Adobe Inc (ADBE) — Q4 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 fourth quarter and fiscal year 2023 financial results. You can find our press release as well as a PDF 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, December 13th, and contains forward-looking statements that involve risk, uncertainty, and assumptions. Actual results may differ materially from those set forth in these statements. For more information on those risks, please review today's earnings release and 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, Adobe's executives will refer to constant-currency revenue growth rates unless otherwise stated. Reconciliations between the two are available in our earnings release and on Adobe's IR website. I will now turn the call over to Shantanu.

Thanks, Jonathan. Good afternoon, and thank you for joining us. Q4 was our first-ever $5 billion quarter, a new record for the company. Adobe achieved revenue of $5.05 billion, representing 13% year-over-year growth. GAAP earnings per share for the quarter was $3.23 and non-GAAP earnings per share was $4.27, representing 28% and 19% year-over-year growth, respectively. Q4 was the culmination of another record year for Adobe, achieving $19.41 billion in revenue, which represents 13% annual growth. GAAP earnings per share in fiscal 2023 was $11.82 and non-GAAP earnings per share was $16.07, both representing 17% year-over-year growth. We exited the year with $17.22 billion in RPO. Our strong performance reflects the mission-critical role our products play in a digital-first world, incredible product innovation, and exceptional execution. Adobe Creative Cloud, Document Cloud, and Experience Cloud have become the foundation of digital experiences, starting from the moment of inspiration to the creation and development of content and media to the personalized delivery and activation across every channel. Adobe's mission of changing the world through personalized digital experiences and our delivery of foundational technology platforms set us up for the next decade of growth. We take pride in being one of the most inventive, diversified, and profitable software companies in the world. We believe that every massive technology shift offers generational opportunities to deliver new products and solutions to an ever-expanding set of customers. AI and generative AI is one such opportunity and we've articulated how we intend to invest and differentiate across data, models, and interfaces. We have delivered against this strategy and I'm pleased that a number of our groundbreaking innovations, including our Firefly models and integrations across Creative Cloud, Liquid Mode and integrations across Document Cloud, and AI services in our real-time Customer Data Platform as well as integrations in Experience Cloud, are now seeing tremendous usage by customers. We remain excited about the strategic opportunity with Figma, to jointly advance product design, accelerate collaborative creativity on the web, and redefine the future of creativity and productivity. We continue to engage with the European Commission, the Competition and Markets Authority in the UK, and the US Department of Justice, as they conduct their regulatory reviews. The EC has provided a preliminary statement of objections, and the CMA has issued provisional findings of competition concerns. We strongly disagree with these findings and are responding to the respective regulators. As per the current timelines, the EC's decision deadline is February 5th and the CMA’s is February 25th, while the DOJ does not have a formal timeline to decide whether to bring a complaint; we expect a decision soon. I'll now turn it over to David to discuss the momentum in our Digital Media business.

