Adobe Inc (ADBE) 2013 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Q3 FY '13 Adobe earnings conference 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)

I will now turn the call over to Mike Saviage.

You may begin your conference.

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 third 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 have 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 on this call, particularly our revenue, subscription, and operating model targets, and our forward-looking product plans is based on information as of today, September 17, 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 statement 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 our financial targets document, and in our updated investor data sheet on Adobe's 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 will now turn the call over to Shantanu.

Thanks, Mike, and good afternoon.

In Q3 we delivered revenue of $995 million, with non-GAAP earnings per share of $0.32.

We continue to execute well against our strategy with faster than expected adoption of Creative Cloud in our Digital Media business, and strong momentum and growth in our Digital Marketing business.

In Digital Media, we continue to make great progress re-imagining our Creative and Document Services offerings as cloud services.

This enables us to innovate at a more rapid pace, attract new customers to our platforms, and build predictable, recurring revenue streams.

As of the end of Q3, Creative Cloud adoption grew to over 1 million paid subscriptions, and we have millions more in the pipeline who are trying out the service.

As a result of the strong subscription uptake and increased enterprise adoption, total Digital Media annualized recurring revenue, or ARR grew to $655 million.

Individual team and enterprise customers are realizing the advantages of Creative Cloud.

Individuals are receiving a constant stream of innovation at an affordable price.

Teams are benefiting from being on the same version, and the ability to seamlessly share files, fonts and preferences.

Enterprises are increasing their adoption, due to simplified licensing models and integration with Adobe Marketing Cloud.

Individual team and enterprise term-based licensing all had strong results in Q3.

Recent examples of Creative Cloud innovation include significant updates to our video tools, as well as the release of Adobe Anywhere, a solution that helps large video production teams collaborate smoothly and securely.

We announced Adobe Generator, new imaging technology that enables customers to utilize Photoshop for web and mobile app development more quickly and easily.

To facilitate design on tablets, we announced today we will partner with Adonit to produce two new devices.

One is Project Mighty, a cloud-connected pen, and the other is Project Napoleon, a digital ruler.

Our goal is to enable these two new devices to work with tablet apps like Adobe Ideas and Photoshop Touch, and ensure connectivity with Creative Cloud files.

We continue to expand our Creative Cloud offerings to migrate existing customers and acquire new users.

We should start to see the benefit of adding single app subscriptions to our team offering, and a new subscription offer for photographers which combines Photoshop and LightRoom to address requests from the photography community.

We drove stronger than expected performance with large Creative customers, through our Enterprise Term License Agreements or ETLAs in Q3.

Some customers that we believe would have adopted the team offering, are instead choosing ETLAs.

Across our Creative business, the overwhelming majority of customers are moving away from perpetual licenses towards term-based licenses, demonstrating acceptance of the new offering.

As a result of the success, we will exit fiscal 2013 with more ARR, and less reported revenue than we outlined at the outset of the year.

We continue to build momentum with our digital publishing business, with more than 120 million digital additions delivered to consumers through app stores.

Yesterday, we announced new magazine industry standard audience metrics are available through Digital Publishing Suite's analytics, filling a critical gap in the measurement and reporting of audience readership across digital magazines.

We continue to grow corporate adoption of DPS in areas like catalog, company magazines, sales enablement, and brochure publishing with brands like Airbus, Gap, JPMorgan Private Bank and Lowes now engaging their customers through these tablet apps.

In our Document Services business, Acrobat continued to perform well, with online services continuing their strong momentum.

We now have surpassed 1.3 million Document Services subscriptions.

In Digital Marketing, Adobe is extending its leadership position.

We achieved 28% year-over-year growth in Q3 with Adobe Marketing Cloud, and are on a run-rate exceeding $1 billion in annual revenue.

We are driving adoption of multiple solutions, which is increasing the value and size of customer bookings.

Building upon our already comprehensive portfolio of solutions, in July we completed the acquisition of Neolane, a leader in cross-channel campaign management technology based in Paris.

Neolane integrates online and offline marketing data from across an enterprise, performing robust audience segmentation, and delivering marketing messages across channels including web, e-mail, social, mobile, call center, direct mail, and point-of-sale.

This enables marketers to deliver consistent customer experiences, personalize campaigns and increased ROI.

