Q3 2022 Adobe Inc Earnings Call

Yes.

Good day and welcome to the Q3 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 VP of Investor Relations. Please go ahead Sir.

Good morning, and thank you for joining US with me on the call today are Sean to noon Orion Adobe as chairman and CEO , David Wadhwani, President of digital media, and they'll chocolate or RT president of digital experience and Dan Durn Executive Vice President and CFO .

On this call, which is being recorded we will discuss adobe's third quarter fiscal year 2022 financial results you can find our Q3 press release as well as pdfs of our prepared remarks in financial results on Adobe's Investor Relations website the.

The information discussed on this call, including our financial targets and product plans is as of today September 15th 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 you should review the factors discussed in today's press.

Please and then 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'll now turn the call over to Sean to now.

Thanks, Jonathan and thank you for joining us.

Adobe had another record quarter, achieving 4.43 billion in revenue, which represents 15% year over year growth.

GAAP earnings per share for the quarter was $2.42 and non-GAAP earnings per share was $3 40.

In our digital media business, we achieved 3.23 billion in revenue.

Net new digital media annualized recurring revenue or a R. R was $449 million.

Total digital media ear are exiting Q3 grew to 13.40 billion.

In our experience cloud business, we achieved 1.12 billion in revenue and subscription revenue was $981 million.

Okay.

In this digital first world Adobe Creative cloud document cloud and experience cloud have become even more mission critical to an increasingly wide range of customers from students to creative professionals to small businesses to the worlds largest enterprises.

Fueled by our groundbreaking technology track record of creating and leading categories and consistently strong execution, our opportunity is larger than ever before.

Adobe is greatness has been rooted in defining new categories and platforms and delivering cutting edge solutions through both organic innovation and inorganic acquisitions.

Throughout our history Adobe's innovations have touch billions of lives around the globe.

From revolutionizing imaging and creative expression with Photoshop too.

To pioneering electronic documents through P D F.

To creating the digital marketing category with Adobe experience cloud.

Adobe continues to invent and transform categories.

We are in the Golden age of design and we believe we have a unique opportunity to usher in a new era of collaborative creative computing.

I'm thrilled to share that today, we announced our intention to acquire Sigma a leading web first design platform that will help us accelerate this vision.

It enables designers developers and all stakeholders to collaborate in the product design process from ideation to designed to delivery.

The combination of Adobe and figment will significantly expand our reach and market opportunity, while making the creative process more accessible and productive to more people.

I will now turn it over to David to share more about our vision for Adobe and Sigma and momentum in the digital media business.

David.

It's an exciting day for Adobe and pigment thickness mission is to help teams collaborate visually and make design accessible to all Dylan field thickness CEO and his team launched picking up as the first design tool purpose built for the web in 2012, Sigma and Fig Jam make it possible for all stakeholders designing.

Active mobile and web applications to collaborate through multiplayer workflows sophisticated design systems, and a rich extensible developer ecosystem.

Sigma has built an incredible product and an outstanding business delivering world class, a or our growth and net dollar retention with a disciplined and efficient operating model.

<unk> has attracted a new generation of millions of designers and developers and a loyal student following.

To give you a sense of their scale and financial success Sigma is expected to add approximately 200 million in net new <unk>. This year, surpassing 400 million in total are are exiting 2022 with greater than 150% net dollar retention rate.

With a total addressable market of 16 5 billion by 2025 Sigma is just getting started.

Adobe has always been focused on empowering everyone to create digital experiences and the combination of Adobe and pigment is the perfect better together opportunity the.

The combination of Adobe and pigment will create new opportunities and accelerate our strategy in a few ways.

First re imagining the future of creativity and productivity.

Adobe and pick my share a passion for helping individuals and teams be more creative and productive Adobe and pigment now have a new opportunity to make content creation more efficient collaborative and fun by bringing together Adobe Express acrobat and Fig Jam and online white boarding solution for teams with.

With the combination of these products, we can offer tremendous value to hundreds of millions of customers.

Second accelerating creativity on the web as creativity becomes increasingly collaborative the web makes it easier for teams to create together figments web based multiplayer platform can accelerate the delivery of Adobe creative cloud technologies on the web, making the creative process accessible to more people.

This will dramatically increase adobe's reach in addressable market opportunity.

Third advancing product design web and mobile applications are increasingly underpinning how we live and work. This is driving explosive growth in the product design category. The combination of Adobe and pigment will benefit all stakeholders in the product design process from designers two product managers to developers.

By bringing powerful capabilities from Adobe's imaging photography illustration video three D and font technologies into the pigment platform over time.

And fourth empowering and expanding the community throughout our history Adobe's community has been a constant source of inspiration and a catalyst for innovation.

Sigma has a thriving community, who develop and share everything from tutorials templates and plug ins with their large and growing ecosystem. The combination of our communities will bring designers and developers closer together to unlock the future of collaborative design.

Adobe and figured I could not be a better match, our people innovative technology and joint mission to democratize creativity and collaboration will deliver increased value to a growing base of customers I look forward to welcoming Dillon and the entire figment team to Adobe once the transaction closes.

The acquisition of pigment could not come at a more exciting time for Adobe's digital media business, which surpassed $13 billion in ore this quarter growing 16% year over your exiting the quarter Adobe creative cloud remains the world's creative engine empowering everyone to create whenever and wherever inspiration strikes in Q.

Three we achieved net new creative cloud <unk> of $330 million and revenue of 2.63 billion, which grew 14% year over year.

