Adobe Inc. (ADBE) Q2 2013 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 Adobe's Second Quarter Fiscal Year 2013 Earnings Call. [Operator Instructions] I would now like to introduce Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon, and thank you for joining us today. Joining me on the call are Adobe's President and CEO, Shantanu Narayen; as well as Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe's Second Quarter Fiscal Year 2013 Financial Results. By now, you should have a copy of our earnings press release, which crossed the wire approximately 1 hour ago. We've also published earnings call prepared remarks and slides and a document containing our financial targets on Adobe.com. If you would like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue, subscription and operating model targets, and our forward-looking product plans, is based on information as of today, June 18, 2013, 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 the financial targets document and in our updated investor data sheet on our Investor Relations website. 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. I'm happy to report we delivered revenue of $1,011,000,000 in Q2, with non-GAAP earnings per share of $0.36. Our Q2 results demonstrate continued execution and momentum across our Digital Media and Digital Marketing businesses. In our Digital Media business, adoption of Creative Cloud continued to accelerate. We exited Q2 with 700,000 paid subscriptions, which is an amazing achievement after just a year of availability. Our subscription performance comes on the heels of the successful MAX Creativity Conference we held in May, where we announced the next major update of Creative Cloud. Subscribers are already downloading the latest updates of their favorite applications, gaining access to new innovations, features and services we're delivering at a more rapid pace through our Creative Cloud platform. Our new CC apps, rebranded to reflect their deep integration with Creative Cloud, include milestone releases of Photoshop, InDesign, Illustrator, Premiere, After Effects and our new family of Edge tools and services. We demonstrated new Creative Cloud services at MAX, including desktop, web and mobile access, file sharing, integration with the Behance creative community and new publishing capabilities. This is just the beginning of what we will be providing to Creative Cloud subscribers, and our road map is packed with additional ongoing value we'll deliver. At MAX, we announced that moving forward, we will focus all of our innovation on Creative Cloud. We believe success comes through reimagining the Creative process and delivering best-in-class creative capabilities to our customers. Since we launched Creative Cloud, the overwhelming majority of customers buying on Adobe.com have selected Creative Cloud rather than CS6. Customer satisfaction rates are high. And the top reasons customers cite for their love of Creative Cloud include having access to everything in the product portfolio, enabling them to try new tools and build new skills, always being up-to-date with latest features and capabilities, and the affordable monthly membership fee. These benefits are compelling to our existing customer base and are helping us achieve our goal of bringing in new customers. Our decision to discontinue perpetual licensing of new versions of our desktop products has caused concern with some customers. While we will still continue to offer CS6 on a perpetual basis, the feedback from our community is important, and we are evaluating additional options that will help them with the transition. Our goal is to over-deliver on customer expectations, which we believe will make the entire community ultimately embrace Creative Cloud. The majority of our paid Creative Cloud subscriptions are individual members. With our announcements at MAX, our channel partners have begun to increase their efforts to market and license the team offering. We are accelerating adoption of our Enterprise Creative Cloud offering and are cross-selling our Adobe Marketing Cloud solutions to these customers. Our expertise in digital marketing is playing an important role in Creative Cloud's success to date. We are using our Adobe Marketing Cloud technology to manage and optimize the Creative Cloud customer acquisition process. The insight we obtain with Adobe Analytics is helping inform Creative Cloud product development, marketing and sales. With all of our efforts across the product teams, we remain on track to reach our goal of 1.25 million paid subscriptions by the end of this fiscal year. Our Digital Publishing Suite business hit an important milestone last week, surpassing 100 million downloads of digital issues in 24 months. The value of DPS has extended beyond the magazine industry to numerous corporate customers, including brands like Renault and Sotheby's International Realty. DPS customers are best served when they use the latest Creative Cloud desktop capabilities, as well as Adobe Marketing Cloud solutions like Adobe Experience Manager. Our Document Services business had another solid quarter. In addition to continued Acrobat adoption, our Cloud-based services now have over 1 million paid subscribers. We unveiled an update to our EchoSign e-signing offering, with new features to enhance mobility and usability for e-signing contracts, agreements and other critical business documents. In Digital Marketing, we continue to be the leader in this exploding category, targeting chief marketing officers, chief revenue officers, advertising agency and publishing executives who are looking to accelerate their shift to digital. Last fall, we announced the Adobe Marketing Cloud and the consolidation of over 30 products into 5 key solutions. The breadth of our solutions is unparalleled, and we continue to lead in categories like web analytics and content management. Forrester selected Adobe as its only leader in their 2013 Web Content Management for Digital Customer Experience report, citing the progress we have made integrating our Adobe Experience Manager solution with our Analytics and Target solutions. As we build out and integrate our Adobe Marketing Cloud solutions, we are driving more multi-solution deals. During Q2 alone, brands that signed up for multiple solutions included Lowe's, Sony Computer Entertainment Europe and Lenovo. Following a successful U.S. Digital Marketing Summit in March, we held sold-out Digital Marketing Summits in London and Tokyo. Announcements included new predictive publishing capabilities with Adobe Social and an expansion of our partnership with SapientNitro, offering customers additional capabilities and services built on Adobe Marketing Cloud. In Q2, we achieved Adobe Marketing Cloud year-over-year bookings growth of greater than 25%, and we continue to ramp towards achieving $1 billion in annual revenue. Our offering in this space is unique when compared to the competition. No other company has long-standing relationships with marketers and an end-to-end value proposition like ours. Marketers need help to accelerate their shift to digital. Integrating Adobe Marketing Cloud with Creative Cloud will completely change the paradigm of how marketing gets done. From creatives to marketers, and from ad agencies to media companies, we provide a compelling, competitive advantage that addresses the challenges they face. In summary, we executed well against our agenda in Q2. We achieved significant milestones in Creative Cloud subscriptions and our DPS solution, and continued to drive strong bookings in our Digital Marketing business. We're well-positioned as we move into the second half of fiscal 2013. Now, I'll turn the call over to Mark for a discussion of Q2 financial results.