Neolane becomes Adobe Campaign, and will be integrated into the Adobe Marketing Cloud as our sixth solution, joining Adobe Analytics, and Adobe Experience Manager, Adobe Media Optimizer, Adobe Social, and Adobe Target.

Adobe Experience Manager had strong performance in Q3.

In July, we rolled out Adobe Social 3.0, featuring integration with Flickr, Foursquare, Instagram and LinkedIn.

Last week, we announced a major update to Adobe Target, with a completely redesigned touch-based interface that guides users through testing digital offers, and personalizing web content for specific audiences.

In addition to driving innovation within each solution, we are focusing on integration across Adobe Marketing Cloud solutions.

Adobe is increasingly being identified as the digital marketing leader among industry analysts.

Coming on the heels of strong recognition in Forrester's Web Content Management Wave in Q2, we were identified as the leader in Gartner's Web Content Management Magic Quadrant and Forrester's Data Management Platforms Wave.

This drives awareness among of customers, especially in Web Content Management, an area that has become mission-critical to companies that need to re-platform their online businesses for the next generation of mobile, social media and apps.

No other Company has an end-to-end value proposition like ours, with Creative Cloud and Adobe Marketing Cloud addressing the entire lifecycle of content.

From creators to marketers, and from ad agencies to media companies, we provide a compelling value proposition as companies transform their businesses to digital.

In summary, we demonstrated strong performance in Q3.

We achieved significant milestones in both Digital Media and Digital Marketing.

Based on year-to-date results, we are on track to exceed our fiscal 2013 targets of $800 million in Digital Media annualized recurring revenue, and greater than 20% revenue growth with Adobe Marketing Cloud.

Now I will turn the call over to Mark for a discussion of Q3 financial results.

Thanks, Shantanu.

In the third quarter of fiscal 2013, Adobe achieved revenue of $995 million.

GAAP diluted earnings per share in Q3 were $0.16.

Non-GAAP diluted earnings per share were $0.32.

Revenue and earnings were within our targeted ranges.

Our acquisition of Neolane during the quarter contributed approximately $6 million in revenue to our Q3 results, and the impact from the transaction on earnings was less than a $0.01.

We are pleased with our results in Q3, as the results of overachievement in subscriptions and ETLAs which is reflected in higher ARR, revenue and earnings per share were below the midpoints of our targeted ranges.

Highlights in the quarter included strong Adobe Marketing Cloud revenue growth, accelerating past 1 million individual and team subscriptions with Creative Cloud, and driving better than expected ETLA adoption with Creative and Acrobat customers.

Success in Q3 with subscriptions and ETLAs drove significant upside in ARR.

We exited Q3 with approximately $655 million in Digital Media ARR, up from $440 million exiting Q2.

Combined with other Adobe businesses where revenue is recognized on a ratable basis, we exited the quarter with 41% of our Q3 revenue as recurring, up from 35% exiting Q2.

When we started this journey to transform our business model in late 2011, we anticipated hitting 40% of our business being recurring by the end of fiscal 2014.

And we have already surpassed that mark, as of the end of Q3 fiscal 2013.

In Digital Media, we achieved reported revenue of $637 million.

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

In our Creative business, customer adoption of Creative Cloud accelerated.

We exited Q3 with 1.031 million paid Creative Cloud individual and team subscriptions, an increase of 331,000 in the quarter.

Adoption of team subscriptions was strong, and we closed more ETLA contracts with enterprise customers in Q3, than the sum of those closed in Q1 and Q2.

Combined, our success with subscription and ETLA adoption helped to drive Creative ARR to a total of $546 million exiting Q3, an increase of $191 million quarter-over-quarter.

Our strategic goal is to accelerate adoption of Creative Cloud, and we are focusing all of our innovation there.

We have added new capabilities to both the individual and team offerings, and continue to offer a variety of targeted promotions to drive awareness, consideration, and purchase.

This strategy is working.

Overall monthly average revenue per user or ARPU remained consistent with prior quarters due to success of the team product, and strong retention among individual customers renewing at full price as their introductory pricing expired.

As of the end of Q3, 95% of Creative Cloud subscriptions are annual plans versus month-to-month, and 81% are for the full Creative Cloud versus Point Products.

Adobe.com remains the preferred way for our customers to engage with us when subscribing, although we have seen solid growth in the channel business with the team offering.

In Document Services, we achieved revenue of $183 million in Q3.

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

Document Services ARR grew from $84 million exiting Q2, to $109 million exiting Q3.

