Autodesk F3Q08 (Qtr End 10/31/07) Earnings Call Transcript

Autodesk, Inc. (ADSK)

F3Q08 (Qtr End 10/30/07) Earnings Call

November 15, 20075:00 pm ET

Executives

Sue Pirri - VP of IR

Carl Bass - CEO

Al Castino - CFO

Analysts

Jay Vleeschhouwer - Merrill Lynch

Steve Ashley - Robert W. Baird

Phil Winslow - Credit Suisse

Philip Alling - Bear Stearns

Brendan Barnicle - Pacific Crest Securities

Sasa Zorovic - Goldman Sachs

Brian Essex - Morgan Stanley

Ross MacMillan - Jefferies

Brad Manuilow - American Technology

Brent Thill - Citi

Richard Davis - Needham

Gene Munster - Jefferies

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Autodesk Incorporated Earnings Call. My name is Melanie, and I'll be your coordinator today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session atthe end of this conference (Operator Instructions).

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Ms. Sue Pirri, Vice President of Investor Relations. Please proceed, ma'am.

Sue Pirri

Good afternoon, everyone. Thank you for joining us today as we report results for our third quarter of fiscal 2008. With me today are Carl Bass, our Chief Executive Officer, and Al Castino, our Chief Financial Officer.

Today's conference call is being broadcast live through an audio webcast. In addition, a replay of the call will be available by webcast on our website, www.autodesk.com/investor. During the course of this conference call we will make forward-looking statements regarding future events and the future performance of the company, our guidance for the fourth quarter and full year of fiscal year 2008, the first quarter and full year of fiscal year 2009, the factors we use to estimate our guidance for those periods, our competitive position, our future business prospects and revenue growth, our market opportunity and transfer of product to various geographies.

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 and specifically our 10-K for fiscal year 2007, our 10-Qs for the quarters ended April 30, 2007, and July 31, 2007 and our periodic 8-K filings, including the 8-K filed with today's press release.

These documents contain and identify important risks and other factors that may cause the actual results to differ from those contained in our forward-looking statements. The forward-looking statements made during this call are being made as of the time and the date of this live presentation. If this call is replayed or otherwise reviewed after the time and date of this live presentation, even if it's subsequently made available by Autodesk on its website or otherwise, the information presented during this call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward-looking statement based on new information, future events or otherwise. In adherence to Regulation Fair Disclosure, Autodesk will provide information and forward-looking guidance in its quarterly financial results press release and this publicly announced financial results conference call. We will not provide any further guidance or updates on our performance during this quarter unless we doso ina public forum.

During the call we will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures will be provided either on this conference call or can be found in today's press release, made available on our website at www.autodesk.com/investor.

Now I'd like to turn the call over to Carl Bass.

Carl Bass

Good afternoon, everyone. Thank you for joining us. Today, Autodesk reported another quarter of very strong financial results. Quarterly revenue was a record $538 million, an 18% increase over last year. Diluted earnings per share were $0.35 on a GAAP basis and $0.49 non-GAAP.

We're going to quote a number of percentage increases as we discuss the financials. Unless otherwise noted, each represents the growth rate of the third quarter of fiscal 2008, as compared to the third quarter of fiscal 2007.

Our outstanding financial performance was a result of focused execution on thekey elements of our business strategy. Once again, we showed robust increases in most of our key revenue and profitability metrics. I'd like to highlight a few of these. Revenue from both our 3D Solutions and our 2D Vertical Solutions were at record levels, resulting in revenues from our Design Solution segment increasing 20%. Thechanges we implemented in our partner incentive programs inthe first quarter, continued to increase reseller attention on our most significant opportunities for growth.

Revenue from our 2D Vertical and 3D products increased 22% and 32% respectively. 3D revenue now represents 24% of total quarterly revenue, its highest level ever. 3D still presents a significant growth opportunity, as 3D penetration of our customer base remained under 15%. Clearly 3D continues to bean important growth driver for the company, and our 2D Vertical solutions provide the easiest migration path for our customers to our 3D products and then on to digital prototyping.

Revenue growth in emerging economies continues to significantly outpace growth in developed economies. Quarterly revenue in emerging economies increased 31% and now represents 17% of total quarterly revenues, its highest percentage ever. Revenue from new seats increased 20%. Non-GAAP income from operations increased 42% to $151 million, resulting in 28% operating margin. And finally, cash from operating activities increased 21% to $161 million. I am very pleased with our results this quarter and the continued momentum in our business.

Now I'd like to turn the call over to Al for a detailed discussion of the financial results.

Al Castino

Alright, thanks, Carl. Once again, Autodesk delivered great quarterly performance. As Carl said, net revenues grew 18% compared to the third quarter of last year to $538 million. GAAP diluted earnings per share were $0.35. Non-GAAP diluted EPS was $0.49. Customer demand for Autodesk products was very strong again this quarter. Revenues from our 3D and 2D Vertical products showed strong growth. During the quarter, we shipped nearly 43,000 commercial seats for Inventor, Revit and Civil 3D. Revenue from these products increased 29% to $127 million.

