Q1 2022 Adobe Inc Earnings Call
Okay.
[music].
Good day and welcome to the Q1 FY 2022 Adobe earnings call. Today's conference is being recorded at this time I'd like to turn the conference over to Mr. Jonathan Boss. Please go ahead Sir.
Good afternoon, and thank you for joining us with me on the call today are Sean to noon Orion Adobe's, Chairman and CEO , David Wadhwani President of digital media and they'll chocolate Bharti President of digital experience and Dan <unk> Executive Vice President and CFO .
On this call, which is being recorded we will discuss it'll be first quarter fiscal year 2022 financial results.
You can find our Q1 press release as well as pdfs of our prepared remarks and financial results on Adobe's Investor Relations website.
Information discussed on this call, including our financial targets and product plans is as of today March 22nd.
And contains forward looking statements that involve risk uncertainties and assumptions.
Actual results may differ materially from those set forth in these statements.
For a discussion of these risks.
Should review the factors discussed in today's press release and in Adobe's SEC filings.
On this call, we will discuss GAAP and non-GAAP financial measures.
Our reported results include GAAP growth rates as well as adjusted growth rates in constant currency that account for an extra week in the year ago quarter.
During this presentation adobe's executives will refer to adjusted growth rates unless otherwise stated.
Reconciliations between the two are available in our earnings release and on Adobe's Investor Relations website.
I will now turn the call over to Sean to now.
Thanks, Jonathan Good afternoon, and thank you for joining us.
Before I discuss our Q1 results I want to acknowledge the horrifying and heartbreaking crisis in Ukraine.
The pain and suffering of millions of innocent civilians as incredibly tragic and our thoughts and prayers are with the Ukrainian people.
Adobe joined the global community and taking a stand by stopping all new sales of our <unk>.
Products and services in Russia.
The Adobe Foundation has made grants to aid humanitarian relief efforts.
I am proud of how our teams have come together and continue to successfully manage our business throughout the most challenging of times, while focusing on delighting customers in the long term growth initiatives for the company.
Adobe has always had a strong purpose driven culture and that has never been more evident than it is today.
Adobe's mission to change the world through digital experiences is more critical than ever before.
Everywhere, we look whether it is an entertainment education or the enterprise.
Content is fueling the global economy.
The democratization of creativity emergence of new ways to work and learn from anywhere in the business mandate for personalized customer experiences underscore the immense opportunities we have as a company.
Our strategy to unleash creativity for all accelerate document productivity and power digital businesses is working.
Our innovation engine is delivering category, leading products services and platforms across creative cloud document cloud and experience cloud.
Adobe had a strong Q1, we achieved a record $4 $2 6 billion in revenue, representing 17% year over year growth on an adjusted basis.
GAAP earnings per share for the quarter were $2 66, and non-GAAP earnings per share was $3 37.
In our digital media business, we drove strong growth in both creative cloud and document cloud achieving 311 billion in revenue.
Net new digital media annualized recurring revenue or <unk> was $418 million and total digital media IRR exiting Q1 grew to $12 $5 7 billion.
In our experience cloud business, we built on our Q4 momentum achieving $1 6 billion in revenue and subscription revenue was $932 million for the quarter.
I am pleased to have David Wadhwani precedent in digital media and our needle Cakravartin President digital experience on this call to share more about our momentum in the digital media and digital experience businesses respectively.
David.
Thanks, <unk> and Hello, everyone.
The acceleration to all things digital has made content and creativity more important than ever before.
Everyone needs to express themselves digitally from the individual on social media to the student, creating a more compelling scope project to the creative professional making the next marketing campaign.
The rapid rise of the creator economy is giving individuals' solar printers, and small business owners the opportunity to monetize their passions their products and their services.
Creative cloud is catalyzing these trends and fulfilling our vision for creativity for all enabling customers of every skill level to create content that stands out.
We continue to lead in core creative categories, such as imaging design video an illustration.
And we are advancing new media types like <unk> immersive for the emerging med diverse platforms.
We are building applications for every surface and every audience across web mobile and desktop and we're investing heavily and collaboration services that are deeply integrated into our flagship applications.
Our new web based solutions enable us to deliver value more quickly and broadly than ever before creative cloud solutions are powered by Adobe Sensei, our AI engine, which enables customers to work faster and smarter.
As a result, our creative community has never been stronger <unk> enhanced now has nearly 30 million members and we continue to host hundreds of on demand and live sessions weekly that serve as a source of learning and inspiration.
As a result in Q1, we achieved net new creative <unk> of $315 million and revenue of $2 55 billion, which grew 16% year over year on an adjusted basis.
Q1 highlights include the launch of creative Cloud Express, our new template driven web and mobile products that makes it easy for anyone to create and share beautiful content.
Zero friction onboarding will bring millions of small business owners, social influencers and students into the creative cloud family and empower them to create everything from social posts to marketing materials Creative Cloud Express features thousands of gorgeous templates millions of stunning stock images and videos and the world's most complete collection of.
<unk> it's.
It's easy to use interface is continuously expanding with innovation such as enhanced search capabilities for millions of assets and new PDF quick actions that enable users to edit convert combined and organize pdfs. While we are just a few months into our journey, we're seeing strong traffic millions of monthly active users and high customer.
Satisfaction.
On the video front the explosive demand for video content shows no signs of abating in Q1, we launched new AI powered innovations in premiere pro that help merge music into video sequences and accelerate transcriptions. We also drove strong growth for frame Io the leading video collaboration solution Adobe acquired late last year.
<unk> frame.
<unk> had its best quarter ever closing more deals than in any prior quarter, while increasing deal sizes to record levels as creativity has become a team sport, we will extend our leadership in video collaboration and bring collaboration capabilities to all creative categories.
