Adobe Inc.

Operator: Good day. And welcome to the Q2 FY 26 Adobe Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Douglas G. Clark, Vice President of Investor Relations. Please go ahead. Douglas G. Clark: Good afternoon, and thank you for joining us. With me on the call today are Shantanu Narayen, Adobe's chair and CEO; David Wadhwani, president of creativity and productivity; Anil S. Chakravarthy, president of customer experience orchestration; and Steven Day, Senior Vice President, Corporate Finance, and CFO of customer experience orchestration. On this call, which is being recorded, we will discuss Adobe's second quarter fiscal year 26 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, June 11, and contains forward looking statements that involve risk, uncertainty and assumptions. Actual results may differ materially from those set forth in these statements. For more information on those risks, please review today's earnings release and Adobe's SEC filings. On this call, we will discuss GAAP and non GAAP financial measures. Our reported results include GAAP growth rates, and non GAAP growth rates, including constant currency rates. During this presentation, Adobe's executives will refer to revenue growth in constant currency rates unless otherwise stated. Non GAAP reconciliations 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, Douglas. Good afternoon, everyone, and thank you for joining us. We achieved $6.62 billion in revenue in Q2 representing 11% year over year growth. GAAP earnings per share for the quarter was $4.25 representing 8% year over year growth and non GAAP earnings per share was $5.96 representing 18% year over year growth. Strong revenue growth was driven by subscription bookings to revenue conversion. We drove EPS growth through record top line revenue and disciplined investments across the company. At Adobe, we continue to be driven by our mission to empower everyone to create and deliver innovative products to delight users based on our customer strategy. We are focused on business professionals and consumers, creators and creative professionals, and marketing professionals. For business professionals and consumers, we are delivering AI powered quick and easy apps to stand out through creativity and productivity. For creators and creative professionals, we are delivering power and precision to bring creative visions to life across any media type and surface. For marketing professionals, we are delivering customer experience orchestration to create, deliver, and optimize personalized digital experiences. As we reflect on the market context and our first half performance, it is clear that relative even to the beginning of fiscal 26, AI is accelerating customer behavior at an unprecedented speed and we need to evolve our strategy and execution to address these changing expectations. Much like how developers have embraced and expanded the AI coding market, there is a transformation underway for how consumers are discovering, onboarding, and purchasing products across all categories, including creativity, product gaming, and entertainment. As it relates to creativity and productivity, there is an unprecedented demand across additional surfaces for the combination of content consumption and content creation. Conversational interfaces and agents now orchestrate across tools to achieve outcomes faster. The proliferation of media generation models is reshaping and democratizing content workflows from ideation through delivery. AI first applications that will serve broader audiences need to provide free, intuitive onboarding that drive usage and monetization through paywalls. Big picture, the immediate opportunity for Adobe. Is to accelerate new user acquisition and lifetime value through a freemium offering. As it relates to business professionals and consumers, we have dramatically increased Acrobat and Express MAU from greater than 700 million to greater than 850 million year over year. The opportunity is to serve billions of business professionals and consumers through a comprehensive freemium funnel building on the success of the Adobe Reader model. Over the last year, we have delivered tremendous innovation across AI assistant, PDF spaces, express, and conversational interfaces and made these innovations available across surfaces, including AI mode and reader, on Chrome, and WhatsApp. Business professional and consumer traffic on adobe.com seeking Adobe capabilities is growing 35% year over year. We believe this traffic is better served through a customized friction free onboarding experience. Without immediate paywalls and will result in greater customer acquisition and deeper engagement over time. Based on the early success and MAU growth of freemium journeys for Acrobat and Express, we are ready to expand this experience. more aggressively. For next generation creators, the opportunity is to deliver an AI production studio across web and mobile that seamlessly integrates with the power and precision capabilities of Creative Cloud. We have increased our Creative Freemium MAU from 50 million to 90 million year over year. The opportunity is to attract hundreds of millions of additional creators through a freemium funnel based on the early success of Firefly. Over the last year, we have delivered tremendous innovation across ideation through boards, generation with support for multiple media models, semantic image and video editing, and conversational interfaces that are available across surfaces including mobile, web, and flagship Creative Cloud applications such as Photoshop, Illustrator, and Premiere. The new personalized journeys for creators drove approximately 50% increase in Firefly ARR quarter over quarter through Firefly apps and credit packs. Based on this early success, we are confident that we should expand the Firefly premium experience to acquire and delight the next generation of creatives. Creative Cloud continues to perform well as the best of breed offering creative and marketing professionals globally. While we focus on accelerating creator acquisition through the freemium Firefly funnel, we have made the decision to defer previously planned Creative Cloud second half line optimizations. As it relates to the customer experience orchestration, agentic opportunity in the enterprise, marketing professionals are looking to automate and rapidly create, deliver, and personalize content at scale across every channel in a way that drives customer engagement and elevates their brand. Content creation designed specifically for marketing use cases is exploding. New AI coworkers and agents offer organizations the ability to deliver automation and outcomes powered by context, data, MCPs, and skills. These address the dual needs of enterprises to expand consumer centricity and cost savings in the era of AI. Business models are expanding to include consumption and outcome based pricing along with subscriptions. The total marketing opportunity across people, software, agency and channel spend is enormous. AI is changing enterprise behavior as they are increasingly bringing marketing capabilities in house. Through their adoption of software platforms and the creation of custom models that uniquely capture their brand intelligence. IT organizations are looking to Adobe to accelerate their provisioning, deployment, and customization to serve their consumers through the availability of headless and agentic capabilities with pricing models that address outcomes as well as AI usage. Customer experience orchestration AI first ARR, grew 4x year over year reflecting how Adobe is the leader in both the traditional marketing category and the emerging customer experience orchestration