Thanks, Shantanu. Hello, everyone. In Q4, we achieved net new Digital Media ARR of $569 million and revenue of $3.72 billion, which grew 14% year-over-year, fueled by innovation in both our Creative and Document businesses. Starting with Creative Cloud, global demand for content is accelerating and continues to be a tailwind for the business. Creative Cloud remains the creativity platform of choice for creators across imaging, photography, design, video, web, animation, and 3D. Our rapid pace of product and AI model innovation is empowering a wide and growing base of individuals, students, creative professionals, small-business owners, and enterprises to create and monetize amazing content more quickly and easily than ever before. We were thrilled to come together in person with thousands of creators at Adobe MAX in Los Angeles and at our MAX event in Tokyo, with millions more from our community engaging with us online. We reached a record 300 million social interactions in the month following MAX. Q4 was a record quarter for Creative Cloud, achieving $3 billion in revenue, which grew 14% year-over-year. Net new Creative Cloud ARR was $398 million. Business highlights include strong digital traffic, resulting from product innovation, social engagement, and our continued product-led growth efforts, which drove record new commercial subscriptions in the quarter. The general availability of our generative AI Firefly models and their integrations across Creative Cloud drove tremendous customer excitement with over 4.5 billion generations since launch in March. The release of three new Firefly models - Firefly Image two model, Firefly Vector model, and Firefly Design model, offering highly differentiated levels of control with Effects, Photo Settings, and Generative Match. We also introduced Generative Credits as part of our Creative Cloud subscription plans. The general availability of Photoshop Generative Fill and Generative Expand which are seeing record adoption; they're already among the most used features in the product. Advances in Adobe Illustrator with the introduction of Text to Vector beta enabling users to generate icons, scenes, subjects, patterns, and gradients. Adobe Premiere Pro advances include a significant performance improvement in the timeline for faster and smoother editing, new color preferences, and improved tone mapping. Premiere Pro is now natively integrated with Frame.io, offering faster content sharing and collaboration. The combination of Adobe Express and Firefly is enabling everyone from Creative Pros to beginners to quickly move from ideation to task-based workflows in Express, dramatically expanding our reach and widening our top-of-funnel. The family of generative capabilities across Express, including Text to Image, Text Effects, Text to Template, and Generative Fill are driving adoption of Express and making it even faster and more fun for users of all skill levels. Express now comes pre-installed on all new Chromebooks, making it accessible to students, educators, and anyone using Chrome OS. Continued strength in Adobe Stock, which had its best year ever, driven by accelerating demand for high-quality image, vector, video, and 3D content. Creative Cloud, Express, and Firefly integrations with Adobe GenStudio enabling ideation, creation, and stakeholder collaboration as part of their overall content supply chain. Strong mid-market and enterprise adoption driven by up-sell to Creative Cloud offerings with Firefly. Key customer wins include Cyber Agent, Deloitte, Discovery Communications, Nexstar Media, Pepsi, Publicis, and the United Nations. We are thrilled with the momentum we're seeing in the Creative business following a year of unprecedented innovation. Customer excitement around Firefly integrations across our applications has been great to see with community engagement, social interactions, and creative marketing campaigns driving organic brand search volume, traffic, and record demand. While we started rolling out new Creative Cloud pricing in select geographies in November, the primary driver of growth continues to be new paid subscriptions across our routes-to-market. We are excited to build on this momentum as we enter FY '24. Now turning to Document Cloud, digital documents are essential enablers of our personal and professional lives. Document Cloud is a leader in digital documents powering all common document actions including editing, sharing, reviewing, scanning, and signing. Document Cloud innovations are advancing accessibility, comprehension, productivity, automation, and security in document workflows across web, desktop, and mobile. In Q4, we achieved Document Cloud revenue of $721 million, growing 17% year-over-year. We added a record $171 million of net new Document Cloud ARR, with ending ARR growing 23% year-over-year in constant currency. Business highlights include Acrobat Web growth, which continues to be an incredible source of customer acquisition, with monthly active users up over 70% year-over-year. The surge in usage of link sharing for stakeholder collaboration around PDF files, which increased 400% year-over-year, created a viral growth loop, that is bringing tens of millions of users into the Acrobat ecosystem. This is a great example of how we are scaling our PLG motions. Strong demand for Acrobat on mobile with MAU surpassing 100 million users in Q4. Liquid Mode has now served over one billion files to customers, demonstrating how indispensable this technology has become on mobile devices. Adobe Acrobat to Express workflows make it even easier to import, edit, and enhance documents to create visually stunning PDFs. Key enterprise customer wins include Alshaya, Bank of America, Department of Veterans Affairs, Mastercard, State Farm Auto Insurance, and Volkswagen. Much like the Creative business, we expect generative AI to deliver additional value and attract new customers to Document Cloud. Acrobat's generative AI capabilities, which will enable new creation, comprehension, and collaboration functionality have already been rolled out in a private beta. We expect to release this in a public beta in the coming months. It's been an extraordinary year for the Digital Media business with the introduction of hundreds of transformative innovations that are reshaping the future of creativity, productivity, and digital experiences. Capping this year’s many accolades, TIME magazine recognized Adobe Liquid Mode, Photoshop Generative Fill, and Generative Expand among the best inventions of 2023. I'll now pass it to Anil.

Thanks, David. Hello, everyone. Digital experiences are indispensable for every business in every category, enabling companies of all sizes to engage and transact with customers around the world. Adobe's Holiday Shopping Report, which analyzes trillions of data points, found that both Black Friday and Cyber Monday sales hit record highs of $9.8 billion and $12.4 billion, respectively, jumping 7.5% and 9.6% from last year. We predicted that holiday 2023 spend will exceed $221 billion in the US alone. Adobe Experience Cloud is optimally positioned to capitalize on this massive global opportunity. Companies across B2C and B2B are turning to Adobe Experience Cloud as the platform to accelerate experience-led growth. Our leading solutions spanning data insights and audiences, content, and commerce, customer journeys, and marketing workflow, empower businesses to drive customer demand, engagement, and growth while simultaneously delivering productivity gains. Our comprehensive set of applications, including Real-Time CDP, are built natively on our highly differentiated Adobe Experience Platform, providing companies with a unified profile of each of their customers to deliver personalized, real-time experiences at scale. Generative AI accelerates our pace of innovation across the Experience Cloud portfolio enabling us to build on our capabilities to deliver personalized digital experiences. Our efforts are focused in three areas: one, augmenting our applications with an AI Assistant that significantly enhances productivity for current users, and provides an intuitive conversational interface to enable many more knowledge workers to use our products; two, reimagining existing Experience Cloud applications, like we did with Adobe Experience Manager; and three, developing entirely new solutions built for the age of generative AI, like Adobe GenStudio. In Q4, we continued to drive strong growth in the Experience Cloud business across our enterprise and mid-market customers achieving $1.27 billion in revenue. Subscription revenue was $1.12 billion, representing 12% year-over-year growth. Business highlights include strong momentum with Adobe Experience Platform and native applications inclusive of Real-Time CDP, Adobe Journey Optimizer, and Customer Journey Analytics. AEP had its first $100 million quarter of net-new business in Q4 and exited the year with a greater than $700 million annualized book of business. Release of Adobe GenStudio, an end-to-end solution that brings together best-in-class applications across Creative Cloud, Express, and Experience Cloud with Firefly generative AI at the core to help brands meet the rising demand for content. GenStudio provides a comprehensive offering spanning content ideation, creation, production, and activation. We're seeing tremendous interest in GenStudio from brands like Henkel, Pepsi, and Verizon and agencies like Publicis, Omnicom, and Havas as they look to accelerate and optimize their content supply chains. Reimagined customer experiences with the all-new Adobe Experience Manager Sites that enable businesses and developers to quickly test and optimize web content, deliver fastest possible page load times, and maximize SEO rankings, lighthouse scores, and conversion. Adobe was recognized as a leader in over 25 industry analyst reports this year, including the Gartner Magic Quadrant for Digital Experience Platforms, B2B marketing automation platforms, and multichannel marketing hubs. In the Forrester Wave for Digital Experience Platforms, which was published last week, Adobe received the highest scores for strategy. Key customer wins include Alshaya, Coca-Cola, EY, IBM, Marriott, Riyadh Air, Santander Brasil, Sony, Southern Graphics, Unilever, Vanguard, and Verizon. In our conversations with these and other customers around the world, C-Level executives are continuing to prioritize experience-led growth as a critical business imperative, despite ongoing budget scrutiny. Adobe Experience Cloud is well-positioned to keep winning with innovative products that power end-to-end customer experiences and enable companies to simultaneously drive growth and profitability. We are looking forward to continuing our leadership and momentum into 2024. I'll now pass it to Dan.

