Autodesk Inc (ADSK) — Q2 2015 Earnings Call Transcript

Thanks, operator. Good afternoon. Thanks for joining our conference call to discuss the results of our second quarter. Also on the line is Carl Bass, our Chief Executive Officer, and Sue Pirri, VP of Finance. 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 anticipated future performance of the company, such as our guidance for the second quarter and full year fiscal 2015, long-term financial model guidance, including billings, subscriptions, and recurring revenue growth. The factors we use to estimate our guidance, new business model introduction, new product and suite releases, market adoption and expected growth rates, our expectations concerning large deal activity in the fourth quarter, business execution, business prospects and financial results, our market opportunities and strategies, including our desktop subscription offering, our plans to transition to cloud and mobile computing, trends and sales initiatives for our products, and trends in various geographies and industries. We caution you that such statements reflect our best judgment based on factors currently known to us, and that actual events or results could differ materially. Please refer to the documents we file from time-to-time with the SEC, specifically our Form 10-K for fiscal year 2014, our Form 10-Q for the period ended April 30, 2014, and current reports on Form 8-K, 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 the forward-looking statements. Forward-looking statements made during the call are being made as of today. 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. 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 our 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 growth changes as we discuss our financial performance, and unless otherwise noted, each such reference represents a year-on-year comparison. And now, I would like to turn the call over to Carl.

Thank you, Dave, and good afternoon everyone. Building upon the momentum we generated in the last two quarters, we are pleased with our results for the second quarter. The results were consistently good across geographies, industries, and product offerings. Strengthening our core AEC and manufacturing businesses led to better than expected results, including record revenue and deferred revenue. We advanced our business model transition with strong subscription additions and continued adoption of our enterprise agreements. If you also consider the $26 million backlog balance into the quarter, our total business capacity for the quarter was exceptional. From a geographic perspective, we experienced broad-based strength. All three of our major geographies grew double-digits on a constant currency basis led by growth in EMEA. The areas in which we are seeing weakness are those affected by geopolitical turmoil. Our strong results in AEC and outstanding growth in our AEC suites can be attributed to the continued adoption in building and infrastructure industries. BIM is now not just limited to desktop products, but is available in cloud and mobile technologies that support access to infield and real-time information. We closed several large AEC transactions in Q2, including a strong win in a competitive stronghold with Autodesk Advance Steel, a technology we acquired with the Graitec acquisition a few quarters ago. We also landed meaningful wins with our structural detailing and fabrication offerings. We continue to steadily grow our user base in each of our AEC cloud-based technologies, including BIM 360, AutoCAD 360, and InfraWorks 360. BIM 360 in particular continued to grow rapidly. We had numerous wins including one with a large European construction firm proving once again that the construction market is primed to embrace the full benefits of BIM. Our manufacturing team delivered very strong results driven by growth in industrial machinery, consumer products, and automotive. Acquisitions we made in both plastics and composite simulation are particularly significant for the aerospace industry. In Q2, we closed deals with three major aerospace engine manufacturers. The Delcam business is performing well and contributed almost $11 million in revenue to Q2. We're pleased with the early results from this business and look forward to advancing our position in the CAM market. Our cloud-based PLM 360 product nearly doubled its billings compared to Q2 last year. We also launched the PLM 360 mobile application in Q2, making PLM 360 the first truly mobile PLM solution. As I mentioned earlier, we had another strong quarter with 74,000 subscription additions. As expected and similar to last quarter the majority of the subscription additions were maintenance subscriptions. With the discontinuation of the upgrade program at the end of this fiscal year, we are seeing a lot of customers take advantage of the upgrade discount one last time and we are experiencing a higher than average maintenance subscription attach rate. The desktop subscription offering for AutoCAD LT had its first full quarter of availability and has performed well out of the gate. What's fantastic is that we also experienced solid growth in perpetual licenses for AutoCAD LT. It’s clearly the case with AutoCAD LT that the desktop subscription program is expanding our reach and bringing new customers to Autodesk. Another element of our business model transition is offering our enterprise customers more flexible licensing options. In addition to being a great benefit for our customers, these contracts create a larger recurring revenue stream which is recognized ratably. In Q2, we doubled the number of large million dollar plus transactions compared to Q2 last year and we transitioned approximately $10 million in enterprise license revenue to deferred revenue. Given our strong Q2 performance and our optimistic view of the macroeconomic environment, we've raised our FY '15 guidance ranges for billings, revenue, and subscription. We also narrowed the operating margin range keeping the high end of prior guidance. As you can see in the numbers, margin upside is muted this year for a number of reasons. This year's operating margin assumption includes the impact from the business model transition, investment in our cloud infrastructure, the dilutive effect of the Delcam acquisition, as well as incremental investment spending on key initiatives. Additionally, commission and our employee incentive program are volume related and increased based on our better-than-expected billing performance. It's worth repeating that our business model transition will not be perfectly linear and that the amount of business that we transition and the number of new subscriptions will fluctuate from quarter to quarter and year to year. We expect the transition to progress gradually in FY '15 and then ramp more significantly by the time we get to FY '17 and FY '18. Lastly, I'll give you an update on our CFO transition. We've started to interview candidates. In the meantime, we have a strong finance organization built of talented people to bridge the transition. I think most of you know Sue Pirri, who has been with the company for over 10 years. She is leading our finance team and is here to participate in the Q&A. So to wrap things up, we were really pleased with our overall results in Q2 and the first half of the fiscal year. We continue to feel great about our opportunities and the direction of the company. It is rewarding to see our mobile and cloud-based products adopted by our customers. These products solve important customer problems and clearly position us as the industry leader as engineering inevitably moves to a cloud and mobile computing infrastructure. It's still very early in our business model transition, but we are encouraged by what we experienced in the first half of the fiscal year. We look forward to building on these early successes and transitioning Autodesk to a more profitable and recurring subscription-based model over the coming years.

