Like many technology stocks, Adobe (ADBE -0.77%) has been punished over the past year. Economic headwinds saw businesses and consumers alike cut spending in the face of historically high inflation, rising interest rates, and geopolitical uncertainty. As a result, investors didn't hold out much hope that its results would be worth a second look. Like so many times in the past, however, the software-as-a-service (SaaS) pioneer delivered all investors were looking for -- and more.
For its fiscal 2023 first quarter (which ended March 3), Adobe generated record revenue of $4.66 billion, up 9% year over year, or 13% in constant currency -- which strips out the impact of volatile foreign exchange rates. This also marked the seventh consecutive quarter of year-over-year revenue increases in the face of macroeconomic headwinds. This helped produce non-GAAP (adjusted) earnings per share (EPS) of $3.80, up 13%.
Image source: Getty Images.
The top and bottom line results exceeded Adobe's targets while also surpassing investor expectations. For context, analysts' consensus estimates were calling for revenue of $4.6 billion and EPS of $3.68, so Adobe cleared both bars with ease.
A return to form
Adobe saw strength across its largest business segments, resulting in broad-based sales growth. Revenue from the digital media segment grew to $3.4 billion, up 9% year over year, while the digital experience segment produced revenue of $1.18 billion, up 11%. Both segments would have grown 14% if not for foreign currency headwinds. The results in both segments outpaced Adobe's guidance, which called for growth of 8% and 10%, respectively.
Digging a little deeper into the results illustrates the broad strength that exists across the business. Within the digital media segment, both the Creative Cloud and Document Cloud shined. Revenue from the creative business climbed to $2.76 billion, up 8% year over year, while the Document Cloud grew to $634 million, up 13%. The Digital Experience segment continued on a solid footing, generating subscription revenue of $1.04 billion, up 12%.
Annualized recurring revenue (ARR) is the foundation upon which future growth is built, and it didn't disappoint. ARR in the digital media segment grew to $13.7 billion, adding $410 million during the quarter. Creative ARR increased $307 million to $2.76 billion, and Document Cloud ARR added $103 million.
Acquisition update
On the conference call to discuss the results, CEO Shantanu Narayen provided an update regarding Adobe's previously announced plans to acquire collaborative digital design company Figma for $20 billion.
Recent media reports suggest the deal could face regulatory headwinds, as the U.S. Department of Justice (DOJ) is conducting an antitrust investigation. Additionally, the European Union (EU) recently announced that it, too, would scrutinize the deal.
In response to these reports, Narayen said, "The potential combination continues to be well-received by customers, industry analysts, and partners. In addition, we are preparing for integration as we work through the regulatory process. From the outset, we have been well-prepared for all potential scenarios while realistic about the regulatory environment." He went on to say that Adobe has completed the discovery phase of the DOJ's second request and is preparing for the next steps and believes the deal is "on track to close by the end of 2023.
Robust guidance was the cherry on top
Given the current economic environment, investors are paying close attention to guidance for insight into a company's future business prospects, and that was another area where Adobe didn't disappoint. For the second quarter, Adobe is guiding for revenue of roughly $4.76 billion, up 8.5% year over year, and adjusted earnings per share of $3.78, both at the midpoint of its guidance.
Perhaps more importantly for investors, Adobe raised its full-year guidance in the wake of its record results. While its guidance for revenue of $19.2 billion remained unchanged, Adobe now expects digital media net new ARR of $1.7 billion (up from $1.65 billion) and adjusted EPS of $15.45 at the midpoint of its guidance (up from $15.30). For context, analysts' consensus estimates were calling for revenue of $19.2 billion and EPS of $15.29.
The past couple of years have been challenging for Adobe investors, with the stock still down 52% from its peak in late 2021. That said, the stock is currently selling for roughly 7 times next year's sales, its cheapest valuation since 2014. Given its industry-leading position and consistently strong growth, Adobe stock is well worth the cost.
