Good afternoon.
My name is Jay and I will be your conference operator today. At this time, I would like to welcome everyone to the Adobe Fourth Quarter Fiscal Year 20 12 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you.
I'd now like to hand the call over to Mr. Mike Savage, Vice President of Investor Relations. Please go ahead.
Good afternoon and thank you for joining us today. Joining me on the call are Adobe's President and CEO, Shankh Sunun Orion as well as Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe's Q4 fiscal year 2012 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately 1 hour ago. If you need a copy of the press release, in this call, particularly our revenue, subscription and operating model targets and our forward looking product plans It is based on information as of today, December 13, 2012, 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 in Adobe Connect and is also being recorded for playback purposes.
An archive of the call will be made available on Adobe's Investor Relations website for approximately 45 days and is the property of Adobe. The audio and archive and 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 pleased to report we delivered Record revenue of $1,153,000,000 in Q4. This performance helped us achieve record revenue for $4,400,000,000 in fiscal year 2012. At Adobe, we're focused on 2 large market opportunities, Digital Media and Digital Marketing. 2012 was a milestone year in terms of innovation with our Creative Cloud and Adobe Marketing Cloud.
We achieved great success in both these areas. In the Digital Media business, we are redefining the creative process with Creative Cloud. Through frequent product and feature enhancements, new cloud services and attractive pricing, Adobe is changing how we We will deliver customized offerings for individuals, work groups and large enterprises. As with all successful subscription services, we are offering a free trial program. This enables an easy on ramp and a funnel of prospects We intend to convert to paying subscribers.
Since we launched the individual Creative Cloud offering in May, We have already delivered 3 updates to the service. Earlier this year, we added Lightroom to the Creative Cloud as well as new features for Dreamweaver and Illustrator. Since then, we have provided new HTML products, including Edge and Muse. And this week we delivered major feature enhancements to Photoshop and Digital Publishing Suite. We also introduced a sync and store capability, which will enable our creative customers to share and collaborate.
We're now shipping Creative Cloud for Teams, which includes central administration of licenses, expert support, online training and collaboration features. Creative Cloud for Enterprises, which we will deliver in 2013 integrates with Digital Publishing Suite and the Adobe Marketing Cloud with Digital Asset Management being an obvious area of integration. We have begun transitioning enterprise customers to enterprise term license agreements, which provide them cloud services and updates to our desktop tools. Pricing for each segment is designed to reward loyal customers and aggressively transition them to the cloud. Response to the Creative Cloud exceeded our expectations, helping us grow total creative units by over 13%.
As of the end of the year, we had 326,000 paid memberships and over 1,000,000 free Creative Cloud members. As a result, in our Creative business, we exited FY 2012 with 153,000,000 in annualized recurring revenue. Based on overwhelmingly positive customer feedback, our results to date And the roadmap of new innovation planned for the coming year, we intend to accelerate customer transition to the Creative Cloud in 2013. In Document Services, we launched Acrobat 11 with newly integrated cloud services including web contracting with Adobe EchoSign and Forms Creation, data collection and analysis with FormCentral. Acrobat and these document services at record revenue in 2012.
3 years ago, we embarked on a strategy to create a new business for Adobe. Through organic innovation and acquisitions, we have become a market leader in the explosive digital marketing category. Our Adobe Marketing Cloud enables marketers to deliver personalized web experiences across multiple devices, Manage multi channel campaigns and optimize media monetization. We target Chief Marketing Officers, Chief Revenue Officers, Advertising agencies, publishing executives and digital marketers with our solutions. Our 5 Adobe Marketing Cloud solutions are architected to provide best of breed capabilities across analytics, online targeting, Media Optimization, Social Media and Web Experience Management.
By consolidating our 30 distinct offerings, We have simplified our messaging and made it easier for customers to license and implement our solutions. In addition to innovating on the product side, We intend to aggressively evangelize the benefits of digital in the evolution of marketing. We believe digital marketing will be a multi $1,000,000,000 category and 2012 was a great year for Adobe as we established ourselves as the leader in analytics, online targeting and media optimization. In Web Experience Management, we have the fastest growing solution in the space, doubling our market share over the past 2 years. As a result, we drove over $220,000,000 of revenue in Q4 and achieved 35% annual revenue growth for the year.
In summary, 2012 was an outstanding year of accomplishments against our strategic priorities. We entered 2013 in a strong position. Now I'll turn it over to Mark.
Thanks, Shantanu. Our earnings report today covers both Q4 and fiscal year 2012 results. Adobe achieved record revenue of $4,404,000,000 in the year compared to 4.216 $1,000,000 in fiscal 2011. Our success in fiscal 2012 demonstrates Significant progress toward our goal of transforming our business and building a predictable revenue stream. In 2012, 25% of our revenue was recurring, up from approximately 19% in fiscal year 2011.
In fiscal 2012, we added approximately 293,000 net new paid subscriptions. Using an ASP of $7.50 this achievement in subscriptions effectively transitioned approximately 220,000,000 of perpetual revenue to Creative Cloud during the year. Backing out recognized subscription revenue of 39,000,000 We would have achieved approximately $181,000,000 more of revenue in FY 2012. Additionally, moving to term based enterprise license agreements transitioned approximately $19,000,000 of FY 2012 perpetual revenue. After these adjustments, we believe FY 2012 revenue would have been approximately $4,600,000,000 representing 9% year over year growth.
