Adobe Inc. (ADBE) Q3 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Adobe Third Quarter Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] Mr. Mike Saviage, Vice President of Investor Relations, you may begin.

Good afternoon, and thank you for joining us today. Joining me on the call are Adobe's President and CEO, Shantanu Narayen, as well as Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe's third quarter fiscal year 2012 financial results. By now you should have a copy of our earnings press release, which crossed the wire approximately 1 hour ago. If you need a copy of the press release, you can go to adobe.com under the Company and Newsroom links to find an electronic copy. Before we get started, I want to emphasize that some of the information discussed on this call, particularly our revenue, subscription and operating model targets and our forward-looking product plans, is based on information as of today, September 19, 2012, 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 2 is available in today's earnings release and on our Investor Relations website in the investor data sheet. Call participants are advised that the audio of this conference call is being broadcast live over the Internet in Adobe Connect and is also being recorded for playback purposes. An archive of the call will be made available on Adobe's Investor Relations website for approximately 45 days and is the property of Adobe. The audio and 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. At Adobe, we're focusing on 2 large market opportunities: digital media and digital marketing. Our results in Q3 demonstrate both our market leadership and momentum in these businesses. In our digital media business, we're transforming the way people create, publish and monetize their content across devices, and our pace of innovation has never been faster. The global Creative Cloud launch in May broke new ground. Through attractive subscription pricing, new cloud services and frequent product and feature enhancements, Adobe is changing how we deliver value to a broader set of customers. Response to Creative Cloud has exceeded our expectations. After only 4 months since its introduction, we have approximately 200,000 paid Creative Cloud subscriptions. In addition to paid subscriptions, we offer an on-ramp to Creative Cloud through free memberships. We now have over 300,000 free members, and they represent a significant funnel for driving future paid subscribers. We expect adoption to accelerate as we deliver constant innovation exclusively to Creative Cloud members. Since we've launched Creative Cloud, we've enhanced the offering to include Lightroom and Digital Publishing Suite, Single Edition and added new features to products like Illustrator. Coming soon are enhancements to Photoshop and Dreamweaver. Next Monday, we're hosting a Create the Web event in San Francisco that will showcase our latest innovations around HTML5 products, which will also be included in Creative Cloud. Our success thus far has been through Creative Cloud for individual users. Over the next few months, we will introduce new offerings for teams and enterprises which significantly expand the market opportunity for Creative Cloud. In November, we will launch Creative Cloud for teams, which will enhance collaboration and simplify the setup, management and administration for creative workgroups. Next year, we will deliver an enterprise version of Creative Cloud targeted at companies who wish to deploy and provision Creative Cloud across large organizations with a scale similar to the enterprise license agreements we have for Creative Suite today. Creative Cloud for enterprises will integrate with our Digital Publishing Suite and the Adobe marketing cloud offerings provided through our Digital Marketing Suite. Creative Cloud for teams and enterprises will be made available through our channel partners as well as directly from Adobe. Today, we added Adobe Digital Publishing Suite, Single Edition, a service for individuals using Creative Cloud. At the enterprise level, we continue to drive strong adoption of Digital Publishing Suite. Nearly 1,100 customers are now using DPS worldwide to reach their readers with digital editions, up from 850 last quarter. These customers are now distributing 125,000 digital editions on average every day to iPads and other devices with over 40 million delivered to date. This quarter, we added Time Inc., which has signed an agreement to move its magazines over to Adobe DPS. In digital marketing, we drove 40% year-over-year revenue growth with our Digital Marketing Suite. Annual Digital Marketing Suite revenue is expected to exceed $750 million this year, making Adobe the clear leader in this exploding category. In Q3, we closed Digital Marketing Suite business with customers such as American Airlines, American Express, Nintendo, Toyota and Shutterfly. Adobe Digital Marketing Suite enables marketers to deliver personalized web experiences across multiple devices, manage multichannel campaigns and optimize media monetization. These solutions are built on our leading content management and data analytics platforms. We deliver over 460 billion marketing campaign assets a year, measure over 6 trillion transactions a year on the web and manage 27 petabytes of data for our customers. We are the big data company for marketeers. In addition to leading in marketing analytics, we are now the recognized leader in web content management. Last week, Gartner recognized Adobe as a leader in its web content management Magic Quadrant report, making Adobe the only vendor identified as a leader in all 3 major industry analyst reports. Earlier this month, we delivered Adobe Social, the newest addition to our Digital Marketing Suite. Adobe Social's unique differentiation is enabling companies to tie their social marketing efforts to measurable business results, leveraging our data analytics platform. Adobe Social enables marketers to create and publish communications through social channels, get insights from their communities, measure results in real time and manage their social engagement programs. It integrates with leading social platforms such as Facebook and Twitter. We will continue to drive leadership in the digital marketing category, utilizing advantages that only we have. Adobe has a unique relationship with marketing customers, thanks to our creative design history. Our solution integrates content and data, analytics, personalization, web experience management, campaign management and social capabilities in a way no other industry player can touch. We have the largest portfolio of digital marketing customers, representing leading brands in the world, including all of the top 10 retailers and top 10 auto manufacturers, 9 of the top 10 global media companies and 7 of the top 10 banks. And most importantly, Adobe has the most compelling vision for the future of digital marketing. We will engage our digital marketing customers across all aspects of their business, extending from their use of Creative Cloud to how they manage, deliver, measure and monetize their content with Adobe marketing cloud. Now I'll turn it over to Mark for a more detailed discussion of our Q3 results. Mark?