Q3 highlights include strong momentum for Adobe Express with significant growth in new users Adobe Express disturbing and expansive universe of creative professionals communicators and knowledge workers from students to small business owners to social Influencers, it's exciting to see the rapid innovation, we are delivering to enable millions of.

Customers to create standout multimedia content.

Adobe Express has thousands of templates millions of stock assets and quick action functionality that make it easy to do any creative task.

Millions of new users are coming to Adobe Express driven by viral adoption and our creative marketing campaigns fast company recently named Adobe Express one of the best new productivity apps of 2022.

Strength in our Photoshop, and lightroom offerings across desktop and mobile.

Tail winds in our video segment for premiere pro and frame Io are integrated video editing and collaboration offering.

Demand for our substance products as brands across every industry embraced <unk> and immersive content as a new medium.

And momentum in the Adobe stock business, emphasizing the importance of content velocity for businesses of all sizes.

And finally, we are really excited about Adobe Max the world's largest creativity conference. It will be held in Los Angeles and streamed live for our global community. In addition to unveiling amazing new creative cloud innovations, we will hear from luminaries, including we're now in film directors artists and musicians.

Now onto our document cloud business digital documents are enabling individuals and businesses to be productive and a digital first world with more than 300 billion Pdfs opened and more than 8 billion digital signatures processed each year Adobe document cloud is accelerating document productivity and workflows across web desktop.

And mobile.

Document cloud had its best Q3 ever achieving net new document cloud <unk> of $119 million and record revenue of 607 million, which grew 25% year over year.

Q3 highlights include continued adoption of PDF across every computing surface with over 2.6 billion cumulative installs of acrobat and reader.

Significant enhancements to the acrobat web experience, making popular verbs like view edit and collaborate easier than ever and adding accessibility capabilities such as read out loud and high contrast support.

Acrobat web MAU continues to see tremendous growth driven by the high volume of web searches for document actions.

Strong growth in Adobe sign driven by integrated esignature functionality and acrobat.

Integrated workflows between acrobat desktop acrobat web and Adobe Express.

And key enterprise customer wins, including Amazon Boeing Chubb, Lloyds Bank and service now.

Demand for our industry, leading digital media products remains strong across a growing base of customers. We are accelerating momentum across the business with continued product innovation strong go to market capabilities and a proven data driven operating model I will now pass it to Aneel.

Thanks, David Hello, everyone.

One thing has become abundantly clear in this environment did.

Digital has become a critical channel to engage customers and drive growth.

Across the globe companies in every industry are prioritizing investments in software solutions and services.

Enable them to anticipate and meet the expectations of their consumers.

Customer experience management is an imperative and Adobe is the category leader.

Adobe experience cloud delivers predictive personalized real time digital experiences from acquisition to monetization to retention.

Cross content and commerce customer journeys data insights and audiences and marketing workflow.

In particular, we are driving strong enterprise adoption of Adobe experience platform and real time, CDP, which are foundational to this next generation enterprise architecture.

F C buyer one of the world's most successful football clubs is leveraging adobe experience cloud and real time CDP to transform their fan experience.

This gives them a holistic view of every fan's engagement online and offline, enabling them to deliver personalized experiences such as discounted the stadium.

Rod and immersive shopping experience for viewers at home.

In Q3, we continued to drive strong experience cloud growth.

Keeping a record $1.12 billion in revenue.

Equipment revenue was $981 million for the quarter, representing 15% year over year growth.

Q3 highlights include strong momentum for Adobe experience platform and AEP native applications with the book of business more than doubling year over year.

Significant growth for Adobe Commerce, underscoring the demand for digital store fronts and marketplaces.

Experience cloud was named a leader for the sixth consecutive year in the Gartner Magic quadrant for digital Commerce and achieved the highest position in the Forrester wave for enterprise marketing suite.

And key customer wins, including credit Agricole, Morgan Stanley NASA, Qualcomm T mobile and United Health Group.

Looking forward although.

He is leading an explosive growth category, that's increasingly important to enterprises of all sizes.

Adobe is well positioned to help enterprises deliver exceptional customer experiences with industry, leading platforms and applications.

Our strong track record of deploying solutions successfully for thousands of customers.

And a proven ability to deliver the next generation architecture for customer experience management.

Then over to you.

Thanks, Aneel today I'll start by summarizing Adobe's performance from Q3 fiscal 2020 tail highlighting growth drivers across our businesses, then I will discuss the announced acquisition of Sigma and I'll finish with financial targets.

Adobe delivered a solid Q3, continuing to demonstrate that our products are mission critical to our customers' success in any macro environment from the millions of individuals who use our offerings to create digital content to the small businesses that run their document workflows on adobe to the large enterprises that have transformed how the inner.

Iraq with their end users by providing personalization at scale Q3 business and financial highlights included record revenue of 4.43 billion GAAP diluted earnings per share of $2.42 and non-GAAP diluted earnings per share of $3 40.

Digital media revenue of 3.23 billion net new digital media are are a $449 million digital experience revenue of 1.12 billion cash flows from operations of 170 billion R. P. O a 14.11 billion exiting the quarter.

And repurchasing approximately five 1 million shares of our stock during the quarter.

And our digital media segment, we achieved 13% year over year revenue growth in Q3 or 16% in constant currency, we exited the quarter with 13.40 billion of digital media a R. R.

