Q3 2024 Adobe Inc Earnings Call
Mhm.
Okay.
[music].
Yeah.
[music].
Adobe: At Adobe, we are building the future of video to help editors realized it.
Adobe: Creative vision faster and push it further.
Speaker Change: This past spring, we unveiled early explorations of generative AI and our video applications and today, we're excited to share an update on progress and new capabilities that will help creatives overcome common editing challenges.
Speaker Change: Guided by our communities input the Adobe Firefly video model as trains with graders rights in mind and designed to be commercially safe.
Speaker Change: With Firefly text video you can use text prompts.
Speaker Change: A wide variety of camera controls and referenced images to generate bureau that seamlessly fills gaps in your timeline.
Speaker Change: Quickly explore ideas for unique visual effects.
Speaker Change: Create element for pre visualization like atmospheric overlays.
Speaker Change: Or use text video to generate inspiration promotion graphics.
Okay.
Speaker Change: With image to video bring your still shots or illustrations to life by transforming them, it's a stunning live-action clips.
Speaker Change: And coming later this year to Premier Probative generative extent lets you extend clips to cover gaps some footage that transitions or hold on shops longer for perfectly time data.
Speaker Change: And again like other Firefly generative AI models. Our video model is designed to be commercially safe and it's only trained on public domain or licensed content.
Speaker Change: Never on our users' content. So you can create with confidence.
Speaker Change: We can't wait for you to get your hands on these new capabilities in data later this year.
Speaker Change: Yeah.
Speaker Change: Good day and welcome to the Q3 FY 'twenty for Adobe Earnings Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Jonathan Ross VP of Investor Relations. Please go ahead.
Speaker Change: Good afternoon, and thank you for joining us with me on the call today are Sean to noon Orion Adobe's Chair and CEO, David Wadhwani President of digital media and Mel Cakravartin <unk> President of digital experience and Dan Durn Executive Vice President and CFO.
Speaker Change: On this call, which is being recorded we will discuss Adobe third quarter fiscal year 2024 financial results you can find our press release as well as PDF of our prepared remarks in financial results on Adobe's Investor Relations website.
Speaker Change: The information discussed on this call, including our financial targets and product plans is as of today September 12 and contains forward looking statements that involve risk uncertainties and assumptions.
Speaker Change: Actual results may differ materially from those set forth in these statements for more information on those risks. Please review today's earnings release, and Adobe's SEC filings.
Speaker Change: On this call, we will discuss GAAP and non-GAAP financial measures are reported results include GAAP growth rates as well as constant currency growth rates. During this presentation adobe's executives will refer to constant currency growth rates unless otherwise stated non-GAAP reconciliations are available in our earnings release and on Adobe's Investor Relations.
Speaker Change: Website, I will now turn the call over to Sean to Neil.
Sean: Thanks, Jonathan Good afternoon, and thank you for joining us.
Sean: Adobe had an outstanding third quarter, we saw strength across creative cloud document cloud and experience cloud.
Speaker Change: <unk> revenue of 5.41 billion representing.
Speaker Change: Representing 11% year over year growth.
Speaker Change: GAAP earnings per share for the quarter was $3 76, and non-GAAP earnings per share was $4 65, representing 23% and 14% year over year growth respectively.
Speaker Change: Our success reflects our strong execution against an ambitious innovation agenda to deliver value to our customers.
Speaker Change: <unk> advances we've launched in the past 18 months are delighting, a huge and growing universe of users and enterprises empowering them to unleash their creativity accelerate document productivity and power their digital businesses.
Speaker Change: Our vision revolves around adobe's deep technology platforms across creative cloud document cloud and experience cloud.
Speaker Change: Which when integrated provide significant differentiation and value.
Speaker Change: We're amplifying creativity and productivity by enabling the convergence of products like Photoshop Express and acrobat as knowledge workers and creative seek to make content more compelling and engaging.
Speaker Change: We're bringing together content creation and production workflow and collaboration and campaign activation and insights across creative cloud Xpress in experience cloud.
Speaker Change: New offerings include Adobe Gen studio and Firefly services empower companies to address personalized content creation at scale with agility and enable them to address their content supply chain challenges.
Speaker Change: Adobe is customer centric approach to AI is highly differentiated across data models and interfaces.
Speaker Change: We train our Firefly models on data that allows us to offer our customers a solution designed to be commercially safe.
Speaker Change: We have now released Firefly models for imaging, Victor and design and just previewed our new Firefly video model.
Speaker Change: Our greatest differentiation comes at the interface layer with our ability to rapidly integrate AI across our industry, leading product portfolio, making it easy for customers of all sizes to adopt and realize value from AI.
Speaker Change: Firefly powered features in Adobe Photoshop illustrator lightroom and Premier Pro help creators expand upon their natural creativity and accelerate productivity.
Speaker Change: Adobe Express is a quick and easy create anything application unlocking creative expression for millions of users.
Speaker Change: Acrobat AI assistant helps extract greater value from PDF documents.
Speaker Change: Adobe experience platform AI assistant empowers brands to automate workflows and generate new audiences and journeys.
Speaker Change: Adobe Gen studio brings together content and data integrating high velocity creative expression with the enterprise activation needed to deliver personalization at scale.
Speaker Change: Overall, we're delighted to see customer excitement and adoption for our AI solutions continue to grow.
Speaker Change: We have now surpassed 12 billion Firefly power generations across Adobe tools.
Speaker Change: I'll now turn it over to David to discuss the momentum in our digital media business.
David: Thanks, <unk> Hello, everyone. In Q3, we achieved net new digital media <unk> of $504 million and revenue of 4 billion, which grew 12% year over year fueled by innovation in both our creative and document businesses.
Speaker Change: With document cloud, we continue to reinvent how people create edit share review and sign digital documents with PDF and acrobat across mobile web and desktop.
Speaker Change: For decades, PDF has been the de facto standard for storing unstructured data, resulting in the creation and sharing of trillions of pdfs.
