Adobe Inc. (ADBE) Earnings Call Transcript & Summary

Hello, and welcome — thanks for being here this morning. Joining us today are Adobe 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 third quarter of fiscal year 2022. Our Q3 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, September 15th, and includes forward-looking statements involving risk, uncertainty and assumptions. Actual results could differ materially from those set forth in these statements. To learn about these risks, you should review the factors discussed in today's press release and then Adobe's SEC filings. Today we'll cover both GAAP and non-GAAP financial measures. Our reported results include GAAP growth rates as well as adjusted growth rates in 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.

Thanks, Jonathan, and I appreciate everyone being here. Adobe delivered yet another record quarter, with revenue hitting $4.43 billion — that's growth of 15% compared to the same period last year. On a GAAP basis, earnings per share came to $2.42 for the quarter, while non-GAAP earnings per share reached $3.40. Within our Digital Media segment, revenue totaled $3.23 billion. Net new Digital Media annualized recurring revenue, or ARR, came in at $449 million, and total Digital Media ARR as we exited Q3 climbed to $13.40 billion. Over in our Experience Cloud business, we brought in $1.12 billion in revenue, with subscription revenue of $981 million. In a world that's digital-first, Adobe Creative Cloud, Document Cloud and Experience Cloud have grown even more essential to a broadening set of customers — spanning students, creative professionals, small businesses and the biggest enterprises on earth. Powered by our pioneering technology, our history of building and heading up categories, and our reliably strong execution, the opportunity ahead of us has never been bigger. Adobe's excellence has always come from establishing brand-new categories and platforms, and from providing state-of-the-art solutions via both organic innovation and acquisitions. Across our history, Adobe's breakthroughs have reached billions of people worldwide. From transforming imaging and creative expression via Photoshop, to being first in electronic documents with PDF, to establishing the digital marketing space through Adobe Experience Cloud, Adobe keeps on inventing and reshaping categories. Design is enjoying a golden age, and we think we hold a distinctive chance to bring about a new period of collaborative creative computing. I'm delighted to report that today we revealed our plan to acquire Figma, a top web-first design platform that will assist us in speeding up this vision. Figma allows designers, developers and every stakeholder to work together throughout product design, from ideation through design and on to delivery. Bringing Adobe and Figma together will greatly broaden our reach and market opportunity, while also opening up the creative process more accessibly and productively to more individuals. Now I'll hand things to David so he can tell you more about our vision for Adobe and Figma, plus the momentum in the Digital Media business. David?

