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Autodesk (NASDAQ:ADSK)

Q2 2013 Earnings Call

August 23, 2012 5:00 pm ET

Executives

David Gennarelli

Carl Bass - Chief Executive Officer, President and Director

Mark Hawkins - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Kenneth Wong

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Brent Thill - UBS Investment Bank, Research Division

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Richard H. Davis - Canaccord Genuity, Research Division

Perry Huang - Goldman Sachs Group Inc., Research Division

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Sitikantha Panigrahi - Crédit Suisse AG, Research Division

Daniel T. Cummins - ThinkEquity LLC, Research Division

Steve Koenig

Ross MacMillan - Jefferies & Company, Inc., Research Division

Melissa Gorham - Morgan Stanley, Research Division

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

Blair Abernethy - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good afternoon. My name is Hope, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Fiscal Year 2013 Autodesk Earnings Conference Call. [Operator Instructions] Thank you. Mr. Gennarelli, you may begin your conference.

David Gennarelli

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our second quarter of fiscal 2013. Joining me today are Carl Bass, our Chief Executive Officer; and Mark Hawkins, our Chief Financial Officer.

Today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com/investor. As noted in our press release we have published our prepared remarks in our website in advance of this call. Those remarks are intended to serve in place of extended formal comments, and we will not repeat them on this call.

During the course of this conference call, we will make forward-looking statements regarding future events and future performance of the company, such as our guidance for the third quarter and full year fiscal 2013, long-term financial model guidance, the factors we use to estimate our guidance, new products and suite releases and expected growth rates, expected cost savings from our restructuring and other cost management efforts, hiring plans, business execution, certain future strategic transactions, business prospects and financial results, our market opportunities and strategies, including our transition to cloud and mobile computing, trends in sales initiatives for our products and trends in various geographies and industries.

We caution you that such statements reflect our best judgment based on factors currently known to us, and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, specifically our form 10-K for the fiscal year 2012, our form 10-Q for the period ending April 30, 2012, and our periodic form 8-K filings, including the form 8-K filed with today's press release and prepared remarks. Those documents contain and identify important risks and other factors that may cause actual results to differ from those contained in our forward-looking statements.

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

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

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

Carl Bass

Thanks, Dave. And good afternoon, everyone. Our second quarter results reflect execution issues stemming from our organizational realignment earlier this year, as well as continued unevenness in the economic environment. There are a few bright spots, but the reality is we missed our revenue targets on most fronts. Recall that last quarter, I spoke to you about a reorganization of our go-to-market activities. We organized our sales teams by industry to better serve our customers and drive future growth. We also made some adjustments to our channel programs, drawing on best practices from our various geographies. We can point to a mixed global economy for part of the explanation. But we did not execute as well as we would've liked on a number of fronts. It's clear that our reorganization and having people in different positions slowed us down in the quarter. With many employees taking on new roles, new customers, new managers and teams, the amount and level of change has been significant. And while the reorganization changes are important for the future, some degree of confusion and slower decision-making resulted, which affected the organization overall and our revenue results in particular.

As we track the progress of the quarter, the shortfall in revenue did not emerge until July, as our demand generation activities did not produce the anticipated effect. The organizational realignment, combined with an uneven economic environment, limited our ability to both identify the shortfall earlier and respond more quickly.

From a geographic perspective, the weakness we experienced in Southern Europe was not surprising. However, weakness in Central Europe was unforeseen. Although there was growth in the U.S., revenue growth in the Americas was well below what we've been experiencing over the past several quarters, due in large part to our results in Latin America. On the bright side, the Asia Pacific performed much better than the 2 other geographies. And in fact, the APAC had record revenues due to strong growth in Japan and China.

Similar to last year, results from BRIC countries were mixed as growth in China and Russia was partially offset by weakness in Brazil and India. From a divisional perspective, PSEB performed the best, driven by 12% growth of combined AutoCAD and AutoCAD LT revenues. I'm calling this is out because our AutoCAD business was hit the hardest during the big downturn a few years ago. So we're pleased to see the relative strength in this area.

I was also pleased to see early positive signs from several of our cloud initiatives. For example PLM 360 had a nice start in its first full quarter of availability. We signed a number of PLM deals with companies ranging from small business to well-known large enterprises, and our professional mobile apps continued to experience strong adoption during the quarter. For example, AutoCAD WS, which allows people to view and edit AutoCAD files via web browser or an iOS or Android device, has now been downloaded more than 9 million times.

From a higher level perspective, revenue from our direct sales business had good growth for the quarter, buoyed by activity from large deals in the U.S. Revenue growth was much lower in our indirect channel, which makes up about 85% of our revenue mix.

Now let me focus on our expenses. With the backdrop of an uneven macroeconomic environment and our focus on delivering on our operating margin improvement goals, Autodesk has been taking a prudent approach to spending for the fiscal year. These on-going cost management measures contributed to the delivery of non-GAAP EPS within our company's guidance range for the second quarter. In light of our second quarter performance and a reduced revenue outlook for the year, we are further reducing our spend by implementing cost-cutting measures in the second half of this fiscal year, such as restricting non-sales related travel and reducing our number of contractors.

