Adobe Inc (ADBE) 2013 Q2 法說會逐字稿

Good afternoon.

My name is Jay, and I will be your conference operator today.

At this time, I would like to welcome everyone to Adobe's second-quarter fiscal-year 2013 earnings call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you.

I would now like to introduce Mr. Mike Saviage, Vice President of Investor Relations.

Please go ahead, sir.

Good afternoon, and thank you for joining us today.

Joining me on the call are Adobe's President and CEO, Shantanu Narayen, as well as Mark Garrett, Executive Vice President and CFO.

In the call today, we will discuss Adobe's second-quarter fiscal-year 2013 financial results.

By now, you should have a copy of our earnings press release, which crossed the wire approximately one hour ago.

We've also published earnings call prepared remarks and slides in a document containing our financial targets on Adobe.com.

If you would like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links.

Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue, subscription and operating model targets, and our forward-looking product plans, is based on information as of today, June 18, 2013, and contains forward-looking statements that involve risk and uncertainty.

Actual results may differ materially from those set forth in such statements.

For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today, as well as Adobe's SEC filings.

During this call, we will discuss GAAP and non-GAAP financial measures.

A reconciliation between the two is available in the financial targets document, and in our updated investor data sheet on our Investor Relations website.

Call participants are advised that the audio of this conference call is being broadcast live over the internet in Adobe Connect, and is also being recorded for playback purposes.

An archive of the call will be made available on Adobe's Investor Relations website for approximately 45 days, and is the property of Adobe.

The audio and archive may not be re-recorded, or otherwise reproduced or distributed, without prior written permission from Adobe.

I'll now turn the call over to Shantanu.

Thanks, Mike, and good afternoon.

I'm happy to report we delivered revenue of $1.011 billion in Q2, with non-GAAP earnings per share of $0.36.

Our Q2 results demonstrate continued execution and momentum across our Digital Media and Digital Marketing businesses.

In our Digital Media business, adoption of Creative Cloud continued to accelerate.

We exited Q2 with 700,000 paid subscriptions, which is an amazing achievement after just a year of availability.

Our subscription performance comes on the heals of the successful MAX Creativity Conference we held in May, where we announced the next major update of Creative Cloud.

Subscribers are already downloading the latest updates of their favorite applications, gaining access to new innovation, features and services we're delivering at a more rapid pace through our Creative Cloud platform.

Our new CC apps, rebranded to reflect their deep integration with Creative Cloud, include milestone releases of Photoshop InDesign, Illustrator, Premiere, After Effects, and our new family of Edge tools and services.

We demonstrated new Creative Cloud services at MAX, including desktop, web and mobile access, file sharing, integration with the Behance creative community, and new publishing capabilities.

This is just the beginning of what we will be providing to Creative Cloud subscribers, and our road map is packed with additional ongoing value we will deliver.

At MAX we announced that moving forward we will focus all of our innovation on Creative Cloud.

We believe success comes through reimagining the creative process, and delivering best-in-class creative capabilities to our customers.

Since we launched Creative Cloud, the overwhelming majority of customers buying on Adobe.com have selected Creative Cloud rather than CS6.

Customer satisfaction rates are high, and the top reasons customers cite for their love of Creative Cloud include having access to everything in the product portfolio; enabling them to try new tools and build new skills; always being up-to-date with latest features and capabilities; and the affordable monthly membership fee.

These benefits are compelling to our existing customer base, and are helping us achieve our goal of bringing in new customers.

Our decision to discontinue perpetual licensing of new versions of our desktop products has caused concern with some customers.

While we will still continue to offer CS6 on a perpetual basis, the feedback from our community is important, and we are evaluating additional options that will help them with the transition.

Our goal is to over-deliver on customer expectations, which we believe will make the entire community ultimately embrace Creative Cloud.

The majority of our paid Creative Cloud subscriptions are individual members.

With our announcements at MAX, our channel partners have begun to increase their efforts to market and license the team offering.

We are accelerating adoption of our enterprise Creative Cloud offering, and are cross-selling our Adobe Marketing Cloud solutions to these customers.

Our expertise in digital marketing is playing an important role in Creative Cloud success to date.

We are using our Adobe Marketing Cloud technology to manage and optimize the Creative Cloud customer acquisition process.

The insight we obtained with Adobe Analytics is helping inform Creative Cloud product development, marketing and sales.

With all of our efforts across the product teams, we remain on track to reach our goal of 1.25 million paid subscriptions by the end of this fiscal year.

Our Digital Publishing Suite business hit an important milestone last week, surpassing 100 million downloads of digital issues in 24 months.

The value of DPS has extended beyond the magazine industry to numerous corporate customers, including brands like Renault and Sotheby's International Realty.

DPS customers are best served when they use the latest Creative Cloud desktop capabilities, as well as Adobe Marketing Cloud solutions like Adobe Experience Manager.

