Adobe Inc (ADBE) 2015 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

I would like to welcome you to Adobe Systems second-quarter FY15 earnings conference call.

My name is Ian and 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; Mark Garrett, Executive Vice President and CFO; and David Wadhwani, Senior Vice President and General Manager, Digital Media.

In the call today we will discuss Adobe's second-quarter FY15 financial results.

We will also review announcements made earlier today regarding our latest Creative Cloud release and our new Adobe Stock offering.

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

We have also posted PDFs of our earnings call prepared remarks and slides, our financial targets and an updated investor data sheet 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 and operating model targets and our forward-looking product plans, is based on information as of today June 16, 2015 and contains forward-looking statements that involve risks 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 and financial targets document 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 in 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 re-recorded or otherwise reproduced or distributed without prior written permission from Adobe.

I'll now turn the call over to Shantanu.

Adobe delivered strong results in Q2 with revenue of $1.162 billion and non-GAAP earnings per share of $0.48.

Momentum across our Creative Cloud, Document Cloud and Marketing Cloud businesses drove these results.

As digital continues to disrupt industries, Adobe is uniquely positioned to help brands, media companies, government agencies and educational institutions create digital experiences that are unique, relevant and effective across every touch point.

We are the only company with the vision and assets to address the entire content lifecycle from creation and delivery to optimization and monetization.

We are accelerating the pace of innovation in each of our cloud offerings and customers are looking to us to provide a complete integrated platform for their digital transformation.

Adobe Marketing Cloud is the industry's most comprehensive offering.

We had strong bookings in Q2 and reported revenue of $327 million, representing 15% year-over-year growth.

We continued to drive Adobe Marketing Cloud adoption across all eight solutions in Q2 and saw a significant uptick in customers acquiring multiple solutions.

In fact, two-thirds of our top customers this quarter licensed multiple solutions.

Key customer wins included Saks & Co., The Gap, DirecTV, Fox Entertainment and Canadian Imperial Bank of Commerce.

The breadth of Adobe Marketing Cloud has been extended with two new solutions, Adobe Audience Manager and Adobe Primetime.

Adobe Audience Manager is a data management platform that integrates online and off-line data, enabling marketers to create and target audience segments in their multi-channel campaigns.

Adobe Primetime is a multi-screen TV platform that helps broadcasters, cable networks and service providers create and monetize engaging and personalized TV and film experiences.

Primetime has emerged as a global leader in powering TV content across screens, including over-the-top devices such as Apple TV and Roku.

And we're partnering with content owners, programmers and pay-TV providers such as Major League Baseball Advanced Media to offer innovative programming across all screens.

The integration of the creative and marketing workflow is a unique differentiator for Adobe Marketing Cloud.

In Q2 we announced a common asset management foundation across Adobe Marketing Cloud and Creative Cloud which will make it easier and more efficient for creative and marketing teams to work together.

In Q2 we acquired Tumri's advertising technology to add dynamic creative optimization to Adobe Media Optimizer, extending Adobe's lead in the programmatic advertising space.

We continue to build a vibrant ecosystem of industry partners for Adobe Marketing Cloud.

In Q2 we announced a strategic partnership with Microsoft to integrate Adobe Marketing Cloud into Microsoft's Dynamics CRM to help enterprises better engage with customers.

Our Digital Marketing events around the world provide, inspiration education and networking opportunities for leading brands and marketers around the world.

In Q2 the Digital Marketing Summits in Salt Lake City, London and New Delhi were all sold out, and this summer we will host thousands more at our Digital Marketing Symposia in Sydney and Singapore.

Industry analysts continue to recognize our solutions as market-leading in their categories.

In April, Gartner recognized Adobe's leadership in its 2015 Magic Quadrant for multi-channel campaign management.

In Digital Media we launched the Document Cloud in March and early response has been positive.

We saw strong Acrobat DC subscription uptick during the quarter.

As the paper-to-digital transition continues Adobe has a tremendous opportunity to capitalize on our leadership with the PDF and Acrobat franchise.

Document Cloud features new mobile and touch capabilities and has built-in electronic signature tools for all users.

We reported Document Cloud revenue of $197 million in Q2 and exited the quarter with $329 million of Document Cloud annualized recurring revenue, or ARR.

Creative Cloud continues to be the preeminent destination for creators.

We're migrating customers from our Creative Suite install base as well as attracting new users.

In Q2 creative ARR surpassed the $2 billion mark, driven by strong adoption across our individual, team and enterprise offerings.

Net new Creative Cloud subscriptions grew by 639,000 in the quarter to over 4.6 million, and represents 38% year-over-year growth.

Across our Creative and Document Cloud businesses total Digital Media ARR grew to $2.35 billion as of the end of Q2.

Today we launched our 2015 release of Creative Cloud, featuring innovation in desktop and mobile apps and CreativeSync technology to enable seamless integration between the two.

We unveiled Adobe Stock a new service that enables creators to buy and sell stock content as part of the Creative Cloud experience.

Now I would like to turn it over to David to provide an update on our Creative Cloud strategy and more details on today's announcements.

David?

Thanks, Shantanu.

Our Creative Cloud strategy focuses on three growth drivers -- the continued migration of Creative Suite customers to Creative Cloud, the expansion of our market through tiered offerings that attract new customers, and the introduction of value-added services that increase ARPU.

We are executing well in each of these areas.

Our strategy to migrate Creative Suite customers to Creative Cloud is working.

