Adobe Systems Incorporated (ADBE) Management Presents at Citi Global Tech Conference (Transcript)

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About: Adobe Systems Incorporated (ADBE)
by: SA Transcripts

Adobe Systems Incorporated (NASDAQ:ADBE) Citi Global Tech Conference September 5, 2018 8:25 AM ET

Executives

John Murphy - CFO

Mike Saviage - VP, IR

Analysts

Walter Pritchard - Citi

Walter Pritchard

Welcome everybody for the first keynote session of the 2018 Citi Global Tech Conference. I’m Walter Pritchard, software analyst. Very happy to have with us Adobe. John Murphy is the CFO and Mike Saviage is the VP of Investor Relations. So I'm going to go through some questions that I have. Just want to mention, we will take questions in the audience. We’re not going to talk about Q3 or financial results, given the proximity of earnings. So keep the questions higher level and go with that. Thanks.

Mike Saviage

And Walter if I can just add a little bit.

Walter Pritchard

Yes.

Mike Saviage

Yeah. So as Walter mentioned, we’re in a quiet period. We report earnings next week. We also have a Financial Analyst meeting coming up on October 15. If you're not on our distribution list, send an e-mail to ir@adobe.com. But given it's our quiet period as Walter mentioned, we’ll be sticking to high level topics and no tone of business, targets, numbers type questions today.

Walter Pritchard

Thanks for reiterating that, Mike. So John, maybe you’ve been with the company here about 18 months, spent about 6 months in the CFO seat. Adobe has got these two businesses. You've got the creative business, I think, we've all known or digital media, we’ve all known forever and more recent -- last ten years or so, entering into the digital marketing space. Could you talk about the characteristics of the two businesses, how do you manage the company overall, given what appears to most people to be a very high margin digital media business in a more investment mode in the digital marketing space?

John Murphy

Yeah. Sure. I think when you look at the digital media business, the document cloud and creative cloud side of the business coupled with our experience cloud on the digital experience side of the business, creates a really strategic offering for our customers. So, I’m trying to look at them as two separate businesses, but look at the digital media side of the business, our core or what we may be able to do and we continue to extend value into those products and services. Here, it is really all the way through to our experience cloud business, because it gave us an entry into companies because we were really engaged with the CMOs and the marketing departments for a long time and the creative side of these businesses.

So now, we're able to move beyond content creation and delivery to understanding how customers can actually use this medium to engage with customers and understand how customers are using their own products as well. So, you've got content creation, delivery and then you've got insights and you've got personalization, you’ve got monetization now. So it's an -- it's a way that we are able to kind of extend the value proposition for our customer, end to end with a unique set of strategic platforms and solutions.

Walter Pritchard

And can you talk about what you've done on the product side to sort of bring that complete vision together and any examples of customers that are successes across the entire portfolio?

John Murphy

Oh, yeah. There are a lot of customers that are successes across the portfolio, because most of the content that's created today is really created using Adobe solutions of the creative cloud. And the document cloud business as well as at the center of companies that are trying to automate old paper based processes, so when you couple those together, moving over to the experience cloud, they're actually end to end, linking those together. So you could take many different customers, whether it be in the automotive space, whether it be in the consumer products space. I don’t know if there's anyone to call out specifically, but there are a lot of large ones that are using our products for a long time.

Walter Pritchard

Got it. And as we think about just investments in the business across the board, can you talk about where you're making investments and ironically, the two business lines have been growing in similar zip codes, but could you talk about sort of pace of investment across the business and where you're making most of those?

John Murphy

Yeah. I mean, we look at the large opportunities in front of us. So whether it be in the digital media side or the digital experience side of the business, we’re continuing to invest in both and where there are opportunities for us to add value, so in creative cloud, we continue to invest in products and services that will expand the market for those products and certainly on the digital experience side, recently, with our acquisition of Magento as well as our investments in our Adobe cloud platform and things like that are really kind of balancing the whole portfolio of investments. So, the goal is really to continue to add value on all sides of the business and strategically invest for that.

