This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk12: Adobe Q2 FY20 quarterly earnings call. At this time, I will be suspending on a listen-only mode. Later, we will conduct a -and-answer session, and instructions will be given at that time. Today's conference is being recorded. I would like to turn the conference over to our Vice President of Industry Relations, Jonathan Boss. Please go ahead, sir.
spk11: 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 and 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.
spk06: 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 drove 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% -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% -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 Lab. 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 offering 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 of nearly 40% quarter over quarter and the number of documents shared in Acrobat increasing 50% year over
spk09: year.
spk06: 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%
spk09: year over year.
spk06: 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 as 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 experience, 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, Safely, Estella's Pharma, and Allianz. We're dedicated to our customers' success and proud to see the impact our technology is having. Government organizations such as the U.S. 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 the 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, the 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 Chakravarty 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 organization. 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 -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 who are outraged at the senseless violence against the black community in the U.S. 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.
spk08: John? Thanks, Shantanu. In the second quarter of FY20, Adobe achieved record revenue of $3.13 billion, which represents 14% -over-year growth. Gapped eluded earnings per share in Q2 was $2.27, and non-gapped eluded earnings per share was $2.45. Business and financial highlights in Q2 included digital media revenue of $2.23 billion, net new digital media ARR of $443 million, digital experience revenue of $826 million, expanding profitability with strong earnings per share, cash flow from operations of $1.18 billion, and repurchasing approximately 2.6 million shares of our stock during the quarter. Adobe's strong second quarter performance demonstrates our continued top and bottom line growth despite an ongoing global pandemic. We are well positioned to navigate the continuing crisis given our resilient business model and a healthy balance sheet. In the work from home and distance learning environment, our strategy of fueling content creation, digital workflows, and digital transformation is more relevant than ever as digital engagement continues to underpin the global economy. In our digital media segment, we achieved 18% -over-year revenue growth in Q2. On an FX-adjusted basis using rates in effect as of the start of our Q2, digital media revenue grew 19% -over-year. During Q2, we added $443 million of net new digital media ARR, our strongest Q2 on record. Total digital media ARR exiting the quarter was $9.17 billion. Within digital media, we achieved another strong quarter with our creative business. Creative revenue grew 17% -over-year, and we increased creative ARR by $352 million. During the second quarter, we saw increased demand for our solutions on adobe.com amid the work from home environment, and usage of our products spiked notably during the quarter. Q2 creative growth drivers included strong new user growth across all geographies, including single app adoption by individuals. Adoption of our professional video products, including single app premier pro subscriptions, as engagement from communicators and YouTubers increased significantly. Strength in migrating students and trial users to paid subscriptions, significant unit growth for paid mobile subscriptions, and continued focus on targeted campaigns using insights from our data-driven operating model, which drove significant growth in web traffic during the quarter. Adobe Document Cloud delivered another quarter of strong revenue growth. We achieved record Document Cloud revenue of $360 million, which represents 22% -over-year growth. And we added $91 million of net new Document Cloud ARR during the quarter. As with our creative business, Document Cloud benefited from tailwinds associated with knowledge workers and communicators working from home. And we had a particularly strong quarter driving new business for Adobe Sign, with net new ARR more than doubling -over-year. Document Cloud performance during Q2 was driven by strength on aw.com across the individual and SMB segments. Significant growth in consumer adoption of mobile apps and PDF services shortened deal cycles for enterprise, Acrobat, and sign customers as the imperative to translate paper processes to digital accelerates across the globe. Increased pipeline and improved execution of the government segment, particularly for our sign solution, and conversion of free mobile app users and our reader install base to paid subscriptions. Across digital media, consistent with our expectations, we experienced some weakness for the SMB offerings in the reseller channel and adobe.com. Turning to our digital experience segment, our primary focus is to grow software-based subscription revenue across our portfolio of products. Our Adobe Experience Cloud revenue includes subscription revenue, which includes revenues from advertising cloud, professional services revenue, and other, which includes perpetual OEM and support revenue. In Q2, we achieved quarterly digital experience revenue of 826 million, which represents 