Speaker Change: The introduction of AI assistant across Adobe Acrobat and reader has transformed the way people interact with and extract value from these documents in Q3, we released significant advancements, including the ability to have conversations across multiple documents and support for different document formats saving users valuable time and providing important <unk>.
Speaker Change: <unk>.
Speaker Change: We are thrilled to see this value translate into AI assistant usage with over 70% quarter over quarter growth in AI interactions.
Speaker Change: In addition to consumption, we're focused on leveraging generative AI to expand content creation in Adobe acrobat, we've integrated Adobe Firefly image generation into our edit PDF workflows, we've optimized AI assistant and acrobat to generate content fit for presentations E mails and other forms of communication and we're laying the.
Speaker Change: <unk> work for richer content creation, including the generation of Adobe Express projects.
Speaker Change: The application of this technology across verticals and industries is virtually limitless Tata consultancy services recently used Adobe premiere pro to transcribe hours of conference videos, and then used AI assistant and acrobat to create digestible events summaries in minutes.
Speaker Change: This allowed them to distribute newsletters on session content to attendees in real time.
Speaker Change: We're excited to leverage generative AI to add value to content creation and consumption and acrobat and reader in the months ahead, given the early adoption of AI assistant we intend to actively promote subscription plans that include generative AI capabilities over legacy perpetual plans that do not.
Speaker Change: In Q3, we achieved document cloud revenue of $807 million growing 18% year over year, we added $163 million of net new document cloud <unk>.
Speaker Change: Other highlights include.
Speaker Change: Expanded acrobat customer value with multi document support for AI assistant enhanced meeting transcript capabilities and.
Speaker Change: Support for larger documents.
Speaker Change: Optimized AI assistant for mobile web and desktop experiences, including voice enabled conversations on Android.
Continued strength of PDF based collaboration with shared links growing greater than 70% year over year.
Increased top of funnel through acrobat web with monthly active users growing over 35% year over year as a result of linked sharing and our Microsoft edge and Google Chrome extensions.
Speaker Change: Key enterprise customer wins include Amazon, Charles Schwab Disney Home Depot, KPMG Red Bull Sutter health and the U S Treasury Department.
Speaker Change: With creative cloud the demand for creative expression and design across media types and surfaces has never been greater consumers of sharing edited photos more than ever students need to create school presentations that standout.
Speaker Change: <unk> professionals are being asked to create more images designs and videos faster than ever before small businesses are looking to engage prospects on social channels and large enterprises are defining their content supply workflows to deliver personalization at scale.
Speaker Change: AI has the potential to empower creative professionals communicators consumers and organizations of all sizes to be more creative and productive our strategy is to build technology that will create more streamlined and precise workflows within our tools through features like text, a template and express generative Phil and photo.
Shop, generative re color and illustrator generative remove and lightroom and the upcoming generative extend for video and Premier Pro.
Speaker Change: We're exposing the power of our creative tools and the magic of generative AI through Firefly service API is so organizations can generate and assemble content at scale.
Speaker Change: As we integrate Firefly innovations throughout our tools usage continues to accelerate crossing 12 billion generation since launch the introduction of the new Firefly video model earlier. This week at ABC is another important milestone in our journey.
Speaker Change: Our video model like the other models and the Firefly family is built to be commercially safe with fine grained control and application integration at its core.
Speaker Change: This will empower editors to realize their creative vision more productively in our video products, including Premier Pro.
Speaker Change: With express where on a multi year strategic journey to dramatically expand our reach across customer segments. Adobe Express is our AI first content creation application fulfilling our mission to enable creativity for all.
Speaker Change: The all new release of express across web and mobile earlier. This year has been embraced by millions of users. They love how easy it is to create anything in express with strong enthusiasm for our image editing features powered by Photoshop video editing capabilities powered by Premier Pro document and presentation workflows powered by <unk>.
Speaker Change: About an unparallel generative AI features powered by Adobe Firefly.
Speaker Change: Our integration of Adobe stock and design templates with our unique Firefly design model ensures that content created and express can standout.
Speaker Change: Express empowers, our broad array of individuals and businesses from solar printers to the largest enterprises in the world. We're continuing to grow express as we ramp our go to market activities to support recent product releases, including express for individuals Express for education expressed for teams and express for enterprises as a.
<unk> in Q3, we drove 70% year over year growth in cumulative exports, we on boarded over 1500 businesses and millions of students.
Speaker Change: In Q3, we achieved $3, one 9 billion in revenue, which grew 11% year over year in constant currency net new creative cloud <unk> was $341 million.
Other highlights include.
Speaker Change: New AI powered features in Photoshop that accelerate core creative workflows and streamline repetitive tasks.
Generative fill in Photoshop was upgraded to Firefly image three generative image was made generally available and the new selection brush and adjustment brush tools were introduced making selective at it's easier than ever.
Speaker Change: Broad based innovations and illustrator, including significant improvements to vector generation enhancements to text to pattern and the all new generative shaped pill. These advances unlock new ways for pro designers and illustrators to quickly bring their vision to life.
Speaker Change: Strong adoption of the latest version of Lightroom and Lightroom mobile, which now includes the new generative remove feature.
Tens of users have non destructively removed unwanted objects from their photos with a single click.
Speaker Change: Strong demand for Firefly services, which provide API as tools and services for content generation editing and assembly empowering organizations to automate content production, while maintaining quality and control total API calls tripled quarter over quarter.
Speaker Change: Acrobat Pro single App continues to be a growth driver and creative cloud, reflecting the increasing adoption of PDF as a preferred format to create collaborate and share visually compelling content.
Speaker Change: Key enterprise customer wins include the brand Tech group Dentsu, Este Lauder, Google media amongst meta.
B Newell: B Newell.
Speaker Change: <unk> brands, Pepsico Stag will group and the U S Navy.
Speaker Change: We look forward to hosting Adobe Max the world's largest creativity conference next month in Miami, where we will welcome more than 10000 members of our global community and engaged with hundreds of thousands more online we will hear from inspire and creators and unveil innovations across our clouds. In summary, we are excited about the pace and caliber of.
