Adobe Inc. (ADBE) Earnings Call Transcript & Summary

Good afternoon, and thanks for being with us today. Joining me are Adobe’s President and CEO, Shantanu Narayen, along with John Murphy, our Executive Vice President and CFO. During this call, we’ll go over Adobe’s financial results for the third quarter of fiscal year 2020. You ought to have received the press release by now — it went out roughly one hour ago. PDFs containing our prepared remarks and financial results have also been posted to Adobe’s Investor Relations website. Before we begin, we’d like to stress that certain information we’ll cover today, such as our financial targets and product plans, reflects information available as of today, September 15, 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 filings. Today we’ll be talking about both GAAP and non-GAAP financial measures. Reconciliations between the two can be found in our earnings release and on Adobe’s Investor Relations website. Anyone participating on the call should know that the audio is being webcast live and recorded for playback. An archive of that webcast will remain available on Adobe’s Investor Relations website for about 45 days. Neither the call audio nor the webcast may be re-recorded, reproduced or distributed without Adobe’s prior written permission. I’ll now hand the call over to Shantanu.

Thank you, Jonathan. Good afternoon, everyone, and I hope you're staying safe and well. The pandemic that's still with us keeps creating difficult conditions in every corner of the globe. Individuals are looking for fresh methods to connect, study and run companies remotely. Producing and consuming content is booming in a world where visual connection has grown even more vital. Learners are adjusting to studying from home rather than in a classroom. Whole sectors — spanning media and entertainment through pharma, retail, automotive and financial services — have needed to shift to digital operations overnight to reach customers and keep their businesses running. Electronic workflows and signatures represent the sole means of completing business transactions efficiently. Nobody could have foreseen how much the world would change. That reality has created new momentum in Adobe's favor. Our purpose—transforming the world via Digital Experiences—has never been more important. Our strategy, which means opening up creativity to everyone, speeding up document productivity, and empowering digital businesses, matters more now than it ever has, and it's driving strong performance for us across all geographies and audiences. Adobe had an outstanding third quarter. We saw momentum in Creative Cloud, Document Cloud, and Experience Cloud. Revenue for Q3 came to $3.23 billion, representing 14% year-over-year growth. On a GAAP basis, quarterly EPS was $1.97, up 22% from a year earlier, and non-GAAP EPS came in at $2.57, representing 25% year-over-year growth. In Q3, our Digital Media segment delivered strong top-line gains across both Creative Cloud and Document Cloud, with revenue hitting $2.34 billion, a 19% increase compared with the same period last year. Net new Digital Media ARR, or annualized recurring revenue, totaled $458 million, and as we closed out Q3, total Digital Media ARR had risen to $9.63 billion. Our fundamental conviction is that everyone possesses a narrative deserving to be shared. Whether you're a pupil, someone building a following on social platforms, a professional communicating for a company, or working in a creative field, we intend to give you the tools needed to produce your stories and extend their reach. Right now, there's explosive growth in how people make and enjoy content through handheld devices, slates, and computers. In this current period of digital narrative and organizational change, every area — web material, mobile app development, graphics, moving pictures, motion graphics, interface layout, augmented reality, and three-dimensional work — is experiencing rapid expansion. Creative Cloud drives this massive surge in content by making it possible to record, build, and work together throughout all those domains, while also energizing the communities we serve around the world. Creative Cloud had a fantastic third quarter. We brought in $360 million in net new Creative Cloud ARR, along with $1.96 billion in revenue. A number of things drove that Q3 Creative Cloud performance: Adobe.com saw record traffic; our acquisition engine relies on proprietary models for attribution and optimization; we saw momentum across all geographies in both our Creative Cloud single-app and complete offerings; our creative mobile apps expanded, contributing discrete revenue while also serving as a funnel into our multi-surface Creative Cloud offerings; retention improved, helped by growing engagement and product usage among individuals, teams and enterprises; we delivered exceptional results in imaging and video with Photoshop, Lightroom and Premiere Pro; and the education segment — students, educators and institutions — performed robustly. At Adobe MAX, which is the biggest creativity conference anywhere, we'll be holding it virtually during October. Along with revealing exciting new offerings and services in Creative Cloud, our agenda features 56 hours of content from around the globe and includes