Adobe Inc. (ADBE) Q3 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 FY '13 Adobe Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mike Saviage. You may begin your conference.

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 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'd 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 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 17, 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 our financial targets document and in our updated investor data sheet on Adobe's 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. In Q3, we delivered revenue of $995 million, with non-GAAP earnings per share of $0.32. We continue to execute well against our strategy with faster-than-expected adoption of Creative Cloud in our Digital Media business and strong momentum and growth in our Digital Marketing business. In Digital Media, we continue to make great progress reimagining our Creative and Document Services offerings as cloud services. This enables us to innovate at a more rapid pace, attract new customers to our platforms and build predictable recurring revenue streams. As of the end of Q3, Creative Cloud adoption grew to over 1 million paid subscriptions, and we have millions more in the pipeline who are trying out the service. As a result of the strong subscription uptake and increased enterprise adoption, total Digital Media annualized recurring revenue, or ARR, grew to $655 million. Individual, team and enterprise customers are realizing the advantages of Creative Cloud. Individuals are receiving a constant stream of innovation at an affordable price. Teams are benefiting from being on the same version and the ability to seamlessly share files, fonts and preferences. Enterprises are increasing their adoption due to simplified licensing models and integration with Adobe Marketing Cloud. Individual, team and enterprise term-based licensing all had strong results in Q3. Recent examples of Creative Cloud innovation include significant updates to our video tools, as well as the release of Adobe Anywhere, a solution that helps large video production teams collaborate smoothly and securely. We announced Adobe Generator, new imaging technology that enables customers to utilize Photoshop for web and mobile app development more quickly and easily. To facilitate design on tablets, we announced today we will partner with Adonit to produce 2 new devices. One is Project Mighty, a cloud-connected pen; and the other is Project Napoleon, a digital ruler. Our goal is to enable these 2 new devices to work with tablet apps like Adobe Ideas and Photoshop Touch and ensure connectivity with Creative Cloud files. We continue to expand our Creative Cloud offerings to migrate existing customers and acquire new users. We should start to see the benefit of adding single app subscriptions to our team offering and a new subscription offer for photographers, which combines Photoshop and Lightroom to address requests from the photography community. We drove stronger-than-expected performance with large Creative customers through our enterprise term license agreements, or ETLAs, in Q3. Some customers that we believe would have adopted the team offering are instead choosing ETLAs. Across our Creative business, the overwhelming majority of customers are moving away from perpetual licenses towards term-based licenses, demonstrating acceptance of the new offering. As a result of this success, we will exit fiscal 2013 with more ARR and less reported revenue than we outlined at the outset of the year. We continue to build momentum with our digital publishing business, with more than 120 million digital editions delivered to consumers through app stores. Yesterday, we announced new magazine industry-standard audience metrics are available through Digital Publishing Suite's analytics, filling a critical gap in the measurement and reporting of audience readership across digital magazines. We continue to grow corporate adoption of DPS in areas like catalog, company magazine, sales enablement and brochure publishing, with brands like Airbus, Gap, JPMorgan Private Bank and Lowes now engaging their customers through these tablet apps. In our Document Services businesses, Acrobat continued to perform well, with online services continuing their strong momentum. We now have surpassed 1.3 million Document Services subscriptions. In Digital Marketing, Adobe is extending its leadership position. We achieved 28% year-over-year growth in Q3 with Adobe Marketing Cloud and are on a run rate exceeding $1 billion in annual revenue. We're driving adoption of multiple solutions, which is increasing the value and size of customer bookings. Building upon our already comprehensive portfolio of solutions, in July, we completed the acquisition of Neolane, a leader in cross-channel campaign management technology based in Paris. Neolane integrates online and offline marketing data from across an enterprise, performing robust audience segmentation and delivering marketing messages across channels including web, email, social, mobile, call center, direct mail and point of sale. This enables marketers to deliver consistent customer experiences, personalized campaigns and increased ROI. Neolane becomes Adobe Campaign and will be integrated into the Adobe Marketing Cloud as our sixth solution, joining Adobe Analytics, Adobe Experience Manager, Adobe Media Optimizer, Adobe Social and Adobe Target. Adobe Experience Manager had strong performance in Q3. In July, we rolled out Adobe Social 3.0, featuring integration with Flickr, Foursquare, Instagram and LinkedIn. Last week, we announced a major update to Adobe Target with a completely redesigned touch-based interface that guides users through testing digital offers and personalizing web content for specific audiences. In addition to driving innovation within each solution, we are focusing on integration across Adobe Marketing Cloud solutions. Adobe is increasingly being identified as the digital marketing leader among industry analysts. Coming on the heels of strong recognition in Forrester's Web Content Management Wave in Q2, we were identified as the leader in Gartner's Web Content Management Magic Quadrant and Forrester's Data Management Platforms Wave. This drives awareness among customers, especially in web content management, an area that has become mission critical to companies that need to re-platform their online businesses for the next generation of mobile, social media and apps. No other company has an end-to-end value proposition like ours, with Creative Cloud and Adobe Marketing Cloud addressing the entire life cycle of content. From creators to marketers and from ad agencies to media companies, we provide a compelling value proposition as companies transform their businesses to digital. In summary, we demonstrated strong performance in Q3. We achieved significant milestones in both Digital Media and Digital Marketing. Based on year-to-date results, we're on track to exceed our fiscal 2013 targets of $800 million in Digital Media annualized recurring revenue and greater than 20% revenue growth with Adobe Marketing Cloud. Now I'll turn the call over to Mark for a discussion of Q3 financial results.