We're also seeing tremendous interest for substance really and our newest <unk> modeler beta as brands bring together, the physical and digital worlds and begin their journeys to become meta versus ready substance is already being adopted by global brands like Coca Cola, NASCAR, and Nvidia for marketing and E Commerce.
Finally, we continue to see strong demand for creative cloud offerings globally across all segments individuals smbs teams and enterprises with key wins at Disney The FAA IBM <unk> Bank Kohls, and the New Mexico Public Education Department.
On the document cloud side digital documents have become the foundation of how business is run and will continue to gain significance as hybrid work becomes the standard.
Adobe is accelerating document productivity with document cloud, enabling all capabilities, including editing converting sharing scanning and signing to be frictionless across web desktop and mobile.
Pdfs are getting smarter and more accessible through our continued investment in AI and ml.
And we're enabling new workflows through our API is by empowering developers to build customized digital document experiences for their businesses in.
In Q1, we achieved record revenue of $562 million and net new document cloud <unk> of $103 million.
Ending era for document cloud crossed the 2 billion, Mark which represents 29% year over year growth.
Q1 highlights include strong growth in Adobe sign driven by unifying esignature functionality and acrobat and new sign integrations with Adobe Commerce and work fronts on.
On the web we continue to see a high volume of searches for document actions such as editing converting and sharing pdfs as a result, acrobat web contribution to the business has nearly doubled year over year.
On mobile we saw billions of acrobat mobile Pdfs opened in Q1. This usage combined with our efforts to convert users to paid subscribers on mobile is working acrobat.
Acrobat mobile <unk> grew over 70% year over year and.
And lastly, our document cloud enterprise business continues to do well with key wins, including medallion, Mercedes Benz Raytheon weaker Europe , Shimizu and United Health.
We've responded to the needs of professionals by adding a broad array of features to our flagship applications across both creative cloud and document cloud and we're attracting millions of new users, including a significant number of non pros with acrobat and creative cloud Xpress on web and mobile are increasing breadth of offerings not only expand our ability to reach new.
New customers, but also enable us to further a personalized pricing across our offerings. Starting later in Q2.
I'll now pass it to Enel.
Thanks, David Hello, everyone.
Over the last two years the digital economy has exploded as we've experienced a profound global shift in how we work learn and play.
Telehealth visits are now the norm rather than the exception.
Customers and businesses are engaging in transacting digitally.
Online shopping is now essential in the U S is on track to surpass a trillion dollars in E. Commerce sales this year. According to the Adobe digital economy index.
To succeed companies must make the digital economy personal with powerful digital experiences that can be personalized to millions of customers in milliseconds.
Adobe experience cloud is a comprehensive set of integrated AI, driven applications and services to help companies deliver experiences across all aspects of the customer journey.
At its core is the Adobe experience platform with billions of customer profile.
Our Adobe experience cloud application spend the entire customer funnel from acquisition to monetization to retention across content and commerce customer journeys data insights and audiences and marketing workflow.
We have made a dramatic transformation to deliver AI driven services with over 80% of experience cloud customers now using Adobe sensei, our industry, leading AI and ml framework to power experiences for their customers.
Last week, we hosted Adobe summit, the world's largest digital experience conference.
We launched exciting new experience cloud technology and heard from executives from some of the world's most interesting and innovative brands, including BMW, Nike Prada, Real Madrid, and Walgreens Boots Alliance.
We enable the entire event using experience cloud personalizing the experience for our global attendees.
Content has had over 22 million views to date underscoring the significant interest and demand for digital transformation.
We continue to drive outstanding growth in our experience cloud business.
The pandemic has caused brands around the world to realize the critical need for digital transformation.
And we're adding new logos, while continuing to focus on driving significant value realization for our existing customers.
In Q1, we achieved $1.6 billion in revenue.
Subscription revenue was $932 million for the quarter, representing 22% year over year growth on an adjusted basis.
Q1 highlights include a slate of exciting product innovations, including new real time customer data capabilities with the integration of Adobe real time, CDP and Adobe target.
Adobe real time, CDP is used by a large and growing base of customers such as Dick's Sporting goods Henkel Panera Real Madrid service now and Verizon.
New cross cloud integrations, including a unified workflow between where current creative cloud enterprise and experience manager asset that powers, the end to end content creation and delivery.
Strong performance in Adobe experience manager emphasizing the need for unified content management to meet the ever increasing demand for content at speed and scale.
Adobe is uniquely positioned to help customers across the content supply chain.
New Apis that provide developers with the flexibility to create customized user experiences on top of Adobe Commerce.
The general availability of Adobe experience cloud for healthcare to deliver personalized health care experiences.
And expanding partner ecosystem, including a partnership with one trust to simplify consent management. The next phase of E Commerce integrations, with Fedex, Walmart and Paypal as well as a collaboration with the weather company.
And key customer wins, including cloud strike Daiichi Telecom IBM Jaguar land Rover, JP, Morgan Chase, Mcdonalds and United Health.
Our experienced cloud product innovation global customer base and vibrant partner ecosystem are driving our continued success.
We are executing across our entire go to market motion and continue to receive strong industry recognition.
This quarter Adobe was named a leader in three industry analyst reports focused on core customer experience management segments, including Gardner's Magic quadrant for digital experience platforms.
IDC market scape for Cdp's for front office.
And the Forrester wave for digital asset management.
Then over to you.
Thanks, Enel today I'll start by summarizing Adobe's performance in Q1 fiscal 2020 tail highlighting growth drivers across our businesses and I'll finish with targets for Q tail Adobe.
Adobe strong financial results demonstrates the companys ability to execute in a challenging macroeconomic and geopolitical environment.
Across our business, we are attracting new customers signing up transformational deals growing a recurring book of business and seeing emerging businesses ramp and in some cases reached escape velocity we.
We are witnessing the digitization of everything and Adobe's products offer customers access to a digital future underpinning how they live and work our investments in products marketing and a data driven operating model are continuing to drive adobe's growth.
