Adobe Inc. (ADBE) Earnings Call Transcript & Summary

Good afternoon, and thanks for being with us today. Joining me are Adobe's Chair 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 2023. Our press release is available, along with PDFs of our prepared remarks and financial results, on Adobe's Investor Relations website. Everything discussed today, including our financial targets and product plans, reflects information as of today, June 15th, and includes forward-looking statements that carry risk, uncertainty, and assumptions. Actual results could differ materially from what those statements set forth. To learn about these risks, please review the factors covered in today's press release and in Adobe's SEC filings. Today we'll address both GAAP and non-GAAP financial measures. Our reported results include GAAP growth rates and constant currency rates. Unless stated otherwise, Adobe's executives will refer to constant currency growth rates throughout this presentation. Reconciliations 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 thanks for being with us. It was a remarkable quarter for Adobe, with revenue hitting a record $4.82 billion — that's 13% growth compared with a year ago. On a GAAP basis, earnings per share came to $2.82 for the quarter, while non-GAAP earnings per share were $3.91. These results reflect robust demand in Creative Cloud, Document Cloud, and Experience Cloud, and we saw especially strong performance in digital media ARR. Adobe's purpose — transforming the world via personalized digital experiences — matters more than ever now, since digital keeps swiftly reshaping how we work, live, and play. Our pioneering developments, such as the new Adobe Express, the debut of Firefly, our collection of creative generative AI models, copilot features inside our creative apps, including Photoshop and Illustrator, AI-driven improvements in Acrobat, a brand-new product analytics offering, plus the newest capabilities in Real-Time CDP, are enabling a constantly growing customer base to envision, produce, and ship exceptional content and experiences; we're carrying out our plan to unleash creativity for all, speed up document productivity, and power digital businesses. Each disruptive technology has brought exciting chances for Adobe to innovate and expand our addressable market opportunity. That held true for cloud computing, mobile, and AI. Through Adobe Sensei, we've introduced hundreds of AI innovations, for example Neural Filters in Photoshop, Liquid Mode in Acrobat, and Customer AI in Adobe Experience Platform. Our sustained R&D spending has made possible the swift creation and rollout of Firefly, our generative AI technology; we're confident generative AI will fuel even greater accessibility and uptake of our products. Data, models, and interfaces form the core of our generative AI approach. Our abundant data sets spanning creativity, documents, and customer experiences let us train models on the finest quality assets. In the areas where our domain expertise runs deep — imaging, vector, video, documents, and marketing — we'll build foundation models. By embedding generative AI as a copilot throughout our remarkable range of interfaces, we're bringing it to life to deliver magic and productivity gains for a wider set of customers. Since launching in March, Firefly has seized the world's imagination, surpassing 0.5 billion generations, and we've only just begun. Companies worldwide rely on our digital experience business to power personalized customer engagement, helping them achieve experience-led growth. We're rolling out an inventive product roadmap and weaving Sensei GenAI services throughout Experience Cloud. Last week, we held a successful EMEA Summit, with thousands of customers and partners showing tremendous excitement, which underscores that digital is a crucial imperative across industries. Adobe's category, leadership, and mission-critical products will keep fueling our growth; for FY 2023, we now anticipate Creative Cloud and Document Cloud finishing the year above the revenue and ARR targets we previously issued, while Digital Experience will land slightly under our earlier annual target, reflecting today's enterprise spend environment. Thanks to our pioneering innovation and steady execution, we're happy to lift our total Adobe annual revenue and EPS targets. David, over to you.

