Adobe - Earnings Call - Q3 2011
September 20, 2011
Transcript
Speaker 5
Good evening, everyone. Welcome to the Adobe Systems Q3 fiscal year 2011 earnings conference call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Mr. Mike Saviage, Vice President of Investor Relations. Please go ahead, sir.
Speaker 1
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 third quarter fiscal year 2011 financial results. I now share the copy of our earnings press release, which crossed the wire approximately one 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 in this call, particularly our revenue and operating model targets, and our forward-looking product plans, is based on information as of today, September 20, 2011, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements.
For discussion of these risks and uncertainties, you should review the forward-looking statements disclosure and the earnings press release we issued today, as well as Adobe's SEC filings. During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in 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 Systems. The audio and archive may not be re-recorded or otherwise reproduced or distributed without prior written permission from Adobe Systems. I will now turn the call over to Shantanu.
Speaker 0
Thanks, Mike, and good afternoon. In Q3, we delivered revenue and earnings within our targeted ranges. Revenue in the quarter was $1,013 million, with non-GAAP earnings per share of $0.55. Highlights in the quarter include record education revenue, strong growth in our digital video products, solid performance with Acrobat, continued bookings momentum in digital marketing, and non-GAAP earnings at the high end of our targeted range. In today's call, Mark will first review our financial results in the quarter and provide our Q4 outlook. Following that, I will spend some time outlining some important strategic shifts we are making as a company. Mark?
Speaker 2
Thanks, Shantanu. In the third quarter of fiscal 2011, Adobe achieved revenue of $1,013 million. This compares to $990.3 million reported in Q3 fiscal 2010 and $1,023 million reported last quarter. Q3 GAAP operating expenses were $634.4 million, compared to $589.2 million reported in Q3 fiscal 2010 and $637.3 million last quarter. Non-GAAP operating expenses in Q3 were $560.1 million, compared to $524.7 million reported for Q3 fiscal 2010 and $556.7 million last quarter. GAAP operating income in Q3 fiscal 2011 was $274.1 million, or 27.1% of revenue. This compares to GAAP operating income of $302 million, or 30.5% of revenue in Q3 fiscal 2010, and $276.7 million, or 27% of revenue last quarter. Non-GAAP operating income in Q3 fiscal 2011 was $366.1 million, or 36.1% of revenue.
This compares to non-GAAP operating income of $384.9 million, or 38.9% of revenue in Q3 fiscal 2010, and $376.4 million, or 36.8% of revenue last quarter. Adobe's effective GAAP tax rate in Q3 was 24%, and the effective non-GAAP tax rate was 22%. The difference between the GAAP and non-GAAP tax rates is due to our acquisition of EchoSign during the quarter. GAAP diluted earnings per share for Q3 fiscal 2011 were $0.39. This compares with GAAP diluted earnings per share of $0.44 reported in Q3 fiscal 2010 and GAAP diluted earnings per share of $0.45 reported last quarter. Non-GAAP diluted earnings per share for Q3 fiscal 2011 were $0.55. This compares with non-GAAP diluted earnings per share of $0.54 in Q3 fiscal 2010 and $0.55 reported last quarter. I will now discuss Adobe's results in Q3 by business segment.
Creative and interactive solutions segment revenue in Q3 was $417.9 million, compared to $416.9 million in Q3 fiscal 2010 and $433.1 million last quarter. Digital media solutions Q3 revenue was $151.1 million, compared to $157.7 million in Q3 fiscal 2010 and $136.7 million last quarter. Creative Suite revenue in Q3 was consistent with revenue achieved in the year-ago quarter, demonstrating that CS5.5 continues to maintain the solid run rate that CS5 established. We also had a strong quarter and record revenue in the education market in Q3. When comparing the performance of recent Creative Suite releases, CS5 and CS5.5 combined revenue has now achieved approximately the same amount of revenue that we achieved with CS3 for the comparable amount of time and has exceeded revenue achieved with CS4 by approximately 25%. Our subscription offering with CS5.5 is attracting new users.
More than a third of the subscribers have never bought an Adobe product before, and two-thirds of the subscribers to date tell us they would not have purchased without this offering. We will continue to target Final Cut Pro and Avid customers with our Switcher program and believe we are gaining market share in digital video with our Premiere Pro and Production Premium products. Digital enterprise solutions revenue was $270.4 million in Q3, compared to $256.1 million in Q3 fiscal 2010 and $283.5 million last quarter. Within digital enterprise solutions, knowledge worker revenue was $174.6 million, compared to $162.6 million in Q3 fiscal 2010 and $182 million last quarter. Our 7% year-over-year growth demonstrates the continued strength of Acrobat as a standard tool in small and large enterprises.
