Adobe Inc.

Adobe Q2 FY20 quarterly earnings call. At this time, we'll have a suspense on a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. Today's conference is being recorded. I'd like to turn the conference over to our Vice President of Investor Relations, Jonathan Voss. Please go ahead, sir.

Good afternoon, and thank you for joining us. With me on the call today from their home offices are Shantanu Narayan, Adobe's President and CEO, John Murphy, Executive Vice President and CFO, as well as Mike Savage, who in March announced his retirement as Adobe's Head of Investor Relations and is continuing to assist with the transition. On this call, we will discuss Adobe's second quarter fiscal year 2020 financial results. By now, you should have a copy of the press release, which crossed the wire approximately one hour ago. We've also posted PDFs of our prepared remarks in an updated data sheet on Adobe's Investor Relations website. Before we get started, we want to emphasize that some of the information discussed in this call, including our financial targets and product plans, is based on information as of today, June 11th, and contains forward-looking statements that involve risk, uncertainty, and assumptions. Actual results may differ materially from those set forth in these statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in our press release we issued today, as well as Adobe's SEC filing. On this call, we will discuss GAAP and non-GAAP financial measures. Reconciliations between the two are available in our earnings release and on Adobe's Investor Relations website. Call participants are advised that the audio of this conference call is being webcast live and is also being recorded for playback purposes. An archive of the webcast will be made available on Adobe's Investor Relations website for approximately 45 days. The call audio and the webcast may not be re-recorded or otherwise reproduced or distributed without Adobe's prior written permission. I will now turn the call over to Shantanu.

Thanks, Jonathan, and good afternoon. I hope you and your families are safe and healthy. Adobe's second quarter coincided with what we hope was the peak of the COVID-19 pandemic. Around the world, people shifted their attention to their health and their families. Businesses focused on protecting their employees, financial stability, and continuing to serve their customers. Unfortunately, millions of people have lost their jobs and small and medium-sized businesses have been hit particularly hard. Through this crisis, Adobe's focus remains on employee health and safety, serving our customers and on ensuring business continuity. We took early and decisive action to direct our teams to work from home, suspend travel and cancel in-person events through 2020 to flatten the curve. To support the communities in which we live and work, we have donated over $5 million and 22,000 hours of virtual volunteer time to COVID-19 relief organizations. We're also proud to be part of the coalition that developed the COVID-19 testing data response platform, providing test screening appointments and insights for public health officials and government. We immediately instituted work streams to control discretionary expenses and evaluate our strategic priorities to double down on those that will drive the greatest growth and profitability for the long term. Through all of this, the resiliency and flexibility of our employees has been awe-inspiring. I am proud of how our employees transition to this new reality. Adobe is the digital experiences company with millions of global customers relying on our products every day to create the world's content, automate critical document processes, and engage with their customers digitally. Adobe's leadership in three large and growing categories, Creative Cloud, Document Cloud, and Experience Cloud, is driving our performance. Adobe grow strong Q2 performance across Adobe Creative Cloud, Adobe Document Cloud, and Adobe Experience Cloud. We delivered $3.13 billion in revenue in Q2, representing 14% year-over-year growth. Gap earnings per share for the quarter was $2.27, and non-gap earnings per share was $2.45. In our digital media business, we drove strong revenue growth in both Creative Cloud and Document Cloud in Q2. Net new digital media annualized recurring revenue or ARR was 443 million and total digital media ARR exiting Q2 grew to 9.17 billion. Q2 creative revenue was 1.87 billion which represents 17% year-over-year growth. Net new Creative Cloud ARR was $352 million. The past couple of months have shown us that in times of uncertainty, people are turning to creative expression to learn, cope, and make an impact. Adobe Creative Cloud is the center of this new creative renaissance. unleashing creativity for all and empowering millions of people around the world to tell their stories. As schools faced physical closures and moved online, we focused our attention on enabling them to create from home. We immediately provisioned 30 million students at home with Creative Cloud and provided