Our Document Services business had another solid quarter.

In addition to continued Acrobat adoption, our Cloud-based services now have over 1 million paid subscribers.

We unveiled an update to our EchoSign eSigning offering with new features to enhance mobility and usability for eSigning contracts, agreements, and other critical business documents.

In Digital Marketing, we continue to be the leader in this exploding category, targeting chief marketing officers, chief revenue officers, advertising agency and publishing executives who are looking to accelerate their shift to digital.

Last Fall we announced the Adobe Marketing Cloud, and the consolidation of over 30 products into five key solutions.

The breadth of our solutions is unparalleled, and we continue to lead in categories like web analytics and content management.

Forrester selected Adobe as its only leader in their 2013 Web Content Management for Digital Customer Experience report, citing the progress we have made integrating our Adobe Experience Manager solution with our Analytics and Target solutions.

As we build out and integrate our Adobe Marketing Cloud solutions, we are driving more multi-solution deals.

During Q2 alone, brands that signed up for multiple solutions included Lowe's, Sony Computer Entertainment Europe, and Lenovo.

Following a successful US Digital Marketing Summit in March, we held sold-out Digital Marketing Summits in London and Tokyo.

Announcements included new predictive publishing capabilities with Adobe Social, and an expansion of our partnership with SapientNitro, offering customers additional capabilities and services built on Adobe Marketing Cloud.

In Q2 we achieved Adobe Marketing Cloud year-over-year bookings growth of greater than 25%, and we continue to ramp towards achieving $1 billion in annual revenue.

Our offering in this space is unique when compared to the competition.

No other company has long-standing relationships with marketers and an end-to-end value proposition like ours.

Marketers need help to accelerate their shift to digital; integrating Adobe Marketing Cloud with Creative Cloud will completely change the paradigm of how marketing gets done.

From creators to marketers, and from ad agencies to media companies, we provide a compelling competitive advantage that addresses the challenges they face.

In summary, we executed well against our agenda in Q2.

We achieved significant milestones in Creative Cloud subscriptions and our DPS solution, and continue to drive strong bookings in our Digital Marketing business.

We're well positioned as we move into the second half of fiscal 2013.

Now, I'll turn the call over to Mark for a discussion of Q2 financial results.

Thanks, Shantanu.

In the Second Quarter of Fiscal '13, Adobe achieved revenue of $1.011 billion, within our targeted range of $975 million to $1.025 billion.

GAAP diluted earnings per share in Q2 were $0.15.

Non-GAAP diluted earnings per share were $0.36.

Q2 financial highlights included exiting the quarter with approximately $440 million in Digital Media annualized recurring revenue, or ARR, up from $297 million exiting Q1.

We also exited the quarter with 35% of our Q2 revenue as recurring, up from 31% exiting Q1.

Ending Q2 deferred revenue was $691.3 million, and we drove nearly $300 million in cash flow from operations in Q2.

Looking at our business segment results, in our Digital Media segment we achieved revenue of $670 million.

This segment has two major components of revenue -- our Creative family of products and our Document Services products.

In our Creative business, we continued to accelerate adoption of Creative Cloud.

We exited Q2 with 700,000 paid Creative Cloud individual and team subscriptions, an increase of 221,000 in the quarter.

We saw increased adoption of our enterprise Creative Cloud offering through ETLAs.

Combined, this helped drive Creative ARR to a total of $356 million exiting Q2, an increase of $123 million versus Q1's exit of $233 million, and above our Q2 Creative ARR target of $340 million.

Our strategy is to accelerate subscription adoption.

We continue to use a variety of targeted promotions to drive awareness, consideration and adoption of Creative Cloud, which may affect ARPU levels in the short term, but we believe will be accretive to ARR in the long term.

As of the end of Q2, 93% of Creative Cloud subscribers are on an annual plan versus month to month, and 81% of subscribers are licensed to the full Creative Cloud versus point product subscriptions.

Adobe.com remains the preferred way for our customers to engage with us when subscribing.

In Document Services, we achieved revenue of $199.3 million in Q2.

Our success in this category is being driven by continued adoption of Acrobat, Acrobat cloud services, and our EchoSign eSigning contract solution.

Document Services ARR grew from $64 million exiting Q1, to $84 million exiting Q2, driven by the efforts of our sales team to engage Acrobat customers with ETLAs.

In our Digital Marketing segment, there are two components.

The first is revenue from our Adobe Marketing Cloud offering, and in Q2 we achieved Adobe Marketing Cloud revenue of $229.6 million, representing year-over-year growth of 17%.

We continue to see tremendous growth with our Adobe Experience Manager solution as customers re-platform their web infrastructure.

We now offer a new managed services solution for Adobe Experience Manager that we host, making it easier for customer adoption.

It has the additional benefit of allowing us to easily upsell to other Adobe Marketing Cloud solutions.

