Adobe Inc. (ADBE) Earnings Call Transcript & Summary

Good afternoon, and welcome everyone to the Morgan Stanley virtual theme day on the future of work. Very pleased to have with us this afternoon from Adobe, Bryan Lamkin, EVP and General Manager of Digital Media, to talk to us about what's been going on at Adobe during this crisis. More broadly talk to us about how Adobe and Document Cloud, in particular, fit into the future of work. So Bryan, thank you for joining us. I thought starting out, we would talk a little bit about how Document Cloud fits into the broader perspective of how we've been focusing on how we've been presenting the future of work. And we're talking about how information workers largely get their work done and get their job done. And we've been trying to kind of break out the conversation and talking about technologies that, one, support communications and collaboration; two, automate workflows; and three, manage content. And with that premise on kind of how we view the market, can you talk to us a little bit about where Adobe fits into that future of work and where, in particular, Document Cloud fits into that dynamic. And I think we have a couple of slides also that you want me to talk through on this.

Yes. No, I think I had like 2 or 3 slides if we can pop those up, it might be helpful to lay out at least Adobe's perspective here. And thank you for the opportunity today. I wish I could have been there in person, but I'm happy that we could patch it together virtually here. Something we're all getting used to. I don't know, Keith, whether -- I don't know if I'll see the slides when you put them up, but...

No. But...

I'll just say Slide 1, Slide 2, Slide 3.

All right.

But just before we can jump in, Adobe has been focused on the market and technology trends that have been driving massive changes in the nature of work for several years. And with the digitization of workflows with project level collaboration, virtual or hybrid team environments, that's become the reality today. Obviously, over the past 3 months, but it's something that we've identified as a core driver to our overall business that plays, in a big way on the Document Cloud side, and I'll get into that. So on this first slide, we look at the trends, and we believe these are the real tailwinds in our document franchise business. Most of those here in this virtual world, we're already working with digital documents, and we've accelerated doing so over the past couple of months. But the paper to digital transformation, if you think about it, is still very much in its early innings. There's not a CIO I talk to now that is not working very quickly on digitizing archaic paper-based processes, and that obviously is a huge accelerator. With CIOs, maybe 4 months ago, you'd get involved in the conversation, saying, "Yes, yes, I need to do that but I have these other 13 projects that I view as more mission-critical in the short term to get over the line." I'd say that electronic documents and electronic signatures have really ratcheted up very quickly because the disruption that they're feeling in all of their historically paper-based processes, they need this technology. They needed this platform to actually bridge that. So that is going strong. At the same time, cloud and mobile productivity are going mainstream. So global teams are collaborating on critical corporate documents in the cloud and that's becoming more and more mainstream activity even outside of the COVID context. In education, families who are just dealing with their kids in schools and going through forms and getting -- or signing off on homework, et cetera, or filling out a form to -- for permission slips, maybe they aren't doing as many remote field trips, but there's still a lot of permission that needs to go on in the virtual environment for distance learning. Those are all moving aggressively to digital workflows. So net it out, whether you're individuals, you're a CIO, you're a small business, digital is the -- this is the digital hour. Digital is the buzzword of the day to continue transforming your business and even to get just baseline business continuity in a more challenging environment. If you turn to the next slide, last year, and this is -- we walked through this in the financial analyst meeting. We expanded our Document Cloud strategy pretty dramatically. This is a franchise, as you know, we invented PDFs 3 decades ago. We've had the Acrobat application suite. We've been in the sign business for several years right now. But we took a step back and we really took a hard look at the growth drivers, and really started to focus in on how do we actually eclipse the path that we are on and actually accelerate more growth. I'd say, number one is continue to expand the reach for PDF viewing. We have viewing that's -- we're the king on the desktop. We've got a very strong suite of mobile applications with Sign, with Acrobat Reader, with Adobe Scan on mobile. But how do we go beyond that? How do we become the one-stop shop for any action that you would want to take on a PDF document. We call those the document verbs. So the documents are now -- now we want to attach verbs to that. And historically, customers come directly to us on Acrobat to do anything from exporting documents from PDF back to Word, to be able to edit a document, to be able to apply electronic signature processes to the document. How do we take that beyond the desktop plan and embed frictionless services within mobile. And to deliver frictionless services within the context of the web environment so that any customer who's looking for that solution, starting off in the Google Search box, but they see Adobe ranking very high in terms of being able to take action on that verb. And this becomes not just a way to satisfy that demand, but a way to bring new customers into the funnel and then to be able to monetize it over time. On mobile, there are billions of mobile and -- users out there who want seamless access to the power of Acrobat, whether that be in mobile, mobile browser or the desktop browser. We want to make sure that we're satisfying them. There are literally trillions of PDFs in the world today and through the power of our Document Cloud platform and the power of Sensei, where we're really applying a lot of artificial intelligence and machine learning to extracting all of the intelligence from that document and unlocking the data that resides in that document and providing a reflow experience so it reads much better on mobile. These are all areas that we declared that we're going to invest much more deeply. And finally, it's not just for Adobe and its application experiences or its web service experiences. But it's also extending that ability to third parties, whether that be mobile developers, enterprise developers, ISVs. And to be able to deliver this platform as a set of APIs so that all of these frictionless services that we talk about as verbs are embeddable directly within a third-party experience. So this is really where we've chosen to focus the energy and the strategy for Document Cloud. Last slide, I'll just wrap up real quickly on Document Cloud in the era of COVID. Remote work and distance learning have been reemphasized as critical, and PDF format is at the heart of the workflows that our customers are deploying. And that's in a cloud-enabled and that's in a mobile-first world. We benefit because Adobe has, as I said, the richest PDF experience, very rich PDF feeling, a strong set of verbs. We've seen a spike in the usage as we look at the usage through the last couple of months, whether it's in education, whether it's Sign, accelerating business and government trends towards e-signature. Contracts, HR forms, citizen interactions, they're all now being confirmed with e-signature and no physical paper trail. So this has been a key transformation. I'll close by saying that it's also a transformation that we've taken to heart at Adobe and made sure that we are delivering our solutions with the full leverage of Adobe's enterprise team. And so we've actually [ looked at ] them together with Anil, who's taken over for Matt. We've put together a model where we can take advantage of every quota-carrying sales representative on the digital experience side of the business on our enterprise team to drive in customer engagement solutions that incorporate Adobe Sign at the heart of that. And that's true of government, that's true of health care, that's true of financial services. So we have a much broader footprint to engage our enterprise customers. We have the right product strategy to really leverage some of the key trends that we've been talking about.