amazing creators such as the actor Keanu Reeves, the photographer Annie Leibovitz and the award-winning filmmaker Ava DuVernay. We're anticipating an all-time high in attendance and are delighted that more than 200,000 people have already signed up. Through Adobe Document Cloud, we've transformed the way individuals produce, modify, distribute and sign digital documents using Acrobat and PDF. For companies of any scale—whether small, mid-market, or enterprise—digital documents have been helping boost output and streamline operations for years. These days, though, they've become a must-have for organizations with remote workforces. With a robust set of APIs behind it, Adobe Document Cloud enables workflows and teamwork to run without friction across all kinds of devices. The third quarter was a standout for Document Cloud, generating $98 million in net new ARR and bringing in $375 million in revenue, a record for the business. During Q3, several things stood out. Gross new ARR grew strongly, driven by the Adobe Reader funnel. Monthly average use of Acrobat web rose significantly. Acrobat Mobile installs are up 33% year-to-date. Adobe Sign gained considerable traction — for example, we announced plans to pursue FedRAMP Moderate status. We also landed major customers, including Citi, PwC, Pepsi, HSBC, Merkle and J-Power. In addition, we launched the Adobe Document Cloud Resource Hub for Education, a single place that shows how Document Cloud can help with remote learning. Shelter-in-place mandates worldwide made every company feel a greater sense of urgency to accelerate their digital transformation. In almost no time, B2C and B2B companies both small, mid-sized and large altered every element of their customer relationships, from acquisition right through to renewals, moving them to digital. As an organization that has undergone its very own digital transformation, we grasp deeply what it requires to function as a digital business, and that knowledge positions us as the perfect partner to assist other companies in achieving the same. Across the last decade, we've established the appropriate technology, processes and people to measure and manage performance with precision and consistency every day at scale throughout each of our businesses. We built a cross-company, real-time, data-driven operating model that draws on all of our Experience Cloud technology. Our approach to CXM relies on continuous breakthroughs in products, platforms, and processes. It has completely transformed the way our Company runs, and at this point we're helping our own customers build their own CXM playbooks. Adobe Experience Cloud stands as the most complete set of solutions on the market, delivering best-in-class applications and services that are built on top of the Adobe Experience Platform and leverage Adobe Sensei, which serves as our AI and Machine Learning framework. In Q3, Digital Experience revenue came in at $838 million. Subscription revenue grew 14% compared with the same period a year earlier, not counting Advertising Cloud. During the third quarter, a few items deserve mention. Adoption of Adobe Experience Platform increased. We introduced fresh tools enabling marketers to collect information more swiftly across various channels, allowing them to produce personalized interactions faster, informed by insights available in real time. Within the Real-time Customer Data Platform, Data Governance features have reached general availability. Our Customer Journey Analytics offering is gaining initial momentum, providing clients with a complete view of the Customer Journey spanning digital and physical touchpoints. Rollout of our Adobe Experience Manager Cloud Service has accelerated. Quarter-over-quarter, Commerce products expanded considerably. Together with our Advertising Cloud clients, we are in the process of phasing out our transaction-based offerings. Some of the notable customers we brought on board included Eli Lilly, Truist, Nike, Lowe's, Shell, Lloyds, and the U.S. Department of Commerce. We also teamed up with IBM and Red Hat, which means Experience Cloud can now run in hybrid cloud environments — something that strengthens real-time data security for enterprises operating in regulated industries. On top of that, we earned Leader placement in six reports spanning Gartner Magic Quadrant and Forrester Wave. In the Gartner Magic Quadrant for CRM Lead Management specifically, Adobe came out as the leader, posting the highest scores in both Ability to Execute and Completeness of Vision. These record-breaking figures from Adobe owe everything to the tireless efforts and steadfast commitment of our team members across the globe. They showed remarkable adaptability, shifting swiftly to working from home and keeping everything running smoothly. That fills me with both pride and appreciation. What sets great organizations apart is how they navigate challenging periods. Our robust company culture, commitment to pushing boundaries, outstanding clients and collaborators, and our practice of always supporting the communities we serve — these are what propel us forward and fuel our achievements. The enormous potential that lies before us has us thrilled, and we can't wait to build on our powerful trajectory throughout 2020 and into the future. John?