And we've looked at this year when the tax reform, we knew that we would have this benefit and we would end up having large EPS growth, just from tax reform. So, when we looked at the opportunity of either returning that directly to bottom line or actually using that as an opportunity for us to invest, we did end up in the second quarter as we talked about investing in certain aspects of the business, to take advantage of that opportunity. So whether it be Sensei or machine learning and AI platform or whether it be [indiscernible] cloud platform or whether other features and functions across all the three clouds.

Walter Pritchard

Can you talk about sales and marketing? And how important that is from an investment perspective?

John Murphy

Oh, yeah, without a doubt. The enterprise -- the world class enterprise sales force is important. It's typical of the enterprise based, capacity based models. So when we look at the opportunity in large TAM in the enterprise space, we want to make sure that we're able to meet the demand of that market. We also have many, many partners that we work with as well. So from that perspective, we balance the investment in our own sales force as well as through partnerships.

Walter Pritchard

Okay. Okay. Maybe drilling down a little bit into the creative side, I think, you've -- Adobe has sort of written a textbook on a transition of that business. Could you talk about where you feel like you are in that transition? What have been the growth drivers on the creative side and what you see as the growth drivers going forward feeling that business?

John Murphy

Yeah. Sure. I would say the transition is over. We’re – it’s happened about five years ago really and now we're really in that humming of this business and figuring out how we can actually expand subscription growth across the creative cloud or document cloud. And in the creative space, there are many different ways that we can drive growth. So, earlier, the distributor do a price increase, that’s just one lever, there is certainly seed expansion both in the enterprise and in education market.

In the enterprise for instance, we're certainly embedded in the market departments and creative departments, but there are other folks across different departments that are creating content. So they may not be using the product every day or 10 hours a day, but they’ve been using the products for 10 hours a week or 10 hours a month. So engaging with those customers, building that extension across the enterprise is really important.

The other thing is on new products, based on new media types that are coming out. So whether it be AR, VR, 3D, those are areas that we're investing in as well as other geos and things like that.

Mike Saviage

And just building on that, this is one of the common questions we get is, how we can keep driving growth. John touched on a number of those areas. In market expansion, also, we've moved into categories like hobbyist and consumer. Our mobile apps, we've had over 100 million people create an Adobe ID just to access our mobile apps and they become part of our funnel on how we drive awareness, trial use, ultimately subscriptions and there's not only the existing products we've been licensing, but there’s been some new things and we've -- just over the last few months, we've announced a couple of new projects to perhaps monitor.

We announced Project Aero, A-E-R-O. Aero is a new augmented reality content creation tool that we're working on and Apple had us on stage at WWDC a few months ago to showcase that with them. And more recently, we announced Project Rush, which is a whole brand new, call it, video authoring tool for the YouTube generation that wants their content to look very professional, but they need a very simple, easy-to-use tool. And so as we tap into these new areas where content creation is happening, it does two things for us. Number one, of course, it creates incremental opportunity, but for our existing customers in the subscription model, it shows that we have their back in terms of thinking about where the market's going, where they're going to need to add skill sets to create more content and then knowing that Adobe is investing in these areas that helps drive things like retention or upsell from one product to two or two products to the entire creative cloud offering. So all of this is helping to drive not only today's business, but also investing for future growth.

Walter Pritchard

Maybe just drilling down a little bit further, you brought up pricing. Could you talk about the experience you've had in that price increase? What you've learned from it? And just longer term, how do we think about pricing as a driver of the growth in that business?

John Murphy

Yeah, absolutely. We get asked about this a lot, some subscription models obviously have annual price increases and we've said and we continue to say that we don't want to be that type of -- and we don't use that lever in that way at an annual price increase, want to raise prices where it makes sense. A price increase that we did in North America earlier this year was after five years where we added a lot of innovations and different features across that period in addition to five new products that we launched at MAX last fall. So it's really a value proposition.

So, and that's how we’ll optimize on pricing, as we deliver the value, customer seems to resonate whether they don't necessarily react negatively to it. When we announced the price increase MAX, it didn't roll out obvious until spring. We didn't get a lot of pushback. We've had experience with price increases around the world when we adjust for FX. And so we have a good understanding of what the elasticity is and certainly with the value proposition that we're able to offer.