We're delivering content innovation in our Creative Cloud desktop apps, we're expanding our family of connected mobile apps, and we're delivering powerful integrated asset management capabilities that connect our mobile and desktop app workflows.

These cross device workflows are resonating with our customers and have been improving both trial conversion and customer retention.

In addition to migration we are successfully attracting new customers to Creative Cloud through our family of mobile apps and the Creative Cloud Photography Plan.

In Q2 we delivered a milestone release of CCP featuring a simplified user experience and new mobile features.

CCP is ideal for all photographers and a large percentage of the subscribers are first-time Adobe customers.

Finally, we remain focused on expanding the value of Creative Cloud through services that drive stickiness, conversion and increase ARPU.

Today's introduction of Adobe Stock builds on our Creative Marketplace and represents an estimated $3 billion of incremental addressable market.

Now, I'm happy to share a bit about today's 2015 release of Creative Cloud.

The release includes major updates to all of our flagship desktop apps, including significant breakthroughs in productivity, performance and new features.

We also updated our family of mobile apps across iPhone, iPad and now, for the first time, Android.

And we announced significant updates to CreativeSync, the technology that enables our mobile and desktop apps to work together seamlessly.

The combination of these capabilities unlock new creative workflows that will motivate CS customers to upgrade and drive active use and retention of existing members.

Enterprise customers will benefit from all the new Creative Cloud features.

In addition, they will get expanded security options and deeper connections between Creative Cloud and our Digital Publishing and Marketing Cloud offerings.

Finally, we're introducing Adobe Stock, a brand-new service based on our acquisition of Fotolia.

We estimate that 85% of creatives who buy stock content use Adobe tools, and more than 90% of stock content sellers use Adobe software in the preparation of their photos and images.

Adobe Stock is the first stock marketplace embedded into the way creatives work.

Deep integration with our Creative Cloud desktop apps, including Photoshop, Illustrator and InDesign, makes buying and using stock photos, images and illustrations incredibly easy.

The global launch of Adobe Stock shakes up the multi-billion-dollar stock content market.

Customers can buy images on demand or as part of a subscription plan.

Most importantly, existing and new Creative Cloud members are also able to add Adobe Stock to their subscription plan at a special rate, driving increased ARPU over time.

Adobe Stock extends the value of Creative Cloud to subscribers who want to monetize their assets and participate in the large global creative marketplace.

In just a few short years we have successfully reimagined the entire creative process, driving over $2 billion of ARR.

Today's announcement significantly advance all three of our growth objectives.

We're excited this innovation is now available to all our subscribers and we can't wait to see what they do with it.

Mark?

In the second quarter of FY15 Adobe achieved record revenue of $1.162 billion.

GAAP diluted earnings per share were $0.29 and non-GAAP diluted earnings per share were $0.48.

Highlights in our second quarter include growing creative ARR to $2.02 billion exiting Q2 -- ARR has now grown to the point where it has exceeded the peak annual revenue achieved from our legacy Creative Suite perpetual offering -- achieving total Digital Media ARR of $2.35 billion, which is the sum of creative ARR plus another strong quarter of Document Cloud ARR growth; delivering Adobe Marketing Cloud revenue of $327 million; showing leverage in our model with strong year-over-year growth in operating and net income; growing deferred revenue to a record $1.23 billion; achieving strong cash flow from operations of $471 million; and exiting Q2 with a record 72% recurring revenue.

In Digital Media we achieved revenue of $748 million.

This segment has two major components of revenue; Creative Cloud and Document Cloud.

The best overall measure of the health of our creative business is creative ARR and we grew ARR by $230 million during Q2.

Net new Creative Cloud subscriptions increased by 639,000 and we exited Q2 with 4,610,000 Creative Cloud subscriptions.

Retention rates remained strong.

With our Document Cloud products we achieved revenue of $197 million.

The benefits of subscription and enterprise term licensing agreements, or ETLAs, which is a core go-to-market focus with our new Document Cloud offering that shipped during the quarter, helped to grow Document Cloud ARR to a record $329 million exiting Q2.

In our Digital Marketing segment there are two components.

The first is revenue from our Adobe Marketing Cloud offering, and we achieved Adobe Marketing Cloud revenue of $327 million, up 15% year over year.

Bookings accelerated in Q2, driven by strong pipeline creation at our Digital Marketing Summit user conferences across the world during the quarter.

Multi-solution adoption is growing the size of customer engagements.

The second component of our Digital Marketing segment is revenue from the LiveCycle and Connect businesses which contributed $40 million in Q2 revenue, consistent with our expectations.

Print and Publishing segment revenue was $48 million in Q2.

Geographically we experienced stable demand across our major geographies.

From a quarter-over-quarter currency perspective FX decreased revenue by $16 million.

We had $22 million in hedge gains in Q2 FY15 versus $24 million in hedge gains in Q1 FY15.

Thus the net sequential currency decrease to revenue considering hedging gains was $18 million.

From a year-over-year currency perspective FX decreased revenue by $48 million.

Considering the $22 million in hedge gains in Q2 FY15 versus roughly $2 million in hedge gains in Q2 FY14 the net year-over-year currency decrease to revenue considering hedging gains was $28 million.

In Q1 Adobe's effective tax rate was 18.5% 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 tax examinations.

Employees at the end of Q2, including summer interns, totaled 13,266 versus 12,698 at the end of last quarter.

Our trade DSO was 39 days which compares to 45 days in the year-ago quarter and 44 days last quarter.

Cash flow from operations was $471 million in the quarter.

Deferred revenue grew to $1.23 billion, up 32% year over year.

