Good day, ladies and gentlemen, and welcome to the Third Quarter Fiscal 2015 Autodesk Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, today's conference is being recorded. I would now like to turn the call over to David Giannarelli, Senior Director of Investor Relations.
Please go ahead, sir.
Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our Q3. Also on the line today is Carl Bass, our Chief Executive Officer and Scott Herron, our CFO. Today's conference call is being broadcast live via webcast.
In addition, a replay of the on our website in advance of this call. Those remarks are intended to serve in place of extended formal comments and we will not repeat them on this call. During the course of this conference call, we will make forward looking statements regarding future events and the anticipated future performance of the company, such as our guidance for the Q4 and full year fiscal 2015, long term financial model guidance including billings, subscriptions and recurring revenue growth the factors we use to estimate our guidance new business model introductions new product and suite releases market adoption and expected growth rates, business execution, business prospects and financial results, opportunities and strategies, including our desktop subscription offerings plan, our transition to cloud and mobile computing, trends and sales initiatives for our products and trends in various geographies and industries. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, specifically our Form 10 ks for the fiscal year 2014, our Form 10 Q for the periods ended April 30 July 31, 20 14 and our current reports on Form 8 ks, including the Form 8 ks filed with today's press release and prepared remarks.
Those documents contain and identify important risks and other factors that may cause our actual results to differ from those contained in the forward looking statements. Forward looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward looking statements. We will provide guidance on today's call, but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum.
During the call, we will also discuss non GAAP financial measures. These non GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of GAAP and non GAAP results is provided in today's press release, prepared remarks and on the Investor Relations section of our website. We will quote a number of numeric or growth changes as we discuss our financial performance and unless otherwise noted, each such represents a year on year comparison. And now, I would like to turn the call over to Mark.
Thanks, Dave, and good afternoon, everyone. Much like last quarter, our 3rd quarter results reflect strength across industries, geographies and products. We continue to make meaningful progress in our business model transition to a more recurring subscription based business adding approximately 121,000 subscriptions, which includes 25,000 Del Cam subscriptions that were not previously captured. As a result, deferred revenue increased significantly to a record $1,000,000,000 a milestone for Autodesk. All three of our major geographies as well as emerging economies grew double digits on a constant currency basis led by growth in EMEA.
Similar to last quarter, the areas in which we're seeing weakness are those affected by geopolitical turmoil. We also experienced strength in transactions greater than $1,000,000 These large deals were spread across all the major geographies and fairly evenly split between AC and manufacturing. While the number of these large transactions increased nearly 60%, the total value of these large transactions increased over 200%. Our investments in the enterprise sales and consulting services has directly led to the increase in large deals and the size of these transactions. Many of these large deals were flexible enterprise licensing agreements.
In addition to being a great benefit for our customers, these token based contracts create a larger recurring revenue stream, which is recognized ratably. These agreements are also contributing to our subscription growth as we're experiencing increased use of our cloud services. 3rd quarter license revenue would have been approximately $26,000,000 higher before the impact of flexible enterprise license agreements. The environments for global construction coupled with the continued customer excitement for continues to resonate with customers across segments, but especially in construction. We closed several large deals with construction companies that included BIM 360, which continues to be one of Autodesk's fastest growing products ever.
AC Suites grew 23%. The large AC deals that we closed during the quarter were across all geographies, including deals with 4 of the top 25 ENR design firms. Our manufacturing team delivered strong growth of 20% in Q3. Growth was driven by wins in large verticals including industrial machinery, consumer products and automotive. Strength in our core product design suite is leading the growth, but we are really encouraged by what we are seeing with our cloud based products.
We are particularly pleased with the customer response to Fusion 360. It is the next generation cloud based CAD system for mechanical engineers and industrial designers. We put Fusion 360 on the Mac App Store last quarter and within a few days there were over 100,000 downloads. Not only are small customers using it, but we're increasingly seeing large customers adopt it, often replacing their traditional desktop tools. With PLM 360, we added many new customers and perhaps even more encouraging is that we continue to see customers returning to purchase additional seats.
3 of our top 5 POM360 deals were based in EMEA, where we are showing a lot of progress. We also closed our largest ever manufacturing deal in Q3. This was an 8 figure transaction covering design, simulation, data management and consulting. It was also our biggest PLM 360 win to date. The customer is a Fortune 500 industrial and technology company.
It's a story we've heard for years. They've been struggling with their legacy PLM system and began looking for a cost effective scalable alternative that would integrate easily with their other business systems. Rather than spending 1,000,000 more dollars on their old PLM system, they are using PLM 360. We believe this is only the beginning of the cloud based PLM revolution. It is easier to deploy, easier to configure and a lot less expensive than legacy PLM systems.