This marks a thrilling milestone for both Adobe and Figma. Figma exists to enable teams to work together visually and to bring design within reach for everyone. Back in 2012, CEO Dylan Field and his colleagues introduced Figma as the very first design tool built specifically for the web. Through Figma and FigJam, every stakeholder involved in crafting interactive mobile and web applications can work side by side using multi-player workflows, advanced design systems, and a robust, extensible developer ecosystem. Figma has created a remarkable product and a stellar business, achieving best-in-class ARR growth along with net dollar retention, all while running a disciplined and efficient operating model. Figma has drawn a fresh generation of millions of designers and developers, plus a devoted base of student users. To illustrate their scale and financial achievements: Figma should contribute roughly $200 million in net new ARR during this year, pushing past $400 million in total ARR as 2022 ends, alongside a net dollar retention rate above 150%; given a total addressable market reaching $16.5 billion by 2025, Figma is only at the beginning. Adobe has consistently aimed at enabling everyone to build digital experiences, and pairing Adobe with Figma represents the ideal better together opportunity. Bringing Adobe and Figma together will unlock new possibilities and speed up our strategy in several respects. First, reimagining the future of creativity and productivity — Adobe and Figma both care deeply about helping people and teams become more creative and productive. Adobe and Figma now have a fresh chance to make content creation more efficient, collaborative, and enjoyable by uniting Adobe Express, Acrobat, and FigJam, an online whiteboarding solution built for teams. By combining these products, we can deliver enormous value to hundreds of millions of customers. Second, accelerating creativity on the web — as creativity grows more collaborative, the web enables teams to create together more easily. Figma’s web-based, multi-player platform can speed up delivery of Adobe’s Creative Cloud technologies on the web, opening the creative process to more people. This will significantly expand Adobe’s reach and addressable market opportunity. Third, advancing product design — web and mobile applications increasingly form the foundation of how we live and work. That is fueling explosive growth within the product design category. Bringing Adobe and Figma together will serve all stakeholders in the product design process, from designers to product managers to developers, by introducing powerful capabilities from Adobe’s imaging, photography, illustration, video, 3D, and font technologies into the Figma platform over time. And fourth, empowering and expanding the community — across our history, Adobe’s community has been an enduring source of inspiration and a catalyst for innovation. Figma possesses a vibrant community that develops and shares everything from tutorials to templates to plug-ins with their large and growing ecosystem. Uniting our communities will draw designers and developers closer together to unlock the future of collaborative design. There's no better pairing than Adobe and Figma. Our teams, our breakthrough technology, and the shared goal of making creativity and collaboration available to everyone are going to bring more value to an expanding customer base. Once this deal is complete, I can't wait to welcome Dylan and the whole Figma crew into Adobe. This purchase of Figma arrives at an incredibly thrilling moment for Adobe's Digital Media operation, which went past $13 billion in ARR during this quarter, up 16% year-over-year as we exited the quarter. Creative Cloud from Adobe is still the creative engine for the entire world, giving everyone the power to make things whenever and wherever inspiration hits. During Q3, our net new Creative Cloud ARR came to $330 million, alongside revenue of $2.63 billion, an increase of 14% year-over-year. Some Q3 highlights: powerful momentum behind Adobe Express, with considerable expansion in new users. Adobe Express serves a vast world of creative professionals, communicators and knowledge workers, spanning students, small business owners and social influencers. It's thrilling to watch the swift innovation we're bringing forward so that millions of customers can produce standout multimedia content. Adobe Express offers thousands of templates, millions of stock assets and quick action functionality, which makes any creative task simple to complete. Millions of new users are arriving at Adobe Express, fueled by viral adoption along with our creative marketing campaigns. Fast Company just called Adobe Express one of the best new productivity apps of 2022. We're also seeing strength in our Photoshop and Lightroom offerings across desktop and mobile, favorable winds in our video segment for Premiere Pro and Frame.io, our combined video editing and collaboration offering, demand for our Substance products, as brands in every industry treat 3D and immersive content as a new medium, plus momentum in the Adobe Stock business, underscoring how much content velocity matters for businesses of every size. And last, we're genuinely thrilled about Adobe MAX, the biggest creativity conference anywhere in the world. It's taking place in Los Angeles and will be streamed live for our worldwide community. Beyond revealing incredible new Creative Cloud innovations, we'll be hearing from luminaries, among them famous film directors, artists and musicians. Now let's turn to our Document Cloud business. Digital documents allow individuals and businesses to stay productive in a world that's digital first. With over 300 billion PDFs opened and upwards of 8 billion digital signatures processed annually, Adobe Document Cloud is speeding up document productivity and workflows across web, desktop and mobile. Document Cloud enjoyed its strongest Q3 yet, reaching net new Document Cloud ARR of $119 million and record revenue of $607 million, up 25% year-over-year. Q3 highlights: ongoing adoption of PDF across every computing surface, with more than 2.6 billion cumulative installs of Acrobat and Reader; major improvements to the Acrobat web experience, making popular verbs such as view, edit and collaborate simpler than ever and introducing accessibility capabilities like Read out Loud and High Contrast support. Acrobat Web MAU keeps experiencing enormous growth, powered by the high volume of web searches for document actions. Adobe Sign posted impressive gains, fueled by e-signature capabilities built right into Acrobat; by connected workflows spanning Acrobat Desktop, Acrobat Web, and Adobe Express; and by significant enterprise deals landed with names like Amazon, Boeing, Chubb, Lloyds Bank, and ServiceNow. Our Digital Media offerings, which lead the industry, continue to see robust demand from an expanding customer base; we're building momentum throughout the business thanks to ongoing product innovation, powerful go-to-market strengths, and a data-driven operating model that's proven itself. Over to you, Anil.

