Welcome to the Adobe Conference Call to discuss Adobe's intent to acquire Marketo. 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 will now turn the call over to Mike Savage, Vice President of Investor Relations.
Good afternoon, and thank you for joining us today on short notice. Joining me on the call are Shantanu Narayan, Adobe's President and CEO Brad Rencher, Executive Vice President and General Manager of Adobe's Digital Experience Business and John Murphy, Executive Vice President and CFO. In the call today, we will discuss the announcement of Adobe's intent to acquire Marketo. We posted copies of today's press release and our prepared remarks for this call on our Investor Relations page under Quick Links for reference.
Before we get started,
we want to emphasize that some of the information discussed in this call, particularly the timing of closing and the potential benefits of our acquisition of Marketo is based on information as of today, September 20, 2018, contains forward looking statements that involve risks and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward looking statements disclosure in today's press release as well as Adobe's SEC filings. Call participants are advised that the audio of this conference call is being recorded for playback purposes and an archive of the call will be made available later today for reference. I will now turn the call over to Shailesh.
Thanks, Mike, and good afternoon. Adobe's strategy to empower people to create and transform how businesses compete continues to drive our momentum. Our customers recognize that great experiences have become the basis of differentiation in an increasingly competitive world. With the world's best digital media and digital experience solutions, Adobe has become the go to company for developing and delivering transformative customer experiences. We created the digital marketing category to serve the unmet needs of Chief Marketing Officers, Chief Digital Officers and Chief Revenue Officers.
Today, we serve thousands of enterprise customers who rely on Adobe Experience Cloud every day to deliver compelling experiences to 100 of millions of consumers. This innovative platform includes content management, personalization, segmentation, advertising, analytics and commerce solutions that leverage Adobe Sensei, our AI and machine learning framework. Our success has stemmed from serving businesses that sell directly to consumers in industries such as retail, financial services, media and entertainment and travel and hospitality. Increasingly, our platform is also being adopted by B2B and B2B2C customers who face many of the same marketing challenges. To address this large opportunity, we're excited to announce our intent to purchase Marketo, the leading B2B marketing engagement platform.
We believe the combination of Adobe Experience Cloud's analytics, personalization and content solutions with Marketo's lead management, account based marketing and attribution technology will make us the leading platform for all marketers. We're thrilled with the Marketo team, their technology and the opportunity to serve their customers. Brad will share more details about Marketo and our strategy, and John will address the financial details of the transaction. Brad?
Thanks, Shantanu. Adobe Experience Cloud is the most comprehensive integrated and actionable platform for the modern enterprise, designed to help companies deliver consistent, continuous and compelling experience to customers across every touch point and channel. The breadth of our market leadership is underscored in nearly 2 dozen recent industry analyst reports and in the success we've achieved with Experience Cloud bookings and revenue growth. With the acquisition of Magento last quarter, we added next generation commerce capabilities to the Adobe Experience Cloud. Today, we're excited to announce the acquisition of Marketo.
The imperative for businesses across all industries is a laser focus on providing relevant, personalized and engaging experiences. Adobe Experience Cloud has enabled B2C companies to successfully drive business impact by harnessing massive volumes of data, customer data and content in order to deliver on this imperative. When businesses buy from other businesses, they now have the same high expectations as consumers. The addition of Marketo widens Adobe's lead in customer experience across B2B and B2C. The combination of Marketo's leading B2B marketing engagement solution with Adobe's advertising, analytics, Commerce and Marketing Clouds places Adobe at the heart of all marketing.
Specifically, the combination will enable businesses to acquire more customers through targeted account based advertising, improve campaign creation and execution velocity with access to an intelligent repository of content assets, use a data driven approach to focus sales and marketing activities on the most valuable prospects and customers, and deliver cross channel experiences including web, mobile, email, in store and in person that are personalized and consistent. These are a few of the benefits that will allow customers across all industries, sizes and routes to market to grow their revenue using the Adobe Experience Cloud. Now I'll share a few highlights about Marketo. The Marketo engagement platform is a feature rich, cloud native and market leading solution for B2B marketing, marketing planning, engagement and attribution. Their products are enterprise ready with extensive customer adoption across a wide range of industries and geographies.
