Adobe Inc (ADBE) — Q1 2024 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 first quarter fiscal year 2024 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, March 14, and contains forward-looking statements that involve risks, 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 growth rates unless otherwise stated. Non-GAAP reconciliations are available in our earnings release and on Adobe's Investor Relations website. Adobe Summit is just around the corner in Las Vegas at The Venetian Convention and Expo Center beginning on Tuesday, March 26. Following the day one keynote, we will host an Investor Meeting at 2:00 PM Pacific Time. The event will be webcast live and the replay will be available on Adobe's IR website. More details about the summit are available at summit.adobe.com. I will now turn the call over to Shantanu.

Thanks, Jonathan. Good afternoon, and thank you for joining us. Adobe had a strong first quarter. We achieved $5.18 billion in revenue in Q1, representing 12% year-over-year growth. GAAP earnings per share for the quarter was $1.36, and non-GAAP earnings per share was $4.48, representing 18% year-over-year growth. Our performance reflects the essential role that Adobe products play in driving the global digital economy. We're delivering on our strategy to unleash creativity for all, accelerate document productivity and power digital businesses. Adobe Creative Cloud, Document Cloud and Experience Cloud are more critical than ever to the success of creators, communicators, students, entrepreneurs, and businesses of all sizes with AI serving as an accelerant for all. We are a leader in delivering generative AI across all our clouds. We're taking a highly differentiated approach across data, models and interfaces. Our proprietary data is built on decades of deep domain expertise across creative, documents and customer experience management. We leverage large language models, as well as have invested in building and delivering our proprietary models in the creative document and marketing domains. Our IP-friendly approach is a differentiator for creators and enterprises. In addition, we've innovated by delivering generative AI directly in products with releases in Adobe Photoshop, Illustrator and Express across both desktop and mobile. AI Assistant in Acrobat and Reader unlocks the tremendous value of the trillions of PDFs around the world. We're bringing generative AI to Adobe Experience Cloud and will demonstrate our AI Assistant for Customer Experience Management at Adobe Summit. Every student, communicator, creative professional and marketer is now focused on leveraging generative AI to imagine, ideate, create and deliver content and applications across a plethora of channels. Adobe is uniquely positioned through the combination of Express, Firefly, Creative Cloud, Acrobat and Experience Cloud to deliver on this immense market opportunity. The success we are already seeing with our GenStudio offering in the enterprise is validation of our leadership, and we expect that success to translate into other segments as we roll out these solutions throughout the year. We are driving strong usage, value and demand for our AI solutions across all customer segments. We're successfully monetizing our innovations with particular strength in Q1 in the Enterprise segment across our Digital Media and Digital Experience businesses. This strength is reflected in our strong RPO growth of 16% year-over-year. We're pleased with a strong Q1. We have a phenomenal product roadmap that we're executing against to bring AI innovation across our global customer base, and we're just getting started. I'll now turn it over to David to discuss the momentum in our Digital Media business.

