Autodesk - Q3 2012

Transcript

Operator (participant)

Good day everyone, and welcome to the Third Quarter 2012 Autodesk Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If at any time you require operator assistance, please press star followed by zero, and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to our host for today, Mr. Dave Gennarelli, Director of Investor Relations. Please proceed, sir.

Dave Gennarelli (Director of Investor Relations)

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss our third quarter of fiscal 2012. 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 on our website in advance of this call. Those remarks are intended to serve in place of extended formal comments, and we will not repeat them on this call. During the course of this conference call, we will make forward-looking statements regarding future events and the future performance of the company, such as our guidance for the fourth quarter and full year of fiscal 2012, full year of fiscal 2013, and long-term financial model guidance.

The factors we use to estimate our guidance: new product and suite releases and expected growth rates, certain future strategic transactions, business prospects and financial results, our market opportunities and strategies, and 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 at the SEC, specifically our Form 10-K for the fiscal year 2011 and Forms 10-Q for the periods ended April 30 and July 31, 2011, and our periodic 8-K filings, including the 8-K filed with today's press release and prepared remarks. Those documents contain and identify important risks and other factors that may cause our actual results to differ from those contained in 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 on the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. During the call, we will also discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of both GAAP and non-GAAP results is provided in today's press release, prepared remarks, and on the investor relations section of our website. We will quote a number of numeric or growth changes as we discuss the financial performance, and unless otherwise noted, each reference represents a year-on-year comparison.

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

Carl Bass (CEO)

Thanks, Dave, and good afternoon, everyone. Our long revenue growth was driven by double...

Speaker 20

If I want to repeat this recording or to disconnect...

Carl Bass (CEO)

Hello?

Operator?

Operator (participant)

Yes, sir, you may proceed.

Carl Bass (CEO)

Thanks, Dave, and good afternoon, everyone. Our strong revenue growth was driven by double-digit growth across all of our major geographies, with particular strength in Asia Pacific. All of our business segments performed well, driven by revenue from suites. When combined with continued cost controls...

Speaker 20

Thank you for using the replay system. Goodbye.

Carl Bass (CEO)

Operator, do we proceed?

Operator (participant)

Yes, sir, you may proceed.

Carl Bass (CEO)

When combined with continued cost controls, we achieved solid growth in our non-GAAP operating margin, EPS, and cash flow from operations. There were several areas of notable growth and achievement during the quarter, including 15% growth in total revenue, 36% growth in total suites revenue, 28% growth in revenue from Asia Pacific, 21% growth in our PSEB segment, double-digit growth in both our AEC and manufacturing segments, 18% growth in maintenance billings, 360 basis point improvement in non-GAAP operating margin, 38% growth in non-GAAP EPS, and 20% growth in cash flow from operations. This was only the second full quarter that our new design suites have been in the market, and they're off to a terrific start. Our customers realize the significant value delivered in the suites, which is winning us new customers and motivating existing customers to migrate from point products and older suites to our new suites.

Over the course of the next few years, we expect suites to become the majority of our revenue mix. Two weeks from today, at our Autodesk University event, we'll be unveiling our offering for entering the PLM market. As I've said previously, we'll be addressing the significant market opportunity with a very unique approach, which will enable manufacturers as well as AEC and M&E companies to achieve the full promise of PLM for the first time. Our cloud-based approach will be easy to use, implement, and deploy. It will be scalable, configurable, and intuitive, which is a sharp contrast to the decades-old legacy technology in the market now. We think that customers are starving for this new kind of solution, and Autodesk succeeds in introducing this kind of disruptive technology. Speaking of cloud technology, we recently launched Autodesk Cloud, a collection of more than a dozen web-based capabilities.

These services will enable customers to extend their desktops with greater mobility, will offer new viewing and sharing capabilities, and will provide more computing power, helping our users to better design, visualize, and simulate their ideas. Along with our product advances, we continually strive to improve our customers' experience. Electronic download has benefited our subscription customers for the past three years. We're now aiming to increase the use of electronic delivery in developed countries by making new licenses of most of our products available for electronic delivery. In advance of this action, we initiated a plan to further reduce our already low inventory in the channel during the third quarter, and we will continue to do so in the fourth quarter. Channel inventory was reduced by approximately $10 million in the third quarter in conjunction with this initiative.

Over time, we expect to phase in the electronic download availability of new licenses in emerging countries as well. It's worth noting that channel inventory now stands at only 1.5 weeks. We have a long history of acquiring small businesses and leading-edge technologies and integrating them into the fabric of Autodesk and our products. In the third quarter alone, we closed 10 small but strategically important business and technology acquisitions, totaling close to $90 million net of cash acquired. These transactions were across all of our business units. We believe these purchases are an important component to advancing our products and offerings and delivering more value to our customers. Turning towards our view of FY 2012 and beyond, plenty of economic uncertainties remain in each geography around the world, not just the Eurozone.

Recall that we started FY 2012 with expectations of 10% revenue growth and 200 basis point improvement in our non-GAAP operating margin. Despite some choppiness in the market, our businesses perform well, and we believe we are on track to deliver 13% revenue growth and non-GAAP operating margin improvement of between 210 basis points and 240 basis points in FY 2012. Earnings growth is expected to be approximately 30%. We're very proud of our accomplishments so far this year. We've achieved this by continuing to focus on prudent cost containment while making appropriate investments in the business to fuel future growth. We also felt it would be helpful to share with you our initial thoughts about FY 2013. We are modeling revenue growth of at least 10% and non-GAAP operating margin improvement of approximately 200 basis points year-over-year.

