David Gennarelli - Director-Investor Relations Carl Bass - President, Chief Executive Officer & Director R. Scott Herren - Chief Financial Officer & Senior Vice President.

Gregg S. Moskowitz - Cowen & Co. LLC Brent J. Thill - UBS Securities LLC Keith E. Weiss - Morgan Stanley & Co. LLC Jay Vleeschhouwer - Griffin Securities, Inc. Brendan J. Barnicle - Pacific Crest Securities Steve M. Ashley - Robert W. Baird & Co., Inc. (Broker) Heather A. Bellini - Goldman Sachs & Co. Matthew Hedberg - RBC Capital Markets LLC Philip A.

Winslow - Credit Suisse Securities (USA) LLC (Broker) Walter H. Pritchard - Citigroup Global Markets, Inc. (Broker) Steve R. Koenig - Wedbush Securities, Inc. Darren R. Jue - JPMorgan Securities LLC Matthew L. Williams - Evercore Group LLC Kasthuri G. Rangan - Merrill Lynch, Pierce, Fenner & Smith, Inc..

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Autodesk First Quarter Fiscal Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded.

I would now like to hand the conference over to Mr. David Gennarelli, Senior Director of Investor Relations. Sir, you may begin..

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our first quarter of FY 2016. Also on the line is Carl Bass, our CEO; and Scott Herren, our CFO. Today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com/investors.

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 2016, our long-term financial model guidance, the factors we used to estimate our guidance including currency headwinds, our transition to new business models, our market opportunities and strategies, and trends for various products, 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 2015, and our current reports on Form 8-K, including the Form 8-K filed with today's press release and prepared remarks.

Those documents contain and identify important risks and other factors that may cause 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 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. We're off to a solid start in fiscal 2016 with good progress on our business model transition. We're particularly pleased with the 95,000 subscription additions in the quarter.

We continue to experience high growth rates for new model subscriptions such as term based desktop subscriptions, enterprise flexible license offerings and cloud based services. It's worth noting that these new model subscriptions accounted for approximately half of our subscription additions for the quarter.

We achieved our Q1 financial results despite the backdrop of an uneven macro economy and currency headwinds. To put it into numbers, the strong dollar impacted Q1 billings by approximately $31 million and revenue by approximately $22 million and that after our hedging was applied.

It's also worth noting that for the first time in recent memory, we had very limited promotional activity in the quarter. This was intentional as we wanted to digest the activity that had led up to the end of sale for upgrades.

We do have more promotional activity going on here in Q2 to spur demand and we implemented a small price adjustment in both euro and yen. From a geographic perspective, our revenue results in EMEA and the Americas remain strong despite unevenness in certain areas.

We also experienced growth in most of APAC, while Japan continued to be impacted by unfavorable economic conditions. From an industry perspective, our Q1 results were driven by strength in both our AEC and manufacturing business segments.

Taking a closer look at AEC, we're really pleased to see growth being delivered by our Building Design Suite and our Infrastructure Design Suite.

It's great to see strength in these core products, but what gets us excited is the interest we're seeing in the new cloud-based products like BIM 360, which is being adopted in the construction field and InfraWorks 360, which is being adopted by infrastructure firms.

InfraWorks is now being deployed in significant projects such as a hydro project in China and with a U.S. state DOT for its planning and design projects. Our manufacturing team delivered a strong growth in Q1, driven by the contribution from Delcam.

It's been a year since the Delcam acquisition and we are really pleased with the addition of the team and how that business has maintained its momentum, extending Autodesk much deeper into the manufacturing process with industry-leading CAM technology. Delcam's focus is in the mold, tool and die sector as well as high-end production machining.

Our HSM CAM business is focused on an integrated solution for the SMB market working with Inventor Fusion 360 and competitive products. Our HSM business closed hundreds of transactions and added hundreds of new customers in Q1. Once again, we are encouraged by what we're seeing with our cloud-based manufacturing products like PLM 360 and Fusion 360.

PLM 360 continues to expand our base by attracting customers that are new to Autodesk, as well as being adopted by our existing customers. We're also seeing a continued trend of existing PLM customers coming back to add on to their original deal.

In Q1, we had a record quarter for total PLM 360 deals with many new companies buying, as well as many companies expanding their use of PLM 360. There are a lot of exciting things happening with Fusion 360 recently and the buzz around the product is building.

Fusion 360 is such a game-changer for both startups and established manufacturers that we wanted to make it simple to purchase and make it very accessible. So earlier this month, we simplified the pricing structure and made Fusion 360 subscriptions available-for-sale on Amazon.com.

It's clear that the way products are being designed and built is changing and customers are looking for tools to support these changes. Our cloud-based products like BIM 360, PLM 360, and Fusion 360 are leading the market.

Just as we have changed the engineering and PLM markets with cloud-based products, we're doing the same with the Internet of Things. Across all the industries we serve, there is great interest in this technology.

In the near-term, we can monitor buildings and factories to optimize operating conditions such as energy use, safety, and preventative maintenance. Today's industrial products, commercial buildings and urban infrastructure have sensors built into them.

The world of the future includes capturing and analyzing data from these sensors, incorporating the learnings into the next generation of products and designing new products that respond to real-time to changing conditions.

The Internet of Things has the potential to substantively change design from creating static, inert, discrete things to creating dynamic networks of interacting things, environments and media. We think we are in a fantastic position to lead this market. Now, let's talk more about our business transition.

