Good afternoon, ladies and gentlemen. I would like to welcome you to Adobe Systems' Third Quarter Fiscal Year 2018 Earnings Conference Call. My name is Jerome, and I will be your conference operator today. [Operator Instructions]. Thank you. I would like now to 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; and John Murphy, Executive Vice President and CFO. In our call today, we will discuss Adobe's third quarter fiscal year 2018 financial results. By now, you should have a copy of our earnings press release which crossed the wire approximately one hour ago. We've also posted PDFs of our earnings call prepared remarks and slides, financial targets and an updated investor datasheet on Adobe.com. If you would like a copy of these documents, you can go to Adobe's 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 and operating model targets and our forward-looking product plans, is based on information as of today, September 13, 2018, 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 two is available in our earnings release and in our updated investor datasheet 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 re-recorded 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. Q3 was a record quarter for Adobe. We delivered $2.29 billion in revenue, representing 24% year-over-year growth. GAAP earnings per share for the quarter was $1.34, and non-GAAP earnings per share was $1.73. Adobe is empowering people to create and transforming how businesses compete. Our execution against this strategy is driving strong financial results across our Digital Media and Digital Experience businesses. In every market around the world, students, creatives, enterprises and governments are choosing Adobe Creative Cloud, Document Cloud and Experience Cloud to deliver the transformative digital experiences required to compete and win today. In our Digital Media business, we achieved strong growth in both Creative Cloud and Document Cloud revenue in Q3. Net new Digital Media annualized recurring revenue or ARR was $339 million, and total Digital Media ARR exiting Q3 grew to $6.4 billion. Key Digital Media customer engagements in the quarter included the U.S. Department of Education, Facebook, Marks & Spencer and Walmart. Creative Cloud has become the creativity platform for all with millions of highly engaged subscribers and a strong base of trialists whom we actively convert each month into paying customers. Whether it's YouTubers looking for an intuitive video solution or mobile-first photography enthusiasts, we continue to see significant opportunities for growth in new customer segments as well as untapped potential in emerging markets. Video continues to be an explosive category. In June, we previewed Project Rush, a new video editing app that makes creating and sharing online video content easier than ever. Whether your passion is vlogging about food or posting a cool skateboarding clip, Project Rush gives users a way to create video projects across surfaces, providing them with maximum creative flexibility. This week at IBC, we shared a slate of new video creation capabilities that'll speed…

Thanks, Shantanu. In the third quarter of FY '18, Adobe achieved record revenue of $2.29 billion, which represents 24% year-over-year growth. GAAP diluted earnings per share in Q3 was $1.34, and non-GAAP diluted earnings per share was $1.73. We delivered another quarter of strong performance across product offerings and geographies while also successfully integrating Magento. Highlights in Q3 included: record Digital Media revenue, including Creative revenue of $1.36 billion and Adobe Document Cloud revenue of $249 million; record Digital Experience revenue of $614 million, which represents 21% year-over-year growth; net new digital media ARR of $339 million; deferred revenue growth of 23% year-over-year; cash flow from operations of $955 million; returning $714 million of cash to our stockholders through stock buyback; and approximately 90% of our revenue in Q3 was from recurring sources. In Digital Media, we grew segment revenue by 27% year-over-year. The addition of $339 million net new Digital Media ARR during the quarter grew the total to $6.4 billion exiting Q3. Within Digital Media, we achieved another record quarter with our Creative business. Creative revenue grew 28% year-over-year in Q3, and we increased Creative ARR by $289 million. Several key factors contributed to this growth, including: strong net new subscriptions across user segments and across the U.S., Europe, Japan and Asia Pacific, driven by robust traffic and customer acquisition on adobe.com; strength in new individual app subscriptions with the Photography plan and Acrobat; continued momentum with Creative Cloud adoption in emerging markets; retention of users migrating from promotional to standard prices at annual cycles; new pricing introduced in North America; seat expansion and adoption of services in the enterprise; and strength with Adobe Stock, which achieved greater than 30% year-over-year revenue growth during the quarter. We transitioned our adobe.com sites in Europe to comply with new GDPR…