Our Q3 acquisition of EchoSign, a leading web-based provider of electronic signatures and signature automation, enhances our document exchange capabilities and will be a key part of our goal to increase the value of Acrobat in the document access, review, and approval processes. Enterprise segment revenue was $95.8 million, compared to $93.5 million in Q3 fiscal 2010 and $101.5 million last quarter. We continue to see strong demand for the combination of our Day Software content management and Omniture Online Marketing Suite solution. As a result, we are focusing more field resources on the integrated product line. Omniture segment revenue in Q3 was $118.2 million, compared to $99.8 million reported in Q3 of fiscal 2010 and $115.9 million last quarter. Omniture year-over-year bookings growth continues to exceed 20%, and enterprise renewal rates remain strong at 95% in the quarter.
Mobile and tablet device traffic remains the fastest growing part of the Omniture business, with the number of transactions we measured from mobile devices growing to 11% of total transactions in Q3, up from 7% last quarter. Omniture revenue diversification continued, with SiteCatalyst decreasing to 50% of Q3 Omniture product revenue. Conversion and multi-channel analytics products are growing in size as the analytics business becomes a smaller percentage of the business. We are seeing strong demand for our new DEMDEX and social analytics offerings. Our social analytics product is the industry's first analytics solution to tie social activity to business results. Finally, print and publishing segment revenue was $55.6 million, compared to $59.8 million in Q3 fiscal 2010 and $54 million last quarter. Turning to our geographic segments in Q3, results on a % of revenue basis were as follows: the Americas 50%, Europe 29%, Asia 21%.
We experienced stable demand in the Americas and Asia. The weakness in EMEA that we experienced in Q2 continued into Q3. From a year-over-year currency perspective, FX increased revenue by $37.6 million. We had no hedge gains in Q3 fiscal 2011 versus a $13.2 million hedge gain in Q3 fiscal 2010. Thus, the net year-over-year currency increase to revenue considering hedging gains was $24.4 million. From a quarter-over-quarter perspective, FX increased revenue by $4.6 million. We had no hedge gains in Q3 fiscal 2011 versus a $0.2 million hedge gain in Q2 fiscal 2011. Thus, the net sequential currency increase to revenue considering hedging gains was $4.4 million. Employees at the end of Q3 totaled 10,041 versus 9,770 at the end of last quarter. Our trade DSO was 50 days, which compares to 45 days in the year-ago quarter and 51 days last quarter.
Our global channel inventory position at the end of the quarter was within company policy. During the quarter, cash flow from operations was $325 million. Our ending cash and short-term investment position was $2.7 billion, compared to $2.6 billion at the end of Q2. Deferred revenue in the quarter increased by approximately $2 million in the quarter to a total of $484 million. In Q3, we repurchased approximately 3.6 million shares at a total cost of $100 million. Entering Q4, $355 million of stock repurchase authority remains against the $1.6 billion stock repurchase authorization announced in July of last year. This concludes my discussion of our financial results. I would now like to comment on our financial targets for the fourth quarter of fiscal 2011. We are targeting a Q4 revenue range between $1.075 billion and $1.125 billion.
At the midpoint of this targeted range, we would expect all of our business segments to grow sequentially except print and publishing, which we expect to be relatively flat. We would also expect all of our major geographies to grow sequentially. For margins, we are targeting a Q4 GAAP operating margin range of 26.5% to 29.5% and a non-GAAP operating margin range of 36% to 38%. We are targeting our Q4 share count to be 497 million to 499 million shares. We are targeting non-operating expense to be between $17 million and $21 million on both a GAAP and non-GAAP basis. For our Q4 effective GAAP and non-GAAP tax rates, we are targeting 22%. These targets lead to a GAAP earnings per share range of $0.41 to $0.50 per share and a non-GAAP earnings per share range of $0.57 to $0.64.
At the high end of our financial targets for our fourth quarter, we will achieve our 10% annual revenue growth target, as well as earnings growth of 20% for the fiscal year. This concludes my section. I'd now like to turn the call back over to Shantanu.
Speaker 0
Thanks, Mark. Our industry is in the midst of a major transformation. Tablets and smartphones have become the new devices of choice. Software is moving to the cloud. Business models are evolving with subscription offerings and app stores, and technologies like HTML5 are gaining favor. These trends are having a significant impact on our customers. From publishers to marketers to educational institutions, our customers face the same challenge. They need to create compelling digital content and applications that work on both desktops and devices, and they need to measure the impact of those experiences. Adobe's heritage is in content authoring. We built the category, and we remain the market leader. Today, we enable our core audience of publishers, designers, and developers to create the world's best websites, applications, and games using our Creative Suite desktop software.