Enel: Innovations across our digital media products and the continued execution across multiple growth drivers I'll now pass it to enel.
Anil: Thanks, David Hello, everyone.
Anil: In Q3, we achieved experience cloud revenue of $1 $35 billion.
Anil: Subscription revenue was one point to $3 billion, representing 12% year over year growth.
Speaker Change: Customer experience management remains top of mind for a b to C and b to B companies around the world as they focus on digital strategies for customer acquisition engagement retention and expansion.
Speaker Change: Enterprises want an integrated platform to deliver personalized experiences at scale to their customers, while maximizing the ROI of their marketing and customer experience investments.
Speaker Change: Through the integration of experience cloud and creative cloud Adobe is uniquely positioned to combine the right content data and journeys in real time for every customer Expedia.
Speaker Change: The revenue growth, we're driving across our categories.
Speaker Change: <unk> commerce, and workflows data insights and audiences and customer journeys.
All built on the Adobe experience platform demonstrate.
Speaker Change: Demonstrate the strength of our business.
Speaker Change: Global brands Trust Adobe to build our content supply chain and deliver personalization at scale.
Speaker Change: <unk> us the number one digital experience platform in the industry.
Speaker Change: Customers are embracing the opportunity to address their content supply chain challenges with Adobe Gen studio.
With native integrations across experience cloud and creative cloud dense studio empowers marketers to quickly plan create store deliver and measure marketing content and drive greater efficiency in their organizations.
Financial services leader Vanguard is creating an integrated content supply chain to serve the strategic goal of deepening their relationships with a broad range of investors.
Speaker Change: Leveraging the <unk> solution Vanguard was able to increase quantity engagement by 176% by focusing on one to one personalization.
Speaker Change: And to realize millions in savings by improving content velocity and resource allocation with an end to end content creation workflow.
Speaker Change: Other highlights include.
Speaker Change: The general availability of Adobe content hub further enhancing the value of Adobe experience manager assets.
Speaker Change: Content hub enables brands to re imagine how creative assets are used across their organization and with external agencies driving content velocity and major efficiency gains.
Speaker Change: <unk> assets is used by the majority of the Fortune 50, including eight of the 10 largest media companies nine of the 10 largest financial services companies and eight of the 10 largest retailers.
Speaker Change: Increasing importance in adoption of warfarin to streamline workflows across marketing organizations and agencies.
Speaker Change: We extended our leadership in this category through the general availability of Adobe Warfront planning, which delivers a comprehensive view of all marketing activities in an organization and enables teams to optimize marketing planning and execution.
Global brands, including Deloitte Interpublic group and NASCAR are using warfarin planning to drive productivity gains and meet the rising demand for highly personalized marketing campaigns.
Speaker Change: Continued momentum for Adobe experience platform and native applications, including real time customer data platform customer journey analytics and Adobe journey Optimizer.
Speaker Change: We expanded our AEP portfolio with the general availability of Adobe journey, Optimizer, <unk> edition, which leverages generative AI to deliver personalized experiences to buying groups. The decision makers practitioners and stakeholders responsible for major purchasing decision.
Speaker Change: Strong industry analyst recognition, including the Forrester wave for a b to B revenue marketing platforms, and three IDC market scape reports across digital asset management, and headless digital commerce for both enterprise and mid market.
Speaker Change: Key customer wins include Dentsu home depot, Humana, IBM, Johnson, and Johnson Mayo Clinic Newell brands Premier League Stag will group TD Bank and UBS.
Speaker Change: We look forward to unveiling new customer experience management innovations across content data and journeys at Max next month <unk>.
Speaker Change: <unk> integrations across express creative cloud and experience cloud for freelancers solar printers, and marketers across agencies and enterprises.
Speaker Change: Our pace of innovation commitment to customer value global partner ecosystem and category defining solutions position us to continue our market leadership.
Dan: I will now pass it to Dan.
Dan: Thanks Chanel.
Dan: Today I'll start by summarizing Adobe's performance in Q3 fiscal 2024, highlighting growth drivers across our businesses and I'll finish with financial targets in Q3, Adobe achieved record revenue of $5, four 1 billion, which represents 11% year over year growth as reported and in constant currency our folks.
Dan: On both growth and profitability has been a cornerstone of our operating philosophy for years rooted in strategic prioritization relentless innovation and laser focused execution. Our Q3 results reflect this approach, we're making significant investments in our technology platforms launching global campaigns to expand.
Dan: Our customer base and attracting top tier talent, while delivering world class cash flows and profitability.
Dan: Third quarter business and financial highlights included GAAP diluted earnings per share of $3.76 and non-GAAP diluted earnings per share of $4 65.
Digital media revenue of 4.00 billion.
Dan: Net new digital media <unk> of $504 million.
Dan: Digital experience revenue of 1.35 billion cash.
Dan: Cash flows from operations of 2.02 billion in.
<unk> of $18, one 4 billion exiting the quarter.
Dan: In our digital media segment, we achieved Q3 revenue of 4.00 billion, which represents 11% year over year growth or 12% in constant currency.
Dan: We exited the quarter with $16 76 billion of digital media <unk> growing our ending a book of business, 13% year over year in constant currency.
Dan: Adobe achieved document cloud revenue of $807 million, which represents 18% year over year growth as reported and in constant currency.
Dan: We added 163 million of net new document cloud <unk>, which was a record for a Q3 growing our ending <unk> book of business, 24% year over year in constant currency.
Dan: Q3 document cloud growth drivers included.
Dan: Usage of MAU growth across Adobe reader and acrobat.
Dan: Usage of MAU growth via third party ecosystems, including Google Chrome and Microsoft edge extensions, which are driving free to paid conversion.
Demand for acrobat desktop and mobile subscriptions across all customer segments and geographies.
Dan: Strength in monetization of our AI assistant with new acrobat subscriptions.
Dan: <unk> and SMB is driven by our reseller partner network.
Dan: And strength in enterprise and public sector sales with a number of large deals closing in the quarter.