In our Digital Marketing segment, there are two components.

The first is revenue from our Adobe Marketing Cloud offering.

And in Q3, we achieved Adobe Marketing Cloud revenue of $255 million, representing year-over-year growth of 28%.

Excluding the $6 million of Neolane revenue, year-over-year growth was 25%.

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

Mobile transactions increased to 28%, up from 26% 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.

Our growth is driven through new customer acquisition, as well as increased annualized revenue per customer.

The addition of Neolane represents our sixth solution, and enhances our ability to drive larger customer engagements.

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

LiveCycle and Connect contributed $57 million in Q3 revenue, which was consistent with our expectations.

Print and Publishing was down quarter-over-quarter as expected.

This was driven primarily by an increase in ETLA adoption for some of the products in this segment, with revenue being recognized over time, as opposed to upfront.

Geographically, we experienced stable demand across our major geographies.

From a currency perspective, quarter-over-quarter FX rate changes had a $2.6 million negative impact on reported revenue.

Hedging gains contributed $10.5 million to revenue in Q3 FY '13, versus $15.3 million in Q2 FY '13.

Thus the net sequential quarterly currency decrease to revenue considering hedging gains was $7.4 million.

Year-over-year FX rate changes had a $18 million negative impact on reported revenue.

Comparing the $10.5 million in Q3 FY '13 hedging gains to the $7.7 million of hedging gains in Q3 FY '12, the net year-over-year currency decrease to revenue considering hedging gains was $15.2 million.

In Q3, Adobe's effective tax rate was 11% on a GAAP basis, and 21% on a non-GAAP basis.

The GAAP rate was lower than targeted, primarily due to tax benefits recognized as a result of the completion of certain income tax examinations.

Employees at the end of Q3 totaled 12,035 versus 11,413 at the end of last quarter.

The majority of the increase in headcount was due to the acquisition of Neolane.

Our trade DSO was 48 days, which compares to 48 days in the year-ago quarter, and 42 days last quarter.

Ending deferred revenue in Q3 was a record $734 million.

During the quarter, cash flow from operations was $216 million.

Cash flow was lower than typical, primarily due to an income tax payment, and the timing of enterprise billings.

Our ending cash and short-term investment position was $3.16 billion, compared to $3.87 billion at the end of Q2.

The sequential decline was due to our acquisition of Neolane during the quarter, and stock repurchases.

In Q3, we repurchased approximately 7 million shares at a total cost of $326 million.

Now I will discuss our targets for Q4.

For the fourth quarter of fiscal 2013, we are targeting a revenue range of $1 billion to $1.050 billion.

This range includes an estimated $20 million of revenue from Neolane during the quarter.

We expect total Digital Media ARR to be approximately $875 million exiting Q4, exceeding our prior FY '13 target of $800 million.

This is based on adding slightly more Creative Cloud paid subscriptions than was achieved in Q3, and continued strength with ETLA adoption.

Assuming the midpoint of our targeted Q4 revenue range, we expect Digital Media revenue to be down sequentially.

And in our Digital Marketing segment, we expect Adobe Marketing Cloud year-over-year revenue growth of approximately 35%.

We expect LiveCycle and Connect revenue to be relatively flat quarter-over-quarter, and we expect Print and Publishing to decline slightly on a sequential basis.

We are targeting our Q4 share count to be 511 million to 513 million shares.

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

We are targeting a Q4 tax rate of 21% in Q4, on both a GAAP and a non-GAAP basis.

These targets yield a Q4 GAAP earnings per share range of $0.09 to $0.15 per share, and a Q4 non-GAAP earnings per share range of $0.28 to $0.34.

We will provide FY '14 targets on our December earnings call, but we wanted to provide preliminary observations for next year as we entered Q4.

Digital Marketing remains an explosive growth category, and we will continue to target strong revenue and bookings growth.

In Digital Media, the transition to Creative Cloud is happening sooner than expected.

While our multi-year targets remain unchanged, we expect increased Creative ARR in FY '14, with reduced perpetual revenue relative to what we communicated at MAX in May.

I would now like to turn the call back over to Mike.

Thanks, Mark.

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Our Investor Relations website provides easy access to these resources.

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 on our IR site later today.

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

Use conference ID number 42772158.

Again, the number is 855-859-2056, with ID number 42772158.

International callers should dial 404-537-3406.

