Adobe Inc (ADBE) — Q3 2018 Earnings Call Transcript

Good afternoon, and thank you for joining us today. Joining me on the call are Adobe's President and CEO, Shantanu Narayen; and John Murphy, Executive Vice President and CFO. In our call today, we will discuss Adobe's third quarter fiscal year 2018 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 Adobe's 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 13, 2018, 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.

Thanks, Mike, and good afternoon. Q3 was a record quarter for Adobe. We delivered $2.29 billion in revenue, representing 24% year-over-year growth. GAAP earnings per share for the quarter was $1.34, and non-GAAP earnings per share was $1.73. Adobe is empowering people to create and transforming how businesses compete. Our execution against this strategy is driving strong financial results across our Digital Media and Digital Experience businesses. In every market around the world, students, creatives, enterprises, and governments are choosing Adobe Creative Cloud, Document Cloud, and Experience Cloud to deliver the transformative digital experiences required to compete and win today. In our Digital Media business, we achieved strong growth in both Creative Cloud and Document Cloud revenue in Q3. Net new Digital Media annualized recurring revenue or ARR was $339 million, and total Digital Media ARR exiting Q3 grew to $6.4 billion. Key Digital Media customer engagements in the quarter included the U.S. Department of Education, Facebook, Marks & Spencer, and Walmart. Creative Cloud has become the creativity platform for all with millions of highly engaged subscribers and a strong base of trialists who we actively convert each month into paying customers. Whether it's YouTubers looking for an intuitive video solution or mobile-first photography enthusiasts, we continue to see significant opportunities for growth in new customer segments as well as untapped potential in emerging markets. Video continues to be an explosive category. In June, we previewed Project Rush, a new video editing app that makes creating and sharing online video content easier than ever. Whether your passion is vlogging about food or posting a cool skateboarding clip, Project Rush gives users a way to create video projects across surfaces, providing them with maximum creative flexibility. This week at IBC, we shared a slate of new video creation capabilities that'll speed up video production and enable more seamless workflows for professional editors and animators. This includes Adobe Sensei-powered features for audio editing, color grading, and animation in Premiere Pro, Audition, Character Animator, and other video tools. Lightroom CC, our cloud-based photography service, continues to attract new customers. We announced a number of updates to Lightroom CC and Lightroom Classic for Mac, Windows, Android, and iOS and shipped several improvements including new in-app learning capabilities, support for new cameras, and more than 1,200 different lenses. We previewed a brand-new feature, Best Photos, which combines Adobe Sensei intelligence with user-made edits to quickly recommend the best photos within an album. Adobe XD, our all-in-one UX solution for designing and prototyping websites and apps, is quickly becoming the leader in the screen design category with strong monthly active usage among customers. This quarter, we unveiled new open platform capabilities, which allow users to customize their workflow with a broader ecosystem of community and partner plug-ins. As students around the world head back to school, Adobe is partnering with educators and institutions to ensure that creativity, a core 21st-century skill, is a central part of the curriculum and that students have access to the creative tools they need. Adobe Spark, our app for easily creating high-quality graphics, web pages, and video stories, is a cornerstone of this effort. This quarter, we were proud to partner with the Ministry of Skill Development in India to enable more than 1 million students to access Spark. Next month, we'll host MAX, the world's largest creativity conference. We'll unveil new capabilities across Creative Cloud that will enable our customers to push the boundaries of creativity across modalities like voice and touch and emerging media types, including 3D and augmented reality. Adobe Document Cloud is the world's leading digital document service, enabling individuals and businesses to automate inefficient paper-based processes. In Q3, we achieved record revenue for Document Cloud of $249 million. PDF creation, sharing, reviewing, scanning, and signing is accelerating across devices, and Adobe's document business is experiencing strong growth. Over 50 billion PDFs were opened in Adobe products in the last year. In a few weeks, we'll announce major advancements to Adobe Document