Appreciate that, David. Hi, everybody. One fact has really come into sharp focus under these conditions: digital now stands as the essential avenue for connecting with customers and fueling expansion. Everywhere around the world, businesses across all sectors are putting their money into software offerings and services that let them foresee and satisfy what their buyers want. Managing the customer experience is no longer optional, and Adobe holds the top spot in that category. Adobe Experience Cloud provides forward-looking, tailored, immediate digital interactions — spanning acquisition through monetization through retention — covering content and commerce, customer journeys, data insights and audiences and marketing workflow. Specifically, we're seeing robust uptake among large organizations for Adobe Experience Platform and Real-Time CDP, both of which serve as cornerstones for this next-generation enterprise architecture. FC Bayern, among the most accomplished football clubs on the planet, is using Adobe Experience Cloud and Real-Time CDP to reinvent how their fans engage. That provides them a complete picture of each supporter's interaction both online and offline, letting them serve up tailored touches like stadium discounts or an engaging shopping journey for those watching from home. During Q3, we kept generating solid Experience Cloud expansion, hitting a record $1.12 billion in revenue. Subscription revenue reached $981 million in the quarter, which equals 15% growth compared with the prior year. Q3 highlights include: powerful traction for Adobe Experience Platform and AEP-native applications, with the book of business more than doubling year over year; notable expansion for Adobe Commerce, highlighting appetite for digital storefronts and marketplaces; Experience Cloud was recognized as a leader for the sixth consecutive year in the Gartner Magic Quadrant for Digital Commerce and earned the top placement in the Forrester Wave for Enterprise Marketing Suites; plus major customer wins, among them Crédit Agricole, Morgan Stanley, NASA, Qualcomm, T-Mobile and UnitedHealth Group. Going forward, Adobe is steering a rapidly expanding category that matters more and more to enterprises of every size. Adobe is positioned well to assist enterprises in providing outstanding customer experiences through best-in-class platforms and applications, a solid history of rolling out solutions effectively for thousands of customers and a demonstrated capacity to provide the next-generation architecture for Customer Experience Management. Dan, the floor is yours.

