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Autodesk, Inc. (NASDAQ:ADSK)

F4Q08 Earnings Call

February 26, 2008 5:00 pm ET

Executives

Sue Pirri - Vice President of Finance & Investor Relations

Carl Bass - President, Chief Executive Officer & Director

Alfred J. Castino - Chief Financial Officer & Senior Vice President

Analysts

Philip Winslow – Credit Suisse

Jay Vleeschhouwer – Merrill Lynch

Heather Bellini – UBS

Andrew Matorin - Bear Stearns

A. Sasa Zorovic - Goldman Sachs

Steven M. Ashley - Robert W. Baird

Brent Thill – Citigroup

Brendan Barnicle – Pacific Crest Securities

Richard Davis – Needham & Company

Michael Huang – ThinkEquity Partners

Sterling Auty – JP Morgan

Brian Essex – Morgan Stanley

Greg Dunham – Deutsche Bank$

Ross MacMillian – Jefferies & Company

Brad Manuilow – American Technology Research

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2008 Autodesk, Incorporated earnings conference call. My name is Eric and I will be your coordinator for today. At this time all participants are in the listen only mode. We will be conducting a question and answer session towards the end of the conference. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call Ms. Sue Pirri, Vice President of Finance & Investor Relations

Sue Pirri

Good afternoon everyone. Thank you for joining us as we report results for our fourth 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/investors.

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 first and second quarters of fiscal year 2009 and the 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 opportunities and transfer our products in 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 10K for fiscal year 2007, our 10Q for the quarters ended April 30, 2007, July 31, 2007 and October 31 2007 and our periodic 8K filings including the 8K 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 date of the slide presentation. If this call is replayed or otherwise reviewed after that time and date of the slide presentation, even if it is 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 statements based on new information, future events or otherwise. In adherence to Regulation Fair Disclosure, Autodesk will provide quarterly information and forward-looking guidance in its quarterly financial results press release and this publically announced financial results conference call. We will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum.

During the call we will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Account Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measurers 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. In addition we will quote a number of percent increases as we discuss our financial performance. Unless otherwise noted each percentage represents the growth rate of the fourth quarter fiscal 2008 as compared to the fourth quarter fiscal 2007.

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 strong quarter of revenue results capping another record year for the company. Quarterly revenue was a record $599 million a 20% increase over last year. Diluted earnings per share were $0.40 on a GAAP basis and $0.52 non-GAAP. Our overall performance this quarter was strong however there were some individual metrics that did not meet our expectations and we will discuss those later in the call.

First let’s talk about our areas of strength. A key growth driver for the company over the past several quarters has been the increasing revenue generating in emerging economies. Quarterly revenue from emerging economies increased 25% sequentially at a robust 52% compared to the fourth quarter of last year. Revenue from emerging economies was 19% of total quarterly revenues, its highest percentage ever. In addition, our broader international geographies also posted solid performance. Combined revenue from Europe, Middle East Africa and Asia Pacific increased 33%. Even in constant currency, our business in these regions was quite strong. Importantly, we believe our growth in this international markets which represented 66% of our total revenue in the fourth quarter remains robust and sustainable.

Our solutions create competitive advantage for customers which is important in any economic environment. Our products enable improvements in design innovation and productivity. As a result customers are increasing their spending with Autodesk. A great illustration of this point is revenue from new commercial seats of our products grew 30% in the quarter. With this kind of performance it is clear that Autodesk is growing faster than the competition.

Another key driver for our business is the growth in the 3D design market. Our revenue from 3D solutions achieved record levels despite very difficult compares from strong LT gross grades in the fourth quarter of fiscal 2007. Revenue from our 3D products increased 21% to $146 million and was 24% of total quarterly revenue. During the quarter we shipped nearly 46,000 commercial seats of our 3D products Inventor, Revit, Civil 3D and NavisWorks. Although we are the leader in 3D we still believe there is a significant growth opportunity for Autodesk as 3D penetration of our customer base remains under 15%. While we have experienced very growth in the 3D market its important to recognize that our core base of 2D solutions continues to pose healthy double digit growth lead by outstanding results in AutoCAD LT. Strong growth in 2D creates future opportunity as well because our 2D solutions provide the easiest migration path to our 3D products and then to digital prototyping.

Now, let’s look at areas that did not meet our expectations. Our performance in the Americas did not match our robust international results. The Americas which grew 2% were impacted by a number of factors including increasing economic headwinds, difficult year-over-year economic comparison for upgrades and cross grades as well as execution issues. The programs that we put in place over the last 18 months are having the desired effect but there are areas where we need to improve performance. We are taking actions and as a result we are optimistic about improving our performance in the Americas over the course of fiscal 09.

