Adobe Inc. (ADBE) Earnings Call Transcript & Summary

I'm Mark Moerdler, I'm in charge of global software at Bernstein. And I'm extremely pleased to have Ashley Still and Jonathan Vaas from Adobe on this call. It's been a call that I've been looking forward to for quite a while. I've been watching the company for a long time, and it will give us a great chance to be able to go through and answer questions that I have as well as the investors. We've created a Pigeonhole. So anyone who has a question, please enter it on Pigeonhole, and Firoz is going to be monitoring that and asking those of Ashley or for me, just in case I don't ask them. But I have a long list of questions here. Ashley, why don't we start by -- why don't you tell us your background and give us a little overview of where you are and where Creative Cloud is.

Great. Well, first, thank you so much for having me and Jonathan. It's great to be here. And I've been at Adobe for 20 years. I actually just celebrated my 20-year anniversary. I started as a product manager on Photoshop in 2004 when we first invented Camera, and the product now known as Lightroom was a code name in development. And so it's been amazing to see the market for creativity and for content continue to grow and evolve. And of course, I've been a part of many of Adobe's transformations from, again, digital photography, going from scanning single images to vast libraries of digital photographs to, of course, the subscription transformation. I was responsible for the Acrobat business for a number of years, where we introduced Acrobat on the web and Acrobat mobile, and of course, that business is growing incredibly fast right now. And it's great to see how all the secular trends of cloud and collaboration and AI continue to drive the Document Cloud business. And I'm now responsible for Creative Cloud. And obviously, I'm spending a lot of my time looking at, again, how secular trends enable us to continue to accelerate and grow our market opportunity with creative professionals and beyond.

You're on mute, Mark.

Thank you. Sorry, I apologize. Thank you, Jonathan.

So Ashley, you have a long history at the company. Jonathan, you do too. But Ashley, you have a long history at the company, a lot of that goes into Creative Cloud and Express. Can you give us some thoughts on where you are in the innovation cycle. I mean if you look at innovation today versus over the last number of years, how is the cadence and your ability to bring new capabilities and product to market?

Yes. Well, of course, every product team loves innovation. And one of the things that's been amazing over the past few years is we are innovating at a faster rate than I've ever seen Adobe innovate. And again, it's -- what's amazing is it's innovation that our customers are adopting at a faster rate than ever. So over the past 14 months, we've released features really across our flagship products from Photoshop to Illustrator to Lightroom. Many of them powered by Firefly, but not all of them generative AI, that have become some of the most used features in these applications. And like that is astounding, right? Like these applications are established. They have established customer bases and workflows, but Generative Fill in Photoshop, Generative Shape Fill in Illustrator and Generative Remove now in Lightroom, all of them are now, again, within like weeks or months of coming to market, are some of the most used features in the application. And this is great for engagement of our existing customer base. But of course, again, there are always things that we're doing to make these products more accessible to more users. And of course, on the Express side, just phenomenal innovation, replatform the application. We're changing the dynamic in the market from the old way of template-based creation to AI-first creation for communicators. So really, if you look across many different product categories and different vectors, we're innovating at a faster pace than ever.

That's amazing. Okay. So we'll drill into a little on that. We'll start on the AI side. Answer a question that clients often ask me, and that is why can't a competitor build their own competitive AI capability? Again, putting aside for a moment the legal questions of whose data you're training on, but why couldn't they build the depth and breadth of what you guys build?

Yes. Well, creating -- making creative tools is hard and making models that integrate into creative tools is also hard. Doing the 2 of those things together is something that only Adobe can do. And again, I think that's what we've demonstrated with some of the examples of innovation that I gave. Our customers, like a lot of times, what we hear from -- when you think about just pure text to image is it's helpful. I mean, we love everything that basically is a camera, like third-party models we view as cameras that help create additional content, but they're kind of a black box, right? Like you type in a prompt. I joke sometimes it's like a magic 8 ball. Like you shake it, you're not sure what you're going to get. You get an answer and you're like, well, I like part of it, but I don't like all of it. And so typically, when you're creating content, you want some amount of control over the content that you're creating. You don't just want someone to kind of go to that and hand you a finished asset. And so that's really what's unique about what we're doing. It's the combination of the models that, of course, are commercially safe, as you alluded to. But it's really about making them what we call toolable and editable buyer applications. And again, in Photoshop, you actually -- the way that we've built Firefly into Photoshop, it actually takes into account the image that you have open, the selection that you have in Photoshop and what you actually want to add, remove or make better in that image. So it would be phenomenally hard for a third -- for someone else to do that combination of things, to provide the unique, very differentiated value that we're providing.