The other news we announced today was the restructuring as we are accelerating our transition to cloud and mobile computing. This kind of action, especially one that impacts many of our employees, is always a difficult decision. The basis behind the restructuring is twofold. First and foremost, the restructuring centers on getting the right employee skills that will help make us successful and allow us to move faster in our transition to increase cloud and mobile computing. This action allows us to continue investing, recruiting and hiring people who can bring to Autodesk the skills and experience that are critical for achieving our mid- and long-term goals. As part of the ongoing platform shift, it's clear to us that design and engineering software will move to cloud and mobile platforms. Cloud and mobile has been a major investment area for Autodesk over the past couple of years, and this restructuring will accelerate our progress as we intend to further invest in employees with expertise and skill sets essential to this transition. Additional industry restructuring helps us reduce costs and streamline the organization as a continuation of the activities we began earlier this year.

On a combined basis, restructuring and cost savings initiatives, partially offset by planned investments, will result in a pretax spend in the second half of fiscal 2003 -- '13, ranging between a 2% decrease and a 2% increase compared to the second half of fiscal 2012.

As we look at our forecast for this fiscal year, we are adjusting our targets. We have lowered our revenue targets as we're working through these challenges as quickly as possible. People are now settling into their new roles and we have identified and addressed a number of areas for improvements to help us regain our momentum and improve our results. The restructuring and ongoing cost reductions allow us to both invest in our transition and maintain a healthy year-over-year operating margin expansion target of approximately 150 basis points.

Looking at the rest of this year and beyond, although the economic environment is tougher, our market opportunity and prospects remain strong and we remain committed to achieving our long-term growth targets by the end of fiscal 2015.

I'm sure you have many questions. So without further delay, let's open the call up. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Sterling Auty, JPMorgan.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

I guess my first question and then the follow-up. But the first question is, how can you just call it the big issue of the macro was just sales productivity from people being [indiscernible] with new responsibilities versus other things such as competitive or some other factor?

Carl Bass

I mean I guess, Sterling, I think there’re really 2 things that we're trying to parse is what was due to our own execution issues, sales realignment and all the rest, versus macroeconomic. I look at the competitive and I don't think that, that played almost any factor in this. Like I said, you look at the first quarter, you look at the first 2 months, we were on target. If you look at the shortfall, it really happened in 3 geographic areas, the vast majority of it comes in 3 areas that I don't think are particularly sensitive to competitive stuff. So I think the real tricky question is trying to ascertain how much is due to faults of our own making versus what's going on in the global economy.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Okay. And then the follow-up, I guess, would almost be in 2 parts. One, is there any trend as you move through August that gave you sense that productivity-wise things are getting more -- people are getting more comfortable? And the transition or the realignment restructuring you're announcing today, what does that entail? Is that also people moving into new jobs or is it just simply a headcount reduction?

Carl Bass

So for August and what we've seen, and we're relatively late in August relative to other years, we're on track for the guidance that we gave you obviously. And so really nothing about that. What I see is we have 3.5 more weeks under our belt in terms of people moving into their new positions, ironing out some of this. As we said, we’ve really had 7.5 weeks or something like that. July when we start to see the weakness to digest and try to make accommodations to try to fix this. So we've been looking at it for a while. As it relates to the restructuring, there will be people who are moving out of jobs and they will, as we said, there will be people moving into jobs as we continually do. But it’ll be nothing on the scale of what we did in the beginning of the year when there was a big kind of game of musical chairs amongst sales and marketing people within the organization.

Operator

Your next question comes from the lines of Walter Pritchard, Citigroup.

Kenneth Wong

This is Ken Wong for Walter. Just kind of building on what Sterling was asking there, just wondering, are you guys starting to see any of the trends that you guys saw during the last downturn in terms of things like attach or some of the early indicators that might suggest that you guys are in for a more bumpy road?

Carl Bass

What's interesting, and we called that one in particular, which was what we saw last time, what was the most striking was our AutoCAD and LT business. And that was the most resilient this quarter. So it was totally a contra-indicator from what we had seen in the last downturn. We haven't seen anything on the subscription front. So most of it doesn't look anything like it. Mark, you have...

Mark Hawkins

Yes, I would say the -- actually the renewals, we were pleased to see actual sequential improvement there. It's been a good year-on-year improvement, modest. So back to the point that Carl is making, these are not the kind of size that we would see like we saw in other kind of economic circumstances.

Kenneth Wong

And like I said, what we're seeing -- I think it's important while in some ways, July was an unmitigated disaster because the first 2 months, we were right on target and certainly when we went to Analyst Day, we were feeling very comfortable with our guidance for the quarter. A lot happened and it particularly happened in 3 areas. And so it was geographically isolated. So it has a very different feel to it. And I think we went into kind of the postmortem of the quarter, thinking that it was more about macroeconomic weakness. And I think we emerged from our analysis saying that it was more from flaws in execution on our part.