category. The introduction of Adobe CX Enterprise and CX Enterprise coworker at Adobe Summit expands the vision and delivery of our category-defining CXO solutions. The successful acquisition of SEMRush unifies our search engine optimization generative engine optimization, and EEM solutions to further extend our CXO offering. We will deliver this integrated offering that addresses brand visibility at the Cannes Lions, Festival of Creativity later this month. This combination of creativity and marketing uniquely differentiates Adobe. No other company brings together what creatives and marketers can do across our applications and delivery platforms. Adobe Gen Studio ARR grew over 25% year-over-year, reflecting enterprise demand for an end to end solution that spans workflow and planning, creation and production, asset management, activation and delivery, and reporting and insights. Adobe's AI innovation has driven an impressive 3x year-over-year increase in AI first ARR to greater than $500 million We believe now is the time to aggressively acquire the next generation of Adobe loyalists. The strategic shift to acquire more freemium customers through Adobe and Firefly, lowers our second half ARR growth expectations from individual subscribers We believe these changes do make Adobe even stronger. We continue to target double digit total ARR growth for Adobe which now includes the Semrush acquisition. Based on our strong first half revenue performance and the inclusion of Semrush, we are pleased to raise our fiscal year revenue and non GAAP EPS targets. As we announced, Dan Durn, has decided to pursue a new opportunity outside the software industry. I would like to thank Daniel for his contributions to Adobe and wish him well. I am pleased that Steven Day, who has been at Adobe for 20 years, serving in numerous financial leadership roles, serve as interim CFO upon Daniel's departure. I continue to be incredibly energized by Adobe's long term AI opportunity and the innovative products we are delivering to a broader set of customers. Given my decision to transition to board chair, I wanted to provide an update on the CEO search, which is progressing well. The board has been actively engaged in a comprehensive process. While we all continue to be ruthlessly focused on driving execution, Our goal is to have Adobe's next CEO in place. To put their stamp on planning for fiscal 27 and beyond. I will now turn it over to David. David Wadhwani: Thanks, Shantanu. Hello, everyone. AI is rewriting how the world creates and gets work done. And the audiences for creativity and productivity tools are bigger now than at any point in our history. From social creators and students to business professionals and large enterprises, the opportunity for Adobe is massive. These customers are looking for a range of products from easy to use creative tools to professional levels of power and precision. And are increasingly turning to conversational experiences to accelerate their work. Adobe is the only company that has the portfolio breadth to meet this broad range of creativity and productivity needs. We see this interest manifest in traffic growth, signaling demand for existing products and accelerating demand for new AI first experiences. The demand for these new AI experiences begins with LLM conversations and intent based searches and requires immediate gratification. so is best served with friction free experiences. This shift in user behavior is playing out across business professionals and consumers and creators and creative professionals. While we continue to attract strong traffic to adobe.com, which grew over 40% year-over-year, our traditional direct to pay journeys may not always fulfill visitor intent. As a growing number of new users are first looking to quickly complete their intended task, as they begin their relationship with Adobe. Given products like Adobe Firefly, Express, and Acrobat AI assistant have friction free onboarding and significant adoption, we can now rebalance our journeys to better serve this new generation of users rather than send them predominantly to direct to paid journeys. This shift will come at the cost of short term ARR but will accelerate user acquisition in MAU while building the foundation for long term growth by removing friction from user onboarding, enabling deeper user engagement, and driving stronger lifetime value. In Q2, subscription revenue for business professionals and consumers was $1.85 billion growing 15% year over year. BP and C traffic grew 35% year over year with MAU growing from more than 700 million to more than 850 million in Q2 year over year. With significant contributions from AI Assistant, Express creation, and PDF spaces sharing. This quarter, we introduced the Adobe Productivity Agent, shifting Acrobat from a static document tool to an interactive experience. The productivity agent is an AI experience built into Acrobat that draws on Adobe Acrobat document intelligence and Adobe Express's AI first creation capabilities to help business professionals understand, create, and share information. They can turn documents into rich outputs, like presentations, podcasts, and social content, support conversational PDF editing, and power the new sharing capabilities in PDF spaces. Customers get the agent, through Acrobat AI plans. Users can also now share branded PDF spaces with customizable AI assistance tailored to a specific audience, whether for sales prospecting, content marketing, or research delivery. Early adopters of PDF Spaces including Vice Media, Kid Cudi, Jessica Yellen, and Mindy Kaling, are using PDF spaces to move audiences from passive reading to interactive engagement. Additional business professional and consumer highlights include Acrobat AI assistant paid MAU grew over 150% year-over-year, and lifetime AI users in Acrobat tripled year over year, showing both monetization traction and broad based engagement. Express MAU grew more than 20% quarter-over-quarter, and Express users in Acrobat exported 9x more content year over year, demonstrating that the integration is driving creative output at scale. Acrobat Student Spaces launched this quarter to strong early adoption. The number of higher education students with access to express premium through their schools has grown more than 60% year-over-year. And customer wins this quarter include Accenture, Datadog, KPMG, Merck, NHL, New York State Court System, The Church of Jesus Christ of Latter day Saints, Defense Information Systems Agency. And U. S. Department of Housing and Urban Development. In Q2, subscription revenue for creative and marketing professionals was $4.54 billion growing 11% year over year. Demand for AI content creation is exploding across ideation, generation, and semantic editing, and generative creative consumption continues to show strong growth. Our strategy is to empower everyone to create, from first time creators to seasoned professionals to large enterprises, seeking to scale content production. In Q2, C&P traffic to adobe.com grew over 50% year-over-year with Creative Freemium MAU growing from more than 50 million to more than 90 million This immense volume of traffic drawn to the Adobe brand includes users seeking to purchase Creative Cloud, Photoshop, and other CC apps, and an increasing number of new users who are looking for Adobe Magic to complete a creative task with a friction free experience. Firefly freemium users who convert to our paid plans are highly engaged with early indications of significant credit consumption. Firefly ARR grew approximately 50% quarter-over-quarter through Firefly apps, and credit packs. We were excited to launch the Adobe creative agent beta in Q2. The