This new managed solution is a term-based offering resulting in increased recurring revenue.

Had customers selected the perpetual offering instead as forecasted, year-over-year Marketing Cloud revenue growth would have been greater than 20%.

We expect this adoption trend with Adobe Experience Manager to continue.

Mobile device use continues to be a driver in our Digital Marketing business.

Mobile transactions increased to 26%, up from 25% last quarter.

Our focus on five solutions in Digital Marketing with streamlined pricing is resonating with customers, and increasing our ability to create larger engagements with them.

The second component of our Digital Marketing segment is revenue from the LiveCycle and Connect businesses.

LiveCycle and Connect contributed $55.8 million in Q2 revenue, which was consistent with our expectations.

Print and publishing was essentially flat quarter over quarter, as expected.

Geographically, we experienced stable demand across our major geographies.

From a currency perspective, quarter-over-quarter FX rate changes had a $14.1 million negative impact on reported revenue.

Hedging gains contributed $15.3 million to revenue in Q2 FY '13 versus $7.1 million in Q1 FY '13, thus the net sequential quarterly currency decrease to revenue considering hedging gains was $5.9 million.

Year over year, FX rate changes had a $20.8 million negative impact on reported revenue.

Comparing the $15.3 million in Q2 FY '13 hedging gains to the $10.7 million of hedging gains in Q2 FY '12, the net year-over-year currency decrease to revenue considering hedging gains was $16.2 million.

In Q2, Adobe's effective tax rate was 16% on a GAAP basis, and 21% on a non-GAAP basis.

The GAAP rate was lower than targeted due to stronger than forecasted international profits.

Employees at the end of Q2 totaled 11,413 versus 11,196 at the end of last quarter.

Our trade DSO was 42 days, which compares to 43 days in the year-ago quarter, and 44 days last quarter.

Ending deferred revenue in Q2 was $691.3 million, which was a slight decrease from the end of Q1.

Deferred revenue in Digital Media increased when compared to Q1, driven mainly by ETLA adoption.

Digital Marketing deferred revenue decreased solely due to the Q2 calendar close occurring on May 31, as opposed to June 1, impacting the timing of Q2 Digital Marketing billings.

Had Q2 closed on June 1, total deferred revenue would have increased quarter over quarter.

During the quarter, cash flow from operations was $299.1 million.

Our ending cash and short-term investment position was $3.87 billion compared to $3.66 billion at the end of Q1.

In Q2 we repurchased approximately 3.9 million shares at a total cost of $172 million.

Now I will discuss our targets for Q3.

For the third quarter of fiscal 2013, we are targeting a revenue range of $975 million to $1.025 billion.

In Digital Media, we expect to add more Creative Cloud paid subscriptions and digital Media ARR than what was achieved in Q2.

Assuming the midpoint of our targeted Q3 revenue range, we expect Digital Media reported revenue to be down sequentially due to continued adoption of Creative Cloud subscription and ETLAs.

In our Digital Marketing segment, we continue to target Adobe Marketing Cloud year-over-year reported revenue growth of approximately 20%.

We expect LiveCycle and Connect revenue to be relatively flat quarter over quarter, and we expect Print and Publishing to decline.

We are targeting our Q3 share count to be 511 million to 513 million shares.

We are targeting net non-operating expense to be between $17 million and $19 million on both a GAAP and non-GAAP basis.

We are targeting a Q3 GAAP tax rate of 22.5%, and a non-GAAP tax rate of 21%.

These targets yield a Q3 GAAP earnings per share range of $0.10 to $0.16 per share, and a Q3 non-GAAP earnings per share range of $0.29 to $0.35.

We remain comfortable with all of our annual targets we reaffirmed in May at MAX, including our Creative Cloud subscription target of 1.25 million exiting the year, which we expect will be driven by accelerating sequential increases in subscriptions in Q3 and Q4.

I'd now like to turn the call back over to Mike.

Thanks, Mark.

For those who wish to listen to a playback of today's conference call, a web-based Adobe Connect archive of the call will be available from the IR page on Adobe.com later today.

Alternatively, you can listen to a phone replay by calling 855-859-2056.

Use conference ID number 86736888.

Again, the number is 855-859-2056, with ID number 86736888.

International callers should dial 404-537-3406.

The phone playback service will be available beginning at 4 PM Pacific time today, and ending at 4 PM Pacific time on Friday, June 21, 2013.

Operator?

(Operator Instructions)

Brad Zelnick, with Macquarie.

Shantanu, in your prepared remarks you talked about evaluating options to accommodate customers that are resisting the move to Creative Cloud.

What types of solutions are you considering?

And does this in any way impact your confidence in achieving your sub-goals for the full year?

So Brad, fundamentally when we see the results that we've had, it's clear to us that our strategy is spot on, and actually our execution has been pretty outstanding.

