Adobe had a successful third quarter of FY 2023, achieving a revenue of $4.89 billion and a 26% year-over-year growth in GAAP earnings per share. The success was driven by a rich and innovative product roadmap.

Adobe is continuing to lead the industry with innovative technology platforms and services, expanding their Creative Cloud, Document Cloud and Experience Cloud offerings. In Q3, they achieved net new Digital Media ARR of $464 million and revenue of $3.59 billion, driven by the growth in their Creative and Document businesses. They have also released their generative AI capabilities, integrated into their Adobe Creative Cloud, Adobe Express and Adobe Experience Cloud, to allow for AI-enhanced creativity.

Adobe Creative Cloud has released several new advances to its creative business, such as the commercially available Adobe Firefly models, the integration of Adobe Firefly-powered features into Creative Cloud apps, Adobe Firefly for Enterprise, and new generative AI credits for subscription offerings. These advances enable customers to create custom models, generate branded content, and access Firefly APIs for content creation and automation.

Adobe achieved a record Q3 with $2.91 billion in revenue, growing 14% year-over-year. Highlights include the integration of Firefly into Photoshop and Illustrator, the general availability of Adobe Express, new AI and 3D features in Premiere Pro and After Effects, the introduction of new video assets in Adobe Stock, and key customer wins such as Amazon, Havas, and Paramount. Generative Credits are tokens that enable customers to turn text-based prompts into images, vectors and text effects, with free and trial plans including a small number of monthly credits and paid plans offering additional allocations.

Adobe announced price updates for certain Creative Cloud plans across the Americas and Europe, which will start November 1, 2023. The Document Cloud business saw strong growth in Q3, with revenue of $685 million and net new ARR of $132 million. Adobe also saw strong mobile momentum and adoption of Acrobat and Acrobat Sign. Key customer wins include Citibank, GlaxoSmithKline, Emerson Electric, Morgan Stanley and Volkswagen. The company is also excited about the pending Figma acquisition, which will reimagine the future of creativity and productivity.

Adobe is looking forward to hosting Adobe MAX, the world's largest creativity conference, next month in Los Angeles. At the conference, attendees will hear from inspiring creators and learn about innovations across Creative Cloud, Firefly and Express. Anil Chakravarthy then discusses how companies are investing in customer experience management technology to improve customer acquisition, engagement, retention and operational efficiency. Adobe is driving revenue growth across content and commerce, customer journeys, data insights and audiences and marketing workflows, leveraging the Adobe Experience Platform. Additionally, Adobe GenStudio is revolutionizing the entire content supply chain by simplifying the creation-to-activation process with generative AI capabilities and intelligent automation. In Q3, Adobe's Experience Cloud business achieved $1.23 billion in revenue with subscription revenue of $1.1 billion, representing 11% and 13% year-over-year growth respectively.

Adobe Experience Cloud provides personalized digital experiences to customers from acquisition to retention. Business highlights for the quarter include strong momentum for AEP and native apps, continued innovation for Adobe Experience Manager, growth of the Workfront business, and an expanded strategic partnership with Amazon. Furthermore, Adobe's leadership in Content Management Systems was recognized in three industry analyst reports.

Adobe has achieved both growth and profitability in their Q3 fiscal 2023 results, which they attribute to prioritization, innovation, and a focus on execution. They have invested in technology platforms, global campaigns, and recruiting the best and brightest people in their industry, while still driving performance on margin and earnings. They have also been recognized as a Leader in the Gartner Magic Quadrant for Digital Commerce and the IDC MarketScape for OmniChannel Marketing Platforms for B2C Enterprises, and have key customer wins including Amazon, Blue Cross Blue Shield of Florida, Dollar General, Havas, Intuit, IRS, Jet2.com, Lufthansa, Macy's, MSC Cruises, Novo Nordisk and SAP.