Thanks, Shantanu. This is an exciting time to be the CFO of Adobe. We have a focused strategy, and we are executing well against that strategy, transforming our business and setting the company on a path for a higher long-term growth rate with a large recurring revenue stream. In addition to briefly commenting on our Q3 results, I'm going to spend some additional time today discussing our Creative Cloud results and the positive effect it is having on our business model. Understanding this transition and where we are in the migration of our customers to a subscription model will help in understanding our Q3 results, give context for our Q4 financial targets and set up our discussion on how to begin to think about fiscal 2013. In the third quarter of fiscal 2012, Adobe achieved revenue of $1,081,000,000. Driving these results was overachievement of Creative Cloud subscriptions and strong Digital Marketing Suite revenue. In Q3, we added approximately 8,000 Creative Cloud subscriptions per week, exceeding the 5,000 subscriptions per week we assumed in our targets. This overachievement in subscriptions effectively transitioned approximately $29 million more perpetual revenue to Creative Cloud than expected. In addition, currency impacted Q3 revenue negatively by approximately $9 million. Adding both of these back to our reported results would have put third quarter revenue toward the high end of our targeted range. We continue to manage expenses appropriately. Q3 GAAP operating expenses were $682.7 million compared to $688.4 million last quarter. Non-GAAP operating expenses in Q3 were $592.2 million compared to $611.7 million last quarter. This yielded diluted earnings per share in Q3 fiscal 2012 of $0.40 on a GAAP basis and $0.58 on a non-GAAP basis. In Q3, Adobe's effective tax rate was 23.5% on a GAAP basis and 22.5% on a non-GAAP basis, in line with the targets we provided for the quarter. Geographically, our Q3 results on a percent of revenue basis were as follows: the Americas, 52%; Europe, 27%; Asia, 21%. We experienced stable demand in the U.S. and Asia and continued softness in Europe during Q3. From a year-over-year currency perspective, FX decreased revenue by $21.8 million. We had $7.7 million in hedge gains in Q3 FY '12 versus no hedge gains in Q3 FY '11. Thus, the net year-over-year currency decrease to revenue considering hedging gains was $14.1 million. From a quarter-over-quarter perspective, FX decreased revenue by $5.8 million. Considering the $7.7 million in current quarter hedging gains versus the $10.7 million hedging gains we had in Q2 FY '12, the net sequential currency decrease to revenue was $8.8 million. Employees at the end of Q3 totaled 10,811 versus 10,474 at the end of the last quarter. The sequential increase was driven by hiring in R&D as well as in our field organization. Our trade DSO was 48 days, which compares to 50 days in the year-ago quarter and 43 days last quarter. During the quarter, cash flow from operations was $263.3 million. Our ending cash and short-term investment position was $3.25 billion compared to $3 billion at the end of Q2. Our ending deferred revenue balance decreased by $32.5 million to $560.3 million. This decrease is typical in the quarter following a major desktop product launch. Free-of-charge upgrade recognition from the CS6 launch builds short-term deferred revenue during the launch quarter and is recognized as revenue in the quarter following a launch, causing the decline. In addition, our Digital Marketing business invoices customers on the first day of each calendar month, and the timing relative to our quarter end caused some of the sequential decline. As a reminder, Creative Cloud subscriptions are billed monthly and are essentially not reflected in deferred revenue on the balance sheet. In Q3, we repurchased approximately 2.4 million shares at a total cost of $76.1 million. I will now discuss Adobe's key business segment results. Digital Marketing segment revenue in Q3 was $257.1 million compared to $211.7 million in Q3 fiscal 2011 and $250.9 million last quarter. Within the Digital Marketing segment, we achieved record Digital Marketing Suite revenue of $192.4 million. This represents annual growth of 40%. Mobile device use continues to be a driver in this business. Mobile transactions increased to 18% of the 1.6 trillion SiteCatalyst transactions in the quarter, up from 17% last quarter. Turning to the Digital Media segment. Revenue in Q3 was $769.1 million compared to $745.9 million in Q3 fiscal 2011 and $818.4 million last quarter. The 2 major components of revenue in our Digital Media segment are our Creative family of products and our Document Services products. Document Services products, consisting of the Acrobat family as well as the new cloud-based services such as EchoSign, had a solid quarter. We achieved Document Services revenue in Q3 of $185.5 million, driven by continued Acrobat adoption in the enterprise as well as strong growth in EchoSign and related Acrobat cloud services. Looking to Q4, we are excited about the next major release of Acrobat, which will ship late in the quarter. Now, as promised, I'd like to provide more insight on our Creative product results. The goal of Creative Cloud is to deliver more value to customers, which will drive higher revenue growth that is more predictable. During the transition, we measure performance as a combination of perpetual revenue recognized up front and the number of our paid Creative Cloud memberships that is recognized ratably. We've highlighted frequently that 2 additional goals with Creative Cloud are to attract new customers to our offering and keep our existing customers more current on the latest release. As we track against these objectives, it's important to understand where we are in the phased delivery of different versions of Creative Cloud. Creative Cloud for individuals shipped in May, and individual users represent the vast majority of Creative Cloud members today. We intend to release Creative Cloud for teams this quarter, which will be targeted at groups of users in small and medium businesses as well as departments in larger companies. In 2013, we intend to deliver an enterprise offering that is subscription based and will supplement how we engage large customers who today license Creative products via volume licensing agreements. Combined, all of these offerings will help us achieve the goals we set forth at our analyst meeting last November, including 10% unit growth in fiscal 2012 and accelerated new customer acquisition. Our research shows that approximately 40% of subscribers paying list price for Creative Cloud in Q3 were new to the Adobe Creative product family. On a regular basis, we intend to provide insight into key data points which will help you understand and model our transition to subscription. Some of these metrics will fluctuate with product mix from quarter-to-quarter. In Q3, all of our key subscription run rates and metrics increased and exceeded our expectations. We added more than 100,000 net new subscriptions, and we exited Q3 with approximately 200,000 total paid subscriptions. As I said earlier, we achieved an average of 8,000 new subscriptions per week in Q3. Entering the quarter, we expected an average of approximately 5,000 subscriptions per week. In Q3, 86% of subscribers chose annual subscription over month-to-month terms. This grew from 75% that chose annual in Q2. In addition, 75% of subscribers chose the full Creative Cloud offer over point product options in Q3, up from 65% last quarter. Our average revenue per user per month was $37 in Q3, up from approximately $36 we achieved in Q2. 