Operator:

Good day, and welcome to the Q2 FY 2024 Adobe Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jonathan Vaas, VP of Investor Relations. Please go ahead.

Shantanu Narayen:

Thanks, Jonathan. Good afternoon and thank you for joining us. Adobe had an outstanding quarter, achieving revenue of $5.31 billion, representing 11% year-over-year growth. GAAP earnings per share for the quarter was $3.49 and non-GAAP earnings per share was $4.48, representing 15% year-over-year growth. Our success is driven by growing customer value through an innovative product roadmap. The advances we are delivering across Creative Cloud, Document Cloud and Experience Cloud are enabling us to attract an expanding universe of users. Everyone from creators, communicators, students, entrepreneurs and businesses of all sizes are using our products to unleash their creativity, accelerate document productivity and power their digital businesses. Adobe's highly differentiated approach to AI is rooted in the belief that creativity is a uniquely human trait and that AI has the power to assist and amplify human ingenuity and enhance productivity. We're innovating across data, models and interfaces and natively integrating AI across all our offerings. In Creative Cloud, we have invested in training our Firefly family of creative generative AI models with a proprietary data set and delivering AI functionality within our flagship products including Photoshop, Illustrator, Lightroom and Premiere. We're reimagining creativity for a broader set of customers by delivering Adobe Express as an AI-first application across the web and mobile surfaces. Since its debut in March 2023, Firefly has been used to generate over 9 billion images across Adobe creative tools. In Document Cloud, we're revolutionizing document productivity with Acrobat AI Assistant, an AI powered conversational engine that can easily be deployed in minutes. This enhances the value of the trillions of PDFs which hold a significant portion of the world's information. Acrobat AI Assistant features are now available through an add-on subscription to all Reader and Acrobat enterprise and individual customers across desktop, web and mobile. At the end of May, we celebrated the five-year anniversary of Adobe Experience Platform, which we conceived and built from scratch and which is on track to be the next billion-dollar business in our Digital Experience portfolio. We released AEP AI Assistant to enhance the productivity of marketing practitioners through generative AI, while expanding access to native AEP applications. With Adobe GenStudio, we're bringing together products across our clouds including Creative Cloud, Adobe Experience Manager, Workfront, Adobe Journey Optimizer and Customer Journey Analytics as well as Adobe Express for Business to address the massive content supply chain opportunity. Our approach to empower marketers to quickly plan, create, manage, activate and measure on-brand content is resonating with customers and validating our leadership across data, content and journeys to deliver personalized experiences at scale. We're extending our applications to integrate third-party text, image and video models and partnering strategically to create multi-modal large language models offering customers greater choice in tools and further enhancing the value of our leading applications and solutions. We're driving strong usage, value and demand for our AI solutions across all customer segments and seeing early success monetizing new AI technologies across our Digital Media and Digital Experience businesses. Given this rich product roadmap, focus on execution and customer demand in the first half of the year, we are pleased to raise our annual Digital Media net new ARR, Digital Experience subscription revenue and EPS targets. I'll now turn it over to David to discuss the momentum in our Digital Media business.

Anil Chakravarthy:

Thanks, David. Hello, everyone. In Q2, we achieved Experience Cloud revenue of $1.33 billion. Subscription revenue was $1.2 billion, representing 13% year-over-year growth. We are the industry leader in helping enterprises deliver personalized experiences at scale to their customers by combining the right content, customer data and journeys in real time. When we introduced Adobe Experience Platform five years ago, it was a revolutionary approach to address customer data and journeys. Today, we're the number one digital experience platform, and AEP with native apps is well on its way to becoming a billion-dollar business. We're now transforming the content supply chain for enterprises with Adobe GenStudio, enabling them to produce content at scale, leveraging generative AI through native integrations with Firefly services and Adobe Express for Business. Enterprise customers, both B2C and B2B, view customer experience management and personalization at scale as key areas of differentiation, making it a priority investment for Chief Marketing Officers, Chief Information Officers and Chief Digital Officers. We are excited by the customer interest and adoption of our latest innovations, including AEP AI Assistant, a generative AI-powered conversational interface that empowers practitioners to automate tasks, simulate outcomes, and generate new audiences and journeys. For example, customers like General Motors and Hanes brands have been working with AEP AI Assistant to boost productivity and accelerate time to value, while democratizing access to AEP and apps across their organizations. Marriott International is a great example of a customer that's expanded its decade-long relationship with Adobe and turned to Adobe Experience Cloud to orchestrate highly personalized guest experiences across online reservations and the Marriott Bonvoy mobile app. Adobe Real-time CDP and Adobe Journey Optimizer enabled Marriott to connect data from disparate sources and activate relevant experiences in moments that matter, helping the company match individuals with the best options across its portfolio of more than 30 brands and nearly 9,000 properties. Other business highlights include

Shantanu Narayen:

Thanks, Dan. Adobe remains one of the greatest places to work in the industry, and I want to thank our employees for their relentless dedication to supporting our customers and communities. We continue to invest in hiring, including new college grads and interns to bring the best and brightest talent to Adobe. This quarter, Adobe was recognized among Fortune's 100 Best Companies to Work For, Glassdoor's Best-led Companies and the Civic 50 List of the Most Community-minded Companies in the U.S. Demand for our category-defining products and services continues to grow. Our business fundamentals and market tailwinds are strong, and we look forward to building on our momentum in the second half and beyond. Thank you, and we will now take questions.

Mark Moerdler:

Thank you very much and congratulations on the quarter and especially the strong net new ARR. I'd like to ask a little more color on specifically the net new ARR that we saw in Creative Cloud. Can you give us a sense of what the contribution near term, medium term to Digital ARR from seat growth versus upsell versus consumption, things like Adobe Stock and AI credits, even rank ordering or quantifying? Anything you can give us -- to give us a sense of what's driving that number? And that would be very helpful in really understanding what's going on in the drivers of that number. Thanks.

Operator:

And our next question will come from Alex Zukin with Wolfe Research.

Shantanu Narayen:

Sure, Alex. Again, maybe I'll start with that. And just taking a step back, I think we've talked about the platform that we have for gen AI that constitutes data, as well as models and finally, interfaces. On the models, we released Firefly services. We've started to see some customer wins in Firefly services. So they're using it for variations, and these are the custom models that we're creating, as well as access to APIs. I would say that's early in terms of the adoption, but the interest as customers say how they can ingest their data into our models as well as custom models, that's really ahead of us, and we expect that to continue to grow in Q3 and Q4. I think the biggest opportunity for us and why we're really excited about gen AI is in the interfaces, because that's the way people derive value, whether it's in being able to complete their tasks faster, whether it's being able to do new workflows. And I would say in that particular space, Acrobat has really seen a significant amount of usage as it relates to AI Assistant. And Photoshop, I'll have David again add, but Generative Fill and what we are doing there, what we are doing in Illustrator. And that both for existing customers as well as for prospects who now come in and say, the products are becoming increasingly more productive for us, that's what's really driving the value there. And last but not least, the AI-first applications. When we think of an application like Express, Express is all about reimagining what we can do for creatives by sort of leapfrogging existing technologies and providing an AI-first application. And so that's also off to a good start.

Shantanu Narayen:

And maybe one last thing, Alex. Sequentially, if you look at it from a route to market, Digital had a very strong quarter as it relates to what we did on adobe.com. We had talked about enterprise doing well in Q1 as well, that continued. And SMB also, the interest in our teams product also continued to do really well. So I think sequentially, I would point to SMB and Digital's strength as driving the further growth.

Shantanu Narayen:

I think from a macro perspective, what I think differentiates Adobe more than any other company is how differentiated and how diverse the set of products that we have. And again, from individual consumers all the way to enterprises, our products are mission-critical. And so at this scale, it's all about execution. And the business cycles will come and go, Alex, but we're actually continuing to focus on execution and converting the pipeline and the interest and the awareness of AI into monetization. And so, we just will be ruthlessly focused on continuing to execute against that. So nothing really to report different on the macroeconomic environment from our perspective.

Operator:

And our next question will come from Saket Kalia with Barclays.

David Wadhwani:

Yes, it's a great question. And yes, the core has been -- from the very beginning, we've talked to you guys about our primary focus for generative AI is about user adoption and proliferation, right? And that has continued to be the primary thing on our mind. And it's the primary thing on our mind for multiple reasons. And to your point, there are many different ways that we can monetize this. First is, as you think about the growth algorithms that we always have in our head, it always starts with, as Shantanu said, new users, right? And then it's about getting more value to existing users at higher ARPU, right? So in the context of new users, first and foremost, we want to make sure that everything we're doing generative AI is embedded in our tools, starting with Express, right? So we have Express in the market. We're seeing a lot of adoption and usage of Express in the market. As that's happening, we're infusing generative AI more and more into Express in a whole host of ways. And that's really helping, everything from our marketing message for the completeness of the AI offering in there, all the way through to user engagement and success in onboarding and retention. Similarly, though, this is having the same effect in our core Creative products as well, right? The introduction of Firefly combined with some of the product-led growth work we've been doing, in particular, something called the Context Bar makes it easy for new users coming in to just be more successful out of the gate which then, of course, helps with both conversion and retention. And then with AI Assistant, the ability to sort of embed that into the purchase flow for Acrobat and get a high attach rate, we always talk about that as a would you like fries with it moment at Adobe when someone's going through the checkout flow, it's just a great way for people to say, look, this is value I want, I want to add it and buy up to the higher plans. So there are a lot of different mechanisms that we see. But by far, the strongest is going to be the fact that we are seeing people like in Creative Cloud migrating to the higher-priced plans because they include Firefly. And so we just want to get more value to these users as well.

Saket Kalia:

Very helpful. Thanks, guys.

Brent Thill:

David, on Express, you mentioned the success you're seeing. Can you maybe drill into some of the other metrics and accomplishments that you're seeing out of Express this quarter?

Brent Thill:

Thank you.

Gregg Moskowitz:

Hey, thank you very much. And I'll add my congratulations. For your Creative business, how are you thinking about the Q side of the P times Q equation over the balance of the year? Based on these numbers anyway, I would certainly assume that you had really healthy unit growth in Q2. And I'm wondering if you expect that to continue.

Shantanu Narayen:

And Gregg, as you're aware, I mean, certainly with Express, we also have the model of customer acquisition as it relates to people coming in through trial and free and then conversion. So we are seeing the interest level as it relates to Express, in particular, significant interest.

Shantanu Narayen:

I would, Gregg, sort of modesty say, we've been world-class at sort of driving that for a long time now. But the team, I think, continues to do an amazing job. And I would say David referred to the DDOM. Adobe Home is now sort of increasingly the way that we're driving a lot of people to get aware of our new products. And so, I would say the mobile part as well and the mobile journeys, as we've got these mobile products, whether it's Lightroom or whether it's certainly, Express, that's an area of increasing focus for us. And the traditional sort of understanding where search terms are, I think we're getting better and better at that, which leads to way more digital traffic for us. So I think it's across the board. But I'd also highlight, I mean, the commerce team that we have at Adobe that understands what the segments are and how for those particular segments we can attract people, that's great. I mean, I think in the prepared remarks, Dan also talked about the strength in emerging markets. And I think the beautiful part about AI is that since they need access to the cloud to get all of the AI functionality, emerging market growth has been really strong for us.

Operator:

And moving on to Keith Weiss with Morgan Stanley.

David Wadhwani:

Yes. Thanks, Keith. This is one of the areas that I think we've shared with you the complexity of the year-over-year comparisons in the first half based on prior pricing marks that we had. But more importantly, to your point, the year-over-year complexities are now behind us. And we're very excited about the momentum of the first half and how it sets us up for the second half, frankly, across both Document Cloud and Creative Cloud. Both are really momentum stories. The 478 -- the 487, sorry, just to be clear, the $487 million that we printed this time is obviously strong performance, and it implies that both CC and DC came in over what the growth -- the guide would have implied otherwise, right? So it's giving us a lot of good momentum going into the back half. Now the momentum is really driven by three things, and just I'll try to share a little bit more context here and hopefully gives you. First is new user acquisition, right? We're seeing Express starting to perform well in terms of bringing a lot of new users into the franchise across mobile and web. AI Assistant in Reader has been a really nice start for us, and we've been very pleased with how the uptake on that's going. And then Firefly itself, as I mentioned, has been increasingly more productive in terms of bringing in onboarding users and then retaining users because of the growth. We continue -- as we drive that more holistically throughout the product set, we start to see more people using it, including, as Shantanu mentioned earlier, in emerging markets. So we are seeing very good strength and usage in emerging markets, and that has certainly been a bright spot for us, which is something that obviously represents a lot of potential and upside for us. In terms of existing customers, the migration has been going very well for us as well. So, more people are moving to the higher-priced, higher-value plans because of the Firefly capabilities. We're even seeing this in enterprises where people are moving up to the highest versions of Creative Cloud, which is what we call it, Creative Cloud Enterprise 4, because they get more access to features beyond just generation. They have more collaborative capabilities beyond just kind of sharing via e-mail. And we're starting to see that create a nice momentum in upgrade cycles in the enterprise segment as well. And then certainly, let's not forget the new offerings, too. While still early, automation and content production is something that we're driving effectively in a lot of these accounts with Firefly services. So that mix of new users, existing user migration, and also the new offerings that we have in market are driving that growth formula that we talked about, which is now P times Q plus V for value with these automation systems.

Operator:

And we have a question from Brad Sills with Bank of America.

Shantanu Narayen:

I think you're right, Brad. When we think about what we've done with imaging and video, we've done the right thing by making sure the higher-value paid plans that people don't have to think about the amount of generative capability. And so there, the balance between for free and trialist users, they're going to run into the generative capability limits and, therefore, have to subscribe. But for the people who actually have imaging and vector needs, that they're not constantly thinking about generative, I think we actually got it right. To your point, as we move to video, expect to see different plans because those plans will, by necessity, take into account the amount of work that's required to do video generation. So you're absolutely right as a sort of framework for you to think about it. The two other things that I would say is, I mean, clearly, Express is really being driven by sort of the need for AI and how people are able to describe what they want and get the final output. When David talked about exports, just to clarify what that means is people who have successfully got what they want to get done, done. And that's a key measure of how we are doing it, and AI is certainly facilitating and accelerating that. And last thing I would say, Brad is, as you know, on the Acrobat side, it's a slightly different model which we like, which is anybody who has Reader and is looking at a document, they can have an upsell to their AI Assistant. If you have Acrobat Pro, you can upsell to the AI Assistant. And if you're a brand new acquisition of a user when you're coming in, the adoption of the highest-value products, so between Standard Pro and Pro Plus Assistant, we've been pleased to see how many people are migrating to the Pro Plus Assistant. So hopefully, that gives you some color of how we think about it differently by product.

Operator:

And we'll take a question from Brad Zelnick with Deutsche Bank.

Anil Chakravarthy:

Thank you, Brad. Appreciate it. As you know, I mean, customer experience management and especially it's been a hugely important priority area for Chief Marketing Officers and with CIOs and Chief Digital Officers as well. And for us, we are focused on personalization scale, which is really built around the AEP platform. We're the largest provider in this space. We're growing faster than any of our peers, and we're the number one Digital Experience platform as a result. And that has really helped us keep the momentum. When you think about the AEP AI Assistant, it's doing a couple of things. One, it's really making it easier for customers to deploy use cases. When you think of use cases that they have around, for example, generating audiences and running campaigns around those audiences, these are things today that require some data engineering. They require the ability to put these audiences together. So they require marketing and IT teams to work together. The AEP AI Assistant is making it much easier for marketers to be able to do it themselves and be able to deploy a lot more use cases. So as there's more usage, it will help drive more consumption and help drive the growth in terms of number of profiles, number of users, and we help -- we see it helping us grow towards that billion-dollar business.

Jonathan Vaas:

Hey, operator, we're almost at the top of the hour. We'll take two last questions and then wrap up. Thanks.

Kash Rangan :

Hi, thank you very much. You guys could have three separate earnings calls because you have three different businesses that even the smallest one is very large. So yes, sorry, Anil, Dave, and Shantanu, I may not be able to ask all the questions that I want. I'm sure we have plenty. But I'll just keep it super high level, Shantanu. Generative AI, it seems to swing back and forth. Just so early in its evolution, the possibilities seem magical sometimes, endless sometimes, sometimes it feels very disappointing. But with every quarter that Adobe is executing on this path, where do you stand with the question that we do get from investors? Will generative AI be so good that it's the end of the creative process? So we don't need creative folks, that software will do everything? That sounds a little far-fetched, but I'm just throwing it out there to see how you would react that proposition. Same in Experience Cloud as well. Could generative AI create its own marketing campaign, put marketing people out of business? Or maybe it doesn't. I'm sure you have strong views. Maybe flipped on the other side, it does create category growth on the other hand, not category compression. So sorry for that super high-level question, but that seems to be a big debate on the stock here, at least from the long-term perspective. Thank you so much.

David Wadhwani:

And maybe one thing to add to that, Kash, just to build on what Shantanu was talking about. I think the other thing we get asked a fair amount is about the comparison between different models, right? So Firefly might be better at something. Midjourney might be something at something else. DALL-E might do something else. And the key thing here is that around this table, we get excited when models innovate. We get excited when Firefly does something amazing. We get excited when third-party models do something because our view, to Shantanu's point, is that the more content that gets generated out of these models, the more content that needs to be edited, whether it's color correction, tone matching, transitions, assembling clips, or masking composite images. And the reason for this is that this is not a game where there's going to be one model. Each model is going to have its own personality, what it generates, what it looks like, how fast it generates, how much it costs when it generates that, and to have some interface layer to help synthesize all of this is important. And so just sort of to note, we've said this before but I'll say it again here, you will see us building our products and tools and services leveraging Firefly for sure, but you'll also see us leveraging best-of-breed personalities from different models and integrate them all together.

Shantanu Narayen:

Thanks, Kash.

Jacob Roberge:

Hey, thanks for taking the question and I'll echo my congrats on the great quarter. I know it's early, but what's been the feedback and customer behavior for those users that are on Firefly services and GenStudio? And then thinking more longer term, what type of price uplift could you see from those customers over time, just given what you said about the acceleration in Firefly generations being driven by those products? Thanks.

Shantanu Narayen:

And Jake, maybe in terms of what I would say we're seeing usage of, I think the initial usage of Firefly services in most companies was all around ideation. How can they create multiple variations of them and in the ideation process really just accelerate that ideation process? Most companies are then starting with as they're putting it into production, how can they, with the brand assets and the brand guidelines that they have, do this in terms of the variations, whether they be geographic variations or they be just variations? I mean, if you take a step back also, every single ad company right now will tell you that the more variance that you provide, the better your chances are of appropriately getting an uplift for your media spend. So I would say that most companies are starting with creating these variations for geographies. The other one that we see a fair amount of is engaging with their communities. So when they want their communities to have assets that they have blessed for usage within community campaigns, that's the other place where Firefly services are being used. And a company has a community portal where the community can come in, take something and then post whether it's on whatever social media site that you want. So I think that's the initial one. All of the agency companies are companies that have actually even publicly said how GenStudio is something that they have embraced. But even the large media companies, because the media companies are certainly interested in understanding how all of this gen AI could be used to automate as well as accelerate the amount of content that they can produce. So hopefully, that gives you some color of it. If there's been sort of the questions that they ask along the way, which hopefully and actually, luckily, we have great answers, it's all around the indemnification and how they can use it. And I would say that continues to be a really key differentiator for us. But since that is the last question, let me just say I'm proud of how we executed in Q2, both across the product innovation, delivery as well as the go-to-market because clearly, a number of you asked how we were able to put together these numbers where others have perhaps talked about the macroeconomic environment. We certainly remain focused on leveraging technology to light a broader set of customers. And at the end of the day, to the questions that we were asked, we believe that the real value of AI will be in the interfaces that individuals, enterprises use to accomplish their tasks and workflows. And we think we're incredibly well positioned. So thank you for joining us.

Operator:

Thank you. This does conclude today's conference. We do thank you for your participation, and have an excellent day.

Operator:

Good day, and welcome to the Q1 FY 2024 Adobe Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jonathan Vaas, Vice President of Investor Relations. Please go ahead.

Shantanu Narayen:

Thanks, Jonathan. Good afternoon, and thank you for joining us. Adobe had a strong first quarter. We achieved $5.18 billion in revenue in Q1, representing 12% year-over-year growth. GAAP earnings per share for the quarter was $1.36, and non-GAAP earnings per share was $4.48, representing 18% year-over-year growth. Our performance reflects the essential role that Adobe products play in driving the global digital economy. We're delivering on our strategy to unleash creativity for all, accelerate document productivity and power digital businesses. Adobe Creative Cloud, Document Cloud and Experience Cloud are more critical than ever to the success of creators, communicators, students, entrepreneurs, and businesses of all sizes with AI serving as an accelerant for all. We are a leader in delivering generative AI across all our clouds. We're taking a highly differentiated approach across data, models and interfaces. Our proprietary data is built on decades of deep domain expertise across creative, documents and customer experience management. We leverage large language models, as well as have invested in building and delivering our proprietary models in the creative document and marketing domains. Our IP-friendly approach is a differentiator for creators and enterprises. In addition, we've innovated by delivering generative AI directly in products with releases in Adobe Photoshop, Illustrator and Express across both desktop and mobile. AI Assistant in Acrobat and Reader unlocks the tremendous value of the trillions of PDFs around the world. We're bringing generative AI to Adobe Experience Cloud and will demonstrate our AI Assistant for Customer Experience Management at Adobe Summit. Every student, communicator, creative professional and marketer is now focused on leveraging generative AI to imagine, ideate, create and deliver content and applications across a plethora of channels. Adobe is uniquely positioned through the combination of Express, Firefly, Creative Cloud, Acrobat and Experience Cloud to deliver on this immense market opportunity. The success we are already seeing with our GenStudio offering in the enterprise is validation of our leadership, and we expect that success to translate into other segments as we roll out these solutions throughout the year. We are driving strong usage, value and demand for our AI solutions across all customer segments. We're successfully monetizing our innovations with particular strength in Q1 in the Enterprise segment across our Digital Media and Digital Experience businesses. This strength is reflected in our strong RPO growth of 16% year-over-year. We're pleased with a strong Q1. We have a phenomenal product roadmap that we're executing against to bring AI innovation across our global customer base and we're just getting started. I'll now turn it over to David to discuss the momentum in our Digital Media business.

Anil Chakravarthy:

Thanks, David. Hello, everyone. Experience Cloud business had a great first quarter, achieving $1.29 billion in revenue and was our strongest Q1 on record for new business. Subscription revenue was $1.16 billion, representing 12% year-over-year growth. Companies are prioritizing digital investments to improve marketing agility and customer engagement while driving growth and profitability. Adobe's holiday shopping report which analyzes trillions of data points, showed strong online spending during the 2023 holiday season, growing 4.9% year-over-year to $222.1 billion, a new record for e-commerce as well as mobile shopping, which surpassed desktop for the first time and drove 51.1% of online sales. Our Adobe Experience Cloud applications span the entire customer funnel from acquisition to monetization to retention. As the global leader in the Digital Experience Platforms category, Adobe offers businesses a single view of their customers' data across every channel, allowing them to create precise segments and deliver personalized experiences regardless of when and where the customer interacts with their brand. Over the last five years, our organic innovations in Adobe Experience Platform, Realtime CDP, Journey Optimizer, and Customer Journey Analytics have made us the leading platform for customer experience management given the scale of the profiles, campaigns and interactions we process, which now exceed 500 trillion segment evaluations per month. Today, rollout of personalization at scale has been limited by the number of content variations you can create and the number of journeys you can deploy. We believe harnessing generative AI will be the next accelerant with Creative Cloud, Firefly Services and GenStudio, providing a comprehensive solution for the current supply-chain, and generative experienced model automating the creation of personalized journeys. Adobe GenStudio is the generative AI first application that allows marketers to quickly plan, create, store deliver and measure marketing content in a single intuitive offering. With state-of-the-art generative AI powered by Firefly Services, marketers can create on-brand content with unprecedented scale and agility to deliver personalized experiences. Adobe GenStudio natively integrates with multiple Adobe applications across Creative Cloud and Experience Cloud, including Express, Firefly, Workfront, Experience Manager, Customer Journey Analytics, and Journey Optimizer. It can be used by brands and their agency partners to unlock new levels of creativity and efficiency in marketing campaigns. Business highlights include momentum with Adobe Experience Platform and native applications with the combined annualized book of business surpassing $800 million in the quarter. Demand for Adobe Experience Manager, Workfront and GenStudio to address the enterprise content supply chain. Global agencies, including Accenture, Havas, IPG, Omnicom, and Publicis have standardized on Adobe as their technology platform of choice for their own workflows and to optimize creative collaboration with the world's leading brands. Strength in Adobe Journey Optimizer on Adobe Campaign as companies look to deliver more personalized experiences across channels and surfaces. Adobe was recognized as a leader in the Gartner Magic Quadrant for Digital Experience Platforms for the seventh consecutive year, as well as the Forrester Wave for Digital Experience Platforms. Adobe Experience Manager assets was also named a leader for the fourth consecutive time in the Forrester Wave for Digital Asset Management. Key customer wins include Carl Zeiss, Comcast, Home Depot, NASCAR, Nestle, PayPal, Rogers Communications, Santander Group, Starbucks and Walgreens. Later this month, we are excited to host Adobe Summit, the world's largest digital experience conference in Las Vegas, where we will be joined by thousands of customers, partners, and developers from around the world. We look forward to showcasing a number of product innovations, including a new generative experienced model, advances in Adobe GenStudio, a new AI Assistant in Adobe Experience Platform, new capabilities in RT CDP for first-party data activation and expanded Firefly Services offerings. We will articulate our vision and playbook for brands to achieve a new level of personalization at scale in the era of generative AI. We look forward to sharing our exciting product roadmap and hearing from our customers and how Adobe is helping them transform their business. We were off to a fast start in Q1 and look forward to continuing the momentum and leadership in Q2 and beyond. I will now pass it to Dan.