I think what is getting lost on some people is that we're not just changing our business model, we are transforming our business and the products that our customers use.

The cloud is enabling our customers to think differently about how they approach design, simulation, production, and collaboration and doing so in ways that were not previously possible. We're also expanding our presence into new markets and adding new customers to our sizeable base.

It's worth repeating that our business model transition will not be perfectly linear and that the amount of business that we transition, the number of subscription additions and the mix of subscription additions will fluctuate from quarter-to-quarter and year-to-year.

Earlier this year, we announced that we would stop selling new perpetual offerings from most of the standalone products at the end of our fiscal year, which is January 31 of calendar 2016. We will also discontinue selling new perpetual licenses for suites some time in fiscal 2017.

At that point, nearly all revenue will come from ratably recognized offerings including desktop and cloud subscriptions, EBAs and maintenance. This will naturally put downward pressure on reported revenue in FY 2017 as perpetual license offerings are discontinued.

From there, we would expect a material rebound in the income statement the following year. Of course, the model transition will positively impact deferred revenue and subscription additions, which we expect will continue to have healthy year-on-year growth rates during the transition years.

The unevenness of the current macro environment has reduced near-term visibility somewhat. When coupled with the persistent FX headwinds, it calls for a little bit more caution in our outlook.

Our original assumption was that FY 2016 would be more backend loaded than usual given the deadline for end of sale for new perpetual individual product offerings. We continue to believe that's how the year will shape up and likely a little softer in the middle quarters.

Our forecast for FY 2016 now assumes seven points of currency headwinds for billings and five points of currency headwinds for revenue after applying our hedge, which equates to over $160 million of billings and over $100 million in revenue. That's a lot of money.

To wrap things up, we're pleased with the start of FY 2016 and the pace of our business transition. We remain confident in our long-term business model transition goals of 12% billings CAGR, 20% more customer value, 50% more subscriptions and 30% operating margins.

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. Operator, we'd now like to open the call up for questions..

Thank you. Our first question comes from Gregg Moskowitz from Cowen and Company. Your line is open. Please go ahead..

Okay. Thank you very much and I apologize for any background noise.

Just first question, wondering how much of a benefit to Q1 billings is there any way to size this, Carl, it just came from the upgrade extension that existed through early March?.

Not a huge amount. We saw a little bit of pull-through at the beginning of the quarter, from the end of the previous quarter. So I think in – but it was not substantial..

Okay.

And then we've obviously spoken with some of your customers and partners, but I'm curious what you are hearing anecdotally just in terms of feedback from them with regards to the recently announced perpetual licensing changes?.

So, what we've seen – I mean there is – the changes just went in effect very recently. So I don't think it's reached the end customer to any significant degree. The partners are first starting to get ready for it. Like we said, we had almost no promotions in Q1.

We wanted to digest what went on at the end of last year and get people ready for this three quarter March to the – ending license sales. So, I think it will take probably another month or two until we really see what the reaction from customers are. But generally speaking, they've been favorable and most of the results point that way..

Yeah, yeah....

Do you have anything to add, Scott?.

Yeah. Gregg, one of the things that is encouraging on that front is if you look at the 95,000 subscription adds we had in Q1, about half of them came from the new model types. So, there is – we are building pretty good acceptance in the early days at least on the new model types..

Thank you. Our next question comes from Brent Thill from UBS. Your line is open. Please go ahead..

Good afternoon. Just a question on the guidance and I want to make sure we understand this correctly. You left your constant currency guidance for the full year unchanged, but you talked about this unevenness and I know you've changed your as reported guide due to FX.

But beyond the FX, is there something that's making you more nervous as you look at the economy, you talk about this unevenness and I think everyone in Japan has had issues..

Yeah..

But, what – you did leave your constant currency unchanged.

So I'm just curious that is there some inconsistent statements that you're making in terms of how you're thinking about – is it looks – as it relates to the...?.

So, let me put things on both sides of the ledger. Generally, I feel good is, as Scott just said, about the transition to the new model and most parts of the world seem to be doing well. And in that way, our plans are unchanged.

If you wanted me to rank, you know, my first budget, number one on my first budget would be FX; number two would be Japan; and number three would be Russia. And I don't think the list really goes longer than that. Those are the things, I think, FX has been more of a headwind than we anticipated on Japan and Japan can continue to be weak.

Russia, we've already cut our business in such a substantial way that its impact is going to taper off. But if I wanted – anyhow if I wanted to prioritize for you, Brent, that's probably the best that I could do..

Okay.

But your statement just in not changing your constant currency, just the sense of you're not seeing a lot of this have a major impact is just this is – it sounds like it's more FX related?.

There is a lot of FX. I am – I'd be not completely candid if I say I am not worried about Japan. Right now, Japan is one of our biggest markets. You're seeing – as you mentioned, others have had trouble there. I think it can continue. Generally speaking, when Q1 is weak for Japan, it's a weak year for Japan. So, I have some nervousness around Japan.

But as I said somewhat tongue in cheek, it's a lot of money, having a couple hundred million dollars is a lot of money for us just to go in FX. And so I usually feel better about both our hedging policy as well as kind of the buffer we have built in with the rates and this time I had less confidence in that..

Okay. Thank you for the color..

Thank you. Our next question comes from Keith Weiss from Morgan Stanley. Your line is open. Please go ahead..

Excellent. Thank you guys for taking the question.

