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 leads Digital Media as President; Anil Chakravarthy, President of Digital Experience; and Dan Durn, Executive Vice President and CFO. This call is being recorded, and during it we'll go over Adobe's financial results for the third quarter of fiscal year 2024. Our press release is available, along with PDFs of our prepared remarks and financial results, on Adobe's Investor Relations website. Everything we discuss today, including our financial targets and product plans, reflects information as of today, September 12, and includes forward-looking statements involving 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 both GAAP and non-GAAP financial measures. Our reported results include GAAP growth rates as well as constant currency rates. Throughout this presentation, Adobe's executives will refer to constant currency growth rates unless otherwise stated. Non-GAAP 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. Adobe delivered a remarkable third quarter. Strength was evident throughout Creative Cloud, Document Cloud, and Experience Cloud, with revenue reaching $5.41 billion, which marks 11% growth compared to a year ago. GAAP earnings per share came in at $3.76 for the quarter, while non-GAAP earnings per share stood at $4.65, reflecting year-over-year increases of 23% and 14%, respectively. This success stems from how well we've executed on a bold innovation roadmap aimed at bringing value to our customers. The product enhancements introduced over the last 18 months are thrilling an enormous and expanding community of users and enterprises, giving them the ability to unlock their creativity, boost document productivity, and fuel their digital businesses. At the heart of our vision are Adobe's robust technology platforms spanning Creative Cloud, Document Cloud, and Experience Cloud, which deliver meaningful differentiation and value when combined; we're enhancing creativity and productivity by fostering convergence among offerings such as Photoshop, Express, and Acrobat as knowledge workers and creatives strive to make content more captivating and engaging. We're uniting content creation and production, workflow and collaboration, and campaign activation and insights across Creative Cloud, Express, and Experience Cloud. Fresh solutions like Adobe GenStudio and Firefly Services give companies the power to tackle personalized content creation at scale with speed and agility, helping them overcome their content supply chain obstacles. Adobe's customer-focused strategy for AI stands out significantly in terms of data, models, and interfaces; our Firefly models are trained on data that enables us to provide customers a solution built to be commercially safe. We've now launched Firefly models for Imaging, Vector, and Design, and recently gave a preview of a new Firefly Video model. Our strongest differentiation occurs at the interface level, thanks to our capacity to swiftly embed AI throughout our industry-leading product lineup, making it simple for customers of every size to embrace AI and gain value from it. Firefly-driven capabilities in Adobe Photoshop, Illustrator, Lightroom, and Premiere Pro assist creators in building on their innate creativity and speeding up productivity. Adobe Express is a fast and simple create-anything app, opening up creative expression for millions of users. Acrobat AI Assistant helps draw more value out of PDF documents. Adobe Experience Platform AI Assistant enables brands to streamline workflows and produce new audiences and journeys. Adobe GenStudio unifies content and data, merging rapid creative expression with the enterprise activation required to achieve personalization at scale. All in all, we're thrilled to witness customer enthusiasm and uptake for our AI solutions keep expanding, and we've now crossed 12 billion Firefly-powered generations throughout Adobe tools. I'll hand things over to David now to talk about the momentum in our Digital Media business.