Representative customers include Charles Schwab, NVIDIA, Palo Alto Networks, JPMorgan and Workday. Marketo has an engaged marketing community with over 65,000 members and 500 ecosystem partners. Marketo has a strong and talented team that we look forward to welcoming into the ABILITY family. Upon close, their CEO, Steve Lucas, will continue to lead Marketo as part of the digital experience leadership team. Now for more details on the financial aspects of the acquisition, I'll turn it over to John.
Thanks, Brad.
We are
excited about the acquisition of Marketo, which will add a significant asset to our digital experience offering and accelerate our growth in an expanded addressable market. We intend to fund the acquisition price of $4,750,000,000 through our current cash position and new borrowing. The transaction is subject to typical government approvals and the satisfaction of other customary conditions. We expect the acquisition to close by the end of our fiscal Q4. Marketo was public until 2016, at which time they were taken private by Vista Equity Partners and an experienced enterprise focused management team was brought in.
Since then, Marketo has successfully executed on their enterprise strategy and has regained their bookings and revenue momentum. As part of their credit rating process, Marketo reported pro form a revenue of approximately $320,000,000 in calendar year 2017, with expected growth of greater than 20% in 2018 and improving operating margin. Given Marketo's market leadership and their revenue and growth rate, we believe the acquisition represents a fair valuation. With large growth opportunities in digital media and digital experience, Adobe remains committed to driving strong top line and bottom line growth with a focus on operating margin. The addition of Marketo is consistent with the strategy.
With our financial analyst meeting a few weeks away at MAX, we look forward to sharing more details. I'll now turn the call back over to Mike.
Thanks, John. If you wish to listen to a replay of today's call, you can access it by calling 855 859-2056. Use conference ID number 286 7,298. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 p.
M. Pacific Time today and ending at 7:30 p. M. Pacific Time on September 28, 2018. We would now be happy to take a few questions related to today's announcement.
And as always, we ask that you limit your questions to 1 per person. Operator?
Your first question comes from the line of Mr. Brent Haire from Jefferies. Sir, your line is now open.
Thanks. Good afternoon. Shantanu and Brad, you've had a lot of campaign capabilities that you're acquiring in Marketo. You acquired NeoLane many years back. I'm just curious how you think this is different than the current suite that you have today?
That's a great question, Brent. Let me maybe taking a step back as we've been focused more on marketing, just refer to even for the companies that we currently serve, whether they be in financial services, across commercial and consumer banking or across telecommunications and consumers that are being served or corporate customers or in consumer goods companies where you're selling directly to the consumer increasingly as well as you're selling through distribution channels. And in technology companies where everybody is trying to create that personalized brand with consumers, but sell through larger partners. We've been noticing that there continues to be a lot of convergence between the marketing activities that are happening within an enterprise. And so virtually every enterprise is thinking about both what you would have traditionally called their B2B marketing as well as their B2C marketing.
From our perspective, when we looked at what we had with the Experience Cloud, we recognize that the engagement with these customers is critical and it's increasingly digital. And so the fact that we have all of the content that's required to engage with these different constituents and the data that we have for Insight, it felt like we were really in a very unique position to be able to serve the needs of all marketers. When you think about the workflow, certainly with acquisition and what we've done with the advertising cloud, with segmentation and what we've done with the customer data platform and what we've done with insight through analytics, we have a number of the building blocks to be able to serve both these customers. With Neolane, when we thought about our now Adobe campaign, we certainly have the ability to do orchestration and orchestration for tens of millions of consumers. And what Marketo brings is a whole bunch of functionality with respect to driving that particular engagement for buyers and influencers within an enterprise so that they can connect all of the front end communication with lead to revenue activities within the enterprise.