Cloud, including an update to our flagship Acrobat DC solution, which will radically transform what's possible with PDF on mobile devices. In August, we teamed up with Samsung for the launch of the new Galaxy Note9 and its intelligent assistant, Bixby. With the introduction of Adobe Scan for Bixby Vision, we're providing PDF scanning capabilities to Samsung users through Adobe Sensei and Adobe Document Cloud. Adobe Scan has become one of the most popular mobile scanning apps with nearly 14 million downloads to date. Adobe Sign continues to revolutionize the electronic signature market and has become the solution of choice for customers, particularly in highly regulated industries such as government, healthcare, and financial services. This year, Adobe Sign received FedRAMP Tailored authorization, meeting the U.S. government's rigorous security standards. As part of our collaboration with the Cloud Signature Consortium, which is furthering an open standard for cloud signatures, we support key industry standards and guidelines such as HIPAA and the eSign Act. Overall, we continue to drive strong growth in the Adobe Sign business. Adobe Experience Cloud is the leading customer experience platform for the modern enterprise, helping companies deliver predictive, personalized, real-time digital experiences across every touch point. Our unique differentiation stems from the breadth and depth of our offerings and the unparalleled intelligence we derive from the trillions of transactions we process on behalf of our customers. In Q3, we achieved Experience Cloud revenue of $614 million with strong bookings across Adobe Marketing Cloud, Analytics Cloud, and Advertising Cloud. Key customer deals in the quarter included NBA Properties, Commonwealth Bank of Australia, The Federal Aviation Administration, CBS Interactive, and Navy Federal Credit Union. In June, we completed our acquisition of Magento, bringing its industry-leading commerce capabilities to Adobe Experience Cloud for B2B and B2C customers. We delivered the first integrated deployment of Adobe Experience Manager and Magento Commerce Cloud this quarter. Expanding Magento's reach in the global enterprise space continues to be an area of opportunity for Adobe as is expanding other Experience Cloud solutions deeper into mid-sized businesses where Magento has a strong market position. Next month, we'll host over 2,000 customers at MagentoLive in Barcelona, where we'll share more details about how we're integrating Experience Cloud with the Magento Commerce Cloud. Adobe Advertising Cloud enables marketers to deliver search, display, video, and TV advertising across a growing number of screens and formats. We recently announced new capabilities for TV ads in partnership with LiveRamp as well as new fraud protection features and support for emerging formats including digital audio ads on smart speakers and home devices. Our leading offering in data-driven TV advertising continues to see strong interest from brands and agencies as we bring more refined targeting options to linear and addressable TV. We continue to deliver new innovation across our entire set of Experience Cloud solutions, including new email and cross-channel marketing capabilities in Adobe Campaign and Attribution IQ inside of Adobe Analytics Cloud. Growth in our Digital Experience business is enhanced by a strong network of global partners. Our strategic partnership with Microsoft continues to gain traction among enterprise customers as we bring more joint solutions to market. More than 100 enterprises now leverage Adobe and Microsoft's joint Digital Experience offerings, including Bank of America Merchant Services, Cintas, CDW, and Virgin America Airlines. In Q3, Adobe was once again recognized for our technology leadership by top industry analysts. Adobe was named the only leader in the Forrester Wave: Experience Optimization Platforms, and we were named a leader in the Gartner Magic Quadrant for Web Content Management for the eighth year in a row. Additional leadership recognition included the Forrester Wave: Customer Analytics Solutions and the Gartner Magic Quadrant for Personalization Engines. Adobe's employees have always been our greatest asset. We pride ourselves on recruiting and retaining world-class talent and making Adobe a place where our employees can do their best work. Last week, Forbes ranked Adobe as the number one Best Employer for New College Graduates, and we were recognized by Fortune as one of its Best Workplaces for Millennials. The Great Places to Work Institute recently included both Adobe India and Adobe Australia on its Best Workplaces lists. As we look to Q4, we are excited about the opportunities ahead. We expect a strong close to Adobe's 2018 fiscal year and are confident that we have the right strategy, products, people, customers, and partners to sustain our growth and momentum.