Speaker Change: We achieved creative revenue of $3, one 9 billion, which represents 10% year over year growth or 11% in constant currency. We added 341 million of net new creative <unk> in the quarter growing our ending <unk> book of business, 11% year over year in constant currency.
Speaker Change: Q3 creative growth drivers included new subscriptions for creative cloud all apps across customer segments, including teams enterprise and education with back to school demand.
Speaker Change: Strength across our acrobat pro illustrator lightroom and Photoshop single apps on Adobe Dot com.
Speaker Change: Growing demand for AI first Adobe express offerings, and mobile emerging markets and education.
Speaker Change: Early monetization of our new Firefly services solution in the enterprise segment.
Speaker Change: Continued momentum with new subscriptions in emerging markets.
Speaker Change: And contribution from customers stepping up to our higher value creative plans at renewal.
Turning to our digital experience segment in Q3, we achieved revenue of 135 billion, which represents 10% year over year growth as reported and in constant currency.
Speaker Change: Digital experience subscription revenue was 123 billion growing 12% year over year as reported and in constant currency.
Speaker Change: Q3 digital experienced growth drivers included strong subscription revenue growth at scale of AEP and native applications upgraded than 50% year over year.
Speaker Change: Strong subscription revenue growth with Adobe experience manager and work front.
Speaker Change: Success in booking transformational deals as well as individual solution selling.
Speaker Change: Continued strength in retention and expansion across our enterprise customers.
Speaker Change: And growing pipeline for Gen studio solutions to address the content supply chain opportunity.
Speaker Change: Turning to the income statement and balance sheet in Q3, Adobe delivered year over year EPS growth of 23% on a GAAP basis, and 14% on a non-GAAP basis.
Speaker Change: This was primarily driven by revenue growth and disciplined prioritization of our investments, which resulted in operating margin strength in Q3.
The company continues to deliver world class margins, while making significant investments in AI model training and inferencing capacity.
Speaker Change: Adobe's effective tax rate in Q3 was 17, 5% on a GAAP basis, and 18, 5% on a non-GAAP basis.
Speaker Change: <unk> exiting the quarter was $18, one 4 billion growing.
Speaker Change: Growing 15% year over year as reported or 16% in constant currency.
Speaker Change: Current RPI grew 12% year over year exiting the quarter.
Speaker Change: Our ending cash and short term investment position at the end of Q3 was 752 billion in cash flows from operations in the quarter were 2.02 billion in.
Speaker Change: In Q3, we entered into a $2 5 billion share repurchase agreement and we currently have 21 5 billion remaining of the original $25 billion authorization granted in March 2024.
Speaker Change: We will now provide Q4 targets, which factoring current macroeconomic conditions and year end seasonal strength for.
Speaker Change: For Q4, we're targeting total Adobe revenue of $5 five zero to 555 billion.
Speaker Change: Digital media net new <unk> of approximately $550 million.
Speaker Change: Digital media segment revenue of 4.09 to $4, one 2 billion.
Speaker Change: Digital experience segment revenue of $1 three six to 138 billion.
Speaker Change: Digital experience subscription revenue of 123 to 125 billion.
Speaker Change: <unk> rate of approximately 16% on a GAAP basis, and 18, 5% on a non-GAAP basis.
Speaker Change: GAAP earnings per share of $3 58 to $3 63.
Speaker Change: And non-GAAP earnings per share of $4 63 to $4 68 in.
Speaker Change: In summary, I'm proud of our year to date performance, which stems from a powerful combination of product leadership rapid innovation diversified business and financial discipline.
Speaker Change: The massive markets, we're catalyzing I'm confident in our ability to drive growth and industry leadership shunting back to you.
Speaker Change: Thanks, Dan.
Speaker Change: Adobe is focus on responsible innovation with customers at the center continues to be a unifying purpose for the company.
Speaker Change: The content authenticity initiative, which we founded in 2019 now counts over 3300 members across the digital ecosystem, all committed to enhancing trust and transparency with content credentials.
Speaker Change: In five years, the submission has gone from a vision to reality with companies, including Amazon, Google Leica meta Qualcomm, Sony tick tock, and others, all committing to implementing content credentials.
Speaker Change: The U S Department of Defense became the first federal government agency to implement content credentials by applying them to official Dod images.
Speaker Change: We're teaming up with the Governor Gavin Newsom on a new initiative to boost digital and media literacy skills in K through 12 schools and higher education institutions in California.
Speaker Change: By providing educational content programming and resources to schools across the state. We can help empower California's future workforce was success in an AI powered world and use this as a blueprint for other states and countries.
Next week, we will bring employees together for our annual Adobe for all conference to celebrate our vision and purpose and the impact that has on our customers and communities.
Speaker Change: I am confident that Adobe sculpture innovative product roadmap global market opportunity trusted brand and the unwavering commitment of our employees will continue to drive our success.
Speaker Change: Thank you and we will now take questions.
Speaker Change: Thank you.
Speaker Change: Like to signal with questions. Please press star one on your Touchtone telephone if you are joining us today use a speaker phone. Please make sure mute function is turned off to why your signal to reach our equipment. Please limit yourself to one question per person again that will be star. One if you would like to signal with questions.
Speaker Change: Star one.
Speaker Change: And the first question will come from Alex Zukin with Wolfe Research.
Alex Zukin: Hey, guys. Thanks for taking my question and congrats on what looks like a very strong quarter.
Alex Zukin: Just one question, but it's a two parter the quarter itself, particularly on the digital media are well looked very strongly look unseasonably strong because you haven't grown net new IRR sequentially into <unk> I think in almost four years. So maybe just comment like what drove this unseasonable strength as the pricing traction.
Speaker Change: And particularly the document cloud net new IRR.
Speaker Change: But at the same time, given all the product momentum you went through in the script. It is a bit confusing to understand why the Q4.
Speaker Change: <unk> is the lowest it's ever been sequentially for Q4 on net new digital media, <unk>, which I think makes people a little nervous about.
Speaker Change: Maybe that go forward in the next year.
