Good day, everyone. Welcome to the Adobe Systems Q2 FY2012 Earnings Conference Call. As a reminder, 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 of the 2020 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, you can go to adobe.com under the Company and Newsroom links to find an electronic copy. Before we get started, I want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets and our forward looking product plans is based on information as of today, June 19, 2012, and contains forward looking statements that involve risks and uncertainty.
Actual results may to differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward looking statements we will be conducting a discussion of our financial results 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 Systems. The audio and archive may not be rerecorded or otherwise reproduced or distributed without prior written permission from EW Systems. I will now turn the call over to Shantanu.
Thanks, Mike, and good afternoon. We had a strong Q2 with 1,124,000,000 dollars in revenue, representing 10% year over year revenue growth. Our non GAAP earnings per share was $0.60 both results were towards the upper end of our targeted ranges for the quarter. In our digital media business, our strategy is to help customers create, publish, measure and monetize their content on any device. We launched Creative Cloud in May, a subscription based offering that is a hub for creating and publishing content and applications.
Creative Cloud includes our new Creative Suite 6 desktop software, tablet applications and integrated publishing services. Creative Cloud will enable us to rapidly deliver new technology to our customers, track new users through its Lower cost of entry, help us build more direct relationships with our customers and address buyers. At the heart the Creative Cloud is Creative Suite 6. CS6 includes major updates to all of the core CS products, including Photoshop, Premiere Creative Cloud Services include file storage, font services from Typekit, web publishing using business catalyst and will be enhanced through cloud based sync capabilities. A key part the Creative Cloud value proposition will be the ongoing rapid delivery of innovative products, new features and services.
Data Cloud members will receive new offerings such as Lightroom 4, PhoneGap Build, Edge, a version of Photoshop that supports the retina display in Apple's new MacBook Pro and Digital Publishing Suite Single Edition as soon as they are available. While early, feedback from the creative community has been outstanding and Creative Cloud subscriptions are ahead of our targets. In digital publishing, our strong momentum continued during Q2. At our recent digital publishing in New York, we announced an array of new features that enhance its display and social capabilities. Digital Publishing Suite now has 850 customers worldwide, up from 600 last quarter.
These customers have already published more than 1700 applications we're currently distributing 120,000 publications on average every day to announcements to Project Primetime, the industry's first fully integrated video technology platform to deliver seamless viewing of ad supported TV enables media companies to simultaneously broadcast their channels online and seamlessly replace ads stitched into the broadcast stream with dynamically inserted ads. This was driven by large enterprise adoption, including landing a CAD10 1,000,000 contract with the U. S.
Digital marketing suite did well And you talked about stopping investing in live cycle and web conferencing, but the sequential The climb was pretty dramatic. Can you give us a little color on that, please?
Sure. So Peter, at the beginning of the year and at the financial analyst meeting, we we talked about in both the life cycle and the Connect business to actually focus just on government and financial services. And And for the year, we had mentioned that we would expect to see something like $150,000,000 decline. It's actually probably a little bit even less than And so it's very much in line with the strategy to drive focus on digital marketing. And so we would continue to expect to see
And our next question is from Kash Rankin with Merrill Lynch.
Hi, can you hear me okay?
Yes.
Okay, wonderful. On the Digital Media guidance for down sequential, I was wondering if that's driven by Document Services or is it more of a services or is it more of a YARV commentary are really driven by the subscription revenue, Clearly, you would recognize less of upfront. I'm just curious to get your take on the mix behind the guide down because if If I recollect right, in the prior cycle of CS5, your August quarter was actually sequentially up for Digital Media. I know that there's been a reclass, but it was up rather meaningfully I'm just trying to get at what's different about this cycle versus the
previous one? That's it. Thanks.
Kash, it's Mark. Yes, you touched on both of the reasons. It is different this cycle. Like I said, we're optimistic about the move to subscriptions and that might have some impact in the the quarter as well as the fact that we're trying to be prudent about Europe both from a demand perspective and from a currency perspective.
Got it. Mark, at this point, the move to subscription, do you feel like the new revenue guidance for the year fully contains the transition to the subscription model or do you think that we need to see one more quarter before we can size up the subscription impact on your revenue growth rate
this year?
We feel pretty good that we've now captured the impact to 2012 as people move to subscriptions based on the run rate that we've seen so far.
Okay, great. Thank you very much.