5% -over-year growth. Digital experience subscription revenue was 707 million, representing 8% -over-year growth. Digital experience subscription revenue excluding advertising cloud revenue grew 18% -over-year. As outlined on our Q1 earnings call, our advertising cloud revenue was negatively impacted, given the COVID-19 situation. As we saw the extent of the global decline in advertising spend, we made a strategic decision mid-quarter to cease pursuing transaction-driven advertising cloud deals. Together, this resulted in a shortfall of approximately 50 million relative to our targeted Q2 revenue. A significant portion of the revenue from the transaction-driven advertising cloud offerings is recognized on the gross basis, with the related cost of media purchase recognized as cost of goods sold, resulting in low gross market percentages for these offerings. While the discontinuation of these offerings will negatively impact revenue, it will enable us to drive improvements to our overall gross margins, DSO, and the profitability of our digital experience segment, as already evident in this quarter's results. We now expect approximately 200 million total advertising cloud revenue for the full fiscal year, with 70 million for the second half, decelerating from the first half of the year. As comparison, we achieved 360 million in advertising cloud revenue in fiscal 2019, and our original 2020 targets assumed that advertising cloud would grow at rates consistent with the overall subscription revenue for digital experience. In Q2, our professional services revenue and digital experience declined approximately 8% year over year. While there were some delays in converting consulting backlogs of revenue early in Q2, we saw progress in implementations as the quarter progressed. Through a challenging quarter, we continued to build pipeline and saw strength in our content and commerce offerings, particularly in the enterprise segment. As a consultant, we saw some momentum late in the quarter in our commercial segments that targets small and medium businesses. Across Adobe, as we navigate the economic downturn, we are managing the business carefully to drive growth and profitability. We reduced discretionary spending and delivered a strong operating margin. Our operating expenses declined sequentially quarter over quarter as a result of a reduction in the pace of hiring, savings across travel and entertainment, and in-person event cancellations. Having completed our strategic review and reprioritization, we will now turn our focus to investing appropriately for continued long-term growth. From a quarter over quarter currency perspective, FX decreased revenue by 18 million. We had 5 million in hedge gains in Q2 FY20 versus 7 million in hedge gains in Q1 FY20. Thus, the net sequential currency decrease to revenue considering hedging gains was 20 million. From a year over year currency perspective, FX decreased revenue by 37 million. The 5 million in hedge gains in Q2 FY20 versus the 9 million in hedge gains in Q2 FY19 resulted in a net year over year currency decrease to revenue considering hedging gains of 41 million. Adobe's effective tax rate in Q2 was minus 10% on a gap basis and 10% on a non-gap basis in line with our Q2 targets. Our trade DSO was 40 days, which compares to 42 days in the year-ago quarter and 41 days last quarter. Remaining performance obligation or RPO grew by 19% year over year to 9.92 billion exiting Q2 and was relatively flat quarter over quarter. Adobe.com cloud offerings typically billed monthly are reported as unbilled backlog, whereas channel offerings billed annually upfront are reported as deferred revenue. The strength in acquisition from Adobe.com during the quarter drove a mixed shift from deferred revenue to unbilled backlog. We exited Q2 with 3.46 billion in deferred revenue. Our ending cash and short-term investment position exiting Q2 was 4.35 billion and cash flow from operations was 1.18 billion in the quarter. Consistent with macroeconomic trends, we saw some increase in customer requests for billing concessions. We continue to be focused on working with our customers to ensure their success while managing our cash flows. In Q2, we repurchased approximately 2.6 million shares at a cost of 850 million. We currently have 3.4 billion remaining over 8 billion repurchase authority granted in May 2018, which goes through 2021. In light of the macroeconomic environment and the strategic shifts for advertising cloud, we are withdrawing the annual fiscal 2020 targets. Our targets factor current macroeconomic conditions, continued impacts of the pandemic, and typical Q3 seasonality across the summer months of June, July, and August. For Q3, we are targeting revenue of approximately 3.15 billion. Digital media segment -over-year revenue growth of approximately 16%. Net new digital media ARR of approximately 340 million. Digital experience segment revenue flat -over-year. Digital experience subscription revenue growing 5% -over-year or 14% when excluding advertising cloud revenue. Tax rate of approximately 10% on a GAAP and non-GAAP basis. Share accounts of approximately 485 million shares. GAAP earnings per share of approximately $1.78 and non-GAAP earnings per share of approximately $2.40. We expect typical seasonal strength in Q4 across our digital media and digital experience business. We expect our operating expenses to increase in line with growth rates in previous years as we continue to invest for growth. In summary, our resilient business model, healthy balance sheet, and data-driven operating model enabled us to successfully navigate this unprecedented macroeconomic environment. We are extremely proud of how our employees have continued to innovate and remain productive. Our long-term opportunity remains robust, and digital technologies will increasingly drive the global economy. I'll now turn the call back over to Jonathan.