Thanks, Shantanu. In the third quarter of fiscal 2013, Adobe achieved revenue of $995 million. GAAP diluted earnings per share in Q3 were $0.16. Non-GAAP diluted earnings per share were $0.32. Revenue and earnings were within our targeted ranges. Our acquisition of Neolane during the quarter contributed approximately $6 million in revenue to our Q3 results, and the impact from the transaction on earnings was less than $0.01. We're pleased with our results in Q3. As a result of overachievement in subscriptions and ETLAs, which is reflected in higher ARR, revenue and earnings per share were below the midpoints of our targeted ranges. Highlights in the quarter included strong Adobe Marketing Cloud revenue growth, accelerating past 1 million individual and team subscriptions with Creative Cloud and driving better-than-expected ETLA adoption with Creative and Acrobat customers. Success in Q3 with subscriptions and ETLAs drove significant upside in ARR. We exited Q3 with approximately $655 million in Digital Media ARR, up from $440 million exiting Q2. Combined with other Adobe businesses where revenue is recognized on a ratable basis, we exited the quarter with 41% of our Q3 revenue as recurring, up from 35% exiting Q2. When we started this journey to transform our business model in late 2011, we anticipated hitting 40% of our business being recurring by the end of fiscal 2014, and we've already surpassed that mark as of the end of Q3 fiscal 2013. In Digital Media, we achieved reported revenue of $637 million. This segment has 2 major components of revenue: our Creative family of products and our Document Services products. In our Creative business, customer adoption of Creative Cloud accelerated. We exited Q3 with 1,031,000 paid Creative Cloud individual and team subscriptions, an increase of 331,000 in the quarter. Adoption of team subscriptions was strong, and we closed more ETLA contracts with enterprise customers in Q3 than the sum of those closed in Q1 and Q2. Combined, our success with subscription and ETLA adoption helped to drive Creative ARR to a total of $546 million exiting Q3, an increase of $191 million quarter-over-quarter. Our strategic goal is to accelerate adoption of Creative Cloud, and we are focusing all of our innovation there. We have added new capabilities to both the individual and team offerings and continue to offer a variety of targeted promotions to drive awareness, consideration and purchase. This strategy is working. Overall monthly average revenue per user, or ARPU, remained consistent with prior quarters due to success of the team product and strong retention among individual customers renewing at full price as their introductory pricing expired. As of the end of Q3, 95% of Creative Cloud subscriptions are annual plans versus month-to-month and 81% are for the full Creative Cloud versus point products. Adobe.com remains the preferred way for our customers to engage with us when subscribing, although we've seen solid growth in the channel business with the team offering. In Document Services, we achieved revenue of $183 million in Q3. Our success in this category is being driven by continued adoption of Acrobat, Acrobat ETLAs, Acrobat cloud services and our EchoSign e-signing contract solution. Document Services' ARR grew from $84 million exiting Q2 to $109 million exiting Q3. In our Digital Marketing segment, there are 2 components. The first is revenue from our Adobe Marketing Cloud offering, and in Q3, we achieved Adobe Marketing Cloud revenue of $255 million, representing year-over-year growth of 28%. Excluding the $6 million of Neolane revenue, year-over-year growth was 25%. Mobile device use continues to be a driver in our Digital Marketing business. Mobile transactions increased to 28%, up from 26% 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. Our growth is driven through new customer acquisition as well as increased annualized revenue per customer. The addition of Neolane represents our