Autodesk F1Q09 (Qtr End 4/30/08) Earnings Call Transcript

| About: Autodesk, Inc. (ADSK)
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Autodesk, Inc. (NASDAQ:ADSK) F1Q09 Earnings Call May 15, 2008 5:00 PM ET

Executives

David Gennarelli - Director of Investor Relations

Carl Bass - President, Chief Executive Officer, Director

Alfred Castino - Chief Financial Officer

Analysts

Steven M. Ashley - Robert W. Baird

Jay Vleeschhouwer - Merrill Lynch

Andrew Matorin - Bear Stearns

Vic Taramedi - Lehman Brothers

Brendan Barnicle - Pacific Crest Securities

A. Sasa Zorovic - Goldman Sachs

Heather Bellini - UBS

Gene A. Munster - Piper Jaffray

Brent Thill - Citigroup

Ross MacMillan - Jefferies

Robert Becker - Argus Research

Greg Dunham - Deutsche Bank

Atol Baga - Penmore

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Autodesk Incorporated earnings conference call. My name is Eric and I will be your coordinator for today. (Operator Instructions) I would now like to turn your presentation over to your host for today’s call, Mr. David Gennarelli, Director of Investor Relations. Please proceed.

David Gennarelli

Thanks, Operator. Good afternoon and thank you for joining our conference call to discuss our first quarter fiscal 2009. 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 at Autodesk.com/investor.

During the course of this conference call, we will make forward-looking statements regarding future events and the future financial performance of the company, our guidance for the second and third quarters of fiscal 2009 and full year fiscal 2009, the factors we used to estimate our guidance for those periods, our future business prospects and revenue growth, our market opportunities, trends for our products and trends for various geographies and the anticipated benefits of acquisitions, such as the proposed acquisition of Moldflow Corporation.

We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results might differ materially. Please refer to the documents we file from time to time with the SEC, specifically our 10-K for fiscal year 2008 and our periodic 8-K filings, which includes the 8-K filed with today’s press release. These documents contain and identify important risks and other factors that may cause actual results to differ materially from those contained in our forward-looking statements.

The forward-looking statements made during this call are being made as of today’s earnings call. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward-looking statements.

In adherence with the regulation Fair Disclosure, Autodesk will provide quarterly information and forward-looking guidance in its quarterly financial press release and this publicly announced 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 accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures will be provided either on this conference call or can be found in today’s press release and made available on our website.

In addition, we will quote a number of percentage increases as we discuss our financial performance. Unless otherwise noted, each percentage represents the growth rate of the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008. And with that, I would like to turn it over to Carl Bass.

Carl Bass

Good afternoon, everyone and thank you for joining us. Today Autodesk reported another solid quarter of financial results. Revenue for the quarter increased 18% over last year to $599 million. Diluted earnings per share were $0.41 on a GAAP basis and $0.50 non-GAAP.

Growth in our international geographies continues to underpin our overall revenue growth. Revenue from outside the United States increased by 24% as reported and 13% at constant currency. While favorable currency exchange rates help fuel this growth, even at constant currency our overall business outside of the United States remains healthy and continues to grow.

As we outlined in our investor day, the booming economies in emerging markets represent significant opportunities for Autodesk. In total, revenue from emerging economies increased by a robust 41% and represented 17% of our total revenue for the quarter. As we broaden our presence in these regions, I believe we will be able to further capitalize on this growth opportunity.

Revenue from new commercial seats grew 23% in the quarter, which is a good indicator that our products remain in strong demand. Another key driver for our business is the growth of the 3D design market. Our revenue from 3D solutions increased 37% to $146 million and was 24% of total revenue. During the quarter, we shipped over 35,000 commercial seats of our model-based 3D design products, Inventor, Revit, Civil 3D, and NavisWorks. That represents about a 9% increase and is in line with seasonal patterns.

The 3D market represents a significant growth opportunity for Autodesk and we believe that we will continue to penetrate this market over time.

As important as the 3D market is to our future growth, our core 2D solutions are maintaining very healthy growth rates, led by very strong contribution from AutoCAD LT. The large base of Autodesk 2D customers are typically our best prospects to become users of our 3D solutions.

It’s important to note that regardless of how pervasive 3D solutions become in the future, 2D solutions like AutoCAD will continue to be a relevant and essential part of the design world.

Turning to our business in the Americas region, as expected the U.S. continued to face economic headwinds. This region posted 4% growth, which I believe is respectable given the current economic environment in the U.S. As I noted last quarter, over the past 18 months we have put programs in place to help stimulate demand and we are seeing many positive data points stemming from these actions.

For example, in the first quarter of fiscal 2009 in the Americas, we experienced nice growth in new commercial seats, a modest rebound in Latin America, and strong growth in subscriptions. What’s more, we managed to increase our subscription attach and renewal rates.

Additionally, we are seeing a strong increase in our business with government agencies in the U.S., especially the federal government. This is the result of a more focused effort we initiated a few quarters ago and we believe we can further increase our presence in this area. While we can’t control or predict the length of the current economic slowdown in the U.S., our experience shows that our products improve the productivity and competitiveness of our customers, and I believe that our results indicate that such a message resonates even more in times of economic weakness.

