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 fourth quarter and 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 we discuss on this call, including our financial targets and product plans, reflects information as of today, December thirteenth, and includes forward-looking statements that carry risk, uncertainty, and assumptions. Actual results could differ materially from what those statements set forth. To learn more about those risks, please review today's earnings release and Adobe's SEC filings. During this call, we'll cover GAAP and non-GAAP financial measures. Our reported results include GAAP growth rates as well as constant currency rates. Throughout this presentation, unless otherwise stated, Adobe's executives will refer to constant currency revenue growth rates. Reconciliations between the two can be found in our earnings release and on Adobe's IR website. I'll now hand the call over to Shantanu.

Thanks, Jonathan. Hello everyone, and I appreciate you joining. During Q4, we crossed $5 billion for the first time in one quarter, which is a record for the company. Adobe's top line was $5.05 billion, representing a 13% gain versus the same period last year. On a GAAP basis, quarterly EPS was 3.23, and non-GAAP EPS came to 4.27 — those figures rose 28% and 19%, respectively, compared with a year earlier. The fourth quarter wrapped up another record-breaking year for Adobe, as revenue totaled $19.41 billion, which is 13% higher year over year. For fiscal 2023, GAAP earnings per share stood at 11.82, and non-GAAP earnings per share reached 16.07, with both delivering 17% growth compared with the prior year. We finished the year with RPO totaling $17.22 billion. That result reflects just how essential our offerings are in a world that's digital first, and it also speaks to remarkable innovation across our product lines and outstanding execution. Our three clouds — Adobe Creative Cloud, Document Cloud, and Experience Cloud — now serve as the bedrock of digital experiences: starting at that first spark of inspiration, moving through content and media creation and development, and extending all the way to personalized delivery and activation on any channel. Adobe's purpose — transforming the world via personalized digital experiences — combined with the foundational technology platforms we deliver, sets us up for growth over the coming decade. We're proud to count ourselves among the most inventive, diversified, and profitable software companies anywhere in the world. In our view, each enormous wave of technological change creates once-in-a-generation chances to bring fresh offerings and answers to a customer base that keeps growing. AI and generative AI represent exactly that kind of opening, and we've already explained the approach we plan to take for putting money in and standing apart when it comes to data, models, and interfaces. We've carried out that plan successfully, and it's gratifying to see heavy customer adoption of several of our pioneering developments — among them the Firefly family of models, connections within Creative Cloud, Liquid Mode, ties throughout Document Cloud, AI capabilities inside our Real-Time Customer Data Platform, and linkages in Experience Cloud. We're still enthusiastic about the strategic opening with Figma to push product design forward together, speed up collaborative creativity online, and reshape what the future holds for creativity and productivity. As the European Commission, the Competition and Markets Authority in the U.K., and the U.S. Department of Justice carry out their regulatory assessments, we keep working with them. European regulators have laid out their initial objections—the EC through a preliminary statement, and the CMA through provisional findings flagging competitive issues. We take strong exception to both and are in the process of replying to each authority. Based on the schedules they've set, the EC will rule by February 5, while the CMA's target date is February 25. The DOJ hasn't set a fixed deadline for determining whether it will file a complaint, though we anticipate word before long. At this point, I'll hand things over to David, who will walk through the traction we're seeing in digital media.

