Good afternoon, ladies and gentlemen. I would like to welcome you to Adobe Systems Second Quarter Fiscal Year 20 17 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. I would now like to turn the call over to Mr.
Mike Savage, Vice President of Investor Relations. Please go ahead, sir.
Good afternoon, and thank you for joining us today. Joining me on the call are Adobe's President and CEO, Shantanu Narayan and Mark Garrett, Executive Vice President and CFO. In our call today, we will discuss Adobe's Q2 fiscal year 2017 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately 1 hour ago. We've also posted PDFs of our earnings call prepared remarks and slides, financial targets and an updated investor datasheet on adobe.com.
If you'd like a copy of these documents, you can go to Adobe's Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets and our forward looking product plans, is based on information as of today, June 20, 2017, 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 our earnings release and in our updated investor datasheet on Adobe's Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe's Investor Relations website for approximately 45 days and is the property of Adobe. The call audio and the webcast archive may not be rerecorded or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu.
Thanks, Mike, and good afternoon. Adobe had a record quarter with revenue of $1,770,000,000 representing 27% year over year growth. GAAP earnings per share in Q2 was $0.75 and non GAAP earnings per share was $1.02 We're executing on our strategy of enabling our customers to design and deliver best in class digital experiences. Digital transformation continues to be the burning agenda for creative professionals, enterprises, governments and educational institutions. Adobe is now the go to company for creating world class digital customer journeys from design to delivery to measurement and monetization.
At the core of our ability to drive transformative change across all customer segments is Adobe Sensei, our artificial intelligence and machine learning framework, which is being deployed across all Adobe solutions to solve our customers' greatest experience challenges. Central to our strong performance this quarter was record revenue in our Digital Media business. We achieved $1,210,000,000 in Digital Media revenue in Q2, a 29% increase year over year. We exited the quarter with over $4,560,000,000 of Digital Media Annualized Recurring Revenue, or ARR. The net ARR increase in Q2 was $312,000,000 and was driven by continued strength in our Creative Cloud and Document Cloud businesses.
Creative Cloud is the one stop shop for millions of creative people globally and we continue to successfully migrate CS customers, acquire new customers, expand into new market segments and add value through new services. In Q2, we exceeded the $1,000,000,000 mark for Creative product revenue for the first time, an increase of 34% year over year. Creative Cloud growth was driven by healthy net new subscription adoption, strong retention and positive trends in our average revenue per user or ARPU. Our Adobe Stock business continues to accelerate, driven by customer demand for powerful visual content. Last week, we introduced aesthetic filters, a next gen search capability leveraging Adobe Sensei to streamline one of the most cumbersome time consuming tasks for creatives, finding the perfect image or video for creative projects.
With nearly 90,000,000 assets, Adobe Stock is becoming the most comprehensive marketplace for digital assets. And this week, we announced the availability of new collections from Reuters and Stocksea with USA TODAY Sports coming soon. In our video business, Premiere Pro continues to be the leader in the category with 49% year over year growth in single app subscriptions. At NAB, we unveiled a major update to Premiere Pro, which will help filmmakers and video producers create, deliver and monetize their video assets faster than ever before. This latest update delivers new features for graphics and titling, animation, polishing audio and sharing assets, support for the latest video formats such as HDR, VR and 4 ks, and new integrations with Adobe Stock.
Our leadership in video applications is attracting a new set of creatives to our platform. With flagship applications like Photoshop, Illustrator and After Effects and innovative new apps like Character Animator, we have the most comprehensive video authoring solution. New customers buying single apps like Premiere Pro will be a great base to convert over time to a full Creative Cloud subscription. In addition to video, we continue to innovate in new categories like experience design, 3 d and mobile apps including Adobe Spark, which greatly simplifies the process of designing social graphics, web stories and animated videos. These offerings will expand our footprint and bring new customers to Creative Cloud.
The world's leading digital document service, Adobe Document Cloud, is addressing growing customer demand for more efficient digital processes. In Q2, Document Cloud revenue was $200,000,000 and we grew Document Cloud ARR to 520,000,000 exiting the quarter. Acrobat units across Creative Cloud and Adobe Document Cloud combined grew double digits year over year, fueled by a record number of new subscriptions in the quarter. Adobe is focused on delivering innovative capabilities to enable PDF creation in the mobile era. We recently introduced a new app called Adobe Scan, which turns a smartphone or tablet into a PDF creation tool that can do both scanning and intelligent text recognition through integration with Document Cloud.
