Good day, and welcome to the U. S. Retail's
4th Quarter Fiscal Year 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Thank you. Mr. David Gianarelli, Director, Investor Relations, you may begin your conference.
Thanks, operator, and good afternoon. Thank you for joining our conference call to discuss the results of our 4th quarter. Joining me today are Carl Bass, our Chief Executive Officer and Mark Hawkins, our Chief Financial Officer. Today's conference call is being recorded via webcast. In addition, a replay of the call will be available at autogest.com/investor.
As noted in our press release, we have published our prepared remarks on our website in advance of this call. Those remarks are intended to serve in place of extended formal comments and we will not repeat them on this call. During the course of this conference call, we will make forward looking statements regarding future events and the anticipated future performance of the company, such as our guidance for the Q1 and full year fiscal 2015 long term financial model guidance, including subscriptions, value per subscription, billings and recurring revenue growth the factors we use to estimate our guidance our business model transition new product and suite releases market adoption and expected growth rates, cost management efforts, our market opportunities and strategies, business execution, 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 2013, Form 10 Q for the periods ended April 30, July 31 October 31, 2013 and our current reports on Form 8 ks, including the 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 our forward looking statements. Forward looking statements made during the call today are being made as of today. If this call is replayed or reviewed after today, the information presented on the call may not contain current or accurate information. Autodesk disclaims any obligation to update or revise any forward looking statements. We will provide guidance on today's call, but will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum.
During the call, we will also discuss non GAAP financial measures. These non GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of our GAAP and non GAAP results is provided in today's press release, prepared remarks and on the Investor Relations section of our website. We will quote a number of numeric growth changes we discuss our financial performance and unless otherwise noted each such reference represents a year on year comparison. And now I'd like to turn the call over to Carl.
Thanks, Dave, and good afternoon, everyone. We finished the year strongly and have good momentum going into fiscal 2015. This was the Q1 of our new business model transition. Considering the substantial sequential backlog we built, along with the strong cash flow and deferred revenue, we are very pleased with the overall results. I'll get into our business model our business model transition in
a minute, but first I'll call out some highlights from Q4.
Our 4th quarter results were driven by continued strength in both our suites offerings. Our AEC business really had a spectacular quarter to close out a record year. We booked a significant number of $1,000,000 plus transactions, including the largest transaction in Autodesk's history worth more than $20,000,000 We made significant progress in driving BIM adoption in the AEC industry. BIM is increasingly mandated on projects and we're partnering with our customers to ensure they have the right tools to deliver high quality projects. Collaboration and mobility are rising in importance for our customers and that's what our cloud based BIM 360 product is all about.
Last quarter, I mentioned we booked our first $1,000,000 transaction for BIM 360. In Q4, we booked more than 20 BIM 360 transactions worth over $100,000 including 2 new transactions worth over $1,000,000 each. In just a few quarters, BIM360 has become one of our fastest growing products ever. Another area of strength in our 4th quarter results is the continued adoption of our suites, which grew 15% and now represent 37% of total revenue. The growth and adoption of our suites remains one of the pillars of our growth strategy and supports our long term goal of generating 20% more value from our subscription customers.
Our strength in suites was partially offset by a decline in AutoCAD, which was anticipated as we look to migrate our point product users to one of our suites. We did see a nice rebound to solid growth in AutoCAD LT, which had particular strength in Asia Pacific. I'm very happy with our execution in the manufacturing business. We continue to see significant wins in industrial machinery, consumer products and automotive. I'm thrilled with the rollout of Fusion 360, the first cloud based CAD tool for mechanical and industrial designers.
One other highlight is the momentum in our PLN360 business. We had our best quarter ever, which included our largest PLN360 transaction to date worth almost $700,000 We are seeing good traction across geographies and industries. One particularly interesting data point is that almost 25% of this quarter's PLM 360 customers are new to Autodesk. To date, nearly 1,000 companies have deployed PLN360. Just after Q4, we closed our acquisition of Del Cam, the industry's leading cam technology.
With this acquisition, we are taking the next step in helping our customers manufacture their products. Autodesk and Del Cam have many things in common from a loyal group of talented employees to a shared desire to radically improve the process of manufacturing. It's really exciting to bring together a combination that will change the way products are designed and made. So now let me talk about our business model transition. The start of our business model transition is a milestone event that will take Autodesk to a more recurring subscription oriented business over the next 4 years.
In many respects, we started the transition 10 years ago with the introduction of maintenance subscription, which has grown to become about 45% of our revenue mix. We're now taking the next step in transitioning even more of our upfront license revenue to recurring over the next 4 years and beyond. As we build upon the maintenance subscription base with cloud service subscription and desktop subscription, formerly referred to as rentals. Q4 was the 1st full quarter of availability for desktop subscription. While it's obviously very early, we're pleased with what we're seeing so far.
A meaningful portion of desktop subscribers are new to Autodesk and the majority is choosing the annual term length option. We experienced good uptake of our M and E products, which makes a lot of sense as those customers tend to be much more project based. Another element of the business model transition is offering our enterprise customers more flexible licensing options. In addition to being a great benefit for our customers, these contracts create a larger recurring revenue stream, which is recognized ratably. Our enterprise customers have expressed great interest in this type of contract.