Walter Pritchard

So it's more about product delivery rather than a timeframe?

John Murphy

Exactly.

Walter Pritchard

It’s not in every three years, every two years, every one year and so forth.

John Murphy

Yeah. If there is enough value based upon what we've been investing and we deliver to the market and we feel that customers are resonating with the value, we’re just pricing accordingly.

Mike Saviage

Another example of that is the photography plan, being able to get Photoshop and Lightroom, two very popular tools from Adobe at $10 per month has brought a lot of people in. We introduced last fall a brand new version of that offering at double the price and we didn't force customers into the new offering. We said you can stay with your existing plan or if you want some of these new features and innovation that we've added to the new offering, you can self-select to essentially double the price you're paying. And so that's an example of how we can drive higher ARPU without sort of forcing customers into a higher price point.

Walter Pritchard

Got it. Another lever on the ARPU that you touched on a little bit has just been adding things on a new Adobe stock, for example, it's been something that’s been sort of pushed into the base. Maybe you talk about Adobe stock, specifically, how we should be thinking about penetration of that and then other things that are sort of add-ons into the creative base like that offering?

John Murphy

Yeah. So Adobe services certainly are important for our customers and drive more value out of the core offering that they’ve subscribed to. So, stock is great. We’ve got millions of images that can be utilized by the career professionals seamlessly within the creative cloud. And so having that as a service has resonated well with our customers.

Individually, it's a small distributor, but it's a -- it really is a larger contributor on the broader scale of the creative cloud offering, similar to signed and document cloud, this is a very similar situation there.

Walter Pritchard

And other things like that, this is a major area for investment and there are others you could point to that are maybe in the earlier stages that we might look at down the road as more meaningful for revenue.

Mike Saviage

Yeah. Another example would be Adobe XD, which is a brand new tool for screen design, which has been out roughly a year, but I bring that up only because, when you think about Adobe’s stock, we think of images or graphics as being things that creative professionals might buy as part of the process. With Adobe XD, you can also buy or access templates and other types of content. So -- or if you're a video author creating video content, you can access 4K video in the platform. So it really is synergistic to how we're rolling out new products.

We roll in capabilities into things like Adobe stock or into the community where we have services and features online that help our customers learn our products. It all works together to build understanding, awareness and adoption and then retention of the offering over time. And with something like stock, I mean, if you're paying us 50 plus dollars a month for creative cloud and you add Adobe stock, the most popular subscription is $30. So now we've gone from 50 to 80 per month with the user. It's a substantial increase in the opportunity.

Walter Pritchard

Got it. And on the -- so you mentioned we're sort of through the transition, which I think most of us model, see that. When we think about just the unit growth, we talked a lot about sort of the price, P times Q, the price side of it, from a quantity side of it or unit side, I feel like I covered Adobe back when it was a sleepy sort of population or a workforce growth. You’ve been growing units much faster than that. Can you talk about maybe what have been some of the drivers of unit growth and which of those you see as sustainable?

John Murphy

Yeah. So, I think the -- certainly on a subscription based model, you get the lower price point of entry, right. So you end up attracting more people to the platform that maybe couldn't or wouldn't necessarily part with a much higher price point. In addition to that, you've got -- the fact that we've got storage and collaboration capabilities that are based on the cloud and can be accessed from multiple devices I think is also driving usages. People [indiscernible] not necessarily in a place of, a physical place of work, they’re working all over the place. So I think those aspects are driving adoption.

Plus, the constant innovation, I mean, people who come to view Adobe as or coming to a stock and a stock to innovate on our products and deliver what the customers are asking for in terms of making their work more effective and then also their productivity. So, our investments in machine learning and AI are really important, because it's able to increase the productivity of the creative professional as well as make it easier for the casual creative or the hobbyist to actually use our products.

Walter Pritchard

And is that still, but that's still not -- that's not driving conversion as much or is it still driving conversion of the casual user that maybe wasn't on subscription plan?