Got it. That's super helpful. And when we think about -- one of the themes we've been talking a lot today across vendors is the blurring of some of the competitive lines that we've historically seen in this market. And then we put together a presentation where we kind of delineated the traditional IDC markets of kind of what went on in collaboration communication, what went on in workflow automation, what went on in content management. When you start talking about verbs, as it relates to Document Cloud, does that kind of speak a little bit to that blurring of lines that it's not just about the content and it's more is what you do with the content. It's more about the workflow around that content?

I'd say, absolutely. And the way -- if you think about the average small business customer or the average consumer who uses Acrobat or uses the free reader or maybe use one of our frictionless verbs delivered via the web, they don't really think about workflow. They just think about getting things done. They just want to take an action on a document. And so the whole language we use is very different with that customer. But when we're going into the enterprise, applying these verbs to more complex business processes, they definitely think that way. And I think that it does blur the categories a bit where we're taking advantage of a very robust platform with PDF. We've had one of the leading workflow systems and approval in electronic signature in the world with Sign. And then we're extending the definition of what does it mean to collaborate, what does it mean to deliver a more integrated verbs within the context of the workflows that you're trying to deliver. So I do think that there is more a blurring in the lines. We still -- we think about 2 sides of this business. It's really the Acrobat and the PDF side of the business that is our core franchise, and there's a huge amount of opportunity to expand into the market with that. But it's also about the document services platform, where we are with electronic signature. And where we can expand with a lot of the work we're doing with Sensei into more intelligent document services over time. So I think that we're well positioned on both sides of the house, and they intersect, where we have a very strong integration of Adobe Sign directly back into Acrobat. We'll do the same within our web services, et cetera, to serve a much broader footprint of customers beyond strictly the enterprise customer base.

Right. Okay. That's super helpful. And you touched on the point on sort of the impacts and the clear acceleration you're seeing in a lot of these businesses, as people are turning to Document Cloud to help during this crisis. And you saw, I think the number is 175% increase in the Adobe or Adobe Sign usage this beginning of the year. Acrobat Reader installation is up 43% year-on-year. Web-based PDF services up 40% quarter-on-quarter. So some real nice adoption trends that you guys were seeing in your Q2, basically calendar Q1. How should investors think about that in terms of -- is this just a pull forward of demand that you would have seen else-wise? Or does this crisis sort of put a spotlight on the need for sort of improving how you're utilizing your content or how you work with that content, that's growing the overall market opportunity.

