Adobe Inc. (ADBE) Earnings Call Transcript & Summary

Good afternoon, everyone, and thanks for being with us today. Joining me on this call are Shantanu Narayen, Adobe's Chair and CEO; David Wadhwani, President of Creativity and Productivity; Anil Chakravarthy, President of Customer Experience Orchestration; and Steve Day, Senior Vice President, Corporate Finance and CFO of Customer Experience orchestration. This call is being recorded, and during it we'll go over Adobe's financial results for the second quarter of fiscal year 2026. Our press release is available, along with PDFs covering 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, June 11, and includes forward-looking statements subject to risks, 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. The results we report include GAAP growth rates as well as non-GAAP growth rates, including constant currency rates. Throughout this presentation, unless otherwise stated, Adobe's executives will refer to revenue growth in constant currency rates. 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.

Appreciate that, Doug. Hello, everyone, and thanks for being here this afternoon. Our Q2 revenue came in at $6.62 billion, which marks 11% growth compared to the same period last year. On a GAAP basis, earnings per share for the quarter totaled $4.25, up 8% year over year, while non-GAAP earnings per share reached $5.96, an increase of 18% year over year. The solid top-line expansion came from converting subscription bookings into revenue; our EPS gains were fueled by record revenue along with careful, disciplined spending throughout the organization. Here at Adobe, our guiding mission remains empowering everyone to create, and we stay motivated by delivering innovative products that delight users, all in line with our customer strategy. Our attention is on three groups: Business Professionals and Consumers, Creators and Creative professionals, and Marketing Professionals. When it comes to business users and everyday consumers, we provide fast, simple applications built on AI that help them distinguish themselves via imagination and efficiency. For those who create content and the creative experts, we offer strength and accuracy so their creative ideas can be realized on any medium or platform. Turning to marketing teams, we supply customer experience coordination so they can build, distribute, and refine tailored digital interactions. Looking at both the market landscape and how we performed in the first six months, it's evident that even compared with the start of fiscal 2026, artificial intelligence is driving shifts in customer behavior faster than ever before, which means our approach and how we carry it out must adapt to meet these new expectations. In the same way our developers have adopted and grown the market for AI-assisted coding, a shift is taking place in the way buyers find, try, get started with, and buy goods in every category — creativity, productivity, gaming, and entertainment included. Turning to creativity and productivity, we're seeing unmatched appetite on additional surfaces for pairing content consumption with content creation. Tools are now coordinated by agents and conversational interfaces so that results come together more quickly. As media generation models multiply, they are remaking and opening up content workflows, from the first idea all the way to delivery. Applications built AI-first that aim to reach wider audiences must offer free, easy-to-grasp onboarding, which fuels usage and, via paywalls, monetization. Looking at the broader picture, Adobe's near-term chance lies in boosting how many new users it brings in and how much value each one generates over time, achieved via a freemium approach. When it comes to Business Professionals and Consumers, our Acrobat and Express MAU figures have jumped substantially, climbing from over 700 million to over 850 million compared with a year ago. What's available to us is reaching billions of Business Professionals and Consumers with a full freemium funnel, extending what worked so well with the Adobe Reader model. During the past twelve months, we've rolled out remarkable innovation spanning AI assistant, PDF spaces, Express and conversational interfaces, and brought these innovations to many surfaces, such as AI mode in Reader, Edge, Chrome and WhatsApp. Traffic from Business Professionals and Consumers on adobe.com looking for Adobe capabilities is up 35% versus the prior year. Our view is that this kind of traffic converts better when people get a tailored, hassle-free sign-up process with no paywall right away, which should drive more new customers and stronger long-term involvement. Given how well the freemium paths for Acrobat and Express have performed so far, including their monthly active user adoption, we're set to push this approach forward more forcefully. For the upcoming wave of creators, our offering is an AI production studio that works across web and mobile and stays closely tied to the robust, precise capabilities of Creative Cloud. Year over year, our creative freemium MAU has risen from 50 million to 90 million. There's a chance to bring in hundreds of millions more creators via a freemium funnel, built on how