Speaker Change: Performance and so maybe just address this dichotomy because it looks kind of seasonally a little bit different than what we're used to and I think it's weighing on the stock after hours.
I'm happy to start Alex and then David can certainly also add to that I mean to your point, we had a strong quarter earn.
Speaker Change: When I think about digital media document cloud to the point that you made acrobat continues to perform the AI assistant and the SKU that we have associated with.
Speaker Change: Acrobat continues to perform well as we had said we expect creative to show.
David: Growth on growth year over year, and so that also played out exactly as we expected and it was a strong Ed when you look at it as it relates to.
The last few weeks performance we saw the.
David: Typical trend that we would see going into Q4.
Alex Zukin: I can see how youre, saying youre looking at the sequential guide, we're looking at it and saying, it's our strongest ever Q4 target that we have put out there for Q4, Alex and so I think we just continue to focus we would expect creative to again grow when you talk about growth over growth net new IRR in Q4.
David: Foreign.
David: All of the new initiatives that we're talking about AI et cetera continue to perform so.
David: From our perspective.
When we look at what we guided to the second half of the year to your point Q3 is stronger we expect a seasonally strong Q4 and then.
Speaker Change: Continued innovation should continue to drive growth and maybe I'll just add a couple of things to a chat and you said.
Speaker Change: Again, just a little bit more context behind the strength in document cloud obviously linked sharing.
Speaker Change: And what we've done with the reader distribution across mobile web and desktop that's really what continues to drive this business and that underlying strength is going to continue not just in Q3, but it's going to be something that we are able to.
Speaker Change: <unk> and <unk> and grew ongoing forward because we've got a lot of flow optimization associated with that.
Speaker Change: As we look at.
Speaker Change: Creative cloud again, we have a broader set of offerings than we've ever had right. We have things like with creative cloud we.
Speaker Change: We have higher value higher priced offers thanks to AI innovation, that's happening in the base plans that are impacting how how the creative cloud businesses is that is doing we also have a broader set of offerings than we've ever had now with web and mobile, including premium and lower priced offerings that are driving more probe.
Speaker Change: Separation and the blend of those two things also sort of comes into the strength of the quarter and how we see things going out, but as you look at the second half overall.
Speaker Change: We came into the second half with a with a strong expectation of how the second half is going to play out and frankly, it's playing out as we expected in terms of the aggregate Q3 Q4 number in terms of the specifics on timing.
Speaker Change: Q3 was a little stronger than you expected and for good reason given seasonality I think a lot of that can be explained by a few deals that would have historically.
Speaker Change: Closed in Q4 closing earlier than expected in Q3 and that changed the dynamic in terms of the linearity that you would typically see between Q3 and Q4.
Speaker Change: Very helpful guys. Thanks again.
Speaker Change: And our next question will come from Mark Murphy with Jpmorgan.
Mark Murphy: Thank you so much and I'll add my congrats.
David I'm wondering if you can compare the AI monetization opportunity that.
Mark Murphy: You're sensing with the image models relative to the future potential.
Mark Murphy: With your audio and video models as for instance, how many tokens might be consumed when someone is generating.
Here versus an image and then tying in with that is how optimistic are you maybe being able to solve some of the limitations with the current video generation models, where the facial expressions.
Mark Murphy: Ken lack realism or they can't handle the object interactions or they don't provide enough detail or a resolution of the video.
Speaker Change: Yes happy to happy to take that let me just sort of taken a little bit of a step back and talk about the core strategy that we have for AI and AR and the conversion then in terms of how we think about monetization. So.
Speaker Change: I think we've been incredibly consistent with what we've said dating back a year or year and a half.
Ago, where we talked about the fact that we were going to develop the broadest set of models for the creative community and we're going to differentiate the models based on quality commercial safety integrate ability into our tools and control ability and as you've seen very methodically over the last 18 months we continue.
Speaker Change: To bring more and more of that innovation to life and that fundamentally is working as we've now started to integrated much more actively into our base. If you look at it with with <unk>.
Speaker Change: Photography, we now have in our tool generative remove we have AI assisted edits and design, we have generative pattern generative fill shape we have.
Speaker Change: In.
Speaker Change: In Photoshop, we have gen remove we also have gen.
Jen Phil: Jen Phil and I can continue on with all of the generations, but we've also now started to integrate it and Firefly services for what we're enabling enterprises to be able to access and use.
Jen Phil: In terms of batch working through Apis.
Speaker Change: If you look at sort of how that's played out as we talked about we're seeing accelerated use and generative credits being consumed because of that of that deeper integration into all of our tools and that is playing out as we expected. When you look at then how that converts to monetization first and foremost.
Speaker Change: We've integrated it a lot of that value into our core products with more value and more pricing. We're also seeing that when people use. These generative features they retain better we're also seeing that when people come to.
Adobe to try our creative cloud applications or access express application they are able to convert better.
Speaker Change: And so there are all these ancillary implied benefits that we're getting but in terms of direct monetization. What we've said in the past is that the current model is around generative credits, which is I think where youre going with this and we do see with every subsequent capability. We integrated tool total credits consumed going out now what we are trying to do as we go forward we have.
Speaker Change: It started instituting the caps yet and part of this is as we've said all along we wanted to really focus our attention on proliferation and usage across our base. We see a lot of users excited about it at some of the most actively used features that we've ever ever released and we want to avoid the generation anxiety that people feel.
Speaker Change: But we're watching very closely is the economic the economy of generative credits evolves and we're going to look at instituting those caps at some point when we feel the time is right <unk>. We're also looking at other alternative models, what we did with the acrobat AI assistant have proven to be very very effective and so we're also considering other opportunity.
Speaker Change: He is like having standard cc plans that have a core set of generative capabilities, but also having premium API sorry.
Speaker Change: Premium AI plans that will include things more like video and other things. So we're very happy about the innovation that's key.
Speaker Change: Coming in we see the opportunity to engage very deeply in the monetization, but we want to play it out over time and proliferation continues to be our primary guide and then lastly in terms of quality.
