Adobe Q1 FY2014 Earnings Call Script March 18, 2014

Transcription

1 MIKE SAVIAGE Good afternoon and thank you for joining us today. Joining me on the call are Adobe s President and CEO, Shantanu Narayen, as well as Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe s first quarter fiscal year 2014 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, our 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. Page 1 of 13

2 Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue, subscription and operating model targets, and our forward-looking product plans, is based on information as of today, March 18 th, 2014, 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 financial targets document and in our updated investor datasheet on Adobe s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect, and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe s Investor Relations website for approximately 45 days, and is the property of Adobe. The call audio and the webcast archive may not be re-recorded, or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Page 2 of 13

3 SHANTANU NARAYEN Thanks Mike and good afternoon. Adobe is redefining the Creative and Digital Marketing categories with our industry-leading Cloud offerings. Through a steady stream of innovation, we will expand adoption of Creative Cloud; grow multi-solution sales of Adobe Marketing Cloud; and drive integration across our cloud offerings. We made progress on all fronts this quarter. In Q1 we achieved $1 billion in revenue, with non-gaap earnings per share of 30 cents. We drove strong performance across key growth metrics, including Creative Cloud subscriptions, Annualized Recurring Revenue or ARR and Adobe Marketing Cloud bookings. In Digital Media, Creative Cloud momentum continued. Creative Cloud ARR grew to just under $1 billion in Q1, and we exited with over 1.8 million subscriptions. Page 3 of 13

4 Driving that customer adoption and satisfaction is the ongoing flow of innovation in the Creative Cloud platform. Coming off our delivery of more than 500 new features and capabilities last year to Creative Cloud subscribers and enterprise users, in Q1 we delivered numerous updates including major features in Photoshop, Illustrator, and InDesign. We are excited about the amazing innovation we will deliver in a major update to Creative Cloud in the next few months. Our digital publishing business continues its momentum, where we are building on our success with publishers in the corporate market like General Motors and Disney. Last month, we announced the integration of Digital Publishing Suite and Adobe Experience Manager, part of the Adobe Marketing Cloud. This integration enables publishers and brands to create, deliver and measure experiences across the Web and content-rich apps like digital magazines using one set of assets. This enables a faster and more efficient publishing process. In Document Services, Acrobat continued to achieve solid performance, with online document services continuing their momentum. EchoSign adoption continues, with brands including Citrix, Electronic Arts, Kia, NEC Financial Services and UC Berkeley using our esignature platform. Combined with Acrobat ETLAs, Document Services ARR grew to $164 million exiting Q1. Between our Creative and Document Services businesses, total Digital Media ARR grew to $1.15 billion at the end of Q1. In Digital Marketing, Adobe Marketing Cloud achieved 24% year-over-year revenue growth in Q1. We continue to have the most comprehensive offering in the market for chief marketing officers, chief revenue officers, advertising agencies, publishing executives and digital marketers. Page 4 of 13

5 To create even more impact for our marketing customers, we are focused on integrating our six Adobe Marketing Cloud solutions. In January, we announced the integration of Adobe Campaign and Adobe Experience Manager. This will allow marketers to use a single digital asset management repository and integrate data from anonymous visitors and identified customers to create personalized customer experiences. Campaign is off to a strong start, as it addresses marketers challenge to manage communications with their customers across multiple channels. Examples of customers licensing multiple Adobe Marketing Cloud solutions in Q1 included GMC, Kohl s, MGM, NBC Universal and Under Armour. Last month, we had an exciting event when NBC Sports used Adobe Primetime to deliver the Sochi Olympics to desktops, tablets and other mobile devices. Millions of viewers were able to access events live and on-demand. NBC was able to use Primetime's analytics, authentication, ad delivery and media playback capabilities to stream video across screens. With more than 10.2 Million video stream starts, the men s hockey game between the U.S. and Canada stood out as the biggest, authenticated online event in history. Next week, we will hold our Digital Marketing Summit in Salt Lake City, with over 5,500 attendees. Summit has become a premier industry venue where we engage with current and prospective customers as well as an ever-growing list of global partners. We have a number of significant announcements on the docket as well as an amazing speaker lineup, including senior marketing executives from brands like Audi, FedEx, REI and Sephora. I m proud to share we donated over $300 million of software and training to the White House s ConnectED initiative. The goal of ConnectED is to advance digital learning among our youth, and we re excited about enabling 15,000 schools across the country to help students express their creativity and build skills for future success. We delivered another strong quarter and continue to make great progress against our goals in both Digital Media and Digital Marketing. Next week at Summit we ll walk you through more details about where we re headed. We hope to see you there. Now, I ll turn it over to Mark. Page 5 of 13