Shantanu Narayen:

Thanks, Dan. We're the leader in three large and growing categories and have delivered groundbreaking innovation across Creative Cloud, Document Cloud and Experience Cloud. We believe that AI augments human ingenuity and expands our addressable market opportunity. I'm proud of the pace and the responsible manner in which we have embraced and delivered generative AI capabilities across our product portfolio. As a result of our strategy and execution, we're confident in our ability to attract new users and deliver value to existing customers to drive growth and profitability. I'd like to thank our 30,000 employees for their continued dedication and unwavering focus on innovation and execution. It is particularly exciting to be named to Glassdoor's Best Places to Work, Fortune's Most Admired Companies, and he JUST 100. Thank you, and we will now take questions. Operator?

Kirk Materne:

Yeah. Thanks. Thanks very much for taking the question. I guess maybe this is for David or Dan. Obviously, you guys called out that new creative ARR was up more than 20% year-over-year when you exclude the pricing increases which infers a pretty major pricing headwind that we're seeing right now. Can you all just try to parse out how that's going to play out over the year? I know David you mentioned ARR will go up in the back half of the year, but that it’s just tough I think to reconcile what's going on in the business on a normalized basis, and when we might see that sort of translate more into the metrics that everybody follows. Thanks.

Kirk Materne:

Thanks.

Brent Thill:

Thanks. Shantanu, the magnitude of the beat this quarter was -- there was roughly half the absolute beat you've had in past quarters and then the guide obviously, lower for next quarter. I think everyone is asking is this some type of AI headwind? Is this macro? Is this execution? Can you just comment on -- and maybe it's none of these things, but can you just comment on what you think you're seeing in the current quarter?

Brent Thill:

Thanks, Shantanu.

Brad Zelnick:

Great. Thanks so much for taking my question. My question is for Dan. You're not raising the full-year guide, and I appreciate it's still early in the year, but I think we're all hoping you can at least affirm it for us. But you also -- you pushed out the enforcement of generative credit limits for some products beyond April that were originally expected sooner. What's the thinking behind this decision? And what are you seeing thus far in terms of credit consumption and purchasing patterns of those credit packs? Thanks.

David Wadhwani:

Yeah. And I'm happy to add a little bit. Yeah, in terms of the timing of the -- when we start enforcing credits, don't read anything into that other than right now, we are still very much in an acquisition mode. We want to bring a lot of users in. We want to get them using the products as much as possible. We want them coming back and using it. One thing I do want to state because I know there's a lot of energy around how do these credits play out over time. In the last few weeks, we've done a couple of sneaks that could also be instructive. Last month, we snuck music composition, where you can take any music track, you can give it a music type like hip hop or orchestral or whatever, and it will transform that initial track into this new type of music. Just this morning, we snuck our ability to do auto dubbing and lip-syncing, where you give it a video of someone talking and saying English, and then you can translate it automatically to French or Spanish or Portuguese or whatever. As you can imagine those actions will not take one credit. Those actions will be much more significant in terms of what they cost. So right now, Alex, the primary point is about proliferation and usage. We're going to be bringing in a lot more new capabilities throughout the tools that will drive more usage, and we're going to be bringing in more expensive capabilities as well. And as we've talked about, you should start to see that ramp through the year, and we feel very comfortable with the adoption we're seeing. Just one last thing to call out, as we mentioned on the call, highest number of users using generative AI in Q1 ever so we're very excited about the trajectory.

Brad Zelnick:

Thank you so much. Very helpful.

Michael Turrin:

Hey, great. Thanks. I appreciate you taking the question David, couldn't help but notice you led off your prepared remarks section with the Document Cloud. Can you speak to the enthusiasm you're seeing on the document side? And when we think about the mix of Digital Media growth for the year, should we expect it will continue to trend towards that Document side? Or is it more the second half where some of the creative enhancements start to layer on more meaningfully we could start to see that shift back a bit? Thanks.

Michael Turrin:

I appreciate all the details there. Thank you.

Saket Kalia:

Okay. Great. Hey, guys, thanks for taking my question here. Maybe for both David and Shantanu. Clearly, a lot of news around video creation using generative AI during the quarter, of course, with the announcement of Sora. Maybe the question for you folks is, can we just talk a little bit about how you think about the market impact that generative AI can have in the video editing market and how maybe Firefly can participate in that trend?

David Wadhwani:

Yeah. And maybe I'll just add a few things. First of all, as Shantanu mentioned, the research in the industry and certainly with Sora is very impressive and exciting. It's also very consistent with the models that we're developing. So we think that there is -- there will be, as there was with video -- sorry, imaging, there will be multiple models that come out, including the Adobe model later this year, and we should start to see a lot of innovation there like we've seen in imaging. We've already started to sneak a couple of things that Shantanu talked about. So you will see text-to-video capabilities from us later this year. But you'll also see it with transparency around the training data that we have, you'll see it with more tool ability and controllability. You'll see it integrated into our tools as well. Now, all of that said, I do want to be very clear with what Shantanu said, which is that we see the proliferation of video models to be a very good thing for Adobe. And we're going to work with OpenAI around Sora. You're going to see us obviously, developing our own model. You're going to see others developing model. All of that creates a tailwind because the more people generate video clips, the more they need to edit that content, right? So whether its Premiere or After Effects, or Express, they have to assemble those clips, they have to color-correct those clips, they have to tone match, they have to enable transitions. So we're excited about what we're building, but we're just as excited about the partnerships that we see with OpenAI and others coming down this path. And if you take a step back, you should expect to see more from us in the weeks ahead with imaging and vector and design, text effects, and in the months ahead with audio and video and 3D. We're very excited about what all of this means, not just for the models, but also for our APIs and our tools.

Operator:

Your next question comes from the line of Alex Zukin with Wolfe Research. Please go ahead.

Shantanu Narayen:

Yeah. So we take our guide seriously. Q1 played out as expected. It was ahead of where we were last year. Our Q2 guide is ahead of where the guide was in Q2. We're talking about acceleration into the back half of the year. If I didn't feel like our full-year guide was achievable, we would have a different conversation. We're confident in the targets that we put out there, our ability to meet them. If there's an opportunity to do better, we certainly will. So we feel good about where we sit in the first half. And as we look forward into the second half, the momentum we see from an innovation standpoint integrating into our products, what we see going from beta to GA, we feel good about the momentum into the second half.

Operator:

And your next question comes from the line of Karl Keirstead with UBS. Go ahead.

Dan Durn:

Yeah. So there was two pricing actions that we had taken in 2022. In May of 2022, we pushed forward a pricing action, and then October of 2022, we pushed forward the Doc Cloud line optimization, where we integrated Sign. The one-year anniversary of those pricing actions from May of 2022 and October of 2023, or -- I'm sorry, October of 2022 will be behind us on the one year anniversary. So you will still see some Q3 impact from pricing actions in the year-ago period. Q4 will be a clean look for the company, at least two months in Q4 will be a clean look. The actions that we're taking right now from both a pricing and a product standpoint on the Creative side will be more apparent in the back half of the year into the end of the year.

David Wadhwani:

I think the other way I would look at it, honestly -- sorry, go ahead.

David Wadhwani:

Well, the way I would look at it, in terms of the rhythm of the numbers and how you've seen sort of what transpired in 2023, and how we look at 2024, and the path to $1.9 billion and beyond, the way I would look at it is we're ahead in Q1. We're ahead in Q1. We're giving you all the reasons why we think there's more product coming and more monetization coming in the rest of the year. And that's what gives us the confidence associated with the targets. I guess there's this question of every quarter, do we reiterate targets? Do we update targets? What does that mean? And the way we've always thought of it is, if it was a way -- if we didn't have confidence, we would give you that. We have confidence associated with the numbers, but we're not in the business of every quarter, looking at every number. And let's go down one other number, which was the GAAP EPS. Certainly, there's an impact, as you know, in the GAAP EPS associated with what we did as it related to the Figma sort of transaction, and therefore the impact to GAAP EPS in Q1. So I think, from my perspective, the quarter and the year is playing out just as we did, and I feel more confident now than I did when we gave you our annual targets. I'll leave it at that.

Operator:

And we will take our next question from the line of Jay Vleeschhouwer with Griffin Securities.

David Wadhwani:

Yeah. Let me take the first one and then Anil can answer the question on sales. As it relates to the momentum we're seeing with Firefly, I think there are multiple layers of it. One is obviously, we're seeing the quality of the models. We're seeing a differentiated approach as it relates to the training data, as it approaches contribution of assets from our community and how we compensate those folks. And so that's not just an Adobe perspective, but it's playing out obviously, in enterprises as they look at what are the models that they can consider using for production workflows. We're the only one with the full suite of capabilities that they can do. It's a really unique position to be in, but it's also being noticed by the research community, right? And as the community starts looking at places as if I'm a PhD that wants to go work in a particular environment, I start to ask myself a question of which environment do I want to pick. And a lot of people want to do AI in a responsible way. And that has been a very, very good opportunity for us to bring in amazing talent. So we are investing. We do believe that we have the best -- one of the best, if not the best, research labs around imaging, around video, or around audio, around 3D, and we're going to continue to attract that talent very quickly. We've already talked about we have the broadest set of creative models for imaging, for vector, for design, for audio, for 3D, for video, for fonts and text effects. And so this gives us a broad surface area to bring people in. And that momentum that starts with people coming in has been great. The second part of this too is managing access to GPUs while maintaining our margins. We've been able to sort of manage our cost structure in a way that brings in this talent and gives them the necessary GPUs to do their best work.

David Wadhwani:

And I don't know if Jay, you were asking for -- building your model, or if you were looking for a job? But if you're interested in any of these positions, let us know more.

David Wadhwani:

Okay.

Operator:

Thank you. We will take our next question from Kash Rangan with Goldman Sachs.

David Wadhwani:

Great. So maybe I'll take your first part, and Dan obviously, can take the second. So as it relates to generated content, I'm going to sort of break it up into two parts. One is around the tooling and how you create the content, and the second is around automation associated with the content. I think if you take a step back before we even get into either one of those, there is no question that there's a huge appetite because of personalization at scale, the need to engage users, the need to build your personal brand online. That content is going to explode in terms of the amount of content being created, and it's going to explode because of one of two things. The first is around the ability to create audio clips, video clips, images, vectors. These are things that get users started. It's a great for ideation. You'll see in a few weeks that some of the incredible work the team has been doing around ideation on Firefly.com. And once those things are created, they do flow into our tools for the production, work and process. We're clearly seeing a huge benefit from that because the more content that gets created, the more editing that's required, and that's what's driving more commercial CC subscribers this quarter than any other Q1 before. So that's the foundation of it. The second part of this, though, from an editing perspective is the controllability of -- and the editability of not just pixels and vectors and timelines, but also the editability of the latent space itself. The latent space being the core capability -- core model capabilities that actually generate the output. We have a lot of research that we've already started releasing, the first of which was Style Match, and you'll start to see more and more of that actually coming out at summit and beyond. But we are, in my mind, very, very clearly the leader in terms of creating models that can also be tooled on top of. So that combination of the models getting better and the controllability of those models, we're in a remarkable position for that. So we benefit from that. The second part, Kash, is around automation. So as people are generating more content, you clearly need to be able to automate that content and how it's created. And that's really where Firefly Services come in. First, it's built on the strength of our Firefly models, say for commercial use integrated into our tools, but it also adds the ability to have custom models so control what kinds of information or brand and content it's trained on for both brand styles and product replica, and it's also part of an ecosystem of API services, not just generate something which is a core part of it like text to image, or Generative Fill or Generative Expand, but also process. So once you generate some images through APIs and automation, you want to be able to remove the background, you want to be able to blur the depth, you want to auto tone, you want to apply actions to that image. And then the last is you want to be able to assemble that for delivery. Firefly services don't just generate something, but they let you have that entire ecosystem, and then you can embed that using low code, no code environments into your flows, and we are already embedding it into GenStudio and all of the capabilities that we're shipping. So I think the core part of this is that as more of this content creates, you need more tool ability. The best models are going to be the models that are safe to use and have control built in from the ground up. And I think we have the best controls of anyone in the industry, and they need to be able to be done in an automated fashion that can embed into your workflow. So I think all three of those vectors point to benefits for Adobe.

Dan Durn:

And then as we think about the forward-looking, a couple of points I would turn to, just think about cash flow in Q1. Strength of our cash flow, once you normalize for the $1 billion termination payment, that's up 28% year-over-year. When you think about RPO, 3 point acceleration sequentially, and when I break that up on deferred revenue, unbilled backlog, you saw that acceleration in each of those subcomponents, which as you look through that acceleration, the near-term underscores the strength of the business and it underscores the longer term strength we have around the momentum of the business. When I think about individual product commentary, we talked about it a lot on this call. You see record commercial subscriptions in the Creative business. In Q1, you see engagement going up on the products. Usage of Firefly capabilities in Photoshop was at an all-time high. In Q1, Express exports more than doubling with the introduction of Express Mobile in beta now going to GA in the coming months, AI Assistant Acrobat, same fact pattern. You can see that momentum as we look into the back half of the year. And from an enterprise standpoint, the performance in the business was really, really superb in Q1, strongest Q1 ever in the enterprise. So there's a lot of fundamental components that we're seeing around performance of the business that give us confidence as we look into the back half of the year.

Operator:

We'll take our next question from Keith Weiss with Morgan Stanley. Please go ahead.

Shantanu Narayen:

And let me tackle that, Keith, and maybe I'll just tackle it by taking a couple of the other questions as well, summarizing that and ending with your question associated with the financial results. I think the first question that I hear across many folks is, hey, with the advent of AI and the increase in the number of models that people are seeing, whether they be image models or video models, does that mean that the number of seats, both for Adobe and in the world, do they increase or do they decrease? To me, there's no question in my mind that when you talk about the models and interfaces that people will use to do creative content, that the number of interfaces will increase. So Adobe has to go leverage that massive opportunity. But big-picture models will only cause more opportunity for interfaces, and I think we're uniquely qualified to engage in that. So that's the first one. The second one, I would say, is that does Adobe innovate, and when we do that, do we only leverage the Adobe model, or is there a way in which we can leverage every other model that exists out there? Much like we did with plugins, with all of our Creative applications, any other model that's out there, we will certainly provide ways to integrate that into our application. So anybody who is using our application benefits not just from our model creation, but from any other model creation that's out there. The way we first started to execute against that is in the enterprise because for us, the enterprise and the ability to create custom models so people can tweak their models to be able to do things within Photoshop that are specific to a retailer or a financial service was where we focus. But long term, certainly, as I've said with our partnerships, we will have the ability for Adobe in our interfaces to leverage any other model that's out there, which again, further expands our opportunity. I think as we play out the year, when we gave our targets for the $1.9 billion in ARR and the $410 million in Digital Media ARR for Q1, it factored in both our product roadmap and how things would evolve in the year. All of the product roadmaps we knew whether it was Acrobat, whether it was Express, whether it was Firefly, whether it was Creative Cloud, or whether it's GenStudio that brings all of these together, we knew the product roadmap, which we're executing against. In the first half of the year, a lot of that was beta, and in the second half of the year, a lot of that's monetization. It's playing out as expected. If anything, I would say the excitement around that, and in particular, the enterprise is faster than expected. And so I think our ability to monetize it just -- not just through new seats but also through these new Firefly services is expanded as it relates to what we are doing. And then as it relates to your question around financial results and the go-forward execution, we gave a Q1 target, we beat the Q1 target. And that gives us confidence that the financial target that we gave at the beginning of the year, we're ahead of that. And that's how I'll play it out. You're right. You have to model it. You can look at last year's model and look at last year's model and say, hey, they got to $1.913 billion. If they're ahead, does that fundamentally change Adobe's thesis on why we get to $1.9 billion and beyond, and in my mind it doesn't. And so that's the way I would answer that question. We have to go execute against the opportunity that we have. I look forward to those who are at Summit. I'm sure we'll have a little bit more conversation. But Q1 was a strong start. It was a strong start against product execution. It was a strong start against the financial metrics that we outline, and we're going to go do it again, Keith. So that's how I'd answer your question. So thank you all for joining.

Shantanu Narayen:

And with that, I'll hand it back to Jonathan.

Operator:

Good day, and welcome to the Q4 and FY 2023 Adobe Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jonathan Vaas, VP of Investor Relations. Please go ahead.

Shantanu Narayen:

Thanks, Jonathan. Good afternoon, and thank you for joining us. Q4 was our first-ever $5 billion quarter, a new record for the company. Adobe achieved revenue of $5.05 billion, representing 13% year-over-year growth. GAAP earnings per share for the quarter was $3.23 and non-GAAP earnings per share was $4.27, representing 28% and 19% year-over-year growth, respectively. Q4 was the culmination of another record year for Adobe, achieving $19.41 billion in revenue, which represents 13% annual growth. GAAP earnings per share in fiscal 2023 was $11.82 and non-GAAP earnings per share was $16.07, both representing 17% year-over-year growth. We exited the year with $17.22 billion in RPO. Our strong performance reflects the mission-critical role our products play in a digital-first world, incredible product innovation and exceptional execution. Adobe Creative Cloud, Document Cloud, and Experience Cloud have become the foundation of digital experiences, starting with the moment of inspiration to the creation and development of content and media to the personalized delivery and activation across every channel. Adobe's mission of changing the world through personalized digital experiences and our delivery of foundational technology platforms, set us up for the next decade of growth. We take pride in being one of the most inventive, diversified, and profitable software companies in the world. We believe that every massive technology shift offers generational opportunities to deliver new products and solutions to an ever-expanding set of customers. AI and generative AI is one such opportunity and we've articulated, how we intend to invest and differentiate across, data, models, and interfaces. We have delivered against this strategy and I'm pleased that a number of our groundbreaking innovations, including our Firefly models and integrations across Creative Cloud, Liquid Mode and integrations across Document Cloud and AI services in our real-time Customer Data Platform and integrations in Experience Cloud, are now seeing tremendous usage by customers. We remain excited about the strategic opportunity with Figma, to jointly advance product design, accelerate collaborative creativity on the web, and redefine the future of creativity and productivity. We continue to engage with the European Commission, the Competition and Markets Authority in the UK, and the US Department of Justice, as they conduct their regulatory reviews. The EC has provided a preliminary statement of objections and the CMA has issued provisional findings of competition concerns. We strongly disagree with these findings and are responding to the respective regulators. As per the current timelines, the EC's decision deadline is February 5th and the CMA’s is February 25th, while the DOJ does not have a formal timeline to decide whether to bring a complaint, we expect a decision soon. I'll now turn it over to David to discuss the momentum in our Digital Media business.

Anil Chakravarthy:

Thanks, David. Hello, everyone. Digital experiences are indispensable for every business in every category, enabling companies of all sizes to engage and transact with customers around the world. Adobe's Holiday Shopping Report, which analyzes trillions of data points, found that both Black Friday and Cyber Monday sales hit record highs of $9.8 billion and $12.4 billion, respectively, jumping 7.5% and 9.6% from last year. We predicted that holiday 2023 spend will exceed $221 billion in the US alone. Adobe Experience Cloud is optimally positioned to capitalize on this massive global opportunity. Companies across B2C and B2B are turning to Adobe Experience Cloud as the platform to accelerate experience-led growth. Our leading solutions spanning data insights and audiences, content, and commerce, customer journeys, and marketing workflow, empower businesses to drive customer demand, engagement, and growth while simultaneously delivering productivity gains. Our comprehensive set of applications, including Real-Time CDP are built natively on our highly differentiated Adobe Experience Platform, providing companies with a unified profile of each of their customers to deliver personalized, real-time experiences at scale. Generative AI accelerates our pace of innovation across the Experience Cloud portfolio enabling us to build on our capabilities to deliver personalized digital experiences. Our efforts are focused in three areas

Shantanu Narayen:

Thanks, Dan. In addition to our financial accomplishments, we are proud to once again be recognized for our industry leadership. Content credentials and Adobe's approach to responsible AI were recognized by Fast Company as one of the year's breakthrough innovations. We were again named to the Dow Jones Sustainability Index, Glassdoor listed Adobe is one of the best places to work and Interbrand ranked us in the top 20 Best Global Brands as the rising brand for the eighth year in a row. Digital remains a massive tailwind as content demand and consumption continues to grow and businesses of all sizes are focused on transforming their customer experiences. Adobe is incredibly well-positioned to lead and capitalize on this opportunity. Thanks to our innovative roadmap expanding global customer base, strong brand, and the best employees in the world. Our fiscal '24 financial targets reflect our confidence in continuing to drive strong topline growth and world-class profitability. I am more certain than ever that Adobe's best days are ahead of us. Thank you, and we will now take questions. Operator.

Kash Rangan:

Hi. Thank you very much. Congrats on the quarter and happy holidays. Shantanu and team, I'm wondering, going into 2024, it definitely feels like the economy is in stable footing and in general, the software metrics are all improving as the year unfolded. And very different from going from '22 to '23, yet your DM - new ARR guidance is about the same as how you started last year, but you got the benefit of generative AI, tailwinds from the economy, and got pricing and Firefly. Can you just help us understand if you isolate for those factors, what has gone into your -- into your guidance, but it seems like, if we exclude the optionality that you have, including the tailwinds in economy that guidance looks like it's very conservative. And maybe that's the right thing to do, but just wanted to understand your thought process. Thank you so much.

Kash Rangan:

Thank you so much and happy holidays. All the best for 2024.

Operator:

We will take our next question from Keith Weiss with Morgan Stanley. Please go ahead.

David Wadhwani:

Yeah. Happy to take that. Keith, David here. So first of all, as you've mentioned in the DME business, we're really excited about the results for '24, over $1.9 billion in net new ARR obviously well above the guide. We see an expanding base of customers and a lot of momentum coming from gen AI as you noted. As part of this, we delivered -- what we delivered in Q4 was net new ARR -- was a record net new ARR in constant currency. Now specific to your question on Creative Cloud momentum and how to interpret the numbers that you see there, underlying all of this is very strong momentum because we delivered a record Creative Cloud new commercial subscriptions number in the year. So that is really the foundation and the base of customers coming in and really benefiting from not just what we get in this quarter, but also how we build on that going forward. So it really just sets us up well for FY '24. As you look at the numbers for Creative Cloud ARR, net-new ARR in the quarter, you have to look at it relative -- Q4 FY '23 relative to Q4 FY '22 as you mentioned. You need to consider that FY '22 had two pricing actions, that accrued to Creative Cloud that are much lower now in Q4 FY '23. So, if you normalize for the impact of the pricing that rolled off and the pricing that came on, Creative Cloud net new ARR in Q4 grew on a constant currency basis.

Keith Weiss:

Excellent. Thank you, guys.

Alex Zukin:

Hey, guys. Thanks for taking my question. I guess maybe looking at next year, as we look at how much of the renewal base in Creative Cloud is potentially up for that type of the pricing uplift. And as we look at Acrobat, specifically the AI functionality that you're releasing into public beta. How should we think about the tailwind to both Creative Cloud from pricing and to Document Cloud, specifically from an AI product monetization perspective for '24 -- for calendar '24?

Alex Zukin:

Perfect. Thank you for the very fine point and answer.

Operator:

We'll take our next question from Kirk Materne with Evercore ISI. Please go ahead.

David Wadhwani:

Yeah. Maybe I'll start and then Anil can add because does crossover our two businesses. So with Firefly and Express, very excited about the momentum that we continue to see. You heard that we crossed 4.5 billion generations now, so we continue to see really, really strong adoption and usage of it. Partially as a standalone business, but also integrated into our Photoshop and Illustrator and these existing workflows. And we're starting to see a lot of interest, not just in the context of using it as part of those existing products, but also using it as part of the ecosystem within enterprises. So, we've been working with a number of customers to not just enable them with Firefly, which is the predominance of the growth that we're seeing in Q4 for enterprise adoption but also have a number of pilot customers already engaged around custom model extension, so that they can bring their own assets and their own content into what Firefly generates. Second, we're also enabling the ability to expose it through APIs, so they can build it into their existing workflows and third, we of course connecting it in tying it all into Adobe Express, which now also has its own Firefly and additional capabilities like things, so that you can not just sort of create content using Firefly, but then start to assemble it, start to schedule, social posts around it, start to do multi-language translations that -- those are all features that are already in there and then create a stakeholder workflow from people working in Photoshop to the marketers that are trying to post externally. So, that's where things get very interesting and exciting in terms of the connection we have with GenStudio and everything that Anil is doing.

Shantanu Narayen:

And maybe I'll just add a little bit to that, Kirk. I mean, I think the exciting thing about what people are doing is they're standardizing on Firefly and the fact that we have responsible generations for the entire enterprise. So the interest level has been around, how do we standardize that for all of the image or vector or other generations that they want to do for all the knowledge workers in the enterprise. So really good adoption of Firefly.

Operator:

We will take our next question from Karl Keirstead with UBS. Please go ahead.

Shantanu Narayen:

Great. Yeah. Happy to take that. Express is off to a great start. As you remember, we went general availability in August with the latest version of it, it's been getting a lot of very, very positive reaction response. And frankly, since then in Q4 too, we've added a ton of new innovation. Firefly integration started with Text to Image and Text to Effects, but we also added Text to Template that will create a fully-formed template for you and generative fill, so you can iteratively change things on the fly. We now let you drawing paint on the campus -- canvas, we've given users much more video support. We've really built an incredible best-of-breed PDF support and workflow with Acrobat in there as well. Some of the other things that now start to bleed into the enterprise also, we have integrated social workflows so that people can schedule their post, we've enabled people to do auto-translations, so you can post to multiple geographies and languages. We've opened up our ecosystem for partner plug-ins and we have now over 50 extensions. And we've added enterprise features like AEM integration and template locking, so that the core, brand police in an organization can manage and make sure that their brand elements that they don't want changing are locked when you disseminate this more broadly. What we've seen is really. I think some very exciting broad-based benefits from this. One is, we've seen new trialists coming in, growing very quickly after this launch, which is exciting to see, we've seen education, users starting to adopt this very quickly as well, the Creative Cloud probe paid base has been coming on and growing very quickly in terms of their usage and then enterprise, as we talked about from a usage perspective and again, Express is a core part of how Anil and team are now selling GenStudio. And the last thing is like this is just setting up the momentum for the year to come. We have a mobile release coming out, which will be very exciting for users to be able to use this on the go. We have thousands of people already using that beta. We announced our Chromebooks partnership. So, anyone that buys a new Chromebook is going to have this. We have partnerships with folks like Wix for their workflows. We're going to be doing deeper integrations into Acrobat. So we are very excited about where this goes. That is a long way to answer a very simple question. We want a lot of people using this. So, our primary focus continues to be around broadening the top of funnel. Of course, as part of that, we are constantly and continually, as I mentioned, journeying people for upsell and cross-sell opportunities to the paid plan, and over to Creative Cloud and other products, but our primary focus continues to be adoption and broad proliferation.

