Adobe : Q2 FY2022 earnings transcript

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EDITED TRANSCRIPT

ADBE.OQ - Q2 2022 Adobe Inc Earnings Call

EVENT DATE/TIME: JUNE 16, 2022 / 9:00PM GMT

OVERVIEW:

Co. reported 2Q22 revenue of $4.39b, GAAP diluted EPS of $2.49 and non-GAAP diluted EPS of $3.35. Expects FY22 revenue to be approx. $17.65b, GAAP EPS to be approx. $9.95 and non-GAAP EPS to be approx. $13.50. Also, expects 3Q22 revenue to be approx. $4.43b, GAAP EPS to be approx. $2.35 and non-GAAP EPS to be approx. $3.33.

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JUNE 16, 2022 / 9:00PM, ADBE.OQ - Q2 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

Brad Alan Zelnick Deutsche Bank AG, Research Division - Head of Software Equity Research and Senior US Software Research Analyst Bradley Hartwell Sills BofA Securities, Research Division - Director, Analyst

Brent John Thill Jefferies LLC, Research Division - Equity Analyst

Gregg Steven Moskowitz Mizuho Securities USA LLC, Research Division - MD of Americas Research

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

Karl Emil Keirstead UBS Investment Bank, Research Division - Analyst

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

Keith Weiss Morgan Stanley, Research Division - Equity Analyst

Saket Kalia Barclays Bank PLC, Research Division - Senior Analyst

Stewart Kirk Materne Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research 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 Q2 FY '22 Adobe Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jonathan Vaas, VP of Investor Relations. Please go ahead.

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 second quarter fiscal year 2022 financial results. You can find our Q2 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, June 16, and contains forward-looking statements that involve risk, 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.

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JUNE 16, 2022 / 9:00PM, ADBE.OQ - Q2 2022 Adobe Inc Earnings Call

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. During this presentation, Adobe's executives will refer to constant currency growth rates, unless otherwise stated. Reconciliations between the two are available in our earnings release and on Adobe's Investor Relations website.

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.

Adobe had a strong Q2, driven by the secular shift to digital that is transforming how we live, work and play. In Q2, we achieved a record $4.39 billion in revenue, representing 15% year-over-year growth. GAAP earnings per share for the quarter was $2.49 and non-GAAP earnings per share was $3.35.

In our Digital Media business, we drove strong growth in both Creative Cloud and Document Cloud, achieving $3.2 billion in revenue. Net new Digital Media annualized recurring revenue, or ARR, was $464 million. And total Digital Media ARR exiting Q2 grew to $12.95 billion.

In our Experience Cloud business, we achieved $1.1 billion in revenue, and subscription revenue was $961 million for the quarter.

The digital economy runs on Adobe's tools and platforms. Customers from individuals and small businesses to the largest enterprises are using our products to unleash their creativity, accelerate document productivity and deliver personalized customer experiences. Digital experiences - from apps on our devices to digital documents we consume, edit and sign to personalized online shopping experiences are made possible by Adobe. Our mission to enable the world's digital experiences has never been more relevant, and we remain focused on executing our long-term growth initiatives.

We are delivering mission-critical products that serve an ever-increasing base of customers, and we have a track record of strong growth and profitability. In my conversations with customers "(added by company after the call)" around the world, it is clear that digital is playing a pivotal role in powering the economy and enabling the world to keep moving forward.

I will now turn it over to David to share more about our momentum in the Digital Media business. David?

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

Thanks, Shantanu, and hello, everyone. Adobe products have always been the solution of choice for the world's creators, whether they're designers, photographers, filmmakers or illustrators. Today, the explosion of the creator economy is enabling even more individuals, solopreneurs and small business owners to express themselves in creative ways, whether it's a hobby, a side hustle or a full-time job. Every creator and business is reimagining how they build their brand and engage their audiences in a digital-first world, underscoring the rapidly growing demand for content and creativity.

Adobe Creative Cloud offers the most comprehensive portfolio of products and services across every creative category, including imaging, photography, design, video and 3D and immersive.

