Adobe Inc. (ADBE) Earnings Call Transcript & Summary

Gil Luria, D.A. Davidson, the Head of Technology Research and Senior Software Analyst. I have the CFO of Adobe, Dan Durn; and the CFO of Adobe's Digital Experience business, Steven Day, for conversation today. And we will keep it that way. I'll try to make it a little more conversational, but I will be monitoring my e-mail at some point to see if there's any questions from the audience. For those of you that don't have my e-mail handy, [email protected], and I'll keep an eye on that. As I promised Dan and Steven at the outset, let me start with a statement of where I think we're at. Adobe -- so we cover, just by way of background, we have 6 publishing analysts in software at Davidson. We cover more than 70 software companies. Adobe is the biggest dislocation in software. It is the most mispriced stock in software as far as I'm concerned. Of the 70 that we cover, it is by far the best value, and I am continuously perplexed by where the stock trades. Clark and I have done a tremendous -- Clark Wright, the other covering analyst, have done a tremendous amount of work on Adobe. He's traveled to all the conferences, competitor conferences, worked on the tools, and we keep coming back to that statement. So the purpose of this conversation is really going to be talking through what we do about that. And so let me start with a couple of -- so again, thanks for being with us today. Let me start with a couple of high-level questions.

So Dan, you've been at Adobe for almost 4 years. Is Adobe in better or worse shape than when you started?

Absolutely better shape. I think about the inflection that's shaping the end markets, increasingly digital content data being the driver of global economic growth against that backdrop for the digital content company, the digital document, digital workflow company and the digital interface between a company and its customers through that digital channel. Any one of those would be a great business. All 3 under one roof at this moment in time, I think, makes us a special business. And nobody comes to the table with the collection of assets that we have. And as we drive cross-cloud solutions to solve our customers' highest value problems, I feel like we're incredibly well positioned to capitalize and generate a tremendous amount of value as this market inflection plays out. So I'm very bullish on where we sit today. I was 4 years ago, but I'm more so today than I was 4 years ago.

Steven, you've been there almost 20 years. How do you feel about where we're at?

Yes. The company is very different from when I first started. We had no enterprise business. There was no such thing as a subscription software business at the time. Of course, we were shrink wrap and license products, a very sort of early sort of enterprise footprint of like a few hundred thousand, and it's amazing the difference that it makes now seeing the company and how it's evolved from like a $3 billion to $4 billion a year business to the $20-plus billion business we have today. Yes. No, I mean it's worlds apart from what it was then. It's in such a better place and the opportunities ahead are still fantastic.

So let's -- so that dislocation that I talked about at the outset, for a while, Clark and I thought it was the tactical issues, it was the specific tools, or is the growth rate going to be 10% or 10.5%, is ARR going to grow slightly faster than you guided, slightly? And we did a lot of the work there. And at some point, I realized I actually think the problem is at a much higher level. So we'll get to those topics. I'm sure that's where the questions are going to come in. But at a higher level, I almost think that because you've been public for so long and such a household name, there's some -- it's easy to forget what you actually do. So I don't want to spend too much time on this, but can we visit what those key businesses are and where the value added is in each of them, because that will help us, I think, frame the rest of the conversation that we're going to have about AI and competition from the low end and margins and growth rates and all that. But can we just frame it, because I sometimes talk to investors. Again, not the investors on this call. They're all incredibly well informed and good looking, but I have talked to investors that sometimes it seems to me like they forget what Adobe actually does. So can you just touch about what those businesses are, where the key value added is in each of the businesses?

