Adobe Inc (ADBE) — Q3 2021 Earnings Call Transcript

Good afternoon. And thank you for joining us. With me on the call today are Shantanu Narayen, Adobe's President and CEO, and John Murphy, Executive Vice President, and CFO. On this call, which is being recorded, we will discuss Adobe's Third Quarter fiscal year 2021 financial results. You can find our Q3 press release, as well as PDFs of our prepared remarks and financial results on Adobe's Investor Relations website. The information discussed in this call, including our financial targets and product plans, is as of today, September 21st, and contains forward-looking statements that involve risks, uncertainties, and assumptions. Actual results may differ materially from those set forth in these statements. For a discussion of these risks, you should review the factors discussed in today's press release and in Adobe's SEC filings. On this call, we will discuss GAAP and non-GAAP financial measures. Reconciliations between the two are available in our earnings release and on Adobe's Investor Relations website. I will now turn the call over to Shantanu.

Thanks, Jonathan. Good afternoon. I hope you are all staying safe and healthy. Adobe had another outstanding quarter as people across the globe continue to embrace new ways of storytelling, learning, and customer engagement in our digital-first environment. This quarter we delivered significant new product innovations, announced the exciting acquisition of Frame.io, and continued to increase customer engagement across an ever-expanding customer base. We're executing on our strategy of unleashing creativity for all, accelerating document productivity, and powering digital businesses as reflected in our strong performance. In Q3, Adobe achieved $3.94 billion in revenue, representing 22% year-over-year growth. GAAP earnings per share for the quarter were $2.52 and non-GAAP earnings per share were $3.11. In Q3, we drove record performance in our Digital Media business, achieving $2.87 billion in revenue, representing 23% year-over-year growth. Net new Digital Media annualized recurring revenue, or ARR, was $455 million and total Digital Media ARR exiting Q3 grew to $11.67 billion. Creativity has always played a central role in the human experience. Over the last year, we have all witnessed the way creativity has sustained us. We've shared photographs with loved ones on different continents, taught art classes to students at their kitchen tables, and launched entirely new businesses online. Building on decades of leadership, Adobe continues to pave the way in core creative categories, including photography and design, while pushing the boundaries across a wide range of emerging categories, such as AR and 3D. Whether it's the latest binge-worthy streaming series, a social media video that sparks a movement, or a corporate video, the creation and consumption of video is experiencing explosive growth. In August, we announced an agreement to acquire Frame.io, a leading cloud-based video collaboration platform. Video editing is rarely a solo activity, and it's traditionally been highly inefficient. Frame.io streamlines the video production process by enabling editors and key project stakeholders to seamlessly collaborate using cloud-first workflows. The combination of our leading video editing offerings, including Photoshop, Premiere Pro, and After Effects, with Frame.io’s cloud-based review and approval functionality will radically accelerate the creative process and deliver an end-to-end video platform. The addition of Frame.io creates an opportunity for Adobe, in conjunction with the partner ecosystem, to expand beyond video editors to a broader set of customers, teams, and enterprises. We hope to close the Frame.io transaction in Q4 and look forward to welcoming the team to Adobe. Next month, we will host Adobe MAX, the world's largest creativity conference. Max has always been the place to be inspired, connect with the creative community, and experience the latest Creative Cloud innovations. Our programming will feature iconic speakers, including Oscar-winning writer, director, producer Chloe Zhao, actress Tilda Swinton, and SNL star and executive producer Kenan Thompson. This year's fully digital experience allows us to expand our reach and engage with more people across our global creative community than ever before. Max will be hosted on Adobe’s custom digital event platform built on Adobe Experience Cloud. In Q3, we achieved Creative revenue of $2.37 billion with strong new user acquisition, engagement, and renewal across all creative products and geographies, with particular strength in our Creative Cloud for Teams offering. Q3 Creative Cloud highlights include innovative enhancements to our photography offerings, including new services and AI-driven capabilities in Lightroom, Creative Cloud applications now running natively on Apple's new silicon M1 chip, delivering a boost in performance. The release of Adobe Substance 3D Collection, a suite of interoperable tools and services that support 3D creativity. Partnerships, such as 'The Great Untold' with Netflix, enabling next-gen creators to tell their stories. And key customer wins at the Department of Education of the Philippines, Facebook, Nike, Rutgers University, and the U.S. Department of the Interior. Document Cloud is accelerating document productivity by powering the paper to digital revolution and enabling all document actions to be frictionless