As you realize with any major change like this, we're looking for tweaks that would lead to a better customer and business outcome.

We don't have any that we've identified today but we're pretty confident of all of the results and the metrics that we've identified at the beginning of the year.

So we continue to be very positive about the opportunity.

And if I could just ask one of Mark.

Mark, on Creative Cloud ARPU you mentioned promotional pricing would pressure ARPU in the short-term, but drive value longer term.

What was ARPU in the quarter and where do you see it going?

So we gave you guys an ARPU number, Brad, back in Q3.

It's been kind of in that ballpark, frankly, ever since we gave you that number.

We are very focused, as Shantanu said, on driving subscribers.

And we've said, I think consistently, that ARPU is going to move around a bit as we have things like promotion and mix change, depending on what products people buy.

But in the end, we're driving ARR and any of these moves we make, we expect would be accretive to ARR.

It's fair to say it's around 37.

Is there any lower limit that you would manage to?

Or you're just looking to maximize ARR?

Right now we're just looking to maximize ARR.

But it's been in that ballpark like I said, since the beginning.

Thank you very much.

Nice job, guys.

Thank you.

Peter Goldmacher, Cowen.

I just wanted to try and understand the discrepancy between the reported numbers for Marketing Cloud and the bookings number.

We have about 17% growth for Marketing Cloud and the bookings number is about 25%.

Are you guys able to invoice for longer durations now?

Is that what's primarily driving the growth?

And if there is a change in invoice duration, if we normalize for that invoice duration what would that growth rate be?

So, Peter, specifically what is happening in one of our solutions, which is the Adobe Web Experience Manager solution, is that we have a new offering that we're now providing, which is managed services offering.

So think about it as people are actually now out-sourcing their web infrastructure to us, and the duration of this, rather than being an up-front license is actually a term-based offering.

The benefits to us are quite significant for this, Peter.

We now are hosting the infrastructure for a number of the best brands in the world.

Our ability to upsell them to other solutions has never been higher, namely the Adobe Target solution or the Adobe Social solution.

But the way we invoice this right now, rather than it be up-front, it's over a multi-year period and it is a term period.

And so I think Mark also alluded in his prepared remarks too, if we had recognized all of those bookings that we had got in the quarter, yes, the revenue, reported revenue, would have been greater than 20%.

So that business continues to perform exceedingly well.

And actually, I think it's a healthier state of the business long term, for our long term shareholders.

Thanks, Shantanu.

When we get to the point where we're anniversarying normalized contracts for that business and your other subscription businesses, what would that normalized growth rate be?

Would it be closer high teens, lower 20%s?

Well I think, Peter, it's Mark.

I think we would still be in the 20% ballpark.

That's what we would target.

Okay.

Great, thanks guys, that was my question.

Sure.

Walter Pritchard, Citigroup.

Mark, I'm wondering if you can talk a bit about the trajectory of subscriber adds during the quarter.

Because you launched, you talked about at MAX, and made some changes and so forth, and made clearly subscription the direction of the future at that event.

I'm wondering if you can talk about the trajectory in March and April versus what you saw in May after that news.

I think, Walter, why don't I take that first, and then Mark can certainly add on.

We continue to see a good linearity of subscribers, actually, during the quarter.

I would say after the MAX announcement, when we announced some of our new offerings, the team offerings saw increased momentum.

And I would attribute that to the fact that all of our channel partners are now up to speed, they're trained on the team offering.

And so we certainly saw a strong end-of-quarter surge in the team stuff.

But for the individual subscribers, I would say it's been a good linear progression of the number of subscribers we have.

And then, Shantanu, a follow-up on that.

(multiple speakers)

Oh, sorry, go ahead Mark.

I was just going to say as we pointed out, the ramp just accelerates as you go through the back half of this year.

So we would expect more subscribers in Q3 and then yet more again in Q4.

And I guess the follow-up was actually on that.

So is that primarily a function of the channel just ramping up on their training and comfort with the product?

Or are there other factors as you look at the run rate coming out of the month of May, that give you comfort in the ramp up?

It's a few things.

It's a few things, Walter, right?

It's the launch we just had.

It's the viral nature of the offering.

It's the team offering as well.

I think it's a combination of all of those.

And I would say, Walter, it's also the continued growth in the number of people who are coming in for the free memberships, which also continues to increase.

Mark's given you insight into certainly the ARR, and the number of subscribers that we see on a quarterly basis.

And on an annual basis we'll update the other key metrics that we measure in this business, which are all positive.

Namely things like new customer acquisition units and install base.

So all signs point towards a healthy second half.

And then, Mark, just a quick one on the guidance.

It does suggest that keeping the guidance at the year number of $4.1 billion, that your Q4 will be down sequentially, which doesn't occur that often.

I'm wondering if that's really what you're implying, or if you're just simply not updating the guidance at this point in time?

No, no.