Kenneth Wong

Got you. And then on the -- on your restructuring, I mean it sounds like it's more -- just you guys are trying to get the right people on the cloud. If things start to get worse, I mean does it -- it sounds like you guys probably have a little room to cut if the pare back cost to maintain profitability, if that's the case?

Carl Bass

Yes, we certainly created a bunch of headroom that allows us much more flexibility about cost going forward.

Operator

Your next question comes from the line of Brendan Barnicle, Pacific Crest Security.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Carl, I wanted to follow up, you'd said that execution was in the indirect channel and that's where you had changes in personnel. So what kind of changes in that -- in the indirect channel on your side would have created this sort of shortfall if it's something other than the macro?

Carl Bass

So by the way we have -- just -- let me just be clear, we had changes on both sides. And I would just say, relatively speaking, our direct activity was stronger than our indirect. It wasn't a blowout quarter by any means, but it was definitely stronger. What we did is, just to put it in the highest level terms, we went from a geographically organized sales force to one that was focused around the industry. So in some ways, maybe we underestimated because a lot of people still have the same job. So if you were a manufacturing salesperson for us in Central Europe, you still were after the change. But your chain of command had changed because you are now in the manufacturing organization as opposed to being in the European or Central European organization. So it was a big structural change at the top and it was all about organizing around our customer segments. That was really the big change. And it involved a fair amount of movement of personnel. It also probably impacted our ability to get quotas and targets out to our sales force, as well as probably our ability to measure the results as they came in.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

And so how does that work? You've got 1 month left in the quarter and all of a sudden, that falls off. I mean the resellers, presumably are selling on their own. Is it that your guys weren't out monitoring that closely enough to see that folks were all of a sudden falling behind and trying to do things to pull that back in line?

Carl Bass

Yes -- I mean, I think we always work closely with our partners. I think there's a fair amount of promotional activity as well as added assist we give in deals. And as what I said, I think if we had more experience than people in place, we might have been able to pick up on the cue’s sooner. But just to repeat myself, there was really 3 parts of the world where we -- and so just to be clear, this is Central Europe, Brazil and India. So lots of other places where we shouldn't paint the broad brush of something is broken there. It may not be optimal. It probably needs improvement. But the shortfall compared to our forecast happened in 3 places. And we had changes in leadership, changes in distribution in places, we had changes in partnership agreements. And so I think the -- almost if we had 3 months of the quarter, we would've been better off than finding out in the last month of the quarter. We would’ve had more time to respond. But you're absolutely right that the resellers are out there doing business. But, for example, in one part of the world, a bunch of our resellers where our business was poor, if you were to speak to them, they would say they had good quarters. Their mix of services and software was decidedly different. And so they’re walking away saying, "I had a good quarter." It was a bad quarter for us. So I think we have to understand that while I think everything I've said is broadly applicable about the changes we need to make and how we're working on it, there were several isolated places that were the major contributors to the shortfall.

Operator

Your next question comes from the line of Steve Ashley, Robert W. Baird.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

I'm actually just going to follow up right on Brendan's exact line of questioning and ask, were there changes to channel policy in terms of the resellers that impacted their performance? Not the oversight of the channel people by your people, but rather just changes in the channel that -- was there anything that disrupted their performance?

Carl Bass

Yes, I mean there were changes in -- some of the channel partner agreements that happen every year, there are always changes. In some parts of the world, they were probably a little bit larger this year than other years. And so that was a one. Regardless of the people involved in the administration of it, there were policy changes there. There were also some program changes and there were actually some offerings that were different. So pricing changes and what we put together in different suites and stuff like that. So there were a number of variables involved. And like I said, that's why as we started to dig into it and really dug into the 3 areas where we experienced the shortfall, we saw particular issues cropping up in each one of those that are certainly partially responsible for the problems.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

And as you move to the cloud, is there anything you could tell us about time frame, milestones, what kind of phased implementation we can look for over time? Any color on that would be helpful.

Carl Bass

Yes, sure. I mean, well, we are believers that cloud and mobile and social are phenomena that are important technology platforms for design and engineering. And that our offerings in the future will be there. And we've been very clear about this for a long time. What I would say is the way we intend to offer it and the way we're rolling it out, which is already visible is, step one, is to combine our cloud-based offerings to existing products, generally in-suites with subscription. So it's a bundled offering that comes together, and we're offering cloud-based Web services that are complementary to the existing products that exist within the suite. We will roll out different pricing models, termed offerings and other ways for people to use them, as well as à-la-carte ways, so they can get access to more services. And what we hope to see is a switch in which now, the desktop products are the primary component of a suite and that packaged offering, and we think over time, it will move where the desktop component becomes less important or the Web services becomes more important. And so you'll see a change in licensing model, you'll see a change in how we go to market. And we will certainly see a change in the usage model amongst our customers. And then just to put it -- Steve, just to put a time frame on it, we've already introduced a bunch of Web-based services. There's more coming out this year. Beginning of the year, you'll see a lot more. We have a -- right now what I'd say is we have very strong individual offerings. There are things like the PLM 360 and the Autodesk 360, and we will continue to enhance them as we go forward.

