Adobe Inc (ADBE) — Q3 2023 Earnings Call Transcript

Good afternoon, and thank you for joining us. With me on the call today are Shantanu Narayen, Adobe's Chair and CEO; David Wadhwani, President of Digital Media; Anil Chakravarthy, President of Digital Experience; and Dan Durn, Executive Vice President and CFO. On this call, which is being recorded, we will discuss Adobe's third quarter fiscal year 2023 financial results. You can find our press release, as well as PDFs of our prepared remarks and financial results, on Adobe's Investor Relations website. The information discussed on this call, including our financial targets and product plans, is as of today, September 14, and contains forward-looking statements that involve risk, uncertainty 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. Our reported results include GAAP growth rates as well as constant currency rates. During this presentation, except per share amounts, Adobe's executives will refer to constant currency growth rates, unless otherwise stated. Reconciliations 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. Adobe had another record Q3, achieving revenue of $4.89 billion, representing 13% year-over-year growth. GAAP earnings per share for the quarter was $3.05 and non-GAAP earnings per share was $4.09, representing 26% and 20% year-over-year growth, respectively. Driving this success is a rich and innovative product roadmap. The advances we are delivering across Creative Cloud, Document Cloud and Experience Cloud are enabling us to attract an ever-growing set of users while delivering more value to existing customers. Yesterday's exciting announcements add to this roadmap. With the commercial availability of our generative AI capabilities, natively integrated in Adobe Creative Cloud, Adobe Express and Adobe Experience Cloud, we are unleashing a new era of AI-enhanced creativity for millions of customers around the globe. We are bringing generative AI to life across our portfolio of apps and services to deliver magic and productivity gains. Our rich datasets enable us to create foundation models in categories where we have deep domain expertise. In the six months since launch, Firefly has captivated people around the world who have generated over 2 billion images. We are excited about the potential to reimagine the content supply chain for all businesses through the integration of our clouds, enabling the delivery of personalized and engaging customer experiences. Our strategy to unleash creativity for all, accelerate document productivity and power digital businesses is driving our growth across every geography. By delivering innovative technology platforms and services, we continue to advance our industry leadership and delight a growing universe of customers. I'll now turn it over to David to share more about our momentum in the Digital Media business.