Thanks, Anil. Our earnings report today covers both Q4 and FY '23 results. What a year 2023 was! Fueled by a deep understanding of our customers, product innovation, and outstanding execution, we delivered strong financial results and world-class margins, positioning the company for years of continued growth. In FY '23, Adobe achieved record revenue of $19.41 billion, which represents 10% year-over-year growth or 13% growth in constant currency. GAAP EPS for the year was $11.82 and non-GAAP EPS was $16.7; each growing 17% year-over-year. FY '23 business and financial highlights included Digital Media revenue of $14.22 billion, net new Digital Media ARR of $1.91 billion, Digital Experience revenue of $4.89 billion, cash flows from operations of $7.3 billion, RPO was $17.22 billion exiting the year, and repurchasing approximately 11.5 million shares of our stock during the year at a cost of $4.63 billion. In the fourth quarter of FY '23, Adobe achieved revenue of $5.05 billion, which represents 12% year-over-year growth or 13% in constant currency. GAAP-diluted earnings per share in Q4 was $3.23 and non-GAAP diluted earnings per share was a record $4.27, growing 28% and 19% year-over-year, respectively. Q4 business and financial highlights included Digital Media revenue of $3.72 billion, net new Digital Media ARR of $569 million, Digital Experience revenue of $1.27 billion, cash flows from operations of $1.6 billion. Adding approximately $1.5 billion RPO in the quarter, our highest sequential quarterly increase ever, and repurchasing approximately 1.8 million shares of our stock. In our Digital Media segment, we achieved Q4 revenue of $3.72 billion, which represents 13% year-over-year growth, or 14% in constant currency. Our net-new ARR in Q4 was $569 million, which was a quarterly record in constant currency, and we exited the quarter with $15.17 billion of Digital Media ARR. We achieved Creative revenue of $3 billion, which represents 12% year-over-year growth or 14% in constant currency, and we added $398 million of net-new Creative ARR in the quarter. Driving this performance was strong customer acquisition throughout the quarter as well as strength during the peak holiday shopping weeks. Fourth quarter Creative growth drivers included individual subscriber growth fueled by targeted campaigns and strong web traffic. A strong quarter for Creative Cloud All Apps subscriptions across customer segments and geographies, with particular strength in emerging markets. Sales of CC single apps, including a strong quarter for Imaging and photography offerings. Continued growth of our Frame.io offering and Adobe Stock, which capped off its best year ever in terms of net-new ARR. Customer demand in education driven by back-to-school purchasing as well as migrations to full-priced offerings by graduating students entering the workforce. And typical Q4 strength in the Enterprise, including significant upsell of our new Firefly and Express offerings. Adobe achieved Document Cloud revenue of $721 million, which represents 16% year-over-year growth or 17% in constant currency. We added a record $171 million of net new Document Cloud ARR in the quarter. Fourth quarter Document Cloud growth drivers included Acrobat's subscription demand across all customer segments, routes-to-market, and geographies. Continued strength of our free-to-paid funnels, including Reader on the desktop and Acrobat web. Strong performance of our collaboration services, including PDF link sharing and Sign, which are virally bringing new users to the Acrobat ecosystem. An outstanding quarter for Acrobat Mobile as a result of increased proliferation, usage, and conversion, and year-end seasonal strength in SMB and enterprise. Turning to our Digital Experience segment, in Q4, we achieved revenue of $1.27 billion, growing 10% year-over-year, or 11% in constant currency. We achieved subscription revenue of $1.12 billion, which represents 12% year-over-year growth. Fourth quarter Digital Experience growth drivers included strong year-end bookings across solutions with particular strength in North America, continued success in closing multi-solution transformational deals with large enterprises, momentum with AEP and native applications with the FY '23 exiting book of business growing greater than 60% year-over-year, strong net dollar retention for early adopters of AEP, demonstrating the value enterprises are realizing from our real-time data platform and integrated offerings, and strength across our data and insights, content, and workfront solutions and growing customer interest and pipeline for our new GenStudio solution. We drove world-class operating margins in Q4 and throughout fiscal 2023 by making disciplined investments in R&D, marketing, and sales, and we're pleased that we grew EPS faster than revenue. Adobe's effective tax rate in Q4 was 18% on a GAAP basis and 18.5% on a non-GAAP basis, in line with our expectations. RPO exiting the quarter was $17.22 billion, growing 13% year-over-year. Our ending cash and short-term investment position exiting Q4 was $7.84 billion and cash flows from operations in the quarter were $1.6 billion, after making a previously discussed payment in the quarter of $826 million of US Federal taxes that we deferred from the second and third quarters of FY '23. In Q4, we entered into a $1 billion share repurchase agreement, and we currently have $2.15 billion remaining of our $15 billion authorization granted in December 2020. As a reminder, we measure ARR on a constant-currency basis during the fiscal year and revalue ARR at year-end. FX rate changes between December of 2022 and this year have resulted in a $160 million increase to Digital Media ARR balance entering FY '24, which is now $15.33 billion and is reflected in our updated investor datasheet. Factoring in the momentum across our businesses and current expectations for the macroeconomic and foreign-exchange environments, for FY '24, we are targeting total Adobe revenue of $21.30 billion to $21.50 billion. Digital Media net new ARR of approximately $1.9 billion, Digital Media segment revenue of $15.75 billion to $15.85 billion, Digital Experience segment revenue of $5.275 billion to $5.375 billion, Digital Experience subscription revenue of $4.75 billion to $4.80 billion. Tax rate of approximately 18% on a GAAP basis and 18.5% on a non-GAAP basis. GAAP earnings per share of $13.45 to $13.85. And non-GAAP earnings per share of $17.60 to $18. As a reminder, and as is customary, these targets do not reflect our planned acquisition of Figma. We expect normal seasonality throughout the year with a seasonal step-down for new business into the first quarter, sequential growth from Q1 to Q2, typical Q3 summer seasonality, and a strong finish to the year in Q4. We expect our cash tax rate to improve sequentially in FY '24 by 2 percentage points as the amortization of previously capitalized R&D increases our deductions next year for tax purposes, benefiting our operating cash flows next year. For Q1 FY '24, we're targeting total Adobe revenue of $5.10 billion to $5.15 billion, Digital Media net new ARR of approximately $410 million, Digital Media segment revenue of $3.77 billion to $3.80 billion, Digital Experience segment revenue of $1.27 billion to $1.29 billion, Digital Experience subscription revenue of $1.14 billion to $1.16 billion. Tax rate of approximately 18% on a GAAP basis and 18.5% on a non-GAAP basis. GAAP earnings per share of $3.35 to $3.40. And non-GAAP earnings per share of $4.35 to $4.40. While the implied operating margin for Q1 is up sequentially, we expect a typical seasonal margin step-down starting in Q2 as a result of the annual merit increases and disciplined investments to drive growth. In summary, I couldn't be prouder of the company's performance in FY '23 and the momentum we're carrying into 2024 across Creative Cloud, Document Cloud, and Experience Cloud. Our strategy, scale, speed of execution, and profitability position us for years of sustained success. Shantanu, back to you.