Operator

Your next question comes from the line of Brent Thill, UBS.

Brent Thill - UBS Investment Bank, Research Division

Carl, you haven't implemented price increases for quite some time. I would've thought that the price increase gone into effect in August would have a bigger impact in the last quarter. Can you just give your sense of what you think the dynamic will be going forward? And I just want to be clear, on the indirect side, the deals that didn't come through, you saw visibility and I would assume it's just details that have been delayed versus lost?

Carl Bass

So as to the pricing increase actually stimulating demand. All I can say is I would have hoped so. It didn't. And so I lose all credibility, Brent, with actually predicting what the price increase will do going forward because historically, when we look announcing a price increase before a quarter generally stimulates demand. And we really didn't see that this time. We're not -- we saw it, but not to the degree that we would have expected. The other part of your question, Brent?

Mark Hawkins

About indirect, anything that [indiscernible] Yes.

Carl Bass

Go ahead. Oh, the deals?

Brent Thill - UBS Investment Bank, Research Division

Just from the deals that just -- that didn't flip in the indirect side. I assume your visibility on those deals, those deals have not been competitively lost. They're still on the cue. It's just a question of the timing when they come in.

Carl Bass

Yes, and I talked to our head of sales yesterday. A bunch of deals that didn't come in have already come in this quarter. I don't want to be hypocritical here. I always make fun of companies when they announce that the missed and it was just lack of a deal or 2 because I think the real explanation is so are you taking up the next quarter to accommodate those deals? We're not doing that. So I wouldn't want to sit here and say it's a deal or 2. But I did check with our sales leaders. And we have seen the deals come in. And also, I think there was an earlier question, it might have been Sterling or Walter. But we haven't seen any real change in the competitive environment out there. So it's not like are -- not like the deals are being lost. But we certainly didn't bring in the number of deals that we needed to.

Operator

Your next question comes from the land of Gregg Moskowitz, Cowen and Company.

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Carl, you spoke about some of the weakness in some of the territories from a product standpoint that -- it did look like the uptake from manufacturing suites was practically low this quarter. Just curious if there was anything that stood out there.

Carl Bass

Other than it was terrible, no, nothing stood out. It was just a bad result. The only thing I can offer is that our manufacturing products are particularly strong in Europe and Central Europe and so it's disproportionately affected. That's probably the only good insight I can give you. And I will go back to what I've said repeatedly on these calls is, while the results are really disappointing, even when we have good results, I don't draw out too many conclusion from one data point and I wait to see another quarter before we go too far in any direction drawing conclusions about the offerings, the pricing, the promotions or the programs.

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Okay. And then just as a follow-up for Mark. You guys spoke and provided some good color around the incremental investments toward cloud and mobile. We're just wondering if there's any more insight you can give as to the net change and overall staffing levels as a function of the restructuring.

Mark Hawkins

Yes, sure, Ken -- Gregg. We reduced our heads or we're in the process of reducing our heads by about 520 people roughly speaking. And that is creating headroom, as Carl said, around investment. An investment in cloud and mobile, this is all about transformation and accelerating toward the strategy that we think is so important. I think you can expect in the period of the fiscal year that we plan to reinvest a good portion of that, perhaps as much as 250 people by the time we exit the fiscal year. And then as you look beyond that, we'll continue to invest into '14. And as I think Walter called out, it gives us a little headroom as we're working toward other -- that strategic investment. So hopefully, that helps you, Gregg.

Operator

Your next question comes from the line of Richard Davis with Canaccord.

Richard H. Davis - Canaccord Genuity, Research Division

Hey, Carl, so one of the things I wonder about is as you kind of start trying to sell more sophisticated software, whether that's suites, whether that's rendering or simulation or PLM, is the channel -- do you feel the channel is sufficiently -- educated is not the right word, but trained? And so and would that possibly explain what happened in this quarter and as much as maybe it makes sense to circle back to these folks and say, "Hey, look. Here's a better way to do it." Or something like that. I’m just trying to figure that out.

Carl Bass

Yes -- Well, I appreciate any hypothesis that anybody has right now. But when we look at it, I think the suites are right down the sweet spot, so to speak, of what our resellers are very capable of selling. I think the performance over the last 2 years has demonstrated that. There is certainly an issue around things like simulation, about whether or not all of our resellers worldwide are capable of supporting things like that. I mean I think that's slightly different PLM, which we've mainly led with the direct sales force. I think those are slightly different. But I go back to 2 things. I think prior results say that our channel partners are quite capable of doing it. And then the second thing is I think the better insights you can get from this is look at a couple of geographic areas and try to ascertain, we don't think there's one explanation that deals with all 3, despite having dissected this upside down. But we do think in each 3 places, there are things that are going on that are worthy of note. But I wouldn't go as broad as the assertion that our partners are having trouble selling particular products.

