Adobe Systems' CEO Discusses Q2 2011 Results - Earnings Call Transcript

Jun.22.11 | About: Adobe Systems (ADBE)

Adobe Systems (NASDAQ:ADBE)

Q2 2011 Earnings Call

June 21, 2011 5:00 pm ET

Executives

Mike Saviage -

Mark Garrett - Chief Financial Officer and Executive Vice President

Shantanu Narayen - Chief Executive Officer, President and Director

Analysts

Adam Holt - Morgan Stanley

Philip Rueppel

Chad Bartley - Pacific Crest Securities, Inc.

Brent Thill - UBS Investment Bank

Daniel Cummins - ThinkEquity LLC

Jay Vleeschhouwer - Griffin Securities, Inc.

Ross MacMillan - Jefferies & Company, Inc.

Walter Pritchard - Citigroup Inc

Steven Ashley - Robert W. Baird & Co. Incorporated

Brad Zelnick - Macquarie Research

Michael Olson - Piper Jaffray Companies

Kash Rangan - BofA Merrill Lynch

Operator

Good day, everyone. Welcome to the Adobe Systems Second Quarter Fiscal Year 2011 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to the management, Vice President of Investor Relations. Please go ahead, sir.

Mike Saviage

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'll discuss Adobe's second quarter fiscal year 2011 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately 1 hour ago. If you need a copy of the press release, you can go to adobe.com under the Company and News Room 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, June 21, 2011, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements.

For a discussion of these risks and uncertainties, you should review the Forward-Looking Statements Disclosure in the earnings press release we issued today, as well as Adobe’s SEC filings.

During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in 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 rerecorded, or otherwise reproduced or distributed without prior written permission from Adobe Systems. I will now turn the call over to Shantanu.

Shantanu Narayen

Thanks, Mike, and good afternoon. I'm pleased to report, we delivered revenue of $1,023,000,000 in Q2 with non-GAAP earnings per share of $0.55. Our strong performance reflects our unique value proposition in the industry. We enable our customers to make, manage, mobilize and measure digital experiences across screens in ways no other company can. This end-to-end approach is resonating with our customers and fueling our growth across an increasingly diverse set of markets.

As we have previously shared with you, we're focused on 3 significant growth opportunities, content

authoring, digital marketing optimization and customer experience management. We're executing well in each area.

In content authoring, we successfully launched Creative Suite 5.5, an update to the CS5 product family. The release features enhancements for mobile content and application creation, new innovations for HTML5 and Flash authoring, and amazing new features and productivity improvements in our video authoring solutions.

CS5.5 is the first release in our transition to an annual release cycle, enabling us to deliver content creation innovations to our customers more frequently in response to the rapidly evolving marketplace. It also allows us to augment our business model to drive incremental revenue. In addition to the perpetual license model we've always offered, we now offer a new subscription addition with CS5.5 that provides a lower upfront price point for customers.

Whether it be HTML, Flash or any other output format, the goal of CS5.5 is to be the best authoring suite, regardless of platform, browser or operating system. Response to our HTML 5 tooling capabilities in CS5.5 has been positive and we recently made new contributions to the HTML standards process by proposing enhancements to build complex, magazine-like layouts in web browsers using web standards.

We are working on an implementation of this proposal in the WebKit open-source HTML engine with Apple, Google and other members of the community. Looking forward, we will deliver a beta release of Adobe Edge in July, which is a new Creative tool for creating expressive animations in HTML for desktops and devices.

While we work to help advance HTML capabilities, we will also continue to innovate with our Flash technology, particularly in areas such as premium video content delivery and measurement, rich Internet applications and gaming.

In premium video content, services such as Amazon Instant Video, HBO Go and Hulu and media companies such as ABC and CBS, the BBC in the U.K., M6 in France, MTV, Turner and many others rely on Adobe's platform for delivering and monetizing their assets.

For mobile apps, the industry is starting to recognize the power of utilizing Flash through the Adobe AIR runtime for devices running Android, iOS, RIM's BlackBerry tablet OS and others. IDC cited Adobe as having a, "leading multiplatform mobile-development environment."

This week, we released version 4.5 of Flash Builder and Flex to extend the capabilities of our developer tools platform. CS5.5 integrates with our new Digital Publishing Solution, which enables publishers to create, distribute and monetize their digital publications for use on tablets.

Our digital publishing solution has enabled our customers to launch over 400 titles already in over 40 countries. We continue to be excited about the opportunity that the tablet market offers us, not only as a consumption device, but also as a creation Platform for Adobe applications in the future.

Looking forward, expect this type of innovation to continue. We intend to ship the next milestone release of Creative Suite in 2012, and that will include an updated version of Photoshop.

In digital marketing optimization, Q2 was another record revenue quarter. It's clear that the digital marketing category is exploding, as evidenced by our sold-out digital marketing summits in Salt Lake City and London.

We announced our next-generation platform for the Adobe online marketing suite that helps our customers more quickly analyze and derive actionable insight from video, social and mobile traffic. We also introduced Adobe Tag Manager, which provides a tag management framework to accelerate digital campaigns within the suite. These innovations ensure that we continue to have the most comprehensive offering in the space.