We will continue to innovate on the desktop, providing new functionality to address the challenges our customers face. With a shifting landscape that favors HTML5-based content and application delivery, we are doubling down in our investment in this area. CS5.5 delivered enhanced HTML5 capabilities. We recently previewed Adobe Edge, a new HTML5 web motion and interaction design tool which allows web designers to create cutting-edge animations for their websites. Interest in this tool far exceeded our expectations. We just introduced the beta release of a new product, code name Muse, which allows designers to create and publish HTML-based websites without writing complex HTML code. We're also contributing new innovations to WebKit to allow for a more expressive web. These initiatives show our commitment to help drive the evolution of browsers and be the leading tools provider for HTML5, and this is only the beginning.
The explosion of tablets is changing the paradigm for content authoring. We believe that content will be consumed and created on these devices. Similar to the desktop, we intend to be the leading provider of creative authoring applications on tablets. We will soon be introducing a broad set of tablet-based and cloud-connected apps and services across iOS, Android, and other mobile platforms that represent a new revenue stream. We're excited about the recent introduction of Adobe Carousel, an innovative new cloud-connected imaging app for macOS and iOS devices. As we bring these new products to market, expect to see us place a greater emphasis on new customer acquisition and the introduction of subscription offerings to drive more recurring revenue. One of the highest priorities for our publishing customers is to deliver, measure, and monetize their content on tablets.
With CS5.5 and our Digital Publishing Suite, we've helped our customers deliver over 600 titles through app stores. As more publishers move their magazines, newspapers, and catalogs to tablets, our addressable market and our offerings in this space will grow. In addition to publishers, every major enterprise is moving more of its business online. We are helping our customers re-platform their digital assets, optimize their marketing spend, and drive more digital commerce. We will continue to integrate our Creative Suite content authoring, our Day Software content management, and our Omniture Online Marketing Suite solutions to meet the needs of publishers, advertising agencies, and marketers. The strong growth in our Omniture and Day Software bookings this year is evidence of our success in this space already. In digital marketing, the opportunity is massive, with worldwide ad spend expected to grow to more than $100 billion by 2013, according to IDC.
Adobe's Online Marketing Suite is one of the largest cloud-based software offerings in the world. Our solutions enable marketers to drive their business across all marketing channels, including web, mobile, email, search, display, and social. We're a leader in this category and will continue to introduce new technologies like the social analytics product we delivered this quarter. We will also align our field and marketing resources to more aggressively target the digital marketing opportunity and accelerate the momentum we have already achieved. Document services and the use of Acrobat and PDF continue to have huge momentum. Content protection and reliable document delivery remain priorities for customers across every segment. Adobe will increase its investment in cloud-based document exchange services, with electronic signatures being a new growth opportunity. At Adobe MAX in early October, we will unveil some of our newest innovations in the content authoring arena.
In November, we will host a financial analyst meeting where we will provide a comprehensive update on our strategy and opportunities. Thank you for joining us today. Now, I'll turn the call back over to Mike.
Speaker 1
Thanks, Shantanu. Before we start Q&A, I want to remind everyone about some important dates for Adobe this fall. As Shantanu mentioned, Adobe MAX is just around the corner. Our annual conference will be held once again in Los Angeles during the week of October 3rd. We are offering a special registration price for Wall Street professionals to attend and are hosting a special reception with Adobe management for Wall Street attendees. Please email Adobe Investor Relations at [email protected] if you'd like information on the agenda and how to register. Our annual financial analyst meeting will be held in New York City on November 9th. Please save that date, and a formal invitation will be sent out soon. In regard to today's earnings report, we have posted several documents on our Investor Relations website today, including a copy of the script containing our prepared remarks for today's call.
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 888-203-1112. Use conference ID number 4657343. Again, the number is 888-203-1112 with ID number 4657343. International callers should dial 719-457-0820. The phone playback service will be available beginning at 4:00 P.M. Pacific Time today and ending at 4:00 P.M. Pacific Time on Friday, September 23rd, 2011. We would now be happy to take your questions. Operator?
Speaker 5
Okay. Thank you. Ladies and gentlemen, if you'd like to ask a question, please signal by pressing the star key followed by the digit one on your touch-tone telephone keypad. If you're on a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star one to ask a question. At this time, we will go to Steve Askley with Robert W. Barron.
Speaker 4
Hi, Greg. Shantanu, during your prepared remarks, you talked about possibly monetizing some of the new HTML5 tools that you plan to introduce in the future. I was just wondering if you might be able to give us a little bit more color around that.
Speaker 0
Sure. As we think about the evolution of Creative Suite moving forward, I think there are a couple of different things that we're hearing from our customers in terms of what would be a catalyst for Creative Suite and HTML5 and support for HTML5, whether that's browser-based content or creating standalone applications, is certainly one of it. As you can expect, we will be taking the tools that we've been delivering, like Adobe Edge and Muse, and you might see that in future versions of the Creative Suite. That's one example of how we're continuing to monetize HTML because we want to be clearly the leader in HTML authoring.
