Adobe Inc. (ADBE) Earnings Call Transcript & Summary

Good afternoon, everyone, and thanks for being with us. Joining me today 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 during it we'll go over Adobe's financial results for the second quarter of fiscal year 2022. Our Q2 press release, along with PDFs of our prepared remarks and financial results, is available on Adobe's Investor Relations website. Everything we discuss today, including our financial targets and product plans, reflects information as of today, June 16th, and includes forward-looking statements involving risk, uncertainty, and assumptions. Actual results could differ materially from those set forth in these statements; to understand these risks, please review the factors discussed in today's press release and in Adobe's SEC filings. Today we'll cover both GAAP and non-GAAP financial measures. Our reported results include GAAP growth rates, adjusted growth rates, and constant currency. Unless otherwise stated, Adobe's executives will refer to constant currency growth rates during this presentation. Reconciliations between the two 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. Good afternoon, and I appreciate everyone being here. Adobe delivered a robust second quarter, fueled by the broad move toward digital that is reshaping the way we live, work, and play. During Q2, we brought in a record $4.39 billion in revenue, which marks 15% growth compared with the same period a year earlier. GAAP earnings per share came in at $2.49 for the quarter, while non-GAAP earnings per share reached $3.35. Within our Digital Media segment, we saw significant expansion across both Creative Cloud and Document Cloud, generating $3.2 billion in revenue. Net new Digital Media annualized recurring revenue, or ARR, totaled $464 million, and overall Digital Media ARR at the close of Q2 climbed to $12.95 billion; over in our Experience Cloud division, we posted $1.1 billion in revenue, with subscription revenue hitting $961 million during the quarter. Adobe's tools and platforms are what the digital economy relies on. Everyone from individual users and small companies to the biggest enterprises depends on our offerings to unlock their creativity, boost document productivity, and create tailored customer experiences. Whether it's the apps on our devices, the digital documents we read, modify, and sign, or the personalized shopping journeys we encounter online, Adobe is what makes these digital experiences possible. Our purpose of empowering the world's digital experiences has never mattered more, and we continue to stay focused on carrying out our long-term growth plans. We provide essential products that support a constantly expanding customer base, and we have demonstrated a history of solid growth and profitability. From my discussions across the globe, it's evident that digital is central to driving the economy and helping the world continue advancing. I'll now hand things over to David, who will talk more about our momentum in the Digital Media business. David.