One of the things that we're all trying to figure out here, as you go through the business model transition is the push and pulls between whether people are going to be hoarding perpetual licenses upfront or whether you're going to be able to convince guys to go to desktop subscription more fully or more wholesomely upfront as we go through this transition.

Any indications you could give us, it's been in the market for a couple of months now.

Any indications you could give us on how you think that's going to break, which direction it's going to break?.

No, Keith, we've been trying to be totally transparent as we don't actually – we have a number of models and we have a number of knobs and levers to move during the year, as we see it. I think you'll see first break this quarter and we'll have a little bit of understanding of that.

And then we can adjust some things as we go through the rest of the year. But it's not as obvious – I was obviously encouraged that people – many higher subscription numbers in Q1. So we'll just have to see how that plays out, but that was at least a positive sign..

Yeah. Keith, the other thing that besides what Carl just mentioned about the half of our net adds coming from new model in Q1, when we look at the promotional activity that we've got queued up for Q2 and through the end of the year, there is a couple of different trust behind that.

One is going to the installed base and offering a way for them to – if they're ready to move to subscription offer away for them to get there on a multi-year basis with a slight discount.

And the other is really going directly after the LT base in Europe and there are LT customers to the extent that they are willing to or want to buy another perpetual license and will buy a multi-year, they can get a scaled up discount on that depending on how many years of maintenance they decide to buy upfront.

So, you'll see us doing more from a promotional standpoint that help drive that shift..

Yeah. And let me just try and – Keith, let me just try to give you a little bit of color on promotions, because certainly if I read some of your notes, the extrapolations were somewhat imperfect. And so the first thing what was clear, over the last few years, we have centralized much more of our promotional activity around the world.

So it used to be that this was a more decentralized activity done by sales leaders in the geographies. And at any point, we could have literally dozens of promotions going on. Over the last few years, those have been centralized. So that's just the first thing. So that we have a really good handle what they are.

Second one is there were almost no promotions in the first quarter. It's the lowest level of promotional activity I have ever seen certainly in my tenure. And the third thing is that when you have picked up from talking to customers or resellers, any pricing changes, those have not been promotional activities driven by us.

As you know, we don't control end user pricing and we obviously have an impact on it. But those were things initiated by some of our partners.

And so – and then I just conclude the color commentary on promotions by saying, now we have a pretty robust promotional program going through Q2, Q3 and Q4 and so you should start picking up signs of that in your channel checks..

Got it. And if I could perhaps sneak one last one in. So we're on this sort of the beginning a business model transition, which isn't just pricing model, it's about how you guys are taking product to market something that you guys think is going to add a lot of value to the business over the next two years to three years.

And I would argue is probably not terribly well understood by investors and probably not fully reflect into the stock.

If that's the case, why aren't you guys buying back your stock more aggressively here?.

Scott?.

Yeah. Keith, when we look at our – that's obviously a question about capital allocation. So the first thing I would say is when you look at the $2 billion plus of cash we have in the balance sheet as you probably saw in the prepared remarks, 86% of that is offshore. But it hasn't really affected the way we think about allocating capital.

So just to reiterate first and foremost it's to support the business during the transition, whether that's organic growth or that's M&A type growth. Second, it's about managing the dilution of the equity plans and by the way, that includes not just our SKUs, but our employees stock purchase plan that everyone has the opportunity to participate in.

And then it's beyond that, it's to reduce the outstanding share count. So that policy is still in place and that's still really where our head is as we look at the next couple of years..

Yeah. And we've just gone through capital planning review. And stay tuned, we're not ready to say anything at this point. But we've just gone through a fairly comprehensive review of looking at the next few years and what the capital requirements are. So, you'll see more in the coming months..

Thank you. Our next question comes from Jay Vleeschhouwer from Griffin Securities. Your line is open. Please go ahead..

Carl, I'd like to ask a couple of questions regarding what the steady state that the business might look like starting in fiscal 2018 in two respects, and you touched on it in part when you talked about your products and how they're being used differently.

So, the first question is you already have a reasonably complex product line in terms of numbers of SKUs, numbers of configurations per suite and so forth.

And the question is versus what the portfolio looks like today, do you think the portfolio in fiscal 2018 is somewhat more simplified or reduced, for example, when you come out with subscribe to Autodesk, do you think that even with various flavors of that, that you might in effect consolidate the product line or do you think that it just expands, you just introduced a new suite, for example.

So what do you think the general direction of the scope of the portfolio looks like? And then just a second question for Scott, also looking at what the steady state might look like? Would it be fair to say that in terms of the margin leverage you get, once you're on the other side of this transition that sales and marketing as a percent of revenue is where you get the most leverage perhaps several 100 basis points of reduction, sales and marketing, and that you might even have a flat to lower absolute spending of sales and marketing at some point?.

Okay. So let me just start. What I would say is right now, we're probably at the height of complexity of our product portfolio, because we really have one foot in each world. As we move forward, what I think you will see for the more traditional desktop products is subscribe to Autodesk will tend to be the primary way our customers buy.

And so there maybe underlying that offer individual products, but certainly, as you would see them through our financial statements, these will look like subscribe to Autodesk. As you know, subscribe to Autodesk is just the umbrella term we're using for bringing our flexible license offerings to the majority of our customers.

And so there may be underneath it product names that you're familiar with today, but the method in which they buy will be more common there.