Thanks, Shantanu. In the second quarter of fiscal '13, Adobe achieved revenue of $1,011,000,000, within our targeted range of $975 million to $1,025,000,000. GAAP diluted earnings per share in Q2 were $0.15. Non-GAAP diluted earnings per share were $0.36. Q2 financial highlights included exiting the quarter with approximately $440 million in Digital Media annualized recurring revenue or ARR, up from $297 million exiting Q1. We also exited the quarter with 35% of our Q2 revenue as recurring, up from 31% exiting Q1. Ending Q2 deferred revenue was $691.3 million, and we drove nearly $300 million in cash flow from operations in Q2. Looking at our business segment results. In our Digital Media segment, we achieved revenue of $670 million. This segment has 2 major components of revenue: our Creative family of products and our Document Services products. In our Creative business, we continued to accelerate adoption of Creative Cloud. We exited Q2 with 700,000 paid Creative Cloud individual and team subscriptions, an increase of 221,000 in the quarter. We saw increased adoption of our enterprise Creative Cloud offering through ETLAs. Combined, this helped drive Creative ARR to a total of $356 million exiting Q2, an increase of $123 million versus Q1's exit of $233 million and above our Q2 Creative ARR target of $340 million. Our strategy is to accelerate subscription adoption. We continue to use a variety of targeted promotions to drive awareness, consideration and adoption of Creative Cloud, which may affect ARPU levels in the short term, but we believe will be accretive to ARR in the long term. As of the end of Q2, 93% of Creative Cloud subscribers are on an annual plan versus month-to-month, and 81% of subscribers are licensed to the full Creative Cloud versus point product subscriptions. Adobe.com remains the preferred way for our customers to engage with us when subscribing. In Document Services, we achieved revenue of $199.3 million in Q2. Our success in this category is being driven by continued adoption of Acrobat, Acrobat Cloud services and our EchoSign e-signing contract solution. Document Services ARR grew from $64 million exiting Q1 to $84 million exiting Q2, driven by the efforts of our sales team to engage Acrobat customers with ETLAs. In our Digital Marketing segment, there are 2 components. The first is revenue from our Adobe Marketing Cloud offering. And in Q2, we achieved Adobe Marketing Cloud revenue of $229.6 million, representing year-over-year growth of 17%. We continue to see tremendous growth with our Adobe Experience Manager solution as customers re-platform their web infrastructure. We now offer a new managed services solution for Adobe Experience Manager that we host, making it easier for customer adoption. It has the additional benefit of allowing us to easily upsell to other Adobe Marketing Cloud solutions. This new managed solution is a term-based offering, resulting in increased recurring revenue. Had customers selected the perpetual offering instead as forecasted, year-over-year Marketing Cloud revenue growth would have been greater than 20%. We expect this adoption trend with Adobe Experience Manager to continue. Mobile device use continues to be a driver in our Digital Marketing business. Mobile transactions increased to 26%, up from 25% last quarter. Our focus on 5 solutions in Digital Marketing with streamlined pricing is resonating with customers and increasing our ability to create larger engagements with them. The second component of our Digital Marketing segment is revenue from the LiveCycle and Connect businesses. LiveCycle and Connect contributed $55.8 million in Q2 revenue, which was consistent with our expectations. Print and Publishing was essentially flat quarter-over-quarter, as expected. Geographically, we experienced stable demand across our major geographies. From a currency perspective, quarter-over-quarter FX rate changes had a $14.1 million negative impact on reported revenue. Hedging gains contributed $15.3 million to revenue in Q2 FY '13 versus $7.1 million in Q1 FY '13, thus the net sequential quarterly currency decrease to revenue considering hedging gains was $5.9 million. Year-over-year, FX rate changes had a $20.8 million negative impact on reported revenue. Comparing the $15.3 million in Q2 FY '13 hedging gains to the $10.7 million of hedging gains in Q2 FY '12, the net year-over-year currency decrease to revenue considering hedging gains was $16.2 million. In Q2, Adobe's effective tax rate was 16% on a GAAP basis and 21% on a non-GAAP basis. The GAAP rate was lower than targeted due to stronger than forecasted international profits. Employees at the end of Q2 totaled 11,413 versus 11,196 at the end of last quarter. Our trade DSO was 42 days, which compares to 43 days in the year-ago quarter, and 44 days last quarter. Ending deferred revenue in Q2 was $691.3 million, which was a slight decrease from the end of Q1. Deferred revenue in Digital Media increased when compared to Q1, driven mainly by ETLA adoption. Digital Marketing deferred revenue decreased solely due to the Q2 calendar close occurring on May 31 as opposed to June 1, impacting the timing of Q2 digital marketing billings. Had Q2 closed on June 1, total deferred revenue would have increased quarter-over-quarter. During the quarter, cash flow from operations was $299.1 million. Our ending cash and short-term investment position was $3.87 billion compared to $3.66 billion at the end of Q1. In Q2, we repurchased approximately 3.9 million shares at a total cost of $172 million. Now I will discuss our targets for Q3. For the third quarter of fiscal 2013, we are targeting a revenue range of $975 million to $1,025,000,000. In Digital Media, we expect to add more Creative Cloud paid subscriptions and Digital Media ARR than what was achieved in Q2. Assuming the midpoint of our targeted Q3 revenue range, we expect Digital Media reported revenue to be down sequentially due to continued adoption of Creative Cloud subscription and ETLAs. In our Digital Marketing segment, we continue to target Adobe Marketing Cloud year-over-year reported revenue growth of approximately 20%. We expect LiveCycle and Connect revenue to be relatively flat quarter-over-quarter, and we expect Print and Publishing to decline. We are targeting our Q3 share count to be 511 million to 513 million shares. We are targeting net nonoperating expense to be between $17 million and $19 million on both a GAAP and non-GAAP basis. We are targeting a Q3 GAAP tax rate of 22.5% and a non-GAAP tax rate of 21%. These targets yield a Q3 GAAP earnings per share range of $0.10 to $0.16 per share and a Q3 non-GAAP earnings per share range of $0.29 to $0.35. We remain comfortable with all of our annual targets we re-affirmed in May at MAX, including our Creative Cloud subscription target of 1.25 million, exiting the year, which we expect will be driven by accelerating sequential increases in subscriptions in Q3 and Q4. I'd now like to turn the call back over to Mike.