Operator

Your next question comes from the line of Heather Bellini with Goldman Sachs.

Perry Huang - Goldman Sachs Group Inc., Research Division

This is Perry for Heather. Just wanted to ask a follow-up question on product revenue. It looks like results for suites were impacted the most, growing only, I guess, 5% year-over-year. This was also due to a tough prior year comp. But is there any additional color you can provide here, like do the internal reorg play a role here at all or was it largely due to the channel?

Mark Hawkins

Yes, I don't think there's a lot of additional color. To be honest with you, Perry, I think it was just again, as Carl said, we had 3 major areas of focus as we kind of deep dive into the -- some of the execution issues, suites were impacted in those 3 areas as well. There's no real silver bullet to pull out on that.

Operator

Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Mark, I'd like to follow-up on some of the maths surrounding the restructuring. You mentioned earlier that you are going to have an initial reduction of 520 heads. In the last large restructuring back in January of '09, you reduced by 750 heads and that targeted $130 million in savings. So using some proportionality here, would you be looking to save about $100 million in OpEx before you commence the reinvestment you talked about?

Mark Hawkins

Jay, here's -- I get them. I understand the math that you're doing. I would actually point you a little bit different. The way you can actually map this out pretty straightforwardly is take a look at our half 1 growth rate, which is about 6% in spend. And take a look at the guidance, it's implying minus 2% to plus 2% growth rate in spend in half 2. If you look at the differential from going at a 6% run rate to between minus 2% and plus 2%, I think you can get the math number that gives you really good feel for the net effect of the reduction plus the investment. And that will map that out I think quite well for you, Jay.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Okay. A follow-up question on maintenance, which came up earlier, and if you're seeing any change in your revenues from maintenance customers in the following way, in fiscal '12, you grew your average maintenance revenues for active license by a couple of percent but in Q1, you saw a 4% decline of maintenance revenues per licensee or per license. Are you seeing now in Q2, are you expecting for the remainder of the year any further deterioration in the revenues per license?

Mark Hawkins

Jay, we don't guide on the license -- excuse me, the maintenance portion of this. I would say the maintenance growth rate going forward is really a function of the prior 4 quarters in many ways. Just the momentum we have, the attach rates, the renewal rate and such. But we don't actually guide in specificity there. So I can't really give you a lot more color there.

Operator

[Operator Instructions] Your next question comes from the line of Philip Winslow with Credit Suisse.

Sitikantha Panigrahi - Crédit Suisse AG, Research Division

This is Siti Panigrahi for Phil Winslow. So my question is, could you compare verticals by geography, and which stood out from a strength or weakness perspective during the quarter versus what you have seen previously?

Mark Hawkins

Yes, it's more -- it's probably more detail than we'd want to get into at this stage. I mean...

Carl Bass

Yes, I mean I think we gave a fair amount of color in the...

Mark Hawkins

Prepared...

Carl Bass

Prepared remarks. If you look in there, you can kind of see by geo. And I think we've added some color about specific areas that might better help explain what specifically is going on. But we don't want to break down by division by geo.

Mark Hawkins

Exactly.

Operator

Your next question comes from the line of Dan Cummins with ThinkEquity.

Daniel T. Cummins - ThinkEquity LLC, Research Division

Let's see. First, I'll ask a couple of questions about the geos. You said that the U.S. business grew year-over-year. Was it up -- did it meet with your expectations overall?

Carl Bass

No, we're short of our expectations. But I said, the thing that -- well, let's be clear. What we talked about was the Americas. And that missed our expectations. It was primarily because of Latin America and in particular, Brazil, just to be as clear as possible.

Daniel T. Cummins - ThinkEquity LLC, Research Division

Right, yes. I wanted to ask about each of those 3 weak areas, India, Brazil and Central Europe. Have each one of those -- and I think you said in isolation, each one represents kind of a different case, a weak case. But has each one got into some level of stability in terms of week-over-week visibility? Obviously, you're giving guidance and are you comfortable with that? But I'm curious if these -- currently, are these situations worsening or have they stabilized?

Mark Hawkins

I would say that when we look at our linearity for the quarter thus far in, basically it looks on track at this stage of course. And there's no big deviations in these particular areas compared to what we would expect for the quarter.

Carl Bass

Yes, we're on track. And what I see the usual amount of moving parts, a little bit of strength in one part of the world, a little bit of weakness, but nothing dramatic. It seems very normal, if you will.

Operator

Your next question comes from the lines of Steve Koenig, Wedbush Securities.

Steve Koenig

One question and one follow up. Really for the first one, I'm looking for color here on the kind of the changes to your organization and your channel policies. And in particular, if I can, just kind of the things I'm wondering there, why did the personnel changes, that I believe happened in Q1, why did they affect you more in Q2 and not Q1? How much of the channel weakness stemmed from the changes to the rebate and registration program? And why didn't the promotional activity generate the leads you expected? And I do have one follow-up if you don't mind.

