Adobe Inc. (ADBE) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day, everyone, and welcome to the Adobe Q1 FY 2021 Earnings Conference Call. Today's call is being recorded. All lines are currently in a listen-only mode. There will be time for a question-and-answer session at the end of today's presentation. Instructions will be given at that time. At this time, I would like to turn things over to Jonathan Vaas, VP of Investor Relations. Please go ahead.
Jonathan Vaas: Good afternoon, and thank you for joining us. With me on the call today are Shantanu Narayen, Adobe's President and CEO; and John Murphy, Executive Vice President and CFO. On this call we will discuss Adobe's first quarter fiscal year 2021 financial results. By now, you should have a copy of the press release, which crossed the wire approximately one hour ago. We've also posted PDFs of our prepared remarks and financial results on Adobe's Investor Relations website. Before we get started I want to emphasize that some of the information discussed in this call, including our financial targets and product plans, is based on information as of today, March 23, and contains forward-looking statements that involve risk, uncertainty and assumptions. Actual results may differ materially from those set forth in these statements. For a discussion of these risks, you should review the Forward-Looking Statements Disclosure in the press release we issued today, as well as Adobe's SEC filings. On this call we will discuss GAAP and non-GAAP financial measures. Reconciliations between the two are 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 is 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. The call audio and the webcast may not be re-recorded, or otherwise reproduced or distributed without Adobe's prior written permission. I will now turn the call over to Shantanu.
Shantanu Narayen: Thanks, Jonathan. Good afternoon. I hope you are all well and staying safe. It is hard to believe that it has been over a year since the pandemic began and the world changed forever. During this unprecedented time, we have gone from a world with digital to a digital-first world. Digital experiences have played a vital role in making every aspect of our lives possible, from keeping families and co-workers connected, to enabling new ways of learning, to powering digital commerce and ensuring continuity of essential business operations. Overnight, we have transitioned to a global digital economy. Adobe's mission is to change the world through digital experiences. At Adobe, we are helping fuel the digital economy with our continuous innovation, our large and diverse set of global customers and partners and the unique expertise we have garnered from undergoing our own digital transformation.
John Murphy: Thanks, Shantanu. Q1 was a fantastic start to the year for Adobe, with strong financial results across all of our businesses. We accelerated revenue growth, expanded operating margins, and continued to drive demand across our portfolio of products and services, which are clearly resonating with enterprises and individuals in a world where digital has become the default. Harnessing the power of data, we continue to utilize our data-driven operating model DDOM to drive traffic to Adobe.com, generate demand for our products, acquire new customers and increase engagement. We are investing in massive market opportunities, delivering innovations across our products, and Workfront had a great first quarter as part of the Adobe family. As a result, in Q1 Adobe achieved record revenue of $3.91 billion, which represents 26% year-over-year growth. Recall that Q1 was a 14-week quarter for us versus the typical 13-week quarter. Business and financial highlights included: GAAP diluted earnings per share of $2.61 and non-GAAP diluted earnings per share of $3.14; Digital Media revenue of $2.86 billion; Net new Digital Media ARR of $435 million; Digital Experience revenue of $934 million; Cash flows from operations of $1.77 billion; Remaining Performance Obligation of $11.61 billion exiting the quarter; and repurchasing approximately 1.9 million shares of our stock during the quarter. In Q1 we saw continuing recovery in the business environment both in the U.S. and internationally, particularly with small and medium businesses, which contributed to our strong financial performance in the quarter.
Shantanu Narayen: John has played a critical role in Adobe's strong performance for which I am deeply grateful. John and the entire finance and operations organization have helped drive top and bottom line growth with a relentless focus on shareholder value. In addition to his accomplishments as CFO, John embodies Adobe's values, always operating with the highest integrity and ethical standards. John will work with me to ensure a smooth transition and I'm happy that John will be able to focus on his family and philanthropic pursuits and wish him all the best. Adobe's global brand, unparalleled innovation, broad spectrum of customers and partners, and dedicated employees provide an unmatched competitive advantage. I remain bullish that technology will continue to transform work, learn and play, resulting in a brighter future for all of us. I will now turn the call over to the operator to take your questions.
Operator: Thank you. And we will go first to Kash Rangan of Goldman Sachs.
Kash Rangan: Hello. Thank you very much, and congratulations on a spectacular quarter. Shantanu, my question, again, naggingly, annoyingly, is about Creative TAM. You've been very consistent in talking about how large the TAM for Creative is. I think goes back to 10 years prior. Can you talk -- and you mentioned today on this call that it's seemingly endless in terms of the opportunity. Can you expand on that? Why is that the case? There is a view, not that I share, that once the economy opens up that the creative folks are going to get out and enjoy their summer vacations and do less creative stuff, so we take a bit of a back step on digital transformation. I don't know how you feel about that, but if you can just talk to that tactical opening of the economy and if that might impede digital transformation or maybe not, and then talk about why your confidence in the TAM of Creative is even greater than it was, say, five years back? Thank you so much.
