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Executives

Shantanu Narayen – President and Chief Executive Officer

Mike Saviage – Vice President of Investor Relations

Analysts

Brent Thill – UBS Securities LLC

Adobe Systems Incorporated (ADBE) UBS Global Technology Conference Call November 20, 2013 2:30 PM ET

Brent Thill – UBS Securities LLC

Thanks, I want to welcome you to lunch. Again apologize for the rain today, but I think we’ve got a nice setting here at call point and glad to have the conference on the West Coast this year. My name is Brent Thill. I run the software research initiative. I want to welcome you guys tonight at 5 O’clock. We’re going to give casual drinks and dinner here, so if you can join us that would be great. We’re going to have number of our presenters, industry consultants at 5 O’clock and hopefully we get some to dry up the port, so we can get outside and have the fresh air.

Adobe is a story that I’ve followed for quite sometime and I think many of you that have watched the story have seen a transform into a real pioneer now in terms of a lot of big companies are following Shantanu and Mike’s lead in terms of the transformation that they’ve gone on. And I think a couple of years ago I was questioning where Abode was going and I think it’s pretty clear where they’re headed right now. And you’ve seen that in the numbers, you’ve seen that in the stock, you’ve seen that in the customer response when we talk to customers. And I think when you look at the marketing cloud clearly, they are pioneer here, others are trying to emulate and chase them, but clearly they’re out ahead of everyone else right now. So, I think you’ll hear a little more about how important this is in the transformation on the marketing side as well as protecting their core franchise and the creative side from Shantanu.

Shantanu joined almost approximately 15 years ago at Adobe. He is the member of the U.S. President Advisory management Board, serves on the Board of Pfizer. He’s on the advisory board of the Haas School of Business just across here in the East Bay, Berkeley. And Mike Saviage, many of you know Mike. He needs no introduction. He’s the most seasoned IR person in software.

So thank you for joining us today. We really appreciate your coming.

Shantanu Narayen

Great, thanks Brent for that warm introduction. What I thought I do is I’ll just spend 15 or 20 minutes talking about the growth strategy that we’ve embarked upon and then I think that should give us enough time for questions. Since this is being webcast, I’ll give you a few seconds to read the standard disclaimer and I should also mention that we are in the last two weeks of both our quarter as well as our fiscal year, so I’ll be keeping my remarks to the big picture as well as in questions that we answer really talking about only information that we gave as of the last investor and earnings call.

It’s been as Brent said a really exciting couple of years for Adobe. A few years ago we realized that there were some massive tectonic shifts that were happening in the technology landscape. And if we didn’t change the company or transform to really take advantage of everything that was happening in the industry that we’d be missing out on a – what we thought was a massive opportunity and clearly the three shifts that we saw happening in the industry was everything with respect to people consuming and creating content on mobile devices and form mobile devices. The move towards the cloud in terms of being able to deliver cloud services to a broader set of customers and everything that was happening with respect to social and community in terms of making sure that we engage with our customers in a more direct way.

Mission of the company actually has remained relatively steadfast and we want to continue to change the world through digital experiences. If you look at the impact that Adobe has had on any form of communication, what’s happening with mobile devices right now and application creation, what’s happening with the entire move of video to IP based networks and what’s happening with respect to content being consumed in application stores. I think we do remain at the forefront of making sure that we are producing the world’s most compelling experiences that people want to deliver. So one of the things we realized a few years ago was that if we restricted Adobe’s offering only to content creation at the front end that we would actually be missing out on a much larger opportunity with respect to the entire content lifecycle.

And so we embarked on the strategy not just to focus on making the world’s content which is what I think everybody knew us for, but increasingly enabling people to manage that content. Measurement of the content I think everybody talks about big data right now and really having bird’s eye view of understanding what people are doing with that content. And so we realized a few years ago that measuring that content was going to be absolutely critical to delivering the kind of customized personalized experiences that we thought every company would want to do.

And last but certainly not the least, we recognize that if you are in a financial services organization, if you’re in retail, the last step is frequently the most important which is are you enabling people to actually monetize that content. And so we decided to shift the company’s focus from just the front end of making of that content to managing it, measuring and monetizing it and I’ll talk a lot more about both the offerings as well as the success that we’ve seen downstream, but I would leave you with the end result in that we have become far more mission critical as a result of taking on the aspects of managing that content for our customers and measuring the content for our customers and then both of those categories I think were now the undisputed leader in terms of both analytics for measurement on websites and increasingly on applications that are being consumed in app stores and in management as people are replatforming their websites that’s the business that’s on fire for us.

So really exciting strategy and one that we’ve aligned the entire company on. When we think about our advantage, I think the big advantage is that as Brent mentioned, we have been able to leverage the core franchise that we had on the making of this content into everything that we’re doing by targeting the marketer and targeting the Chief Revenue and Digital officer on the Adobe marketing cloud and again I’ll take a lot more about what the vision is for the Adobe creative cloud as well as what we’re doing in the marketing cloud, but there isn’t another company that I think has the breadth and depth of offering that we have as well as the customer franchises across both the creative cloud and now increasingly the marketing cloud because at the end of the day it is about that customized experience, it is about the brand that people want to have increasingly online.