While we saw good traction on the new offerings and customers responded enthusiastically, We introduced these offerings a little late in the quarter for some customers to make the change. As a result, we overestimated how much revenue would be deferred. We thought it might be as much as $50,000,000 but came in at approximately $30,000,000 We received very positive feedback from our customers around this new pricing option. Some of our largest customers including AECOM, URS, Floor and GHD moved to the new option. With AECOM, we entered into a global multiyearenterprise wide agreement, which provides all of their users with complete access to Autodesk desktop and cloud services in a flexible model to support their business strategy.
It is deals like this that make me confident that these flexible licensing offerings will be a meaningful portion of our large enterprise deals going forward. This time, we don't have anything new to report regarding changing the ratability of some of our perpetual license revenue. We'll keep you posted as our plan evolves in that area. Now I'll take a minute to review our FY twenty fifteen guidance. For the first time, we're providing billings guidance.
During the transition, this will be another way to measure the overall health of our business. Our initial view is for net billings to grow 5% to 8% in FY 2015. Our initial view for revenue growth is 3% to 5%. Within the revenue estimate, we have factored in our assumption for moving additional enterprise customers to ratably recognize flexible contracts. It also contains our assumption for increased adoption of our desktop and cloud subscription offerings.
The revenue contribution from Dell Cam will be muted, especially in Q1, in part due to the typical write down of deferred revenue the 1st year. Our operating margin assumption for the year includes the impact from the business model transition, investments in our cloud infrastructure and the dilutive effect of the Dell Cam transaction. We continue to balance our cost savings initiatives with the investments we are making to solidify our leadership in the cloud and our business model transition. In FY 2015, we're expecting to add approximately 150,000 to 200,000 net new subscriptions. Since FY 'nine, our subscription base has grown 26% to approximately $1,900,000 As we go forward, we plan to report out on the number of net new subscriptions added on a quarterly basis.
Keep in mind that this transition will not be perfectly linear and the amount of business that we transition and number of new subscriptions we add will fluctuate from quarter to quarter year to year. We're expecting the transition to progress gradually in FY 2015 and then ramp more significantly by the time we get to FY 2017 and FY 2018. To help you track our progress, we will continue to provide you with our typical guidance and disclosures. For now, we've added the subscription guidance. As the model evolves, we will include other metrics as appropriate.
We remain confident in our 4 year model that we highlighted at our Investor Day last October, which calls for a 12% billing CAGR, 20% more annual value from our new and existing subscriptions and a 50% increase in subscriptions. We believe we can accomplish this while getting to a 30% non GAAP operating margin by the end of FY 2018. Clearly, there are a lot of moving parts as we head into FY 2015. We feel good about the current macro environment and feel great about the direction of the company. Never before we had such a rich and deep product portfolio and we've clearly established ourselves as the cloud leader in design, engineering and simulation.
This is important because many of the problems our customers face benefit directly from the cloud as a platform. The early successes of BIM 360, PLM 360 and Fusion 360 demonstrate this. We're really excited about our new cloud based services, which complement our existing offerings. The industry is beginning a major technology shift and we are ideally positioned to capitalize on it. The new business model and technology platform are a win for our customers and us.
Lastly, I want to thank our employees and partners for their outstanding efforts and contributions over the past year. They've done a fabulous job. Operator, now I'd like to open the call up for questions.
Our first question comes from the line of Brent Thill with UBS.
Carl, the billings and revenue guidance are better than what the Street expected, but it does imply a slower ramp And
why not just aggressively
step on the gas a little harder? And why not just aggressively step on the gas a little harder here in this transition?
So I mean if you're talking about the other ratable revenue, I mean I think on the subscriptions and the cloud services we're doing, we're doing well and we'll move our customers as appropriate. On more of the accounting issue about ratable revenue, just stay tuned, you'll hear more as we get into the year.
Okay. And I think we've asked this in the past, but when you look at the operating margin in the last downturn, I think you were not managing the business for the operating margin. And I think now at least you have better visibility in the operating margin. But when you look at the 14% to 16%, is that do you consider that more of a floor that you don't want to go below that? Or how should we think about that just as it relates to some of the other companies are giving guidance on operating margin?
Yes. I think as we've outlined, we kind of demonstrated in October, the way the curve works and the way the math works, it is the floor. So barring any unforeseen events, the way this works just the arithmetic of moving more business to ratable and having more of these subscriptions is the biggest impact. The second part of it is also we are investing right now ahead of the curve into our cloud infrastructure. We need to be there as our customers get there.
And so we're seeing the expenses now, but not nearly all of the benefit. But if you go back and you just look at how we described the transition and how we would move through operating margin, the 1st year is by far
the most difficult. Thank you.
Our next question comes from the line of Steve Ashley with Robert W. Baird. Hi.
