Welcome to the Adobe Systems Q3 Fiscal Year twenty fourteen Earnings Call. I'd like to turn the call over to Mr. Mike Savage, VP of Investor Relations. Please go ahead, sir.
Good afternoon, and thank you for Joining me on the call are Adobe's President and CEO, Shantanu Narayan as well as Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe's Q3 fiscal year twenty fourteen financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately 1 hour ago. We have also posted PDFs of our earnings call prepared remarks and slides, our financial targets
and
an updated investor datasheet on 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, Our forward looking product plan is based on information as of today, September 16, 2014, It contains forward looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward looking statements disclosure in the earnings press release we issued today as well as Adobe's SEC filings.
During this call, we will discuss GAAP and non GAAP financial measures. A reconciliation between the two is available in 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 Chania.
Thanks, Mike, and good afternoon. Adobe's strong performance continued in Q3. We achieved $1,500,000,000 in revenue with non GAAP earnings per share of $0.28 Adoption of Creative Cloud, Adobe Marketing Cloud and Document Services was robust, demonstrating continued momentum across our businesses. In Digital Media, we continue to deliver new innovation and enhance value for our customers spanning our Creative and Document Services businesses. In June, we unveiled a major update to Creative Cloud with 14 new versions of our desktop applications and 4 new mobile apps.
We announced the Creative SDK for mobile devices. We added new offerings for enterprises, With the pace of innovation accelerating with Creative Cloud, adoption from existing as well as new customers has been outstanding. We exited Q3 with $1,400,000,000 of Creative Annualized Recurring Revenue or ARR, which now includes more than 2,800,000 Creative Cloud subscriptions and reflects a record increase of more than 5 fell $100,000 from the prior quarter. To capitalize on the large opportunity with Creative Cloud, we remain focused on 3 growth initiatives. First, we are aggressively converting the large installed base of CS customers to Creative Cloud.
This transition is going well as CS customers realize the significant value they obtain when they migrate. We are driving this conversion with individuals through trials and promotional pricing on adobe.com and moving enterprises and teams to Creative Cloud to direct sales and the channel. 2nd, we are expanding the market opportunity through acquiring new customers with tailored offerings such as Creative Cloud for photographers. The potential market for creative expression has never been greater with the desire to use creative tools at work, at home and at school. While Adobe remains dedicated to meeting the needs of the creative professional, We see big opportunities ahead with a broader array of workers, students and consumers and you will continue to see new targeted offerings for these audiences.
And third, we will significantly expand the definition of Creative Cloud with mission critical and valuable services such as mobile apps built on ISDK, training, a marketplace for content and talent search and acquisition. This focus will expand the Creative Cloud market opportunity and revenue potential beyond our current subscription offerings. MAX has become the community showcase for creative inspiration and innovation and we're excited about what we will be able to announce and deliver in October, particularly in the area of mobile, which represents a big opportunity for our customers and for Adobe. In Document Services, we achieved strong revenue of $208,000,000 in Q3. Our Document Services business spans Acrobat ETLAs, cloud based Acrobat Services and EchoSign.
Document Services ARR
grew
to $217,000,000 exiting Q3. PDF and Acrobat are de facto standards for document collaboration and workflows and mobile represents huge potential to increase usage of our document creation, sharing and signing services. We have permission to expand our footprint and brand in these areas and are excited about the product roadmap, which will position our document solutions as must haves now and in the future. Across our Creative and Document Services businesses, total Digital Media ARR grew to $1,620,000,000 at the end of Q3. Digital marketing is an explosive category that is fundamentally transforming In order to enable the personalized experience that every consumer expects, companies need to invest significantly in a modern technology platform.
This revolution is beginning in marketing, but is extending to include the entire real time enterprise. We are the leader in this category. We achieved strong Adobe Marketing Cloud bookings in Q3 and have a healthy pipeline heading into Q4. The volume and size of engagements with our customers is growing. In Q3, the number of customers with annual contract value of greater than $500,000
grew
by more than 40% year over year. Examples of Marketing Cloud customer wins in the quarter included Adidas, Biogen, British Sky, Ford Motor, H and M, Lloyds Bank, Nestle, the State of Illinois, the State of Utah, Tiffany, Travelocity, the U. S. Department of Treasury, the U. S.
Marine Corp, DSV in Germany and Motorola in the UK. Our value proposition is clearly resonating with marketers, driven by the market share and thought leadership that we have built in this category. Interest in our solutions is high as evidenced by sold out conferences across the globe. In addition, we are earning strong industry analyst recognition for our Adobe Marketing Cloud Solutions. Forrester recognized Adobe as a strong performer and best positioned in their Digital Experience Delivery Platforms report.
