Autodesk, Inc. (ADSK) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter Autodesk Inc. Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host for today, Mr. Dave Gennarelli, Director of Investor Relations. Please proceed, sir.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss our second quarter fiscal 2012. Joining today from our Waltham office is Carl Bass, our Chief Executive Officer; and here in San Rafael is Mark Hawkins, our Chief Financial Officer. Today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com/investor. As noted in our press release, we have published our prepared remarks on our website in advance of this call. Those remarks are intended to serve in place of extended formal comments, and we will not repeat them on this call. During the course of this conference call, we will make forward-looking statements regarding future events and the future performance of the company, such as our guidance for the third quarter and full year fiscal 2012, the factors we use to estimate our guidance, new products and suite releases and expected growth rates, certain future strategic transactions, business prospects and financial results, our market opportunities and strategies, and trends in sales initiatives for our products and trends in various geographies and industries. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, specifically, our Form 10-K for the fiscal year 2011, our Form 10-Q for the period ended April 30, 2011, and our periodic 8-K filings, 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 our 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 GAAP and non-GAAP results is provided in today's press release, prepared remarks and on our Investor Relations website. We will quote a number of numeric 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. Financial markets grew weaker and more volatile by the week. Today was certainly no exception. It's a bit surreal announcing our results after the close of today's market, since we have lots of positive news to report. Across the board, our key financial metrics was strong, with growth across all geographies and business segments, better-than-expected operating margins and profitability and continued strong cash flow. Hoping driver growth was an increase in the demand for our suites. There are several areas of notable growth and achievement. Highlights for the quarter include 16% growth in total revenue, 45% growth in total suites revenue, 24% growth in revenue from Asia-Pacific, 20% growth in record revenue in Manufacturing, 19% growth in AEC, 37% growth in maintenance billings, 22% growth in non-GAAP EPS, 18% growth in cash flow from operations, strong operating margins and record deferred revenue. From a geographic perspective, Asia Pacific continues to lead our growth. We saw straight across most countries, and we signed our largest contract ever in the region. Our EMEA region posted solid growth based on strong performance of our Manufacturing products and our suites. What might be surprising to some is that our business in Europe grew across all regions, including Southern Europe. Our Americas team posted another quarter of double-digit revenue growth, which strengthened both our channel business, as well as major accounts. I mentioned that our Manufacturing business hit an all-time high for revenue, with solid growth in all our geographies, led by EMEA. We're seeing some great wins with Factory Design Suite, and our Product Design Suite is performing really well. The strength of our manufacturing portfolio, anchored by our Inventor product, enables our sales team and channel partners to beat our competition with outstanding solutions for design and simulation. What's really great to see is that we're getting deeper penetration in certain industries where we historically have had a smaller presence, such as automotive and aerospace. In fact, last quarter, we signed our largest manufacturing deal ever, with a key global supplier in automotive and aerospace, displacing competitors with legacy technology. The combination of superior modern technology and a broad portfolio of products was a key factor in their decision. After experiencing some softness in the first quarter, our AEC business had a terrific second quarter. AEC had strong growth across all geographies, led by Asia Pacific. Our Infrastructure Design Suites began shipping in early July and sales of Revit-related products have the biggest quarter ever. Suites was another driver of growth in Q2. All of our suites offer a tremendous value to our customers, and we couldn't be more pleased with the initial uptake of our newly launched design in creation suites. We're having success in selling suites to new customers and migrating existing customers from point products in older suites into our new suites. At their core, our suites facilitate the migration to model-based 3D design tools and helps eliminating the purchasing and interoperability complexity of stand-alone point products. They also increase value by improving the customers' workflow. It's a clear win-win scenario for our customers and for us. Helping drive growth across all geographies and business segments is the increasing success we're having with large enterprise customers. Initiatives and investments that we started last year targeting major accounts are paying off, as we continue to see an increase in large deals and related revenue. There are a number of other positives in our Q2 results. Our maintenance billing growth was the strongest we've seen it in the past 4 years. New customers see real value in signing up for our subscription program, and our attach rate is above prerecession levels. We're also having success with programs that get customers on subscription after upgrading from older versions. Two other positive trends in our subscription business is that our renewal rate is at a record high level and we are seeing an increase in multiyear subscriptions. We're also evolving our subscription business to provide even more value to our customers through web services. At our investor day event in June, I spoke to you about Autodesk's initiatives utilizing the cloud. Later this quarter, we'll be introducing a collection of new web-based services, adding unlimited computing power to our offering. This will transform the way our customers work by helping them design, visualize, simulate and share ideas more rapidly and effectively than they've ever been able to do before. Stay tuned for the launch and more details in the coming months. There's obviously been a lot of volatility in the markets over the past few weeks, including today. Despite that, our Q2 results were solid across the board, and we're confident in our ability to deliver on our third quarter and full-year guidance. Of course, we can't completely ignore today's economic headlines, and our guidance considers the recent macroeconomic news. We continue to deliver great value to our customers and are gaining market share against all of our major competitors. Despite the turmoil in the financial markets, the strength of our products, finances and our team of employees and partners gives me great confidence in our ability to succeed. Operator, we now like to open up the call up for questions.