We continue to invest across our core flagship products, including a heavy dose of new AI features. As demand for content increases, content creators are looking to Adobe to help them work together efficiently. We're responding by integrating collaboration capabilities directly into our flagship applications that enable creative teams to collaborate with each other and with stakeholders.

As communicators have become a growing part of our Creative Cloud customer base, we've expanded our offering to include Adobe Express, our new template-basedeasy-to-use web and mobile product. Express creates an opportunity to serve a broader base of communicators who need lightweight task-based tools to create everything from social media posts, logos and flyers for their small businesses to party invitations and posters

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JUNE 16, 2022 / 9:00PM, ADBE.OQ - Q2 2022 Adobe Inc Earnings Call

for their personal needs. Real estate entrepreneur, Chrishell Stause, is a great example of a social media influencer who is leveraging Adobe Express to transform how she markets her properties and engages her followers. She's one of millions of users promoting their products and services with Adobe Express.

In Q2, we achieved net new Creative Cloud ARR of $357 million and revenue of $2.61 billion, which grew 14% year-over-year. Q2 highlights include continued innovation in the imaging category. This quarter, we launched powerful new capabilities in Photoshop, including Photo Restoration Neural Filter that detects and restores damage photos in seconds. Neural Filters are one of Photoshop's most used AI-powered features. They have now been used by millions of users and applied to hundreds of millions of images. We're also delivering enhancements to Photoshop on the web, including new editing features, support for mobile browsers and integrated learning content.

Video production also continues to explode, and Premiere Pro remains a leader in video creation, editing and now collaboration with Frame.io. The new integration between Frame and Premiere Pro and After Effects is streamlining review and collaboration workflows across stakeholders. Frame had another strong quarter with new customer wins, including Epic Games and NBC Universal, which are using it to manage their video content supply chain, something that Anil will talk more about in a few minutes.

We're also seeing the emergence of new categories like 3D as customer demand for metaverse-ready content continues to increase. Substance 3D had its strongest Q2 ever as customers like HUGO BOSS, Mattel and Unity rely on it to deliver immersive experiences across fashion, gaming and e-commerce. We continue to rapidly innovate in this space, including delivering native Apple hardware support for Painter, Designer and Sampler, enabling creators to work faster than ever before. The Substance team also delivered a new SDK for developers who want to integrate 3D capabilities into their applications.

And finally, we're excited about the momentum we're seeing for Adobe Express, with millions of monthly active users and strong growth in traffic and new users in Q2. We continue to bring the magic of Photoshop imaging, Premiere video and Acrobat PDF capabilities like background removal, QR code generation, video resizing and PDF editing to Express. And we released our new Content Scheduler feature, thanks to our recent acquisition of ContentCal, allowing creators to quickly create preview, schedule and publish social media content.

We're also excited to kick off our Express Your Brand partnership with Meta, which will enable over 200 million businesses to grow their online presence using Adobe Express. And our product-led growth strategy allows us to use millions of data points to continuously test, learn and optimize the entire Express experience from search to export.

Adobe Express recently received the Editor's Choice Award on the App Store, recognizing top apps for design, functionality and performance.

We're very excited about the strong demand for Creative Cloud offerings globally, driven by acquisition, engagement and retention from our data-driven operating model across individuals, SMBs and enterprises. Key enterprise customer wins include Activision, Bertelsmann, Hasbro, Honda Motor, Daimler AG, NCSOFT, Services Australia, State of California and WPP.

In our Document Cloud business, digital document workflows are automating manual paper processes across our personal and professional lives. Whether it's a legal contract, invoice or school permission slip we now need to scan, edit, share and sign from anywhere. Adobe Document Cloud offers the most comprehensive intuitive tools for document productivity across every device and platform.

In Education, the University of East London is adopting Document Cloud to manage workflows for enrolling 17,000 students from 135 countries. In Financial Services, TSB Bank is transforming the online banking experience by enabling customers to quickly and securely complete common tasks like loan applications that could previously only be done in branches.

