Adobe Inc (ADBE) — Q1 2019 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 first quarter fiscal year 2019 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, 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, March 14, 2019, 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. On our Q4 FY18 call in December, we provided targets for fiscal year 2019 and for Q1 FY19 based on revenue accounting standard ASC 605. As required, we have adopted ASC 606 for FY19, and today are reporting our results based on ASC 606. Where applicable, we will call out differences in our results between ASC 605 and ASC 606 for comparison purposes against our prior ASC 605-based targets. On this call we will discuss GAAP and non-GAAP financial measures. Reconciliation between the two is available in our earnings release and on Adobe’s Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live, 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. Fiscal 2019 is off to a strong start for Adobe as we delivered another record quarter in Q1. We achieved $2.60 billion in revenue, representing 25% year-over-year growth. GAAP earnings per share for the quarter was $1.36 and non-GAAP earnings per share was $1.71. Adobe empowers people to create and transforms how businesses compete, a highly differentiated strategy that we continued to execute well on in Q1. Across all industries and geographies, we are helping customers large and small transform themselves and their businesses with Adobe Creative Cloud, Document Cloud and Experience Cloud. In our Digital Media business, we achieved strong revenue in both Creative Cloud and Document Cloud in Q1. Net new Digital Media Annualized Recurring Revenue or ARR was $357 million, and total Digital Media ARR exiting Q1 grew to $7.07 billion. Q1 Creative revenue was $1.49 billion, which represents 22% year-over-year growth. Adobe Creative Cloud is democratizing creativity by delivering innovative new ways for everyone, from businesses to students, to creative professionals, to hobbyists, to tell their story. Our flagship digital imaging and video solutions, including Photoshop, Premiere Pro and After Effects, have long been the go-to tools for indie and feature filmmakers and editors. At this year’s Academy Awards, both Adobe Photoshop and After Effects received Scientific and Engineering awards for their contributions to the filmmaking industry. It’s a tremendous honor for Adobe, and we’re very proud of the product and engineering teams who contribute to the development and ongoing innovation in these iconic products. Most recently, Photoshop was used in the making of Spider-Man: Into the Spider-Verse, which won this year’s Oscar for Best Animated Film. Our photography business including mobile usage continues to show strong momentum. The number of Lightroom CC mobile subscribers has increased by more than 400% over the past year. Beyond film and photography, Adobe is pushing the boundaries of creativity onto new canvases and broadening the appeal of Creative Cloud to entirely new segments of users. New media types, including 3D, video and augmented reality continue to emerge, which will enable more immersive and engaging digital experiences. In January, we acquired Allegorithmic, the industry standard in tools for 3D material and texture creation for gaming and entertainment. The addition of Allegorithmic further expands Creative Cloud into interactive content design and allows us to better equip video game creators, Visual FX artists working in film and television, designers and marketers, to deliver the next generation of immersive experiences. Premiere Rush CC, our popular video editing app for social media creators, is expanding its footprint to Android, and was recently showcased at Samsung’s Galaxy S10 event. We continue to innovate with Adobe XD, our solution for designing and prototyping websites and apps, adding expanded collaboration, prototyping and voice capabilities, all supported by a growing ecosystem of plug-ins and integrations with companies like Microsoft, Slack and Atlassian. We feel passionately that creative skills are a critical component for success across K-12 and higher education classrooms. We recently announced a partnership with the Royal Shakespeare Company in England. Together, we’ll make new creative teaching resources and tools, including Creative Cloud and Adobe Spark, available to teachers and millions of students learning the works of Shakespeare in schools throughout the UK. This quarter we partnered with the California State University System to give students and staff at 21 campuses access to our full suite of Creative Cloud tools. Since Adobe launched Spark for Education in April 2018, over 7 million licenses have been provided to students and teachers worldwide. With Adobe Document Cloud, we’re reinventing how people create, scan, edit, collaborate, sign and share documents, and leading the paper-to-digital revolution. Document Cloud revenue in Q1 was a record $282 million and we grew Document Cloud ARR to $856 million. Overall momentum for Acrobat is