Our ending cash and short-term investment position was $3.41 billion compared to $3.18 billion at the end of Q1.

In Q2 we repurchased approximately 2.6 million shares at a cost of $200 million, of which $133 million was done under the new $2 billion authorization approved by our Board of Directors in January 2015.

Now I would like to provide our financial outlook covering both Q3 as well as the rest of FY15.

We have executed well in the first half of FY15, meeting or exceeding key targets that we set at the outset of the year.

And we expect our momentum to continue in the second half of this year and into FY16.

Adobe has a global business where currently more than 40% of our revenue comes from outside the US.

As we have explained, our hedging efforts focus on three quarters out, and that strategy has served us well over time.

Based on the rolling approach of our hedging program, our hedges maturing in the second half of 2015 and early FY16 were struck at current rates.

Therefore, moving forward our hedges will not mitigate the FX impact against our FY15 and FY16 revenue targets provided in December of 2014.

With the strengthening US dollar on a revenue weighted average basis FX rates have moved approximately 9% from December of 2014 until today.

We expect approximately $900 million of foreign currency denominated revenue in the second half of FY15.

Applying the 9% rate change to the expected $900 million of revenue yields an estimated $80 million of impact due to FX that we expect will not be offset by hedging.

We estimate $30 million of this impact will occur in our third quarter.

Our FY15 annual revenue target was $4.925 billion.

This revenue target was the sum of our original guidance of $4.85 billion in December plus the additional $75 million of expected FY15 revenue from our acquisition of Fotolia in January.

We are now targeting FY15 annual revenue of $4.845 billion solely due to the estimated $80 million impact of FX in the second half of FY15.

We also expect second half year-over-year Adobe Marketing Cloud reported revenue growth of approximately 24%.

Given our business momentum we are increasing our Digital Media ARR target to approximately $2.925 billion exiting FY15, which, as a reminder, is measured on a constant currency basis.

This updated ARR target does not include any benefit from our newly launched Adobe Stock service.

Despite the impact of currency we continue to expect Adobe Marketing Cloud bookings growth of approximately 30% for the year and non-GAAP earnings per share of approximately $2.05.

Taking into account the negative impact of $30 million from FX, in Q3 of FY15 we're targeting a revenue range of $1.175 billion to $1.225 billion.

In Q3 we expect the sequential increase in Digital Media ARR to be similar to what we achieved in Q2.

We expect Digital Media segment revenue to grow sequentially.

And we expect approximately 21% year-over-year reported revenue growth for Adobe Marketing Cloud.

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 approximately 25% on a GAAP basis and 21% on a non-GAAP basis.

These targets yield a Q3 GAAP earnings per share range of $0.23 to $0.29 per share and a Q3 non-GAAP earnings per share range of $0.45 to $0.51.

In summary, our strong execution continued in Q2 and Adobe's P&L now reflects the positive impact from the growth of our cloud-enabled solutions.

Mike?

Thanks, Mark.

As part of our Adobe MAX conference this fall in Los Angeles, we will host an analyst meeting on the afternoon of Tuesday, October 6. Registration information for MAX and the analyst meeting will be sent out later this month.

The main keynote presentation at MAX will be on Monday, October 5. And more information about our user conference is available at max.adobe.com.

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 58501348.

Again, the number is 855-859-2056 with ID number 58501348.

International callers should dial 404-537-3406.

The phone playback service will be available beginning at 5 PM Pacific time today and ending at 10 AM Pacific time on Monday, June 22, 2015.

We would now be happy to take your questions and we ask that you limit your questions to one per person.

Operator?

(Operator Instructions)

Walter Pritchard, Citi.

Hi, thanks.

We heard David talk about the Fotolia opportunity for ARPU, and that makes a lot of sense.

I'm wondering if you could just talk a bit about ARPU trends during the quarter.

And we noticed from of promotional perspective you added some stuff at the end of the quarter, which we've seen, and haven't resumed that.

Could can you put that in the context of how we should think about ARPU here as we move through the second half of the year?

Hello, Walter, it's Mark.

As it relates to promotions, I think we told you on the last quarter call in Q1 we did not have a lot of promotions in the quarter, very little.

This also was a quarter where we had very little promotional activity.

So, we're really pleased with the amount of net new subscribers we're driving without a lot of promotional activity.

That doesn't suggest we won't do them in the future but the fact that we are driving a lot of net new subscribers without it right now is a very good sign.

As it relates to ARPU, we had the smallest sequential decline we've had in quite a long time.

We are very happy with ARPU.

As we've continued to say, ARPU by offering continues to remain stable or increase.

And the average of all of the ARPUs this quarter dropped very slightly.

And, again, it was the smallest decline we've had in several quarters.

Also, Walter, with respect to Adobe Stock, just to clarify, as David said in his prepared remarks you can, if you are a Creative Cloud subscriber add a subscription for Adobe Stock.

And you can also as a new subscriber subscribe to both Creative Cloud applications as well as Adobe Stock.

Both of those will be reflected in the ARR numbers that we report on an ongoing quarterly basis.

I wanted to clarify for everybody listening on the call that the standalone subscription for just Adobe Stock is not reported at this point in the Creative Cloud numbers.

And we would likely not add that until FY16.

Okay.

Thank you.

Brent Thill, UBS.

Thanks.

Shantanu, CS6 just passed its three-year birthday and I'm curious -- that base is fairly large -- what you've seen so far in the CS6 base now converting over to Creative Cloud.

