw in France, what we saw in the first quarter, the other almost identical amount of perpetual sales as the prior period plus we had a substantial number of desktop subscriptions, just the behave we want to so probably is moderates the growth of little in perpetual but in total it’s a much bigger number and that same dynamic is play as we rolled out in other places. We are – we’ve done a little bit survey work what is seems to be is there are people who are price sensitive to upfront costs. There are people who have peak demand loading issues the work force change in size and having a more flexible way to get access to the is good and truthfully I suspect some people who didn’t pay for the software. We would like to couldn’t afford to some other reason who are now actually good, were actually given an affordable option are choosing to pay for it.

Brendan Barnicle – Pacific Crest

So, if you looked that group that’s either new because of the price point or piracy or whatever, 1% do you think they represent of that total of number of folks who bought it as a perpetual and now bought it in the cloud. Is there way to look at that metric at all?

Carl Bass

The amount of (indiscernible), is only do…

Brendan Barnicle – Pacific Crest

I’m trying to get with actually net new what percent of although you think I can net new is oppose the transition.

Carl Bass

I think is I don’t have great numbers or I would say probably 20%, 30%.

Brendan Barnicle – Pacific Crest

Terrific and then have you as you take this out globally anything that yield we doing different that would – making think you wouldn’t get that same sort of adoption or are markets so different it’s just hard tied out this point?

Carl Bass

No, I mean our senses will be same having said that, having done this job, long enough where you always surprise by behavior in a given countries and is always individual dynamics about the markets. But generally speaking we’ve now proven in to ourselves enough places that we expect for the most part the rollout to be identical.

Brendan Barnicle – Pacific Crest

Perfect, thank so much that for additional color.

Operator

The next question comes from Keith Weiss from Morgan Stanley.

Keith Weiss – Morgan Stanley

Excellent. Very nice quarter guys and thank you for taking my question. When you at Analyst Day, you talked about this base of non-maintenance paying, but active customers, can you give us a sense of the 89,000 subs are sort of the good progress you had in subs. How much of that was sort of new seats, new customer driven how much of that was going after that base of non-maintenance paying subs as this guys sort of carrying on sort of upgrading and getting on board with the maintenance program?

Mark Hawkins

We don’t have the exact number. It’s a little bit hard for us to get it perfectly, but I suspect the fair number is out of the base of non-maintenance paying customers.

Keith Weiss - Morgan Stanley

Got it. And then on a different tact when it comes to the 3D printer and sort of the reference architecture, so you have reference architecture for other people to make clone 3D printers, there is a sort of open source Spark software, can you walk us through what’s going to be the longer term? So, how does Autodesk conventionally get paid on this? Where do you see is the path to modernization for you guys or sort of the advantage of you guys going forward and proselytizing this if you will?

Carl Bass

Yes. I think there are really two things. One is if you are going to stand today and one will play out over the year, you need the year. And so first one is our customers make more 3D models than anybody. More 3D printer models come from our software. So, to the extent that we increased the demand for 3D modeling software, we think we will get our fair share of people who now want 3D modeling software. And we have seen that play out. And what we are really trying to do is make that whole work flow smoother. I will date myself here a little bit, but remember, there is a period of time in which Apple felt the need to have a laser writer of its own.

Keith Weiss - Morgan Stanley

Yes.

Carl Bass

It’s good you dated yourself. Yes, I am glad I sucked you in on that one. Yes, and so it was like as I said, the that second part is a little bit more complex, but we have been doing a lot of modeling software that relies on in order to produce the parts relies on intimate knowledge of the 3D printers. And we wanted to really close tight connection and demonstrate how good the experience could be when you get the hardware, software and material sciences right. And so we will be introducing more software this year and potentially more hardware to take advantage of that. So, stay tuned to that part, but I think the simple straightforward one is everything that’s 3D printed was generally 3D modeled and we are the largest supplier of 3D modeling software.

Keith Weiss - Morgan Stanley

Got it. So, the Spark software, that’s just about the interface between the design software and the printer itself, it’s not the design software?

Carl Bass

Yes. We are really going to keep a good analogy on this that I have been using try to explain think of the Spark software as a little bit like Android, kind of the – if Android is an OS for mobile phones, this is an OS for 3D printing and think of the printer and by the way just to make sure that we are speaking to say minus. We are not only giving you reference architecture, we are actually producing the printer. So, we will reference implementation that we will manufacture. And think of that machine as a Nexus One. Google continues to produce cell phones even though the success of it really depends on companies like Samsung and HTC producing way more than they do.