fueled by strong demand for Adobe PDF among individuals and businesses worldwide. Our mobile footprint continues to grow. Adobe Reader and Adobe Scan downloads have now surpassed 600 million, and our partnership with Samsung contributed significantly to downloads of Adobe Scan in Q1. In addition, Adobe Reader is now available in the “Made for Samsung” section of the Galaxy App Store, increasing our potential reach to millions of Samsung smartphone users. We recently launched the “PDF Like a Boss” global advertising campaign to drive further awareness for new Document Cloud, Acrobat and Adobe PDF capabilities. Last month, we announced a partnership with the PGA TOUR, which will feature our new campaign in TV coverage for 10 tournaments this year. Adobe Sign has strong momentum and has become the e-signature solution of choice for organizations across all industries. We continue to enable resellers such as Nintex to sell Adobe Sign to thousands of partners, public, private and government organizations on their platforms. In our Digital Experience business, we achieved Experience Cloud revenue of $743 million for the quarter, which represents 34% year-over-year growth. The success of our Digital Experience business is bolstered by several industry tailwinds: the mandate for enterprises and organizations to digitally transform their businesses, and the need to deliver the world-class end-to-end customer experiences consumers have come to expect. More and more businesses are choosing Adobe Experience Cloud, the industry’s only end-to-end solution for marketing, advertising, analytics and commerce, serving both B2C and B2B customers. Key Experience Cloud customer wins in the quarter include HSBC, NBC Universal, Bass Pro Shops and WebMD. Delivering exceptional experiences requires a lot more than tapping into a customer database to deliver a personalized email. Businesses need a full range of capabilities from creation through commerce and acquisition through renewal. For today’s digital businesses, it’s not enough to have data, you need the right data, behavioral, transactional and operational, to understand your customer and the intelligence to act on it in context. With our Adobe Experience Platform and breadth of Adobe Experience Cloud solutions, Adobe is enabling enterprises to achieve a unified, real-time view of their customers, and harness these insights to deliver engaging digital experiences. Last year, we made several significant investments to further expand the range of capabilities we offer to Experience Cloud customers with the acquisitions of Magento, with its best-in-class ecommerce capabilities and Marketo, the leader in B2B marketing engagement. We’re off to a strong start with both Magento and Marketo, and we’re successfully integrating them into Adobe Experience Cloud. This is creating an unmatched value proposition for customers, and growing Adobe’s addressable opportunity in the Customer Experience Management category. We are focused on product integration while driving acceleration of the Magento and Marketo businesses, leveraging Adobe’s brand, enterprise sales and go-to-market organization, while maintaining a strong global footprint in the mid-market. With Magento, we are driving momentum by cross-selling our commerce offering to existing Adobe Experience Manager customers. With Marketo, we delivered our first integrated deployment of Adobe Experience Platform Launch, our tag management system. We are seeing strong interest from strategic Adobe accounts, many of which are B2C, who have significant B2B operations as part of a broader digital transformation strategy. Industry analysts continue to recognize Adobe Experience Cloud as the market leader. This quarter, Adobe Experience Cloud was named a leader in the Gartner Magic Quadrant for Digital Experience Platforms and once again achieved the strongest position in the quadrant out of 17 vendors for “Completeness of Vision.” Our upcoming Summit in Las Vegas will be our largest to-date, and we will welcome the Marketo Marketing Nation community to the event. We are excited to share our Customer Experience Management vision, strategy and technology roadmap with our customers and partners. At Adobe, our employees are our greatest asset and we are proud to have a brand that continues to be recognized for its innovation, progressive workplace practices and commitment to the communities in which we do business. For the third consecutive year, we were named one of Fast Company’s Most Innovative Companies. Forbes recently recognized Adobe as one of its Best Employers for Diversity. And Fortune included Adobe on its annual Most Admired Companies in Software list again this year. Adobe is the clear leader in empowering people to create, and helping businesses transform to deliver the customer experiences needed to compete and win in today’s competitive climate. These two tremendous market opportunities are fueling our business. With the world’s best employees, customers and partners, we are well positioned for further growth and continued success in 2019.

