Adobe Inc (ADBE) 2014 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

I would like to welcome you to the Adobe Systems second-quarter FY14 earnings call.

I would now like to turn the call over to 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 FY14 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 posted PDFs of our earnings call, prepared remarks, and slides, our financial targets, and an updated investor data sheet on www.Adobe.com.

If you'd 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 17, 2014 and contains forward-looking statements that involve risks and uncertainties.

Actual results may materially 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 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 webcast live in Adobe Connect, and is also being recorded for playback purposes.

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

The call audio and the webcast archive may not be rerecorded, 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.

Adobe's business momentum continued in Q2 and I'm happy to report we achieved $1.068 billion in revenue with non-GAAP earnings per share of $0.37, both exceeding the high end our targeted ranges.

We drove strong performance across key growth areas including Creative Cloud, Adobe Marketing Cloud, and document services.

In Q2 Creative ARR grew to $1.2 billion and we exited with more than 2.3 million Creative Cloud subscriptions, well ahead of the target we set for the quarter.

More importantly, moving forward all [Adobe] and channel focus will solely be on Creative Cloud offerings and CSX perpetual revenue becomes de minimis.

Building on our strong Q2 momentum, tomorrow we will unveil a broad set of Creative Cloud innovations including desktop and mobile applications, new services, and specialized offerings for key customer segments.

In addition to targeting creative professionals and CS customers, we will expand the core Creative Cloud platform to target obvious end consumers including former Photoshop Elements and Photoshop Lightroom customers.

We believe this addresses a larger market opportunity.

While Creative Cloud customers regularly receive access to new features, products, and services as part of their subscriptions, this is our biggest update since CS6.

We're excited to share what we've been working on, and will host a live customer event in New York that will be webcast on Adobe.com at 1:00 PM.

Eastern time.

In digital publishing, we continue to see traction in the corporate market.

New DPS customers include Booz Allen Hamilton, Dow Jones and Co, Honeywell, and Procter & Gamble.

In addition, Samsung will support DPS as the publishing platform for their new magazine service, Paper Garden.

In document services Acrobat continued to achieve solid performance, and our hosted document services offerings continued their momentum.

With EchoSign we teamed up with Progressive Insurance to make electronic signature solutions available to their more than 35,000 agencies in the US to help them tackle their biggest business challenges.

Combining the reliability of Adobe PDF with EchoSign e-signatures, so agents can close business faster, more easily, and securely.

Combined with Acrobat ETLAs, document services ARR grew to $183 million exiting Q2.

Across our creative and document services businesses, total digital media ARR grew to $1.38 billion at the end of Q2, compared to $444 million exiting Q2 of last year.

This year-over-year growth in ARR demonstrates the stellar progress we've made in transforming our digital media business.

In digital marketing, Adobe Marketing Cloud achieved strong bookings in Q2 led by Adobe Experience Manager.

Every enterprise is faced with a task of re-platforming their web infrastructure to deliver more personalized, relevant content to their customers and provide a first-class mobile experience.

Given our number-one position in the web experience management and analytics categories, and integration with our campaign, social, and target solutions, we have the leading offering in the market.

In addition, Adobe Marketing Cloud integration with Creative Cloud and DPS is a unique differentiator, enabling Adobe to target the c-suite with corporate-wide mission critical solutions.

During the quarter we held digital marketing summits in Salt Lake City and London.

Both events were sold out and have generated strong pipeline for the Adobe Marketing Cloud among our growing number of partners and direct enterprise customers.

Major announcements at these events included the introduction of new core services, innovation in mobile solutions, and deep integration across our Marketing Cloud offerings.

Early in Q2, we announced a global agreement with SAP, which will resell Adobe Marketing Cloud with their HANA platform and hybrid commerce suite into their base of 250,000 enterprise customers.

We're hard at work with SAP to address goals such as improved product and solution integration, sales enablement, and partner education.

Adobe continues to win strong industry analyst recognition of our Marketing Cloud solutions in Q2.

We were recognized as a leader in Forrester's Web Analytics Wave Report, achieving the highest scores in all major categories evaluated: current offering, strategy, and market presence.

