Adobe Inc. (ADBE) Earnings Call Transcript & Summary

Life After COVID: Morgan Stanley Virtual Conference Series that we're presenting to really bring about perspectives and views on how work, personal life, business processes, personal processes are likely to evolve and change as we come out of the pandemic and as we move past this crisis and try to get a better understanding of what were more temporary changes, what were more permanent changes that we should expect on a going-forward basis. Very pleased to have with us this afternoon from Adobe to present their perspective, both Jonathan Vaas, VP of IR; as well as Andrew Chan. I'm Keith Weiss. I run the U.S. software research team here at Morgan Stanley. Before we get started with the presentation, a brief disclaimer. For important disclosures, please see the Morgan Stanley website at www.morganstanley.com/researchdisclosures. And with that out of the way, Jonathan, Andrew, thank you very much for joining us this afternoon.

Thanks so much for having us on, Keith.

Excellent. So thinking about life after COVID and from an Adobe perspective, how work changes on a go-forward basis, where does Adobe play into this theme? Should this be a discussion where we're talking only about Document Cloud and reenvisioning sort of content management? Or is there a broader conversation that plays out in terms of where creation and the totality of the Adobe tool set really comes into play?

Yes. I think, really, when you think about the different -- the 3 different business we're in, we're in the content creation business, the digital documents business and then the digital transformation business for enterprises, they all feel like long-term secular winners based on the changes we're seeing in COVID. Before this chat, we just did a small group meeting and we were talking about Adobe's own declared view of the future of work, just for our own employees. And one thing we said is the future -- given everything we've learned as a society during COVID, the future is going to be a hybrid between physical and digital. And because of that, everything you do has to have a digital-first mindset. If you have a meeting on the calendar and you don't know if everyone will show up in person, but some people might take it from home, you have -- it has to be a digitally-enabled meeting. And if you have document processes, but you don't know if folks are going to be around the network printer to take the piece of paper to them, it has to be a digitally-enabled and a digital-first document process. And of course, enterprises now realize that consumers often have that digital-first mindset and aren't necessarily going to walk into the stores anymore. And so I just think everything, even though we're really excited as a company culture, I personally hope that this is -- that the next time we do something, Keith, it will be in person and I can finally shake your hand. But the digital -- digital has gotten us through the pandemic. And so I do think really for all 3 of the businesses, when we look at the future, because digital is going to be a winner, Adobe is in the right spaces. You mentioned in a question, is it just the Document business? And we do often start there because it's the most obvious example of a secular trend not likely to go back. And so it is a good place to start.

Got it. That's a great segue. Let's start there on the Document Cloud business. And maybe you could talk to us a little bit about what happened and sort of what transpired over the past year in that business. Through the course of the year, you talked to us about large increases in Adobe Sign usage, solid growth in reader installation, spiking web PDF usage. Can you give us a little bit of a sense of sort of the numbers around there? And the really big question for investors is how durable is this likely to be on the other side, if you will, as we come up against these tougher compares?

I think the first thing we saw, when you look at all of the different types of data and the aspects of your business, the first thing we started to see in the pandemic was the number of e-signatures our customers were transacting going up by multiples. So first, it started with the usage and you realized that all of -- even customers of Adobe Sign, they still probably had a lot of physical signatures that they were doing. I know when I was going into the office, I was probably e-signing 10 docs a day and physically signing maybe 5 documents. But the number -- just the number of transactions went up a ton. And when we were looking at all of the secular changes in the world, we just saw -- suddenly, everybody overnight was home. And all of our customers are saying, like, hey, we -- the pipeline just built really, really fast. And people were saying, we've got to be enabled with electronic signatures. And so we leaned into that business, really. I mean, we started immediately investing in it. We got a reseller channel up and running for certain geographies. We had never used a reseller channel before. We made sure all of our enterprise sales reps were enabled to add signatures to any digital transformation deal. So it was fairly immediate when we just saw those secular trends broaden the opportunity. I'm also an attorney, and for years, we, at Adobe, had been sort of working on influencing different countries to change their laws to acknowledge e-signatures as a legal way to sign a document. And I think people are often surprised to learn how old fashioned a lot of the laws have been. So for me, coming -- looking at from that legal lens, it's been really rewarding to see finally the U.S. Securities and Exchange Commission changed a lot of regulations to no longer require pen on paper. The State of Delaware changed a lot of things. India finally accepted. I mean, think about how massive that market accepts electronic signatures as a valid way to sign a document. There was a lot of requirements of notarizations and stamps and things prior on India. So if you just think about -- and I believe that change in laws around the world is going to continue because every country that's enabled electronic signature has benefited from not requiring people to move around and potentially transmit COVID. And so it's -- there's so much greenfield out there where the legal changes and these secular changes are opening up e-signature. With how big the TAM is, and there's only 2 real enterprise players today out there in the space, that's going to be -- I think growth will be quite durable for the foreseeable future in that space.

