Mike Saviage - VP, Investor Relations Shantanu Narayen - President and Chief Executive Officer Mark Garrett – EVP and Chief Financial Officer David Wadhwani - SVP and General Manager, Digital Media

Walter Pritchard - Citi Brent Thill - UBS Brad Zelnick - Jefferies Kash Rangan - BofA Merril Lynch Sterling Auty - JPMorgan Ross MacMillan - RBC Capital Markets Kirk Materne - Evercore ISI Mark Moerdler - Bernstein Philip Winslow - Credit Suisse Jay Vleeschhouwer - Griffin Securities Keith Weiss - Morgan Stanley Steve Ashley - Robert W. Baird Alex Zukin - Stephens Samad Samana - FBR Capital Markets Shateel Alam - Goldman Sachs

Good afternoon, Ladies and gentlemen. I would like to welcome you to Adobe Systems Second Quarter Fiscal Year 2015 Earnings Conference Call. My name is Ian and I would now like 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; Mark Garrett, Executive Vice President and CFO; and David Wadhwani, Senior Vice President and General Manager, Digital Media. In the call today, we will discuss Adobe's second quarter fiscal year 2015 financial results. We will also review announcements made earlier today regarding our latest Creative Cloud release, and our new Adobe Stock offering. 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, our financial targets and an updated investor datasheet on www.adobe.com. If you would like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links. Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets, and our forward-looking product plans, is based on information as of today, June 16th, 2015, 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 and financial targets document 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 financial targets document 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.

Adobe delivered strong results in Q2 with revenue of $1.162 billion and non-GAAP earnings per share of $0.48. Momentum across our Creative Cloud, Document Cloud and Marketing Cloud businesses drove these results. As digital continues to disrupt industries, Adobe is uniquely positioned to help brands, media companies, government agencies and educational institutions create digital experiences that are unique, relevant, and effective across every touch point. We are the only company with the vision and assets to address the entire content lifecycle – from creation and delivery to optimization and monetization. We are accelerating the pace of innovation in each of our Cloud offerings and customers are looking to us to provide a complete, integrated platform for their digital transformation. Adobe Marketing Cloud is the industry's most comprehensive offering. We had strong bookings in Q2 and reported revenue of $327 million, representing 15% year-over-year growth. We continued to drive Adobe Marketing Cloud adoption across all eight solutions in Q2 and saw a significant uptick in customers acquiring multiple solutions. In fact, two thirds of our top customers this quarter licensed multiple solutions. Key customer wins included Saks & Co, The Gap, DirecTV, Fox Entertainment and Canadian Imperial Bank of Commerce. The breadth of Adobe Marketing Cloud has been extended with two new solutions, Adobe Audience Manager and Adobe Primetime. Adobe Audience Manager is a data management platform that integrates online and offline data enabling marketers to create and target audience segments in their multi-channel campaigns. Adobe Primetime is a multiscreen TV platform that helps broadcasters, cable networks and service providers create and monetize engaging and personalized TV and film experiences. Primetime has emerged as the global leader in powering TV content across screens, including over-the-top devices such as Apple TV and Roku, and we're partnering with content owners, programmers and pay-TV providers such as Major League Baseball Advanced Media to offer innovative programming across all screens. The integration of the creative and marketing workflow is a unique differentiator for Adobe Marketing Cloud. In Q2, we announced a common asset management foundation across Adobe Marketing Cloud and Creative Cloud, which will make it easier and more efficient for creative and marketing teams to work together. In Q2, we acquired Tumri's advertising technology to add dynamic creative optimization to Adobe Media Optimizer, extending Adobe's lead in the programmatic advertising space. We continue to build a vibrant ecosystem of industry partners for Adobe Marketing Cloud. In Q2, we announced a strategic partnership with Microsoft to integrate Adobe Marketing Cloud into Microsoft's Dynamics CRM to help enterprises better engage with customers. Our Digital Marketing events around the world provide inspiration, education and networking opportunities for leading brands and marketers around the world. In Q2, the Digital Marketing Summits in Salt Lake City, London, and New Delhi were all sold out, and this summer, we will host thousands more at our Digital Marketing Symposia in Sydney and Singapore. Industry analysts continue to recognize our solutions as market-leading in their categories. In April, Gartner recognized Adobe's leadership in its 2015 Magic Quadrant for Multichannel Campaign Management. In Digital Media, we launched the Document Cloud in March and early response has been positive. We saw strong Acrobat DC subscription uptake during the quarter. As the paper-to-digital transition continues, Adobe has a tremendous opportunity to capitalize on our leadership with the PDF and Acrobat franchise. Document Cloud features new mobile and touch capabilities and has built-in electronic signature tools for all users. We reported Document Cloud revenue of $197 million in Q2, and exited the quarter with $329 million of Document Cloud Annualized Recurring Revenue or ARR. Creative Cloud continues to be the preeminent destination for creatives. We are migrating customers from our Creative Suite installed base as well as attracting new users. In Q2, Creative ARR surpassed the $2 billion mark, driven by strong adoption across our Individual, Team and Enterprise offerings. Net new Creative Cloud subscriptions grew by 639,000 in the quarter to over 4.6 million and represent 38% year-over-year growth. Across our Creative and Document Cloud businesses, total Digital Media ARR grew to $2.35 billion as of the end of Q2. Today, we launched our 2015 release of Creative Cloud, featuring innovation in desktop and mobile apps, and Creative Sync technology to enable seamless integration between the two. We unveiled Adobe Stock, a new service that enables creatives to buy and sell stock content as part of the Creative Cloud experience. Now I would like to turn it over to David to provide an update on our Creative Cloud strategy and more details on today's announcements. David?