We're not implying that Q4 would be down sequentially, if that's what you're saying, Walter.

Okay, thanks.

Brent Thill, UBS.

Mark, you've talked a lot about the education market in the past.

And I'm curious if you could update us on their receptivity to this transition, given the importance of the vertical.

Yes, Brent.

Education is doing well.

I think we're getting more and more traction, clearly with the school year coming up, we would expect there to be an uptick in education as people start to adopt, but it's going well.

And the other thing I'd add to that, Brent, is the fact that even education, ETLAs are doing well for us.

So in addition to the individual subscribers, which is a really healthy part of the subscriber mix that we have, the ETLAs also continues to do well.

We saw some good acceleration of ETLAs, which are now as you know, term-based deals in the enterprise during the quarter.

And while we're not going to do this, obviously, every single quarter, there are metrics that will provide, like we have in the past, on more of an annual basis.

So things like free subscribers or units or install base, and things like product mix, Brent.

We'll do that more on an annual basis.

Okay.

And just a quick follow-up on the customer behavior you're seeing.

Many of us followed some of the lower trajectory in the first half of the year for the industry.

I'm just curious from your conversations, obviously the results continue to show good results.

But what's your sense of what's going on in terms of overall behavior?

And why do you think that you're effectively been separated from many of the others that have been not doing so well in the last sell quarter?

Well, I would say, Brent, really I think just a clarity of the strategy within the Company and alignment that we have associated with it.

And I have to give the employees here a lot of credit.

I mean, we've been executing strong against the strategy that we outlined.

We have to continue to remain focused on that.

The fact that we've said it's subscribers and ARR and the Digital Media business and driving product innovation and bookings in the Digital Marketing business, and delivering on the Creative Cloud, there's great alignment associated with that in the Company.

Thank you.

Jennifer Lowe, Morgan Stanley.

I might ask just the inverse of the question Walter asked, which is what have you seen in terms of the trajectory of people buying perpetual licenses still, given the intentions there to not continue development on the CS Platform going forward?

And how quickly do you expect the tail of perpetual to fade away as people rotate to subscriptions?

Could we see it drop dramatically?

Or is it going to be more of a steady slope as we go forward?

Jennifer, it's Mark.

We talked about that a little bit at MAX.

We still believe that that holds true, which is we would expect over time perpetual to tail off.

We said it would be deminimus in FY '15.

We still are selling CS6, but clearly we want to move people more and more to the cloud, and we're starting to see that more and more.

Great.

And just one more question on the subscription piece.

Now that we're about a year into the Creative Cloud availability, do you have a read yet on how the renewal trends have played out?

And especially as customers move to the higher price points after the initial discounts, has that played out as you expected?

How have renewal rates been?

Jennifer, it's early but again, its been very much in line with our expectations.

I think the results have been strong, and as we get more data, we will continue to monitor it.

But so far, so good.

Great, thank you.

Steve Ashley, Robert W. Baird.

I'd like to ask about new customers.

You had very strong subscription growth, 211,000.

And I realize it's difficult for you to get any kind of quantitative handle on new customers.

But maybe qualitatively, is there a sense that some of this subscriber growth is coming from people who are new to Adobe?

And if so, if you have any sense if they're pros or at work or at home or anything around that?

Sure.

So Steve, this is one of those numbers again, where we continue to track new customer acquisition that is brand new to the Creative Cloud Platform.

And it's clear that the attractive pricing, up-front pricing, is attracting new customers to the Platform.

When we look at the number of subscribers that we have, the relative ratio of the three categories that we've had for our customers, namely creative pros, people at work and people at home, it continues to be relatively the same, whether it's new customers or customers who are transitioning to the Creative Cloud offering.

I would say that North America is slightly ahead of the international markets in terms of the adoption of the Creative Cloud.

But our other big markets, the UK, Germany and Japan, are also seeing adoptions.

Relatively in line with what we had when we had only a perpetual offering, Steve.

And then my second question relates to the Marketing Cloud.

We've seen salesforce.com make an aggressive acquisition and take a position in the e-mail marketing place, adding that to their marketing cloud.

Just was wondering what you thought of that, and how you view e-mail.

Is that something that needs to be part of your offering?

if that's something you still think partnering for is the best option?

Just some comments around that, please?

Sure.

Maybe big picture first, Steve.

It's clear that we've been talking about marketing being a multi-billion dollar opportunity.

And I think you're seeing that, like we've said, it's going to provide really sustained growth for not just us, but we continue to think that there are going to be a number of companies approaching this space with multiple winners.

But Adobe is going to be one of those winners.

We clearly see our heritage in the fact that we have the most comprehensive set of marketing solutions available as our advantage.

We don't approach it from the ERP or that sales side.

And hence we believe that we're the trusted partner of marketers all around the world.

We will continue to fill out our offering as well, in terms of the marketing cloud.

