Adobe Inc (ADBE) 2019 Q2 法說會逐字稿

Good afternoon.

I would like to welcome you to the Adobe Second Quarter Fiscal Year 2019 Earnings Conference Call.

(Operator Instructions)

At this time, I would like to turn the call over to Mike Saviage, Vice President of Investor Relations.

Please go ahead, sir.

Good afternoon and thank you for joining us today.

Joining me on the call are Adobe's President and CEO, Shantanu Narayen; and John Murphy, Executive Vice President and CFO.

In our call today, we will discuss Adobe's second quarter fiscal year 2019 financial results.

By now, you should have a copy of our earnings press release, which crossed the wire approximately 1 hour ago.

We've also posted PDFs of our earnings call prepared remarks and slides and an updated investor datasheet on adobe.com.

If you would like a copy of these documents, you can go to Adobe's Investor Relations page and find them listed under Quick Links.

Before we get started, we want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets and our forward-looking product plans, is based on information as of today, June 18, 2019, and contains forward-looking statements that involve risk and uncertainty.

Actual results may differ materially from those set forth in such statements.

For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today as well as Adobe's SEC filings.

On this call, we will discuss GAAP and non-GAAP financial measures.

Reconciliation between the 2 is available in our earnings release and on Adobe's Investor Relations website.

Call participants are advised that the audio of this conference call is being webcast live, and it's also being recorded for playback purposes.

An archive of the webcast will be made available on Adobe's Investor Relations website for approximately 45 days and is the property of Adobe.

The call audio and the webcast archive may not be rerecorded or otherwise reproduced or distributed without prior written permission from Adobe.

I'll now turn the call over to Shantanu.

Thanks, Mike, and good afternoon.

Q2 was another strong quarter for Adobe, with record revenue and continued growth across Adobe Creative Cloud, Adobe Document Cloud and Adobe Experience Cloud.

We delivered $2.74 billion in revenue in Q2, representing 25% year-over-year growth.

GAAP earnings per share for the quarter was $1.29, and non-GAAP earnings per share was $1.83.

Adobe's solutions have become the standard for creating and managing the world's digital experiences.

Millions of consumers depend on brands like Photoshop and PDF for their personal and professional pursuits.

Thousands of enterprises the world over are turning to Adobe every day to help them transform their businesses.

The power of our brand, the continuous innovation in our products and services, the deep investment we're making in our technology platforms and a robust ecosystem of partners are enabling us to serve millions of customers around the globe.

We are creating large addressable markets in the creativity, document and customer experience management categories.

Our opportunity has never been greater.

In our Digital Media business, we drove strong revenue growth in both Creative Cloud and Document Cloud in Q2.

Net new Digital Media annualized recurring revenue, or ARR, was $406 million, and total Digital Media ARR exiting Q2 grew to $7.47 billion.

Q2 Creative revenue was $1.59 billion, which represents 22% year-over-year growth.

Mobile is a tailwind in our Digital Media business, and we're driving significant increases in mobile traffic and member sign-ups for our offerings.

This is the golden age of creativity, and our vision for Creative Cloud is to be the creativity platform for all.

Whether you're a student, an experienced designer, a YouTuber or a marketer, storytelling is central to the way you communicate and connect.

The key part of our Creative Cloud growth strategy is appealing to new segments of users.

Adobe Spark, our offering for easily turning ideas into compelling stories, graphics and web pages, is rapidly gaining popularity among creators from the classroom to the boardroom.

Spark traffic on web and mobile has more than doubled year-over-year.

In Q2, we expanded Spark's global footprint with support for 5 new languages: Brazilian-Portuguese, French, German, Italian and Spanish.

We've expanded our vision of platforms to include social media channels like Facebook, Instagram and YouTube.

Premiere Rush is rapidly becoming the solution of choice for YouTubers and social video creators.

Premiere Rush is now available on Android in addition to iOS, MAC and Windows.

Experience design is one of the most explosive creative categories, and we continue to innovate in this space with Adobe XD, our design system for UX and UI.

We released a major update to Adobe XD in May, enabling teams to create and share designs to enhance both productivity and collaboration.

In Q2, we drove strong subscription growth across our flagship photography and digital video offerings.

At NAB in Las Vegas, we unveiled new innovations across Premiere Pro, Audition, Character Animator and After Effects.

One exciting announcement was the availability of the Content-Aware Fill feature in After Effects powered by Adobe Sensei, which magically enables editors to seamlessly remove unwanted objects from video, saving hours of tedious manual work.

