Shantanu Narayen - President and CEO Mark Garrett - EVP and CFO Mike Saviage - VP, Investor Relations

Steven Ashley - Robert W. Baird & Company Ross MacMillan - RBC Capital Markets Brent Thill - UBS Brad Zelnick - Jefferies Sterling Auty - JPMorgan Walter Pritchard - Citi Kash Rangan - Bank of America Merrill Lynch Mark Moerdler - Sanford C. Bernstein & Co. Kirk Materne - Evercore ISI Keith Weiss - Morgan Stanley Derrick Wood - Susquehanna International Group Brendan Barnicle - Pacific Crest Securities Jay Vleeschhouwer - Griffin Securities Heather Bellini - Goldman Sachs Philip Winslow - Credit Suisse

Good afternoon, ladies and gentlemen. I’d like to welcome you to Adobe Systems Third Quarter Fiscal Year 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I’d like to now turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon and thank you for joining us today. Joining me on the call are Adobe's President and CEO, Shantanu Narayen; and Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe's third quarter fiscal year 2015 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. 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 17, 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 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 Web site. 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 Web site 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’ll now turn the call over to Shantanu.

Adobe delivered strong results in Q3 with revenue of $1.218 billion and non-GAAP earnings per share of $0.54. Strong Creative Cloud Adoption and record Adobe Marketing Cloud revenue drove these results. In digital media, Creative Cloud has become the de facto platform for all creatives, providing the tools and services to fulfill every creative need. We are migrating customers from our Creative suite installed base as well as attracting new users with strong adoption across our individual team and enterprise offerings. Net new Creative Cloud subscriptions grew by 684,000 during Q3 and we exited the quarter with over 5.3 million subscriptions. Combining this adoption with the annual value of enterprise agreements in success with Adobe Stock, Creative Annualized Recurring Revenue or ARR achieved sequential growth of $262 million. We exited the quarter with approximately $2.3 billion of Creative ARR. Continuous innovation is the hallmark of Creative Cloud and the catalyst for our retention and growth. In the video space Adobe continues to trail blaze. Last week at IBC 2015, Europe’s largest professional broadcast conference, we announced the next wave of Creative Cloud innovation coming soon to Adobe Premier Pro. Featuring groundbreaking support for Ultra HD, brilliant color technology improvements, a new touch work flows, Premier Pro is the leader in professional video. We see a large growth opportunity in enabling film and broadcast customers to transition to an entirely Adobe based workflow. Marquee customers continue to make the switch to Premier Pro. 20th Century Fox is using Adobe’s Video Solution for its upcoming movie Deadpool which opens in February. Creative Cloud innovation is forging ahead in the mobile space where our mission is to help Creatives bridge their desktop and mobile design processes into a seamless Creative workflow. One of our most anticipated mobile apps Photoshop Fix debuted last week on stage at Apple’s launch event. Photoshop Fix will deliver incredible retouching capabilities to a mainstream mobile first audience while providing pros with a handy tool for quick edits. Our plan to deliver new values with services such as Adobe Stock to augment our desktop and mobile applications is off to a strong start. Customers appreciate the deep integration of Adobe Stock in our Creative applications and are adopting Creative Cloud subscription offerings that include Adobe Stock. We will continue to deliver new services and partner with a broader ecosystem to make Creative Cloud the one stop shop for Creative inspiration. In July we announced our next generation digital publishing solution. Already the leader in the publishing segment, our new DPS offering will enable brands to easily repurpose their existing marketing content into immersive mobile apps without writing code. Next month we will hold our Max Creativity Conference in Los Angeles. Max has become the annual meeting place for the Creative community and we expect this to be our biggest event ever. We are excited to showcase how customers are changing the world with their creativity and we will unveil our newest Creative Cloud technology. In our documents business, reception to our new Adobe Document Cloud and Acrobat DC has been positive. Success with the new launch helps to drive Document Cloud revenue of $194 million in Q3. We grew Document Cloud ARR to $357 million exiting the quarter. Document Cloud ARR is increasing based on Enterprise Adoption as well as the growth of individual subscriptions with new users. We continue to expand our offering in e-signatures through integrations with a vibrant and growing enterprise partner ecosystem including Ariba, Salesforce and Workday. Across our Creative Cloud and Document Cloud businesses, total digital media ARR grew to $2.65 billion as of the end of Q3. Adobe Marketing Cloud continues to be the leader in the exploding digital marketing category offering the most complete set of solutions and a robust partner network with strong bookings in Q3 and record marketing cloud revenue of $368 million, representing 27% year-over-year growth. In July, we held sold out Digital Marketing events in Sydney and Singapore where we hosted thousands of marketers for a day of inspiration, education, and networking. Customers on stage included Starwood Hotels and Resorts Unilever, Nestlé, Rakuten, and Tourism Australia. Next week we will host nearly 2,000 customers at our symposia in Tokyo and San Francisco. Partners continue to be a critical part of our digital marketing strategy. Last week we announced the WPP Adobe Alliance and expanded partnership with WPP, one of the world’s largest agency networks. WPP agencies will become certified Adobe Marketing Cloud experts with the skills required to design and develop, sell, deploy and operate our solutions throughout their network. Adobe announced a major advancement in our programmatic ad platform for advertisers and media publishers leveraging fully integrated solutions in Adobe Marketing Cloud. Powered by Adobe media optimizer, the new self-service technology allows advertisers to take direct control of automated ad buying for search, display, and social media across ad exchanges and media networks like Google, Facebook, and Yahoo!. Tight integration with Adobe Analytics and Adobe Audience Manager, ensures that advertisers can tap into data to refine and target granular audience segments. Dynamic creative capabilities enable advertisers to use images, videos, and other assets from Creative Cloud to deliver the right content to the right user at the right time. In addition to making this programmatic platform available to advertisers, Adobe also announced its programmatic offering for media publishers. Adobe Primetime, Adobe's TV platform, now supports over the top and direct to consumer offerings with audience acquisition, engagement, monetization, and measurement capabilities. Recently launched services benefiting from Adobe Primetime include HBO Now, Showtime, MLB and Sony Pictures Entertainment. Industry analysts continue to recognize our solutions as market leading in their categories. Last month Gartner named Adobe as a leader in two Magic Quadrant reports. Web content management where we were ranked highest in completeness of vision and mobile application development. Earlier today we announced some changes to our executive team. David Wadhwani has decided to leave Adobe, to pursue a CEO opportunity and we’ve named Brian Lampkin to head up the combined digital media business. Brian, who currently leads the Document Cloud business is no stranger to the Creative business having being one of the architects of both Photoshop and Creative Suite. Under Brian's leadership we have the opportunity to further align Creative Cloud and Document Cloud product development and go to market efforts. I want to thank David for his numerous contributions and wish him well. In July we announced Abhay Parasnis, as our new CTO. Abhay has 20 years of experience in enterprise software industry and his charter is to drive Adobe's overall technology strategy, architecture and innovation roadmap for cloud services. Human resources are our capital at Adobe. In Q3 we announced a new employee leave policy. Progressive benefits such as this help us be recognized as one of the best places to work and enable us to attract and retain incredible talent including a record number of new college hires. Great software comes from great people. I look forward to seeing many of you at our Financial Analyst meeting at MAX in October. Mark?