Thanks, Dan. In addition to our financial accomplishments, we are proud to once again be recognized for our industry leadership. Content credentials and Adobe's approach to responsible AI were recognized by Fast Company as one of the year's breakthrough innovations. We were again named to the Dow Jones Sustainability Index, Glassdoor listed Adobe as one of the best places to work, and Interbrand ranked us in the top 20 Best Global Brands as the rising brand for the eighth year in a row. Digital remains a massive tailwind as content demand and consumption continues to grow, and businesses of all sizes are focused on transforming their customer experiences. Adobe is incredibly well-positioned to lead and capitalize on this opportunity. Thanks to our innovative roadmap, expanding global customer base, strong brand, and the best employees in the world. Our fiscal '24 financial targets reflect our confidence in continuing to drive strong topline growth and world-class profitability. I am more certain than ever that Adobe's best days are ahead of us. Thank you, and we will now take questions.

Hi. Thank you very much. Congrats on the quarter and happy holidays. Shantanu and team, I'm wondering, going into 2024, it definitely feels like the economy is on stable footing and in general, the software metrics are all improving as the year unfolded. And very different from going from '22 to '23, yet your DM new ARR guidance is about the same as how you started last year, but you got the benefit of generative AI, tailwinds from the economy, and got pricing and Firefly. Can you just help us understand if you isolate for those factors, what has gone into your guidance, but it seems like, if we exclude the optionality that you have, including the tailwinds in the economy, that guidance looks like it's very conservative. And maybe that's the right thing to do, but just wanted to understand your thought process. Thank you so much.

Thanks, Kash. I’m really excited about the incredible year we experienced across all areas of our business, including the $5 billion quarter and the $5 billion book of business we have in DX. We also saw strong performance in Digital Media ARR. Reflecting on the guidance we provided at the start of 2023 and 2024, we initially set it at $16.50, then adjusted it to $17.50, and ended at $19.13. In terms of execution, we have introduced some great innovative products and expanded our customer base with offerings like Express and Firefly. We are dedicated to ensuring all our flagship products are available across various surfaces. We have multiple growth drivers and are focused on leveraging this opportunity. We take our guidance very seriously, and this year's guidance is our highest ever, including our highest Q1 guidance. Our goal is to execute fully on this significant opportunity and achieve another record year. We feel good about the momentum in the business and remain serious about our guidance at this point in the year.