agent is available as part of Creative Cloud and Firefly subscriptions. And provides a conversational experience to achieve complex and repetitive creative tasks. Brent usage will be monetized through our existing credit consumption model. The Adobe creative agent is also available in Claude, ChatGPT, and soon Copilot and Gemini. Additional creators and creative professionals highlights include in Premiere, we launched a brand new color mode a first of its kind color grading experience built specifically for video editors. We continue to deepen AI capabilities across our flagship Creative Cloud applications, Photoshop added Rotate Object and Illustrator released Turntable, both enabling subscribers to turn 2 d photos and illustrations into 3D renditions they can rotate and harmonize into their work. Capabilities like these grow record AI usage within our flagship applications. Firefly continues to support third party models now with Kling 3.0 and Kling 3.0 Omni. Firefly ending ARR across Firefly app Firefly credit packs, and Firefly enterprise is approaching $300 million exiting Q2. Firefly Enterprise spanning Firefly services, Adobe Firefly Foundry, and brand intelligence is helping the world's largest brands industrialize content production with brand safe custom models. The number of generated assets grew more than 4x year over year making it an AI content engine for marketing at scale. Our announced NVIDIA partnership will bring accelerated computing to Adobe Firefly Foundry for faster, higher performing custom models across image, video, audio, vector, and 3D plus a cloud-native 3D digital twin built on Omniverse and OpenUSD. And enterprise wins this quarter include Merck, SAP, ServiceNow, Tesco, The Coca Cola Company, Workday, and Xfinity. In summary, demand for creativity and productivity in the AI era is dramatically increasing as evidenced by our record traffic on adobe.com. While we continue to fulfill demand for Acrobat and Creative Cloud, the early success of Firefly Express and Acrobat AI assistant gives us conviction that this is the time to aggressively serve new users with a friction free freemium journey. We are confident that driving MAU which has an impact on ARR, is the right trade off and will drive future business growth. I will now turn it over to Anil. Anil S. Chakravarthy: Thanks, David. Hello, everyone. In Q2, AI continued to be a tailwind for our enterprise business, enabling us to deliver creative and marketing professional subscription revenue of $4.54 billion, growing 11% year-over-year. These results underscore the continued explosion in content and the imperative to deliver personalized customer experiences at scale. The opportunity for AI powered marketing automation customer experience orchestration is large and growing. And we are continuing to gain market share and expand our leadership. We are focused on 3 critical AI for solutions. Adobe Experience Platform and native apps for customer engagement, Adobe Gen Studio for content supply chain, and Adobe Experience Manager in AgenTek web apps for brand visibility. Q2 highlights included. GenStudio ending ARR grew over 25% year-over-year, as leading brands and agencies continue to standardize on Adobe to power their content supply chain. Subscription revenue for AEP and native apps grew over 30% year-over-year. AEP delivers over 70 billion profile activations and 35 trillion segment evaluations per day. As well as more than 1 trillion experiences per year. Over 80% of AEP and AEM customers are now using agentic capabilities built into our products. Over 1.5 thousand customer trials are underway for our agentic web offerings. Adobe LLM optimizer, sites optimizer, and brand concierge. 60% quarter-over-quarter growth for forward deployed engineering and integrated services offerings designed to co innovate and deliver customized AI powered CXO solutions. Q2 industry analyst recognition. Being named the leader in 2 Gartner Magic Quadrants including customer journey analytics and orchestration, and content marketing platforms. And 2 Forrester Waves, including email marketing service providers and customer analytics technologies. And global enterprise customer wins in Q2 included Dentsu Merkel, Defense Information Systems Agency, Diriya Company, Kaiser Foundation Hospitals, Merck Sharp and Dome, NHL, SAP, ServiceNow, Stagwell, Stellantis, Tesco, and The Coca-Cola Company. In April, we closed the acquisition of SEMRush, leading provider of search engine optimization and generative engine optimization solutions. Semrush added $480 million ARR to our book of business. And expands our ability to serve marketers at every scale. We are rapidly integrating SEMrush into Adobe, uniting SEMrush's discoverability intelligence with Adobe's agentic web apps. We look forward to unveiling a comprehensive brand visibility solution combining SEMrush with Adobe at the Cannes Lions Festival of Creativity later this month. At Adobe Summit in April, where we hosted over 14 thousand in-person attendees, We launched Adobe CX Enterprise, a new end to end agentic AI system that simplifies how enterprises manage their entire customer life cycle from acquiring and engaging prospects to driving conversion and lasting loyalty. Adobe CX Enterprise brings together AI agents agent skills, and model context protocol endpoints. With an intelligence and governance layer. To deliver reliable and auditable agentic workflows that enable highly personalized differentiated customer experiences. Over 20 thousand global brands have built their business on Adobe, and CX Enterprise will help assure them into the era of agentic AI. As part of CX Enterprise, we announced CX Enterprise coworker, a specialized AI agent that executes tasks based on business goals dramatically increasing productivity and campaign execution. CX enterprise coworker has garnered tremendous customer interest since launch. With over a 150 leading enterprises in the early adoption program prior to general availability this week. At Adobe Summit, we also introduced Adobe brand intelligence, a continuous learning system that helps enterprises create and validate on brand content faster and with less effort. Adobe brand intelligence learns from creative and marketing team feedback, approvals, and rejections in real time. It is a headless platform exposed through APIs so it can integrate with existing first and third party apps rather than running as a separate app. Customer experience is 1 of the first areas of AI powered transformation for enterprises. Around the world, our conversations with c level executives reflect how they view Adobe as the trusted partner for this transformation in the era of agentic AI. In Q2, we announced native integrations with major enterprise AI platforms including Microsoft Copilot, Anthropic, OpenAI, Google Gemini. Our partnership with NVIDIA brings CX enterprise coworker capabilities into the NemoClaw enterprise agent platform. Enabling brands to deploy, Adobe's customer experience intelligence within NVIDIA's secure policy-governed, open-shell run time. Leading global agencies Dentsu, Havas, Omnicom, Publicis, Stagwell, and WPP are standardizing on Adobe, combining our AI powered capabilities with their unique IP and industry expertise, to co develop innovative differentiated solutions for joint clients. Our vision, deep expertise, and creativity in marketing, track record of innovation, and broad partner ecosystem uniquely position Adobe as the partner of choice for AI powered customer experience orchestration. Our extensive customer base, innovative CXO products, and robust pipeline, give us confidence for a seasonally strong second half. I will now pass it to