Thanks very much. I think what we'd all really like to hear is a little more granularity in terms of the FY 2015 revenue guidance. You have Del Cam contributing some amount. If you could help us there at all with in terms of quantifying that? And then you have the shift to flexible licensing reducing
So Let me take a shot at that Karl, maybe you can jump in. First of all, Steve, on Del Cam, one of the things I want to call out to folks is the fact that it won't shock any of you, there's a deferred revenue write down, which is significant. But that's the only part of the story. The other part of the story is that there's actually when you consolidate, there's a stub period or a lag period for consolidation. So just to put it in simple language, we're going to get like a month of the Q1 in terms of the even consideration for the revenue.
So it's not only the write down, it's the stub period. So the way to think about Delacam, think about it roughly in this year, this fiscal year is about 2% of our total revenue would be that would give you a sense of proportion about just how dramatically the write off the write down of the deferred revenue and the sub period impacts us. That should help you right away on that one Steve from a dimensionalization standpoint. I think the second thing that you're calling out is trying to understand the VMT kind of the flexible licensing impact. As you know in this transformation, there's 3 different impacts that are happening.
1 is the flexible licenses at an enterprise level, 1 is the SaaS growth in the new offerings and one is the desktop subscriptions and that interdynamic. What we try to do is to help people by anchoring it with the billings in aggregate. So if you look at the revenue, Steve, and you look at the billings, you can quickly discern the deferred revenue and kind of the impact that's going to go to the balance sheet. And I can see a lot of you guys are actually doing that in the street in your models and we tried to provide that explicitly to give you a sense. So I hope those two things help you, Del Cam and how to triangulate on what's going to the balance sheet.
Perfect. And just a
quick follow-up. You mentioned you
did largest deal ever $20,000,000 deal. About how much of that was billed and recognized and deferred revenue in the recent period?
It would only be that's a booking for the $20,000,000 keep in mind. And so only a fraction of that would have been billed at the onset here. So it's a multiyear deal. I would say just take a fraction of it. Tiny fraction.
Yes, a tiny fraction of it from that standpoint. I think it's a 5 year deal, Karl, I think on that one. Don't quote me on that one. I think it's yes. Okay.
Thank you.
Our next question comes from the line of Heather Bellini with Goldman Sachs.
Great. Thank you. I was wondering if you could share with us a little bit Carl about how you're feeling about overall demand trends. I mean we're all very excited about the model transition, but how do you feel the momentum is building in the different regions? And do you see the environment getting better?
Or is it the same? Or can you share with us some color there?
Yes. Sure, Heather. I mean, I would say generally speaking, I mean, if you factor out all the other things going on in our business, just normalized conditions, I think the demand environment is growing stronger. And doing so on a fairly consistent basis worldwide. The only part of the world that I've seen not really recover is Southern Europe.
I mean, if you go back to pre-two thousand and nine levels, it's the only part of the world that hasn't come back to that kind of level. Particularly what I'm seeing right now is demand in the U. S. Is strong, demand in Japan is strong. And even though there's more moving parts when it comes to emerging economies, the preponderance of evidence right now is on real strength in the emerging economy.
So I'm feeling really good about the demand environment. When you break it down a little bit more by industry, AEC in particular, we're seeing a real pickup and a real effort around retooling and people buying new tools. And that's why I think we saw it not only in our BIM 360 business, which I try to highlight in my remarks, but I mean people don't recognize that when I said this is BIM 360 is close to our fastest growing product ever. That's pretty dramatic. And for people to be in the 1st year or so of a product release, spending 1,000,000 of dollars on the product is kind of incredible.
And I think that speaks to the demand as well and people wanting to enter what they see to be an improving macro environment with a new set of tools and processes. So generally speaking, I see good stuff out there right now.
And then can I just ask a follow-up? You mentioned BIM 360 and I wanted to ask you kind of what do you think what's the key differentiator of when you're going in and selling to a customer of BIM 360 and even PLM 360, if you could just share with us why you might be winning those deals?
Yes. I think both of them reflect this idea of using cloud computing and mobile devices to get information to the right place in the right time. So if you look specifically at BIM 360, there really is a lot is going to construction customers who need to get information in the field. One of the big inefficiencies we've talked about, the entire industry has talked about for years is the fact that you have entire crews working without the most up to date information. It's that lack of information that leads to bad decisions and bad coordination.
And so that's what we're seeing there. It's kind of similar. The words change. The picture looks slightly different in PLM360, but it's really the same thing. Instead of thinking of people out in the field, just think of an extended supply chain that might stretch across the world.
And people are trying to get that same level of coordination and information fidelity regardless of where they are. And I think for many people, both with BIM 360 and PLM 360, the part of the market we're tapping into is the one that's ready for adoption of cloud products. So I think that's the other interesting thing that's going on here. In the AEC market, that generally speaking is almost the entire market because they've recognized and been organized economically as a federation of companies. And so they're used to sharing information across organizational boundaries.
And the cloud is being accepted widely in AAC. In manufacturing, I would equate our adoption more closely to other SaaS companies. So look at Salesforce, NetSuite, Workday, in terms of the kinds of companies who come on as the early adopters. And we're seeing that same kind of dynamic.