97% of subscriptions were ordered through adobe.com. Anyone trying to do channel checks by calling contacts in the distributor and reseller channels to understand the status of CS6 and Creative Cloud for individuals should balance the findings of those checks with the knowledge that a mix shift is happening. The introductory $29.99 per month promotion has proven to be an effective strategy for onboarding existing customers into Creative Cloud, and we decided to extend it beyond August. We believe that once users try Creative Cloud and see the value it gives them over the perpetual offer, they will stick with Creative Cloud after the monthly price resets to $49.99 after the first year. We continue to build a healthy pipeline for potential Creative Cloud paid subscribers through marketing programs, trial downloads and free memberships. Getting prospects into the marketing and conversion funnel is therefore a key part of the strategy to drive the transition to subscription. Now let's look at revenue and the financial model of the subscription transition. For Q3, given the subscription mix, we estimate we would have recognized $750 of average license revenue per unit if the perpetual option was chosen instead of subscription. We expect this average to fluctuate as we add more subscribers and deliver new offerings for teams and enterprises. Put another way, when a perpetual commercial customer migrates to subscription, instead of recognizing the approximately $750 of revenue immediately, we are instead recognizing revenue month-to-month with a subscription model. As I said earlier, in Q3, we added approximately 8,000 Creative Cloud subscriptions per week, exceeding the 5,000 subscriptions per week we assumed in our targets. This overachievement of 39,000 subscriptions multiplied by the ASP of approximately $750 yields $29 million more than expected in Q3 revenue effectively transitioned to Creative Cloud. Using the more than 100,000 subscriptions we added in Q3, we believe we saw a total effective shift in revenue of approximately $75 million from perpetual to Creative Cloud during Q3. In total, the approximately 200,000 subscriptions we achieved to date equates to approximately $150 million in revenue that has effectively transitioned away from perpetual to Creative Cloud. This leads to one of the most important metrics we will want the financial community to follow going forward. That's the total amount of annualized recurring revenue being driven by Creative Cloud subscriptions. ARR is calculated by multiplying the number of current paid subscriptions by the average monthly revenue per user multiplied by 12. We exited Q2 with Creative Cloud annualized recurring revenue of $39 million with an average monthly revenue per user of $36. With the success we had in Q3, that ARR amount increased to $86 million with an average monthly revenue per user of $37. Average monthly revenue per user will fluctuate based on product and geographic mix. Overall for Adobe, our percent of recurring revenue across all of our businesses exceeded 25% in Q3, driven primarily by growth in Digital Marketing, the initial success of Creative Cloud and the emergence of our document exchange services. With that context, I'd now like to discuss Q4. We are targeting the addition of 125,000 new paid subscriptions to Creative Cloud in Q4. At the same ASP of $750 we used for Q3 estimates, this would represent approximately $94 million in Q4 perpetual revenue which would effectively move to subscription and ratable monthly recognition. At the Q3 average revenue per user per month of $37, this would add $55 million to our annualized recurring revenue balance as we exit the fiscal year. We are targeting a Q4 revenue range between $1,075,000,000 and $1,125,000,000. This factors knowledge of our hedges based on the spot currency rates as we ended the quarter. At the midpoint of the Q4 targeted range, as a result of continued momentum with Creative Cloud adoption, we expect our Digital Media segment to be down sequentially. In our Digital Marketing segment, we expect Digital Marketing Suite revenue to grow sequentially in Q4, offset by a slight sequential decline in our legacy enterprise products. In addition, we're targeting our Q4 share count to be 500 million to 502 million shares. We are targeting nonoperating expense to be between $18 million and $20 million on both a GAAP and non-GAAP basis. We are targeting a Q4 GAAP tax rate of 23.5% and a non-GAAP tax rate of 22.5%. We are targeting a Q4 GAAP earnings per share range of $0.34 to $0.39 per share and a Q4 non-GAAP earnings per share range of $0.53 to $0.58. These EPS targeted ranges also factor in the continued success of Creative Cloud adoption. Exiting the year, in just 7 months since the launch of Creative Cloud, we expect to have 325,000 paid subscriptions, bringing the expected total of annualized recurring revenue to more than $140 million. This means we will have effectively transitioned over $240 million of perpetual license revenue to subscription. Looking beyond 2012, it is clear we are rapidly transforming our business. Our Creative Cloud results to date are exceeding our expectations, and we intend to accelerate the migration to subscription next year. We are also the leader in the fast-growing Digital Marketing category and are quickly building a $1 billion business in the cloud for marketers. The true health of our growth businesses will be represented by increasing recurring revenue in Digital Media and Digital Marketing, which will be recognized over time. While we aggressively build this recurring revenue stream during fiscal 2013, it will reflect on reported revenue and earnings per share, as is seen in our Q4 targets. The resulting overall financial health of the company will be even stronger, and we will drive higher growth rates for revenue and EPS in 2014 and beyond. We will provide more financial details regarding next year on our Q4 earnings call. This concludes my section. I'd now like to turn the call back over to Shantanu.