But I think our biggest differentiation and our unique point comes from the Web Infrastructure and Web Analytics, where we are clear leaders.

And then we look at adding functionality from that core set of offerings that we have.

Great, thanks.

Ross MacMillan, Jefferies.

Congratulations on the sub number.

I actually, Mark, wanted to circle back on the traditional license Creative business.

Our math suggests that we could be seeing declines around 30% there, if you backed out the implied subscription and implied ETLA subscription.

And I wondered if, A, that sounded about right?

And then, B, do you expect that decline to worsen in the second half as you ramp the efforts to drive more to Creative Cloud?

Or do you expect that base decline to be broadly in and around that number?

Thanks.

So if you look at the back half, Ross, I'd say a couple things.

First of all, of course everything that we think is going to happen is reflected in the guidance already.

So the $4.1 billion relates back to the 1.25 million subscribers we think we're going to get.

We've said all along that to the extent that we drive increased subscribers, were we to beat that number, there's a chance that perpetual could come in lighter.

But in the end that would be a good result from my perspective.

Right now we'd would say it's 1.25 million subscribers and it's $4.1 billion in annual revenue, and that mix will potentially shift as we go through the back half of the year.

But that's what we think right now.

Is that math ballpark about right, the 30%?

You know, I can't answer that for you, Ross.

I don't know what you're comparing to, 30% from what.

Just the like-for-like with last year, given subscriber subscription revenue was so low.

Ross, you have to take into account the fact was that we had a launch in Q2 of last year.

I think there's some other factors that you really have to look at when you do it.

Understood.

The one thing I'll say is that since we outlined this in November 2011, actually we've been remarkably on track with the overall projections that we've had.

But factor in the launch as well, as you look at your numbers.

That makes sense, thank you, Shantanu.

And one quick follow-up.

Mark, you made comment around the Digital Marketing billing cycle having some impact on the deferred.

Can you just remind us of how that billing works?

Is it mostly quarterly billing?

And so that transition of a day, would it been as much as a quarter's worth of billings?

Is there some concurrency around the billings on the first of the month?

Yes, that's exactly it.

On the first of the month the billings go out for the month.

It's not the entire quarter.

So you'll have a large chunk that went out on June 1 that didn't get reflected in Q2.

But if you go back to Q1, you saw that we picked up that extra day, if you will, on the last day of the quarter.

That's really helpful.

Thank you very much.

And Ross, again, as you factor that in, I'll tell you have to think about not just a license bookings, but also professional services, because that bookings also happens on the first.

Great.

Thank you so much for the clarification.

And of course, that also has an impact on the cash flow number.

So that was reduced by the fact that we didn't have those billings in the month.

Kash Rangan, Merrill Lynch.

I was just thinking about the slide that you had at your Analyst day, Fiscal '12 revenue mix by home, individuals, education, work, creatives, creative professionals.

If you could talk about how that distribution looks like for your subscription base, which is roughly about 700,000, is it more or less tracking your approximate revenue mix from these different ending categories?

Or is the mix of subscribers in your Creative Cloud a little bit different from that?

And I also wanted to find out at what point do you think the special promotional pricing for people that have bought CS3 all the way to CS6, when would that go away?

That's it for me, thank you.

Let me answer your first question first, Kash, which is as we look at the people who are adopting Creative Cloud, as I mentioned to Steve as well, it's relatively consistent with what we saw with Creative Suite.

Namely it's the creative pros, followed by people at work, followed by people at home.

And so that gives you a general direction.

And we'll update those on a less-frequent basis, but we'll certainly give you updates on an annual basis, things like Install Base, et cetera.

We track it.

It's just hard to do as part of an earnings call.

And with respect to your second question on promotions, I think, again, Mark alluded to the fact that we'll continue to have targeted opportunities available for people to have an on ramp.

And as those tail off, we have people moving to different price points and so far that's, again, all in line with the expectations that we have.

Got it and one follow-up, if I could, Shantanu.

When I look at your base of people that have bought the licenses, Point solutions, and the Suites across the CS family, it's about 12 million plus.

Do you think it's unrealistic to expect the vast majority of them, or maybe perhaps all of them, over the very long term to move into a complete subscription model?

I think that's a little unrealistic.

I think there will be people, and we assumed this when we rolled out this strategy two years ago, that maybe fall by the wayside.

But we would certainly try to get as many as possible.

And we will get a lot of them, but I don't think it's fair to see that we'd get every single one.

Okay, got it.

Thank you so much.

Robert Breza, RBC Capital Markets.

Just as a follow-up to Ross' question around the deferred revenue, when you look at the split between the short-term and long term, is there anything going on from the long term perspective that we should be taking into account as we go forward with the change to ARR, et cetera?

Thanks.

So ARR is obviously just the first year's worth, but ARR, so this gets a little complicated.

ARR doesn't really show up in deferred, because the way we bill for Creative, we're not billing in advance.

