Adobe Inc. (ADBE) Q4 2014 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. I would like to welcome you to the Adobe Systems Fourth Quarter Fiscal Year 2014 Earnings Conference Call. [Operator Instructions] Thank you. I would like to now turn the call over to 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 Fourth Quarter and Fiscal Year 2014 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 posted PDFs of our earnings call prepared remarks and slides, our financial targets and an updated investor data sheet 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 in this call, particularly our revenue, subscription and operating model targets, and our forward-looking product plans, is based on information as of today, December 11, 2014, and contains forward-looking statements that involve risks 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 on 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 webcast live in Adobe Connect, and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe's Investor Relations website for approximately 45 days, and is the property of Adobe. The call audio and the webcast 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.

FY '14 was an outstanding year. Our achievements included better-than-expected Digital Media ARR and subscriptions, strong bookings growth for Adobe Marketing Cloud, broad industry recognition of our product leadership, and great progress in growing and deepening our customer relationships. In Q4, we delivered revenue of $1.07 billion, contributing to total revenue of $4.15 billion in FY '14. In Digital Media, Creative Cloud continued its strong performance. As of the end of Q4, Creative Cloud adoption grew by more than 644,000 to over 3.45 million subscriptions, significantly exceeding our annual target. Subscription growth was fueled by continued movement of the Creative Suite installed base to Creative Cloud as well as the addition of customers that are new to Adobe creative products. We saw strength across all our offerings: Creative Cloud Complete, Creative Cloud for teams in the channel and on Adobe.com, Creative Cloud Single App and the Creative Cloud Photography bundle. Creative Cloud innovation continues to accelerate. At MAX, we unveiled another major update to Creative Cloud, which includes significant new versions of CC desktop tools, a new family of complementary mobile apps, touch support for Microsoft Windows 8 and Surface Pro 3, and the new Creative Profile, which connects creatives to their work, assets and communities. We made significant strides in realizing our vision for Creative Cloud as much more than desktop tools. The Behance creative community continues to thrive, growing to over 4 million members. We launched a public beta of a Creative SDK that enables the delivery of third-party mobile apps that connect to Creative Cloud. This move comes on the heels of our September announcement when we acquired Aviary, a developer of mobile SDKs for the delivery of creative apps. At MAX, we launched Creative Talent Search, a service that connects creatives around the world with job opportunities. This was the first step in making Creative Cloud a true marketplace for the creative community. Today, we took another major step in expanding the marketplace with the announcement of our intention to acquire privately held Fotolia, a leading service for creatives to buy and sell photos, graphics and video. Stock content is critical for creatives and is a large and fast-growing multibillion-dollar market. Once closed, we intend to integrate Fotolia into Creative Cloud, resulting in higher ARPU and increased revenue. We also plan to continue to operate Fotolia as a standalone stock content service. Creative Cloud has become the preeminent destination for creatives, transforming how they find inspiration and deliver their best work. The Document Services business continues to grow. PDF and Acrobat remain the de facto standards for document creation and collaboration. In fact, we have more than 1 billion cumulative downloads of Reader on desktop and mobile. In FY '14, we drove strong year-over-year and sequential growth in Document Services ARR, primarily due to strength in the adoption of Acrobat ETLAs and subscriptions. We have introduced new mobile and cloud capabilities to increase usage of our document creation, sharing and EchoSign electronic signature services. We have permission to expand our footprint and extend our brand in these areas, and are excited about a major update in the first half of FY '15. Across our Creative and Document Services businesses, total Digital Media ARR grew to $1.95 billion at the end of FY '14. In Digital Marketing, we achieved record Adobe Marketing Cloud bookings in Q4 and we were well ahead of our 30% annual growth target. Reported revenue for Adobe Marketing Cloud in Q4 was $330 million. We continued to deliver significant innovation in Adobe Marketing Cloud during Q4. Mobile is a key focus area for us, and we launched new mobile functionality across Adobe Marketing Cloud in 2014. Last month, we introduced new intelligent location marketing features, allowing companies to reach their customers with targeted content based on a user's proximity to iBeacons. In October, we released cross-device targeting and personalization capabilities via Adobe AudienceManager. With these capabilities, marketers now have the tools to profile which individuals in a household are consuming content on a connected device at any given moment. In the video space, we announced the availability of Adobe Primetime Digital Rights Management across mobile apps on connected devices and via HTML5 on major web browsers. We continue to drive large-scale engagements with Adobe Marketing Cloud customers. Big deals in Q4 included Ford, FedEx, MasterCard, Morgan Stanley, QVC, Commonwealth of Pennsylvania and U.S. Department of Veterans Affairs. Adobe Experience Manager and Adobe Analytics are our unique differentiators and continue to be the foundation of our growth. Adobe Target and Adobe Media Optimizer solutions had strong results in Q4. One of the best performing solutions in Q4 was Adobe Campaign, which came from our acquisition of Neolane last year. This is another proof point of our success in integrating acquisitions to effectively expand our offerings to customers. Adobe Primetime, which brings TV to every IP-connected screen, is gaining traction among both programmers and operators in the fast-growing online video market. In October, we announced an alliance with Nielsen to deliver the industry's first comprehensive, cross-platform system for measuring online TV, video and other digital content across the web and apps. Both companies will jointly market Nielsen's Digital Content Ratings, Powered by Adobe, which will give customers comparable metrics to measure audiences accurately and consistently across every major IP device, including desktops, smartphones, tablets, game consoles and over-the-top boxes. The Nielsen alliance builds on other Adobe Marketing Cloud strategic partnerships announced earlier this year, including our relationship with advertising giant Publicis. With over 30 trillion data transactions measured annually by Adobe Marketing Cloud, we're in a unique position to predict and report on major retail and consumer trends. Through our Adobe Digital Index report, we recently tracked Black Friday and Cyber Monday online sales. Our prediction came within 1% of the nearly $6.4 billion spent online, and 22% year-over-year growth versus 2013. Another interesting statistic was that over 1/4 of Thanksgiving Day and Black Friday online sales were transacted on a mobile device. Press coverage of our holiday reports was extensive across online, print and broadcast channels. Adobe Marketing Cloud continued to be recognized as the leader in numerous industry analyst reports. This quarter, new recognition includes: we were named the leader in the first-ever Forrester Wave report, evaluating the most significant marketing cloud vendors. Adobe Marketing Cloud was positioned highest in current offering, strategy and market presence; and Adobe Experience Manager was recognized as a leader in the 2014 Gartner Magic Quadrant for Web Content Management report. Adobe was positioned highest in ability to execute and placed strongly in completeness of vision. Our strong results in 2014 represent the collective efforts of our employees around the world. Creative Cloud has become the preeminent destination for millions of creatives, and we are delivering more value every day. The Fotolia acquisition gives us yet another opportunity to grow Creative Cloud revenue and tighten our bond with the creative community. Adobe Marketing Cloud continues to lead in the fast-growing digital marketing category and we're seeing strong partner and customer momentum. And we're shaping new opportunities for our Document Services business. All of this positions us well for another strong year in 2015. Mark?

