Autodesk's (ADSK) CEO Carl Bass on Q2 2015 Results - Earnings Call Transcript

Aug.14.14 | About: Autodesk, Inc. (ADSK)

Autodesk, Inc. (NASDAQ:ADSK)

Q2 2015 Results Earnings Conference Call

August 14, 2014, 05:00 PM ET

Executives

David Gennarelli - IR

Carl Bass - CEO

Sue Pirri - VP, Finance

Analysts

Brent Thill – UBS

Jay Vleeschhouwer - Griffin Securities

Matt Hedberg - RBC Capital Markets

Walter Pritchard – Citigroup

Brendan Barnicle – Pacific Crest

Keith Weiss – Morgan Stanley

Steve Ashley – Robert W. Baird

Heather Bellini - Goldman Sachs

Sterling Auty – JPMorgan

Steve Koenig – Wedbush Securities

Kash Rangan – Merrill Lynch

Matthew Williams – Evercore Partners

Operator

Good day, ladies and gentlemen and welcome to Autodesk Second Quarter of Fiscal 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference David Gennarelli, Director, Investor Relations. Please go ahead.

David Gennarelli

Thanks, operator. Good afternoon. Thanks for joining our conference call to discuss the results of our second quarter. Also on the line is Carl Bass, our Chief Executive Officer and Sue Pirri, VP of Finance.

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, our expectations concerning large deal activity in the fourth quarter, business execution, business prospects and financial results, our market opportunities and strategies, including our desktop subscription offering, our plans, transition to cloud and mobile computing, 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 fiscal year 2014, our Form 10-Q for the period ended April 30, 2014 and current reports on Form 8-K, including the 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 are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today’s call, but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum.

During the call, we will also discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of our GAAP and non-GAAP results is provided in today’s press release, prepared remarks, and on the Investor Relations section of our website. We will quote a number of numeric 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

Thank you, Dave and good afternoon everyone. Building upon the momentum we generated in the last two quarter, we are pleased with our results for the second quarter. The results were consistently good across geographies, industries and product offerings.

Strengthening our core AEC and manufacturing businesses led to better than expected results, including record revenue and deferred revenue. We advanced our business model transition with strong subscription additions and continued adoption of our enterprise agreements.

If you also consider the $26 million backlog balance into the quarter, our total business capacity for the quarter was exceptional. From a geographic perspective, we experienced broad-based strength. All three of our major geographies grew double-digits on a constant currency basis led by growth in EMEA. The areas in which we are seeing weakness are those affected by geopolitical turmoil.

Our strong results and AEC and outstanding growth in our AEC suites can be attributed to the continued adoption of building and infrastructure industries. BIM is now not just limited to desktop products, but is available in cloud and mobile technologies that support access to infield and real-time information.

We closed several large AEC transactions in Q2 including a nice win and a competitive stronghold with Autodesk Advance Steel, a technology we acquired with the acquisition of Graitec a few quarters ago.

We also landed meaningful wins with our structural detailing and fabrication offerings. We continue to steadily grow our user base in each of our AEC cloud based technologies including BIM 360, AutoCAD 360 and InfraWorks 360. BIM 360 in particular continued to grow at a rapid race -- rapidly.

We had numerous wins including one with a large European construction firm proving once again that the construction market is primed to embrace the full benefits of BIM.

Our manufacturing team delivered very strong results driven by growth in industrial machinery, consumer products and automotive. Acquisitions we made in both plastics and composite simulation are particularly significant for the aerospace industry. In Q2 we closed deals with three major aerospace engine manufacturers.

The Delcam business is performing well and contributed almost $11 million in revenue to Q2. We're pleased with the early results from this business and look forward to advancing our position in the CAM market. Our cloud-based PLM 360 product nearly doubled its billings compared to Q2 last year.

We also launched the PLM 360 mobile application in Q2 making PLM 360 the first truly mobile PLM solution. As I mentioned earlier, we had another strong quarter with 74,000 subscription additions. As expected and similar to last quarter the majority of the subscription additions were maintenance subscriptions.

With the discontinuation of the upgrade program at the end of this fiscal year, we are seeing a lot of customers take advantage of the upgrade discount one last time and we are experiencing a higher than average maintenance subscription attach rate.

The desktop subscription offering product for AutoCAD LT had its first full quarter of availability and has performed well out of the gate. What's fantastic is that we also experienced solid growth in perpetual licenses for AutoCAD LT. So it's clearly the case of AutoCAD LT that the desktop subscription program is expanding our reach and bringing new customers to Autodesk.