As social media becomes an integral part of our customers' marketing, digital marketers find it critical to measure the impact of social media in their campaigns. In March, we announced a beta release of our new Adobe SocialAnalytics product, and reaction from customers has been strong. The new product enables users to actively correlate social media sentiment to business impact. Recent customer wins in our Digital Marketing business include Dell, Lenovo, the European financial group, UniCredit and Vodafone.

In customer experience management, we achieved year-over-year growth of 34%. The integration of our desk software acquisition has gone well, with Q2 customer wins, including Delta Airlines, SAP, Barclays services, Louis Vuitton and Café Pacific.

Yesterday, we announced the new Adobe Digital Enterprise Platform, a unified solution for customer experience management and a suite of Adobe customer experience solutions to power engaging digital experiences across multiple communication channels. This platform and set of solutions, incorporate Day's web content management capabilities, along with our LiveCycle capabilities and the measurement and analytics of our online marketing suite. We will roll out these offerings beginning later this summer and we're excited about the progress that we're making in delivering integrated solutions, which leverage many of our products.

This strategy is helping to grow the size of our engagements and sales with large enterprise customers, as we're increasingly benefiting from the synergy among our offerings to help customers create differentiated and effective digital experiences.

For example, both Nike and publishing from Meredith Corp. purchased multiproduct solutions across our Omniture and Day product lines in Q2. So did retail and online stores H&M, Marks & Spencer and Nordstrom.

Success in selling multimillion dollar Enterprise solutions such as these, demonstrate how we've increased the value we provide to customers and how we're increasingly becoming mission-critical to how our customers run their Online business. Later, I will have some closing comments. But first, I will now turn the call over to Mark for a look at the financial results in the quarter. Mark?

Mark Garrett

Thanks, Shantanu. In the second quarter of fiscal 2011, Adobe achieved revenue of $1,023,000,000. This compares to $943 million reported in Q2 fiscal 2010 and $1,028,000,000 reported last quarter. Year-over-year, this represents 9% revenue growth.

Q2 GAAP operating expenses were $637.3 million compared to $607.9 million reported in Q2 fiscal 2010 and $617.7 million last quarter. Non-GAAP operating expenses in Q2 were $556.7 million compared to $520.2 million reported for Q2 fiscal 2010 and $539.5 million last quarter.

GAAP operating income in Q2 fiscal 2011 was $276.7 million or 27% of revenue. This compares to GAAP operating income of $227.3 million or 24.1% of revenue in Q2 fiscal 2010 and $302.3 million or 29.4% of revenue last quarter. Non-GAAP operating income in Q2 fiscal 2011 was $376.4 million or 36.8% of revenue. This compares to non-GAAP operating income of $334.5 million or 35.5% of revenue in Q2 fiscal 2010 and $400.1 million or 38.9% of revenue last quarter.

Adobe's effective GAAP tax rate in Q2 was 11.5% and the non-GAAP tax rate was 22%. Our GAAP tax rate was lower in Q2, due to the favorable impact of a state income tax ruling. GAAP diluted earnings per share for Q2 fiscal 2011 were $0.45. This compares with GAAP diluted earnings per share of $0.28 reported in Q2 fiscal 2010, and GAAP diluted earnings per share of $0.46 reported last quarter.

Non-GAAP diluted earnings per share for Q2 fiscal 2011 were $0.55. This compares with non-GAAP diluted earnings per share of $0.44 in Q2 fiscal 2010 and $0.58 reported last quarter.

I will now discuss Adobe's results in Q2 by business segment. Creative and Interactive Solutions segment revenue in Q2 was $433.1 million compared to $423.3 million in Q2 fiscal 2010 when we launched CS 5 and $424.8 million last quarter.

While it's only been a matter of weeks since 5.5 shipped, we can make the following observations. The release of CS5.5 in Q2 has helped maintain a solid run rate that CS5 established during the prior 4 quarters. Interest in Master Collection, as well as Web premium and the production premium video suites has been strong, indicating positive reception to the key innovations and new features that were added to those products.

Adoption of the new subscription addition has met our expectations and is attracting new users. We expect this to build a new recurring revenue stream overtime. Digital Media Solutions Q2 revenue was $136.7 million compared to $139.3 million in Q2 fiscal 2010 and $151.7 million last quarter. The sequential revenue decline is primarily attributed to product LifeCycle timing.

Digital Enterprise Solutions revenue was $283.5 million in Q2, compared to $231.9 million in Q2 fiscal 2010 and $286.6 million last quarter. Within Digital Enterprise Solutions, Knowledge Worker revenue was $182 million compared to $156 million in Q2 fiscal 2010 and $181.8 million last quarter.

Acrobat grew 17% year-over-year driven by an increase in both ASPs and units. Enterprise segment revenue was $101.5 million compared to $75.9 million in Q2 fiscal 2010 and $104.8 million last quarter. Year-over-year revenue growth of 34% was driven by strong adoption of Day content management and the increased awareness of our broad customer experience management solutions.