across the web, desktop, and mobile. From complex legal documents to sales contracts to employee welcome kits, documents are at the core of work. Using the power of AI with Adobe Sensei, Document Cloud is automating workflows and adding new value across all document verbs. In Q3, Document Cloud achieved record revenue of $493 million, growing 31% year-over-year. Driving this performance was increased unit demand for Acrobat subscriptions globally, and strength in the SMB segment. Q3 Document Cloud highlights include continued adoption of Adobe Sign and Acrobat, with transactions growing over tenfold in the last three years. Growth across Acrobat web and frictionless PDF, which optimizes the customer journey and captures organic search-driven demand. Increased adoption and usage of mobile applications, including Acrobat, Scan, and Sign with over 100 million monthly active users; proliferation of liquid mode and adaptive and responsive mobile experiences with over 300 million PDF files flowed in the last year. Key customer wins at Daimler AG, Fujifilm, Micron, and PwC. Businesses of every size across every category are investing in customer experience management. Adobe Experience Cloud is powering CXM for B2B and B2C companies with applications focused on customer journey management, data insights and audiences, content and personalization, commerce, and marketing workflows. Adobe Experience Cloud empowers companies to deliver predictive, personalized, real-time digital experiences across every touchpoint of the customer lifecycle. In the digital economy, companies are relying on digital presence and commerce as the dominant channel to drive business growth. According to the Adobe Digital Economy Index, U.S. consumers spent over $541 billion in e-commerce from January through August, 58% more than what we saw two years ago. In Q3, we delivered Experience Cloud revenue of $985 million, driven by strong performance across both subscription and professional services. Q3 subscription revenue was $864 million, representing 29% year-over-year growth. As businesses reopened around the world, interest in Adobe CXM solutions as an enterprise priority is resulting in increased spending in both software and services. Q3 Experience Cloud highlights include product innovations, including new personalization capabilities in Adobe Experience Cloud to help customers move from third-party cookies to first-party data strategies. Workfront momentum, reflecting the need for workflow and collaboration to deliver global campaigns, and growing customer interest in our pioneering marketing system of record. Key partnerships in commerce with Walmart to integrate their omnichannel fulfillment technologies and with PayPal to offer a robust, secure, and integrated payment solution for companies of all sizes. Continued industry analysts’ recognition, including being recognized as a leader in the Forrester Wave for Digital Experience Platforms and achieving the highest score of all participating vendors for current offering. Adobe was also named a leader in the 2021 Gartner Magic Quadrant for personalization engines and a leader in the Gartner Magic Quadrant for digital commerce. Strong customer adoption of Adobe Sensei-powered capabilities in the Adobe Experience Cloud, as over 80% of customers now rely on our AI-powered capabilities to drive data insights and optimization. Key customer wins at Accor, the Australian government, Bertelsmann, Capital One, CVS Pharmacy, Daimler AG, Facebook, Ford Motor Company, Fidelity Brokerage Services, Honeywell, Real Madrid, and the GAAP. Adobe's strength has always come from our most important asset, our people. We want to thank our 25,000-plus employees for their dedication and resilience. Our customers and partners for their trust, as we continue to navigate a dynamic external environment. I'm proud of the continued industry recognition we received as a great and equitable place to work. This quarter, Adobe received a 100% score on the Disability Equality Index for Best Places to Work for disability inclusion and we were named to People Magazine's Companies That Care list for the fifth consecutive year. Last week, we held our Adobe for All virtual conference, designed to bring employees together around our shared values of diversity, equity, and inclusion. As part of that event, we reaffirmed pay parity. We continue to pioneer opportunity parity to ensure that employees are offered equal career development and growth across all demographic groups. As part of our ongoing efforts to bring in more diverse talent, Adobe has established partnerships with historically black colleges and universities and Hispanic-serving institutions. This new program offers a million-dollar donation to schools, scholarships, internships, and career readiness programs. Our goal with these deeply focused partnerships is to provide opportunities for students to learn technology and creative skills. The health and safety of our employees remain our top priority. Our offices are slowly reopening to fully vaccinated employees on a voluntary basis. As we look ahead to the future of work at Adobe, we will remain hybrid and flexible and continue to do what's best for our employees and our business. I'm confident that Adobe's culture of innovation, category-defining products, strong brand, and the unwavering dedication of our employees will drive our continued business success and a strong close to the fiscal year. John.