In Gartner's Multichannel Campaign Management Magic Quadrant, we achieved leadership positioning and the highest scores in completeness of vision, underscoring the progress we've made with the Neolane integration and the competitive advantage we've built with Adobe Marketing Cloud.

In summary, we're pleased with the great progress we have made against our strategy in the first half of the year.

Creative Cloud ARR has grown faster than expected.

User satisfaction and retention remained strong, and Creative Cloud customers will benefit from exciting new innovation in the second half of the year.

Our leadership in the digital marketing category is widening with industry recognition, a thriving ecosystem of partners, and Adobe Marketing Cloud revenue growth ahead of our target for the year.

I'm proud to share that we were named the greenest technology company in the world according to Newsweek's just released 2014 Green Rankings.

This is an important recognition of our commitment to make Adobe a sustainable business and a great place to work.

Our employees are at the core of our success.

We thank them for our strong results and the momentum we've booked.

Now, I'll turn it over to Mark.

Thanks, Shantanu.

In the second quarter of FY14, Adobe achieved revenue of $1.068 billion, above the high-end of our targeted range.

GAAP diluted earnings per share in Q2 were $0.17, and non-GAAP diluted earnings per share were $0.37, both also above the high-end of our targeted ranges.

Highlights in the quarter included adding 464,000 net new Creative Cloud subscriptions, growing digital media ARR by $227 million to a quarter ending total of $1.38 billion.

Achieving 23% Adobe Marketing Cloud year-over-year revenue growth; generating $368 million in cash flow from operations; growing deferred revenue by $48 million to a record $929 million; and exiting Q2 with 53% of our quarterly revenue as being recurring.

In digital media we achieved revenue of $692 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 quarter over quarter.

We exited Q2 with 2.308 million Creative Cloud individual and team subscriptions.

Q2 was the last quarter we broadly offered perpetual volume licensing of CS6 through the channel.

As a result, there was a high demand by customers serviced by the channel who wanted to add to their perpetual seat capacity.

This drove the upside relative to the high end of our total targeted Q2 revenue range.

We believe these customers will migrate to Creative Cloud over time.

Beginning in Q3, the channel is solely focused on licensing Creative Cloud.

Our success with subscriptions, ETLAs, and digital publishing suite adoption helped to drive creative ARR to a total of $1.2 billion exiting Q2, an increase of $208 million quarter over quarter.

Our strategy with segmented Creative Cloud offerings is to target existing customers across all user categories, as well as attract new customers to the platform.

Overall, we are seeing strength in migrating the installed base, as well as expanding our market with new user adoption.

Enterprise customer migration is proceeding well with Adobe's direct salesforce driving new enterprise term license agreements or ETLA adoption.

Adoption of the full Creative Cloud offering and the creative professional segment was strong in Q2, with acceleration over Q1.

Creative Cloud for team subscriptions has now become a significant percent of overall subscriptions, and is expected to grow given increased channel focus with the elimination of CS6 perpetual licensing.

And we are expanding the overall opportunity with our Photoshop Lightroom offering, targeting the photography segment.

This offer is enabling us to acquire new customers as well as migrated those who historically licensed Photoshop Elements and Photoshop Lightroom.

Retention of Creative Cloud subscriptions, including renewals after promotional pricing expiration, continues to track ahead of our initial projections.

Q2 average revenue per user, or ARPU, in each Creative Cloud offering was consistent with Q1.

As you know, the photography offering has a lower ARPU than the rest of the Creative Cloud business and is also responsible for a majority of the subscription upside we have achieved in the past couple of quarters.

Given total subscription mix, the growth in Photoshop Lightroom subscriptions slightly decreased total Creative Cloud ARPU in Q2 while expanding our overall market opportunity.

In total, Creative Cloud subscription and ETLA adoption drove stronger-than-expected creative ARR in Q2 which reflects the strong health of the business.

In document services we achieved revenue of $196 million in Q2.

Our success in this category is being driven by continued adoption of Acrobat, Acrobat ETLAs, Acrobat Cloud Services, and EchoSign.

Document services ARR grew to $183 million exiting Q2.

