Adobe Q3 FY2016 Earnings Call Script - · PDF fileAdobe Q3 FY2016 Earnings Call Script...

Adobe Q3 FY2016 Earnings Call Script September 20, 2016

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MIKE SAVIAGE

Good afternoon and thank you for joining us today. Joining me on the call are Adobe’s President and

CEO, Shantanu Narayen; and Mark Garrett, Executive Vice President and CFO.

In the call today, we will discuss Adobe’s third quarter fiscal year 2016 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

the Investor Relations page and find them listed under Quick Links.


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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 20th, 2016, 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.


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SHANTANU NARAYEN

Thanks Mike and good afternoon.

In Q3 Adobe delivered another record quarter, with revenue of $1.46 billion dollars, GAAP earnings per

share of 54 cents, and non-GAAP earnings per share of 75 cents.

These strong results are a reflection of our market leadership and momentum we have with Creative

Cloud, Adobe Document Cloud and Adobe Marketing Cloud. We are enabling the world’s leading

brands to develop design and data-driven digital experiences for their customers across every channel.

Our unique value proposition continues to distance Adobe from our competitors.

In our Digital Media segment, we exited Q3 with $3.7 billion of Annualized Recurring Revenue, or ARR,

which represents an increase of $285 million quarter-over-quarter. The increase was a result of the

continued adoption and retention of Creative Cloud and Document Cloud across all customer segments.


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Creative Cloud is the one-stop shop for creativity and design, offering the world’s best creative apps,

services and training as well as a vibrant marketplace and community. We achieved record Creative

revenue of $803 million in Q3, which represents 39% year-over-year growth. Creative ARR grew in line

with our expectations and was driven by continued migration of Creative Suite users; the addition of

new value to existing subscribers with services such as Adobe Stock; new customer acquisition in the

education and hobbyist photography markets; and retention of existing subscribers.

Creative Cloud continues to deliver powerful new innovations across our segments at a rapid pace. As

the leader in digital photography, Adobe has set the standard for professional grade photography across

cameras and mobile devices with Adobe DNG, a raw file format we created. As of last week’s iOS 10

release, Adobe DNG is now supported natively by iOS and Android, and Lightroom is the first cross

platform app to empower users with an end-to-end raw mobile photography workflow for high quality

image capture and editing.

New Creative Cloud innovation enables subscribers to design for emerging categories like Experience

Design. Adobe XD, our solution for designing and prototyping websites and mobile apps, continues to

gain momentum among users and industry watchers. Although still only available as a preview release,

last week it was selected as one of 15 winners in the Fast Company Innovation by Design Awards – a

distinct honor, given the 1,700 entries.

Earlier this month we showcased Adobe’s leadership in the video category, unveiling advancements in

virtual reality, character animation and 3D at the IBC conference in Amsterdam. These new capabilities

are enabling video creators of all kinds – from YouTubers to Hollywood studios – to create, deliver,

monetize and measure innovative and immersive media across multiple screens.

This morning we announced the beta release of our new Adobe Stock Contributor Site, which reduces

the friction for Creative Cloud users to promote and sell their work. The new site is integrated with

Creative Cloud apps and introduces auto-keywording – which uses machine learning algorithms to

analyze and tag content, streamlining the submission process and increasing the discoverability of

Adobe Stock content.


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In November, we will hold our annual MAX Creativity Conference in San Diego. We expect this year’s

MAX to be the largest gathering ever of designers, photographers, film makers and other creative

professionals from around the world. As always, we look forward to unveiling new technology at MAX,

including whole new categories of cloud-first creative solutions.

The world’s leading digital document service, Document Cloud leverages PDF and enables businesses to

transform inefficient paper-based processes to digital, using Acrobat desktop and mobile apps as well as

integrated cloud services like Adobe Sign. In Q3, individual Acrobat subscription units exceeded

perpetual units for the first time, and on Adobe.com over 90% of Acrobat customers chose the

subscription offering. Document Cloud revenue was $187 million in Q3. Combined with Acrobat

adoption reflected in Creative Cloud, Document Cloud continues to be an important growth business for

Adobe.

In June, we announced the Cloud Signature Consortium, a group comprised of leading industry and

academic organizations committed to building a new open standard for cloud-based digital signatures

across mobile and web – so anyone can digitally sign documents from anywhere. Adobe led the way in

establishing PDF as a digital document standard, and is now raising the awareness of electronic

signatures as a key to any business’s digital transformation.


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In our Digital Marketing segment, Adobe Marketing Cloud is the leader in enabling brands, government

agencies and institutions to deliver great digital experiences across devices and channels. Whether it’s

financial institutions, retail, travel and entertainment, or automotive, entire industries are experiencing

disruption and aggressively deploying technology to drive stronger loyalty and growth. Success hinges

on a strong foundation of content and data, which enable a deep understanding of customer needs,

development and delivery of consistent, personalized experiences, and the ability to monitor business

performance in real time.