Thanks, Anil. To kick things off today, I'll walk through how Adobe performed in the third quarter of fiscal 2022, point out the growth drivers across each of our businesses, then cover the announced Figma acquisition, and wrap up with our financial targets. Adobe turned in a solid Q3, once again showing that what we make is mission critical to our customers' success no matter what the macro environment looks like — from the millions of people who rely on our offerings to produce digital content, to small businesses that handle their document workflows through Adobe, to big enterprises that have reimagined how they engage their end users by delivering personalization at scale. Turning to our third-quarter results, both business and financial, here's what stood out. We brought in revenue of $4.43 billion, a record for us. On a GAAP basis, diluted earnings per share came to $2.42, while non-GAAP diluted EPS was $3.40. Our Digital Media business generated $3.23 billion in revenue, and we added $449 million in net new Digital Media ARR. Digital Experience revenue reached $1.12 billion. Operating cash flow was $1.70 billion, and we exited the quarter with RPO of $14.11 billion. We also repurchased about 5.1 million shares of our stock during the quarter. Inside the Digital Media segment, revenue grew 13% compared with a year earlier in Q3, which works out to 16% on a constant-currency basis. We ended the quarter with Digital Media ARR of $13.40 billion. During the quarter, we saw the summer seasonal pattern we had anticipated, and at the same time the broader landscape for acquiring and engaging users of our products remained robust. Revenue from Creative reached $2.63 billion, which works out to 11% growth compared with a year earlier, or 14% when measured in constant currency. Net new Creative ARR for the quarter totaled $330 million. Several factors fueled Creative's expansion in Q3. First, our Teams product is gaining traction among smaller companies, where we're bringing in a steady stream of new accounts and seeing record levels of both usage and customer loyalty. Second, Illustrator and InDesign both posted solid gains. Third, there's robust appetite for our leading photo, imaging, and video tools. Fourth, Adobe Stock keeps building a healthy pipeline of business. And fifth, newer ventures like Frame.io and Substance are picking up speed — each finished the quarter with ending ARR up more than 50% compared with the same period last year. On the Document Cloud side, we brought in $607 million in revenue. That's up 23% compared to the same period last year, and 25% when you strip out currency effects. Net new Document Cloud ARR for the quarter came to $119 million — the best third quarter we've had so far. Several things drove Document Cloud growth in Q3: more people adopting PDF and Adobe Reader across a range of surfaces; Acrobat Web growing thanks to online searches for PDF and document actions; Acrobat and Adobe Sign performing well; our reseller channel continuing to bring in new Document Cloud subscriptions, especially among small and medium businesses; and ongoing seat expansion within the enterprise. In August, we started rolling out the new Acrobat integrated with Sign offering, which came with updated pricing. Now, regarding our Digital Experience business: during the third quarter, we brought in $1.12 billion, which marks a 14% increase compared with the same period last year, and 15% when measured in constant currency. Subscription revenue for Digital Experience came to $981 million. Here's how the Digital Experience segment's growth played out in Q3. First, retention held up strongly, and we also saw upsell activity and enterprise bookings rise across our product lines, with the United States standing out in particular. Second, we got a large number of million-dollar-plus deals over the finish line, along with larger transformational contracts spanning the full breadth of our solutions portfolio. Third, momentum continued in our foundational business — Adobe Experience Platform and Real-Time CDP — and as we closed out the quarter, our book of business for Platform plus AEP-native applications had more than doubled year over year. Fourth, we kept making headway on connecting our solutions to workflow offerings like Workfront, which posted revenue growth above 35% for the quarter compared with the prior-year period. And fifth, professional services saw rising customer demand, driven by enterprises zeroing in on implementations and value realization. In the third quarter, we concentrated on careful spending meant to drive expansion — this covered a large batch of new graduates brought on board from universities, along with promotional efforts intended to raise visibility for both newly launched and leading products. Our operating margins remain best-in-class, and we turned in strong earnings per share for the period. On a GAAP basis, Adobe's effective tax rate for Q3 was 22%, while on a non-GAAP basis it was 17.5%. The GAAP figure came in lower largely due to advantages related to share-based compensation. The non-GAAP figure came in lower largely due to extra U.S. income tax credits. When the quarter closed, our remaining performance obligations came to $14.11 billion. That's a 12% increase from the same period last year, and it would have been 15% if not for a 3% drag from foreign exchange. At the end of Q3, we held $5.76 billion in cash and short-term investments. Operating cash flow for the quarter was $1.70 billion, which is 20% higher than a year ago. In Q3, we repurchased about 5.1 million shares for $1.80 billion, and that figure includes shares we got through the final settlement of the ASR we signed in December 2021. Right now, $8.3 billion remains available under the $15 billion authorization approved in December 2020, which stays in effect through 2024. As Shantanu and David mentioned, we're really excited about the opportunity to bring Figma into the fold, since this deal would accelerate Adobe's strategy. Under the terms of the definitive agreement, we've committed to purchasing Figma for roughly $20 billion, split about evenly between cash and stock, with the usual adjustments applied. Figma's CEO and its employees will receive around 6 million extra restricted stock units, which vest across a four-year period following the close. We expect the transaction to wrap up in 2023, assuming we get the necessary regulatory approvals. For the cash side of the consideration, our plan is to draw on cash on hand and, should the need arise, a term loan, which we'd pay down using operating cash flows once the deal closes. When it comes to the market Figma serves, the opportunity is worth $16.5 billion. Their financials are also quite impressive. By year's end, they're projected to bring in $200 million in net new ARR, pushing total ARR past $400 million, while net dollar retention sits above 150%. Their operating model is both disciplined and efficient, with gross margins near 90% and operating cash flows in positive territory. Figma has real business momentum and a customer base that's both sizable and growing, and from a financial standpoint, we couldn't be more excited about what this combination will allow us to deliver. Although the main purpose of this deal is opening up new markets, widening nearby opportunities, and speeding up growth, we remain dedicated to preserving Adobe's robust profitability and getting the most EPS we can for our investors. During the first and second years following the close, this transaction is going to dilute Adobe's non-GAAP EPS, and our expectation is that it breaks even in year three and becomes accretive by the close of year three. Although the transaction is still pending, I want to walk you through the path to non-GAAP EPS accretion for the merged entity by the end of year three, taking Adobe's operating margin during the latter half of fiscal 2022 as our baseline. Three primary factors will accelerate revenue expansion for Adobe and Figma combined: initially, we introduce Figma to our existing clientele and broaden its footprint via our global sales and marketing organization; subsequently, Figma accelerates the launch of fresh Adobe products on the web for the upcoming generation of users; and finally, jointly we deliver innovative solutions to the market as we push the boundaries of what collaborative creativity can achieve. Obviously, Figma's tremendous revenue growth, paired with their efficient operating model, would produce a standalone operating margin that keeps expanding. Figma's innovative technology platform is going to speed up our R&D roadmap, including bringing our Creative Cloud technologies to the web, which lets Adobe concentrate on and steer our future R&D investments. Once the deal closes, we'll move quickly to pay down any term loan if we need to, and after that we'll restart stock repurchases to bring down Adobe's share count. While the deal is still pending, we expect at a minimum to keep repurchasing enough shares to offset the dilution from equity issued to Adobe employees; we'll now give Q4 targets, which take into account the broader macroeconomic environment; FX headwinds, since the U.S. dollar keeps getting stronger against foreign currencies; and the usual seasonal pickup in demand for our offerings at year-end. Looking ahead to Q4, here's what we're aiming for: Adobe's total revenue should come in around $4.52 billion. We expect net new Digital Media ARR of about $550 million. Digital Media segment revenue should grow roughly 10% compared to last year, which works out to 14% in constant currency. For our Digital Experience segment, we're projecting about 13% year-over-year revenue growth, or 15% in constant currency, with subscription revenue for that segment also up roughly 13% year-over-year, or 15% in constant currency. On taxes, we're looking at approximately 23% on a GAAP basis and 17.5% on a non-GAAP basis. GAAP earnings per share should be around $2.44, with non-GAAP earnings per share of roughly $3.50. In short, Adobe continues to perform well across Creative Cloud, Document Cloud and Experience Cloud, even as we make transformational investments in strategic growth initiatives. I can't wait to talk about the ways we can grow when we meet in LA next month for Adobe's Financial Analyst meeting. Over to you, Shantanu.