Yes. I mean, I think we'll talk about the TAM, so to speak, the total available market when we update in the fall. But I think that this is a -- as I said before, this is a set of trends that we have identified and have been driving our strategy for a number of years. So using the sailing metaphor, we've had strong wind in our sail, maybe a temporary gust here that we're seeing. But I don't think it -- I don't view it as a pull forward. I think it's more of an endorsement of an intrinsic tailwind that we've identified in the business, and we will continue to drive our long-term strategy against. We're seeing, obviously, very -- we've seen strong performance in Document Cloud for a number of quarters. We're seeing over-indexed performance given the work-from-home environment and business continuity needs. But we anticipate we're going to see strength in this franchise for quarters and years to come.

Got it. I'm going to go back to last year's Analyst Day. I think Shantanu outlined a $13 billion TAM for Document Cloud. That was up pretty markedly from the year ago. The year ago at $7.5 billion. Can you talk to us about kind of what changed in that Document Cloud story that enabled it. What was the broader opportunity enabling that number to go from $7.5 billion to $13 billion for the TAM there?

Yes. And I think at the core, we really took more of a user-centric view of where the opportunity was and thinking more expansively about how do we address a broader user base. And that we applied on the creative side, that was really the pivot in terms of how we express the top line opportunity. And then all of our strategies underneath that to monetize came underneath that. On the Document Cloud side, I think we continue to really think about the 2 key pillars of growth that we're driving here. On Acrobat, it's category growth. I think PDF is becoming more and more relevant every day. And I think we're seeing that in stage right now. It's the declared strategy of expanding access to those verbs with more aggressive mobile, more aggressive web strategies to acquire new users via these very high-growth funnels, but it's the delivery of frictionless web experiences to keep them engaged once we acquire them. And then there's still on Acrobat, as I mentioned before, there's still a healthy migration opportunity from perpetual that underpins that full opportunity. On the services side, it's much more how do we think about the expansive opportunity in electronic signatures. How do we get even more bullish and more aggressive against our growth goals there? How do we think about embedded PDF as a service so to speak? How do we take the great franchise and platform that we've built over decades and deliver that in the hands of other customers who can take advantage of as an API kind of a strike for PDF is what I would -- we would call it internally. And then finally, Document Intelligence services, we know that we're just scratching the surface of what we can unlock in millions and billions of PDFs via AI. Right now, out of the gates, we're focused on with our Sensei project on documents. We're focused on bringing structure to the document so that we can elegantly reflow those documents and deliver a much better mobile viewing experience. But once you have that structure, what you can do with that structure will present a lot more opportunity over time. And so as we stood back and looked at kind of the aggregate of these opportunities, we were very bullish and convinced that it was time to raise the TAM.

Got it. Got it. I think one of the things that interest a lot of investors into the Document Cloud opportunity is the installed base of Acrobat. You guys talked about 2 million devices that already have Acrobat on it. Can you talk to us about the opportunities of how does Adobe think about kind of pushing that base forward, monetizing that base more fully on a going-forward basis. And I guess getting more of those verbs, getting more of that intelligence into that installed base.

Yes. Think of it as a -- if you think about mobile and web, these are engagement funnels, right? And using DDOM, we have -- we spend a lot of time analyzing the cohorts that come into that funnel and kind of assessing and interpreting the actions they're taking within the context of our experience and then driving them towards conversion. And so we do a lot of A-B testing. We do a lot of price point testing, but the goal ultimately is to have a satisfied paid customer, right? And so that's something that -- this is a -- make no mistake, this is a core growth factor for subscriptions. That is our -- that is our ultimate goal. And we'll pursue that differently, that we may choose to let somebody sign a document 5 times and download it and then choose to monetize that at that point through a web funnel. We may give a mobile user, a certain set of rich PDF experiences but put 5 key features that we know because we've studied the data and the usage in DDOM, we know [ who ] will be key drivers and levers for monetization. And then we go test monetization against those features. So it's really -- think of the verbs, whether it's in mobile or on the web, as the antechamber for a subscription in a sense, that's the way we talk about it, that's the way we drive it. We're happy to have a large base of free customers. We're much happier to have a larger base of paid customers.

Got it. Got it. And how should investor be thinking about the competitive environment for Document Cloud as you're looking to monetize these customers as you're looking to get a broader usage of the PDF format and Acrobat, what's the alternatives? What's the other competitors -- they're trying to win that business from?