The other way is, as HTML video is also taking off, you've probably seen that we announced a new version of the Flash Media Server, and the Flash Media Server also now serves up content not just to Flash video, but in addition to that, also to HTML video. Finally, the digital publishing solutions also export all of these newspapers, magazines, catalogs that we are preparing in either Flash content or AIR or as HTML. Big picture, I would say, as HTML is getting more prevalent, we're clearly both embracing it from the point of view of tools and being the leader in tools, but also contributing aggressively to the evolution of HTML as a standard.
Speaker 4
Great. Maybe lastly, I'm sure the question on most people's minds is, have you seen any change in the economic environment, and maybe particularly Europe here in recent weeks or months?
Speaker 2
Hey, Steve. It's Mark. You know, from a demand perspective, I'd say that Asia and the Americas have been relatively stable, like I said in my prepared remarks. The weakness that we saw in the second quarter did continue into the third quarter in Europe, but I thought it was important to keep in mind that Q3 is always a tough quarter due to summer seasonality, the way our calendar falls. We were very pleased with where we came in in our target range. If you look at the guidance we provided, like I said, at the high end, we would grow the business 10%, just like we anticipated before the start of the year. Margins are improving year over year. Earnings growth will be around 20% at the high end of the range.
Shantanu said CS5.5 is having the effect of keeping the run rate up late in the cycle. Omniture bookings are growing over 20%, and Acrobat is doing very well. Overall, we're really pleased. We were definitely off the most in Europe. The weakness that we saw last quarter, like I said, continued. The largest miss within Europe was in the enterprise segment, but we've got a strong pipeline for Q4, and we just now need to execute on our fourth quarter.
Speaker 5
Thanks a lot. Moving along, we'll hear from Walter Pritchard with Citi.
Speaker 3
Hi, guys. This is Ken Long for Walter. Thanks for taking my question. Just kind of digging down a little more into the Q4 guidance, which was quite impressive. I'm just wondering if you guys could give us a little color around your confidence. Is it just you guys saw some deal flip, or is it really just the strength of the pipeline?
Speaker 2
Yeah, sure. This is Mark again. Q4, we expect to be similar to what you've seen from us in prior years. We expect to close the fourth quarter strong. It's traditionally strong given our larger and larger enterprise business. As you know, enterprise customers do tend to buy more in the fourth quarter. In addition, like I said, Europe's seasonality is tough in Q3. That improves in Q4. The government year-end falls in our fourth quarter, and we benefit from our hobbyist launch in the fourth quarter. We've got a very strong pipeline, and we expect to close strong, like I said, we've done in prior years.
Speaker 3
Great. Maybe if you could just kind of talk a little bit on your video tools. Apple and their Final Cut product had sort of a bit of some shenanigans these past quarters. Did you see much impact on your business? What else are you doing to capitalize on this opportunity?
Speaker 0
Yeah. Currently, we do see video as a large growth opportunity. That business actually did really well. We had a very aggressive program that we first rolled out in the U.S. called the Video Switcher Program, where we targeted both Avid as well as Final Cut Pro customers. We're now actually rolling that out worldwide. Even prior to the recent announcements by Apple in terms of their focus more on the prosumer rather than the videographer, we were actually continuing to do well against both Apple and Avid. It is our intent to continue to be strong in the video space. At the IBC conference recently, we also announced high-end color. The video is a strong business for us, not just on the authoring tools, but frankly, for the entire workflow because now we also have the ability to deliver that content and do content protection.
We're seeing good double-digit growth, and it's clearly driving what you see in the DMS segment as we report our revenue.
Speaker 3
Great. Thanks, Ed.
Speaker 5
Next in line, we will go to Mike Olson with Piper Jaffray.
Speaker 1
All right. Thanks. Good afternoon. Just a question that we often get on Adobe is, will the growth in the business come from growth of the creative professional user base or increased revenue per customer? My guess is that you would answer that it's a combination of both. Perhaps you'll give us an update on the creative pro customer base like you have before at the analyst day. Would you suggest that the biggest growth in the number of creative pros, if we're looking at that piece of the growth of the business, is in the mobile space or the video space or somewhere else?
Speaker 0
Mike, that clearly is one of those questions where we'll spend a lot of time at the analyst meeting. As you point out, it is both, which is for the existing creative professional customer. I think there are a significant amount of changes that we'll drive. Digital publishing represents a large opportunity as they all want to get their content out to new devices. Video is clearly a growth opportunity for us. We're doing very well in that space with respect to market share. HTML5, continuing to make sure that we deliver the best tools in HTML5 for creative pros. As I said, tablet applications, we intend to deliver a whole new set of tablet applications, which will be augmenting the current desktop functionality for creative professionals.
In addition to that, we actually believe that there's a large opportunity to attract new customers to the base with the new set of tablet applications that we will create, as well as subscriptions and attracting new customers. Both delivering new creative applications and extending that to the workflow is the way in which we intend to continue to grow that business. You'll certainly hear a lot more about that at the analyst meeting.