And I had a quick follow up with Mark as it relates to Japan, what you saw in the quarter and any trends there would be helpful.

Sure.

So, Brent, as you point out, CS6 is definitely long in the tooth.

And with today's CC 2015 release the innovation that we are providing, as well as the integration with services, makes it even older.

We still have a fairly large CS6 base, which clearly represents upside opportunity for us to convert to the Creative Cloud.

As you are aware, in Japan that was a market where we were selling CX6 still even late last year.

We continue to target CS5 and CS6 as the most likely install base to convert to CC.

They are converting.

The innovation is definitely resonating with them.

And that continues to be the focus for David and his group.

I think Shantanu touched on Japan so I don't have anything to add.

Mark, just a quick follow maybe on the DSO.

It was 39 days.

We had to go back six years in the model.

Is that just the subscription model?

Is there something about linearity in the quarter that surprised you?

There is nothing that really surprised us.

It is definitely related to subscription model.

The team does a great job on the collection front, as well.

It's going to move around as you go through quarters and you have various linearity and deal sizes.

But we've always been, as you know, historically very good at driving a low DSO.

Great, thanks.

Brad Zelnick, Jefferies.

Thanks for taking my question.

On Creative Cloud, can you give us an update on the mix of point products versus full suite subscriptions?

And particularly with strength in the point products the past several quarters, which seem to be accretive to the model, can you update us with even a directional sense of how many users you are attracting that are net new and where they come from?

Sure.

Brad, I'll go ahead and take that.

I think the mix in the second quarter of 2015 was, 56% was complete as well as 44% were single app.

We saw strength across the board, the momentum of subscriptions.

If you look at 630,000-plus subscriptions that we had, 38% growth, we're seeing good momentum across each one of them.

As we have mentioned in the past, the Creative Cloud Photography is certainly attracting a significant number of new customers.

The overall new customer adds continues to be greater than 20%.

So, we continue to be pleased with what we're seeing on Creative Cloud adoption.

Thanks.

If I could just sneak in a quick one for Mark.

OpEx looks like it's guided up 5% sequentially in Q3.

Other than the seasonal hires, the summer interns -- which it looks like headcount is also up a similar percentage sequentially -- is there anything else we should be thinking about seasonally?

And where do you expect headcount for the full year?

Thanks.

The bulk of the increase in OpEx as you look out from here is really going to be driven by sales and marketing.

Interns don't drive it that much.

The regular hires in the quarter were about 350 and there were a couple hundred interns in this quarter.

But the Op Ex moving forward is really going to be driven by continued investment in sales and marketing to drive that 30% bookings growth that we need to do in Digital Marketing, and obviously the ETLAs and Digital Media, as well.

Great.

Thanks a lot.

Kash Rangan, Merrill Lynch.

Hi, guys, thank you.

You made an observation that Creative business is finally at the point where it was, roughly comparable to the size of the Creative business, the license model.

Yet you have only 4.6 million subscribers in your base.

It feels like the overall opportunities at least only one-third penetrated, maybe even less so.

So, what are the opportunities to be able to triple the size of your Creative business given that you've gotten through about one-third penetration of your old base opportunities?

And challenges consequently, as well, as you try to triple the size of the business, that is to say, possibility.

And also wanted to ascertain from you what realistic attach rate should we expect for the Stock business given your base of Creative pros is about $6 million, $6.7 million.

That's the data that I have from your Analyst Day a couple years back.

Thank you.

Kash, I think you are alluding to the numbers that we've given in terms of the Creative Suite install base being over 12 million.

Clearly the innovation that David and his group are driving -- and I will ask him to add color on the specific features -- will certainly continue to help migrate the existing CS customers into the Creative Cloud option.

The addition of the new services are certainly continuing to attract a brand-new set of customers.

That's expanding the overall install base as we continue to target creators, both in the imaging space and with a number of the mobile applications, what we're doing to increase the size of the funnel -- which, again, is adding to the available opportunity that we have in that particular market.

And I think Stock is a little bit early in terms of the rollout.

But, again, I think David has talked about what percentage of people both buy and sell using Adobe tools, and that represents an opportunity.

Sure.

Let me add a couple things to that.

First of all, the announcements that we had with the 2015 release were very broad-based.

We had major enhancements to our desktop applications and our mobile applications on iOS.

And we also, for the first time, introduced the mobile applications on Android so we feel that that's going to have a broader play, as well.

Additionally, we made some significant updates to the CreativeSync technology that moves assets across the desktop and mobile applications.

So it enables them to work as a single family.

And, of course, we introduced Adobe Stock in addition to some very visible changes that we made to the desktop applications around touch, which is one of the big drivers that we believe in terms of CS4, CS5, and CX6 customers coming to the platform.

A couple things to call out in terms of what we're seeing in terms of the new capabilities and how that's driving existing customer behavior.

A lot of the existing enhancements we have made to mobile applications are having significant driving on both the migration and also on new customers coming into the family.

So, as you noted and as we have talked about in the past, the mobile applications have been around for about a year.

And what we are seeing is that they are driving increased conversion of people trialing the products.

We see that there are increasing retention of paid members that have been using the products.

And we see that they are driving additional creation of Adobe ID.

So, we have seen more Adobe IDs created as a result of mobile first interaction with Creative Cloud than ever before.

And I would characterize the conversion of those mobile IDs to paid customers as generally strong.

So, we are very happy with how all that has been playing out in the ecosystem.