Thank you so much and happy holidays. All the best for 2024.

Thanks. Happy holidays.

Thank you for taking my question. I want to focus on Q4 specifically. When reviewing the Digital Media net new ARR additions in Q4, it appears that Document Cloud performed exceptionally well, achieving record results and demonstrating impressive year-over-year growth in those additions. However, for Creative Cloud, despite the price increase and the excitement surrounding Firefly, we actually saw a decline in year-over-year performance. This marks the first time since 2018 that the Creative Cloud net new ARR has fallen below $400 million. This is the unexpected aspect for investors, and we're trying to understand whether there were factors negatively impacting Creative Cloud this year, if we had a challenging comparison from last year, or if there are other reasons why despite the price hikes and the positive developments from Adobe MAX, we're not seeing growth in net new ARR for Creative Cloud.

I'm happy to take that. First of all, regarding the DME business, we are very excited about the results for '24, with over $1.9 billion in net new ARR, which is significantly above our guidance. We are seeing a growing customer base and strong momentum driven by generative AI. In Q4, we achieved a record net new ARR in constant currency. As for your question about the momentum in Creative Cloud and how to interpret the numbers, there is strong momentum overall, as we recorded a record number of new commercial subscriptions for Creative Cloud this year. This forms a solid foundation for future growth. Looking at the Creative Cloud net new ARR, it's important to compare Q4 FY '23 with Q4 FY '22, considering that FY '22 had two pricing changes that affected Creative Cloud differently than in Q4 FY '23. If we adjust for the pricing impacts, the Creative Cloud net new ARR in Q4 grew on a constant currency basis.

And Keith, to emphasize the two points that David made, David mentioned that it was a record for Creative ARR related to subscriptions in Q4 of 2023 and that Creative ARR would have increased if you excluded the pricing effects. So, the business remains very strong, as you pointed out.

Excellent. Thank you, guys.

Thank you for taking my question. As we look ahead to next year, I'm curious about the potential for pricing increases within the renewal base of Creative Cloud. Additionally, regarding Acrobat and the AI features you are releasing in public beta, how should we view the impact on Creative Cloud pricing and Document Cloud monetization from AI products in calendar year 2024?

Yeah. Happy to take that Alex, a lot packed into that question. So let me try to tease them apart. Let me first start with the question around FY '24 and impact of pricing. Before we jump straight into that I do want to take a bit of a step back and just remind everyone that Digital Media ARR is a mix of a few things, new subscriptions which as I mentioned we had a record number of new subscriptions in Q4, up-sell and cross-sell, which is transitioning people to higher plans from the plan that they're on. And then lastly offer optimization. And as you've noted in the last couple of years, we've really been broadening the number of offers we have all the way down from free price points to the all-apps price points, but even beyond that, we now have capabilities to sell add-ons to all-apps as well. And of course, all of this does include the pricing increases that you had mentioned where we've added more value. I do want to just stress, because I know there's a lot of attention on the pricing impact that we always have seen and continue to believe that the primary growth driver for ARR will be new subscriptions in '24. So, that's why we're so focused on the top-of-funnel and new customer acquisition. But specific to your question on pricing, you need to consider a few things. First, our recently announced pricing changes will impact less than half the Creative Cloud base. So there was a very specific question you asked, hopefully, that gives you the answer, but it also leaves us the opportunity to price in new value in the years ahead as we move forward. Second, the impact will be more visible in net new ARR in the back half of FY '24 as we lap the previous pricing actions that I was talking to Keith about from last year. And as we roll out the pricing over the next few quarters. So the second half of FY '24 we'll see more visibility into the benefits of that to net new ARR. Third, given that we're rolling out these prices across plans and across geos incrementally over the year, the benefit to ARR will actually be spread across FY '24 and FY '25. And fourth, if you really want to have sort of sharpen your pencil, the pricing impact on ARR in '24 is actually lower than the pricing impact was in '23 to Creative Cloud. So hopefully that gives you a sense, but again it comes back to this is why we're so excited about the momentum we're seeing in new subscriptions, which really bodes well for the business this year and in the long term. Hopefully, that gives you a pretty good sense on that. And then really quickly on Document Cloud, we're thrilled with the performance of Document Cloud, a lot of that comes down to our core strategy, which has been around integrating the desktop, the web, and mobile into a single ecosystem. And really driving the monthly active usage of Document Cloud up through all of the product-led growth motions we have and converting people on the back-end of that. What we're really excited about as we bring the AI assistant to market which, by the way, as I mentioned, is now in private beta, expect it to come out in the next few months as a public beta and then later in the year. But what we're really excited about there is being able to not just service that paid Acrobat based with that but also start to bring that to the free reader base. So, lots of opportunity and excitement for the year ahead for Doc Cloud as well.

Perfect. Thank you for the very fine point and answer.

