The conference call for Adobe's Q1 FY 2024 earnings is being held with the company's CEO, President of Digital Media, President of Digital Experience, and CFO. The call will discuss the company's financial results and product plans, with a focus on constant-currency growth rates. Non-GAAP reconciliations are available on Adobe's Investor Relations website. An Investor Meeting will also be held during the upcoming Adobe Summit in Las Vegas. The call is then turned over to Adobe's CEO, Shantanu Narayen.

Adobe had a strong first quarter with $5.18 billion in revenue and 12% year-over-year growth. Their performance reflects the essential role of their products in driving the global digital economy. They are a leader in delivering generative AI across all their clouds, leveraging their proprietary data and models. They have also innovated by incorporating generative AI directly into their products, such as Photoshop and Acrobat. They will be demonstrating their AI Assistant for Customer Experience Management at Adobe Summit. The use of generative AI is becoming increasingly important for students, communicators, creatives, and marketers to create and deliver content across various channels.

In the first quarter, Adobe's combination of Express, Firefly, Creative Cloud, Acrobat and Experience Cloud has led to success in the enterprise market with their GenStudio offering. They are also seeing strong usage and demand for their AI solutions across all customer segments, resulting in a 16% year-over-year growth in RPO. The company has a strong product roadmap for bringing AI innovation to their global customer base. In the Digital Media business, they achieved a net new ARR of $432 million and revenue of $3.82 billion, with a 13% year-over-year growth. They recently announced Acrobat AI Assistant, which uses generative AI and a proprietary attribution engine to transform the way people interact with and extract value from their PDF documents.

In Q1, Adobe's AI Assistant received a positive response and will be monetized through a monthly add-on offering to Reader and Acrobat users. Document Cloud revenue grew 18% year-over-year and saw a record net new ARR of $143 million. Other highlights include increasing monthly active users for Acrobat Web, accelerating free-to-paid conversion for Acrobat Mobile, and a 300% growth in PDF files sent. Key enterprise customer wins were also achieved. Creative Cloud remains the top choice for creators in various mediums and Adobe Express is inspiring millions of users to design more efficiently.

Adobe Firefly, a creative generative AI model, has been integrated into Creative Cloud and Adobe Express, generating $6.5 billion in assets. Firefly Services allows enterprises to incorporate this technology into their workflows and create custom models. IBM has seen success using Firefly for content creation, and in Q1, Adobe achieved $3.07 billion in revenue with $289 million in new Creative Cloud ARR. The new Adobe Express mobile app beta integrates Firefly AI models and has a first-of-its-kind integration with TikTok's creative assistant. Express Web usage is increasing, and overall adoption is expected to accelerate with the positive reception of the mobile beta.

The introduction of Generative Fill in Photoshop has led to increased adoption and usage of Firefly powered tools, with a record high in Q1 of 2023. Adobe video tools were also popular at the Sundance Film Festival. The launch of Behance Pro and new research in music and video generation has inspired Creative Cloud and Express customers. Enterprise wins for Firefly Services include Accenture, IPG, and Starbucks. Adobe continues to focus on driving innovation and adoption of AI solutions, with strong growth in both clouds and a promising product roadmap for the future.

Adobe's Experience Cloud business had a successful first quarter, with $1.29 billion in revenue and strong growth in subscription revenue. The company's holiday shopping report showed record online spending and mobile shopping surpassing desktop for the first time. Adobe's Experience Cloud applications cover the entire customer funnel and offer businesses a single view of customer data. The company's organic innovations have made it a leader in customer experience management, with the ability to process over 500 trillion segment evaluations per month. However, personalization at scale is currently limited by the number of content variations and journeys that can be deployed.

Adobe is utilizing generative AI through their Creative Cloud, Firefly Services, and GenStudio to provide a comprehensive solution for marketing campaigns. GenStudio allows marketers to plan, create, deliver, and measure content with the help of generative AI. It integrates with multiple Adobe applications and has been adopted by major global agencies. Adobe has also been recognized as a leader in the digital experience platform and digital asset management categories.

In the first quarter of fiscal year 2024, Adobe had a strong performance with double-digit revenue growth and robust margins. The company's product innovation across its Document Cloud, Creative Cloud, and Experience Cloud has led to large customer investments and record revenue. Adobe also saw an increase in its RPO and achieved GAAP-diluted earnings per share of $1.36 and non-GAAP diluted earnings per share of $4.48.