Another element of our business model transition is offering our enterprise customers more flexible licensing options. In addition to being a great benefit for our customers, these contracts create a larger recurring revenue stream which is recognized ratably. In Q2 we doubled the number of large million dollar plus transactions compared to Q2 last year and we transitioned to approximately $10 million in enterprise license revenue to deferred revenue.

Given our strong Q2 performance and our optimistic view of the macroeconomic environment, we've raised our FY '15 guidance ranges for billings, revenue and subscription. We also narrowed the operating margin range keeping the high end of prior guidance.

As you can in the numbers, margin upside is muted this year for a number of reasons. This year's operating margin assumption includes the impact from the business model transition, investment in our cloud infrastructure, the dilutive effect of the Delcam acquisition, as well as incremental investment spending on key initiatives.

Additionally commission and our employee incentive program are volume related and increased based on our better than expected billing performance.

It's worth repeating that our business model transition will not be perfectly linear and that the amount of business that we transition at a number of new subscriptions will fluctuate from quarter to quarter and year-to-year. We are 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.

Lastly, I'll give you an update on our CFO transition. We've started to interview candidates. In the meantime we have a strong finance organization build of talented people to bridge the transition. I think most of you know Sue Pirri, who has been with the company for over 10 years. She is leading our finance team and is here to participate in the Q&A.

So to wrap thing up we were really pleased with our overall results in Q2 and the first half of the fiscal year. We continue to feel great about our opportunities and the direction of the company. It is rewarding to see our mobile and cloud based products adopted by our customers.

These products solve important customer problems and clearly position us as the industry leader as the engineering inevitably moves to a cloud and mobile computing infrastructure. It's still very early in our business model transition, but we are encouraged by what we experienced in the first half of the fiscal year.

We look forward to building on these early successes and transitioning Autodesk to a more profitable and recurring subscription based model over the coming years.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Brent Thill from UBS. Your line is now open.

Brent Thill – UBS

Thanks. Good afternoon, Carl. On EMEA you had meaningful improvement in the growth rate. And I'm just curious in terms of what you're seeing in that region, given the growth has really been lackluster and you're your finally seeing that return to healthy growth.

Carl Bass

Yes, I think over the last couple of years it was certainly the other part of your -- we talked about it repeatedly is that in Central Europe was doing well, but was being dragged down by Southern Europe. We hit the bottom in Southern Europe. In other ways we are starting to see a consistent rebound.

So EMEA did well but kind of as I noted in the remarks, the only places where we saw geographic weakness was in EMEA and that was due to what was going on in Russia and the Ukraine and what's going on in the Middle East. Other than that EMEA did great.

Brent Thill – UBS

Okay. And just a quick follow-up. You mentioned construction. And I believe that this has been one of the bigger net inflows of money, when you look at the new revenue inflow into the company. Correct me if I'm wrong, but give us a sense of what you're seeing there in terms of the sustainability, as well, what you're seeing on the construction segment?

Carl Bass

Yes sure Brent. Some of it is driven by increased business activity in construction, but some of it also was that were secular move to seeing more money within the AEC industries spend by construction companies on technology. That's been going for a long term. There is this other more cyclical thing that goes with the economic activity.

That's been good across geographies, but I think as much as anything it's just the adoption of technology by construction companies and as they realize the benefits they historically have been severely under invested in technology.

Operator

Thank you. And our next question comes from Gregg Moskowitz from Cowen and Company. Your line is now open. Please go ahead.

Unidentified Analyst

This is actually [Matt Primo] (ph) for Greg. Thanks for taking my questions. So despite the huge licensed revenue upside, it was a bit surprising to us that subscription revenue was generally in line with consensus expectations. Could you comment on renewal rates this quarter?

Carl Bass

Yes, renewal rates, Attach and renewal was really high. Everything about subscription was good.

Unidentified Analyst

Okay. Great. And do you still expect the geo and bus core adoption of desktop and cloud subscriptions to be pretty broad based by Q4?

Carl Bass

I think you will start to see -- they are doing well but being overwhelmed by the maintenance subscriptions. I think you will see Q4 throughout next year and beyond. So, what’s going on with -- the desktop stuff is good, cloud subscriptions are good. They’re just being overwhelmed a little bit by the maintenance subscriptions. It’s a good problem to have.

Operator

Thank you and our next question comes from Jay Vleeschhouwer from Griffin Securities. Your line is now open. Please go ahead.