In its 1st 12 days, the Adobe Scan app had over 750,000 downloads across iOS and Android. Adobe is recognized as the leader in the digital marketing category and we have expanded our ambition to solve enterprises' broader customer experience mandate. At Adobe Summit in March, we unveiled Adobe Experience Cloud, a comprehensive set of cloud services designed to give enterprises everything they need to deliver exceptional customer experiences. Adobe Experience Cloud includes Adobe Marketing Cloud, an integrated set of industry leading solutions to help marketers differentiate their brands and engage their customers Adobe Advertising Cloud, the industry's first end to end platform for managing advertising across traditional TV and digital formats and Adobe Analytics Cloud, the core system of data and intelligence for the enterprise. We drove a record 495,000,000 dollars in Adobe Experience Cloud revenue in Q2, representing 29% year over year revenue growth.
We manage more than 135,000,000,000,000 data transactions on behalf of our customers over the past 4 quarters across our solutions. This massive volume of data feeds Adobe Sensei, enabling our Experience Cloud solutions to better understand, predict and personalize customer interactions. We announced the availability of our first set of joint solutions with Microsoft to help enterprises transform cross channel experiences and campaign orchestration using Adobe Experience Cloud and Microsoft Azure, Dynamics 365 and Power BI. In addition, we will collaborate on an industry standard to create semantic data models that will define language for marketing, sales and services, which will accelerate the delivery of digital experiences at scale across the entire enterprise. Adobe's ad tech momentum continues to build.
We have now integrated Adobe Audience Manager into Adobe Advertising Cloud, enabling advertisers to identify high performing segments and do automated data driven media planning and buying across all channels, including linear TV. Adobe Experience Cloud continues to be the leader across multiple industry analyst categories. Forrester Research named Adobe as the only leader in digital intelligence platforms, an emerging market segment bringing together digital data management, digital analytics and customer engagement optimization technologies. They also recognized Adobe Advertising Cloud as a leader in the omnichannel demand side platforms and Adobe Audience Manager as a leader in data management platforms. Gartner recognized Adobe as a leader in its Magic Quadrant for multichannel campaign management where they placed Adobe furthest in the leaders quadrant for completeness of vision out of 22 vendors evaluated in the report.
Interest in Adobe Experience Cloud continues to be strong. We had record attendance at our U. S. And MER summits, as well as our symposia in New York, London, Mumbai, Toronto and Sydney. Major customer wins this quarter included Best Buy, Cisco, Morgan Stanley and Verizon.
Last week, Adobe joined the Fortune 500 list for the first time, an exciting milestone for our company. This quarter, we were also included on Forbes Best Large Employers list and LinkedIn's Top Global Companies list and received great places to work recognition in the U. K. And Germany. People are our greatest asset at Adobe and we continue to invest in creating an innovative culture and exciting work environment to attract and retain the best talent in the industry.
With the introduction of Adobe Experience Cloud, we have expanded our vision and our market opportunity. Our brand, coupled with our deep technology platforms, are further distancing us from the competition. We have the world's best customers, partners and employees and we look forward to a strong second half. Mark?
Thanks, Shantanu. In the Q2 of FY 2017, Adobe achieved record revenue of $1,770,000,000 which represents 27% year over year growth. GAAP diluted earnings per share in Q2 was $0.75 and non GAAP diluted earnings per share was $1.02 Highlights in Q2 included our first $1,000,000,000 quarter of Creative revenue, achieving strong net new Digital Media ARR of $312,000,000 record Adobe Experience Cloud revenue of 495,000,000 dollars strong year over year growth in operating profit and net income, record deferred revenue with strong cash flow from operations and 86% of Q2 revenue came from recurring sources. In Digital Media, we grew segment revenue by 29% year over year. The addition of $312,000,000 net new digital media ARR during the quarter grew total digital media ARR to $4,560,000,000 exiting Q2.