sixth solution and enhances our ability to drive larger customer engagements. The second component of our Digital Marketing segment is revenue from the LiveCycle and Connect businesses. LiveCycle and Connect contributed $57 million in Q3 revenue, which was consistent with our expectations. Print and Publishing was down quarter-over-quarter as expected. This was driven primarily by an increase in ETLA adoption for some of the products in this segment, with revenue being recognized over time as opposed to upfront. Geographically, we experienced stable demand across our major geographies. From a currency perspective, quarter-over-quarter FX rate changes had a $2.6 million negative impact on reported revenue. Hedging gains contributed $10.5 million to revenue in Q3 FY '13 versus $15.3 million in Q2 FY '13. Thus, the net sequential quarterly currency decrease to revenue considering hedging gains was $7.4 million. Year-over-year, FX rate changes had an $18 million negative impact on reported revenue. Comparing the $10.5 million in Q3 FY '13 hedging gains to the $7.7 million of hedging gains in Q3 FY '12, the net year-over-year currency decrease to revenue considering hedging gains was $15.2 million. In Q3, Adobe's effective tax rate was 11% on a GAAP basis and 21% on a non-GAAP basis. The GAAP rate was lower than targeted primarily due to tax benefits recognized as a result of the completion of certain income tax examinations. Employees at the end of Q3 totaled 12,035 versus 11,413 at the end of last quarter. The majority of the increase in headcount was due to the acquisition of Neolane. Our trade DSO was 48 days, which compares to 48 days in the year-ago quarter and 42 days last quarter. Ending deferred revenue in Q3 was a record $734 million. During the quarter, cash flow from operations was $216 million. Cash flow was lower than typical, primarily due to an income tax payment and the timing of enterprise billings. Our ending cash and short-term investment position was $3.16 billion compared to $3.87 billion at the end of Q2. The sequential decline was due to our acquisition of Neolane during the quarter and stock repurchases. In Q3, we repurchased approximately 7 million shares at a total cost of $326 million. Now I will discuss our targets for Q4. For the fourth quarter of fiscal 2013, we are targeting a revenue range of $1 billion to $1,050,000,000. This range includes an estimated $20 million of revenue from Neolane during the quarter. We expect total Digital Media ARR to be approximately $875 million exiting Q4, exceeding our prior FY '13 target of $800 million. This is based on adding slightly more Creative Cloud paid subscriptions than was achieved in Q3 and continued strength with ETLA adoption. Assuming the midpoint of our targeted Q4 revenue range, we expect Digital Media revenue to be down sequentially. In our Digital Marketing segment, we expect Adobe Marketing Cloud year-over-year revenue growth of approximately 35%. We expect LiveCycle and Connect revenue to be relatively flat quarter-over-quarter, and we expect Print and Publishing to decline slightly on a sequential basis. We are targeting our Q4 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 Q4 tax rate of 21% in Q4 on both a GAAP and a non-GAAP basis. These targets yield a Q4 GAAP earnings per share range of $0.09 to $0.15 per share and a Q4 non-GAAP earnings per share range of $0.28 to $0.34. We will provide FY '14 targets on our December earnings call, but we wanted to provide preliminary observations for next year as we enter Q4. Digital Marketing remains an explosive growth category, and we will continue to target strong revenue and bookings growth. In Digital Media, the transition to Creative Cloud is happening sooner than expected. While our multi-year targets remain unchanged, we expect increased Creative ARR in FY '14, with reduced perpetual revenue relative to what we communicated at MAX and May. I'd now like to turn the call back over to Mike.