Non-GAAP EPS came in at the low end of our guidance range due to increase product development and sales and marketing spending. GAAP EPS came in lower than our guidance range. On the product front we accelerated a number of product initiatives including both internal development and acquisitions. The internal development initiatives included broader interoperability, accelerated localization efforts and improvements in visualization, simulation and analysis. During the fourth quarter we completed three acquisitions. A provider of outsource product development as well as two companies with key pieces of technology and talent for our 3D offering in the AEC space. A more favorable job market and the availability of relevant companies at much more reasonable valuation makes this an opportune time to make these investments and distance ourselves from the competition.

Earnings were also impacted by significantly higher than planned commissions and commission accelerators driven by our strong performance for the year and by the relative mix by individual, territory and geography. These accelerated investments in product development and sales and marketing in Q4 will have a moderate impact in Q1 but will have no impact on the rest of the year.

Overall, I am 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.

Alfred J. Castino

Net revenues grew 20% to $599 million. Breaking it down license revenue increased 18% to $446 million and maintenance revenue from subscriptions increased 25% to $153 million. Combined upgrade revenue and maintenance revenue from subscriptions increased 1%. This is due to a decrease in total upgrade revenue of 36%. We have had continued success migrating customers to subscription all year as demonstrated by the significant growth in deferred revenue. We also had a difficult compare to the same period last year.

Our performance by geography was varied. Revenue in the Americas was $206 million an increase of 2%. EMEA revenue was $262 million an increase of 38% as reported and 27% cost in currency. Once again, our results in the EMEA emerging economies were particularly strong. Revenue in Asia Pacific as $131 million an increase of 24% as reported and 21% cost in currency. Japan had another quarter of strong performance led by healthy growth in AutoCAD LT, AutoCAD and Inventor. Looking at the divisions in our design solutions segment platform solutions in emerging businesses had a great quarter increasing revenue 19% to $263 million. AutoCAD posted strong revenue growth of 9% and AutoCAD LT had an outstanding growing 33%. In total our horizontal and 2D vertical products grew 14%.

Total revenue from our manufacturing solutions division increased 26% to $123 million once again, far exceeding the growth of the entire market. Revenue from new seats of Inventor series increased 50% driving 20% revenue growth for the entire Inventor family. We shipped more than 17,000 commercial seats of Inventor and more than 56,000 total seats for our many manufacturing products in the quarter. Against tough compares from Q4 last year, AEC Solutions revenue increased 22% to $137 million. Revenue from our Revit family of products increased 19%. We shipped approximately 21,000 commercial seats of Revit and NavisWorks. Civil 3D revenue grew 14% and we shipped more than 7,500 commercial seats.

Revenue from our media and entertainment segment was $71 million, an increase of 10%. However, the trends in our two M&E businesses were very different. Both 3Ds Max and Miya had outstanding quarters as 3D animation revenue increased 26%. Revenue from Advanced Systems declined 5%. The migration of our Advanced System solutions off of SGI hardware to mainstream systems continues to have a negative impact on revenues given that the new hardware is less expensive. On a positive note however, the change has substantially improved the Advanced Systems gross margins which is a better measure of the health of our systems business.

Moving to the rest of the income statement gross margins were 92% on both a GAAP and non-GAAP basis. The improvement of three percentage points GAAP and two percentage points non-GAAP was primarily due to the increased growth margins on Advanced System solutions which I just mentioned. In addition strong software license sales and productivity improvements in operations contributed to the increase. Operating expenses were $424 million GAAP and $392 million non-GAAP. Our operating margin was 21% GAAP and 27% non-GAAP. Our tax rate in the quarter was 26% both GAAP and non-GAAP. GAAP diluted earnings per share were $0.40. Non-GAAP diluted EPS was $0.52. At the end of the quarter there were 230 million total shares outstanding. Compared to the fourth quarter of last year the foreign currency impact was $25 million favorable in revenues and $9 million unfavorable on expenses. Compared to last quarter the foreign currency impact was $12 million favorable on revenues and $4 million unfavorable on expenses.

Turning to the balance sheet, cash and investments were $958 million. During the quarter we issued1.7 million shares from employee stock plans generating $27 million in cash. We used $100 million to buyback 2.1 million shares. Cash generated from operating activities increased 15% to $219 million. During the quarter we acquired three companies for $49 million net of cash Robobot, Hanna Strategies and Carmel Software. Total deferred revenues increased 19% for $82 million sequentially to $506 million. Deferred maintenance revenue from subscriptions increased $68 million sequentially and $111 million over the fourth quarter of last year as we successfully drove strong subscription results. Unshipped product orders or shippable backlog was down slightly sequentially to $15 million. Total backlog including deferred revenues and unshipped product orders was $522 million an increase of $126 million over last year. Channel inventory remains below three weeks. DSO was 59 days this quarter. Similar to prior years the strong fourth quarter and deferred maintenance revenue caused DSOs to increase. Excluding the increase in deferred maintenance revenues, DSOs were 52 days.