Thanks, Mark. Last year, we outlined a strategy to reinvent the company to accelerate growth and capitalize on industry and technology trends. We've reimagined our Creative software franchise as an ever-changing, innovative services offering to drive new customer adoption, increase customer relevance and accelerate growth. We expect to end the year with 325,000 paid subscriptions and over $140 million in annualized recurring revenue. This will be an incredible accomplishment for our Creative Cloud business in just 7 months. We've created a brand-new Digital Marketing business in the last 3 years and established ourselves as the leader in an explosive market category. By driving 40% year-over-year Digital Marketing Suite revenue growth in Q3, we're on pace to build a high-growth and cloud-based $1 billion business. Through these actions, we've galvanized our employees and made ourselves more mission critical to our customers and eliminated the risk of standing still. Our results demonstrate our strategy has put us on a path to accelerated growth. Thank you for joining us today. Now I'll turn the call back over to Mike.

Thanks, Shantanu. Before we begin Q&A, I have a few logistics items to go over. First, for those investors and financial analysts who want to stay current on the latest Adobe news, we encourage you to follow Adobe on Twitter and Facebook and to frequently check Adobe's corporate blogs on blogs.adobe.com. We are increasingly using social channels as a means to get the word out. In addition, tv.adobe.com is a great resource to learn more about Adobe's products and solutions and check out our new customer case studies. We're in the process of updating Adobe's Investor Relations website to provide easier access to these resources. In regard to today's earnings report, we have posted several documents on our IR website, including a copy of the script containing our prepared remarks for today's call. Given the new detailed information we provided today, the script should be a useful resource to assist with modeling our business. To access these documents and the other investor-related information, go to www.adobe.com/adbe. For those who wish to listen to a playback of today's conference call, a web-based Adobe Connect archive of the call will be available from the IR page on adobe.com later today. Alternatively, you can listen to a phone replay by calling (855) 859-2056. Use conference ID number 23202752. International callers should dial (404) 537-3406. The phone playback service will be available beginning at 4 p.m. Pacific time today and ending at 11 p.m. Pacific Time on Sunday, September 23, 2012. We would now be happy to take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Walter Pritchard with Citigroup. Our next question comes from Brent Thill with UBS.