Thanks, Shantanu. Our Creative Cloud strategy focuses on three growth drivers: The continued migration of Creative Suite customers to Creative Cloud; the expansion of our market through tiered offerings that attract new customers; and the introduction of value-added services that increase ARPU. We are executing well in each of these areas. Our strategy to migrate Creative Suite customers to Creative Cloud is working. We are delivering constant innovation in our Creative Cloud desktop apps, we are expanding our family of connected mobile apps, and we are delivering powerful, integrated asset management capabilities that connect our mobile and desktop app workflows. These cross device workflows are resonating with our customers and have been improving both trial conversion and customer retention. In addition to migration, we are successfully attracting new customers to Creative Cloud through our family of mobile apps and the Creative Cloud Photography Plan. In Q2, we delivered a milestone release of CCP featuring a simplified user experience and new mobile features. CCP is ideal for all photographers and a large percentage of the subscribers are first time Adobe customers. Finally, we remain focused on expanding the value of Creative Cloud through services that drive stickiness, conversion and increased ARPU. Today's introduction of Adobe Stock builds on our Creative Marketplace and represents an estimated $3 billion of incremental addressable market. Now, I'm happy to share a bit about today's 2015 release of Creative Cloud. The release includes major updates to all our flagship desktop apps including significant breakthroughs in productivity, performance and new features. We also updated our family of mobile apps across iPhone, iPad and now for the first time, Android. And we announced significant updates to CreativeSync, the technology that enables our mobile and desktop apps to work together seamlessly. The combination of these capabilities unlocks new creative workflows that will motivate CS customers to upgrade, and drive active use and retention of existing members. Enterprise customers will benefit from all the new Creative Cloud features. In addition, they will get expanded security options and deeper connections between Creative Cloud and our Digital Publishing and Marketing Cloud offerings. Finally, we're introducing Adobe Stock, a brand new service based on our acquisition of Fotolia. We estimate that 85% of Creatives who buy stock content use Adobe tools, and more than 90% of stock content sellers use Adobe software in the preparation of their photos and images. Adobe Stock is the first stock marketplace embedded into the way creatives work. Deep integration with our Creative Cloud desktop apps including Photoshop, Illustrator and InDesign makes buying and using stock photos, images and illustrations incredibly easy. The global launch of Adobe Stock shakes up the multi-billion dollar stock content market. Customers can buy images on demand or as part of a subscription plan. Most importantly, existing and new Creative Cloud members are also able to add Adobe Stock to their subscription plan at a special rate driving increased ARPU over time. Adobe Stock extends the value of Creative Cloud to subscribers who want to monetize their assets and participate in a large, global Creative Marketplace. In just a few short years, we have successfully re-imagined the entire creative process driving over $2 billion of ARR. Today's announcements significantly advance all three of our growth objectives. We're excited this innovation is now available to all our subscribers and we can't wait to see what they do with it. Mark?

