Good afternoon. My name is Tashan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Adobe's TubeMogul conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question, simply press star, then 1 on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. I'd now like to turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir.
Good afternoon. Thank you for joining us today. Joining me on the call are Shantanu Narayen, 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'll discuss Adobe's acquisition of TubeMogul and revisions to our financial targets, which reflect the addition of TubeMogul. 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 on 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'll discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available on adobe.com 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. Good afternoon. Adobe's acquisition of TubeMogul closed on December 19, and we're hosting this call today to update our financial targets to reflect the addition of TubeMogul. TubeMogul 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 TubeMogul 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. 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 TubeMogul 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 TubeMogul 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 will 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.
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 solutions. We intend to combine the search display and social capabilities of Adobe Media Optimizer with the video capabilities of TubeMogul into a single advertising platform, enabling planning and buying of both brand and direct response media with one independent platform. TubeMogul'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 TubeMogul solutions in current and potentially new markets.
TubeMogul 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 TubeMogul, Adobe becomes a leader in ad tech 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 ad tech and the broader digital marketing category. I'm excited to have TubeMogul's CEO, Brett Wilson, join my team and lead our efforts in advertising, an opportunity we have sized at more than $7 billion 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 offerings 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 billion, 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 two 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 million in revenue. Platform Services was 63% of their business, achieving $35 million in revenue.
At Adobe, we intend to build upon the strategic focus TubeMogul 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 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 19th.
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 million of revenue in our first quarter of FY 2017, and for the year, we estimate TubeMogul will add approximately $140 million of revenue to fiscal 2017. This increases our prior target as follows. We are targeting total Adobe Q1 FY 2017 revenue to be approximately $1.644 billion, up from the prior target of $1.625 billion provided on December 15. We are targeting total Adobe FY 2017 annual revenue to be approximately $7.09 billion, up from the prior target of approximately $6.95 billion.
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% 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 first 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 43571692. 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 12th, 2017. We would now be happy to take a few questions related to the TubeMogul acquisition and our updated targets. We ask that you limit your questions to one per person. Operator?
At this time, I would like to remind everyone that in order to ask a question, you may press star one on your telephone keypad. 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 two things going on here. One is just a defocusing away from the Platform Services side, 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, we can understand maybe once the rev model transition is over, what the trajectory of the business looks like?
Yeah. To your point, Walter, there's probably three things going on. One is the stub period.
Right
is material. The second is the gross to net change on services. The third, of course, is focusing on the Platform Direct business. 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 million Platform Direct revenue number for FY '16, greater than $90 million for FY '16. Basically, we're saying now we're going to grow that business to $140 million. Another way to look at this is the gross to net change alone is approximately $70 million. 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. Is that independent of the stub period, that $70 and the $140?
Yeah. Those comments were independent of the stub period.
Yeah.
The stub period.
Okay. I just want to clarify.
is another piece of that change.
I think, Walter.
Okay. Thanks
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, what TubeMogul had guided, they had guided to the mid-90s for 2016 revenue. 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. There's a very significant haircut that you get just for that, as well as for the stub period. Excited about the growth prospects, but we wanted to be really transparent about how you would see the revenue being recognized from day one at Adobe.
Okay, great. Thank you.
Your next question comes from the line of Brian Wieser 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 TubeMogul, but I was wondering if you could talk about the ways that TubeMogul 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. That goes from fighting botnets, ad units that are marketed as being video but really aren't. 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, again, the company that discovered this botnet, has said 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." 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. Doesn't create any financial liability for us. 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.
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 positions. TubeMogul has highlighted that their TAM for U.S. market was like $7 billion in the latest call. You highlighted the $40 billion TAM in 2019. Can you reconcile the two? Is it additive? Because you're going off an adjacent market, do we take it as additive? Is there an upside towards the programmatic TV take rate? Because Tube had highlighted it's lower than their typical take rates, but with the new companies, are going to be normalized to a higher rate going forward?
Yeah, I'll take the first one. With respect to the overall TAM for digital marketing, we talk about a $40 billion TAM that exists, and that is the total Marketing Cloud TAM that exists. Within that, there are multiple components. There's the core content management, there's analytics, and there's advertising, and we estimate that advertising is greater than a $7 billion addressable market. Where advertising is headed is certainly having a unified platform that combines the best of search, social, display, and video, that's what we get through the combination of what Media Optimizer had, as well as Tube. We look at it and say it just strengthens our position, and the overall market continues to be greater than $40 billion. That's the way we look at it.
We clearly have a leading solution now in the marketplace, the integration should strengthen our ability to target advertisers with a one-stop solution across all of these different channels.
This is Brad. As far as take rates on programmatic television, you're correct. 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. Take rate is also kind of accounted for in the guidance that we've given.
Thank you.
Next question.
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 TubeMogul customer base and your base today, and what kind of go-to-market changes, if any, would be necessary to sort of bring this into the broader Adobe Marketing Cloud.
Yeah, Keith, I'll take that. This is Brad. I think as we look at the customer overlap between who we're serving with the Adobe Marketing Cloud and TubeMogul, I think there's a significant overlap in terms of the logos themselves, the companies themselves. I think within that, what we looked at 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. I think that there is overlap, but there's an opportunity to consolidate both this brand and direct response advertising 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 has just become a standard that many brands are using to activate their customer data. 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're taking the TubeMogul account management team and the account management team for our Media Optimizer business to really create one 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.
Excellent. That's very helpful. Thank you.
Operator, we're going to take two 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 Yan from Brent Thill. 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.
I think we're in the middle of all the integration planning. We just closed a few weeks ago, so I think in terms of how the products are going to be integrated, we certainly will be sharing more at our upcoming Adobe Summit in just a few weeks in Las Vegas, in terms of what that future product roadmap is going to be. The account management teams, we're 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.
Your final question comes from the line of Ross MacMillan from RBC Capital Markets. Your line is open.
Thanks for squeezing me in. One for Mark, then maybe one broader question. Mark, you talked about the emphasis of the Platform Services business, you also said that that'd 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.
You're right, Ross. We focused on the Platform Direct piece. I think you said services, 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, we do believe that there's an opportunity to migrate some of that business to Direct.
Long term, Ross, there's no question that having a self-serve automated solution is the future of this business, 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. 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. Maybe just one quick one, maybe for you, Shantanu or Brad. Just in general, you've done a couple now of deals, acquisitions here in ad tech with TubeMogul and Efficient Frontier, I think what became the Media Optimizer. Just looking forward, is this an area that you could potentially see more opportunity? Is the integration of ad tech and marketing technology continuing to become a bigger opportunity for Adobe? Just curious what we might see going forward. Thanks.
I think the opportunity that we see across the business is in this broader digital transformation ecosystem. That takes place in just the digitization of the business with the website. 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 end point. 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. I think we certainly continue to see opportunities in the ecosystem to do that. 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? In all three of those with TubeMogul, we check those boxes.
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. We're pleased at how we continue to expand in multiple directions to capitalize on the opportunity that we have. 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, we feel good about it. We've got the key talent at TubeMogul all signed up to deliver and to grow the business that they have pioneered. It's exciting. Happy New Year to everybody, 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 TubeMogul. Thank you, we look forward to chatting with you at the end of Q1. With that, I'll turn it back over to Mike.
Thanks, Shantanu. Since Brad mentioned it, I did want to highlight that Adobe Summit will be held during the week of March 20th. 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@adobe.com with your request. Thanks again for joining us, and this concludes our call today.
This concludes today's conference call. You may now disconnect.