Appreciate that, Shantanu, and good morning to all of you. For creators around the globe — be they designers, photographers, filmmakers, or illustrators — Adobe's offerings have long been the go-to pick. These days, the surge of the creator economy means still more people, solopreneurs, and small business owners can express themselves creatively, whether that's a hobby, a side hustle, or their main occupation. In a digital-first world, each creator and company is rethinking the way they craft their brand and connect with their audiences, which highlights how quickly appetite for content and creativity is climbing. Across every creative category — imaging, photography, design, video, and 3D and immersive — Adobe Creative Cloud delivers the broadest portfolio of products and services. We keep putting money into our core flagship products, and a big chunk of that goes toward fresh AI features. With content demand rising, creators turn to Adobe for help collaborating efficiently. Our answer is to weave collaboration capabilities straight into our flagship applications, letting creative teams work together and with stakeholders. Since communicators now make up a bigger share of our Creative Cloud customer base, we've broadened what we offer by adding Adobe Express, our new template-based, simple-to-use web and mobile product. With Express, we can connect with a broader set of communicators—people looking for simple, task-oriented solutions to create things like social media content, business logos, flyers, party invites, or personal posters. A great example is Chrishell Stause: a social media influencer and real estate entrepreneur who uses Adobe Express to transform the way she markets her listings and engages her audience. She represents just one of the millions of people who rely on Adobe Express to promote what they offer. In Q2, Creative Cloud net new ARR reached $357 million, and revenue totaled $2.61 billion, which is a 14% increase compared to last year. Continuing innovation in imaging stood out as one of the key highlights this quarter. During this quarter, we introduced some really strong new tools in Photoshop. One of them is the Photo Restoration Neural Filter — it can detect and repair damaged pictures in just a matter of seconds. Neural Filters are among the most widely used AI-driven capabilities in Photoshop. They've been tried by millions of users at this point, who have applied them across hundreds of millions of images. On top of that, we're introducing enhancements for Photoshop on the web, including fresh editing tools, compatibility with mobile browsers, and built-in learning materials. Video production also continues to grow at a fast pace, and Premiere Pro remains a frontrunner when it comes to creating, editing, and — with Frame.io — collaborating on video. The newly launched connection between Frame, Premiere Pro, and After Effects is making it easier for stakeholders to handle review and collaboration workflows. It was another strong quarter for Frame, with new customers coming on board such as Epic Games and NBCUniversal — both of them count on it for managing their video content supply chain, and Anil will get into that in more detail soon. We're also keeping an eye on emerging categories like 3D as demand from customers continues to grow for content that's ready for the metaverse. Substance 3D had its best quarter ever in Q2, with customers such as HUGO BOSS, Mattel, and Unity relying on it to build immersive experiences across fashion, gaming, and e-commerce. Innovation in this space keeps moving fast for us, and that includes delivering native support for Apple hardware for Painter, Designer, and Sampler, which allows creators to work more quickly than ever before. The Substance group additionally released a fresh SDK, targeting programmers who want to bring 3D functionality into what they build. And finally, we're excited about how Adobe Express is performing — it has millions of people using it each month, along with strong growth in visits and first-time users throughout Q2. We continue bringing the magic of Photoshop's imaging tools, Premiere's video tools, and Acrobat's PDF tools — things like removing backgrounds, generating QR codes, resizing video, and editing PDFs — into Express. Thanks to the ContentCal purchase we made recently, our new content scheduler went live, which allows creators to quickly make, preview, plan, and post their social media material. We're also eager to begin our Express Your Brand partnership with Meta, which will let more than 200 million businesses expand their online presence through Adobe Express. Thanks to our product-led growth strategy, we can draw on millions of data points to constantly test, learn, and optimize the whole Express journey from search through export. Adobe Express just earned the Editor's Choice Award on the App Store, which honors top apps for design, functionality, and performance. We're quite enthusiastic about the robust demand for Creative Cloud offerings worldwide, fueled by acquisition, engagement, and retention coming from our data-driven operating model spanning individuals, SMBs, and enterprises. On the enterprise side, a number of significant customers came on board, including Activision, Bertelsmann, Hasbro, Honda Motor, Daimler AG, NCSOFT, Services Australia, the State of California, and WPP. Turning to Document Cloud, digital workflows for documents are taking over the paper-based tasks people once handled by hand, both at home and at work. Take any given item — a legal contract, an invoice, or a permission slip from school — and today it needs to be scanned, edited, shared, and signed no matter where you are. Across every device and platform, Adobe Document Cloud delivers the most complete and easy-to-use set of document productivity tools. In the education space, the University of East London is bringing in Document Cloud to handle the workflows involved in enrolling 17,000 students who come from 135 countries. TSB Bank is changing how online banking works in the financial services space — customers can now handle routine things such as applying for a loan, which used to require a branch visit, quickly and securely. For Q2, net new Document Cloud ARR came in at $107 million, alongside record revenue of $595 million, a 28% increase compared to the same period last year. Among the Q2 highlights: solid gains in monthly active users spanning desktop, mobile, and web. Search traffic for Acrobat verbs keeps climbing, and it continues to serve as an effective funnel toward Acrobat web, which crossed 50 million monthly active users during Q2 — up more than twofold year-over-year. Momentum on the mobile side is still strong: billions of PDFs have been opened in Acrobat Mobile, and cumulative Adobe Scan installs have reached the hundreds of millions. Bringing Acrobat and Adobe Sign together keeps fueling significant interest in Adobe Sign, since people are sending PDFs off to be signed straight within the single Acrobat interface more and more often. Thanks to the connections between Acrobat and Adobe Express, hundreds of millions of those using Acrobat can now drop in personalized templates and turn their PDFs into visually striking documents. Our Acrobat and Sign APIs are growing nicely as clients keep tailoring, connecting, and automating their document services. The energy we're seeing around the Acrobat ecosystem makes us very happy, and so does how the business is doing across our various routes to market and types of customers, among them notable enterprise deals closed with Automatic Data Processing, Duke Energy, Quanta Services, and U.S. Bank. Demand for what we offer remains robust looking at the back half of FY 2022. Product innovation spanning Creative Cloud and Document Cloud, aimed at a wide and expanding customer base, will keep us winning within the Digital Media business. Momentum is picking up speed across both our newer and more mature businesses thanks to our enormous scale, steady marketing spending, a data-driven operating model that's been proven, and fresh product-led growth efforts. Anil will take it from here.