Steven. Steven Day: Thanks, Anil. Today, I will start by summarizing Adobe's performance in Q2 FY 26, highlighting growth drivers across our customer groups, I will finish with our financial targets. In Q2, Adobe achieved record revenue of $6.62 billion growing 13% year-over-year as reported and 11% in constant Diluted earnings per share was $4.25 on a GAAP basis and $5.96 on a non GAAP basis. Our GAAP results reflected a $70 million or $0.17 per share of a non cash goodwill impairment charge related to our Publishing and Advertising reporting unit. Q2 financial highlights included total Adobe ending ARR of $27.1 billion growing 12.5% year over year including approximately $480 million from the acquisition of SEMrush. Total customer group subscription revenue of $6.39 billion growing 14% year over year or 12% in constant currency, including approximately $40 million from the addition of SEMRush. RPO of $22.27 billion exiting the quarter with RPO and CRPO both growing 13% year over year or 12% in constant currency. Cash flows from operations in the quarter were $2.17 billion and ending cash and short term investments exiting Q2 was $5.63 billion, and we repurchased approximately 8.5 million shares of our stock during the quarter. Exiting Q2 we have approximately $27 billion remaining under our authorizations, including the new $25 billion authorization announced in April. Customer group results and insights. Business professionals and consumers subscription revenue was $1.85 billion increasing 16% year over year as reported or 15% in constant currency. Q2 growth drivers for Business Professionals and Consumers included sustained double digit ending ARR year over year growth across all geographies. Acrobat and Express MAU surpassed 850 million growing approximately 20% year over year Acrobat AI assistant ARR growing approximately 3x year-over-year and strong performance in the enterprise across both commercial and government. Creative and Marketing Professionals subscription revenue was $4.54 billion increasing 13% year over year or 11% in constant currency. Q2 growth drivers for Creative and marketing professionals included growth in Creative Cloud driven by the CC Pro offering, Creative Freemium MAU, which includes web and mobile versions of Firefly Express, Premiere, Photoshop, and Lightroom, crossed 90 million, growing over 70% year over year. Continued strong generative credit consumption driven by video and audio, Firefly ending ARR, including Firefly apps and credit plans and enterprise Firefly offerings approaching $300 million with the intent to drive more traffic to Firefly freemium in H2. Ending ARR across GenStudio, AEP, and apps and AEM and Agentic Web growing over 20% year over year enterprise customers with over $10 million in ARR growing more than 20% year over year and continued strength in retention across the enterprise customer base. Let me now turn to our financial targets. Which include SEMrush, and assume current macroeconomic conditions. Given strong year to date performance, we are raising full year revenue and non GAAP EPS targets. For FY 2026, we are targeting total Adobe revenue of $20.5 billion to $20.6 billion Business Professionals and Consumer subscription revenue of $7.44 billion to $7.48 billion Creative and Marketing Professional subscription revenue of $18.21 billion to $18.27 billion which now includes approximately $280 million from SEMRush. Total Adobe ending ARR book of business growth of 10.2% year over year compared to our FY 2026 beginning book of business of $25.6 billion. GAAP EPS of $17.9 to $18 and non GAAP EPS of $24.35 to $24.45 Our FY 2026 targets assume a non GAAP operating margin of approximately 45% a GAAP tax rate of approximately 22.5%, and a non GAAP tax rate of approximately 18%. FY 2026 total Adobe ARR growth target of 10.2% now reflects both the addition of the SEMRush book of business as well as the strategic choice to accelerate MAU premium growth and defer previously planned Creative Cloud line optimizations. We believe this is the right long term strategy to expand our customer base and strengthen the foundation for durable growth. For Q3 FY 26, we are targeting total Adobe revenue of $6.67 billion to $6.72 billion Business professionals and consumer subscription revenue of $1.87 billion to $1.89 billion Creative and marketing professional subscription revenue of $4.61 billion to $4.64 billion GAAP EPS of $4.4 to $4.45 and non GAAP EPS of $6.05 to $6.10 For Q3, we assume non GAAP operating of approximately 44% and a GAAP tax rate of approximately 23% and a non GAAP tax rate of approximately 18%. We believe Adobe is well positioned to capitalize on the expanding AI opportunity. Our focus remains on helping customers achieve better outcomes through innovation, relentless execution, and deep integration of AI across our portfolio. We are expanding our user base, deepening engagement, and investing with discipline in the opportunities that will drive Adobe's next phase of growth. Shantanu Narayen: Thanks, Steven. We are at a transformative moment in the industry and for the company. The convergence of AI, agentic workflows and the explosion of content demand is creating significant opportunities that play directly to Adobe's strength. My focus continues to be driving execution against our product roadmap and successfully expanding to new monetization models, that reflect how the diversity of our customers want to engage with Adobe. I am committed to driving this as we finalize the right leader for Adobe's next chapter of growth. It gives me confidence beyond our products and groundbreaking technology is our people. Adobe remains 1 of the greatest places to work in the industry and the talent and culture we have built over decades is the foundation for this transformation. Thank you. We will now take your questions. Operator: Thank you. Saket, once your mute function is turned off to allow your signal to reach our equipment. Again, that is *1 if you would like to signal with questions. And the first question will come from Michael Turrin with Wells Fargo Securities. Michael Turrin: Hey. Brent. Thanks very much. Appreciate you taking the question. And I guess just realize it was not planned, but with Daniel leaving, I think we are going to feel questions on how the company manages through this level of transition in a world where there are a lot of questions around just disruption or changes to the market across software. So maybe you can just speak to how you maintain continuity with the both CEO search and CFO transition in motion and maybe also touch on the profile of what you are looking towards or think the company needs and it is next stage at this point. Shantanu Narayen: Sure, Michael. Let me take that. And, you know, I will first start off by saying, the leadership team that exists in the finance organization is absolutely, absolutely seasoned and top notch. So you know, I wish Daniel well. it is clear that where he is going is where his background and expertise has been. But I am confident that we will not miss a beat. I think as it relates to, you know, any other questions associated with the transition, I am happy to answer that. But my short answer is we have a incredibly seasoned leadership team and, you know, I will continue to work with them closely as I have in the past. To make sure that we drive, all our strategic objectives. Michael Turrin: And just if I may, a follow-up just on the decision to defer line optimizations on Creative Cloud I assume we are coming up on just potential price increase there. So maybe speak to why that is the right decision for Adobe today. And how you think that kind of sets the creative business up for future