Adobe Inc Virtual Fireside Chat Hosted by Citi Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Tyler Radke - Citi - Analyst : I think it's a great overview and obviously a lot of specific questions, and we've gotten a lot from the audience but maybe sticking on just the AI monetization, and then we'll go into Canada Post quarter questions because I know we've received a lot of follow-ups on those. But as we think about that generation, you talked about accelerating momentum of images being generated. How do you think about when you start monetizing that starting to charge for that usage? Is that something that you're thinking about for next year? How do you approach that monetization conversation?

Question: Tyler Radke - Citi - Analyst : Yeah. Maybe since you brought it up, like what how do you think about those monetization vectors over time. And I know you're not specifically giving guidance or actions you're going to take next quarter or next year, but just periodically between it's higher price SKUs?

Question: Tyler Radke - Citi - Analyst : Got it. Very helpful. And sticking on the price side, obviously, that's been very topical for Adobe following the actions just about a year ago, you announced in terms of that initial way of monetizing the value that customers are getting with Firefly. I guess where we add in terms of -- first question is where are we at in terms of the rollout? I've those pricing actions that have been announced in terms of those are impacting the installed base I think the last data point was around 60%. I'd love to get an update there and how you're thinking about additional SKUs that maybe haven't been announced yet. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 19, 2024 / NTS, C.N - Adobe Inc Virtual Fireside Chat Hosted by Citi

Question: Tyler Radke - Citi - Analyst : Got it, okay. In this year, I think was interesting just in terms of the quarterly dynamics on pricing, because while you had this November rollout, I believe that the comments were that pricing was actually a net headwind year over year. If you're looking at Creative Cloud net new ARR growth in the first half of the year, but actually by the second half that reverses to neutral too and a slight tailwind. I guess could you run through how to think about pricing between Q3 and Q4 versus the year-ago periods? And then how to think about pricing in FY25 it relative to the FY24?

Question: Tyler Radke - Citi - Analyst : Okay. So it sounds like second half better from a compare perspective on pricing in the first half and it would you think of Q3 and Q4 seeing about the same or is one of those quarters have slightly more tailwind?

Question: Tyler Radke - Citi - Analyst : Okay. And so then next year, you're not expecting any net pricing headwinds just given that you won't have any of these like compares from Acrobat Pro and potentially there could be additional price rollouts to other SKUs that you haven't done. Is that the right way to think about next year?

Question: Tyler Radke - Citi - Analyst : Right, right. Yeah. I think that was when people saw the Acrobat increased base deals. I'm often just defaulted to thinking about Document Cloud, but it is a bigger chunk than I think even We realize this is Creative Cloud.

Question: Tyler Radke - Citi - Analyst : Right. And that is a good point. And I think come we did want to ask you about the Document Cloud growth because that has been very robust to your point. But as you think about that digital media guide for Q4, which we can get into the puts and takes and some of the reaction certainly on the stock post the quarter. But as we think about the comp should we be seeing more outsized growth in creative and then declines in net new for document just because of those pricing actions you referenced any other finer point and I think if you imply some growth in Creative Cloud, you're looking at about a mid-teens decline, net new ARR and Document Cloud. So just curious if that's the right way to think about it?

Question: Tyler Radke - Citi - Analyst : Yeah. It's been a very, very strong growth driver over the most recent years. I'm going back to as what we're talking about earlier around Firefly and some of the consumption services, one of the ways that you are monetizing, particularly at the high end around Firefly services and enterprise deals you have. Gen studio, but specifically around Firefly services. Can you help us understand, is that show up in both DX and digital media if it's attached to a DX? And then how do you think about consumption as it relates to ARR?

Question: Tyler Radke - Citi - Analyst : Yeah, that's a helpful way of framing it, and I'm sure we'll learn a lot more in Miami next month. But we've got a few follow-up questions come in, just it's around some of the topics we were hitting on earlier in maybe combined few questions here into one, but let's just go back to last quarter and maybe just start with on one hand, look, you put up a very healthy beat again in the quarter. You raised the full year digital media net new ARR, which is positive. Obviously, the stock reaction was not positive. So what do you think -- I guess what do you think folks are missing? Or is there anything that you think you want to get out there that maybe didn't get appreciated and then we can dive into some of the questions.

Question: Tyler Radke - Citi - Analyst : Yeah. Okay. And I guess just as you think about that Q4 guide, being a bit sub-seasonal, but obviously there's offsets to that being Cyber Monday timing also that some of the favorable timing that you saw in terms of some larger deals in Q3, I guess, was there anything that what changed? You talked about record growth in Q3. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 19, 2024 / NTS, C.N - Adobe Inc Virtual Fireside Chat Hosted by Citi Would you say that positive, no description of like record growth? Is that true about the pipeline or anything that leads you to tell investors to be a little bit more cautious as they're thinking about next year?

Question: Tyler Radke - Citi - Analyst : Sure, sure. Right. But and to be clear, the Cyber Monday guide was those dynamics were already incorporated in the initial full year guidance more just your comment on Q3 versus Q4 season?

