Adobe Inc. (ADBE) Q4 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Adobe Fourth Quarter Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] I'd now like to hand the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us today. Joining me on the call are Adobe's President and CEO, Shantanu Narayen; as well as Mark Garrett, Executive Vice President and CFO. In the call today, we will discuss Adobe's fourth quarter and fiscal year 2012 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately 1 hour ago. If you need a copy of the press release, you can go to adobe.com under the Company and Newsroom links to find an electronic copy. Before we get started, I want to emphasize that some of the information discussed on this call, particularly our revenue, subscription and operating model targets and our forward-looking product plans is based on information as of today, December 13, 2012, 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 2 is available in today's earnings release and on our Investor Relations website in the investor data sheet. Call participants are advised that the audio of this conference call is being broadcast live over the Internet in Adobe Connect and is also being recorded for playback purposes. An archive of the call will be made available on Adobe's Investor Relations website for approximately 45 days and is the property of Adobe. The audio and archive may not be rerecorded or otherwise reproduced or distributed without prior written permission from Adobe. I will now turn the call over to Shantanu.

Thanks, Mike, and good afternoon. I'm pleased to report we delivered record revenue of $1,153,000,000 in Q4. This performance helped us achieve record revenue of $4.4 billion in fiscal year 2012. At Adobe, we're focused on 2 large market opportunities: Digital Media and Digital Marketing. 2012 was a milestone year in terms of innovation with our Creative Cloud and Adobe Marketing Cloud. We achieved great success in both these areas. In the Digital Media business, we are redefining the creative process with Creative Cloud. Through frequent product and feature enhancements, new cloud services and attractive pricing, Adobe is changing how we provide value to a broader set of customers. We will deliver customized offerings for individuals, workgroups and large enterprises. As with all successful subscription services, we're offering a free trial program. This enables an easy on-ramp and a funnel of prospects that we intend to convert to paying subscribers. Since we launched the individual Creative Cloud offering in May, we have already delivered 3 updates to the service. Earlier this year, we added Lightroom to the Creative Cloud, as well as new features for Dreamweaver and Illustrator. Since then, we have provided new HTML products, products, including Edge and Muse and this week, we delivered major feature enhancements to Photoshop and Digital Publishing Suite. We also introduced a sync and store capability, which will enable our creative customers to share and collaborate. We're now shipping Creative Cloud for teams, which includes central administration of licenses, expert support, online training and collaboration features. Creative Cloud for enterprises, which we will deliver in 2013, integrates with Digital Publishing Suite and the Adobe Marketing Cloud, with digital asset management being an obvious area of integration. We have begun transitioning enterprise customers to enterprise term license agreements, which provide them cloud services and…

Thanks, Shantanu. Our earnings report today covers both Q4 and fiscal year 2012 results. Adobe achieved record revenue of $4,404,000,000 in the year compared to $4,216,000,000 in fiscal 2011. Our success in fiscal 2012 demonstrates significant progress toward our goal of transforming our business and building a predictable revenue stream. In 2012, 25% of our revenue was recurring, up from approximately 19% in fiscal year 2011. In fiscal 2012, we added approximately 293,000 net new paid subscriptions. Using an ASP of $750, this achievement in subscriptions effectively transitions approximately $220 million of perpetual revenue to Creative Cloud during the year. Backing out recognized subscription revenue of $39 million, we would have achieved approximately $181 million more of revenue in FY '12. Additionally, moving to term-based enterprise license agreements transitioned approximately $19 million of FY '12 perpetual revenue. After these adjustments, we believe FY '12 revenue would have been approximately $4.6 billion, representing 9% year-over-year growth. In the fourth quarter of fiscal 2012, Adobe achieved record revenue of $1,153,000,000, exceeding our targeted range of $1,075,000,000 to $1,125,000,000. We continued to accelerate adoption of Creative Cloud subscriptions. In Q4, we added approximately 132,000 net new paid subscriptions. Using an ASP of $750, this achievement in subscriptions effectively transitions approximately $99 million of perpetual revenue to Creative Cloud in Q4. After backing out recognized Q4 subscription revenue of $20 million, we would have achieved approximately $79 million more of revenue in Q4. We also began to ratably recognize some enterprise agreements, which additionally transitioned approximately $19 million of Q4 perpetual revenue. With these adjustments, we believe Q4 revenue would have been approximately $1.251 billion. We experienced stable demand across our major geographies. From a currency perspective, quarter-over-quarter FX rate changes had a $6.7 million positive impact on reported revenue. Hedging gains contributed $2…