Thanks, Mark. At Adobe, we are increasingly using blogs and social channels as a primary means to communicate important information. Investors and analysts who want to catch the latest Adobe news are encouraged to follow Adobe on Twitter, Facebook and YouTube and to frequently check Adobe's corporate blogs on blogs.adobe.com. In addition, tv.adobe.com is a great resource to learn more about Adobe's products and solutions and find new customer case studies. Our Investor Relations website provides easy access to these resources. 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 on our IR site later today. Alternatively, you can listen to a phone replay by calling (855) 859-2056, use conference ID number 42772158. 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, September 20, 2013. We would now be happy to take your questions. Operator?

[Operator Instructions] Your first question is from Walter Pritchard with Citigroup.

Mark, I'm wondering if -- just 2 questions about subscribers. I don't have access to the presentation here, but I didn't hear you update your goals for fiscal '15 around the number of subscribers, which I believe before was 4 million. And then secondarily, we're used to seeing an uptick from Q3 to Q4 in your perpetual business when it was that model exclusively. And I think you noted in the past, when you were setting expectations for this year, that you would expect to see a bump from Q3 to Q4 in terms of that, and now you're saying sort of relatively flat. And I'm wondering, did you sort of pull forward some of that demand that you expected incrementally in Q4? Or what else would account for a much more level sequential increase?

Sure, Walter. So a couple of things. On the Q3 to Q4 uptick for seasonality, to be honest with you, as we moved more and more to this ratable model through ETLAs and subscribers, that seasonality starts to get muted. And I think that's what you're seeing in our guidance. There's a little bit in there for digital marketing. Obviously, there'll be a bump in that business, but that's less seasonal. That's a SaaS-based model. But the typical seasonality, we're just not going to see like we used to in the perpetual business, especially as more and more people are moving off of perpetual on to the subscription model. In terms of FY '15, let me back up a minute and talk about '14 a little more, which will then kind of give you some color into '15 as well. As we said on the call, we've had a really successful move to subscriptions and ETLAs. And as Shantanu and I both articulated, customers are moving even sooner than we had anticipated. We've had success in the individual and team and the ETLAs. And as a result of that, we do see it as mix shift to greater ARR and less perpetual revenue. So what you see in Q3 and Q4 of this year is going to be representative of what you're going to see through the beginning of 2014. You're going to see a more rapid subscription and ETLA adoption. So there's going to be a quicker decline in reported perpetual revenue and then a steeper return in reported revenue as we ramp up the subscribers. We expected the Creative product family revenue is going to begin to increase sequentially by the middle of next year. And the health of the business through this transition, as we've said for a while now, is best measured by ARR. To your point on the FY '15 targets, our long-term targets are unchanged. For Creative, we still believe we'll hit 4 million subs by the end of 2015. We still believe we'll grow reported revenue on a CAGR of over 15% from '14 to '16. We still believe total Adobe revenue and earnings growth rose in '14 and beyond. So none of those long-term metrics have changed. Things are just happening faster, which is exactly what we want. The other thing to keep in mind on that 4 million target, as Shantanu alluded to the fact that some of the team subscribers are moving to ETLAs, and as a result of that, they don't show up in the subscriber count that we publish. So the 4 million would be bigger were it not for the fact that some team people are now moving to ETLAs, but we still are confident in the 4 million.

And just Walter, maybe a little bit more color on Q3 to Q4 transition. We do see strength in the pipeline as it relates to both Digital Marketing as well as enterprise ETLAs, which is why we've said Digital Marketing, we expect to grow 35% at the midpoint, and ETLAs also is a very healthy pipeline.

Your next question is from Peter Goldmacher with Cowen.

Just wanted to ask you a question on the competitive environment in the marketing cloud. Specifically, salesforce.com is making a lot of noise with the ExactTarget acquisition. Would love to hear your perspective on it, and how you guys intend to compete against it and what you think your competitive advantages are.