Thank you, Shantanu. Hi, everybody. During the fourth quarter, we brought in net new digital media ARR totaling $569 million, alongside revenue of $3.72 billion, representing 14% growth compared with the same period a year earlier, driven by breakthroughs across both our creative and document offerings. Turning first to Creative Cloud: worldwide appetite for content keeps speeding up and remains a favorable force for this business. For creators working in imaging, photography, design, video, web, animation, and 3D, Creative Cloud continues to be the platform they choose. The swift tempo of our innovation in products and AI models is enabling a broad and expanding group — individuals, students, creative professionals, small business owners, and enterprises — to produce and earn from incredible content faster and more simply than at any point before; we were delighted to gather face to face with thousands of creators at Adobe MAX in Los Angeles and at our MAX event in Tokyo, while millions more in our community joined us online; we hit a record 300 million social interactions during the month after MAX. For Creative Cloud, Q4 was a record-setting quarter, generating $3 billion in revenue, up 14% year-over-year. Net new Creative Cloud ARR came to $398 million. Business highlights include robust digital traffic stemming from product innovation, social engagement, and our ongoing product-led growth initiatives, which produced record new commercial subscriptions during the quarter. Customer enthusiasm ran high thanks to general availability of our generative AI Firefly models and the ways they are integrated throughout Creative Cloud, with more than 4.5 billion generations since the March launch. We released three new Firefly models — Firefly Image 2 Model, Firefly Vector Model, and Firefly Design Model — delivering highly differentiated control through effects, photo settings, and Generative Match. In addition, we rolled out Generative Credits within our Creative Cloud subscription plans. Photoshop Generative Fill and Generative Expand reached general availability and are experiencing record adoption. They already rank among the most used features in the product. Adobe Illustrator saw advances with the launch of Text to Vector beta, letting users generate icons, scenes, subjects, patterns, and gradients. Improvements to Adobe Premiere Pro include a major performance boost in the timeline for quicker, smoother editing, new color preferences, and better tone mapping. Premiere Pro now has native integration with Frame.io, delivering faster content sharing and collaboration. By combining Adobe Express with Firefly, everyone from creative pros to beginners can rapidly go from ideation to task-based workflows in Express, greatly extending our reach and broadening our top of funnel. The suite of generative capabilities across Express — Text to Image, Text Effects, Text to Template, and Generative Fill — is fueling Express adoption and making it quicker and more enjoyable for users at every skill level. Express is now pre-installed on every new Chromebook, putting it within reach of students, educators, and anyone on Chrome OS. Adobe Stock maintained its momentum, enjoying its strongest year yet, powered by rising demand for high-quality image, vector, video, and 3D content. So, integrations between Creative Cloud, Express, and Firefly with Adobe Gen Studio — that lets people brainstorm, produce content, and work with stakeholders, all within their broader content supply chain. We're seeing really solid uptake in the mid-market and enterprise, fueled by upsells into Creative Cloud offerings that include Firefly. Some of the key customer wins worth calling out: CyberAgent, Deloitte, Discovery Communications, Nexstar Media, Pepsi, Publicis, and the United Nations. After a year of innovation unlike anything we've seen, we couldn't be more excited about the momentum in the creative business. It's been wonderful watching customers get excited about Firefly integrations across our apps — community engagement, social interactions, and creative marketing campaigns are all fueling organic brand search, volume, traffic, and record demand. We began rolling out new Creative Cloud pricing in select geographies back in November, but new paid subscriptions across our routes to market remain the main growth engine; heading into FY 2024, we're eager to build on this momentum. Now let's shift to Document Cloud. Digital documents are critical enablers in both our personal and professional lives. Document Cloud leads in digital documents, powering every common document action — editing, sharing, reviewing, scanning, and signing. Innovations in Document Cloud are pushing forward accessibility, comprehension, productivity, automation, and security in document workflows spanning web, desktop, and mobile. In Q4, Document Cloud revenue came in at $721 million, up 17% year-over-year. Net new Document Cloud ARR hit a record $171 million, and ending ARR rose 23% year-over-year in constant currency. On the business side, highlights include Acrobat Web growth, still an amazing source of customer acquisition, with monthly active users climbing over 70% year-over-year. There's also been a surge in link sharing usage for stakeholder collaboration around PDF files — up 400% year-over-year — which creates a viral growth loop drawing tens of millions of users into the Acrobat ecosystem; that's a terrific illustration of how we're scaling our PLG motions. Demand for Acrobat on mobile is strong too, with MAU crossing 100 million users in Q4. Liquid Mode has now delivered over 1 billion files to customers, showing just how essential this technology has become on mobile devices. Adobe Acrobat to Express workflows make importing, editing, and enhancing documents even simpler, so users can produce visually stunning PDFs. Notable enterprise customer wins include Alshaya, Bank of America, Department of Veterans Affairs, Mastercard, State Farm Auto Insurance, and Volkswagen. Just like in the creative business, we anticipate generative AI will bring added value and draw new customers to Document Cloud. Acrobat's generative AI capabilities — which will unlock new creation, comprehension, and collaboration functionality — are already available in a private beta. We expect a public beta to arrive in the coming months. It's been a remarkable year for the digital media business, with hundreds of transformative innovations introduced that are reshaping the future of creativity, productivity, and digital experiences. To top off this year's many accolades, Time Magazine named Adobe Liquid Mode, Photoshop Generative Fill, and Generative Expand among the best inventions of 2023. I'll now hand things over to Anil.