Thank you, Shantanu. Hi everybody. During Q3, we generated net new Digital Media ARR totaling $504 million alongside revenue of $4 billion, representing 12% growth compared to the same period last year, driven by innovation across our Creative and Document businesses. Through Document Cloud, we keep reimagining the way individuals produce, modify, distribute, evaluate, and sign digital documents using PDF and Acrobat on mobile, web, and desktop. For many years, PDF has served as the go-to standard for housing unstructured data, which has led to trillions of PDFs being created and shared. Bringing AI Assistant to Adobe Acrobat and Reader has changed how people engage with these documents and pull value from them. During Q3, we shipped major enhancements, among them the capability to hold conversations spanning several documents and compatibility with various document formats, which saves users precious time and delivers meaningful insights. We are delighted to see this value reflected in AI Assistant usage, with AI interactions increasing more than 70% quarter-over-quarter; beyond consumption, our focus is on using generative AI to grow content creation within Adobe Acrobat. Adobe Firefly image generation is now part of our Edit PDF workflows. We have tuned AI Assistant in Acrobat so it can produce content suited for presentations, emails, and other communication formats. We are also preparing the foundation for richer content creation, such as generating Adobe Express projects. There's almost no limit to how this technology can be applied across different verticals and industries. A recent example comes from Tata Consultancy Services, which used Adobe Premiere Pro to transcribe many hours of conference video, and then turned to AI Assistant in Acrobat to generate easy-to-digest summaries of the event in just minutes. As a result, they were able to send attendees newsletters about session content in real time. Over the next several months, we're excited to use generative AI to deliver additional value in how content is created and consumed in Acrobat and Reader. Given how fast AI Assistant has been adopted, our plan is to actively promote subscription offerings that include generative AI features, instead of older perpetual plans that don't have them. In Q3, Document Cloud revenue came in at $807 million, which is 18% higher than the same period last year. Our net new Document Cloud ARR came to $163 million. There are other highlights as well. We increased what Acrobat offers customers by adding multi-document support for AI Assistant, improved meeting transcript features, and the ability to work with bigger documents. AI Assistant got improvements across mobile, web, and desktop, which includes voice-enabled conversations on Android. Collaboration through PDFs stayed solid, with shared links up more than 70% compared to a year ago. Acrobat Web drove growth at the top of the funnel, with monthly active users climbing over 35% year-over-year, helped by link sharing along with our extensions for Microsoft Edge and Google Chrome. On the enterprise side, we closed some notable deals — Amazon, Charles Schwab, Disney, Home Depot, KPMG, RedBull, Sutter Health, and the US Treasury Department all came on board. With Creative Cloud, the demand for creative expression and design across all kinds of media and surfaces has reached an all-time high. When it comes to consumers, they're sharing edited photos at record levels. For students, the priority is making school presentations that really stand out. Creative professionals are under pressure to crank out images, designs, and videos faster than ever before. Small businesses are looking to social platforms to connect with prospects. And at the same time, large enterprises are figuring out their content supply chains so they can personalize at scale. There's real potential in AI to give creative pros, communicators, consumers, and organizations regardless of size the ability to be more imaginative and efficient. What we aim to do is create tech that makes workflows inside our tools more streamlined and precise, via capabilities such as Text-to-Template in Express, Generative Fill in Photoshop, Generative Recolor in Illustrator, Generative Remove in Lightroom, plus Generative Extend for video in Premiere Pro, which is coming soon. Through Firefly Service APIs, we're putting the strength of our creative tools and the wonder of generative AI within reach, letting organizations produce and piece together content at scale. Adoption continues to accelerate as we integrate Firefly innovations throughout our product lineup, surpassing 12 billion generations since launch. The debut of our new Firefly Video model this week at IBC represents another important milestone on that journey. Designed for commercial safety, this video model—like every member of the Firefly Family—prioritizes granular control and deep application integration. Thanks to this, editors can realize their creative ideas more quickly within our video tools, including Premiere Pro; meanwhile, with Express, we are pursuing a multi-year strategic initiative aimed at dramatically expanding our footprint across all customer segments. Adobe Express, our AI-first content creation application, delivers on our mission of making creativity accessible to everyone. Since we rolled out the completely redesigned Express across web and mobile earlier this year, millions of people have taken it up. What they like is how easy it is to create just about anything in Express, and there's a lot of enthusiasm for our image editing tools that come from Photoshop, our video editing functions that come from Premiere Pro, our document and presentation workflows that come from Acrobat, and generative AI capabilities that no one else matches, which come from Adobe Firefly. When we bring Adobe Stock and design templates together with our unique Firefly Design Model, we ensure that whatever gets created in Express is able to stand out. Express is used by everyone from one-person operations to the largest companies in the world. We're continuing to expand Express while ramping up our go-to-market push behind products we've recently launched, including Express for individuals, Education, Teams, and Enterprises. As a result, cumulative exports rose 70% over the prior year in Q3, and we brought on more than 1,500 businesses plus millions of students. Revenue for Q3 came to $3.19 billion, up 11% year-over-year in constant currency. Creative Cloud net new ARR reached $341 million. Among the other standout items: fresh AI-driven capabilities in Photoshop that speed up essential creative work and cut down on repetitive chores. In Photoshop, Generative Fill got an upgrade to Firefly Image 3, Generative Image became broadly accessible, and users gained the brand-new Selection Brush alongside the Adjustment Brush Tools, which together make doing selective edits simpler than at any point before. Illustrator saw wide-ranging new developments, among them major gains in vector generation, better text-to-pattern functionality, and the entirely new Generative Shape Fill. Thanks to these steps forward, professional designers and illustrators have fresh options for rapidly turning their ideas into reality. The most recent versions of Lightroom and Lightroom Mobile have drawn remarkable adoption, and they now include the new Generative Remove feature. Using a single click, millions of people have erased unwanted objects from their pictures without damaging the original image. There's also robust appetite for Firefly Services, offering APIs, tools and services for generating, editing and assembling content, which lets organizations automate content production while keeping quality and control intact. API calls overall were three times higher than the prior quarter. Acrobat Pro single app remains a growth engine within Creative Cloud, which shows more and more people adopting PDF as their go-to format for creating, collaborating on and sharing visually compelling content. We've got some big enterprise customer wins to highlight: The Brandtech Group, Dentsu, Estee Lauder, Google, MediaMonks, Meta, MLB, Newell Brands, PepsiCo, Stagwell Group and the US Navy. Then next month in Miami, we're looking forward to hosting Adobe MAX, which is the largest creativity conference in the world — more than 10,000 members of our global community will be there in person, and we'll reach hundreds of thousands more who join online. Creators who inspire will be sharing what they think, and we'll be unveiling new things that span across our clouds. So to close out, we're excited about just how fast and how effectively new innovations are coming through across our Digital Media products, and about the continued execution we're seeing on a number of growth drivers. With that, I'll turn it over to Anil.

