Adobe Inc. (ADBE) Earnings Call Transcript

We're all set. All right. Thanks, everyone, for joining us. My name is Sterling Auty. I'm a software analyst here at SVB MoffettNathanson. Very happy to have with us, Scott Belsky, who is the Chief Strategy Officer, Head of Design and Emerging Products. And Scott's going to be making his way up to the podium. As he does that, he actually brought a video to share with us to give just some highlights. So why don't we go ahead and run the video. [Presentation]

Love it. Scott, thanks for joining us. Really appreciate it.

Yes, of course, because I was try to like show not tell, but there was a quick like myriad of assets representing some of the separate doing across the company.

Well, it's great because a number of the companies that I cover its infrastructure software, you can't do anything like that to show a video. So it's great to see some of the products in action.

But maybe for those that are in the audience and joining us live on the webcast, you have a new role over the last several months. Maybe just give people a little bit about who you are, your new role within the company and where you're focused.

Sure. So I came into Adobe through the acquisition of Behance back in 2012. Behance is now a network of around 40 million creatives around the world, showcasing their work on their portfolios. Came in and was -- it was at Adobe for about 3 years in my first and helping develop some of the services behind Creative Cloud, Creative Cloud libraries, bringing Creative Cloud to mobile, that sort of thing. Left, because it had been like a 10-year journey. I was an entrepreneur through my 3 years at Adobe, and then had the opportunity to come back in the Chief Product Officer role, overseeing design engineering and product for the Creative Cloud business. And that was about 5.5 years ago. And the objective there was to really build a set of services that enable people to work across products, bring our products to the cloud. So you can start to use them on mobile and web, that sort of thing; build a 3D and immersive franchise, which is now one of the fastest-growing businesses in the company; and also start to develop new approaches, whether it's through Adobe Express, whether it's through Firefly AI-generated capabilities to fulfill our mission of creativity for all. In January, I took on a new role, chief of overseeing strategy and M&A, design for the entire company as well as emerging products. And the objective here is really just to focus on some of these fast-changing and quickly emerging products that are really changing the company, making sure that we're aligned across every pixel that we ship across all the products in the company. And also, I think it's a moment where a lot of the different parts of our business are really connecting in some ways. As a lot of you know, we've talked about the clouds kind of coming together and marketers working more closely with creatives. And we've always found like little ways, little bridges here and there to make these workflows better and much more productive for our customers. But in some ways, AI is like the thread that was always missing in like the stitching of a lot of this stuff. And so now you think about how a marketer works in the Adobe Experience Management platform or personalizing assets for customers and that sort of thing. And now it's very clear how the Creative products and tools and creators in an organization will be a part of that. So those are the types of things I'm focusing on.

Now that's awesome. Before we get too far in, I just want to remind, for those in the audience, if you do want to submit a question, just scan the QR code, type in a question, it'll pop up on the iPad, and we'll work it into the discussion. Just going back to the video that you showed, there was a lot of things that were there. What are some of the things that jump out at you that have you excited?