Thanks, Shantanu. In the third quarter of FY '18, Adobe achieved record revenue of $2.29 billion, which represents 24% year-over-year growth. GAAP diluted earnings per share in Q3 was $1.34, and non-GAAP diluted earnings per share was $1.73. We delivered another quarter of strong performance across product offerings and geographies while also successfully integrating Magento. Highlights in Q3 included: record Digital Media revenue, including Creative revenue of $1.36 billion and Adobe Document Cloud revenue of $249 million; record Digital Experience revenue of $614 million, which represents 21% year-over-year growth; net new digital media ARR of $339 million; deferred revenue growth of 23% year-over-year; cash flow from operations of $955 million; returning $714 million of cash to our stockholders through stock buyback; and approximately 90% of our revenue in Q3 was from recurring sources. In Digital Media, we grew segment revenue by 27% year-over-year. The addition of $339 million net new Digital Media ARR during the quarter grew the total to $6.4 billion exiting Q3. Within Digital Media, we achieved another record quarter with our Creative business. Creative revenue grew 28% year-over-year in Q3, and we increased Creative ARR by $289 million. Several key factors contributed to this growth, including: strong net new subscriptions across user segments and across the U.S., Europe, Japan, and Asia Pacific, driven by robust traffic and customer acquisition on adobe.com; strength in new individual app subscriptions with the Photography plan and Acrobat; continued momentum with Creative Cloud adoption in emerging markets; retention of users migrating from promotional to standard prices at annual cycles; new pricing introduced in North America; seat expansion and adoption of services in the enterprise; and strength with Adobe Stock, which achieved greater than 30% year-over-year revenue growth during the quarter. We transitioned our adobe.com sites in Europe to comply with new GDPR requirements, and we are successfully engaging with potential and existing customers, allowing us to continue to drive growth in revenue and ARR. Retention, upsell, new customer acquisition and conversion remain huge opportunities, which we address through digital marketing campaigns, frequent targeted promotions and the introduction of new offerings across desktop and mobile. With Document Cloud, we achieved record revenue of $249 million, which represents 21% year-over-year growth, and we delivered another solid quarter of Document Cloud ARR growth. Acrobat unit growth across Creative Cloud and Document Cloud was again greater than 20%. Adobe Sign achieved greater than 25% year-over-year revenue growth. In our Digital Experience segment, we achieved record Adobe Experience Cloud revenue of $614 million, which represents 21% year-over-year growth. Experience Cloud subscription revenue grew 25% year-over-year. Experience Cloud performance in Q3 was driven by success across our Analytics Cloud, Marketing Cloud, and Advertising Cloud offerings with particular strength in Audience Manager, which is our data management platform, and in Adobe Campaign. Magento is off to a strong start and contributed subscription and services revenue of $27 million in Q3. Strength in demand, a longer-than-anticipated stub period in Q3, and a smaller-than-anticipated write-down of deferred revenue contributed to this success. From a quarter-over-quarter currency perspective, FX decreased revenue by $13.8 million. We had $16.8 million in hedge gains in Q3 FY '18 versus $0.3 million in hedge gains in Q2 FY '18. Thus, the net sequential currency increase to revenue considering hedging gains was $2.7 million. From a year-over-year currency perspective, FX increased revenue by $27.7 million. We had $16.8 million in hedge gains in Q3 FY '18 versus $0.2 million in hedge gains in Q3 FY '17. Thus, the net year-over-year currency increase to revenue considering hedging gains was $44.3 million. In Q3, Adobe's effective tax rate was 5% in both a GAAP and a non-GAAP basis. The GAAP rate was lower than targeted due to larger-than-expected tax effects related to share-based payments as well as a favorable resolution of an income tax matter. Our trade DSO was 41 days, which compares to 50 days in the year-ago quarter and 44 days last quarter. Deferred revenue grew to a record $2.71 billion, up 23% year-over-year. With strong bookings, deferred revenue was in line with our expectations. Given Q3 FY '18 ended on August 31, deferred revenue was impacted by having one less billing cycle for many enterprise customers when compared to Q2 FY '18 and Q3 FY '17. Our ending cash and short-term investment position exiting Q3 was $4.94 billion. The quarter-over-quarter decline in our cash position was due to the Magento acquisition. Cash flow from operations was $955 million in the quarter. And in Q3, we repurchased approximately 2.9 million shares at a cost of $714 million. We currently have $150 million remaining of our $2.5 billion authority granted in January 2017. We expect this authorization to be exhausted by the end of fiscal year 2018. On May 21, we announced that our board had authorized an incremental $8 billion stock repurchase program through fiscal year 2021, which will be funded from future cash flow generation. Now I will provide our financial outlook. In Q4 FY '18, we expect normal seasonal year-end strength in our business and are targeting: revenue of approximately $2,420,000,000; Digital Media segment year-over-year revenue growth of approximately 22%; Digital Experience segment year-over-year revenue growth of approximately 20%; tax rate of approximately 6% on a GAAP basis and 5% on a non-GAAP basis; share count of approximately 495 million shares; GAAP earnings per share of approximately $1.42; non-GAAP earnings per share of approximately $1.87; and net new Digital Media ARR of approximately $385 million. Our Q4 FY '17 Digital Media segment included a material amount of Acrobat perpetual licensing revenue. As we continue to migrate the business to subscriptions, we do not expect material Acrobat perpetual licensing this Q4. This is factored into our Digital Media year-over-year revenue growth target. Given the lower-than-expected write-down of Magento deferred revenue that we discussed earlier, we expect some slight upside to our original target of $30 million of Magento revenue in Q4. We look forward to a strong Q4 close and another record year for Adobe.

