Q3 2020 Adobe Inc Earnings Call

Roughly an audience.

Adobe had an outstanding third quarter, we saw strength across creative cloud document cloud and experienced cloud.

We achieved $3.23 billion in revenue in Q3, representing 14% year over year growth.

GAAP earnings per share for the quarter was $1.97, representing 22% year over year growth.

And non-GAAP earnings per share was $2.57, representing 25% year over year growth.

In our digital media business, we drove strong revenue growth in both creative cloud and document cloud in Q3, achieving 2.34 billion in revenue representing 19% year over year growth.

Net new digital media annualized recurring revenue or our AR was 458 million and total digital media ARR exiting Q3 grew to $9.63 billion.

We believe that everyone has a story to tell and our goal is to give all creators from students to social media Influencers business communicators and creative professionals, the ability to create and amplify their stories.

Creation and consumption across phones tablets and desktops is exploding.

Web content mobile application creation imaging video animations screen design.

Our end three D are all surging in this new era of digital storytelling and business transformation.

Enabling the capture altering and collaboration across each of these categories and inspiring our global communities creative cloud is driving this massive content revolution.

Q3, creative cloud performance was outstanding with net new creative cloud EMR of $360 million and revenue of $1.96 billion.

Driving our Q3 creative cloud performance was.

Record traffic to Adobe Dot Com, our acquisition engine using proprietary models for attribution and optimization.

Strength in our creative cloud single App and complete offerings across all geographies.

Growth in our creative mobile apps, delivering discrete revenue as well as a funnel to our multi surface creative cloud offerings.

Improvement in retention driven by increased engagement and product usage among individuals teams and enterprises.

Outstanding performance in the imaging and video categories with Photoshop Lightroom and Premier Pro.

And strong performance in the education segment across students educators and institutions.

Adobe Max the world's largest creativity conference will be hosted virtually in October.

In addition to showcasing exciting new creative cloud products and services. Our programming includes 56 hours of around the world content and features incredible creators like actor Keanu Reeves photographer, Annie Leibovitz and award winning filmmaker Eva to Bernie.

We expect a record turnout and are thrilled to already have over 200000 registrations.

With Adobe document cloud, we've reinvented how people create edit share and sign digital documents with acrobat and PDF.

While digital documents have always helps small mid size and large businesses realized productivity and efficiency gains they've now become central to businesses operating remotely.

Supported with a rich set of Npis Adobe document cloud enable seamless workflows and collaboration across devices.

Q3 document cloud performance was exceptional with net new document cloud ARR of $98 million and record revenue of 375 million.

Q3 highlights included strong growth in gross new EMR coming from the Adobe reader funnel.

Significant gains in acrobat web monthly average use acrobat mobile installs up 33% year to date.

Significant momentum with Adobe sign, including our announcement to pursue fed ramp moderate status.

Customer wins, including city, Pwc, Pepsi HSBC, Markel NJ power and the.

And the release of the Adobe document cloud resource hub for education, a one stop destination outlining our document cloud can assist with remote learning.

The shelter in place requirements instituted across the globe created a heightened sense of urgency among all companies to accelerate their digital transformation.

Overnight small midsize and large b to C and b to B companies shifted every aspect of their customer relationships from acquisition all the way through renewals to digital.

As a company that's been through its own digital transformation, we have a deep understanding of what it takes to be a digital business and that experience makes us the ideal partner to help other companies do the same.

Over the past decade, we have put the right technology processes and people in place to precisely and persistently measure and manage performance everyday at scale across each of our businesses.

We developed across company real time data driven operating model that Leverages all of our experience cloud technology.

The CSM playbook, which relies on continuous product platform and process innovation has fundamentally changed the way we run our company and today, we are helping our customers build their own CSM playbooks.

The industry's most comprehensive offering adobe experience cloud features industry, leading applications and services built on the Adobe experience platform, leveraging Adobe sensei, our AI and machine learning framework.

Digital experience revenue was $838 million in Q3 so.

Subscription revenue, excluding advertising cloud grew 14% year over year.

Q3 highlights include.

Increased adoption of Adobe experience platform and the launch of new capabilities that allow marketers to accelerate data collection across channels to enable faster personalized experiences based on real time insights.

General availability of data governance capabilities in the real time customer data platform.

Early traction with our customer journey analytics service, which provides customers a complete view of the customer journey online and offline access.

Acceleration in the deployment of our Adobe experience manager cloud service so.

Significant quarter over quarter growth for commerce offerings work.

Working with our advertising cloud customers to wind down our transaction based offerings.

Key customer wins included Eli Lilly Truest, Nike lows shell Lloyds and the US Department of Commerce.

Our partnership with IBM and Red hat to enable experienced cloud deployment in hybrid cloud environments that further strengthens real time data security for enterprises and regulated industries Andrew.

And recognition as a leader in six Gartner Magic quadrant and Forrester wave reports.

In the Gartner Magic quadrant for CRM lead management Adobe was the leader achieving the best scores across ability to execute and completeness of vision.