Appreciate that, Shantanu. Adobe turned in exceptional results for Q3, with the standout items being robust net new Digital Media ARR, subscription revenue expansion in Digital Experience, and all-time-high operating cash flows. Even with tough macroeconomic circumstances, the continued remote work and learn-from-home setup gave us a chance to counter the usual Q3 Summer seasonality. What powered our success was Adobe's distinctive capacity to pull real-time insights from across the business through our data-driven operating model. That lets us grasp what customers want from our solutions, place strategic bets where returns are highest, and boost engagement plus conversion throughout our channels — above all, our web properties. All quarter long, we saw steady traffic and demand levels for our Adobe.com offerings, even through the summer holidays, a period when buying activity has traditionally dipped. Leveraging our proprietary attribution technologies, we directed variable marketing spend that helped us bring in and involve new customers, producing Adobe's best Q3 ever, while simultaneously upholding fiscal discipline to speed up earnings growth. Consequently, Adobe posted record Q3 revenue of $3.23 billion, reflecting 14% growth year-over-year. Adjusted for constant currency, total Adobe revenue rose 15% year-over-year. GAAP diluted earnings per share for Q3 came to $1.97, while non-GAAP diluted earnings per share reached $2.57. Business and financial highlights featured Digital Media revenue of $2.34 billion; net new Digital Media ARR of $458 million; Digital Experience revenue of $838 million; record cash flow from operations of $1.44 billion; remaining performance obligation of $10.34 billion as we exited the quarter; and the repurchase of roughly 1.5 million shares of our stock during the quarter. Adobe's robust third quarter results demonstrate the ongoing momentum throughout our cloud businesses. From knowledge workers to creative professionals, from small businesses to large enterprises, people feel compelled to engage digitally and want tools that let them communicate more capably across digital platforms. In our Digital Media segment, Q3 revenue growth hit 19% year-over-year. On a constant-currency basis, Digital Media rose 20% year-over-year, and we closed the quarter with $9.63 billion of Digital Media ARR. Inside Digital Media, our Creative business had yet another strong quarter. Creative revenue reached $1.96 billion, marking 19% growth year-over-year, and we gained $360 million of net new Creative ARR. Our Q3 Creative growth came from investing to bring in new users across every geography and segment; keeping our unrelenting emphasis on engagement to fuel retention and renewal among existing customers; successfully finalizing enterprise term licenses with educational institutions, plus expanding our education business via individual subscriptions by students; building awareness and licensing for our professional video products; concentrating on turning free mobile app users into paid mobile subscriptions, with strong growth in Lightroom Mobile; and applying insights from our data-driven operating model to execute targeted campaigns and promotions. Adobe Document Cloud turned in another quarter of strong revenue growth. Document Cloud brought in $375 million in revenue, up 22% compared with the same period a year earlier, and net new Document Cloud ARR hit a record $98 million. Just like our Creative business, Document Cloud is gaining from how work itself is evolving and from the ongoing need for digital document solutions, since individuals, enterprises and governments are all seeking to move away from paper-based dependencies toward digital workflows. Several things powered our Document Cloud growth in Q3: we invested in and drove awareness for our Acrobat web business; we kept building momentum on mobile monetization with Acrobat Reader; demand for Acrobat subscriptions rose across all geos; and we built, advanced and closed pipeline for our enterprise offerings, with standout strength in Adobe Sign, where enterprise bookings climbed more than 200% year-over-year. Although the SMB segment showed some recovery during Q3 across Digital Media, smaller businesses are still feeling the effects of the macroeconomic environment; we anticipate that will keep weighing on our Team offering through the reseller channel and on Adobe.com. Now to our Digital Experience segment: in Q3 we delivered revenue of $838 million, which is 2% growth year-over-year. Digital Experience subscription revenue came to $729 million, up 7% year-over-year. If you set aside Advertising Cloud, Digital Experience subscription revenue rose 14% year-over-year; we are continuing to wind down the transaction-driven ad network business within Advertising Cloud. In Q3, enterprise sales and services implementations adjusted to a new normal of virtual engagements. We generated strong pipeline and customer acquisition across our Digital Experience solutions, since the digital transformation imperative keeps resonating with our customers; our Commerce business accelerated, and we drove greater adoption of our AEM Cloud Service and Adobe Experience Platform, which we anticipate will be growth drivers over the next decade; we saw standout strength in the number of transactions above $1 million in new annual subscription value that we closed during the quarter. Even though enterprises and smaller businesses are still feeling the effects of the macroeconomic environment, spending on customer experience management is coming back as the top imperative for enabling businesses to engage their customers and spark growth. On the whole, while we are focused on investing for profitable growth, especially in research and development, we generated significant savings from travel and entertainment and facilities operations as our employees work from home. Having made sure our current resources are concentrated on the key priorities, we plan to ramp up hiring in Q4 and FY21 to take advantage of our large addressable markets. Looking at currency quarter-over-quarter, FX lifted revenue by $15 million. After accounting for hedging impacts, the sequential currency boost to revenue was $10 million. Looking at currency year-over-year, FX reduced revenue by $14 million. After accounting for hedging impacts, the year-over-year currency reduction to revenue was $25 million. Adobe’s effective tax rate for Q3 came in at 10% on both a GAAP and a non-GAAP basis, consistent with our targets. Trade DSO came in at 37 days. In the same quarter a year earlier it was 44 days, and it stood at 40 days in the prior quarter. Remaining Performance Obligation, or RPO, rose 18% compared with a year ago, reaching $10.34 billion as we exited Q3, and it was up 4% sequentially from quarter to quarter. Deferred revenue at the close of the quarter totaled $3.45 billion. As I noted three months ago, what we offer on Adobe.com is usually billed each month and gets reported as unbilled backlog, while channel offerings that are billed annually in advance show up as deferred revenue. Acquisition strength on Adobe.com this quarter keeps pushing a mix-shift away from deferred revenue and toward unbilled backlog. Our closing cash and short-term investment position at the end of Q3 came to $5.26 billion, and cash flows from operations during Q3 hit a record $1.44 billion. During Q3, we bought back roughly 1.5 million shares, spending $617 million. At present, $2.9 billion is left from the $8 billion repurchase authority we received in May 2018, which runs through 2021. Turning to Q4, taking into account today's macroeconomic conditions, the usual seasonal strength at year-end, and the strategic shift involving our Advertising Cloud business, our targets are: total Adobe revenue of about $3.35 billion; year-over-year revenue growth for the Digital Media segment of roughly 18%; net new Digital Media ARR of about $540 million; Digital Experience segment revenue that is approximately flat versus a year ago; Digital Experience subscription revenue up approximately 1% year-over-year, or 12% once Advertising Cloud revenue is excluded; a tax rate of approximately minus 90% on a GAAP basis and 10% on a non-GAAP basis; a share count of roughly 485 million shares; GAAP earnings per share of about $4.29; and non-GAAP earnings per share of about $2.64. That GAAP tax rate gets a boost from planned changes to optimize our international structure in Q4, so that ownership of certain intellectual property rights better aligns with how our business operates, which we talked about on our Q1 call earlier this year. To sum up, we anticipate a strong Q4 to wrap up yet another year of record revenues and earnings for Adobe. Throughout these times, the resilience shown by our employees and our business model has been clear. With our market-leading solutions continuing to resonate with individuals and enterprises around the world, we stay excited about the growth opportunities that lie ahead. Over to you, Jonathan.