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 Castino

All right, thanks, Carl. Net revenue was $599 million, an increase of 18% as reported and 10% at constant currency. Breaking it down, license revenue increased 13% to $432 million and maintenance revenue increased 33% to $167 million. Combined, upgrade revenue and maintenance revenue increased 16%. As expected, upgrade revenue decreased 14%.

Breaking down revenue by geography, revenue in the Americas was $191 million, an increase of 4%. EMEA revenue was $259 million, an increase of 25% as reported and 11% constant currency. As we enter the second quarter, we are feeling good about our EMEA business, both in the emerging countries and in the core European markets.

Revenue in Asia-Pacific was $149 million, an increase of 27% as reported and 18% constant currency. Japan had another quarter of strong performance led by healthy growth in AutoCAD LT, AutoCAD, and Inventor.

Before I get into the results by division, I want to note that we will be making a change to how we report our segments in our SEC filings. Last year Autodesk had two reportable segments, the design solutions segment and the media and entertainment segment. Effective at the start of our fiscal year 2009, the operating results of our segments will track our four divisions.

Looking at our divisions, platform solutions and emerging businesses had a solid quarter, increasing revenue 11% to $278 million. Growth was led by very robust sales of AutoCAD LT, which grew 28%. AutoCAD grew 3% in the quarter. In total, our horizontal and 2D products grew 14%.

Total revenue from our manufacturing solutions division increased 26% to $119 million, once again far exceeding the growth of the entire market. Revenue from Inventor increased 25%. During the quarter, we shipped more than 11,500 commercial seats of Inventor and approximately 46,000 total seats of our manufacturing products.

AEC revenue increased 29% to $129 million. Revenue from our Revit family of products was very strong with an increase of 61%. We shipped approximately 24,000 commercial seats of Revit, Civil 3D, and NavisWorks.

Revenue from our media and entertainment division was $67 million, an increase of 14%. Animation revenue increased 23%. The migration of our advanced systems solutions off of SGI hardware to mainstream systems is now largely complete. The change had substantially improved the advanced systems gross margin but we expect this portion of our M&E business to remain fairly low growth. Revenue from advanced systems increased 3%.

Moving to the rest of the income statement, gross margins were 90% on a GAAP basis and 91% on a non-GAAP basis. Operating expenses were $479 million GAAP and $447 million non-GAAP.

As we previously announced, operating expenses include approximately $9 million of cost reduction initiatives, including prioritization of projects and resource reorganization. We believe these initiatives will aid future growth of the company and strengthen our financial position.

Our operating margin was 20% GAAP and 25% non-GAAP. Our tax rate in the quarter was 25% GAAP and 26% non-GAAP. GAAP diluted earnings per share were $0.41. Non-GAAP diluted EPS was $0.50. At the end of the quarter, there were 224 million total shares outstanding.

While it’s clear the favorable exchange rates have aided our revenue growth, it’s the strength of the business that allows us to sell our product in local currency in many parts of the world. We believe this also helps to lower the underlying volatility in our business.

Compared to the first quarter of last year, the foreign currency impact was $41 million favorable in revenues and $14 million unfavorable on expenses. Compared to last quarter, the foreign currency impact was $14 million favorable on revenues and $5 million unfavorable on expenses.

Turning to the balance sheet, cash and investments were $950 million. During the quarter, we issued 1.6 million shares from employee stock plans, generating $35 million in cash. We used $257 million to buy back 8 million shares. We drew down $40 million on our line of credit, primarily to help fund the stock repurchase.

Cash generated from operating activities decreased 4% to $185 million, due primarily to the payments of commissions and bonuses during the quarter. Total deferred revenues increased 9% or $44 million sequentially to $550 million. Deferred maintenance revenues increased $40 million sequentially and $130 million over the first quarter of last year, as we successfully drove strong maintenance results.

Unshipped product orders, or shippable backlog, were up sequentially to $18 million. Total backlog, including deferred revenues and unshipped product orders, was $567 million, an increase of $149 million over last year.

Channel inventory remains below three weeks. Day sales outstanding was 51 days this quarter, a eight day decrease from last quarter due to a smaller increase in the deferred revenue balance, as well as improvements in billings linearity.

Now let’s turn to guidance -- for the first quarter of fiscal 2009, we expect our revenue to be in the range of $600 million to $610 million. GAAP earnings per diluted share are now expected to be in the range of $0.40 and $0.42, and non-GAAP EPS is expected to be between $0.52 and $0.54, and excludes $0.09 related to stock-based compensation expense and $0.03 for amortization of acquisition related intangibles.

For the third quarter of the fiscal year, we expect our revenues to be in the range of $605 million to $620 million. GAAP earnings per diluted share are expected to be in the range of $0.42 and $0.45, and non-GAAP EPS is expected to be between $0.53 and $0.56, and excludes $0.09 related to stock-based compensation expense and $0.02 for the amortization of acquisition related intangibles.

Our guidance by quarter is in line with historical quarterly allocation patterns for both revenue and earnings.