well Firefly has performed so far. During the past year, we've shipped major innovation spanning ideation through boards, generation with backing for several media models, semantic image and video editing, plus conversational interfaces available across surfaces such as mobile, web and flagship Creative Cloud apps like Photoshop, Illustrator and Premiere. Thanks to the new personalized journeys for creators, Firefly ARR rose roughly 50% from one quarter to the next via Firefly apps and credit packs. Given that early success, we're confident we ought to broaden the Firefly freemium experience so we can win over and thrill the coming generation of creatives. Creative Cloud continues to perform very well and remains the premium choice for creative and marketing pros worldwide. While our focus is on accelerating how quickly creators come on board via the freemium Firefly funnel, we decided to push back the Creative Cloud second-half line optimizations that we'd mapped out earlier. Now shifting to Customer Experience Orchestration: within the Enterprise, the agentic opening is significant, since marketing professionals are looking to automate and rapidly produce, ship, and tailor content at scale across all channels in ways that drive greater customer engagement and elevate their brand. Content creation tailored to marketing use cases is growing rapidly. Through new AI coworkers and agents, organizations gain the ability to achieve automation and results shaped by context, data, MCPs, and skills. So these address two things enterprises really need at once: getting more consumer-centric and finding cost savings in the AI era. When it comes to business models, they keep expanding — now they cover consumption and outcome-based pricing alongside subscriptions. If you look at the total marketing opportunity, it spans people, software, agency and channel spend, and it's enormous. Enterprise behavior is being reshaped by AI. More and more, companies are bringing marketing capabilities in-house by picking up software platforms and building custom models that capture their brand intelligence in a distinctive way. And iT organizations turn to Adobe to make provisioning, deployment and customization faster, so they can serve their consumers. That happens through headless and agentic capabilities being available, along with pricing models that address outcomes and AI usage alike. On the customer experience orchestration side, our AI-first ARR has grown four times over what it was twelve months back, which demonstrates Adobe's leadership in both the classic marketing space and the newer CXO space. With Adobe CX Enterprise and CX Enterprise Coworker now launched at Adobe Summit, we're broadening both the ambition and the execution behind our category-defining CXO products. By bringing Semrush into the fold, we've united our SEO, GEO and AEM capabilities, which pushes our CXO portfolio even further. Later this month, at the Cannes Lions Festival of Creativity, we'll introduce this combined offering, one focused on how brands show up in search and discovery. This merging of creative work with marketing is something only Adobe can deliver, and it's what truly distinguishes us. Regarding what marketers and creators are able to get done throughout our apps and delivery platforms, we're the only company that brings everything together in this way. Adobe GenStudio's ARR increased over 25% year over year, reflecting enterprise demand for an end-to-end solution spanning planning and workflow, production and creation, asset management, delivery and activation, plus reporting and insights. Because of Adobe's work in AI innovation, AI first ARR has grown threefold versus the prior year, surpassing $500 million — a remarkable increase. In our judgment, now is the time to pursue the next generation of Adobe loyalists with real aggression. With this strategic move toward bringing in more freemium customers via Adobe and Firefly, our expectations for second half ARR growth from individual subscribers come down. These adjustments, we believe, genuinely make Adobe stronger; for Adobe overall we still aim at double-digit total ARR growth, and that figure now counts the Semrush acquisition. Because our first half revenue performance was strong and Semrush is now included, we're happy to lift our targets for fiscal year revenue and non-GAAP EPS. As we shared, Dan Durn has chosen to take a new opportunity outside the software industry. For all Dan has contributed to Adobe, I want to express my thanks, and I wish him the best. I'm glad that Steve Day, whose 20 years at Adobe have included numerous financial leadership roles, will step in as interim CFO once Dan leaves. Adobe's long-term AI opportunity, along with the innovative products we're bringing to a wider set of customers, keeps me tremendously energized. Since I've decided to move into the Board Chair role, I wanted to give an update on the CEO search, and it's going well. The Board has been deeply involved in a thorough process. We all remain ruthlessly focused on driving execution, and at the same time our aim is to have Adobe's next CEO in place so they can put their stamp on planning for fiscal '27 and beyond. I'll now turn it over to David.