So conceptually -- I want to make sure I'm not making a mistake here -- the ARPU is going to lift and the TAM is actually larger than the old base, which means in the new world you don't even have to give revenue guidance, but it feels like your Creative business could be multiples of what it was in the prior to this model transition.

And your comments?

Yes, Kash, the whole strategy around the Creative Cloud was to reimagine the creative process, make it far more predictable.

And we definitely thought to increase significantly the size of the market opportunity.

I think one measure that you can see even today of how successful we have already been is the fact that we have talked about how we used to sell approximately 3 million units in the past, and now if you look at what we're doing, which is 4.6 million subscribers, and in addition to that all of the enterprise deals that we have, we've already dramatically, I think, increased the size of the available opportunity.

One last thing I might add in addition to what David and I said, the enterprise also represents an opportunity with this particular release.

We have some very significant optionality that will enable enterprises to store all of their assets from behind the firewall.

And so continuing to focus on ETLAs and migrating enterprise customers with this new product, I think, represents an untapped opportunity.

Sterling Auty, JPMorgan.

Thanks.

Hi, guys.

I'm wondering, in terms of your comments around the Marketing Cloud, in terms of the revenue growth in particular, how much of the new targeted tier is impacted just by the FX versus anything else that's going on.

And just as a quick follow up, Mark, any sense of what the EPS impact on the third quarter from FX looks like?

Sure, sterling.

On the Marketing Cloud, as we said, bookings remains very strong.

In fact, I am sure you caught that we are not changing that 30% bookings outlook despite the impact to currency, which obviously suggests that we would have done better than 30% without the change in FX rates.

So, FX is clearly impacting bookings.

It's clearly impacting the marketing revenue growth.

We've always felt that the marketing revenue growth would accelerate in the back half of the year, and that's why I mentioned that the second half would grow 24% year over year.

So, we're still seeing really strong growth in marketing despite currency but there's no doubt that currency has an impact on that revenue growth rate, just like the rest of the business.

And then as it relates to EPS, Sterling, it's pretty straightforward.

We said that FX was impacting Q3 by about $30 million.

So, if you do the rough math you're going to get to around $0.04 to $0.06 of earnings impact in the third quarter as a result of that $30 million.

But, like we said, we are still confident in the $2.05, again, despite the impact of $80 million worth of currency in the back half of the year.

Great, thank you.

Ross MacMillan, RBC Capital Markets.

Thanks a lot.

Mark, just wanted to ask you on the Stocks.

I know you are focused on ARR.

But earlier in the year you talked about sequential increases [saw bad] through this year.

So, just curious as to whether you still expect sequential increases into Q4 and the $5.9 million target for the year.

And then I had one specific one for David on Fotolia regarding the contributor payouts.

It looks like you've set up 33% payout and I just wanted to get a sense whether that was an increase on the payouts to the contributors of Fotolia.

Thanks.

Hey, Ross.

As you know, we've always said for four years now that ARR is really the best measure of the health of the business.

And the sub number is an incomplete number because it doesn't include enterprise.

And as we add future offerings like Adobe Stock, looking at that sub number gets less and less meaningful over time.

But everything is encompassed in that ARR number.

That's obviously going very well.

That's why we raised our guidance on the ARR number.

And we had a great sub quarter.

We're thrilled with the sub quarter and we continue to report sub actuals.

But we're not going to guide on the sub number moving forward.

That said, our annual expectations really have not changed.

We need that $5.9 million sub number to hit the increased ARR target.

And clearly, with the performance we have had to date, we are on a path to meet or exceed that $5.9 million target.

But we really do want you guys, as we do, to focus more and more on ARR.

Great.

And on the question about the contributor payouts, the way we look at this opportunity is that it's obviously a large growing opportunity where we have strong relationships with both the buying side and the selling side.

And as we looked at the market makeup we saw the opportunity to grow the TAM of this opportunity by doing two fundamental things.

First was to remove the friction in terms of how sellers and buyers come together.

And that's what we've done to integrate both the selling and the buying directly within the tools.

And we believe that's going to be a really big opportunity to increase the velocity of content flowing through the system.

The second thing we wanted to do was streamline the economics around these businesses.

We believe that the marketplace today is priced with too much complexity.

So, we wanted to streamline the opportunity for pricing for the buyers and we wanted to create a very simple price model for the contributors, as well.

So, instead of doing a complex tiered approach for Adobe Stock we're doing a simple 33% for all sales that we have.

In terms of thinking about Q3 and Q4, Ross, just to maybe add a little bit more color, I would look at ARR being slightly up in Q3 and then sequentially up in Q4.

And that's a reasonable proxy for subs.

Exactly.

Thanks a lot.

Helpful.

Kirk Materne, Evercore ISI.

Thanks very much.

Shantanu, I was wondering if you could talk a little bit more about the Digital Marketing business.

With two-thirds of your customers now taking on more than one product, could you just talk about some of the solutions that are doing particularly well within more of a bundled framework?

And as you start to sell more solutions, does the competitive environment change at all?

Are you displacing more point products?

Is it still meeting the greenfield opportunity?

I was wondering if you could just provide a little more color on that front.

Thanks.

Sure, Kirk.

With respect to where the bulk of the bookings are right now and the revenue, I would say it's the combination of the Adobe Experience Manager, which is helping people create the online web infrastructure for the future.

It continues to be Adobe Analytics so people can get insight on what's exactly happening on their website.

And Adobe Campaign continues to do very well which enables you to have multi-channel orchestration of communication with your customers.

Having said that, the breadth of the offerings right now is starting to make all of these sticky and that's resulting in the increased bookings and the more strategic relationships.

