Thank you. I would now like to hand the call over to Mr. Mike Savage, Head of Investor Relations. Please go ahead, sir.
Good afternoon, and thank you for joining us today. Joining me on the call are Adobe's President and CEO, Shantanu Narayen, as well as Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe's first quarter fiscal year 2013 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately one hour ago. We've also published our earnings call prepared remarks and slides in a document containing our financial targets 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, I want to emphasize that some of the information discussed on this call, particularly our revenue, subscription, and operating model targets, and our forward-looking product plans, is based on information as of today, March 19th, 2013, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today, as well as Adobe's SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in today's earnings release and on our investor relations website in the investor data sheet.
Call participants are advised that the audio of this conference call is being broadcast live over the Internet on Adobe Connect and is also being recorded for playback purposes. An archive of the call will be made available on Adobe's investor relations website for approximately 45 days and is the property of Adobe. The audio and archive may not be re-recorded or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu.
Thanks, Mike, and good afternoon. I'm happy to report we delivered revenue of $1.008 billion in Q1, with non-GAAP earnings per share of $0.35. Both results were above our targeted ranges for the quarter. Our Q1 results demonstrate we are executing well on our strategy, delivering strong product innovation across our Digital Media and Digital Marketing businesses, and becoming more mission-critical to both our creative and marketing customers. In Digital Media, we're redefining the creative process with Creative Cloud. We drove strong Creative Cloud adoption in Q1. We exited the quarter with 479,000 paid subscriptions, and recently we crossed the half-million mark. With this momentum, we are on track to reach our goal of 1.25 million paid subscriptions by the end of this fiscal year.
Creative Cloud is becoming the go-to destination for creative professionals, satisfying their need to access all their creative tools and services as well as sync and store their work and collaborate with their colleagues. Creative Cloud subscription growth is being driven by its attractive pricing as well as frequent product, feature, and service enhancements we are providing. The value and rich features of Creative Cloud is also helping us achieve our goal of bringing in new customers. The buzz about Creative Cloud is increasing, and we are seeing significant growth in the number of free Creative Cloud users. We currently have more than 2 million free and trial members, all of whom become a funnel of prospects that we target for conversion to paid subscriptions. Our Creative Cloud for teams offering was introduced at the end of last year, and we're starting to see good traction with it on adobe.com.
We expect to see the same momentum in the channel as we continue to educate our customers and partners on its value proposition. Larger enterprise customers continue to adopt enterprise term license agreements or ETLAs. Desktop ETLAs are the first phase of the Creative Cloud for enterprise offering, which will integrate with Digital Publishing Suite and Adobe Marketing Cloud capabilities. During Q1, we continued to expand the value of our Creative Cloud offering. In December, we announced the acquisition of Behance, the leading online social media platform for creative professionals. Behance is the location of choice for creatives to showcase and share their work. All Creative Cloud members will soon gain access to the basic Behance capabilities, while paid Creative Cloud subscribers will also have access to premium Behance features.
The acquisition of Behance accelerates our strategy to bring great community features to Creative Cloud, making it the ultimate destination for creatives worldwide. Product updates for Creative Cloud members during Q1 included a new Photoshop release, which includes enhancements such as smart object support, new 3D features, improved CSS support, workflow improvements, and support for the Apple Retina display. And innovations in our HTML tooling, which includes updates to our Edge products and services and updates to Muse that allow its users to create websites tailored for mobile and tablet experiences. We have much more innovation coming to Creative Cloud, and we will make some exciting announcements at our MAX conference in May. In Digital Marketing, we continue to be the leader in this exploding category, targeting Chief Marketing Officers, Chief Revenue Officers, advertising agencies, and publishing executives who are looking to accelerate their shift to digital.
We drove strong Q1 performance with 20% year-over-year Adobe Marketing Cloud revenue growth and are building a healthy pipeline. We're on pace to achieve over 25% Adobe Marketing Cloud bookings growth for the year. With Adobe Marketing Cloud, we have consolidated our 30 distinct product offerings into five solutions: Analytics, Experience Manager, Target, Media Optimizer, and Social. At Adobe Summit two weeks ago, the largest digital marketing conference in the world, we announced a number of new Adobe Marketing Cloud capabilities, including a new social-enabled touch user interface that surfaces data and insights to marketers and business leaders so they can easily gauge the impact of their marketing dollars, as well as linking with the Creative Cloud and the agency creatives who build and deliver campaigns. New mobile, phone, and tablet capabilities in Adobe Social.