Thank you, Dan; getting back out there this quarter to connect with customers and partners was wonderful, as companies shift toward a new hybrid work model. Meeting our newest team members and Adobe staff at several locations energized and inspired me — these are the people who will collectively propel the coming era of innovation, growth and culture. Our most vital asset, people, has always been the source of Adobe's strength. The ongoing recognition as an excellent workplace makes me deeply proud. During this quarter, Adobe appeared on Fast Company's Best Workplace for Innovators list and Fortune's Best Workplaces in Tech. We will host our Adobe for All conference next week, gathering employees to honor our shared values of diversity, equity and inclusion; this is a thrilling moment for Adobe. Unleashing creativity for everyone, speeding up document productivity and empowering digital businesses — that strategy of ours is delivering results. Our innovative product roadmap is being executed, we are generating growth in both new and established businesses and bringing joy to an expanding customer base. Alongside all these accomplishments, we keep scanning ahead for fresh transformational possibilities that will fuel decades of growth for Adobe. In this digital era, we believe every person, team and company will seek to become more creative and productive. A singular chance exists for Adobe to bring about a world of collaborative creativity; through my discussions with Dylan at Figma, it became entirely evident that joining forces would let us speed up this new vision, bringing tremendous value to our customers and shareholders. Once the transaction closes, I can't wait to welcome Figma into the Adobe family. We hope to see you at MAX and finish the year on a high note. At this point, we will open the floor to questions. Operator?

Hi there. Thanks a lot. Nice work on what is truly a huge leap ahead, management team. Shantanu and everyone, could you perhaps describe Figma's persona and whether there's any overlap whatsoever between where Adobe hoped to head in the future with its Creative family and where Figma is expanding — was heading, and if you add it all up, what the incremental opportunity is. It seems like a $16 billion TAM, yet your own Creative business, you lay out as having a TAM above $40 billion. So I'm curious what the TAM might be for Figma going forward as it becomes part of Adobe, you spot new personas. Dan, you mentioned three years until breakeven, and it seems like you've built in some conservative estimates, especially given that Figma is already generating cash. I'd like to know what assumptions underlie that rather lengthy path to breaking even. Many thanks, and congratulations.