Jay Vleeschhouwer - Griffin Securities

Thanks. Good afternoon. Carl, I would like to ask you a longer term question about your operations and your corporate infrastructure, meaning how are those operations in infrastructure being prepared or are they prepared so the new increasingly hybrid business model that you’re going to have over the next number of years, in effect what I am asking is, are you going to have the capacity and the efficiency that you’ll need for bigger channel engagement and improve order processing, I know that sounds very dull but I think it’s very important for the company and improve your systems for customer engagement, especially as volume is deliverable, so will likely increase materially over the next number of years?

Carl Bass

No Jay. You’re absolutely right. There’s actually two ports of operations in infrastructure, let’s take a minute. The first one is just the increased amount of order processing, because the nature of the subscriptions being term based some of them are for shorter period of time and the perpetual licenses, so there’s a huge effort underway to make sure that we can handle the financial transaction aspect

But there’s also a customer facing aspect of this. There’s a sales engagement part and there’s a marketing effort as well they are really all tied together, that the finally overall customer experience with what we’re doing also because as you know such a huge amount of our business goes through our channel partners, it is having our channel partners engaged as appropriate in some of those activities. So, the operations and infrastructure is big on that.

The second part is just in terms of providing cloud based engineering and design services. We’ve been building out cloud infrastructure as well. So, both of those things are critically important for the future.

Jay Vleeschhouwer - Griffin Securities

Okay. My follow up is on the new cloudy parts of the business. As of the data available in the first quarter 10Q, only 5% of your subscriptions revenue was non-commercial maintenance, in other words run rate of somewhere between $55 million and $60 million was from non-classic maintenance let’s call and the new subscription services.

Could you talk about the growth of that business in the second quarter and more importantly what has happened for that to become a lofty $100 million business over time instead of a mid eight figure kind of business like today?

Carl Bass

One thing I’ll say is, in October at our analyst day, we’ll give you a lot more detail on this. Right now what’s going on with our cloud subscriptions are they’re exceeding all the projections we had. The business is doing well, there’s a lot more stuff coming online, some came on in Q2, there’s a lot in Q3 and Q4. So, these are growing business and so far I am happy with the results.

As to becoming a multi $100 million business I think both our desktop and our cloud businesses will become that and it’s kind of inevitable. I think we’re right on track to do that.

Operator

Thank you. And our next question comes from Matt Hedberg from RBC Capital Markets. Your line is now open. Please go ahead.

Matt Hedberg - RBC Capital Markets

Thanks for taking my questions guys. Congrats on the quarter. Certainly, this year seems to be seeing a benefit from the elimination of upgrades next year. Carl, I'm wondering, when might you eliminate perpetual sales? And maybe more generically, what is the framework for eventually pulling this license option?

Carl Bass

I'll ask you Matt, what do you think is a good timeframe to do that.

Matt Hedberg - RBC Capital Markets

I would certainly probably depend on the products, but the market generally wants it -- seems to be wanting it sooner than later.

Carl Bass

We’ve been looking at considering it seriously and we’ll talk again a little bit more about this in October what our plans are. Right now, we have a fair amount of transition going on in the business with the elimination of the upgrades and certainly inspiring people to action. But as we move into next year, we’ll have more to say on that.

Matt Hedberg - RBC Capital Markets

That's great. And maybe dovetailing on that same question, obviously, you're seeing some early success on the subscriptions side, the cloud subscription side. I think you've talked in the past about seeing a 20% or more value from those customers. Is that still the case, or in some cases do you see even more value from those types of deals?

Carl Bass

Some are more and what’s been interesting to me, and somewhat surprising is the number of cloud subscribers and some of our cloud based products are just attracting new people to Autodesk.

It was interesting. I was with a customer the other day, and asking them why they choose in this case PLM 360? And they said they just wanted to build on a 21st century company, we are building new kinds of products and our entire infrastructure is going to be in the cloud.

So our first decision point was who has a cloud based PLM. And second what was the best? So we are finding companies that were in our natural customers before and so that’s happening and in addition, very specific to your question. Yeah, some people are moving more quickly to the cloud then within our forecast.

Operator

Thank you. And our next question comes from Walter Pritchard from Citi. Your line is now open. Please go ahead.

Walter Pritchard – Citigroup

Hi, thanks. In the prepared remarks you talked to about the gross and license revenue primarily related to upgrade revenue increase that you saw in the quarter. Can you quantify that and what license is sort of an apple-to-apple basis if you would, promotional on the upgraded side is, as of the period you were in the quarter?