A digital asset management offering, along with other key upgrades in Adobe Experience Manager, which is enabling customers to re-architect their websites. New predictive marketing workflow capabilities in Adobe Analytics, which lets marketers quickly identify and target high-value audiences in minutes. A new offering of Adobe Media Optimizer designed for media buying agencies, search engine marketing agencies, and direct marketers. In addition to Summit, where we had record attendance of more than 5,000 people, we held an invitation-only event for CMOs in New York City. This outreach to customers, combined with our ongoing marketing campaigns and the increased focus on our cmo.com web property, is broadly extending Adobe's thought leadership in the digital marketing space. At Summit, our growing ecosystem of partners was evident. We announced a global strategic partnership with Razorfish to jointly create and deliver solutions based on Adobe Marketing Cloud, including integration with their Fluent software.
Other key partners showcasing integration with Adobe Marketing Cloud at Summit included Deloitte Digital, ExactTarget, Hybris, SapientNitro, and Silverpop. We believe digital marketing is a multi-billion-dollar category, and as the leader in this space, we're on a run rate to achieve $1 billion in annual revenue. No other company has the relationships with marketers and the end-to-end value proposition that we do, and we're seeing tremendous interest in our solutions from the marketing community. We announced that we are integrating the Adobe Marketing Cloud with the Adobe Creative Cloud, a significant move that will enable marketers and agency creatives to easily collaborate on their marketing campaigns. Overall, Q1 was another quarter of strong execution by our employees, and we enter Q2 with great momentum. Now, I'll turn the call over to Mark.
Thanks, Shantanu. In the first quarter of fiscal 2013, Adobe achieved revenue of $1.008 billion, exceeding our targeted range of $950 million to $1 billion. GAAP diluted earnings per share in Q1 were $0.13. Non-GAAP diluted earnings per share were $0.35. Key business highlights in the quarter included exiting Q1 with 479,000 paid Creative Cloud subscriptions. This helped drive Creative annualized recurring revenue to a total of $233 million exiting Q1, an increase of $80 million versus Q4's exit of $153 million. We grew Adobe Marketing Cloud revenue by 20% year-over-year and achieved strong bookings growth. Our total deferred revenue grew sequentially by $80 million to a record $700 million. We exited the quarter with 31% of our Q1 revenue as recurring, up from 26% in Q4. Looking at our business segment results in our Digital Media segment, we achieved revenue of $688 million.
This segment has two major components of revenue, our Creative family of products and our Document Services products. In our Creative business, we continued to accelerate adoption of Creative Cloud. During Q1, we added approximately 153,000 net new paid subscriptions with our Creative Cloud for individuals and teams offerings. Our sales team also continued to migrate enterprise customers to enterprise term license agreements or ETLAs. ETLAs for enterprise customers are similar to Creative Cloud for individuals in that they are term-based and give customers access to ongoing technology updates and represents the first phase of migrating enterprise customers to Creative Cloud. As a reminder, our Creative Cloud subscription count excludes ETLA units. Success with Creative Cloud and ETLA adoption helped to drive Creative annualized recurring revenue or ARR.
Creative ARR is calculated by multiplying the number of current paid subscriptions by the average monthly revenue per user per month, multiplied by 12, and adding the annual contract value of Creative product ETLAs. Exiting Q1, we had a total of $233 million of Creative ARR, up from $153 million exiting Q4. Exceeding our Q1 target of $215 million. As of the end of Q1, 92% of Creative Cloud subscribers are on an annual plan versus month-to-month, and 81% of subscribers are licensed to the full Creative Cloud versus point product subscriptions. adobe.com remains the preferred way for our customers to engage with us when subscribing to Creative Cloud. In Document Services, we achieved year-over-year revenue growth in addition to increasing Document Services ARR from $50 million exiting Q4 to $64 million exiting Q1, exceeding our target of $60 million.
Continued adoption of our recent Acrobat release, combined with growth in EchoSign, our electronic contract solution, and Acrobat Cloud services, helped drive this performance. In our digital marketing segment, there are two components. The first is revenue from our Adobe Marketing Cloud offering. During the quarter, we achieved Adobe Marketing Cloud revenue of $215 million. This represents year-over-year growth of 20%. Mobile device use continues to be a driver in the digital marketing business. Mobile transactions increased to 25%, up from 22% last quarter. Our focus on five solutions in digital marketing with a more simplified pricing program is resonating with customers and increasing the potential to create larger engagements with them. The second component of our digital marketing segment is revenue from the LiveCycle and Connect businesses. LiveCycle and Connect contributed $52 million in Q1 revenue, which was consistent with our expectations.
