DOUG 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 Digital Media, Anil Chakravarthy, President of Digital Experience, and Dan Durn, Executive Vice President and CFO. 1 On this call, which is being recorded, we will discuss Adobe's fourth quarter and fiscal year 2025 financial results. You can find our press release, as well as PDFs of our prepared remarks and financial results, on Adobe's Investor Relati ...

Core Viewpoint - Both Adobe and Salesforce have lost favor on Wall Street, yet their fundamentals continue to strengthen, presenting a potential investment opportunity or indicating a decline not yet reflected in financial data [1] Company Overview - Adobe is set to release its Q4 FY2025 earnings report on December 10, which will provide insights into its performance and future expectations [1] - The company has transitioned to a subscription-based model, with nearly 97% of its revenue coming from subscriptions [1] - Adobe's operations are divided into three main segments: Digital Media (approximately 74% of total revenue), Digital Experience (25%), and Publishing & Advertising (1%) [1] Financial Performance - For FY2024, Adobe reported a revenue of $21.5 billion and aims for a target of at least $23.65 billion for FY2025 [2] - The company anticipates its first quarter revenue to exceed $6 billion, with a projected net profit margin over 30% and an EPS range of $16.53 to $16.58 [2] - Adobe's revenue guidance has been consistently raised throughout the year, indicating strong growth prospects [5] Growth Metrics - Adobe's core financial indicators have shown steady improvement over the past decade, with no signs of adverse impacts from AI on its business [6] - From FY2021 to FY2024, Adobe's product revenue has grown at an average annual rate of at least 12%, with Document Cloud experiencing a compound annual growth rate of 23% [6] Market Perception and AI Integration - Concerns about AI negatively impacting Adobe's business appear exaggerated, as the management emphasizes that AI presents significant growth opportunities [9][10] - Adobe is integrating AI deeply into its core products, enhancing user experience and maintaining high-quality tools for professional users [10] - The company has reported that over $5 billion of its annual revenue is driven by AI technology, up from an estimated $3.5 billion a year ago [12] Customer Retention and Ecosystem - Adobe has not experienced user attrition; instead, customer retention rates are improving, driven by the integration of AI into its products [12] - The introduction of intelligent workflows has increased user engagement within Adobe's ecosystem, with 70% of eligible customers utilizing the AI assistant feature [11] Valuation and Stock Buyback - Adobe's current P/E ratio stands at 20, with a forward PEG ratio of 1.16, indicating a potentially undervalued position in the tech sector [12] - The company has been actively repurchasing shares, with a total buyback of nearly $12 billion over the past four quarters, reflecting confidence in its valuation [14] Future Outlook - If Adobe maintains a 12% net profit growth rate, its forward P/E could decrease to 14.9 by 2026, suggesting a valuation more typical of industrial firms despite its tech giant profitability [13] - Analysts believe that Adobe's narrative may shift positively, similar to Google's recent market performance, potentially leading to significant returns for investors [16][17]

Core Viewpoint - Both Adobe and Salesforce have lost favor on Wall Street, yet their fundamentals continue to strengthen, presenting a dilemma: they could either be the most attractive stocks in the software sector or companies in decline whose downturn has not yet reflected in financial data [1]. Adobe Financial Performance - Adobe is set to release its Q4 FY2025 earnings report on December 10, which will provide insights into its performance for the fiscal year and expectations for the next fiscal year [3]. - The company's success over the past decade is attributed to its transition to a subscription-based business model, with nearly 97% of revenue coming from subscriptions. The revenue breakdown includes approximately 74% from digital media, 25% from digital experience, and 1% from publishing and advertising [4]. - For FY2024, Adobe's revenue target is set at no less than $23.65 billion, with expectations of quarterly revenue surpassing $6 billion for the first time [4][7]. - The projected net profit margin for the current fiscal year is expected to exceed 30%, with earnings per share (EPS) estimated between $16.53 and $16.58, leading to a trailing P/E ratio of approximately 20.5 [4][7]. Revenue Guidance and Growth - Adobe's revenue guidance has been consistently raised throughout the year, with the latest targets exceeding earlier projections made in March [8]. - Over the past decade, Adobe's core financial metrics have shown steady improvement, with no signs of adverse impacts from AI on its business. The average annual revenue growth rate for its products from 2021 to 2024 is projected to be no less than 12%, with Document Cloud experiencing a compound annual growth rate of 23% [8]. AI Integration and Market Perception - Concerns about AI disrupting Adobe's business model may be overstated, as the management has emphasized that AI presents significant growth opportunities [10]. - Adobe's professional user base requires high-quality tools, and while AI can enhance content production efficiency, it also increases the demand for post-processing, which could drive growth for Adobe [10][11]. - The integration of AI into Adobe's core products, such as Photoshop and Illustrator, is being executed through Adobe Firefly, which uses authorized datasets to mitigate legal risks [11]. - The adoption of AI features has led to a 70% penetration rate among eligible customers using Adobe Experience Platform's AI assistant, indicating that AI is becoming a growth driver rather than a threat [13][14]. Valuation and Stock Buyback - Adobe's current P/E ratio stands at 20, with a forward PEG ratio of 1.16, suggesting it is undervalued compared to typical tech valuations. The forward EV/EBITDA ratio is 12.4, and the forward P/FCF ratio is 15.34 [14]. - If Adobe maintains a 12% net profit growth rate, its forward P/E could drop to 14.9 by 2026, indicating a valuation more typical of industrial companies despite its tech-level profitability [15]. - The company has been actively repurchasing shares, with a total buyback of nearly $12 billion over the past four quarters, reflecting confidence in its undervalued stock [15][16]. Investment Outlook - Analysts view Adobe as an attractive investment opportunity, likely to yield substantial returns in the coming years, as the divergence between market narratives and the company's fundamentals becomes more pronounced [18]. - A comparison is drawn to Google's previous undervaluation, suggesting a similar turnaround could occur for Adobe by 2026 [19].

Core Insights - Adobe is scheduled to report its fourth-quarter fiscal 2025 results on December 10, projecting total revenues between $6.075 billion and $6.125 billion, with non-GAAP earnings expected between $5.35 and $5.40 per share [1][10]. Revenue and Earnings Estimates - The Zacks Consensus Estimate for Adobe's revenues is $5.39 billion, indicating a year-over-year growth of 12.06%. The earnings consensus remains at $5.39 per share, also reflecting a 12.06% increase from the previous year [2]. Competitive Landscape - Adobe faces significant competition in the AI and Generative AI sectors from companies like Microsoft, Alphabet, Salesforce, and others, which poses challenges to its growth prospects [4]. Growth Drivers - Adobe's strategy to integrate AI across its applications is expected to enhance revenue growth, particularly in the Digital Media segment, projected to generate revenues between $4.53 billion and $4.56 billion, and the Digital Experience segment, anticipated to reach $1.495 billion to $1.515 billion [5]. - The Creative Professionals segment is benefiting from increased demand for AI features in products like Photoshop and Premiere Pro, while the Marketing Professionals segment is seeing strong demand for the Adobe Experience Platform [6]. Performance Metrics - The integrated GenStudio solution has surpassed $1 billion in annual recurring revenues, growing over 25% year-over-year in Q3 2025, with expectations of continued momentum [7]. - Adobe's AI-influenced annual recurring revenue exceeded $5 billion in Q3 2025, with ongoing growth anticipated in Q4 2025 [8]. Stock Performance - Adobe shares have declined by 40.5% over the past year, underperforming the broader Zacks Computer and Technology sector, which returned 25%, and the Zacks Computer Software industry, which saw a 1.1% increase [9]. Valuation Insights - Adobe's shares are trading at a forward 12-month price/book ratio of 11.69X, which is higher than that of its sector peers [13]. - The company's valuation is considered stretched, as indicated by a Value Score of C [17]. Strategic Developments - The acquisition of Semrush is expected to enhance Adobe's portfolio of AI-driven customer experience solutions, improving brand visibility and audience reach for its customers [19]. - Adobe's AI business remains relatively small compared to competitors like Microsoft and Alphabet, which have seen significant growth in their AI services [20]. Conclusion - While Adobe's prospects are bolstered by strong demand for its creative products, the company is grappling with increasing competition in the Generative AI space and faces concerns regarding its valuation [21].