Yes. I think there are a few -- well, let me answer it this way. If we look out a few years into the future and, in many cases, much sooner than that, what sorts of experience would you expect made possible by Adobe? You should expect that in any of our flagship products, the ability to generate other variations or parts of your work and also explore far more surface area of possibility, as you're trying to solve a problem for a customer or make a movie or make an image or whatever the case may be, do brand development, generative actions will be fully baked into the workflows of these products. And they will just be a native part of creation. You're going to be making something, and there's going to be a Generate button in all kinds of places in different moments, and it's just going to generate various variations. And you can take bits and pieces from different ones, stitching together and make new generations based on that. It's a very kind of empowering for the creative world moment where -- because every creative has always said, "If I just had more time, I could explore more possibility and come up with better solutions." And so it's always been a function of time. And so this is technology that sort of turbocharges possibility in that regard. So I think you'll see that in our flagships. I think you'll see far more people in the world gaining creative confidence. I feel like creative confidence kind of peaked for many of us when we were 6 years old. And it kind of went down from there as people stopped putting our work on their refrigerators. And I think that we're entering an area now where any of us with ideas can kind of come in and prompt and get pieces of video and imagery and whatever else. Of course, when you do that, what is the next thing you want to do? You want to make a change. You want to add text. You want to add a logo. You want to make it on brand. You want to add a little tint. You want to take someone else's style and add it, so you can augment it in some way, shape or form. That's like part of the human desire we all have. I think we're very squarely positioned for that. So people are going to come in with Express and some of our Firefly stand-alone capabilities. And I hope that we show them wanting to get more serious and take on additional tooling and become better customers of ours. Final thing, I think, you should expect is the whole world of marketing to change. I think it's going to become far more personalized than we can even imagine. I think that e-commerce websites will welcome us by name and have assets that are catered to our own interest and our own -- the stuff that we like, and that customer data profile is going to be at the core of personalizing these experiences. And the connection with all the source of truth assets is going to be a key part of enabling every digital experience to be hyper-personalized.

There's a lot to unpack there. First of all, thank you for Photoshop on the iPad. Just that was a big step. So the work that you did there, really appreciate it personally. So I want to hit AI head on. There's definitely 2 big camps. There's a group of investors that think Adobe is going to be a winner and there's another camp that I think you're going to be negatively disrupted. Obviously, we expect you to believe that you're going to be a winner. But what gives you confidence that Adobe is going to be a winner in generative AI?

Yes. So I think that there are 3 core convictions I have deep in my soul, which is why I'm here. Number one is that I think far more people will want to express our ideas and stand out creatively. And I think that making tools like Firefly as well as Adobe Express as well as making all of our products easier to use, which AI helps us do and we can get to in a minute, that's going to be great for our business. And I think that we should have 100x more customers at the top of our funnel playing and paying to be able to express themselves creatively and stand out, whether it's at school or on social or with our PowerPoint presentations or whatever it might be. So that's a core conviction. Number two is that creatives don't ever sit stagnant. If something gets easier for them to do, they don't say, "Oh, great, I'll quit earlier today." They'd use that time to make something better. Just like it's part of how creativity works. Creators are always advancing their segment, just like every athlete is always advancing their sports. The tennis players of today are far better than they were 10 years ago. That's how it's going to roll out and continue to roll out for creative professionals. And we're seeing that because we're testing our features and our products with our customers. And what we're seeing is that they're exploring so many more possibilities at every stage of their journey now and not just enticing them to want to push further and do more and make it better. And so yes, I mean, you could argue, if you have a team of 5 designers, right, and suddenly, you've freed up 30% of their -- each of their capacity using some of this new technology, does that mean you want to hire now fewer designers? Or does that mean you want to design more things? And I think -- and better things. And so I'm on the camp. And by the way, the history, for example of engineering, engineering has become more productive every year for decades, yet people keep hiring more engineers because they want to create more products and they want to create better products with the new-found productivity. And so I believe that creative professionals are continuing to advance their segment, and AI is going to enable them to do that.

One of the areas that's kind of come up in my investor conversations is around the consumer segment in particular. How does AI impact or benefit that segment of the business?

Which segment?

Just the consumer.

The consumer user.

Or prosumer.

Yes. So -- and we also see this with Express, which I think is very similar. I mean generative AI is just a source of ingredient assets. And so you could start and find ingredient assets from sorting through templates. You could find them through stock assets. You could find them through prompts now with generative AI. Once you find an asset that you like, you then need to do something with it. And usually, you have to add a text to it. You have to edit it. You have to make it yours. You have to put your product in it, whatever those cases may be. That's why I believe that tools need to be natively integrated into the ingredients and where you're prompting for the ingredients. I think the other thing that people forget, especially on the prosumer and consumer side of things is that we need ideas. We need ideas. That's why people like to browse. People like to sort through stock photography. People like to get suggestions for prompt as opposed to have to think of them themselves. And so that's how these tools need to evolve in order to be successful. And so we're obviously squarely positioned with what we're doing with Firefly and Express, but that's our approach to it.