Thanks. Good afternoon, Carl. On EMEA you had meaningful improvement in the growth rate. And I'm just curious in terms of what you're seeing in that region, given the growth has really been lackluster and you're finally seeing that return to healthy growth.

Yes, I believe that over the past few years, while Central Europe was performing well, Southern Europe was holding it back. We have reached the lowest point in Southern Europe, and now we are beginning to see a steady recovery. EMEA performed well overall, but as I mentioned earlier, the only areas of weakness were in EMEA, primarily due to the situations in Russia, Ukraine, and the Middle East. Other than that, EMEA did exceptionally well.

Okay. And just a quick follow-up. You mentioned construction. And I believe that this has been one of the bigger net inflows of money when you look at the new revenue inflow into the company. Correct me if I'm wrong, but give us a sense of what you're seeing there in terms of the sustainability, as well, what you're observing in the construction segment?

Yes, sure Brent. Some of it is driven by increased business activity in construction, but some of it also was that were secular move to seeing more money within the AEC industries spend by construction companies on technology. That's been going for a long time. There is this other more cyclical thing that goes with the economic activity. That's been good across geographies, but I think as much as anything it's just the adoption of technology by construction companies, and as they realize the benefits, they historically have been severely under-invested in technology.

This is actually Matt Primo for Greg. Thanks for taking my questions. So despite the huge licensed revenue upside, it was a bit surprising to us that subscription revenue was generally in line with consensus expectations. Could you comment on renewal rates this quarter?

Yes, renewal rates, Attach and renewal were really high. Everything about subscription was good.

Okay. Great. And do you still expect the geo and bus core adoption of desktop and cloud subscriptions to be pretty broad-based by Q4?

I think you will start to see that they are doing well but feeling some pressure from the maintenance subscriptions. You will notice this in Q4 and continue to see it next year and beyond. The desktop products are performing well, and cloud subscriptions are solid. They're just experiencing a bit of pressure from the maintenance subscriptions. It’s a good problem to have.

Thanks. Good afternoon. Carl, I would like to ask you a longer-term question about your operations and corporate infrastructure. How are those operations and infrastructure being prepared for or are they prepared for the new increasingly hybrid business model that you’re going to have over the next number of years? In effect, what I am asking is, are you going to have the capacity and the efficiency that you’ll need for bigger channel engagement and improve order processing. I know that sounds very dull but I think it’s very important for the company, especially as volume is deliverable, so is it likely to increase materially over the next number of years?