Core Insights - Adobe's shares have declined 36.3% over the past year, underperforming the Zacks Computer and Technology sector's return of 23.9% and the Zacks Computer – Software industry's appreciation of 9.5% [1][8] - The underperformance is attributed to modest growth prospects due to intense competition in the AI and generative AI sectors from companies like Microsoft, Alphabet, Salesforce, and others [1][15] Financial Performance - Adobe's annual recurring revenues (ARR) influenced by AI surpassed $5 billion, with new AI-first products generating over $250 million in ARR [6][8] - The company raised its fiscal 2025 revenue guidance to between $23.65 billion and $23.7 billion, up from the previous range of $23.5-$23.6 billion [11] - The Zacks Consensus Estimate for fiscal 2025 revenues is pegged at $23.67 billion, indicating a 10.1% growth from 2024 [12] AI Business Growth - Strong demand for AI-powered products like Creative Cloud Pro and Acrobat is driving growth, with monthly active users of Acrobat and Express growing approximately 25% year over year [7][8] - The Creative Professionals segment is benefiting from increased usage of AI in applications like Photoshop and Premiere Pro [8][9] - The integrated GenStudio solution and other AI services now exceed $1 billion in ARR, growing more than 25% year over year [10] Competitive Landscape - Adobe's AI business remains small compared to competitors like Microsoft and Alphabet, which are seeing significant growth in their AI services [15] - Microsoft and Alphabet have reported returns of 17.3% and 68.3%, respectively, while Salesforce has seen a decline of 30% [2][15] Valuation Concerns - Adobe's Value Score is C, indicating a stretched valuation, trading at 11.31X price/book compared to the sector's 10.13X and competitors like Microsoft and Alphabet [16] - The stock is currently trading below the 50-day and 200-day moving averages, suggesting a bearish trend [21]

Core Insights - Adobe's strategy of integrating AI into its product offerings is significantly contributing to its growth, as evidenced by the third-quarter fiscal 2025 results, with annual recurring revenues (ARR) surpassing $5 billion [1][7] - The company has raised its fiscal 2025 revenue guidance to between $23.65 billion and $23.7 billion, reflecting strong performance driven by AI initiatives [5][7] Financial Performance - Adobe's Digital Media ARR increased by 11.7% year over year at constant currency, fueled by demand for AI-powered products like Creative Cloud Pro and Acrobat [2][3] - The monthly active users of Acrobat and Express grew approximately 25% year over year in the Business Professionals and Consumers segment [2] - ARR from new AI-first products, including Firefly and Acrobat AI Assistant, reached over $250 million, meeting the company's end-of-year target [1][7] Product and Market Dynamics - The Creative Professionals segment benefited from increased demand for AI features in Photoshop, Premiere Pro, and Illustrator, contributing to the growth of the Creative Cloud Pro offering [3] - The Marketing Professionals segment saw ARR growth of over 40% year over year, driven by strong demand for Adobe Experience Platform and its native applications [3] - Integrated solutions like Workfront, Frame, AEM Assets, Firefly Services, and GenStudio for performance marketing now exceed $1 billion in ARR, growing more than 25% year over year [4] Competitive Landscape - Adobe's shares have declined 21.5% year to date, underperforming the broader Zacks Computer and Technology sector and the Computer – Software industry [7][11] - Compared to competitors like Microsoft and Alphabet, which reported higher revenue growth rates of 18.1% and 13.8% respectively, Adobe's revenue growth of 10.7% in the recent quarter is lagging [10] - Adobe's AI business remains small compared to major players like Microsoft and Salesforce, which are experiencing significant growth in their AI offerings [9] Valuation and Market Sentiment - Adobe's current valuation is considered stretched, with a Price/Book ratio of 12.59, higher than the sector average and competitors [14] - The stock is trading below its 50-day and 200-day moving averages, indicating a bearish trend in the market [17]