In the second quarter of FY15, Adobe achieved record revenue of $1.162 billion. GAAP diluted earnings per share were $0.29 and non-GAAP diluted earnings per share were $0.48. Highlights in our second quarter include, growing Creative ARR to $2.02 billion exiting Q2. ARR has now grown to the point where it has exceeded the peak annual revenue achieved from our legacy Creative Suite perpetual offering. Achieving total Digital Media ARR of $2.35 billion which is the sum of Creative ARR plus another strong quarter of Document Cloud ARR growth; delivering Adobe Marketing Cloud revenue of $327 million; showing leverage in our model, with strong year-over-year growth in operating and net income; growing deferred revenue to a record $1.23 billion; achieving strong cash flow from operations of $471 million, and exiting Q2 with a record 72% recurring revenue. In Digital Media, we achieved revenue of $748 million. This segment has two major components of revenue, Creative Cloud and Document Cloud. The best overall measure of the health of our creative business is Creative ARR, and we grew ARR by $230 million during Q2. Net new Creative Cloud subscriptions increased by 639,000 thousand, and we exited Q2 with 4,610,000 Creative Cloud subscriptions. Retention rates remain strong. With our Document Cloud products, we achieved revenue of $197 million. The benefits of subscription and Enterprise Term Licensing Agreements, or ETLAs, which is a core go-to-market focus with our new Document Cloud offering that shipped during the quarter, helped to grow Document Cloud ARR to a record $329 million exiting Q2. In our Digital Marketing segment there are two components. The first is revenue from our Adobe Marketing Cloud offering and we achieved Adobe Marketing Cloud revenue of $327 million, up 15% year-over-year. Bookings accelerated in Q2, driven by strong pipeline creation at our Digital Marketing Summit user conferences across the world during the quarter. Multi-solution adoption is growing the size of customer engagements. The second component of our Digital Marketing segment is revenue from the LiveCycle and Connect businesses, which contributed $40 million in Q2 revenue consistent with our expectations. Print and Publishing segment revenue was $48 million in Q2. Geographically, we experienced stable demand across our major geographies. From a quarter-over-quarter currency perspective, FX decreased revenue by $16 million. We had $22 million in hedge gains in Q2, FY15, versus $24 million in hedge gains in Q1, FY15, thus the net sequential currency decrease to revenue considering hedging gains was $18 million. From a year-over-year currency perspective, FX decreased revenue by $48 million. Considering the $22 million in hedge gains in Q2, FY15, versus roughly $2 million in hedge gains in Q2, FY14, the net year-over-year currency decrease to revenue considering hedging gains was $28 million. In Q1, Adobe's effective tax rate was 18.5% on a GAAP-basis and 21% on a non-GAAP basis. The GAAP rate was lower than targeted primarily due to tax benefits recognized as a result of the completion of certain tax examinations. Employees at the end of Q2, including summer interns, totaled 13,266 versus 12,698 at the end of last quarter. Our trade DSO was 39 days which compares to 45 days in the year-ago quarter and 44 days last quarter. Cash flow from operations was $471 million in the quarter. Deferred revenue grew to $1.23 billion, up 32% year-over-year. Our ending cash and short-term investment position was $3.41 billion compared to $3.18 billion at the end of Q1. In Q2, we repurchased approximately 2.6 million shares at a cost of $200 million, of which $133 million was done under the new $2 billion authorization approved by our Board of Directors in January, 2015. Now, I would like to provide our financial outlook, covering both Q3 as well as the rest of FY15. We have executed well in the first half of FY15 meeting or exceeding key targets that we set at the outset of the year and we expect our momentum to continue in the second half of this year and into FY16. Adobe has a global business, where currently more than 40% of our revenue comes from outside the U.S. As we've explained, our hedging efforts focus on three quarters out and that strategy has served us well over time. Based on the rolling approach of our hedging program, our hedges maturing in the second half of FY15 and early FY16 were struck at current rates. Therefore moving forward our hedges will not mitigate the FX impact against our FY15 and FY16 revenue targets provided in December 2014. With the strengthening US dollar on a revenue weighted average basis, FX rates have moved approximately 9% from December of 2014 until today. We expect approximately $900 million of foreign currency denominated revenue in the second half of FY15. Applying the 9% rate change to the expected $900 million of revenue yields an estimated $80 million of impact due to FX that we expect will not be offset by hedging. We estimate $30 million of this impact will occur in our third quarter. Our FY15 annual revenue target was $4.925 billion. This revenue target was the sum of our original guidance of $4.85 billion in December plus the additional $75 million of expected FY15 revenue from our acquisition of Fotolia in January. We are now targeting FY15 annual revenue of $4.845 billion, solely due to the estimated $80 million impact of FX in the second half of FY15. We also expect second half year-over-year Adobe Marketing Cloud reported revenue growth of approximately 24%. Given our business momentum, we are increasing our Digital Media ARR target to approximately $2.925 billion exiting FY15, which as a reminder is measured on a constant currency basis. This updated ARR target does not include any benefit from our newly launched Adobe Stock service. Despite the impact of currency, we continue to expect Adobe Marketing Cloud bookings growth of approximately 30% for the year and non-GAAP earnings per share of approximately $2.05.Taking into account the negative impact of $30 million from FX, in Q3 of FY15 we are targeting a revenue range of $1.175 billion to $1.225 billion. In Q3, we expect the sequential increase in Digital Media ARR to be similar to what we achieved in Q2; we expect Digital Media segment revenue to grow sequentially and we expect approximately 21% year-over-year reported revenue growth for Adobe Marketing Cloud. We are targeting our Q3 share count to be 506 million to 508 million shares. We are targeting net non-operating expense to be between $14 million and $16 million on both a GAAP and non-GAAP basis. We are targeting a Q3 tax rate of approximately 25% on a GAAP basis and 21% on a non-GAAP basis. These targets yield Q3 GAAP earnings per share range of $0.23 to $0.29 per share, and Q3 non-GAAP earnings per share range of $0.45 to $0.51. In summary, our strong execution continued in Q2 and Adobe's P&L now reflects the positive impact from the growth of our Cloud-enabled solutions. Mike?

Thanks Mark. As part of our Adobe MAX conference this fall in Los Angeles, we will host an analyst meeting on the afternoon of Tuesday October 6th. Registration information for MAX and the analyst meeting will be sent out later this month. The main keynote presentation at MAX will be on Monday October 5th, and more information about our user conference is available at max.adobe.com. 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 58501348. Again, the number is 855-859-2056 with ID number 58501348. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5pm Pacific Time today, and ending at 10am Pacific Time on Monday June 22nd, 2015. We would now be happy to take your questions, and we ask that you limit your questions to one per person. Operator?

[Operator Instructions] And your first question comes from Walter Pritchard at Citi. Your line is open.

Hi, thanks. We might prefer David talked about the Fotolia opportunity for ARPU and that makes lot of sense. I am wondering if you could just talk a bit about ARPU trends during the quarter and we noticed from a promotional perspective you've added some stuff at the end of the quarter which we've seen and haven't resumed that, could you put that in the context of how should we think about ARPU here as we move through the second half of the year?

Hey, Walter. It's Mark. Sure, so as it relates to promotions, I think we told you on the last quarter call in Q1 we did not have a lot of promotions in the quarter, very, very little. This also was a quarter where we had very little promotional activities. So we are really pleased with the amount of net new subscribers we are driving without a lot of promotional activity. That doesn't suggest that we won't do them in the future but the fact that we are driving a lot of net new subscribers without it right now is a very good sign. As it relates to ARPU, we had the smallest sequential decline we had in quite a long time. So we are very happy with ARPU as we've continued to say ARPU by offering continues to remain stable or increase and the average of all of the ARPUs this quarter dropped very, very slightly and again it was the smallest decline we had in several quarters.