Within Digital Media, we delivered creative revenue of $1,010,000,000 which represents 34% year over year growth. In addition, we increased creative ARR by $285,000,000 during Q2 and exited the quarter with $4,040,000,000 of Creative ARR. Driving the momentum with our Creative business was continued solid demand for Creative Cloud across all segments, including individual, team and enterprise. We saw particular strength on adobe.com and in the education market. International adoption of Creative Cloud was notable, particularly in Germany and Japan.
Q2 ARR performance was also driven by solid retention as well as quarter over quarter ARPU growth across all key offerings. Adobe Stock contributed to this performance with another quarter of record revenue. We are also pleased to see the growing subscription base for Adobe Stock adding to overall ARR. With Document Cloud, we achieved revenue of $200,000,000 and Document Cloud ARR grew to $520,000,000 exiting Q2. Across Creative Cloud and Document Cloud, Acrobat unit growth accelerated when compared to last quarter and again achieved double digit year over year growth.
In addition, Adobe Sign growth continues and we expect the recent Document Cloud launch with new Acrobat sign and scan functionality to contribute to the overall Document Cloud performance moving forward. In digital marketing, we achieved record Adobe Experience Cloud revenue of $495,000,000 which represents 29% year over year growth. We are hard at work integrating TubeMogul into our new advertising cloud solution and Q2 performance with the TubeMogul business continues to track as we outlined earlier this year. TubeMogul gross revenue recognized in the quarter was de minimis as forecasted. Mobile remains a key driver for our Experience Cloud business.
Mobile data transactions grew to 57% of total Adobe Analytics transactions in the quarter. Experience Cloud success is fueled by a large ecosystem of partners, including systems integrators and digital agencies. They are working with us and our joint customers to create digital strategies, plan and execute implementations and achieve value realization. In Q2, partners were involved in approximately 50% of our bookings. From a quarter over quarter currency perspective, FX increased revenue by 400,000 dollars We had $13,300,000 in hedge gains in Q2 FY 2017 versus $18,300,000 in hedge gains in Q1 FY 2017.
Thus, the net sequential currency decrease to revenue considering hedging gains was 4,600,000 dollars From a year over year currency perspective, FX decreased revenue by $19,200,000 We had $13,300,000 in hedge gains in Q2 FY 2017 versus $3,600,000 in hedge gains in Q2 FY 2016, thus the net year over year currency decrease to revenue considering hedging gains was $9,500,000 We experienced stable demand across all major geographies during the quarter. In Q2, Adobe's effective tax rate was 24% on a GAAP basis and 21% on a non GAAP basis. Our trade DSO was 46 days, which compares to 43 days in the year ago quarter and 46 days last quarter. Deferred revenue grew to a record $2,070,000,000 up 23% year over year. Our ending cash and short term investment position exiting Q2 was 4,930,000,000 dollars Cash flow from operations was $645,000,000 in the quarter.
In Q2, we repurchased approximately 2,000,000 shares at a cost of $266,000,000 and we exhausted our $2,000,000,000 authority granted in January 2015. In Q3, we will begin utilizing our new $2,500,000,000 authority granted in January 2017. Now I will provide our financial outlook. In Q3 'seventeen, we are targeting revenue of approximately $1,815,000,000 net new Digital Media ARR of approximately 300,000,000 dollars Digital Media segment year over year revenue growth of approximately 26%, Adobe Experience Cloud year over year revenue growth of approximately 25%, share count of approximately 501,000,000 shares, net non operating expense of approximately $14,000,000 on both a GAAP and non GAAP basis, tax rate of approximately 24% on a GAAP basis and 21% on a non GAAP basis, GAAP earnings per share of approximately $0.72 and non GAAP earnings per share of approximately $1 Given our business momentum, we continue to expect total Adobe revenue, Digital Media ARR and earnings per share to all grow sequentially from Q3 to Q4. When modeling segment and total revenue estimates for Q4 2017, it is important to factor the material amount of perpetual revenue reported in our digital marketing business in Q4 2016, which we do not expect to reoccur in Q4 of this year.
Considering this and our strong performance year to date, we now expect total Adobe revenue year over year growth to be approximately 23%, an increase from our prior target. In summary, our record Q2 achievement demonstrates we are executing well against a large growth opportunity. We remain excited about our prospects for the rest of the year and beyond.