Appreciate that, Shantanu. Hi, everybody. Artificial intelligence is transforming the way the world produces and accesses work, and today's audiences for creative and productivity solutions are larger than they've ever been at any moment in our company's history. Whether it's social creators, students, business professionals, or big enterprises, Adobe's opportunity is enormous. These customers want everything from simple creative tools to professional-grade power and precision, and they're increasingly choosing conversational experiences to speed up what they do. No other company matches Adobe's portfolio breadth when it comes to serving this wide spectrum of creativity and productivity needs. That interest shows up in our traffic numbers, which tells us there's demand for what we already offer and rising demand for new AI-first experiences. Demand for these new AI offerings starts with LLM conversations and intent-based searches, and it calls for instant satisfaction — which means friction-free experiences serve it best. This behavioral change is unfolding across Business Professionals and Consumers as well as Creators and Creative Professionals. We keep drawing strong traffic to adobe.com, which rose more than 40% year-over-year, yet our conventional direct-to-pay paths might not always match what visitors want, since a rising share of new users initially seek to finish their intended task quickly as their relationship with Adobe begins. Because offerings such as Adobe Firefly, Express and Acrobat AI Assistant feature friction-free onboarding and substantial adoption, we're now able to rebalance our journeys so they serve this new generation of users better, instead of mostly routing them into direct-to-pay journeys. This change will cost us short-term ARR, but it will speed up user acquisition in MAU while laying the groundwork for long-term growth by taking friction out of user onboarding, enabling deeper user engagement and driving stronger lifetime value; in Q2, subscription revenue for Business Professionals and Consumers reached $1.85 billion, up 15% year-over-year. BP&C traffic climbed 35% year-over-year, with MAU rising from greater than 700 million to greater than 850 million in Q2 year-over-year, with major contributions from AI Assistant, Express creation and PDF Spaces sharing; during this quarter, we launched the Adobe productivity agent, transforming Acrobat from a static document tool into an interactive experience. The productivity agent is an AI experience embedded in Acrobat that leverages Adobe Acrobat's document intelligence and Adobe Express' AI-first creation capabilities to help business professionals understand, create and share information; it can convert documents into rich outputs such as presentations, podcasts and social content, enable conversational PDF editing and power the new sharing capabilities in PDF Spaces. Customers obtain the agent via Acrobat AI plans. Users can also now share branded PDF Spaces featuring customizable AI Assistants tailored to a specific audience, whether that's for sales prospecting, content marketing or research delivery. Early adopters of PDF Spaces, among them Vice Media, Kid Cudi, Jessica Yellin and Mindy Weiss, are using PDF spaces to shift audiences from passive reading toward interactive engagement. On the business professional and consumer side, there are some other highlights worth calling out. Paid monthly active users for Acrobat AI Assistant rose by more than 150% compared with a year earlier, while the count of lifetime AI users in Acrobat was triple what it was a year ago — evidence of both monetization momentum and engagement across a wide base. Express monthly active users increased by more than 20% versus the prior quarter, and Express users within Acrobat sent out 9x as much content as they did a year earlier, which shows the integration is fueling creative output at scale. Acrobat