Keith Weiss - Morgan Stanley

Excellent, very helpful. Thank you guys.

Carl Bass

Okay, thanks, Keith.

Operator

The next question comes from Jay Vleeschhouwer from Griffin Securities.

Jay Vleeschhouwer - Griffin Securities

Yes, thanks. Good afternoon. Carl, Mark, I would like to ask first about your licensing model for token or usage based consumption of the kind for example that you did with the large contract in Q4. The question is can that time of token-based model be implemented or offered beyond just the large or largest project-oriented customers as an AEC in particular with the sort of thing that could potentially be offered to the SMB customer base. Additionally, is it possible that this model is broadly adopted by large and SMB customers could turn out to be a larger source of repeatable for you than either rentals or even the 360 services?

Carl Bass

Before I go to the most speculative part of your question, Jay, let me answer the factual one which is yes, we can actually we are doing some places and it can be done in more. So, the flexible license that allows people access to more software is a great model. I think it is a win-win here, it’s good for the customers, it’s good for us. We’ve demonstrated it over and over again in the large enterprise accounts and I think it’s true almost all the way down through the pyramid of size of customers. And so there was a little giggle here because we’ve just spent the last couple of hours here talking about doing that more broadly. So you’re on to something that. It could be a big source of revenue when you get to the more secular one. The one I want to throw in, it certainly could be bigger than the desktop subscriptions, I’m not sure it will be bigger than the cloud subscriptions. I think there is a huge amount of value tied up in delivering services through the cloud that were just beginning to tap into and I won’t venture that this is bigger but it’s certainly a meaningful and an important way that customers could get access to more software in a more convenient and affordable way.

Mark Hawkins

I think what you’re pointing out Jay is there is multiple levers for us to get to the 70% north of 70% recurring revenue. And I think that’s good point.

Jay Vleeschhouwer - Griffin Securities

Okay. My second question is the obligatory channel question. First, could you talk about the result so far of having re-implemented the earned back comp model versus what you had previously for the last couple of years. Could you talk about how that’s influencing channel productivity, channel behavior having gone back to that? Also the company has talked about for example at AU the last couple of years about the prospect of channel consolidation. Any signs of that and is that sort of thing that you would watch passively occur let’s say was that the sort of thing that perhaps you might encourage or otherwise get involved in?

Carl Bass

So I think the answer to the first part of your question is it seems to work quite well in Q1. The model seems to be working. When it comes to channel partners I mean these are independent businesses we’re keenly interested but I don’t think we would take an active hand, we haven’t seen any signs of consolidation. I think most of our comments about consolidation have generally been over the long-term. When people ask kind of speculatively what do you think will happen I mean those are we speculated that they will get a figure, we don’t see any real signs of it. The only times that we saw consolidation happening or enter into the channel it’s really doing like 2008, 2009, they are really hard economic times, we saw a little consolidation there but on an ongoing basis generally channel seems to be doing well and I think in particular over the last few quarters they’ve done very well.

Jay Vleeschhouwer - Griffin Securities

Thanks, Carl, thanks, Mike.

Carl Bass

You’re welcome, Jay.

Mark Hawkins

Thanks.

Operator

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

Gregg Moskowitz - Cowen and Company

Thank you very much and good afternoon guys. Carl, you mentioned that the revenue impact from the business model change was less this quarter than in the Q4. Could you tell us that again concentrated in AEC in the Americas, there was the shift to subscription, somewhat meaningful or starting to get somewhat meaningful in other verticals or geos as well?

Carl Bass

It was small enough to hardly matter. I mean I think it’s a time to really look us in Q4 this year when those contracts come up for renewal again. That’s really the time to look at. And I think you will see in Q4 of this coming year being more broad-based both by industry and geo. As we talked about at the time a number of the deals that were on kind of on the docketing Q4 didn’t close and in the end we decide them to close them as is rather than introduce the business model change, it just got hard and we recognize that it was probably best for everyone just to take the business off the table. But I think in Q4 this year where there is more preparation with our account managers working with our large customers I think you’ll see a more broad-based switch.

Gregg Moskowitz - Cowen and Company

Okay. That’s helpful. And then just one follow-up. So after some pretty lean quarters, AutoCAD LT has been doing better recently and putting aside to desktop subscriptions for a moment. Can you talk about what’s driving the improvement in perpetual licenses?

