Adobe Inc. (ADBE) Earnings Call Transcript & Summary

Good afternoon, and thanks for being with us today. Joining me are Adobe's Chairman and CEO, Shantanu Narayen; David Wadhwani, who serves as President of Digital Media; Anil Chakravarthy, President of Digital Experience; and Dan Durn, Executive Vice President and CFO. This call is being recorded, and we'll be talking about the financial results for Adobe's first quarter of fiscal year 2022. Our Q1 press release is available, along with PDFs of both the prepared remarks and the financial results, on Adobe's Investor Relations website. Everything we discuss today, including our financial targets and product plans, reflects information as of today, March 22, and includes forward-looking statements involving risks, uncertainty and assumptions. Results that actually occur could differ materially from what those statements set forth. To understand these risks, please look at the factors covered in today's press release and in Adobe's SEC filings. Today we'll be covering both GAAP and non-GAAP financial measures. The results we report include GAAP growth rates, plus adjusted growth rates in constant currency, which account for an extra week in the year-ago quarter. Unless stated otherwise, Adobe's executives will refer to adjusted growth rates during this presentation. Reconciliations between the 2 can be found in our earnings release and on Adobe's Investor Relations website. I'll now hand the call over to Shantanu.

Thank you, Jonathan. Hello, everyone, and I appreciate your presence this afternoon. Prior to going over what we achieved in the first quarter, I'd like to recognize the terrible, deeply saddening situation unfolding in Ukraine. It is profoundly tragic that millions of innocent civilians are enduring such pain and hardship, and the Ukrainian people remain in our thoughts and prayers. Adobe is standing with the worldwide community by halting every new sale of goods and services we offer in Russia. Grants have been provided by the Adobe Foundation to support humanitarian aid. I take pride in the way our teams have united and keep steering our operations effectively through these extraordinarily difficult circumstances, all while staying dedicated to customer satisfaction and the company's long-term expansion plans. A strong sense of purpose has long defined Adobe's culture, and that quality stands out today more than it ever has. The company's goal of transforming the world via digital experiences matters more now than at any previous point. No matter where we turn — be it entertainment, education, or the enterprise — it's content that drives the worldwide economy. Greater access to creative tools for everyone, the rise of fresh approaches to working and learning from any location, and the corporate imperative for tailored customer interactions all highlight the enormous possibilities before us. Our approach — releasing creativity for everyone, speeding up document productivity, and empowering digital businesses — is producing results. Category-leading offerings, services, and platforms spanning Creative Cloud, Document Cloud, and Experience Cloud keep coming from our innovation engine. It was a solid first quarter for Adobe. We brought in a record $4.26 billion, which reflects 17% growth compared with the prior year on an adjusted basis. GAAP earnings per share came to $2.66 for the quarter, while non-GAAP earnings per share stood at $3.37; within our Digital Media segment, robust expansion occurred in both Creative Cloud and Document Cloud, generating $3.11 billion. Net new Digital Media annualized recurring revenue, or ARR, reached $418 million, and total Digital Media ARR at the close of Q1 climbed to $12.57 billion. Turning to our Experience Cloud segment, we carried forward the momentum from Q4, bringing in $1.06 billion, with subscription revenue hitting $932 million during the quarter. I'm glad to have David Wadhwani, President, Digital Media, along with Anil Chakravarthy, President, Digital Experience, here today to discuss further our momentum in the Digital Media and Digital Experience businesses, respectively. David?