Looking back at fiscal 2008 we achieved the financial goals we set forth at the beginning of the year. Revenues increased 18% to $2.172 billion. Fiscal 2008 operating margins increased two percentage points to 21% GAAP and 27% non-GAAP. Full year diluted earnings per share increased 24% GAAP to $1.47 and 23% non-GAAP to $1.88. We are pleased with our overall financial results. As we look forward to fiscal 2009 we are mindful of the concerns about the health of the US and possibly the worldwide economies. While we have seen weakness in the Americas, our international business remains strong. We remain confident in our market position and optimistic about our opportunities for continued growth.

Now, let’s talk about guidance. For our fiscal first quarter we are reiterating our prior revenue forecast of $575 million to $585 million. As Carl mentioned the accelerated product investments we made in the fourth quarter will have a moderate impact on Q1 earnings but will have no impact on the remainder of the year. GAAP earnings per diluted share are now expected to be in the range of $0.35 and $0.37. Non-GAAP EPS is now expected to be between $0.46 and $0.48. Consistent with normal seasonal patterns for our fiscal second quarter we expect revenues to be about $590 million and EPS to be about $0.40 GAAP and $0.50 non-GAAP. For fiscal year 2009 we are reaffirming our expectations of net revenue in the range of $2.425 and $2.475 billion. Full year GAAP earnings per diluted share are now expected to be in the range of $1.75 and $1.85. Non-GAAP EPS is now expected to be in the range of $2.15 and $2.25 a growth rate at the midpoint of approximately 17% over fiscal 2008. We expect our GAAP and non-GAAP tax rates for all of fiscal 2009 to be 26%.

Now, I’ll turn it back to Carl.

Carl Bass

Our results for this quarter and fiscal 2008 demonstrates the strength and stability we enjoy as a result of our diversified business. For example, while we drove solid results in most of the develop countries our performance in the emerging economies was superb as we continue to capitalize on the growth trends driving those geographies. We do not believe that we are immune from the implements of macro economic conditions however, our geographic balance and our customer and industry diversification help insulate Autodesk from any one particular market trend.

One benefit of the current macro environment is that it creates a fantastic opportunity to distance ourselves from the competition by continuing to add exciting new technology and features to our product portfolio as well as growing strength in our channel. We are continuing our push to develop better interoperability amongst our products and further our lead in digital prototyping. In addition, as Al mentioned we’ve recently announced acquisitions which will expand our portfolio to include middle wear for gains and additional simulation and analysis software. We will also continue to invest in building the capacity and capability of our channel. We firmly believe that our long term opportunities are significant and we are committed to capitalizing on these opportunities.

With that, I’d like to turn it back over to the operator so we can take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Phil Winslow with Credit Suisse. Please proceed.

Philip Winslow – Credit Suisse

I just wanted to dig into the Americas a little bit. Was there one specific vertical i.e. construction where you saw most of the weakness? Then when you do look at your outlook for fiscal 09 what are your expectations for geographic growth? Are you expecting a slowdown in Europe which remains strong? Just sort of how we should think about that as well?

Carl Bass

I think what we saw is across the Americas, particularly in the United States it was slow. No real difference although construction was the slowest amongst the verticals in the Americas. Going forward we’re just not going to project by discipline for next year.

Operator

Your next question comes from the line of Jay Vleeschhouwer with Merrill Lynch. Please proceed.

Jay Vleeschhouwer – Merrill Lynch

Carl, I’d like to ask about the last comment you just made in your summary remarks with respect to investing in capacity and the capabilities of the channel. All of your peers in the group seem to be saying similar things, [Deso], SolidWorks, Parametric and so with all the peers counting far more teams on capacity as a driver to revenue and to a lesser extent productivity it seems, how much available capacity do you think there really is for you and how much of the fiscal 09 or fiscal 10 growth is dependent on your being able to add a requisite amount of capacity? That’s question number one.

Carl Bass

There were seven parts, if I counted correctly. The first thing I’d say, Jay, is as you know for most of the peer group when you particularly talk about the manufacturing vertical it’s a little bit applies and oranges. Most of them don’t have a channel business. While they aspire to have a channel business and talk about it every two years or every blue moon, they still don’t actually have a channel business. I think if you look at, let’s say Deso’s subsidiary they have a channel business but that’s a small part of their overall business. Because of that I don’t really see channel capacity as a zero sum gain. When we look to expand channel capacity, it’s really our existing resellers continuing to grow and while certainly this quarter we, as we do many quarters, we convert resellers from others. That is not the primary way to grow the capacity of the channel. It’s just the individual businesses as we’ve doubled over the last five years, their businesses have doubled as well and they’ve added that. When you look forward I would say, we’ve talked about this before, build in the capacity and capability to channel as an ongoing work just like you do with your own internal sales force and your own internal work force. But nothing we’re talking about in the forward-looking guidance is contingent upon the growth of the channel.

Jay Vleeschhouwer – Merrill Lynch

What were the execution issues you mentioned earlier in your prepared remarks in the context of Americas underperforming? You mentioned economy, tough comps and then you said something about execution issues. What was that?