In Q1, Adobe achieved record revenue of $4, $2, 6 billion, which represents 9% year over year growth or 17% on an adjusted basis.
Business and financial highlights included GAAP diluted earnings per share of $2.66 and non-GAAP diluted earnings per share of $3 37.
Digital media revenue of $3, one 1 billion.
Net new digital media <unk> of $418 million.
Digital experience revenue of one point or $6 billion.
Cash flows from operations of $1 77 billion.
<unk> was $13 83 billion exiting the quarter.
And repurchasing approximately three 8 million shares of our stock during the quarter.
And our digital media segment, we achieved 9% year over year revenue growth in Q1 or 17% on an adjusted basis, we exited the quarter with $12 $5 7 billion of digital media <unk>.
Global demand for digital content continues to explode and with the strength of Adobe's product innovation and our data driven operating model or net new digital media <unk> in Q1 grew on a year over year basis. After factoring out the additional week in the year ago period.
We achieved creative revenue of $2, $5, 5 billion, which represents 7% year over year growth or 16% on an adjusted basis, we added $315 million of net new creative IRR in the quarter.
First quarter creative growth drivers included.
Strong creative engagement and retention across individual and SMB segments.
New customer demand across large organizations small and medium businesses driving growth in our creative cloud for teams offering which was the highest Q1 on record.
Sustained growth of subscription licensing for individual flagship applications, such as photoshop illustrator and premiere as well as strength in our Adobe stock business.
And enterprise adoption of new collaboration capabilities, including frame IL as well as our three D and immersive applications.
We're also pleased by the adoption, we see in some of our newer initiatives such as creative cloud xpress substance as well as acrobat Photoshop and illustrator on the web.
We are driving strong usage growth and have already attracted millions of monthly active users to our cloud native offerings. We expect these businesses to be drivers of future <unk> and revenue growth.
Adobe achieved document cloud revenue of $562 million, which represents 17% year over year growth or 26% on an adjusted basis, we added $103 million of net new document cloud <unk> in the quarter, surpassing $2 billion and ending IRR growing at 29% year over year.
Document cloud continues to be our fastest growing business demonstrating that our strategy of accelerating document productivity as working and reflecting how acrobat and PDF are essential to the way people work and a digital first world.
First quarter document cloud growth drivers included customer demand for acrobat subscriptions, the strongest Q1 on record.
New licensing and renewal for acrobat for teams offering in the SMB segment, both on Adobe Dot com and through our reseller channel.
Momentum in Adobe sign with strong year over year growth of signed transactions within acrobat.
Strong demand for our PDF solutions on mobile.
And continued momentum with our frictionless onboarding of new customers through acrobat web with a growing approximately 90% year over year.
Turning to our digital experience segment.
In Q1, we achieved revenue of $1, <unk> 6 billion, which represents 13% year over year growth or 20% on an adjusted basis.
Digital experience subscription revenue was $932 million, representing 15% year over year growth or 22% on an adjusted basis.
When we look at the quarterly sequential revenue growth, we continue to see acceleration as our strategy of delivering personalization at scale is resonating with enterprise customers.
First quarter digital experienced growth drivers included new logo acquisition across our solutions Stu.
Strong customer retention as a result of investments we've made in product innovation greater value realization and customer experience.
Larger deal sizes in our work from business traction upselling customers to new cloud native solutions and.
And momentum with our content and commerce customer data platform and customer journey analytics offerings.
In Q1, we continued to increase in investments in initiatives that will drive long term revenue growth, including ramping head count across R&D and sales capacity traveling facilities remained at lower levels in Q1, but we're increasing facilities utilization and travel in Q2, as we resume in person meetings with customers.
And partners.
Adobe's effective tax rate in Q1 was 18% on a GAAP basis, and 18, 5% on a non-GAAP basis.
The tax rate came in higher than expected, primarily due to less than expected tax benefits associated with stock based compensation.
Our trade DSO was 36 days, which compares to 38 days in the year ago quarter, and 42 days last quarter.
<unk> grew by 19% year over year to $13 83 billion exiting Q1 benefiting from enterprise bookings.
Our ending cash and short term investment position exiting Q1 was $4 seven zero billion and cash flows from operations in Q1 were 177 billion.
We repurchased approximately three 8 million shares in Q1 at a cost of $2 1 billion included in this purchase was the partial settlement of an accelerated share repurchase entered into during Q1 to repurchase shares at an aggregate cost of $2 4 billion. The final number.
Of shares to be repurchased under the ASR will be based on a discount to the volume weighted average price of our common stock during the term of the agreement with the final settlement and delivery of incremental shares to Adobe scheduled to occur in early Q3.
These share repurchases are part of the previously announced program under which we currently have $10 7 billion remaining of our $15 billion authorization that was granted in December 2020, and goes through 2024.
Before we get to our Q2 targets I wanted to discuss the impact of the devastating situation in Ukraine.
Earlier this month Adobe announced the cessation of all new sales in Russia, and Belarus and.
In addition, we've made the decision to reduce our digital media are balanced by 75 million, which represents all four existing.
<unk> business in these two countries.
While we will extend subscriptions automatically in Ukraine. During this period and continue to provide digital media services, we reduced <unk> by an additional $12 million, which represents our entire Ukraine business.
This results in a total a reduction of $87 million and unexpected revenue impact of $75 million for fiscal 2020 to the.
The impact toward digital experience business is de Minimis.
For Q2, we are targeting total adobe revenue of approximately $4 three 4 billion.
Net new digital media <unk> of approximately $440 million.
Digital media segment revenue growth of approximately 13% year over year or 14% in constant currency.
Digital experience segment revenue growth of approximately 15% year over year or 16% in constant currency.
Digital experience subscription revenue growth of approximately 17% year over year or.
Or 18% in constant currency.
Tax rate of approximately 20% on a GAAP basis, and 18, 5% on a non-GAAP basis.