Thank you, David. Hi, everybody. Despite the shaky state of the economy, each of our businesses keeps putting digital spending first. According to our June Adobe Digital Index Report, drawing on trillions of data points from Adobe Analytics, May online spending by consumers came in at $1 billion above April's figure. Looking at the year so far, shoppers have laid out in excess of $377 billion online, an increase of about 9% versus the equivalent stretch a year ago. What fuels this digital momentum is the need to deliver personalization for customers at scale. Within the customer experience management category, Adobe Experience Cloud holds the top position, with a full suite of integrated applications and services that reach across data insights and audiences, content and commerce, customer journeys, and marketing workflow. Running natively on Adobe Experience Platform, our real-time customer data platform, Real-Time CDP gives companies one unified picture of customer data spanning all channels, so they can build precise segments and serve personalized experiences no matter when or where someone engages with their brand. Adobe supplies real-time data through over 24 trillion audience segment evaluations each day. Among the large and expanding group of industry-leading customers who have made Adobe's Real-Time CDP the foundational platform for their digital operations, The Home Depot is the newest. Real-Time CDP offers a full picture of The Home Depot's shoppers across e-commerce, mobile, and in-store purchases, which helps them build customer loyalty and expand their business. During Q2, we kept up outstanding Experience Cloud growth, hitting a record $1.1 billion in revenue. Subscription revenue for the quarter reached $961 million, up 18% year over year. Q2 highlights include native integration spanning Real-Time CDP, Customer Journey Analytics, and Adobe Journey Optimizer, a major differentiator that lets brands orchestrate, measure, and optimize the whole customer experience. New innovations, like Segment Match, let brands securely exchange customer segment data with business partners while honoring customer privacy. Large enterprises are choosing Real-Time CDP as their preferred platform, with notable customer wins this quarter such as Autodesk, National Football League, and U.S. Bank. We're broadening Experience Cloud leadership in healthcare by making Adobe Journey Optimizer and Real-Time CDP HIPAA-ready via Healthcare Shield. This quarter's customer win with CVS stands as an excellent proof point for this enormous market opportunity. New services in Adobe Analytics provide brands with one workspace to unify data and insights from new media types, including 3D and streaming media, alongside traditional channels, giving a holistic view of customer engagement through Customer Journey Analytics. We saw strong adoption of Adobe Experience Manager for unified content management, showing Adobe's leadership in helping companies effectively manage their content supply chain from creation through delivery. Partner and Adobe professional services saw tremendous growth and demand, highlighting the urgency around implementation and value realization. Notable customer wins include Audible, Anthem, Bank of Nova Scotia, Humana, McDonald's, Stellantis, and Toyota. We kept strengthening our leadership standing, and industry analysts kept giving Adobe high marks—among those honors, Gartner ranked us number one in two areas: the customer experience and relationship management marketing sub-segment, plus digital experience platforms. We also earned leader placement in the first-ever IDC MarketScape covering worldwide retail and CPG customer data platforms, as well as in the IDC MarketScape for Professional Services. As we move forward, our category-leading offerings, robust pipeline, and enormous scale via our partner ecosystem put us in position to bring personalization at scale to every industry and produce strong growth during the second half. Dan, I'll hand it to you.