Carl Bass

I think there are places where we certainly can perform better. Not in the general places where everyone would look, the resellers you’d be familiar with. I think there are opportunities for us in other places like Latin America and Canada, things we can do in the government sector. So those kind of places where I’d really look for stuff. And then always, as you noticed, there are things that we do around managing the channel and promotions and things like that, but nothing really extraordinary in that. And I’d really stick to more the peripheral ones where I think we can perform better.

Jay Vleeschhouwer – Merrill Lynch

Lastly, for the new year would you anticipate any changes, experiments, new programs, etcetera with respect to product packaging and/or pricing, for example, to the extent you can implement inter-operability better as you demonstrated at the conference in November? Does that imply this year or to next, new conjoined products, new packages, new pricing than we’ve seen before?

Carl Bass

Two things, one is we continually look at pricing and there’s always some impact from pricing that we have but it’s moderate and I wouldn’t expect us to do anything distinctly different in terms of pricing. As I’ve spoken about before, I think the potential for having better inter-operability opens a lot for us in terms of the way we package and bring products to market. I think some pure companies, not necessarily our competitors have done a really nice job of bundling products together and I think it’s an interest opportunity that we’re considering to look at. At this point we haven’t announced anything, but I think it really does depend on making sure the products work well together and so that the experience for the customer is from both a licensing and deployment standpoint as well as a work flow standpoint really makes sense.

Operator

Your next question comes from the line of Heather Bellini with UBS. Please proceed.

Heather Bellini – UBS

Carl, I waseathH just wondering if you could give us a little more clarity on, I know you mentioned investing and product development initiatives for R&D, but the big jump in sales and marketing, you had the same type of year-over-year growth in total revenue last year yet your marketing expenses didn’t go up nearly by this much. I guess I’m wondering how much of the acquisitions that you bought did those impact the sales and marketing budget and how much of that – what would be another reason? Because it just seems like – perhaps you had more clarity of this earlier in the quarter.

Carl Bass

I understand Heather. First of all the acquisitions, negligible impact in terms of sales and marketing line. Most of the M&As you know is mostly those small deals that tend to be technology deals and if it hits anywhere in it’s the R&D line.

Heather Bellini – UBS

Could they have added much to revenue, by the way?

Carl Bass

No, none of the deal – we usually talk about the revenue if it’s significant. Most of the ones the last couple quarters have been small. The place where you would have seen it is probably from our sales commissions and the reason for the sales commissions being higher than we would have planned for or that you might have anticipated is just because the mix was so skewed. There were places where people really got into their accelerators and so that obviously has a compounded effect, where the places where people underperformed it kind of goes down linearly.

Alfred J. Castino

By the way our accounting policy is we book these sell areas when they’re actually earned, we don’t try to estimate them during the year. So basically they all go into the fourth quarter and what can happen is, based on the mix of countries and people then, you can get some pretty big swings in what the accelerators turn our to be. That’s what happened in the fourth quarter.

Heather Bellini – UBS

Because the same thing would have been applied last year, right?

Alfred J. Castino

Well we always book the accelerators in the fourth quarter, but if the mix is not skewed to certain countries or certain individuals having big accelerators we may not have as much accelerator expense to book in relation to revenues as we did this past quarter.

Carl Bass

If you look back to last year, Heather, you’d see a much more balanced growth across all the geos and even at the sub-geo level you would have seen a much more balanced growth. This time it was more skewed and so we hit the accelerators in more places.

Heather Bellini – UBS

Well then can you, given that you’re keeping your revenue guidance the same for the year, it obviously sounds like you still have investments in R&D that you’re making, but what was the reason then for the reduction in earnings by the magnitude that it was in terms of guidance?

Alfred J. Castino

The reduction in earnings for guidance is actually, I think, modest. It’s down about $0.05 for the year and that’s basically all in the first quarter. Basically what that is, is we accelerated some investments in the product terrain that we planned to do later in the year so we just did them earlier and that’s the reason it’s hitting us in the first quarter. But second quarter onwards it has no impact. So that entire change is from the first quarter.

Carl Bass

And if you look at the first quarter you see we did some internal product investments. We did see a number of companies come available for M&A that we took advantage. We think these are really attractive prices and I think particularly with an uncertain economic environment certain places we want to make sure we continue to invest in the channel.

Alfred J. Castino

The other thing to be focused on is our margin numbers. Our margin goals for the second quarter onwards haven’t changed, they’re the same. Again the entire change in earnings is just for the first quarter.

Operator

Your next question comes from the line of Andrew Matorin with Bear Stearns. Please proceed.

Andrew Matorin - Bear Stearns

If you could perhaps provide a little more insight onto this expense issue that Heather brought up. You say that you’re bringing some investments forward into Q1 that perhaps would have been spread out further along into the year, if that’s the case, if you’re just bringing forward expenses, I’m not sure I follow on why your full year EPS guidance is reduced.