Thank you, Shantanu, and good morning, everyone. For a long time, Adobe's purpose has been to bring creativity within reach of everybody, and right now that goal is achievable to a greater degree than at any previous point, thanks to artificial intelligence. The launch of the fresh Adobe Express together with Firefly will be remembered as a defining milestone in the story of our creative business. Through these inventive offerings, along with our generative AI copilot inside our flagship applications, we will strengthen our position as leaders across essential creative fields including imaging, design, video, illustration, animation, and 3D, while also drawing in a global audience that keeps expanding. During Q2, our net new creative ARR came to $354 million, alongside revenue totaling $2.85 billion, representing growth of 14% compared with the same period a year earlier. Our enthusiasm about the generative AI roadmap is immense, since it will open Adobe products to an even wider population while sharply boosting efficiency for the customers we already serve. Customer fascination with Firefly is enormous, and it stands apart from competitors in the marketplace. We are embedding it straight into our product workflows, functioning as a copilot that speeds up ideation, exploration, and production from start to finish. On the business and innovation side, a few standout items: Firefly moved into beta. It's Adobe's pioneering set of generative AI models for creativity, and there's also adobe.com/firefly, a destination where people can create and refine their work. To build that first Firefly model, Adobe drew on Adobe Stock imagery along with other openly licensed assets, aiming to deliver output that's professionally graded and safe for commercial use. Firefly-driven features now sit inside Photoshop in a smooth, integrated way, opening up fresh levels of creative precision and possibility. And the response to Photoshop's Generative Fill copilot has been nothing short of explosive across social media. So far, over 500 million assets have been created by users on the Firefly site and inside Photoshop — that puts both of them among the most successful betas we've ever launched. Pushing this innovation even further, we rolled out Generative Recolor in Illustrator earlier this week, and it will serve a similar role as a generative AI copilot for millions of designers as they work through iterations and reshape vector art. On top of that, we released a brand-new Adobe Express that includes Firefly generative AI features, changing how everyone — whether they're students, small business owners, or marketers at big organizations — approaches designing and sharing content that gets noticed. With Adobe Express, the capabilities found in Photoshop, Illustrator, Premiere, and Acrobat are combined — blending strength and accuracy with rapidity and ease of use. Response to the open beta has been extremely positive, particularly regarding the groundbreaking tools for editing video. Through the enterprise version of Adobe Express and Firefly, anyone working at a company will be able to participate in creating content, campaigns, and websites together with Experience Cloud. New text-based editing powered by AI and automatic tone mapping in Premiere Pro allow those working with video to get more done. An expanded Frame.io platform, which now supports working together across PDFs and images in addition to video, boosts the value of Adobe's Cross Cloud Content Supply Chain offering. We rolled out a major update to Lightroom Mobile, and it now allows you to bring in photos straight away from Apple, iCloud, and the Android Gallery — something that makes our growing base of mobile-first and mobile-only users even stronger. Momentum continues to build across our ecosystem of strategic partners, and that drives both product awareness and top of funnel for Adobe. Google described Adobe Firefly as a premier generative AI partner for Bard, with Firefly powering text-to-image capabilities. Adobe and NVIDIA stated that the two companies will collaborate on generative AI optimizations that cover both hardware and software. During WWDC, Apple demonstrated how Lightroom will let users edit photos on the Vision Pro VR headset. Momentum continues across routes to market and customer segments, among them key enterprise wins with EY, Government of the Philippines, NVIDIA, Omnicom, TAFE NSW, and WPP. Additional customer value, plus multiple new monetization opportunities, come from our generative AI offerings. First, consumers will get Firefly as a standalone freemium offering, and there's also an enterprise offering announced last week. Second, higher ARPUs and retention will be driven by copilot generative AI functionality inside our flagship applications. Third, subscription credit packs are going to be made available for customers needing to generate greater amounts of content. Fourth, developer communities will get access to Firefly APIs, and enterprises will be allowed to create exclusive custom models using their proprietary content. To wrap up, we're seeing promising new avenues for bringing users into Express, Creative Cloud, and Document Cloud through our industry partnerships, plus Firefly. Our top priority at the moment is driving widespread adoption of Firefly, and we'll roll out specific pricing later in the year. Switching over to Document Cloud now. PDF has emerged as the standard format for unstructured data globally, and companies of every size are looking to Adobe for help in streamlining and automating workflows built around documents. Adobe Document Cloud delivers a broad suite of widely used offerings, boosting document productivity on any device by embedding PDF services directly into Acrobat; during Q2, revenue for Document Cloud hit $659 million, up 14% compared to the same period last year. We brought in $116 million in net new Document Cloud ARR, and our ending ARR rose 22% compared with a year earlier. On the business and innovation side, several things stood out. Acrobat Web monthly active users grew substantially, fueled by people searching for Acrobat verbs and given an extra push by a surge in PDF consumption via our Chrome and Edge extensions. PDF collaboration services have seen viral adoption, which is both lifting active usage among current users and forming a growth loop that draws new users into the Acrobat ecosystem. Mobile is gaining momentum, both in app store downloads and in documents consumed in Liquid Mode. And new workflows linking Acrobat and Express let users weave documents smoothly into their creative process. Express can now import and edit PDFs with complete fidelity, letting people create documents that look great. We're seeing strong traction across our distribution channels and various types of customers, with notable enterprise deals closed at Boston Consulting Group, Cushman & Wakefield, Novartis, T-Mobile, and WPP. It's Acrobat's 30th birthday today — a big moment that fills us with both inspiration and humility. PDF and Acrobat matter more right now than they ever have. We take enormous pride in how PDF continues to transform digital documents, fueling communication and productivity for billions of people every day, and we believe the years ahead will bring even more. Our planned purchase of Figma will broaden the market we can serve, and it's been a pleasure hearing from customers, partners, and industry analysts who feel enthusiastic about what this combination will make possible. We remain in discussions with the UK's Competition and Markets Authority, the European Commission, and the US Department of Justice while they carry out their regulatory reviews, and because the case is so strong, we expect the deal to be completed by the end of 2023. Adobe's Digital Media business has tremendous momentum. We're quickly rolling out pioneering innovations throughout Creative Cloud and Document Cloud. We now reach a wider customer base than at any previous point, thanks to an expanding product lineup. Meanwhile, our strong market execution and our proven method of running the business on data are driving growth across both recently launched and long-established offerings. Given this tailwind, we are raising our targets for net new Digital Media ARR as well as revenue for fiscal 23. At this point, I'll pass it to Anil.