We saw expected summer seasonality in the quarter with the overall acquisition and engagement environment for offerings remaining strong.

We achieved creative revenue of 2.63 billion, which represents 11% year over year growth or 14% in constant currency, we added $330 million of net new creative a or are in the quarter.

Third quarter creative growth drivers included.

Momentum in small and medium businesses with our teams offering where we continued to drive strong new customer acquisition and are seeing engagement and retention at all time highs.

Strong growth in our illustrator and indesign businesses.

Demand for our flagship photography imaging and video applications.

Dolby stock, where we continue to drive strong book of business growth.

And momentum in our new growth initiatives, such as frame I O in substance each of which grew ending air are greater than 50% year over year exiting the quarter.

Adobe achieved document cloud revenue of $607 million, which represents 23% year over year growth or 25% in constant currency.

We added $119 million of net new document cloud <unk> in the quarter, our strongest Q3 to date.

Third quarter document cloud growth drivers included <unk>.

Accelerating adoption of PDF and Adobe reader across multiple surfaces.

Growth of acrobat web fueled by online searches for PDF and document actions sure.

Strong performance of acrobat and Adobe sign.

Performance of our reseller channel continuing to drive new document cloud subscriptions, particularly with small and medium businesses.

And continued seat expansion in the enterprise.

In August we began to rollout the new acrobat integrated was sign offering which included updated pricing.

Turning to our digital experience segment in Q3, we achieved revenue of 1.12 billion, which represents 14% year over year growth or 15% in constant currency.

Digital experience subscription revenue was $981 million.

Third quarter digital experienced growth drivers included strong.

Retention upsell and enterprise bookings in the quarter across our solutions, particularly in the U S.

Success closing numerous million dollar deals as well as larger transformational deals that span our portfolio of solutions.

Continued momentum with our foundational Adobe experience platform and real time, CDP business with our book of business for platform and E. P native applications more than doubling year over year exiting the quarter.

Success, integrating our solutions with workflow, including work front, which grew revenue greater than 35% year over year in the quarter.

And higher customer demand for professional services as enterprises focus on implementations in value realization.

In Q3, we focused on making disciplined investments to drive growth, including a strong class of University hires and marketing campaigns to raise awareness of new and flagship offerings.

We continue to have world class operating margins and drove strong EPS performance in the quarter.

Adobe's effective tax rate in Q3 was 22% on a GAAP basis, and 17, 5% on a non-GAAP basis. The GAAP tax rate came in lower primarily due to benefits associated with share based payments.

non-GAAP tax rate came in lower primarily due to additional U S income tax credits.

RP O exiting the quarter was $14, one 1 billion growing 12% year over year or 15% when factoring in a 3% foreign exchange headwind.

Our ending cash and short term investment position exiting Q3 was $5 76 billion in cash flows from operations in the quarter were $1 seven zero billion up 20% year over year.

In Q3, we repurchased approximately five 1 million shares at a cost of 1.80 billion, including shares received for the final settlement of our ASR entered into in December 2021.

We currently have $8 3 billion remaining of our $15 billion authorization granted in December 2020, which goes through 2024.

As Sean and David mentioned, we are thrilled about the opportunity to acquire figment, which will accelerate adobe strategy.

Under the definitive agreement, we've agreed to acquire a figment for approximately $20 billion comprised.

Approximately half cash and half stock subject to customary adjustments approximately 6 million additional restricted stock units will be granted to figments CEO and employees that will vest over four years subsequent to closing.

The transaction is expected to close in 2023 subject to regulatory approvals.

We plan to finance the cash portion of the consideration with cash on hand, and if necessary a term loan to be paid down from our operating cash flows following the closing.

Thickness products address a $16 5 billion dollar market opportunity and the company has an impressive financial profile.

This year they are expected to add $200 million of net new air are surpassing 400 million total a or by the end of the year with greater than 150% net dollar retention.

They are a disciplined efficient operating model with gross margins of approximately 90% and positive operating cash flows.

Sigma has strong business momentum, our large and expanding customer base and we are incredibly excited about what we can bring to this combination from a financial perspective.

While this transaction is primarily about creating new markets expanding adjacent opportunities and accelerating growth.

We are committed to maintaining adobe strong profitability and maximizing EPS for investors in.

And you're wanting to after closing.

The transaction will be dilutive to adobe's non-GAAP EPS and we expect it to be breakeven in year, three and accretive at the end of year three.

While the transaction has not yet closed I want to provide color on the path to non-GAAP EPS accretion as a combined company exiting year three assuming adobe's operating margin for the second half of fiscal 2022 as the baseline.

The combination will accelerate topline growth for both Adobe and Sigma based on three primary drivers one we extend stigmas reach to our customers and through our global go to market footprint.

Two sigma accelerates the delivery of new Adobe offerings on the web to the next generation of users and three.

We jointly introduced new offerings to market as we unlock the possibilities of collaborative creativity.

Clearly the explosive revenue growth a figment combined with our efficient operating model would result in an expanding standalone operating margin.

Sigma is innovative technology platform will accelerate our R&D roadmap, including the delivery of our creative cloud technologies on the web, which will allow adobe to focus and manage our future R&D investments.

We will quickly pay down any term loan if necessary after close and then resume stock repurchase to reduce adobe share count.

The transaction is pending at a minimum we expect to maintain share repurchases sufficient to offset the dilution of equity issuances to Adobe employees.

We will now provide Q4 targets, which factor in the overall macroeconomic environment.