6 MARK GARRETT Thanks Shantanu. In the first quarter of FY14, Adobe achieved revenue of 1 billion dollars, at the high-end of our targeted range. GAAP diluted earnings per share in Q1 were 9 cents; non-gaap diluted earnings per share were 30 cents. Highlights in the quarter included: Adding more than 405 thousand net new Creative Cloud subscriptions; Creative subscription reported revenue exceeding perpetual licensing revenue for the first time; Growing Digital Media ARR by over $200 million to a quarter-ending total of $1.15 billion; Page 6 of 13

7 Driving 24% Adobe Marketing Cloud year-over-year revenue growth; Increasing deferred revenue by $52 million to a record $881 million; and Exiting Q1 with 52% of our one billion dollars of Q1 revenue as being recurring this is truly a major milestone in the company s transformation. In Digital Media we achieved revenue of $641 million. This segment has two major components of revenue: our Creative family of products and our Document Services products. In our Creative business, customer adoption of Creative Cloud grew quarter-over-quarter. We exited Q1 with 1 million 844 thousand paid Creative Cloud individual and team subscriptions. With this achievement, we hit a milestone where Q1 reported Creative revenue from subscriptions and ETLAs exceeded reported revenue from perpetual licensing for the first time. Our success with subscriptions, ETLAs and Digital Publishing Suite adoption helped to drive Creative ARR to a total of $987 million exiting Q1, an increase of $186 million quarter-over-quarter. As of the end of Q1, 96% of Creative Cloud subscriptions were annual plans. The percentage of single app subscriptions grew as a percentage of total subscriptions as a result of our successful Photoshop/Lightroom bundle which is expanding our overall market opportunity. Page 7 of 13

8 We are making good progress migrating individual, team and enterprise customers to Creative Cloud. In addition, we are offering incentives to accelerate migration of Creative Suite customers, acquire new creative customers, and further expand in the photography market. Retention and renewal rates after promotions expire continue to track ahead of our internal projections. The resulting Average Revenue Per User, or ARPU, was lower in Q1 as expected. As a result of Creative Cloud success across teams and enterprises, we will soon end general availability of CS6 perpetual licensing in the channel. This decision is consistent with our comments last December when we stated we expected no material revenue from perpetual licensing of CS6 in the second half of fiscal We anticipate this change will align channel resellers to exclusively focus on Creative Cloud for Teams subscriptions. In Document Services, we achieved revenue of $194 million in Q1. Our success in this category is being driven by continued adoption of Acrobat, Acrobat ETLAs, Acrobat cloud services and our EchoSign e- signing solution. Document Services ARR grew from $143 million exiting Q4 to $164 million exiting Q1. Total Document Services subscriptions spanning EchoSign, Create PDF Online and related services grew to nearly 1.8 million. Page 8 of 13

9 In our Digital Marketing segment, there are two components. The first is revenue from our Adobe Marketing Cloud offering, and in Q1 we achieved Adobe Marketing Cloud revenue of $267 million representing year-over-year growth of 24% and ahead of our target of 20% growth in FY14. We drove strong bookings in the quarter which puts us on pace to achieve our target of 30% bookings growth this year. Total transactions managed by all our Marketing Cloud solutions grew to more than 5.4 trillion in Q1. Mobile device use continues to be a driver in our Digital Marketing business; mobile transactions increased to 36% of total Adobe Analytics transactions, up from 33% last quarter. Next week at Summit we are hosting a financial analyst briefing and we intend to update you on numerous metrics which reflect our leadership and momentum in our Digital Marketing business. The second component of our Digital Marketing segment is revenue from the LiveCycle and Connect businesses, which contributed $47 million in Q1 revenue. As a reminder, late last year we introduced a path for LiveCycle customers to migrate to our Adobe Experience Manager offering. As a result, we expect LiveCycle revenue will continue to decline, while Connect revenue will remain relatively flat. Print and Publishing segment revenue was $45 million in Q1. Page 9 of 13