Shantanu, on the Digital Marketing Suite, you had another solid quarter. I guess you've also seen new competitors enter the market like salesforce.com. I was just curious if you could give us your thoughts in terms of what you're seeing from that perspective on the competitive side. And I had a quick follow-up for Mark.

Sure, Brent. I mean, overall, the -- as you said, the Digital Marketing business is actually doing really well. At the beginning of the year, we had outlined that we would grow both revenue and bookings, and we are seeing solid growth in both of those categories. And I would say our clear differentiation is the fact that we have both the leading data platform right now with the acquisition that we made of Day and the leading analytics product. And so we really don't see a number of competitors right now in that particular space because of our most comprehensive offering and the fact that when you have the data in our platform and the analytics, there really isn't anybody who can close the loop as effectively as we can. So pipeline looks really good. The awareness of our offerings is certainly increasing. I think you'll see us get more awareness as well in the market. But we continue to be really bullish not only about the organic business but also new products like Adobe Social and Adobe AdLens, which was the acquisition of Efficient Frontier.

Okay. Quickly for Mark. Just cash is at an all-time high. Would you consider a dividend? Or should we still think of cash use on buybacks and M&A as the primary use?

The short answer is you should consider buybacks and M&A as the primary use right now. Keep in mind our cash runs a good 75% offshore. At any point in time, that varies, and it makes it a bit difficult to do a dividend, although we will continue to look at it.

Our next question comes from the line of Adam Holt with Morgan Stanley.

This is Jen Swanson Lowe on behalf of Adam. I guess sort of a first question. Looking at -- taking out the impacts of subscriptions and all these other things, can -- how is the CS6 upgrade cycle tracking versus past cycles at this point?

Sure. Why don't I take that? And maybe I'll give you just some overall thoughts as we reflect the performance of both Creative Cloud and CS6 over the last 7 months because, as Mark outlined, we really have to look at it as the sum of what we are seeing in the perpetual business as well as what we are seeing in subscriptions. So let me start off by saying when you look at it combined, we're actually seeing accelerated growth this year with the release of Creative Cloud and CS6, which clearly means that it's not only a healthy business, but we are continuing to innovate against our customers. A couple of other thoughts. When you think about Creative Cloud, it's really important to remember that the initial offering was primarily focused on individuals. We're clearly attracting a new set of customers to Adobe, which was important. And we're really innovating very effectively as we transition our teams to take advantage of cloud delivery. And as we deliver more and more enhancements that are exclusive to Creative Cloud members, as we get the team offering out later this year as well as the enterprise offering, we actually think that, that accelerates adoption and, therefore, as you look at the business in aggregate, accelerates growth for the overall business. In particular, I would say enterprises are also really excited about what they can do with the combination of Creative Cloud on the desktop and our Digital Marketing Solutions and Digital Publishing Suite on the server. So the business, any way you cut it, is very healthy.

And just as a quick follow-up on that, I think when the original positioning around Creative Cloud was with both the opportunity to migrate existing users to the cloud and also an opportunity to attract net new users, and I think you laid out a goal of 800,000 net new users over the next 3 years, putting that against the framework of subscriptions tracking ahead of what you had expected maybe a year ago or when you initially gave that guidance, is the upside coming from more existing customers upgrading or better attraction outside of the core base? And is that still the right trajectory to be thinking about in terms of the user base expansion opportunity?

Yes, again, we continue to think that the unit growth that we expected in 2012, 10% unit growth, we're on track to get that. And frankly, we are seeing adoption in both the categories that you identified, namely new users as well as more and more users as they see the steady pace of innovation clearly understand that the Creative Cloud is the better option moving forward.

Our next question comes from the line of Walter Pritchard with Citigroup.

So I guess first question, just, Shantanu, on the introductory pricing on the Creative Cloud, you sound pretty confident that when the price does go up from roughly $30 a month to $50 a month, that you will be able to retain those customers. I'm just wondering what gives you that confidence? Because in the past, we've seen sometimes a lot of churn when that happens in comparable businesses.

Two things, Walter, that give us confidence. The first is even when you see the mix of the business today, there are certainly a number of subscribers who have taken the introductory pricing, but we're also attracting a number of customers to the $49.99 offering. In fact, I think Mark mentioned in his prepared comments that when you look at the people who are adopting the list price, it's new customers, and they're adopting at approximately 40%. So that gives us confidence. I mean, certainly, when we see all the innovation that we're putting in there, I think that will also -- the feedback is really quite positive. So there's a lot of research that we've done in data that demonstrates that it is sticky value, that there's additional value that we're demonstrating.