Print and publishing was essentially flat quarter-over-quarter as expected. Geographically, we experienced stable demand across our major geographies. From a currency perspective, quarter-over-quarter FX rate changes had a $6 million negative impact on reported revenue. Hedging gains contributed $7 million to revenue in Q1 FY 2013 versus $2 million in Q4 FY 2012. The net sequential quarterly currency decrease to revenue considering hedging gains was $1 million. Year-over-year, FX rate changes had a $13 million negative impact on reported revenue. Comparing the $7 million in Q1 FY 2013 hedging gains to the $10 million of hedging gains in Q1 FY 2012, the net year-over-year currency decrease to revenue considering hedging gains was $16 million. In Q1, Adobe's effective tax rate was 22% on a GAAP basis and 21% on a non-GAAP basis.
Both the GAAP and non-GAAP tax rates were lower than targeted, primarily due to the retroactive reinstatement of the U.S. R&D credit in January 2013. Adobe's GAAP tax rate includes a tax benefit for this credit related to our fiscal 2012, which was essentially offset by tax costs associated with licensing intellectual property. Adobe's non-GAAP tax rate only includes the tax benefit related to the credit for fiscal 2013. Employees at the end of Q1 totaled 11,196 versus 11,144 at the end of last quarter. Our trade DSO is 44 days, which compares to 45 days in the year-ago quarter and 49 days last quarter. During the quarter, cash flow from operations was $322 million. Our ending cash and short-term investment position was $3.66 billion, compared to $3.54 billion at the end of Q4. In Q1, we repurchased approximately 2.7 million shares at a total cost of $100 million.
I'll discuss our targets for Q2. For the second quarter of fiscal 2013, we are targeting a revenue range of $975 million to $1,025 million. In digital media, we expect to exit Q2 with approximately $340 million of creative ARR, up from $233 million exiting Q1. Our targeted Q2 creative ARR is based on adding slightly more Creative Cloud paid subscriptions than what was achieved in Q1. We expect a sequential quarterly increase in the net new number of subscriptions through the year and expect to achieve our 1.25 million subscription target by the end of the fiscal year. In Document Services, we expect to exit Q2 with approximately $80 million of Document Services ARR, up from $64 million in Q1. Adding targeted creative ARR and Document Services ARR yields a total digital media ARR target exiting Q2 of approximately $420 million.
We expect a sequential quarterly increase in the amount of additional digital media ARR through the year to achieve our target of $800 million exiting the fiscal year. It's worth noting that any digital media ARR billed in advance, such as ETLAs, is reflected in deferred revenue on the balance sheet. Assuming the midpoint of our targeted Q2 revenue range, we expect digital media reported revenue to be down sequentially due to continued adoption of Creative Cloud subscription and ETLAs. In our digital marketing segment, we continue to target Adobe Marketing Cloud year-over-year reported revenue growth of over 20%. For the rest of our major business areas, we expect reported revenue to be relatively flat quarter-over-quarter. We are targeting our Q2 share count to be 507 million to 509 million shares.
We are targeting net non-operating expense to be between $17 million and $19 million on both a GAAP and non-GAAP basis. We are targeting a Q2 GAAP tax rate of 22.5% and a non-GAAP tax rate of 21%. These targets yield a Q2 GAAP earnings per share range of $0.08 to $0.14 per share and a Q2 non-GAAP earnings per share range of $0.29 to $0.35. Given our Q1 results and the benefit of the reinstatement of the R&D tax credit, we are increasing our fiscal 2013 earnings per share targets. We are now targeting FY 2013 GAAP earnings per share of approximately $0.62 per share and FY 2013 non-GAAP earnings per share of approximately $1.45. Q1 was a great start to the year. We are confident this is the main year of transition in our business.
Our strategy and our execution show that the company is better positioned than it has ever been. I'd now like to turn the call back over to Shantanu.
Thanks, Mark. We just spent three days with our customers at our Adobe Summit, and their excitement about this business is palpable. As the leader in this category, we're incredibly well-positioned to take advantage of this massive opportunity with the Adobe Marketing Cloud. Creative Cloud momentum continues to build. We're regularly releasing new innovation and are dramatically enhancing and simplifying the creative process for our customers. We encourage you to attend our Adobe MAX conference in May, where we will be making some exciting announcements. We look forward to seeing you then. Mike?