Thanks, Mark. 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 86736888. 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 4 p.m. Pacific Time on Friday, June 21 [indiscernible]. Operator?

[Operator Instructions] Our first question comes from Brad Zelnick with Macquarie.

Shantanu, in your prepared remarks, you talked about evaluating options to accommodate customers that are resisting the move to Creative Cloud. What types of solutions are you considering? And does this in any way impact your confidence in achieving your subgoals for the full year?

So Brad, fundamentally, when we see the results that we've had, I mean, it's clear to us that our strategy is spot on. And actually, our execution has been pretty outstanding. As you realize, with any major change like this, we're looking for tweaks that would lead to a better customer and business outcome. We don't have any that we've identified today, but we're pretty confident of all of the results and the metrics that we've identified at the beginning of the year. So we continue to be very positive about the opportunity.

And if I can just ask one of Mark. Mark, on Creative Cloud ARPU, you mentioned promotional pricing would pressure ARPU in the short term, but drive value longer term. What was ARPU in the quarter, and where do you see it going?

So we gave you guys an ARPU number, Brad, back in Q3. It's been kind of been in that ballpark, frankly, ever since we gave you that number. We are very focused, as Shantanu said, on driving subscribers. And we've said I think consistently that ARPU is going to move around a bit as we have things like promotion and mix change depending on what products people buy. But in the end, we're driving ARR. And any of these moves we make, we expect would be accretive to ARR.