Appreciate that, David. Hi, everybody. For any company, in any sector, digital experiences have become essential — they let organizations large and small connect with and sell to buyers across the globe. Adobe's holiday shopping report, built on an analysis of trillions of data points, revealed that Black Friday and Cyber Monday each set records, reaching $9.8 billion and $12.4 billion respectively, up 7.5% and 9.6% versus last year. Our projection is that holiday 2023 spending in the U.S. by itself will top $221 billion. Adobe Experience Cloud sits in an ideal spot to seize this enormous worldwide opportunity. Businesses in both B2C and B2B are choosing Adobe Experience Cloud as the platform to speed up experience-led growth. Our top-tier solutions — covering data insights and audiences, content and commerce, customer journeys, and marketing workflow — give companies the power to generate customer demand, engagement, and growth, all while producing productivity gains at the same time. Our broad suite of applications, Real-Time CDP among them, is built natively on our highly differentiated Adobe Experience Platform, which gives companies a unified profile of every customer so they can deliver personalized real-time experiences at scale. Generative AI speeds up how fast we innovate throughout the Experience Cloud portfolio, letting us extend our capabilities to deliver personalized digital experiences. We've centered our work on three areas. First, augmenting our applications with an AI assistant that dramatically boosts productivity for existing users and offers an intuitive conversational interface so more knowledge workers can pick up our products. Second, reimagining current Experience Cloud applications, as we did with Adobe Experience Manager; and third, creating completely new solutions designed for the age of Generative AI, such as Adobe Gen Studio; in Q4, we kept generating robust growth in the Experience Cloud business among our enterprise and mid-market customers, reaching $1.27 billion in revenue. Subscription revenue came to $1.12 billion, which is 12% growth year-over-year. Business highlights include strong momentum with Adobe Experience Platform and native applications, inclusive of Real-Time CDP, Adobe Journey Optimizer, and Customer Journey Analytics. AEP posted its first $100 million quarter of net new business in Q4 and closed out the year with a greater than $700 million annualized book of business. Launch of Adobe Gen Studio, an end-to-end solution that unites best-in-class applications across Creative Cloud, Express, and Experience Cloud, with Firefly generative AI at the core to help brands meet the rising demand for content. Gen Studio delivers a comprehensive offering spanning content ideation, creation, production, and activation. We're seeing enormous interest in Gen Studio from brands such as Henkel, Pepsi, and Verizon, and agencies such as Publicis, Omnicom, and Havas, as they seek to speed up and optimize their content supply chains. Reimagine customer experiences with the all-new Adobe Experience Manager Sites that let businesses and developers rapidly test and optimize web content, deliver the fastest possible page load times, and maximize SEO rankings, Lighthouse scores, and conversion. Adobe was named a leader in over 25 industry analyst reports this year, including the Gartner Magic Quadrants for Digital Experience Platforms, B2B Marketing Automation Platforms, and Multichannel Marketing Hubs. Last week’s release of the Forrester Wave for Digital Experience Platforms had Adobe earning the top marks in strategy. Among the notable customer wins are Alshaya, Coca-Cola, EY, IBM, Marriott, Riyadh Air, Santander Brazil, Sony, Southern Graphics, Unilever, Vanguard, and Verizon. When we talk with these and other clients globally, senior executives keep putting experience-driven growth at the top of their agenda as a vital business priority, even as budgets remain under the microscope. With products that deliver end-to-end customer experiences and let organizations pursue growth and profitability at the same time, Adobe Experience Cloud is in a strong spot to continue succeeding. We look forward to carrying our leadership and momentum through 2024. Now I’ll hand things over to Dan.