growth. Shantanu Narayen: Yeah. Happy to, Michael. I mean, I think if we really look at it, we just look at what is happening with the AI opportunity for creativity. is this incredible opportunity that is upon us right now and no other company is as well positioned given what we have with our models across our products. Across our interfaces to take advantage of it. So this is really about saying, what we have done as it relates to capturing MAU with Acrobat and Express, what we have done with respect to Firefly, the entire creative market. You know, sometimes I like to also characterize this much like what is happened with the code opportunity. If you think about what is happened with the code opportunity across AI, it is just completely being turned upside down. And every company is thinking about how they can, you know, add to all of the billions that is already spent in code. The same opportunity exists, I think, in every single category, whether that is gaming, entertainment, and creativity. And this is an opportunity for us not just to focus on creative pros and communicators, who have traditionally been the strength of this company, but to actually become that AI platform for all creativity. Across every single surface. The success that we have seen associated with what we have done on these new products. We talked about the MAU. We have talked about the ARR that is coming. We want to just have a singular focus right now to make sure that we go capture that immense opportunity with a singular focus, a clear marketing message. It also is based on a complete confidence that we have that the creative business is extremely stable. The amount of innovation that we have delivered in that space continues to make us you know, a category of 1 as it relates to our focus on that particular market. And so, you know, that 1, we can defer. it is not going away. But anything that comes in the way of the company aligning, and the market understanding that we are going to go after that entire creative opportunity right now, I think will detract from what is the real price for this company. So, hopefully, that gives you some color. And I think in terms of, you know, the impact on ARR, you can think of it as maybe half of the impact of ARR is as a result of what we are doing around deferring that creative, price line optimizations. And the other half is about going, you know, full steam on what it-- what it takes to deliver the freemium experience. Appreciate the candor in those responses. Thanks, Shantanu. Thanks, Michael. Operator: And the next question comes from Alex Zukin with Wolfe Research. Alex Zukin: Hey guys. appreciate you taking my question. I apologize for any background noise. Maybe just at the risk of redundancy or simplification, just why now to accelerate the freemium MAU motion I think before, we were thinking that the previous messaging was that it could actually positively impact second half ARR. The freemium motion, and now it is turning into a headwind. As they convert. Or so maybe just simplify why now is the right time and then I have got a quick follow-up. Shantanu Narayen: Sure. I mean, I think you should think of it, more in terms of, does that early success that we are having across all of them give you confidence to actually go even more aggressively about this? So that is how I think about this, Alex, in terms of why now. We all recognize that when you look at the traffic that is coming to the Adobe site, that traffic is just gushing. And so when we think about how we can capture that with a unique value proposition associated with delighting them and making sure we have a friction free experience, anything that comes. When we take a step back, we have built a incredible business. But it is a balanced business. We are always trying to figure out what we send to the freemium. And what we send to ARR. I think this singular clarity will enable us to capture way more people in the audience. And so the why now has more to do with the fact that we are seeing the success associated with what we have done the products, whether it is Acrobat Express or Firefly, are there. The ability to support third party models is there, and I will have David-- I will have David also add. So it is really the success that we are seeing and the incredible amount of traffic that says, if-- if we do not take advantage of this opportunity right now, we will just unnecessarily diffuse it, and we will send people other places when they want to come, have that engagement with Adobe and are looking for the Adobe brand, and Adobe Magic to help them solve their creativity needs. David Wadhwani: David? Yeah. And maybe, Alex, I will just add on a couple examples to what Shantanu was saying to demystify what we mean by, you know, user behavior changing and evolving. Let me give you 1 example with Acrobat and 1 example with Creativity and Firefly as an example to hopefully cement this a bit. So what we see is a shift in or an emergence in terms of LLM usage and that is driving a lot more intent based search. So what is an intent based search? Someone might type into a search engine, summarize this PDF. Right? And what we do is we are using SEO and SEM and some of, Anil's SEMrush capabilities now to make sure that we are ranking high when someone types in something like summarized PDF. When the user clicks on our link, we take them instead of taking them to adobe.com and talking to them about Acrobat. We are now taking them directly into Acrobat web with a single call to action, which is upload your PDF, and then we summarize it for them. And when we summarize it for them, we then introduce them to this idea that they can use AI assistant to even have her ask some questions. And we use this process to let them build a habit before we start giving them paywall. So that is an evolution. If we just took that traffic direct to a paid flow to buy Acrobat and download Acrobat, it would not produce as much opportunity long term for Adobe. Similarly, in Firefly, we see things like you know, a growth in terms like generate pixel for social media posts. Again, we rank really high in SEO SEM, then we take them directly into Firefly so they can upload an image of themselves create this pixelated version, maybe introduce them to this idea that you can convert that to video, But it is a very different flow. And that is where the world is going. that is how users are engaging. We want to lean into that, and we think, as Shantanu said, we have the right products for that now. So this is the moment to go for it. Shantanu Narayen: Maybe the last thing I will say to that to just punctuate what David said is, not only are we seeing the MAU increase, but we are seeing the engagement increase then as a result of serving that first experience because they are looking for Adobe. So I think it is the satisfaction associated with completing their task that makes them want to engage with Adobe more and are those signals. Give us confidence that now is the time. Alex Zukin: And then maybe just to follow-up then. If we think about the combination of that action that you described and the per postponement of the line optimizations as driving roughly, I think, by our math, a half-billion-dollar adjustment to the organic ARR. Downward. Like, what is the payback period on that? So $500 million, let's say, that you are investing in this motion, what is the payback period and multiple that you think you can get as a result of the successful strategy that you are or potential successful strategy that you are embarking Well, let me give you some color. Shantanu Narayen: I think on the second 1 first, which is you know, the, Creative Pro line optimizations, we can introduce