David Gennarelli Carl Bass - Chief Executive Officer, President and Director Mark J. Hawkins - Chief Financial Officer, Principal Accounting Officer and Executive Vice President.

Walter H. Pritchard - Citigroup Inc, Research Division Jay Vleeschhouwer - Griffin Securities, Inc., Research Division Heather Bellini - Goldman Sachs Group Inc., Research Division Sterling P.

Auty - JP Morgan Chase & Co, Research Division Brent Thill - UBS Investment Bank, Research Division Gregg Moskowitz - Cowen and Company, LLC, Research Division Brendan Barnicle - Pacific Crest Securities, Inc., Research Division Steven M. Ashley - Robert W. Baird & Co.

Incorporated, Research Division Matthew Hedberg - RBC Capital Markets, LLC, Research Division Keith Weiss - Morgan Stanley, Research Division Steven R. Koenig - Wedbush Securities Inc., Research Division Ross MacMillan - Jefferies & Company, Inc., Research Division Kash G. Rangan - BofA Merrill Lynch, Research Division Matthew L.

Williams - Evercore Partners Inc., Research Division.

Good afternoon. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2014 Autodesk Earnings Conference Call. [Operator Instructions] Mr. Dave Gennarelli, Director of Investor Relations, you may begin your conference..

Thanks, operator. Good afternoon, and thank you for joining our conference call to discuss the results of our first quarter. Joining me today is 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 made 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 2014; long-term financial model guidance; the factors we use to estimate our guidance; new products and suite releases; market adoption and expected growth rates; cost management efforts; hiring plans; business execution; large transactions; strategic transactions; business prospects and financial results; our market opportunities and strategies, including our transition to the 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 the fiscal year 2013 and our 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 risk 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 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 or growth changes, as we discuss our financial performance, and unless otherwise noted, each such reference represents a year-on-year comparison.

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

Thanks, Dave, and good afternoon, everyone. Over the past several quarters, we've been experiencing uneven economic activity around the world. For this quarter, the mixed global economy and challenging end-market environment weighed heavily on our revenue results.

There are a few positive areas in the quarter, but overall, a weak April led to a disappointing finish to the quarter. From a geographic perspective, each geography had its challenges. Solid performance in Japan buoyed our results in Asia Pacific. Performance in EMEA remain mixed by country.

We experienced good large deal activity in Northern Europe, but malaise in Southern Europe continued. In the Americas, our results in the U.S. were flat, while most of the region experienced declines. As a whole, emerging economies remained choppy and underperformed our overall business.

Our AEC products performed relatively well, with growth in our suites and growth in all 3 major geographies. We have experienced signs of a recovery in the commercial construction market as architects, contractors and building owners are turning to our BIM solutions like our Building Design Suite and Infrastructure Design Suites.

As we highlighted in the BIM webinar we hosted this past March, Autodesk is leading the BIM revolution, and we are well positioned to take advantage of the meaningful opportunity to provide BIM tools to the construction market. The construction industry and how it operates in the field has long been an unrealized opportunity for Autodesk.

BIM 360 is allowing us to capitalize on this potential, and we saw a continued adoption and enthusiasm for both BIM 360 Glue and BIM 360 Field. Solid growth in our Product Design Suite for Manufacturing could not offset the declines we experienced in our standalone manufacturing solutions.

The global manufacturing market has been more influenced by the downward pressures, but we look to fight through these headwinds as we go forward. Despite these headwinds, we continue to make progress in important verticals such as automotive.

Several of our large multimillion-dollar-plus transactions over the past few quarters had been with automotive companies. More importantly, our investment in these major accounts is now opening up new opportunities to sell Factory Design Suite, simulation and visualization tools.

What's more, penetration into the automotive companies themselves creates ecosystem opportunities for us in their supply chains. Overall, our suites continue to grow faster than our overall business, as customers realize the value and power of our suites.

During the first quarter, we launched our new 2014 Design and Creation Suites, which offer unprecedented access to Autodesk's software portfolio, spanning desktop and cloud. We continue to transform Autodesk in the way our customers design, create and get their jobs done.

Autodesk is leading the industry in cloud and mobile applications for design and engineering, with increased connectivity to the desktop, expansion across platforms and achieving significant milestones.

Our cloud platform, Autodesk 360, was a key aspect to our new Design and Creation Suites, demonstrating again that the desktop and cloud are better together. New cloud-based features include the new Autodesk ReCap Photo service, which helps users create high-resolution 3D models from photos using the power of cloud computing.

Also illustrating the power of the combined cloud and desktop solution, we introduced new desktop software and 360 cloud services called InfraWorks. This new tool helps accelerate the adoption of BIM and cloud-based workflows for the planning, design, construction and management of civil infrastructure projects.