I mean, again you -- if you're focusing on the PDF side of the house, there for a while, we put this out in the -- created an ISO standard out of PDF many years ago. And so it is available for developers to build and using open source libraries to do so. I'd have to say they're generation is behind about -- in terms of what they're doing with the format and the way that they're integrating this format in their platforms and services. So I think the differentiation for us is we have the strongest, richest, most unified platform of PDF functionality on the planet. And that's why we're fully confident in our ability to compete in the subscription offerings, but also to be able to platformize that and deliver that functionality to a broader set of enterprise customers, developers and ISVs. So I think we're in a pretty unique position, given how much we've invested in cloud services, and how much we've invested in platform relative to your standard cloud and PDF provider. Hopefully, that answers your question on PDF.

Got you. And then switching gears to the competitive environment on the Adobe Sign side of the equation. On the webcast, I see the questions coming in. And all of the questions are about the competitive environment, particularly with DocuSign, so 2 questions on that. One, how do you guys view that competitive environment? Where do you guys see yourselves gaining ground against DocuSign? And then two, what do you think about DocuSign's sort of expansion into contract life cycle management? Is that something that like Adobe is likely to follow into a broader kind of contract life cycle management offering?

Yes. The way to think about it is the Venn between DocuSign and Adobe's strategy is that they intersect on e-signature, right? That's where -- that's what we have in common. But if you back away from that, we're running fairly different strategies. DocuSign has gone, from our perspective, narrower into contract life cycle management. They obviously have a very strong presence than Sign. They're doing a good job with their business. They're going to be multiple winners and the broader transformation. Again, to my point, it's the 800-pound gorilla is not DocuSign, but it's the network printer down the hall that we're all harnessing this tailwind of digital transformation and digitization of doc processes. Our platform, I feel like I've spoken quite a bit about today, but it's a much broader, much more established PDF-based document platform with a variety of routes to market, a large base of customers that we serve, dealing off -- processing billions upon trillions of PDF documents out there in the market. And so we're very much taking a more of a PDF plus sign view of the opportunity. We have all the verbs that our customers need to take action on with PDF. Sign is one of the mega verbs where it is a really critical business process that we've attached directly to the PDF franchise, and we're leveraging that across every route to market, whether that's directly on adobe.com, via our channel providers or via our direct enterprise sales engagement. So they've got a good business. We have a bigger business. We're both growing very, very well. And yes, we meet in the market now and again. But I think that the focus and the aperture of how we see the opportunity is distinct.

Got it. Got it. In talking about the future of work and sort of enabling our people to get their job done, shouldn't Creative Cloud be sort of brought in to the conversation as well? Because a lot of what Shantanu talked to is empowering creatives and not just creatives, but millions of people to unleash their creativity and to better tell their story. I mean, that's part of the work that they're getting done. So do you think that's an appropriate sort of addendum into this conversation of what you guys are doing on a Creative Cloud side of the equation?

Absolutely. I mean there's -- you wouldn't want to ignore the bigger twin sibling in the room here. Creative Cloud is the -- it's the workhorse for digital content. Digital content powers the global economy. So it's not just about documents or document-based processes at all. I think that if you think about it, it's hard to imagine a piece of content that has been delivered to compel a customer to action, to compel a social follower to action, et cetera, that wasn't put through at least one of Adobe's products. And so creative Cloud is definitely the linchpin on the platform for the digital economy. In that respect, we still fundamentally believe everybody has a story to tell. Obviously, the heritage of Creative Cloud has been a great professional story, and there's a lot more opportunity within creative professionals. But I think the even larger opportunity over time is with what we call communicators or knowledge workers or social bloggers or hobbyists who want to get their message out as well, and they're turning to much more creative means to do so because the technology and the tools have gotten easier to use. And so we see a broader market of people in the app work environment who are going beyond PowerPoint and really using creative tools to tell a richer story, or turning to video. Video has been one of our highlights in terms of performance and through the COVID era is more and more people are trying to video to bridge the virtual distance and tell a story there. Social marketers, hobbyists, consumers, all looking for ways to be creative. And to engage their audiences. And so I think that Creative Cloud absolutely fits in the context of what you've characterized for your event today. Our customers are looking for the best-in-class platform for creativity. And there's -- we're the premium brand in the space, but we're also doing a lot to take that a bit down market to or expanded segments of communicators of consumers, et cetera. We talked about the Photoshop Camera in the earnings announcement and how we're pretty much taken 3 decades of Photoshop excellence and put it in a small box called the mobile app and really bringing photoshop creativity to the point of capture. So that's an example of how broadly we're thinking about an expanded opportunity for our Creative Cloud. There's always going to be the opportunity on top of that as we grow the customer base to then deliver more value, to deliver more content and services and to continue to engage those customers in a much deeper, much richer way. But Creative Cloud is absolutely at the table in this conversation.