Got it. So the durability of that growth, there's a couple of kind of different parts of the equation that I think are worth picking up. One is in terms of like, how do your contracts work with your customers, right? You talked about the spike in usage. Typically, the contracts give customers the ability to have a certain number of sort of signatures within sort of the documents and they have a capacity constraint. When your customers start spiking their usage, did you accrue all of that upfront? Is there like an overage were that impacted the numbers? Or does more of that benefit come on the tail when you renew those contracts as you go through that life cycle and you're expanding out the capacity of those contracts?

It's more the latter, and you hear us talk about the same type of pricing with some of our other products. When you're a single-product company, which Adobe is not, but a single-product company kind of has to find all the different ways to grow revenues as quickly as they can. When you have a suite of products like Adobe, we tend to have pretty customer-favorable pricing and licensing models because ultimately, we're not thinking about how do we squeeze out as much sign revenue from this customer as possible? But we want to have -- we want to be viewed as a partner that grows with them and can sell them other products down the road. So we tend to -- these are negotiated agreements where we arrive upon an annual license fee based on number of seats they use, expected numbers of signatures in transacting. But you never hear Adobe say, "Hey, why such a strong Q1? Well, overage revenue was really big in Q1, Keith." You don't hear us say that because we don't do a lot of that in our pricing models. We basically -- we license it to them. And when our e-commerce customers have a really great sales quarter or when our sign customers have a really great quarter transacting with e-signatures, we're rooting for them. We're not sending them the bill for the overage.

Got it. Got it. That's helpful to hear. It probably lessens sort of the degree of the difficult comp, if you will, as we start to anniversary some of those impacts. You talked about sort of -- your focus was on sort of the legal side of the equation, sort of pushing more opportunity for digital signature on a go-forward basis. Can you give us any sense of, just more broadly, how penetrated do you think digital signatures are? When you guys look at this market, where are we in sort of the opportunity -- I mean, because there's a bear case out there from investors, hey, listen, if you didn't move to a digital signature last year, when will you, right? Like if that wasn't enough of a catalyst, how could there be anything that's left physical? My sense is that, that's not that true, that this is the tip of the spear. But have you guys done any work to try to sort of investigate where we are in terms of the penetration of digital signatures?

Yes. I mean -- so I think -- again, I think of it on a global basis in terms of the total market share of signatures and how -- and effectively, how many are moving through Adobe Sign and DocuSign and then down market players. I think today's market share is still relatively low. I mean, you look at the TAM we gave for 2023 in the e-signatures piece, I think we said $10 billion. DocuSign gives a much larger TAM just for e-signature stand-alone. Whichever TAM you like, if you take their e-signature revenues, but we don't break ours out, but I'm sure every portfolio manager and analyst who's listening has a model that has their best guess. Take that market share today. I think there's still a phenomenal amount of growth out there. And I think the network printer and all the people bustling around and sending paper, I mean, I still am signing -- and I work for Adobe, I'm still signing with pen on paper a couple of times a week and driving to FedEx and sending documents off to Armenia because Armenia is a country that doesn't yet acknowledge e-signatures. And so there's -- we're part of different consortia groups that are driving changes to the laws. But I imagine when you look at the world in 10 years, you'll be hard-pressed to find places that don't have a -- whose legal systems don't acknowledge e-signatures as completely legal.