It won 5 awards at the show, including the NAB Show Product of the Year Award.

We continue to expand Creative Cloud with value-added services.

Adobe Stock, our fast-growing service for stock images, videos and millions of additional creative assets, grew greater than 25% year-over-year.

We're proud of the role our solutions play in inspiring the global creative community and shaping popular culture.

This quarter, we launched a creative campaign with 17-year-old music sensation Billie Eilish, which inspired significant participation among our important student segment.

With Adobe Document Cloud, we're reinventing how people scan, edit, collaborate, sign and share documents in the cloud and mobile era.

Document Cloud revenue in Q2 was a record $296 million, and we grew Document Cloud ARR to $921 million driven by continued strength in Acrobat subscription adoption.

Mobile is the next frontier for digital documents and our flagship apps.

Adobe Reader for mobile and Adobe Scan continue to gain traction.

Adobe Scan, which allows you to capture everything from documents to forms, whiteboard sketches or business cards and turn them into picture-perfect, high-quality PDFs, is now the leading scanning app on iOS and Android.

We're driving adoption for Adobe Sign, our cloud-based electronic signature solution, with customers including Merck, Hitachi and Iowa State University.

They're using Adobe Sign to provide a better customer experience, close contracts and win business.

In our Digital Experience business, we achieved record Experience Cloud revenue of $784 million for the quarter, which represents 34% year-over-year growth.

To win in today's competitive landscape, businesses must become more customer-centric and data-driven.

Our vision for Adobe Experience Cloud is to enable businesses to reimagine the entire customer journey using data to understand and drive their business from discovery through trial, purchase, use and renewal.

At the core of Adobe's own transformation has been our use of Adobe Experience Cloud.

B2B and B2C companies across every country and industry are choosing Adobe Experience Cloud, the only end-to-end solution for marketing, advertising, analytics and commerce to master the art and science of customer experience management.

Key Experience Cloud customer wins in Q2 include Amazon, Rite Aid, Vodafone and Wyndham Hotels.

The acquisitions of Magento and Marketo have significantly increased our value to existing customers, helped us attract new logos and expanded Adobe's addressable opportunity.

Magento adds to our Experience Cloud vision by allowing us to make every moment personal and every experience shoppable in addition to attracting a large and vibrant developer community to Adobe.

This quarter, we announced the availability of Adobe Commerce Cloud built on the Magento Commerce platform with deep integrations across Adobe Analytics Cloud, Marketing Cloud and Advertising Cloud.

We announced a new partnership with Amazon, creating Magento Commerce branded stores for Amazon sellers, which will give merchants a more seamless way to manage their business across both Amazon.com and their own storefront.

With the addition of Marketo, Adobe provides the leading marketing engagement platform for both B2B and B2C customers.

We've deepened the integration between Adobe Marketing Cloud and Marketo Engage.

We're leveraging Adobe Sensei so companies can deliver the right experiences to the right people at the right time.

This quarter, we announced our partnership with LinkedIn, empowering B2B marketers and sellers to easily identify, understand and engage B2B customer buying teams.

At Summit, we announced the global availability of Adobe Experience Platform, the industry's first real-time platform for customer experience management.

Adobe Experience Platform provides real-time CDP and DMP capabilities, and stitches together data from across the enterprise, creating real-time customer profiles and enabling the activation and delivery of hyper-personalized experiences.

Some of the world's leading brands are already using Adobe Experience Platform in beta, including Best Buy, Sony Interactive Entertainment, The Home Depot and Verizon Wireless.

We've built a strong ecosystem of global partners.

Recently, we announced new partnerships with ServiceNow and Software AG.

We will deliver integration between Adobe Experience Platform and the ServiceNow platform as well as with Software AG's webMethods platform.

Adobe and Marketo were both positioned as Leaders by Gartner in the Magic Quadrant for Multichannel Marketing Hubs.

Among the 21 companies evaluated, Adobe achieved the strongest position for completeness of vision.

Adobe Experience Cloud was recently named a leader in the Gartner Magic Quadrant for Digital Experience platforms.

Adobe Marketing Cloud, Advertising Cloud and Analytics Cloud were reviewed and successfully validated by TrustArc, making Adobe the first company in the Digital Experience space to receive TRUSTe GDPR Privacy Practices Compliance Validation.

Our mission to change the world through digital experiences gives purpose to the work we do.

We're proud Adobe was honored with a Hope Award from the National Center for Missing and Exploited Children.