John Murphy

Oh, yeah. It certainly is. I mean, you’ve got, there's certainly a number of Creative Suite users out there today that are, we still target to from creative cloud. It's probably not as big an emphasis today as it once was, but certainly, internationally, it falls a little bit later than it did in the US and in terms of Germany and Japan, but there are obviously other geos that we're able to target there to get customers convert and we still have piracy, but it's hard to quantify.

Mike Saviage

Yeah. I was just going to add that last point, really two things. One, there's category growth that's really happening in a bigger way than ever before, because of the amount of content being created in the world. There's more people entering that as an opportunity or job for their future. So, just the number of creative professionals or content creators in the world is growing substantially.

And then what John just mentioned, I was going to add, which is fighting piracy. It's very hard to quantify in terms of numbers the amount of piracy, but we know it exists. And we know also just looking at our run rates in geographies where there's high piracy rates, we're growing our business there. It's because of the low entry point of price, it’s because it's tougher to steal the product when it's tethered to the cloud and all those values being serviced to the desktop product from the cloud. And so those are also helpful drivers in thinking about the growth trajectory for the business.

Walter Pritchard

Got it. Great. And maybe switching over, talking about document cloud a bit, you've seen that subscription transition is to some degree lagging. The creative side, it has picked up steam in the last year. Could you talk about what's really motivated the accelerated growth of -- really accelerate conversion of the document cloud -- to the document cloud business.

John Murphy

I think we said in the past that we're focused on the transition for creative cloud. We may be taking our foot off the gas although of document cloud, but certainly now, looking at the different services we're able to add, we’re able to kind of put a little bit more gas on that, use the same playbook that we did with Creative Suite and creative cloud and start to migrate customers over to document cloud from just the standalone Acrobat. And so the unit growth that we've seen in the last four quarters has been fantastic and continues to be a focus of ours as we go forward. So again, it's a lower price point. It's the full features, set of services that are in the cloud. It's all the other add on services that we've been able to enhance Acrobat with. And so that's where some of our growth has been. I think we’re really satisfied with it.

Walter Pritchard

And in the enterprise, in document area, you do see a lot of casual usage of that product. How do you feel about, you mentioned on the creative side that some of these and the new product 10 hours a week is more of a target for you? On the document cloud side, does subscription do anything there to help or how are you attacking the expanded user opportunity in that market?

John Murphy

Yeah. I mean, if you think about, just even as individual users, how many different engagements have you had with paper based documents and so if you can actually leverage that paper digitally and then fill out a form and sign it and all those things and use that on a somewhat ad hoc basis as an individual or maybe as a small business, then you’ve got great opportunities to kind of digitally transform your own life in that sense.

Walter Pritchard

Got it. And you talk about sign, I think, there's now an independent public company that's exclusively focused on signing. Could you talk about your, just the state of your business there. I think, actually a lot of investors are trying to understand how big is it, how fast it is growing. I know, you’re not breaking it out, but any sort of color around that business would be helpful?

John Murphy

Yeah. DocuSign, obviously great story there in terms of entering the market and creating business around really one feature sort of the Acrobat. And so from our perspective, we didn't look at it as a point solution or a sign product is fully integrated in to our Acrobat offering. And so we end up with a little bit more robust offering in that sense. So we’ve been pretty happy with the growth of sign attached or document services.

Mike Saviage

There's another area too where we're investing and we think mobile is a whole new frontier for us in terms of how we can add more value and services to businesses to just general users that want to take a paper based document or workflow and turn it into something digital. So, we launched Adobe Scan about a year ago, just over a year ago, which basically turns your phone into a high end, high quality scanner and turns your document on your desktop into a full-fledged OCR and PDF. And so we're doing things like that to just augment or add to what we've been doing with the Acrobat and the document cloud offering.

And when you think about the reach Adobe has, we have over 1 billion copies of the free Adobe Reader out there on mobile devices and PCs and that becomes a huge opportunity for us in how we leverage the use of PDF everywhere. And then we start to add these new services in these new mobile apps and things and that just builds a bigger opportunity for Adobe broader than just getting a signature on a document.