Hi, thank you and congratulations on a great quarter. David, I would like to return to the topic of enterprise strength. You mentioned the successful upselling of Firefly and Express among your enterprise customers. Could you provide more insights into those discussions? Is this driving the increase in new subscriptions in the enterprise segment? Also, regarding Express, could you elaborate on the leading indicators that suggest it will continue to grow as an enterprise product into fiscal '24? Thank you.

I can start, and then Anil will add to this because it connects our two businesses. We are very excited about the momentum we are experiencing with Firefly and Express. As mentioned, we have surpassed 4.5 billion generations, indicating strong adoption and usage. This is happening both as a standalone offering and as part of our Photoshop and Illustrator workflows. There is growing interest in utilizing Firefly within enterprise ecosystems, not just as an add-on to existing products. We are collaborating with various customers to enhance their experience with Firefly, which is driving significant growth in Q4 for enterprise adoption. Additionally, we have engaged a number of pilot customers to explore custom model extensions, allowing them to incorporate their own assets and content into Firefly's outputs. We are also providing APIs to facilitate integration into their existing workflows. Moreover, we are connecting these capabilities with Adobe Express, which has its own Firefly and features that enable content creation, social media post scheduling, and multi-language translations. These features are designed to streamline collaboration between those using Photoshop and marketers who are sharing content externally. This integration presents exciting opportunities for us, especially alongside what Anil is doing with GenStudio.

Since we announced GenStudio at MAX, we've received significant interest from enterprise customers like Henkel, Pepsi, and Verizon, as well as various agencies. This aligns with what we discussed at Summit regarding the expected fivefold increase in content demand over the next few years. Every brand is seeking ways to accelerate the production of quality content while enabling various teams within the organization to create their own content that meets enterprise standards. Our Digital Experience portfolio, including Adobe Experience Manager and additional assets, combined with the Creative Cloud offerings, especially Express, allows enterprises to achieve agility and cost-effectiveness in content production at scale. Consequently, we are witnessing a substantial amount of interest in this area.

And maybe I'll just add a little bit to that, Kirk. I mean, I think the exciting thing about what people are doing is they're standardizing on Firefly and the fact that we have responsible generations for the entire enterprise. So the interest level has been around, how do we standardize that for all of the image or vector or other generations that they want to do for all the knowledge workers in the enterprise. So really good adoption of Firefly.

Thank you.

Thanks. I'd like to ask about a different subject. And that's the creative Express product now that it's being sold into the enterprise. I'm wondering if you could offer some color on the adoption ramp, the competitiveness versus Canva and whether your plans around driving Express revenues versus driving user adoption have changed at all. Thank you.

Express is off to a great start. As you may recall, we launched the latest version in August, and it has received a very positive response. Since then, we have added significant innovations in Q4. We started integrating Firefly with features like Text to Image and Text to Effects, and we've also introduced Text to Template for creating fully formed templates, along with generative fill, allowing for real-time changes. Users can now draw and paint on the canvas and we have enhanced video support. We've developed a top-notch PDF support and workflow alongside Acrobat. Additionally, we've integrated social workflows for scheduling posts, enabled auto-translations for multiple languages and regions, and expanded our ecosystem with over 50 partner plug-ins. Enterprise features such as AEM integration and template locking ensure that brand elements remain controlled when shared widely. The results are promising, with new trialists increasing rapidly after the launch, along with quick adoption from education users, and growth in the Creative Cloud user base. Express is a key component in how our team is selling GenStudio. Looking ahead, we have a mobile release on the way, which will be beneficial for users on the go, and thousands are already using the beta. Our partnership with Chromebooks means new buyers will have access to this product. We’re also collaborating with firms like Wix for their workflows and plan to deepen our integration with Acrobat. Overall, we are excited about the future direction. Our main goal remains increasing user adoption. We are focusing on broadening access while also exploring upselling and cross-selling opportunities to the paid plan and Creative Cloud, but our priority is continued adoption and widespread use.

Got it. Thank you.

Great. Thanks very much. This is for Dan or maybe Anil. As we think about the momentum within the DX business, it's great to hear things like the 60% increase in your AEP, and native apps book of business, the strong net dollar retention. And you talked about overall strong year-end bookings, but what does it maybe about the pipeline ahead, bookings conversion or perhaps other factors that account for the degree of deceleration that you're guiding for into next year? Thanks.

Thanks, Brad. I mean we are really excited about this massive multi-year opportunity, if we would look at any enterprise customers around the world, everybody recognizes the long-term imperative of transforming their customer experiences. And we're seeing that in these transformational deals that we talked about. And as you mentioned, for example, with AEP, our first $100 million net new business quarter and ending with over $700 million in our annualized book of business. With that said, definitely we're seeing macroeconomic impact, just like other enterprise software companies are. Every customer looks at the total cost of deploying the software and then what it would take to get the payback and ROI. And as a result, there is definitely some scrutiny and caution there. But that said, if we look at going into next year, we do see the pipeline across both our industry verticals as well as our mid-market customers. And we continue to be the leader in the market and we did get that recognition from both analysts and customers.

Okay. Thank you.

Dan, could you review the overall assumptions in your guidance? There seems to be some concern from investors about why your guidance is different from market expectations. Also, could you connect Shantanu's insights to the guidance? What is your general perspective on whether the environment is improving or just stabilizing? Any high-level thoughts on what you think is happening as we move into next year would be appreciated.

