Mike Saviage - Vice President, Investor Relations Shantanu Narayen - President and Chief Executive Officer Mark Garrett - Executive Vice President and Chief Financial Officer

Ross MacMillan - RBC Capital Markets Brent Thill - UBS Walter Pritchard - Citi Kirk Materne - Evercore ISI Heather Bellini - Goldman Sachs Keith Weiss - Morgan Stanley Kash Rangan - Bank of America/Merrill Lynch Sterling Auty - JPMorgan Jay Vleeschhouwer - Griffin Securities Alex Zukin - Piper Jaffray Derrick Wood - Cowen and Company

Good afternoon, ladies and gentlemen. I would like to welcome you to the Adobe Systems Third Quarter Fiscal Year 2016 Earnings Conference Call. [Operator Instructions] Thank you. I would like to now turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir.

Good afternoon and thank you for joining us today. Joining me on the call are Adobe’s President and CEO, Shantanu Narayen; and Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe’s third quarter fiscal year 2016 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately 1 hour ago. We have also posted PDFs of our earnings call prepared remarks and slides, financial targets and an updated investor datasheet on adobe.com. If you 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 20, 2016 and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today, as well as Adobe’s SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and in our updated investor datasheet on Adobe’s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe’s Investor Relations website for approximately 45 days and is the property of Adobe. The call audio and the webcast archive may not be rerecorded or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu.

Thanks, Mike and good afternoon. In Q3, Adobe delivered another record quarter, with revenue of $1.46 billion; GAAP earnings per share of $0.54; and non-GAAP earnings per share of $0.75. These strong results are a reflection of our market leadership and momentum we have with Creative Cloud, Adobe Document Cloud, and Adobe Marketing Cloud. We are enabling the world’s leading brands to develop design and data-driven digital experiences for their customers across every channel. Our unique value proposition continues to distance Adobe from our competitors. In our Digital Media segment, we exited Q3 with $3.7 billion of annualized recurring revenue, or ARR, which represents an increase of $285 million quarter-over-quarter. The increase was a result of the continued adoption and retention of Creative Cloud and Document Cloud across all customer segments. Creative Cloud is a one-stop shop for creativity and design, offering the world’s best creative apps, services and training, as well as a vibrant marketplace and community. We achieved record Creative revenue of $803 million in Q3, which represents 39% year-over-year growth. Creative ARR grew in line with our expectations and was driven by continued migration of Creative Suite users, the addition of new value to existing subscribers with services such as Adobe Stock, new customer acquisition in the education and hobbyist photography markets, and retention of existing subscribers. Creative Cloud continues to deliver powerful new innovations across our segments at a rapid pace. As the leader in digital photography, Adobe has set the standard for professional grade photography across cameras and mobile devices with Adobe DNG, a raw file format we created. As of last week’s iOS 10 release, Adobe DNG is now supported natively by iOS and Android, and Lightroom is the first cross platform app to empower users with an end-to-end raw mobile photography workflow for high quality image capture and editing. New Creative Cloud innovation enables subscribers to design for emerging categories like Experience Design. Adobe XD, our solution for designing and prototyping websites and mobile apps, continues to gain momentum among users and industry watchers. Although still only available as a preview release, last week it was selected as one of 15 winners in the Fast Company Innovation by Design Awards, a distinct honor given the 1,700 entries. Earlier this month, we showcased Adobe’s leadership in the video category, unveiling advancements in virtual reality, character animation, and 3D at the IBC Conference in Amsterdam. These new capabilities are enabling video creators of all kinds from YouTubers to Hollywood studios to create, deliver, monetize, and measure innovative and immersive media across multiple screens. This morning, we announced the beta release of our new Adobe Stock Contributor Site, which reduces the friction for Creative Cloud users to promote and sell their work. The new site is integrated with Creative Cloud apps and introduces auto-keywording, which uses