[Operator Instructions] Today's first question comes from the line of Heather Bellini with Goldman Sachs.

This is actually Perry Huang for Heather. I just had a general macro-related question. Things are still obviously early days in terms of the direction of the economy and its potential impact over the near term. I was just wondering from a planning perspective, is there anything the management team is doing differently, if anything, this time around as compared to the end of '08? And also, from the perspective of your customers, are you hearing about them possibly doing anything different this time around?

Yes, the one thing I would say is that I'm not sure it's really the early days. It's a little bit strange announcing results today, as I said. It was also strange in the Investor Day a couple of months ago, where we were out being fairly bullish, yet there was a lot of turmoil in the market. So I think it's just a -- it's a rocky road, people are uncertain when it comes to the financial markets. The thing that strikes me the most is the disconnect between what we're seeing in the financial markets and how our customers are behaving. Most of my recent meetings with customers have entirely been about -- they're seeing business be fairly strongly and it's been evidenced by most of the results that people have been reporting. And most of them feel like they made a number of adjustments during the recession. And I don't see them yet making big changes in what they're doing. So maybe they're somewhat blind to what's going on in the financial markets, Heather, right, maybe not.

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

Mark, I'd like to ask about your maintenance business. You had some comment about the attach and renewals rates. But I noticed that there was a small sequential drop in your active base, notwithstanding the strength of overall billings. Have you begun to see or does the guidance encompass any adverse effects in terms of attach or renewal rates for the remainder of the year? And is there any discernible difference in terms of maintenance performance across the verticals? Then a follow-up.

So a couple of things, there Jay. one is that you're correct, that if you look at the installed base for subscription, it's down slightly sequentially. What's happened there is our educational installed is down a little bit, the commercial is actually up more one aspect of the business, but the net-net is a slight negative. That's not a really great indicator for the overall subscription business alone. What you touched on are some broader indicators that are very important. One is that as Carl said, our renewal is at a record level, and it continues to grow year-on-year and sequentially. The attach rate has been up again sequentially. So we like what we see. We like the value proposition that we're offering and the way our customers are responding to that. And we see a healthy trend there based on the data today. So we look to the second half, I would just say we can speak to the trend today, it looks good.

Okay. With respect to suites, that you highlighted the momentum sequentially and year-over-year. Two things. Could you comment on your maintenance experience with suites? Is it similar to or better than stand-alone apps in terms of attach and renewal? And I imagine it's driving up your revenues per license. And are you seeing or might you expect some sort of transition effect or inverse relationship even between stand-alone apps and suites?

Well, certainly, let me address the latter part at the beginning, in terms of stand-alone apps versus suites. As you see, our suites as a percent of our total business going from 23% in the last period to 29% of our total revenue this period. We're very, very pleased with the suites growth, as Carl called out. We're growing 45% year-on-year. And so I do think, over the long term, suites will be a bigger and bigger fraction of our total business. So that part, I would certainly address straight away. In terms of the revenue per license, over time, and we've talked about the uplift that you should expect. Again, it will take over time for that transition to come to bear. For example, some people that have upgraded to our new suites, when they do the renewal of their subscription, we'll see more ASP uplift there as an example. And in terms of the specific attach and renewal rates for suites, we haven't broken that out to disclose separately. I would fall back to say the trends that we're seeing in renewal and attach is strong as we've seen for years to come, including a multiyear subscription. We like the fact that, that's up. That's actually quite a nice sign from our customer.

All right. Lastly, if the guidance turns out to be a bit optimistic, and what are your contingencies in terms of cost management responses, promotions, selling activities and the like? Might you, for instance, delay some of the new initiatives or services that you've been planning on the consumer side or the web side or simulation side or anything of that kind? Or do you temporarily, just to deal with the incremental costs?