Speaker 1
Good. Thanks. Just one quick one for Mark. When you think about 2012, I know you're not giving guidance on that, but just wanted to talk about kind of linearity of the quarters. When you look at the year, is there any reason to not expect normal seasonality with Q2 up from Q1, especially with assuming CS6 ships in Q2 and then Q3 down from Q2 based on normal seasonality, and then Q4 up from Q3? The reason I ask is, if you look at kind of current consensus numbers, they assume revenue is up in every quarter in 2012. Would you suggest Q3 should be down sequentially followed by an uptick in Q4?
Speaker 2
From a seasonality perspective, I wouldn't expect anything to change next year. To be honest with you, we're not prepared to talk about 2012 color. We'll definitely spend a lot of time talking about that as we get together with you guys at analyst day.
Speaker 5
Moving along, we'll go to Adam Holt with Morgan Stanley.
Speaker 3
Hi, Phillip. Thank you. I had a couple of questions about the enterprise business. First, it looked like the year-on-year growth in the enterprise business is a little bit lower than what it has been. Was that a function of some of the difficulty that you talked about in Europe? How do you think about the trajectory of that business going forward?
Speaker 2
Yeah, Adam. Hi, it's Mark. Clearly, enterprise was a little lighter than we would have liked. The weakness that we saw in Europe was primarily driven by weakness in the enterprise. If you look at our guidance for the full year, we still expect that enterprise can grow 20%. I know you're all very focused on quarterization, which I completely understand. We expect the year, the full year, to play out exactly as we had talked to you about at the end of last year. The year is playing out exactly right. Q3 was a little different than we had expected, driven by Europe.
Speaker 3
Okay. Terrific. If I could just shift to Creative Suite (CS5.5), it has obviously been a good release. Where do you think you are in penetration of CS5.5? How do you think about the transition from the back half of the annual release into the sixth release?
Speaker 0
Adam, why don't I comment a little bit about that? In terms of where the penetration is for Creative Suite (CS5.5), as Mark said in his prepared remarks, the revenue is now on par with Creative Suite 3 and considerably greater than it is for Creative Suite 4. We have about 40% of our customers on Creative Suite now on Creative Suite (CS5.5). That gives you some sense of the penetration. What Creative Suite (CS5.5) has done is really accomplish a couple of the objectives that we had set out to do. The first is, how do we drive a continued strong run rate of 5 while moving to the annual cycle so that we could enable more frequent innovation? The second goal that we clearly had was to continue to update our products more frequently to allow our customers to deal with what was happening in the marketplace.
As we look forward, frankly, to the next version of Creative Suite, we think there are a lot of things that are going to drive the new version of Creative Suite, not least of which is a new version of our franchise imaging application. In addition to that, the things that I mentioned earlier, video, expect to see a fair amount of HTML5 innovation coming in the next Creative Suite. The combination of both the creative applications, the tablet applications, and what we provide as cloud services is exciting. There is a lot of excitement about what we're going to deliver next year.
Speaker 3
Terrific. Thank you.
Speaker 5
Next question will be from Jay Vleeschhouwer with Gershon Securities.
Speaker 3
Got it. Thanks. Good afternoon. With respect to recurring revenue, which you highlighted in your prepared remarks, how likely is it that CS5 would have to take a focus on CS5 versus for revenue?
Speaker 0
Jay, what we have found when we look at what we delivered both in the pilot in Australia and with Creative Suite (CS5.5) was clearly we're attracting new customers to the platform. That is working. A number of the customers that we surveyed said that they would not be buying Creative Suite products had it not been for subscriptions. In terms of what we are also seeing to add a little bit more color, we're seeing a fair number of people adopt the point products, and we're seeing a fair number of people adopt the entire suite. Subscriptions as a strategy are clearly working for us in terms of attracting new customers to the platform.
With respect to Creative Suite, the next version of Creative Suite, CS6, and beyond, yes, continue to expect us to deliver more as a combination of what's there in the desktop as well as what's there as services. While I'm not going to share specifics around it, directionally, that's absolutely the way we're headed.
Speaker 3
You used the term transformation and doubling down in your remarks, which I thought was interesting. A question perhaps for Mark. You have over $3 billion of goodwill on your balance sheet. I'm wondering to what extent you've thought about the need or desirability of perhaps writing down some of your older technology that may not take you in the future where you want to be. Is that at all something that you've given any thought to? Similarly, is there any opportunity for Adobe to license or even sell some of the guys that you have reached in the domestic tech company too?
Speaker 2
Hey, Jay. It's Mark. On the goodwill, we do look at that every year. We do a goodwill impairment test that's required. Given the strength of all those businesses that that goodwill represents, we've not had a situation where we need to write that down.