InfraWorks is available only with the new Building Design Suite and Infrastructure Design Suite. Autodesk PLM 360 and Simulation 360 continue to gain momentum, with increased adoption amongst our manufacturing industry customers. We hit our official 1-year mark as a PLM provider, with a community of users over 10,000 strong.

While billings and revenue contribution are still immaterial, the trajectory is encouraging. Our PLM ecosystem is expanding to include new strategic partners. Earlier this week, we announced a new partnership with NetSuite, another company leading business transition to the cloud.

The relationship integrates our Autodesk PLM 360 with NetSuite's own products and aims to transform modern manufacturing by helping manufacturers confront challenges, deliver quality products and address customer innovation requirements, all with a flexible cloud-based system.

Starting this summer, we will roll out term-based or rental offerings of some of our suites and select individual products. These rental offerings of our desktop products are designed to give our customers even more flexibility in how they utilize our products and will provide us with new ways to take advantage of new market opportunities.

As I mentioned last quarter, these offerings are based on a significantly different model, and we expect adoption and consumption of our cloud and rental offerings to increase gradually over time. As such, we are not anticipating any significant changes to our core business model in FY '14.

Given our overall performance in the first quarter and continued unevenness of the global economy, we've lowered our revenue forecast for the rest of FY '14.

However, through our continued diligence around cost controls, we believe that we can expand margins by 50 to 100 basis points for the fiscal year while still making essential investments in the business. In the long term, I believe that our business will achieve meaningfully higher revenue growth.

We also remain committed to driving long-term margin expansion, with the goal of getting to 30% plus. As we look forward, our market opportunity and leadership has not diminished.

I'm more excited than I've ever been about the opportunity in front of Autodesk, as we continue to transform our existing markets and disrupt new ones with our leading technologies. Operator, we'd now like to open the call up for questions..

[Operator Instructions] Our first question comes from the line of Walter Pritchard with Citigroup..

Carl, I was wondering if you could just talk about from a sales perspective -- obviously, you guys have made some changes over the last year.

Maybe it's been a little bit longer than a year here, and I'm just wondering what impact -- how are you guys isolating the impact that the change in sales may have had on your performance this quarter?.

I think the changes in sales we made are diminishing in importance. There are a number of things. If you dig into the numbers more deeply this time, Walter, you'll see a couple of things that differ from before. We highlighted strength in Central and Northern Europe.

Remember -- if you remember back, we talked about weakness there before, particularly the suite in our major accounts. One of the things that was clearly different this quarter was weakness in our major accounts. Major accounts has been something that we've been investing in and really proud of the accomplishments.

To some extent, it looks to me like we ran the table a little bit in Q4, a little bit more than we thought. And so there was weakness around that. There was weakness in the emerging economies. And so I'd say in the sense of continuing improvement, I'd say we probably saw a slightly more effect from overall macro and less from our internal sales things.

But there's probably still some lingering effects. Moving forward, we're not particularly pleased with the results this quarter. And we put in a bunch of plans already to rectify it. So we see kind of small incremental improvements we can make that will drive better results for the rest of the year. And so we will continue to tweak those.

The major changes are behind us. But it'd probably be too far for me to go and say that there was no impact at all from the changes we've made in the sales organization..

And then just a question for Mark on -- you guys have talked about in the past sometimes seeing some early indications of what's going out -- what's coming in, at least on the macro side from things like LT sales and subscription renewals, subscription attach rates.

Could you just talk about how -- what you're seeing from the perspective of those metrics and what that tells you about the macro environment?.

Sure, Walter. I would say a couple of things. One is that LT is very promo driven and certainly, I think, was affected by the macro environment that we saw I'd say, especially in April. I think the one thing that we do know is how to address LT.

And I think promotional activities can certainly help that, but we certainly saw an effect in April, for sure. I think the other things that we saw -- generally, things like our subscription renewal and attach, they were off slightly in terms of the metrics. But we're pretty stable.

Really, in total, they're pretty close to highs that we've had in the past year, so not a material change in that effect..

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

Carl, Mark, I'd like to ask your thoughts on the composition of the revenue growth that you're looking for, for this year, the 3%.

In other words, how are you thinking about the contribution from new license revenue growth versus maintenance revenue growth and even the residual from upgrades and cross-grades? With respect to the new business, there are 2 things I'd like you to perhaps reflect upon.

One is that your new unit volume through the end of fiscal 2013 would appear to be still have been somewhat below what it was in the last full year before the recession. So you still had some upside left, so to say, to get back to where you are in terms of new unit volume.

And back at AU in November, Mark, you pointed out that the majority of your new unit volume was attributable to suites and when you exclude LT.

So if you could perhaps talk about how you're thinking about the overall opportunity to grow new license volume this year versus where you were and the other components of revenue?.