Mike? Thanks, Mark. And investors that afternoon. An invitation with registration information will go out within the next month, and more details about the conference is available at max.adobe.com. If you wish to listen to a playback of today's conference call, a web based archive of the call will be available on our IR site later today.
Alternatively, you can listen to a phone replay by calling 855 859-2056. Use conference ID number 2,890,28,378. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 pm Pacific Time today and ending at 5 pm Pacific Time on June 27, 2017. We would now be happy to take your questions and we ask that you limit your questions to 1 per person.
Operator?
Your first question is from Ross MacMillan from RBC Capital Markets.
Thanks a lot and congratulations. I had one for Shantanu and a follow-up for Mark. Shantanu, just you mentioned Premier Pro and the success you're having there with the single app product. And then you commented that, that could be a mechanism to drive more sales into full Creative Cloud. And I guess I just had a question on the overall strategy in terms of the potential to create new bundles in the Creative Cloud with the analogy being the Creative Suite when I think you had 6 different suite types.
So just wondered if you could just elaborate on that for a second and help us think about the opportunities going forward to kind of segment the Creative Cloud product portfolio? Thanks. Yes.
Thanks, Ross, and happy to do so. Also, I wanted to say upfront, Mark and I are actually on different calls. I was visiting the Tech Council. So I'm in New York and Mark is in San Jose as usual. The strategy, Ross, with Creative Cloud was initially, as you know, to migrate existing customers.
And so it was really important for us to simplify the offering and have a CC complete that we thought would be the right solution for the broad swath of customers that we have. And as you are aware, that has played out really well. We always knew that as we wanted to attract new customers, the single app product would be a great stepping stone to get people into the platform and then convert them into full units. This is something that we did in the past, whether it was with InDesign during the print era or think products like Dreamweaver or Photoshop or Illustrator. They have always been great ways to attract new customers who may have real experience with one product and then focus on multiple products.
And video is clearly being one of those new categories where more and more people are using video. And the fact that Premiere Pro is such a great product in video, We're attracting customers to the platform and then we will convert them into CC Complete, whether it's through promotions as well as training. So that's the way to really think about it, which is when we're doing new customer acquisition, just the way photography has played out really well with photography expansion and market expansion, we think video will be the same. We're equally excited about XD and what's happening with screen design. So think about it as bring more customers into the platform through single apps and then convert them to higher ARPU servicing products.
That's helpful. And just a follow-up for Mark on the ARR. You've obviously exceeded now Q1, Q2 and guiding a bit above where certainly we were for Q3. It looks like you're going to do better than your $1,000,000,000 for the year, but you didn't raise that number. Just maybe any thoughts around sort of the $5,000,000,000 sort of exit target and how we should think about that?
Thanks.
Yes. Actually, if you don't mind, Ross, before I answer that question, I want to clarify something. As we were reading our prepared remarks, I caught something that needs clarification. So in the end of my prepared remarks, we talked about how we now expect Adobe revenue year over year growth be approximately 23%. That's for the full year.
It wasn't clear whether that was the full year of the quarter. So just to be very clear, we expect the full year to be up 23% year over year. So just make sure you think about that as you update your models. For ARR, yes, we're very pleased how that's playing out, Ross, obviously, relative to our expectations. And we're not updating annual targets, but clearly, we're on a great trajectory.
We had a great first half. And as you know, there's just lots of positive trends that are driving AR up, everything from ARPU growing across each of the offerings. We've consistently said ARPU continues to grow across each of the offerings, bringing new people into the franchise, selling them services, migrating the base over and all those trends continue. So we are very optimistic
20,000,000,000 dollars large opportunity that exists for this entire business. We were pleased also in addition to the stuff that Mark said with how both Germany and Japan have started to adopt Creative Cloud and stock as well. So our focus is continue to execute on the near term, but focus on the large untapped opportunity that we have. Great. Thanks again.
Congratulations. Thanks, Ross.
Thank you. Your next question is from Walter Pritchard from Citi.
Hi, thanks. Mark, I'm wondering just on the ARR guidance for Q3, that seems like stronger a stronger performance than you've seen in the last couple of years, given that's a pretty seasonally light quarter. And you had strength in areas like Germany and Japan, which might be weaker that quarter as well. I'm wondering what gives you the confidence in what areas of the business you expect to see the strength in Q3 ARR for digital media?