Core Insights - Adobe is heavily integrating AI into its Creative Cloud applications, with strong adoption of the Creative Cloud Pro offering, particularly in emerging markets like India, which saw a 50% year-over-year growth in ending units [2][3] - The Firefly application is becoming a central hub for creators, incorporating both Adobe's and third-party AI models, with significant growth in usage metrics such as a 30% increase in monthly active users and 20% growth in first-time subscribers [5][3] - Adobe GenStudio has surpassed $1 billion in annual recurring revenue (ARR), growing 25% year-over-year, and is seen as a comprehensive solution for AI-driven marketing automation [9] - The Adobe Experience Platform (AEP) AI Assistant is being utilized by 70% of eligible customers, indicating a strong adoption of AI capabilities within the platform [10] - Adobe's AI-influenced ARR has exceeded $5 billion, reflecting the company's successful integration of AI across its product offerings [16] Adobe's AI Integration - Adobe's management is infusing AI across flagship applications like Photoshop and Illustrator, with new features such as Harmonize and Project Turntable enhancing user experience and productivity [2][3] - The Firefly application has seen 29 billion generations since its launch, with video generations increasing by 40% sequentially in 2025 Q2 [5][3] - The integration of third-party models into Adobe's applications is a key focus, with management emphasizing the importance of seamless workflows for users [7][8] Marketing Automation and Customer Experience - Adobe GenStudio is positioned as a leading solution for marketing automation, with new capabilities accelerating video and display ad campaign creation [9] - The company is leveraging AI to enhance customer engagement and loyalty, with a focus on hyperpersonalized experiences [11][12] - The launch of Adobe LLM Optimizer aims to improve brand visibility and drive traffic from AI chatbots, reflecting a strategic shift in marketing approaches [19][21] MongoDB's Position in AI - MongoDB is witnessing a surge in AI-native customers, positioning itself as a key component of the AI infrastructure stack [31][34] - The company is seeing strong growth in Atlas consumption, driven by capabilities like Search and Vector Search, which are essential for AI applications [32] - MongoDB's management believes that its JSON database structure is well-suited for handling complex and evolving data structures, making it advantageous for AI applications [44] Adyen's AI-Driven Solutions - Adyen's AI-powered Adyen Uplift technology is enhancing payment processes, improving conversion rates, and reducing costs through intelligent payment routing [25][26] - The company is focusing on agentic commerce, which requires new approaches to fraud prevention and secure information exchange [28][29] - Adyen's modular design allows merchants to adopt specific capabilities relevant to their business needs, with significant adoption rates for its Optimize and Protect modules [26]

Financial Data and Key Metrics Changes - Adobe achieved record revenue of $5.99 billion in Q3 FY25, representing a 10% year-over-year growth [4][29] - GAAP earnings per share for the quarter was $4.18, and non-GAAP earnings per share was $5.31, reflecting 11% and 14% year-over-year growth respectively [29] - Cash flows from operations reached a record $2.20 billion for Q3 [30] - Remaining performance obligations were $20.44 billion, growing 13% year-over-year [30] Business Line Data and Key Metrics Changes - Digital Media revenue was $4.46 billion, growing 11% year-over-year, with ending ARR of $18.59 billion, up 11.7% year-over-year [11][30] - Digital Experience revenue was $1.48 billion, with subscription revenue of $1.37 billion, representing 11% year-over-year growth [22][33] - AI-influenced ARR surpassed $5 billion, with significant contributions from Firefly, Acrobat AI Assistant, and Gen Studio for Performance Marketing [10][29] Market Data and Key Metrics Changes - The adoption of Adobe Experience Platform AI Assistant reached 70% among eligible customers [8][27] - Monthly active users of Acrobat and Express grew approximately 25% year-over-year [31] - Over 14,000 organizations added Express in Q3, a 4x increase compared to the previous year [15] Company Strategy and Development Direction - Adobe's strategy focuses on integrating AI across its applications to enhance value and deliver innovative products [4][10] - The company aims to be the operating system for creative work, combining creativity and marketing solutions [7][10] - Adobe is positioned to help businesses orchestrate personalized customer experiences through its integrated platform [23][24] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in Adobe's ability to deliver durable and profitable growth in an AI-first world [38][39] - The company raised its FY25 revenue and EPS targets based on strong momentum and customer adoption of AI-first products [38][39] - The shift in consumer behavior towards LLMs is seen as an opportunity for Adobe to enhance brand visibility and customer engagement [22][24] Other Important Information - Adobe's effective tax rate in