Carl Bass

I think one is the desktop, the desktop subscriptions are definitely helping. You’d see much more modest growth in that number but it wasn’t for that. I think the other thing was as we said at the time is we took our eye off the ball a little bit. And when we paid more attention to it we could actually drive the results.

Gregg Moskowitz - Cowen and Company

Perfect. Thanks very much.

Operator

The next question comes from Walter Pritchard from Citigroup.

Walter Pritchard - Citigroup

Hi, thanks. Two questions. Just first on the upgrades you talked about seeing some strength there and you talked about it possibly strengthening in as you get towards back half of the year. Could you talk about qualitatively on – are you seeing growth in upgrades year-over-year, how much in any sense as to where we might see that as we exit the year?

Mark Hawkins

One thing Walter I’d say is we don’t breakout the upgrades specifically but I think building on Carl’s comment certainly we saw nice performance in Q1. And I think just by the definition of the fact that the upgrades are going away and just to go to market plans that we have we would expect it to spike in Q4. So that won’t be a shock to see to us to see that happen.

Walter Pritchard - Citigroup

And then Mark there was a quote in the prepared remarks talking about being committed to returning excess cash. And I’m wondering if you could just give us some framework around how much cash you feel like you need to run the business and therefore kind of to do so much as is excess?

Mark Hawkins

Sure. Well a couple of things here. The first thing I would say is that just kind of historical facts Walter in the last couple of years we’ve returned 70% of our operating cash flow back to the shareholders vis-à-vis the share buyback and about 80% of our free cash flow roughly speaking in the last couple of years. And so we certainly have shown evidence of doing that number one to kind of backup that fact. The second thing as you know the vast preponderance of our cash is offshore it’s roughly about 75% of our cash is offshore and so we try to keep a balance in terms of the U.S. cash from that standpoint. So I haven’t given an exact number out. There is a number that we look at that we talk with the management team and the board about and I’m not wanting to disclose a specific number but obviously we need to keep some flexibility in U.S. cash that’s the thing I’m most sensitive to for lots of reasons, Walter that you appreciate whether it’s M&A or other strategic reasons.

Walter Pritchard - Citigroup

Okay, great. Thank you.

Mark Hawkins

You bet.

Operator

The next question comes from Matt Hedberg from RBC Capital Markets.

Matt Hedberg - RBC Capital Markets

Yes. Thanks for taking my question guys. I know at this point you’re not breaking out this split between maintenance and cloud and certainly on quarterly basis subs can be lumpy. But I guess I’m wondering is there a timeframe that we can think about when cloud will be a majority of the sub ads in quarter kind of as you think about attaining your longer term both billings and margin targets?

Carl Bass

We’re not sure while we have a model that says when it is. We don’t really know. The one thing we did say in the fourth quarter is that we’d start giving you more metrics on this as we went through the year. So we’re going to continue to look at it and try to give you a little bit more visibility, we didn’t want to promise it every quarter, we knew it would be lumpy, but probably give us a quarter or two more under in our belt and we’ll start breaking out more the metrics around subscription.

Matt Hedberg - RBC Capital Markets

That’s great. And then a question about Fusion 360 sounds like there is some good success there. I’m wondering what is a typical customer look like for that product and potentially how do you think about adding functionality to expand it’s usage if you think about a more fully functioned desktop CAD solution?

Carl Bass

The way I think about it is Fusion is about form function and fabrication so the kind of people who are using it tend to be small companies, tend to be at the cutting edge and they’re interested in products that – mechanical products that are ecstatic where the form actually matters and they might actually really be interested in how it’s fabricated. So 3D printed machines so it tends to be the kinds of products you see like consumer products, medical devices more in that category than you would see big heavy industrial equipment. We’re going to continue to add functionality to the trick with it is we wanted (indiscernible) the easiest used product out there, we wanted to be simple and complete in a different way than some of our other offerings like Inventor or some of the competitive offerings.

So we’re really pleased with the progress it has and the one thing about it it’s really attractive in different time of customer. Unlike other times where we’ve introduced new products and there is a lot of consternation amongst our customers and our partners and therefore us that should I buy A or should I buy B I think it’s pretty obvious to everybody involved which one to buy and we’re bringing in lots of new customers. And the premium for them is on things like collaboration it’s working in the cloud, its sharing models and it’s really about a different way to work than I would see in many of our larger manufacturing customers.