Carl Bass

Well, because for example if they were only going to be on – let’s say it’s hiring of people and they were only going to be on our books for three quarters they’re now on it for four quarters.

Andrew Matorin - Bear Stearns

So it’s increased hiring?

Carl Bass

Yeah it’s hiring. Some of it’s a result of M&A, some of it’s organic hiring and some of it’s deciding to make some investments in the channel earlier in the year.

Andrew Matorin - Bear Stearns

With respect to the commercial 3D seat numbers, clearly those numbers, the growth year-over-year is actually down for the first time on all three products, core products. Could you talk a little bit more about what’s driving demand there and if you’ve seen any shifts in that migration path through 3D and how that’s –

Carl Bass

I think if you do the algebra on it you’ll figure out that it’s all in the Americas and if the Americas were at anticipated levels they’d actually be higher. It’s just pretty simple math in that most of the products would have grown considerably faster if the Americas had performed at expected levels.

Andrew Matorin - Bear Stearns

And the fact that the Americas is slow apparently so dramatically since your last concept, does it give you pause for your guidance for 09?

Carl Bass

No, I think one thing you’ve got to look at in the quarter in which the Americas slowed considerably, we still have $599 million of revenue the highest in 25 years. It still shows a good growth rate. I think in some ways if you just reflect on it, it speaks to the thing that we’ve talked about a number of times which is the diversity of our business. While we always insist that we’re not immune from macro economics and we’re no keener students than you are of macro economics at the end of the day being in multiple business lines spread out geographically benefits and a downturn in one particular market doesn’t have as big an impact on us as it might otherwise have.

Operator

Your next question comes from the line of Sasa Zorovic with Goldman Sachs. Please proceed.

A. Sasa Zorovic - Goldman Sachs

So continuing this year, the question that begs to be asked and I guess even a clarification on an earlier question asked, is so if there was a slow down in the Americas what have you then anticipated then happens, what underlies this number that you have now reiterated in terms of what happens in Europe and then in Asia?

Carl Bass

While I think the premise of your question is a slow down I think what you have to combine it with is it was obviously an unanticipated acceleration in Europe and Asia Pacific. Otherwise we wouldn’t have come in so far above our guidance in revenue. So obviously EMEA is performing beyond our expectations and Asia Pacific is as we try to ponder all the things that we know about our particular business as well as what we see in the world economy. We’re very comfortable with reiterating our guidance for the year.

A. Sasa Zorovic - Goldman Sachs

So then does it mean that if this had been the case in the fourth quarter your anticipation is that this trend continues in the respective three geographies as it’s been in essence in the fourth quarter?

Carl Bass

What I would say without getting into detail about projecting revenues by geography by quarter is that we are not expecting a dramatic up turn in the next quarter in the Americas and we think there’s a balance in our business that will accommodate us meeting both our revenue and our EPS targets.

Operator

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

Steven M. Ashley - Robert W. Baird

My first question is just on the general level of profitability, maybe if we just looked at the EBIT line, if we look at the United States versus maybe Europe and outside the United States. Are they just qualitatively, is the profitability level there about the same or does the US carry a little bit higher margin due to scale?

Alfred J. Castino

We don’t talk much about profitability by geo. I’ll tell you though it looks pretty similar across the globe. We’re very profitable in all of our sales operations. If I look it at it on some kind of legal basis, of course, we have R&D people in different spots, so it’s not a real meaningful number to be showing people.

Steven M. Ashley - Robert W. Baird

And just maybe a follow up on the simulation you talked about as part of the accelerated R&D spent, can we get a little more color maybe on what you’re doing there, could we see a stand alone product or are you going to bake more maybe feature functionality into Inventor Pro or anything you might be able to tell us there.

Carl Bass

I think what you’ll see in a number of our product lines, one of the things that we try to do that I think is different than our competitors is we try to package our offerings in a very simple way, in a digestible way for customers and what I think you’ve seen over the last year or two is more simulation and more analysis in both the Inventor product and it will continue as well as I think you’ll see more simulation and analysis, you’ve seen it in Revit Civil 3D. So all of our 3D products are really the foundation for this next level of visualization simulation and analysis and I think while we reserve judgment on each product offering, a more likely thing for us is to bundle these things in ways that simply the packaging for both our customers as well as for our channel to sell them.

Operator

Your next question comes from the line of Brent Thill with Citi. Please proceed.

Brent Thill – Citigroup

Carl, can you just elaborate on the US weakness, did you feel that throughout the quarter or was it more pronounced as you got later in the quarter?

Carl Bass

I think there were signs of it all throughout the quarter. It’s never quite clear until the very end. I think it becomes crystal clear at the end. I think we saw it throughout, got clearer as we got to the end and I don’t want to make any excuses about deals moving and all the usual mumbo jumbo. I think we recognize the weakness, it is hard within the course of a quarter to change a lot and effect the outcome too much just because of the nature of the business and that built in delay but I think we recognize it and I think what we’re able to do is drive revenue in the other geographies.