Thanks, Shantanu, and hi, everybody. The push toward everything digital has made creativity and content matter more than at any point in the past. Each person has to express themselves online — whether that's someone on social media, a pupil putting together a stronger school assignment, or a creative pro building the next ad campaign. As the creator economy grows quickly, it hands individuals, solopreneurs and owners of small businesses a chance to earn money from what they love, what they make and what they offer. Creative Cloud is driving these shifts forward and delivering on what we envisioned for Creativity For All, letting buyers at any skill level produce content that gets noticed; we keep leading across core creative areas including imaging, design, video and illustration. Plus we're pushing into fresh media formats such as 3D and immersive for the metaverse platforms now emerging. We're creating apps for each surface and each audience spanning web, mobile and desktop. And we're putting major investment into collaboration services that sit deeply integrated inside our flagship apps. Our brand-new web-based offerings let us bring value to people faster and more widely than at any time previously. Our AI engine, Adobe Sensei, is what drives Creative Cloud offerings, and it enables customers to operate faster and with greater intelligence. As a result, the creative community we serve is in the strongest position it has ever been. Membership at Behance has climbed to nearly 30 million, and on a weekly basis we continue to run hundreds of sessions, both on-demand and live, that serve as venues for learning and inspiration. So in Q1, we achieved $315 million in net new Creative ARR, along with $2.55 billion in revenue, which represents 16% growth compared with the prior year on an adjusted basis. Among the Q1 highlights was the launch of Creative Cloud Express, our new template-based web and mobile product that allows virtually anyone to create and share beautiful content with ease. With its zero-friction onboarding, millions of small business owners, social influencers and students will be brought into the Creative Cloud family, gaining the ability to create anything from social posts to marketing materials. Thousands of gorgeous templates, millions of stunning stock images and videos, and the world's most complete collection of fonts are all part of Creative Cloud Express. The simple interface keeps advancing through innovation such as enhanced search capabilities for millions of assets and new PDF Quick Actions, which allow users to edit, convert, combine and organize PDFs. Although this journey is only a few months old, strong traffic, millions of monthly active users and high customer satisfaction are what we're seeing. Regarding video, the surging appetite for content in that medium continues unabated. In Q1, we introduced fresh AI-driven features in Premiere Pro, which assist with blending music into video timelines and speed up transcriptions. Additionally, we achieved robust expansion with Frame.io, the top-tier video collaboration platform Adobe bought late last year. Frame experienced its strongest quarter to date, finalizing a greater number of agreements than in any earlier quarter while pushing deal values to unprecedented highs. Because creativity is now a collaborative effort, we plan to broaden our dominance in video collaboration and deliver collaboration tools across every creative segment. There's also a lot of excitement around Substance 3D and the beta of our new 3D Modeler, since companies are merging the physical and virtual realms and starting down the path toward being metaverse-ready. Coca-Cola, NASCAR and NVIDIA are among the worldwide brands already putting Substance to use for marketing and e-commerce. And we keep seeing robust demand worldwide for Creative Cloud across every segment: individuals, SMBs, teams and enterprises, with notable wins at Disney, the FAA, IBM, ING Bank, Kohl's and the New Mexico Public Education Department. Turning to Document Cloud, digital documents now underpin how companies operate and will only grow more important as hybrid work turns into the norm. With Document Cloud, Adobe is speeding up document productivity, making every capability — editing, converting, sharing, scanning and signing — seamless on web, desktop and mobile. Thanks to our ongoing AI and ML investment, PDFs are becoming smarter and more accessible. And through our APIs, we're opening up new workflows by giving developers the power to create tailored digital document experiences for their companies. In Q1, we hit record revenue of $562 million along with net new Document Cloud ARR of $103 million. Document Cloud's ending ARR went past the $2 billion threshold, reflecting 29% growth year-over-year. Turning to the first quarter's key points: Adobe Sign posted healthy expansion, driven by uniting e-signature capabilities inside Acrobat along with fresh Sign connections to Adobe Commerce and Workfront. Over on the web, the number of searches tied to document actions such as editing, converting, and sharing PDFs is still elevated. As a result, the amount Acrobat Web adds to the business has roughly grown twofold compared with a year earlier. When it comes to mobile, users opened billions of Acrobat mobile PDFs during Q1; that engagement, combined with our effort to convert users into paying subscribers on mobile, is delivering returns. On the mobile side, Acrobat's ARR climbed over 70% compared with a year earlier. And last, our enterprise Document Cloud operation continues to deliver strong results, landing notable deals with Medallia, Mercedes-Benz, Raytheon, Ricoh Europe, Shimizu, and UnitedHealth. By rolling out a broad set of capabilities across our flagship apps in both Creative Cloud and Document Cloud, we've addressed what professionals are looking for. At the same time, we're bringing in millions of new users — including plenty who aren't professionals — through Acrobat and Creative Cloud Express on web and mobile. This expanding lineup doesn't only widen our reach to fresh customers; starting later in Q2, it also enables us to fine-tune pricing on a more individualized basis across what we offer. I'll pass it to Anil now.