Thanks, Shantanu. Our financial results reflect strong growth across revenue, Digital Media, ARR, digital experience, subscription revenue, RPO, and EPS, demonstrating the power of our category-defining offerings. In a digital-first world, Adobe's market opportunity is larger than ever, and we are investing for sustained growth through product innovation and by driving awareness and demand for our products with customers of all sizes. With our data-driven operating model, or DDOM, we continue to leverage our Experience Cloud technology to create personalized experiences for our customers in real-time, driving traffic to Adobe.com and app stores to acquire new customers. As a result, in Q3, Adobe achieved a record revenue of $3.94 billion, which represents 22% year-over-year growth. Business and financial highlights included GAAP diluted earnings per share of $2.52 and non-GAAP diluted earnings per share of $3.11. Digital media revenue of $2.87 billion, net new Digital Media ARR of $455 million, digital experience revenue of $985 million, cash flows from operations of $1.42 billion, RPO of $12.63 billion exiting the quarter, and repurchasing approximately 1.7 million shares of our stock during the quarter. In our Digital Media segment, we achieved 23% year-over-year growth in Q3, and we exited the quarter with $11.67 billion of Digital Media ARR. As anticipated, with regions beginning to reopen across the globe, we saw pronounced summer seasonality in Q3. This is consistent with the experience of businesses across industries, as evidenced by data from the Adobe Digital Index, which showed that June and July marked the highest consumer travel season in two years. This correlated with lower web traffic while individuals enjoyed their summer holidays. We do see continued recovery in the SMB segment associated with the reopening. We achieved Creative revenue of $2.37 billion, which represents 21% year-over-year growth, and we added $348 million of net new Creative ARR. Our strong Q3 results demonstrate continued demand for our offerings and execution driven by our DDOM insights. Third Quarter creative growth drivers included strong engagement, retention, and renewal across all creative products and customer segments, new user acquisition for Creative Cloud All Apps driven by global marketing campaigns, continued recovery in the SMB segment with our Creative Cloud for Teams offering, including through our reseller channel. Driving subscriptions for our flagship products, including our photography and video applications on both desktop and mobile, and the adoption of our 3D and immersive applications, including Adobe Substance. Adobe achieved Document Cloud revenue of $493 million, which represents 31% year-over-year growth. And we added $107 million of net new Document Cloud ARR in the quarter. Digital documents are essential to the changing nature of work, and we saw the paper-to-digital transformation continue in Q3 as Document Cloud remained our fastest-growing business. Third-quarter Document Cloud growth drivers included adoption driven by the increase in the need to collaborate in a hybrid work environment, increasing unit demand for Acrobat subscriptions globally, strengthened new licensing and renewal for our Acrobat for Teams offering in the SMB segment, and continued adoption of our Acrobat web and the Acrobat mobile offerings. Turning to our Digital Experience segment, in Q3, we achieved revenue of $985 million, which represents 26% year-over-year growth. Digital experience subscription revenue was $864 million, representing 29% year-over-year growth. We continue to see subscription revenue acceleration in digital experience as large and mid-sized enterprises increased their investments in customer experience management. Business performance and digital experience during the quarter were driven by strong deal volume, including several large Adobe Experience platform deals, momentum in Adobe Commerce with strong revenue growth and new customer acquisition, merchant services growth through new strategic partnerships, increasing adoption of our Workfront and Customer Journey Management offerings, and strong customer retention as we focus relentlessly on value realization for our customers and demand for Adobe's professional services. Operating expenses increased in Q3 as we continue to make strategic investments and increase headcount. We began to reopen our facilities and return to moderate levels of business travel. The majority of our employees continue to work from home, while the return to business travel is expected to ramp slowly. And we expect to further ramp our hiring in Q4. From a quarter-over-quarter currency perspective, the impact of FX, net of accounting for hedging activities, caused a sequential currency increase to revenue of $10 million. From a year-over-year currency perspective, the impact of FX, net of accounting for hedging activities, caused a currency increase to revenue of $80 million. Adobe's effective tax rate in Q3 was 14.5% on a GAAP basis and 16% on a non-GAAP basis. The sequential reduction in our GAAP tax rate is primarily due to a decrease in U.S. tax accrued on foreign earnings and tax benefits associated with share-based payment. Our trade DSO was 36 days, which compares to 37 days in the year-ago quarter and 35 days last quarter. RPO grew by 22% year-over-year to $12.63 billion exiting Q3, benefiting from strong enterprise licensing during the quarter. Our ending cash and short-term investment position exiting Q3 was $6.16 billion; cash flow from operations in Q3 was $1.42 billion, sequentially down from Q2 due to increases in prepaid expenses, income tax payments, and a decrease in accrued expenses. We repurchased approximately 1.7 million shares in the quarter at a cost of $1 billion. We currently have $14.1 billion remaining of our $15 billion authority granted in December 2020. Q4 targets factor in current macroeconomic conditions and typical year-end seasonal strength, including an expected increase in back-to-school spending and year-end enterprise licensing strength. Total Adobe revenue of approximately $4.07 billion, Digital Media segment revenue growth of approximately 20% year-over-year, net new Digital Media ARR of approximately $550 million, Digital Experience segment revenue growth of approximately 22% year-over-year, Digital Experience subscription revenue growth of approximately 26% year-over-year, a tax rate of approximately 17% on a GAAP basis, and 16% on a non-GAAP basis, and a share count of approximately 480 million shares, GAAP earnings per share of approximately $2.52, and non-GAAP earnings per share of approximately $3.18. Given Adobe's year-to-date performance and our Q4, we are clearly on track to exceed our updated annual targets for fiscal 2021 provided in March. With the massive opportunities across creativity, digital documents, and customer experience management, we continue to invest and drive strong business results. I will now turn the call over to the operator to take your questions.