The phone playback service will be available beginning at 4 Pacific Time today, and ending at 4 Pacific Time on Friday, September 20, 2013.

We would now be happy to take your questions.

Operator?

(Operator Instructions)

Your first question is from Walter Pritchard with Citigroup.

Your line is open.

Hi.

Thanks.

Mark, I am wondering if -- just two questions about subscribers.

I don't have access to the presentation here.

But I didn't hear you update your goals for fiscal '15 around the number of subscribers, which I believe before was 4 million.

And then secondarily, we are used to see an uptick from Q3 to Q4 in your perpetual business when it was (inaudible).

I think you noted in the past, when you were setting expectations for this year, that you would expect to see a bump from Q3 to Q4, in terms of adds.

And now you are saying sort of relatively flat.

And I am wondering, did you sort of pull forward some of that demand that you expected incrementally in Q4, or what else would account for a much more level sequential increase?

Sure, Walter.

So a couple things.

On the Q3 to Q4 uptick for seasonality, to be honest with you, as we move more and more to this ratable model through ETLAs and subscribers, that seasonality starts to get muted.

And I think that is what you are seeing in our guidance.

There is a little bit in there for Digital Marketing.

Obviously, there will be a bump in that business.

But that is less seasonal.

That is a SaaS-based model but the typical seasonality, we are just not going to see like we used to in the perpetual business, especially as more and more people are moving off of perpetual, onto the subscription model.

In terms of FY '15, let me back up a minute and talk about '14 a little more, which will then kind of give you some color into '15 as well.

As we said on the call, we have had a really successful move to subscriptions and ETLAs.

And as Shantanu and I both articulated, customers are moving even sooner than we had anticipated.

We have had success in the individual, and team, and the ETLAs.

And as a result of that, we do see this mix shift to greater ARR and less perpetual revenue.

So what you see in Q3 and Q4 of this year, is going to be representative of what you are going to see through the beginning of 2014.

You are going to see a more rapid subscription and ETLA adoption.

So there is going to be a quicker decline in reported perpetual revenue.

And then a steeper return in reported revenue, as we ramp up the subscribers.

We expect that the Creative product family revenue is going to begin to increase sequentially by the middle of next year.

And the health of the business through this transition, as we have said for a while now, is best measured by ARR.

To your point on the FY '15 targets, our long-term targets are unchanged.

For Creative, we still believe we will hit 4 million subs by the end of 2015.

We still believe we will grow reported revenue on a CAGR of over 15% from '14 to '16.

We still believe total Adobe revenue and earnings growth grows in '14 and beyond.

So none of those long-term metrics have changed.

Things are just happening faster, which is exactly what we want.

The other thing to keep in mind on that $4 million target, as Shantanu alluded to the fact that some of the team subscribers are moving to ETLAs.

And as a result of that, they don't show up in the subscriber count that we publish.

So that 4 million would be bigger, were it not for the fact that some team people are now moving to ETLAs.

But we still are confident in the 4 million.

And just Walter, maybe a little bit more color on Q3 to Q4 transition.

We do see strength in the pipeline, as it relates to both Digital Marketing, as well as enterprise ETLAs.

Which is why we have said, Digital Marketing we expect to grow 35% at the midpoint, and ETLA is also is a very healthy pipeline.

Great.

Thank you.

Your next question is from Peter Goldmacher with Cowen.

Your line is open.

Hi.

Just wanted to ask you a question on the competitive environment in the marketing cloud, specifically salesforce.com is making a lot of noise with the ExactTarget acquisition.

Would love to hear your perspective on it, and how you intend to compete against it, and what you think your competitive advantages are?

Sure.

So Peter, I think you saw a significant strength in our offering.

There are multiple, I think key differentiators, as it relates to our solution.

The first of which is, both our data and our Analytics platform have just significant market share.

As I mentioned, the Adobe Experience Manager product is doing exceedingly well.

Adobe Analytics continues to do well.

And then when you add out, all of the other solutions that we talked about, we do believe we have the most comprehensive offering in the market.

As it relates specifically to e-mail marketing, we think the bigger opportunity, honestly is in multi-channel campaign marketing.

And again there, with the acquisition of Neolane, we believe we have the strongest offering in the market.

When you think about what people want, everybody is an individual.

And at the end of the day, you want a campaign targeted at an individual.

Not just through e-mail, but also through all of the other channels that we talked about, including the web.