It's fair to say it's around 37. Is there any lower limit that you would manage to or you're just looking to optimize ARR?

We're just, right now, we're looking to maximize ARR. But it's been in that ballpark, like I said, since the beginning.

Your next question comes from the line of Peter Goldmacher with Cowen.

I just wanted to try and understand the discrepancy between the reported numbers for Marketing Cloud and the bookings number. We have about 17% growth for Marketing Cloud, and the bookings number is about 25%. Are you guys able to invoice for longer durations now? Is that what's primarily driving the growth? And if there is a change in invoice duration, if we normalize for that invoice duration, what would that growth rate be?

So Peter, specifically, what is happening in one of our solutions, which is the Adobe Web Experience Manager solution, is that we have a new offering that we are now providing, which is a managed services offering. So think about it as people are actually now outsourcing their web infrastructure to us, and the duration of this, rather than being an upfront license, is actually a term-based offering. The benefits to us are quite significant for this, Peter. We now are hosting the infrastructure for a number of the best brands in the world. Our ability to upsell them to other solutions has never been higher, namely the Adobe Target solution or the Adobe Social solution. But the way we invoice this right now rather than it be upfront, it's over a multiyear period, and it is a term period. And so I think Mark also alluded in his prepared remarks to if we had recognized all of those bookings that we had got in the quarter, yes, the revenue, reported revenue, would have been greater than 20%. So that business continues to perform exceedingly well. And actually, I think it's a healthier state of the business long term for our long-term shareholders.

Shantanu, so if we -- when we get to the point where we're anniversary-ing normalized contracts for that business and your other subscription businesses, what would that normalized growth rate be? Would it be closer, high teens, lower 20s?

I think -- Peter, it's Mark. I think we'd still be in the 20% ballpark. That's what we would target.

Your next question comes from Walter Pritchard with Citigroup.

Mark, I'm wondering if you can talk a bit about sort of trajectory of subscriber ads during the quarter because you launched -- you talked about at MAX and made some changes and so forth, and made, clearly, subscription the direction of the future at that event. I'm wondering if you can talk about the trajectory in March and April versus what you saw in May after that news?

I think, Walter, why I don't take that first, and then Mark can certainly add on, which is we continue to see good linearity of subscribers actually during the quarter. I would say after the MAX announcement, when we announce some of our new offerings, the team offerings saw increased momentum. And I would attribute that to the fact that all of our channel partners are now up to speed. They're trained on the team offering. And so we certainly saw strong end-of-quarter surge in the team stuff. But for the individual subscribers, I would say it's been a good linear progression of the number of subscribers we have.

And then as...

Shantanu, as follow-up on that -- sorry, go ahead, Mark.

No, I was just going to say, as we pointed out, the ramp just accelerates as you go through the back half of this year. So we would expect more subscribers in Q3, and then yet more again in Q4.

And I guess the follow-up was actually on that. So is that primarily a function of the channel just ramping up on their training [indiscernible] with the product, or are there other factors as you look at the run rate coming out of the month of May that gives you comfort in the ramp-up [indiscernible].

It's a few things. It's a few things, Walter, right? It's the launch we just had. It's the viral nature of the offering. It's the team offering as well. I think it's a combination of all those.

And I would say, Walter, it's also the continued growth in the number of people who are coming in for the free memberships, which also continues to increase. Mark has given you insight into, certainly, the ARR and the number of subscribers that we see on a quarterly basis. And on an annual basis, we'll update the other key metrics that we measure in this business, which are all positive, namely things like new customer acquisition, units and installed base. So all signs point towards a healthy second half.

And then, Mark, just a quick one on the guidance. It does suggest that keeping the guidance at the -- your number of $4.1 billion, that your Q4 would be down sequentially, which doesn't occur that often. I'm wondering if that's really what you're implying, or if you're just simply not updating the guidance at this point in time.

No, no, we're not implying that Q4 would be down sequentially, if that's what you're saying, Walter.

The next question comes from Brent Thill with UBS.

Mark, you've talked a lot about the education market in the past. And I'm just curious if you could just update us on their receptivity to this transition given that -- given the importance of the vertical.

Yes, Brent. Education is doing well. And I think we're getting more and more traction. Clearly, with the school year coming up, we would expect there to be an uptick in education as people start to adopt, but it's going well.

And the other thing I would add to that, Brent, is the fact that even education ETLAs are doing well for us. So in addition to the individual subscribers, which is a really healthy part of the subscriber mix that we have, the ETLAs also continues to do well. We saw some good acceleration of ETLAs, which are now, as you know, term-based deals in the enterprise during the quarter.

