Autodesk, Inc. (ADSK) Q3 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Lory, and I will be your conference operator today. At this time, I would like to welcome everyone to the Autodesk Third Quarter Fiscal 2013 Financial Results Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would like to now turn the call over to our host, the Director of Investor Relations, Dave Generali.

Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our third quarter fiscal 2013. Joining me today is Carl Bass, our Chief Executive Officer; and Mark Hawkins, our Chief Financial Officer. Today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com/investors. As noted in our press release, we have published our prepared remarks on our website in advance of this call. Those remarks are intended to serve in place of extended formal comments and will not be reviewed on this call. During the course of this conference call, we will make forward-looking statements regarding future events and future performance of the company, such as our guidance for the fourth quarter and full year 2013, long-term financial model guidance, the factors we use to estimate our guidance, new products and suite releases and expected growth rates, expected cost savings from our restructuring and other cost management efforts, hiring plans, business execution, certain future strategic transactions, business prospects and financial results, our market opportunities and strategies, including our transition to cloud and mobile computing, 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 fiscal year 2012 and Forms 10-Q for the period ended April 30 and July 31, 2012 and our current reports on Form 8-K, including the 8-K filed with today's press release and prepared remarks. Those documents contain and identify important 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 we'll not provide any further guidance or update 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 the GAAP and non-GAAP results is provided in today's press release, prepared remarks and on our Investor Relations section of our website. We will quote a number of numeric or growth changes as we discuss our financial performance, and unless otherwise noted, each such reference represents a year-on-year comparison. And now I'd like to turn the call over to Carl.

Thanks, Dave, and good afternoon, everyone. Our overall revenue results were disappointing. Revenue was lower than expected and stemmed from a weakening demand environment. The positive news is that our ongoing cost control helped us exceed our EPS goal. It was clear to us that our second quarter's revenue performance was mostly due to our own execution challenges, with the uneven global economy as a secondary factor. It was almost the inverse during the third quarter with a weakening economy taking the lead. Our sales execution improved relative to the organizational realignment we implemented earlier this year. There's still some work to do in this area, but we've made a lot of progress with the new organizational structure. When looking at our revenue results for the quarter, recall that we had a onetime $10 million license compliance transaction in Japan in the third quarter last year. So normalizing for that, Asia Pacific would have been up slightly, and we would also be showing better results in our PSEB and flagship categories. Superstorm Sandy hitting the Northeast U.S. in the final days of our quarter also had a negative impact on our third quarter revenue results. While we experienced pockets of relative strength in the U.S., Northern Europe and Russia, most of the markets around the world slowed during the quarter, most notably in emerging markets. We remain pleased with the overall progress and adoption of suites. Customers are seeing the value and the rich array of design features and improved workflow, and we continue to benefit from higher subscription attach and overall revenue per user. Our AEC suites performed particularly well this quarter, with strong growth in our Building Design Suite, Infrastructure Design Suite and Plant Design Suite. Looking longer-term, I'm extremely pleased with our customers' early adoption of our cloud technologies. Autodesk is the leader in cloud-based design and engineering software, and our customers are tapping into the power of the cloud to do things they couldn't do previously. Autodesk customers have used our cloud platform, Autodesk 360, to perform nearly 1 million visualization jobs over the last year, which amounted to more than 3.5 million hours of rendering. In addition, in October, AutoCAD WS, which is a mobile version of our flagship software, surpassed 10 million downloads. Our BIM 360 cloud platform has seen strong adoption since its launch in June, with more than 21,000 users leveraging BIM 360 services. We're adding more new users of BIM 360 field every day, and our customers are very excited about this offering. Autodesk Simulation 360, which debuted in September, is a powerful cloud-based simulation solution and has been recognized by industry analysts as changing the simulation market. Customers are responding positively to the productivity gains and cost savings offered by Simulation 360. In its first month, the Autodesk Simulation 360 trial registered more than 10,000 simulation jobs. We're especially pleased with the first couple of quarters of Autodesk PLM 360, the industry's first cloud-based PLM solution. Autodesk is transforming the PLM industry with an affordable, easy-to-use and simple-to-deploy PLM solution that makes the benefits of PLM available to anyone, anytime, anywhere. Autodesk PLM 360 is now being used by more than 350 companies. Our acquisition strategy is also centered on adding cloud and mobile technologies to our portfolio. During the quarter, we closed 6 transactions for a cumulative investment of $135 million. These transactions include context social collaboration technology which we will use with Autodesk 360, and Inforbix, which is focused on SaaS solutions for PLM. We continue to repurchase stock under our ongoing buyback program, with the goal of reducing our total shares outstanding over time. We have strong cash flow from operations for the quarter. Our cash and marketable securities balance was approximately $1.7 billion. Like many tech companies, the vast majority of this cash is offshore. Over the past few years, it's been typical for 80% or more of our cash balance to be offshore in any given quarter. Given the amount of cash used on M&A transactions closing this quarter, coupled with the cash used for our stock buyback program, we elected to utilize our existing line of credit, tapping $110 million. Looking forward, we believe that the long-term potential of our market opportunity remains intact. We are focused on growth and demand generation, but today's mixed economic environment keeps us cautious on our near-term outlook and makes it difficult to provide long-term revenue projections at this time. It's clear by our actions that we remain committed to operating margin expansion. Despite a lower revenue outlook, we believe we can still achieve year-over-year operating margin expansion of between 80 basis points and 140 basis points for fiscal 2013. We'll come back to you on our next earning call in February with our projection for FY '14. We were also reassessing our long-term financial model but believe we can achieve a 30-plus percent run rate as we exit fiscal 2015. Operator, let's open the call up for questions.