Thanks, Mark. These are exciting times at Adobe. Last year, we outlined a strategy to reinvent the company and accelerate growth by focusing on the Digital Media and Digital Marketing categories. I'm pleased to report we are ahead of schedule in our transformation. We continue to be the undisputed leader in Digital Media and in just 7 months since the launch of Creative Cloud, we have over 326,000 paid subscriptions and $153 million of annualized recurring revenue. We are a leader in Digital Marketing, with the most comprehensive offering and the inside track with the marketing community. This business, which didn't exist at Adobe 3 years ago, is on pace to reach $1 billion in annual revenue. As we close the year, we see huge opportunity for Adobe ahead. The dramatic shift we are making in our business is really not different than what we've done for the past 30 years. Innovation is in our blood. It defines us and galvanizes our employees. We look forward to 2013. Thank you for joining us today. Now I'll turn the call back over to Mike.

Thanks, Shantanu. Before we begin Q&A, I have a few logistics items to go over. First, for those investors and financial analysts who want to stay current on the latest Adobe news, we encourage you to follow Adobe on Twitter, Facebook and YouTube, and to frequently check Adobe's corporate blogs on blogs.adobe.com. We are increasingly using blogs and social channels as a primary means to communicate important information. In addition, tv.adobe.com is a great resource to learn more about Adobe's products and solutions, and check out new customer case studies. We have updated Adobe's Investor Relations website to provide easier access to these resources. During fiscal 2013, Adobe Investor Relations will begin to use Twitter to highlight news and interesting stories or articles, which will help the investment community stay on top of what's happening. Follow adobe_ir on Twitter to track what we have to say. Second, I'd like to highlight the invitation we sent out last week to attend our upcoming Digital Marketing Summit in March. There's no better way to immerse yourself into the opportunities we see in this explosive category and how Adobe is best positioned to win in this market. Contact Adobe Investor Relations to get more information for how to attend. And third, I'd like to highlight that we've slightly modified our segment reporting for fiscal 2013. We have moved our video server solutions products from Digital Media to Digital Marketing, to better align the role of how Adobe can help its customers monetize their video assets with our Digital Marketing Solutions. The updated IR data sheet we've published today contains a page with the new segments by product name. An updated IR datasheet with restated revenue by segments will be made available by the end of January, around the time our 10-K is filed. For reference, the amount of Q4 revenue that will be moving from Digital Media to Digital Marketing is less than $10 million. In regard to today's earnings report, we have posted several documents on our IR website, including a copy of the script containing our prepared remarks for today's call. Given the new detailed information we've provided today, the script should be a useful resource to assist with modeling our business. To access these documents and the other investor-related information, go to www.adobe.com/adbe. For those who wish to listen to a playback of today's conference call, a web-based Adobe Connect archive of the call will be available from the IR page on Adobe.com later today. Alternatively, you can listen to a phone replay by calling (855) 859-2056. Use conference ID number 73230376. International callers should dial (404) 537-3406. The phone playback service will be available beginning at 4 p.m. Pacific Time today, and ending at 4 p.m. Pacific Time on Monday, December 17, 2012. We would now be happy to take your questions. Operator?

[Operator Instructions] Our first question comes from Walter Pritchard with Citigroup.

A question I had around the Creative Cloud move. It does seem like customers are enduring somewhat of a price increase as they move to these new offerings. And I'm wondering if you could talk about where customers are seeing the additional value that's driving them to move. How much of it is sort of a carat that you're offering in terms of value versus a stick in terms of practices you may be using, especially around enterprise licensing to encourage the change?