This quarter we announced our plans to introduce cloud based data management to complement the existing cloud based PLM. Our business model transition is gaining momentum. We've added 285,000 subscriptions through the 1st 3 quarters of this year. This has been a fantastic start that is well ahead of our initial expectations. The discontinuation of the upgrade program at the end of this fiscal year is helping drive our medium subscriber count.
It's not surprising that we're seeing a lot of customers take advantage of the upgrade program and we are experiencing a higher maintenance subscription attach rate with these upgrades. What we're really encouraged about is the contribution we're getting from both desktop and cloud subscriptions. AutoCAD LT has quickly become our leading desktop subscription offering. As we mentioned at our Investor Day event last month, a meaningful portion of our desktop subscription customers are new to Autodesk and about half are subscribing by purchasing through our e store. Those are great early trends.
Cloud subscriber growth remains very high and similar to desktop subscription. It's bringing a significant number of new users to start a desk. Our cloud based project collaboration tool A360 is still in limited release and we're very encouraged by some of the early indicators for that product. Our mobile and cloud based products are being adopted by our customers, which validates the investments and focus we put into these products. Other investments will quickly establish a leadership position in cloud and mobile and in many ways we're just getting started.
The early success we've experienced with our business model transition has in part led us to accelerate the process. As we outlined last month, we plan to stop selling new perpetual offerings over the next 12 to 24 months. Stay tuned for more details around this over the coming months as we start to discuss specifics with our customers and channel partners regarding these plans. Given our strong Q3 performance, we've raised our FY 2015 guidance ranges for billings revenue and subscriptions. The investments we've been making in cloud and mobile are just beginning to show up in these metrics.
Earlier this year, I called out that operating margin is muted for a number of reasons, including the impact from the business model transition, investments we're making in our cloud infrastructure, the dilutive effect of the Del Cam acquisition, as well as incremental investment spending on key initiatives. Additionally, commissions and our employee incentive program are volume related and increased based on our better than expected billings performance. Lastly, I'm very pleased that earlier this month Scott Herring joined Autodesk as our CFO and is joining me on this call. Scott brings with him a broad mix of financial sales and product management experience. His leadership experience at Citrix will benefit Autodesk in our model transition over the coming years.
I'd like to thank Sue Puri, who did a great job leading our finance organization during the interim as well as the rest of the finance team. So to wrap things up, we were really pleased with our overall results in Q3. The year has shaped up to be stronger than our initial view and remain confident in our long term business model transition goals of 12% billing CAGR, 20% more customer value, 50% more subscriptions and 30% operating margins. As you know, a key element of our model transition is ending perpetual offerings over the next 12 months to 24 months. While we are not providing FY 2016 guidance at this time, keep in mind that doing so will impact the top line and profitability in the short term.
As always, we will monitor global economic conditions as well as currency movements as we head towards FY 2016. We look forward to building on these early successes and transitioning Autodesk to a more profitable and recurring subscription based model over the coming years. Operator, we'd now like to open the call up for questions.
The first question comes from Brent Thill from UBS.
Good afternoon, Scott. Welcome. Carl, the last couple of quarters on the billings, you've obviously done really well mid-twenty percent growth. Yet the fiscal guide at 15% to 17 percent would just imply a stronger fall off in the next quarter. What's your sense in terms of is that just a conservative view on your behalf for the Q4?
And I'm just curious if that 8 figure deal how that is going to be recognized?
Yes. So the 8 figure deal is a ratable deal. And so it will be taken over a long period of time a longer period of time. The one thing we said about the end of the changing model during this year is that the promotional incentives got weaker towards the end of the year. So while we've exceeded it for all the quarters so far, we're always a little bit cautious because the incentives to do so go down.
As we get to the Q4, the incentive is eliminated except for the fact that it's expiring. So there's less financial incentive. There's greater time based pressure. Trying to wrap those 2 together that's where we ended up is our guidance.
Great. Thank you.
The next question comes from Keith Weiss from Morgan Stanley.
Excellent. Thank you guys for taking the question and really impressive quarter. And what looks like really strong progress in the business model transition. I was wondering if we could kind of sort of cut off at the head what it's going to be probably the biggest bear case out there of how do we know that we're not pulling forward a potential demand out of FY 2016 with the strength this year. How do you guys get comfortable with that you're going to be able to sustain the pace of maybe like billings growth if you will as we go through sort of further into this business model transition?