Total document services subscriptions spanning EchoSign, Create PDF Online, and related services grew to 1.9 million exiting the quarter.

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 $283 million, representing year-over-year growth of 23%.

We drove near-record bookings for any quarter which is impressive for a Q2, and continues to put us on pace to achieve our target of 30% Marketing Cloud bookings growth this year.

Total transactions managed by all our Marketing Cloud solutions grew to more than 6.3 trillion in Q2.

Mobile device use continues to be a driver in our digital marketing business.

Mobile transactions increased to 37% of total Adobe analytics transactions.

The second component of our digital marketing segment is revenue from the LiveCycle and Connect businesses which contributed $47 million in Q2 revenue, flat with Q1 revenue and consistent with our expectations.

Print and Publishing segment revenue was $46 million in Q2.

Geographically, we experienced stable demand across our major geographies.

From a quarter-over-quarter perspective, FX increased revenue by $3 million.

We had $2.6 million in hedge gains in Q2 FY14, versus $2.8 million in hedge gains in Q1 FY14, thus the net sequential currency increase to revenue was $2.8 million.

From a year-over-year currency perspective, FX increased revenue by $3.1 million.

Comparing the $2.6 million in hedge gains in Q2 FY14 to the $15.3 million in hedge gains in Q2 FY13, the net year-over-year currency decrease to revenue considering hedging gains was $9.6 million.

In Q2, Adobe's effective tax rate was 27% on a GAAP basis and 21% on a non-GAAP basis.

The GAAP rate was lower than targeted primarily due to stronger than forecasted profits outside the US.

Employees at the end of Q2 totaled 12,026, versus 11,802 at the end of last quarter.

Our trade DSO was 45 days, which compares to 42 days in the year-ago quarter and 46 days last quarter.

Cash flow from operations was $368 million in the quarter, and our ending cash and short-term investment position was $3.33 billion, compared to $3.13 billion at the end of Q1.

In Q2, we repurchased approximately 2.6 million shares at a total cost of $166 million.

Now I'd like to go over our financial outlook.

As I noted earlier, our reported revenue in Q2 included final demand for CS6 perpetual product.

Moving forward, we will be solely focused on subscriptions and ETLAs.

With this as context, in Q3 of FY14 we are targeting a revenue range of $975 million to $1.025 billion.

In Q3, we expect to add approximately $250 million of digital media ARR, with digital media segment revenue declining sequentially.

We are targeting Adobe Marketing Cloud revenue to grow approximately 20% year over year.

We expect combined revenue with LiveCycle and Connect to decline sequentially, and we are targeting Print and Publishing segment revenue to be relatively flat.

We are targeting our Q3 share count to be 506 million to 508 million shares.

We are targeting net non-operating expense to be between $14 million and $16 million on both a GAAP and non-GAAP basis.

We are targeting a Q3 tax rate of 26% to 28% on a GAAP, and 21% on a non-GAAP basis.

These targets yield a Q3 GAAP earnings per share range of $0.02 to $0.08 per share, and a Q3 non-GAAP earnings per share range of $0.22 to $0.28.

In the second half of FY14, we expect Creative Cloud adoption to continue to accelerate.

We are targeting digital media ARR to grow sequentially in Q4 to a total of $1.925 billion exiting the year, an increase over our prior annual target of $1.85 billion.

We expect to add approximately 1 million net new Creative Cloud subscriptions in the second half of the year with sequential growth in each quarter.

This means we expect to achieve approximately 3.3 million Creative Cloud subscriptions by year end, which is 300,000 higher than our target of approximately 3 million that we gave entering the year.

Our updated digital media ARR target exiting the year reflects the Creative Cloud subscription and ETLA product mix we expect, including continued success of the Photoshop Lightroom offer that is expanding our market opportunity.

We also continue to target at least 20% revenue growth and 30% bookings growth with Adobe Marketing Cloud for the year.

I'll now turn the call back over to Mike.

Thanks, Mark.

Before we get to Q&A, a few logistics items.

Adobe MAX is coming up in October and will be held again in LA.

The opening-day MAX keynote is on Monday, October 6. We plan to host a brief financial analyst update meeting that afternoon.