spk11: Thanks, John. As we announced last month, we have shifted Adobe MAX, our annual creativity conference, to be an online event this October. Information about the event can be found online at .adobe.com. We plan to host a virtual financial analyst meeting later in the fall. Invitations will be sent to our analyst and investor email list this summer. If you wish to listen to a playback of today's conference call, a webcast archive of the call will be available on Adobe's IR site later today. You can also listen to a phone replay by calling the number shown above. The phone playback service will be available beginning at 5 p.m. Pacific time today and ending at 5 p.m. Pacific time on June 18. We would now be happy to take your questions, and we ask that you limit your questions to one per person. Operator?
spk12: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off until our signal to reach our equipment. Again, press star 1 to ask a question. And we'll take our first question of the day from Brent Ville with Jefferies.
spk15: Good afternoon. Shahnu, for the third quarter of digital experience, you're guiding the flat revenue growth. And I think many are curious given the digital tailwinds, why such a steep headwind on this business? It also is a follow-up if you could just talk to the field changes with max departure and Neil picking up just reassurance around the field and that there won't be any major changes. That would be great. Thank you.
spk06: Sure, Brent. Happy to answer both of the questions. I mean, first, as it relates to digital experience, I think as we said, while we saw a little bit of slowness in interest at the beginning of the quarter, we certainly, as people dealt with the employee issues as well as financial stability, the interest and demand in digital experience absolutely continues to grow stronger. With respect to Matt and Anil's transition, we really don't expect any issue. Matt has been planning for this for a long time. Anil has certainly in his role as CEO at Informatica managed the field. There's a deep bench. Matt is available for a transition. And he's certainly going to remain a friend of the company. And so I would not anticipate any issues whatsoever with respect to the field transition because the next layer is completely in place and has tremendous experience with Adobe. I think as it relates to the revenue expectations for Q3, Brent, I think, you know, maybe I can touch a little bit on what we said with the advertising cloud again just to make sure everybody understands that, which is, you know, the opportunity to take a step back around both digital experience and customer experience management. There's no question that it's larger than prior to this pandemic. And as you know, Brent, we have an unbelievably unique portfolio of products. And so what we did was we said, let's take the opportunity to really prioritize the largest growth vectors as well as look at profitability. Content and commerce had a great quarter. Customer experience orchestration continues to be really important. Analytics and insight is really important. And advertising cloud, as it relates to the solutions that we have for attribution and insight, they add a significant amount of value for our customers. However, again, as we said, given an advertising cloud, they are two separate businesses, the software driven and the transaction different. We did take the opportunity to accelerate our moving away from the lower margin transaction business, something, as you remember, we actually signaled at our analyst meeting last year. And so, you know, when you take out the revenue impact associated with that, you will find that the strength of the business continues. As it relates to bookings, in Q2, we achieved the book of business for subscription bookings was greater than 15%. That in this current climate, I would say, was excellent performance. And so, we continue to feel really positive about the business, but hopefully that gives some color. And the last thing I'll say is even if you think about our Q2, Brent, when we guided to 3.175 billion and we said that we had 50 million in advertising revenue that we decisively decided to stop pursuing, you know, with the numbers that we posted, you could see that we
spk10: had a really good quarter.