Speaker Change: I don't know if you had a chance to see some of the videos we put out there.
Integrated directly into Premier also texted taxed a video image to video more control ability. We have also the ability now to generate not just.
Speaker Change: It seems with humans and dogs and organic animals, but all of these like overlays and things that creative professionals actually want to work with and so we're very excited about the set of things that they can get out of the box it get going and human faces and things will just continue to get better we have a lot of great research that youll start to see and I hope you get to play with the models because we've taken a huge step forward.
Mark Murphy: Mark maybe I'll, just add a little door, David said, which was great I spent a couple of hours with our video team are they're just absolutely hit it out of the park I mean, the work that they have done which is leveraging the image models with video and again I think to David's point, the integration with Premier that's where we've always.
Speaker Change: You said, it's the integration of the model and the application that differentiate that I think when other models first came out people were like Wow you can describe it that's just such a small part of where the value is in the real value is you have a video you want to extend it.
Speaker Change: And a game changer in terms of what we can do it so really excited about the stuff that we're doing in video and again to David's point. This will be monetize differently from the way we have four images, which was you know part of the you know sort of base value of pricing. So the way I answer. Your question is and the third thing I would say is.
Speaker Change: Remember, we have the ability to create custom models as well and so when you ingest the video that people want to edit the ability to extend that is not just dependent on what the model is but also on what the new data is and again that represents really a unique ability for us so hopefully all of those three.
Speaker Change: Why.
We're leading the pack in terms of how people can derive value in the non linear editors, which is where the action is going to be.
Speaker Change: Thank you very much.
Speaker Change: And moving on to Keith Bachman with BMO.
Keith Bachman: Hi, Thank you very much I appreciate taking the question.
Keith Bachman: I wanted to pick up a little bit on how we should be thinking about David you spent monetization.
Keith Bachman: And we'll consumption do you think as we start to turn the year consumption contribute to our growth.
As we look at FY 'twenty, five because I think there's pervasive fears that.
Speaker Change: State of competition May in fact limit your ability to turn on that monetization. If you will from either consumption or or price I just wanted to see if you could.
Speaker Change: Laythan consumption against.
Speaker Change: The backdrop of competition.
Speaker Change: From our perspective, Keith I think when you look at what we have with the apps and the models are real.
Speaker Change: Just continue to think that uniquely differentiated Firefly services, which is you can think of that also is a consumption model, where we have that it's off to a really good start our.
Speaker Change: Our ability to give enterprises, the ability to automate content create custom models.
Speaker Change: Within enterprises, we're seeing real traction because it's a differentiated solution and that it's designed to be commercially safe and as it relates to the core subscription models again, David said this but all our reiterated which is the core subscription models for products like.
David: Photoshop and illustrator I think the differentiation is the combination of the model and the.
David: The technology and in video I think we will find additional ways to monetize it so I'm not sure who specifically you're referring to as it relates to you know competition in this space, but from our perspective, it's just unique I mean, if you look at the acceleration of what we have seen of generations and photoshop illustrator lightroom.
David: <unk>.
David: Its clear that were actually extending.
David: The value rather than having other people catch up.
David: And then one other thing I'd just emphasize there is that the commercial safety is so important to businesses of all sizes, frankly and that is something that we feel very very very differentiated on in addition to everything Chinese.
Speaker Change: Okay, Great and then perhaps for my follow up I wanted to pick up on Alex's first question, but you are guiding net new IRR down 3% year over year in Q4, and I think investors are.
Speaker Change: Thereby taking that as perhaps a framework when you look at next year, but is there anything.
Speaker Change: Net new IR will be down next year and I know you don't want to give guidance for next year, but just any kind of thoughts you want to address as it relates to.
Speaker Change: The guidance associated with that are being down in Q4 versus a framework that we might want to apply for the.
Speaker Change: FY 'twenty five net new way or.
Speaker Change: You're right Keith we're not going to give.
Speaker Change: 25 guidance, we'll certainly share more at Max and we would expect like we did last year that the.
Speaker Change: December earnings call, we'll give color on <unk>.
Speaker Change: Fiscal 'twenty five IRR, but I'd say a couple of things first as it relates to again the performance of the second half because to Alex in your question. If there are questions around Q3, and Q4 and what that.
Speaker Change: <unk> means again, we will hope to have record net you out or in fiscal 'twenty, four which I think is a great thing. We gave a 195 zero at the end of Q2, we are clearly on track to beat that number which we take as a positive sign and the other thing maybe perhaps.
Speaker Change: Tactically for you folks to think about it as well as it relates to the Q4 guidance typically you have black Friday and cyber Monday in the same quarter. This time cyber Monday I believe is in Q1 and so as it relates to our Q4 performance.
Speaker Change: It's the highest target that we've ever issued we will go out and continue to execute in.
Speaker Change: Continue to innovate so that's the way I look at the business scale.
Speaker Change: Okay. Thank you short tenor.
Curt Calia: And the next question will come from circuit Calia with Barclays.
circuit Calia: Okay, Great Hey, guys. Thanks for taking my question.
circuit Calia: David maybe maybe for you.
Calia: You touched on some of the drivers in document which was super helpful. But I'd love to maybe go one level deeper into some of the dynamics in that business, which of course continues to grow with net new <unk> at <unk>.
Speaker Change: At a really nice clip. So so maybe we can just talk a little bit about.
Speaker Change: Or are there are there any pricing headwinds or tailwind that we should keep in mind specifically for document cloud.
Speaker Change: And also maybe you can give us a sense for sort of where a document cloud is in its journey to maybe becoming more of a subscription heavy business.
Speaker Change: Makes sense.
Speaker Change: The first part is let me let me try to address the whole thing the question on subscription heavier.
Speaker Change: It is a very strong subscription business for us already.
Speaker Change: Hotline that and hopefully I'll address your question. So first if we take a step back and look at the document cloud I mean, the foundation of everything we're doing here.
Speaker Change: Is incredibly strong and it's machine we've had for a long time, but it continues to perform incredibly well and what I mean by that is the platform proliferation of what we have with acrobat and reader.