machine learning algorithms to analyze and tag content, streamlining the submission process, and increasing the discoverability of Adobe Stock content. In November, we will hold our annual MAX Creativity Conference in San Diego. We expect this year’s MAX to be the largest gathering ever of designers, photographers, film makers, and other creative professionals from around the world. As always, we look forward to unveiling new technology at MAX, including whole new categories of cloud-first creative solutions. The world’s leading digital document service, Document Cloud, leverages PDF and enables businesses to transform inefficient paper-based processes to digital, using Acrobat desktop and mobile apps as well as integrated cloud services like Adobe Sign. In Q3, Individual Acrobat subscription units exceeded perpetual units for the first time. And on Adobe.com, over 90% of Acrobat customers chose the subscription offering. Document Cloud revenue was $187 million in Q3. Combined with Acrobat adoption reflected in Creative Cloud, Document Cloud continues to be an important growth business for Adobe. In June, we announced the Cloud Signature Consortium, a group comprised of leading industry and academic organizations committed to building a new open standard for cloud-based digital signatures across mobile and web, so anyone can digitally sign documents from anywhere. Adobe led the way in establishing PDF as a digital document standard and is now raising the awareness of electronic signatures as a key to any business’ digital transformation. In our Digital Marketing segment, Adobe Marketing Cloud is the leader in enabling brands, government agencies, and institutions to deliver great digital experiences across devices and channels. Whether it’s financial institutions, retail, travel and entertainment, or automotive, entire industries are experiencing disruption and aggressively deploying technology to drive stronger loyalty and growth. Success hinges on a strong foundation of content and data, which enable a deep understanding of customer needs, development, and delivery of consistent, personalized experiences, and the ability to monitor business performance in real time. In Q3, Adobe managed a record 23 trillion data transactions. Our customers in every major category of business are utilizing our machine learning algorithms to predict customer behavior and drive their business. Adobe Marketing Cloud solutions, including Adobe Campaign, Adobe Audience Manager and Adobe Media Optimizer are achieving strong growth as our customers invest more in data-driven solutions. In August, Adobe Marketing Cloud once again played a key role in the digital broadcast of the Olympic Games. NBC Sports used Adobe Primetime to power the digital delivery of the 2016 Rio Olympics, the largest digital Olympic Games in history. In addition to being listed earlier this year as the Marketing Cloud platform category leader, Adobe Marketing Cloud was recognized by industry analysts during the quarter as a leader in categories such as Mobile Application Development, Cross Channel Campaign Management, and Enterprise Marketing Software. We continue to drive new logo wins and expand our business across geographies and vertical markets. Some Q3 customer wins include T-Mobile, Nordstrom, Subaru, SunTrust Bank, AstraZeneca and the state of Tennessee. At the core of our business are the people that make it happen. As a software business, we know that employees are our most strategic asset and we are committed to increasing diversity. We have broken new ground in terms of employee benefits like extended parental leave and are implementing new programs, including coding initiatives focusing on young women. We were recently recognized as one of Forbes’ Most Innovative Companies and we continue to garner best place to work honors around the world, most recently in Australia and India. In addition, our focus as a company on the environment and sustainability is important to our employees and to many investors. We were pleased to learn Adobe has been selected as a component of the Dow Jones Sustainability World Index for the first time. Today, every company is under pressure to be more connected and in tune with its customers, to know their history, their preferences and to create and deliver powerful, personalized experiences to them anywhere they go. Content and data are at the core of these exceptional experiences and Adobe is the only company that brings these critical capabilities together in our market leading cloud solutions. The market opportunity is significant. Our strategy is sound. And our results demonstrate the leverage in our model. All of these are what make us excited about the opportunities ahead. Mark?