Carl Bass

So first of all, I'll let Sue jump in, but what I would say is generally speaking our promotions have been going down as the year has progressed so compare to Q1 the promotional activities going down.

The time frame is getting shorter. But my experience in the years of doing this is when we have a like generated by the removal of the upgrades, you're not going to see a wide disparity of activity among so channel partners. They are very focused on this in bringing in this business of it buyers.

Sue Pirri

That’s right. And we don’t actually breakout upgrade portion of license from the rest of license but I think it was right, the important part is , the important goal for us is to get us many of our customers on the curve version before upgrades go away. And we’re – the channel partners tend to focus on, the most compelling offer in the quarter and that’s really what people are focused right now.

Walter Pritchard – Citigroup

And then just a follow-up sort of related to that. You didn’t talk about there is a impact on subscribers from the promotional activity. And I guess if I look at the pace you're on track to add subscribers during the year, you’re talking about 200 to 250,000 this year.

If I go back to fiscal 2013, you added about 250,000 sort of the high end which you’re adding this year really without any help from significant amount of promotional activity like you have this year. And so I guess while I look at those two numbers, I'm kind of understand why, we are convinced here that, that really is a significant amount of demand per subscription, if you’re not that where you are in 2013 levels while driving promotions pretty aggressively.

Carl Bass

So I mean the way I look at is first of all I'm not sure exactly what time period you’re looking at but all through this there were significant promotions with us weeks. We were making very attractive offers, and moving our customers from there point products.

So I mean we always have promotion going on. I think just the nature of the business, and promotions give a small financial incentive for the customers, but there are also way to focus our entire go to market activity among our sales and more teams as well those are of partners.

So in some ways to look at it is, it’s less the incentives it’s more the goals of what we are trying to accomplish. And what we are seeing is moving amount of people on to subscription that were non subscription, we also noted in the remarks that the attached rates are a big bump as well. So we are happy with where our subscriptions are going.

Operator

Thank you. And our next question comes from Brendan Barnicle from Pacific Crest. Your line is now open. Please go ahead.

Brendan Barnicle - Pacific Crest

Thanks so much. Carl, I have a follow-up on your comment to Matt about, the new subscribers. People are new to Autodesk. Do you have any number on what percent of the subscriber base you think are generally new users that weren’t previously Autodesk customers?

Carl Bass

I mean we certainly have numbers. We haven’t been disclosing it and particularly let me separate, it’s not the maintenance subscriptions that are capturing those, I’ll tell you more about that. what we’re seeing is in the desktop subscriptions and particularly I called out LT and while historical rate to LT are being maintained we are also now have this new category of desktop subscriptions and that’s doing more plus what I was noting is in a number of our cloud based offering, build 360 PLM, 360 some of the others, we are seeing customers who just weren’t there before.

We’ll try to give a little bit more color about that. But it is certainly attracting new customers and as I pointed out last year at Investor Day, I thought in some cases, some of the markets were engaged in kind of the terrestrial battle where it is kind of that – so it’s with still minimal amounts of market share shift as we are offering a new technology platform we are finding people who really like being on cloud and mobile and selecting elsewhere before, they maybe even happy with another vendor.

Brendan Barnicle - Pacific Crest

We’d heard just sort of anecdotally from the folks in the channel, but it could have been as much as 20% of the subscribers are generally new people. Does that seem like a ballpark number?

Carl Bass

I’d hate to guess, but I will go do a little bit work on this.

Brendan Barnicle - Pacific Crest

Terrific and then just following up on Walter's question on the maintenance subs, you obviously you had good attached there. Any sense of where we are within the installed base the number of folks who done upgrades to get to subscription now and what percent may remain or what kind of market size that looks like?

Carl Bass

Our best indications are guidance in the revised upward guidance. We see continued strength in – as I talked about in the last call, we said the Q3 maybe the weakest for the quarter, but we thought Q4 would be a big quarter.

The hardest part of that figuring this out is, there is a way more subscribers left and we know we will be some behind. Then real question is just how many.

So, we can meet everyone of the expectations we have set. And there are still people behind we’re trying to minimize that as much as possible.

But you know, when we look at that base, it goes back. We think of going back about in the three to five year category and when you go back five years, there maybe people with company’s – company’s can’t have a business, they may have consolidated, they may have shrunk.

So it’s a little bit hard to procure exact hand on, how many of those seats are active today. So problem will be able to know the answer too much better in the future.

Operator

Thank you. Our next question comes from Keith Weiss from Morgan Stanley. Your line is now open. Please go ahead.

