Adobe : Q1 FY2022 earnings transcript

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EDITED TRANSCRIPT

ADBE.OQ - Q1 2022 Adobe Inc Earnings Call

EVENT DATE/TIME: MARCH 22, 2022 / 9:00PM GMT

OVERVIEW:

Co. reported 1Q22 revenue of $4.26b and GAAP diluted EPS of $2.66. Expects 2Q22 revenue to be approx. $4.34b, GAAP EPS to be approx. $2.44 and non-GAAP EPS to be approx. $3.30.

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MARCH 22, 2022 / 9:00PM, ADBE.OQ - Q1 2022 Adobe Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Anil S. Chakravarthy Adobe Inc. - President of Digital Experience Business

Daniel J. Durn Adobe Inc. - CFO and Executive VP of Finance, Technology Services & Operations

David Wadhwani Adobe Inc. - President of Digital Media Business

Jonathan Vaas Adobe Inc. - VP of IR

Shantanu Narayen Adobe Inc. - Chairman & CEO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Aleksandr J. Zukin Wolfe Research, LLC - MD & Head of the Software Group

Brent John Thill Jefferies LLC, Research Division - Equity Analyst

Jay Vleeschhouwer Griffin Securities, Inc., Research Division - MD of Software Research

Kasthuri Gopalan Rangan Goldman Sachs Group, Inc., Research Division - Analyst

Keith Weiss Morgan Stanley, Research Division - Equity Analyst

Keith Frances Bachman BMO Capital Markets Equity Research - MD & Senior Research Analyst

Michael James Turrin Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

Saket Kalia Barclays Bank PLC, Research Division - Senior Analyst

Sterling Auty JPMorgan Chase & Co, Research Division - Senior Analyst

Tyler Maverick Radke Citigroup Inc., Research Division - VP & Senior Analyst

P R E S E N T A T I O N

Operator

Good day, and welcome to the Q1 FY 2022 Adobe Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Jonathan Vaas. Please go ahead, sir.

Jonathan Vaas - Adobe Inc. - VP of IR

Good afternoon, and thank you for joining us. With me on the call today are Shantanu Narayen, Adobe's Chairman and CEO; David Wadhwani, President of Digital Media; Anil Chakravarthy, President of Digital Experience; and Dan Durn, Executive Vice President and CFO.

On this call, which is being recorded, we will discuss Adobe's first quarter fiscal year 2022 financial results. You can find our Q1 press release as well as PDFs of our prepared remarks and financial results on Adobe's Investor Relations website.

The information discussed on this call, including our financial targets and product plans, is as of today, March 22, and contains forward-looking statements that involve risks, uncertainty and assumptions. Actual results may differ materially from those set forth in these statements. For a discussion of these risks, you should review the factors discussed in today's press release and in Adobe's SEC filings.

On this call, we will discuss GAAP and non-GAAP financial measures. Our reported results include GAAP growth rates as well as adjusted growth rates in constant currency that account for an extra week in the year-ago quarter. During this presentation, Adobe's executives will refer to adjusted growth rates unless otherwise stated. Reconciliations between the 2 are available in our earnings release and on Adobe's Investor Relations website.

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MARCH 22, 2022 / 9:00PM, ADBE.OQ - Q1 2022 Adobe Inc Earnings Call

I will now turn the call over to Shantanu.

Shantanu Narayen - Adobe Inc. - Chairman & CEO

Thanks, Jonathan. Good afternoon, and thank you for joining us. Before I discuss our Q1 results, I want to acknowledge the horrifying and heartbreaking crisis in Ukraine. The pain and suffering of millions of innocent civilians is incredibly tragic, and our thoughts and prayers are with the Ukrainian people. Adobe joins the global community in taking a stand by stopping all new sales of our products and services in Russia. The Adobe Foundation has made grants to aid humanitarian relief efforts.

I'm proud of how our teams have come together and continue to successfully manage our business throughout the most challenging of times while focusing on delighting customers and the long-term growth initiatives for the company. Adobe has always had a strong purpose-driven culture, and that has never been more evident than it is today.

Adobe's mission to change the world through digital experiences is more critical than ever before. Everywhere we look, whether it is in entertainment, education or the enterprise, content is fueling the global economy. The democratization of creativity, emergence of new ways to work and learn from anywhere and the business mandate for personalized customer experiences underscore the immense opportunities we have as a company. Our strategy to unleash creativity for all, accelerate document productivity and power digital businesses is working. Our innovation engine is delivering category-leading products, services and platforms across Creative Cloud, Document Cloud and Experience Cloud.

Adobe had a strong Q1. We achieved a record $4.26 billion in revenue, representing 17% year-over-year growth on an adjusted basis. GAAP earnings per share for the quarter were $2.66, and non-GAAP earnings per share was $3.37.