We're billing by the month.

As a result of that, it doesn't show up in deferred.

Deferred is really the rest of the business, if you will.

It's the ETLAs, it's the Digital Marketing business, and we are starting to see more longer term contracts in that business.

Okay, thank you.

Mark Moerdler, Sanford Bernstein.

Two questions.

The first one is, can you give us a sense, in terms of the community that's moving over?

You gave us numbers on Creative Suite 6 and previous users.

Is this predominantly the pre-Creative Suite 6 users that have been making the move up to this point?

And then I'll ask the second question.

No, Mark.

I would say it's a spectrum of people.

As we said, we are attracting new customers to the platform.

We're certainly seeing CS6 customers.

We're seeing people from prior versions.

We're seeing Point Product users move to the Creative Cloud.

So I think it's a spectrum of customers across all of our previous versions, as well as new customers.

Okay, thank you.

Second of the questions is a quick, on the asset held for sale and a write-down, can you give us a little bit of data on that?

Yes, it's pretty straightforward.

We have a building that we own that we put up for sale, and as a result of that we had to write it to market value.

So we had to write it down to market value.

Perfect.

That's easy.

Thank you very much.

I appreciate it, and congrats on the numbers.

Thank you.

Brendan Barnicle, Pacific Crest Securities.

Mark, I wanted to quick follow-up on Kash's question about the install base, and more specifically around that approximately 4 million of Point solution users.

What do you think, or what have you seen, so far in terms of conversion rate among that install base versus what you've seen with the CS install base?

Well, maybe I'll take that one.

I mean, I think we're seeing both individual Point Product subscriptions as well as CS.

I would say we are seeing a larger number of, as you saw in our numbers, the majority of the numbers that are subscribing to Creative Cloud are actually for the entire offering, as opposed to the Point Products.

Certainly a large percentage of that are former Creative Suite customers, as opposed to Point Product customers.

But I think you're seeing the other side as well.

And if you look at it, there's about 80% of the people on Creative Cloud who are subscribing to the full offering.

There are about 20% to the Point Products.

And that's a little higher than what it was for Creative Suite, which was approximately 70% of the CS Suites revenue was for the full, and about 30% was for CS Point Products, so hopefully that gives you some color on what's happening.

Do you think, Shantanu, that you're getting folks that are moving off of Point on to Creative Cloud because of some of the offerings that you've made?

Yes, we are.

People look at it and some of the new things that we've done, the HTML tools, products like Muse.

The fact that some of our offerings are only available as Creative Cloud offerings are certainly a reason for people migrating to the Creative Cloud.

Great and one quick follow-up on Steve Ashley's question.

In addition to ExactTarget, you had another partner, Hybris, that was acquired during the quarter.

Obviously there will be changes in those partnerships.

Will they continue along?

How might they change?

Or will you look for new partners in those areas?

I think with Hybris and with Commerce specifically, we have a great partnership, not only with Hybris, but also with SAP.

So we expect that to actually continue and to provide more opportunities for us.

In fact, SAP reached out as soon as it was announced, to say they'd like to continue to strengthen the partnership.

Great.

Thanks so much.

Jay Vleeschhouwer, Griffin Securities.

Shantanu, you mentioned earlier that the bulk of customers are in fact on the full product.

But if you look at the sequential trends and the data, the annual demand, or proportion, has been increasing relatively more than the demand for full Creative Cloud, suggesting relatively strong momentum over the last few quarters sequentially for the Point Products.

Is that something that you might expect will continue for the balance of the year?

Has that played out as you thought it might in terms of that recent momentum of point versus full?

I would say overall, Jay, it's played out relatively in line with our expectations.

And I think we continue to believe that the entire offering is really where people will hopefully migrate to, and that the Point Products are a great on ramp to the entire Creative Cloud offering.

Okay.

You've mentioned that Adobe.com remains the preferred method for acquiring Creative Cloud.

Do you think it will remain that indefinitely?

Or are you expecting that the channel and/or the direct effort might grow disproportionately from here?

And then one or two follow-ups.

Well clearly, we mentioned in the prepared remarks that we are seeing an acceleration of the ETLAs.

The direct sales efforts are really paying off and customers are actually responding very positively, Jay.

So you've known that we had a fairly healthy licensing business, which is enterprise agreements.

Those are migrating, I would say, in Q2 a little faster than expected to the ETLAs, so that's positive.

As it relates to the channel, because we had multiple offerings prior to the announcement at MAX that we would be focusing on the Creative Cloud offering, I thought we saw more of a mix between the perpetual offering and the team offering.

At the end of the quarter we definitely saw an acceleration of team units that were sold by the channel.

And we're counting on that continuing in Q3 and beyond, as the channel partners are educated and focused pretty much exclusively on selling subscriptions.

Okay.

You highlighted DPS, which hit the hundred million download mark, about a quarter sooner than I thought it might.