Brent Thill – Citigroup

Just as it relates to Europe, the European growth rate was better than many quarters historically in 2007 I think you grew in the low 20’s in Europe and you put up a 38% year-over-year number, was there something special that happened in Europe that caused that big a growth?

Carl Bass

I think overall our business in Germany is doing well and one of the things that we’ve talked about is in order for these businesses to over perform, whether we’re talking about it relative to our guidance for a quarter or for the year, when all of the parts are working well, we over perform and we certainly don’t give guidance assuming everything is working perfectly. Europe happened to have one of those quarters in which all the pieces were really working well. I think the accelerator to that is the emerging economies which people tend to forget about in Europe actually played a big part as well. And so I think the combination of all the developed countries just operating at or above expected levels plus the kicker that we really got from the emerging economies did well, drove the really high performance.

Alfred J. Castino

There’s one thing that stands out, there was a currency benefit so that 38% is 27% cost and currency but that’s still fabulous and all I’ll tell you is that we feel really good about the European business at this point in the quarter and the year. We don’t see it as a one shot thing, it’s a strong business.

Operator

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

Brendan Barnicle – Pacific Crest Securities

Carl, when I was at [inaudible] University talking to customers, some of the ones that have big businesses like construction firms, engineering firms here in the US, you’re talking about a lot of the work they were doing in emerging markets and having a lot of their new seats come on there. Do you guys have any sense of what portion of that emerging market derivative of North America or European business, you know I’m asking to see if that’s maybe an area that we need to watch to see sort of an after affect of this slow down you see in North America.

Carl Bass

The first thing is, it is really hard to get at that data and we really don’t have any great insight into it. One thing I could say to you qualitatively, after the down turn in 2001 many of the US based architecture, engineering, construction firms made a concerted effort to diversify their businesses. Secondarily the world markets have reached a place where you look at building in the Middle East or in China they want international firms to be working on those projects. So the dynamic that set that up is there. To track it down it’s not very easy and guessing whether it’s a leading or lagging indicator is even harder.

Brendan Barnicle – Pacific Crest Securities

And then with the execution issues that you face, were there any structural reorg changes that went in place in terms of personnel or organizationally?

Carl Bass

No, major changes.

Operator

Your next question comes from the line of Richard Davis with Needham & Company. Please proceed.

Richard Davis – Needham & Company

With regard to acquisitions, I know most of the ones you’ve been making have been more technology oriented. Do you have a kind of upside limit in terms of how large you would go or does it just kind of depend on the situation? In other words would you consider making larger acquisitions? Because as you know the ones you’ve been doing have been fairly small?

Carl Bass

Generally speaking what we’re interested in is the smaller technology acquisitions and those are small price points. You know all the characteristics of the small tuck in ones. We look at the other ones but really the universe of possibilities is really small and you could sit there and on less than the fingers of one or two hands figure out all the ones there. There are a number of them that are not possible for all kinds of reasons that you can imagine to. We don’t spend a lot of time contemplating these large ones and what I would say is less so than the limit on the amount we would have to pay for it, it would much more be a strategic thing about how healthy is the business? Can we run it and blend it with our business? Do the financials make sense? Rather than an absolute dollar limit, I think people need to recognize in this business the number of large M&A possibilities. It’s a very small universe.

Alfred J. Castino

When we talk about it being a great point in time to do M&A basically what we’re looking at is you look at private company space. All of that credit that was feeding through private equity firms is really dried up and it’s just a much less competitive situation for getting some really useful companies some really good people at a good price. So that’s a big opportunity right now.

Operator

Your next question comes from the line of Michael Huang with ThinkEquity. Please proceed.

Michael Huang – ThinkEquity Partners

A couple of questions, first can your platform division execute a very strong quarter, does this reflect any decisions by any customers to slow their spending on more expensive vertical products and what percentage of this platform division comes from emerging regions and were there any special onetime promotions that drove this performance?

Carl Bass

Okay so working backwards, no real special promotions and we don’t really give the breakdown of platform by geography. I think the hypothesis is an interesting one. We haven’t really seen that. I think there may be a small aspect in which if it’s really tough economic times people may just choose to upgrade or keep their subscription and not look for a change. But we haven’t seen any broad evidence of that at all and it’s not really consistent with that big new seat growth and the large 3D growth. So there’s a little bit of conflicting data just when you look over this three month period. But I don’t see anything that’s a trend or anything that makes me nervous about this, looking forward.

Michael Huang – ThinkEquity Partners

When you look at this year’s product release what are the most notable new products or features that we should be paying attention to and which one is the most likely to drive upside if you actually had to bet on one?

Carl Bass

I think there’s a handful of products, they would all be in the 3D space. Inventor and Revit are clearly the leaders and those are the ones that continue to outperform expectations. Inventor and Revit are there. I think there’s a lot more being done with MIA and MAX which have also performed well. We don’t combine it in our official 3D revenue but they’re clearly 3D products and with the growth of media and entertainment in markets around the world they’re performing well. I would look at that and then as I already mentioned, I think it was in Jay’s question, I’d look at some of the new bundling things that we might do that could also drive additional growth.