Also, Walter, with respect to Adobe Stock just to clarify, as David said in his prepared remarks, you can if you are a Creative Cloud subscriber add a subscription for Adobe Stock and you can also as a new subscriber subscribe to both Creative Cloud applications as well as Adobe Stock. Both of those will be reflected in the ARR numbers that we report on a going quarterly basis. I wanted to clarify for everybody listening on the call that the standalone subscription for just Adobe Stock is not reported at this point in the Creative Cloud numbers.

And we would likely not add that until 2016, FY16.

And your next question comes from the line of Brent Thill with UBS. Your line is now open.

Thanks, Shantanu, C6 just past, it is three year birthday and I am curious that basis is fairly large and what you've seen so far in the CS6 base now converting over to Creative Cloud and I had a quick follow up with Mark just it relates to Japan. What you saw in the quarter? And any trends there would be helpful.

Sure. So, Brent, as you point out CS6 is definitely long in the -- with today's CC2015 release, the innovation that we are providing as well as the integration with the services makes it even older. We still have a fairly large CS6 base which clearly represents upside opportunity for us to convert to the Creative Cloud. As you are aware in Japan that was the market where we were selling CS6 till even late last year. And so we continue to target CS5 and CS6 as the most likely installed base to convert to CC. They are converting; the innovation is definitely resonating with them. And that continues to be the focus for David and his group.

I think Shantanu touched upon Japan so I don't have anything to add.

And Mark just a quick follow up maybe on the DSO, it was 39 days, we had to go back six years in the model, was that just a subscription model kind or was there -- is there something about lean area in the quarter that surprised you.

There is nothing that really surprises us. It is definitely related to the subscription model. Team does a great job on a collection front as well. It is going to move around as you go through quarters and you have various linearity and deal sizes but we've always been, as you know historically very good at driving a low DSO.

And our next question comes from the line of Brad Zelnick with Jefferies. Your line is now open.

Thanks for taking my question. On Creative Cloud, can you give us an update on the mix of point products versus full suite subscription and particularly with the strength in the home products the past several quarters which seemed to be accretive to the model? Can you update us with even a directional sense of how many users you are attracting that are net new and where are they coming from?

Sure. So, Brad, I'll go ahead and take that. I think the mix in the second quarter of 2015 was 56% was complete as well as 44% was single app. We are certainly -- we saw strength across the board. The momentum of subscriptions if you look at 630,000 plus subscriptions that we had, 38% growth we are seeing, good momentum across each one of them as we've mentioned in the past the Creative Cloud photography is certainly attracting a significant number of new customers and the overall new customer adds continues to be greater than 20%. So we are continued to be pleased with what we are seeing on Creative Cloud adoption.

Thanks. If I could just sneak in a quick one for Mark, OpEx looks like it is guided up 5% sequentially in Q3. Other than the seasonal hires of the summer interns which look like headcount is also up similar percentage sequentially. Is there anything else that we should be thinking about seasonally and where do you expect headcount for the full year? Thanks.

Yes. I mean the bulk of the increase in OpEx as you look out from here is really going to be driven by sales and marketing. Interns don't drive it that much. The regular hires in the quarter were about 350 and there were couple hundred interns in this quarter. But the OpEx moving forward is really going to be driven continued investment in sales and marketing to drive that 30% bookings growth that we need to do in digital marketing and obviously the ETLAs in digital media as well.

And our next question comes from the line of Kash Rangan with Merril Lynch. Your line is now open.

Hi, guys. Thank you. You made an observation that the creative business is finally at the point where it was roughly comparable to the size of the creative business the licensed model, yet you have only 4.6 million subscribers in your base. It feels like the overall opportunity is at least only one third penetrated, maybe -- and maybe even less so. So what are the opportunities to be able to triple the size of your creative business given that you got about one third penetration off your old base, opportunities and challenges consequentially as well as you try to triple the size of the business, is that to say a possibility, and also wanted to ascertain from you what realistic attach rate should we expect for the stock business given your base of creative pros is about 6 million - 6.7 million, I think that's the data that I have from your analyst day a couple of years back. Thank you.

Yes. So, Kash, I think you are alluding to the numbers that we've given in terms of the Creative Suites installed base being over 12 million and clearly the innovation that David and his group are driving and I'll then ask him to add color on the specific features. We'll certainly continue to help drive new, migrate the existing CS customers into the Creative Cloud option. The addition of the new services are certainly continuing to attract a brand new set of customers that's expanding the overall installed base as we continue to target creatives both in the imaging space and with a number of the mobile applications, what we are doing to increase the size of the funnel which again is adding to the available opportunity that we have in that particular market. And I think Stock is a little bit early in terms of the rollout, but again I think David has talked about what percentage of people both buy and sell using Adobe tools and that represent an opportunity.

Sure. Let me add a couple of things to that. First of all, the announcements that we had with the 2015 release were very broad based. We had major enhancements to our desktop applications and their mobile applications on IOS and we also for the first time introduced the mobile applications on Android. So we feel that that's going to have a broader play as well. Additionally, we made some significant updates to the Creative Sync Technology that moves assets across the desktop and mobile application to enable them to work as a single family. And of course we introduced the Adobe Stock in addition to some very visible changes that we made to the desktop applications around touch which is one of the big drivers that we believe in terms of CS4, CS5 and CS6 customers coming to the platform. A couple of things to call out in terms of what we are seeing in terms of the new capabilities and how that's driving existing customer behavior. A lot of the existing enhancements we've made to mobile applications are having significant driving on both the migration and also on new customers coming into the family. So as you noted and as we've talked about in the past, the mobile applications have been around for about a year and what we are seeing is that they are driving increased conversion of people filing the products. We see that they are increasing retention of paid numbers that are using -- that have been using the products. And we see that they are driving additional creation of Adobe ID, so we are seeing more Adobe IDs created as a result of mobile first interaction with Creative Cloud than ever before and I’d characterize the conversion of those mobile IDs to paid customers as generally strong. So we are very happy with how all of that has been playing out in the ecosystem.