Got it. So that's going to be a separate breakout session in the Investor Day next year, the Armenian equation?

That's right. Workfront had an Armenian subsidiary in that, so now I've been learning about Armenian law.

Outstanding. All right. And then the last I want to dig into and then we can move on to sort of the other parts of the equation, the broader kind of solution sale when we talk about Document Cloud is not just digital signatures. There's a broader vision, if you will, in terms of automating kind of the end-to-end workflow around these documents. Can you talk just about sort of the extent of sort of what does the Document Cloud encompass today? And how successful has Adobe been in terms of following up Adobe Sign with a broader solution of, hey listen, let's take care of the broader workflow around these documents?

Yes, yes, absolutely. And I think there's going to be a lot more exciting things to come in that world, especially when you think about workflow and the acquisition of Workfront, there's even more that we can do. But going from 5 years ago, just Acrobat, which was a tool to help author and edit PDFs to today, we talk about -- we always talk about the actions or the verbs that people want to take on documents. And sign is just one of those. So much of it is collaborate, cloud storage, being able to scan and have that -- I mean, I use that every day to scan and then I go onto my desktop and I open it up through Document Cloud. I'm commenting on documents without having to e-mail them around by having those be cloud-enabled is something that you see teams and enterprises do a lot in governments. So there's so many different ways that we take actions on documents. And when I talk about -- I mean, Andrew and I talk to investors all the time that just asking us about our business, our document strategy, compare it to DocuSign's. One thing I say is, imagine the total global number of PDF documents that exist in the world, billions, if not trillions. Imagine the market share of those documents that are contracts. We don't know -- I don't know what that number is, but everybody can sort of imagine that's -- the contracts are where DocuSign's business is really focused. But the entire rest of that pie is where we're focused. We're not -- it's not just about contracts. It's about every single type of presentation, every single type of PowerPoint deck, every single type of inter-office memo, all of those documents that teams collaborate on and need to store, take different actions on, we're trying to address that. It's a massive market opportunity. And we're really the only technology in the world that exists for -- that's really just thinking about teams being able to do every type of action they want to on those documents. And then we're expanding it to mobile, we're expanding it to web to make sure people can work in any way they want to. And I think web and mobile, you have to have those mindsets to not just be kind of the desktop player when we're thinking about where we're going in the future.

Got it. And you brought up Adobe Acrobat. And I think last time I heard the number from you guys is something like 2 billion devices globally that have Acrobat installed. How much of an asset can that be in terms of the broader Document Cloud vision? How hard can you push against that base to try to better monetize it, if you will? Or are there kind of red lines that you really don't want to cross in terms of going too aggressively into that user base?

Sure. Andrew, why don't you jump in and talk about that?

Yes. So you're right. We said that there were over 2 billion mobile and desktop devices with Reader. Can you hear me?

Yes, we can hear you.

Oh, sorry, my video cut out. Yes. So for us, Acrobat, it's what we use as a top-of-funnel sort of opportunity for people to come in and use our products, right? So when we talk about Acrobat, obviously, it won't have the functionality of the full Document Cloud and I'll refer to what Jonathan talked about. But if you think about sort of how we've used that as a strategy over the last several years, if for us, it's a top-of-funnel play where people will come in and use it to, for example, just at a very basic level, read or mark-up a PDF, right? So for us, it's an attractive way for people to come in to go and read PDF and then we bring them on board. And what we want to do is we want to be the tool that everyone uses. And then when they hit that wall, that wall of free, we use that opportunity to bring them on, right, whether it's through a desktop or through mobile. So mobile has been huge for us. Jonathan had mentioned Scan before. Scan for us is a very powerful tool, right? We talk about how Scan is a scanner in your pocket that you can walk around and you can scan documents that aren't just pictures, they're actual PDFs that you can go and search. And that sounds simple on the surface, on its surface, but it's a very, very powerful tool that people use. So our strategy around that is, look, we get hundreds of millions of people to sign up to our Document Cloud. We've given those statistics over the years, right? Hundreds of millions of people will sign up, first name, last name, e-mail address. They get to use our tools. When we see how much they use those tools through our DDOM or data-driven operating model, we know the type of engagement and the levels that they use those tools, we use those opportunities to move people up. So for us, Acrobat, even though it's free, is a huge top-of-funnel move for us, it's a huge strategy for us to get people on board. And you've seen that play out over the last several years in terms of the unit growth, in terms of the revenue growth we've seen in Document Cloud, all because Acrobat brings people on board, it's attractive and it's ubiquitous. So it's a really huge play for us in terms of just bringing people on board and potentially monetizing them.