With the creative cloud, what we really said to ourselves a few years ago was that we had to completely re-imagine the creative process. It was clear that tablets would not just be consumption devices, but there would be creation devices. We recognize that we had to appeal as much to that next generation of creative as we have to the generation of creative that was completely dependent on Adobe products for everything that happen associated with print. And if necessary, we also had to make sure that we innovated around what was required in terms of hardware to enable people to expose to the next generation of creative process.

The Adobe creative cloud was the offering that we introduced last year and really the fundamental strategy behind the creative cloud was to embark on this multi-year strategy to go beyond the desktop. Certainly the desktop products continue to be the core innovative franchise for the company, but you will increasingly see Adobe deliver new products as we have been on tablet devices. You’ve seen us introduced to new prototype business of hardware in order to be – in order to allow people to do content creation such as pens as well as rulers. And last but certainly not least, we think that the creative process has to include a collaborative way for people to collaborate in that entire creation process and so delivering services was going to be important.

The fundamental reason why we think creative cloud will be the best offering is that it actually unleases all of the product people from instead of delivering products on our 12 or 18 month cycle to being able to deliver products for our customers at the pace at which application stores are evolving, while at the pace at which browsers are evolving and at the pace at which video is increasingly being consumed on all of these mobile devices. One of the attractive things that we recognized associated with the creative cloud was the ability to attract new customers.

We said as of the earnings call in September that we get approximately 20% of the people who are now subscribing to the creative cloud are people who have never done business with Adobe before. And we also see a substantial number of people who say that if they were not for the flexibility associated with the creative cloud, they would not transact business with us during this year. So in addition to the shifting for subscriptions, which enables us to build a far more predictable revenue stream in addition to being able to innovate at a far more rapid pace and become far more machine critical, I think the new customer acquisition is something that we continue to be excited about.

Mobile content and mobile app creation certainly is a big area of focus for us. And I think we have a unique ability to actually integrate all of the applications that we deliver on these tablet devices with what we are delivering on the desktop. And so think of it as a product like ideas that’s available on a tablet device integrates with Adobe Illustrator better than any other product can or when you have a product like Photoshop Touch that’s available on a mobile device. It actually augments and integrates with Photoshop better than any other app can and so mobile content and mobile app creation as well as the analytics associated with it is certainly very important.

We’ve talked a little bit about how we believe that the future of a lot of the publishing that was print is increasingly going to be through application stores. I think you’re seeing that with a number of magazines right now. And if you are on an iPad and you are downloading a magazine, chances are that if it’s coming from Condé Nast or Meredith or News Corp or Time Warner, it’s the technology behind all of that is being now delivered through Adobe. And so, we have this product called the Digital Publishing Suite which enables people who are creating magazines or creating newspapers to be able to deliver that content leveraging all of the workflow that they had on print increasingly through these application stores.

But I think the much larger opportunity with Digital Publishing is associated with also targeting every corporate publisher. So if you’re in financial services chances are going to be providing that through an app store. If you are delivering a retain and catalogues or if you’re delivering training material, if you’re delivering automobile manuals, we certainly believe that all of that is going to get delivered increasingly not just through print or increasingly only on digital and I think the very well positioned in that particular space with a digital publishing suite because it leverages the workflow that we already have for all of our desktop products.

And net as all of you know, we increasingly think the metric by which you should be looking at the success that Adobe is having in the Creative Cloud business, is everything to do with what we call annualized recurring revenue and we think we’ve been quite transparent in providing you with what is happening as people make the transition from doing business with Adobe upfront in a perpetual way to doing business with us in an annualized recurring revenue. So off to a great start and we continued to think that we’re very well positioned with the Creative Cloud business.

I think it’s fair to say three or four years ago when we announced that we were acquiring Omniture that there was a fair amount of head scratching that happened and people were wondering why we were making such a bold statement in the measurement space. And we really thought that there was a large untapped opportunity in being a leader and now what’s being increasingly called big data, but really in understanding how people are using all of that content and we continue to believe that the CMO or the Chief Revenue Officer or the Chief Digital Officer is perhaps the largest untapped opportunity in terms of automation or IT spend or marketing spend within the enterprise.

When you see everything that’s happening with respect to whether you are in retail or whether you are in travel, the need to be able to interact with your customers across all of these different channels: mobile, social, what’s happening with electronic e-mail. We identify that as one of the key untapped opportunities that Adobe was really going to focus on. Every CMO that I talked to is increasingly thinking about what happens with their marketing mix and how do they shift their marketing mix towards digitals, but more importantly really understand what the return of investment is on that marketing spend.

And the fact that we have the analytics, we process over 10 trillion transactions, puts us in a very unique position if we have both the content layer or the data layer by which they’re creating this compelling experience and the analytics layer to understand exactly what people are doing whether that’s on search, whether that’s on social, whether that’s on any other channel that customers are doing to be able to provide them with value that no other company can.

