Good afternoon. My name is Tishan, and I'll be your conference operator today. At this time, I would like to welcome everyone to Adobe's TubeMogul Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I 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 Shantanu Narayan, Adobe's President and CEO Mark Garrett, Executive Vice President and CFO Brad Rencher, Executive Vice President and General Manager of Adobe's Digital Marketing Business and Brett Wilson, Vice President of Adobe's Advertising Business. In the call today, we will discuss Adobe's acquisition of 2Mogul and revisions to our financial targets, which reflect the addition of 2Mogul. We posted an updated financial targets document as well as our conference call prepared remarks 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 our revenue and operating model targets and our forward looking product plans, is based on information as of today, January 9, 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 financial targets document as well as Adobe's SEC filings. During this call, we will discuss GAAP and non GAAP financial measures. A reconciliation between the two available on Adobe's Investor Relations website in the Financial Targets document and in our investor data sheet. 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'll now turn the call over to Shantanu.
Thanks, Mike, and good afternoon. Adobe's acquisition of TubeMogul closed on December 19, and we are hosting this call today to update our financial targets to reflect the addition of TubeMogul. Tube Mobile is a leader in video advertising, a natural adjacency for us. Video content consumption and consequently video advertising are exploding across the web and mobile devices. Adobe is the undisputed leader in video content creation applications with Creative Cloud's Premiere Pro and After Effects, and we have deep expertise in video delivery with Adobe Primetime, a multi screen TV platform in Adobe Marketing Cloud that enables broadcasters, cable networks and service providers to distribute and monetize their video content across devices.
TubeMogul's video advertising solution will be integrated with Adobe Marketing Cloud's media optimizer offering, a programmatic ad buying solution that helps advertisers both forecast the best mix of search, display and social advertising as well as automate the execution of their media plans. The addition of Qmobile will make Adobe a key player in the expansive ad tech category. Adobe Marketing Cloud continues to be the most comprehensive and integrated offering in the exploding digital marketing category. In addition to our leadership in media optimization and video content delivery, Adobe Marketing Cloud has best in class solutions in analytics, content management, cross channel campaign management, data management and multivariate testing. The world's biggest brands and agencies rely on Adobe every day to drive their digital businesses and we continue to see strong demand across all our solutions.
Brad will now provide you with more specifics about our TubeMogul strategy.
Thanks, Shantanu, and good afternoon, everyone. Buying advertising today, it's not easy. There are a vast array of devices and content choices, resulting in audiences that are fragmented and hard to reach. Compounding that are the multiple disparate platforms that must be used to buy search, social, display and video campaigns. The category is crying out for some order.
The combination of TubeMogul and Adobe Marketing Cloud will address these challenges. TubeMogul is a leader in the Video Demand Side Platform or DSP category. DSPs are used by advertisers and agencies to help them buy display, video, social and search ads, but up until now this process has been siloed. TubeMogul's primary focus to date has been on orchestrating sophisticated programmatic video advertising campaigns across digital screens and television. By integrating TubeMogul's capabilities with Adobe Media Optimizer, Adobe will create an unprecedented end to end advertising solution within Adobe Marketing Cloud, enabling brands and agencies to plan, buy and optimize all their digital advertising across paid, owned and earned channels on desktops, mobile, streaming devices and TVs.
Working in concert with Adobe's Audience Manager data management platform, the 2 mobile demand side platform will provide Adobe Marketing Cloud customers with a unified advertising and data management solution that can precisely identify the highest value audience segments and plan, execute, measure and optimize their ad campaigns. Integrating Tube Mobile into the Adobe Marketing Cloud will help address the lingering concern that advertisers and agencies have had about the effectiveness of brand advertising on digital channels And we'll consolidate brand and direct response media planning and buying into one platform. Traditionally, big brands like Coca Cola and McDonald's have relied on broadcast TV for their brand advertising. But more recently, brands have been increasing their investment in digital video advertising, which can deliver the emotional impact of broadcast TV advertising, but with more precise audience targeting and higher efficiency. Adobe is currently a leader in the planning and delivery of search, display and social advertising, which are commonly referred to as direct response media with our Adobe Media Optimizer solution.