And I can say that some of the smaller or the newer solutions, when you look at what's happening with Media Optimizer, as well as the other solutions like Target, you're actually seeing that business double year over year.

So, we're seeing some really good traction in the new solution as people look at the benefit of that.

Primetime had a great quarter.

Again slightly smaller numbers in the scheme of things.

But the good news from our point of view is the new solutions like Audience Manager, Primetime, Target, as well as Media Optimizer are doing really very well on a year-over-year basis, and makes the entire platform far more comprehensive and sticky.

And if I could ask you a really quick follow up.

You guys had some nice partnership announcements at the Summit this year with Accenture, IBM.

Can you just talk a little bit about how your broader channel in Digital Marketing is going in terms of the kind of leverage you are potentially getting out of those type of partnerships, if you don't want to talk about any of them specifically?

I think the great news is every single analyst who covers the Digital Marketing space has clearly identified Adobe as the leader.

That continues to be the case.

And what that means is that the inbound requests for systems integrators, for digital agencies to want to partner with Adobe is only increasing.

The way we look at the revenue is we look at what's partner-sourced, partner-influenced, and partner-driven.

And that as a percentage of the bookings is certainly going up.

Without highlighting any one partner on this call, the number of significant partnerships is only increasing.

Thanks a lot.

Mark Moerdler, Bernstein.

Thank you, I appreciate it.

Two questions.

First on the Digital Marketing side, bookings was a bit slow this quarter.

Was this timing of billings, FX, deal closure?

What else was impacting that number?

And then on the Adobe Stock, should we think of this as being purchased by Digital Marketing Cloud customers or will the sale be through the Creative Cloud and from there to Digital Marketing?

Mark, I do want to clarify, we had a very strong bookings quarter in Q2, as it related to bookings revenue.

Mark can maybe add more color on that.

But in terms of bookings we had a very strong quarter with Digital Marketing.

And as it relates to Adobe Stock, very quickly, you can both as an individual get it through Adobe.com as well as we have an enterprise offering that we will sell.

I think you are very perceptive in that the number of marketing professionals who will also use Stock and the integration of Adobe Stock with our Marketing Cloud also definitely represents untapped opportunity.

And as David said, we are really increasing the total available market for this because making pictures more accessible to people and allowing more people to contribute, I think that's a unique advantage that Adobe has.

And as Shantanu said, Mark, on the Digital Marketing side bookings were very strong.

We are reiterating the 30% growth for the year despite the impact of currency.

Revenue grew 15%.

So, if you are looking at revenue, revenue growth was maybe a little less than you would have thought.

But, as I said, we expected that to ramp over the course of the year.

And in the second half of the year, again despite currency, we're anticipating 24% growth in the second half of the year, second half over second half.

There is some currency impact in there, without a doubt, but still strong growth in the back half of the year.

Perfect.

One quick, as a follow-up.

How should we think about the impact of Document Cloud or Document Services revenue?

Do you see a dip as clients transition or is it just going to be revenue growth?

Where we talked about Document Cloud is that the revenue will continue to be relatively consistent or flat.

But where we are seeing the adoption is in the annualized recurring revenue, or ARR.

So, we are seeing good growth in the ARR.

I think we highlighted that in the prepared remarks, as well.

And we did see a good healthy subscription adoption of the new Acrobat DC product.

Thank you very much.

I appreciate it.

Phil Winslow, Credit Suisse.

Hi, thanks, guys, for taking my questions.

I just have a question on the Marketing Cloud.

Obviously a lot of companies have made acquisitions here in different categories of just the broad marketing space over the past couple of years.

I wonder if you could just comment on the competitive environment, what you are seeing out there.

And as you guys look at your portfolio versus the competition, what really stands out as to why you continue to win business but also what areas do you think you could see yourself looking to fill in either organically or inorganically?

I think to your point, everybody recognizes that addressing the Chief Revenue Officer, the Chief Digital Officer, or the Chief Marketing Officer is the most explosive software category that exists.

I think our sweet spot has always been how do we target this market of publisher with the customer experience solutions that we have.

In the offerings that we have, I will continue to say it's the combination of content plus data that represents the unique advantage that Adobe has.

And that's the combination of the Adobe Experience Manager as well as Adobe Analytics.

But the product that's doing really very well right now is Audience Manager.

And what Audience Manager allows people to do is have absolutely the same segmentation across their marketing spend if they are trying to attract customers, across any personalized offers that they want to make, as well as conversion.

I think it's the combination of all of our products.

And, honestly, it's also the tieback with the Creative products, that content velocity in terms of people trying to run campaigns.

The fact that Creative Cloud works with the Adobe Experience Manager asset management solution, that enables us, whether you are retailer, whether you are a financial services, whether you are government, whether you are a publisher, that content velocity that we can provide is just so much faster than anybody else.

I think across the marketing platform we really don't see one single competitor.

We do have a number of point product competitors for each of the individual solutions, but I think it's the comprehensiveness of our offering that enables us to win those deals.

Got it.

Thanks, guys.

Jay Vleeschhouwer, Griffin Securities.

Thanks, good afternoon.

A question first on the components of growth in the Doc Services or Document Cloud ARR, and then a cash flow question.

This was touched on a couple questions back, but when we think about the components of Doc Services in terms of new businesses, you must be shipping at least a couple million new licenses a year of Acrobat.

And you've made very clear that you are not going to pull the plug on perpetuals, at least not any time soon.

But how are you thinking about converting those, or having those signed as subscriptions versus perpetuals?