We will be sending out registration information in the next week for investors and analysts to sign up for MAX.

We will also webcast the MAX keynote sessions as well as our financial analyst briefing.

For those who wish to listen to a playback of today's conference call, a web-based 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 54143487.

Again, the number is 855-859-2056, with ID number 54143487.

International callers should dial 404-537-3406.

The phone playback service will be available beginning at 5:00 PM Pacific Time today, and ending at 4:00 PM Pacific Time on Monday, June 23, 2014.

We will now be happy to take your questions.

Operator?

(Operator Instructions)

Walter Pritchard, Citigroup.

I'm wondering, Mark, if you could talk about ARPU, in Q3 you have a few factors here with acceleration potentially in team addition, which carries a higher ARPU and then continued growth in the lower end; just wondering how we should think about ARPU headed into Q3.

Walter, why don't I start and then Mark can add?

Because overall we continue to track ARPU for CC instructions, which again just to remind everybody does not include the enterprise ETLAs.

And to give you all some color excluding the Photoshop Lightroom bundle, overall ARPU across individuals and teams, single applications as well as the complete Creative Cloud in all markets, including education which you know is priced lower than commercial, has actually increased every quarter for the last few quarters, and is now in the high $30s.

When you blend in Photoshop and Lightroom that's priced at approximately $10, the resulting ARPU is now in the low $30s.

So keep in mind that with the PSLR bundle we believe that the overall opportunity is larger than when we first outlined the Creative Cloud opportunity, and therefore represents a greater ARR potential.

So that's how we have seen ARR progress.

I wouldn't add much to that.

I think it's doing exactly, Walter, what we would like it to do.

Across each of the different offerings it's holding up very well, and as Shantanu said, the important part is on the creative professional side, it's been increasing the last several quarters.

I was just going to say, it's just going to move around based on product mix every quarter.

And to follow-up to that, would you expect that you did see a nice reacceleration in the full suite add this quarter from it being flat in Q4, Q1?

I'm wondering if you look into Q3 and Q4, do you expect that as part of the subscriber guidance that you gave that the full suite additions would continue to accelerate along with the total?

I think we'll continue to see strength, Walter, in the full units as well.

And as you know, the channel I think we identified that the channel is also going to focus exclusively on the complete offering as well as the team offering.

And so I think the combination of those give us confidence for the number that we outlined for the remainder of the second half.

Great.

Thanks a lot.

Steve Ashley, Robert W Baird.

Shantanu, my question is about the Creative Cloud, and I'm assuming one of your goals is to get the Creative Cloud customers to save more of their content to cloud.

I first want to confirm that that is something you'd like to do.

And number two, if there are any steps you hope to take to encourage that behavior?

Sure, Steve that's a good question.

And yes, we do want people to be able to collaborate effectively, whether it's freelancers who are working with other freelancers on a project, whether it's people who wish to show their portfolios on Behance, as well as within an enterprise, people wanting to collaborate either through Creative Cloud or through our Marketing Cloud Adobe Experience Manager solution.

So being able to allow people to collaborate is a clear goal.

We have actually now turned on the ability for people to save files for anybody, whether you're a trial user or whether you're a full user.

We have functionality that is now present in Creative Cloud that allows people to share individual files, allows people to share complete folders.

And the way we will continue to encourage that is by integrating it directly into the desktop applications.

Again, tomorrow I think there's some exciting announcements.

Hopefully you'll all be on the call to hear about what's new, both in services and mobile apps, as well as in desktop apps.

Great.

Maybe a quick follow-up for Mark.

In the Marketing Cloud, we all know there's a business transformation going on in the Creative Cloud, but there's also a little bit of a business model change taking place in the Marketing Cloud with Experience Manager shifting to subscription.

And can you talk at all maybe qualitatively about the impact that might be having on reported revenue growth there and/or when that might normalize year over year in the future?

Sure, Steve.

Clearly, in digital marketing, AEM is the hottest solution, and it's a competitive advantage for us that we have both an on-premise perpetual offering as well as a term-based managed services offering.

We believe that the better option for most customers and for Adobe frankly, is the term-based offering.