Operator:

We will take our next question from Brad Zelnick with Deutsche Bank. Please go ahead.

Anil Chakravarthy:

Thanks, Brad. I mean we are really excited about this massive multi-year opportunity, if we would look at any enterprise customers around the world, everybody recognizes the long-term imperative of transforming their customer experiences. And we're seeing that in these transformational deals that we talked about. And as you mentioned, for example, with AEP, our first $100 million net new business quarter and ending with over $700 million in our annualized book of business. With that said, definitely we're seeing macroeconomic impact, just like other enterprise software companies are. Every customer looks at the total cost of deploying the software and then what it would take to get the payback and ROI. And as a result, there is definitely some scrutiny and caution there. But that said, if we look at going into next year, we do see the pipeline across both our industry verticals as well as our mid-market customers. And we continue to be the leader in the market and we did get that recognition from both analysts and customers.

Operator:

We will take our next question from Brent Thill with Jefferies. Please go ahead.

Dan Durn:

Yeah. So thanks for the question, Brent. When we take a look at the guide. If we think about where we're at, at this point in time as we're looking forward in FY '24, clearly we see a lot of momentum in the business, the company's engine of innovation has been incredibly strong. And you see the strong financial performance of the company. That's both from a top line standpoint, as well as profitability and cash-flow standpoint. So, clearly a lot of momentum around the business. As I think about where we sit today, we printed a 46.4% operating margin. As we look forward in to next year, we take into account everything we can see. As Shantanu said, we take the guidance seriously and we set expectations in a prudent way, there is an opportunity to do better than the expectations that we set. Clearly, the company is going to be driving towards that. As we think about the engine of innovation, we think the pipeline is strong, we're going to continue to invest in the drivers of growth. This company is going to orient towards growth. When I think about the investment profile, not only are we going to be disciplined. But we're going to continue to invest in those drivers of growth on the DX side. Anil talked about AEP and Apps strong book of business, strong growth, we're laying the groundwork and content supply chain with the GenStudio solution, scaling that motion, and engaging with customers to go from ideation, to creation to activation, delivering new technologies, products, AEM sites incorporating intelligence into those products. On the DME side, you can see it across the portfolio, AI assistant Acrobat, it's in private beta, and it's going to be in public beta in the coming months, you look at Firefly and Express, natively and deeply integrating these technologies throughout the product portfolio, there is going to be continual investment as it relates to that innovation. As you think about the momentum exiting this year and as you think about the guide into Q1, you can see that momentum continuing, get the operating margin up a little bit, and then throughout the year, as we said at our FA Day and the last year's earnings call, you can see a mid-40s expectation around operating margin for the company as we drive this investment cycle, as we drive leadership in our core markets and our key catalyst in the trends that are shaping those markets. So, again, taking a step back, it nets into account the macro that Anil talked about everything we see from a core business standpoint, and the investment profile that we're going to drive to lead, if there's an opportunity to do better than where we set those expectations we're certainly going to do it.

Dan Durn:

And then just one thing to add, Brent, If we were here a year ago, the expectations going into the year where FX was going to be a pretty decent headwind to the performance, you see that in the way we've reported our results and then compare it to a constant-currency basis. We started with a pretty decent spread between the as-reported numbers in constant-currency in Q1. By the time we got to Q4, you saw that spread compress, as I look forward into FY '24, it's more of a neutral footing to maybe a slight headwind. Too early to really call it with precision, but I see that setup being slightly different. And maybe just a slight headwind versus what we were seeing a year ago.

Operator:

We'll will take our next question from Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Shantanu Narayen:

Yeah. Thanks, Jay. As I pull some of the threads together that we've heard on this call. Anil, talked about large transformational deals being the platform of choice with customer experience management, simultaneously driving topline and bottom-line productivity and the investments around driving those are an imperative in the market. We see a similar dynamic with the new technologies that we're bringing to market on the DME side at the business, we're streaming seeing strong pull from the enterprise. And so as I net out that environment and our performance against that opportunity, it goes to produce the type of sequential RPO progression that we saw Q3 to Q4. Every quarter won't be that large, but the backdrop around that dynamic for the company given the setup we see, it should be another strong year for RPO throughout the year.

Shantanu Narayen:

Operator. We're getting close to the top of the hour. We'll take two more questions and then we'll wrap up. Thanks.

Saket Kalia:

Okay. Great. Hey, guys. Thanks for taking my question, and congrats on a nice quarter. David maybe for you, I had a question just on Firefly and the subscription packets. I know that the commercial model for commercial -- I'm sorry, for Firefly credit packets, really just started about six weeks ago. But are there any early observations that you've seen just on customers' willingness to add those packets, or maybe how they're consuming the initial credit allocation that they get with the Creative Cloud subscription?

Saket Kalia:

Makes sense. Thanks, guys.

Mark Moerdler:

Thank you for squeezing me in. I really do appreciate. Dan, I'd like to look a little bit at MAX we discussed how excited you were on Firefly and how it drives Creative Cloud seed and paid seed adoption. Now that you had a bit of time in market, can you explain how you think about how this will drive the paid seed growth, is it how strong it could be and should we expect to seeds going to be lower unit price because they're going to be entry-level, what do you think that we will get offset by these higher-priced Firefly driven sales into the enterprise. Thank you.

Anil Chakravarthy:

From a product perspective, when you think about it, Mark, for us, the biggest thing that we want to do is, how do we further make our products accessible, fun and affordable for increasing set of customers and I think Firefly is one of those inflection points that will help everybody get over the blank screen fear that they have and so first, as you think about Firefly as an ideation and people just coming and want to have creative inspiration. This is, whether you're an individual user, whether you're agencies, we're seeing a lot of adoption of Firefly to just start the entire Creative process and that sort of brings them as an on-ramp into Express, which would be the other part. Express is certainly the introductory pricing, the ability to get millions more into the fold and the ability, right now, it used to be that Express and other offerings in that is to all worry about, do I have the right templates. Well, AI is going to completely change that, we have our own models and so Firefly will allow anybody to take whatever creative idea that they have and make that available, so I think Firefly really helps with the Express offering. On the Creative Cloud, David mentioned this. I mean if you look at the adoption of that functionality and usage, that's being driven, whether it's in Photoshop right now, Illustrator as we add video, both in terms of providing greater value and we certainly will therefore have the uplift in pricing as well as the retentive ability for Firefly. That's where I think you're going to see a lot of the really interesting aspects of how Firefly will drive both adoption as well as monetization. And then if you go at the other end of the spectrum to the enterprise, GenStudio, every single marketer that I know and CFO and CMO, are all worried about how much am I spending on data, how do I get agility in my campaigns and the fact that Firefly is integrated into both Express as well as when we do the custom models for them, so they can upload their own models and then have the brand consistency that they want. So, Firefly really is the fact that we have our own models. A great catalyst for our business, all across the spectrum and the usage and the adoption shows that in emerging markets, as people there in emerging markets are increasingly used to create variance of content and localization of content, that's where we are also seeing a tremendous usage of these particular technologies. So really exciting. And then, you take the same technology that we have in Creative and think about its impact in both Document Cloud when we do that and the ability to have summaries and have conversational interfaces with PDF, thereby making every single PDF as David again said, both for communication, collaboration and creation far more compelling. I think you're going to see that same kind of uplift in usage and therefore monetization on the Acrobat side. And since it was the last question. I mean, for us, we look at FY '23, and we're really proud what we were able to accomplish across all spectrums topline revenue, RPO and driving book of business, Creative Cloud, Document Cloud, and Experience Cloud and profitability, and we think '24 is going to be exactly more of the same, which is continuing to drive great innovation, great product growth, great profitability. Clearly, I think there has been a set of questions around the Digital Media ARR and what I'll take is on that and we're extremely confident about how that continues to be a growth business and perhaps the pricing impact was overestimated. And as we said, this is again new growth business and it will be a multi-year pricing benefit for us as we think about the uplift that we have. So we're really pleased. We appreciate you being on the call. And like many of you wished us, happy holidays and we hope to see you soon. Thank you for joining us.

Operator:

Once again, this concludes today's call. Thank you for your participation. You may now disconnect.

Operator:

Good day, and welcome to the Q3 FY 2023 Adobe Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jonathan Vaas, VP of Investor Relations. Please go ahead.

Shantanu Narayen:

Thanks, Jonathan. Good afternoon. Adobe had another record Q3, achieving revenue of $4.89 billion, representing 13% year-over-year growth. GAAP earnings per share for the quarter was $3.05 and non-GAAP earnings per share was $4.09, representing 26% and 20% year-over-year growth, respectively. Driving this success is a rich and innovative product roadmap. The advances we are delivering across Creative Cloud, Document Cloud and Experience Cloud are enabling us to attract an ever-growing set of users while delivering more value to existing customers. Yesterday's exciting announcements add to this roadmap. With the commercial availability of our generative AI capabilities, natively integrated in Adobe Creative Cloud, Adobe Express and Adobe Experience Cloud, we are unleashing a new era of AI-enhanced creativity for millions of customers around the globe. We are bringing generative AI to life across our portfolio of apps and services to deliver magic and productivity gains. Our rich datasets enable us to create foundation models in categories where we have deep domain expertise. In the six months since launch, Firefly has captivated people around the world who have generated over 2 billion images. We are excited about the potential to reimagine the content supply chain for all businesses through the integration of our clouds, enabling the delivery of personalized and engaging customer experiences. Our strategy to unleash creativity for all, accelerate document productivity and power digital businesses is driving our growth across every geography. By delivering innovative technology platforms and services, we continue to advance our industry leadership and delight a growing universe of customers. I'll now turn it over to David to share more about our momentum in the Digital Media business.

Anil Chakravarthy:

Thanks, David. Hello, everyone. Every company sees digital as an opportunity to drive experience-led growth. As I've spent time with customers across the world, it's clear that they are prioritizing investments in customer experience management technology to improve customer acquisition, engagement, retention and operational efficiency. We are driving revenue growth across content and commerce, customer journeys, data insights and audiences and marketing workflows, leveraging the Adobe Experience Platform, demonstrating the strength of our business. Brands around the globe are working with Adobe to accelerate personalization at scale through generative AI. With the announcement of Adobe GenStudio, we are revolutionizing the entire content supply chain by simplifying the creation-to-activation process with generative AI capabilities and intelligent automation. Marketers and creative teams will now be able to create and modify commercially safe content to increase the scale and speed at which experiences are delivered. In Q3, we continued to drive strong growth in our Experience Cloud business, achieving $1.23 billion in revenue, representing 11% year-over-year growth, as a growing number of enterprises turned to Adobe as their trusted partner for customer experience management. Subscription revenue was $1.1 billion, representing 13% year-over-year growth. Adobe Experience Cloud delivers predictive, personalized, real-time digital experiences, from acquisition to monetization to retention. We are driving strong enterprise adoption of Adobe Experience Platform, and native apps including Real-Time CDP, Adobe Journey Optimizer and Customer Journey Analytics. For example, the Coca-Cola Company is leveraging Adobe Real-Time CDP and Adobe Journey Optimizer to bring together 98 million customer profiles globally into a single CDP to quickly deliver personalized campaigns and experiences. smart Europe, an all-electric automotive brand, is using Adobe Experience Cloud to offer customers the ability to personalize their vehicle purchases through the integration of Adobe Workfront, Adobe Creative Cloud and Adobe Experience Manager. Business highlights include

Shantanu Narayen:

Thanks, Dan. Adobe's strong Q3 results are a reflection of our team's exceptional execution. We recently lost our beloved co-founder John Warnock. John's brilliance and innovations changed the world. He was one of the greatest inventors of our generation and an inspiration to the technology industry. While we miss him tremendously, it gives me great comfort knowing that John was so proud of all of the innovation Adobe continues to deliver. As someone who shares John's passion for product and innovation, I'm exceptionally energized by the technology platforms we are delivering with AI at the center across our three clouds to delight customers. Our brand, technology and our talented employees position us for a strong close to the year and continued growth in the decades to come. Adobe's best days are ahead of us. Thank you. We will now take questions.

Keith Weiss:

Excellent. Thank you guys for taking the question and really nice quarter. Dan, actually a margin question, for you. And kind of a riddle that, like, we've been thinking about. We've been told generative AI is really expensive to run. The inference and training costs are really high. You guys have been running a beta for a while, 2 million images generated. There's a lot of functionality already in the product. And your operating margins are up. Your gross margins are up on a year-on-year basis. So, how are you able to do that? Like, where are these costs going, if you will? And on a go-forward basis, if all this stuff becomes generally available, how should we think about that gross margin impact or the overall margin impact of generative AI on a go-forward basis? Thank you.

Shantanu Narayen:

And maybe Keith, just 30 seconds to add to that, for investors like you who want to make sure we're not in any way not investing in the future, we are investing on training for 3D, for video, for new forms of imaging and vectors. So, what we are confident is while we continue to invest in that, the scrutiny that Dan and his team have on other expenses, that we can continue to drive top-line growth as well as cash flow and EPS. So, I think we're unique in that respect.

Operator:

And our next question will come from Kash Rangan with Goldman Sachs.

Shantanu Narayen:

Well, Kash, maybe David and I can take the first parts of the question. And just again, for everybody on the call, I think to summarize the new offerings that we have, we've announced that we have a Firefly subscription. So, you can use a free trial number of credits, and after that, you can actually subscribe to Firefly. We have Adobe Express, which now includes an allocation of Firefly. We certainly have the Creative Cloud products and Photoshop and Illustrator that have it. We have Generation Credit Packs, and we have GenStudio for the Enterprise and to be able to deal with it. So first, I just wanted to make sure that you recognized the tremendous innovation that we're delivering associated with that. And as you know, one of the things that we have done is to really focus on both new user acquisition, which is going to be driven across all of those offerings, as well as with the price increase, given there is an allocation associated with it for existing customers, they will start to see that as they roll over and they have to renew their subscription. So, I just wanted to set that bit, and maybe then I'll ask David to add a little bit about each of these and how we see that play out.

Shantanu Narayen:

And maybe Kash, just to then tie that all together, in terms of the numbers that we've given for Digital Media ARR, because you asked the question from the beginning of the year, remember, I think we guided to $1.65 billion, if you look at what it is even with our Q4 guide that I think $200 million more than that, $1.86 billion or something to that effect. And since we guided in Q3, for Q3 and Q4, $100 million. So, we continue to be really confident and we're excited about the roadmap.

Saket Kalia:

Okay, great. Hey, guys, thanks for taking my question, and congrats on a great quarter and outlook. Anil, actually my question is for you. Obviously, a lot to talk about with Firefly in the Digital Media business. And it's very clearly a revenue opportunity there. I'm wondering how you think about the generative AI roadmap or revenue opportunity in the Digital Experience part of the business. I know we talked about the content supply chain, but how do you think about the future of generative AI in your business?

Shantanu Narayen:

Saket, maybe, just to give Anil and the team a lot of credit for what they actually accomplished in Q3 as well, the wins in Q3 in the enterprise actually included a lot of the components of GenStudio, both in the Digital Media as well as in the Digital Experience. So, certainly the transformational deals that we're talking about, a big part of that is the synergy between the two clouds. So, I wanted to point that out as well.

Saket Kalia:

Great to hear. Thanks.

Gregg Moskowitz:

Hey, thank you for taking the question. Congratulations as well on a strong quarter. So, when I look at Firefly, the amount of image generation in a six-month period is clearly pretty stunning. I'm just wondering if you're able to provide any additional color, whether it be monthly active users or some other metric that may additionally help all of us gauge the improvements that Firefly is driving to your engagement level, to your top-of-funnel, et cetera? Thank you.

Shantanu Narayen:

Two other maybe financial indicators to that, Gregg, are first the Photoshop Single App, and I think Dan referred to that. Even in the beta, that actually drove a lot of Photoshop Single App and the early indicators of how that also benefits retention in the entire book of business. So both of those are also good financial indicators of the potential of AI.

Operator:

And we have a question from Brad Sills with Bank of America.

David Wadhwani:

Yeah. So from the very beginning of Firefly, we took a very different approach to how we were doing generative. We started by looking at and working off the Adobe Stock base, which are contents that are licensed and very clearly we have the rights to use. And we looked at other repositories of content where they didn't have any restrictions on usage, and we've pulled that in. So, everything that we've trained on has gone through some form of moderation and has been cleared by our own legal teams for use in training. And what that means is that the content that we generate is, by definition, content that isn't then stepping on anyone else's brand and/or leveraging content that wasn't intended to be used in this way. So that's the foundation of what we've done. We've gone further than that, of course, and we've now actually -- we've been working with our Stock contributors. We've announced, in fact, yesterday we had our first payout of contributions to contributors that have been participating and adding Stock for the AI training. And we're able to leverage that base very effectively, so that if we see that we need additional training content, we can put a call to action, call for content out to them, and they're able to bring content to Adobe in a fully licensed way. So, for example, earlier this quarter, we decided that we needed a million new images of crowd scenes. And so, we put a call to action out. We were able to gather that content in. But it's fully licensed and fully moderated in terms of what comes in. So as a result, all of the content we generate is safe for commercial use. The second thing is that because of that, we're able to go to market and also indemnify customers in terms of how they're actually leveraging that content and using it for content that's being generated. And so, enterprise customers find that to be very important as we bring that in, not just in the context of Firefly standalone, but we integrate it into our Creative Cloud applications and Express applications as well. So, the whole ecosystem has been built on that. And the last thing I'll say is we've been very focused on fair generation. So, we look intentionally for diversity of people that are generated and we're looking to make sure that the content we generate doesn't create or cause any harm. And all those things are really good business decisions and differentiate us from others.

Operator:

And we have a question from Keith Bachman with BMO Capital Markets.

David Wadhwani:

Yeah. First of all, we are very happy with the quarter Doc Cloud had. The ending book of business grew 22% in constant currency. And the strength of that is really driven based on top-of-funnel growth. So, Acrobat on the web had a phenomenal year-over-year growth rate. We've been working very actively to get Acrobat sort of deployed with -- as plugins within the browsers. We've got a great -- we've been doing a lot of product-led growth work in the products themselves to drive link sharing, so that more and more people are not just using our products, but as they share links, we're actually able to capture more people and build growth loops. Signatures has been also doing incredibly well. So, as we've got this broad-based proliferation of our surfaces that are available and continue to grow in terms of both free and paid usage, it creates a surface area that we can introduce a lot of really interesting things into. We haven't announced anything publicly associated with gen AI directly inside of Acrobat, but I think you can fairly safely expect to hear more about that from us soon. And what makes gen AI particularly interesting as it relates to Acrobat is the distribution that we have with Acrobat. So, if Acrobat is -- and Reader are in front of hundreds of millions of people on a monthly basis, our ability to insert generative AI into their workflows, just like we've been able to really differentiate our work on generative AI in creative by inserting it into the workflows of creative folks, I think that becomes the secret sauce to how we differentiate ourselves.

Operator:

And our next question will come from Brent Thill with Jefferies.

Shantanu Narayen:

I think in the ETLAs specifically, Brent, both to the comments that David and Anil mentioned, the first is the amount of content that people are creating, there's a lot of interest associated with ensuring that the combination of Creative Cloud plus Express that people can really understand what they are spending on their content, as well as find ways to use AI to automate it, to localize it, to improve production costs. So, I think that message is certainly resonating with people. And the fact that Express can be a productivity application for every knowledge worker in the enterprise, much like Acrobat as well. So, I think both of those are really leading to a significant amount of great conversations. I think, mobile -- David perhaps mentioned even in his prepared remarks how mobile has been one of the tailwinds that we've seen, Brent. So, I think that's also working. So, I think investment in productivity gains is clearly top of mind right now. And both of these play well into that narrative in enterprises.

Operator:

And we have a question from Alex Zukin with Wolfe Research.

Shantanu Narayen:

I think, Alex, on the first question associated with how did we think about pricing, I mean, first, it's important to remember the breadth of all of the segments that we serve. In other words, how we think about K-12 all the way to the largest enterprise in the world. And I think it's fair to say that philosophically, we wanted to drive more adoption. And therefore, the pricing as it relates to what's included in the at least short run for Firefly subscriptions, Express subscriptions, GenStudio in terms of how much they can get within an enterprise is going to be the bulk of how we recognize the ARR. And I think getting that adoption and usage is where the primary focus is going to be in terms of the new user adoption, as well as for existing customers, the pricing upgrade. So that's how we think about it. We certainly need the ability to have the generative packs, but I think just getting everybody exposed to it. One of the real innovations that we did that's driven tremendous uptake in that is what we've called this context aware sort of menus within Photoshop. So, it's so front and center, you'll start to see that being rolled out in all of the other applications. So that's sort of the focus. Let's get the core subscriptions, let's get all of them exposed to it, and let's make sure that we're covering what we need to by the pricing actions that we took. So that was sort of the focus. I think on the Doc Cloud part and how we look at it, to add to again what David said, I mean, some of the things that people really want to know is how can I have a conversational interface with the PDF that I have? Not just the PDF that I have open right now, but the PDF that are all across my folder, then across my entire enterprise knowledge management system, and then across the entire universe. So, much like we're doing in creative, where you can start to upload your images to get -- you train your own models within an enterprise, [indiscernible]. The number of customers who want to talk to us now that we've sort of designed this to be commercially safe and say, hey, how do we create our own model? Whether you're a Coke or whether you're a Nike, think of them as having that, I think in the document space, the same interest will happen, which is we have all our knowledge within an enterprise associated with PDFs. Adobe helped me understand how your AI can start to deliver services like that. So, I think that's the way you should also look at the PDF opportunity that exists, just more people taking advantage of the trillions of PDFs that are out there in the world and being able to do things. The last thing maybe I'll mention on this front, Alex, is the APIs. So part of what we are also doing with PDFs is the fact that you can have all of this now accessible through APIs, it's not just the context of the PDF, the semantic understanding of that to do specific workflows. We're starting to enable all of that as well. So, hopefully that gives you some flavor. You're right, the generative credits has been designed to more for adoption right now, but we also wanted to make sure that at the high end, we were careful about how much generative credits we allow.

Alex Zukin:

Super clear. Super thoughtful. If I could sneak one in for Dan. Of the $520 million in the net new ARR for Q4, just roughly, you've talked about before having some impact from the generative AI product that you were going to launch this year. Is it fair to assume it's very minimal in that $520 million?

Alex Zukin:

Perfect. Thank you, guys.

Brad Zelnick:

Great, thanks very much. David, you talked about making Firefly APIs available to customers to embed Firefly into their own content creation and workflows. Can you talk about the use cases and monetization? And is this something you foresee partners leveraging as well into their own third-party offerings?

Brad Zelnick:

Great. Thanks very much for taking the questions. Congrats.

Operator:

Thank you. Our next question will come from Jay Vleeschhouwer with Griffin Securities.

Shantanu Narayen:

Yeah, Jay, I mean, certainly I think at MAX also you'll see a bunch more of the innovation. I think first internally, I'd be remiss if I didn't start off by saying how really thrilled I am with how quickly the company has embraced the possibilities of AI, how we've run all of these betas out there at a scale that, as we have said, is unprecedented, dealing with the differentiation that we can provide, whether that's how we deal with the data, understanding the indemnification, how we embed all of this AI stuff in the interfaces, and we've already shown that in Photoshop, Illustrator, Express, as well as create the new offering. So, I think the pace of innovation internally of what we have done is actually truly amazing. I mean, relative to a lot of the companies that are out there and the fact that we've gone from talking about this to very, very quickly making it commercially available, I don't want to take for granted the amount of work that went into that. I think internally it is really galvanized, because we are our own biggest user of these technologies. What we are doing associated with the campaigns and the GenStudio that we are using, as David alluded to it, our Photoshop Everyone Can campaign, or the Acrobat's Got It campaign, or how we will be further delivering campaigns for Express as well as for Firefly, all of this is built on this technology. And we use Express every day, much like we use Acrobat every day. So, I think it's really enabled us to say, are we really embracing all of this technology within the company? And that's been a big change, because I think the creative products, we've certainly had phenomenal usage within the company, but the extent to which the 30,000 employees can now use our combined offering, that is very, very different internally. So, very pleased associated with that. And I think one way in which that manifests is that all of our product reviews right now include all three groups. So, there's very little product sort of reviews that happen without people from Creative and Document and the Experience Cloud being part of it. So that's one of them. I think the work that we have already put in on the digital excellence as part of D-DOM, that also gives us a lot of confidence of, "Now that we have this breadth of offering, how do we make sure that we can personalize the offerings?" Part of the success that was driven in this quarter, Jay, was to do with the fact that the Stock and these value-added services, I think the digital excellence team in terms of the D-DOM have really got very good at segmenting our customers and understanding how we can make sure that they have the right offering. And now think of that with all of the breadth of offerings that we have across mobile and desktop and web. So, I think internally and externally, this has been again a real sort of drinking from the fire hose of how we embrace AI. And so, I think those are really two examples of how we've done it. And the third thing I would say is that in parallel, internally we've had to really change. Where prior to this, Jay, we may have said, okay, we're really going to make all of this magic happen in one of our applications. Today, that has to happen not just within the application, which we've certainly done, but it has to happen as an API so that everybody else can use it. It has to happen as a web-only playground, which is what Firefly and Express both are. So, the simultaneous release of not just investing in the model, but making sure that's available across all the surfaces, I would say that's another thing. And the last thing I'll leave you with is you've seen this for imaging. Make no mistake, those same investments, whether it's in vector or animation or 3D or -- all of those video certainly are underway. And so, I think the parallelism associated with saying how do we embrace this opportunity, I think that's also been another big change. But I think it's clear given this was the last question before I hand it over to Jonathan that a lot of the questions have been focused on understanding right now all of our announcements and the monetization associated with it. But I did want to again sort of acknowledge that we have delivered all of this innovation at a breakthrough pace. And so, we'll certainly share more as it relates to how we see this play out. At MAX, you'll see us have more information on the products. And certainly with the 2024 targets, you'll start to get more visibility into how and why we believe this is both a growth opportunity as well as embracing new customers. So, thank you for joining us. And with that, I will turn it back over to Jonathan.