Yes. I mean, we kind of touched on it, Walter. We do have seasonality in prior years in Q3. So I don't think this is anything unusual in terms of strength. We just continue to see momentum across the business though.
It's everything from international, whether that's Germany or Japan. Like I said, ARPU going up across all the different offerings. We continue to migrate the base over. We continue to attract new users. Stock is contributing to ARR.
We're starting to see the benefit of less piracy across the offering. So all of those factors just play into our performance in the first half and what we see moving forward.
Your next question is from Kirk Materne from Evercore ISI.
Hi, this is actually Tom Mow on for Kirk. Mark, as some of your original ETLA deals come due, can you talk about how that's impacting ARPU for Creative Cloud now that you have a subscription version for the enterprise?
Yes. Maybe even I can touch on what we are hearing when we go meet with all of these customers from enterprises. The two points I would make is firstly, actually increasing. One of the things we track is the amount of the Creative Cloud ETLA customers who are adopting services when they renew their contract. And the second thing we're actually tracking right now is the actual number of users who are downloading and using the product and training it so that we can ensure that our customers get the value associated with it.
And both of those are going well. That again and even answering Walter's question gives us confidence as to the ARR moving forward in the Digital Media business. But fundamentally, it's the adoption of services, it's the deployment of the Creative Cloud applications and the usage and training associated with it that have all done well for us in the enterprise customer base.
And just more broadly in the Digital Media business, can you talk about I think you kind of touched on this a little bit, but just some of the drivers for increases outside of Adobe Stock?
Well, I think we've always said that as it relates to getting people onto the platform, the first step is on promotional prices to get them onto the platform. I think we mentioned in the prepared remarks that retention continues to be strong. People are using increased number of products. And so I think when we look at ARPU, that's really the reason and foreign exchange hasn't had an impact. So it's true usage as well as adoption of more products that's driving ARPU.
Of more products that's driving ARPU. Great. Thanks.
Your next question is from Keith Weiss from Morgan Stanley.
Hey, guys. Good afternoon.
This is actually Stan Zlotsky sitting in for Keith. So one question for Shantanu and then one for Mark. For Shantanu, since the marketing summit, what has the customer feedback been like on the partnership with Microsoft? What are customers most excited about? And with this combined solution, which parts of the market are you looking to address near term and then more long term as the solution matures?
And then a quick one for Mark. Recurring revenue now just hit 86%. How much further can that go as we go and as we look at 2018 and beyond? Thank you.
I think big picture, Ashley, when you look at what customers are saying, they're all struggling with digital transformation and they want to understand how we can help them create this digital customer journey and help them take advantage of all of the technology trends that are happening. The combination of Adobe and Microsoft in that regard is clearly providing a more comprehensive solution than each one of us alone. And as they are thinking about which is the cloud provider that they standardize on, the fact that we have a great application on Azure also really provides great go to market synergy between the 2 field organizations. The first solutions that we identified and we've actually started to deliver are the Adobe Experience Manager solution, which is a managed service on Azure. The second solution is being able to run campaign integrated with Dynamics.
So think of it as a complete CRM as well as a messaging and campaign and orchestration solution. And clearly being able to look at all of the data that they have in Experience Cloud and visualize that through Power BI. And so I think it's the fact that together we have a more comprehensive solution, the fact that the field organization and the marketing organization is very aligned and the fact that unlike all other partnerships which are press releases, the fact that we've actually executed against it and delivered value, I think is leading to a lot of interest in our joint solutions.
And in terms of recurring revenue, that's my favorite number. It does just keep creeping up. It's going to keep going up a bit, but it's not going to go to 100%. And we're always going to have some revenue that's going to be recognized upfront. But I do expect that it keeps slowly increasing.
It's hard to say exactly where it settles in.
Got it. Thank you. Your next question is from Heather Bellini from Goldman Sachs.
Hey, this is Mark Grant on for Heather. Thanks for taking the question. Just wanted to follow-up real quick on enterprise as you talked about some of those renewals from the ETLAs from 3 years ago and with the announcements that you made around Experience Cloud at Summit, are you seeing an improvement in customer response there given the introduction of the Experience Cloud and that integrated suite? And what's the impact that you're seeing on typical contract values in the enterprise as you bring that up?