Last quarter, we completed the acquisition of NavisWorks. The NavisWorks family of products fully enables the benefits of 3D models for design coordination and construction simulation, and accordingly will be included in our 3D revenue starting in the third quarter. NavisWorks revenue was $3 million inthe quarter, resulting in total 3D revenue of $130 million, a 32% increase. Combined upgrade revenue and maintenance revenue from subscription increased 15%. Maintenance revenue from subscriptions was $143 million, an increase of 29%. As expected, revenue from upgrades and cross-grades decreased 16%.

Each of our geographies grew substantially. Revenue inthe Americas was $218 million, an increase of 12%. EMEA revenues were $203 million, an increase of 27% as reported, and 18% constant currency. Asia-Pacific revenue increased 14% to $118 million. Japan had another good quarter of execution. As we said last quarter, our business inJapan has stabilized and is now growing. We remain optimistic about continued improvement going forward.

Revenue growth in emerging economies continues to significantly outpace growth in developed economies. Quarterly revenue in emerging economies increased 31% to $92 million and represents 17% of total quarterly revenue, its highest percentage ever. Revenues from the Design Solution segment increased 20% to $457 million.

Now, let's look atthe divisional performance within Design Solutions. Revenue from platform solutions and emerging businesses increased 14% to $242 million. AutoCAD LT had an outstanding quarter, growing 35%. As we mentioned earlier, thechanges in our incentive programs has shifted reseller focus away from AutoCAD to our 2D Vertical and 3D products. As a result, AutoCAD revenue was flat, while AutoCAD 2D Vertical revenue increased 22%. We continue to believe that the most relevant measure of 2D performance, given our strategy, is the growth of all AutoCAD-based products in total, which grew 16%.

Total revenue for Manufacturing and Solutions division increased 19% to $102 million. This far exceeds the growth of our closest competitor. Revenue from new seats of Inventor increased 22%. We shipped more than 13,400 commercial seats of Inventor inthe quarter. AutoCAD mechanical had another great quarter, increasing revenue 30%. In total, we shipped more than 54,000 seats of our Manufacturing products. AEC Solution's revenue includes NavisWorks and increased 34% to $124 million.

The building industry continues its rapid adoption of building information modeling, both in theUS and abroad, driving strong record results. Revenue from Revit family of products increased 53%, and we shipped more than 21,400 commercial seats. Civil 3D also had a great quarter, growing revenue 31%, and we shipped nearly 8,200 commercial seats. Revenue from our Media and Entertainment segment was $67 million, an increase of 4%. However, the trends in our two M&E businesses were very different.

Animation revenue increased 17%, led by an outstanding quarter for 3ds Max. Revenue from Advanced Systems declined 8% as themove off SGI hardware continues to have a negative impact on revenues. This change has substantially improved the Systems' gross margin, however.

Moving to the rest of the income statement, gross margins increased 2 percentage points on a GAAP basis to 90%, and 3 percentage points non-GAAP, to 91%. The improvement was primarily due to increased gross margins I just mentioned on our Advanced Systems Solutions.

In addition, strong software license sales and productivity improvements in operation contributed to the increase in our gross margin. Operating expenses were $381 million GAAP and $341 million non-GAAP. Operating income was $106 million GAAP and $151 million non-GAAP. Our operating margin was 20% GAAP and 28% non-GAAP. Our tax ratein the quarter was 23% GAAP and 26% non-GAAP. The GAAP tax rate was lower primarily due to tax benefits related to stock-option exercises recorded under FAS 123R. Net income was $85 million GAAP and $117 million non-GAAP. Atthe end of the quarter, there were 230 million total shares outstanding.

Compared to rates we used when we set our guidance for the third quarter, foreign currency rates impacted our results by an insignificant amount. Compared to the third quarter of last year, foreign currency impact was $16 million favorable on revenue and $5 million unfavorable on expenses. Compared to last quarter, foreign currency impact was $7 million favorable on revenue and $1 million unfavorable on expenses.

Turning to the balance sheet, cash and investments were $873 million. During this period of uncertainty in the worldwide credit markets, we feel it is prudent to maintain somewhat higher cash balances than we have previously planned.

During the quarter, we received $77 million from issuing 4 million shares from employee stock plans. We used $138 million to buyback 3 million shares. Year-to-date, we have repurchased 10 million shares, which exceeds employee stock plan issuances by 1 million shares. We will continue to repurchase shares under our previously authorized share repurchase program to offset dilution from employee stock program.

Cash from operating activities was $161 million. We used net cash of $45 million for acquisitions. Total deferred revenues increased $12 million sequentially to $424 million. Deferred maintenance revenues from subscription increased $10 million sequentially and $101 million over the third quarter of last year. Unshipped product orders or shippable backlogs were $17 million, a decrease of $4 million sequentially. Total backlog, including deferred revenues and unshipped product orders, increased $8 million sequentially to $441 million. Channel inventory remains below three weeks. DSO was 51 days this quarter.

We're very pleased with our third quarter results. As we look forward to the fourth quarter of fiscal 2008 and fiscal 2009, we are mindful of the concerns about the health of the US and worldwide economies. However, our business has remained strong. In this environment, we believe it is prudent to be cautious. At the same time, we remain confident in our business and optimistic about our opportunities for growth.

Now let's talk about guidance. We continue to expect fourth quarter revenue to be inthe range of $575 million to $585 million. GAAP earnings per diluted share are expected to be inthe range of $0.42 and $0.44. Non-GAAP EPS is expected to bein the range of $0.52 and $0.54.