Gartner named Adobe a leader in their 2014 Magic Quadrant for mobile app development platforms highlighting the capabilities of Adobe Experience Manager, PhoneGap and Digital Publishing Suite And Forrester named Adobe Campaign, a leader in their cross channel campaign management 2014 Wave Report. This recognition and our leadership in the digital marketing industry is helping to build an even stronger partner ecosystem with software companies, agencies and systems integrators. Recent partnerships include a global reseller, where SAP will resell Adobe Marketing Cloud with their HANA platform and Hybris Commerce Suite. The relationship has progressed well since the announcement in The strategic partnership with the Publicis Group to deliver the 1st end to end marketing management platform, automating all components of our clients' marketing efforts. All Publicis agencies will standardize on Adobe Marketing Cloud, making this our most comprehensive agency partnership to date and a partnership with Wipro, a leader in global IT, consulting and Business Process Services, which is creating a new business unit to deliver integrated marketing, commerce, analytics and customer experience In summary, Adobe demonstrated strong execution across our business in Q3.
Our Creative Cloud user base continues to grow as we offer an ever expanding stream of new creative solutions and tailored customer offerings. Adobe Marketing Cloud had another strong quarter and is outpacing the market from a solution, partner and customer perspective. Content and data have never been more important and Adobe is the leader involved. We have become the trusted content and data partner for the world's biggest brands, media companies, governments and educational institutions. We have a strong tailwind moving into Q4 and are excited about the opportunities ahead.
We hope to see many of you Eda Max is on for us. Mark?
In the Q3 of FY 2014, Adobe achieved revenue of $1,050,000,000 within our targeted range. GAAP diluted earnings per share in Q3 were $0.09 and non GAAP diluted earnings per share were $0.28 Looking at highlights in our Q3, those that stand out include driving strong adoption of Creative Cloud, growing Adobe Marketing Cloud bookings well ahead of our target, Managing expenses to deliver upside on earnings per share, achieving record deferred revenue and Generating a substantial increase in recurring revenue, we exited Q3 with 63% of our revenue as recurring. In Digital Media, we achieved revenue of $621,000,000 This segment has 2 major components of revenue: our Creative family of products and our document services products. In our Creative business, adoption of Creative Cloud accelerated quarter over quarter, while reported revenue declined sequentially as expected due to Q2 being the last quarter of any meaningful perpetual CS6 revenue. We exited Q3 with 2,810,000 Creative Cloud individual and team subscriptions.
Retention of Creative Cloud subscriptions, including renewals after promotional pricing expiration, continues to track ahead of our initial projections. Across all active subscriptions, average revenue per user or ARPU in each Creative Cloud offering was consistent with Q2. Given continued adoption of the photography offering and seasonal educational strength, which are adding new customers, total Creative Cloud ARPU exiting Q3 decreased slightly. Our success with subscriptions, enterprise term license agreements or ETLAs and digital publishing suite adoption helped to drive Creative ARR to a total of $1,400,000,000 exiting Q3 at constant currency from December of 2013, an increase of $209,000,000 quarter over quarter. Our strategy with segmented Creative Cloud offerings is to target Overall, we are seeing strength in migrating the installed base as well as expanding our market with new user adoption.
Adobe's direct sales force continues to migrate enterprise customers with new ETLAs and we have a strong pipeline going into the end of the year. Creative Cloud for team units grew sequentially on both adobe.com and through the channel. Subscriptions through the channel We're below our expectations in Q3 as resellers came off a strong final push with CS6 in Q2. We expect subscriptions and the associated ARR will gain momentum as the channel now focuses exclusively on Creative Cloud. Q3 adoption of the full Creative Cloud offering in the Creative Professional segment was consistent with our performance in Q2.
Our Photoshop Lightroom offering, which was rebranded as the Creative Cloud Photography program in June, continues to drive new customer adoption as well as migrate those who historically licensed Photoshop Elements and Photoshop Lightroom. In Document Services, we achieved revenue of $208,000,000 in Q3. Our momentum in this category is being driven by continued adoption Acrobat, including several large contracts which closed during the quarter. Adoption of Acrobat ETLAs, Acrobat Cloud Services and EchoSign grew Document Services ARR to $217,000,000 exiting Q3. In our digital marketing segment, there are 2 components.
The first is revenue from our Adobe Marketing Cloud offering and our momentum as the leader in this market continued. We achieved revenue of $290,000,000 in Q3. More importantly, we continue to drive strong year over year bookings growth that puts us ahead of our goal for the year. Our success is being driven by an increase in size of transactions, number of solutions per customer, international expansion and growth in partner driven business. The second component of our digital marketing segment is revenue from the LiveCycle and Connect businesses, which contributed $47,000,000 in Q3 revenue and was consistent with our expectations.
