Autodesk, Inc. (ADSK) Q1 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Misty, and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Fiscal Year 2013 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Dave Gennarelli, Director of Investor Relations, you may begin your conference.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results for our first quarter of fiscal 2013. Joining me today are Carl Bass, our Chief Executive Officer; and Mark Hawkins, our Chief Financial Officer. Today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com/investor. As noted in our press release, we have published our prepared remarks on our website in advance of this call. Those remarks are intended to serve in place of extended formal comments, and we will not repeat them on this call. During the course of this conference call, we will make forward-looking statements regarding future events and the future performance of the company, such as our guidance for the second quarter and full year fiscal 2013, long-term financial model guidance, 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 2012, and our periodic Form 8-K filings, including the Form 8-K filed with today's press release and prepared remarks. These 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 this 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'll 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, and reconciliation of GAAP and non-GAAP results is provided in today's press release and prepared remarks and is on our Investor Relations section of our website. We will quote a number of numeric and 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 Bass.

Thanks, Dave. And good afternoon, everyone. We were pleased with our first quarter results, which were solid, although somewhat uneven. We had strong revenue growth in Asia Pacific and the Americas, strong growth in our Manufacturing and AEC business segments and strong growth in revenue from suites. Offsetting these strong growth areas were mixed results in EMEA and emerging countries, as well as a decline in our Media and Entertainment business segment. We also accomplished a couple of significant structural and organizational changes during the quarter that we believe will better position the company for future growth. There were several areas of highlights in our performance compared to the first quarter of last year: 34% growth in total suites revenue, 19% growth in revenue from commercial new licenses, 18% growth in Manufacturing, and 16% growth in AEC, record revenue in Asia Pacific, record deferred revenue balance, a 210 basis point improvement in non-GAAP operating margin, and 18% growth in non-GAAP EPS. Much like the past few quarters, our business in EMEA was varied within the region. As you might expect, we experienced weakness in most of Southern Europe and had better results in Central Europe, including a record quarter in Germany. Within EMEA, we had good performance in our Manufacturing and AEC business segments, while PSEB and M&E did not do as well. PSEB had a tough compare to Q1 last year, when we ran a successful promotion on AutoCAD LT. The economic picture for EMEA is unpredictable, so there continues to be a degree of uncertainty. But overall, the sales environment in EMEA doesn't feel all that different than it has over the past few quarters. Another area where our results were uneven was our revenue growth in emerging economies. By nature, these markets are much more volatile, and much like EMEA, our results were varied by country. For example, compared to the first quarter of last year, we recorded strong growth in Russia and China but had weak results in Brazil and India. While currency devaluation played a role in both Brazil and India, we are taking actions to expand our business and improve our performance in these countries. We continue to believe that the BRIC countries and other emerging economies around the world hold tremendous growth potential for Autodesk, and we are focused on improving our performance there. Our results for M&E were impacted by 2 items: One was an intentional part of our strategy and the other resulted from poor execution. First, as you know, our new design suites combine the functionality of many of the products necessary to optimize the design workflow. The value of providing all these functionality in a suite helps drive increased ASPs. Several of our animation products include 3ds Max, are now available in our design suites, and, as a result, many of our customers no longer need to purchase these products separately. So as our customers migrate to our new suites, we are starting to see reported revenue for the standalone version of those animation products decline. This is not unexpected. And as we've noted in the past, we anticipate and encourage our customers to migrate to our suites, which carry a higher ASP. The value of the suites is highly compelling to our customers and is the right strategy for Autodesk. Our results in Creative Finishing were disappointing. Separate from what we're experiencing with animation products, revenue from Creative Finishing declined as we believe customers delayed their purchase in anticipation of a new third-party hardware platform that is expected to be released this quarter, and our Smoke for the Mac product, which will be released in Q3. We achieved strong results in our Manufacturing business segment with solid performance in each geography. During the quarter, we unveiled our new manufacturing suites, which offer a complete set of integrated and interoperable suites to simplify design, visualization and simulation workflows. These suites also provide a broad range of cloud services to help manufacturers more efficiently design, engineer and manufacture better products faster and at reduced cost. At the heart of our manufacturing suites is Inventor, our model-based 3D design tool. Since we launched Inventor in 1999, it has become a significant contributor to our growth over the years, and we recently reached the milestone of shipping our 1 million suite. Our growing Simulation business also performed well during the quarter. We're excited about the launch of the new Autodesk Simulation family of products, which deliver a faster, more accurate and flexible approach to predicting, optimizing and validating designs earlier in the design process. Our new PLM offering went wide in the quarter as well. Autodesk PLM 360 is our new cloud-based solution designed to transform how customers manage their entire product life cycle. 100% cloud-based, Autodesk PLM 360 was a new generation of PLM that's affordable, easy-to-use and simple to deploy, bringing the benefits of PLM instantly to anyone within the extended enterprise. We've only been in the market for 3 months, but we're thrilled with the current results. We're seeing everything from large enterprise companies who have legacy PLM systems deploy pilot projects to SMB companies who never used PLM before deploy our new service. This truly expands our market opportunity, and we're looking forward to watching this business grow over time. Our AEC business segment performed well on a global basis. We refreshed our AEC suites, which had exceptional growth in Q1. We've added enhancements to our AEC suites, expanded cloud services and improved collaboration and data management tools, aimed at helping design, engineering and construction professionals address today's business challenges with enhanced then workflows. The cloud services I referenced are all part of Autodesk 360, a cloud computing platform that helps users dramatically improve the way project teams design, visualize, simulate and share work. Autodesk 360 offers secure access to project data anytime, anywhere, taking advantage of virtually infinite computing power through a broad range of cloud-based services. Autodesk 360 is now available to all Autodesk Design Suite customers with additional capabilities and greater capacity available to Design Suite customers who purchased an Autodesk subscription. Since the launch of Autodesk 360 cloud services last September, we've had approximately 8 million unique users and among other things, have utilized more than 3 million hours of rendering services. I've mentioned over the past 2 years that we've been moving to increase usage of electronic software delivery. The purpose behind this move is twofold: to improve customer experience and to help us control cost. We are seeing a positive impact on our cost as gross margins improved during the quarter. Additionally, at the end of the first quarter, channel inventory weeks was at a record low of approximately 1 week. A decrease in channel inventory and shippable backlog was expected as a result of our transition to increased use of electronic software delivery. In addition, we completed a reorganization of some of our internal resources, including organizing our sales teams by industry. The changes are intended to better serve our customers and drive future growth. We also made some adjustments to our channel program for FY '13, drawing on best practices from our various geographies. So to wrap things up, we've got a lot accomplished in the first quarter and posted solid overall results. While the macroeconomic environment continues to keep us somewhat cautious, we remain confident with our FY '13 goal of increasing revenue by at least 10% and increasing non-GAAP operating margin by approximately 200 basis points. Operator, we'd now like to open up the call for questions.