And thanks for that, Andrew. Keith, I want to add one more thing. When you think about that strategy of giving something away for free to generate all that top-of-funnel activity, which was the Reader, the next -- sort of the next generation of that strategy is Acrobat Web. And I would love -- if after this call, every single person listening would Google Acrobat Web and check it out, it's a place where you can take just about any action on a PDF you want to for free. You just have a PDF and somebody needs to reorder the pages or redact something, or flip around if the page is upside down, you can do that for free. And then ultimately, if you want to keep doing it, it'll ask you to create an Adobe ID and then you can go there and keep doing things for free until you hit a paywall at volume. And it's sort of -- it's a web-first mentality of how do we keep bringing people to Adobe's PDF technology and have -- what's the next big pipeline going to be? And there's such demand for people going online and web queries around how do I do such and such with a PDF, that, that's kind of the next place that we're evolving that strategy.

Got it. Got it. A lot more we can talk about in Document Cloud, but we only got 30 minutes. I want to make sure we touch all 3 parts of the business. Within Digital Experience, like the obvious beneficiary would've been Magento with the e-commerce platform, all of -- significant portion of retail shifting towards e-commerce. Can you talk to us, one, about sort of how much of a benefit did you see particularly with Magento? And two, how durable do you expect that to be as we start to anniversary these tougher compares? What kind of momentum are you seeing more broadly in that business as we head through the remainder of calendar '21?

Yes, yes. With our Digital Experience business, because we don't break out the individual sections, people always on the call have to kind of listen to the prepared remarks and where did John call out as the areas of strength and the growth drivers? And I think if you went back and looked at all those prepared remarks from 2020, you would pretty consistently hear content and commerce, which is how we talk about that part of the business as one of those areas of strength, which is what people expected. And that's where we had -- we've had for many, many years, the leading content management platform for enterprises in Adobe Experience Manager. But we didn't have the shopping cart technology until we acquired Magento in 2018. And the marriage of those 2, I think it's been as successful as people would have thought strategically when they're already running their content engine on Adobe, if we can provide them the shopping cart technology, there's such a synergy there. And then when purchasing all went online, when brick-and-mortar was just shut down in the pandemic, that was a business that had a really strong year. So I think in a year that in many ways, early in the pandemic, was a tough business environment for us, the content and commerce business was a consistent source of strength. However, just like I mentioned with our Signature business, unlike some of the stand-alone public comps in the commerce space, we don't charge a percentage of the GMV, the gross merchandising value. We do a licensing model. And then when those customers come back to renew and their shop had a gangbusters year and they did way more SKUs than in the original license, more GMV, then we can upsell them to a higher licensing band. We actually mentioned in the prepared remarks on our Q1 call that, that was a source of strength, which was actually the upsell motion of those commerce customers coming up to the renewal points and us moving them into higher licensing bands. So rather than seeing the benefit all upfront in terms of the revenue, you'll see it over time. And like you said, so there's not a tough comp because of that but just -- it's just part of the long-term growth of the business. Yes. For me right now, I would say I'm a buyer long term on e-commerce in general, just given all the secular trends we've seen. And whether you look at the down market players like big commerce and Shopify or in the enterprise space where we play and compete with SAP and Salesforce, that whole area had a strong year and I think is definitely something we see as being a durable grower.