Thanks, Shantanu. Hello, everyone. In Q3, we achieved net new Digital Media ARR of $464 million and revenue of $3.59 billion, which grew 14% year-over-year, driven by strength in both our Creative and Document businesses. On the creative side, digital content creation and consumption are exploding across every creative category, customer segment and media type. Creative Cloud is the leading creativity platform, offering a comprehensive portfolio of products and services for every discipline across imaging, photography, design, video, animation and 3D. We're excited about the growth we are driving with our creative flagship products, and with Adobe Express, our AI-first, all-in-one creativity app that makes it fast, easy and fun for any user to design and share standout content. Yesterday's announcements highlighted several advances to our creative business: First, after an unprecedented beta that saw over 2 billion images generated, Adobe Firefly models and the Firefly web application are now commercially available. Firefly supports text prompts in over 100 languages and enables users around the world to create content that is designed to be safe for commercial use. We will continue to train and release new Firefly foundation models in areas where we have rich datasets and expertise, such as imaging, vector, video, design, 3D and more. Second, Adobe Firefly-powered features are now natively integrated into several Creative Cloud apps, including Generative Fill and Generative Expand in Photoshop, Generative Recolor in Illustrator, and Text to Image and Text Effects in Adobe Express. These deep integrations deliver more creative power than ever before to customers, enabling them to experiment, ideate, and create in completely new ways. Third, Adobe Firefly for Enterprise is now generally available for businesses to enable both creative teams and knowledge workers to confidently deploy AI-generated content. Adobe will empower customers to create custom models using proprietary assets to generate branded content and offer access to Firefly APIs so customers can embed the power of Firefly into their own content creation and automation workflows. And finally, we announced subscription offerings including new generative AI credits with the goal of enabling broad access and user adoption. Generative Credits are tokens that enable customers to turn text-based prompts into images, vectors and text effects with other content types to follow. Free and trial plans include a small number of monthly fast Generative Credits and will expose a broad base of prospects to the power of Adobe's generative AI, expanding our top-of-funnel. Paid Firefly, Express and Creative Cloud plans will include a further allocation of fast Generative Credits. After the plan-specific number of Generative Credits is reached, users will have an opportunity to buy additional fast Generative Credit subscription packs. In Q3, we added $332 million of Creative ARR and achieved $2.91 billion of revenue, growing 14% year-over-year. Business highlights include: The integration of Firefly into Photoshop and Illustrator. Over 3 million users have downloaded the Photoshop and Illustrator beta releases. The general availability of Adobe Express now includes support for editing and posting designs, videos, images, PDFs, presentations and more. Express features include Firefly-powered Text to Image and Text Effects. Express is already being used by millions of people globally. New AI and 3D features in Premiere Pro and After Effects, including Enhance Speech and Text-Based Editing in Premiere Pro and a new 3D workspace in After Effects. The Text-Based Editing feature in Premiere Pro received the 2023 Hollywood Professional Association Award for Engineering Excellence. New Lightroom mobile now integrates directly with the camera roll and introduced a streamlined interface to make editing even easier on the go. The introduction of new video assets in Adobe Stock and strong product-led growth motions drove a record Q3 for the Stock business. Key customer wins include Amazon, Havas, Paramount, SAP, Southern Graphics, Take-Two Interactive and U.S. Department of Energy. As we have continued to add new applications and delivered innovations across our creative offerings, we announced price updates for certain Creative Cloud plans across the Americas and Europe, starting November 1, 2023. In addition to being a growth driver in the Creative Cloud business, Acrobat and PDF continue to power the Document Cloud business. Whether it's a sales contract, legal document or a back-to-school form, seamless document workflows across every device and platform are more important than ever for all of us to be productive in our professional and personal lives. Document Cloud is powering document productivity and automation across the web, desktop and mobile. In Q3, we achieved Document Cloud revenue of $685 million, growing 15% year-over-year. We added $132 million of net new Document Cloud ARR, with ending ARR growing 22% year-over-year in constant currency. Business highlights include: Significant growth in monthly active users across web, mobile, and embedded third-party app ecosystems, reflecting our growing top of funnel and the effectiveness of our product-led growth execution. Strong mobile momentum reflecting the value of Acrobat as an essential productivity application on mobile devices. Adoption of Acrobat and Acrobat Sign through increased link sharing for enhanced collaboration and approval workflows. Enhanced PDF workflows across Acrobat and Express making it seamless to create visually stunning PDFs. A new Adobe PDF Electronic Seal API, which is a cloud-based, end-to-end solution for applying electronic seals on PDFs at enterprise scale. Key customer wins include Citibank, GlaxoSmithKline, Emerson Electric, Morgan Stanley and Volkswagen. We continue to be excited about the pending Figma acquisition, which will reimagine the future of creativity and productivity. We remain engaged with regulators and have confidence in the merits of the case. We look forward to hosting Adobe MAX, the world's largest creativity conference, next month in Los Angeles, where we will welcome 10,000 members of our global community and engage with hundreds of thousands more online. We will hear from inspiring creators and unveil innovations across Creative Cloud, Firefly and Express. In summary, we are excited about the pace of innovations across our Digital Media products and continued execution across multiple growth drivers. I'll now pass it to Anil.