Yes. So maybe we can combine on this. I mean, one thing I continue to see 2 areas which will drive the growth in the end of the year. One is continued focus on Suites. Suites did well. They didn't just do well enough to offset some of the shortcomings in individual products, and the other one is LT. And so those are probably the 2 areas of focus.

It will be -- it will certainly be our new units. Some of our forecast was against an increasing headwind on FX. So we see a changing currency happening and a little instability out there economically. But remember, when you look at new volume, that's going to be driven by volume in Suites and volume in LT..

Yes. And I would just -- I would add, I certainly support Carl's comments. The other thing, when you are breaking it between new license and subs, Jay, we don't always guide out that way. But I think a couple of points to note that our subscription revenue grew nicely at 6% in Q1.

And I think the other thing to point out to you is that our deferred revenue, which is where subscription comes from, is up 17% year-on-year. The total deferred revenue balance is $851 million. So I wouldn't -- again, you have to model it all the way out there. All I would say is subscription should be a part of that growth equation as we go forward..

All right. Clarification on the earlier question about maintenance.

Could you break it down across the business units or segments? In other words, is there any appreciable difference in attach rates or renewal rates or just general growth in billings across PSEB and AEC and Manufacturing?.

I would say different. Jay, I would say things -- there are certain geographies where the attach is slightly different than other geographies. We don't give specifics but, for example, in Asia Pac, the attach is slightly different than it would be, for example, in the United States. It would be one dynamic that we have called out.

The other important dynamic that I will call out, Jay, that's important is that the actual renewal rate on Suites is actually higher than the renewal rate in average for the company. And the company is at, close to a high -- within a few points of the high for the company.

So I think the fact that Suites are something that Carl talked about that we're going to be growing in the future, that's not a bad dynamic..

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

I've got a couple, Carl and Mark.

I guess, first off, how did -- how do you see -- Carl, you mentioned you don't think Autodesk 360 can impact your business model this year, but how do you see it impacting your business model in calendar '14 and beyond, if you could share that with us? And then, Mark, I guess the question for you would be, how do we think about what's implied in your back-half revenue ramp? Because the seasonality was obviously much more pronounced to the downside in Q1, and you're guiding to similar below-normal seasonality in 2Q.

But in the back half, you actually have seasonality that looks above normal.

So can you walk us through what's implied in your kind of macro assumptions or business assumptions to get to that -- to see that ramp in the back half of the year?.

Yes. I think if we generally look, Heather, all the 360 products, what we'll see this year is continued growth in PLM 360 and Simulation 360. We will be launching Fusion 360, which is the first engineering tool that's cloud-based this year.

And so when you just do the math over that and the way we're selling those products, we don't think it'll be very material this year. I think if you look at the collection of 360 products for next year, along with what we're doing with the term-based Suites, I think it starts becoming an important part of next year's story..

And I'm just wondering, does that impact how you think about giving guidance? Because -- is that going to be revenue that sits on the balance sheet? Or the way you bill it, is it going to be similar to kind of Adobe, where maybe it's not monthly, but it's quarterly? So it's not going to be the standard way of looking at the business..

I think we're going to end up in a similar place to Adobe over the long term. We're both going through a business model transformation, as well as a technology platform change. The way we get there will probably be different, partially because of the starting points. Remember, we're starting with nearly $1 billion in subscription revenue. They don't.

And I think the second part is the offerings will look similar along the way. I have -- I don't think the ending of perpetual licenses abruptly is such a good idea. It's certainly not what our customers are asking for. So I think the rate of that transition for us will be slower, because we're going to still offer that choice to our customers..

Okay. And then Heather, the second part question of the question had to do with the back half versus the first half of the year. So a couple of things that I'll call out to -- you asked about economics, but I'll just give you a little bit more color.

The first thing I would just remind, and I know you understand this, but just for the broader folks on the call, is that there's a bit of a normalization you need to think about just from the reference point of the first half. We took $24 million of what would have been first-half growth and pulled it into Q4.

If we normalized that, Heather, that would be a couple of points of growth in the period. That's just to kind of get to the starting point of the discussion. The second thing is that, you're absolutely right, you will see growth in the second half that's going to be higher.

The thing to remind folks on is Q1 of this year, compared to Q1 of last year, Q1 of last year, we grew 11%. It's the toughest compare in the entire year. As you look at Q2 through Q4, the compares are much better, if you look at just the definition of year-on-year growth rate in Q2 through Q4 of last year.

So the compares are definitely easier, certainly much, much easier than Q1. I think the other thing that we need to call out, as Carl touched on, you should expect the growth to come from Suites and LT will be driving forces in that, and I think I also touched on subscription. And so you'll see those as the makeup.

And I can't get into particulars, as you will very much appreciate, but our go-to-market plans will address the opportunities both from the product and offerings and all things that you do with go-to-market. So let me just leave it at that, that's what's going to push us forward.