Thanks, Shantanu. Hello, everyone. In Q1, we achieved a net new Digital Media ARR of $432 million and revenue of $3.82 billion, which grew 13% year-over-year. The world's information, whether it's an enterprise legal contract, a small business invoice or a personal school form, lives in trillions of PDFs. We were thrilled to announce Acrobat AI Assistant, a massive leap forward on our journey to bring intelligence to PDFs. With AI Assistant, we're combining the power of generative AI with our unique understanding of the PDF file format to transform the way people interact with and instantly extract additional value from their most important documents. Enabled by a proprietary attribution engine, AI Assistant is deeply integrated into Reader and Acrobat workflows. It instantly generates summaries and insights from long documents, answers questions through a conversational interface, and provides an on-ramp for generating emails, reports and presentations. AI Assistant is governed by secure data protocols so that customers can use the capabilities with confidence. We are pleased with the initial response to the English language beta and look forward to usage ramping across our customer base as we release other languages later in the year. We will monetize this functionality through a monthly add-on offering to the hundreds of millions of Reader users as well as the Acrobat installed base across individuals, teams and enterprises. In Q1, we achieved Document Cloud revenue of $750 million, growing 18% year-over-year. We added $143 million of net new Document Cloud ARR, which was a Q1 record with year-over-year ending ARR growth of 23% in constant currency. Other business highlights include Acrobat Web continues to be an incredible source of customer acquisition with monthly active users up over 70% year-over-year and surpassing 100 million users in Q1. Acrobat extensions for Microsoft Edge and Google Chrome, and our Acrobat Mobile offerings continue to accelerate free-to-paid conversion. Increased viral adoption through link sharing and stakeholder collaboration drove over 300% year-over-year growth in the number of PDF files sent. Key enterprise customer wins include Berkshire Hathaway, Merck Sharp & Dohme, Northrop Grumman, Porsche, and the U.S. Navy. On Creative Cloud, creativity is the currency of differentiation in our digital-first world. Every creator and business is focused on building their brand and engaging with their audiences through standout content. Creative Cloud remains the solution of choice for the world's creators, whether their medium is design, photography, video, illustration or 3D. Adobe Express is inspiring millions of users of all skill levels to design more quickly and easily than ever before. In the year since we announced and released Adobe Firefly, our creative generative AI model, we have aggressively integrated this functionality into both our Creative Cloud flagship applications and more recently, Adobe Express, delighting millions of users who have generated over $6.5 billion assets to date. In addition to creating proprietary foundation models, Firefly includes a web-based interface for ideation and rapid prototyping, which has seen tremendous adoption. We also recently introduced Firefly Services, an AI platform that enables every enterprise to embed and extend our technology into their creative, production and marketing workflows. Firefly Services is currently powered by our commercially safe models and includes the ability for enterprises to create their own custom models by providing their proprietary datasets as well as to embed this functionality through APIs into their email, media placement, social and web creation process. Early adopters like IBM are putting Firefly at the center of their content creation processes. IBM used Adobe Firefly to generate 200 campaign assets and over 1,000 marketing variations in moments rather than months. The campaign drove 26X higher engagement than its benchmark and reached more key audiences. In Q1, we achieved $3.07 billion in revenue, which grew 12% year-over-year. Net new Creative Cloud ARR was $289 million. Other business highlights include the launch of the new Adobe Express mobile app beta, bringing the magic of Adobe Firefly AI models directly into mobile workflows. The first-of-its-kind integration with TikTok's creative assistant makes the creation and optimization of social media content quicker, easier and more effective than ever before. Express Web usage continues to ramp nicely with total exports more than doubling year-over-year and overall Express adoption is expected to accelerate even further, given the positive reception we're seeing from the mobile beta. Generative Fill in Photoshop continues to empower creators to create in new ways and accelerate image editing workflows. Q1 saw the highest adoption of Firefly powered tools in Photoshop since the release of Generative Fill in May 2023, with customers adopting these features across desktop, web and most recently, iPad, which added Generative Fill and Generative Expand in December. The beta release of AI-powered Enhance Speech and new audio workflows drove premiere beta usage to record highs. Adobe video tools were the go-to choice at Sundance Film Festival with over 80% of this year's entrants using Adobe software. The introduction of Behance Pro, a new offering to serve the rapidly growing Behance community empowers members to build their brand and find opportunities, and for businesses to hire talented creators through the Behance platform. The unveiling of new research like the preview of our music generation models and editing tools last month and our video auto dubbing models earlier today have inspired our Creative Cloud and Express customers. The introduction of Firefly Services for enterprises drove notable wins in the quarter, including Accenture, IPG and Starbucks. Other key enterprise wins include AECOM, Capital Group, Dentsu, IBM, Nintendo and RR Donnelley. Given the size of the opportunity we see with generative AI, we continue to focus on driving innovation, adoption and usage of our AI solutions. In Q1, we saw strength across both clouds with record new commercial subscriptions in Creative Cloud for Q1, and strong product-led growth in Document Cloud. You can expect to see the product advancements and Express with Firefly on mobile. Firefly Services and AI Assistant in Acrobat drive ARR acceleration in the second half of the year. We're excited about our product roadmap. The 6.5 billion assets generated to date include images, vectors, designs and text effects, and we can't wait to share the work we're doing on audio, video and 3D through research sneaks and product announcements in the coming months. I'll now pass it to Anil.

Thanks, David. Hello, everyone. The Experience Cloud business had a great first quarter, achieving $1.29 billion in revenue and was our strongest Q1 on record for new business. Subscription revenue was $1.16 billion, representing 12% year-over-year growth. Companies are prioritizing digital investments to improve marketing agility and customer engagement while driving growth and profitability. Adobe's holiday shopping report, which analyzes trillions of data points, showed strong online spending during the 2023 holiday season, growing 4.9% year-over-year to $222.1 billion, a new record for e-commerce, as well as mobile shopping, which surpassed desktop for the first time and drove 51.1% of online sales. Our Adobe Experience Cloud applications span the entire customer funnel from acquisition to monetization to retention. As the global leader in the Digital Experience Platforms category, Adobe offers businesses a single view of their customers' data across every channel, allowing them to create precise segments and deliver personalized experiences regardless of when and where the customer interacts with their brand. Over the last five years, our organic innovations in Adobe Experience Platform, Real-time CDP, Journey Optimizer, and Customer Journey Analytics have made us the leading platform for customer experience management, given the scale of the profiles, campaigns, and interactions we process, which now exceed 500 trillion segment evaluations per month. Today, the rollout of personalization at scale has been limited by the number of content variations you can create and the number of journeys you can deploy. We believe harnessing generative AI will be the next accelerant, with Creative Cloud, Firefly Services and GenStudio providing a comprehensive solution for the current supply chain and generative experienced model, automating the creation of personalized journeys. Adobe GenStudio is the generative AI-first application that allows marketers to quickly plan, create, store, deliver and measure marketing content in a single intuitive offering. With state-of-the-art generative AI powered by Firefly Services, marketers can create on-brand content with unprecedented scale and agility to deliver personalized experiences. Adobe GenStudio natively integrates with multiple Adobe applications across Creative Cloud and Experience Cloud, including Express, Firefly, Workfront, Experience Manager, Customer Journey Analytics, and Journey Optimizer. It can be used by brands and their agency partners to unlock new levels of creativity and efficiency in marketing campaigns. Business highlights include momentum with Adobe Experience Platform and native applications with the combined annualized book of business surpassing $800 million in the quarter. Demand for Adobe Experience Manager, Workfront and GenStudio to address the enterprise content supply chain. Global agencies, including Accenture, Havas, IPG, Omnicom, and Publicis, have standardized on Adobe as their technology platform of choice for their own workflows and to optimize creative collaboration with the world's leading brands. Strength in Adobe Journey Optimizer on Adobe Campaign as companies look to deliver more personalized experiences across channels and surfaces. Adobe was recognized as a leader in the Gartner Magic Quadrant for Digital Experience Platforms for the seventh consecutive year, as well as the Forrester Wave for Digital Experience Platforms. Adobe Experience Manager assets were also named a leader for the fourth consecutive time in the Forrester Wave for Digital Asset Management. Key customer wins include Carl Zeiss, Comcast, Home Depot, NASCAR, Nestle, PayPal, Rogers Communications, Santander Group, Starbucks and Walgreens. Later this month, we are excited to host Adobe Summit, the world's largest digital experience conference in Las Vegas, where we will be joined by thousands of customers, partners, and developers from around the world. We look forward to showcasing a number of product innovations, including a new generative experienced model, advances in Adobe GenStudio, a new AI Assistant in Adobe Experience Platform, new capabilities in Real-time CDP for first-party data activation, and expanded Firefly Services offerings. We will articulate our vision and playbook for brands to achieve a new level of personalization at scale in the era of generative AI. We look forward to sharing our exciting product roadmap and hearing from our customers and how Adobe is helping them transform their business. We were off to a fast start in Q1 and look forward to continuing the momentum and leadership in Q2 and beyond. I will now pass it to Dan.