Walter Pritchard

And on sign, I think one thing in our coverage of DocuSign, we took a look at it, it’s just your website and how many people you are hiring and we didn't come away from that feeling like this was a super high priority for the companies. Can you help us understand, like, are you investing enough in sign? Is that -- it just seems like probably a lot of things on your plate, but curious how you prioritize that area of investment?

John Murphy

Yeah. I mean the thing, if you look at a company like Adobe, we're a large company and we've got investments across our R&D platform, working on a number of initiatives and so we balance those investments across where we think there are really great opportunities. And we do think sign is a opportunity for us. And so from our perspective, I think we're – we definitely are investing and we continue to evaluate whether we should invest more.

Mike Saviage

And keep in mind also that a lot of our subscription based business run as digital. We drive traffic, we drive a funnel of people to adobe.com. So our sales force which is driving a lot of our growth is really our team that's running our outlined properties. We of course have sales people, we have people on the phones, we have partners. That all comes with a business that's been around 20 years, but now we've also leveraged our -- the infrastructure we've built for creative cloud and how we drive the funnel and the traffic through our website. We do the same thing and that's been driving a lot of the growth with Acrobat. So that's not going to show up as Acrobat sales people on the job posting.

Walter Pritchard

Got it. Maybe switching over, talking about the experience cloud. So in that market, you have a number of competitors who have margins that are [indiscernible] willing to invest substantially to drive growth. You've driven more of a balanced approach. Can you talk about the tradeoff you're making there between the growth in that business and the investment level required to achieve that growth? And how you think about that balance?

John Murphy

Yes, sure. There's a huge opportunity I think in the digital experience business and we’ve talked about pretty substantial TAM that are over $60 billion by 2020. So, it's a pretty fragmented market as you talked about. There are a lot of competitors in the market, because there are a lot of opportunities too, because we've got a unique proposition where we have content creation, content management, content delivery, web analytics, advertising, personalization, TV delivery and monetization. So we've got this end to end capability that really doesn't stack up against any of the competitors. There's a lot of talk about where we compete with certain other software companies, but in reality, there's very little overlap.

And so from that perspective, we've got an opportunity to continue to capture market share and aggressively invest to do that. And so it's a, we talk about balancing investment. We've been a disciplined operator, as you said, maybe there are other companies with lower margins that are investing more, but we're very prudent I think in the investments that we make. So whether it be through acquisition, making sure that if we were buying a company that it ends up being the number one solution in the marketplace after we've owned it for a little while, so that's kind of the focus that we've.

Walter Pritchard

And would you say in that business, is the rate limiter to your growth, is it on the product side or is it on the go to market sort of sales resource side?

John Murphy

Well, I think on – certainly, enterprise sales is capacity model, right. So, you end up with our own sales force from a partnership. But I think we've got really great coverage there. What we're seeing though is that as customers are engaging in their own digital transformation, they don't want to necessarily -- they may enter into that process with a point solution for an aspect of their business, but as they get into it more, they don't want to necessarily deal with multiple vendors and multiple products.

So, our goal is really to provide the marketing functions of companies with an end to end solution that gets them to either enter in one or two offerings and then ultimately buy a full suite of offerings. And what we've seen over time, particularly with our partnership with Microsoft, we’re able to secure larger deals, multi solution deals and so they're just a little bit longer sales cycles as we talked about last year. But in the end, they have a much greater value proposition to both the customer and to us in terms of a meaningful investment on their side and certainly a larger engagement on our side.

Walter Pritchard

Got it. I’m just going to pause. We'll have a few microphones going around, if there's any questions in the audience. Again, let's keep the questions in the spirit of what we talk about at the beginning of the session. So, you recently completed the acquisition of Magento, brought you kind of an e-commerce capability in the market. Could you talk about how you’ve, in the early days, integrated that in? How are you taking that to market? Let's start there and then I have a follow up?

John Murphy

Sure. We always had the capability of commerce before, because we’ve partnered with other commerce providers. So, as customers were looking again to fill out kind of their solution portfolio, some wanted us to have our own solutions. So with the opportunity with Magento, they've got a great solution, a good portion of the code is open source, which is actually -- helps with innovation, obviously engaging with different types of customers’ existing environments. So from that perspective, Magento was well on its way in developing its products.