spk06: Thank
spk10: you. Next,
spk12: we'll hear from Keith Weiss with Morgan Stanley.
spk15: Excellent. Thank you guys for taking the question and a very nice job on the quarter. Shifting focus to the digital media side of the equation, John, in your comments, you talked about seeing some weakness in the commercial and SMB side of the equation, frankly, with 443 million and the new AR edition doesn't really show through in terms of the numbers. So, it's pretty remarkable that you saw that kind of strength even with the weakness. But Keith, walk us through kind of the push and takes on that. Like, what were the areas that were weaker and sort of what were the areas that had such strong outperformance that you guys were able to, even with that, exceed your, like, 380 target?
spk06: Yeah, maybe I'll start as well, Keith, and then John can certainly add. I mean, overall, clearly, when you think about the creative and the document business, working from home, shelter in place, and the ability to both create and tell their story as well as what's happening with the documents, you're right. I mean, we had guided to about 385 million. It's a record for a Q2 for us in our business. So, it was strong. I think what we were trying to also give color was the different routes to market. And when you think about the routes to market, certainly Adobe.com, the traffic right through the quarter was very strong because, as you know, we have a data-driven operating model. We use the effective marketing tools to continue to drive visitor acquisition across the globe. I think small and medium businesses, we would all say, was probably the most impacted, as you think about a customer segment. And therefore, through the channel, what we were trying to indicate was that that revenue was lower than, you know, we would have normally seen. We fully expect that that business is going to come back as that segment continues to get strong. But document cloud, sign, video, single apps, all did really strong, Keith, as it relates to what happened on Adobe.com. So, you know, it was more a route to market, and there's probably some aspect of folks who typically transacted through the channel, who are also probably coming to Adobe.com as a result.
spk08: Okay. Excellent. Yeah, I wouldn't add anything. I think Sean's going to cover all the points there. Excellent. Thank you very much,
spk00: guys. Okay.
spk12: Next, we'll hear from Jennifer Lowe with UBS.
spk00: Great. Thank you. Actually, I wanted to follow up on Keith's question a little bit, and maybe get a bit more granular, because we certainly heard about, you know, some of the things that worked in your favor this quarter. You put that in contrast of guidance, which would seem to imply things being down sequentially pretty significantly. You know, how, I know these things are hard to parse out, but maybe just looking at the linearity of NetNew AR as you moved through the quarter, was there sort of a, you know, upswing and then sort of slowdown in demand, as you kind of saw a surge as people moved to -in-place and work from home, and that drove a specific level of demand that you don't expect to continue in Q3, because it seems like a lot of these things are durable. So I'm just curious, you know, if you have any way of parsing out what might have been sort of a point in time around shifts in how people work and maybe, you know, consumer demand attached to being at home, relative to things which seem like they should be favorable, durable shifts for the business.
spk10: Yeah, Jennifer, you know,
spk06: again, I think as the -in-place work at home began, when we last spoke to you, it was, I think, 10 days into the quarter, and we said that we had actually seen limited, you know, impact of COVID. And then we did see an increase as it related to the traffic, which actually continued quite high right through the quarter. So we continue to see the strength in that particular business on the acquisition side. It's early, but the first few days of the quarter, again, you know, we continue to see the strength in Q3. I think, as you know and have followed us for a while, Q3 tends to be our seasonally weak quarter. You know, we have such a great insight into the business as it relates to the data-driven operating model. So while the overall against the addressable market is certainly a durable trend, I think we're factoring in normal seasonality. We're not assuming that things will get better as it relates to the small and medium business. But overall, you know, whether it's the document cloud or the creative cloud, you know, we continue to, you know, feel good. I think if there was one thing that we probably overestimated the impact of COVID as it related to the consumer space, and now I think a number of you are like, wow, that was great outperformance, you know, and we, if you look at our Q3 numbers as well, it will clearly demonstrate continued momentum
spk10: in that business.
spk00: Thank
spk10: you. Saquette Callia with Barclays Capital has our next question.