For fiscal year 2008, net revenues are expected to be between $2.148 billion and $2.158 billion, a growth rate of approximately 17% over fiscal 2007. Full-year GAAP earnings per diluted share are expected to be inthe range of $1.50 and $1.52. Non-GAAP EPS is expected to bein the range of $1.89 and $1.91, a growth rate of approximately 24% over fiscal 2007. We continue to expect our GAAP and non-GAAP tax rates for all of fiscal 2008 to be between 25% and 26%.

Now let's look at next year. For fiscal 2009, net revenues are expected to be between $2.425 billion and $2.475 billion, a growth rate of approximately 13% to 15% over our fiscal 2008. Full year GAAP earnings per diluted share are expected to be inthe range of $1.84 and $1.90. Non-GAAP EPS is expected to bein the range of $2.20 and $2.26, a growth rate of approximately 17%. We expect our annual tax rate for fiscal 2009 to be 26% on both a GAAP and non-GAAP basis.

For the first quarter of fiscal 2009, we expect revenue to bein the range of $575 million to $585 million. GAAP earnings per diluted share are expected to be inthe range of $0.42 and $0.44. Non-GAAP EPS is expected to bein the range of $0.50 and $0.52. We expect seasonality to be similar to last year.

Now, I will turn it back over to Carl.

Carl Bass

Thanks, Al. As we have told you, Autodesk had a terrific quarter. Before we begin taking your questions, I would like to remind you of some of the reasons for the strength of our business. First, our business is diversified on many levels. On a geographic basis, the majority of our revenues are international. In fact, less than 35% of our revenues arein the U.S. Emerging economies area rapidly growing part of the business. China, India, Russia, and Eastern Europe have been some of our best performing regions in the past few years, and we were encouraged by trends we see developing in theMiddle East.

This quarter, revenue from emerging economies grew at approximately twice therate of our business in developed economies, and we continue to believe it will be a significant growth driver. We are well diversified across the major industrial segments inthe economy, including building, manufacturing, infrastructure and media, with little exposure to financial services. In addition, purchases of our software typically fall into R&D spending instead of IT spending, so they are less subject to changes in the economic environment. Finally, we serve customers of all sizes, from Fortune 100 to small post production facilities, not just large enterprises.

As I have said many times, our diversification helps to moderate the impact on our business of large swings and external factors. Second, as you know, our customers are under constant pressure in today's business environment. Globalization, the rising cost of energy, worldwide building expansion, development and rejuvenation of infrastructure, and the increasing drive to keep data digital, are important global trends that drive our customers to search for tools to improve their competitive position. These trends are also creating significant growth opportunities for Autodesk.

Third, the increase in innovation and productivity that our model based 3D products provide, is compelling our customers to migrate to new design tools faster than ever before. For example, let's talk about the building industry. In theU.S., buildings consume one third of all energy used and two thirds of electricity. As a result, increases in energy prices and a desire for energy independence are forcing the commercial building industry into action. This is happening all over the world. Owner/operators are searching for more energy efficient alternatives to traditional building processes. The simulation and analysis capabilities enabled by Revit allow our customers to address highly complex problems ina way that was never possible in the past. This platform transition is occurring inall of our industries, not just building, as we bring sophisticated 3D design tools to the mainstream markets.

Finally, Autodesk is increasing its competitive separation. Both Autodesk and our resellers are increasing investment in sales and marketing, both by increasing marketing program spend and by adding sales staff. We are increasing our investment in R&D to bring new products to market and create exciting new versions of existing products. We have also used M&A activity to enhance our strategic position. We completed a number of small acquisitions during the quarter, including Opticore, Skymatter, and PlassoTech, all of which bring additional functionality to our 3D platforms, further enhancing our leadership in our core markets. And we recently announced our intent to acquire two others, Hanna Strategies, a global engineering services firm, and Robobat, a provider of software for structural engineering design, engineering and analysis. These initiatives area significant investment in our future success that our competitors have been unable to match.

As Al mentioned, we are mindful of the mixed economic indicators inthe market today. While this mixed data requires us to be more cautious, we believe we have the right strategy, the right products and the right team to continue to succeed.

Operator, we're ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Jay Vleeschhouwer with Merrill Lynch. Go ahead.

Jay Vleeschhouwer - Merrill Lynch

Thanks. Good afternoon. Carl, I'll start with the obligatory channel question. It appears that going into your fiscal '09, you're not going to make the sorts of channel changes that you made at the beginning of this year. Whatever changes you make, the thinking seems to be limited, if any. And can you comment if that is in fact your intention that you will not make thechanges you made this year? And if so, what other levers or investments you think you can make in '09 to guide the resellers towards the mix and growth that you would like to see out of them?

Carl Bass

So Jay, time for the obligatory channel answer. I think your assumption is correct. I think we made significant changes atthe beginning of this year. We don't anticipate doing anything nearly as dramatic going forward. We've always assumed that it takes a while for our channel partners to digest some of these changes, internalize them and make changes in their own program in allocation of resources to maximize their businesses. And I think we're very early in those changes. We're pleased with the success we've seen so far, but it's going to take beyond the end of this year for them to fully incorporate it. And it would be too disruptive for us to be introducing anything drastically new next year.