And the big thing that we see, the big movement all across the world is this replatforming of the web because people recognize that a website that’s not truly targeting tablets, a website that’s not truly targeting mobile and a website that not have a presence just on their website on their own website but on social websites is a website that’s not as compelling to consumers today. And so, the technology that we have with Adobe, we have experienced manager, the acquisition that we made of a company called Day Software is clearly paying off in space because that is the largest untapped opportunity that we see in terms of people moving towards digital.

We certainly think we have a very comprehensive offering. I think everyday you’re going to hear about another marketing cloud that’s being released from companies all around the world. Adobe Analytics this was the acquisition of Omniture, we’re the leader in Adobe Analytics today. Adobe Target is all about making sure that we provide that customized personalized experience. And so when you as an individual come, how can we do whether its AB testing or whether its based on your demographic, based on your profile, based on all your user behavior provide you with the best experience. And that’s where the return of investment is really the most relevant for our customer. We have social in two ways. We do allow people to spend money on social. We also allow people to do the publishing on social. And so as you are creating your presence on your website, increasingly you have to create the appropriate presence on the all of these social sites and that’s what social does.

Media Optimizer was the acquisition of Efficient Frontier. We have multiple billion dollars today under annualized marketing spend. And again, the benefit that we have over other providers in that space is by fact – by virtue of the fact that we have the analytics we can actually in real time make that a far more predictive and optimize media spend than anybody else today. I talked about experienced manager that is the fundamental replatforming of the website. We offer that now in three variances actually. We offer that on premise and government agencies are increasingly using that to replatform their website.

We offer that as a managed service, which we think is a big strategic advantage because the companies who are providing their website to us as a managed service, we can immediately integrate all of the other offerings for them and turn that on with a single switch of the button. And last but certainly not least, we bought a company called Neolane recently, which we’ve rebranded Adobe Campaign and what Adobe Campaign allows you to do is it has a cockpit of the orchestration of your entire marketing spend across multiple channels.

So the real opportunity with Marketing Cloud much like we did with the creative products is to make sure that its better integrated than any other platform that’s available on the market as well as with a single user experience. And so that’s really what we are focused on with the marketing cloud. But the success as shown on the slide with Q3, we’re now on $1 billion run rate for just the marketing offering, which makes us clearly one of the leaders in that space.

And as you see on the slide whether its 9 of the top 10 retailers or 5 of the top airlines that exists, I think we’ve clearly seen traction in that space. We see opportunity in the marketing space in two big areas. The first is continuing to sell existing customers with more of our solutions and so how do we up sell them and the fact that they’re as well integrated as they are right now allows us to have confidence and being able to increase our value to each of these customers as well as new logos.

We think international continues to be a large opportunity for us as well as local and if you looked at our results in Q3 we had very significant growth and we also said that we continue to expect to see that growth happening in Q4 of this particular year. The other thing I should probably spend 30 seconds on is we really see a great opportunity for us to integrate these two marketing clouds and I get to ask that question a lot, can you make that a little bit more tangible.

There are two ways in which we are integrating it, if you are a creative cloud customer in the enterprise. The fact that we have digital asset management as part of the marketing cloud allows us to tell all of our creative customers that you can take all of that creative content, store it in the digital asset management system and then with a single click of a button allow that to get out on a website or an app store or any other channel that you want. So that’s one big area of integration.

The second big area of integration that we provided to our customers is what we call with the digital publishing suite in the Adobe Experience Manager. And so if you are a company that wants to make sure that the brand that you provide on a tablet is exactly the same as the brand that you have on a website that’s again done through integration. So I think that’s a unique opportunity that we have.

This is a last slide, again our mission remains relatively the same as to be able to create and monetize the worlds content, very excited about the traction that we’ve seen and being able to reimagine our creative process as not just desktop software, but desktop plus tablets, plus a whole suite of web services that we are providing with creative cloud to both make it a more predictable business to get more of our existing customers on the latest offering as well as to drive new customer acquisition.

We certainly believe and I think you are seeing a lot of companies now recognize that digital marketing is going to be a multibillion dollar opportunity within global position, we are one of the leaders in that space. And I think as investors at the end of the day what Mark Garrett and Mike have done is being able to take our business that was largely non-recurring to be a recurring business.

In 2011 we talked about how we expect to see our business get to 35%, 40% recurring and I know Mark has talked about how we are ahead of that. So we are excited – we are excited because we think we have successfully transition the desktop business, we’ve clearly positioned ourselves as a leader in a hugely explosive growth opportunity and we are providing integration between those two.

So with that I am happy to take any questions.

Question-and-Answer Session

Brent Thill – UBS Securities LLC

A lot of buzz around the marketing cloud and you guys have the vision and with the suite rather than a number of point solutions. And you’ve been growing that business I think 25% bookings rate, when you look at where you’re at, I mean how do you think about the sustainability of that type of growth and maybe another way to look at this. If you can look at penetration where you think you are and your core tamper for marketing?