Your first question will come from line of Brent Thill.

Maybe if you just can compare and contrast the last downturn to what you're seeing now. You mentioned most markets are starting to slow. Maybe if you could just talk to some of the differences that you're seeing. And if you could just also comment on what you're seeing in terms of the renewals, that would be helpful.

Yes, sure, Brent. I'd characterize this very differently than 2008. My characterization would be that not nearly as deep, not seeing kind of the level of despair almost or kind of hopelessness that we saw during 2008 and the complete freezing of pocketbooks. Instead, it looks like people are being far more cautious, deals are getting delayed but they're not getting canceled. And I would say it's broader. So I don't think it's nearly as deep but broader. I think from the first time, what we started to see is, while our results in the Americas were reasonably good or relatively good to the other places, it's no secret about businesses' consternation about the fiscal cliff. You saw the news, obviously, about Europe this morning, and we're certainly seeing slowing in Europe. With Southern Europe certainly being the worst, and as you move north, the economic condition is improving. And there is some spillover into Asia and some of the emerging economies. So I think it's broader but not as deep as what we saw in 2008.

And just on the renewals, any meaningful change?

No, actually, just kind of building on Carl's points, the renewals and attach actually were either even or up basically in terms of year-on-year comparison. They look solid, and that's one of the things that really reinforces Carl's point, that we're just seeing more caution around business and deals and such. But actually, once people decide to buy, it's a good attribute that they see a lot of value in our subscription, and we like that.

Your next question comes from the line of Jay Vleeschhouwer.

Carl, you alluded in the end of your prepared remarks to reconsidering your long-term financial model. By that, did you mean what you talked about at the analyst meeting in June about an evolution to a mostly per user subscription model and usage metering or usage-based model? And if that's what you meant, why not accelerate that process, particularly given current market condition and the change of your portfolio? Then a follow-up.

Yes, no. So Jay, what I was really talking about there -- I mean, you can follow up, you can ask about the other thing, but the thing I was really talking about is kind of a long-term guidance that we've given for 10%, 12% to 14% growth and 30-plus percent operating margin. I think it's clear to us. I don't think the arithmetic works given at least 1 downturn and 1 maybe minor downturn in 5 years to achieve that. I think what we've demonstrated is, during kind of normal economic periods, we can certainly grow in the teens. What I think we've demonstrated better over the last 2 quarters then during 2008 is a degree of resiliency around our earnings power, and I think we managed to do that. So what we have to really recalibrate, I think if you look now for the period in which we gave the 12% to 14% growth, we'd have to grow it 30% or 40% next year to kind of get there. It's something that's not reasonable. So what we were asking, give us some time, we're going to recalibrate, we'll watch as the fourth quarter proceeds. And then I think the thing is, we'll give you growth rates for the year. We'll give you growth rates for next year, but despite that, we still think we can maintain our projections around operating margin.

Okay. You said as well that you're getting past some of the sales execution issues from the reorg that you had experienced in the second quarter, that got better in the third. Could you talk about other longer-term implications of the industry alignment that you've now put in place? For instance, what it means ultimately not just for sales coverage but for things like the suites, packaging of products, overall coverage of the marketplace as you build out this industry alignment. And just a clarification from Mark, in the prepared remarks, you talked about increasing revenues per user, I think, in the context of maintenance. So did you mean by that, that you're reversing the declining revenues per maintenance seat that you had in the first half?