spk13: Okay, great. Thanks, guys, here for taking my questions and the whole ball as well. Shantanu, maybe for you, can you just talk about the bigger picture with the decision on advertising cloud? You know, it seems like the margin benefit of slightly lower focus in the transactional part of the ad cloud kind of has an interesting byproduct with the margin. And so perhaps the bigger question is, do you feel the team is perhaps going to balance profitability a little bit more with growth in the DX business than it has in the past?
spk06: Well, first, Saquette, unlike other companies in the enterprise space, we've never pursued revenue, you know, that is not good profitable revenue, which I know other companies do. And so I would say what we did really well in the quarter was say, how do we take a step back, understand strategically what are the really long-term growth opportunities, and how is the business going to get transformed as a result of what we saw? In that particular context, when every company on the planet, whether it's a small and medium or large business is saying, how do I engage digitally with customers, it's clear that the content and commerce associated with our offerings, what we can do around customer journey orchestration and the core analytics and insight is really where all of these built on experience platform is where we are unparalleled in terms of the unique differentiation. On the advertising side, there really were two businesses, and this is something that we have talked about, which is there's a software-driven business that shows how attribution works that really can benefit from the Adobe analytics insight in terms of making sure you're spending that money well. And so that we will continue to offer, but we doubt that that's going to be a huge growth opportunity. It was the transaction business, which is very resource intensive, and, you know, that one we had always signaled that we were going to be reducing that business, but we certainly used the pandemic as a catalyst to say, let's make a change right now so we can double down our resources on what really represent durable long-term opportunities. So hopefully that gives you a little bit of color on strategically, you know, why waste the prices in terms of making the changes that you know you can make to
spk10: be a stronger company.
spk14: Very helpful.
spk10: Thanks. Our next question will come
spk12: from Brad Zelnick with Credit Suisse.
spk15: Great. Thank you so much, and congrats to you all on a great quarter. My question is for John. John, in your prepared remarks, you stated that coming away from the strategic review, we will now turn our focus to investing appropriately for continued long-term growth. Can you expand on what exactly you mean by that, and how is that any different than what Adobe has always done?
spk08: Yeah, that's a fair question, Brad. I think when we look at Q2 because of the pandemic, we obviously benefited in earnings and our margin related to expenses that, you know, basically slowed down because we couldn't hire the way we typically hire. We couldn't travel the way we wanted to travel, and certainly the cancellation of the in-person events. You know, we certainly are a growth-oriented company, so the point really was to say, hey, we're going to invest in growth going forward. We've got these great opportunities in front of us that are constantly laid out. And so the operating margin that we achieved in Q2 is one that I would pencil in as a trend line. It's really what I was trying to get to. And we have great opportunities to invest for growth, and you know, as we've proven, as we continue to grow revenue, we continue to grow profitability and whatnot.
spk06: And Brad, maybe just to add a little bit to what John added. I mean, we actually took very decisive action at the beginning of the quarter because we did not know how widespread, how long the pandemic would be to make sure that we controlled our expenses. When you look at the opportunities that we have on the document cloud, when you look at the opportunities that we have with experience platform, the ability to continue on variable marketing to make sure that we're acquiring the right customers that will deliver the right long-term value. I think that's really important for us to continue to make sure that we're opening up the company back to the long-term opportunities that we have because we're going to be in an even more unique place than the smaller companies. So to your point earlier, Brad, it is something that we always do. I think John was also referring to the early actions that we took and saying, hey, we understand our business, and so it's time to really focus on the long-term opportunities that will continue to drive both top and bottom
spk10: line growth. Thanks again. Thanks again. We now hear from Mark Mordler with
spk12: Bernstein Research.
spk03: Thank you very much for taking my question. And again, congrats on the quarter, given all the moving parts. It's a tough thing to work your way through. Document cloud and sign were really strong this quarter. As you mentioned, COVID-19 was a tailwind. Can you give us some color about how you think about those tailwinds going forward? Do they abate as people start to move back? Do they continue as they move back? Any color would be much appreciated. And then as a quick follow-up, can you give any color on how much of revenue now came through adobe.com versus traditionally? Thank you.