For fiscal year 2009, we are reaffirming our expectations of net revenue in the range of $2.45 billion and $2.50 billion, which represents growth of 13% to 15%. Full year GAAP earnings per diluted share are now expected to be in the range of $1.78 and $1.88. non-GAAP EPS is expected to be in the range of $2.20 and $2.30, and excludes $0.32 related to stock-based compensation expense and $0.10 for amortization of acquisition related intangibles.

On May 1st, we announced our intent to acquire Moldflow Corporation. We believe Moldflow will contribute approximately $30 million to our net revenues in fiscal year ’09 and decrease [inaudible] GAAP diluted earnings per share by approximately $0.10 per diluted share. We now believe it will be dilutive to fiscal year ’09 by up to $0.03 per diluted share on a non-GAAP basis; however, we believe this still fits within our stated non-GAAP guidance of between $2.20 and $2.30 for full year fiscal 2009.

Assuming the Moldflow acquisition is completed in the second calendar quarter of 2008, Autodesk expects this transaction to be dilutive to our GAAP diluted earnings per share by between $0.07 and $0.08 in the second quarter. We expect this transaction to be dilutive to non-GAAP diluted earnings per share by between $0.01 and $0.02 the second quarter of fiscal 2009 excluding $16 million related to the write-off of IP R&D and amortization of acquisition related intangibles.

Let me turn it back to Carl.

Carl Bass

Thanks, Al. As Al just mentioned, we’ve announced our intent to acquire Moldflow Corporation, a leading provider of simulation software used to optimize the design of injection molded plastic parts in molds. We are very excited about this as we believe the plastics market represents an important and complementary opportunity. The combination of solutions will enable Autodesk to provide suppliers in the automotive, electronics, healthcare and consumer products markets with a fully digital development process for plastic injection part and mold design.

So to wrap things up, we are tuning our business to meet the current market conditions. We will continue to work through the economic headwinds in the U.S. and capitalize on growth markets in our international regions. We will also continue to work hard to shape the evolution of industry design trends, such as digital prototyping and BIM, where Autodesk's product portfolio is very strong.

Our results this quarter continue to demonstrate the strength and stability we enjoy as a result of our diversified business. The real beauty of our diversity is that we don’t necessarily need every facet of our business or every geography to be hitting on all cylinders in order to meet or exceed our growth objectives.

Lastly, as we announced a couple of weeks ago, Al has decided to step down in order to take some time off, spend more time with his family, and pursue his many outside interest. Al has been a key contributor to our financial success over the course of his six-year tenure and we greatly appreciate his efforts. We wish him nothing but the best.

We have commenced the search for a successor but Al will be staying on as we go through this process.

With that, I will 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 Steve Ashley with Robert W. Baird. Please proceed.

Steven M. Ashley - Robert W. Baird

Carl, in your prepared remarks, you talked about implementing some programs domestically to help stimulate demand and that they were bearing fruit. I was wondering if you might be able to give us some more color on that.

Carl Bass

It’s a number of things we’ve been doing, some are just accelerating some of the programs we had in place, making sure people were considering our 3D products, talked a little bit about our government initiatives. So we are just trying to be a little bit more sensitive to the market. We talked about some things going on in Latin America as well, which is an emerging region that we report in our Americas. So we are just looking for the opportunities there while the economy stabilizes and hopefully picks up towards the second half of the year.

Steven M. Ashley - Robert W. Baird

And then can I ask a quick housekeeping question for Al --

Carl Bass

The Operator’s going to shoot you, but it’s okay with me.

Steven M. Ashley - Robert W. Baird

Okay, just what kind of assumptions are you making on currency and maybe Euro exchange rates for your full-year guidance, Al?

Alfred Castino

As we’ve told you before, on the guidance, we always back off like a few cents for the next quarter, just to be conservative. In the second half, as I mentioned at investor day, I am still not assuming we get rates that are in the range we are at today. I’m looking at more like a 12-month moving average and assuming it looks more like that in the second half. So time will tell but these are historically high rates and I’m gun-shy about assuming that those continue into the second half.

Steven M. Ashley - Robert W. Baird

Thank you.

Operator

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

Jay Vleeschhouwer - Merrill Lynch

Thanks. Carl, in your prepared remarks, notwithstanding the overall limited growth in the Americas, you were suggesting that subscriptions remained healthy, both new and renewals. Was that true across the business divisions or was AEC an exception?

Carl Bass

No, I think it was true across geographies and across divisions.

Jay Vleeschhouwer - Merrill Lynch

Okay. Looking out over the rest of the year, what are the upward biases in terms of spending priorities? Particularly in sales and marketing, either geographically or vertically -- where do you think you will accelerate or most increase your spending in any targeted ways?

Carl Bass

Well, you know, there’s a couple of areas that we will, you know -- one is when you look at it geographically, we’ve talked a long time about as our business has continued to grow, we need to build out the capability and capacity of our channel. We do that in many ways. When you look there -- certainly we see a bias towards some of the emerging economies. You know, we talked about the results from those emerging economies. We continue to be under-represented, we believe, relative to the opportunity that those markets present for us so we will continue to do things like that.