Shantanu Narayen

Brent, I would say at a million dollar run rate approximately and if you look at what the market dam is for that, we continue to think that we can grow at the rates that we have talked about. Adding newly into that solution just allows us to have a much more compelling offer with the orchestration and you know the pipeline is very healthy I mean that business we continue to think that we are capacity constrained if anything rather than market constrain. And we’ve been focusing on some of the large markets that exists the U.S., UK, Germany, Japan. But there is just a lot of opportunity in that market Australia. So while there are other competitors and if that’s part of the question do you feel confident about your ability to continue to grow, the answer is yes.

Brent Thill – UBS Securities LLC

You have a 120,000 people across the water here attending the conference where there is a lot of noise around marketing. You were there all day yesterday. It is a question we get is when you look at sales force, the lane they pick versus the lane you pick that you’re tied to the content creation process; they’re more tied to a sales process to feel right. I mean but it seems like there is enough runway for both that coexists at this point.

Shantanu Narayen

I do believe that. I do believe that actually this market if it really turns out to be as big as we think it’s going to be. I think there is room for multiple players. We’re clearly a leader. I think the differentiation that we have relative to sales forces is first on the content layer. I mean if you have the ability to actually be powering the world’s websites the way we have and if you have the analytics that’s a very compelling value proposition to the marketer. And our brand with marketers continues to be very strong I mean at the end of the day that is the segment that we have targeted. If you look at some of the partnerships that we have in that particular space with agencies, it’s a historical strength of the company. But I will say that we think the opportunity is so large, there will be multiple players in that space and I think they can all grow at fairly aggressive rates.

Brent Thill – UBS Securities LLC

You’ve talked how you simplify the marketing collaborate you had, a lot of products you collapsed now into categories that make it more easy for your customers to understand. Can you just help us to understand the pricing, how do customers take this – take one of the six or seven and then move on, are you seeing them taking a sweep out of the gate, how do the mechanics of that work?

Shantanu Narayen

Yes maybe just to set the context, as Brent mentioned, at one point we probably had 20 or 25 products in that space right. And then we had both through organic innovation as well as inorganic acquisitions. We had even if they were looking at it in the Adobe Media Optimizer space, we had a rules based engine that you allowed you to spend money on search and we had a predictive technology that allow you to do it. And we’re using honestly the same playbook that we used in the creative cloud where the creative suite when we first introduced creative collection and creative suite, a fraction of our revenue was based on this suite. And as you know at the end creative suite was approximately 70%. And so the value proposition associated with having a single marketing cloud and tying all these products together in the six solutions that we talk about.

First it makes it really easy for us to message the product to our customer. The second thing it really allows you to do is instead of having specialists across 25 different products, you have solution specialists across six, which makes it easier. We have in most of the cases a typical standard product, you see might have Adobe Analytics Standard and you have Adobe Analytics Premium. So the selling proposition is easier honestly Brent, the marketing value for each of them is easier. And the other thing that we’ve done is by integrating it, if somebody has one of the solutions; the ability to turn on the other solution is a lot easier than it has been before.

And so, what we’re trying to do is clearly seize the market and say anybody who has one solution, why don’t you find a way to do multiple solutions. If I look at the results that we’re having in Q3 and Q2 after we’ve introduced the new solutions, we’re really happy with the solution adoption. And so, new deals were clearly incenting the sales force to go out there and sell multiple solutions, but the existing logos that certainly upside in terms of getting them if they use one solution or two solutions to use multiple solutions. So it’s working. It’s early, but it’s working quite well.

Brent Thill – UBS Securities LLC

And you had asked about pricing [Question Inaudible] essentially volume base, so as the capacity of our customers grows [Question Inaudible] our revenue. As their success grows, our revenue grows because the amount of throughput that I think delivered through our servers is basically the main pricing environment. That was the follow up question and processing over 10 trillion transactions is achieved. So when you think about getting scale and getting efficiency. Omniture had the probably early on where they were just growing servers in CapEx at the fall. And it seems like you’ve figured out a way to potentially address that. Can you help walk through how you think about your efficiency rather than just drawing additional data centers at this probe?

Shantanu Narayen

Well, I think in all cloud based services and SaaS based services, I think the cost of goods is something that you have to be ruthlessly focused on and really understand what’s the cost of a transaction. And as these transaction scales, are you getting volume benefit associated with it. So it’s something where you leverage also other systems that exist like AWS to make sure that where somebody else has able to upscale provide the cost. But I don’t know that there is a silver bullet Brent to it, I think its engineering discipline that you have to do and they were really very focused on. We will have our own data centers, but we’re appropriate. I mean we’re leveraging other infrastructures that allow us to provide this upscale. But we become world class and it’s something that we have to continue to do.

Brent Thill – UBS Securities LLC

You mentioned AWS, is that – is that something that you are using or looking at using more of?

Shantanu Narayen

We use AWS in some of the creative cloud to do the storage associated with our files. I mean, it’s as very well architected system and it’s something that we can leverage to get it out there.