Student Spaces arrived this quarter and saw strong adoption right away. The count of higher education students who can reach Express Premium via their schools is up more than 60% from a year ago; and among customer wins this quarter are Accenture, Datev, KPMG, Merck, NHL, New York State Court System, The Church of Jesus Christ of Latter-Day Saints, Defense Information Systems Agency and U.S. Department of Housing and Urban Development. Subscription revenue for Creative and Marketing Professionals came to $4.54 billion in Q2, up 11% from a year earlier. Demand for AI content creation is surging across ideation, generation and semantic editing, and consumption of generative creative keeps growing strongly. Our approach is to enable anyone to create — from people making their first piece of content, to veteran professionals, to big enterprises looking to scale up content production. C&CP traffic to adobe.com rose more than 50% year-over-year in Q2, with creative freemium MAU climbing from above 50 million to above 90 million. That enormous traffic volume coming to the Adobe brand includes people wanting to buy Creative Cloud, Photoshop and other CC apps, plus a rising number of new users chasing Adobe Magic to finish a creative task with a friction-free experience. Firefly freemium users who move to our paid plans show high engagement, with early signs of substantial credit consumption. Firefly ARR rose roughly 50% quarter-over-quarter via Firefly apps and credit packs. We were thrilled to introduce the Adobe Creative Agent beta during Q2. It ships as part of Creative Cloud and Firefly subscriptions and delivers a conversational experience for handling complex, repetitive creative work. Usage of the agent will be monetized under our current credit consumption model. The Adobe Creative agent can also be found in Claude, ChatGPT and, before long, Copilot and Gemini. Other Creators and Creative Professionals highlights include: in Premiere, we introduced a completely new color mode — a first-of-its-kind color grading experience designed specifically for video editors; we keep expanding AI capabilities throughout our flagship Creative Cloud applications — Photoshop gained Rotate Object and Illustrator shipped Turntable, and both let subscribers convert 2D photos and illustrations into 3D renditions they can rotate and harmonize into their work. Features such as these produced record AI usage inside our flagship applications. Firefly now supports third-party models as well, with Kling 3.0 and Kling 3.0 Omni. Firefly ending ARR across Firefly App, Firefly credit packs and Firefly Enterprise is nearing $300 million as we exit Q2. Firefly Enterprise — covering Firefly Services, Adobe Firefly Foundry and Brand Intelligence — is helping the largest brands in the world industrialize content production using brand-safe custom models. Generated assets rose more than 4x year-over-year, making it an AI content engine for marketing at scale. The NVIDIA collaboration we just made public is going to deliver accelerated computing into Adobe Firefly Foundry, so custom models can be built quicker and perform better in image, video, audio, vector and 3D, along with a cloud-native 3D digital twin that runs on Omniverse and OpenUSD. On top of that, enterprise deals closed during this quarter came from Merck, SAP, ServiceNow, Tesco, The Coca-Cola Company, Workday and Xfinity. To wrap up, the AI era is producing a sharp rise in appetite for creativity and productivity, and record traffic on adobe.com proves it. Even as we keep meeting demand for Acrobat and Creative Cloud, the strong early reception of Firefly, Express and Acrobat AI Assistant convinces us that now is the moment to go after new users aggressively through a freemium experience without friction. We believe pushing MAU, which affects ARR, is the correct trade-off and will fuel business growth going forward. Anil, over to you.