And maybe 2 other things to just add to that cash, clearly relative to what we had outlined at the analyst meeting in terms of the impact that we thought we would see in this year as we move to the subscription, we think subscription adoption is better than expected and what we had said at the analyst meeting and as well as the subscription offerings and it's gone extremely well from our point of view because we had to deliver all of the perpetual product. We've delivered individual subscriptions in over 30 countries via adobe.com and through some other partners. And the response actually of people who got subscriptions, their success rates are actually higher than all other traditional means. And so that really bodes well for customer's hat and loyalty moving forward. So just wanted to point out that the execution on the move towards the Creative Cloud globally has actually gone really
I wanted to go back to the subs question and apologize. I'm having a little bit of trouble hearing some of the answers. So if you said this, I apologize, but it sounds you said 30,000 of the subs came from 5,000,000 which implies maybe 60,000 were net new and A, is that right? And if that's the case, could you update us on your thoughts for what you would expect to see seat growth be this fiscal year?
Yes. So Adam, I I think there are 2 questions in that. We had said that subscriptions moving forward, we are sort of modeling it for the time being given it's only the individual subscribers at about 5,000 a week moving forward. You And your third question was?
You said update us on what expect you'd given some parameters for what you expected seats to do this year at the Analyst Day? Yes. How are you what's the updated target for seat growth?
Yes. We're tracking to that. I think at the Analyst Day, we had said that we expect to see something like a 10% seat growth and we think we're on track to accomplish
Terrific. Thank you.
And we have a question from Brad Zelnick will be required.
Thank you very much. Just to follow-up on Adam's question, and not to belabor this, But specifically, I think you had said that and I know it's only 25 days shipping the product in the quarter, but that total seats or total units were up Just slightly from the CS5 launch. So kind of resolve that against what else was said and tracking to that 10% target, Shantanu, which you say is still on track, is that should we then infer that the perpetual Sales perhaps were less than you'd expected in the quarter or is that not a fair conclusion?
I think Brad, continuously Comparing sort of units with the old models given some of the new offerings we have in subscriptions is actually going to be harder. What we were Surprise and individuals, the subscription offering is seeing an uptick that is higher than our projection. So what we were trying to do was give you a flavor not just continue to be optimistic about this move towards the cloud as being the right strategic move for the company. In terms of total units, we had talked about how the cloud enables us to attract new customers and to drive seed growth. And again, in response to Adam's question, we think
Thanks, Shantanu. And just a separate topic I want to ask, have the acquisitions of Vitru and Buddy Media changed the competitive dynamic around social marketing? I think Oracle and salesforce.com would argue that this capability is an extension of CRM. Is it an advantage or disadvantage to be selling this type of solution
Marketing as a category is absolutely heating up and we continue to think that we are very, very well positioned in that entire space with I'd like to everything we offer. The content management business continues to do really well. Efficient Frontier, we had the best quarter in bookings in terms of Efficient Frontier, the integration between analytics And content management and the integration between analytics and multi campaign, multi channel campaigns going really well. So Specifically as it relates to social, we introduced Adobe Social and we think that since Adobe Site Catalyst is widely deployed on all of these thousands of brand sites, because we collect 1,600,000,000,000 transactions, we're uniquely positioned frankly to correlate those social media mentions with the business metrics on we can actually do is demonstrate the impact on business results. We also now enable them to actually do the content creation through context And we're the 1st and actually I think the only Facebook preferred marketing developer who supports all of Facebook's marketing API.
So clearly the space is heating up. I think different companies are going to come at it from the CRM point of view, the IT point of view and the marketeer. We think we're uniquely positioned On the market here and the content, and this is such an explosive space. I think all companies will continue to do well right now.
Thank you. And our next question comes from Thomas Byrne with Deutsche Bank. Good
What's your sense for the demand? Are they asking for the availability of cloud?
So Tom, What we're hearing from the enterprise customers is the rapid innovation that we're going to be delivering as part of the Creative Cloud. They certainly want access To that, I would say the file storage capabilities, they not only want it with across the enterprise through Creative of cloud, they really want digital asset management through the day solution and so we've provided that. And so their content requirements and their app requirements, we're hearing more demand not just for the content creation tools, but frankly for content management through day as well as the digital publishing suite set of solutions.
Ding with them. Did you as a follow-up that you think that this might be something you pursue and open up ahead of the next major cycle.
Yes, we'd intend to do that before the next major cycle, Tom. And for those of the customers who are on enterprise Since agreements, since they are on a per seat basis, there really is no risk associated with them whether they get the perpetual or the subscription you get access to all of this technology. Thanks, Jan.
And our next question comes from Mark Moldeber with Sanford Bernstein.
Thank you. Two quick questions on it. The first is, what drove
This is Mark. On the digital marketing side, the cost is mainly around hosting. On the digital media side, COGS were up this quarter primarily due to the shipment of the CS6 product, things like localization, increased shrink-wrap product that went out into the channel, things like that. Both of those are somewhat unique to this quarter.