In Q3, Adobe managed a record 23 trillion data transactions. Our customers in every major category of

business are utilizing our machine learning algorithms to predict customer behavior and drive their

business. Adobe Marketing Cloud solutions including Adobe Campaign, Adobe Audience Manager and

Adobe Media Optimizer are achieving strong growth as our customers invest more in data-driven

solutions.

In August, Adobe Marketing Cloud once again played a key role in the digital broadcast of the Olympic

Games. NBC Sports used Adobe Primetime to power the digital delivery of the 2016 Rio Olympics, the

largest digital Olympic games in history.

In addition to being listed earlier this year as the Marketing Cloud Platform category leader,

Adobe Marketing Cloud was recognized by industry analysts during the quarter as a leader in categories

such as Mobile Application Development, Cross Channel Campaign Management and Enterprise

Marketing Software. We continue to drive new logo wins and expand our business across geographies

and vertical markets. Some Q3 customer wins include T-Mobile, Nordstrom, Subaru, SunTrust Bank,

Astra Zeneca and the state of Tennessee.


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At the core of our business are the people that make it happen. As a software business, we know that

employees are our most strategic asset, and we are committed to increasing diversity. We have broken

new ground in terms of employee benefits like extended parental leave and are implementing new

programs, including coding initiatives focusing on young women. We were recently recognized as one

of Forbes Most Innovative Companies and we continue to garner Best Place to Work honors around the

world, most recently in Australia and India. In addition, our focus as a company on the environment and

sustainability is important to our employees and to many investors. We were pleased to learn Adobe

has been selected as a component of the Dow Jones Sustainability World Index for the first time.

Today, every company is under pressure to be more connected and in tune with its customers – to know

their history, their preferences – and to create and deliver powerful, personalized experiences to them

anywhere they go. Content and data are at the core of these exceptional experiences and Adobe is the

only company that brings these critical capabilities together in our market-leading cloud solutions.

The market opportunity is significant. Our strategy is sound. And our results demonstrate the leverage

in our model. All of these are what make us excited about the opportunities ahead.

Mark.


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MARK GARRETT

Thanks, Shantanu.

In the third quarter of FY16, Adobe achieved record revenue of 1 billion 464 million dollars, which

represents 20% year-over-year growth. GAAP diluted earnings per share in Q3 were 54 cents and non-

GAAP diluted earnings per share were 75 cents. Strong performance across our three cloud offerings

helped to deliver revenue towards the high end of our targeted range. Our cost discipline helped to

deliver earnings upside, while we continue to invest in the business to drive future growth.

Highlights in our third quarter include:

• Solid growth with Digital Media ARR; we achieved our target of $285 million net new ARR during

what is typically a seasonally soft quarter – and keeps us on pace to achieve our annual target that

we increased earlier this year;

• Record Creative revenue of $803 million, which represents 39% year-over-year growth;


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• Record Adobe Marketing Cloud revenue of $404 million, which represents 10% year-over-year

growth and was above our target for the quarter;

• Strong growth in operating and net income;

• Record cash flow from operations and deferred revenue;

• And 83% of Q3 revenue from recurring sources, an all-time high.

In Digital Media, we grew segment revenue by 29% year-over-year. The addition of $285 million net

new Digital Media ARR during the quarter grew total Digital Media ARR to $3.7 billion exiting Q3.

Within Digital Media, we delivered Creative revenue of $803 million which represents year-over-year

growth of 39%. In addition, we increased Creative ARR by $258 million during Q3 and exited the quarter

with $3.26 billion of Creative ARR. Our Creative ARR is more than a billion dollars higher than the peak

annual Creative revenue we achieved when there was just perpetual licensing of Creative Suite.

Driving the momentum with our Creative business was continued strong demand for Creative Cloud

across all offerings and routes to market during the quarter – including net-new Creative Cloud

subscriptions and enterprise contract renewals. Retention rates for subscriptions overall remain ahead

of our original targeted projections. Creative Cloud ARPU across each of our commercial offerings

continues to grow quarter-on-quarter as new users on promotion pricing renew at full price after their

promotions expire. We also drove strong subscription growth in the education market during the back-

to-school season in Q3.


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Our focus with Creative Cloud continues to be in three key areas:

• Growing our core base of users, including migrating the legacy user base of Creative Suite users,

addressing piracy, and growing our installed base in the Education market;

• Driving new customer adoption in adjacent markets with market expansion efforts such as the

Photography Plan, and using Creative Cloud mobile apps to create awareness and drive new

member adoption;

• And growing ARPU and ARR with value expansion services such as Adobe Stock, where revenue

grew by over 40% year-over-year in Q3.