Appreciate that, David. Hi, everybody. During the second quarter, AI kept acting as a booster for our enterprise segment, which let us post Creative and marketing professional subscription revenue of $4.54 billion — an 11% increase compared with the same period a year earlier. What these figures show is that content keeps exploding and that companies must deliver tailored customer experiences at scale. The chance before us in AI-driven marketing automation and customer experience orchestration is substantial and expanding, and we keep taking share while widening our lead. Our attention is on three essential AI-first solutions: Adobe Experience Platform together with native apps for customer engagement; Adobe GenStudio for the content supply chain; and Adobe Experience Manager agentic web apps for brand visibility. Among Q2's notable items: GenStudio's ending ARR rose more than 25% versus a year ago, as top brands and agencies keep standardizing on Adobe to run their content supply chain. Subscription revenue for AEP and native apps climbed above 30% compared with the prior-year quarter. Each day, AEP handles more than 70 billion profile activations and 35 trillion segment evaluations, plus over 1 trillion experiences annually. More than 80% of AEP and AEM customers now take advantage of agentic capabilities embedded in our products. We have over 1,500 customer trials running for our agentic web offerings: Adobe LLM Optimizer, Sites Optimizer and Brand Concierge. Forward Deployed Engineering and Integrated Services offerings — built to co-innovate and deliver tailored AI-powered CXO solutions — saw 60% growth quarter-over-quarter. On Q2 industry analyst recognition, we were named a leader in two Gartner Magic Quadrants, covering Customer Journey Analytics and Orchestration and Content Marketing Platforms; plus two Forrester Waves, covering Email Marketing Service Providers and Customer Analytics Technologies. Global enterprise customer wins during Q2 featured Dentsu Merkel, Defense Information Systems Agency, Diriyah Company, Kaiser Foundation Hospitals, Merck Sharp & Dohme, NHL, SAP, ServiceNow, Stagwell, Stellantis, Tesco and The Coca-Cola Company. Back in April, we completed our purchase of Semrush, a top provider of search engine optimization and generative engine optimization solutions. Semrush contributed $480 million in ARR to our book of business and strengthens our capacity to serve marketers at every scale. We're moving quickly to fold Semrush into Adobe, joining Semrush's discoverability intelligence with Adobe's agentic web apps. Later this month at the Cannes Lions Festival of Creativity, we look forward to revealing a comprehensive brand visibility solution that pairs Semrush with Adobe. At Adobe Summit in April, where more than 14,000 people attended in person, we introduced Adobe CX Enterprise, a new end-to-end agentic AI system that streamlines how enterprises handle their whole customer life cycle, from acquiring and engaging prospects through driving conversion and lasting loyalty. Adobe CX Enterprise unites AI agents, agent skills and Model Context Protocol endpoints with an intelligence and governance layer, producing dependable and auditable agentic workflows that make highly personalized, differentiated customer experiences possible. More than 20,000 global brands have built their business on Adobe, and CX Enterprise will help carry them into the era of agentic AI. Within CX Enterprise, we unveiled CX Enterprise Coworker — a purpose-built AI agent that carries out work tied to business objectives, boosting both productivity and how quickly campaigns get executed by a wide margin. Since its release, CX Enterprise Coworker has drawn enormous interest from customers, with more than 150 major enterprises taking part in the early adoption program before general availability arrived this week. During Adobe Summit, we additionally rolled out Adobe Brand Intelligence, a system built for continuous learning that assists enterprises in producing and confirming content stays on-brand more quickly and with reduced effort. Feedback, approvals and rejections from creative and marketing teams are absorbed by Adobe Brand Intelligence in real time. Because it is a headless platform surfaced via APIs, it can plug into existing first and third-party apps instead of operating as its own standalone application. For enterprises, customer experience ranks first among the first areas undergoing AI-powered transformation. Everywhere we operate, discussions with C-level executives show how they see Adobe as the trusted partner for this transformation amid the era of agentic AI. During Q2, we revealed native integrations with major enterprise AI platforms, among them Microsoft Copilot, Anthropic, OpenAI and Google Gemini. Through our partnership with NVIDIA, CX Enterprise Coworker capabilities are brought into the NemoClaw enterprise agent platform, letting brands deploy Adobe's customer experience intelligence inside NVIDIA's secure policy-governed OpenShell run time. Major global agencies — Dentsu, Havas, Omnicom, Publicis, Stagwell and WPP among them — are standardizing on Adobe, merging our AI-powered capabilities with their distinctive IP and industry know-how to co-develop inventive, differentiated solutions for shared clients. Our vision, deep expertise in creativity and marketing, history of innovation and wide partner ecosystem have uniquely placed Adobe as the partner of choice for AI-powered Customer Experience Orchestration. Our large customer base, inventive CXO products and strong pipeline give us confidence for a seasonally strong second half. I'll now hand things over to Steve.