In the Q4 of fiscal 2012, Adobe achieved record revenue of $1,153,000,000 exceeding our targeted range of $1,075,000,000 to $1,125,000,000 We continued to accelerate adoption of Creative Cloud In Q4, we added approximately 132,000 net new paid subscriptions. Using an ASP of $7.50 this achievement in subscriptions effectively transitioned approximately 99,000,000 of perpetual revenue to Creative Cloud in Q4. After backing out recognized Q4 subscription revenue of $20,000,000 We would have achieved approximately $79,000,000 more of revenue in Q4. We also began to ratably recognize some enterprise agreements, which additionally transitioned approximately $19,000,000 of Q4 perpetual revenue. With these adjustments, We believe Q4 revenue would have been approximately $1,251,000,000 We experienced stable demand across our major geographies.
From a currency perspective, Quarter over quarter FX rate changes had a $6,700,000 positive impact on reported revenue. Hedging gains contributed $2,000,000 to revenue in Q4 FY 2012 versus $7,700,000 in Q3 FY 2012. Thus, the net sequential quarterly currency increase to revenue considering hedging gains was 1,000,000 Year over year, FX rate changes had a $13,700,000 negative impact on reported revenue. Comparing the $2,000,000 in Q4 FY 2012 hedging gains to the $3,600,000 of hedging gains in Q4 FY 2011, The net year over year currency decrease to revenue considering hedging gains was 15,300,000 Employees at the end of Q4 totaled 11,144 versus 10,811 at The sequential increase was driven primarily by hiring in our field organization. Our ending deferred revenue balance increased by $59,300,000 to a record 619,600,000 As a reminder, Creative Cloud subscriptions are billed monthly and are not reflected in deferred revenue on the balance sheet.
Our trade DSO was 49 days, which compares to 50 days in the year ago quarter and 48 days last quarter. During the quarter, cash flow from operations was 473,700,000 Our ending cash and short term investment position was $3,540,000,000 compared to $3,250,000,000 at the end of Q3. More than 80% of our cash is offshore. In Q4, we repurchased approximately 2,000,000 shares at a total cost of $67,000,000 For the year, we repurchased approximately 11,500,000 shares at a total cost of 372,000,000 I will now discuss business segment results. Our digital marketing segment is made up of 2 components.
The first is revenue from our Adobe Marketing Cloud, which we previously referred to as Digital Marketing Suite. During the quarter, we achieved record Adobe Marketing Cloud revenue of 220,400,000 This represents Q4 year over year growth of 32%. Adobe Marketing Cloud Analytics transactions in On Cyber Monday, we achieved a single day traffic record with 19,000,000,000 server transactions, up from the previous record of $17,500,000,000 last year. The second component of our digital marketing segment is revenue from the Lifecycle Connect Businesses. Lifecycle and Connect contributed $70,000,000 in Q4 revenue, down as expected from the 102 point $7,000,000 we achieved in Q4 of FY 2011.
In our Digital Media segment, we achieved revenue of 810 $700,000 The 2 major components of revenue are our Creative family of products and our Document Services products. In Document Services, the new Acrobat release achieved strong enterprise adoption. That Plus continued growth in EchoSign, our electronic contract solution and Acrobat Cloud Services Drove record revenue in Q4 of $210,200,000 Similar to the Creative business, we are driving subscriptions growth and a shift to enterprise term based licenses. As a result, we exited the year with approximately 50,000,000 in annualized recurring revenue in Document Services. I'd now like to discuss our Creative Cloud business.
Our strategy is to provide differentiated offerings for our Creative Cloud customers. During fiscal 2012, Our subscription results were primarily driven by adoption of Creative Cloud for individuals. Towards the end of Q4, We had a limited release of Creative Cloud for Teams, which became widely available this week. In 2013, we will be offering Creative Cloud to enterprise customers. In anticipation of Transitioning enterprise customers to Creative Cloud, during Q4 we began moving them to enterprise term license agreements or ETLAs.
Like Creative Cloud subscriptions, ETLAs are term based, give customers access to ongoing technology updates and will enable a smoother migration to the enterprise offering when it becomes available. Earlier this year, we introduced several metrics to help you understand our progress with Creative Cloud Adoption. They included total number of subscriptions and annualized recurring revenue or ARR. ARR is calculated by multiplying the number of current paid subscriptions by the average monthly revenue per user per month multiplied by 12. We also provided a methodology to correlate the value of our new subscribers to revenue we would have recognized As our enterprise customers migrate to ETLAs, some of these contracts involve estimated numbers of licenses rather than precise registered user information.
As such, we have decided we should exclude enterprise based Subscriptions from our Creative Cloud subscription count. However, because revenue from ETLAs is recognized ratably, We will include the annual contract value of ETLAs in our Creative ARR calculations. Now I would like to review our recent Creative Cloud results. During the Q4, we To reiterate, these do not include enterprise users who are covered under ETLA agreements. In Q4, we averaged 10,000 new subscriptions per week, up from 8,000 per week in Q3.
Exiting Q4, 90% of subscribers are on an annual subscription versus month to month and 81% of subscribers are subscribed to the full Creative Cloud versus point product subscriptions. We exited Q4 with Creative ARR of $153,000,000 up from $90,000,000 of ARR exiting Q3. $146,000,000 of ARR was from Creative Cloud Individual and Team subscriptions. The remaining $7,000,000 was from the annual contract value of creative ETLAs signed in Q4. Adobe.com is increasingly becoming the preferred way for our customers to engage with us.