Appreciate that, David. Hi, everybody. During the second quarter, we kept generating robust expansion within our Experience Cloud operation, reaching $1.22 billion in revenue. Subscription revenue came in at $1.07 billion, which marks 14% growth compared with the same period a year earlier. Interest from customers in the digital experience space is still elevated. We were thrilled last week to spend time alongside thousands of customers and partners at EMEA Summit. Organizations of every size and across every industry globally are leaning more and more on digital channels to interact with customers and produce experience-led growth. They are choosing Adobe as the partner they trust for that journey. Adobe Experience Cloud provides the broadest collection of solutions spanning content and commerce, data insights and audiences, customer journeys, and marketing workflows. Our real-time customer data platform, built natively on Adobe Experience Platform, gives businesses one unified view of their customers' data spanning every channel. Real-Time CDP now produces more than 600 billion predictive insights annually. Customers are building over 30 trillion audience segments daily. 87% of Fortune 100 companies now rely on Experience Cloud. For instance, Prudential Financial leverages our cross-cloud offerings to run its end-to-end customer experience management workflows, going from producing high-impact content with Creative Cloud and Express to delivering personalized customer experiences at scale with Adobe Experience Platform. Beyond that, Prada relies on Real-Time CDP and Journey Optimizer to link digital and in-store customer experiences in real time, all while reimagining shopping experiences using Substance 3D. Our vision for Experience Cloud centers on delivering personalized experiences at scale. Generative AI's power speeds up our capacity to accomplish that. We are rolling out Sensei GenAI innovations to reimagine the tasks marketers perform and the way they perform them. With Sensei GenAI serving as their copilot, marketers are able to generate audiences with high precision and design tailored customer journeys for those audiences. They can activate personalized campaigns for their audiences using on-brand visual content made with Adobe Express and Firefly, along with compelling offers generated by Experience Cloud applications, drawing on real-time customer profiles in AEP. Conversational natural language interfaces driven by Sensei GenAI will make it considerably simpler for any marketer to pull insights from Customer Journey Analytics and apply those insights in real time to optimize their campaigns; these represent only a handful of the transformational innovations that Sensei GenAI is delivering to Experience Cloud. Business and innovation highlights include robust demand for Adobe Experience Platform and native applications, with our book of business now surpassing $500 million. During this quarter, we introduced new capabilities in Real-Time CDP that will let brands scale first-party data with lookalike audiences, greatly speeding up the delivery of personalized experiences. General Motors, Henkel, Major League Baseball, ServiceNow, and TSB Bank. The introduction of Adobe Product Analytics, which merges customer journey insights with product analytics to drive a new level of product-led growth. A comprehensive Content Supply Chain solution that links content creation and delivery across Experience Cloud and Creative Cloud to help enterprises effectively manage their content demands. We're collaborating with companies such as Accenture, IBM, Omnicom, and Publicis to expand how Content Supply Chain gets delivered to shared clients. There's robust appetite for Workfront, which is fast turning into the go-to option for teams wanting to plan, coordinate, and roll out tailored campaigns at scale. Adobe Mix Modeler is now available worldwide, giving marketers an AI-driven self-service tool to precisely evaluate campaigns spanning paid, owned, and earned channels. Fresh AI advancements in Adobe Experience Manager deliver live content performance insights plus forecasts about which assets will resonate most with each audience segment. We've also been recognized as leaders in analyst reports, among them the IDC MarketScape for Retail Commerce Platforms, along with a favorable rating in Gartner's yearly review of Adobe's enterprise strategy. Notable customer victories include DSV, ICICI Bank, JP Morgan, Kroger, Omnicom, Royal Canin, ServiceNow, T-Mobile, and Volkswagen. Although demand overall remains robust and our win rates are still solid, heading into the second half we're observing certain projects getting deferred amid the present enterprise spending climate, something we've factored into our revised annual targets. Given that digital has emerged as the leading way to connect with and involve customers, Adobe stands in a distinctive spot to continue succeeding through inventive offerings that drive comprehensive customer journeys and let enterprises pursue growth alongside profitability at the same time. Now I'll hand things over to Dan.