No Jay. You’re absolutely right. There’s actually two parts of operations in infrastructure, let’s take a minute. The first one is just the increased amount of order processing because the nature of the subscriptions is term-based and some of them are for shorter periods of time than perpetual licenses, so there’s a huge effort underway to make sure that we can handle the financial transaction aspect. But there’s also a customer-facing aspect of this. There’s a sales engagement part and there’s a marketing effort as well. They are really all tied together, so the overall customer experience with what we’re doing is also important, because as you know, a significant amount of our business goes through our channel partners; it is vital to have our channel partners engaged as appropriate in some of those activities. So, the operations and infrastructure is big on that. The second part is just in terms of providing cloud-based engineering and design services. We’ve been building out cloud infrastructure as well. Both of those things are critically important for the future.

Okay. My follow-up is on the new cloud parts of the business. As of the data available in the first quarter 10Q, only 5% of your subscriptions revenue was non-commercial maintenance, in other words, run rate of somewhere between $55 million and $60 million was from non-classic maintenance let’s call it, and the new subscription services. Could you talk about the growth of that business in the second quarter and more importantly what has happened for that to become a lofty $100 million business over time instead of a mid-eight-figure kind of business like today?

One thing I’ll say is, in October at our analyst day, we’ll give you a lot more detail on this. Right now, what’s going on with our cloud subscriptions is they’re exceeding all the projections we had. The business is doing well, there’s a lot more stuff coming online, some came on in Q2, there’s a lot in Q3 and Q4. So, these are growing businesses and so far I am happy with the results. As for becoming a multi-$100 million business, I think both our desktop and our cloud businesses will become that, and it’s kind of inevitable. I think we’re right on track to do that.

Thanks for taking my questions guys. Congrats on the quarter. Certainly, this year seems to be seeing a benefit from the elimination of upgrades next year. Carl, I'm wondering, when might you eliminate perpetual sales? And maybe more generically, what is the framework for eventually pulling this license option?

I'll ask you Matt, what do you think is a good timeframe to do that?

I would certainly rely on the products, but the market appears to want them sooner rather than later.

We’ve been looking at considering it seriously and we’ll talk again a little bit more about this in October what our plans are. Right now, we have a fair amount of transition going on in the business with the elimination of the upgrades and certainly inspiring people to action. But as we move into next year, we’ll have more to say on that.

That's great. And maybe dovetailing on that same question, obviously, you're seeing some early success on the subscriptions side, the cloud subscription side. I think you've talked in the past about seeing a 20% or more value from those customers. Is that still the case, or in some cases do you see even more value from those types of deals?

Some are more, and what’s been interesting to me, and somewhat surprising is the number of cloud subscribers and some of our cloud-based products, which are just attracting new people to Autodesk. It was interesting; I was with a customer the other day and asking them why they chose, in this case, PLM 360? And they said they just wanted to build on a 21st-century company. We are building new kinds of products and our entire infrastructure is going to be in the cloud. So our first decision point was who has a cloud-based PLM. And second, what was the best? So we are finding companies that were not our natural customers before, and so that’s happening. Additionally, very specific to your question, yes, some people are moving more quickly to the cloud than within our forecast.

Hi, thanks. In the prepared remarks you talked about the gross and license revenue primarily related to upgrade revenue increase that you saw in the quarter. Can you quantify that and what license is sort of an apple-to-apple basis if you would, promotional on the upgraded side is, as of the period you were in the quarter?

So first of all, I'll let Sue jump in, but what I would say is generally speaking our promotions have been going down as the year has progressed, so compared to Q1 the promotional activities are going down. The time frame is getting shorter. My experience in the years of doing this is when we have a like generated by the removal of the upgrades, you're not going to see a wide disparity of activity among our channel partners. They are very focused on this in bringing in this business of it buyers.

That’s right. And we don’t actually break out upgrade portion of license from the rest of the license, but I think it was right. The important goal for us is to get as many of our customers on the current version before upgrades go away. And we’re – the channel partners tend to focus on, the most compelling offer in the quarter, and that’s really what people are focused on right now.

And then just a follow-up sort of related to that. You didn’t talk about there is an impact on subscribers from the promotional activity. And I guess if I look at the pace you're on track to add subscribers during the year, you’re talking about 200,000 to 250,000 this year. If I go back to fiscal 2013, you added about 250,000 sort of the high end, which you’re adding this year really without any help from a significant amount of promotional activity like you have this year. And so I guess while I look at those two numbers, I'm kind of understanding why we are not convinced here that that really is a significant amount of demand per subscription, if you’re not seeing where you are in 2013 levels while driving promotions pretty aggressively.