Speaker 0
Jay, with respect to the doubling down, when we think of what's happening with content authoring and digital marketing, it really was to continue to signal that we're so excited about the opportunity associated with digital marketing. When we go in there and talk to large customers, whether they'll be in retail, financial services, transportation, the combination of what we are doing with our content authoring, content management, and analytics is really resonating. That's why we will continue to make sure that that integrated offering is the route to market. The more we can align our resources, the more we believe that we will see accelerated growth in licensing in the enterprise.
Speaker 3
Thank you.
Speaker 5
Moving along, we'll hear from Chad Bartley with Pacific Crest.
Speaker 1
Hi. Thank you. Follow-up question or two on the enterprise business. You know, Mark, achieving 20% growth for this year would imply about 25% sequential growth in Q4. Is that realistic? That's a pretty big jump. Assuming that that's still the growth target going forward, this year benefited from the Day Software acquisition. From an organic perspective, are you still thinking about 20% growth beyond this year for the enterprise segment?
Speaker 2
Yeah, it is a big jump in the fourth quarter. Like I said, the pipeline supports that. We're getting a lot of traction with Day in that space, and we've got the pipeline to support a very healthy Q4. If you look back in prior years, like I said, we do have typically a very strong fourth quarter of the enterprise, which is typical for most enterprise software companies. With Day, we don't look at it as with Day, without Day anymore. The Salesforce is selling an integrated solution. It's basically one customer experience management solution that's being brought to market now.
Speaker 0
With respect to 2012, we'll share more about.
Speaker 2
That 2012 will show at Analyst Day.
Speaker 0
The analyst day, yeah.
Speaker 3
Fair enough. Thank you.
Speaker 5
The next question in the queue will be from Brett Thill with UBS.
Speaker 3
Thanks. Mark, just on Q4, you talked about the pipeline. I think most of us that were taking slightly more conservative close rates based on some of the macro things that are coming up. I guess just when you take that into account, what have you done in this Q4 versus the past Q4? Have you taken your close rate assumptions down? Just trying to understand what type of.
Speaker 2
Yeah. Brent, Shantanu and I and Matt Thompson, our Head of Sales, we sit down and we go through this every single week, and we look at the pipeline. We factor risk into that pipeline. Like I said, Q4 is going to be seasonally strong in the enterprise. We've got the government year-end. We've got the hobbyist launch. There are a lot of things that every year kind of are going in our direction from a Q4 perspective, and we do risk assess that pipeline.
Speaker 3
From your perspective, have you taken a slightly more conservative close rate than Q4, or is it?
Speaker 2
I think the fair thing to say is that the sales cycles have been a little bit extended. You might have seen some of that in the third quarter, and we're taking that into account. It's factored into our range, right? The upside and maybe some of that risk is factored into the range. That's the purpose of the range as well.
Speaker 3
Okay. No, I appreciate that. Just a quick follow-up on the government. I mean, you anticipate that we will see follow-through. There won't be a bigger lockdown like everyone's expecting.
Speaker 0
Q4 tends to be the year-end and government, as you know, Brent, in terms of the U.S. government. As Mark said, we're going to be focused on taking the pipeline that we have, continuing to deliver new products, and driving to a strong close. It's not anything different from what we would do every quarter. That's what we're focused on.
Speaker 3
Great. Thanks.
Speaker 5
Next question will be from Dan Durn with Pink Equity.
Speaker 3
Thank you. You answered part of my question, speaking to Jay about the subscriptions having some success with point products as well as the suites. I was wondering if you could go a little bit further and talk about the geo-regions and perhaps even the demographics with respect to the success you're having bringing new Adobe customers into the family. I have a general question about the subscription revenue line growing 2.5% Q on Q. What kind of objective do you have to really stimulate that line with the tablet applications and this further initiative around subscription adoption? Thanks.
Speaker 0
Sure. There are multiple questions in that. For the current subscriptions, the customers that we are attracting, I would say, fall into two categories. The new customers, and these are customers who have never experienced an Adobe product before. Clearly, what we are doing with having attractive entry-level prices attracting brand new customers, it's also converting customers whom we would have traditionally called version skippers to stay more current with the CS set of products. That's how I would characterize what we are seeing with the subscription pricing. In terms of moving forward and in future releases of CS, our goal clearly is to have our current creative professionals stay current at higher numbers than we've seen with CS5 and prior releases. With everything that's changing in the creative environment, we believe that this really allows us to have more innovation. Take a product like Adobe Edge.
If we have a product like Adobe Edge that's on subscription, that's offered to all of the subscription people, that provides incentive for people to stay current. Today, with the 18-month cycles, you aren't allowed to do that, as you know, given financial accounting. That's the strategic rationale for continuing to drive towards subscriptions and attracting new customers to the platform. On the tablet side specifically, I think we would all say it's early. We do believe strongly that tablets will be used not just for consumption devices but for creation devices. You're going to continue to see styluses added to tablet devices, which make it an even more compelling offering. We will have a comprehensive set of products, and I think it's early to say how rapidly that will grow. We do think that's a new revenue stream that will be meaningful for Adobe.