We intend to combine the search display and social capabilities of Adobe Media Optimizer with the video capabilities of Tube Mobile into a single advertising platform, enabling planning and buying of both brand and direct response media with one independent platform. Tube Mobile's customers will gain access to Adobe's deep expertise in video, advertising, audience segmentation and marketing measurement. Adobe has a large customer base and global operational scale, which will help grow the use of Tube Mobile solutions in current and potentially new markets. Tube Mobile and Adobe have many customers in common. Existing Adobe Marketing Cloud customers can now extend the value of these investments to video advertising.
By acquiring Tube Mobile, Adobe becomes a leader in adtech and gains a talented engineering leadership and go to market team. Both companies are based in the San Francisco Bay Area, have similar cultures and have a shared vision for the opportunity in both adtech and the broader digital marketing category. I'm excited to have Tube Mobile's CEO, Brett Wilson, join my team and lead our efforts in advertising, an opportunity we have sized at more than $7,000,000,000 by 2019. The Adobe Marketing Cloud is the world's most comprehensive digital marketing platform. As the digital marketing category continues to grow, we are expanding our market leading digital marketing to address large subcategories like advertising, analytics and personalization in order to accelerate revenue growth and stay well ahead of the competition.
With an estimated 2019 total addressable market of greater than 40,000,000,000 dollars we remain very excited about the vast opportunity we have in digital marketing. I'll now turn it over to Mark for more details on the financials.
Thanks, Brad. Since many of you are not familiar with TubeMogul's business model, I'll spend a couple of minutes on that and how the integration of TubeMogul into our business will benefit our financials. TubeMogul has 2 main product offerings Platform Direct and Platform Services. Platform Direct is TubeMogul's self serve software offering and is the strategic priority of this business. Platform Services is TubeMogul's managed services solution, primarily offered as a way to onboard clients accustomed to buying media on a campaign by campaign basis and leveraged as a feeder for Platform Direct.
TubeMogul recognized revenue from their Platform Direct business on a net revenue basis and revenue from their Platform Services business was recognized on a gross revenue basis. In their most recently reported quarter, Platform Direct was 37% of TubeMogul's business, achieving $21,000,000 in revenue. Platform Services was 63% of their business, achieving $35,000,000 in revenue. At Adobe, we intend to build upon the strategic focus Tube Mobile had with their platform direct software solution, given the future of advertising will be more automated and data driven. In addition, we intend to transition platform services revenue recognition to be on a net basis as opposed to a gross basis similar to our Adobe Media Optimizer solution.
The result of this strategy will mean driving accelerated revenue growth in the platform direct part of the business to over 30% annual growth. Due to the change from gross to net revenue recognition as well as our emphasis on platform direct as our strategic priority, we expect Platform Services revenue to decline in the coming year. It is important to note that our Q1 it is important to note that in our Q1 and in FY 2017, we will only report the addition of TubeMogul for the stub period starting with the closing of the acquisition on December 19. In addition, TubeMogul's business has always seen seasonal strength in December, much of which will not be reflected in our financials. With this as context, I will now discuss the impact of TubeMogul's business to our financial targets.
We estimate TubeMogul will add approximately $19,000,000 of revenue in our Q1 of FY 2017 and for the year we estimate Tubemogel will add approximately $140,000,000 of revenue to fiscal 2017. This increases our prior targets as follows. We are targeting total Adobe Q1 FY 2017 revenue to be approximately $1,644,000,000 up from the prior target of $1,625,000,000 provided on December 15. We are targeting total Adobe FY 2017 annual revenue to be approximately $7,090,000,000 dollars up from the prior target of approximately $6,950,000,000 With the addition of TubeMogul to our Adobe Marketing Cloud offering, we believe we will now achieve Q1 Adobe Marketing Cloud revenue growth of approximately 24%, up from the approximately 20% growth target we gave on our call in December. Similarly, we are now targeting greater than 25 percent annual Adobe Marketing Cloud revenue growth in FY 2017, up from the prior approximately 20% target.