And so big picture, we just look at it and say, we now have the ability through a single orchestration, single content platform, single analytics to be able to do a couple of things. At the end of the day, with B2C customers, we were able to really deliver these great engaging experiences across different channels. The B2B marketing is essentially the same challenge because you're targeting a number of buyers across different channels within an enterprise. And so if you can take everything that we had combined Adobe campaign with the best of what Marketo does, which is extremely innovative at the point of how you can translate all of this upfront communication to revenue, we think we have an unbeatable combination. So I know it was a little longer answer to your question, but hopefully that sets the context.
It complements everything that we have with Adobe Campaign. And at some level, all we are thinking about is if customers across B2B and B2C want to plan, they can use Adobe products. If they want to engage, they can use Adobe products. If they want to measure and get insight, they can use Adobe products. And now we can connect that all the way back to whatever is the revenue bearing functionality within an enterprise.
Thank you.
Your next question comes from the line of Saket Kalia from Barclays. Your line is now open.
Hi, guys. Thanks for taking my question and congrats on the acquisition. For Shantanu or Brad, clearly the expansion into B2B use cases is one of the main benefits of this combination. Could you give some sense of how big your current B2B business is within the Experience business? And perhaps relatedly, how the long term revenue opportunity with B2B compares to B2C anecdotally?
Yes, I'll take that one. This is Brad. From a B2B standpoint, I would say within the B2B world, every B2B customer has said, hey, I really need to have a website in which to communicate my brand strategy and the core values to customers. They've measured that with analytics. They've done some form of email campaign.
But what we really see is the opportunity here is to connect much more closely to the core revenue flows of a B2B business. So to connect all the leadership that we have put together from a website and an analytical standpoint and a cross channel marketing and connect that to the core lead, marketing lead all the way to the conversion of revenue for B2B businesses. And we see that as a significant market opportunity that's borne out by analyst reports who certainly cover this space. So we see it as a significant growth opportunity for the Experience Cloud.
And Saket, one of the things we've been talking about is certainly while this increases our TAM as John alluded to and we'll share more at MAX. When you think about consumer goods companies, that might have traditionally been referred to as one part of B2B. It's a massive investment that they are making with respect to using digital techniques to directly engage with customers. So and again, I think we gave you examples in financial services, all banking today, you have both the commercial banking as well as the consumer banking. And our ability to get a greater share of wallet in the marketing activity, we think is enhanced through the availability of this solution.
Very helpful. Thank you.
Your next question comes from the line of Mr. Ross MacMillan from RBC Capital Markets. Sir, your line is now open.
Thanks so much. Chelsea, I wonder if you could just comment on the timing of the transaction. Why is now the right time to move into B2B? And then a follow-up for John. You gave us some pro form a revenue numbers.
I wondered if you could share any pro form a operating margin numbers either for 2017 or 2018? Thanks.
Yes, Ross. I mean, I think as it relates to the timing of the transaction, we continue to be extremely diligent and thoughtful about acquisitions in terms of making sure that we get great people first and foremost, great technology and that the financials make sense. I think what we have done internally with the innovation around the customer platform that we have, the unified profile that allows us to plug in more things at an accelerated rate, really gives us a lot of confidence with respect to being able to integrate all of these and deliver value to our customers. That's a platform that customers are already using and it not only integrates all of our experience cloud solutions, it actually facilitates the ability to integrate others as we had conversations with Marketo. It was clear that joint customers were looking for this integration.
So that gives some flavor. And from the point of view of a deep management bench that we have at Adobe and the ability to execute against these, we feel confident. So I think when we see good synergies and the financial ability to make this good for our investors, it's incumbent upon us to act prudently.
And Ross, in regards to the pro form a numbers that I provided, those were during what Marchetta provided during their credit rating process. And one of the things that was attractive about this asset is that under Vista's ownership, they were able to return to growth, so both top line and bottom line. So what we wanted to kind of emphasize there is that this is a really healthy business that's growing and it's consistent with our strategy to continue to grow top line and bottom line growth.