Sure. So Peter, I think you saw significant strength in our offering. There are multiple, I think, key differentiators as it relates to our solution, the first of which is both our data and our analytics platform have just significant market share. As I mentioned, the Adobe Experience Manager product is doing exceedingly well. Adobe Analytics continues to do well. And then when you add out all of the other solutions that we talked about, we do believe we have the most comprehensive offering in the market. As it relates specifically to email marketing, we think the bigger opportunity honestly is in multichannel campaign marketing. And again, there, with the acquisition of Neolane, we believe we have the strongest offering in the market. When you think about what people want, everybody is an individual. And at the end of the day, you want a campaign targeted at an individual, not just through email but also through all of the other channels that we talked about, including the web. So expect to continue to see us innovate in each of the solutions independently and across solutions. But we're really pretty confident that we'll continue to have the best offering in the market, and we're going to focus on it.

Your next question is from Jennifer Lowe with Morgan Stanley.

Shantanu, I just wanted to follow up on a comment that you made during your prepared remarks that you saw some customers you thought would be team users actually choosing ETLAs. What's sort of the dynamic driving that? And do you think that given that the 4 million target referenced earlier was a team plus individual piece, if ETLAs ends up being a bigger piece than -- of the mix than you previously thought, does that change your thinking around where that sub count number can go over time?

Well, Jennifer, what we had originally given on our numbers was based on the experience that we had with our perpetual offerings where individuals would buy shrink-wrapped software either through the channel or directly on Adobe.com. And enterprises would transact business with us through a variety of licensing mechanisms that we had: transaction licensing, which wasn't a commitment to buy further products from Adobe; or contractual licensing, which was a commitment to buy further products from Adobe. And we certainly had our internal estimates of -- for that licensing, whether people would move to the team option and just transact business with us on the website, or whether they would choose to actually have a contract with us through the enterprise term license agreement. What we are seeing is as a result of the comprehensive offering that we have for the Creative Cloud within enterprises and the integration with things that we have like digital asset management as well as the marketing cloud, the enterprise customers are actually choosing to transact business with us through the enterprise term license agreement, which is why both Mark and I wanted to make sure you all understood that the annualized recurring revenue, given it contains both the subscription performance as well as the ETLAs, is really a good proxy for the business. We expect to continue to see strength in individual, team as well as in enterprise, and that's why we continue to be confident of our long-term goals. But as Mark said, expect to continue to see that reflected in ARR as well.

And just to add on to that one last time, my point was we're not raising the 4 million. We're very confident in the 4 million. We're not raising it. It's just a little too early to do that. Plus, we have this effect of team moving over to ETLA in some cases.

Great. And maybe just one quick follow-up around the ETLA point. As you think about the Document Services business, and the ARR component there is also getting to be fairly large and a lot of that is tied to customers wanting more unified ETLAs. Is there a scenario where we could see Document Services go fully subscription at some point in time? How do you think about that business transitioning?

Well, today in Document Services, we actually have 3 different offers. We do offer customers the ability to have perpetual, and we continue to believe that, that will have a longer tail than in the Creative business because of the variety of customers. We do offer Document Services customers the ability to both get an ETLA, and we actually did see strength in the ETLA business for Document Services as well in the quarter. Having an aligned offering between Acrobat and Creative is actually useful for our sales force as they go into an enterprise because they can sell consistent ETLA across both. And just to clarify, an ETLA is a very standard deal for all of the deals that we're talking about. It's a 3-year deal, and we recognize revenue ratably across all of the 3 years. So what you're seeing in the annualized recurring revenue does not reflect the entire transaction value that we're actually getting from the customers. But I think to answer your question, we will continue to have Document Services in the current model, perpetual model for a longer period.

Your next question is from the line of Brent Thill with UBS.

Shantanu, on the marketing cloud, you're seeing acceleration in that business even when you strip out Neolane. And I'm just curious if you could just help walk through what -- why that acceleration just on a pure organic basis, and I had a quick follow-up for Mark.

I'd attribute it, Brent, to a couple of issues. The first issue is the awareness of our solution is certainly increasing. I think as the adoption of our various solutions is taking hold, we're certainly upselling to our customers. So we look at both new customer acquisition as well as within an existing customer, are we selling them increased solutions, and both of those are working. And I would say the comprehensiveness of our solution, I think we've done a good job as a team of adding to data and Analytics and Target and Social. And I think Adobe Campaign, also there's a lot of interest. And we're just executing. We're executing against both the platform that we're delivering to our customers, which is resonating with them, and we're executing on the field and marketing side.