Thanks, Anil. To kick things off today, I'll recap how Adobe did in the second quarter of fiscal 2023, walk through the growth drivers across our businesses, and then wrap up with our financial targets. Our Q2 results show robust demand spanning a varied lineup of products — everything from individual buyers coming in through digital channels all the way to the biggest enterprises in the world. As we expand existing businesses and keep delivering top-tier profitability, Adobe keeps nurturing and putting money into breakthrough new technologies that will reshape how people work and open up access to our tools for everyone. I feel a great deal of pride in how Adobe has responded to today's environment and positioned itself for success. During the second quarter, the company achieved an all-time high in revenue, bringing in $4.82 billion — a 10% increase compared with the same period a year earlier, or 13% when measured in constant currency. Some of the notable business and financial points include: GAAP diluted earnings per share stood at $2.82, and on a non-GAAP basis, diluted earnings per share were $3.91. Revenue from Digital Media amounted to $3.51 billion. Net new Digital Media ARR totaled $470 million. Digital Experience brought in $1.22 billion in revenue. Operating cash flow was $2.14 billion. The quarter closed with RPO of $15.22 billion, and roughly 2.7 million shares were repurchased during that time. In our Digital Media business, second-quarter sales reached $3.51 billion — a 10% increase compared with the same period a year earlier, and 14% when measured in constant currency. At the close of the quarter, Digital Media ARR stood at $14.14 billion, representing 15% growth year over year in constant currency. Creative revenue totaled $2.85 billion, rising 9% from a year ago, or 14% in constant currency. During Q2, we generated $354 million in net new Creative ARR, as demand for our products remained strong in digital channels all quarter long. Growth in Creative during the second quarter was driven by new users joining across regions, customer types, and Creative products, supported by focused campaigns and promotions as well as by putting insights from our data-driven operating model to work. Additionally, adobe.com delivered robust visitor numbers and conversion rates. Contributions came from single-app subscriptions, with imaging enjoying a particularly good quarter thanks to the Everyone Can Photoshop initiative. Photography achieved significant expansion, propelled by rising interest in Lightroom Mobile. Another solid quarter came from Adobe Stock and our other emerging ventures, as exiting ARR for Frame.io alongside Substance climbed beyond 50% compared to last year in constant currency. Our rollout of the new Acrobat CC offering with integrated sign capabilities kept gaining traction, and we found success among enterprise customers as Creative and collaboration solutions continue to be embraced enthusiastically. Revenue for Adobe's Document Cloud reached $659 million, marking an 11% increase from a year earlier, which amounts to 14% in constant currency. During the quarter, Document Cloud's net new ARR reached $116 million, pushing us past the $2.5 billion mark, and constant-currency exit ARR rose 22% compared with a year earlier. Several factors fueled Document Cloud's expansion in Q2: robust subscription interest in Acrobat, including integrated sign functionality spanning various customer segments and regions, which was propelled by targeted promotions, DDOM insights, and the Acrobat's Got It campaign. In addition, we monetized new customers effectively via the Acrobat web funnel, where monthly active users climbed more than 50% versus the prior year, reflecting the ongoing success of our product-led growth approach. We saw momentum in Acrobat mobile downloads, conversion, and engagement, and Liquid Mode usage rose more than 40% compared with a year earlier. We also saw enterprise strength, fueled by seat expansion. During this quarter, perpetual sales made up under 5% of Document Cloud revenue. Now moving to our Digital Experience segment: in Q2, we brought in $1.22 billion in revenue, reflecting 12% growth year-over-year, or 14% in constant currency. Q2 subscription revenue came to $1.07 