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

This is Perry Huang for Heather. I had a question about the business environment and linearity, I guess, particularly for EMEA, the emerging markets and the U.S. Did you notice any change on the part of your customers as you moved to the quarter? For example, their budgets get tighter towards the end versus the beginning. Or did you sense any increase in hesitancy on spend on their part?

No, Perry, we really didn't see any change in linearity during the quarter. Nothing different than usual and nothing -- despite the varied performance by country, nothing country by country in linearity.

Got you. And then I guess, given where you stand today and sort of the conversations you're having with customers, how would you characterize customer demand and I guess the business outlook today versus, say, back in August of last year, like concerns around Europe were also in the headlines, are there any noticeable similarities or differences?

If I had to say anything, in some ways, I'd say it's better. People are more optimistic, and I think partially, it's that people have gotten a little bit immune in the business community less than in the financial community to concerns over Greece, Spain, Portugal, whatever. So I think there's a sense in the business community that people need to drive their businesses forward. And so while a year ago, it was closer to the downturn in the U.S. and seemed scarier. I think the business environment remains one in which people feel like they need to move their business forward. The only thing I'm seeing that is similar, particularly in Europe, there's -- we had a good quarter in the U.S. and I think if anything, the bias there is upwards. In Europe, we're seeing a tightening of credit. And I think it's all -- I mean, that shouldn't be news to anybody if you're reading the newspapers, that the banks are experiencing some amount of trauma.

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

Carl, just on Europe, you mentioned that it hasn't really felt any different but it obviously caught up to you this quarter. And you had a fairly easy comp on a year-over-year basis. I mean, from your perspective, how long lasting do you think this is, if you have any visibility you could share with us? Do you think this is a shorter-term impact or are you a little more concerned about the longer-term?