Thanks, David. Hello, everyone. Every company sees digital as an opportunity to drive experience-led growth. As I've spent time with customers across the world, it's clear that they are prioritizing investments in customer experience management technology to improve customer acquisition, engagement, retention and operational efficiency. We are driving revenue growth across content and commerce, customer journeys, data insights and audiences and marketing workflows, leveraging the Adobe Experience Platform, demonstrating the strength of our business. Brands around the globe are working with Adobe to accelerate personalization at scale through generative AI. With the announcement of Adobe GenStudio, we are revolutionizing the entire content supply chain by simplifying the creation-to-activation process with generative AI capabilities and intelligent automation. Marketers and creative teams will now be able to create and modify commercially safe content to increase the scale and speed at which experiences are delivered. In Q3, we continued to drive strong growth in our Experience Cloud business, achieving $1.23 billion in revenue, representing 11% year-over-year growth, as a growing number of enterprises turned to Adobe as their trusted partner for customer experience management. Subscription revenue was $1.1 billion, representing 13% year-over-year growth. Adobe Experience Cloud delivers predictive, personalized, real-time digital experiences, from acquisition to monetization to retention. We are driving strong enterprise adoption of Adobe Experience Platform, and native apps including Real-Time CDP, Adobe Journey Optimizer and Customer Journey Analytics. For example, the Coca-Cola Company is leveraging Adobe Real-Time CDP and Adobe Journey Optimizer to bring together 98 million customer profiles globally into a single CDP to quickly deliver personalized campaigns and experiences. smart Europe, an all-electric automotive brand, is using Adobe Experience Cloud to offer customers the ability to personalize their vehicle purchases through the integration of Adobe Workfront, Adobe Creative Cloud and Adobe Experience Manager. Business highlights include: Strong momentum across AEP and native apps with the total book of business surpassing $600 million during the quarter. Adobe Journey Optimizer book of business more than doubled year-over-year as customers increasingly drive omnichannel personalization and engagement. Continued innovation in Adobe Experience Manager with AEM Assets now natively integrated with Firefly and Express, enabling any employee across an organization to generate and reuse beautiful on-brand content. Growth of our Workfront business, reflecting our ability to serve the workflow and collaboration needs of enterprise customers and agencies. In Q3, we added Havas to the growing list of top agencies standardizing on Adobe for their content supply chain. Expanded strategic partnership with Amazon. Given customer demand, we will jointly deliver AEP on AWS and Amazon will deploy Experience Cloud across their enterprise. Adobe's leadership in Content Management Systems was recognized across three industry analyst reports, including the IDC MarketScape for Full-stack Content Management Systems, the IDC MarketScape for Hybrid Headless CMS and the Forrester Wave for Content Management Systems. Adobe was also named a Leader in the Gartner Magic Quadrant for Digital Commerce as well as the IDC MarketScape for OmniChannel Marketing Platforms for B2C Enterprises. Key customer wins include Amazon, Blue Cross Blue Shield of Florida, Dollar General, Havas, Intuit, IRS, Jet2.com, Lufthansa, Macy's, MSC Cruises, Novo Nordisk and SAP. These and other customers continue to prioritize investments in customer experience management solutions despite increased scrutiny of enterprise IT spend. Our solutions enable enterprises to simultaneously achieve the twin goals of driving new customer acquisition and serving existing customers to deliver profitable growth. Adobe is well positioned to keep winning with our differentiated offerings, track record of innovations and ability to drive ROI for companies across industries. We're looking forward to a strong close to the year. I will now pass it to Dan.

Thanks, Anil. Today I will start by summarizing Adobe's performance in Q3 fiscal 2023, highlighting growth drivers across our businesses, and I'll finish with financial targets. Adobe's performance in Q3 demonstrates something that makes us exceptional, the combination of growth and profitability. In fact, at Adobe, rather than talking about trade-offs between growth or profitability, we call it an 'and' statement. Growth and profitability is not new for us, we have been delivering both for a very long time and it is at the core of our operating philosophy. It all starts with prioritization, innovation and a sharp focus on execution. This philosophy shines through in our Q3 results. We are investing in technology platforms, global campaigns to attract and engage millions of customers and recruiting the best and brightest people in our industry. While doing that, Adobe is driving performance on margin and earnings, demonstrating what a special company we are. In Q3, Adobe achieved revenue of $4.89 billion, which represents 10% year-over-year growth, or 13% in constant currency. GAAP diluted earnings per share was $3.05, up 