Thank you, John. As we shared earlier in the year, our yearly creativity conference, Adobe MAX, is going to take place as a virtual gathering this October. Details regarding that event are available at max.adobe.com. We also made an announcement today that Adobe will hold its Q4 and fiscal 2020 earnings conference call along with a financial analyst meeting in an online format on December 10th, and at that time we'll give an overview of the Company's strategy and the financial targets for fiscal 2021. Invitations are going out to those on our analyst and investor list over the next few weeks. Should you want to hear a playback of the call today, a webcast archive will be posted on Adobe's IR site later on today. A phone replay is also available if you dial the numbers listed above. That phone playback service starts at 5 pm Pacific Time today and concludes at 5 premium Pacific Time on September 22nd; at this point we'd be glad to take your questions, and we ask that each person limit themselves to one question. Operator?

Yes, thank you so much, and congratulations on the quarter. Shantanu, perhaps something to kick things off — or actually, my question is simply going to focus on the Experience Cloud business. Clearly, you're divesting the Advertising Cloud portion of that. But when it comes to the commentary, the pipeline appears to be building well, RPO rose nicely during the quarter, and yet revenue guidance for the upcoming quarter is somewhat lower. I was hoping you could reconcile those two things, since it sounds like your excitement about that opportunity is still extremely high; but I think some folks might be asking themselves why revenue perhaps isn't lining up with that? Thanks.