Thanks, John. Adobe MAX returns to Los Angeles and is quickly approaching. Day 1 of our user conference is Monday, October 15, and we will host a financial analyst meeting that afternoon. At the meeting, our executive team will discuss Adobe's vision, strategy and opportunities to continue to drive sustained revenue growth. Invitations to MAX and our financial analyst meeting with registration information were sent out in early July. If you wish to attend MAX and our financial analyst meeting, please send an e-mail to ir@adobe.com. More details about MAX and our exciting lineup of speakers and educational sessions are available at max.adobe.com. If you 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 #1136856. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5:00 p.m. Pacific Time today and ending at 8:00 p.m. Pacific Time on September 19, 2018. We would now be happy to take your questions. [Operator Instructions].

[Operator Instructions]. Your first question comes from the line of Jennifer Lowe from UBS.

I wanted to ask about, coming into this quarter, there was some concern that GDPR could have an impact on Q3 Digital Media ARR. Obviously, the results speak for themselves that there wasn't as much of an impact there as maybe were contemplated initially. But if I put that in the context of Q4 ARR guidance and given sort of Adobe's long history of conservatism, the seasonality there is maybe even a little better than I would have expected going into Q4 relative to what you did last year. So can you talk a little bit about that was no impact from GDPR or was just less than maybe you thought it could be? And does that sort of set up a more positive dynamic headed into Q4 around ARR?

Sure, Jennifer. I mean, there a couple of questions in there. First, some color on GDPR. As we know, requirements and regulations for all businesses that are transacting online continue to evolve. But from our perspective and looking at Q3, we don't think it'll fundamentally change the relentless move that all businesses have to do more online, which is driven by customer preference. We did transition our own adobe.com sites to meet these requirements. And we'll continue to tweak and evolve our technology to lead the market. And as you pointed out, our results show that we achieved strong results in Q3. When we look at the transition between Q3 and Q4, I think it's important to remember a couple of things. The first is Q3 tends to be seasonally weak, and so Q4 is our seasonally strong quarter. Education comes back, and education will show its strength in Q4. I think, with MAX coming up and all of the innovation that we continue to show with respect to MAX, which will be exciting, I hope you're attending, is also going to be in Q4. So Q3 ARR was strong. The business continues to add momentum. I think John spoke in his prepared remarks also as to strength that we saw across offerings. I'll highlight mobile. Mobile, we continue to drive a lot of new customer acquisition through units, Single App of Acrobat and the Photography continue to do well. So we continue to innovate in creativity, and there's strong demand there, Jennifer.

Okay. Great. And maybe just one last one for me. The pricing increase in the U.S. was obviously sort of a big topic amongst investors. Is there any notable benefit to ARPU as a result of that? Or does it just sort of become rounding [error][ph] given the size of the business?

Well, I think our primary focus, again, putting it in big picture, continues to be attracting new customers and delivering value. Certainly, the new pricing that we introduced was accretive to us, but we continue to attract new customers. And they are seeing the benefit, as you point out again, with all of the innovation that we deliver, Lightroom, XD, Character Animator, Spark and Dimension, it was clearly the right time to introduce new pricing. And -- but we have also had quite a bit of experience with that as currency has fluctuated in other countries. The one other thing I might mention here is I know there have been some questions to Mike about promotions and how we look at promotions as well. From our point of view, they continue to be compelling events to drive a call to action. And then we see a double benefit because not only do we attract new customers to the platform but with strong retention rates that, at renewal time, leads to a further increase in ARR, which, again, when you think about Q4, given annual cycles, that's another thing that factors into our guidance for Q4. So all in all, we think our business is good.

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

Shantanu, you've seen a steady re-acceleration in Experience Cloud. I'm curious if you could just talk to what you're seeing there. And I think tying into that, just coming off of a $1.8 billion acquisition, there's obviously some chatter about you looking to be more inquisitive. Just given the re-acceleration in Experience Cloud, maybe just talk through your appetite for larger transactions. Realize you have the [$8][ph] billion buyback also on your plate.