Operator

Your next question comes from the line of Sterling Auty with JP Morgan. Please proceed.

Sterling Auty – JP Morgan

Al, can you quantify for us out of the accelerated investment in the first quarter how much towards the R&D side versus the sales and marketing, meaning since you had the big commissions in the fourth quarter should we see a fall off in the sales and marketing spent in the first quarter?

Alfred J. Castino

I don’t want to do forecasts at line item level. I will tell you though that Q4 has a bigger impact from commissions than we see in Q1 but that’s when we booked the accelerators again so you’ll see less impact on the sales and marketing arena on the first quarter than you saw on the fourth quarter but that’s as detailed as I want to get about that.

Sterling Auty – JP Morgan

Can you just describe, Carl the rationale behind it both on the R&D and the sales and marketing? So, you mentioned accelerating in terms of the R&D side but what do you think that’s going to give you for the year? What’s the strategy behind getting the interoperability a little quicker? And, on sales and marketing is that spend going to be targeted towards some of the execution issues here in North America?

Carl Bass

A couple of things, the interoperability allows us to do product bundling. It allows us to make products available in markets in which they previously haven’t been sold. So, that’s what we do there. Some of the M&A opportunities are really just opportunistic, they come along just as you guys are pondering the worldwide economics so are venture capital firms and investors in these small companies so they’re looking for exit opportunities so when something comes along we do that. I think the other thing is, just generally speaking, we’re seeing some of our competitors perform badly. There are people available for hire, there are people available to help staff up our channel partners and so when we see good people come on the market we want to bring them into our universe and so we’ve been doing that. Really, the rational is if you prioritize it clearly the marketing will have the first affect, more spend on marketing has the most dramatic affect short term, sales comes next and R&D is later. So, the R&D stuff you often don’t think of it even having an effect in the same year whereas much of the sales and marketing really can.

Sterling Auty – JP Morgan

So, is one way to look at it in light of the questionable economy especially in North America that you want to accelerate some of the sales and marketing to prop up demand?

Carl Bass

Sure. But, I think it’s equally true where we see emerging economies growing quickly where you can hardly ever keep up with that rate of growth in terms of the number of people there, the number of channel partners, the geographic reach. Those are places where we want to expand too and we’re doing both. I wouldn’t look at the additional sales and marketing spend as purely being a response to America’s economy.

Operator

Your next question comes from the line of Brian Essex with Morgan Stanley. Please proceed.

Brian Essex – Morgan Stanley

I was just wondering if I could revisit the sales and marketing issue just one more time maybe a different way. If I look at the kind of rate as a percentage of revenue over the first nine months of the year I get to about a $14 million overage over what we would have expected given the current period sales level. I guess can you offer any color maybe into one, is that kind of the right math to look at for the acceleration? Two, can you offer any color into maybe the portion of that that was due to accelerators versus maybe some challenge incentives to help US along?

Alfred J. Castino

I don’t want to fine tune the sales and marketing allowance but I’ll tell you the accelerators are a big chunk of that because again, keep in mind they are all booked in the fourth quarter for the year. Almost nobody hit an accelerator in the third part, we book them as they’re earned so that’s how that thing came out. We didn’t have any special programs or anything like that going on in the fourth quarter if that’s what you mean. It was business as usual, the normal programs we announced were there but nothing special.

Carl Bass

One of the things whether you look at the ASPs or special deals, I mean one of the things we are absolutely not willing to do is make special end of quarter deals which result in lower prices and you know all the rest that follows through that. And so this was normal run rate business as expected, nothing special about it.

Brian Essex – Morgan Stanley

So all indications are so far through the quarter that you wouldn’t expect the same type of environment to continue into Q1?

Alfred J. Castino

I‘m not sure what you mean by the same type of environment?

Brian Essex – Morgan Stanley

Well I guess where you hit the accelerators to that degree?

Alfred J. Castino

No, no keep in mind, let me explain again how accelerators work. So people have annual plans, they have commission plans that are annual plans and at some point late in the year they get to a level where they earns these accelerators because they hit an annual mile stone that puts them in a higher commission rate. No one is going to get there in the first quarter, we’re not a big deal oriented kind of a company. So almost everybody that’s going to get an accelerator will earn it in the fourth quarter, there’s virtually nothing in Q1, nothing in Q2 almost nothing in Q3, it’s all in Q4.

Brian Essex – Morgan Stanley

And then on the acquisition front you know Carl, I think you noted the contribution wasn’t meaningful to revenue. With respect to guidance in 2009 is there a threshold that you would use for that kind of reasonable comment?

