Adobe Inc. (ADBE) Earnings Call Transcript & Summary

Good afternoon, and thanks for being with us. Joining me today from their home offices are Adobe's President and CEO, Shantanu Narayen, along with John Murphy, our Executive Vice President and CFO, and Mike Saviage, who announced back in March that he is retiring from his role as Adobe's Head of Investor Relations and remains on hand to help with the transition. During this call, we'll go over Adobe's financial results for the second quarter of fiscal year 2020. The press release should be in your hands by now; it went out over the wire roughly one hour ago. PDFs of our prepared remarks, plus a refreshed data sheet, are also up on Adobe's investor relations website. Before we begin, we'd like to stress that certain information we cover today, including our financial targets and product plans, reflects what we know as of today, June 11th, and includes forward-looking statements subject to risk, uncertainty, and assumptions. Actual results could differ materially from what those statements set forth. To learn about these risks and uncertainties, please look at the forward-looking statements disclosure in the press release we issued today, along with Adobe's SEC filing. Today we'll be covering both GAAP and non-GAAP financial measures. You can find reconciliations between the two in our earnings release and on Adobe's investor relations website. Anyone participating on this call should know that the audio is being webcast live and recorded for playback. An archive of that webcast will stay up on Adobe's investor relations website for roughly 45 days. Neither the call audio nor the webcast may be re-recorded, reproduced, or distributed in any other way without Adobe's prior written permission. I'll hand things over now to Shantanu.