Thanks, Shantanu. Our strong results in Q1 reflect a solid start to fiscal year 2019. As we discussed on our Q4 FY18 call in December, we provided targets for Q1 FY19 based on ASC 605. We are reporting results today based on our adoption of ASC 606 as required. Where applicable, we will call out differences in our results between 605 and 606 for comparison purposes against our prior 605-based targets. In Q1 FY19, Adobe achieved record revenue of $2.6 billion under 606, which represents 25% year-over-year growth when compared to $2.08 billion reported in Q1 FY18 under 605. Q1 FY19 revenue would have been $2.58 billion under 605, which represents 24% growth. Based on 606, GAAP diluted earnings per share in Q1 was $1.36 and non-GAAP diluted earnings per share was $1.71. Based on 605, GAAP diluted EPS in Q1 would have been $1.31 and non-GAAP EPS would have been $1.65. This compares to our EPS targets based on 605 of $1.14 on a GAAP basis and $1.60 on a non-GAAP basis. Business and financial highlights in Q1 included: Digital Media revenue of $1.78 billion, including Creative revenue of $1.49 billion and Adobe Document Cloud revenue of $282 million; net new Digital Media ARR of $357 million; Digital Experience revenue of $743 million; exiting the quarter with deferred revenue of $3.22 billion; cash flow from operations of $1.01 billion; repurchasing 2.1 million shares of our stock through stock buyback; and approximately 91% of our revenue in Q1 was from recurring sources. In Digital Media, we grew segment revenue by 22% year-over-year under both ASC 606 and ASC 605. The addition of $357 million net new Digital Media ARR during the quarter grew the total to $7.07 billion. Exiting Q1 ARR included an approximately $20 million cumulative adjustment from adoption of ASC 606. Within Digital Media, we achieved another strong quarter with our Creative business. Creative revenue grew 22% year-over-year in Q1, and we increased Creative ARR by $292 million. Notable growth drivers in Q1 included: new customer acquisition across all offerings and geographies; subscription momentum and strength with Creative Cloud enterprise deployments; continued growth in emerging markets; ARPU increases, particularly in markets where price optimizations were introduced last year; and services adoption including continued momentum with Adobe Stock, which again achieved greater than 20% year-over-year revenue growth. We achieved record Document Cloud revenue of $282 million in Q1, which represents 22% year-over-year growth, and we added $65 million of net new Document Cloud ARR during the quarter. In addition to delivering another strong quarter with Acrobat and Document Cloud, some of the revenue strength in Q1 is attributed to a benefit from the move to ASC 606 revenue recognition. Notable drivers of Document Cloud growth include continued strength with Acrobat subscription adoption, helped by a steady on-ramp and conversion of free mobile app usage to paid subscriptions, strength with enterprise adoption of Acrobat and Document Cloud services, and strong performance with Adobe Sign. In our Digital Experience segment, we achieved record quarterly Experience Cloud revenue of $743 million, which represents 34% year-over-year growth. There were minor benefits from adoption of ASC 606, and year-over-year growth would have been 32% under ASC 605. Experience Cloud subscription revenue was a record $612 million. In addition to new revenue from our recent Magento and Marketo acquisitions, Experience Cloud performance in Q1 was driven by success across many offerings, with strength in Adobe Campaign and Adobe Experience Manager. Cross-sell of Magento within existing Experience Cloud accounts was notable, and Marketo delivered solid results in their first full quarter as part of Adobe. Our Publishing segment, which includes OEM contracts, saw a sizable benefit from the move to ASC 606 and benefited from a large renewal deal in the quarter. From a quarter-over-quarter currency perspective, FX decreased revenue by $6.6 million. We had $8.5 million in hedge gains in Q1 FY19, versus $30.5 million in hedge gains in Q4 FY18. Thus, the net sequential currency decrease to revenue considering hedging gains was $28.6 million. From a year-over-year currency perspective, FX decreased revenue by $14.7 million. The $8.5 million in hedge gains in Q1 FY19 versus $1 million in hedge gains in Q1 FY18 resulted in a net year-over-year currency decrease to revenue considering hedging gains of $7.2 million. In Q1, Adobe’s effective tax rate was 4% on a GAAP-basis and 11% on a non-GAAP basis. Our trade DSO was 46 days, which compares to 47 days in the year-ago quarter and 49 days last quarter. Deferred revenue grew to a record $3.22 billion, up 25% year-over-year. Remaining Performance Obligations, RPO, a financial measure required with reporting under ASC 606, was approximately $8.13 billion exiting Q1. RPO includes approximately $600 million of non-cancelable and non-refundable committed funds related to some of our enterprise customer agreements. These funds do provide our customers options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services. Our ending cash and short-term investment position exiting Q1 was $3.23 billion, and cash flow from operations was $1.01 billion in the quarter. In Q1, we repurchased approximately 2.1 million shares at a cost of $491 million. We currently have $7.35 billion remaining of our $8 billion repurchase authority granted in May 2018, which goes through 2021. Now, I will discuss our financial targets. We are providing ASC 606-based annual fiscal 2019 targets that reflect our Q1 results. In FY19: we are targeting total Adobe revenue of approximately $11,150 million; Digital Media segment revenue growth of approximately 20%; net new Digital Media ARR of approximately $1.5 billion; Digital Experience segment revenue growth of approximately 34%; Digital Experience subscription bookings growth of approximately 25%; a GAAP tax rate of approximately 10% and a non-GAAP tax rate of approximately 11%; GAAP earnings per share of approximately $5.59; and non-GAAP earnings per share of approximately $7.80. We anticipate Q3 and Q4 year-over-year revenue growth rates to be similar to the growth rate implied in our Q2 revenue target. As in prior years, we expect summer seasonality which can lead to sequentially lower net new Digital Media ARR in Q3, followed by normal year-end strength in Q4. As the impact of lost deferred revenue due to purchase accounting from our acquisitions of Magento and Marketo tapers off during FY19 and as we grow our business, we expect quarterly operating margins to increase in the second half of the year. In Q2, we are targeting: Q2 revenue of approximately $2,700 million; Digital Media segment year-over-year revenue growth of approximately 20%; net new Digital Media ARR of approximately $370 million; Digital Experience segment year-over-year revenue growth of approximately 32%; other expenses of approximately $36 million; tax rate of approximately 12% on a GAAP basis, and 11% on a non-GAAP basis; share count of approximately 495 million shares; GAAP earnings per share of approximately $1.20; and non-GAAP earnings per share of approximately $1.77. As a reminder, Q2 continues to be impacted by lost deferred revenue and acquisition-related costs. In summary, Q1 was a great start to what we expect will be another record year for Adobe. We look forward to seeing many of you at Summit.