Keith Weiss - Morgan Stanley

Excellent. Thank you guys for taking the question and very nice quarter. I’ll keep on track with the, the very hard questions to answer.

In terms of business model transition, we are seeing really good evidence sort of the new subscriber add We are seeing good evidence you guys on targets as sort of long term buildings target. One of the things that’s tougher for us to give ability into his, that the target of uplift in customers value.

I was wondering if sort of give us your view as sort of how you’re doing on that metric of whether you kind of seeing, that movement that upper movement in customer value that you guys are looking for?

Carl Bass

So what I would say I think the base is too small to know of the whole thing. Remember a lot of the guidance we gave around was over five year plan, we are just in very beginning of that.

So I’d say the anecdotal evidence is strong, but it's certainly not on a big enough sample size. So, I don’t think we need any core strength, and I don’t think it's anything different. I just don’t think as big enough to really be certain.

Again when we get to Investor Day in October, be happy to treasure detail some more of that about how we’re doing according to plans.

Keith Weiss - Morgan Stanley

And then as a follow-up. At the end of last year when I was first talking about business model transition, you guys actually broke out on the guidance sort of how much license revenue is always going to move into those term contracts and going to the balance sheet.

This quarter you called out what happened in the quarter that just passed in 10 million. Do we have a better handle on sort of what the cadence of that movement is going to be on a go-on forward basis? Have you guys just sort of been able to sort of give a little bit more visibility into the accounting there?

Carl Bass

Yes. We knew a little bit more. We certainly know on the enterprise side what’s going on there. And as we always said, just as a matter of historical fact, a lot of the contracts come up in Q4. So, we’re seeing more moving Q4 just like we did in the prior Q4.

So there is going to be a seasonality to that. As we get to the accounting on moving other parts of our business that were recognized upfront to a more ratable business model. We’ll fill you more as we go. And we have gotten hands on that. And in addition, there’s been some complication and there have been some new accounting guidelines issued at the same time.

They work together and we will describe more of that. Sue you have anything you want to add there.

Sue Pirri

No, I think, you’re right. We will talk more about it at Investor Day and we continue to do work with our finance team and the auditors and we’re finally understanding that accounting around ratability.

Operator

Thank you, and our next question comes from Steve Ashley from Robert W. Baird. Your line is now open, please go ahead.

Steve Ashley - Robert W. Baird

Thank you. I’d like to just drill down on the AEC business, to Brent’s question earlier you talked about that being strong but really being two parts to it. One, cyclical recovery, and two, just greater adoption by the contractors part.

Just for cyclical part, wondering if you could just talk about what you’re seeing across the major geographies, the U.S., Europe and Asia Pac? Where are we in the cyclical recoveries in AEC by geographies?

Carl Bass

So, what I would say, I think in all three geographies we are seeing strength. A very informal way is just to look at the cranes in every city you travel to. Everywhere you go, you can see rather large commercial building going on as well as a big investment in infrastructure.

I don’t think we’re at the top of the cycle yet. We’re somewhere on the way up, it’s been building for while and continues to build. I have no better way to forecast how long the uptick is going to be but it’s been sustained, right now it seems strong and consistent across geographies.

When compared to last time it feels healthier. It doesn’t have some of the bubble aspects as last time. And so, right now, we’re feeling really good about what’s going on and because it’s been one on the coming after the 2008, 2009 downturn, and it hasn’t gotten too hot too quickly. What we’re seeing is company’s willingness to invest in retooling.

They recognize in places where they’re having these technology and they will not spend money to really get onboard. And, it’s nice when it comes slowly enough that they can invest in new technology, train their teams, start to see the benefits, come back and reinvest again and that’s what we’re seeing this time.

Steve Ashley - Robert W. Baird

And then, with respect to Delcam, just wondering what kind of geographic breakdown that $11 million of revenue might have, not looking for exact numbers just looking for some kind of subjective commentary on how that might have broken down by geo?

Carl Bass

We want to break it down. One thing to remember about when we look at things like acquisitions, the thing you have to remember is that it is you also have the differed revenue right down, but it may not be consistent across geographies. But if I just want to speak more generally the Delcam business is really strong in Europe.

And, probably a better way to look at Delcam is by the industry’s reserves and it really does well in aerospace and automotive. There are certainly parts of industrial machinery and others but the way to think about Delcam is computing on the very high end in automotive and aerospace machining.

Operator

Thank you. And our next question comes from Heather Bellini from Goldman Sachs. Your line is now open. Please go ahead. Bellini, please check your mute button.