GAAP earnings per share of approximately $2 44.
And non-GAAP earnings per share of approximately $3 30.
As a result of the lower than expected deductions from stock based compensation, our effective tax rate for fiscal 2022 is now targeted to be 19, 5% on a GAAP basis, and 18, 5% on a non-GAAP basis.
As we look towards the back half of the year, we expect quarterly sequential revenue and EPS growth in Q3 and Q4.
In digital media, we expect strong second half performance across document cloud and creative cloud, including continued strength of emerging businesses like acrobat web frame Io substance and creative cloud Xpress.
In addition, we expect our contributions to increase sequentially in Q3, and Q4 from a new offering and pricing structure, which starts late in Q2.
We expect digital experience bookings to show continued momentum in the second half with a traditional strong Q4 finish.
We will continue to invest in product innovation sales capacity marketing awareness and demand generation, given our immense market opportunity.
As the World Reopens, we expect to increase our travel and facilities expenses.
In summary, I am pleased that Adobe delivered another record quarter in Q1 with sustained growth and world class profitability.
Obi continues to show its resilience through unprecedented circumstances that all companies face today and I am confident we will emerge stronger we are on track for another year of strong financial performance.
<unk> back to you.
Thanks, Dan.
This is a transformative time at Adobe.
We're engaging with hundreds of millions of customers globally from individuals to the largest enterprises launching new applications for new audiences and bringing our flagship category applications to new surfaces and platforms, while increasing collaboration capabilities across our solutions.
Adobe is a winning strategy applied to an exceptional opportunity.
We're a leader in the digital economy with Adobe Creative cloud document cloud and experience cloud, which combined have a total addressable market of 205 billion.
Few companies can consistently deliver technology innovation successful transformation across new categories and business models and.
And abroad ever growing base of customers and partners.
I'd like to thank our 26000 employees for their continued dedication and unwavering focus on delivering customer innovation and inventing the future of digital experiences.
Thank you we will now take questions.
Operator.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment.
So please limit yourself to one question before re entering the queue again that is star one we will take our first question from Brent Thill with Jefferies. Please go ahead.
Good afternoon curious if you could shed any more color on the new pricing structure.
And what that means and Sean you beyond Ukraine is there anything else you are seeing in the broader economy, that's different than <unk> seen historically thank you.
So Brent as it relates to what we have seen first in terms of the macroeconomic situation.
We actually continue to see strength, we were pleased with our strong Q1.
Certainly I think the last few weeks of the quarter you saw some impact in Europe .
Specifically as it related to what happened.
In terms of the terrible situation in Ukraine, but I think we continue to see growth around the world and I think on the first one as you know and then I'll have David also add some color. The last major comprehensive overall that we had for our pricing was in 2017 and you've seen since then.
A number of different initiatives that we have in offerings that we've introduced whether it was the <unk> offerings. What we have done on the web what we've done in mobile what we've done around creative cloud Express. So I think it was time to take a very comprehensive look which David has done and I think directionally, what I would say is that.
We want to continue to attract hundreds of millions to the platform, but we also want to get value for that tremendous innovation that we've provided David maybe you can add a little bit more yeah happy to so as Sean had mentioned in the last pricing update an adjustment we made was in 2017.
Since then we've added a lot to our existing offerings that we've added new applications, we've extended broadly.
Broadly across multiple services, we've doubled down on collaboration.
We've added millions of stock assets and thousands of funds.
And we've also introduced new offerings, obviously acrobat across.
Web and mobile has been growing for the last few years and you heard us talk.
Year or two you've heard us talk about that in the prepared remarks.
But also <unk> is now in market across web and mobile and the early success, we're seeing with these new offerings across web and mobile and across acrobat and CTX.
It has really been the catalyst for these pricing adjustments that were looking at doing.
Yes.
Introduced the right value with the right Onboarding experience and the right price pricing to attract millions of new subscribers and they provide us the opportunity to rightsize the value where engagement and usage is highest in our existing customer base. The.
The impact of this we think for Q2 will be fairly minimal because it takes time to roll this out globally and it takes time for.
Customers to go through their renewal cycles, where their prices change, where we expect it to have a more significant impact in build out in Q3 and Q4.
Thank you.
Thank you we'll take our next question from Alex Zukin with Wolfe Research.
Hey, guys.
So maybe.
Thank you.
Brent.
And I would ask the question a different way if you think about.
Adobe has been around for a long time through many business cycles.
As we as you look at the pipeline of activity for the back half of the year and you think about the.
Yes, how investors should think about it in a more recessionary inflationary environment can you just give us some color around how you think about the pipeline development. How do you think about any changes with respect to the shape of the year and seasonality.
Maybe just a financial question I think there is just a better understanding of how the mechanics of the IRR.
Saving up for Q2 are you taking that.
440 is that guide inclusive of the impact of the Russia, Ukraine adjustment.
Is that taken out of the prior year, just a little bit more context would be helpful. Thank you guys.
Sure Alex.
There were multiple questions in that so let me maybe first.
To your point, which I agree with when you think about the rhythm of the business and maybe the seasonal cadence.
Clearly that's being impacted by whether it's the external events as it relates to the pandemic or more recently the water in Ukraine, but big picture as we look at whats happening in terms of customer adoption and what's happening in terms of the excitement. There is no question that digital as a tailwind and we will continue to be a tailwind.
And our perspective is that what happened was the pandemic actually put a spotlight on the importance of everything we're doing whether its customer engagement, whether it's content or document productivity and so as you think about what happens seasonally.
Certainly I think we would continue to see strength in Q3 and Q4 then.
To that in terms of the second half momentum that we would see.
<unk>, even Q1, we had a strong start so from our perspective.
Some of the seasonal cadence might have changed but the secular trends in terms of up and to the right. We actually don't see any impact associated with it I think your second question as it related to what happened specifically on Russia and Belarus.