In the third quarter of FY15, Adobe achieved record revenue of $1.218 billion. GAAP diluted earnings per share were $0.34 and non-GAAP diluted earnings per share were $0.54. Highlights in our third quarter include, accelerating adoption of Creative Cloud which helps to grow Creative ARR to almost $2.03 billion exiting Q3. Building total Digital Media ARR to $2.65 billion which is the sum of Creative ARR plus another strong quarter of Document Cloud ARR growth. Achieving record Adobe Marketing Cloud revenue of $368 million, which represents 27% year-over-year growth, delivering strong year-over-year growth in operating and net income; growing deferred revenue to a record $1.3 billion; achieving strong cash flow from operations of $360 million, and exiting Q3 with a record 73% recurring revenue. In Digital Media, we achieved revenue of $770 million. This segment has two major components of revenue, Creative Cloud and Document Cloud. As we have said, the best overall measure of the health of our creative business is Creative ARR, and in Q3 growth of Creative ARR was strong. We added $262 million of Creative ARR during the quarter, driven by strong net new Creative Cloud subscription ads of 684,000. Te exited the quarter with 5,334,000 Creative Cloud subscriptions. Our investor data sheet on adobe.com reflects a favorable adjustment of Creative Cloud subscriptions. We slightly underreported Creative Cloud subscriptions due to how retail point of sale or POSA units were reported. The adjustment added approximately 40,000 net new subscriptions over the prior three quarters. Across all routes to market, we continue to see strong demand for Creative Cloud. We are migrating existing customers to Creative Cloud and are attracting large numbers of first-time customers. In addition, we are now migrating significant numbers of hobbyist customers who previously used Photoshop Elements and Lightroom on a perpetual basis to the Creative Cloud photography subscription offering. Adobe Stock is contributing to both ARR and ARPU. Creative Cloud ARPU was consistent with Q2 and Creative Cloud Retention remains strong. With our Document Cloud products, we achieved Q3 revenue of $194 million. Adoption of our new Document Cloud offering that shipped during Q2 has been solid, helping to grow Document Cloud ARR to $357 million exiting Q3. Document Cloud reported revenue remains relatively flat as we continue to drive towards our goal of more acrobat subscriptions, which is reflected in the Document Cloud ARR growth. In our Digital Marketing segment there are two components. The first is revenue from our Adobe Marketing Cloud offering and we achieved record Adobe Marketing Cloud revenue of $368 million, up 27% year-over-year. Despite currency impact, based on our strong Q3 bookings, we remain on track to achieve 30% or greater Marketing Cloud bookings growth for the year. The second component of our Digital Marketing segment is revenue from the LiveCycle and Connect businesses, which contributed $34 million in Q3 revenue. Print and Publishing segment revenue was $46 million in Q3. Geographically, we experienced stable demand across our major geographies. From a quarter-over-quarter currency perspective, FX decreased revenue by $6 million. We had $9 million in hedge gains in Q3, FY15, versus $22 million in hedge gains in Q2, FY15, thus the net sequential currency decrease to revenue considering hedging gains was $19 million. From a year-over-year currency perspective, FX decreased revenue by $58 million. Considering the $9 million in hedge gains in Q3, FY15, versus $1 million in hedge gains in Q3, FY14, the net year-over-year currency decrease to revenue considering hedging gains was $50 million. In Q3, Adobe's effective tax rate was 25% on a GAAP-basis and 21% on a non-GAAP basis, consistent with our targets for the quarter. Employees at the end of Q3 totaled 13,665 versus 13,266 at the end of last quarter. Our trade DSO was 44 days which compares to 48 days in the year-ago quarter and 39 days last quarter. Cash flow from operations was $360 million in the quarter. Deferred revenue grew to $1.31 billion, up 31% year-over-year. Our ending cash and short-term investment position was $3.67 billion compared to $3.41 billion at the end of Q2. In Q3, we repurchased approximately 1.6 million shares at a cost of $132 million. Now, I’d like to provide our financial outlook. Our overall business remains strong across our key product segments and geographies. We continue to drive large portions of our legacy perpetual businesses to a recurring model and this shift has improved the overall long-term health of our business. ARR deferred revenue and unbilled backlog have all grown faster than expected with some short-term impact to revenue. In Digital Media, we have discussed how the transition to subscriptions is happening faster in Creative. We're now seeing a similar trend with Acrobat Lightroom and Photoshop Elements. As a result, we’ve consistently raised our Digital Media ARR targets and we’re doing so again for Q4 FY15. Our new Digital Media ARR target existing this year is 2.95 billion with slightly lower revenue in Q4 than previously expected. In Digital Marketing, we are driving larger, multi-year and multi-solution customer contracts. As a result of larger engagements and longer implementation cycles, we are seeing strong growth in deferred revenue and unbilled backlog. We are targeting a Q4 revenue range for Adobe Marketing Cloud of $365 million to $400 million based on the potential variability of contracts that closes perpetual versus ratable licensing. We are therefore targeting an overall Adobe Q4 revenue range of $1,275,000,000 to $1,325,000,000. We expect our Q4 share account to be between 506 million to 508 million shares. We're targeting net non-operating expense to be between $40 million and $60 million on both a GAAP and non-GAAP basis. We are targeting a Q4 tax rate of approximately 25% on a GAAP basis and 21% on a non-GAAP basis. These targets yield a Q4 GAAP earnings per share range of $0.32 to $0.38 per share and a Q4 non-GAAP earnings per share range of $0.56 to $0.62. In summary, we delivered record results once again and are focused on a strong finish in Q4. We remain excited about our long-term growth prospects and look forward to sharing a financial roadmap with you at MAX in a few weeks. Mike?