28% of all creative subscriptions And perpetual units were licensed via adobe.com in FY 2012, up from 18% last year. With Creative Cloud for individuals and teams now available and with our sales team migrating enterprise customers to ETLAs, We are in a position to utilize all our routes to market to help accelerate customer migration to Creative Cloud. At our last analyst meeting, we reported that total creative product units have been at approximately 3,000,000 units per year for each
of the past 4 years.
We disclosed our goal to increase total perpetual and subscription units by 10% this year. I'm pleased to report that we grew creative units 13% in FY 2012. Now let's look at Q1 and FY2013. For the Q1 of fiscal 2013, we are targeting a revenue range of $950,000,000 to $1,000,000,000 In Digital Media, we expect to exit Q1 with approximately $215,000,000 of Creative ARR, up from $153,000,000 in Q4. The estimated Q1 Creative ARR is based on adding slightly fewer New Creative Cloud paid subscriptions than what we achieved in Q4 due to normal Q4 to Q1 seasonality.
In Document Services, we expect to exit Q1 with approximately $60,000,000 of Document Services ARR, up from $50,000,000 in Q4. Adding Creative ARR to Document Services ARR Yields a total Digital Media ARR exiting Q1 of approximately 275,000,000 Assuming the midpoint of our targeted revenue range, we expect Digital Media reported revenue to be down sequentially due to continued migration to Creative Cloud subscription and ETLAs as well as normal Q1 seasonality. In our digital marketing segment, we expect Adobe Marketing Cloud Q1 revenue to be relatively flat with Q4 revenue, coupled with a sequential decline in our lifecycle and Connect businesses. We expect Print and Publishing to also be flat quarter over quarter. In addition, we are targeting Q1 share count to be 503,000,000 to 505,000,000 shares.
We are targeting non operating expense to be between $19,000,000 $21,000,000 on both the GAAP and non GAAP basis. We are targeting a Q1 GAAP tax rate of 28% and a non GAAP tax rate of 22.5%. These targets yield a Q1 GAAP earnings per share range of $0.08 to $0.14 per share and a Q1 non GAAP earnings per share range of $0.26 to $0.32 Now I would like to discuss fiscal 2013. We expect to exit FY2013 with over 1,250,000 paid Creative Cloud individual and team subscriptions. We expect the impact of these subscriptions and continued adoption of ETLAs to effectively transition approximately $690,000,000 of reported perpetual revenue, 2 subscriptions next year and to exit the year with a total ARR of approximately 685,000,000 In Document Services, in order to drive consistency in how we sell to enterprise customers, We have begun to migrate many of our large Acrobat customers to ETLAs.
As a result, we expect Document Services reported revenue to $750,000,000 in FY2013 with an additional $80,000,000 of perpetual revenue transition to ETLAs that will be ratably recognized. Together, this results in a targeted growth rate in document services of 5% to 7%. Combining Acrobat ETLAs and cloud based services, we expect to exit FY2013 with $115,000,000 of document services ARR. FY2013 will be the pivotal year in our transition to a And we expect to exit the year with approximately $800,000,000 of Digital Media ARR. As the leader in the digital marketing segment, we will continue to invest in this explosive growth category.
By focusing on the 5 solution areas in the Adobe Marketing Cloud, we expect to grow bookings by over 25%, yielding reported revenue growth of over 20%. In just a few years, we will have built a brand new $1,000,000,000 business for Adobe. We expect Lifecycle and Connect to continue to decline, But to contribute an estimated $200,000,000 of revenue during FY twenty thirteen, we expect print and publishing to be flat year over year. We expect total Adobe reported revenue in FY twenty thirteen to be approximately 4,100,000,000 We will closely manage expenses during this upcoming transition year and expect earnings per share to be approximately $0.62 on a GAAP basis and $1.40 on a non GAAP basis. Keep in mind, the $770,000,000 of revenue effectively transitioned from perpetual to subscription and ETLAs equates to approximately $1.20 of non GAAP EPS.
At our analyst meeting last November, we said we would redefine the creative process and deliver an amazing set of products and services for our customers available via a new subscription model. In FY 2012, we overachieved our goals by growing total creative units by 13%. We exited the year with 326 At the analyst meeting, we said the transition to a cloud model would be complete within 4 years. Based on our success in FY 2012 and our plans for FY 2013, we anticipate we will complete the bulk of the transition sooner than that with approximately 4,000,000 individual and Team Creative Cloud paid subscriptions by the end of 2015. After FY twenty thirteen, we believe reported revenue from our Creative Cloud and CS product family will achieve a CAGR of over 15% from FY 2014 through FY 2016.
We said by the end of 2014, we would build a $1,000,000,000 business in digital marketing. With the success we've achieved in FY 2012, We're on pace to achieve a $1,000,000,000 run rate by the end of 2013, growing 25% in bookings and 20% in revenue. We said that by the end of 2014, 40% of Adobe's overall revenue would be recurring. We're on a track to achieve this goal exiting the end of 2013. While FY2013 is a transition year, we are confident that our strategy and our execution show that the Company is better positioned than it has ever been.
We are committed to providing continued transparency to demonstrate progress as we reinvent the company. I'd now like to turn the call back over to Shantanu.
Thanks, Mark. These are exciting times at Adobe. Last year, we outlined a strategy to reinvent the company and accelerate growth by focusing on the digital media and digital marketing categories. I'm pleased to report we are ahead of schedule in our transformation. We continue to be the undisputed leader in digital media And in just 7 months since the launch of Creative Cloud, we have over 326,000 paid subscriptions and 153,000,000 of annualized recurring revenue.