Thanks, John. Adobe MAX is returning to Los Angeles soon. Day 1 of our user conference is on Monday, October 15, and we will host a financial analyst meeting that afternoon. During the meeting, our executive team will share Adobe's vision, strategy, and opportunities for continued revenue growth. Invitations for MAX and the financial analyst meeting, along with registration details, were sent out in early July. If you would like to attend MAX and the financial analyst meeting, please email ir@adobe.com. More information about MAX, including our exciting lineup of speakers and educational sessions, can be found at max.adobe.com. If you would like to listen to a playback of today's conference call, a web-based archive will be available on our IR site later today. Alternatively, you can listen to a phone replay by calling 855-859-2056 with conference ID #1136856. International callers should dial 404-537-3406. The phone playback service will be available starting at 5:00 p.m. Pacific Time today and will end at 8:00 p.m. Pacific Time on September 19, 2018. We are now ready to take your questions.

I wanted to ask about, coming into this quarter, there was some concern that GDPR could have an impact on Q3 Digital Media ARR. Obviously, the results speak for themselves that there wasn't as much of an impact there as maybe were contemplated initially. But if I put that in the context of Q4 ARR guidance and given sort of Adobe's long history of conservatism, the seasonality there is maybe even a little better than I would have expected going into Q4 relative to what you did last year. So can you talk a little bit about that, was there no impact from GDPR or was it just less than maybe you thought it could be? And does that sort of set up a more positive dynamic headed into Q4 around ARR?

Sure, Jennifer. I mean, there are a couple of questions in there. First, some color on GDPR. As we know, requirements and regulations for all businesses that are transacting online continue to evolve. But from our perspective and looking at Q3, we don't think it'll fundamentally change the relentless move that all businesses have to do more online, which is driven by customer preference. We did transition our own adobe.com sites to meet these requirements. And we'll continue to tweak and evolve our technology to lead the market. And as you pointed out, our results show that we achieved strong results in Q3. When we look at the transition between Q3 and Q4, I think it's important to remember a couple of things. The first is Q3 tends to be seasonally weak, and so Q4 is our seasonally strong quarter. Education comes back, and education will show its strength in Q4. I think, with MAX coming up and all of the innovation that we continue to show with respect to MAX, which will be exciting, I hope you're attending, is also going to be in Q4. So Q3 ARR was strong. The business continues to add momentum. I think John spoke in his prepared remarks also about the strength that we saw across offerings. I'll highlight mobile. Mobile, we continue to drive a lot of new customer acquisition through units, Single App of Acrobat and the Photography continue to do well. So we continue to innovate in creativity, and there's strong demand there, Jennifer.

Okay. Great. And maybe just one last one for me. The pricing increase in the U.S. was obviously sort of a big topic amongst investors. Is there any notable benefit to ARPU as a result of that? Or does it just sort of become rounding error given the size of the business?

Our main focus remains attracting new customers and providing value. The new pricing we introduced has been beneficial for us, and we are still drawing in new customers who are recognizing the advantages of our innovations like Lightroom, XD, Character Animator, Spark, and Dimension. It was clearly an appropriate time to adjust our pricing. Additionally, we have experience managing fluctuations in currencies in other countries. I also want to mention that there have been questions about promotions, which we see as effective opportunities to encourage action. This not only helps us attract new customers but also leads to higher retention rates, which increases our annual recurring revenue at renewal time. Considering the annual cycles, this is another factor in our guidance for Q4. Overall, we believe our business is performing well.

Shantanu, you've seen a steady re-acceleration in Experience Cloud. I'm curious if you could just talk to what you're seeing there. And I think tying into that, just coming off of a $1.8 billion acquisition, there's obviously some chatter about you looking to be more inquisitive. Just given the re-acceleration in Experience Cloud, maybe just talk through your appetite for larger transactions. Realize you have the $8 billion buyback also on your plate.