Our earnings report today covers both Q4 and fiscal year 2014 results. In FY '14, Adobe achieved annual revenue of $4,147,000,000. GAAP EPS was $0.50 and non-GAAP EPS was $1.29. All of these results were well ahead of the annual targets we provided entering the year. These numbers are a result of strong execution against our strategy, and from some noteworthy achievements during the year. In FY '14, we reported Digital Media segment revenue of $2.6 billion, ahead of our target of $2.5 billion that we communicated last December. More importantly, we built Digital Media ARR to a total of $1.95 billion exiting the year, which was nearly $100 million higher than the annual target we provided last year. Helping to drive this was 3.45 million Creative Cloud subscriptions exiting the year, more than 400,000 higher than the target we provided a year ago. In Digital Marketing, we drove record Adobe Marketing Cloud bookings well above our target of 30% growth for the year. As we outlined in September, reported revenue for Adobe Marketing Cloud was impacted by the faster-than-anticipated transition of Adobe Experience Manager and Adobe Campaign to a subscription-based revenue model this year. Were it not for the quicker shift to ratable revenue, Adobe Marketing Cloud revenue would have grown 21%, above our original target of 20% annual revenue growth in the year. Other financial highlights during the year include growing deferred revenue to a record $1.16 billion and increasing our unbilled backlog to approximately $1.74 billion exiting the year; together, this represents nearly $3 billion of contracted revenue that will be recognized over time; and returning nearly $700 million in cash to stockholders through our stock repurchase program. In the fourth quarter of FY '14, Adobe achieved revenue of $1,073,000,000, at the high end of our targeted range. GAAP diluted earnings per share in Q4 were $0.14, and non-GAAP diluted earnings per share were $0.36. Highlights in our fourth quarter include driving strong adoption of Creative Cloud across all offerings: individual, team and enterprise; growing Adobe Marketing Cloud bookings well ahead of our target; managing expenses to deliver upside on earnings per share; achieving $400 million in operating cash flow; and exiting Q4 with 66% recurring revenue. In Q4 of last year, the percentage was 44% and in Q4 of fiscal 2012 it was 27%. In Digital Media, we achieved revenue of $649 million. This segment has 2 major components of revenue: our Creative family of products and our Document Services products. In our Creative business, adoption of Creative Cloud accelerated significantly quarter-over-quarter. We exited Q4 with 3,454,000 Creative Cloud subscriptions. Adoption across all Creative Cloud offerings grew quarter-on-quarter. Retention of Creative Cloud subscriptions, including renewals after promotional pricing expiration, continues to track ahead of our initial projections. Average revenue per user, or ARPU, within each of our Creative Cloud offerings maintained steady levels consistent with results over the past year. Blended ARPU across all Creative Cloud offerings declined slightly as a result of the significant increase in new Single App subscriptions. It is important to note that the unit mix between Creative Suites and individual point products in our perpetual offering was approximately 50-50. We are excited that adoption of Single Apps and the Creative Cloud Photography plan is expanding our market opportunity. During this growth phase, we fully anticipate the percentage of Single App subscriptions will continue to grow. This strategy is driving higher ARR and revenue, and creates the opportunity to drive even higher revenue through ARPU-enhancing services. Adoption of Creative Cloud for teams accelerated in Q4, with momentum in both the channel as well as on Adobe.com. Our success with individual and team subscriptions, and enterprise term license agreements, or ETLAs, helped to drive Creative ARR to a total of $1.68 billion exiting Q4 at constant currency from December of 2013, an increase of $272 million quarter-over-quarter. In Document Services, we achieved revenue of $197 million in Q4. Revenue declined slightly quarter-over-quarter, offset by strong growth in ARR. Strong adoption of Acrobat ETLAs, subscriptions, and cloud services including EchoSign helped to grow Document Services ARR to $271 million exiting Q4 at constant currency rates, a $54 million sequential increase over Q3. In our Digital Marketing segment, there are 2 components. The first is revenue from our Adobe Marketing Cloud offering, and our momentum as the leader in this market continued. We achieved revenue of $330 million in Q4. More importantly, we drove record bookings that put us ahead of our goal of 30% bookings growth for the year. Our Adobe Marketing Cloud success is being driven by an increase in the size of transactions, number of solutions per customer, international expansion and growth in partner-driven business. Adobe Analytics, Experience Manager, Campaign, Target and Media Optimizer all had strong bookings which sets us up nicely for FY '15. The mix of Adobe Experience Manager and Campaign that was ratable versus perpetual revenue grew to approximately 75% for the year. As you recall, we explained in September, our target for that mix entering the year was approximately 60%. Were it not for this incremental shift of approximately $60 million of revenue to ratable with these 2 solutions, we would have achieved 21% Marketing Cloud revenue growth for the year. The growth rate would have been greater than 25% for the year if no shift at all had occurred, and we are reiterating our 25% Marketing Cloud revenue CAGR. The second component of our Digital Marketing segment is revenue from the LiveCycle and Connect businesses, which contributed $44 million in Q4 revenue, consistent with our expectations. Print and Publishing segment revenue was $50 million in Q4. Geographically, we experienced stable demand across our major geographies, and we saw increased adoption of Creative Cloud subscriptions