them, as we continue to deliver value. So that 1 is just you know, a phase shift. And as we add that, we will actually think we believe that we are gonna have better offerings that are more differentiated the more these premium offerings are successful. So that 1 for us, we just look at it and say, you know, we are deferring it, but not closing it. So, hopefully, that gives you some color. And then in terms of, you know, the traffic, if the disproportionate amount of traffic is gonna go to these premium offerings, You are right about, hey. How does that sort of start to come back? And, you know, we are already seeing some of it as it relates to the amount that we have on Firefly. So we shared some numbers. On that as well as on express, you know, which are growing well, but that will play out, I think, over 2027. More important, I think it sets the company up for the right, you know, sort of really growing our customer base, which, like we have done, with Reader, you know, then pays off for decades. And maybe the other thing, just to give color because I am sure people will ask this question. As you think about it in terms of how it plays out over the second half, you know, maybe the way to think about it is if you go back and look at our fiscal 2024 or our fiscal 2025 results, yeah, you can understand whatever our second half ARR expectations are. They probably typically pay out 40 and 60 in Q3 and Q4. Given we will be making more of these changes, in Q3 as it relates to you know, changing the traffic patterns, and we expect our seasonal enterprise strength. The enterprise and everything we are doing around content continues to be an area of strength for us. That will be perhaps a little bit more proportionately in Q4 than it was in, Q4 in the last few years. So, hopefully, that gives you both color on the line optimizations we can always introduce. But we wanted to be transparent with you. I think as it relates to the moving of the freemium, hopefully, we gave you a lot of indication as to why now all of the early success that we are seeing. And I just wanted to make sure you had color as to how that might play out in Q3 and Q4 as you do your modeling. Operator: And once again, if you would like to And we will take our next question from Matt Swanson with RBC Capital Markets. Matt Swanson: Brent. Thank you guys so much for taking my question. Not to front-run Cannes too much, but if we could focus a little bit on the brand visibility solution and kind of the broader idea of what SEMRush brings to the Adobe platform. You just kinda talk a little bit maybe more holistically on how that fits into your broader portfolio and kind of what the maybe compounding benefit could be over time? Anil S. Chakravarthy: Thanks for the question, Matthew. Brand visibility is a topic of huge interest to CMOs. As you just heard from David as well, you know, we are seeing a lot of that play out in our own traffic patterns, and every brand across the world wants to have the right placement in regardless of which LLM, customers are using. Want to have the right message, and they want to have their messages show up. On LLMs, on social media, and all the other new platforms that consumers are going to. And we believe that the best way to do that is to take their content that they have already within their content management system like Adobe Experience Manager, and make sure it gets out there, whether it is the bots and the agents that these LLMs have or third party sites where have credibility with these LLMs. Making sure that all the brand visibility is shows up in the right places. Requires the integration of what SEMrush brings, which is the outside in knowledge of how what is actually being prompted for, what is being searched for, And that, the data, the database that they have of all of the prompts and search queries and so on. And combine it with the inside out intelligence that we have with all the content, marrying those 2 products, the opportunity to bring the most comprehensive brand visibility solution in the market, and that is what we are introducing at Cannes. Later this month. So we are super excited about that, and I believe we believe that this is going to be a must have. For every CMO. Thank you. Operator: And the next question will come from brand Zelnick with Deutsche Bank. brand Zelnick: Brent. Thank you so much for taking the question. Maybe on a different topic, we saw the announcement on the Creativity Connector with Google Gemini. Wondering how you are thinking about relationships with companies like Google that are seemingly developing their own design tools versus making Adobe innovations available in their apps? And more broadly, how are you thinking about competition partnerships and co-opetition in the age of AI? David Wadhwani: Yeah. Thanks for asking that question, Brad. I think it is a-- there is-- we have made a lot of progress in terms of how we think about the evolution of a creative agent and productivity agent, and Anil also introduced to basic customer experience, coworker, at Summit a couple of months ago. Overall, what we have done is we have taken all of our, core capabilities in our, creative flagship applications as an example. And we have used that to create a series of capabilities that are accessible to the endpoints. In other words, if the creativity agent can now really access 50, creative tools across our ecosystem. And that AI assistant is then available in Firefly and to our Creative Cloud subscribers we have also, to exactly to your point, we have also taken that AI assistant, that creative agent, and made it available inside of, both ChatGPT and inside of, Claude with Copilot and Gemini, coming, very soon. And what that lets us do is it lets us again, similar to what we were talking about go to where user experience and user intent actually, initiate. So if someone starts to want to do something with, AI assistant, to, you know, create a logo, convert that logo to some merchandise, be able to post that merchandise across social, media networks, you can do all of that conversationally at this point. In that context, if you have anything you wanna do that goes beyond what you can do conversationally, we use that opportunity to journey them over to Firefly for a deeper, richer AI, tooling, experience. So the whole end to end experience here is about getting to users where they are, letting them do a lot more conversationally, really reducing the bar to create more but then also leveraging the opportunity to monetize them by converting them over to Fireflies, etcetera. And the last thing I will say is the monetization model for these AI agents is similar in that it is basically about credit consumption, and it drives a lot more, credit consumption and opportunity for upsell. Operator: And as it relates to your question on partnerships, maybe I will just add a couple more points. Shantanu Narayen: I mean, firstly, you have to look at what the economic model is for a lot of these companies. So whether it is Amazon, Microsoft, or Google, We are huge, you know, users of their cloud services. Which at the end of the day is a significant revenue stream for them. So, you know, we have great partners with all 3 of them. I think with Google specifically, we also partner on how we can jointly go to media and entertainment. We are a big user of their Nemo Framework within our application. So I think there is a lot of synergy associated with that. I think with OpenAI and with Anthropic, they are looking to say how can they become more of a sort of platform of choice and provide us. I think all of their focus right now, I would say, Brad, is on code, and that is where everybody is doing a