Jay, I don't think we would do much right now. I think a lot remains to be seen if there really is a big economic slowdown. I wouldn't jump to things like the new services and things like that. That makes more sense to continue to move forward with those things, since we've already invested the lion's share of the money in things like new services or new products. There's certainly parts of the business in certain initiatives that we would slow down. But I think it remains to be seen what actually the shape of it is. Right now, there's the big bogeyman out there that everybody's worried about, but I don't quite know quite the shape of the bogeyman. And I'm reluctant to be very public about plans about this imagine thing.

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

Carl, just on Jay's point. On the last cycle, the margins did get cut in half. And I guess, the one thing investors want to hear is that, I know you don't have a contingency plan in place for now that you're giving us. But is there something different about this cycle versus the last cycle? And if we did see a downturn, do you think you would put a floor on the operating margin versus last cycle, when there really wasn't a floor? I'm just curious in terms of how you think about it, and if you think the cycle is any different, I know you mentioned the bogeyman, you don't know how it looks like right now, but?

No, Brent, so listen, I think there's 2 interesting parts to it. So the first question and the thing that we've been wrestling with is trying to find evidence in our results that are similar to the last time. So I'm not going to sit here and say there's not a double-dip coming or there's not a big slowdown coming. What I would say is if it's coming, it doesn't look at all like the last one did. So none of the metrics that we saw go down last time have we seen evidence of yet. So I don't know if you remember correctly or precisely, but last time, we saw a slowdown in our Americas business about, 9 months or so before the collapse of Lehman. So if you want to date it by Lehman as being the official cataclysmic event, about 9 to 12 months before that is where we saw a slowdown in our Americas business. And it seem to go around the world and catch up. We also saw a number of things like subscription rates went down considerably. We also saw our run rate business, particularly LT and AutoCAD go down substantially and differentially than the other things. We've been looking for evidence in our numbers of things that look like the last downturn. And so far, we haven't found those. So I sit here today, we also have gotten to look at the first couple of weeks of our business in this quarter. And that famous graph that we like to show of the linearity of the quarter. It's perfectly on track for our expected plans for this quarter. So, so far, we haven't seen indications of it. So I just wanted to get that out of the way because I'm sure there's going to be a lot of questions from people about what if and when and what are you seeing. But so far, we can't find evidence of it. It doesn't mean that we're deaf and dumb and we're not listening to the news or looking at the reports and seeing what other people are saying. So the move to the second part of the question is, I would differ a little bit with you and I'd say there was a real floor last time. And while our operating margins got cut in half, I think we did a remarkably good job. And despite having our revenue go down by high 20-something percents decrease in revenue, the operating margins were always positive. They were always double-digits, and it rebounded fairly quickly. I think the question this time is, what is the actual situation? How does it differ? What's the most appropriate way to respond? And I think the other question, I think, for many companies, which is what I think someone was getting at before, is how should we respond to it this time? I worry too much about a lack of investment through what will be a 5-year period, if companies slowdown too much and cut too far back on their initiatives. So I think we've demonstrated our flexibility and agility in being able to respond. But I'm not committed to getting out of the gate ahead of it, especially since we haven't seen it yet.

The other thing I'd like to add just to all the points that Carl made is that in addition to this comment on linearity this quarter, one of the things you'll note in the prepared comments is that our linearity in the last quarter finished strong. And again, that's not what you would typically look for in a -- it's not the typical signal that we would be concerned about. I also called out the multiyear subscription is one of the first things that comes off the table when our customers are starting to get nervous, and that actually increased substantially for us this year, this quarter. So just a couple of extra comments.

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

I wanted to follow up on the strength you are noting in the suites business, I mean if we can quantify that a little bit more? I know there were promotions during the quarter that get people to upgrade on that. Did you see or can you qualify the type of -- maybe ASP lift you were seeing around suites and where that -- and where to quantify, how much that might've impacted what we saw in the outperformance on the license side?

Actually, I would say it's -- my sense is that the suites ASP effect is really just barely begun to take effect and show relative to the way I think it will over time. Again, we talked about, for people that did an upgrade, basically, through some of the promotions, Brendan, that you're referencing, that was a minor ASP lift. But when they do the renewal, there'll be another lift. And we're just beginning to see the front end of the ASP lift. So it's too early to give a really good quantitative figure, other than expect that, that will show up more later.

Well that leads into my follow-up, which is on -- in here we saw that the great improvement in maintenance billings and you listed out attach and renewal rates and a few other things there. Any way to quantify, sort of the suite impact on that? And whether how much of that we're starting to see? Is that the same situation as the licenses? Are we starting to see that sooner or later?