Thanks, John. Adobe Summit is just around the corner. Day one of the Digital Experience Conference in Las Vegas at the Venetian-Palazzo is Tuesday, March 26th. In addition to the day one general session, we will host a Q&A session with financial analysts and investors in attendance at 2 P.M. Pacific Time. Invitations to the conference with registration information to Summit were sent out in January. More details about Summit and the agenda are available at summit.adobe.com. We would also like to extend an invitation to the Adobe EMEA Summit in London on May 15th. If any Europe-based investors or analysts wish to attend, please email us at ir@adobe.com and we will send you registration information. 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 #4657707. International callers should dial 404-537-3406. The phone playback service will be available beginning at 5 P.M. Pacific Time today and ending at 9 P.M. Pacific Time on March 20th, 2019. We would now be happy to take your questions, and we ask that you limit your questions to one per person.

Thanks so much, and congrats on a good start to the year. If I'm limited to one question, my question is for John. John, how should we think about the impact of 606 on a quarterly basis for the remainder of the year? Will it be a tailwind to both revenue and margins for each quarter relative to 605? Thanks.

Sure. No, I think as we have talked about at Analyst Day and further in December at our Earnings Call. Overall, 606 does not have a material impact on our results. What we're seeing in Q1 is the pull forward of revenue by recognizing some OEM contracts upfront that otherwise would have been recognized throughout the year. But otherwise we don’t expect a material impact for the year.

And if I could slip in a quick follow up. The $20 million ARR benefit from ASC-606. How does that split between Document Cloud versus Creative in the quarter? Thanks again.

So that was a cumulative catch-up adjustment against the $7 billion base of ARR. So really quite immaterial and the split is really more in the Creative versus Document.

Shantanu, there were some questions about some of the promotional activity towards the end of the quarter. And I think then you noted that Creative Cloud ARR was more in line and historically you've been beating that number. So can you just talk to the promotional activity and what happened, was that just a coincidence at the end of the quarter or is this just ongoing promotional activity you've seen historically that we shouldn’t read too deeply into? Thank you.

The short answer, Brent, is you shouldn’t read too deeply into it. The slightly longer answer is when I think about the business and the momentum that we saw across Creative Cloud, Document Cloud and Experience Cloud, it's clear we're off to a strong start. With respect to the Creative and Document businesses specifically, we talked to you about the state of the art DDOM model that we have, the Data Driven Operating Model. And the fundamental strategy continues to be to acquire new customers. We're very aware of what is the activity that enables us to attract them, how we can make it a compelling event. But if you look at our success that we've had associated with attracting new customers to the platform, upselling them, and if you look, Brent, also at the Q2 targets that we are providing, as well as the raise in ARR for the year, I think that should reflect the continued confidence and momentum that we have against the overall addressable market.

Just along the same lines I guess. Just if I pool $20 million of that cumulative benefit, I think your net new ARR would have been a little bit better than your initial guide. But then I look at your Q2 net new ARR guide, and it's certainly a lot better than I would have thought given that adjustment off of Q1. And I wondered if you could just maybe talk about why that second quarter guide is where it is relative to Q1 and if there are certain things you'd highlight? So for example, the price changes on international and Doc Cloud, I think go into full effect for the current quarter. But I was just curious as to that transition adjusting out the $20 million cumulative adjustments from Q1 to Q2. Thanks.

Ross, I think when we look at the business from a seasonal perspective, we do see traditional change between Q2 and Q1 that's been something that you can go back and look at fiscal '18 as well and you see the same trends. Remember in fiscal '18, there was that catch up as it related to the systems. So you see a nice growth in Q1 '19 over Q1 '18 and you see the same sequential change then if you look at it, whether it was in '18 or it was in '19. And I think where we continue to see momentum in the business, John, certainly alluded to some of those in his prepared remarks. Enterprise continues to do well. Mobile and the adoption of mobile continues to do well. Acrobat, we're seeing tremendous trend in the Acrobat business. If you look at the 22% revenue growth that we talk about, both in the Creative part of the business, as well as in the document part of the business, we're continuing to see that. And remember, in addition to new customer acquisition, there's a very significant installed base that exists with the perpetual version of Acrobat as we move them to the subscription offering. That's part of the reason why we're spending money in advertising and awareness of the new document cloud features. And this is the traditional, December slowing a little bit as it relates to the Creative. You start to see the momentum in the business. So, nothing different from what we've seen in past years.