I think big picture, the whole digital transformation agenda, Brent, continues to be front and center to every C-level executive. We had strong bookings. I think we talked about that a couple of times both in my prepared remarks as well as in John's, and I think the strength of our product portfolio continues to be differentiated. Magento was off to a good start. I mean, the fact that they have both B2B and B2C, I think continues to help. We saw some good deployments of Adobe Experience Manager. So big picture, we are continuing to see a lot of demand for our solutions. We had some great events that we had all around the world. We normally do Japan and Sydney and Singapore during the quarter. And so I think it's digital transformation and customer centricity and loyalty that's driving the Digital Experience business. As you know, we would never comment on a market rumor.

Congratulations from me. I apologize for any background noise. Shantanu, I wanted to ask a bit about the upcoming announcement regarding the Adobe Document Cloud. Is there any chance you could give us a preview or at least discuss the intent behind it? Additionally, John, with your comments about the Acrobat perpetual license not being material, along with the slowdown in Digital Media revenue in Q4 compared to the strong net new ARR, my calculations suggest that we might see a little under $100 million in perpetual wins last year, and that much of it could diminish going forward. Could you comment on whether that assessment is generally accurate?

Ross, to answer your first question, we continue to see a lot of demand in people really both automating inefficient paper-based processes as well as using mobile devices to deal with PDF. I think we mentioned that over 50 billion PDFs are being opened in our documents alone. And so I think as we think about the document business in particular, among the customer pieces of feedback that we're getting, the first one clearly is that they want access to that PDF across all devices. They continue to want to have mobile devices being a PDF-creation device. So we talked a little bit about scanning and storage therefore so that people can actually have access to their content across devices. The other area I would say that a lot of people are looking at is certainly collaboration and what we can do with respect to collaboration and allowing different people to participate in a document workflow. And certainly signing and the interest in signing, whether that's ad hoc completely using the Acrobat product and desktop readers or complete workflows where signing is an ingredient within the enterprises. Hopefully, that gives you a flavor for how we are thinking about how we will continue to innovate in Document Cloud. And the one other thing I'd mention is a deeper focus on partnerships and what we are doing to ensure that PDF is embedded within other ecosystems. We certainly introduced recently support for both Sign in SharePoint as well as in Outlook. So that hopefully gives you a flavor of where we're focused with the document business.

In response to your comment about perpetual revenue with Acrobat, I want to clarify that in the fourth quarter of fiscal year '17, we saw significant perpetual revenue. We continue to offer both perpetual and subscription options, but this quarter, we anticipate a smaller amount of perpetual revenue due to the ongoing shift of customers towards subscriptions. This aligns with our overall business strategy, and we are enthusiastic about this direction.

Two things for Shantanu. At the Summit a month ago, you discussed the strategic objectives or roadmap for Experience Cloud, stating your goal of providing a unified experience with streamlined integration of Experience Cloud. I assume you were referring to both content and data along with the multiple solutions. Additionally, you aimed to deliver domain-specific expertise through AI. Reflecting on the past six months and looking ahead to the next twelve months, could you highlight some key achievements, especially in integration, which had been a challenge in the portfolio previously? Also, could you relate this to the Experience Cloud roadmap? Last year at MAX, in discussing your new products within CC, you mentioned that XD could potentially become the next InDesign, indicating it could be your next major product. Considering this, when do you anticipate XD might evolve into a nine-figure business, especially since you don't have an incumbent competitor like you did with InDesign?

So Jay, let me take both of those questions. First, with respect to what we are doing on the Experience Cloud, an area of innovation that we're particularly excited about is enabling for all enterprises to have a Unified Customer Profile, where we are getting all of the behavioral, demographic data for customers across all of our different solutions. It's something that customers are already testing out in beta. And if you think about that, what it really means for us is this Unified Customer Profile can become the central nervous system in an enterprise, not just therefore targeting the CMOs but increasingly having the CIOs look at that as the basis for how they want to integrate a unified customer experience across all of the different enterprise solutions that might exist. And so that also then allows us, to your second question about the domain-specific AI, with Adobe Sensei, we have the ability for people not only to have our AI be applied to their dataset but for also their own AI and their data science continues to be leveraged using the datasets that they have. So both of those, we've started to deliver them. When I look at the results of the bookings in Q3, the multiproduct implementation and sales continues to be strong. So it's clearly an effective tool for us to go in and have more of the entire CMO deck be served by Adobe. So both of those, we continue to do it. I'm sure Brad will give an update at MAX as well in terms of how we see that, and so we look forward to that. And with respect to your question on MAX, certainly, XD and screen design has been an area of fairly deep investment for us. It's the only cross-platform solution, I think, we talk about not just helping design mobile applications but every screen. I mean, you have all of this content that's being delivered to screens across retail, across even fast food. And our products, all the way from content creation to content management and delivery, is powering that. Collaboration is another area for XD. And it's harder than it was in the InDesign as a result of more and more people using the Creative Cloud entire suite to look at just an individual product but both from an individual product's monthly average usage of XD as well as the adoption in Creative Cloud All Apps, we continue to be pleased with how XD is doing. And that just serves as additional value to all of our Creative customers.