Ukraine since the digital media or the book of business, we made the decision to reduce it and so I think what youll see on the data sheet is what our exiting Q1 <unk> and then another number would just takes out all of the existing book of business for those three countries Youll see.
The impact on revenue certainly in Q2, Q3, and Q4, because what it means is that the revenue that we would have been able to collect but again in the Grand scheme of things as you can see it's a fairly small as it relates to the business. So I think our targets for <unk>, specifically as you said, yes, it's impacted.
By the.
Our business in those countries.
But overall business is strong and we feel optimistic I think in many ways the <unk>.
<unk> really is that the new growth initiatives that both Dan and David talk to they're starting to really show traction and so.
We expect to see strength in the second half of the year and certainly beyond that.
Got it thank you guys.
Thank you we'll take our next question from Keith <unk> from Barclays.
Okay, Great Hey, Thanks for taking my question here Dave.
David maybe for you great to see the the creative cloud Xpress launch.
Recently I guess the question for you is how do you feel the product differentiates from some of the competition out there and maybe without going too deep how do you plan on investing in that product specifically to continue year lead.
Yes. Thanks for thanks for the question, we're very excited about the launch of FCC X, but just to up level for a minute and as a reminder for everyone on the call.
Been talking about the communicator segment for years, both as it relates to non pros and as it relates to the creator economy.
We've talked about in the past that our mobile and desktop apps have hundreds of millions of registrations, which is clearly going beyond our creative pro base and we've built a significant business. In fact, we believe that we're the largest provider of creative tools in the world when measured by by revenue across all of our segments pros communicators.
And consumers.
The introduction of the introduction of creative cloud Xpress, though represents a lot of our learning over the last few years, starting with the business model, It's a freemium business model.
Predominantly web and mobile so it's zero friction for Onboarding customers and users are seeing success.
In minutes not not ours.
In addition to that we have.
And unprecedented library that we bring to creative cloud Xpress, we have $175 million stock images and videos. We have 20000 fonts largest spot library online available and thousands of templates that had been really carefully crafted and designed by some of the best creators in the world and this is important because at the end of the day, if youre going to be a content <unk>.
Creation tool the content you mixed together is a fundamental differentiator in terms of what you're creating and what you're producing and we feel very very good and confident about our ability to continue to expand this library and just make sure that what people are mixing to create their output is world class, but of course, we also have the power of Adobe If you look.
What we're starting to do and this gives you a hint of where we're going with our quick actions across Photoshop quick actions Premier quick actions acrobat quick actions that have started to make their way into into creative cloud Xpress. We feel really good about the pipeline of innovation, we can bring from our decades of leadership in across all of our <unk>.
<unk>.
Directly into creative cloud Xpress and then of course, we are we are looking for ways to accelerate we acquired a company called content calendar that we've announced will be the foundation of rich content publishing and scheduling.
For creative cloud Xpress users and then lastly, the work we've been doing over the last many years around the data driven operating model that Dan talked about in his opening has been invaluable here. So we are finding and we are on boarding new users that would not have typically and interacted with adobe through their intent based search and.
And the result is a little bit of what we alluded to it we've seen great traffic, we're seeing millions of monthly active users just a few months into into the launch we have an NPS over 60 at this point and the product. So we're really bullish on the start of where we are and if you look at the long pipeline of Adobe only innovation maybe to your question.
Super excited about that and the last thing I'll say here is that don't forget the opportunity here is to drive millions of new users into our franchise, but the opportunity is also to drive high engagement and usage within our core Cc base and take what is already been a very very strong retention curve, there and continue to.
Drive engagement and retention of our cc users as well.
Very helpful. Thanks, guys.
Thank you we'll take our next question from Sterling Auty with J P. Morgan.
Yeah, Thanks, Hi, guys.
For clarification.
With the changes there is no update to the annual guidance you typically don't but I think investors want to understand how the impact on the negative side from the changes to IRR for Russia, and Ukraine impact that annual guide versus the positive uplift that youll get from the from the pricing structure.
Thanks.
Yes, Sterling I think.
Otherwise, it's really still early in the year, but I feel great about the way we've been navigating all of the external.
Issues that have come and it was a strong Q1 as we prepared for this call. We felt it was important to share with you the impact that we know of things, whether it's the revenue or IRR for Russia, what's happening on EPS as it relates to the tax rate.
As well as to provide some more of the growth drivers, but I netted out by saying, while we are not updating the annual targets as you pointed out we're really optimistic on the significant number of growth drivers that we have and we will share more throughout the year because we still are all navigating what is.
Considerably unpredictable situation.
Strong Q1, however, and the things that we control we feel excellent about.
Understood. Thank you.
Thank you we'll take our next question from Jason <unk> with Griffin Securities.
Thank you good evening.
Jonathan are referring back to the analyst meeting in three months ago.
New and David used the term.
Product led growth and I was wondering if you could elaborate on that because arguably when you think about the company over the last 30 years or more.
You've always had effect been product led growth.
How are you thinking about that differently now in terms of a concept or various executable.
For that and then for Dan could you talk about how youre thinking about your head count growth relative to your expense growth.
For the year you onboard at over 500 employees during the quarter.
We finished Q1 with a record number of open reqs.
How are you thinking about.
Filling those positions either to compensate for the increase in attrition you had in fiscal 'twenty, one versus normal organic growth that you otherwise would have done anyway.
Yes, Joe when I think about the transformative things that we've done in the company certainly the move to subscriptions the entrance into digital marketing.
What we've done with data driven operating model to drive.
The sort of financial cadence of the business day.
Absolutely bubble to the top but I would say those actually go off.
In comparison to the excitement that I feel about what product led growth can continue to do when you have hundreds of millions or billions of people using your software a good example of what we've done is the constant innovation that we're delivering on the document cloud side and I think David referred to some of the statistics whether it's.
