Adobe (Nasdaq: ADBE) recently reported a mixed second quarter that missed revenue estimates. It had a strong quarter for its Digital Media segment but its Advertising Cloud revenue was impacted by the COVID crisis. But what’s interesting is how Adobe quickly de-emphasized the low-margin and capital-intensive parts of its business to focus on growth.

Adobe’s Financials

Adobe’s second-quarter revenues grew 14% to a record $3.13 billion, short of the market’s projections of $3.16 billion. Adjusted EPS of $2.45 was ahead of the Street’s forecast of $2.32.

Adobe’s Subscription revenues grew 17% to $2.87 billion and Product revenues fell 20% to $153 million. Services & support revenues declined 7% to $126 million.

By segment, Digital Media segment revenue grew 18% to $2.23 billion. Creative revenue grew to $1.87 billion and Document Cloud revenue was $360 million. Digital Media Annualized Recurring Revenue (ARR) grew to $9.17 billion. Creative ARR grew to $7.93 billion, and Document Cloud ARR grew to $1.24 billion. Digital Experience segment revenues grew 5% to $826 million. Digital Experience subscription revenue grew 8% to $707 million. Digital Experience subscription revenue, excluding Advertising Cloud revenue, grew 18%.

Adobe forecast revenues of $3.15 billion and an adjusted EPS of $2.40 for the third quarter, compared with the market’s forecast of revenues of $3.26 billion with an EPS of $2.46. Adobe has also withdrawn the annual fiscal 2020 targets that were issued in December 2019.

Adobe’s Customer Traction and Future Focus

The shift to remote work has driven a surge in demand for digital documents. Usage of web-based PDF services was up nearly 40% q-o-q and the number of documents shared in Acrobat increased 50% year-over-year. Usage for Adobe Sign, its cloud-based electronic signature solution, grew a whopping 175% since the start of the fiscal year. Mobile usage exploded with Acrobat Reader installations increasing 43% y-o-y and Adobe Scan installations, up 66% y-o-y. To capitalize on this trend, Adobe plans to focus on Adobe Sign, web-based PDF services and availability of PDF functionality through APIs.

During the second quarter, Adobe recorded historic highs in Adobe.com traffic across both Creative Cloud and Document Cloud. Demand for its professional video products was particularly high with strong engagement for Adobe Premiere Pro and After Effects. There was a 75% q-o-q increase in monthly active users for video editing software Premiere Rush. Mobile traffic, member sign-ups, and monetization continue to accelerate. Adobe Fresco has seen a greater than 40% increase in downloads since the start of 2020. Photoshop Express has surpassed 20 million in monthly active users. 

Adobe announced that for its Creative business, it will increase its investment in two exciting areas, providing new solutions that address the unmet needs of the communicator segment and ensuring that the web browser is a first-class authoring platform. 

In Customer Experience Management, key customer wins in the quarter included IBM, Walgreens, Safeway, Astellas Pharma, and Allianz. US Census Bureau is relying on Adobe Experience Cloud to modernize citizen experiences. Adobe’s client list for its Experience Platform includes 3M and Verizon and over 10 billion active customer profiles are running on the Adobe Experience Platform.

Adobe has integrated Sensei, its AI and machine learning framework, into the Experience Platform to provide market leading solutions across content and commerce, customer journey management, and customer data and insights. To further its lead, it plans to increase its investment in AI and machine learning, next-generation applications and services on the Adobe Experience Platform, and accelerated integration of its content and commerce offerings.

COVID Impact

While the Digital Media segment saw strong demand due to the COVID crisis, the significant global decline in advertising spending affected Adobe’s Advertising Cloud revenue. Its advertising offerings consist of Advertising Cloud software solutions as well as Advertising Cloud transaction-driven solutions.

Adobe made the strategic decision mid-quarter to cease pursuing low-margin transaction-driven Advertising Cloud deals. This resulted in a shortfall of about $50 million in its Q2 revenue target. Adobe will continue to offer its Advertising Cloud software solutions to our Digital Experience customers, but it will not be an area of growth moving forward. Adobe now expects approximately $200 million total Advertising Cloud revenue for the full fiscal year, compared to $360 million in fiscal 2019. This decision is expected to increase the overall profitability of the Digital Experience segment in the long term.

Its stock is currently trading at $428.01 with a market capitalization of $206.22 billion. It touched a 52-week high of $429.27 last week. It was trading at a 52-week low of $255.13 in October last year.

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