Thanks, Anil. Let me start by taking you through how Adobe performed in the second quarter of fiscal 2022, what drove growth in each of our businesses, and then close with the financial targets we've laid out. Adobe had a strong quarter — we beat the Q2 financial goals we'd shared earlier, even amid uncertainty in the macroeconomic environment. Top-line revenue was up 14% year over year, and on a constant-currency basis that figure reaches 15%. Even as we invested in future growth, our GAAP operating margin landed at 35%, while the non-GAAP number was 45%. That keeps Adobe among the most dependable and consistently profitable growers in the technology sector. We have three strategic units expanding inside vast addressable markets, delivering differentiated products that hundreds of millions of people depend on every month. Beyond what we've already built, we're introducing new innovations and offerings that should drive transformative growth going forward. In Q2, the business and financial highlights included record revenue of $4.39 billion, GAAP diluted EPS of $2.49, non-GAAP diluted EPS of $3.35, Digital Media revenue of $3.20 billion, net new Digital Media ARR of $464 million, and Digital Experience revenue of $1.10 billion. Operating cash flow came to $2.04 billion. We ended the quarter with RPO of $13.82 billion, and we repurchased about 1.9 million shares during the period. Revenue increased 15% versus a year earlier on a constant-currency basis. Digital Media ARR was $12.95 billion at quarter's end. Creative revenue totaled $2.61 billion, rising 12% year over year, or 14% in constant currency. Net new creative ARR for the quarter was $357 million, a 13% sequential improvement over Q1. Creative growth in Q2 was driven by continued strength in acquiring, engaging, and retaining customers across every segment. We also saw momentum in the small and medium business segment, where our Teams offering keeps attracting new customers. There's obvious demand for cornerstone products like Photoshop, Illustrator, and Premiere. In mobile apps, ending ARR exited the quarter up more than 30% versus a year ago. With Adobe Stock, we saw strong book of business expansion among organizations and first-time customers. Momentum is also building in newer ventures, with Frame.io growing robustly and our Substance products posting ending ARR that exited the quarter up over 60% year over year. Now turning to Document Cloud, Adobe generated $595 million in revenue — a 27% rise from a year ago, or 28% on a constant-currency basis. Since PDF remains so relevant and essential for knowledge workers around the world, Document Cloud continues to be our fastest-growing business. In the quarter, we brought in $107 million in net new Document Cloud ARR. During Q2, Document Cloud's growth was propelled by ongoing gains in acquiring, engaging, and retaining Acrobat users across every customer segment we serve. New Document Cloud subscriptions continued to be driven by momentum with small and medium-sized businesses, as well as through our reseller partners. Online searches related to document tasks continued to grow, bringing millions of new customers into our document business through Acrobat Web. Mobile had a strong performance, with exiting ARR growing over 40% year-over-year as we ended the quarter. Acrobat with integrated sign capabilities saw good adoption across organizations of all sizes. In addition, Acrobat perpetual license sales were strong for our document business this quarter. Turning to Digital Experience, we delivered $1.10 billion in revenue in Q2, which is up 17% year-over-year, or 18% in constant currency. Digital Experience subscription revenue was $961 million, up 18% year-over-year. Digital Experience Q2 growth was driven by a number of factors: our Adobe Experience Platform, or AEP, business grew strongly, with Real-Time CDP revenue more than doubling year-over-year. Customers are increasingly interested in building pipeline for new applications on AEP, including Real-Time CDP, Customer Journey Optimizer, and Customer Journey Analytics. Workfront had a good performance, with average deal sizes growing over 35% year-over-year. Demand continued in content and commerce, with significant