Thanks Shantanu. In the third quarter of FY ‘16, Adobe achieved record revenue of $1.464 billion which represents 20% year-over-year growth. GAAP diluted earnings per share in Q3 were $0.54 and non-GAAP diluted earnings per share were $0.75. Strong performance across our three cloud offerings helped to deliver revenue towards the high end of our targeted range. Our cost discipline helped to deliver earnings upside while we continued to invest in the business to drive future growth. Highlights in our third quarter include; Solid growth with Digital Media ARR, We achieved our target of $285 million net new ARR during what is typically a seasonally soft quarter and keeps us on pace to achieve our annual target that we increased earlier this year, Record Creative revenue of $803 million, which represents 39% year-over-year growth, Record Adobe Marketing Cloud revenue of $404 million, which represents 10% year-over-year growth and was above our target for the quarter, Strong growth in operating and net income, Record cash flow from operations and deferred revenue And 83% of Q3 revenue from recurring sources, an all-time high. In Digital Media, we grew segment revenue by 29% year-over-year. The addition of $285 million net new Digital Media ARR during the quarter grew total Digital Media ARR to $3.7 billion exiting Q3. Within Digital Media, we delivered Creative revenue of $803 million, which represents year-over-year growth of 39%. In addition, we increased Creative ARR by $258 million during Q3 and exited the quarter with $3.26 billion of Creative ARR. Our Creative ARR is more than $1 billion higher than the peak annual Creative revenue we achieved when it was just perpetual licensing of Creative Suite. Driving the momentum with our Creative business was continued strong demand for Creative Cloud across all offerings and routes to market during the quarter, including net new Creative Cloud subscriptions and enterprise contract renewals. Retention rates for subscriptions overall remained ahead of our original targeted projections. Creative Cloud ARPU across each of our commercial offerings continues to grow quarter-on-quarter as new users on promotion pricing renew at full price after their promotions expire. We also drove strong subscription growth in the education market during the back-to-school season in Q3. Our focus with Creative Cloud continues to be in three key areas; growing our core base of users, including migrating the legacy user base of Creative Suite users, addressing piracy and growing our installed base in the education market, driving new customer adoption in adjacent markets with market expansion efforts such as the Photography plan and using Creative Cloud mobile apps to create awareness and drive new member adoption and growing ARPU and ARR with value expansion services such as Adobe Stock, where revenue grew by over 40% year-over-year in Q3. With Document Cloud, we achieved revenue of $187 million, which was in line with our expectations as we gradually migrate this business to be more recurring. Document Cloud ARR exiting Q3 grew to $442 million, which represents the highest sequential quarterly growth this year. Helping this growth is our effort to drive adoption of Acrobat subscriptions and value add services such as Adobe Sign, both of which are benefiting ARR and building a foundation for revenue growth in the future. In Digital Marketing, we drove strong year-over-year growth in annual Adobe Marketing Cloud subscription bookings and greater than 25% year-over-year growth in subscription revenue. Reported Marketing Cloud revenue was a record $404 million, ahead of our Q3 target as a result of accelerated second half pipeline conversion and resulted in year-over-year growth of 10%. Marketing Cloud retention, bookings in Q3 and our pipeline set us up for a strong Q4. Our increased focus on first year annual subscription value will help us more quickly convert our bookings into reported revenue as we look to FY ‘17 and beyond. Mobile remains a key market trend for this business. Mobile data transactions grew to 52% of total Adobe Analytics transactions in the quarter. From a quarter-over-quarter currency perspective, FX increased revenue by $0.9 million. We had $3.9 million in hedge gains in Q3 FY ‘16 versus $3.6 million in hedge gains in Q2 FY ‘16, thus the net sequential currency increase to revenue, considering hedging gains was $1.2 million. From a year-over-year currency perspective, FX decreased revenue by $14.2 million. We had $3.9 million in hedge gains in Q3 FY ‘16 versus $9.1 million in hedge gains in Q3 FY ‘15. Thus, the net year-over-year currency decrease to revenue, considering hedging gains was $19.4 million. We experienced stable demand across all major geographies during the quarter. Although there was a short-term impact on demand following the Brexit announcement in the UK, it did not affect our ability to achieve our Q3 goals and we do not anticipate any significant impact through the rest of FY ‘16. In Q3, Adobe’s effective tax rate was 24% on a GAAP basis and 21% on a non-GAAP basis. Our trade DSO was 45 days, which compares to 44 days in the year ago quarter and 43 days last quarter. Deferred revenue grew to a record $1.8 billion, up 38% year-over-year. Our ending cash and short-term investment position was $4.45 billion compared to $4.32 billion at the end of Q2. Cash flow from operations was a record $518 million in the quarter. During this year we have been using excess domestic cash to buyback stock and drive our share count down. In Q3, we repurchased approximately 3.5 million shares at a cost of $344 million. We currently have $800 million remaining under our current authority granted in January 2015. Now I will provide our financial outlook. We are targeting a fourth quarter revenue range of $1.55 billion to $1.6 billion. In Digital Media, we expect to add slightly more than $300 million of net new Digital Media ARR during Q4 to achieve our full year target of approximately $4 billion of ARR exiting the year. In Digital Marketing, we expect our business momentum to enable us to achieve Q4 Marketing Cloud year-over-year revenue growth of approximately 30%, which puts us on pace to achieve our annual growth target of approximately 20% for the year. We are targeting our Q4 share count to be between 503 million to 505 million shares. We expect net non-operating expenses to be between $8 million and $10 million on both a GAAP and non-GAAP basis. We are targeting a Q4 tax rate of approximately 24% on a GAAP basis and 21% on a non-GAAP basis. These targets yield a Q4 GAAP earnings per share range of $0.60 to $0.66 per share and a Q4 non-GAAP earnings per share range of $0.83 to $0.89. For the year, our updated annual targets reflect our year-to-date results and our Q4 targets. We expect FY ‘16 annual revenue between $5.8 billion and $5.85 billion, GAAP EPS between $2.12 and $2.18 and non-GAAP EPS between $2.94 and $3. In summary, Q3 was yet another strong quarter for Adobe, with the leverage in our model continuing to be reflected in our bottom line performance. Our year-to-date results and targets for Q4 keep us on track to meet or exceed all of the financial targets we provided at the outset of the year. We look forward to finishing the year strong and hope to see you at MAX and our upcoming financial analyst meeting in San Diego. Mike?