I think it's going to -- I think there are -- we really break that out and call that a headliner per se. I would say that the drivers for the maintenance billings, which is the highest we've seen in the long-term, is a function of commercial new licenses, is a function of cross grades, is a function of multi-years, it's a function of big-deal renewals. It's a function of increased attach and renewal rates and aggregate showing up across all the geographies, and to a small degree, FX. So really a broad-based response to a nice customer offering that's getting -- the value proposition's getting better.

And along the same line, we saw it looks like the best maintenance growth in about 2.5 years. So should we expect that we see, given what we're seeing in the billings, it would be right to assume that we would see continued sort of acceleration in that growth on the maintenance side?

Yes, we don't guide in that aspect. But I think your notion that we're putting deferred revenue on the books that's going to show up over time, I think you want to model that out with all the algorithms that you guys naturally do. But I think it's a good sign that these billings are being booked to your point.

Our next question comes from the line of Steve Ashley with Robert W. Baird. Steven Ashley - Robert W. Baird & Co. Incorporated: I would just like to drill down on some of the promotions and just a general point product to suite migration activity. And can you talk about the success or were you having success getting people moving from point products onto suites? And specifically, from 2D point products on to suites?

Yes, I mean, the 2 things that I noted in my comments, Steve, where we were very successful in moving people from point products to suites, as well as moving people from some of the older suites. Because remember, we introduce that big bunch of suites this year and towards the end of last year. And so -- but we had some existing suites in the market. So we were both successful in transitioning people from the older suites to new ones, as well as moving them from point products. In some ways, if you just step back and think about it, the collection of products that are put together in suite are really meant as a collection of tools that work well together. And as we've always said, moving from 2D to 3D is just the first step. The real payoff for moving from 2D to 3D comes in that collection of tools that surround it, that allow for analysis and simulation and visualization. All those things that contribute to a better understanding of your design. And so the tools that we put together in the pack, in a suite, are exactly designed to do that. And when you look more closely at the suites, the sweet spot for the suites, "Sweet spot for the suites," is the premium level, which is the middle tier. And what we saw is really the performance of the middle tier, as well as the top-tier. And as pointed out, even in the last call, the top-tier continues to exceed our expectations. Steven Ashley - Robert W. Baird & Co. Incorporated: And then maybe you could offer a comment on Japan and how that performed in the period?

Sure. In terms of Japan, we normally don't call out all the real specifics in each of the countries. But Japan was actually, we're very pleased with it. We know they've overcome an incredible natural disaster. We had strong growth in Japan. Steven Ashley - Robert W. Baird & Co. Incorporated: Great. And just real quickly, the multiyear subscriptions, I'm assuming those are billed for just one year at a time.

Actually, the multiyear subscriptions, they actually are billed up front. And it could be mixed, but largely, they're billed up front.

Our next question comes from the line of Blair Abernethy with Stifel, Nicolaus. Blair Abernethy - Stifel, Nicolaus & Co., Inc.: Carl, I just wondered, maybe you can dig in a little more for us on some of the success you're having in the automotive and the aerospace verticals. What's changing there? And are you supplementing what engineers have in these sectors? Or are you are you displacing or what?

I think 2 things have changed. I think, by nature, both those industries, for really good reasons are fairly conservative, yet they both faced a bunch of economic pressure and they're looking for better tools to get their jobs done. We've been in the market for a while, but it takes a while to convince people of our seriousness in the market, the capabilities of our tools. And we've been slowly building credibility, which has really reached kind of tipping point where we are being on everybody's consideration list. In the early days of having our products, many times, we didn't even really make the consideration list, now we're always there and we're being seriously considered. Second thing that's going on is we've really broadened our portfolio all the way from conceptual design tools, all the way to Factory Design tools and everything in between. And particularly, as we've entered the market with more and more simulation and analysis tools, people understand that we're very serious about these markets. That in many cases, we have much better technology, and it's much more accessible. And so I think for all the reasons we win, we've done that. Now I'd say the other thing that really has helped is we've gone to market differently. Starting really during the downturn, we made a significant investment in our major accounts. Many of these sales cycles involved in aerospace and automotive take quite a bunch of time, they require a bunch of consulting services, and we made those investments. And so while we've probably -- the last 3 to 5 years, we've had products that were more than capable of displacing competitors. We didn't have the complete offering. We didn't have the right to way to go-to-market, as we've increased our footprint with major account sales people, as well as our consulting services, we now have what they need to actually choose us. And I'd say in many cases, we're displacing competitors, Most of these companies have already had stuff. In some cases, we're expanding the footprint within it to reach other users who may not have had the tools. But a lot of it is displacement of kind of the legacy, the old crusty, expensive stuff. Blair Abernethy - Stifel, Nicolaus & Co., Inc.: Okay, and just Mark, I wonder if you could just help us on your G&A this quarter improved quite nicely sequentially. Is that sort of a level we're going to be running at now? Or could you just explain that a bit?