Yes. So from a digital document standpoint, PDF, most common file format on the planet, over 3 trillion PDFs in this world and the world's information lives in PDF. Acrobat is the clear market leader in terms of engaging with that file format, whether you're consuming content, whether you're editing, you're making the documents visually rich. We're so foundational to the exchange of ideas, exchange of insights, exchange of information, we're literally ground zero of how companies and people communicate through the most common file format on the planet. Monthly active users, over 700 million monthly active users. We're virtually touching 1 in 10 people on the planet each and every month. It's the most performant part of the freemium funnel, massive top-of-funnel surface area through a strong PLG motion drives strong growth in that business. Increasingly, you're going to see communications become far more visually rich. And so as you think about the next piece of the business that I'm going to talk about, think about increasingly blurring of the boundaries between documents and creativity to strike right at the heart of productivity and make it more visually rich. From a creativity standpoint, we are the de facto standard in this world on how digital content comes to life. If you think about the creativity process, when someone has a spark of inspiration, when someone has a clear idea in their mind's eye of what they want to see, our tools bring that spark of inspiration and what's in someone's mind's eye to in the digital world. And it's across different media types and whether it's Photoshop or Illustrator vector, whether it's in design, design layouts and how things get communicated to consumers, whether it's premiere and after effects on how feature-length films and short films come together, we're virtually touching every aspect of the creative process to bring those ideas to life in the digital world. And everybody in this world has a story to tell, whether you're a consumer, whether you're a small or medium business, whether you're the largest enterprises on the planet communicating brands and products to connect with people, whether you're a creative organization that's engaging, whether it's Netflix or linear TV, connected TV, whatever it happens to be, we're foundational to bringing those ideas to life and connecting with virtually everybody on the planet. And the de facto standard means there's a pervasiveness of that footprint in the ecosystem, which I'm sure we'll come to later in the conversation. As we talk about the inflection of where we are at this moment in time, we'll talk about the importance of the pervasiveness of the Adobe ecosystem as a surface area of bringing these new generation of technologies to life. The third piece of our business, this is where we provide infrastructure for companies to connect with their customers through a digital channel. If I go back to the Adobe journey, we've been running our business this way for the better part of a dozen years now. We went digital and connected directly with our customers through adobe.com and the surface area of the products that they know and love and they work with every single day. How we've tuned a set of infrastructure to connect with those customers, drive commercially accretive outcomes when they're exploring their next product purchase, or make sure they're aware of the new product features. There's a whole infrastructure that's defined our digital go-to-market with our customers. We're packaging those capabilities up and serving them up to the largest enterprises on the planet. And nobody knows more about this than we do, because we develop these capabilities for customer zero ourselves, and we've run our business this way through the digital channel. So the insights we've derived from running our business for over a decade this way, serve our customers extremely well. And where I personally get excited about this third leg of the business. Everybody today, from multinationals, large corporations take for granted that you need an ERP system at the core of a company's infrastructure to operate. But if you rewind the clock 30, 35 years, that was not a foregone conclusion. And then SAP and Oracle emerged with an integrated suite of capabilities and companies derive productivity benefits from that infrastructure. And it's a foregone conclusion today, companies are going to operate. As you think about front office software as distinct from back office, how companies connect through digital channels, the foundational components of developing content, serving it up, workflows, analytics, driving commercially accretive outcomes, that's all Adobe. And I think if we roll the clock forward a decade, I think there's going to be a general acceptance that every single large multinational company is going to need a front office suite of capabilities to complement the physical infrastructure to drive those commercially accretive outcomes with customers from investments they're already making. I see the power of it in our financials, mid-40s operating margin. A lot of that in addition to being a disciplined operator is the power of a finely tuned digital channel to monetize investments we're already making. I know the power of these technologies. Nobody does it better than we do. Nobody has a more complete vision and the upside in that business, in my opinion, is off the charts.

Exactly. Okay. That's what I was hoping, because I'm going to make 2 points. One is each one of those businesses you described, you've been growing double digits. And you've been growing double digits for a very consistently long time. I'm going to circle back to the stock and your peers, but we're not going to be able to say it about them. And then the second point is, what you didn't just say, we take blank sheets of paper and put text on them. We take blank sheets of paper and put an image on them, blank sheets of paper and put a video on them. That's where the technology is shifting. Everything else you just said is not changing. And so let me ask it just -- even qualitatively, 3 years ago, before the AI revolution, what percent of your revenue came from image generation, from going from nothing to having an image. You have a stock photo business from movie directors putting images on camera. What percent of the business was that?

I want to say it's probably 75%, 80% of the business. And I forgot what time frame did you say, over what time frame?

I'm not talking about what you just described. I'm saying the 0 to an image, my point is that I think it's actually a very small part of your business, that taking the [indiscernible] starting to put it in a workflow, communicate it, publish it, edit it is what you do. The photo in the first place, the video in the first place, the word document in the first place has never been Adobe's business.

I think that's exactly right. Now I understand the nature of the question. So let me frame it for you in sort of my perspective. So I think there's 4 steps in the creativity process. Step 1 is ideation; step 2, image capture; step 3, production; step 4, do something with it, activation and delivery. Historically, Adobe's traditional source of strength was in production, step 3; activation and delivery, step 4. We were never in conference rooms and whiteboards as creative types explored the surface area of possibility for that spark of inspiration. We were never foundational to a photo shoot where you go on to a beach and you do Tahiti in one shoot and Bora Bora in the next shoot and Hawaii in the next shoot and then the South of France. That was never our area of focus or expertise. We weren't in a digital SLR camera. We weren't on Hollywood movie steps with the movie cameras. What's great about the inflection that's unfolding in our market, software gets to shift left into the creativity process. We go from the traditional source of strength of production and activation and delivery, we shift left into image capture. Firefly Image Model is an image capture device. Firefly Video Model is now an image capture device. We get to shift left in the process. And as we think about products that we're releasing, infinite canvases, surfacing Adobe generative AI models, surfacing third-party models, we get to participate now in the ideation space in a shared digital environment. This inflection, not only it makes the core business better because we've got a unique set of assets that really define end-to-end creativity in an enterprise, we get to shift left in a TAM expansive way into areas we traditionally have not participated in, which is ideation and image capture.