Thanks, Jonathan. Good afternoon, everyone, and I hope you and your loved ones are staying safe and well. Adobe's second quarter lined up with what we believe may have been the worst point of the COVID-19 pandemic. Everywhere, individuals turned their thoughts toward health and family. Companies concentrated on safeguarding their staff, keeping their finances steady, and finding ways to keep serving buyers. Sadly, job losses have reached millions, and smaller and mid-sized firms have suffered especially badly. Throughout this difficult period, Adobe continues to prioritize the well-being and safety of our employees, meeting the needs of our customers, and maintaining uninterrupted operations. We acted quickly and firmly, instructing our teams to work from their homes, halting all travel, and calling off in-person gatherings through 2020 in order to flatten the curve. To give back to the communities where we live and work, we've given more than $5 million along with 22,000 hours of virtual volunteering to organizations providing COVID-19 relief. We also take pride in being part of the coalition behind the COVID-19 testing data response platform, which delivers test screening, appointments, and insights to public health officials and government. Immediately, we established teams focused on curbing optional expenses and evaluating where our strategic bets lie, so that we could pour more resources into those likely to drive the greatest long-term growth and profitability. Throughout this period, the adaptability and strength our staff has demonstrated has genuinely amazed me. I take pride in how our team members have responded to these changed circumstances. Adobe is the digital experiences company, and millions of customers around the globe rely on what we make every day to generate content for the world, streamline critical document processes, and engage their own customers through digital channels. Our results are driven by Adobe's leadership position in three sizable and growing sectors: Creative Cloud, Document Cloud, and Experience Cloud. Adobe achieved strong Q2 performance throughout Adobe Creative Cloud, Adobe Document Cloud and Adobe Experience Cloud. We brought in $3.13 billion in revenue during Q2, which equals 14% growth year-over-year. GAAP earnings per share for the quarter came to $2.27, while non-GAAP earnings per share reached $2.45. Within our digital media business, we generated robust revenue growth in both Creative Cloud and Document Cloud during Q2. Net new digital media annualized recurring revenue, or ARR, totaled $443 million, and total digital media ARR at the close of Q2 climbed to $9.17 billion. Q2 creative revenue reached $1.87 billion, reflecting 17% growth year-over-year. Net new Creative Cloud ARR came in at $352 million. Over the past two months, it's become clear that in uncertain times, individuals turn to creative outlets to gain skills, manage challenges, and contribute positively. At the center of this renewed creative wave is Adobe Creative Cloud, empowering creativity universally and letting countless individuals across the globe tell their tales. As schools faced shutdowns of their buildings and moved to remote formats, we focused on assisting them in creating from their residences. We quickly provided Creative Cloud to 30 million students learning from home and offered teachers assistance for remote instruction. In Q2, we saw record-breaking levels of traffic on adobe.com for both Creative Cloud and Document Cloud. Our professional video offerings saw especially robust demand, with Adobe Premiere Pro and After Effects drawing strong engagement. Steady growth continues from social content creators who use Premiere Rush. Monthly active users rose 75% quarter-over-quarter. Acceleration continues across mobile traffic, member sign-ups, and monetization. Downloads of Adobe Fresco have grown more than 40% since the beginning of 2020. Photoshop Express now exceeds 20 million monthly active users. Later this month, our teams are preparing a major Creative Cloud update, one that features exciting new product innovation plus new capabilities built to facilitate collaboration among creators — something particularly important in this environment. We're thrilled to announce this week that Photoshop Camera is now broadly released for both iOS and Android, delivering Photoshop's enchantment right at the moment you snap a photo. This app is a delightful, user-friendly tool for consumers, designed for social content creators—a group that matters more and more to Adobe. Here at Adobe, our belief is that creativity lives in everyone, so we must build offerings that fit varying levels of expertise. Adobe Spark, available through the web and as a mobile application, serves the vast audience of communicators who require tools to produce social graphics, web pages, and short videos for their work, education, or local groups. After conducting a strategic assessment of our creative division, we've made the call to increase funding in a pair of promising opportunities: delivering novel offerings that serve the unmet requirements of the communicator group, and making certain the web browser functions as a top-tier platform for authoring. We take pride in the part we play in motivating the worldwide creative community. Our Honor Heroes initiative rallied our community to produce artwork paying tribute to essential workers on the front lines; we developed a digital coloring book compatible with Adobe Fresco and kicked off a creative campaign alongside musician Marshmello, inviting fans to make a video for his newest single, "Be Kind". Document Cloud revenue reached a record $360 million in Q2, and we increased Document Cloud ARR to $1.24 billion. Through Adobe Document Cloud, we're speeding up how documents get produced, letting our users connect, complete transactions, and work together without friction while working remotely. Just as we did for Creative Cloud, we rolled out a number of initiatives aimed at helping our customers, among them offering our web-based PDF services on adobe.com at no charge and launching a government rapid response program that gives local governments longer trial access to Adobe Document Cloud. Demand for digital documents has climbed sharply as work has moved remote — usage of web-based PDF services is up almost 40% compared with the prior quarter, while the count of documents shared within Acrobat has grown 50% versus a year ago. Adoption of Adobe Sign, our cloud-based e-signature offering, keeps accelerating — usage is up 175% since the fiscal year began. On mobile, things really took off: Acrobat Reader installs rose 43% compared with a year earlier, while Adobe Scan installs climbed 66% year-over-year. It's gratifying to see our technology help government customers speed up their shift to digital. When Seattle had to pivot quickly to telework, the city's digital workplace group brought Adobe Sign to every one of its departments. Meanwhile, in Utah, Acrobat and Sign sit at the heart of the state government's telework program, supporting emergency response and making statewide communication run more smoothly. Through the strategic review of our document business, we are putting more investment into Adobe Sign, into our PDF services available on the web, and into making PDF functionality accessible via APIs, so we can seize the opportunity created by the sweeping move toward remote work and document processes that put digital first. Within our Digital Experience Business, Experience Cloud revenue came to $826 million for the quarter. During our previous earnings call, we explained that we expected delays in enterprise bookings and in consulting services implementations, since companies were giving priority to the well-being of employees and their finances. Bookings also took a hit from the severe economic difficulties enterprise customers faced in some verticals, along with softness in our commercial segment, which serves small and medium-sized businesses. Our Advertising Cloud revenue was affected by the substantial worldwide drop in advertising spending. Even with these near-term obstacles, the push to digitally transform has grown more urgent. Adobe's leadership in customer experience management continues to be recognized by enterprises. Notable customer wins during the quarter were IBM, Walgreens, Safeway, Astellas Pharma, and Allianz.

