Q2 2022 Adobe Inc Earnings Call
Yeah.
[music].
Good day and welcome to the Q2 FY 'twenty to Adobe Earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Jonathan Bock V. P of Investor Relations. Please go ahead.
Good afternoon, and thank you for joining us on the call today are Samson under Ryan Adobe as Chairman and CEO , David Wadhwani President of digital media and all chuckle.
Chuckle about the president of digital experience and Dan <unk> Executive Vice President and CFO .
On this call, which is being recorded we will discuss adobe's second quarter fiscal year 2022 financial results you can find our Q2 press release as well as pdfs of our prepared remarks in 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 June 16th and contains forward looking statements that involve risks uncertainty and assumptions.
Actual results may differ materially from those set forth in these statements.
For a discussion of these risks you should review the factors discussed in today's press release and in Adobe's SEC filings.
On this call, we will discuss GAAP and non-GAAP financial measures are reported.
Results include GAAP growth rates as well as adjusted growth rates in constant currency.
During this presentation adobe's executives will refer to constant currency 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.
Adobe had a strong Q2, driven by the secular shift to digital that is transforming how we live work and play.
In Q2, we achieved a record $4 $39 billion in revenue, representing 15% year over year growth.
GAAP earnings per share for the quarter was $2 49.
And non-GAAP earnings per share was $3 and 35.
In our digital media business, we drove strong growth in both creative cloud and document cloud achieving $3 2 billion in revenue.
Net new digital media annualized recurring revenue or <unk> was $464 million.
And total digital media <unk> exiting Q2 grew to $12 95 billion.
In our experience cloud business, we achieved $1 1 billion in revenue and subscription revenue was $961 million for the quarter.
The digital economy runs on Adobe tools and platforms.
Customers from individuals and small businesses to the largest enterprises are using our.
Products to unleash their creativity accelerate document productivity and deliver personalized customer experiences.
Digital experiences from the apps on our devices to the digital documents, we consume it at ensign to the <unk>.
Arsenal is online shopping experiences is made possible by Adobe.
Our mission to enable the world's digital experiences has never been more relevant and we remain focused on executing our long term growth initiatives.
We are delivering mission critical products that serve an ever increasing base of customers and we have a track record of strong growth and profitability.
In my conversations around the world. It is clear that digital is playing a pivotal role empowering the economy and enabling the world to keep moving forward.
I will now turn it over to David to share more about our momentum in the digital media business.
David.
Thanks, Sean and Hello, everyone Adobe products have always been the solution of choice for the world's creators, whether theyre designers photographers film makers or illustrators to date the explosion of the creator economy is enabling even more individuals solar printers, and small business owners to express themselves and.
Creating ways, whether its a hobby aside hustle or a full time job.
Every creator and business is re imagining how they build their brand and engage their audiences in a digital first world underscoring the rapidly growing demand for content and creativity.
Adobe Creative cloud offers the most comprehensive portfolio of products and services across every creative category, including imaging photography design video and <unk> immersive.
We continue to invest across our core flagship products, including a heavy dose of new AI features.
As demand for content increases content creators are looking to adobe to help them work together efficiently where.
Were responding by integrating collaboration capabilities directly into our flagship applications that enable creative teams to collaborate with each other and with stakeholders.
As communicators have become a growing part of our creative cloud customer base. We've expanded our offering to include Adobe Express our new template based easy to use web and mobile product.
Express creates an opportunity to serve a broader base of communicators, who need lightweight task based tools to create everything from social media posts logos and Flyers for their small businesses to party invitations and posters for their personal needs.
Real estate entrepreneur <unk> is a great example of a social media Influencer, who is leveraging Adobe express to transform how she markets or properties and engages her followers. She is one of millions of users promoting their products and services with Adobe Express.
In Q2, we achieved net new creative cloud <unk> of $357 million and revenue of $2 six 1 billion.
Which grew 14% year over year.
Q2 highlights include continued innovation in the imaging category. This quarter, we launched powerful new capabilities in photoshop, including photo restoration neuro filter that detects and restores damage photos in seconds neuro.
<unk> filters are one of Photoshops. Most used AI powered features they have now been used by millions of users and applied to hundreds of millions of images. We're also delivering enhancements to photoshop on the web, including new editing features support for mobile browsers and integrated learning content.
Video production also continues to explode and premiere pro remains a leader in video creation editing and now collaboration with frame Io.
The new integration between frame and premiere pro and after effects is streamlining review in collaboration workflows across stakeholders frame.
<unk> had another strong quarter with new customer wins, including epic games, and NBC, Universal which are using it to manage their video content supply chain something that Aneel will talk more about in a few minutes.
We're also seeing the emergence of new categories like <unk> as customer demand for med adverse ready content continues to increase substance <unk> had its strongest Q2 ever as customers like Hugo boss, Mattel and unity rely on it to deliver immersive experiences across fashion gaming and E. Commerce, we continue to rapidly.
In this space, including delivering native Apple hardware support for painter designer and sampler, enabling creators to work faster than ever before.
The substance team also delivered an USDA for developers, who want to integrate <unk> capabilities into their applications.
And finally, we're excited about the momentum we're seeing for Adobe Express with millions of monthly active users and strong growth in traffic and new users in Q2.
We continue to bring the magic of Photoshop imaging Premier video and acrobat PDF capabilities like background removal QR code generation video resizing and PDF editing to express and we released our new content scheduler feature thanks to our recent acquisition of content Kal, allowing creators to quickly create preview sketch.