student body left on that. And I think creativity is an area that we not only have a passion for, that we are uniquely qualified, And so, you know, this is our time, and our opportunity to leverage everything that they are providing. And so with every 1 of them, we have a great partnership. But I think as it relates to the consumer side of creativity, which is where this is going after, where I think a company of 1 in terms of the focus that we can have. on that particular business. Very helpful. Thank you both. Operator: And the next question will come from Billy Fitzsimmons with Piper Sandler. Billy Fitzsimmons: Hey, guys. Thanks for taking the question and fitting me in. I want to go back to the discussion earlier. there is a lot of debates right now around kind of the moats in software. If I think back to Summit, there is a big focus on kind of what you are doing with AI agents internally. And I think there is an important emphasis on your differentiation of being you know, having 20 years of customer relationships and proprietary data around that. As well as being that governance and auditability layer for AgenTic workflows. You just talk about the importance of that in the ecosystem? And then if I could sneak another 1 in And to be honest, I do not really know who this is for at this point, but you announced a $25 billion share repurchase authorization at Summit. A significant chunk of your cap we are also in a much more or it feels like a more relaxed regulatory environment. How do we think about kind of your ability and propensity to do kind of tuck-in M&A in this environment? Thanks, guys. Shantanu Narayen: Maybe I will start with the second and then you know, we can all touch on the first. And we are all a team of 1, so you can ask anybody that question, Billy, and we you will get the same answer. I think as it relates to the you know, stock buyback, I think you know we had a $25 billion authorization previously. We added to that with another $25 billion authorization in April. Of the first authorization. I think if you look at it, there is $2 billion left and, you know, we would have completed it in less than you know, 11 quarters or so. So, you know, we are clearly showing a lot of confidence that, we should be using our capital allocation, to buy back our stocks. Semrush was a good acquisition. We are confident about, you know, our ability to monetize that. It further differentiates our marketing solutions, and I will come to the marketing part. But, you know, we are continuously looking at a whole bunch of companies. there is going to be some very interesting tuck ins as it relates to technology because, none of them have business models that are sustainable or monetizable. So it is actually a good time for us to look at technology companies. I think as it relates to differentiation, we always talk about content. And the fact that we have these behaviors and we have the data as a huge differentiator for us, I know there is a lot of talk about what is happening in the enterprise. Number of CEOs and CFOs who are coming to us and talking about, hey. We have this transformation. A big, big component of that transformation is customer experience in Adobe. You are the 1 who is gonna help us with that in terms of both the content and the understanding of the customer. that is a huge differentiator. I think we are clearly you know, focused on that as separated us from anybody else in the customer experience orchestration. The Creative Pro, as I continue to say, you know, our understanding of that customer base is unique. And this is now about saying, how do we extend both of those into also the consumer space and the era of AI? And so that is how we look at it. And to your point, our ability to take the depth of our technology, whether it is in audio, whether it is in video, whether it is in imaging, and bring that to Firefly, the speed and velocity by which we can bring it. Has to do a lot with what the technology code base is underlying. And the understanding of behaviors. So that is how I would describe our differentiation. Anybody who wants to create content and use it for marketing, that is Adobe. Operator: And our next question will come from Kirk Materne with Evercore ISI. Kirk Materne: Yes. Thanks for taking the question. I guess this 1's maybe for David. David, when we think about this push into freemium and changing that up a little bit, I guess, how do you get comfortable on sort of the long term economics in terms of lifetime value? I guess, what are you seeing in terms of those customers going through sort of a gestation period and then monetizing over a certain period of time. Can you just add some more color to that? Because I get the idea of adding a lot more new users to the platform, but just trying to get a sense on how you guys get comfort about sort of the stickiness of those users after a certain period of time. And you know, the ultimate monetization opportunity? Thanks. David Wadhwani: Yeah. Happy to take that. You know, again, just the foundation of this here really starts with understanding user intent and user behavior. As I mentioned in the example of that transition to, increasing intent based expression when they are searching. That just gives us an opportunity to, massively open up the top of funnel you are starting to see with the over 40% increase in traffic to adobe.com through those activities. And if you think about the journey, the user goes from, they go from searching directly to using our product, which does result, and we see that in our stats, that results in higher engagement which you then start to see in terms of, monthly active user growth. And what we see is on the on the back end of that, when they convert to a paid user, they tend to have much higher engagement and usage patterns than those that go directly into paid, which translates to long-term lifetime value and long term value for the company. And in terms of why now, again, that question was asked earlier. Why now? Because we see all the right signals. Right? The product is there. the traffic is up 40% year-over-year over year. We see the strong usage of the product. We see that MAU is up 70%, year over year, when looked at it. And we even talked about how that has started to translate into ARR growth with 50% as an example, ARR growth that you see, quarter over quarter for Firefly. So all of those early indicators are there. And, really, what we are working to do as we bring more of that traffic over is that just needs time to play out. All of that sort of in the backdrop of this is where the world is going. The opportunity is bigger than ever. Instead of trying to balance the you know, both things, really go all in on this opportunity because it is ours to ours to win. We have all of the foundation here. Operator: And our next question will come from Brent Thill with Jefferies. Brent Thill: Shantanu, 1 of the questions we get is, just the reset for this next tectonic shift and I realize you are guiding margins down a bit, but I think many investors believe that you could be doing more and putting a much bigger moat and investment in to protect yourself. I do not know if that view is right or wrong, but I am curious why not be a little more severe in terms of the push and the pivot You went through this from perpetual subscription. You obviously nailed it and had incredible results from that pivot. Maybe it is not the right analogy, but I think we are getting a lot of questions on that. Yeah. Shantanu Narayen: I think, Brent, this is actually a indication that we are, you know, really going to pivot, as you, to use your words. Into getting, you know, this acquisition and customers. I mean, I what