They’re certainly focused on mid-markets, we're moving up to enterprise. That's where our sweet spot was. So that's the capability and opportunity that we have to bring to Magento. So, but at the same time, we want to actually still nurture the business that came with the company and that's a very strong mid-market business that has market leading products and I think they were already transitioning to enterprise solutions as well at the time. So for us, it's an ability to accelerate that for the company and really add it into the full digital experience.

Walter Pritchard

Got it. We’ll take any questions in the audience if we have any.

Question-and-Answer Session

Q - Walter Pritchard

Quiet room. From an M&A perspective, you've done a handful of these deals, nothing that's been sort of blockbuster, really large. As I mentioned, you do have a landscape, especially on the experience side that’s moving very quickly. Some of your peers I think may be willing to do some of those deals that are more blockbuster in nature. How do you evaluate M&A prospects? You've got valuation. You've got potential synergies, other factors. What are the -- what's the criteria set you're using to come to the outcomes that you've come to so far and how does that play in to the future?

John Murphy

Yeah. We’ve proven to be a very disciplined acquirer. And so, the three main criteria that we looked at is, does it make financial sense, does it make strategic sense and is it a strong culture fit for the company, which is really critical to driving the success through integration and synergies. So those are really the criteria and while we have typically or historically favored more small tuck-in capabilities and we continue to focus on those, Magento was the third largest acquisition that the company has done in its history. So with digital experience, digital marketing in general, so many competitors of very fragmented market, I think there's definitely a lot of opportunity. And we have a lot of leverage obviously. We have a capability to do larger deals, but I think we're very disciplined in how we evaluate them and make sure that they make sense for the company.

Walter Pritchard

Got it. Any audience questions out there? So to talk about, competitively, you've sort of alluded to this, maybe not a lot of overlap. It does look like you and Salesforce are to some degree kind of coming, they're building out marketing, you've gotten into e-commerce. Can you talk about just generally who you're seeing competitively, how much of it is contested business with Salesforce versus other players and what the trends have been there?

John Murphy

Certainly, we see them, but I think, as I said earlier, I think a lot of people think that we're probably more in this path of collision than we really are, because really the overlap is around campaign management and data management and now that we have Magento in commerce with again Salesforce’s Demandware, when you look at the rest of what we offer between content delivery, web analytics, advertising, personalization, TV delivery and, it's just not as much overlap as it may be perceived. We partner with Microsoft on -- with dynamics for CRM solutions when our customers want a choice. But, obviously we've been selling into Salesforce environments as well. So, we -- there's some competition, but we actually probably don't see that as much as people would think from a pure marketing perspective.

Walter Pritchard

Okay. On -- you mentioned Microsoft. I guess that partnership was announced I think at MAX, was it last year or two years ago now?

John Murphy

Two years ago. Two years ago right now.

Walter Pritchard

Two years ago. Can you talk about where you are in the sort of putting the strategic steps into action and what tangible results you've gotten out of that relationship at this point?

John Murphy

Oh, yeah. It's well on its way and we continue to find more opportunities to collaborate. As I said, we're selling in with Microsoft. They're not selling our product, we’re not selling theirs. We’re selling together. When we're brought in, we actually end up securing larger deals. Likewise, the fact that we can actually integrate well on an Azure platform with their dynamics product gives us an opportunity to tap into customers that maybe haven't looked directly at us before. So in that case, I think, from my perspective, I think, it's going well.

Mike Saviage

Just to add, I think, it's not just a, on paper, we're going to work together. There's weekly meetings around pipeline. There's weekly meetings around how we look at things like a data model that can be used across our products. So leveraging Adobe’s investment in the analytics and data management and how that can be used with assets across our portfolio and theirs to provide more value to customers. More recently, the partnership is extended into things like office in the knowledge worker space where Adobe Sign has become the preferred e-signature solution as part of their deployments for office and windows and SharePoint. And we’re continuing to look at more ways to collaborate. So it's really been beneficial and as we've always said, part of the reason it’s successful is there is really no competitive overlap in what we're doing. They have an agenda, they have goals and things that they're trying to reach and as are we and both of those lead to a common goal of servicing customers that are looking for value in this space where we can generally provide.