So conceptually I want to make sure I am not making a mistake here. The ARPU is going to lift and the TAM is actually larger than the old base which means in the new world you only have to give revenue guidance but it feels like your creative business could be multiples of what it was in the prior to this model transition. But I just add up your comments.

Yes, Kash. I mean the whole strategy around the Creative Cloud was to reimagine the creative process, make it far more predictable and we definitely thought to increase significantly the size of the market opportunity. I think one measure that you can see even today of how successful we’ve already been is the fact that we've talked about how we used to sell approximately 3 million units in the past and now if you look at what we are doing with this 4.6 million subscribers and in addition to that all of the enterprise deals that we have, we've already dramatically I think increased the size of the available opportunity. One last thing I might add in addition to what David and I said, the enterprise also represents an opportunity with this particular release. We've some very significant functionality that will enable enterprises to store all of their assets from behind the firewall and so continuing to focus on ETLAs and migrating enterprise customers with this new product I think represents an untapped opportunity.

And our next question comes from the line of Sterling Auty from JPMorgan. Your line is open.

Yes, thanks. Hi, guys. Wondering in terms tell us around the Marketing Cloud in terms of the revenue growth in particular how much of the new target this year is impacted just by the FX versus anything else is going on. And just as a quick follow up, Mark, any sense of what's EPS on a third quarter for FX looks like?

Sure, Sterling. So on the Marketing Cloud as we said booking remains very strong. In fact, I am sure you caught that we are not changing that 30% bookings outlook despite the impact to currency which obviously suggest that we would have done better than 30% without the change in FX rate. So FX is clearly impacting bookings, it is clearly impacting the marketing revenue growth. We've always felt that the marketing revenue growth would accelerate in the back half of the year. And that's why I mentioned that the second half would grow 24% year-over-year. So we are still seeing really strong growth in marketing despite currency, but there is no doubt that currency has an impact on that revenue growth rate just like the rest of the business. And then as it relates to EPS, Sterling, I mean it is pretty straight forward. We said that FX was impacting Q3 by about $30 million. So if you do the rough math, you are going to get to around $0.04 to $0.06 of earnings impact in the third quarter as a result of that $30 million but like we said we are still confident in the in the $2.05 again despite the impact of $80 million worth of currency in the back half of the year.

And your next question comes from the line of Ross MacMillan with RBC Capital Market. Your line is open.

Yes, thanks a lot. Hey, Mark, just wanted to ask you on the subs. I know you are focused on ARR but earlier in the year you talked about sequential and pieces in the sub add -- to this year, so just curious whether you still expect sequential increases in 3Q, 4Q and the $5.9 million target for the year and then just on -- I had one specific one for David on Fotolia regarding the contributor payout, it looks like you said 33% payout and I just want to get a sense of whether that was new-- whether that was an increase of the payout to the contributors still we have -- Thanks.

Hey, Ross, Yes, so as you know we've always said for a four years now that ARR is really the best measure of the health of the business. And the sub number is an incomplete number because it doesn't include enterprise and as we add future offerings like Adobe Stock, looking at that sub number gets I think less and less meaningful over time. But everything is encompassed in that ARR number. That's obviously going very well, that's why we've raised our guidance on the ARR number and we had a great sub quarter. We are thrilled with the sub quarter and we continue to report sub actuals. But we are not going to guide on the sub number moving forward. That said our annual expectations really have not changed. We need that $5.9 million sub number to hit the increased ARR target, and clearly with the performance we've had today we are on the path to meet or exceed that $5.9 million target. But we really do want you guys as we do to focus more and more on ARR.

Great. And on the question about the contributor payouts. The way we look at this opportunity is that, it is obviously a large growing opportunity where we have strong relationships with both the buying side and the selling side. And as we looked at the market make up, we saw the opportunity to grow this -- grow the TAM of this opportunity by doing two fundamental things. First was to move the friction in terms of how sellers and buyers come together. And that's what we've done to integrate both the selling and the buying directly within the tools. And we believe that's going to be a really big opportunity to increase the velocity of content flowing through the system. But the second thing we wanted to do is streamline the economics around these businesses. There we believe that the marketplace today is priced with too much complexity. So we wanted to streamline the opportunity for pricing for the buyers and we wanted to create a very simple price model for the contributors as well. So instead of doing a complex tiered approach Adobe Stock we are doing a simple 33% for sales that we have.

In terms of thinking of Q3 and Q4, Ross, just too maybe add a little bit more color. I would look at ARR being slightly up in Q3 and then sequentially up in Q4. And that's reasonable proxy for sub, sub.

Right, exactly.

And our next question comes from the line of Kirk Materne from Evercore ISI. Your line is open.

Thanks very much. Shantanu, wondering if you could talk a little bit more about the digital marketing business just with two thirds of your customers now taking on more than one product. Could you just talk about some of the -- I guess the solution that are doing particularly well within sort of more of bundle framework and you start to sell more solution, I guess the competitive environment change at all or you just placing more point core products, is it so much mean the greenfield opportunity, I was wondering if you just provide a little bit more color on that front. Thanks.