Effects headwinds as the U S. Dollar has continued to strengthen against foreign currencies and typical year end seasonal strength and demand for our offerings.

As a result for Q4, we are targeting total adobe revenue of approximately 4.52 billion.

Net new digital media are are of approximately $550 million.

Digital media segment revenue growth of approximately 10% year over year or 14% in constant currency.

Digital experience segment revenue growth of approximately 13% year over year or 15% in constant currency.

Digital experience subscription revenue growth of approximately 13% year over year or 15% in constant currency.

Tax rate of approximately 23% on a GAAP basis, and 17, 5% on a non-GAAP basis.

And GAAP earnings per share of approximately $2.44.

non-GAAP earnings per share of approximately $3 50.

In summary, Adobe continues to drive performance across creative cloud document cloud and experience cloud, while making transformational investments in strategic growth initiatives.

I look forward to sharing more about our growth opportunities next month in Los Angeles at Adobe's financial Analyst meeting <unk> back to you.

Thanks, Dan.

It was great to be back on the road this quarter meeting customers and partners as business has returned to new hybrid work model.

I was inspired and energized welcoming our new hires and meeting Adobe employees across multiple sites, who will together drive the next phase of innovation growth and culture.

Adobe strength has always come from our most important asset people.

I'm incredibly proud of the recognition we continue to receive as a great place to work.

This quarter Adobe was named to fast company's best workplace for innovators in Fortune's best workplaces in Tech.

Next week, we will hold our Adobe for all conference to bring employees together to celebrate our shared values of diversity equity and inclusion.

It's an exciting time at Adobe a strategy to unleash creativity for all accelerate document productivity and power digital businesses is working.

We're delivering on our innovative product roadmap driving growth across new and established businesses and delighting, our growing universe of customers.

In addition to achieving all of the success, we continue to look around the corner for new transformational opportunities that will drive decades of growth for Adobe.

We believe that every individual team and business will strive to be more creative and productive in those digital era.

Adobe is a unique opportunity to usher in a world of collaborative creativity.

In my conversations with Dillon at Sigma It became abundantly clear that together, we could accelerate this new vision delivering great value to our customers and shareholders.

I look forward to welcoming sigma into the Adobe family upon close of the transaction.

We look forward to seeing you at Max and closing the year strong.

Now, we'll take questions operator.

Thank you.

I'd like to ask a question. Please signal by pressing star one on your telephone keypad. Please ensure that the mute function of your telephone is switched off to allow your signal to reach our equipment again press star one to ask a question.

Our first question comes from a cash Rangan of Goldman Sachs.

Hello, Thank you very much congratulations.

The massive step forward to the management team.

I don't think I Wonder if you can talk about the persona.

Sigma and if theres any overlap at all between what Adobe.

Wanted to be in the future with its creative family and verified MAU is growing.

And if you netted out what is the incremental opportunity it.

It looks like $16 billion tablets your own creative business, you outlined is having a more than a $40 billion Tam. So I'm wondering what the Tam could look like for Sigma in the future as it integrates with the Adobe you identified forced on us.

Then.

Three years to breakeven it sounds like there are some conservative assumptions built in especially because it's generating cash I'm wondering what your assumptions are for that.

The length of duration to breakeven. Thank you so much and congrats.

Thanks, Kash and congratulations to you as well for the conference that you know is happening right now and given our quiet period as you know we've gone to them, but let.

Let me take a step back and talk about you know why we believe this is a fundamentally transformative move for Adobe.

When we think about the future of what's happening with creativity and in a sense, a what's going to happen as it relates to multiple people engaging in that.

With respect to collaboration we just believe that this is going to be an incredible value and a way to attract a whole bunch of new customers to the combined platform. When you think about Adobe certainly you know we target knowledge workers, we target communicators retarget creative professionals.

Sigma really focuses a lot also on developers they focus very much on the other stakeholders who are involved in the product design process. So when we talk about the fact that Sigma has a $16 billion Tam that's referring to the dam as it exists today in terms of what they are doing both as it relates to <unk>.

<unk> design as well as it relates to collaborate of white boarding and ideation, which as you know take jams. This incredible product that has I believe a much much larger available addressable opportunity.

But if you take a really what we think is the massive opportunity in putting this together.

I think there are four aspects that are really exciting for us.

First.

There is going to be a next generation of creative collaboration that happens in the industry and we believe that the combination of the two companies enables us to really position Adobe and deliver great value for this creative collaboration industry.

Second we continue to believe that we can accelerate what it means to create on the web what figment has done is they've delivered a really incredible technology platform and solved a number of the issues that need to be solved to allow multiple people to collaborate on the web.

Third we think that we're going to advanced product design and if you take the decades of Adobe technology that exists our imaging technology, a vector technology. The video technology that we have and think about what that means to you know bring that to the web and dramatically increase the number of customers, who can then benefit from Ed and <unk>.

Last but not least I think to your question. This now really addresses that sort of Holy Grail of anybody, creating a mobile application anybody creating a website anybody creating an application for any device that has a screen combining what we can do on the designers developers and the stakeholders to make that hat.

And so I think today, what we shared with you is what they talk about is their addressable market opportunity, what we talk about as ours, but I think the real benefit of this combination is creating brand new markets much like we've done with our digital experience and in other industries that were part of so thank you and we're really excited about this.

Yeah, then from an accretion standpoint.