Thank you for taking my question. Can we explore the seasonality commentary for the quarter? It appears that while we had the weakest beat in net new digital media ARR, we also had the strongest guidance in the past three years, which seems to support the seasonality comments you mentioned. Could we get more insight into what influenced that for the Creative Cloud business? Additionally, what trends are you observing in enterprise adoption, particularly concerning AEP and the CDP, that are contributing to the strong guidance?

Happy to do that, Alex. So first on your DME question, as it relates to the ARR. Overall, we were pleased and I think it really speaks to the strength of our DDOM and the insights that we get associated with the business. I think going into the quarter, we had expected that the consumer with a little bit more return to normalcy as what's happening in the environment. Now, this may have been a little prior to the Delta Variant that we expected travel to increase and therefore, as a result, we saw summer seasonality and summer holidays really had an impact. So as expected, we saw a little bit of less web traffic on that particular front. The SMB was a highlight for us, which was impacted a little bit more, we're continuing to see strength associated with the SMB. And to your point about the guide, I mean, I think our optimism and the relevance of our products and what's happening with digital as a tailwind really leads us to guide, as you pointed out to $550 million, which would be the largest ever guide that we've given for Q4. And if you take a step back relative to the approximately $1.75 billion ARR guide that we had given at the beginning of the year, or the $1.8 billion that we've given in March, we're going to exceed easily all of those numbers. So, as it relates to individual categories, imaging continues to do really well, video continues to do well, and the Acrobat business, which is reflected both in the Creative Cloud and the Document Cloud is doing well. MAX is going to be exciting. So, net-net, I would say that the growth prospects for that particular business and the growth drivers remain intact. But again, very much in line, and this is what we feel good about the insights that we're getting on the business. So that's to answer your question on DME. And again, remember, we have a seasonally strong quarter in Q4 for DME, the enterprise deals tend to be in Q4. We also see education start to ramp up in Q4, so that hopefully gives you some color as to what happened in Q3 and what we expect in Q4. And on the DX side to your second question, really pleased with what we saw in the adoption of the Adobe Experience Platform and the applications on top of that, the Adobe Journey Optimizer, the Customer Journey Analytics, continued to see strength. I think we're very unique and differentiated in the platform that we have the real-time nature of what we're doing with personalization. And again there, I think if last year there was a lot of interest in that particular digital transformation and customer experience management, I think people recognize that this needs to be an enterprise spend priority for all of the businesses irrespective of size, which is why both in terms of Q3 performance as well as the Q4 targets, we continue to think that digital experience will also do well. So hopefully that gives you color on both, Alex.

It does. Thanks. Thanks a lot, Shantanu.

Oh, yes. Thanks very much, and congrats on the quarter. Shantanu, I was wondering if you could expand a little bit more on a couple of the bigger Experience Platform wins that you had. Are these existing customers, competitive? I guess if you had to step back, what's helping you all win these larger deals? I was also impressed with 80% of your clients seem to be using some of the AI powered capabilities, which seems to be a really high uptake rate or take rates. So, we're just kind of curious if you can expand on some of the larger enterprise Experience Platform deals you had this quarter. Thanks.

Certainly, Kirk. Ultimately, the overarching trend everyone is noticing is that having a digital presence, engaging in commerce, and leveraging data insights and analytics is essential for any business. Initially, everyone established a website and began utilizing analytics. However, the key differentiator with the Adobe Experience Platform, particularly in the realm of personalization, is significant. Whether one is a B2B or B2C company, investing in this area is crucial. Our team has effectively communicated this across various industries. The healthcare sector, for instance, continues to thrive with growing interest. Consumer businesses are also showing signs of recovery as normalcy returns. We are focused on both existing customers and acquiring new clients, but the real advantage comes from the robustness of the Experience Platform, the real-time collection of behavioral data, and the messaging that emphasizes the need for companies to turn their first-party data into an asset. The trends in digital commerce further reinforce our position, allowing us to secure deals because of our strong offerings and our clear distinction as a dedicated marketing company compared to others in the field.