Print and Publishing segment revenue was $47,000,000 in Q3. Geographically, we experienced stable demand across our major geographies. Asia as a percent of total revenue was low given Creative Cloud adoption in Japan has been slower than other geographies. With the removal of perpetual licensing from the channel in Japan, we are confident the transition towards Creative Cloud will begin to accelerate. From a quarter over quarter currency perspective, FX had no meaningful impact on revenue.
We had $1,100,000 in hedge gains in Q3 FY 2014 versus $2,600,000 in hedge gains in Q2 FY 2014. Thus, the net sequential currency decrease to revenue was $1,500,000 From a year over year currency perspective, FX increased revenue by $7,100,000 comparing the $1,100,000 in hedge gains in Q3 FY 2014 To the $10,500,000 in hedge gains in Q3 FY2013, the net year over year currency decrease Considering hedging gains was $2,300,000 In Q3, Adobe's effective tax rate was 29% on a GAAP basis and 21% on a non GAAP basis. The GAAP rate was higher than targeted primarily due to stronger than forecasted profits in the U. S. Employees at the end of Q3 totaled 12,368 versus 12,026 at the end of last quarter.
Our trade DSO was 48 days, which compares to 48 days in the year ago quarter 45 days last quarter. Cash flow from operations was $269,000,000 in the quarter and our ending cash and short term investment position was $3,520,000,000 compared to $3,330,000,000 at the end of Q2. In Q3 2014, we repurchased approximately 1,900,000 shares at a cost of 133,000,000 Now I would like to go over our financial outlook. We are targeting a revenue range of 1,025,000,000 to $1,075,000,000 in our Q4 of fiscal 2014. In Q4, we expect Digital Media We expect Creative ARR and Document Services ARR to grow sequentially.
We expect net new Creative Cloud We continue to expect we will achieve total Digital Media ARR of approximately $1,925,000,000 exiting the year. We are targeting Q4 Adobe Marketing Cloud revenue to grow slightly on a year over year basis. As you think about Adobe Marketing Cloud revenue, it is important to understand we are seeing increased customer adoption of our term based Adobe Experience Manager and Adobe Campaign Solutions. This is resulting in larger customer engagements, more predictable revenue as well as higher long term revenue growth. In FY2013, Approximately 45% of these marketing cloud bookings were term based.
Entering FY 2014, we anticipated a move toward a mix of approximately 60% term based bookings in FY 2014 for AEM and campaign. With the acceleration of term based adoption in FY 2014, we anticipate achieving approximately 75% term based bookings this year. As a result of the faster transition, We estimate approximately $60,000,000 of revenue that would have been recognized in FY 2014 will have shifted from perpetual and campaign licensing to term based contracts during the year. Adding the Q3 portion back to our results this quarter would have driven total Adobe revenue to the high end of our targeted revenue range and Adobe Marketing Cloud would have achieved greater 20% year over year revenue growth in Q3. Adding back the estimated Q4 impact, the high end of our targeted Q4 revenue range would have been $1,100,000,000 And adding back the $60,000,000 full year impact, Adobe Marketing Cloud FY 2014 year over year revenue growth would have been greater than our annual target of 20%.
We highlighted at the outset of the year our goal of driving at least 25% revenue CAGR for Adobe Marketing Cloud revenue between FY 2014 and FY 2016 and we're on pace to achieve this. We expect combined revenue with Life Cycle and Connect to decline sequentially and we are targeting Print and Publishing segment revenue to be relatively flat. We are targeting our Q4 share count to be 508000000 to 510,000,000 shares. We are targeting net non operating expense to be between $12,000,000 $14,000,000 on both a GAAP and non GAAP basis. We are targeting a Q4 tax rate of 28% to 29% on a GAAP and 21% on a non GAAP basis.
These targets yield a Q4 GAAP earnings per share range of $0.05 to 0 point 1 $1 per share and a Q4 non GAAP earnings per share of $0.26 to $0.32 Mike? Adobe
MAX is coming up in a few weeks with the opening day keynote on the morning of Monday, October 6. As we previously announced, we will host the financial analyst briefing that afternoon beginning at 3 p. M. Pacific Time. The MAX keynote as well as our meeting with the financial community will be webcast with the financial analyst briefing ending at 5 pm Pacific Time.
If you still want to sign up to attend MAX, please contact Adobe Investor Relations. 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. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 pm Pacific Time today and ending at 4 pm Pacific Time on Friday, September 19, 2014.
We would now be happy to take your questions. Operator?
Operator? Your first question comes from the line of Ross MacMillan from RBC Capital Markets. Your line is open. Thanks very much. Mark, the question on the mix between the full creative cloud and the point products this quarter, I think maybe some of us thought we might see that return to a higher mix of full Creative Cloud because of the rundown of inventory of the Creative Suite The channel, obviously, there was some mix difference there and perhaps it was explained by education So what is your expectation for that mix going forward and also for the blended ARPU as we think about Q4 beyond?