in Japan. Asia as a percent of total revenue remains lower given Creative Cloud and Marketing Cloud adoption trails other geographies. From a quarter-over-quarter currency perspective, FX decreased revenue by $11.7 million. We had $12.2 million in hedge gains in Q4 FY '14 versus $1.1 million in hedge gains in Q3 FY '14, thus the net sequential currency decrease to revenue considering hedging gains was $0.6 million. From a year-over-year currency perspective, FX decreased revenue by $8.8 million. We had $12.2 million in hedge gains in Q4 FY '14 versus $3.1 million in hedge gains in Q4 FY '13, thus the net year-over-year currency increase to revenue considering hedging gains was $0.3 million. In Q4, Adobe's effective tax rate was 21% on both a GAAP and non-GAAP basis. The GAAP rate was lower than targeted primarily due to stronger-than-forecasted profits outside the U.S. Employees at the end of Q4 totaled 12,499 versus 12,368 at the end of last quarter. Our trade DSO was 50 days, which compares to 52 days in the year-ago quarter and 48 days last quarter. Cash flow from operations was $400 million in the quarter. Our ending cash and short-term investment position was $3.74 billion compared to $3.52 billion at the end of Q3. In Q4 FY '14, we repurchased approximately 1.8 million shares at a total cost of $127 million. For the year, we repurchased 10.9 million shares at a total cost of $689 million. Now I would like to go over the acquisition announcement we made today, as well as provide our financial outlook. Today, we announced a definitive agreement to acquire privately held Fotolia in an all-cash transaction of $800 million. We expect it to close in the second half of Q1 and add approximately $75 million in FY '15 revenue, net of purchase accounting adjustments. We believe this transaction will be neutral to non-GAAP earnings in FY '15 and accretive in FY '16. At this time, we cannot estimate the impact to earnings on a GAAP basis. Fotolia is a U.S.-based company, so we're primarily using onshore cash for the transaction. The bulk of their operations and business are in Europe, and we intend to invest in the business during the year to drive broader global adoption of their services, particularly in the U.S. We see significant synergies over time with Fotolia and our Creative Cloud offering, in what is a large and fast-growing market. Turning to our financial outlook. The targets we are providing today reflect current currency rates and exclude any benefit or impact from the announced acquisition of Fotolia. We are happy to report we are either on track or are ahead of key long-term goals we set a year ago. Consistent with our target of approximately 20% compound annual revenue growth between FY '14 and FY '16, we are targeting total revenue of approximately $4.85 billion in FY '15. We expect GAAP earnings per share of $1.20 and non-GAAP earnings per share of $2.05, which is ahead of the target we provided a year ago. As we've mentioned before, we will adjust ARR on an annual basis to reflect any material FX changes. Our FY '14 exiting Digital Media ARR of $1.947 billion was based on December 2013 FX rates. We've revalued that ARR amount based on December 2014 FX rates, and this has led to an updated ARR of $1.875 billion, which is approximately $72 million lower entering FY '15. In Digital Media, we remain on track to drive a revenue CAGR of 20% between FY '14 and FY '16, supported by strong growth in ARR and the subscription adoption we've driven. In FY '15, we expect to grow ARR by greater than 50% from $1.875 billion to approximately $2.9 billion by year end. We expect to grow total subscriptions by approximately 70% year-over-year and exit the year with approximately 5.9 million subscriptions. We also expect continued ETLA adoption during the year. In Digital Marketing, we have strong momentum with Adobe Marketing Cloud bookings. We expect to continue to drive annual bookings growth of 30%, with annual reported revenue growth of approximately 25% in FY '15. Both are consistent with our long-term targets. During FY '15, we anticipate revenue and earnings will grow sequentially every quarter during the year. Given strong adoption in Q4 and normal seasonality in Q1, we expect net new Creative Cloud subscriptions will decline in Q1 when compared to the 644,000 we added in Q4, and then grow sequentially in the second, third and fourth quarters. We expect Digital Media ARR to follow the same trend. In Digital Media, we expect creative revenue to grow significantly year-over-year. We are targeting Document Services revenue to grow slightly year-over-year. We also expect annual revenue for LiveCycle and Connect, and for Print and Publishing, to decline slightly year-over-year. Quarterly Adobe Marketing Cloud bookings and reported revenue should also follow normal seasonality during the year. In Q1 of FY '15, we are targeting a revenue range of $1,050,000,000 to $1,100,000,000. Again, this excludes the expected benefit of adding Fotolia during the quarter. We expect Digital Media segment revenue to grow sequentially in Q1. Within Digital Media, we expect Creative revenue to grow sequentially, with Document Services revenue declining slightly. In Digital Marketing, we are targeting Q1 Adobe Marketing Cloud revenue to decline on a sequential basis and grow on a year-over-year basis. We expect combined revenue with LiveCycle and Connect to decline sequentially. We also expect Print and Publishing segment revenue to decline. We are targeting our Q1 share count to be 508 million to 510 million shares. We are targeting net nonoperating expense to be between $12 million and $14 million on both a GAAP and non-GAAP basis. We are targeting a Q1 tax rate of 25% to 27% on a GAAP and 21% on a non-GAAP basis. These targets yield a Q1 GAAP earnings per share range of $0.14 to $0.20 per share, and a Q1 non-GAAP earnings per share range of $0.34 to $0.40. In summary, 2014 was a great year. With multiple growth opportunities and category-leading products, we are poised to see strong revenue and earnings growth in the coming years. Mike?