Yes, Walter, let me start off with that. And with respect to the transparency, as I think both Mark and I have said right through, we want to make sure that we provide you with the information while we go through this transition. As it relates to the cloud, I think people are really seeing the benefits of always having access to the applications and the latest applications. As I mentioned, we've actually given 3 updates already. We've introduced new services like sync and share and we've really just started, I mean, in terms of the innovation. So I think it's just a better way to stay current. I think people see the promise of having their assets in a place which they can get location independent. And so there really are no sticks, so to speak, right now. It's all about seeing that the future of creation is being delivered through the Creative Cloud.

Okay, great. And then Mark, just I didn't hear you talk about -- you gave a lot of detail on fiscal '13. I didn't hear you talk about cash flow. I know there is probably also some cash flow impact to you based on the fact that most of these are monthly billed. But maybe you could help us understand sort of where we should be thinking about cash flow for fiscal '13?

Yes, so the great news is we have a terrific cash balance. I talked about that. From a cash flow perspective, Walter, it is going to model, as it has, somewhat closely with non-GAAP net income. So you should expect the cash flow will be less as we go through this pivotal year in 2013 than it has been in, say, 2012.

Next, we have the line of Peter Goldmacher with Cowen.

I just want to ask you a quick question. It was interesting to hear your reconciliation from a shrink wrap to subscriptions and on the revenue, I think, you gave us. How do you guys think about drawing in new users that maybe had been priced out of the products because of the upfront costs were so high and new users you're getting because of a more affordable price point?

Yes, Peter, I mean we certainly are seeing new customer adoption. I think we referred to that statistic last time in terms of the number of new users because it is more affordable. And I think we've heard that over 30% at times would not have subscribed or would not have gone through the perpetual version but are finding that the Creative Cloud is the best option to go. I think, actually, there's again a lot of headroom ahead of us as we start to combat piracy as well and start to get those customers as part of the Creative Cloud. So at this point, we're clearly attracting new customers. I think Mark referred to the fact that for the first time in many years, we've actually grown units for the Creative business, which is exciting to see, and it just again speaks to the innovation that the teams are providing. Maybe to add to Walter's question as well, we do have information on all of the apps that are being downloaded, and the new HTML applications that were created are seeing quite a bit of downloads. We're certainly seeing the flagship products of Flash Pro, Photoshop and Illustrator and InDesign. But the new products that we're delivering as part of the Creative Cloud, whether it's Lightroom or whether it's Edge and Muse, are also seeing fairly significant adoption, which I think bodes well for us.

Just following up on that. So when you're selling these new products and some of these new products are integrated with the Digital Marketing cloud, I know it's early days, but how helpful is it to you to leverage that Creative brand when you're selling the Digital Marketing products? Are we early in that part of the sales cycle? Or do your marketing -- Digital Marketing customers already have a positive view of Adobe and that's a catalyst to sell that Digital Marketing stuff?

I think it's a great question, Peter, and there's no question that we are seeing quite a bit of synergy between the Creative Cloud and the marketing cloud. And the 2 places where we see that a lot is in the web experience part of Digital Marketing. That business continues to be on fire as people re-platform their online businesses. And the second area where we see that is if you have a Chief Revenue Officer who's thinking about Digital Publishing Suite. Traditionally it was just magazines that were buying Digital Publishing Suite, now you're seeing insurance companies, financial services, retail and travel all seeing it. So I think Mark and his organization are really able to go in and paint a picture of the entire content life cycle. And it's clearly working. It's also working for us in the reverse way, which is if you have our content management solution, you want to make sure that you have the latest version of the Creative products so that it can automatically put data. And as I said, we'll be also releasing digital asset management that ties them together.

Next, we have the line of Adam Holt with Morgan Stanley.