For more than a decade, Adobe has been partnering with NCMEC through software contributions and technical expertise in service of its important mission: To find missing children and prevent child exploitation and victimization.

At Adobe, our employees are our greatest asset, and we continue to invest in our future talent.

This summer, we're pleased to welcome more than 1,000 interns and new grads to Adobe from more than 150 schools around the world.

Our strategy of empowering people to create and transforming how businesses compete offers a unique value proposition in the market and large addressable opportunities to grow our business.

FY '19 is expected to be another record year.

We expect the first half momentum to continue in the second half.

Our revenue growth, cash flow and operating profit differentiates us among SaaS companies at scale.

John?

Thanks, Shantanu.

As with last quarter, we are reporting results based on our adoption of ASC 606 this fiscal year.

As a reminder, our results in the year ago fiscal period were reported based on ASC 605.

We have not adjusted our prior fiscal year reported numbers for comparison purposes under ASC 606.

In Q2 FY '19, Adobe achieved record revenue of $2.74 billion, which represents 25% year-over-year growth.

GAAP diluted earnings per share in Q2 was $1.29, and non-GAAP diluted earnings per share was $1.83.

Business and financial highlights in Q2 included: record Digital Media revenue of $1.89 billion, including Creative revenue of $1.59 billion and Adobe Document Cloud revenue of $296 million; strong net new Digital Media ARR of $406 million; record Digital Experience revenue of $784 million; remaining performance obligation, or RPO, grew to $8.37 billion; cash flow from operations of $1.11 billion; repurchasing 2.5 million shares of our stock through stock buyback; and approximately 91% of our revenue in Q2 was from recurring sources.

In our Digital Media segment, we achieved record revenue of 22% year-over-year growth.

The addition of $406 million net new Digital Media ARR during the quarter grew the total to $7.47 billion.

Within Digital Media, we achieved another strong quarter with our Creative business.

Creative revenue grew 22% year-over-year in Q2, and we increased Creative ARR by $341 million.

Notable growth drivers in Q2 across conversion, upsell and retention included: new user growth driven by numerous global initiatives to generate demand, including targeted campaigns and promotions, leveraging the funnel of users coming to Creative Cloud through mobile apps and online engagement and continued focus on new categories, including immersive media and new segments such as social media creators; Creative Cloud Photography Plan subscriptions; Adobe Premiere Pro Single App subscriptions in the video category; Creative Cloud enterprise, including customer acquisition, seat expansion and services adoption; and adoption of Adobe Stock where revenue and subscription growth rates remain strong.

We achieved record Document Cloud revenue of $296 million in Q2, which represents 22% year-over-year growth, and we added $65 million of net new Document Cloud ARR during the quarter.

The growth in the Document Cloud business was driven by strong demand on adobe.com, the continued migration of the Acrobat perpetual customers to subscriptions, enterprise services adoption and monetization of mobile app use.

In addition, Adobe Sign achieved another strong quarter of growth.

In our Digital Experience segment, we achieved record quarterly Experience Cloud revenue of $784 million, which represents 34% year-over-year growth.

Experience Cloud subscription revenue was a record $654 million.

Business performance in Digital Experience during the quarter was driven by strength in: Adobe Marketing Cloud, including Adobe Experience Manager, Adobe Target and Adobe Campaign; multi-solution digital transformation engagements; and traction with cross-selling Magento and Marketo in the enterprise.

During Q2, we continue to focus on driving Magento and Marketo synergies, including organizational, product and go-to-market alignment.

Both Magento and Marketo were prominently featured at Summit events in the U.S. and Europe, and we also held Magento Imagine and Marketo Marketing Nation events during Q2.

The depth and breadth of our enterprise partner ecosystem remains a competitive advantage contributing to pipeline generation, customer success as well as financial performance.

We had another successful quarter of selling alongside Microsoft where our combined value proposition is resonating with enterprise customers.

Our overall financial results were negatively affected by currency rate movements.

Total Adobe Q2 year-over-year revenue growth would have been 27% if measured in constant currency.

In year-to-date, total first half FY '19 year-over-year revenue growth would have been 26% if measured in constant currency.

More specifically in Q2, from a quarter-over-quarter currency perspective, FX decreased revenue by $4.9 million.

We had $9 million in hedge gains in Q2 FY '19 versus $8.5 million in hedge gains in Q1 FY '19.

Thus, the net sequential currency decrease to revenue considering hedging gains was $4.4 million.

From a year-over-year currency perspective, FX decreased revenue by $45.3 million.