And while it may vary quarter over quarter, the hosted offering now represents over 50% of the bookings in Q2, and we would expect this trend to continue.

In 2015 to your point, in FY15 we would expect the vast majority to be term bookings, so we're kind of getting through the bulk of that little mini transition if you will.

Great.

Thanks so much.

Brent Thill, UBS.

About a year ago, you articulated the Creative Cloud base in creative solution was around 12.8 million when you looked at the CS3 to CS6 cycle.

With 2.3 million of that 12.8 million you get to kind of 18% of the base that's converted.

Is that still the numbers that we should be looking at in terms of judging the conversion over?

Brent, firstly when we outlined the number that you talked about, that does include the enterprise customers.

And as you know when we talk about the subscription numbers we're only talking about the subscription numbers that are individual and team, so I think it's important to remember that the 12 million-plus includes our enterprise customers.

The second thing I would say is that when we think about the longer-term opportunities for Creative Cloud, given the initiatives we described with the photography offering, it's actually increasing our available market opportunity.

And you also have to remember that when we last did our surveys, a number of the people that are now signing up for Creative Cloud are new customers, and therefore that's expanding the available opportunity.

So we're not providing the longer-term numbers at this time, because we have really focused on driving financial performance in the second half.

But I think you should look at it big picture and say, we're making good traction migrating the existing customer base, we're attracting new customers to the platform and we're providing market expansion opportunities with the Creative Cloud platform to target a broader set of customers.

Okay.

And just a follow-up for Mark as a follow-on given you're still in the infancy of converting the base over; that ARPU in the near-term we should assume that you're going to continue to effectively try to drive everyone on that versus trying to drive ARPU off as it relates to the conversion rate that you're at today inside the install base?

That's right, Brent.

Right now the key is to get people to move over to Creative Cloud, get those new users to adopt Creative Cloud.

There will be ARPU expansion opportunities down the road.

Terrific.

Thank you.

By the way, one other point on all that, we keep saying this but keep in mind that we firmly believe the true health of the business is measured through ARR.

ARR encompasses everything.

It encompasses ARPU, it encompasses retention.

So while I understand the focus on ARPU, the right way to look at the business is on the ARR side.

Kash Rangan, Merrill Lynch.

Shantanu, could you give us a bit of an estimate on how much the base of 12.8 million expands by as a result of the new offerings that you're going to be targeting tomorrow to launch?

And also as you pointed out as you're trying to reach a broader base of individual point solutions and recognizing that 12.8 million is more of a thing of the past looking backwards, I'm curious how you think about the percentage expansion to that number as a result of targeting new users, point solutions, et cetera.

Kash, first --

10% more, 20% more or just some rough magnitude?

Well, Kash, first up, the expansion opportunities that we are talking about, I do want to reflect that they're already represented in the outlook that we have for the second half of the year.

And so the 1 million subs that we are talking about as well as the $1.925 billion ARR, both reflect our expectation of what we expect to see with the announcements tomorrow.

Again, Kash, we really want to focus on the second half.

We give you color relative to the 20% new customer growth that we've been seeing, but expanding that entire available opportunity and articulating what the numbers are, we're not providing updates to that at this time.

Got it.

Understood.

And sorry, this is another longer-term question for Mark.

Just wondering, how is your confidence level today relative to say, three months back or so with respect to earnings targets for FY15 and FY16 being at least two and at least three respectively?

Thank you.

That's it for me.

Hi Kash.

Well, unfortunately I'm going to give you the same answer that Shantanu just did.

Obviously we've put those targets out there.

They're still there, but we're not going to update them on a regular quarterly basis.

As we get through towards the end of this year and get ready for F Y15, that will be the appropriate time to update some of those longer-term targets.

I hope you're seeing that everything that we've articulated, we continue to focus on execution against it.

And we certainly believe in the Company that we've had a good first half.

And we expect to see a strong second-half as well as to continue to expand on our opportunities.

Got it.

My question was more spurred by looking at the subscription revenue growth rate and the very little operating expense growth rate you've had to put through to get that almost 70%, 80% subscription growth.

It feels like the operating leverage in your model is finally starting to really come through, and this seems to be the [literal] quarter of that happening.