I think in a number of other areas when you look at it more from an industry perspective, I think the products that are in our 3D categories, things that serve building information modeling, our digital prototyping initiatives, the stuff we are doing with games and film in the media and entertainment markets, those are places you know, so more of the cutting edge stuff, which seems to be a little bit less susceptible to the economic pressures.

Jay Vleeschhouwer - Merrill Lynch

All right, and finally on LT, that had a substantial year-over-year increase. Did you see, however, any adverse effects on unit run-rates, or was most or all of the increase as a result of the price increase?

Alfred Castino

The price increase took effect during the quarter, so we did not even have an entire quarter of it, so it contributed but it was primarily just organic growth excluding the price increase at this point.

Jay Vleeschhouwer - Merrill Lynch

Okay, thanks, Al.

Operator

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

Andrew Matorin - Bear Stearns

Thank you very much. Just a couple of questions on the 3D commercial seat numbers and subscription adoption numbers. It looks like on the 3D side, it looks like the growth in the sales of new seats has maybe plateaued somewhat. I’m wondering if you can talk about that to some degree. On the flip side, it seems like there is an acceleration of adoption on subscription over the last couple of quarters, with over 100,000 adds to your subscription rolls this quarter. What is driving that? If you can talk to specific programs that you are running or anything else that you are seeing out there with your customer base that’s driving this kind of acceleration of adoption there?

Carl Bass

So a couple of things -- on the new seats, you know, as always let me just caution you at the beginning of this not to make too much out of one data point, but I would say what we saw this time is volume was at a consistent level, our ASPs have been consistent or rising. So the interesting thing is to think about our prices going up, particularly in this economic environment, and still being able to hold steady on the volume.

I wouldn’t put too much into yet until we look out over several quarters and see that that’s really true and it really differs -- 3D product by country really varies a lot, and so there’s a lot that goes into that.

On the subscription side, I think one of the things that’s becoming true is people are more accustomed to buying software this way from us. This was a radical change we introduced a number of years ago, the way people bought it. We certainly got the early adopters to do it and now I think it’s just becoming a regular way to do it. It is the more natural way to buy our software as the programs have been moved to support that.

I think one of the other things that we’ve done is we become better at the execution of our subscription program. You know, we’ve looked around the world at the places where we do things particularly well and try to copy those things into other places. You know, and there’s still a -- there’s still a range of performance across our different countries in terms of our subscription performance when measured by attach and renewal, so we look in countries and see what we do best and then we try to copy that in other places.

So a number of things that we are doing programmatically, a number of things we are doing to unify it to bring the best to bear.

Alfred Castino

The other thing to keep in mind though is growth in commercial new seats for 3D was in the 30s, so there’s really nothing to apologize for. If it plateaus at that level for a long time, we’ll be very happy.

Andrew Matorin - Bear Stearns

Thanks a lot.

Operator

Your next question comes from the line of Vic [Taramedi] with Lehman Brothers. Please proceed.

Vic Taramedi - Lehman Brothers

Just a question on the Americas -- should we expect the Americas revenue to steadily accelerate over the next couple of quarters? Maybe you can give us some color on that and especially given some of the new programs you have put in place.

And then lastly, Al, maybe if you can perhaps give us a little bit more color in terms of your FX assumptions against the Euro in terms of how are you protecting guidance going forward? And then I just have one follow-up.

Carl Bass

We’re not willing to break out the forecast by geography. We haven’t historically done that and also, I’m in no better position than any of you to tell you what the economy is going to look like in the U.S. in the fourth quarter this year.

Having said that, I think there are two interesting things to look at. One is there seems to be some stabilization. We saw it this quarter in the performance. We hear it anecdotally from our customers that they are getting back to doing business, that they think it may have bottomed out. We hope that’s right.

I mean, I think the other thing and one of the reasons not to forecast is that there is some clear link between a weak dollar and the weak U.S. economy and when things move the other way, I think we’ll see this kind of tie trait with our European business seeing less benefit from currency as the dollar strengthens and the U.S. economy gets better.

Alfred Castino

And what I would add to that is as I mentioned in the past, we never try to predict the economy in doing our guidance, so we are assuming the kind of economy we see in Americas is what we are going to see for the time period of our guidance, and that’s consistent with our outlook. It’s really no different than what we’ve talked about for the last month, starting with investor day.

On the foreign currency for the Euro, so as I mentioned earlier, we always take the spot rate on the guidance, we back off several cents, say $0.02 to $0.03 for the current quarter’s guidance and mainly just to have a little bit of room in case it moves on us right away.

Then as we get into the second half though, I am not doing that because I feel like a rate in the mid-150s is historically high, so we backed off from that in the second half in doing our guidance and I’m assuming it’s closer to the 12-month moving average and if you calculate that, you will get something that is below 150.

Vic Taramedi - Lehman Brothers

Okay, great and then just a quick follow-up on Japan -- you mentioned Japan was strong in LT and AutoCAD and Inventor. Do you expect that in Japan that we should get more traction from some of the other 3D products because that historically has been more of an LT and AutoCAD-centric arena?