new customer wins for Adobe Experience Manager as a cloud service. Adobe Professional Services saw enterprise demand that drove customer success and new implementations across our solutions. Retention was strong this quarter, driven by product differentiation and our focus on delivering value to customers. Our strategy of helping enterprises activate first-party data to deliver personalization at scale in real time is resonating with customers, fueling our continued Digital Experience growth. In Q2, we continued to focus on disciplined investments to drive growth, including marketing campaigns and adding headcount in R&D and sales. We're pleased with our talent acquisition this quarter in a competitive market. On a GAAP basis, Adobe's effective tax rate in Q2 was 21%, while on a non-GAAP basis it was 18.5%. The increase in the GAAP rate was primarily due to tax benefits related to stock-based compensation coming in lower than we expected, along with the geographic mix of our earnings. At quarter end, RPO was $13.82 billion, which represents 13% growth year-over-year—or 15% growth after accounting for a 2% foreign exchange headwind. Cash and short-term investments totaled $5.30 billion at the close of Q2, and operating cash flows for the quarter were $2.04 billion. We repurchased approximately 1.9 million shares in Q2 for $800 million. Under the $15 billion authorization from December 2020 that runs through 2024, $9.5 billion remains available. Now we'll provide Q3 targets and an update on the annual targets we shared in December, taking into account these four items. First, back in March, we said that due to lower-than-expected tax benefits related to stock-based compensation, our effective tax rates would rise in fiscal 2022. Next, back in March, we laid out how the continuing conflict in Ukraine, together with our decision to stop all fresh sales in Russia and Belarus, would impact us — resulting in an expected $75 million reduction in revenue spread across Q3 and Q4. And fourth, while appetite for what we sell remains robust, we now expect the back half of this fiscal year to deliver sharper summer seasonality during Q3 for the enterprise business, then a bigger sequential lift in Q4. So for Q3, our target is total Adobe revenue of roughly $4.43 billion. Net new Digital Media ARR of approximately $430 million. Turning to the Digital Media segment, revenue increased around 13% versus the prior-year period, which becomes 16% once currency effects are removed. In Digital Experience, revenue was higher by about 12% year-over-year, or 14% in constant currency. Subscription revenue inside Digital Experience climbed approximately 13% year-over-year, or 15% in constant currency. On taxes, the GAAP rate sits at about 22.5%, while the non-GAAP number is 18.5%. GAAP earnings per share came to approximately $2.35, and non-GAAP was about $3.33. Now turning to fiscal year 2022, our target is for Adobe's total revenue to reach around $17.65 billion. Net new Digital Media ARR came in at close to $1.90 billion. Within the Digital Media segment, revenue advanced about 12% against last year, and 17% on an adjusted basis. The Digital Experience segment posted revenue growth of roughly 14% year-over-year, or 17% adjusted. Subscription revenue within Digital Experience rose approximately 15% year-over-year, or 19% adjusted. As for taxes, the rate was near 21% GAAP and 18.5% non-GAAP. On a GAAP basis, diluted earnings per share landed at about $9.95, while the non-GAAP number was roughly $13.50. To close, Q2 was a quarter I feel good about for Adobe. Growth is arriving from all three of our clouds — Creative, Document, and Experience — with our mature offerings carrying momentum and our newer efforts showing encouraging early results. Since we operate a disciplined model and remain focused on execution, we managed to sharply cut the damage that elevated tax rates and currency pressure would otherwise have inflicted on EPS. The $175 million we're investing in our workforce, our product lineup, and our marketing today puts us in position to deliver robust growth well into the future, and we still expect to set new records this year for both revenue and cash flow from operations. Over to you, Shantanu.