Thanks, Shantanu. Before we begin Q&A, I have a few logistics items to go over. First, for those investors and financial analysts who want to stay current on the latest Adobe news, we encourage you to follow Adobe on Twitter, Facebook, and YouTube, and to frequently check Adobe's corporate blogs on blogs.adobe.com. In addition, tv.adobe.com is a great resource to learn more about Adobe's products and solutions and check out new customer case studies. Adobe's investor relations website provides easy access to these resources. We also use Twitter to highlight news and interesting stories or articles which can help the investment community stay on top of what's happening. Follow Adobe_IR on Twitter to track what we have to say. Second, we will send out invitations this week to investors and analysts to attend Adobe MAX in May in L.A.
On Monday, May sixth, the first day of Adobe MAX, we'll host a meeting with Wall Street attendees in the afternoon. This meeting, which we will webcast, will include Shantanu, Mark, and David Wadhwani. They will review progress with adoption of Creative Cloud, discuss Adobe MAX news, and provide additional information to help analysts model our creative business. Contact Adobe Investor Relations to get more information for how to attend, and go to max.adobe.com to learn more about the event. For those who wish to listen to a playback of today's conference call, a web-based Adobe Connect archive of the call will be available from the IR page on adobe.com later today. Alternatively, you can listen to a phone replay by calling 855 859 2056. Use conference ID number 16765134.
Again, the number is 855 859 2056 with ID number 16765134. International callers should dial 404 537 3406. The phone playback service will be available beginning at 4:00 P.M. Pacific Time today and ending at 4:00 P.M. Pacific Time on Friday, March 22nd, 2013. We would now be happy to take your questions. Operator?
At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. Once again, that is star 1. We'll pause for just a moment to compile the Q&A roster.
Before we get started, I also want to apologize. We received feedback that the phone line audio quality was poor. I do hope you all have access to the prepared remarks which are available on adobe.com. In addition, absolutely feel free during the Q&A to ask us to repeat any of the data that we might have provided in the prepared remarks. Thank you.
Our first question comes from the line of Peter Goldmacher with Cowen and Company. Your line is open.
Hi. Thanks. Two quick questions. Can you talk about ASPs on the 153,000 subscribers in the quarter? It looks like they were ticking up, and you talked about more people taking suites. I'd love to know about that. Digital marketing by our organic
calculation was about 16%, which was a little bit lighter than we were hoping for. Would love some more color on that. Thanks.
Peter, let me get both your questions. The first one on the ASP, I think it was relatively flat, and so that's what I would share as it related to the ASP of the subscriptions that we saw. We certainly had, as we talked about, 153 net new subscriptions in the individual and team. We're pleased with that. In digital marketing, what I did say on CNBC earlier today was also the fact that bookings actually grew a very healthy over 25%, so we're very pleased with the strength in the business. The revenue grew as well, 20%. One of the things to remember in that particular business is that there still is a certain amount of business that's taken on premise, the Adobe Experience Manager. There's certainly a growing of the pipeline that happens during the quarter, and then we're rebuilding that healthy pipeline.
Underlying trends in both of the businesses, very strong.
Shantanu, can I just ask you a quick question on the bookings number. Are you seeing contracts get a little bit longer to drive your total bookings? Are people willing to commit for a longer duration? Is that partially what's driving that bookings number to 25%?
Peter, it's Mark. The bookings number that we're talking about is just annual contract value. It's just the first year's worth of any agreement with the customer.
Okay, thank you, guys.
Next, we have the line of Brent Thill with UBS. Your line is open.
Good afternoon. Shantanu, could you talk about the impact of Team Edition in the quarter? I had a quick follow-up for Mark.
Sure. Brent, as we mentioned, we have introduced the Team Edition. It's available both through adobe.com, small and medium businesses and teams and marketing departments can actually transact business directly with us, as well as you are now making that available in the channel. During Q1, the majority of the net new subscriptions that we saw were actually continued to be individual, both in the commercial as well as in the education space. adobe.com's off to a good start, we're aggressively educating the channel partners as well as new online partners that will be effective channel for us on the team, we continue to expect to see acceleration in the team with channel partners Q2 through Q4.
Okay. Mark, just on EMEA down double digits year-over-year and sequentially, can you just give us your view what's happening there and specifically how you think about the pipeline for the rest of the year for EMEA?
Yeah, Brent, Europe did well for us, frankly. It's a little different looking at the mix, especially as it relates to Creative, because as we move to subscriptions more and more, obviously that has an impact on reported revenue until we get through the transition. We did not see any unusual problems in Europe. Europe's definitely stabilized and is performing well, the business looks good going forward.
Great. Thank you.
Next, we have the line of Ross MacMillan with Jefferies. Your line is open.
Thanks a lot. Mark, is there any way to size the ETLA component within Creative? The reason I'm asking is because obviously that's incremental to the individual and team subs. Any color on that you could help us with?