Shantanu, just to maybe switch gears off of Digital Media towards Digital Experience. Given the change in management there with Brad Rencher moving on, can you just talk a little bit about the search for his replacement and perhaps just as importantly how that organization can change structurally now with a bigger slate of things to sell and a bigger team?

Yes first, Saket, let me talk a little bit about the momentum that we're seeing in the business. I was actually with customers the last two weeks on the road in both U.S. and Europe. And all the meetings that you have, whether it's with CEOs, CMOs and CIOs, they're absolutely reflecting the urgency of digital engagement and an appetite really to work with Adobe, because we are viewed not just as a leader in the technology strategy part of it, but a company that can share results, lessons as a result of our own transition. So very pleased with the success that we saw in that business in Q1. I think it was 34% growth under the 606, 32% under the 605, so really strong part of that. And I think we highlighted as well the success that we're seeing with both Magento and Marketo; and so Magento, the integration with AEM and the success that we're seeing there; Marketo, which is the leader in B2B. So, fundamental market dynamics continue to be very favorable. My immediate and direct involvement and frankly, the alignment of the entire DX organization that was previously matrixed at Adobe, the whole goal was intended to accelerate the momentum in what is very clearly a large and growing opportunity for Adobe. And so, Saket, what we've done is we're actually integrating the two recent acquisitions quicker where appropriate, Magento and Marketo, to enable the synergies between the businesses. I touched on what was happening there. Operationally, Matt's been running the combined go-to-market. Abhay, has been running and helping us with the product roadmap. And so, I think the scale and the momentum of that business, that's now north of on a $3 billion run-rate, allows us the luxury of attracting world-class executives and growing internal talent. But net-net I would say the direct involvement that I have and the alignment of the entire organization is frankly allowing us to operate at a faster pace.

I want to ask about the partnership with Microsoft and maybe just if you could give us an update on the impact that had on the digital experience business, and then maybe how you're thinking about that partnership given the Marketo and Magento integration as well?

Yes, I mean, big picture, it's clearly one of the most successful partnerships we've had. I'll make a little bit of a plug for Adobe Summit for those of you are there, Satya, will be joining us on day two, and so on Wednesday. So I think you'll hear from him as well, his perspective on not just the current partnership and what we've been able to do, but some of the new opportunities that are emerging ahead of us whether it's ODI where we're continuing to make progress. And I think speaking for Adobe, we're certainly excited about the ability to have Magento and Marketo as well work on their cloud platforms. The current success is all based on what we've done with AEM, Adobe Experience Manager and Adobe Campaign. But the go-to-market alignment, I mean again, when I was on the road in Europe as I was mentioning as well as in America. Executives all around, the fact that they are all moving to a cloud-based environment for native applications and they see not just rhetoric but actual evidence of how Adobe and Microsoft have partnered to make our technology work together and for us to connect the desperate SaaS based systems. It's working. It's actually exceeded our targets. As I think we mentioned for '18, we expect the same success in '19.

So as we look at through the incremental investments into the business in terms of sales and marketing and R&D at this point. How much of that is going towards the traditional Creative business, the Document Cloud business versus the Marketing Cloud? And has that shifted at all, particularly in creative as you start to go on for a broader set of users or continue to expand?

Yes, Jennifer. And as you look at the OpEx and if you look at the margins, I mean just recall again the impact of Marketo and Magento. But big picture unless you're trying to get me in trouble with my product organization, I would say we see so much opportunity across each of the three businesses. And I think we're investing in all three. On the creative side certainly, we've touched on the new applications that are coming out on iPads. We've talked about the innovation in the fundamental desktop applications. We've alluded to with the acquisition of Algorithmic, our excitement around what we can do with immersive media. On XD, what we've done with respect to fundamentally changing the nature of collaboration and allowing people to collaborate in a meaningful way. We talked about some good partnerships there with Slack and Atlassian, in addition to Microsoft, the new voice enabled application. So on Creative, there's absolutely significant amount of product innovation that's underway that’ll be delivered to customers, Acrobat, what we are doing the strategy around delivering more functionality with verbs around documents, things that we've done with scan and create and sign. Document Cloud had a really successful business. And clearly with Experience Cloud, the delivery of the platform, I hope you're going to be at summit where we’ll share more and show more. And I think underlying all of this, the investments that we're making in the core cloud infrastructure for us, to not only deliver value but over time reduce the COGs, because we're going to get more efficient there, as well as on AI and ML, so really comprehensive roadmap that exists against all of those, Jennifer. And given the opportunity, when you have a $100 billion addressable market, I think we've done a good job of balancing the long-term while continuing to deliver great value for shareholders.