One of the items that came up in previous conversations with the team has been the depth and breadth of AI expertise. Maybe you can give a little bit of color on the level of expertise in AI, how long you guys have been doing AI and how many people you have working on it, may help.

Yes. So yes, we've been working on AI and building AI into our products for over a decade. And there's hundreds of features across our applications that are AI-powered. More and more of them are Firefly powered, right? But if you -- really, it's a continuation of that research and that methodology. And again, the understanding of what customers are trying to achieve with video, with images. Another example is one of the features that we showcased at the National Association of Broadcasters in April that we're working on releasing before the end of the year is generative extend. And that comes from the understanding of the challenges that video editors face. And they really -- it would be revolutionary as they could just get 5 more frames of the video that they need for a transition. If you just have a clip and it's 5 or 7 frames too short for what you're trying to achieve, that could take hours or days, right? And again, how do you solve that problem? It's not just about the AI, it's about the AI built into the workflow.

Mark, one question here on the Pigeonhole, interested in knowing. How important is owning the LLM to your AI capability? And as an extension, do you think you have the best LLMs that are required? Or eventually, do you consider partnering or using third-party LLMs to include in your AI offering?

Yes. Great question. So first, it's incredibly important that we have -- and again, maybe let me take a step back. What Firefly is, Firefly is a creative family of models. There are actually very purpose-built in the scheme of generative models out there. They're actually small models, right? And that also makes them more efficient, which we can talk about later. But they're really purpose-built for the type of applications that Adobe builds, right? So they're best in class at very specific things. We also, like, for example, with -- and they're built for controllability and what we call toolability. They're built to integrate into Express, into Photoshop, into Illustrator, into Premiere, et cetera, et cetera, right? That is incredibly important because it gives Adobe control over our road map and what we actually -- the problems that we can solve. Now of course, there's other use cases. There's -- let me -- in video, there are interesting use cases around things like B-roll, right, where I am not trying to extend something content that I already have, I'm actually trying to ideate or I'm trying to create something brand new. Again, we use third-party LLMs and third-party models as new sources of content, as new cameras, Think of it as like an infinite video camera or an infinite digital camera. So that's incredibly interesting to us. We don't see it as competitive. I don't see those as competitive to Firefly, because they're just different sources of content. And if you think about -- in a way, like if you think about how much content is already available on the Internet, you could almost start to argue there's enough content already existing in the world to satisfy everybody's creative needs. But of course, we all know that's not true, right? Like there's -- so there's this kind of insatiable need for ideation. And again, we don't view Firefly as competitive third-party models. And as we've said before, we're very interested in how we can work with third parties to make our tools and our workflows better as well.

Makes a lot of sense. Maybe a follow-up on that. One of the items that you talked about something I think is really interesting. Inferencing can be expensive, okay? You talked about the size of the model. Where is the Adobe on, one, driving down model size? Two, driving efficiency in the model? Three, moving the models to the AI PC or even the iPhone AI phones and tablets? Where are you in that process?

Yes. Well, first, let me start with, we have always had pretty efficient models. Like we've been operating efficient model since the beginning. And the things we balance are quality, response time and cost. And one of the elements that you didn't allude to is like response time in terms of customer experience matters a lot, right? So that's another benefit of smaller models and different architectures. So we already believe we're incredibly efficient. But we also are always looking at the latest techniques. Like there's, for example, a new technique that we're exploring called mixture of experts, which basically takes -- you still have the same amount of parameters in model, but only a subset of them are active, so you effectively increase the model capacity but reduce the compute cost. So we always -- like the -- what's really exciting, and there's so many different ways that AI drives innovation. There's innovation at the user experience level, there's also innovation at the engineering level, right, and at the research level. And so we are constantly investing in new methodologies. There's a lot of excitement around what workloads we can run on device as well. And for me, that's not just about cost, as I said, it's also about the response time. So as devices become more capable and as we're able to kind of move some of these workflows to the device, we, of course, would take advantage of those capabilities.

How soon do you think the hardware will be ready? Any sense at this point in terms of PC and iPhone?