Thank you.
You're welcome.
Our next question comes from the line of Walter Pritchard with Citigroup.
Hey, guys. This is Ken Wong for Walter. Just quickly to clarify Carl, did you I think you mentioned you guys closed out the year 1,900,000 subs. I mean, 1, is that accurate? And then 2, if that's the case, isn't that similar to what you guys closed out fiscal 2013 with?
I just wanted to understand the dynamics behind kind of what kept subscription from growing more this year?
Sure. Ken, this is Mark. Let me just say that we did at a rounded level, it's at $1,900,000 You got it exactly right in terms of paid subscriptions. The fact is that there's year on year growth obviously since October as well. When you look at the round and two sides of it basically, it turns out to be $1,900,000 on a rounded basis, but you can expect year on year growth there would be the first thing I would say.
Okay. And I guess kind of a follow on to that, you guys guided 150,000 to 200,000 kind of net adds. And I guess if we were to look from fiscal 2012 to 2013, you guys did grow roughly $250,000 I guess I would have expected with this big push behind the business model transition that that number would have been higher. I mean, should we look at the guide as a conservative number and you guys expect that to pick up? Or is this more of a kind of as we look to out years, it should accelerate beyond the $250,000,000 that we saw from $12,000,000 to $13,000,000
Let me add 2 points and just to throw out there. One is that we think it's a prudent guide, number 1. Number 2 is that if you look at the linear step up to get to the 50% increase that we talked about in the twelvetwenty fifty that would be 225 when we talked about it being back end loaded. So we think that sits right in the spot where you would expect with some momentum that builds over time. Yes.
And Cam, we'll report as we go. And so you and us will get
a little bit better indication as we move through the year. Exactly.
Got you.
All right. Great. Thanks a lot guys.
You bet.
Our next question comes from the line of Kash Rangan with Merrill Lynch.
Hi. Thank you guys for taking the question. One question for mechanical engineer to another mechanical engineer or And if I give you credit for $30,000,000 of deferred license revenue on an apples to apples basis, it looks like the overall business was somewhat down about 2%, 3%. But if I go back and take away the $24,000,000 that you had benefited due to promotion from last year, you still get a single digit type of growth rate. So the question for you is is there something else that is not reported in the numbers maybe a off balance sheet backlog or number of subscriptions?
Because if you were to just look at the P and L statement even giving credit for the 2 one time items, it looks like business was roughly flattish. And I have a follow-up question. Thank you.
Yes, sure. No, I think there's 2 dynamics, Kash, that you want to look at and you were touching on 2 of them, but just make sure we look at the math and sync from that standpoint. The first dynamic is that clearly we took $30,000,000 to the balance sheet that would have been upfront license revenue. And just to be clear and to make a point of it, those enterprise deals, the bookings were closer to $70,000,000 The upfront license portion of it was closer to $30,000,000 that we pushed to the balance sheet. So that normalization alone obviously puts us into positive territory in terms of growth at plus 2%.
The second point the second normalization that you touched on that we press released last year in Q4 is we pulled in $24,000,000 from that standpoint in terms of the dynamics for the simplified upgrade pricing last Q4. And so if you look at that and you do the second normalization, you're looking at something that starts to approach into the 6% growth rate there. So again, that's 2 simple normalizations that we've tried to be very discreet on. So I think the thing I would look at it slightly different cash. Actually, I'm glad to see the growth reigniting.
You can see it on billings too when you make the same normalization. By the way, for the $24,000,000 last year, that's a revenue normalization. If you do the billings normalization, it's $34,000,000 and so the growth in year on year billings is also starting to reignite, which I think is a good dynamic. And just to put a finer point on this at the very end, as we leave this year, what's interesting and we look forward to next year, our plan for year 1 of our 4 year plan is slightly better than what we shared with you at IR Day back in October. So to Carl's point, the macro is slightly better.
We're seeing the growth start to reignite. And so I just want to make sure you can see that perspective. Karl,
any color?
Yes, absolutely. And the final thing is with respect to the billings growth rate, I think 6% to 8% for this year and you got the longer term CAGR of 12%. It implies a pretty significant catch up in the latter years of 16%, 17 percent. So in light of that, how are we to judge your progress against these benchmarks? Should we take your 150,000 subscriptions or so that we're targeting, multiply it by annual recurring revenue type equivalent.
What is the right way to do those calculations to monitor this market? Thank you.
But what I would do is, I would certainly look at the classic things like that we provide to you, but including deferred revenue and things of that nature. But certainly, we try to be very prominent on the subscription target for the year is a good way to start looking at it. And the fact that we also are offering billings. So if you think about the twelvetwentyfifty, we're giving you an annual target for the 12 and we're giving you an annual target for the 50. And the 12 is a good although it will be choppy by quarter is that billings guidepost that we gave you will be a good indicator to track progress throughout the year and it will grow in momentum throughout the year and throughout the multiple years.