Omniture segment revenue in Q2 was a record $115.9 million compared to $91.9 million reported in Q2 of fiscal 2010 and $110.9 million last quarter. Omniture server transactions were up 13% on a year-over-year basis. Mobile and tablet device traffic remains the fastest-growing part of the Omniture business, with the number of transactions we measured for mobile devices growing 24% quarter-over-quarter in Q2.

Omniture revenue diversification continued with site Catalyst at 51% of Q2 Omniture product revenue. Conversion and multichannel analytics products are growing in size as Analytics business becomes a smaller percentage of the business. Enterprise renewal rates remained at 95% in the quarter. Finally, Print and Publishing segment revenue was $54 million compared to $56.6 million in Q2 fiscal 2010 and $53.7 million last quarter.

Turning to our geographic segments in Q2. Results on a percent of revenue basis were as follows: the Americas, 48%; Europe, 30%; Asia, 22%. At the time of our Q1 earnings call in March, the unfortunate events in Japan caused us to estimate that as much as $50 million in Q2 revenue was at risk in that market. Fortunately, through the strong work of our team in Japan and the resiliency demonstrated in the country, we estimate the impact was only $10 million in the quarter. This helped to drive a sequential increase in our Asia revenue versus our estimate that revenue would decline sequentially.

Partially offsetting the Q2 upside in Japan, we experienced weaker-than-expected demand in EMEA. In the Americas, the demand environment remained stable. From a year-over-year currency's perspective, FX increased revenue by $35 million. We had $0.2 million hedge gain in Q2 fiscal '11 versus a $6.2 million hedge gain in Q2 fiscal '10, thus the net year-over-year currency increase to revenue considering hedging gains was $29 million.

From a quarter-over-quarter perspective, FX increased revenue by $15.6 million. We had a $0.2 million hedge gain in Q2 fiscal '11 versus no hedge gain in Q1 fiscal '11. Thus, the net sequential currency increase to revenue, considering hedging gains was $15.8 million.

We entered and exited the second quarter with no shippable backlog. Employees at the end of Q2 totaled 9,770 versus 9,503 at the end of the last quarter. The increase was primarily due to the addition of summer interns and hiring in sales and marketing.

Our trade DSO was 51 days, which compares to 42 days in the year ago quarter and 47 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 $389 million. Our ending cash and short-term investment position was $2.6 billion, the same as it was at the end of Q1.

Deferred revenue in the quarter increased by $38.6 million in the quarter to a total of $482 million. In Q2, we repurchased approximately 13.7 million shares at a total cost of $461.6 million. Entering Q3, $455 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 third quarter of fiscal 2011.

We are targeting a Q3 revenue range of $1 billion to $1,050,000,000. At the midpoint of this targeted range, we would expect Omniture and Enterprise segments to grow sequentially. We would expect Creative and Interactive, as well as digital Media solutions to be flat to slightly up. We would expect Knowledge Worker to decline and we would expect Print and Publishing to be flat. Geographically, we would expect Americas to grow sequentially, offset by an expected sequential decline in Asia and EMEA due to normal seasonality in those markets.

For margins, we are targeting a Q3 GAAP operating margin range of 24.5% to 27.5% and a non-GAAP operating margin range of 34% to 36%. We are targeting our Q3 share count to be 501 million to 503 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 Q3 effective GAAP and non-GAAP tax rates, we are targeting 22%. These targets lead to a GAAP earnings per share range of $0.35 to $0.42 and a non-GAAP earnings per share range of $0.50 to $0.56.

We are also reaffirming today our 10% annual revenue growth target for fiscal year 2011. In addition, we are targeting our full-year operating margin to be approximately 27.5% on a GAAP basis and approximately 37% on a non-GAAP basis.

This concludes my section. I'd now like to turn the call back over to Shantanu.

Shantanu Narayen

Thanks, Mark. It is an exciting time at Adobe. The company is undergoing a significant transformation and our mission of changing the world through digital experiences has never been more relevant. We continue to focus on our 3 large growth opportunities: content authoring, digital marketing optimization and customer experience management, and most importantly, on the synergies among them.

Increasingly, we are finding that the real power is in creating customer solutions like digital publishing and web experience management that integrate our product lines. This will be a major thrust for us moving forward. Regardless of whether our customers are major media companies, enterprises, government agencies or educational institutions, they all face the same challenge with their digital content and applications. They need to make compelling experiences that will scale across media and devices, manage their assets to streamline touch points with customers, mobilize the experiences to easily reach their audience across every channel and measure the effectiveness of experiences to maximize customer conversion and revenue. This need has never been more critical than it is right now. And we see the opportunities for Adobe continuing to grow as the digital landscape becomes richer and more diverse.

Adobe's success has always been due to our incredible team of employees throughout the world. I would like to especially recognize the contributions of our employees in Japan who showed tremendous commitment to serving customers following the earthquakes and tsunami. Their dedication help limit the impact on our business in Q2. Thank you for joining us today. Now I'll turn the call back over to Mike.