So expect to continue to see us innovate in each of the solutions independently, and across solutions.

But we are really pretty confident that we continue to have the best offering in the market.

And we are going to focus on it.

Okay.

Thank you.

Your next question is from Jennifer Lowe with Morgan Stanley.

Your line is open.

Great.

Thank you.

Shantanu, I just wanted to follow up on a comment that you made during your prepared remarks, that you saw some customers you thought would be team users, actually choosing ETLAs.

What is sort of the dynamic driving that?

And do you think that, given that the 4 million target referenced earlier was a team plus individual piece?

So if ETLA's ends up being a bigger piece of the mix than you previously thought, does that change your thinking around where that subs account number can go over time?

Well, Jennifer, what we had originally given, our numbers was based on the experience that we had with our perpetual offerings, where individuals would buy shrink-wrapped software either through the channel, or directly on Adobe.com.

And enterprises would transact business with us, through a variety of licensing mechanisms that we had, transaction licensing which wasn't a commitment to buy further products from Adobe, or contractual licensing which was a commitment to buy further products from Adobe.

And we certainly had our internal estimates of, for that licensing, whether people would move to the team option, and just transact business with us on the website.

Or whether they would choose to actually have a contract with us through the enterprise term license agreement.

What we are seeing is as a result of the comprehensive offering that we have for the Creative Cloud within enterprises and the integration with things that we have like digital asset management, as well as the Marketing Cloud, the enterprise customers are actually choosing to transact business with us through the enterprise term license agreements.

Which is why both Mark and I wanted to make sure you all understood that the annualized recurring revenue, given it contains both the subscription performance as well as the ETLAs, is really a good proxy for the business.

We expect to continue to see strength in individual team, as well as in enterprise.

And that is why we continue to be confident of our long-term goals.

But as Mark said, expect to continue to see that reflected in ARR as well.

And just to add on to that, one last time.

My point was, we are not raising the 4 million.

We are very confident in the 4 million.

We are not raising it.

It is just a little too early to do that, plus we have this effect of the team moving over to ETLA in some cases.

Great.

And maybe just one quick follow-up around the ETLA point.

As you think about the Document Services business and the ARR component, they are is also getting to be fairly large.

And a lot of that is tied to customers wanting more unified ETLAs.

Is there a scenario where we could see Document Services go fully subscription at some point?

How do you think about that business transitioning?

Well, today in Document Services, we actually have three different offers.

We do offer customers the ability to have perpetual.

And we continue to believe that will have a longer tail than in the Creative business, because of the variety of customers.

We do offer Document Services customers the ability to both get an ETLA.

And we actually did see strength in the ETLA business for Document Services as well in the quarter.

Having an aligned offering between Acrobat and Creative is actually useful for our sales force as they go into an enterprise, because they can sell consistent ETLA across both.

And just to clarify, an ETLA is a very standard deal for all of the deals that we are talking about.

It is a three-year deal, and we recognize revenue ratably across all of the three years.

So what you are seeing in the annualized recurring revenue does not reflect the entire transaction value that we are actually getting from the customers.

But I think to answer your question, we will continue to have Document Services in the current model, perpetual model for a longer period.

Great.

Thank you.

Your next question is from the line of Brent Thill with UBS.

Your line is open.

Thanks.

Good afternoon.

Shantanu, on the marketing cloud, you are seeing acceleration in that business, even when you strip out Neolane.

And I am just curious if you could just help walk through what -- why that acceleration, just on a pure organic basis?

And I had a quick follow-up for Mark.

I would attribute it, Brent, to a couple of issues.

The first issue is the awareness of our solution is certainly increasing.

I think as the adoption of our various solutions is taking hold, we are certainly upselling to our customers.

So we look at both new customer acquisition, as well as within an existing customer, are we selling them increased solutions?

And both of those are working.

And I would say, the comprehensiveness of our solution, I think we have done a good job as a team of adding to data and analytics and target and social.

And I think Adobe Campaign also there is a lot of interest.

And we are just executing.

We are executing against both the platform that we are delivering to our customers, which is resonating with them, and we are executing on the field and marketing side.

And for Mark, just you mentioned you surpassed the milestone on the recurring revenue, over 40% now.

Is there a sense, obviously the majority of the business is going to go to subscription.

So I would assume that you are looking at that metric over time, still growing to be the majority of revenue.

But is there any way you can frame how you think that will play out in the next couple years?