In the first quarter, Adobe reported a digital media revenue of $3.82 billion, with a net-new ARR of $432 million and a digital experience revenue of $1.29 billion. They also had strong cash flows from operations and repurchased 3.1 million shares of their stock. However, their GAAP EPS was impacted by a $1 billion termination payment related to the Figma transaction. Without this payment, their cash flows would have been $1 billion higher and GAAP EPS would have been $2.19 higher. In the digital media segment, they achieved 12% year-over-year revenue growth and added $143 million of net new Document Cloud ARR. Their creative revenue also saw 11% year-over-year growth with $289 million of net new ARR.

In the first quarter, Adobe's overall Creative Cloud pricing actions performed as expected, with a net new Creative ARR growth of over 20% year-over-year. The growth was driven by new subscriptions, strong demand for single-apps in creative categories, and continued growth in emerging markets. In the Digital Experience segment, revenue grew by 10% year-over-year, driven by success in closing transformational deals with large enterprises and strong adoption of their solutions. Adobe's effective tax rate for the quarter was 36% on a GAAP basis and 18.5% on a non-GAAP basis.

In Q1, Adobe's GAAP tax rate was higher than expected due to a termination payment. The company had a record RPO of $17.58 billion and strong cash flows. They have announced a new $25 billion share repurchase program and are targeting strong growth for Q2. Adobe is well-positioned to capitalize on future trends and has delivered innovation across all three of their product categories.

The speaker expresses pride in the company's embrace of generative AI and its potential for growth and profitability. They thank the employees for their dedication and mention the company's recognition as a top place to work. They then address a question about pricing headwinds and explain that the business had a strong start to the year and is focused on accelerating growth through clear drivers.

Adobe is focused on expanding access to users through initiatives like Express on mobile and introducing new offers such as AI Assistant. They also plan to access new budget pools with the introduction of Firefly Services and GenStudio. The early signs are positive and the business has shown stability and diversity. In the second half of the year, they will be ramping up capabilities for Creative Cloud pricing with Firefly and rolling out new features like Express Mobile and AI Assistant. They have also had two significant pricing actions that benefited FY '23 and are continuing to introduce new value to their products.

The company has introduced new pricing for CC with Firefly, and the roll-off of the prior pricing is more significant than the new pricing. The magnitude of the beat this quarter was smaller than in past quarters, and the guide for next quarter is lower. The company takes their targets seriously and factored in factors such as pricing and product roadmap in their guide. The company is on track to meet or exceed their $1.9 billion guide. The desktop products are still in beta, and the company is seeing positive feedback and utilization.

Adobe's AI monetization is going well in two areas: Creative Cloud pricing and enterprise use of Content and GenStudio. They are seeing more monetization earlier than expected. While expectations may have been higher for Q2, they are still optimistic about their product delivery and monetization. The full-year guide was not raised, and the enforcement of generative credit limits for some products has been pushed out beyond April. The reasoning behind this decision is not mentioned, but they are seeing good credit consumption and purchasing patterns for the credit packs.

The company is not updating their targets for the full year, but did mention a material change in Q1 due to a termination payment. They are currently focused on acquiring users and promoting usage of their products, with recent sneaks showcasing new features that may require more credits to use.

Adobe is planning to introduce more capabilities and features to their tools, both expensive and affordable, in order to drive more usage and adoption. They have seen a high number of users utilizing generative AI in Q1 and are excited about the trajectory. They are still in the early stages of monetizing AI and are looking at both value utilization and experimentation. They plan to incorporate AI into their pricing models and have already started selling AI solutions to enterprise customers. They believe the integration of AI into their apps will attract new customers to Creative Cloud, as seen with their Firefly tool.

The speaker discusses the strong performance of Document Cloud, attributing it to a combination of go-to-market efforts and product innovation. The growth is driven by factors such as the increasing number of Reader monthly active users, the success of Acrobat Web, and the implementation of product-led growth strategies.

The company's strategy for product innovation has been to integrate Sign into PDFs and introduce link sharing, resulting in significant growth and value for users. The introduction of AI Assistant in Acrobat is expected to further drive monetization and provide new opportunities for users, including those using Reader. The company is optimistic about the upcoming monetization of new innovations in Q3.