So let's dive into Firefly. What exactly is Firefly?

So Firefly is our family of generative AI models that is starting with use cases around text-to-image, text-to-text effect, which is really cool. You actually saw an example in that video of a word and then you like typed in and you make it like nylon letters or balloons or whatever. And then it instantly creates -- turns those letters into that prompt as well as a vector creation and under development, so many more things like 3D and video and many other generative AI capabilities. So Firefly is our family.

And is that going to manifest itself as a stand-alone product? Or is that being done inside of like Photoshop?

Yes. So it will come to market in 3 ways. It will come to market as both the stand-alone Firefly product and is really baked into Express. And I think that's really where we're monetizing through either people getting more credits to generate more stuff or they're just converting to Express and getting some credits associated with that subscription and then hopefully getting even more credits as they generate more stuff. So that's number one. I think it comes to market through our flagships, and generative capabilities will be baked into every single part of the workflows across these flagships over time. People will be paying for the plan for these flagships, and they'll be getting a lot more value now as a result of some of these AI capabilities, which we hope to capture in the pricing of the plans as well as we hope that they get more generative credits. And if we do a good job of making it so much easier and more exciting to create using generative capabilities, we should be having people add on more credits to their flagship plans. And then the third area is on the enterprise side. And one of the things I'm most excited about, and this goes into that third like sort of belief and conviction I have around personalization. I believe that every brand in the world will have their own proprietary model that is trained on their own assets. And so if you're Nike, for example, what are you going to want your teams to use? You're going to want them to use a commercially viable model that was trained in the right way, which you can talk about, Firefly, plus all the assets that Nike has, right, that hopefully are stored in Creative Cloud or in our AM system. And so we believe that brands will have their own proprietary kind of versions of Firefly that they're using. And that will, of course, be a service they're paying for.

So there's a number of investors that are brand new to just the world of AI. When you talk about credits and buying more credits, what is this credit idea? What's the monetization model?

So the monetization model, it's simple in the sense that every customer that is a customer of ours today, as their plans get enhanced with generative AI capabilities, I do believe, again, that they're getting more value and we should get more value in the traditional business model as it is today as a start, right? Alongside that, there is the idea of every generation you do. So I want to generate 17 versions of this one thing I made for Instagram to be able to fit across every other format of every other social platform. Some of those will require texts to be reimagined. Some of them will require pixels to be added. And for generative AI to guess what would actually fill the frame, there's all kinds of stuff going on behind the scenes to generate those 17 variations that any social media marketer would want. And they used to have to spend days to create. Now they can just generate it. Those are 17 generations, right? And if they have a credits for generations that is -- I don't know, I'm making up a number now, but 1,000 or 2,000, they just start to eat into that as they make more of these requests. Imagine a marketer who is taking a final asset that was delivered to them, and they're sending that asset through our campaign -- Adobe Campaign system to customers around the world. And they want to actually generate 140 versions of this e-mail because they have different geos and different languages and also different images will be more performant based on the data they've captured previously with us. That's -- those are all generative credits that are being leveraged to generate these various assets that they're going to then use for their marketing. And so we need to bake the generation capability into our products. We need to kind of make sure everyone has some so they get the taste of this, and then we want to make sure they just start using it.

So in essence, it's a consumption-based model?

It is.

And then sounds great. You showed the video, but when is this actually going to get in users' hands?

