Adobe Q1 FY2016 Earnings Call Script & Slides March 17, 2016

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; and Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe s first quarter fiscal year 2016 financial results. By now, you should have a copy of our earnings press release which crossed the wire approximately one hour ago. We ve also posted PDFs of our earnings call prepared remarks and slides, financial targets and an updated investor datasheet on Adobe.com. If you would like a copy of these documents, you can go to the Investor Relations page and find them listed under Quick Links. Page 1 of 16

2 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, March 17 th, 2016, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today, as well as Adobe s SEC filings. During this call, we will discuss GAAP and non-gaap financial measures. A reconciliation between the two is available in our earnings release and in our updated investor datasheet on Adobe s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live in Adobe Connect, and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe s Investor Relations website for approximately 45 days, and is the property of Adobe. The call audio and the webcast archive may not be re-recorded, or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu. Page 2 of 16

3 SHANTANU NARAYEN Thanks Mike and good afternoon. Adobe s year is off to a strong start, with first quarter revenue of $1.38 billion dollars and non-gaap earnings per share of 66 cents. Adobe s opportunity has never been greater. Every brand, government agency and educational institution is undergoing large-scale digital transformation. Creating a compelling experience for their customers and constituents across every touchpoint is paramount to their success, and they are turning to Adobe for help. In Digital Media, Creative Cloud momentum continued in Q1 with strong adoption across all segments. There have never been more people creating content. Whether it s creative professionals, photographers, students or hobbyists creating compelling images, videos, websites, or mobile applications, our opportunity is to provide them with a one-stop shop for all their creative needs. Page 3 of 16

4 There are three primary growth drivers for Creative Cloud as we target a $17 billion addressable market: continuing to migrate our core base of Creative users, market expansion into new segments and value expansion through new services. Our migration strategy focuses on driving Creative Suite users to our core offerings, Creative Cloud for individuals, teams and enterprises. In Q1 we executed well against this opportunity driving adoption across all routes to market, including Adobe.com, our channel partners and Adobe direct sales. Our market expansion strategy is to bring in new users, including photo enthusiasts and hobbyists with our Creative Cloud Photography plan. Over 30% of Creative Cloud subscribers are new to Adobe, and many are coming to us through our mobile apps. Over 23 million new Adobe IDs have been created through our mobile apps to date. In terms of value expansion, we have begun to see the positive effect of Adobe Stock, our stock content marketplace, on our Creative revenue and ARR. Millions of Creatives use stock content and we believe Adobe has a tremendous opportunity to deliver additional value by seamlessly integrating Adobe Stock directly into the Creative Cloud service. We intend to become the leader in this space through further product integration and new offerings, including stock video. In February, we added more than 100,000 native 4K video assets to Adobe Stock, which already includes more than 1 million video assets and more than 45 million images and graphics. The primary benefit of a Creative Cloud subscription is access to Adobe s continuous innovation. Earlier this week, we announced the preview release of a brand new product, Adobe Experience Design CC, a design and prototyping product that empowers user experience designers to deliver new mobile apps and web sites quickly and easily. User experience design is one of the fastest growing creative disciplines. According to data from our Behance creative community of over 6.6 million creatives, interaction design projects grew by 52% in 2015, more than any other creative field. We look forward to hearing feedback from our community as we work toward launching the product later this year. Page 4 of 16