teachers distance learning support. In Q2, we saw historic highs in Adobe.com traffic across both Creative Cloud and Document Cloud. Demand for our professional video products was particularly high with strong engagement for Adobe Premiere Pro and After Effects. We continue to see steady growth from social content creators using Premiere Rush, which saw a 75% increase in monthly active users quarter over quarter. Mobile traffic, member signups, and monetization continues to accelerate. Adobe Fresco has seen a greater than 40% increase in downloads since the start of 2020. Photoshop Express has surpassed 20 million in monthly active users. Our teams are gearing up for a significant Creative Cloud update later this month, featuring exciting new product innovation, as well as new capabilities designed to facilitate collaboration between creators, particularly important in this environment. We're excited to make Photoshop Camera generally available on iOS and Android this week, bringing the magic of Photoshop to the point of capture. Photoshop Camera is a fun and easy consumer app targeted at social creators, an increasingly important segment for Adobe. At Adobe, we believe everyone is a creator, and we need to make products suitable for different skill levels. Adobe Spark, available both on the web and as a mobile app, is targeted at the large group of communicators who need to create social graphics, web pages, and short videos for their business, school, or community. As part of the strategic review of our creative business, we've decided to increase our investment in two exciting areas. providing new solutions that address the unmet needs of the communicator segment and ensuring that the web browser is a first-class authoring platform. We're proud of the role we play in inspiring the global creative community. With our Honor Heroes campaign, we galvanized our community to create artwork honoring essential workers on the front lines. We created an Adobe Fresco compatible digital coloring book and launched a creative campaign with musician Marshmello, challenging fans to create a video for his latest single, Be Kind. Document Cloud revenue in Q2 was a record $360 million, and we grew Document Cloud ARR to $1.24 billion. With Adobe Document Cloud, we're accelerating document productivity, enabling our customers to engage, transact, and collaborate seamlessly in a remote work environment. As we did with Creative Cloud, we implemented several programs to support our customers. This included making our web-based PDF services on adobe.com free and implementing a government rapid response program to assist local governments by providing extended trials for Adobe Document Cloud. The shift to remote work has driven a surge in demand for digital documents. With use of web-based PDF services, up nearly 40% quarter over quarter, and the number of documents shared in Acrobat increasing 50% year over year. We continue to drive strong adoption for Adobe Sign, our cloud-based electronic signature solution, with usage increasing 175% since the start of our fiscal year. Mobile usage exploded, with Acrobat Reader installations increasing 43% year over year, and Adobe Scan installations up 66% year over year. We're proud of the role our technology is playing in enabling our government customers to accelerate their transition to digital. The city of Seattle's Digital Workplace Division deployed Adobe Sign across its departments when the city quickly shifted to telework. The state of Utah is using Adobe Acrobat and Sign It's part of its telework initiative to facilitate emergency response and streamline communication across the state. As part of the strategic review of our document business, we're increasing investment in Adobe Sign and our PDF services on the web and availability of PDF functionality through APIs to capitalize on the wholesale shift to remote work and digital-first document processes. In our digital experience business, we achieved experience cloud revenue of $826 million for the quarter. As outlined at our last earnings call, we saw anticipated delays in enterprise bookings and consulting services implementations as companies prioritized employee and financial well-being. The extreme economic challenges that enterprise customers in certain verticals experienced as well as weakness in our commercial segment that targets small and medium-sized businesses also adversely impacted bookings. In addition, the significant global decline in advertising spending impacted our advertising cloud revenue. Despite the short-term challenges, the mandate to digitally transform has taken on heightened urgency. Enterprises continue to recognize Adobe's leadership in customer experience management. Key customer wins in the quarter included IBM, Walgreens, Safeway, Estella's Pharma, and Allianz. We're dedicated to our customer success and proud to see the impact our technology is having. Government organizations such as the US Census Bureau are relying on Adobe Experience Cloud to modernize citizen experiences. 