Adobes record results would not be possible without the ongoing contributions and unwavering dedication of our employees around the world.

They have demonstrated incredible resilience by quickly pivoting to a remote work environment without missing a beat I'm.

I'm proud and grateful.

Great companies are defined by how they manage through difficult times are strong.

Our strong corporate culture focused on innovation.

Sectional customers and partners and always doing right by our communities drives us and our success.

We're excited about the tremendous opportunity ahead of us and look forward to continuing our strong momentum in 2020 and beyond.

John.

Thanks Shantanu.

Adobe delivered outstanding performance in Q3 highlighted by strong net new digital media ARR digital experience subscription revenue growth and record operating cash flows despite challenging macroeconomic conditions, the ongoing remote work and learning from home environment provide an opportunity to offset normal Q3 summer seasonality.

Our success was driven by Adobes unique ability to draw insights across our business in real time, utilizing our data driven operating model.

This enables us to understand demand for our solutions make strategic investments to capitalize on the highest returns and drive engagement and conversion across our channels, most notably our web properties throughout the.

Throughout the quarter, we generate sustained levels of traffic and demand across our adobe dot com offerings, including during the summer holidays were purchasing patterns of historical softened utilizing our proprietary our vision technologies, we made variable marketing investments that enabled us to attract and engage new customers delivering the strongest Q3 on record for Adobe while at the same time maintaining fiscal discipline to solve.

Great earnings growth.

As a result in Q3 Adobe achieved record revenue of 3.23 billion, which represents 14% year over year growth on a constant currency basis total Adobe revenue grew 15% year over year.

GAAP diluted earnings per share in Q3 was dollars 97, and non-GAAP diluted earnings per share was $2 or 57 cents.

Business and financial highlights included digital media revenue of 2.34 billion.

Net new digital media ARR of 458 million.

Digital experience revenue of $838 million record.

Record cash flow from operations of 1.44 billion remaining performance obligation of 10.34 billion exiting the quarter and repurchasing approximately 1.5 million shares of our stock during the quarter.

There will be a strong third quarter performance shows the continued momentum across our cloud businesses from knowledge workers to creative professionals from small businesses to large enterprises people are driven to engage digitally and are seeking tools that enable them to communicate more proficiently across digital platforms.

In our digital media segment, we achieved 19% year over year revenue growth in Q3.

On a constant currency basis digital media grew 20% year over year, and we exited the quarter with $9.63 billion of digital media ARR.

Within digital media, we achieved another strong quarter with our creative business we achieved.

We achieved creative revenue of 1.96 billion, which represents 19% year over year growth and we added 360 million of net new creative ARR.

Our creative growth in Q3 was driven by investing to acquire new customers across all geographies and segments, continuing our relentless focus on engagement to drive retention and renewal of existing customers successfully closing enterprise term licenses with educational institutions as well as growing our education business through individual subscriptions by students drop.

During awareness and licensing of our professional video products focusing on converting free mobile app users to paid mobile subscriptions, including strong growth in light, where mobile and utilizing insights are data driven operating model to run targeted campaigns and promotions.

Adobe document cloud delivered another quarter of strong revenue growth, we achieved document cloud revenue of $375 million, which represents 22% year over year growth and we added a record $98 million of net new document cloud ARR.

As with our creative business document cloud is benefiting from the changing nature of work and the continued importance of digital document solutions as individuals enterprises and governments look to pivot away from paper based dependencies to digital workflows.

Our document cloud growth in Q3 was driven by investing in driving awareness and our acrobat web business continuing to build.

Continuing to build momentum with our mobile monetization efforts with acrobat reader, increasing demand for acrobat subscriptions across all Geos and building progressing in closing pipeline for our enterprise offerings with particular strength in Adobe sign which grew enterprise bookings more than 200% year over year.

While we saw some recovery in the SMB segment during Q3 across digital media smaller businesses continued to be impacted by the macroeconomic environment. We expect this to continue to impact our team offering across the reseller channel and on Adobe Dotcom.

Turning to our digital experience segment in Q3, we achieved revenue of $838 million, which represents 2% year over year growth.

Digital experience subscription revenue was $729 million, representing 7% year over year growth is.

Excluding advertising cloud digital experience subscription revenue grew 14% year over year, we continue to wind down the transaction driven AD network business and advertising club during.

During Q3 enterprise sales and services implementations settle into a new normal virtual engagements, we drove strong pipeline and customer acquisition across our digital experience solutions as the digital transformation imperative continues to resonate with our customers.

We saw acceleration of our commerce business and we drove increased adoption of our am cloud service and Adobe experience platform, which we expect to be growth drivers over the next decade.

We saw particular strength for the number of transactions greater than $1 million in new annual subscription value that we closed in the quarter.

Well enterprise and small businesses continued to be impacted by the macroeconomic environment spending and customer experience management is reemerging as the primary imperative to enable businesses to engage with our customers and ignite growth.