Our focus is on helping customers win, and it's rewarding to witness what our technology is accomplishing. Agencies like the U.S. Census Bureau depend on Adobe Experience Cloud to update how citizens interact with them. 3M and Verizon are gaining from Adobe Experience Platform; altogether, we now have more than 10 billion active customer profiles operating on Adobe Experience Platform. In the Gartner Magic Quadrant for multichannel marketing hubs, Adobe Experience Cloud was recognized as a leader with the top placement out of 19 vendors, and Forrester also named us a leader in the B2B and B2C Commerce Suites Wave reports. We made the move successfully to an all-digital Adobe Summit, where we introduced fresh Adobe Experience Cloud innovation, such as intelligence services, Customer Journey Analytics, and the customer experience management playbook. Through the Adobe Summit live virtual experience, we reached a much bigger audience than a physical event would allow and established the standard for virtual events. All told, we've connected with over 0.5 million visitors. Even though it was hard to picture doing business solely with CMOs and CIOs remotely, one silver lining of everyone being at home is that we can arrange and connect with many more customers spanning multiple continents. In every one of these conversations with business leaders, it's obvious that spending on digital — and particularly customer experience — matters more than it ever has. Following the strategic review of our Digital Experience Business, it's evident that we hold an unmatched value proposition and market-leading solutions spanning content and commerce, customer journey management, and customer data and insights, all driven by Adobe Experience Platform. To extend our advantage, we're boosting our investment in AI and machine learning, next generation applications and services built on Adobe Experience Platform, and faster integration of our content and commerce offerings. Our present Advertising Cloud offerings are made up of Advertising Cloud software solutions plus Advertising Cloud transaction-driven solutions. We'll keep providing our Advertising Cloud software solutions to our digital experience customers, though this won't be a growth area going forward. CMOs are looking for one source for reporting and attribution of their advertising spend, something we can offer in a way no one else can by combining Advertising Cloud with the Adobe Experience Cloud. We've chosen to speed up the strategy we previously outlined of phasing out the low-margin Advertising Cloud transaction-driven offerings. Those offerings are no longer central to our broader value proposition of delivering customer experience management, and they don't add to our subscription-based bookings and revenue — in fact, they demand an enormous amount of resources. The effect of this strategic change showed up in our Q2 revenue, cost of goods sold, and gross margin results, and it will be incorporated into future digital experience targets. Earlier this year, we brought on Anil Chakravarthy to pursue the enormous enterprise opportunity. During the past few months, Anil has kept broadening his charter to include responsibility for strategy, product engineering and marketing, consulting, and customer success for the Digital Experience Business. Alongside the retirement Matt Thompson had long been planning — he serves as Adobe's Executive Vice President of Worldwide Field Operations — Anil is going to take on responsibility for the whole worldwide enterprise field organization. Across the last 13 years, Matt was central to the company's shift toward a subscription software model within the Digital Media Business, and also to the birth of the digital marketing category. A world-class go-to-market organization is what he built, and customer centricity was something he championed. Our partnership is something I'll miss, and I wish Matt well as he retires. A deep management bench is among Matt's achievements, and under Anil's leadership I have confidence this combined organization will thrive. In customer experience management, Adobe leads the market, and our investments have gone into deep product integration, platform innovation, and a robust ecosystem; when it comes to the growing total addressable market for customer experience management, we're well-positioned to execute. Our guiding belief at Adobe is that success depends not only on what we do but on how we do it. Respect and equal treatment are what everyone deserves, in our view, and the senseless violence against the Black community in the U.S. outrages us; this painful reminder shows the injustice and systematic racism present in our country; doing better is both possible and necessary, and at Adobe we're committed to it. How a company leads through adversity is what defines great companies; several crises have been navigated successfully by us, and we've always treated them as a catalyst for strategic and structural change so we emerge stronger. I take particular pride in the way our employees embrace the current challenges and rally to ensure that innovation, customer centricity, and adherence to our core values stay front and center. A broad and diverse portfolio of products among our employees, a strong balance sheet, and a rigorous operating cadence place us in a rarefied atmosphere among companies of our size and scale — 0.5 million is the figure I'd point to there. Stronger than ever is where we will emerge. John?