Sure, Kirk. With respect to where the bulk of the booking are right now and the revenue, I would say it is the combination of the Adobe experience manager which is helping people create the online web infrastructure for the future. It continues to be Adobe Analytics so people can get insight on what's exactly happening on their website. And Adobe Campaign continues to do very well which enables you to have multi-channel orchestration of communication with your customers. Having said that, the breadth of the offerings right now is starting to make all of the sticky and that's resulting in the increased booking and the most strategic relationships. And I can say that some of the smaller or newer solutions, when you look at what's happening with media optimizer as well as the other solutions like target. You are actually seeing that business double year-over-year. So we are seeing some really good traction in the new solutions as people look at the benefit of that. Primetime had a great quarter. Again, slightly smaller numbers in the scheme of things but the good news from our point of view is the new solutions like Audience Manager, Primetime, Target as well as media optimizer are doing really very well on a year-over-year basis. And makes the entire platform far more comprehensive and sticky.

If I get just have really quick follow up, you guys had some nice partnership announcement added to summit this year with Accenture, IBM. Can you just talk a little bit -- just about how your broader chain on this digital marketing is going in terms of the kind of leverage, you are potentially getting at if this type of partnership, if you want to talk about any of them specifically.

Well, I think the great news is every single analyst who covers the digital marketing space has clearly identified Adobe as the leader. That continues to be the case, and what that means is that the inbound request for systems integrators, for digital agencies to want to partner with Adobe is only increasing. The way we look at the revenue as we look at what are partner source, partner influence and partner driven. And that as a percentage of the booking is certainly going up. And without highlighting anyone partner on this call, the number of significant partnership is only increasing.

And our next question comes from the line of Mark Moerdler of Bernstein. Your line is now open.

Thank you, I appreciate. Two questions. First on the Digital Marketing side. Bookings were bit slowly this quarter. Was this timing of billing, FX, deal closure, what else was impacting that number? Then on the Adobe Stock. Should we think this has been purchased by Digital Marketing Cloud customers or will the sale be through the Creative Cloud, their additional market?

So, Mark, I do want to clarify. We had a very strong bookings quarter in Q2. So as it related to bookings, our revenue Mark and maybe add more color on that but in terms of booking we had a very strong quarter with Digital Marketing. And as it relates to Adobe Stock very quickly, you can both as an individual get it through adobe.com as well as we have enterprise offering that we will sell. I think you are very perceptive in that the number of marketing professionals who will also use Stock and the integration of Adobe Stock with our Marketing Cloud also definitely represents on tapped opportunity. And as David said, we are really increasing the total available market for this because making pictures more accessible to people and allowing more people to contribute, I think that's a unique advantage that Adobe has.

Yes, and Shantanu said Mark on the Digital Marketing side bookings were very strong. We are reiterating the 30% growth for the year despite the impact of currency. Revenue grew 15%, so if you looking at revenue, revenue growth were maybe a little less you would have thought. But as I said we expected that to ramp over the course of the year and in the second half of the year again despite currency, we are anticipating 24% growth in the second half of the year. Second half over second half. So there is some currency impact in there without a doubt but still strong growth in the back half of the year.

Perfect. And one quick and the follow up I apologize. How should we think about the impact of Document Cloud or document services revenue? We see a dip as quite tradition or is it just going to be revenue growth?

We talked about Document Cloud is that the revenue will continue to be relatively consistent or flat. But way we are seeing the adoption is in the annualized recurring revenue or ARR so we are seeing good growth in the ARR. I think we highlighted that in the prepared remarks as well. And we did see a good healthy subscription adoption of the new Acrobat DC product.

And our next question comes from the line Phil Philip Winslow, Credit Suisse. Your line is now open.

Hi. Thanks for taking my questions. Just have a question on the Marketing Cloud. Obviously a lot of companies have made acquisitions here in different categories so just the broad marketing space of that couple of years. Wondering if you could just comment on the competitive environment. What you are seeing out there? I just kind of look at your portfolio sort of versus the competition, what really sort of standout is why you continue to win business but also what areas do you think you could see yourself looking to fill in either organically or inorganically?

Yes. I think to your point, everybody recognizes that addressing the chief revenue officer, the chief digital officer or chief marketing officer is the most explosive software category that exist. I think our sweet spot has always been how do we target this marketer publisher with the customer experience solutions that we have. In the offerings that we have I will continue to say, it is the combination of content plus data that represents the unique advantage that Adobe has. And that's the combination of the Adobe Experience Manager as well as Adobe Analytics. But the product that's doing really very well right now is Audience Manager. And what Audience Manager allows people to do is have absolutely the same segmentation across their marketing spend if they are trying to attract customers across any personalized offers that they want to make as well as conversion. And so I think it is the combination of all of our products. And honestly it is also the tieback with the creative products that content velocity in terms of people trying to run campaigns. The fact that Creative Cloud works with the Adobe Experience Manager asset management solution that enables us whether you are a retailer, whether you are a financial servicers, whether you are government, whether you are a publisher, that content velocity that we can provide is just so much faster than anybody else. And I think across the marketing platform, we don't really don't see one single competitor. We do have a number of point product competitors for each of the individual solutions but I think as the comprehensiveness of our offering that enables us to win those deals.

And our next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Your line is now open.