Yes, some of the -- what happened there, you can appreciate it when we go into the second quarter, some of the French goes down is one thing. The other thing is that we are managing costs very, very tightly. So as far as going forward, I don't want to guide you in a -- per se, but we are trying to keep a tight lever on that, while making the investments essential for supporting the infrastructure to grow the company.

Our next question comes from the line of Sterling Auty with JPMorgan. Sterling Auty - JP Morgan Chase & Co: Carl, you mentioned some of the things in the numbers that were the leading indicator as you went into the slowdown. But what were the customers saying? What were the body language that kind of gave the leading indicator to the slowdown in their spending habits as you went into last recession?

What we saw last time was a real reduction in their pipelines. Many of them are already working with smaller workloads than they did when they went into the last recession. Many companies have been much more resourceful in where they're finding work, how they're doing work, the size of their workforce, it's been one of the issues behind unemployment in a number of places. So I mean, last time what we saw -- started to see was delayed deals, smaller deals, non-renewals or smaller renewals. And I think people were pretty freaked out. This time, I've been with a lot of customers over the last few weeks, and there's a little bit of sense of immunity, or they just have the sense, what, we've seen this movie before, we don't think the world's coming to an end. Many of them regret having not been more aggressive during the last downturn and being so reactive to the slowdown, but not in a long-term, healthy way. So most the customers I see right now, they're worried about getting new products out. But they don't have that same sense of fear that we saw last time. Sterling Auty - JP Morgan Chase & Co: Okay. And then a follow-up on those, on the suite side, can you give us a sense of the order of magnitude, which of the suites is contributing the most now? And how should that evolve over, let's say, the next 12 months?

Yes, I think the biggest contributor and the biggest surprise to the upside has been in the Building Design Suite, particularly because as we looked at the macroeconomic factors going on, this would not be a particular time you would have guessed that the Building Design Suite would be leading the charge, given all the economic factors out there. So that's pretty much surprised us the most. But the Product Design Suite's done well. Some of the -- and both of those are building off previously existing suites. The numbers on the other seats, like Factory Design Suite, Plant Design Suite, the basic design suite, those all are coming off much smaller bases and the movement from point products. So while the growth has been -- exceeded our expectations, those numbers are relatively small.

Our next question comes from the line of Walter Pritchard with Citi.

Just a couple of questions here, mostly financial in nature. I guess, first, just trying to understand on this, we noted the change in the FX methodology that was in the press release. Can you just clarify relative to the guidance you gave last quarter, did you change it since that guidance? And what impact it had relative to the guidance range you gave last quarter? And then, also, any impact that, that FX change methodology had on the 13% growth guidance for the year versus prior 12%?

Yes, first of all, Walter, happy to address that. Keep in mind the change in the FX is actually quite straightforward. The U.S. dollar, no effect, no change, we've given guidance in U.S. dollar. The only thing that we did for this particular improvement is we just simply took out the gains and losses on hedge. And what that allows you to do is just have a better insight on what's happening in the local currency in terms of revenue. That's the upshot of this. So it's really quite straightforward from that standpoint. In terms of the impact, we even modeled the old methodology, and you can see it in the fact sheet.

Yes, I got it. I saw the 10 versus the 14.

So it's really -- this is like really immaterial, the only thing that we find that's interesting, is when you go to try to understand for example, how Europe's doing, we can take a look at the constant currency rate and not have to worry about our four quarter layered hedge gains and losses, and you have a better understanding of what's happening on the ground, and yet, when you look at the FX impact, you can actually see the full effect, including the gains and losses.

Got it, great. That makes sense. And then, Carl, just on share gain comments, I guess, we talked to other players in the space, I mean everybody sort of claims that they're gaining share and defending turf or expanding into new turf. I think mostly, is around manufacturing. I think in the AEC space, not so much contended. But just curious, is it market industry estimates? Or is it your own work that -- or is it anecdotal that convinces you're gaining share Manufacturing and just maybe a little bit more detail on that would be helpful.