Matt Hedberg - RBC Capital Markets

Right. Thanks. Very helpful, Carl.

Carl Bass

Okay. You’re welcome.

Operator

The next question comes from Steve Koenig from Wedbush.

Steve Koenig - Wedbush

Hi, good afternoon. Thanks for taking my question. I was curious to get your though qualitatively on this. As your license upgrades go away at the start of next year and your – but you’re still on your year-on-year model transition, so you haven’t gotten maximum traction you got probably on cloud and desktop subscriptions. What’s the shape of that subscription ad curve next year, in other words should that – should we expect a bit of a low (valley) next year before things pickup in your (indiscernible). And I guess the related question on to that now and that’s all I have which is just your thoughts qualitatively on the kinds of subscriptions that you have which ones will become important following the good results in maintenance subscriptions, which – is it the desktop subscriptions next or the cloud subscriptions. How do you expect the competition of your subscription additions to change over time?

Carl Bass

Okay. Let me answer the first question because it informs the second. I think if we did nothing different from where we’re today if we introduced no program changes or policy changes for next year you would see a low in the curve, you would see something downward. Not wanting to have that happen. We have a number of knobs and dials we can turn programmatically and through our different offerings and promotions to change the shape of that curve. So that – I hope that makes sense. So left without of doing anything it goes down we believe we have a number of things we can do to change that so that it goes up.

When you move to your second question clearly maintenance subscriptions because of the size of it will be the most important for a long time. We – there are number of things we can do around desktop subscriptions to make them more attractive. If you remember how we made the transition from upgrades to maintenance subscription over the last decade, one of the strongest ways was to provide financial incentives for customers to (mobile) and we can do the same thing with desktop subscriptions. And then the last part is I think for the future the most important are the cloud subscriptions. The cloud subscriptions in the long-term will be the most important but we will never get there from here unless we start with a really strong base of maintenance subscriptions.

Mark Hawkins

I would just add to Carl’s point too. I agree with all that and then also you talked about the leverage that we can put on the bid on. The enterprise it’s a last point that we also have the levers to be able to flip significantly and so.

Carl Bass

Good point, Mark.

Mark Hawkins

Yes, to shut that in.

Steve Koenig - Wedbush

Okay, great. Thanks for your color on that.

Operator

The next question comes from Matt Williams from Evercore.

Matt Williams - Evercore

Hi, good afternoon guys. Thanks for filling me in. Carl, just one for you maybe more macro-related, you spoke some about conditions in the commercial construction market. And I’m just wondering if you can provide a little bit of an update around what you’re seeing in manufacturing vertical, some of the data points that you can point too? It’s nothing else increased stability there and I’m just curious from a growth standpoint what you’re seeing in that vertical?

Carl Bass

Yes. So I’m a little bit confused truthfully by some of the economic data out there. Sometimes I think people the needle is too sensitive and it’s bouncing too much with some of the manufacturing date out there. What we’re seeing from our business is relatively stable, it’s been stable, it’s growing, it’s relatively healthy across the globe. Again I’d add the one caveat there are a couple of geographies I worry about a little bit, the only one I really worry about is Russia right now. But we’ve seen relative stability just and hopefully steady growth everywhere. So a little bit of economic data coming out is a little bit surprising and like I said we maybe looking at a little bit too much perturbation of needle, that’s a little too sensitive.

When you get out of it qualitatively or anecdotally from talking to customers there seems to be a general comfort amongst most of our manufacturing customers as their businesses are doing well. They’re investing for the future, their focus these days they’ve moved on from being driven truly by quality and cost so they’re really interested in innovation and agility, how do I get better markets, better products to market more quickly, how do I differentiated my products and they’re willing to invest in retooling. They’re doing it in a healthy thoughtful way. So I feel really good about what’s going on in manufacturing and once we have the data plays out over the next couple of quarters.

Matt Williams - Evercore

Great. That’s helpful. And maybe just one sort of follow-up along the same lines there. In the past you’ve talked about PLM 360 and really opening to that new customers. I was just curious if you could provide any update on trends you’re seeing there and if that is starting to move maybe beyond just the departmental sort of deployment or is it moving out market at all just any color on the PLM 360 business would be helpful?