And for Mark, just -- you mentioned you've surpassed the milestone on the recurring revenue, over 40% now. Is there a sense -- obviously, the majority of the business is going to go to subscription. So I would assume that you're looking at that metric over time still growing to be the majority of revenue. But is there any way you can frame how you think that, that will play out in the next couple of years?

I would say exactly what you said, frankly, Brent. It's just going to keep getting bigger and bigger as we drive more and more subscribers, as we drive more ETLAs and as we drive the Marketing Cloud business, which is primarily a SaaS-based business. I don't have an exact figure for you at this point, but it will just keep getting bigger.

The next question is from Ross MacMillan with Jefferies.

I wondered if you could just comment on what you're seeing in terms of renewal rates from those customers that adopted early last year on promotional pricing. And as you start to see those customers come up for renewal, is it in keeping with your 20% type churn? Or do you think you're tracking better or worse than that?

So Ross, just to clarify, the subs exit number that we talk about, 1,031,000 in this particular quarter, it is net of attrition. Attrition is running lower than we had originally modeled, which I think is a good sign. And what we also find is that we introduce new offerings, whether it's team, enterprise, the new photography, that customers are migrating amongst these offerings. And so we're pleased so far with what we are seeing in terms of renewal rates. I do want to clarify that we also added the individual app option to the team offering, but that came in really late in the quarter. So this will really be the first quarter where people will also have the option for individual apps within the team offering.

That's helpful. And then maybe just to follow up, you're obviously seeing a lot of success with ETLAs and frankly, also Team Edition this quarter. I was curious, when you think about the individual subscribers, how big a driver was education in this quarter? Was it material? And I'm curious to get a sense for ARPU. You said it was pretty consistent. But I should imagine that the individual subscribers outside of team were maybe a little bit lower if education was strong. I'd love any color around that.

I'll take the first one, Ross, and then maybe Mark can add on ARPU. As it relates to the education segment, we are seeing adoption of the individual offering by students across various categories, so that's good. We're also seeing strength, frankly, in the ETLAs where entire universities are adopting the Creative Cloud. So education, as you would expect in Q3, is one of the drivers of the Creative Cloud subscriptions.

And on the ARPU, Ross, on the individual and the education side with the promos that we have in place, that's going to pull the ARPU average down. But what you've seen is through the strength of team, which is what we always anticipated in the model, that pulls the ARPU number back up, and that's why you see that ARPU has been holding up very nicely.

Your next question is from Heather Bellini with Goldman Sachs.

Great. I was wondering, Shantanu, if you could touch a little bit on Digital Marketing. You guys have put together a pretty comprehensive portfolio of products. And I'm just wondering if you can help shape the opportunity for customers to move from point products to a suite such as yours. And is there a way we can think about the type of uplift as customers maybe moving from just using, say, one of your solutions to taking on the full suite?

Yes, Heather, as I think we outlined at our Digital Marketing Summit, our big opportunity really is in getting customers to really [ph] adopt the entire digital marketing cloud, and I would say that's a work in progress. I mean, the real opportunity is when you're a platform for all of the digital marketing needs that a customer has, whether it's their marketing spend, whether it's their campaigns, whether it's their social presence, it should actually represent significant uplift for us in our Digital Marketing revenue because the average number of products that our Digital Marketing customer is using is still low. We made 2 big milestones in the quarter that we just finished in. Target had a brand-new user experience. And one of the things we're doing is in the product you actually have access and visibility to all of the other solutions. So we are making them integrated, much like we did with the Creative Suite of products. So while we're not quantifying exactly what the uplift could be, we definitely see it as an area of internal focus and external growth because the average number of products per enterprise customer, we can continue to grow that quite a bit.

Your next question is from Brad Zelnick with Macquarie Capital.

Shantanu, do you have any sense of how you're performing against your goals for driving Creative unit growth? And specifically, is there any data that speaks to the cloud offering better to penetrating certain geographies or converting casual pirates or even attracting version laggers?