Thanks Mark. Adobe MAX will be held on November 2 through November 4 in San Diego and we will host a financial analyst meeting on the first day of the conference which is Wednesday, November 2. We have sent e-mail invitations to our investor list to attend MAX at a discounted price. If you have not registered and wish to attend, please contact Adobe Investor Relations with an e-mail to ir@adobe.com. For those unable to attend MAX and the financial analyst meeting, we will provide live webcast of the November 2 MAX keynote presentation and the financial analyst meeting later that afternoon. If you wish to listen to a playback of today’s conference call, a web-based archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056, use conference ID #73287217. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5:00 p.m. Pacific Time today and ending at 5:00 p.m. Pacific Time on September 23, 2016. We would now be happy to take your questions and we ask that you limit your questions to one per person. Operator?

[Operator Instructions] Your first question comes from Ross MacMillan from RBC Capital Markets. Your line is open.

Thanks so much, and congratulations from me. Shantanu, I think Mark commented that the Creative ARR is now about $1 billion higher than the peak in the Creative revenue versus – or under the Creative Suite licensing model, so you clearly cleared that barrier and you are growing that rapidly. But I actually wondered if you could look at the – compare and contrast that with the Acrobat and Document Cloud given that, that’s earlier in its cycle of conversion. And I wondered if you could maybe frame for us what the opportunities are there in terms of driving expansion in that opportunity over time and maybe how much larger that could be? Thanks.

Well, thanks Ross. And while I won’t be updating our TAMs at this point, we are pleased with our performance and I will be happy to give you some color on how we see the opportunity ahead of us in terms of what the Creative Cloud as well as the Document Cloud. The Creative Cloud business is certainly being driven both by customer migration as well as by new customer adoption and we certainly think that’s going to be true for the document business as well. As you know, we have tens of millions of people who have bought Acrobat over the lifetime of the Acrobat product. And for the first time as we mentioned again in our prepared remarks, the number of subscription units of Acrobat actually exceeded the perpetual units. So, we are pleased with how that transition is going. The playbook is exactly the same. It’s about how do we migrate Acrobat customers to Acrobat DC. It’s about adding new services like Sign. It’s about enhancing new services that we can add to the business. But the thing I would also caution folks listening is to recognize that part of the Creative ARR that’s being driven is also already being driven by the document business. And so while we report the document segment separately, let’s already reflect that it’s actually helping not just the document business, but also the creative business. So, we are pleased with that on mobile. PDF has continued to be adopted as a wide standard, which I think also augurs well for its continued growth.

Great. And maybe just a quick follow-up if I could. Mark, great to see the operating leverage coming through, OpEx is growing in the mid-teens, which you think is ahead of headcount growth. So, I wondered if you could just maybe just bridge that for us as we see OpEx growing a little bit ahead of headcount this quarter and probably next quarter? Thanks.

Yes. I mean, in terms – thanks, Ross. In terms of OpEx growing faster than headcount, I would say a couple of things. Number one, when you hire people during the quarter you don’t get the full effect of their expense in the quarter. They are averaged out over the course of the quarter, so you don’t get the full impact until the following quarter. And as you saw, we did add 500 heads this quarter. There is also a lot of spending that we do that’s non-headcount related, particularly in marketing, and that can come and go despite what we do from a headcount perspective. But let me comment briefly on EPS overall, because I know this will be a follow-on question. We have consistently shown that we have leverage in our model. I think Adobe has been a poster child of that for a number of years now. And with good revenue execution and good cost discipline, I think you have come to expect that from us. When we don’t have very specific short-term investment needs, you are going to see earnings upside like you saw in the back half of this year, both in Q3 and our guidance in Q4. In the longer term, we see a lot of tremendous opportunity that’s going to continue to require investment in sales and marketing. I mean, you saw that in the 500 heads that I mentioned we hired this quarter. So for the longer term, ‘17, ‘18, I would encourage you not to raise your EPS models right now. I would encourage you to recognize that we are going to continue to invest in sales and marketing and wait as we provide ‘17 revenue and earnings guidance later this year.

Understood. Thanks so much and congrats again.

Thanks, Ross.

Your next question comes from Brent Thill from UBS. Your line is open.

Thanks. Shantanu, the Marketing Cloud is set to accelerate into the fourth quarter, and I would assume given the perpetual falloff and more moving to the new model that should continue accelerating into fiscal ‘17. Can you just talk a little bit about your confidence underpinning what’s happening in Marketing Cloud as some of your competitors have shown a pretty material slowdown in their growth rates in their cloud, are you taking share? What’s happening here that’s giving you this confidence?

Well, Brent, I think we continue to be the undisputed leader of the Marketing Cloud. It’s a category that we created. And I think from a unique differentiation, what we provide in terms of both the core content and analytics and all of the personalization software that we are delivering, I just – we continue to execute against that opportunity. I mean, the macro environment, Brent – I mean, people are still talking about digital disruption and how do they help create more personalized experiences for customers, and we are right in the center of that particular tailwind. With respect to the second half of the year, again, it’s playing out as we expected. We told you at the end of Q2 that we had a strong pipeline, which gave us confidence to grow approximately 20% for the year. We were actually able to close deals on an accelerated basis in Q3, which is why you saw upside to our Q3 numbers relative to the target. And we just have to keep executing the way we are, Brent. It’s not for lack of market opportunity in the marketing space and we just have to keep innovating as well. So, that’s what gives us confidence, the market leadership that we have and continued focus on execution. International expansion, I will again continue to say, is a large opportunity for us in marketing and cross-selling existing customers with new solutions.