Our recent performance, coupled with our revenue outlook for FY 2013, reinforces our confidence in achieving our long-term target of growing revenue by 12%-14% compounded annually and getting to 30% operating margins by the end of FY 2015. We remain highly confident in our market position. Our product portfolio is the most compelling it has ever been. We're very excited about our PLM opportunities, and we remain well-positioned to expand our business and better serve our customers and attract new ones. Operator, we would now like to open the call up for questions.

Operator (participant)

Ladies and gentlemen, if you have a question, please press star followed by one on your phone. If your question has been answered or you would like to withdraw your question, press star followed by two. Questions will be taken in the order received. Please press star one to begin. Our first question comes from the line of Brent Thill of UBS. Please proceed.

Brent Thill (Analyst)

Thanks. Mark, if you could just talk about the guidance for next year starting at 10%. Maybe if you could just start with your visibility and for Carl, just on Europe, if you could give us just your view of what's happening. You had decent growth, but obviously Asia Pacific was outpacing by quite a bit. If you could compare and contrast, that would be helpful. Thank you.

Mark Hawkins (CFO)

Sure, Brent. Glad to do so. Our 10%, at least 10%, as we look at FY 2013, is based on a kind of a normal process. It is five quarters out, but we look very comprehensively with our sales team and with our channel partners. We have a lot of, obviously, data that we get that we factor into a rigorous plan. We feel like this is a solid projection. We feel confident in the guidance, and it's kind of our normal process that we look at. Historically, in Q3, we typically give our fiscal year projection for the following year.

Carl Bass (CEO)

Brent, we'll update it as we get closer to the beginning of the fiscal year. On Europe, I don't think our experience is very different than what other companies are saying and reporting. I think it's mixed across Europe. Certainly, Southern Europe is fairly weak. Northern and Central Europe is fairly strong, and there's a lot of uncertainty about what's going to go on in the Eurozone and in Brussels. Asia Pacific was really strong. It has continued to outpace both the Americas and Europe for a long time, and I expect it to continue to do so.

Operator,

Operator (participant)

Our next question comes from the line of Heather Bellini of Goldman Sachs. Please proceed.

Perry Huang (Analyst)

Hi. This is Perry Huang for Heather. Thank you for taking the question. On your July earnings call, you had talked about various metrics you were monitoring to keep tabs on the business environment. Could you maybe talk to these indicators again for the October quarter and whether you noted any changes?

Carl Bass (CEO)

Yeah. I mean, what we were trying to do, if you remember, three months ago, the world was fearing going into a double dip. What I said at the time was we had no great insight into whether we were going, but in looking back at our business, I said if the world does go into a second dip, it looked different than the first one. We were trying to monitor all these metrics that we saw, some in front of and some when we looked retrospectively at what happened a few years ago. Some of the indicators that we had seen the first time were decreases in our run rate business. Those would be products from our PSEB segment. If you look now, PSEB had a particularly strong quarter.

I would kind of stick to the comments I made before that, as well as a bunch of the other metrics we looked at, subscription renewals, subscription attached, they were strong. Like I said before, it's still hard to figure out what's going to go on in Washington and what's going to go on in Brussels. Just looking at our business, we're certainly not seeing the indicators we saw in 2009. If anything, we're seeing contraindicators.

Perry Huang (Analyst)

Got it. Thank you.

Operator (participant)

Our next question comes from the line of Richard Davis from Canaccord. Please proceed.

Richard Davis (Analyst)

Hey, thanks. Carl, as you guys kind of transitioned and flipped out your PLM product and you presumably put it in the cloud and those kinds of things, one of the things that some of the early firms in the space were challenged with is just being able to sell because PLM is more of a higher-level sale than a department sale. How do you sell higher in the organization, get into the C-suite? Does that require a different salesman? How do you think about that? How do you think about the process? How should we look at it from the outside?

Carl Bass (CEO)

Good question, Richard. What I would say is we already sell fairly high up. It depends on the account. We've talked about repeatedly how our major account business is doing really well. We continue to invest in our major account business. Those are all decisions that are made at the executive suite. We're typically selling in large companies to the CIO or the head of engineering or the head of design. I think for those customers, we already have a sales force in place. As you get to a small, medium-sized business, I think it's incumbent upon our partners. Many of our partners work at that level, though, in smaller companies. I think it will be different. It's a more holistic sale. It's more of an enterprise sale. People often misunderstand our business.

The fact that I say over and over again is, nearly 30% of our business comes from 1% of our customers. In those cases where you look, people have thousands of licenses in mission-critical applications. I don't think you should mistake the fact that a machine shop down the street has a license of our software with the fact that we're mission-critical in large enterprises. They both exist simultaneously.

Richard Davis (Analyst)

Got it. Thank you very much.

Carl Bass (CEO)

Sure.

Operator (participant)

Our next question comes from a line of Jay Vleeschhouwer. Please proceed.