Dates for our Digital Marketing Summit in Salt Lake City have been announced and registration is now open. The opening day keynote will be on the morning of Tuesday, March 10, and we are once again providing special pricing for financial analysts and investors to attend. We will send out a formal invitation in January. But in the meantime, if you'd like to register, you can contact Adobe Investor Relations by e-mailing ir@adobe.com for registration information. For those who wish to listen to a playback of today's conference call, a web-based 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 39655431. International callers should dial (404) 537-3406. The phone playback service will be available beginning at 5 p.m. Pacific Time today and ending at 10 a.m. Pacific Time on Tuesday, December 16, 2014. We would now be happy to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of Brad Zelnick from Jefferies.

Can you please just talk a bit about the evidence that you're seeing Digital Marketing and Digital Media categories driving demand for one another? And maybe if you could share trends in the percentage of enterprise deals that include solutions from both sides of Adobe.

Sure. Thanks, Brad, first, on your comment on the quarter. We were certainly pleased with what we accomplished in Q4. With respect to joint deals that we are seeing that's primarily with the ETLAs as well as the Digital Marketing bookings that we are seeing, and it actually is across most segments, Brad. In the publishing space for sure, people are using our digital creation tools as well as our infrastructure tools. We're seeing a fair amount in retail as people are trying to create campaigns. We've talked about companies like Under Armour who are using all of our products. We're seeing that in video, as people are using both Primetime, as well as Creative Cloud, Premiere, as well as our digital marketing products like Primetime. And so I think across the board, while we might lead with CC ETLA and then go in with Digital Marketing or might go in with Digital Marketing and then come back to a CC ETLA. And at the end of the day, I mean, more marketing is moving online. And I think our sales force goes in with a one Adobe [ph] story. Clearly, DPS is another area where we're seeing synergy between the 2 businesses, and now what we have with PhoneGap Enterprise.

It's definitely working. Just one more follow-up, if I may. Last quarter, you noted about 20% of CC users were new to the franchise. Are there any directional updates on this? I know it's only one quarter since when we think about the mix. And can you maybe comment on any thoughts you might have on where this can go as you penetrate into new geographies and perhaps capture some of the opportunity on piracy?

Well, 2 thoughts there, Brad. The first is, while we don't do the surveys every quarter, certainly given the strength that we saw in Q4, we are confident that we are continuing to attract new customers to the platform. What was really nice about Q4 was we actually saw strength across every single offering in all the geographies. You correctly point out that we are still focused primarily on developed markets and we continue to think that emerging markets is an opportunity over time with differential pricing and products. But at this point, I would say, we are still just combating casual piracy in developed markets and really attracting new customers. One thing I will mention also is that one of the offerings that we added in Q4 was the team offering on Adobe.com did not have the Single App option. And so allowing that just enables teams to be more collaborative, and so team had a good showing in Q4 as well.

Your next question comes from the line of Brent Thill from UBS.

Shantanu, just on the acquisition. I'm just curious if you could walk through the revenue model. Just casually going through the site, looks like you can pick up stock photos for single dollars or videos for high single digits. How does the revenue model work for Fotolia?

Sure. So, Brent, I mean the big picture is that with Creative Cloud continuing to become the preeminent destination for creatives, all our surveys show that our customers of our creative tools are the primary purchasers of stock content, creative assets that exist. I would look at Fotolia today and really their presence is more in Europe. In the U.S., they have attempted to come in with an offering that is aimed at beyond the creative professionals. The sweet spot for us is with the creative professional community, we think all the millions of creative professionals will be people who will acquire these products. And I think the offerings will look like an on-demand offering where people who have need for a specific content can go online and find and search it. We will have subscription offerings which exist as a standalone service, which allow people to just subscribe and get a certain number of stock content on the frequency that they want. And as you can imagine, once we are closed, I think we have opportunities to also offer our desktop products in conjunction with the subscription offering of our stock content. So I think we see a lot of options. And what that should result in is, first, more stickiness with our creative community because they have a one-stop shop for talent search, buying stock as well as the creative tools. And that should hopefully result in increased revenue and increased ARPU.

Okay. And real quickly, on the Marketing Cloud, you highlighted a handful of big deals in that campaign. It was one of the best performers inside this suite. Can you maybe just bring us up to speed in terms of what you're seeing in terms of the deal sizes? Are you seeing a nice improvement as, back to your original comments, they're taking more of the suite? Any color to help us understand the direction of the Marketing Cloud on pricing would be really helpful.

Yes, we didn't update this time, Brent, the number of large deals, million-dollar deals. I know we've updated that in the past. But when you drive record bookings, you're certainly driving it at a more strategic level with adoption of multiple solutions. We highlighted Campaign because we've always believed that campaign orchestration was important. We are winning a number of deals of what was traditionally e-mail service provider accounts with Campaign, so I wanted to make sure that we highlighted that in the quarter. But it's a spectrum. I mean, we have really large deals that we are seeing from customers at the CMO, CEO level.