Brent Thill – UBS Securities LLC

Yes, it’s great. Back on the creative side, you’ve effectively changed your model. Some of the customers initially were resistance to this change that maybe if you can walk through what your aim from the behavior there is obviously any times of exchangers going to be some push back, but where were you at in terms of the customer behavior now saying that this is a way you have to take and you can’t take it the other way else?

Shantanu Narayen

Well, first I’ll start out by saying overall customer satisfaction of people on the creative cloud is higher than customer satisfaction of people who transacted business with us through our two-tier distribution model because we’re always keeping the software current. I think as you mentioned initially when we first introduced the product, we did not have the history of the numerous releases that we are providing along the way. And I think since last May, if you look at the number of releases that we’ve done, Apple comes out with retina display Mac, Photoshop is available that supports the retina display.

When you look at what’s happening with video at the IVC conference, I mean we continue to be the clear leaders in video. So I think we’ve established right now a track record of the fact that we’re going to be innovating at a much faster pace. And so people are looking at it as well in addition to the low cost of entry that truly is from Adobe, a roadmap that’s far more rapid than in the past.

When I look at individuals, team and enterprise, we have three offerings with the creative cloud. The enterprise was the one that we first started off with and that’s clearly of – we’ve had the most history with it as I said, customer satisfaction is great. They were some feedback from our customers in the photography segment associated with could we offer them a product that was more tailored for the casual photography segment. And as you know, we’ve introduced a product that allows us to do Photoshop and Lightroom. So I would say, Brent, I mean, the beauty of a SaaS based model is you have to constantly look at what your customers are telling us.

We have a direct relationship with them that we actually did have to this degree. So we know exactly how many people are launching the product, how they are using it, what value of products they are benefiting. Do maybe not so obvious things that we’ve seen benefits are. The first thing that customers have told us is their ability to digest the innovation from Adobe is actually better in a SaaS-based model. Because in a 12-month cycle if you release 56 new products I mean 56 new features and maybe 14 new products it was impossible for them to truly understand how they could take benefit of all of that. Now by virtue of the fact that it’s a little bit more staggered, they are actually seeing the benefit of it. Slipping all the way to the enterprise I think we mentioned this on our Q3 earnings call.

We’ve been really very pleasantly surprised by how enterprises have seen adoption of the creative cloud offering. I think its Microsoft may have paved the way with respect to a term based offering. And we’ve been very pleased with our enterprise customers are looking at it, they see the value of the creative cloud, they know it’s a logical thing that they have to include on their desktop. And team which was probably the second – which was the second offering, is now also starting to see momentum. And so overall I think we are pleased across the board.

Brent Thill – UBS Securities LLC

There were one or two things you like to see in your enterprise sales team over the next year, what would – what are the things that you think they could…

Shantanu Narayen

Well the number keeps going up every year, right for the enterprise team in terms of both their quota. I think we have so much headroom with respect to both upselling existing customers Brent with the entire marketing cloud offering. And I know one of the questions I get asked also is – are you really seeing people when they buy the creative cloud, buying the marketing cloud and vice versa. And we are starting to see traction with that. So that’s another area…

Brent Thill – UBS Securities LLC

And you measure the affinity?

Shantanu Narayen

Well, we certainly know with every customer I mean we have a spreadsheet which shows exactly what offerings from Adobe they are having and you know that is your best lead generation because if the customer you already have business split, but we have to get better and better at selling the value proposition associated with the entire offerings.

Brent Thill – UBS Securities LLC

So, you see those metrics and that you are going to disclose them there. And they are continuing to move on and…

Shantanu Narayen

Yes, we continue to see, you know again when you think about an automotive manufacturer and an automotive manufacturer has to do a manual that’s delivered to an iPad as well as a website that works with 400 leaders. It’s a very clear value proposition.

Brent Thill – UBS Securities LLC

Okay. The [indiscernible] talked about 90% of the apps in the next few years are going to be mobile yesterday at their [indiscernible] you know there were a lot of criticism really on, but it seems like that the critics have disappeared a little bit, I mean give us a sense of where you think you are out on mobile today are there any last remaining things you would like to see?

Shantanu Narayen

Well, I could answer that three or four different ways Brent, I mean first on the marketing cloud. I think we continue to demonstrate how the marketing cloud is being driven by this growth in mobile, right I mean so we talked about analytics and the percentage of mobile analytics that’s driving the business. So we are very well positioned. When you talk about the Adobe web experience manager, no question the biggest driver of that as people wanting to create mobile websites or creating tablet websites.

And so when you talk about multi-channel campaigns it is all about are you providing the right campaign not just online and offline, but also on mobile devices. So mobile is both – big growth driver as well as something that across all of our solutions we want to make sure that we are world class. Instrumentation, but we are doing analytics instrumentation for mobile application. So as more and more apps have been created in the app store Adobe analytics is there. So that’s one way I’d answer that question. The second way I would answer the question is on the creative cloud as we continue to deliver these services, the store and think capability that we are now providing as we rolled that out to all of our customers worldwide. There is no question that more content is being accessed on mobile devices. When you look at the application, that we’re delivering on iPads, those are getting consumed and those are getting integrated. So mobile continues to be a driver of both of our businesses.