Thank you.
Your next question comes from the line of Mr. Alex Zukin from Piper Jaffray. Sir, your line is now open.
My question, so just a 2 parter for me. As you think about the competitive landscape in B2B being different than B2C, and you think about some of your competitors having a dominant position in kind of CRM and customer service and support specifically, How do you sell against that or around that? What's kind of the go to market proposition versus that or those vendors? And then maybe just a financial one, given Marketo's kind of 20 percent -ish growth rate similar to the Experience Cloud subscription growth rate, do you see a chance to accelerate that business to maintain it? And then how should we think about the retention rate of that product versus your Experience Cloud retention rates?
Yes. Alex, just a couple of thoughts on that. I mean, first, as it relates to the competitive landscape, at the focus at the end of the day, the focus for us is the marketer. It's a customer that has tremendous affinity towards Adobe. They're buying our solutions.
They want the same comprehensive solutions that we're selling. So you should look at this as we now have the ability for all of the industries that we serve and we're serving the Chief Revenue Officer, Chief Digital Officer and Chief Marketing Officer to actually go in with a more comprehensive solution. So in my mind, it's less about going in against another offering and more about going in with a more expansive and unified offering that starts with all of the digital engagement that they're doing on the website, all the way out back to lead generation. So that's conceptually how I think about it. Certainly, both Brad and John alluded to the fact that they've done well in the enterprise.
And so from our point of view, the ability to bring synergies is a big part of the attractiveness of this. And in a few weeks at MAX, what we wanted to do is make sure we got in front of you today. As we get more color on when we will close it. We will certainly provide more information whether it relates to Q4 or whether it relates to the next year and onwards. And we have an opportunity at MAX to really be in front of you directly.
Next question, please.
Your next question comes from the line of Mr. Kash Rangan from Bank of America. Sir, your line is now open.
Hi, thank you very much and thanks and congratulations to the team on your biggest, boldest acquisition, Shantanu, since you became CEO. Certainly, trying to probe into the strategic intent of this, do you think much like I think The Street doubted Adobe's ability to monetize Omniture and you certainly ended up being very successful at this. So where do you think Adobe can add value to Marketo in a way that this might potentially transform Adobe the way Omniture transformed Adobe 2 to 3 years from now? And a question from a financial standpoint on my policies. If I just roughly do 2% cost of capital for the cash you'd be spending on this and assuming that the 20% growth rate yields about a 5 $1,000,000 revenue outcome for Marketo, it would occur to me that Marketo has to do 20% -ish operating margins for the deal to be not dilutive to pro form a earnings per share.
So am I thinking about this the wrong way or the right way or generally within the ballpark? That's it for me. Thank you.
So Kash, this is Brad. Let me just take the first part of that question and then John can follow-up on the second part. So first, if you step back just from a market context standpoint, really becoming an experience led business is now a C level imperative for every organization in the world. And so with that, it's how you drive competitive differentiation, it's how you win and lose every day in the market. And in fact, we've worked with an analyst firm to come out with statistics that actually bring that down in terms of metrics.
Experience led businesses grow faster from a revenue standpoint. They have higher brand awareness. They have higher employee satisfaction around that. So what is Adobe's unique opportunity here with Marketo to continue to take these principles that Adobe has pioneered in marketing and in B2C marketing, as you think about data, processing trillions of transactions, bringing all that behavioral data together with operational data and financial data to understand your customer base better. And then take that out and ultimately with content and the delivery systems that we have to do best in class cross channel advertising.
We do that more than any company in the world right now and we're very excited to then take those same principles that we pioneered in B2C marketing to B2B marketing. And with Marketo to not only just drive great personalization on the website, but to take what we're doing with them to really become part of the core revenue flow and the core revenue engine for B2B customers across the world.