5 Adobe s momentum continues in the video space, where we are now the leader in video production and editing. Over 175 films debuting at the 2016 Sundance Film Festival used Adobe Premiere Pro CC and other Creative Cloud tools. Deadpool is the latest blockbuster film to be edited exclusively with Adobe Premiere Pro. Our footprint is extending beyond Creative pros to Creative consumers. In February we introduced Adobe Post, a free mobile app that allows consumers to quickly and easily turn photos and text into beautifully designed graphics and share them on social media. It joins our other consumer mobile apps, Adobe Voice and Adobe Slate, in bringing fast and fun storytelling capabilities to a broad audience, including students and small businesses. Adobe Document Cloud is becoming critical to the paper-to-digital transformation of document processes. More than six billion digital and electronic signature transactions are now processed through Document Cloud each year. Global businesses like The Royal Bank of Scotland, Scottrade and NetApp rely on Document Cloud and Adobe Sign for fast, secure and mobile e-signatures. In Q1, Document Cloud revenue was $199 million and we exited the quarter with $393 million in ARR. Across our Creative and Document Cloud businesses, total Digital Media ARR grew to $3.13 billion as of the end of Q1. Page 5 of 16

6 We are the leader in the exploding digital marketing category. In Q1 we achieved strong Adobe Marketing Cloud bookings, with revenue of $377 million which represents a 21 percent year-over-year increase. We continue to drive large-scale, multi-solution engagements with Marketing Cloud customers. Significant customer engagements in Q1 included RR Donnelly, Samsung Electronics, MGM Resorts International, Nissan, Workday and Goldman Sachs. At Adobe, we are focused on product innovation and Adobe Marketing Cloud solutions continue to garner accolades from industry analysts. Earlier this month, we were recognized by IDC as a Leader in its Worldwide Marketing Cloud Platforms vendor assessment, and Forrester Research recognized Adobe Analytics, the data and analytics backbone of Adobe Marketing Cloud, as a Leader in its Customer Analytics Solutions Wave report. In January Gartner named Adobe as a leader in the 2016 Magic Quadrant for Digital Marketing Hubs. Adobe managed over 51 trillion customer data transactions through the Marketing Cloud over the past four quarters, and our Adobe Digital Index reports are increasingly being viewed as the source for reporting and predicting major retail and consumer trends. Yesterday, we launched our new Digital Economy Project, which includes three digital indicators of the U.S. economy a digital price index, a housing index and a job seeking index. Page 6 of 16

7 Next week we will hold our Adobe Summit event in Las Vegas and we re expecting record-breaking attendance, including hundreds of our partners and mainstage speakers from top brands including Cirque de Soleil, McDonald s, Comedy Central, Mattel and Royal Bank of Scotland. Adobe Summit is the industry s leading digital marketing conference and the venue to learn where the industry is headed and see Adobe s latest technical advancements in mobile, video and data science. For over 30 years, Adobe employees have demonstrated a sense of purpose and commitment to our communities and we re proud of the recognition we received in Q1 as both an employer and a good corporate citizen. We were included as one of the Global 100 Most Sustainable Corporations and were recognized as Fortune s Most Admired Company within the software category. While Creative Cloud, Adobe Document Cloud and Adobe Marketing Cloud are all leaders in their respective categories, our true opportunity is in bringing these solutions together. We have been unwavering in our mission to use content and data to deliver world-class experiences to our customers whether they're on the web, in an app, in a retail store or in a car. Adobe is the only software company with deep history in content and vast data capabilities to deliver consistent, continuous and compelling experiences. We have a robust technology platform, a thriving ecosystem of partners and developers and a strong brand that has affinity worldwide with the world's largest enterprises, agencies, governments and educational institutions. Our Q1 results demonstrate strong execution against this vast opportunity. Our market leadership, product differentiation and continued momentum give us confidence to raise our FY16 revenue and earnings targets. Mark. Page 7 of 16

8 MARK GARRETT Thanks, Shantanu. Before I comment on Q1 results, as a reminder, 2016 is a 53 week fiscal year with a 14 week first quarter. This was factored into all of the targets we provided in December. In the first quarter of FY16, Adobe achieved record revenue of 1 billion 383 million dollars, which represents 25% year-over-year growth. We estimate the extra week added approximately $75 million of revenue to the quarter, but this was mainly offset by a net year-over-year currency decrease to revenue of approximately $69 million. GAAP diluted earnings per share in Q1 were 50 cents and non-gaap diluted earnings per share were 66 cents. These strong results reflect continued momentum across our Cloud businesses. Page 8 of 16