Thanks Mark. As we have discussed, Adobe MAX is coming up next month in Los Angeles with the main keynote presentation on Monday, October 5. We will host a financial analyst meeting on the afternoon of day two at MAX, which is Tuesday October 6. Registration information for MAX and the Analyst Meeting was sent out during the summer and more information about our user conference is available at max.adobe.com. If you haven't already signed up and need registration information, sent an email to IR at adobe.com. If you’re unable to attend in person, we will provide a live video webcast of the meeting along with an archive. 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 24899607. Again, the number is 855-859-2056 with ID number 24899607. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 pm Pacific Time today, and ending at 5 pm Pacific Time on Friday October 2nd. 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 our first question comes from the line of Steve Ashley with Robert W. Baird. Your line is open.

Great. Thanks so much. Mark, I’d just like to drill down, you talked about the fourth quarter, the revenue guidance being slightly lower than you had originally expected. You laid out the fact that there has been a conversion outside of Creative Cloud with some of the single products. Wonder if you could just talk about which of those products might be seeing the most aggressive transition, and maybe the magnitude of the impact of that dynamic?

Sure. Steve, let me again maybe just touch on what we're seeing happening across the industry and then I think we can have Mark answer that specific question, because the industry shift to the subscription business model which clearly is helping drive both customer intimacy as well as productivity in the -- predictability in the business we clearly see that accelerating. As you know we were the pioneer in moving desktop software to the cloud and now we see actually all major software vendors on the desktop adopt similar strategies. And from a color point of view while the Creative business has mostly transitioned, what we are seeing is the same trends and increased adoption of subscription in both our imaging hobbyists business where Photoshop Elements customers are now subscribing instead to the Creative Cloud photography program and Acrobat users especially on adobe.com are moving increasingly to the subscription offering much like what I think Microsoft is also seeing with Office 365. So that's just a big trend that we are seeing across. On the Enterprise side, Steve, it's slightly different because the trend has a little more variability based on industry verticals as to their preference of whether they want to go with the subscription or ratable versus perpetual. And so the overall mix may be a little harder to predict, but the strength of our overall business during the transition is not being impacted. So maybe with that as a big picture of what we are seeing Mark can address your question.

Yes, so Steve on the Digital Media side, Shantanu just touched on and it’s Hobbyist, it’s Lightroom, and it’s Acrobat. And if you look at ARR, because as you know for the past four years we’ve been talking about this transition, if you look at ARR over the course of this year, we raised it twice. We started at 2.9 billion. In Q2 we raised it to 2.925, now in Q3 we are raising it another 25 million to 2.5 billion. That $50 million increase in ARR if you use that old rule of thumb that we used to have of each dollar of ARR is roughly $3 of revenue that’s a lot of revenue. It’s moved over during the course of this year. So from a Digital Media perspective you clearly see it in ARR. On the Digital Marketing side, it’s a similar story, but slightly different metrics. So we had some perpetual in the fourth quarter that closed early in Q3, that’s why you saw 27% year over growth instead of 21% year over growth. We are seeing larger multi-year deals and those deals are great to locking customers but they have as we said longer implementation cycles. What you’re going to see though is on the Digital Marketing side reflected in deferred revenue and unbilled backlog, really nice increases. And so by the end of this year, I’d anticipate that the two of those together deferred and unbilled backlog will be over $3.5 billion. That’s $3.5 billion of closed business that will get recognized to revenue over time. So that’s really healthy both in Digital Media on the ARR side and Digital Marketing on the deferred and unbilled backlog side.