And to listen to your question, Kash, with the deal this size and not being closed, we need to really work through the closing activities and have a better understanding of the calendarization impacts that Marketo will have to Adobe as we move Marketo to Adobe's fiscal calendar because they were on a standard calendar year form. And the deferred revenue impact as we talked about in other acquisitions, we need to work through that as well as other purchase accounting. But really make no mistake, we're committed to accelerating growth and the strategic fit of this asset.
Got it. Thank you. So I would assume that you would take a little bit of valuation from a non GAAP perspective because What I meant was given that this is strategically when you're going for growth, it's fair to assume that there's going to be a little bit of non GAAP earnings per share shouldn't get it 1 year out whatnot, just judging from the tone of your comments. I'm just wondering if that's the right take over we should have with us till we approach you at MAX. Thank you so much.
Yes. I think we're looking forward to providing more details at MAX cash and we'll cover that there.
Your next question comes from the line of Mr. Walter Pritchard from Citi. Sir, your line is now open.
Hi. Thanks. Either for Shantanu or for Brad. I guess, if I look back 2 years, this asset probably could have been acquired for a third of the price that you're paying right now, given where it was taken out at the time. And it seems like you have been focused on evolving your platform towards B2B, but maybe not fast enough.
And I'm wondering how you looked at the time to market boost that this acquisition gives you, especially relative to the significant premium you're paying now versus where it was sold in 2016?
Walter, I can't comment to what it was 2 years ago because that was not part of our rationale at that point. But from my perspective, it's a market leading product, which is one of the things that I want to make sure we emphasize. I mean, the growth that they're having, the traction in the marketplace and we just think our ability to accelerate the combined offering is far superior as a result of all the innovation that we've made and the progress that we've made with our customers. If you think about what Adobe can do as a result of having Marketo, we now serve virtually every industry. We serve all sizes and scales, all verticals, and we have a much more comprehensive offering to the Chief Marketing Officer and the Chief Revenue Officer.
And as somebody who's followed us for a while, Walter, we focus a lot on our ability to execute against these opportunities at the speed at which we need to. So we look at it right now, great market leading product. We're making a lot of traction with the Adobe Experience Cloud. We understand the shared value that we can derive for, as I said, customers across financial services, telecommunication, tech, consumer goods and our ability to execute and we feel really good about it.
Okay, fair enough. Thanks.
Next question comes from the line of Mr. Kurt Materne from Evercore. Sir, your line is now open.
Yes. Thanks very much and congrats on the acquisition. Shanithu and Brad, you guys were obviously aware of Marketo before. I was just curious when you went in to engage with them around this deal, were there a few things that Steve and the team have done over the last couple of years that made this asset that much more attractive to you? You've obviously said they sort of reaccelerated growth.
I I was just kind of curious, did you see metrics within, say, the enterprise market that spoke to why this is why this makes so much more sense for you today than maybe a few years ago. I was just kind of curious if there's anything they did that makes the asset different today than maybe what we would have thought about a couple of years ago when it was last public.
I'm glad you're asking this question, Kirk, after we've announced our intent to acquire because some of the progress that they've made actually as we have gone back and looked at what they've done over the last couple of years under Steve's leadership is remarkable. I think they always had a leading product. They were growing when they went private as well at a growth rate. They've substantially improved their go to market across a wider variety of customers. They've invested in technology and product to the point where in addition to their core Engage platform, what they've done around plan and measure, they made a couple of really smart acquisitions.
When you think about the user community that they've created over 60,000 and the partnerships that they've created, the ability to have this look at multi cloud deployments in terms of how customers can look at it and the integration. I mean, a lot of these lead to the value that I think that team has created by maybe being a little bit under the radar as a private company. And I think I want to continue to emphasize the progress that we've made under Brad's leadership to have a more unified platform with other acquisitions we've done and the ability to plug it in. And what we've done with the unified customer profile and serving these trillions of transactions makes us feel better about our ability to integrate and get value. So I think it's a combination of both of those.
Great. Thanks very much.
Operator, we'll take 2 more questions, please.
Your next question comes from the line of Mr. Jay Veeshar. Sir, your line is now open.
Thank you. Good evening.
