Adobe (ADBE 0.87%) had a standout year in 2019 as its stock notched gains of nearly 46%, easily surpassing the returns of the broader market. Investors were hoping for more of the same to start out 2020, and Adobe delivered.
For the fiscal first quarter (which ended Feb. 28), the creative software company reported record revenue of $3.09 billion, up 19% and continuing its unbroken streak of year-over-year revenue gains going back to Q3 2015. It also edged past both Adobe's forecast of $3.04 billion and analysts' consensus estimates of $3 billion. The company generated profits that topped expectations, with non-GAAP diluted earnings per share (EPS) of $2.27, an increase of 33% year over year, compared to expectations of $2.23.
Image source: Adobe.
Solid growth across the board
Each of Adobe's major operating segments contributed to its broad-based sales growth. Revenue from the digital media segment grew to $2.17 billion, up 22% year over year, while the digital experience segment generated revenue of $858 million, up 15% compared with the prior-year quarter. Both segments performed well compared to Adobe's guidance, which called for growth of 19% and 15%, respectively.
A deeper dive into the results shows Adobe's continued strength across its businesses. Within the digital media segment, both the Creative Cloud and Document Cloud produced record results. Revenue from the creative business grew to a record $1.82 billion, up 22% year over year, while the Document Cloud achieved a record $351 million, up 24% compared to the prior-year quarter. The digital experience segment did its part, generating $858 million, up 15% year over year.
Annualized recurring revenue (ARR) -- the backbone of any subscription-based business -- continue to excel. ARR in the digital media segment grew to $8.73 billion, up $400 million during the quarter. Creative ARR increased $329 million sequentially to $7.58 billion, and Document Cloud ARR added $71 million in the same period, increasing to $1.15 billion. All told, a massive 91% of the company's revenue during the quarter came from subscription revenue.
The impact of coronavirus
It seems nearly every company on Wall Street is feeling the effect of coronavirus, and Adobe is not different. CFO John Murphy said, "We have factored into our Q2 targets the expected impact of the global uncertainty caused by the COVID-19 situation based on the latest data and information available."
As a result, Adobe expects the worldwide pandemic to have an effect on several areas of its business. Primarily, management anticipates enterprise clients will defer making booking decisions, a delay in the implementation of consulting services, and lower spending on marketing.
The company also took a one-time charge related to the cancellation of the Adobe Summit -- the company's annual digital marketing conference -- which hit earnings by $0.07 per share.
The final tally
For the second quarter, Adobe is forecasting revenue of $3.175 billion, an increase of just under 16% year over year, which would be its slowest rate of growth in five years. The company is also guiding for EPS of $2.35, an increase of 28% compared to the prior-year quarter.
Revenue guidance came in below analyst expectations of $3.22 billion, while the bottom-line outlook topped estimates of $2.33 per share.
The software-as-a-service (SaaS) provider is confident in its forecast, however. "Our recurring revenue model and the real-time visibility we have into our business uniquely positions Adobe to manage through an uncertain environment," Murphy said.
Investors initially cheered the results, sending Adobe shares higher by more than 17% the day after the March 12 release of the results. But as of market close March 16, shares had receded to only a fraction of a percentage point above their pre-release levels.