I think we're already -- like we've already moved some client processing to -- or some processing to clients. So like, for example, this isn't GenAI, but it's AI. So neural filters, for example, is already on device. I would expect it to happen on Mac and Windows before mobile devices, for example. So again, I don't want to give a time line, but we already -- like there's already AI that's running on device, and we see that expanding over time. I would like to say, like, for example, like we're not worried about the cost of the client run time for AI. Like that's -- we don't see that as a significant factor in our cost of operating Creative Cloud.

Nor in terms of the cost from a customer point of view of the willingness to use the capabilities?

No, neither.

Excellent. So maybe changing gears, let's step up a level. Give you a tough one. When you launch subscription, you delivered a visible value proposition, at least migrating the existing customer base to subscription and getting a revenue lift for Adobe and giving them much better functionality more quickly. And no one at that time that I spoke to in terms of investors question how differentiated Adobe was. The subscription transition is mostly behind you, and many argue that AI can be done -- can do what Adobe's Creative Cloud can do and possibly easier. How do you refute that argument?

Well, hopefully, I've started refuting that argument earlier, which is we don't see and we don't see any evidence in our customer use of our software versus of AI services that it, in any way, replaces what we do, right? In fact, when we see our customers using third parties, it's incredibly complementary. They're often generating ideas and bringing those ideas into Photoshop or Illustrator or Premiere Pro. It's kind of like -- I mean, Pinterest is complementary to Creative Cloud. Like the Internet is -- going and getting ideas and being inspired is complementary to then being able to take those ideas and create what you actually want. And so we sit -- another analogy that I use is, for a long time, everyone said the advent of the Internet and the cloud was going to kill PDF, right? And it's more software could create PDF, that there wouldn't be a need for Acrobat, right? The opposite has happened, right? The more PDFs there are in the world, the more people need Acrobat to collaborate on that PDF, to edit the PDF, to reuse and make changes to that content. And again, we see all of these ways of ideating and creating content is complementary. It also makes more people creators. It makes more people go from using just words to express their thoughts to using pictures, videos, illustrations to express their thoughts. And that is always good for Adobe.

Mark, there's a kind of a comical scene, I'd like to imagine in your question, which is, imagine there are just text prompts and AI outputs. Now go into the room where an ad agency is pitching something to a Chief Marketing Officer or a CEO is looking at his team's outputs for a campaign, and she gives comments on -- please make these changes. And everybody says, "Hold on just a second," and starts typing and then gets a new set of -- no, that's not it and starts typing. I mean to take the toolability and the controllability out of creative professionals and just hope for the best from AI outputs to me is kind of comical. I almost want to see some political cartoons on that.

And that's why I call it -- that's what I mean when I say black box. Like the content that you get out, like it's a bit of a black box, you can't actually edit anything. And that's not how creativity or content works.

Do you think that -- I think a really important point. It's like my thesis has been that "competitors" out there, you ask them a question and gives you something. And that may be good for kid's homework assignment, but you're not going to make a movie that way, okay? No one is going to set -- load up the text to the movie and say, "Okay, create this whole movie," you'd be crazy. But the editing process is different. And that's the way we create excels, that we create research notes, creative professionals script, content of different forms. Do you think that flows across all the levels from the most senior creative professionals all the way down to the new group of users you're hoping to get involved with using the Creative products. Is it the same need for an iterative editing process?

Absolutely, because that child doing homework assignment, all of this has a piece of content. And whether it's that first homework assignment or the second homework assignment, at some point, it's going to say I want to change something. I like this, but I want to -- or I like this and I want to animate it. Now the tool that they go into is going to be different. The child doing homework assignment should be -- should go into Express and take that idea and have very, very approachable ways again to animate it, to crop it, to make it into a social media post, to make quick, easy edits. Someone that is like, hey, I want to have control over how I'm going to change this. That person is much more control over how many changes. That person is going to go into Photoshop.

That makes sense. There's a lot of noise out there around potential competing products. Again, I apologize to keep asking these, but this is what the questions coming at me are. But products both from the creative side and the AI side, what -- can you give us a layout of how defensible do you believe the Creative Cloud mode is in the traditional markets, the enterprise, professionals, consumers obvious? Is it the same amount of mode? Or do you think the mode may be different?