Thank you.

Your next question comes from Walter Pritchard from Citi. Your line is open.

Thanks. Shantanu, I am wondering if you could talk about on the creative side, maybe you will update this at MAX, so I will ask another one if you do. But the Creative users that you have talked about in the past that were still to convert, any update on sort of what is left that you have visibility into conversions of the prior CS users still to go on to CC?

I think big picture Walter, we continue to do a good job of migrating them. As you know, there was a fairly healthy cohort of CS6 customers that continues to be an opportunity for us in the U.S. And we talked about international expansion also as an opportunity. Both Japan and Germany had a good quarter. Now, when we looked at Q3, Japan and Germany grew – run rate units grew greater than the overall units, so that’s continuing to please us in terms of now seeing CS customers in those geographies migrate. Education had another great subscription units quarter, which means we are attracting that next generation of customers. When you look at overall subs in the quarter, it was a very healthy number, so we are attracting new customers to the platform, but even the migration opportunity continues to be one. I think one of the areas where we are executing well is whether you are an existing customer or whether you are a new customer, the work we are doing in terms of delivering new innovative products, what they are seeing with XD, you will see some new announcements as well at MAX that I am not going to preview here today. What we are doing with VR and video, I think that also gives a lot of people the confidence that by adopting the Creative Cloud, it is the one stop shop for all of their Creative needs. So I think that gives us continued confidence that those who haven’t migrated, they will continue to see additional value as we continue to deliver new innovation.

Okay, thank you.

Your next question comes from Kirk Materne from Evercore ISI. Your line is open.

Thanks very much and congrats on the quarter guys. Shantanu, I was wondering if you could just talk a little about where you think we are on the Digital Marketing side in terms of customers moving away from buying sort of point products or best of breed products towards buying more Digital Marketing solutions where you guys obviously I think have an advantage just given the breadth of the product portfolio, can you just talk where we are in that transition in your view and how much of an advantage is that today for you all versus some of the competitors, especially some of the smaller ones out there? Thanks.

Sure, Kirk. I think we mentioned that when we think about big picture what’s happening in the enterprise space, if the first era was all about back office automation and the second era was about what happened with productivity or front office, we really are motivated by this notion that it’s going to be the experience business. And if you are trying to create the experience business, the only way to transform your company is by adopting an entire platform rather than piece-meal trying to buy individual products and trying to fit that together. Virtually every new logo that we get is a multi-solution deal because what they want is a complete offering that enables them to do that transformation. Given the breadth of existing customer base, certainly we are up selling all of them to multiple solutions. But whether it’s a new logo acquisition or whether it’s renewals, most of the deals are now multi-solution deals and much larger revenue to Adobe and value to the customer. So hopefully that gives you some color in terms of the number of solutions that they are all adopting and how that’s certainly migrating. To your point, it is a competitive advantage for us most definitely.

If I can just ask a really quick follow-up for Mark around that topic Mark, deferred revenue growth has obviously been looking really, really strong, I assume that’s primarily being driven by the strength you have seen in bookings around Digital Marketing, I guess do ETLAs play into that as well I guess from the Creative Cloud side? Thanks.

Yes. It’s actually both. It’s been driven by Digital Marketing bookings, but it’s also very heavily driven by ETLAs on the Creative side and on the Acrobat side. So it’s really across the board, Kirk.

Thanks.

Your next question comes from Heather Bellini from Goldman Sachs. Your line is open.

Great. Thank you. Most of my questions have been answered. But I was wondering, Shantanu or Mark, if you could talk a little bit about – you mentioned piracy reduction earlier in your prepared remarks and I am wondering if you could share with us how much of a tailwind do you see that giving you, is there kind of a framework that we could think about in terms of the impact on top line growth that you can get from piracy reduction and are there things that you are doing that you are changing even more than you were kind of a couple of years ago to stay ahead of the pirates? Thanks.