As we have previously stated, we expect the acquisition to be neutral to earnings in the 1st year and as such we continue to target the same Q1 and FY 2017 non GAAP earnings per share targets we provided in December. Please note the initial purchase accounting for the transaction has yet not been completed given the short period of time from the acquisition date. The completion of the purchase accounting may result in an impact to our GAAP earnings per share. All of this information is reflected in the updated financial targets document on the Investor Relations page on adobe.com. We continue to be excited about the addition of TubeMogul and what lies ahead for Adobe.
Mike?
Thanks, Mark. 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 4,357,1692. International callers should dial 404-537-3406. The phone playback service will be available beginning at 4:30 p.
M. Pacific Time today and ending at 4:30 p. M. Pacific Time on January 12, 2017. We'd now be happy to take a few questions related to the 2 Mogul acquisition and our updated targets.
We ask that you limit your questions to 1 per person. Operator?
Your first question comes from the line of Walter Pritchard with Citi. Your line is open.
Thanks. Mark, could you help us understand there's sort of 2 things going on here. One is, just a defocusing away from the platform services side. And then the other is just a change in the revenue model. Can you help us understand maybe the impact of each of those separately or directionally so we can understand maybe once the rev model transition is over, what the trajectory of the business looks like?
Yes. To your point, Walter, there's probably 3 things going on. One is the stub period, which is material. The second is the gross to net change on services. And then the third, of course, is focusing on the platform direct business.
So one way to think about this is in the last earnings call that Tube had as a public company, they had guided for a roughly $90,000,000 platform direct revenue number for FY 2016, greater than $90,000,000 for FY 2016. And basically, we're saying now we're going to grow that business to $140,000,000 Another way to look at this is the gross to net change alone is approximately $70,000,000 So we've got a significant change in just the way we treat revenue to make it consistent with the rest of our business.
Got it. And that's independent of the stub period, that 70 and the 140?
Yes, those were but those comments were independent of sub periods. So the sub period is another piece of that change.
And I think, Walter, from a strategic point of view, this is Shantanu. The real focus is on driving the platform direct revenue. When you look at, as Mark said and what TubeMogul had guided, they had guided to the mid-90s for 2016 revenue. And so we certainly plan to accelerate that revenue significantly in 2017. We want to recognize, as again, Mark said, all of the platform services revenue as net rather than gross.
So there's a very significant haircut that you get just for that as well as for the stub period. So excited about the growth prospects, but we wanted to be really transparent about how you would see the revenue being recognized from day 1 at Adobe.
Okay, great. Thank you.
And your next question comes from the line of Brian Weiser from Pivotal. Your line is open.
Hi, thanks for taking the question. Over the holidays, I know you published a statement on Methbot and that it was immaterial to Tumobile. But I was wondering if you could talk about the ways that Tumovil is able to limit exposure to frauds, maybe more broadly with the focus on the Platform Direct, if you're exposed to any financial risk, making advertisers whole, if something like that were to happen in the future where unfortunately you might be exposed. I'm wondering if you could just talk broadly around those issues.
Hi, Brian, it's Brett. Thanks for the question. As you know, we've had a long commitment to fighting fraud going back to when we launched the platform in 2011. And that goes from fighting botnets, ad units that are marketed as being video, but really aren't. And our brand has really been synonymous with brand safety and transparency.
As far as MethBot, this was a botnet that was discovered by a security company called White Ops that we've actually been working with for the past couple of years and we've instrumented their technology in our platform. Michael Tiffany, the co founder of White Ops, the company that discovered this botnet has set on record. Our reporting shows that MethBot's effect on TubeMogul's clients is absolutely immaterial. This is no accident. It's the result of an above and beyond commitment to fighting fraud.
