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 second quarter of fiscal year 2021. You should have received the press release by now — it went out over the wire roughly one hour ago. PDFs of our prepared remarks and financial results have also been posted to Adobe's Investor Relations website. Before we begin, I'd like to stress that certain information we discuss today, such as our financial targets and product plans, reflects what we know as of today, June 17, and includes forward-looking statements involving risk, uncertainty and assumptions. Actual results could differ materially from what those statements set forth. For a discussion of these risks, please review the forward-looking statements disclosure in the press release we issued today, along with Adobe's SEC filings. Today we'll cover 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 this call should know that the audio is being webcast live and recorded for playback purposes. An archive of the webcast will be available on Adobe.com for about 45-days. The call audio and webcast may not be re-recorded, or otherwise reproduced or distributed, without Adobe's prior written permission. I'll now hand the call over to Shantanu.

Appreciate that, Jonathan. Adobe just wrapped up yet another remarkable quarter, and the move toward a digital-first reality keeps speeding up. Whether you're talking about learners, working creatives, smaller companies, or the biggest multinational corporations on earth, digital technology is reshaping the way we do our jobs, absorb knowledge, and enjoy ourselves. Adobe's purpose — transforming the world via digital experiences — has arguably never carried more weight than it does right now. The playbook we follow, which is about opening up creativity to everyone, boosting how productive documents can be, and enabling digital enterprises, is delivering results. Thanks to our pioneering work, our demonstrated ability to establish and dominate new categories, and our broad customer footprint across the globe, the possibilities before us and the momentum behind us have reached unprecedented levels. During Q2, Adobe brought in $3.84 billion in revenue, which works out to 23% growth compared with the same period last year. On a GAAP basis, earnings per share came in at $2.32 for the quarter, while non-GAAP earnings per share hit $3.03. Within our Digital Media segment, Q2 delivered robust revenue gains across both Creative Cloud and Document Cloud, reaching $2.79 billion, a 25% increase year over year. When Q2 came to a close, Digital Media ARR overall had risen to $11.21 billion, while net new ARR for that segment reached $518 million. If we look at the last twelve months, it's clear how crucial creativity has been everywhere around the globe. Whether you're a demanding professional, a high school teenager, or one of the emerging group of social media content creators, Creative Cloud provides the means for telling your story. In core creative areas such as imaging, design, video, and illustration, Adobe holds the leading position, and we are carrying that same leadership into exciting new media formats, including screen design and prototyping, 3D, and AR. Given a world where just about anyone needs the ability to create from any location, we're developing products and services suited to every surface and platform. Our lively creative communities remain an incredible wellspring of inspiration, and we continue aiming to give a wider and ever more varied group of creators and design teams the access they need, which advances our goal of opening up creativity to all. Creative Cloud posted solid results in Q2, generating $405 million in net new Creative Cloud ARR alongside $2.32 billion in revenue, a 24% rise year over year. Highlights from Q2 include fresh product innovations, such as updates to Lightroom, Photoshop and Illustrator that bring better creation and collaboration features along with faster speed and stronger performance. Next week, we'll introduce new innovations for Substance, our 3D offering, built to streamline the creation process using new tools that assist with assembling, styling and sculpting. We also saw rising engagement and retention across our offerings, helped by more customers taking up training, joining community events, and benefiting from ongoing product improvements informed by insights into how customers use and value our products. Additionally, there's momentum worldwide for our Creative Cloud Teams offering, which underscores growing adoption of Creative Cloud among small and medium businesses. Our customer acquisition was robust across the board, spanning our main creative offerings as well as newer areas like photography and video. Global marketing pushes for Photoshop and Premiere gave that a real boost. Demand is picking up speed for 3D&I in several important verticals, including gaming, automotive, fashion