Right. And so with all that as the setup, you've gotten the AI question a million different ways. I'm just going to ask it open-ended. The concern is, right, the conventional wisdom is, again, hence, back to my original comment about the big dislocation is that the way AI is going to develop is going to take away the value of what you're doing. You've answered the question in a million different ways. What's the way that you've been able to answer the question that you feel will help our investors understand the nature of how things are going to develop from here?

Yes. I'm going to come back to the pervasive comment I mentioned earlier. In the era of generative AI, the winners are going to be those that enable customer success. And so as you think about the strategy that we're pursuing, pervasive ecosystem that defines day-to-day workflows for virtually anybody in the creative process. And you take these technologies and you deeply and natively embed them into the products our customers know and love and revealed into the workflows in line. That's where the real productivity magic of generative AI happens. It's not a one-off model that has some cool technology. As workflows materialize, everybody wants integrated workflows from ideation to capture to production, all in line. And so the strategy of natively embedding these technologies into this pervasive ecosystem as well as surfacing third-party models to explore more surface area in the ideation process, but offer our customers something that's truly, truly valuable in the form of a Firefly Model when you get to production, so you do something with it commercially with customers. Our customers want a commercially safe option. They want models that have controllability at their core for fine grain control to really unlock the productivity benefits. And then they want the embedded capabilities around content authenticity and a digital nutrition label, so that as customers engage with digital content, they can verify, so they can trust. We have shifted from trust but verify to verify then trust. And we're putting all of the infrastructure in place to realize that vision deeply and natively embedded into the products customers know and love that are the foundation and definition of their workflows today. Nobody is in a more advantaged position with that end-to-end set of capabilities with the complete vision around commercial safety, because production and activation is the end of the creative process, and it needs to be done in a responsible way. The recent lawsuit around those scraping data to produce models is a proof point that as case law gets written around these technologies, I think it's going to be validation that our approach and the way we're engaging with customers is the right one. And one proof point of that, Coca-Cola, Project Fizzion, that is their project, not ours. They are creating a bespoke design environment on Adobe infrastructure that allows them to harness the power of generative AI models to do it with high brand fidelity, so that as they deepen their engagement with customers through a digital channel, it's not flooding the zone with genericized content, it's actually higher productivity outcome to connect in a more personalized way with high brand fidelity. What's happening with Coke and Project Fizzion, I think, is the vision that all large multinational companies drive towards. Coke is visionary, harnessing the power in the way they are, but there's going to be others that follow. And I feel really good about the foundational nature of Adobe in that ecosystem with that as a vision, bringing it to life for customers.

That's very helpful. So let me bring it down one level before we move on from AI to the tactical level, which is you provide a lot of AI tools, a lot of generative tools with the image business, with the video business. But you're also talking about a very important aspect, which is incorporating third-party models. Can you talk about the specific time lines of when we've introduced the ability for customers to incorporate third-party models? And what's the road map for continuing to do that in terms of dates?

Yes. So as you think about that 4-step creative process, ideation, capture, production, activation and delivery, the traditional source of strength, production and delivery, from a capture standpoint, we've always been agnostic to the creative ecosystem around what device they choose for capture. Our approach to generative AI models, it's an alternative capture device, is going to be very consistent with customer choice. Ideation is about how fast you can explore a broad surface area of ideas to create that spark of inspiration. Putting these models that have different personalities at our customers' fingertips to enhance that ideation process, to explore more surface area, to get to that spark of inspiration faster, so that they can take it into production and delivery, drive that productivity from an end-to-end standpoint is foundational to the thought process. And in an environment where companies are trying to drive better productivity to connect in a personalized way, creatives who are executing a vision don't want to pop into this model environment or that model environment out of their workflow. Then they save a file, they import a file. It doesn't have the layers and the complexity that they would typically expect within our workflows, and it creates friction in a process. Having that vision of what our customers are really trying to accomplish and how we unlock the magic of the technology to really drive productivity is foundational to injection of these third-party models within the workflows. So it's a seamless process where they can access personality of different models. And we announced a handful of them on the most recent earnings call to give a snapshot of where we are. And then I think there was a half a dozen of them on the road map of models that stay tuned, they're going to be announced and brought to the ecosystem. And there will be more after that. And so this is ultimately about giving customers choice, enhancing the creativity process, and making our customers even more productive, leveraging the pervasiveness and the de facto standard that we represent in the creative process.