Q - Walter Pritchard

Got it. Again, I’ll pause to see if there is any questions out. Can see up here. Can we get a microphone towards the front?

Unidentified Analyst

You mentioned Magento expanding into e-commerce. What do you think about expanding into the service, enterprise service market?

Walter Pritchard

Customer service side of the market?

Unidentified Analyst

Customer service side.

John Murphy

Customer service side. Yeah. No. We look at all the adjacent markets and see if there's opportunities that we can really kind of leverage what our customers are asking for. Services is actually a little bit of an area that there are some good players there, but it’s also a lower margin business where we’re kind of balancing out investments on those types of acquisitions we would be kind of evaluating that against what our current portfolio is rather than maybe hurt margins further.

Walter Pritchard

Okay. Any questions? So on public cloud, you've been a early user of public cloud. I think, you're still operating a lot of your own data centers. Can you talk about the sort of strategy there long-term, impacts on margins or other business impacts you see from public cloud adoption?

John Murphy

Yeah. I think it's been -- it's certainly been beneficial in the sense that, assuming, there is a lot of opportunities to engage with multiple customers across the world really and so we – obviously, we are partnered with [indiscernible] we are partnered with Microsoft with Azure, we have the Adobe cloud platform as well. So we've been intentionally a hybrid kind of approach and model.

Mike Saviage

And I think just taking that question a step into where we talked about investing on our Q2 call, this Adobe cloud platform, if we think about creative cloud, document cloud and experience cloud, these were all sort of initiatives that were sort of siloed in the early days without a strategy of how do we architect, what would be a common architecture across all of these. So, things like security model, how data is used, single sign on, all these things are very important to customers rolling out the entire offering. And so, we've been working not just on which public cloud offering we worked on and we've had of course Azure in the last year or two, but now, we also are looking at how can we really create synergy across everything we do.

So that as we move forward, there's a lot of leverage in that, so that we don't have to reinvent the wheel every time we move into a new initiative. Same thing, we did with the creative products years ago around Illustrator and Photoshop and all these things. They all had common elements in them and when we invested in that common infrastructure, it benefited all the products simultaneously and I think the same thing is playing out with how we're investing in the Adobe cloud platform, investing in AI machine learning around that, so that we can really introduce continued magic and value to our customers as part of these initiatives. And then what it's deployed on, it's just an output of that investment.

Walter Pritchard

Sure. Got it. So, John, you mentioned obviously on the sales side, you’re making your own investment, you have partnerships there. In terms of the traction with that size, what's the biggest factor that helps to drive that and where are you in addressing that to get more leverage out of the SIs?

John Murphy

Yeah. So the partnerships that we have with SIs, they have been long going. And so in a sense of whether it be the SIs or whether it even be Deloitte Digital or Accenture, those partnerships are important to us, continuing to service the needs of our customers. And, for us, it gives us the opportunity to continue to focus investment on what our core capabilities are as product and innovation and things like that and allowing them to kind of cover the services side of the business.

Walter Pritchard

And how do you feel about in the future, do you expect to have moved the sales and marketing sort of the expense carried by them or is it -- is this balance sort of where you expect it to be and just driving more scale in that arrangement?

John Murphy

Yeah. I mean we're going to continue to be looking at it. I think, we're in a good spot right now in terms of that balance that I don't necessarily think that would see a great desire to shift it dramatically one way or the other. I think it's kind of balanced at this point.

Walter Pritchard

Yeah. And your need to build out your own services capabilities, maybe you can update us on, deals are getting larger and to some degree, there may be a need to build the services piece out. Has that moved along with the deals getting larger?

John Murphy

We do have a large services organization within Adobe that actually enhances how customers should utilize and drive value out of our products. So it's a balance of where we play in the services spectrum. So it's really more in making sure the customers get value out of what they’re purchasing.

Walter Pritchard

Yeah. Got it. Any questions we have in the audience. There is one.