The $9 million in hedge gains in Q2 FY '19 versus $0.3 million in hedge gains in Q2 FY '18 resulted in a net year-over-year currency decrease to revenue considering hedging gains of $36.6 million.

In Q2, Adobe's effective tax rate was 11% on a GAAP and non-GAAP basis.

Our trade DSO was 42 days, which compares to 44 days in the year ago quarter and 46 days last quarter.

Remaining performance obligation, or RPO, was approximately $8.37 billion exiting Q2, which compares to $8.13 billion exiting Q1.

Deferred revenue exiting Q2 was $3.13 billion.

The sequential decline in deferred revenue was a result of timing rather than business performance due to fewer billing cycles in our second quarter.

The impact was more than offset by an increase in unbilled backlog.

Our ending cash and short-term investment position exiting Q2 was $3.48 billion, and cash flow from operations was $1.11 billion in the quarter.

In Q2, we repurchased approximately 2.5 million shares at a cost of $659 million.

We currently have $6.6 billion remaining of our $8 billion repurchase authority granted in May 2018, which goes through 2021.

Now I will discuss our financial targets.

As a reminder, our Q3 includes the summer months of June, July and August, and we expect normal seasonality to influence our results during the quarter.

In Q3 FY '19, we are targeting revenue of approximately $2.8 billion; Digital Media segment revenue year-over-year growth of approximately 20%; net new Digital Media ARR of approximately $360 million; Digital Experience segment year-over-year revenue growth of approximately 34%; other expense of approximately $22 million; tax rate of approximately 11% on a GAAP and non-GAAP basis; share count of approximately 491 million shares; GAAP earnings per share of approximately $1.40; and non-GAAP earnings per share of approximately $1.95.

As usual, we are not updating annual targets at this time of the year.

We are pleased with our first half performance, and we expect our first half momentum to continue in the second half with typical seasonality in Q3 and strength in Q4.

We continue to expect sequential operating margin growth as we move through the second half of the year.

I'll now turn the call back over to Mike.

Thanks, John.

Adobe MAX, our user conference focused on our Digital Media solutions, will occur during the first week of November this year in Los Angeles.

On day 1 at MAX, on Monday, November 4, we plan to host a financial analyst meeting.

Invitations, including discounted registration information, will be sent to our analyst and investor e-mail list later this summer.

More information about the event can be found online at max.adobe.com.

If you wish to listen to a playback of today's conference call, a webcast archive of the call will be available on our IR site later today.

Alternatively, you can listen to a phone replay by calling (888) 203-1112, use conference ID #2843011.

International callers should dial (719) 457-0820.

The phone playback service will be available beginning at 5 p.m.

Pacific Time today and ending at 5 p.m.

Pacific Time on June 25, 2019.

We would now be happy to take your questions.

(Operator Instructions) Operator?

(Operator Instructions) We'll take our first question from Brent Thill with Jefferies.

Shantanu, just on Magento and Marketo.

Just curious if you could give us your updated thoughts on the integration, how you're doing in the field and some of the customer traction on both of those acquisitions, that would be helpful.

Sure, Brent.

Both of them are actually, big picture, going really well.

We have, as you saw, started to integrate the products, the delivery of the Adobe Commerce Cloud that was based on Magento Commerce.

We announced some good partnerships there as well as it relates to what we are doing with Amazon to allow multiple small and medium businesses to be able to deliver their storefronts based on this combined technology.

We did some good work as it related to integration between the Adobe Experience Manager as well as the Adobe Commerce Cloud.

So you can now have in a single digital foundation the ability to do web content management, analytics as well as commerce.

So product integration with Magento is going well.

I think on the market -- go-to-market efforts, the enterprise motion that we have, which was clearly a strength of Adobe, we are putting the Magento solutions through that enterprise go-to-market motion.

We've also done a good job, I think, of integrating the mid-market, small and medium business, whatever you want to call it, of Magento and Marketo because the combination of both of them give us a little bit more heft in the marketplace.

And on Marketo as well, I mean it's clearly a fabulous SaaS platform for engagement as it relates to B2B marketing.

The focus there has been on both integration with Adobe Analytics as well as making sure that the combination of Campaign and Marketo will be the best B2E, which is what we call sort of the business-to-everyone engagement platform.

So pleased with it.

Results are good, continued focus.

And I think that's one of the reasons why we are aligning the organizations more rapidly to make sure that we get the appropriate alignment.

And we'll take our next question from Jennifer Lowe with UBS.

It was nice to see the net new ARR outperformance this quarter.