Great. I'm getting a few questions. There's some detailed financial questions. I promise those that asked, I will get to those. But I got one on AI. So let me extend this section just a little bit, which is part of the concern is, yes, the tools will be useful in Adobe, but because they're so useful, there's going to be such a dramatic reduction in the number of seats that since much of our revenue comes in at that model, that will be a headwind going forward. So the 2 parts of that question are, do you actually anticipate there will be less creative seats going forward? And to the extent that for some of your products there are less seats, how are you going to transition to more of a volume model?

So I'm going to take a step back because I think the journey the technology industry has been on is instructive to my philosophy on how I'm going to answer this question. So we go back, productivity enhancements is not new in the business world. Productivity enhancements is not new in technology. It's been alive and well for decades. And one observation I'd make around companies and R&D as a percentage of revenue. You haven't really seen a dramatic shift in the investments people are making to drive road maps and serve customers and make them successful despite the fact that productivity enhancements have been a multi-decade trend. And why is that? The basis of competition for companies is, are they driving growth? Growth is underpinned by customer success. Customer success is underpinned by road maps and time to market of those features. The competitiveness is in the road map and how you drive success with customers. Companies that drop all of those productivities to the bottom line may get a near-term sugar high, but it's going to be at the expense of long-term competitiveness, because their road maps are going to atrophy relative to the competition that continues to invest in those feature sets and invest that productivity into what the real basis of competition is. And I think the analogy holds when you think about the creative process. If the world was at a point of efficiency in terms of content created and digital content consumed, we're at an equilibrium and a point of efficiency. Then I think you could argue that you're going to see seat compression from productivity enhancements. I would argue that the supply of digital content today has been limited due to the productivity with which you can bring that content to life in an economically affordable way. I think productivity is going to lead to a significant amount of digital content creation. We have more digital content in our lives today than we did 5 years ago and certainly 10 years ago. And 5 years from now and 10 years from now, I understand exactly where this is going. 5x increase in digital content in the next 3 years, I think it is. There is a voracious appetite for more and more. So I don't have a point of view that it leads to seat compression. But let me take the other side of that argument. And let's say, I'm engaging with an enterprise and I sell a seat of our Creative All Apps into an enterprise, and let's say it's a $1,500 seat. It's not the right number, but just use it as an illustrative example. And it's used by someone who, let's say, makes $200,000 a year. And let's say there's a team of 10 of those people making $200,000 a year. So from a labor standpoint, I've got a $2 million labor charge. And if I can enhance productivity and go from $10 to $8, and my software costs $1,500 a year, but I'm saving the company $400,000, I guarantee you there's a value sale from the unlock of that capability, driving productivity into their operations that it's no longer a P times Q equation, that V is introduced into the equation and the economic algorithm for Adobe. You see that with Firefly services, the way we're scaling up content production in the enterprise, making it an outcome-based, value-based sale. Those pieces are going into place. So you can take either side of that argument. I've got a personal view based on what history and technology has taught me over the last 3, 4 decades. But if that argument is not persuasive and you take the other side of the equation, the headroom we have from a value standpoint because we're competing with salaries of people versus a subscription cost that is modest, very, very modest in comparison, the headroom from a value standpoint is enormous.

That's great. So I want to take a little detour to be able to help with some of the financial questions, because that's most of where we're coming in. Then I want to come back to competition, because we're getting some questions about that. So let's start with the fact that on the most recent earnings call, Shantanu said that 10% is still our true north. I think he said a lot more eloquently than I just did, but that's one very important statement. I think you said that margin expansion is still possible even from these very high levels, as in we have the capacity within our businesses to still grow 10% revenue and faster than that on earnings. One of the important piece parts to that is our ability to impact pricing. And there's been a lot of moving pieces, and you've been very transparent about it. Over the last couple of years, you've been transparent about the impact of pricing, when it's a net headwind, when it's a net tailwind. So if you wouldn't mind walking us through the most recent large pricing changes, how they play out, and I'm going to take specifically to how they play out for the balance of this fiscal year.