The speaker expresses confidence in the second half acceleration of Creative Cloud. They answer a question about the impact of generative AI on the video editing market, stating that the advances in AI have addressed difficult problems in video editing and will likely accelerate the use of text-to-video prompts. They are excited about the potential for Adobe applications to use this technology in video editing.

The company has integrated models into their interfaces and is partnering with others, such as Jensen from OpenAI, to push the envelope on video using their models. They have released a demo of their lip sync feature and believe that video will be even more important for editing applications to take advantage of generative AI. The research in the industry and with Sora is impressive and consistent with the models they are developing. They plan to release text-to-video capabilities later this year and will work with OpenAI and others to develop video models.

The company is experiencing a tailwind due to the increasing demand for video editing tools. They are excited about partnerships with OpenAI and plan to release new features for imaging, vector, design, text effects, audio, video, and 3D. The company reaffirms their guide for Digital Media ARR and expects acceleration in the second half of the year. They are confident in achieving their full-year guide.

The company is confident in meeting their targets and improving as opportunities arise. They feel good about their momentum and innovation in the first half and expect it to continue into the second half. There were two pricing actions taken in 2022, with the one-year anniversary of those actions being behind them in Q4. The impact of these actions will still be seen in Q3, but Q4 will be a clean look for the company. The actions being taken currently on the Creative side will have a more noticeable impact in the back half of the year.

David Wadhwani and Dan Durn discuss Adobe's financial targets for 2024 and the impact of the Figma transaction on GAAP EPS in Q1. They also mention their confidence in the numbers and their focus on product development and monetization. Jay Vleeschhouwer asks about the significant investments in Firefly and the number of open positions for Firefly development.

David Wadhwani discusses the success of Firefly and the unique position it holds in the market with its full suite of capabilities. He also mentions that the research community has taken notice of Adobe's responsible approach to AI, leading to the company being able to attract top talent. Anil is then asked about the company's sales strategy and whether there is enough talent available to meet their needs.

Adobe has a wide range of creative models and has been successful in attracting talent and managing costs. The company is in a strong position in the enterprise market, which is investing in customer experience management. They have recently hired a VP of Sales with experience at Cisco and Salesforce. The company is open to hiring more talent. There is a high level of trust in AI and Excel models, despite the qualitative information shared on the call.

The speaker addresses the concern about AI being able to edit and produce videos, stating that while AI can generate content, it is unlikely to replace the role of human editors. They also mention the increasing demand for content creation and how this will benefit their tools. The second part of the paragraph discusses the positive indicators for their business, such as new business bookings, in the first quarter.

The company is experiencing a significant increase in commercial Creative Cloud subscribers due to the demand for more content and editing. They are also leading in creating models that can be easily controlled and automated for content creation. The Firefly Services, which integrate Firefly models and allow for custom models, are part of an ecosystem of API services that can generate, process, and assemble images for delivery.

The paragraph discusses the benefits of using Firefly services, which allow for the creation of an entire ecosystem and can be embedded into workflows using low code or no code environments. The speaker also mentions the importance of having controls and automation built into models, highlighting Adobe's strengths in this area. They then mention the strong cash flow and acceleration in RPO, as well as record subscriptions and engagement in various Adobe products.

In response to a question about investors' concerns and the stock market reaction, the Adobe team expresses confidence in the performance and outlook of the business, citing strong Q1 results and fundamental components. They address concerns about uncertainty and back half ramps, with Shantanu Narayen specifically addressing the question of whether they still expect to reach $1.9 billion in net new Digital Media ARR and providing more details on the building blocks of the expected second half ramp, including potential GA releases, new monetization avenues, and pricing strategies within Creative Cloud. The team concludes by acknowledging the gap between their confidence and the market reaction and addressing Keith Weiss's question about financial results.

The speaker discusses two main questions that arise regarding AI and its impact on the number of seats for Adobe and in the world. They believe that the number of interfaces will increase, creating more opportunities for Adobe. Additionally, they mention that Adobe will continue to innovate and integrate other models into their applications, as they have done with plugins. They have already started to execute this in the enterprise and plan to expand it in the future through partnerships. The speaker also mentions that their targets for Q1 take into account their product roadmap and how things will evolve throughout the year.

The speaker discusses the product roadmaps for various Adobe products and how they are being executed and monetized. They are pleased with the progress and believe they are ahead of their financial targets. They will continue to execute and look forward to discussing more at the upcoming Summit event. The call has now concluded.

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