Your next question comes from the line of Walter Pritchard from Citi.

I'm wondering if you could, Mark, just give us a little bit more detail on the mix of versions -- or not versions, but point versus suite. You talked about, in your perpetual business, a 50-50 mix. Did you throw that out there to sort of point us to that's where it is today? Or is that where you think it'll be in '15? Or just trying to get a sense of how we should be thinking about where it is right now. Because you've provided that the last -- I guess since you've started undergoing the transition, and then, how we should think about that in the future.

Yes, I think the most important thing to remember is that this is right on strategy. The idea of selling more single apps, especially as it relates to driving a higher market opportunity and attracting new users, and that's working really, really well. So what you see in subs, what you see in ARR is a result of driving new users to the platform, which we would not have been able to do without these single apps. The mix was really just to show you that what's happening is not terribly different from what you saw under the suite model with the Perpetual offering. We're not saying that it's ultimately going to settle in at 50-50, but it's certainly going that direction. And you can see that in the mix this quarter. If you do the math on the mix this quarter, you'll see that it's roughly 50-50 in terms of the net new adds this quarter. So we had really good uptick in the full units this quarter, but we also had a nice increase in the single app. And that's right on strategy.

And also, overall, we are convinced that it is increasing the total available market, and we continue to see, as people adopt the individual app and they get familiar with our products, it represents an opportunity for them to migrate up to Creative Cloud Complete.

Got it. So just actually, that was, Shantanu, the follow-up I had for you. We did some survey work just a little bit ago, and one thing we noted is there was a high intention from point product customers to upgrade to suite. Some short term, some over time. Can you talk about -- it hasn't been that long that you've had the point product out, but it's been -- some of those folks are -- were renewing in the quarter. Can you talk about sort of any color on how many of those renewed to the full suite from the point?

Well, what we said, I think, in the prepared remarks was that retention continues to be ahead of our internal expectations. And while we continue to have pricing that's promotional in nature to get customers to migrate from CS to Creative Cloud when they, then, continue to stay on the platform, they are actually -- the retention is at the higher price points. So we're happy about that. We have become really good by using our own digital marketing products, Walter, in terms of the pipeline. So while I have numbers, everything, from new trial users, how many are overlapping with Behance, how we are seeing them going through the funnel in terms of usage. It was such a strong quarter across all elements: new customer acquisitions, upgrades, retention and team. We were really pleased. And I think, if we take a step back, it just reflects. First, we're continuing to deliver significant product value for the customers. They're seeing that innovation, things like Touch that we delivered in the quarter; second, the sole focus on all routes-to-market on the Creative Cloud is certainly helping. There isn't perpetual anymore in the channel. And I think, third is we're just getting better at dealing with this consumer marketing funnel in the business unit.

Your next question comes from the line of Mark Moerdler of Sanford Bernstein.

So I got 2 quick questions. The first one is you have subs increasing next year from 3.5 million to 5.9 million, which is a 71% increase in subs year-over-year, but you have ARR in Digital Media increasing over 50%. Can you give us some color maybe, Mark, on the -- what the disconnect is? Is it ETLAs growing slower or Document Services ARR growing slower? What -- how should we think about that?

Yes, I don't you should think about it as ETLA growing slower. I think you should think about 2 things, Mark. One is the $1 billion increase reflects new FX rates, right? So there is a fairly significant, as you know, from every company, change in FX, and that has a chunk of it in there. Plus, as we were just talking about with Walter's question, we are seeing more single app to acquire new customers and expand the market. And I think it's primarily those 2 things. I don't think you should read anything into that in respect of anything slowing down.

Okay. And then as a second question, can you give us a sense in terms of digital marketing, whether -- and you talked a little bit about it, but in terms of how much of the mix of the growth is coming from expansion into the existing customers versus sales to new customers.

It's across the board, honestly. I mean, we're seeing new logos coming into the platform. I think we highlighted some of the key customers. But without a doubt, within existing customers as well. If they were an analytics customer, they are continuously looking at the Experience Manager. If they're using both of those. Campaign, which was such a strong showing in the quarter, is certainly seeing more adoption within Analytics and Experience Manager. And I think what we said at our prior call is we're seeing something like 74% growth in customers with 3-plus solution products. This was the data that we had provided at MAX. So I mean, that continues to be the case, and we're seeing the ARR of customers with 3-plus solution products in the millions.

Your next question comes from the line of Kash Rangan from Merrill Lynch.

It looks like you're well on track to hit about 6 million subs by the end of next year, which relative to the TAM that you laid out, I think, in the spring of last year, Mark or Shantanu, is roughly about 50%, a little bit less than 50%. The question for you, Shantanu, is are we in the second innings of a cricket game or second innings of a baseball game? And depending upon how you're going to answer the question, I'd like to also find out, if it is indeed a baseball game, how much larger can the TAM be? Especially because when I look at the upside of this quarter, even if you didn't have a positive deviations in the point solutions, you would have still had a very good quarter, just with the full suite lot. It looks like you're expanding the TAM but I don't want to get too ahead of myself. If you can just put it in context, that will be very appreciated.