I'll tell you how you could go do it. You could take the number of subscribers times that average revenue per user per month, which has been, as Shantanu just said, relatively consistent, times 12, that'll give you an ARR number. The difference between that ARR number and the ARR number that we reported for total Creative is basically gonna be the ETLA component.
I think it's fair to say that the ETLA business, the transition on the sales side to being able to sell these term desktop ETLAs is going well, Ross.
Yeah, that was my sense. What happens when you introduce enterprise subscriptions? How should we think about that ETLA to enterprise subscription transition?
I would actually, Ross, look at what we are offering today, which is these ETLAs, as the first phase of the enterprise offering. It enables an enterprise customer to get all the benefits of the desktop products with all of the enhancements and innovation that we add to it. What we are also seeing among enterprise customers is a desire to make sure that these desktop products continue to work with the server-based products that we have. We announced at Summit, Ross, that the next version of the Adobe Experience Manager has a digital asset management component, so that's an add-on. We also have Digital Publishing Suite, that's an add-on, and Adobe Experience Manager, that's an add-on. I would actually say that the transition to the enterprise offering has begun, and the sales force is focused on getting enterprise customers to buy the term license.
Keep in mind, the enterprise ETLA numbers do not get reflected in our subscriber counts, right?
Right, exactly. Maybe just a very last one. I know that last year you had helped us think about an equivalent unit growth number by using the sort of proxy for the perpetual or upgrade license. Any way to think about that as we have moved through Q1 in terms of what you think the like-for-like units look like on the creative side?
Yeah, Ross, we did see unit growth in the quarter. I will state that. We will provide updates on that more on an annual basis. I think Mike talked about it. Max will provide further color and update into the business. I think big picture, we are on track. Subscriptions are doing well. The product offering is being well-received, and individual team and enterprise initial offering are all now in the market.
Great. Thank you.
Next, we have the line of Walter Pritchard with Citigroup. Your line is open.
Hi, guys. This is Ken Wong for Walter. Just a quick question on the 1.25 sub guide for the year. Your run rate in February and I guess a little bit in March would suggest you guys are at kind of 10,000 to 12,000, and you guys probably have to hit mid-20s in the back half to achieve those goals. What gives you comfort that you guys can get to that 1.25 number?
Hey, Ken. Yes, Mark. As we pointed out in the prepared remarks, the ramp just accelerates as we go through the year, so the net additions each quarter gets larger each sequential quarter as we go through the year. That gets us to that 1.25 million. Some of that's just going to be more and more awareness of the offering. Some of that's going to be the viral nature of the offering. Some of that's going to be the constant innovation that we put out in the offering as people see more and more go to the cloud. The customer feedback is really what gets us confident in reaching that 1.25 million.
Got it. As we start to anniversary the Creative Cloud offering that you guys introduced last year, how should we think about retention rates there?
I think when we talked about our targets for the year, we said that the 1.25 million is certainly net of any attrition that we would expect. As you point out, we're coming up on the first anniversary for those who subscribe to it. We're confident that there's a lot of innovation, but there is a retention rate that we have built in and an attrition that we have built into our targets.
Okay, great. Thanks, guys.
Your next question comes from the line of Jennifer Lowe with Morgan Stanley. Your line is open.
Great. Thank you. I just wanted to drill into that 2 million free number on the Creative Cloud. It was big last quarter. It's even bigger now. What's your sense of the conversion rates potentially for that population, where are those users coming from at this point? What's your sense there?
Jennifer, I think in terms of who is signing on for a trial or a free membership, there are really two kinds of folks who are signing up. The first is people who want to try out our products. Trials have always been a good way for people to try out the products before buying. As we move from the trial downloads that Adobe has had historically to these free and trial members, that's certainly one of the ways in which we're signing up new members. Also, it's important to remember that some of the free members are members who are participating in a collaborative workflow with other creative professionals, rather than all of them necessarily being potential customers for the entire offering. We have our conversion rates. Every Monday morning, we look at what's happening with respect to people moving through the funnel.
We're not going to give you numbers on a quarterly basis in terms of that conversion. I think it just shows a healthy pipeline of people that we are going after in order to convert them to paying customers.
Great. Maybe just switching gears a little bit and following up maybe on Peter's line of questioning earlier on. You've got 25% bookings growth in the digital marketing business within the cloud component of that. The revenue growth is a little bit slower than that. Is there a reason why we shouldn't see the revenue growth there start to approximate that 25% bookings growth number? In theory, it should. Is there some reason why it wouldn't or we shouldn't be thinking about it that way?