Yes. So Firefly, we've been rolling out invites into the private beta every single week. And now we have certainly a lot of users. We've announced, there's over 70 million generations that have been done using Firefly by these early customers. We've announced that we've had over 1 million people request access. And also, we've shared that a lot of those million are actually net new Adobe IDs, which is also a trend we see in Express, a lot of net new Adobe IDs coming into the funnel. And imminently, we are going to take off the -- sort of open the floodgates, as we say internally, for Firefly because we have the capacity now ready, and we have the mechanisms to like deliver high-quality service, sort of battle tested. And then once that happens, then it all becomes the go-to-market game.

So a couple of questions came in from the audience. I want to work in here as well. One is how will Firefly really connect? We talked a little bit with the rest of the Creative Cloud, Creative Suite, but also potentially with Figma. What's the longer-term view of the kind of connectivity?

Yes. Well, the connection between generative AI and our existing flagships and the marketing tools, I think I just made relatively clear, and I'm happy to answer more questions on that. When I look at -- we're in the asset-creation business across all of these different segments. People use our products to make video and images and logos and illustrations and everything else. I'm talking about the Creative Cloud side, of course, of the business. With Figma, people are stitching all these assets together, putting them into an interactive product experience that is then handed off to developers. And of course, around half of Figma users are developers, which are not currently in our ecosystem, and we hope they are soon. But the idea of -- initially, the idea of having all these assets be linked assets is really enticing, and our customers are very excited about the prospect of when they're stitching these -- when they're making those assets and they're handing them off to product designers they're working with, the developers they're working with, having those assets be linked and live. Such that if you update the video or update the image or change the slogan for the Christmas campaign or whatever other things you do in real time, the product designers and developers you work with, they can like update their assets and make sure that these prototypes and the actual interactive product experiences are up to date. So that's kind of one of the major synergy cases we're excited about and aside from getting us into this new market of product design and development. But also, with generative AI, there's all kinds of situations where you're designing a prototype and you need to generate 50 fake people just to kind of show how a directory would look or you're trying to generate some various versions of a design. So I think the Firefly would be a really exciting integration on the Figma side.

You talked about Express a couple of times. Help people understand what is Express and where does it fit in the product portfolio?

Sure. So Express is a mixed media, widely accessible creative product across web and mobile that really touches the needs of a lot of the people who don't have the skills or the endurance for a learning curve and how to create with some of the Pro products. Part of the insight around Express also is really around organizations, teams in the enterprise. If you have a company these days, you have folks that design the products and design the actual branding and all this stuff, which is hopefully stored in our Creative Cloud library service or in cloud documents that you're using. You also have all these social media marketers and everyone else internally that's making presentations and anyone else that wants to be on brand and have the source of truth brand assets at their fingertips. And so the idea of outfitting all of these social media marketers and other people that you work with in agencies and everything else with the ability to use templates and be able to share in real time is an important need these days in the world of marketing. One of those moments where I realize this, everyone remember the Super Bowl where the lights went out for a few seconds? And within 30 seconds, OREO did this campaign, "You can still dunk in the dark." And if you think about what has to happen behind the scenes for a marketing team to think and act in real time, they need to have access to those assets. They can't rely on the design and the branding team. They can't rely on approval processes. They have to have templates they can use, like all this stuff needs to be at their fingertips. And that's kind of this new think and act on real-time world that we're in these days as marketing budgets shift towards social, that we need to outfit brands, companies, teams to work in. So Express is like really squarely focused on some of that on the enterprise side as well. And final thing I would just say is that the content that shows up in social media and increasing other places these days is mixed media. You don't come in to Instagram, sometimes thinking it's going to be an image versus a video versus animation versus text or whatever. It's actually an amalgamation of all those things. So Express is natively a mixed media tool. And the next generation of Express, in my opinion, brings out to an entirely different level, and that's launching imminently.

Excellent. You also talked about Express not -- the separation between Express and Pro. How does AI then, outside of Firefly, manifest itself within the Pro products, within the Creative Cloud, Photoshop, et cetera?