Doubling what we see with web traffic and really being aware of the Intel based approach that people want when they come on the web to accomplish document actions, what we're doing in mobile and doubling it and I think product led growth just really relates to <unk>.
Ensuring that all of our product teams have information at their fingertips as to how people are really using it. So that we can rapidly iterate in terms of what customers want and delight them and I think on the creative cloud to add to what David said to socket as well.
That means with creative cloud Xpress is as you have these millions of users we're constantly understanding where the search.
Traffic is how do you improve it and it's just a new way of liberating all of the product led product teams to focus on what's truly important and truly needle moving as far as customer interest and customer sentiment and its something that David has pioneered so I'll have David out a little bit more but I think the impact.
How we serve customers the NPS and being able to continue to recruit and retain is significant yes, I think Sean you covered most of it just a couple of things to add.
As you correctly point out.
We joke internally that actually John and Chuck created product led growth with distributing the free reader and then sort of upselling people from there too.
To the acrobat.
<unk> and so throughout our history had this idea in sense of how you drive utilization and usage and engagement and then drive that to convert to users I think what we are where we are right. Now is I think is an exciting inflection point, where as Sean mentioned, we are seeing a lot more activity and engagement on web were seeing.
A lot more activity and engagement on mobile.
And that lets us have better and more seamless onboarding. So we can use that.
Everything we've learned around data to drive better.
Based search and reach audiences that frankly, we werent able to reach before because the onboarding experience the actions to success and then what we do beyond that.
As in minutes not hours, maybe one last thing before Dan comments.
I think both Dan and David talked about retention and engagement during the quarter and to give you a little bit more color in terms of that we look at churn rates. We look at reseller renewal, we look at 90 day cohort Retentions and in all of those I think as a result of the activity that we're doing on the.
Product teams to help improve we're seeing improvement.
And getting to rates on all three of those that are better than they've ever been even prior to the pandemic. So I think that's again. Another example of what gives us confidence in our offerings and our innovation.
Going forward.
And then Jay just to come to your second question.
We talked about the business performing well when we talk about digital content and data increasingly driving economic growth going forward in a world where everything is going digital and that means we have an immense market opportunity in front of us greater than $200 billion.
In 2024 and significantly larger than that as we look forward. So our long term growth opportunity at Adobe is not opportunity constrained and so when we think about our leadership and product positions. They are built on the back of a very strong innovation engine at the company. So we're going to Orient towards.
Growth, we're going to continue to invest in R&D and the sales muscle to scale our businesses over time and continue that leadership in the markets that we are.
Participate in but we're going to do what we've always done along the way is do it in a disciplined way. So we're marrying the investments we make with the opportunities as they materialize and grow in a very profitable way and so you can see the company's history in terms of strong profitable growth and I would expect our tracker to <unk>.
Over the long run.
Thank you.
Thank you we'll take our next question from Keith Weiss with Morgan Stanley .
Excellent. Thank you guys for taking the question actually I had a couple of clarifications.
Was hoping to ask you guys about.
Sure Anthony earlier in the call you made some comments about perhaps seeing a little bit of weakness in Europe at the end of the quarter can you dig in on that a little bit like where we are in the business did you see that weakness and that persist into Q2.
Was it just kind of more and more temperamental. That's number one number two on the I know, you're not giving full year guidance, but when we think about.
The operating margin outperformance in Q1 is the commentary that that's going to be given back later in the year or is it just sort of a ramp up gets pushed out so the savings kind of accrue throughout the full year and then clarification number three when you guys gave the original $1 9 billion net <unk>.
<unk> guidance for FY 'twenty Q did you guys already contemplate these price increases or was that the or the price changes where the price changes already in that $1 $9 billion guide. So that's my three clarifications.
Sure. So Keith maybe I'll answer the last question first and then talk about it which is.
As we were entering the year and what we talked at the Fab meeting if you actually I think we also got a couple of questions as it relates to what we were going to do on pricing and we alluded to the fact that we're constantly looking at it and so while it was something that we were working on we actually just pretty recently finished.
The entire effort. So we didn't have it finalized, but we always thought that it was time with the new offerings to actually locate the pricing structure as well and so.
The different amount and the materiality of that we will know as we go through the process, but directionally. We knew that we were going to be looking at pricing more exhaustively I think in terms of the clarification of what we saw.
When the war broke out.
The last couple of weeks that impact is not just felt in Russia, and Belarus, and Ukraine, Youll see a little bit of that traffic across the region. So that's really all I was alluding to and we saw strength and that strength continued in the U S right through the quarter and so you know not unsurprisingly, we saw little impact. So that's all I was referring to.
Is it related to the European situation and did you have a third question Keith.
Second one was on your figure on operating margins.
Your third question on operating margin. So let me break it up into three time periods talk about Q1 briefly let's talk about FY 'twenty, two and beyond so as we think about Q1 clearly omicron.
<unk>.
A context around that quarter so.
Our investments in things like travel facilities Werent as robust as originally contemplated and you saw a little bit of uplift from a margin structure standpoint in Q1, when we take a step back we talked about the growth profile and the leadership of our product positions continuing to invest to scale, our businesses and a lot of those investments being <unk>.
Andy and sales oriented will continue to do that and the targets that we set in FAA day, a few months ago.
Implied in those in that framework is an operating margin for the year and so I think you'll see that unfold throughout the rest of the year and then longer term, we've talked about the significant opportunities facing the company and our ability to capture that with our leadership position as the world grows increasingly digital and as we can.
Grow and scale this business youll see the benefits of that over time layer into the operating margin as we continue to do it now.
Strong profitable and disciplined way.
Excellent. Thank you so much guys.
Thank you we'll take our next question from Tyler Radke with Citi.
Yes, thanks very much for taking my question.
Just going back to the price increase and pricing changes.
Obviously.