is not as evident is under the surface, how we are increasingly, you know, moving all of the expenses that we have and spend that we have and the scrutiny on just making sure. That we find the money to spend. So we will not be short term focused on this, Brent, in terms of, you know, spending money to make sure we capitalize on the opportunity and but we are spending on this, and we will continue to, whether it is on the models whether it is in marketing, whether it is in the product. Associated with these. We do not intend to be short term at all. About trying to-- this is as you point out correctly, Brent, this is not about balance. This is about saying, hey. Be clear about your strategic intent, and we are saying it is about becoming that platform of choice for AI right now. It is about getting those users to engage with Adobe and partner with Adobe But be assured that as it relates to cloud spend, what we are doing on models, as well as what we are doing in marketing, we are spending the money. The good news is we get a lot of you know, Anil's products relatively, you know, cheap in order to be able to use it. So our, efficiency on that is probably better than anybody else in the industry. Operator: And moving on to Saket Kalia with Barclays. Saket Kalia: Okay, great. Hey, guys. Thanks for taking the question here. Maybe for Shantanu and David, you know, as I think about the original freemium business at Adele, it is really Acrobat. And I think the hope here is that some of your products like Express and Firefly can replicate that success. Maybe the question is, can you just compare and contrast maybe the next generation of freemium products in terms of what is similar, what is different than, you know, some of the really successful freemium businesses that we have built up over the years. David Wadhwani: Yeah. Thanks, Saket. Happy to share a little bit about this For the broader context of folks that may not have been tracking us as long as you have, You know, if you really take a step back, we have talked a lot in terms of the Acrobat funnel as part of our data driven operating model. And the level of scrutiny and detail we understand around you know, the breakup of when we talk about the 850 million monthly active users, many of them are on desktop readers. Some of them are in our Chrome extension. Some of them are in Microsoft Edge extension. Some of them are on mobile devices. We are able to look at the utilization of all of that, reader experience in those free, free experiences and understand the specifics of how users are engaging in each of those, and look for the right opportunities in those surfaces to put up paywalls and opportunities to convert. So we found in that process things like edit PDF or redact PDF, inquiries are a great opportunity to, take a user that is built up a habit using these products, and convert them to a long-term paid customer. A lot of that same learning, that infrastructure that we have in place for Acrobat that we have developed over the years that same infrastructure applies to everything we are doing as you said, with Express, with Firefly, with Acrobat AI assistant. And the foundation of how we are taking that 90 million of creative premium MAU and converting that is identical. Maybe the difference that we see as an opportunity, and this goes back to why we are investing so heavily right now, in going after where we see a user behavior is that intent no longer just starts in the product. That intent now also starts, as part of their search history and the things they are doing in search. And so the investment in terms of driving a broader percentage of that search directly into the same flows and the same model that we have done with Acrobat over the years, I think that is really the opportunity to fundamentally change and reshape this business for decades to come. So very excited about what we have learned, and there is growth that we can apply to new experiences as well. Shantanu Narayen: Maybe I will just add a little bit to it, Saket. Having been there for, that journey, which was, I think, you know, a lot of people may not remember that we actually tried to charge for the Acrobat Reader. And, you know, most customers told us that, hey. Allow us to use it and, you know, you will find different ways to monetize it. And so, you know, in addition to what David said, I would add that I think what is common across all of these is product first and foremost, which is how do you get usage? In the reader case, it was distribution. In this case, the new model is premium, and that is the underlying theory behind both of those is get the product right and get usage. Going because that is the way to monetize it. I think as it relates to, the 2 other things that are, I think, learnings from what we will continue to do, on Firefly, how we can expand from Firefly into Creative Cloud. And we are doing a really great job of that, which is you try things in Firefly and you wanna expand to creative cloud, that is pretty seamless. You wanna start with Creative Cloud and have Firefly, that is also very seamless in terms of you know, how much innovation we have delivered. it is slightly different with Acrobat Express in that with Acrobat and Express, it is a little bit more of paywalls in terms of how we are doing it. So, you know, what I look at when we see what we are doing is usage is common, getting the product is common. And then making sure that at the appropriate times, we find ways to add value and find ways to monetize it. And so I think that is the learning that we have, but usage at the end of the day. And since I believe that is the last question, I mean, let me just because I think the whole set of questions has really been around hey. As you think about this era of AI and as you think about what is happening with creativity, what gives you confidence associated with some of the things? And I will repeat what I said, which is we really think this is a unique opportunity for creativity. Everything that is changing with AI and user behavior and user intent and how users discover products. Based on the early success to say now is the time to have the singular focus in the company, get the alignment, and go really drive. The Creative Cloud business continues to do well. That is not where you know, tweaking it is going to, you know, allow us to get the next hundreds of millions of customers. On the marketing side, you know, enterprises, we just continue to extend you know, the offerings that we have and tying together content between what we are doing on the client side and the enterprise. That entire economic pool, as I think, Anil talked about, in terms of how much money is being spent across content creation, marketing folks, practitioners, the agencies, as well as the channels, that is only gonna increase, and that is gonna go the benefit of that and the economic pool is gonna go to folks who can help automate that. Provide technology and software to do that. So, you know, that is why we feel really good about these changes, and we feel, this is the way to continue to drive. We are also pleased with what we have done as it relates to the conversion of ARR to revenue. I should recognize that. that is why you have seen the overachievement. And so, you know, that speaks to again, the stability, I think, that we see in the ARR from customers. So thank you for joining us today, and we look forward to those of you who are gonna be at Cannes, you know, certainly, stop by and see what Adobe has to offer. Otherwise, we will see you at the next call. Operator: Thank you. Thank you. That does conclude today's conference We do thank you for your participation. Have an excellent day.