Adobe Inc. (NASDAQ:ADBE) Oppenheimer 26th Annual Technology, Internet & Communications Conference August 8, 2023 10:45 AM ET
Ashley Still – SVP and GM, Digital Media
Jonathan Vaas – Investor Relations
Conference Call Participants
Brian Schwartz – Oppenheimer
Greetings. I want to thank everyone who’s dialed in. I’m thrilled today here because we have one of our premier companies in our franchise, Adobe, presenting with us. And our presenters, we’ve got Ashley Still, she’s the Senior Vice President and General Manager of Digital Media. And of course, everyone knows Jonathan Vaas, who heads up the Investor Relations program for Adobe.
So greetings to both of you. For our audience, there is a chat function. If you’d like to ask any questions, we will do some Q&A at the end. Feel free to type in your chat questions, and I’ll be happy to read them to Jonathan and Ashley.
So why don’t we start? So Ashley, maybe just to start the discussion, since I don’t know if many of our listeners are familiar with you and your role at Adobe, so maybe you could share that with us. What is your role with the company and where are you focused these days?
Sure. So first, thank you for having me. It’s great to be here. Looking forward to the time today. I’ve been with Adobe for quite a while.
I started about 20 years ago. And I joke that I get younger and younger every year than when I started. So it’s great that they hired me out of high school. And — just kidding, of course. And I have had many roles in the company at that time.
My current role is Senior Vice President of Creative Product Group. And I’m responsible for product engineering and business strategy for Creative Cloud, which I’m sure you all have heard of. And so I’m really focused on product innovation, technology innovation and, of course, business innovation around our core products as well as emerging businesses like Frame and 3D. And in my 20 years at Adobe, there has never been a time with kind of as much innovation and product opportunity as we have today. So it’s a really exciting time.
Q – Brian Schwartz
Perfect. Well, maybe just starting out, Ashley, what are some of the things that have you most excited these days for Creative Cloud and Digital Media business…
Yes. Absolutely. So we talk about our mission a lot. Many people at Adobe and one of the — I think one of the reasons you see so many people with tenure, and we also talk about people boomerangs, they’re very common at Adobe, is our mission really speaks to so many of us and the opportunity to enable people and businesses to tell their story and expand their brands and, as we say, change the world through digital experiences. And there are a couple of ways that I’m really excited that we’re able to do that even more.
First, our investments in Firefly, which I’m sure we’ll talk about — a lot about today, and our investments in generative AI and certainly also our investments in Adobe Express, which is our communicator offerings, web-based, template-driven, really enable us to expand the market for who can create great content. And these are really purpose-built products for nonprofessionals. Many nonprofessional use our flagship products, but these really give us the ability to build both purpose-built product experiences as well as good markets that enable anyone to create whatever is in their mind’s eye. Second, for Creative Cloud, just the amount that we can innovate in our flagship categories. And certainly, I’ll talk a lot about Photoshop and Illustrator and Premiere and others where we are fundamentally innovating on the core creative workflow.
And that’s exciting, right? That — it’s not every year, right, where you are taking your core products and driving innovation that makes them more expressive, more productive, and that’s exactly what we’re doing now with our core product line. And then third, content supply chain, and I know we’ll talk a little bit more about this later as well. I’ve been involved with our enterprise customers for a long time. And just these waves of digital maturity have always accelerated the need for content.
You went just when companies started creating websites, right? And then they had mobile apps. And then there were socials. So just the waves of digitization across the enterprise, each one has exponentially increased the need for content. And now the trend of true personalization means that more content is needed than ever.
And right now, it’s really just not economically viable to get to true content personalization. But if you take tools, workflows in AI and bring them together in a solution, there’s a huge opportunity to actually meet this need. So those are just some of the things that I’m sure we’ll jump into them in more detail.
Absolutely. It’s a great intro. Ashley, I got to ask you at least the obligatory question about the macro and demand trends that are out there. Maybe if I ask it to you this way, that Digital Media business in general, it’s been generating very strong results here in this fiscal year. What could you share with us and what you’re seeing in terms of demand trends from those enterprise and consumer customers?