A question for you, Shantanu, on the experience side from a product perspective. I'm wondering if you feel like sort of going down market where you have a lot of competition in that space. Do you feel like your product is adequately positioned there? And if not, what else do you need to get that whole experience suite down market into more of the mid-market?

Yes. I think, Walter, we were looking for a nice beachhead to start to think about how we could leverage the strength that we had in the enterprise down into whether that's departments, mid-market, commercial, sort of is another way in which people look at it. And that has been an area where we have seen some good adoption. And so our job was to continue to leverage Magento within the enterprise and to leverage Magento's base and their ecosystem of developers by allowing them. And I would say both the Adobe Experience Manager and Adobe Analytics are products that can be used in that particular category to create websites as well as to have analytics in there. So it will continue to be an area. I think you're also seeing this product now being used within B2B installations as they all want to create a direct relationship with customers. So you have a lot of these companies that have billions of customers but don't have direct access to those folks because they go through a distribution channel. So hopefully, that gives you some indication of how we're continuing to expand the customer set that we target with Experience Cloud.

Shantanu, continuing on the Digital Experience theme. Can you talk a bit about your relationship with Microsoft in Digital Experience? And is there any way to size or scope these types of deals or think about the number of products included? And are you seeing accelerating adoption now that you've been in market for some time?

The first answer, Brad, is we're definitely seeing accelerated adoption as a result of our products having been delivered on Azure. And I think going back to what I talked about with respect to the customer profile, what we are seeing is people are standardizing on Azure increasingly as an infrastructure for their cloud-based solutions, and we have a really great solution on top of that in order to be able to bring this Unified Customer Profile that exists. And so the success is leading to larger deals. It's leading to higher close rates. And frankly, I think more and more of both the Microsoft field force as well as the Adobe one are now looking at it and saying this is something that's resonating with customers. And so it is accelerating.

Shantanu, perhaps a more strategic question for you on Magento, understanding that it's still relatively early. I guess, as you look at other commerce clouds out there, how can you differentiate Magento either technically or perhaps from a pricing packaging perspective over time?

Yes, Saket. There are a few key points to consider. First, it's important not to overlook how commerce is integrated with content management systems and analytics. While commerce completes the loop, the real action occurs during A/B testing and content delivery. What I found compelling about Magento is that it not only closes the loop and makes every experience shoppable but also uniquely addresses both B2B and B2C markets, as well as digital and physical goods. Additionally, their ecosystem is proving to be beneficial. The commerce market has seen numerous separate customization efforts, and having an extensive ecosystem of over 300,000 developers allows for quicker value realization for enterprise customers. These developers also function as a channel, assisting in the rapid installation of Magento, which helps us secure more deals. This was the strategic reasoning behind our decisions. Customers were seeking a comprehensive end-to-end solution from Adobe, and we're thrilled to have delivered on that, with positive early results.

So just maybe a strategic one on mid-market and B2B. You've mentioned it a couple of times now. So I guess, my question is basically, if I think about from a go-to-market perspective, how are you thinking about attacking the mid-market opportunity? And is the Microsoft partnership something that could evolve to be helpful there? And then what about the B2B market, in addition to Magento, makes that uniquely interesting for Adobe at this point in time?

Yes. To your question, Alex, our partnership plays a significant role in how effectively we can engage with customers in the mid-market. We have always been able to target them through both inside sales and partnerships, so that aspect is manageable. With Magento, we also have an effective product to serve this market. In terms of B2B, consider a consumer goods company with a billion users of their product daily. They might struggle to connect with those customers because they rely on distribution channels. However, they are beginning to realize the importance of building direct relationships with their customers, which is crucial for our business expansion. Companies are looking to Adobe for help in establishing direct connections, similar to what we have accomplished. The trend of B2B2C is already significant, and we are central to facilitating that digitally.