Yes. So the first one for me, Keith, is getting more people on maintenance subscription is not a pull through. And so I've actually had a little bit of a hard time just reckoning about that because we have customers who are not on maintenance, who are now on maintenance. It's a big thing. Any way I look at it, I think that's the best possible outcome for us to get a non subscriber on subscription.
We've also talked about as we're moving forward that while this is a promotion for this year, we've talked a lot about what we're going to do next year in terms of ending perpetual licenses. In many ways, that's probably a bigger incentive for our customers to do something differently. And I don't know if I can help you take the bear and put it up on the wall, but mounted and stuff it. But I think some of the arguments out there are trying to extrapolate from too few facts or to take this one thing and say, this is the only incentive program that will work with our customers. And I don't think and I don't really think that's true.
Got it. And if I could potentially sneak one last one in. Just in terms of the mix of the subscriptions strong heavily weighting towards the maintenance subscriptions? Or are you starting to see a richer mix of desktop subscriptions in there?
It's richer, but it's still heavily, heavily But in terms of meaningful financial contribution, it's maintenance. And I would say and while we've said it may slow down going into the Q4, I think the proportion will remain somewhat constant.
Got it. Excellent. Nice quarter,
guys. Thank you. Thanks.
The next question comes from Walter Pritchard from Citi.
Hi, thanks. Just a question as it relates to the token related deals. It sounded like in the first couple of quarters of the year, you didn't have as much business go that way. In the Q3, you had about $26,000,000 that was a headwind. And then it sounds like last year, you had some impact.
And I'm wondering if you could help us understand how you expect that business to ramp in the Q4? And then do we expect to see a more significant uptick in that revenue stream as you go into 2016 fiscal 2016?
Yes. So, Walter, let me start at the back end of question. I think we've demonstrated over the last few years that this investment in enterprise sales and consulting services has really paid off. We tried to demonstrate a little bit at Investor Day where we showed you not only our customers paying more, they're using more. This has been a truly a win win situation.
We're going to continue to invest in it. And even to our channel partners, the thing I say all the time is when we win these big enterprise accounts, it's good for the whole ecosystem. So this is not at the expense of our channel partners. Quite the contrary, it is reinforcing business for our channel partners. So we're going to continue to invest in it.
We think we barely tapped into it. We outlined that we've had kind of in the dozens of accounts that we're talking to with this. And there's probably upwards of 1,000 customers who will eventually move this way. And we're going to keep doing it. Now one of the things also about it just to the timing that you talked about, we have always a lot of these deals in Q4.
Last year, we made a conscious effort to move some of them into Q3. For a number of reasons, we'd like to spread it more fully throughout the year, but it is not fully within our control. And so I suspect it will always be a little bit back end loaded throughout the year. But just in general, the 2 takeaways are we're going to continue to invest because we think it's really good business. And the second thing is this level of flexibility with products is something we hope to offer to a broader range of our customers not just the top 1,000 accounts.
And then thanks, Karl. And then just a question for Scott. Welcome aboard. It may be too early to ask you this question and you don't have all the history. But I look at you raised the revenue guide range for the year and the operating margin guide for the year is sort of the lower half of where you were talking before.
And you mentioned that you have more commissions being paid out. And we've seen this over time with Autodesk where if the performance is good, it impinges on the margins in the near term. Can you talk about how much of what's going on the incremental expense side here in the guide now has to do with that versus investments that you have to make more for the longer term?
Yes, Walt, thanks. It's both. I mean, we are investing in cloud infrastructure build out for the business model. We're investing in the back office system so that we can handle the higher volume of transactions. Del Cam is in there, which is hitting the op margin year on year.
And I think that the one unique thing that we see in Q4 is some of the volume related things that hit Q4 around both commissions and variable comp for the year. So I don't think it's I don't think it makes sense to break that out. But I think the way you need to think about it is it's a combination of both. The volume related things in Q4 and some of those trends, the investment in the business model transition frankly will continue into next year.
Okay. Thank you.
The next question comes from Brendan Barney from Pacific Crest Securities.
Thanks so much. Scott, just following up on Walter's question. Can we assume that margins are bottom tier? Or given the model transition, particularly at the end of perpetual coming sometime over the next 12 to 24 months, should we expect that maybe margins still go lower still?
Yes. Brendan, we're not giving guidance right now for fiscal 2016 and beyond. As you can appreciate, we're in the midst of our fiscal 2016 planning right now. So I'm not at liberty at this point to talk about some of the longer term trends.
Well, as I think about how we think about modeling licenses and those potential potentially going away, is there a point next year that we may have a quarter where that license line just is at 0 and so we should be kind of preparing the models for that?