Absolutely. And so certainly, I can comment on what we’ve seen kind of year-to-date and spoken about in our Q2 results. So demand continues to be strong, and we’re particularly seeing strength in traffic, which is great to see. And this is really across the board for our flagships, Acrobat, Photoshop, Lightroom. I — one of my roles at Adobe was bringing Acrobat Web and Acrobat Mobile to market.
And certainly, those are performing incredibly well in terms of top of funnel and really, again, speaks to our ability to expand our customer base across our product line, right? And that’s one of the things that’s just been phenomenal to see with Acrobat. PLG, or product-led growth, continues to be a great driver certainly for Acrobat Web and Mobile, which I discussed, but also we’ve been investing in PLG motions for Photoshop as well actually within the application. Photoshop is a product where the aspiration to create in Photoshop just continues to grow across customer segments. And we’re using PLG to make different types of customers successful as they match their aspiration from Photoshop to their usage of Photoshop.
Lightroom continues to have a really strong year. Lightroom Mobile, we continue to invest and have just made that application easier and easier and more and more delightful to use. And so we’re seeing growth in mobile-only users of Lightroom that are both adopting and also converting to paid, which is also great to see. We have had some of the most successful betas in company history or really the most successful betas in company history this year. And we continue to see really strong demand and usage of those betas.
So Firefly has had 1 billion images created and actually this past week, we also passed 1 billion images created in Photoshop through Generative Fill, which we’ll talk more about as well. So both a lot of demand across the portfolio and then a lot of engagement with product innovation that we’re bringing to market. Express is also having a great year. The scale and pace and productization is really unparalleled. We’re putting out more than 100 releases a year on the Express side, huge beta release in June that really advances the state-of-the-art with video and design, all in the same editor within Express.
Feedback has been incredibly strong and particularly with Creative Cloud customers. So we have some features that really make Express incredibly unique for Creative Cloud customers like linked assets and PDF editing that I can talk a little bit more about later. But a lot of our Creative Cloud customers, we see really starting to engage with and adopt Express. So those — great, and I’ll see if Jonathan has any other comments.
Yes, I couldn’t resist either. When you asked me about demand, it reminded me of some investor events we did right at the beginning of the year. And investors have been hearing a bunch of different things from different companies in terms of what the macro is looking like this year and what they’re seeing in demand. And I think we’ve been pretty consistent this year in saying from what we’re seeing in consumers all the way up to the enterprise, we see strong demand. And it goes to show you the importance of our — of the markets where we compete.
I often say only half joking that digital content and the hierarchy of needs is somewhere between air and food for the way people live their lives every day. It’s so critical to the experience of what we do every single day and how we relate to the world. And enterprises, especially the largest enterprises, really aren’t slowing down and investing for what they believe digitization means in the future, personalization at scale. And all year long, we’ve talked about these big transformational deals we’ve done in digital experience with bringing together real-time data together with content supply chain and really a platform approach of buying our solutions. And it just shows you how important that vision is that these large enterprises are making those sorts of investments.
So it’s been exciting to see the resilience in our markets and demand at a time when that isn’t necessarily true across different categories of software. But I would also add, I think, overall, we’re starting to see that the economy has been resilient. The consumer has been resilient, and we feel good about how we’re positioned.
Perfect. Ashley, circling back on the content on supply chain evolution. You kind of talked about that a little bit. Maybe diving into that. From your perspective, has the acceleration in content velocity and in personalization with content, is that driving demand for the creative suites within Adobe? And maybe you can touch on some of the key growth areas within content generation for the Creative Cloud products.
Absolutely. So I love Jonathan’s analogy or metaphor, right, to human needs. And I would actually argue that demand for content is actually more elastic than sleep or food, right? Like there’s a certain point where you saturate your sleep or hopefully saturate how much you’re eating a day. And what we’ve seen is this very elastic demand for content as technology and — enables more consumption of that content, right?