So I -- it sounds like it was a few different things there, but just any more color on what drove the upside would be great.

In particular in the last quarter, there were some unusual items in there.

I just want to check was there anything unusual this quarter.

And maybe just to round it out, as we think about seasonality into Q3, it looks like the guide implies a bit more seasonality than what we saw last year.

Anything to keep in mind there as well?

Yes.

I think big picture, Jennifer, Digital Media, we continue to do really well.

We had, as you point out, a great Q2 achieving, I think, $406 million in net new ARR, which is a record for Q2.

Certainly, I think in terms of the different offerings, as John mentioned in his prepared remarks, we are seeing traction on the video offerings.

We're seeing traction with enterprise adoption services.

Both Stock and Sign are continuing to perform quite well.

International expansion continues to be an area of opportunity as well as new customer acquisition through the marketing campaigns that we have.

And if you think about, as you pointed out again, the $360 million target that we're putting for Q3, which would be a record for a Q3, and then you add to that the $750 million plus in ARR for the first half, I mean it's clear that the momentum continues in the business.

I think to your question around seasonality and color, I think it's our expectation that net new DME ARR in Q4 would be similar to what we had last year in Q4.

And so if you add that all up, it implies that we will have record new ARR again in 2019.

And I think underlying all of that, as we've outlined to you, is the DDOM model that we have.

It allows us to optimize our marketing spend.

It allows us to engage better with customers, and MAX should be another great show for that business.

One thing I should also mention, sorry, is that Acrobat continues to, as you clearly saw from the results, do really well.

And we'll take our next question from Keith Weiss with Morgan Stanley.

Very nice quarter.

I wanted to touch base on kind of leadership on the Digital Experience side of the equation.

Kind of what were the current thought processes?

I'm sure, Shantanu, you're doing a great job sort of with leadership there, but are we planning on replacing Brad and kind of what's the sort of the game plan for rolling out new leadership and how sort of the new assets are going to fit under that new leadership plan?

Thanks, Keith, for the question.

It's such a large opportunity that we're completely convinced, I am, that the focus on the aligned organization was the right choice.

It's been great.

I focus a lot of time on the customers.

Just I think over the last 10 days, 3 Fortune 100 CEOs have come in to talk to us about our view and our vision for digital transformation, spent a lot of time on the product to make sure that we get great alignment.

You've seen the general availability of the Adobe Experience Platform, the artificial intelligence features that were now in beta, attribution and customer journey.

We've signed some great partnerships with Software AG and ServiceNow and really have been trying to focus also the organization on a lot more with respect to customer centricity.

I think as we've aligned the 2 acquisitions, the Magento and Marketo, which we've outlined to you, Keith, was a priority, we brought the same rigor that we have in DDOM for creating that cadence and customer centricity, for pipeline progression, for marketing demand generation as well as for the software delivery life cycle.

And so I'm really also pleased with how the current management team, which is extremely strong and has stepped up and is executing in alignment.

So while the search continues, we haven't missed a beat, and I've been spending a lot of time, which just continues to give me a lot faith in the long-term opportunity associated with the business.

And it's not hampering the progress at all in terms of what we need to do.

And we'll take our next question from Brad Zelnick with Credit Suisse.

Congrats as well on a great quarter.

Shantanu, on customer data platforms, there's been a lot of recent news from Adobe as well as some of your competitors watching their own CDP offerings.

How will Adobe Experience Platform differentiate from peers?

And why is your product going to be better and win in the market?

It's a good question, Brad.

And I think fundamentally, it stems from the fact that when you have the leading content management platform, we have the data.

And I think that continues to differentiate us in terms of the customer and traction across different channel points.

We've been talking to you for a couple of years of the investment that we've made in the Adobe Experience Platform.

The vision there has always been not only to integrate all of our existing solutions so we have a platform across content and data to win it but to frankly stitch together all that customer profile in real time.

And when you have all that customer interaction that's happening as a result of mobile access to the website or website access or as customers are giving us access to the other channel data, that's just a unique differentiator that no other company has.

So we start off from that being a huge advantage.

I think the effort that we've put in to an ecosystem of partnerships there in terms of ingesting that data, the common taxonomy that we've agreed to, the partnership with SAP and Microsoft on ODI and frankly the credibility that we just continue to get associated with the fact that when you're processing these hundreds of trillions of transactions on an annual basis that we have more insight to be able to activate it, I think all of that gives us hope.

I think with the whole Experience Cloud, I will continue to reinforce that when we talk about it being north of $70 billion addressable market, you should look at this as it's not a win-loss kind of situation.