Brent Thill – UBS Securities LLC

Yes. The luxury you had in kind of taking the PitStop and that you’ve made was that you’re able to reset the margins which were at 35 to 40 now you are back down to 20s. One of the questions we always get is can you get back on the road at the same speed you were ahead of the PitStop, so...

Shantanu Narayen

I don’t know if people within the company would have given them the luxury of a PitStop Brent, but modular that. I think when we look at the margin profile for the business, I mean, clearly with the creative I think the question that we get asked all the time is you have a more direct relationship with your customers, you’ve eliminated packaging, you don’t have any box costs, so why isn’t your margin going to continue to improve as you get people transition from the perpetual to the subscription based service and its something that we certainly believe. The current strategy and goal is to get as many people as quickly as possible on to the Creative Cloud because the other benefit that we’ve certainly seen by moving to the Creative Cloud as we don’t have the hundreds of thousands of SKUs that we had in the past.

And so we are focused on it, I would say, at this point the real focus Brent is trying to get as many people getting those new customers on it. But make no mistake. We do recognize that a number of the investors are really keen on understanding how the margin profile improves and gets back to it.

So that margin should continue to improve no questions. Then the question that we get asked is okay, now talk about the overall corporate margins. Marketing cloud will be at a lower margin than the creative cloud, correct. And therefore, we are focused on continuing to drive and accelerate our EPS in that particular space, but it is never going to have the margins that we have in the creative business. For those of you who’ve been following SaaS based businesses I think you’d all recognize that the upfront cost is the cost associated with acquisition of the customers and that’s why we give you the retention rates associated with our marketing cloud customers, which continue to be very healthy in the enterprise space when you have marketing retention greater than 90%. So that’s the way I look at it.

We certainly are the world-class benchmark for creative margins and we will continue to focus on it and marketing will be at a lower margin as we continue to make sure that we grow that business. Candidly, we also get a lot of questions that are associated whether is the market is that big right now, why aren’t you even more aggressively going after the marketing cloud. But we’ll continue to be transparent with how the business is going, but we are focused on getting people to the Creative Cloud and Marketing Cloud for this year and 2014, but we said that we will continue to see margins improve after that.

Brent Thill – UBS Securities LLC

There are literally probably 150 to 200 individual marketing companies’ peeks now that the role of consolidations going to play out here, I think we’ve seen this movie before. You’ve largely built your Marketing Cloud on acquisitions I mean, how do you feel in terms of your existing shelf if you look at it, it seems that you got a lot of the big functional areas?

Shantanu Narayen

And that’s the way we feel, first I think you are right, I think there are companies been formed everyday that will take one of the six solutions that we have and say we are world-class on this platform, on this mobile device and those are not sustainable. I mean, and so I think you are going to see a lot of these marketing cloud. If you see one of these Ovum reports or analyst reports there are literally 100 of companies I think consolidation is inevitable.

We feel really pretty good right now about the key offerings that we have and I think we’ve said, we don’t see big holes or gaps in that space. I think continuing to in these solution areas make sure that there is no chink in the armor with respect to the product offering is something we’ll focus on. But what I feel really good right now about Brent is as we integrate this platform, we have a much better mechanism also for integrating new things into it. The hard work or the heavy lifting associated with these big solutions, when you have a core platform, its actually easier to plug-in smaller things into that particular mix.

Brent Thill – UBS Securities LLC

Everyone want me to ask you who do you think the next CEO of Microsoft is that I can’t answer [indiscernible] we’ll open up the Q&A if you guys have any…

Shantanu Narayen

Sure.

Brent Thill – UBS Securities LLC

Sure, if we look out for years, what do you think the annual CAGR in your revenue growth is going to be excluding any acquisitions?

Shantanu Narayen

Yes, I think we’ve talked about the CAGRs that we have in our respective businesses and so again that’s why that’s one of those things that as of the Q3 earnings call we have said 15% CAGR growth. We should continue to see in the creative business and on the digital marketing side, we’ve said that we continue to expect to see 20% revenue growth and 25% bookings growth and there is nothing in that that tells us that those are anything has changed with respect to that.

Brent Thill – UBS Securities LLC

How much leverage – that’s the question about margins, obviously moving away from software sales that changes dynamics, but where should we see the margins progress up towards as the businesses scale?

Shantanu Narayen

We’re not committing to one specific target number for the combined company. We are, as I said, on the creative side, we recognize that what we are seeing right now is a dip in the margins as it relates to the transition. And subjectively I think I’ve tried to explain to you that the question that’s on investors minds is the way we look at it which is when the business comes back to being primarily or predominantly subscription based business should the margins look as healthy as they were and why isn’t Adobe focused on driving back to margins, historical margins in that part of the business and we will be focused on that. I think in the digital marketing space, I think it continues to be an area of explosive growth for us and right now that that’s the way we’re looking at that business.