Thanks, David. Good morning, everyone. During the third quarter, we brought in Experience Cloud revenue totaling $1.35 billion. Subscription revenue came to $1.23 billion, which marks 12% growth compared with the same period a year earlier. For B2C and B2B organizations worldwide, Customer Experience Management continues to be a leading priority as they zero in on digital approaches for acquiring, engaging, retaining and expanding their customer base. What enterprises are looking for is a unified platform capable of delivering tailored experiences at scale to their customers, while also getting the most out of the ROI on their marketing and customer experience spending. By bringing Experience Cloud and Creative Cloud together, Adobe holds a distinctive position to merge the appropriate content, data and journeys in real time for each customer experience. The revenue growth we're generating throughout our categories — content, commerce and workflows, data insights and audiences, and customer journeys, all of which rest on the Adobe Experience Platform — shows how strong our business is. Major brands across the globe rely on Adobe to establish their content supply chain and provide personalization at scale, which makes us the industry's leading digital experience platform. With Adobe GenStudio, customers are seizing the chance to tackle their content supply chain difficulties. Thanks to native integrations spanning Experience Cloud and Creative Cloud, GenStudio gives marketers the ability to rapidly plan, create, store, deliver and measure marketing content, and to achieve better efficiency within their organizations. Vanguard, a leader in financial services, is building an integrated content supply chain to support the strategic aim of strengthening its relationships with a wide array of investors. Using the GenStudio solution, Vanguard managed to boost quality engagement by 176% through an emphasis on one-to-one personalization, and to capture millions in savings by enhancing content velocity and resource allocation via an end-to-end content creation workflow. Additional highlights include the following. The general availability of Adobe Content Hub, which further boosts the value of Adobe Experience Manager Assets. Content Hub lets brands rethink how creative assets get used throughout their organization and with outside agencies, increasing content velocity and producing significant efficiency gains. AEM Assets is relied upon by most of the Fortune 50, among them 8 of the 10 biggest media companies, 9 of the 10 biggest financial services companies and 8 of the 10 biggest retailers. There's growing significance and uptake of Workfront for streamlining workflows across marketing organizations and agencies. We strengthened our leadership in this category by making Adobe Workfront Planning generally available, which provides a thorough picture of every marketing activity within an organization and allows teams to fine-tune marketing planning and execution. Major brands such as Deloitte, Interpublic Group and NASCAR are turning to Workfront Planning to achieve productivity improvements and satisfy escalating demand for deeply personalized marketing campaigns. Momentum continues to build for Adobe Experience Platform and native applications, among them Real-Time Customer Data Platform, Customer Journey Analytics and Adobe Journey Optimizer; we broadened our AEP portfolio by making Adobe Journey Optimizer B2B Edition generally available, which taps generative AI to provide personalized experiences for buying groups — the decision-makers, practitioners and stakeholders who handle major purchasing decisions. We received notable praise from industry analysts, such as being named in the Forrester Wave for B2B Revenue Marketing Platforms, plus 3 IDC Marketscape reports covering Digital Asset Management and Headless Digital Commerce, in versions for both Enterprise and Mid-Market. Among the notable clients we brought on board are Dentsu, Home Depot, Humana, IBM, Johnson & Johnson, Mayo Clinic, Newell Brands, Premier League, Stagwell Group, TD Bank and UPS. At MAX next month, we can't wait to reveal fresh customer experience management breakthroughs spanning content, data and journeys, highlighting integrations connecting Express, Creative Cloud and Experience Cloud for freelancers, solopreneurs and marketers at agencies and enterprises. Our speed of innovation, dedication to customer value, worldwide partner ecosystem, and category-defining solutions put us in a position to keep leading the market. I'll hand things over now to Dan.