So Brent, one part I agree with you, it's really caught up with us. The one that's different is, I want to tell you, it's a particularly easy compare. We've run a promotion with LT and a number of other things same time last year. So the compare wasn't -- we didn't feel it was particularly easy. To the substance of your question, I don't think I have anything really to add that's not already out there. I'm not sure any of our business results give an indication of anything different than what everybody is talking about. I think, if anything, we just put a finer point on it and reinforce the strength in Northern and Central Europe and the weakness in Southern Europe. The thing that struck me particularly is that we did well in Manufacturing and AEC and that Germany had a record quarter. And so I think you really just see the tale of 2 nations, and I think it's Northern and Southern Europe are just going in divergent directions.

Okay. I guess, on the bottom line you're expecting starting a little bit more -- I don't know if Mark can comment in terms of the expense structure. Were there any one-time event at the beginning of the year that maybe you weren't anticipating that came in, in Q1?

Brent, first of all, I would say, no. I mean, I think we are pleased to be able to deliver the plan that we put out there and execute accordingly. So I wouldn't say that there were any things in particular. As you know, we don't guide at a spending level or at an operating margin level for the particular quarter. We focus more on the EPS level. So I think the answer is there's nothing in particular that I would call out to be special.

[Operator Instructions] Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities.

Returning to the subject of the Europe comp, in terms of the disparity between Germany and non-Germany, first of all, do you do anything differently operationally or on the cost side to respond to these different performances by region within Europe? Or do you let things continue as you had planned before for the year? In addition, still on Europe, do you think that any of the structural changes in the channel over there in the last 6 to 9 months might have had any effect on the ground, in terms of tech data or anybody else going through some of the changes over there, could that have had any effect in addition to the macro effects?

Yes, so let me just take it backwards. I think the major thing we're seeing is macro effects. On the margin, I think there's many things that we do in our sales execution and channel policies that affects stuff. But I think the major thing -- and as we've seen often, we're a pretty good reflection of what's going on in the economy. As to what we do differently, certainly marginally, there are investments that, for example -- let me a give you a concrete example. The PLM sales force that we continue to build out, we're having great success with our PLM sales. In the plan were headcount slated for Southern Europe, it makes no sense in my mind to go there when there's so much business in the U.S., Germany. As you saw from the results, Japan and Korea did well. So you have other places that are really strong in Manufacturing, and so why not go there instead of go to Southern Europe? So I think when we have incremental decisions to make, the answers are kind of obvious. I think we're taking a more cautious attitude to EMEA as we look to the long term. I really don't know if I'm going to wake up tomorrow and read that the Eurozone is falling apart and Greek is out of it or whether a bank defaults. So what we're doing is taking a more cautious attitude. We've moderated spend in EMEA, and in very specific examples, where it makes much sense, to hire new people in southern Europe or where we have the opportunity to redeploy people from Southern Europe to Northern our Central Europe, we're taking advantage of all of those.

Okay. My follow-up has to do with maintenance. The year-over-year billings increase was a bit light if I were to look at the last 6 months and take into account the upside in Q4, we're still up about 10%. So maybe you could just walk us through the billings performance, the maintenance in Q1, what your thoughts are for the balance of the year? And now that the new suites from last year are, in fact, 1 year old, are you beginning to see the renewals for the 2011 suites?

Yes, let me answer a little bit and then I'll ask Mark to jump in. I mean, one of the things that we have seen is from some of the channel practices, and we did roll out a new channel partner framework, is we did see some of the business move into Q4, there are incentives in place for our partners and our customers. So I think we saw some there. And I think the view you were taking is a better one of blending it over a period of time, to better analyze it, as I often say, rather than look at one quarter, it's better to look over time. And we're really happy with where our Maintenance billings are without wider lens.

I completely agree. And Jeff, I think you're completely on it. When you take a look at the -- both Q1 of '13 and Q4 of '12, and you look at the average Maintenance billings of around 10% and you look at the exact same kind of reference point a year earlier, it's around 10%. We're pleased. It's exactly as Carl described, it's just a normalization while we have implemented these big changes.

Your next question comes from the line of Brendon Barnicle with Pacific Crest Securities.

Carl, you touched on in your comments that you saw re-acceleration in both the AEC business and the Manufacturing business on a year-over-year growth basis. And you mentioned suites. Were there any other factors that were driving that acceleration?