26% year-over-year, and non-GAAP diluted earnings per share was $4.09, up 20% year-over-year. Other business and financial highlights included: Digital Media revenue of $3.59 billion; net new Digital Media ARR of $464 million; Digital Experience revenue of $1.23 billion; cash flows from operations of $1.87 billion; RPO of $15.72 billion exiting the quarter; and repurchasing approximately 2.1 million shares of our stock during the quarter. In our Digital Media segment, we achieved Q3 revenue of $3.59 billion, which represents 11% year-over-year growth, or 14% in constant currency. We added $464 million of net new ARR in the quarter, our strongest Q3 on record, exiting the quarter with $14.60 billion of Digital Media ARR, growing 15% year-over-year in constant currency. We achieved Creative revenue of $2.91 billion, which represents 11% year-over-year growth, or 14% in constant currency. We added $332 million of net new Creative ARR in Q3, with strong demand across our offerings. Third quarter Creative growth drivers included: new user growth across geographies, customer segments and Creative offerings, driven by innovation and targeted campaigns utilizing insights from our data-driven operating model; outstanding top-of-funnel performance resulting from viral community excitement and success of our product-led growth strategy, driving traffic to Adobe.com; single app subscriptions for Photoshop driven by interest in the magic of Firefly, Generative Fill and Generative Expand; another great quarter for value-added services, including strong customer demand for Adobe Stock; continued customer adoption of Acrobat CC; strong engagement and retention across customer segments; and success in the enterprise, driven by transformational ETLAs that span the entire Creative portfolio, including CC All Apps for creative teams, Express for knowledge workers, Frame for collaboration, and Adobe Stock and Firefly for content. Adobe achieved Document Cloud revenue of $685 million, which represents 13% year-over-year growth, or 15% in constant currency, and we added $132 million of net new Document Cloud ARR in the quarter. Third quarter Document Cloud growth drivers included: success with new customer acquisition through our Reader and Acrobat web funnels and distribution partners, with monthly active users up over 70% year-over-year for Acrobat web; strong demand for Acrobat subscriptions across customer segments and geographies, driven by targeted offers; strength in monetization from Acrobat mobile, which grew ending ARR over 30% year-over-year in constant currency, driven by product innovation and conversion; and traction in B2B, with strong unit demand for our Team offering through the reseller and direct routes to market. Turning to our Digital Experience segment, in Q3, we achieved revenue of $1.23 billion, which represents 10% year-over-year growth, or 11% in constant currency. Q3 subscription revenue was $1.10 billion, which represents 12% year-over-year growth, or 13% in constant currency. Third quarter Digital Experience growth drivers included: demand for our Adobe Experience Platform and native applications, including Real-Time CDP, Customer Journey Analytics and Adobe Journey Optimizer. In Q3, subscription revenue for AEP and Apps grew 60% year-over-year; strength in Content and Commerce, with Adobe Experience Manager continuing to set the standard for enterprise content management; growth of our Workfront business, as workflow and collaboration are essential components of an enterprise content supply chain solution; strong retention rates in the quarter, as we continue to focus on value realization to our Digital Experience customers; and continued momentum in transformational platform deals with large enterprises adopting our end-to-end suite of applications. Adobe's effective tax rate in Q3 was 19.5% on a GAAP basis and 18.5% on a non-GAAP basis. The GAAP tax rate came in lower than expected due to tax benefits associated with the vesting of share-based payments in the quarter. RPO exiting the quarter was $15.72 billion, growing 11% year-over-year, or 13% when adjusting for a 2% FX headwind. Our ending cash and short-term investment position exiting Q3 was $7.52 billion, and cash flows from operations in the quarter were $1.87 billion. In Q3, we entered into a $1 billion share repurchase agreement, and we currently have $3.15 billion remaining of our $15 billion authorization granted in December 2020. Factoring in current macroeconomic conditions and year-end seasonal strength, for Q4, we are targeting: total Adobe revenue of $4.975 billion to $5.025 billion; Digital Media net new ARR of approximately $520 million; Digital Media segment revenue of $3.67 billion to $3.70 billion; Digital Experience segment revenue of $1.25 billion to $1.27 billion; Digital Experience subscription revenue of $1.11 billion to $1.13 billion; tax rate of approximately 18% on a GAAP basis and 18.5% on a non-GAAP basis; GAAP earnings per share of $3.10 to $3.15; and non-GAAP earnings per share of $4.10 to $4.15. Q3 was a great quarter for Adobe, and I couldn't be more pleased with how the company is positioned to continue to deliver for our customers and investors. We're looking forward to our Investor Meeting at Adobe MAX on October 10, where we'll do a deep dive into our AI innovation. I hope to see you there. Shantanu, back to you.