Jay Vleeschhouwer (Analyst)

Thanks. Good evening. Carl, I'd like to ask about your suites and maintenance business and the connection between them. Your suites business declined some sequentially from the second quarter, although it did grow year-over-year, of course. Your maintenance billings, deducing from your prepared remarks, had a substantially greater decline in absolute terms from the second quarter than we've seen in previous second or third quarters. Although, again, up year-over-year, it was a pretty substantial decline since July. On the other hand, you added a pretty considerable number to your active maintenance base, the most in a year. Could you perhaps talk about some of those moving parts in terms of suites and maintenance and the active base?

Carl Bass (CEO)

Yeah. I mean, the quarter-over-quarter decline in suites is to be anticipated. One is just the usual seasonality in Q3, but the more important thing is the introduction of most of the suites in Q2. After the big introduction, I would have been very surprised if Q3 was bigger. In terms of maintenance, yeah, all of our subscription rates are doing really well. Attach is good. Renewal is well. Everything about that business seems particularly healthy. In relation to the questioner before, that was another one of the indicators that we saw go down. We're not seeing that at all. We're really pleased with where we saw the maintenance business going.

Jay Vleeschhouwer (Analyst)

Okay. Yeah, just a couple of quick follow-ups. Earlier this year in Q1, you pointed to some weakness in your infrastructure business, and that may have been due just to some product timing, but could you comment on how that's doing now? Finally, also earlier this year, you made some changes in terms of your channel segmentation with some airline-like platinum status and so forth. Could you talk about how those changes in your channel structure or certifications may have had any discernible incremental benefits thus far this year?

Carl Bass (CEO)

Yeah. Let me just broaden your infrastructure question to the general AEC question. Two quarters ago, people were questioning a lot about the health of the AEC business and trying to extrapolate from there one thing or another. I tried to point out at the time something that remains true, has always been true, is that if you really want to understand how we serve architecture, engineering, and construction, you have to look at the combination of what we report as AEC and PSEB. That one was particularly low in AEC two quarters ago. The other point I've made repeatedly is I try not to read too much into any one quarter's number in one particular area. My logic around that is we have a capacity constraint system with various incentives. Under that, you see behavior that goes on within a quarter that's not very controllable.

Over time, when it becomes a trend, you should take note of it, and we certainly do and try to do something about it. Overall, I'd say our AEC business is doing well. You can see it in the AEC number alone, as well as the fraction of the PSEB business. Along with that, infrastructure is doing well. There were some timing issues also that we brought up two quarters ago. It had a lot to do with the introduction of suites, the introduction of the infrastructure suite in particular. Those were all things that came out later in the year in the U.S., as well as in other geographies and languages.

Jay Vleeschhouwer (Analyst)

Okay. The channel question?

Carl Bass (CEO)

Oh, the channel question. I was so busy answering that one, Jay. No, we continue to make incremental changes. I think if you just try to step back and not try to dissect too finely any moves in our programs, but look at it more holistically. Generally, what we're trying to do is reward our partners who put in the most work and accomplish the most. Given the regulatory framework in which we operate, the business conditions, there are various ways that we're able to incent people and make sure that the people who do the most work, who contribute the most, provide the most value to the customers, get paid the most. That's what we continue to do. You've seen some changes this year.

I think the introduction of a premier status, and I think you'll see some changes coming in the channel framework for next year as well, all keeping in mind that the goal remains to reward the people who do the most work.

Jay Vleeschhouwer (Analyst)

Thanks, Carl.

Carl Bass (CEO)

You're welcome, Jay.

Operator (participant)

Our next question comes from the line of Walter Pritchard of Citigroup. Please proceed.

Walter Pritchard (Analyst)

Hi, thanks. Two questions. One on manufacturing. If I look at your two peers in that space that have already reported, Parametric and Dassault, it looks like they grew a little bit faster. I thought of you as potentially being a share gainer there. I know we're looking at one quarter of data here, but I'm wondering how you're on the competitive front in manufacturing, what you're seeing and where you think the share battle is being fought in terms of that market.

Carl Bass (CEO)

Yeah. First thing, the part of PSEB that is not AEC is primarily manufacturing. When you look at manufacturing, it's not our as-reported number. You have to look at both those numbers together. If you put the two together, I continue to say that we're growing. We're growing faster than our competitors. When you look at things like seat counts and market share as measured by install base, we're growing much faster than our competitors there as well. One of the other things to remember is when you look at some of the competitors out there, they're actually growing in areas where we don't even compete, and vice versa. I think when you look at things where we both compete, which is design and engineering software, as well as analysis software, by both a seat count and a revenue count, we're growing much faster.

I love the position we're in in manufacturing. We're kind of the underdog. We're kind of the disruptor. We democratize technology. We have a broader product portfolio than anybody. We have a better product portfolio. I'd hold it up against anybody in the industry. If you just look back, last quarter, it was the biggest quarter ever in manufacturing history, and it grew 20% year-over-year. I'm really happy with where we're going. I'm really excited about what we're doing around PLM because I think that's going to be a big game changer in terms of how we're able to serve customers and how we're perceived in the market.

Walter Pritchard (Analyst)

Thanks, Carl. Mark, on the comment around the half a percentage point of reduction in channel inventory, that gives half a week reduction in channel inventory in the $10 million impact. Should we think about that as having gone straight to revenue? I'm curious, was that in your guidance or not? I just wanted to clarify that.

Mark Hawkins (CFO)

Absolutely want to help you with that, Walter. First of all, for channel inventory, just to step way back from it, we only recognize revenue when we sell into the channel. The fact that we did not sell into the channel, basically, and achieve these numbers, if we would have kept, said differently, if we would have kept the channel inventory flat, we would have had about $10 million more revenue, okay? Just so you understand from that standpoint. Does that answer your question?