Appreciate that, Shantanu. During FY 2020's second quarter, Adobe brought in all-time-high revenue of $3.13 billion, marking 14% growth compared with the same period a year earlier. On a GAAP basis, diluted earnings per share for Q2 came to $2.27, while the non-GAAP figure for diluted earnings per share stood at $2.45. Among the business and financial highlights for Q2: Digital Media revenue reached $2.23 billion, net new Digital Media ARR hit $443 million, Digital Experience revenue totaled $826 million, profitability expanded alongside robust earnings per share, cash flow generated by operations amounted to $1.18 billion, and we bought back roughly 2.6 million shares of our stock over the quarter. These solid second-quarter results from Adobe show that both our top line and bottom line kept growing even with a global pandemic still underway. Thanks to a resilient business model and a healthy balance sheet, we're positioned well to steer through this ongoing crisis; with so many people working from home and learning at a distance, our approach of powering content creation, digital workflows, and digital transformation matters more than it ever has, since digital engagement keeps driving the worldwide economy. In our Digital Media segment, Q2 revenue rose 18% compared with the prior year. Using exchange rates that were in effect when our Q2 began, and adjusting for currency effects, Digital Media revenue was up 19% year-over-year. Over the course of Q2, net new Digital Media ARR came to $443 million — our best Q2 ever recorded. Digital Media ARR in total stood at $9.17 billion as we left the quarter. Inside Digital Media, our Creative business turned in yet another robust quarter. Creative revenue climbed 17% versus a year ago, and Creative ARR rose by $352 million. Throughout the second quarter, demand picked up for our solutions on adobe.com as people worked from home, and product usage among our customers jumped noticeably during that period. Creative growth drivers in Q2 included robust new user gains across every geography, among them single app adoption by individuals. Take-up of our professional video offerings, including single-app Premiere Pro subscriptions, as engagement from communicators and YouTubers rose substantially. Momentum in converting students and trial users into paid subscriptions. Considerable unit growth in paid mobile subscriptions. An ongoing emphasis on targeted campaigns drawing on insights from our Data-Driven Operating Model, which fueled substantial growth in web traffic over the quarter. Adobe Document Cloud posted yet another quarter of solid revenue growth. Document Cloud revenue hit a record $360 million, reflecting 22% growth year-over-year, and net new Document Cloud ARR added during the quarter was $91 million. Just like our creative business, Document Cloud gained from tailwinds tied to knowledge workers and communicators doing their jobs from home. We enjoyed an especially strong quarter generating new business for Adobe Sign, with net new ARR greater than doubling compared with a year earlier. Document Cloud's Q2 results got a lift from several areas: strong performance on adobe.com in both the individual and SMB segments; meaningful gains in consumer uptake of mobile apps and PDF services; faster deal cycles for Enterprise, Acrobat, and Sign customers as the push to move paper-based processes into digital keeps accelerating worldwide; a bigger pipeline and better execution in the government segment, especially for our Sign solution; and free mobile app users plus our reader install base converting to paid subscriptions. Within digital media, as we had anticipated, we did see some softness in the SMB offerings sold through the reseller channel at adobe.com. Now for our Digital Experience segment, the main objective is expanding software-based subscription revenue throughout our product portfolio. Revenue for Adobe Experience Cloud consists of subscription revenue, which covers Advertising Cloud, professional services revenue, and other items, which include perpetual OEM and support revenue. During Q2, Digital Experience revenue came in at $826 million for the quarter, up 5% year-over-year. Subscription revenue for Digital Experience reached $707 million, a rise of 8% year-over-year. If you exclude Advertising Cloud revenue, Digital Experience subscription revenue climbed 18% year-over-year. As we explained during our Q1 earnings call, COVID-19 dealt a negative blow to our Advertising Cloud revenue. Once we grasped how far global advertising spend had fallen, we made a strategic call midway through the quarter to stop chasing transaction-driven Advertising Cloud deals. All of that combined to leave us roughly $50 million short of the Q2 revenue target we had set. A large share of revenue from the transaction-driven Advertising Cloud offerings gets recognized on a gross basis, with the associated cost of goods sold recorded as cost of goods sold, which produces low gross margin percentages for those offerings. Although winding these offerings down will hurt revenue, it