In our Digital Media business, we drove strong growth in both Creative Cloud and Document Cloud, achieving $3.11 billion in revenue. Net new Digital Media annualized recurring revenue, or ARR, was $418 million, and total Digital Media ARR exiting Q1 grew to $12.57 billion. In our Experience Cloud business, we built on our Q4 momentum, achieving $1.06 billion in revenue, and subscription revenue was $932 million for the quarter.

I'm pleased to have David Wadhwani, President, Digital Media; and Anil Chakravarthy, President, Digital Experience, on this call to share more about our momentum in the Digital Media and Digital Experience businesses, respectively. David?

David Wadhwani - Adobe Inc. - President of Digital Media Business

Thanks, Shantanu, and hello, everyone. The acceleration to all things digital has made content and creativity more important than ever before. Everyone needs to express themselves digitally, from the individual on social media to the student creating a more compelling school project to the creative professional making the next marketing campaign. The rapid rise of the creator economy is giving individuals, solopreneurs and small business owners the opportunity to monetize their passions, their products and their services.

Creative Cloud is catalyzing these trends and fulfilling our vision for Creativity For All, enabling customers of every skill level to create content that stands out. We continue to lead in core creative categories such as imaging, design, video and illustration. And we're advancing new media types like 3D and immersive for the emerging metaverse platforms. We're building applications for every surface and every audience across web, mobile and desktop. And we're investing heavily in collaboration services that are deeply integrated into our flagship applications.

Our new web-based solutions enable us to deliver value more quickly and broadly than ever before. Creative Cloud solutions are powered by Adobe Sensei, our AI engine, which enables customers to work faster and smarter. As a result, our creative community has never been stronger. Behance now has nearly 30 million members, and we continue to host hundreds of on-demand and live sessions weekly that serve as a source of learning and inspiration. As a result, in Q1, we achieved net new Creative ARR of $315 million and revenue of $2.55 billion, which grew 16% year-over-year on an adjusted basis.

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MARCH 22, 2022 / 9:00PM, ADBE.OQ - Q1 2022 Adobe Inc Earnings Call

Q1 highlights include the launch of Creative Cloud Express, our new template-driven web and mobile product that makes it easy for anyone to create and share beautiful content. Its zero-friction onboarding will bring millions of small business owners, social influencers and students into the Creative Cloud family and empower them to create everything from social posts to marketing materials. Creative Cloud Express features thousands of gorgeous templates, millions of stunning stock images and videos and the world's most complete collection of fonts. Its easy-to-use interface is continuously expanding with innovation such as enhanced search capabilities for millions of assets and new PDF Quick Actions that enable users to edit, convert, combine and organize PDFs. While we're just a few months into our journey, we're seeing strong traffic, millions of monthly active users and high customer satisfaction.

On the video front, the explosive demand for video content shows no signs of abating. In Q1, we launched new AI-powered innovations in Premiere Pro that help merge music into video sequences and accelerate transcriptions. We also drove strong growth for Frame.io, the leading video collaboration solution Adobe acquired late last year. Frame had its best quarter ever, closing more deals than in any prior quarter while increasing deal sizes to record levels. As creativity has become a team sport, we will extend our leadership in video collaboration and bring collaboration capabilities to all creative categories.

We're also seeing tremendous interest for Substance 3D and our new 3D Modeler beta as brands bring together the physical and digital worlds and begin their journeys to become metaverse-ready. Substance is already being adopted by global brands like Coca-Cola, NASCAR and NVIDIA for marketing and e-commerce.

Finally, we continue to see strong demand for Creative Cloud offerings globally across all segments: individuals, SMBs, teams and enterprises with key wins at Disney, the FAA, IBM, ING Bank, Kohl's and the New Mexico Public Education Department.

On the Document Cloud side, digital documents have become the foundation of how businesses run and will continue to gain significance as hybrid work becomes the standard. Adobe is accelerating document productivity with Document Cloud, enabling all capabilities, including editing, converting, sharing, scanning and signing to be frictionless across web, desktop and mobile. PDFs are getting smarter and more accessible through our continued investment in AI and ML. And we're enabling new workflows through our APIs by empowering developers to build customized digital document experiences for their businesses.

In Q1, we achieved record revenue of $562 million and net new Document Cloud ARR of $103 million. Ending ARR for Document Cloud crossed the $2 billion mark, which represents 29% year-over-year growth. Q1 highlights include strong growth in Adobe Sign, driven by unifying e-signature functionality in Acrobat and new Sign integrations with Adobe Commerce and Workfront. On the web, we continue to see a high volume of searches for document actions such as editing, converting and sharing PDFs. As a result, Acrobat Web's contribution to the business has nearly doubled year-over-year.