Sure, Heather. I mean if you look at the macro level and we used to sell approximately 3 million units of Creative Suite a year and if you look at the numbers right now of where we are with Creative Cloud, it’s clear that we have seen significant acceleration. Without a doubt, a large part of that acceleration is people who want Creative Cloud and are no longer pirating Creative products, but are actually as a result of the low price and the value that we are delivering using the entire subscription based offerings. So what we have done from a technical perspective already we have actually ensured that people who download the trials that once the trial expires that they don’t have access to the products. And as you know, we have also shutdown places, online websites where people could buy a repackaged box. So there is no question that we have already addressed piracy in a meaningful way. In terms of the installed base of pirates, I think the numbers for that are all over the map. But I think you can go back and look at the last numbers that we gave in terms of the addressable market and you would see that there is still significant headroom. And the last thing I will mention is I think later this year, we will also make some announcements. There are still a number of countries where we actually only sell CS6 and we are going to start to offer CC in all of those markets. And for the first time we have the ability to offer differential pricing. So this is playing out exactly as we expected. Let’s get the markets that are most developed, let’s address casual pirates, let’s hit the enterprise and then let’s now expand that into emerging markets where there was more piracy and now we have the ability to counter that, both through pricing as well as through technology.

Thank you.

Your next question comes from Keith Weiss from Morgan Stanley. Your line is open.

Thank you, guys for taking the question and very nice quarter. What are the things that we were picking up when we were talking to let’s say channel partners was increasing benefit from the roll-off of promotional pricing and good renewal rates on those – as your promotions roll-off and your comments seem to support that, so I was wondering if you could help us think about that in terms the magnitude of the impact, how much are we seeing that in the numbers today and how much we think about that’s occurring on a go-forward basis and how well is that going to sustain into FY ‘17?

Certainly some part of that, Keith is reflected in the ARR. When you think about it, Mark may have mentioned in his prepared remarks that when we think about all of the commercial offerings, the ARPU of all of the commercial offerings are increasing. And that, as you point out is a reflection of high retention rates of people who are moving off of promotions. And again, the strategy very much is let’s have promotions to bring people onto our platform. And once we deliver the value as they retain at the annual boundaries, then we get the additional revenue. So it certainly has had an impact on ARR. The same thing is also true in the enterprise. When we first introduced the enterprise offerings, we had what we would call sort of custom enterprise offering, which was more of a mirror of what they were accustomed to buying with the Creative Suite. As they all move off the 3-year cycle and they are renewing, we are definitely marketing to them the value of the entire Creative Cloud offering. And we have seen adoption of that is fairly high again, which again leads to increased revenue per customer.

Got it. And if I could perhaps follow-up on that latter comment in terms of the ETLAs to the enterprise market, is there any change in terms of who is able to sell those ETLAs, any expansion of that into the partner channel that we should be aware of?

For the most part, I would say the large enterprise offerings it’s a direct sales force in our sales force. I think if I look at that also moving forward, we are going to be providing more and more of those as self-serve on adobe.com moving forward. I mean the trend in the industry is clear whether it’s us directly or whether it’s through channel partners in addition to very motivated direct sales force. We want to reduce the friction of procuring, of expanding, of administering the Creative Cloud within enterprises. And we will continue to make that easy for people who just come to our website to start small and then grow as their organization grows. That’s very much of the vision of how we look at adobe.com.

Excellent. Thank you very much.

Your next question comes from Kash Rangan from Bank of America/Merrill Lynch. Your line is open.

Hey guys. Thanks for taking my questions. Congrats on the quarter. Mark, question for you as it relates to the longer term operating leverage in the business. And clearly you have gotten to a point where I think you mentioned 80% plus of revenues are recurring. And as you have you this recurring revenue business that renews at very high margins, the secondary derivative starts to slow down, although the overall growth still looks pretty good. You don’t have to grow your new subscription revenues quite at the pace that you have been growing before. So therefore that has some positive consequences for acquisition cost and sales and marketing or perhaps are we missing some other consideration in relation to your statement that you continue to see investment opportunities? So, just trying to measure or square off the merits of the subscription model vis-à-vis your comments that we should be more muted as far as how much margin expansion we should be expecting? Thank you.

Yes. Hey, thanks, Kash. I am not saying you should be more muted. I am saying just don’t get a little carried away based on what we are delivering in the second half of this year at all. Yes, we gave you guys a 3-year model a year ago that shows some pretty significant margin expansion over the next several years and we are ahead of that pace in the back half of this year. As I said because when we don’t have some short-term investment needs we can deliver that to you in the form of upside to EPS and deliver that to shareholders. You are right in 83% recurring revenue model, particularly on the creative side, you are going to over time have less cost of acquisition and you can drive more margin. On the Digital Marketing side as we have discussed, that business is a very different business. We have got a lot of variable cost that comes with that business in the form of hosted infrastructure. It’s going to be a very different margin profile. So, we have got two different businesses with two different margin profiles both growing very fast right now. But nothing has changed from our perspective about our ability to continue to drive more margin in the out years.

And Kash, maybe the one thing I will add is we are clearly seeing the benefits of the stacking effect. When you look at the results for just Q3, I think digital media grew approximately 29%. The Creative grew approximately 39% and certainly the core Creative is growing even faster than that. So very pleased with both new customer acquisition as well as seeing the benefits of the stacking effect in the core subscription revenue stream.