Fuel and publish social media content.
Also excited to kick off our express your brand partnership with meta, which will enable over $200 million businesses to grow their online presence using Adobe Express and.
And our product led growth strategy allows us to use millions of data points to continuously test learn and optimize the entire express experience from search to export.
Adobe Express recently received the Editor's Choice award on the App store, recognizing top apps for design functionality and performance.
We're very excited about the strong demand for creative cloud offerings globally, driven by acquisition engagement and retention from our data driven operating model across individuals Smbs and enterprises.
Key enterprise customer wins include Activision Bertelsmann, Hasbro Honda Motor Daimler AG Ncsoft services, Australia State of California and W. P.
In our document cloud business digital document workflows are automating manual paper processes across our personal and professional lives, whether it's a legal contract invoice or school permission slip, we now need to scan edit share and sign from anywhere.
Toby document cloud offers the most comprehensive intuitive tools for document productivity across every device and platform and education. The University of East London is adopting document cloud to manage workflows for enrolling 17000 students from 135 countries and financial services TSB Bank is transforming.
The online banking experience by enabling customers to quickly and securely complete common tasks like loan applications that could previously only be done in branches.
In Q2, we achieved net new document cloud <unk> of $107 million and record revenue of $595 million, which grew 28% year over year.
Q2 highlights include strong growth in monthly active users across desktop mobile and web the rising volume of search traffic for acrobat verbs remains a productive final to acrobat web, which surpassed 50 million monthly active users in Q2 more than doubling year over year <unk>.
Mobile App momentum remains strong with billions of Pdf's opened in acrobat mobile and hundreds of millions of cumulative Adobe scan installs.
Acrobat and Adobe sign integration continues to drive strong demand for Adobe sign as users increasingly sand pdfs for signature directly from the unified acrobat experience.
Acrobat and Adobe Express integrations now give hundreds of millions of acrobat users the ability to embed customized templates and make their pdfs visually stunning.
And acrobat and sign Apis are thriving as customers increasingly customize integrate and automate document services.
We are thrilled with the momentum we see in the acrobat ecosystem and our business performance across routes to market and customer segments, including key enterprise customer wins with automatic data processing, Duke energy Quanta services and U S Bank.
We continued to see strong demand for our products in the second half of FY 'twenty. Two we will continue to win in the digital media business through product innovation across creative cloud and document cloud, which are targeting a broad and growing base of customers are tremendous scale consistent marketing investments proven data driven operating model and new product led.
Growth initiatives are accelerating our momentum across our new and established businesses I'll now pass it to Aneel.
Thanks, David Hello, everyone.
Even in this uncertain economy every business continues to prioritize its digital investments.
Our June Adobe Digital Index report, which Leverages trillions of data points from Adobe analytics found that consumers spent a $1 billion more online in may compared to April .
Year to date shoppers have spent over 377 billion online, which is roughly 9% more than the same period last year.
Driving this digital momentum is the imperative for personalized customer experiences at scale.
Adobe experience cloud is the leader in the customer experience management category.
Offering a comprehensive set of integrated applications and services.
Spanning data insights and audiences content and commerce customer journeys and marketing workflow.
First natively on Adobe experience platform, our real time customer data platform real time CDP provides businesses with a single view of their customer data across every channel, allowing them to create precise segments and deliver personalized experiences regardless of when and where our customer interacts with their brand.
Adobe delivers real time data with more than 24 trillion audience segment evaluations per date.
The home depot is the latest in a large and growing set of industry leading customers.
Adopting adobe use real time, CDP as the underlying platform to power their digital business.
Time CDP provides a comprehensive view of the home depot as customers across e-commerce mobile and in store purchases, enabling them to build customer loyalty and grow their business.
In Q2, we continued to drive outstanding experience cloud growth, achieving a record $1 1 billion in revenue.
Subscription revenue was $961 million for the quarter, representing 18% year over year growth.
Q2 highlights include native integration across real time, CDP customer journey analytics, and Adobe journey, Optimizer, which is a significant differentiator, allowing brands to orchestrate measure and optimize the entire customer experience.
New innovations such as segment match enable brands to securely share customer segment data with business partners, while respecting customer privacy.
Major enterprises are adopting real time CDP as their platform of choice with key customer wins, this quarter, including Autodesk National Football League and U S Bank.
Expanding experience cloud leadership in the healthcare industry by making Adobe journey, Optimizer, and real time, CDP hip already through healthcare shield.
This quarter's customer win with Cvs is a great proof point of this massive market opportunity.
New services in Adobe analytics, delivering a single workspace for brands to unified data and insights from new media types, such as <unk> and streaming media with traditional channels to get a holistic view of customer engagement with customer journey analytics.
Strong adoption of Adobe experience manager for unified content management, demonstrating adobe's leadership in helping businesses effectively manage their content supply chain from creation through delivery.
Tremendous growth in demand for partner and Adobe professional services underscoring the urgency for implementation and value realization.
And key customer wins, including audible anthem bank of Nova Scotia, Humana, Mcdonalds still Lantus and Toyota.
Reinforcing our leadership position Adobe continued to receive strong industry analyst recognition, including being named number one by Gartner for both the marketing subsegment of customer experience and relationship management and digital experience platforms.
We were also named a leader in the inaugural IDC market scale for worldwide retail and CPG customer data platforms, and the ADC market scape for professional services.