So I mean the way I look at it is first of all I'm not sure exactly what time period you’re looking at, but through this there were significant promotions with us weeks. We were making very attractive offers, and moving our customers from their point products. So, I mean we always have promotions going on. I think just the nature of the business, promotions give a small financial incentive for the customers, but there are also ways to focus our sales and marketing activity among our teams and our partners. So, in some ways, to look at it, it’s less the incentives; it’s more the goals of what we are trying to accomplish. And what we are seeing is a growing number of people on subscription that were non-subsubscription. We also noted in the remarks that the attach rates are a big bump as well. So, we are happy with where our subscriptions are going.

Thanks so much. Carl, I have a follow-up on your comment to Matt about the new subscribers. People are new to Autodesk. Do you have any number on what percent of the subscriber base you think are generally new users that weren’t previously Autodesk customers?

We certainly have numbers, but we haven’t disclosed them. It's important to note that maintenance subscriptions are not the primary focus here. What we’re observing is in desktop subscriptions, particularly in the LT category. While we're maintaining historical rates for LT, we now have a new category of desktop subscriptions that is performing even better. Additionally, in several of our cloud-based offerings like BIM 360 and PLM 360, we are seeing customers that we hadn’t engaged with before. We will provide more details about this, but it's clear that we are attracting new customers. As I mentioned last year at Investor Day, some markets have been somewhat stagnant with minimal changes in market share, but our new technology platform is appealing to those who prefer cloud and mobile solutions, including people who may have previously been satisfied with another vendor.

We’d heard just sort of anecdotally from the folks in the channel, but it could have been as much as 20% of the subscribers are generally new people. Does that seem like a ballpark number?

I’d hate to guess, but I will go do a little bit of work on this.

Terrific and then just following up on Walter's question on the maintenance subs, you obviously you had good attachment there. Any sense of where we are within the installed base the number of folks who have done upgrades to get to subscription now and what percent may remain or what kind of market size that looks like?

Our best indications are guidance in the revised upward guidance. We see continued strength in – as I talked about in the last call, we said Q3 may be the weakest for the quarter, but we thought Q4 would be a big quarter. The hardest part of figuring this out is, there are way more subscribers left, and we know we will be some behind. Then the real question is just how many. So, we can meet everyone of the expectations we have set. And there are still people behind we’re trying to minimize that as much as possible. But you know, when we look at that base, it goes back. We think of going back about in the three to five-year category and when you go back five years, there may be people whose companies can’t have a business; they may have consolidated or shrunk. So it’s a little bit hard to procure an exact hand on how many of those seats are active today. So we will be able to know the answer much better in the future.

Excellent. Thank you guys for taking the question and very nice quarter. I’ll keep on track with the very hard questions to answer. In terms of business model transition, we are seeing really good evidence sort of the new subscriber add. We are seeing good evidence you guys on targets as sort of long-term buildings target. One of the things that’s tougher for us to give ability into is that the target of uplift in customers' value. I was wondering if you could give us your view on that metric or whether you’re seeing that motion, that upward movement in customer value that you guys are looking for?

So what I would say I think the base is too small to know of the whole thing. Remember a lot of the guidance we gave centered around a five-year plan; we are just in the very beginning of that. So, I’d say the anecdotal evidence is strong, but it's certainly not on a big enough sample size. I don’t think we need any core strength, and I don’t think it’s anything different. I just don’t think it's big enough to really be certain. Again, when we get to Investor Day in October, I would be happy to share more detailed plans.

And then as a follow-up. At the end of last year when I was first talking about business model transition, you guys actually broke out on the guidance sort of how much license revenue is always going to move into those term contracts and into the balance sheet. This quarter you called out what happened in the quarter that just passed in $10 million. Do we have a better handle on sort of what the cadence of that movement is going to be on a go-forward basis? Can you give a little bit more visibility into the accounting there?

Yes, we know a little bit more. We certainly know on the enterprise side what’s going on there. As we always said, just as a matter of historical fact, a lot of the contracts come up in Q4. So, we’re seeing more moving in Q4 just like we did in the prior Q4. So there is going to be seasonality to that. As we get to the accounting on moving other parts of our business that were recognized upfront to a more ratable business model, we’ll fill you in more as we go. And we have gotten hands on that. Additionally, there’s been some complications and there have been some new accounting guidelines issued at the same time. They work together, and we will describe more of that. Sue, do you have anything you want to add there?