Carl Bass

Yes, I mean I'd say the best explanation that I have is that -- I mean business was kind of on track through Q1 and the beginning of Q2. And as we've said, 85% of our business goes through our channel partners. I think as we -- everybody kind of saw at least a hiccup in the economy, we were unable to respond as quickly. And I think a bunch of that comes from the people we had in place. I also think as always happens when we change channel programs, in effect, we're changing incentives. And I think some of the incentives got out of whack with some of our channel partners. And as they always do, they try to find a way to maximize their revenue based on that. And so we've already looked at that and we've addressed it. But I think we -- as I said in my remarks, we might have been better able to identify it and respond more quickly if we've had the same people on the ground.

Steve Koenig

I see, right. Okay. And then for the follow-up, just one anecdote that maybe you can help me put into context. We got some feedback then that when you extended your promotion into August, some customers were surprised when they went to take advantage of that. There were surprised to discover it because prices were up -- that net discount was 5% less than they expected. It wasn't as big as they thought it was going to be. And I’m just wondering how well was the price increase communicated? Were there any failures there? And the promotion was not as effective this time. Can I assume that – August, is it starting out weaker than usual? I mean I assume just by looking at your guidance, that's probably the case.

Carl Bass

Yes. So I mean I'm not familiar -- I mean most of the things we're targeted to generate revenue in July, and the programs were there. They were -- I would say they were managed -- they were conceived, managed and executed by pretty much the same team that has done all of them. So to the extent that they did it well or not, I mean it was an experienced team. They've done this before. We have an evolving set of policies with our partners, we communicated, we're in close contact. So I don't have any insight that, that was part of the problem.

Mark Hawkins

I agree.

Operator

Your next question comes from the line of Ross MacMillan, Jefferies.

Ross MacMillan - Jefferies & Company, Inc., Research Division

I have, I think, 2 questions. One, you care to talk about this issue around the organizational changes impacting your ability to respond as being somewhat transient and of your own making. But it certainly does appear from your guidance that you're still modeling a low single-digit growth rate in the second half of this year, which certainly doesn't imply any improvement. In fact, the margin is slightly worse than that, which you saw in Q2. So I was just trying to understand, is that because the baseline run rate of revenue is just lower now? You're off this July kind of run rate and you're not making any assumptions around improvement? Or are there any other factors that have gone into your thinking on that?

Carl Bass

I mean I think there's dozens of factors, Ross. But I mean your observation is right. And I would say we are being, what I consider, appropriately cautious. We're not -- we're coming off a bad quarter. At this point, forecasting a big jump in growth rate seems inappropriate to me. We're conscious of at least a volatile global economy. I don't think it's worsening, but it's certainly volatile. I mean there are the other factors of FX headwinds and stuff like that. And until we've proven otherwise, I don't think we're going to champion kind of a double digit growth rate. And I'd like to prove it first.

Ross MacMillan - Jefferies & Company, Inc., Research Division

Okay. And then, one, just follow-up on maintenance billings, I think they grew 7%. But I think there was a comment that most of that was driven by multiyear contracts. So I guess the question is now that we're anniversary-ing the introduction of the suites last year, why are we not seeing a pickup in the maintenance billings growth rate? Because I thought we were going to be getting that kicker on higher subscription or higher maintenance prices on the suites.

Mark Hawkins

Yes, let me speak to that, Ross. First of all, you're correct that in the billings, one of the playbook items that did work was our multiyear event when there was a price change, it was a compelling event. And that did drive billings. It didn't show up as revenue, but it did drive the billings in a reasonable way. And so that's one aspect. The second thing, that when you look at maintenance billings beyond that, I think the main driver for that has to do with attach rate and getting enough licenses that are out there so that the more license you'd sell, the more opportunity we have to drive maintenance billings. So I think it's more a function of license growth right now from that standpoint. I think for ASPs, over time as people do renew suites, we will see that the thing we talked about before.

Carl Bass

We're already seeing it. We were actually seeing it. It's just, unfortunately, been offset by fewer licenses.

Mark Hawkins

Exactly.

Operator

Your next question comes from the line of Keith Weiss, Morgan Stanley.

Melissa Gorham - Morgan Stanley, Research Division

This is Melissa calling for Keith. And just in terms of guidance for the full year, what are your assumptions around growth in Europe? Are you assuming that the macro stays relatively stable to how it is today? And then also, lowering of the growth rate for FY '13, how much is that just from macro versus execution-related issues specific to Autodesk?

Mark Hawkins

So a couple of things. One is we're not assuming any major changes to the economy in Europe, number one. Melissa, secondly, in terms of the, just the macro consideration, as was called out for sure, we're dealing with both the execution issue and the 3 areas that Carl called out, and then also we're mindful of a dynamic economic environment. So we're -- that is coming into our consideration. But I think it leads with the execution of the 3 main areas. It's consideration when we think about the guidance.