And the second one is, Mark, what data would you be able to supply us in Q over Q in the next couple of quarters to be able model the growth in the subscription.
Well, we gave you quite
a few numbers given the fact that the product's only been out for 4 or 5 weeks. As we move forward, we'll certainly continue to give you the numbers that we did this quarter and we'll look to expand that as It starts to settle into a range that's a little more predictable. So you can look forward to us providing more information as we move forward.
Perfect. Thank you.
And our next question comes from Dave Bleeschhouwer with Griffin Securities.
Thanks. Good afternoon. A couple of questions around 2 subjects that came up with the Digital Marketing Summit in Salt Lake a couple of months ago. First, Adobe mentioned in one of the presentations that adobe.com does over $500,000,000 In revenue and the question first, perhaps Mark, is how are you thinking about the progression of adobe.comrevenues this year and beyond when you take Into account all the mix of upgrades plus subscription plus perpetual. So can you talk about that outlook?
And then secondly for Shantanu also at Salt Lake, there was a good amount of discussion about the integration plans critical next steps along that integration path that you have for those two sides of the business?
Sure, Jay. It's Mark. So for adobe.com, directionally, we fully expect adobe.com to be a larger and larger percentage of business, especially as we move more and more subscription people over onto adobe.com, it gives us a one to one relationship with our customers that we don't always get when product is sold elsewhere and frankly it's better margin as well. So we would expect that business to grow going forward without Fadell.
And Jay, on the second question as it relates to the integration plans, I mean, there are probably 3 key areas that we focused on right now, both between the digital marketing suite and across them, which is Content management and analytics, that's been a huge customer request, which is if they are implementing the content management system to make sure There's analytics associated with it. I would say the second one has been with content creation tools, the CS tools and Digital Asset Management, so that all of the content that we are creating is automatically stored in these digital asset management areas. And so you consider that an integration between CS as well as the day content management repository. And the 3rd, I would say and related to the question that was asked earlier is everything to do with analytics and measuring whether it's marketing spend or Conversion, so I would say the integration is going really quite well. We will continue to push on it.
And we there's so many ideas on the table. I'll put one more out there. Virtually every customer is interested in also exploring digital publishing suite because they all recognize that they have to publish things not just on their website through day or on social sites through context optional, but also increasingly through app stores using the digital publishing And so that's clearly another area of integration between the content creation tools and our services.
Okay. Just one follow-up on the subscriber numbers that you talked about earlier. At the analyst meeting, you mentioned that you had a new subscriber goal of 800 1,000 by 2015. If all we do is just extrapolate the 5,000 a week that you've been seeing, then you get there by Early 2015, assuming no change in the 5,000 a week. Is there any reason to believe from the pipeline comments you made that you you did in fact see some step up in the net adds of subscribers and perhaps you hit that 800,000 goal sooner than 2015?
So Jay, firstly, as Mark said, I think it's really early. We've only introduced the individual offering. We haven't yet introduced the team. We And the fact is that people are looking at this as a natural way. We've talked about piracy.
We're definitely hearing anecdotal evidence that people who Pirated copies in the past are now wanting to become legitimate by paying the monthly fee. And so it's all off to a Good start, but I think it's too early to project 2015 right now.
And we'll take our next question from Mike Olson with Piper Jaffray.
Hey, thanks. Good Acceleration in Creative Cloud uptake rates potentially accelerating later in the year whenever it is launched above The 5,000 new subscriptions per week that you see at the end of the quarter?
Yes. So Mike, the 5,000 is only as it relates to individual subscribers. And yes, we would expect acceleration when the other offerings come to market because the numbers there per individual customer do tend to
Okay. And then just quickly, what was the if you could share what was the recurring revenue as a percent of overall in the May quarter? I think
Yes, this is Mark. It was 23% last quarter. It's about 23% again this quarter, keep in mind that the subscription revenue from the cloud really doesn't impact our financials this quarter at all because obviously The offering was late in the quarter and it takes a while to ramp up from a revenue perspective. One other thing while I'm on this that I should mention is if you look at deferred revenue, we had a nice healthy deferred revenue increase, which is great. Deferred revenue does not and will not include cloud revenue because we bill on a monthly basis.
We don't bill in advance even for the annual subscriptions. So I just want to make sure you understand not to look at deferred revenue as some metric to figure out future cloud revenue.
I just had one follow-up on the digital media business. I think you said 90,000 subscribers and 30,000 it is about 5,000 a week. I'm just curious as to whether that math is right. And was there a bulge at the front or is there some other Why that 60,000 number has happened over a 4 or 5 week period?