Thank you, Dan. We take pride in the robust results we delivered in Q2 across Creative Cloud, Document Cloud and Experience Cloud. Adobe continues to stand among the industry's best workplaces, and I want to express gratitude to our staff for their unwavering commitment. In this quarter, Forbes recognized us as a leading employer for college graduates, and we earned a spot on their list of America's Best Employers for Diversity. I'm delighted to welcome this summer our biggest group of interns and university graduates. Demand keeps rising for the products and services that define our category; we're innovating quickly for both new and existing customer segments, strengthening our lead in established categories and witnessing strong momentum for our newer initiatives. Our strategy continues to center on long-term growth initiatives while also delivering world-class profitability. Our business fundamentals and market tailwinds are strong, and my confidence has never been higher in our ability to execute on the $205 billion market opportunity ahead of us. Now I'll hand it back over to Jonathan.

Appreciate that, Shantanu. Our creativity conference, Adobe MAX, is scheduled for the 3rd week of October in Los Angeles this year; on Tuesday, October 18th, which is day 1 at MAX, we intend to hold a meeting for financial analysts. Later this summer, invitations will go out to our analyst and investor email list, and those will include details on discounted registration. You can find more details about the event at max.adobe.com. At this point we'd be glad to take your questions, and we ask that each person limit themselves to one question. Operator?

Kirk, thanks a lot, and congratulations on the strong quarter. Shantanu, then Anil — I wanted to ask if you two could spend a moment describing the kinds of discussions you're currently having with enterprise clients, especially with the macro picture the way it is. Are you detecting any reluctance when it comes to spending? Clearly, you're maintaining your full year guidance in spite of all these headwinds. I'm also curious whether there's been any shift in the sorts of deals you're seeing — is it smaller deals but a greater number of them? Or does the product mix on the Experience Cloud side look any different? I'd love some color there, since that clearly remains a top concern for people right now. Thanks.

Shantanu here — thanks, Kirk. Yes, we feel good about what the quarter showed us. In terms of the discussions taking place, both Anil and I would start by noting that executive interest levels are extremely high across the globe. Differently from the last time around, I'd say the emphasis today is heavily on execution as well. Many of the digital investments organizations have already made — they understand, given how essential it is to interact with customers through digital channels. We're genuinely pleased: Adobe, and likewise the whole systems integrator and partner ecosystem, are seeing substantial demand for implementation work around Adobe products. Another element of the dialogue you're all having with enterprise CEOs at the moment is that everyone acknowledges this is an uncertain period, and that's something we discuss too. Even with that uncertain macroeconomic backdrop, what every one of them agrees on is that digital sits at the top of the priority list. They genuinely wish to keep talking with us about how to pursue digital. I'll let Anil perhaps share a bit about what he's observing across the various verticals. The significance of digital, you know, stays undiminished.

Yes, thank you, Shantanu. I'd like to expand slightly regarding the verticals. We felt genuinely encouraged by several deals we closed during Q2. Take automotive, for example, and our work with Daimler in Europe, where our momentum carried forward — you know, in sports, media, and entertainment, with NFL, which relies on the Real-Time CDP to personalize at scale throughout its fan base. Then in healthcare, we landed a truly significant win with CVS. That represented strong confirmation of all the HIPAA readiness we embedded into our platform. It unlocks a substantial market opportunity. Those wins left us quite encouraged. As you mentioned, digital remains a priority, and we're noticing that reflected in the pipeline for the second half.

Nope, that covers everything. I'll stick with just one question, as I promised. Appreciate it, everyone.

Hello there. Dan, I'd like to hear your thoughts on why summer seasonality seems stronger this time around. How does what you're observing now compare with what happened in earlier years? And one brief clarification about the figures. The guidance for net new ARR declined from Q2 to Q3, but my understanding is that during the prior quarter you indicated it would rise. Did we take your remarks from last quarter the wrong way? I just want us to get that straight. Thank you.

Sure, Brent — here's how I'd frame it. Our first half was solid, and demand for the distinctive solutions we offer keeps holding up. All the fresh programs we've launched, along with the older lines of business, are performing nicely. What we're also keeping an eye on, I suppose, is what everyone reads about in the broader economic picture. When it comes to what we anticipate for the back half, the confidence hasn't wavered at all. For us, it's really a matter of timing, and perhaps we're leaning slightly cautious about what unfolds with the summertime patterns. Brent, you know this better than almost anyone — the stretch of July and August. Regarding the pipeline for the back half, the confidence hasn't wavered at all, and we're simply being a touch careful when it comes to timing. On what we told you back in March — you're correct. We had kind of hinted that we'd anticipate a sequential bump. Obviously, Q2 came in strong, though that's partly why we chose to offer a bit of color and stay transparent about our view. And as you saw, we held to the $1.9 billion in net new ARR for the year.