Perfect. Really helpful. Thank you.

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

Great. Thanks a lot and congrats on a great quarter. Just two questions from me. Just on the sub adds, Mark, you have the mix between full Creative Cloud and single app, do you have that?

I do. Its 54% fall 46 -- and 46% point. Yes, 54%, 46%.

That’s interesting. I guess, along those lines are you starting to see -- I know you will talk about this at MAX, but are you starting to see a better sort of shift, if you will, from that Creative Suite base excluding the CS6 base to the Creative Cloud now that we’re three years after the launch of CS6. I’m just curious to get a sense for what we’re seeing there?

Ross, I will take that. And yes we’re definitely seeing a good mix. I think we’ve characterized the CS6 base as a healthy base for us to migrate to the Creative Cloud. And to give you an example of that one of the things that we had been talking about is how international adoption in the past was lagging the adoption of Creative Cloud within the U.S. In the quarter that just finished, we saw some great progress with respect to migrating the CS6 base in Japan. So Japan had a good quarter and as you know the perpetual business was healthier there later in the cycle relative to the U.S. And so clearly the CS6 base continues to be a base that we think is ripe for migration to the Creative Cloud and we’re clearly seeing signs of success in transitioning them from Creative Suite to Creative Cloud.

That's great. Maybe one if I could squeeze it. Just on Digital Marketing, Mark last year we’ve the shift where I think you went to 75% term ratable. If we get to low end of the Q4 revenues, where we’re going to stand in that sort of ratable mix within Digital Marketing Cloud? Thanks.

If we were at the lower end that would mean most of the perpetual in Q4 would have moved over to subscription, because the pull in of that perpetual into Q3 was a piece of what we were anticipating in Q4 and then the range that you see is basically a mix of perpetual moving to subscription depending on whether you’re at the high end or the low end. There would be very little left at the low end.

That’s great. Congrats again. Thank you.

Thank you.

Thanks, Ross.

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

Thanks. A question just on Digital Marketing. Mark, you mentioned that you’re seeing larger deals, you’re seeing longer deals, I’m just curious if you can just give us a little more color around perhaps what you’re seeing in the overall lift of ASPs and when you look at the contract duration, is there been a change in terms of what you’re seeing, maybe you could comment on what the duration is and I had a quick follow-up just as it relates to Digital Marketing.

Sure. Brent, why don’t I give you a little bit of color on what’s happening with Digital Marketing. As you know when we first started the business and we had these different solutions, we would be selling primarily to practitioners who continue to be important buyer within the companies. And when we were selling into the practitioners, the practitioners would implement the product of virtually instantly and we recognize revenue and it’s up and running. As more and more customers are adopting the entire Creative Cloud and multiple solutions, what they’re doing is they’re standardizing on the Adobe Solution, but the sequence with which they implement each of the solutions is still they implement one then they may implement others. And so what Mark was alluding to was these deals if they are in the million dollar plus range, it has to do with more solutions being acquired and then them implementing it sequentially, which is why you see it in unbilled backlog and you see it in deferred revenue, but you don’t see it translate to revenue as quickly. From our point of view that’s all great, because they’re standardizing on our platform, the value proposition of the entire marketing cloud is working with them Brent and we recognize that in the large -- in the bigger picture, it’s actually a more predictable and healthy business for us. The other thing that’s also seeing good traction is the managed services, which again is in our best interest, because those deal sizes are larger and we’ve tremendous visibility into how they’re using our solutions.

Okay. And just -- so I’m clear, you’ve been talking about 30% backlog growth for quite sometime yet. The revenue has been understated and it feels like that the milestone to hit that keeps getting pushed out, is there anything else that we should consider or is this just naturally because of the issues that you just brought up I think there is a lot of questions around that that’s been off for quite sometime?

Yes, I understand Brent. It’s Mark. I think you meant 30% bookings growth, you said backlog …

That’s right.

…but yes 30% bookings growth, no there nothing else going on. I mean, that’s really what it is. A lot of it is just moment of perpetual; a lot of it is as Shantanu just said this larger multiyear transactions as well. And like I said, you do see it in unbilled and deferred.

Great. Thanks.

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

Thanks very much. And I will also echo my congratulations on a nice Q3. I want to revisit the first question that was asked, maybe to ask a little bit differently. Trying to resolve the Digital Media ARR outlook for next quarter going up with revenue coming down and logically there is only two ways that make sense to me to get there either your linearity assumptions changed and you thought you could achieve greater ARR in Q3 or at more earlier within Q4 or the mix of subscription versus product change which you already spoke to. And if that’s the case, how can you forecast that or maybe ask differently what’s changed in a way that you’re offering those three products in Q4 that gives you the visibility to know that the take rate will be more subscription versus product?