We are a leader in digital marketing with the most comprehensive offering in the inside track with the marketing community. This business, which didn't exist at Adobe 3 years ago, is on pace to reach $1,000,000,000 in annual revenue. As we close the year, we see huge opportunity for Adobe ahead. The dramatic shift we are making in our business It's really not different than what we've done for the past 30 years. Innovation is in our blood.
It defines us and galvanizes our employees. We look forward to 2013. Thank you for joining us today. Now I'll turn the call back over to Mike.
Thanks, Shantanu. Before we begin Q and A, I have a few logistics items to go over. First, for those investors and financial analysts Want to stay current on the latest Adobe news, we encourage you to follow Adobe on Twitter, Facebook and YouTube and frequently check Adobe's corporate blogs on blogs. Adobe.com. We are increasingly using blogs and social channels as a primary means to communicate important information.
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. We have updated Adobe's Investor Relations website to provide easier access to these resources. During fiscal 2013, Adobe Investor Relations will begin to use Twitter to highlight news and interesting stories or articles, which will help the investment community stay on top of what's happening. Follow AdobeIR on Twitter to track what we have to say.
2nd, I'd like to highlight the invitation we sent out last week to attend our upcoming Digital Marketing Summit in March. There's no better way to immerse yourself into the opportunities we see in this explosive category and how Adobe is best positioned to win in this market. Contact Adobe Investor Relations to get more information for how to attend. And 3rd, I'd like to highlight that we've slightly modified our segment reporting for fiscal 2013. We have moved our video server solutions products From digital media to digital marketing, to better align the role of how Adobe can help its customers monetize their video assets with our digital marketing solutions.
The updated IR data sheet we published today contains a page with the new segments by product name. An updated IR data sheet with restated revenue by segments will be made available by the end of January around the time our 10 ks is filed. For reference, the amount of Q4 revenue that will be moving from digital media to digital marketing is less than $10,000,000 In regard to today's earnings report, we have posted several documents on our IR website, including a copy of the script containing our prepared remarks for today's call. Given the new detailed information we've provided today, the script should be a useful resource to assist with modeling our business. To access these documents and the other investor related information, go to www.adobe.com forward slash adbe.
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 732 30,376. Again, the number is 855-859-2056 with ID number 732-30376. International callers should dial 404 537-3406.
The phone playback service will be available beginning at 4 p. M. Pacific Time today and ending at 4 p. M. Pacific Time on Monday, December 17, 2012.
We would now be happy to take your questions. Operator?
Our first question comes from Walter Pritchard with Citigroup. Your line is open.
Hi, thanks. Sean, Newmark, great And I think everybody appreciates all the transparency that I just wanted to highlight that. But a question I had around the Creative Cloud move. It does seem like customers are enduring somewhat of a price increase as they move to these new offerings. And I'm wondering if you could talk about where customers are seeing the additional value It's driving them to move.
How much of it is sort of a carrot that you're offering in terms of value versus a stick in terms of practices you may be using especially around enterprise can seem to encourage
the change. Yes. Walter, let me start off with that. And with respect to the transparency as I think both Mark and I have Right. So we want to make sure that we provide you with the information, while we go through this transition.
As it relates to the cloud, I think people are really seeing the benefits of always having access to the Applications and the latest applications. As I mentioned, we've actually given 3 updates already. We've introduced new services like Sync and Share and We've really just started, I mean, in terms of the innovation. So I think it's just a better way to stay current. I think people see the promise of having their assets And so there really are no sticks so to speak right now.
It's all about Seeing that the future of creation is being delivered through the Creative Cloud.
Okay, great. And then Mark just I didn't hear you talk about you gave a lot of detail on fiscal 2013. I didn't hear you talk about cash flow. I know there is probably also Cash flow impact here based on the fact that most of these are monthly billed, but maybe you could help us understand sort of where we should be thinking about cash flow for fiscal 2013?
Yeah. So the great news is we have a terrific cash balance. I talked about that. From a cash flow perspective, Walter, it is going to model As it has somewhat closely with non GAAP net income, so you should expect that cash flow will be less as we go through this pivotal year In 2013 than it has been in say 2012.
Okay, great. Thanks. Thanks for taking the questions.
Next we have the line of Peter Goldmacher with Cowen. Your line is open.
Hey. I just want to ask you a quick question. It was interesting to hear your reconciliation from shrink-wrap to subscriptions and on the revenue you think you gave up. How do you guys think about drawing in new users that maybe had been priced out of the products because of the upfront cost was so high And new users you're getting because of a more affordable price point?
Yes. Peter, I mean, we certainly are seeing new customer adoption. I think we referred to that statistic last time in terms of the number of new users because it is more affordable. And I think we've I heard that over 30% at times would not have subscribed or would not have gone to the perpetual version, But our finding that the Creative Cloud is the best option to go. I think actually there's again a lot of headroom ahead of us as we start to Combat piracy as well and start to get those customers as part of the Creative Cloud.
So at this point, we're clearly attracting new customers. I think Mark referred to the fact that for the first time in many years, we've actually grown units for the creative business, which is exciting to see and it just again Speaks to the innovation that the teams are providing. Maybe to add to Walter's question as well. We do have information on all of the apps that are being downloaded And the new HTML applications that we have created are seeing quite a bit of downloads. We're certainly seeing the flagship products of Flash Pro, Photoshop And illustrator and InDesign.