spk06: Yeah, Mark, I think this is similar to the question that Jennifer asked, which is nobody's going to go back to business as usual. I mean, if you take Adobe as a company and how we also think about reentry, I think the new normal is going to be people working in remote locations, engaging more digitally, making sure that digitization continues to be a really important phenomenon. So I think as it relates to the document, as you know, Mark, we've been excited about it. We always talked about the move from perpetual to subscriptions. We had talked about PDF services on the web. And as we said, that's all substantial growth, making sure PDF API functionality is available for anybody who wants a document as part of any system that they are trying to accomplish. And so, you know, we don't think that abates. We think that these will just continue to be secular tailwind trends that we will benefit from. And I think that, again, going back maybe to Brad's question, is the reason why we feel optimistic, given everything that we've seen, to make sure that we continue to capitalize on those particular opportunities. And so, you know, the document business has always been a growth. It just accelerated, and we think that that's a trend
spk10: that will be durable. Beautiful. Next, we'll hear from Kurt Matern with Evercore ISI.
spk01: Thanks very much. Actually, I wanted to stay on the same topic in terms of the document cloud. So, Shantanu, given that this might be the new normal and maybe demand's getting pulled forward, are you applying more resources to that area from a sales capacity perspective, either verticalizing even further? You know, what are you doing, I guess, to capture maybe what is the pull forward? And it turns out people are thinking about the digitization of documents. And then, John, just on a related topic, you know, bookings in document ARR, document cloud ARR, have been up 30%, I think, the last two quarters. You know, it seems to be an upward bias, perhaps, on revenue in that segment. Is that a fair assumption going forward? Thanks.
spk06: Kurt, your first question's a good one. And, again, going back to what we were able to do during this, we have made it so that, you know, the offerings that we have that combine the strength of what we are doing on Adobe Sign with the strength that we have on content in the digital experience business and what we were delivering with forms, whether that was for the public sector, we have our entire field organization now out there evangelizing what we can do on the document side. So, that gives you one example of a significant shift as it relates to making sure that we have our entire organization aligned around the go-to market. I think, in terms of partnerships and partnerships that we've done on the document side and sign and the API functionality, we'd always talk about the opportunity that we have with Microsoft and the integration. We also announced a really strategic partnership with ServiceNow. If you think what ServiceNow is able to do, which is really change how workflows happen in an enterprise, every single one of those workflows then needs the statement of record as it relates to a PDF that then, you know, makes that tangible. So, again, that one we've been able to do. So, really great question, and that's one of the ways in which we are able to pivot like a nimble small company rather than and use our brand rather than wait. And so, that's an example of the entire DX field organization also now has an offering associated with time that they can take into every one of our customers.
spk08: And I think in terms of the bias towards document cloud writing growth versus creative, you know, both are just huge opportunities, and we continue to see growth opportunities coming for both. Certainly, obviously, the pandemic kind of maybe accentuated the move to, you know, digital document workflows and signatures. But as we talked about, you know, we see some of these smaller businesses come back, we certainly expect them to come back in the creative side as well. Because content creation is not going away. It's imperative, you know, going forward for these businesses. So, I think we just are excited about the opportunity in both of those files and all the solutions
spk10: associated with them. Thank you. Jay Fleishauer with Griffin Securities has our next question.
spk04: Thank you. Good evening. Champil and John, does the strategic mix shift in DX improve the feasibility of your getting back to a 65% or better gross margin in DX, which is where you were before the two mogul acquisition? And perhaps as part of your overall strategy, you could also talk about the role of increasing self-serve, which we talked about on prior calls. Additionally, at Summit, Adobe had some very interesting things to say about some new initiatives and technologies, such as scalable content, optimized personalization, the base of commerce, which is a really interesting one. And then, of course, applications and intelligence services. So, maybe talk about the latter in terms of how you're thinking about resources for those and incremental business opportunity from those.