No, I think you’re right. We will talk more about it at Investor Day, and we continue to work with our finance team and the auditors and we’re finally understanding that accounting around ratability.

Thank you. I’d like to just drill down on the AEC business. To Brent’s question earlier, you talked about that being strong but really being two parts to it. One, cyclical recovery, and two, just greater adoption by the contractors part. Just for the cyclical part, wondering if you could just talk about what you’re seeing across the major geographies, the U.S., Europe, and Asia Pac? Where are we in the cyclical recoveries in AEC by geographies?

So, what I would say, I think in all three geographies we are seeing strength. An informal way is just to look at the cranes in every city you travel to; everywhere you go, you can see rather large commercial building going on as well as big investments in infrastructure. I don’t think we’re at the top of the cycle yet. We’re somewhere on the way up; it’s been building for a while and continues to build. I have no better way to forecast how long the uptick is going to be, but it’s been sustained. Right now it seems strong and consistent across geographies. Compared to last time, it feels healthier; it doesn’t have some of the bubble aspects from last time. So, right now, we’re feeling really good about what’s going on because it’s been one coming after the 2008-2009 downturn, and it hasn’t gotten too hot too quickly. What we’re seeing is companies' willingness to invest in retooling. They recognize in places where they’re having these technologies and they will not spend money to really get onboard. It’s nice when it comes slowly enough that they can invest in new technology, train their teams, and start to see the benefits, come back and reinvest again, and that’s what we’re seeing this time.

And then with respect to Delcam, just wondering what kind of geographic breakdown that $11 million of revenue might have, not looking for exact numbers just looking for some subjective commentary on how that might have broken down by geo?

We want to break it down. One thing to remember about when we look at things like acquisitions is that you also have deferred revenue right down, but it may not be consistent across geographies. But if I just want to speak more generally, the Delcam business is really strong in Europe. Probably a better way to look at Delcam is by the industries it serves, and it really does well in aerospace and automotive. There are certainly parts of industrial machinery and others, but the way to think about Delcam is computing on the very high end in automotive and aerospace machining.

Sorry about that. Yeah, it’s Heather Bellini. I have a couple of questions for you Carl and Sue. The first one would be, you mentioned that maintenance attach has been running I guess even higher than you expected. I am just wondering if you could give us an idea in percentage terms how much higher you’ve seen it thus far this year for the first half versus what you saw the last fiscal year? And then the second question would be related to, can you give us kind of rank order for us, the top three things that drove the deferred upside? It was much higher than the Street. And then, I guess the last question is more of a capital allocation question Carl. You have been very successful in the transition thus far and I know you have very big plans as to how you’re going to exit a few years from now. What’s the current thought around being more aggressive and issuing debt of something of that nature in order to really take out a big plug of your stock, given you’re executing on your plans so well?

Okay. So, I don’t want to break down the percentage upside. Sue, you want to break it out?

I can tell you the categories. The categories in deferred are obviously maintenance.

I was talking about the upside in attach rate first, but...

No, we don’t break that out.

…is it running 20 points higher, is it running 10 points higher, it’s not a specific number that we’re looking for.

So what I want to say Heather is, it’s meaningfully more – we’ve seen that in a couple of quarters in a row, but with the current attach rates we have, it’s not going to be 20 points more obviously.

Okay. And the other two questions? On what drove the deferred upside if you could around the quarter?

Yes, so we don’t break down the specifics of where the increase in deferred came from, but the things in deferred obviously consulting plays a part in it; the maintenance is in there. There are some support, and there’s a variety of things in deferred and one of the big moves is consulting during the quarter, some of the deferred consulting and services.

If I had to put two things, I’d say one is consulting and the other one is regular maintenance. Just the upside in maintenance drove that as well.

And Carl the last one.

Yeah, on the capital allocation. We’ve been working on a capital allocation plan. We did an offering, it’s probably a year or two now. We’re always reviewing it with the Board as well, and we have nothing to announce at this point but we’re certainly looking at it and making some decisions about capital allocation.

Thank you.

Yeah, thanks. Hi, guys. I wanted to actually ask about suites. It’s been a while since we talked about the idea of what kind of average uplift that you’re getting on a suite sale versus a point product and more specifically where are you seeing the strength in the suites, whether it’s the highest-end suite, the mid-range or the lowest?