And I would say, Heather, another important point is just think about Q4 growth will be even greater than Q3 growth. So just want to give you that profile..

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

Can you give us a little color on the strength in the short-term deferred revenue? I think you touched upon it, Mark.

Was it all based on subscription? Or was there some other factor that gave you a lift?.

Yes. Sterling, it was subscription and multi-year subscription. In general, both of those together really contributed to that, if you look at it on a year-on-year basis. Just to give you a sense here, Sterling, that makes up -- I won't give you the exact percentage, but it's the vast preponderance of our deferred revenue..

Okay.

And looking at the quarter, was there any one particular geography that really surprised you in terms of the weakness?.

I would say it was -- more uneven across a number of different categories. I -- Carl, I don't know if you have any thoughts. But I think -- I don't know that I would call one out as much as all of them, the macro sentiment was just tougher; in general, just a tougher selling environment..

Yes. The [indiscernible] is equal opportunity. I'd spread it around..

Yes. And I gave you more -- something more specific, but I think the general selling environment was tougher..

Yes. If you get too fine grained about it, like you said, there are places here and places there. And if you pick it apart by channel, by geography, you can get to things. But I don't think it's that meaningful.

And I think, more importantly, we spent a bunch of time trying to understand the patterns -- understand the root causes, as well as the patterns. And nothing really emerged for us from that. It looks like in places, we need to do a better job, at very specific things. But there wasn't a general trend across it.

If anything, I don't think we should have been surprised or anyone else. But I continue to be disappointed by performance in Europe, particularly Southern Europe just continues to be a drag. But that'd be a bit much to call out a surprise..

Our next question comes from the line of Brent Thill with UBS..

Carl, x 2009 recession, this would be the lowest growth rate you guys have posted in 10 years. I mean, is there something deeper going on in your markets or some competitive issue? Anything that you're seeing that's different? And I'd a quick follow-up for Mark..

Yes. The one thing I would say is that we are looking at, and we don't really have a conclusion, I think there is certainly noise out in the customers about the way they buy software. That is certainly beginning to impact.

So I think the news from Adobe during the quarter about ending perpetual licenses and the lead up to that certainly has our customers asking questions about it. There's clearly a secular decline in desktop PCs. On the other hand, our customers still need workstation, quality devices in order to do their day jobs.

They continue to buy software and hardware to do it. But I think at the margin, there is some friction and some doubt about what are the business models and what are the delivery models and what are the platforms look like going forward, and should I be looking at new ways to do it.

So I think it's too early for me to declare that this is an ongoing thing. But I do think there are a number of points in there like that. I don't think that it can also -- the only thing else I'd add is one of the things that did change this quarter is we have moved from a sell-in to a sell-through model.

And I think, naturally, that will introduce a little bit more volatility in the results, and not to introduce it as an excuse, but more just to bring -- to shine a light on it. So people are aware that having a sell-through model will continue to be slightly more volatile.

I don't think it has a dramatic first order effect but certainly, marginally, it has some impact..

And Mark, just on the pipeline forecast methodology, this is now the second year where you had to take numbers down inside the year, where you gave the original guidance.

So is there a difference in terms of how you're thinking about what's going on in the pipeline, given what's happened in the last few years?.

It's a great question, Brent. I think people have been pressure-testing the pipeline nonstop. We -- I think people have been looking at it with -- the company hasn't -- not done this for like 30 years.

We've looked really carefully from a channel standpoint, from a sales standpoint, cross-secting that, trying to put the appropriate prudence in there and yet at the same time, the global economy has toughened up. And I -- I know I read all these different reports. I can see we're not alone in this dynamic.

It's unfortunate, but in some of the same locations, where the economy has toughened enough and the selling environment is tougher, we're feeling the same things. So we're not exempt from that.

Unfortunately, they just -- I think we absolutely are constantly scrubbing this thing, constantly trying to work the pipeline with all the right parties in the team.

So Carl?.

Yes. I think the other thing is slowly, our business model is shifting. And that's why you're seeing better revenue results in the recurring revenue and not so much in the new license.

Part of high renewal and -- attach and renewal rates, the addition of more functionality in there, we are continuing to move the business to that, which tends to spread out the revenues. So I think there are a number of small dynamics that add to it, much more so than something dramatically different.

When you look at the competitive landscape, I don't think it's hard -- it's changed very much. If I look across AEC, I think we're starting to see pickup slightly. We tried to signal -- last quarter, we were beginning to see signs of a pickup in the commercial construction market on a worldwide basis. We continue to see some of that this quarter.

So we see some strengthening in the C market. I continue to love our positioning in BIM as being not only the defining company for BIM but also the leading provider. In Manufacturing, which reported overall bad results, the place where the market is most competitive is around the Flagship offering, which is around our Product Design Suite.