Thank you, Anil. Today's earnings release addresses our Q4 performance along with the full FY 2023 outcome. What a remarkable year 2023 turned out to be! Because we know our customers deeply, keep innovating on products, and execute extremely well, we posted robust financial results and margins of the highest caliber, setting up the business for many years of ongoing expansion. During FY 2023, Adobe brought in record revenue totaling $19.41 billion, reflecting 10% growth compared with the prior year, or 13% when measured in constant currency. For the year, GAAP EPS came to $11.82, while non-GAAP EPS reached $16.07, with both figures up 17% year-over-year. For fiscal 2023, our business and financial highlights were as follows: digital media brought in $14.22 billion in revenue, with net new digital media ARR reaching $1.91 billion, while digital experience revenue came to $4.89 billion. Cash flows from operations were $7.3 billion, we exited the year with RPO of $17.22 billion, and we bought back roughly 11.5 million shares of our stock over the course of the year, spending $4.63 billion to do so. During the fourth quarter of FY 2023, Adobe's revenue was $5.05 billion, which represents 12% growth compared with the prior year, or 13% on a constant currency basis. GAAP diluted earnings per share in Q4 came in at $3.23, while non-GAAP diluted earnings per share reached a record $4.27, rising 28% and 19% year-over-year, respectively. During the quarter, our key business and financial results were as follows: digital media brought in $3.72 billion in revenue, net new digital media ARR hit $569 million, digital experience revenue totaled $1.27 billion, we generated $1.6 billion in cash flows from operations, added roughly $1.5 billion to RPO — the largest quarter-over-quarter gain we've ever posted — and bought back about 1.8 million shares of our stock. Turning to the digital media segment, Q4 revenue was $3.72 billion, which represents a 13% year-over-year increase, or 14% when measured in constant currency. Net new ARR for the fourth quarter came in at $569 million, a quarterly record on a constant currency basis, and we ended the quarter with digital media ARR of $15.17 billion. Creative revenue came in at $3 billion, which represents a 12% increase compared to the same period last year — or 14% when you strip out currency effects. During the quarter, we brought in $398 million in net new creative ARR. Several things drove that outcome: strong customer acquisition throughout the quarter, along with momentum we carried through the heaviest weeks of holiday shopping. When it came to fourth quarter creative growth drivers, we saw individual subscriber growth, which was fueled by targeted campaigns and a high volume of web traffic. It was also a very strong quarter for Creative Cloud all-app subscriptions, spanning customer segments and geographies, with particularly notable strength in emerging markets. We also saw sales of CC Single Apps, including a robust quarter for our imaging and photography offerings. On top of that, there was continued expansion of our Frame.io offering and Adobe Stock, which wrapped up its strongest year ever when it comes to net new ARR. On the education side, back-to-school buying drove demand, and graduating students entering the workforce moved over to our full-priced options. We also saw the typical fourth-quarter enterprise momentum, which included substantial upsells of our new Firefly and Express products. Document Cloud revenue at Adobe came in at $721 million, a 16% increase versus the prior year, or 17% on a constant-currency basis. During the quarter, Document Cloud added $171 million in net new ARR, which was a record. Expansion in Document Cloud during Q4 was powered by Acrobat subscription demand across all customer segments, every route to market, and all regions. Our free-to-paid conversion funnels continued to deliver strong results, especially Reader on desktop and Acrobat Web. Collaboration services delivered strong results as well, among them PDF link sharing and Sign, which bring new users into the Acrobat ecosystem through viral means. Acrobat Mobile had an excellent quarter thanks to greater proliferation, usage, and conversion, plus seasonal year-end strength in SMB and enterprise. Now to our digital experience segment: in Q4, revenue came in at $1.27 billion, up 10% year-over-year, or 11% in constant currency. Subscription revenue reached $1.12 billion, representing 12% growth year-over-year. During Q4, our digital experience segment expanded thanks to several factors. We saw healthy end-of-year bookings across our solutions, and North America was especially strong. We kept succeeding in finalizing transformational agreements that bundle multiple solutions for big enterprises. AEP and