Thank you, Shantanu.

Ah, excellent. I appreciate it, everyone, for fielding my question. I was hoping to ask regarding Creative Cloud Express. You brought up a few new capabilities during this call, imaging, video, editing for Acrobat. From my perspective, it appears those would normally be viewed as premium-tier capabilities. Does any strategic shift exist for Creative Cloud Express concerning which parts of the market you envision it serving? Thank you.

Yes, thank you for asking that. To start, the response to Creative Cloud Express and Adobe Express entering the market has truly delighted us. Honestly, it has been quite enjoyable for us, since it's something that every person here at Adobe can use too; watching the creativity emerge from areas like finance and legal is remarkable. Just as a quick refresher, to bring everyone up to speed, our attention has been on the communicator and creator economy ecosystem for many years. Actually, we think we are the biggest supplier of creative tools for professionals and communicators, built on the strength of our core products. I simply want to ensure everyone realizes those core products address this enormously large market. What we observe is that Express adds something and extends our reach among that fresh communicator audience, precisely because of what you mentioned — the freemium approach, the frictionless sign-up. It's plainly demonstrating our capacity to bring millions of new users into the franchise, and we accomplish that quite efficiently by refining how we bring customers in from search terms that previously weren't ones we prioritized. We also consider how we can onboard those users and set the offering apart through incorporating these fantastic features drawn from the desktop applications, such as Adobe Magic. All of that assists in distinguishing what we're doing with Express. Taking a broader view from a business standpoint, we remain highly confident that Adobe Express, and the manner in which we draw people into that funnel, adds to the market opportunity before us. We're placing real emphasis on expanding capabilities there and standing apart there. I'd also like to remind everyone that Express remains available to existing core Creative Cloud subscribers. By weaving some of those features into Express, we're making workflows possible between the core Creative Cloud offerings and Express too. We think that will deliver significant retentive value across the core base. In fact, we just enjoyed an excellent quarter with extremely strong retention for Creative Cloud as well.

Thanks a lot.

Brad, perhaps I could jump in here — honestly, I believe the team is genuinely enjoying themselves with every one of these neat capabilities. As you mentioned, within the quick actions they're demonstrating some truly remarkable things. When you consider how deep what they've built goes, I mean, there's a great deal happening behind the scenes that we'll have the ability to turn into revenue. Obviously, the emphasis at this moment is on usage, just as David mentioned. It's been enjoyable.

Great to hear. Thank you so much.

Okay, hi everyone. Appreciate you letting me ask. Maybe this is a two-part thing. On the first part, we've discussed quite a bit, I believe, how pricing tailwinds affected the year when we looked at last quarter. Could you assist us in putting a number on what you expect for Q3 and Q4? It really seems like this is starting to build pretty significantly. Shantanu, maybe this one's for you: regarding the strategic view on M&A and what might be coming, given how valuation paradigms are shifting in the market, how much does large strategic M&A matter to the growth profile of the business versus tuck-ins?

That's my view as well, Alex.

I'd be glad to take that one. Please, Shantanu, you start.

Regarding your question about M&A, I'll take that one, and then David can certainly address the other. Obviously, as you mentioned, valuations have shifted considerably. Let me begin by saying our portfolio has us very encouraged. When you consider a few of the newer efforts we've discussed — Adobe Express, the Real-Time CDP, customer journey analytics, plus our work on the web, PDF included — we're feeling quite good. Alex, my sense is that a fair number of smaller, single-product businesses likely won't make it through the current environment. The fact that valuation multiples are shifting is, in my view, actually beneficial for a bigger player such as Adobe. It doesn't feel as though we require anything, yet we'll keep watching for opportunities that are additive and adjacent and that will deliver strong shareholder value. Our criteria around securing excellent technology, strong cultural alignment, and adjacency haven't changed. There's so much happening inside the company that our existing portfolio has us excited. Plainly, M&A terms will be more sensible as well.