Got it. More broadly, in the MarTech stack that you guys have within Digital Experience, it seems to me like it's a very good digital marketing environment coming out of the pandemic, particularly in the U.S. The consumer wallet is pretty fat right now. There, if you look at some of the bigger kind of vendors or players in the digital marketing space, they're doing very, very well. Are we starting to see follow-through impacts to the Adobe Suite? Is the front end sort of spending that's taking place, does that flow through into larger or bigger appetites for the MarTech software that goes behind it?

Yes, I think that's exactly right. And after a period of slowdown, what we saw is actually more of a sense of urgency by enterprise buyers to start getting their digital transformation done. And so we -- for us, we saw that start in Q3. Last year, we said in that business, we had a record number of million-dollar deals in Q3. Usually, that's our lightest quarter. So that shows that something has really changed when -- after that slowdown. And that -- and I think that was what started the reacceleration of our subscription revenue in that segment was a strong Q3, strong Q4. Anil, also, strategically, when he came in and looked at that business, has been pivoting in the direction of this -- right now, it's -- there's so much fragmentation and people are just looking to buy stand-alone solutions. We think of that as acquiring tech debt that down the road, buyers are going to have to pay off that debt by having more of an end-to-end platform that works together. So let's lean in to the platform we've built and really be selling the entire platform. And it's a little bit longer of a sales cycle. But we've -- having been through it now, I think now it's lined up really nicely that we have that pipeline. We just have the summit, got a ton of good press, a lot of interest in our solutions because the old way of doing things in the MarTech space is going away. Third-party cookies are going away. We've talked about a cookie-less world now for a few years and we have the technology to do that. IDFA, which advertisers have used to track Apple users, that's going away. And so all digital marketers have to learn new ways of doing things, and we have -- we've built the technologies for the next generation to help them do that with first-party data in a compliant manner. And so there's a lot of great energy around what we've built. So yes, I agree with you that it's a really good setup and we just had a phenomenal event. And now I think both business sellers and business buyers are kind of used to this digital engagement. I think last March, April, May, every enterprise seller in the world was a little lost about how do they do their business without having to put on a nice pair of shoes and hop on a plane. But now the whole ecosystem is really moving digitally.

Got it. You mentioned the increasing importance of first-party data. And it's actually a question we got from one of the investors on the line asking about sort of CDP, right, which is an important component of that equation. Is Adobe seeing an inflection in CDP interest/adoption? And how are they seeing the competitive processes play out, given there's a variety of other CD players -- CDP players in the market?

We are absolutely seeing an inflection. I think the changes around cookies and IDFA, they've been foreshadowed for a while, but right now, people are realizing just how imminent those changes are. And we've had our B2C offering in market for several quarters now. But I think in terms of the pipeline building, we're seeing a ton of interest in that, especially because now we have some big referenceable customers who are doing it today. And Panera was one we mentioned. When you think about a big broad B2C experience-driven business that -- of customers using websites and mobile apps to order and coming in store and need a cohesive experience. Verizon was the big one we dropped in December. And so that business is definitely, I think, has a ton of interest. You asked about the competitive environment as well. There are a few other players -- there are a lot of folks who are throwing out the term CDP. Salesforce, with their Customer 360, is certainly a competitor. Twilio made an acquisition in this space. You'll hear Adobe every time we mention it -- say a few things. We talk about unifying these profiles in real time, which means 250 milliseconds or less, so you can provide a relevant actionable experience kind of at the speed of a click. And there's no other player in the space that actually has the content management so that they can -- whatever action a consumer takes on a -- it could be a phone call with a customer service rep. It could be a mobile device. It could be walking in a store while authenticated in the app. And to be able to unify that and deliver at the speed of the next click, a personalized image or offer or experience that's going to help grow the business and grow affinity with that customer, we're the only one in the market who's actually built those capabilities. All the other solutions have a lot of latency built into them. And they don't actually have the content management platform to be able to deliver that next experience. So that's how we differentiate what we've built. And we think there's a lot of interest in doing that because the referenceable customers are saying, they're actually -- they're growing their online revenues or increasing conversion by multiples by being able to do these things.