Thank you, Anil. I'll begin today by giving a rundown of how Adobe did in Q2 FY '26, calling out the growth drivers across each of our customer groups, and then I'll wrap up with the financial targets we're setting. During Q2, Adobe brought in record revenue of $6.62 billion, which was up 13% year-over-year as reported and 11% in constant currency. On a GAAP basis, diluted earnings per share came to $4.25, and on a non-GAAP basis it was $5.96. Within our GAAP results, there was a noncash goodwill impairment charge of $70 million, or $0.17 per share, tied to our Publishing and Advertising reporting unit. Here's how the second quarter shook out financially: Adobe's total ending ARR hit $27.1 billion, which is a 12.5% increase compared with the same period last year, and about $480 million of that total came by way of buying Semrush. Subscription revenue for the Total Customer Group landed at $6.39 billion, rising 14% year-over-year, or 12% when you strip out currency effects, and the Semrush addition contributed roughly $40 million of that amount. RPO came in at $22.27 billion, and once the quarter wrapped, RPO and cRPO were each up 13% from a year earlier, or 12% in constant currency terms. Operating cash flow for the quarter added up to $2.17 billion, cash plus short-term investments finished Q2 at $5.63 billion, and during the quarter we bought back around 8.5 million of our own shares. Leaving the second quarter behind, roughly $27 billion is still open to us through our buyback programs, and that figure takes into account the fresh $25 billion approval we made public during April. Turning now to how the Customer Group performed and what we learned. Business Professionals and Consumers together brought in $1.85 billion of subscription revenue, which is 16% higher than the same period last year on a reported basis, or 15% once currency effects are stripped out. Several things fueled Q2 growth for Business Professionals and Consumers: closing ARR maintained a double-digit pace of expansion compared with a year earlier in each and every geography. Monthly active users for Acrobat and Express surpassed 850 million, rising about 20% from a year ago. ARR for Acrobat AI Assistant climbed approximately threefold versus the prior year. And within the Enterprise segment, we delivered solid results in both Commercial and Government. On the earnings call, the company reported that Creative and Marketing Professionals subscription revenue reached $4.54 billion, reflecting a 13% increase compared with the prior year, or 11% when measured in constant currency. Several factors fueled Q2 growth for Creative and Marketing Professionals, including expansion in Creative Cloud, which was supported by the CC Pro offering. Creative freemium MAU — spanning the web and mobile editions of Firefly, Express, Premiere, Photoshop and Lightroom — surpassed 90 million, rising more than 70% year-over-year, alongside sustained robust generative credit usage propelled by video and audio. Firefly ending ARR, encompassing Firefly apps and credit plans as well as enterprise Firefly offerings, is nearing $300 million, and the company plans to push additional traffic toward Firefly freemium during H2. Annual Recurring Revenue at year's end for GenStudio, AEP along with apps, AEM, and Agentic Web climbed more than 20% compared to the prior year. Customers in the enterprise segment holding ARR above $10 million increased by over 20% versus a year earlier, while retention stayed robust throughout that enterprise base. Now I'll shift to our financial goals, which factor in Semrush and rest on present macroeconomic circumstances. With such solid results so far this year, we're lifting our targets for both full-year revenue and non-GAAP EPS. Looking at FY '26, our aim for total Adobe revenue is $26.5 billion to $26.6 billion. For Business Professionals and Consumers, subscription revenue should land between $7.44 billion and $7.48 billion. Creative and Marketing Professionals subscription revenue is projected at $18.21 billion to $18.27 billion, a figure that now accounts for roughly $280 million coming from Semrush. Across all of Adobe, ending ARR for our book of business rose 10.2% versus the prior year, measured against the $25.66 billion we started FY '26 with. On a GAAP basis, EPS lands between $17.90 and $18, while non-GAAP EPS comes in at $24.35 to $24.45. For FY '26, our assumptions include a non-GAAP operating margin near 45%, a GAAP tax rate near 22.5%, and a non-GAAP tax rate near 18%. The 10.2% goal we have set for total Adobe ARR growth in FY '26 now captures two things: bringing in the Semrush book of business, plus a deliberate decision to speed up MAU freemium expansion and push back creative Cloud line optimizations that had been planned earlier; in our view, this long-term approach is correct for growing our customer base and reinforcing the groundwork for durable growth. Looking at Q3 FY '26, our targets are total Adobe revenue between $6.67 billion and $6.72 billion. Subscription revenue from Business Professionals and Consumers comes to $1.87 billion to $1.89 billion. Subscription revenue from Creative and Marketing Professionals comes to $4.61 billion to $4.64 billion. GAAP EPS is targeted at $4.40 to $4.45, with non-GAAP EPS at $6.05 to $6.10. For Q3, we anticipate a non-GAAP operating margin near 44%, a GAAP tax rate near 23%, and a non-GAAP tax rate near 18%. In our view, Adobe is positioned well to seize the growing AI opportunity. We continue to concentrate on assisting customers in reaching improved outcomes via innovation, unwavering execution, and tight integration of AI throughout our portfolio. We are growing our user base, strengthening engagement, and investing with discipline in the possibilities that will fuel Adobe's next stage of growth.

