Good day, ladies and gentlemen and welcome to third quarter fiscal 2015 Autodesk earnings conference call. [Operator instructions.] I would now like to turn the call over to David Gennarelli, 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 third quarter. Also on the line is Carl Bass, our chief executive officer, and Scott Herren, our CFO. Today’s conference call is being broadcast live via webcast. In addition, a replay of the call will be available at autodesk.com/investor. As noted in our press release, we have published our prepared remarks on our website in advance of this call. Those remarks are intended to serve in place of extended formal comments, and we will not repeat them on this call. During the course of this conference call, we will make forward-looking statements regarding future events and the anticipated future performance of the company, such as our guidance for the fourth quarter 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, our market 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-K for the fiscal year 2014, our Form 10-Q for the periods ended April 30 and July 31, 2014, and current reports on Form 8-K, including the form 8-K filed with today’s press release and prepared remarks. Those documents contain and identify important risks and other factors that may cause our actual results to differ from those contained in 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 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 or growth changes as we discuss our financial performance, and unless otherwise noted, each such reference represents a year-on-year comparison. And now, I would like to turn the call over to Carl.

Thanks, Dave, and good afternoon everyone. Much like last quarter, our third 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 Delcam subscriptions that were not previously captured. As a result, the third revenue increased significantly to a record $1 billion, 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 million. These large deals were spread across all the major geographies, and fairly even spread between [AEC] 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 enterprise sales and consulting services have 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. Third quarter license revenue would have been approximately $26 million higher before the impact of flexible enterprise license agreements. The environments for global construction, coupled with the continued customer excitement for our desktop and cloud-based BIM tools resulted in a strong Q3 for our AEC business. Anchored by [unintelligible], our BIM portfolio continues to resonate with customers across segments, but especially in construction. We closed several large…

[Operator instructions.] The first question comes from Brent Thill with UBS.

Carl, the last couple of quarters on the billings you’ve obviously done really well, mid-20% growth, yet the fiscal guide at 15% to 17% would just imply a stronger falloff in the next quarter. What’s your sense in terms of is that just a conservative view on your behalf for the fourth quarter? And I’m just curious if that eight-figure deal, how that is going to be recognized.

Yes, the eight-figure deal is a ratable deal, and so it will be taken over a longer period of time. The one thing we said about the changing model during this year is that 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 fourth quarter, 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 two together, that’s where we ended up as our guidance.

The next question comes from Keith Weiss with Morgan Stanley.

It 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’s going to be probably the biggest bear case out there of how do we know that we’re not pulling forward potential demand out of FY16 with this strength this year? How do you guys get comfortable with that you’re going to be sort of able to sustain the pace of maybe like billings growth, if you will, as we go through further into this business model transition?

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 were 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 nonsubscriber 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, mount it, 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, you know, this is the only incentive program that will work with our customers. And I don’t really think that’s true.

If I could potentially sneak one last one in, just in terms of the mix of the subscriptions that we are seeing, is it remaining relatively constant with the 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 subscription, because that’s the one being promoted. And the others are off small bases, so we like the trajectory of the other ones, but in terms of meaningful financial contribution, it’s maintenance. And while we’ve said it may slow down going into the fourth quarter, I think the proportion will remain somewhat constant.

The next question comes from Walter Pritchard with Citigroup.

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 third quarter, you had about $26 million that was a headwind, and then it sounds like last year you had some impact, and I’m wondering if you can help us understand how you expect that business to ramp in the fourth quarter, and then do we expect to see a more significant uptick in that revenue stream as you go into fiscal 2016?

Why don’t we start at the back end of that 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 it a little bit at investor day, where we showed you not only our customers paying more, they’re using more. This has been 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’ve 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 had 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 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 two 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 thousand accounts.

And then just a question for Scott. Welcome aboard. It may be too early to ask you this quarter, and you don’t have all the history, but I look at your rates of revenue guide 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 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?

It’s both. We are investing in cloud infrastructure, buildout for the business model. We’re investing in the back office system so that we can handle the higher volume of transactions. Delcam is in there, which is hitting the op margin year on year, and I think 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 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 in the next year.

The next question comes from Brendan Barnicle with Pacific Crest Securities.

Scott, just following up on Walter’s question, can we assume that margins have bottomed here, 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 go lower still?

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 perpetuals essentially going away, is there a point next year that we may have a quarter where that license line just is at zero, and so we should be kind of preparing the models for that?

I’ll start, and then I’ll hand back off to Carl 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.

Yeah, and the only thing I’d add, you know, I tried to give you guys a little bit more color when a number of you were here during investor day. 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. I think in some ways it would just be unusual operationally to drive to a place where we get to zero license revenue in a quarter, but directionally, I think you clearly understand where we’re headed.