Operator:

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.

Operator:

Good day, and welcome to the Q2 FY '23 Adobe Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jonathan Vaas, Vice President of Investor Relations. Please go ahead.

Shantanu Narayen:

Thanks, Jonathan. Good afternoon and thank you for joining us. Adobe had an outstanding quarter, achieving record revenue of $4.82 billion, representing 13% year-over-year growth. GAAP earnings per share for the quarter was $2.82, and non-GAAP earnings per share was $3.91. Our results demonstrate strong demand across Creative Cloud, Document Cloud and Experience Cloud with particular strength in Digital Media ARR. Adobe's mission to change the world through personalized digital experiences is more critical than ever as digital continues to rapidly transform work, life and play. Our groundbreaking innovations, including the new Adobe Express, the launch of Firefly, our family of creative generative AI models, co-pilot functionality in our creative applications, including Photoshop and Illustrator, AI-powered advancements in Acrobat; a new product analytics solution and the latest capabilities in real-time CDP are empowering an ever-expanding customer base to imagine, create and deliver standout content and experiences. We're executing against our strategy to unleash creativity for all, accelerate document productivity and power digital businesses. Every disruptive technology has presented exciting opportunities for Adobe to innovate and increase our addressable market opportunity. This has been true for cloud computing, mobile and AI. We have delivered hundreds of AI innovations through Adobe Sensei such as Neural Filters in Photoshop, Liquid Mode in Acrobat and Customer AI in Adobe Experience Platform. Our ongoing R&D investments have enabled a rapid development and deployment of Firefly, our generative AI technology. We believe generative AI will drive both further accessibility and adoption of our products. Our generative AI strategy focuses on data, models and interfaces. Our rich data sets across creativity, documents and customer experiences, enable us to train models on the highest quality assets. We will build foundation models in the categories where we have deep domain expertise, including imaging, vector, video, documents and marketing. We are bringing generative AI to life as a copilot across our incredible array of interfaces to deliver magic and productivity gains for a broader set of customers. Since its launch in March, Firefly has captured the imagination of the world with over 0.5 billion generations and we're just getting started. Our digital experience business is powering personalized customer engagement for companies around the world, enabling them to drive experience-led growth. We're delivering an innovative product road map and integrating Sensei gen AI services across Experience Cloud. Last week, we hosted a successful EMEA Summit with tremendous excitement from thousands of customers and partners reinforcing that digital is a critical imperative across industries. Adobe's category leadership and mission-critical products will continue to drive our growth. For FY '23, we now expect Creative Cloud and Document Cloud to end the year ahead of our previously issued revenue and ARR targets and Digital Experience to be slightly below our previous annual target given the current enterprise spend environment. As a result of our groundbreaking innovation and continued execution, we are pleased to raise total Adobe annual revenue and EPS targets. David, over to you.

Anil Chakravarthy:

Thanks, David. Hello, everyone. In Q2, we continued to drive strong growth in our Experience Cloud business, achieving $1.22 billion in revenue. Subscription revenue was $1.07 billion, representing 14% year-over-year growth. Customer interest in the digital experience category remains high. Last week, we were excited to spend time with thousands of customers and partners at EMEA Summit. Businesses of all sizes and industries around the world are increasingly relying on digital channels to engage customers and deliver experience-led growth and they are turning to Adobe as their trusted partner on that journey. Adobe Experience Cloud offers the most comprehensive set of solutions for content and commerce, data insights and audiences, customer journeys and marketing workflows. Built natively on Adobe Experience platform, our real-time customer data platform provides businesses with a single view of their customers' data across every channel. Real-time CDP now delivers over 600 billion predictive insights each year, and customers are creating over 30 trillion audience segments every day. Experience Cloud is now used by 87% of Fortune 100 companies. For example, Prudential Financial uses our cross-cloud offerings to power its end-to-end customer experience management workflows from creating high-impact content with Creative Cloud and Express to delivering personalized customer experiences at scale with Adobe Experience Platform. In addition, Prada is using real-time CDP and Journey optimizer to connect digital and in-store customer experiences in real time while reimagining shopping experiences using Substance 3D. Our vision for Experience Cloud is to deliver personalized experiences at scale, and the power of generative AI accelerates our ability to do that. We are delivering Sensei gen AI innovations to reimagine the work marketers do and how they do it. With Sensei gen AI as their copilot, marketers can generate audiences with high position and design tailored customer journeys for these audiences. They can activate personalized campaigns for their audiences with on-brand visual content created with Adobe Express and Firefly and compelling offers generated by Experience Cloud applications, leveraging real-time customer profiles in AEP. Conversation in natural language interfaces powered by Sensei gen AI will make it significantly easier for any marketer to derive insights from customer journey analytics and apply these insights in real time to optimize their campaigns. These are just a few of the transformational innovations that Sensei gen AI is bringing to Experience Cloud. Business and innovation highlights include strong demand for Adobe Experience platform and native applications with our book of business now exceeding $500 million. This quarter, we unveiled new capabilities in real-time CDP that will enable brands to scale first-party data with look-alike audiences, significantly accelerating the delivery of personalized experiences. Realtime CDP is used by global brands across industries, including DICK'S Sporting Goods, General Motors, Henkel, Major League Baseball, ServiceNow and TSP Bank; the launch of Adobe Product Analytics, which combines customer journey insights with product analytics to drive a new level of product-led growth; a comprehensive content supply chain solution that connects content creation and delivery across Experience Cloud and Creative Cloud to help enterprises effectively manage their content demands. We're working with partners, including Accenture, IBM, Omnicom and Publicis to scale the delivery of content supply chain to our joint customers. Strong demand for Workfront as it rapidly becomes a solution of choice for teams to plan, orchestrate and launch personalized campaigns at scale. Global availability of Adobe Mix Modeler to provide marketers with an AI-powered, self-service solution to accurately measure campaigns across paid, owned and earned channels. New AI innovations in Adobe Experience Manager, that provide real-time content performance data and predictions on which content will perform best by audience segment. Leadership in industry analyst reports, including the IDC Marketscape for retail commerce platforms and a positive rating in Gartner's annual assessment of Adobe's enterprise strategy. Key customer wins, including DSV, ICICI Bank, JPMorgan, Kroger, Omnicom, Royal Canin, ServiceNow, T-Mobile and Volkswagen. While overall demand is strong and win rates remain healthy, as we enter the second half, we are seeing some projects being pushed out in the current enterprise spend environment, which we have reflected in our updated annual targets. In a world where digital has become the predominant channel to reach and engage customers, Adobe is uniquely positioned to keep winning with innovative products that power end-to-end customer experiences and enable enterprises to simultaneously drive growth and profitability. I'll now pass it to Dan.

Shantanu Narayen:

Thanks, Dan. Our strong Q2 results underscore our momentum and the significant opportunities we have across our business. I'm proud of how our employees around the world continue to raise the bar, create the future and live our purpose. We continue to invest in hiring new college grads and interns to bring the best and brightest talent to Adobe. It's an incredibly exciting time at Adobe. Demand for our category-defining products and services continues to grow. Our innovation engine is delivering Adobe Magic for an expanding set of global customers and our strong execution is enabling us to address a massive market opportunity. 2023 is going to be another phenomenal year for Adobe as we continue to deliver top line growth and margins while investing in fundamental technologies that expand Adobe's success for decades. Thank you. We will now take questions. Operator?

Michael Turrin:

Nice job on the results. I mean, obviously, I think starting point is with Firefly. We've been fielding a number of questions just on how this alters the size of the market. You had some useful commentary both on monetization and your views on the market. But can you just add some context around early demand signals and how you're expecting this to show up both on the user side of the market and just the overall velocity of content generation? Thank you.

Michael Turrin:

Clearly lots to be excited about there. Thanks.

Saket Kalia:

Okay. Great. Hey, guys. Thanks for taking my question here. Congrats on a great quarter. David, maybe for you. I want to zero in on that point around Firefly and generating billions of potential users in the years ahead. Obviously, still very early with Firefly but as well as Adobe Express. But I'm curious, what are you seeing with Adobe Express and the ability for Firefly to generate some of that demand or pull through some of that demand for Express, both on the consumer side and the enterprise side.

Shantanu Narayen:

And Saket, maybe if I were to add two things to that. First, I think on the consumer side, with the new Express, if you can imagine it, you can do it. And so I think it's really powerful. And within an enterprise, much like Acrobat, we want every enterprise employee to now have a combination of both Acrobat and Express.

Kirk Materne:

Thanks very much and congrats on the quarter. I guess one, it's probably for David again. David, I was just kind of curious when you think about the enterprise part of the Visual Media business. How, I guess, prepared are customers from a content perspective and a data perspective to take on some of the generative AI capabilities that you guys are bringing to market? And I'm sure this blends into Anil, too, on the Adobe Experience Manager. But I was just wondering if you guys could talk about the data aspect of this and how that interplay might help, frankly, both sides of the Digital Media and the Digital Experience businesses. Thanks.

Anil Chakravarthy:

Just picking up on what you said. I think if you look at Express and Firefly and also the Sensei gen AI services that we announced for Digital Experience, comes at a time when marketing is going through a big shift from sort of mass marketing to personalized marketing at scale. And for the personalization at scale, everything has to be personalized, whether it's content or audiences, customer journeys. And that's the unique advantage we have. We have the data within the Adobe experience platform with the real-time customer profiles. We then have the models that we're working with like Firefly. And then we have the interfaces through the apps like Adobe Campaign, Adobe Experience Manager and so on. So we can put all of that together in a manner that's really consistent with the data governance that customers expect that their data is used only in their context and use that to do personalized marketing at scale. So it really fits very well together.

Operator:

And our next question will come from Alex Zukin with Wolfe Research.

David Wadhwani:

Sure. Yes, first of all, thanks for the question. Yes, we feel like we're off to a great start for the first half of the year. And as we look at it, the strength was very broad-based. Traffic to adobe.com and top of funnel was strong, frankly, all quarter long. And it's clear that our messaging is resonating well with a broader and broader set of audiences that we can reach. Second, we saw a strong conversion. Our product-led growth investments that we've been making for some time now are starting to pay dividends. Adobe.com is an area we've focused for a long time. We continue to see improvements in terms of customer journey work and conversion. And we've more recently been investing much more significantly in product-led growth motions in our core flagship applications like Photoshop and Acrobat as well. And we've been leveraging a lot of Anil's Digital Experience products that allow us to do personalization at scale in terms of in-product experiences there. And then lastly, it feels like we've really started to see some good inflection in our mobile applications, in particular, Acrobat on mobile and Lightroom mobile performed very well this quarter as well. In addition to that, as Dan mentioned in his opening comments, the emerging products like Substance and Frame continue to grow very nicely and really sort of slipstream into the content supply chain conversation that we're having with enterprise customers. And frankly, enterprise demand for content creation continues to grow. Anil said last week at EMEA Summit that our customers are expecting it to grow 5x in terms of content creation over the next few years. We continue to see more pull for creative apps. And also, we're starting to see enterprises invest much more in Acrobat penetration into their accounts. So they really want more people to have Acrobat from Adobe. So that's just to name a few things. Things are shaping up great for the year, and we're very excited about the direction of the business.

Mark Moerdler:

Thank you very much and congratulations on the strong quarter and the updated guidance. Dan, can you give us some color on how gen AI is going to impact margins? Especially 0.5 billion assets created just in the beta, the potential for substantial gen AI, once this is all launched, is going to be enormous. How should we think about that?

David Wadhwani:

Yes. And just I'll add a little bit on to that because we've been working very closely between our engineering organization and the finance organization on a number of levers to make sure that we're managing and keeping discipline and cost front of mind. The first is the model training itself. There are a number of things the team has been doing to optimize our ability to train larger models more efficiently. The second is post training inference optimization. There's a lot of, I think, cutting-edge work coming out here, both in terms of research and the work we're doing around things like pruning and distillation and quantization that make the inference execution much more efficient. Third is, as we've talked about in the past, we're working with folks like NVIDIA to make sure that the hardware and software advances go hand in glove, and we're leveraging more and more compute pathways that are on the chip itself. Four is user experience, making sure that as we expose these things to users, we do it in a way that drives more efficiency in the back end. And of course, the big unlock longer term is about hybrid generative approaches. So how do we move more of this computing to the desktop as well, that will be a major cost benefit down the road. But it's a significant effort and a lot of work to do, and we take it very seriously.

Operator:

And our next question will come from Tyler Radke with Citibank.

David Wadhwani:

Yes. Maybe I'll talk about the Acrobat business and we can get to Q4 after that. So first of all, yes, another great quarter. It was great to see ARR growing 23%. And a lot of this is the basics of PDF demand, right? We've seen this incredible tailwind with demand for PDF continuing to grow. PDF has become the de facto standard for unstructured data. And PDF-related searches continue to grow. And this as Shantanu mentioned, and I mentioned in the prepared remarks, 30 years after PDF had launched. So it's amazing to see how things are going. We've been investing very heavily in expanding our top of funnel. We have Acrobat Web that's been driving a lot of new users. We've seen good growth directly to Acrobat Web. Acrobat Mobile has also been a source of new opportunity for us. We talked about our extensions in Chrome and Edge. And also we've mentioned in the past, our partnership with Microsoft to really make Acrobat the foundation or PDF and Reader, the foundation of all documents viewed in Edge as well. So that creates an enormous top of funnel for us, and we continue to sort of broaden that. In addition to that, we've been adding more value directly into the products with a proliferation of signatures and collaboration capabilities. And all of that, combined with our product-led growth motion, is driving strong conversion. So we feel really good about the foundation of that business.

Operator:

And our next question will come from Matt Swanson with RBC.

Shantanu Narayen:

Matt, maybe I'll take that. It's actually been off the chart the interest. We just had our Summit in London, following the successful launch that we had here where customers even in the U.S. were asking us questions. And I would say there are around three areas. All of them had perhaps experimented with other solutions. The moment Adobe came in and said this is both safe and designed for commercially safe as well as we can create the custom models, I think the interest associated with that has been off the charts. We've already created some custom models where we tweak our core model with assets that people can provide us. And that's also a secret sauce that we're unlocking and the integration of that within each of our products. So frankly, the product is not yet available, but the number of customers who want to sign on in terms of wanting to use it has been one of the most successful launches that we've had. And when I say the product is not ready, all I'm saying is it's not generally available. It's certainly available for them to put through their paces within the company.

Shantanu Narayen:

Thank you.

Jay Vleeschhouwer:

Thank you. Good evening. Shantanu, at Summit, with the content supply chain news, the company pretty much effectuated something that you've been talking about for the last number of years. That is content supply chain. And the question is about the potential business impact. Could you talk about what is fundamentally new or newly required in terms of pipeline development for that broader concept of implementing Adobe product? What you think the impact might be, for example, in your average book of business that you disclosed with your top 2,500 and top 1,000 customers each year at the analyst meeting? And you do seem to be investing still heavily in consulting capacity. So is that part of the development that you're foreseeing necessary for content supply chain?

Anil Chakravarthy:

Yes. We are just so uniquely differentiated across the Creative Cloud and Experience Cloud. And in terms of getting this implemented for customers, as you mentioned, we have now partnerships with Accenture, with IBM, with Omnicom, with Publicis. And all of them are working very closely with us, with our field teams to make sure that the content supply chain gets implemented for every customer across different verticals and geographies, specifically for their needs.

Elizabeth Porter:

Great. Thank you very much. This is Elizabeth Porter on for Keith Weiss. Congrats on the strong quarter. And my question is again around generative AI. There's clearly a lot of investment and news across the industry. So are there generative AI capabilities that could become table stakes? And what are the areas that drive real differentiation that is monetizable for Adobe? How do you see this market evolving between those two pieces over time where Adobe really solidifies its leadership?

Jonathan Vaas:

Operator, we're right at the top of the hour. Let's take one more question and then we'll conclude.

Brent Thill:

Thanks. Shantanu, a lot of questions around why won't the DX Cloud give the Creative Cloud the [indiscernible] as well. Why are you confident this won't spill over? And given on the last question, I'll break the operator's policy and asking one for David on, when you think about just the number one question we're all getting, will AI reduce the number of seats available to you. Can you just address that? That's the number one question we continue to get. Thank you.

Shantanu Narayen:

And Brent, if I understood the question right, I mean, the interest within the DX customer base for what we are doing on Creative Cloud, if you look at both Summits, the interest associated with how these clouds and offerings are working together is actually one of the catalysts that I think will help both the Digital Media as well as the Digital Experience business. So you're right. I mean, we are finding that every customer is saying, this is the way for us to really go all the way from when we start to create a campaign all the way to the delivery and understanding the analytics associated with that. And I think the enterprise team has really aligned around this joint selling, and we've created a bill of materials where you can actually have both the Digital Experience as well as the Creative Cloud offerings in it. And I think that's what you're going to see. In the second half, we're going to have a lot more of these combined sales that happen with every enterprise because it helps, as we've been saying, with both the top line and the bottom line. And since it was the last question, I mean, let me end by saying it was a great first half. We appreciate all the comments that you have made about the quarter. And I wanted to thank the Adobe team for real great execution as well as, again, congratulate in particular, the Acrobat team for 30 years of amazing innovation. What I'm most proud of is, if you look at just the last few months in terms of what the company has delivered across Firefly and Generative Fill and Generative Recoloring, what's happening with Acrobat across the web, in Digital Experience, the Adobe mix model, product analytics, what we are doing around content supply chain, the new offerings that are coming for an increasing set of customers that will serve real customer problems I think really all goes well for how we will continue to drive innovation and serve customers as well. So I'm really excited about the second half as well as what we're going to continue to do in terms of delivering top line and bottom line growth. And with that, I'll hand it over to Jonathan.

Operator:

Thank you. That does conclude today's conference. We do thank you for your participation and have an excellent day.

Operator:

Good day and welcome to the Q1 FY 2023 Adobe Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Jonathan Vaas, VP of Investor Relations. Please go ahead.

Shantanu Narayen:

Thanks, Jonathan. Good afternoon and thank you for joining us. Adobe had a strong Q1, driving record revenue across our Creative Cloud, Document Cloud and Experience Cloud businesses. We achieved $4.66 billion in revenue, representing 13% year-over-year growth. GAAP earnings per share for the quarter, was $2.71 and non-GAAP earnings per share was $3.80. Digital is reshaping how we connect and engage with the world around us. Our performance demonstrates the critical role that Adobe products are playing in fueling the global digital economy, empowering everyone everywhere to imagine, create and bring any digital experience to life. We are executing against our strategy to unleash creativity for all, accelerate document productivity and power digital businesses, delivering on our innovative product roadmap and engaging a growing universe of customers from individuals to small businesses to the largest enterprises. Given the recent news reports, I wanted to provide an update on the process and timing of our pending acquisition of Figma. We remain excited about the opportunity to advance product design, accelerate collaborative creativity on the web, and redefine the future of creativity and productivity. The potential combination continues to be well received by customers, industry analysts and partners. In addition, we are preparing for integration as we work through the regulatory process. From the outset, we have been well prepared for all potential scenarios while realistic about the regulatory environment. We have completed the discovery phase of the U.S. DOJ second request and are prepared for next steps, whether that is an approval or a challenge. Adobe remains confident in the facts underlying the case. And based on current process timing, we believe the transaction continues to be on track for a close by the end of 2023. It goes without saying that our Q1 success demonstrates that we continue to be ruthlessly focused on executing against our immense opportunities, independent of this combination. David, over to you.

Anil Chakravarthy:

Thanks, David. Hello everyone. During the 2022 holiday season, e-commerce drove a record $211 billion with 38 days of $3-plus billion in daily spend according to the Adobe Digital Economy Index. Companies across B2B and B2C need an integrated customer experience management platform that empowers them to anticipate and meet the expectations of their customers. Today, digital is especially critical in enabling companies to drive profitable growth by delivering engaging and efficient customer experiences across the entire funnel, and Adobe is uniquely positioned to power experience-led growth. Experience Cloud offers a comprehensive portfolio of products that span the entire experience life cycle from marketing planning and workflows to data insights and activation to content and commerce and customer journeys. Built natively on Adobe Experience platform, our real-time CDP provides businesses with actionable customer profiles, leveraging data from online and off-line channels to deliver personalized experiences at scale. In Q1, we continued to drive strong growth in our Experience Cloud business, achieving $1.18 billion in revenue. Subscription revenue was $1.04 billion, both representing 14% year-over-year growth. Petco is a great example of a B2C company leveraging Adobe’s comprehensive set of products to create and deliver engaging experiences. Petco uses Creative Cloud to create content and Experience Cloud, including real-time CDP and Adobe Journey Optimizer, to orchestrate personalized experiences across their pet care ecosystem, including veterinary care, grooming, training and insurance. On the B2B side, Qualcomm is harnessing experience cloud to deliver personalized experiences and improve marketing performance as well as Creative Cloud and Document Cloud to accelerate content velocity across its business lines. Additional Q1 highlights include high retention rates and strong demand for services, demonstrating our customers’ focus on long-term value realization; strong growth in Adobe Experience Platform and our native applications, inclusive of real-time CDP, Adobe Journey Optimizer and Customer Journey Analytics; momentum for Workfront, which is powering workflows to help teams around the globe collaborate and launch campaigns with ease and efficiency; significant wins over single product competitors in analytics, content management and CDP that underscore Adobe’s differentiation; leadership in industry analyst reports, including the Forrester Wave for Digital Intelligence Platforms, the Forrester Wave for Cross-Channel Marketing Hubs and Gartner’s Magic Quadrant for Digital Experience Platforms; a significant number of transformational deals, including Accenture, Carnival Aida, Costco, IBM, MetLife, Paramount, Pfizer, S&P Global, TD Bank and Tim Hortons. The Digital Experience business had a strong start to the year. Enterprises are focused on driving revenue growth through digital channels while increasing the productivity of their investments in customer experience and marketing. Experience Cloud is uniquely positioned to help enterprise customers across the world unlock profitable growth. Next week, we are excited to host Adobe Summit, the world’s largest digital experience conference. It’s our first time coming together in person in Las Vegas since 2019. And we’ll be joined online by tens of thousands of customers, partners and developers from around the world. In addition to unveiling exciting new technology innovation across Experience Cloud, we will host inspirational C-level executives from several companies at the forefront of the digital economy. I will now pass it to Dan.

Shantanu Narayen:

Thanks, Dan. Adobe’s Q1 results underscore our strong momentum and the significant opportunities we have across our businesses. We’re thrilled to be back in Las Vegas for Adobe Summit next week. In addition to unveiling several new innovations across Experience Cloud, Creative Cloud and Document Cloud, we will share how we are building on our decades of AI leadership to deliver generative AI technologies that redefine creativity and customer experiences. We look forward to seeing you there. Adobe’s employees around the world motivate us to continuously raise the bar and create the future. This quarter, we were named to Glassdoor’s Best Places to Work; Bloomberg’s Gender Equality Index for the 5th year in a row; and the CDP A List, which recognizes leadership and environmental impact. Our renowned brand, mission-critical products, and vast base of customers create an unmatched advantage that will fuel our growth. Thank you, and we will now take questions. Operator?

Brad Zelnick:

Great. Thank you so much for taking the question. And congrats on a really strong start to the year. Dan, your guidance explicitly embeds assumptions for the macro environment. Can you share with us what those are and how those assumptions might have changed from a few months ago when you last guided? Thanks.

Brad Zelnick:

Thank you.

Alex Zukin:

Yes. Hi, guys. So maybe just what do you think is the driving force behind – so many companies are talking about longer sales cycles, difficult to closing business. You had an outstanding quarter, specifically within the enterprise. So maybe what’s driving those macro headwinds for others that you’re not seeing or your resiliency specifically? And then on the topic of metrics, every metric was strong as we looked at revenues, RPO, Digital Media ARR operating margins. But maybe just can you talk about deferred revenue in the quarter? Anything there that was a headwind, because it did look like free cash flow was a little bit lighter than what we were expecting?

Dan Durn:

And Alex, I’ll jump in on the second part of the question. As we think about RPO being up 13% year-over-year on a constant currency basis, you think about the underlying performance of deferred revenue, unbilled backlog, it’s very similar profile across both of those dimensions of the RPO. If you think about cash flow, the one thing I would point to, we all know that there has been a change in the tax regulation around capitalization of R&D expenses. We signaled at the time we set our annual targets that we would see a step-up in cash taxes starting this quarter, and that’s really what you see profiling through operating cash.

Operator:

[Operator Instructions] We will take our next question from the line of Keith Weiss with Morgan Stanley. Please go ahead.

Dan Durn:

Yes. So let me take them in reverse order. In terms of cash taxes, there is a 5-year amortization period around the capitalization of that R&D. So you’ll see a pretty dramatic cash tax step-up initially. But over that 5-year amortization period, it will converge on the reported tax rate. And so that’s the general profile, and that’s why you see the significant step-up in Q1 just starting that process now. In terms of the environment we are in, clearly, the company is performing well. You see the diversification of our business that’s across geographies, industry sectors, product portfolio. The company is just performing well at a broad base way on the strength of that performance and the momentum we have, the visibility we have into the full year. We think it’s the prudent thing to set expectations with investors in a way that reflects what we see as the opportunity in the company-specific performance. When I take a step back and I think about what is driving that differential performance in this environment, I think our products are mission-critical to our customers. We are on the critical path of them generating revenue. But as the world goes digital and those investments are prioritized, not only do we help companies drive top line growth, but we help them with the underlying productivity gains that go with that. It is why customers in this environment are prioritizing around things that we sell to enable their success. It addresses top line performance as well as underlying profitability of our customers. So being on the critical path, being mission critical to customers, we think this is the type of environment where the power of Adobe and the performance of the company gets to shine.