Secondly, I'd say, as we've looked at our cloud offerings, the one thing about many of our cloud offerings is they are not as distinct as desktop offerings, that the services that you offer in a web-based environment tend to blur together and all fall under a single subscription fee.

With different kind of levels, but I think from the outside, it will be much more transparent, it will be much easier to discern what's going on. And the intention is for customers, it's much easier for them to choose. So a lot of the emphasis on the changing business model here is to allow customers to be much more flexible.

We've talked about many times, how we see flexible license offerings is both being good for our business and really good for our customers. So that's the general direction. I think you're probably at the apex of product portfolio complexity, and certainly as you get to FY 2018, you'll see considerable simplification..

And, Jay, this is Scott. To your question on sales and marketing as a percent of revenue leverage, for sure we'll get a good deal of leverage as we get – kind of reestablish steady state in that fiscal 2018, fiscal 2019 timeframe for a couple of reasons, one of which is just scale and sales and marketing is our highest spend as a percent of revenue.

So, of course, that means it's going to get the greatest leverage as we scale. We'll also see channel mix shift out in time.

Our reseller channel will continue to be the overwhelming majority of our sales, but we will see some mix shift and we're starting to see a little bit of that today and as we do, that will drive also leverage in sales and marketing. To the extent that it comes out in absolute terms, that's a little far out to be able to project at this point..

Thank you. Our next question comes from Brendan Barnicle from Pacific Crest Securities. Your line is open. Please go ahead..

Thanks so much. And, Carl, thanks for reiterating that fiscal 2018 guidance. I wanted to drill down on maybe how we get there a little bit.

It sounded like based on your comments that fiscal 2017, not this year, would be the low in terms of revs and EPS and if that's so, do you also expect that billings would remain positive in fiscal 2017 as we go through this transition or would those dip negative as you make the change?.

There's a chance it dips negative. A lot depends on the pace of change. So the question that was asked earlier, a huge amount depends on how quickly people move between the two models. We'll update you as we see it develop, but I don't think it's wrong to assume that it dips in FY 2017 and I think it is correct to say that FY 2017 is the low point.

That will be the place where the customers are most compelled to do something and make a choice.

And let me just remind you, to the extent that we're most successful in transitioning customers to the new models, which is what we really want to do because the financial model at the other end of the rainbow is so promising, is that it will impact traditional income statement metrics.

So it's a mixed bag for us, so while we root for it, it definitely brings down the traditional metrics that people look at..

Yeah. And, Brendan, that same dynamic is in play this year, right, to the extent that it moves much more quickly to new models and away from perpetual sales, we will see that in the reported revenue results this year.

We will continue to see the build in subscribers, we will continue to see the build in deferred revenues, but that same dynamic that we're talking about in fiscal 2017 is also in play for the remainder of this year..

Great, thanks. And, Scott, just following up quickly on the cash flow you mentioned in the prepared comments, the higher payout of variable employee comp.

And just curious whether given that you didn't see as much this quarter if you had just more direct sales in Q4 and then whether direct sales met the expectations for Q1 or if that's just a seasonal pattern we should start modeling?.

Yeah. What really impacted cash flow from ops in Q1 was really – was two things. So we talked about both of these when we talked about our income statement in Q4, but they both came out of cash in Q1. One was the variable comp plans.

Fiscal 2015 for us which ended January 31 was a very good year and so we saw in our OpEx throughout the year, but in particular, in Q3 and Q4 of last year pretty elevated level of variable comp expense so all that got paid out in Q1.

And so year-on-year, we spent – out of our cash, we spent about $60 million more in variable comp in Q1 of this year than we spent in variable comp in Q1 of last year. The second, as we talked about – if you remember Q4 was a record quarter for us for cash flow from ops of $257 million.

Within that we talked about the linearity of Q4 was such that we had a lot of those large EBAs close actually in December, it wasn't the end of our fiscal year, but it was the end of a lot of our customers fiscal year.

So a lot of those big transactions actually got closed in December, got invoiced and collected still in Q4 as opposed to a normal linearity, which would have those much more at the end of the quarter and then collected in the following quarter and that contributed about a little more than $40 million to the OpEx impact year-on-year.

So those two together drove Q1 cash flow from ops down a little bit more than $100 million on a year-on-year basis..

Great. Thanks for the clarity..

Thank you. Our next question comes from Steve Ashley from Robert W. Baird. Your line is open. Please go ahead..

Perfect. Just like to go back and maybe touch a little bit on what Brent had talked about a little earlier about your talking about the year.

Just wondering if your internal way that you had expected the year to play out has changed from when you started the year until now, do you now expect the seasonality quarterly of the way that revenue flows to be different?.

Yes, Steve. This is Scott. I'll start and then let Carl add some commentary. It's really not significantly different that as we calculate the FX impact, it – there is rounding going on in there.

We quote that in whole percentage points, but it has increased and has moved from what was 6% and 4% billings and revenue to 7% and 5%, but the reality is there is some rounding going on underneath the covers. So I think the shape of the year is the same shape that we expected.

There is a little bit of uncertainty, as Carl talked about earlier, in some of our key markets, in particular, in Japan and then to some extent in Russia, and that's really what you see reflected..

Great..

Yeah. I mean, same thing I said before in terms of concerns it's FX and then it's Japan and then it's Russia and the list ends there..

And I would – just in terms of 50% of the subscriptions coming from the new model, I wonder if we could get a little more granularity there and maybe just comment, are you seeing traction with desktop subscriptions?.