Speaker Change: The fact that we have 40 years into this business the rise of PDF and PDF, becoming the de facto standard for Qatar.
Speaker Change: Content as unstructured content as a whole is a remarkable foundation for us to be building on and the distribution, we have across desktop web mobile including web extensions.
Speaker Change: Is really the foundation of everything we do because that becomes the top of funnel for US you layer on top of that.
Speaker Change: The fact that generative AI in general has come out where unstructured content, especially PDF unstructured content that three trillion pdfs out there that we believe are out there.
It has suddenly inherently much more value than it did a year ago and this whole ecosystem is set up well for us in.
Speaker Change: In addition to that foundation, we've also band over the course of the last few years really transitioning the way people share because if you think about.
Speaker Change: PDF and acrobat in general one of the most important things people do is they produce the PDF to share it with others often for comment and review engagement and by increasing sharing via links versus sharing is an attachment we.
Speaker Change: We see a lot more engagement and interaction that we're able to benefit from and that also helps with the top of funnel and we can provide more value.
Speaker Change: And then on that platform, what we've done is with AI assistant we focus on consumption for the last nine months, starting with the ability to look at a single PDF and ask questions of that PDF. Then we started then we added support for multi dark. So you can now have five or six pdfs that youre, having a conversation with we added support for multiple.
Speaker Change: Formats. So you can look at PD asked but you can also dragon.
Speaker Change: Word documents are a powerpoint document or a link to.
Speaker Change: Two of our meeting transcript that you have.
We're adding in the process of adding language support for other languages optimizations. We're now starting to work on document type optimization. So if it's a contract we know how to optimize the results even better than if it's a marketing document.
Speaker Change: And that's all about consumption, but in addition to consumption. We're now expanding because of these conversations that happen with these documents are inherently about getting some insight and then sharing that insight. We've also started to do things that you can create richer content on the back end of it. So firefly is embedded now in edit PDF.
Speaker Change: Workflows.
Speaker Change: The conversational content is now able to generate E mails and presentations and those kinds of things. We've now embedded in the convert PDF workloads the ability to output to express.
And create richer media outputs and you can start to see all of this stuff coming together in a very real way already but also in the months ahead. The last thing I want to say on this too is that.
Speaker Change: What's really working out well for us is that when we are out pitching this opportunity not just in terms of the individuals that use it but also businesses is that we don't have any security concerns.
Speaker Change: Our our data governance model is the same data governance model has happened if you have access to the documents you can have conversations with the documents.
Speaker Change: And so it makes it a much easier thing for enterprises to adopt because theres no system systemic or government governance governance changes and so all of that continues to drive more adoption and as I said on the prepared remarks.
Speaker Change: Document cloud is substantially a subscription business, but now with AI assistant being available to subscription subscribers and not as directly to a perpetual users. We expect that to continue to transition even further.
Speaker Change: Super helpful. Thanks, guys.
And the next question will come from Jay <unk> with Griffin Securities.
Jay: Yes. Thank you good evening, David I'd like to follow up on something you said on the second quarter call.
Speaker Change: And that was that.
Jay: You said at the time that you work with the rest of the year going to quote pour gas on your G. T M and is well engage in a full funnel campaign later in the year. So the question is could you update us on that I mean, it does seem to be.
Speaker Change: In no small part corroborated by some of your internal investments that we've been able to see.
Speaker Change: For example in Europe Ics team your go to market positions across multiple products strategy positions and so forth.
Speaker Change: You've made this commitment score a substantial expansion, but do you think you need going forward to continually accelerate the pace of investments in go to market.
Speaker Change: Or do you think at some point, perhaps soon you can begin to taper that off and then leverage that capacity.
Speaker Change: Through revenue growth and thereby margin expansion.
Speaker Change: I think we might have to have you join our marketing organization given how much you know about the market dynamics are great question and so.
First and foremost again, a figure and to talk about express lets take a little bit of a step back and understand the dynamics of where we are in the evolution.
Speaker Change: I think with what we had talked about in Q2 was that.
Speaker Change: Not only do we feel like we have an incredible product now but that product is built on a brand new platform that has the ability to develop AI functionality.
Speaker Change: As a native part of that platform. So the speed of innovation that we've been.
Speaker Change: Adding capabilities to express is really been a breakneck speed and we're very excited about that.
Speaker Change: <unk> like.
Speaker Change: Native integration of Firefly, so that everything that's generated here is commercially safe, which again like I said is important to individuals and to businesses.
Speaker Change: But doing it with more control things like style and structure match and integrated into the image viewer the video viewer editor and the and the design surfaces. So very excited about that.
Speaker Change: In addition to the to those basic capabilities that are faster foundational. This is really the design model that we've been talking about Firefly design model. This is where it's surfacing the most and so you combine what we're doing with templates and the design model and people are able to create and effectively get access to an infinite number of templates rate, we believe that we're moving.
Speaker Change: From a template centric.
Speaker Change: A set of tools for communicators to an AI centric set of tools and we feel that with our design model and everything we have we're fundamentally going to create better content that stands out ultimately we also have great workflows that we've developed with photoshop and illustrator and acrobat.
And we've integrated all of this in ways that are fundamentally effective for businesses, including bulk creation and assembly capabilities. So small businesses all the way through enterprises are able to leverage this for their designer marketer workflows.
Speaker Change: In addition to all of that innovation to your point, we've really been focused on the go to market since last time.
Speaker Change: Since we last spoke of right before we last spoke in Q3, we expanded the offer set significantly we've always had expressed by individuals in market, but we added express for teams Express for enterprise and we just launched express for education.
This back to school year, with a lot better support for classrooms, and teacher student workflows as well.
Speaker Change: On the marketing side, we've been ramping ramping that very actively it's a net new audience to Adobe I mean, that's something to really recognize this isn't about shifting existing audience over shortly it's about getting access to net new audience and so for that we have to employ both traditional means.
Speaker Change: A focus on awareness campaign, but also.