And as we've talked about on the 20% number, we think a reasonably good proxy for that is what's going on with subscriptions. And we detailed in October the increase in value per user from subscription. So you should be able to see progress on all three of the metrics we laid out for you in addition to all of the conventional ones. Exactly.
Our next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Carl, I'd like to ask you about how you're thinking about the business this year in terms of the new seat volume or up front business through at least the Q3 of last year based on the last available filings you had a cumulative 27% decline of new seat volume in the 1st 3 quarters of fiscal 2014 as you reported it, which ought to set you up in principle for some very easy new seat comps this year as early as this quarter. So how are you thinking about that growth in that new seat metric as you've traditionally talked about it? Secondly, also as recently as the Q3, your subscriptions revenue not counting traditional maintenance was only about $10,000,000 If we just extract traditional maintenance from the total subs number that leaves only about $10,000,000 Would it be fair to say that by the end of this year given the kind of billings guidance you've given and the kind of backlog you've been adding that that number should be a multiple by the end of the year. In other words several times $10,000,000 a quarter in new forms of subscription revenue.
Okay. You want to take the first you take the second part, I'll take the first part.
Sure. Yes, absolutely. I think I would say a couple of things here. One is that when you start to think about the non subscription maintenance part of subscription, you will see that grow significantly. I think you're all over it.
And part of that for is the fact that this is going into deferred revenue. We have billings that are happening that are going to start coming off the deferred revenue into the P and L from a revenue standpoint over time. So that number when Carl says we've had the all time record quarter for BIM 360 and we're getting $1,000,000 deals and that type of thing and we had PLM with a 700,000 dollars deal and things are starting to grow and multiply. This thing is going to build and you're going to see both the billings grow and then over time you're going
to see the revenue grow. So yes, you should expect that to grow. Yes. And Jay, I hate to be the bearer of bad news for you, but when it comes to new seats, I think the new seats calculations are going to be a little bit more tricky going forward because of some of the offerings. We have more offerings in enterprise licensing and more flexible licensing, which doesn't break down into individual seats anymore.
And so when a company moves from standalone licenses that we would have counted as new seats into ones where they're enterprise, we don't break those down necessarily. We'll try to figure out a way to give you more color. Also, many of the new offerings, PLM 360, BIM 360, don't break out individual users either. We'll try to do something about trying to size that for you. But comparing some of this to the previous way of doing business is not going to be as accurate as you might like it to be or we'd like it to be.
The other thing is in some of the old models, if a user bought 2 products, they were each counted as a new user or a new seat. With subscriptions when they add them and particularly any of the termed offerings, that they will not get counted as new. So there are a number of things that are going to make that artificially depressed in spite of business being good. And we'll work to try to bring some color to that during the year so that you can understand that because it is somewhat different than the way we've operated for a long time.
Our next question comes from the line of Brendan Barnicle with Pacific Crest.
Hey, guys. This is Owen filling in for Brendan. Wondering if you guys are seeing any new use cases from the shift to cloud? And second, I was wondering how pricing is holding up? Thanks.
Yes. So I think there are places like some of the things we've called out already. Many of the 360 products are the places where we're seeing new and somewhat unimagined uses. PLM 360 particularly, it's a lot of customers who haven't been Autodesk customers before. It's reaching to a part of the organization that was not one that we traditionally sold to.
And they're trying to solve different problems. PLM360, for the most part is not about your classic engineering problems. What does this product do and how does it perform? It's really around the processes of managing how you get that product to market and service it and maintain it. So that's one place.
Same thing with like BIM 360 and the BIM 360, what we're seeing is people who their organization and certainly their product may have been Autodesk users, but they probably were not. It's people like I said, it's construction people out in the field, it's subcontractors, it's specialty contractors back in the shop who haven't usually been customers. They may have been recipients of paper blueprints in the past and now they're interacting online. And so you're bringing all those people that have always been part of the commercial ecosystem, but you're now bringing it into the digital ecosystem. And then with some of the products like Fusion 360, we're reaching a new class of designers.
It's people who are working on different kinds of products than you might see with a more traditional mechanical product like Inventor. And so we're really happy. We think the combination of cloud and mobile devices and this built in collaboration is really set up to reach new customers. We think it will help many of the traditional ones, but we've been pleased with how many new people we're reaching.
Thanks. That's helpful. And then secondly, I was on pricing. How is that holding up?
It's stable. Yes. Stable and the relative pricing between point products and suites is maintaining the same differential.
Great. Thanks guys.
You bet.
Our next question comes from the line of Keith Weiss with Morgan Stanley.
Excellent. Thank you guys and thank you for taking
the question. I was wondering if
you could give us some of the initial feedback that you've gotten from your customers and maybe from the channel to the elimination of upgrade pricing at the end of this fiscal year? What kind of responses have you gotten back? Because basically you guys have started socializing that a little bit more
with the customer base. Yes. So as you would imagine, our channel is enthusiastic about it. They think it's a big spur to their business in the coming year. And I think it not only drives business, but it reignites conversations that channel partners already should have been having with customers.