Yeah, we are, Steve. We're seeing desktop – we've talked about it growing on a sequential basis at a pretty high clip. We're not actually breaking it out because it's still – despite the rapid growth, it's still not a material number. But it is continuing to grow actually and not experience seasonality at this point.

We're still seeing very strong sequential growth coming out of desktop and cloud..

Perfect. Thank you..

Thank you. Our next question comes from Heather Bellini from Goldman Sachs. Your line is open. Please go ahead..

Great. Thank you. I had a couple of questions. One, I just wanted to follow up on, I guess, that last one before I go to these other two about the product strength that you're seeing, you guys mentioned new products in particular.

I'm just wondering you just gave us some color on desktop subscription, but can you give us some other information about or any more granularity on where you're seeing growth in other new products? And then, I've got a couple of follow-ups..

Yeah. So – okay. Sure, Heather. First one I would say is the enterprise licensing, the EBAs continue to do really well. They're still a little bit more seasonal than other parts of our business. They coincide with customer or our end of year. But enterprise licenses continue to grow. I expect them to continue to this year and next.

And then, we're having tremendous amount of success on the cloud-based products. So, PLM 360 – I'd call that's some color with the CAM products, PLM 360, Fusion 360, all doing really well.

In some ways, if you think about it, it's been crazy that's it's taken this long for cloud software to make it to the world of engineering and as it's becoming a mainstream deployment in IT shops, people are realizing that the world of design and engineering and manufacturing is going to move there as well.

And so we're benefiting from being in a leadership position in all of those. I think backing it up too would be the desktop subscriptions continue to do nicely and we'll be able to give you a little bit more color on the desktop subscriptions as the promotions start in Q2 and the deadlines approach in Q4, we'll watch that go.

And I think just generally last thing in our kinds of great coloring of the macro economies, most of the world is doing pretty well. And we saw that in a lot of the construction numbers and a lot of the manufacturing numbers that absent a couple of specific countries, generally speaking, the economies of the world are doing pretty well..

Heather, the one bit of color I'd add to Carl's comments on desktop that I should have mentioned earlier is it's early days, but what we are seeing is within our desktop subscription growth, the largest component of it is LT and I think what's encouraging about that is an LT customer traditionally would buy perpetual license.

So we had a much lower attach rate of maintenance. And so seeing that cohort that that set of our customers now shifting over to our subscription model is pretty encouraging for the future..

Okay. That's great. Thank you. And then I just had a question – two more actually, but there's a lot of people wondering if you could give some color between the difference between how you guys calculate billings and then the billings we all see on your financial statements, because those are the only ones we have to look at.

So if you can talk a little bit about that and then also when you guys gave your billing's CAGR, is it based on your definition of billings or is it going to be the billings we see on your financial statements, because that's the other thing we're getting pinged on a lot? And then I just had one follow-up after that..

Sure. Yeah, the way we do billings is it's outlined actually in our prepared comments, but it's actually what's invoice minus the partner incentives. So our contras come out of that. I think the one thing that maybe driving some confusion....

But why aren't those in the financial – but why aren't those in your Qs and Ks?.

Net billings are reported on the face of our quarterly earnings. I'd have to go back and look at the Q and see if we put that in there or not. It's not – there is no magic to it though. It's what's invoice but minus the contras..

But yes – yeah but then – and then when you guys give your billings growth target, I mean I'm just passing on the questions that are hitting my inbox?.

Sure, yeah..

What are you guys – what's the goal based on? Is it based on what you just defined that net billings number?.

Yes..

Yes..

Yes. When we talk about billings....

Okay..

...we talk about net billings..

Okay. And then, I guess, the question for you, Carl, you've been asked a lot over the last year or so about buybacks and I heard your comments that said, you just finished a comprehensive review and that you would be back to us.

Is that, I guess, when we hear you saying that, is that something like you guys know this isn't something that you should be contemplating, I'm just trying to get a sense of, we've known for years, that you guys have used your buyback to offset dilution from stock options and the employee stock purchase plan, but is the board at least going through the analysis to determine where you are in the transition, how much better it would be for shareholders if you were to take the dilution out now.

How much of that is being factored in because while we appreciate saving cash for a rainy day and understanding that a lot of it's offshore. And I think even during the depths of the credit crisis, you guys didn't burn any cash.

So, how do we think about how the board is going about the comprehensive review?.

Okay. So first, let's start by being honest. You don't appreciate saving cash for a rainy day. And those – the people hidden in your inbox appreciate it either are very few. But more seriously as – I mean you'll hear from us in the next month or so that what our plans are.

So, we'll certainly do in Q2, we'll talk about it and we do – and I mean I was very serious, it was comprehensive. We went through – this is a point of inflection and so it required a different analysis than we've done before. And so, stay tuned..

That's great. Thanks so much..

Welcome..

Thank you. Thank you. Our next question comes from Matt Hedberg from RBC Capital Markets. Your line is open. Please go ahead..

Yeah. Thanks for taking my questions, guys.

One of the questions that I get the most is how might the range of outcome look for 2017, and when might those ranges start to narrow here? And I guess I'm wondering, how should we think about cash margins versus operating margin? Should cash margins be a bigger focus for investors during this transition versus your 30% operating margin targets?.

Yeah. Matt, I think both are important. Obviously, we are continuing to generate cash. I don't think you see a significantly different trend, though, between our cash margins and our op margins.