Just let me go first and then Mark. Okay. So on the -- just on the industry alignment, what I think industry alignment is really helping us with is our go-to-market activities. Where I think it really helps particularly well is in tailoring messages that make sense and resonate with our customers. It's also very good on kind of 2 parts of our business. One is certainly the major accounts, and you've seen increasingly large deals not only this year but over the last couple of years and greater penetration into really large accounts. If you really recall back to the many times we've shown our curvaceous pyramid where little less than 1% of our customers generate about 30% of our revenue, we're continuing to do that. So it works really well for the major accounts and that business that we do directly, as well as the ones where we work with our partners on specific named accounts. That's where it really has the strongest resonance. As you get into our more horizontal products, it's less effective. So we feel really good about that alignment in terms of tailoring the messaging and the coverage models and understanding what we need for each of the geographies. And I think this is natural course correction. I think we'll continue to course correct. I think we found in some places where we made some mistakes or we went a step too far, and we're figuring those things out and rejiggering it. And we saw that already with improved performance in some places. In other places, some things take longer than a quarter to get better.

And Jay, just to the second point. In terms of maintenance per seat, basically, one of the things that we're actually pleased to see, we saw it and talked about it at the IR day and we continue to see that and validate that, is that for suites, the actual subscription quotient per seat is actually going up. And so we actually like that trend and macro there. So I think one of the things that we have to be careful of when we look at the seats is excluding education from commercial, which can kind of throw these things a little bit. The other point that I would throw out for consideration is that Q3 marks -- we just eclipsed the anniversary for suites. We're in, I guess, the second quarter of anniversary-ing the suites, and you're starting to see this longer-term effect of people renewing suites at a slightly higher revenue quotient for the subscription. So we actually like that trend.

And your next question comes from Brendan Barnicle.

Focusing on 2 areas of strength. But the AEC strength and the suite strength seems surprising given the overall macro. What, specifically, you think was accounting for that outlier?

I'm chuckling, Brendan. In some ways, I'm more prepared to talk about the things that went badly than the things that went well. I mean, truthfully, that surprised us a little bit, too. If I have to look at the AEC, there has been some improvement in the AEC markets from kind of the depths of the recession. We also talked about things like BIM are reaching the tipping point. And with the place we're doing particularly well with our AEC products is in the engineering part, the E part, and in the C part in construction. And I'd emphasize the construction part. And I think what we saw is that contractors realize that in order to be competitive coming out of the downturn, they need to adopt these new technology platforms. Some of the stuff we're doing, particularly on cloud and mobile, is probably the best suited technology for that part of the AEC market than we've had in 30 years. For the first time, we have solutions that people can take to the field and get their work done, and that makes a huge difference. And so I think it's really the retooling of the construction industry that as long as they're willing to invest, they recognize this is as a -- this is just a critical thing.

Yes. I totally agree, Carl. And I think the -- one of the things was just the resounding response to the Building Design Suites, a nice -- really nice -- I think it was at 26% growth there. It was great to see, and it just echoes the kind of comments you're making. People see the...

Yes, I mean, we're tracking it across the world. And there are places where it has become the standard. Governments across the world are mandating it. If governments are not mandating it, owners and operators are. So we're at that point in the market where it takes many years to kind of build that demand, but I feel like we're on the backside of having to build the demand. And we're kind of -- we're just kind of reaping the benefits of all that effort.

And then, Mark, on the negative interest income in the quarter, was that related to the line of credit that you mentioned that you used for the stock buyback in the quarter?

Actually, the -- Brendan, that's a good question. There's -- the other expense, other income is a combination of dynamics. The biggest thing that really affected us there was foreign exchange. The gains and losses for the part of the hedging that is not cash flow hedging shows up there. And that's what it was, is FX fluctuation.

And should we expect that going forward?

I would, actually, because it's really hard to kind of predict the currency markets. I mean, you'd have to make a call on that, but I think it's tough to expect that one, I would say. It's tough to project that one, let's put it that way.

Your next question comes from Philip Winslow. Philip Winslow - Crédit Suisse AG, Research Division: Just got a question here on margins. Obviously, you have better-than-expected margin this quarter, but in the guidance, you talked about sort of almost the count of -- like regardless of the revenue growth over the next couple of years here through 2015, you're still committing to a 30%-plus margin exiting fiscal '13. How should we think about that getting there? I mean, how much of your business, because I often think it was somewhat fixed versus variable. So is that wrong versus what I expect? And then also, is there just some excess spending that you think that's going on that you could target further from here? So let's say if revenue doesn't -- isn't worse than what you might be expecting versus your previous long-term growth rates, does that mean we could actually get above 30%?