There is just so much opportunity.

But starting with what we had with Audience Manager and DMP that we have with Demdex, combined with what we are doing in CDP and making sure that, that all operates in real time, I think that is just a unique combination for Adobe.

And we'll take our next question from Saket Kalia with Barclays Capital.

Maybe for you, Shantanu, just to dig into one of the prior questions on Creative.

Adobe Spark seems to be doing very well.

So can you just talk a little bit about why you think that's doing so well?

And maybe more specifically, talk about what you've seen in the last couple of years that Spark has been available, what you've seen in terms of lifetime value and customer acquisition cost qualitatively.

Yes.

Saket, I mean I think it stems from this fundamental assertion and hypothesis that we have -- belief that we have that everyone has a story to tell.

And when you have K-12 student all the way to the largest enterprise in the world wanting to use social media, wanting a quick template-based approach to start to be able to express themselves and then grow that expertise into using our products, it's just a fantastic on-ramp.

And so the millions of customers that we have, the penetration in the education segment is both an opportunity in itself where frankly great brand building and awareness of what the Adobe solutions can do across the spectrum.

And so I think it really -- we've been talking about this for a while, but it's the golden age of creativity and design.

And it doesn't matter whether you're starting history or geography.

I mean the ability to express yourself visually and graphically and to do that across social channels is just such an intrinsic part of what it is.

And I think we've really struck a chord with a great, great product across both mobile.

I think the fact that we're exploring different platforms.

And previously, we used to look at print and web as a platform.

Now we look at even channels like YouTube as a platform.

It's just a great, in addition to mobile, way to attract new customers.

So I think that's why it really resonates with customers and why it will continue to be both from an ARR perspective a growth as well as from overall brand and awareness just a significant ability for us to continue to keep Digital Media ARR momentum going.

We'll take our next question from Sterling Auty with JPMorgan.

Maybe I can bring John into the conversation here.

Kind of curious as you look at the growth in Creative Cloud for the quarter, is there a way to disaggregate how much of that growth has actually come from the price changes that you've made over x number of quarters versus how much of that growth is actually coming from pure volume.

Yes.

Sure.

It's really coming from both.

And when you think about the North America price increase that we did last year in Q2, that, as we said, was going to be accretive, and certainly through the year as we now anniversary that price increase.

And then earlier this year, in February, we did price increase for Doc Cloud and also in EMEA for Creative.

So all these things are accretive, but one of the things that we've talked about for a long time now is attracting new users to the platform is really our biggest growth opportunity.

And we're able to do that through the various new products that are attracting folks to our platform because some of these newer products are easier to use.

And then as they get comfortable with those, they end up -- we're able to upsell them into full suite products for multiple applications.

So we have this opportunity to really kind of tackle it from many different ways, and we've been successful now in growing the number of users across the platform and also leveraging the mobile app on-ramp.

But if you think of it in terms of material, it's primarily new user growth and new subscriptions, Sterling, is how you should think about it.

I think the value that we're providing enables us to keep driving the anniversary of people moving over to the new pricing, keep them as loyal customers and improve their engagement.

But it's -- as it relates to the photography and video, it's primarily new user growth that's driving the Digital Media ARR.

And we'll take our next question from Kash Rangan with Bank of America.

Congratulations.

I'm curious, given the strength in the quarter, you had a very nice quarter on net new ARR and on the Experience Cloud side, you had very good bookings as well.

But when I look at the guidance, you didn't change the guidance for the year, but Q3 numbers look a little bit light relative to the Street at least.

Is it just a function of conservatism given maybe a questionable macro environment?

Or is it just that the seasonality of the business, we've had the first chance to model the seasonality of the business including the acquisitions and that we may have been a little off relative to what is the new seasonality of Adobe?

Just wondering what your thoughts are there, and congrats.

Yes.

I think -- sure.

Thanks first.

I mean big picture, it's clear we're having another record year and great execution against both growth opportunities across all of the 3 Marketing Clouds: Creative, Document and Experience.

And as you point out, the results, revenue growth of 25%, the significant cash flow as well as the strong EPS, while we're increasing margins.

I think on Digital Media, I gave some color as it related to what will certainly be a record Digital Media ARR year.

And I think we factor in seasonality.

And so that's, I think, part of how you should be thinking about Q3 versus Q4.

And NDX as well, I mean the subscription revenue growth, if you look at that, when you see the revenue growth of 34%, the subscription revenue growth certainly has exceeded that.

And it's closer to 39%.