In some ways, it's been very quiet on the customer front. One part of it is many of these customers are not the ones that are closest to us. They're not on any negative feedback from the customers. I'm sure as we get closer to a year from now, we will hear some moaning and groaning. But for the most part, very well received by the channel partners, enthusiastically received.
And most customers understand the change.
Got it. And maybe if I could sneak in a follow-up as well. When we've seen channel heavy businesses move more to this attrition model, and this isn't an Arvadegh's comment, it's sort of across the board. Channel partners who are used to selling a box or selling a box of software typically tend to be a little bit reluctant to move to a more of a subscription model selling the subscription. How well has your channel or how receptive has your channel been to the subscription products?
How difficult has it been to get them on board with some of these new offerings?
Well, so let's just take a little trip back through the history machine. The first one was our maintenance subscriptions. Like I talked about in those remarks, 10 years ago when we first started this, our channel was incredibly reluctant to go into that. I think it's some of the reasons you pointed out. There was a fear.
At that point, we didn't have a direct relationship. We didn't have contact info. There was a worry about us circumventing them and going direct to customers. Now you look and it's nearly half of our revenue. It is the foundation for most of our partners' business.
And so they've come to appreciate it. Having said that though, every time we introduce something new, there's an amount of reluctance out there. Where I see it most strongly is not on things like the cloud based services. The place and this is very legitimately an issue for our existing resellers is they see it on things like the desktop subscriptions because if a user chooses to go from the old model to the new model, it affects their cash flow in the short run. And as we've always said, many of our channel partners are much more sensitive to short term cash flow than any other financial metrics.
So that's an understandable one we're working through. When I read a bunch of reports and people said our channel partners weren't doing much with the desktop subscriptions, that doesn't surprise me. That's not the place where the first take up is going to come and that's not where we've seen it. But as long as the transition goes smoothly and gradually, our partners can work into this new model and still have very healthy profitable businesses with good cash flow.
Absolutely. Excellent guys. Thank you for the color there.
Sure, Keith.
Our next question comes from the line of Phil Winslow with Credit Suisse.
Hi. Thanks, guys. Of my questions have been answered, but just have a question on operating margins. Obviously, you gave the guidance for this next quarter and the full year. If you could give us a sense of the sort of the progression of margin over the course of the year?
And then as far as investments in this year sales and marketing versus R and D, how do you sort of see those being allocated? And what are the key initiatives you're focused on?
Well, just a couple
of quick things, Phil. One is that we don't classically break that out and guide that throughout the year in terms of the spend breakup, where we give targets in session number 1. I will call out though that when you look at Q1, one of the things that we kind of touched on is, as we bring Del Cam on board, there's even deal costs that are involved. There's the stub period. There's the deferred revenue write down separate from normal seasonal expenses and separate from what Carl talked about, which is investing to really solidify our leadership in the cloud and doing the back office work we need to do to support a scalable business model transformation.
So I think the one thing that you can see is in Q1, there's more pressure than normal because of the transaction itself with Del Tam. But beyond that, we're investing to absolutely secure a win both in the platform and the business model
transformation. Yes. I would just add to that. Investments in our go to market particularly around new products. So bucketed is sales and marketing, but particularly think of being able to reach this new class of customers.
We've been investing there. There's a significant investment in cloud infrastructure just to build out and get a rationalized platform that we can use globally. And then the last part, I would just stress the Del Cam part. Del Cam was naturally diluted. When you add the stub period plus the deferred revenue write down, it becomes even more so.
And so it's just the arithmetic working against us there.
Yes. And even the deal cost. And the deal cost. Yes. So hopefully that helps a little bit, Phil.
Yes. I wonder if from just the acquisition, I wonder if you could give us any color on just the incremental just this cost that you're expecting to bring on from that?
Well, let me just say for the company, Del Cam will be dilutive about $0.10 $0.10 to $0.11 for the year. So that gives you a sense of the magnitude. It will be accretive in 2016. But we're that being said, we're obviously very excited about the strategic aspects of this, the enhanced footprint in manufacturing, which is obviously very strategic. And Carl, if you want to add anything on that, but I mean that we're very excited about Del Cam.
Yes. No, I think one of the things that maybe towards just taking short amount of time just to discuss. All of a sudden in manufacturing, the manufacturing part of manufacturing is getting interesting again. For a long time, many companies focused on product design and innovation on product design. And manufacturing was kind of a 6 Sigma exercise that was just about optimization and driving costs out.
Our customers are realizing that there's an importance and new technology and processes that are coming along goes by different names around the world. In the U. S, there's a lot of what you might hear and you might have heard the President talk about the other day, advanced manufacturing. It has to do with new ways of manufacturing and getting competitive advantage instead of just driving costs out. Del Cam is ideally positioned to help with that.
And so we've become interested over the last few years in making sure it's not only the ideation and the design and engineering we help with, but we help through PLM 360 with the management of the process and with CAM software to actually drive the machine tools on the factory floor. So all of that's important and I think there's a renewed interest globally in how companies can use their manufacturing techniques and processes to actually have an advantage.
Got it. That was great. Thanks guys.
You bet.
Our next question comes from the line of Steve Koenig with Wedbush Securities.