Shantanu Narayen: Happy to do that, Kash, and it's good to have you back on our calls now at Goldman. So first, let me just say that, when you think about content and design, there is no question that it's fueling the global economy and the way we segment our business as we think about what we are doing for Creative pros, what we are doing for communicators, and what we are doing for consumers. And first to, I think, just share some numbers associated with that, I think we've said there are 49 million Creative professionals who use our products to make a living. There are 700 million communicators, and approximately 4 billion consumers. And so when you think about the TAM, whether that's $20 billion for the Creative pros, $15 billion for communicators, or $6 billion for consumers in 2023, I mean, that represents a $41 billion addressable market opportunity given the importance of design. So it's a massive opportunity. What gives us confidence? I think when we think about strategically what we are trying to do, certainly, the first thing we're trying to do is advance every Creative category. And I'll just give you one example, Kash. I mean, what's happening with immersive media and when you think about 3D to 2D and being able to do all these virtual shoots as the amount of content, that's an emerging business. I had a really great quarter that continues on what we had said about video being one of the growth initiatives for us. So, I think the new media types and advancing it is certainly critical. I think multi-surface systems, what we can do associated with making sure mobile, mobile has been a really good growth opportunity for us. And the way we look at that, it's both as a result of the funnel that it provides for both mobile and desktop, but also as part of a system, so people can create whenever they want. So even if they are going to be out in summer, as you say, they'll have access to all of our Creative tools wherever they go. The third one I would say is what we are doing with collaboration and the team and everything associated with allowing people to collaborate. Services, I mean, Stock had another great quarter. We grew that business approximately 30% year-over-year, and the notion of just continuing to make sure that we do creativity for all, I think, the world is going to be in a place where Creative expression is going to dominate everything associated with education and productivity. So all of that gives us really high confidence associated with the opportunity and our execution. And then, if you think about it for Q1, really just quickly, I mean, Q1 was a record quarter. We continued to see really great demand on the web associated with what's happening, and the absolute ARR was strong again. And this is, as you point out, despite the recovery being complete. And so we just feel like we're in an absolutely sweet spot as it relates to what people want to do with our tools and services.
Kash Rangan: Thank you very much. Congratulations.
Shantanu Narayen: Thanks, Kash.
Operator: Our next question will come from Jennifer Lowe of UBS.
Jennifer Lowe: Great, thank you. Maybe just following along sort of the commentary on recovery. One of the things that stood out to me is the strength that you saw in SMB this quarter. So maybe two questions on that. First, are you kind of back to pre-COVID levels at this point in terms of SMB momentum? Or is there still more to gain there? And then secondly, just specific on Experience Cloud, I know even pre-COVID there were some execution challenges that you were experiencing in the SMB space. So have those execution challenges been sort of fully addressed and you're seeing some of those more mid-market oriented products that you've acquired executing the way you'd like them to? That's it for me. Thanks.
Shantanu Narayen: Yes, first, I think as it relates to the SMB segment, as we mentioned, both in the Document Cloud and Creative Cloud and to your question specifically around Experience Cloud, we did see continued momentum and growth. So I still think that when you think about what's happening in the world, it's still not fully back, right, to normal and we're still in a sort of a pandemic situation. So I clearly think there's upside. And every day you have good news in certain geographies and unfortunately not so good news. And so that only augurs well for us as we look at our business moving forward. But if I take a big picture view associated with Experience Cloud, which was the second part of your question, digital transformation, just talking to all the CEOs that I'm talking to, those who've already invested in digital are absolutely doubling down because they recognize that this is the way to further differentiate. And those who are not are clearly investing in the people, technology and processes to be in this market, whether it's transformational accounts at the enterprise level that Anil talked about at the Financial Analyst Meeting or whether it's at the small and medium business, your question associated with what we are able to do to enable them to have a digital storefront, which is an absolute necessity for doing business today. There's a lot of interest and demand in both of those. I know a lot of you, as I read your reports, the checks that you're doing, you're hearing the interest in our solutions and the talk from both the customers and the partners is high. And so we are going to see more demand for this. We had a good quarter. If you look at how we are targeting DX, we clearly expect acceleration of revenue without -- with and without Workfront, Q3 over Q2 and Q4 over Q3. So we're really excited and I think we're in the sweet spot on all three of our growth areas.
Jennifer Lowe: Great. Thank you.
Operator: And the next question will come from Mark Moerdler of Bernstein Research.
Mark Moerdler: Thank you very much, and congratulations on the quarter and a great start to the year. John, we're going to miss you, but completely understand the desire to spend more time with family and philanthropy. So enjoy it. Two quarters ago, you called out your increased focus on driving Experience Cloud margin improvement. Can you give us an update on where you are in driving Experience Cloud margin improvement? And any sense what you think about long-term margins could be for what Experience Cloud is today versus the future? Thank you.
Shantanu Narayen: Well, Mark, I'll let John speak to his decision after this as well. But I think the decision to be made associated with reducing our focus on the transaction-based advertising revenue, if you look at everything that's happening associated with that business, there are other companies in that space. I think that was a good way to do it, what we've done with the Experience platform. And with Anil coming in, taking a soup to nuts approach associated with that entire P&L and the business opportunity, he's been able to align and simplify and improve it. And so, I mean, you don't accomplish the kinds of margins that we accomplished in the year without a focus across all of our businesses. And so we have an incredibly good leverage model, but there's more. I mean, Digital Experience is still in that area where we're growing revenue, I mean 20% is what we've targeted for the entire year. We had 27% of subscription revenue in Q1. And so it really is one of those areas that's a growth opportunity and you will see that translate into the bottom line over time. But, John, maybe I'll have you also add to that.
John Murphy: Yes, no; absolutely. I think the continued focus that we have both on gross margin and on operating margin in the businesses is key. And Mark, thanks for the words. I'm definitely going to miss you guys as well, but I will be here for a while during the transition. You can imagine it was a difficult decision to make. You think about these things for a while. But I decided even last year during the pandemic, and you kind of refocus on some priorities. And so I'm really fortunate for the great career I've had and thankful to Shantanu and Adobe to allow me this opportunity to pursue my passions.
Mark Moerdler: Thank you. I appreciate it and congrats.
Shantanu Narayen: Thank you.
Operator: Next, we'll go to Brent Thill of Jefferies.