Congrats guys. Thank you so much.

Thank you.

Your next question comes from Sterling Auty from JPMorgan. Your line is open.

Yes, thanks guys. Actually looking for the intersection of two questions that I think were asked earlier was just I think Shantanu, you talked about Creative Suite 6 is still – the migration path is still there. Later I think you have talked about Germany and Japan having good quarters. But I want to put those two together and try to understand where are you still seeing the most momentum in the Creative Suite conversion by geography?

I think we continue to see strength across all geographies, Sterling. I think in terms of trying to give some color, Japan and Germany had a good quarter. It was very interesting as Australia where as you know we started the entire process for the Creative Cloud. They had a great new unit growth and run rate and so new customer acquisition is also clearly powering the business. And hopefully those three data points give you – and Rest of World is growing. It’s just – we are seeing nice growth across all of the geographies in the run rate business. Clearly, there is more untapped opportunity in terms of international markets than they are in the U.S., no question, because in the U.S., we have seen tremendous progress. But I don’t want to give anybody the impression that in the U.S., we are not both growing new customers as well as migrating existing customers.

Got it. Thank you, guys.

Thanks.

Your next question comes from Jay Vleeschhouwer from Griffin Securities. Your line is open.

Thanks. For Mark, would it be fair to say that your pace of hiring could very well accelerate in terms of total heads even as compared – or especially as compared with Q3 adds? When looking, for example, at the number of open positions, right now on in your website we detected a pretty sharp increase year-over-year and sequentially over the past few months in all major regions, Americas, Asia, EMEA, sales and R&D spiking up pretty considerably. And interestingly, Japan is picking up in terms of opening U.K. post-Brexit, picking up in terms of openings. So, again, would it be fair to say that do you think you might even drive the headcount additions, particularly in non-U.S. markets more rapidly?

Hey, Jay. Yes, without a doubt, the 500 people we added roughly this quarter is the most we have added in a quarter in my recent memory and it’s all being driven by what we have been seeing for quite a while, which is our need to drive sales capacity for both Digital Media and Digital Marketing, drive more marketing and R&D as well for that matter. So, I would expect that to continue and that’s why I made the comment I did about our investment for the next couple of years. We are going to need to make sure we have got the right available funds to invest in that and drive the growth that we are trying to driving these businesses. We are driving 20% revenue growth on the Digital Media side of the business and 30% bookings growth on the Digital Marketing side. Those are pretty significant growth numbers and you have got to have the investment to drive that growth.

Right. For Shantanu, you have spoken at Summit and on other occasions Mark has as well, about your future technology infrastructure meaning you have referred on a number of occasions to defining a common data model, common cloud architecture, investments in data science and so forth. Could you talk about that a little bit in terms of ultimately where do you see the platform going? Is that part of what you were referring to earlier in terms of a frictionless self-service capability that you could offer customers? What do those really mean in terms of functionality and deliverables to the customer?

Well, Jay, I think in terms of how we as a product company continue to innovate for our customers, there is no question that Creative Cloud has been as successful as it is, because not only is it best-of-breed individual products for specific users, but the integration across all of those is unparalleled in the industry in terms of how colors or types of fonts work. Our vision for the Marketing Cloud is exactly the same, which is we are building a data platform that enables all of our products to work seamlessly together. We have made a lot of progress in that space. And the benefit for customers is certainly as they think about a campaign, as they think about customer segments it naturally flows from the analytics product to the target product to the campaign product. And in the enterprise space, we certainly see that our Marketing Cloud, while it’s a leader, we have aspirations for that not to be an island unto itself, but really to be the hub that interconnects all of the enterprise software. And so investing as you point out in these core data platforms to enable our customers to derive value and for us to continue to build a technology moat that will serve us well for many years is very much part of the strategy. And last but not least, customer expectations right now across the globe are that content flows seamlessly from our Creative Cloud into our Marketing Cloud and so we do that. The one other comment I will make you are right, there is a lot of conversation right now about machine learning and AI. It’s something that we have invested in for years. I mean, we wouldn’t be building the magic that we build in Creative Cloud or Creative Suite without very deep technology in terms of machine learning. And the reality is when we think about Marketing Cloud, it’s not about data collection, it’s all about how we are driving insight and predictive, which is another form of machine learning and that’s what’s really fueled our Marketing Cloud business. So continue to invest in deep technology across the company.

Okay, thank you.

Your next question comes from Alex Zukin from Piper Jaffray. Your line is open.

Thanks for taking my question guys. Shantanu, you mentioned some accelerated deal signings in the quarter. And I guess maybe you can comment on the macro backdrop as you are seeing this year versus last year as some of the other vendors in the space saw some deal pushes and you clearly aren’t seeing that. So maybe just give a comment there and then I have got a quick follow-up.