Ross, it's Mark. Those numbers are correct. And yes, we did have an initial spike when we first launched the product and then we've settled into the 5,000.
Great. And then just one follow-up. As you've thought about making some slight adjustments for the full year, you talked about Europe demand, F FX and then better adoption of the Creative Cloud. And I think from our own work, and I think you said 70% the weight of those two items, Europe plus FX as 1 versus the higher Portion moving to subscription, any sort of sense of that sort of mix, if you will?
Well, if you look at the fact that we had dollars 10,000,000 impact in terms of overachievement in the second quarter. You can use that as a surrogate for what that Might mean going forward, we took a point, if you will, off the top end of the range. We didn't lower the range. We just took a point off the top of it. And you can look at description impact might be as you go forward and then the rest is Europe and FX.
That's very helpful. Thank you.
Operator, we're running upon an hour. So why don't we take 2 more questions, please?
Thank you. Our next question
Some of the ones people were asking, where in particular are you seeing demand for Creative Cloud? I was just wondering if you could characterize the customers for us that are coming into that fold. And then also, Shantanu, you said pairing units to the old model is going to be hard. What in your opinion should we be using to judge Thank you.
So Heather, first with respect to of the interest and demand that we're getting for Creative Cloud, it's actually very broad based. The number of customers who signed on for the free membership, the trial downloads, the volumes associated with that has It's products as well, which suggests that it's a broad based demand right now for the Creative Cloud. The thing I will remind everybody who is Listening is that it is so early and none of them have actually seen the amount of innovation that we can add on a monthly and a quarterly basis. And so I think the beauty of the Creative Cloud offering really is that it feeds on itself with respect to all of the new innovation that we can provide. And we're so early while we have a roadmap for all of that development.
It really hasn't materialized yet. And so we think that that actually should help accelerate adoption of the of the Creative Cloud. With respect to your second question on units, as Mark said in his prepared remarks, the way we look at performance is going to be a combination of the perpetual revenue, the site license revenue as well as subscription. So we'll start to give you that data as the quarters proceed. And so you have to look at all of that cumulatively as you get a true state
And our last question will come from Robert Breza with RBC
Hi, thanks for squeezing in. Art, you just your recent comments here in the last question or To talk about not reading too much into the deferred revenue move, I'm wondering, I know you don't give financial targets Just for deferment. Can you talk to us directionally on how you think that will trend? And then also maybe just directionally help us understand how you think cash flow will
revenue you can see was up $44,000,000 that's driven by the Omniture and the digital marketing businesses that are some royalty contracts in the print and publishing business that get renewed and they're booked to deferred and then recognized ratably over time. I would expect over a longer period that deferred revenue will continue to go up. I think next quarter, it's conceivable that it's flat to maybe even slightly down next quarter just because of this royalty contract that got renewed this and that was worth I'll tell you that was worth $13,000,000 in deferred. Of the $44,000,000 $13,000,000 was from a royalty contract in print and publishing. So that would come out next quarter and we might see it slightly down, but over the longer period, I would fully expect deferred revenue to continue to even though Creative Cloud subscriptions won't be reflected in deferred because we've got the digital marketing business which is be a very large SaaS business moving forward.
And then from a cash flow perspective, I don't foresee any changes in the near term. We continue to have a very healthy cash generating business model and I fully expect that to continue. 1 one thing I did want to add before I turn the call to Shantanu to wrap up is, I think there's been some question about the digital marketing revenue and I just want to make sure if you look at the data sheet that you understand that digital marketing includes the lifecycle and connect businesses and if you look at our supplementary data, it's a better way to look at those businesses so that you can see how much was Lifecycle and Connect and how much is what we call the digital marketing suite revenue which is the Omniture products and the WEM products together which is really where the growth is going to come from.
Thanks, Mark. Again, at the beginning of the year, we had talked about 2 key goals for the company. We were going to move the creative business to the cloud to attract New customers to make that far more predictable and to continue to drive innovation. And while early, we think we're off to a really successful start with With respect to the Creative Cloud introduction that we've seen so far, as we've said subscriptions are ahead of track and we have now a platform on which we can build to drive continuous innovation. The second goal that we had talked about was focusing on this fast growing category of marketing, it's clear that that's panning out and that the acquisitions and the organic innovation that we've position us very well.
As Mark said, we've had 35% year over year growth in revenue in that category. The pipeline is healthy. And so while there was some softness in Europe, we do not think that it impacts our confidence both in our strategy as well as in our execution. So thank you for joining us today.
And this concludes our call. Thanks for joining