Brent Thill: Good afternoon, Shantanu. You had mentioned a couple of years ago at Summit that the customer data platform architecture was a revolutionary architecture and was going to bring some really interesting opportunities to Adobe. It sounds like some of those customers are going live now. And I'm just curious to get your perspective on where you're at on that journey and what you're starting to see in Experience Cloud with CDP coming online?
Shantanu Narayen: Brent, we have seen some -- quite a bit of success. I think we have some really blue chip customers that we talked about -- the conversations that I'm having with each of these customers. And people talk about Customer 360. We're the only major company that has anything out there of this scale to be able to do real-time personalization at scale. We have billions of profiles that are already going through this. Absolutely blue chip customers, whether it's financial services, whether it's in other online like retail -- what we are doing with telecommunications. And so not only do we have that, but it has really served as a basis for what we've done with the customer journey analytics. So, if you take a step back and the big areas that we talked about content, commerce, data insights and audiences, which is such a key part -- I think that becomes even more important with what's happening in the spooky world so that you can have access to all your first party data and profiles. So, I think the decision to invest in that was right. The success that we're seeing in the marketplace and the leadership, I think, positions us incredibly well, Brent. And you'll hear a lot more about that at Summit, certainly. I think the Workfront acquisition also has had the unique opportunity to be able to add to what we have in terms of our solutions and get workflow also and attribution associated with it. So I feel really good. But I feel really good about the infrastructure with CDP. And we focus a lot more on the real-time nature of what we can do with personalization as the key differentiation. But some great customer wins.
Brent Thill: Just a quick follow-up for John. On the 20% growth you're now guiding, just back to Jen's question. Does that assume a full recovery for SMB or is that still contemplating that there's still some improvement that you could squeeze out of that segment of the market?
John Murphy: Thanks, Brent. Yes, no, for sure it really reflects a continued recovery. But it's not -- we don't expect to be back to pre-COVID levels. I think as we saw as we exited FY '20, that momentum and kind of recovery was just gradual and continual recovery. And we're into the benefit of that.
Brent Thill: Okay, thanks.
Shantanu Narayen: Hey Brent, you followed us for a significant amount of time. We don't bank on anything dramatically changing. We look at the demand that we have and current trends. We're not macroeconomic experts. And so as the recovery happens more, but we're not banking on it. Just to be clear.
Brent Thill: Thanks, gentlemen.
Operator: And we'll go now to Kirk Materne of Evercore ISI.
Kirk Materne: Hi, thanks very much. Shantanu, I was just kind of curious. As we come out of the pandemic, your businesses has executed incredibly well. Are there parts of the business though that would benefit from getting back in front of the customer base? I'm thinking about sort of the Experience Cloud business in particular. You guys have, obviously, been able to execute really well in a virtual world. But I do wonder if there's areas whether it's Experience Cloud, maybe in the education market, areas like that, where being able to get out and talk to the customers again would actually be beneficial. I was just curious if you had any thoughts on that.
Shantanu Narayen: I think so. I mean the world has done a pretty amazing job of pivoting to working at home and being able to do as much as you can. And I've talked about the fact that being able to visit with customers all across the globe without travel is in many ways a real ability to scale. But I also am one who believes that being in front of the customers and getting the partners that we have together and accelerating the rollout and sharing best practices and that social part is only going to help. I don't think the world is going back to everybody being in the office, but I do believe that it will be an accelerant. Because people's desire to also invest more as the economic situation improves can only be another tailwind for us. And so we've done a pretty incredible job. I mean when you look at our numbers. But there's no question in my mind. I mean if we can go travel and if we can meet with those customers and do it, there's only upside associated with that.
Kirk Materne: And then, maybe just one quick one for.
Shantanu Narayen: What we notice that we can do as well as -- sorry, both in terms of what we can do as well as their own confidence, right, in continuing to expand their investments.
Kirk Materne: Thanks for that. And then just maybe a quick one for John. John, on the Workfront revenue came in a little bit higher than your initial expectations. Was that just mainly around sort of deferred accounting? I realize you probably took a fairly conservative view on that given you had to close the acquisition, you talked to us in December. But it sounds like you got off to a good start. Is there any uplift maybe in the bookings or revenue just in terms of the combination or is that mainly just sort of a factor of accounting? Thanks.
John Murphy: Yes, thanks, Ken. No, the Workfront actually really did have great performance. So outside of the accounting adjustments for purchase accounting, we saw momentum in the business. And we had kind of suggested maybe about $140 million, $150 million in Workfront revenue impacting FY '21, but we think it'll be a bit more than that given the performance because the combined offering is really resonating with our customer base. That was really the, from the business case of doing this acquisition to begin with. We'll take the next question, operator.
Operator: We'll go to that next question and that will come from Jay Vleeschhouwer of Griffin Securities.
Jay Vleeschhouwer: Thank you. Good evening. Shantanu, for you first. At the Analyst Meeting in December, the company had some very interesting things to say about your technology and where you were investing. You referred, for example, in the case of Creative to what you called a deeply collaborative shared system. In the case of Doc Cloud, you referred to intelligence applied to PDF, as with Liquid Mode; all of that in the context of your applications and intelligent services. The question is, could you foresee the role for or need for new configurations or a new kind of segmentation of the product line, new SKUs, new packaging, anything of that sort particularly as you become more domain-specific oriented? And then for John, over the last three quarters you've had a very steep almost V-shaped recovery in your job openings from almost none back in June/July, to now over 1,000 and up four months in a row year-over-year. Could you talk about that in terms of your onboarding and the context of how you were thinking about OpEx growth for the year?