Speaker 3
Would those be purely subscription, and do you think you could have those substantially in the market in the first half of the next fiscal year?
Speaker 0
We don't want to have end-use associated with unannounced products. I think Adobe Carousel you've seen is a product which is a subscription-based product. I think as we continue to offer all of our creative customers a suite, we will have both point products and suite offerings. That's as much as I'll share right now.
Speaker 3
Okay. Thanks.
Speaker 5
The next question in the queue will be from Mark Murphy with Wells Fargo.
Speaker 3
Hello. Question specifically relating to the announcements at Microsoft with Microsoft moving Windows 8 to HTML5 and Java as a core development environment, and the extended support within Visual Studios for HTML5. How do you see both the opportunity changing as well as the competitive landscape changing?
Speaker 0
Sure. I think in terms of the opportunity, again, we have said for a while that we continue to think that people will create content for web browsers, and they will create content as standalone applications. Adobe intends to play in both of those categories with our creative tools. As it relates to HTML5, I think it's still in its infancy, but we will work collaboratively with the entire community to make rich internet applications possible in HTML5 through the use of new frameworks. We will push video as a capability within HTML5. We will do the same thing for video. I think that's going to evolve over the next four or five years. The browser support is just beginning to happen, frankly, in terms of browsers that are supporting HTML5 both on desktops as well as on smartphones.
I think big picture, that's a big opportunity for a company like Adobe. Our customers are clearly telling us they want us to help reduce the complexity of authoring for these new, richer, expressive paradigms through our creative tools. In terms of Microsoft specifically, yes, I think they will also offer developer tools, and they'll be one of many companies that targets this large opportunity. On the standalone application side as well, we continue to make progress. I think the number one selling iPad application in, I think, something like 13 countries was an application that was built in Flash and then recompiled in Air to run on the iPlatform. Expect us to continue to also invest in making sure that for standalone applications, whether they be on the Apple platform, the Android platform, or the Microsoft platform, we also expect our technology to work standalone on those environments.
Speaker 3
You're following up on the comment about the iPad app. Do you have a little more information you'd like to share in terms of what you're seeing in terms of people recompiling for iPad? Obviously, there's been this worry about the Flash issue.
Speaker 0
I think Air is the technology that works on iPads. We have thousands of applications that are working, and our tools are being used to get their applications as standalone applications in the Apple Store. We've also supported Apple iTunes in terms of our digital publishing solutions. We support subscriptions as part of that, and we support the newsstand as part of it. Think of Adobe as the company that will provide tools, workflow, and solutions, not just for the web, but also for all of these different app stores that are emerging.
Speaker 3
Excellent. Thank you.
Speaker 5
Next, we'll hear from Raj McMillan with Jefferies.
Speaker 3
Thanks a lot. I actually had a question just on the education segment because you mentioned it as a strong area for the business. I recall this time last year, I think it was a weak part of the business. Given that we all assume education is tied somewhat to state and local spending, which inherently is weak right now, can you provide any colors to kind of what drove the strength in education? Thanks a lot.
Speaker 0
Sure. Raj, again, in Q3 of last year, what we had said was that the revenue was strong, but it was slightly weaker than our expectations a year ago. In Q4 of this year, we did have record revenue in education. I think it's being driven by the different offerings that we have. We have large deals that are driving it. Our Creative Suite is being adopted increasingly as a standard across all of the design training schools. The progress that we've made in video is actually helping make that more of a standard. As more and more students use our products for digital literacy, we're continuing to see good growth in that. I would attribute it to a combination of the direct enterprise large deals that we're driving across higher education primarily, as well as more adoption of our products by students.
Speaker 3
If I could have a follow-up, there's obviously some changes within the enterprise sales leadership recently. Is there any comment you can make around how you're thinking about the investments into enterprise? The reason I also asked that is because we saw that you're also making some channel partner plan incentive changes. It seems like you're making a number of changes, if you will, within kind of distribution. I just wondered if you could comment to that. Thank you.
Speaker 0
Yes. When I go out and talk to a number of enterprise customers, and I spend a fair amount of my time, the sweet spot of that opportunity is the combination of these customers adopting our entire Creative Suite and Acrobat as an enterprise license and standardizing on content management and Omniture because they're all thinking of how do they revamp their website, how do they move their business online, how do they get closer to the customers, and how do they make sure they can measure all of the transactions on their website. In terms of our enterprise go-to-market, again, Mark said that's the reason for aligning more and more of our sales force as well as our marketing programs to align around that joint offering to the customer because that's really resonating.