First and foremost this deal is about growth, it's about positioning the company to define new categories and drive growth for decades to come and as we think about that growth trajectory walked into you know walked through a number of those drivers it's about extending the performance of that platform as part of the combined company getting it acts.

First to our customers and our go to market global go to market footprint, it's about accelerating the delivery of new Adobe offerings on the web.

And then jointly introduce.

New offerings as we unlock those possibilities and collaborative creativity. This gives us an opportunity to focus and manage the R&D investments as we drive that roadmap and striking the balance between accelerating the growth and preserving that growth trajectory, but doing it in a disciplined way.

To deliver tremendous amount of value over time to investors.

<unk> in year, two post close you'll see our EPS growth rate.

<unk> faster than our overall revenue growth will be accretive exiting year, three and we're poised to deliver a lot of value.

Okay.

Wonderful. Thank you so much and best wishes.

Great.

Our next question comes from Brad Zelnick of Deutsche Bank.

Thank you very much and congratulations this is obviously a big moment for Adobe.

Pretty clear with Sigma brings to the table in terms of innovation collaboration and communities and I. Appreciate the comments about Sigma helping to further Weber Fi core Adobe products, but what do you say to the perspective that this $20 billion acquisition, it seems more reactive versus proactive in.

Perhaps more importantly, how do we get comfortable that Adobe is organic innovation engine is alive and well for capturing the trends and opportunities that lie ahead and creative.

Brian It's a good question and I understand that in these markets in particular.

Acquisitions, and maybe large ones are viewed with some skepticism.

We certainly believe and I'll talk about it that Sigma will be a transformative deal for the customers and industries.

And it dramatically increases our Tam you know, we can deliver great value to an increasing set of customers.

But I also want to reassure all of you and if you look at our results. This in no way changes our focus or our excitement on our current portfolio.

We're growing well, we're demonstrating strength across all of our three.

Howard offerings, and we continue to execute against our current initiatives and so if you look at the multiple internal businesses that are achieving the velocity, whether it's adobe experience.

Platform and the apps that are built natively on top of it what's happening with <unk> and immersive what's happening with acrobat forms of what's happening with frame. This is additive and when opportunities like this present themselves Brad I think it's the great companies that look at it and say are you going to focus on the here and now only or are you going to see.

He's on the opportunity that really positions Adobe for the next few decades and so it's a great question, we understand that there'll be questions associated with valuation. We certainly believe that it provides a valuation to our shareholders as well.

When you look at what this means for us, but it in no way diminishes my excitement around our current portfolio.

Very fair. Thank you and look forward to seeing it all on display at Max next months. Thanks, guys. Congrats.

Thank you Brett.

We can go to Alex Zukin of Wolfe research.

Hey, guys.

I'll start with a with a nonsurgical question and then layer in Sigma I guess Sean.

Can you talk or David can you guys give us a kind of a lay of the land on the demand environment, how it trended throughout the quarter. Obviously a lot of companies are seeing some elongation of deal cycles. The scoping, even our channel checks on the digital experience side suggested that their deals are taking longer to close the requiring a lot more signatures. So.

I guess first of all what are you seeing in the demand environment.

What are they going.

One of the questions. We're getting from investors is widened now given that we may be entering a more recessionary environment could you have done this type of a transaction cheaper later.

That's kind of how I want to lead this effort.

Yeah, Let me address the first.

Part, which was your second part of the question, which is why now again.

Again, and as I said, we just believe that this new vision that we can create for you know what.

What we can do with our collaborative creativity, there's no time like the present to start working on top of it and when opportunities like this present themselves you have to act upon it rather than kicking that can down the road Alex So from my perspective, we know how to make this you know deliver great value to our customers I'll have David.

Also speak to the demand environment in the creative side on the enterprise side as we said we had strong results I mean, you know the AEP plus apps business you know that book of business is doubling which really reflects the foundational aspects of what we're delivering.

But again I go back to opportunities like this present themselves rarely and Sigma is one of those rare companies that has achieved the kind of escape velocity and technology platform that they have will be equally believe that it's even rarer for a company like adobe to be able to take advantage of.

What they deliver and actually accelerated and provide greater value and so from my perspective, there's no time like the present.

Yeah and on the digital media side, we began the year with our guide of $1 9 billion.

And of course, we hope to beat that.

And in the context of everything happening in the macro if you look at Q1, Q2 Q3, and our guide for Q4, we're at $1 88 billion and in the context of everything happening in the World. We're very proud of this performance.

And of course, where we're an aggressive company, we hope to beat that that number and all the leading indicators remained strong new user acquisition as strong engagement and retention.

Continues to be strong monthly active users continue to be strong and so we feel really good about the macro.

About our ability to navigate the macro and despite what's happening in the world around us.

And then in the context of as we start looking for opportunities to grow we have so much product innovation coming out at and we'll see a lot of it at Max accelerating what's happening in our flagship applications, what's happening around express and the kinds of capabilities. We're.

Putting in there, we're seeing great growth and momentum in terms of Houston and N. P. S. There photoshop and illustrator or coming to the web we have a lot of share for review collaborative capabilities coming as well and then as you look at the conversation around figment, we've known billing for years and we've shared very calm.

<unk> values and vision and the opportunities to grow that business faster than the synergies. We have in mind are just allow us to take what is already a strong business and make it even stronger and faster.

Perfect. Thank you guys.

The next question is from Brent Thill of Jefferies.

Sean you everyone's admired.