Hi, gentlemen. Thanks for taking my question. I'd love to see if we can get a little bit more help the revenue model for fiscal 2015. And in particular, probably just a few things that could be very helpful here. One would be any feel for where subscription will trend either as a mix of revenue or otherwise by the end of the year and or subscriber ASPs?
And then 2 other things related to the model transition. One would be any help on thinking about the contribution from license upgrades this year? Typically, the license upgrades when you guys used to report it ran on the average $120,000,000 in license upgrades per year. Are we looking at more like 2 $100,000,000 this year or $150,000,000 or just the usual $120,000,000 And then lastly, any
jump into this and maybe Carl can add some more. First of all, I'd say the contributions from the upgrades, we're not providing specificity on that. As Carl said, I think the channel is very enthusiastic about that as we are. I think you're going to get 4 bites of the apple. It will be most pronounced at the end of the year.
It will build, but each quarter it's going to be an opportunity and then it's going to build. And clearly, I think people in the market significance of this. So in terms of dollarization, Steve, I can't provide that specificity to you. But in terms of it's going to help us in each of the quarters with special help at the end of the year. And that's going to certainly what's interesting for us is not only the contribution to billing growth, but where the people go is basically into a choice of subscription.
So we think that it's a double win in terms of moving our model forward. In terms of your makeup of the model, the second thing you talked about, I'm actually excited to stand here before you and say that this last year we just booked 45% of our revenue as recurring. It's up from 41% the year prior. And after as Carl said, a 10 year journey and we're now at the beginning of a 4 year journey to take it to a completely different level. And as you know, we want to exit at 70% recurring.
You should expect that number to go up. And we're not providing specific guidance on that. But it's early days. It's at the beginning of the beginning. What we did is we stepped out and said, hey, let's give subscriptions because that's an important number for everybody to track progress.
And then billings, if you think of the twelvetwentyfifty mantra, billings is the 12. And we've guided that for the first time in the history of the company. And the 50 is a subscription, so we've guided that for the first time in the history of the company. And so those 2 should be good guidepost to give you a sense of where we're going and what we're doing. What we want to do Steve is we're not hesitant to provide more metrics as when we make sure that they're meaningful that it's not chatter and that there's some level of predictiveness in it.
So we're studying a number of different things, but we think these will certainly anchor. And by the way, we've tracked very carefully what other businesses have done. Obviously, ours is a little different than other very well and very well respected companies in terms of where they're at. But anyhow, that's what we're doing from a mix standpoint. Obviously, subscriptions are going to grow as we've called out.
And then in terms of the cloud, early days, desktop subscriptions early days as soon as they're we think that it's going to be useful and meaningful we're going to break out and you would expect that of us. So Carl, any other commentary on that?
No. I mean, I think you got it right. Cool.
Can I add one follow-up, which is
on the macro? Please do.
Yes.
Okay, great. Thanks. Yes, I'm wondering on the macro, can you guys give any color on the complexion in Europe, Middle Europe versus say France or U. K? And also I'm curious on Asia.
Japan clearly is helping there. China has been kind of a laggard on the PMIs and how is that impacting Asia? So kind of with any forward looking thoughts here especially would be helpful.
Yes. So what I would say is Europe in general has been strong and we see momentum building in Europe. Central Europe is strong, Northern Europe strong, The UK is doing well. I still see weakness particularly in Spain, France, Italy, Greece. They like I said, they haven't returned to levels before.
I don't see the momentum there. But I think business that really is a new level for business there. And I don't see that changing. When you get to Asia Pacific, we've seen strength. Japan has been particularly strong.
Korea continues to do well. The data out of China that we see doesn't always The data out of China that we see doesn't always reflect what we see from our business. I think there are a number of reasons why you could speculate on why we don't see a perfect correlation. What we're seeing is a strong China, not overly I don't think it's overheated. I don't think it's at that kind of torrid paces before, but it doesn't seem to be weakening either.
And in a place like Russia, Russia seems to be doing well. Yes, the other place where we saw a fair amount of business during the last two quarters, but particularly in Q4 was in the Middle East. We certainly saw some real strength there, particularly in terms of some of the AEC projects that are being built and some really large infrastructure projects that are being started. So there seems to be a level of investment. And while many of these projects have been on the books for a while, they seem to be moving forward now.
And so and that generally comes from their government sense of renewed confidence. Yes.
I just I totally agree, Karl. And even at India, I mean, straight up India is just starting at small, but even that's starting to stabilize and start to grow again, small plant. Yes.
Great. Awesome. It's good news. Thanks guys.
Okay. Thanks.
Our next question comes from the line of Ross MacMillan with Jefferies.
Thanks a lot. You may have already answered this Carl, but I wanted just to go back on the subscriber number. Is that a blend of maintenance payers, 360 customers, rental customers? Is it a blend of all of those? That's the first question.
And then second, when you think about the 360 offerings, could you force rank which are doing the best and which are maybe not doing so well? I'd be curious to get a sense for the mix.