And that really goes to a few things. It has business ROI, right? The better your content and the more personalized your content is, it drives business results. And second, there’s more and more channels, right, to reach consumers. And so those 2 vectors are really driving this kind of insatiable demand for content.
I see it in my own children, whether it’s TikTok or whatever it might be. And so we see a lot of demand not just for creative tools, but again, it’s the combination of tools, workflow and AI that we’re really seeing a demand for in the enterprise. And that is when we refer to content supply chain, what we’re referring to is whether it be marketing use cases, media use cases but the need to have this broad solution, really end-to-end solution that starts from ideation all the way through execution and publishing to digital channels and the optimization of that content. And whether it’s Creative Cloud, Workfront, AM, Firefly, Express, right, what are the combination of tools and workflows and making sure that those are integrated so that if you’re creating — if you’re enabling your marketers to create content Express so that not every content request is going back to your very constrained studio, that content is available on AM automatically, right? Or that you have brand guidelines and templates that are maybe created in Creative Cloud, but available and kind of enforced, if you will, within Express.
Workfront, of course, has been a total game changer for many of our customers to really kind of make sense of the madness of the projects that people are working on, the budgets, the schedules and giving organizations the ability to actually have visibility across all of the projects that are operating across the enterprise. And then, of course, AM, really foundational as a source of truth and a way to publish and optimize across all of these channels. And so all of this is resonating with our enterprise customers, both individually but increasingly as part of an integrated solution that increases productivity and again, just gives more visibility for both the experience optimization as well as the cost optimization within the enterprise going forward.
Great. Ashley, I’d like to switch the conversation now over to generative AI here, very topical. So maybe we’ll start first, big picture here, and then we can dive into Firefly as we progress. So maybe just starting from a real high level with generative AI. We get the big questions all the time whether Adobe is going to be a winner or loser in generative AI.
I think the consensus view and my view is Adobe is clearly a winner. But there are naysayers out there that they think it could be cannibalistic to some of the core creative tool sets like you have with Lightroom and Photoshop, Illustrator, et cetera, as customers, they migrate to what could be a faster, easier, less creative level of effort software with Firefly or with Express. So what gives you the confidence that Adobe is going to be a winner in generative AI?
Sure. Well, first, I’ll go back to my — what I’ve seen, and my experience is that the demand for creativity and kind of expression as well as the demand for businesses for content is incredibly elastic, right? Demand is not fixed. And so as you have new ways of creation, more people come into the market, right? So we talk about this in 2 ways: how we raise the ceiling or advance the state-of-the-art for creative professionals and then how we expand the tent for everybody else.
There are a lot of people in the world that don’t create content today, right? It’s too hard. They don’t believe they have the creative skills. They don’t enjoy the creative process as much as others do. All of that is an opportunity to bring those people into the creative process, right?
And we’ve seen this with Firefly. People who are not — they don’t aspire to learn Photoshop, they can go to Firefly, type in their idea, and they have content, right? We see this with Express. You can go — you can browse templates, you can browse stock content. You can now create, again, text to image with your own ideas through Firefly and Express, and now they’re creating content.
So bringing people into the market with new products and ways of creating is an incredibly interesting and meaningful way to expand Adobe’s opportunity but also just to expand the market. When we talk about raising the ceiling or advancing the state-of-the-art, creative professionals, first of all, when they are more productive, they tend to create more content, right? Or they create better content, more impactful content. And that’s, again, what we see with AI where they’re not just using AI to replace what they’re doing. They’re integrating it into their workflows, and they’re producing better content, more content, et cetera.
So we see this both as an opportunity to just make our tools and products more valuable for the creative professional, but really also expand the tent, if you will, to bringing more people into the market.
Ashley, just to touch on that point because a question came in from an investor, and I think you just answered it, but I just want to make sure so we can answer their question. The question is, will AI reduce the number of digital content creators in the future, ultimately leading to a smaller TAM? Or do you believe the opposite that it’s actually going to increase?
