Adobe Inc. (NASDAQ:ADBE) Q4 2022 Earnings Call Transcript

Adobe Inc. (NASDAQ:ADBE) Q4 2022 Earnings Call Transcript December 15, 2022

Adobe Inc. beats earnings expectations. Reported EPS is $3.6, expectations were $3.5.

Operator: Good day, and welcome to the Q4 and FY22 Adobe Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Jonathan Vaas, Vice President of Investor Relations. Please go ahead.

Jonathan Vaas: 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 fourth quarter and fiscal year 2022 financial results. You can find our 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, December 15th, 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. On this call, we will discuss GAAP and non-GAAP financial measures. Our reported results include GAAP growth rates as well as constant currency rates and adjusted growth rates in constant currency that also account for an extra week in fiscal 2021. During this presentation, Adobe’s executives will refer to constant currency and adjusted 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: Thanks, Jonathan. Good afternoon, and thank you for joining us. 2022 was an exciting and eventful year for Adobe. We achieved record revenue of $17.61 billion, representing 15% year-over-year growth. GAAP earnings per share was $10.10 and non-GAAP earnings per share was $13.71. We delivered record operating cash flows with a focus on profitability. Our strong performance in the uncertain macroeconomic environment underscores the resilience of our business and the mission-critical role of our products in a digital-first world. Our strategy to unleash creativity for all, accelerate document productivity and power digital businesses is driving momentum across every geography and customer segment, making us one of the most innovative, diversified, and profitable software companies in the world.

We continue to execute against our product roadmap, serve a vast customer universe from individuals to large enterprises and deliver strong top- and bottom-line growth. Adobe Creative Cloud, Document Cloud and Experience Cloud have become the foundation of Digital Experiences, starting with the first creative spark, to the creation and development of all content and media, to the personalized delivery across every channel. In Q4, we achieved revenue of $4.53 billion, representing 14% year-over-year growth. In our Digital Media business, we had our best quarter ever on net new ARR, delivering $576 million, and our Digital Experience business achieved its first $1 billion subscription revenue quarter, growing 16% year-over-year. I will now pass it to David.

See also Real Estate Investing For Beginners and 10 Best Battery Stocks To Buy.

David Wadhwani: Thanks, Shantanu. And hello everyone. The demand for digital content across every creative category, customer segment and media type is accelerating at a rapid pace. Creative Cloud remains the leading creativity platform, offering a comprehensive portfolio of products for every discipline across imaging, photography, design, video, web, animation and 3D. Core products such as Photoshop, Lightroom, Illustrator, Premiere Pro and Acrobat continue to lead their categories as we add new features and enhance their capabilities with Adobe Sensei, our AI engine. The rapid progress we’re making with Adobe Express is attracting millions of new users and delivering additional value to Creative Cloud members who are also interested in lightweight, task-oriented tools.

New collaboration capabilities, like Share for Review, are integrated directly into Creative Cloud and Document Cloud applications to enable seamless creation, sharing and review across creative and document workflows. Our ongoing product innovation ensures that Adobe remains the preeminent destination for a wide and growing base of individuals, students, creative professionals, small business owners and enterprises to create and monetize amazing content more quickly and easily than ever before. Q4 was a record quarter for Creative Cloud. We achieved net new Creative Cloud ARR of $453 million and revenue of $2.68 billion, which grew 13% year-over-year. This strong performance was a result of: demand for our flagship applications, including Photoshop, Lightroom, Illustrator, Premiere Pro and Acrobat; expansion in SMB and enterprise, driven by strong execution of our year-end pipeline across direct sales and our reseller channel; accelerating growth in Substance 3D and Frame.io, underscoring the continued strength and significant opportunities in our newer businesses; momentum in Express, our template-based web and mobile product for creating everything from year-end sales promotions to holiday cards to social media posts.

Express’ unparalleled collection of stock images, videos, fonts, design assets and templates and its unique integration of AI magic from Photoshop, Premiere Pro and Acrobat enable us to deliver the best of Adobe to customers of every skill level. Q4 continued to see exciting growth with millions of monthly active users, greater than 40% quarter-over-quarter visitor growth in the U.S., and an NPS greater than 50. Key customer wins include Electronic Arts, Meta, NBC Universal, Publicis, Roku, Target and United Nations. In October, we were thrilled to be back live with thousands of members from our creative community at Adobe MAX. The conference has always been an opportunity to showcase our incredible innovation, and we drove over a quarter of a billion video views across all channels.