Well, whether I'll start and then I'll hand back off Karl on this. Whether it's next year or beyond, I think what we've said is, we're planning to end of life perpetual license in the next 12 to 24 months. And that, of course, is a big driver of that license
line. Yes. And the only thing I'd add and try to give you guys a little bit more color when a number of you were here during Investor Day is one of the variables that we have, the knobs and dials around this are whether we do all products at the same time or stagger it and whether we do all geographies at the same time or not. So we do have some level of control over those things. What we were more indicating is directionally by the end of the 24 months.
So I think in some ways it would just be unusual operationally to drive to a place where we get to 0 license revenue in a quarter. But directionally, I think you clearly understand where we're headed.
Great. And then one last one Carl. As you have more of these like 8 figure deals like that large one that you mentioned that you'll be recognizing over time, does it make sense at some point to start to share like a off balance sheet bookings type number?
I'll let Scott add. Welcome Scott.
Yes. Thanks for that. Brennan, I think it's fairly straightforward. I know it's a calculation that gets done today and I think it's not that difficult to pull it right out of the change in deferred revenue plus the announced revenues. So I don't know that it's that difficult to metric.
It is something that we'll talk about if it makes sense to besides guiding to a growth range to start to guide to an number and then report on that.
No, Scott. I was referencing those deals where you don't bill all in advance, so we don't see it on the deferred revenue and you have some that's off balance sheet.
I'm sorry. You're talking about the enterprise agreements specifically?
Right. As you do run
those and they become more material, is that going to be a metric we should start to look at like we do for Salesforce or for Microsoft's contracts that are on build?
Yes. I don't actually have a plan. I would say it's it feels to me it's a bit awkward to announce that because all of the revenues there, all those enterprise agreements are captured or most of them are captured in the deferred revenue balance. So it feels a bit awkward that we split it out today, but I don't have a plan to either start to continue to be more explicit on that or not.
Yes. If it turns out that it's somehow so opaque that you're having trouble understanding and learning, then we'll provide some clues to how to do that. So I hope it becomes a problem.
Great. Thanks a lot guys.
The next question comes from Heather Bellini from Goldman Sachs.
Great. Thank you. Carl, at the Investor Day last month, you mentioned that in fiscal 2016, you thought that you could add at least as many subs in that period as you would add in fiscal 2015. And I guess I'm just wondering would you still say that's possible given your significant outperformance in your new sub guidance for this year? And then I just had a follow-up.
No, I know what you're trying to do. You're trying to trick me into giving guidance for next year.
We would not do that.
I know that. You know what? I feel really good about the trajectory of the subs. I'd be a little hesitant to start guiding for subs for next year. But right now all I would say is all the curves on the subs look really good.
And 3 months from now in February, we'll start trying to break it out. There's nothing here that I see going in the wrong direction, but we'll just wait the 3 months.
Okay. And then the follow-up question was, I know you all have been working on some initiatives to help drive renewal rates higher. And I'm just wondering if you can share with us, are you seeing some of those initiatives start to pay off? And how have your and as a result, have your renewal rates been trending? So I know that's big for Q4.
Yes. So the renewal rates are definitely being driven higher. Some is being driven programmatically like we talked about with the end of upgrades and some is just more attention to detail, if you will, about the non renewals. And so we've done a better job. We've put more systems in place to track that.
We've been sending our partners and ourselves to do it. So we'll see we're seeing it. It's edging up on small numbers because we're at a relatively high number, but it's still in good direction and material.
Great. Thank
you. The next question comes from Gregg Moskowitz from Cowen and Company.
Okay. Thank you very much. First question is for Carl. Just wondering if you saw any change this quarter with regard to the mix of new versus existing subscribers across both desktop
as well as cloud? No.
A lot of the trends we outlined in October are kind of continuing. And I think they'll be relatively stable, but we'll update them. And if we see a material change, we'll talk about it. But we're learning as we go too.
Okay, perfect. And Scott welcome to Autodesk. Wanted to ask where we are right now when it comes to investments to the investments that you alluded to in back office systems and cloud infrastructure. When we look out over the next call it 12 to 18 months, how much of this lies ahead versus kind of what you guys have done already?
Yes. So it's day 14 for me today. So what I'd say on that is, obviously, those investments didn't start just this quarter, they've been in flight. But I think it's a significant transition both in building out the cloud infrastructure or the world that we envision around desktop subscriptions as well as building office systems to handle the significantly higher volume of transactions. So it's still early innings on those investments.
Okay. Thank you.
The next question comes from Saket Kalia from Barclays.
Hi, guys. Thanks for taking my questions. And Scott, look forward to working with you. First, I realize it's still early to provide guidance for fiscal 2016. But just given the moves that we've had in the euro and yen, can you just talk about how FX exposure might look next year compared to what you've hedged?