Thank you, Anil. To kick things off today, I'll walk through how Adobe performed during the third quarter of fiscal 2024, point out the growth engines across each of our businesses, and then wrap up with our financial goals. During Q3, Adobe brought in all-time-high revenue of $5.41 billion, reflecting 11% growth compared to a year ago both as reported and on a constant-currency basis. Striking a balance between expansion and profitability has sat at the heart of how we run this company for many years, built on prioritizing where we place our bets, innovating without pause, and executing with extreme discipline. The results we posted in Q3 demonstrate that playbook at work; we are pouring substantial resources into our technology platforms, rolling out campaigns worldwide to bring in more customers, and bringing aboard elite talent, all while generating best-in-class cash flow and profits. Business and financial highlights for the third quarter were as follows. GAAP diluted earnings per share came in at $3.76, while non-GAAP diluted earnings per share reached $4.65. Digital Media revenue totaled $4.00 billion. Net new Digital Media ARR was $504 million. Digital Experience revenue came to $1.35 billion. Operating cash flow was $2.02 billion, and we closed the quarter with RPO of $18.14 billion. Within our Digital Media segment, Q3 revenue reached $4.00 billion, up 11% from a year earlier, or 12% in constant currency; we ended the quarter holding $16.76 billion in Digital Media ARR, which lifted our closing ARR book of business by 13% year-over-year in constant currency. Adobe posted Document Cloud revenue of $807 million, an 18% increase versus a year ago as reported and in constant currency. We brought in $163 million in net new Document Cloud ARR, a Q3 record, raising our closing ARR book of business 24% year-over-year in constant currency. Growth drivers for Document Cloud in Q3 were as follows. Growth in usage and MAU across Adobe Reader and Acrobat. Growth in usage and MAU through third-party ecosystems, such as the Google Chrome and Microsoft Edge extensions, which are fueling free-to-paid conversion. Need for Acrobat desktop and mobile subscriptions spanning every customer segment and geography. Powerful monetization of our AI Assistant alongside new Acrobat subscriptions. Powerful performance among SMBs, fueled by our reseller partner network, plus powerful enterprise and public sector sales, with several big deals signed during the quarter; Creative revenue reached $3.19 billion, up 10% compared to a year earlier, or 11% in constant currency. We brought in $341 million in net new Creative ARR during the quarter, lifting our closing ARR book of business 11% year-over-year in constant currency. Growth drivers for Creative in Q3 were as follows. Fresh subscriptions to Creative Cloud All Apps spanning customer segments, among them Teams, Enterprise, and Education, helped by back-to-school demand. Momentum across our Acrobat Pro, Illustrator, Lightroom and Photoshop single apps on Adobe.com. Rising need for our AI-first Adobe Express offerings in mobile, emerging markets and Education. Early monetization of our new Firefly Services solution among enterprise customers. Ongoing momentum from new subscriptions in emerging markets, along with contributions from customers upgrading to our higher-value Creative plans when renewing. Shifting to our Digital Experience segment, Q3 revenue reached $1.35 billion, up 10% versus a year ago as reported and in constant currency. Subscription revenue for Digital Experience came in at $1.23 billion, up 12% compared to the same period last year, both as reported and in constant currency. Several factors drove Digital Experience growth in Q3. We saw robust subscription revenue growth at scale for AEP and native applications, which rose more than 50% versus a year ago. Subscription revenue also grew strongly with Adobe Experience Manager and Workfront. We had success closing transformational deals, along with selling individual solutions. Retention and expansion remained solid across our enterprise customers, and our pipeline keeps building for GenStudio solutions aimed at the content supply chain opportunity. Now moving to the income statement and balance sheet. During Q3, Adobe achieved EPS growth of 23% year-over-year on a GAAP basis and 14% on a non-GAAP basis. The main factors were revenue growth and a disciplined approach to prioritizing our investments, which produced operating margin strength in Q3. The company keeps delivering world-class margins even while investing significantly in AI model training and inferencing capacity. Adobe's effective tax rate for Q3 stood at 17.5% on a GAAP basis and 18.5% on a non-GAAP basis. RPO at quarter end totaled $18.14 billion, an increase of 15% year-over-year as reported, or 16% in constant currency. Current RPO rose 12% year-over-year as we exited the quarter. Our cash and short-term investments at the close of Q3 came to $7.52 billion, and cash flows from operations during the quarter reached $2.02 billion. In Q3, we signed a $2.5 billion share repurchase agreement, and we have $20.15 billion left of the original $25 billion authorization approved in March 2024. We'll now share Q4 targets, which take into account current macroeconomic conditions and typical year-end seasonal strength. For Q4, our targets are as follows. Total Adobe revenue between $5.50 billion and $5.55 billion. Digital Media net new ARR of roughly $550 million. Digital Media segment revenue between $4.09 billion and $4.12 billion. Digital Experience segment revenue between $1.36 billion and $1.38 billion. Digital Experience subscription revenue between $1.23 billion and $1.25 billion. Tax rate of about 16% on a GAAP basis and 18.5% on a non-GAAP basis. GAAP earnings per share between $3.58 and $3.63, and non-GAAP earnings per share between $4.63 and $4.68. To wrap up, I'm proud of how we've performed year-to-date, reflecting a strong mix of product leadership, fast innovation, a diversified business, and financial discipline. With the enormous markets we're catalyzing, I have confidence in our capacity to drive growth and lead the industry. Shantanu, back to you.

