Q2 FY2026 Adobe Earnings Conference Call

Sure, Michael. Let me take that. I will first start off by saying the leadership team that exists in the finance organization is absolutely seasoned and top-notch. I wish Dan well. It's clear that where he's going is where his background and expertise has been. But I'm confident that we won't miss a beat. As it relates to any other questions associated with the transition, I'm happy to answer that, but my short answer is we have an incredibly seasoned leadership team and I will continue to work with them closely as I have in the past to make sure that we drive all our strategic objectives.

Yeah, happy to, Michael. I think if we really look at it, we just look at what's happening with the AI opportunity for creativity as this incredible opportunity that is upon us right now. No other company is as well positioned given what we have across our models, products, and interfaces to take advantage of it. This is really about saying what we have done as it relates to capturing MAU with Acrobat and Express, what we've done with respect to Firefly, the entire creative market. Sometimes I like to characterize this much like what's happened with the code opportunity. If you think about what's happened with the code opportunity across AI, it's just completely been turned upside down, and every company is thinking about how they can add to all of the billions that is already spent in code. The same opportunity exists in every single category, whether that's gaming, entertainment, and creativity. This is an opportunity for us not just to focus on creative pros and communicators who've 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've seen associated with what we have done on these new products, we talked about the MAU, we've talked about the ARR that's coming. We want to have a singular focus right now to make sure that we go capture that immense opportunity with a singular focus and a clear marketing message. It also is based on a complete confidence that the creative business is extremely stable, the amount of innovation that we have delivered in that space continues to make us a category of one as it relates to our focus on that particular market. So, that one we can defer, it's not going away, but anything that comes in the way of the company aligning and the market understanding that we're going to go after that entire creative opportunity right now will detract from what is the real price for this company. Hopefully that gives you some color. In terms of the impact on ARR, you can think of it as maybe half of the impact of ARR is a result of what we are doing around deferring that creative price line optimizations and the other half is about going full steam on what it takes to deliver the freemium experience.

Thanks, Michael.

Sure. I think you should think of it more in terms of does that early success that we're having across all of them give you confidence to actually go even more aggressively about this. That's how I think about this, Alex. In terms of why now, we all recognize that when you look at the traffic that's coming to the Adobe site, that traffic is just gushing. 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 this incredible business, but it's a balanced business. We're always trying to figure out what we send to the premium and what we send to ARR. I think this singular clarity will enable us to capture way more people in the audience. The why now has more to do with the fact that we are seeing the success associated with what we've done, the products, whether it's Acrobat Express or Firefly, are there. The ability to support third-party models is there, and I'll let David add. So, it's really the success that we're seeing and the incredible amount of traffic that says if we don't 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.

Maybe the last thing I'll say to punctuate what David said is, not only are we seeing the MAU increase, but we're seeing the engagement increase as a result of serving that first experience because they're looking for Adobe. I think it's the satisfaction associated with completing their task that wants them to engage with Adobe more, and I see those signals that give us confidence that now is the time.

Well, let me give you some color. On the second one first, the creative pro line optimizations, we can introduce them as we continue to deliver value. That one is just a phase shift, and as we add that, we believe that we're going to have better offerings that are more differentiated the more these premium offerings are successful. So, we look at it and say we're deferring it but not closing it. Hopefully that gives you some color. In terms of the traffic, if the disproportionate amount of traffic is going to go to these premium offerings, you're right about how that starts to come back. We're already seeing some of it as it relates to the amount that we have on Firefly. We shared some numbers on that as well as on Express, which are growing well, but that will play out over 2027. More important, I think it sets the company up for really growing our customer base, which like we've done with Reader, pays off for decades. Maybe the other thing to give color because I'm sure people will ask this question: as you think about how it plays out over the second half, the way to think about it is if you go back and look at our fiscal 24 or fiscal 25 results, you can understand whatever our second half ARR expectations are, they typically play out 40 and 60 in Q3 and Q4. Given we'll be making more of these changes in Q3 as it relates to changing the traffic patterns and we expect our seasonal enterprise strength, the enterprise and everything we're 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 the last few years. Hopefully that gives you both color on the line optimizations we can always introduce, but we wanted to be transparent with you. As it relates to the moving of the premium, hopefully we gave you a lot of indication as to why now, all of the early success that we're seeing. 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.

Thanks for the question, Matt. Brand visibility is a topic of huge interest to CMOs, as you just heard from David as well. We're seeing a lot of that play out in our own traffic patterns, and every brand across the world wants to have the right placement regardless of which LLMs consumers are using. They 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. 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's the bots and the agents that these LLMs have or third-party sites which have credibility with these LLMs. Making sure that all the brand visibility shows up in the right places. That requires the integration of what Semrush brings, which is the outside-in knowledge of what is actually being prompted for, what's being searched for, and the database that they have of all the prompts and search queries, combined with the inside-out intelligence that we have with all the content. Marrying those two provides us the opportunity to bring the most comprehensive brand visibility solution in the market, and that's what we're introducing at Cannes later this month. We are super excited about that, and we believe this is going to be a must-have for every CMO.