Yes. As we talked about, we always have the rolling hedge. We continue to have that. But FX will definitely be a headwind next year. Borrowing, I think, moves the other way.
I mean, if it just stayed where it is today, it's definitely a headwind. And it gets more significant as we go out to the end of next year versus Q1 of next year.
Yes. If you look at our hedge program, it is layered out in time. And so obviously as the year goes on, the exposure from today goes up. But I'd say it's you can look at our revenue mix, you can see where we are. Obviously, the euro is a significant currency for us.
The yen is a significant currency for us. And it's something that we'll take into account when we do provide guidance for fiscal 2016.
Got it. And then Carl, I think you said last quarter that the 3rd quarter was a little bit slower in terms of subscribers coming from maintenance renewals compared to the Q4. Is that still the case?
No, I don't think I said that. If I said that maybe I misspoke. I thought it was the other way. Yeah. What I said, I mean, generally speaking, what I thought is we would see in Q3 more subscribers in the small, medium part of our business.
And what we would see is more enterprise agreements in Q4. And that was really our best guesstimate as I said on those two factors of the time based nature of it expiring, yet the financial incentives were going to 0.
The next question comes from Sterling Auty from JPMorgan.
Yes, thanks. Hi, guys. On the enterprise excuse me, flexible licensing agreements that you've got, can you give us a sense what's the average duration on those types of deals? So in other words, when would we expect the deals that you did this quarter to start coming back up for results?
I'm not sure if I can give you the average, but typical is a 3 year agreement. So that's a very typical agreement is a 3 year.
Yes. And I think Sterling bear in mind these are largely ratable in terms of revenue. So although they'll drive a bit of lumpiness in the billing stream, it'll be a little bit smoother on the revenue stream.
Sure, sure. And then can you give us a sense of the linearity of the subscribers that you added through the quarter? Was it fairly linear? Or did you see any particular patterns through the quarter?
No. I mean, I didn't see anything that substantially if you take out the Del Cam 1, which is a one time thing, but if you look at the kind of the organic, it tracked pretty closely to the way you would see the seasonality around revenue historically. So a little bit heavier in the last month of the quarter, but not tremendously so.
Okay. And then last question. I know you're not giving us when in that 12 to 24 months you're going to eliminate the perpetual licensing. But can you give us some of the factors that are kind of going into your decision process?
Yes. I mean, we're looking at a number of things. We are working the program with our customers. We've engaged them and they're talking heavily with them. We're working with our partners.
We're trying I mean, what we intended to do as opposed to the kind of rip off the Band Aid strategy was we were going to work through this slowly and deliberately. And we're making sure we keep the business as intact as possible as we move through what's a fairly big transition.
Got it. Thank you.
The next question comes from Jade Leshauer from Griffin Securities.
Thanks. Good evening. Carl, I'd like to ask first about the famous 2 $900,000 active base number from the analyst meeting that is customers who've purchased product, but haven't gone on maintenance. By our math, the largest piece of that into 3 main buckets is customers who upgraded since fiscal 2010 through this year, but didn't for some reason take maintenance as well. Could you talk about why those customers would not have taken maintenance despite of all the promotions and inducements you've had over the years for them to do so when they upgraded?
And how do you get them to convert? And then a follow-up.
When you go to Best Buy, do you buy that service contract, Jay? I think there are a lot of things that we do. I mean, if they ask me one more time to check out if I want that service contract, I'm going to shoot them. I think it's the same thing. Some people remember when we've talked about as we introduced these programs, many of our customers have been buying for decades.
They have a certain buying behavior. We also we've talked about depending on the product, they may feel like the maintenance subscription is more or less valuable. So the 2 biggest factors we see are the lower cost products generally have lower attaching renewal rates. And the other one is geographically there's wide variance between generally speaking developed countries and emerging economies. So those are the 2 biggest differences.
As we move forward, we hope to eliminate that choice by the combination of this year's program and next year's program or
Okay. The follow-up is at the analyst meeting you mentioned value per account as an important metric. That's come up in some conversations since then. Would a corollary to that would be that at some point Autodesk would introduce a single Autodesk account as a kind of Uber suite for access and particularly for driving the Flex licenses down market into SMB? Would that be some way that you could approach combining Flex licenses with making it more broadly available or appealing to the smaller accounts?
Yes. So, Rob, let me break those 2 questions, which somehow you managed to put into 1. And I'm still looking for the connection, but let me just separate it, so it helps my feeble mind process it. On the ARPU conversation, we talked about value per account. There's been some people have asked us about ARPU.