Thanks, Steve. The industry and our company are both at a pivotal juncture right now. When you combine AI, agentic workflows, and the surge in demand for content, you get major opportunities that align squarely with what Adobe does best. I'm still focused on pushing execution on the product road map and on extending successfully into new ways of monetizing that match the range of preferences our customers have for engaging with Adobe. I'm dedicated to seeing that through while we settle on the ideal leader for Adobe's next phase of growth. Beyond our products and our pioneering technology, what makes me confident is the people here. Adobe is still among the best workplaces in this industry, and the talent and culture built across many years form the bedrock for this transformation. Thanks. We're ready to take your questions now.

I realize this wasn't something anyone planned, but given that Dan is departing, I expect we'll get questions about how the business navigates a transition of this magnitude, especially when there's so much uncertainty out there regarding disruption or shifts in the software market. So perhaps you could address how continuity gets maintained while both the CEO search and the CFO change are underway, and maybe also describe the kind of profile you're seeking — or what you believe the company requires — as it enters this next phase?

Absolutely, Michael. I'll handle that one. To begin, I want to say that the leadership group we have within the finance organization is truly, truly experienced and exceptional. So my best wishes go to Dan. Clearly, the place he's headed matches where his background and expertise have always lain, and I have every confidence we'll keep moving forward without interruption. Regarding whatever other questions come up around this transition, I'm glad to address them, but to put it briefly: our leadership team is remarkably seasoned, and I'll keep collaborating with them closely, just as I always have, to ensure we achieve every one of our strategic objectives.

If I could just add one more thing, a follow-up regarding the choice to hold off on line optimizations for Creative Cloud. My assumption is that a potential price increase is right around the corner there. So perhaps you could explain why that's the correct call for Adobe at this moment, and how you see that positioning the Creative business for growth down the road?

Sure thing, Michael, glad to. I mean, when you take a real look at it, we're simply examining what's taking place with the AI opportunity for creativity as this remarkable opportunity that's right in front of us at this moment. And given what we possess across our models, across our products and across our interfaces, no other company is positioned as strongly to capitalize on it. So really, the point here is that what we've accomplished when it comes to capturing MAU with Acrobat and Express, what we've accomplished regarding Firefly, the whole creative market. At times, I also enjoy describing this in much the same way as what's occurred with the code opportunity. If you consider what's taken place with the code opportunity across AI, it's simply being flipped completely on its head. And each company is contemplating how they might add to all of the billions already being spent in code. That same opportunity, I believe, is present in every category you can name, be it gaming, entertainment and creativity; and for us this represents a chance not merely to concentrate on creative pros and communicators who have historically been this company's strength, but to genuinely turn into that AI platform for all creativity across every surface imaginable. The success we've observed tied to what we've achieved on these new products; we mentioned the MAU, we mentioned the ARR that's on its way. We simply want to have one single focus at present to ensure we go seize that enormous opportunity with one single focus and a clear marketing message. It's also rooted in our total confidence that the creative business is exceptionally stable. The level of innovation we've brought to that space keeps making us a category of one when it comes to our concentration on that specific market. And so that particular one can be postponed. It isn't disappearing; but anything standing in the way of the company aligning and the market grasping that we're going to pursue that whole creative opportunity right now, I believe, would take away from what is the true price for this company. So with any luck, that provides you with some color. And regarding the effect on ARR, you can regard it as perhaps half of the ARR impact resulting from what we're doing around postponing those creative price line optimizations. And the remaining half concerns going full steam on what it makes — what it takes to deliver the freemium experience.

Sorry about any noise behind me. At the risk of repeating something or oversimplifying, why is now the moment to push harder on the freemium motion? My understanding is that earlier the message was that this freemium motion could actually help second half ARR, and at this point it's becoming a headwind as they convert? So perhaps just make it simple — why is now the right time? Then I have one quick follow-up.

Sure. What I'd say is, look at it as: does the early success we're experiencing across all of them give you the confidence to move even more aggressively on this? That's my way of framing it, Alex, when it comes to why now. All of us see that the traffic arriving at the Adobe site is simply pouring in. So we ask ourselves how to seize that with a distinctive value proposition built around delighting them and ensuring the experience has no friction, whatever shows up. Stepping back, we've created this amazing business, yet it's a balanced one. We're constantly trying to determine what goes to freemium and what goes to ARR. My sense is this singular clarity will let us bring in far more people from the audience. So the why now relates more to the reality that we're witnessing the success from what we've done, the products — whether that's Acrobat, Express or Firefly — are in place, the capability to support third-party models is in place, and I'll let David add too. So it truly is the success we're seeing plus the tremendous volume of traffic telling us that if this — if we don't seize this opportunity at this very moment, we'll needlessly dissipate it, and we'll direct people elsewhere when they want to come engage with Adobe and are seeking the Adobe brand and Adobe Magic to solve their creativity needs. David?