and e-commerce. On the mobile side, traffic continued to climb, drawing in fresh users for products like Lightroom Mobile and Photoshop Express, while desktop apps maintained a healthy pipeline. Adobe Stock also expanded powerfully, driven by a content library that keeps improving and growing submissions that provide our contributors with reliable earnings. Momentum was worldwide, with demand accelerating across EMEA and Asia Pacific. Among the standout customer wins were ByteDance, Netflix, Microsoft and Unity. We've launched new collaborations designed to spark creativity in the next wave of makers. The first is with Netflix, which provides emerging creators with tools, resources, and mentorship to help them tell their stories. The second is with Khan Academy, aimed at bringing digital tools and learning materials to teachers and students in underserved communities. Today's work environment is digital-first, so having smooth document workflows across all devices and platforms is more important than ever for employees to work together and stay productive. Document Cloud is accelerating document productivity by driving the shift from paper to digital and making every document task — editing, sharing, scanning, and signing — effortless on web, desktop, and mobile apps. In Q2, our Document Cloud revenue came in strong. We saw $113 million in net new Document Cloud ARR, along with outstanding revenue of $469 million — that's 30% growth compared to the same period last year. Among the Q2 highlights were product innovations, including fresh capabilities in Acrobat Liquid Mode that make mobile devices even more accessible; added Adobe Scan features so users can combine, save, and store their scans with greater efficiency; and new Sign tools within Acrobat that give small and medium-sized businesses a boost to their digital footprint through easily embeddable forms and digital payments. Acrobat performed well across every channel and product line, as enterprise bookings climbed more than 60% compared with the prior year. Sign saw faster uptake, with first-time Sign buyers rising twofold versus a year earlier, and a growing portion of Acrobat users now taking advantage of Sign features. Acrobat Web services grew explosively, fueled by substantial SEO gains that brought in a fresh customer base. During the second quarter, we generated 30 million visits to frictionless PDF pages, and our offerings now support more than 20 distinct document verbs. Mobile traffic kept expanding, with Adobe Scan surpassing 110 million mobile downloads and total scans reaching one billion to date, while adoption of the Acrobat mobile app rose by over 20% compared with a year earlier. We saw momentum everywhere, as demand picked up faster across Europe, Latin America, Australia and New Zealand. We also secured important customer wins with ADP, AstraZeneca, GlaxoSmithKline, Toyota and Wells Fargo. It makes me incredibly happy to welcome David Wadhwani back — he has returned to Adobe as Executive Vice President and Chief Business Officer of our Digital Media business. He is the perfect choice to guide our Digital Media division into its next stage of expansion, thanks to his remarkable history of results and his enthusiasm for Adobe and the people we serve. For companies of all sizes, in every sector, going digital is now something they must do. Our latest Adobe Digital Economy Index shows that worldwide e-commerce expenditure should hit $4.2 trillion during this year, while in America by itself it will arrive at $1 trillion come 2022. We're forecasting that during the upcoming Prime Day, online buying in the U.S. will surpass the $10.9 billion mark reached by Cyber Monday in 2020. Around the globe, companies in consumer-facing and business-to-business markets alike are allocating capital toward digital tools, aiming to deliver customized and engaging experiences to their buyers. When it comes to content alongside commerce, insights from data along with audience management, customer paths and marketing processes, Experience Cloud ranks as the most comprehensive solution on the market. Because of consolidated customer profiles and an architecture that is both open and expandable, Adobe Experience Platform is clearly the go-to choice for major enterprises wanting to deliver real-time personalization at scale, supporting more than 17 trillion audience segment evaluations each day. Experience Cloud generated $938 million in revenue during Q2, representing 21% growth from the same period last year, and subscription revenue totaled $817 million, which works out to 25% growth year over year. Our yearly digital experience conference, Adobe Summit, took place in April in a virtual format. We generated an extraordinary 20 million views of Summit content from people worldwide, which highlights just how much interest and demand exists for customer experience management.