Shantanu Narayen: Jay, maybe I'll take your question and since they haven't been asked many questions yet on Document Cloud, I'll use Document Cloud with the technology lens to answer your question. I mean first, Liquid Mode, I was on the road. I was traveling on the road last week and the entire preparation for this I was doing on a mobile device with Liquid Mode. And I will tell you, Liquid Mode for me was an absolute lifesaver in terms of being able to look at all these documents and do everything collaboratively on the road. So an unabashed plug for those who haven't tried Liquid Mode or haven't tried Adobe Scan to really see how it changes. And the way we think about it is when you apply that kind of AI to fundamentally change the nature and understanding the structure and semantics of documents, it opens up so many different possibilities on the segmentation. I mean we now have revenue that we drive through Reader and Reader distribution and upsells because we understand what people are trying to do and understand the intent. We're driving revenue through search engine optimization that we do on PDF because we have a one-click way of having them do more and more PDF functionality. We have a new revenue monetization model associated with APIs and being able to have people use PDF and embed that in their particular workflows. And we've always had Acrobat Sign, had a great quarter. Again, I think John may have mention that we grew 50%. And so to your point, I mean AI and technology and being able to make that available and accessible in different ways is not just serving the customers better but it's clearly providing us new opportunities to monetize it that previously did not exist. And so I think you'll continue to see that in the innovation roadmap whether it's Summit or MAX. You'll see some really cool things which will not just push the envelope for our Creative pros but also make it way more accessible, productive and fun for communicators and consumers. John?
John Murphy: Yes, in regards to the job openings, the headcount growth, when we entered the pandemic last year, we did pause hiring initiatives we talked about to really focus our resources on our highest priorities, and we did that and successfully navigated the pandemic and really came out taking advantage of the opportunities in front of us. And so with that, of course, we talked about it in Q3 that we were going to start to ramp hiring. And so we have done that and we continue to look to invest, as I said, in R&D and sales capacity as well as variable marketing. In terms of the impact on OpEx, we had originally planned for margin expansion in FY '21 over FY '20, and we've updated targets actually indicating even greater margin expansion even though it accounts for our phased reentry as we come back to traveling, as we reopen our facilities. So for us, it's the ability to grow the top line and the leverage in our operating model allows us to be able to do that. So for us, margin expansion is really all driven off of revenue growth and ultimately we can perform both very well on the top line and on the bottom line.
Jay Vleeschhouwer: Thank you.
Operator: And next, we will go to Saket Kalia of Barclays Capital.
Saket Kalia: Okay, great. Hey. Thanks for taking my question here, guys, and congrats, John, on the well-deserved retirement. Shantanu, maybe for you on the Creative business, can you just talk about the product pipeline to that growing individual user base for the rest of 2021? Broad brushes, of course. And how you feel about Adobe's ability to help them grow or progress in their journey to higher-end Creative Cloud apps? And, John, if I can just fit in one housekeeping question that maybe might be helpful, I was wondering if you can just quantify how much the extra week added to total revenue and net new ARR in the quarter?
Shantanu Narayen: Yes, Saket, I mean, maybe I'll speak to that and I'll also give you my color on sort of what happened with ARR. But first as it relates to how we're expanding both the user base and acquisitions, I mean, the net new ARR, when you look at it, it's primarily all new net new ARR in terms of customer acquisition. And whether it's the mobile-only applications that we are providing, whether it's the web-based ability to do things in the browser, whether it's collaboration, that's certainly the way in which we are expanding our offering. And frankly, the way we do it is that anybody who uses one of our on-ramp products whether it's an individual category apps that is then using the entire CC all apps or whether it's the consumer app where they start to get exposed to things like maybe layers in Photoshop or a timeline in Premiere Rush, they have the ability to then be upsold as well as to become more productive by going to Premiere or Photoshop. So it's very much been a part of our strategy all along, which is how do you attract customers to the platform and how do you think about then making sure that as they grow in their Creative endeavors that we have the right on-ramp whether it's an offer that we provide at the right time, whether it's engagement that we do with Adobe CreativeLive. I mean, CreativeLive has really become in that community of Behance a great way for people to continue to grow and learn. And I think there are a whole cottage industry also of people who've done training and learning and education on Creative products. So that's the strategy, which is meet the customer where they are whether it's on a surface or whether it's a degree of specialization, and then make sure that as they expand their Creative pursuits that we're the right product for that. And so if you think about it, I mean, digital media ARR, what really happens is it's not -- while revenue may be more representative of the number of weeks in a quarter, and so if you take the 14 weeks over 13 weeks, you can argue that it was probably eight points of revenue that was extra as a result of the 14 week. But ARR is not as cyclical because ARR when you have an enterprise part of the business, it's probably going to be back-end loaded by most enterprise much like enterprise. So that's why we look at the Q1 ARR, which was a record for Creative, as a really solid performance. So, hopefully that gives you a flavor. Revenue for Creative is little bit more dependent on the number of weeks, but ARR is sort of you have these things that we do, which are cyclical, and that drives the strong growth that we saw across both Creative and Documents.
Saket Kalia: Very helpful, Shantanu. Thanks.
Shantanu Narayen: Thank you.
Operator: And next we will go to Ken Wong of Guggenheim Securities.
Ken Wong: Great, thanks for taking my question. I just wanted to dive in a little bit on the Digital Experience business. Would love some color behind the confidence in the 23% DX sub growth. Is this purely just improving macro or are you guys seeing better deal flows, bigger deals, specific products that are contributing to this uptick? And any help there would be fantastic.