I'm sure, you'll you'll be sharing a lot more specifics as we go forward, but philosophically just how are you thinking about the pricing changes at the high end versus the.
Kind of entry level creative products.
And particularly just just curious how you're evaluating those pricing changes in the context of the competitive landscape. Thank you.
So I think philosophically the way we are looking at it I'll repeat what I said earlier, which is we haven't done a comprehensive look at that in multiple years.
And Directionally I think the significant value that we've added has to do with people, whether youre in businesses or whether youre.
The user of the entire apps I mean, we continue to add new apps to the what's called the Cc all apps platform and Directionally, where just say that as the area, where we have to look at all of the increased value that we have.
This is not driven in any way shape or form by any competitive response. So let me be categorical about that this is raised by you know we continue to attract billions.
Of <unk>.
People to the platform in terms of the interest and with all of the new offerings that we have again as David said across web across mobile across.
The browsers, we just want to make sure that as we continue to expand the offerings. We're looking at the pricing in a good way. So the value that we've added to whether youre in teams with collaboration or whether you are to businesses.
<unk> to be a motivator for us to look at the prices as well as all the new apps that we've added so hopefully that gives you color. Let me also backup and say you know.
This is for us all really about customers and delighting customers, but because we had an earnings call. We said you know as this gets rolled out we at least wanted to give you some heads up because otherwise some of you would say why didn't do at least alluded to it as David said this doesn't have an impact in Q2 really it's a pretty small impact.
Was the rationale and thinking associated with it and we will certainly roll this out with customers first and then we will share with you more of what the impact is but that's the way we look at how we move the business going forward.
Great and if I could sneak in a follow up just on the digital experience side.
Obviously pretty strong growth here.
Q4.
And the first part of the year above 20% on adjusted basis, I guess was there any kind of onetime.
Factors that drove that outperformance and as we think about the guide for the next quarter.
And the deceleration implied just anything to call out there. Thank you.
Yes.
Thanks for the question, we're pleased with the momentum we are seeing in the digital experience business with 22% growth in.
Subscription on an adjusted basis.
The market opportunity is huge over $100 billion of Tam.
The pandemic, obviously put a spotlight on it in terms of the urgency we're seeing it continue to grow in terms of.
Customer demand customer interest at the board level and at the C level and we are in a really strong market position with what we've built with Adobe experience platform and the native apps like customer journey analytics and CDP that we built with that so overall, we feel really excited about.
The path forward and we just had the summit conference last week excellent pipeline building event as well as a chance to showcase our product innovation. So we expect this to continue through to.
In terms of all the momentum.
Thank you.
Thank you we'll take our next question from Keith Bachman with BMO.
Hi, Thank you.
Paul alluded a couple of clarifications and could you comment on what.
The inorganic contribution was this quarter and where it.
Where it manifest held for instance frame Io.
It was the contribution there.
Secondly, when you think about I just want to clarify on the IRR.
Write offs so to speak the comment was that you are.
Ceasing all new incremental business.
But are you going to continue to get our.
Payments in Russia, or from Russia, Belarus from existing business that Mike.
Actually contribute to <unk> a little bit.
Confused on that one.
And then in the spirit of Keith Weiss I'm actually going to ask the third clarification shutting in the past you've said that in.
In the creative side.
New subscribers was the most significant contributor to growth.
And I just wanted to try to understand given.
More competition, perhaps in the lower end of the market is that still true. Thank you.
I'll answer the first the third one first Keith has done does which is if you look at the growth the unit growth is being driven by <unk>.
Single App, such as new subscribers and driving to it so that trend in terms of continuing to drive <unk>.
<unk> unit is definitely part of how we think about it I'll answer maybe one part of also how you have to think about it which is when you think about Russia and Belarus.
We have the IRR, which is the book of business, but there is no way to really get payments and with all of the sanctions that there. What we have factored is that book of business, because we are not going to be getting payments from Russia that.
As the impact that Dan alluded to which is the $75 million for the rest of the year. So in addition to seizing new payment in addition to stopping.
Stopping new sales what do you have to realize is for a service that exists as a SaaS based service you are unable to collect payments and so we've reflected that impact as well in the particular geographies and just coming back to your last piece Keith on frame.
Now that it's part of the bus business, we're not going to be breaking this out we talked about the momentum in the business it's great.
The team's doing really well the number of deals the average deal size business has a lot of momentum around it and we talked about the great collaboration technology that exists there and now that it's a part of the business, we won't be breaking it out explicitly.
Okay. Thank you I'll cede the floor.
Thank you we'll take our next question from Kash Rangan with Goldman Sachs.
Okay. Thank you very much congrats on the quarter does the numbers look quite good for Q1, so Jonathan I'm curious the shifting seasonality generally when you find more seasonal second half.
That's generally a sign of maturity of the market or macro factors just product transition factors.
When I look at your second half have relatively easier comps for DM.
And then you have the pricing optimization.
So we netted all out.
How do you feel about the business in the second half relative to going into the first quarter.
We have all these macroeconomic concerns, but narrowed the positive positive as against.
Better than negative against the positives how do you feel today versus three months back about the rest of the fiscal year. Thank you so much.
Thanks, Kash I mean, two netted out I definitely feel more positive about our business moving forward than I ever have because.
If you take a step back and look at all of first look at Q1, we had a strong Q1, we clearly beat our targets.
In what is.
Perhaps the most unpredictable situations that exist in the world. So we feel really good about Q1, we feel really good about the new initiatives that both.
In document cloud and creative cloud and experience cloud that David and Enel spoke to.
I did allude to the fact that when you think about the seasonal cadence and the rhythm of the business certainly some of that is impacted and perhaps the thing that you're alluding to cash was in Q2 of last year. There was sort of a catch up as a quote unquote small and medium businesses came on come back online and so you have to just factor what <unk>.
It isn't but both in terms of the revenue growth in <unk> for Q3 and Q4.