Again, every customer conversation I have is about increased need for not just our products but our technology. So let me start with Enterprise. On the Enterprise side, there is so much personalization and digitization happening that every business is a digital business and customer experience is everything, all of that requires content. And it requires content across more channels and it requires more personalized content than ever. So there's an exponential increase in content. I mean just think about even like 10, 15 years ago, most companies had to worry about creating TV campaigns or print campaigns once in a while, right? Now it's like you're updating your content on TikTok every day, in Instagram every day and on e-mail every day, right, web, et cetera. So all of that just fundamentally changes how you think about content creation. And so we have customers that are like, of course, I need Creative Cloud, but I also need Firefly and Creative Cloud APIs to actually build new workflows that help me create all of these variations that I need of the content across channels, right? So our customer conversations are actually expanding from, of course, the need for tools to also the need for workflows in enterprise. There's also more departments that are -- HR is posting to LinkedIn, right? Your sales team is creating regional proposals and presentations. And so they're talking to us about how Express can actually democratize but still have brand-safe content across the enterprise. Same thing for small business. Small business needs this, but they need it in very easy packaged solutions, but they have all of these same needs, right? How do I create? I have a campaign and need to create all these variations, I need to do bulk creation. And this is an example of where Express is completely differentiated in its ability to take content and create all the very different languages, different formats for different channels. That is like a lifesaver for a small business that, otherwise, has to figure out -- or just not expand their business as fast. So -- and then, of course, on the consumer side, obviously, some consumers, we are very confident that people who are passionate about their base are using Adobe tools. But I mean, Lightroom. Lightroom Mobile has tens of millions of active customers. That -- I mean, that's probably one of the things that people are least familiar with is just the explosive growth of Lightroom on mobile and this new generative remove capability. I mean people who are passionate about photography love Lightroom, and then, of course, on the video side, Premiere.

So that there are tens of millions. That's a big jump, I think, in the number of users?

Yes. It's absolutely explosive.

Are you seeing similar types of explosions in other specific -- for example, Express, can you give us some sense of adoption of Express at this point?

Sure. And I think we've shared some of these numbers in the past. I mean, Express is a rocket ship in terms of growth, in terms of active users. John can correct me if I'm wrong, I think we shared that over 100% growth in MAU with Express, the mobile app is doing very well.

Yes, for mobile.

Yes, yes.

So beyond mobile, any sense of -- and are you willing to give us any numbers?

We can only, in this context, reiterate ones we shared. But when we came out with the new mobile app, Ashley mentioned, we replatformed that recently, that was earlier this year. And just sequentially in the quarter, we saw a doubling of the MAU. It shows you how much more powerful this AI-first mobile app is. And I think we -- if you go back and look at the presentation we shared in March at our investor event, there were some more statistics about growth in the users of Express and Export. In some ways, now that we've finished the replatforming, the moment is really now that we're going to start to shift our focus more towards driving monetization. David said in our Q2 call, it's time to pour fuel on the go-to-market, and we think we have the best product in the market now. So that's -- continue to look for us to share more and more along the term.

Hopefully, we'll get more at mix, but we'll see on that one. Question for you. Are you seeing customers moving from Creative Cloud to Express? And if not -- because you've talked about it, people go and use both, but you don't really see at any point people move, deciding they don't need Creative Cloud and they can do it all with Express?

No. That's really not what we see because again, they solve different use cases. Express is about creating anything. And it's editing and lay out all in one application, which is phenomenal. But obviously, one of the features of Express is that it doesn't have the compositing engine of Photoshop, right? Like it doesn't have advanced blending and effects, right, that Photoshop would have. And so if you're a Photoshop user and you value that the ability to really create any effect that you want in Photoshop, you're not going to substitute that with Express or other similar applications. You're going to use Photoshop for that, but then you're going to take that content into Express to do your social media post. And then features like being able to actually schedule your social media posts are really, really helpful in express that obviously don't exist in Photoshop.

So you see them, as at this point, completely complementary?

Very complementary. Yes.

Okay.

And then more and more workflows that we're building. So for example, we make it really easy to bring content from our flagship applications into Express. Because increasingly, we also see designers in Photoshop and Illustrator basically handing off content to their stakeholders to be able to use in Express. And so we think of this -- again, we think of it more and more as a platform or a system where you have your designers, video editors in Creative Cloud in those flagship applications that are handing off content into Express for marketers or stakeholders to be able to leverage, remix. But again, in a brand safe way, which again is unique from Adobe.