will let us improve our overall gross margins, DSO, and the profitability of our Digital Experience segment, something already visible in this quarter's results. We now anticipate total Advertising Cloud revenue of approximately $200 million for the full fiscal year, with $70 million coming in the second half, a deceleration from the first half of the year. For comparison, Advertising Cloud revenue in fiscal 2019 came to $360 million, and our original 2020 targets had assumed Advertising Cloud would grow at rates in line with overall subscription revenue for digital experience; during Q2, our professional services revenue and digital experience fell roughly 8% year-over-year. Although some delays occurred early in Q2 in converting consulting backlog into revenue, we made progress on implementations as the quarter went on. Throughout a difficult quarter, we kept building pipeline and saw strength in our content and commerce offerings, particularly in the enterprise segment. Just as with consulting, we saw some momentum late in the quarter in our commercial segments, which target small and medium businesses. Across all of Adobe, as we steer through the economic downturn, we are running the business prudently to generate growth and profitability. We cut back on discretionary spending and posted a strong operating margin. Operating costs came down on a sequential basis from one quarter to the next, driven by slower hiring, lower travel and entertainment spend, and the cancellation of in-person events. Now that the strategic review and reprioritization are behind us, our attention shifts to making the right investments to support long-term growth. Looking at currency on a quarter-over-quarter basis, FX cut revenue by $18 million. Hedge gains totaled $5 million in Q2 FY 2020, compared with $7 million of hedge gains in Q1 FY 2020. So the net sequential currency hit to revenue, once hedging gains are factored in, came to $20 million. On a year-over-year currency basis, FX reduced revenue by $37 million. The $5 million of hedge gains in Q2 FY 2020 against $9 million of hedge gains in Q2 FY 2019 produced a net year-over-year currency reduction to revenue, including hedging gains, of $41 million. Adobe's effective tax rate for Q2 came in at -10% on a GAAP basis and 10% on a non-GAAP basis, right in line with what we targeted for Q2. Trade DSO stood at 40 days, versus 42 days in the same quarter a year earlier and 41 days in the prior quarter. Remaining performance obligation, or RPO, rose 19% year-over-year, reaching $9.92 billion as we exited Q2, and was roughly flat quarter-over-quarter. Cloud offerings on adobe.com that are typically billed monthly show up as unbilled backlog, while channel offerings billed annually upfront show up as deferred revenue. Strong acquisition activity from adobe.com this quarter pushed a mix shift away from deferred revenue and toward unbilled backlog. We closed Q2 with $3.46 billion of deferred revenue. Our cash and short-term investment balance at the end of Q2 was $4.35 billion, and cash flow from operations for the quarter was $1.18 billion. In keeping with macroeconomic conditions, we did see a bit more customer demand for billing concessions. We remain focused on partnering with our customers to ensure their success while also managing our cash flows. During Q2, we bought back roughly 2.6 million shares for $850 million. Of the $8 billion repurchase authority granted in May 2018, which runs through 2021, we still have $3.4 billion left. Given the macroeconomic backdrop and the strategic shifts in Advertising Cloud, we are withdrawing our annual fiscal 2020 targets. Our targets take into account current macroeconomic conditions, the ongoing effects of the pandemic, and the usual Q3 seasonality across the summer months of June, July, and August. For Q3, we are targeting revenue of about $3.15 billion, year-over-year revenue growth for the Digital Media segment of roughly 16%, net new Digital Media ARR of about $340 million, Digital Experience segment revenue that is flat year-over-year, Digital Experience subscription revenue up 5% year-over-year, or 14% excluding Advertising Cloud revenue. Tax rate of roughly 10% on both a GAAP and non-GAAP basis, share count of about 485 million shares, GAAP earnings per share of approximately $1.78, and non-GAAP earnings per share of approximately $2.40. For our Digital Media and Digital Experience segments, we anticipate the usual seasonal uptick in Q4; as we keep putting money into growth, we look for operating expenses to rise at rates similar to those seen in prior years. To wrap up, the strength of our business model, a solid balance sheet, and our Data-Driven Operating Model let us steer through this extraordinary macroeconomic climate effectively. We take great pride in our staff's ongoing ability to create new things and stay productive. With digital technologies set to power more and more of the world economy, the opportunity ahead of us over the long term is still substantial. At this point, I'll hand things back to Jonathan.