I think the big one is suites. I think that's what's really driving that, I think, in each of the industries. Manufacturing has held together relatively well. Our customers are continuing to invest. Suites, higher ASPs are all contributing in there. There is certainly a moderately improved construction environment around the world and we're seeing the benefit of that. As I've said, as we've walked through this transition from 2D modeling all the way to BIM, the adoption of BIM is inevitable now. People are doing it, as they see new projects come on, we're seeing increased mandates from governments around the world for building information modeling as a standard deliverable. So I think we have a lot of secular factors in each of the industries. I was really pleased to see both those businesses do well.

Great. And then focusing on something other than Europe, the emerging markets. Any changes? I mean, you mentioned that you know you could do better there. Any personal changes or channel changes that are going on in that market, or, for that matter, in the medium product line, as well, to kind of address some of the execution issues you saw there?

Yes, so a number of things. So first of all, let me just give you the backdrop. I think I say this every 90 days, is that the emerging markets are always more volatile. And so we just have to remember that. Having said that, I was definitely disappointed. We had made personnel changes already. We had some other structural changes in place. There's also an effect of our overall sales reorganization. We're working hard on it but in some ways, we'll watch it as it develops this quarter. I think we've made a substantial number of changes and understand what we're doing, but we're going to watch it closely. I don't see anything systemic. I think this is more of an acute issue.

And anything on the Media side, sort of the same question?

Oh, the Media? The Media and Entertainment business was a little bit more one of -- we've got a bunch of bad bounces in some ways. One of our hardware vendors pushed out the release of their product, selling our Creative Finishing products on that is -- once there's a new product announced, nobody wants to buy our product on their old products. Because of the way the industry works, we went to market with Smoke for the Mac. It's getting rave reviews. People are highly anticipating it. But it has certainly frozen sales to some degree. And then the third thing I mentioned a little bit is we do expect our reported revenue in M&E to go down somewhat as some of that functionality is incorporated into the design suites. So there are a number of things there. We've made a number of changes. We're on top of what's going on. In some ways, it's an interesting quarter. And if I told you, well, the Americas and Japan we're going to do well, Manufacturing, AEC we're going to do well, I would have never imagined that there was a conspiracy amongst these other -- these smaller parts of our business to make the results less than perfect.

Your next question comes from the line of Gregg Moskowitz with Cowen.

Carl, I was wondering if you could just comment on the large deal activity on the quarter both on a broad basis as well as via major geo?

Yes, the large deals continue to be up. We made an investment in our major account sales force a couple of years ago. We continue to invest in that. We see really good returns from it. And large deal activity was about double, I think.

That's exactly right.

So double -- double what we saw the year before.

Got it. And then just as a follow-up, how are hiring trends over the past 90 days -- or the past quarter, rather? And how are you thinking about net adds over the balance of fiscal '13 at this point?

Yes, I mean, as we've seen the turmoil in Europe, we've slowed down our hiring. What we've really limit it to -- I mean, we don't want to compromise future growth so there are key places, for example, I already mentioned PLM sales force in places like the U.S. and Germany. We want to continue to expand that, our sales efforts in Simulation and in BIM. They're paying good rewards, we want to continue. We've definitely slowed down hiring and I feel like we're tapping on the brakes, or it's one foot on the gas, one foot on the brakes is maybe the appropriate driving metaphor. But we're definitely being more cautious not only with hiring but spending in general. And that's why we're able to sit here and kind of reiterate guidance for the year, but it's definitely with some adjustments to the spending plan.

Your next question comes from the line of Phil Winslow with Credit Suisse. Daniel Morrison - Crédit Suisse AG, Research Division: This is actually Dan Morrison in for Phil. Can you just give a little bit more detail on how business has been trending in the commercial construction vertical? And then whether you've seen any major changes with your customers?

Like I said, I think the bias in commercial construction is up. Certainly, in the U.S. and Japan, there are definitely more construction starts, more projects being funded. Some of the things that were going on in the United States around financing, that seems to have lifted. So I don't think any of our construction customers would say it's a booming economy. But they've certainly all adjusted their business, and the business is expanding and they're investing.

Your next question comes from the line of Steve Ashley with Robert W. Baird. Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division: I'd like to ask on EMEA what your expectations are for the second half of the year? Are you expecting that, that business improves?