Our Product Design Suite grew double digits this quarter, and that's a great result. That's the most accurate comparison point against our competitors. And if you look at our competitors, they didn't grew double digits in that product line. So our lead engineering product grew double digits, so I feel good about that as well.

Around margin, I'm not -- I feel like we have room to improve in some of the point products and in some of the more niche applications that overall weighed on it. But if you look at the positioning overall, that's really strong. The other thing I would point out is we have a lead position in terms of how these markets are changing.

We have the first cloud-based engineering design tools. We have the first cloud-based simulation tools. We have the first cloud-based PLM tools, the first cloud-based construction tools. So if you go through that, those are all places where, to some degree, we're slightly ahead of the market.

But if you give me a chose between being slightly ahead of the market and slightly behind the market, I would choose our position in, all day long..

Our next question comes from the line of Gregg Moskowitz with Cowen and Company..

Carl, just anecdotally, what are the early responses been to the refreshed Design and Creation Suites that you introduced a few weeks ago?.

It's a little bit early. General response is really good. Continue -- people continue to see the value. Mark talked about reflecting it in renewal and attach rates, which is the most sure sign that people see value in it. It's one thing, that anecdotal, it's another to see those renewal rates be good.

We pretty much got that down to a science, how we do our Suites. And like I said, I like to see continued growth in building Design Suite, Infrastructure Design Suite, Product Design Suite, those are the key initiatives, and they're doing well. I like the strength in those products.

The interesting thing to see this year is we've started offering more capabilities about a connected workflow, being connected to the cloud, using it for simulation, visualization, PLM.

That's really -- and almost back to Heather's question, we'll be able to give you a little bit more insight, as we watch the adoption of the cloud services that are attached to our desktop products, to the Suites. That will be a really good indication of how well we're doing with it during the year.

So in a standalone basis, I think we've proven the point and proven the value in the Suites. Our -- the next task in front of us is demonstrating value to our customers in terms of the web services that come along with the Suites..

Okay, great. And then just for Mark, the loss on hedging in the quarter was a little greater than we were expecting. For fiscal '14 guidance, I'm sure you're assuming that spot rates will remain constant.

But can you say what sort of currency impact on revenue that will equate to for the full year?.

We don't actually present that, Gregg, for the full year. But I think you got it right, we always disclose that in the current quarter. You could see that the full effect on a year-on-year basis. It took about -- it depressed it by about 3 points of revenue growth year-on-year. You can see the effect on operating margin.

It had a downward draft on operating margin. You can see the delta there between the FX effect on OpEx, favorability and the unfavorability on revenue. So you can see it from that standpoint.

One of the things that I would call out, Gregg, just to help is that we're not anticipating or projecting anything different from kind of what we have in our -- what we see today. You do know we do a 4 quarter layered hedge from that standpoint so it will actually cover that.

And another point, just that kind of touches on this, Gregg, around FX and even the economy, some people -- I've read a lot of the industry reports on the competitive market, where people are also finding it a tougher selling environment.

I see some thread about tough first half patch, rough patch there and then, we'll get better assuming going forward. We're not assuming that. So FX, what you see is what you get. For the 4 quarter layered hedge, you can see the effectiveness, period.

And then from an economic standpoint, we're not assuming anything different either on the FX side or the macro economy side. I hope that helps, Gregg..

Our next question comes from the line of Brendan Barnicle with Pacific Crest..

Carl, I was just going to follow up on Walter's -- your response to Walter's question about the weakness in major accounts.

Does that -- can we assume from that, that direct sales, your internal direct sales were weaker than general sales?.

Yes, you're absolutely -- as I watched a number of people this quarter publish -- a number of people published reports on their channel chats.

I think that some of the people got cross wise is that they did a -- they were safely in the channel, and the channel actually got better than our major accounts, which is the opposite of what has been the majority of the last 6 quarters --.

Right. And then following up on -- you talked [indiscernible] product. I think you ended a lot of it with Heather's -- with your response to Heather's question.

But I assume that you contemplated all those changes in terms of that move to rental, whatever that may, however that may impact revenue in this full year guidance?.

Yes, of course. Yes. Everything we're talking about is in there. There may be some variability in the adoption rates and stuff like that. But to the extent that we've been able to project it and run sensitivity analysis around it, this is our best idea of what will happen..

Our next question comes from the line Steve Ashley with Robert W. Baird..

I just like to ask about the emerging economies, kind of declined here to 13% in total. I think we have to go back to 2006 before -- the last time it was that low of a percentage of your revenue. Would just love to get some color on the relative kind of shrinking of that geographic representation within your business.

And is that something where they're not buying Suites as much in emerging economies? Just trying to get some color on that..