But the new products that we're delivering as part of the Creative Cloud, whether it's Lightroom or whether it's Edge and Muse are also seeing fairly significant adoption, which I think bodes well for us.
When it's Just following up on that. So when you're selling these new products and some of these new products are integrated with the digital marketing cloud, I know it's early days, but how helpful is it to you to leverage that creative brand when you're selling the digital marketing products? Are we Early in that part of the sales cycle or do your marketing digital marketing customers already Have a positive view of Adobe and that's a catalyst to sell that digital marketing stuff?
I think it's a great question Peter and there's no Question that we're seeing quite a bit of synergy between the Creative Cloud and the Marketing Cloud. And the two places where we see that a lot is in the Web experience part of digital marketing that business continues to be on fire as people replatform their online businesses. And the second area where we see that is, if you have a Chief Revenue Officer who's thinking about digital publishing suite, Traditionally, it was just magazines that were buying Digital Publishing Suite. Now you're seeing insurance companies, financial services, retail and travel all seeing it. So I think Matt and his organization are really able to go in and paint a picture of the entire content lifecycle and it's clearly working.
It's also working for us the reverse way, which is if you have our content management solution, you want to make sure that you have the latest version of the Creative products, so that it can automatically put data. And as I said, we'll be also releasing digital asset management that ties them together.
Great. Thanks a lot.
Next we have the line of Adam Holt with Morgan Stanley. Your line is open.
Thanks so much. I had a couple of questions.
The first is it looks like you all had nice unit growth for the year. I I was hoping maybe you could break down, was that all on the Creative Cloud side? And maybe if you can add any color about what you think you added in terms of net new users in the quarter and or year. Is that new to the Adobe family?
So Adam, overall units, We do know that we added approximately 13% new units in 2012. And I think it's actually been across the board. I mean, commercial units did really quite well. We continue to see units did really quite well. We continue to see adoption of both what you would call the perpetual version as well as Clearly, the subscribers were materially ahead of where we thought we would be in the 1st 6 or 7 months.
And we will continuously update what we are seeing in terms of new users, but we are certainly attracting new users to the platform.
And if I could just ask a follow-up on the subs guidance for next year. It looks like it implies a little bit of an acceleration in your Subs Edge, you've got new products in the market. Maybe walk us through the different variables you're thinking about that gets you comfortable with an acceleration on the sub side? Thank you.
Sure, Adam. And I think it comes from the initial success that we've seen on subscriptions has been predominantly on the individual side. The team we had a product released to our partners really late in the quarter. And so when you look at the Q4 subs number That's all individual and we'll certainly be extending that through the team offering that's coming out that has come out. It's not shipping.
And so That significantly enhances the number of people we can target. Similarly geographic expansion, I think as we go through 2013, You're going to see geographic expansion in terms of the subscriptions. And frankly, I think we expect that as the innovation is increasingly cloud based That more and more customers are going to be doing it. We're going to have community. We're going to have training and the viral impact of people looking at it and understanding That the latest version is on the cloud, we do believe will drive it.
Last, we also have a funnel. I think we talked about the fact that we have over 1,000,000 Free members and it's certainly our goal to convert them. Trials have always been the number one A way in which we've converted customers and we believe that that's a good opportunity to go be a world class consumer marketing company and convert them.
Thanks very much. Next, we have the line of Steve Ashley with Robert W. Baird. Your line is open.
Thank you very much. I'd like to ask about the enterprise term license agreements you've begun to introduce and why they're a necessary or required interim step Moving people to the cloud, is it just simply because the enterprise version isn't out now? It will be out in a little while and you simply wanted to Start the transition now. So a little bit of color on that. And then my second question has to do with the education market.
Have you started to tap that? Do Any activity in the Q4? And is there a game plan if we didn't to tapping in next year?
Sure, Steve. So on the first question as it relates to the enterprise, it clearly is in line with our strategy to have the Creative offerings be rather than perpetual offerings be term offerings. So as we are signing these enterprise wide agreements, I think it makes a lot more sense for us to have those be term license agreements. It's very aligned with the subscription model. And so in Q4, we started to move to that.
I think it's in our best interest. I think it's also in customers' best interest because By definition then that they have access to all of the latest upgrades as they become available. We will deliver enhanced Functionality to enterprises as well in 2013 and that will be much better integration between our desktop products and what our marketing cloud provider. So certainly there'll be more functionality, but moving to ETLAs was very much in line with strategically where we want to go. In terms of education, we did see a fair number of education subscribers.
I think people are starting to adopt The Creative Cloud in Education and we saw a very healthy number of subscribers in Q4.
The other thing I'd add Stephen this was maybe inherent in what Shantanu That is that ETLAs from a customer's perspective, they're buying and paying for the software in a similar way to So the way they will under a subscription model. So it gets them kind of more adapt to paying us on a regular basis as instead of all upfront.
Thank you.
Next we have the line of Mark Moerdler with Sanford Bernstein, your line is open. Thank you very much. Two questions. Just a quick clarification. You said that the there were 3,000,000 creative units over the last couple of years and you've seen growth.