And then on the ETLA side of Doc Services wouldn't it make sense that ETLA as a proportion of Doc Services should be substantially higher for historical base reasons than ETLAs on the Creative side?

In other words, it looks like ETLAs are about one-tenth of Creative ARR, but given old line of licensing part of Acrobat, shouldn't ETLAs be a much higher percentage of Doc Services?

Jay, with respect to the Document Cloud you are right that the ETLA portion of Document Services is higher than the ETLA portion of the Creative Cloud due to the historical adoption of Acrobat within the enterprise, and them moving to three-year ETLAs.

With respect to individuals, Acrobat shrink used to continue to be a part of the offering.

And now on Adobe.com the main offering that we provide is the subscription offering.

And the subscription offering uptake within individuals and teams is actually very healthy.

I think what has happened, honestly, in the marketplace is that, when you look after Creative Cloud, even Office 365 is now being offered through subscription.

It's just become the more standardized way of happening.

So, you are right that the perpetual mix of Acrobat is higher than other products in our category but what we continue to be pleased with is when people come to Adobe.com the individual adoption, which is important to create that viral impact within enterprises, the subscription offering uptake is very healthy.

All right, thanks.

On cash flow, for Mark, through the first half your GAAP operating cash flow was about $650 million.

Given your guidance for the second half of the year, even taking into account currency, plus the stacking effect of the model, doesn't it stand to reason that your second-half cash flow should be at least as much and probably substantially higher than the first half so that total FY15 cash flow should be at least a couple hundred million dollars higher than the amount from FY14?

Jay, we don't guide, obviously, on cash flow.

I can tell you there is quarterly seasonality to cash flow.

If you look at Q4 to Q1, it is typically down coming off of Q4 due to all the year-end payments that you make and our debt interest.

And then you get to Q2 and there's none of those payments so it goes back up, which is what you saw this quarter.

And Q3 you typically see a dip relative to last quarter again because of tax payments and ESPP and debt interest.

And then you've got a spike back up in Q4.

So, there is seasonality quarter to quarter.

Obviously, as the net income in the business starts to get better and better as we start to drive more and more earnings, cash flow is going to follow that.

So, without a doubt, cash flow is going to get better and better.

Thank you.

Keith Weiss, Morgan Stanley.

Excellent.

Thank you, guys, for taking the question.

And good quarter.

You talk about earlier the sequential decline in ARPU, saw that it was as small as you've seen in quite some time.

And it seems like we have a couple of potential -- or several potential -- ARPU benefit on the horizon.

I was wondering if you could talk to us a little bit about what our expectations should be for the timing of that, particularly on when we think that the Adobe Stock starts benefiting ARPU and when the renewal of promotional pricing, or the expiration of promotional pricing, could start to benefit ARPUs, just so we could have a better understanding of all that going forward.

Keith, I'll start and then Shantanu and David can add on.

I hate to sound like a broken record but focus on ARR.

That's really the metric that is going to incorporate everything -- subs, ARR, any kind of churn.

That is where we are focused and we obviously feel good about that because we just raised the number on the year for ARR.

I think in terms of the mix, when you think about what's happening with the mix, just continue to recognize, as we have said, that within each band ARPU has been very stable.

And as the mix continues to drive new offerings, what the ARPU will reflect is the blended mix.

I'll also end with what Mark said -- I think continuing to focus on ARR.

If you look at the second half of the year it shows that ARR will continue to increase over Q1 and Q2, which I think shows the momentum in the business.

Got it.

Maybe if I could have a different type of question, then -- you mentioned earlier about the conversion of trial customers to paid users improving.

I wonder if you could give us a little more color in terms of, is that an inflection going on or it's just an improvement?

Is there anything that's catalyzing that transition from free to paid, if you will?

I can take that.

From a perspective of the improvements we have been seeing to conversion and retention associated with mobile applications, I believe is what you are referring to, the statement you made, this is really just an ongoing evolution that we started a year and a half ago.

As we started to move more and more of our business online, we have the added advantage of having access to the world's best marketing cloud.

So, in the context of using all the technology from that side of the business, it's been an ongoing set of activities to improve conversion that we see as traffic comes to Adobe.com.

More recently we've had an increase in terms of traffic and utilization of our mobile applications.

So, we understand what's driving that, what are the predictive indicators of use in those applications that are driving conversion to paid customers.

And we are increasingly seeing the use of data and content flows with CreativeSync as another material driver of conversion and retention.

So, what we're doing is that we're building the products and updating the products with new capabilities and features, but we're also making sure that as we do that the user experience, the onboarding workflows, and the communication that we have with them through email and other forms, through training, are all driving people to use these features that drive higher conversion and retention.

So, it's not one magic bullet but it's been a series of actions we have taken and we see a lot more we can do in the years to come.

Excellent.

Thank you very much, guys.

Steve Ashley, Robert W. Baird.

Thanks.

A couple questions.

I think on the last call you said that Japan had been really lagging in terms of just where it was in Creative Cloud adoption.

But we've started to see some improvement there.

Is that improvement or ramping of Creative Cloud adoption in Japan continuing?

And then my second question is just on the Marketing Cloud business and partner or channel leverage.

Are you seeing improved partner contribution in that business?

Thanks.

Steve, Japan continues to, as the distance from CS6 gets longer and longer, improve.

We have a special event, also, that we're doing in Japan to ensure that the awareness of the CC 2015, as well as all of the other additional services and mobile apps, is strong right now.