And the while we're not going to do this, obviously, every single quarter, there are metrics that we'll provide, like we have in the past on more on an annual basis. So things like subscribers or free subscribers or units or installed base and things like product mix, Brent, we'll do that more on an annual basis.

Okay. And just a quick follow-up on just the customer behavior you're seeing, many of us saw [ph] some of the lower trajectory in the first half of the year for the industry. I'm just curious, from your conversations, obviously, the results continue to show good results. But what's your sense of what's going on in terms of overall behavior? And why do you think that your -- effectively been separated from many of the others that have been not doing so well in the last quarter?

Well, I would say, Brent, really, I think just the clarity of the strategy within the company and alignment that we have associated with it. And I have to give the employees here a lot of credit. I mean, we've been executing strong against the strategy that we outlined, so we have to continue to remain focused on that. The fact that we've said it's subscribers and ARR in the Digital Media business, and driving product innovation and bookings in the Digital Marketing business and delivering on the Creative Cloud, there's great alignment associated with that in the company.

The next question comes from the line of Jennifer Lowe with Morgan Stanley.

And I might ask just the inverse of the question Walter asked, which is, what have you seen in terms of the trajectory of people buying perpetual licenses still, given the intentions there do not continue development on the CS platform going forward? And how quickly do you expect the tail of perpetual to sort of fade away as people rotate to subscriptions? Could we see it drop dramatically, or is it going to be more of a steady slope as we go forward?

Yes, Jennifer, it's Mark. We talked about that a little bit at MAX. We still believe that, that holds true, which is we would expect over time, perpetual to tail off. We said it would de minimis in FY '15. We still are selling CS6. But clearly, we want to move people more and more to the Cloud, and we're starting to see that more and more.

Great. Just 1 question on the subscription piece. Now that we're about a year into the Creative Cloud availability, do you have a read yet on how renewal trends have played out? And especially as customers move to the higher price points after the initial discounts, has that played out as you expected? Or how have renewal rates been?

Jennifer, it's early, but again, it's been very much in line with our expectations. I think the results have been strong. And as we get more data, we will continue to monitor it. But so far, so good.

Your next question comes from Steve Ashley with Robert W. Baird. Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division: I'd like to ask about new customers. You added very strong subscription growth, 211,000. And I realize, it's difficult for you to get any kind of quantitative handle on new customers. But maybe qualitatively, is there a sense that some of this subscriber growth is coming from people who are new to Adobe? And if so, if you have any sense if they're pros or at work or at home or anything around that.

Sure. So Steve, this is one of those numbers again where we continue to track new customer acquisition that is brand new to the Creative Cloud platform. And it's clear that the attractive pricing, upfront pricing, is attracting new customers to the platform. When we look at the number of subscribers that we have, the relative ratio of the 3 categories that we've had for our customers, namely creative pros, people at work and people at home. It's sort of continues to be relatively the same, whether it's new customers or its customers who are transitioning to the Creative Cloud offering. I would say that North America is slightly ahead of the international markets in terms of the adoption of the Creative Cloud. But our other big markets, the U.K., Germany and Japan are also seeing adoption, so relatively in line with what we had when we had only our perpetual offerings, Steve. Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division: And my second question relates to the marketing cloud. We've seen salesforce.com make an aggressive acquisition and take a position in the email marketing place adding that to their marketing cloud. Just was wondering what you thought of that and how you view email. Is that something that needs to be part of your offering? If that's something you still think partnering for is the best option? Just some comments around that, please.

Sure. Maybe big picture first, Steve. It's clear that we've been talking about marketing being a multibillion-dollar opportunity. And I think you are seeing that like we've said, it's going to provide really sustainable growth for not just us, but we continue to think that there are going to be a number of companies approaching the space with multiple winners. But Adobe's going to be one of those winners. We clearly see our heritage and the fact that we have the most comprehensive set of marketing solutions available as our advantage. We don't approach it from the ERP or the sales side. And hence, we believe that we are the trusted partner of marketers all around the world. We will continue to fill out our offering as well in terms of the marketing cloud. But I think our biggest differentiation and our unique point comes from the web infrastructure and the web analytics, where we are clear leaders in. And then we look at adding functionality from that core set of offerings that we have.

The next question comes from the line of Ross MacMillan with Jefferies. Ross MacMillan - Jefferies & Company, Inc., Research Division: I actually, Mark, wanted to circle back on the traditional sort of license Creative business. And I guess, our math suggests that we could be seeing declines around 30% there if you backed out the implied subscription and implied ETLA subscription. And I wondered if a, that sounded about right? And then b, do you expect that decline to worsen in the second half as you ramp the efforts to drive more to Creative Cloud? Or do you expect that pace of decline to be broadly in and around that number?