Overall, while our focuses on investing for profitable growth, particularly in research and development, we drove significant savings from travel and entertainment and facilities operations as our employees work from home.

After ensuring that our current resources are focused on the key priorities, we expect to ramp our hiring in Q4, and therefore 21 to capitalize on our large addressable markets.

From a quarter over quarter currency perspective, FX increased revenue by $50 million negative impacts from hedging the sequential currency increased revenue was $10 million from a year over year currency perspective, FX decreased revenue by $14 million net of impact from hedging the year over year currency decrease to revenue was $25 million.

Yes.

Adobes effective tax rate in Q3 was 10% on both a GAAP and a non-GAAP basis in line with our targets.

Our trade Dsos 37 days, which compares to 44 days in the year ago quarter, and 40 days last quarter right.

Remaining performance obligation or ARPU grew by 18% year over year to $10.34 billion exiting Q3 and grew sequentially by 4% quarter over quarter deferred.

Deferred revenue exiting the quarter was 3.45 billion asms.

As I mentioned last quarter, our Adobe Dot com offerings typically billed monthly are reported as unbilled backlog, whereas channel offerings billed annually upfront are reported as deferred revenue the strength.

The strength in acquisition on Adobe Dot com during the quarter continues to drive a mix shift from deferred revenue so unbilled backlog.

Our ending cash and short term investment position exiting Q3 was $5.26 billion and cash flows from operations in Q3 were a record 1.44 billion.

In Q3, we repurchased approximately 1.5 million shares at a cost of $617 million.

We currently have 2.9 billion remaining over 8 billion repurchase authority granted in May 2018, which goes through 2021.

For Q4, factoring current macroeconomic conditions typical year end seasonal strength and the strategic shift related to our advertising cloud business. We are targeting total adobe revenue of approximately 3.35 billion digital media segment year over year revenue growth of approximately 18% net new digital media ARR of approximately 504.

30 million digital.

Digital experience segment revenue approximately flat year over year digital experienced a subscription revenue growing approximately 1% year over year or 12% when excluding advertising cloud revenue.

Tax rate of approximately minus 90% on a GAAP basis, and 10% on a non-GAAP basis share count of approximately 485 million shares.

GAAP earnings per share of approximately $4.29 and non-GAAP earnings per share of approximately $2.64.

The GAAP tax rate is benefiting from plan changes to optimize our international structure in Q4 to better align ownership of certain intellectual property rights with how our business operates as we discussed during our Q1 call earlier this year.

In summary, we expect a strong Q4 to conclude another year of record revenues and earnings for Adobe.

Through these times the resilience of our employees and our business model had been evident as our market leading solutions continue to resonate with individuals and enterprises across the globe. We remain excited about the growth opportunities ahead.

Back to you Jonathan.

Thanks, John as we announced earlier this year Adobe Max our annual creativity conference well be an online event. This October information about the event can be found at maxed out Adobe Dotcom today, We also announced that Adobe will host at fourth quarter and fiscal year Twentytwenty earnings conference call and financial analyst.

Moving online on December 10th where we will provide an overview of the company's strategy and financial targets for fiscal year 2021 inch.

Invitations will be sent to our analyst and Investor list in the coming weeks if.

If you wish to listen to a playback of todays conference call a webcast archive will be available on Adobes IR site. Later today, you can also listen to a phone replay by calling the number shown above the phone playback service will be available beginning at five PM Pacific time today and ending at five PM Pacific time on September 22nd.

We would now be happy to take your questions and we ask that you limit your questions to one per person operator.

Operator.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Again press Star one to ask a question and remember to limit yourself to one question per person.

We'll take our first question from Kurt pattern with Evercore ISI.

Hi, yes, thanks, thanks, very much and congrats on the quarter shots.

Shantanu I was hoping maybe to start day or my question actually just going to be around the experience cloud business.

Obviously, you guys are divesting the advertising cloud part of that but just in terms of the commentary it seems like the pipeline is building nicely.

ARPU was up nicely in the quarter, yet revenue guidance for next quarter is down a little Dan I was wondering if you just square that up because it sounds like your enthusiasm for that opportunity still remains very high but I think some people might be wondering why maybe is revenue not serves matching up with that thanks.

Sure happy to and as you pointed out car I mean, firstly digital transformation is a massive addressable.

Addressable opportunity and it's clear that we are the leaders we had a great quarter bookings grew up north of 15%. As you saw you know we had good revenue. We successfully have introduced brand new products, which we believe are going to be the growth drivers from what we did with the Adobe experience platform, what we did.

That customer journey analytics, the customer data platform as well as you know what we're doing around both commerce as well as Ah the Adobe experience cloud in the cloud service. So yes, the business and the interest frankly, because there isn't a small and medium business, our large enterprise that isn't interested in how digital.

We can help them deal with the current health situation. So you know bookings have been strong business has been strong I think as it as it relates to revenue you have to continue to think about the wind down of the advertising cloud business.