Shantanu Narayen: Yes, I think the confidence comes from first, the performance in Q1. As we said, we had 27% subscription revenue growth. I think the confidence comes from the conversations that we're all having with companies all across the globe, from the pipeline that we have, from what we know in terms of Summit. And again, as in their response to the previous question that was asked, this is not banking on any macroeconomic environment changes for the rest of the year. So it's based on what we know today and the interest. Commerce is an area that is seeing a fair amount of interest, the real-time customer data platform. The experience platform is seeing a significant amount of interest. Workfront, as we said, and John mentioned that it's not the deferred revenue. It's the performance as well that's driving the upside in that particular business. Customer journey analytics and being able to address this in a multichannel, that's seeing a lot of interest. I think you're going to see some new products also in terms of how we evolve our campaign product and analytics product to be more business performance related. And frankly, to a large extent, Ken, all of this is also predicated on how we run our business, right? And our DDOM and understanding what it takes to run an online business, and we're world class at that, and we're building products for ourselves. And so that gives us a lot of confidence that it will help every other customer out there.
Ken Wong: Great, thanks a lot for that insight.
Operator: And next we will go to Sterling Auty of J.P. Morgan.
Sterling Auty: Yes, thanks. Hi, guys. First, John, congratulations on a wonderful tenure as CFO of Adobe. Just one question from my side, you touched upon Adobe Sign and the 50% growth that you saw on the quarter. It seems like meaningful acceleration from what we saw year or so ago, where I think that business was growing about 25%. I'm going to take a stab, any sense would you be willing to quantify and size the Adobe Sign business at this point? And then second, in terms of the accelerating growth, I think you mentioned government. But what are you particularly seeing that's driving the uptake of that e-signature business?
Shantanu Narayen: I think our key differentiating there, Sterling, is the fact that PDF as a format continues to be the format the people are using for automating these workflows. I think the fact that we have Adobe Reader, which is the operating environment in which all of the workflows are happening, I think we've done a better job with awareness, frankly, of what we have and that, hopefully, some of you have seen the incredibly new Creative campaigns that we're running associated with that. We're actually getting a fair amount of wins from other competitive products that people might have been using in terms of moving over to Adobe. The partnerships that we have with Microsoft and ServiceNow in terms of being embedded, whether it's in SharePoint or Outlook or partnering with ServiceNow. So, I think we're executing on the product side. I think we have some key differentiation, and this is not a zero-sum game. It's such a large opportunity, and I think the work-from-home has also certainly benefited us and everybody else in that space. So all of those I think are reasons why Sign just continues to be a real growth opportunity for us. The last thing I would mention is the ability to embed our Sign stuff within other people's offerings as well. I think we made some good progress on that one as well so all of these give us confidence. And to your question, Sterling, we don't break it up because it's hard, right? Sometimes you have an enterprise deal where you have all of them using Acrobat and Sign. And so even on the individual case, you have the ability to use a certain amount of Sign capability with an Acrobat. And so I think our strength is in the combined offering.
Sterling Auty: Got it. Thank you.
Operator: And next we will go to Keith Bachman of Bank of Montreal.
Keith Bachman: Hi, thank you very much. Shantanu, I was wondering if you could give an update on the Commerce Cloud. And I'll break it into two parts. A, could you talk a little bit about growth rates and profiles? In other words, are you moving into larger situations with more scalable demands? And, B, could you talk a little bit about you moved through acquisition into the commerce area, and it fits into the DDOM model. And yet you're still partnering on the services side of the equation of the service cloud. I just wanted to see if you could juxtapose your strategies surrounding willingness to move into commerce via M&A and any thoughts on is partnering still the right strategy for the services side? Thank you.
Shantanu Narayen: Yes, at the end of the day, Keith, we are a software company. And so I think -- actually just to give you a little bit of an update on numbers -- the beauty of when we acquired Magento and put it in the Commerce Cloud was first it was B2B and B2C. That was an attractive area for us. Second, it was physical goods and digital growth. That was an interesting opportunity for us. I think the third thing that was important for us was the fact that we had the ability to have both a large ecosystem of partners who were implementing this as well as an open-source community that was able to extend the functionality and, in effect, the extended R&D model. On the partner side, I think we've gone something from 2,800 or so partners that they had to well over 4,000. So the interest in partnering with us on the Commerce Cloud is high. And our model, as we've always said, this goes back also to the earlier question that somebody had on the P&L associated with Digital Experience. Our model is software, and we're happy actually to have a large ecosystem of partners that work with it. And maybe the last thing I would say on that particular front is that we're really continuing to expand what we do on the Merchant Services offering. So partners like PayPal and what we can do in conjunction with them and other credit card and other partners. I think that's going to also be a good area of continued growth for us.
Keith Bachman: Okay. Thank you, Shantanu.
Shantanu Narayen: Thank you.
Jonathan Vaas: Operator, we'll take two more questions and then wrap up. Thanks.
Operator: Certainly. And next we will go to Derrick Wood of Cowen & Company.
Derrick Wood: Great. Thanks. Question on Document Cloud and maybe the first part for John. It looks like perpetual is quite strong, and I suspect that came from strength in the ETLA activity. But can you talk to how you're thinking about perpetual mix as we look through the rest of the year and whether we could see another spike in any given quarter? And then, maybe more for Shantanu. Just kind of a refresher around the strategy within Document Cloud on getting more customers to shift to subscription and how to think about those efforts over the next couple of years.