So if you look at the back half, Ross, I would say a couple things. First of all, of course, everything that we think is going to happen is reflected in the guidance already. So the $4.1 billion kind of relates back to the 1.25 million subscribers we think we're going to get. We've said all along that to the extent that we drive increased subscribers, were we to beat that number, there's a chance that perpetual could come in lighter. But in the end, that would be a good result from my perspective. So right now, we'd say it's 1.25 million subscribers, and it's $4.1 billion in annual revenue. And that mix will potentially shift as we go through the back half of the year, but that's what we think right now. Ross MacMillan - Jefferies & Company, Inc., Research Division: Is our math ballpark about right, the 30%?

I can't answer that for you, Ross. I don't know what you're comparing to, 30% from what, so... Ross MacMillan - Jefferies & Company, Inc., Research Division: Just the -- I guess just like-for-like with last year given subscription revenue was so low.

Ross, you have to take into a fact -- account the fact was that we had a launch in Q2 of last year. So I mean, I think there are some other factors that you really have to look at when you do it. The one thing I'll say is that since we outlined this in November 2011, actually we've been remarkably on track with the overall projections that we've had. But factor in the launch as well as you look at your numbers. Ross MacMillan - Jefferies & Company, Inc., Research Division: That make sense, Shantanu. And then maybe just one quick follow-up. Mark, you made comment around the digital marketing billing cycle having some impact on the deferred. Can you just remind us of how that billing works? Is it mostly quarterly billing, and so that transition in a day [ph] would it mean as much as a quarter's worth of billings? Or is it -- is there some concurrency around the billings on the first of the month?

Yes, that's exactly it. On the first of the month, the billings go out for the month. It's not the entire quarter. So you'll have a large chunk that went out on June 1 that didn't get reflected in Q2. But if you go back to Q1, you saw that we picked up that extra day, if you will, on the last day of the quarter.

And Ross, again, as you factor that in, I'll tell you, you have to think about not just our license bookings, but also professional services, because that bookings also happens on the first.

And of course, that also has an impact on the cash flow number. So that was reduced by the fact that we didn't have those billings in the month.

Your next question comes from Kash Rangan with Merrill Lynch.

I was just thinking about the slide that you had at your Analyst Day, the fiscal '12 revenue mix by home individuals, education, work creatives, creative professionals. And if you could talk about how that distribution looks like for your subscription base, which is roughly at about 700,000, is it more or less tracking your approximate revenue mix from these different end categories? Or is the mix of subscribers in your Creative Cloud a little bit different from that? And I also wanted to find out at what point do you think the special promotional pricing for big people that have bought CS3 all the way to CS6, when would that go away? That's it for me.

Let me answer your first question first, Kash, which is as we look at the people who are adopting Creative Cloud, as I mentioned to Steve as well, it's relatively consistent with what we saw with Creative Suite. Namely, it's the creative pros followed by people at work, followed by people at home. And so that gives you a sort of general direction. And we'll update those on a less frequent basis, but we'll certainly give you updates on an annual basis. Things like installed base, et cetera, we track it. It's just hard to do as part of an earnings call. And with respect to your second question on promotions, I think again, Mark alluded to the fact that we'll continue to have targeted opportunities available for people to have an on-ramp. And as those tail off, we have people moving to different price points. And so far, that's again all in line with the expectations that we have.

Got it. And then one follow-up, if I could, Shantanu. When I look at your base of people that have bought license, point solutions and the suites across the CS family. It's about 12-million-plus. Do you think it's unrealistic to expect the vast majority of them or maybe perhaps all of them over the very long term to move into a complete subscription model?

I think that's a little unrealistic. I think there will be people, and we assumed this when we rolled out this strategy 2 years ago, that maybe fall by the wayside. But we would certainly try to get as many as possible. And we will get a lot of them, but I don't think it's fair to see [ph] that we'd get every single one.

The next question comes from Robert Breza with RBC Capital Markets.

Just as a follow-up to Ross' question around the deferred revenue. When you look at the split between the short term and the long term, is there anything going on from the long-term perspective that we should be taking into account as we go forward with the change to ARR, et cetera?

Well, so ARR is obviously just the first year's worth. But ARR -- so this gets a little complicated. ARR really doesn't show up in deferred because the way we bill for Creative, we're not billing in advance. We're billing by the month. As a result of that, it doesn't show up in deferred. Deferred is really the rest of the business, if you will. It's the ETLAs. It's the Digital Marketing business. And we are starting to see more longer-term contracts in that business.