Appreciate that, David. Hi, everybody. During the past 2 years, the digital economy has surged amid a deep worldwide change in the way we work, learn and play. Telehealth appointments have become standard practice instead of the rare case. Consumers and companies alike are interacting and doing business through digital channels. Buying online is now a necessity, and per the Adobe Digital Economy Index, the U.S. is poised to exceed $1 trillion in e-commerce sales during this year. For companies to thrive, they need to make the digital economy personal through strong digital experiences capable of being tailored for millions of customers within milliseconds. Adobe Experience Cloud offers a thorough collection of integrated AI-driven applications and services that assist companies in providing experiences throughout every part of the customer journey. The Adobe Experience Platform, containing billions of customer profiles, sits at its center. Our Adobe Experience Cloud applications cover the full customer funnel — from acquisition to monetization to retention — spanning content and commerce, customer journeys, data insights and audiences and marketing workflow. We've completed a dramatic transformation to provide AI-driven services, with more than 80% of Experience Cloud customers now relying on Adobe Sensei, our industry-leading AI and ML framework, to power experiences for their customers. Last week, we held Adobe Summit, the biggest digital experience conference anywhere in the world. We introduced exciting new Experience Cloud technology and heard from executives at some of the globe's most fascinating and innovative brands, among them BMW, Nike, Prada, Real Madrid and Walgreens Boots Alliance; we powered the whole event through Experience Cloud, tailoring the experience for our attendees worldwide. Summit content has drawn over 22 million views so far, highlighting the considerable interest and demand for digital transformation; we keep generating exceptional growth in our Experience Cloud business. The pandemic has led brands everywhere to recognize how essential digital transformation is. And we're bringing in new logos while staying focused on delivering substantial value realization for customers we already have. In Q1, we brought in $1.06 billion in revenue. Subscription revenue reached $932 million for the quarter, which reflects 22% year-over-year growth on an adjusted basis. Q1 highlights include a group of exciting product innovations, among them new real-time customer data capabilities through the integration of Adobe Real-Time CDP and Adobe Target. Adobe Real-Time CDP is relied on by a large and expanding customer base that includes DICK'S Sporting Goods, Henkel, Panera, Real Madrid, ServiceNow and Verizon; new cross-cloud integrations, such as a unified workflow among Workfront, Creative Cloud Enterprise and Experience Manager assets that enables end-to-end content creation and delivery; strong performance in Adobe Experience Manager, underscoring the need for unified content management to satisfy the ever-increasing demand for content at speed and scale. There's no other company quite like Adobe when it comes to supporting clients throughout the whole content supply chain. We've introduced new APIs giving developers room to build tailored user experiences layered on Adobe Commerce. Adobe Experience Cloud for Healthcare is now generally available, enabling personalized care experiences. Our partner network keeps growing — we've teamed up with OneTrust to make consent management easier. We're also moving into the next stage of e-commerce integrations alongside FedEx, Walmart and PayPal, plus working with The Weather Company. And we've landed major customer wins with CrowdStrike, Deutsche Telekom, IBM, Jaguar Land Rover, JPMorgan Chase, McDonald's and UnitedHealth. Innovation in our Experience Cloud products, a worldwide customer base and a dynamic partner ecosystem together fuel our ongoing success. We're pushing forward across our full go-to-market motion and industry recognition keeps coming our way. During this quarter, Adobe earned leader status in 3 analyst reports covering key customer experience management segments: Gartner's Magic Quadrant for Digital Experience Platforms, the first-ever IDC MarketScape for CDPs for Front Office, and the Forrester Wave for Digital Asset Management. Dan, I'll pass it to you.