So as we go into fiscal 2017 and as Carl talked about, some of the traditional income statement metrics particularly around reported revenue will be under pressure in fiscal 2017, that's going to put pressure right down the face of the income statement.

I think the better way to track our progress through the transition is going to be looking at things like the growth of deferred revenue, and the growth of the subscriber base, which really get at the underlying business dynamics that then set up for the way the model looks as we come back out of the transition..

That's great. And then, Carl, I wanted to ask about IoT, it seems to me that you've talked about a little bit more in your prepared remarks than I can remember historically.

Can you give us a little bit of sense for how you might play in that market and should we expect maybe further investments be it M&A to further boost that opportunity for you guys?.

Yeah. So, I mean this is probably the first time we've really talked about it and it's one of the areas where our customers are really interested in it.

I was doing the prepared remarks last night when I came upon this tweet and it made me pause about including it, because the tweet was something like IoT is like teenage sex, everyone talks about it, nobody really knows how to do it, everyone thinks everyone else is doing it, so everyone else claims they are doing it.

And so, it did give me a little bit of pause, but let me just tell you that we do know what we're doing and it has become a huge focus for our customers in all of our industries.

IoT has been often associated with just purely manufacturing, but it's also in the building space and I would say this is both for vertical and horizontal construction, a big deal.

Sensors have been built into every building, they are being put in every infrastructure project from electrical infrastructure to sewage infrastructure, to dams, roads, bridges are all having it.

And the important thing for us is figuring out how do you help customers not only collect that data and analyze that data, but how does that feed back into better products that they build in turn for their customers.

Also many of our customers are contemplating transitions of their own, but you've certainly seen things along the lines, from large industrial companies like GE talking about essentially jet engines as a service as opposed to selling jet engines and railroads as a service, and so it's a huge interest.

What we saw in the market was that there was a real lack of contemporary modern tools to do it. There is a lot of old tools that have been around for a long time.

And so we will do the usual thing to answer your question directly, which is we're doing some in-house development that we started from scratch and we will be opportunistic about finding M&A opportunities.

But I wouldn't take those remarks specifically anything significant about a big acquisition, any acquisitions we will do will be in the style that we're most accustomed to..

Thank you. Our next question comes from Philip Winslow from Credit Suisse. Your line is open. Please go ahead..

Thanks, guys, for taking my question. Most questions have already been asked. But just want to dig into the linearity question and then, Carl, back to your comments about being more backend loaded and a little softer in the middle.

Perhaps you could help us sort of kind of as given an analogy here to sort of how you expect the end of sale of point product licenses at the end of this fiscal year to impact the second half maybe versus how the end of upgrade sales impacted that – the second half or just last fiscal year, what did we learn from the end of upgrades and how you're thinking about that implying it to the end of point product sales and then in terms of the guidance, that'd be great?.

Yeah. So I think – yeah, I think it's a great question. I think the best indication we have about the trajectory, the slow growth, the activity is what happened last year. It's a really good indication of how our customers respond to changes that need to be made. The very – so that much I look at is being very similar to last year.

The place where there is probably a little bit of difference is just we don't know what they will do as a result of it. So how many will move to desktop subscription versus the hoarding extra licenses.

So there is a little bit of difference in what they'll do, but the level of activity we've been modeling is pretty close to a mirror of what happened the year before and in checking with historical patterns, it's pretty similar to things we've done with other kinds of transitions where there was really an end of sale demarcated in the future..

So is it fair to summarize that hey, we're coming off of a lot of one-time demand the last couple of quarters, we're now halfway through the trough and then there is this ramp-up for the now or never purchase the second half of this year.

I mean, is that a fair way to describe it, a U-shape?.

Yeah. A little bit of subtlety that's in there is because of that the way the incentives work for our partners and our customers is the biggest discount starts earlier in the year. So, what we've noticed that if we have the biggest financial incentive at the end of the year, that combined with a compelling deadline makes for a very non-linear year.

So instead we did the opposite just like we did last year is the financial incentives are greatest in Q2 and ramp down to Q4. So we tried to just balance those two forces out as much as possible to get a little bit more linearity..

Got it. Thanks, guys..

Yeah. Phil, the other nuance there compared to upgrades, is what Carl said earlier, in the case of upgrades it was buy the upgrade now or don't. In this case, it's buy perpetual license now or go ahead and make the shift over to desktop or cloud. So there is a little bit of unknown.

We always felt the shape of the year was going to be backend loaded and that's exactly how we're seeing it play out. We've put in place promos to try to drive more of that demand earlier in the year and I still think it will be fairly backend loaded.

The other point just to make sure that everyone still has on the radar screen is we're really talking about end of sale at the end of this year just for the individual products. We haven't yet announced the end of sale point on suites although we have said it will be sometime within our fiscal 2017 that's still out there for part of fiscal 2017..

Thank you. Our next question comes from Walter Pritchard from Citi. Your line is open. Please go ahead..

Hi, thanks. Two questions just to follow up to the prepared remarks.

One is you commented in there that LT (46:13) and I'm wondering is that just a revenue business model transition impact, or did you actually see some fundamental underlying unit based (46:20) weakness during the (46:21) quarter?.

Hey, Walt, can you repeat the question? For some reason you are breaking up, we're having trouble hearing you..

I'm sorry.

All right, let's see is this any better?.