Sure, glad to. And as you mentioned, I mean, first of all, digital transformation represents a huge addressable opportunity. And it's obvious that we hold the leadership position. We delivered a fantastic quarter. Bookings increased more than 15%. As you observed, we posted solid revenue; we've successfully rolled out entirely new products, which we think will serve as the growth drivers stemming from what we accomplished with the Adobe Experience Platform, what we accomplished with Customer Journey Analytics, the Customer Data Platform, and also what we're doing across both Commerce and the Adobe Experience Cloud within the Cloud Service. So, the business and the interest honestly, since there's no small and medium business or large enterprise that isn't curious about how digital can assist them in coping with the present health situation. So, bookings have been robust, business has been robust. I think, when it comes to revenue, you need to keep in mind the wind-down of the Advertising Cloud business, which keeps occurring. We anticipate bookings will be robust. And then, the other matter for us is really, given the macroeconomic environment, you consider the spending patterns, but all things considered for us, we felt the business performed quite well. It was a terrific rebound, compared with what we had anticipated in Q2, which was on both the consulting side and the net ASP, we thought it might be a bit slow; so, we're genuinely thrilled; and we're sitting in the sweet spot of what is unmistakably a growth business.

Shantanu, perhaps to remain focused on the Digital Experience segment. Taking a step back strategically, I believe Anil Chakravarthy is continuing to settle into his role overseeing the DX unit and field operations. The question, I suppose, is what goals does he have, especially within the DX business, that excite you the most looking ahead to next year?

Saket, to begin, I'll mention this: his ramp-up has been quicker than any other executive we've brought in; thus, he's performing tremendously well and is a wonderful addition to what you know is an already very robust leadership team that I'm fortunate to have at Adobe. Perhaps I'd highlight three points. First, regarding products, he's truly grasped the platform and the innovation tied to it, along with the rollout of Customer Journey Analytics. We enjoyed an excellent quarter with the Adobe Experience Platform and numerous clients embracing it, our efforts around CDP and the instantaneous capabilities we offer, plus intelligent services that utilize Adobe Sensei; so, in terms of product and innovation, ensuring we have this platform where we bring together all our offerings has genuinely contributed significant value there. However, that will remain the space where I believe we can set ourselves apart entirely from everyone else. Since although competitors discuss delivering a single unified profile, as you're aware, we already have tens of billions of profiles within Adobe Experience Platform. Second, I'd point to the unified organization truly concentrating on customers and customer-centricity, and our work with partners. The framework for U.S. and international operations is established. And he's dedicated to vigorously promoting both our vision and our marketplace differentiation; plus one additional perk, Saket, from everyone telecommuting is that we can interact with clients far more effectively, and a typical day involves considerable customer interaction. So, that's definitely where his attention lies, since he must be visible as the head of this; and third, I'd mention culture. Adobe's culture has consistently been distinctive, with emphasis on talent and recruitment, and wherever there's major potential, ensuring we secure the finest talent. Thus, he's already managed to bring in some crucial individuals to strengthen his leadership team. Yet, much remains to be done and much has already been accomplished. And so, we're thrilled to have him with us.

Understood, that's quite useful. Thank you, everyone.

Hello there, good afternoon. Shantanu, regarding Q4, the Digital Media guidance sits well above what the Street had. You've obviously witnessed plenty of strong tailwinds in that segment. I'd like to know if you could break down the drivers and explain what's behind this upside surprise compared with Street estimates?

Sure. Brent, it's a bit surprising you didn't bring up the Q3 upside too. I mean, we just witnessed it. That's fair. Performance was tremendous. As you can observe, with what's going on across creativity and document productivity, Brent, the operation is simply running at full power. That relates to products and, honestly, to services as well. Perhaps we didn't address services directly, yet services — the stock side of things — keeps performing nicely, and without a doubt we're picking up share. The sign side has expanded quite effectively. Still, if you keep considering what powers that segment, first off, we honed our emphasis on usage and engagement, and that usage and engagement genuinely assisted in bringing retention rates back to where they stood before COVID. That emphasis will simply carry on; we hold a really substantial book of business. Education — education delivered a solid quarter. So our attention stays on education. With individual apps, we mentioned Lightroom, Photoshop and Premiere Pro as places where considerable interest exists in our operation. Beyond that, the refinement of what we discussed, specifically marketing attribution and models, helps us direct funds so efficiently and maintain the durability of acquiring new customers and trends. So, as you noted, when we examine second half performance, it merely shows how both Creative Cloud and Document Cloud, honestly, are the leading platforms; and we ought to keep seeing solid strength from our Q3 through into Q4. So, we're thrilled.