Thanks.
Yes. Hi, Ross. Like we said on the prepared remarks, We feel really good about the quarter. We drove 500,000 units. This is a Q3 for us, which is a seasonally more difficult And we felt very good about how we did.
We do believe there's tremendous upside in the channel. In the Q2, you saw the channel was primarily focused on kind of the last hurrah of perpetual revenue with CS6, if you will. This is the Q1 they had to sell exclusively the subscription product and we think there's a tremendous ramp that we're going to see from them Contributing to that mix moving forward. Education, as you know, is strong in Q3 as well. We had a good education quarter And the bundle continues to attract new customers.
So we're really happy with how it's progressing. We do think that the channel will be able to contribute Moving forward and that's going to help that mix and it's also going to add to ARPU over time.
And Ross maybe if I were to add 2 other quick things. When we think about excluding the PSLR bundle as well as education units, ARPU across the individual team single application as well as the complete CC in all markets was relatively consistent. In fact, it increased Slightly, yes. So we feel good about how that performance is happening. And in general, you have to also go back to the creative Suite mix that we had.
Single application was even in that particular business about 40%. We realized that's an on That's accretive to overall ARR as Mark also mentioned with the photography bundle. So pleased with how the quarter performed.
That's great. And maybe just one quick follow-up. I know that you're seeing better retention rates than your initial 80% assumption. Will we get to a point in the near future where we might actually talk about what sort of percentage retention you're
Well, Ross, we told you approximately 80%. We're ahead of that as we talk about in our retention rate. So we think that that gives you the right color to understand that the business is very healthy. I mean, other way we look at it is, When you think about the number of units that we've transacted with 2,800,000 subscriptions as well as what we are doing with the enterprise ETLA, That's already ahead of what we were doing steady state with Creative Suite. And we continue to think there's headroom both in terms of migrating Existing customers as well as attracting new customers.
So that should also give you a good sense of how healthy the business is.
That's helpful. Thank you very much for taking my question.
Let's take the next question and let's try to limit to one just so we can fit everybody in. Thanks.
Your next question comes from the line of Brent Thill from UBS. Your line is open.
Thanks. Good afternoon. Mark, just on the Q4 guidance, You're guiding below the street. I just want to be clear that that's largely a transition to term versus perpetual?
Yes, Brent. So as I pointed out upfront, in the Adobe Marketing Cloud, we are seeing a much faster move to Term based managed services solutions for AM and Campaign, we went into the year assuming about a 60% Term based mix and we're going to end more around 75%. And that delta, That $60,000,000 delta for the year is what's really driving the difference. If you look at the Q4, as I said, We would have been closer to $1,100,000,000 at the high end of our range had we not gone through a faster shift of this
Okay. Just a quick follow on then as you mentioned the Marketing Cloud bookings were well ahead of target. I know you don't give out a booking number, but can you perhaps just give us some color as it relates to what you've seen Last couple of quarters relative to your booking target, did you significantly exceed or any other color that
you could help to frame at that would be helpful? Thanks.
Brent, maybe I can jump in there. I mean, we had talked about getting 30% bookings, which would drive 25% CAGR over 3 years. And as Mark mentioned in his Prepared remarks, we are seeing significant strength above that particular target. And maybe big picture, it's better to explain that It's really in our best interest to manage and deliver the entire customer marketing platform. And what that is resulting in is we're seeing multiyear deployments.
It's increasing the revenue per customer. We gave you some color on what we are seeing of deals greater than $500,000 that grew over 40%. What we're also seeing is more solutions within existing customers, which is driving stickiness. And so I think this transition to the platform, the multi solution, multi year sale has really gone faster than expected, which Hopefully, it's good news if you want better and more predictable revenue. And that's why we also provided you with some way to model it with what happened with AEM and campaign for 2014.
And then just to add on to that one more time, what that does, Brent, as you know, is it helps drive deferred revenue. We had a record It also helps drive the unbilled backlog, which we disclosed at the end of the year. And between the 2 of them now, we've got roughly $2,000,000,000 of contracted business waiting to be recognized in the form of revenue. So it just makes for a much healthier business overall.
Great. Thanks.
Your next question comes from the line of Brendan Barnickel from Pacific Crest Securities. Your line is open. Thanks so much. Shantanu, I
was interested in where you might be seeing some of the cross sell around both the Creative Cloud and Marketing Cloud? And know you highlighted that in some of the comments. Can you give us any more color on where we are in that migration? And maybe a sense of maybe what percent of the installed base is even looking at Both of those and leveraging both of each other. Thank you.