Got it. And maybe just one follow-up. If you think about Experience Cloud growth, and if we back out Magento from the quarter and your guide, core markets, core Experience Cloud revenue growth is in the mid-teens, is that what you consider healthy and what we should expect going forward? Do you see that accelerating over time? What's the right way to think about it?

Yes. When considering Experience Cloud, it’s important to recall what we stated at the start of the year regarding our emphasis on subscription bookings and revenue growth. If you analyze Q1, Q2, Q3, and the targets for Q4, they are actually exceeding our initial expectations. We believe we have an excellent offering and are a market leader, while focusing on the significant addressable opportunity available. In 2018, we were also navigating this process, discussing how the partner ecosystem would take on more service responsibilities. You can likely see this reflected in the financial data sheets we've shared.

Shantanu, a question for you. You talked about conversion rates from free products to paid subscribers for Creative in a way that I've not heard before. Can you just expand on that in the context of your previous observations that the TAM for the Creative Cloud product in this cycle is a multiple of the TAM that existed in the days bygone? So how is this all working out conceptually? Do you still continue to believe that to be the case? It does look like the front end of the funnel is expanding at a rate greater than we all anticipated. I know it's more of a question/observation but just really want to draw you out on your thoughts on why this creative cycle is a much bigger cycle and why is it taking much longer in this cycle than what we all expected.

Kash, I think we've always talked about the fact that if we look at the installed base of Creative and the number of creatives that exist, it's a massive number. And when you think about what's happening with the segment like photography, or when you think about what's happening with mobile, and you think about what's happening with emerging markets and students, those have always been areas of tremendous interest for us. I would say where we have really matured is when you think about the data-driven model that we're using to run that particular business, and Bryan's going to touch in more detail on this at MAX. The fact that we understand what we have to do on the discover, try, buy, use, and renew part of that workflow, we have got so much better at understanding how people are discovering us and why trialists are a key part of getting people both aware of our products, using our products, and then converting. And so I wouldn't say that, that's new. I would say that we're getting better and better at it as we understand how to tailor our offerings. I think the other thing that we've always talked about is the fact that we now have more offerings enables us to further attract new customers to the platform. With the only All Apps, we did not have the kind of offerings that we have right now. The fact that we can do it with mobile and we have multiple photography offerings, there's just far more scrutiny and focus on how we attract new customers to the platform, Kash. And I think in the past, we've thrown out that we have over 100 million IDs that are being created by these trialers, and that's how we look at expanding the top of funnel.

I wanted to ask about churn in your Digital Media business. So I'm curious, have you seen any impact on retention rates since the price change in U.S.? And then if you take a longer-term view, I think churn has been steady for some time in the mid-teens range. Do you see any things you can do to improve that? Or is that just kind of the natural state of the market going forward?

I think with respect to churn and retention, which continues to be a huge area of focus for us, I think the way we continue to be focused on it, it continues to do well so that we haven't seen really any change in the aggregate as it relates to churn. But the thing that we will continue to do is the more offerings you have and the more those offerings can be tailored allows us to actually target and retain more of the customer base. So I think that is one of the things with mobile. We're able to do that. And we continue to be really focused. I mean, in that sense, I just look at it and say when there's a long tail of creators, the deeper our offering is, whether it's Spark, Premium at one end of the spectrum or the ability to do one PDF conversion all the way to the entire Creative Suite or Creative Suite plus Acrobat app, that's the way in which you can continue to make sure that you're delivering value to a broader and broader swath of customers. And outside the U.S., the ability to have differential pricing and look at that differential pricing also is another way that we will continue to focus on retention, on sales and continuing to have people have value. And so I think that's the way we look at it.

Well, given that was the last question, Derrick, I mean, just for everybody, I think Q3 reflected another quarter from our perspective of both strong execution and validation that the strategy of empowering people to create and helping businesses transform is working. When you look at the Q4 targets, I think it reflects the momentum that we continue to drive across all geographies and all offerings. And we're really excited about sharing more at MAX about how we intend to continue to expand addressable markets and the strategic initiatives that we will focus on as a company to drive sustained growth on both the top and bottom line and deliver more value to our customers. But we appreciate you joining us on the call today. Thanks, everyone. We'll see you at MAX. This concludes the call.