Shantanu Narayen: Awesome. Maybe I'll go with the strategy and then, John, you can certainly add to that, which . First, from a strategic point of view, if you go to Adobe.com, it's primarily subscription. And so we've done a fantastic job of converting that business to subscription. When you look at it globally and you consider some other markets where a lot of it is going through the resellers, even that has predominantly become subscription. But we'd be crazy not to have people if they do want some perpetual to buy the perpetual and then convert it to subscription because we still know that. So, I think to your Uber point, yes, we did see some strength in perpetual. China, I think, had also a pretty strong quarter as it related to Acrobat. And that may be a little bit more perpetual. Our strategy is clearly moving into the cloud. Our strategy is clearly demonstrating the value of where people see the ongoing innovation that we're providing. But that business, unlike the other business, we just want to attract more and more customers to any one of those offerings. And that's why we've continued to have the Acrobat perpetual offer out there. But it's becoming smaller and smaller. As a part of the business it's definitely becoming smaller and smaller. I know on Adobe.com it's virtually de minimis.
Derrick Wood: Great, thanks.
Operator: And we will go to our final question, and that will be from Keith Weiss of Morgan Stanley.
Keith Weiss: Excellent. Thank you, guys, for sneaking me in and again my congratulations to John on the retirement, well-deserved. And also, really nice quarter. I wanted to ask you guys about a concern that I hear from investors and kind of get your take on it. While you guys are seeing a recovery on the SMB side of the equation, the fact of the matter is the Digital Media business did really well through all of last year, even in the height of the pandemic. In the upcoming May quarter, you guys saw really good ARR growth, it was up on a year-on-year basis, which exceeded a lot of people's expectations. But now there's a concern that it's a really tough comp ahead that you guys saw work-from-home benefits or benefit that were due to sort of what was going on with the crisis that that might create a difficult compare. Can you talk about whether there is like a difficult compare ahead? And is there a different sort of tone or nature of the business that you're seeing now versus what you saw last year at this time as we were in the crisis?
Shantanu Narayen: I think Keith, the question that we ask ourselves is the big shifts that we've seen in terms of how people work, the need to create, the different kinds of media types that exist. Is there anything that's going to fundamentally change when the economy changes? And we don't think so, because we just continue to believe that that importance of all of those areas and the tailwinds that exist in the market will continue to exist. I mean I think in terms of our numbers and you look at what we are doing, we've said, it's -- we've raised the target a little bit from what we had, the $1.75 billion to the $1.8 billion. And this is 10 years into it, driving a record ARR. I would say that that reflects the much larger market opportunity that we've created for ourselves. And so, the way I actually look at it, Keith, is that it's brought more attention to what's possible with our tools. And once people experience the benefits of what they're doing with us, it's going to be hard to go back to not using those kinds of technologies, which is what gives us a lot of interest. Hopefully, and you were certainly there, Keith, at the Analyst Meeting. That's why we tried to lay out completely what we see in terms of communicators and consumers and Creative pros. And I mean the business is doing really well. We're expanding the Digital Media segment revenue for the year, we're expanding revenue. And so that's all based on what we see as demand for what we have created and the tremendous amount of innovation that's ahead of us. So I think all of those give us a lot of confidence in the fundamental nature of the growth opportunities that we're focused on. And since that was the last question, I mean maybe just a couple of points. I would like to, and I know a lot of you did, also publicly thank John. This was I know for John a very personal decision, and I'm happy that he is going to be able to focus on what's important to him which is family and his philanthropic interests, and I'm deeply grateful. And on the overall business, it's hard. It's hard to believe that a year has passed since the pandemic impacted the world, but I think what's really incredible is digital is not just a nice to have right now, it's absolutely mission critical. And most companies would be thrilled to have one area of growth. We have three areas of growth: creativity, storytelling, design, what's happening with the future of work and remote work and the limitations of what you can do with in-person interaction, which will lead to more automation of digital documents and how every business in the planet is going to focus on engaging digitally with their customers, so massive opportunity. I think Q1 was a really strong quarter. We have a compelling strategy, an outstanding innovation roadmap. And I really have to thank all our employees who've pivoted to work from home and executed magnificently in what had been difficult circumstances, and which is why the momentum let us to increase our targets for '21. And as I always say, I think the top line and bottom line performance really set us apart as an investment for people. But stay safe, stay healthy, and we really look forward to having you attend Summit where we will unveil the next generation of enterprise innovation. Thank you for joining us, and I'll pass it back to Jonathan.
Jonathan Vaas: Okay. Thanks, Shantanu. And this concludes the call. Thanks, everyone.
Operator: And again, everyone, this does conclude today's call. Thank you for your participation. You may now disconnect.
Related Analysis
Adobe Beats Q4 Estimates, But Shares Drop 12% on Weak Revenue Outlook
Adobe (NASDAQ:ADBE) delivered strong fourth-quarter results, surpassing analyst expectations for earnings and revenue, yet a softer revenue outlook for the coming periods caused its stock to slide over 12% intra-day today.
For the fiscal fourth quarter, Adobe reported adjusted earnings per share of $4.81 on revenue of $5.61 billion, both ahead of market estimates, which had forecast EPS of $4.67 on revenue of $5.54 billion. The company’s net new digital media annualized recurring revenue reached $578 million, while its digital experience segment saw revenue grow 10% year-over-year to $1.40 billion.
Adobe’s total remaining performance obligations (RPOs) climbed to $19.96 billion, reflecting a 16% year-over-year increase and slightly accelerating from the 15% growth posted in the prior quarter.
However, the company’s guidance for fiscal Q1 raised concerns among investors. While adjusted EPS was forecasted between $4.95 and $5.00, slightly ahead of the $4.94 estimate, revenue was guided between $5.63 billion and $5.68 billion, falling short of the $5.72 billion consensus.
Looking ahead to fiscal 2025, Adobe projected adjusted earnings per share in the range of $20.20 to $20.50 and revenue between $23.30 billion and $23.55 billion. These forecasts came in below analyst expectations of $20.53 EPS and $23.80 billion in revenue. The revenue outlook implied a growth rate of approximately 9%, or about 10% on a constant currency basis.