Thank you, Kash, and congratulations to you as well on the conference happening at this moment — since we're in a quiet period, as you're aware, we're unable to attend. Allow me to take a broader view and explain why we see this as a truly transformative step for Adobe. Thinking about where creativity is headed, and what it will mean when lots of people take part in that through working together, our view is simply that this will deliver tremendous value and bring a large number of fresh customers onto the merged platform. Take Adobe — we definitely aim at knowledge workers, at communicators, and at creative professionals. Figma puts a great deal of emphasis as well on developers, and very much on the additional stakeholders who take part in designing products. When we say Figma's TAM is $16 billion, we mean the market as it stands right now — covering what they already do in product design plus collaborative whiteboarding and ideation. That second area includes FigJam, which in my view is a fantastic product with a far bigger addressable opportunity. Still, if you combine everything into what we see as a huge opportunity, there are four elements we find genuinely exciting. To start, the industry is heading toward a new phase of creative teamwork, and we think bringing these two businesses together puts Adobe in a strong spot to provide real benefits for that kind of collaborative creative work. Next, our view hasn't changed that we can speed up what creating on the web involves. Figma has pulled off something impressive: they've created a genuinely outstanding technology platform and solved a number of the challenges that need solving before large groups of people can collaborate over the internet. Next, we believe we're positioned to push product design forward — consider the many decades of Adobe technology we possess, including our imaging, vector, and video capabilities, and imagine what it would mean to deliver those on the web and greatly expand the number of users who could take advantage of them. Finally, and importantly, regarding what you asked: this truly gets at the ultimate goal sought by anyone building a mobile app, anyone building a site, anyone building software for any device with a display — bringing together everything we're able to do for designers, developers, and stakeholders to make it a reality. So I believe that what we presented to you today is what they refer to as their addressable market opportunity, and what we refer to as ours. Yet in my view, the genuine upside of bringing these together is the creation of entirely new markets, quite similar to what we've achieved with Digital Experience and the other sectors we participate in. So, thank you — we couldn't be more thrilled about this.

Yes. So when we look at it through the lens of accretion, the main thing to understand is that growth is what this deal is really about. What we're doing is putting the company in a position to create new categories and generate growth for many years ahead. And when we consider how that growth will play out, we went through several of the things driving it. It involves taking that platform's performance further within the combined organization, giving it reach into our customer base and our worldwide go-to-market presence. It also involves speeding up how quickly new Adobe products reach the web, and then together launching new products as we open up those opportunities in collaborative creativity; this lets us concentrate on and direct our R&D spending as we move along that roadmap, finding the right balance between speeding growth up and keeping that growth path intact, while still being disciplined about it; over time, we'll hand investors an enormous amount of value. Once we get past the closing and into year two, our EPS growth rate will come in higher than our total revenue growth, it will turn accretive as we leave year three behind, and we're set up to hand over a great deal of value.

Great. Many thanks, and all the best.

Thanks a lot, and congratulations. Clearly this is a huge moment for Adobe; what Figma contributes when it comes to innovation, collaboration, and communities is quite evident, and I appreciate the remarks about Figma helping further webify Adobe's core products. Yet how would you respond to the view that this $20 billion acquisition looks more reactive than proactive? And maybe even more significantly, how can we feel confident that Adobe's organic innovation engine remains alive and well for seizing the trends and opportunities ahead in Creative?

Brad, that's a fair question, and I realize that in these markets especially, acquisitions—perhaps big ones—tend to be met with some skepticism; we firmly believe, and I'll speak to this, that Figma will be a transformative deal for customers and industries, and it significantly expands our TAM; we can bring great value to a growing set of customers. Yet I also want to reassure everyone: if you examine our results, this does not alter in any way our focus or our enthusiasm for our existing portfolio. We're growing nicely, we're showing strength across all three of our cloud offerings, and we keep executing against our present initiatives. So if you consider the many internal businesses gaining velocity—whether it's Adobe Experience Platform and the apps built natively on top of it, what's taking place with 3D and immersive, what's taking place with Acrobat Forms, what's taking place with Frame—this is additive. And when opportunities such as this come along, Brad, I think great companies are the ones that look at it and ask, will you concentrate only on the here and now, or will you grasp the opportunity that truly positions Adobe for the coming decades? So it's a fair question. We recognize there will be questions tied to valuation. We firmly believe it delivers valuation to our shareholders too. When you consider what this means for us, it in no way lessens my enthusiasm about our existing portfolio.