Yes, I think the 2 things are -- there's not as much purchase of Suites in emerging economies. It's clearly still a single-suite product solution there. And I'd say the second part of it is, which has always been true, is there's more volatility in the emerging economies, and our ability to grow there is tempered by the piracy.

Piracy is still at incredibly high percentage. Remember, piracy rates are somewhere north of 80% in these emerging economies, which means the availability of software that you don't have to pay for. That's just a difficult environment, and we do the best we can against that backdrop.

But as economies weaken or as governments let up on their compliance efforts, companies see it as an opportunity to contribute to their bottom line rather than ours..

And then I'd like to really ask about one of the kind of the bright spots in the quarter. And that was the AutoCAD Design Suite. That was a product you've had out for several years -- not several, but 2 years. But recently, it seems to be getting more traction.

Am I reading that right? And if I am, what do you think is aiding that?.

Yes, you're reading it correctly. It's continuing -- and by the way, remember, even at the very beginning of our introduction of Suites, we were pleased with the results of every suite with the exception of that one.

The best analysis we've been able to put together in talking to customers and surveying them is that the pattern around buying AutoCAD was most entrenched compared to our other products.

It was a product that people tended to use more in the standalone fashion, and it was the one in which had been in the market the longest, and their buying habits were more -- they were more set in their ways in the way they bought it. I think we've continued to add value to it. People have appreciated it.

They began to recognize the other things we put into it. And it's one of those cases where having a consistency, our purpose of making sure that people get more value from this, has benefited us. So just staying the course sometimes is half the battle..

Our next question comes from the line of Matt Hedberg with RBC Capital..

A lot of questions on Suites here. I'm wondering -- obviously, that had some good success here since you introduced them. I'm wondering how you think about a pricing increase eventually..

So -- I mean we've had pricing increases in our Suites. We're constantly looking at prices that -- if you look at our prices across the product lines, across geographies, we are always working to balance the value we deliver with -- to our customers with the prices we charge. And we continue to do that on an ongoing basis.

Right now, we're really happy with the performance of Suites. And I don't want to beat a dead horse here about it. When I look at the results of the first quarter and project it to the remainder of the year, my focus is continuing the good work we're doing on Suites and picking up the slack in some of the areas that have already been addressed.

So I feel really good about Suites. I think there are single-point products. There are important products like LT. There are particular geographies like we talked about, our major account program needs to pick up the ball here. That's more where I see our efforts going in towards the second -- to the second through fourth quarter..

And then a quick one on the customer side, obviously, you haven't monetized that to date much, how should we think about that adding to growth next fiscal year?.

Yes. The consumer business continues -- kind of doubles in size on a small base. If you can continue to do that in future years, that number gets bigger. It started on a pretty small base. I think it's important -- I think just to back up and just talk about our consumer business, our consumer business is a relatively separate part of our business.

It doesn't compete with the operations of the rest, so it's relatively distinct. It has been a wildly successful marketing engine for us. We are learning a tremendous amount by serving consumers. We're also learning a tremendous amount about new ways to monetize.

And so for me, it's been a great learning ground and a great marketing device for the overall company. As we've continued to work this year, the goals have shifted more from the experimental, more towards turning into revenue. And we're finding the ability to do that.

It's just -- it is off a relatively small base, but I am encouraged by some of things I'm seeing in our consumer market and our ability to turn this into revenue..

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

Just thinking about stuff that may have changed in April, because we've been operating in an uneven macro environment for a while. One thing that comes to mind is federal and the sequester.

Do you think there's any kind of ripple effect going on from the sequester that might be impacting your customers?.

Well, one thing I would say to you, Keith, is we're always looking at things like that. Because the sentiment, as I say, you can see it in the other parts of the space. We can see it. But what was interesting is our government business is small, but it actually grew year-on-year.

So we don't break that out, because it's a small thing from our direct relationship with the government. The second order effect is obviously harder to see in terms of how the sequester could be impacting the United States..

Yes, we certainly get more revenue in that secondary way, which Mark alluded to, and far more than our direct business in government, which has always been small. It's the secondary that comes through the contractors who provide the services to the government.

And certainly, anecdotally, many of them said, "Things got hung up." I think the question right now is how much is postponed versus canceled. But in talking to our infrastructure customers, there's no doubt that money dried up, which affects the private sector that's associated with the public sector work..

Got it, got it. It makes sense. And then in terms of -- I think it kind of goes along with Heather's question. If we look at in the back half, not only due to revenues ramp-up in the back half, but it seems like the operating margin gains come largely in the back half.

Is that just on the back of sort of better revenue performance to easier comps? Do you guys get some revenue growth in the back half? Or are there any actual sort of expense-saving programs that are going to take effect and get you those margin gains in the back half of the year?.