Walter Pritchard (Analyst)

That makes sense. Thanks a lot. I assume, were you expecting that in the guidance or not, or is it insignificant?

Mark Hawkins (CFO)

In fact, this is comprehended in our guidance in Q3, and then also in Q4, as we talk about in the prepared remarks, we're going to take the channel down further. That's comprehended into our guidance as well. You should see a natural, you know, kind of correlation with that in backlog. This is absolutely correlated. I think.

Carl Bass (CEO)

The plan is not blind. We went into the quarter thinking we might do some. The quarter proved strong, and we decided we could reduce and do it gracefully without any impact to our partners or our customers. I'd say the same thing. We've contemplated a level reduction in Q4. We might be slightly more aggressive if business is stronger than expected.

Walter Pritchard (Analyst)

Great, thanks a lot.

Operator (participant)

Our next question comes from the line of Sterling Auty of JPMorgan. Please proceed.

Sterling Auty (Analyst)

Yeah, thanks. Carl, when Adobe introduced Creative Suite 1, they got a definite benefit from Photoshop users that were not using Illustrator that always kind of wanted to but couldn't afford it or didn't want to pay the price and vice versa. When you look at the suites that you have available and the feedback that you've gotten so far, are there natural synergies between one, two, or three products that are now bundled together that are really making the difference on the suite adoption?

Carl Bass (CEO)

I think the two products that are coming along in suites, you know, one is 3ds Max that many people have always wanted visualization capabilities. For others, it's AutoCAD or some flavor of AutoCAD that's in there as well. Those are probably the two big ones. I think industry by industry, it's a little bit different with different customers latching onto it. We're really getting our first complete data right now about not only what they buy, but what customers use. We'll have more data as this goes on. We're studying it pretty closely to understand the adjacency. If you remember, we also have the three tiers of products. It's interesting not only what people buy, but I'm interested in watching the migration over time between the various levels in the stack.

Sterling Auty (Analyst)

Okay. One follow-up, Mark. Now that the acquisitions you've been doing are small, but they're starting to add up when you do the number of acquisitions that you did, like in this last quarter, how should we think about the cumulative impact or contribution to revenue or cumulative impact to earnings?

Mark Hawkins (CFO)

Yeah. First of all, Sterling, this was factored into our guidance as we look at Q4. Obviously, we comprehend this. As we think about the future, we did 10 strategic deals. They're small in nature, as you've noted. A number of them are intellectual property that will be worked into the overall portfolio over time. We have a few other ones that we've disclosed publicly, ones like Instructables and [GRIP] and MAP and things of that nature. I think the way to think about this is a lot of these are the core technology that's going into the business. Some have revenue generation as well, but each one of those is not material. Otherwise, we would make a further public disclosure about that. All that we see is comprehended into our view for the future.

Carl Bass (CEO)

Yeah, I think if you just want to understand a little bit directionally where we're looking, there are really pretty much two things that we're trying to do with most of these acquisitions. As Mark said, they're mostly either IP or they're very small teams and technologies. What we're generally trying to do is, one, expand into adjacent markets. When you see a particular kind of engineering or analysis software, it's adjacent to a market we're in, and we're trying to round out the offering. Particularly as we package things into suites, we want to be able to give our customers a complete workflow that answers their problems. The second thing is, as we've talked about many times, we're undergoing a platform technology transition. There are a bunch of technologies that we're getting in order to make sure that we're the best provider of engineering tools in the cloud.

Sterling Auty (Analyst)

All right, great. Thank you.

Operator (participant)

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

Brendan Barnicle (Analyst)

Thanks so much for taking my questions. Carl, I wanted to follow up on, I think, a question that Jay had been trying to get at a little bit earlier, which was whether you were starting to see any change in maintenance pricing as a result of the introduction of suites.

Carl Bass (CEO)

The answer to the question is the maintenance pricing is higher on suites than standalone products. We're seeing no differential in discounting or anything around that. As people have suites or higher value products, our average for maintenance is going up as well.

Brendan Barnicle (Analyst)

When do you think it gets to be material enough that you've got enough of the sort of installed base on suites that way that it starts to, you know, have a material impact on that, on the subscription number?

Carl Bass (CEO)

I think just start seeing it next year.

Brendan Barnicle (Analyst)

Great. Following up on the strength in Asia Pacific, how much of that was related to the recovery in Japan or how broad-based was that?

Carl Bass (CEO)

I don't know. I didn't know there was a recovery in Japan. You know, I think it was pretty broadly based. You know, Japan did well. Everywhere in Asia Pacific did reasonably well. What is generally true is our fastest growing areas, whether Asia Pacific or emerging countries, are also our most volatile. We see ups and downs country by country, discipline by discipline, as also in emerging countries between the different ones quarter-to-quarter. They just are more volatile. We saw a little bit of this time. It seemed like everything kind of lined up this time in Asia Pacific.

Brendan Barnicle (Analyst)

Mark, on gross margins, those have been down year-over-year for the last two quarters. When do you think we might start to see those start to improve year-over-year again?