As you have more of these eight-figure deals, like that large one that you mentioned that you’ll be recognizing over time, does it make sense at some point to share an off balance sheet bookings type number?

Welcome, Scott. [laughter]

Yeah, thanks for that. You know, Brendan, 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 a metric. It is something that we’ll talk about if it makes sense, besides guiding to a growth rate, just to start to guide to an absolute number and then report on that.

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.

Oh, I’m sorry, you’re talking about the enterprise agreements specifically?

Right. As you do more of 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 Microsoft’s contract on build?

I don’t actually have a plan. I would say 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 continue to be more explicit on that or not.

If it turns out that somehow it’s so opaque that you’re having trouble understanding it, then we’ll provide some clues to how to do that. I hope it becomes a problem. [laughs]

The next question comes from Heather Bellini with Goldman Sachs.

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 add in fiscal 2015. And I guess I’m just wondering, would you still say that’s possible given your significant outperformance and your new sub-guidance for this year? And then I just had a follow up.

I know what you’re trying to do. You’re trying to trick me into giving guidance for next year. [laughter]

[laughs] 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 three 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 three 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 could share with us, are you seeing some of those initiatives start to pay off, and as a result, how have your renewal rates been trending? Because I know that’s big for Q4.

Yeah, 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 it’s just more attention to detail, if you will, about the nonrenewals. And so we’ve done a better job, we’ve put more systems in place, to track that. We’ve been [unintelligible] our partners and ourselves to do it. It’s edging up on small numbers, because [we’re at] a relatively high number, but it’s still a good direction and material.

The next question comes from Gregg Moskowitz with Cowen & Company.

First question is for Carl. Just wondering if you saw any changes in the 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.

Scott, wanted to ask where we are right now when it comes to the investments that you alluded to in back office systems and cloud infrastructure. When we look out over the next 12 to 18 months, how much of this lies ahead versus kind of what you guys have done already?

It’s day 14 for me today, so what I’d say on that front 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 for the world that we envision around desktop subscriptions as well as building out the back office systems to handle the significantly higher volume of transactions. So it’s still early innings on those investments.

The next question comes from Saket Kalia from Barclays.

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?

As we’ve talked about, we always have the rolling hedge. We continue to have that. But FX will definitely be a headwind next year. [Or maybe it] moves the other way. 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.

Yeah, 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 you can look at our revenue mix, you can see where we are. Obviously the euro is a significant currency for us. The yen’s a significant currency for us. And it’s something that we’ll take into account when we do provide guidance for fiscal 2016.

And then Carl, I think you said last quarter that the third quarter was a little bit slower in terms of subscribers coming from maintenance renewals compared to the fourth quarter. Is that still the case?

If I said that, maybe I misspoke. I thought it was the other way. Generally speaking, what I thought is you’d 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 you know, that was really our best guestimate, as I said, on those two factors of the time-based nature of expiring, yet the financial incentives were going to zero.

The next question comes from Sterling Auty from JPMorgan.

On the enterprise 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 renewal?

I’m not sure if I can give you the average, but typical is a three-year agreement. So that’s a very typical agreement, is a three year.

And I think, Sterling, bear in mind these deals are largely ratable in terms of revenue. So they’ll drive a bit of lumpiness in the billing stream. It will be a little bit smoother on the revenue stream.

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?

If you take out the Delcam one, which is a one-time thing, but if you look at kind of the organic, it tracks pretty closely to the way you would have seen the seasonality around revenue historically. So a little bit heavier in the last month of the quarter, but not tremendously so.

And then last question, I know you’re not giving us when in the 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?

Yeah, we’re looking at a number of things. We are working the program with our customers. We’ve engaged them and are talking heavily with them. We’re working with our partners. 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.

The next question comes from Jay Vleeschhouwer with Griffin Securities.

Carl, I’d like to ask first about the famous 2.9 million 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, of the three 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 in spite of all the promotions and inducements you’ve had over the years for them to do so when they upgraded, and how do you now get them to convert? Then a follow up.

When you go to Best Buy, do you buy that service contract, Jay? You know, I think there are a lot of things that we do. I mean, if they ask me one more time at checkout if I want that service contract I’m going to shoot them. [laughter] I think it’s the same thing. Remember, we’ve talked about this as we’ve reintroduced these programs, many of our customers have been buying for decades. They have a certain buying behavior. We’ve talked about, depending on the product, they may feel like the maintenance subscription is more or less valuable. So the two biggest factors we see are the lower cost products generally have lower attach and renewal rates. And the other one is geographically, there’s wide variance between, generally speaking, developed countries and emerging economies. So those are the two biggest differences. You know, as we move forward, we hope to eliminate that choice by the combination of this year’s program and next year’s program, or over the next two-year program. We’re going to get to a place where customers are on a program with us.