So a couple of things here, Keith. One is that -- I think you can see, even with Q1, a tight handle on the spend. I think our total spend was down year-on-year about 2%. OpEx was down over 4%. So we've got the -- the spend is quite tight. I think the -- a little bit of revenue growth with a 91% gross margin, roughly speaking, gives you a lot of leverage.

And so I think that is one thing that would certainly help. Of course, you'll expect us to continue to be prudent in our spending while at the same time making the investments we need to. So I think you should assume we've got a pretty good handle on the spend and the revenue growth as we articulated.

Okay?.

Our next question comes from the line of the Steven Koenig with Wedbush Securities..

Let's see. Let me start with a housekeeping one for Mark.

Mark, can you bridge us by giving us maintenance revenue this quarter or just cloud subscription revenue? We have the comparison from the year-ago quarter now, but is that something you can help us with?.

So that's -- is that maintenance revenue, Dave?.

You're talking about a breakout between subscription and maintenance?.

Yes, sir..

We don't actually break that out. It's -- the preponderance of it is maintenance, though. I mean that's the thing you should think about because the other -- there's a couple of bits in there, but it's vastly maintenance. Gregg -- or excuse me, Steve, that should help you the most there..

Okay, all right. It's going to be hard for us to do the comparisons since we've got just 2 quarters of apples-to-apples now. But....

Why don't we do this, Steve? Take this off-line. You can reach out to Dave. I'm saying the vast, vast, vast majority is -- I don't how to underscore vast enough -- is maintenance revenue. But you're asking a great question. I'm trying to give you a very, very clear signal that this is a very big number that's maintenance relative to subscription..

Yes, okay. Got it, okay. Let me just throw a question for Carl then. So Carl, in thinking about your full year guidance reduction, when we think about the factors behind it, you've already talked about the macro being probably the most important here.

But if you think about the macro versus any lingering impact from last year's sales changes versus a structural change in the market, what's -- your comments were interesting earlier about that.

How do those factors play in here in terms of the reduction of full year guidance?.

Yes. So I would certainly back those as being the leading and predominant cause. I think FX is beginning to take a toll secondarily. And any of the other things, I would see out of a different trajectory going in the other direction. So for example, any changes we made from sales, I see improvement coming there.

I expect to have a much better second half of the year in our major account business. One of the things that's unlike the rest of our channel business, even if you look over the past several years, our major account business is becoming increasingly back-end loaded. It's not a characteristic I particularly love. It just happens to be a fact.

And it has somewhat to do with our end-of-year and our customers' end-of-year spend. That puts us more in the category of other enterprise software companies. So most of the other things I see is changing for the better. I think there'll be some small impact of more revenue going to termed and recurring, but we've contemplated that in our guidance.

And so overwhelmingly, our anxiousness is around the worldwide economy and what's going on..

Our next question comes from the line of Ross MacMillan with Jefferies..

Carl, I was just curious as to whether you think there are any other factors impacting license sales. And what I was thinking about is whether you think there's any risks that Suites can actually cannibalize some sales of products in the portfolio.

So for example, a customer was going to be buy Navisworks, they're on Revit, they can now do the cross-grade and buy Building Design Suite. And so they sort of forego having to buy that Navisworks license.

How do you -- how are you gauging whether that's happening or not? And how do you know it's not a factor here?.

Yes, Ross, I think that's a fantastic question. Whenever we do any of these combining products into different offerings, we model out the cannibalization, and we do our best to measure it. So to answer your question directly, there was absolutely cannibalization. To date, we haven't seen it exceed what we modeled in laying this out.

And in all the cases in which we do this, the expectation is that the increase in units from the new offering will outweigh the cannibalization. And so in every offer we've ever done, whether this is LT relative to other data suites, relative to point products.

Now the other interesting part of this is we have a much better system by which to measure what people are actually using. And we combine that information with survey work we do and look at historic buying patterns in our customer base to understand the cannibalization. So at this point, we say there is differently cannibalization.

But it's as projected and as modeled. We haven't seen anything that wildly exceeds that in any dimension.

But it's a really, really good point that the people who work on this pay lots of attention to, and we're always really mindful of because it's a very -- it could be collateral damage of a very good strategy, and we know we have to manage it very carefully..

Okay, that's helpful. And then, Mark, I think you commented that the assumption you have for the rest of the year is no improvement in the macro environment.

Given that -- it sounds like the first 2 months of the quarter were better than the last months of the quarter, so as you sort of reset, is it -- I guess, I sort of nitpicked, but is it a -- sort of blended first quarter, let's assume no change? Or do you think the status quo of April is persistent? I'm just trying to get a sense for how you kind of approach that and think about that..

It's a great question. I would say, Ross, our thinking was more around, what we saw in April is the most current data point, including the linearity, even going into the quarter. But April, we don't try to assume that things are going to get better.