9 Highlights in our first quarter include: Better-than-expected growth in Digital Media ARR, exiting the quarter with $3.13 billion; Record Creative revenue of $733 million, which represents 44% year-over-year growth; Record Adobe Marketing Cloud revenue of $377 million, which represents 21% year-over-year growth; Strong growth in operating and net income, with cash flow from operations of $498 million; and Exiting Q1 with a record 81% of Q1 revenue as recurring. In Digital Media, we grew Q1 segment revenue by 33% year-over-year, and exited the quarter with Digital Media ARR of $3.13 billion. Within Digital Media, we delivered Creative revenue of $733 million which represents year-over-year growth of 44%. We increased Creative ARR by $238 million during Q1. Driving this strong performance was demand for Creative Cloud across all offerings and routes to market including the addition of 798 thousand net-new Creative Cloud subscriptions during the quarter. Migration continues to represent a large opportunity. Creative Cloud continues to distance itself from Creative Suite, and Creatives are migrating as well as renewing at non-promotional pricing. New customer adoption continues to increase our installed base. Creative Cloud mobile apps are driving new top-of-funnel traffic and first-time customer adoption. Market expansion is being driven by offerings such as the Creative Cloud Photography Plan which targets photo enthusiasts. Page 9 of 16

10 Value expansion with new services like Adobe Stock are increasing ARPU and ARR. Our performance across all of these offerings and the health of the business is best reflected in ARR. Because of this, moving forward we have decided to provide forward-looking quarterly ARR targets to help you better model the total business. With respect to subscriptions, it has been our stated goal to attract tens of millions of customers at widely-varying price points. We reviewed this strategy with you back in October at our analyst meeting. Creative Cloud Photography Plan was our first market expansion offering, and has resulted in well over a million subscribers. New SKUs such as the recently announced K-through-12 education offering will make Creative Cloud available to millions of students. And as we said at the analyst meeting, we are also considering a mobile-only offering. All of this further dilutes the relevance of the number of subscribers as a measure of the health of the business. In addition, with respect to Acrobat, customers have been able to choose to subscribe to Acrobat either through Creative Cloud which has been reflected as Creative Cloud subscriptions and Creative ARR; or, via Document Cloud which has been reflected in Document Cloud ARR. For all these reasons, while we might choose to periodically report subscriptions, we no longer intend to provide actuals on a quarterly basis. With Document Cloud, we achieved revenue of $199 million with Document Cloud ARR exiting the quarter of $393 million. Page 10 of 16

11 Adoption of our new Acrobat DC offering was strong in Q1 both through the perpetual offering as well as in both Creative Cloud and Document Cloud subscription offerings on Adobe.com all of which is captured in Digital Media ARR. In Digital Marketing, we achieved record Adobe Marketing Cloud revenue of $377 million. We delivered strong bookings during the quarter, and both the revenue and bookings in Q1 put us on pace to achieve our annual targets of approximately 20% revenue growth and 30% bookings growth. Other Marketing Cloud highlights in Q1 include: Strong year-over-year revenue growth across all Marketing Cloud solutions; Continued growth in multi-solution adoption by our biggest customers; and Mobile data transactions grew to 49% of total Adobe Analytics transactions. Our Digital Marketing segment revenue also includes LiveCycle and Connect, which declined as expected. Page 11 of 16