Which continues to happen, we expect bookings to be strong and then the other issue for US is really as the macroeconomic environment do you think about the spending patterns, but net net for US we thought the business did really well it was a great rebound from what we had expected in Q2, which was both on the consult.

Things side as well as on the Nat gas, we we thought it would be slightly slow. So we're really excited and we're in the sweet spot of what is clearly a growth business.

Thanks Shannon.

Thank you we'll take our next question from sick heat Khalia with Barclays capital.

Hey, guys. Thanks for thanks for taking my my question here.

I don't know maybe just to stay on the digital experience business zooming out a little bit strategically.

I think a nail chakrabarti is still getting settled in as as leader of the Dx business and field operations. I guess the question is what are some of his objectives, particularly in the ECS business that you're most excited about for next year.

Well, it's like at first a I will say this that you know his has been the fastest ramp that I've seen if any executive that we've got so he is doing an absolutely fantastic job in a great addition to what you know is already a very strong management team that I'm blessed with at Adobe.

Oh, maybe I would say three things. The first is on the product side. He has really got his hands around the platform and the innovation associated with the platform that delivery of customer journey analytics, a we had a great quarter with the Adobe experience platform a in a number of customers adopting it what we are doing around.

CDP and their real time nature of what we can do there as well as intelligent services that are leveraging adobe sensei, so on the product and innovation, making sure that we have this platform that we integrate all our products. He is really.

Really added a lot of value there, but that will continue to be the area, where I think we can completely differentiated ourselves relative to anybody else because while others are talking about providing this unified profile. As you know we have tens of billions of profiles already in Adobe experience platform I do.

I think the second area is with the unified organization are really focusing on the customers and the customer Centricity and what we are doing with partners.

You know the structure for us and international is set up and he is focused on aggressively evangelizing, both our vision as well as the differentiation in the marketplace. I mean, one side benefit socket of everybody working from home as we can engage with customers so much better and you know.

A routine de consists of a significant customer engagements. So that's clearly the area that he.

The area that he is focused on because he needs to be out there as the leader of this and third I would say as you know the culture Adobes culture has always been a unique point and focus on talent and hiring and you know where there's significant opportunity making sure that we have the best talent. So he is already being able to.

Recruit some key people as additions to his.

To his management team.

But there's a lot to do and there's a lot that he has done and so we're very excited about having him on board.

Got it very helpful. Thanks, guys.

Thank you we'll take our next question from Brent Thill with Jefferies.

Good afternoon, Sean News on Q4 digital media guide well above the street clearly seen a lot of great Tailwinds in that business I'm curious if you could just kind of unpack.

The drivers and what what you're seeing for that upside surprise relative to street numbers.

Yes, Brent I'm surprised you didn't talk about the Q3 upside as well [laughter] you know I mean, we always onward.

[laughter] fair enough.

We saw tremendous performance I mean as you as you see what's happening in both creativity and document productivity or Brent I mean, the business is just firing on all cylinders and that has to do both with the products as well.

As well as frankly with service as you know we didn't maybe comment specifically on the services, but the services. The stock business just continues to do well. There's no question, we're gaining market share. The sign business has grown very successfully but if you continue to think about I think whats driving that business. The first is.

We sharpened our focus on usage and engagement and the usage and engagement that we did really helped improve retention rates back to the pre covert levels. So that focus will just continue we have a very large book of business.

The education education had a good quarter. So you know we have continued focus on education, a individual apps, we talked about lightroom Photoshop and Premier pro as areas, where there is a lot of interest in our business and also the sophistication of you know what we are.

Talked about namely the marketing attribution and models. It just helps us spend money.

Spend money, so efficiently and sustain the durability of the acquisition of new customers and trends. So as you pointed out when we look at the second half performance. It just demonstrates how both creative cloud and document cloud frankly, other pre eminent platforms and you know we should continue to see a good oh sorry.

Again from our Q3 back into Q4, so we're excited.

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

Nice to go right. After Brent here. Thank you so much and congratulations on your quarter shopping you talked about how the pandemic is actually resulted in better customer engagement.

As we come out of the pandemic, if theres ever such a thing called coming out of this brand I think we've got a vaccine.

How does the business perform and do you feel that.

This is actually less than the cycle for digital transformation or do you think we could be in a pocket.

Okay, Halo effect, where things get pulled in a little bit because we've got all this time to go more work and there's not a catch up and then of course the longer term secular trajectory for digital transformation is unchanged.

Hi, how are we to think about whether your mind that environment is actually.

Usually supportive off your results not only yourself, but other software companies, so that might get or whatever pulled back if we enter into a normal economy, sorry to the board it that way, but I'm just curious to get your thoughts. Thank you.

Yeah cash we've been talking about you know the trends that are going to be tailwinds across each of our businesses, where there was creativity document productivity or specifically to your question digital transformation and the Genie is not going to go back in the bottle I mean, we've certainly certainly seen as you point out an inflection in the <unk>.

Business as it.

As it relates to the demand in.