Yes. So let me -- I'll take a shot, and then, Mark, feel free to add any colored commentary. What I would say is that the way to think about our business is that there is a strong component of fixed costs, that when you look particularly on the R&D and go-to-market, at least the marketing side of go-to-market, those are relatively fixed. Once we get above that, when we get marginally about it, it becomes marginally profitable. If we kind of hit it out of the park, it gets very profitable. So I don't think it's fair to think of it as purely fixed or purely variable. Once you get past that initial development and bringing products to market, and as we even talked about, if the areas where we're really successful like BIM, it takes years to become that successful. When we first mentioned those 3 letters, nobody even knew how to spell it. They have no idea what we were talking about when we talked about BIM. And now you see it being written into government contracts around the world. So there's a fair degree of investment. When you cross that, you start gaining the rewards from it. Then there is a second component to our business where many of the costs are variable. So some of the fluctuation you see quarter-to-quarter are more related to things like compensation. So sales compensation varies with it. COGS varies. COGS didn't vary that much this quarter, but it was actually the result of 3 or 4 different effects being mashed together in a way that showed no net movement. But there is actually quite a bunch of movement there. So there are variable aspects to our business that are volume-related, but there is a large fixed component. And then the other part we talked about, just to try to give you the whole dynamics around the business, is that in any short period of time, our biggest expenses are people-related. So our ability to change that in the short-term is very limited. But over any period of time, we can adjust to that. I think on your question about 30%, we're comfortable. We're comfortable with the guidance we've given for a number of years, and we're comfortable with it going forward. And that's why we really reiterated it.

Yes. I just -- I think it's spot on. I think we're -- there's not a lot to add to that, Carl. I think that gives a full picture, really.

And your next question comes from the line of Steve Ashley. Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division: Carl, you alluded to the fact that execution got a little bit better. I wonder if you could specifically speak to Central Europe and Brazil, which were 2 markets that were challenged in the second quarter.

Yes. So I would say we saw a reasonable improvement in Central Europe. Central Europe is one of our biggest markets. I was really pleased to see that. Brazil started to turn around. I think it's one of the areas we still have work to do. Some of the things we saw, we have a number of big deals that pushed out of the quarter in Brazil. I just heard today that 1 closed yesterday, another one is being worked. So, I mean, we're making our way through that, but I would say Central Europe is really back on track. I think there's more work to do in the Americas outside the United States. Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division: And then I would just like to ask about the share buyback. You spent, I think it was $130 million, and you put $110 million of line of credit on your balance sheet. What is your just appetite and willingness to continue to add debt to your balance sheet to more aggressively be buying your stock in the future?

So Steve, I think we're constantly looking at our capital structure, and we're constantly trying to look at the overall opportunity with share buyback, obviously, and trying to do the right thing for the shareholder long-term. So I think it's a given that we're going to take whatever actions we think are in the best interest of the shareholder. You're absolutely factually correct in that we have raised the level of share buyback as we said we would do at the IR day. We're starting to take shares out, as you can see, for the last couple of quarters since we said we would. And I think I'm not going to extrapolate or forecast exactly how we're going to shape the capital structure. But I think there's a reason to believe that we're constantly looking at it, and we've never ruled out the notion of taking on debt, for example.

Yes. I mean, I would just reiterate. I mean, we were very clear that we said we would do share buybacks that exceeded dilution. We specifically did it. We've been doing that since we announced it to you. And I would reiterate, we have been considering our capital structure, and we certainly have been contemplating things like that to continue, being able to maintain that level of buyback that we'll continue to offset dilution from employee stock programs.

Absolutely.

The other part of it really to remember, we try to address a little bit, certainly in my remarks, is if you look at our cash positions and how geographically kind of off-balance they are, it's one of the things that also drives us. So not only the need to do buybacks, our need for cash for acquisitions, but also just rejiggering geographically to get money in the places where we actually need it. All of those are conspiring for us to be spending a lot of time looking at capital structure options.

Your next question comes from Steve Koenig.

I want to see, Carl, if -- can you comment at all on the potential impact of promotional activity in Q4? And, in particular, any thoughts on your upgrade pricing going forward and the potential for increasing that, and that potentially having a positive impact on promotional activity?

Yes, I mean, we have definitely -- I mean, first of all, we're not happy with Q2 or Q3 results. So you can imagine we spent a lot of time trying to figure out what to do. We are willing and able to do more promotional activity in Q4 as long as it's consistent with the long-term health of the business. And we've looked at it. There are certainly things that we're going to do, there are things that we've already announced, programs we put in place in the channel. We're taking a more centralized hand in running promotions probably than we have before. It used to be a little bit more left to the various geographical areas, the sales regions to do it. And we've been much more centralized in our control over that. But it is certainly one of the knobs and dials that we can turn.

And, Carl, how would you mitigate any impact on pulling forward revenue from tapping your base in a bigger way than you've tapped in the past?