Q3 was 19.0% on a GAAP basis and 18.5% on a non-GAAP basis [36] - The company entered into a share repurchase agreement totaling $2.50 billion, with $8.40 billion remaining of its $25 billion authorization [37] Q&A Session Summary Question: Insights on Adobe's video manipulation technology and competitive risks from advertising platforms - Management highlighted the integration of third-party models like Nano Banana into Adobe's applications, emphasizing the unique workflow and control Adobe provides [44][45] - Concerns about competition from advertising platforms were addressed, noting that larger enterprises prefer Adobe for multi-channel campaign management [48][49] Question: Drivers of success in AI-first products - Management noted strong adoption across various AI-first products, including Firefly and Acrobat AI Assistant, contributing to exceeding the $250 million ARR target [52][54] Question: Mix of AI credit usage and internal impact of LLM Optimizer - The majority of AI generation continues to come from Firefly, with increasing usage of third-party models for ideation [58][59] - The LLM Optimizer was tested internally, leading to increased visibility for Adobe's products through LLMs [60][61] Question: Pricing strategy and performance expectations - Management reported strong adoption of Creative Cloud Pro and Firefly, indicating healthy migration and overall strength across the creative business [64][66] Question: Future growth prospects and adaptation to LLMs - Management expressed confidence in the growth of digital media ARR, driven by strong adoption of AI-first products and integrated solutions [68][70]

Financial Data and Key Metrics Changes - Adobe achieved record revenue of $5.99 billion in Q3 FY25, representing a 10% year-over-year growth [5][30] - GAAP earnings per share for the quarter was $4.18, and non-GAAP earnings per share was $5.31, reflecting 14% year-over-year growth [5][30] - AI-influenced ARR surpassed $5 billion, up from over $3.5 billion exiting FY24 [11][30] - Cash flows from operations reached a record $2.20 billion for Q3 [31][37] - Remaining performance obligations were $20.44 billion, growing 13% year-over-year [31][37] Business Line Data and Key Metrics Changes - Digital Media revenue was $4.46 billion, growing 11% year-over-year, with ending ARR of $18.59 billion, up 11.7% year-over-year [12][31] - Digital Experience revenue was $1.48 billion, with subscription revenue of $1.37 billion, representing 11% year-over-year growth [23][34] - Acrobat and Express products saw combined monthly active users grow approximately 25% year-over-year [11][32] - Workfront, Frame, AEM Assets, Firefly Services, and Gen Studio for Performance Marketing products exceeded $1 billion in ARR, growing over 25% year-over-year [9][37] Market Data and Key Metrics Changes - Strong adoption of Adobe Experience Platform AI Assistant, with 70% of eligible customers leveraging this functionality [9][28] - LLM traffic grew 4,700% year-over-year in July 2025, indicating a significant shift in consumer behavior [23][24] - Digital Experience subscription revenue grew over 40% year-over-year [28] Company Strategy and Development Direction - Adobe's strategy focuses on infusing AI across its applications to enhance value and deliver innovative products [5][10] - The company aims to provide an integrated customer experience platform that combines creativity and marketing [10][25] - Adobe is positioned to capitalize on the growing demand for hyper-personalized experiences and marketing automation [10][24] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in Adobe's ability to deliver durable and profitable growth, driven by product leadership and customer-centric innovation [39][40] - The company raised its FY25 revenue and EPS targets based on strong momentum and execution [39][40] - Management highlighted the importance of adapting to changes in consumer behavior driven by AI and LLMs [24][79] Other Important Information - Adobe entered into a share repurchase agreement totaling $2.50 billion, with $8.40 billion remaining of its $25 billion authorization [37][38] - The company plans to showcase innovations at Adobe Max, focusing on productivity features and AI capabilities [22][42] Q&A Session Summary Question: Insights on the Adobe Magic demo and its value proposition - Management highlighted the integration of third-party models like Nano Banana into Adobe's applications, emphasizing the unique workflow and control Adobe provides [44][46][49] Question: Concerns about competition from advertising platforms - Management noted that larger enterprises prefer Adobe for multi-channel campaign management and attribution, indicating a strong competitive