Yes, thanks very much and congrats on a nice start to the year. Shantanu, you mentioned that that’s running the combined go-to-market efforts for the Experience Cloud. And in your prepared remarks, you mentioned some good initial cross-sell of Magento. Can you just maybe remind us about how the go-to-markets is working right now? Are Adobe sales reps able to sell Magento and Marketo? Are you leaving those somewhat apart for now? Can you just remind me of how that playing out in the early stages and where you maybe have to have that size at the end of the fiscal year? Thanks.

When we first acquired Magento and Marketo, the field organizations were somewhat separate, functioning within their business units rather than as part of the overall field organization. Now, we have fully aligned our pipeline generation across the entire Experience Cloud. Our marketing, partner, and organic sales initiatives are all focused on creating a robust pipeline. Currently, our enterprise sales team is dedicated to delivering comprehensive value to our customers. Many of these customers already use other Adobe solutions, which allows us to seamlessly integrate commerce and B2B marketing into that pipeline. We had a very strong quarter with Magento in the enterprise segment. At the same time, we want to ensure that our mid-market strategy globally remains unaffected. I believe that our unified message and single sales kickoff are reflecting positive results. Steve, the CEO of Marketo, and Mark Lavelle are assisting us in understanding how to effectively market Magento and Marketo while leveraging the Adobe brand. This unified approach is definitely speeding up the integration process and providing a cohesive experience for our customers.

Shantanu, I would like to ask you to comment on three internal programmatic initiatives that Adobe clearly seems to be investing in or ramping up, those being; first, retention, which you described at the MAX meeting as both the new growth; number two, monetization; and then thirdly, self-service, particularly EC. And if you could just comment on how you are looking at those generally and how any or all of those might be informing your guidance for this year and beyond?

Can you maybe just, before I answer, Jay, talk a little bit about the middle one? What did you mean by monetization? We are trying to monetize everything, so I just want to make sure I…

Yes. Well, what I'm looking at, for example, you're looking to bring people on that are specifically focused in the monetization area. I realized it's an ongoing thing. But it looks like something that you are incrementally focusing on, particularly in Creative Cloud and new services and Experience Cloud. I'm going off of some of the internal investments you seem to be making.

No, those are good questions. First, regarding retention, I still believe that retention is the new growth. Our primary focus has been on engagement and helping users derive value from our products. We utilize our own campaign tools to communicate with users, and Scott Brezski has highlighted the first mile initiative at MAX, which shows how new users can take advantage of our offerings. The integration with Adobe Stock helps alleviate the fear of starting from scratch. Additionally, the community support and shared successes have been vital in enhancing retention, which remains a key focus for us. Retaining customers not only benefits us financially, but they also become advocates for our brand. On the monetization side, engaging users early in the process, whether through mobile, Reader, or Acrobat, allows us to expand our brand reach and create a solid sales funnel. We're also experiencing success with a system approach in products like Lightroom, which are consistent across devices, leading to higher retention rates as users find more value. The self-service model continues to be crucial for attracting new users to Adobe products, and we recently created 100 million IDs. In line with a question earlier, we do offer promotions to some users who might not have converted from a free product to a paid one. Our DDOM remains a priority, focusing on optimizing our efforts and delivering value simultaneously.

Question for John on the Experience side. I guess, a little challenge to try to understand maybe as we move past all of the moving parts on deferred revenue write downs and acquired revenue and so forth. Could you help us understand what the business is growing either, if we were to look at all-in with everything part of the past year and the current year or if we were to maybe strip out some of the things we've acquired. It feels like we're working with numbers maybe in the mid-teens and the reported numbers are in the mid-30s, and there is a lot of room between I think for people to interpret how fast you may be growing on the Experience side?

When reviewing the Digital Experience business, it is a collection of solutions, services, and products. Magento and Marketo have recently been added and are contributing to accelerated growth for the overall Digital Experience business. Currently, we are comfortable targeting a combined growth of 34% for the year, as we are integrating our sales approach without separating the performance of Magento and Marketo. We are focusing on the broader opportunity in the Digital Experience space, which we discussed during the Analyst Day, and these new assets are enhancing that opportunity. Additionally, subscription bookings growth has been robust, and we are satisfied with our performance this quarter and the momentum we anticipate for the remainder of the year.

So, John on that, I mean, it doesn't feel like though we get past the end of the year there we're going to be growing at 34%. That seems I guess I feel like people are going to mis-calibrate the model as they look forward at the growth rate. Any help as we look at it that way, I think that's the real confusion I think we get as we get the guidance and even the 606 impact?

I think, Walter, if you look at it taking a step back and you think about the book of business, I think the most accurate comparison is we take Magento, we take Marketo we bring it into the beginning of business. And when we say we're growing that book of business by 25%, that shows the growth of what is the core part of the business, mainly software as a service and licensing when you take the fact that consulting as a result of the partner ecosystem that exists is less of a focus for us. Hopefully, that gives you a sense of the underlying dynamics in that business and our excitement, because at the scale at which we are to continue to grow subscription bookings at that rate and to continue to expand, I think reflects the momentum we have.