That’s a good question Brad and what is really happening in the imaging business in particular is as you know that traditional Q4 cycle when we had predicted what the revenue would be viewed have a version of Photoshop Elements that was released in every Q4, which was always perpetual revenue. We have also had Lightroom that is offered in both perpetual and now as part of the Creative Cloud photography offer, a subscription offering. And as we see both of those migrate through the Creative Cloud photography offer that is giving us visibility into the fact that our customers are increasingly choosing the subscription offering rather than the perpetual offering. So think of it as Photoshop Elements not having the normal change or increment that we normally see in Q4 and continue to see Lightroom move towards the subscription rather than the perpetual is resulting in that revenue. And again as Mark said, if you think about it as every $10 million is leading to -- in ARR is leading to $30 million or so in revenue. And if you look at what we had given as our Q4 targets, at the high end of the range approximately half of that is probably in Digital Media and it's clearly shown as a greater portion of that going through ARR. So hopefully that helps.

Thanks for taking my question Shantanu. It’s helpful. And I will save my others for a couple of weeks when I see you all at MAX.

Okay.

Thank you.

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

Yes, thanks guys. I apologize I got kicked off the call, so it may have been asked, but what’s causing the longer implementation time that you mentioned in your prepared remarks and also geographically where are you seeing the best strength in terms of the Creative Cloud net adds?

The Creative Cloud Net adds, Sterling continue to be strong everywhere. One of the things I talked about earlier was that Japan which we’ve had a lag relative to the adoption of Creative Cloud in the U.S is now showing good strength. We had the CS6 sold in Japan later than we had in any another country and now that’s CS6 base, whether it's in Japan or Germany, other countries, we’re certainly seeing migration of that into the Creative Cloud, which all goes well for continued strength of Creative Cloud across the globe. And with respect to the implementation cycles, what I had mentioned was that as we move from selling to practitioners single solutions to selling entire Marketing Cloud and multiple solutions higher up in the chain, what’s still happening is the implementation of the solutions happen sequentially and therefore as soon as the solution goes live we start to recognize it. So they standardize on the Adobe product which results in the bookings and the unbilled backlog, but the implementation because it is multiple solutions takes a little longer than single solution.

Got it. Thank you guys.

And our next question comes from the line of Walter Pritchard with Citi. Your line is open.

Hi, thanks. Shantanu, I look at the full suite adds and its coming a little to your growth is continuing to slowdown there a bit. And we also noticed that you’re being a lot less aggressive with promotion in -- especially this year overall, but even into the August quarter where we’re tracking it. And I’m wondering how you’re thinking about the mechanisms to continue to convert full suite customers over. I mean it would feel like you’re feeling pretty good about it, because you’re not being as promotional, but we’re seeing the gross add as we calculate it on the full suite adds decelerating a bit more from where they were in the first half of your fiscal year?

Yes, I think Walter we had a good Creative Cloud subs add across virtually every single offering that we had. Team had actually a very strong quarter and globally we continue to feel strong about the migration capabilities of moving Creative Cloud -- Creative Suite customers to Creative Cloud. You’re also right in that, we had fewer promotions in the quarter which again I think reflects both the distinction now that we’ve drawn between Creative Cloud and the old Creative Suite products, and the fact that in Q4 we continue to expect to see strength. And we’ll talk a little bit more about this at MAX as well Walter relative to all of the new stuff that’s coming and how we see the business unfold in 2016 and beyond.

Okay. Thank you.

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

Hi, guys. Thank you for taking my question. I apologize for the background noise here. Mark, if you could just parse for us the new guidance maybe take the mid-point of your revenue versus where Wall Street had been and break it down into how much of the delta is coming from the Digital Marketing business rev rec changes vis-à-vis the Digital Media that will be helpful. And also as it pertains to Digital Marketing are we completely done with this, because I remember you’re saying that about 70% of the business was booked at subscription not too long ago, but basically you commented that you expect that number could be higher, and so effectively are you going to be completely done and devoid of surprises in the Digital Marketing subscriptions? Thank you.

Hi, Kash, it’s about half and half in terms of the new guidance to the old guidance from a revenue perspective. So about half of it is Digital Media driven which is now showing up in ARR and about half of it is Digital Marketing driven which is showing up in deferred and un-built backlog. So it’s roughly half and half. On the mix, yes you’re right, we said it was moving towards 70-30 or even 80-20 but if you do the math that’s, its still a lot of dollars of perpetual revenue in any given quarter. And so, there is going to be some variability based on customer preference as we said and we closed some of it in Q3 instead of Q4 but there’s still going to be some variability in the fourth quarter and that’s why we gave you a range. At the high end of that range right at that $400 million which is the high end of the range, we would still hit the 24% year-over-year growth that we said we would go in Digital Marketing for the second half.

Got it. I think its actually a good thing and I completely agree with you guys that you’re designing the solutions such way to assume the [indiscernible] of revenue ratably, but as a quick [indiscernible] just so investments are offered that the data, is there a way which we can say that you expected your off balance sheet, on balance sheet backlog that for revenue to be X, but as a result of the shift you expect it to be Y at the end of this year so we can see that as supposed to the Digital Media business where you clearly pointed out that ARR increase can be match fit with a corresponding 150 million [ph] or whatever, is there something like that that we can offer to investors as to what to look for if you report the end year results as far as backlog for digital markets is concerned? Thank you.