But if you look at SaaS-based businesses, other SaaS-based businesses at majority – and this I’m not speaking to Adobe, most people would say SaaS-based businesses should go to 30% margins at majority, we’re so far away from it, we’re not focused on that and that’s what we look at as sort of a goal to target.

Brent Thill – UBS Securities LLC

Thank you.

Shantanu Narayen

In the digital marketing side.

Brent Thill – UBS Securities LLC

Did you see the prospects of a peer Adobe cloud everything running in the cloud, not – no downloadable software to the client?

Shantanu Narayen

I think Brent for the foreseeable future we will continue to take advantage of all the processing power that exists on these machines. I think you will see more services that Adobe delivers that are completely cloud based. And I think the power of that as you can deliver that at a faster pace, the kind of objects that that you can deal with. I mean you’re trying to do a thing like deblur in Photoshop. The image sets that you can do by delivering it as a cloud service is incredibly better than what you can do it on a desktop. But I continue to believe that where we can deliver a client plus service that’s the way we’re going to continue to do it, but we’ll deliver more services.

The other thing I would say is in virtual environments, I think we’re starting to show that we can have our products around in a virtual environment, some of the announcements that you’ve probably seen companies like NVIDIA and Citrix. If you’re an enterprise term license agreement customer, I think being able to run our desktop products on a virtual environment. The technology is getting pretty damn good. And so again the beauty of that for us is if you’re a creative cloud customer may be you can do some simple touch ups on our tablet device that previously you can do it. So that’s a way I think about it right now, but the processing power for video on these devices is unbelievable and not taking advantage of GPUs right now, makes no sense, actually it makes so much sense to take advantage of that.

Brent Thill – UBS Securities LLC

The other advantage going to the cloud is the last time I checked I think you’re one of the top three most pirated features of software in the planet.

Shantanu Narayen

Yes.

Brent Thill – UBS Securities LLC

So you can’t hijack these logins, so…

Shantanu Narayen

You’re absolutely right.

Brent Thill – UBS Securities LLC

Are you’re starting to see, I mean are you starting to see that impact I mean with the – more in the Asia Pacific region I think that…

Shantanu Narayen

Well, we’ve talked about anecdotally right. I mean we are seeing more and more people who say they’ve used Adobe software in the past, but the cost was prohibited, so they pirated it. I think that’s one thing. I think a couple of other benefits that I would say is as we deliver more and more services that are completely cloud based as you point out, we don’t worry about Adobe Analytics being pirated because it’s completely running on the cloud. And so, we will see more benefit of it. Remember also as the one thing that we have not done yet with the creative cloud is we always see a viral impact as file formats change or by desktop products then in order to actually stay current and abreast with the latest product, you actually have to have the latest product. So as we get more distant from the last perpetual release which we’ll see as a six, it seems so long ago. And then I think there is also more network and viral impacts so people having to stay on the cloud and that will also have a positive reinforcement. Sure.

Unidentified Analyst

I think dovetail Brent’s questions, but I put it more positive, just curious as the world goes to cloud, are you seeing data where you will have an incremental new type of user of a younger people more sophisticated type of technology or in the olden days you used to count how many people could use greater suites and try to be addressable but how does the world of digital in younger generation to embracing technology and ease of using technology that help you or what and what…

Shantanu Narayen

I think it helps us a lot. I think we have the – I’ll give you two things that we’re working on that I think will add to what you’re saying. As we move to the cloud, one thing we will offer Brent is we will offer all of our imaging science as well as our document science as well as our video science available as programmable interfaces on our cloud offering. So think about the ecosystem of people who can then also build interesting technology based on the creative cloud. And so today if somebody is trying to create an imaging app or somebody is trying to do publishing, a lot of people who publish content and through one of those book stores might actually used in design server. All of that stuff when that’s available we start to think we can actually target a much broader set of customers because it’s not just Adobe creating apps and the metered approach for charging for that is fairly well understood.

The second thing we can do and we’re starting to do is you can actually take features that exists in the breadth of our products and offer them as single features. And so somebody just wants to do a single feature that’s available also as a service on the creative cloud. And so you can have literally hundreds of features where people can say I just want to do a thing which clearly makes it far easier to use and attracts a new set of customers. So the goal with the first release of the creative cloud was let’s really shift internally the company’s focus from delivering the perpetual software to the cloud. Let’s make that user experience of downloading it and customer satisfaction higher. Let’s move from 12 month product cycle to an ongoing product cycle.

Now with every new version of the creative cloud software that you see. I think you’re starting to see us do all of those new exciting things and I think over the next 12 to 18 months, you’re going to see the fruit of that training. Why can’t we offer training as part of the creative cloud, why can’t we offer other plug-ins as part of the creative cloud. Behence as a community continues to actually see great traction. So, we’re building a community in a social place where people who want to learn how to use our products or sell their technology or maybe sell their services, there is no reason why people won’t come and find creative professionals on Behence if they want to find them for a job. So I think the infrastructure can do really powerful. Now, it’s all about execution against that. I think the heavy lifting is behind us, now we have to just go execute against that.