Sure. I mean, I think when we look at what's happening with our enterprise sales force And the sales force that is selling both the Creative Cloud as well as the Marketing Cloud into enterprises through the ETLAs, the Document Services ETLAs as well as marketing cloud bookings. That's where Matt and his team are driving multiple 1,000,000,000 of dollars in terms of what we are being able to sell. Some customer examples there include publishing. They want a single asset repository and workflow to Create content once and repurpose that across web and mobile applications and video, which is fast becoming one of the key things for every to do online.
So publishing is a good industry. In retail, you're seeing more and more of the innovative customers want to completely Accelerate their time to market by having the design for these goods directly delivered through this workflow all the way out to manufacturing as well as for the consumer to have the ability to actually create personalized goods directly on a retail website and video. I think when you talk about creation, delivery and ad insertion. So hopefully that gives you some examples, but it's driving more strategic relationships with customers across all of these industries. Great.
Thank you.
Your next question comes from the line of Walter Pritchard from Citibank. Your line is open.
Just one question, Mark, around pricing. You've been in the market now for quite a while with
the individual addition and You
haven't talked about what percentage of your customers have gone past the 1 year anniversary and have had pricing go up. But can you talk about maybe An ARPU on that segment or something that would give us an idea of how many of those customers or what progress you're seeing in terms of The expiration of the promo and the uplift in ARPU that that would drive?
Well, I mean, generally speaking, like Shantanu mentioned and I think I mentioned across each of the offerings, the ARPU has either remained constant or actually increased. And from a retention perspective, We're seeing very good retention with people renewing even after the promo expires. So as that happens, of course, it does drive ARPU up.
Walter, if you go to the website and you look at the pricing for the various offerings, I think you would recognize that the individual complete is about $49.99 you can look at the promotional pricing at about $29 and for team the complete pricing is 69 99 and promotional pricing could be 39 or 49. So I think that gives you some sense of what you're seeing in terms of as people migrate off the Promotional pricing, what kind of ARPU we're getting
from those customers?
Okay. Thank
you. Your next question comes from the line of Curt Materne from Evercore. Your line is open.
Yes. Thanks very much. Mark, you mentioned that the channel had a little bit of a slower start to the Q3 given that they shifted away from the license Base product, I guess in your guidance for the Q4, I guess how much are you counting on that to bounce back to meet your Subscription as well as your ARR targets for the quarter? Or do you expect it to sort of maintain itself the way it was in 2Q and that's upside if you get a lift from there.
We're expecting it to move up. I mean, we're not expecting a huge ramp, but we are expecting it to move up from here given that They are done with perpetual and frankly they're solely focused on selling subscription now.
The other thing I might add is if you look at the Traditional Q3 to Q4 transition and you go back and look at what happened last year, there are 2 things that drive it. 1st is seasonal strength. The second thing is enterprise ETLAs Q4 tends to be the strong quarter for that. And so you should factor that in also As you think about how we go from Q3 ARR to adding Q4 ARR.
Thanks. If I could just ask a really quick follow-up to Mark's comment on the deferred Vings just This quarter, obviously, I'm sure the transition of term deals and marketing cloud played a part in that. Was there anything else in terms of Billing, how you're billing some of your customers that played a part that you expect to continue to go forward? Thanks.
Yes. I mean, it's 2 big pieces really. It's digital marketing cloud and then it's the creative cloud as well. It's the ETLA around creative cloud as well. ETLAs are built in advance for the 1st year And that goes into deferred and then years 2 and 3 would show up in that unbilled backlog number that I referenced.
So it's really both businesses that are driving The deferred revenue as well as the unbilled backlog. Thanks.
Your next question comes from the line of Kash Rangan from Merrill Lynch. Your line is open.
Hi. Thank you for taking my question. I'm just wondering if you could talk about the percentage of business from term based bookings and marketing cloud That has obviously caught you by surprise. Why would you not just take the step of making all the business completely ratable? And if you were to do with it, wondering what might be a rough way to think about impact to your revenue.
Maybe you could talk about a 10 percentage point shift in term based bookings Might mean X millions of dollars in revenue, so we will not be at all absolutely surprised by any development in the future. And also curious if you can comment on that time, I think Shantanu likes to mention reiterate that the goal of the company is to go after the entire Install base. At this stage at which you're adding stuff, it looks like you could transition the entire installed base in about 4 to 5 years. So Question is do you anticipate adding more capacity so you could even add more units than what you're doing now to enable this transition happening with Quikka? Thank you.