Your ability to stay discipline on M&A over the last decade, and I guess, many are kind of feeling like you broke the mold on this.

And I think everyone's just wanted to hear on the multiple even if revenue doubled again, it would be over 25 times or so.

What was it that was so special and if you think about in the last few years, you've always said.

Steve.

Carrie you why what happened with XD, what happens with XD now.

As as the scales.

So two things to that Brent. The first is I understand that you know what what youre, saying in effect as some people will say Hey show me how does value.

Is accruing to Adobe shareholders as well and we certainly believe that otherwise.

No we wouldn't be doing it and we do believe that it will be a value generating for the Adobe shareholders I think as it relates to XD and as it relates to Fig MA I mean, we certainly for designers, we're targeting what needed to happen as it related to screen design with a desktop product.

I think the much newer market that emerged which fig more effectively both addressed and pioneered was the ability to do this in a collaborative way and dramatically increased the scale and they over the last decade have really invested in and solve some of the hard technical problems that existed to make this.

Happened on the web a friction free so you know from our perspective, the creative products continue to be strong the ability to really tie the designers and developers.

Is really where there's this unique opportunity as well as to create new markets. I mean, I'll give you one more you know sort of what if scenario in terms of how we think about it which is you combine what they've done with white boarding and ideation and what will be the future of work and if you think about the presence of acrobat and what we have with acrobat or if you.

Think about the notion of brainstorming and what happens with Fig gem with what happens with Adobe Express I think the opportunities are tremendous I understand that there'll be some sentiment associated with the price and balls in our court to go demonstrate how we execute against our current initiatives as well as to demonstrate the value of this new one.

<unk>.

Thanks Ronnie.

Yeah.

Okay.

You can go to Keith Weiss of Morgan Stanley .

Thank you guys for taking the question one just real brief one on figure, but don't want to beat that horse too much and then some questions on the core business.

Sigma we've definitely heard a lot about them in the field and it's a great asset that you guys are acquiring.

It does seem like it overlaps pretty directly within design. So can you talk a little bit about sort of the is there a rationalization of those two products or just figured I would just kind of the go forward product there and then on the core business last week last week last quarter, you gave us a little bit of an update on kind of how pricing was impacted impacting <unk>.

Median net new air or I was hoping to get an update on sort of how the pricing impact.

Flowed through this quarter and then on the margin front. It looks like you guys pulled back on hiring a little bit can you talk to us about the pace of investments on a go forward basis, and whether that's going to be a little bit more measured given the macro impacts starting to build up thank you very much.

Yes, I'll start by talking about.

In design and figured out there.

They're very different products at the at the core and designers around building print and publishing workflows and and during lay out our Sigma is really all about enabling product design.

And the collaborative product design model in fact, if you look at and design. It's our traditional base of users predominantly designers that are using it one of the things that's really interesting about Sigma is the makeup of their user base are in fact, two thirds of their users are not designers their developers and other stakeholders in the process and the foundation of that collaborative model is.

Is what makes this such a special and accretive acquisition for us.

If you think about going forward. The primary focus is going to be about bringing a figment of the family and then taking all of the capabilities, we have across illustration and video and creative imaging and building. It on top of the figure of a platform to enable a whole new generation of.

The capabilities that are going to resonate with digital native and next generation creative professionals and and we're very excited about them. The two products are quite different.

Yeah, then from an investment standpoint.

One of the great things about Adobe is is we've got tremendous growth opportunities. We've got an opportunity to drive the core franchise to 30 and $40 billion of revenue, but we're going to do what we've always done which is invest in a disciplined way and drive that growth with strong profitability and strong cash flow and so we will do what we've always done we're gonna oriented.

Towards growth were backed utilizing our facilities, we're investing to scale our business, we're investing in our products go to market marketing.

We're driving P. L G motions, but we're going to do it in a disciplined way that that deliver strong profitability and cash flow, while growing this business and a strong and robust way. So we'll do what we've always done operating discipline business.

Got it and on the pricing side.

Okay.

Yeah on the pricing side first of all you know.

Pricing for us is all about value.

The business.

That we've been building is all based on new user acquisition Upselling and of course, occasionally pricing pricing moves and the pricing is always associated with added value. So on the creative side, we've been adding lots of apps, we've been enabling frame io integration into creative into our creative cloud applications, we've been bill.

A lot of share and review workflows as an example, a lot of stock in content images in there as well and then on the acrobat pro side, we've been doing a lot more deep integration with sign around.

Bulk signatures branding a web forms payments. So the foundation is that pricing is always connected to the real value that we're adding and in doing that we continue to see pricing play out the way, we expected and all of this was baked into what we had planned for the year.

Right.

The next question comes from Brad Sills of Bank of America Securities.

Oh, great. Thanks, so much another question here on SYGMA.

It looks like the company is well positioned for a designer developer use cases, much like frame IL four video editing, bringing you into more of those use cases really extending the reach for creative cloud.

I guess the question is where it was creative cloud.

And up.

Or does that footprint and the Sigma footprint began in other words could you see a scenario where this acquisition in these use cases bring through a pull.

Pull through more sales of creative cloud subscriptions.

I think the three ways in which we look at that.

In terms of the customers for Sigma I think as David mentioned, the number of developers who are part of this products set.

<unk> is actually extremely extensive but in addition to the product set associated with the Sigma design for developers as well as stakeholders I do want to again emphasize the product.