Mark Hawkins (CFO)

We're looking at, you know, one of the things that we think about, Brendan, is the broader operating margin. Of course, you're seeing that expansion, you know, with the projection for the year between 210 basis points and 240 basis points. Some of the downward pressure on the gross margin, which is kind of the subtext of the broader profitability, has to do with us as we have penetrated major accounts in enterprise. In some cases, there's consulting work and such that's required, and it has a little bit of a margin effect. You can see it's not a big effect on a year-on-year basis. That is a dynamic that's happening. I think the most important thing that I would point to, Brendan, is just looking for the operating margin expansion in total and knowing the geography will move a little bit here and there.

It should be no sharp turns, but a little bit.

Brendan Barnicle (Analyst)

Great, thanks a lot.

Mark Hawkins (CFO)

You're welcome.

Operator (participant)

Our next question comes from the line of Blair Abernethy of Stifel Nicolaus. Please proceed.

Blair Abernethy (Analyst)

Thanks. Mark, just following on that, I'm wondering if you could give us a little more of a view into your margins for next year, your operating margin expansion of 200+ basis points. Can you give us a sense of how much of that is just going to come from operating leverage versus ongoing productivity improvements?

Mark Hawkins (CFO)

Yeah, I think there'll be both. You know, Blair, from that standpoint, we'll get all the leverage we can. We'll look at each of the different areas. We've got plans that we're driving efficiencies really across multiple functions. We have concerted efforts and initiatives to do that. You should expect both. It'll be both leverage and productivity items. I wasn't wanting to get into a specific detail of all the initiatives we have. We have a thing called an operating council where there's a large queue of activities that we work together on at the highest level in the company to really drive scale, basically. That is a long list of things that we're executing on. We have a plan well thought out as we go into FY 2013, ideas that we'll capitalize on. Leverage is important too.

Blair Abernethy (Analyst)

Okay, great. Thank you. Carl, I don't know if you're willing to or not, but on the PLM side, what's your strategy in terms of target verticals you might be going after or customer size you might be going after in the early days?

Carl Bass (CEO)

I think we'll see. Right now, we're finding two segments in particular. The large enterprise customers who are frustrated or disappointed with existing PLM offerings seem to be surprisingly receptive to it. That's probably the big surprise we've had as we've gone out in beta, is we originally thought it would be appropriate for small and medium businesses who've understood what PLM could do for them but couldn't afford it. We thought that was it. What we're finding is huge desire on the part of large manufacturers who are just frustrated with a previous offering. I think in some ways, you know, you compare this, this is the same thing as Salesforce is to Siebel or Workday is to PeopleSoft.

I think this is exactly the same kind of dynamic where that was technology that was good in its time, but much of this technology, you know, dates back 20 years. Now there's just a much better way to deploy, and it's much more effective. I think what I underestimated a little bit during the year as we went through the planning on this is just how ready large customers are to move to the cloud. You know, they're doing it with all kinds of offerings. The question amongst, you know, the very large company CIOs is, how do I go about this transformation? How does it integrate with my existing systems? Much more so than what we had heard a year or two ago, which were lots of concerns about privacy and security and other stuff.

I think there's a greater willingness amongst the large customers to move there than we anticipated.

Blair Abernethy (Analyst)

Okay. Is it a recurring revenue model, a ratable revenue model? Is that the approach you're taking?

Carl Bass (CEO)

Yeah, it's a ratable revenue model.

Blair Abernethy (Analyst)

Okay, great. Thank you.

Operator (participant)

Our next question comes from the line of Cash Rangan of Merrill Lynch. Please proceed.

Cash Rangan (Analyst)

Last question I thought Jay was going to ask. On the PLM side, clearly, this is something that the manufacturing customers had been asking for. Nice job of introducing the product. Carl, just curious how long the product has been in beta or is it still in alpha stage? What kind of feedback are you getting from customers? Also, secondarily, how much of the PLM revenue is baked into your forecast for fiscal 2013? I have a follow-up. Thank you.

Carl Bass (CEO)

Okay, so I'll start with there's almost no revenue baked in. By the way, our pricing model and the business model doesn't look too dissimilar from some of the SaaS companies I mentioned. That part of the business, things like bookings will be a better indicator than revenue because they will be back-end loaded. Everything you've learned from following companies like that, you should apply at least to this part of the business. There's not a lot of it baked in at all. The feedback that we're getting so far is that it's way exceeding our expectations. We're just surprised by how warm the reception is. Probably leave it for now at that. We'll be showing more of it in two weeks at Autodesk University. For people who want to come there or who will be there already, you can see it in action.

There will be customers there who have used it. As we head into the first months of the calendar year, you'll see a more public release of it.

Cash Rangan (Analyst)

Got it. Carl, is it fair to assume that the subscription price of the PLM solution will probably be less than what customers are paying for the maintenance of their legacy PLM solutions?

Carl Bass (CEO)

Easily.

Cash Rangan (Analyst)

Okay.

Carl Bass (CEO)

It'll easily do that. I also think, in many cases, what's happened with these PLM systems is they're kind of like the Chernobyl of the enterprise. They've got encased in concrete and they're in there. Really, what the CIOs are trying to figure out is how do I work around this system? There are many of the users within the enterprise who are not served, who they've never been able to roll it out for. The prices are too expensive to reach large parts. For almost everyone, the behind-the-firewall approach doesn't work for the current way they're doing business. Their businesses have moved far along. Both their suppliers and their customers, customers and employees are accessing information in new ways, and they want a more modern approach.