So, Kash, there were multiple questions in that. Let me address sort of the question associated with the term based as well as the perpetual from an Point of view, there's certainly still a number of customers and we think it's a competitive advantage for us that want to have the AEM solution, the Experience Manager as well as the campaign solution on premise. I mean, you can think about government agencies and other agencies who want to actually manage it themselves, which is why we can't completely transition from the perpetual offering to the managed services, which we definitely think is Right long term solution. If you look at the trend, as Mark pointed out, it's moved from 45% to close to 75%. So I think it's now becoming Less and less and as digital marketing revenue grows, the impact of this is certainly going to be muted.
So I think that should give you comfort As it relates to the Marketing Cloud, bookings and revenue and that transition.
Yes. Shantanu said exactly what I was going to say. The 75%, this is the reason we wanted to I'll tell you the 75% because it shows that we're pretty much through this. This is a very quick transition. The good news is It really happened much faster in the back half of the year than we thought.
And with only 25% left to go and the business in total growing, as Shantanu said it's not going to have a material impact next year.
With respect
to your second question, Kash, Q3 was the first $500,000 subscription quarter for Creative Cloud. It was $500,000 Q3. It was a Strong quarter. And so I mean as we look at what's happening in the business, we are both migrating existing customers, but we continue to add a healthy dose of new customers to the platform. And so the And so the strategy that we outlined namely getting new customers to the platform as well as migrating continues.
With CS 6 perpetual being strong in the last couple of quarters. All of them represent available opportunity or headroom for us to move over to the cloud as do some of Countries where we outlined that the adoption has been slightly slower. So we're going to be focused on driving that. Max is going to be another catalyst in terms of How far the Creative Cloud offering distances itself from the Creative Suite offering. So we have to continue to innovate.
We're focused only on the Creative Cloud is an offering and there's still significant headroom opportunity. Next question.
Your next question comes from the line of Jennifer Lowe from Morgan Stanley. Your line is open.
Great. Thank you. Shantanu, in your remarks you mentioned that there was a thought of having more targeted offerings that get The photography SKU, especially given the success you've seen there. So I guess two questions related to that. 1, as you think about How those targeted SKUs fit into the traditional point versus suite strategy?
What are sort of the right break points around packaging Pricing to go after specific use cases versus maintaining the premium ASPs traditionally associated with suites. Is it a situation where we could see a whole spectrum of offerings? Or are you still sort of working along the lines of point versus suite with a relatively big gap in between? And then related to that, in terms of the time horizon that we should think about for any types of targeted offerings, is that something that we'll hear About next month at max? Or is that something that's going to be more of a multiyear strategy for you?
Jennifer, when I think of overall the Creative Cloud offerings And the fact that the complete offering is still we think the best solution for a creative professional who wants to Create content for multiple kinds of media. We still believe that that's really the right offering. Photography has always been Even with the traditional creative suite such a large opportunity that having the photography bundle was the right way to go target that. Part of what we are alluding to is new ARPU enhancing services that we will start to introduce And that could be to the entire Creative Cloud customer base and you will start to see some of that starting at max. And some of them might be even more market expansion opportunities as it relates to what consumers are trying to do and you've seen us Introduce mobile offerings.
So I think for the core creative professionals, I think we have it right and I think we have to continue to innovate and migrate Existing customers, but I think you're going to start to see us implement against the things we've talked about the mobile SDK leading to new ARPU enhancing
Your next question comes from the line of Heather Bellini from Goldman Sachs. Your line is open.
Great. Thank you. I was wondering just if you could walk We've heard a lot about how agencies are evolving their digital marketing strategies and trying to figure out how to build or whether Goodbye, some of the ad tech that they think they need to serve their clients better. I'm just wondering how you see kind of the Steve evolving on that front and how you feel Adobe how you position Adobe in that context?
Sure, Heather. First, I think it's a good opportunity to reiterate that global agreement that we announced with the Publicis Group. From my point of view, digital marketing agencies have always been working with their key clients, Chief Marketing Officers, Chief Revenue officers, Chief Digital Officers to demonstrate a digital strategy for media buying as well as a creative strategy. I think the creative strategy need continues unabated and I think all digital agencies have to continue to provide that creative strategy and now augment it with what they are doing on the technology side to enable people to truly understand the return of investment and move the marketing spend from just being analog to more digital. And I think again if you saw the announcement around what Publicis is that systems integrators are seeing the marketing automation as a huge untapped market.
And so I think they're going to see competition As it relates to the traditional systems integrators, companies like Deloitte or PwC also enter that market. And from our point of view as a technology provider, none of these relationships are competitive. They're all using our technology to go implement and automate marketing flows within all traditional industries. To give you some color, our relationship with Publicis allows them to use our technology to do automated search spend or social spend or using our technology, it allows a company like Razorfish that's part of the Publicis Group to go ahead and implement Replatforming associated with websites, it also allows them honestly to now with our audience manager solution have a way to segment Both the online and offline customers, which is a big part of how they want to target their offerings. So we're excited about that.