Thank you very much for taking the question. Shantanu, I know that you only have three quarters of that data thus far, but is Workfront driving larger average deal sizes in DX? Is that something that's already showing through?

Hi, it's a great question, Gregg. And then maybe as I had responded to Kirk as well, I should have talked about the big thing that we're hearing from our customers in that space. Gregg, is they have more and more campaigns. They want to do the agility of the campaigns. These are global, and how do they not only have an integrated suite of products, but how do they get the workflow to be more efficient, especially as we're all working in a hybrid environment or working from home? So Workfront is definitely helping us, it's helping us with existing customers, it's helping us with deal sizes. And in many ways, it's the glue both to enable the people and technology and processes; it's helping with the processes part. But the promise of what we've also said there in terms of this pioneering marketing system of record, that's another area for the interest. And I think this was always a great Company. I think they were looking to become more general-purpose. I think what Anil and the team have done are really focusing on marketing workflows and solving it for all of the different personas. That's definitely resonating, but all of the large deals that we do Workfront is definitely a part of the interest and a part of the bill of materials associated with that.

Very helpful. Thank you very much.

Thanks, Gregg.

Thank you, guys, for taking the question and very nice quarter. Maybe digging in a little bit more on the M&A side of the equation, we've definitely heard really good things about Workfront getting into a lot of deals upfront. Perhaps, can you characterize the sort of the performance of Workfront versus your expectations and kind of contribution you're seeing in the quarter? Secondarily with Frame.io, just for clarification, is that in the forward ARR guidance, so is that included in the $550 million for Q4? And then perhaps more broadly, just on M&A strategy. The last two big deals seem to have a common thread in terms of collaboration. Is that just a self-idealist putting together two data points and drawing the trend line, or is that sort of a particular area of focus for Adobe in terms of adding to the portfolio on a go-forward basis? Thank you, guys.

So, Keith, I actually think there were three questions in that, so let me parse each one. The first, I think as it relates to Workfront, we're very clearly targeting a need that exists and we had originally, I think, said something like Workfront will do $140 million to $150 million in revenue for FY21. And then I think we've said that it's on track to significantly beat that, and that continues to be the case. As we do these larger deals, Keith, we don't breakout Workfront. And so that's the way we think about the business. But Workfront is definitely appealing to that. Your second question as it relates to Frame.io. No, it is not in the ARR guide until we close the deal. We expect that to happen in Q4. We'll certainly update you on what happens as it relates to the Frame. But we're excited about that. And your third question as it relates to collaboration is a team; it's part of what we've been talking about for a while. If you remember what we've done with XD in terms of being able to do live editing. I think what we've done with the multi-surface applications, where our applications run on mobile devices, or iPads, or tablets, as well as desktops, is just one of those themes that people are working from different locations. People are increasingly working with people, and I think we have the ability to really provide value for our existing customers and attract new customers. I think with Frame, in particular, we're excited because it expands dramatically the potential of the number of people who will become participants in the video workflow. And if they become, I hope you liked the videos that we placed at the beginning of the earnings call, and it's all of that stuff is being done remotely. We're pleased. And as you know, we are always cautious about the acquisitions and making sure it's a case where we can bring significant value both to our shareholders and to our customers.

That spend especially the color guys.

Thank you.

Good afternoon. Thank you for your questions. Regarding margins, year-to-date, they are now above 46%. I remember you mentioned the possibility of a decrease in the second half. How should we view the margin profile and what other benefits might you highlight that could normalize with a return to more typical conditions?

John, do you want to start and then I can add?

Yeah, that'd be great. Yeah. You're right. The margins at 46% this quarter we had indicated that with the more reopening across different regions, we would start to see our facilities come online, or business travel, and come back and certainly continue our hiring ramps with the Delta Variant probably slowed that down a little bit. And so that contributed to the margin expansion you saw in Q3. But overall, it was an outstanding quarter for our business. And what it says, the long road, the path to margin expansion is really to revenue growth given the leverage in our mode and after the contributions from the revenue performance with quarter continued expense and things, I just talked about that contributed overall to the performance. But we expect those expenses to come back in a phased reentering out maybe a little slower than we originally thought when we talked about the second half, but that being said, when I think about our original targets in December, its implied margin expansion. When we did our updated targets in Q1, it was an even larger margin expansion from what we saw. But we're executing against these huge March opportunities, and we'll continue to do that with an eye and I continued top-line growth, such as areas of innovation you touched on, which is 3D and immersive Adobe Experience Platform, sign stock mobile, all of that.