I believe no. I think we will see, as with all significant technologies like — that jobs evolve, right? And so I think you will see some jobs be automated, right, and other jobs emerge. So for example, one of the things that we see is that people who have a design background actually write different prompts than people who don’t. So someone still has to drive the AI, right?
Someone still has to say, how do I produce on-brand content, impactful, expressive content working with the AI and then evolving and editing the content that emerges from the AI, right? I think there will be more of those jobs in the market. Then there are jobs right now where it might be just localizing or taking a single asset and producing 20 different versions of the aspect ratio, right, because you’ve got different places that you need to use that image. That work will likely be absorbed. And so I think the balance of there will be an increase — and think about, again, any technology, think about the web, right?
There were certain jobs that probably were absorbed as businesses invested more in digital channels, and there were jobs that were created. So there certainly will be an evolution in the types of creative roles, but I don’t think at the macro, you’ll see a shrinking of the market opportunity.
I have some other thoughts here as well. We talk — one thing we talk about a lot is the way personalization at scale or you could call it content velocity is driving needs for creators to produce way more than they used to. The world I grew up and a brand might have a piece of content that would last a year. Today, the shelf life of content is a much shorter period of time. And brands are producing way more content for different types of people in different areas and meeting them where their interests are.
So creators say in the next few years, the amount of content they’ll have to produce will increase fivefold from where it is today. I don’t believe that the productivity enhancement from generative AI will even be enough to meet that need. It will help. But in some ways, I also think this is similar to what Adobe with our Creative business has been doing for decades, which is if you go back 10 years and asked a Photoshop user how they spend their time, they’d spend hours of their day masking objects. Now they can mask objects in a click but they’re using — so they’re doing more deep ideation, better work in the tools, producing more.
And I think this — there are parallels with all sorts of other industries. When knowledge workers became more productive with the PC, when engineers become more productive, people actually invest more in them because that productivity dividend drives business outcomes. So there’s a number of reasons why we’re bullish even on seats with the productivity enhancements of generative AI.
Ashley, let’s talk about Firefly, Adobe specifically. So if you — just taking from a step back, what is Firefly? Is Firefly a standalone product or is it embedded technologies within the core creative suite or products? And what’s generally available today with Firefly?
Yes. So yes to both of those and more. So Firefly is, first and foremost, Adobe’s family of creative generative models. And we started with text to image. So Firefly is not an LLM, it’s not a large language model, it’s a diffusion model.
So it creates media, right, pixels. We’ve started to expand into vectors. Certainly on our road map is video and 3D and every — you can think of every media type. Firefly is also not one single model, right? It started as one model, but you really should think of it as a family of models.
There are different ways that we then productize Firefly. Firefly is a product in and of itself. There’s a Firefly website where, again, anyone with access to a browser and has an idea can create images, can recolor vectors, can play with Generative Fill as well within the Firefly product experience. And I’ll talk a little bit more about commercialization later. We have said that we will make Firefly a standalone product.
Then we also are building unique and relevant workflows, leveraging Firefly within our flagship applications. And one of the best examples of this is Generative Fill and Photoshop. So what Generative Fill does is it is deeply integrated into the core of the Photoshop workflow. So Photoshop is unique because, as Jonathan said, you can select down to the pixel level, right? And then you can also composite using layers in Photoshop.
All of that now works with generative AI. So if you select an object or you select just an area of the image, you can enter a text prompt to either add or remove content to that image. But when that content is generated, it’s using all of the data from your selection and the context of the image in addition to your text prompt. So it is literally uniquely generating content for that specific piece of content as well as your ideas or your prompts. And this is what’s resonating so much with Photoshop customers because it’s putting the power of AI into the hands of the creative professional.
It’s their ideas, their content. And that’s where we see all of these productivity and expressiveness gains with Generative Fill. So that is just getting great response as is Firefly as a standalone product. We’re also integrating Firefly into some of the DX products, particularly AM. Again, you can think of needing to create images, illustrations, et cetera, within the AM environment.