You talked about that last -- I think last year at MAX, the fact of the ability to keep in a brand safe, manage the brand, but be able to now have more people being able to leverage the content rather than sending a request back to the marketing department to create the content. At this point in terms of what you're seeing, that's additive in terms of user seats, et cetera. It's not like corporate is going I can get away with less marketers, build the same amount of content creators.

Yes, absolutely. Think about it as there are people who are taking content and modifying it in ways that the company can't see today that is, again, that the CMO kind of lives in fear of what's happening in all the regional teams. And this is a way to actually, one, make it a lot easier but also give companies the ability to have people be able to access and modify content in a brand-safe way. So completely additive. One of the analogies I use is like if you think about the growth in demand for health care, you -- it's not like you need fewer doctors, but you definitely see an increase in nurse practitioners, because doctors alone can't meet all of the demand or you think about it as like a chef and a sous chef. So these are not replacing seats or shifting seats, it's actually because of the demand for content and the need for really everyone in the enterprise or everyone in a small business to be able to communicate visually, you have to have a system to do that, and that's what we're building.

I think you said something interesting there that I hadn't realized before. The fact of that companies will likely doing this or individuals were doing this on their own in a nonbrand safe way without using Express. In other words, this proliferation, just like all these studies on AI that most people are basically using it without corporate approval because they want to use some of GenAI capabilities. How big a situation do you think that is? Or do we even have any concept of how much content is being modified, for lack of a better word, out of the trenches without corporate having any control over it?

Oh, I think it's huge. I think companies started trying to measure how much is getting posted to like social, LinkedIn, sent to customers, right, or to prospects that is not on brand and they may not have the rights to. I think there would be a great alarm across, again, the CMO and IT. I think it's very common.

I think it's very common. Interesting. And we do have Pigeonhole, if anyone who has questions, Firoz is keeping an eye on the Pigeonhole while I'm holding the conversation at this time. So if you have a question, please pop it on to Pigeonhole, and Firoz will interrupt periodically with questions. Okay. So if hobbyist is our core customer for Express or one of the core customers for Express. Why do you believe they'll pay for a solution versus trying to do something with some free or ad hoc capabilities?

Right. So 2 ways to think about that. First, Express is for anyone and everyone that wants to create something. So that could be a hobbyist, a consumer, a small business, a solopreneur. Certainly, we believe that solopreneurs and small businesses, they have a business imperative that they need to stand out, right? Stand out through content, through marketing. And so we see -- we are very focused on solopreneurs and SMBs as -- for paid customers, right? So while we see millions and millions of hobbyists and consumers using Express, again, a lot of how we think about the paywalls and the subscription value is that target of solopreneurs and SMBs. The second thing I'll say, and again, this will go back 20 years, when I first started at Adobe, one of the most surprising things when I started on Photoshop was the percentage of Photoshop customers that were nonprofessionals, right, because they had a passion, because they had a hobby and they were willing to pay, all the way back in 2004, for Photoshop. And so that has always been true. When people are passionate about, again, creation, about whether it's images or video or just the ability to communicate and share memories visually, they're willing to pay for those passions. And we've seen that with Photoshop. We certainly see it with Lightroom. As I said, tens of millions of customers, huge growth in paid users as well for Lightroom. And so you'll see that dynamic as well with Express. So I think that combination of the passion of people to create, combined with the focus on solopreneurs and SMBs, and of course, enterprises as well, as I talked about before, gives us a very, very compelling paid opportunity.

I'm glad you went there, Ashley, because I think sometimes investors miss what a great customer base hobbyists are. And in fact -- so I liken it to golfers, where I think in golf, I'm sure the hacks and the hobbyists spend a lot more on golf clubs and green speeds than the professionals. With the thing about professional tools is when you retire, you might stop, but we do have our hobbies for our entire lives, and I know I'll be using Photoshop later in life than I'm using Microsoft Excel probably. So I think the hobbyists are underappreciated just for how passionate they are about using our tools, and they're great customers.

Yes. In front of you they feel they are, which is -- that's inspiring to us and also good business.

Excellent. Firoz, I think you had a question there on competition?

Yes. A couple of questions centering around competition from Canva, particularly 2 in that same vein. One, they kind of have been coming out with pretty strong MAU numbers. If you have any commentary there. Is there a big overlap with your customer base? Does it impact the top of the funnel for Adobe? And anything around that side? And the second question, again, is their ability to graduate up and enter into enterprise customers market eventually. Yes, those 2 questions around Canva.