Absolutely, Alex — let me build on what Shantanu mentioned by offering a few illustrations that clarify how we think about user behavior shifting and developing. I'll share one case involving Acrobat, plus another tied to Creativity and Firefly, in hopes this makes things clearer. What we're observing is a change — or really an emergence — around LLM usage, which is fueling much more intent-driven searching. So what does intent-driven searching look like? Picture somebody entering a query like "summarize this PDF" into a search engine. Our approach relies on SEO and SEM, along with some of the Semrush tools Anil brings to the table, to ensure strong rankings whenever a person searches something along the lines of "summarize PDF." Once that person taps our link, rather than sending them to adobe.com with messaging about Acrobat, we now bring them straight into Acrobat web with one simple prompt: upload your PDF, and we'll summarize it. After summarizing it, we then show them the possibility of using AI Assistant to go further — and pose a few questions. Through this approach, we let them establish a habit prior to introducing paywalls. That represents an evolution. Had we simply routed that traffic straight into a paid journey to purchase Acrobat and download it, Adobe would gain far less long-term opportunity. In a similar vein, with Firefly, we're noticing rising searches such as generating pixel art for social media posts. Once again, we rank very highly through SEO and SEM, and then bring users directly into Firefly so they can upload a picture of themselves, produce that pixelated look, and perhaps discover that it can be turned into video — though the flow is quite distinct. That's the direction the world is heading; that's how people are interacting. We intend to embrace it, and as Shantanu noted, we now have the right products in place for it. So now is the time to seize the opportunity.

Perhaps the final point I'd make to underscore what David mentioned is that we're not just observing growth in MAU; we're also witnessing a rise in engagement, which stems from delivering that initial experience since these individuals are seeking Adobe. So I believe it's the fulfillment tied to getting their job done that drives them to interact with Adobe further, and those indicators give us assurance that the moment is right.

And so perhaps only a quick follow-up at this point. When we consider combining the move you just outlined with the delay in line optimizations, by our calculations that's driving an adjustment downward to organic ARR of roughly $0.5 billion. So what's the payback period there? That $500 million you're putting into this motion, essentially — what payback period and what multiple do you believe could result from the strategy you're pursuing, assuming it succeeds or potentially succeeds?

Let me offer a bit of color. Taking the second item first — the Creative Pro line optimizations — those can be rolled out while we keep delivering value; so it's really just a face shift; and as we bring that in, we'll actually consider — our belief is that we'll end up with better offerings that are more differentiated, the more successful these freemium offerings turn out to be; so for us, we simply look at it and say we're pushing it back rather than shutting it down; hopefully that provides some color; and then regarding traffic, if a disproportionate share of traffic ends up going toward these premium offerings, you're correct to ask, hey, how does that begin to come back? And we're already witnessing some of that with respect to the MAU we have on Firefly. We shared some figures on that, and on Express too, which are growing nicely, but I think that will unfold across 2027. More importantly, I believe it positions the company for the right kind of real expansion of our customer base, which, as we did with Reader, then delivers returns for decades. And perhaps one more thing for color, since I'm certain people will raise this question. When you think about how it unfolds across the second half, maybe the way to frame it is this: if you look back at our fiscal '24 or our fiscal '25 results, you can grasp that whatever our second half ARR expectations are, they typically pay out 40 and 60 across Q3 and Q4, given that we'll be making more of these changes in Q3 when it comes to shifting the traffic patterns, and we expect our seasonal enterprise strength — the enterprise and everything we're doing around content keeps being an area of strength for us. That will be perhaps somewhat more proportionately in Q4 than it was in Q4 over the last few years. So hopefully that gives you color on both the line optimizations, which we can always introduce, but we wanted to be transparent with you. As for the moving of the freemium, hopefully we gave you plenty of indication as to why now, with all the early success we're seeing. I simply wanted to confirm that you possess some insight regarding how that could unfold during the third and fourth quarters while you're working on your models.