Your next question comes from Mark Moerdler with Sanford Bernstein. Mark L. Moerdler - Sanford C. Bernstein & Co., LLC., Research Division: Two questions. The first one is, can you give us a sense in terms of the community that's moving over? You gave us numbers on Creative Suite 6 and previous users. Is this predominately the pre-Creative Suite 6 users that have been making the move up to this point? And then I'll ask the second question.

No, Mark. I would say it's a spectrum of people. As we said, we are attracting new customers to the platform. We're certainly seeing CS6 customers. We are seeing people from prior versions. we're seeing point product users move to the Creative Cloud. So I think it's a spectrum of customers across all of our previous versions as well as new customers. Mark L. Moerdler - Sanford C. Bernstein & Co., LLC., Research Division: Okay. Thank you. Second of the questions, quick. On the -- there is asset held for sale and a write-down? Could you give us a little bit of data on that?

Yes, it's pretty straightforward. We have a building that we own that we put up for sale. And as a result of that, we had to write it to market value. So we had to write it down to market value.

The next question comes from Brendan Barnicle with Pacific Crest Securities.

Great. Mark, I wanted to just quick follow up on Kash's question about the installed base and more specifically, around that approximately 4 million of point solution users. What do you think or what have you seen so far in terms of the conversion rate among that installed base versus what you've seen with the CS installed base?

Well, maybe I'll take that one. I mean, I think we are seeing both individual point product subscriptions, as well as CS. I would say we are seeing a larger number of -- as you saw in our numbers, the majority of the numbers that are subscribing to Creative Cloud are actually for the entire offering as opposed to the point products. Certainly, a large percentage of that are former Creative Suite customers as opposed to point product customers, but I think you are seeing the other side as well. And if you look at it, there's about 80% of the people on Creative Cloud who are subscribing to the full offering, they're about 20% to the point products. And that's a little higher than what it was for Creative Suite, which was approximately 70% of the CS Suite's revenue was for the full and about 30% was for CS point products. So hopefully, that gives you some color on what's happening.

Do you think, Shantanu, that you're getting folks that are moving off of point onto Creative Cloud because of some of the offerings that you've made?

Yes, we are. I mean, people look at it. And some of the new things that we've done, the HTML tools, products like Muse, the fact that some of our offerings are only available as Creative Cloud offerings are certainly a reason for people migrating to the Creative Cloud.

Great. And then just one quick follow-up on Steve Ashley's question. In addition to ExactTarget, your had another partner, hybris, that was acquired during the quarter. Any change -- obviously, there'll be changes in those partnerships. Will they continue along? How might they change? Or are you looking for new partners in those areas?

I think with hybris and with commerce specifically, we have a great partnership, not only with hybris but also with SAP. And so we expect that to actually continue and to provide more opportunities for us. In fact, SAP reached out as soon as it was announced to say that they'd like to continue to strengthen the partnership.

The next question comes from Jay Vleeschhouwer with Griffin Securities.

Shantanu, you mentioned earlier that the bulk of customers are, in fact, on the full product. But if you look at the sequential trends and the data, the annual demand or proportion has been increasing relatively more than the demand for full Creative Cloud, suggesting relatively strong momentum over the last few quarters sequentially for the point products. Is that something that you might expect will continue for the balance of the year? Has that played out as you thought it might in terms of that recent relative momentum of point versus full?

I would say overall, Jay, it's played out relatively in line with our expectations. And I think we continue to believe that the entire offering is really where people will, hopefully, migrate to, and that the point products are a great on-ramp to the entire Creative Cloud offering.

Okay. You've mentioned that Adobe.com remains the preferred method for acquiring Creative Cloud. Do you think it will remain that indefinitely or are you expecting that the channel and/or the direct effort might grow disproportionately from here? And then 1 or 2 follow-ups.

Well, clearly, we mentioned in the prepared remarks that we are seeing an acceleration of the ETLAs, the direct sales efforts are really paying off and customers are actually responding very positively, Jay. So you've known that we've had a fairly healthy licensing business, which is enterprise agreements. Those are migrating, I would say, in Q2 a little faster than expected to the ETLA, so that's positive. As it relates to the channel, because we had multiple offerings prior to the announcement at MAX that we would be focusing on the Creative Cloud offering, I thought we saw more of a mix between the perpetual offering and the team offering. At the end of the quarter, we definitely saw an acceleration of team units that were sold by the channel. And we're counting on that continuing in Q3 and beyond as the channel partners are educated and focused pretty much exclusively on selling subscriptions.