Looking ahead, our category, leading solutions strong pipeline and terminal to scale through our partner ecosystem position us to deliver personalization at scale across every industry and drive strong growth in the second half.
Then over to you.
Thanks Danielle.
Today I'll start by summarizing Adobe's performance in Q2 fiscal 2020 tail highlighting growth drivers across our businesses and I'll finish with financial targets Adobe.
Adobe delivered a strong quarter, surpassing our issued Q2 financial targets and an uncertain macro environment on the topline we grew revenue by 14% year over year or 15% in constant currency, while making long term growth investments, we delivered operating margins of 35% on a GAAP basis.
And 45% on a non-GAAP basis, continuing to be one of the most predictable and profitable growth companies in technology.
We have three strategic businesses growing into massive addressable markets with differentiated products used by hundreds of millions of individuals every month.
In addition to our established businesses, we are delivering innovations and new offerings that will drive transformational growth in the future.
Q2 business and financial highlights included.
Record revenue of $4 39 billion.
GAAP diluted earnings per share of $2 49.
And non-GAAP diluted earnings per share of $3 35.
Digital media revenue of $3 two zero billion net.
Net new digital media <unk> of $464 million.
Digital experience revenue of 110 billion cash.
Cash flows from operations of 2.04 billion.
Arpaio of 13, eight 2 billion exiting the quarter.
And repurchasing approximately one 9 million shares of our stock during the.
15% year over year revenue growth.
And currency.
We exited the quarter with $12 95 billion of digital media <unk>.
We achieved creative revenue of $2, six 1 billion, which represents 12% year over year growth or 14% in constant currency.
We added $357 million of net new creative IRR in the quarter, a sequential increase of 13% from Q1.
Second quarter creative growth drivers included <unk>.
Continued strength in acquisition engagement and retention across our customer segments.
Momentum in the small and medium business segment, where our teams offering continues to drive new customer acquisition.
Demand for our flagship products, including Photoshop illustrator premiere.
Mobile applications, where our ending <unk> grew greater than 30% year over year exiting the quarter.
Adobe stock, where we saw strong book of business growth across organizations and new customers.
And momentum in new businesses with strong growth in frame Io as well as our substance offerings, which grew ending IRR greater than 60% year over year exiting the quarter.
Adobe achieved document cloud revenue of $595 million, which represents 27% year over year growth or 28% in constant currency.
Document cloud continues to be our fastest growing business, given the relevance and importance of PDF the knowledge workers around the globe.
We added $107 million of net new document cloud <unk> in the quarter.
Second quarter document cloud growth drivers included.
Continued strength in acquisition engagement and retention for acrobat across our customer segments.
Momentum in the small and medium business segment, and the reseller channel continuing to drive new document cloud subscriptions.
<unk> growth of searches online for document actions funneling millions of new customers into our document franchise through acrobat web.
Strength in mobile with ending a growing greater than 40% year over year exiting the quarter.
And strong adoption of acrobat with integrated <unk> capabilities within organizations of all sizes are document business also had a strong quarter in sales of acrobat perpetual licenses.
Turning to our digital experience segment in Q2, we achieved revenue of 110 billion, which represents 17% year over year growth or 18% in constant currency.
Digital experience subscription revenue was $961 million, representing 18% year over year growth.
Second quarter digital experienced growth drivers included strong.
Strong growth in our Adobe experience platform business or AEP with real time, CDP revenue more than doubling year over year.
Increasing customer interest in pipeline generation for new applications built on AEP, including real time, CDP customer journey, optimizer and customer journey analytics.
Success with work front, where average deal sizes grew greater than 35% year over year.
Continued customer demand and content and commerce with significant new customer acquisition and Adobe experience manager as a cloud service.
Enterprise demand for Adobe professional services, driving customer success, and new implementations across our solutions.
And strength in retention rates during the quarter, driven by product differentiation and our focus on delivering customer value.
Our strategy of enabling enterprises to activate first party data to provide personalization at scale in real time is resonating with customers driving our continuing digital experience growth.
In Q2, we continued to focus on making disciplined investments to drive growth, including marketing campaigns and head count additions in our R&D and sales organizations.
We're pleased with our success in talent acquisition during the quarter and a competitive market.
Adobe's effective tax rate in Q2 was 21% on a GAAP basis, and 18, 5% on a non-GAAP basis the.
The increase in the GAAP tax rate is primarily due to the lower than expected tax benefits associated with stock based compensation and geographic mix of earnings.
Arpaio exiting the quarter was $13 eight 2 billion growing 13% year over year or 15% year over year, when factoring in a 2% foreign exchange headwind.
Our ending cash and short term investment position exiting Q2 was 530 billion in cash flows from operations in the quarter were 2.04 billion.
In Q2, we repurchased approximately one 9 million shares at a cost of $800 million. We currently have $9 5 billion remaining of our $15 billion authorization granted in December 2020, which goes through 2024.
We will now provide Q3 targets as well as an update on the annual targets. We provided in December factoring in the following four items.
First in March we stated that as a result of lower than expected tax benefits associated with stock based compensation, our effective tax rates will increase in fiscal 2022.
Second in March we outlined the impact of the ongoing war in Ukraine, and our decision to cease all new sales in Russia, and Belarus, resulting in an expected $75 million revenue impact on our digital media business.
Third as a result of the continued strength of the U S. Dollar. We are now factoring in an incremental FX headwind of $175 million across Q3 and Q4 revenue.