And then just on the go-to-market on the enterprise side, it sounds like you're going to roll out the Creative Cloud into those customers in 2013. Can you talk about the go-to-market strategy there, just the channels involved? And specifically, do you expect more of those customers to go to Creative Cloud than what you've seen so far among the single users and what you've got coming here with the team users?

Sure, Walter. So first, let me specify that the combination of customers that we have in the team offering and in the enterprise offering as a percentage of the total market opportunity, it's huge. So again, as you see the success of Creative Cloud, you have to put in context that, that's happening only for individuals. With respect to the team offering, we certainly expect the channel to be a good partner in helping us get the word out when the offering is released later in November, and everything is under way in terms of the offering there. For the enterprise, the 2 aspects of what we have to do. The first is, like other companies that have done this in the past, we will transition to a term offering, which really reflect that. Again, within the enterprise, it's going to be sticky, and we expect customers to stay current. And Matt has built a really effective sales organization today that's actually selling enterprise license that's recognized perpetual. And what we will be doing is we will be transitioning that sales force to sell this Creative Cloud offering. In fact, the customers are already asking us. Because they hear us talk as much about the Creative Cloud, they want to know how they can do that same content life cycle within the enterprise. And that's, frankly, where the content management of our digital marketing offering as well as Digital Publishing Suite are just a natural complement. So we feel pretty confident about that.

Our next question comes from Steve Ashley with Robert W. Baird. Chaitanya Yaramada - Robert W. Baird & Co. Incorporated, Research Division: This is Chaitanya Yaramada for Steve Ashley. First, a quick one. Could you comment on how the unit adoption of CS6 and Creative Cloud is tracking versus CS5 at this point in the cycle?

Again, when we look at it in aggregate, we said that we expect to see the 10% growth in 2012. So it is tracking in line with our expectations. Chaitanya Yaramada - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then should we expect -- how should we think about the impact of the transition to subscription? And next year, you said that you expect to release the team version and enterprise version, and that should accelerate adoption next year. How should we think about that impact next year on revenue? And could that be bigger than the impact on FY '12 revenue?

So yes, again, I think as Shantanu said, this is Mark, and as I mentioned in our prepared remarks, you have to view the Creative Cloud health as a combination of what we report in revenue and this annualized recurring revenue metric that we're going to give you every quarter. We really continue to believe, as you see this year, that Creative is a growth business. And as we focus on transitioning the business to subscription, we're clearly going to be focused on building up that annualized recurring revenue balance. So in 2013, as a result of acceleration in this annualized recurring revenue, the combination of the 2 businesses, if you will, the revenue and the annualized recurring revenue, will grow, but the reported revenue in 2013 will decline because we're moving so quickly. And then when you get beyond 2013, so starting in 2014, we believe that you will see growth in reported revenue and accelerated growth in the total business. So we're really pushing this fast, and when we push it really fast, you'll see a dip in 2013 reported revenue. But in 2014 and beyond, you'll see accelerated growth in the total business.

Our next question comes from Ross MacMillan with Jefferies & Company. Ross MacMillan - Jefferies & Company, Inc., Research Division: Mark, you mentioned that 40% of the full-list-price adopters were new to the franchise. Can you give us a sense for what percentage, let's say, of the total subscribers are in that camp of paying full list price? Or any sort of way we can think about how big that is within the 200,000 base of subscribers you have so far?

Yes, Ross, so if you look at the number of people that are buying the full Creative Suite versus, say, the point products, in Q2, 70% of them were buying the promotion price. And in Q3, it's roughly the same, it's 67%. So it's been pretty consistent at about 70% of the people buying the full Creative Suite or buying through the promotion.

Ross, let me just say one thing -- let me just add one point to, I think, all of those data. It was really important as we had this call that we gave you some insight, as Mark said, in the data that we're seeing in Q2 and Q3. I would also make sure that everybody knows that some of this will fluctuate from quarter-to-quarter. The underlying trends are really positive, and so as you think about the average revenue per user, as you think about the number of subscribers on the full versus the individual point products, again, we're pleased, and all of these have exceeded our expectations. But I think it's important to set the context that in the -- as team gets introduced, as enterprise gets introduced, we will all see some fluctuation. Ross MacMillan - Jefferies & Company, Inc., Research Division: That's helpful. I had a follow-up just on the team offering. It looks like you're planning to bring that to market at a higher price point per user than the current undiscounted Creative Cloud for the individual user. Could you just explain maybe some of the reasons why that will have a higher price point? And also, are you planning to do similar promotions around the team product?