Our guidance for the year contemplates not knowing what's going on in Europe. So I would say it a little bit more clearly is, we assume it's not going to be much different than what we've seen so far in kind of the trend we've been under. Should it worsen, we'll take appropriate measures. Should it improve, there'll be upside to what we're doing now. But we're not really expecting any difference. And I certainly don't -- I don't have any crystal ball that I think any of you don't have. But I'm certainly not expecting it in the next 90 days. I think given the usual things that go on in Europe during the summer, given the results of 2 elections and the upcoming negotiations, I don't think we're going to see much change in the business environment. Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division: So if we look at the Manufacturing business and the AEC business growing 16% and 18%, yet the suite growth within those, one was in AEC up 51% and in the Manufacturing business up 16%. I just wonder, what is the strength in suites and AEC? What is the color going on there?

Well, I mean, one of the things you have is that when -- some of it is a direct shift from individual products to suites, and that is the biggest effect that you're seeing. So the majority of what you're seeing going on is that. Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division: And just real quickly, on the platform solutions business, was that slower at all in the United States or Asia Pac?

On the Manufacturing business? Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division: I'm talking about the platform solution in emerging businesses market. Was there any weakness or slowing in the United States, let's say, in that business?

Nothing dramatic.

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

So my question is actually, I guess, following-on, on Steve's. In looking at a 2Q guide that if you look at the midpoint of the guidance range, I believe, it calls for about 8% total revenue growth. You guys are still confident seeing growth for 10% for the year, which would seem to imply something like a re-acceleration to the back half of the year. So I guess the more pointed question is, what gives you confidence in that ability to, basically, reaccelerate off of 2Q into the back half of the year? Is there anything in the pipeline or kind of what you're seeing from a buyer perspective that gives you confidence of that boost?

Yes, I mean, what I'm assuming for the back half of the year is some of the changes that we made will actually have an impact. Certainly, we slowed down our businesses in certain places, and, like I said, a couple of things bounced the wrong way in the quarter. But generally speaking, the most important countries and our most important markets are growing well and we see the bias on them upwards. And so that's why I feel confident about it. Maybe Mark wants to add something?

I agree with Carl's comments. And keep in mind, we did grow 11% in Q1. And also, the thing I think about that Carl underscored at the onset, is we've just got some major changes implemented that we actually feel really position us well for the long term. So that's a good thing to have behind us as well.

Got it. So 2Q slowing down from 11% to the 8% at the midpoint of your guidance, does that mean there's still transitions taking place as some of these changes take effect?

I think what you should think about is just we're looking at the year and the commitment for the year at 10% plus in revenue growth and approximately 200 basis points in operating margin. And we always talk about, Keith, it's not going to be a perfectly linear kind of spread sheet effect. We've looked at a number of different facts and circumstances, and we think there's a range of guidance we put out and we feel like that probably...

Yes, I mean, if you put Q1 and Q2 together, and then you look at Q3 and Q4, it's not very far off, linear growth.

And we also...

And I wish, with thousands of transactions, we could be more predictable, but that's pretty good.

Got it. And if I could sneak in one last one, and you talked about a really good growth in your large deals. And there's one in particular that you guys called out in a press release with Balfour Beatty, which was a large transaction, I think 3 years, $12 million. But in the press release, you noted it was a first of its kind. I was wondering if you could give us a little bit more color of what made this a first of its kind type transaction in the quarter?

I think you read the press release more closely than I did. Seriously. I mean, I would actually take a slightly different point of view. I mean, Balfour Beatty is a great customer but it looks like many of the other deals that we've been doing with large construction firms, it looks very similar to a number of the big deals we've done in the last couple of years. Large firms, consolidating their positions, growing their market share outside their core markets, we being able to service them globally, it has lots of the characteristics that we see from our large construction companies as well as large E&C firms all around the world. So I wouldn't have thought of it as a particularly atypical deal.

Your next question comes from the line of Richard Davis with Canaccord.

So on the cloud PLM product, does that offer kind of a high level of product data management functionality? Or possibly kind of a derivative question off of that is, if I were a potential customer, could I buy your cloud PLM as a project management layer and maybe then link that into other firms that did, frankly, more gnarly back-end data management effort, so not to diminish what you have, but maybe that would be a quick way to...