Mike Saviage

Thanks, Shantanu. Before we start Q&A, I have a number of logistical items to go over. First, we have set a date for our Annual Financial Analyst Meeting. This year, the meeting will be held in New York City on Wednesday, November 9. Invitations and additional information will be communicated later this summer. Registration for Adobe MAX is now open. And once again, we are offering a special registration price for Wall Street professionals to attend. MAX will be held once again in Los Angeles during the week of October 3. We will send out the special registration offer to attend MAX in the coming weeks.

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. We also encourage you to sign up for easy access to updated documents and communications via RSS feeds that you can subscribe to on the website.

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 9999062. Again, the number is (888) 203-1112 with ID number 9999062. 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, June 24, 2011.

We will now be happy to take your questions. In addition to questions that come in from those participating in the live phone call, we've also enabled the question pod in the Connect Session. So those on the Connect Session, feel free to send in your questions and we'll try to take a few.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from Steve Ashley with Robert W. Baird.

Steven Ashley - Robert W. Baird & Co. Incorporated

I have a couple of questions on CS5.5. First of all with respect to demand for the web premium and which also drove the demand for the Master Collection, what do you think the feature functions that were most desired by the customers? What are drivers of the demand there? And then my second question is about what -- in terms of seeing the demand, were you seeing it come from CS5 customers? Were you seeing it come from older customers? I don't know if you have any color on that.

Shantanu Narayen

Sure, Steve. Why don't I take that? But before I answer that specifically, let me maybe give you a few more observations on 5.5 as we looked at it after the first quarter. And clearly, it was the first step in us moving to an annual cycle. And so I think we've successfully transitioned against that strategy which really allows us to deliver more innovations on a more regular basis and introduce new business models. When we saw the results, it is clearly demonstrating that it's extending the life of CS5 and we expect to see the CS5 and 5.5 revenue actually cross the CS3 revenue within the comparable period right now. So it's clear that it continues to do well in the marketplace. The products that were updated in the CS5.5, and you know that all products were not updated, we're clearly off to a strong start, which I think again, reflects the need in the marketplace. So the Web and video products, specifically the Master Collection, production premium and Web premium. And Steve, I think there are a couple features that seem to resonate particularly with the customers. Clearly, the HTML offering that we're providing is resonating. Mobile app creation, now that we can have mobile apps that are created and deployed across the i devices, Android devices and the RIM devices. The other thing that we're also seeing frankly is the tie in from those products to our digital publishing suite. And so for people who wish to use our digital publishing suite, a lot of those products also enable you to participate in that entire workflow. So I think that's a sampling of what we've seen. And with respect to which customers, I mean we clearly have very, very loyal customers. So a number of the customers who adopted were customers who were on CS5. But in addition to that, as we've said, we're targeting the earlier version customers, namely the CS4 and the CS3 customers.

Operator

We'll take the next question from Walter Pritchard with Citi.

Walter Pritchard - Citigroup Inc

I'm wondering, 2 questions. One, just on the deferred revenue, Mark, looks like that was pretty strong. I'm wondering what the drivers of that were. And then secondly, on Europe, I'm wondering, did that business get worse as you headed through May and into June with sort of the delay of the political events side going on over there?

Mark Garrett

Yes, Walter. On deferred revenue, yes, we were really pleased with deferred revenue. It did go up $39 million like I said. It's driven by a few things. It's clearly driven by the Omniture SaaS kind of ratable model which drives a lot of deferred revenue every quarter, especially as we see their bookings doing so well. We also have some royalty agreements that represent deferred revenue in there as well as maintenance and support. So it's kind of a combination of all those frankly, but obviously, a very good result from a deferred revenue perspective. And as it relates to Europe, it was somewhat off of our expectations. It was primarily in Northern Europe, which is the Nordic countries in the U.K., obviously. I wouldn't say that it was concentrated more towards the end of the quarter or the beginning of the quarter. I think it was fairly consistent tough-selling throughout the quarter. But again, we're very fortunate that we have a diversified model from a geographic perspective. Japan did a little better this quarter, Europe did a little worse than we thought and in the end, overall, we had a good quarter.

Operator

The next question will come from Brent Thill with UBS.

Brent Thill - UBS Investment Bank

Just a quick follow-up to Walter's question on Europe. I guess just from a tough-selling environment market, was there anything consistent in what you are hearing just in terms of customers? Were they just putting off the decision for a while? Was it something related to another topic? I don't know if there's any other color.

Mark Garrett

Yes, I think Brent, at this point, all I could probably say is that the decisions have been deferred or are taking longer than we would have anticipated.

Brent Thill - UBS Investment Bank

And for Shantanu, on the 5.5 launch, what was the most surprising thing that you took away? And I know it's only been out for a few weeks. And can you just talk about the carry forward into this current quarter and just in terms of how we should think about the impact for this current quarter as well?