Thanks, Anil. Today, I'll start by summarizing Adobe's performance in Q1 fiscal 2024, highlighting growth drivers across our businesses, and I'll finish with financial targets. In Q1, Adobe delivered another quarter of double-digit top-line growth with robust margins that result from product leadership, strong execution, and financial discipline. The pace of our product innovation across Document Cloud, Creative Cloud, and Experience Cloud is leading to customers making large multi-year commitments to Adobe. And you see the result of those customer investments in our RPO performance, which accelerated to 16% year-over-year growth. In the quarter, Adobe achieved record revenue of $5.18 billion, which represents 11% year-over-year growth, or 12% in constant currency. Business and financial highlights included GAAP-diluted earnings per share of $1.36 and non-GAAP diluted earnings per share of $4.48. Digital Media revenue of $3.82 billion, net-new Digital Media ARR of $432 million, Digital Experience revenue of $1.29 billion, cash flows from operations of $1.17 billion, RPO of $17.58 billion exiting the quarter, and repurchasing approximately 3.1 million shares of our stock during the quarter. GAAP EPS came in lower due to the $1 billion payment resulting from the termination of the Figma transaction. Absent the termination payment, our cash flows from operations would have been $1 billion more, and GAAP EPS would have been $2.19 higher. The termination payment impacts both Q1 GAAP EPS and our full-year fiscal 2024 GAAP EPS. In our Digital Media segment, we achieved Q1 revenue of $3.82 billion, which represents 12% year-over-year growth, or 13% in constant currency. We exited the quarter with $15.76 billion of Digital Media ARR, up 14% year-over-year in constant currency. Adobe achieved Document Cloud revenue of $750 million, which represents 18% year-over-year growth as reported and in constant currency. We added $143 million of net new Document Cloud ARR in the quarter. Q1 Document Cloud growth drivers included demand for Acrobat subscriptions across all customer segments and geographies. Continued growth of Acrobat Web demonstrating the success of our flagship products across multiple surfaces, growing monthly active users in our Acrobat Reader Funnel driving free-to-paid conversion. New user acquisition resulting from our Microsoft Edge and Google Chrome partnerships. Strength in our Teams business with upselling our new Acrobat offerings, which include integrated sign capabilities, and strong demand from businesses of all sizes, demonstrating the mission criticality of our Document Solutions. We achieved Creative revenue of $3.07 billion, which represents 11% year-over-year growth, or 12% in constant currency. We added $289 million of net new creative ARR in the quarter with ending ARR growing 12% year-over-year in constant currency. Overall CC pricing actions performed as expected in the quarter. Q1 net new Creative ARR grew more than 20% year-over-year, excluding the impact of pricing actions associated with both Acrobat CC and All Apps in the year-ago quarter and Creative Cloud in Q1 FY '24. Q1 Creative growth drivers included new subscription growth, including strong adoption of Creative Cloud All Apps across geographies and customer segments. Strong single-app customer demand in creative categories such as imaging and photography, and continued growth of stock and Frame.io. We again saw strength in emerging markets, which we continue to believe is a massive growth opportunity and outstanding performance of Creative Cloud in the enterprise including early traction of Firefly services. Turning to our Digital Experience segment. In Q1, we achieved revenue of $1.29 billion, which represents 10% year-over-year growth as reported and in constant currency. Digital Experience subscription revenue was $1.16 billion, growing 12% year-over-year as reported and in constant currency. Q1 was a tremendous start to the year for our Experience Cloud business with growth drivers, including: success closing transformational deals across geographies and verticals with large enterprises that are choosing Adobe to be their end-to-end customer experience management platform, continued momentum with AEP and native applications with the annualized book of business growing more than 60% year-over-year, strong customer adoption of our content, campaign and Workfront solutions, and continued strength with customer retention and expansion across our products. Customer Experience Management remains an enterprise imperative. And as a leader in the category, we see a robust pipeline as we look into Q2 and beyond. Turning to the income statement and balance sheet. Adobe's effective tax rate in Q1 was 36% on a GAAP basis and 18.5% on a non-GAAP basis. The Q1 GAAP tax rate came in higher than targeted due to the Figma termination payment. RPO exiting the quarter was a record $17.58 billion, growing 16% year-over-year as reported and in constant currency. Our ending cash and short-term investment position exiting Q1 was $6.82 billion, and cash flows from operations in the quarter were $1.17 billion. In Q1, we entered into a $2 billion share repurchase agreement, which effectively exhausted our prior $15 billion authority. As a result of our strong trajectory of growth and profitability, we are announcing a new $25 billion share repurchase program, which demonstrates Adobe's continued commitment to returning capital to our shareholders. In light of the momentum across our business and factoring in the macroeconomic environment, for Q2, we're targeting total Adobe revenue of $5.25 billion to $5.30 billion; Digital Media net-new ARR of approximately $440 million; Digital Media segment revenue of $3.87 billion to $3.90 billion; Digital Experience segment revenue of $1.31 billion to $1.33 billion; Digital Experience subscription revenue of $1.165 billion to $1.185 billion; tax rate of approximately 18.5% on a GAAP and 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. In summary, fiscal 2024 is off to a strong start. By combining the power of product innovation and executional excellence, Adobe is driving consistent profitable growth. We're delivering on our product roadmap, and we have the right strategy to monetize these innovations into the back half of the year and beyond. Adobe is incredibly well-positioned to capitalize on the secular trends that will shape the next decade. Shantanu, back to you.