Well, Ross, as it relates to the team offering, there's some functionality that's actually exclusive to a team to enable them to collaborate more effectively on whatever piece of content that they are doing. So as it relates to storage for a team, as it relates to how they can have group folders that they are sharing, as it relates to all of the products that we'll be offering, clearly the digital asset management functionality that we will provide and administration, we clearly believe that there's more value associated with that with teams, and it'll make the entire team more productive. And the same thing is true, frankly, in the enterprise. If you think about every marketing department in an enterprise having a common repository for all of this content, enabling them to put it out on the web, enabling them to create it within app stores, enabling them to monetize it. And so we really believe that the value towards teams and enterprises is larger than individual freelancers. And I think the pricing and go-to-market will reflect that.

Our next question comes from the line of Heather Bellini with Goldman Sachs.

This is Perry Huang for Heather. Just one question. Based on the traction with Creative Cloud subscriptions, I guess high level, how should we think about operating margin trends as the user base increases? I realize there are many factors at play like pricing and promotions, the subscriber and offering mix and geo, and that annualized revenue is sort of the benchmark to watch. But just trying to think about how we should try and model that going forward.

From a pure product shift going from perpetual to subscription, the margin difference really isn't that great, because this is not yet a hosted offering. It's just an ability to store and sync and share in the cloud, and then you, in essence, download the product to your desktop and you get the power of your desktop by using it on your desktop. So apples to apples, perpetual product to subscription product, the margins are not that terribly different.

And to give you maybe a little bit more color, certainly the sales and marketing expense as these people are increasing on our platform, the cost associated with the physical goods that get put in the channel are also clearly areas for us to improve the operating expense on. And as Mark said, this will be somewhat offset by people logging in by the storage capabilities. And so as we've modeled it, as Mark said, we continue to think it'll be a very profitable business.

Our next question comes from Jay Vleeschhouwer with Griffin Securities.

A couple of questions around subscription adoption and pricing. First, with respect to adoption, could you talk about it in terms of geographic adoption, how is it looking in U.S. versus Europe, for example? In addition, with 60% of the business coming from existing customers, that number of around 60,000 or so in Q3 works out to around 1% of the last reported active base number for CS. And I'm wondering if now with the team enterprise versions coming you would expect, in fact, a several-point improvement in what effectively would be the attach rate of Creative Cloud to the existing base. And then a follow-up.

And so, Jay, if you think about it from an annual perspective, it's clear that based on the math, you have approximately 3 million units that are sort of shipped per year. And what you've seen with the release of the Creative Cloud for just individuals is we've seen fairly good adoption, 325,000 expected by the end of the year. We certainly expect all of this stuff to accelerate when we get the team offerings out as well as when we get the enterprise offerings out. And people will increasingly see that the future of the Creative offering is part of the cloud. In terms of the adoption, which was your first question, by geography, I would say it's pretty similar to perpetual. The large markets that we have, the U.S., in Europe, Germany and the U.K. and Japan, we're seeing adoption in both the perpetual products with CS6 as well as with the cloud. So nothing really stands out in terms of a difference in adoption by geography.

Just a follow-up for Mark on pricing. According to the last 10-Q, the -- there was some discussion about ASPs having come down through the first half of the fiscal year in the Creative side of the business, perhaps due to mix. But could you talk about your experience in the base business pricing for -- particularly on the Creative side and what your assumptions might be going forward on the base business so long as that's still the bulk of the business?

Jay, I think what you're referring to is related to the launch. So when we launched the product, CS6, you've got a lot of people that jumped on the point products, you've got a lot of people that upgrade. And as a result of that, you have a slightly lower ASP in that initial launch period. There's nothing material going on in the perpetual product from an ASP perspective that I would identify as a trend.

Okay. And then just one last clarification, if I may. Earlier in the year, at the Salt Lake conference, there were some mention of adobe.com's revenues at over $0.5 billion a year. Is the bulk of the revenue transition effect therefore affecting the adobe.com revenue so that while the adoption is good in terms of organic or unit terms, the revenue effect is bringing the revenues lower from the previously stated number for adobe.com?

Not necessarily. What I said is 97% of the subscriptions right now are being bought on adobe.com, but that doesn't mean that those people would have bought perpetual, necessarily, from adobe.com. They could have bought perpetual anywhere.

I think you're seeing 2 shifts, honestly, Jay. The first shift is that the business is moving more online and moving directly to Adobe, whether that's by virtue of the fact that they're buying in the store or, frankly, increasingly buying through ESDs so that they get immediate delivery of the software. So that trend continues. In addition to that, as Mark said, when we look at subscriptions, the primary purchase vehicle for individuals for the subscription is directly through us, through Creative Cloud.

Our next question comes from the line of Of Kash Rangan with Merrill Lynch. Our next question comes from the line of Richard Fetyko with Janney Capital.