I would say exactly what you said, frankly, Brent.

It is just going to keep getting bigger and bigger, as we drive more and more subscribers, as we drive more ETLAs.

And as we drive the marketing cloud business, which is primarily a SaaS-based business.

I don't have an exact figure for you at this point, but it will just keep getting bigger.

Great.

Thank you.

Next question is from Ross MacMillan with Jefferies.

Your line is open.

Thanks a lot.

I wondered if you could just comment on what you are seeing, in terms of renewal rates from those customers that adopted early last year on promotional pricing?

And as you start to see those customers come up for renewal, is it in keeping with your 20% type churn, or do you think you are tracking better or worse than that?

Thank you.

So Ross, just to clarify, the subs exit number that we talk about, 1.031 million in this particular quarter, it is net of attrition.

Attrition is running lower than we had originally modeled, which I think is a good sign.

And what we also find is that we introduce new offerings, whether it is team, enterprise, the new photography, that customers are migrating you amongst these offerings.

And so, we are pleased so far with what we are seeing, in terms of renewal rates.

I do want to clarify that we also added the individual app option to the team offering.

But that came in really late in the quarter.

So this will really be the first quarter where people will also have the option for individual apps within the team offering.

That's helpful.

And then maybe just a follow-up.

You are obviously seeing a lot of success with ETLAs, and frankly, also team addition this quarter.

I was curious, when you think about the individual subscribers, how big a driver was education this quarter?

Was it material?

And I am curious to get a sense for ARPU?

You said it was pretty consistent.

But I should imagine that the individual subscribers outside of team were maybe a little bit lower, if education was strong.

I would love any color around that.

Thank you.

I will take the first one, Ross, and then maybe Mark can add on ARPU.

As it relates to the education segment, we are seeing adoption of the individual offering by students across various categories.

So that is good.

We are also seeing strength, frankly, in the ETLAs, where entire universities are adopting the Creative Cloud.

So education, as you would expect in Q3, is one of the drivers of the Creative Cloud subscriptions.

And on the ARPU, Ross, on the individual and the education side, with the promos that we have in place, that is going to pull the ARPU average down.

But what you have seen is through the strength of team which is what we always anticipated in the model, that pulls the ARPU number back up.

And that is why you see that ARPU has been holding up very nicely.

Great.

Thank you very much.

Your next question is from Heather Bellini with Goldman Sachs.

Your line is open.

Great.

Thank you.

I was wondering, Shantanu, if you could touch a little bit on Digital Marketing.

You have put together a pretty comprehensive portfolio of products.

And I am just wondering if you can help shape the opportunity for customers to move from Point Products to a suite such as yours?

And is there a way we can think about the type of uplift as customers may be moving from just using say, one of your solutions to taking on the full suite?

Yes, Heather, as I think we outlined at our Digital Marketing summit, our big opportunity really is in getting customers to really adopt the entire Digital Marketing cloud.

And I would say that is a work in progress.

I mean, the real opportunity is, when you are a platform for all of the digital marketing needs that a customer has, whether it is their marketing spend, whether it is their campaigns, whether it is their social presence, it should represent significant uplift for us in our Digital Marketing revenue.

Because the average number of products that a Digital Marketing customer is using is still low.

We met two big milestones in the quarter that we just finished in.

Target had a brand-new user experience, and one of the things we are doing is, in the product you actually have access and visibility to all of the other solutions.

So we are making them integrated much like we did with the Creative suite of products.

So while we are not quantifying exactly what the uplift could be, we definitely see it as an area of internal focus and external growth.

Because the average number of products per enterprise customer, we can continue to grow that quite a bit.

Thank you.

Your next question is from Brad Zelnick with Macquarie Capital.

Your line is open.

Excellent.

Thank you.

Shantanu, do you have any sense of how you are performing against your goals for driving Creative unit growth?

And specifically, is there any data that speaks to the cloud offering better penetrating certain geographies, or converting casual pirates or even attracting virgin laggards?

So Brad, we continue to do research on that.

All of our research shows that we continue to drive both new users to the Creative Cloud platform, these are users who have never transacted business with us before.

And so, whether they are brand-new users, or previously they pirated products, we see a meaningful number of people who are using and adopting the Creative Cloud.

We also continue to see meaningful number of people, who give us the feedback that if they did not have the Creative Cloud option, they would have chosen not to transact business with us in the quarter or the year.