On the broad product line, so I realized that's hard to answer. But is there a way to think about the customer wins that you're getting and that are rip and replace versus new budget dollars, because I think you're getting both, right? I mean, there is more budget dollars going to marketing, tech and customer stuff but there is also rip replace. Is there a mix and how does that deal?

I would say when we look at 2018, we were doing a lot more of the existing customers. And we put a pretty good emphasis on new logos as well, that is really helping bring a lot more people. I think the whole B2B space that we talked about now with the combination of Magento, and Marketo that's been good. But to your point, there's a fair amount of expansion within existing customers. And the expansion is coming from two different sources. The first is the expansion is coming from the cross-sell of new products that we're acquiring into existing customers as people see the benefits of the integration. The upsell is also coming from more usage of the current products as they're seeing more efficiency gains and/or additional benefits associated with it. So, we're pretty focused on all three of those. I mean you want to keep growing new logos and going after greenfield territory, I think we're getting more international expansion that continues to be new logos. But within accounts, we’re very focused and in most of the accounts, we're very diligent about making sure as we look at a particular account that we're not just measuring renewals but we are measuring growth in those particular accounts. And so hopefully that gives you some color of what it is. You're right. We don't break that out. I wouldn’t know how to break that out frankly for a business this size. But internally, we're absolutely inspecting all three of those.

I think a question for John, just to get into the ASC 606 impacts. I just want to make sure I understand how it's impacted the guide. So if we look at Q1, you beat the original guide on Q1 by $0.11. It looks like about $0.05 of that came from the underlying fundamental on a like for like basis and $0.06 from ASC 606 impact, but the full year guide only moves by $0.05. So am I reading correctly that $0.06 benefit that you saw in Q1 on ASC 606, you see actually a headwind of you have a lower earnings, or is it negative impact throughout the year? And then related to that on the last quarter in Q4, you guys mentioned that you did expect to see sales and marketing benefits, and it wouldn't be much of the change to revenues at ARR, but you did expect to see sales and marketing benefits from different commissions. Does that still apply is there still that benefit that's coming through?

Yes, I think maybe, Keith, I'll just start and then I'll certainly have John add more color to it. I mean, first big picture when we look at the momentum in the business, it just continues the way we had imagined. The way you have to think about it is you're right. I mean if you look at the 60 million above the guide that we had done, you also have to factor in that there was actually foreign exchange, there was probably a little bit more of a headwind. So we actually had a very strong quarter. What happens in some of the accounts is you're recognizing the revenue upfront rather than recognizing them rapidly and so that's part of the reason for how you should think about what might that also play out in Q2 for the same reason, namely deferred revenue. But in terms of how we looked at the targets for 606 for fiscal '19, we wanted to give you an update. It's early in the year. The business is doing well. On the ARR front, which has nothing to do with 606 or 605, moving forward, we were very clear about the success that we're continuing to have. And so that's part of the way we are doing it but we're excited about the business.

So I guess just to add on to that in relation to the sales and marketing benefit that we’ve talked about last quarter, it's really because of the Marketo acquisitions so it’s a slight benefit that we are seeing from the capitalized commissions related to the Marketo business. So you can see a little bit of that benefit here in Q1 and you look at OpEx under 605 and 606 and you will see that through the year. But certainly as Shantanu said, I think it's just being a little cautious in terms of how the rollout of the different contracts are in terms of upfront revenue versus recognizing the rest of the year.

Thanks for taking the question. This is Shankar on behalf of Kash. I have a question on XD and then just a question on how we think about the total TAM opportunity for that business. It seems like when you talk to partners and customers who use it, it’s not just UX designers, UI designers using it, but there are more developers also on the platform. And when you think about the total opportunity, both in terms of units and dollar, how do you think about it? And does XD provide you an opportunity to drive more enterprise-wide adoption of your creative cloud?

When we think about XD, in particular, I mean I think the biggest picture message that I would send is we look at it and say everything is going to have a screen. And if everything is going to have a screen then it's going to have digital content delivered to it, whether you are in your automotive, whether you are in a retail store, whether you are using a watch. We think XD is a perfect application to design, prototype and deliver content for all of those different devices. So it's not just UX designers; it's certainly developers as developer breaking that designer, developer bridge that exist today to deliver great applications that's another use case. I think your question around enterprise is actually spot on. We are seeing a fair amount of success and adoption in the enterprise because enterprises are standardizing on the collaboration between the marketing organization, the product organization and the engineering organization. We are seeing some good traction there. New apps like voice, that’s certainly an area where XD I think continues to shine. And so we are just excited. I mean every time you see one of these new applications, you see both new app adoption among new customers. The monthly average usage of XD is growing very nicely and you certainly see that as an additional benefit to the full value of Creative Cloud. And that’s also true. I know you didn’t ask the question, but when you think about Algorithmic as well, it's the same thing. We start to attract a whole new set of customers with Algorithmic. It gives us the opportunity to have a higher priced all-apps bundle for people who are doing even more high-end work. And so both from a top of funnel acquisition as well as from optimization, that's how we think about each one of these different categories.