And Whether it's agencies or SIs expect to see more people want to partner with Adobe.
Great. Thank you.
Your next question comes from the line of Mark Hoetzler from Sanford Bernstein. Your line is open. Thank you very much. I'd like to have Mark fill in a little more on The $16,000,000 should we be thinking of this move to 75% Does it simply mean that we get the license revenue is ratably recognized over the contract term or is there a revenue lift during the 1st contract Obviously, there's a lift after the 1st contract. And then a quick follow-up on that.
Hey, Mark. Yes, it's $60,000,000 just to make sure everybody heard that right, 60. And it's recognized ratably over the contract term for the most part. So it is Spread out typically they're multi year deals and it's spread out over that multi year period.
But there's not a it's not a More in the 1st contract term, it's not more revenue, it's just ratably recognized and then potentially it's more revenue in the 2nd contract term?
Correct.
Okay. And then the quick follow-up to that to keep you on the line. Do you are you now selling still selling the same mix Of term versus perpetual in this space or are you now basically predominantly selling the term
Yes. By far, we're now predominantly selling the term agreements. So the 75% that we'll end the year at, like I said, Only leads 25% of perpetual. So it's not going to be a material shift in any given quarter moving forward now.
Okay. Thank you.
Your next question comes from the line of Derrick Wood from Susquehanna. Your line is open. You guys talked about Japan being a little weaker than expected. I guess how do you weigh the impact Potentially coming from the macro versus the impact coming from kind of the shifting channel focus around Creative Cloud. And then How does that kind of bake into your expectations for Japan next quarter and look into your pipeline and sub add contribution?
From From my point of view, I think Japan continues to be a large untapped opportunity for Creative Cloud. It's been a traditional strength for us with the Creative products when we had The Creative Suite offering, I think what's a little bit different about that geography is the large dependency on Retail in that and we had the retail product in Q2. We see early adopters and we think there's untapped opportunity associated with the Japanese market. So nothing changes our long term view and it's not a demand issue.
Thank you.
Your next question comes from the line of Robert Breza from Sterling Auty. Your line is open.
Hi. Thanks for taking my question. Just wanted to touch back on the $60,000,000 mark. So as you think about the Remaining 25%. Do you think that's a how should we think about that transition?
I know you're saying it shouldn't be a big part, but do you think that moves to 80 By the end of FY 2015 or how do you think that just trends longer term?
Yes, I think the 75 Continues to creep up a little bit. I think we will get to a point where it stops frankly and we're getting close to that. It's a little hard to say exactly where. But yes, I could see it going up to eightytwenty or something like that over the course of next year. It's going to depend in any given quarter on How the bookings come in and who the customers are.
As Shantanu said, certain customers want the perpetual version, but I don't think it's going to get to the point Where it moves the needle in terms of our total company revenue like it has the back half of this year.
Okay. Maybe as a quick follow-up, given the strong deferred revenue number that you guys did put up, would I mean, I'm sure it's hard to quantify exactly what drove that, but was part of that moving more of this $60,000,000 to the term base piece Sure. Overall strength of the demand, qualitative commentary would be helpful. Thanks.
Yes. The $60,000,000 represents multi year Contracts, so a big chunk of the well, the $60,000,000 is the impact to this year, but the bookings that that drove would get recognized over time under a term based model and that would show up in next year's revenue On a ratable basis, the 1st year's worth would be in deferred and the years 2 and 3 of those bookings would be in unbilled.
Great. Thanks very much.
Your next question comes from the line of Jay Shaul from Grissom Securities, your line is open. Shantanu and Mark, other than highlighting the momentum For EM and for Campaign, could you talk otherwise in terms of what you're seeing for the other components of Marketing Cloud specifically for example, Media Optimizer, which you've highlighted in the past as a particularly strong new product for you and Perhaps update us as well on the number of solutions that customers are thinking on average. I believe the last time you updated that was 6 months ago at Salt Lake where it was 1.4 solutions to customers. You want to update it in that respect and a quick follow-up.
Yeah. Sure, Jay. I mean in terms of the solutions, what we were trying to do was highlight the key differentiation that we had. And the differentiation is still very much the combination of Experience Manager plus Analytics. Campaign has been doing really well.
After the acquisition of Campaign, it's got really good analyst reviews as well as customer adoption. So Campaign is off to a Solid start. Media Optimizer, the amount of marketing spend on the management continues to grow. I would say Target has been doing really well. We've seen Significant growth year over year as the ability to offer personalized solutions really increases.