I have a couple of questions. The first is it looks like you all had nice unit growth for the year. I was hoping maybe you could break down, was that all on the Creative Cloud side? And maybe if you can, add any color about what you think you added in terms of net new users in the quarter and/or year, net new user to the Adobe family?

So Adam, overall units, we do know that we added approximately 13% new units in 2012. And I think it's actually being across the board. I mean, commercial units did really quite well. We continue to see adoption of both, what you would call the perpetual version, as well as a clearly, the subscribers were materially ahead of where we thought we would be in the first 6 or 7 months. And we will continuously update what we are seeing in terms of new users, but we're certainly attracting new users to the platform.

And if I could just ask a follow-up on the subs guidance for next year. It looks like it implies a little bit of an acceleration in your subs adds. You've got new products in the market. Maybe walk us through the different variables you're thinking about that gets you comfortable with an acceleration on the subs side?

Sure Adam, and I think it comes from the initial success that we have seen on subscriptions has been predominantly on the individual side. The team we had a product released to our partners really late in the quarter. And so when you look at the Q4 subs number, that's all individual and we'll certainly be extending that through the team offering that's coming out -- that has come out, it's now shipping. And so that significantly enhances the number of people we can target. Similarly, geographic expansion, I think as we go through 2013, you're going to see geographic expansion in terms of the subscriptions. And frankly, I think we expect that as the innovation is increasingly cloud-based, that more and more customers are going to be doing it. We're going to have community, we're going to have training and the viral impact of people looking at it and understanding that the latest version is on the cloud we do believe will drive it. Last, we also have a funnel. I think we talked about the fact that we have over 1 million free members, and it's certainly our goal to convert them. Trials have always been the #1 way in which we have converted customers, and we believe that that's a good opportunity to go and be a world-class consumer marketing company and convert that.

Next, we have the line of Steve Ashley with Robert W. Baird. Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division: I'd like to ask about the enterprise term license agreements you’ve begun to introduce and why they're a necessary or required interim step to moving people to the cloud? Is it just simply because the enterprise version isn't out now? It will be out in a little while when you simply wanted to start the transition now. So a little bit of color on that. And then my second question has to do with the education market. Have you started to tap that? Do we see any activity in the fourth quarter? And is there a game plan, if we didn't, to tap into that next year?

Sure, Steve. So on the first question as it relates to the enterprise, it clearly is in line with our strategy to have the Creative offerings be -- rather than perpetual offerings, be term offerings. So as we are signing these enterprise-wide agreements, I think it makes a lot more sense for us to have those mid-term license agreements. It's very aligned with the subscription model. And so in Q4, we started to move to that. I think it's in our best interest. I think it's also in customers' best interest because by definition then that they have access to all of the latest upgrades as they become available. We will deliver enhanced functionality to enterprises as well in 2013, and that will be much better integration between our desktop products and what our marketing cloud provides. So certainly, there'll be more functionality. But moving to ETLAs was very much in line with strategically where we want to go. In terms of education, we did see a fair number of education subscribers. I think people are starting to adopt the Creative Cloud in education, and we saw a very healthy number of subscribers in Q4.

The other thing I'd add, Steve, and this was maybe inherent in what Shantanu said is that ETLAs, from a customer's perspective, they're buying and paying for the software in a similar way to the way they will under a subscription model, so it gets them kind of more adapt to paying us on a regular basis as instead of all upfront.

Next, we have the line of Mark Moerdler with Sanford Bernstein. Mark L. Moerdler - Sanford C. Bernstein & Co., LLC., Research Division: Two questions. Just a quick clarification. You said that there were 3 million Creative units over the last couple of years and you've seen growth. Is that 3 million that were sold during, or total of 3 million in there? The second part of it is we've seen the EPS guide is low. Obviously, and a good chunk of that is due to the move to subscription. Is there some other part of that from the line items we should be considering that might be additional costs or expenses we should be modeling in?