Brent Thill – UBS Securities LLC

So that’s not really a question because I take a picture of my daughter and I want to do a quick Adobe Photoshop, upload it through a central server well all my fellows to see and also my family. I mean it just – it seems like there is a big opportunity to take you even lower under the mass market.

Shantanu Narayen

Yes I think the way we look at it as we look at it and say there is the top of the pyramid where people are willing to really invest the time and energy and we always had a huge hallow impact. But across the segment all the way down to the consumer, we have this new terminology that we use within the company, which is this 1x or 10x and 100x in terms of the size of the opportunities. And if we can make our technology easier to use, we have the best imaging science in the world, we have the best video science in the world. How do we offer them as atomized services that are available on the web right now, so people can build all of those exciting cool new application. And you’re going to start to see it. I mean you’re starting to see that with Lightroom and the things that we are doing to add to Lightroom to make that available on mobile.

You’re starting to see that with Ravel, which is how can you keep all your images across all of your devices synched in a single way. And it’s just the infrastructure is there. I think the team would say there is more work that they have to do right now. And there is work to do both on that front, there is also work to do on as we’re targeting these new customers and what we’re doing with theme and how do we provide the upgrades and all that as part of adobe.com. Are we making sure that that end-to-end customer experience is as good as it can be?

Unidentified Analyst

All right, we recently met with SAP and quite pleased using you as for their marketing cloud options for the time being and they’ve often been [Indiscernible] as a potential player in doing M&A within the marketing cloud. What are you doing to retain them for using your platform as opposed to going out and doing the consolidation that Brent referred to?

Shantanu Narayen

Well, the question was around SAP and I’ll answer that in sort of the more general way of – we continue to think that there is a lot of partnership opportunities with us and the marketing cloud. And we have partnerships with companies like SAP as you mentioned on making sure. I mean we use a lot of the HANA technology for providing this sort of real-time experience as a dataset. We have partnerships with companies like Sapient who are out there really delivering this technology to customers, digital agencies like WPP, Wunderman.

So I think the exciting thing about the offerings that we have with the marketing cloud is there a lot of these companies. The way we think we continue to have a significant advantage is again Brent started off with this. The creative apps and starting with that workflow, there isn’t another company that produces the amount of volume or content and the content management was such a logical next extension to that and I think we have to continue to innovate on that space, but we are very excited about our partnership with SMP.

Brent Thill – UBS Securities LLC

I think there was some questions about Neolane where obviously for giving [ph] analytics and you have a lot of pieces, now Neolane actually physically execute the campaign and e-mail or I think they can go in stores, if you walk into J.Crew and – want that red scarf and they can say hey when you just bought two red scarf online given – give her discount, is that the view of how this is going to work in terms of in store e-mail?

Shantanu Narayen

Yes, I think the two big challenges that the CMO has right now, Brent that we are focused on. The first is their media mix and the marketing mix right and how much of a marketing mix should I invest in social versus search, versus display, versus and how do I make sure I understand the true return of investment associated with that. The second to your point is how do I provide the same unified experience to my customers across all of the different channels at which I’m integrating with them the mobile app, the in-store experience, the website, the app store. Great example of that actually is Delta Airlines.

We are working with Delta Airlines and if you look at what Delta is trying to do, the kiosk when you go to a terminal and you look at the kiosk. When you look at the mobile application by which you do your check-in, whether you look at the website in terms of the experience. And increasingly if you have the screen in front of you on the – in the plain and the publication that they have, the Delta publication, is that all the same experience knowing the same customer. And so I think that’s the opportunity and so depending on which industry you are in, the channels by which you interact with the customer might be different, but I don’t think there is any company that only interacts with the customer across one channel. So the orchestration of that campaign across all of the channels is the second big issue.

So overall marketing mix and the orchestration of the campaign, now why can Adobe do that better than anybody else can. If you talk to marketing people, they will say we have this new idea for a campaign, but the process to create that campaign requires new content to be created and that content creation process sometimes takes weeks. With the Creative Cloud and Marketing Cloud integration, if you want to run a new campaign on a mobile device with mobile assets, we can make that happen much quicker than anybody else can. And so what we talk about in the marketing cloud that orchestration, the campaign, the marketing mix having that unified dashboard across all of those channels that when Neolane really has great technology.

We introduced the new Adobe Campaign pricing. We are trying to look at how that pricing should really be done for the future. And I think what people have recognized there is some great articles on that about how we’ve been innovative instead of the number of messages being sent, thinking about it as a number of users I think that’s the next frontier for how e-mail marketing or campaign based pricing is happening and we were able to provide that very quickly after the acquisition of Neolane.

So I think we have some interesting opportunities there.

Brent Thill – UBS Securities LLC

Last question…

Mike Saviage

Okay, Shantanu that we’re wrapping up our quarter – our earnings calls in December 12, so if you’re not on our list and you want to be, may be drop off a card to me or send an e-mail to ir@adobe.com.

Shantanu Narayen

Thanks for having me Brent.

Brent Thill – UBS Securities LLC

Thank you.

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