Carl Bass

No but I would say first of all the guidance we’re giving at this point doesn’t anticipate any acquisitions. So we’re not sitting here knowing about any acquisitions or planning on any meaningful amount. You know we use the usual standards for disclosure when we acquire a company but truthfully many of the acquisitions we do are really single digit, low single digit in revenue. Some have been smaller than that; single digit millions. So they’re really relatively small and many of them are not even acquired for the revenue.

Brian Essex – Morgan Stanley

I guess I’m just looking for maybe an organic contribution versus you know contributions from acquisitions you’ve made over the pats I guess two and a half three months?

Alfred J. Castino

We did that when we bought Alias two years ago but it was significant enough to be worth doing. The stuff we have been buying is lost in the rounding so if we tried that it wouldn’t even move the needle. So if we did decide to do one that moved the needle we would split it for you and tell you organic and non-organic. Again we did it three years ago with Alias.

Carl Bass

And again I would say none of the forecast is predicated on any M&A activity.

Operator

Question comes from line of Greg Dunham with Deutsche Bank. Please proceed.

Greg Dunham – Deutsche Bank$

One more commission one but forward looking basis here. Now, given that the accelerators were hit in the international region this year, were you guys more aggressive in adjusting your comp plans going forward in those international regions? And are there any risks associated with that potentially?

Carl Bass

No I mean we certainly revisit the commission plans every year and we have. And you know when you look at some of the issues around execution it’s about better forecasting and you know better planning around commissions.

Alfred J. Castino

We certainly don’t want to set up our commission plans such that we react to people who earn good money and we don’t want to them to do it again, e want them to make these number that we set them up to motivate behavior achievement that we want and when they get there that’s good news. So were not interested in trying to pull a rug out from under people so they can’t earn a good accelerator. We want them to make those numbers.

Greg Dunham – Deutsche Bank

Okay so no major changes this year going forward?

Alfred J. Castino

No.

Operator

Next question comes from the line of Ross MacMillan with Jefferies. Please proceed.

Ross MacMillian – Jefferies & Company

Just one more on that sales and marketing thing if I can, just want to be clear so if $1.00 of business is sold in EMEA or if a $1.00 business sold in Asia Pac, is it effectively I mean if you take the total blended rate on sales and marketing is it the same cost of sale? Or if we see more growth out of those territories are we going to see sales and marketing higher those costs higher within the mix?

Carl Bass

What I would say is our model doesn’t figure $1.00 from those geographies differently and I would suggest the same to you. You know it’s lost in the rounding the difference in the cost of sales across geographies.

Ross MacMillian – Jefferies & Company

That’s absolutely fair. And this one on Revit, so it’s been a big unit driver over the last 18 months compared to all your other 3D products. It’s now been flat for three quarters and obviously it is exposed to building and architecture. You know have we got to a point now that that kind of run rate 21,000 seats a quarter is going to be tough to break out of for? Or, do you not really view it like that and think that it’s all about capacity in the cannel and that could easily grow off that 21k a quarter type run rate on units?

Carl Bass

So I think there’s capacity in the channel which you pointed out correctly. I think there’s broader geographic distribution that could happen. I think if you see an improved economy in the Americas. All of those things would drive it. You know as well as when we look at Revit there’s a lot of product capability that has expanded. You know we generally talk about Revit as the entire family but there’s things around specific disciplines like structural engineering or mechanical engineering within the building and we’ve continued to build that out. So those are parts of the business that could grow faster that are in an earlier stage of adoption. And you know then I think there’s the question that gets asked all the time is there a way to accelerate 3D adoption in general and you know and I think there are times at which you hit those dipping points at which there is an acceleration. We’ve just not been willing to venture when that is.

Alfred J. Castino

By the way, I think the revenue growth is probably the more important metric anyway. Revit was not flat, it grew 19% last quarter with a weak Americas. Revit had a really strong international quarter so it’s not flat.

Operator

Your next question comes from the line of Brad Manuilow with American Technology Research. Please proceed.

Brad Manuilow – American Technology Research

Just two quick ones, when you exclude the FX impact from Canada and Latin America, I’m just wondering if the US was actually down on a year-over-year basis?

Alfred J. Castino

No. The answer is no. A very small FX impact. In Latin America we almost sell everything dollars and the Canada impact was tiny.

Brad Manuilow – American Technology Research

Then second, how much do you guys have left on your buyback authorizations right now?

Sue

The board just increased the authorization in December Brad.

Alfred J. Castino

Yeah. I think it’s on the order of 20 million shares. It’s large and our goal continues to be that we offset the employee stock program dilution. We have plenty of shares to do that over the coming year.

Operator

This concludes our G&A session. I would now like to turn over the call for closing remarks.

Sue

Before we conclude the call I’d like to remind all of you that [Dave Generali] recently joined our investor relations team from Symantec. We are pleased to have Dave on the team. He’s here with us today. Dave and [Katy Blanchard] and I will be available to any questions you may have later. And that concludes the call operator.

Operator

Thank you for your participation in today’s conference. This concludes our presentation you may now disconnect. Have a good day.

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