In digital transformation, but my perspective on this business is it's just going to gain importance I think you know as the macroeconomic environment improves the spending will actually open up you know in terms of what people spend and we've been touching on customer experience management as a.

Imperative and a priority for enterprise spend for a while and I don't think that changes. So I think everybody is recognizing that not having a commerce a website and not being able to engage digitally with customers and I think.

And I think the two areas, where we're seeing the most excitement is this unified profile because people now absolutely recognize where you have a physical presence and you have a digital presence you have to absolutely create a unified experience and that I think is only going to accelerate so you will see more physical perhaps once the vaccine is.

As a present, but that's not going to change the need to provide this unified experience and on the marketing spend side more and more is going to go digital and people would want to run more of these digital campaigns with customers. So I think the basic trends of personalization of unified profile of customer.

Experience management are only going to continue once the pandemic and I actually feel like that should hopefully signal a an improvement in the macroeconomic environment for everybody I think a lot of what's happened right. Now is people want to spend in digital but they're spending ability may be limited.

Third and as that spending ability opens up as the economy improves I don't think it changes the prouder to you I think that frankly opens up spending.

Very insightful. Thank you very much congrats.

Thanks Kash thank.

We will take our next question from Brad Zelnick with credit Suisse.

Excellent. Thank you so much and congrats on the really strong Q3.

John My question is for you in your prepared remarks, you talked about the variable marketing investments that enable the adobe to attract and engage new customers, which clearly worked well can you.

Can you comment on what you're seeing in terms of ROI trends on marketing spend and reasons to believe they may or perhaps may not be sustainable. Thanks.

Sure.

Thanks again, Brian for the question I think when you look at our capabilities with the dog or or did driven operating model the level of precision tradable to see performance of our business real time really allows us to surgically invest where we know we can be successful and so you can see that in the than the performance I would say they are both in Q3 in where we thought.

If we can drive momentum in Q4, so we have a lot of confidence in investing for corporate return and also looking at breadth of the different markets. We're trying to track to the platforms. Both CNBC. So we monitor that very carefully we don't just for money yet on variable marketing just to see where it lands were actually measuring very completely.

Every dollar that we invest in that space.

And Brad maybe if I were to add just a little bit on top of that what you have to do is again harken back to what we said as the overall addressable market opportunity for all of our businesses and then on the creative and document cloud as we talk about a greater than $30 billion addressable opportunity. This.

Sophistication just helps us target all those people with more efficiency and as John said, the constant changing nature of where that marketing goes we definitely view that as a differentiation for us in terms of what product watch service, what geography across more channels.

Thank you both very clear.

Thank you we'll take our next question from Jennifer Lowe with DBS.

Great. Thank you I want to touch on the gross margin within the digital experience business and you know as as talked about earlier, but my understanding was that as the I pod winds down there should be a gross margin benefit [noise] attached to that but if I look at the GAAP gross margins in digital experience are actually down.

Little bit quarter over quarter, so sort of related to that first how should we think about the costs associated with <unk> cloud rolling off the cost of goods sold line over the coming quarters and secondly, how should we think about the margin profile of that business once that wind down the top end.

You know I can add and then Jennifer you know John certainly feel free I mean overall on that business I think there was a slight performance in what we saw in the AD cloud revenue in the quarter, so that might account for what.

You are referring to I think big picture, we just look at it and say a this is a growth business. What we have been able to do by aligning is to make sure that we're focused on the highest priority growth objectives, and so it's still a growth business, that's a real focus for us but as.

But as it relates to the overall margins I mean, the company performed exceedingly well I would argue maybe we were a little conservative frankly, because we were unclear on the macroeconomic environment in terms of hiring but we are certainly going to be opening up the hiring and research and development to continue to differentiate ourselves and all.

On the digital Expedience now that we have consolidated the organization we've eliminated all the inefficiencies we made the strategic change on advertising cloud now we feel like it's all going to be profitable growth as we invest in the digital experience business.

Thank you that's very structural there quarter to quarter, it's really partly to overperform, others, we had not been transparent with our customers we help them try.

Help them transition to other services, but we also hope that Ken. We're you know scheduled this year the volume of activity across our other products did actually increase some of our clubs that are cloud costs or third party club. So that's something that we are largely very closely so that we can leverage the volume and negotiate our contracts appropriately to drive efficiencies across our clubs.

Okay. Thank you.

Thank you well take our next question from Jay Vleeschhouwer with Griffin Securities.

Thank you good evening.

Shantanu the company has often spoken in the past for instance at the summit presentations that you've identified about [noise] forward doesn't use cases for Dx.

And the question is setting aside AD cloud and whatever part of that mix. They may have a accounted for what the trends are evolutions have you been seeing and the number or mix of a of use cases within the X and then related to that perhaps you could also update us on a the applications in.

And intelligence services that you previewed a packet summit earlier, this year and how that might flow into the various use cases and more importantly, the dx growth that you're anticipating.