Good. I always find this slightly amusing. That mathematical fact is the subject of so much argument by anecdote. It seems much better to go back to the math. And I think there are only 2 ways to look at market share. One is you can look at the number of seats and the other is to look at the amount of revenue. And I think if you do the math by those measures on any apples-to-apples comparison, I think that's where my comments come from. So I always find it amusing when somebody says, their CAD business is growing by 3%, but we're gaining share. I just don't know the how that's mathematically possible.

Got it. And then just, Mark, I just had one quick one on the maintenance billings and you mentioned long-term was driving it. I'm just trying to get a sense of if you're doing anything different there to try to incent that type of behavior, if that's just truly the customer feeling better about things and going longer to...

Yes, it's actually, Walter, the customer feeling better. We're seeing that in the channel, we're seeing where there's no unique incentives. It's different than what's been there in the past. We offer a very small incentive, if they want to go multiyear, that's been consistent. What they're doing is their behavior is just different. And I think we like that trend and we like what we see there.

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

I was wondering just from a high-level perspective, obviously, you guys aren't seeing any impact in your business from the macro, but investors are. And significant pullback in your stock price. Looking at that versus $1.6 billion of cash on your balance sheet, any thoughts about getting more aggressive there or perhaps on using that cash to more aggressively buy back shares, considering the big pullback that we've seen?

Yes, I mean, generally speaking, our program is around offsetting dilution. But certainly, when you see such a dramatic pullback, it's more than crossed our minds. At this point, we have no commitments to doing. But we certainly have thought about it a lot. And we generally don't try to time the market around that, but it's just, it's staring us in the face. So we've given a lot of consideration to it.

Got it. And then on your hiring plans for the year, kind of -- had there been any changes, given sort of -- you made a remark earlier that you're not blind to what you're seeing out in the financial markets and all the uncertainty out there. Has there been any impact on your hiring plans throughout the back half of the year? Or sort of the expense ramp? Or is it just business as usual for Autodesk going forward into the back half?

No, I think we've definitely kind of put up the yellow flag. I don't want to put up the red flag because I think that's usually disruptive to the business, I think if we were to go through another period like that, if it was unwarranted. It unnecessarily -- is a jerky response to it. But we have been observant of it. What I would say is most of our investment has been moved closer to revenue generating activities. So the things that we want to preserve are the introduction of new products and services and continued investment in our go-to-market activities major accounts, our investment in the channel, marketing programs and promotions around, like suites and Web services. So where we would continue to invest until it seems unhealthy would be closer than the go-to-market activities, where we've pulled back from or proceeding much more cautiously is those things with much longer payback. Some of the R&D initiatives and things like that. And in many cases, we're just doing the work of figuring out which area, how to categorize these things, how to think about it. And we'll see but we want to continue to invest in this go-to-market activities to make it through. I mean 1 of the things that we saw is we have a certainly, a number of directions we're heading in as a result of the adjustments we made during the last downturn. Our investment in major accounts and consulting is a good one. Our relationships with a number of large system integrators. We'd like to continue that going through and I'd hate to pullback on that. And come out of this a year from now, and not have those in place. When they've been so successful, and I think in some ways, they speak to what's kind of booming our results, in certainly a rocky economic time.

Got it. And if I could sneak 1 last one in, just wondering about spending with governments in general. Both sort of U.S. Federal Government, as well as, perhaps the most -- particularly in Europe. In Europe, we're seeing a lot of austerity measures and in the U.S., were seeing crazy budget ceiling price. Any impact on your business from all this turmoil going on in terms of -- at least, what it appears like from the outside and from governments?

Yes, what we've seen is uneven release of the money. So I think there's 2 things that go on. 1 is the policy decisions about how to spend the money, which is the ones that get the big headlines. In fact, what we've seen to be slightly more important is kind of the back end to the process, where the money actually gets released. And as our elected officials in Washington kind of gummed up the works, money got held back, we saw some of that happen early in the quarter. And so there is no doubt that government officials around the world have the ability to borrow up government spending, and it could have an impact. But it's somewhat tied to how they release funds a little bit more so than how they plan on spending the money.

So the funds might be that they're just getting sort of procurements more difficult?

The difference might be something like if you look at something like infrastructure spending, it's many, many years before the money is first committed to the time that a project is built. That can be 5 to 10 years. So what's less important is whether or not they agree to move forward with a big infrastructure project, as compared to whether they're releasing funds from ones they've already committed to. I think -- 1 other thing I was just thinking about, I think we look a lot at government spending in places like the U.S. and Western Europe. But the other things to remember is, the other governments of the world, particularly the emerging economies and what the governments are doing there. There's significant spend in places like China, India, Brazil, Russia. They all performed really well and there's a lot of government spending there. And it seems to be on a very different track than what's going on in the U.S. and Western Europe.