What we've said about ARPU because of the A in there is it's going to be really mix sensitive and we have a wide range that's going into that. And we do think the distribution of it will be more helpful or some categorization or bucketing of it is better. And that I think if you do it by account, it's a way of normalizing that is not nearly as extensive. So that's what we've thought about there. 2nd question in my mind is about what I said is we've seen tremendous reception from the enterprise licenses.
Customers truly appreciate the flexibility and the access to pieces of software they might not have had. We think many of our small and medium business customers will want the same thing. You mentioned like the Uber Suite. I think we will introduce something that is similar to giving people access to the portfolio for a fixed price. We're not going to announce anything today, but it's certainly directionally where we're headed.
We again, we think that this is a win for everyone involved and at least what we've been able to manage more closely in the enterprise space. We will first broaden it there and then secondarily introduce it to the more general population. Okay. Thank you. Thanks,
Jay. The next question comes from Steve Ashley from Robert W. Baird.
Thanks very much. I'd just like to go back to the success you're having with the large deals and just maybe try to get some more color on how you're driving that? I think you mentioned that some of it is your consulting services. But if you could just maybe walk us through how you are having success in driving those with this go to market, that would be great.
Sure, Steve. Yes, I mean, the said thing that I scratched my head too is kind of if you're having such great success with it now, what took you so long? And one thing that we have seen very clearly is the build out of capabilities of our consulting services have mattered a lot. So it's one thing to provide access to people, but if you really want to drive usage and adoption, we need people on-site to do that, particularly in large complex organizations. So it's large complex organization that already complicated business processes in hand or in ones like for example in some of the engineering construction firms where they're going through a transformation adopting BIM and they need help understanding how to best bring that into their business.
And the differences in places where we have consulting versus we don't are dramatic in terms of their adoption and in terms of the increase in value of those contracts when they get renewed. The second thing is, I think this is just one of these things as we began to have a bigger major account presence and listen to our customers, we realized that that was happening simultaneously with the build out of a much bigger and broader product portfolio. So if you roll this back 5 years, part of the thing was we just didn't have as rich a set of offerings to go in with. We now have a much richer set of offerings. And that's true both in our AEC, our M and E and our manufacturing products.
And we have the people who can deliver what's really needed for the customer to be successful. Probably the third factor is slightly more environmental, in which there's really conditioning in the buyers of software to look at more term based models, to look at more consumption based models and people are much more comfortable with that. I think when we first started, there was a little bit of a negative reaction in certain accounts. I think what's happened just to give you the kind of the insight and the color commentary here is that what has happened in a number of these accounts is that people are happier. They're okay paying more if they feel like the software is really being used.
There was always this suspicion that they were buying things that were not being fully utilized, but now because this is in because of the tokens, they feel like it's being used. The secondary dynamic that goes on within these accounts is that they can do some kind of internal accounting about it charge back to the cost centers using it. I think the combination of those two things plus the accessibility of the broader portfolio is winning over. And like we showed you at Investor Day, I mean, it's pretty dramatic the increase in usage and company satisfaction as a result of the customers who have done this.
And just a quick follow-up to Sterling's earlier question on the enterprise flexible agreements. He asked about the duration. You said, well, you didn't have at your fingertips, but a lot of the deals are 3 years. Is the mechanics here that after a year you go in and do a true up and there is some maybe adjustment made or remuneration to you from these contracts?
Yeah. I mean essentially you can take I mean there's just a constant accounting in which people have tokens that they burn off. They buy what they think they need and they eventually run out and have to buy more, a little bit more than a true up. I mean, it's better just thinking of it as you just bought a bunch of tokens. And I would say most people so far have guesstimated on the low side of what they need.
And the reason why they guesstimate on the low side is they go out, they make the software available to the broader community. There's more usage of it and they end up having to go back and buy more tokens sooner than they would have otherwise thought they needed to.
Very helpful. Thank you.
The next question comes from Matt Hedberg from RBC Capital Markets.
Yes. Thanks for taking my questions guys. I wanted to ask about the geographies here. Obviously EMEA was your strongest geo. Carl, I'm wondering, was this was the streak there Autodesk specific with the transition ongoing here?
Or are you seeing a different environment there than what some of the macro indicators might imply? And then also APAC obviously grew 10% too in constant currency, maybe a little additional color there?
Yes. So I mean, let me just use this to riff on. I mean, like the broader thing I'm seeing geographically, which is the Americas is strong. There are a lot of good secular trends in the U. S.