Thanks, Dan. We're the leader in three large and growing categories and have delivered groundbreaking innovation across Creative Cloud, Document Cloud and Experience Cloud. We believe that AI augments human ingenuity and expands our addressable market opportunity. I'm proud of the pace and the responsible manner in which we have embraced and delivered generative AI capabilities across our product portfolio. As a result of our strategy and execution, we're confident in our ability to attract new users and deliver value to existing customers to drive growth and profitability. I'd like to thank our 30,000 employees for their continued dedication and unwavering focus on innovation and execution. It is particularly exciting to be named to Glassdoor's Best Places to Work, Fortune's Most Admired Companies, and the JUST 100. Thank you, and we will now take questions. Operator?

Yeah. Thanks. Thanks very much for taking the question. I guess maybe this is for David or Dan. Obviously, you guys called out that new creative ARR was up more than 20% year-over-year when you exclude the pricing increases, which infers a pretty major pricing headwind that we're seeing right now. Can you all just try to parse out how that's going to play out over the year? I know David you mentioned ARR will go up in the back half of the year, but that it’s just tough I think to reconcile what's going on in the business on a normalized basis, and when we might see that sort of translate more into the metrics that everybody follows. Thanks.

I’ll start and others can add on. First of all, we see a strong start to the year with Q1 generating $432 million across the business. Specifically for Creative Cloud, it’s important to recognize our strategy to accelerate growth, as the key drivers are clear. We are aiming to expand access with tools like Express on mobile and introduce new offerings such as AI Assistant, along with features from Firefly integrated into our core applications like Photoshop and Illustrator. We are also targeting new budget sources with Firefly Services and GenStudio. Early indicators from Q1 suggest these growth drivers are becoming effective. Adjusted for FY '23 and FY '24 pricing changes, our Creative Cloud business grew about 20% year over year. Notably, we achieved a new record for commercial subscriptions in Q1, and the business growth has remained stable, with revenue and ARR both growing at 12%. The stability and diversity of the business are strong. As we look toward the second half of the year, we have launched Creative Cloud pricing with Firefly, which began rolling out late last year and will continue throughout the year. We are also ramping up Firefly Services, Express, and Enterprise, and we saw a positive start to that rollout towards the end of Q1. In the second half, we expect to see continued ramp-up from Express Mobile and AI Assistant. We have established many backend capabilities to start monetizing these new features, which are currently in beta, beginning in Q3 and beyond. Regarding pricing, we previously discussed two significant pricing actions that benefited FY '23: the Acrobat price increases due to the new value we provided with sign capabilities and a Creative Cloud price increase from FY '22 rolling into FY '23. Both of these older pricing strategies are now being replaced by the new Creative Cloud pricing with Firefly, and overall, the impact of rolling off the prior pricing is more substantial than the new pricing we have introduced.

Thanks.

Thanks, Shantanu. This quarter's performance showed an absolute beat that was about half of what we've experienced in previous quarters, and the guidance for the next quarter is also lower. Many are wondering if this is related to AI challenges, broader economic conditions, or execution issues. Could you share your thoughts on what you’re observing in the current quarter?