Thanks, good afternoon. Now the question first on the components of growth in the doc services or Document Cloud. ARR then a cash flow question. So this was touched on couple of questions back but when we think about the components of doc services in terms of new business you must be shipping at least couple million new licenses a year of acrobat. And you made very clear that you are not going to pull the plug on perpetual at least not any time soon but how are you thinking about regarding those or having signed as subscription versus perpetual and then on the ETLA side of doc services, win an extends that ETLA there is a proportion of doc services, it should be substantially higher for historically based reasons than ETLA on the creative side. Another words looks like ETLA are about tenth of creative ARR. But given the old volume license in part of Acrobat shouldn't ETLA be much, much higher percentage of doc services.

So, Jay, with respect to the Document Cloud you are right that the ETLA portion of document services is higher than the ETLA portion of the Creative Cloud due to the historical adoption of Acrobat within the enterprise. And then moving to three year ETLAs. With respect to individual, Acrobat shrink used to continue to be a part of the offering and now on adobe.com the main offering that we provide is the subscription offering and the subscription offering uptake within individuals and teams is actually very healthy. I think what's happen honestly in the marketplace is that when you look at after Creative Cloud even Office 365 has now been offered through subscription is just become the most standardized way of happening. And so you are right that the perpetual mix of Acrobat is higher than other products in our category. But what we continue to be pleased with is that when people come to adobe.com, the individual adoption which is important to create that viral impact within enterprises, the subscription offering uptake is very healthy.

All right, thanks. On cash flow for Mark, through the first half your GAAP operating cash flow is about 650, you gave your guidance for the second half of the year, into taking into account currency plus the stocking effect to the model doesn't extend to reason that your second half cash flow should be at least much and probably substantially higher than the first half, so that total fiscal 2015 cash flow should be at least couple hundred million higher than the amount of fiscal 2014.

Yes, Jay, so we don't guide obviously on cash flow. I can't tell you there is quarterly seasonality to cash flow. If you look at Q4 to Q1 it is typically down coming off of Q4 due to all the yearend payments that you make and debt interest and then you get to Q2 and there is none of those payments so it goes back up which is what you saw this quarter. In Q3, you typically see a dip relative to last quarter again because of tax payments and ESPP and debt interest and then you got a spike back up in Q4. So there is seasonality quarter-to-quarter. Obviously, the net income and the business starts to get better and better as we start to drive more and more earnings, cash flow is going to follow that. So without a doubt cash flow is going to get better and better.

And our next question comes from the line Keith Weiss with Morgan Stanley. Your line is now open.

Thank you, guys for taking the question and good quarter. You talked about earlier on there is quite much decline in ARPU dollar was small you have seen in quite some time. And it seems like we have a couple of financial -- and several potential ARPU sort of benefit on the horizon. I was wondering if you could talk just little bit about what our expectations should be with the timing of that particularly on when we think that the Adobe Stock is fair than getting ARPU and when this sort of the renewal of commercial pricing or the expiration promotional pricing could start to get benefit ARPUs so just we get better understanding to following that ARPU.

Keith, I'll start and then Shantanu or David can add on. I have to sound like a broken record but focus on ARR right I mean that's really the metric that's going to incorporate everything. Subs, ARR, any kind of churn so that is where we are focused and we obviously feel good about that because just we just raised the number on the year for ARR.

And I think in terms of the mix when you think about what's happening with the mix just continue to recognize as we've said that within each band ARPU has been very stable and as the mix continues to drive new offerings what the ARPU will reflect is the blended mix and so I'll also end with what Mark said. I think continuing to focus on ARR and if you look at the second half of the year it shows that ARR will continue to increase over Q1 and Q2 which I think shows the momentum in the business.

Got it, and I take rather different type of question then, I think you mentioned earlier about that the conversion of trial customers to the end users are improving. Wondering if you could just give little bit color in terms of -- is that an inflection going on or is just an improvement, is there anything that this kind of cap rising that a transition from residue.

Yes. I can take that. From a perspective of the improvements we've been seeing to conversion and retention associated with mobile application I believe is what you are referring to the statement you made. This is really just an ongoing evolution that we started a year and half ago. As we started to move more and more of our business online, we have the added advantage of having access to the world's best Marketing Cloud. So in the context of using all of the technology from that side of the business, it has been an ongoing set of activities to improve conversion that we see as traffic comes to adobe.com. More recently we've had an increase in terms of traffic and utilization of our mobile applications. So we understand what's driving that, what are the predictive indicators of use in those applications that are driving conversion to paid customers. And we are increasingly seeing the use of data and content flows with creative sync as another material driver of conversions and retention. So what we are doing is that we are building the products and updating the products with new capabilities and features, but we are also making sure that as we do that the user experience, the on boarding workflows and the communication that we have with them through email and other forms through training are all driving people to use these features that drive higher conversion and retention. So it is not one magic bullet but it has been a series of actions that we've taken. And we see a lot more we can do in the years to come.

And our next question comes from the line of Steve Ashley with Robert W. Baird. Your line is now open.

Thanks. A couple of questions. I think on the last call you said that Japan had been really lagging in terms of just where it was in Creative Cloud adoption but we had started to see some improvement there. Is that improvement or ramping of Creative Cloud adoption in Japan continuing? Then my second question is just on the Marketing Cloud business and partner or channel leverage. Are you seeing improved partner contribution in that business? Thanks.