Cash Rangan (Analyst)

Got it. One for you, Mark, final. The maintenance billings have been growing nicely, but there's been a trend of the maintenance subscription revenue growth rate actually lagging that. I'm just curious at what point could we start to see? Also, license growth rate has been far outpacing maintenance revenue as a secondary observation there. Just curious, at what point does the real growth in subscription revenue really start to pick up from this point? That's it for me. Thank you.

Mark Hawkins (CFO)

I think, again, the billings we were certainly pleased with at 18% growth year-on-year for the subscription. I think over time, as we've talked a little bit before, Cash, there's a few moving parts, but over time that will show up in our revenue. We don't give forward-looking guidance for subscription revenue, but growth of 18% year-on-year is a good dynamic. Over time, we'll see that and it'll fuel it. You know how it works, that it's ratably recognized, divided by 12, most of it, some is multi-year, but hopefully that'll give you a sense. You're right on the track that it, you know, you'll see the growth come out in revenue over time.

Cash Rangan (Analyst)

Got it. Thank you so much.

Our next question comes from Greg Moskowitz of Cowen. Please proceed.

Greg Moskowitz (Analyst)

Okay, thanks. Good afternoon, guys. First question, I guess, for Mark, just in terms of the shift to electronic delivery going forward, does that have an effect on margins in fiscal 2013, or will it take a little longer to have an impact on the model?

Mark Hawkins (CFO)

Greg, it'll take a little bit of time. Partway is just, you know, we have to have the customers adopt that. Over time, you know, we've factored in, you know, all that will happen with the electronic delivery in terms of efficiencies. It will be a process that will evolve over the course of the year.

Greg Moskowitz (Analyst)

Okay, perfect. Just for Carl, curious to get your latest thoughts on hiring over the next several months. From a go-to-market perspective, where do you think you stand in terms of selling your PLM going forward? Thanks.

Carl Bass (CEO)

Yeah, I don't see drastic changes in our hiring pattern. Most of the hiring we've done absent the acquisitions has been for more salespeople. We will continue to hire more direct salespeople. On the other hand, our percentage of business through our major accounts has remained fairly constant. I like the mix that we have right now, but most of the efforts and most of the investment will go to go-to-market activities and sales and marketing. There'll be a particular emphasis on the PLM because, as some of the people have already pointed out, it's a somewhat different nature of a sale. We want to go as broad as we possibly can and be successful with it.

Greg Moskowitz (Analyst)

Great. Thank you.

Operator (participant)

Our next question comes from the line of Philip Winslow of Credit Suisse. Please proceed.

David Simpson (Analyst)

Hi, this is David Simpson for Phil Winslow. When you think about the FY 2013 revenue guidance, which segments out of civil, construction, manufacturing do you think will grow above or below that 10% average? Thanks.

Carl Bass (CEO)

I think if you want, generally, we don't give any segment-by-segment forecasting. I think if you want to look back at historical trends and try to guess from there, Manufacturing has been the fastest and steadiest grower. I would expect that to continue. I see nothing to disrupt that trend. The big unknown, particularly as we start getting further out, is what happens in the worldwide economy around construction. We're having really great pickup in the construction part of AEC. Business has certainly stabilized, and in parts of the world, it's improving. A little bit depends on something that my crystal ball is not that clear about, certainly towards the end of next year, what happens with the global AEC market.

David Simpson (Analyst)

Okay, thanks.

Mark Hawkins (CFO)

I would certainly add just, you know, we talked on the product side and such. Certainly, geographically, Asia Pacific will help. As Carl said, if you look backward, you know, we would certainly expect that trend to continue as well.

Operator (participant)

Our next question comes from the line of Steve Koenig of Longbow Research. Please proceed.

Steve Koenig (Analyst)

Hi, gentlemen. Just two kind of qualitative questions here for you. The first one, just wondering about changes to the channel and how you manage them. We understand some of the resellers have expressed concern about opening them up to more competition as you open up the certification process. My understanding is there won't be as rigorous product-specific certification required. I'm guessing that goes hand in hand with the adoption of your suites. I'm wondering how do we think about that impact on your revenues, on the channel, and on the street pricing of your products?

Carl Bass (CEO)

I think the way to look at it is, while we've taken the authorization scheme and made it more open, at the same time, we've introduced a whole host of programs that are pay-for-value. As I said earlier on the call, our goal is to reward the people who do the most work and are the most successful. The only way it's made sense to open up on the authorization side is because we have these other programs in place. What you're seeing is a combination of a number of programs coming together that we think can even better than we've ever been able to reward the people who are the most successful. I think that's what you're seeing. If you hear griping out there, I would just say historically, almost every change we've made in the channel is met with some amount of griping.

Probably the loudest I've heard in my career was the introduction of subscription, which has turned out to be, I think, a major benefit for both Autodesk and our channel partners. Typically, our channel partners have incomplete information as they hear about new programs. The only thing I would say is we've worked hand in hand with our partners for over 25 years. Our partners have gotten stronger during that time, and we continue to want to reward the best partners. They're an integral part of our plan going forward. When you see these changes, you have to know how important our channel partners are to us and all the plans we're putting in place to make sure that they're successful along with us.