Product news we're highlighting covers Adobe Journey Optimizer, a tool that assists marketers in refining the customer journey across both outbound and inbound touchpoints. Then there's Adobe Customer Journey Analytics, letting brands unify and standardize data from online and offline sources, and it stands years ahead of what competitors offer. We also have the upcoming version of Adobe's Real-time Customer Data Platform, aiding brands in fine-tuning acquisition and engagement approaches within a first-party data landscape. There's a sneak peek at an innovative marketing system of record that's based on Workfront tech, crafted to handle intricate marketing workflows for better efficiency and agility. Plus, we're introducing fresh intelligent commerce features and a strategic alliance with FedEx, enabling all small and medium businesses to provide expedited shipping options within their commerce setups. Outside of Summit, Q2 wins feature robust performance in core products, with bookings for Adobe Experience Platform surging, along with related services such as Customer Journey Analytics and Real-time CDP, which together surpassed the $100 million book of business threshold in Q2. We've seen triumphs in big multi-solution agreements within transformative clients and better closure rates spanning various regions, customer categories, and product areas. We're shaping the upcoming workforce by giving free global access and curriculum to college teachers and learners for Adobe Analytics, the top-tier customer data analytics solution. Ongoing praise from industry analysts continues across every customer experience management area, such as being recognized as a leader in the Forrester Wave for Enterprise Marketing Software Suites, securing the number one position all five times the report has come out, and leading in the Gartner Multichannel Marketing Hubs Magic Quadrant for the fourth consecutive year. Also, we've landed major customer deals with companies including Nike, NatWest, NTT Docomo, and T-Mobile. We take pride in the incredible outcomes and momentum throughout our operations. As we look ahead to a world after the pandemic, we'll stay adaptable since various regions bounce back on different timelines. Although workplaces in Australia and certain parts of Asia have reopened for a while, and situations in the U.S. and some European areas are getting better, we'll keep backing our team members in locations such as India and Brazil where conditions stay tough. During the past year, we've been crafting a model for Adobe's future work setup, which will blend hybrid and flexible approaches; within the U.S., we'll test a return to our San Jose office, beginning with a modest number of fully vaccinated staff in July. We're dedicated to combining the strengths of face-to-face and virtual engagements to tap into what defines Adobe, our ingenuity, creativity, and culture, powered by our greatest resource, our people. I'd like to express gratitude to every one of our staff for their commitment and grit throughout a year defined not just by the pandemic, but also by violence and racial unfairness. I'm pleased with how far we've come in pushing forward our initiatives on diversity, equity, and inclusion; we've achieved progress in our plan to boost representation, development, and elevation of the Black community. Yet with Juneteenth coming up in just a few days, it's clear there's still a great deal ahead of us. During June, when we observe Pride Month, we're celebrating and shining a light on the LGBTQ+ communities we serve, within Adobe and beyond. What these actions show is Adobe's enduring dedication to backing its varied workforce and to creating change in the places where we reside and work — a value passed down to us by our co-founders, John Warnock and Chuck Geschke. During Q2, we lost Chuck Geschke, our cherished co-founder. The imprint Chuck made on Adobe, on the tech sector and on the globe will never fade. Though his absence weighs on us heavily, I take deep comfort in the knowledge that Chuck felt immense pride in what Adobe has grown into. With its robust culture, admired brand, groundbreaking product roadmap, and the finest employees, customers and partners anywhere, Adobe is set up to keep thriving through 2021 and past it. John?