So, we continue to expect that will lead to increased adoption of Creative Cloud in Japan.

And the second question was with respect to Marketing Cloud and partner leverage.

I mentioned earlier that the amount of partner influence across source, as well as influenced revenue in the Marketing Cloud, is fairly high.

And that's happening across both the digital agencies as well as systems integrators.

And all of the large deals that we are doing, because consulting is something that we would like partners to provide, there is a partner involved in most of the larger deals.

Perfect, thanks.

Alex Zukin, Stephens.

Thanks for taking my question.

Can you maybe talk about what you are seeing with respect to overall users that are realizing some of the synergies around content creation and distribution, and maybe which combinations are currently the most popular?

Sure.

I think we've talked in the past about how the publishing segment for sure, as publishers are trying to provide the content creation once and then delivery across multiple forms of devices.

That is clearly the vertical that has led integration of Creative Cloud and Marketing Cloud.

Retail tends to be another large vertical where we're seeing a lot of adoption of the Creative Cloud and the Marketing Cloud because the velocity of the products that they are offering tends to be fairly high.

And everything to do with consumers, whether it's travel or entertainment, is an area where I think we have talked about companies like Under Armour and others are certainly using that particular technology, as well.

We're seeing it across all industries -- financial services.

Honestly, we are getting better at also painting the entire Adobe story with the CC enterprise release that is coming out now, and the fact that it synchronizes with the Adobe Marketing Cloud.

That's going to make it even more natural.

So, while I would say the publishing and retail led the charge in terms of seeing the benefits of the Creative Cloud and Marketing Cloud integration, now that is spreading to, honestly, every single vertical in every geography.

Got it.

And if I could just squeeze in one more about the recent partnership announcement with Microsoft and what that could mean strategically for Marketing Cloud

I think with Marketing Cloud our vision really is that, as every single enterprise moves to become more of a real-time enterprise, where the need to, in the last millisecond, deliver the right piece of content based on the consumer profile or the consumer demographic, it becomes even more apparent to us that enabling integration with people who have CRM solutions is something that will add value of our Marketing Cloud.

So, Microsoft with Dynamic CRM has a great offering in that, and that was the reason for the integration.

The other reason for a partnership with Microsoft continues to be how we can leverage Assure in terms of having technology that enables us to create all of these compelling offerings in real-time.

So, that's the benefit on the Digital Marketing side.

On the Creative Cloud side I think we have shown that as touch becomes more natural way for people to do content creation, with what we have done on the Surface Pro and in products like Illustrator and Photoshop, I think we have demonstrated significant value associated with touch, which both Microsoft and Adobe are excited about.

Samad Samana, FBR Capital Markets.

Hi.

Thanks for taking my questions.

I want to shift gears a little bit and talk about the profitability side.

Margins expanded nicely and continue to do so year over year.

Operating expenses were actually down year over year.

I was curious how you think about the ramp in expenses, whether there's some catch-up that will happen in the back half, or how we should expect expenses to ramp going forward.

Hi, it's Mark.

We've obviously been very focused on driving earnings back into the model as revenue comes back into the model and as we get back to where we were before we started this transition, which is going to happen relatively soon.

Moving forward from here, you will see Op Ex increase.

And I touched on this earlier.

We're driving 30% bookings growth in Digital Marketing.

That requires a lot of sales and marketing capacity.

And obviously we're driving ETLAs in the enterprise for the document services business, the Document Cloud business, as well as the Creative business.

So, you will see more Op Ex investment but with that we're going to continue to drive more and more margin moving forward.

Great.

Thanks for taking my question.

Heather Bellini, Goldman Sachs.

Hi, this is Shateel Alam filling in for Heather.

I just want to ask a quick one on seasonality of single app subs.

Perhaps you said that mix was about 50/50, a little lower this quarter at 44%.

Should we expect that to swing around a lot from quarter to quarter?

What do you expect that to fall out for the year?

I think what we have said in the past is if you look at steady state or what's happened in the Creative suite, the mix was approximately 50/50.

I think as we continue to attract new customers to the platform through the Creative Cloud Photography offering we're certainly seeing the single app adoption increase.

We've also said in the past that when we first offered Team, Team was only offered in the complete option.

And the single app is definitely a non-ramp to the Creative Cloud.

So, I think as it relates to the Creative segment part of Creative Cloud, steady state on the Creative Suite is probably a good metric.

Certainly as we are expanding the entire available market through the introduction of these new single app offerings, that will skew it a little bit more towards the single app, as well.

Given that was the last question, in summary what I would like to say is it's clear that all around the world companies are focusing on how they use technology as an enabler to accomplish this customer-centric transformation.

And I think delivering these great online experiences across mobile devices, which is key to the transformation, is driving Adobe's business because we have this unique set of technology assets to help customers solve this across various industries.

The business momentum we are experiencing we believe is the result of both having a great strategy as well as excellent execution.

We are pleased with Creative Cloud momentum.

This week was a really important milestone as we released CC 2015 and introduced Adobe Stock, which is both an ARPU as well as a TAM-enhancing service.

And it's really more proof how we're making Creative Cloud a one-stop destination for Creatives.

Document Cloud continues to go after the large paper-to-digital opportunity.

And Marketing Cloud continues to be the leader in delivering great value in an explosive software category.

I think in this quarter you also saw the earnings upside, which is the leverage of our financial model.

And, in summary, we think Adobe is in great shape and we remain focused on driving both product innovation as well as strong financial results for the rest of 2015 and beyond.

Thank you for joining us today.

And this concludes our call.