10 Geographically, we experienced stable demand across our major geographies. From a quarter-over-quarter perspective, FX decreased revenue by $0.7 million. We had $2.8 million in hedge gains in Q1 FY14, versus $3.1 million in hedge gains in Q4 FY13; thus the net sequential currency decrease to revenue was $1.0 million. From a year-over-year currency perspective, FX decreased revenue by $10.9 million. Comparing the $2.8 million in hedge gains in Q1 FY14 to the $7.1 million in hedge gains in Q1 FY13, the net year-over-year currency decrease to revenue considering hedging gains was $15.2 million. In Q4, Adobe s effective tax rate was 27.5% on a GAAP basis, and 21% on a non-gaap basis. The GAAP rate was higher primarily due to stronger-than-forecasted profits in the U.S. Employees at the end of Q4 totaled 11,802 versus 11,847 at the end of last quarter. Page 10 of 13

11 Our trade DSO was 46 days, which compares to 44 days in the year-ago quarter, and 52 days last quarter. Cash flow from operations was $252 million in the quarter. And our ending cash and short-term investment position was $3.13 billion, compared to $3.17 billion at the end of Q4. In Q1, we repurchased approximately 4.5 million shares at a total cost of $263 million. Now, I would like to go over our financial outlook. In Q2 of FY14, we are targeting a revenue range of $1 billion to $1 billion 50 million dollars. Assuming the midpoint of our Q2 revenue range: we are targeting total Digital Media and Adobe Marketing Cloud revenue to grow sequentially; we also expect LiveCycle and Connect revenue to decline sequentially; and we are targeting Print and Publishing revenue to be relatively flat. During the quarter, we expect to add approximately the same number of Creative Cloud subscriptions and amount of Digital Media ARR as what was achieved in Q1. We are targeting our Q2 share count to be 508 million to 510 million shares. We are targeting net nonoperating expense to be between $16 million and $18 million on both a GAAP and non-gaap basis. We are targeting a Q2 tax rate of 28% to 29% on a GAAP and 21% on a non-gaap basis. These targets yield a Q2 GAAP earnings per share range of 6 cents to 12 cents per share, and a Q2 non- GAAP earnings per share range of 26 cents to 32 cents. Page 11 of 13

12 Looking to the second half of the year, in the coming months we are planning a major launch of our Creative products and the removal of legacy CS6 products from the channel. We expect both of these will cause channel partners and our customers to increase their focus on Creative Cloud adoption. Finally, based on this roadmap, and factoring our Q1 performance and our Q2 targets, we expect we will meet or exceed all of the annual FY14 targets we provided in December. These targets are available in the financial targets document on our Investor Relations website. I ll now turn the call back over to Mike. MIKE SAVIAGE Thanks Mark. We look forward to hosting everyone that has signed up to attend Summit next week. The opening keynote session is on Tuesday morning March 25 th. We will be hosting a brief financial analyst meeting with presentations by Adobe management and a Q&A session at the event on Tuesday afternoon starting at 3pm Mountain Time. It s not too late to sign up. Contact Adobe Investor Relations for registration information and discounted pricing for professional financial analysts and investors. Keynote sessions and the audio of the financial analyst meeting will be webcast for those unable to attend. We remind everyone that Adobe increasingly utilizes blogs and social channels as a primary means to disclose important information. Investors and analysts who want to stay current on the latest Adobe news are encouraged to follow Adobe on Twitter, Facebook and YouTube, and to frequently check Page 12 of 13

13 Adobe s corporate blogs on blogs.adobe.com. In addition, tv.adobe.com is a great resource to learn more about Adobe s products and solutions, and find new customer case studies. Our Investor Relations website provides easy access to these resources. For those who wish to listen to a playback of today s conference call, a web-based Adobe Connect archive of the call will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling ; use conference ID # Again, the number is with ID # International callers should dial The phone playback service will be available beginning at 4pm Pacific Time today, and ending at 4pm Pacific Time on Friday March 21 st, We would now be happy to take your questions. Operator. Page 13 of 13