Got it. One question I wanted to get your view on is coming into the COVID crisis, so more recently, we stuck with Adobe, we stuck with ARR rating. And I would say we're only kind of -- we were right with the rating, but kind of -- we could have been more optimistic on sort of the fundamentals. We thought it was going to be the operating margins, subscription model that get you through. But the underlying demand sustained really well. Well, when you guys put out your Q2 report, you really surprised me, but I think a lot of investors, with how well sort of Digital Media overall, especially Creative Cloud, Digital Media net new ARR, sustained, it actually grew on a year-on-year basis. I think it was like 9% growth on a year-on-year basis. Part of the reason that was so surprising is that we looked at the '08, '09 downturn as the analog. And we hear investors saying net new ARR is not too different than sort of perpetual licenses at the time. And back then, perpetual licenses fell 30% versus net new ARR growth of 9%. And to me, it really talks about a different type of Adobe, a different type of Creative Cloud offering going in this time around. Can you help me understand what's different about Creative Cloud now that this isn't the expense savings initiative it was in '08, '09. Now this is a necessary piece of solution that actually grows in importance. That actually -- the net ARR grows on a year-on-year basis as we go into an economic downturn.

Sure. Well, first, I'd say the first message never miss the opportunity that a crisis presents, right? And '08, '09 was a bit of a crisis moment. But I think what that caused us to do, and that was -- I was gone from Adobe for about 7 years. So that -- I can't take credit for that brilliance. It was before I came back to Adobe in 2013. But it caused us to really reflect on the boxed software model. And how do we kind of break that model wide open. It was getting challenging for us to actually deliver software updates to our customers because of revenue recognition issues that was getting -- our engineers are really looking to deliver services, and we had no way of taking those services to market. We didn't have a cloud platform to build them on top of. And then the business model, we heard very clearly from customers. They voted what their pocket looks and demand fell off and upgrades slowed down. So the business model of high-priced perpetual software just wasn't very current with the times. And so I think it was a duality of saying, "Hey, we need to ignite innovation at a whole new level. We're not keeping pace with the demands of our customers and frankly, the desires of our product development teams." And we need to make sure that we can put this software in the hands of not just the existing customer base at an affordable price point. But it actually -- let us put it in the hands in a much broader set of customers. Let us help it become one of the levers where we could go fight piracy in international markets, et cetera. And so I think that was the birth of the Creative Cloud model. I can't say that we were completely accurate with the way that we modeled this success, I think we haven't beat our own numbers on it, but it's been really encouraging to see how much we've been able to grow this business and expand into new categories, bring new categories to the Creative Cloud, like augmented reality or virtual reality, and hence, the video offerings to be able to deliver new products that spoke better to the communicator segment and not always focusing explicitly on the professional segments to deliver a much faster pace of innovation. I mean the -- our ability, we are rolling releases monthly on some of these teams. And no one's moving slower than quarterly in terms of the pace of innovation that we're delivering. So to be able to deliver innovation at a much faster rate. And then if you build this all on top of this platform, this business platform that we developed called DDOM, it lets us wire that all up and really manage a virtual funnel where we can inspect usage. We can look at everything from the first touch point on web traffic, all the way through the renewal cycle and really model and inspect and apply the secret sauce that we have from the digital experience side of the house to understand customer behavior to test offerings, to test price points, to test features and then to adapt to the response to that. And so it gives us much deeper insights. And that insight comes at an operating level. It comes at a route to market level. It comes at a geographic level because there are all kinds of differences as you start to mix this in between -- so that's really been the learning and the opportunity along the way. Frankly, right now, we don't talk a lot about the conversion opportunities for Creative Cloud from Creative Suite. There's more opportunity there, but we have much more opportunity in new user growth. And as we acquire these new users, that is really driving deep engagement and then deliver higher-value services to those users. So that's really the essence of the Creative Cloud story. We're going to continue to drive a high pace of innovation. We're going to invent new categories, like you're seeing with the substance line for 3D texturing, it's kind of the Photoshop of 3D texturing. And we want to remain the one-stop shop for creativity. But we're going to do so in a way that lets millions and millions of new customers into the fold every year.

Got it. Outstanding. Unfortunately, that takes us to the end of our allotted half hour. But Bryan, thank you so much for joining us. Really an interesting discussion on Document Cloud and the broader Digital Media Suite. And very -- a great opportunity to get your views on sort of how that relates to the future of work. So thank you for joining us this afternoon.

Thanks for having me. And I look forward to seeing you in person someday sooner.

You too. Okay. Take care, everyone.