Express is also — Adobe Express is also a great example of where we’re really changing the underlying workflow and enabling people to create images, create text effects all within Express, but integrated with the templates and other capabilities that already exist there. Lastly, we also announced an offering for Firefly and Express in enterprise. And we believe there’s some unique capabilities of that offering. We’re offering indemnification, which we’ll talk a little bit more about later as well. And one of the things that’s unique for enterprise and how we’ll evolve that productization of Firefly is custom models, bring your own data, all of those capabilities that enable enterprises to really have Firefly understand their brand and really help them produce content at scale.
Terrific. Ashley, it’s perfect. Can you talk a little bit — before we get on to the monetization path for Firefly, can you talk a little bit about the moat about the differentiation? We actually had a question from an investor, and they were curious your thoughts of generative AI makes the competitive landscape tougher for Adobe since there’s more existing models. So maybe you can just talk about the differentiation and the moat for Firefly.
Yes. So one of the decisions that we made in bringing Firefly to market is we had 2 goals. Obviously, we have to have the best model. It has to produce amazing high-quality content, given the markets that we’re in. But it also needs to be commercially viable.
And when we were talking to customers a year, 1.5 years ago about generative AI, the biggest thing that we heard was the legal considerations for practically how they could use generative AI to scale and to create. And so the decision that we made was to focus on training Firefly, all — the first Firefly model and all subsequent models, training it on content where we have an explicit license to that content or the licenses open and available to everybody. And so we used Adobe stock content. We’re unique that we actually have a library of millions and millions and millions of assets that we can use — that we have the rights to train Firefly with. And it’s not just those rights, but we also have a moderation process for that content, and we always have.
So when contributors submit content to stock, there are human moderators that make sure that they’re model releases, that there’s not offensive content, et cetera, et cetera. And all of that means that we have just an incredibly unique training set. So that’s first and foremost. Second, I think we’re differentiated because we have not just the AI, but we have the tools, and they’re integrated together. And we see this — a wealth of examples.
It’s hard to find, particularly in professional use cases and business use cases, where AI content is being used unedited, right? AI might be using — being used for ideation. But when you actually get into the workflows the businesses have to produce content, that content is certainly being accelerated by AI, but clearly, the tooling is still driving the output. And only Adobe really has both the AI as well as the tools and workflows. So commercial safety as well as the integration with the tooling are really differentiated.
Okay. Well, let’s talk about the monetization path with Firefly. I guess we’ll start first with the model, the monetization model. Is it going to be subscription-based, transaction-based, consumption-based? We’ve heard about credit packs. How should we think about the monetization model of Firefly?
Yes, there’s not a single way we will monetize Firefly. There are a number of ways that we’ll begin monetizing Firefly this year and certainly more in the future, right? So I would think of this as an evolution, right? I mean this is — think of Firefly as a foundational way we can create product value for a very long time to come, right? So first, I’ll say that. And again, that’s one of the reasons why I’m so excited about generative AI and the trends because it’s just a wealth of opportunity to continue to create customer value and product value over the next 5 years, right, and longer. So first, and I’ll just reiterate things that we’ve said over the past couple months and reinforce them. So first, Firefly will be available both of — as a standalone premium offering, as I said before, for consumers as well as an enterprise offering. And we’ve announced both, right? The enterprise offering is also available.
Firefly will also enable us to expand value within our flagship applications, and that gives us the opportunity to drive higher ARPUs as well as higher retention. And again, the engagement that we’re seeing, I’ll just say it again. We have a beta, you have to download a separate application, and there have been 1 billion images created in this beta. So that’s — if that is not engagement, it’s hard to point a better example. Third, you talked about credit packs.
We certainly will have credit packs available for customers who want faster results. I mean, remember, one of the variables with generative AI is all of this is hitting today a server, and it means GPU capacity. And so one of the ways that we can kind of monetize and create value is the speed at which you want results or are you always in the priority lane, so to speak. So I don’t know if — everyone is fast track, right? And then certainly, APIs.