Question: Tyler Radke - Citi - Analyst : Yeah. Okay. So one of the other dynamics of the quarter beyond the ARR noisiness, which I'm sure you're talking about at this point, but just on revenue, I think there were some questions on that, to your point, record Q3 favorable timing have some large deals and full year and net new Digital Media ARR was increased to. So mechanically, you would think those would be more positive for revenue in digital media, but the digital media revenue guide was basically held flat and there was a big beat in the quarter. So Q4 digital media revenue came down. Can you walk us through why that happened because it's not really intuitive I think for a lot of investors, if you have better ARR and timing, usually that would translate to better revenue. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 19, 2024 / NTS, C.N - Adobe Inc Virtual Fireside Chat Hosted by Citi

Question: Tyler Radke - Citi - Analyst : Got it. Okay. I guess I'm on FX. You know that the dollar is weekend, I guess, over the last 90 days. But when should we think about it, I guess with the revenue guide not updated for FX on last quarter. I guess thinking about it from a 90 day ago perspective, it's not as intuitive as to why FX would be a headwind because it's been a bit of an incremental tailwind for others out there.

Question: Tyler Radke - Citi - Analyst : Okay. Makes sense. And then I guess as we think about the margins on which assist first time, we're bringing that profitability 35 minutes into the call, but it's one of the great things about Adobe is the margin structure. Headcount, I believe was down a little bit and sequentially, I think there's some seasonal timing and whatnot there. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 19, 2024 / NTS, C.N - Adobe Inc Virtual Fireside Chat Hosted by Citi But how do you think about on the margin expansion picture from here? You mentioned earlier you have some really great efficiency in terms of driving some of these GPUs for the images, but how should investors think about and a margin expansion from here?

Question: Tyler Radke - Citi - Analyst : Got it. That's helpful. In framing between the different businesses and everything. I guess an investor question that came in here is on the -- I guess, related to margins and in a way, but just capital allocation like how are you thinking about buyback versus M&A? Obviously, there's been some large M&A there. You have announced with Sigma that ultimately it got blocked. But do you think you're just given the momentum that you now have with Firefly, like you're leaning more towards buybacks here versus larger M&A?

Question: Tyler Radke - Citi - Analyst : Yeah, makes sense. Okay. One question that we got from the audience. Just going back to thinking about next year's growth, is there a way to in the context of product cycles and everything. But is there a way to stack rank impact or maybe call out what are the biggest contributors to new growth from new products is we think about Firefly services video and Acrobat AI expressed or expressed for business and consumption credits. I know maybe there's some that we're not thinking about, but anything that you'd put at the top of that list.

Question: Tyler Radke - Citi - Analyst : Got it. And you think about the express monetization and some of the momentum, I think you talked about goals earlier of getting to $1 billion plus users and everything like that. How do you think about that on the competitive landscape today? Obviously, Adobe historically is dominated high end of the design category, but you do have designed companies out there with real scale and growth Kinver and then there's a number of others that are really adopting generative AI. But if you look internally, what are some of the metrics that you track that gives you conviction that you still have that competitive advantage that's sustainable.

Question: Tyler Radke - Citi - Analyst : Got it. And going back to the enterprise side, just a couple of questions there. I mean, number one, the most recent, I think price increases that you announced in November of last year. I guess you announced it a little bit before that, but largely those were not applied to enterprise. I don't think we didn't see at least publicly at the ETLA some price increases or anything like that, but how do you think about the AI related price increases to the enterprise SKU? And then just pricing generally within ETLAs, like how much more runway do you think you have? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 19, 2024 / NTS, C.N - Adobe Inc Virtual Fireside Chat Hosted by Citi And just what I imagine is like very attractive volume discounts to incentivize adoption, but just how do you think about the growth potential of ETLAs from pricing?

Question: Tyler Radke - Citi - Analyst : Got it. Okay. A couple of other questions that have come in I guess going back to some things that you mentioned. The first one is you talked about goals of trying to elevate the discussion from net new ARR to more overall ARR growth. What do you mean by that? Or are you thinking of maybe guiding to any different? And I guess if you report just ARR, you can back into net new, but just any thoughts on that?

Question: Tyler Radke - Citi - Analyst : Okay. Very helpful. And back to your coffee and espresso analogy, which hopefully you have a nice espresso next year there on what do you need to see stop selling the coffee and start charging for espresso? And I guess is that something you're expecting to do next year? What do you need to see?

Question: Tyler Radke - Citi - Analyst : Got it. Okay. That makes sense to buy more get announced the next month at MAX too. And I guess on the topic of the MAX and not that you would ever want to Front Runner shot, newer or David, in terms of the exciting things there's been announced, but what should investors expect to hear from Adobe at Max and I know you are doing some investor sessions, I believe more Q&A focused, but just trying to level set for folks because we get the question of what should I expect that Max? So give us a little bit of a preview.

Question: Tyler Radke - Citi - Analyst : Got it. So we shouldn't expect any formal targets?

Question: Tyler Radke - Citi - Analyst : Okay. Great, awesome. Well, I know we're running up against time, but maybe I'll turn it back over to you if there was anything you wanted to hit on any message that you want to get out to investors just as they're thinking about Adobe into Max and the rest of the year?

Question: Tyler Radke - Citi - Analyst : Okay. Yeah. So I guess we should maybe think about other KPIs being introduced around images generated, et cetera?

Question: Tyler Radke - Citi - Analyst : Awesome. Well, I think we're right at the top of the hour. So the quick hour we covered a lot of ground everything down in the weeds to high level. Jonathan, thanks for spending time with us, and thank you, everyone, for dialing in. And hopefully we'll see everybody in Miami next month.