Thanks, Dan. Adobe's strong Q3 results are a reflection of our team's exceptional execution. We recently lost our beloved co-founder John Warnock. John's brilliance and innovations changed the world. He was one of the greatest inventors of our generation and an inspiration to the technology industry. While we miss him tremendously, it gives me great comfort knowing that John was so proud of all of the innovation Adobe continues to deliver. As someone who shares John's passion for product and innovation, I'm exceptionally energized by the technology platforms we are delivering with AI at the center across our three clouds to delight customers. Our brand, technology and our talented employees position us for a strong close to the year and continued growth in the decades to come. Adobe's best days are ahead of us. Thank you. We will now take questions.

Excellent. Thank you guys for taking the question and really nice quarter. Dan, actually a margin question, for you. And kind of a riddle that, like, we've been thinking about. We've been told generative AI is really expensive to run. The inference and training costs are really high. You guys have been running a beta for a while, 2 million images generated. There's a lot of functionality already in the product. And your operating margins are up. Your gross margins are up on a year-on-year basis. So, how are you able to do that? Like, where are these costs going, if you will? And on a go-forward basis, if all this stuff becomes generally available, how should we think about that gross margin impact or the overall margin impact of generative AI on a go-forward basis? Thank you.

Thank you, Keith. As you mentioned, our company's innovation engine is very robust. We had many exciting announcements this week, and after a year of integrating generative AI and Firefly, we are just beginning our innovation journey. In the last six months, we've been running a beta program, and our customers have created over 2 billion images. It's important to note that we've achieved this while maintaining strong margins. When we evaluate these technologies, we have made investments in areas such as cost of goods sold, inferencing, and content, as well as in R&D for training and creating foundational models. David touched on this in his comments, and we have released the image model for the Firefly family, with plans to introduce other media types soon. We are making significant investments. Referring back to my initial comments, our core operating philosophy, which has long been part of our company, focuses on growth and profitability. We are prioritizing, innovating, and executing meticulously, which is reflected in our financial results. As we look ahead, when we set our fiscal 2023 targets, we included a 44.5% operating margin within those targets. Considering our recent guidance for Q4, with the rollout of four great new products and the technologies incorporated into our product lineup, we anticipate an operating margin of around 45.5%. As we lead our industry through this significant shift, we believe that mid-40s percentage is a reasonable estimate for our margin structure as we continue to advance this technology and our leadership position. I am looking forward to the Q4 earnings call where we will discuss our fiscal 2024 targets in more detail.

And maybe Keith, just 30 seconds to add to that, for investors like you who want to make sure we're not in any way not investing in the future, we are investing on training for 3D, for video, for new forms of imaging and vectors. So, what we are confident is while we continue to invest in that, the scrutiny that Dan and his team have on other expenses, that we can continue to drive top-line growth as well as cash flow and EPS. So, I think we're unique in that respect.

Definitely. Very impressive, guys. Thank you so much for taking the question.

I'm saddened to learn about John Warnock's passing, and I extend my condolences. Congratulations on the quarter. As we examine the pricing model for generative AI products that are consumption-based, how much do you believe the generative AI offerings will contribute to the company's growth moving forward? Additionally, for Dan, when reviewing your Q4 guidance, it appears there hasn't been much change compared to previous market expectations. Are we not highlighting any opportunities to demonstrate what the generative AI products can achieve? They seem to add incremental value compared to what was initially projected when guidance was provided last fall. Thank you.

Well, Kash, maybe David and I can take the first parts of the question. And just again, for everybody on the call, I think to summarize the new offerings that we have, we've announced that we have a Firefly subscription. So, you can use a free trial number of credits, and after that, you can actually subscribe to Firefly. We have Adobe Express, which now includes an allocation of Firefly. We certainly have the Creative Cloud products and Photoshop and Illustrator that have it. We have Generation Credit Packs, and we have GenStudio for the Enterprise and to be able to deal with it. So first, I just wanted to make sure that you recognized the tremendous innovation that we're delivering associated with that. And as you know, one of the things that we have done is to really focus on both new user acquisition, which is going to be driven across all of those offerings, as well as with the price increase, given there is an allocation associated with it for existing customers, they will start to see that as they roll over and they have to renew their subscription. So, I just wanted to set that bit, and maybe then I'll ask David to add a little bit about each of these and how we see that play out.

Thank you, Shantanu. As mentioned, we assess the business implications through two primary lenses: new user adoption and the opportunity to grow our existing business. Regarding new users, our focus remains on proliferation, as we believe there is a significant number of potential users. Our main goal is to increase net user additions and subscribers. In terms of proliferation, we aim to deliver the right value to the right audience at the right price. Considering the four new offerings Shantanu discussed, I believe two of them are well-positioned for early success. First is Express, which has been on the market for over a year. The latest release represents a major advancement in its capabilities, enhancing everything from performance to support for a broader range of functions, including video, illustration, and document workflows, all with added generative AI features. We are optimistic that Express will serve as an early indicator of our success. The second initiative involves our work with Anil on the DX business and the DME sector, specifically GenStudio, which enables a broad base of marketers to effectively use Express alongside Creative Cloud teams to enhance content creation. We anticipate this will be significant for short-term growth. We also foresee many new users entering our free plans, which will take some time to ramp up, but we aim to integrate them into the Adobe family and increase their engagement over time. So, our primary focus is on acquiring new users. The second aspect pertains to our existing business, particularly regarding pricing changes. These will have a gradual impact, starting late in Q4 in select regions, and will roll out to new countries over the next few years. Additionally, the renewal timing for enterprise customers will likely take about three years due to existing multi-year contracts. Overall, we view this as a pivotal moment for our growth strategy, though it will take a few years to fully materialize, and we are excited about the implications for acquiring new customers.

And maybe Kash, just to then tie that all together, in terms of the numbers that we've given for Digital Media ARR, because you asked the question from the beginning of the year, remember, I think we guided to $1.65 billion, if you look at what it is even with our Q4 guide that I think $200 million more than that, $1.86 billion or something to that effect. And since we guided in Q3, for Q3 and Q4, $100 million. So, we continue to be really confident and we're excited about the roadmap.

Okay, great. Hey, guys, thanks for taking my question, and congrats on a great quarter and outlook. Anil, actually my question is for you. Obviously, a lot to talk about with Firefly in the Digital Media business. And it's very clearly a revenue opportunity there. I'm wondering how you think about the generative AI roadmap or revenue opportunity in the Digital Experience part of the business. I know we talked about the content supply chain, but how do you think about the future of generative AI in your business?