Well said, John, and maybe the only other thing I would add is that in I certainly, I think when you look at some of the TENEO facilities expenses, it's a little lock efficient in terms of what's happening on expenses. But our big position is when you have a $100 billion plus addressable market, I think driving profitable growth is where we're focused on, which is why I think John also referred to we continue to be in the market to hire talent to make sure that we can continue to address all the market opportunities that we have. And so, where folks, just don't drive profitable growth.

Thank you. Good evening. Shantanu and John. Shantanu, for you, first as I'm sure you recall, over the last number of years, particularly at a conference like MAX, we've talked about the integration, and many ways, the unique integration that you have between Digital Media and the DX business, and you'll recall it's gone by a certain acronym over time. The question is, can you quantify or in some way describe the business effect of that combination and even going back to the old days of how this neutrality does in fact help you drive business through the integration across the two segments. Relatedly, with regard to DX specifically, you'll recall that over the last number of years, the Company has often referred to having about four dozen or so use cases that you were targeting for DX, and that was a number of years ago. So perhaps you could talk about how the number of targeted use cases has increased for DX in the last number of years, particularly now with the introduction of payment services and other new capabilities.

Sure, Jay. First, I think as it relates to your question around the integration between the clouds, as you know, first, let's even talk about Acrobat, right? Because so much of the Acrobat business is reflected both in Creative Cloud and Document Cloud, and so that's one very tangible example of how we've integrated the clouds. I think taking a step back, the area that I would say is of most interest to customers right now is what we have referred to in the past also as content velocity, which is people are creating more digital assets. They're spending more on content and how they both ensure that all of that content seamlessly is distributed, whether it's a marketing campaign, whether it's something that goes on a mobile application, whether it's something that goes on the website. And so, I think that's the hard problem that we've been able to help facilitate for our customers, which is creating all of this content and making sure that its delivery is accelerated through marketing campaigns is an area of real integration between DME as well as DX. And where that shows up also in the revenue is the continued growth of M and M assets, specifically because that's where the assets are really flowing between these two solutions. So hopefully that gives you a little bit of the flavor. I think to the earlier questions that Gregg and Kirk had asked. I mean, it is also on the workflow; that's when people are looking at it and saying, wow, if my freelancers have created content, how's that now being reflected in the DX.

Thank you very much.

Thank you, everyone, for addressing my question. John, I’d like to shift topics for a moment. Could you provide insights on the seasonality of the Document Cloud business? I’ve noticed that the net new ARR in that area has typically shown consistent growth throughout the year. My question is whether we are approaching a point where the seasonality might begin to resemble that of the Creative segment, or if there are any specific factors to consider regarding Document Cloud ARR seasonality for this quarter?

When we consider the impact of the pandemic and the ongoing shift from paper to digital, it's clear that this transformation affects not only large enterprises and institutions, which have experienced significant growth, but also individuals engaging with various services. Looking at our individual offerings in Creative and Document Cloud, we observed slightly lower traffic recently. We believe this is related to individuals enjoying their holidays, as indicated by our Adobe Digital Index data. Notably, travel has surged during some of the busiest months in the last two years. This seasonal trend has affected our numbers a bit, but we maintain a strong presence in education, government, and enterprise sectors within Document Cloud, where we continue to see robust growth. This performance reinforces that Document Cloud is currently our fastest-growing business.

Very helpful. Thanks.

Thanks, Saket.

Great. Thank you for taking my question. This one is for you, Shantanu. You guys have a history of bringing your professional tool down to the consumer; you had Light Edition, you have mobile editions. I think in your prepared remarks, you mentioned the addition of Frame.io, creating additional opportunities across the customer base, teams, and enterprises. I guess do you envision this as a platform that could be brought down to consumer prosumers? Or is it still going to be in that professional bucket?

Ken, it's a very important area of expansion for us. I mean, I think the Creative has always been a segment that looks to us to deliver mission-critical products that enable them to make a livelihood. But the halo effect of that, when you look at what we talked about at our analyst meetings and you know, how big the communication business already is as well as the outreach of that even into the consumer business. But stay tuned on that front. I think as we talk about our product roadmap and the excitement that we have to fulfill this vision of creativity for all and target a broader and broader set of customers with some great solutions using our artificial intelligence and Sensei technology, we have some very exciting things underway. That will start to be served to customers. So, we're very excited about that opportunity; it's a big opportunity. It's already a big business for us. I mean, when we talk about the fact that we're adding over $0.5 billion of net new ARR as our expectation for Q4. A portion of that is also going to what you would call communicators or prosumers. And we're going to be delivering more and more really phenomenal products targeted at that customer segment.

Got it. Fantastic. Looking forward to MAX. Thanks, guys.

Thank you.