Our next question comes from the line of Dan Cummins with Thinkequity.

A couple of questions. First, I wanted to know, Carl, if you could talk about your Direct business. I guess, maybe comparing the results and versus expectations this quarter and the prior quarter. And I guess I -- perhaps have never asked before, how much of that extends into emerging markets? Curious also about Revit adoption by the global geo regions and then finally, on DOT opportunities and infrastructure, do you expect to see approximately the same amount of vendor review opportunity along the lines of, I think, what you had in California going forward, even as some of the state finances are hobbled perhaps?

Yes, so let me see if I get this right, there's a Revit adoption question about DOT and vendor review. And the first part of your question?

Yes, your Direct business, kind of what's -- how's that been trending over the last couple of quarters and the mood of the big customers, I guess, fine to ask it over the last 6 to 8 weeks, if you sense anything different about their ability, I guess, to build firewalls around Wall Street and bank nonsense?

So what I'd say is our direct business has done really well. It's exceeded our expectations. It's partially a function of the customers' behavior, but it's also a function of the fact that we've been adding capacity to our direct sales force. And as they ramp up over time, you have greater capacity. So it's a combination of the 2 of those things. It's been interesting conversations. I mean, everyone's been crass [ph] about it. But in many of the meetings I've had with major accounts, there's almost a gallows humor about the financial markets. And I think everyone sees it, everybody hopes it doesn't affect it, but I don't think everyone of us is naive enough to believe that if it continues, that it won't affect our businesses. I think many of us are behaving in response to the things that we can see and feel everyday and running our businesses according to those plans and observations. And many of our major accounts are moving forward, if it wasn't for the downturn in the financial markets, I'd be sitting here telling you about hiring, we're seeing in the construction business, increasing projects that people were gearing up for. Now like I said, on one hand, I'm seeing that, on the other hand, I've been around long enough to know that if the banks go into another really bad period, and credit tightens up, you're not going to see financing of those projects. So right now, it's a little bit schizophrenic and it's hard to balance out those 2 things. But what we saw as our direct business is growing. It's doing really well. And in many cases, it's enabling us to reach customers that we weren't able to reach before. And like I talked about in aerospace and automotive, what the direct salespeople really allow us to do is take what I believe to be equal or better products to what already exists in the market and add the other components to it about how our customer really wants to buy and get service from us. So I'm feeling really good in whether it's aerospace or automotive or what you see at the DOTs, that's a result of our direct business. Revit adoption has really been strong. Revit is closely tied in the markets of this concept of BIM or building information modeling. BIM has been on a roll, it's way past the tipping point, it's doing incredibly well. People are thinking about BIM not only in terms of buildings, but in terms of civil infrastructures. So it's been doing really, really well. It's been doing well across the world, lots of countries, it's doing really well. We're seeing it strong in United States, we're seeing it strong in EMEA, particularly Australia and New Zealand. And the thing that I find most exciting about it is that early on in the rollout of Revit, there was a lot of adoption by the architectural community. As we proceeded further, there's a huge take-up in what's going on with engineering firms, as well as what's going on in construction with the large, general contractors. And that's obviously a much bigger portion of this global $4.2 trillion industry. So what I'm excited about is the use of BIM all across the value chain. And if you just look at the numbers from our point of view, Revit revenue, was at an all-time high. On the DOTs, DOTs have a calendar for their vendor review. And I think they will continue to proceed along that. A little less sensitive to the economic cycle. We feel good about the Department of Transportation, we've won in the United States and announced. We feel really good about the pipeline of opportunities, both in the United States, North America and around the world. And we're doing really well there. When you look at it right now with government revenues down, the DOTs are feeling real pressure to improve that process and to be more responsive and to get better projects built and brought to market much sooner. And that's what our tools do. So we have something valuable to say and to add to the process of how DOTs go about doing their work, as well as the whole supply chain, the whole value chain that supports them. It's all about getting things built better and getting them built more quickly.

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

Just a couple of questions here. one is more of a narrow question first. The growth, particularly in the license and other line looks like -- it looks like it was led by upgrade and cross-grade, it was really good. The comparison looks pretty easy relative to last year. Could you maybe break that down a little bit for us or give some color on what drove the growth there in the upgrade and cross-grade?

Well, one of the things that drove that is the fact that as we were introducing the suites, we gave people opportunities that had point products to actually upgrade to a suite. And -- so that's one of the factors that was involved there, Steve.

Okay. Was that the major factor, would you say, Mark?