Yes. On the Digital Media side there is, because we originally guided to $2.9 billion and ARR is now going to be $2.95 billion. So there is a lot of increase to ARR in the Digital Media side, so you can clearly show that. On the Digital Marketing side granted it’s a little bit harder. We don’t guide on deferred revenue, we don’t guide on build backlog. I will tell you though, its growing faster, both of those are growing faster than our own expectation, that’s about all I could give you right now.

And Kash, maybe I’ll just repeat again what Mark said, which was in Q3 we definitely saw strength in the perpetual licensing which was reflected in the 21%. We had strong bookings in Q3, we continue to see the pipeline is really strong for Q4 and so we expect a strong finish. And for Q4 the high end of the range, it’s really identical to, the targets that we provided at the end of the Q2 call with respect to what kind of revenue achievement we expect for the second half of fiscal ‘15. So I think the fact that we continue to reiterate 30% bookings and now this is in, even despite the change in currency. So I think those are some of the factors which give us continued confidence in the momentum of the Digital Marketing business.

Nice work gentlemen. Thank you.

Thank you.

Thank you.

Our next question comes from the line of Mark Moerdler with Bernstein Research. Your line is now open.

Thank you very much. So drilling a little more on the, Adobe has moved to the Cloud, what's driving that adoption now, is it pricing, is it functionality or how should we think about what the key drivers, and then I have a quick follow-up?

Mark, I think in the highest sense it’s the Photoshop brand and the Photoshop name and the fact that the Creative Cloud innovation pace is happening at a much faster pace than it is with traditional 12 month Photoshop element cycle, Photoshop elements cycles. The other thing that I think we are starting to see, maybe I can touch on this a little bit more, is that the mobile apps. What we’re seeing with usage of mobile across imaging, this is light-room mobile as well as what you can do on smartphones. I mean we have 10s of millions of downloads of our mobile applications. And in the imaging when we look at usage data, the usage data and imaging across multiple devices which we would argue will lead to much higher retention is also fairly high. So I think the elements move is largely due to the attractiveness of the element -- the offer of both light-room and Photoshop as well as the fact that it’s mobile enabled.

Okay. And a quick follow-up, how should we think about, I know you said that Adobe stock is strong in terms of adoption. Can you give us a little more color of how that is going? Were you expecting it to, how we should think about stock having an impact?

Well it’s early. I think you when Mark had given us targets for how much revenue we expect to see added when we had talked about the revenue addition for Fotolia versus the revenue reduction at that point for currency. I would say we’re on track with that business, it’s early. We’re seeing people both add to and existing Creative Cloud subscription with stock and we are starting to see people adopt the new subscription offers that have the Creative Cloud complete plus stock. So I realize that’s not quantifying it yet for you, but relative to any of the targets that we’ve provided earlier we’re on track.

Okay. One other quick question, what's the percentage of subs with annual contracts, do we know that?

Yes, we do Mark. Its about 97% annual and 3% month-to-month.

Perfect. Thank you, and it was a nice quarter. Thank you very much.

Thank you.

Our next question comes from the line of Kirk Materne from Evercore. Your line is open.

Thanks very much, and I’ll eco my congrats on the quarter. One of the things that had been talked a whole lot since you guys have been switching over to some of the element of [indiscernible] some of the software that was perhaps not obtained legally historically, and I’m kind of curios just that you, I see a little bit more traction especially in our sort of international markets with the suite. If you feel like you’re recapturing maybe [indiscernible] casual pirating Cloud especially around that Hobbyist level. I was just kind of curious on your thoughts there. And then just a really quick one in certain, all that related on the marketing side, just the difference in competition as you get into these multi-year deals, multi-product multi-year deals? That’s it. Thanks.

Sure, to answer both your questions, the first thing I would say is relative to the new seat adoption that we’re seeing, the new seat adoption is definitely being driven both by creators who are entering the market as well as casual pirates who existed for whom the lower price of entry is far more attractive way to have legal software than not. There’s no question about that, we hear that anecdotally all the time that people are pleased with the fact that they can have legitimate software. As we’re delivering more Cloud based services, as you know the only way to use the mobile apps and share content between the mobile apps as well as our Creative Cloud, is by having a subscription. So I think that’s also as we see more creative sync and creative profile being used, that’s certainly, driving that. So I think we feel good about that. With respect to your second question on completion. I think our differentiator continues to be honestly the content and data part, and there’s nobody that comes at it with respect to having the kind of content infrastructure that we have to enable them to re-platform their websites which is a massive trend as well as the fact that we have the analytics. We had this announcement recently also about what we’re doing with respect to a programmatic advertising platform that also leverages the fact that we have analytics. So I think the unique differentiation was analytics in the past. It continues to be audience manager right now, because for the first time people can have the same audience, the same segment, the same campaign, the same content, the same assets used across all of our marketing solutions. With respect to external competition, I think we still see a number of point product vendors that are in that market place and I think you’re seeing the larger ISVs as well start to identify marketing as one of the large growth opportunities for them and Oracle is the company that’s probably done a lot of acquisitions in that space. But we like our differentiation and we continue to execute on it.

Thanks very much.