Thank you very much. Congratulations Shantanu and team, a fantastic quarter. Shantanu, I remember, I think what's the MAX 2019, we talked about video and how that could be as big of an opportunity as photos, and I'm curious to get your thoughts on the total available market that is new and incremental to Adobe's Creative business as a result of the acquisition that you made. Particularly, you used the word dramatically expansive scope of what you could do, meaning collaborators in addition to content creators. Can you just talk about what you mean by that? Can you just put a final point? This means that the greater term will be then, what Wall Street thinks we just always been the case for the past ten years or so? And secondly, not that it's a negative, but what would the seasonal pattern and in summer? Is there at all any risk that digital transformation takes a bit of a backseat as we go shopping not online that will go to stores; therefore, e-commerce activity might actually start to flatten? But the secular trend is too pretty solid. But jumps on the adjustment have reinforced some adjustment or maybe not, but I just want to get your thoughts on that. Thank you so much.

Thanks, Kash. Regarding your first question about video, we've indicated for some time that video represents a significant growth opportunity, and that's becoming evident. Our products like Premiere and After Effects remain leaders in this area, while Photoshop and Illustrator are widely used as well. With the emergence of numerous streaming services, it's clear that every company is now offering one. The relentless consumer demand for video is pushing more companies to launch these services and cater to diverse genres. Our partnership with Netflix exemplifies this trend, allowing people in different locations to collaborate effectively. The ability to rapidly develop creative ideas for the right audience is increasingly valuable to our customers. We are optimistic about the direction of the video space, especially after acquiring Frame.io and receiving feedback about its potential. This optimism extends across various roles, including scriptwriters, reviewers, creative agencies, and corporate video production. Adding this as an enterprise product can significantly expand our total addressable market, and we'll provide updates on that as we normally do. Jonathan will discuss our Q4 plans as well as our 2022 results in due course, and we're enthusiastic about the future. The collaboration of Frame.io with not only Adobe products but other solutions is also a key strength. Regarding your question on shopping and online interactions, our Digital Experience business saw substantial success in Q3, largely because more companies are embracing multi-channel strategies. This trend is set to continue driving our Digital Experience Solutions. Whether customers are shopping in-store or online, companies must offer a solution that recognizes and treats them as valued customers. Our Q3 results exceeded expectations, with some non-recurring items related to increased commerce usage. We are witnessing a rise in this usage. Looking ahead, as education resumes and end-of-quarter activity increases across all companies, we anticipate a strong demand for our DME solutions in the upcoming seasonal Q4 period.

That's fantastic. Thank you so much.

Thanks, Ken.

Thanks for taking my question, John. I wanted to come back to the Document Cloud business because it looks, perhaps, to me, that there was some outside strength from licensed products that may have been in lieu of revenue coming from ARR products. And I think you can see this with total Document Cloud revenue growth actually accelerating even though total ARR growth decelerated. So is that the right assessment, and would we be looking at total revenue, not ARR? And I guess. So, is there any reason for a mix shift towards more licensed products, and as you look into Q4, given it's a big ELA quarter, should we expect that to continue?

Yes. There will definitely be strength in ELA as I mentioned for Q4, with expansion also seen in Q3. We still have basic customers migrating as well, so ARR remains important, and we want to focus on driving more of it. Our growth over the past year has been quite impressive and provides us with opportunities for healthy subscription growth. However, ELA won't deliver significant revenue in Q4; it will make a substantial contribution, but our focus remains on driving subscriptions as part of our strategy. We still have customers purchasing perpetual licenses, which will lead to some fluctuations.

Yes. Got it. Okay. Thanks.

Hi, thanks for taking my question, Sean, I was wondering if you could talk about the nature of Creative wins in the public sector with organizations like the Department of Interior. What do these types of organizations historically rely upon for Creative needs? And hopefully, they're embracing the features of the Creative Cloud versus using maybe a particular application like Photoshop or a distinct set of applications. Thanks.

To your point, I think the public sector has always been an important part, but I think it's just the amount of content that people are creating is increasing. And when the amount of content that people are creating, then content management becomes an important issue. Workflow becomes an important issue. And the standardization of the products. And one of the things we did really well is what we called our named user deployment and how, you know, when we have these enterprise licensing agreements, we offer enterprises the ability to download and distribute within the companies. And the more we do training and evangelism of the products, that leads to adoption. So, I would say there's an element of standardization, there's an element of more content. I mean, even if you're a public sector Company right now, I mean, what you transact online is becoming dramatically greater than it's ever been because the physical presence is seeing cutback as a result of what's happened in the pandemic. I think all of those are macro trends that are going to continue, but we've also done a really good job of actively making sure we evangelize what these solutions are.

Great feedback. Thank you.

Operator. We're coming up on the top of the hour. We have time for two more questions. Thanks.