Jay Vleeschhouwer - Merrill Lynch

Okay. For Al, can you talk about the kinds of investments that you're going to be ramping up significantly in next fiscal year? Carl alluded to some investments inthe channel and R&D and the like; could you perhaps put some scale on that in terms of percentages of revenue or growth and how are you ranking the priorities for incremental investments?

Al Castino

The areas we're investing in have been fairly consistent, actually, for a few years now. So we're continuing to push further into 3D. We certainly are working on interoperability, something we've been talking about, which will provide customers more value out of our 3D offering. You'll continue to see us make a number of these small acquisitions, and you have seen good examples this year. And primarily, looking for technology allows us to go deeper into our product offerings. In terms of percent, I think that the most important thing to keep inmind is all of it is built into our guidance, built into our model. We make investments allthe time. So I never really quantified at what percent we consider investments in, and that's actually not a simple thing for to us separate anyway, but it's built into our model. We're always investing for growth, and we think our growth trend is large and the priority for investment, those arethe areas we think that have the most promising growth. And those have been clear, just based on what we've been doing the last couple of years.

Jay Vleeschhouwer - Merrill Lynch

Okay. Just two last things, geographic question. For you and most of the peer group, Europe has been an especially good driver for growth. And what is your assumption about your ability to continue to see that inEurope over the next year? And by the same token, you're talking now about some improvements in Japan, where some of your closest peers have yet to see that solid [work] counting on that, at least in the mechanical market, until well into the first half of '08. So why are you seeing this improvement in Japan sooner than the rest? And lastly, any comment on what you're seeing in terms of attach rates or renewals in maintenance? Any indications that the growth in maintenance might be beginning to flow or that the attach rates are at some risk of any kind?

Carl Bass

So Jay, let me answer a couple, and Al can jump in. On the geographic distribution, two things I would say about EMEA again, about us and all of the other companies. Certainly, the benefits that we've seen from currency are primarily in EMEA. So that's artificially inflating some of the results for everybody from EMEA. The other thing to recognize about EMEA, it is by far, the most diversified geography in which there are developed economies; Western Europe that looks incredibly like the US, but it also includes parts of Russia, Eastern Europe, parts of the Middle East as well as Africa. So, that one is much more an average of two very different things going on. However, we continue to see business being strong inEurope, including the developed parts of Europe, but it's certainly getting a special bump in a much more consistent way than some of the other developed economies. We've talked about good growth inLatin America, but it's also more volatile and more variable, whereas what we've seen inEastern Europe and Middle East, it's much more consistent.

As for Japan, all I can say is, I can talk about us. I can't explain why SolidWorks is not doing as well as you expect them to do. What I would say is, we noted over the last year that there were two things. There were some errors of our own doing, and there were some things inthe market in our approach with our channel partners, and we thought both of those needed fixing. We made significant changes in our sales management team there, as well as the approach to the market in some of our products. That new team has forged new relationships and is working much better with our channel partners in expanding the reach there. So, we've always been a little bit cautious about it, but it's starting to become a trend that we feel much more confident about.

Al Castino

Yeah, I'll add to it. We certainly do feel much better about Japan, and probably, one reason we're doing better has to be related with their products. That should have some impact on this. In terms of the subscription, the attach rates, renewal rates are consistent with what we've seen inthe past couple of years. You've seen the growth rate has slowed down in the last couple of years. Just a little large numbers, as it becomes a bigger base.

But what you're seeing recently, the high 20s, that's very consistent with the growth goals we have over the coming several years. So we feel good about the subscription revenue base, and that base continues to grow, and we're doing very well attaching new customers.

Carl Bass

Yeah, I mean the other thing that I'd say about [true] is we see opportunity for upside there too. While we're happy with the results we've seen, we all know the number of things we could do to certainly increase both the attach and renewal rates, and we're obviously working on those.

Jay Vleeschhouwer - Merrill Lynch

Thank you.

Operator

(Operator Instructions). Our next question comes from the line of Steve Ashley with Robert W. Baird. Go ahead.

Steve Ashley - Robert W. Baird

Hi, thank you. I have a question regarding guidance. If we look atthe guidance for the April quarter, it looks like the midpoint of that is flat with the January quarter on a sequential basis. I was just wondering, if we look atthe Design Solutions business, are there any of the business segments within there in which you're taking a more cautious view, more conservative view than perhaps some of the others?

Carl Bass

No. I think flat sequentially is consistent with the seasonality that we've seen over the last few years. Remember, as you look back over the lot of years, you've got to look for different timings about release of software and promotions. But generally speaking, that seasonality has been consistent with the last few years. We no longer have thebig retirement programs that we had, so those promotions are no longer there, but nothing especially true there. When you look on the various disciplines within Design Solutions, I don't think there's anything we're doing uniquely for anyone. I think it's consistent, and it's really an extrapolation of the performance we've seen in each of those units over the last couple of years. There's nothing out there that we see on the horizon that's affecting positively or negatively to an extreme any of the divisions more than the other. It really is just a natural extension of what we've seen before.

Steve Ashley - Robert W. Baird

Great. If I could ask one quick housekeeping question?