Carl Bass

It certainly has been historically more AutoCAD and LT-centric. We think we will see more business in the Revit and Civil 3D.

Alfred Castino

They had a good Inventor quarter also, so we are getting some traction in Inventor in Japan.

Vic Taramedi - Lehman Brothers

Thank you.

Operator

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

Brendan Barnicle - Pacific Crest Securities

Thanks a lot. Carl, I was wondering if you had any way of breaking out the contribution you are starting to get from Civil in what I’ll call like the 3D add-on products, things like BIM and Visualization, things that have been newer initiatives? Any just ballpark sense on what kind of percentage contribution those products produce?

Carl Bass

No, you know -- I mean, we have a number of ways that we add to the capabilities of our products. Some comes through our organic development and some comes through M&A. When we do that development or we acquired technology, some of it we build into existing products, some we build as add-on products, some we build, you know, we sell as new and complementary products.

Really hard to look at it that way. What we hope to encourage by this is seeing customers buying groups of our products, and we talked a little bit at investor day about in the future offering bundles that allow people to do this more conveniently. But what we are interested in people using more of our solutions, improving the workflow and the dataflow between those products to make sure that a user of one product is more inclined to buy one of our other products.

Alfred Castino

It’s really tough to separate but you know, MAX had another great quarter and it’s turning to pretty good strength. And we know from data we collect that a lot of that’s going to design customers doing visualization, so that trend is continuing and strong but it’s pretty tough for us to separate impacts like this.

Brendan Barnicle - Pacific Crest Securities

I guess another way of looking at it though is you gave us the animation numbers so on that part, we can roll that through but when we think about BIM and some of the other pieces, are those included when you give us 3D revenue as part of that 3D revenue item? And would that be attributing to some of the ASP increase?

Carl Bass

Yeah, so you would see BIM on the 3D products. I mean, when you think about BIM, you should certainly think about the Revit family and then things like NavisWorks would be in there. The recent acquisition of Robobat -- that would be something that would be part of our BIM things. When you look at digital prototyping, it’s a slightly wider cast of products. When you look out there, it’s not only the Inventor family, it’s things like AutoCAD Mechanical, products like Alias Studio and Showcase. So that’s -- I mean, that’s a little bit of a larger family of products and to support digital prototyping, but as Al pointed out correctly, we have products that are used across all of our markets, like MAX that’s used extensively in visualization, as well as in the creation of content for games and film. Very different users using the same product. The same thing would be true for Maya and some of our other visualization products.

And I think if you want to think of it going forward, visualization will always be harder to break out as being slightly more horizontal technology. The analysis and simulation products on a going forward basis will be a little bit clearer because they are better aligned with specific industries.

Brendan Barnicle - Pacific Crest Securities

Great, thanks. And Carl, just quickly on the Moldflow guidance, you mentioned the impact to EPS. Can you give us any ballpark figures on what it may do in terms of revenue?

Alfred Castino

I actually provided that. Just to be clear, when I gave you the guidance by quarter, that was without Moldflow and at the very end of my prepared remarks, I talked about Moldflow in terms of [next year] and how it would it would impact our numbers and that can change by when we close the transaction.

But assuming we close it late this quarter, it would contributed about $30 million of revenue for the year and that’s after a deferred revenue write-down, which hits heavily in the first six months of an acquisition, so that’s where I talked about it. That $30 million that come from Moldflow, that’s not in that revenue range I gave you of 2.45 to 2.5, the same range we had at investor day. It would be in addition to that but it can vary according to when we close the deal.

Brendan Barnicle - Pacific Crest Securities

Right, right, I understand that but you had mentioned Q2 and you had given us where you thought the EPS dilution would come from. Can you give us any more -- and I understand that depends on when it closes but there must be some sort of revenue assumption that’s around that $0.01 to $0.02 dilution in Q2.

Alfred Castino

It would not produce much revenue in Q2. The deferred revenue write-down hits pretty heavily in that very first quarter of the transaction. But yeah, we are not going to break it that finely and again, it changes dramatically according to what day we actually close the transaction, especially the revenue number changes dramatically, so yeah, we are not ready to do that.

Brendan Barnicle - Pacific Crest Securities

Okay. Thank you.

Operator

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

A. Sasa Zorovic - Goldman Sachs

Thank you. I actually wanted to ask specifically about sort of growth within North America as the region, so if you could tell us specifically about the U.S. and I remember the last quarter, there were a couple of little issues regarding Canada and Mexico, that they were declining. Has that sort of turned around? But really more specifically about the United States per se.

Carl Bass

You know, we reported results for the U.S. I don’t see any big difference between what’s going on in Canada and what’s going on in the United States. We see more similarity than differences there. I think in both cases, business improved marginally so it grew 5%, in that range, and so it’s an improvement over the prior quarter in terms of growth rate. Still not back to historical levels of growth but I don’t see a big discrepancy between any of the conditions that exist in Canada and the U.S. for the most part.