So let me just remind you, one of the things we've done is, with our cloud PLM, we've done in the cloud the parts of PLM, the business process, the workflow that has been historically the promise of PLM. On the PDM side, we actually have a very capable product called Autodesk Vault. If I was to guess, there's probably more data stored in Autodesk Vault than in any of the other PDM systems around. We have more customers. We have more data in it than almost anything else on the market. So we have that. We still believe the product data management thing is probably more appropriate for almost all of our customers behind the firewall. Because it's for work in process with engineering teams. So we actually have a capable one. Having said that, the PLM thing, we believe that the right deployment for PLM, the truly name PLM is on the cloud. And our PLM system will work whether the data is stored in Autodesk Vault, whether it's stored in another so-called PLM system or anywhere else. One of the interesting things as we brought this to market and talked to many of the analysts, in some ways, there's been a little bit of -- people who follow the industry, having been hoodwinked by the PLM vendors. The vast majority of PLM that's been sold and successfully deployed is really a PDM system. The PLM was a name that they put on top of it to make it sound more important, more enterprise-wide. But really, what was being sold was PDM. And so I feel really good about our capabilities in PDM, and I'm even more excited about what we're going to do with PLM because I think it's really the first time ever that there's a solution out there that answers the question of managing Manufacturing processes.

Got it, that makes sense. Well, you just need to rename you Vault to Big Data and then that's...

Exactly. If I can rename our Vault to Big Data and I could get a valuation like Pinterest on something else, Autodesk will be worth like a billion dollars.

Right. Yes. Then you're off to the races at that point...

Exactly.

Your next question comes from the line of Sterling Auty with JPMorgan. Sterling P. Auty - JP Morgan Chase & Co, Research Division: With the strength in the AEC suites up 51%, was there something in particular in this version that is accelerating the switch to the suite? And as that grows, how you do you look at the sustainability, or maybe was there some pent-up demand there?

No, we moved customers only this time, just like we had done with Inventor last year. But there's real traction in the suites. It is, by far, the most attractive offering for our customers. It will not stay at 51% at all. That's not a reasonable terminal run rate. But we were really pleased. I think, also, what we finally did is we brought together some of the things that we've been working on for a while. So not to get too down into the weaves but as an example, our Revit products used to be separate. So whether you're doing mechanical, electrical, plumbing or structural, we've brought that together into a single product and put that in the suites. We've put in some of the other products that's around it and made for a more complete workflow. And we worked on making sure that the products really met the interoperability needs of our customers. So by doing all of that, it's really a very attractive offering. And as I've said before, I think the majority, if not vast majority, of our AEC customers over time will move to suites. Sterling P. Auty - JP Morgan Chase & Co, Research Division: One follow-up. On the Media and Entertainment, you mentioned a couple of factors that was hitting it. How should we think about the longer term? As you get past those couple of near-term items, how should we think about the Media and Entertainment segment in terms of growth?

I think you should see a return to historic levels. I fully expect our hardware partner to ship their hardware next quarter. You may see a little impact until Smoke for the Mac comes out in Q3. I'm hoping to see a little bump there. We have huge pent-up demand for Smoke on the Mac. I mean, we've really kind of changed the offering and changed the price point. It was kind of extreme but highly attractive to the market. So we'll see how that plays out in Q3. But certainly, by then, any unevenness will -- should have been moderated.

Your next question comes from the line of Walter Pritchard with Citigroup.

Carl, I'm wondering if you could talk about some of the pricing changes that you've made. We've seen some of the promotional materials out to the channel and to your customers about some of the deadlines coming up here, and just wondering how we should expect that to roll through the business as we move into the July and quarter and beyond?

I think you'll continue to see some pricing changes. I don't think there's anything extreme. I don't think you'll see anything radical. In some ways -- the 2 things to look at, and it sounds like, Walter, you were doing both. There are 2 important things to look at. One is what the pricing changes are and not on a per-unit price but on the overall channel framework. I think that certainly influences our partners' behavior. And then secondarily, what we do for these kind of point promotions. What goes on. I don't see any unusual activity around promotions. I think you'll see the usual promotions and you'll probably see the usual, but not consistent across the portfolio, price increases this year as well.

Got it. And then just a question on margins. Your guidance for the year is clear with 200 basis points. And I guess, as we think beyond this year, not specifically looking for a number here, but if I compare your business model to some of your peers in software, your R&D spending, that's creeping into the mid-20s, seems to be high relative to the group. And I'm wondering, as you get beyond this year, do you start to have to bring that number down to be able to continue to expand your margins?