billion, reflecting 11% growth year-over-year, or 14% in constant currency. For Digital Experience in Q2, several things fueled our growth. Demand was strong for Adobe Experience Platform along with its native applications, including Real-Time CDP, Customer Journey Analytics, and Adobe Journey Optimizer. Subscription revenue tied to AEP and those apps climbed over 60% compared with the same period a year earlier. Content and commerce also performed well, with AEM as a cloud service posting significant book of business gains during the quarter. On top of that, customers showed interest in our Content Supply Chain solution. Enterprises are responding to the idea of linking content creation workflows directly with customer experience management, and that appeal is pushing faster growth for Workfront and our content offerings. We keep seeing customers get real value out of what we offer, and that drives solid retention across all our segments. It also fuels momentum in transformational deals with big enterprises that are bringing on our platform and full end-to-end application suite — T-Mobile and Omnicom are examples. On a GAAP basis, Adobe's effective tax rate for Q2 came in at 21.5%, while non-GAAP it was 18.5%, both matching what we expected. RPO at quarter's end stood at $15.22 billion, up 10% from a year earlier, or 13% once you account for a 3% FX headwind. We closed Q2 with $6.60 billion in cash and short-term investments, and operating cash flow for the quarter reached $2.14 billion. During Q2, we also signed a $1 billion share repurchase agreement. At the moment, we've got $4.15 billion left under the $15 billion authorization approved back in December 2020, which runs until the close of fiscal 2024. Given how our business is performing and taking into account where the macroeconomy stands right now along with typical summer patterns, here's what we're aiming for in Q3: Adobe's total revenue landing somewhere between $4.83 billion and $4.87 billion, roughly $410 million in net new ARR for Digital Media, Digital Media segment revenue between $3.55 billion and $3.57 billion, Digital Experience segment revenue in the range of $1.21 billion to $1.23 billion, Digital Experience subscription revenue of $1.08 billion to $1.10 billion, a tax rate around 21.5% under GAAP and 18.5% on a non-GAAP basis, GAAP earnings per share between $2.82 and $2.88, and non-GAAP earnings per share of $3.95 to $4.00. Thanks to how the business did in the first six months and our ongoing push to grow in a disciplined, profitable way, we're lifting the fiscal 2023 full-year goals we'd set for EPS and net new Digital Media ARR. On top of that, we're increasing our overall Adobe revenue goal for fiscal 2023, as Digital Media is now tracking above the numbers we gave earlier while Digital Experience comes in a bit below. Turning to fiscal 2023, we now expect Adobe's total revenue to land somewhere in the range of $19.25 billion to 19.35 billion. For Digital Media, net new ARR should come in at approximately $1.75 billion, with segment revenue of $14.10 billion to 14.15 billion. Our Digital Experience segment is projected at $4.85 billion to 4.90 billion, and subscription revenue within that segment at $4.30 billion to 4.35 billion. On taxes, we're looking at roughly 21.5% under GAAP and 18.5% on a non-GAAP basis. GAAP earnings per share should be $11.15 to 11.25, while non-GAAP earnings per share are expected at $15.65 to 15.75. As for Q4, we're anticipating a strong close to the year, with robust customer demand for both our Digital Experience and Digital Media solutions. Looking at our updated goals for fiscal 2023, we expect meaningful operating margin growth during the back half of the year relative to the same period in fiscal 2022. All things considered, Adobe's performance across the first six months of the year has me feeling great. It's rare for a company to achieve robust growth on both revenue and earnings while navigating a tough climate — and at the same time bring breakthrough innovations to market that will fuel expansion over the coming ten years. Thanks to these innovations, customer interest in what we offer is running high, and that positions fiscal 2023 to be yet another fantastic chapter for Adobe. Over to you, Shantanu.