Yes. So, I mean, that's what I said. I mean, everything we do around promotional activity is contemplated in the context of a longer term. So if you look historically, we haven't run stupid promotions. We give promotions. We adjust to competitive activity around the world. We react to pricing changes due to currency fluctuations. We also sometimes can stimulate demand by upcoming pricing changes or we can include more things in a particular offering. So we try to do things that are really consistent with the long-term health and the direction we want our customers to move as opposed to taking turns. And as I said before, our business is primarily a channel business. It requires the coordination of us with thousands of partners, and in order to do that, we need a steady hand on the rudder. It's not a business where we -- it's not let's make a deal, and we get up one morning and do something kind of radical. It requires us kind of a steady hand and consistent communication about what we're trying to do in order for these things even to be effective.

Okay, great. And then one more question, if I can, for, really, either Carl or Mark. I'm wondering if you can talk a little bit more than you did in the prepared remarks about linearity in the quarter. Your comment on DSO sounded like you may have seen a bit of an uptick in October. Can you tell us more about that?

Sure, yes. I think one of the things that we saw in the linearity for the quarter is it got more difficult as time went on. And so it was one of the -- more of a gradual stiffening of the headwinds, if you will. And so that's one of the dynamics that was signaling to us that something broader was happening. And so that would be one of the things, Steve, that I would say. And then in terms of DSO, I was actually pleased to see the sequential improvement in the DSO, and you could see us bringing it into the -- in the 40s range, 49-ish. And so from that standpoint, I think we've made improvement. There's still more improvement to make. Obviously, in the cash conversion cycle, we try to run it tight. But as you could see with this quarter, the cash flow from operations was solid. So I think that's -- those are the 2 dynamics that were going on, Steve.

And your next question comes from Keith Weiss.

I wanted to ask Mark a question about expenses. Second quarter in a row, you did a remarkably good job at sustaining margins, with revenues coming in below your expectations. I was wondering if you could help us figure out really 2 things: one, place the reduction in expenses that we saw this quarter in context to the restructuring that you talked about last quarter; and two, give us a sense of kind of how much dry powder do you have left there. How -- is there still sort of more expenses that you can take out to the same degree if macro gets worse, per se?

Well, Keith, a couple things here. One is that I really credit our whole company. I think people really instill a really sensible way to spend money. I think people, our whole Autodesk team, has done a good job, and I think you're seeing that in the numbers today. And people really get it. They spend it like it's their own money. That's one of the things I love about our culture. In terms of the restructuring, you're absolutely right. We created some room, if you will, to invest in really critical things like cloud social mobile. And I think what's interesting is, as Carl opened up today, you saw with context on the social. We did some mobile video. We did Inforbix. We're doing things that, actually, we're investing, just like we said we would. And at the same time, we're trying to scale everywhere we can. And so I think what you're -- just to give you context, a, I think people have a good sense of spend management; b, we're investing where we said we would; c, we still have had some headroom, and we obviously manage on the fly to be responsible. We're very committed, as Carl said, to the margin. We've been -- we've come up from the trough. Just to be clear, this quarter is over 1,300 basis points up from the trough in the cycle. We're -- hopefully, that's evidence over multi-years that we're serious about this, and we've made progress. In terms of the dry powder, I hope I never tell you a day where there's not room for improvement. We certainly expect that from ourselves. We're always looking for ways to scale. And at the same time, Keith, we know how important it is to invest in our long-term future, so we make those balances. So those will be my comments. I think there's room for the long-term. Carl, I don't know if you'd add something there.

Yes, I mean -- first of all, I would second what Mark said. I mean, this was a team effort. Everybody understood the need to do it. And what I feel most pleased about is we were able to control spending without any -- without really impacting anything for the future. People were able to continue to invest and move their initiatives forward regardless of where they worked in the company. And I think that is a testament to really everybody at Autodesk. The second thing I'd say, well, it's not necessarily a muscle I was looking to develop. We have developed a pretty good muscle at looking for the opportunities on spend management, and we have done a really good job at finding things. And going forward, I'd say I think there's plenty of opportunity. There's -- Mark has championed an effort within the company for doing that, and there are things in place for next year. And to Mark's point, I think many of the things that we're doing to improve our expense management is going to be done regardless of what the revenue environment is. So regardless of the demand, we have a number of things there, and we will either take them or drop them to the bottom line or invest as appropriate. But we feel there's a lot of areas of opportunity to continue to improve how we spend our money.

Got it. And just to clarify. I think last quarter, we were talking about reducing heads by about 500 and potentially hiring back 250. To what degree was that executed on this quarter? Do we go down 500 and hire back some or all that 250?

Well, we don't give our headcount by quarter. We do it annually. But let me directionally address that, Keith. We did go down by a little more than 500. You got that accurately corrected. And we have done some hiring that tipped up the number up from that decrease of 500. So we're somewhere in the middle there. I don't want to get more precise on that because we're not trying to establish quarterly headcount reporting. But the reality is, we're pretty much executing what we said we would execute.