Thank you, Saket. Shantanu and David have already discussed Adobe GenStudio, and we are very enthusiastic about it. This presents a significant opportunity for enterprises to create personalized content and enhance efficiencies through automation. When we consider the entire process that enterprises engage in, from content creation and production to workflow and activation across our applications, we have a unique advantage. We have already implemented it within Adobe for our own Photoshop campaign and are collaborating with various agencies and customers. This represents a substantial new opportunity for us with Adobe GenStudio. Additionally, we are exploring generative AI for other Digital Experience applications. At the investor meeting in October, we will provide more details. We believe there is a similar potential with generative AI to unite various users in marketing departments or organizations, allowing them to utilize the Adobe Experience platform and applications, acting as a co-pilot to expedite their use cases. We will elaborate on this at the upcoming investor meeting.

Saket, maybe, just to give Anil and the team a lot of credit for what they actually accomplished in Q3 as well, the wins in Q3 in the enterprise actually included a lot of the components of GenStudio, both in the Digital Media as well as in the Digital Experience. So, certainly the transformational deals that we're talking about, a big part of that is the synergy between the two clouds. So, I wanted to point that out as well.

And if I could actually just add one quick thing is that the GenStudio work that Anil's team has been doing, we've actually been using that within the Digital Media business already to release some of the campaigns that we've released this quarter. So, it's one of these things that it's great to see the impact it's having on our business, and that becomes a selling point for other businesses too.

Great to hear. Thanks.

Hey, thank you for taking the question. Congratulations as well on a strong quarter. So, when I look at Firefly, the amount of image generation in a six-month period is clearly pretty stunning. I'm just wondering if you're able to provide any additional color, whether it be monthly active users or some other metric that may additionally help all of us gauge the improvements that Firefly is driving to your engagement level, to your top-of-funnel, et cetera? Thank you.

I'm glad to discuss that. The past few months have been quite impressive. We've noted that the excitement generated by Firefly on social media has been extremely beneficial, leading to a significant increase in our top-of-funnel opportunities. Additionally, we were very pleased to see that integrating Firefly into our CreativePro applications, particularly Illustrator and Photoshop, resulted in over 3 million downloads of those beta applications, which is unprecedented for us. This clearly indicates the strong interest from our existing customer base in the generative capabilities we offer. Furthermore, we closely monitor how this impacts our reach to new users who typically don't engage with Adobe. Both Express and Firefly, especially the integration of Firefly and Express, have been pivotal in attracting these new users. It's encouraging to witness not only excitement within our current customer base but also the influx of millions of new users who wouldn’t have usually considered Adobe and are beginning their journey with us through Firefly and Express.

Two other maybe financial indicators to that, Gregg, are first the Photoshop Single App, and I think Dan referred to that. Even in the beta, that actually drove a lot of Photoshop Single App and the early indicators of how that also benefits retention in the entire book of business. So both of those are also good financial indicators of the potential of AI.

Great. Thank you, both.

Wonderful. Thank you so much for taking my question. I wanted to ask about a comment that I think David made earlier in the call where you're working hard to make Firefly the option for content design to be safe. I would love to double-click on that, understand a little bit, how is Adobe the safe option, and how is the company making this Firefly in this new generative frontier the safe option for enterprises?

From the start, Firefly has taken a unique approach to generative content. We began by utilizing Adobe Stock, which consists of licensed materials we have the rights to use, and explored other unrestricted content sources. Everything we've trained on has undergone moderation and been approved for use by our legal teams. This ensures that the content we produce does not infringe on any existing brands or misuse materials. Additionally, we've been collaborating with our Stock contributors and recently initiated our first payout for contributors who have added Stock for AI training. When we identify a need for more training content, we can request contributions from them, ensuring that all submitted content is fully licensed and moderated. For instance, earlier this quarter, we needed a million new crowd scene images and were able to collect that content safely. This process allows us to offer content that is secure for commercial use and provides indemnification to our enterprise customers regarding their use of the generated content. This aspect is critical as we integrate Firefly into our Creative Cloud and Express applications. Furthermore, we're committed to fair generation by actively seeking diversity in the content we create, ensuring it does not cause any harm. These strategies not only represent solid business practices but also set us apart from others in the market.

Great to hear. Thanks, David.