Yes, Alex, I think when, after Q2, we said as we looked at the pipeline for the second half of the year, it was a healthy pipeline. And we look at it and we have our internal expectations of what’s going to close in Q3 and what’s going to close in Q4. As you know, enterprise software Q4 is the traditionally strong quarter, which again to the question that Brent also asked earlier gives us confidence the strength of the pipeline for the numbers that we said. But I think we executed well against it. And I think it also reflects the importance of our solutions for the customers that we are serving. I mean if you are trying to move your business online, if you are trying to create a more personalized relationship with your customers sure, you can defer the decision. You are only deferring the inevitable in terms of having to invest in technology that helps you automate that process. And so I would say part of it is the offering that we have, part of it is execution that we have. And we have to just continue to be focused on it.

Operator – sorry Alex, go ahead.

Yes. I was going to ask a question, you mentioned machine learning and predictive analytics and Shantanu I guess – and kind of in the context of AI, do you see – when you think about the application of data within your product suite, are you thinking more in terms of automation context or insights context, just in general how do you see that playing out in the marketing landscape over the next few years?

I think Alex, for years we have been talking about our platform unique advantage being the combination of data and content. And as we are enabling our customers to have these Marketing Clouds deliver more personalized experience, I think table stakes a few years ago was being to actually just collect that data to the core Web Analytics. Our business is being fueled by not just collecting the data. Our business is certainly being fueled by across campaign and across target. How are we providing a unique insight into our customers, so we have been doing this for years and I think to your point, there are a lot of people talking about it. It’s going to become something that becomes the industry buzz. We have partly been executed against that for quite a while now.

Operator, we are coming up at the top of the hour, why don’t we take one more question?

Thank you. Your next question is from Derrick Wood from Cowen and Company. Your line is open.

Great. Thanks for squeezing me in. Shantanu, on the Marketing Cloud, based on our conversations, at least within the enterprise B2C base, it seems like we are moving a bit past the website re-platforming cycle and a bit more towards adding modules on top of AEM and better monetizing the content in the platform, would you agree with this and if so, what does that mean to the kind of the velocity of transaction activity and the type of deal sizes you are seeing. And then maybe correlated but Mark, I think I heard you say you want to increase both more focused on first year contract value and shorten time to go live, could you just flush out a bit more about what you guys are doing and what you hope to yield from it?

Yes. I will start and then Shantanu can add on. So as it relates to that. I think we have discussed this with you. I know we have discussed this with you in the past, but we want to more closely align revenue to bookings. And as a result to that, our focus has shifted more towards annual subscription value. So the field – our sales force is now compensated more towards annual subscription value. We continue to believe that we are going to hit our 30% ASP bookings growth for the year. And by doing so, that puts revenue more closely aligned to bookings.

And Derrick, as to your question, you are absolutely right. I mean the single point of interaction in the digital world for most customers used to be the website with AEM as you pointed out. What’s becoming table stakes increasingly is having that same kind of personalized experience across all digital channels, whether you are in airlines and that’s the experience in the kiosk or a terminal, whether it’s in retail and that’s the particular experience when you walk into a retail store, whether it’s in food and functionality, whether it you are coming to a drive-in. And so what’s fueling our business is the ability to actually deliver that same experience across each of those different channels. And more specifically, what that means is as people are creating new mobile applications and using our AEM mobile solutions or as people are corresponding more with people and addressing our campaign solutions. And it’s certainly our goal to provide that single stop shop for all communication and all experience across all different channels. It’s very definitely driving it. The one product that I will again single out is Audience Manager really just continues to do extremely well in the enterprise. And I think the reason for that is all enterprises are starting off with this question who are my customers, what are the demographics and how do I set up that up. And Audience Manager is so much more than just DMV. It actually allows enterprise to start off in a business strategy and say, let me get as real clear understanding of my customers and what I am trying to deliver to them across all different touch points. So our vision of the Marketing Cloud and continuing to be the one stop shop, I think it’s paying off and you are seeing that in the results. And big picture, since that was the last question, I think we continue to focus on the large opportunities ahead of us as a company. And we are helping create the world’s content. We are helping enterprises use technology to deliver better customer value. I know Mark and I are pleased with our Q3 results. Our Q4 targets reflect the continued momentum in the business. It’s going to be able to enlist macro environment, continue to reiterate our financial targets. And as you saw, increase our EPS target for the year. And so we think we are in great shape. We remain focused on driving innovation for our customers. I again want to thank customers, partners worldwide for their commitment and to our employers – employees for continuing to drive innovation in this industry. We look forward to seeing you all at MAX. There are going to be some exciting announcements and we will have an update for you, but thank you for joining us today.

And this concludes our call. Thank you.