Well, first, for the sports fans on the call. Baseball, having 9 innings, we certainly believe that we're definitely in the second innings of a 9-inning game rather than a 2-inning game, Kash. So we continue to think there's significant upside. I think we provided the numbers on the number of Creative Suite perpetual products and licenses that we've delivered. As you can see from our numbers, there's significant headroom. I think you are continuing to see, as we have said, new customers being attracted to the platform. And if I take a step back, we're actually executing against everything we laid out 3 or 4 years ago. We're continuing to migrate customers and demonstrate value and drive customer satisfaction to be higher. We are adding new customers, the Individual apps are certainly attracting new customers to the platform. And the ARPU-enhancing services, things like Fotolia, I think, we're really excited about how that also, not only keeps the current customers on the Creative Cloud, but that it also brings people who may be laggards onto the Creative Cloud, because it just demonstrates more value that we're going to be providing. So I think Mark's numbers reflect why we continue to be really enthusiastic about this business in '15 and beyond.

Wonderful. And on the Fotolia side, to the extent that you know this information, how many subscribers do they have? How many of them are CC or CS users already? And what is the rough potential for cross-selling the core Creative Cloud family to the Fotolia user base, and vice versa? Anything, any color commentary. Qualitative would be fine. I understand that you may not be able to share numbers, because the deal's not closed yet.

Well, Kash, we did surveys of our creative professionals. And I would say, the vast majority of creative professionals that exist globally are customers of stock content. So I first want to -- in terms of the available market opportunity, it's important to remember that we believe that every single creative professional is a customer of Fotolia. The other thing we actually find is that a number of marketers are the people who actually buy this stock content to use in campaigns or put on websites. So the customer base for Fotolia actually extends beyond the creative professional as well as the marketer to, also, consumer hobbyists. As we look at the numbers right now, and it's really early with Fotolia, we certainly think that getting access to Fotolia content to every one of our creative professionals is the opportunity that we have. There's a high overlap, clearly, of the Fotolia customers who are already Creative Suite or Creative Cloud customers, but we can package it and provide a lot more value as we move down this path.

Your next question comes from the line of Ross MacMillan from RBC Capital Markets.

Two questions, if I could. Just first on operating expense growth. That's been really impressive this year in the sense that it's been very low. I think 3% for the year, 1% in the quarter. And if I look on a sort of trailing 3-year [ph] basis, I think OpEx grew something more like 8%, on average, over the last 3 [ph] years. So I'm just curious, either Shantanu or Mark, is this sort of lower trajectory of operating growth sustainable? Could you maybe just provide some color?

Hey, Ross. It's Mark. Yes. I mean, I think the bottom line is we really felt it was important to drive earnings leverage back into the model as revenue starts to come back, since we're through this transition now. And that's what you're seeing both in FY '14 and especially in FY '15 as we move from $1.29 to $2.05 and then, to over $3. So earning starts to come back into the model in a big way. OpEx will increase, probably a little bit more than what you've seen recently, and that's obvious for you guys to figure out as you do your revenue model and figure out what the OpEx is that'll drive that EPS. So the short answer is we've done a great job this year of containing costs and still hitting all of our targets. As we build out more and more of an enterprise sales force, you're going to see us invest more and more in sales and marketing. But it's all embedded in that $2.05 and over $3 in '16.

That's great. And then just a clarification for me. Mark, you commented that the unit mix between Suites and Point products in your perpetual offering was 50-50. I think my reference was going back to the Analyst Day in '13 when you described that installed base of Suites versus Point products of $12.8 million. And I think it was more like 2/3 Suites versus 1/3 Point products. Is there some kind of bridge there that I'm not seeing to connect the 50-50 with that sort of 2/3-1/3 mix?

Again, we'll go back and look at those numbers, Ross. I think, from a revenue point of view versus units point of view, there's a difference, clearly. And revenue was more towards Suites than it was towards Point products. But we'll get back to you on that one.

Your next question comes from the line of Kirk Materne from Evercore ISI.

I guess, maybe just first, Shantanu, you mentioned that when customers have come back to renew, they're renewing at a higher price than the promotional price they might have signed up on. I guess I just want to clarify that, that's correct. And I guess have you had any pushback from clients that maybe signed up on promotional? And I guess, how are you dealing with that in terms of making sure that they obviously still feel like they're getting the value? I guess, could you just give us some color on how that's been going? Because you obviously have a much bigger cohort renewing at this point this year versus, say, last year.

Sure. Well, just to clarify, the promotional pricing tends to be more on the CC Complete than it is the CC Photography. So the CC Photography, the pricing is now the permanent pricing. And what we were trying to do it was reflect that long-term customers of CS, if they had just bought CS6, they were entitled to promotional pricing for a year. And yes, I was saying that as they, then, retain or renew after a year, they are renewing. And I think the big reason for the renewal is they're seeing the amount of innovation that we're delivering. I mean, we've delivered over 1,000 features; we now have mobile apps that we've delivered, they're looking at the services like share and sync, what we're delivering with points. So again, continues to be incumbent on us to demonstrate the value of our Cloud Service by constantly providing new value to them.

Great. And then, just one for Mark. Mark, on the Digital Marketing side, obviously, in the back half of the year, you had a lot of sort of mix of Experience Manager and Campaign going more ratable. I guess, will that cause the actual revenue growth of digital marketing in 2015 to be a little bit more back-end loaded? Meaning, you'll still be going up against the sort of headwinds in the first half of the year? Or am I sort of overthinking that? Is the growth in bookings going to overcome that so it's -- you're perhaps not so much of a step function in the back half of the year than I might be assuming?

Yes, you're right. It isn't going to be a little bit more back-end loaded. You also have seasonality going from Q4 to Q1, as I said, in Digital Marketing. So you're going to have a lower Q1 than you did in Q4 but up year-over-year. But you're right. It's going to be a little bit more back-end loaded because of that mix shift that you saw from '14.

Your next question comes from the line of Brendan Barnicle from Pacific Crest Securities.