That's completely reasonable. Thanks, and I can't wait to see everything showcased at MAX in the coming month. Appreciate it, everyone. Nice work.

Thanks, Brad.

Hi, everyone. I'll begin with something unrelated to Figma, and after that I'll bring Figma into it. I suppose, Shantanu, could you speak — or David, could both of you give us a sense of the demand landscape, and how it moved across the quarter? Clearly, many businesses are experiencing longer deal cycles and scope reductions, and even what our channel checks picked up regarding Digital Experience indicated that their agreements take more time to finalize since far more signatures are needed. So, I suppose, to begin with, what are you observing regarding demand, and what are — since one thing investors keep asking us is why do this now, when we might be heading into a more recessionary climate, couldn't this kind of transaction have been completed more cheaply at a later point, so that's roughly how I'd like to bring this together?

Yes. Allow me to take the first portion, which was actually the latter portion of what you asked, namely why now. Once more, and as I mentioned, we simply hold the belief that this fresh vision we're able to build around what collaborative creativity can accomplish — there's no better moment than today to begin building upon it; and whenever chances such as this arise, you must seize them instead of postponing them, Alex. So, from where I sit, we understand how to ensure this brings tremendous value to our customers. I'll also have David address demand and the Creative side. Regarding the Enterprise side, as we stated, our results were solid. I mean the AEP plus apps business, that book of business is doubling, which genuinely mirrors the foundational elements of what we provide. But it — once more, I return to — chances such as this seldom come along, and Figma is among those uncommon companies that has reached the sort of escape velocity and technology platform that they possess. Yet we just as strongly believe it's even more uncommon for a company such as Adobe to be capable of capitalizing on what they deliver and truly speed it up while offering greater value, and so from where I sit, there's no better moment than today.

Okay, so regarding Digital Media, we kicked things off this year with guidance of $1.9 billion, and naturally, our aim is to exceed that figure. Given all the macroeconomic conditions we're dealing with, when you add up Q1, Q2, Q3 plus what we're guiding for Q4, that puts us at $1.88 billion, and considering everything going on globally, we're quite pleased with how we've performed. Obviously, we're a company that pushes hard. Our goal is to surpass that target. All our key metrics have stayed robust. We're bringing in new users at a solid pace, engagement and retention remain healthy, and monthly active users are holding up well too. So we have a lot of confidence about the macro — about our capacity to steer through these macro conditions no matter what's unfolding around the world. Then, when we think about where we can find growth opportunities, there's an enormous amount of product innovation in the pipeline — much of which will be showcased at MAX — speeding up what's already underway in our flagship apps, what's happening with Express and the sorts of features we're building into it. We're experiencing fantastic growth and momentum when it comes to usage and NPS there, with Photoshop and Illustrator arriving on the web. There's also plenty of share-for-review collaboration functionality on the way. And when it comes to the discussion surrounding Figma, Dylan is someone we've known for many years, we share deeply aligned values and vision, and the chance to scale that business more rapidly along with the synergies we envision — it all lets us take a business that's already strong and make it stronger and faster still.

Great. Thanks, everyone.

Shan, over the past 10 years everyone has respected how you kept your M&A approach so disciplined, and I suppose a lot of people sort of feel you abandoned that pattern here, and I believe everybody simply wants to know about the multiple, because even with revenue doubling once more, that would still exceed 25 times ARR. So what exactly made this so unique, and when you look back at recent years, you always claimed XD alone could support you — so why did that change with XD, and what role does XD play now as it grows?