Heather Bellini - Goldman Sachs

Sorry about that. Yeah, it’s Heather Bellini. I have a couple of questions for you Carl and Sue. The first one would be, you mentioned that maintenance attach has been higher than, has been running I guess even higher than you expected. I am just wondering if you could give us an idea in percentage terms, how much higher you’ve seen it thus far this year for the first half versus what you saw the last fiscal year?

And then, the second question would be related to, can you give us kind of rank order for us, top three things that drove the deferred upside? It was much higher than the Street. And then, I guess the last question is more of a capital allocation question Carl. You have been very successful in the transition thus far and I know you have very big plans as for how you’re going to exit a few years from now.

What’s the current thought around being more aggressive and issuing debt of something of that nature in order to really take out a big plug of your stock give you’re executing on your plans so well?

Carl Bass

Okay. So, I don’t want to breakdown the percentage upside. Su, you want to break it out?

Sue Pirri

I can tell you the categories. The categories in deferred are obviously maintenance.

Carl Bass

I was talking about the upside in attach rate first, but.

Sue Pirri

No, we don’t break that out.

Heather Bellini - Goldman Sachs

…is it running 20 points higher, is it running 10 points higher, it’s not a specific number that we’re looking for.

Sue Pirri

So what I want to say Heather is, it’s meaningfully more – we’ve seen that in a couple of quarters in a row, but with the current attach rates we have, it’s not going to be 20 points more obviously.

Heather Bellini - Goldman Sachs

Okay. And the other two questions? On what drove the deferred upside, if you could around the quarter.

Sue Pirri

Yes, so we don’t breakdown the specifics of where the increase in deferred came from but the things in deferred obviously consulting plays a part in it that the maintenance is in there, there are some support, there’s a variety of things in deferred and one of the big move is consulting during the quarter, some of the deferred consulting and services.

Carl Bass

If I had to put two things, I’d put one as consulting and the other one is from regular maintenance. Just the upside in maintenance drove that as well.

Sue Pirri

And Carl the last one.

Carl Bass

Yeah, on the capital allocation. We’ve been working on capital allocation plan. We did an offering, it’s probably year or two now. And we’re always, we just review it with the Board as well and we have nothing to announce at this point but we’re certainly looking at it and making some decisions about capital allocation.

Heather Bellini - Goldman Sachs

Thank you.

Carl Bass

You’re welcome.

Operator

Thank you. And our next question comes from Sterling Auty from JPMorgan. Your line is now open. Please go ahead.

Sterling Auty - JPMorgan

Yeah, thanks. Hi, guys. Wanted to actually ask about suites. It’s been a while since we talked about the idea of what kind of average uplift that you’re getting on a suite sale versus a point product and more specifically where are you seeing the strength in the suites, whether it’s the highest end suite, the mid range or the lowest?

Carl Bass

All through this, it’s really been the mid range suites that have done the best, which is where we wanted to. I would say we overestimated the people who would go to the low end suites and we underestimated the two other categories above, the medium and the high. And we’ve seen more consistently going there.

We are getting the uplift, it’s one of those time which our modeling ended up being very spot on and it’s been very consistent over the last few year. So, we’re seeing the uplift, the strategy around the suites has worked really well and really according to plan.

Sterling Auty - JPMorgan

And the follow up is actually in the media and entertainment. In the prepared talked about some of the impact is end market demand. Some of it is on the move to subscription. How should we think about where the media and entertainment revenue line goes from here, is it something that actually could start to fade away?

Carl Bass

No. I think, as we always try to distinguish, media and entertainment they are two different parts of the business. There is the creative finishing. Creative finishing has been diminishing, some of it is just nature of the market and some of it has to do with the hardware component in there which we no longer sell.

And then there’s the other part which is the software part of the business. The software part of the business is good and healthy and we like all the dynamics in that part of the business. What we see in the other part less happy with it.

That’s been going on for the last half dozen years in the creative finishing part.

Operator

Thank you. And our next question comes from [indiscernible] from Barclays. Your line is now open. Please go ahead.

Unidentified Analyst

Hi guys, thanks for taking my question and one question and a follow-up if I can. First Carl, nice growth in subscription billings. As we think about the total billings guide for 10% to 12% growth this year, how do you think about the related growth profiles between license billings and subscription billings?

Carl Bass

Yeah, I think what we’re going to see in the short term is just because of -- as we’ve talked about activity in the channel I think we will see subscription billings grow faster. I think what you saw in the first two quarters is a good indicator. As I pointed out 90 days ago that Q3 maybe the anomaly in the year and Q4 will be very strong in maintenance subscriptions once again.