Yes. And the other thing is, just to put a finer point on it, I mean, one of the things that companies do, I think, during periods in which they're being super vigilant about their expense management is there are things that you move inside and outside the company. You go to outside providers and you use less of it or more of it. So remember those things. So while headcount is a good indication, there are also a lot of other things that you really need to get a complete picture. And so in some ways, the best thing to do is just to look at the overall number, because there are a fair number of moving pieces that underlie those results.

And your next question comes from Walter Pritchard.

Mark, I think 2 questions for you here. First, on the -- I think you said 30% -- or a goal of 30% -- believe you can get the 30% margin by fiscal '15. Which is more than 200 basis points a year and it's more aggressive than you committed to when you had higher revenue growth. Which I would assume higher revenue growth make it easier to do the margin. I'm just wondering how we should think about the path to get to that kind of margin expansion in what seems here to be kind of a new normal that probably has a lower growth rate than you were thinking about when you came out of the last downturn?

Sure. A couple things, Walter. One of the things we try to be really explicit on is that we -- you're absolutely right. The revenue growth is mitigating the ability to go even faster with our revenue -- or our operating margin expansion as you would expect. And at the same time, what we said is that we're reiterating 30% as the exit rate. So in Q4 of '15, that's what we're driving to as is called out. So that is a little different than saying for the entire FY '15 that we're at 30% plus, and we try to be very explicit on that. And so that takes a little bit -- gives us a little bit of additional runway in the face of a little bit stiffening in the environment in terms of revenue growth opportunity. So that's the first point, I think, is really important to clarify, Walter. I think the second thing is, as Carl was calling out and I'm touching on, we have a number of initiatives to just drive and scale the company that are just good things. And I really like what Carl said. We'll do those if, for whatever reason, the economy got on fire hot, we still want to do these things to help ourself fully create the fuel that we can for the company's long-term well-being. So I'm not going to articulate all the different pathway, which you can imagine, we've been thinking about it, and you can see the real progress we've made. So we're not going to say it's not hard work, Walter. We're not going to say that there could be challenges and such, but we try to be clear that we're not wavering from the intention to keep driving this thing up. Carl, any...

No.

And then -- great. And then, Mark, I think just another question for you. On the upgrade revenue stream, there's been some talk of promotions and so forth there, and you've typically had quite a strong -- even though upgrade is becoming a smaller part of your business, it's declining pretty meaningfully year-over-year. I'm wondering if we should expect that the upgrade and cross-grade stream within Q4 here shows a typical sequential increase that we've been accustomed to seeing with that business.

Well, I think the tricky thing about that one, Walter, is that we don't kind of pre-signal like our promotional plans. And you're hitting a really good question, which is cross-grade upgrades are a function of promotional plans. So that one, I wouldn't want to guide to specifically. You can -- I'm sure you can appreciate why we wouldn't want to do that right now. But I would say, here's what I would tell you, is that we certainly wouldn't take appropriate promotional plans off the table for driving the well-being of the business. So Carl, I don't know if you have any other comments.

I agree.

[Operator Instructions] Your next question will come from the line of Sterling Auty. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Carl, I wondered if you could give us a little bit more detail about, you said some improvement in Central Europe. I think there was some questions over the structure of the Product Design Suite in this iteration. How did resellers react this quarter, and what else helped drive that improvement?

Yes, so -- your recall is perfect, Sterling. We spent a bunch of time working with reseller, with our partners in Central Europe just cooperating on account management and interacting with customers. We've done a number of things to work on the offerings, particularly around Product Design Suite for both fourth quarter and what's coming next year. And like I said at the time, our partners realize that they can do well in the short-term by just driving subscription and services. But over any medium period of time, new license growth is actually as important to them as it is to us. And so I think they felt like they weren't being heard about the changes. And remember, there was an odd thing here in which we essentially lowered the prices and our partners were upset because they wanted the prices higher. It's a little bit of an inverse of what you usually expect, and they were upset with us for giving away more value for less money. We had a number of reasons to do this. We put our heads together. We've come up with a plan, and we've started working on it. I think they feel better about the future, and they understand what the plan is. And so better communication. And we actually took a bunch of input from them, and we rejiggered our plans. Sterling P. Auty - JP Morgan Chase & Co, Research Division: And at what point do you think would you be able to communicate some more details around the plan? And how does that affect the other geographies?

It's a global plan. We've been working on the standardization with global plan. You know what, like Mark said, it's particularly ineffective for us to talk about promotionals -- promotions and packaging ahead of when we otherwise want to release it. I mean, I can assure you right now that we've done a bunch of work on it and worked with them on it. And I've met with several of our Central European partners over the last few weeks, and they feel good about it. In 2 weeks, I'll see a lot more of the partners at Autodesk University in Las Vegas. But I think we're on track there. And as it comes out, we'll talk about it, and I'd be happy to explain what we did looking retrospectively. It will make sense. Not trying to obscure it, but it really undercuts the work of our partners out there everyday if we preannounce things like promotions and packaging. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Understood. Maybe one last question. When you did the restructuring, you had the reduction in headcount. How should we think about when you said you would hire back? How does acquisition headcount fill that need? Meaning, would you hire back some portion of that 500 just direct? Or are you including the heads that come in through acquisition as part of that net?