Thank you, Shantanu. As far as Adobe is concerned, the second quarter stood out, distinguished by strong growth at the top line, enterprise bookings in Digital Experience, and net new ARR in Digital Media — every one of which shows that what we offer resonates with customers in each category amid a world that continues to shift toward digital. By way of our data-driven operating model, DDOM, we continue to use our own Experience Cloud technology to refine customer journeys, driving ever more traffic to Adobe.com so that we can acquire new customers and deepen familiarity with our products. We continue to invest in growth across sales and marketing, and we added headcount in Q2 as well to drive product innovation. As a result, Adobe recorded Q2 revenue of $3.84 billion, which represents 23% growth versus the same period a year ago. Our business and financial highlights were: GAAP diluted earnings per share of $2.32, plus non-GAAP diluted earnings per share of $3.03; Digital Media revenue of $2.79 billion; net new Digital Media ARR of $518 million; Digital Experience revenue of $938 million; record cash flows from operations of $1.99 billion; RPO of $12.23 billion at quarter's end; and the repurchase of about 2.1 million of our shares during that span. Inside our Digital Media segment, Q2 delivered 25% revenue growth year over year, and when the quarter ended we held $11.21 billion in Digital Media ARR. Creative revenue reached $2.32 billion, an increase of 24% from a year earlier, and we added $405 million in net new Creative ARR. The forces propelling Creative growth in the second quarter were: strong retention and renewal throughout every Creative product and customer segment; new user acquisition, driven by global marketing campaigns that leverage our DDOM insights; a quicker recovery in the SMB segment via our Creative Cloud for Teams offering; enterprise licensing wins, propelled by account expansion at renewal; momentum in our Adobe Stock business, which continues to grow revenue faster than others in the industry; subscription growth in the education segment, among individuals as well as institutions; and generating net new ARR through app store sales of our mobile and iPad applications. Adobe brought in Document Cloud revenue of $469 million, which marks 30% growth year over year, and in the quarter we generated $113 million in net new Document Cloud ARR. What propelled Document Cloud growth in the second quarter: increased unit demand for Acrobat subscriptions across all geos; strong subscription licensing of our Teams offering in the SMB segment; enterprise licensing wins, with broad seat expansion across enterprise accounts. Faster adoption of our Acrobat Web offering, raising top-of-funnel awareness and conversion into paid subscriptions; continued strength at Adobe Sign, whose ARR rose more than 40% year over year when the quarter closed; and improved conversion on Adobe.com. Turning now to our Digital Experience segment, where Q2 revenue came to $938 million, up 21% year over year. Digital Experience subscription revenue was $817 million, an increase of 25% year over year. Immediately following Adobe Summit, Q2 proved successful for us in generating pipeline and finalizing strategic client agreements that span our customer experience management—CXM—portfolio. Deal flow was consistent throughout the period, and several large transactions were signed close to the beginning of the quarter, which contributed to our Q2 revenue performance. We continue to see a broad macroeconomic recovery, encompassing the commercial segment, and organizations of all sizes are investing in digital transformation. Digital Experience results for the quarter stemmed from: strong bookings for Adobe Experience Platform, or AEP, along with native applications built atop AEP, including Real-Time CDP and Customer Journey Analytics, which are steadily building momentum; new product launches and partnerships that are driving awareness and adoption of our Analytics, Commerce and Campaign offerings; continued momentum with Workfront, as we reap the rewards of combining a best-in-class workflow tool with our CXM portfolio to create a leading marketing system of record; achievement in landing transformative, multi-solution agreements with global enterprise customers; and better renewal and expansion metrics across our customer base. T&E and site operations savings continue while our employees work remotely. We are investing in our offices as we reconsider the future of work, and many of our employees will return to offices and resume business travel during Q3. On a quarter-over-quarter basis for currency, FX increased revenue by $10 million, both before and after the net effects of hedging. On a year-over-year basis for currency, FX increased revenue by $94 million. After accounting for hedging effects, the year-over-year currency benefit to revenue was $78 million. Adobe's effective tax rate for Q2 was 19.5% on a GAAP basis and 16% on a non-GAAP basis, in line with our expectations for the quarter. Trade DSO was 35 days, compared with 40 days in the same quarter last year and 38 days in the previous quarter. RPO grew 23% year over year to $12.23 billion as we exited Q2, supported by strong enterprise licensing during the quarter. Deferred revenue at quarter's end was $4.28 billion, an increase of 24% year over year. Our cash and short-term investments balance at the close of Q2 was $5.77 billion. Operating cash flows for Q2 hit a record $1.99 billion. We repurchased approximately 2.1 million shares in the quarter, spending $983 million; we now have $15.1 billion of remaining authorization, with $100 million granted in May 2018, and $15 billion granted in December 2020. The Q3 guidance below reflects current macroeconomic conditions and the expected return of summer seasonality associated with June, July and August. This comes as we continue to manage costs carefully, including the roughly $80 billion in total addressable market we see ahead for our Digital Experience business. Adobe's revenue came in at roughly $3.88 billion. Inside our digital Media unit, sales were up about 22% from the equivalent quarter last year. Net new Digital Media ARR landed near $440 million. The Digital Experience business posted a revenue gain of approximately 21% versus the prior-year period. Digital Experience subscription revenue was up around 25% compared with a year ago. Our tax rate was approximately 19% on a GAAP basis and 16% on a non-GAAP basis. Shares outstanding totaled roughly 480 million. GAAP earnings per share came to about $2.27, while non-GAAP earnings per share were approximately $3. We're pleased with how the first half played out, and we expect that momentum to continue, aided by the typical strength we see in Q4. With the traction we're seeing across creativity, digital documents and customer experience management — and with $80 billion in the mix — we're still on track for another record year, after already putting up a solid first half. There aren't many companies of our scale that can show revenue growth north of 20%, top-tier operating margins and a subscription model built to deliver growth and profitability over the long term. With that, I'll turn it back to the operator so we can take your questions.