native apps continued to gain traction, and as FY 2023 closed, the book of business for those offerings had grown over 60% compared with the prior year. Enterprises that adopted AEP early demonstrated impressive net dollar retention, reflecting the benefits they receive from our real-time data platform and connected products. We also experienced momentum in our data and insights, content, and Workfront offerings, while customer curiosity and pipeline for our new GenStudio solution kept building. Looking back at the fourth quarter and all of fiscal 2023, we achieved top-tier operating margins by putting money into research and development, marketing, and sales in a careful, disciplined way. We're also pleased that earnings per share increased at a faster pace than revenue did. On a GAAP basis, Adobe's effective tax rate came in at 18% for Q4, while the non-GAAP figure was 18.5% — both right in line with our expectations. Remaining performance obligations finished the quarter at $17.22 billion, which represents 13% growth compared with the same period a year earlier. When Q4 ended, we held $7.84 billion in cash plus short-term investments. Operating cash flow for the quarter reached $1.6 billion. That figure reflects an $826 million payment of US federal taxes made during the quarter, which had been deferred from the second and third quarters of FY 2023 and which we had previously discussed. In the fourth quarter, we entered into a share buyback arrangement worth $1 billion. That leaves us with $2.15 billion remaining under the $15 billion authorization we received back in December 2020. One quick note: our ARR measurement uses constant currency throughout a fiscal year, then gets revalued at year-end. Movements in FX rates from December 2022 through this year added $160 million to the Digital Media ARR figure as we came into FY 2024. That balance is now $15.33 billion, and you can find it in the updated investor data sheet. Considering the traction we're seeing throughout our operations, along with what we currently anticipate regarding macroeconomic conditions and currency fluctuations, our FY 2024 targets are as follows: Adobe's overall revenue should land between $21.30 billion and $21.50 billion; net new ARR for Digital Media is expected to reach roughly $1.9 billion; the Digital Media segment should generate between $15.75 billion and $15.85 billion in revenue; the Digital Experience segment is projected to bring in $5.275 billion to $5.375 billion; subscription revenue within Digital Experience should fall between $4.75 billion and $4.80 billion; the tax rate will be around 18% under GAAP and 18.5% on a non-GAAP basis; GAAP earnings per share should come in at $13.45 to $13.85; and non-GAAP earnings per share are expected between $17.60 and $18. As a reminder — and this aligns with how we typically operate — the projections we're providing exclude the Figma acquisition that we intend to complete. Across the year, we anticipate typical seasonality: new business steps down seasonally in Q1, then grows sequentially from Q1 into Q2, followed by the usual summer pattern in Q3, and we close the year strongly in Q4. On cash taxes, we look for sequential improvement of 2 percentage points in FY 2024, since amortization of R&D that was previously capitalized raises our deductions for tax purposes next year, which helps operating cash flows next year. Looking ahead to Q1 of fiscal 2024, here's what we're projecting. On the top line, we expect Adobe's total revenue to land somewhere between $5.10 billion and $5.15 billion. For Digital Media, net new ARR should come in at roughly $410 million, with segment revenue between $3.77 billion and $3.80 billion. Turning to Digital Experience, we're targeting segment revenue of $1.27 billion to $1.29 billion, and within that, subscription revenue of $1.14 billion to $1.16 billion. On taxes, we're looking at about 18% under GAAP and 18.5% on a non-GAAP basis. GAAP earnings per share should be in the range of $3.35 to $3.40, while non-GAAP earnings per share are expected to fall between $4.35 and $4.40. Now, even though implied operating margin is set to improve from one quarter to the next in Q1, we do expect the typical seasonal dip in margin to kick in starting in Q2. That's a result of our annual merit increases, along with the disciplined investments we're making to drive growth. In closing, I want to say that the way this company delivered in FY 2023, and the momentum we're carrying into 2024 across Creative Cloud, Document Cloud, and Experience Cloud, makes me prouder than I've ever been. What we've built in terms of strategy, scale, how quickly we execute, and our profitability positions us well for sustained success stretching out over many years. Shantanu, I'll hand things over to you.