We've included the heads that come from acquisition. We think when people join Autodesk, it really doesn't matter if they join through acquisition or we hire them off the street.

Mr. MacMillan, your line is open.

Ross, stop typing.

Ross? Ross MacMillan - Jefferies & Company, Inc., Research Division: I'm creating some problems in the system.

You were caught with your hand in the cookie jar. Ross MacMillan - Jefferies & Company, Inc., Research Division: Exactly. So maybe the first one, just -- I'm just going back to this question on rehiring. Obviously, you've hired back some of the planned rehiring post the restructuring you did. I'm just curious as to whether now that you're sort of resetting the revenue run rate again, whether that's actually leading you to a different conclusion on your hiring plans that you had 90 days ago. In other words, is the current plan to hire back less than you were going to? And I had 1 follow-up.

Yes. It's definitely less. I mean, we'd be disingenuous to say otherwise. I mean, I think there are 2 things I'd add in, too. We did a reduction in the force, plus there's a natural attrition. What I would say is what we've done so far is we've probably filled the jobs that were made available by attrition and we've added some through M&A, but we've clearly slowed down our overall hiring plan. And we will continue to kind of titrate as we watch revenue in the coming quarters. Ross MacMillan - Jefferies & Company, Inc., Research Division: And I was curious. Obviously, your fiscal fourth quarter is normally the quarter where you have a seasonally strong direct business. Have you recalibrated your thoughts around the direct business, just given the environment?

Yes. You know what? What -- we certainly thought about it a lot. We've spent a lot over the last 2 weeks probing on this. Despite the overall weak results, our major account business did particularly well. It was particularly strong. Forecasts continue to be particularly strong. The pipeline is strong. I think we've probably applied some management judgment to more conservatively guide and to build ourselves a buffer, should the economy worsen. But I just wanted to leave you with 2 things. Yes, we think there will be a strong fourth quarter in our named account business. And the fact that even during Q3, our named account business did particularly well.

Yes. Ross MacMillan - Jefferies & Company, Inc., Research Division: Great. And then maybe one very last one, a slightly different topic. But obviously, if we look at maintenance billings, those were down. But we're comping, I think, the challenge of the multi-year promotion, if you will, last year, or the incentive, if you will, to sign early. Is it possible to adjust for that, and give us a sense for what the true kind of like-for-like maintenance billings growth was?

Well, so you know what we were able to do, and I'll let Mark jump in. I mean, one of the things we were able to tell you is that attach and renewal rates were even to slightly higher. So that was the good thing. It was less than we expected but in line with usual seasonality. Q3 is odd mainly because of when we started this program. There was a seasonality when we introduced the program. I think it would actually be better -- I'll let Mark answer, but it will certainly be better when we finish the fourth quarter probably to look at the year in total and certainly the last 3 quarters. And then we'll have a better handle on exactly what went on. But the individual rates did go up.

Yes. I agree. The attachment and the renewals went up, and that was a good sign for us, especially as we look at the nature of the economy and such. I think Carl's right. The preponderance of our maintenance opportunity in terms of new maintenance opportunities comes in the fourth quarter, I think it would be interesting for you to look at that and have a complete triangulation on that versus the prior year. That will give you a better feel. I think that's a great way to do it.

Your next question comes from Heather Bellini.

I had a couple of questions. One, I was just wondering if you could give us some sense of how much Sandy impacted your business in the quarter, given that your business has always been fairly linear. And then I also -- going back to 2 things that you mentioned before. The named account business, you said, did well in the third quarter. So can you give us a sense of where you saw weakness being more pronounced? And then I had 2 more follow-ups, if that's okay.

Sure. Sure, Heather. Yes, so the first thing is, Sandy is a little bit hard. I mean, we can directly attribute a few million dollars. We can look and say $2 million or $3 million. There's a direct deal that didn't close before the quarter that would have. There are a number of deals in which the paperwork was not completed and we couldn't recognize the revenue. So we'll probably get to $3 million there. I'd probably add a couple more million dollars in business that just doesn't happen. As you know, tragically, both our customers and our partners were greatly affected by it. I wouldn't want to make too -- I wouldn't make too big a deal about the weather. That would be a whole new area of exploration for us in our business. But it was particularly poorly timed for our quarter.

