Adobe Inc. (ADBE) Earnings Call Transcript & Summary

Okay. We're good. Thank you. All right, good morning, everybody. Again, thanks for joining us today. Thank you. We're really pleased to have Adobe with us once again at the conference. We've got John Murphy, who's the Executive Vice President and CFO of Adobe; and Mike Saviage, who is a stranger to no one in this room, who's the Vice President of Investor Relations. So thank you, gentlemen, for being here with us. Greatly appreciate it.

So I mean, look, if you think of Adobe, the first thing that comes to mind is always Creative Cloud, at least for me. And then you've got the Document Cloud and the Acrobat franchise. But you've been building out over the last, I guess, since Omniture, this Digital Marketing business. So I guess how do you think about the company's positioning in that market? And how has it evolved? What's the positioning today? And kind of where do you see it going over the next few years?

Sure. So I think -- yes, about 10 years ago, we acquired Omniture and it was the beginning of the category creation for Digital Marketing and Marketing Cloud. And we ended up looking at this as an adjacency to our Digital Media space because of content creation and data, analytics and how we would look at engaging with people, how enterprises need to engage with their consumers. And so it was really a good natural fit for us to extend the franchise of Digital Media over to Digital Marketing and with Enterprise. Where we built out our current set of solutions, and we truly believe it is the most comprehensive set of digital marketing solutions to drive customer experience management was through the 10 years of investment not only in inorganic opportunities, like Omniture and of course, more recently with Marketo and Magento, but also in the organic development of products like we launched last year with Adobe Experience Platform and Real-Time Customer Data Platform. They're really differentiators on how we can drive engagement for our enterprise and mid-market business customers to engage with their consumers to drive their business and drive revenue and drive loyalty. I think when we look at that, we're -- the market, as we've sized the TAM, is obviously very, very large and it's specific on how we view where we want to play in the market and where we want to drive our investments. And so we talked about it at the Analyst Day that the market TAM in 2022 will be about $84 billion. And right now, this business is going to be roughly around $4 billion for us. So a lot of great growth opportunity for us.

And how much -- so again, you guys pioneered the category. If you go back to the Omniture acquisition, you've done a lot with it since then. You had the vision then that this was kind of a natural intersection. How is it -- like, has it played out as you expected? And how much sharing of -- or knowledge transfer is there, I guess, if you will, from the creative side to the marketing side and vice versa, right? How has that evolved?

Well, it's definitely played out as expected. When you think about the content creation explosion that's occurred, and it's continuing to occur because of the devices that are available to engage with consumers and customers across different enterprises and different verticals, whether it be on mobile devices, on tablets, on desktops, on screens in your car, for example, I mean, there's all these touch points that are available for enterprises to engage with the customers. They have to have rich content to engage with customers. So that was the perfect marriage really of our businesses.

What I would add is if you think about the growth of our digital experience business, we really leveraged all of these products that we had to grow our creative business. 10 years ago, we had a $2 billion box software business called Creative Suite. And we decided we're going to move that to subscriptions, we're going to move that to an online model. We started to use our own tools to do that. And we learned a lot about the process around how you drive visitor acquisition and visitor conversion. It built feature sets into our digital experience products and how we market to customers, how we measure the ROI of marketing spend, how we drive that funnel of traffic to adobe.com or through mobile apps. And now we've connected that all the way through the process of a transaction. And so what's happened is we've built out this solution that our customers want. But we also allowed us to take a $2 billion business and basically triple it in size in the last 7, 8 years through the use of our own tools. And now we have this long line of customers coming to us saying, "How did you do that? And can you help us do that with our business?"

Right. And so the feedback loop from the data people are getting in real-time and marketing can go back into the creative community that are creating the ads for this. Is that kind of a -- is that a seamless loop at this point?

It pretty much is. If you think -- we've talked before about the data-driven operating model that drives our Creative business, and that's using the Adobe Experience Platform, and it's using all of our products in Experience Cloud. It's real-time. It's a way to measure every point on the journey between discover, try, buy, use and renew. And you can translate those journey points to many different verticals, maybe different words. But if you think about engaging with the customer and discovering who they are, our products do that, and they measure it in real-time. We understand -- as Michael was saying, the return on the marketing dollar and the investment, we understand if it's successful. And we're able to shift our marketing investments and our tactics very quickly all the way into the transaction where they purchased the product and they're using it. We're able to measure how much they're using the product. And if it starts to wane, we can engage with them real-time because our artificial intelligence tells us that a customer might have a propensity to churn because they're not engaged with the product. So we're able to do in-app messaging and maybe a case where maybe they're struggling with the feature of the product, and we can give in-app messaging to a learn capability or just even to a tool set that they're looking to use. So all of the capability that we've been able to build out and [ DDMP ] for our Creative business is what we now have productized in Adobe Experience Platform.

You touched on this a little bit before, but just kind of the number of touch points customers have, right? It's screened everywhere, if you will. So how are you thinking about that or leveraging that to think about where you want to take innovation going forward?