So on both those dimensions, we continue to make progress.

Sounds like it is working well.

Just a follow-up to Ross' question earlier.

For the customer -- it is good to see that you attrition is lower than you had baked into the model.

But for the customers that don't renew, after storing all their content in your cloud, and using the latest versions of your products, where are they going?

Well, Brad, I don't want to lose a single customer, and we are going to work on trying to keep all of those customers.

We are seeing some migration, where you may have individuals within an enterprise who have tried out the individual offering.

And then what happens is, they actually move to the enterprise offering or the team offering.

We will continue to make their assets available to them, if they want to be on the free offering that we have.

But it tends to be more of the monthly users.

And I think what they are doing is primarily trying out the products, and then hopefully migrating to a more comprehensive version.

That makes sense.

And just to be clear, if you see a customer go from a point product, and step up into a suite, you are not counting that as churn;?

Correct?

That's correct.

Thank you very much.

Your next question is from Kash Rangan with Merrill Lynch.

Your line is open.

Hi.

Thank you very much for taking my questions.

Sounds like the transition is going faster than expected.

Two questions.

One is at the Analyst Day, Mark, I think you gave us some disclosure on the number of licensees, the accumulated installed base of licensees including point and suite was about 12.8 million.

Now I am going to ask you a provocative question.

What is to stop Adobe from converting all of those licensees into subscribers?

Because if you could, you would end up being the largest -- one of the largest subscription revenue software companies.

So the thoughts on that?

And second, since the discounted window expired, I am wondering if your ARPU would actually start to go back up, as you start to roll in regular prices for folks that were on promotion, but are starting to renew as you say?

Thank you very much.

Thanks, Kash.

Yes.

You are exactly right.

I mean, we do have 12 million out there in terms of the installed base.

And the whole point of putting that slide up for you at Analyst Day was to show you that 4 million is not the end state, a 4 million is a goal over the next few years.

We fully believe we will be able to drive much more than 4 million.

But we wanted to put a marker at you -- out there for you in the short term, to show you what we were striving towards.

So we would certainly strive towards a lot more than 4 million subscribers.

On the ARPU, you are also exactly right.

As people renew outside of their promo for the first year, that will drive the individual ARPU up as well.

Sounds like music to ears.

Keep it up.

Thank you.

Thank you.

The next question is from Kirk Materne with Evercore.

Your line is open.

It is actually Matt Williams in for Kirk.

Most of our questions have been answered.

But just wondering if you could provide a little bit more color on the initial customer reaction to Neolane, and the marketing automation space in general?

And I know you have talked about integration amongst some of the products.

And maybe just kind of update us on your plans for integrating Neolane into the marketing cloud?

Thanks.

Sure, Matt.

Neolane had a scheduled conference, that they had scheduled before we announced the acquisition of Neolane.

And it was then absolute sell-out, standing room only, because there was a lot of interest in what Adobe products would get integrated with Neolane.

So I think the initial response from customers has been, this is a no-brainer.

It makes complete sense.

If I can help with the orchestration of my campaign across social, which you have already had at Adobe, and the web where you are a leader, and now through e-mail and voice and online and offline.

So strategically, we have got very, very positive feedback.

I think the next big step was earlier this month when we announced Adobe Campaign.

So we have already done the hard work of rebranding the product, starting the integration, making it available as part of our user experience.

So while it is work in progress, I think both the initial customer response, as well as the initial integration, I think all goes well for that business.

Great.

Thanks so much.

Your next question is from the line of Mark Moerdler with AllianceBernstein.

Your line is open.

This is Emily Chien dialing in for Mark.

I am wondering if you can talk a bit more about team version of the Creative Cloud.

Now that we have the resellers also pushing this version, how much of a tailwind this has provided?

And is that where you are seeing a lot of migration up to the ETLAs?

The team was very successful in the quarter that we just concluded.

It was the first real full quarter of having team offering from the resellers.

And so, we are very pleased.

While it is early, the results have been really encouraging.

The ETLAs are happening primarily with the Adobe internal sales force.

So the resellers are helping us with presenting the team offering to customers.

But the ETLA is all with our internal sales force at this point.

I will also say that Adobe.com is doing quite well, as it relates to the team offering.

In other words, a number of the teams find that they may come to Adobe.com.

And the process for sign-up is quite easy, so people are using Adobe.com also as a channel, not just for the individual product, but also for the team product.