Keith, thanks for the question, and thanks for the kind words about the quarter. In a period when many investors were concerned about a tough comparison, net new ARR growth actually sped up, which I think is quite noteworthy. We were hoping you might elaborate on that a bit; clearly you're building momentum, and a wider set of customers is joining the Digital Media family. Could you say a little about who those customers are and where you're finding the greatest success in expanding that reach and fueling the momentum you're building in this business, which is already fairly large and growing well? Shantanu, over to you.

Thanks, Keith. Like you said, it was a truly excellent quarter; and throughout the quarter we also saw strong linearity with Digital Media ARR. As you're aware, we have this amazing data-driven operating model that lets us handle every part of the customer funnel, from discovery—which happens through our marketing attribution—all the way to usage and engagement; when it comes to new customers joining the platform, mobile and communicators, the way we define that, Keith, make up a meaningful share of the new customer base. Specialists, by contrast, relate to 3D&I. Acrobat, as we mentioned too, had a very strong offering. So I'd say the photography and video offerings truly target everyone from creative professionals to communicators to consumers, and so does Acrobat. But we're also seeing some really good Acrobat adoption across the spectrum. And in our prepared remarks, the final thing I'd mention is that we also discussed the revival of the Teams business; and as we all know, the small and medium business segment, I think, was hit hardest last year. So we're really pleased with it, Keith. So across product offerings, across geographies, and across some of the new businesses and services, as you said, we saw good strength in Q2.

Understood. And if I could slip in one more for John regarding the Q3 guidance — the net new ARR guide shows roughly a 15% decline quarter over quarter. That seems like more than the usual seasonal pattern. Should we be factoring in anything specific, like one-time items in Q2, or anything to watch for in Q3 that would account for that larger-than-normal seasonal drop into Q3?

Yes. Thanks, Keith. Looking at our Q3 guide, it's the biggest ARR guide we've ever provided for a Q3. As we mentioned the past couple of quarters, last year was a pretty unusual year — we didn't experience the typical seasonality because of the pandemic and everyone being locked down. Now that things are beginning to open up, we expect somewhat of a return to the seasonality we experienced previously. So we've built that into the guide. But we're truly thrilled that we can aim for the highest ARR guide in Q3 ever; so all in all, strong performance and the momentum remains in the business.

Outstanding, great job, guys.

Thank you.

Hey, everyone, I appreciate you fielding my question. I'll focus on the opposite segment — Digital Experience. Once again, all the signals, be it RPO, or the Digital Experience top line along with subscription revenue, came in robust. Could you describe your observations during the quarter, what has shifted post-pandemic, and perhaps touch on some of the pipelines? Also, how ought we to frame that segment going forward in terms of growth?

Just as you note, Alex, the quarter was a solid one. Throughout the pandemic, we've discussed how enthusiasm for our Digital Experience offerings and the conviction — whenever I speak with CEOs in every vertical — is that engaging with customers can only happen digitally. I believe folks are beginning to grasp that this spending is one they must commit to. So to start, from a macro standpoint, it's evident that digital transformation, and inside it, customer experience management, sits squarely at the center of what they wish to allocate funds toward. Next, I'd mention the performance on our new experience platform. John and I both referenced Customer Journey Analytics along with the additional services we're developing atop it, and those are plainly striking a chord with customers, since regardless of whether you're B2B or B2C, you need the capability today to provide a personalized experience; so my second point is that the innovation we're bringing, plus the fact that we held summit, and the capacity to connect with these customers, was undoubtedly a catalyst for the business. My third point concerns the ecosystem and how swiftly it can make certain these customers obtain value from the investment we're making. That assists with translating bookings into revenue, and it also assists with expanding the book of business among enterprises. So I'd address each of those three. Considering our targets too — above 20% revenue growth, near 25% subscription revenue growth that we're observing in that segment — I think we remain optimistic that we possess the right product that plainly satisfies a customer need. And the company's execution on that business has been solid.