So congrats.

Thank you.

Keep in mind, we did have upside this quarter like because of perpetual, right.

The beauty, though of the story this quarter is as in the past prior to this transition, when we had revenue upside, you're going to have earnings upside.

And that's starting to come back into the picture.

So going forward, just like in the past when we have revenue upside we will likely have earnings upside.

And just to confirm again, Kash, in response to your question what I wanted to say was in the surveys that we are doing 20% of the user base that we're finding who are adopting the Creative Cloud are new users to the platform.

Wonderful.

Thank you so much.

Mark Moerdler, Sanford Bernstein.

So maybe you just answered that and I didn't catch it completely, but what's the sense in terms of the net new users within the subscriber base?

What percentage of subscribers are net new?

Do we have that yet?

Mark, we do surveys on a periodic basis is what we were saying and it's approximately 20% of the users are net new.

That's sort of an order of magnitude way of looking at it.

Okay.

So that's still staying.

And then the follow-up for Mark, cash and cash equivalents is growing quarter over quarter.

Is this US cash that's growing or is it all overseas?

Well, it's both.

But as we've said in the past, the great majority of our cash is overseas.

We still believe that the best way of returning cash to shareholders is in the form of share repurchases.

We continue to do that.

You saw we bought a bunch of stock again this quarter.

We'll continue to do that.

And obviously we look at our capital planning and our capital structure on a regular basis, but right now we think that's the right answer.

Perfect.

Thank you.

I appreciate it.

Good job on the quarter.

Thank you.

Kirk Materne, Evercore.

Can you talk a little bit about the progress you're seeing in terms of cross-selling with the digital marketing and the digital media solutions in your customer base, I think we all understand that you guys have a very strong product offering, both and a very big customer base of digital media.

Can you give us some anecdotes that give you some comfort that the progress and some of the advantages you have in say, the CMO officer are starting to play out, especially as it relates to the digital marketing business?

Yes.

We certainly track that internally and we continue to feel good about the progress that we are making in having larger enterprises adopt both the Creative Cloud ETLA offering as well as multiple Marketing Cloud solutions.

I think the two areas where we see the most traction, the first area where we see traction is where people are now adopting the Creative Cloud and doing all of the asset management within the Marketing Cloud, Adobe Experience Manager, asset management solution.

So that's one area where we see traction.

The second area where we see traction is certainly in the area of people wanting to use the same workflow for both delivering mobile applications using PhoneGap enterprise as well as DPS, which is the digital publishing suite option.

And last but certainly not least there's no question, that when we look at the new deals that we're having, we're selling to the c-suite, we're selling the combination of the entire content lifecycle.

And while there may be specialist salesforce that are selling one solution or the other, the number of quarterbacks that we have in these large accounts selling the entire Adobe story is certainly growing.

So hopefully that gives you some color.

With respect to which markets, I would say retail continues to be an area where we are seeing quite a bit of traction when we see travel, automotive, these are a couple of the industries where -- and financial services -- where we are seeing synergy between the two solutions.

And just a quick follow-up if I may, you guys announced a partnership with SAP at the summit.

Any update on how that's progressing or your thoughts on how that might impact the digital marketing opportunity in the back half of the year?

I think we said when we announced the partnership that we don't expect a material impact.

It's all baked into our targets as well.

Brad Rencher certainly was at Sapphire where as you know it's their largest event and they showcased the partnership as well in terms of what we are jointly doing together.

I think long term and next year what you can expect to see is that both companies will jointly go to market.

I think the real areas of synergy is as commerce is becoming a bigger play for SAP, with their hybrid commerce suite, the integration we have with that, and for the realtime enterprise, the integration that we have between HANA as well as our Adobe Marketing Cloud.

But we're hard at work educating their salesforce on our offerings, and we're starting to see both companies go into joint customer accounts but it's early yet.

Thanks very much.

Jennifer Lowe, Morgan Stanley.

Just to go back to ARPU a little bit -- I know this topic has almost been beaten to death at this point, but you're just looking at Q2.

I think coming into the quarter, the guidance has been for subs adds similar to last quarter and digital media ARR at similar to last quarter.