I think big picture, the whole digital transformation agenda, Brent, continues to be front and center to every C-level executive. We had strong bookings. I think we talked about that a couple of times both in my prepared remarks as well as in John's and I think the strength of our product portfolio, which continues to be differentiated. Magento was off to good start. I mean, the fact that they have both B2B and B2C, I think, continues to help. We saw some good deployments of Adobe Experience Manager. So big picture, we, again are continuing to see a lot of demand for our solutions. We had some great events that we had all around the world. We normally do Japan and Sydney and Singapore during the quarter. And so I think it's digital transformation and customer centricity and loyalty that's driving the Digital Experience business. As you know, we would never comment on a market rumor.

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

Congrats from me. Sorry for any background noise. I actually -- Shantanu, I wanted to ask a little bit around the announcement you -- that's coming up on the Adobe Document Cloud. And I wondered if there's any sort of way you could maybe give us a little preview of that here or at least directionally talk about what the intent is there. And then related to that, John, the comments around the Acrobat perpetual license being not material, couple that with the deceleration in Digital Media revenue in Q4 relative to the strength in net new ARR, my math, I was trying to back into it, would suggest a little bit below $100 million of perpetual win last year and maybe most of that's going to go away. And I wondered if you could maybe just comment on whether that's directionally right.

Ross, to answer your first question, we continue to see a lot of demand in people really both automating inefficient paper-based processes as well as using mobile devices to deal with PDF. I think we mentioned that over 50 billion PDFs are being opened in our documents alone. And so I think as we think about the document business in particular, among the customer pieces of feedback that we're getting, the first one clearly is that they want access to that PDF across all of -- all devices. They continue to want to have mobile devices being a PDF-creation device. So we talked a little bit about scanning and storage therefore so that people can actually have access to their content across devices. The other area I would say that a lot of people are looking at is certainly collaboration and what we can do with respect to collaboration and allowing different people to participate in a document workflow. And certainly signing and the interest in signing, whether that's ad hoc completely using the Acrobat product and desktop readers or complete workflows where signing is an ingredient within the enterprises. Hopefully, that gives you a flavor for how we are thinking about how we will continue to innovate in Document Cloud. And the one other thing I'd mention is a deeper focus on partnerships and what we are doing to ensure that PDF is embedded within other ecosystems. We certainly introduced recently support for both Sign in SharePoint as well as in Outlook. So that hopefully gives you a flavor of where we're focused with the document business.

And Ross, just in regards to your comment on perpetual revenue with Acrobat, really, what we're trying to explain is that in Q4 FY '17 we actually had a large perpetual revenue in that quarter. And we still sell both perpetual and subscription, and what we're expecting this quarter is not quite as large a perpetual revenue this quarter because we see continued momentum as customers are migrating to subscriptions. So it's -- for us, it's really kind of following our strategy for the business, and we're excited about it.

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

Two things for Shantanu. At MAX -- sorry, at Summit month ago, you talked about the strategic objectives or road map for Experience Cloud, and you said that what you want to do is deliver unified experience, streamlined integration of Experience Cloud. I wish I assume you were referring to both content and data and the multiple solutions. And then also deliver what you called domain-specific expertise via AI. And when you look back over the last six months and well, clearly, perhaps over the next 12 months, can you talk about some of the key things that you achieved, particularly in the area of integration, which had been a bit of an issue within the portfolio a while back? And maybe talk about that vis-à-vis the Experience Cloud road map. And at MAX last year, in the context of talking about your various new products within CC, you made the very interesting comment that XD could be the next InDesign. In other words, that would be your next big holding new product. And as such, when do you think XD might become your next nine-figure business, particularly when you think about the fact that you have no incumbent to go up against as you did with InD?