So as you rightfully point out, we've been talking for a while about how we're going to broaden the product lineup. And if I were to go back in time, as you think about a product that's doing multiple duty across customer segments, your ability to drive ARPU increases into that equation, means that you're going to truncate the long tail of customers who get periodic benefit from the product to capture the area under the curve from the power users of the product. And you've got to optimize across that continuum. With the broadening of the lineup, we now have better purpose-built products to meet these users' specific needs. And then within the power users, we've now created a headroom for ARPU increases over time without having to worry about truncating the long tail of customer exposure. So we've optimized now the product lineup to really meet customers where they are and the use case-specific needs that they have and the area under the curve from the power users in terms of value received versus how we're pricing it historically. There's a ton of headroom, and now we're set up to continue that journey. And pricing is a journey. It's not pulling one big lever. It's going to be a journey and multiple steps along that journey periodically where you're aligning the value we get with the value that is being delivered to the customer. Most recent, CC Pro, it's marrying the Firefly capabilities with our All Apps application. It's a portion of the customer base. It's not single apps. It's not stock services, substance. It's a slice of the customer base and initially North America. We'll roll out to other geographies here in the coming months. And then you'll see as you layer in on renewal, it's not everybody's price changes overnight. At renewal, customers will be renewed into the new SKU at the higher price level, and you'll get a layering effect that will build over time. So it's not an instant on pricing benefit overnight. And it's very consistent with the strategy we've been talking about now for the last couple of years, broadening that lineup and giving us the degrees of flexibility, so we can start going on the pricing journey as part of the growth algorithm. Remember, the predominant driver of growth at the company is still new users. And every year at the Analyst Day, we showed the chart of paid subscribers into the Digital Media business, and you see the upward slope on that. It's the predominant driver of growth, has been, continues to be. We're going to continue to cross-sell our customers along the way, get them landing into the Adobe ecosystem, and then through these digital techniques and insights that we've derived, figure out what's next in their journey to deepen their connection with the Adobe ecosystem. So cross-sell and upsell is step 2 of the algorithm. Pricing is step 3, but we've now got the product lineup to really support optimization across that product lineup for the way in which customers are deriving value.

Yes. That makes a lot of sense. To drive it then all the way down then, are the price increases that we've taken in May for the balance of the year? Are they going to be net higher than the price increases that we were lapping a year ago?

Pricing is less of a contributor this year than it was in the prior year. So it is less of a contributor this year.

And then the last piece on that is you've gone a little bit away from making a quarterly commentary about net new ARR. But in terms of clarifying your previous comments from the call, et cetera, what is your approach for the second half of the year for net new ARR compared to the first half of the year and compared to the second half of the year last year?

Yes. So you see the guide for the year, ending ARR book of business growth. In the most recent quarter, we're growing the book of business 12.1%. You see what the target is for the full year at 11%. You see what we've done in the first half of the year in terms of the contribution from what we used to talk about with net new ARR, but it's easily derivable and you get a sense of how we're looking into the back part of the year. So without being point specific in the quarterly profile, I think that gives you a good framing of how to think about the delivery. Last year, where pricing was a bigger contributor to the net new ARR equation, back when we were talking about it quarterly, you saw us deliver $2.001 billion of net new ARR. Pricing is less of a contributor this year, but it is an execution story around how we're driving cross-cloud solutions to solve the highest value problems our customers have. How we're broadening the lineup to address the needs of business professionals and consumers and increasingly make those communications more visually rich by more closely linking Acrobat and Express to bring those documents and information and communication to life. How we're increasingly in the enterprise driving cross-cloud solutions around content supply chain. So there's an execution story at play this year that's going to be the driver and less so pricing. It gives you a good framing. And the other thing I'd say is, as we broaden the lineup, and as we look to really align our ARPU with the value that's being delivered, and as we continually drive cross-cloud solutions into the enterprise, those historical patterns of what a Q1 looks like or what a Q2 looks like or what a Q3 looks like, the business is evolving, and we're really putting the foundation in place for the success over the next decade or 2. And so that evolution of the underpinning of the business and how we're going to market and how we're serving customers, those same historical patterns may not always hold the way they have in the last decade. And so going to an ending ARR book of business gives us the intra-quarter flexibility to really drive the business and satisfy customers without the context of a historical pattern, which is less relevant quarter-to-quarter than it used to be.

I appreciate that. So let's look back up and talk about competition. And this is another important topic that investors are trying to wrap their head around. So first of all, I'll say everybody has competition. You serve a large enough market. Sand Hill Road, which is not far from where you guys are at, will fund new upstarts. So let me divide it into 3 pieces. Canva, Figma, and maybe some other type of competition such as Meta providing better tools for content creation on their platform. Let's start with Canva. That's the one that's often discussed. Can you talk about what has Canva done really well? And what have we done to address their approach into the market?