spk06: As always, Jay, that was three questions, you know, mirror than one. But I appreciate all of them. I think as it relates to the COGS, I think, and the gross margin, you've actually seen that improve even as you look at the, you know, data sheets that you have for Q2. So, I think it's something like 35 million or something, you know, on quarter over quarter. So, I think you see the improvement in the COGS. You know, when we're constantly looking at our COGS, and we want to make sure we improve. I think your question around Summit and the excitement that we have around all the things that we announce is another reason why when you have that differentiated solution, that's really where I think, you know, our value add to a customer is so much higher. And there's a lot of interest. There's a lot of interest as people look at it and say, all of this data that they're now drowning in, how can they use Adobe's intelligent services so that it automatically personalizes whatever is required for a user across multiple channels. So, you're right. I mean, Summit for us was very interesting in that, you know, we were able to transact with a lot more folks. We got a lot more awareness out. We were able to, you know, actually advance what we would do with Summits that were globally rolled out. I would say probably a little less mature pipeline, and that's one thing that you missed, the ability to move that forward. But all of that now, you know, we expect that trend as we move into the second half in 2021 because that is going to be top of mind. So, that's a little bit of how we're looking at
spk10: it.
spk04: Thank
spk10: you. We're now here from Cash Rangan with Bank of America.
spk05: Yes, thank you very much. First off, I want to just congratulate my friend Brent Phil on his 25 years of being a software analyst, something in case you did not know. That's my value add for you today. But my question for you, Shantanu, as far as Adobe, what were the lessons learned by Adobe in this quarter operating virtually as a company? And what are the windows or snippets of insight you could offer to us that go to market or product development, partnership, marketing, the things that you were able to accomplish virtually, and as a result, how much of this is here to stay as you look into 2021 beyond and the kind of savings, costs, expenses, whatever it is, the revenue opportunities, how should we train Adobe post pandemic?
spk06: Yes, Cash, I mean, you know, it's something that we are all focused on a lot as a company. I mean, first, I will reiterate the fact that overnight as a company, 20,000 employees all around the world were productive. I mean, in my internal note to the company as part of this earnings, I said, I was just blown away. We had our first ever virtual close, you know, the IT organization in terms of how they've made sure that we're all productive through video conferences. And I would actually say when you look at existing projects, most people would say that their productivity is actually greater than 100% because, you know, they're saving on travel, they're saving on the ability to, you know, be very productive without too many meetings. And so I think as it relates to the new normal on the product engineering side, you know, it's been phenomenally successful. I think we need a little bit more focus on what happens with respect to creating new projects. So that's, you know, one of the, you know, the brainstorming that happens as it relates to the virtual, you know, whiteboarding. So that's something that we will continue to focus on. On the dealing with customers, which was the other part. So internally, we feel very good. On the dealing with customers, I think, you know, that went through a little bit of a slow phase as customers were first thinking about their internals. But frankly, right now, I mean, sometimes you feel like you've conquered time and space because you can have meetings with people across four continents on the same day. It makes for a long day cash, but it actually feels really good that we're now engaging with customers. So, you know, we just feel that our ability to attract talent also, wherever they might live, that's going to improve. And so net-net, I would say for a company like Adobe, internally our productivity is overall higher. But even more important, I think it serves as such an inflection point because every single company is now going to say, hey, I need to go talk to Adobe, whether it's about creative, whether it's about documents, or whether it's about digital experience. So I think the macro tailwind is probably going to be the longer lasting benefit to a company like Adobe. And certainly, Brent, congratulations on 25 years. I mean, the two of you have been great, you know, sort of followers of the company
spk10: and very insightful. So congratulations. Well, now I hear from Keith Bachman with Bank of Montreal.
spk02: Hi, thank you very much. Chantanu, I want to direct this to you. In the past, you've talked about the growth of creative being both people or units, as well as price mix, and suggested that the growth of users has been a greater contributor to the net growth rates of creative. And I just wanted to see, given the pandemic over the next few quarters, is that still true, and how are you thinking about potential price increases when you normally introduced new products with the creative suite? And then also just wanted to sneak in, wanted to see if you could give us an update on Magento and traction and integration and any kind of anecdotes on the run rates associated with that property. Thanks very much.