So Jay, let me take both of those questions. First, with respect what we are doing on the Experience Cloud, an area of innovation that we're particularly excited about is enabling for all enterprises to have a Unified Customer Profile, where we are getting all of the behavioral, demographic data for customers across all of our different solutions. It's something that customers are already testing out in beta. And if you think about that, what it really means for us is this Unified Customer Profile can become the central nervous system in an enterprise, not just therefore targeting the CMOs but increasingly having the CIOs look at that as the basis for how they want to integrate a unified customer experience across all of the different enterprise solutions that might exist. And so that also then allows us, to your second question about the domain-specific AI, with Adobe Sensei, we have the ability for people not only to have our AI be applied to their dataset but for also their own AI and their data science continues to be leveraged using the datasets that they have. So both of those, we've started to deliver them. When I look at the results of the bookings in Q3, the multiproduct implementation and sales continues to be strong. So it's clearly an effective tool for us to go in and have more of the entire CMO deck be served by Adobe. So both of those, we continue to do it. I'm sure Brad will give an update at MAX as well in terms of how we see that, and so we look forward to that. And with respect to your question on MAX, certainly, XD and screen design has been an area of fairly deep investment for us. It's the only cross-platform solution, I think, we talk about not just helping design mobile applications but every screen. I mean, you have all of this content that's being delivered to screens across retail, across even fast food. And our products, all the way from content creation to content management and delivery, is powering that. Collaboration is another area for XD. And it's harder than it was in the InDesign as a result of more and more people using the Creative Cloud entire suite to look at just an individual product but both from an individual product monthly average usage of XD as well as the adoption in Creative Cloud All Apps, we continue to be pleased with how XD is doing. And that just serves as additional value to all of our Creative customers.

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

A question for you, Shantanu, on the experience side from a product perspective. I'm wondering if you feel like sort of going down market where you have a lot of competition in that space. Do you feel like your product is adequately positioned there? And if not, what else do you need to get that whole experience suite down market into more of the mid-market?

Yes. I think, Walter, we were looking for a nice beachhead to start to think about how we could leverage the strength that we had in the enterprise down into whether that's departments, mid-market, commercial, sort of is another way in which people look at it. And that has been an area where we have seen some good adoption. And so our job was to continue to leverage Magento within the enterprise and to leverage Magento's base and their ecosystem of developers by allowing them. And I would say both the Adobe Experience Manager and Adobe Analytics are products that can be used in that particular category to create websites as well as to have analytics in there. So it will continue to be an area. I think you're also seeing this product now being used within B2B installations as they all want to create a direct relationship with customers. So you have a lot of these companies that have billions of customers but don't have direct access to those folks because they go through a distribution channel. So hopefully, that gives you some indication of how we're continuing to expand the customer set that we target with Experience Cloud.

Your next question comes from the line of Brad Zelnick from Crédit Suisse.

Shantanu, continuing on the Digital Experience theme. Can you talk a bit about your relationship with Microsoft in Digital Experience? And is there any way to size or scope these types of deals or think about the number of products included? And are you seeing accelerating adoption now that you've been in market for some time?

The first answer, Brad, is we're definitely seeing accelerated adoption as a result of our products having been delivered on Azure. And I think going back to what I talked about with respect to the customer profile, what we are seeing are people are standardizing on Azure increasingly as an infrastructure for their cloud-based solutions, and we have a really great solution on top of that in order to be able to bring this Unified Customer Profile that exists. And so the success is leading to larger deals. It's leading to higher close rates. And frankly, I think more and more of both the Microsoft field force as well as the Adobe one are now looking at it and saying this is something that's resonating with customers. And so it is accelerating.

Your next question comes from the line of Saket Kalia from Barclays Capital.

Shantanu, perhaps a more strategic question for you on Magento, understanding that it's still relatively early. I guess, as you look at other commerce clouds out there, how can you differentiate Magento either technically or perhaps from a pricing packaging perspective over time?