Adobe Inc. (NASDAQ:ADBE) Q4 Earnings Preview: What to Expect
- Adobe's anticipated EPS is $4.66, with projected revenue of approximately $5.54 billion, indicating a 9.71% year-over-year growth.
- The company has a history of earnings surprises, with an average of 2.59% over the last four quarters.
- Analysts remain optimistic, with a majority recommending a "buy" rating and an average price target suggesting a 12% upside.
Adobe Inc. (NASDAQ:ADBE) is a leading software company known for its creative and digital marketing solutions. As it prepares to release its fourth-quarter earnings for fiscal 2024 on December 11, analysts are closely watching the company's performance. Adobe's anticipated earnings per share (EPS) is $4.66, with projected revenue of approximately $5.54 billion, reflecting a 9.71% increase from the same quarter last year.
The Zacks Consensus Estimate aligns with Adobe's revenue projection, indicating a stable outlook with a 9.13% growth in earnings from the previous year. Adobe has a track record of surpassing expectations, with an average earnings surprise of 2.59% over the last four quarters. This consistent performance is attributed to strong demand for its Generative AI solutions, despite facing competition and valuation challenges.
Analysts are optimistic about Adobe's growth, with 11 out of 15 tracked by Visible Alpha recommending a "buy" rating. The average price target for Adobe's stock is $619, about 12% higher than its recent closing price. This positive sentiment is supported by Adobe's ability to revise its EPS estimate upward by 0.1% over the past month, signaling confidence in its financial performance.
Adobe's financial metrics, such as a price-to-earnings (P/E) ratio of 45.49 and a price-to-sales ratio of 11.51, reflect high market expectations for future growth. The company's enterprise value to sales ratio of 11.46 and enterprise value to operating cash flow ratio of 35.66 highlight its valuation in relation to revenue and cash flow generation. With a debt-to-equity ratio of 0.39 and a current ratio of 1.11, Adobe demonstrates strong financial health, maintaining a low level of debt and a good balance of current assets to liabilities.
Adobe (NASDAQ: ADBE) Maintains "Outperform" Rating by RBC Capital
- RBC Capital reiterated its "Outperform" rating for Adobe (NASDAQ: ADBE), highlighting the company's leadership in creative and digital marketing solutions.
- Adobe's integration of AI technologies, particularly the Firefly AI platform, is central to its growth strategy and positions it strongly in the expanding AI market.
- Despite providing soft guidance, Adobe's Price/Earnings to Growth (PEG) ratio suggests the stock may be undervalued, indicating potential for investors.
On December 5, 2024, RBC Capital reiterated its "Outperform" rating for Adobe (NASDAQ: ADBE), with the stock priced at $534.61. Adobe is a leading software company known for its creative and digital marketing solutions. It competes with other tech giants like Microsoft and Salesforce in the software industry. Adobe's innovative AI technologies, such as the Firefly AI platform, are key to its growth strategy.
Generative AI is creating significant opportunities for companies like Adobe, as highlighted at Bloomberg Intelligence's conference. Adobe is at the forefront of this productivity revolution, alongside key players like Nvidia and PayPal. The integration of AI technologies has contributed to the resurgence of software stocks, including Adobe, which have outperformed semiconductor stocks in the second half of 2024.
Adobe's third-quarter results exceeded expectations, but the company provided soft guidance, leading to a decline in its stock price. Despite this, Adobe's Price/Earnings to Growth (PEG) ratio suggests that the stock may be undervalued. The company's Firefly AI platform shows significant potential, positioning Adobe well in the expanding AI market.
Adobe is set to release its fourth quarter and fiscal year 2024 earnings results on December 11, 2024. This announcement will be followed by a conference call with investors, streamed live on the Adobe Investor Relations Site. The company continues to use its website as a primary channel for distributing important information to investors.
Currently, Adobe's stock is trading at $535.76, with a slight decrease of 0.1361% from the previous day. The stock has seen a low of $529.79 and a high of $536.125 today. Over the past year, Adobe's stock has reached a high of $638.25 and a low of $433.97. The company's market capitalization is approximately $235.84 billion, with a trading volume of 367,608 shares.
Adobe Positioned for Growth Amid AI Opportunities, DA Davidson
DA Davidson analysts reiterated their Buy rating on Adobe (NASDAQ:ADBE), highlighting the company’s strong prospects for sustained growth and margin expansion.
The analysts emphasized Adobe’s ability to enhance its already market-leading margins, driven by increased operational scale and contributions from artificial intelligence. Adobe's durable growth engine, supported by its market leadership and consistent innovation, was viewed as a key factor in maintaining its competitive edge.
Adobe’s valuation was noted as particularly attractive, trading at 26 times next twelve months (NTM) earnings per share—currently the lowest among its large-cap peers. The analysts attributed this discount to concerns about AI’s potential impact on Adobe's business, which they argued were unfounded. Instead, the exponential growth of AI-generated content was seen as a significant monetization opportunity, positioning Adobe for both near- and long-term success.
Marjorie Taylor Greene Invests in Adobe Inc. Amidst Market Fluctuations
- Adobe Inc. (NASDAQ:ADBE) sees a 19.4% decline in share price over the past year, contrasting with the tech sector's growth.
- Despite challenges, Adobe's strong demand for Creative Cloud, Document Cloud, and Adobe Experience Cloud drives top-line growth.
- Adobe is considered a laggard with significant upside potential, trading at $511.69 with a market cap of approximately $225.25 billion.