Well, I think you see that in a lot of the innovation we delivered in the mobile apps that we're offering today. And of course, we offered Photoshop on iPad this past year as well. So mobile is important. And understanding the different screens that people are interacting with and the different modes in which they're interacting is very important for us to take some of our flagship products to make sure that they're relevant in that medium. And so we've been able to invest there in innovations. We've been able to deliver lighter versions of those products. Some of them are complex, and so we want to give a lighter version to customers, so that they can engage with those products and actually use them and be successful because we know when they're successful, then they'll either use additional applications or they'll upgrade to the full-service model.

The other area, too, to think about is the use of AI and machine learning and how we apply very complex algorithms against all of this data. So our customers use our solutions for AB testing. So the next visitor might come and get a certain experience. The next visitor might get another experience. And now we're using sort of data-driven algorithms to help them decide what is the best experience to drive the best outcome. We've learned how to do that with our own business, and so how do you bring people in, how do you deliver personalized content that connects to the content management opportunity of delivering the right content to the right person at the right time. And AI and machine learning, very domain-specific for the creative process, for documents, for digital experiences is enabling us to innovate at an even faster pace around helping our customers deliver great experiences that fuel their transformation and their engagement with their constituents.

So that AB testing that you mentioned, and if I think about kind of the sheer volume of advertising, digital advertising dollars, in particular, and you look at some of the walled gardens, if you will, of Google and Facebook, how can you help people make their spend more efficient on those 2 dominant platforms that are making it harder to leverage third-party data?

Well, it's actually really interesting because they're using our creative tools to create their content. And you're able to provide them the -- their own data, their first-party data and how it's being successful in those platforms. They're able to leverage that data in our tools to measure.

And for a marketer, they look at Google, they look at Facebook as channels. Just like print, radio, TV, e-mail, they're all channels. And where we can help is help them measure the effectiveness and optimize their spend across walled gardens, across other forms of reach and how they go to their customers. And so we are a revenue source for platforms like that because our customers are using them. And they're understanding the measurement and the ROI of their spend not just within that walled garden or that platform, but across all of their marketing spend, so they can effectively understand in a multichannel environment what's working, what's not, where do I invest, where do I maybe pull back.

Right. It is a -- the marketing business is a fragmented market, right? So there's a bunch of different players in there. The company does have very good differentiation. But how have you seen that the adoption of your marketing kind of evolve as people come to recognize the closed-loop nature of Creative Suite?

The closed-loop nature of...

The Creative Suite with the Marketing Cloud.

Yes. So I think what's happened is, because many of our enterprise customers were using Creative Suite, if you think about it in the traditional days, the creative departments were creating content and they might have been in print. And now gone digital, we've got mobile, and they've been using our products for that. It's actually been important to how they engage with customers. And so they're able now to measure that and they can measure it in real-time, and it can change how the behaviors in which they engage. And this is personalized. It's regionalized. It's by product. It's by customer segment. So they see the closed loop because they see the linkage between what they need to change in the Creative to be more effective in how they're actually engaging in the marketing with the customer.

And so if you kind of were to walk through the differentiation between, say, your offering versus what Salesforce has, if you're talking to customers and there is some sort of an RFP going on, where they're trying to figure out who uses their digital marketing platform, how do you differentiate it? And what would you say your strengths would be versus the competition? And I guess the other one, sorry to make this so long-winded but who do you see most often?

Yes. I mean, I think there's, I guess, a misperception that we see in Salesforce all the time because, in reality, Salesforce approaches most of their sales through CRM opportunities and then marketing. Their marketing cloud is essentially an add-on to that. And if you think about what we've done is we've intentionally created a product suite, a solution set that really does go across the entire customer journey. It was very specific to play in this domain space, so that we could create really an unmatched customer experience management ecosystem. And we've then developed the Adobe Experience Platform to integrate all of those capabilities that we had into a kind of lower total cost of ownership kind of platform that we launched last year. So our entry into a customer is someone that's trying to digitally transform and engage with their customers where, in some cases, it will be -- we're just placing in homegrown system, but we're not going in there to displace the CRM system. We believe the CRM system is a little bit more legacy technology. It was necessary for a point in time. But if you want to engage with the customers today, you want to engage in real-time, so that you can actually impact transactions immediately. And that's where we differentiate ourselves, and we're able to do that across a series of different solutions that go from discovery of the customer to transact with the customer, all the way to understand different engagements across their life cycle. So that's the differentiation for us.

And Creative Cloud, if we just spend a little bit of time there, obviously, it's been a dominant product for a long, long time. How do you think about ways to sustain your competitive advantage?