Yes, Saket. I mean, a couple of things. The first is I would not underestimate the importance of commerce being tied into content management systems and analytics because while commerce is closing the loop, the real activity is happening when you're doing A/B testing or where you're delivery content. And from my point of view, what was really attractive about Magento in addition to this really closing the loop and making every experience shoppable is the fact that they were the only player who had both B2B as well as B2C as well as digital goods and physical goods. And the other thing that I think they brought to bear, which is really paying off, is this ecosystem. What's happened in the commerce market, if you think about it, is that there are so many separate customization efforts. Having this large ecosystem of over 300,000 developers leads to both more rapid time to value for the enterprise customers, and honestly, they actually serve in many ways as a channel because they are helping with the ability to quickly install Magento as a way to bring us into more deals. And so that was the strategic rationale. I mean, it was a clear -- as you know, we had integrations with a whole bunch of different vendors, but the customers really wanted a solution end to end from Adobe. And we're pleased that we're able to deliver it, and it's off to a good start.

Your next question comes from the line of Alex Zukin from Piper Jaffray.

So just maybe a strategic one on mid-market and B2B. You've mentioned it a couple times now. So I guess, my question is basically, if I think about from a go-to-market perspective, how are you thinking about attacking the mid-market opportunity. And is the Microsoft partnership something that could evolve to be helpful there? And then what about the B2B market, in addition to Magento, makes that uniquely interesting for Adobe at this point in time?

Yes. I mean, first, to your question, Alex, partner certainly plays a huge role in terms of the amplification of how effectively we can get in and meet all of those customers in the mid-market. But we also have and we've always had ability through inside sales as well as the ability through partners to target them. So that isn't rocket science. We certainly have the ability to do that. And with Magento, we have the product as well that serves them well. And then as we think about B2B, what's really happening -- I mean, think of yourself as a consumer goods company. You may be a consumer goods company where you have 1 billion people use your product every day, but you don't have the ability to have those customers in your profile because you're going through a distribution channel. They're increasingly understanding that they have to create that direct relationship with customers, and so it's going to be a big part of the expansion of how we look at our business because they're all looking at Adobe to help them do what we frankly did in many ways, which was have a direct relationship with our customers. So B2B2C is already a major trend that's happening, and we're a key part of digitally enabling that.

Got it. And maybe just one follow-up. If you think about Experience Cloud growth, and we -- if we back out Magento from the quarter and your guide, kind of core markets, core Experience Cloud revenue growth is in the mid-teens, is that what you consider healthy and what we should expect going forward? Do you see that accelerating over time? What's the right way to think about it?

Yes. I think when you look at Experience Cloud, I think it's important to remember what we said at the beginning of the year as we are focused a lot more on subscription bookings and subscription revenue growth, and to really understand that from our point of view, when you look at Q1, Q2, Q3 and the targets for Q4, it's actually ahead of what we had said. And so I -- we think we have a great offering. We're the leader in that market, and continuing to focus on the massive addressable opportunity is what we are doing. But clearly, 2018, we were going through that as well as we talked about having the partner ecosystem take on more of the services part of it. And you can -- you probably see that as well if you look at the financial data sheets that we've provided.

Your next question comes from the line of Kash Rangan from BofA.

Shantanu, a question for you. You talked about conversion rates from free products to paid subscribers for Creative in a way that I've not heard before. Can you just expand on that in the context of your previous observations that the TAM for the Creative Cloud product in this cycle is a multiple of the TAM that existed in the days bygone? So how is this all working out conceptually? Do you still continue to believe that to be the case? It does look like the front end of the funnel is expanding at a rate greater than we all anticipated. I know it's more of a question/observation but just really want to draw you out on your thoughts on why this creative cycle is a much bigger cycle and why is it taking much longer in this cycle than what we all expected.