We think it's more prudent to plan with what we see and then try to factor in all the overlays that Carl talked about. That's the way we approach it..

Yes. The way we'd generally do this is, just to get behind the curtain a little bit, is we get to see the last month and we get 2.5 to 3 weeks of this quarter. And so it's that combination of factors that we look at as we put this together.

And we've talked about this before, someone brought up the methodology, we continue to do the same kind of forecasting. We do big work on macroeconomic stuff. We do grounds-up surveys and a rollout from the field, plus we do the analytical work to see the historicals just like you do. And we're continuing that same methodology..

Our next question comes from the line of Kash Rangan with Merrill Lynch..

I'm just wondering, if you look at the maintenance base of the company, you've done a fabulous job over the last 4 to 5 years. From the great recession onwards, you've raised that base by about 70%, 80%. So the number of subscriptions on your maintenance program is up about 70%, 80%.

Are we at the point where that is starting to, not the Suite so much, but the fact that you have so many people on maintenance that get the free upgrade, is that what, maybe the reason behind the slow license growth there? And if that is the case, even partially, why would you not do the full-blown model transmission? I think -- I'm sorry, transition, not transmission.

That was a question that I asked from the earlier call a quarter back. Why would you just not go full transition to subscription and get price increases through new products and such? And the stock market seems to love these kind of transitions anyway..

Yes. So I think you're onto something. If I was to attribute something, I think there is somewhat of -- we always used to talk about some amount of our new Suite license revenue was more about churn in the industry, and what I had labeled is the lost sock phenomena. People lost licenses like they lost socks.

When people are on subscription, the socks, so to speak, don't get lost. So I do think there is some amount of new licenses that we used to see, and there is some impact there. It's really hard for us to categorize it.

To turn the hypothesis of your question and go to the conclusion, we are spending a good amount of time contemplating, given the macro environment and given the model change, just where -- which things we need to really accelerate and which not. And we -- you'll see this year, we're going to roll out.

We decided not to do it in this quarter, but you'll see in Q3 the rollout of more termed offerings. It turned out that we ran an experiment last quarter. We thought it was very successful.

And again, back to that question on cannibalization, we thought the termed offerings were really successful at getting people to use licenses that otherwise would not. We did not think it cannibalized our sales. We are going to go to a much broader slot in the portfolio in Q3.

Given the Q1 results, we delayed the introduction in Q2, because we didn't want to impact 2Q -- Q2 until we move to Q3. But in Q3, we'll see much broader use of termed offerings. As I already said in answer to a number of questions, we're going to more termed offerings around our 360 products.

And in the combination of that, we are constantly making a judgment about how hard to step on the gas in terms of the model transition..

Carl, and also the -- with the 360 term-based product, cloud-based product being available for quite some time, do you think that might be confusing buyers and making them sit on the sidelines as they evaluate your -- for subscription-based offerings?.

There might be a small amount, but one of the things that we've tried to do in contemplating this is remember, we connected many of the 360 offerings to the Suites so that people get entitlements along with it. We've worked hard. I mean, model transitions are hard, and everybody understands that.

And we've gone out of our way to try to understand all the implications, all the consequences and, to some degree, the unintended consequences as we put together new pricing and new offerings.

And it's a complicated environment in which people are making new choices about the way that deploy IT in their organizations, about the offerings that we have. News comes in from the site from other companies and the way they're offering their products.

So I think it's going to be a little bit more spotty, but we have spent a huge effort in trying to understand how we can move this model as quickly as possible but while still being prudent..

Our last question comes from the line of Matt Williams with Evercore Partners..

Just one quick question for me on the rentals approach.

Is there anything, do you think, structurally within your organization or your go-to-market model that needs to change as you sort of begin to make more of a push on the rental options later on this year? And I guess, along with that, are there any particular markets, whether it's AEC or Manufacturing, that you feel might be better suited towards that offering?.

Yes, I think the 2 markets that are better suited in M&E and AEC, and I think that's just the nature of the work within the industry is more project-based. The economic structure of the industry revolves around projects in both of those industries. Manufacturing is more enterprise-based or firm-based.

And so, generally speaking, it's less attractive there, particularly the termed offerings over short periods of time would be a little less interesting there. On the other hand, we've got to be clear in our terminology because some of our products like our Fusion 360 and PLM 360 are all intended for the manufacturing market.

So they will move to termed offerings. But in the place where we offer the existing product like the Suite and now we will have the ability for people to rent that Suite, I think they're going to be far more attractive in AEC and Media and Entertainment than they will in Manufacturing..

There are no further questions at this time..

That concludes our call. We'll be at the B Bay [ph] Conference on June 5. If you have any follow-up questions, you can reach me, Dave Gennarelli, at (415) 507-6033. Thank you..

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