Great to follow Brent here. Many thanks, and well done on the quarter. Shantanu, you mentioned that the pandemic has in fact driven stronger engagement with customers. However, once we exit the pandemic — assuming that's even a real possibility, if a vaccine arrives — how will the business do? Also, do you believe this extends the transformation timeline, or might we be in some kind of bubble, a halo effect, where activity gets pulled forward somewhat, since we've had all this time to accomplish more and there's some catching up, and then naturally the longer-term secular path of Digital Transformation stays the same? I mean, how should we think about the environment? The environment is in fact remarkably favorable to your results — not just yours but every software company — so you could see a bit of a pullback if we move into a normal economy. Sorry to phrase it that way, but I'm just curious to hear your thinking. Thank you.

Yes. Kash, we've discussed the trends that will act as tailwinds for each of our businesses, be it Creativity, Document Productivity, or specifically regarding your question, Digital Transformation. The genie won't return to the bottle. I mean, we've definitely witnessed, as you note, an inflection in the business when it comes to demand for digital transformation. But my view of this business is that it will simply grow more important. I believe that as the macroeconomic environment gets better, spending will in fact open up regarding what people spend. And we've been mentioning customer experience management as a imperative and a priority for enterprise spend for some time, and I don't think that shifts. So, I think everyone's realizing that lacking a commerce website, being unable to engage digitally with customers — and I think the two areas where we see the greatest excitement is this unified profile. Because people now fully recognize that when you have a physical presence and a digital presence, you must absolutely build a unified experience, and that I think will only speed up. So you'll see more physical perhaps once the vaccine is available; but that won't alter the need to deliver this unified experience; and on the marketing spend side, increasingly more is going to go digital and people will want to run more of these digital campaigns with customers. So, I think the fundamental trends of personalization, of unified profile, of customer experience management will only persist once the pandemic. And I actually feel that should hopefully indicate an improvement in the macroeconomic environment for everyone. My take is that what we're seeing at the moment largely comes down to this: folks have a desire to put money into digital, yet what they're able to spend might be constrained. And once that capacity to spend expands as the economy gets better, my sense is the ranking of priorities stays the same. Actually, I believe it simply unlocks more spending.

That was really helpful, thanks a lot. Nice work.

Appreciate it, Kash.

Great. Thanks a lot, and congratulations on the very impressive Q3. John, this one's directed at you. During your prepared remarks, you mentioned the variable marketing investments that let Adobe bring in and engage new customers, and those obviously performed quite well. Could you speak to what you're observing regarding ROI patterns on marketing spend, plus the reasons to think those trends can or possibly cannot be maintained? Thanks.

Absolutely. Thanks once more, Brad, for raising that. When we consider what we can do with DDOM, or data-driven operating model, the degree of precision that lets us observe how our business is performing in real time genuinely enables us to invest surgically in places where we're confident success is achievable. As a result, that shows up in the results, clearly, in our numbers for Q3 and in where we believe we can move a metric in Q4. So we hold a great deal of confidence about investing for a suitable return. And additionally, considering how broad the various markets are that we're attempting to draw toward the platform — both CC and BC — we keep a very careful watch on that. We don't simply toss money into variable marketing just to find out where it ends up. Every dollar we put into that area is in fact measured very thoroughly.

Brad, let me tack on one small thing here. Once again, you need to look back at what we described as the total addressable market opportunity across every one of our businesses, and on the Creative and Document Cloud side, we speak of an addressable opportunity worth more than $30 billion. This added sophistication simply lets us reach all of those individuals more efficiently. Plus, as John mentioned, the way that marketing keeps shifting location is something we absolutely see as a differentiator for us — which product, which service, which geography, through which channel.