We'll probably have to at least cap it where it is in order to do it. But let me remind you of a couple of things and then tell you a little bit about some of the factors that go into the R&D spend. We spend a lot of time looking at this number, and, actually, we've dug deep with some of our peers. We spent a lot of time benchmarking. And one of the things to do is it's very interesting to compare us to people who sell primarily through a channel versus those who sell direct. Because if you look and if you take our percentage of R&D over our total revenue, as compared to our R&D over end-user spend, the overall end-user spend by our customers is probably about twice of what our revenue is. So if a company does everything direct, those numbers are way off. As I indicated, it could be off by as much as a factor of 2. If you limit the group more to the peer companies that sell through the channel, then I still think we're at the high end of the range but it's much more normal. The reason that I think it's important, we're going through a fairly important transition where we think there's a bunch of opportunity, and this is primarily around social, mobile and cloud. And while I think we can continue to invest in R&D and make steady progress to our promise goal of 30% operating margins, we don't want to forgo the opportunity and kind of be left on the desktop as the entire world moves to social, mobile and the cloud. So it's a constant balancing act. Those are some of the factors that weigh into it. And maybe that gives a little bit more clarity in how we're thinking about this.

But comparison to like an Adobe, it's probably balanced?

Adobe is very fair, unfortunately.

Your next question comes from the line of Ross MacMillan with Jefferies. Ross MacMillan - Jefferies & Company, Inc., Research Division: I wanted to go back to the maintenance billings again. And I think you mentioned that it make sense for us to look on a blended basis rather than at the 1% growth in the quarter. But the question I have to that is, given the strength in Maintenance billings growth last year in the high teens, almost 20% level, and now thinking about it blended, more at 10%, how would you have us think about kind of how this may play out this year? Is the 10% number more accurate than the closer to 20%? How would have us think about that Maintenance billings growth this year? And then I have a follow-up.

I mean -- oh, this is Ross, sorry. Ross, I mean, we don't usually guide at that level, but if I -- indications, I'd be on the high side of 10% -- I'd be closer to the high side of 10% than the low side of 20%. Ross MacMillan - Jefferies & Company, Inc., Research Division: Okay. And then related to that then. Obviously, you saw Maintenance billings strength last year, especially as you're selling suites and you're going to capture more of that revenue this year through the tail on Maintenance on the suites. Is there anything that's changing around either renewal rates or attach rates? And I guess I'm just curious to whether you -- because you made notice something along those lines in the prepared remarks. Anything that we should be thinking about in terms of how you envisage customers reacting to what are clearly higher maintenance rates as they move to suites?

So one of the things I would say to you, Ross, is that if you look at our attach rates and you compare them on a year-on-year basis, really, no change to speak of, we're pleased with what we're seeing with the attach rates. In terms of our renewals as well, I think we've got a really solid performance in the renewals. And I would call out to you that, again, they're higher than pre-recession levels. I mean, we're getting good traction on that, long term. So and as far as anything in particular with suites, we're doing the anniversary-ing of a lot of our suite introductions, so we're going to continue to see the renewal rates. But thus far, I think things look solid.

[Operator Instructions] Your next question comes from the line of Steve Koenig with Longbow Research.

I've got one for Mark and then one for Carl. Mark, starting with you, I was surprised at the amount of year-on-year currency tailwind you got this quarter, I think it was maybe 2 points or so to get to that 11% revenue growth. Could you give us any help with what your assumptions are regarding the currency/hedging impact in Q2 built into your guidance?

Yes. One of the things that we don't get into particulars on is the actual FX rates and such that we lock down on. But the one thing I can give you color on and just to kind of reiterate, is that we do a 4-quarter layered hedge, and we hedge our exposures not only for revenue but also deferred revenue and such. And so we look at the full equation. And the closer you are, for example, in the current quarter, like for example when we give guidance, we're mostly hedged. And as you go out 4 quarters out, it's less hedged. So that's the -- more of the kind of the dynamic process that we use. But in terms of particular rates, we don't typically share that. But I think you've called out the tailwind for Q1 appropriately.

Okay. All right. And then Carl, for you, maybe what I'd like to do here is just drill down a little bit on the changes in terms of the sales organization internally and the channel program. Could you maybe give us -- drill down and give us a little color on how the verticalization in the sales organization might help you going forward? What the timing of that might be? Where will it show up? And secondly, in terms of the channel, what kind of impact do you expect from the new global rebate program? Positive or negative? Short term, long term? And were there any other major changes that -- aspects to that program that you changed in Q1?