Carl Bass

You may get reprimanded, just like Jay.

Steve Ashley - Robert W. Baird

Yeah. I'll try to make this short. Inventor revenue year-over-year, Al, I don't know --?

Al Castino

What was that again?

Steve Ashley - Robert W. Baird

If I could getthe percentage growth in Inventor revenue, year-over-year? Thanks.

Al Castino

It was about --

Carl Bass

I think it's 19%.

Sue Pirri

19%.

Carl Bass

19%.

Al Castino

19%.

Sue Pirri

16%.

Carl Bass

16%.

Al Castino

16%.

Steve Ashley - Robert W. Baird

Thank you.

Operator

Our next question comes from the line of Phil Winslow with Credit Suisse. Go ahead.

Phil Winslow - Credit Suisse

Hi, guys. Good quarter. Just wondering if you could just break down a little bit for us what you're seeing by vertical across the geographies, if anything is standing out from a strength or weakness perspective, beit commercial construction here in the US or let's say, manufacturing over in Europe. Anything that stands out either which way?

Carl Bass

So a couple things are consistent with what we talked about. Building industry and infrastructure worldwide continues to be going strong, so you can look at infrastructure across the world and sometimes people don't recognize how much of our software is used inthe infrastructure market. Any infrastructure is such a broad term, but it's everything, its roads and tunnels and bridges. It's water, waste water, electrical distribution. All of that's in the category of infrastructure. Regardless of whether that's the refurbishment of infrastructure in places like the US or Western Europe or the build out of infrastructure inthe emerging economies, that continues to go well and seems in some ways less sensitive to some of the variability caused by the economic ebbs and flows.

Phil Winslow - Credit Suisse

And Al, you mentioned that potentially maintaining higher cash balances. Then when you do look at fiscal 2009, how do you think about fully diluted shares outstanding as per your EPS guidance and also just from a buyback perspective?

Carl Bass

Two things will stay in place. I think you can assume shares will stay flat. And I think our buyback program will continue to be used to offset dilution from employee stock programs.

Al Castino

Yes, the shares outstanding will remain flat. Now obviously, the stock price impact is fully diluted too, but our goal remains to hold the shares outstanding flat.

Operator

Our next question comes from the line of Philip Alling with Bear Stearns. Go ahead.

Philip Alling - Bear Stearns

Thanks very much. With respect to the commercial 3D growth that you reported this quarter, stronger for Revit and Civil 3D than what we see for Inventor. So is there something competitively within the manufacturing vertical or I guess increased penetration there that might give some additional color as to the relative strength of Revit and Civil versus what we're seeing in Inventor growth?

Carl Bass

So I would say a couple of things is, number one, generally, the stronger growth we're seeing in 3D overall and 2D Vertical as a result of the programs we put in place to direct our channel partners' attention to 3D and 2D it's a 3D and 2D Vertical. I think what you're seeing also is, some of the things we've talked about for along time is just the productivity, the efficiencies people are getting from 3D are just becoming clearer, and part of our acquisition strategy is to drive some of the uses of those 3D models and people are beginning to truly understand it. When it gets to manufacturing, we have always said we continue to outpace the growth of all of our competitors, some of which are growing at truly anemic rates. The most important thing to look atin the manufacturing market is the first thing is we're competing inthe most interesting, fastest-growing part of the market, which is what you might call the mainstream market.

There's this other part of the market, which people like to refer to as high-end. I refer to it as dead end. It's the big legacy systems that seem to be growing at 2%, 3% a quarter, after all kinds of favorable accounting instrument treatment to get them to 2% or 3%. Those are really parts of the market we wouldn't want to participate in. Sothe part of the market we're in is the most interesting part, and we're growing faster than anyone else in there, so but when you look, compared to the other verticals, manufacturing is the segment that is the most competitive for us.

Philip Alling - Bear Stearns

Okay. And just a quick follow-up for me, then, with respect to some of the cautious comments you made about growth outlook going forward and the 13% to 15% that you were talking about with respect to fiscal '09 top-line growth, that would appear to be moderating down some from prior comments about 15% long-term growth. Just want to make sure that we're not misinterpreting there is sort of guidance as a sort of moderation down in your long-term growth outlook. Thanks.

Carl Bass

No, we'd reiterate the 15% long-term growth rate. This year if you look atthe numbers for this year, it'll be at 17%. I think the comment you heard is we're being cautious. If anything, we're reflecting back more of what we're hearing from you than what we're seeing in our business, which is that there is some uncertainty inthe credit markets and there may be some spillover affect. So I'd say we'd still with a number of months to go in this quarter and 15 months to the end of next year, we're being cautious, but we still remain confident inthe long-term goal of 15% growth.

Al Castino

I also want to remind you a year ago we told you 13% to 15% too. We have five quarters to go, there's uncertainties with the economy; there's always going to be uncertainty for greater than five quarters away than there arein the middle of the year. So its perfectly in line with our long-term growth rate goal.

Philip Alling - Bear Stearns

Thanks very much.

Operator

Our next question comes from the line of Brendan Barnicle with Pacific Crest Securities. Go ahead.