And perhaps I can fit in a fast one for John; regarding cash flow, it came in well above what we had projected for Q2, so how should we interpret that? What's behind it? Is it merely a matter of robust collections on bigger transactions? And looking at the full year, clearly, no guidance is being issued or revised by us, but is there anything to consider about fresh approaches to evaluating the free cash flow margin for this business along with how much free cash flows are growing?

Yes, absolutely. Yes, we were definitely happy to report results of that kind. There was some payment timing involved, no doubt; and as you noticed, our DSO fell quite a lot from one quarter to the next. So everything there played a part in it, plus the scheduling of certain sizable payments < >, and also the scheduling of when we have some dispersions too. So it's really — on the whole simply outstanding execution by the company. And at times you might observe a slight shift from quarter to quarter, yet we are undoubtedly, considering what this company can do and the operating leverage built into the model, in a position where we're producing substantial cash at present.

Got it. Thank you guys.

You bet.

Hey everyone, I appreciate you letting me ask something here. Shantanu, perhaps you could revisit the Creative segment. Could you share, just in a anecdotal way, whether there was any variation in the product mix, more specifically? My guess is that, with additional prospective subscribers returning to their jobs, Creative professionals among them, did the balance between individual applications and full suite memberships shift at all?

Saket, my sense is that every one of the businesses showed momentum. What I'd note is that the individual app offering, as you're aware, serves as a truly excellent entry point that helps us grow the business. So we keep witnessing fresh uptake when it comes to that single app. Then, looking at it through revenue, you could view it as the single apps making up roughly 50% of the business during the quarter. After that, we leverage it as an entry point to move people toward the all apps. Thus I wouldn't characterize it as a sharp shift between Q1 and Q2 — my view is that we simply keep seeing the pattern of bringing in new subscribers. And when it comes to revenue, without a doubt, we feel the Creative Cloud all apps is the place where we simultaneously create value for our subscribers and generate greater ARR for us over the long run.

Got it. Very helpful. Thanks, guys.

Thank you.

Hi, thanks for letting me ask. I'd like to focus on the Digital Experience portion of the company. My sense is that, based on whatever assumption you make regarding Workfront and once you adjust for that additional week we had in the prior quarter, this area displayed a pleasant sort of reacceleration. Could you assist us in grasping how you anticipate that faster pace will unfold over the remaining portion of the year? Also, roughly what are your longer-horizon aspirational goals for the growth rate you'd want this business to achieve?

So Tyler, the way I'd begin responding to that is to discuss the TAM, since I believe we keep mentioning how large that TAM is, for the whole company; thus, given the roughly $80 billion plus dollar TAM we possess, our optimism regarding that business remains very strong. From where I sit, we have the biggest delever we've had. If you examine the DX business, it centers on concentrating on transformational accounts spanning every deal band, plus distinct segmentation of the market. Our tendency is to view it as the corporate market, the commercial market and the strategic markets, and we observe strength throughout those specific areas; and as I said earlier when answering a prior question, the capacity to turn bookings into revenue and to upsell them further, but what we've accomplished with the experience platform and the capacity to have every one of the new services constructed upon it, that is genuinely quite unique within the industry, since that's roughly how we view it. Consequently, you ought to anticipate seeing, once more, Q4 be roughly the strongest close that normally occurs in enterprise software; and, we are plainly on track to surpass the DX target for the whole year, if you consider our first-half performance and our Q3 guidance, along with John's remark about anticipating Q4 to be seasonally strong.

Great, and if I could squeeze in one more question, I wanted to ask you more generally — I realize you haven't increased pricing in some time, and clearly you've been quite mindful of that throughout the pandemic. But when you consider reopening and, obviously, some worries surrounding an inflationary climate, I'm just wondering how your discussions about price have developed across the past three months? Thank you.