I mean, Mexico is clearly a very different kind of country in which to do business, whether you look at it from a standard of living and the cost we charge for our software. If you look at license compliancy rates in Mexico versus North America and Canada, so it looks -- Mexico looks more like the rest of Central and South America, while Canada and the U.S. are very similar, with small differences where Canada is more resource rich and you see more of our business going to things like natural resources, whereas in the U.S. it’s still a stronger manufacturing environment.

A. Sasa Zorovic - Goldman Sachs

And then secondly regarding the strong emerging markets growth, I know that it’s probably difficult to quantify but have you seen sort of a similar benefit from improved compliance rates, as this was the case in the past several quarters?

Carl Bass

Yeah, I mean, I think when you look at emerging economies, a substantial amount of the improvement in business comes from better license compliance. It’s really, really hard to figure out because people typically don’t come forward and volunteer that I’m buying your software and I used to steal it. And so it’s really hard for us to know but we certainly see a correlation between as we increase our efforts at license compliance, we see more revenue in those places. So it will continue to be a part of it but you know, the thing to remember is while license compliance is really a very important part of how we think about emerging markets.

I mean, these economies really are on fire. There’s a tremendous amount of development of new industry, there’s a build-out of infrastructure, new buildings, and we also have to recognize that there are opportunities for us to get our software to people who have never used it before. That may mean people who are new to the market because in those places, the job pool is growing dramatically and in many places, it also means winning share from our competitors. So we will continue to do that as well as the license compliance but these economies really are red hot and there’s a lot of economic development and we want to take advantage of it in all facets.

A. Sasa Zorovic - Goldman Sachs

Thank you.

Operator

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

Heather Bellini - UBS

Great. Thank you. I have two questions for you, Carl. The first one is you mentioned programs that you are putting in place in the U.S. to spur demand. I was just wondering if you are doing something similar in Europe to get in front of any potential slowdown that could emerge in that region? And then I just had a follow-up.

Carl Bass

So right now, we’ve done a number of things in the U.S. I would say we are not as -- one is we haven’t been concerned about Europe. We’ve actually felt good about the business that is going on in Europe. I think it’s an ongoing part of running our business. We are constantly looking for programmatic things we can do, systematic things we can do, so there are smaller improvements. In the U.S., it was just much more dramatic. But you know, we talked a little bit even at investor day about our three-to-one initiatives, which is really taking the best programs from the Americas to Europe and visa-versa, as well as blending in Asia.

So we are really taking the things that we do best. One of the things that we find is while there is significant cultural and language differences around the world, the behavior of our customers is in the end very, very similar and most of the programs that work in one place work well in the other. And so more of the effort has been in taking the best, whether that’s around a subscription program as we saw or how we approach governments and taking that, or how we work with educational institutions and having a unified approach across the world to it.

Alfred Castino

There is one thing I would point out in Europe though is that our hottest geos by far are the emerging markets in Europe, and so we are definitely investing more heavily there. We are opening more offices. We are putting more channel support there. So we see that as an area that is relatively unaffected by the economy. It is just an area where we are under-invested, we are under-covered, and we get great pay-back as we put money there. So we are investing more heavily there right now.

Heather Bellini - UBS

Okay, great. And then I just had one follow-up; I mean, obviously you guys had [a very good] performance this quarter in a tough macro environment and I guess Carl, back to what you’ve been saying at past analyst days, that that’s a long-term growth target of 15%. You are obviously on track to achieve that after this quarter for the year. I was wondering, when you refer to this, a question that I’ve been getting a lot from investors is are you assuming it on a constant-currency basis? So when you think of 15%, is that just kind of what the company is going to report year-in and year-out on a reported basis? Or do you kind of think fixing up currency movements that the business can grow at kind of a 15% [inaudible]? Thank you.

Carl Bass

Well, the honest answer here, Heather, is three years ago probably when we first started talking about this, there wasn’t nearly as fine a point on as-reported, you know, local currency or --

Heather Bellini - UBS

Right, right, very fair.

Carl Bass

So when we first started talking about this, we were thinking as-reported. It’s become more important to draw the distinction. The one thing I would say is for all of those who look at this as just currency, I do think there is an inverse relationship between positive currency effects to us and the health of the U.S. economy. And when one moves one way, the other is going to move in the opposite direction. And I think the timing of that is uncertain but it would be hard to imagine a big rebound in the U.S. economy without the dollar getting stronger.

So we really thought about this as reported. You know, if this continues to be a multi-year thing, we can rethink it but we were really thinking when we first gave this that this was just our results.

And by the way, as you’ll remember or remind people who are asking you, nobody ever seems particularly sympathetic when the dollar is moving in the other direction.

Heather Bellini - UBS

No, no, exactly. I think that’s why people keep asking but yes, thank you very much.

Operator

Your next question comes from the line of Gene Munster with Piper Jaffray. Please proceed.

Gene A. Munster - Piper Jaffray

Good afternoon. Regarding I guess the international side, Carl, you said a minute ago that it’s red hot. Now you kind of mentioned some of the things you are doing to kind of capitalize on that. I guess can you go through in terms of priority as far as are you hiring more people, more piracy control measures, or how are you -- what are you doing, I guess, to keep this red hot growth going?