They remain strong. The places like the Middle East and Russia, Russia particularly, business might even be down by half in Russia over comparable periods. Just to put it in perspective, I mean, we've always been very interested in the emerging economies, but none of them are bigger than they're in the low single digit percentages. None is bigger than 3% of our revenue. But Russia and the Middle East have been clearly weak.
The other places have been okay. There's a little bit of weakness that we've detected in Japan coupled with weakening of the currency. And the currency is as big an effect right now as the actual business. Europe is in the middle of this quarter, it seemed like there was a lot of consternation about Europe. I put it in not at the strength of the U.
S, but relatively strong. And even some signs of increasing strength in Southern Europe, which I don't think I've been able to say for probably 7 years.
That's very helpful. And then maybe a quick follow-up. At Analyst Day, you talked about instituting a new campaign to lower the margin dollars on license sales and increase them on a desktop. So I guess I'm curious, you're 20 days into this. What's been some of the initial feedback from the field on some of these changes?
Yes. So we're just beginning and we said we would just start with LT. One of the things just in general that people should think about with this, LT is a very different product than our other products. It's a good experimentation. It's a high volume product for us.
And so far so good in terms of the reception to it. But also it goes through at least on a mix basis a different channel than some of our other products. To said and just in general, when people look at this, I would say, what people have to understand is that there's a difference in products between LT and others. And the other thing I would say is as we do this, just to keep in mind is that the programs you put in place either when the programs are new or the products are new are considerably different than what you do as they mature. So there's a fair amount of flexibility.
I mean there are a number of degrees of freedom depending on the product and the channel and the maturity of the product. So right now, long winded answer, the short answer is the LT1 is fine and you'll see us continue to do this as we work our way through the entire portfolio.
Very helpful. Congrats on the quarter.
Thank you.
The next question comes from Richard Davis from Canaccord.
Hey, thanks.
You bought I was trying to remember Mold Flow back in I think like 'eight Blue Ridge back in 'eleven and I can't remember if DelChem had much simulation. But anyways, what are your thoughts with regard to kind of organic and even inorganic growth in simulation? Because it's a less iterative design tool and it works perfectly I would think with that kind of burst capacity relationship you have with Amazon Cloud? Thanks.
Yes. So two things there. One is we've always talked about the cloud being good for two reasons. One is for these computational intensive tasks and the other is central coordinating hub for collaboration. Things like finite element analysis, computational fluid dynamics are perfect for cloud based computing.
It works really well for those as you say burst high peak demand needs. So we see it as being really good for that. It's also particularly as you move from the desk of the analyst to that of the engineer. In many large companies, they built out computing centers for the analysts, but not for every engineer. So it gives access to the for the average engineer to much more computing capability.
So we're really happy with what we've seen. And I think the difference when you look at us versus other company in analysis and simulation is we're just much more focused on the engineer than the analyst. And some of the things we're doing with the products should be viewed through that lens.
Got it. Thanks. You're
welcome, Richard.
The next question comes from Kash Rankin from Merrill Lynch.
Maybe not. Hi.
Yes, I made it in the nick of time. Thank you so much for taking my question. Carl, when I look at your business model transition and follow along the commentary over the last couple of quarters, it feels like a lot of the upside in deferred revenue seems to be predominantly coming from flexible licensing agreements and also catch up maintenance. So where is the real business model transition happening here with respect to this Adobe like desktop subs that you would like to pursue? And as it relates to that, when you look at fiscal 2018, if the company is going to be ending perpetual licenses, which is terrific, how should we think about how you get to 30% non GAAP operating?
Because that feels like license is going away that seems like a steep target, right?
So, two things Kash. On your first question, I would say, for example, forgetting everything else about the business model transition, I can't think of a healthier way to grow your business than selling more value to your best customers. It's just as straightforward as that. And so call it token based or flexible licensing, just the idea that your best customers are buying more products from you seems like everything about it is good. And in some ways, it answers your question because it's the most sustainable thing is having good customers who want more products for you and are paying you more money for it.
The second thing is, I think a number of people have looked and tried to draw conclusions too early in terms of the business model transition. What you saw this year was the end of a multiyear program to eliminate upgrades. What we're heading into is a multiyear program to end perpetual licenses. At the end of that, the company is in a distinctly different place than it was when entering where the primary means for your customers to buy things were perpetual licenses with upgrades. And you come out the other end and everyone is in a recurring ratable relationship with you.
So I see that is fundamentally changing it. The difference, and I said this, whether it's Adobe or Microsoft or anyone else or any of the born in the cloud SaaS companies, we all end up in an identical place. So you roll out 3, 4 years and there will be virtually no difference whether you're talking about Salesforce or NetSuite or Workday or Autodesk or Intuit or Adobe or Microsoft. It's a software industry that's changing. We are all delivering software on the same platforms in the same way.