With Document Cloud, we achieved revenue of $187 million which was in line with our expectations as

we gradually migrate this business to be more recurring. Document Cloud ARR exiting Q3 grew to $442

million, which represents the highest sequential quarterly growth this year. Helping this growth is our

effort to drive adoption of Acrobat subscriptions and value-add services such as Adobe Sign, both of

which are benefitting ARR and building a foundation for revenue growth in the future.


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In Digital Marketing, we drove strong year-over-year growth in annual Adobe Marketing Cloud

subscription bookings and greater than 25% year-over-year growth in subscription revenue. Reported

Marketing Cloud revenue was a record $404 million, ahead of our Q3 target as a result of accelerated

second half pipeline conversion – and resulted in year-over-year growth of 10%.

Marketing Cloud retention, bookings in Q3 and our pipeline set us up for a strong Q4. Our increased

focus on first year annual subscription value will help us more quickly convert our bookings into

reported revenue as we look to FY17 and beyond.

Mobile remains a key market trend for this business; mobile data transactions grew to 52% of total

Adobe Analytics transactions in the quarter.

From a quarter-over-quarter currency perspective, FX increased revenue by $0.9 million. We had

$3.9 million in hedge gains in Q3 FY16, versus $3.6 million in hedge gains in Q2 FY16; thus the net

sequential currency increase to revenue considering hedging gains was $1.2 million.

From a year-over-year currency perspective, FX decreased revenue by $14.2 million. We had $3.9 million

in hedge gains in Q3 FY16, versus $9.1 million in hedge gains in Q3 FY15; thus the net year-over-year

currency decrease to revenue considering hedging gains was $19.4 million.

We experienced stable demand across all major geographies during the quarter. Although there was a

short-term impact on demand following the Brexit announcement in the UK, it did not affect our ability

to achieve our Q3 goals and we do not anticipate any significant impact through the rest of FY16.


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In Q3, Adobe’s effective tax rate was 24% on a GAAP-basis and 21% on a non-GAAP basis.

Our trade DSO was 45 days, which compares to 44 days in the year-ago quarter, and 43 days last quarter.

Deferred revenue grew to a record $1.8 billion, up 38% year-over-year. Our ending cash and short-term

investment position was $4.45 billion, compared to $4.32 billion at the end of Q2.

Cash flow from operations was a record $518 million in the quarter.

During this year we have been using excess domestic cash to buy back stock and drive our share count

down. In Q3, we repurchased approximately 3.5 million shares at a cost of $344 million. We currently

have $800 million remaining under our current authority granted January 2015.

Now I will provide our financial outlook.

We are targeting a fourth quarter revenue range of $1.55 billion to $1.6 billion dollars.

In Digital Media, we expect to add slightly more than $300 million of net new Digital Media ARR during

Q4 to achieve our full year target of approximately $4 billion of ARR exiting the year.


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In Digital Marketing, we expect our business momentum to enable us to achieve Q4 Marketing Cloud

year-over-year revenue growth of approximately 30%, which puts us on pace to achieve our annual

growth target of approximately 20% for the year.

We are targeting our Q4 share count to be between 503 million to 505 million shares. We expect net

non-operating expense to be between $8 million and $10 million on both a GAAP and non-GAAP basis.

We are targeting a Q4 tax rate of approximately 24% on a GAAP basis and 21% on a non-GAAP basis.

These targets yield a Q4 GAAP earnings per share range of 60 cents to 66 cents per share, and a Q4 non-

GAAP earnings per share range of 83 cents to 89 cents.

For the year, our updated annual targets reflect our year-to-date results and our Q4 targets. We expect

FY16 annual revenue between $5.8 billion and $5.85 billion, GAAP EPS between $2.12 and $2.18, and

non-GAAP EPS between $2.94 and $3.00.

In summary, Q3 was yet another strong quarter for Adobe with the leverage in our model continuing to

be reflected in our bottom line performance. Our year-to-date results and targets for Q4 keep us on

track to meet or exceed all of the financial targets we provided at the outset of the year. We look

forward to finishing the year strong and hope to see you at MAX and our upcoming financial analyst

meeting in San Diego.

Mike.


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MIKE SAVIAGE

Thanks Mark.

Adobe MAX will be held on November 2nd through November 4th in San Diego, and we will host a

financial analyst meeting on the first day of the conference which is Wednesday November 2nd. We have

sent email invitations to our investor list to attend MAX at a discounted price. If you have not registered

and wish to attend, please contact Adobe Investor Relations with an email to [email protected].

For those unable to attend MAX and the financial analyst meeting, we will provide live webcasts of the

November 2nd MAX keynote presentation and the financial analyst meeting later that afternoon.

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 #73287217. International callers should dial 404-537-3406. The phone playback

service will be available beginning at 5pm Pacific Time today, and ending at 5pm Pacific Time on

September 23, 2016.

We would now be happy to take your questions, and we ask that you limit your questions to one per

person. Operator.

mailto:[email protected]

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