Yeah. Happy to, Brent. And again, I'll reiterate that as it relates to us taking our targets pretty seriously. I mean, when we guided to $1.9 billion for the year, I mean, we had factored in both, as David mentioned, what was likely to happen in the pricing and how that rolls off, as well as the product roadmap, and when AI Assistant and Acrobat would be available, when Express, which is now in beta, would be available. So I think it factored in all of those. I guess if you are looking at it from accomplishment, we look at it and say, hey, we did $410 million. I think last year we did $432 million. If we look at the guide and we're on track as it relates to the $1.9 billion, and to hopefully exceed that guide. And so from our perspective, it's playing out. Maybe the other color, Brent, that I would provide is given the desktop products are still in beta, and there we look at value and there we look at utilization. And so I think we gave you some numbers on the $6.5 billion generations that we're seeing, and the really positive feedback that we're getting in Acrobat that continue to give us optimism associated with how that is. I think where there's tremendous interest and where if you look at it from an AI monetization, the two places that we're monetizing extremely in line with our expectations. The first is as it relates to the Creative Cloud pricing that we've rolled out, and as you know, the generative packs are included for the most part in how people now buy Creative Cloud, that's rolling out as expected. And the second place where we are monetizing it is in the entire enterprise as it relates to Content and GenStudio. And I'm really happy about how that's monetizing it. I mean, that's a combination, Brent, of when we go into an enterprise for creation, whether we provide Creative Cloud or a combination of Express, what we are doing with asset management in AEM, workflow, as well as Firefly Services to enable people to do custom models as well as APIs. We're seeing way more monetization earlier, but again, very much in line with expected. So again, I look at the quarter and I feel really good, both about the product delivery as well as the way monetization is turning out. I mean, it's clear, I guess, a little bit from sort of what we've seen that expectations were perhaps a little higher, both in terms of what we would guide for Q2, but I'm really optimistic about what we have done.

Thanks.

Thank you for taking my question. This is for Dan. I noticed that the full-year guidance hasn't been raised, and while I understand it's still early in the year, I hope you can at least confirm it for us. Also, I noticed that the enforcement of generative credit limits for certain products has been postponed past April, which was initially expected to happen sooner. What is the reasoning behind this choice? Additionally, what insights do you have so far regarding credit consumption and purchasing habits related to those credit packs? Thank you.

Yeah. Thanks, Brad. I'll jump in on the first part, then toss it over to David for the second. So we're not updating the targets. What the targets we provided for the full year, they're, as of the December call. What we did share on the call was the material change that we saw in Q1 as a result of the Figma termination payment. We talked about the GAAP EPS impact. It rolls through Q1 and it'll certainly have an effect for the full year. And it's $2.19 as a result of the $1 billion payment. And I think with that, I think you have everything you need relative to where we set our targets, but we're not going to be updating them on this call.

I'm happy to provide some additional insight. Currently, we are still focused on acquiring users and encouraging them to use our products frequently. There's a lot of interest regarding how the credit system will evolve over time. Recently, we introduced some new features that could offer valuable insights. Last month, we launched a music composition feature that allows users to transform any music track into different styles such as hip hop or orchestral. This morning, we introduced auto dubbing and lip-syncing, enabling users to translate videos into different languages automatically. These features will require more than one credit due to their complexity. The main priority right now is driving usage and expanding our capabilities, which will also include more costly features. We expect to see this growth throughout the year, and we are confident in the adoption rates we are experiencing. Additionally, it's worth noting that we reached the highest number of users utilizing generative AI in Q1 to date, which is very encouraging for our future trajectory.

And maybe just to add a little bit more of how we're thinking about it as it relates to the monetization of AI. I think we're in the early stages as it relates to experimentation. So we're looking at both what the value utilization is as well as experimentation. The value utilization is actually really positive for us. I think, as it relates to the monetization and the experimentation, we have the generative packs, as you know, in Creative Cloud. I think you will see us more and more have that as part of the normal pricing and look at pricing because that's the way in which we want to continue to see people use it. I think in Acrobat, as you've seen, we are not actually using the generative packs. We're going to be using more of an AI Assistant model, which is a monthly model. As it relates to the Enterprise, we have both the ability to do custom models, which depends on how much content that they are creating, as well as an API and metering that we've rolled out and we've started to sell that as part of our GenStudio solution. So I think it's fair to say, and I certainly monitor what everybody else in the industry is saying. The good news about this is the interface integration that we've done in all our apps and the utilization, and I think the experimentation will enable us to determine how we best attract the largest number of customers that we can who are new to Creative Cloud. We've talked about that as it relates to Firefly attracting new customers. Certainly, I think the number of Q1 commercial subscriptions was another record. So we're absolutely doing everything that we intended to experiment as we roll this out, Brad. So I wanted to accentuate that as well.

Thank you so much. Very helpful.

Hey, great. Thanks. I appreciate you taking the question, David, couldn't help but notice you led off your prepared remarks section with the Document Cloud. Can you speak to the enthusiasm you're seeing on the document side? And when we think about the mix of Digital Media growth for the year, should we expect it will continue to trend towards that document side? Or is it more the second half where some of the creative enhancements start to layer on more meaningfully we could start to see that shift back a bit? Thanks.