There'll always be a lag, Jennifer, between the bookings and the revenue. The way we charge our customers is after they make a contract with us, we have to get their servers up and running. Until they start to run transactions through our servers, they will not be participating. I think there's always going to be a lag between the bookings and the revenue. Certainly, we've said that we expect to see 20% revenue growth given how large we believe the market is.
Great. Thank you.
Our next question comes from Steve Ashley with Robert W. Baird. Your line is open.
Thank you very much. I see a headline going across some newswires that Kevin Lynch has resigned and left the company or is going to leave. I wonder if you can confirm that. If that's true, maybe give us a little color on that.
Sure, Steve. Yeah, Kevin has made significant contributions during his time at Adobe. I'm really grateful for that. He's decided it's time for a new adventure. He's off on that. We're on our adventure. The momentum in our business continues. I wish him well, but yes, that is confirmed.
Will you do a search to backfill his position?
No, Steve. At this point, we have no plans to backfill the CTO position. As you know, Bryan Lamkin rejoined the company, Bryan's taking on all of the responsibility for both the long-range advanced technology that we're doing within the company as well as the cross-business unit product integration.
Great. I just had a question on hiring at your customers. We've really not seen a lot of hiring of marketing professionals in several years, but I've seen a couple signs that maybe that's picking up, and I was just wondering if you had any comments on that.
I think in terms of the two macro trends that we continue to look at, Steve, is certainly the amount of data that's being created and the amount of video that's being created, mobile applications, digital publications, just continues to go up and to the right. In marketing, there is more and more of that spend that's moving digital. I think both macro trends are positive. I don't track myself the hiring among our customers. I think as Mark said, the stability that we saw in all geographies seems to suggest that the economy is doing well.
Perfect. Thank you.
Next, we have the line of Mark Moerdler with Sanford Bernstein. Your line is open.
Thank you very much. Two quick questions. The first was, it appears it's obviously the digital media drove the beat, and yet the subscriptions was higher. Are we seeing a tick up in license acquisition in here as pure play license or license upgrade? Can you give some sense in terms of this?
Mark, I think the strength in the Creative business was across the board. You're right in pointing out that both reported revenue as well as subscriptions were strong. I think it just reflects the underlying strength of that business.
Okay. The other part of that is the convert from this. Are we seeing an increase in the convert from month-to-month to annual in here? Do you measure that? Can we get a sense of it?
We do measure that. I think the fundamental trends in the subscription business have always been that the entire Creative Cloud is the majority of the subscriptions that we have, and within that, an annual commitment is the majority. That really hasn't changed. I think some of those numbers are actually numbers that are in the prepared remarks, that part may have been unclear, but it's available for you, Mark, on our website.
I know the number's in there. I was just going to see if there was any sense in terms of whether you're having success in converting month-to-month to annuals.
I think there are folks who use it as an on-ramp, that's been successful. I think the vast majority of people are already signing up for the annual subscription and the entire subscription, which I think just reflects the value that's available in the entire Creative Cloud offering.
Perfect. I much appreciate it. Thank you.
Next, we have the line of Jay Vleeschhouwer with Griffin Securities. Your line is open.
Good. Thank you very much. Pricing question and a product question. In terms of pricing, on the digital marketing side, is there a case to be made that you could or should offer some or all of the solutions on a rentals basis? Is there a case to be made that in addition to the annual or multi-year contracts, that some kind of periodic rental availability of some part of digital marketing might make some sense? Then on the digital media side, could you just talk about your thoughts on making the package upgrades increasingly unappealing economically to further drive customers towards the cloud? A follow-up or two.
Yeah, Jay. First, the question on digital marketing. At Adobe Summit, as you know, we announced these five solutions, Analytics, Target, Social, Media Optimizer, and Experience Manager. We took the approximately 30 products that we had, and we've integrated them a lot better, as well as provided them in terms of simplified pricing and on-ramp for customer. As part of that, one of the things we do offer the larger enterprise customers is because they've now subscribed to the Creative Cloud, as part of the overall transactions that they're committing to do with the company, they can certainly try out some solutions that they haven't already explicitly purchased. I think this does allow a quote-unquote, try before you buy of some of our new solutions with customers, as long as they have the appropriate capacity to do that within their annual cycle.
I think it actually does help. We don't offer a rental per se, but the goal in order to make a simple on-ramp definitely is available. Your question on digital media, I think it's becoming increasingly clear, frankly, to our customers that the pace of innovation on the Creative Cloud is just going to get faster and faster. That's really our focus in demonstrating the value proposition of that. People who are on the perpetual product are going to fall further and further behind on the innovation. I think we're more focused right now on innovation, and we will continue to explore pricing across both those.