And then as far as the question on liability, typically we have financial arrangements with our suppliers that protect us in the event that we discover any of this fraud. So doesn't create any financial liability for us. And for advertisers, we think it's just inconceivable now that they wouldn't plan and buy their media through software given the protection that we give them.
Okay, great. Thank you.
And your next question comes from the line of Kash Rangan from Bank of America. Your line is open.
Hi, this is Shankar on behalf of Kash. I have a question on the overall TAM projections. T Mobile has highlighted that their TAM for U. S. Market was like $7,000,000,000 in the latest call.
And then you highlighted the $40,000,000,000 TAM in 2019. Can you reconcile the 2? Is it additive? Is it because you're going off an adjacent market, do we take it as an additive? And then how do you is there an upside towards the programmatic PV take rate?
Because Cuba highlighted some it's lower than their typical take rates, but with the new companies that are going to be normalized to a higher rate going forward?
Yes, I'll take the first one. With respect to the overall TAM for digital marketing, we talk about a $40,000,000,000 TAM that exists and that is the total marketing cloud TAM that exists. Within that, there are multiple components. There is the core content management, there is analytics and there is advertising. And we estimate that advertising is greater than a $7,000,000,000 addressable market.
Where advertising is headed is certainly having a unified platform that combines the best of search, social, display and video and that's what we get through the combination of what Media Optimizer had as well as Tube. And so we look at it and say it just strengthens our position and the overall market continues to be greater than $40,000,000,000 So that's the way we look at it. We clearly have a leading solution now in the marketplace and the integration should strengthen our ability to target advertisers with a one stop solution across all of these different channels.
And this is Brett. As far as take rates on programmatic television, you're correct that the take rates can be lower, but you have to remember this is also the world's largest advertising market. TV accounts for over 40% of the total ad market. And then take rate is also kind of accounted for in the guidance that we've given.
Thank you.
Next question?
And your next question comes from the line of Keith Weiss from Morgan Stanley. Your line is open.
Excellent. Thank you guys for taking the question. I was hoping you guys could talk to us a little bit about any significant level of customer overlap that exists between the 2 mobile customer base and your base today. And whether what kind of go to market changes, if any, would be necessary to sort of bring this into the broader Adobe Marketing Cloud?
Yes, Keith, I'll take that. This is Brad. I think as we look at the customer overlap between what who we're serving with the Adobe Marketing Cloud and TubeMogo, I think there's a significant overlap in terms of the logos themselves, the companies themselves. But I think within that, what we looked at Adobe is we really saw this explosive growing opportunity in video where Tubemogul was a leader and that was tapping a different business opportunity inside of these accounts that we wanted to get after. So I think that there is overlap, but there's an opportunity to consolidate both this brand and direct response advertising into 1 onto one platform, and I think that's going to drive a lot of efficiency for these brands.
The second area that I think you'll see us really exploit with customers is we've got our audience manager data management platform, which is just, has become a standard that many brands are using to activate their customer data. And one of the areas that they're looking to do that is with DSPs and buying advertising. It helps them activate their customer assets and their valuable audiences. And we think that that combination is really unbeatable in the marketplace and one that we can really uniquely bring together. The last one in terms of the go to market changes, we are really we're taking the 2 mobile account management team and the account management team for our media optimizer business to really create 1 global account management organization that can really go and drive upsells and the customer dialogue so that we can continue to grow both of these businesses together.
Operator, we're going to take 2 more questions, so we can finish on time at the bottom of the hour. Thank you.
Certainly. Your next question comes from the line of Brent Thill with UBS. Your line is open.
Hi, thank you. This is John Yoon for Brent Thill. Just continuing on the account team and also on the integration of product line, if you could talk about in general what the timeline is to integrate the products as well as the account teams?