Is that $3,000,000 that were sold during or a total of $3,000,000 in there? The second part of it is we've seen the EPS guide is Hello, obviously and a good chunk of that is due to the move to subscription. Is there some other part of that from the line items we should be
So the 3,000,000 is 3,000,000 units per year that we were shipping of creative product and it's been relatively stable at 3,000,000 for the Past many years and this year we saw a 13% uplift to that unit count. Perfect. On the financial model and We can go into this in detail, but a very high level. Yes, the primary move in earnings was driven by The transition of revenue from perpetual to subscription and to ETLAs both together, That was worth $1.20 as I said in the script in 2013 earnings. And if you believe that there's more there that we could have driven from an earnings perspective, yes, there's a portion of that That's cost.
It's not too terribly different than where our run rate is from a cost perspective, however. So if you look at Expenses they ramp during the year and then you've got obviously the full effect of that cost going into the next year. And the other thing I'd say is that we do It's very important to continue to invest in the business, particularly around the digital marketing space where it's a very hot market. We're the leader in the space and we want to keep that 25% bookings growth and 20% revenue growth going.
Perfect. Thank you very much. Next we have Ross MacMillan with Jefferies. Your line is open.
Thanks a lot. The first question I had was to do with the fact that this year I think you had offered Folks that really were on versions older the opportunity to still get upgrade pricing through the end of the calendar year. And I'm just curious as to whether there's any way you can look at the units that you sold this year and get a sense for whether you've had a better success in converting, If you will older version users to the new product either on Creative Cloud or just on the perpetual? Thanks.
Ross, I think I would say that across the board the Creative Cloud, we've seen interest from new users, from users of the latest version And clearly allowing people on prior versions to upgrade to the cloud, we've also seen Uplift on that. As I said earlier, we the number of subscribers that we saw in the 1st few months was significantly higher than the one that we expect. Moving forward, the good news about having them all in our customer database is that we will be in a position to get a lot more information on What they are using to improve their customer sat, which by the way I should say, we track customer satisfaction quite a bit and we've seen that the Satisfaction of people online as part of the Creative Cloud is quite a bit higher than perpetual. So I think that bodes well for us as well.
That's helpful. And then maybe just one quick one on ASP. I know Mark you didn't Call out ASP. I think you've got a blended ARR now. But is there any color you could provide around the ASP on the at Creative Cloud Subscriptions.
And also what's your current thinking with regard to how you'll deal with the promotional Pricing as we start to come up against the anniversary. Thanks.
Yes. So we are Ross more focused on the ARR number, but The average revenue per user on the individual side has been very stable. It's very consistent with what it was last quarter. On the promotional pricing, it's our expectation that those people will stay with us and start paying the higher price. That's been tested in many other businesses and we expect that it is a very sticky product and that those people will continue to subscribe at the higher price.
That's great. Thank you.
Our next question is from Brent Thill with UBS. Your line is
open. Thanks. Mark, just on the margins, I think you're assuming somewhere in the mid-20s If we did the math right on your operating margins for this next year. From your perspective over the long haul, do you believe this transition will yield a more profitable Adobe relative Where you saw the margins or do you expect a similar operating margin target as we go through this when we exit?
So, yes, Brent, you're right. This is the pivotal year as we said and it's very consistent with what we would expect From a transitional perspective, from here onward, from 2013 onward, revenue, margin and EPS are all going to grow. And we have tried to give you guys some transparency around longer term growth rates for some of the revenue streams. We talked about 4,000,000 Creative Cloud subscribers in 2015. We talked about Creative Cloud and the CS product group Growing 15% on a CAGR from 14% to 16%.
We talked about the Marketing Cloud growth continuing at 20%. And I would expect that EPS through all that starts to grow again at least as fast as revenue. So we get through this year And all of those metrics get better and better from 2013 onward.
Okay. So do you believe over time then it can be as Possible as this is the old model?
Well, to be honest with you, as the digital marketing business grows, That's an inherently lower margin business, right? That's a complete SaaS oriented business. It's just not ever going to be at Digital Media type margins. So as that gets bigger and bigger, it does weigh on margins. I think we can do some things to pull More margin out of some of the businesses that we have and we're very good at that.
But again, we're going to be very focused On driving EPS growth and driving that EPS growth with revenue growth, even if it means doing so at a lower margin than where we've been.
Okay. Just one last point. At the Analyst Day, you did say through the transition, you thought operating margins you could Hold the margins up and obviously you're crossing a point where you can go after this given the success that you've seen. And I would assume that this success now has fueled This increase in spending beyond kind of what you had initially mentioned at the Analyst Day?
It's not the And then Brett is that we're moving faster on the transition, right? We are so happy with the way this is going that we want to get through this in 2013. We want to be Completely transitioned when we get through 2013 from a financial model perspective and that is clearly more optimistic We'll wait for it Analyst Day.
Great. Thanks Mark. Next we're at the line of Brad Zelnick with Macquarie. Your line is open. Thank you.
Great to see you finished the year on a high note and especially the overachievement on creative unit growth, which brings me to my question. Mark, what's your assumption for creative unit growth embedded in your guidance for subscribers and revenue in 2013? And what seat growth will you have achieved in 2014 In 2015, if you exit with 4,000,000 Creative Cloud subs and just ask another way because I guess get this question asked all the time. What does the BK rate look like on the perpetual side? What's your assumption there?
Sorry, the what rate? You mean the churn rate?
So on the perpetual side
Oh, I see. Yes, yes, I see. Well, so Brad we've said for a while and we still believe this that we think we can drive 10% More unit growth. If you look at the $4,000,000 right, the $4,000,000 is significantly above the $3,000,000 We've said we've been shipping per year for the past several years. So when you get out to 2015 with 4,000,000 units that's quite a jump up from the 3,000,000 that we've seen in the past.