Shantanu Narayen:

And maybe just putting it altogether if you look at it and say that, hey, we did $410 million in Q1, we are targeting $420 million of net new ARR in Q2. The question you would have asked us if we hadn’t done this was what are you signaling about the second half of the year. So I think it’s a way of showing that the momentum is there in the business.

Operator:

And we will take our next question from the line of Jake Roberge with William Blair. Please proceed.

Shantanu Narayen:

Well, for a couple of years right now, we’ve been really focused on what we’ve called in the past, the data-driven operating model and really being pretty focused on driving the business both with the narrative and the number. And so I think as we continue to, as David mentioned, have different products. And he is really focused on how we are acquiring them, how are we engaging them, what’s the usage, how do we make sure they are getting value for the product, how do we continuously tell them about what’s new. And then I think as David has come in and introduced the notion of product PLG, I think that part has also really started to reflect in making sure that customers know that we’re building products and features that are relevant for the pain points that they have. So I would say the underlying business, while they are sort of the digital imperative, I wouldn’t underestimate the incredible execution that the team continues to do on that or in DX. I mean how do you look at the solutions we’re selling? How do you understand cross-sell? How do you understand upsell? And I think the hours and hours of work that goes in is sometimes not appreciated, but I’m incredibly respectful and appreciative of what the teams have done. So a lot of execution is, I think, the short answer.

Operator:

And we will take the next question from the line of Brad Sills with Bank of America. Please go ahead.

David Wadhwani:

Yes. As Shantanu talked about, it’s a holistic process. First of all, we’ve, over the last couple of years, spent a lot of time with product-led growth. What that gives us is confidence that when people come to Adobe.com and they get into the products, they are going to have a great onboarding experience. They are more likely to convert, and they are more likely to stay, which then starts to give us more confidence and growth in terms of improving what has already been a world class in terms of lifetime value. As that happens, we’ve been running more targeted campaigns with things for Photoshop and Acrobat and Illustrator as an example that are more targeted to the growth activities and the landing pages in the products themselves. And we’ve actually been connecting all of our outbound marketing activities with landing pages in the products themselves. So we have been able to really increase our demand efforts and the ROI associated with that to bring more traffic to top of funnel. In addition to that, we have been investing a lot in growth loops. So people are able to now when using the products actually share some of – share the content out to stakeholders. Those stakeholders are able to look at that content, but also become top of funnel opportunity for us. If you look at Acrobat Web, as an example, we have seen a massive increase in terms of Acrobat Web usage driven by things like Share for Review. So, that drives more top of funnel for us. And then third is partnerships. We have been working very closely with Microsoft as an example. We have announced that Reader, as an example, will be the default PDF viewer in Edge, which now gives us access to over billion users on Windows-based devices. So, it’s a cacophony of these activities that ultimately results in strong top of funnel. And then as we talked about, it’s really about the hard work and the data to drive personalized experiences at scale, leveraging a lot of Anil’s DX businesses and products to drive users all the way through to conversion.

Operator:

And we will take our next question from the line of Michael Turrin with Wells Fargo Securities. Please go ahead.

Anil Chakravarthy:

Yes. Let me start on the digital experience side. We have a broad and comprehensive portfolio, and it’s integrated with the Adobe Experience Platform. So, from a customer perspective, they get the best of both worlds. They get those best-in-class applications, whether it’s content and commerce or customer journeys or data insights or workflow, marketing workflow, and they get the benefit of integration with the Adobe Experience Platform and the native apps that we have built there. So, that’s a powerful combination. It helps to really address what Shantanu was talking about, which is how do you keep growing through your digital channels and you get the revenue growth, but you also get the benefit of getting efficiency through consolidation. And that’s where we believe we really shine as customers are looking at their overall stack, similar to what they have done in other aspects of their IT enterprise architecture. They are looking at who is my go-to platform that I can really standardize on and I will build around, and so we are getting the benefit of that choice.

Operator:

And we will take our next question from the line of Kash Rangan with Goldman Sachs. Please go ahead.

David Wadhwani:

Kash, I think there was about three or four questions, but all related. So, happy to take those really quickly. Nicely played. First of all, this is really about increasing the total number of users, we believe, very strongly. As we talked about at MAX, this is about enhancing human creativity, not replacing it. And ultimately, whether you are an individual solo printer SMB or enterprise, we are hearing the same thing, which is that you need to create more content than you are able to create today. And so this really plays well into our core strengths. As you know, we have got a decades-long focus on AI, things like neural filters and object selection. And hundreds of other features have been based on AI for us, and they have increased creativity, and they have increased productivity, and they have helped people keep up with the demand for content. They have also made it easier for people to onboard into the experiences, and so we have been able to broaden the opportunity for people to start leveraging and using our core products. We have now been able to leverage the hundreds of people that are in our research organization and really target them towards generative technology, which we believe is a huge step forward, leveraging all of the work we have done, but a huge step forward going forward. And we and everyone else in the industry are still in the early innings. So, to give you a sense of where we are going at MAX, we talked about our vision for effectively not just creating content, but really engaging and embedding it in the existing workflows to create a creative copilot we refer to it as. And since then, we have been very hard at work at creating our own model, and the model that we are focused on is around output quality. So, it’s about best-of-breed generative AI. But combining that with the Adobe magic that we have talked about over the years and all of the technology we have that takes images and makes them better, and so the output quality, we think is going to be differentiated. The second thing is around commercial reuse. There is a lot of complex questions here around copyrights, around diversity and inclusion, about harmful content that’s being created. That’s something we take very seriously, and we are embedding that into everything we do. And the third thing is really about workflow integration. Creating an image is just the start. It’s not the end. And Adobe is the only player that has a full end-to-end workflow, not just within the products and the tools that we have in the digital media business, but also everything that Anil is doing around the content workflow and the content supply chain out to the point of distribution. And in fact, because of this, we are seeing other gentech companies wanting to partner with us more and more, and so we feel like we are in a really advantaged position where we are going to come out with our own model and we are going to be partnering with others to make sure that because of our distribution and the place we play in the market, we can bring a lot of this value to actual fruition. And stay tuned, next week at Summit, where we have a lot of exciting announcements and progress to make there. And then last to your, I think fourth or fifth question.

David Wadhwani:

Monetization, we are very excited about what this means for the business. New user onboarding. We think that, again, if you can start to imagine yourself as creative by using a text prompt, we can take you through that full journey and onboard you into other Adobe offerings. It’s also great for retention. We have always seen the more value that gets used in our core offerings, the better the retention rates and the better the LTV. And we think there is up-sell opportunity. We do think these are distinct new packages that we can bring to market and up-sell people to.

Jay Vleeschhouwer:

Thank you. Good evening. David, for you first, when we spoke at MAX on the subject of monetization, you alluded to Adobe’s plans for new pricing and packaging, and you alluded to that this evening. But there was a third ingredient that you also alluded to at the time, which was segmentation, which sounded to me like something that you have success with back in the pre-CC days. And so is this something that you could talk about in terms of your returning to the segmentation techniques of the past that work rather well for the company? And then for Anil, it’s interesting to hear the reference to your competition with single product companies. That’s not a new phenomenon, of course. You have had multi-solution DX portfolio for some time. So, would you say, therefore that the wins or magnitude of the wins against single product competitors is more pronounced now? It’s a larger part of the DX business? And would you say that the investments that you have evidently been making over the last year in consulting capacity has been a critical enabling ingredient for the growth you are now seeing in DX?

Shantanu Narayen:

And just to punctuate that maybe a little bit, Jay. I mean the reality is that we actually have different pricing for different devices today, which is completely different. We have web-based pricing for people who come and experience this as a result of a web search that they have made more successfully through Acrobat Web, for example. And so if the question is when we have had things like design collection or web collection or video collection, I mean the reality is the CCO laps, which actually had a really good quarter, is perceived by people to be the new sort of table stakes for what is happening in creative, and we think that that’s a great offering. And as David said, I mean whether it’s Stock or whether it is Substance and our 3D offerings, what we are doing there, those are really perceived to be the differential offerings that are personalized. And for a Photoshop customer, how do we get them to use one of these other offerings. So, I think we have done a really good job on that particular front.

Shantanu Narayen:

And there is more scrutiny, wouldn’t you say, Anil, that so I think part of what’s happening is as the IT or the Chief Marketing Officer, the Chief Digital Officer is thinking about this holistically. There is more scrutiny around who is the company that can provide us the more comprehensive solutions. So, that – you have seen, Jay, a certain difference in how customers are viewing that, which again plays to our strengths.

Operator:

And we will take our next question from the line of Saket Kalia with Barclays. Please go ahead.

Shantanu Narayen:

Yes. Saket, maybe I will first jump in. I mean I think just let’s remember before they answer, these are two separate companies, and so we are operating at arm’s length in terms of what they are doing. I think we have shared upfront that the XD revenue is de minimis, and so that’s the part that I wanted to get across. And then David can certainly speak to some of the strategic rationale and ideas for what we can do.

Saket Kalia:

Very helpful. Thanks guys.

Operator:

Thank you. We will take our next question from the line of Brent Thill with Jefferies. Please go ahead.

Shantanu Narayen:

Happy to, Brent, and I hope we get to see you next week at Summit because then you willalso get to meet a whole bunch of customers. I think – and Anil, certainly feel free to add. I mean I think we saw some really good transformational deals. I think both Dan and Anil referred to that. And so companies that are looking at Adobe to help them with their entire end-to-end customer experience management, good strength there, Brent. I mean those tend to be ones that we have worked with for many years and some that are really looking at it as a strategic. So, I would say that segment, the pipeline associated with people who are looking for a comprehensive and integrated CXM solution is pretty large. I think as it relates to what we call the solution-led segment as well, which is people who may have our analytic solutions and want content solutions or those who have both of those and want journey optimizer or customer journey analytics or certainly the commerce solutions, that’s another part of the business where we are making sure that we can up-sell. I know Anil typically at every FA meeting gives you stats and metrics on how we are making progress. So, that is one. Given we have the customer relationship and we have the customer engagement, and we have customer success managers, I think continuing to penetrate a customer account, that’s where also we see pipeline. And that’s a pipeline that’s driven, frankly, by us. I think in terms of the geographies, we continue to see strength in North America. I think when you think about EMEA, that remains an area of strength. There are some areas in Asia, some countries in Asia. So, our job there, really, Brent, has been how do you drive a large pipeline, understanding that there is going to be different companies that look at this differently in specific quarter, but we are focused on the addressable market. Anil, I don’t know if you have other stuff to add.

Shantanu Narayen:

And Brent, the other thing I will say, given just the last question is, I think at Summit, you will see some of the themes. I mean certainly, content has been a theme for us for a long time. Data has been a theme for us for a long time. The focus on customer platform and CDP has been a big one. I think how this spreads its tentacles into the product and PLG as David has said, so I think we have some exciting things that we will talk about in that particular space in AI and how AI can help. So, we are not just resting on what we have today as an integrated offering. We are really the innovative product roadmap across each one of our businesses, what Dave has been doing in creative, what’s happening in documents on the web and mobile devices and what Anil is going to show. I think that’s also what gives us a lot of confidence that we are anticipating and solving customer problems. And so it was a strong start to Q1. And based on the product innovation, we really continue to be excited about the opportunity that we have at Adobe, and we look forward to seeing all of you at Summit.

Operator:

Thank you. This does conclude today’s meeting. Thank you for your attendance and you may now disconnect.

Operator:

Good day, and welcome to the Q4 and FY’22 Adobe Earnings Conference Call. Today's conference is being recorded. At this time, I’d like to turn the conference over to Jonathan Vaas, Vice President of Investor Relations. Please go ahead.

Shantanu Narayen:

Thanks, Jonathan. Good afternoon, and thank you for joining us. 2022 was an exciting and eventful year for Adobe. We achieved record revenue of $17.61 billion, representing 15% year-over-year growth. GAAP earnings per share was $10.10 and non-GAAP earnings per share was $13.71. We delivered record operating cash flows with a focus on profitability. Our strong performance in the uncertain macroeconomic environment underscores the resilience of our business and the mission-critical role of our products in a digital-first world. Our strategy to unleash creativity for all, accelerate document productivity and power digital businesses is driving momentum across every geography and customer segment, making us one of the most innovative, diversified, and profitable software companies in the world. We continue to execute against our product roadmap, serve a vast customer universe from individuals to large enterprises and deliver strong top and bottom line growth. Adobe Creative Cloud, Document Cloud and Experience Cloud have become the foundation of Digital Experiences, starting with the first creative spark, to the creation and development of all content and media, to the personalized delivery across every channel. In Q4, we achieved revenue of $4.53 billion, representing 14% year-over-year growth. In our Digital Media business, we had our best quarter ever on net new ARR, delivering $576 million, and our Digital Experience business achieved its first $1 billion subscription revenue quarter, growing 16% year-over-year. I will now pass it to David.

Anil Chakravarthy:

Thanks, David. Hello everyone. Every business in every category now depends on digital to engage and transact with their customers. Adobe’s Holiday Shopping Report, which analyzes trillions of data points in Adobe Analytics, found that Cyber Monday drove an all-time high of $11.3 billion in online spending, with mobile shopping now accounting for 55% of sales on Thanksgiving, and Buy Now Pay Later orders jumping 85% during Cyber Week. We predict spend will exceed $210 billion this holiday season. No company is better positioned than Adobe to capitalize on this large global opportunity. In my customer conversations, it’s clear that the current macroeconomic climate requires businesses to prioritize investments, and digital remains mission-critical to drive operational efficiency, improve customer engagement and maximize long-term value realization. We are driving a mix of diversified revenue streams through subscription and consulting services across new and existing customers, demonstrating the strength of our business. Experience Cloud is powering digital businesses in every industry across B2B and B2C with our leading solutions spanning data insights and audiences, content and commerce, customer journeys and marketing workflow, and it is unique in that it helps businesses drive customer demand, engagement and growth while simultaneously delivering productivity gains. Our comprehensive set of applications, including Real-Time CDP, are built natively on our highly differentiated Adobe Experience Platform, providing companies with a unified profile of each of their customers to deliver the most personalized, real-time experiences at scale. Adobe Experience Platform processes 29 trillion segment evaluations per day and executes a response time of less than 250 milliseconds, illustrating the impact of its real-time capabilities at scale. In Q4, we continued to drive strong growth in our Experience Cloud business, achieving $1.15 billion in revenue. Subscription revenue was $1.01 billion, our first billion-dollar quarter and representing 16% year-over-year growth. Adobe is differentiated in our ability to power the entire customer experience, from ideation to content creation to personalized delivery to monetization. Chipotle is a great example. They are using Creative Cloud to design content for web and mobile channels and Experience Cloud to highlight new product offerings based on consumer preferences and support a faster, easier and more customized online ordering process. In government, the State of Illinois is using Experience Cloud and Document Cloud to provide simpler and more equitable access to state services for over 12 million residents. It's especially inspiring to witness the positive social impact of Adobe technology. The National Center for Missing and Exploited Children has long used Photoshop to create age-progressed photos and uses Experience Cloud to facilitate the recovery of missing children. Additional Q4 highlights include

Shantanu Narayen:

Thanks, Dan. As the company celebrates its 40th anniversary, it is a perfect time to reflect on our past and our future. Adobe was founded on simple but enduring principles that remain with us today. Innovation is at our core, employees are our greatest asset and our customers, communities and shareholders are central to our success. Over the past four decades, Adobe’s continuous innovation and leadership have empowered billions of people around the globe to imagine, create and deliver the best Digital Experiences. Our strong brand and company culture enable us to attract and retain the world’s best employees. We are proud to once again be named to Interbrand’s Best Global Brands list as a top riser for the 7th year in a row and to Wall Street Journal’s Best Managed Companies, ranking number one for Employee Engagement and Development. We have everything it takes to continue our success in the future

Mark Moerdler:

Thank you very much, and congratulations on the quarter and the guidance, by the way. Can you give us, David, some more color on Adobe Express and your ability to convert free users to paid users? Are you seeing any impact to creative customers trying to switch to Express? And how do you assure express paid adoption with that impact on Creative Cloud?

Operator:

We'll go ahead and move on to our next question from Brad Sills with Bank of America.

David Wadhwani:

Yes. As we talked about when we launched Creative Cloud Express, the primary focus right now is bringing people into Adobe Express and just making them successful, whether it's at the free tier or whether it's at the paid tier or whether it's a pay tier eventually migrating up into the core flagship applications. Our primary focus has been and continues to be right now around usage, repeat usage and utilization. We are seeing, though, while that's our primary focus, we are seeing a lot of really interesting data coming in suggesting that we -- that the upgrade has are -- while still early and not our primary focus are working. For example, in many higher ed institutions where we've started to deploy Adobe Express, we're starting to see not just the increase in terms of usage of Express, but we're also starting to see increase in demand for Adobe Creative Cloud flagship applications. And again, part of this is we know and we believe that everyone should be creative and creativity is the new productivity. But as people start to leverage and benefit from that creativity, they naturally want more power and precision as well. So that they do go well hand in hand.

Sterling Auty:

So, I'm curious, is there anything operationally that you can do in preparation for the Figma acquisition, either from an expense structure or development side now before close? And if so, what are those moves that you're making?

Operator:

We'll move on to our next question from Brad Zelnick with Deutsche Bank. Please go ahead.

Shantanu Narayen:

Brad, as you know, they're a private company. And so, we're certainly not at liberty to talk about it. And they have to continue to execute on their opportunity by themselves.

Operator:

We'll move on to our next question from Mark Murphy with JPMorgan. Please go ahead.

Shantanu Narayen:

Well, Mark, firstly, thanks for being there, and it's clear that you were also looking at all of the cool new innovative stuff that was delivered. I always worry about questions like that because it's, you know, which of my children do I love the most. But let me just speak to, I think, thematically, what David and Scott showed, which is the core applications. We just continue to make sure the core applications are more accessible, more productive, more fun. And so I think that's one area, thematically, that the team has done an outstanding job of making sure that we continue to deliver innovative capabilities. You mentioned Intertwine and Illustrator. I think the second thing, thematically, we talk about how do we get more people into the franchise. David also referred to that when he answered the two questions on Express, which is, the more we get people into the franchise, whether it's through our trial products, whether it's through Express, whether it's through participating in the collaborative process. I think that only adds to the available market for Adobe. And so, I think the work that we're doing in collaboration is really continuing to democratize what we can do. So, I'm pretty excited about that. I think the AI and the sneaks that you talked about, that really -- the potential for that when you see whether it was the individual fonts that were being done or whether your ability through a text, to be able to get your content done exactly the way it is. I'm sure you've been tracking also what's happened, Mark, in terms of the chat GPT and what you can do with respect to text. So, I think that entire space, our vision has always been anybody who has a creative idea, how do you get that creative idea to life. And so, I think moving from the hundreds of millions to billions of people who can use it. You're right, that has profound impact in terms of getting more people on our platform. And I think you'll see us be quite aggressive about delivering more of that functionality in an augmented way, perhaps first starting with Express. But I think we're excited about all of that. And the Frame acquisition certainly also is off. I think David and Dan spoke to Substance. So, we feel really good about the multiple growth drivers.

Operator:

The next question will come from Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Shantanu Narayen:

Yes. Jay, thanks for recognizing that our innovation has really come through an extremely close relationship with customers. So, I think in the past, in the desktop era, what product-led growth really was all about was making sure that as we engage with the customers, as we engage with the community, that we were able to use that. I think the best example perhaps in the desktop era was what we did with Lightroom. And when we first came up with Lightroom, given the fact that we had Photoshop already as a product, just getting the millions of people to use it even before we release the product, having all those evangelists and a great product, I think was a great example. What the team in both Creative Cloud and frankly, in the Experience Cloud, are doing is actually also following on the great work that we pioneered in the Document Cloud. And so, in the Document Cloud, I think product-led growth really related to as we think about what people were doing on searches when we introduced our web-based offerings for Acrobat, that's when we just started to see this velocity of how we engage with customers and prioritizing what's clearly top of mind for them, our ability to immediately satisfy them, I think, escalated quite a bit. When David came in, David really said, we've got to take this to a whole new level with product-led growth, and it's integrating both the community as well as, frankly, right now, engagement and engagement marketing in the product. And so when you get into product sessions right now, and you see the product manager and the engineering manager as well as the product marketing manager, all of them are on the same page. We have data. We have things instrumented in the products and your ability to do both AB testing and here's where we use our own products and the products that Anil does. And so, product-led growth right now is about saying, at any given time, we probably have three tests in market for a particular feature as well. And we're using that to really learn from the customer interactions and to deliver better quality products sooner. But David has really been the pioneer. So, David, if you'd like to add? And then maybe a little bit, Anil, on what we are doing for that in Digital Experience as well.

Anil Chakravarthy:

Yes. I just wanted to add, Shantanu, as you said, several of our enterprise customers are starting to deploy their own product-led growth using our analytics technology, a banking customer, for example, one of our best customers. They have their online mortgage application, and they want to track who is able to use it successfully, who's able to complete applications completely online, and they're using our analytics technology to do that and see what works and what they need to do to fix it. So, we're starting to see like exactly, as you said, our technology being both used inside Adobe to drive our own PLG as well as customers doing it.

Operator:

We'll move on to Derrick Wood with Cowen & Company. Please go ahead.

David Wadhwani:

Sure. Yes, I'm happy to do that. So first of all, yes, as Shantanu mentioned, we're very pleased with how FY22 has gone and how the quarter closed out, we saw a lot of strength in the core businesses. And our primary focus across these businesses continues to be around new customer acquisition, new customer ads. We also have a lot of diversity in terms of the drivers that we have and the leverage we have to drive the business. As we mentioned, we saw great strength across all of our creative segments imaging, photo, video, design. We also grew a lot of -- focused a lot in terms of new campaigns that are targeting new audiences for creative as well with a new campaign called Everyone can Photoshop, that's bringing customers in directly into the products and has been very productive in terms of driving top of funnel and conversion. On the -- in terms of new businesses for Creative, we're seeing a lot of strength from new businesses like Frame and Substance that have contributed more this quarter than ever before. And to your point, we've also been seeing a lot of strength in the core business around Acrobat. We're running a Acrobat’s Got It campaign really targeted at new customers in SMB where we show them all the capabilities that Acrobat has now, including specifically focused on signatures and things that really help them drive the business. So overall, the business is doing very well. The one dynamic that -- if you look at from an Acrobat perspective that we're really proud of too, is that we saw -- for the year, we saw growth of ARR at 23% despite the complicated macro. And it's important to remember that some portion of this is also -- the Acrobat business is also represented in the creative business. So, the Acrobat growth number is probably a bit understated in this point.

Michael Turrin:

Maybe one on the digital price side. We fielded some questions there just around guidance for next year in the current backdrop. You're holding on targets, grew well at 16% in constant currency for the quarter. So, can you just talk more around how much visibility you have in the targets there and it's how you closed the year at all, particularly given that EMEA comment provides incremental confidence in those targets going forward. Thank you.

Shantanu Narayen:

Maybe Anil, I'll just add a couple of things to what you said. I mean the first is that value realization has been top of mind for a lot of these customers. And so, I think if you look at the business as well, the services part, it's very clear that people want to implement it. And what I think is unique about Adobe's offerings in this particular space is that we help both with the customer engagement and frankly, the top of funnel as well as we help with productivity and cost. And so, it doesn't matter which side of that equation you are as, as an enterprise, I think both of them find that the Adobe Experience Cloud as well as, frankly, what we are doing with Sign actually help them on both fronts. And so we're pleased associated with that, and we have good visibility. I want to complement Anil and his team on the execution against the pipeline and transformational deals also, I think, just reflect the overarching interest that people have in making sure digital continues to be an imperative. And so, we're not going to be immune to the macroeconomic, but I like our differentiated solution and our execution.

Brent Thill:

Thanks. Dan, in terms of your guide, are you implying the environment gets worse or stays the same. And for Shantanu, can you just talk about the next 6 to 9 months as we potentially go into a tougher economic headwind, how you're reshaping and rethinking your go-to-market or any steps that you can take to ensure you can cut through what is coming in.

Shantanu Narayen:

And Brent, as it relates to your second question, I'll unpack that in maybe two ways. First is we're really pleased with what we did and even when the pandemic first started about prioritizing what was really critical for us. And I think the prioritization exercise when you're really focused on your top imperatives, that's really helped bring clarity and alignment within the company that I don't think should be undersold in terms of how effective that has been for execution. As it relates to the next 6 or 9 months and you think about the three routes to market, digital continues to be an area of strength. I mean, I know through our Adobe Digital Index we talk about what we are seeing in terms of people continuing to engage with the customers -- companies that they want to transact with electronically. And so, on the digital side, we will just continue to make sure we focus on acquiring the customers. David spoke to some of the effective campaigns. Clearly, we understand the attribution of that. And we just have to remain vigilant on making sure that we're attracting the customers on the new platforms where they exist. And for retention, which is a key issue as well, just how they continue to get value from the offerings that they have. The partner ecosystem, whether that's for the small and medium business or whether that's for what we are doing with the SI and VAR community on Digital Experience, just continuing to enable them, continuing to engage with them. I think that's a part. Clearly, the small and medium business did see a rebound after what they went through last year, which was a really bad situation. So I think we have to remain vigilant on that. And I think on the direct sales part, as we look at our pipeline, December, despite the fact that it's our first month of our quarter, we will continue to focus on execution against that to take advantage of whatever budget flush exists in companies. And then, as you start to come to what happens in Japan in February as it's the end of their fiscal year, continuing to focus on Europe. Brent, Europe was actually one of the highlights for us in the quarter. I think Adobe Experience platform has done well. And so, we remain cautious clearly about the macroeconomic, but I think we have visibility into making sure that we can continue to execute, Brent.