As it relates to Fig Jam for anybody who has a knowledge worker and anybody who wants to I did so if you think about the value of ideation and brainstorming I mean, the reality is they have tens of millions of people, who have signed up and trial Sigma we have hundreds of millions of people who have used our products and so the adjacency.

In terms of you know, enabling both of those combined sets of customers to use each of those products. We continue to believe that that drives great value. So this is really about in our sense and then if you take acrobat and the penetration that acrobat has everybody who's using acrobat also wants to both share as well as I did in <unk>.

<unk>. So I know, there's a lot of questions around figment design, which is clearly achieved escape velocity I would urge you also to spend a little time looking at Fig, Jim as I know you have and then you know really understand that that also dramatically expands the customer base, so, yes, getting creative cloud to them.

More.

Diverse set of customers on the web, allowing collaboration and enabling it much like you said with frame that's very much part of the strategy and Thats why even in the press release, we talk about accelerating creativity on the web as one of the key pillars.

Thanks, So much afternoon, Dan one for you. Please if I could.

You've talked about in the past some healthy pipeline builds for Q4 back in your confidence.

For digital media <unk> guidance based on some good pipeline activity there for Q4 any update on that please thank you.

Yeah, no it's playing out as we expected as.

As we take a look at the enterprise business closing.

Plus deals transfer.

Transformational deals as we look forward off of that momentum into Q Q4 pipeline is building nicely teams doing a good job executing against the opportunity and it's playing out as expected.

Thank you so much.

The next question is from James Lee shower of Griffin Securities.

Got it thank you and good morning.

Shelton, who.

Some of your remarks and Dan.

One of your bullet points regarding the rationale for Sigma you made some interesting references to their platform.

Accelerating your products on the cloud are you, suggesting perhaps that there was something in there.

<unk>, let's call it that may lead ultimately to a material change in adobe's pre.

Product release cadence or product packaging.

How do you see.

Portfolio.

Evolving and your underlying R&D.

Let's call it infrastructure or process, because there's something.

Into in terms of how they develop products that I think youre, hoping to splice in that that kind of DNA.

And then secondly, it's not unprecedented for Adobe to purchase a dynamic competitor.

We can go back many years you've done this before maybe put this in the context of some of those prior acquisitions.

Where you bought a competitor that had meaningful either competitive impact or complementary.

Technology and thinking of course.

The material impact of tobacco media acquisition had many years ago.

So Jay let me first cover the first one and Theres no doubt that what Sigma has been able to do on the web by solving a lot of these multi player.

Hi, scalability requirements to allow the tens of millions of people to use our Sigma design and even more important big jam on the web.

Is an engineering, Marvel and having access to that technology and being able to take advantage of it to dramatically increase anybody who is participating in our design products, whether they'd be stakeholders and developers will I think dramatically increase our tam as well and so firsthand.

For most of their Dev ops is great. I mean, we certainly have a lot of that expertise on the digital experience side of the house as it relates to you know the trillions of transactions, but for the creative we really believe that this is one of the key pieces of technology that we're getting that are going to be really amazing I think as it relates to your second question.

We really view these as when you have the right altitude for us. It's all about how do you take things that might seem competitive but are actually more complementary and expand the nature of the market and for me when I think about what we did with Macromedia. It was really about saying, we're going to target you know more.

<unk> professionals are not just focused on imaging, we're going to focus on what's happening with video on the web or gaming and so I think it was an expensive part of how we looked at it and that's the same situation here for US it's really not about you know what we had on the desktop it's really about expanding to the web multi surface is some.

That we have talked about a lot it's about our community.

In many ways, a J and what they have done as it relates to their communities and plug ins and how they are being able to use artificial intelligence all of that also our power we bring to bear to the combined so from my perspective. This is really about adjacency it's about complementary.

Things that we have done certainly we did have a presence in screen design on the desktop, but big picture. This is all about dramatically expanding it and that's the conversation that David Dillon, Scott and I have been having and David feel free to add to that yeah.

From the beginning of the conversations with Dillon.

Primary focus has been on things that we couldnt do individually what are the things that we could do and bring to market that that combining the two products.

Two product sets in two companies could really enable a better together story and in particular, what we see is that we have this incredible wealth of AV technology and expertise around illustration in video and imaging and photography and three D. All from coming from the lens of our floor.

Chip applications and as Sean mentioned, they've built such a rich.

Platform for collaboration bringing these things together allow us to re imagine what the basically creative.

Content creation should look like in the future by taking our technology integrating it on top of or building. It on top of the the Sigma platform and then enabling a whole set of new use cases that would never have happened were it not for this combination.

Thank you.

The next question comes from circa <unk> Kalia of Barclays.

Okay, Great Hey, guys. Thanks for taking my question and congrats to all on the announcements.

Dan maybe for you just to maybe focus on the core business for a minute and then loop and loop and FEMA.

Are there any puts and takes with margins. This year that we should keep in mind when thinking about organic margins next year and of course, I understand youre guiding to it but just sort of anything that you want us to note and then on top of that how do you think about the EBIT profitability for <unk> and where that can go over time.

Sure. So let me take them in order so as we think about our margins. This year I think you can see the trajectory throughout the year, what I would say is as what we're seeing in the back half of 2022, I think is more reflective of a normalized environment.

We talked about continuing to invest in the products, how we market those products, how we drive.

Product line growth, how we're going to market, but also complementing it with.