Thanks, Dan. Beyond what we achieved financially, it's great to be acknowledged yet again for leading our industry. Fast Company honored Content Credentials along with Adobe's responsible AI strategy as a breakthrough innovation for the year. Once more, we earned a spot on the Dow Jones Sustainability Index. Glassdoor put Adobe among the top workplaces, and Interbrand placed us in its top 20 Best Global Brands, naming us a rising brand for an eighth consecutive year. Digital continues to be a huge tailwind, since demand for and consumption of content keeps rising, and companies large and small are prioritizing the transformation of their customer experiences. Adobe is positioned extraordinarily well to lead and seize this chance, given our innovative roadmap, growing worldwide customer base, strong brand, and the finest employees anywhere. Our targets for fiscal 2024 show how confident we are in sustaining robust top-line growth and world-class profitability. My certainty that Adobe's greatest days lie ahead has never been higher. Thanks, and now let's take questions. Operator?

Hello, and many thanks. Nice work on the quarter, and enjoy the holidays. Shantanu, along with the rest of the team, I've been thinking about this as we head into 2024 — it really does seem as though the economy has found a steady base, and broadly speaking, software metrics have been getting better throughout this year, which is quite unlike the shift from 2022 to 2023. And yet the guidance you've given for DM new ARR doesn't match how you opened last year, even though you now have generative AI working in your favor, economic tailwinds, plus pricing and Firefly. Could you walk us through what's behind that guidance once those elements are stripped out? It appears that if we set aside the optionalities at your disposal, including those economic tailwinds, the guidance comes across as quite cautious — and perhaps that's the prudent approach — but I just wanted to hear how you're thinking about it. Thanks so much.

Yes, thank you, Kash. I have to say, we're genuinely excited about the incredible year we just had in every part of the business, from the $5 billion quarter and the $5 billion book of business now in DX as we exit, to digital media and our ARR results. Now, if you look back — you brought up the guidance we provided at the start of 2023 and 2024. As you may remember, our initial guide was $16.50 billion, and then we raised it, as you're aware, to $17.50 billion, and we finished at $19.13 billion. So, to your point about execution, we've brought out some terrific innovative products. We've grown the customer base through new offerings such as Express and Firefly. We're definitely centered on surfaces and on ensuring every one of our flagship products can be accessed on all surfaces. That means we have several growth drivers, as you mentioned, and our attention is on monetizing that opportunity. I'd say we treat our guide with a great deal of seriousness. Another lens on this, Kash, is that it's the largest annual guide we've ever put out. It's also the biggest Q1 guide ever, and we want to, once again, deliver against this massive opportunity and post another record year. So we feel good. There's definitely momentum in the business, but at this stage of the year, we take our guidance very seriously.

Thank you so much, and happy holidays. All the best for 2024.

Thanks. Happy holidays.