I think that's the at a high level that's the best way to look at it.
The other thing I would say Brad is that relative to what we had talked about at the analyst meeting, we certainly believe that subscriptions are going to grow faster. It's going to come with unit growth, but also what you consider perpetual, we do believe that that's going to transition as well faster.
Thanks, Shantanu. Just a follow-up on something else you said earlier. You said over 30% of new creative units have been new to the franchise. How can you define that and determine that? And what is the trend then from Q3 to Q4?
And what assumptions do you make for guidance for next
Yes, Brad. So that I was reiterating some of the statistics that we had said at the end of Q3. We do periodic surveys. We certainly understand that we're attracting new customers and we'll give you more insight. But net net it's clear to us that We're driving new users.
We're driving faster subscription than we had originally expected. And we'll certainly as we have been with other numbers Continue to update that as we do our surveys.
Great. Thanks for taking my question. Our next question is from Jay Vleeschhouwer with Griffin Securities. Your line is open. Thanks.
Good afternoon. Couple of operational questions first. Shantanu, how do you anticipate investing in external Sales and distribution capacity this year and through the rest of the transition. And internally would it be fair to say that by the time you Get to 2015 and complete the transition that the adobe.com could be roughly a $1,000,000,000 business for you, well up from the $500,000,000 or so that it's typically been doing and a couple of follow ups. Thanks.
Sure. So Jay, if the question was around sales and distribution capacity only for the Digital Media business, We certainly are seeing more on adobe.com. You're right. If we have the subscriber growth that we've talked about adobe.com will be I just want to reiterate that we will continue to invest in sales capacity for The digital marketing business. The other thing I will highlight is that even as it relates to digital media and subscriptions, We do expect to continue to sign a lot of online partners who will be able to drive traffic and hence subscribers To Adobe.
And we continue to think that that's a great way to attract customers. There's no reason why e tail stores as Well as other online services will not be a source of customers to Adobe moving forward.
Okay. And Mark, with respect to the revenue shift, So far the majority of the customers signing up I think have been from existing customers within the installed base Who therefore might otherwise have been eligible to upgrade. So somewhat similar to an earlier question, how do you think about The decay of your upgrades business, which has also been roughly typically I think over $500,000,000 a year, do you think that decays Significantly as well as the eligible existing customers move to cloud.
Yes. I think the short answer is I do. I think as the cloud gets more and more adoption and as people have that viral aspect towards the cloud, Both sides of perpetual full and upgrade are going to come down. And that's baked into these assumptions on subscribers, on long term adoption and units as well.
Okay. And then lastly, a product question Shantanu, you mentioned in your remarks digital asset management. I assume you're referring to the DAIS CQ product line. So with respect to that, are you going to be quickly transitioning that to a ratable model, which historically hasn't been? And could you talk about how Day might become more integrated with other Adobe products and technologies to Make it a broader or more functional platform in its own right.
Sure. So, first as it relates to the day business, Which is now part of the marketing Adobe Marketing Cloud as part of the Web Experience Management solution, That business has been doubling. It has been really a phenomenal success for us Jay. We Both offer day on premise, so that people can have their websites behind the firewall. We've also started to offer it as managed services where we will run that website for them and we offer that as a hosted.
And so I think we're the most comprehensive offering right Now for online web asset management. In terms of the digital asset management, that's a component that we will deliver over and above the core Web Experience Management Solutions. So we think that's actually additive to revenue and helps tie the Creative Cloud and the Marketing Cloud together. And that's going to be We're already testing it out with some customers and it's going to be out imminently.
Thank you. Next we have Heather Bellini with Goldman Sachs. Your line is open.
Great. Thank you. I just had a couple of questions and I think there's been kind of some talk about this, but I was wondering if you could get maybe a little bit more granular. You gave us your view about the fiscal 2014 to fiscal 2016 kind of 15% revenue CAGR in your prepared remarks. I'm wondering if you could kind of walk us through the 1 or 2 key drivers behind those.
And then also I think a lot of people are trying to figure out How should we be thinking about the fiscal 2014 impact of subscription on the top line? I know you said things are going to grow from there in terms of Revenue, margins and EPS, but kind of will there still be this transition period going on? And How should we think about the high level impact on 2014? And then I just got a follow-up.
Sure. Heather, it's Mark. I'll start out. So the big impact when you get out to 2014, 2015 2016 from a revenue point of view and the reason you get that 15 plus percent CAGR is primarily two things. 1 is we're driving new units.
You're shipping 4,000,000 units a year instead of 3,000,000 units a year. And the other is you get this very nice stacking effect Of the subscription model, I mean, it's the beauty of the subscription model. Obviously, people are paying you every month, month after month, nobody's skipping releases and that Stacking effect plus the new units drives a very healthy growth rate in that business. On the
Fiscal 20.
Yes. On the kind of path from here forward, revenue grows. So we will not see a dip in revenue after fiscal 2013. You do get
Right. But to get to that CAGR, I'm just wondering how what does the What does the line look like?
Well, I can't do that for you frankly Heather, but you can do the modeling At a high level based on some of the metrics we gave you and that's why we wanted to make sure you had the 4,000,000 subscribers in 2015. But everything does grow from here. So you won't see a revenue dip in creative or in total Adobe from here out.
Right. And then Mark, I guess the follow-up would be, could you walk us through what type of churn rates we should be thinking about in our models from the subscription business?