Couple of things. Shantanu, the press release refers to Marketo's having nearly 5,000 customers. Their last 10 ks 2.5 years ago referred to more than 4,500 customers. So in the space of that time, they've added just a few 100 customers. So the question is, how does that base compare to your existing Experience Cloud customer base?
And based on the revenue numbers that John shared, they would look as though their average spend per customer is well under $100,000 And I'm wondering how does that compare to what your typical customer spends with you today within Experience Cloud? Or what kind of upside spend do you think you might potentially have with the acquisition? And then relatedly Let's pause right
there first on that.
Okay.
So Jay, as we look at their customer base and how they have successfully moved up market since they went private, I comment on the exact transition, but just looking at the success that they've had over the last year and adding some very impressive logos and substantially increasing the average revenue and or bookings that they're getting from these customers is what attracted us to Marketo. In terms of the overlap, it's actually a nice blend. We have a lot of customers in common, which allows us to integrate and we have a lot of customers that are not in common, which allows us to cross sell and upsell the different solutions. And I think again at Max, Jay, we'll give you a little bit more color on how their business has matured and how we look at it visavis existing customers that we have and the verticals that we have.
How do you foresee tying this into the digital media or content creation side of the business? It would seem to me that that so called DM Squared ability that you have to integrate across into Digital Meet might also be a competitive distinction. But could you give some examples of how that might work?
Yes. This is Brad. Let me jump in on that. So certainly, the fundamental pillars of a marketing campaign from a B2B standpoint really are very similar and are right in Adobe sweet spot. If you look at first, I have to have my data foundation and have it be a modern data foundation that can be real time, can handle millions of records and to be able to do that very quickly.
That's one with the Adobe Cloud Platform, we feel like we have a unique point of view there. The second, as you're correctly calling out, is around content. If you want to deliver millions of personalized experiences across the web, mobile, social, in store, you have to have access to content and that the velocity of that content is going to be critically important. And clearly, with Adobe DNA and content creation capabilities, we think that's something unique, a unique combination with Adobe and Marketo that will create significant value for our customers in the future.
Thank you.
Your last question comes from the line of Mr. Sterling Auty from JPMorgan. Sir, your line is now open.
Yes, thanks. Hi, guys. I want to follow-up on the earlier question on timing, but from a different perspective. Just wondering, Shantanu, how we should think about the timing of this deal and the size and magnitude of it? Is it actually making a statement about how you guys are thinking about the growth opportunity in Creative Cloud as you invest more aggressively in the digital marketing side to boost the future growth in this area?
Sterling, that did not even factor into our minds. I mean, we when you look at both what we reported on the Creative Cloud growth as well as the Document Cloud growth, we continue to be extremely bullish about both growth opportunities. I hope you're coming to max. I think you will see just a tremendous amount of innovation. What we've been doing on the creative side with the ARR, you certainly are aware of the targets that we gave for ARR that continue to show whether it's migration of existing customers, attraction of new customers, innovation across new modalities, new media types in the creative business and the traction that we're seeing in the enterprise.
I mean, if I can for a few seconds, when you think about the importance of creativity and design that exists across the world today, I don't think there's ever been a better opportunity to provide the world's best tools across different media types. And so we look at this, Sterling, really as we have 2 massive growth opportunities. We have the ability to execute against both opportunities. And when you're the market leader, if you either get complacent or if you don't focus on how you can continue to drive value for customers and investors, you're going to fall behind. So this is I think coming from a tremendous position of strength across both businesses.
And since that's the last question, I guess what I'd like to do is thank you. I know this was short notice, but we appreciate you joining us to the question that was asked. We really continue to focus on driving innovation against both our growth opportunities. Marketo was clearly a leading provider of B2B marketing solutions. We're excited to have them part of the Adobe family once it closes.
So we really look forward to sharing more about our strategy, our long term growth prospects and what excites us at MAX in a few weeks. So I hope you'll join us there. Thank
you. And this concludes our call. Thanks everyone for joining us.