Shantanu, I wanted to follow up on the Marketing Cloud. Some of our industry contacts have been suggesting that customers are starting to want to see more commerce apps and functionality tied more directly into their marketing platforms. Are you seeing that trend? And how do you see tying more commerce into the Marketing Cloud, potentially?

I think at the end of the day, Brendan, when people are re-platforming their website, commerce is definitely one of the key reasons why they're doing that. We have partnerships with virtually all of the key commerce providers, including hybris, that's available through SAP. And so I think what we find is, whether it's an Adobe installation or whether it's one of the numerous partners that we have that's built digital transformation practices on our solution. They have all the tools that are required to take Adobe Experience Manager and tie into whatever commerce engine exists. So we view that as a partnership opportunity.

So you haven't seen it as a disadvantage that you don't have it natively?

No, we don't. I think the big thing that CMOs, really, are focused on is how do they deliver really great, rich, interactive experience on mobile devices and tablets. And I think every report that you read out there demonstrates that we have the best technology in that space.

Terrific. And just a quick one, Mark. You mentioned in your prepared comments the slight dip in overall ARPU because of the single app subscriptions. I was also wondering if there's any seasonality that you ever see in ARPU. I just didn't recall.

I don't think you should think about ARPU as seasonal. It's really driven by that blended rate, which I would encourage you guys not to focus on. It's really driven by mix. Like we said, ARPU across each offering through the year has either been consistent or, frankly, up throughout the entire year.

The 2 things you might think of in that particular space, the first is education. And when there's an education season, there's a high potential for a lot more edu [ph] units during that season. The second thing I would say is that as we are seeing former Premiere Elements or Photoshop Elements customers think about what a holiday purchase might be, the Creative Cloud Photography bundle is certainly, hopefully, high on their list of things that they want to get their kids and family. And so I would say, you'll see that a little bit of seasonally in the holiday season.

Your next question comes from the line of Steve Ashley from Robert W. Baird.

Great. I'd just like to start and ask about ETLA activity. Maybe you could give us a little bit more color around how that performed in the period -- and if there are any renewing ETLA agreements from a year ago, how that might have gone [ph].

So Steve, when you think about enterprise agreements in the ETLAs for the Creative business or the Acrobat business, they tend to be 3-year agreements. The vast majority tends to be 3-year agreements. And so they're not up for renewal, really, yet. Clearly, in the Digital Marketing business, we have renewals happening all the time. And that continues to perform well. In fact, I would say that the organization has done a really good job this year of making sure that we drive new bookings growth over and above renewals at the existing level. So I think the team has done a good job there. And with respect to color, overall, in that business, the enterprise business did really well in Q4. And I think that's why you see the strength. It's become a traditional Q4 seasonally strong quarter, and I think that's just true of all enterprise companies. Europe did well. North America did well. Australia continues to be a strong performance for us as well, from a geo perspective.

Great. And just my follow-up. I'd like to ask about the single app business, which has really been strong here and, I think, aided by the Photoshop Lightroom, which really helped you tap into a whole new vein of customers. Are there other opportunities similar to that to introduce single apps that might be more segmented to tap other new user groups?

Well, I think that our mobile apps, Steve, we certainly believe that everybody is -- want to be creative. And our job is to continue to make the power of our creative tools available to everybody. So as our mobile apps, we've seen millions of downloads of the mobile apps that we deployed at MAX. I think we definitely have opportunities to provide a different kind of a subscription service for the vast non-photographer, creative community. But at this point, we're still pretty ruthlessly focused on the creative and the photography segments, because those are the largest and those are the ones that are really where we need to focus.

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

This is Shateel Alam, filling in for Heather. So you said your blended ARPU declined again for the quarter. I understand how single app subs are bringing this down, but you should also have some positive factors offsetting this like promo pricing from Creative Cloud anniversary-ing. I just want to know, when should we expect your blended ARPU to trough and begin increasing again? Should we expect that sometime in fiscal '15?

Well, again, we pointed out that 50-50 mix because we want you to understand that there's a good chance that single app will just keep growing and may grow faster than full for the reasons we mentioned, and it does expand the market opportunity for us. So we view that as strategic and very positive. I don't think you should expect that ARPU number. Even though, again, I encourage you not to look at a blended ARPU number, I don't think you should expect that blended ARPU number to go up soon. We also have, down the road, other opportunities like Fotolia to help bring ARPU up.

Hey, Walter, I just wanted to go back to your question as well because I just looked at the data. And what we said was right. The unit mix in the historical perpetual business was 50-50, which was inclusive of commercial enterprise, education, upgrades, et cetera. And as I mentioned, the revenue mix was closer to 70-30. And I think the data that we presented in May 2013 was showing the installed base and not the annual unit mix of perpetual users and point product users. And so if customers in multiple point products, and as they migrate to suites, we de-duped [ph] and normalized that for -- in our installed base data. So hopefully, that provides that -- or Ross.

Just one follow-up. On Adobe Marketing Cloud, that grew 15% this year. What drives that to 25% growth for '15? And is there any assumption of acquisitions in there?

There's no assumptions of acquisitions.

Yes, I was just going to say that. We don't assume acquisitions in our guidance. The growth really comes from the fact that, obviously, you're bringing more and more revenue in from bookings, and you also don't have the big shift from perpetual to hosted like we had in '14. The shift is, for the most part, going to stabilize now.

Your next question comes from the line of Robert Breza from Sterne Agee.

I was wondering if you could comment geographically whether you're seeing the single app uptake, are you seeing it more here in North America? Or geographically, just curious to understand kind of the geographical mix.

I think it's fairly consistent across all geographies. I won't point to any real difference in adoption right now between geographies.