Yes, I think the we're in the middle of all the integration planning. We just closed a few weeks ago. And so I think in terms of how the products are going to be integrated, we certainly would, will be sharing more at our upcoming, Adobe Digital Marketing Summit in just a few weeks in Las Vegas in terms of what that future product roadmap is going to be. And the account management teams were already well underway in some of that integration to bring those organizations together so that we can effectively engage with our customers.
Okay. Thank you.
And your final question comes from the line of Ross MacMillan from RBC Markets. Your line is open.
Thanks for squeezing me in. One for Mark and then maybe one broader question. Mark, you talked about the emphasis of the Platform Services business, but you also said that that would act as a feeder into the Platform Direct. Is there some assumption that you've made of how much of that platform services either on a gross or net basis, I don't mind, is going to move into that other bucket over the next year? That's the first question.
Over the next year? That's the first question. So you're right, Ross.
We focused on the platform direct piece. I think you said it you said services, but our focus is on platform direct. We did make said services, but our focus is on Platform Direct. We did make an assumption that some of that Platform Services business would migrate to Platform Direct. I don't think I could give you a number per se, but we do believe that there's an opportunity to migrate some of that business to direct.
And long term Ross, there's no question that having a self serve automated solution is the future of this business. And the quicker we help transition that, I mean, in many ways, the platform services is used by people who haven't yet got comfortable with platform direct and or if there's excess capacity in their campaigns that they want to run. And the more you can make that automated and data driven, I think is in the best interest of the customers, which will result in better stickiness for Adobe.
Great. And maybe just one quick one, maybe for you Shantanu or Brad. Just in general, you've done a couple of deals, acquisitions here Ad Tech with TubeMogul and Vision Frontier, I think, became the media optimizer. Just looking forward, is this an area that you could potentially see more opportunity? Is the integration of AdTech and marketing technology continuing to become a bigger opportunity for Adobe?
Just curious what we might see going forward. Thanks.
Yes. I think the opportunity that we see across the businesses is in this broader digital transformation ecosystem and that takes place in just the digitization of the business with the website, but then also increasingly touching every way that customers are interacting or brands are interacting with their customers, whether that's in paid media, whether that's in owned media or earned media, we know that they're looking to activate that data and drive better personalization all the way to the endpoint. So in that case, we're looking to provide the software platforms and the tools to enable brands to better interact with their customers to have those high value conversations that are going to drive impact for the business. So, I think we certainly continue to see opportunities in the ecosystem, to do that. And for us, it always comes back to does it make strategic sense?
Can we make it financially successful? And is there a great cultural fit? And in all three of those, with TubeMogul, we check those boxes.
And Ross, from my point of view, when we look at how we are growing the digital marketing business, we already have the most comprehensive platform, whether it's targeting the CIOs in many cases with the core web infrastructure, whether it's targeting Chief Revenue Officers and Chief Digital Officers with what we are doing on the advertising side and what we are doing for people who are responsible for the customer journey. I think this is yet another great proof point of how we're adding to deliver the most comprehensive solution. So we're pleased at how we continue to expand in multiple directions to capitalize on the opportunity that we have. But what we wanted to do today was just give you a quick update. We're really excited about TubeMogul.
I'd actually give Brad and Brett a fair amount of credit. We've done the integration. The teams are starting to execute on this in Q1. So we feel good about it. We've got the key talent at Tumobile all signed up to deliver and to grow the business that they have pioneered.
So it's exciting. Happy New Year to everybody. And I think not lost in all of this should be if you look at what Mark said, in effect, we're saying that Q1 is on track and we're adding to the revenue goal from Qmobile. So thank you and we look forward to chatting with you at the end of Q1. With that, I'll turn it back over to Mike.
Thanks, Shaynu. Since Brad mentioned it, I did want to highlight that Adobe Summit will be held during the week of March 20. An invitation for investors and analysts went out this morning to our mailing list. If you did not get that message and wanted to attend, please email ir@aw.com with your request. Thanks again for joining us, and this concludes our call today.
And this concludes today's conference call. You may now disconnect.