As we try to gauge the impact of the transition to subscriptions, you used a $750 ASP for the analysis of migrated perpetual revenues in 2012. What ASP should we assume in 2013, perhaps, or even in the second sort of half of the fourth quarter? Once you launch the Creative Suite -- I'm sorry, the cloud for the team and later for the enterprise, I assume the ASP should be higher and, therefore, the impact to perpetual revenues will be higher as well?

No, it's actually the other direction. The impact on perpetual, because these are people that are buying in volume, are going to pay less than the average individual that's buying perpetual today at $750. So the $750 that I used as a surrogate for how much revenue is moving from perpetual would actually come down as you move into team and enterprise, because they're going to pay less, if you will, per seat than an individual will. I can't give you a number for that. Education ultimately is going to impact that as well. I can't give you a number for that today. It's going to be -- it's going to depend on what the mix is that we see in subscriptions, and that mix will get reflected in what we'll use for that corollary to $750.

And then clarification on your statement that 2013 revenues could dip. Are you specifically talking about the Digital Media segment or Creative Suite revenue?

Yes -- I was talking about Creative.

Creative Suite revenues?

Yes.

Got it. And then lastly, if I may. A majority of the user growth that you speak about on the Creative side, the 10% increase in 2012 that you're on track to hit, is that coming from -- a majority of that coming from the cloud adoption?

Yes. It's, for the most part, coming from the cloud adoption. That was one of the big goals for us with the cloud, was to attract those new users given a lower price point for entry and given the constant innovation that they're going to receive.

Our next question comes from the line of Brad Zelnick with Macquarie.

It's actually Bhavin here for Brad. Can you just give out the linearity in the quarter on subscriptions? Was it fairly similar to that all 3 months [ph]? Or do you see a ramp near the end of August, the initial deadline for promotional pricing?

I think we continue to see a fairly steady adoption of the cloud. I think you're seeing a lot of people get a free membership. They're converting at a higher rate. You're seeing new subscribers. So I would say as people get more and more familiar with the offering, we're certainly seeing accelerated adoption. And so we continue to be excited about that adoption.

And speaking of the free membership, can you just briefly talk about what's exactly included and how you've seen conversions go through the quarter?

Yes, there are 2 parts to what we offer as part of free membership. The first is we recognize that creative professionals work in groups. And so the ability to share their files and their content with other people has always been a really important value proposition to the customers. So one of the things that you can do allows you to have access to all of this content and some minimal storage. For years, Adobe has also been offering trial versions of our software. We certainly, with those old trial versions, didn't necessarily have access to the mail ID of these customers, and we didn't know all of that. We're moving that from a trial subscription to a free membership. So the people who have signed up for free membership also get the same benefits that you would have got in the past with trial downloads, namely access to the software for a month. But now we actually do have access to that subscriber's information.

So you -- part of this, how [ph] the increase in conversion from the trial version you had with perpetual to the memberships now with Creative Cloud?

I'm not sure I follow that question. I mean, we are certainly seeing a higher rate of conversion from the people who are members and who are trial -- using our software to fully paid members.

Our final question will come from Robert Breza with RBC Capital Markets.

I was wondering if you could just talk a little bit about how you think about cash flow maybe going into next quarter and maybe just some qualitative-type judgments around how we should think about it for fiscal '13 just with the transition going on and how you see that kind of working its way through as we move through this period.

I'll spend more time on that when we go through guidance in December when I have a little bit more concrete numbers for you on 2013. But generally, cash flow, it, of course, tracks fairly closely with revenue. We are invoicing customers on a monthly basis with the subscription model, so we get that constant cash flow coming in versus that, say, $750 up front when they buy perpetual. But that gets normalized relatively quickly, especially as we get through 2013, like I said, and you get past this transition period and you start to accelerate growth. So in the longer run, I don't see a change to cash flow from our business.

So I just wanted to thank everybody again for joining us today. And maybe as a quick summary, we're clearly executing against the 2 growth strategies we outlined in both Digital Media and Marketing. In Digital Media, the Creative Cloud is exceeding our expectations, and, as we thought it would, it's attracting a new set of customers. So clearly, our goal and strategy is to accelerate delivery of the Creative Cloud across all of the different customer segments and accelerate adoption, both in Q4 as well as in fiscal '13. And we think it's really important for you, as you look at the health of that business, to look at the combination of both reported revenue as well as the annualized recurring revenue. And in Digital Marketing, the business is doing really well, both revenue as well as bookings. It's clearly an explosive new category. And we do think that we are uniquely positioned to win, given both our history in the marketing departments within enterprise as well as the comprehensive product strategy that we have with both our data and analytics platform. And I don't think there's any other company that can deliver that last millisecond of content delivery based on information as well as Adobe. So thank you for joining us today, and we look forward to catching up with you at our next earnings call.

And this concludes our call. Thanks for joining us today.