Thanks, Dan. The solid numbers we posted for Q2 really highlight the momentum we've got and the big opportunities in front of us throughout the business. It makes me proud to see our team members worldwide keep pushing standards higher, building what comes next, and embodying our purpose. We're still putting money into bringing on new college graduates and interns so that the sharpest talent lands at Adobe; this is a truly thrilling moment for the company. Interest in the products and services that define our category keeps rising. Our engine of innovation is producing Adobe Magic for a growing group of customers globally, and because we're executing well, we can go after an enormous market opportunity. Adobe is set for yet another remarkable year in 2023, as we keep generating top-line growth and margins while putting resources into foundational technologies that will extend Adobe's success for decades to come. Thanks. Now it's time for questions. Operator?

Hello. Fantastic, thank you. Good afternoon to everyone. I appreciate the chance to ask. Congratulations on the performance. So, clearly, the natural place to begin is Firefly. We've had quite a few inquiries regarding the way this changes the market's size. You provided helpful remarks, covering both monetization and your perspective on the market. Could you give a bit more background on the early indicators of demand and what you anticipate in terms of how this appears, on the user side of the market as well as the general pace of content creation? Thanks.

Absolutely. Glad to discuss it. If it isn't obvious from this call, we're truly thrilled about Firefly and what it stands for. The initial reaction from customers and the community has been nothing short of electrifying for everyone here. You heard us mention that more than half a billion assets have been produced already. Generations coming from Photoshop came in 80 times greater than our original projections as we entered the beta. Naturally, we feel very good about the quality of what's being created and our capacity to scale the product to handle it. The social buzz has been amazing. The Photoshop community is behaving exactly as it always has, applying the product—Firefly and Photoshop alike—in manners we never even imagined when we first designed the feature set; it's wonderful to witness all this organic growth and excitement building. As we mentioned, we're also enthusiastic about what this means in terms of business opportunity. When it comes to retention, we believe the value we deliver in the flagship applications will be excellent for current users; regarding top of funnel, we believe this allows us to reach billions of new users since it renders the act of creating more accessible; as for conversion, we're extremely eager about what this could do for onboarding new users, across Photoshop and Illustrator as well as Express. It makes bringing new customers on board, particularly achieving early success, much more attainable for them. It brings in fresh offers with adobe.com/firefly as a destination we can monetize, plus everything we discussed at Summit last week concerning what this could become as an enterprise-grade offering. Naturally, alongside all that, we have a chance to sell subscription credit packs for upsell possibilities. Once you add it all up, we see an ARPU opportunity, we see an opportunity in net user numbers, and also an opportunity from retention and LTV. Now we anticipate all of this unfolding across many years. At present we're highly focused on acquiring users. None of this, none of this do we anticipate affecting our Q3 numbers; we'll begin seeing a portion of it in Q4, though we don't anticipate it being material. Like I said, we anticipate that it will scale up across the coming several years, and we'll provide further details on that in the months to come.

There's obviously a great deal to feel enthusiastic about in that area. Appreciate it.

All right, wonderful. Hi there, everyone. Thanks for letting me ask my question. Nice work on such a strong quarter. David, this one might be for you — I'd like to focus on that idea regarding Firefly and producing billions of potential users in the coming years. Of course, things remain quite early with Firefly, and with Adobe Express too. What I'd like to know is what you're observing with Adobe Express and how Firefly can create some of that demand, or draw some of that demand through, for Express, on the consumer side as well as the enterprise side?