Sure Jay I think what's been consistent in the business and you know areas that continue to show both growth as well as interest from customers is first and foremost content and data and so I think when we think about what's happening with content. They use case of people increasing.

Moving to cloud services on the Adobe experience manager side, creating new mobile applications and engaging directly with customers I think that just continues to be an area of significant growth.

On the data side as we have added more capabilities, both through Adobe analytics as well as with the Adobe experience platform off being able to say what is the insight that people are getting I mean, we're all looking at data even more stringently in this environment and so the use case associated with going for.

From collecting that data to getting insights on that data the demand for that particular Ah you know area of our solutions, including an intelligent services, whereas you know we have a intelligence services that are associated with each of the solutions. That's an area of increase I would say the third area is.

This unified profile and just being able to get all of the data that's clearly a trend Jay because people recognize that they have all these silos and.

And that was even more accentuated by what's happening in the house so.

The need and desire to get this unified profile. So that they can serve the customer adequately docked use case and you know when we are talking about customer journey analytics or how you do the equivalent of what we have done would de Dom I think thats a use case thats clearly resonating with customers Commerce, you know I I.

I would say the commerce use case and how you have to find different models, whether it's a subscription based business model of transacting with customers, whether its loyalty base business models. So I think the commerce and using commerce to accomplish new business models I think that use case.

He has also increased in the last thing I would say is between the b to B and B to C. We've talked about that distinction blurring, but I think all b to b companies are still stating how can we both work directly and engage with customers as well as through a network of partners I hear that over and over.

Again, so whether you are a company a you know providing a goods through a distribution channel or whether you're a car manufacturer all of them recognize that they have to bridge. This gap between being deemed a b to B company in a b to C company.

Thank you very much on to them.

Thank you.

Take our next question from Sterling Auty with JP Morgan.

Yeah. Thanks, Hi, guys you mentioned in your prepared remarks that the SMB segment showed some improvement in the quarter can you just give us maybe something from a high level how much exposure does the business have at this point to SMB and even into that pro Sumer area, where maybe some of the stimulus being talked about would have a big.

Your impact.

Yes, Sterling we looked at both those up you know trends are quite a bit as we went through the quarter and you know I would say as it relates to the stimulus when the first package came out. This was early we saw appreciable difference in sort of the payment successes and what.

Happened with the individual subscribers. So we saw a correlation associated with that subsequent ones have not done as I said the engagement work that we did helped US a you know get a retention back up to the levels that we had pre covert. So I don't know whether that was a initiative catalyst but to us it just demonstrated the increase.

He is the importance of Ah you know the solutions that we provide as it relates to the small and medium business or you know segment again that is through the team offering a lot of that happens through the channel and Q3, we saw some strength in that so I don't know that we've broken out Sterling you know what percentage is exactly.

On a individual versus team versus enterprise. It is a big part of our business because you know small and medium businesses. So to use both our creative and document do this but we were pleased with what we expected as it relates to our Q3 targets you know, we're still going to be a little cautious about seeing the rebound in that area.

Can be so we're not necessarily expecting a significant new acquisition in that but we were pleased with what we saw in Q2 and long term. We just continue to think that our solutions help them become a digital enterprise, which is going to become more important.

Thank you.

Thank you we'll take our next question from Alex Zukin with RBC capital markets.

Hi, guys. Thanks for taking the question.

So maybe a combo question for shopping in for John John Do you are seeing kind of now two straight quarters of all time highs for traffic on Adobe Dot com and according to our data it would actually appear the trends only accelerating so I guess the question is back to that durability kind of what's driving that acceleration and how would you think about the durability of that.

20, plus percent digital media air our growth trend as you sit here today and then ultimately maybe just remind us what kind of rules should we remember in our models as DNA our stays above 20% does that you know what kind of churn assumptions, we should think about when looking at digital media revenue growth next year.

Yeah, Alex as it relates to the overall macro demand aegis the amount of content. That's being created a is just you know absolutely exploding and it actually doesn't matter whether youre as we talked about an individual who has a story that they want to tell us.

Small and medium business, who asked to transact business online and therefore has to create the appropriate content, whether it's a large enterprise.

That you know is increasingly engaging digital and therefore once the appropriate personalized content and I think that trend will only continue to speak well for Adobe. We look at some other trends like the number of people engaging with us on be hands, which is our community. We're getting more you know.

<unk> of B. hands of being use than ever before well, what we are doing with spark, which is allowing prosumers and others, who have a task based offering to come. So you know we just continue to think that the amount of content being created and the amount of content being consumed is only going to go up and we have deep premier.

Offering in that space not only from the product side, but from also the de Dum side and so I I think you know it really can.

Really continues to all go well for US and you know we will certainly give you more color as we come up to Oh fiscal 21 on what we Ah you know expect moving forward, but were excited about the opportunity.

Yeah, I would say that in it yeah in regard to your calls every touch right of the chart.

The success of the efforts of putting to engaging our customers and making sure. They are using the right product for the right use case has really driven a retention efforts.