3M and Verizon are reaping the benefits of the Adobe Experience Platform, and we now cumulatively have over 10 billion active customer profiles running on Adobe Experience Platform. Adobe Experience Cloud was named a leader with the highest position among 19 vendors in the Gartner Magic Quadrant for multi-channel marketing hubs, as well as a leader by Forrester in the B2B and B2C Commerce Suites Wave Reports. We successfully transitioned Adobe Summit to an exclusively digital event where we debuted new Adobe Experience Cloud innovation, including Intelligent Services, Customer Journey Analytics, and the Customer Experience Management Playbook. The Adobe Summit live virtual experience enabled us to engage a far larger audience than an in-person event and set the bar for virtual events. Cumulatively, we have engaged with more than half a million visitors. While it was difficult to imagine only conducting business with CMOs and CIOs virtually, a side benefit of everyone working at home is that we're able to schedule and engage with far more customers across multiple continents. In all these discussions with business leaders, it is clear that investments in digital and specifically customer experience are more important than ever. As a result of the strategic review of our digital experience business, it is clear that we have an unparalleled value proposition in market-leading solutions across content and commerce, customer journey management, and customer data and insights, all powered by the Adobe Experience Platform. To further our lead, we're increasing our investment in AI and machine learning next-generation applications and services on the Adobe Experience platform, and accelerated integration of our content and commerce offerings. Our current advertising offerings consist of advertising cloud software solutions as well as advertising cloud transaction-driven solutions. We will continue to offer our advertising cloud software solutions to our digital experience customers, but this will not be an area of growth moving forward. CMOs want a single source of reporting and attribution for their advertising investment, which we can uniquely offer through the combination of Advertising Cloud and the Adobe Experience Cloud. We have decided to accelerate our previously stated strategy of eliminating the low-margin Advertising Cloud transaction-driven offerings. These offerings are no longer core to our overall value proposition of delivering on customer experience management, nor contributing to our subscription-based bookings and revenue, and in fact are extremely resource-intensive. The impact of this strategic shift was evident in our Q2 revenue, cost of goods sold, and gross margin results, and will be factored into future digital experience targets. Earlier this year, we hired Anil Chakravarti to drive the immense enterprise opportunity, Over the past few months, Anil continued to expand his charter with responsibility for strategy, product engineering and marketing, consulting and customer success for the digital experience business. Coincident with the long-planned retirement of Matt Thompson, Adobe's Executive Vice President of Worldwide Field Operations, Anil will now be adding responsibility for the entire worldwide enterprise field organizations. Over the past 13 years, Matt has played a pivotal role in the company's transformation to a subscription software model in the digital media business, as well as the creation of the digital marketing category. He has built a world-class go-to-market organization and championed customer centricity. I will miss our partnership and wish Matt well in his retirement. Matt has built a deep management bench and I'm confident that this combined organization will thrive under Anil's leadership. Adobe is the market leader in customer experience management, and we have invested in deep product integration, platform innovation, and a robust ecosystem. We're well positioned to execute on the growing total addressable market for customer experience management. At Adobe, we are guided by our belief that it's not only what we do, but how we do it that is core to our success. We believe that everyone deserves respect and equal treatment, and we're outraged at the senseless violence against the black community in the US. This is a painful reminder of the injustice and systematic racism that exists in our country. We can and must do better and we're committed to doing so at Adobe. Great companies are defined by how they lead through adversity. We have successfully navigated several crises and have always used them as a catalyst to make strategic and structural change to emerge stronger. I'm particularly proud of how our employees embrace the current challenges and rally to ensure that innovation, customer centricity, and adherence to our core values remains front and center. Our employees, broad and diverse portfolio of products, strong balance sheet, and rigorous operating cadence put us in a rarefied atmosphere among companies of our size and scale. We will emerge stronger than ever. John?