What we find most exciting regarding our Creative Cloud and Document Cloud businesses — assuming, Tyler, that those are the two areas you're inquiring about — is that acquiring completely new customers has really driven that entire operation. We pursue this through a range of products, and we pursue it in a range of regions. Regarding the worth we deliver to our clientele, it makes no difference if the economy is experiencing inflation or not; we remain convinced that we generate enormous value for them. Consequently, the discussions taking place at Adobe center on our innovation and product roadmap and on drawing in fresh customers far more than on attempting, right now, to pursue price optimization — and a huge TAM lies before us. That truly is where our attention goes.

Thanks.

Hey, Shantanu — regarding the digital experience segment, a lot of your SI partners keep saying they're stretched on capacity, and their utilization numbers are, as they put it, off the charts. I'm wondering whether you're hitting limits when it comes to implementation, and what you're doing to counter that? Is this more like one odd data point? Or are you hearing it everywhere from certain SI partners?

Brent, I'd put it this way — obviously there's strong appetite for what we offer and for the expertise around it, be it content and commerce, be it data and insights, be it the newer workflow things we've built, and what's great for us is that the ecosystem is eager for us to assist them with training. Every so often, I think you'll find some of them sensing that they're short on capacity, and that stems a bit more from the battle to attract talent. Still, on the whole, we'll keep doing whatever we can to back them up. And all things considered, I view it as a positive indicator for the business. When it comes to the product, we're absolutely going to keep ensuring it gets simpler to provision, simpler to operate, simpler to realize value. And we've noticed encouraging customer feedback tied to our efforts there. So with any luck, that's an isolated case when it comes to a given SI partner's capacity to take it on. Yet it's definitely the case when it comes to the broader market, plus the capability and the appetite for what we provide. So that piece, I'd say, is definitely accurate.

A quick second question, this one's directed at John, regarding margins in the latter half of the year. With reopening underway, what's your perspective on that? What I'm getting at is, this quarter you're roughly 1 point shy of your record quarterly peak for out margin. Does it need to ease back somewhat eventually, considering renewed spending in an opening environment, or is that not the case?

Yes, thanks Brent. Yes, we certainly expect a modest decline during Q3 and Q4 as reopening proceeds. What I mean is, we keep putting money in, like we mentioned, adding staff in R&D; we're absolutely putting funds into sales and variable marketing to genuinely propel the business and deliver against the enormous TAMs we have spanning all 3 businesses. So given the momentum present in the business world, we'll ensure we seize that momentum and put money in so we can capture it; though certainly, with reopening happening, those costs will return online, as we bring on additional personnel, it'll be introduced via a phased reentry approach for us across Q3 and Q4. Yet certainly, business travel is going to begin rising too.

And Brent, perhaps I could just chime in here—when we consider a few of those important emerging areas where we keep putting money in, and you're witnessing what comes out of that, I mean, regarding your inquiry on Real-Time CDP plus the related services, Sign, Stock, Mobile, and what we provide on mobile, we also spoke about 3D&I and the specialized solutions tied to it. So it truly makes sense for us to keep doing what we've always done—spending wisely on marketing so we can draw in additional customers to the platform, which once more, like John mentioned, will show up in sales and marketing expense. But all things considered, I mean, we're genuinely thrilled about the expansion we're witnessing.

Right, and when it comes to Shantanu, comparing this year to the last one, you're going to notice that margins widen, and that increase actually exceeded the goals we'd set initially. Appreciate it.

Hello, and thank you so much. Great job to the whole Adobe team — the results are truly spectacular. Shantanu, I'd like to revisit the Creative TAM, since that subject never stops intriguing me. We're seven, eight years into this shift, and the Creative business has reached a scale of $10 billion at its peak, with close to 100 and growth of 22% to 24%. As you peel back the layers of that Creative market, what have you discovered that perhaps caught you off guard? And as the business evolves, might we see that Creative TAM turn out to be even bigger than what you initially anticipated? Then, as a related point, would you talk about video and how that area is progressing? I recall you once saying video might become as large as the photo-oriented business — any perspective on that would be wonderful. Also, do you have any views on what role David might play in the Creative business? And with David returning, should we anticipate any refinements, enhancements, or modifications to the strategy on the Digital Media side? Thank you so much, and congratulations.