Keith Bachman:

Hi. Thank you very much. And apologize in advance for some background noise. Shantanu and David, I wanted to direct this to you, if I could. The ARR net new in the quarter was very good, particularly relative to expectations. If we look back over a little longer period of time though than the quarter, growth has slowed in net new ARR, even if it's assuming of flattening out. And what I didn't -- what we didn't really get -- I think as much as we would have liked at the Analyst Day was, what do you think the key drivers of the net new ARR and creative have been or total ARR, if you want? And what are the key things that you're focused on before Figma that would cause an improvement in AR growth? I assume that one has been perhaps Adobe Express as a more compelling entry point. Is there anything else that you can call out as some things that you believe that Adobe is focused on like really some issues in the past that you think are going to be resolved and therefore before Figma but improve despite the macro or help growth in the creative side? Many thanks.

Shantanu Narayen:

And maybe to add to that, Keith. I mean, when you think about the newer businesses that we're talking about, video just continues to be a really key growth driver, 3D and immersive imaging and photography. But if you take a step back, I think that two things happening in the macroeconomic environment that are actually going to be tailwinds. The first is the fact that it is the golden age of design. Everybody would like to express themselves. There are more screens on which all of this content is being consumed. So, I think the insatiable consumer demand for content, I think, is certainly driving a lot of more content that's being created. One of the exciting areas that I think David and Anil have talked about is what we are calling content supply chain. And when you take even the larger companies, they are all trying to get a handle of as they engage digitally with customers how much content is being created? Where is it being created? Where is it being delivered? How do I localize it? What's the efficacy of that content? And so, I think this content supply chain and everything we have with our creative applications, our asset management, the fact that we then deliver that content, I think we continue to believe that that's going to be a growth driver for the entire business as well. So, I wouldn't underestimate the insatiable consumer demand but I also wouldn't underestimate what's happening as enterprises recognize that the way to engage with people is to personalize that content.

Operator:

You bet. We'll go ahead and take our last question from Alex Zukin with Wolf Research. Please go ahead.

Dan Durn:

Yes. So from an operating performance standpoint, you rightfully point out, the Company is performing really, really well. But we're doing what we've always done inside the company, which is drive growth, deliver industry-leading products and innovation to our customers, help them become more effective on the critical path of driving revenue for their business. But we do it in a very disciplined way that drives margin and cash flow while driving growth. And we talked a lot about Rule of 40 at our FA day. If I were to take a step back and reflect on FY22, it's complicated macro environment, and we’re operating at a rule of 60 for the year. So, we feel really good about our ability to operate. And so as I look forward into next year, we're going to continue to lead. We're going to continue to innovate. We're going to continue to make our customers successful, but we'll continue to do what we've always done, which is ruthlessly prioritized where we make our investments, constantly review the portfolio, prioritize the things that are going to drive long-term value for our customers and do it in a very disciplined way. So, that's the operating tone inside the company. Nothing's changed on that front. We feel really good about how we're executing in the environment and the momentum we're carrying into 2023. From a cash flow standpoint, it all starts with driving that discipline in the business and we'll continue to drive cash flow and deploy that excess cash on a quarterly basis to create value with the shareholders.

Jonathan Vaas:

Thanks, everyone. This concludes the call.

Operator:

Good day. And welcome to the Q3 FY 2022 Adobe Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jonathan Vaas, VP of Investor Relations. Please go ahead, sir.

Shantanu Narayen:

Thanks, Jonathan, and thank you for joining us. Adobe had another record quarter, achieving $4.43 billion in revenue, which represents 15% year-over-year growth. GAAP earnings per share for the quarter was $2.42 and non-GAAP earnings per share was $3.40. In our Digital Media business, we achieved $3.23 billion in revenue. Net new Digital Media annualized recurring revenue or ARR was $449 million and total Digital Media ARR exiting Q3 grew to $13.40 billion. In our Experience Cloud business, we achieved $1.12 billion in revenue and subscription revenue was $981 million. In this digital-first world, Adobe Creative Cloud, Document Cloud and Experience Cloud have become even more mission-critical to an increasingly wide range of customers, from students to creative professionals to small businesses to the world’s largest enterprises. Fueled by our groundbreaking technology, track record of creating and leading categories and consistently strong execution, our opportunity is larger than ever before. Adobe’s greatness has been rooted in defining new categories and platforms and delivering cutting-edge solutions through both organic innovation and inorganic acquisitions. Throughout our history, Adobe’s innovations have touched billions of lives around the globe. From revolutionizing imaging and creative expression with Photoshop, to pioneering electronic documents through PDF, to creating the digital marketing category with Adobe Experience Cloud, Adobe continues to invent and transform categories. We are in the golden age of design and we believe we have a unique opportunity to usher in a new era of collaborative creative computing. I am thrilled to share that today we announced our intention to acquire Figma, a leading web-first design platform that will help us accelerate this vision. Figma enables designers, developers and all stakeholders to collaborate in the product design process from ideation to design to delivery. The combination of Adobe and Figma will significantly expand our reach and market opportunity while making the creative process more accessible and productive to more people. I will now turn it over to David to share more about our vision for Adobe and Figma and momentum in the Digital Media business. David?

Anil Chakravarthy:

Thanks, David. Hello everyone. One thing has become abundantly clear in this environment, digital has become the critical channel to engage customers and drive growth. Across the globe, companies in every industry are prioritizing investments in software solutions and services that enable them to anticipate and meet the expectations of their consumers. Customer Experience Management is an imperative and Adobe is the category leader. Adobe Experience Cloud delivers predictive, personalized, real-time digital experiences, from acquisition to monetization to retention, across content and commerce, customer journeys, data insights and audiences and marketing workflow. In particular, we are driving strong enterprise adoption of Adobe Experience Platform and Real-Time CDP which are foundational to this next-generation enterprise architecture. FC Bayern, one of the world’s most successful football clubs, is leveraging Adobe Experience Cloud and Real-Time CDP to transform their fan experience. This gives them a holistic view of every fan’s engagement online and offline, enabling them to deliver personalized experiences such as discounts at the stadium or an immersive shopping experience for viewers at home. In Q3, we continued to drive strong Experience Cloud growth, achieving a record $1.12 billion in revenue. Subscription revenue was $981 million for the quarter, representing 15% year-over-year growth. Q3 highlights include; strong momentum for Adobe Experience Platform and AEP-native applications, with the book of business more than doubling year over year; significant growth for Adobe Commerce, underscoring the demand for digital storefronts and marketplaces; Experience Cloud was named a leader for the sixth consecutive year in the Gartner Magic Quadrant for Digital Commerce and achieved the highest position in the Forrester Wave for Enterprise Marketing Suites; and key customer wins, including Crédit Agricole, Morgan Stanley, NASA, Qualcomm, T-Mobile and UnitedHealth Group. Looking forward, Adobe is leading an explosive growth category that is increasingly important to enterprises of all sizes. Adobe is well-positioned to help enterprises deliver exceptional customer experiences with industry-leading platforms and applications, a strong track record of deploying solutions successfully for thousands of customers and a proven ability to deliver the next-generation architecture for Customer Experience Management. Dan, over to you.

Shantanu Narayen:

Thanks, Dan. It was great to be back on the road this quarter meeting customers and partners as businesses return to a new hybrid work model. I was inspired and energized welcoming our new hires and meeting Adobe employees across multiple sites who will together drive the next phase of innovation, growth and culture. Adobe’s strength has always come from our most important asset, people. I am incredibly proud of the recognition we continue to receive as a great place to work. This quarter, Adobe was named to Fast Company’s Best Workplace for Innovators and Fortune’s Best Workplaces in Tech. Next week, we will hold our Adobe for All conference to bring employees together to celebrate our shared values of diversity, equity and inclusion. It is an exciting time at Adobe. Our strategy to unleash creativity for all, accelerate document productivity and power digital businesses is working. We are delivering on our innovative product roadmap, driving growth across new and established businesses and delighting a growing universe of customers. In addition to achieving all this success, we continue to look around the corner for new transformational opportunities that will drive decades of growth for Adobe. We believe that every individual, team and business will strive to be more creative and productive in this digital era. Adobe has a unique opportunity to usher in a world of collaborative creativity. In my conversations with Dylan at Figma, it became abundantly clear that together we could accelerate this new vision, delivering great value to our customers and shareholders. I look forward to welcoming Figma into the Adobe family upon close of the transaction. We look forward to seeing you at MAX and closing the year strong. Now, we will take questions. Operator?

Kash Rangan:

Hello. Thank you very much. Congratulations on really massive step forward to the management team. Shantanu and team, I wonder if you can talk about the persona of Figma and if there is any overlap at all between what Adobe wanted to be in the future with its a Creative family and where Figma is growing -- was going, and if you net it out, what is the incremental opportunity. It looks like $16 billion TAM, but your own Creative business, you outline as having a more than a $40 billion TAM. So I am wondering what the TAM could look like for Figma in the future as it integrates into Adobe, you identify new personas. And for Dan three years to breakeven, it sounds like there are some conservative assumptions built in especially because Figma is generating cash. I am wondering what your assumptions are for that the rather lengthy duration to breakeven. Thank you so much and congrats.

Dan Durn:

Yeah. Then from an accretion standpoint, first and foremost, this deal is about growth. This is about positioning the company to define new categories and drive growth for decades to come. And as we think about that growth trajectory, walked into -- walked through a number of those drivers. It’s about extending the performance of that platform as part of the combined company, getting it access to our customers and our go-to-market global -- go-to-market footprint. It’s about accelerating the delivery of new Adobe offerings on the web and then jointly introduce new offerings as we unlock those possibilities in collaborative creativity. This gives us an opportunity to focus and manage the R&D investments as we drive that roadmap and striking the balance between accelerating the growth and preserving that growth trajectory, but doing it in a disciplined way. We are going to deliver a tremendous amount of value over time to investors. Starting in year two post close, you will see our EPS growth rate faster than our overall revenue growth, will be accretive exiting year three and we are poised to deliver a lot of value.

Operator:

Our next question comes from Brad Zelnick of Deutsche Bank.

Shantanu Narayen:

Brad, it’s a good question and I understand that in these markets, in particular, acquisitions and maybe large ones are viewed with some skepticism. We certainly believe and I will talk about it that Figma will be a transformative deal for the customers and industries and it dramatically increases our TAM. We can deliver great value to an increasing set of customers. But I also want to reassure all of you and if you look at our results, this in no way changes our focus or our excitement on our current portfolio. We are growing well, and we are demonstrating strength across all of our three cloud offerings and we continue to execute against our current initiatives. And so if you look at the multiple internal businesses that are achieving velocity, whether it’s Adobe Experience platform and the apps that are built natively on top of it, what’s happening with 3D and immersive, what’s happening with Acrobat Forms, what’s happening with Frame. This is additive. And when opportunities like this present themselves, Brad, I think it’s the great companies that look at it and say, are you going to focus on the here and now only or are you going to seize on the opportunity that really positions Adobe for the next few decades. And so it’s a great question. We understand that there will be questions associated with valuation. We certainly believe that it provides valuation to our shareholders as well. When you look at what this means for us, but in no way diminishes my excitement around our current portfolio.

Shantanu Narayen:

Thank you, Brad.

Alex Zukin:

Hey, guys. So I will start with a non-Figma question and then layer in Figma. I guess, Shantanu, can you talk, or David, can you guys give us the kind of lay of the land on the demand environment, how it trended throughout the quarter, obviously, a lot of companies are seeing some elongation of deal cycles, descoping, even our channel checks on the Digital Experience side suggested that their deals are taking longer to close as they are requiring a lot more signatures. So, I guess, first of all, what are you seeing in the demand environment and what are -- because one of the questions we are getting from investors is why now, given that we may be entering a more recessionary environment, couldn’t you have done this type of a transaction cheaper later, so that’s kind of how I want to weave this in?

David Wadhwani:

Yeah. And on the Digital Media side, we began the year with a guide of $1.9 billion, and of course, we hope to beat that. And in the context of everything happening in the macro, if you look at Q1, Q2, Q3 and our guide for Q4, we are at $1.88 billion and in the context of everything happening in the world, we are very proud of this performance. And of course, we are an aggressive company. We hope to beat that number. And all the leading indicators remained strong. New user acquisition is strong, engagement and retention continues to be strong, monthly active users continue to be strong. And so we feel really good about the macro -- about our ability to navigate the macro despite what’s happening in the world around us. And then in the context of as we start looking for opportunities to grow, we have so much product innovation coming out at -- and we will see a lot of it at MAX, accelerating what’s happening in our flagship applications, what’s happening around Express and the kinds of capabilities we are putting in there. We are seeing great growth and momentum in terms of use and NPS there, Photoshop and Illustrator coming to the web. We have a lot of share for review collaborative capabilities coming as well. And then as you look at the conversation around Figma, we have known Dylan for years and we have shared very common values and vision, and the opportunities to grow that business faster and the synergies we have in mind are -- just allow us to take what is already a strong business and make it even stronger and faster.

Operator:

The next question is from Brent Thill of Jefferies.

Shantanu Narayen:

So two things to that, Brent. The first is, I understand that what you are saying in effect is some people will say, hey, show me how this value is accruing to Adobe shareholders as well and we certainly believe that otherwise we wouldn’t be doing it and we do believe that it will be value-generating for the Adobe shareholders. I think as it relates to XD and as it relates to Figma, I mean, we certainly, for designers, we are targeting what needed to happen as it related to screen design with the desktop product. I think the much newer market that emerged, which Figma effectively both addressed and pioneered was the ability to do this in a collaborative way and dramatically increase the scale, and they over the last decade, have really invested in and solve some of the hard technical problems that existed to make this happen on the web friction-free. So from our perspective, the Creative products continue to be strong, the ability to really tie the designers and developers is really where there’s this unique opportunity, as well as to create new markets. I mean I will give you one more sort of what-if scenario in terms of how we think about it, which is you combine what they have done with whiteboarding and ideation, and what will be the future of work, and if you think about the presence of Acrobat and what we have with Acrobat or if you think about the notion of brainstorming and what happens with FigJam, with what happens with Adobe Express, I think the opportunities are tremendous. I understand that there will be some sentiment associated with the price, and ball’s in our court to go demonstrate how we execute against our current initiatives, as well as to demonstrate the value of this new one.

Operator:

We can go to Keith Weiss of Morgan Stanley.

David Wadhwani:

Yeah. I will start by talking about InDesign and Figma. They are very different products at the core. InDesign is around building print and publishing workflows and doing layout. Figma is really all about enabling product design and a collaborative product design model. In fact, if you look at InDesign, it’s our traditional base of users, predominantly designers that are using it. One of the things that’s really interesting about Figma is the makeup of their user base. In fact, two-thirds of their users are not designers, they are developers and other stakeholders in the process, and the foundation of that collaborative model is what makes this such a special and accretive acquisition for us. If you think about going forward, the primary focus is going to be about bringing Figma into the family and then taking all of the capabilities we have across illustration and video and creative imaging and building it on top of the Figma platform to enable a whole new generation of capabilities that are going to resonate with digital native and next-generation creative professionals, and we are very excited about them. The two products are quite different.

Keith Weiss:

Got it. And on the pricing side?

Operator:

Next question comes from Brad Sills of Bank of America Securities.

Shantanu Narayen:

I think the three ways in which we look at that. First, in terms of the customers for Figma, I think, as David mentioned, the number of developers who are part of this products set is actually extremely extensive. But in addition to the product set associated with Figma design for developers, as well as stakeholders, I do want to again emphasize the product fit as it relates to FigJam for anybody who’s a knowledge worker and anybody who wants to ideate. So if you think about the value of ideation and brainstorming. I mean the reality is, they have tens of millions of people who signed up and trialed Figma. We have hundreds of millions of people who have used our products and so the adjacency in terms of enabling both of those combined sets of customers to use each other’s products, we continue to believe that drives great value. So this is really about, in our sense and then if you take Acrobat and the penetration that Acrobat has, everybody who’s using Acrobat also wants to both share, as well as ideate and brainstorm. So I know there’s a lot of questions around Figma design, which is clearly achieved escape velocity. I would urge you also to spend a little time looking at FigJam as I know you have and then you would really understand that, that also dramatically expands the customer base. So, yes, getting Creative Cloud to a more diverse set of customers on the web, allowing collaboration and enabling it much like you said with Frame. That’s very much part of the strategy and that’s why even in the press release, we talk about accelerating creativity on the web as one of the key pillars.

Dan Durn:

Yeah. No. It’s playing out as we expected as we take a look at the enterprise business, closing million dollar plus deals, transformational deals as we look forward off of that momentum into Q4. Pipeline is building nicely. Team is doing a good job executing against the opportunity and it’s playing out as expected.

Operator:

The next question is from Jay Vleeschhouwer of Griffin Securities.

Shantanu Narayen:

So, Jay, let me first cover the first one and there’s no doubt that what Figma has been able to do on the web by solving a lot of these multiplayer high scalability requirements to allow the tens of millions of people to use Figma design and even more important FigJam on the web, is an engineering marvel. And having access to that technology and being able to take advantage of it to dramatically increase anybody who’s participating in our design products, whether they would be stakeholders and developers will, I think, dramatically increase our TAM as well. And so, first and foremost, their DevOps is great. I mean we certainly have a lot of that expertise on the Digital Experience side of the house as it relates to the trillions of transactions. But for the Creative, we really believe that this is one of the key pieces of technology that we are getting that are going to be really amazing. I think as it relates to your second question, we really view these as, when you have the right altitude, for us it’s all about how do you take things that might seem competitive, but are actually more complementary and expand the nature of the market. And for me, when I think about what we did with Macromedia, it was really about saying. We are going to target more graphics professionals and not just focus on imaging. We are going to focus on what’s happening with video on the web or gaming. And so I think it was an expansive part of how we looked at it. And that’s the same situation here. For us, it’s really not about what we had on the desktop. It’s really about expanding to the web. Multi-surface is something that we have talked about a lot. It’s about a community in many ways, Jay, and what they have done as it relates to their communities and plug-ins and how they have been able to use artificial intelligence, all of that also power we bring to bear to the combined. So from my perspective, this is really about adjacency. It’s about complementary things that we have done. Certainly, we did have a presence in screen design on the desktop. But big picture this is all about dramatically expanding it and that’s the conversation that David, Dylan, Scott and I have been having. And David, feel free to add to that.

Jay Vleeschhouwer:

Thank you.

Saket Kalia:

Okay. Great. Hey, guys. Thanks for taking my question and congrats to all on the announcement. Dan, maybe for you, just to maybe focus on the core business for a minute and then loop in Figma. Are there any puts and takes with margins this year that we should keep in mind when thinking about organic margins next year, and of course, I understand you are guiding to it, but just sort of anything that you want us to note? And then on top of that, how do you think about the EBIT profitability for Figma and where that can go over time?

Saket Kalia:

Very, very helpful. Thanks, Dan. Congrats again.

Jonathan Vaas:

Hey, Operator. We are coming up on the top of the hour. Let’s try to squeeze in two more questions please.

Phil Winslow:

Hi. Thanks for taking my question. I just wanted to focus on a little bit more in the near-term in terms of your guidance for Q4. If we were in back to last year, you saw sort of a lower uplift around sort of the Black Friday selling period as compared to prior years. Now, obviously, going into this Q4 is always is you are a seasonally stronger business or enterprise spend period for Adobe, we are also going into that sort of that Black Friday period again, obviously. When you think about your guidance for Q4, what are you baking in compared to last year for sort of those Black Friday trends, but also that sort of seasonal uplift in the business spending?

Phil Winslow:

Great. Thanks, guys.

Kirk Materne:

Hi. Thanks very much and congrats on the acquisition. Dan, I just wanted to follow up on your comments maybe on the dilution around the deal. I think just based on what Shantanu and all of you have said about sort of the complementary nature of the deal, the ability to expand the market. I think people are asking why isn’t there more sort of synergy from a go-to-market perspective with this deal, meaning bringing Figma onto your platform would theoretically just turbocharge sales immediately given sort of your scale? So I just -- how much of that’s baked into the dilution forecast or are you -- I realize it’s early, but are you leaving that more for upside, because I think the length of the dilution given that this should be complementary from a go-to-market perspective, I think, is what’s somewhat confusing to folks? Thanks.

Kirk Materne:

Okay.

Kirk Materne:

Yeah.

Kirk Materne:

Just a follow-up on that. I just -- too difficult for us to, meaning you both can grow faster, are these new developers that require sort of new efforts to go get them from Adobe perspective. I am just trying to get a sense of the overlap of the opportunity would seemingly think that you guys combined could actually do it more effectively together, which would create greater operating leverage to a certain degree sooner. So I am just trying to -- I realize there’s a lot of moving parts in the near term to this, but I was just kind of curious, is that what’s sort of embedded in your expectations or are you sort of leaving that for to see what happens as you get, I guess, a little bit closer to the deal closing?

Jonathan Vaas:

Thanks, Shantanu, and thanks, everyone, for joining us this morning. This concludes the call.

Operator:

Good day and welcome to the Q2 FY 2022 Adobe Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jonathan Vaas, VP of Investor Relations. Please go ahead.

Shantanu Narayen:

Thanks Jonathan. Good afternoon and thank you for joining us. Adobe had a strong Q2 driven by the secular shift to digital that is transforming how we live, work and play. In Q2, we achieved a record $4.39 billion in revenue representing 15% year-over-year growth. GAAP earnings per share for the quarter was $2.49 and non-GAAP earnings per share was $3.35. In our digital media business we drove strong growth in both Creative Cloud and Document Cloud achieving $3.2 billion in revenue. Net new Digital Media annualized recurring revenue or ARR was $464 million and total Digital Media ARR exiting Q2 grew to $12.95 billion. In our Experience Cloud business we achieved $1.1 billion in revenue and Subscription revenue was $961 million for the quarter. The digital economy runs on Adobe’s tools and platforms. Customers from individuals and small businesses to the largest enterprises are using our products to unleash their creativity, accelerate document productivity, and deliver personalized customer experiences. Digital experiences from the apps on our devices to the digital documents we consume, Edit and Sign, to the personalized online shopping experiences is made possible by Adobe. Our mission to enable the world's digital experiences has never been more relevant, and we remain focused on executing our long term growth initiatives. We are delivering mission critical products that serve an ever increasing base of customers and we have a track record of strong growth and profitability. In my conversations around the world, it is clear that Digital is playing a pivotal role in powering the economy and enabling the world to keep moving forward. I will now turn it over to David to share more about our momentum in the Digital Media business. David?

Anil Chakravarthy:

Thanks, David. Hello, everyone. Even in this uncertain economy, every business continues to prioritize its digital investment. Our June Adobe Digital Index report, which leverages trillions of data points from Adobe analytics found that consumers spent a billion dollars more online in May, compared to April. Year-to-date, shoppers have spent over $377 billion online, which is roughly 9% more than the same period last year. Driving this digital momentum is the imperative for personalized customer experiences at scale. Adobe Experience Cloud is the leader in the Customer Experience Management category, offering a comprehensive set of integrated applications and services, spanning data insights and audiences, content and commerce, customer journeys and marketing workflow. Built natively on Adobe Experience platform, our real time customer data platform, real time CDP provides businesses with a single view of their customers data across every channel, allowing them to create precise segments and deliver personalized experiences, regardless of when and where a customer interacts with their brand. Adobe delivers real time data with more than 24 trillion audience segment evaluations per day. The Home Depot is the latest in a large and growing set of industry leading customers who are adopting Adobe's real time CDP as the underlying platform to power their digital business. Real Time CDP provides a comprehensive view of the Home Depot's customers across e-commerce, mobile and in-store purchases, enabling them to build customer loyalty and grow their business. In Q2, we continue to drive outstanding experience cloud growth, achieving a record $1.1 billion in revenue. Subscription revenue was $961 million for the quarter, representing 18% year-over-year growth. Q2 highlight include native integration across real time CDP customer journey analytics and Adobe journey optimizer, which is a significant differentiator, allowing brands to orchestrate, measure and optimize the entire customer experience. New innovations such as segment match enable brands to securely share customer segment data with business partners while respecting customer privacy. Major enterprises are adopting real time CDP as the platform of choice with key customer wins this quarter, including Autodesk, National Football League and U.S. Bank. Expanding experience cloud leadership in the healthcare industry by making Adobe journey optimizer and real time CDP HIPAA-ready through healthcare shield. This quarter’s customer win with CVS is a great proof point of this massive market opportunity. New services in Adobe analytics, delivering a single workspace for brands to unify data and insights from new media types such as 3D and streaming media with traditional channels to get a holistic view of customer engagement with customer journey analytics. Strong adoption of Adobe Experience Manager for unified content management, demonstrating Adobe's leadership in helping businesses effectively manage their content supply chain from creation through delivery. Tremendous growth in demand for partner and Adobe Professional Services, underscoring the urgency for implementation and value realization and key customer wins including Audio book [ph], Anthem, Bank of Nova Scotia, Humana, McDonald's, Stellantis, and Toyota. Reinforcing our leadership position, Adobe continued to receive strong industry analyst recognition, including being named number one by Gartner for both the marketing sub segment of customer experience and relationship management and digital experience platforms. We've also named the leader in the inaugural IDC MarketScape for worldwide retail and CPG customer data platforms and the IDC MarketScape for professional services. Looking ahead, our category leading solutions, strong pipeline and tremendous scale through our partner ecosystem, position us to deliver personalization at scale across every industry and drive strong growth in the second half. Dan, over to you.

Shantanu Narayen:

Thanks, Dan. We are proud of our strong Q2 performance across Creative Cloud Document Cloud and Experience Cloud. Adobe remains one of the greatest places to work in the industry. And I want to thank our employees for their relentless dedication. This quarter, Forbes named us a top employer for college graduates, and we were ranked on their list of America's best employers for diversity. I'm thrilled to welcome our largest cohort of interns and university graduates this summer. Demand for our category defining products and services continue to grow. We're innovating at rapid speed for new and existing customer segments, accelerating our leadership in established categories, and seeing strong momentum for our newer initiatives. Our strategy remains to focus on long term growth initiatives while delivering world class profitability. Our business fundamentals and market tailwinds are strong. And I've never been more confident in our ability to execute on the $205 billion market opportunity ahead of us. I will now turn it back over to Jonathan.

Operator:

Thank you. [Operator Instructions] And we will go to our first question from Kirk Materne of Evercore ISI.