Melissa Gorham - Morgan Stanley, Research Division

Okay. And then just on the PLM products, the commentary was that you're seeing pretty good traction. Can you just give us a little bit more detail on some of the enterprise pilots that you're doing right now? Is it mostly your existing manufacturing customers that you're targeting with that solution or are you seeing growth in the customer base? And if there's any like particular verticals that you're adopting, that would be helpful.

Carl Bass

Yes, sure. Well, I'd say what I'm most pleased about is that it's opening doors in competitive accounts. And that doesn't always mean that their brand-new customers to Autodesk because we do have a pretty broad footprint. But in terms of being their preferred supplier, we -- what I'm most pleased about, we're getting into places where we are not the preferred supplier. And that's very encouraging. In many places, it's being viewed as complementary to their existing PLM system. Some people are considering it as a future placement. But we have pretty extensive trials going on. And what I've been most pleased with is getting to those accounts. There are certainly some in our existing customer base, and I'd say more than particular verticals what we're seeing is just parts of -- we're seeing more similar kinds of problems. So things around new product introduction, things about quality, there are a number of areas in which customers across different segments are trying to solve similar problems and where this solution is particularly well-suited, some of the stuff in the supply chain. So there a handful of different areas that seem to be forming a stronger pattern than a particular vertical versus another.

Operator

Your next question comes from the line of Matt Hedberg, RBC Capital Markets.

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

Carl, you -- obviously there's been others would come before you that have transitioned from a perpetual to more a faster cloud-based revenue stream. I'm wondering, are there any lessons learned from some of these other prior examples that you guys are implementing that may make the transition smoother?

Carl Bass

Yes, we have definitely studied them all. One's in software, one's outside software. We've looked at all kinds of transitions. Right now, most of what we're doing is -- I mean what we're talking a lot about in developing cloud and mobile applications, the major change that's in front of our customers is going from buying point products to buying suites. And most of that transition came from a perpetual license with upgrades to one with maintenance over the last 6 to 10 years. I think we've managed that fairly successfully. What we hope to do is gradually phase in new kinds of offering that are more annuity-based, more based on termed offerings. But we're not seeing any of that affect our revenues today. But I think it's an issue we'll deal with and we've extensively studied what others have done.

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

And then a question for Mark. Obviously, the guidance for operating margins comes down for fiscal '13. Assuming all of the restructuring that's going on here, can we assume more of a normal year-on-year improvement of maybe closer to 200 basis points for fiscal '14?

Mark Hawkins

Matt, first of all, we -- it's probably a little early to talk about FY '14 in terms of targets per se. But one of the things I can get to you, the spirit of your question, we are absolutely committed to our long term operating margin goal of 30%-plus. And so we are driving toward that, and you can see that certainly with the first year of our 5-year plan at 480 the second at 260 in this year even with a headroom -- headwind, you can see the approximately 150 basis points. So we're very serious about that. We're still driving toward the 30%-plus, and while whereby I'm not going to comment specifically about '14, I think the spirit of the question I think you get is we're very focused on the operating margin in addition to the growth.

Operator

Your next question comes from the line of Blair Abernethy with Stifel Nicholas.

Blair Abernethy - Stifel, Nicolaus & Co., Inc., Research Division

Mark, I was just going to follow on Matt's question there in terms of the change you're doing now in accelerating your investment on the cloud side and the mobile side. Does that maybe slow you down a little bit on that margin accretion?

Mark Hawkins

Well, I think we tried to talk a little bit earlier about trying to give ourselves some room to invest in these critical areas that are absolutely right on point with our long-term strategy as a company. So no, I don't think that these slow us down. I think this whole movement, this whole action is difficult and delicate as it is, is to accelerate toward our strategy. So no, operating margin and growth are our strategic intent. And we plan to continue to make progress.

Blair Abernethy - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. And just a follow-up, Carl, you haven't talked too much on the AEC side, particularly about BIM traction this quarter. Obviously, we're seeing ABI slowdown in the U.S. over the last 4 or 5 months now and obviously, you know what's going on in Europe. What are you seeing in the AEC vertical?

Carl Bass

I mean what we saw in results, it was not good. But the more color on it was -- I mean we -- when saw kind of the same thing, if anything, BIM is becoming more of a fabric of how people do construction projects. It's extending more to construction beyond architecture and engineering. What we did this quarter was we extended BIM. We released our BIM 360 product, as well as we did BIM for the field with an acquisition that we discussed. So it was bringing BIM out to the field, which was also good for construction. So I feel -- despite the results in the AEC vertical, I feel good about what's going on in the industry and the adoption of BIM. We're seeing more and more government-mandated BIM projects. So generally speaking, all the trends we've talked about in the last few quarters are continuing in the customer base.

Operator

Your next question as a follow up question from the line of Sterling Auty, JPMorgan.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

I want to circle back to a question earlier. Mark, you mentioned that there's not a silver bullet in terms of the weakness in suite revenue. But it -- just wondering, given the 3 geos that you mentioned, the Brazil, India, Central Europe, are they particularly strong in terms of suite sales, meaning were they adopting suites at a faster rate than others so maybe there was some correlation?