Yes. So yes, of course, Firefly deeply embedded in Express. We talked about that. And with Express, you can also always open up things in the Pro products. That's another feature that's coming, and that's an important part of our funnel and the connective tissue of all these products. But on the flagship side, so what the teams are now doing is with customer empathy, knowing what challenges their customers face and how their customers work every day and what these workflows look like. They know what Firefly is capable of, and they're taking these APIs we have internally and then they're just baking them into all these workflows. And so what you'll see, and I think I showed a little glimpse of it, but we're going to be launching soon a feature in Photoshop called generative fill. And it actually literally just anything you select, you can fill it with anything you can imagine. And it makes it completely integrated into the asset you're working with, but it's also a nondestructive asset, which what that means is that you can save it as a layer and you can manipulate that layer without changing the whole thing. Any other prompt-based fun tool out there these days is a destructive asset. It just spits it out, and it's -- and then you take it into Photoshop and you have to work with it. Well, what if you didn't have to do that? What if you actually could prompt in Photoshop, get something but it's a nondestructive asset with layers, and you can further edit and make it something that you would use commercially.

That's been my personal frustration with some of the tools that are out there, is that change process. What about the possibility of a copilot type of element within something like Photoshop?

Yes. So this is another major focus for us right now is -- and this is where Firefly is our foundational models, and those are all built internally and has built on our data sets and everything else. We are also going to be partnering, on the LLM side, to power natural language capabilities across our products. And so you can imagine, I'll make up a name called the Adobe AI Assistant. That is a box on the side of all of our products, across products that greets you, asks you what you're trying to accomplish and functions in 3 ways. Number one is it certainly trains you and helps you. It's a much better natural language way of navigating. The second thing it does for you is it gives you ideas. So as you're doing something, it might say, "Hey, try this color variation. It performs better or try this font. It might be a better fit." So it's actually suggesting things to you. And then the third thing it's doing is it's actually doing things for you. You can actually use it as a command center. You can say, "Hey, here's an image. Crop it. Oh, here's a video, cut it. Please add in this audio." And so if you think about what that does to our flagship products, that I'm really excited about, is it boosts success in those products for new customers. Because you can come in and you don't have to now be done with this learning curve of Premiere Pro, which is a Hollywood-grade video editor. You can actually upload a family video. You can use it through the copilot capability and then you can see the cursors moving around. And hopefully, at some point, you decide to take control of that cursor. But in that case, you're a successful customer. And one of the things I've been passionate about for almost the last 6 years in these 2 roles I've had, is the opportunity for retention being a growth driver. There are some people who just can't figure out some of these products. And every time we make an incremental improvement in retention and success of the customer, that's like a material impact to growth of our business, of our core. And so these technologies can really improve that funnel as well as meet the needs of all the other things we've discussed.

To me, that's where I think another vector for the TAM expansion. So I'm a Photoshop user, but I don't use it every single day. So whenever my wife says, "Oh, I need this image to do this." Up on the screen is Photoshop on the left and YouTube on the right.

Right.

Right?

Yes.

Because you're searching YouTube like, how do I blah, blah, blah in Photoshop? Being able to do that, I think, is going to...

And I think it's a great point. And I think that the next generation will be like, why did they have to do that? Like the idea of YouTube in parallel, like you should never have to do that. So that's why I would say AI is this platform shift because it really changes the nature of how we use all of these products. But for us, it's value expansion in the sense that people are going to get more value out of the tools we're giving them. They're going to be able to explore more possibilities, try more things, convert to more formats and more languages and they're going to be able to pay for that. It's also market expansion because not only is it the net new Adobe ideas we talked about in Firefly and Express, but it's also the increased success that customers have in our flagship products. And that's also market expansion, if you think about it, because we lose some of those people today.

Absolutely. One of the other questions that came in kind of along those lines, as the marginal cost of the creative process kind of drives towards 0, how does that really just change the competitive landscape? Meaning that you're not the only ones that are going to want to pursue this path. You guys obviously have a massive head start, but how does it really just change the competitive dynamics out there?