Our announcements included: powerful new AI capabilities in Photoshop, such as a one-click Delete and Fill tool to remove and replace objects, and a new Photo Restoration neural filter that instantly fixes damaged photos; a Share for Review service in Photoshop and Illustrator that enables designers to easily collaborate with key stakeholders; the first-to-market Camera to Cloud integration between Frame.io and RED Digital Camera and Fujifilm, significantly reducing production costs and time; advances in Substance 3D that empower brands such as Electronic Arts, Hugo Boss, NASCAR, NVIDIA and The Coca-Cola Company to create engaging immersive experiences; a new partnership between the Content Authenticity Initiative and Leica and Nikon to implement provenance technology into cameras, allowing photographers to embed when, where and how images were captured; and early demonstrations of Adobe’s Generative AI technology integrated into our tools, which promises to transform the creative process, making it more accessible, fast and efficient than ever before.

Now turning to the Document Cloud business, digital documents have become synonymous with productivity in our personal and professional lives, whether it’s an offer to purchase a new home, a bank deposit form, a school permission slip or a sales contract. Document Cloud is the leader in digital documents, offering innovative solutions across every device and for every skill level. Our strategy to enable all common document actions, including editing, sharing, reviewing, scanning and signing across desktop, mobile and web, is paying strong dividends. In Q4, Document Cloud had record revenue of $619 million, which represents 19% year-over-year growth and strong net new ARR of $123 million, with ending ARR growing 23% year-over-year. Q4 highlights include: new Acrobat functionality for SMBs, including the ability to send branded agreement templates and combine payments with e-signed documents; new capabilities between Document Cloud and Creative Cloud to help knowledge workers and creative professionals seamlessly collaborate and improve their productivity; scan innovation that allows users to simultaneously scan the left and right pages of a book as well as scan both sides of an ID card on one page; strong organic growth in both traffic and searches for PDF capabilities, which serve as a critical funnel to Acrobat web; significant growth in Sign transactions within Acrobat, underscoring the need for integrated document solutions; outstanding growth in API transactions.

API calls nearly doubled quarter-over-quarter, demonstrating the strategic necessity of integrating PDF capabilities within enterprise applications; key customer wins include BioNTech, Cigna, Deloitte, Mitsubishi Electric, Raytheon, Shell Information Technology and the U.S. Department of State. Q4 was the strongest net new ARR quarter ever for Digital Media, driven by outstanding execution against multiple growth drivers in our core business. In addition, we’re excited about the pending Figma acquisition, which represents a tremendous opportunity to accelerate the future of creativity and productivity for millions of people. Overall, the regulatory process is proceeding as expected. The transaction is being reviewed globally, including by the Department of Justice and the Competition and Markets Authority in the UK.

We are currently engaged in the DOJ’s second request process. We expect that the transaction will also be reviewed in the EU. We continue to feel positive about the facts underlying the transaction and expect to receive approval to close the transaction in 2023. I’ll now pass it to Anil.

Anil Chakravarthy: Thanks, David. Hello everyone. Every business in every category now depends on digital to engage and transact with their customers. Adobe’s Holiday Shopping Report, which analyzes trillions of data points in Adobe Analytics, found that Cyber Monday drove an all-time high of $11.3 billion in online spending, with mobile shopping now accounting for 55% of sales on Thanksgiving, and Buy Now Pay Later orders jumping 85% during Cyber Week. We predict spend will exceed $210 billion this holiday season. No company is better positioned than Adobe to capitalize on this large global opportunity. In my customer conversations, it’s clear that the current macroeconomic climate requires businesses to prioritize investments, and digital remains mission-critical to drive operational efficiency, improve customer engagement and maximize long-term value realization.

We are driving a mix of diversified revenue streams through subscription and consulting services across new and existing customers, demonstrating the strength of our business. Experience Cloud is powering digital businesses in every industry across B2B and B2C with our leading solutions spanning data insights and audiences, content and commerce, customer journeys and marketing workflow, and it is unique in that it helps businesses drive customer demand, engagement and growth while simultaneously delivering productivity gains. Our comprehensive set of applications, including Real-Time CDP, are built natively on our highly differentiated Adobe Experience Platform, providing companies with a unified profile of each of their customers to deliver the most personalized, real-time experiences at scale.