All through this, it’s really been the mid-range suites that have done the best, which is where we wanted to. I would say we overestimated the people who would go to the low-end suites and we underestimated the two other categories above, the medium and the high. We’ve seen more consistently those moving up. We are getting the uplift; it’s one of those times which our modeling ended up being very spot on, and it’s been very consistent over the last few years. So, we’re seeing the uplift; the strategy around the suites has worked really well and really according to plan.

And the follow-up is actually in media and entertainment. In the prepared remarks, you talked about some of the impacts on end-market demand. Some of it is on the move to subscription. How should we think about where the media and entertainment revenue line goes from here? Is it something that actually could start to fade away?

No. I think, as we always try to distinguish, media and entertainment are two different parts of the business. There is the creative finishing. Creative finishing has been diminishing; some of it is just the nature of the market, and some of it has to do with the hardware component in there, which we no longer sell. And then there’s the other part, which is the software part of the business. The software part of the business is good and healthy, and we like all the dynamics in that part of the business. What we see in the other part, we’re less happy with it. That’s been going on for the last half dozen years in the creative finishing part.

Hi guys, thanks for taking my question and one question and a follow-up if I can. First Carl, nice growth in subscription billings. As we think about the total billings guide for 10% to 12% growth this year, how do you think about the related growth profiles between license billings and subscription billings?

I believe that in the short term, we will observe subscription billings increasing at a faster pace due to the activity in the channel. The results from the first two quarters serve as a positive indicator. As I mentioned three months ago, Q3 might stand out as an exception this year, and we can expect Q4 to show strong growth in maintenance subscriptions again.

Sort of, and then for those customers that are buying an update while they can before the deadline, can you remind us at what point will those same customers be forced to come back and either buy another professional license at full price or maybe finally cave in for maintenance to stay current?

Well they really have to do something. If they buy an upgrade now along with maintenance, they're on, and they only have till the end of the year.

Well, so just to clarify that, so a customer that…

The only other choice they have is just to buy. If you don’t want to get our maintenance, you buy a perpetual license. You do not buy maintenance and then some number of years from now when you’re comfortable with the new product, you buy another perpetual license.

Okay, I wasn’t sure if there was a time period where Autodesk would stop supporting. Maybe in the past it was after three years, Autodesk would stop supporting some number of versions of its software, but it sounds like it’s more customer-based.

Yeah, and the truth of it is there is a half-life to software. Given the integration with enterprise systems and the data and the training, the software becomes less valuable over time. If you’re not on the latest releases, it just becomes difficult to communicate with those folks in your ecosystem, and it just becomes difficult overall. So the value of that license definitely diminishes over time. Being more than three years back is not practical for most companies.

Thanks for taking my question. I have got one short question and then a slightly longer one to follow-up. So on the short question. Could you give any color on that Q3 EPS guide? It looked a little light.

Yeah, we tried to cover it a little bit. At least in my open commentary I listed a whole host of reasons that are in there. Some of these return are expenses due to the over performance. So compared to last year, there’s more in bonuses and other compensation-related expenses. There’s also continued investment in building up the infrastructure and relationships to Jay’s question. We talked about building back office systems as well as a cloud infrastructure. So we’ve been investing in that and then I detailed a number of other ones, but there are continued investments that we believe are really important for the future of the company.

That's great. I’d like to ask about Europe. If I had any concerns, it would be related to weaker data points coming from Europe, particularly in Eastern Europe, Germany, and Italy. You mentioned observing some weakness in certain parts of Europe. Was this offset in Q2 due to strong license upgrades or strong performance in other regions? Additionally, do you see any changes ahead? Does your linearity suggest anything, and how do you incorporate the recent macro data points into your guidance for Europe?

A couple of things to note. The only areas in Europe that I found weak were Russia and Ukraine, along with issues in the Middle East affecting EMEA. Those are the two regions of concern. Most of traditional Europe actually performed well. I was surprised by the numbers from Germany. We haven’t seen any significant negative trends, so that was a bit unexpected for me, but I can certainly consider it.

Thank you for taking my questions. Carl, how confident are you that the limited window for selling upgrades might not impact the impressive strength you're seeing this quarter? I'm concerned that this performance could be at the cost of your license business next year, or even your subscription business. I would think that getting on updates and maintenance would relieve some pressure on customers to consider new licenses or subscriptions. Additionally, it's been almost a year since the launch of the subscription initiative. Is it because the company is still balancing between selling licenses and subscriptions that you’re not as pleased with the subscription update? It's clearly performing better than your overall forecast, but I would have expected to see a more immediate, noticeable impact due to such a significant change. Could it be that selling both licenses and subscriptions has prevented a larger breakthrough this year? Thank you.