I'd say probably is one of the major factors, yes.

Yes, the most significant was cross grade hasn't been as big a part of it over the last few quarters. And this was a good upgrade, cross grade opportunity for many of the customers.

I think the simplified upgrade, just continues to in the past, continues to have a favorable effect on this now today.

Okay, great. And then one other -- maybe a little broader question here is, I've been tracking your revenue growth, both in Manufacturing and AEC, versus employment levels. And you consistently have demonstrated an ability to grow significantly faster than staffing levels. For instance, in architecture and generic [ph] services or manufacturing, even when employment is relatively flat. But you certainly have been very levered to change the employment, especially in the last downturn. I'm wondering, is that kind of leverage to the employment level, the kind of relationship we should continue to expect? Or do you think things like BIM and the growth of your Direct business and the suites, do they provide you -- how do they affect that relationship?

I think it's really -- look, the overall macroeconomic environment clearly affects our business. We saw during the last downturn, when spending turns off, it certainly affects our business. But I don't think there's great causal relationship between the number of people out there, the number of people employed. As a matter of fact, what we see during slowing economic times or low growth times like now, is this need for huge process improvement and efficiency. And I think during these times, that's where we make it up, is that people need to find ways to get the same amount of work done with smaller workforces. And they're looking for tools that drive efficiency. So I think the correlations out there. I would also say, there are places in the world that we sometimes tend to forget about that have big shortages in skilled labor. So I recently heard that in Brazil, they have 100,000 too few architects and engineers for the projects that they want to build. And almost 2 million people -- there's a deficit of 2 million skilled construction laborers. So there are parts of the world in which there is a need for more employment, even if in the U.S. and the EU, you see other things. So we found over time, difficult to correlate some of the simple numbers to our actual performance. But we certainly know we're not immune to overall macroeconomic stuff.

Our next question comes from the line of Philip Winslow with Crédit Suisse. Dennis Simson - Crédit Suisse AG: This is Dennis Simson, for Philip Winslow. Could you guys comment about what you're seeing in the Manufacturing vertical across regions? Some of the ISM and PMI indicators are rolling over and we're just curious what the feedback from customers has been?

Yes, sure. Yes, I mean, Manufacturing was really strong for us, it demonstrated strong growth. It was our biggest Manufacturing quarter ever. So we're really pleased with what we saw. When you try to break it down geographically, I mean, I would say relative strength across the world, the U.S. was strong. Central Europe was strong, northern Europe was strong, parts of Asia were strong. So I mean, it seems like the PMI moves much more quickly than the manufacturers do. I think if you saw a continued downward trend, they become more worrisome. But right now, what we saw is a fair amount of strength and like I said, it was our strongest quarter ever in Manufacturing with -- when you look at the subtext of it, lots of nice factors inside those numbers, when we look at individual products and suites and product adoption, renewal rates around subscription. A lot of the stuff underlying that number was really positive as well.

Today's final question comes from the line of Matt Hedberg with RBC Capital Markets.

I guess, Carl, broadly speaking within sort of in a large slobs here, enterprise, SMB and professional markets, where did you see the most upside versus your internal expectations? We've kind of talked about this a couple of different slices. But I guess I'm wondering in that slice?

Yes, I mean, this time, nothing stuck out particularly. I think we continue to be pleased by how well we're doing in the enterprise accounts. But I would also say that I was really pleased by the resiliency of what we saw in the small and medium, as well as the small thing. Like I said, that was one of the places where we look to because of what we had seen last time going into the downturn. We've found that a much more difficult environment to control than the ones in which we have direct relationships with your customers. And so we were very mindful of what was going on with our channel partners, as well as what was going on kind of with volume channels, and people buying in really small numbers. And the run rate business continued to be strong. So I would say those numbers were resilient. And our suites business was primarily driven by our channel partners. I talked about this before that while suites is applicable across a broad range of our customers, the most appropriate place for it is through the smaller medium customers that buy through our channel partners. The smaller customers may not be willing to invest in such a big portfolio of products, and our enterprise customers have other flexible licensing options to get the same functionality. So it was really pretty solid across the various channels.

That does conclude our question-and-answer session for today. I would like to give it back to Dave Gennarelli for closing remarks.

Thanks, operator. That concludes our call today. Just as a note, we will be at the city conference in New York City on September 8. And we'll also be hosting our AEC webinar on September 14, and stay tuned for more details on that. Otherwise, if you have any further questions, you can reach me at (415) 507-6033. Thanks.

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation. You may now disconnect, and have a great day.