Yes. So first, let me take the customer base. So certainly, we look at the -- some of the numbers that have been published, and it just validates the opportunity at the low end of the market, right? That as I said before, everyone is a creator, and I think that's just a great data point, that there's more and more people that are creating. And again, we're excited about that market opportunity, and we think it's going to keep growing and give Adobe an amazing opportunity to build a large customer base at that customer segment as well. We see incredible strength in demand for our products. Traffic for Creative Cloud and traffic for Express continues to grow significantly. So we don't see any impact. In fact, as I said before, we actually -- I believe, the more that people start creating, the more it creates actually prospects and a funnel for Adobe. Because they start creating, they hit limits, but they're already -- they now have confidence, there's some level of confidence and some level of experience in creating content. And so we see that dynamic with people coming to Photoshop. We see that dynamic with people coming to Premiere. So that's on the MAU side and on the Adobe demand and traffic side. We just continue to see growth in the market, and it's really ours to go capture.

Just to clarify -- one second Firoz. Just to clarify, so you're not seeing any competitive pressure at this point? Or do you expect any competitive pressure from any of these competitors?

We continue to see strength in traffic growth and demand. Again, as I said before, like some of the stats that we have talked about before, I mean we saw growth in -- a huge growth, like 30% growth in Photoshop units over the past year. So we continue to see demand particularly as we innovate. The biggest -- our innovation agenda is really what -- the single biggest contributor to growth for Creative Cloud continues to be new subscribers, right? That has been true for the history of Creative Cloud, it continues to be true. And we see very strong correlation with our product innovation and new subscriber growth. So we saw that with Photoshop. We're seeing increased demand in traffic for Illustrator since we had a release about a month ago with new capabilities. And some of the AI audio enhancements that we made to Premiere earlier this year led to the single biggest engagement with the beta that Premiere has ever had. So again, we continue to see more engagement and strong demand for our products.

I'll jump in and make a few points too. I think a lot of times people think of creative tools as a zero-sum game, where you pick one tool that you use and this or the other. I think -- particularly web-based creativity in this world of AI, there's a lot of similarities for me to gain, where I don't know if people think of Mario and Fortnite as competitors or substitutes for each other, but I imagine they're actually on ramps for each other, because people like to go online and play with different things and experiment. We know we see that in the creative world. We know we see that with AI models where -- and folks, if you talk to Instagram influencers or YouTubers and say how many creative tools do you use? They'll use a lot. And certainly, Adobe is going to be a big one of them. But I absolutely think there is certainly overlap, and a lot of opportunity for creators to play with a lot of these technologies and bring them together with their own alchemy and their own processes.

Very helpful. Firoz, I cut you off there.

No worries. And so as a follow-up, early on, you talked about toolability as a very important value proposition of Adobe's creative suite, the editability that you bring. As you see the competitive products coming to the market, do you think they kind of have the depth in the technology that they could eventually become a viable product in the enterprise space? Or do you think that the technology -- competitive technology is currently just limited to web-based hobbyist creative use cases?

Yes. Again, it's why we created Express versus building out something like Photoshop and Illustrator for web-based template -- template-based creativity. Because those 2 things -- I mean, it's a different customer segment. It's a different customer need. You cannot do the -- what Photoshop and Illustrator and Premiere obviously do is fundamentally different than what Express does. They both create content. But to Jonathan's point earlier, they do it in such a different way. And the amount of control and precision over the effects that you're going to be able to create is just different, right? So again, maybe an analogy of car models, right? Like do you believe a high-end Lexus competes with the low-end Lexus, right? They're just -- they're expanding their market opportunity to -- and you have some people that will graduate up. And again, we can make that graduation very, very seamless, but we don't really see and don't expect to see trading between the two, right? They're additive. And again, it comes down to literally the type of work that is possible. It's not just a brand preference. It's like substantive what the products do is different, even though they both create content.

Changing gears a bit. Historically, Adobe has managed the price versus user count process. And you discounted on price, noted on revenue customers, now you've gone to a freemium model in which there are some capabilities that you can play with more and more. You've always had some initial version that people could play with. How do you think at this point about the trade-off and price versus user? Where is more of the focus? Is it on growing the user base or driving the existing user base to more? I know you do need both. But can you give us a sense of what is more of the mix in terms of revenue? What is more of the mix in mindset?