Mark, this is Mark. So the 3 million is 3 million units per year that we were shipping of Creative product, and it's been relatively stable at 3 million for the past many years. And this year, we saw a 13% uplift to that unit count. On the financial model and you can go into this in detail but a very high level, yes, the primary move in earnings was driven by the transition of revenue from perpetual to subscription and to ETLAs, both together. That was worth $1.20, as I said in the script in 2013 earnings. And if you believe that there's more there that we could have driven from an earnings perspective, yes, there's a portion of that, that's cost. It's not too terribly different than where our run rate is from a cost perspective, however. So if you look at expenses, they ramped during the year and then you've got obviously the full effect of that cost going into the next year. And the other thing I'd say is that we do think it's very important to continue to invest in the business, particularly around the Digital Marketing space where it's a very hot market. We're the leader in the space, and we want to keep that 25% bookings growth and 20% revenue growth going.

Next, we have Ross MacMillan with Jefferies. Ross MacMillan - Jefferies & Company, Inc., Research Division: The first question I had was to do with the fact that this year, I think you had offered folks that really were on versions older the opportunity to still get upgrade pricing through the end of the calendar year. And I'm just curious as to whether there was any way you can look at the units that you sold this year and get a sense for whether you've had a better success in converting, if you will, older version users to the new product that are on Creative Cloud or just on the perpetual?

Ross, I think I would say that across-the-board, the Creative Cloud we've seen interest from new users, from users of the latest version and clearly allowing people on prior versions to upgrade to the cloud, we've also seen uplift on that. As I said earlier, the number of subscribers that we saw in the first few months was significantly higher than the one that we expect. Moving forward, the good news about having them all in our customer databases is that we will be in a position to get a lot more information on what they are using to improve their customer sat which, by the way, I should say we track customer satisfaction quite a bit. And we've seen that the satisfaction of people online as part of the Creative Cloud is quite a bit higher than perpetual, so I think that bodes well for us as well. Ross MacMillan - Jefferies & Company, Inc., Research Division: That's helpful. And then maybe just one quick one on ASP. I know, Mark, you didn't call out ASP. I think you've got a branded ARR now. But is there any color you could provide around the ASP on the Creative Cloud subscriptions? And also, what's your current thinking with regard to how you'll deal with the promotional pricing as we start to come up against the anniversary?

Yes. So we are, Ross, more focused on the ARR number. But the average revenue per user on the individual side has been very stable. It's very consistent with what it was last quarter. On the promotional pricing, it's our expectation that those people will stay with us and start paying the higher price. That's been tested in many other businesses, and we expect that it is a very sticky product and that those people will continue to subscribe at the higher price.

Our next question is from Brent Thill with UBS.

Mark, just on the margin side. I think you're assuming somewhere in the mid-20s, if we did the math right, on your operating margins for this next year. From your perspective over the long haul, do you believe this transition will yield a more profitable Adobe relative to where you saw the margins? Or you'd expect a similar operating margin target as we go through this when we exit?

So yes, Brent, you're right. This is the pivotal year, as we said, and it's very consistent with what we would expect from a transitional perspective. From here onward, from 2013 onward, revenue, margin and EPS are all going to grow, and we have tried to give you guys some transparency around longer-term growth rates for some of the revenue streams. We talked about 4 million Creative Cloud subscribers in 2015. We talked about Creative Cloud and the CS product group growing 15% on a CAGR from 14% to 16%. We talked about the marketing cloud growth continuing at 20%. And I would expect that EPS, through all that, starts to grow again, at least as fast as revenue. So we get through this year, and all those metrics get better and better from '13 onward.

Okay. So do you believe over time then it can be as profitable as the old model?

Well to be honest with you, as the Digital Marketing business grows, that's an inherently lower-margin business, right? That's a complete SaaS-oriented business. It's just not ever going to be at Digital Media-type margin. So as that gets bigger and bigger, it does weigh on margins. I think we can do some things to pull more margin out of some of the businesses that we have and we're very good at that. But again, we're going to be very focused on driving EPS growth and driving that EPS growth with revenue growth, even if it means doing so at a lower margin than where we've been.