Thank you, Anil. To kick things off today, I'll walk through how Adobe did in the first quarter of fiscal 2022, point out what fueled expansion throughout our segments, and then wrap up with our goals for Q2. These solid financial numbers show that this company knows how to deliver even when the macroeconomic and geopolitical backdrop is difficult. Everywhere in our business, we're bringing in new customers, closing transformational deals, expanding our recurring revenue base and watching emerging businesses scale up and, in certain cases, hit escape velocity; digitization is touching everything, and Adobe's offerings give customers a path into a digital future, forming the foundation for how they live and work. Our spending on products, marketing and a data-driven operating model keeps powering Adobe's expansion. During Q1, Adobe brought in record revenue of $4.26 billion, reflecting 9% growth versus a year ago, or 17% once adjusted. Among the business and financial highlights: GAAP diluted earnings per share came to $2.66, while non-GAAP diluted earnings per share were $3.37; Digital Media revenue reached $3.11 billion; net new Digital Media ARR totaled $418 million; Digital Experience revenue was $1.06 billion; operating cash flows amounted to $1.77 billion; we exited the quarter with RPO of $13.83 billion; and we bought back roughly 3.8 million shares of our stock in that period. Within our Digital Media segment, revenue growth for Q1 came in at 9% versus a year earlier, or 17% on an adjusted basis. We closed the quarter with Digital Media ARR of $12.57 billion. Worldwide appetite for digital content keeps surging. And thanks to the power of Adobe's product innovation and our data-driven operating model, net new Digital Media ARR for Q1 increased compared with a year earlier once you strip out the extra week that fell in the prior-year period. Creative revenue came to $2.55 billion, representing 7% growth year over year, or 16% adjusted. We brought in $315 million of net new Creative ARR during the quarter. Creative growth drivers in Q1 included robust creative engagement and retention among individual and SMB segments; fresh customer demand from large organizations and small and medium businesses, fueling gains in our Creative Cloud for Teams offering, which had its best Q1 ever; continued expansion of subscription licensing for individual flagship applications like Photoshop, Illustrator and Premiere, plus momentum in our Adobe Stock business; and enterprise uptake of new collaboration capabilities, among them Frame.io and our 3D and immersive applications. We're equally encouraged by the traction we're seeing in newer initiatives such as Creative Cloud Express, Substance, and Acrobat, Photoshop and Illustrator on the Web; usage is climbing strongly and we've already drawn millions of monthly active users to our cloud-native offerings. We anticipate these businesses will fuel ARR and revenue growth going forward. Adobe posted Document Cloud revenue of $562 million, which works out to 17% growth year over year, or 26% adjusted. We brought in $103 million of net new Document Cloud ARR for the quarter, pushing ending ARR past $2 billion, up 29% year over year. Document Cloud remains the business expanding at the quickest pace for us, which shows our approach of speeding up document productivity is delivering results and illustrates how Acrobat and PDF are vital to the way individuals work in a world that is digital first. During the first quarter, the factors propelling Document Cloud included demand from customers for Acrobat subscriptions, our best Q1 ever recorded; fresh licensing along with renewals for the Acrobat for Teams product among SMB customers, both via adobe.com and our reseller channel; momentum for Adobe Sign, with Sign transactions inside Acrobat rising strongly compared with a year earlier; robust appetite for our PDF offerings on mobile devices; and ongoing progress in smoothly onboarding new customers via Acrobat Web, where ARR climbed roughly 90% versus the prior year. Now to our Digital Experience segment. During Q1, we brought in revenue of $1.06 billion, amounting to 13% growth compared with a year ago, or 20% when adjusted. Subscription revenue for Digital Experience reached $932 million, amounting to 15% growth versus a year earlier, or 22% when adjusted. Looking at revenue growth from quarter to quarter sequentially, we keep observing acceleration, since our approach of providing personalization at scale is connecting with enterprise customers. The factors driving Digital Experience growth in the first quarter included acquiring new logos throughout our solutions; keeping customers strongly