So as we think about our focus on business professionals and consumers, in that customer group, you're really focused on almost virtually everybody on the planet. You can count customers in the billions in that segment. And that's going to be a space where it's not going to be winner take all. There will be companies that serve one-off consumer or whatever it happens to be. There will be many solutions when you talk about billions of people on the planet. Everybody's going to have a particular choice. As we think about that market and monetizable market, you think about Express, AI first, easy-to-use, all-in-one application that brings some of the magic of Adobe together in a way that is very approachable to an average consumer. The other thing I'd say that's foundational is marrying that capability with the Acrobat franchise. Again, it's the original freemium play in software. I think people forget that we invented freemium model, and we did it with Acrobat. It's the original one, touches 1 in 10 people on the planet. And as that as a customer base and a surface area to make visual communication, make business communication, make digital communication more visually rich and engaging, it's a natural linkage with Express and increasingly link that functionality within an Acrobat environment and let customers choose how they go get their creativity to make those documents more visually rich. Very natural play. I would say, as we think about Acrobat AI Assistant and Adobe Express, we signed up, I think it was 35,000 businesses in Q2, and Express alone was 8,000 of them. So you can see the power of it playing out as we focus on business professionals and consumers, which is where Canada is. When we think about creative professionals, we think about the enterprise, we don't really see them when we compete for business. It's not part of that competition set. It's really in business professionals and consumers. To their credit, they figured out that, that was a deeply monetizable segment, but Express is a great product now with feature parity. What I like going forward, though, is our future road map around Express. I already know what it is, because as I take the feature set of our professional tools, that we've invested billions over decades in, and I selectively reveal those capabilities to bring customers deeper into Express, I know what that future road map looks like, and they don't have to pay for it. It's already been paid for. So we have a real distinct advantage as we engage with customers, as we diagnose usage patterns, as we think about valuable features that if we selectively reveal this one feature, we're going to see a spike in use cases within the Express environment, and I feel really good about that. The other thing I'd say from an education standpoint, as students in the classroom, and I'm talking elementary, middle, high school students, students in the classroom want to get a taste of creativity. And increasingly, generative AI is going to be part of that journey. It's just going to be a foundation technology that students are going to be acclimated to over time. And my children just graduated from college and now a junior in college. So this isn't my problem. But back when my kids were in third, fourth, fifth grade, if they were going to be exposed to technology and you've got generative AI that's unleashed with no guardrails and who knows what you get based on what a third grader types in versus commercially safe with guardrails, I would much rather my kids be exposed to generative AI with guardrails without the randomness of what that output looks like that could be potentially an adverse impact. So I really like the leadership and the way we're approaching the market with that leadership lens on what the real customers' problem statements are. We've got a lot of work to do, but I like how we're positioned.

So by the way, what I'm telling anybody that's in college now is to quickly shift your major to math and be an AI researcher, because Mark Zuckerberg is paying $100 million sign-on bonuses. So this is the time to quickly pivot. You've talked about growth rates in Adobe Express, where are we at in terms of growth rates there?

Yes. So you can see the growth from a project standpoint. I think we crossed 1 billion projects that have been initiated. You can see us, 8,000 businesses in the most recent quarter, and that's up 6x from Q1. So you're beginning to see the momentum of the business. We haven't taken a step back and give that look-through metric on the business. The other metric that we've given is in business professionals and consumers, Acrobat Express, over 700 million monthly active users. So consistent with our go-to-market strategy of continuing to link those products together to create enhanced functionality around more visually rich communication, you'll see that number continue to grow. And that $700 million at that scale is up 25% year-over-year.

Yes. So obviously, very competitive with any upstart. Let's talk about the Figma episode that we went through, right? The timing didn't work out in terms of when we tried to do the deal or an ability to complete it. Obviously, if we did try to do it today, maybe it would have gone differently. But now that, that chapter is over, that's a company that's going to go public, going to be very vocal about what they do, how they do that well. Since the deal broke off or that you knew that it was going to break off until now, what have you done to be able to stay competitive in that tangential market that you paused when you announced that deal?

Yes. So at the core of that deal was a couple of things. First of all, their market focus is an adjacency to where we are, product design with their infinite Canvas, maybe some footprint from an ideation space. But when you need to take that initial exploration and transition to the fine-grain control, there's definitely a transition in the product workflow at the production stage to come into the Adobe environment and really bring those concepts to life. So it was a nice adjacency. The other thing that was interesting about Figma is they've got a great collaboration engine. So in a shared digital environment, multiplayer, shared digital workspace, great technology there. Roll the clock forward to where we are today. We talked about generative AI being an unlock to shift left in the ideation and capture process. We've got some of the best models out there in areas where we've got expertise. We're going to be releasing workspaces, infinite canvases that bring all of the horsepower of this ideation, the models, the web and mobile versions of products into a shared collaborative digital workspace. The market is moving in a direction where we're going to increasingly be able to cover the surface area where they've traditionally had strength, probably less so product design and more around the ideation part of the process. The other thing I'd say is from a collaboration standpoint, like we talked about greater than 700 million monthly active users between Acrobat and Express. The collaboration, the link sharing, the being able to be in a document simultaneously has been a foundational capability, helping drive that monthly active user growth. As we think about workspaces, as we think about the Firefly app, as we think about an AI-first ideation platform for the creative types, increasingly, you're going to see a lot of the investments that we're making around collaboration, shared digital workspaces come to life. So the things we would have gotten that would have accelerated our road map into an adjacent market area as well as underpin a broad product portfolio with a collaborative engine, we've made great progress on both fronts since we've chosen to go our separate ways based on regulatory outcomes. And so I really like how we're positioned and the way the team has been able to execute here in the last couple of years.