Unidentified Analyst

Sort of, and then for those customers that are buying an update while they can before the deadline, can you remind us at what point will those same customers be forced to come back and either buy another professional license at full price or maybe finally cave in for maintenance in order to stay current.

Carl Bass

Well they really have to something. If they buy an upgrade now along with maintenance they they're on and they only have till the end of the year.

Unidentified Analyst

Well, so just to clarify that, so a customer that…

Carl Bass

The only other choice they have is just to buy. If you don’t want to get our maintenance, you buy a perpetual license. You do not buy maintenance and then some number of years from now when you’re comfortable with the new product, you buy another perpetual license.

Unidentified Analyst

Okay, I wasn’t sure if there was a time period where Autodesk would stop supporting. Maybe in the past it was after three years, Autodesk would stop supporting some number of versions of its software but it sounds like it’s more customer based that's the one that it comes…

Carl Bass

Yeah, and the truth of it is there is a half-life to software. Given the integration with enterprise systems and the data and the training, the software becomes less valuable over time. If you’re not on the latest releases, it just becomes difficult to communicate with those folks in your ecosystem and it just becomes difficult overall. So the value of that license definitely diminishes over time. Being more than three years back is not practical for most companies.

Operator

Thank you and our next question comes from Steve Koenig from Wedbush Securities. Your line is now open. Please go ahead.

Steve Koenig – Wedbush Securities

Thanks for taking my question. I have got one short question and then a slightly longer one to follow-up. So on the short question. Could you give any color on that Q3 EPS guide looked a little light.

Carl Bass

Yeah, we try to cover it a little bit. At least in my open commentary I listed a whole host of reasons that are in there. Some of these returned some expenses due to the over performance. So compared to last year, there’s more in bonuses and other compensation related expenses. There’s also continued investment in building up the infrastructure and relationship T.J.’s question.

We talked about building back office systems as well as a cloud infrastructure. So we’ve been investing in that and then I detailed a number of other ones but there’re continued investments that we believe are really important for the future of the company.

Steve Koenig – Wedbush Securities

Okay that’s great and then I want to ask this well on concerning Europe, if had any concerns it would be about reaching data points out of Europe where they seem be weaker not only Eastern Europe but even in Germany and Italy etcetera. And I am wondering you did make some comments that you saw weakness in sort of part of Europe.

Was this an -- and obviously this was offset in Q2 just because license upgrades were strong or other regions are so strong that they get and then I guess the other part of that question is do you see anything changing there? Did you linearity suggest anything or in addition how do you factor the recent macro data points in your guidance for Europe?

Carl Bass

Yeah, so couple things. So the only part of Europe that I really called out as weak were Russia and then Ukraine and the other part was EMEA, was what’s going on in the Middle East. So those are the two areas.

What would you think of most of traditional Europe actually performing sharply. Just like when I saw the numbers out of Germany, I was surprised by it. We don’t see anything that’s just -- we haven’t seen that at all. So it was a little bit surprising to me but can surely take a bit of it into account.

Operator

Thank you and our next question comes from Kash Rangan from Merrill Lynch. Your line is now open. Please go ahead.

Kash Rangan - Merrill Lynch

Hey guys, thanks for taking my questions. Carl, how confident are you that having a very limited window for selling upgrades may not -- the strength as impressive as you’re seeing in the quarter is not coming at the expense of what would have been license business next year or perhaps even subscription business because I would assume that just getting on the update and getting on maintenance would certainly take the pressure off of the customer to consider a new license or a subscription and as a follow-up, I think it’s almost a year since the launch of the subscription initiative.

Is it because the company is still in a dual mode selling the license and subscription not as happy as you are with the subscription update, well clearly, it's doing better than your total forecast. But I would assume that given such a big change that we would see that Adobe type of whizbang effect right out of the gate. But is it because you’re selling the license and the subscription that we’ve not seen that big breakout this year? Thank you

Carl Bass

Yeah, no, no, actually all the guidance that we did, that we talked about five years in, as you just referenced Adobe I’ve said this before, while there are certainly similarities between Autodesk and Adobe there’s also a big difference. Adobe went and made the more dramatic step of eliminating perpetual licenses for most of their desktop products and that accounts for the difference on one side.

On the other side it is, we had already a very large installed subscriber base and it was related to maintenance relative to what adobe had, so the starting points are a little bit different and the actions we have taken, we’re still selling perpetual licenses and they’re not. So I don’t think looking directly, laying one graph over the other does much good on the other hand. The general trends that both us and Adobe -- and I think others in the traditional desktop software business is looking at are all the same things.