So Brad, we continue to do research on that, and all of our research shows that we continue to drive both new users to the Creative Cloud platform. These are users who have never transacted business with us before. And so whether they are brand-new users or previously they pirated products, we see a meaningful number of people who are using and adopting the Creative Cloud. We also continue to see meaningful number of people who give us the feedback that if they did not have the Creative Cloud option, they would have chosen not to transact business with us in the quarter or the year. So on both those dimensions, we continue to make progress.

Sounds like it's working well. Just a follow-up-to Ross' question earlier. For the customer -- it's good to see that attrition is lower than you had baked into the model. But for the customers that don't renew, after storing all their content in your cloud and using the latest versions of your products, where are they going?

Well, Brad, I don't want to lose a single customer, and we're going to work on trying to keep all of those customers. We are seeing some migration where you may have individuals within an enterprise who tried out the individual offering, and then what happens is they actually move to the enterprise offering or the team offering. We will continue to make their assets available to them if they want to be on the free offering that we have. But it tends to be more of the monthly users, and I think what they are doing is primarily trying out the products and then hopefully, migrating to a more comprehensive version.

That makes sense. And just to be clear, if you see a customer go from a point product and step up into a suite, you're not counting that as churn, correct?

That's correct.

Your next question is from Kash Rangan with Merrill Lynch.

It sounds like the transition is going faster than expected. But 2 questions. One is at the Analyst Day, Mark, I think you gave us some disclosure of the number of licensees, the cumulative installed base of licensees, including point and suite was about 12.8 million. Now I'm going to ask you a provocative question. What is to stop Adobe from converting all of those licensees into subscribers business? Because if you could, you would end up being the largest -- one of the largest subscription revenue software companies. So thoughts on that. And second, since the discounted window expired, I'm wondering if your ARPU would actually start to go back up as you start to roll in regular prices for folks that were on promotion but are starting to renew as you said.

Thanks, Kash. Yes, You're exactly right. I mean, we do have 12 million out there in terms of the installed base. And the whole point of putting that slide up for you at Analyst Day was to show you that 4 million is not the end state. 4 million is a goal over the next few years. We fully believe that we will be able to drive much more than 4 million. But we wanted to put a marker out there for you in the short term to show you what we were striving towards. So we would certainly strive towards a lot more than 4 million subscribers. On the ARPU, you're also exactly right. As people renew outside of their promo for the first year, that will drive the individual ARPU up as well.

The next question is from Kirk Materne with Evercore.

It's actually Matt Williams in for Kirk. Most of our questions have been answered. But just wondering if you could provide a little bit more color on the initial customer reaction to Neolane and the marketing automation space in general. And I know you've talked about integration amongst some of the products, and maybe just kind of update us on your plans for integrating Neolane into the marketing cloud.

Sure, Matt. I -- Neolane had a scheduled conference that they had scheduled before we announced the acquisition of Neolane. And it was then absolute sellout standing room only because there was a lot of interest in what Adobe products would get integrated with Neolane. So I think the initial response from customers has been this is a no-brainer. It makes complete sense. If I can help with the orchestration of my campaign across social, which you've already had Adobe, and the web where you're a leader and now through email and voice and online and offline. So strategically, we've got very, very positive feedback. I think the next big step was earlier this month when we announced Adobe Campaign. So we've already done the hard work of rebranding the product, starting the integration, making it available as part of our user experience. So while it's work in progress, I think both the initial customer response as well as the initial integration, I think all goes well for that business.

Your next question is from the line of Mark Moerdler with AllianceBernstein.

Hey, this is Emily Chan dialing in for Mark. I'm wondering if you can talk a bit more about team version of the Creative Cloud now that we have the resellers also pushing this version, how much of a tailwind this has provided. And is that where you're seeing a lot of migration up to the ETLAs?

Team was very successful in the quarter that we just concluded. It was the first real full quarter of having team offering from the resellers, and so we're very pleased. While it's early, the results have been really encouraging. The ETLAs are happening primarily with the Adobe internal sales force. So the resellers are helping us with presenting the team offering to customers, but the ETLA is all with our internal sales force at this point. I will also say that Adobe.com is doing quite well as it relates to the team offering. In other words, a number of the teams find that they may come to Adobe.com and the process for sign-up is quite easy. And so people are using Adobe.com also as a channel, not just for the individual product, but also for the team product.