In Q2, we achieved net new Document Cloud ARR of $107 million and record revenue of $595 million, which grew 28% year-over-year. Q2 highlights include strong growth in monthly active users across desktop, mobile and web. The rising volume of search traffic for Acrobat verbs remains a productive funnel to Acrobat web, which surpassed 50 million monthly active users in Q2, more than doubling year-over-year.

Mobile app momentum remains strong with billions of PDFs opened in Acrobat Mobile and hundreds of millions of cumulative Adobe Scan installs.

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JUNE 16, 2022 / 9:00PM, ADBE.OQ - Q2 2022 Adobe Inc Earnings Call

Acrobat and Adobe Sign integration continues to drive strong demand for Adobe Sign as users increasingly send PDFs for signature directly from the unified Acrobat experience. Acrobat and Adobe Express integrations now give hundreds of millions of Acrobat users the ability to embed customized templates and make their PDFs visually stunning. And Acrobat and Sign APIs are thriving as customers increasingly customize, integrate and automate document services.

We're thrilled with the momentum we see in the Acrobat ecosystem and our business performance across routes to market and customer segments, including key enterprise customer wins with Automatic Data Processing, Duke Energy, Quanta Services and U.S. Bank.

We continue to see strong demand for our products in the second half of FY '22. We'll continue to win in the Digital Media business through product innovation across Creative Cloud and Document Cloud, which are targeting a broad and growing base of customers. Our tremendous scale, consistent marketing investments, proven data-driven operating model and new product-led growth investments are accelerating our momentum across our new and established businesses.

I'll now pass it to Anil.

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

Thanks, David. Hello, everyone. Even in this uncertain economy, every business continues to prioritize its digital investments. Our June Adobe Digital Index report, which leverages trillions of data points from Adobe Analytics, found that consumers spent $1 billion more online in May compared to April. Year-to-date, shoppers have spent over $377 billion online, which is roughly 9% more than the same period last year. Driving this digital momentum is the imperative for personalized customer experiences at scale.

Adobe Experience Cloud is the leader in the customer experience management category, offering a comprehensive set of integrated applications and services, spanning data insights and audiences, content and commerce, customer journeys and marketing workflow.

Built natively on Adobe Experience Platform, our Real-Time Customer Data Platform, Real-Time CDP, provides businesses with a single view of their customers' data across every channel, allowing them to create precise segments and deliver personalized experiences regardless of when and where a customer interacts with their brand. Adobe delivers real-time data with more than 24 trillion audience segment evaluations per day.

The Home Depot is the latest in a large and growing set of industry-leading customers who are adopting Adobe's Real-Time CDP as the underlying platform to power their digital business. Real-Time CDP provides a comprehensive view of The Home Depot's customers across e-commerce, mobile and in-store purchases, enabling them to build customer loyalty and grow their business. In Q2, we continued to drive outstanding Experience Cloud growth, achieving a record $1.1 billion in revenue.

Subscription revenue was $961 million for the quarter, representing 18% year-over-year growth. Q2 highlights include native integration across Real-Time CDP, Customer Journey Analytics and Adobe Journey Optimizer is a significant differentiator, allowing brands to orchestrate, measure and optimize the entire customer experience.

New innovations such as Segment Match enable brands to securely share customer segment data with business partners while respecting customer privacy. Major enterprises are adopting Real-Time CDP as their platform of choice, with key customer wins this quarter, including Autodesk, National Football League and U.S. Bank. Expanding Experience Cloud leadership in the health care industry by making Adobe Journey optimizer and Real-Time CDP HIPAA ready through Healthcare Shield. This quarter's customer win with CVS is a great proof point of this massive market opportunity.

New services in Adobe Analytics, delivering a single workspace for brands to unify data and insights from new media types such as 3D and streaming media with traditional channels to get a holistic view of customer engagement with Customer Journey Analytics.

Strong adoption of Adobe Experience Manager for unified content management demonstrating Adobe's leadership in helping businesses effectively manage their content supply chain from creation through delivery. Tremendous growth in demand for partner and Adobe professional services,

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