So we just stepped back for a second and say what’s this going to work like in the future. Three years from now it will be surprising to me if anybody is really running very much perpetual desktop software.

Kash Rangan - Merrill Lynch

And the impact of the upgrades, Carl, to what extent do you think it might have been at the expense of next year’s demand for licenses and subscriptions or maybe not strong cost.

Carl Bass

I don’t think the upgrades have much to do with next year’s subscriptions. Some of the people are certainly deciding now to upgrade and buy their licenses ahead of that change. There’s always a small effect but as we’ve talked about before, there will be new emphasis next year for something else and it’s a large install base and we’ll tap into a different part of it and hopefully motivate it appropriately.

Sue Pirri

The other thing that I would add is as we’re seeing the folks upgrading, we aren’t seeing higher cash rates with these customers and getting closer to Autodesk to being on a maintenance subscription is a good lead-in for us marketing other products for them and eventually priming them for the desktop subscriptions and the cloud.

Operator

Thank you. (Operator instructions). And our next question comes from Matthew Williams from Evercore. Your line is now open. Please go ahead.

Matthew Williams - Evercore Partners

Hi guys. Thanks so much for fitting me in. Most of my questions have been answered at this point but Carl I just wanted to -- if you could provide a little bit of color on maybe what you’re seeing out of the consumer side and now it’s -- lot of focus has been on the enterprise with what you’re doing but I think longer term you guys have highlighted quite an opportunity on the consumer side. I was just wondering if you could give an update there.

Carl Bass

Yeah sure. What’s going on with the consumer is really exciting. We’re getting close to more than 200 million users in the consumer space. Over 50 million up monthly unique users in the consumer space. So this is turning into something substantial. We continue to do more in that market and we’re succeeding with that.

We’re also kind of bridging the gap between some of the consumer stuff for some of things that have been delayed in the consumer work and what’s going on in the more industrial markets. One thing that I didn’t touch upon but we did announce that we were doing a 3D printer.

Autodesk was actually designing and manufacturing a 3D printer. That’s going really well. I am very pleased with the progress that we’ve to date. I am sure we’ll be showing you the 3D printer in October. Prints are coming out of it all day long and it’s sort of really exciting and so well I am excited about the consumer opportunity in and of itself and we’ve just spent the last 50 minutes talking about the more industrial part.

There’s this interesting segment in the middle as well that we see developing on the small new industrial that transitions out of the consumer but all signs are really positive with the consumer and in many ways, they’ve been a great leading indicator of the other stuff, much more willing to adopt cloud and mobile stuff ahead of the enterprise.

Matthew Williams - Evercore Partners

Great. That’s helpful. I appreciate it and maybe just one quick follow-up. I know the channel’s been focused on really getting customers hurrying on subscription. As we start to look in the next year when the upgrade option goes away and the focus is just a little bit more towards desktop subscription and the cloud offering, what sort of work or investment do you need to do to make sure the channel’s ready to really help drive growth in those areas as well?

Carl Bass

I don’t think there is anything dramatic going on that needs to happen with the channel. We work really closely with our channel partners and when I am able to report really good results like this quarter, it is the result of the combined activity of every channel partners.

So they are doing really well. They are really optimistic and one thing that did surprise me this quarter was I did notice in your guys’ channel checks not actually picking up on the strength in the quarter so there’s some level of disconnect that I don’t quite understand they ended up looking to probe into a little bit more but our channel partners are really optimistic about the rest of the year going into next year.

I am surprised that didn’t come through in some of the conversations with you but it certainly came through in the results. Si I think you’ll see only small incremental changes in how we work with our channel partners.

Matthew Williams - Evercore Partners

Great. Thanks and congrats on the quarter.

Carl Bass

Okay, thanks very much.

Operator

Thank you and I am not showing any further questions. I would like to turn the call back to David Gennarelli for any further remark.

David Gennarelli

Okay, well that concludes our call today. As Carl mentioned, we have our Investor Day coming up this October 1, at our gallery in San Francisco. If you have not signed up for that already, please send me an email or call me at 415-507-6033 and that concludes our call today. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today's program. You may all disconnect. Everyone have a great day.

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Autodesk (NASDAQ:ADSK): Q2 EPS of $0.35 beats by $0.07. Revenue of $637M (+13.4% Y/Y) beats by $33.84M. Shares +7.3%.