Okay. You highlighted DPS, which hit 100 million download mark about a quarter sooner than I thought it might. But let me ask you this: What trends are you seeing in terms of your revenues per download that you are getting from publishers and other customers? Can you talk at all about the pull-through effects on CQ and other parts of Marketing Cloud, and the demand you're seeing from non-publishing customers, for example, catalog companies, financial services and the like?

Let me take your last question first, Jay. When we look at the DPS business for Q2, it's actually fairly clear that we are seeing tremendous traction outside traditional publishers as well. And so when you look at the bookings, we are seeing a lot of growth in the markets that you mentioned: financial services, catalog providers, training material. And that is actually not just licensed on a per copy. There's an enterprise license agreement for that, so it's a very healthy business term-based agreements. As it relates to the core publishing platform, as you point out, I think the adoption is actually going fairly quickly. And those are drawdown of the number of downloads that they've committed to. And when that happens, they have to renew their agreement. So seeing health in the publisher business with the downloads, I would say seeing greater-than-expected strength in the commercial market as people are providing them materials through the app stores, which are provided as enterprise license for those customers.

Okay. Lastly, on Marketing Cloud. At the summit in Salt Lake, there was some talk that this summer I think, there would be a new interface that you'd be introducing across the product line. And as well, there was some talk about perhaps segmenting the pricing some, with standard pricing, some premium pricing and the like, within the context of your various solutions. Is that something you can update us on?

Yes, we're seeing early success with the 5 solutions and simplified pricing that has been rolled out. And we've taken the 30 products that we had and consolidated it into the 5 offerings. So it's early. But there's a single contract in place right now that enables customers to easily friction-free do business with us. And Tartan is available right now in beta for some customers, Jay. So we are making progress on both the product side, as well as on the go-to-market side.

Your next question comes from Kirk Materne with Evercore Partners.

Shantanu, I was wondering if you can just talk about the Creative Cloud adoption by geography. Are you seeing any, I guess, differences in terms of adoption across different geos? Or is it pretty much uniform in terms of how clients are adopting the platform?

I'll answer that question relative to the Creative Suite business as sort of a benchmark. I would say North America, because it's been available here for the most time, is slightly ahead of where Creative Suite was at the time that we only had Creative Suite. But the other major markets that we are seeing, EMEA I would say, is just pretty much on line with what we are seeing for Creative Suite. Asia is a little bit behind where we were for Creative suite, but in line with our expectations. So hopefully, that gives you some color of what's happening. North America, slightly ahead, and Asia slightly behind of where we were with Creative Suite in terms of a geo distribution.

The next question comes from Mike Olson with Piper Jaffray.

I think it's hard for anyone to argue that the transition to Creative Cloud subscription won't be driver in increasing revenue per customer over time. But it sounds like you're also indicating that the transition to subscription is a driver for increasing the size of the Creative customer base. And if so, I'm just wondering where you are thinking some of those customers may be coming from that would be Creative Cloud customers under subscription, but wouldn't have been within your Creative customer base previously. Or do you really kind of more expect that more of the growth in the overall Adobe customer base will be from Digital Marketing offerings and other initiatives, or I guess will it be a combination of both?

I think, Mike, we feel good about the growth opportunities in both of the markets. Digital marketing certainly as we continue to see 25% bookings and as that continues to grow, we definitely look at that as an opportunity. In Digital Media, I would say 2 things. As you know, when we released versions of our products, not everybody migrated to every version of the product. And so we expect to see growth, both through new customer acquisition in Digital Media, but also honestly, just having more people stay current with the current offering that we have as part of Creative Cloud. And at MAX, we outlined the over 10 million people that we have as our installed base. And the fact that not everyone of them transacted business with us every year, if we are successful with this when we are successful, we will have more people who are current with our offerings. And so I think both of them represent growth opportunities. Mark has, in the past, showed that we will continue to see CAGR increasing for the Digital Media as well, starting in 2014. So everything seems to be on track. And maybe that's a good way, given that was the last question, to really just summarize. From our point of view, we look at it, and we said in November 2011, that there was a new strategy for the growth businesses. We provided you metrics to measure this progress in multiyear goals. And I would say the management team and employees feel really good about the fact that we're exceedingly -- executing exceedingly well and ahead of goals in both of the focused markets, media and marketing. As we pointed out, we've attracted 700,000 paying subscribers to this new offering that we think will reimagine creativity. One thing I should point out is that yesterday, we started to provide integration with Behance to all of our customers. And so, we are starting the journey to create also the largest creative community in the world. And with marketing cloud, we think we have the most comprehensive offering for marketers. So we're driving innovation. We're serving customers well. And I think we have an incredibly energized employee base. Thank you for joining us today.

This concludes our call. Thanks, everyone.

Good night.