Great. And then the next topic ties the AI topic with the competition topic, which is Meta, Shopify. I'm not even talking about the pure-play AI guys, because they don't have -- they're all engineers. They don't even have salespeople, right? But Meta and Shopify and others in this realm are trying to use generative AI to help their customers and advertisers and their merchants, in Shopify's case, create these tools that try to replicate the creative process. Is that something that you're seeing as value added? Can you incorporate into what you're doing? Or is it going to carve off a piece of the business?

Yes. So this gets back to -- you can't paint this with a very broad brush. Really, what customers are we talking about? And if you're talking about individuals who want to share some things or they're a solopreneur and they're primarily a Meta interface channel to their customer set, that walled garden approach by Meta is going to be like a great environment for them to operate in. They have to learn one environment, they double down, that's their channel, off they go. If you're the local pizza shop on the corner, same thing. Single channel, that's what you do. But what if you're a medium-sized business or a large small business that wants to cover a broader surface area. Are you going to learn 5 different walled garden environments? Or let's say you're an influencer that pushes content out across a broad surface area of social channels. You're not going to want to learn 5 or 6 different environments to bring your brand or your content to life. Much easier to learn one environment that serves multiple channels. And then when you think about medium-sized businesses or enterprise, it's that same concept, on steroids. What's the traditional customer base of companies? And I think that gives you a better sense of maybe who gets carved out of a Meta walled garden versus a company like ours, which are going to serve a broader cross-section of how companies, influencers go to market and serve their customers. It's a great learn environment, serves all of the different channels. But not everybody is going to want to learn Adobe, much like the small business is probably not running on SAP either. So there's a footprint and a customer focus. And I think we do an incredible job putting foundational infrastructure in place to connect with people through a digital channel that marries content creation with workflows and activation delivery to get that streamlined end-to-end process and the native analytics that help you tune content creation. But that's not a solution for a person who's a solopreneur and wants to connect through Instagram. So there's a role for Meta in doing that. but it's not going to serve everybody's needs. And it's important that we have a nuanced conversation of who really gets served in that environment and what customers start to get friction introduced depending on the surface area of channels they want to use to connect with customers.

Yes. Margins, right? You already have best-in-class margins, right? When people got all over Marc Benioff, it was why can't you have Adobe margins? And yet, again, on the last earnings call, you still believe that those margins can get higher. It's not open-ended. How can those margins possibly get higher when you're best-in-class?

So a couple of things. First of all, I think you're touching on the power of a digital channel when done right. You can see what is possible with companies on how you take investments you're already making and more deeply monetize them, because you connect at a much more personal level and have that fine-grained understanding of what customers need. So I think what we're talking about just illustrates the power of a digital channel and really what our digital experience business can unlock for others. When I think about Adobe specifically, first of all, philosophically, in the seat I sit in, I will never -- yes. I will never accept that we can't do better than where we're at today. That will never like be possible. And if we were at 100%, I'd say there's probably a better way to do better. Mathematically, it's impossible, but I'd still take the same philosophy. So I will never accept that. So start with philosophy. Second thing is, we burn a lot of calories inside of the company. As you think about the way we tune our cloud infrastructure to bring these generative AI capabilities to life, we are making meaningful investments to lead into this inflection. But as you take a look at the observability from an operating margin standpoint, clearly, you can see the company driving more efficient price points. Part of that is how we engage with the ecosystem. Part of that is how we tune our algorithms and drive cost down curves embedded within generations of models, so cost per inference is optimized over time to make sure that as users adopt this functionality more and more, cloud usage goes like this, and you get a disconnection of that cost curve that allows you to drive more operational efficiency. We burn a lot of calories on that inside of the company, and the teams have made a lot of great progress. The other thing I'd say is once we get through this investment cycle around leading into the generative AI inflection, you're going to see the scale benefits return from a company standpoint. As we continue to scale the business, we should be able to scale G&A in a more efficient way. We should be able to scale our sales and marketing expenses. That's all about hygiene of running a disciplined business and continuing to drive those operating efficiencies. Once we get through the investment cycle, you'll begin to see those operating efficiencies take hold again because of the rate and pace we're investing from an R&D and go-to-market standpoint. Those are great investments to underwrite future growth of the company. But you'll see those scale benefits return once we're through the investment cycle.