Yes, I know, definitely. And then the named account business, so if that was strong, were was the weakness more pronounced?

Weakness was much more pronounced in the channel business. The named account business -- I mean, what we saw, and this is what's led us to believe -- I mean, let me step back a second, Heather. I think if you look more broadly, I mean, we certainly look at the results of our competitors. We look at the financial results of peer companies, as well as we look at the kinds of companies that are typically our customers. And many of them reported weaker results. And most of them are on a calendar schedule that's a month ahead of us. So the first thing we saw was that. Our major account business did relatively well. But what concerned us a little bit, for the first time, we would probably have more big deals leaking over into another quarter in which we couldn't close, and that's independent to the storm. There were just more big deals that didn't get closed in the quarter. And when we dug down into them, a lot -- we can't identify ones that have gone away, but we have certainly ones where management of our -- of the companies, of our customers, in which they've said, "Let's reevaluate, let's look at the ROI on this, has to go through another round of approval." So we saw some slowdown there. So we're really happy with our performance relative to that, but we did see some slowing. When you look at the place it slowed down, it's the indirect business, and particularly, we call that several geographies. And most importantly, it was the emerging countries, places like Southern Europe and parts of the Americas outside the U.S.

Okay. And then just 2 follow-ups. Can you comment on kind of federal and local spending that you saw, given you have an October quarter end and the obviously federal spend on a September cycle, and then kind of how are you feeling about that for next year? And then I've got a follow-up to that.

So -- sure, Heather. So just -- this is Mark. Just to give you a sense, you know that our government business is not a big business, per se, but at the same time, we were pleased we set a record for the quarter. It was up. We saw a real growth. It was good to see. I mean, the team works it well. It's not a big part of our business at all, but it absolutely grew.

Yes, one of the things that are -- one of the things just to know about our government business, while I am really pleased with the results of the government, per se, most of our business in civil infrastructure is related to the private sector that's tied to government spending. And so it's a little bit more interesting to look at the broader results around it. Oftentimes, even when Department of Transportation decides to make a purchase, it ends up being spent in the private sector. So we tend to look at it by industry, but our government results, per se, were good.

Okay. And then the last question I have is it goes back to a lot of the other questions were around the 30% margin goal for fiscal '13. And I just want to make sure I'm thinking about it the right way. Given your uncertainty about revenue growth and given the fact that in the past, you were forecasting kind of higher top line growth levels. Is what you're trying to say is regardless of the top line environment, we'll make this a 30% margin company even if we have to cut to get there regardless of the top line?

Yes. I think -- well, pretty... Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division: Like are you solving for margins? Because it's hard to know margins if you don't know revenue, unless you tell me that come hell or high water, you're going to get to that margin number regardless of what the revenue number is.

I think if you look over, certainly the last couple of years and specifically the last 2 quarters, we demonstrated in an environment in which revenue was far below our expectations that we were still able to drive margins. And I won't go so far as to say we're trying to do -- we're solving for margins, because I think that might indicate too short-term a view of what we think the opportunity in our business is. We think there's plenty of opportunity to invest, and to drive more to the bottom line, and maintain that commitment about margins.

Okay. So when we think about the progression of margins, it's not like -- I think Walter asked a question before that, basically, to get there, you'd have to be doing more than the type of margin bump you've been seeing the last few years. It doesn't necessarily have to be a linear progression, meaning 250 bps, et cetera, per year, that it could be more of a hockey stick. Is that fair?

I mean, I think it will be a little bit more steady than that. We won't be looking out hoping some magic happens at the end of FY '15. I don't think that's a realistic way to run the business. But we do think there is opportunity to expand margins along the way, even in a lower growth environment. Having said that, our goal is to drive to higher revenue growth. We're doing lots of things to do that, and it would certainly make the job much easier to do that. But I think we've demonstrated, even without that, we're capable of expanding margins.

And your final question is a follow-up question from Brendan Barnicle.

Just quickly following up. We did see subscription revenue grow sort of in a typical seasonal pattern. Any reason that, that would change going to the fourth quarter?

Well, Brendan, I think I agree with you that it was a typical pattern. I think you can -- I think we would confirm that. It's in that range. In terms of going forward with a projection of it, we don't guide that one, per se, but I think you got the right read on where we're at today.

And just to be a little bit more specific, we don't see any reason that, that wouldn't be true.

There are no further questions. I'll now turn the conference call over to the host.

Thanks, operator. So lastly, we're going to be -- we have 2 things going on this quarter. On November 22, we have our Autodesk University event. I know many of you have already signed up for it. If you'd still like to, please e-mail me or call me at (415) 699-0143. We'll also be at the Crédit Suisse Conference on the 28th, the following day. That concludes our call. Thank you.

Thank you. This will conclude today's conference call. You may now disconnect your lines.