retained thanks to the investments we have made in product innovation, greater value realization and customer experience; bigger deal sizes within our Workfront business; gaining traction in upselling customers toward new cloud-native solutions; and momentum across our Content & Commerce, customer data platform and Customer Journey Analytics offerings. During Q1, we kept boosting investments in efforts that will fuel revenue growth over the long term, including adding headcount throughout R&D and sales capacity. Travel and facilities stayed at reduced levels during Q1, though we are ramping up facilities utilization and travel in Q2 as we return to meeting customers and partners in person. Adobe's effective tax rate for Q1 came to 18% on a GAAP basis and 18.5% on a non-GAAP basis. That tax rate landed above what we had anticipated, mainly because of smaller-than-expected tax benefits tied to stock-based compensation. Our trade DSO stood at 36 days, versus 38 days in the same quarter a year ago and 42 days in the prior quarter. RPO rose 19% compared with a year earlier, reaching $13.83 billion as we exited Q1, helped by enterprise bookings. Our cash plus short-term investments position at the close of Q1 totaled $4.70 billion, while cash flows from operations during Q1 amounted to $1.77 billion. We bought back roughly 3.8 million shares during Q1, spending $2.1 billion. That purchase included partial settlement of an accelerated share repurchase we entered into during Q1 to buy back shares at an aggregate cost of $2.4 billion. The ultimate count of shares to be repurchased under the ASR will hinge on a discount to the volume weighted average price of our common stock over the life of the agreement, with final settlement and delivery of additional shares to Adobe slated to take place in early Q3. The buybacks we're doing fall under the program we announced earlier; at this point, $10.7 billion is still available out of the $15 billion authorization approved in December 2020, which runs through 2024. Ahead of discussing our Q2 targets, I'd like to address how the terrible events in Ukraine affect us. Adobe said earlier this month that it would stop all new sales in Russia and Belarus. Beyond that, we chose to lower our Digital Media ARR balance by $75 million, which accounts for the full ARR tied to existing business across these 2 countries. Although we'll auto-renew subscriptions in Ukraine over this stretch and keep delivering Digital Media services, we cut ARR by another $12 million, reflecting the whole of our Ukraine business. That adds up to an $87 million total ARR reduction, with an anticipated revenue hit of $75 million in fiscal 2022. Effects on the Digital Experience business are de minimis; for Q2, our targets are roughly $4.34 billion in total Adobe revenue; about $440 million in net new Digital Media ARR; roughly 13% year-over-year growth in Digital Media segment revenue, or 14% in constant currency; roughly 15% year-over-year growth in Digital Experience segment revenue, or 16% in constant currency; roughly 17% year-over-year growth in Digital Experience subscription revenue, or 18% in constant currency; a tax rate near 20% on a GAAP basis and 18.5% on a non-GAAP basis; GAAP earnings per share around $2.44; and non-GAAP earnings per share around $3.30. Because deductions from stock-based compensation came in lower than expected, our effective tax rate for fiscal 2022 is now targeted at 19.5% on a GAAP basis and 18.5% on a non-GAAP basis. Looking to the back half of the year, we anticipate sequential quarterly revenue and EPS growth in Q3 and Q4. Within Digital Media, we anticipate robust second half ARR performance across Document Cloud and Creative Cloud, including ongoing strength in emerging businesses such as Acrobat Web, Frame.io, Substance and Creative Cloud Express. Furthermore, we anticipate ARR contributions rising sequentially in Q3 and Q4 thanks to a new offering and pricing structure that begins late in Q2; we anticipate Digital Experience bookings maintaining momentum in the second half, with the usual strong Q4 finish. Given our enormous market opportunity, we'll keep investing in product innovation, sales capacity, marketing awareness and demand generation. With the world reopening, we anticipate higher travel and facilities expenses. To wrap up, I'm happy that Adobe posted yet another record quarter in Q1, with sustained growth and world-class profitability. Adobe keeps demonstrating resilience amid unprecedented circumstances facing every company today, and I'm confident we'll come out stronger. We remain on track for another year of strong financial performance. Shantanu, back to you.