Adobe Experience Platform processes 29 trillion segment evaluations per day and executes a response time of less than 250 milliseconds, illustrating the impact of its real-time capabilities at scale. In Q4, we continued to drive strong growth in our Experience Cloud business, achieving $1.15 billion in revenue. Subscription revenue was $1.01 billion, our first billion-dollar quarter and representing 16% year-over-year growth. Adobe is differentiated in our ability to power the entire customer experience, from ideation to content creation to personalized delivery to monetization. Chipotle is a great example. They are using Creative Cloud to design content for web and mobile channels and Experience Cloud to highlight new product offerings based on consumer preferences and support a faster, easier and more customized online ordering process.

In government, the State of Illinois is using Experience Cloud and Document Cloud to provide simpler and more equitable access to state services for over 12 million residents. It’s especially inspiring to witness the positive social impact of Adobe technology. The National Center for Missing and Exploited Children has long used Photoshop to create age-progressed photos and uses Experience Cloud to facilitate the recovery of missing children. Additional Q4 highlights include: strong demand for Adobe Experience Platform and native applications, inclusive of Real-Time CDP, Adobe Journey Optimizer and Customer Journey Analytics, which are rapidly becoming the digital underpinning of large brands globally; accelerating demand for Adobe Experience Manager, demonstrating Adobe’s role in helping businesses effectively manage their content supply chain, from creation to monetization; a new Marketing Mix Modeling service as part of our data insights and audiences offering, which enables marketers to harness the power of Adobe Sensei to assess marketing ROI in weeks rather than months and forecast resources for campaigns more effectively; strong growth in partner and Adobe professional services, underscoring our customers’ continued focus on implementation and value realization; key customer wins, including BlackRock, Chipotle, Delta Air Lines, DFS Group, Disney Parks, Elevance Health, GM, Office Depot, Publicis, Santander and Wells Fargo.

Adobe continued to receive strong industry analyst recognition, including leadership in the Gartner Magic Quadrant for B2B Marketing Automation Platforms, the Forrester Wave for Collaborative Work Management and the Forrester Wave for Enterprise Marketing Suites. I’ll now pass it to Dan.

Dan Durn: Thanks, Anil. Our earnings report today covers both, Q4 and fiscal year 2022 results. As you know, in 2022 we experienced significant headwinds from the strengthening of the U.S. dollar, increased tax rates and the impacts from the Russia-Ukraine war. Despite those headwinds, in fiscal €˜22 Adobe achieved record revenue of $17.61 billion, which represents 12% year-over-year growth, or 15% growth in constant currency on an adjusted basis. GAAP EPS for the year was $10.10, and non-GAAP EPS was $13.71. We exceeded our initial Non-GAAP EPS target for fiscal year €˜22, which speaks to the discipline, strong execution and resilient operating model of the Company. Fiscal year 22 business and financial highlights included: Digital Media revenue of $12.84 billion; net new Digital Media ARR of $1.91 billion; Digital Experience revenue of $4.42 billion; cash flows from operations of $7.84 billion; RPO of $15.19 billion exiting the year; and repurchasing approximately 15.7 million shares of our stock during the year at a cost of $6.30 billion.

In the fourth quarter of fiscal year €˜22, Adobe achieved revenue of $4.53 billion, which represents 10% year-over-year growth, or 14% in constant currency. GAAP diluted earnings per share in Q4 was $2.53 and non-GAAP diluted earnings per share was a record $3.60. Q4 business and financial highlights included: Digital Media revenue of $3.30 billion; record net new Digital Media ARR of $576 million; Digital Experience revenue of $1.15 billion; record cash flows from operations of $2.33 billion; adding over $1 billion to RPO sequentially in the quarter; and repurchasing approximately 5 million shares of our stock. In our Digital Media segment, we achieved Q4 revenue of $3.30 billion, which represents 10% year-over-year growth, or 14% in constant currency.

We exited the quarter with $13.97 billion of Digital Media ARR. We achieved Creative revenue of $2.68 billion, which represents 8% year-over-year growth, or 13% in constant currency, and we added $453 million of net new Creative ARR in the quarter. Driving this performance was good linearity throughout the quarter as well as strong customer purchasing during the peak holiday shopping weeks. Fourth quarter Creative growth drivers included: new user growth, fueled by customer demand, targeted campaigns and promotions, and yearend seasonal strength, which drove strong web traffic and conversion rates in the quarter; adoption of our Creative Cloud All Apps offerings across customer segments, from enterprise, to Team, to individual and education; strength of the new Acrobat within our Creative Cloud offering, demonstrating the importance of digital documents and workflows to the creative community; sales of individual applications, including a strong quarter for our imaging and photography offerings; continued growth of newer businesses, including Express, Substance, Frame and Stock; and a solid finish to the year in SMB and enterprise.