Okay. Just one last point. At the Analyst Day, you did say through the transition, you thought operating margins, you could hold the margins up and obviously, you're crossing a point where you can go after this, given the success that you've seen. And I would assume that this success now has fueled this increase in spending beyond kind of what you had initially mentioned at the Analyst Day?

It's not the spending, Brent. It's that we're moving faster on the transition, right? We are so happy with the way this is going that we want to get through this in 2013. We want to be completely transitioned when we get through 2013 from a financial model perspective. And that is clearly more optimistic than what we thought at Analyst Day.

Next, we have the line of Brad Zelnick with Macquarie.

Great to see you finish the year on a high note and especially the overachievement of your unit growth, which brings me to my question. Mark, what's your assumption for Creative unit growth embedded in your guidance for subscribers and revenue in 2013? And what unit growth will you have achieved in 2014 and 2015 if you exit with 4 million Creative Cloud subs? And just to ask another one because I get this question asked all the time, what does the decay rate [ph] look like on the perpetual side? What's your assumption there?

Sorry, the what rate? You mean the churn rate?

No, on the perpetual side [indiscernible].

I see. Yes, I see. Well, so Brad, we've said for a while, and we still believe this, that we think we can drive 10% more unit growth. If you look at the 4 million, right, the 4 million is significantly above the 3 million that we said we've been shipping per year for the past several years. So when you get out to 2015 with 4 million units, that's quite a jump up from the 3 million that we've seen in the past. I think that's the -- at a high level, that's the best way to look at it.

The other thing I would say, Brad, is that relative to what we had talked about at the analyst meeting, we certainly believe that subscriptions are going to grow faster. It's going to come with unit growth. But also, what you consider perpetual, we do believe that that's going to transition as well faster.

And just a follow-up to something else you said earlier. You said all that 30% of new Creative units have been due to franchise. Can you define that and determine that? And what is the trend then for Q3 to Q4? And what assumptions you based, you used in your guidance for next year and beyond?

Yes, Brad. So that, I was reiterating some of the statistics that we had said at the end of Q3. We do periodic surveys, we certainly understand that we're attracting new customers, and we'll give you more insight. But net-net, it's clear to us that we're driving new users, we're driving faster subscription than we had originally expected and we certainly, as we have been with all the numbers, continue to update that as we do our surveys.

Our next question is from Jay Vleeschhouwer with Griffin Securities.

A couple of operational questions first. Shantanu, how do you anticipate investing in external sales and distribution capacity this year and through the rest of the transition? And internally, would it be fair to say that by the time you get to 2015 and complete the transition, that the Adobe.com could be roughly $1 billion business for you, well up from the $0.5 billion or so that it's typically you've been doing, and a couple of follow-ups.

Sure. So Jay, if the question was around sales and distribution capacity only for the Digital Media business, we certainly are seeing more on Adobe.com. You're right, if we have the subscriber growth that we've talked about, Adobe.com will be in the billion-dollar range. I just want to reiterate that we will continue to invest in sales capacity for the Digital Marketing business. The other thing I will highlight is that even as it relates to Digital Media and subscriptions, we do expect to continue to sign a lot of online partners who will be able to drive traffic and, hence, subscribers to Adobe. And we continue to think that, that's a great way to attract customers. There's no reason why e-tail stores as well as other online services will not be a source of customers to Adobe moving forward.

Okay. And Mark, with respect to the revenue shift, so far, the majority of the customers signing up, I think, has been from existing customers within the installed base who therefore might otherwise have been eligible to upgrade. So, so much similar to an earlier question, how do you think about the decay of your upgrades business, which has also been roughly, I think, over $0.5 billion a year. Do you think that decays significantly as well as the eligible existing customers move to cloud?

Yes, I think the short answer is I do. I think as the cloud gets more and more adoption and as people have that viral aspect towards the cloud, both sides of perpetual full and upgrade are going to come down. And that's baked into these assumptions on subscribers, on long-term adoption and units as well.