Shantanu Narayen

Sure. So Brent, I mean I think with respect to 5.5, the fact that we've embraced and we're actually rapidly doing future development for HTML5, as people think about the different media formats, that's clearly resonating with customers. I'll say Digital publishing has really been a pleasant surprise as it relates to people whether they're publishing catalogs, magazines, video training material, all of the media solutions, that's been a pleasant surprise. We're definitely starting to see as we sell content management and we sell analytics people want Creative Suite part of that. So I mean what's really playing out nicely is as we're selling to the marketers, each of the different products are leading to other product sales. So we've seen some fairly significant multimillion dollar deals with all of the Creative customers. And I think people are looking forward frankly, to the next release as well, because there's a significant anticipation that's being built up for all the cool thing that we can do in imaging with Photoshop. And there's a lot of exciting stuff underway. Maybe the last comment is video, I mean we are definitely making significant traction in video with our offering tools. People have seen the quality that we've put in so for broadcast as well as high-end video. We're clearly gaining market share. And on subscriptions, I think, Mark just alluded to that. We are seeing new customers coming to the platform as a result of subscription. So it's not material yet, but what we are pleased with is people who would otherwise, not be attracted to the Adobe Platform. It's clear that subscriptions is helping attract new customers to the platform.

Operator

And we'll take the next question from Mike Olson with Piper Jaffray.

Michael Olson - Piper Jaffray Companies

Can you provide any more details on what Adobe Edge will bring to the CS Platform and how it will change Adobe developers, design process with HTML5 and Adobe Tools? And then the second question is as far as the annual release cycles for CS, should we expect that the timing is going to be kind of consistent during one-time of the year, like we'll see CS every year in April-May time frame or will it

be kind of variable each year?

Shantanu Narayen

So Mike, I'm glad you asked about Adobe Edge. I think there's actually going to be a YouTube video that's being posted up later this day to talk about some of the key new functionality. Clearly, what Flash did a phenomenal job of is, everything from rich Internet advertising to completely interactive games. That's what people are using Flash for. And that's actually increasing. When it comes to delivering these capabilities for PC, we've seen no letup whatsoever in people using Flash. But now people are trying to push the envelope with how they can use HTML5 to do the same things, whether it's apps for mobile devices, whether it's interactive games and completely new interactive websites. And so think of it as everything that you could do with Flash Professional as that capability gets added to HTML overtime, and it will take many years before the functionality is comparable, we want Adobe Edge to be the best way in which people create, whether it's animation, interactivity or rich Internet applications using HTML5. So that sort of conceptually what we're doing. With annual releases, we're still very focused right now on 5.5 and to also the question that Brent asked, continuing to drive that through the cycle until we release the next version. But I think it is fair to say that when we go to an Annual Release, the cadence will be about the same quarter because that's what really enables us even with Enterprises to get to be far more of an annual release cycle and have maintenance be a more meaningful part of the business.

Operator

The next question will come from Philip Rueppel with Wells Fargo.

Philip Rueppel

Just a couple of quick questions on 5.5. Are all languages shipping? And then as a corollary to that, as you move to more of an annual cycle, will we see a condensation of when the languages rollout?

Shantanu Narayen

Yes, so as we did with CS5 itself, we are moving to a more consistent release schedule where all major releases are released at the same time. The reality is, we're in a global world and so the day we announced the product, the interest, whether it's in North America, whether it's in another part of the world, is consistent. So yes, expect to see us do simultaneous releases of all major languages moving forward.

Philip Rueppel

And then just as a corollary to that, you mentioned that some of the Web publishing and video features were the key features of 5.5 and then in the next version of Photoshop will be enhanced. Do you see yourself moving to a yearly cycle where all or most of the modules are improved or pushed forward from a functionality perspective or will we see sort of cycles like what you just described for 5.5 in the next release?

Shantanu Narayen

I would say that this one was more of the transition cycle. And so I expect to see most of the major products being updated with the future releases.

Operator

We'll take the next question from Ross MacMillan with Jefferies.

Ross MacMillan - Jefferies & Company, Inc.

Back to, the first was just on Enterprise. It's been a little lumpy and I think you had seen some deal slippage in Q1. It looks like it was still down a little bit in Q2. Is much of that also reflective of Europe or is there any other color you could maybe provide around that kind of sequential, if you will, on the Enterprise business?

Shantanu Narayen

Sure, Ross. Why don't I take that? First, we have 34% year-over-year growth. The excitement around what we are delivering with the Adobe Digital Enterprise Platform, the fact that we are selling deals between Day and Omniture. And our business, we are definitely making a mark. As it relates to specifically in the quarter, yes. Some of that impact was Europe. Otherwise, it looks really strong. We had talked about government in the past being some of the deals being pushed. We're seeing government come back strong, the budgets have been rereleased. I was in DC earlier last week, and it's clear that they now have their budgets and our solutions are resonating there as well. So I'm very excited about the progress that we are making across the CEM.

Ross MacMillan - Jefferies & Company, Inc.