Carl Bass

Yes, the PLM continues to the most and most of the customers are either new to Autodesk entirely where they certainly are in primarily in Autodesk shop. And that continues to be true. The other profile about many of the PLM 360 customers there are companies who have made a decision that their IT strategy revolves around cloud deployments so they’re frequently deploying other cloud-based products like NetSuite, Salesforce, Workday and they’ve made a decision this is the way they go about business. And so when they go out there looking you were obviously the leading or one of the leading choices there. So and what we’re seeing and I kind of referenced it a couple of times, what we’re seeing is increased size of the deployments and that’s the healthiest sign. People start with numbers in the dozens and now they’re getting up to the 100s and what I like most of all that I’m seeing in the PLM 360 business is more small deals and more repeat deals, so we’re broadening the number of deals in the quarter and we’re starting to see the repeat deals in both to meet our indicators of the healthy growing business.

Matt Williams - Evercore

Great. Thanks so much for the color.

Carl Bass

Okay. You’re welcome.

Operator

The next question comes from Sterling Auty from JPMorgan.

Sterling Auty - JPMorgan

Yes. Thanks. Carl, you touched upon this a little bit in your last answer. So Russia (indiscernible) actually called out specifically saying that it has an impact on the business in the quarter. Are you saying that you’re keeping an eye on it but you haven’t seen any impact thus far?

Carl Bass

No, we have seen – we have what you said and we’ve certainly seen an impact. And if I had to guess I suspect it’s going to get worse before it’s going to get better. It’s a little on the horizon that says people are about to invest more in Russia. So I think it will get worse, definitely was not a bright spot for us this quarter.

Sterling Auty - JPMorgan

I think that.

Mark Hawkins

Sterling, that’s a small part of our business.

Sterling Auty - JPMorgan

I think part of it was whether it would have spillover factored into more of core Continental Europe which is a big part of your business?

Carl Bass

Yes, I haven’t seen that. I mean obviously it’s a big economy and but generally speaking the rest of Europe looks reasonably healthy task. And we didn’t pickup anything during the quarter that we change that opinion.

Sterling Auty - JPMorgan

Got it. On a different topic, can you remind us what in this year’s suite of products in terms of future functionality is there to help motivate the adoption of subscription and maybe what you’ve talked about at least at this point in terms of what might come in the next round of upgrades that again where future functionality that would only be available if you had some sort of subscription attached?

Carl Bass

I think there were a number of things that we’re doing, but I think the primary one is just the fact that the upgrades are going away.

Mark Hawkins

I could tell you all kinds of wonderful things on the other side but I think the truth of the matter is people right now are making a decision of how they want to buy for the future, we’ve told them that perpetual licenses and buying a new one every five years is still an option but there is no way to buy an upgrade and so what I think people are doing is they’re deciding between getting our maintenance subscription or getting on desktop subscription. And that’s probably the primary driver of the behavior in all the upsides you saw.

Sterling Auty - JPMorgan

Makes sense. Thank you.

Operator

The next question comes from Richard Davis from Canaccord.

Richard Davis - Canaccord

Hi, thanks. So one question I kind of small a little bit and I can’t remember how you wrote it in the note about the other day. But have you been able to kind of encourage kind of what I would call unaided downloads on the web, so that nothing we can love sales (indiscernible) that, but there is no friction with regard to that. I mean, at some point down at the low end of the market, you might be able to have an easy enough brain simple download that would allow you to get revenues without a lot of cost to absorb in sales and marketing expense? Thanks.

Carl Bass

Yes. One of the things we have done extensively is try to ease the download and trial process. We have done it as we have talked in education and we see now millions of downloads in education. We also see thousands and thousands of trials. And the difference between the trial and a buy is really the exchange of payment method. You need a credit card. So what we see a lot of is people most of our sales and particularly our online sales start with the trial of download. And we are getting better at doing it. And I think customers are getting much more comfortable doing, much more comfortable downloading and paying for software online.

Richard Davis - Canaccord

Got it. Great, thanks.

Carl Bass

You’re welcome.

Operator

I am showing no further questions. I would now like to turn the call back over to Dave Gennarelli.

David Gennarelli - Director, Investor Relations

Alright, thanks everybody. That concludes our call. Lastly, we are going to be at the Morgan Stanley Conference on June 3. And if you need to reach me, you can reach me at 415-507-6033. Thanks.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.

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Source: Autodesk's (ADSK) CEO Carl Bass on F1Q 2015 Results - Earnings Call Transcript
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