And APIs are relevant not only to a developer community but certainly enterprise. And I talked about that as well, being able to create custom models with their proprietary content. Certainly, partnerships enable us to both expand our reach and top of funnel but also can offer specific monetization opportunities as well. Express as well, in addition to Creative Cloud and our flagships, expanding value there. So lots of monetization opportunities, both in the near term, not even getting to new products that we may create.
Okay. Ashley, we had a question from an investor about just the distribution and the go-to-market strategy, how to think about that with Firefly from the company?
Certainly. So first, Adobe is in a great position where we just have a massive footprint across digital, channel and enterprise. So we already have an incredibly scaled go-to-market. Firefly both fits into our existing channels and also gives us an opportunity to expand them. Again, it’s — think about the power of — when we brought products to the web, anyone with a browser could access those products, right?
Now we’re bringing products to the web where the only thing you need to be able to do is type to engage with our products. So it’s just this next level of expansion of — think about Acrobat as our — the product that is most broadly distributed. And this has an even lower barrier to engagement and adoption than something like Reader, right, which, again, is just massive. And then we have a lot of existing products that we can make better and increase both the demand for those products as well as the value of those products. And of course, we have a lot of ideas for standalone offerings beyond Firefly.
Great. Jonathan, maybe this is a question for you in terms of thinking about the financials impact to Firefly. What’s the right way of thinking, maybe not the magnitude, but maybe at least from a timing perspective, when Firefly will start having some impact to net new ARR and then also on the expense side, starting to think about when that could have an impact to the financials.
Yes, sure. Like Ashley said, there’s a number of ways we’re going to monetize this, and you’ll see announcements around those monetization methodologies this year. So as we look into 2024, certainly, we expect Firefly to be a contributor to our ARR. And we’ll wrap more color and context around that I’m sure at Q3 earnings, which isn’t far away as well as an investor event we’ll have at MAX. On the cost side, I think investors have been really pleased that we’ve been able to drive the adoption in these betas when we’re still pre-monetization, like Ashley said, more than 1 billion generations.
And that right now is R&D expense for us because we’re not monetizing this yet. So you’ll see a small shift, when we start to monetize this, of some of those costs moving up to COGS, but we’re talking about a small shift, but you’ll make up for that on the operating line. And we think in the long run, these technologies are going to be very, very profitable for us and of course, drive growth. So we’re certainly thinking about it as drivers, not just of top line, but growth and profitability.
Ashley, we’re almost out of time. I just wanted to ask you one just quick question about the Express business because that clearly has been a highlight for the company and the business here this fiscal year. Can you share with us what is driving the uptick in that business this year? And then maybe anything else that you’d like to share in terms of either the growth or the product road map strategy for Express?
Yes, absolutely. So first, Express is just a fantastic product. And it’s increasingly unique in its ability to enable communicators to edit video, animate images, edit images and take all of that content and produce fantastic digital work, whether it’s social media posts, presentations, whatever it might be. So first, I think just the underlying product innovation is driving a lot of interest and demand. And then second, as I mentioned before, there are some incredibly unique integrations with Creative Cloud and flagship applications like Photoshop now.
So for example, you can link assets between Express and Photoshop. So as you update that content in Photoshop, it just automatically updates in Express. And that saves time and again, we already see communicators using not just a single tool, but a variety of tools. And they’re sometimes working with creative professionals as well. And so we’re able to just make those workflows really seamless.
And then lastly, as I mentioned before, we’ve brought PDF workflows into Express as well. So being able to import PDFs, edit them, add templates to PDFs, again, just a very common use case for communicators that we’ve made incredibly easy but also kind of visually impactful within Express.
We’re out of time. Ashley, Jonathan, I want to thank you very much for presenting Adobe today. It was great seeing both of you. Thank you.
Thank you so much.