Yeah. So thanks for the question, Brent. When we take a look at the guide, if we think about where we're at, at this point in time as we're looking forward in FY '24, clearly we see a lot of momentum in the business, the company's engine of innovation has been incredibly strong. And you see the strong financial performance of the company. That's both from a top line standpoint, as well as profitability and cash-flow standpoint. So, clearly a lot of momentum around the business. As I think about where we sit today, we printed a 46.4% operating margin. As we look forward into next year, we take into account everything we can see. As Shantanu said, we take the guidance seriously and we set expectations in a prudent way, there is an opportunity to do better than the expectations that we set. Clearly, the company is going to be driving towards that. As we think about the engine of innovation, we think the pipeline is strong, we're going to continue to invest in the drivers of growth. This company is going to orient towards growth. When I think about the investment profile, not only are we going to be disciplined. But we're going to continue to invest in those drivers of growth on the DX side. Anil talked about AEP and Apps strong book of business, strong growth, we're laying the groundwork and content supply chain with the GenStudio solution, scaling that motion, and engaging with customers to go from ideation to creation to activation, delivering new technologies, products, AEM sites incorporating intelligence into those products. On the DME side, you can see it across the portfolio, AI assistant Acrobat, it's in private beta, and it's going to be in public beta in the coming months, you look at Firefly and Express, natively and deeply integrating these technologies throughout the product portfolio, there is going to be continual investment as it relates to that innovation. As you think about the momentum exiting this year and as you think about the guide into Q1, you can see that momentum continuing, get the operating margin up a little bit, and then throughout the year, as we said at our FA Day and the last year's earnings call, you can see a mid-40s expectation around operating margin for the company as we drive this investment cycle, as we drive leadership in our core markets and our key catalyst in the trends that are shaping those markets. So, again, taking a step back, it nets into account the macro that Anil talked about everything we see from a core business standpoint, and the investment profile that we're going to drive to lead, if there's an opportunity to do better than where we set those expectations we're certainly going to do it.

And maybe just to add to that, Brent, since you asked. First, let me clarify, there is nothing as it relates to the economic indicators that we saw anything that would give us cause for concern. So let me start off by saying that, I think at our Investor Meeting, we told you that we would expect a strong quarter; I think you would acknowledge, we posted some really strong numbers and the momentum continues. And I think as it relates to Creative Cloud, it's going to be driven by new customer acquisition, which is the engine that's driven the business and maybe perhaps the sell-side looked at some of the pricing and put more of that in '24 then in '24 and '25 and that will spread out and perhaps they put a little bit more in what percentage of the base that impacts. So from my perspective, the good news about Creative is it's being driven by massive new adoption into the platform. On Document Cloud, really strong results. I think as Dan said, as we put the AI pack on there as well, that should help fuel more adoption and Digital Experience, I mean, I know that Brad also asked that question. I mean it's great to see the adoption of AEP and Apps. I mean, that is clearly the future of digital experiences, driving $100 million quarter, the $700 million in the annualized book of business, which I think will reflect the next-generation customer experience architecture. So we're feeling positive. And we're going go execute against that, Brent. So, nothing that we see on the horizon would tell us either from the economic or competition that we're not poised to have another great year and profitability as well, I mean, look at the numbers that we posted both in terms of Q4, as well as for fiscal '24 and that does not in any way mean that we're not going to invest in all of the cloud and the foundation models. So I feel really good.

And then just one thing to add, Brent, if we were here a year ago, the expectations going into the year were that FX would be a pretty decent headwind to the performance, you see that in the way we've reported our results and then compare it to a constant-currency basis. We started with a pretty decent spread between the as-reported numbers in constant-currency in Q1. By the time we got to Q4, you saw that spread compress. As I look forward into FY '24, it's more of a neutral footing to maybe a slight headwind. Too early to really call it with precision, but I see that setup being slightly different. And maybe just a slight headwind versus what we were seeing a year ago.

Thanks for the color.

Yeah. Thank you. You noted the strength in RPO in the quarter, including the record sequential increase. Can you talk about how you're thinking about RPO for fiscal '24? Would you expect it to continue to be able to outgrow revenue growth by several points as you did in fiscal '23 and perhaps talk about the ingredients that will continue to drive RPO, either by segment or any other considerations that you'd like to talk about in that.

Yeah. Thanks, Jay. As I pull some of the threads together that we've heard on this call. Anil talked about large transformational deals being the platform of choice with customer experience management, simultaneously driving topline and bottomline productivity, and the investments around driving those are an imperative in the market. We see a similar dynamic with the new technologies that we're bringing to market on the DME side at the business; we're seeing strong pull from the enterprise. And so as I net out that environment and our performance against that opportunity, it goes to produce the type of sequential RPO progression that we saw Q3 to Q4. Every quarter won't be that large, but the backdrop around that dynamic for the company given the setup we see should be another strong year for RPO throughout the year.

Thank you.

Operator. We're getting close to the top of the hour. We'll take two more questions and then we'll wrap up. Thanks.