Yeah, that's better..

Yeah, that's better..

Okay, great. All right. So, the question was on LTs, you had in the prepared remarks that LT was weak during the quarter.

And I'm wondering if that was a business model transition source of weakness or if there was something going on that was more demand related or otherwise?.

I think LT as we've always said is very promotion related. With that – it's the most price-sensitive amongst our customers. And so I tie it almost completely to lack of promotions in the quarter..

Got it. And then just another follow-up on the prepared remarks, you had in there that manufacturing, I think, it grew – I don't remember exactly the numbers, but it was a little weaker than we thought it would be on a constant currency basis, and obviously some of the things like PMI manufacturing data on the macro side haven't been as strong.

I'm wondering if you attribute that relative weakness to the macro or if – I'm just curious how you think about your market share there and if you are holding share in that market?.

Yeah. No, I think I feel relatively good about manufacturing. Japan is obviously one of the areas impacting us. So generally feel good about where we are. If I was to break it down a little further to the question of share, I think we're holding serve or better in all of the traditional products.

The place where we really gaining ground, although it's not reflected so much in the financials is in all the cloud-based products.

As we talk about the cloud-based IoT product and cloud-based PLM product and cloud-based design and engineering product like Fusion, that's dramatically different than what our competitors are doing and that's a place where we're seeing real traction..

Thank you. Our next question comes from Steve Koenig from Wedbush. Your line is open. Please go ahead..

Hi. Thanks, gentlemen. If I can do a housekeeping and then one follow-up. On the housekeeping, a financial question here.

Scott, can you just explain to us the operating margin being down in guidance, is that all currency or is there a bit of macro or something else in there?.

Yeah, it's – the op margin coming down from previous guide of 13% to 15%, to 12% to 14% really just reflects the change that we've guided on the top-line..

Okay. So it's really....

Sorry, we are getting a lot of feedback. I don't know if you heard the same thing. We got a significant echo there..

Sorry, I didn't hear that, but can you hear me okay now?.

Yes. We can..

Okay, great.

So the operating margin being down, guidance is really all related to that top-line reduction, which was currency?.

That's right..

Okay. And then I wanted to ask you guys as well.

It seems in some aspects, the transition is perhaps a year or at least some measure of time behind what you might have originally anticipated when you planned out your transition and first communicated it, not so much in terms of the subscriber additions, but in terms perhaps of the optics on the headline results and on the margin adjustments.

Is this a correct perception or not and if so, any color around that or why might that be?.

Yeah, I....

Go ahead..

This is exactly – I mean we've been marching pretty much to the same plan all along. There have probably been small alterations as we phase out when the promotions are and when the end of sale of certain products are.

But certainly in big terms, it's virtually identical to what we laid out the very first time at Investor Day about the transition that we saw. So there hasn't been any major disruptions one way or another..

Yeah. My sentiment, Steve, is we're continuing to move as quickly as we can actually through the transition. And so I don't – certainly it's not a sense that we're behind.

I think if anything, when you look at the subscriber adds, we're perhaps a bit ahead of where we might have been at this point when we first talked about going through this transition..

Thank you. Our next question comes from Sterling Auty from JPMorgan. Your line is open. Please go ahead..

Hey. Thank you. It's actually Darren Jue on for Sterling. Carl, you mentioned that you made a small price adjustment in some of the euro and yen denominated markets.

I'm just wondering if you could maybe elaborate more on what you did, and I mean presumably, you've raised prices, and perhaps you could talk a little bit about what the early reaction has been from customers..

Yeah. Scott, you want to....

Yeah. The adjustment we made, Darren, was really as we looked at the way the currencies had moved, and of course, we price in local currency in every market, just trying to attain some level of equilibrium around our pricing across markets. So, there is not a significant arbitrage opportunity to buy licenses in one market versus the other.

So, the adjustment – and we only adjusted the yen and euro, which they are the two most significant non-U.S. dollar denominated price points that we have, and the adjustment was in the 5% to 7% range. So, it's not an enormous amount. From an absorption standpoint in the market, there has been absolutely no noise on that..

Okay, great.

And I wonder if you could tell us of the 95,000 subs that you added in the quarter, how many of them came via the Shotgun acquisition? And also if you could give us a sense for how many came through the Autodesk website?.

Yeah, the Shotgun was steady state. So if you remember in Q4, we talked about the 17,000 subscription add driven by Shotgun, that was an acquisition that we had done previously. And it was the first time that we got their subscriber count to a level of accuracy and conformed it to the way we count subscribers. So, we added that as a one-time.

So the ongoing adds from Shotgun will just be the ongoing adds that are driven by the business. And it didn't stand out as a significant number. I'd say the one thing we did see in the subscriber count in Q1 is if you think of our EBAs, so the big, large $1 million plus transactions that we do, those are token-based.

It takes a little bit of time to get the infrastructure set up behind those to begin reporting out the monthly average users which is what gets added to the subscriber base. So part of what we saw in Q1 was a little bit of a catch-up from the large number of EBAs we had done in Q3 and Q4 of last year.

That infrastructure was set up and we got 90 days worth of monthly average users rolling in. There was a little bit of a net add from that, but that's probably the only thing I would point to as a bit of an anomaly in the Q1 adds..

Okay. Thank you..

Thank you. Our next question comes from Matt Williams from Evercore. Your line is open. Please go ahead..

Hi, guys, thanks for fitting me in.