Yes. We're thrilled on both of those fronts. As you probably saw, a beta release of Express went out last week, and it's a huge update to Express. In fact, it's an entirely new product, essentially rebuilt from scratch, and our belief is that this is something everyone can use. The reaction has been truly remarkable. Feedback across the board has been extremely favorable, as you pointed out, thanks to the Firefly integration, but also because Firefly can plug straight into user flows and user journeys for utilizing and generating video content, and for PDF integration as well, so users can import and construct, you know, complete workflows that produce fantastic marketing collateral using PDF. We've observed CC users — current subscribers to CC — who are very enthusiastic about the workflows we've rolled out with Illustrator and Photoshop. Those using Illustrator can take what they've made in Illustrator, move it into Express, add animation, and distribute it to social. People on Photoshop are taking their whole collection of Photoshop templates and turning that into the basis for simple editing and sharing across their marketing teams. That's genuinely been, you know, an amazing vote of confidence from everybody we've watched using the beta, which also fueled the announcements from last week, particularly regarding Express and Firefly bundled together for enterprises. The interest generated by that announcement, in terms of enterprise attention and pipeline creation tied to it, has been outstanding. What excites us most about it is that it unites our clouds. You know, creative professionals can create in Photoshop and Illustrator and our other flagship apps. Marketers can take that content and edit it faster in Express. Workfront and Frame.io orchestrate both of those, and everything gets pushed into AEM. Truly a central piece of our Content Supply Chain. It genuinely feels like a turning point for Express too.

Saket, perhaps I could tack on a couple of points there. To start, when it comes to consumers and that fresh Express offering, anything you're able to picture, you're able to accomplish. Honestly, I find that quite compelling. And inside a company, in a similar way to Acrobat, our goal is for each worker at an enterprise to possess both Acrobat and Express together.

That's really useful, thank you.

Thanks a lot, and congratulations on the quarter. This is probably for David once more. David, I'm just sort of wondering — when you look at the enterprise side of the visual media business, how ready would you say customers are, from both a content standpoint and a data standpoint, to adopt some of the generative AI features you're launching? I'm certain this ties into Anil as well, around Adobe Experience Manager. I was just hoping you could address the data side of it, and how that connection could end up benefiting, honestly, both the Digital Media and Digital Experience sides. Thanks.

Absolutely. Let me offer a couple of thoughts, and then I'll pass it over to Anil too. Like we've discussed, Firefly has had a handful of foundational principles from day one. Number one is the quality of what it produces, correct? For text, we can do text to imaging and text to text effects. Vectors are in there at this point. Video design and 3D generation are things we're actively working on; we've got this whole array of amazing content that we believe will serve as the building block for everything required when it comes to enterprise content velocity. Second, we're constructing it so that it can plug into the workflows people already use. We've already begun announcing integrations with Photoshop, Illustrator, and Express. You'll see us keep adding those integration points, and you'll also see us bring it more directly into the digital experience workflows too. Third — and this may be the most significant — we've managed, thanks to how we share and stay transparent about the sources of our content, to assure customers that anything they generate with Firefly is commercially safe to use. No copyrights get violated, diversity and inclusion sit right at the center, and no harmful imagery gets produced. We can hand them that reassurance, and on top of that, through our enterprise plans, offer indemnification for whatever content gets created. Those factors, in my view, really help move them to engage.

Great. Yeah, to build on your point. When you consider Adobe Express and Firefly, plus the Sensei GenAI services we introduced for digital experience, this arrives as marketing undergoes a major transformation—moving away from mass marketing toward personalized marketing at scale. To achieve personalization at that scale, everything must be tailored: content, audiences, customer journeys. That's our distinctive edge; we hold the data inside the Adobe Experience Platform, with real-time customer profiles; next, we have the models we collaborate with, such as Firefly; and then we provide the interfaces via applications like Adobe Campaign, Adobe Experience Manager, and others; we can bring all of that together in a way that's truly consistent with the data governance that people, that customers demand, ensuring their data is utilized solely within their own context, and leverage that for personalized marketing at scale. It genuinely meshes quite well. Perhaps, considering the level of enthusiasm we have about this, Kirk, three brief points. First, it truly enables us, inside an organization, to have each marketer take part in producing and delivering content, so agility for an enterprise is excellent. Second, I might add to what both Anil and David mentioned; we can now build custom models. Imagine, if you're a firm like Coke or a firm like Disney, and you wish to develop these campaigns where you'd like to experiment with various options, the Firefly model can be tailored for them, and that combined with what we offer through Express and AEM, genuinely makes it possible to customize for that specific company. I also wanted to make clear that the whole go-to-market is already fully aligned within the organization, we have a single enterprise sales force engaging them across Express, Creative Cloud, and Experience Cloud solutions.