Efforts really well that engagement and of course, you know the fact that we will be able to see a return to kind of pre corporate levels is indicative of peoples engagement products.

Got it thank you guys.

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

Perfect. Thank you. So much guys. This is stands lonsky's sitting in for <unk> for key a quick question for John very strong margins in Q3 record margins are high operating margin side, what should we keep in mind as far as margins as we head into Q4 and what.

It's embedded in the EPS guidance for the quarter. Thank you.

Sure.

Sure. Thanks, Dan I'm you know when we entered you know Q3 than we do with to it really focusing our resources on the the top priorities once we got through.

Got through that that activity and we felt really comfortable but the performance that we're seeing we realize that we probably being a little conservative we're slow route to get where they are hiring we're committed to a rising or hiring now going into Q4, and that's up about 21 to really to drive the opportunity that we see the drug performance on these opportunities so.

We are investing in R&D, and we'll see that kind of manifest in our Q4 hiring and into 21, you know we do believe that some of the other opex savings that we've had one time savings around travel and facilities and in person events that are going to change as we start to look at our offices, where it when it's safe and so on we don't expect a level.

The lack of spending in those areas in Q3 to be sustainable going forward. So that is something to consider when you look at the operating margin performance in Q3.

Perfect. Thank you so much.

You bet.

Thank you we'll take our next question from Walter Pritchard with Citi.

Hi, I'm wondering John if you or John or trying to if you could talk about retention and you highlighted that in your prepared remarks around improvement in retention and maybe just directionally, how you talk little bit about some headwinds there a quarter ago, where you are now versus retention in sort of a steady state on you know how much.

Dip down in if it varies much by the various segments of your of your digital media business.

I think we all know maybe looking at it now in retrospect I don't know if a you know when covert first Ah you know a hit whether there was a shock to the system and therefore, you know people reacted and I think that has settled down as we've said in a couple of.

Times, it's definitely gone back to the pre covert levels. I think you know I would also give our team tremendous credit for what we've done around engagement I mean, the good news for US Walter is we have such a a variety and portfolio of products that we can use and you know, let's take acrobat, where we haven't spent that we haven't got as many.

Questions I mean from everything we can do around acro back on the web or do what we can do with a you know the retail fund another two acrobat and so we really just auto World class machine on both the acquisition and increasingly on the engagement retention. So you know my best guess is there was a little bit of a shock to the system that has.

Definitely stabilized that provided the impetus for us to really focus on engaging more with customers and delivering the value and last but not least I think it just shows how mission critical these products are and so again.

Again, it's very different by offering to your the second part of your question, but you know within enterprises within creative Pros are we just continue to see a really good oh retention and really good acquisition.

Thank you.

Thank you we'll take our next question from Derrick Wood with Cowen and company.

Great. Thanks for taking my question, Sean you mentioned that the education vertical had a good quarter and I think there was some uncertainty around the health of spending here given all the all the change institutions. If I had to go through I guess since we're you know at back to school mode. Right. Now you know, though obviously a much more virtual.

Bend to it can you talk about what you've seen out of out of the education vertical in terms of demand and usage patterns and how that looks typically.

Back to back to school season, there and kind of what insights that gives you as we progress through the school year.

Sure Derek and again I mean first all right. Let me acknowledge that you know I think for both the parents of young kids as well as those who have college going kids I mean, there's still quite a bit of uncertainty or if you know what happens but.

But as it relates to this trend I mean, we saw strength of both in terms of students educators as well as in institutions and so you know we saw strength across the board part of what I would attribute that to is when it first truck and everybody was from home or if you have a young kid or a college going care do you want to continue to invest in.

Making sure that they have access to the best software I think we did a good job of provisioning creative cloud and ensuring that they have access to creative cloud and then we are pretty actively went out with our field organization. Both in terms of a licensing products as well as the enterprise site licenses.

You can have for institutions to demonstrate it and the last thing I would say is we are seeing more and.

More and more curricula in these institutions also added so much more on creativity as part of that curriculum. So I think that's a trend that is also helping our business.

Right. Thanks.

Thank you well take our next question from Ken Wong with Guggenheim Securities.

Mr. Wong please unmute if your mute it.

Oh, sorry about that.

Thanks for taking my question John You mentioned in the prepared remarks, seeing an acceleration of Adobe Commerce, just when thinking about how you guys licensed the product when should we expect to see that benefit revenue is that something you already capturing or is that down the line at a at renewal time.

Really I really of both has come for your question. So we certainly saw a commerce revenue performed this quarter and then started to bookings associated with the demand for commerce offerings increases for so we just see the momentum there people are really resonating with a product for seeing that it's it's a great add on as well when they're looking at some of our.

Other solutions and digital transformation in the segment. So we think.

So we think that was a nice tailwind there and commerce.

[noise] integrate second question, Ken I mean, John we certainly have bands and since we have bands and we don't charge based on necessarily the media transaction. What happens is as people come up for renewal, which was the second part of your question again, Yes. Ah you know the intention is that they are both.