Steve Koenig (Analyst)

Okay. Thanks for that. I'll have just one follow-up here, which is really in regards to your suites. You talked a little bit about how the maintenance pricing on the combined suite ends up being better than one individual product. We should expect to see that somewhat in revenues next year. I'm just wondering, given that customers can upgrade, but they can't really downgrade, how do you, how will you go about maintaining the customer value that you're delivering in those suite subscriptions as those subscriptions come up for renewals and the customers, you know, maybe using a large part of their suite, but maybe not all of it yet?

Carl Bass (CEO)

Yeah, I think it's great insight. I mean, we're spending a lot of time watching not only the purchase, but the adoption and usage of the suites. We think once people are using more than one product, it becomes of value to them. If you look at the prices, it makes sense. We are very cognizant of how widely it's adopted and how broadly it's used in order to do that. Along with it, we made several introductions this year of various other technologies. Most of the cloud offerings are tied to our subscription. We're continuing to increase the value of subscription as being more than just the annual delivery of new functionality in packaged software. We're also making sure that there's constant engagement with web services that provide ongoing value.

Steve Koenig (Analyst)

Great, thank you very much.

Carl Bass (CEO)

You're welcome.

Operator (participant)

Our next question comes from the line of Keith Weiss of Morgan Stanley. Please proceed.

Keith Weiss (Analyst)

Excellent. Thank you guys for taking my question. I wanted to ask about, it seemed like in the press release, there was more language about cost controls from both Carl and Mark than we've seen in prior quarters. I just wanted to check to see, are there any new initiatives in there or any kind of new programs that you guys have embarked on, or is this just the sort of the traditional cost control and perhaps just more of a focus on it given the uncertain macro environment?

Carl Bass (CEO)

No, I think if anything, our cost controls have been balanced with investment for the future. We're always looking for places where there's slop or kind of gunk in the system, try to eliminate as much as that. Particularly when we see new opportunities, would I rather spend $2 million too much on travel or get $2 million worth of sales capacity to sell PLM? I think along with Mark and his team's help, we've been looking really carefully at all the costs. It really is in balance with making sure that we're positioned for the future and being able to make the investments that we think are necessary for the future. If you saw anything that's dramatically different, it wasn't intentional, and it's not really reflective of anything going on.

I think having said that, I think everybody in the middle of this year, inside Autodesk and outside, took pause as there was that moment of panic and just wanted to make sure that none of the sloppiness was seeping back into the system after the big purge of two years ago.

Mark Hawkins (CFO)

Yeah, I completely agree with Carl's point. We understand the duality, Keith, of investing, as Carl said, and also chasing out the efficiencies that we should get only in the areas that make sense in the back office and areas of that nature.

Carl Bass (CEO)

Yeah, and in many cases, this is kind of a win-win-win. If you look at something like electronic delivery, over time, it's going to lower the costs, but it provides a much better experience for our customers. It also gets our resellers out of a bunch of non-value-added work. You look at the combination, you say, it's, first of all, good for customers, it's good for partners, it's good for us. Those are the kind of initiatives I really like to see.

Keith Weiss (Analyst)

Excellent. If I could sneak in one follow-up, just on use of cash, interesting trends this quarter in use of cash with 10 acquisitions, but you also saw a nice pickup in your repurchase activity, 3.5 million shares this quarter. To what extent do you expect those to continue, both those trends? One, is 10 deals in one quarter an anomaly? Is that something unusual, or is that going to really pick up on a go-forward basis in terms of just picking up those smaller technology deals? As far as repurchase, how much of that was related just to the fact that the share price got really low and you took advantage of it, or how much is a bigger commitment to repurchasing shares?

Carl Bass (CEO)

Let me answer the question about the acquisitions and Mark can handle the one about stock repurchase. I think the acquisitions are somewhat anomalous if you go back over any period of time. It just so happened a whole bunch of stuff just lined up this quarter. It wasn't particularly intentional. As you say, it was $90 million in aggregate for 10 acquisitions. There were a couple that were large enough to talk about, which means the others were really small. I wouldn't read too much into it. I would be surprised. Ten acquisitions is generally about what we've been averaging per year, not per quarter. I don't see really any change in the historical rate.

Mark Hawkins (CFO)

Keith, on the share buyback, you're absolutely correct in that we did step up a bit in this particular quarter. What I would say to you is our philosophy hasn't changed in terms of covering our dilution. It just, again, will be a little bit lumpy at times. We'll look at the market and facts and circumstances, but the broader picture on the policy hasn't changed. We'll look at the market and look at the situation.

Keith Weiss (Analyst)

Excellent. Thank you, guys.

Operator (participant)

Our next question comes from the line of Steve Ashley of Robert Baird. Please proceed.

Chaitanya Yaramada (Analyst)

Hi, this is Chaitanya Yaramada for Steve Ashley. Thanks for taking my question. Just quickly, you noted a large $11 million deal in Asia Pacific in the prepared comments. Was this deal included in the guidance you gave last quarter?

Carl Bass (CEO)

Not specifically this deal. All our deals are factored in with a probability of closing in a particular quarter. We've been working on that particular deal for a long time, as well as others. Some deals fell in this quarter, some deals fell out this quarter. Big deal activity for us is not that important. We've often talked about the linearity of individual quarters all through. What we saw this time is this one happened to close. There are at least a few deals that we anticipated in our guidance closing. They're now closed, but didn't close by the end of the quarter.

Chaitanya Yaramada (Analyst)

Okay, great. A follow-up, if you can just give us some color on the education vertical, given it was their year-end during the quarter. If you can comment on how did that vertical do versus your expectations?