Yes. If you put yourself in the shoes of a customer, if you're in retail, what you're trying to do is ensure that all the assets that you have from creation of these assets all the way out to delivery are in a consistent lifecycle of content all the way from our content creation tools to when it's delivered either through a mobile application or on the website. If you're in advertising or you're creating a campaign, you want to make sure that the brand content that you've created in one country rolls out exactly with the same fidelity across multiple countries. So when we go customer after customer, they're trying to ensure that all of the digital content that's exploding, they have a good way to deal with it and to roll it out with the fidelity and the efficacy that they expect. That's where the combination of what we've done with Creative Cloud, with the ETLA option and AEM assets, the Experience Manager Asset Solution is a clear leader in the marketplace.
And when I alluded to the fact that services and tracking the service usage within CCETLA, that's what we're trying to do, which is to make sure that they have the ability to do asset management. So the interest level, I would say 3 or 4 years ago, we were pitching this vision of how they could corral all their assets across the enterprise in a global way. Today, they are absolutely utilizing it and getting benefit out of it. So there's no question that we've been able to solve a customer pain point.
Great. Thank you.
Your next question is from Mark Moerdler from Bernstein Research.
Thank you very much. I'd like to ask a question both to Shantanu and to Mark. Given the strong revenue growth for Adobe over the last few years and the expected growth this year of 23%, what would you think are the largest impediments to driving roughly 20% year over year growth for the next few years? Me, for next few years. Is it external issues such as market size, law of large numbers or is more internal issues such as sales staff or breadth of product offering in digital marketing?
How should we think about it?
Well, Mark, I think the first thing we always try to do is to state the overall opportunity and TAM that's available for us. And we identified that, that was an over $60,000,000,000 market opportunity available to us. So I think you start with that. I think you look at the tailwinds that exist in the categories that we are, namely content creation and what's happening on the media side with new media types, what's happening with augmented reality, virtual reality, more people coming into the the creative franchise. And frankly, as we've always said, people having and wanting a story to tell.
On the digital marketing side, continuing to help businesses transform, just like on the individual side, we're empowering people to create. It's a massive opportunity associated with it. So we look at it and say big picture, there's no question that the market opportunity is available. Within the company, we want to make sure we're really focused on building these deep technology platforms. I think at Summit, Mark, you saw us talk about what we are doing with the data platform and these key strategic partnerships to ensure that we build a moat around our offering and that's what we are focused on.
And we have to continue to execute and focus on our customers. But as long as we keep our customers front and center, The opportunity is there. If you're trying to get us to back into a long target right now, we're not going to do that. But we're really pleased with what we did in the first half, and we're going to continue to execute against this opportunity.
That's excellent. I appreciate that. We're just trying to get an understanding of how we should think about it. Any color would be appreciated.
Okay. Thanks, Mark.
Thanks.
Your next question is from Derrick Wood from Cowen and Company.
Thanks and nice job on the quarter. A question on the partner front. One of the things we heard is that demand for certified developers on Adobe, especially the marketing cloud is really starting to outstrip supply. So are there incremental investments you guys are looking at in terms of driving more partner enablement in the channel? And I guess as a follow-up, I'd be curious if the integration with Microsoft or other ISVs can attract new third party developers or resellers to your cloud?
Derek, that's a great question. And I think we said at Summit, and this is true not just of the U. S. Summit, but all around the world, the number of partners who are there and creating digital practices that are based solely on Adobe's Experience Cloud solutions is growing quite dramatically. I think from our point of view, we continue to ensure that we're providing the best training solutions for these customers.
Our professional services organizations available to help them onboard, to help with architectural services that they might need and to continue to be the eyes and ears. But we're thrilled with the number of practices that have been created in every large SI as well as every large digital agency that exists. And so we just have to continue to focus on providing the best training, allowing them to download and use our products. All of them are our customers, so they have firsthand experience of everything that they're doing in this particular space. And with respect to your second question, you're absolutely right.
They are a couple of key both digital agencies and SI partners who view the fact that Microsoft and Adobe are working so closely together to actually create a joint practice where they have real experience with integrating these 2 and delivering that as value to their customers. So as long as Azure continues to grow and do as well as it has and Experience Cloud does, there will be a market for somebody who is an expert in specifically the integration of these two offerings.