Brendan Barnicle - Pacific Crest Securities

Thank you, guys, I was looking atthe do count, which was a nice update this quarter, and I looked atit relative to the revenue there and it looks like we have an ASP decline that goes on, and as I looked back at last year, it looks like the same thing happened last year, albeit so we'll have growth year over year, but as you progress through the year it looks like there's some seasonality maybe to that ASP. Can you give mean explanation as to what goes on there that might be accounting for some of that activity?

Carl Bass

So let me give you a couple of things that go on. So one of the important things is the mix of where it comes from. Soa seat of Inventor inIndia or theMiddle East costs less than it does in theUnited States, so one of the things that the investor is in just the blend based on the different economies. Second is things like promotions. We've had some promotions in which there've been cross-grades and other things, so some of the things you're seeing there are promotions that come, and those tend to be more seasonal. Often, we run the same plays the same time of the year, so I think you're probably seeing something there. I'd say if you looked, if you looked generally speaking, when you narrowed it down to an apples-for-apples comparison, ASPs are generally remaining constant, and we're forecasting and consistent with that.

If you look down, the revenue growth was 29%. There was 29% revenue growth, and there was a 13% seat growth. And one of the other things that I did mention this, but you'll have to look atthe mix of those 3D products. A good example is the difference between Inventor Series and Inventor Professional. Clearly, as we've gone through the last year, year and a half, the amount of Professional, the Professional has been a higher ratio. So number of factors that go in there in the average can sometimes be misleading, but year over year the ASPs are up.

Brendan Barnicle - Pacific Crest Securities

Great. That's very helpful. And then just on the acquisition announced today, any guidance on what contribution that adds to the revenue for next quarter or for next year?

Carl Bass

Very minimal contribution next quarter and even somewhat minimal for next year. It's not material for next year, given the combination of the size of the company and the deferred revenue write-down as a result of the accounting. It's not a very material number for next year, but it's taken into account inthe guidance that we gave you.

Brendan Barnicle - Pacific Crest Securities

Great. Thanks very much.

Operator

Our next question comes from the line of Sasa Zorovic, with Goldman Sachs. Go ahead.

Sasa Zorovic - Goldman Sachs

Thank you. So I want to stick with this 13% to 15% growth next year versus the longer-term or 15%. So basically what that makes us think, if 15% stays longer-term, then there ought to be then in acceleration thereafter. Is that not the case, or should we be maybe starting to think that the longer-term growth there ought to start coming down?

Al Castino

Sasa, as I mentioned a year ago, we also said 13% to 15% and got exactly the same question, and when we look at year back, when we look atit one year in advance, so we're five quarters in advance of the close I am sure, and the uncertainties are greater than they would besix months from now. So we do believe 15% compounded growth rate over the subsequent five years makes a lot of sense. For any individual here, we're going to have some range of variance, and we certainly take into account the uncertain economies. The other uncertain events can happen five quarters out. But this is consistent with how we've done guidance inthe past, and we think it's very consistent with a compounded growth rate of 15%.

Carl Bass

Yes, if you look at what Al said, last year we gave 13% to 15% guidance, and its 17%, and I think if you look back two years, we talked about 10% to 12% guidance and eventually posted 19% growth. I think it's really just due to the uncertainty of forecasting that far out. And certainly, as we sit here today, there's a variable like what's going on with currency and credit and a number of other things, and what we feel confident about is our business. Some of the more external factors, we're not comfortable doing a lot of prognostication around.

Sasa Zorovic - Goldman Sachs

So specifically when you talk about credit, where do you think sort of that are you seeing any related weakness to it, or you're just being cautious, but you're not seeing the weakness for the time being.

Carl Bass

I'm seeing it on the squawk box. You certainly look in the financial markets, and you can see. All you have to do is open the newspaper or listen on TV, and you can hear people talking about it. We haven't seen it impacting our business yet and so our caution is really what we're hearing more from the financial markets. And we've certainly seen itin some of the large enterprise IT vendors. You hear them talking about a potential slowdown. I think the thing to remember about our business, and we try to outline some of these factors.

There is a really technology shift going on in our business in this move to 3D that people are going to power through any slight variations inthe economy in order to get that level of productivity and be able to be competitive, and we've said that for years. So as long as the economy remains relatively healthy, we think people will continue to do that. Some of those other trends we talk about, things about energy, sustainability, the build out of infrastructure, what's going on inthe emerging economies, we think those are trends that are overcoming. Right now, if you ask me to look, the place I had the most nervousness about it is not because of our business; it's around theUS and financial markets. And it's really related to what went on inthe sub-prime lending market and the fallout from that. Absent that, we're seeing really no difference inthe business.

Sasa Zorovic - Goldman Sachs

Thank you.

Operator

Our next question comes from the line of Brian Essex with Morgan Stanley. Go ahead.

Brian Essex - Morgan Stanley

Hi, good afternoon. Just a few housekeeping items. I'm trying to geta sense for conversion to subscription; how penetrated is that, and I don't know if you can offer an estimate in terms of your addressable installed base, but how much do you believe is converted to the subscription, and maybe how much is left, and maybe perhaps therate that you think that you can run at?

Al Castino

Well, our investor factsheet shows you the number of subscribers we have today, still under 1.4 million subscribers. It still has along way to run. I don't know exactly for sure how many we can getlong term, but I do think a great majority of our customers will go to subscription. So I don't think we're atthe halfway mark, so we can still grow substantially.