Got it. That's super interesting. And then, finally, in the last couple of minutes we have, I want to touch on the Digital Media side of the business, particularly Creative Cloud. Because I think that's the one where you guys have to kind of stretch your imagination most to understand how you guys benefited during the downturn. And it definitely seems like you did, to a certain extent, in that if we think of the '08, '09 downturn, it was a different model, but license revenues were down pretty sharply during that downturn. All throughout last year, you guys didn't see any negative net new ARR growth, right? Like there was no indication that sort of new business in the door was coming down in any significant way, or said inversely that you saw good demand trends all throughout the downturn. One, is that true? And two, what caused that? What was the kind of incremental demand that you guys saw during the downturn?

Yes. I'll start. You mentioned the last financial crisis. When you have no recurring revenue and your business is ultimately trying to -- I use, it might be crude, but a plumber analogy. We are -- in the old business, we are trying to sell a new shiny set of tools to plumbers every 12 or 18 months. And in an economic downturn, we saw that a plumber will say, "I'll just keep using the same rusty old wrench. It might have some bugs but I'll be okay." That was -- that's a tough business model to be in, in a downturn. And I think that really provided the impetus for Adobe to shift to being almost an entirely recurring revenue business. Before the pandemic, no one knew what to expect for Adobe. There was a lot of doom and gloom because of the last downturn. But I think first of all, what we learned, we still have such a strong base of people that use our products for their livelihood. And the last thing a plumber does in an economic downturn is hawk the tools at a pawnshop. If you don't keep subscribing, you can't use the tools, and if that's what people are using for their livelihood. So the retention was actually very, very strong. So that was a positive and I attribute it to the change in the business model. There's always been this debate over the past year about whether or not Adobe's Creative business was a beneficiary or not of COVID in the short term. If you look at the growth of the ARR we did throughout the year and take away the targets, which we had some targets that I think we expected worse of the pandemic. But if you take that away and just look at the growth, it looks like fairly normal year-on-year growth from the past year. And what I would say though is the mix shifted a little bit, we saw real headwinds in small businesses, but we were able to offset that with strength for individuals, which we were able to target while they're online more. And so that ultimately, I think it was a year where there were definitely puts and takes. Engagement was stronger than I think anyone anticipated. SMB took that big -- had a big macro hit. But individuals were engaging, and digital content was the only way anybody was communicating with anyone. And so what -- after all those puts and takes, we had a nice year. I don't think we had this outsized year of COVID beneficiary growth that ends up being a tough comp. I think actually as SMB comes back, which -- those are business users, higher ARPU users, I think that's -- you'll start to see, in Q2, wind in our sails of getting past the toughest of the pandemic here in Q2. But all in all, we had a good year of continued growth in the business. And we believe that the pace of content consumption globally is just going to keep going up and up, and up, which is going to keep making new content creators into the marketplace, especially as digital reaches new geographies that are still kind of underinvested today in digital. One more thing I'll say because investors missed this. When enterprises are able to provide customized experiences to every consumer to create -- to get that conversion uplift or to increase sales, what that means is if they have the ability to give a different image to 20 different consumers from different geographies to be personalized for them, then the need to create the content just increased 20x because now your marketing department has to create the right image for every person of every demographic that you want to provide that customized experience. So I think people often miss that the personalized nature of enterprises are reaching their constituents online is creating the need for way more content creation so they can deliver all of those personalized experiences.

Yes, that makes a ton of sense. Unfortunately, we've gone about 5 minutes over our allotted time. This has been a fascinating conversation. Thank you to Jonathan and Andrew. Jonathan, I think you were a little bit remiss, you didn't mention DDOM once. Andrew did mention it once so he wins the prize and Shantanu is not going to yell at him. But thank you very much for joining us. Again, great conversation. Thank you to all the investors for joining us as well. A lot more to come in terms of the Life After COVID Virtual Conference. So please stay tuned. And if you have any questions, feel free to reach out to myself or anyone on the team. Thank you very much, and have a great afternoon.

Thanks, Keith. Always a pleasure.