Yes, I’m happy to discuss that. We are very pleased with the performance of Document Cloud. The growth in Document Cloud stems from both our marketing efforts and product innovation. For our marketing efforts, Reader remains a key entry point, and we're observing growth in monthly active users for Reader. This means the number of potential users we can convert to paid subscribers is increasing. Additionally, Acrobat Web has significantly contributed to our growth, showing a 70% year-over-year increase in Web monthly active users, and we have surpassed 100 million monthly active users on the website for the first time. We are also implementing product-led growth strategies to help users recognize the value that encourages conversion. In terms of product innovation, our strategy has focused on making PDF the central element of workflows. For example, we integrated Sign into the service to allow users to utilize PDFs for their business transactions, which is growing well and serves as an excellent selling point for our integrated services. We also launched link sharing a few years ago for commenting and review among groups, which has seen a 300% growth year-over-year, providing significant value and opportunities for viral growth. When users receive a shared link, it gives us another chance to introduce them to our broader offerings. You can also anticipate similar developments with AI Assistant in Acrobat. I hope all of you are using it, as it should enhance your effectiveness. We see numerous monetization opportunities for insights generated by AI Assistant for our core Acrobat users and, for the first time, consumption-based value. The extensive monthly active user base of Reader will also have access to AI Assistant and can purchase an add-on package. This creates a substantial opportunity for monetization while also allowing users to generate emails and presentations from their conversations. Overall, the combination of our marketing strategies and product innovations remains promising. Regarding your second question, we are really excited about the upcoming innovations in Creative Cloud, which we expect to begin monetizing in Q3. Therefore, we feel optimistic about the growth in Creative Cloud during the second half of the year.

Okay. Great. Hey, guys, thanks for taking my question here. Maybe for both David and Shantanu. Clearly, a lot of news around video creation using generative AI during the quarter, of course, with the announcement of Sora. Maybe the question for you folks is, can we just talk a little bit about how you think about the market impact that generative AI can have in the video editing market and how maybe Firefly can participate in that trend?

Sure, I'll start and then David can add. Firstly, the advancements in OpenAI and our own models are remarkable. When it comes to video, we face fundamental challenges like physics. For instance, if someone is walking on a street, we need to ensure they don't walk through a building or fall through the floor. Many of the video advancements we’ve seen at Adobe have addressed these difficult issues. Overall, I believe video will significantly enhance editing applications. The idea that future blockbuster films will be created solely from text-to-video prompts will take decades to materialize. Instead, I foresee a growing trend in video where users will look for ways to begin using text-to-video features and edit them with our applications. I am particularly excited about the capabilities we can unlock with Premiere and After Effects in relation to video. In summary, the technology is impressive. We have integrated our models into our interfaces and are exploring partnerships as well. I had a productive conversation with Jensen about potential collaborations, especially as they invest in video. We are eager to see how we can innovate with their models, whether it's Edify or Nemo. Although it’s still early, we have made significant progress. David also mentioned our work on lip sync technology that enables auto-dubbing and translation into different languages, which we intentionally showcased in a demo. Overall, there are great advancements in this area, and video will increasingly drive the need for editing applications to leverage generative AI.

Yeah, I’d like to add a few points. First of all, as Shantanu mentioned, the research in the industry, especially with Sora, is very impressive and exciting. It aligns well with the models we're developing. We believe there will be, much like with imaging, multiple models launched, including our Adobe model later this year, and we expect to see significant innovation in this area. We’ve already started to preview some features that Shantanu discussed. You can anticipate seeing text-to-video capabilities from us later this year, along with transparency regarding our training data, enhanced tool usability, and more control options. These features will be integrated into our tools as well. That being said, I want to emphasize what Shantanu mentioned: we see the growth of video models as positive for Adobe. We will collaborate with OpenAI on Sora, while also focusing on our model development. This environment promotes growth because as more people generate video clips, they will need to edit that content. Whether in Premiere, After Effects, or Express, users will need to assemble video clips, perform color corrections, match tones, and create transitions. We're thrilled about our developments and are equally excited about the partnerships with OpenAI and others in this space. If you look at the bigger picture, expect to see more updates from us in the near future concerning imaging, vector design, text effects, and later, audio, video, and 3D. We’re very enthusiastic about what this means for both our models and our APIs and tools.

Super helpful. Thanks.

Thanks for taking my question. I have a clarifying question. It seems clear from various comments that Digital Media ARR is outperforming this quarter, and Creative ARR is accelerating in the second half. There’s also potential for exceeding $1.9 billion in Digital Media ARR for the full year. My question is straightforward: can you reiterate the guidance provided in December regarding Digital Media ARR and net new specifically for this year? Additionally, could you share some insights on the factors affecting how we should view the second half versus the first half regarding tailwinds and headwinds around pricing?

Yeah. So we take our guide seriously. Q1 played out as expected. It was ahead of where we were last year. Our Q2 guide is ahead of where the guide was in Q2. We're talking about acceleration into the back half of the year. If I didn't feel like our full-year guide was achievable, we would have a different conversation. We're confident in the targets that we put out there, our ability to meet them. If there's an opportunity to do better, we certainly will. So we feel good about where we sit in the first half. And as we look forward into the second half, the momentum we see from an innovation standpoint integrating into our products, what we see going from beta to GA, we feel good about the momentum into the second half.

Thank you. Dan, maybe I'll continue with this subject that Alex was getting at. So I think what's tough about modeling ARR of late is it's very difficult to see the impact of the price actions. It feels like a black box to us. So I'm wondering if you could help us get aligned for the second half, and offer some qualitative color on the extent to which the prior period price actions roll off. Is that more of a 3Q or 4Q phenomenon? Is there any way you could help size that impact, just to feel good about David's earlier comment about that roll-off being a big part of the second-half ARR acceleration? Thank you.