Carl Bass (CEO)

Yeah, you know, our education revenue is not really substantial. You know, no big plus or minuses there, no surprises.

Chaitanya Yaramada (Analyst)

Great, thank you.

Operator (participant)

Our next question comes from the line of Fatima Bulani of Jefferies. Please proceed.

Fatima Bulani (Analyst)

Hi, this is Fatima in for Ross MacMillan. Quick question on your direct sales force investment. You'd mentioned that this is an area of priority in terms of investments at your analyst day, and you've reiterated that again. Just in terms of where these feet on the street are, is it sort of a regional thing, or the focus is just on bolstering the U.S.-based direct sales force?

Carl Bass (CEO)

The effort has been broad. It's in some of the areas we're looking at. First of all, if you just look geographically, it's been broad. It's not just the U.S. It's certainly been in Europe. It's certainly been in Asia, as well as the emerging countries in all three geos. Generally speaking, it's been for those areas that we've called out as being new and those in which there are large entities that kind of dominate it. One is in the area of construction. Certainly, there's some in the area of manufacturing. Those are the kind of places where we're looking. It's kind of the cross product of looking at the geography and then the economic structure of the industry. As we've gone into construction, as opposed to broad-based AEC, that's something where it makes more sense to go to market with a direct sales force.

The same thing is absolutely true as we look at PLM. For a certain class of enterprise customer, it's a direct sale.

Fatima Bulani (Analyst)

Okay. Just another question regarding suites. Now that suites are kind of in the year, year and a half in stage for a lot of the newer ones, what are your plans around promotional campaigns? Are they going to be scaled back a bit, or are they going to become more aggressive as the new fiscal year begins?

Carl Bass (CEO)

Yeah, so we're really half a year into having suites. We had introduced some at the end of last year, more as tests and pilots to better understand what's going on. This spring and going into the summer was the first introduction. I'd say we're still early in it. We're adjusting the knobs and dials. A bunch of the questions that have already come up on the call, we're analyzing the data. What are people buying? Where are they finding value? Which things are they using? We're going to continue to monitor closely the activity around suites, and we will definitely adjust prices, packaging, as well as promotions as we look to maximize our investment there.

Fatima Bulani (Analyst)

Okay, that's it for me. Thank you.

Carl Bass (CEO)

You're welcome.

Operator (participant)

Our last question comes from a line of Dan Cummins of ThinkEquity. Please proceed.

Dan Cummins (Analyst)

Thanks. Okay, a final blast of AEC questions. With regard to the published comments about record AEC business in public agencies, just looking for color, is that largely a comment about U.S. federal? Is there anything meaningful from other geographies? Was this good performance the result of longer lead time project business or more short-term in nature? Just, you know, quick follow-ups.

Carl Bass (CEO)

I would just say general overall improvement worldwide in AEC. I think when you look, for a while, construction had dramatically slowed down worldwide. I think you've seen a stabilizing and, in fact, growth in certain areas. I think the government deals are more one-off, but aren't the major determinants of growth overall in the sector.

Dan Cummins (Analyst)

Okay, yeah, there's some optimism there in terms of going forward. I guess curiosity around, are you talking about stuff that's identifiable in the current sales funnel? I hear what you're saying about short-term opportunities. If I could just move on.

Carl Bass (CEO)

I was just going to say one thing, Dan. If you really want to look at it, what I think is driving it is a stabilization in the overall market, coupled with the retooling efforts that we've talked about, where people want to get tools that make them more productive. Generally speaking, as people were going into the downturn, they were less interested in retooling. Now, as they start to see job prospects on the future, starts for buildings increasing, they want to make sure they're in the best position to compete for those, and when they win them, that they can perform them as effectively as possible. The big shift in our business has been from a business that originally served primarily the architects and somewhat the engineers.

Our engineering capabilities have gone out dramatically, and we have invested quite a bunch to make sure that we serve the builders or the construction part of AEC. I think there's some overall secular trends going on there in terms of the adoption of technology in the industry that's being bolstered or supported by a general improvement in the overall economy.

Dan Cummins (Analyst)

Thanks. I guess just last thing was just you mentioned penetrating utilities. Is that a notable breakthrough? You have been talking about this as kind of a multi-year objective. Just some more color on that too. Thanks.

Carl Bass (CEO)

I think if you look, in addition to the things that we're doing with broad-based industry, you can look at things like utilities, what we're doing in transportation with departments of transportation. Those are long sales cycles. We've continued to invest in it. We think we have great products to serve those needs, but it's not a decision any of those entities take lightly. They don't do it particularly quickly. It takes us a long time. We're in it for the long term, and we've continued to make those investments. Both in utilities as well as in transportation agencies, we're starting to see the payoff.

Operator (participant)

With no further questions, I would like to turn the call back over to Dave Gennarelli for closing remarks.

Dave Gennarelli (Director of Investor Relations)

Thanks. First of all, I want to apologize for the technical quality at the beginning of the call and the interruptions. Secondly, I want to mention that in a couple of weeks, as Carl mentioned, we have our Autodesk University event. We'll be hosting an Investor Relations event there on the 29th. I know most of you are going to be there. We're also going to be at the Credit Suisse Conference in Scottsdale on November 30th and the Nasdaq London Conference on December 6th in London. With that, we'll conclude the call, and thanks for joining us.

Operator (participant)

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may disconnect at this time. Have a great day.