Okay. And then lastly, a product question for Shantanu. You mentioned in your remarks digital asset management. I assume you're referring to the Day CQ product line. So with respect to that, are you going to be quickly transitioning that to a ratable model, which historically hasn't been? And could you talk about how Day might become more integrated with other Adobe products and technologies to make it a broader or more functional platform in its own right?

Sure. So first as it relates to the Day business, which is now part of the marketing, Adobe Marketing Cloud as part of the web experience management solution, that business has been doubling. It has been really a phenomenal success for us, Jay. We both offer Day on premise so that people can have their websites behind the firewall. We've also started to offer it as managed services where we will run that website for them and we offer that as a hosted. And so I think we have the most comprehensive offering right now for online web asset management. In terms of the digital asset management, that's a component that we will deliver over and above the core web experience management solution. So we think that's actually additive to revenue and helps tie the Creative Cloud and the marketing cloud together, and that's going to be -- we're already testing it out with some customers, and it's going to be out imminently.

Next, we have Heather Bellini with Goldman Sachs.

I just had a couple of questions. And I think there's been kind of some talk about this, but I was wondering if you could get maybe a little bit more granular. You gave us your view about the fiscal '14 to fiscal '16 kind of 15% revenue CAGR in your prepared remarks. I'm wondering if you could kind of walk us through the 1 or 2 key drivers behind those. And then also, I think a lot of people are trying to figure out how should we be thinking about the fiscal '14 impact of subscription on the top line. I know you said things are going to grow from there in terms of revenue, margins and EPS, but kind of will there still be this transition period going on? And how should we think about the high-level impact on '14? And then I just had a follow-up.

Sure, Heather, it's Mark, I'll start out. So the big impact when you get out to '14, '15 and '16 from a revenue point of view and the reason you get that 15-plus percent CAGR is primarily 2 things. One is we're driving new units. You're shipping in essence 4 million units a year instead of 3 million units a year. And the other is you get this very nice stacking effect of the subscription model. I mean, it's the beauty of the subscription model. Obviously, people are paying you every month, month after month, nobody is skipping releases, and that stacking effect plus the new units drive a very healthy growth rate in that business. On the...

Fiscal '14...

Yes, on the kind of path from here forward, revenue grows, so we will not see a dip in revenue after fiscal '13. You do get...

Right. So to get to that CAGR, I'm just wondering how -- what does the slope of the line look like?

Well I can't do that for you frankly, Heather. But you can do the modeling at a high level based on some of the metrics we gave you, and that's why we wanted to make sure you have the 4 million subscribers in 2015. But everything does grow from here, so you won't see a revenue dip in Creative or in total Adobe from here out.

Right. And then, Mark, I guess the follow-up would be could you walk us through what type of churn rates we should be thinking about in our model from the subscription business?

So it hasn't been...

What are you guys using in your assumptions?

Yes, I mean right now, we've been at 80% retention rates in terms of modeling, which we think is conservative. We haven't seen churn yet for the annual people. So the big data point will come when the annual people have to renew. But we've assumed in the modeling, 80% retention.

Next, we have Blair Abernethy with Stifel. Blair H. Abernethy - Stifel, Nicolaus & Co., Inc., Research Division: Just want to, Mark, if you could drill in a little bit more into the Acrobat business and just give us a sense there in terms of the historically when it was really just a shrink wrap business, how much of that business would be under enterprise site licenses? I'm just kind of looking for a shape of the magnitude of that, that's going to transition to term.

Blair, let me take that question. I think the Acrobat business has been pretty broad-based. The enterprise license agreements are actually a smaller part of the entire business. But the important thing for us in that was to make sure that we offer both the Creative products as well as the Acrobat products in one enterprise term license. As I think about modeling that business, I think for 2013, we've said you can model that at about a 5% to 7% growth. And that revenue, I think, we broke up how much would be in perpetual and how much would be going to ARR. And I would model that as growing in revenue after 2013 at that 5% to 7% and growing in ARR higher than that. Blair H. Abernethy - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. And on the subscriptions on the Creative side, what sort of been the experience in the last 6 months here from sort of a geographic or regional strength?