In 2022, we implemented two pricing changes. In May, we initiated a pricing action, followed by the Doc Cloud line optimization in October, where we integrated Sign. We will soon reach the one-year anniversary of these actions. Therefore, some impact from the pricing changes will still be evident in Q3, while Q4 will provide a clearer picture for the company with at least two months free from those effects. The current adjustments we are making in pricing and product on the Creative side will become more noticeable in the latter half of the year as we approach the end of the year.

I think the other way I would look at it, honestly, please continue.

Go ahead, David.

I would approach this by considering the numbers' rhythm and what happened in 2023, as well as our outlook for 2024 and our goal of reaching $1.9 billion and beyond. We are ahead in the first quarter, providing reasons to believe in more product and monetization opportunities for the rest of the year. This is what gives us confidence in our targets. Each quarter, there's a question of whether we should reiterate or update targets, and we have always believed in communicating our confidence. We have faith in the numbers, but we don't reassess every figure each quarter. Additionally, regarding GAAP EPS, there's an impact from the Figma transaction that affects our Q1 GAAP EPS. Overall, I believe the quarter and the year are unfolding as expected, and I feel more confident now than I did when we set our annual targets.

Yeah. We got it. Thank you.

Thank you. Good evening. And with respect to Firefly, it's obvious that you are significantly ramping up your investments there, at least judging by the number of relevant open positions you're looking to fill for Firefly development, many of which are seemingly fairly senior. Could you comment on your pipeline of being able to bring in the requisite amount of developmental capacity to support everything you're doing with Firefly and everything else that David in particular talked about? And relatedly, on go-to-market in the last few months, you've been opening up the aperture for sales positions globally. Could you comment on what the thinking is behind that? And again, whether the population is there for you to bring in to meet your sales headcount needs? Thank you.

Sure. I’ll answer the first part, and then Anil can address the sales question. Regarding the momentum we're experiencing with Firefly, there are several factors at play. First, we are observing an improvement in the quality of models and a unique approach to training data, which involves contributions from our community and how we compensate them. This isn't just from Adobe's viewpoint; it's evident in enterprises as they evaluate which models are suitable for production workflows. We are in a unique position because we offer a full suite of capabilities. This has also caught the attention of the research community. Many individuals, particularly those with PhDs, are considering where they want to work, and there’s a growing desire to engage in AI responsibly. This has provided us with an excellent opportunity to attract exceptional talent. We are investing in this area because we believe we have one of the best research labs for imaging, video, audio, and 3D. We will continue to draw in talent rapidly. We already have a broad range of creative models across various domains like imaging, vector, design, audio, 3D, video, and font effects, which gives us a significant area to attract new people. The influx of talent has been beneficial. Additionally, we are successfully managing our access to GPUs while maintaining our profit margins. We've structured our costs effectively to accommodate this talent and provide them with the necessary GPUs for optimal performance.

In Enterprise, we're in a strong position because customer experience management is essential for Enterprise customers. Everyone is investing in personalization at scale and the current supply chain, which drives growth and profitability. These elements have become indispensable, helping us attract the right talent. Recently, we onboarded a VP of Sales with significant experience from Cisco and Salesforce, showcasing our ability to bring in excellent enterprise sales talent.

And I don't know if Jay, you were asking for building your model, or if you were looking for a job. But if you're interested in any of these positions, let us know more.

More the former.

Hey, operator, we're coming up on the hour. Let's try to squeeze in two more questions. Thanks.

Hey, thank you very much. Looks like there is more trust in AI and Excel models than what you're actually saying qualitatively on this call. I just wanted to give you an opportunity to debunk this hypothesis that is going around, that AI is generating videos and pictures, but the next step is it's going to do the actual editing and put out Premiere Pro use or whatnot. So that is probably the existential threat that people are debating. So why don't you see if we could take a shot at why that scenario is very unlikely that right now it's about generation of images and then your tools pick up where the generation stops and you do the processing, right? So help us understand why this can coexist with AI. That's a philosophical question. And Dan, one for you. Besides the net new ARR that you've already reported on Creative and DM, what are the other indicators such as new business bookings that you don't quantify necessarily that you qualitatively saw in Q1 that makes you feel good about the year? Thank you so much.