And so I think that also reflects the success that we continue to have and the fact that we have the leading SaaS enterprise platform for enterprises to engage digitally with their customers.

And so I think big picture, the 2 opportunities continue to be significant tailwinds.

We're executing well against it.

I think we'll give you more color as it relates to Q4 in September as well as 2020 at MAX.

But continue to be really optimistic.

And I think where we are in the quarter, just updating annual numbers for a year is akin to giving Q3 and Q4 targets.

And that's why as you know, typically, we don't do that, but that should not change the fact that we have momentum in the business and optimism for the future.

We'll take our next question from Mark Moerdler with Bernstein Research.

Congrats also on the quarter.

So you've guided to 34% Digital Marketing growth for the back half of the year off of what's a more difficult set of compares as you lapped Magento's acquisition and lapped a bit of the Marketo.

Can you give us a bit more color on what's driving that strength?

I appreciate.

I think as it relates to the Digital Experience business, we've always outlined, Mark, that the focus has been on driving subscription bookings.

I think as the deferred revenue also starts to taper off, that's certainly going to factor into what happens.

But it's just a large addressable opportunity.

We have the market-leading products, and we continue to be excited about how we execute against that.

So that's how I would think about that particular business.

And we'll take our next question from Jay Vleeschhouwer with Griffin Securities.

Shantanu, a technology strategy question.

I was hoping we could parse through the plethora of 3-letter acronyms that Adobe has been sharing with us at Summit and in other occasions.

We now have CDP, CXM, CXT, XPM and so forth.

The question is ultimately does Adobe have a single underlying data model that is the Adobe data model.

Or could you foresee 2 or more principal data models, particularly an MTX?

I ask in part because at Summit EMEA last month, there were some mention in one of the sessions about you're having a new purpose-built B2B data model.

And so maybe you could put this in the context of the complexity of the architecture, the technology as it might relate to any implications for R&D and sales efficiency.

You forgot ODI and maybe a couple of other TLAs, Jay, but it's a good question.

And I think as it relates to how we think about the technology underpinnings, we think about it from 2 strategic points of view.

The first is are we able, in our own products, to have a common way in which people can really provide integration for our existing applications better than any other individual point product vendor can provide?

And I think our track record, as you know, better than most in terms of what we've done on the Digital Media side of having colors and types and fun faces work well.

That is the reason why the underlying data model allows us to have things like campaigns or segments or audiences work better across our applications than anybody else.

And so we did that heavy lifting associated with having a common way to define the taxonomy, the customer journey across our products.

We clearly saw that, that was not going to be adequate in terms of the aspirations we had to actually being the underlying sort of infrastructure for how all companies deal with digital transformation.

And the reasons for the partnership with both Microsoft as well as with SAP is to actually, through ODI, make that true, not just for customer behavioral data where we clearly have access to all of that data but also to extend that to financial data, to transactional data, over time to IoT data.

And so the way I would think about it is it's a common taxonomy.

It's a common way for people to extend it, but we don't have to do the heavy lifting of defining everything.

The beauty of the model is that actually, we define the framework, we define the API, we define the services, and other people can actually extend and augment that.

And so it enables the entire ecosystem to partner.

So it's exciting.

We deliver that through the Adobe Experience Platform.

I talked in the prepared remarks about how we have early beta customers.

We are starting to see it.

Certainly, Adobe is using it in our own offering.

But I think it's really going to be the underlying infrastructure for a next-generation enterprise who wants to engage with their customers.

So we're excited about that.

And we'll take our next question from Kirk Materne with Evercore ISI.

Shantanu, I want to ask a little bit about Sensei in the context of is that coming up at all in some of the conversations on the Experience Cloud side.

I know there's a lot of factors that go into those decisions from a product portfolio perspective.

I was just kind of curious if Sensei is adding to the conversation and if you view that as sort of a needle mover for you all at this point.

I'm really glad you asked that question because we talk a lot about the Adobe Magic that we've had in the Digital Media products, and we certainly touched on what we've done with Content-Aware Fill, which is Magic as it relates to being able to do that across frames and reduce a whole bunch of complexity for the video products.

We are investing very heavily in the same technology, Sensei, in the Experience Cloud.

Let me maybe give you a couple of examples to make it more tangible.

I mean the first is when you're doing search, the way you do search when you're doing it in Digital Media, trying to find an object in Stock where we have the best technology is still substantially different from that way you would do search in Commerce where you're looking for an object maybe based on a color or based on the type of preference.