Thank you, John. Last month, we shared that Adobe MAX, the creativity conference we hold each year, is moving to a virtual format for this October. Details on that event are available at max.adobe.com; later in the fall, we intend to hold a virtual meeting for financial analysts. This summer, invitations will go out through our analyst and investor email list. Should you want to hear a replay of the conference call happening today, an archived webcast will be posted on Adobe's IR site later today. A phone replay is also available if you dial the number listed above. That phone playback option will open at 5:00 P.M. Pacific Time today and will close at 5:00 P.M. Pacific Time on June 18th. At this point, we're glad to take your questions, and we ask that each person limit themselves to one question. Operator?

Hello there. Shantanu, when it comes to Digital Experience in quarter three, your guidance points to revenue staying level. A lot of people find that unexpected, I think, considering the momentum behind digital. What's causing such a strong drag on that segment? And then, secondly, could you address the shifts in the field organization now that Matt has left and Anil is stepping in — just some comfort regarding the field and confirmation that nothing substantial will change. That would be wonderful. Thanks.

Absolutely, Brent. Glad to take on both of those. To start with Digital Experience: as we mentioned, there was some softness in interest early in the quarter, but once people worked through employee-related matters and financial stability concerns, demand and interest in Digital Experience have clearly kept growing at a strong pace. Regarding the transition involving Matt and Anil, we truly don't see any problems arising. Matt has been preparing for this over an extended period. In his position as Informatica's CEO, Anil has definitely run the field organization. We have a deep bench of talent. Matt will be around to help with the transition, and he will without a doubt stay a friend of the company. I wouldn't expect any difficulties at all when it comes to the field transition, since the next layer is fully established and brings enormous Adobe experience. Now, on the revenue expectations for Q3, Brent, perhaps I can speak briefly to what we shared regarding Advertising Cloud once more, just so everyone is clear on it. Stepping back to look at both digital experience and customer experience management, the opportunity is unquestionably bigger than it was before this pandemic. As you're aware, Brent, our product portfolio is remarkably unique. What we chose to do was take this chance to truly focus on the biggest growth vectors while also examining profitability. Content and commerce delivered a strong quarter. Customer experience orchestration remains very important. Analytics and insight matters a great deal. When it comes to the solutions we offer for attribution and insight, Advertising Cloud delivers substantial value to our customers. That said, as we've noted, even within Advertising Cloud there are two distinct businesses—one software driven, the other transaction driven—and we took the chance to speed up our exit from the lower margin transaction business, which, as you'll recall, we actually flagged at our analyst meeting last year. Once you remove the revenue impact tied to that, you'll see the underlying strength of the business persists. Turning to bookings, during Q2 the book of business we achieved for subscription bookings came in above 15%. Given the current environment, I'd call that excellent performance. We remain very optimistic about the business, but hopefully that provides some color. One final point, Brent: even considering our Q2, when our guidance was $3.175 billion and we noted $50 million in advertising revenue that we made the decisive choice to stop pursuing, the results we reported show we had a genuinely good quarter.

Thank you.

Great, thanks for fielding my question, and congratulations on a strong quarter. Let me turn to the digital media piece. John, during your remarks you mentioned noticing some softness among commercial and SMB customers. Honestly, given $443 million in net new ARR, that softness doesn't really come across in the figures. It's quite impressive that you delivered that level of strength despite the softness. Could you take us through the pluses and minuses there? Which areas were softer, and which areas performed so far above expectations that you still managed to beat your $380 million target?

Sure, I can begin, Keith, and then John will surely chime in. Broadly speaking, if you consider the creative and document businesses, with work from home, shelter in place, and people's capacity both to create and share their stories, plus everything happening with documents, you're correct. Our guidance had been roughly $385 million. For a Q2 in our business, that's a record, so it was a strong result. What we also aimed to shed light on was the various routes to market. Considering those routes, adobe.com clearly saw very robust traffic throughout the quarter, since, as you're aware, we run a Data-Driven Operating Model and rely on effective marketing tools to keep driving visitor acquisition worldwide. As for small and medium businesses, I think we'd all agree that was likely the customer segment hit hardest. So through the channel, what we meant to convey was that revenue came in below what we'd ordinarily have expected. We absolutely anticipate that business recovering as that segment regains strength. Document Cloud, Sign, Video, and Single Apps all performed very well on adobe.com, Keith. It came down more to route to market, and some portion of those who usually purchased through the channel are likely also now coming to adobe.com.