And fourth while demand for our products remains strong we now expect the second half of the fiscal year to show more pronounced summer seasonality in Q3, and the enterprise business with a stronger sequential increase in Q4.
As a result for Q3, we are targeting total adobe revenue of approximately $4 four 3 billion.
Net new digital media <unk> of approximately $430 million did.
Digital media segment revenue growth of approximately 13% year over year or 16% in constant currency.
Digital experience segment revenue growth of approximately 12% year over year or 14% in constant currency.
Digital experience subscription revenue growth of approximately 13% year over year.
15% in constant currency tax.
Tax rate of approximately 22, 5% on a GAAP basis, and 18, 5% on a non-GAAP basis and GAAP earnings per share of approximately $2 35.
And non-GAAP earnings per share of approximately $3 33.
For fiscal year 2022, we're now targeting total adobe revenue of approximately $17 65 billion.
Net new digital media <unk> of approximately 190 billion.
Digital media segment revenue growth of approximately 12% year over year or 17% on an adjusted basis.
Digital experience segment revenue growth of approximately 14% year over year or 17% on an adjusted basis.
Digital experience subscription revenue growth of approximately 15% year over year or 19% on an adjusted basis.
Tax rate of approximately 21% on a GAAP basis, and 18, 5% on a non-GAAP basis.
And GAAP earnings per share of approximately $9 95.
And non-GAAP earnings per share of approximately $13 50.
In summary, I'm pleased by the way Adobe executed in Q2, we are driving growth across creative cloud document cloud and experience cloud with momentum in our established businesses and early success in our new initiatives.
As a result of our disciplined operating model and focused execution, we were able to dramatically reduce the expected impact of increased tax rates and FX headwinds on our EPS.
The investments, we're making today in people products and marketing will enable us to drive strong growth for years to come and we are on track for another year of record revenue and operating cash flows Shanghai back to you.
Thanks, Dan we are proud of our strong Q2 performance across creative cloud document cloud and experience cloud.
Adobe remains one of the greatest places to work in the industry and I want to thank our employees for their relentless dedication.
This quarter Forbes named US a top employer for college graduates and we were ranked on their list of America's best employers for diversity.
I am thrilled to welcome our largest cohort of interns and University graduates this summer.
Demand for our category defining products and services continues to grow.
We're innovating at rapid speed for new and existing customer segments accelerating our leadership in established categories.
<unk> strong momentum for our newer initiatives.
Our strategy remains to focus on long term growth initiatives, while delivering world class profitability.
Our business fundamentals and market tailwind is a strong.
And I've never been more confident in our ability to execute on the 205 billion dollar market opportunity ahead of us.
I will now turn it back over to Jonathan.
Thanks, Sean.
Adobe Max our creativity conference will take place during the third week of October this year in Los Angeles.
On day, one at Max on Tuesday October 18th we plan to host a financial analyst meeting.
Invitations, including discounted registration information will be sent to our analyst and Investor E. Mail list later this summer.
More information about the event can be found online at Max Adobe Dot com.
We would now be happy to take your questions and we ask that you limit your questions to one per person.
Operator.
Thank you.
Next I would like to ask a question.
Please signal by pressing star one on your telephone keypad.
You are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again plethora of wanted to ask a question, we'll pause a moment tell everyone has an opportunity to signal for questions.
Okay.
And we will go to our first question from Kirk <unk> of Evercore ISI.
Hi, yes, thanks, very much and congrats on the strong results as Shannon <unk> and Aneel I was wondering if you guys could just talk a little bit about the type of conversations youre, having with your enterprise customers. These days given the macro backdrop.
Are you seeing any hesitancy to spend obviously you guys are keeping your full year guidance. Despite all these headwinds, but I was also just curious if there's any change in kind of that type.
Type of deals or is it more smaller deals, but more deals or is the product mix changing at all on the experience cloud side. I was just wondering if you could give us some color on that because that obviously remains a very.
Our primary concern for folks these days thanks.
Thanks, Patrick Yes, we are pleased with what we saw in the quarter.
Conversations that we're having both on an island I would first say that the interest level and executives all around the world.
Is very high.
Unlike last time I would say right now the focus is also a lot on execution. So a lot of the investments that people have made in digital they recognize that given how critical the embedded derivatives to engage with customers digitally. So we're actually pleased both adobe as well is if you look at the entire systems.
And partner network.
They are finding that there is a lot of demand for implementation on Adobe products.
I think the other part of the conversation that you all have with enterprise Ceos right now as they all recognize it's an uncertain time and that's a conversation that we have but despite that uncertain macroeconomic environment. The thing that all of them recognize is that digital is a priority and they really want to continue to have gone.
<unk> with us as to how they can do digital olive until maybe add a little bit of what are you seeing across different verticals as well, but the importance of digital remains undiminished.
Yeah. Thanks, I'll, just add a little bit on the vertical color. We were really pleased with some of the wins we had in Q2. If you look at the automotive than what we had with Daimler over in Europe . However, we continued our strength in sports media and entertainment with NFL, which is they are using real time CDP.
For personalization at scale across their fan base and in healthcare where.
Where we had a really important win with Cvs that was a great validation of all the HIPAA readiness, we built into our platform. So that opens up a big market opportunity. So we were really pleased with both wins and as you said digital continues to be a priority and we are seeing that India in the pipeline for the second half.
And correct did you have anything further.
Okay.