As it relates to your question on partnerships, maybe just add a couple more points. Firstly, you have to look at what the economic model is for a lot of these companies. Whether it's Amazon, Microsoft, or Google, we are huge users of their cloud services, which at the end of the day is a significant revenue stream for them. We have great partnerships with all three of them. With Google specifically, we also partner on how we can jointly go to media and entertainment. We are a big user of the Nano banana within our applications. There's a lot of synergy associated with that. With OpenAI and Anthropic, they are looking to become more of a platform of choice and provide us. I think all of their focus right now, Brad, is on code, and that's where everybody is doing a student body left on that. Creativity is an area that we not only have a passion for but we're uniquely qualified. This is our time and our opportunity to leverage everything that they are providing. With every one of them, we have a great partnership. But as it relates to the consumer side of creativity, which is where this is going, we are a company of one in terms of the focus that we can have on that particular business.

Maybe I'll start with the second and then we can all touch on the first. We are all a team of one, so you can ask anybody that question, Billy, and we'll get the same answer. As it relates to the stock buyback, we had a $25 billion authorization previously. We added to that with another $25 billion authorization in April. Of the first authorization, if you look at it, there's $2 billion left, and we would have completed it in less than 11 quarters or so. We're clearly showing a lot of confidence that we should be using our capital allocation to buy back our stock. Marketo was a good acquisition. We're confident about our ability to monetize that. It further differentiates our marketing solutions, and I'll come to the marketing part. We are continuously looking at a whole bunch of companies. There's 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. It is actually a good time for us to look at technology companies. 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. There's a lot of talk about what's happening in the enterprise. The number of CEOs and CFOs who are coming to us and talking about their transformation, a big component of that transformation is customer experience and Adobe. You're the one who's going to help us with that in terms of both the content and the understanding of the customer. That's a huge differentiator. Our focus on that has separated us from anybody else in customer experience orchestration. On the creative pro, as I continue to say, our understanding of that customer base is unique. This is now about saying, 'How do we extend both of those into the consumer space in the era of AI?' That's how we look at it. Our ability to take the depth of our technology, whether it's in audio, video, or imaging, and bring that to Firefly, the speed and velocity by which we can bring it has a lot to do with the underlying technology code base and the understanding of behaviors. That's how I would describe our differentiation. Anybody who wants to create content and use it for marketing, that's Adobe.

Yeah, I think Brent, this is actually an indication that we are really going to pivot, to use your words, into getting this acquisition of customers. Perhaps what's not as evident is under the surface how we're increasingly moving all of the expenses and spend that we have with scrutiny on just making sure that we find the money to spend. We will not be short-term focused on this, Brent, in terms of spending money to make sure we capitalize on the opportunity. We are spending on this and we will continue to, whether it's on the models, in marketing, or in the product associated with these. We do not intend to be short-term at all about this. As you point out correctly, Brent, this is not about balance. This is about saying, 'Hey, be clear about your strategic intent.' We are saying it's 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 annual's products are relatively cheap in order to be able to use it. So our efficiency on that is probably better than anybody else in the industry.

Maybe I'll just add a little bit to it, Saket, having been there for that journey. A lot of people may not remember that we actually tried to charge for the Acrobat Reader. Most customers told us, 'Hey, allow us to use it and you'll find different ways to monetize it.' In addition to what David said, I would add that what's 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's the underlying theory behind both of those: get the product right and get usage going because that's the way to monetize it. As it relates to the two other things that are learnings from what we will continue to do on Firefly, how we can expand from Firefly into Creative Cloud, we are doing a really great job of that. You try things in Firefly and you want to expand to Creative Cloud, that's pretty seamless. You want to start with Creative Cloud and have Firefly, that's also very seamless in terms of how much innovation we've delivered. It's slightly different with Acrobat Express, where it's a little bit more of paywalls in terms of how we're doing it. What would I look at when we see what we are doing? 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. I think that's the learning that we have. Since I believe that's the last question, let me just because I think the whole set of questions has really been around, as you think about this era of AI and what's happening with creativity, what gives you confidence associated with some of the things. I'll repeat what I said: we really think this is a unique opportunity for creativity with everything that's changing with AI and user behavior and user intent and how users discover products. Based on the early success, now's 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. Tweaking it is not going to allow us to get the next hundreds of millions of customers. On the marketing side, enterprises, we just continue to extend the offerings that we have and tie together content between what we are doing on the client side and the enterprise. That entire economic pool, as 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, is only going to increase. The benefit of that economic pool is going to go to folks who can help automate that and provide technology and software to do that. That's why we feel really good about these changes and we feel this is the way to continue to drive. We're also pleased with what we have done as it relates to the conversion of ARR to revenue. That's why you've seen the overachievement. That speaks to the stability that we see in the ARR from customers. Thank you for joining us today, and for those of you who are going to be at Cannes, certainly stop by and see what Adobe has to offer. Otherwise, we'll see you at the next call. Thank you.