Maybe just to build on that last question for you, Mark. In the prepared comments, you mentioned that partners were involved with about 50% of bookings in the Experience Cloud. Qualitatively, could you just talk about how services revenue in the digital marketing business has trended and maybe how you're thinking about it going forward?
Yes. Services marketing has clearly increased in that business over time as we've driven more implementations into customers. But that is not a critical number for us. From our perspective, a lot of customers want us to do the customer it's going to be a mix of us doing it as well as our 3rd party ecosystem.
One thing I might strategically add from a color perspective is one of the things we're doing is as they become more and more at doing each of the individual point products, we're focusing our services a little bit more on architecture and the integration between these products as a way to supplement and augment their offerings. And so again, I think as Mark said in their prepared remarks, we feel that we have more partners and that they are driving more revenue for themselves and we're happy to augment that through higher end architectural services as required.
Got it. Thank you.
Your next question is from Alex Zukin from Piper Jaffray.
Thanks, guys. I wanted to ask a go to market question around Experience Cloud. Can you maybe comment about the current structure of sales organization? And maybe as you move towards these bigger solution oriented sales and it's less kind of individual product focused, How are you realigning or thinking about strategically with the sales organization? And then just a follow-up for Mark, any impacts on deferred revenue that we should be aware of from the ETLA to create a cloud conversion or anything else?
I'll take the first part. Certainly, big picture, when we think about our go to market with sales organization, and I'm assuming you mean primarily in sales organization in digital marketing. So think of it as a financial services or retail or travel and hospitality, media and publishing sales organization, so that our customers clearly understand the vocabulary of the people that they are dealing with named accounts because these named accounts are increasingly relying on us as the complete mission critical solution for them. And then we have the equivalent of what you might call either territory or commercial, which are customers who are not yet named accounts or other verticals that exist. And we certainly have specialists as well and these specialists are able to augment what exists with the named accounts.
So the field organization has been structured like that all around the world. It's executing against that. One of the new initiatives that we also have in the field organization is a strategy group that's actually enabling them to have a recipe all the way from going from a digital transformation all the way to how they can start to execute us. So more and more customers are asking us to be their trusted strategic advisor in that particular respect and we stepped up to do that as well.
And then Alex, as it relates to deferred revenue, there are a couple of things that you should probably know in there. As you know, it's comprised of both digital media and digital marketing invoiced bookings. On the digital media side, ETLAs continue to perform well and that flows through deferred. More and more of our business is going through adobe.com, some of which goes through deferred and then some frankly doesn't flow through deferred. And then in digital marketing, there's a seasonal component to deferred.
So in digital marketing, you usually see a decline from Q1 to Q2 because in Q4, we have a very strong booking quarter and those Q4 bookings are typically build and hit deferred in Q1. So then you'll see a bit of a seasonal decline in Q2. It was a little bit different than that last year not to complicate things because we had the extra week last year in Q1 and that extra week ended up billing in Q2. But typically you do see in digital marketing a seasonal decline from Q1 to Q2.
Got it. Thank you, guys.
Your next question is from Sterling Auty from JPMorgan.
Yes, thanks. Hi, guys. Shantanu, I'd be curious if you could compare and contrast the drivers of the strength in Creative Cloud
today versus a year ago. And specifically wondering how much of the strength is what you're doing in the enterprise versus continued conversions of legacy Creative Suite versus just upsell and expansion within existing Creative Cloud users?
Yes, Sterling. I think when we identified the 3 strategies that we were going to continue to focus on, which is migration of the Creative Suite base market expansion and delivering new services. I think you have to look at it across each one of those. On the migration side, certainly, we had, I think, identified in November of 2016 that we have about 7,000,000 people left to convert. We're continuing to make good progress against that.
We had said that Japan and Germany had lagged. That's now showing good progress. So the migration continues well. From a new customer acquisition, the new customer acquisition has been very healthy. And I think the fact that we combated piracy, you can't buy a box anymore on one of those e commerce channels that you were able to, the fact that it's a low price of entry.
Like I mentioned, Sterling with video or with XD, we have new categories where we're leading the platform. That continues to be really healthy. It starts off a lot with single app. And so people come on with a single app and then they move them into the complete suite. Education had a strong quarter.