No that was that I'll keep to my one question limit thanks, guys.
And.
We'll go next to Brent Thill of Jefferies.
Good afternoon, Dan I was curious if you could just comment on the more pronounced summer seasonality.
What are you seeing this year versus perhaps in past years and it just a quick follow up on the numbers the net new <unk> guide.
It was down.
Q2 to Q3, and I think last quarter, you said it would be up do we did we misinterpret what you said last quarter I just want to make sure we clarify that thanks.
Yes, Bret the way I would describe it is we had a strong first half and we actually continue to see strong demand for our unique solutions.
And all of our new initiatives as well as the established businesses are doing well.
What we're also paying attention to as you know of what we all read as part of the macro.
Environment and when I look at what we expect for our second half confidence remains undiminished.
Question really for US is timing and maybe we're being a little cautious as it relates to what happens given the summer seasonality as you know Brad better than most is.
The July and August so as it relates to our second half pipeline the confidence remains undiminished and.
Just maybe a little cautious as it relates to timing in terms of what we had said in March Youre right. We had sort of alluded to the fact that we would've expected. Some sequential increase clearly we had a strong Q2, but that's part of the reason why we wanted to give a little bit of color and be transparent on how we see it and as.
You noticed we reaffirmed the $1 9 billion for net new IRR for the year.
Thanks Shannon.
And we'll go next to a question from Brad Sills from Bank of America.
Oh, great. Thanks, guys for taking my question wanted to ask about creative cloud Xpress you mentioned some new features here imaging video editing for acrobat. It seems to me like those those are would be considered typically premium features is there any change in strategy with creative cloud xpress as to where you see that playing in different segments.
The market. Thank you.
Yes. Thanks for the question first of all we're really thrilled with the reception of critical loud Express.
Adobe express into the market and frankly, it's been a lot of fun for us because it's a product that everyone had adobe can also be using it's amazing to see the creativity coming out of finance and legal for example.
As a reminder, just to sort of up level for a second.
We've been focused on the communicator and creator economy.
The ecosystem for years in fact, we believe that we're the largest provider of creative tools to professionals and communicators on the back of our core products. So I wanted to just make sure people recognize that the core products are.
Playing to this incredibly large market, where we see express.
The filling in is that express is additive and broadens the reach in that new communicator base because of exactly what you are saying the freemium business model. The zero friction onboarding, it's clearly showing that we're able to attract millions of new users into the franchise and we're able to do it very efficiently by.
By optimizing how we onboard customers from search terms that typically were not ones that we've focused on in the past.
Also look at the ability to onboard those users and differentiate the offering with the integration of these amazing.
Features that we get from the from the desktop applications like Adobe Magic.
All of this helps differentiate what we're doing with express.
And if we take a step back and look at it from a business perspective, we feel very confident that Adobe express on the way, we actually pull people into that funnel is additive to the market opportunity that we that we're playing so we're really emphasizing the ability to add more capabilities, there and differentiate there I do also want to.
To remind folks that.
Net express is also available to core creative cloud customers.
By integrating some of those features into express we're enabling workflows between the core creative cloud products and also express and we believe that's going to have a strong retentive value on the core base and we just had in fact, a great quarter with very strong retention for creative cloud as well.
Thank you so Greg maybe if I were to add I think the team is actually having a lot of fun with all of these cool feature is to your point, they're showing some incredible stuff is part of the quick actions.
But if you look at the depth of what they have I mean, there is so much behind the scenes that we will be able to monetize but clearly the focus is on usage right now as David said, it's been fun.
Great to hear thank you so much.
We'll go next to Alex will kind of Wolfe research.
Hey, guys. Thanks for taking the question I guess, maybe just to.
Two parts. The first one we've talked a lot about pricing tailwind.
During last quarter in terms of the impact for the year and I guess can you.
Help us just quantify it.
The impact that you're anticipating for Q3 and Q4.
Does it does it does look to start ramping.
Here pretty meaningfully and then shot I guess.
Maybe just for you with respect to the strategic approach to.
M&A and kind of.
What's on the horizon, given the changing valuation paradigms in the market how important is either a large strategic M&A to the growth profile of the business versus tuck ins.
I think I'll be happy to Jonathan.
Go ahead John .
I think as it relates to your M&A question and then David can certainly answer the other one.
Clearly valuations to your point have changed quite a bit in the first thing I'll start off by saying, we're really pleased with our portfolio. If you look at some of the new initiatives and we've touched on that whether it's Adobe Express whether it's the real time CDP customer journey analytics, what we are doing with.
Things on the web, including PDF, we feel really good I do feel Alex that theyre going to be a number of small single product companies that are probably not going to see.
Survived what's happening in the valuation.
Multiple changing is actually I think good for a larger company like Adobe So.
It doesn't feel like we need anything, but we'll always be on the lookout for things that are additive that are adjacent and that will provide great shareholder value and our metrics associated with ensuring great technology, great cultural fit and adjacency remain but we have so much going on within the company that we're.
<unk> about our current.
Our portfolio clearly things will be more reasonable in terms of M&A as well.
And on pricing.
You are right, we did sort of introduce a modest price increase.
A portion of our customer base in Q2, the new prices were in market for about a month and drove a little under $10 million of benefit.
Which is exactly what we were expecting.
You can see is a very small part of the $464 million that we drove in Q2.
Customer reaction overall to this has been good because we've added so many new features since the last last price update.