Great. Off topic, but one of my favorite investors sent me a question that I was supposed to ask, and I don't think I asked it right. So I'm just going to read it from his question. It's very specific, but I want to get it right. Seasonality through the year. Typically, you have summer seasonality in Q3, given EU seasonality, and net new digital ARR is down quarter-over-quarter. Is there any reason that wouldn't be true this year?

Yes. So I don't think we're going to see any dramatic shifts in seasonality. My comment is more the long term. As we underpin this business with more cross-cloud solutions, more One Adobe motions, more value sale into the enterprise, leveraging these technologies to really unlock value for customers as we continue the journey from an ARPU standpoint, that seasonality will evolve. It's not a 2025 comment. It's more of just recognizing real time where we're taking our business and trying to evolve the dialogue around the company to recognize where we are in this moment in time and how we're driving forward. The great thing about Adobe is that we've created a tremendous amount of value. The bad thing about that is the community has really honed a way of looking at the business that sometimes can be a touch static as the business evolves and drives forward in a different manner. And all I'm trying to do is recognize where we are in this moment in time, not signal some dramatic shift around 2025.

Let me editorialize and then use that to ask the wrap-up question. So again, I think this is all nuts that a company that has a long, long track record is growing 10%, increasing margins to 12% earnings by per consensus and is trading at 17x earnings, while a company a little bit up the road is decelerating quickly on anything but AI and is trading at 22x and another company that's probably even closer to you has one really fast-growing business and everything else is declining. And as of the market right now is trading at 30x earnings in spite of the fact that they guided to 4% to 6% earnings growth next quarter. So again, this is crazy. I've been debating investors for a year. I will keep doing it. Please investors bring it my way. Why do you think that is? And more tangibly, how much have you bought back? And what's the next authorization?

Yes. So in situations like this, there's things you control and things you don't. So we're going to stay focused on the things we can control, which is driving our road map, making our customers successful, like we've done several times over the course of our journey, see inflections coming, position the company with industry-shaping innovation that allows us to grow into those inflections and extend our leadership positions, even if the narrow slice of time of those inflections happening can create uncertainty in some people's minds. Think about the acquisition of Omniture. I think the quote in the Wall Street Journal is Adobe acquires Omniture, what were they thinking? And roll the clock forward to today and finally seeing that vision of the art and science of marketing and customer connection through a digital channel unfolding in front of us. Pretty bold move at the time that sets us up well for market leadership today, both in how we run our business, but how we serve our customers. Taking our products from Box software to the cloud. Again, that wasn't a popular decision at the time. But when we innovate, we wanted in our customers' hands immediately, not wait 18 months. And so we needed a different economic arrangement with our customers that facilitated speed of innovation and not introducing friction in the way we serve our customers due to an outdated model. So we're going to take points of view, and we're going to execute into those points of view. We've done it time and time again. I don't see this as any different. Nobody is going to hand us success. We have to go out and earn it. And that's exactly what we're going to do. And I'm sorry, Gil, there was a second part of the question.

Buyback.

Yes. So look, like I can't control where the stock trades. I have a point of view of what I see unfolding, the engine of innovation, the feedback we get from customers. We've been talking about capabilities seeding in an enterprise like Project Fizzion at Coke. That is the lead horse of, like I said, what will be many. If there's a dislocation relative to value, we're going to take a point of view on that. You saw us do $3.25 billion of repurchase in Q1, followed it up with $3.5 billion. I think over the last 3.5 years, a little over 3 years, we bought back 60 million shares. We're going to continue to put capital to work. I think we put almost $12 billion to work in the last 4 quarters. This is an opportunity for us. I'm not going to miss the opportunity. I've got a point of view. The great thing today, it's an intellectual debate of who's right, who's wrong. We have a point of view. We're going to put our capital to work around that point of view. Down the road, there will be an answer on this, who is right, who is wrong. I'm pretty confident of where we're going to be once that question gets answered.

Appreciate you taking the high road. I was a little bit more explicit. So I appreciate you doing the right thing and taking the high road. We're out of time. I really appreciate you taking the time. Dan and Steven. Hopefully, we helped make the case today. And again, if anybody has any more questions, we'd be happy to help. And thank you, and thank you, Nancy as well. I'm sure she's listening. Thank you, everybody.

Appreciate it, Gil. Thank you.

Thanks, Gil. Take care.