So it hasn't What are
you guys using in your assumptions?
Yes. I mean right now we've been at 80% retention rates in terms of modeling, which we think is conservative. We haven't seen churn yet for the annual people. So The big data point will come when the annual people have to renew, but we've assumed in the modeling 80% retention.
Okay, great. Thank you very much.
Okay. Next we have Blair Abernethy with Stifel. Your line is open.
Thanks very much. Just want to Mark if you
could drill in a little bit more into the Acrobat business and just give us a sense there In terms of the historically when it was really just a shrink-wrap business is how much of that business would be Under enterprise site licenses that I'm just kind of looking for a shape of the magnitude of that that's going to transition to term.
Blair, let me take that question. I think the Acrobat business has been pretty broad based. The Enterprise license agreements are actually a smaller part of the entire business. But the important thing for us in that was to make sure that we offer both the creative products as well as the Acrobat products in 1 enterprise term license. As I Think about modeling that business.
I think for 2013, we've said you can model that at about a 5% to 7% growth. And that revenue I think we broke up how much would be in perpetual and how much would be going to ARR. And I would model that as growing in revenue after 2013 of that 5% to 7% and growing in ARR higher than that.
Okay, great. Thank you. And on the subscriptions on the creative side, What's sort of been the experience in the last 6 months here from sort of a geographic or regional strength?
I think as it relates to subscriptions, it's primarily at this point U. S. And some countries in Europe. And it sort of actually mirrors what you might think of as our traditional strength. That's one of the reasons why I said as we roll out The offering in other geographies, there's certainly opportunity.
But you can assume that at this point, it's primarily the Big markets for Adobe, which tends to be the U. S, U. K, Germany, Japan.
Okay, great. Thank you.
Operator, we've gone past our normal hour. Why don't we take 2 more questions?
Certainly. Our next question comes from Robert Breza with RBC Capital Markets. Your line is open.
Hi. Thanks for taking my question. Mark, as I look at the 3,000,000 units Going to 4,000,000 units in 2015 and think about what you said from a churn perspective, but The renewal rates being high, not a lot of alternatives for people to switch after they get on the Creative Cloud. And historically you guys have been at 40% margin kind of business or at least have peaked out over 40% margins. What prohibits you from getting back to that level, given this transition going forward?
Thanks.
It really comes down to digital marketing. It really comes down to how big digital marketing becomes as a percent of the total company. And I think you could look at any SaaS company in the world and see that you're just not going to get to 40% operating margins in those businesses. So It becomes a mix question. Believe me, I think you've seen over the past 5 plus, 10 plus years that we're very focused on the cost side of the business.
We pay very close attention to it. We will manage it very effectively. But I'm leery to say that we're going to go back to 40% operating margins primarily due to the mix.
And again Great. Thank you.
Again, we're going to be very focused on driving earnings per share at least as fast as revenue.
Thanks. Next, we have the line of Jason Maynard with Wells Fargo. Your line is open.
Hey, thanks for taking my question. The one thing that I
maybe I missed it earlier on was on the cash flow question.
When you think about the amount
of revenue that's getting deferred, What would be helpful is what's the rate if you will of cash flow capture if you will are you thinking about on that revenue? So if it's a So if it's a $700,000,000 deferral, should we think about roughly the Creative Cloud Suite Annual ARR versus the perpetual license
and maybe look at that and sort
of say, okay, that will get captured over X months type of timeframe. What's your best guess if you will for us to think about that type of modeling?
I mean, again, the challenge is that it's not a challenge. The way the business model works is that we're billing people monthly. So we're collecting that cash monthly. Even the annual people are getting charged on their credit card monthly. So that revenue That used to come in upfront is getting spread out over say 2 years.
If you think about they're paying Roughly $4.80 per year that now gets spread out over a couple of years to get back to that $7.80 plus that we used to get upfront. So I don't know if that helps answer your question. I think going forward, I'll look at cash flow and provide more details about Kind of go forward cash flow. I'm just frankly not prepared to do that today.
All right. That's fair. Thank you.
Well, I just want to again reiterate thank you for joining us on the call today. And there's no question in our mind that As a company, we're in significantly better shape entering 2013 than we were entering 2012. I think we had a very successful introduction of Creative Cloud. We're attracting new customers. We're creating a strong funnel for conversion.
And I think we've transitioned the company to a more rapid development methodology that helps us innovate faster for our customers. I think we are broadening the customer base that we can target with Creative Cloud with the introduction of the Teams product and we will extend that even further with Creative Cloud for Enterprises in 2013. We're starting to transition our enterprise customers to the ETLAs And there's no question that we're seeing synergy with the Adobe Marketing Cloud, both in the web experience management area as well as in the digital publishing suite. And I think you've also seen that in document services, with mobile driving more PDF usage, we're actually building a really nice Annuity with our document services. And I think you'll see that the ARR shows the health of the business that we expect to exit in 2013.
And on digital marketing, the business is doing well both revenue and bookings and it's clear that it's an explosive market category where Adobe is Very well positioned. I'm actually quite pleased with the introduction of the Adobe Marketing Cloud and the solution Focus that we're going to take with content management, analytics, targeting, media optimization and social had a really good quarter as well in Q4. So as we think about entering 2013, it's with driving innovation, serving customers and having a Really energized employee base. We're building a recurring revenue stream as well. Thank you for joining us today.
And this
concludes our call. Thanks everyone.
This concludes today's conference call. You may now disconnect.