That it's been very positive overall and in fact, if we get asked anything by by analysts. It's why we didn't make a bigger price increase in the reality. There is we are primarily focused on adding millions of new users. We are a growth business, we want to continue to grow the user base.
And we believe that with the initiatives we have around both the core and the new products, we want to run the business through acquisition of new users engagement and retention.
Got it and sorry, Dan just maybe just the impact on Q3 that you are anticipating in the guide for net new air <unk> on pricing.
Yes that we won't provide that as part of the guide I think the.
Fix that David gave you around Q to give you a good sense of the expected actions that we anticipate going forward.
Thank you guys.
And we'll go next to circa <unk> of Barclays.
Okay, Great Hey, guys. Thanks for taking my question here.
David maybe you can maybe just to stay with you given the questions on macro I was wondering if we could go one level deeper into the makeup of creative <unk>.
Very helpful disclosure from analyst day, the single App versus the all out mix.
Which is helpful. But how do you think about the mix from maybe consumers versus professionals, if theres a way to to break that down because of course right. Now there are lots of questions just about the health of the consumer how do you think about that mix and how do you think about maybe the defensiveness or the retention rates on both of those different cohorts does that makes sense.
Yes. It makes it makes perfect sense, yeah happy to happy to take that one so at a high level, we think about the business.
Sure.
Obviously multiple segmentation, but as youre looking at it we think about it as enterprise buyers Midmarket and SMB buyers communicators and consumers. So we have a very broad and diverse portfolio, which has served us very well in the past and as you as you are.
Our alluding to we've been through multiple recessions before so we have some good insight into how how these different.
Cohorts.
Spot too difficult financial times.
And overall, we fared very well enterprises, we've talked about you heard <unk> talk about content is fueling the digital economy and needing to stay very focused on their digital investments from a pro market perspective.
We have professionals that are making their living using our products. So we feel very good about about that offering as well from a communicators.
Perspective.
They tend to be either working in departments or small businesses or they are part of this growing movement around the creator economy, and theyre aspiring to make money or build followers with that so it is an essential part of their.
Their tool set that they're going to do to grow their side hustle and their activities.
As it relates to the consumer businesses, we've been very thoughtful with pricing there and have have very attractive pricing that we think has fared very well for us in the past around through recession. So overall, we think the business is diverse and we see the business is very resilient.
Very helpful. Thanks.
And we'll go to our next question from Karl Keirstead of UBS.
Hi, Thanks, very much I'd love to ask about the digital experience Guide you said it for 2014% in the third quarter, that's down about four points in constant currency from 18% in May and is the lowest in a bit I know, it's a tougher comp is that the issue or is there anything else to call out on the Dx business. Thanks.
What.
Nothing to call out I mean, if you look at what our targets are for the year and if you look at it in terms of what we would expect.
Both subscription and total revenue where in effect, saying exactly the same at the beginning of <unk>.
And what's a really tough economic environment. So the interest in our solutions remains strong.
I also wanted to maybe add to a little bit of what David said too for socket.
The consumer sentiment that we continue to hear from banks such as yourselves is that the consumer sentiment actually continues to remain strong both in the U S and in Europe . So I didn't want to have anybody feel like that's not what we are seeing as well.
Okay.
Thank you.
And well.
Our next question from Jay Please.
Griffin Securities.
Thank you good evening I'd.
I'd like to ask about two important attributes of your product led growth strategy.
First could you comment on the contribution from or expectations for what you call. Your application and intelligence services is that becoming meaningful at this point and then secondly at summit a couple of months ago and again this evening we heard.
Multiple examples of integrations within and across your segments, which is long standing Adobe practice, but we've heard a great deal more about that the last couple of years.
Could you could you comment on which of the many integrations you think either in terms of addressable market or your own sales capacities.
Might be the most meaningful over the next number of quarters and years.
Hi, Thanks, Thanks for the question Jay in terms of the application and intelligent services.
Fits really well into the portfolio of our Adobe experience platform based services. So just to recap we have three major services, the real time, CDP customer journey analytics and the journey Optimizer and what we have done is really integrated these intelligent services as part of these applications that run natively on the Adobe experience platform.
And where that has been extremely valuable to US is we have a broad base of customers through our digital experience portfolios for example, with that'll be analytics.
Thats been the gold standard for a long time on.
For web traffic analysis, and trends and insights and with customer journey analytics.
Our enterprise customers can now get a 360 degree view of everything that's happening across the customer journey, whether its web traffic.
Through mobile apps, social call center, and so on and Thats, where the intelligence services really fit in to really be able to expand the portfolio and derive value from how you segment dosing to audiences and activate them.
Okay and the second part of the question.
If you can repeat the second part of the question. Please Oh sure.
I was trying to get some insights into which of the many integrations that you've done either within or across your segments, whether its digital media Dx or combinations thereof, you think have had or will have the most meaningful impact assuming that not all of these integrations are created equally.
I'll start off maybe on that particular question, Jamie because one of the areas that we are seeing just tremendous interest is what we're referring to is content supply chain and both David and I will.
Can touch on that as well a little bit more but this notion of people creating campaigns. If you agree with us that the greatest value that we can provide is enabling every enterprise to do personalization at scale. The amount of content, that's being created the amount of content, that's being delivered and to understand the efficacy of <unk>.
The campaigns is just absolutely top of mind I mean, we have a large large consumer company that has completely consolidated all of their marketing activity to really understand what this content supply chain is and so the notion of content supply chain and what we can do between our creative applications.