Our next question comes from the line of Keith Weiss with Morgan Stanley. Your line is open.

I just want to thank you guys for taking the question and congrats on a very nice quarter. Maybe just to carry on the theme of the marketing environment, the competitive environment, one of the things a lot of us have been looking for in this space for quite sometime is that sort of consolidation of what has been a very fragmented market. Where do you think we are in that progress of the marketing cost ever being more willing to consolidate multiple solutions into one suite just from a prior market perspective? And then how do you sort of help to push that along?

I think Keith, the thing that I hear a lot when I talk to customers and I spend a lot of time with customers is, this notion of digital transformation and digital disruption at the C-suite is front and center across every single industry. Without a doubt that is leading to people looking at larger systems and saying, how do we transform our business to drive more direct relationship with customers and build a customer centric company. So I think every C-suite that I’m talking whether you’re in retail, whether you’re in financial services that’s a thing that’s leading to understanding which companies, which vendors have a larger offering in that particular space. I think as they think through that, they’re also having to reorganize the marketing function, because search versus commerce, versus revenue has traditionally been in different places. So I think you’re see that play out over the next year, couple of years, but I think you are seeing more of them recognize that having a unified platform is the way to go. So we still sell to practitioners and we still have to make sure we’re best of breed in each of the individual solutions, but I would say increasingly our deals especially the new customer acquisition is a larger deal that’s being sold higher in the chain.

Okay. And can I just stick one last one, just on the broader environment there’s been a lot of obviously market turmoil particularly around emerging markets. How have you seen overall demand trends particularly internationally sustain throughout the quarter?

Well maybe this is one of the benefits of not having too much of emerging markets, business or presence in the creative space that it’s not really impacting us. So we continue to see strength across most international markets. And as you know in Digital Marketing that’s primarily the UK, Germany, Japan and Australia where we have significant presence and some presence in other places. But I think as we said on the prepared remarks, the interest in the solutions when we were in Singapore or when you’re in Sydney or now in Tokyo, all of these symposia being held to sold out audiences. So the awareness and the understanding of this as one of those important technologies is only growing.

Excellent. Thank you guys.

Our next question comes from the line of Derrick Wood with Susquehanna International Group. Your line is open.

Thanks. Mark, given the accelerated mix shift and the model on the revenue side, does that impact the framework you’ve given for 2016 expectations on revenue and EPS or maybe do we need to think about trends in gross margins in any different way?

I don’t know if they need to think about trends in gross margins in any different way. As it relates to ’16, we don’t typically comment on next year until we get to the Q4 call. So I can't really given you any insights into ’16, but it shouldn’t have any significant movement in gross margins. Because on the creative side, it’s not a fully hosted offering, it’s got Cloud componentry to it, but it’s not a huge Cloud component.

Okay. And then Shantanu, I’d be curious to hear how you ranked the impact for some of your ARPU enhancing services on the creative platform. You’ve got [indiscernible] with social, a talent search, you’ve got Fotolio with stock content, you’ve got things like video and mobile apps. Anyway you could just couch the relative impact on driving additional ARR and how you see that ramping in the upcoming quarters?

I think with respect to new services that have the largest potential upside, we continue to think that Adobe stock is what drives upside in terms of ARR. Usage of Behance is driving higher retention. So the way we look at what's happening with Behance is being part of the community because, that’s included for the most part. There are some value added services as you point out, but for the most part Behance is driving greater retention. And video is driving more usage from single app to the CC complete. So I think we look at each of the different ones as driving either an increase in ARPU as you pointed out or as driving greater retention both of which from our point of view are useful, because as you know as people move off of any promotional pricing retention is something that’s key to us and adding increased value is important in that respect.

Great. Thank you.

Our next question comes from the line of Brendan Barnicle with Pacific Crest Securities. Your line is now open.

Thanks so much. Shantanu, I wanted to follow-up on Keith’s question about the Marketing Cloud and you alluded to uncertainty that C-suite tab and they’re figuring what to do with their marketing strategy. Is that the biggest obstacle that you run into in terms of closing Marketing Clouds, that folks are still trying to figure out what tools to work with or is this something else that’s holding up deals?

No, I actually continue to feel like the awareness and the importance of that deal is actually playing to our favor rather than the other way around and that’s why we continue to see strong bookings and it’s leading to larger deal sizes rather than then other way around. So from our point of view, we have the most comprehensive offering. We’re the leader in that particular category and so those deals actually play to Adobe’s favor.

Great. And then, Mark do you have a percentage number for us in terms of total end customers to in subscription not net news but folks who are brand new to you. Do you have that kind of breakdown?

We’ve been consistently saying that it’s over 20% and that’s still holding true.

Great. Thank you guys.

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

Thank you. I’d like to ask first about the transition you’re seeing now in Document Cloud and then just follow-up on adobe.com. So perhaps, Shantanu you could talk about the Document Cloud transition within volume terms. Two quarters ago, you updated us by noting that the active base, you calculated for Acrobat was something more than $30 million. We know historically that the average new unit volume for Acrobat were somewhere in that mid-single digit unit [indiscernible] when it was packaged software. So if we look out over the next number of years, how you’re thinking about converting that large phase, most of which was done on the LA's over to subscription. And given what you’re seeing now are anymore client [indiscernible] on perpetuals that you’ve been doing or collecting to do for Acrobat?