Your next question is from the line of Jay Vleeschhouwer with Griffin Securities.

Shantanu, Mark, I'd like to follow up on the earlier question about the opportunity for Document Services' recurring revenue, the ARR and ETLA there. If I'm not mistaken, in earlier calls, you suggested that a good part of the momentum in Doc Services' ETLA was due to EchoSign. So the question is, how do you see the opportunity for converting the large base of Acrobat, which is measured in the tens of millions of licenses historically far larger than the Creative base, and much of that through ETLA contracts historically? Do you see the potential for fairly substantial conversion of that historical base of Acrobat to recurrence and potentially getting perhaps multi 9-figure ARR out of that as well? Then I have a couple follow-ups.

So Jay, a couple of clarifications as well which you know, which is the current Document Services, in addition to EchoSign which is our digital signature solution, we also have offerings in order to enable people to create PDF, to take a PDF and save it out as Word or any other file format as well as the ability to do forms on the Acrobat.com site. In terms of reimagining Document Services to also take advantage of what's happening on mobile devices, to take advantage of the ubiquity of the Reader that we have, as well as provide new services to enable collaboration, clearly, that's in our strategic intent in order to be able to do that. I was answering the question in that I think Acrobat, we will continue to have perpetual for a longer period. But I do think we're seeing adoption of the Document Services by new customers. So both as a new customer acquisition as a growth category, you're absolutely right, as well as in ETLAs. We do think Document Services will see more ARR with new customers, with ETLAs and with the new services that we are providing.

Jay, how about one follow-up?

And on Creative, how were you thinking about the opportunity for single app adoption? Historically, in the olden days, you would sell perhaps a few hundred thousand new licenses stand-alone of Photoshop, not counting CS. It looks like you're at about that pace now for non-full Creative Cloud adoption. Do you think that you could have a multiple of your former volume business be installed as single app kind of subscription?

Jay, it was important to us strategically to make sure that we had the single app subscription offer for teams because then teams really have the flexibility to choose. But make no mistake, it's our goal that hopefully, the teams would actually subscribe to the entire team offering, and that really is our goal. So much like for the individuals, while we offer individual products, we're really focused on getting creators to adopt the entire Creative Cloud offering. Our goal would be to do the same, which is offer the individuals. And in many cases, whether it's Photoshop or Illustrator or InDesign, there may be customers who only want individual products. But our goal, even with the team, is to have them subscribe to the entire offering.

The last question is from Steve Ashley with Robert W. Baird. Chaitanya Yaramada - Robert W. Baird & Co. Incorporated, Research Division: This is Chaitanya Yaramada sitting in for Steve Ashley. I just wanted to go back to your comments around FY '14 color around revenue, and just wanted to confirm that you said you expect Creative revenue to grow sequentially starting mid next year. And so I was wondering if it's possible that full year Creative revenue could be down year-over-year for FY '14.

We still expect that full year Creative revenue would be up. It isn't likely up much, but it should be up next year, full year. Chaitanya Yaramada - Robert W. Baird & Co. Incorporated, Research Division: Okay. Great. And then on the Creative transaction growth, just was wondering if you could give us an update on where we are with -- given that you've outperformed on the subscription side.

I'm sorry, I don't think we understood your question. Chaitanya Yaramada - Robert W. Baird & Co. Incorporated, Research Division: I'm sorry. Just the combined license plus subscription transaction growth?

Units? So yes, if you mean total units for both perpetual and subscription, as Shantanu mentioned, we do see growth this year in total units.

Well, thank you all, again, for joining us today. I think we identified 2 growth initiatives for Adobe, which was reimagining the Creative process, leveraging the desktop, mobile apps and cloud. And it's really gratifying to see the accelerated adoption for our Creative Cloud, which is measured both by the number of subscriptions, as well as annualized recurring revenue. And surpassing 1 million subscribers was a big milestone for the company. The second growth, as well, initiative in digital marketing, which we continue to believe is an explosive growth category, growing that business 28% and successfully adding to our market-leading Adobe Marketing Cloud offering through the acquisition of Neolane was a significant milestone in the quarter. So thank you, again, for joining us, and we look forward to chatting with you soon.

And this concludes our call today. Thanks for joining.