Thank you for taking my question, and congratulations on a successful quarter. David, I have a question regarding Firefly and the subscription packets. I understand that the commercial model for Firefly credit packets has only been in place for about six weeks. Have you noticed anything so far about customers' willingness to purchase these packets or how they are using the initial credit allocation that comes with the Creative Cloud subscription?

I'm happy to address that. First, I want to emphasize that our main goal is to enhance the use of generative capabilities, which is evident from the 4.5 billion images generated; our strategy is proving effective. Additionally, we have directly integrated the generative capabilities and credits into our paid plans to encourage adoption and widespread use of these features. We're observing strong engagement with our paid plans. As we've noted before, Generative Fill in Photoshop is one of the fastest-growing features we've introduced recently. The usage and engagement levels are impressive. I don't anticipate the generative packs will have a significant short-term impact aside from encouraging more usage and attracting more customers to our existing paid subscription plans. Over the next few years, we will be incorporating increasingly more generative capabilities into our existing workflows, including video generation, which will come at a higher cost than basic generation and create natural market inflation, driving future growth. This year is primarily about getting users onto the appropriate paid plans for our flagship applications and Adobe Express, and we expect that as this occurs, everything else will follow smoothly in the coming years.

Makes sense. Thanks, guys.

Thank you for squeezing me in. I really do appreciate. Dan, I'd like to look a little bit at MAX we discussed how excited you were on Firefly and how it drives Creative Cloud seed and paid seed adoption. Now that you had a bit of time in market, can you explain how you think about how this will drive the paid seed growth, is it how strong it could be and should we expect to seeds going to be lower unit price because they're going to be entry-level, what do you think that we will get offset by these higher-priced Firefly-driven sales into the enterprise? Thank you.

Yeah. Thanks, Mark. I think at the core of bringing this technology to life as a standalone application to drive an ideation part of the process, but value in deeply integrating these capabilities into the flagship applications and the workflows that define the creation process, it gives us a lot of surface area with customers and meeting them where they are in their particular needs and use-case specific needs. And so bringing people efficiently top of funnel, establishing the segmentation across that product portfolio, driving efficiency into the creation process, and allowing the velocity to enter the ideation, creation, activation and then instrumentation of that to really refine how companies engage with customers. So, it lays the groundwork for us to touch more customers where they are in the ecosystem, bring them on board in a use-case specific way, and then take them on digital journeys which is something the company has very skilled at with our D-DOM to cross-sell and upsell over the life of their engagement with our ecosystem.

From a product perspective, when you think about it, Mark, for us, the biggest thing that we want to do is how do we further make our products accessible, fun, and affordable for an increasing set of customers, and I think Firefly is one of those inflection points that will help everybody get over the blank screen fear that they have. And so first, as you think about Firefly as an ideation and people just coming and wanting to have creative inspiration. This is, whether you're an individual user or agencies, we're seeing a lot of adoption of Firefly to just start the entire Creative process and that sort of brings them as an on-ramp into Express, which would be the other part. Express is certainly the introductory pricing, the ability to get millions more into the fold and the ability, right now, it used to be that Express and other offerings in that is to all worry about, do I have the right templates. Well, AI is going to completely change that, we have our own models and so Firefly will allow anybody to take whatever creative idea that they have and make that available, so I think Firefly really helps with the Express offering. On the Creative Cloud, David mentioned this. I mean if you look at the adoption of that functionality and usage, that's being driven, whether it's in Photoshop right now or Illustrator as we add video, both in terms of providing greater value and we certainly will therefore have the uplift in pricing as well as the retentive ability for Firefly. That's where I think you're going to see a lot of the really interesting aspects of how Firefly will drive both adoption as well as monetization. And then if you go at the other end of the spectrum to the enterprise, GenStudio, every single marketer that I know and CFO and CMO, are all worried about how much am I spending on data, how do I get agility in my campaigns and the fact that Firefly is integrated into both Express as well as when we do the custom models for them, so they can upload their own models and then have the brand consistency that they want. So, Firefly really is the fact that we have our own models. A great catalyst for our business all across the spectrum and the usage and the adoption shows that in emerging markets, as people there in emerging markets are increasingly used to create variance of content and localization of content, that's where we are also seeing a tremendous usage of these particular technologies. So really exciting. And then, you take the same technology that we have in Creative and think about its impact in both Document Cloud when we do that and the ability to have summaries and have conversational interfaces with PDF, thereby making every single PDF as David again said, both for communication, collaboration, and creation far more compelling. I think you're going to see that same kind of uplift in usage and therefore monetization on the Acrobat side. And since it was the last question. I mean, for us, we look at FY '23, and we're really proud of what we were able to accomplish across all spectrums topline revenue, RPO and driving book of business, Creative Cloud, Document Cloud, and Experience Cloud and profitability, and we think '24 is going to be exactly more of the same, which is continuing to drive great innovation, great product growth, and great profitability. Clearly, I think there has been a set of questions around the Digital Media ARR and what I'll take is on that and we're extremely confident about how that continues to be a growth business, and perhaps the pricing impact was overestimated. And as we said, this is again a new growth business and it will be a multi-year pricing benefit for us as we think about the uplift that we have. So we're really pleased. We appreciate you being on the call. And like many of you wished us, happy holidays and we hope to see you soon. Thank you for joining us.

Thanks, everyone. Happy holidays. This concludes the call.