It's a great size market as well. When you talk about the TAM there in Creative Cloud, about $31 billion. It's a market that is growing with the fact that more than creative professionals are creating content. Average consumers are creating content that they're sharing on social media. The devices that people are using today are enabling them to create real-time, whether they're walking around with their phone or tablet. And so more people are trying to tell a story, and Shantanu talks about that a lot. Everyone has a story to tell. And they're doing so with a lot of our products, and it doesn't have to be the creative professionals. But of course, that is part of the core. And that group of users is growing every year. And at Analyst Day, we talked about by 2022, 45 million.

Right. You mentioned that at your Analyst Day.

Creative professionals. But that's even dwarfed by the number of communicators in the enterprise, people that want to use creative tools to -- that maybe are doing a project or investment analysis, and they want to create a story for the purpose of making the decisions, where they're trying to communicate in the case of a product marketing department that wants to actually talk about an evolution of an innovation. You also have then the consumers. We start with students. We seed our products in education. We want those students to learn how to use them not because every one of them are going to become creative professionals, but because they're actually going to need to use digital tools to create impact and to communicate.

So there's -- it's been rare that we've seen competitors try and get into this market, right? It's almost like they know better. But you have seen Canva, for example, as one that, I think, people maybe talk about from time to time. SIGMA is another. How do you -- again, it goes back to the differentiation, but how are you paying attention to kind of these upstarts, some that have very good valuations at this point, nowhere near yours, but still good valuations nonetheless? How are you paying attention to them and kind of learning from maybe the way they're approaching it from a clean sheet of paper?

I think we've always had competition across the portfolio going back decades.

[ Christine Barney ] was here yesterday. You don't have to worry.

And we know the path to compete successfully in that space. Number one, it's through constant innovation. And we all use Excel regularly, right? I can't think of another new feature to add to Excel. But if we add one feature to Photoshop that saves somebody 10 minutes of time or makes the output even look better, that's money in their pocket. And if you apply that to the 15 different products in Creative Cloud, we're constantly innovating and setting a higher bar for everybody to try to meet. The second part of the strategy is deep integration. I mean, we'll share Word memos and Excel files graphs inside of a Word. And we take it for granted, you can drop a graph inside of a Word document. Imagine that times 1,000. That's the type of integration we do between Illustrator and Photoshop and InDesign and Premier. These products are seamless on how they work together. And so if you come in, trying to compete with Illustrator or Photoshop, you have to build a better product and you have to handle all of the integration that, that product has. Now if we fast forward to what we're doing today, each of our key products on the desktop has a complementary product on a mobile device. We just launched Photoshop for the iPad last year. We said we're going to bring out Illustrator on the iPad. And then we have mobile apps that are even easier-to-use versions of that. That creates brand awareness and brand affinity from the new generation that's coming up. We've also taken these products and technologies in creating brand-new offerings, which are even easier to use. And so we have this massive funnel of awareness that creates more opportunity for us to grow the business. And we're always thinking ahead. There's new categories, there's new file types, we have a product for doing augmented reality. We have a product that allows texturing and 3D for gaming and high-end movies and interactive marketing online. And so as we keep pushing that bar, it's really tough to make an entrance. We certainly pay attention to everybody that's in the space. But growth of some of these companies is just reflective that this is not a slow growth market. It's -- more and more people have Creative as part of their skill sets. They need to, to be successful, and it's a fast-growing market that we help drive.

So if we take a look at your strategy or what you've done with Creative Suite, you've been -- you haven't been aggressive on taking price, right? You have -- actually have only done it, I think, twice, right? You had price increases in the U.S. Then you had price increases internationally. And you're obviously creating more and more value for people as every year goes by. How do you think about -- when you're trying to plan for the growth of these businesses, whether it's a 3- or 5-year plan, how do you think about driving price, driving SKUs? And then also, you've also had very good success with Fotolia, right? So I mean, you've had to lever that way. So how do you think about all the different vectors of growth to kind of hit your long-term targets that you might be laying out to the Board?

Sure. When we talked at the Analyst Day, we have over 20 different levers that we play with to drive growth in the Creative business. Price is a lever, and we do exercise that very judiciously. We've taken the approach of making sure that we've added significant value to the products. And we've demonstrated that with the first price increase in North America that we did a couple of years ago in North America and then also later in international, but on CC, on Creative Cloud individual and for team, we showcased the different innovations that we had for years, and we also showcased 5 new products at MAX that year. And the messaging early enough and the value that we're driving really get resonated well with the customers -- the existing customers, and we do not see any significant impact to retention. And so that approach, I think, helps the customer trust us that we're not going to just continually increase prices with not -- any meaningful value-add. So being that, that is a lever, and we will use it accordingly, we do test pricing periodically in different markets and we see how customers react to that, so it's not something that we're ignoring by any means. We're not taking advantage of. But our -- given the growth opportunity that we have, our goal is to drive more and more users to the product. And so for us right now, having good entry price points for customers and have offers where they have a discounted price for a certain period of time, they go to full price afterwards when they renew, that's actually a great lever for us to be able to increase ARPU over time and also to get people to engage on the product. And the more they engage, the more they want to stay with us.