Understood, that's great.

Right, nothing further from me. Everything was addressed by Shantanu.

Great, thanks so much, everyone.

Thanks. I'd like to build a bit on what Keith asked and perhaps dig into more detail, since we definitely heard about a few factors that benefited you this quarter. You set those against your guidance, which appeared to suggest things declining quite sharply on a sequential basis. I realize it's tough to tease these apart, but perhaps by examining how net new ARR trended linearly across the quarter — did it rise and then demand eased off, as a spike occurred when people began sheltering in place and working from home, generating a particular level of demand you don't anticipate carrying into Q3? A lot of these factors look durable to me. I'm simply wondering whether you can tease apart what may have been a temporary phenomenon tied to changes in how people work and possibly consumer demand linked to staying at home, versus items that appear likely to be lasting, favorable shifts for the business.

Yes, Jennifer. Once more, I believe when we were speaking with you previously, right as stay-at-home orders and remote work were starting, we were roughly 10 days into the quarter. We mentioned that COVID's effect had in fact been limited from what we could tell. We did observe a rise when it came to traffic, and that stayed pretty elevated all the way through the quarter. On the acquisition side of that specific business, we keep witnessing strength. It's early, yet during the initial few days of the quarter, once again, we keep witnessing strength in Q3. As I think you're aware, having tracked us for some time, Q3 is usually our seasonally soft quarter; through the Data-Driven Operating Model, we have such strong visibility into the business. Although the broader picture, measured against the addressable market, is definitely a lasting trend, I think we are incorporating typical seasonality. Regarding small and medium business, we aren't presuming matters will improve. On the whole, be it Document Cloud or Creative Cloud, we still feel positive. I think if there's one area where we likely overstated how much COVID would affect things, it was the consumer space, and at this point I think many of you are saying, "Wow, that was impressive outperformance." Looking at our Q3 numbers too, it will plainly show ongoing momentum in that business.

Thanks.

Alright, thanks folks for fielding my questions, and I trust everything's going fine. Shantanu, perhaps this one's for you — could you speak to the broader context behind what we're doing with Advertising Cloud? It appears that the profitability upside from paying somewhat less attention to the transactional side of the Ad Cloud has an intriguing side effect when it comes to margin. Maybe the more important thing to ask is whether you think the team will, going forward, weigh profitability somewhat more heavily against growth in the DX business than was the case previously?

Okay, Saket, to start with, in contrast to many other firms operating in the enterprise arena, we have never gone after income that isn’t solid, profitable income—something I’m aware others in the market do. What I think we managed particularly well this quarter was to ask ourselves, “How can we pause, look strategically at where the genuine opportunities for growth over the long haul lie, and how will the business be reshaped because of what we observed?” Given that backdrop, when literally every organization worldwide—be it a small, medium, or large enterprise—is asking, “In what ways can I connect with customers through digital means?”, it’s obvious that the content and commerce tied to what we provide, along with what we’re capable of doing in customer journey orchestration plus the fundamental analytics and insight, is truly the area where, all of it built on Experience Platform, we have no equal when it comes to distinctive differentiation. On the advertising side, there were genuinely 2 parts to the business, and this is something we’ve discussed before: one is a software-focused operation demonstrating how attribution functions, which can genuinely gain from Adobe Analytics insight to ensure that money is spent effectively; we’ll keep providing that, though we question whether it will become a massive growth area. The other was the transaction operation, which demands a great deal of resources; for that one, we had consistently indicated our intention to shrink it, yet we definitely treated the pandemic as a trigger to say, “Let’s implement a shift immediately so we can channel more resources toward what truly constitutes lasting long-term opportunities.” I hope that provides a bit of insight into the strategic reasoning behind why we chose to not let the crisis go to waste by making the adjustments you know are possible to build a stronger company.

That's quite useful. Thank you.

Excellent. Many thanks. Congratulations to everyone on a strong quarter. I'd like to direct my question to John. John, during your prepared comments, you mentioned that as a result of the strategic review, "We will now turn our focus to investing appropriately for continued long-term growth." Could you elaborate on precisely what that means, and in what way does it differ from what Adobe has consistently been doing?