I think as it relates to subscriptions, it's primarily, at this point, U.S. and some countries in Europe. And it's sort of actually mirrors what you might think of as our traditional strength. That's one of the reasons why I said as we roll out the offering in other geographies, there's certainly opportunity. But you can assume that at this point, it's primarily the big markets for Adobe, which tends to be the U.S., U.K., Germany, Japan.

Our next question comes from Robert Breza with RBC Capital Markets.

Mark, as I've looked at the 3 million units going to 4 million units in 2015 and think about what you said from a churn perspective but the renewal rates being high, not a lot of alternatives for people to switch after they get on the Creative Cloud. And historically, you guys have been at 40% margin kind of business or at least you had peaked out over 40% margins. What prohibits you from getting back to that level given this transition going forward?

It really comes down to Digital Marketing. It really comes down to how big Digital Marketing becomes as a percent of the total company. And I think you could look at any SaaS company in the world and see that you're just not going to get to 40% operating margins in those businesses. So it becomes a mixed question. Believe me, I think you've seen over the past 5-plus, 10-plus years that we're very focused on the cost side of the business. We pay very close attention to it. We will manage it very effectively. But I'm leery to say that we're going to go back to 40% operating margins primarily due to the mix. And again, we're going to be very focused on driving earnings per share, at least as fast as revenue.

Next, we have the line of Jason Maynard with Wells Fargo.

Mark, the one thing that I -- maybe have missed it earlier on, was on the cash flow question. Was -- when you think about the amount of revenue that's getting deferred, what would be helpful is what's the rate, if you will, of cash flow capture, if you will? Are you thinking about a net revenue? So if it's a $700 million deferral, should we think about roughly the Creative Cloud suite annual ARR versus the perpetual license and maybe look at that and sort of say, "Okay, that will get captured over X type of time frame." What's your best guess, if you will, for us to think about that, that type of modeling?

I mean again, the challenge is that -- it's not a challenge, the way the business model works is that we're billing people monthly, so we're collecting that cash monthly. Even the annual people are getting charged on their credit card monthly, so that revenue that used to come in upfront is getting spread out over, say 2 years, if you think about they're paying roughly $480 per year. That now gets spread out over a couple of years to get back to that $780-plus that we used to get upfront. So I don't know if that helps answer your question. I think going forward, I'll look at cash flow and provide more details about kind of go-forward cash flow. I'm just frankly not prepared to do that today.

I just want to again reiterate, thank you for joining us on the call today. And there's no question in our mind that as a company, we're in significantly better shape entering 2013 than we were entering 2012. I think we had a very successful introduction of Creative Cloud. We're attracting new customers. We're creating a strong funnel for conversion, and I think we've transitioned the company to a more rapid development methodology that helps us innovate faster for our customers. I think we are broadening the customer base that we can target with Creative Cloud with the introduction of the team product, and we will extend that even further with Creative Cloud for enterprises in 2013. We're starting to transition our enterprise customers to the ETLAs, and there's no question that we're seeing synergy with the Adobe Marketing Cloud, both in the web experience management area as well as in the Digital Publishing Suite. And I think you've also seen that in Document Services, with mobile driving more PDF usage, we're actually building a really nice annuity with our Document Services. And I think you'll see that the ARR shows the health of the business that we expect to exit in 2013. And on Digital Marketing, the business is doing well, both revenue and bookings. And it's clear that it's an explosive market category where Adobe is very well positioned. I'm actually quite pleased with the introduction of the Adobe Marketing Cloud and the solution focus that we're going to take with content management, analytics, targeting, media optimization. And social had a really good quarter as well in Q4. And so as we think about entering 2013, it's with driving innovation, serving customers and having a really energized employee base. We're building a recurring revenue stream as well. Thank you for joining us today.

And this concludes our call. Thanks, everyone.

This concludes today's conference call. You may now disconnect.