Yes. So I mentioned this before, our growth algorithm has always been user growth first and foremost, and that continues to be true. And we think about user growth, and then we take them on a journey of cross-sell and upsell, that is also still true. We have many people that come in and they first -- they might start with Express or start with a single app and then add on another single app, or move from single app to all apps. And we think of pricing as like the last part of that, right? Then we look at the overall value that we're providing, our rate of innovation, pricing for comparative tools, dynamics in the market and make pricing -- regional differences, et cetera. And of course, how we continue to manage all of that is our data-driven operating model that we've been using for the past decade. And importantly, as I said before, when we think about user growth, again, we think about product innovation as the single biggest lever we have to drive that user growth. And that goes all the way back to the first question that you asked which is tell us about your rate of innovation. We have a faster rate of innovation than we've ever had before. And that's -- we see that and are really excited about that being correlated to user growth. We also, again, through our data-driven operating model, we're really good at using promotions or region-specific pricing as tactics to help us with new user growth in very kind of purposeful specific ways.

So following up on that. That's worked incredibly well in Creative Cloud. Does the same type of approach work for the hobbyists in Express?

Absolutely. I mean, again, I think product innovation, whether you think about mobile and we have this massive product innovation and replatforming that's leading to tremendous user growth on mobile. With Web, we've seen over 100% growth in exports. And again, that's a really important metric for Express. All of that's driven from product innovation and, again, using DDOM to understand how you optimize the journey, how do you move someone from discovery, and maybe even starting with the search, through first use and into repeat use. So it's similar.

Do you think there's going to be tiered products within Express at some point? The same type of thing you have individual products and then going -- driving people to more bundles over time. Is Express likely to follow the same type of approach?

I think with Express, it's very important to keep the pricing model simple. And it really is the fundamental value proposition of Express is you can create anything. And you can create anything for one subscription price a month. So certainly, if you look at the overall portfolio, we have Acrobat Web, we now have Photoshop on the web and illustrator on the web. If you look across the portfolio, I think there are opportunities for us to think about how we package different combinations of our applications. But if you look at Express specifically, I think you'll see us, for the foreseeable future, just keep it simple.

So simply drive them into a paid version of Express and hopefully drive more usage, rather than driving to drive them necessarily to Creative Cloud or anything beyond that?

Yes. I mean there are already journeys between Express and Creative Cloud, and we feel confident that if you're an Express user and you want to go further with image compositing and image editing, we're pretty confident that we'll be able to connect you to Photoshop. So I don't worry about that. I think more of the -- making sure that we're really clear with the Express customer base, the value that they get for within the Express paid subscription and keeping that straightforward.

So a couple of minutes left. Firoz, do you want to ask one first and then I'll ask a follow up.

Yes. A couple of questions on the Pigeonhole. First one around the impact of pricing. We had pricing as an important either driver or a detractor in 2023, 2024. As we look towards 2025, do we see pricing as a much smaller driver in 2025 versus 2024? Could it be -- could it create difficult comps for 2025? Basically, how should we think about the effect of pricing into the 2025?

Yes. I'll jump in and take that one just to share kind of how we've talked about it. When we initially rolled out some pricing updates for Firefly in November, we shared that they covered a little less than half of our creative book of business. And while we still were working on some localization and spreading it across some other geos. Ultimately, the pricing-led growth from those changes will drive some net new ARR not only in 2024, but also into 2025. And then as we look out into the midterm, we expect, like Ashley said, pricing to be part of the growth algorithm. But the third place after the growth driven by new customer acquisitions and then taking them on journeys. And I think that certainly will hold for next year and beyond.

And maybe one more here, not related to pricing, but given all the commentary around recession and difficult demand environment. Anything you can share here. What are you guys seeing from a demand environment perspective?

Yes. I think everything we're seeing is continued strong demand across customer segments from digital to small business to enterprise.

Yes. I thought we were pretty -- we tend not to go into a lot of commentary on the macro, but we were pretty positive in Q2. And this week, I've seen several other companies in the technology space, kind of in adjacent spaces, also kind of similarly reflect some of the positive. Which is good to see because it's -- I know a lot of investors are seeing leads that are cutting both ways on the macro. But in our markets, we've seen strong demand.

And with all the innovation, hopefully, that continues?

Yes. And we think it's -- we can -- when you're driving demand through innovation, we tend to think that we can control a lot of those outcomes regardless of the macro.