Thanks, that's helpful. I'd like to ask about gross margin in the Digital Experience segment. As was mentioned before, I understood that when the Ad Cloud business declines, that ought to bring a gross margin upside with it. Yet when I look at GAAP gross margins for Digital Experience, they've actually slipped somewhat from one quarter to the next. So, in relation to that, first, how should we think about the expenses tied to Ad Cloud coming out of the cost of goods sold line across the next few quarters? And second, how should we think about the margin profile for that business after that decline has taken place?

Let me jump in, and then Jennifer, John, please feel free to add. Broadly speaking, for that business, I believe there was a modest result in what we saw from Ad Cloud revenue during the quarter. So that could explain what you're pointing to. From a big-picture standpoint, we simply view it and say this is a growth business. What we've managed to accomplish by aligning is to ensure we're centered on the top-priority growth objectives; and so, it remains a growth business that is a genuine focus for us. But when it comes to the overall margins, the Company did exceedingly well. I'd say perhaps we were somewhat conservative, honestly, since we weren't certain about the macroeconomic environment regarding hiring, but we will definitely be opening up hiring in research and development to keep differentiating ourselves. And regarding Digital Experience, now that we've consolidated the organization, we've removed all the inefficiencies. We made the strategic change on Advertising Cloud. Now, we believe it's all going to be profitable growth as we invest in the Digital Experience business.

When you look at it from one quarter to the next, this really ties into how Ad Cloud has performed as a whole. We'd been open with customers about that, and we supported them in moving over to different services, while at the same time we assisted them in running the campaigns they already had on the calendar. On top of that, the amount of activity happening in our other products did push up some of our cloud expenses — particularly what we pay for our own cloud and for third-party cloud. That's an area we're watching really carefully, so we can take advantage of that volume, get our contracts negotiated on suitable terms, and find efficiencies throughout our clouds.

Thanks. Good evening. Shantanu, management has said many times before—during Summit sessions, for example—that roughly 48 use cases for DX had been pinpointed. So my question is this: leaving aside Ad Cloud and whichever portion of that total it might represent, what shifts or developments are you noticing in how many use cases exist inside DX, or in how they're mixed? And tied to that, maybe you could bring us up to date on the applications and intelligence services you showed at Summit earlier in the year, and explain how those might feed into the different use cases—and, more significantly, into the DX growth you expect?

Certainly. Jay, what has stayed steady across the business—and what keeps demonstrating customer interest along with expansion—is content and data above all; so when I consider the situation with content, the scenario of customers shifting more and more toward cloud services through Adobe Experience Manager, building fresh mobile apps rather than connecting with customers face to face, I believe that remains a space delivering considerable expansion. Where data is concerned, since we've introduced additional features to Adobe Analytics and to the Adobe Experience Platform—enabling us to determine which insights customers are obtaining—after all, every one of us examines data, and does so even more rigorously given current conditions. Consequently, the scenario tied to moving from gathering that data toward deriving insights from it, along with demand for that specific portion of our offerings, intelligent services included—since, as you're aware, we provide intelligence services linked to every one of the solutions—that represents a growing space. The third space, I'd mention, involves this unified profile and simply managing to capture all the data, which is unmistakably a trend, Jay. That's because customers realize they're sitting on all those silos. And the health situation made that even sharper; hence the requirement and wish to obtain this unified profile, enabling them to serve customers properly—that scenario. And when we discuss Customer Journey Analytics, how you replicate what we accomplished with DDOM, I'd say that's the scenario genuinely connecting with customers. Commerce—I'd argue the commerce scenario, and how various models must be found, be it a subscription-based approach to conducting business with customers, be it a loyalty-based approach, so commerce and leveraging commerce to achieve fresh business models, that scenario has grown too, in my view. Finally, regarding B2B versus B2C—we've discussed how that line is fading. Yet I believe every B2B organization still asks how they can operate directly and connect with customers while also working through a partner network; I keep hearing that repeatedly. So regardless of whether a business sells products via a distribution network, or whether it's an automaker, every one of them understands they need to close that distance between being seen as a business-to-business operation and a business-to-consumer one.

During your prepared comments, you noted that the SMB segment improved somewhat this quarter. Could you give us, perhaps at a high level, how much of the business now relates to SMB? And also within that prosumer space, where some of the stimulus being discussed might land with greater effect.