Great. Thanks, guys for taking my question here. Just with your view across the broader marketing stack here with Experience Cloud. I'm curious what you're observing with regard to these Customer 360 initiatives. Are you finding customers are taking more of multiproduct deals here to get that view across multiple channels here, e-commerce, marketing automation, CMS? You've got workflow automation in there. Are there any combinations of any of that that you're seeing trending more recently been in the past? Thank you so much.

It clearly has been a push for us, Brad, in terms of, you know, what we're doing, which is how do we sell the entire suite offering? And I think every year we give you an update on how that is actually indeed, how we are selling it. And so, from our perspective, the marketing stack, what's completely unique about us is the data and insights that we're getting, the ability to do commerce, and the digital presence. I think as it relates to customers, we have 60 waivers unique, and I think we're years ahead of any other large company that has space in this real-time nature of what we've delivered, it's scalable, we've got billions of profiles. And so, I think a lot of other companies are talking about how they take something that may be in the record somewhere and do things with it. But for us, it's the activation of that data. And that's where I think most people are really excited about what Adobe has to offer. And the other thing that I think has really happened, is people recognize that they have to get control of their first-party data. I think a lot of interest used to exist about customer acquisition and third-party data. But I think right now, it's about do we have even control of our first-party data? Do we have control of our behavior? And what is happening on multiple channels? And the fact that that can be very easily answered as it relates to what we have done with the Adobe Experience Platform. Last but not least. I mean, remember we're the only company that can go in. And say, hey, we have a B2B business and a B2C business. And when we talk about how we're using this in terms of the playbook on Adobe.com, I think that really opens up a lot of people's ideas as to how they can use this and utilize it. And so, I think the playbook that we delivered for DDOM earlier this year and how we talk about what they can do, I think that's what really resonates with customers.

That's great to hear. Thanks, Jonathan.

Thank you.

Shantanu, the DX DRaaS is seeing an acceleration from Q2. Can you explain the factors driving that acceleration? And for John, as it pertains to seasonality with Magento and commerce in Q4, are there any considerations to keep in mind as we navigate the tougher comparisons in that business? Thank you.

Brian, I think what really drove that revenue was both subscriptions as well as the services. As you know, the services were again, really reliant on a large partner ecosystem. But over the last 18 months, as we've always talked about, the interest is high. How they are all implementing it. And so as they continue to implement it, and as they continue to say, we need to invest in these solutions, I think that's driving it. And I think to your point, if you take a step back, I think guided to something like 19% revenue at the beginning of the year, and 22% in subscriptions, we had increased that in March, respectively. And we just posted 26% in Q3. So, and if you look at it for Q4 as well as you point out with the large comps, we continue to be excited about that opportunity. So I think there is. This is front and center; it's an enterprise priority. And I think since people are staying, we've got to deal with this new reality; there's no time to waste in terms of implementing it. Again, there were, as we said, a couple of non-recurring items; some of those had to do with usage in commerce, and that actually is also indicative that maybe a little bit more depends on the quarter, but it's up and to the right as far as we're concerned in terms of the business opportunity in the business.

Go ahead.

No, go ahead. Sorry, Jonathan, I didn't hear you.

Yeah, no problem. Just going to just kind of over the top on Brent's question on seasonality-related commerce, of course, in Q4 as a strong commerce quarter anyway. Given the holiday spending trend. And so, we're excited about the opportunity there as well; it's just trying to set us up into the right, I think we have great momentum.

And overall, since that was the last question, I mean, again, I think we were really pleased with our performance in Q3. We do expect a strong end of the year for our business. As you saw from our targets, it's clear that your win, this unique position that we have three large growth opportunities ahead of us, and we're executing well against all three of those, and the innovation and the roadmap that exists across all three of those clouds just gives us continued optimism that we will serve our customers well, and we feel fortunate. I think the future of work and the fact that it's more hybrid will only continue to emphasize digital as a priority for companies of every size. And so, whether that's an increase in content for personalization, whether that's more automation of digital documents, and whether that's every business saying we need to understand how to do customer experience management. I believe Adobe is very unique and positioned to drive those particular macroeconomic trends. But thank you for joining us today, and we look forward to MAX, as well as the Q4 earnings call. And with that, I will turn it back over to Jonathan.

Thanks, Jonathan here. And thanks to everyone for joining us on the call today. As we mentioned in the press release today, we look forward to connecting with you again on Thursday, December 16th, for our Q4 earnings and virtual financial analyst day. We will be sending out more details in the coming weeks, and if you have any questions, feel free to contact us at ir@adobe.com. I look forward to speaking with many of you soon, and we appreciate your interest in Adobe. This concludes the call.