And our customers truthfully are pushing us to buy it in the same way. So I think some of the distinctions in the transition maybe trying to put too fine a filter on it and try and understand things that may not look identical in year 2 or year 2.5 versus something else. But if you just step back and look at the long term, you say companies end up in the same place. We're all selling enterprise applications that are centered around cloud, social and mobile. And the business relationship with the customer will be a long term subscription model.
And so in that way, I think it's the easiest way to see the similarities.
And on the implication for margins Carl, certainly this is a thoughtful transition, but what I struggle with is licenses fall off the subscriptions, you have to cut a lot of cost to get the 30% non GAAP margins versus the 30%. Just wondering what drives that? Thank you so much.
Yes. So the first thing is, I think if you look over any period of time, I would say there are 2 different things. So one, I'll get to what costs have to change. But the first one is the amount of revenue over time is the same if not more. And we saw that with like the enterprise licenses.
Customers are paying us more even though there are no more upfront licenses. And so the lifetime value or the value over a fixed period of time is actually higher. And I think that same trend that we see with our enterprise customers we'll see with our other customers. As I've been very willing to say repeatedly, I think the two areas where we will see a change is, one is our R and D spend is relatively high right now. We are supporting 2 different technology models, a traditional desktop model and we're building out for a SaaS infrastructure.
And so we're doing development infrastructure costs on both simultaneously. And the second one is our sales and marketing is high. When you consider the total between what we spend and our various channel partners spend on sales and marketing. So I think if you combine those 2, both those as a percentage and certainly if you do the calculation on the overall ecosystem as opposed to us goes down over time and that's how you get to 30 plus percent.
The next question comes from Matt Williams from Evercore.
Hi, guys. Thanks for fitting me in. And Scott welcome aboard. Carl just quickly on the partner side of things. I'm just wondering if you could give us an update on partner interest around sort of rentals cloud.
I saw a press release earlier today around the PLM business and a partner that was announced there. And I'm just wondering sort of what sort of traction you're seeing within the partner base around the PLM 360, BIM 360, some of the cloud offerings and how they're adapting to the desktop subscription offering as well?
Yes. So I see more traction amongst our traditional partners around desktop subscription, because it's the same products licensed differently. The pickup amongst our traditional partners has more variance when you get to these offerings like PLM 360 and BIM 360. Some partners have been great involved with it, but in other cases, we have actively gone out and recruited new partners whose business is already much more aligned with this. So some of our existing partners are much more willing to make the transformation.
Others some of these like the PLM deals involve large amounts of services as we've talked about. They are $1,000,000 deals. For some partners, that's a little bit much. Others are reacting really well. But I would say in some of our newer offerings like BIM and PLM, you will see a higher proportion of new partners entering the mix.
And in desktop subscription, that's the bulk of that work will be covered by our existing partners.
Great. Thanks for taking the question.
You're welcome Matt.
The next question comes from Steve Koenig from Wedbush.
Hi, gentlemen. Thanks for taking my question. I joined the call a little late, so I apologize if this has been asked. I wanted to go to the subscriber additions for next year, where you're expecting a fairly similar level to this year. In light of maybe an update after the Q3 now, any thoughts on where these subscribers will be coming from?
Are you still thinking about desktop subscribers as being the priority for next year? I guess if that's true, maybe just a little bit of color on what kind of people would you be targeting in that 3,000,000 base of active but non rarely paying users that haven't chosen the upgrade this year, but might go to a desktop subscription next year? Or am I thinking about this, Ron?
No. I think if you look at next year without getting too quantitative about it, I think with the end of perpetual licenses, you'll see a large number of people going to desktop subscription as a result of recognizing as they get nudged towards doing that. You'll also see just based on the maturing of the products, more people going to cloud based subscriptions. And the last one is, I think there will be a substantial number of people who move to maintenance along with perpetual with maintenance to stay in that mode. So I think you will see a substantial portion of maintenance subscribers next year, but you'll see an increasing number of desktop and cloud.
Yes. That makes sense. Thanks. That's very helpful.
Okay, good. You're welcome Steve.
I'm showing no further questions. I would now like to turn the call back over to the presenters for closing remarks.
Thanks, operator. As a reminder, Autodesk University is coming up in a couple of weeks in Las Vegas. If you'd like to join us in the Investor Relations track on December 2, please contact me. We'll also be at the Credit Suisse Conference in Scottsdale on December 3rd and the Barclays Conference in San Francisco on December 9th. That concludes our call today.
You can reach me at 415-507-6033 if you have any further questions. Thanks.
Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.