And then just a follow-up, Shantanu, I'd love to get your thoughts on them, Flash and Flex and this notion of the cross-platform development for mobile devices versus what appears to still be the main stay, developing natively for the iOS or Android Platform. How do you -- where do you think we are in this kind of opportunity for the cross-platform development?

Shantanu Narayen

There's no question, Ross, that if there are going to be multiple platforms. Any provider that provides tools that enable people to deliver applications across those environments, that value proposition is strong. I think it's clearly true that with Apple first, people started to build native applications. But as you are starting to see these new platforms take off, whether they be Android, whether they be what HP is going to come out with the touchpad, as Microsoft and RIM deliver their mobile environments. Customers are clearly struggling with being able to deal with all of these different platforms. The other thing that we've done and with Flash Builder for our 0.5, which is also being released, is we actually now allow native extensions. And so one of the things that I think we've done very creatively is allow people to use a common framework for the most part, but optimize for each of these native environments using the native extensions. And that's clearly something that's resonating. So you can take advantage of any specific features that you have. Whether they be in Android or iOS. And we have thousands of applications that people are building cross-platform. And I just think as there are more platforms, people are going to deliver that. And the last thing I would say is when you build applications, people are building applications both within the web browser and they're building standalone applications. And if you can bridge that gap, I think there's a value proposition there for application developers around the world.

Operator

We'll now hear from Brad Zelnick with Macquarie.

Brad Zelnick - Macquarie Research

With respect to Europe and the disappointment at EMEA, can we just clarify the extent to which this is due to environment versus execution? And maybe you can provide more insight into which specific business segments or products were disappointing. Was this public or private sector accounts that you were having disappointment in? And are there any particular industries that stood out?

Mark Garrett

Again, Brad, it was pretty much concentrated from a kind of expectation perspective that we had in Northern European countries. What we saw was customers delaying their purchases, slowing down the process to some extent. It was focused around like we said, Enterprise. There was some CS and there would be some Acrobat as well. So it was a little bit more broad based from a product perspective. And we've got -- as we guide going forward, things staying relatively stable. So that's somewhat factored into what we're talking about for the next quarter and for the guidance that we provided on the year. I mean in terms of sectors like private versus government, government's been a little bit challenging around the world. We've been talking about that for a while, so I don't think there's anything new there.

Brad Zelnick - Macquarie Research

Mark, and if I could just follow-up with one other, on Digital Publishing Suite, it's very encouraging to see that you're up to 400 titles. Can you maybe just remind us of what that compares to last quarter? What's the size of the market and how is monetization going, relative to your expectations?

Shantanu Narayen

Sure. So again, just to clarify what the business model is with the digital publishing suite, which was in beta up until very recently. And so you know, it's really just starting to ship from a commercial point of view. We have a couple of different versions. But the core business model is we charge a license fee and then think of it as a per issue, royalty fee associated with these titles as they scale. So clearly, the business is going to scale as more and more people target tablet devices across the world. Again as I said for a variety of different magazines, catalogs, newspapers and publishing systems. The other thing we do also is for people who want their Digital Publishing Suite, the tie-in with the Creative Suite and that the Creative Suite is the best way to author our photo SaaS-based services. So that's how we think about it. At the analyst meeting, we'll give you an update on the available market and the sizing of the market. But clearly, I look at it and it's going to be the same kind of growth that you saw with websites. Everybody's going to target these tablet devices and I think digital publishing suite positions us very effectively in that space. It's got analytics built in as well, so we charge for that the same way we charge our core analytics with Omniture. And over time, if you want to build your own solution, we will also have our content management solutions be part of that.

Brad Zelnick - Macquarie Research

And Mark, just real quick, did you guys mention shippable backlog, where it finished up?

Mark Garrett

We did. Like we've said in the past, it's not indicative of future performance. We factored it into our guidance. We did not have shippable backlog this quarter.

Brad Zelnick - Macquarie Research

Coming in or leaving?

Mark Garrett

Coming in or leaving. Right.

Operator

The next question comes from Adam Holt with Morgan Stanley.

Adam Holt - Morgan Stanley

Maybe just a follow-up on the backlog, is there anything changing about the business model that would lead this to their being less backlog on a going forward basis?

Mark Garrett

I mean I think we're managing the channel much better. We're doing a better job of managing the inventory as we go through product cycles and versions. I think that's the gist of it.

Adam Holt - Morgan Stanley

And another for you, Mark, the margins were obviously strong in the quarter. If you look at the guide to the upcoming quarter, it looks like margins are implied to be down sequentially. Could you walk us through what some of the elements would be, given the high revenue?

Mark Garrett

Yes, in fact if you go back to the Q4 earnings call, we had said way back then, that if you looked at margin over the course of the year, it would go down a little bit in Q2. It would go down in Q3 due to seasonality of revenue and then back up in Q4. We're actually following that trend exactly as we anticipated. Basically, what you find is that as you look at the revenue guidance we've provided for the third quarter, we're still ramping on the expense side as we hire, primarily in sales and marketing for capacity for 2012. And as a result of that, you've got some additional OpEx, with not as much growth on the revenue line in the third quarter, but then, we more than make up for that in the fourth quarter with strong margin improvement, and that's why you end up on the year with approximately 37%, which is up from last year.