Yes, the guidance we provided five years ago is relevant, especially in comparing us to Adobe. While there are similarities between Autodesk and Adobe, there are significant differences as well. Adobe made a bold decision to eliminate perpetual licenses for most of their desktop products, which contributes to those differences. In contrast, we already had a much larger subscriber base compared to Adobe, so our starting points were different. We continue to sell perpetual licenses, whereas they do not. Therefore, directly comparing our graphs is not particularly useful. However, the overall trends that both we and Adobe—along with others in the traditional desktop software market—are observing are quite similar. If we take a moment to consider the future, three years from now, I would be surprised if anyone is still heavily relying on perpetual desktop software.

And the impact of the upgrades, Carl, to what extent do you think it might have been at the expense of next year’s demand for licenses and subscriptions or maybe not strong costs?

I don’t think the upgrades have much to do with next year’s subscriptions. Some of the people are certainly deciding now to upgrade and buy their licenses ahead of that change. There’s always a small effect, but as we’ve talked about before, there will be new emphasis next year for something else, and it’s a large install base, and we’ll tap into a different part of it and hopefully motivate it appropriately.

The other thing that I would add is as we’re seeing the folks upgrading, we aren’t seeing higher cash rates with these customers and getting closer to Autodesk to being on a maintenance subscription is a good lead-in for us marketing other products for them and eventually priming them for the desktop subscriptions and the cloud.

Hi everyone. Thank you for having me. Most of my questions have already been addressed, but Carl, I wanted to ask if you could share some insights on what you’re observing from the consumer segment. There's been a lot of emphasis on the enterprise side, but you’ve mentioned that there’s significant potential with consumers in the long run. I was curious if you could provide an update on that.

Yeah, sure. What’s going on with the consumer is really exciting. We’re getting close to more than 200 million users in the consumer space with over 50 million monthly unique users. This is turning into something substantial. We continue to do more in that market and we’re succeeding with that. We’re also kind of bridging the gap between some of the consumer stuff for some of the things that have been delayed in the consumer work and what’s going on in the more industrial markets. One thing that I didn’t touch upon but we did announce that we were doing a 3D printer; Autodesk was actually designing and manufacturing a 3D printer. That’s going really well, and I am very pleased with the progress that we’ve made to date. I am sure we’ll be showing you the 3D printer in October. Prints are coming out of it all day long, and it’s sort of really exciting. I am excited about the consumer opportunity in and of itself, and we’ve just spent the last 50 minutes talking about the more industrial part. There’s this interesting segment in the middle as well that we see developing in the small new industrial that transitions out of the consumer, but all signs are really positive with the consumer. In many ways, they’ve been a great leading indicator of the other stuff, much more willing to adopt cloud and mobile stuff ahead of the enterprise.

Great. That’s helpful. I appreciate it and maybe just one quick follow-up. I know the channel’s been focused on really getting customers hurrying on subscription. As we start to look into next year when the upgrade option goes away and the focus is just a little bit more towards desktop subscription and the cloud offering, what sort of work or investment do you need to do to make sure the channel’s ready to really help drive growth in those areas as well?

I don’t think there is anything dramatic going on that needs to happen with the channel. We work really closely with our channel partners and when I am able to report really good results like this quarter, it is the result of the combined activity of every channel partner. So they are doing really well. They are really optimistic, and one thing that did surprise me this quarter was I did notice in your guys’ channel checks not actually picking up on the strength in the quarter, so there’s some level of disconnect that I don’t quite understand; I need to probe into a little bit more, but our channel partners are really optimistic about the rest of the year going into next year. I am surprised that didn’t come through in some of the conversations with you, but it certainly came through in the results. So I think you’ll see only small incremental changes in how we work with our channel partners.

Great. Thanks and congrats on the quarter.

Okay, thanks very much.

Okay, well that concludes our call today. As Carl mentioned, we have our Investor Day coming up this October 1, at our gallery in San Francisco. If you have not signed up for that already, please send me an email or call me at 415-507-6033 and that concludes our call today. Thank you.