Yes, thank you. I wanted to return to the Document Cloud and hear your thoughts on it as we look ahead to the next year. My question relates to the significant attention on Firefly and possibly its connection to the Experience Cloud. Does generative AI offer any advantages for the Document Cloud, or will it primarily be the existing factors driving its growth next year? What key aspects should we focus on for the Document Cloud? Thank you.

We are very pleased with the performance of Doc Cloud this quarter, showing a 22% growth in our book of business when adjusted for constant currency. This growth is largely supported by an increase in top-of-funnel activity. Acrobat on the web has experienced remarkable year-over-year growth, and we have been focusing on integrating Acrobat into browsers as plugins. Our efforts in product-led growth have been significant, encouraging link sharing which not only increases usage of our products but also helps us attract more users and create growth loops. The Signatures product has also performed exceptionally well. The widespread availability and increasing usage of our offerings, both free and paid, provide ample opportunities to introduce innovative features. While we haven't made any formal announcements regarding generative AI within Acrobat, we expect to share more details soon. The potential of generative AI in Acrobat is particularly exciting due to its vast distribution; with Acrobat and Reader reaching hundreds of millions of users monthly, we aim to seamlessly integrate generative AI into their workflows. This strategy is akin to how we've successfully implemented generative AI in creative fields, helping us stand out in the market.

Interesting. Thanks very much.

Shantanu, you mentioned success in ETLAs. What's driving that? Especially given some of the macro jitters are still lingering, are you starting to see those jitters go away and that's a result of what's happening with the ETLAs?

I think in the ETLAs, there is significant interest in the amount of content people are creating, particularly in how Creative Cloud and Express can help users understand their content spending and leverage AI to automate processes, localize content, and enhance production efficiency. This message is resonating well with our audience. Additionally, Express has the potential to serve as a productivity tool for every knowledge worker in the enterprise, similar to Acrobat. These factors have led to numerous valuable discussions. As David pointed out earlier, mobile has also contributed positively to our momentum. Overall, investment in productivity improvements is currently a major focus, and both platforms align well with this theme in enterprises.

Thanks.

Hey, guys, thanks for taking the question. And I guess a two-parter on generative AI. First just around the pricing model for generative credits, obviously, very progressive. And I guess how should we think about as we go forward? And you've seen at least on the hobbyist side, some of the usage of Firefly and within Express. How do we think about for the two cohorts of both obvious and professional creatives? How many credits are kind of a typical user or use case likely to drive in a given month? And to the question that you got kind of about Document Cloud and the impact of generative AI on that business, is it fair to think that given the pricing that's been announced, the next wave of incremental innovation, is that going to come more from a new product availability, or should we think about more pricing enabled levers to come?

I think it's important to consider the wide range of segments we serve, from K-12 to the largest enterprises. Our main goal is to drive more adoption. Therefore, pricing related to Firefly subscriptions, Express subscriptions, and GenStudio will significantly influence how we recognize the annual recurring revenue. Our focus is on increasing adoption and usage, especially for new users and existing customers looking to upgrade their pricing. We are also looking to introduce generative packs, but our priority is to ensure everyone is exposed to these offerings. One innovation that has significantly increased uptake is our context-aware menus in Photoshop, which will be rolled out across other applications as well. Our strategy is to get our core subscriptions widely adopted and make sure our pricing actions support that. Regarding Doc Cloud, I would like to expand on what David mentioned. Customers are eager to interact conversationally with their PDFs, not just the ones currently open but those in their folders and across entire enterprise systems. Like in the creative sector, where users can upload images to train their own models, we anticipate a similar interest in the document space. Companies with extensive knowledge in PDFs are looking for ways to leverage AI to enhance their services. This reflects the growing opportunity in the PDF sector, as more users utilize the vast number of PDFs available. Lastly, I want to highlight the APIs we are developing for PDFs, which will make these features accessible. This will include not just understanding the context of the PDFs but also enabling specific workflows. While our generative credits have been designed to foster adoption, we are also being cautious at the high end regarding the quantity of generative credits we distribute.

Yeah. And just one thing to add to that, Alex, is that one of the things we did, first of all, it was a very thoughtful, deliberate decision to go with the Generative Credit model and the limits, as you can imagine, we're very, very considered in terms of how we set them. The limits are, of course fairly low for free users. The goal there is to give them a flavor of it and then help them convert. And for paid users, especially for people in our single apps and all apps planned, one of the things we really intended to do was try and drive real proliferation of the usage. We didn't want there to be generation anxiety put in that way. We wanted them to use the product. We wanted the Generative Fill and Generative Expand. We wanted the vector creation. We wanted to build the habits of using it. And then, what will happen over time as we introduce 3D, as we introduce video and design and vectors, and as we introduce these Acrobat capabilities that Shantanu was talking about, the generative credits that are used in any given month continues to go up because they're getting more value out of it. And so that's the key thing. We want people to just start using it very actively right now and build those habits.