The asset management that we deliver.
Website, and what we're doing with AAM experience manager that and work front to be able to do a workflow associated with that that is really resonating with every single customer right now.
Okay. Thank you.
And we will go next to Keith Weiss of Morgan Stanley .
Thank you guys for taking the question I have a question for Dan and it's about sort of the guidance philosophy and I think there were a lot of people are trying to get at is understanding holding the digital media <unk> guide at $1 9 billion for the full year. Despite the kind of increased seasonality in Q3. Despite the fact like the street kind of.
Give you a pass we've already taken our numbers down to like $1 8 billion.
Why keep that risk out there why why push more risk into Q4, why put out a high bar out there when obviously, it's not in the stock all the stocks are getting killed here, it's not in our expectations like what is it that.
It gives you so much confidence to keep that number out there.
Yeah.
So I guess, where I'd start is if you take a look at where we are in the first half I would say the bit the performance of the businesses is really good.
We talked about it earlier conversations with our customers.
What we're seeing in data and data and the insights that it gives us we see strength into the back half of the year.
We are confident in the underlying performance of the business and I would go back to the earlier comments.
We see the headlines we see what others are talking about and so in an environment like this maybe we're a little cautious about Q3, I think that's the prudent way to go but it doesn't take away from the insights we have and the belief we have and confidence in the underlying performance and the strength, we see into the second half and so I think.
We've taken everything into account and we've got the right set of targets out there that reflect what we're seeing in the business and how we expect to perform.
Got it.
Any visibility into what gets better in Q4, that's going to enable that because youre looking for net new era to go from basically down in the first half of the year to growing in the back half.
Could you give us any kind of visibility into like what gives you guys that confidence.
Hi, Andy I can talk a little bit.
If you look at the rhythm of how we've managed the business certainly you look at what happens with education. In Q4, you look at the enterprise, which tends to be a seasonally strong Q4, you start to look at whats happening with the emerging businesses that will continue to ramp and so it's a combination.
Think somebody else alluded to pricing and we'll have a full quarter of pricing as well and so when you put all of those together.
Every Q3 to Q4, we see a seasonal.
And if you look at what happened even last year.
Look at what the numbers look like.
It's something that we're going to drive.
Got it thank you guys.
Okay.
And we will go next to Tyler Radke with Citi.
Yes, thanks for taking the question.
Wanted to ask you about the CDP space I think you talked about your revenue there doubling year over year I guess, just a couple of questions number one.
How significant.
CDP is part of the overall experience busy.
Business as a growth driver in two could you just talk a little bit about the competitive landscape.
It's something that Salesforce talked a lot about on our last earnings call. We've seen amplitude recently launched CDP. So how do you kind of see all of this evolving.
And how do you think this plays out thank you.
Thanks, David Yes, but let me take the Big picture first on what we see the overall CDP market.
First of all the all of the interest in CDP.
Is a great validation of the fact that the traditional CRM is not the way to go to build the next generation customer experience.
Some of the data might be dead, but you really need to activate the data and construct a rich profile before you can activate day. So if we look at the <unk> market. What we see is in our from our perspective, it's the platform for cost full customer engagement and that involves a number of different components and you look at the data collection.
As required and we built a lot of connect is not only with our apps. We have order 100 connect is out there for the data collection.
You need to be able to assemble that into a real time database. So that you can make that next best action next best offer we call. It personalization at scale to millions of people in milliseconds and that real time customer profile needs to be activated and third. It then becomes the platform for not just the apps in our.
Portfolio, but then for example, the integration we have with dynamics for example.
With customer service or the integration we have in service now and so on it needs to become the customer data platform that serves the entire range of customer facing applications. That's the way we look at CDP, that's what makes it a broad and exciting market and Thats really where we are differentiated where when we talk to customers I mean, I'll give you the examples of CBS and NFL and so on.
They recognize and agree with that vision and Thats why they are betting on us in most of the players you see do one piece of it and don't really have the either of the comprehensive nature of the product in the portfolio are the real ability to pull it off in a true real time manner.
Maybe the one thing I would add to all of that is we.
We have 32 billion profiles right now I mean, clearly every customer has their profile.
Isolated so we're clearly the leader as it relates to large companies that have a CDP in the market that's real time.
Thank you.
And we'll move next to Gregg Moskowitz with Mizuho.
Okay. Thank you for taking the question can you talk about the express your brands program. Obviously meta has huge small business reach but it will be helpful to get your expectations on what this partnership will do for our Adobe incrementally.
Yeah, So happy to do that it's been it's actually a very exciting program for US as you know Adobe Express is predominantly focused on on communicators small medium businesses as they start to move more online.
We've talked a lot about the rise of the creator economy. We've mentioned that there are hundreds of millions of small medium businesses that are really targeting more online communication and really focus on social media in fact in a recent survey we found that the majority of small medium business is actually say that their online presence is more important than their physical.
Presence.
So they need to to coordinate and communicate digitally and in our ability to provide with meta provide all of the tools that they need end to end to build incredible content that stands out and participate in the online experience that met is providing and of course also.
Work more broadly across all the other social networks I think is a really great opportunity for matter for us and certainly for the small medium business owners that are part of that program.
Okay. Thank you.
Hi, operator, we're coming up on the top of the hour, we'll take two more questions. Please.
Thank you we'll go next to Kash Rangan of Goldman Sachs.