Adobe achieved a revenue of $4.89 billion in Q3, with a GAAP diluted earnings per share of $3.05 and a non-GAAP diluted earnings per share of $4.09. Digital Media revenue was $3.59 billion, with $464 million of net new Digital Media ARR. Creative revenue was $2.91 billion, with $332 million of net new Creative ARR. Cash flows from operations were $1.87 billion, and the company repurchased 2.1 million shares of their stock during the quarter.

In the third quarter, Adobe experienced growth across its Creative, Document Cloud, and Digital Experience segments. Creative growth was driven by new user growth, top-of-funnel performance, single app subscriptions, value-added services, customer adoption of Acrobat CC, and success in the enterprise. Document Cloud growth was driven by new customer acquisition, demand for Acrobat subscriptions, monetization from Acrobat mobile, and traction in B2B. Digital Experience growth was 11% year-over-year in constant currency.

In Q3, Adobe's subscription revenue grew 12% year-over-year, driven by demand for their Adobe Experience Platform and native applications. Additionally, Workfront business, Content and Commerce, and transformational platform deals also contributed to the growth. Adobe's effective tax rate was 19.5% on a GAAP basis and 18.5% on a non-GAAP basis, and their RPO exiting the quarter was $15.72 billion. They also entered into a $1 billion share repurchase agreement and have $3.15 billion remaining of their $15 billion authorization.

In Q4, Adobe is targeting total revenue of $4.975 billion to $5.025 billion, Digital Media net new ARR of approximately $520 million, Digital Media segment revenue of $3.67 to $3.70 billion, Digital Experience segment revenue of $1.25 to $1.27 billion, Digital Experience subscription revenue of $1.11 to $1.13 billion, a tax rate of 18% on a GAAP basis and 18.5% on a non-GAAP basis, GAAP earnings per share of $3.10 to $3.15, and non-GAAP earnings per share of $4.10 to $4.15. Adobe's Q3 results are a reflection of the team's execution, and the company is positioned to continue to deliver for customers and investors. Adobe's co-founder John Warnock was recently lost, and the company is now delivering technology platforms with AI at the center across its three clouds. Adobe is positioned for a strong close to the year and continued growth in the decades to come.

Dan Durn discussed how the company has been able to generate 2 million images with strong margins despite the high costs associated with generative AI. He explained that the company has been investing in COGS, R&D, and content, as well as a Firefly family of models, to bring other media types to market. He also mentioned that the company has a fundamental operating philosophy of growth and profitability.

Dan and his team have been prioritizing, innovating, and executing with rigor, resulting in strong financial results and a projected 45.5% operating margin in Q4. The company is also investing in training for 3D, video, imaging, and vectors to ensure continued top-line growth, cash flow, and EPS. The team expressed condolences for the passing of John Warnock.

Shantanu Narayen and David Wadhwani discussed the pricing model for generative AI products, which are based on consumption. These products are expected to be additive to the company's growth profile going forward. The Q4 guidance does not seem to reflect the potential of the generative AI products, but Narayen and Wadhwani mentioned the new offerings, such as the Firefly subscription, Adobe Express, Creative Cloud products, Photoshop, Illustrator, Generation Credit Packs, and GenStudio for the Enterprise, that have the potential to drive new user acquisition and price increases.

Adobe is focusing on net user adds and subscribers in order to increase the value of their products and reach more users. They are releasing new versions of Express and GenStudio to make their products more accessible and powerful, and to make it easier for marketers to use Creative Cloud. They are also expecting to see an increase in the number of users on their free plans.

Anil Chakravarthy explains how pricing changes will be implemented in the Digital Media business, which will have a rolling impact and take a few years to play out. He also notes that the Digital Media ARR is expected to be $1.86 billion by the end of the year. Finally, he explains how generative AI could be used to generate revenue in the Digital Experience part of the business.

Shantanu and David are excited about the Adobe GenStudio, which would allow enterprises to create personalized content and become more efficient through automation. Adobe has already used the GenStudio for its own Photoshop campaign, and are working with agencies and customers to do the same. Adobe is also working on generative AI for other DX applications. At the investor meeting in October, more details will be shared. In Q3, the wins in the enterprise included components of GenStudio in both the Digital Media and Digital Experience, and Adobe has already used the GenStudio to release some campaigns this quarter.