Both the Day Software as well as the Omniture bookings are growing over 20% a year, and that will continue to be a focus. You're right. We were able to re-recruit back Garrett, who's heading up our North America sales effort. Garrett used to head up all of SAP's Japan efforts, so we were pleased with that. Expect to see more alignment and more focus around digital marketing as the sweet spot in the enterprise. Having a unified message and having a unified marketing program actually helps us paint a bigger story and sell higher into the enterprise. Expect to continue to see effort on that.
Speaker 5
Moving along, we will hear from Brad Zelnick with Macquarie Securities.
Speaker 3
Thank you very much. Mark, I was hoping you could talk about your uses of cash and specifically your propensity for M&A versus buybacks versus organic investment at this point. Maybe if you could give us an update on your thoughts around hiring going forward.
Speaker 2
Sure. From a cash perspective, our strategy has been pretty consistent. Clearly, we make sure we have the right level of cash we need to invest in the organic part of the business. We have been acquiring, like we said, mostly on the smaller side, new to smaller-sized companies. I always want to make sure we have cash on hand to do that. Whatever excess U.S. cash we have after those two things, we've been driving towards, shall we purchase? I would argue we've done a great job over five to seven years of buying back an incredible amount of stock, probably close to $1 billion a year every year for the past five or more years. We've now got the share count down below 500 million, 500 million shares. I think that's been strategic in driving value to the shareholders. The second part was what?
Speaker 3
Hiring.
Speaker 2
Hiring.
Speaker 3
Just hiring.
Speaker 2
We continue to hire into the business. You can see that this quarter looks a little higher than it is because we had about 80 interns in that number. If you back those out, it's a little bit less. Despite the interns, we continue to hire in primarily sales and marketing to drive that sales capacity in the enterprise for those enterprise businesses. There is also some hiring in R&D, not necessarily all in the U.S., but around the world.
Speaker 3
Thanks, Mark. If I could just follow up with two quick data points. One, can you remind us or give us an update on how much of your cash balance is onshore at this point? Number two, I missed the shippable backlog number. Did you finish the quarter with any backlog? Thanks again.
Speaker 2
Yeah. The onshore cash, obviously, fluctuates, but what we've been saying is that it's roughly two-thirds offshore at any given point in time and a third onshore. In terms of backlog, the backlog is always factored into our guidance. We had no backlog coming into the quarter, and we had no backlog exiting this quarter. I think at this point, we're managing the inventory in the channel much, much tighter. I would expect the backlog to be relatively insignificant going forward.
Speaker 3
Thanks for taking my questions.
Speaker 5
We're coming up on our end time. We'll take one more question, operator.
Speaker 3
Thank you. That question will be from Heather Bellini with Goldman Sachs.
Speaker 5
Hey, Ms. Bellini, your line is open. Please go ahead.
Speaker 3
Is she?
Speaker 5
We're having a little trouble hearing you. Could you check your mute button? We're not getting a response from that line. We'll move along to Perry Huang with Goldman Sachs. Sir, we're having trouble hearing you. Please check your mute button. We're not getting a response from that line either. We will go to David Halal with FBR Capital Markets.
Speaker 1
Great. Thank you. I want to go back in a little bit on the business segment. Specifically, within Creative and Interactive, that business was down sequentially and missed consensus numbers. I wanted to understand some of the weakness there and whether that was attributable to Europe as well. On the convertible digital media, we've got a pretty good quarter. I'm not sure if that was Photoshop, but maybe you could help us understand the strength there and some of the weakness in Creative and Interactive. Thanks.
Speaker 2
Yeah, David, I'll start. Shantanu can add on. I understand that because we split those up, it gives you a little bit more color underneath the creative covers, if you will. If you look at it in total, the total creative business did very well sequentially. Like I said, maintained the run rate that we had for Creative Suite (CS5) with 5.5 on a year-over-year basis. There's always going to be some ups and downs within there. Overall, Creative Suite (CS5.5) is doing very well.
Speaker 0
Specifically, I would say within the DMS segment, as we had alluded, the video products and the Production Premium is also within that category, continue to do well, as do the imaging products. With that, three things, maybe messages that I'll leave all of you with. The first is we're clearly focused on driving a strong close to Q4 to achieve the financial targets that we had set for ourselves in 2011. As we preview what we are going to be talking about a lot more at the analyst meeting, our focus for 2012 really is in two areas. In content authoring, the four key initiatives that we have are continuing to drive innovation in Creative Suite, in imaging, in video with our publishing solutions, as well as in HTML5.
The introduction of new tablet applications, as well as cloud services, will continue to innovate in terms of how people author. Our digital publishing and monetization solutions have over 600 titles. We're going to continue to focus on having newspapers, magazines, and catalogs move online. Document services with things like ensuring that document security, creation of PDF, and electronic signatures continues to grow for us. The large opportunity associated with digital marketing is targeting marketers.