Adam Holt - Morgan Stanley

And if I could just sneak one last thing, what was the Day contribution for the quarter?

Mark Garrett

Go ahead Shantanu.

Shantanu Narayen

Adam, the way we are actually selling the entire Enterprise solution, we have, as you know, integrated everything together. So you have core content management that's provided by Day, you have the business process management that was provided as a result of what we had with LiveCycle, you have the rich Internet applications, front end and you have analytics. And so increasingly, all these sales are frankly the solutions that we have been delivering, rather than individual point products. And so the Enterprise sales force was trained from day one of fiscal 2011, to sell the entire solution. So we don't break up that revenue, either internally or externally.

Operator

The next question comes from Kash Rangan with Merrill Lynch.

Kash Rangan - BofA Merrill Lynch

Shantanu, certainly, looks like you seem to be confident with near-term business environment and that's why you're hiring. At the same time, the markets been going through some gyrations with talk of economic slowdown. From your position as CEO and management team, what do you make of these changing macro conditions? And what is your feel for the pulse of your channels and what the system feedback is in general? That's just 1 broad macro question, then I will follow-up on CS5.5.

Shantanu Narayen

Sure, Kash. I mean it's a good question. I think it just reflects frankly, the enthusiasm for the growth teams that we've been talking about. The Enterprise business grew 35% year-over-year, and we mentioned I think throughout the year, that, that's capacity constraint and that as we add more salespeople, it's clear that the demand is out there. Same thing is true of the Online Marketing, Digital Marketing business. And we haven't answered any questions yet about that, but that was record bookings again. And when you think about what's happening with respect to digital marketing, that category is exploding. Social analytics, we announced a beta of our product, and we add over 100 customers wanting to sign up. The businesses diversifying, side catalysts is again, the lowest percentage of the overall business. So the suite approach. And there again, without a doubt, as we add sales capacity, they're actually coming up to speed incredibly fast and contributing to the bottom line. Digital publishing and everything that's happening with Creative Suite, we've successfully transformed that to an annual cycle. We've dealt with mobile, we've built with HTML and Flash. And so the things that we've outlined in terms of the core businesses for the company, we're executing against all of those. And Acrobat again, continues to perform well. If there is a significant downturn, I think Mark has always demonstrated that we will find a way to deal with that situation. But right now, given the opportunities and given the fact that we're executing against it, that's going to be our plan of record.

Kash Rangan - BofA Merrill Lynch

And you mentioned that CS5 is continuing to keep the current trajectory, but you also added that mobile and HTML's incremental developments on both those fronts positioned the product suite quite well. I'm just wondering if this means that we'll have a good tail for 5.5 in the second half of the year? Or do you really keep most of excitement for the next release? Because there's some skepticism on whether there can be enough innovation to come in successful releases? I'm sure you have a different view on that, but just curious how you balance out what you put on CS5.5 versus what you put in 6, and what 5.5 really means for the second half of the fiscal year?

Shantanu Narayen

Sure, Kash and again, I think when you look at, even the CS performance this quarter relative to the launch quarter of CS5, it continues to do well. Mobile, the amount of features that we've put in, in 5.5 as it relates to mobile, is actually the tip of the iceberg. And so again, the focus on 5.5 was to start to transition to the annual release. Most of the actual heavy investment has been left for delivery in the next version of our product, but we're pretty confident that even if you look at the targets that Mark spoke to earlier, we have to continue to drive 5 and ensure that people are dot 5[5.5] and these are both 5.5, both the 5 customers as well as the earlier version. So we're optimistic.

Operator

We'll now hear from Jay Vleeschhouwer with Griffin Securities.

Jay Vleeschhouwer - Griffin Securities, Inc.

Mark, I'd like to ask about the long-term evolution of your model since you did mention recurring revenue on a couple of occasions. If you strip out Omniture, Adobe Connect and Scene7 from the reported subscriptions revenue, then we're left with about 1% or 2% of your revenue coming from product related maintenance or recurring revenue. When you think out over the next years and consider the size of your base, particularly for CS, but as well for Acrobat, would it stand to reason that at some point, that form of product-based recurring revenue should get well into the double digits as a percentage of revenue, as we see with some of your peers?

Mark Garrett

Yes, without a doubt, Jay, that's what we're trying to do between the subscription offering in CS, as well as Shantanu alluded to, moving more and more of the Enterprises to a maintenance type offering. I would fully expect that over time, we grow a nice significant ratable revenue stream through those offerings. It's going to take some time, but we certainly feel that, that's the right answer from a long-term business model perspective.

Shantanu Narayen

Jay. Another thing to add, CS -- in addition to CS moving to maintenance as Mark said, the entire Enterprise Platform that we just announced yesterday, that's also a SaaS-ready right now. And so I think we're way ahead of the competition in terms of being able to offer those kinds of Customer Experience Management solutions, either on-premise like we do with Connect or in the cloud. And so that's going to be an exciting new area for us as well moving forward.