Great.

Thank you.

Operator, we are starting to wrap up.

Why don't we take two more questions?

Your next question is from the line of Jay Vleeschhouwer with Griffin Securities.

Your line is open.

Thanks.

Good afternoon.

Shantanu and Mark, I would like to follow up on the earlier question about the opportunity for Document Services recurring revenue, the ARR and ETLA there?

If I am not mistaken, in earlier calls you suggested that a good part of the momentum in Doc services ETLA was due to EchoSign.

So the question is, how do you see the opportunity for converting the large base of Acrobats, which is measured in the tens of millions of licenses historically, far larger than the Creative base, and much of that through ETLA contracts historically.

Do you see the potential for fairly substantial conversion of that historical base of Acrobat to recurrents, and potentially getting perhaps multi nine-figure ARR out of that as well?

And then a couple follow-ups?

Thanks.

So Jay, a couple of clarifications as well, which you know, which is the current Document Services, in addition to EchoSign which is our digital signature solution, we l also have offerings in order to enable people to create PDF.

To take a PDF and save it out as Word or any other file format, as well as the ability to do forms on the Acrobat.com site.

In terms of reimagining Document Services to also take advantage of what is happening on mobile devices, to take advantage of the ubiquity of the reader that we have, as well as provide new services to enable collaboration, clearly, that is in our strategic intent in order to be able to do that.

I was answering the question in that I think Acrobat we will continue to have perpetual for a longer period.

But I do think we are seeing adoption of the Document Services by new customers.

So both as a new customer acquisition as a growth category, you are absolutely right.

As well as in ETLAs, we do think Document Services will see more ARR with new customers with ETLAs, and with the new services that we are providing.

Okay.

Real quick --

Only one follow-up.

Yes.

(Laughter).

Thanks, Mike.

On Creative, how are you thinking about the opportunity for single app adoption?

Historically, in the olden days, you would sell perhaps a few hundred thousand new licenses stand-alone of Photoshop, not counting CS.

It looks like you are at about that pace now, for non-full Creative Cloud adoption.

Do you think that you could have a multiple of your former volume business, the installed, the single app through subscription?

Jay, it was important to us strategically to make sure that we had the single app subscription offer for teams, because then teams really have the flexibility to choose.

But make no mistake, it is our goal, that hopefully the teams would actually subscribe to the entire team offering, and that really is our goal.

So much like for the individuals, while we offer individual products, we are really focused on getting Creatives to adopt the entire Creative Cloud offering.

Our goal would be to do the same, which is offer the individuals -- and in many cases whether it's Photoshop or Illustrator or InDesign, it may be customers only want individual products.

But our goal even with the team, is to have them subscribe to the entire offering.

Thanks, Shantanu.

The last question is from Steve Ashley with Robert W. Baird.

Your line is open.

Hi, this is Chaitanya Yarmada sitting in for Steve Ashley.

Thanks for fitting me in.

Just wanted to go back to your comment around FY '14 color around revenue.

And just wanted to confirm that you said, you expect Creative revenue to grow sequentially starting mid next year?

And so, I was wondering if it is possible that full year Creative revenue could be down year-over-year for FY '14?

We still expect that full year Creative revenue would be up.

It isn't likely up much, but it should be up next year, full year.

Okay.

Great.

And then on the Creative transaction growth, just was wondering if you could give us an update on where we are with -- given that you outperformed on the subscription side?

I am sorry, I don't think we understood your question.

Oh, I am sorry.

Just the combined license plus subscription transaction growth?

Units.

So yes, if you mean total units for both perpetual and subscription.

As Shantanu mentioned, we do see growth this year in total units.

Great.

Thank you so much.

Well, thank you all again for joining us today.

I think we identified two growth initiatives for Adobe, which was reimagining the Creative process, leveraging the desktop mobile apps and clouds.

And it is really gratifying to see the accelerated adoption for our Creative Cloud, which is measured both by the number of subscriptions, as well as annualized recurring revenue.

And surpassing 1 million subscribers was a big milestone for the Company.

The second growth as well initiative in Digital Marketing, which we continue to believe is an explosive growth category, growing that business 28%, and successfully adding to our market-leading Adobe Marketing Cloud offering through the acquisition of Neolane was a significant milestone in the quarter.

So thank you again for joining us, and we look forward to chatting with you soon.

And this concludes our call today.

Thanks for joining.