Great. I appreciate you all for fielding the question. This is somewhat along the lines of what Kash was driving at, though perhaps somewhat more centered on Q4 specifically. Looking at digital media net new ARR additions during Q4, it appears you enjoyed an extremely robust Document Cloud quarter, as you mentioned, with really powerful year-over-year expansion in those net adds. Creative Cloud, where a price increase actually occurred and where there's plenty of enthusiasm around Firefly, was in fact lower compared with a year earlier. And this marks the first instance since 2018 that we've witnessed Creative Cloud net new ARR falling under $400 million. I believe that's what caught investors off guard, or the unfavorable surprise investors are attempting to work through. Was anything weighing on the Creative Cloud portion of the equation this year, or a difficult comparison against last year, or anything that accounts for why the price hikes together with all the favorable momentum and innovation coming out of Adobe MAX isn't converting into net new ARR growth specifically for Creative Cloud?

Sure, glad to address that, Keith. This is David speaking. To start, as you pointed out regarding the DME segment, we're quite thrilled with how 2024 turned out — more than $1.9 billion in net new ARR, which is clearly far beyond what we had guided. We're seeing our customer base grow and considerable drive stemming from GenAI, just as you said. In connection with that, what we achieved in Q4 was net new ARR — an all-time high for net new ARR on a constant currency basis. Now, turning to your specific question about momentum in Creative Cloud and how one should read the figures you're seeing there: beneath it all lies extremely robust momentum, since we posted a record number of new commercial subscriptions for Creative Cloud during the year. That truly forms the groundwork and the customer foundation coming aboard and gaining value not only from what we get this quarter, but also from how we continue building on it moving forward. So it genuinely positions us nicely for FY 2024. When you examine the Creative Cloud ARR figures — net new ARR for the quarter — you must view them on a relative basis, comparing Q4 FY 2023 against Q4 FY 2022, as you brought up. It's important to factor in that FY 2022 included two pricing actions that benefited Creative Cloud, and those are significantly diminished by Q4 FY 2023. Therefore, if you adjust for the effect of the pricing that fell away and the pricing that was introduced, Creative Cloud net new ARR during Q4 increased on a constant currency basis.

And Keith, I just want to underscore the two things David brought up. David noted, first, that subscriptions drove a record for Creative ARR in Q4 of 2023, and absent the pricing, Creative ARR would have shown growth. So, as you were saying, the business keeps being really robust.

Excellent. Thank you, guys.

Hey, everyone, thanks for letting me ask. So I suppose, when we think about the coming year, how much of the Creative Cloud renewal base might be eligible for that kind of price increase? And then for Acrobat, particularly the AI features you're putting out in public beta, how should we frame the boost to Creative Cloud from pricing and to Document Cloud from monetizing AI, looking at 2024, calendar 2024?

Yeah, glad to handle that, Alex. There's a lot in there, so let me break it down. I'll begin with the FY 2024 question and how pricing plays in. Before going right into it, I want to step back a little and remind everybody that Digital Media ARR combines several elements. New subscript — new subscriptions, and like I said, we saw a record amount of those in Q4. Upsell and cross-sell, which moves customers from their current plan to higher-tier ones. And finally, offer optimization. As you pointed out, over the past couple of years, we've significantly expanded our range of offers, from free tiers all the way up to the All Apps tiers; and on top of that, we can now sell add-ons to All Apps too; and naturally, all of this incorporates the price increases you brought up, where we've delivered added value. I want to emphasize, since I know the pricing effect draws a lot of focus, that we've consistently observed and still expect that new subscriptions will remain the main engine of ARR growth in 2024; that's exactly why we're so concentrated on top-of-funnel and bringing in new customers. But regarding your pricing question, a few factors matter. First, the pricing changes we just announced will touch under half of the Creative Cloud base. That was the precise thing you asked, so hopefully that answers it. Yet it also keeps open the chance to charge for added value in future years as we go along. Second, the effect will show up more clearly in net new ARR during the back half of FY 2024, once we lap last year's pricing moves that I discussed with Keith, and as we phase in the pricing over the coming quarters. So in the second half of FY 2024, we'll get better visibility into how that helps net new ARR. Third, since we're introducing these prices across plans and across geos gradually throughout the year, the ARR benefit will really be distributed over FY 2024 and FY 2025. And then fourth, to really put a fine point on it, the effect of pricing on ARR during 2024 is in fact smaller than what pricing did to Creative Cloud back in 2023. So that should give you some idea. Yet once more, it all ties back to the reason we feel such enthusiasm about the traction we're seeing with new subscriptions, and that genuinely points to good things for the business both this year and over the long haul. That should give you a fairly solid picture of it. Then, very briefly on Document Cloud, you know, we couldn't be happier with how Document Cloud has performed. Much of that traces back to our central strategy, which has centered on, you know, bringing desktop, web, and mobile together into one ecosystem, and truly pushing monthly active usage of Document Cloud higher via all the product-led growth efforts we run, and then converting users afterward. What has us genuinely excited is launching the AI assistant, which, incidentally, as I noted, is in private beta right now, with a public beta anticipated within the next few months, and then, you know, GA at some point later in the year. But the thing that really fires us up there is the ability to serve not only the paid Acrobat base with it, but likewise begin extending it to the free reader base. Plenty of opportunity and enthusiasm lie ahead this year for Document Cloud too.