There are two points there, Brent. First, I realize that what you're essentially describing is that some folks will ask, hey, demonstrate how this value is building up for Adobe shareholders too, and we definitely think that, since otherwise we wouldn't pursue it, and we do think it will generate value for Adobe shareholders. Regarding XD and regarding Figma, I mean, for designers, we certainly aimed at what had to be done concerning screen design using the desktop product. I believe the far newer market that appeared, one Figma both served and essentially created, was the capacity to accomplish this collaboratively and massively expand the scale, and across the past 10 years, they truly put resources into and resolved several of the difficult technical challenges that stood in the way of making this work friction-free on the web. So from where we sit, the Creative products remain robust, and the capacity to genuinely connect designers with developers is precisely where this distinctive opportunity lies, along with building new markets. I mean I'll offer you another sort of hypothetical example regarding how we view it, which is that you merge what they've accomplished with whiteboarding and ideation, and what the future of work will be, and if you consider Acrobat's presence and what we have with Acrobat, or if you consider the idea of brainstorming and what occurs with FigJam, with what occurs with Adobe Express, I think the opportunities are enormous. I realize there will be certain sentiment tied to the price, and it's up to us to go show how we deliver on our existing initiatives, and also to show the worth of this new one.

Thanks, Shantanu.

Great. Appreciate you all taking my question. Just a very quick one regarding Figma — I don't want to dwell on that topic excessively — and then a few questions about the core business. Regarding Figma, we've certainly heard plenty about them out in the market, and it's a fantastic asset that you're bringing in. It appears to overlap quite directly with InDesign. So could you speak a bit about whether there's some rationalization between those two offerings, or is Figma simply the go-forward option there? And then regarding the core business, last week — no, not last week, last quarter you provided us a bit of an update on how pricing was affected — affecting Digital Media and net new ARR. I was hoping to receive an update on how the pricing effect played out this quarter; and then regarding margins, it seems you've eased up on hiring somewhat, could you tell us about the pace of investments going forward and whether that will be somewhat more measured given the macro impact beginning to accumulate? Thank you very much.

Yes. I'll begin by discussing InDesign and Figma. At their core, they are quite distinct products. InDesign focuses on creating print and publishing workflows and performing layout. Figma is truly about empowering product design and a collaborative product design approach. In fact, when you examine InDesign, it's our conventional user base, mainly designers who rely on it. One aspect that's genuinely fascinating regarding Figma is the composition of its user base. In fact, two-thirds of its users aren't designers — they're developers and other stakeholders involved in the process, and the basis of that collaborative approach is what renders this such a unique and accretive acquisition for us. Looking ahead, the main emphasis will be on welcoming Figma into the family and then taking all the capabilities we possess across illustration and video and creative imaging and constructing them atop the Figma platform to enable an entirely new generation of capabilities that will connect with digital native and next-generation creative professionals, and we're extremely enthusiastic about them. The two products are fairly distinct.

Right. So when you look at it through an investment lens, one really attractive aspect of Adobe is that our growth possibilities are huge. There's a chance for us to take the core franchise up to somewhere between $30 billion and $40 billion in revenue. Even so, our approach will be the same as it has always been: put money to work with discipline, and let that expansion come alongside solid profitability and solid cash flow — so the playbook doesn't change. Our focus is pointed at growth. Our facilities are in use again; we're putting capital into scaling the business. We're putting capital into our products, into go-to-market and marketing. We're pushing PLG motions forward, yet we'll do all of that with discipline, producing robust profitability and cash flow even as the business expands in a strong, sturdy manner. So the same approach we've always taken applies — running a disciplined business.

Understood. And what about on the pricing front?

Yes. When it comes to pricing, the key thing for us is value. Everything we've been constructing in this business rests on bringing in new users, moving them up to higher tiers, and naturally, now and then we make pricing adjustments — and those adjustments are invariably tied to additional value. So with Creative, we've been rolling out many apps. We've brought Frame.io integration into Creative — into the applications within our Creative Cloud; we've been developing plenty of share and review workflows, for instance, plus lots of stock and content images in there too, and then over on the Acrobat Pro side, we've been pursuing much deeper integration with Sign when it comes to bulk signatures, branding, web forms payments. The underlying principle, then, is that pricing always links to the genuine value we're delivering, and by doing that, we keep seeing pricing unfold just as we anticipated, and every bit of this was already factored into what we'd laid out for the year.