Repopulating the campuses being back to in person interactions getting on planes and let's move bit more reflective of a normalized operating environment and so that's what I would say think about maybe the second half of 2022 as a bit more of a normalized environment as we think about margins in.

The context of Sigma and the transaction.

We talked a couple about a couple of things we talked about this is about growth.

This is delivering that growth in a disciplined way so when I think about operating margins in that context.

We talked about the second half of 2022 being that baseline.

More normalized run rate and if I think about the first couple of years post close year. One year. Two post close think about margins that are may be one to two points delta versus where we would be on a standalone basis, and then by the time, we get to year three I would expect it to be more neutral from an.

<unk> standpoint, and again I also want to register the point that I mentioned earlier in Q&A.

As we get past year, one we're gonna start growing EPS faster than our revenue growth profile and so we feel good about that inflection point and driving a disciplined way when we look at GAAP operating margins, obviously, you'll see a bigger delta in the near term to account for the stock based.

Can we really view.

Stock based compensation to incentivize the employees to stay with the company and unlock those growth potentials and youll see that amortize over a four year period consistent with our equity programs and then we'll be back to a more normalized run rate after that amortization period, so you'll see more impact on the <unk>.

<unk> side, and we feel pretty good about the trajectory from a non-GAAP operating margin standpoint.

Very very helpful. Thanks, Dan Congrats again.

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

Secondly, we can go straight to Phil Winslow of credit Suisse.

Hi, Thanks for taking my question I, just wanted to focus a little bit more on the near term in terms of your guidance for Q4, if we were going back to last year, you saw a sort of a lower uplift around sort of the black Friday selling period as compared to prior years now obviously going into this Q4 is always is your seasonally strong.

Longer business.

Or <unk>.

Prize spend period for Adobe, but we're also going into that sort of the black Friday period again again, obviously when you think about your guidance for Q4, what are you baking in compared to last year for sort of those black Friday trends, but also that sort of a seasonal uplift in the business spending.

I think as we said in our prepared remarks, Phil we're guiding in your typical seasonality Q4 tends to be a strong season. Both in terms of the enterprise business for us in closing the enterprise business in the pipeline that we've built over the year as well as some consumer commerce days as you mentioned and all of that is.

Factored into the targets that we're.

Guiding we're not.

Changing that based on anything different that we've seen so I think we continue to believe that our business is resilient and if you look at the initial targets that we're providing we would expect to have another strong seasonal flows through the year.

Great. Thanks, guys.

And the final question today comes from Kirk <unk> of Evercore ISI.

Yeah, Thanks, very much and congrats on the acquisition Dan I just wanted to follow up on your comments maybe on the on the dilution around the deal you know I think just based on what she knew all of you have said about sort of the complementary nature of the deal the ability to expand the market. I think you know people are asking why isn't there more sort of synergy from a go to market perspective with this.

Deal, meaning bringing sigma onto your platform would theoretically just turbocharged sales immediately given sort of your scale. So I just how much of that's baked into the dilution forecast are you I realize it's early but are you, leaving that more for upside because I think that the length of the dilution given that this should be complementary from a.

Go to market perspective, I think it's what's somewhat confusing to folks. Thanks.

Well certainly for US. If this is all about the top line growth and you know what if you look at actually what we would expect in terms of their continued growth and our continued growth I think the top line of both companies they would accelerate and so.

I think maybe at the meeting as we get more time, we're happy to share more color associated with it.

But you know from my perspective.

We actually think that we have.

In a plan that allows us to.

Really show the.

Benefits of the combination as well as continue to overachieve against those.

Okay.

Okay, and so is that is the.

Go ahead, Sir just to follow up on that.

Difficult for us to meaning you both can grow faster.

Are these new developers that require serve new efforts to go get them from Adobe perspective, I was just trying to get a sense of the overlap of the opportunity would seemingly think that you guys combined could actually do it more effectively together, which would create greater operating leverage to a certain degree sooner. So I am just trying to I realize theres a lot of moving parts in the near.

Turn to this but I was just kind of curious is that what's sort of embedded in your expectations or are you sort of believing that for you have to see what happens as you get I guess, a little bit closer to the deal closing.

I think for US, we're just factoring in everything including the fact that this is a stock purchase and half of it is approximately in stock and what that means in terms of dilution as we said we will start to offset that we have tremendous cash flow generation, but you know from our perspective, we are going to be aggressive.

Making sure that we continue to drive the top line and the bottom line and so that is very much on our mind in terms of delivering great value to the customers in the industry and creating new opportunities.

And from my perspective.

What I do want to say since that was the last question was first and foremost we're really excited about our current business I mean, the current business is growing at a great clip in this macroeconomic environment. We have multiple growth initiatives that are all demonstrating how mission critical they are and how they're relevant they are in this.

New digital first world, where whether it's work live play everything is going to be impacted by digitally so.

First and foremost we are very confident about our existing portfolio and the growth trajectory of the current portfolio. The addition of Fig. My from my perspective is the ability to turbocharge that in terms of both the opportunity that the company has as well as the ability to serve our ever broadening set of customers and so.

I hope you all view that within that context, which is a lot of confidence about our existing business and more excitement about making sure that we're setting in place.

You know greater future opportunities we.

We'll look forward to having a lot of you at Max I Hope you do come there we are planning a F.

Part of that section as well and so we'd be happy to share more with you when we joined that and with that I'll turn it over to Jonathan Thanks, Shawn and thanks, everyone for joining US. This morning. This concludes the call.

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Yeah.