Dan, appreciate that. Adobe is going through a period of major change right now. We serve hundreds of millions of users around the world, ranging from solo individuals all the way up to the biggest enterprises, and we're rolling out fresh apps for fresh audiences while extending our flagship category apps onto additional surfaces and platforms, and at the same time boosting collaboration features throughout our offerings. A winning strategy aimed at an outstanding opportunity is what Adobe has. Within the digital economy, we hold a leading position through Adobe Creative Cloud, Document Cloud and Experience Cloud, and together those carry a total addressable market worth $205 billion. Not many organizations can reliably produce technology innovation, pull off successful transformation spanning new categories and business models, and maintain a wide, ever-expanding customer and partner base. I want to express gratitude to our 26,000 employees for their ongoing commitment and steadfast dedication to bringing customers innovation and creating what's next in digital experiences. Thanks. Questions can begin now. Operator?

I'm wondering whether you can give us a bit more detail on the new pricing structure and what it actually means. And Shantanu, apart from Ukraine, are you noticing anything else out there in the wider economy that differs from what you've observed in the past?

Sure, Brent. When it comes to the macroeconomic picture we've been observing, strength is honestly what we keep seeing. Q1 was strong, and that made us happy. Obviously, during the final few weeks of that quarter, there was some effect felt in Europe, particularly tied to what occurred with that awful situation in Ukraine. Even so, growth is something we still see worldwide, I'd say. On your first question, as you're aware — and then I'll let David chime in with some additional perspective as well — the most recent broad, all-encompassing pricing review we did dates back to 2017. Since that point, you've witnessed all the various initiatives and offerings we've rolled out, whether that's the 3D offerings, the work we've done on the web, the work we've done in mobile, or the work we've done with Creative Cloud Express. So the moment felt right, I think, for a really thorough examination, and that's what David has carried out. And directionally speaking, here's what I'd say: our aim is to keep drawing hundreds of millions of people to the platform, while also capturing value from the enormous innovation we've delivered. David, perhaps you could share a bit more.

Sure, I'm glad to do that. As Shantanu said, the most recent time we changed or adjusted pricing was 2017. From that point on, we've brought a great deal into what we already offered; we've brought in new applications. We've expanded widely over many services. We've gone further in collaboration. We've brought in millions of stock assets along with thousands of fonts. And we've also rolled out new offerings. Clearly, Acrobat on web and mobile has been expanding over the past few years, and you've heard us discuss — during the last year or 2, you heard us discuss that in the prepared remarks. But beyond that, CCX is now available in market on web and mobile. And the early success we're seeing with these new offerings on web and mobile and across Acrobat and CCX has truly been what's driving the pricing adjustments we're considering making. They allow us to bring in the right value along with the right onboarding experience and the right pricing to draw millions of new subscribers; and they give us the chance to rightsize the value in places where engagement and usage are greatest within our core existing customer base. The effect of this, we believe, for Q2 is going to be fairly minimal since rolling it out globally takes time, and customers going through their renewal cycles, where their prices change, takes time. But we anticipate it will have a more significant effect and build-out in Q3 and Q4.

Maybe, to put it another way — to ask Brent — to frame the question differently: Adobe has existed for quite a while and weathered numerous business cycles. As you examine the activity pipeline for the year's second half, and as you consider how investors ought to view it amid a more recessionary, inflationary climate, could you provide some insight into how you see that pipeline developing, and how you see any shifts regarding the year's shape and seasonality? Then, perhaps, just one financial question. I believe there's simply a clearer grasp needed of how the NRR mechanics are taking form for Q2. Are you factoring that in — does the $440 million guidance include the effect of the Russia-Ukraine adjustment? Has it been removed from the prior year? A bit more background would be useful.

Sure, Alex. That contained several questions. So let me — perhaps first, regarding your point, which I concur with: when you consider the business's rhythm and perhaps the seasonal cadence, obviously, that has been affected by either external events tied to the pandemic or, more recently, the war in Ukraine. But on the whole, as we observe what's occurring with customer adoption, what's occurring with the excitement, there's no doubt that digital is a tailwind and will remain a tailwind. And from our standpoint, what took place was that the pandemic actually highlighted how important everything we're doing is, whether that's customer engagement, whether that's content or document productivity. And so when you consider what occurs seasonally, certainly, I think we would keep seeing strength in Q3 and Q4. Dan mentioned that regarding the second half momentum we would see; but even in Q1, we got off to a strong start; so from our standpoint, some of the seasonal cadence may have shifted, but the secular trends — up and to the right — we actually don't see any impact tied to it. I think your second question concerns what happens specifically with Russia and Belarus and Ukraine. Since the Digital Media ARR, the book of business, we decided to reduce it; and so I think what you'll find on the data sheet is our exiting Q1 ARR and then another figure that simply removes all of the existing book of business for those 3 countries. Obviously, Q2, Q3, and Q4 top-line results take a hit, since that's money we otherwise could have brought in. Still, when you look at the bigger picture, as you can tell, that amount is pretty minor relative to the overall company. So regarding our goals — the $440 million figure in particular, as you mentioned — yes, ARR in those nations does affect it. That said, on the whole the business remains robust, and our outlook is positive. In a lot of respects, the real takeaway is that the fresh growth efforts Dan and David both described are beginning to gain real momentum. As a result, we anticipate a solid performance across the back half of the year, and definitely past that point as well.

All right, that's excellent. David, this one might be for you. It's been good to watch the recent Creative Cloud Express rollout. So what I'd like to ask you is this: in what ways does this offering stand apart from what else is available in the market? And, without getting into too much detail, what's your approach to putting money behind this particular product so that you keep extending your advantage?