Appreciate that, Dan. Putting customers first while innovating responsibly remains a shared mission that unites everyone here at Adobe. Back in 2019 we launched the Content Authenticity Initiative, and today it has grown to more than 3,300 participants spanning the digital ecosystem, each one dedicated to strengthening trust and transparency through Content Credentials; over the course of five years, what began as an idea has become something real, with organizations such as Amazon, Google, Leica, Meta, Qualcomm, Sony, TikTok and additional names all pledging to put Content Credentials into practice. When it comes to official DoD imagery, the US Department of Defense turned into the first federal agency to adopt Content Credentials. Together with Governor Gavin Newsom, we are launching a fresh effort aimed at strengthening digital and media literacy among K-12 schools and higher education institutions throughout California. Through delivering educational materials, programming, and resources to schools statewide, we can assist in preparing California's future workforce to thrive in an AI-driven world, and serve as a model for additional states and nations. In the coming week, we'll gather our employees for the yearly Adobe for All conference, honoring our vision and purpose along with the difference it makes for our customers and communities. My confidence is strong that Adobe's culture, inventive product roadmap, worldwide market opportunity, trusted brand, and the steadfast dedication of our team will keep propelling our success. Thanks, and now let's open it up for questions.

Hi everyone. I appreciate you fitting me in, and congratulations on what appears to be a really robust quarter. I have a single question, though it comes in 2 parts. Regarding the quarter itself, the Digital Media ARR in particular seemed extremely robust. It came across as unusually strong, since sequential net new ARR growth during 3Q hasn't happened, as I recall, for close to 4 years. So perhaps you could explain what caused this out-of-season strength. Is it pricing, AI momentum, and especially the net new ARR from Document Cloud? Yet simultaneously, with all the product progress you described in the script, it's somewhat puzzling why the Q4 guidance is the weakest sequentially it has ever been for Q4 regarding net new Digital Media ARR, which I believe leaves people somewhat anxious about perhaps the forward-looking, the coming year's results; so perhaps you could speak to this contradiction, because it seems seasonally a bit unlike what we typically see. And I believe it's pressuring the stock in after-hours trading.