Adobe achieved Document Cloud revenue of $619 million, which represents 16% year-over-year growth, or 19% in constant currency. We added $123 million of net new Document Cloud ARR in the quarter. Fourth quarter Document Cloud growth drivers included: Acrobat subscription demand across all customer segments; continued growth of Acrobat web, fueled by online searches for PDF and product-led growth; strong performance of our new Acrobat offering integrated with Sign, driving upsell ARR as well as new customer adoption; and year-end seasonal strength in SMB, including through our reseller channel. Turning to our Digital Experience segment, in Q4 we achieved revenue of $1.15 billion and subscription revenue of $1.01 billion, both of which represent 14% year-over-year growth, or 16% in constant currency.

Fourth quarter Digital Experience growth drivers included: expected year-end strength, with significant bookings of our newer offerings in EMEA that builds on our momentum in North America; success closing numerous transformational deals that span our portfolio of solutions; momentum with our Adobe Experience Platform and native applications, including RealTime CDP; strength with our Content and Workfront solutions, which are integral components of our content supply chain strategy; and increased customer demand for professional services, as enterprises focus on implementation and accelerating time to value realization from digital investments. In Q4, we focused on making disciplined investments to drive growth and awareness of our products.

We continue to have world-class gross and operating margins and drove strong EPS performance in the quarter. Adobe’s effective tax rate in Q4 was 22.5% on a GAAP basis and 17.5% on a non-GAAP basis. The GAAP tax rate came in lower than expected primarily due to lower-than-projected tax on our foreign earnings. RPO exiting the quarter was $15.19 billion, growing 9% year-over-year, or 12% when factoring in a 3 percentage-point FX headwind. Our ending cash and short-term investment position exiting Q4 was $6.10 billion, and cash flows from operations in the quarter were a record $2.33 billion, up 14% year-over-year. We now intend to use cash on hand to repay the current portion of our debt on or before the due date, which we expect will reduce our interest expense in fiscal year €˜23.

In Q4 we entered into a $1.75 billion share repurchase agreement, and we currently have $6.55 billion remaining of our $15 billion authorization granted in December 2020 which goes through 2024. As a reminder, we measure ARR on a constant currency basis during a fiscal year and revalue ARR at year-end for current currency rates. FX rate changes between December of 2021 and this year have resulted in a $712 million decrease to the Digital Media ARR balance entering fiscal year €˜23, which is now $13.26 billion after the revaluation. This is reflected in our updated investor data sheet, and ARR results will be measured against this amount during fiscal year €˜23. We provided preliminary fiscal year €˜23 targets at our Financial Analyst Meeting in October that take into account the macroeconomic environment and the growth drivers for our various businesses.

While there is ongoing macro uncertainty, given the massive long-term opportunity in digital and the momentum in our business, we are pleased to reiterate those financial targets. In summary, for fiscal year €˜23 we are targeting: total Adobe revenue of $19.1 to $19.3 billion; Digital Media net new ARR of approximately $1.65 billion; Digital Media segment revenue of $13.9 to $14.0 billion; Digital Experience segment revenue of $4.925 billion to $5.025 billion; Digital Experience subscription revenue of $4.375 billion to $4.425 billion; tax rate of approximately 22% on a GAAP basis and 18.5% on a non-GAAP basis; GAAP earnings per share of $10.75 to $11.05; and non-GAAP earnings per share of $15.15 to $15.45. As a reminder, these targets do not contemplate our planned acquisition of Figma.

We expect normal seasonality throughout the year, with Q1 being sequentially down and seasonally light for new business, sequential growth from Q1 to Q2, a dip in Q3 on account of summer seasonality, and a strong finish to the year in Q4. For Q1 fiscal year €˜23 we are targeting: total Adobe revenue of $4.60 billion to $4.64 billion; Digital Media net new ARR of approximately $375 million; Digital Media segment revenue of $3.35 billion to $3.375 billion; Digital Experience segment revenue of $1.16 billion to $1.18 billion; Digital Experience subscription revenue of $1.025 billion to $1.045 billion; tax rate of approximately 22% on a GAAP basis and 18.5% on a non-GAAP basis; GAAP earnings per share of $2.60 to $2.65; and non-GAAP earnings per share of $3.65 to $3.70.

In summary, Adobe finished FY22 strong, executing on our strategies across Creative Cloud, Document Cloud and Experience Cloud. I expect this performance to carry into next year, as Adobe’s sustained top-line growth and world-class profitability continue to position us well for fiscal year €˜23 and beyond. Shantanu, back to you.