position [45][51] Question: Drivers of AI-first product growth - Management indicated that strong adoption across various AI-first products, including Firefly and Acrobat AI Assistant, contributed to exceeding the $250 million ARR target [54][56] Question: Mix of AI credit usage between Firefly and third-party models - Management confirmed that the majority of generation continues to be from Firefly, with a growing interest in third-party models for ideation and editing [59][62] Question: Impact of LLM Optimizer on internal operations - Management shared that LLM Optimizer was tested internally, leading to increased visibility for Acrobat through LLMs [63][64] Question: Pricing strategy and performance - Management reported strong adoption of Creative Cloud Pro and Firefly Services, indicating healthy migration and overall strength across the creative business [68][70] Question: Future growth confidence and AI adoption - Management expressed confidence in the growth of digital media ARR, driven by strong adoption of AI-first products and integrated solutions [72][74]

Financial Data and Key Metrics Changes - Adobe achieved record revenue of $5.99 billion in Q3 FY25, representing a 10% year-over-year growth [4] - GAAP earnings per share for the quarter was $4.18, and non-GAAP earnings per share was $5.31, reflecting 14% year-over-year growth [4][28] - Cash flows from operations reached a record $2.20 billion for Q3 [29] - Remaining performance obligations were $20.44 billion, growing 13% year-over-year [29] Business Line Data and Key Metrics Changes - Digital Media revenue was $4.46 billion, growing 11% year-over-year, with ending ARR of $18.59 billion, up 11.7% year-over-year [11][29] - Digital Experience revenue was $1.48 billion, with subscription revenue of $1.37 billion, representing 11% year-over-year growth [22][29] - AI-influenced ARR surpassed $5 billion, up from over $3.5 billion exiting FY24 [10] Market Data and Key Metrics Changes - Monthly active users of Acrobat and Express grew approximately 25% year-over-year [30] - Over 14,000 organizations added Express in Q3, a 4x increase compared to the previous year [15] - Digital Experience Platform subscription revenue grew over 40% year-over-year [26] Company Strategy and Development Direction - Adobe's strategy focuses on integrating AI across its applications to enhance value and deliver innovative products [4][10] - The company aims to be the operating system for creative work, combining creativity and marketing solutions [6] - Adobe is expanding its offerings with new products like Acrobat Studio and Firefly, targeting both business professionals and consumers [10][12] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in Adobe's ability to grow digital media ARR at least double digits for the foreseeable future [68] - The company raised its FY25 revenue and EPS targets based on strong momentum and customer adoption of AI-first products [35][36] - Management highlighted the importance of hyper-personalization and immersive experiences in the evolving marketing landscape [23] Other Important Information - Adobe's effective tax rate in Q3 was 19.0% on a GAAP basis and 18.5% on a non-GAAP basis [34] - The company entered into a share repurchase agreement totaling $2.50 billion, with $8.40 billion remaining of its $25 billion authorization [35] Q&A Session Summary Question: Insights on the video demo and Adobe's value proposition - Management emphasized the differentiation in choice and integration of third-party models within Adobe applications, enhancing user workflows [43][44] Question: Concerns about competition from advertising platforms - Management noted that larger companies prefer Adobe for multi-channel campaign management, which mitigates risks from single-channel marketers [47] Question: Strength in AI-first products - Management highlighted strong adoption across various AI-first products, including Firefly and Acrobat AI Assistant, contributing to exceeding the $250 million ARR target [50][51] Question: Mix of AI credit usage between Firefly and third-party models - Management confirmed that the majority of generation continues to be from Firefly, with a nice uptick in third-party model usage for ideation and editing [55][57] Question: Pricing and performance of the Performance X product - Management reported strong adoption of Creative Cloud Pro and Firefly Services, indicating healthy migration and overall strength across the creative business [64][65] Question: Relationship between seats and consumption in Creative Cloud - Management acknowledged the shift towards consumption models but emphasized the continued strength in seat-based revenue, particularly with AI integration [78]