And so when I look at it, The way we look at that business is both new sales, which are largely multi solution sales as well as existing installed customer base and How we can continue to sell existing customers on more and more of our solutions. And when you think about the number of large deals, again, as we Said that grew 40% year over year. So overall, I think people are standardizing on our platform. The usage Starts always pretty much with AEM plus analytics and now campaign as a third leg of that stool.
Okay. And lastly for Mark, just a clarification from the earlier questions on retention or renewal rates. Now that we've had 10 quarters of Creative Cloud behind us, could you talk a little bit more about the Cohort churn of the original class from 2012, let's say, or early 2013 in terms of their retention rates, if you go back 8, 9, 10 quarters, how does that projection look?
Yes. So Jay, we can't kind of get into that level of Detail here, but the bottom line is, like I said, from a retention perspective, people are renewing after the promotion along the lines of what we Had expected, if not even better than we had expected. While I'm chatting here, one thing, I tried to be very clear about the impact of the digital marketing shift from perpetual to term. I think we laid it out at the end of my prepared remarks Pretty well. So if you have any questions, please refer back to that paragraph and then we can do some more follow-up phone calls because we tried to lay it out exactly as we had the past under the creative transition.
Next question?
Your next question comes from the line of Matt Simona from FBR Capital Markets. Your line is open.
Hi. Thanks for taking my question. I wanted to ask about ALN. You've had that for a little bit over a year now. What is That's been in upselling that into the installed base and how is the integration with the rest of the marketing cloud going for that set of products?
Really well. That's the solution that we now call Adobe Campaign. Adobe Campaign had another strong quarter in Q3. Pipeline looks great for Q4. And The ability to orchestrate these multiple campaigns across the web, email, SMS outside the U.
S, which is pretty strong, we're very pleased with the performance of campaign so far. And have you seen any change
in the competitive environment? I know that ExactTarget has been with Salesforce for a while now and their customers are coming up for renewal. Has there been any change in the competitive environment for in the marketing space for you guys?
Well, I think from a competitive point of view, as this market continues to explode, you're certainly seeing Everybody participate in it. We still think we are the leader in the category and our solutions are most differentiated. And we continue to grow that By both expanding our footprint. So specifically as it relates to exact target versus campaign, a lot of the campaign solutions for us right now Our greenfield opportunities as people are continuing to implement and automate their marketing processes. So we've been focused a lot of that.
Okay. Thanks.
Operator, we're coming up on the hour, so maybe we'll take one more question.
Your final question comes from the line of Steve Ashley from Robert Baird. Your line is open. Hi. Thanks very much for Hey, I just wanted to swing back to the digital marketing business. Again, you talked about the nice increase in the number of Larger deals that's happening there and since you've introduced the platform.
And I was hoping to just get more color over how you're driving that. Is that coming from you going back into the installed base More solutions into existing customers or is that also coming from new customers buying more solutions when they initially buy and where you're getting kind of traction among those solutions? Thanks.
Steve, the short answer is actually it's both. It's both and it's happening both through our direct sales force and honestly it's happening through partners who are increasingly recommending us as the solution of choice as They go into all of these digital transformation products. Again, I would say till 2 quarters ago, it was largely driven by The combination of AEM and analytics and then the cross sell was media optimizer and social And target, today I would say the initial sale is much more AEM plus analytics plus campaign, because that's been very Well received. And then the upsells continue to be those other solutions. In terms of industries, retail continues to be really strong.
Automotive is strong. Financial Services is doing well. Government as government does digital government, we've had a really strong presence with AEM and analytics Government as well as document security there. So we're seeing trend, good positive trend across every industry. There isn't a CMO In the world that I go to isn't talking about digital transformation and trying to understand how technology helps them.
So I think it's that Tremendous tailwind, Steve.
That's really helpful. Thank you, Shantanu.
Well, thanks for joining us. I mean, I think as I think about all of Questions I do want to reiterate and what's traditionally been a weak quarter for Adobe Q3, we really had strong performance both with Scriber additions over $500,000 digital marketing bookings that were strong as well as document services revenue in Q3. And as a result, we're on track to deliver the key financial commitments that we outlined for the second half of the year. On the Creative Cloud, it still is how do we drive customer adoption and migration to Creative Cloud. Adobe.com has been focused on this for a couple of years and now the Entire channel ecosystem as well as ETLAs through the enterprise, we're focused on this.
In digital marketing, I would say awareness It's been growing. We continue to drive leadership with successful product launches of our marketing products. The fact that we're seeing this shift From perpetual to term, we view that as a real positive because people are signing these large multiyear agreements with us. On the internal side, the innovation engine is humming. We're delivering new value with Creative Cloud, Marketing Cloud as well as Document Services.
And I think the earnings upside continues to demonstrate the leverage of our financial model. We're excited about MAX and we look forward to seeing you there. Thank you for joining us.
This concludes our call. Thanks for