Yes. So the answer to your first question is yes. That is a blend. And during the year, we'll start figuring out which things to break out for you as it makes sense. But the number we gave you was as a whole.
And the reason why we want to break it out, one is just to provide more clarity for you. But also as we start talking about whether it's ASPs or ARPU or whatever kind of average, as you get these different kinds of subscriptions, there's going to be very different math associated with each of them. And it will be important to be able to give you more than just one average number for it. Your second question was about 360s. Which is my favorite child.
This is Sophie's choice. Let's see. I mean, I think if you just look at the numbers, BIM 360 has to be the one that's leading the pack. It had by far the strongest quarter. Mean going into the Q4, it wasn't as obvious.
I mean we just had a breakaway quarter. We know that will even come down in Q1 just because of the seasonality of the business. But BIM 360 is actually doing well. I've been very pleased with our progress on all the 3 60 products. One of the things to know is when you introduce new products is and particularly doing it through new channels with new business models, you have to find the right mix in terms of what's the right way to go to market, what's the right pricing, what's the right packaging.
And I think we've been relatively successful in a short time in figuring that out. And it hasn't been without stumbles. As a matter of fact, the one that I just highlighted BIM 360 is our best. In Q2, I would have ranked it down near the bottom. We were having a number of troubles post acquisition kind of integrating it and moving the business model forward.
We kind of tripped upon ourselves and it was through hard work of a lot of people. We got it right back on track and it rebounded from early in the year to being really spectacular at the end of the year. So I don't think any of these new businesses are without their challenges, but I'm really pleased with how we're doing M360 businesses.
That's really helpful. And then maybe just one quick one for Mark. On the net subscription billings calculation, should we just basically look at the proxy being revenue plus change in deferred plus change in product backlog? Is that effectively going to get us to the same number as you're looking at?
I think you're on the right track. Yes. Yes. That's the right track.
The rest is left to a reader, isn't it?
You got it there.
Appreciate it. Thanks so much. Congrats.
Thanks guys.
Our next question comes from the line of Matt Williams with Evercore.
Hi guys. Thanks for taking the question. Most of mine have been answered at this point. But I was just wondering on the rentals, I think you called out that some of the adoption there had been in the M and E business, which would seem to make some sense. But any more color you could provide on sort of what areas or what segments are starting really go down the path there and sort of which ones are looking at that option?
Sure.
Let me start and maybe Carl can add if he likes. So as you called out, there's areas where people are more project based and very small business, small medium business project based people that are trying to enter but may not have the upfront cash flow. M and E is an ideal target as we talked about it and it absolutely is getting some nice traction actually. We're getting a lot of good feedback there. That would be one data point, but that's not we're getting it in other products as well.
I just that's one I would call out explicitly. And the second thing is that one of the fact patterns is that they're going for the annual and that's the primary vehicle of choice. And so that also is happening. And I would just say maybe the last bit of color is that we talked about how we're doing up to the call in this quarter because we don't give beyond that period. That ramp continues to look really nice.
And so those are a couple of bits of data, Matt, that I'd like to share.
Yes. The only thing I'd say is if you just want to look at the general trends, I would say among size of business, you'll go from small to big. This is going to be much more common, small business or very small business, much less common with big companies. They have other flexible licensing mechanisms to accomplish the peak demand loading that this accomplishes. And I think if you look by industry, I think M and E is first, I think AEC is second and I think manufacturing is 3rd.
And that just reflects the project based nature of the work within each of those respective industries.
Great. That's helpful. I'll leave it there. Thanks guys. Thanks, Matt.
And our last question comes from the line of Jay Vleeschhouwer with Griffin Securities. Thanks. Just a couple of follow ups. First, Carl, in honor of the 20th anniversary of LT this year, do you think you'll be offering rentals of LT for the first time? Those weren't talked about in the initial rentals batch back in September.
Secondly, if in the long run you go to mostly an agency model in lieu of the current VAR model, what would be the margin implications for you and for your channel in light of your earlier comments about their concerns over cash flow and margin?
Yes. So first thing is, Jay, around LT. Yes, I think you can expect to see us doing guest top subscriptions for LTE. We already ran a pilot project in France with really good results from it, kind of some of the same things that Mark highlighted about the rest of the program. We actually saw it earlier on with LT, and we want to continue to expand that, and that's going well.
Your earlier question is a little hypothetical at this point. We'll move through this. There may be some changes to both margin structure and there may be some changes to the contractual relationship. Particularly, the place I would look for it more is on the cloud based services. I think that's it.
I think it's less likely to see dramatic changes on the existing products. But certainly, we have been looking and studying and working closely with our partners around the cloud based services and the best way for them to bring them to market to aid what we for now have primarily been doing by ourselves through a direct sales force.
Okay.
Thanks very much.
You're welcome, Jay.
Thanks, Jay. Yes.
Operator?
Seem to be no further questions.
Great. Thanks, operator. That concludes our call this afternoon. We will be at the Morgan Stanley conference this coming Monday. If you'd like to reach me at Investor Relations, you can reach me at 415-507-6033.
Thanks.
Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may all disconnect.