Mark Hawkins

Well, Sterling, I would say that certainly, if you look at areas like Central Europe, let's just take as an example, is an important area for suites in the achievement of our goals in suites. That would be a good example where there was a direct correlation. That would be one example.

Carl Bass

Yes, and generally speaking, what I'd say is heavily developed industrialized countries are the leading adopters of suites. And generally, the emerging economies are less so. Just a broad brush so in this case, one out of 3. But given the magnitude and importance of Central Europe, it far outweighs the others.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Okay, and then one follow-up. Specifically in software, when you make major changes to go to market and sales, it takes 3 quarters for things to settle out. If that's the case here, how far along in that transition are we? And the restructuring again, restructuring that you announced today, did that actually exacerbate things and make things a little bit worse before they get better and kind of restart that 3-quarter block or do you think the nature of the changes are different so maybe you're further along?

Mark Hawkins

I guess I would say a couple things here, Sterling. One is that part of the restructuring is, as we called out, the primary overlay is to accelerate our cloud mobile development and the headroom for that. The other thing is really the secondary part of that is to really clear the way. It's almost the second aspect of moving through the industry change. And so what we found as we got through this is that there's a little -- some overlaps, some things that we needed to clear up and just kind of streamline as we've gone through this. So I think this actually should help, not hinder, as it relates to that particular point, would be my thoughts. Carl, I don't know…

Carl Bass

Yes, I would totally agree with what you said.

Operator

[Operator Instructions] Your next question comes from the line of Dan Cummins, ThinkEquity.

Daniel T. Cummins - ThinkEquity LLC, Research Division

Thanks. My question was answered.

Operator

Your next question is a follow-up question from Jay Vleeschhouwer with Griffin Securities.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

Carl, as part of the changes you're talking about through the cloud and the like, how are you thinking about the long-term structure of the distribution channel in terms of scale and concentration? What I mean is in your largest distributor Tech Data, which is not of your bar but a distributor, is now over 1/5 of your revenues, is that something that you think has advantages to grow proportionately over time to give you some distribution scale benefits or how are you thinking about that sort of structure?

Carl Bass

Yes, so we spent a lot of time talking to our partners about it. I think the role of resellers will remain largely unchanged as we move more to online services and offerings. Obviously, certain ones will adapt themselves more quickly and move more easily. But in general, I think the opportunity is the same. I think for the various distributors, it's a different question because the role they play in terms of financing, logistics, et cetera, changes dramatically in an online world. I mean I don't want to get too in the weeds here, but I’ve talked to many of our biggest distributors about plans that they have for their business. And I think all of them are aware of these changes and are making plans about it and probably best to talk to them about how they're going to deal with it. But I don't think there is a changed role for the distributor in order to make it through this transition where I feel like for the resellers, it's a much simpler one. They still are the primary contract contact with the customer, customer still needs integration and training and other services. So I think their primary function remains intact and the opportunity does as well.

Jay Vleeschhouwer - Griffin Securities, Inc., Research Division

All right. A follow-up about the manufacturing market, I understand that you're issue cropped up largely in July, but now that everyone in the mechanical and manufacturing space has reported, you seem to be the only one that didn't grow either sequentially or year-over-year. And I'm just wondering if you think, in fact, that there's been some change in competitive situation or is there something that you saw in July that they haven't yet seen.

Carl Bass

No, like I said, at this point, I'm putting more emphasis on our own shortcomings than I am on something that somebody else would see who is not going through a similar transition. I guess that was the end of my comment. So what I see, I don't expect them to necessarily see the same things. I think in 90 days we'll talk and we'll say if we've seen it. Generally speaking, we've really outgrown all of our competitors in the manufacturing space over the last half a dozen years. I see no change really there. If anything, I see more opportunities for us. At this point I see this quarter as an anomaly in terms of gaining market share. But kudos to others who made it through some of the same transitions and macroeconomic weakness that we seem to stumble upon.

Operator

Your final question is a follow-up question from the line of Brendan Barnicle with Pacific Crest Security.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

If you -- if this is already asked, but the Media and Entertainment business didn't really recover this quarter. I think you had expected that it would on the release of the, I think it was the C Series servers that have been delayed. What happened there?

Carl Bass

Well, I think a number of things. I'll -- let me give you a few points and Mark has a few things. One, is one of our big markets for M&E is India. That was a weak area. So that definitely affected it. We also had some products that didn't ship in this quarter, which also affected it that we'll see towards the end of the year.

Mark Hawkins

Yes, I -- that's exactly what I would add is I think that's a combination of product and then also the touch points of these particular geos that added to the issue. It was more in the hardware side. It was the biggest impact, by the way, between the 2, between that and the animation.

Operator

I would now like to turn the call back over to Dave Gennarelli for any closing remarks.

David Gennarelli

Well, that concludes our call this afternoon. If you have any follow-up questions, you can reach me at (415) 507-6033. Thank you.

Operator

This completes today's conference call. You may now disconnect.

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