Sure, I appreciate that. The debut of CCX has us really energized. Still, let me step back briefly and remind everybody listening in: the communicator category is something we've discussed for a number of years now, in connection with non-professionals as well as with the creator economy. We've noted previously that our apps for phones and computers have drawn hundreds of millions of sign-ups, which obviously reaches well past our Creative Pro audience. And we've grown a substantial operation. As a matter of fact, in our view, no one else supplies creative tools on a bigger scale globally, judged by revenue spanning every one of our segments: professionals, communicators and consumers. Still, bringing out Creative Cloud Express reflects much of what we've picked up across the past several years, beginning with how we make money; the model is freemium; delivery happens mostly through web and mobile; that means customers get onboarded without any friction, and they achieve results within minutes rather than hours. Beyond that, we're offering an unmatched collection through Creative Cloud Express; it includes 175 million stock images and videos. There are 20,000 fonts — the biggest online font library you can find — plus thousands of templates, all thoughtfully and skillfully made by some of the finest creatives anywhere. That matters because ultimately, when your tool centers on content first, whatever content gets combined is a core point of distinction for what you make and what you generate. So we're feeling extremely confident about our capacity to keep growing this collection and to guarantee that whatever people blend together to produce their results is top-tier. Naturally, though, we also carry Adobe's strength behind us. Consider what we've begun doing — this hints at our direction — with our quick actions spanning Photoshop Quick Actions, Premiere Quick Actions, Acrobat Quick Actions, which have begun finding their way into Creative Cloud Express; we're feeling very positive about the innovation pipeline we can deliver, drawing on our decades of leadership across every segment, straight into Creative Cloud Express. Beyond that, naturally, we're seeking ways to speed things up. We bought a business named ContentCal, and we've said it will serve as the basis for robust content publishing and scheduling for Creative Cloud Express users. Finally, all the effort we've put in across the past several years on that data-driven operating model Dan mentioned when he kicked things off has proven enormously valuable in this context. What we're doing is bringing in and getting started users who normally wouldn't have come to Adobe via a search driven by intent. The outcome is somewhat along the lines of what we hinted at. Traffic has been strong. Only a few months after launch, we're seeing millions of monthly active users. At this stage in the product, our NPS is above 60. So at this early point, we're quite optimistic. And when you consider the lengthy roadmap of innovation that's unique to Adobe, perhaps that speaks to your question, we're very enthusiastic about it. One more thing I'd add: keep in mind that the chance here is to bring millions of new users into our franchise. Yet there's also a chance to generate strong engagement and usage among our existing core CC base, and to take what's already been an extremely robust retention curve there and keep pushing engagement and retention for our CC users too.

To clarify things a bit — with these modifications, the yearly guidance stays untouched. That's not unusual for you, though I believe investors are looking to grasp how the negative effect on ARR from the Russia and Ukraine situation weighs against the boost coming from the pricing structure, in terms of what it means for the annual guide.

Right. Sterling, from a color standpoint, we're genuinely only a short way into the year, yet I'm feeling very good about how we've handled every one of the outside challenges that have arisen; and Q1 came in strong. While getting ready for today's call, we decided it mattered to tell you about the effects we're aware of, be it revenue or ARR tied to Russia, what's going on with EPS in connection with the tax rate, and also to offer additional growth drivers. My bottom line, though, is this: even though the annual targets aren't being updated, just as you noted, we remain quite bullish about the large set of growth drivers in our hands. More will be shared as the year progresses, since all of us are still dealing with a situation that's highly unpredictable. That said, our robust Q1 and the elements within our control leave us feeling terrific.

Jay, looking back at the analyst meeting from 3 months ago, both you and David brought up the phrase product-led growth. I wanted to see if you might expand on that, since one could argue that when considering this company across the last 30 years or more, it has always, in practice, operated as product-led growth. So what feels different in how you approach that now, whether as a concept or as various things you can execute? Then for Dan, might you discuss how you view your headcount growth in relation to your expense growth for the year? You brought on over 500 employees during the quarter. You ended Q1 with a record number of open recs. If we look at how to staff up those units — is it partly to counter the higher attrition you experienced in fiscal '21, versus the ordinary organic expansion you'd have kept pursuing either way?