Speaker Change: Leveraging social because that's where this this audiences so you'll see us doing a lot more on social as a result, and then on the back of all of that we're ramping our direct sales we have a very at scale inside sales motion that we're starting to lean into we have a very significant direct sales motion that we have in enterprises and mid market that were leveraged.
Speaker Change: <unk> Adobe Dotcom journeys, we have a lot of businesses in an individual's coming on Adobe Dot com and doing a lot more optimization in the App store and that's really what you're starting to see in the numbers, we shared with strong usage at 70% year over year cumulative exports strong business momentum with over 500 businesses sold and really great.
Speaker Change: Our best back to school season ever with millions of students now enabled on it so that's the foundation and pure.
Speaker Change: The one thing I would say is yes, we started pouring gas on it and we're going to pour more gas on it not lessen in the months and years ahead, maybe two other things Jay just a big picture I mean, we continue to invest in all of the key long term things whether its training of models whether its express.
Speaker Change: It's AEP and apps, whether it's gen studio.
Speaker Change: While delivering what I think a phenomenal margins and so we'll continue to.
Make those tradeoffs in terms of growth and profitability and maybe a little tongue in cheek part of the reason why.
Speaker Change: David has the ability to invest as much in marketing as he uses the best marketing technology in the world for mono and it's true.
Speaker Change: Okay.
David: Thank you.
David: And our next question will come from Tyler Radke with Citi.
David: Yeah.
Tyler Radke: Yes, thanks very much for taking the question.
Wanted to ask you about the digital experience outside of the business So RP outlook.
Speaker Change: Pretty pretty strong in terms of sequential additions.
Speaker Change: <unk> guide for Q4 was a bit lighter than consensus I know you did talk about some unusual.
Speaker Change: <unk> in terms of seasonality cyber Monday, but could you just talk about that.
Speaker Change: The strength of the underlying dynamics youre seeing in the business.
Speaker Change: Thank you.
Speaker Change: Yes, when we look at the digital experience business. We are pleased with the overall execution of the business, we have a big opportunity with what we call personalization at scale, where whether its a b to C company or a <unk> company the ability to deliver personalized customer experiences.
Speaker Change: To consumers or to hundreds of thousands of business customers individuals within businesses. This is important for every company in the world and we have the integrated platform and the applications to be able to help them deliver those kinds of experiences and we have the unique ability to bring together the right content the data customer data and the customer.
Speaker Change: Journeys across our experience cloud and the integration with creative cloud.
Speaker Change: <unk> delivered those personalized experiences and that's pretty unique to what we can do it.
Speaker Change: Toby and that's one of the things that we're seeing in the dynamic in the enterprise market is.
Speaker Change: Enterprises are scrutinizing all the deals that they wanted to do I think in this.
Speaker Change: In this case, they looked at our offerings and see the ability to not only help with the growth. They also look at.
Speaker Change: The efficiency gains that we can help them create and that's helping us as enterprises scrutinize the spin and when you look at our guide. We're obviously we are focused on club most closely on our subscription business and that's the business that.
Speaker Change: <unk> continues to grow strongly and with crude showing a good performance on the subscription business and our overall revenue is a combination of subscription and services, where we really are focused on working with our broad global partner ecosystem to make sure that we deliver services to our customers and help them realize value from our offerings.
Speaker Change #100: Thank you Hey, operator, we're at the top of the hour, we'll sneak in one more question and then wrap up thank you.
Speaker Change #100: Thank you that question will come from Brent Thill with Jefferies.
Brent Thill: Thanks, Dan just back to the guide can we just drill and I know you mentioned there were a couple of factors that were off.
Speaker Change #100: I.
Brent Thill: Contemplated that I am just curious if there's anything else that youre seeing that is different in terms of end demand or.
Speaker Change #102: Any any softness I noted the U S to accelerate a little bit.
Brent Thill: All right.
No Brian I think we had a strong Q3.
Speaker Change #103: We continue to see the momentum in the business then.
Speaker Change #103: It's our typical.
<unk> considered targets that we do in <unk>.
Speaker Change #103: Focus on execution so.
Speaker Change #103: We're not seeing anything as it relates to you know a change in the business dynamics I also mentioned that the last few weeks of Q3 as you know the summer seasonality and so we saw the traditional strength that we expect to see on our web traffic. So.
Speaker Change #103: I think Max is coming up we are very exciting.
Speaker Change #103: Agenda in terms of what we're going to be talking about in terms of Max and so you know I mean, if I take a step back and think about it given this is the last question I mean.
Speaker Change #105: From my perspective strong Q3 across every aspect of our business and our revenue EPS digital media our Dx.
Speaker Change #105: Subs revenue Acrobat certainly also continued to show the strength, we have innovated our momentum in the business and the innovation roadmap I mean across all of the key initiatives that we've been talking about whether that's express Gen studio and the excitement that people have associated with automating all of that content AEP and apps on the.
Speaker Change #105: Data side imaging and video of the work that the digital media team has done on Photoshop.
Speaker Change #105: And on illustrator and then what's coming down the Pike on video and Firefly services, I think the AI monetization as well, which I know is a.
The theme of a number of people that have asked whether its acrobat whether it's.
Speaker Change #105: The premium SKU skus as it relates to experience cloud, whether it's what's happening on gen fail in the usage of Jennifer Lightroom and lightroom mobile.
Speaker Change #105: We are clearly demonstrating how AI can both drive value.
Speaker Change #105: For our customers and therefore, you know, we acquired new customers and retain customers better so.
Speaker Change #106: Feels good we look forward to.
Speaker Change #106: Seeing all of you at Max and we're going to just continue to focus on innovation and delighting our customers, but thank you for joining us.
Speaker Change #107: Yeah, Thanks, Jonathan and we do look forward to the Investor event that we'll be holding in Miami at Max on October 14th where we will be doing a Q&A with management, we hope to see many of you there and with that thank you for joining the call and this concludes the event.
Speaker Change #108: Thank you that does conclude today's conference. We do thank you for your participation have an excellent day.
Speaker Change #108: Okay.