Shantanu Narayen:

Thanks Kirk. Yes, we are pleased with what we saw in the quarter. In the conversations that we're having, both Anil and I would first say that the interest level in executives all around the world, is very high. Unlike last time, I would say right now, the focus is also a lot on execution. So a lot of the investments that people have made in digital, they recognize that given how critical the imperative is to engage with customers digitally. So we're actually pleased both Adobe as well as if you look at the entire systems integrator and partner network, they are finding that there's a lot of demand for implementation on Adobe products. I think the other part of the conversation that you all have with enterprise CEOs right now is they all recognize it's an uncertain time. And that's the conversation that we have. But despite that uncertain macroeconomic environment, the thing that all of them recognize is that Digital is a priority. And they really want to continue to have conversations with us as to how they can do Digital. I’ll have Anil maybe add a little bit of what he's seeing across different verticals as well. But the importance of digital remains undiminished.

Operator:

And, Kirk, did you have anything further?

Operator:

And we'll go next to Brent Thill of Jefferies.

Shantanu Narayen:

Yes, Brent, the way I would describe it as we had a strong first half, and we actually continue to see a strong demand for our unique solutions. And all of our new initiatives as well as the established businesses are doing well. I guess what we're also paying attention to is, what we all read as part of the macro environment. And when I look at what we expect for our second half, the confidence remains undiminished. The question really for us is timing. And maybe we're being a little cautious as it relates to what happens, given the summer seasonality, as Brent better than most is, sort of the July and August. So as it relates to our second half pipeline, the confidence remains undiminished. And we're just maybe a little cautious as it relates to timing. In terms of what we had said, in March, you're right, we had sort of alluded to the fact that we would have expected some sequential increase; clearly we had a strong Q2. But that's part of the reason why we wanted to give a little bit of color and be transparent on how we see it. And as you notice, we reaffirm the $1.9 billion for net new ARR for the year.

Operator:

And we'll go next to a question from Brad Sills of Bank of America.

David Wadhwani:

Yes, thanks for the question. First of all, we're really thrilled with the reception of Creative Cloud Express, Adobe Express into the market. And frankly, it's been a lot of fun for us because it's a product that everyone at Adobe can also be using, it's amazing to see the creativity coming out of finance and legal for example. As a reminder, just to sort of up level for a second, we've been focused on the communicator and creator economy, ecosystem for years. In fact, we believe that we're the largest provider of creative tools to professionals and communicators on the back of our core products. So I want to just make sure people recognize that the core products are playing to this incredibly large market, where we see Express filling in is that Express is additive and broadens the region, that new communicator base, because of exactly what you're saying the freemium business model, there's zero friction onboarding, it's clearly showing that we're able to attract millions of new users into the franchise. And we're able to do it very efficiently by optimizing how we onboard customers from search terms that typically were not ones that we've focused on in the past. We also look at the ability to onboard those users and differentiate the offering, with the integration of these amazing features that we get from the from the desktop applications like Adobe magic. And all of this helps differentiate what we're doing with Express. And if we take a step back and look at it from a business perspective, we feel very confident that Adobe Express and the way we actually pull people into that funnel is additive to the market opportunity that we're playing. So we're really emphasizing the ability to add more capabilities there and differentiate there. I do also want to remind folks that that Express is also available to core Creative Cloud customers. And by integrating some of those features into Express, we're enabling workflows between the core Creative Cloud products and also Express and we believe that's going to have a strong retentive value on the core base and we just had, in fact, a great quarter with very strong retention for Creative Cloud as well.

Shantanu Narayen:

Brad maybe if I were to add, I think the team is actually having a lot of fun with all these cool features. To your point, they're showing some incredible stuff as part of the quick actions. But if you look at the depth of what they have, I mean, there is so much behind the scenes that we will be able to monetize. But clearly the focus is on usage right now, as David said. It's been fun.

Operator:

We'll go next to Alex Zukin of Wolfe Research.

Shantanu Narayen:

I think as it relates to your M&A question, and then David could certainly answer the other one, clearly valuations to your point have changed quite a bit. And the first thing I'll start off by saying is, we're really pleased with our portfolio. If you look at some of the new initiatives, and we've touched on that, whether it's Adobe Express, whether it's the real time CDP customer journey analytics, what we're doing with things on the web, including PDF, we feel really good. I do feel Alex that there are going to be a number of small single product companies that are probably not going to survive, what's happening. And the valuation sort of multiple changing is actually I think, good for a larger company like Adobe. So I, it doesn't feel like we need anything, but we will always be on the lookout for things that are additive, that are adjacent, and that will provide great shareholder value and our metrics associated with ensuring great technology, great cultural fit, and adjacency remain. But we have so much going on within the company that we're excited about our current portfolio, clearly, things will be more reasonable in terms of M&A as well.

Alex Zukin:

Got it. And sorry, Dan, just maybe just the impact on Q3 that you're anticipating in the guide for net New ARR on pricing?

Alex Zukin:

Thank you guys.

Saket Kalia:

Okay, great. Hey, guys, thanks for taking my question here. David, maybe just to stay with you, given the questions on macro, I was wondering if we could go one level deeper into the makeup of Creative ARR. We have the very helpful disclosure from analysts say the single app versus the all-out mix, which is helpful. But how do you think about the mix from maybe consumers versus professionals if there's a way to break that down? Because of course, right now, there are lots of questions just about the health of the consumer. How do you think about that mix? And how do you think about maybe the defensiveness or the retention rates on both of those different cohorts? Does that make sense?

Saket Kalia:

Very helpful. Thanks.

Karl Keirstead:

Hi, thanks very much. I'd love to ask about the digital experience guide. You said it for 14% in the third quarter, that's down about four points in constant currency from 18% in May, and is the lowest and a bit. I know it's a tougher comp is, is that the issue? Or is there anything else to call out on the DX business? Thanks a lot.

Karl Keirstead:

Thank you.

Jay Vleeschhouwer:

Thank you. Good evening, I'd like to ask about two important attributes of your product led growth strategy. First, could you comment on the contribution from or expectations for what you call your application and intelligent services? Is that becoming meaningful at this point? And then secondly, at Summit a couple of months ago, and again this evening, we heard multiple examples of integration within and across your segments, which is long standing Adobe practice. But we've heard a great deal more about that the last couple of years. Could you comment on which of the many integrations you think either in terms of addressable market, or your own sales capacities might be the most meaningful over the next number of quarters and years?

Jay Vleeschhouwer:

Okay and the second part of the question

Jay Vleeschhouwer:

Oh, sure. I was trying to get some insights into which of the many integrations that you've done either within or across your segments, whether it's Digital Media DX, or combinations thereof, you think had had or will have the most meaningful impacts, assuming that not all of these integrations are created equally.

Jay Vleeschhouwer:

Great, thank you.

Keith Weiss:

Thank you guys for taking the question. I have a question for Dan. And it's about sort of the guidance philosophy. And that these are what a lot of people are trying to get at is understanding holding the Digital Media ARR guide at 1.9 billion for the full year, despite the kind of increased seasonality in Q3, despite the fact like the street kind of gave you a pass, we've already taken our numbers down to like 1.8 billion. Why keep that risk out there? Why push more risk into Q4? Why put a high bar out there when obviously, it's not in the stock? All the stocks are getting killed here. It's not in our expectations, like, what is it that gives you so much confidence to like, keep that number out there.

Keith Weiss:

Got it. And I mean, any visibility into what gets better in Q4 that that's kind of enabled it because you're looking for net New AAR to go from basically down in the first half of the year to growing in the back half what, what could you give us any kind of visibility to like, what gives you guys that confidence?

Keith Weiss:

Got it. Thank you.

Tyler Radke:

Yes, thanks for taking the question. I wanted to ask you about the CDP space. I think you talked about your revenue, they're doubling year-over-year. I guess just a couple of questions. Number one, how significant is CDP as part of the overall experience businesses is a growth driver; and two, could you just talk a little bit about the competitive landscape. This is something that Sales force talked a lot about, on their last earnings call. We've seen amplitude recently launched a CDP. So how do you kind of see all this evolving? And how do you think this plays out? Thank you.

Shantanu Narayen:

Maybe the one thing I would add to all of that is, we have 32 billion profiles right now. I mean, clearly every customer has their profile kept isolated. So we're clearly the leader as it relates to you know, large companies that have a CDP in the market. That's well done.

Operator:

And we'll move next to Gregg Moskowitz with Mizuho.

David Wadhwani:

Yes, so happy to do that. It's been a it's actually a very exciting program for us. So as you know, Adobe Express is predominantly focused on communicators, small medium businesses, as they start to move more online. We've talked a lot about the rise of the creative economy, we've mentioned that there are hundreds of millions of small medium businesses that are really targeting more online communication and really focus on social media, in fact that in a recent survey, we found that the majority of small medium businesses actually say that their online presence is more important than their physical presence. And so they need to do coordinate and communicate digitally and our ability to provide with meta provide all the tools that they need end-to-end to build incredible content that stands out and participate in the online experience that that meta is providing. And, of course, also work more broadly across all the other social networks, I think, is a really great opportunity for meta, for us and certainly for the small medium business owners that are part of that program.

Jonathan Vaas:

Hi, operator, we're coming up on the top of the hour. We'll take two more questions, please.

Kash Rangan:

Hey thank you very much, Shantanu and team. This upcoming maybe recession is the one that everybody has been predicting. And the company has, as David said, has been through a couple of recessions before. The company's a very different company today than it was even just a few years ago. What is your best prognosis as to how the portfolio of Adobe products behaves if we are to enter a downturn, not that we wish it but if we are to enter one, how do you think the portfolio is positioned? And in the financial angle are you prepared to at all slow down firing? The beauty of the subscription model is that the instant start on hiring and produce nice margin upset that sort of thing from a financial perspective, but curious to get your thoughts overall on this particular topic

David Wadhwani:

Yes, just want to build a little bit on the first part of Shantanu’s answer. We talked about offsetting some of the headwinds we see. We talked about the increase in tax rate. We talked about the FX headwind into the back half of the year. In Q1, we discussed the impact we were seeing from the war in Ukraine. When we take the effects and the impact we discussed in Q1, that's a $250 million revenue, headwind in the back half of the year, the increase in tax rate is about a $0.25 a share impactful year. When I net both of those together, we would expect to see about $0.60 to $0.70 a share erosion of the earnings power of the company. And to Shantanu’s point, it really underscores a philosophy that's underpinned how this company has operated for a very long time. It's about focused execution. It's about operating discipline. And the fact that the full year targets have come down $0.20 when the map would suggest it should be much greater than that just really underscores the power of the model. We're investing for innovation. We're investing to serve our customers, but we're doing it in a very focused and disciplined way. And I think that says a lot about who we are as a company.

Operator:

And our last question is from Brad Zelnick with Deutsche Bank.

David Wadhwani:

Yes, absolutely happy to talk about that. We are very excited about the work we're doing here. Frankly, not just with Adobe Express but with Photoshop, as we mentioned here with Lightroom, as we've done in the past, and also with, with Acrobat. Our focus has always been to take the strengths that we have in the desktop and build a multi surface experience for our customers across desktop, mobile and web. And as we've done that, we've noticed that web and mobile really represents an opportunity to broaden our audience in a very significant way. And we do that by capturing search, traffic and at the point of intent, bringing them into the zero friction web experience with a freemium model. And so PS web and what you're seeing there is a step along that journey for our core imaging franchise. And we absolutely anticipate it being a source of funnel opportunity, similar to the way that that Acrobat has seen Acrobat web as a source of that funnel activity. You see how strong the core Acrobat businesses and how it's performing. We have a version of Acrobat web that's available we've been able to double traffic to that. And we now have over 50 million monthly active users, leveraging Acrobat web. And we use that as a top of leveraging Acrobat web on a monthly active basis. And we're able to leverage that and convert that traffic into real business. We're playing that same playbook now with Photoshop as well. And we expect that to be a very productive opportunity.

Shantanu Narayen:

I think if I were to add to that, I mean, really, in effect, what we do is we look at platforms in an unbelievably expensive way. And on any platform, just making sure that we get the magic of our technology and as friction free way possible, is part of what we are continuing to do. And we have a unbelievably rigorous process also or then really understanding how to monetize it. So some of the press releases may be a little bit more sensationalistic, in terms of how they announced that, Brad. But since that was the last question, I just have to say we're proud of how we're executing against our strategy. I mean, everybody would have knowledge that it's an uncertain macroeconomic environment. But we believe that we will continue to win by delivering great innovative products that at the end of the day delight and ever increasing for our set of customers. We're making some very creative marketing campaigns. We have strong sales and go-to-market motions that are appropriate for the set of customers that we're targeting. And I think we're the being the best users of our product, which actually gives us tremendous credibility, to both innovate at a rapid pace, as well as deliver great customer satisfaction and growth to our customers worldwide. So thank you for joining us. And with that, I'll turn it over to Jonathan.

Operator:

Good day and welcome to the Q1 FY 2022 Adobe Earnings Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Jonathan Vaas. Please go ahead, sir.

Shantanu Narayen:

Thanks, Jonathan. Good afternoon and thank you for joining us. Before I discuss our Q1 results, I want to acknowledge the horrifying and heartbreaking crisis in Ukraine. The pain and suffering of millions of innocent civilians is incredibly tragic and our thoughts and prayers are with the Ukrainian people. Adobe joins the global community in taking a stand by stopping all new sales of our products and services in Russia. The Adobe Foundation has made grants to aid humanitarian relief efforts. I am proud of how our teams have come together and continue to successfully manage our business throughout the most challenging of times while focusing on delighting customers and the long-term growth initiatives for the company. Adobe has always had a strong purpose-driven culture and that has never been more evident than it is today. Adobe’s mission to change the world through digital experiences is more critical than ever before. Everywhere we look, whether it is in entertainment, education or the enterprise, content is fueling the global economy. The democratization of creativity, emergence of new ways to work and learn from anywhere and the business mandate for personalized customer experiences underscore the immense opportunities we have as a company. Our strategy to unleash creativity for all, accelerate document productivity and power digital businesses is working. Our innovation engine is delivering category-leading products, services and platforms across Creative Cloud, Document Cloud and Experience Cloud. Adobe had a strong Q1. We achieved a record $4.26 billion in revenue, representing 17% year-over-year growth on an adjusted basis. GAAP earnings per share for the quarter were $2.66 and non-GAAP earnings per share, was $3.37. In our Digital Media business, we drove strong growth in both Creative Cloud and Document Cloud, achieving $3.11 billion in revenue. Net new Digital Media annualized recurring revenue, or ARR, was $418 million, and total Digital Media ARR exiting Q1 grew to $12.57 billion. In our Experience Cloud business, we built on our Q4 momentum, achieving $1.06 billion in revenue, and subscription revenue was $932 million for the quarter. I am pleased to have David Wadhwani, President, Digital Media; and Anil Chakravarthy, President, Digital Experience, on this call to share more about our momentum in the Digital Media and Digital Experience businesses, respectively. David?

Anil Chakravarthy:

Thanks, David. Hello, everyone. Over the last 2 years, the digital economy has exploded as we have experienced a profound global shift in how we work, learn and play. Telehealth visits are now the norm rather than the exception. Customers and businesses are engaging and transacting digitally. Online shopping is now essential, and the U.S. is on track to surpass $1 trillion in e-commerce sales this year, according to the Adobe Digital Economy Index. To succeed, companies must make the digital economy personal with powerful digital experiences that can be personalized to millions of customers in milliseconds. Adobe Experience Cloud is a comprehensive set of integrated AI-driven applications and services to help companies deliver experiences across all aspects of the customer journey. At its core is the Adobe Experience Platform with billions of customer profiles. Our Adobe Experience Cloud applications span the entire customer funnel, from acquisition to monetization to retention, across content and commerce, customer journeys, data insights and audiences and marketing workflow. We have made the dramatic transformation to deliver AI-driven services with over 80% of Experience Cloud customers now using Adobe Sensei, our industry-leading AI and ML framework to power experiences for their customers. Last week, we hosted Adobe Summit, the world’s largest digital experience conference. We launched exciting new Experience Cloud technology and heard from executives from some of the world’s most interesting and innovative brands, including BMW, Nike, Prada, Real Madrid and Walgreens Boots Alliance. We enabled the entire event using Experience Cloud, personalizing the experience for our global attendees. Summit content has had over 22 million views to date, underscoring the significant interest and demand for digital transformation. We continue to drive outstanding growth in our Experience Cloud business. The pandemic has caused brands around the world to realize the critical need for digital transformation. And we’re adding new logos while continuing to focus on driving significant value realization for our existing customers. In Q1, we achieved $1.06 billion in revenue. Subscription revenue was $932 million for the quarter, representing 22% year-over-year growth on an adjusted basis. Q1 highlights include a slate of exciting product innovations, including new real-time customer data capabilities with the integration of Adobe Real-Time CDP and Adobe Target. Adobe Real-Time CDP is used by a large and growing base of customers such as DICK’S Sporting Goods, Henkel, Panera, Real Madrid, ServiceNow and Verizon; new cross-cloud integrations, including a unified workflow between Workfront, Creative Cloud Enterprise and Experience Manager assets that powers end-to-end content creation and delivery; strong performance in Adobe Experience Manager, emphasizing the need for unified content management to meet the ever-increasing demand for content at speed and scale. Adobe is uniquely positioned to help customers across the content supply chain; new APIs that provide developers with the flexibility to create customized user experiences on top of Adobe Commerce; the general availability of Adobe Experience Cloud for Healthcare to deliver personalized health care experiences; an expanding partner ecosystem, including a partnership with OneTrust to simplify consent management; the next phase of e-commerce integrations with FedEx, Walmart and PayPal as well as a collaboration with The Weather Company; and key customer wins, including CrowdStrike, Deutsche Telekom, IBM, Jaguar Land Rover, JPMorgan Chase, McDonald’s and UnitedHealth. Our Experience Cloud product innovation, global customer base and vibrant partner ecosystem are driving our continued success. We are executing across our entire go-to-market motion and continue to receive strong industry recognition. This quarter, Adobe was named a leader in 3 industry analyst reports focused on core customer experience management segments, including Gartner’s Magic Quadrant for Digital Experience Platforms, the inaugural IDC MarketScape for CDPs for Front Office and the Forrester Wave for Digital Asset Management. Dan, over to you.

Shantanu Narayen:

Thanks, Dan. This is a transformative time at Adobe. We’re engaging with hundreds of millions of customers globally, from individuals to the largest enterprises, launching new applications for new audiences and bringing our flagship category applications to new surfaces and platforms while increasing collaboration capabilities across our solutions. Adobe has a winning strategy applied to an exceptional opportunity. We’re a leader in the digital economy with Adobe Creative Cloud, Document Cloud and Experience Cloud, which combined have a total addressable market of $205 billion. Few companies can consistently deliver technology innovation, successful transformation across new categories and business models and a broad ever-growing base of customers and partners. I’d like to thank our 26,000 employees for their continued dedication and unwavering focus on delivering customer innovation and inventing the future of digital experiences. Thank you. We will now take questions. Operator?

Brent Thill:

Good afternoon. Curious if you could shed any more color on the new pricing structure and what that means. And Shantanu, beyond Ukraine, is there anything else you’re seeing in the broader economy that’s different than you’ve seen historically? Thank you.

David Wadhwani:

Yes, happy to. So as Shantanu mentioned, the last pricing update and adjustment we made was in 2017. Since then, we’ve added a lot to our existing offerings. We’ve added new applications. We’ve extended broadly across multiple services. We’ve doubled down on collaboration. We’ve added millions of stock assets and thousands of fonts. And we’ve also introduced new offerings. Obviously, Acrobat across web and mobile has been growing for the last few years, and you heard us talk – last year or 2, you heard us talk about that in the prepared remarks. But also CCX is now in market across web and mobile. And the early success we’re seeing with these new offerings across web and mobile and across Acrobat and CCX has really been the catalyst for these pricing adjustments that we’re looking at doing. They let us introduce the right value with the right onboarding experience and the right pricing to attract millions of new subscribers. And they provide us the opportunity to right-size the value where engagement and usage is highest in our core existing customer base. The impact of this, we think, for Q2 will be fairly minimal because it takes time to roll this out globally, and it takes time for customers to go through their renewal cycles where their prices change. But we expect it to have a more significant impact and build-out in Q3 and Q4.

Operator:

Thank you. We will take our next question from Alex Zukin with Wolfe Research.

Shantanu Narayen:

Sure, Alex. There were multiple questions in that. So let me – maybe first, to your point, which I agree with, when you think about the rhythm of the business and maybe the seasonal cadence, clearly, that’s been impacted by whether it’s the external events as it relates to the pandemic or more recently the war in Ukraine. But big picture, as we look at what’s happening in terms of customer adoption, what’s happening in terms of the excitement, there is no question that digital is a tailwind and will continue to be a tailwind. And our perspective is that what happened was the pandemic actually put a spotlight on the importance of everything we’re doing, whether it’s customer engagement, whether it’s content or document productivity. And so as you think about what happens seasonally, certainly, I think we would continue to see strength in Q3 and Q4. Dan referred to that in terms of the second half momentum that we would see. But even Q1, we had a strong start. So from our perspective, some of the seasonal cadence might have changed, but the secular trends in terms of up and to the right, we actually don’t see any impact associated with it. I think your second question is related to what happens specifically on Russia and Belarus and Ukraine. Since the Digital Media ARR, the book of business, we made the decision to reduce it. And so I think what you’ll see on the data sheet is what our exiting Q1 ARR is and then another number which just takes out all of the existing book of business for those three countries. You see the impact on revenue certainly in Q2, Q3 and Q4 because what it means is the revenue that we would have been able to collect. But again, in the grand scheme of things, as you can see, it’s fairly small as it relates to the business. So I think our targets, $440 million specifically, as you said, yes, it’s impacted by the ARR business in those countries. But overall, business is strong and we feel optimistic. I think in many ways, the message really is that the new growth initiatives that both Dan and David talked to, they are starting to really show traction. And so we expect to see strength in the second half of the year and certainly beyond that.

Operator:

Thank you. We will take our next question from Saket Kalia from Barclays.

David Wadhwani:

Yes, thanks for the question. We’re very excited about the launch of CCX. But just to up-level for a minute, and as a reminder for everyone on the call, we’ve been talking about the communicator segment for years, both as it relates to non-pros and as it relates to the creator economy. We’ve talked about in the past that our mobile and desktop apps have hundreds of millions of registrations, which is clearly going beyond our Creative Pro base. And we’ve built a significant business. In fact, we believe that we’re the largest provider of creative tools in the world when measured by revenue across all of our segments

Operator:

Thank you. We will take our next question from Sterling Auty with JPMorgan.

Shantanu Narayen:

Yes. Sterling, I mean, I think color-wise, it’s really still early in the year, but I feel great about the way we’ve been navigating all of the external issues that have come. And it was a strong Q1. As we prepared for this call, we felt it was important to share with you the impact that we know of things, whether it’s the revenue or ARR for Russia, what’s happening on EPS as it relates to the tax rate as well as to provide some more of the growth drivers. But I net it out by saying while we are not updating the annual targets, as you pointed out, we’re really optimistic on the significant number of growth drivers that we have. And we will share more throughout the year because we still are all navigating what is a considerably unpredictable situation. Our strong Q1, however, and the things that we control, we feel excellent about.

Operator:

Thank you. We will take our next question from Jay Vleeschhouwer with Griffin Securities.

Shantanu Narayen:

Yes. Jay, when I think about the transformative things that we’ve done in the company, certainly the move to subscriptions, the entrance into digital marketing, what we’ve done with data-driven operating model to drive the sort of financial cadence of the business, they absolutely bubble to the top. But I would say those actually dwarf in comparison to the excitement that I feel about what product-led growth can continue to do. When you have hundreds of millions or billions of people using your software, a good example of what we’ve done is the constant innovation that we’re delivering on the Document Cloud side. And I think David referred to some of the statistics, whether it’s sort of doubling what we see with web traffic and really being aware of the intent-based approach that people want when they come on the web to accomplish document actions, what we are doing in mobile and doubling it. And I think product-led growth just relates to ensuring that all of our product teams have information at their fingertips as to how people are really using it so that we can rapidly iterate in terms of what customers want and delight them. And I think on the Creative Cloud, to add to what David said to Saket as well, what that means with Creative Cloud Express is as you have these millions of users, we’re constantly understanding where the search traffic is, how do you improve it. And it’s just a new way of liberating all of the product-led – product teams to focus on what’s truly important and truly needle-moving as far as customer interest and customer sentiment. And it’s something that David has pioneered. So I’ll have David add a little bit more. But I think the impact on how we serve customers, the NPS and being able to continue to recruit and retain is significant.

Shantanu Narayen:

Maybe one last thing before Dan comments. I think both Dan and David talked about retention and engagement during the quarter. And to give you a little bit more, Jay, color in terms of that, we look at churn rates. We look at reseller renewal. We look at 90-day cohort retentions. And in all of those, I think as a result of the activity that we’re doing on the product teams to help improve, we’re seeing improvement and getting to rates on all three of those that are better than they have ever been even prior to the pandemic. So I think that’s, again, another example of what gives us confidence in our offerings and our innovation going forward.

Jay Vleeschhouwer:

Thank you.

Keith Weiss:

Thank you, guys for taking the question. I actually had a couple of clarifications I was hoping to ask you guys about. Shantanu, earlier in the call, you do made some comments about perhaps seeing a little bit of weakness in Europe at the end of the quarter. Can you dig in on that a little bit like where in the business, did you see that weakness? And did that persist into Q2, or was it just kind of more temperamental? So, that was number one. Number two, on the – I know we are not giving full year guidance, but when we think about the operating margin outperformance in Q1, is the commentary that that’s going to be given back later in the year, or is it just like sort of the ramp-up gets pushed out, so the savings kind of like accrue throughout the full year? And then clarification number three, when you guys gave the original $1.9 billion net new ARR addition guidance for FY ‘22, did you guys already contemplate these price increases, so was the – or the price changes, were the price changes already in that $1.9 billion guide? So that’s my three clarifications.