Thanks.

Hey everyone, Arseniy here filling in for Alex Zukin. Alex is on a flight at the moment, though he does say it's nice to find out who the actual AI victors are. So, on to what I wanted to ask — the DM side of the business keeps beating expectations in a really striking manner. Could you walk us through a few of the levers underneath that and rank them, in terms of what's powering these results — is it content demand, adoption of the newer offerings, or wins from cross-selling?

Could you help break down the different layers behind that success? And then regarding Gen AI, you've rolled out new offerings with Generative Fill and, more recently, Generative Recolor. Given the traction you're seeing online among the creative community, how does that help shape your understanding of where the biggest monetization opportunity lies? Thanks.

Absolutely. Well, to begin with, I appreciate the question. We really do feel we've gotten off to a terrific start across the first half of the year. When we examine it, the momentum came from a wide range of areas. Traffic heading to adobe.com and at the top of funnel stayed robust, honestly, through the entire quarter. It's obvious our messaging is landing well with an ever-wider set of audience, audiences we're able to reach. Next, we experienced solid conversion. The product-led growth investments we've made over a number of years are now beginning to bear fruit. Adobe.com is somewhere we've concentrated on for quite a while. We've kept seeing gains when it comes to customer journey efforts and conversion; more lately we've been putting considerably bigger investment into product-led growth motions across our core flagship applications, such as Photoshop and Acrobat, too; we've been tapping a great deal of Anil's digital experience products, which let us personalize at scale when it comes to in-product experiences there. Finally, it seems we genuinely began seeing a nice inflection across our mobile applications. Specifically, Acrobat on mobile and Lightroom Mobile did really well this quarter too; beyond that, as Dan said during his opening comments, emerging products such as Substance and Frame keep growing quite well and truly sort of slipstream into the Content Supply Chain discussion we're having with enterprise customers. Honestly, enterprise appetite for content creation keeps expanding. Anil mentioned last week at EMEA Summit that our customers anticipate it growing 5x where content creation is concerned over the coming few years. We keep seeing additional pull for our creative apps. Plus, we're beginning to see enterprises put far more into Acrobat penetration within their accounts. They genuinely want more people to have Acrobat from Adobe. That's only naming a handful of items. Things are coming together wonderfully for the year, and we're quite enthusiastic about where the business is headed.

Thanks a lot, and nice work on the solid quarter plus the raised outlook. Dan, could you share some perspective on how Gen AI will affect margins? Particularly, you know, 500 million assets were created during the beta alone, and once everything rolls out, the potential for substantial Gen AI is going to be huge. How should we frame that in our minds?

Appreciate that question, Mark. You know, when I look back at this company's path, we have built a long track record of generating strong, profitable growth. We bring innovation into top line expansion, and we do so with a great deal of discipline, which produces margin and cash flow for investors. I expect this to unfold in much the same way. These are genuine investments. They are significant investments that we are making to unlock the magic of the Adobe technology platform and to weave it smoothly throughout the product portfolio. Regarding the cost drivers, we consider training, we consider inference, we consider storage costs. The company is ruthlessly prioritizing where the money goes and which projects get funded, so we create a spend envelope that brings this technology to life very rapidly. You can observe that discipline at work; we have been at this for multiple quarters. You see the strong print on profitability in Q1. We came through with another strong print in Q2. Looking toward the latter portion of the year, once again, you're seeing second half, year-over-year, second half over second half, indicating an uptick on the profitability side. We will remain focused on staying very disciplined, on how we prioritize what we take on and what we pass on, and on making sure we build the right kind of spend envelopes for this technology as we bring it to life. I think it's an and statement for us at the company and for what we've done over a very long stretch here. Drive innovation, drive strong top line growth, and accomplish that in a very profitable manner that's cash flow generative and value creative for investors.