I'm glad to begin, Alex, and then David can certainly chime in as well. To your point, we delivered a robust quarter, and when I consider Digital Media, Document Cloud, exactly as you mentioned, Acrobat keeps delivering, the AI Assistant, and the SKU tied to Acrobat keeps delivering nicely. As we stated, we anticipate Creative to demonstrate growth-on-growth year-over-year, and that unfolded precisely as we anticipated. And it was a solid finish, if you examine it in terms of how the last few weeks went, we experienced the usual momentum we'd expect heading into Q4. I understand how you're framing it, you're examining the sequential guide. Our view is that it's the highest Q4 target we've ever issued for Q4, Alex. So I believe we simply keep concentrating. We would anticipate Creative to once more expand regarding growth-over-growth, net new ARR in Q4. And every one of the fresh initiatives we're discussing, AI, and so on, keeps delivering; so from where we stand, when we consider what we guided for the second half of the year, as you noted, Q3 is stronger. We anticipate a seasonally robust Q4, and then ongoing innovation ought to keep fueling growth.

And perhaps I could just tack on a few points to what Shantanu mentioned. Once more, just a bit more background regarding why Document Cloud is performing so well. Clearly, link sharing along with our reader distribution efforts across mobile, web, and desktop — that is genuinely what keeps propelling this business, and that fundamental momentum won't stop in Q3 alone; it's something we can rely on and build upon moving forward, since we have numerous flow optimizations tied to it. When we turn to Creative Cloud, once again, our range of offerings is wider than it has ever been, correct? With Creative Cloud, for instance, we now have higher-value, higher-priced options, owing to AI innovation occurring within the base plans that is shaping how the Creative Cloud business performs; we also now have a wider range of offerings than ever before with web and mobile, covering Premium as well as lower-priced options that are fueling greater proliferation. And combining those two elements also feeds into the quarter's momentum and our outlook. But when you consider the second half as a whole, we entered it with a robust forecast for how it would unfold; and honestly, it is unfolding just as we anticipated regarding the total Q3 and Q4 figures. On the timing details, Q3 came in somewhat better than you had projected, and for a solid reason tied to seasonality. I believe much of that can be attributed to a handful of deals that historically would only have closed in Q4, instead closing sooner than anticipated in Q3, which shifted the dynamics around the linearity you'd normally observe between Q3 and Q4.

That's really useful, guys. Appreciate it once more.

Thanks a lot, and congratulations from me. David, I'd like to know whether you could contrast the AI monetization chance you see with the image models against what may come later with your audio and video models — for example, what number of tokens could be used when a person creates a video instead of an image. And connected to that, how hopeful are you that it may be possible to overcome certain constraints of today's video generation models, such as facial expressions that aren't realistic, an inability to deal with object interactions, or videos that don't have sufficient detail or resolution?

Yes. Glad to address that. Let me take a small step back and discuss our core AI strategy and then how that turns into our thinking about monetization. I believe we've stayed remarkably consistent with what we stated a year, a year and a half back, when we described that we would build the widest range of models for the creative community and would set those models apart through quality, commercial safety, the ability to integrate them into our tools, and controllability. As you've observed quite methodically across the last 18 months, we keep delivering more and more of that innovation. And that is basically paying off, since we've now begun embedding it far more actively into our base. With photography, for example, our tool now includes generative remove and AI-assisted edits. In design, there's Generative Pattern and Generative Fill Shape. In Photoshop, we have Gen Remove. We also have Gen Fill, and I could keep going through all the generations, but we've also begun putting it into Firefly services for what we let enterprises access and use through batchwork and APIs. As for how that has unfolded, as we mentioned, we're seeing faster adoption and generative credits being used up because of that deeper embedding across all our tools; and that is happening the way we anticipated. Turning to how that translates into monetization, first and foremost, we've folded a great deal of that value into our core products, along with greater value and higher pricing. We're also finding that when people use these generative features, they stay subscribed at a better rate; we're also finding that when people visit Adobe to try our Creative Cloud applications or Express application, they can convert at a better rate. So we receive all these secondary implied advantages. As for direct monetization, what we've previously said is that the present model centers on generative credits, which I think is the direction your question is heading. And what we're seeing is that each new feature we add to the product leads to a rise in overall credits being used. At this point, we have not yet put any limits in place, and as we've consistently mentioned, our main goal has been to drive adoption and expand how much the tool is used across our existing user base. There's a lot of enthusiasm among users. These rank among the most heavily utilized features we've ever introduced. We're also aiming to prevent the anxiety people might have about generating content. Still, we're monitoring the generative credit ecosystem very carefully, and at some stage, when it feels appropriate, we plan to introduce those limits, or we might explore different approaches. The approach we took with Acrobat AI Assistant turned out to be quite successful. So we're evaluating additional possibilities, such as offering standard CC plans that come with a basic set of generative tools, while also providing premium API—excuse me, premium AI plans that would cover things like video and more. Overall, we're thrilled about the innovations on the horizon. We recognize a chance to dive deeply into monetizing this. But we intend to let it develop gradually, with adoption remaining our top priority. Finally, regarding quality, I'm not sure if you've seen any of the videos we've shared, which are built right into Premiere, plus text-to-video and image-to-video options with greater control. We can now create not only scenes featuring people, dogs, and natural animals, but also various overlays and elements that creative professionals truly need to use. So we're really enthusiastic about what they can access immediately and start using. And the rendering of human faces and similar details will keep improving. We've got plenty of excellent research that will soon become visible. I encourage you to try out the models, since we've made a massive leap in that area.