Super clear. Super thoughtful. If I could sneak one in for Dan. Of the $520 million in the net new ARR for Q4, just roughly, you've talked about before having some impact from the generative AI product that you were going to launch this year. Is it fair to assume it's very minimal in that $520 million?

Yeah, I would say it's modest impact to the business in Q4. And again, a quarter from now when we give our FY 2024 targets, we'll have more to say of what that looks like going forward, but modest impact in Q4.

Perfect. Thank you, guys.

Great, thanks very much. David, you talked about making Firefly APIs available to customers to embed Firefly into their own content creation and workflows. Can you talk about the use cases and monetization? And is this something you foresee partners leveraging as well into their own third-party offerings?

Yes, absolutely. Our current aim for enterprises and third parties we collaborate with is to provide several key features. First, we want to enable API access to everything we’re developing, allowing them to incorporate it into their workflows and automation systems. Second, we want to give them the capability to extend or train their own models. As we noted earlier, our foundation model is a clean model that produces high-quality content and can be relied upon commercially. We want our customers and partners to enhance that model with content specific to them so that Firefly can create content in their branding or style. Additionally, we will enable them to train their own models. Lastly, we will provide some core workflows that will integrate with our existing products, whether it's Express, Creative Cloud, or GenStudio, allowing them to bring everything they’re doing onto our main platform. From a monetization standpoint, we expect the metering concepts for Generative Credits to also apply to API calls, which will of course involve custom negotiated agreements with partners and enterprises.

Great. Thanks very much for taking the questions. Congrats.

Hey, operator, we're getting close to the top of the hour. We'll take one more question, please.

Great. Thank you very much. Shantanu, over the last decade or more, one of the most important attributes of how you've managed your product portfolio have been the intra-segment and inter-segment integrations, particularly between Digital Media and DX. There is, as you know, a famous acronym for that. Now when we think about the current generation of integrations that you just announced, including yesterday, aside from the Firefly-ing of the product line and the proliferation of Firefly, what are some of the internal developmental changes that you yourselves have had to make in order to support the development of new integrations, new packaging? What are you doing differently internally? And then, externally, particularly to support the new generation of products, what are you having to invest in, in terms of customer support and enabling their adoption?

Certainly. I'm really pleased with how quickly the company has integrated AI into our operations. We've conducted beta tests at an unprecedented scale, ensuring we differentiate ourselves through our data handling and application interfaces. Our innovation in products like Photoshop, Illustrator, and Express is remarkable, especially considering how swiftly we’ve transitioned from discussion to commercial availability. Internally, we've energized our teams, as we are one of the largest users of these technologies. Our various campaigns, such as Photoshop Everyone Can and Acrobat's Got It, leverage this technology, and we utilize Express and Acrobat daily. This widespread internal usage represents a significant shift, allowing our 30,000 employees to benefit from our combined offerings in ways we've not seen before. Currently, all our product reviews involve collaboration across all teams, reflecting our integrated approach. The work within our digital excellence initiatives has bolstered our confidence in personalizing our offerings, which contributed to our success this quarter. The digital excellence team has effectively segmented our customers to ensure they receive the right solutions across mobile, desktop, and web. These changes illustrate how we are rapidly adapting to embrace AI. Furthermore, we have also evolved our focus, moving beyond enhancements within applications alone to ensuring API accessibility for broader usage. We've also established web-only platforms like Firefly and Express, making our releases more comprehensive. Additionally, our investments are not limited to imaging; they extend to vector, animation, and 3D, which are all progressing. These parallel efforts demonstrate our commitment to embracing new opportunities. Many inquiries during this call focused on understanding our announcements and their monetization. I want to emphasize the astonishing pace of our innovation, and we will provide more details on product developments at MAX. With our 2024 targets, we will share our vision regarding growth opportunities and customer engagement. Thank you for your participation, and now I'll hand it over to Jonathan.

Thanks, Shantanu, and thanks everyone for joining us today. Looking ahead, we have an exciting lineup planned for MAX starting on October 10, and we hope you'll be able to attend the entire conference. At the Investor Meeting after the day one keynote, we plan to focus on the impact of AI across our customer offerings with previews into our technology roadmap and how these innovations expand Adobe's reach. Given that, fiscal 2024 targets will be provided at our December earnings call. In addition, we're planning another investor event at Adobe Summit in March to give more insight into our addressable markets and financial performance. We hope to see you there. Thanks, everyone, and this concludes the call.