Adobe has seen a lot of success with their Firefly and CreativePro applications, such as Illustrator and Photoshop, with over 3 million downloads of the beta applications and increased viral excitement on social media. They have also seen an increase in new users who don't typically come to Adobe, which they attribute to the integration of Express and Firefly.

Adobe is taking a different approach to generative content design by only using content from Adobe Stock and other repositories that have been moderated and cleared by their legal teams. This ensures that the content generated is not infringing on any brands or using content that was not intended to be used in this way.

David discussed how Adobe has been working with Stock contributors to provide fully licensed and moderated content for AI training. This content is safe for commercial use and can be integrated into Creative Cloud and Express applications. Additionally, Adobe is focused on fair generation and making sure the content generated does not cause any harm.

David Wadhwani discusses the success of the Document Cloud in the quarter, attributing it to top-of-funnel growth. He explains that Acrobat on the web had a phenomenal year-over-year growth rate due to plugins within the browsers, link sharing, and product-led growth work. He also mentions that signatures have been doing well, and that there will soon be more news about gen AI in Acrobat, due to its wide distribution.

Shantanu Narayen discussed the success of ETLAs, and what is driving it. He believes it is due to the content people are creating, the ability to understand and automate it with AI, and the fact that Express can be a productivity application for every knowledge worker. Additionally, mobile has been a tailwind for the success of ETLAs. These investments in productivity gains are top of mind and play well into the narrative in enterprises.

Shantanu Narayen discusses the pricing model for generative credits, which is designed to drive more adoption. He mentions that the bulk of the ARR recognition will come from Firefly and Express subscriptions, as well as pricing upgrades for existing customers. He also mentions the innovation of context aware menus within Photoshop, which has driven tremendous uptake, and will be rolled out in all other applications.

Adobe is looking into creating a conversational interface with PDFs, allowing customers to create their own models, and making PDFs accessible through APIs. Generative credits have been designed to encourage adoption, but Adobe is careful about how much generative credits are allowed at the high end.

David Wadhwani and Dan Durn discussed Adobe's decision to use a Generative Credit model with low limits for free users and higher limits for paid users, in order to encourage usage and build habits. Alex Zukin asked if there was a significant impact from the Generative AI product on the $520 million in net new ARR for Q4, to which Dan Durn replied that it had a modest impact.

David Wadhwani discussed how Firefly plans to provide API access to their content creation and workflows, allowing customers and partners to extend their models and integrate them onto their platform. Monetization will be based on metering concepts and custom negotiated deals with enterprises.

Shantanu Narayen is proud of how quickly the company has embraced AI and the pace of innovation internally. He mentions that they have gone from talking about AI to making it commercially available and that they have used it in products such as Photoshop, Illustrator, Express, and the new offering. He also notes the amount of work that has gone into making this happen.

The company has been able to use its technology, such as Photoshop Everyone Can, Acrobat's Got It, and Express, to enable its 30,000 employees to use the combined offering. Additionally, product reviews now include representatives from Creative, Document, and the Experience Cloud. The digital excellence team has also been successful in segmenting customers and providing them with the right offering across mobile, desktop, and web. AI has been embraced internally and externally as a result of these changes.

Shantanu thanked everyone for joining the discussion and discussed the investments and innovation that have been made in imaging, vector, animation, 3D, and video. He also mentioned MAX, Adobe's upcoming conference, and the exciting lineup that it will offer. He concluded by emphasizing the growth opportunities and new customers that these investments will bring.

Adobe plans to focus on the impact of AI at an Investor Meeting, provide fiscal 2024 targets at the December earnings call, and hold another investor event at Adobe Summit in March to give insight into their addressable markets and financial performance. The conference concluded with the operator thanking participants and wishing them an excellent day.

This summary was generated with AI and may contain some inaccuracies.