Carl, you mentioned earlier in your remarks around cloud how customer seem to be migrating to those solutions a little bit more so than they have in the past, and I'm just curious what level of evangelizing are you guys having to do with the customer base in terms of trying to explain the benefits and help them along versus how much this is really customer saying, yeah, this is the direction we really want to go and you're not having a hold to hand as much?.

Yeah, good question. I would divide it, I would say, we're not having to do much in the evangelism category that the customers who are aware in transitioning in other parts of their business to the cloud are receptive to it. They have been waiting for answers in the construction or in the engineering space.

The place where we're spending more time is on just general awareness. So marketing dollars to make them know that we have a solution that is that. So we probably spent more time and money on awareness rather than the overall benefits. Having said that, I think you've probably seen us do the adoption of cloud technologies like all the others.

There is still recalcitrant part of the audience that's sitting going I'll never do it and they have their arms folding across the chest and they say that will never happen. But with each passing day, it becomes less and less.

And as I've gotten older and seen enough of these transitions, I just know that we can – to be a little crude, we can just wait people out. This is an inevitable transition as mainframes to workstations or workstations to PCs was. And most of the reasons for not moving are not very substantial.

I think there is a handful of places that are wrestling with this question. You see it in terms of government organizations, places in the defense industry.

But it was interesting, we spent a long time in the CTO of the company with folks from DARPA the other day and then kind of marveling at what's possible with what's going on in the cloud, and then say we had difficultly, it was good to be – for them to use it.

And then we went on this interesting conversation that said the bad guys have no problem using the cloud. They are using the cloud already and they're going to continue to use the cloud. And so, I don't think the operational plan should be for you to figure out how not to use it. You need to do something different.

And so I think both businesses and governments will figure out a way because the benefits are so substantial..

Got it. And maybe just one quick follow-up on you've talked in the past about operationally and systems, some of the changes that you need to make internally as more of your business goes direct and transactions through the website and that sort of thing. You talked about the tokens on the EBAs.

How do you feel like you guys are set up as you're starting to really ramp this transition in earnest throughout this year and into next year?.

Yeah. So I would say just to be clear on the question, it's not only important for business that we do direct. It's also for our business through partners. The thing that's really changed is the number of transactions and the frequency in which people transact.

This was a system that was built for perpetual licenses and upgrades and that's what we've been transitioned. So I feel like we're finally carrying – there is a light at the end of the tunnel.

We're certainly servicing the business today and I feel like we're on track to be ahead of when the most massive movement of our customers comes, but we are building infrastructure as we go..

Great. Thanks for taking the question..

(58:07)..

Thank you. Our next question comes from Kash Rangan from Merrill Lynch. Your line is open. Please go ahead..

Hey, thank you very much. Carl, just – I appreciate the enthusiasm for the model transition. Looking back over the last few quarters, maybe there is some other factors at work, the number of subs added, we've seen 121,000, 100,000 and this quarter was 95,000. I would probably expect the numbers to be moving in the other direction.

Also, the billings growth rate although clearly pretty solid this quarter, we've seen 27%, 25%, 20% going down to 8%. So if we take a step back, can you help us understand the context of what seems to be deceleration on the face that was reported, but I'm sure that there is another side to the story just what I really wanted to hear.

And finally also the guidance, you guys have done really well on beating the sub number and taking up the guidance. I noticed that we didn't do it this time, we did it last time. Just wanted to get your thought process on that. Thank you so much and that's it from me..

Yeah, sure. Yeah, sure, Kash. Well, I would say the 95,000 we exceeded our expectations. Like we said, it was not going to be linear. Given what we saw in terms of promotional activity and that the impending end of sale is 12 months off, this was above what our expectations were.

So, the other thing I would say is and I mean we've tried to be as clear as possible is that these things are not going to be perfectly linear. And we've tried to present as much information as we can when we think it gets on a solid footing and when it is understandable and we'll continue to do that.

And we said, we'll start breaking down more numbers as we go forward. But everything about what we saw in the subscription part of the business was at or above where we had planned the year. So I feel good about that.

We have now – as we enter the second quarter with interesting new dynamics with the promotional activity and the end-of-sale getting closer and in three months, we'll have another conversation about where we are at that point..

Yeah. And, Kash, to the numbers that you quoted, when we talked about 121,000 net adds in Q3, bear in mind that there was a one-time add for Delcam, 25,000 built into that number. And then we – as we talked earlier, in the 100,000 that we added in Q4, there were 17,000 one-time.

So, we had some one-time inorganic hits as those acquisitions got their subscriber count up to a level where we were comfortable reporting them and adding them to our base, which was inception to date for those companies as a one-time add and then the ongoing growth is just whatever the ongoing growth of those businesses are.

So, there was a little bit of a – actually a fairly notable tailwind in both Q3 and Q4 in those subscriber add numbers. I think the 95,000 adds we just posted for the quarter, we disclosed, certainly was ahead of our expectations and is something we feel pretty good about..

Thank you. At this time, I would like to hand the conference over to Mr. David Gennarelli for closing remarks..

All right. Thanks, everybody. So just as a reminder, we're going to be at the Banwell (1:01:23) Conference on June 2 in San Francisco. And if anybody wants to talk to me in the meantime, you can call me at 415-507-6033. Thanks..

Ladies and gentlemen, thank you for participating in today's conference. So this concludes our program for today. You may all disconnect and have a wonderful day..