So that was good. And on the CT, E, PLA and team, I think we're just executing against all of this, our awareness of the customer, our ability for them to get value out of the entire offering is improving. And I would say big picture Sterling, I think the biggest thing that's driving it is the creation of good design and content has never been more important, whether that's for the web, whether it's for mobile applications. And so it's not like I can point to one thing that's actually fueling this business. It's the fact that we have the most comprehensive offering.
We're innovating and we're executing because we understand each customer in a more unique way and are addressing our offering to target them in a personalized way using our digital marketing solutions. So I can't point at one thing, but are pleased with our progress against all of the initiatives we identified. Great. Thank you.
Operator, why don't we try to fit 2 more questions in, please?
Your next question is from Jay Vleeschhouwer from Griffin Securities.
Thank you. Good evening. Two questions for both Shantanu and Mark. Mark, you highlighted the role of adobe.com as you typically do on the call. Could you just talk about the margin leverage that you're continuing to get from the growth of adobe.com?
Do you think that's largely played out or do you think there's further margin leverage benefits you can get from adobe.com as the business continues to grow or perhaps you offer some new structural ways of doing business with Adobe perhaps with new combined products, single sign on and the like. But secondly, with respect to Document Cloud, your ARR increased just over $100,000,000 there year over year. At that rate, it would probably take you another 4 or 5 years to get to $1,000,000,000 ARR for Document Cloud. But given the size of the Acrobat base, more than double the creative base and the conversion more and more to subscription, could you foresee a perhaps material acceleration in the ARR accretion for Document Cloud and thereby get to a much higher 9 figure number sooner?
Maybe I'll start off with the latter one, Mark, and then you can, which is on the Document Cloud side, Jay, I think it's really important to remember that Acrobat is also available as part of the Creative Cloud offering and is doing extremely well as part of the Creative Cloud offering. It's probably something I should have mentioned even in Sterling and the other questions that are coming. I think we mentioned that Acrobat is seeing a record number of subscriptions and is doing well both in the Creative Cloud funnel as well as in the Document Cloud funnel. And I think we've identified op more in the creative cloud funnel so that we can then upsell them to our imaging solution. So don't just look at the document cloud ARR or the revenue when you think about how well Acrobat is doing because PDS is actually doing well across both Creative Cloud and Document Cloud?
And I'll let Mark answer the second question.
Yes. And then as it relates to adobe.com, Jay, as you know, we've been scaling adobe.com dramatically over the past several years as we've gone through this transition. There's no doubt that that has contributed to improved margin. I think it will continue to improve margin as we continue to scale up the business on adobe.com. It's a major, major channel for us now and clearly a profitable very profitable one.
The last question is from Samad Samana from
Stephens. Hi, congrats on a great quarter. Mark, I have a question for you. When I look at the Experience Cloud forecast for the Q3, it looks like a deceleration, which I'm a little surprised given the year over year comp and the added to Bogle revenue. Can you maybe remind us if there was a lot of license revenue in the Q3 of last year?
And also, I think you've mentioned ASV growth in the past for Marketing Cloud, maybe what that was so we can reconcile the forecast with our models?
Yes, there was some perpetual in the 3rd and especially the 4th quarter of last year as I said in my prepared remarks. You've also got as we've said for quite a while now the mix of of ASV subscription and services revenue as well in there and sometimes the services revenue plays into that. But if you look at it across the year, it's tracking nicely against what we've said.
Okay, great. Thanks for answering that.
And since that was the last question, I just wanted to end by saying we're really pleased with our performance in the first half of fiscal 'seventeen, both by delivering great top line growth as well as bottom line earnings. I think what excites us really is the long term opportunities that we have to continue to empower people to bring their creativity to life as well as to enable businesses to transform themselves. And from our point of view, it's this combination of content to create the world class digital experience customer journeys that have become so important. And the analysis of that data to deliver great business outcomes, we think is what differentiates the modern enterprise and we have a unique mission critical solution in that entire lifecycle. We continue to invest in deep technology.
We didn't touch much on AI and ML, but that we believe will continue to distance us from our competitors. We look forward to chatting with you at our next earnings call. Thank you for joining us today.
This concludes our call. Thanks, everyone.