So maybe just building on Keith's question that he just asked a little bit earlier regarding 606 and the impact to EPS, so just thinking about the second quarter, in particular. If I look at the full year, great guidance above where we all were for the second quarter, I think our models were a little bit heavy maybe by somewhere in the magnitude of around $0.10 - $0.11. Can you just talk to some of the seasonal investments that might be taking place in addition to some of the 606 impacts that might have pulled some of that profitability forward just so get a sense of what's impacting that Q2 EPS guidance? Thank you guys.

I think part of it is where you also have to factor in was the Q1 over-performance and the operating margin that we showed in Q1. So I wouldn't be surprised if some of you had modeled it where I think as I've looked at the models Q2 and Q3 where you were probably a little ahead of where the numbers were not fully understanding the Magento and Marketo, both impact of deferred revenue and the purchase accounting impact. And you were probably a little light on Q4 as it related to how we thought the year would play out. So I look at it and say, there is a little overachievement in Q1. We've guided to good operating margins in Q2 based on the revenue that we have. And we've I think guided that Q3 and Q4, once the impacts of Marketo and Magento deferred revenue and purchasing accounting taper off then you're back to where you may have modeled it. But John, anything to add?

Yes, I think that's exactly right. We had said that the first half of FY19 was going to be more greatly impacted by the deferred revenue haircuts. And I think you're probably modeled a little more linearly in terms of returning it to the operating margin, and it really does actually accelerate towards the backend of the year. So we exit FY19 at rates that you typically see them our performance in the past.

Hi thanks for taking the question. This is Tim for Mark. I wanted to talk a little bit more about ODI, and specifically if you could talk about where you guys are in the roadmap and maybe feedback that you've gotten from customers?

I think the core strategy of ODI and three large companies getting together to say we're going to agree on the taxonomy, we're going to agree on an API and we're going to ensure interoperability between the data that exists today and silos. There hasn't been a customer that isn't excited about the fact that we're all stepping up to do that and allow enterprises to get value out of all of the data that they have in different silos. So I would say big picture first, there is a lot of excitement. It clearly builds on the progress that Adobe and Microsoft have made over the past few years as we've integrated PowerBI and campaign, or the work that we've done with AEM. I think you'll see at Summit having more people on the ingestion or ETL side also sign up and say, they're going to enable all of this data that exists in silos to get normalized. I mean, the holy grail of what we are trying to do with ODI with a whole bunch of partners is to bring all of the data that exists into this real-time stitched platform there is a common taxonomy. People don't care about where this data is stored, people care about can I action it in real-time. And that is really the goal of ODI. We're making good progress. We'll share more at Summit. But the core value proposition really resonates with customers.

Earlier in the call, Shantanu, you mentioned the importance of adding customers into growth algorithm. So within Creative Cloud, I'm curious what is the biggest target of new users that you're still tapping into? And what ARPU or pricing are you getting on those customers versus what you've seen traditionally?

Sterling, there's so many different opportunities there. If I had to pick one, I would still say mobile, imaging and imaging is the area where there's the most. But what we've done with Premiere Rush; we talked about that. Spark having 7 million people and that being a real seeding ground for what we can do in education, I think that's very significant. The aura that comes from us doing high-end work with AR and what we are doing with Algorithmic. While the numbers may not be small, don't underestimate the importance of how that attracts the whole new generation of creators to our platform. But I would say imaging and PDF still continue to be the two largest areas of acquisition for new customers in the Creative Cloud. And I would highlight Spark as well only because Spark is this incredibly easy product that everybody from K-12 to teachers are starting to use and the more we get that standardized in school districts and frankly, in some cases entire countries as the platform of choice for education, I think that will continue to be a way in which we expose young creative talent to the joys of using Adobe products. But Sterling since you had the last question, let me just summarize by saying, I think when we think about the Q1 financial results. I think it's again, a clear reflection of the core strategy on the enterprise side, helping businesses transform on the content side, empowering people to create. That strategy resonates and our execution against that strategy continues to be strong. We think design and creativity have never been as important as they are today. And whether you call it digital transformation like you call it in the U.S. or digitization as it's called in Europe, it just represents an incredible opportunity for us to continue to grow and deliver value to our customers. We're excited about summit we hope we'll see a bunch of you there. One thing I'll also mention is that it actually integrates Marketo's Marketing Nation, so we're welcoming that community as well to Summit in a few weeks. And the targets that we provided I think reflect the momentum we continue to drive across all geographies. So Q1 was off to a great start. Thank you for joining us today.