Brian Essex - Morgan Stanley

Okay. And then you had quite healthy subscription bookings. I'm getting a little bit over 24%, 25% year-over-year growth in subscription bookings. How much would you assume that that is from new subscribers versus renewals?

Al Castino

So you're talking about the growth in the number of seats subscribed?

Brian Essex - Morgan Stanley

Not seat growth, but actual bookings.

Al Castino

Actual bookings.

Brian Essex - Morgan Stanley

Bookings through deferred revenue. I'm just trying to geta sense of how much of that is generated from attached versus new subscribers converted?

Al Castino

We don't separate that normally, but we said inthe past that it's a great majority of customers who buy a new seat or upgrade to (inaudible) attach subscription. So you can probably build your own model based on that.

Brian Essex - Morgan Stanley

Sure. Okay. And then any changes in contract duration or anything on that side that should skew maybe a calculation of deferred and contribution maintenance going forward in next year?

Al Castino

There's always some customers that do more than 12 months, and we sell those separately as long-term deferred revenue, but most customers are doing 12 months.

Brian Essex - Morgan Stanley

Okay, great. Thank you very much.

Operator

Our next question comes from the line of Ross MacMillan with Jefferies. Go ahead.

Ross MacMillan - Jefferies

Yeah, thank you. Al, one for you. Since the last quarter's guidance you've had quite a significant sequential shift in currency. So I'm just trying to understand; as you set guidance, what's your base line for going forward from a currency perspective, is itthe average of the last quarter; is that as of the close of the quarter? Is that as of the date? Can you help me understand that? Thanks.

Al Castino

We haven't changed what had we do with currency, other than that there's been a lot of volatility, and we've just come across about it. But we always leave a small buffer between current rates and what we use for our guidance, mainly because we don't want to wake up the next morning in a volatile market and already see that our guidance is off. So we always have some buffer. Ithas been very volatile recently, though. And so if I look at itin terms of standard deviations, I might well make the buffer the same number of standard deviations, but that can change the actual pennies. But our method has been pretty consistent with the past.

Ross MacMillan - Jefferies

So you do leave a buffer. That's helpful. And then one other quick one. On the architecture on building side, Carl, I wouldn't say been without competition, but the competition there has been relatively weak and probably has got progressively weaker as you've furthered your whole [VIM] strategy. As you look forward, are you concerned or are you thinking about the potential for maybe another player to enter that market more aggressively? How do you gauge that risk? Thanks.

Carl Bass

So one of the differences in the competition in just building and infrastructure market is due to the nature of the work itself; it's much more local. So our competition is actually quite strong; it's just quite local. So you don't see the same large-scale global companies competing against us, but we have quite strong competition all over the world in both infrastructure and building. I think there's always going to be new entrants into this market. I think there continue to be. I think the one thing I could say about the building market in general when you just think about, is ithas benefited less from information technology than some of the other markets. So when you look at it as a whole, you say, manufacturing and building on a worldwide basis are about the same in terms of total GDP. But if you were to just grossly estimate it, manufacturing, about 5% of the spending goes to IT. In building and construction, it's about 0.5%. So what I would say happening is there may be more entrants into the market. But the real trick is growing the pie for both us and everybody else in this market, because I think many of the efficiencies that industries like manufacturing have seen haven't yet visited the construction industry.

So I think there'll be other opportunities for more people to join and certainly our success and what others have done in driving the adoption of 3D will lead to more opportunities for more people to join in. But I think the most important thing for everybody is to drive the market, understand the benefits of information technology and growthe pie for everybody.

Ross MacMillan - Jefferies

That makes sense. Thank you.

Operator

Our next question comes from the line of Brad Manuilow with American Technology. Go ahead.

Brad Manuilow - American Technology

Thanks for taking my question. Just a quick question on upgrade revenue. Wondering how we should look atthe long-term growth rate, and what impact, if any, cross-grades will have on that. Thanks.

Al Castino

Well, our strategy has been for several years now to move customers to subscription. So we don't see upgrade revenue as an area that is going to grow. We really want our customers to move to subscription contracts.

Carl Bass

I think what --

Sue Pirri

All contracts are included.

Carl Bass

Yeah, I think what we've pointed out inthe past is maybe the best way to look at it, and certainly the way we view it is that if you take subscriptions and add it to upgrades and cross-grades, it's the best indication of what's happening inthe existing user base and viewed as a whole as a good way to look at what goes on there, as opposed to individual elements. But if you just project forward, we think standalone upgrades should continue to go down.

Brad Manuilow - American Technology

Is there anyway to get any granularity on how much cross-grades contribute to upgrade revenues?

Sue Pirri

Brad, we haven't broken that out separately. As the true upgrade part becomes less and less meaningful, that'll be something we will look at going forward.

Brad Manuilow - American Technology

But just so I make sure I understand this correctly, so if someone upgrades from a 2D product to a 3D product, does that revenue show up in upgrade revenue or in 3D revenue?

Sue Pirri

It's inthe line that's included on the factsheet as upgrade revenue. Upgrade is a different slice, it would also be in 3D revenue.

Brad Manuilow - American Technology

Okay. Alright. Thank you.

Operator

Our next question comes from the line of Brent Thill with Citi. Go ahead.