On November 20, 2024, Marjorie Taylor Greene made a purchase transaction involving shares of Adobe Inc. (NASDAQ:ADBE). Adobe is a leading software company known for its creative and digital marketing solutions. It competes with other tech giants in the digital content and marketing industry.
Despite a 19.4% decline in Adobe's share price over the past year, Wall Street analysts view Adobe as a promising investment, as highlighted by Zacks. This decline contrasts with the broader Zacks Computer & Technology sector's 32.9% return and the Zacks Computer Software industry's 16.9% appreciation. The challenging macroeconomic environment and increased competition in the generative AI space have impacted Adobe's performance.
Adobe's strong demand for its creative products, such as Creative Cloud, Document Cloud, and Adobe Experience Cloud, is driving top-line growth. The company's robust cloud-enabled products and expanding generative AI capabilities enhance its business prospects. Rising subscription revenues and solid momentum in mobile apps are significant positives for Adobe.
Adobe is identified as a laggard with significant upside potential for the remainder of 2024. Despite the impressive rally in U.S. stock markets, Adobe has underperformed. However, it is among a select group of stocks expected to achieve double-digit gains in the near term, supported by a favorable Zacks Rank.
Currently, Adobe is trading at $511.69 on the NASDAQ, with a market capitalization of approximately $225.25 billion. The stock has experienced a 1.44% increase, translating to a rise of $7.25. Over the past year, Adobe's stock has fluctuated between a high of $638.25 and a low of $433.97, indicating potential for future growth.
Adobe Stock Drops 8% After Q3 Results Beat Estimates but Q4 Guidance Falls Short
Adobe (NASDAQ:ADBE) reported its fiscal third-quarter results on Thursday, surpassing analysts' expectations, but its guidance for the upcoming quarter fell short of forecasts, leading to a drop in its stock price of more than 8% pre-market today.
The company posted earnings of $4.65 per share on revenue of $5.41 billion, beating analysts’ predictions of $4.53 EPS on $5.37 billion in revenue.
The company reported $504 million in new digital media annualized recurring revenue (ARR), but concerns arose over its guidance for the fourth quarter. Adobe projected Q4 earnings between $4.63 and $4.68 per share, with a midpoint of $4.66, on revenue ranging from $5.50 billion to $5.55 billion. This missed market expectations, which forecasted $4.67 in EPS and $5.60 billion in revenue.
While Adobe’s Document Cloud business maintained strong momentum, growing over 25%, concerns emerged around the projected growth rate for its Creative Cloud segment. Analysts noted that the expected ARR growth of around 11.5% for Creative Cloud in Q4 was slightly below the growth rates seen in previous quarters.
The company anticipates new digital media ARR for the fourth quarter to be around $550 million, which aligns with the guidance but failed to ease investor concerns over the overall outlook.
Adobe Inc. (NASDAQ:ADBE) Surpasses Q3 Earnings and Revenue Estimates
- Adobe Inc. (NASDAQ:ADBE) reported a Q3 EPS of $4.65, beating the estimated EPS of $4.53, and revenue of $5.41 billion, exceeding estimates.
- The company demonstrated significant year-over-year growth with a 10.6% increase in revenue and an EPS growth from $4.09 to $4.65.
- Adobe's financial health is highlighted by a P/E ratio of 48.70, a P/S ratio of 12.42, and a strong track record of exceeding analyst projections for four consecutive quarters.
Adobe Inc. (NASDAQ:ADBE), a leading software company known for its creative and digital marketing solutions, recently reported its earnings for the third quarter of 2024. The company announced an earnings per share (EPS) of $4.65, surpassing the estimated EPS of $4.53. Additionally, Adobe reported revenue of $5.41 billion, exceeding the estimated revenue of approximately $5.37 billion. This performance underscores Adobe's ability to outperform market expectations and demonstrates its continued growth and financial health.
During the Q3 2024 Earnings Conference Call, key executives, including Chair and Chief Executive Officer Shantanu Narayen and Executive Vice President and Chief Financial Officer Dan Durn, discussed Adobe's financial performance and strategic direction. The presence of analysts from prestigious firms such as Wolfe Research and JPMorgan highlighted the investment community's significant interest in Adobe's financial health and future prospects. This level of engagement from the analyst community reflects confidence in Adobe's market position and its ability to sustain growth.
Adobe's revenue of $5.41 billion for the quarter ending in August 2024 marked a significant year-over-year growth of 10.6%, outperforming the Zacks Consensus Estimate by 0.79%. The company's EPS for the same period was $4.65, compared to $4.09 a year earlier, surpassing the consensus EPS estimate of $4.53 by 2.65%. These figures not only demonstrate Adobe's ability to grow its revenue and earnings year-over-year but also its capacity to exceed Wall Street expectations, making it an attractive option for investors.
The company's financial metrics, such as the price-to-earnings (P/E) ratio of approximately 48.70 and the price-to-sales (P/S) ratio of about 12.42, provide insights into the market's valuation of Adobe. With an enterprise value to sales (EV/Sales) ratio of roughly 12.09 and an enterprise value to operating cash flow (EV/OCF) ratio of approximately 37.63, Adobe showcases its valuation in relation to its sales and cash flow generation. The low debt-to-equity (D/E) ratio of 0.03 indicates minimal reliance on debt for financing, while the current ratio of about 1.11 suggests a balanced ability to meet short-term liabilities with its short-term assets.
Adobe's consistent performance, as evidenced by its ability to surpass consensus EPS and revenue estimates for four consecutive quarters, positions it as a key player in the Zacks Computer - Software industry. This track record of exceeding analyst projections underscores Adobe's strong financial health and potential for sustained growth and profitability.