Shantanu Narayen: Thanks, Dan. As the company celebrates its 40th anniversary, it is a perfect time to reflect on our past and our future. Adobe was founded on simple but enduring principles that remain with us today. Innovation is at our core, employees are our greatest asset and our customers, communities and shareholders are central to our success. Over the past four decades, Adobe’s continuous innovation and leadership have empowered billions of people around the globe to imagine, create and deliver the best Digital Experiences. Our strong brand and company culture enable us to attract and retain the world’s best employees. We are proud to once again be named to Interbrand’s Best Global Brands list as a top riser for the 7th year in a row and to Wall Street Journal’s Best Managed Companies, ranking number one for Employee Engagement and Development.

We have everything it takes to continue our success in the future: massive market opportunities; a proven ability to create and expand categories that transform markets; an expansive product portfolio that serves a growing universe of customers; revolutionary technology platforms that advance our industry leadership and competitive advantage; an expanding ecosystem that delivers even greater value to customers; strong business fundamentals; and the most dedicated and talented employees. I have never been more certain that Adobe’s best days are ahead. Thank you and we will now take questions. Operator?

Q&A Session

Operator: Thank you. We’ll go ahead and take our first question from Mark Moerdler with Bernstein Research. Please go ahead.

Mark Moerdler: Thank you very much. And congratulations on the quarter and the guidance, by the way. Can you give us, David, some more color on Adobe Express and your ability to convert free users to paid users? Are you seeing any impact to creative customers trying to switch to Express? And how do you assure express paid adoption with that impact on Creative Cloud?

David Wadhwani: Yes. We’re very excited about sort of the state of Express. Express just finished its first year in market. We have millions of monthly active users. As I mentioned, we saw very strong growth sequentially quarter-over-quarter in the U.S., which is our primary focus market, 40% quarter-over-quarter growth in visitors, terrific NPS of over 50%. And that’s really on the backs of hundreds of millions of stock content that we have, the 20,000 fonts that we’ve added that is unique to our offering, the highest quality templates. And the constant addition of best-breed features from our other Adobe products like Photoshop and Premier and Acrobat. We’ve had over 100 releases in the first year that Express has been out.

So, we’re very excited about that. And so, the Express business itself continues to do well, both in terms of free users and in terms of conversion of those users. But to your question, we also are seeing very strong adoption of Express within our existing CC customer base. So, we see a lot of people, of course, buying our core flagship applications for the power and precision that they have and that they represent, but there are times in those users that are looking to just get something done quickly. And the fact that Express is also entitled to those users gives them the ability to have the power and precision and the speed and ease. And so as users are coming, we’re bringing in more users than we’ve ever had in audiences, we haven’t reached by finding intent-based search for things.

We’re bringing those users in, which is giving us incredible top of funnel. We’re driving the conversion. And we’re also able to drive utilization increases in CC customers, which is driving retention of that business overall as well. So, the funnel and that migration of that base is very healthy and playing out as expected.

Operator: We’ll go ahead and move on to our next question from Brad Sills with Bank of America.

Brad Sills: I wanted to ask another question about Creative Cloud Express. Obviously, you’re seeing some success here with that top of funnel business. Is there any color you can provide on where you see the upgrade path for some of those customers? Are there — is there a certain upsell motion that we could see conversion of other products, even potentially the full suite in that installed base as it’s growing? Thank you.

David Wadhwani: Yes. As we talked about when we launched Creative Cloud Express, the primary focus right now is bringing people into Adobe Express and just making them successful, whether it’s at the free tier or whether it’s at the paid tier or whether it’s a pay tier eventually migrating up into the core flagship applications. Our primary focus has been and continues to be right now around usage, repeat usage and utilization. We are seeing, though, while that’s our primary focus, we are seeing a lot of really interesting data coming in suggesting that we — that the upgrade has are — while still early and not our primary focus are working. For example, in many higher ed institutions where we’ve started to deploy Adobe Express, we’re starting to see not just the increase in terms of usage of Express, but we’re also starting to see increase in demand for Adobe Creative Cloud flagship applications.

And again, part of this is we know and we believe that everyone should be creative and creativity is the new productivity. But as people start to leverage and benefit from that creativity, they naturally want more power and precision as well. So that they do go well hand in hand.

Operator: We’ll move on to our next question from Sterling Auty with SVB MoffettNathanson. Please go ahead.

Sterling Auty: So, I’m curious, is there anything operationally that you can do in preparation for the Figma acquisition, either from an expense structure or development side now before close? And if so, what are those moves that you’re making?