Regarding the pricing piece, Alex, what you're saying is accurate. A modest hike was rolled out to a subset of our customers during Q2. Those updated rates stayed live for roughly 1 month and generated slightly less than $10 million in benefit, matching our expectations precisely. As you're able to observe, that's a really tiny slice of the $464 million we brought in during Q2. The response from customers has generally been favorable, since we've rolled out so many additional features following the prior pricing change that the overall reception has been quite positive. Honestly, if analysts ever raise a question with us, it's about why a larger increase wasn't pursued. The truth is our main emphasis is on bringing in millions of additional users; we operate as a growth business; expanding that user base remains our goal; and given the efforts we've got underway across both the core offerings and the new products, our intention is to run this business via acquiring new users, driving engagement, and improving retention.

Understood. My apologies, Dan — perhaps regarding the effect on Q3 that you expect within the guidance for net new ARR when it comes to pricing.

Right, we're not going to include that in the guide. The metrics David shared with you regarding Q2, I believe, offer a solid picture of the expected actions we foresee moving ahead.

Thanks, everyone.

All right, excellent. Hello, folks. I appreciate you letting me ask something. David, perhaps I'll direct this to you as well. With all the inquiries regarding the macro environment, I wanted to see whether we might dig one step further into what makes up creative ARR. Analysts Day gave us a quite useful disclosure — the split between single app and all app — and that helps. Yet when it comes to the breakdown between consumers and professionals, how do you view that, assuming there's a method to separate the two? Since naturally, at this moment, plenty of people are asking about how healthy the consumer is. What's your take on that composition, and what's your take on perhaps how defensive each of those cohorts is, or what their retention rates look like? Is that clear?

Sure, that's completely clear. Yeah, I'm glad to address that. From a broad standpoint, we view the company across, obviously, a number of different segmentations. When you look at it, our thinking is in terms of enterprise purchasers, mid-market and SMB purchasers, communicators, and consumers. Our portfolio is extremely wide and varied, and that has worked extremely well for us historically. As you're suggesting, we've weathered several downturns previously, so we have solid understanding of how these various groups react when finances get tough. On the whole, we've done very well. You know, with enterprises, as we've discussed, you heard Anil and Shantanu say that content is powering the digital economy and that they need to remain highly committed to their digital spending. From a pro-market angle, you know, we have professionals who earn their living by using our products; so we feel quite positive about that offering too. From a communicators' angle, they're typically either employed in departments or small companies, or they belong to this expanding movement surrounding the creator economy, and they're hoping to earn money or gain followers through that; so it's a vital component of their toolkit for growing their side hustle and their endeavors. When it comes to the consumer businesses, you know, we've been very deliberate about pricing there, and have highly appealing pricing that we believe has, you know, performed quite well for us historically during, you know, downturns. All in all, we believe the company is varied, and we regard it as extremely resilient.

That's quite useful. Thank you.

Hello. Many thanks. I'm curious about the outlook you gave for the digital experience segment. For the third quarter, you put it at 14%. In constant currency terms, that represents a decline of roughly 4 points versus 18% back in May, and it's the weakest figure we've seen in some time. I realize the comparison is a harder one. Is that what's driving it, or is there something else worth mentioning regarding the DX business? Thanks so much.

There's nothing worth mentioning. I mean, when you consider our goals for the year, and when you think about what we'd anticipate, you know, for subscription as well as total revenue, we're essentially communicating the very same thing as we did at the start of the year, amid what is a genuinely difficult economic climate. You know, enthusiasm for what we offer is still robust. I'd also like to perhaps build a bit on something David mentioned for Saket. Saket, you know, the consumer sentiment that we keep hearing about from banks like yours is that it actually remains sturdy in both the U.S. and Europe. I didn't want anyone to think that isn't what we're observing too.