Carl Bass

So one of the things that is going on there’s certainly more people, Gene, but it comes in two different ways. It’s more people in our channel management and infrastructure to support it. So if you were to take an economy that’s growing quickly, we need to put more people there. We also -- often we are under-covered and under-represented geographically, so in places we may need to open a second, third, fourth, or fifth office, which I think is also something.

But primarily we look to develop the channel. In some places, that’s helping our channel partners expand their business from one location to multiple. In other cases, in some of these newer, more emerging economies, it’s finding brand new channel partners where we don’t have enough resellers there. So we are out looking for channel partners. That’s the first thing.

I think we back that up with some license compliance work that we do. I think we do a fair amount around education but -- and we certainly continue to invest in marketing to make sure there’s an awareness and a preference for our products over those of our competitors. But it’s a combination of things that we try to -- that we deal with holistically because if you think about our products in most places in the emerging countries, our products are known, particularly our 2D products, and most of those are not paid for. And so the base we are working from is lots of AutoCAD in the market, the vast, vast majority is not paid for. And so we are very systematic of how we bring up the awareness and the preference for all of our other products and how do we reach places in which we’ve historically had very little geographic coverage.

Gene A. Munster - Piper Jaffray

As you are adding all those people, last quarter we had a little bit of a surprise related to some of the comps in some of these emerging markets. I guess is there -- what’s the likelihood if this kind of growth continues that there could be a spike in comp at the end of the year with these emerging markets?

Carl Bass

I don’t think there will be any surprise about comps at the end of this year.

Gene A. Munster - Piper Jaffray

Okay, great. Thank you.

Operator

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

Brent Thill - Citigroup

Carl, on the M&A side, your absolute number of deals already this year is almost double what you did last year. Can you just speak to -- I think you mentioned historically they are going to be smaller transactions but can you just walk through how you think about the rest of the year now, post Moldflow?

Carl Bass

The number of deals this year has been high but a lot of them have been small and very small by our standards, you know, deals for $1 million or $2 million. There are companies, I mean, that they cross the wire in the same way but you’ve got to recognize some of these deals are $1 million or $2 million in acquisition costs with two to 10 employees. So they really are very, very small deals.

But it is emblematic of us reaching out more to do more analysis simulation and visualization. And what we often find with the very small deals is what we are looking for is a way to inject knowledge into -- knowledge or some technology into the company very quickly to take advantage of an opportunity.

I think if you think about it going forward, I don’t think anything has really changed about our approach to M&A. We will continue to do the small deals in a way where we continue to consider buy versus build for a way to get that expertise. I think some of the medium size deals, you may see a couple a year. And the larger deals are really opportunistic, as we’ve talked about. There’s only a handful of companies in the markets in which we participate that would make sense, and each one is very unique and given the individual nature of those, those happen to be very opportunistic. And that’s not been our historical bent to chase the really big deals. And so I think you will continue to see us look at the market in the same way for M&A.

The one thing that I do think about some is as the markets change, the M&A market changes with it. So one of the things that we’ve seen and when you look at some of the number of deals we’ve done this year, a number of the people in small private companies have seen the exit opportunities as being fairly limited, and much more interested in getting their technology to market. And so we’ve been able to do transactions in a much, much more reasonable price.

Brent Thill - Citigroup

And just a quick clarification for Al, is this right that roughly 16 million shares are left on the share buy-back plan at the current level, [not with] 8 million?

Alfred Castino

I think that’s about right but as I mentioned the table before though, that’s on an extremely important fact in that if I ever run low, we go to the board and get more. We’re committed long-term to holding shares outstanding flat and we’ve been doing this for like a decade but yeah, there’s something around that amount still open.

Brent Thill - Citigroup

Thanks.

Operator

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

Ross MacMillan - Jefferies

Thank you. I think I got the number right -- was it 3% growth in AutoCAD but obviously a much, much higher growth in AutoCAD LT? Can you just explain what’s going on there to drive that significant growth disparity? Is it LT’s success in emerging markets or is there something else that you are structurally doing that would explain that?

And then just a further clarification on the buy-back -- Al, can you say if you bought back more stock since the quarter end? Thanks.

Carl Bass

I would say, Ross, the best way to look at this is the way to look at the AutoCAD number, and we gave a little bit of it in our prepared remarks, is to look at the AutoCAD base products. We have moved people to vertical products and so the way to look at AutoCAD is to include products like AutoCAD Architecture, AutoCAD Mechanical, AutoCAD Electric, which would take the growth rate and nearly double it.

Having said that, I think what’s going on with LT is that it’s a great product, great value. When people look to legalize in places, it’s a cheaper way to become compliant and there’s enough differentiation from the product so we don’t think we are seeing cannibalization rates any different than we’ve historically experienced, and so we think we are bringing more people into the pool and we are going to continue to invest in the development of LT as well as increased marketing for LT.

But the AutoCAD number is really in line with where we expected it to be, even by historical standards and not taking into account macroeconomic conditions when you look at the Autodesk -- the AutoCAD family of products as opposed to just vanilla AutoCAD.