Kash, I think we've always talked about the fact that if we look at the installed base of Creative and the number of creatives that exist, it's a massive number. And when you think about what's happening with the segment like photography or when you think about what's happening with mobile and you think about what's happening with emerging markets and students, those have always been areas of tremendous interest for us. I would say where we have really matured is when you think about the data-driven model that we're using to run that particular business, and Bryan's going to touch in more detail on this at MAX. The fact that we understand what we have to do on the discover, try, buy, use and renew part of that workflow, we have got so much better at understanding how people are discovering us and why trialists is a key part of getting people both aware of our products, using our products and then converting. And so I wouldn't say that, that's new. I would say that we're getting better and better at it as we understand how to tailor our offerings. I think the other thing that we've always talked about is the fact that we now have more offerings enables us to further attract new customers to the platform. With the only All Apps, we did not have the kind of offerings that we have right now. The fact that we can do it with mobile, we have multiple photography offerings, there's just far more scrutiny and focus on how we attract new customers to the platform, Kash. And I think in the past, we've thrown out that we have over 100 million IDs that are being created by these trialers, and that's how we look at expanding the top of funnel.

So that's the ultimate TAM, $100 million in an ideal case.

Well, I think we talk about it more with respect to the over $30 billion that exists in Digital Media between what we have as Document Cloud and Creative Cloud. And I know the question that has also always come by is piracy and are we affecting piracy. There's no question that we're continuing to impact piracy with the business model and the fact that we're allowing people to trial and then convert more effectively.

Your next question comes from the line of Sterling Auty from JPMorgan.

In the prepared remarks, there was a comment about customers increasingly coming direct to adobe.com to transact the business. It's been some time. I'm wondering if you could give us a sense of how much of your business is now being transacted direct through your e-store or through adobe.com? And is there still further margin benefit to be captured moving forward from further increasing that percentage?

Yes. Sterling, I mean, when I look at the Digital Media business, I maybe separate a little bit of what's happening in the Creative side of that business with what's happening on the Acrobat side of the business. In the Creative side of the business, and there may be a few countries that are the exception, but the vast majority of consumers are directly interfacing with us on adobe.com. We certainly have, as you know, an enterprise ETLA. That did really well as enterprises are adopting more and more services. That's increasing the ARPU that exists with enterprises. So I would say the Creative business is primarily happening through adobe.com, except again, as I said, in some countries, where retail is a strong presence. On the document side of the business, I think given a lot of people still buy Acrobat when they buy a new PC as well as in conjunction with Office, the channel continues to be an important partner for us. And that's why we continue to offer both the subscription now, which is increasingly the preferred when -- which people are buying Acrobat DC. But I would say, there, it's still a fairly large percentage of our business and an important part of how we go to market. So hopefully that's giving that gives you some color of what it is. But more and more, it's happening on adobe.com. And as we expand the base and as we renew online and we hopefully up sell them to higher value products, all of those represent both ARR as well as margin improvement opportunities.

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

I'd like to drill a little more as others haven't experienced digital marketing. When you look at that overall market, there's a lot of fragmentation within the market. How should we think about the drivers of growth going forward? Is it more market consolidation or market growth? Which do you think is the bigger driver that's going to help drive that business?

Well, I think you're right in terms of fragmentation. I think the fact that we have a platform is a clear differentiator and allows us to get a disproportionate share. We talk a lot about the number of multi-solution deals, and we're going to continue to, I think, do well in that particular respect. Outside the U.S. continues to be a really important market opportunity for us. I think we've said with commerce now as part of the portfolio that we have, that's an over $60 billion TAM, and that's available for us. But a lot of the small players that existed in different categories, we're clearly getting the request from our customers that across all of these channels, they want one unified way of personalizing the experience. And so I think the consolidation that's happening in that space, Mark, is as a result of when people are using more and more of our solutions, their ability to address that customers is significantly better when -- than when all these fragmented solutions don't talk to each other. And that's our goal, to be the experience platform to enable them to run their business online.