So I think in Commerce, that's one area where Sensei and the ability to do search and find the right shopping good that you're interested in, that's a game changer.

In targeting and in what we can do around how we can optimize targets and recommendations, that's another area where AI is certainly beneficial.

When you are talking about a subscription model and customer preference and a prediction score of who's likely to churn and what are the best way to engage with them across channels, that's another area where we have AI technology.

But in addition to that, as part of the Experience Platform, we actually now have modules.

I talked a little bit about Attribution.

AI and things like that which are AI modules and frameworks for people to actually augment their Experience Cloud.

So I think unlike other companies, we believe that the AI is best built in into each of the existing solutions and through frameworks.

But we've -- a track record of delivering against that has been strong, and it's only getting better.

And we'll take our next question from Tom Roderick with Stifel.

John, let me throw this one at you just looking at the Digital Experience segment itself.

We saw a nice bounce back in the segment gross margins.

And part of that, of course, is gaining scale and some of the deferred revenue write-downs rolling off.

But the other part, of course, is realizing some of the integrations between the components.

And I was hoping you could speak to what you're seeing with some of the leverage between the properties of Magento and Marketo and the core of Digital Experience.

In particular on the COGS side, are there elements of architectural leverage that are starting to show up?

And then even below that line, are you seeing like sales leverage between the acquired properties?

Yes.

No.

Absolutely.

For sure, we're seeing the ability in both properties that we acquired for us to be able to unify development across the platform, and that in and of itself provides some efficiencies.

In addition from the go-to-market perspective, as we've talked about, we've unified and aligned our go-to-market strategy with the existing Adobe enterprise sales organization under Matt.

And so that's been able to bring a lot more efficiency as we cross-sell not only the existing Digital Experience products but also Magento and Marketo, not to mention then our partner ecosystem where we are selling alongside Microsoft, for example, and being successful and having multisolution sales with them as well.

So it's been something that through scale and through continued focus on integration that we're able to get some leverage out of that.

The one thing maybe I'd like to add to that, I know there was some question around seasonality, and while this question was specifically around operating margins, I think Kash had asked.

So maybe we'd give you color on how we think about our investment as well as what's happening as it relates to margins.

I think it's clear that despite the revenue growth and investment, that the operating margin of the company has improved throughout the year.

And I think we remain very focused on profitability.

If you look at seasonally how that should play out over the second half of the year, our guide for Q3 shows EPS increasing by approximately, I think, $0.12 despite seasonality.

And we certainly expect Q4 to be a strong seasonally finish to the year.

And I think to give you some color on that while we are not updating our annual targets, we would expect that sequential EPS growth from Q3 to Q4 to be about 3x the growth from Q2 to Q3.

So hopefully, that gives you some color on how we think about the investments.

We certainly continue to believe in investing for the revenue growth that we're seeing.

And it also clearly gets us back to north of 40% margin.

So hopefully, that gives you some color on seasonality as well as, while the question was on gross margins, how we think about operating margins and expenses.

We'll take our final question from Walter Pritchard with Citi.

Question on the Digital Experience side.

You had talked in the past about a 25% growth in the book of business including these 2 acquisitions.

I'm wondering sort of how things are tracking so far this year and what you've learned in terms of first half growth as that trend progressed into the second half.

Yes.

As you know, Walter, we don't update how we are doing against bookings during the year as we think about the underlying dynamics of the industry and the need for Digital Experience solution.

Nothing diminishes the belief that we have that, that continues to be a large growth opportunity.

I think as you could see from the subscription revenue growth that we see, we continue to focus on executing against that.

And so we'll certainly provide more color, as we've said, on that on an annual basis.

But just big picture, the available opportunity, I think, continues to be large.

And given Mike said that, that was the last question, maybe just as a quick summary again, it's clear that we have the right strategy and the focus on delivering great customer value, we're pleased with the first half financial results.

We expect that momentum to continue in the second half, the strategy of empowering people to create and helping businesses transform.

We believe that continues to be a north of $100 billion addressable market opportunity.

And we're really pleased with the attendance that we saw at the customer events in the DX, whether it was the Summits in the U.S., Europe, whether it was Marketo Marketing Nation, whether it was Magento Imagine, I think that just reflects both the leadership that we have in product strategy and vision as well as the strength of the customer and partner community.

And FY '19 is shaping up again, and we expect it to be another record year for revenue.

And I think the innovation road map and opportunity positions us really well for future growth.

We appreciate all of you joining us today.

Thank you.

And this concludes our call.

Thanks, everybody, for joining us.