Great. I'll address the first part, and Dan can handle the second. When it comes to generated content, I want to break it into two segments. The first relates to the tools for content creation, and the second concerns the automation of that content. It's clear that there is a significant demand for personalized content at scale, as users seek engagement and aim to build their personal brands online. This demand is driving a surge in content creation, fueled by the ability to generate audio clips, video clips, images, and vectors. These tools are essential for kicking off the ideation process, and you'll see some remarkable work from our team in that area soon at Firefly.com. As this content is produced, it flows into our editing tools, which are seeing substantial benefits because increased content creation leads to greater editing demands. This has resulted in higher commercial Creative Cloud subscriptions this quarter than any previous Q1. From an editing standpoint, we are focusing on the controllability of not just images and vectors but also the underlying capabilities that generate the output. We've begun releasing research, starting with Style Match, and more will be unveiled at upcoming events. We firmly believe we lead in developing models that can also be enhanced with additional tools. This combination of improved models and their controllability positions us remarkably well. The second part pertains to automation. As content production increases, there is a clear need for streamlined content creation processes, which is where Firefly Services come into play. These services leverage the strength of our Firefly models for commercial applications and offer custom model capabilities to ensure specific information or brand content is accurately represented. Additionally, this fits within a broader ecosystem of API services, enabling functions beyond just generation, like background removal, depth blurring, auto-toning, and image processing. Finally, these services facilitate easy assembly for delivery. Firefly Services provide not just generation capabilities but an extensive ecosystem that can seamlessly integrate into workflows through low-code or no-code environments, already being implemented in GenStudio and the features we are rolling out. As content generation increases, the demand for better tools also rises. The most effective models will be those that prioritize safety and built-in controls from the start, and we are confident that ours are the most robust in the industry. These systems also need to incorporate automation to integrate smoothly into workflows, and all these elements collectively suggest substantial advantages for Adobe.

And then as we think about the forward-looking, a couple of points I would turn to, just think about cash flow in Q1. Strength of our cash flow, once you normalize for the $1 billion termination payment, that's up 28% year-over-year. When you think about RPO, 3 point acceleration sequentially, and when I break that up on deferred revenue, unbilled backlog, you saw that acceleration in each of those subcomponents, which as you look through that acceleration underscores the strength of the business and underscores the longer-term strength we have around the momentum of the business. When I think about individual product commentary, we talked about it a lot on this call. You see record commercial subscriptions in the Creative business. In Q1, you see engagement going up on the products. Usage of Firefly capabilities in Photoshop was at an all-time high. In Q1, Express exports more than doubling with the introduction of Express Mobile in beta now going to GA in the coming months, AI Assistant Acrobat, same fact pattern. You can see that momentum as we look into the back half of the year. And from an enterprise standpoint, the performance in the business was really, really superb in Q1, strongest Q1 ever in the enterprise. So there's a lot of fundamental components that we're seeing around performance of the business that give us confidence as we look into the back half of the year.

Super. Thank you so much, Dan.

Thank you for including me. I want to take one last shot at this. Shantanu and team, we can sense your confidence in the business, but the stock market's reactions suggest that investors have some concerns. The two main worries for investors are uncertainty and the second half ramp. I think what investors would really like to hear is Dan Durn confirm that we still expect to achieve $1.9 billion in net new Digital Media Annual Recurring Revenue, providing some certainty there. It would also help to have more clarity on the components that will drive the ramp in the second half. Which products are expected to go General Availability? Are we considering new offerings like document intelligence? Are there additional monetization opportunities we’re exploring for the second half? Or will there be changes within the Creative Cloud pricing that will take effect in the latter half of the year? Any further details on this would help bridge the gap between your confidence and the concerns reflected in the after-hours market reaction.

Let me address that, Keith, and I will also touch on a few other questions before concluding with yours about the financial results. The primary concern I hear from many is whether the emergence of AI and the growing number of models, whether for image or video, will lead to an increase or decrease in the number of seats for Adobe and beyond. I firmly believe that as we discuss these models and interfaces for creative content, the number of these interfaces will definitely rise. Therefore, Adobe must seize this significant opportunity. Overall, larger models will create even more opportunities for interfaces, and I think we are particularly well-suited to capitalize on that. Additionally, I want to emphasize that when Adobe innovates, we do not solely rely on our own models. We will definitely find ways to integrate other existing models into our applications, just as we've done with plugins in all of our Creative applications. That means anyone using our applications will benefit from both our model creation and external models as well. Initially, our focus has been on the enterprise, particularly on creating custom models that allow users to tailor their Photoshop experiences to specific needs, like those in retail or financial services. However, in the long run, we will be able to utilize any model available, which will further expand our opportunities. As we progress through the year, our target of $1.9 billion in ARR and $410 million in Digital Media ARR for Q1 was based on our product roadmap and how we anticipated things would evolve. We had a solid understanding of our product trajectories, whether it was for Acrobat, Express, Firefly, Creative Cloud, or GenStudio, all of which we are actively pursuing. The first half of the year was primarily about beta testing, while the second half will focus on monetization, which is aligning with our expectations. In fact, I would say that the excitement, especially in the enterprise sector, is developing faster than we expected. This enhances our potential to monetize not just through new seats but also through new Firefly services. Regarding your inquiry about our financial results and future execution, we set a Q1 target and exceeded it, which boosts our confidence in achieving the financial goals we established at the year's beginning. You are correct that we need to model these outcomes. Looking at last year's data, they reached $1.913 billion. If we are progressing ahead, it does not alter my belief in Adobe’s foundational rationale for reaching $1.9 billion and beyond. Therefore, we must act on the opportunities presented to us. I look forward to engaging further at Summit, and I believe Q1 was a strong start in terms of product execution and the financial metrics we've outlined. We’re committed to continuing this momentum, Keith. Thank you all for joining.

Excellent. That's super helpful.

And with that, I'll hand it back to Jonathan.

All right. Thanks, everybody. I look forward to speaking with many of you soon. And this concludes the call. We look forward to seeing you at Summit.