Right. Jay, when I think about the big transformative steps this company has taken — clearly shifting to subscriptions, getting into digital marketing, and using a data-driven operating model to shape the financial rhythm of the business — those are definitely at the top of the list. Still, I'd argue all of that is actually tiny next to how enthusiastic I am about what product-led growth can keep delivering. At a scale where your user base reaches into the hundreds of millions, or even billions, one illustration of our efforts is the ongoing stream of new features we keep rolling out for Document Cloud. David touched on a few of those figures, I believe — things like the web traffic we're seeing roughly doubling, plus staying closely tuned to the intent-driven way folks behave when they visit the web hoping to get document tasks done, and the same doubling happening with what we're delivering on mobile. So when we talk about product-led growth, what it really comes down to is making sure every one of our product teams can see, right there in front of them, exactly how customers are actually engaging with what we've built — that way we can move fast, adjusting again and again based on what people are asking for, and keep them happy. And on the Creative Cloud side — this builds on what David told Saket — the way that plays out with Creative Cloud Express is that with those millions of users in the mix, we're continuously tracking where search traffic is coming from and figuring out how to make it better. It's really a fresh approach that frees up all the product-led — all our product teams to zero in on the things that genuinely matter, the things that actually move the needle when it comes to what customers care about and how they feel. David is the one who really got this started. I'll let him expand on it, but from my perspective, the effect on customer service, on our NPS, and on our ability to keep bringing in and holding onto people is substantial.

Absolutely. Shantanu already addressed the bulk of this, so I'll just tack on one or two points. You're right to bring it up — we have an inside joke that John and Chuck really invented product-led growth by giving away Reader for free and then moving those folks up to the Acrobat offering. That notion of building usage, engagement, and utilization first, then turning it into paying users, has been with us the whole way. Where things stand today, though, feels like a genuinely exciting turning point: like Shantanu said, there's far more engagement and activity happening on web, and far more on mobile too. That gives us the ability to make onboarding smoother and more seamless, which means everything we've figured out with DDOM can now power smarter intent-based search and let us connect with audiences we simply couldn't get to previously — because now the onboarding, the path to success, and everything after it happens in minutes rather than hours.

Possibly just one more item prior to Dan speaking. I believe retention and engagement for the quarter were both addressed by Dan and David. To provide a bit more, Jay, of that shade, we examine churn rates. We examine reseller renewal. We examine 90-day cohort retentions. And across each of those, I think because of the work being done by the product teams to help enhance things, we're observing gains and reaching levels on all 3 of those that exceed anything previously, even before the pandemic; so I think that is, once again, another illustration of what gives us confidence in our offerings and our innovation going forward.

Then, Jay, regarding your second point, we discussed how the company is doing nicely. We speak of digital content and data progressively fueling economic expansion in the future within a world where all things are becoming digital. This gives us a huge market chance ahead, over $200 billion in 2024, and considerably bigger than that looking ahead. Therefore, our long-term growth prospect at Adobe is not limited by opportunity. Consequently, when we consider our leadership and product standings, they rest upon a highly robust innovation engine within the firm. Thus, we will steer toward growth. We will keep putting money into R&D and the sales strength to expand our operations as time goes on and maintain that leadership in the markets we are part of. Yet, we will act as we always have throughout, which is to do so with discipline, so we are pairing the investments we make with the chances as they come about and grow in a highly profitable manner. Hence, you can observe the firm's past regarding solid profitable growth, and I would anticipate our record on this to persist over the long term.

I was hoping to get a few points clarified from you both. Shantanu, during the earlier portion of this call, you mentioned possibly observing some softness in Europe as the quarter closed out. Could you elaborate on that? Which parts of the business showed that softness? And did it carry over into Q2? Or was it simply more inconsistent? That covers my first item. Second, regarding the — I realize full year guidance isn't being provided, but concerning the operating margin beat in Q1, does the message suggest that it will be reversed later in the year? Or is it more that the ramp-up is delayed, meaning those savings accumulate across the entire year? Then my third point for clarification: at the time you provided the initial guidance of $1.9 billion in net new ARR additions for FY '22, had these price increases already been factored in? In other words — or the price changes? Were those price changes included within that $1.9 billion figure? Those are my 3 items needing clarification.