And that's true via DDOM and driving optimization of pricing and special practices, et cetera. One point, you gave the number that 70% of Creative Cloud came through adobe.com, through DDOM without a salesperson. Won't Express, in fact, increase that percentage?

I mean Express is an entirely digital channel. We break out in pie charts every year the portion of the creative business that comes through the different channels, individual, adobe.com or digital is how we sometimes call that. Digital also, it includes mobile. But yes, there's a large chunk of the business, even team that comes to us all through digital, and certainly Express would fall into that.

And of course, we see so many people in businesses and enterprise start digitally, right, and then they expand their use as well. So it helps us not just for the digital channel, but also establish the leading users in enterprise with the bottom submission as well.

Ashley, the Street has looked at Adobe and has gone through this, generative AI is good for you. Generative AI is bad for you. Generative AI is good it. Generative AI is bad for it. I think you're on the good right now?

Yes.

What's your sense of confidence in your ability to differentiate and innovate going forward and that ability to be able to translate into strength in terms of user growth?

I'm incredibly confident. Again, it is just -- technology shifts that enable us to innovate on how both expressiveness and productivity around creation are great for Adobe, right? And technology shifts that make more people creators are incredibly good for Adobe. And if you think about what happened with mobile, more people creators. What happened with digital cameras, it made more people photographers. That was good for Adobe. What happened with mobile phones, made more people creators. What happened with social media, it made more people creators. All of those things create secular trends that create 2 things. It increases the number of consumers, hobbyists, et cetera, people that are used to and familiar with creating some amount of content. It also creates the ability -- greater ability for businesses to reach their audiences and their customers visually and engage them. And those trends are like at the core of what Adobe is and does. And that's incredibly exciting. And that's even beyond when you talk about how 3D as a medium is growing and how we can make 3D more accessible to 2D designers. I mean there's other trends happening as well. But I would just take a step back and think about how AI, again, if you -- if the analogy is like a camera, like a new creation platform, think about all the creation platforms and the devices that have come before and how that's benefited Adobe, and how we've been able to differentiate our tools with those technology shifts.

Yes, Firoz?

So this is a perfect segue for the next question. This is kind of Interesting. Which product or feature within Creative Cloud you are most excited about and looking forward to playing out in foreseeable future?

Oh my god, there's so many. I'm not sure I can pick one. I'll say -- let me give you not just a feature, but like what we're doing. We are reinventing core creative workflows with AI. So like when you think about what people -- people come into our tools to say I have an image, I have a video, I have 100 clips and I need to make this into a compelling video. But I want to be in control. I don't want to press a button or shake a magic 8 ball and have someone give me something that I might like 15% of. I would like 100% of it. But I want an assistant editor that knows me, that knows what I'm trying to create and can help me get there faster and with greater expression. That's what we're doing. And we're going to do it not with one feature, but probably 20 features in Premiere or 20 features in Photoshop. And that's why Generative Extend and Generative Fill, like think of this as family of capabilities where we're reinventing the state of the art in each of the categories of what's possible. And again, only Adobe is doing that. There is literally no other company on the planet that even has that strategy or is doing it. That is incredibly exciting for me. The other thing I'll say is we also -- Frame, which we haven't talked about in a long time, Creative is also working in teams more and more. And we've been slowly growing Frame and doing more integration with Frame across Creative Cloud. And Frame had a huge update in April. We call it V4, where it's gone much beyond reviewed approval to helping creative teams manage their work together. And you'll be hearing much more from us about this and how we're going to be, again, advancing how that collaboration works, which particularly in the age of teams need to work faster, smarter together, but not reduce the quality of the work that they're doing. So I'm excited about the core innovation and how we're reinventing professional creativity. I'm obviously incredibly excited about Express. But I'm also really excited about our ability to expand the value that we provide to creative professionals. And obviously, this would manifest from a business standpoint in like add-ons and attach. We've done a phenomenal job attaching Stock to Creative Cloud. That's now a significant business for Adobe. And I'm very bullish on what we can do with Frame as well.

So a lot to come in just a couple of months from now.

Yes. I have to say, actually, that those last couple of comments from you were the most compelling. So I think...

Well, we should end it there.

So we will, because we run over time. I really do appreciate. But yes, the fact is you're approaching the market differently, and that's important for people to know.

Yes. Great.

Thank you so much, Jonathan, Ashley, for making time today. I appreciate everyone on the call. If anyone's got any questions, they can reach out to myself or my team. All the best. Thank you.