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

I just had two quick questions. Obviously, you guys had great performance with Magento this quarter. And I know you mentioned it closed a little early and you didn't have the amount of the write-down that you were expecting. But when you think about the comments you made about the upside to your guide for Q4, you had guided to $30 million, how do we think about the magnitude there? Because I would imagine there are some good seasonality in the business and you'll catch the tail end of the start of -- I'm sorry, the beginning at the tail end of your quarter of the holiday shopping season. And then I also had a question, if we look out to ARR build, obviously, you outperformed very nicely there this quarter as you typically do. And if we look out to the next fiscal year, is there any reason -- or anything that would cause you -- or cause it -- cause the change in ARR in the next fiscal year to be below what you're guiding to this year, the net change?

I'll take the question on ARR, and then maybe John can give you more color on the Magento. I think on the ARR, Heather, at the FA meeting, we'll talk a lot more about it. I think it's -- we're focused on a strong close for Q4 and we'll give you more color on the interesting things that are happening at MAX. We continue to be excited about the long-term opportunity.

Heather, in regards to Magento's deferred revenue, when we acquired the company, of course, everyone goes through and evaluates the deferred revenue and whether or not you have a haircut, how much of a haircut. And so when we did the deal, we announced that we really didn't have that work done through the quarter. We ended up realizing that we ended up with a much smaller haircut than we expected. Much of that haircut was really realized in Q3, so we had slight upside in Q4.

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

Shantanu, can you just talk a little bit about stock this quarter? Actually, you sort of called it out in your prepared remarks being up 30% year-over-year, which is pretty obviously very strong. So I was just wondering if there's anything specific this quarter you all saw in terms of just better cross-selling, new net sort of demand gen. Anything you want to maybe just add in terms of some color around that specific product?

Look, I would just say we continue to execute against the opportunity. And we've always maintained that the people who contribute stock and the people who use stock are our customers. And I would say the success was both in the enterprise where we're certainly now having large stock deals that allow them to have access to our entire assets. The fact that the content inventory is improving across a different variety of media types, I think that continues to play a role. And if you look at our apps, I think one thing we're continuing to do better is the integration of the stock portfolio that we have and the Sensei-based features that we have to find the right asset as a means to accelerate content creation is also I think starting to show benefits. And last but not least, I mean, we do have offerings that have both the creative products as well as Stock as part of an offering. We think that's great value, and that continues to be something that we are making available to our customers. So I think across-the-board, we continue to be excited about stock as a service that people will look at as an extension of the Creative Cloud.

Your next question comes from the line of Derrick Wood from Cowen and Company.

I wanted to ask about churn in your Digital Media business. So I'm curious, have you seen any impact on retention rates with -- since the price change in U.S.? And then if you take a longer term view, I think churn has been steady for some time in the mid-teens range. Do you see any things you can do to improve that? Or is that just kind of the natural state of the market going forward?

I think with respect churn and retention, which continues to be a huge area of focus for us, I think the way we continue to be focused on it, it continues to do well so that we haven't seen really any change in the aggregate as it relates to churn. But the thing that we will continue to do is the more offerings you have and the more those offerings can be tailored allows us to actually target and retain more of the customer base. So I think that is one of the things with mobile. We're able to do that. And we continue to be really focused. I mean, in that sense, I just look at it and say when there's a long tail of creators, the deeper our offering is, whether it's Spark, Premium at one end of the spectrum or the ability to do one PDF conversion all the way to the entire Creative Suite or Creative Suite plus Acrobat app, that's the way in which you can continue to make sure that you're delivering value to a broader and broader swath of customers. And outside the U.S., the ability to have differential pricing and look at that differential pricing also is another way that we will continue to focus on retention, on sales and continuing to have people have value. And so I think that's the way we look at it. But given that was the last question, Derrick, I mean, just for everybody, I think Q3 reflected another quarter from our perspective of both strong execution and validation that the strategy of empowering people to create and helping businesses transform is working. When you look at the Q4 targets, I think it reflects the momentum that we continue to drive across all geographies and all offerings. And we're really excited about sharing more at MAX about how we intend to continue to expand addressable markets and the strategic initiatives that we will focus on as a company to drive sustained growth on both the top and bottom line and deliver more value to our customers. But we appreciate you joining us on the call today.

Thanks, everyone. We'll see you at MAX. This concludes the call.