Yes. So, Steve, Japan continues to as the distance from CS6 gets longer and longer improve, we have a special event also that we are doing in Japan to ensure that the awareness of the CC2015 as well as all of the other additional services and mobile apps is strong right now. And so we continue to expect that would lead to increased adoption of Creative Cloud in Japan. And the second question was with respect to Marketing Cloud and partner leverage. I mentioned earlier that the amount of partner influence across sourced as well as influenced, revenue and the Marketing Cloud is fairly high and that's happening across both digital agencies as well as system integrators. And all of the large deals that we are doing because consulting is something that we would like partners to provide, there is a partner involved in most of the larger deals.

And our next question comes from the line of Alex Zukin from Stephens. Your line is now open.

Hey, guys. Thanks for taking my question. Can you talk about what you are seeing with respect to overall users that are realizing some of the synergies throughout content creation and distribution and maybe which combination are currently the most popular?

Sure. I think we've talked in the past about how the publishing segment for sure as publishers are trying to provide the content creation once and then delivery across multiple forms of devices. That's clearly the vertical that has led the integration of Creative Cloud and Marketing Cloud. Retail tends to be another large vertical where we are seeing a lot of adoption of the Creative Cloud and the Marketing Cloud because the velocity of the products that they are offering tends to be fairly high. And everything to do with consumers, whether it is travel or entertainment is an area where I think we've talked about companies like Under Armour and others who are certainly using that particular technology as well. So we are seeing it across all industries, financial services, honestly we are getting better at also painting the entire Adobe story with the CC Enterprise release that's coming out now. And the fact that it synchronizes with the Adobe Marketing Cloud, that's going to make it even more natural. So while I would say the publishing and retail led the charge in terms of seeing the benefits of the creative cloud and marketing cloud integration, now that's spreading to honestly every single vertical in every geography.

Got it. In fact if I could just squeeze in one more about the recent partnership announcement with Microsoft and what that could means strategically for Marketing Cloud?

Yes. I think with Marketing Cloud, our vision really is that as every single enterprise moves to become more of a real time enterprise where the need to in the last millisecond deliver the right piece of content based on the consumer profile or the consumer demographic, it becomes even more apparent to us that enabling us integration with people who have CRM solution is something that will add value of our Marketing Cloud. So Microsoft with dynamic CRM has a great offering in that and that was the reason for the integration. The other reason for our partnership with Microsoft continues to be how we can leverage Azure in terms of having technology that enables us to create all of these compelling offerings in real time. So that's the benefit on the digital marketing side. On the Creative Cloud side I think we've shown that as touch becomes more natural way for people to do content creation with what we've done on the Surface Pro and in products like Illustrator and Photoshop, I think we've demonstrated significant value associated with touch which both Microsoft and Adobe are excited about.

And our next question comes from the line of Samad Samana from FBR Capital Markets. Your line is now open.

Hi, thanks for taking my questions. I want to shift gears a little bit and talk about the profitability side, margin expanded, nice swing continue to say year-over-year, operating expenses were actually down year-over-year, I was curious how you think about the ramp in expenses, whether there is some cash that will happen in the back, how we should expect expenses to ramp going forward?

Hi, it is Mark. Yes, we've obviously been very focused on driving earnings back into the model as revenue comes back into the model. And as we get back to where we before we started this transition which is going to happen relatively soon. Moving forward from here you will see OpEx increase and I touched on this earlier, we are driving 30% bookings growth in digital marketing that requires a lot of sales and marketing capacity. And obviously we are driving ETLAs in the enterprise for the document services business the Document Cloud business as well as the creative business. So you will see more OpEx investment but with that we are going to continue to drive more and more margin moving forward.

And finally our next question comes from Heather Bellini from Goldman Sachs. Your line is now open.

Hi, this is Shateel Alam filling in for Heather. I just want to ask a quick one on seasonality of single app subs. in the past you said that mix was about 50:50; little lower this quarter at 44%. Should we expect that to swing around a lot from quarter-to-quarter and what do you expect that to fall out at for the year?

I think what we've said in the past is if you look steady state or what's happen in the Creatives suite, the mix was approximately 50:50, I think as we continue to attract new customers to the platform through the Creative Cloud photography offering, we are certainly seeing the single app adoption increase. We've also said in the past that when we first offered team, team was only offered in the complete option and the single app is definitely an on ramp to the Creative Cloud. And so I think as it relates to the creative segment part of Creative Cloud, steady state on the Creatives suite is probably a good metric. Certainly as we are expanding the entire available market through the introduction of these new single app offerings that was skew it a little bit more towards the single app as well. Given that was the last question, sort of in summary what I would like to say is it is clear that all around the world companies are focusing on how they use technology as an enablers to accomplish this customer centric transformation. And I think delivering these great online experiences across mobile devices which is key to the transformation is driving Adobe's business because we have this unique set of technology assets to help customers solve this across various industries. And the business momentum we are experiencing, we believe is a result of both having a great strategy as well as excellent execution. We are pleased with Creative Cloud momentum. This week was a really important milestone as we release CC2015 and introduced Adobe Stock which is both an ARPU as well as TAM enhancing service. And it is really more proof of how we are making Creative Cloud a one stop destination for creators. Document Cloud continues to go after the large paper to digital opportunity and Marketing Cloud continues to be the leader and delivering great value in an explosive software category. I think in this quarter you also saw the earnings upside which is the leverage of our financial model. And in summary we think Adobe is in great shape and we remain focused on driving both product innovation as well as strong financial results for the rest of 2015 and beyond. Thank you for joining us today.

And this concludes our call.