Alfred Castino

On the stock buy-back, I want to remind you I’ve never done forecasts for stock buy-backs and you actually found out about the 8 million after I finished it, so I don’t signal what we do.

Just one fact you might note though from my prepared remarks is that we had about $40 million outstanding under the credit line at the end of last quarter, which indicates there was not a lot of U.S. cash, given the amount of buy-backs we did last quarter. But that’s about all I’ll say about that.

Ross MacMillan - Jefferies

Okay. Thank you.

Operator

Your next question comes from the line of Robert Becker with Argus Research. Please proceed.

Robert Becker - Argus Research

Good afternoon. Carl, Moldflow recently adopted a task-based floating license system to improve the adoption of digital prototyping software. I’m wondering, is there an opportunity to adopt this new model to other Autodesk products?

Carl Bass

We haven’t looked a lot at the licensing models. I mean, we have a significant number of models and so one of the things to look at for us is when we do these acquisitions, making sure that we can take the new businesses and integrating them successfully with our back office. So we are always on the lookout for clever or more innovative licensing models and if this is one of them, we’ll take a look at it but in the context of we need to make this work for a $2.5 billion enterprise and not necessarily what’s possible for a $75 billion enterprise.

Robert Becker - Argus Research

Gotcha. Thanks and congrats on a very good quarter.

Operator

Your next question comes from the line of Greg Dunham with Deutsche Bank. Please proceed.

Greg Dunham - Deutsche Bank

Yes, most of my questions have been answered but I did want to clarify the compliance issue, whether that’s something abnormal that has changed here this year in this quarter or just a steady thing that you guys have been doing for a while now that is lifting [inaudible]?

Carl Bass

I mean, the license compliance is something that we have a 10, 15 years certainly of doing it. Hopefully we become better at it and more systematic about it but it’s always been a part of our business and something that we try to control. You know, we’ve talked about it a lot. There’s limitations to what we can do but we hope over time that we continue to eat away at the piracy.

When you look at it, piracy rates correlate pretty well with the development of economies, and in economies, as they become more successful, generally speaking you see greater protection of intellectual property. We are seeing this in places like China that want to develop their own industries based on intellectual property, that they’ve made great advances in the last couple of years and we think that will happen over time. So it’s nothing new in what we are doing. We just try to be more systematic about it, a little bit more organized and as I said, just like in the other things we are doing, we have a concerted effort to drive efficiency and productivity by taking the best practices that we’ve learned in one part of the world and applying it in other parts of the world.

Greg Dunham - Deutsche Bank

Do you think it’s a bigger part of your growth this year than last year?

Carl Bass

I’m not sure that that’s so. I mean, I think in absolute dollars, it’s growing. I’m not sure it’s really growing faster than the rest of the business.

Greg Dunham - Deutsche Bank

Okay. Thank you.

David Gennarelli

Operator, we have time for one more question.

Operator

Your final question comes from the line of [Atol Baga with Penmore]. Please proceed.

Atol Baga - Penmore

Thanks for taking my question. So it seems like for 3D products, ASPs are going up in Q1. I was wondering if you can give some color -- what is the source of this rising ASP? Is it mostly the price increase or is it about customers moving higher up in the chain? And how should we think about ASPs going forward? And then also I have a follow-up question on that.

Carl Bass

Generally speaking, the way I think about ASPs is you should assume that they are steady. You know, if we see dramatic changes, we’ll tell you. We don’t forecast a lot of ASPs. Generally better ASPs come from better channel management practices, better sales practices by our channel partners, but it really comes from less promotions, less discounting is really what we see it coming from.

The way we do it on the positive side is by driving preference for our products. You know, as we talked about a lot, one of the things to remember about this business is that the cost of our software is relatively low for the return on investment that people get. You know, people really understand that when you are talking about this, you are talking about numbers that are relatively small. When you look at comparative to the people that we are winning market share away from, it may be a third, it may be a fifth of the cost they paid for their prior software. And so there is a huge ROI here and the significance of $100 or $200 in the purchasing decision is not really that great, yet through better channel management practices, we can take advantage of that.

Atol Baga - Penmore

Makes sense. And Carl, you also talked about in the remarks about subscription business. That’s doing very well for you guys. I was wondering if you can give some color on what your attach rate and renewal rate was in Q1 -- how does this it compare from previous quarters? And internally, what are you guys targeting for these rates say over a year? Thank you.

Carl Bass

Generally speaking, we don’t break out attach and renewal rates. This time in the prepared remarks, we talked about attach and renewal rates in the Americas getting better, which they indeed did. And we haven’t forecasted anything that we’ve shared publicly about the attach and renewal rates.

What I can say historically is over the last three to five years, both rates, not on a quarter to quarter basis where there is volatility, but year over year, those rates have gone up.

Atol Baga - Penmore

And do you expect these rates to continue to go up?

Carl Bass

Yes.

Atol Baga - Penmore

Thank you.

Operator

Ladies and gentlemen, this concludes our Q&A session. I would like to turn the call over for closing remarks.

David Gennarelli

That concludes our conference for today. If you have any additional questions, you can call investor relations at 415-507-6033. Thank you.

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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