12 From a quarter-over-quarter currency perspective, FX decreased revenue by $9.5 million. We had $3.2 million in hedge gains in Q1 FY16, versus $1.3 million in hedge gains in Q4 FY15; thus the net sequential currency decrease to revenue considering hedging gains was $7.6 million. From a year-over-year currency perspective, FX decreased revenue by $48.1 million. We had $3.2 million in hedge gains in Q1 FY16, versus $23.7 million in hedge gains in Q1 FY15; thus the net year-over-year currency decrease to revenue considering hedging gains was $68.6 million. In Q1, Adobe s effective tax rate was 13% on a GAAP-basis and 21% on a non-gaap basis. The GAAP rate was lower than targeted primarily due to the retroactive reinstatement of the 2015 R&D tax credit. Employees at the end of Q1 totaled 14,154 versus 13,893 at the end of last quarter. Our trade DSO was 42 days, which compares to 44 days in the year-ago quarter, and 47 days last quarter. Cash flow from operations was $498 million in the quarter. Page 12 of 16

13 Deferred revenue grew to $1.61 billion, up 36% year-over-year. Our ending cash and short-term investment position was $4.10 billion, compared to $3.99 billion at the end of Q4. In Q1, we repurchased approximately 1.5 million shares at a cost of $133 million. We currently have $1.48 billion remaining under our latest repurchase authority granted in January, Now I will provide our financial outlook. When considering our targets for the second quarter of fiscal 2016, it is important to remember that the first quarter had an extra week of revenue which we estimate had an approximate benefit of $75 million. Based on Q2 being a standard 13 week quarter, we are targeting a second quarter revenue range of $1 billion 365 million to $1 billion 415 million dollars. In Digital Media, we expect to add approximately $275 million of net new Digital Media ARR during Q2, with strong year-over-year Digital Media segment revenue growth. In Digital Marketing, as we said in December, we expect Marketing Cloud quarterly year-over-year revenue growth will fluctuate below and above our annual FY16 target of approximately 20% growth based on the amount of perpetual revenue achieved in the prior year-ago quarter. Given this, we are targeting approximately 17% year-over-year Adobe Marketing Cloud revenue growth in Q2, with continued momentum in bookings. We expect our Q2 share count to be between 506 million to 508 million shares. We are targeting net non-operating expense to be between $14 million and $16 million on both a GAAP and non-gaap basis. We are targeting a Q2 tax rate of approximately 23% on a GAAP basis and 21% on a non-gaap basis. Page 13 of 16

14 These targets yield a Q2 GAAP earnings per share range of 42 cents to 48 cents per share, and a Q2 non- GAAP earnings per share range of 64 cents to 70 cents. Based on Q1 upside and the benefit of strong Digital Media ARR momentum, we are raising certain full year financial targets. In Digital Media, we are increasing our Digital Media ARR exiting FY16 to approximately $4 billion which is above our prior target of approximately $3.875 billion. We are increasing our targeted revenue for the year to approximately $5.8 billion, up from our prior target of approximately $5.7 billion. FY16 targeted EPS is now approximately $2.00 on a GAAP basis, and approximately $2.80 on a non-gaap basis. Our prior FY16 EPS targets were approximately $1.80 on a GAAP-basis and approximately $2.70 on a non-gaap basis. In terms of color for the rest of the year, in Q3 we expect a slight sequential increase in both total revenue and Digital Media ARR. We also expect Q3 Marketing Cloud revenue growth of less than 20% year-over-year due to the large amount of perpetual revenue in the year-ago quarter. Page 14 of 16

15 In Q4 we expect seasonally strong sequential growth in both total revenue and Digital Media ARR. And we expect Q4 Marketing Cloud revenue growth greater than 20% year-over-year. In summary, Q1 was a great start to what will be another strong year for Adobe. Mike. Page 15 of 16

16 MIKE SAVIAGE Thanks Mark. Next week Adobe will host its annual Digital Marketing Summit in Las Vegas, with the opening day keynote on the morning of Tuesday March 22 nd. If you would like to attend Summit, please send an to for registration information. If you are unable to attend in person, keynote sessions on Tuesday and Wednesday will be webcast live. 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 ; use conference ID # International callers should dial The phone playback service will be available beginning at 5pm Pacific Time today, and ending at 5pm Pacific Time on March 23, We would now be happy to take your questions, and we ask that you limit your questions to one per person. Operator. Page 16 of 16