On mobile, we saw billions of Acrobat mobile PDFs opened in Q1. This usage, combined with our efforts to convert users to paid subscribers on mobile, is working. Acrobat mobile ARR grew over 70% year-over-year. And lastly, our Document Cloud enterprise business continues to do well with key wins including Medallia, Mercedes-Benz, Raytheon, Ricoh Europe, Shimizu and UnitedHealth.

We've responded to the needs of professionals by adding a broad array of features to our flagship applications across both Creative Cloud and Document Cloud. And we're attracting millions of new users, including a significant number of non-pros, with Acrobat and Creative Cloud Express on web and mobile. Our increasing breadth of offerings not only expand our ability to reach new customers but also enable us to further personalize pricing across our offerings starting later in Q2.

I'll now pass it to Anil.

Anil S. Chakravarthy - Adobe Inc. - President of Digital Experience Business

Thanks, David. Hello, everyone. Over the last 2 years, the digital economy has exploded as we have experienced a profound global shift in how we work, learn and play. Telehealth visits are now the norm rather than the exception. Customers and businesses are engaging and transacting digitally.

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MARCH 22, 2022 / 9:00PM, ADBE.OQ - Q1 2022 Adobe Inc Earnings Call

Online shopping is now essential, and the U.S. is on track to surpass $1 trillion in e-commerce sales this year, according to the Adobe Digital Economy Index.

To succeed, companies must make the digital economy personal with powerful digital experiences that can be personalized to millions of customers in milliseconds. Adobe Experience Cloud is a comprehensive set of integrated AI-driven applications and services to help companies deliver experiences across all aspects of the customer journey. At its core is the Adobe Experience Platform with billions of customer profiles.

Our Adobe Experience Cloud applications span the entire customer funnel, from acquisition to monetization to retention, across content and commerce, customer journeys, data insights and audiences and marketing workflow. We have made the dramatic transformation to deliver AI-driven services with over 80% of Experience Cloud customers now using Adobe Sensei, our industry-leading AI and ML framework to power experiences for their customers.

Last week, we hosted Adobe Summit, the world's largest digital experience conference. We launched exciting new Experience Cloud technology and heard from executives from some of the world's most interesting and innovative brands, including BMW, Nike, Prada, Real Madrid and Walgreens Boots Alliance. We enabled the entire event using Experience Cloud, personalizing the experience for our global attendees. Summit content has had over 22 million views to date, underscoring the significant interest and demand for digital transformation.

We continue to drive outstanding growth in our Experience Cloud business. The pandemic has caused brands around the world to realize the critical need for digital transformation. And we're adding new logos while continuing to focus on driving significant value realization for our existing customers. In Q1, we achieved $1.06 billion in revenue. Subscription revenue was $932 million for the quarter, representing 22% year-over-year growth on an adjusted basis.

Q1 highlights include a slate of exciting product innovations, including new real-time customer data capabilities with the integration of Adobe Real-Time CDP and Adobe Target. Adobe Real-Time CDP is used by a large and growing base of customers such as DICK'S Sporting Goods, Henkel, Panera, Real Madrid, ServiceNow and Verizon; new cross-cloud integrations, including a unified workflow between Workfront, Creative Cloud Enterprise and Experience Manager assets that powers end-to-end content creation and delivery; strong performance in Adobe Experience Manager, emphasizing the need for unified content management to meet the ever-increasing demand for content at speed and scale. Adobe is uniquely positioned to help customers across the content supply chain; new APIs that provide developers with the flexibility to create customized user experiences on top of Adobe Commerce; the general availability of Adobe Experience Cloud for Healthcare to deliver personalized health care experiences; an expanding partner ecosystem, including a partnership with OneTrust to simplify consent management; the next phase of e-commerce integrations with FedEx, Walmart and PayPal as well as a collaboration with The Weather Company; and key customer wins, including CrowdStrike, Deutsche Telekom, IBM, Jaguar Land Rover, JPMorgan Chase, McDonald's and UnitedHealth.

Our Experience Cloud product innovation, global customer base and vibrant partner ecosystem are driving our continued success. We are executing across our entire go-to-market motion and continue to receive strong industry recognition. This quarter, Adobe was named a leader in 3 industry analyst reports focused on core customer experience management segments, including Gartner's Magic Quadrant for Digital Experience Platforms, the inaugural IDC MarketScape for CDPs for Front Office and the Forrester Wave for Digital Asset Management.

Dan, over to you.

Daniel J. Durn - Adobe Inc. - CFO and Executive VP of Finance, Technology Services & Operations

Thanks, Anil. Today, I'll start by summarizing Adobe's performance in Q1 fiscal 2022, highlighting growth drivers across our businesses, and I'll finish with targets for Q2.

Adobe's strong financial results demonstrate the company's ability to execute in a challenging macroeconomic and geopolitical environment. Across our business, we are attracting new customers, signing up transformational deals, growing our recurring book of business and seeing emerging businesses ramp and, in some cases, reach escape velocity.

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