Jay Vleeschhouwer - Griffin Securities, Inc.

Just a couple of clarifications or a follow-up. With respect to CS5 and 5.5 revenue, would it be fair to say that while the third quarter of '07 still stands as the record quarter for CS, cumulatively CS5 and 5.5 will exceed all of CS3 and that 5.5 release itself is larger, in terms of incremental revenue so far, than the predecessor interim releases you had with like to 2.3, 3.3 and 4.3 releases?

Mark Garrett

I think both of those are fair, Jay. We believe that 5 will be able to cross over 3 with the dot release, and this dot release is certainly more significant than any other dot release we've ever done.

Jay Vleeschhouwer - Griffin Securities, Inc.

And then lastly, you had about $20 million sequential increase in sales and marketing. You touched on that on an earlier comment. But that's not strictly related to the launch cost of 5.5, some of that is long-term investment or higher end, it's not strictly launch cost, is it?

Mark Garrett

Oh, yes, it's not all launch cost by far. There are some -- we added our tech summit in there, we had some marketing in there, we had hiring for sales capacity in there, so it's kind of a combination of all those.

Operator

The next question will come from Chad Bartley with Pacific Crest.

Chad Bartley - Pacific Crest Securities, Inc.

Basically, all my questions have been asked, but I guess I'll throw in a question about 2012 and awhile ago, you guys established your revenue target at $5 billion, curious, if you can comment on that now that you've reaffirm the goal to grow it 10% in 2011?

Mark Garrett

Yes. This Mark. We still aspire to be $5 billion company. Nothing has changed there. And it's not something that we are going to do dilly M&A to get to. We're going to do things that are strategic, we're going to grow organically and we still aspire to be $5 billion. We're coming up on our 1 hour ending time, we'll take 1 more question from the phones.

Operator

Our last question will come from Dan Cummins with ThinkEquity.

Daniel Cummins - ThinkEquity LLC

I wanted to see if you would give us an update on your performance and near-term opportunity in the education vertical? Captivate 5.5, I'm sure that's very small in revenue terms, but it's there. And in the Print and Publishing category, it's the only product there that got a 5.5 upgrade. And it looks like a fairly compelling improvement for you guys strategically. Also curious on what you're thinking about the opportunity around the e-learning Suite 2.5 and its potential for Adobe in the electronic textbook curricula market?

Shantanu Narayen

Sure. So first, with respect to education as a vertical, it did really well for us in Q2. Clearly, we're coming up to the seasonally strong educational quarter, which is Q3 in North America. That's part of the reason for the sequential increase that Mark talked about as it relates to target in North America. And you're right, Dan, in that we do have a fairly comprehensive offering of products, while they use captivate in the e-learning solution. All of that stuff is actually played back in Flash as people build training and curriculum. And I would also reflect the fact that whether it's electronic books, our digital publishing suite can also be used for publishing electronic books. So the education vertical, the move towards electronic, whether it's textbooks, quizzes, surveys et cetera, it's clearly an area where people are using our tools. And that entire area drive for innovation. And I think we're well-positioned there.

Mark Garrett

One thing I wanted to offer was, we see again and again, schools have purchased tablets and they're still kind of figuring out exactly what they're going to do with them. But a lot of teachers already know how to design or prototype electronic curriculum and Captivate seems to be something they can use right away without any programming know how.

Shantanu Narayen

I agree. The whole idea for Captivate was to target nonprogrammers, with being able to create compelling content and deliver that across. But you also referred to tablets, we've talked about how we're going to be very aggressive about getting tablets not just to be a consumption device, which is what they are today, but also to be a Creative device. So watch out for some really exciting new products. We've already delivered some for Photoshop. They've actually got a very good reception. But you will see Adobe deliver a very comprehensive product suite on all of these tablet devices.

And given that's the last question, maybe I'll just end with a few summary remarks again, which is it's an exciting time. We're really executing well against the transformation agenda that we set for ourselves. And frankly, it leverages the tremendous franchise that we have with both our Creative and our PDF tools. What we're clearly seeing is that a new category is being created for marketing within the Enterprise, much like finance happened with ERP or sales happened with CRM. And this area of marketing online, I don't think there's a company that's better positioned with a more comprehensive set of solutions for all of these marketers. So whether it's creating the authoring tools to create the content, whether it's a platform to manage and deliver and transport that content and measuring and monetizing and delivering it across all mobile environments. We think that's a category that's going to increase significantly. And all of our products are very well-positioned to be able to deal with that particular marketplace. We're very well-positioned in SaaS with all of these offerings as a combination of what we've done with digital marketing and customer experience. And mobile is also clearly driving a lot of the interest, whether it's on authoring, analytics or creating the multichannel solutions. So exciting time, I think it was a strong quarter for us. And we look forward to continuing to execute against the agenda we've set for ourselves.

Mike Saviage

And this concludes our call. We thank you for joining us today.

Operator

Ladies and gentlemen, that does conclude today's conference, we thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!