Unidentified Analyst

One follow-up question on Magento acquisition. Shopify’s CEO on the last conference call told investors that Shopify is taking market share from Magento. So, are you going to invest more in Magento to improve their position, even at the expense of the Adobe free cash flows?

Walter Pritchard

So the question I think was market share balance in e-commerce space and there's a notion that Shopify is taking some market share from Magento. Do you need to invest more in the Magento business at the expense potentially of Adobe’s free cash flow?

John Murphy

Oh, when we looked at Magento, certainly in the space that they’re playing and there's certainly some competition. Obviously, Shopify as well, but Magento is actually doing really quite well in the marketplace and again we're kind of moving more upstream to enterprise level. So we're able to accelerate that. So the investment that we're doing in Magento is to continue to drive into the enterprise faster and enterprise being our size enterprise versus being [indiscernible] as a standalone company, but it, like I said, at the same time, we want to make sure that we continue to invest in the core Magento business and make sure that it is -- maintains its competitive positioning in the marketplace as well in the mid-size.

Mike Saviage

Just, it's always interesting when we get questions which are driven by the IR team about their competitors, where they say they're taking share. Here, they're taking share there. We could say the same thing too. I mean, we're -- we bought Magento because our customers wanted it. They felt like the market was under served, the solutions were rigid and they wanted to extend their investment in Adobe, not just up to the shopping cart, but to make every interaction, every digital experience have the ability to run a transaction with that. We’re very excited about what we've acquired with Magento, but just like several other acquisitions we've done in the past, we have what we have today, but as we invest in that business and integrate it with the rest of our offering, if you look at our acquisition of Day Software, it was an unknown Swiss company that had sort of next generation web content management technology.

Now, it's the number one offering in the world. If you look at Adobe Stock, everybody said, well, why don’t you buy Shutterstock or Shutterstock said they are taking share from [indiscernible]. Guess what, now that business has been growing over 20% year-on-year every quarter for the last four quarters. So, we'll invest appropriately and we see a huge opportunity in that space and I think you just have to take what competitors say with a grain of salt because we have entered this space and we're very excited about how we will take share and grow our business over time.

Walter Pritchard

Any questions in the audience? So on -- if you look at the current market, valuations are quite high. Your stock has appreciated a lot. Acquisition targets have appreciated a lot. Any update on how you just generally look at capital allocation and especially in light of where we are in the market cycle?

John Murphy

Yeah. Really, the same as we've said. There hasn’t really been a dramatic shift in our thinking. So, obviously, we're going to continue to invest in our business. We're going to continue to evaluate the M&A landscape and make sure that we make smart investments and as well as making sure we're balanced with returning value for shareholders through our share buyback program, which last May we ended up increasing quite substantially an $8 billion program through 2021 that’s going to be funded through future cash flows. So, I think it demonstrates a really disciplined balance in our capital allocation, making sure that we're returning value and creating value at the same time.

Walter Pritchard

Got it. All right. Let me give the audience one last shot here. I guess John, last question for you. So, you came in again about 18 months ago as Chief Accounting Officer. Obviously, succession was probably in mind at that point. In terms of your focus as CFO, I think investors who have sort of got used to your predecessor who -- things went quite well, could you talk about where your priorities are as CFO and what areas you see to make an impact on the organization?

John Murphy

I have been great and fortunate to work with Mark for a year and really being part of the strategy that we're building up that we're executing on today. So from that perspective, I've been asked before as I got on, what are you dramatically going to change, I was like, I don’t know, the company has been doing pretty well, so I’m not going to dramatically change anything, but what I do bring to the table is, having great experiences coming for Qualcomm and DIRECTV, these are 30 plus billion dollar companies that have scaled through very high growth cycles. And so my focus is really going to be making sure that I can deliver that scaling expertise to Adobe as we continue to grow 10 billion, 15 billion going forward. So that's going to be a lot of the focus. And then, certainly, I've got a fairly extensive background in M&A as well and so that's an area that I can deliver value for Adobe as well.

Walter Pritchard

Got it. Great, well, John and Mike, thank you very much for coming to the event here and everybody thanks for joining the session.

John Murphy

Thank you.