Mark, I might just build a bit on what David shared, and it was excellent. I hung out with the video group for 2 hours. They've completely knocked it out of the park. The effort they've put in, using the image models alongside video. And once more, regarding David's point, the Premiere integration — that's exactly what we've always maintained. What sets it apart is combining the model with the application. When competing models initially launched, I think folks reacted with, wow, you can describe it. That represents only a tiny fraction of where value resides; the actual value comes when you've got a video and wish to extend it. In terms of what we're capable of, it's a game changer. So I'm genuinely thrilled about our video work. And once more, per David's point, monetization here will differ from how we handled images, which fell under the base value pricing umbrella; so here's how I'd respond to your question, and the third item I'd mention is, keep in mind, we can also build custom models. Thus, when you take in video that users wish to edit, being able to extend it hinges not only on the model itself, but additionally on what the new data happens to be. And once more, that's a genuinely unique capability for us. So ideally, all 3 of those show why we're out front regarding how users can get value within nonlinear editors, which is where things are heading.

Thanks a lot.

Hello. Thanks so much. I’m grateful you’re taking my question. I’d like to build a bit on how we ought to be thinking about—David, you brought up monetization just now. And do you believe consumption, as we begin to move into the new year, could add to ARR growth when we look at FY'25? Because I think there are widespread worries that the competitive landscape might actually constrain your capacity to switch on that monetization, so to speak, whether through consumption or through price. And I simply wanted to find out whether you might weave consumption into the context of competition.

The way we see it, Keith, I think when you consider what we possess with the apps and the models, we keep believing that is uniquely differentiated. Firefly services, which you can also regard as a consumption model that we have, has gotten off to a very strong beginning. Our capacity to provide enterprises with the means to automate content and build custom models inside enterprises—we are witnessing genuine traction, since it is a differentiated solution in that it is built to be commercially safe; and when it comes to the core subscription models, again, David made this point, but I will say it once more, namely, the core subscription models for products such as Photoshop and Illustrator, I believe, the differentiation lies in combining the model with the technology. And in video, I think we will discover further ways to monetize it. So, I’m not certain whom exactly you mean when it comes to competition in this area, but the way we see it, it is simply unique. I mean, if you look at how quickly things have accelerated in what we’ve seen of generations in Photoshop, Illustrator, Lightroom, it is evident that we are in fact extending the value rather than having others catch up.

And then there's one more point I want to stress: commercial safety truly matters to companies of every size, honestly, and that's an area where we believe we stand apart in a very, very, very meaningful way, on top of all the things Shantanu mentioned.

Keith, that's helpful. For a second question, I want to expand on what Alex raised earlier. That said, you're pushing net new ARR toward a year-over-year drop of 3% in Q4. My impression is investors may still be applying that as a lens for the upcoming year. Is there any reason net new ARR would decline next year? I understand you'd prefer not to give guidance for next year, but if you have any thoughts about the guidance related to net new ARR decreasing in Q4 versus a lens we could use for FY'25 net new ARR, I'd welcome them.