Yes, what we really changed with the sales organization is, as opposed to the primary way of organizing had been historically geographical, we moved to one based on industry. And what we were seeing is that a manufacturing customer in Germany and one in Japan had more in common than a construction company and a Media and Entertainment company in Germany did. And it only makes sense, given the size of our business, to move there. Also increasingly, our customers are larger, they're more global, they want to be serviced by us in a way that made sense, and it was starting to strain some of the organizational boundaries. So I think we'll do a better job servicing our customers by being organized this way, better job of bringing our products to market. That actually funnels down to our channel partners. And generally, just keeping up with the trends that we've talked about for a long time, which is giving more access to more of our products to more of our channel partners. We always -- a manufacturing customer, for example, could be someone who buys our manufacturing products, our AEC products or Media and Entertainment products. And we felt increasingly, it didn't make sense for them to have to go to multiple channel partners to do that. So we've been on a process to open up access to more of our channel partners. Other changes we made internally are important for us, I don't think they mean a whole lot to the rest of the world. But suffice to say, it's a fair amount of work reorganizing internally and getting everything lined up, both from the finances, the quotas, everything like that. So there have been a lot of people who have worked awfully hard to get this all lined up and do it in a short time frame of both closing out the year and getting us lined up for Q1.

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

Appreciate the color on some of the early cloud PLM success and realizing it is early, I wonder if you can give us a few more details on some of the enterprise pilots. I guess, in particular, maybe which verticals, early feedback. And then I guess, is there any indication that any of these guys would potentially reduce their spend on traditional PLM?

Yes, there are definitely 2 classes of customers. The patterns are starting to emerge. We've been in beta for a while, but the product, just to remind everyone, the product released on February 29. So we're barely 2.5 months into selling it. The 2 categories that are emerging, and I gave a little bit of indication of this, is the high end of small- and medium-sized businesses that have wanted PLM, may not be able to afford PLM, or really couldn't get it implemented well enough under their budgets. It was too complex, it was -- it just didn't fit what they needed. So that's one class. The second one is the enterprise ones, which in some of these are much more interesting in that the customer already understands PLM, they understand the limitations of the traditional kind of big iron systems and know what they want to do. And what I would say is, we have not replaced a single one yet. Almost all of the work inside the enterprise at this point are pilot projects. They're pilots where one of 2 things, they have a critical area where they want to see if this is a way that a new kind of deployment will fit their needs or the other one is probably slightly more typical, they do not want to extend their use of the traditional PLM systems. They don't know how to remove them, but they don't want to spend more and they're not going to extend their use within the enterprise, and they want to find another way to do that. And so we're seeing lots of places, departments, functions, processes, where PLM, the traditional PLM was never implemented, or more likely have failed one or multiple times. And they see the advantage to do this. The very interesting part of the color commentary is, I just met with our sales team around PLM this morning, and the customers are very clear about what they want to deploy for them. When we go in and talk to them, they're very clear about a very specific problem in which the traditional systems have proved inadequate, and they know exactly what they want to pilot it on. And so we're helping them do that. And 3 months from now, we'll be able to give you a lot more info.

That's very helpful. Then maybe a quick follow-up for Mark. And Mark, I know you guys don't guide the individual components of revenue, license and maintenance. But given the Q2 guide, which I assume would imply license revenue, flat to down slightly sequentially. Have your assumptions for sort of the full-year 10% or better revenue growth changed from when you initially offered it? Or is this still progressing sort of as you expected based off the initial guidance?

I think it's pretty much as we expected. There's always little moderations here or there. But by and large, I think the plan has been the plan, and we're driving to it.

The plan -- I agree with Mark, the plan is the plan. On the other hand, I would have never expected the particular mix of business and geography we saw in Q1. In Q4, you can talk to me all day long, and I never would have guessed so strong in certain places -- so strong in Japan, that didn't seem so likely, so strong in both Manufacturing and AEC. So I wouldn't have expected the exact mix that we got. And if anything surprised us this quarter, it was really that.

[Operator Instructions] At this time, there are no further questions. I would like to turn the call back over to Dave Gennarelli, Director of Investor Relations.

Thanks. And as a reminder, we're going to be holding our Investor Day at the NASDAQ market site on June 19. Please e-mail me if you're interested in attending that. We will also be at the NASDAQ Conference in London on June 26. If you have any follow-up questions, you can reach me at (415) 507-6033. Thanks for joining us. Bye.

This concludes today's First Quarter Fiscal Year 2013 Earnings Conference Call. You may now disconnect.