Okay, just two follow-ups. On the product side, could you, with respect to the integration you talked about of Marketing Cloud and Creative Cloud, explain how something like Digital Publishing Suite can help induce business on the digital marketing side, and in reverse, how something like CQ could induce incremental business, not only in digital marketing but also on the digital media side? Lastly, from Mark, does the change in earnings guidance for the year take into account at all the discontinuation of packaged products that you've now talked about? Have you built in some reduction of cost of revenues from that?
Do you want to take the second question?
Yeah, sure. Jay, yeah, as you pointed out, we are moving away from shrink wrap boxed product. We will have some savings from that in the fact that we don't have to manufacture and ship that box product anymore. That's factored into the guidance. It didn't really drive that $1.45. The $1.45 was really driven through the R&D tax credit, and more so than anything else, the beat that we had in Q1. The savings on the packaged products does, to some extent, get offset by the fact that we have storage costs and things like that through the Creative Cloud offering. There are savings there.
To answer your first question, Jay, I think virtually every chief revenue officer or chief marketing officer, as they think about the various channels through which they communicate with their customers, application stores and online web properties are now part of the same story. If you're an automotive manufacturer that wants to create an interactive website and wants to create a manual digitally, you want to have a similar workflow to do that. One is executed through DPS, one is executed through the Adobe Experience Manager. If you're a media company, you're certainly going to make sure that what you provide on your web is consistent with the way in which you provide your digital publications. We are now up to something like a quarter of a million digital publications that are delivered, editions every day, through the App Store.
We're continuing to see progress in DPS, not just with digital magazines, but also with training material and manuals, collateral, catalogs, and retail information that's going out there. There is really a lot of synergy between going into a large customer, communicating that we have the desktop applications to allow them to create the video they want, the mobile applications they want, as well as the web content, and to have both of our server solutions work seamlessly with that.
Thank you.
Next to the line of Brad Zelnick with Macquarie. Your line is open.
Thank you very much. I have one for Shantanu and a follow-up from Mark. Shantanu, can you talk about how you're doing against your goal of driving overall creative unit growth? The subscription numbers look really strong this quarter, but can you give us a sense of which users are making the transition? How do you think you're doing in converting piracy and getting version laggards on board?
Brad, we did see a unit growth in the quarter, which again, we said last year that we grew units approximately 13% for last year. While we're not providing a specific number, I can confirm that we are actually growing units. We're seeing certainly a new customer base that's coming on, a customer base that's never done business with Adobe, and whether it's as a result of they're the next generation of creators or the affordable pricing, we're attracting customers. We are seeing more and more people on prior versions as we provide affordable on-ramp for them also moving. I would say the majority of the subscriptions today is still individual, as I mentioned, in both commercial freelancers, in commercial and education. I think the focus in the remaining quarters is going to be on team.
In the enterprise space, we are seeing, Matt and his sales force are seeing good adoption of the enterprise term license agreements as well.
That's helpful. Thanks, Shantanu. Mark, on margins, I appreciate your past commentary that earnings should grow at least as fast as revenue from here. While gross margins should come down with the transition to cloud products, shouldn't you also see offsetting leverage in sales and marketing over time, as it presumably costs less to renew a customer than to acquire a new one? Just net net, is it unreasonable to think that this business can't eventually return back to the 35% plus margin level that you were at?
Brad, I'm not going to get into kind of long-term margin profile right now. Obviously, margins will go up from this year into next year. We've said that revenue grows, margins grow, earnings grow. We are focused more on driving earnings at least as fast as revenue growth. While clearly margins will improve from here, it's going to depend a lot on where they go relative to the mix, not only of just what happens in the creative product as it relates to subscriptions, but also the total mix between creative and digital marketing, as digital marketing will never be at the margin profile that our old business was. Again, we're focused on revenue growth and earnings growth, and margins will improve from here. I'm just not at a point where I want to give you a long-term target.
Fair enough. Thank you.
Next, we have the line of Michael Olson with Piper Jaffray. Your line is open.
Thanks. Good afternoon. I missed a couple of minutes earlier, so you might have talked about this, but in talking with the channel partners, they're definitely itching to get the Creative Cloud Enterprise offering. In what quarter are you expecting that Creative Cloud Enterprise is going to hit? Will that result in a material step-up in adds when that's available?
Mike, we didn't provide a specific date as it relates to channel partners. We said the focus has really continued to be on team right now and making sure we educate them, have the right incentives for them to renew the existing install base. We'll provide further updates on all of that stuff at MAX.