I think we’ve always stated Jay that we think that the Document Cloud transition will be different from the Creative Cloud transition, in that it will be important for us to continue to offer the same perpetual version for a while. What we are seeing is on adobe.com the vast, vast majority of people who are buying Acrobat DC right now are buying the subscription option. And so I think as we have previously indicated, I think with respect to the Acrobat transition, we expect to continue to see revenue relatively stable but you will see an acceleration in the Document Cloud ARR that’s reflected, that’s showing how the transitioning is happening. And with respect to the $30 million number that you said, that was the number that we eluded to in terms of what number of Acrobat seats we have sold in the history of Acrobat. And so, again I think we’re pleased with what we see on the Document Cloud but it has slightly different characteristics than what we’re seeing with the Creative Cloud.

All right. As a follow-up on adobe.com, I would have to think that at this point the business flowing through adobe.com is larger that your revenues than was the case prior to the model change if you go back a number of years, adobe.com was probably doing roughly lets say about $0.5 billion give or take, it depends on the year of course, but now I would think given the scale of Creative Cloud and the other businesses that its substantially larger that it might have been historically; so the question is, could you relate Mark, do you presume scaling up significantly adobe.com for the profitability of the company, is there a substantial effect on your operating income by having so much more business going through adobe.com now than historically most case.

Yes, without a doubt Jay, we’re doing more and more business on adobe.com much, much more than we did before the transition by far more than we did before the transition and yes, it is going to be more profitable than going through even our own direct sales force or the channel. So to the extent that we can drive more and more business there, it does improve us from a profitability perspective. I can't give you a number, but it definitely is more profitable for us.

Thank you.

Operator, we’re coming up in the top of the hour. Lets do two more questions, please.

Thank you. Heather Bellini from Goldman Sachs. Your line is open for questions.

Great. Thank you for taking the question. I just wanted to follow-up on Adobe stop for a second. I was just wondering if you can share with us, where you seen the best opportunity for cross sell and also, if you have a sense of when you look out for the potential of the attachment here in install base, kind of how are you framing that opportunity?

Sure, Heather, I think what we’ve said in the past is approximately 85% and greater of that is of the buyers as well as the sellers are using Adobe products. And when you think about the size of that market which is in the multiple billion that represents an opportunity for us to add value to the customers. In terms of what we’ve done Heather for the integration, as you know within Photoshop and all of our products, you now have the ability to both put something up on the market place to sell as well as you have the ability to search for something when you’re starting with a blank canvas and you want to get a creative idea or inspiration to get something going. So integrating it into the workflow makes a lot of sense. And what we’re also offering right now is new subscriptions which say if you are getting a subscription where you know what kind of demand you have for stock, you can buy all of the complete applications in addition to the stock. So I think the value within the workflow is well understood, both the supply and demand participate with us. I think two things maybe underappreciated as we are building this business. The first is the number of people who are running campaigns and when you’re running a campaign using our Marketing Cloud technology being able to use this stock to also stock your campaign progress and time that in we showed brief sneak of that. We think that, that’s an opportunity for us to drive it and second is, within the enterprise. So as we’re selling enterprise ETLAs, there isn’t an enterprise in the world that doesn’t have a marketing department that’s procuring stock. And so if we can demonstrate the value of how an enterprise ETLA for the creative products can include stock as part of that, we think that has value as well.

Thank you.

And our last question comes from the line of Phil Winslow with Credit Suisse. Your line is open.

Hi, guys. Thanks guys for taking my question. Most of my questions have been answered. But I wanted to actually double click on something you talked about earlier, the TAM expansion on the creative side. Obviously you had great user count growth in particular the past couple of quarters and you’ve done a great job of framing the Cloud, the Creative Cloud transition looking to call it your core users, but if you think about net TAM expansion in incremental users, what if you could just help us kind of with the math about how you think about these new sort of lower price products expanding the TAM, just any sort of guide post there would be really helpful?

Yes, Phil I think we’ll definitely share more of that at MAX and so that’s a good segue to match because sharing the numbers for example of how many people have bought our consumer photography offerings in the past that we did not include as part of the TAM or the market, that’s certainly expansion capabilities that are now available for us. As we’re getting more information on piracy and understanding what kind of activations we may have seen, giving you a little bit more color on that with respect to the TAM I think is another way for us to expand. So we’re looking forward to MAX, we will share with you more information on TAMs at MAX and hopefully give you insight into in addition to the core migration of the Creative Suite customer to create a Cloud. How this market expansion with respect to targeting new users as well as users who traditionally may have used other products or value expansion which is how we can sell new services like talent or like Adobe stock into that existing base help us expand our TAM. So I think we’ll be certainly sharing more information with you on that. MAX is coming up in a few weeks, so we look forward to seeing you as well as others at MAX. And let me just end by thanking you for joining us again on the call today. From my point of view, we had a strong quarter, the underlying trends in our business in both Digital Media and Digital Marketing continue to be strong. And I look at it and say, whether it’s a student retouching a photo on their tablet, a director making a latest block buster film or what you see as consumer brand publishing their marketing content across the web and mobile. It’s clear that Adobe technology is at the heart of the world’s best experiences and we look forward to increasing that. Thank you for joining us today.

And this concludes our call. Thank you.