We saw the digital media adds similar to last quarter, it looks like from an ARR perspective, but certainly the subs came in much, much better than we and others had expected from what we saw in Q1.

So just running those two items through that would suggest that there's something in the ARR that maybe didn't play out the way that you had thought, given that you didn't see the similar magnitude uplift in ARR.

So is there anything that surprised you negatively or didn't play out as you were thinking coming into Q2, given the outperformance in subs with more in line-ish number on the ARR side?

No.

I don't think there was anything that actually surprised us.

Remember when you look at the Creative ARR of $1.2 billion, we did say that the significant amount of the overachievement in the subscriptions was as a result of the PSLR bundle, but team continued to do well, and it's actually we expect it to continue to do well with the channel focus on it, Jennifer.

So we're pleased with the mix.

We're pleased with the market expansion, as well as again as I mentioned, if you look at just the Creative ARPU, it is in the high $30s and it's actually been increasing sequentially.

Switching gears a little bit, one of the things that you've talked about in the past being capacity constrained in the Marketing Cloud, and you also highlighted on the call some of the efforts to build that direct sales capacity around ETLAs on the media side.

Can you talk a little bit about the growth in direct salesforce and your efforts in building out some of the capacity there?

Sure.

Matt, who heads up field operations, we continue to focus on adding capacity both directly, as well as the partner revenue that we're starting to see in the Marketing Cloud in particular is actually increasing.

So a very substantial portion of our Adobe Marketing Cloud also has a partner element in it, which we think is good because it actually enables us to work effectively with partners.

We still continue to think, Jennifer, that we are capacity constrained as opposed to market constrained.

We are focused on a few countries right now because that's where we see tremendous opportunity.

And we'll continue with geographic expansion as we continue to build out into the second half of 2014 and beyond.

But we don't provide numbers specifically in terms of the direct sales capacity.

Great.

Thank you.

Derrick Wood, Susquehanna International.

You guys had the outage on Creative Cloud last month.

We've seen this with many cloud companies obviously in the past, but just curious what the reaction has been, and it certainly doesn't seem like you've seen any impact, but in terms of your guidance.

But do you think there's been any impact at all?

Well, with all cloud-based services as you mentioned, Derrick, the new reality is that we have to be even more vigilant about making sure that we have 100% uptime.

The outage that occurred in Q2 should really never have happened.

It was a sequence of things and we've learned from it as well as introduced additional safeguards and redundancies as a preventive measure.

I think our outreach to our customers has helped address any issues.

And you're right, we did not see any real impact from that outage.

Okay.

And quick question for Mark, now that CX is withdrawn from the channel, can you give us any color on the degree of step down in product revenue expected in the second half?

Well, it's really baked into the guidance.

If you look at the $1.068 billion, this quarter going down to $975 million to $1.025 billion, that's really driven by this sequential decline in perpetual revenue.

That is the reason for the decline, because obviously Creative Cloud subscription revenue is increasing, digital Marketing Cloud revenue is increasing.

So it's really, that is the size of the decline right there.

Okay.

All right.

Thank you.

And like we said, you don't have to worry about perpetual revenue much anymore.

It's literally de minimis in Q3 and beyond.

Jay Vleeschhouwer, Griffin Securities.

Shantanu, Mark, I'd like to ask about the potential magnitude of Creative ETLA as a metric.

It would appear that for the last couple of quarters, the year-over-year growth in ETLA has perhaps been triple or more.

That's at least our inference, but the comps get harder of course into the second half of this year and into next.

But when you think about the potential for corporate maintenance renewals, capacity, access to new technology and so forth, wouldn't it stand to reason that over time that Creative ETLA number could be potentially a several hundred million dollar number substantially higher than it is today?

Jay, first, I will say that the field team has done a really good job of educating customers on the benefits of the Creative ETLA and helping transition them from perpetual offering to the term-based offering.

I think when you look at the potential that we still have to get customers to the Creative ETLA, you're right.

The growth that we have seen in that business has been quite significant.

It is a little bit more seasonal, the ETLA, in that you build a pipeline over the year and then you tend to have a stronger Q4 in the Creative ETLA, much like you might see in digital marketing bookings.