Let me ask you this.

What trends are you seeing in terms of your revenues per download that you're getting from publishers and other customers?

Can you talk at all about the pull-through effects on CTU and other parts of Marketing Cloud?

And the demand you're seeing from non-publishing customers, for example, catalog companies, financial services and the like?

Let me take your last question first, Jay.

When we look at the DPS business for Q2, it's actually fairly clear that we are seeing tremendous traction outside traditional publishers as well.

And so when you look at the bookings, we're seeing a lot of growth in the markets that you mentioned, financial services, catalog providers, training material, and that is actually not just licensed on a per copy.

There's an enterprise license agreement for that.

So it's a very healthy business, term-based agreements.

As it relates to the core Publishing platform, as you point out, I think the adoption is actually going fairly quickly.

And those are a draw-down of the number of downloads that they've committed to, and when that happens they have to renew their agreement.

So seeing health in the publisher business with the downloads.

I would say, seeing greater than expected strengthen the commercial market, as people are providing their materials through the app stores, which are provided as an enterprise license for those customers.

Okay, lastly on Marketing Cloud, at the summit in Salt Lake, there was some talk that this Summer, I think, there would be a new interface that you'd be introducing across the product line.

And as well, there was some talk about perhaps segmenting the pricing, some with standard pricing, some premium pricing and the like, within the context of your various solutions.

Is that something you can update us on?

Yes, we're seeing early success with the five solutions and the simplified pricing that has been rolled out.

And we've taken the 30 products that we had and consolidated it into the five offerings.

So it's early, but there's a single contract in place right now that enables customers to easily friction-free do business with us.

And Tartan is available right now in beta for some customers, Jay.

So we're making progress on both the product side as well as on the go-to-market side.

Okay, thanks.

We're coming up on an hour let's try to squeeze two more questions in.

Kirk Materne, Evercore Partners.

Shantanu, I was wondering if you could talk about the Creative Cloud adoption by geography.

Are you seeing any differences in terms of adoption across different geos?

Or is it pretty much uniform in terms of how clients are adopting the platform?

Thanks.

I'll answer that question relative to the Creative Suite business as sort of benchmark.

I would say North America, because its been available here for the most time, is slightly ahead of where Creative Suite was at the time that we only had Creative Suite.

But the other major markets we are seeing, EMEA, I would say, is pretty much online with what we are seeing for Creative Suite.

Asia is a little bit behind where we were for Creative Suite, but in line with our expectations.

So hopefully that gives you some color of what's happening.

North America slightly ahead and Asia slightly behind of where we were with Creative Suite in terms of a geo-distribution.

That's great.

Thanks very much.

Mike Olson, Piper Jaffrey.

I think it's hard for anyone to argue that the transition to Creative Cloud subscription won't be a driver in increasing revenue per customer over time.

But it sounds like you're also indicating that the transition to subscription is a driver for increasing the size of the Creative customer base.

And if so, just wondering where you are thinking some of those customers may be coming from that would be Creative Cloud customers under subscription, but wouldn't have been within your Creative customer base previously?

Or do you really more expect that more of the growth in the overall Adobe customer base will be from Digital Marketing offerings and other initiatives?

Or will it be a combination of both?

Thanks.

I think, Mike, we feel good about the growth opportunities in both of the markets.

Digital Marketing, certainly, as we continue to see 25% bookings.

And as that continues to grow, we definitely look at that as an opportunity.

In Digital Media, I would say two things.

As you know, when we released versions of our products, not everybody migrated to every version of the product.

And so we expect to see growth both through new customer acquisition and Digital Media.

But also honestly, just having more people stay current with the current offering that we have as part of Creative Cloud.

And at MAX we outlined the over 10 million people that we have as our install base, and the fact that not every one of them transacted business with us every year.

If we're successful with this, when we're successful, we will have more people who are current with our offerings.

And so I think both of them represent growth opportunities.

Mark has, in the past, showed that we will continue to see CAGR increasing for the Digital Media as well, starting in 2014.

So everything seems to be on track.

And maybe that's a good way, given that was the last question, to really just summarize from our point of view, we look at it and we said in November 2011, that there was a new strategy for the growth businesses.

We provided you metrics to measure this progress and multi-year goals.

And I would say the management team and employees feel really good about the fact that we're executing exceedingly well, and ahead of goals in both of the focus markets, Media and Marketing.

As we've pointed out, we've attracted 700,000 paying subscribers to this new offering that we think will reimagine creativity.

One thing I should point out is that yesterday we started to provide integration with Behance to all of our customers.

We are starting the journey to create, also, the largest creative community in the world.

And with Marketing Cloud, we think we have the most comprehensive offering for marketers.

We're driving innovation, we're serving customers well, and I think we have an incredibly energized employee base.

Thank you for joining us today.

This concludes our call.

Thanks everyone.