spk06: Yeah, I think on your first question, you know, there's no question that the creative market and everybody who has a story to tell is only getting larger. I mean, as we said, we were proud of 30 million provisioned seats also for education, which is going to be, I think, a great base for us to build on. And I wouldn't say it is one segment or the other. I think really, Keith, it's all of the different segments. Mobile did very well. We have different price points. We have SPAR for communicators. And again, our vision is very clear. It's the one-stop shop for everything from inspiration to monetization. So expect us to continue to see more offerings, more price points, and using our D-DOM, frankly, to both acquire them as well as to make sure that we serve them appropriately. I'm glad you asked the question on commerce. You know, commerce usage has certainly gone up very dramatically in terms of, you know, how we've seen it, the enterprise adoption of our commerce solutions was very strong in the quarter. I think it's important for all of you to also remember that the way we do that is it's typically license-based with a band of how many transactions. So it's really not about, you know, the transaction doesn't immediately result in revenue. But whether it's a true op or whether it's an increased band that they will have to go to. So new customer acquisition was good in that. Usage has certainly gone up. You know, it's almost like you're having Black Friday or Cyber Mondays every day. But we'll continue to hopefully see that as we talk about renewals, how they get into higher bands.
spk11: Operator, we're coming up on the top of the hour. We'll take one more question,
spk12: please. Our final question will come from Alex Zucan with RBC Capital Markets.
spk14: Hey, Shantu, thank you guys for squeezing me in and congrats to Brent for 25 years. I guess maybe, Shantu, can you talk a little bit about, you know, as you look at the linearity of the quarter, particularly for the digital experience business, kind of, you know, taking out the advertising cloud piece. Where are we in terms of sales cycle normalization in your mind? And then, you know, maybe as just a quick follow up on the margins, given the new positive tailwind to gross margin from some of these initiatives, is it fair to say that, you know, the new operating margin profile should be somewhere between the 1Q and 2Q levels?
spk06: John, certainly you can add on the margin. I think Alex has a relate to, you know, the linearity during the quarter. I think the month of March, you know, and this is probably true for most of the businesses, that was where the real impact was felt. And then, April actually became worse. I think as we got into May, you know, people started to engage a lot more. We saw signs of improvement. I think John touched on that as well. And so, I think that's the way I would highlight it for a month, month and a half. You know, everybody knew digital was an imperative, but they had other fires that they were fighting. And then, as it related to March, I mean May, sorry, you know, it all started to open up and we're having far more conversations with customers. So, hopefully that gives you some feeling about linearity, which is why we're optimistic about moving forward as we have that pipeline, how we will deal with. And the operating margin will be between the Q1 and Q2 levels. If you think about it, you're not going to see any big change dramatically. But as John said, I think we continue to invest it. And I realize we ran a little bit long with the prepared remarks. And so, you know, we may not be able to get all of the questions. But let me again say, I'm really proud. I'm proud of what the company was able to accomplish in Q2. And I'm even more excited about what the future growth opportunities are for Adobe. Because there's no question that digital is going to be even more of a driver of the economy. It's going to amplify the urgency for individuals to be creative and collaborative. It's going to improve the urgency for enterprises to engage digitally. And when you think about, you know, the portfolio of products that we have, learning is no longer, you know, learning to be creative will no longer be a luxury. Dealing with electronic documents is going to be the way business is transacted. The PDF platform and ecosystem is thriving. And on the DX side, engaging digitally with customers is going to be mission critical, irrespective of the size of the business. And so, you know, we're proud of our unique business model, growth the priority for us. But we will always focus as we have with great cash flow and high profitability. I'm proud again, as I said, that we use this crisis to further refine our strategy and align the organization on what truly matters, which is sustained innovation and delighting our customers. Please stay safe, stay healthy, and thank you very much for joining us today. This concludes
spk11: our call.
spk06: Thanks, everyone.
Disclaimer