Keith Weiss:

Yes, the third one was on operating margins.

Keith Weiss:

Excellent. Thanks so much, guys.

Tyler Radke:

Yes. Thanks very much for taking my question. Just going back to the price increase and pricing changes. Obviously, I am sure you will be sharing a lot more specifics as we go forward. But philosophically, just how are you thinking about the pricing changes at the high end versus the kind of entry-level creative products? And particularly, just curious how you are evaluating those pricing changes in the context of the competitive landscape? Thank you.

Tyler Radke:

Great. And if I could sneak in a follow-up just on the digital experience side, obviously, pretty strong growth here in Q4 and the first part of the year, above 20% on an adjusted basis. I guess was there any kind of one-time factors that drove that outperformance? And as we think about the guide for the next quarter and the deceleration implied, just anything to call out there? Thank you.

Tyler Radke:

Thank you.

Keith Bachman:

Hi. Thank you. I am going to follow lead with a couple of clarifications. Dan, could you comment on what the inorganic contribution was this quarter and where it manifests? So for instance Frame.io, what was the contribution there? Secondly, when you think about – I just want to clarify on the ARR write-off, so to speak. The comment was that you are ceasing all new incremental business. But are you going to continue to get ARR payments in Russia – or from Russia and Belarus from existing business that might actually contribute to ARR? Just a little bit confused on that one. And then in the spirit of Keith Weiss, I am actually going to ask a third clarification. Shantanu, in the past, you have said that in the creative side, new subscribers was the most significant contributor to growth. And I just wanted to try to understand given more competition perhaps in the lower end of the market, is that still true? Thank you.

Dan Durn:

Yes. And just coming back to your last piece, Keith, on Frame, now, that it’s part of the business, we are not going to be breaking this out. We talked about the momentum in the business. It’s great. The team is doing really well. The number of deals, the average deal size, business has a lot of momentum around it. And we talked about the great collaboration technology that exists there. But now that it’s a part of the business, we won’t be breaking it out explicitly.

Operator:

Thank you. We will take our next question from Kash Rangan with Goldman Sachs.

Shantanu Narayen:

Thanks, Kash. I mean to net it out, I definitely feel more positive about business moving forward than I ever have, because just if you take a step back and look at all of – first look at Q1, we had a strong Q1. We clearly beat our targets in what is perhaps the most unpredictable situations that exist in the world. So, we feel really good about Q1. We feel really good about the new initiatives that – both in Document Cloud and Creative Cloud and in Experience Cloud that David and Anil spoke to. I did allude to the fact that when you think about the seasonal cadence and the rhythm of the business, certainly, some of that’s impacted. And perhaps the thing that you are alluding to, Kash, was in Q2 of last year, there was sort of a catch-up as “small and medium businesses” came on – come back online. And so you have to just factor what that is in. But both in terms of the revenue growth in DME for Q3 and Q4 as it relates to getting more similar to Q1 as well as the ARR, we are optimistic about the second half. The only reason we didn’t talk about Q2 is because we actually gave specific guidance and targets for Q2. So, don’t take that as anything as opposed to we have given you targets for Q2 and we are trying to give you color on what happens in Q3 and Q4. So hopefully, that helps, Kash. And on the DX side, since there have been fewer questions on the DX side, I mean what we have done, Summit was really exciting, the amount of new announcements that we have done there. Every person that I talked to in the C-suite continues to want to really focus on digital transformation and customer experience management. I am excited. I am back on the road again. It feels great. We have employees back in the office and facilities. People want to meet, and digital engagement is top of mind. So, across all three of our businesses, we didn’t talk about the document business. $100 million in ARR for the quarter, $2 billion book of business, really good adoption of our new functionality, whether it’s on the web as well as a unifying sign with Acrobat, which was a big movement that we are trying to do. So, I think all of those are positive. I think the one impact that, again, maybe Dan can just touch on is certainly, it doesn’t impact our core business. But the EPS, you just have to factor some of the revenue and other considerations that happened. But for the functional part of the business, I feel really good.

Kash Rangan:

Thank you, Dan. And Shantanu, just one final follow-up, the clear – I know that you want to talk about the Document Cloud and the Experience Cloud, but I remember fall of 2011, you have made a very bold transition to Creative Cloud subscription. You, in fact, outlined that you have a target of 4 million subscribers in fiscal ‘15, which seemed quite visionary back then, right? So, as you look at the inflection point going – the company is going through, what are your aspirations for Creative Cloud Express if you were to measure it in subscribers or how big of a business would you like it to be? What would be your similar prognostication as you look into the next few years? And that’s it for me. Thank you so much.

Jonathan Vaas:

Operator, we are a little past the top of the hour. We will squeeze in one more question and then wrap up. Thank you.

Michael Turrin:

Hi there. Good afternoon. Appreciate you squeezing me on. We have been expecting a return to normal expense profile. Q1 operating margins were actually flat relative to last year. Anything else you can add just around the Q1 margin results? And as we think through the puts and takes between that return to a more normalized expense profile and some of the product and pricing efforts you have mentioned ahead this year, any way to think through if price uplift can help offset some of that expense normalization you are expecting? Thank you.

Shantanu Narayen:

And since that was the last question, I wanted to, again, thank you all for joining us today. We are pleased with the performance. We think we had a really strong start to the fiscal year across all three of our businesses Creative Cloud, Document Cloud and Experience Cloud. And more than that, I think our ability to continue to delight customers and deliver on the innovative roadmap gives us a lot of confidence associated with the new initiatives taking stock and contributing to the future growth at Adobe. The spotlight, I believe, on digital will just continue. And as we get back to more normalcy, I think that will only all go well for both Adobe and our customers. And the successful Summit that we just organized, I think is another indicator of the interest that exists in our solutions. So, thank you for joining us today, and we look forward to sharing more as we go through the year. Thank you.

Operator:

Thank you. That does conclude today’s conference. We thank you all for your participation. You may now disconnect.

Operator:

Please welcome Jonathan Vaas, Vice President of Investor Relations.

Shantanu Narayen:

Good morning, and thanks, Jonathan. Welcome to this Virtual 2022 Financial Analysts Meeting. Adobe had another outstanding year in 2021. I'm incredibly proud of the dedication and resilience of Adobe's 25,000 employees all around the world in delivering breakthrough technologies for our customers. I'd like to start with a recap of the tremendous accomplishments we had across every dimension in 2021. As a product geek at heart, I take immense pride in our team driving hundreds of innovations across Adobe Creative Cloud, Document Cloud, and Experience Cloud. Earlier this week, we introduced Creative Cloud Express, to enable anyone to express their ideas simply and beautifully. Creative Cloud Express the start of a brand-new journey to introduce first-time creators to Adobe Creative tools, while adding significant value to all of our current Creative Cloud subscribers. I think it marks a new chapter of creation, collaboration, and sharing on the web, and leverages the unique technology and capabilities of Adobe's flagship products. It also builds on the collaboration capabilities we debuted at MAX, including Illustrator and Photoshop on the web, Creative Cloud Spaces, and Creative Cloud Canvas. With the addition of Frame.io, we're now incorporating review and approval functionality to deliver a powerful collaboration platform for end-to-end video collaboration. And we're continuing to add magic to our flagship applications, and we're enabling them to run natively on new hardware like Apple's M1 chip, as well as Microsoft Windows Surface and Pen. In Document Cloud, Acrobat Web now supports 21 frictionless verbs create, export, extract, and edit for both text and images and PDF. We've seen tremendous growth in Acrobat online, as people tap our powerful, free, browser-based document tools to handle important tasks on the fly, without the need to download any software. In addition, we made outstanding progress with PDF support within both the Chrome as well as Edge browsers. And on the Experience Cloud platform, we extended our real-time customer data platform to B2B customers, bringing together individual and account profiles across systems to give B2B companies a single view of their customer for the very first time. We launched Adobe Journey Optimizer, harnessing over 20 years of industry-leading e-mail, marketing, and cross-channel campaign management expertise to empower brands to design and deliver personalized experiences across the entire customer journey in a single application. With the new acquisition of Adobe Workfront, we're now empowering companies to optimize business outcomes by connecting creative and marketing professionals to manage all creative workflows across the entire marketing lifecycle. In addition, we've advanced our industry leadership in key areas across our portfolio. Clearly underpinning our three clouds is the magic and power of Adobe Sensei, our artificial intelligence and machine learning framework, a significant differentiator for Adobe and an enabler to more rapid innovation. We continued our investment in the Adobe Experience platform as the foundational platform for strong governance capabilities across our Experience Cloud business, accelerating innovations like real-time customer data platform and Adobe Journey optimizer on a global scale. We take our responsibility in the creative community very seriously. And as part of the content authenticity initiative, we've published a drop specification as an open standard to combat online disinformation. I'm amazed at the resiliency of our employees and we pioneered all new digital event experiences with Adobe Summit and Adobe MAX, extending our reach and engaging millions of people around the world. I'm also tremendously proud of the industry recognition we continue to receive for our brand, our workplace, our culture, and our practices. And just to name a few examples, we were again named a top riser on Interbrand's Best Global brands list. We're named to Fortune's 100 Best Companies to Work For, for the 21st year, People Magazines Company's Companies That Care list for the fifth year, Fast Company's Brands that Matter list. And I think what's more significant for a lot of investors moving forward, the Dow Jones Sustainability Index for the fifth year, and one that I'm particularly proud of a 100% score for being the best place to work for disability inclusion. When you look at our financial results, it puts us in an incredibly rare position in the industry. Not many companies can drive the top line and bottom line growth with an impressive margin the way we do. And we powered through $15 billion in 2021, and we accomplished some significant milestones in Q4, our first $1 billion digital experience revenue quarter, our first $3 billion digital media, and $2 billion in cash flow; just some incredible financial statistics. Dan Durn, our new CFO, will cover our Q4 as well as our FY'21 results in greater detail. Since he joined Adobe in October, I've really appreciated his experience and partnership, and I look forward to him sharing his perspective as well as having significant impact on Adobe's growth in the decade to come. I'm also delighted to announce that Anil Chakravarthy and David Wadhwani had been promoted to the President of the Digital Experience and Digital Media Businesses, respectively. I value their leadership and contributions, and they will share more color around each of our businesses. While 2021 was awesome, I'm actually most excited about what's to come for 2022 and beyond in the over 20 years that I've been at Adobe. We have this immense market opportunity. We have an incredible technology innovation roadmap and the best leadership team of any company on the planet. And I think what we've done is provided 2022 targets that demonstrate the strength of the underlying business, three incredibly large growing opportunities across our clouds, continued focus on execution based on the current economic climate. I think the one change that we all are experiencing is as the company scales beyond $15 billion, we also have to focus on FX expectations, given the recent strength of the U.S. dollar. But as excited as I am to talk about 2022, today is really sharing about Adobe's tremendous growth story and how we're going to be driving the next decade of growth, because that's really what underpins our growing over $200 billion addressable market opportunity. As you'll hear throughout the day from our leadership team, our growth has anchored across these five key pillars, our proven track record and our focus on creating and leading categories, the ever-increasing expanding set of customers that we serve, from consumers to creative pros to first time creators, to small and medium businesses, to the largest enterprises in the world, our ability to deliver incredible technology platforms that enable whole new classes of applications and accelerate our innovative cadence. The important shift we continue to make from building applications to enabling new business models, app, services, artificial intelligence and platforms, that's paying dividends. And last but not least, an incredible global ecosystem of partners that spans the entire customer lifecycle from experience creation and marketing to delivery and ongoing support. And I think the message for you as investors is across every dimension, across every business, our aspirations are higher, and we're thinking bigger. There's this incredible once-in-a-lifetime expansive opportunity in front of us, and I think we're uniquely positioned to capture it. And now to provide color on the strategy on how we're going to expand markets and categories, I'd like to welcome Ann Lewnes, who recently celebrated her 15th year at Adobe, our incredible Chief Marketing Officer, who's also taken on the additional responsibility for corporate strategy. Ann?

Anil Chakravarthy:

Thank you, Ann. Hello everyone. Good to be here with you. And I look forward to sharing more on our momentum, opportunity and strategy for the Digital Experience business. It's really an exciting time for us as Ann shared. Let me begin by discussing a couple of highlights from Q4. We had strong performance across the board. Our segment revenue crossed over a $1 billion for the first time with 23% year-over-year growth. Our subscription revenue grew to $886 million up 27% year-over-year and our subscription bookings in Q4 were up 50% year-over-year. And with that, we were up over 40% year-over-year for full-year FY'21. A lot of that was powered by the success of our Adobe Experience platform, and the native apps that run on it. It's foundational to our Digital Experience business. We invested early in the platform, and have a significant head start having launched the platform in 2019. Our growth has accelerated. Earlier this year, we disclosed that we had passed over $100 million in revenue and at the end of Q4, we surpassed $250 million in book of business. And we've seen a 300% year-over-year growth in customer count. The scale that we're operating in production is massive, over 21 trillion segment evaluations per day and our ecosystem is extremely broad with over 300 partner integrations. And as Shantanu and Ann both mentioned, we have really accelerated our innovation over the past 18 months with new native applications and services powered by Sensei. A great example of this is Major League Baseball; they are leveraging digital to transform experiences for their customers with a focus on reaching that next generation of fans. And this is across all their channels at home, on the go and in menu in the ballpark, they're focused on personalization at scale, delivering that right experience at the right time, via the right channel to all of their fans. And it's not just Major League Baseball, it's clear that every business is a digital business, and customer experience management is critical to business success. The changes in the tailwinds that we have seen during the pandemic are here to stay. And this has contributed to a strong momentum in our Digital Experience business; couple of examples here again, significant growth in average annual recurring revenue across our Top 1125 accounts. We've seen strong growth across all accounts greater than a million dollars in ARR and all of our customers are building long-term partnerships with us. As an example, the combined total contract value of our Top 10 accounts is $760 million, which is three times higher than what it was at the end of FY'19. When we think about customer experience management, it is imperative for every company today to deliver personalization at scale to millions of customers. That's how they reach and engage all their customers across the world. And it's critical for them to do that, to deliver that next level of digital business growth. It's all about personalized experiences that are tailored to the individuals, delivered in real time, and delivered seamlessly across online and offline channels based on first party data, and making sure that they honor customer preference and privacy. And that's what we focus on, our strategy is battle tested and helps companies across the world achieve personalization at scale. We offer customers, the best of both worlds, integrated, AI enabled comprehensives applications, delivered on a real time cloud scale platform. We have strong momentum with Workfront with the ability to unify marketing workflow, and increase marketing agility for all customers. And we are the strategic partner for customer experience management; I hear this from customers all around the world every day. And our ecosystem of partners is expansive with over 4,000 partners as Ann mentioned across ISVs, tech partners, system integrators and agencies. This is how we make this happen for our customers through the Adobe Experience Cloud. We focus on four key categories, content and commerce, data insights and audiences, customer journeys and marketing workflow, all delivered on a common platform, which is the Adobe Experience platform. We've had a strong innovation engine over the last 18 months and that's continuing both on the application layer as well as the platform with AI and machine learning capabilities in the platform powered by Adobe Sensei. This is a huge moat for us with the combination of a comprehensive set of applications and an integrated platform. In closing, I am incredibly excited about the opportunity we have for the Digital Experience business. We have strong momentum and we're the clear leader in the Customer Experience Management category. We have a large growth opportunity to help every company deliver personalization at scale to millions of customers around the world. And we have the best technology across our Adobe experience platform and the native applications with the ability grow rapidly as we have shown over the last couple of years. With that, it's my pleasure to turn it over to David to cover the Digital Media business. David?

Dan Durn:

Thanks, David, and before I jump in, I also want to thank him for letting me borrow his sweater today. Let me begin by saying how thrilled I am to be here today and be a part of this amazing team at Adobe. Having just been here for a few months, it's obvious what a special company this is, and I couldn't be more excited about what's ahead. Now, let me jump in with Adobe's Q4 results. Adobe achieved revenue of $4.11 billion, a significant milestone, which represents 20% year-over-year growth. GAAP diluted EPS was $2.57 and non-GAAP diluted EPS was $3.20. Digital Media segment revenue was $3.01 billion, the business's first $3 billion quarter, which represents 21% year-over-year growth with net new digital media ARR of $571 million. Digital Experience achieved its first billion dollar quarter, which represents 23% year-over-year growth. Digital Experience subscription revenue was $886 million representing 27% year-over-year growth. We had record cash flows from operations of $2.05 billion in the quarter, and we repurchased approximately 1.6 million shares of our stock. Turning to our three strategic clouds, it was a tremendous finish to the year. In Q4, Adobe achieved $2.48 billion in Creative revenue, and added $430 million of net new Creative ARR. We exited the year with more than $10 billion of ending Creative ARR with strong performance throughout the year. Growth drivers in the quarter included acquisition of new users on adobe.com, strength in our teams offering, seasonal Q4 strength in the enterprise and success co selling frame.io with our Creative Cloud Enterprise offerings. However, while we saw increased demand for offerings during the Black Friday and Cyber Monday weeks, we did not see the traditional spikes we have had in previous years. This is consistent with this year's industry trends in line with e-commerce holiday shopping data from the Adobe Digital Economy Index. Adobe Document Cloud achieved $532 million in Q4, revenue continues to be -- and continues to be our fastest growing business. We added a record $141 million of net new Document Cloud ARR in the quarter with ending ARR of $1.93 billion growing 31% year-over-year. Our Integrated Document platform is clearly resonating with customers around the globe. We continue to see momentum with enterprises, small businesses and individuals using web and mobile first tools. In Digital Experience, we achieved our first billion dollar revenue quarter. We're seeing strong demand for our real time experience platform and app services, as large enterprises are making investments in Adobe to drive customer experience management and personalization at scale. We drove record Q4 net subscription bookings and for the full fiscal year, we grew net ASP greater than 40% year-over-year. Let's look quickly at the annual numbers. Adobe's financial performance in the year was outstanding, with both top line acceleration and margin expansion in the year, resulting in more than $7 billion of operating cash flow and remaining performance obligations grew 23% year-over-year to nearly $14 billion, absolutely world class performance. Now let's discuss what a unique investment opportunity Adobe is. These are some of the outstanding qualities of Adobe that have energized me about the opportunity and it's what ultimately brought me here today. There's a fundamental shift towards digitization, that's accelerating around the globe. And I believe Adobe is better positioned than any other company to capitalize on these opportunities. Combining that with Adobe's financial track record, as well as industry defining products and platforms, the result is an immense runway ahead of this company for growth. Let me elaborate a bit more on my view of this opportunity. In the years ahead, there's going to be fundamental shifts in all aspects of our lives, all of them digitally enabled. Digital enablement will increasingly shape and define how we live, how we create, how we communicate, how we collaborate, how companies serve their customers, how companies compete, and how economies function. These changes are both powerful, and pervasive. I call it the digitization of everything. The digitization of everything is accelerating. And I believe what happens in the next 10 years is going to define the rest of the century, similar to what happened in the Industrial Revolution. Except now, digital content and data are going to be the fuel of the digital economy. This is a generational opportunity. And we're talking about unlocking trillions of dollars of economic value in the global economy. When you look at Adobe's foundational strengths, there's very few companies that is leveraged to the digitization of the global economy, as well as we are. From the way people create and communicate to the future of productivity and digital collaboration in a distributed work environment, to the digitization of businesses, driving customer engagement with data driven insights to personalize customer experiences, but do it at massive scale to AI and machine learning. Global trends towards digitization have so many intersections with Adobe's unique strengths. Again, digital content and data are the fuel of the digital economy. And I believe no one is better positioned than Adobe to be the digital enabler of the world. How many companies on the planet have this profile? How many companies have this opportunity, not very many. When I think about our near-term strengths, combined with our long-term opportunities, there's a uniqueness here, that's incredibly exciting. Let's double click on the company's financial performance and take a closer look at what I'm talking about. Starting with revenue growth, you can see consistent sustained revenue growth over the last four years as the company has grown subscription revenues at a 24% CAGR. That has been the strategy continuing to grow while producing a revenue stream that's even more ratable and predictable. I'm incredibly impressed by this team's acumen, what they've been able to accomplish, as well as by the contribution to revenue growth from newer initiatives, including Adobe Stock, Substance 3D, Acrobat Web, Sign, Creative Cloud mobile apps, and the Adobe Experience platform. Underlying this financial performance is an incredibly diverse business, from our broad base of customers to diversified products and platforms, comprehensive business models, and go to market reach that spans across all geographies. With growing and diverse revenue streams, the company's been able to expand profitability over the last four years, while accelerating the top line. Adobe's disciplined execution and investment rigor has enabled the company to balance long-term investments while also focusing on profitability. This time period also includes the integration of several strategic acquisitions Magento, Marketo, Algorithmic, Workfront, Frame.io, it's impressive the way Adobe has managed to combine expanded profitability with strong sustained top line growth and M&A integration. Let's talk about RPO, contractually committed future revenues which make Adobe's future performance incredibly predictable and reliable. Exiting fiscal year 2021, RPO grew 23% on the strength of our Enterprise bookings. RPO consists of deferred revenue and unbilled backlog with the current portion expected to flow into revenue over the next 12 months. It's also important to note that most of our adobe.com subscriptions are billed monthly and don't show up as deferred revenue, the remaining contractual commitments of those subscriptions, which average about six months in length at any given time, are included in unbilled backlog. The cash flow performance really speaks for itself, as you can see the way our operating cash flows have accelerated over the last two fiscal years. Sustained growth and profitability at scale is not easy to achieve. The momentum at Adobe is strong, as evidenced by our first $2 billion quarter of operating cash flows. A strong capital structure with robust investment grade credit rating positions us to continue to drive growth and provides flexibility making access to capital affordable for Adobe. Let's talk about our capital allocation strategy. First, we focus on investing in the business to drive long-term growth. Given the tremendous opportunities in front of us, some of our recent innovative R&D initiatives include our next generation data platform, as well as Creative Cloud Express, which we announced earlier this week. We're going to continue to invest in sales and marketing to scale those businesses globally. Second, our cash and investment balances as well as our debt capacity, enable inorganic growth opportunities. You've seen the way we've accelerated growth and made a creative strategic addition over the last fiscal year with Workfront and Frame.io. Lastly, and importantly, we focus on returning capital to our shareholders. Our stock repurchase program is funded through growth in our operating cash flows, and you can see how successful we've been in driving down the average shares outstanding over the last 4 years. Since 2018, we've returned approximately $12 billion to shareholders through our stock repurchase program. Exiting Q4, we have $13.1 billion of remaining stock repurchase authority through the end of our fiscal 2024. The hallmark of a great technology company is consistent innovation in category defining products. Adobe's done that across all its businesses, and we'll dive into each of them next to discuss the performance drivers. First, creative, the company has driven sustained ARR and revenue growth, which accelerated from fiscal 2020 to fiscal 2021. Let me tell you about the underlying data-driven operating model used to drive this performance. It all starts with innovation, and the most comprehensive industry defining portfolio of products. Our brilliant marketing campaigns generate awareness about Adobe's offerings and drive traffic to adobe.com to engage customers to try, buy, use, and renew. It's about taking creators on a journey. First with simpler applications, including our mobile, tablet, and web applications, connecting them with vibrant creative communities, and then providing journeys that empower them to do more as they advance, including services like Adobe Stock, Cloud libraries, and collaboration features. Now, with the addition of Frame.io, and Creative Cloud Express, we're continuing to grow the business by broadening the aperture and reaching new creators and stakeholders that will power the world's content. We continue to drive strong growth for Document Cloud. Again, you see this in sustained revenue growth with ARR growing even faster, as the business shifts to being increasingly subscription based, with approximately 90% of Document Cloud revenues in FY 2021 now being subscription. The main Document Cloud growth driver continues to be new user acquisition. We're seeing strong growth of Acrobat on adobe.com across geographies, growth on the web, as well as in mobile, and seed expansion in the enterprise. PDF and doc that workflows are mission critical to the way people work and collaborate in the digital first world. As Anil mentioned earlier, there's tremendous growth opportunity within our cohort of large customers. As we focus on cross-selling and moving them along the maturity curve towards the transformational adoption of our entire platform instead of customer experience management solutions. The average ARR and total contract value of our largest customers demonstrate how massive this opportunity is. And we grow by adding new logos to our customer base and then expanding within those accounts, a multiyear journey. As impressive as this company's track record is, I believe there's even more growth ahead of us. I fundamentally believe there's a trillion-dollar market cap opportunity in Adobe's future, having crossed the $15 billion mark in revenue, what is the path to $30 billion look like? And then from there, how are we going to get to $45 billion? It starts with an estimated $205 billion TAM, and a huge ecosystem that we built around our market leading products and services. How are we going to get there? We're going to continue to broaden our appeal to a wider universe of customers, engage and retain our current customers across all geographies. We're also going to grow by innovating and investing to enter new categories that further complement and expand our growth trajectory and better enable our customers in the digital era. When we execute on that strategy over the next decade, our scale and success, we'll put Adobe in a class that only a few software companies have achieved. Having passed the $15 billion revenue mark, we're going to start reporting revenues in constant currency given the potential impact of foreign exchange movements. Following the year in which FX was a tailwind to reported revenues. The recent U.S. dollar strength is expected to result in a headwind to our reported revenue and growth rates for fiscal year 2022. Consistent with our annual practice, we've revalued our digital media ARR balance to account for the movements and the FX rates. For operating expenses, we continue to save on travel and facilities in fiscal year 2021. While many of our employees continue to work from home, we expect these expenses to ramp throughout FY 2022. We also plan to invest in increasing headcount in integrating Frame.io. We believe these are critical investments and we're making -- we believe these are critical investments we're making and we're going to focus relentlessly on the organic growth opportunities ahead Lastly, fiscal year 2021 was a 53-week fiscal year with an extra week in Q1. That week added approximately to $267 million of revenue and $25 million of net new digital media ARR the math around the return to a 52-week fiscal year is expected to be a two-point headwind on our full-year, FY'22 growth rates and a seven-point headwind in Q1. Here's Adobe's fiscal year 2022 annual targets. We show our segment growth targets on an actual and adjusted basis and constant currency factoring for the additional week last year