Yes, thank you very much Sean and team.
With upcoming maybe recession, the one that everybody is predicting.
Company as well as David said has been through a couple of recessions before.
The company is very different company today than when it was even just a few years ago. What is your best prognosis as to how the portfolio of Adobe products behaves if we.
To answer about <unk>.
But once we are done for one.
How do you think the portfolio is positioned from the financial angle are you prepared to.
Slowdown in hiring the beauty of the subscription model is dead.
So let's start on hydrogen.
It's nice margin upside that sort of thing from a financial perspective.
Curious to get your thoughts overall on this particular topic.
Sure. Let me first cover your second part cash as it relates to you know the bottom line and you know our philosophy right now given all of the myriad opportunities that we have.
We're planning for the outside we know how to react to the downside when that happens I mean look at what's happened with that.
The tax rate in the D and the financial team and the product teams, what they've been able to do too.
Really address all of that is truly remarkable I mean, we take it for granted at the company, but we've done an amazing amazing job at.
Continuing to be extremely profitable.
For me I think when you talk about a recession the.
The question I ask people is when you look at the three things that Adobe does which is and our focus on content focus on automation focus on customer engagement.
Don.
Look at any of those and feel like the secular trend for that will change. So there may be some change in the rhythm of that quarter over quarter, but the fundamental shift of what we are doing and then I'm going to talk about this real time CDP customer engagement is going to be the only thing that differentiates our business.
From another business.
The success that we're seeing in healthcare clearly points to that as well so.
<unk> navigated we have an incredibly experienced management team we're planning for the outside right now, which is all of our growth initiatives and we'll react as appropriate and we are clearly not going to be in denial, but.
Now it feels like a very strong gaiam for Adobe to continue to execute against the things that we have on our plate.
Yes, I just want to build a little bit on the FERC I want to build a little bit on the first part Ashanti news and share we talked about offsetting.
Some of that.
Headwinds, we see we talked about the increase in tax rate.
We talked about.
The FX headwind into the back half of the year in Q1, we discuss the impact we're seeing from the war in Ukraine, when we take the FX and the impact we discussed in Q1, that's a $250 million revenue headwind in the back half of the year. The increase in tax rate is about a 20.
<unk> <unk> a share impact full year when I net both of those together, we would expect to see about 60 to 70 cents a share erosion of the earnings power of the company and to <unk> point, It really underscores a philosophy. That's underpinned how this company is operated for a very.
Long time.
Focused execution, it's about operating discipline and the fact that our full year targets have come down 20.
When the.
Map would suggest that we should be much greater than that just really underscores the power of the model we're investing for innovation.
We're investing to serve our customers, but we're doing it in a very focused and disciplined way and I think that says a lot about who we are as a company.
Thank you Dan.
And our last question is from Brad Zelnick with Deutsche Bank.
Excellent. Thanks for squeezing me in and congrats on a strong Q2.
My question is for David David We've seen reports of the trial Youre running in Canada for a free browser based version of Photoshop, which I assume is another express like offering to build top of funnel interest and awareness can you share more about the strategy here and how you think about the balance of more simplified products, creating incremental demand.
Versus competing with more premium skus.
Yes, absolutely happy to talk about that we are very excited about the work we're doing here frankly.
Not just with Adobe express, but with Photoshop as we mentioned here with light room as we've done in the past and also with that with acrobat. Our focus has always been to take the strength that we have in the desktop and build a multi surface.
Experience for our customers across desktop mobile and web.
And as we've done that we've noticed that web.
Web and mobile really represents an opportunity to broaden our audience and a very significant way.
And we do that by capturing search.
Traffic and at the point of intent, bringing them into the zero friction web.
Experienced with the freemium model and so <unk> web and what Youre seeing there is a step along that journey for our core imaging franchise, and we had absolutely anticipate it being a source of funnel opportunity similar to the way that that acrobat has seen acrobat web as a source of that funnel activity you see how strong.
The core acrobat businesses and how its performing we have a version of acrobat web.
Thats available we've been able to double.
Traffic to that and we now have over 50 million monthly active users leveraging acrobat web and we use that as a top of.
Leveraging acrobat web on a monthly active basis, and we're able to leverage that and convert that traffic into real business. We're playing that same playbook now with photoshop as well and we expect that to be a very productive opportunity.
Thank you I think if I were to add to that I mean really in effect. What we do is we look at platforms in an unbelievably expensive way and on any platform just making sure that we get the magic of our technology and as friction free.
Way possible is part of what we're continuing to do and we have unbelievably rigorous process. Also are then really understanding how to monetize it so some of the.
Press releases may be a little bit more sensational mistake.
In terms of how they announced that Brad.
But.
Since that was the last question I just have to say, we're proud of how we're executing against our strategy I mean, everybody with the knowledge that its an uncertain macroeconomic environment.
But we believe that we will continue to win by delivering great innovative products that at the end of the day delight an ever increasing for us set of customers.
We're making some very creative marketing campaigns, we have strong sales and go to market motions that are appropriate for the.
The set of customers that we're targeting and I think with it being the best users of our product, which actually gives us tremendous credibility to both innovate at a rapid pace as well as deliver great customer satisfaction and growth to our customers worldwide. So.
Thank you for joining us and with that I'll turn it over to Jonathan.
Great. Thanks, Anthony Thanks, everyone.
For joining the call we look forward to speaking to many of you soon and this does conclude the event. Thank you.
Okay.
Okay.