Brent Thill - Citi

Hey Carl. I'm just curious; Microsoft on their last earnings call mentioned that they had a pretty strong tailwind as it related to piracy, and it was about a 5% increase for Vista. I'm just curious if you're starting to see any better impact as it relates to some of the emerging markets related to piracy, if you're seeing a similar tailwind as well?

Carl Bass

I don't think we've seen. Remember, Microsoft introduced some new technology with Vista that enabled them to deter piracy more than they were able to before. So they're at a slightly different point. Where we are right now, we're not seeing anything noticeably different in terms of piracy. I would say though, speaking overall, there's a general improvement inthe enforcement of intellectual property in many of the emerging economies.

Brent Thill - Citi

And just a quick follow-up on the M&A strategy. You've been doing a lot of small tuck-ins and certainly like Maya was the last big one that you did. Should we expect a similar trajectory in some of these smaller deals, or how are you thinking about that going forward? Thanks.

Carl Bass

I think, Brent, what you'll see is really a continuation of the same. Lots of small technology tuck-in acquisitions really do compliment some of the trends that we think are important out there. It's really almost entirely to enhance our 3D strategy around design creation, around analysis and simulation and visualization. Almost all fall into that category of acquiring good, smart people who are passionate and knowledgeable and some technology. I think, what we've said all along is some of the other acquisitions, like the Alias one, just because of the business we're in, will be more opportunistic and certainly rarer.

Brent Thill - Citi

Thanks.

Operator

Our next question is a follow up from the line of Richard Davis with Needham. Go ahead.

Richard Davis - Needham

Hey, thanks very much. Quick question. With regard to simulation, I know everyone thinks that that'll bea big thing, and I would agree with that. Can you tell us, do you have a sense of roughly what percentage of your 3D customers are actually using simulation, either partners or some of the smaller little companies that you've acquired that have that feature functionality?

Carl Bass

I think big variation, Richard, across the spectrum. I think in manufacturing, where it's a much more developed science, many of our 3D customers, I can't quantify it precisely,  but more than half of our customers who do 3D manufacturing have been using things like finite element analysis, things like all kinds of simulation around the factory floor, much more common there. I think when you get into things like infrastructure, as well as building, much less. And if I just had to put a rough guess at it, probably less than 10% of the designs have significant use of analysis and simulation. There might bea little bit more when you get to specific disciplines, like structural engineering, which of course all use modern analysis techniques.

Richard Davis - Needham

Got it. Now, that's helpful. Thanks a lot.

Operator

(Operator Instructions) And our next question comes from the line of Gene Munster with Jefferies. Go ahead.

Gene Munster - Jefferies

Hey, good afternoon. Taking a step back and looking atthe international, I know we've had several questions around it. But clearly it's one of the dialing parts of your business. How aggressively are you guys trying to get bigger into the international markets in terms of hiring specifically? Thanks.

Carl Bass

So Gene, I think we've recognized this trend inthe emerging economies for a while. One of the reasons why we have such a diversified business today is we've invested in some of these places for along time. We've talked about being in China doing business for more than 10 years. And so I think two things, one is we're very aggressive in making sure we continue to increase our staff, that we continue to make sure that we have the right channel partners and that our channel partners grow there. And I think depending on the country, things like what goes on inthe education market, interaction with the government, are all important parts of an overall holistic strategy. But when you look atthe industries we're in, it would be crazy for us not to invest in emerging economies. All you have to do is get off the plane inChina, and you look, and you see the cranes, the building of infrastructure, the recognition that most manufactured products are increasingly [have] entirely or components coming from China. Add to that the emergence of affluent middle class with disposable income who partake in things like consumer products as well as media and entertainment. That's the same dynamic we're seeing all over the world as you getbig portions of the population moving to urban areas and becoming more affluent. So, it's a very important thing, and I think the results bear it out.

Gene Munster - Jefferies

We went on 51Job, which is the Monster of China, and so, 540 jobs on the site for ADT architects. And I don't know, I just would think it would be a great return on your investment if you guys just invested in more people on the grounds who are trying to stamp out some of that piracy. I know you've done some grassroots efforts inthe past; it just seems like that could bea much bigger opportunity than it's presently been.

Carl Bass

Yes, I think you're absolutely right. I think already there is greater opportunity. And I think what we're always trying to do is continue to make people who illegally use our software pay for the software, and there's certainly, as we talked about, probably 5 to 10 times as many people who use our software as pay for it. So we would very much like to see them pay for it. Atthe same times, we want to be appropriately considerate of our paying customers and not make using our products more difficult for the legitimate licensee. So, there's a little bit of a balancing act, but I do think it's a very important thing, and we're continuing to look at ways to do that. Some of them involve work with government organization, some with trade organizations, some comes from enlightened self interest in these countries, as well as there are some things that can be done technologically.

Gene Munster - Jefferies

Okay. Great. Thanks.

Operator

Ladies and gentlemen, that does conclude the time we have for questions today. I'd like to turn the call back over to management for any closing remarks. Please proceed.

Sue Pirri

Thank you, operator. We thank you all for joining us today, and if you have any questions, feel free to give investor relations a call, and we'll help walk you through any questions you have. Thanks.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may now disconnect. Have a wonderful day.

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