It's true up as appropriate and our you know a move to a higher band.

Right.

Great. Thanks, guys.

Operator were coming up on the top of the hour, we'll take two more quick questions. Thanks.

Thank you we'll take our next question from Mark older with Bernstein Research.

Thank you and congrats on the strong quarter I was impressed in the comment on the 200% year over year growth in enterprise bookings driven by Adobe sign can you give more color is this growth in full document cloud is it a portion of that any color on the percentage of documents.

Sign document cloud that is now from enterprise agreements appreciate thanks.

Sure Mark and you know I as you point out and we didn't get too many questions. I mean, the document cloud really had a very strong business and at the macro level you know the strength of acrobat all the bugs that we have including signed a frictionless acrobat web and the platform may be eyes, we're really can make.

Yes, we have the right platform for a document creation sharing signing exporting and scanning I mean scan also the number of installs of scan what we are seeing on mobile so across all of our PDF solutions. When we are talking about the business as it related to sign sign actually grew faster.

Then the document cloud business and the 200% statistic that we gave has to do with signed stand alone. The way we are going to market. We introduced a sign also in the channel just very recently so divided that early we're seeing good traction I would sign in the channel the primary route to market.

As either to acrobat for individuals or through the enterprises in the enterprises, we are seeing or do a forms of traction. The first is where people are using sign as the core signed solution for all of their business processes I think some of the partnerships that we've announced as.

Well with Microsoft as well as with service now we expect to see that continue to grow and in addition to that we've actually seen some really good traction with our docking.

Our document expedience I experienced document or sellers also demonstrating how the combination of Adobe experience manager, which is the core web site plus what you can do around forms and signs for business processes. How that's growing so you know across the board. We saw some really good strength in that business.

Much appreciated thank you.

Yeah.

Thank you, we'll take our last question from Keith Bachman with bank of Montreal.

Oh, Hi, Sean to know, it's Keith I wanted to follow up on that and stay with the document cloud.

Over the last 11 quarters document cloud ARR growth because the low it's kind of a 31% the highest 36 and even in a challenging last two quarters than may and August quarters, it's been.

Towards the high end of that range.

And my question is as the economy improves could you talk a little bit about the durability in other words can they are growth continue in that.

34% to 35% range as you look out over the next couple of quarters and he also just talk a little bit about the competitive landscape and how you see your competitive offering or solution set on stacking up so to speak against your primary component. Thank you.

Sure Keith I mean first as it relates to the sustainability and durability of the document cloud business a it wasn't a an accident that at our last analyst meeting, we talked about document cloud being a separate or you know huge standalone opportunity and accelerating document production.

Activity, that's why we spend as much time as we have on that you know traditionally of people or Keith used to talk about the business moving from perpetual to subscription it as a you know so far exceeded all of that opportunity to really focus on creating brand new.

Customer acquisition, the web as a funnel.

Represents a huge growth opportunity for us a I've talked also about when you think about what's happening with organic searches and the ability for people to want to share information and how that's going to be a driver of the funnel. We're excited about the <unk> economy in what we can do to make sure that any PDF that's created any.

Anywhere on any PDF that scandal assigned a that it uses adobe technology and so you know I at the end of the day, we just look at what we have with documents and the fact that we have PDF and the fact that we have read the ubiquity as a completely differentiated solution with respect to anybody else and yeah.

This business is such a large opportunity a this is not a zero sum game. This is something that you know we just continue to believe is going to fuel our business for a long time, but we frankly think when the catbird seat we have the best combined offering we have great partnerships in the space we're innovating so.

So much on mobile what we've done with a you know this feature the recall liquid mode, where they need to be able to make P.D.S. responsive and so you know I think while the pandemic to the question that somebody else also lost has perhaps accelerated a this movement towards electronic documents I don't think people are going.

Go back because they all see the benefits and the efficiencies of being documents. So that's how we think about that business and we'd certainly be happy to share a lot more you know at our earnings call.

Now since that was the last question I do hope Oh, Keith that both you as well as others will attend Max because we do intend to unveil. The next you know a generation of creative innovation at Max as I said, we have over 200000 people already but net net I would say Q3 was an outstanding.

Marta I feel really good about the strategy that we have and the contributions of our employees, who live ICSI executed incredibly well in what is truly a a difficult environment.

We all believe that digital is going to be mission critical it is going to be a driver of the economy globally and between creative document and enterprise. We have three large markets that are growth markets, where our innovation agenda is stronger I.

I I will say, we're really pleased with how we rallied around re prioritizing to get the most critical initiatives to proceed with the right urgency and as John mentioned we.

We feel very well positioned to invest in growth initiatives that will continue to drive what we aspire to be which is a growth company that also delivers great profitability, but Ah stay safe stay healthy we really appreciate all of you joining us today and we look forward to seeing you at Max.

Well would you Jonathan.

This concludes the call thanks, everyone.

This concludes.