Great. I appreciate the really clear, direct response.

Happy to help.

Okay, thank you, and nice work on the quarter — also, happy holidays. David, I think I'll come back to you once more. So, during the commentary, all of you mentioned how strong enterprise was, and in particular the way Firefly and Express get upsold within your enterprise client base. Could you give us a bit more qualitative detail about how those conversations tend to go? And is that partly why new subscriptions are ticking up, especially on the enterprise side? Then, regarding Express, could you once more describe what leading indicators you're seeing that suggest it's an enterprise product you can keep growing into fiscal 2024? Thanks.

Okay, perhaps I should kick things off, and after that Anil can chime in, since this touches both of our business areas. So, regarding Firefly and Express — we're really thrilled about the momentum we keep witnessing. You heard we've now passed 4.5 billion generations. So adoption and usage continue to be extremely strong, partly as a standalone offering, but also woven into Photoshop and Illustrator and those existing workflows. And we're beginning to see considerable interest, not only when it comes to employing it within those current products, but also when it comes to employing it within the enterprise ecosystem; so we've been collaborating with a number of customers to not only equip them with Firefly — which accounts for most of the Q4 growth we're seeing in enterprise adoption — but we also already have a number of pilot customers involved with custom model extensions, so they can bring their own assets and their own content into whatever Firefly generates. Next, we're also enabling the capability to expose it via APIs, so they can build it into their current workflows. Third, naturally we're linking it and binding it all into Adobe Express, which today also has its own Firefly plus additional capabilities like things, so you can not merely create content with Firefly, but then begin assembling it, begin scheduling social posts around it, begin doing multi-language translations. All those features are already present in there. And then establish a stakeholder workflow spanning people working in Photoshop to the marketers attempting to post externally. So that's where things become quite interesting and exciting regarding the connection we have with Gen Studio and everything Anil's doing.

To add to what was just said, regarding Gen Studio, ever since its debut at Max, the response has been enormous. We've seen this from large organizations such as Henkel, Pepsi, and Verizon, plus quite a few agencies too. This largely ties back to the points raised during Summit. Over the coming 2 years, content demand is projected to increase 5x, and companies everywhere are asking, "How do we accelerate creating high-quality, on-brand material? How do we enable more individuals across marketing and other parts of the business to generate their own assets that meet our enterprise standards?" When you bring together our digital experience offerings, including Adobe Experience Manager and Assets, with our Creative Cloud tools, particularly Express and Creative Cloud, enterprises can achieve that agility and cost efficiency needed to produce content at scale. That's the pattern we're observing, and the level of interest has been incredible.

Perhaps I could just chime in briefly there, Kirk. What I find really thrilling about the work people are doing is that they're coalescing around Firefly, and the fact that we've got accountable generations across the whole enterprise. So the curiosity has centered on how do we make that the standard for every image, vector, or other kind of generation they want to carry out for each knowledge worker in the enterprise? So adoption of Firefly has been truly strong.

Thanks.