We're not going to provide specific targets of how large the Creative ETLA business can be.

But I think we've outlined in the past how much licensing was a meaningful component for the Creative business.

And certainly that licensing revenue should move into what is now ETLA.

So it's an area of significant focus for us in the Company, because it enables us to have a good relationship with the customers.

All right.

Thank you for that.

My follow-up is on EPS.

And I was wondering if you could update us on the volume to date that you've seen there versus $1.70 that you've reported at the end of Q1.

And could you comment as well on how the corporate versus traditional publisher customer base mix has evolved over the last year or so, how you're thinking about that?

Sure, Jay.

I think directionally, the corporate customers is where we've been focusing a little bit more, because we have a number of the publishers already as customers.

And so when you look at the growth that we're finding in DPS, it is for all of these other use cases, whether it's training or manuals or corporate brochures, I think Mike used it for our annual shareholder reports.

So that's where the growth is.

I don't have the exact download number with me, but growth continues in the publishing segment as well.

Thank you.

Matt Hedberg, RBC Capital Markets.

Nice quarter.

Follow up to Jay's question, you guys have a large ELA install base.

I guess I'm wondering, should all former ELA customers become ETLA customers, or will some of those fall into different segments?

And I guess if so, is there a way to think about the split there?

No.

I think the way of looking at it is all ELA customers should become ETLA customers.

In fact, directionally we've also said that some of the customers that may have in the past had smaller licenses which may have quote-unquote moved to team offering could also move to the ELA customers.

So getting a relationship with small marketing departments, entire media agencies through ETLAs is very much a part of our strategy.

That's great.

And maybe one quick question on the geography, it looks like AsiaPac was down again a little bit, clearly more in line with your expectations.

Should that market start to grow in the second half?

With Asia-Pacific the important thing to remember is that what you're seeing is the digital media business move to subscriptions, and in digital marketing it's not as much of a market as some of the other markets.

So Asia continues to perform well.

We believe that Australia and some of those other markets are really good markets for digital marketing, but it's not as extensive a market for us in digital marketing as it has traditionally been in digital media.

And so the growth that we're seeing in digital marketing in the US and Europe, make that as a percentage of our revenue greater than it formerly was.

That's great.

Thanks, guys.

Robert Breza, Sterne, Agee.

I think most questions have been asked, but Mark, you I think tried to make a point here very clear that one perpetual license are gone, we shouldn't probably see any seasonality.

Is there anything else that we should think about as we look out towards FY15 and FY16 in terms of seasonality or changes to the model that you should point us towards?

Thanks.

Not really.

As we move forward now this frankly gets easier for me.

It gets easier for you as well to model out.

The percent of ratable revenue going into a quarter is only going to increase with perpetual coming out.

You don't need to worry about the decline of perpetual in any given quarter.

We really do think now that Q3 could be the low point from a revenue perspective.

One little caveat would be if for some reason we sold an unusual amount of AEM perpetual in any given quarter.

So you will see Q4 revenue go up from Q3 due to seasonality, particularly around AEM.

And then you have that seasonality come out in the first quarter, but we really think that Q3 could be the low point here.

Again, with a little caveat around AEM, but for the most part this gets much easier to forecast.

Perfect.

Thank you very much.

Thanks again, all of you, for joining us.

It feels like we're executing really well against our strategy.

We had strong first-half financial results.

And with upside in both digital media subscriptions as well as ARR.

And in digital marketing also we feel good with strong year-over-year revenue as well as bookings growth.

And as you saw the earnings upside has accompanied revenue upside, demonstrating the leverage of our financial model.

We look at Q2 as a significant milestone for the Creative Cloud business as we eliminated most of the options to license CS6, so both Adobe, our customers, as well as our partners can now focus solely on driving more Creative Cloud adoption.

And most important I think we continue to innovate with successful product launches of our marketing products that we unveiled at the US and Europe summit events.

And hopefully all of you will tune into the global Creative Cloud launch scheduled for tomorrow that should lead to a strong second half.

Thank you for joining us.

We think Adobe is in great shape.

This concludes our call.

Thanks for joining us today.