As you look at bringing in Fotolia into the group, I think in your prepared comments you said it was -- mostly dominated in Europe today. How do you think or how do you plan to bring that more back towards the North American market? Just curious to understand the geographics.

Well, I think the first thing that we hopefully have is affinity with our customers, and the brand that Adobe has in the U.S. market continues to be strong. I think they have a really good technology. And that, coupled with our brand and our ability to deliver that to our customers, we're confident. The surveys that we've done, again, as we said earlier, was that the creative professionals continue to look for stock photography as a mechanism to start a particular creation. And over time, we can also provide value-adds by helping integrate that within our products as well.

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

Shantanu, I'd like to ask, first for you, about the product and services game plan for 2015 and beyond, based on some of the strategies that you and David laid out, for example, and Brad, at the Summit back in March and at MAX just a couple of months ago. So the Digital Marketing Summit, for example, you spoke very broadly about enabling what you called the real-time enterprise and then spoke specifically about some core services that you would need to deliver to enable that and also alluded to the possibility of Marketing Cloud turnkey solutions for the SMB market. So I'd like to ask if that's something that you're still looking to do. And similarly, at MAX, you talked about increasingly tiering or segmenting the Creative Cloud. And so is that still [ph] something that you're expecting to roll out in '15 and beyond? And then, I've got a follow-up for Mark.

So Jay, first, with respect to the announcements that we made about the Marketing Cloud, and as you pointed out, for services, clearly, we're hearing from our customers, as they adopt multiple solutions, that they want to continue to see things work more consistently across our solutions and the value-add that we can provide. So for example, the product that we have, Adobe AudienceManager, that's perceived to be a really key enabling glue between all of our products in order to enable people to use the same segmentation of users across media optimization or across targeting or across analytics. That's a great example of a core service. The visualization, the ability to, again, run a campaign across all of these different products is another one of the core service that, I think, the team continues to perform. And we've also always talked about the fact that we have all of these data transactions and the ability to derive insight from what's happening on those for our customers continues to be an area of value add. And in SaaS-based businesses, unlike the perpetual product, we're constantly delivering that value add to our customers right through the year. So yes, in 2015, we will continue to deliver more core services, and I would highlight AudienceManager as one of the key areas. The other one, I think, we've talked about also is media mix. All CMOs are trying to understand how they do media mix across each of their different channels. And I think that's another area that we have some unique technology. With respect to the Creative Cloud and the creative business, we're excited about Fotolia. I think it represents a great opportunity in the sharing economy. And the entire community can now participate, whether it's finding talent or whether it's being able to acquire stock. And so yes, expect to continue to see new services that are being added, and Talent Search and Fotolia are just the 2 most recent ones.

Okay. And for Mark, in your prepared remarks, you suggested that in fiscal '15, Doc Services revenue would be up only slightly. And that would be so in spite of your expectation of -- I assume it's still your expectation, of an Acrobat release next year?

Yes, yes. Shantanu talked about a release in the first half of the year. And the only reason I'd say it's up slightly, Jay, is because we are driving more and more towards ETLAs in the enterprise. And you'll -- you're seeing that in the ARR.

Your next question comes from the line of Samad Samana from FBR Capital Markets.

I would like to ask you on Fotolia. So Shutterstock would be a natural competitor, and it looks like they're growing around a 40% level. I was wondering if you could just give us an idea of how fast Fotolia was growing, and how you're sizing that market.

Well, in terms of the sizing of the market, I think we definitely view it as a multibillion-dollar market. You're right, in that the other players in that space are growing very rapidly. We're not providing historical information on Fotolia today. But we certainly have high aspirations for the growth in that market for Adobe as well as for the entire market.

And then one follow-up to that. So they offer both annual and monthly subscription plans. And I know you're not disclosing the size of their subscriber base, but could you give us an idea of the mix between annual and monthly subscribers? To see what their pricing model looks like.

I think it's all a little early. We haven't even closed the deal. We just announced the definitive. And I think, as the business gets integrated into Adobe, we'll definitely, as we do with all of our other businesses, provide more color.

Your next question comes from the line of Philip Winslow of Crédit Suisse.

Congrats on the continued growth here. I wanted to focus in on part of the Digital Marketing business. Mark, automation [ph] obviously, over the past couple of years, we've seen a lot of consolidation in the space, including you guys. Just wondering if we can get an update of what you're seeing. Sort of post the acquisition, any change in sort of the competitive [ph] dynamics or how you're positioning the product, et cetera?

Well, first, thanks on your comments on the quarter. I think, with respect to Digital Marketing, there's no question that everybody views this as the most explosive enterprise category that exists. I think our unique differentiation continues to be the fact that we've targeted marketers. And when we talk about the fact that it's becoming the real-time enterprise, I think the tentacles of the Marketing Cloud are certainly spreading into the rest of the organization and needs to be integrated with that. I think in that context, we continue to see real great traction for our particular solutions. But the standard players, whether it's Oracle or IBM or Salesforce. I think they also see the opportunities that exist. We continue to do really well against each one of those competitors in the marketplace. Given that's the last question, I just wanted to say that I'm really proud of what Adobe and our employees accomplished in both Q4 as well as FY '14. We really continue to focus on delivering value and innovating in these large, growing markets where we both have a license to play as well as, we believe, we have tremendous customer affinity and a strong brand. We executed against our goals of adding ARR, migrating existing CS customers as well as attracting new customers. And we continue to be really excited about the opportunity that we see ahead of us in Digital Marketing. More importantly, with initiatives that we just announced delivering our Marketplace, integrating our Marketing Solutions and reimagining our Document Services, we believe we are positioning the company for even better things in the future. So thank you for joining us today, and happy holidays.

And this concludes our call. Thank you.