As it relates to getting more similar to Q1 as well as the IRR. We're optimistic about the second half. The only reason we didn't talk about Q2 is because we actually give specific guidance and targets for Q2, So don't take that as anything as opposed to we've given your targets for Q2, and we are trying to give you color on what happens in Q3 and Q4.
So hopefully that helps cash and on the Dx side since there have been fewer questions on the Dx side I mean, what we have done summit was really exciting the amount of new announcements that we've done there.
Every person that I talked to in the C suite continues to want to.
We really focus on digital transformation and customer experience management I'm excited I'm back on the road again it feels great. We have employees back in the office and facilities people want to meet and digital engagement is top of mind. So across all three of our businesses. We didn't talk about the document business 100 million.
And <unk> for the quarter and a $2 billion book of business really good adoption of our new functionality, whether it's on the web as well as a unifying signed with acrobat, which was a big movement that we're trying to do so I think all of those are positive I think the one impact that again, maybe Dan can just touch on it certainly.
No.
It doesn't impact our core business, but.
The EPS you just have to factor some of the revenue and other considerations that happened but.
For the functional part of the business I feel really good.
Yes, Sean.
Good job talking about the fundamentals of the business.
The other piece or the transient effects and I would point to two of them. So for the war in Ukraine.
We derisked the profile around the situation.
That's the prudent thing to do to be conservative in situations like this so that's what you see.
In the $87 million reduction in <unk> as well as the $75 million reduction from a revenue standpoint Q2 through Q4, so if I take that revenue and I flow through the P&L, that's going to be about a four cent a share headwind per quarter for.
The balance of the year Q2 through Q4.
From a tax standpoint, we talked about an 18, 5% non-GAAP tax rate.
That's a one five point change versus where we were at a day, if I were to roll that through the P&L. That's about six tenths of a share six cents a share per quarter throughout the year, we were able to overcome that in Q1, and then when I look at the share repurchase activity.
Clearly the company took advantage of the current environment and.
That's going to create.
<unk> <unk> a share benefit each quarter this year versus where we were at half a day and so when I net all of that out on a go forward basis, you've got about an H H.
Per share headwind in each quarter and again like we said in Q1, we were able to overcome that headwind in Q1.
And deliver above.
The expectations that we had set and we're going to continue to orient towards growth, we're going to invest to lead but if there's opportunities to do it in a disciplined way and overcome it on a go forward basis, we'll take it a quarter at a time and let you know what we see.
Thank you Dan and Chuck just one final one.
Do you want to talk about the document cloud.
It slowed but.
I don't have a fall of 2011, you made a very bold transition to creative cloud subscription you in fact outline that you'd have a target of 4 million subscribers in fiscal 2015, which seemed quite visionary back then right. So as you look at the inflection point growing the company is going through what are your aspirations for creative cloud Xpress, if you're able to measure it and its subscribers or bigger.
Or a business would you like it to be.
What would be similar prognostication as you look into the next few years and Thats. It for me. Thank you so much.
Cash at the <unk> meeting, we talked about what the overall addressable market opportunity is but I really feel like we can get billions of users to use our product and then they will be the spectrum of people, who will be paying us on a subscription business as well as.
Others, who will perhaps take advantage of some of the premium offerings that we have we're starting to see that kind of adoption with the document cloud certainly right, where you have half a billion people who've used our.
Our readers and other products, but I think in terms of creative cloud Xpress My hope and my aspiration is that every single person who has a story to tell users. Some part of the creative cloud Xpress, we're off to a great start there Kash I think on the differentiation as David said.
The platform. We have every single piece of technology that we need to deliver a great compelling experience and now we're also world class at making sure that we capture search base intent. So we want to anticipate what people want to do with creative but I would be disappointed if that doesn't just continue to be a huge growth.
Area in terms of new users to our platform.
Operator, we're a little past the top of the hour, we'll squeeze in one more question and then wrap up thank you.
Thank you we'll take our next question from Michael <unk> with Wells Fargo Securities.
Hi, there. Good afternoon. Appreciate you squeezing me on we've been expecting a return to normal expense profile Q1 operating margins were actually flat relative to last year anything you else you can add just around the Q1 margin results.
As we think through the puts and takes between that returned to a more normalized expense profile in some of the product and pricing efforts you've mentioned.
This year any way to think through if price uplift can help offset some of that expense normalization youre expecting thank you.
Yes, sure. So if I were to look at where we landed in Q1 and we talked about.
Not fully investing from a travel and facility standpoint, because of the omicron environment and as I look forward to the Q2 guide and the operating margin.
That is implicit in that guide and I were to break it out into some several buckets.
There's going to be an influence from.
The transient.
Transient effects of the Russia situation, we're going to.
Due increased hiring to invest for future growth.
Get full quarter impact from our merit standpoint.
Instead of a one month impact and then we will start to see the reopening.
<unk> start to layer back in those are the four buckets that bridge you from Q1 to Q2 and I would say each of those four buckets is roughly equally weighted and so I think that's what gets you to a more normalized run rate as we look into Q2 and the back half of the year.
And since that was the last question I wanted to again. Thank you all for joining US today. We're pleased with the performance. We think we had a really strong start to the fiscal year across all three of our businesses to creative cloud document cloud and experience cloud.
And more more than that I think our ability to continue to delight customers and deliver on the innovative roadmap gives us a lot of confidence associated with the new initiatives, taking stock in contributing to the future growth at Adobe.
The spotlight I believe on digital will just continue.
And as we get back to more normalcy, I think that'll only all go well for both Adobe and our customers. So.
And the successful summit that we just organized I think is another indicator of the interest that exists in our solutions. So thank you for joining us today, and we look forward to sharing more as well.
We go through the year. Thank you.
That concludes the call thanks, everyone.
Thank you that does conclude today's conference. We thank you all for your participation you may now disconnect.
Okay.
Okay.