Okay. Let me just try in the interest of parity of sub adds. When it does hit, will it cause a big spike up in ARR in that quarter whenever that quarter is?
Again, I think it's important to remember that the units that we describe will be units for individual and team. The ARR number that we communicate will be ARR associated with enterprise units that we have. The way we're going to continue to report it is we will certainly report individual and team, and we will report total ARR, which includes enterprise units.
Okay. Thank you.
Next, we have Heather Bellini with Goldman Sachs. Your line is open.
Thanks for taking our question. This is Sonya Banerjee on for Heather Bellini. I guess just one quick question on the Creative Cloud. How should we be thinking about the core perpetual base and the pace of migration to subscription this year? In other words, can you touch on the assumptions that you've baked into your targets for this year or even longer term as it relates to perpetual migration?
Sonya, this is Mark. Well, we obviously guided to 1.25 million subscribers this year. We guided to 4 million subscribers by the end of 2015. Obviously, the majority of the subscribers are going to be people moving over from perpetual to subscription. We are going to attract new users, but the majority of the subscriber base is going to come from existing customers.
That makes sense. I guess part of the reason I asked the question is because at recent events, it seems like you've spoken to potentially introducing incentives to accelerate the migration of perpetual CS users to the Creative Cloud. That's part of the reason why I was asking. Are these incentives likely to come this year? Is this a longer-term event?
Again, I think we've said this is the heart of the transition this year, and the numbers that we expect are baked into our targets.
Okay. Thank you.
Operator, we will take two more questions, please.
Our next question comes from Philip Winslow with Credit Suisse. Your line is open.
Hi, guys. Thanks for taking my question. Just got a question back on your marketing initiatives there. You have seen a lot of consolidation just across the digital marketing space, Oracle, Salesforce.com, et cetera. Shantanu, just wondering if you could give a sense of how you feel about your portfolio there, and as it starts to evolve, how we should think about the product segments that you might expand into. Thanks.
I think we feel terrific about our portfolio, and I think you're seeing that relative to the success that we're having. We're the leaders in Analytics, which I think is the core of providing insights to our customers. We're the leader in the technology space as it relates to re-platforming of the websites with our Adobe Experience Manager solution, which is certainly a worldwide phenomena that you're seeing. Everybody's gearing up for mobile and tablets. We feel very good about the product portfolio that we have. The affinity that we have with marketers as a result of the brand and heritage that we've had with these customers is absolutely unparalleled. Others are going to take different approaches of going into IT. We're focused on CMOs. We've said that is the big growth opportunity for us.
We're the big data company for marketers, we continue to intend to innovate in that space.
Great. Thanks, guys.
Our last question comes from the line of Brendan Barnicle with Pacific Crest Securities. Your line is open.
Thanks so much for fitting me in, guys. Shantanu, I kind of wanted to follow up on that prior question. As you increasingly integrate digital media and marketing and see the continued evolution that you're discussing within the marketing category, is it time to bring an e-commerce platform in-house?
We have some great partnerships in that space right now. We have a joint solution with customers in that space. I think e-commerce is an important component, but the beauty of the Adobe Marketing Cloud that we have right now is that there's so many adjacencies, and continuing to partner with them actually just continues to lift our ecosystem. We mentioned in the prepared remarks that there were a number of these partners all presenting at our Adobe Summit. Whether it's email partners like ExactTarget or e-commerce, as you asked, like Hybris, we have some great partnerships that are in there. Silverpop, Responsys, Deloitte Digital. I think the partnership strategy is actually very sound, and we continue to partner with a lot of these folks to build a complete solution.
Great. Thanks so much.
Well, thank you again for joining us. I think if you think about the Q1 results, it clearly demonstrates the strong momentum and, frankly, excellent execution that we're against our stated growth objectives. We're pleased with the subscriber growth that we're seeing, and we're seeing traction in both the team as well as the enterprise offerings, which are relatively new. There is an exciting product roadmap as we continue to reimagine the creative process. In digital marketing, I think it's clear that it's acknowledged to be an explosive new enterprise category. Also, based on some of the questions that you've asked. In our DNA, it's clear we're about creativity, and marketers have a very strong affinity to our brand, and the business is doing really well.
Our differentiation, frankly, is closing that loop, the last millisecond of content delivery, which is integrating our content offering and content delivery platforms, we believe will continue to be a unique advantage for us. We're driving innovation, serving our customers well, and building, as Mark said earlier, a really meaningful recurring revenue stream. We hope to see all of you at MAX, and thank you for joining us today.
This concludes today's conference call. You may now disconnect.