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 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 licensing downmarket 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, let me break this into two questions, which somehow you managed to put it into one. And I’m still looking for the connection. But let me just separate it. It helps my feeble mind process it. On the ARPU conversation, we talked about value per account. Some people have asked us about ARPU. What we’ve said about ARPU, because of the “A” in there, 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 I think if you do it by account, it’s a way of normalizing that is not nearly as mix sensitive. So that’s what we’ve thought about there. Second 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 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. Again, we think this is a win for everyone involved, at least while 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.

The next question comes from Steve Ashley of Robert W. Baird.

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 here with this go-to-market, that would be great.

Yeah, you know, the unsaid thing that I scratch 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 buildout 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 onsite to do that, particularly in large, complex organizations. So it’s large, complex organizations that already have complicated business processes in hand, or ones like, for example, in some of the engineering construction firms, where they’re going through a transformation and 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 increasing 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 buildout of a much bigger and broader product portfolio. So if you were to roll this back five 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&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 been a 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 kind of the inside 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’s always this suspicion that they were buying things that were not being fully utilized, but now 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 an internal accounting about it and charge back to the cost center that’s using it. And 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, 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 license agreements. He asked about the duration. You said while you didn’t have it at your fingertips, a lot of the deals are three 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, there’s just the constant accounting, 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.

The next question comes from Matt Hedberg of RBC Capital Markets.

I wanted to ask about the geographies here. Obviously EMEA was your strongest geo. Carl, I’m wondering, was the strength 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?

Let me just use this to riff on a 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, we’ve always been very interested in the emerging economies, but 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 a weakening of the currency, and the currency is as big an effect right now as the actual business. Europe, the middle of this quarter, it seemed like there was a lot of consternation about Europe. I put it in not 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 seven 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 the desktop. So 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?

Yeah, so we’re just beginning. We said we were going to start with LT. You know, 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. 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 keep in mind 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, longwinded answer. The short answer is the LT one is fine, and you’ll see us continue to do this as we work our way through the entire portfolio.

Our next question comes from Richard Davis of Canaccord.

You bought, I was trying to remember, Moldflow, back in I think like ’08, Blue Ridge back in ’11, and I can’t remember if Delcam 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?

Two things there. One is we’ve always talked about the cloud being good for two reasons. One is for these computationally intensive tasks and the other really is the 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 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, you know, other companies 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.

The next question comes from Kash Rangan with Merrill Lynch.

Carl, when I look at your business model transition and follow along the commentary with 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 the Adobe-like desktop subs that you would like to pursue? And as it relates to that, when you look at fiscal ’18, if the company’s going to be in [unintelligible] licenses, which is terrific, how should we think about how you get to 30% non-GAAP [unintelligible], because the appeal of the license is going way. That seems like a steep [unintelligible].

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 the most sustainable thing is having good customers who want more products from 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’d say that is fundamentally changing it. The difference - and I say 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 three four 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 the software industry that’s changing. We’re 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 trying to understand things that may not look identical in year two or year two and a half 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 is the easiest way to see the similarities.

And on the implications for margins, certainly this is a thoughtful transition, but what I struggle with is as licenses fall off, the subscriptions, you have to cut a lot of cost to get to 30% non-GAAP margins versus the 13. Just wondering, what drives that?

Yeah, so the first thing is, I think if you looked over any period of time, I would say there are two 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 up front licenses. And so the lifetime value or the value over a fixed period in 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&D spend is relatively high right now. We’re supporting two 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 two, both of 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.

Carl, just quickly on the partner side of things, I’m just wondering if you could give us an update on partner interest around rentals and clouds. 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.

Yeah, so I’ve seen 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. So some partners have been greatly 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. We’ve talked about they are million dollar deals. For some partners, that’s a little bit much. Others are reacting really well. But I would say some of our newer offerings like BIM and PLM, you will see a higher proportion of new partners entering the mix and desktop subscription. The bulk of that work will be covered by our existing partners.

The next question comes from Steve Koenig from Wedbush.

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 a 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 million base of active but not really 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 wrong?

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 toward 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 licenses. For those who want to continue to buy this way, and as that’s removed, they will go buy perpetual licenses with maintenance to stay in that mode. So I think you’ll see a substantial portion of maintenance subscribers next year, but you’ll see an increasing number of desktop and cloud.

I am showing no further questions. I would now like to turn the call back over to the presenters for closing remarks.