Shares of Adobe (ADBE 0.87%) declined 11% in Thursday's after-hours trading following the software-as-a-service (SaaS) company's release of its report for the first quarter of fiscal 2024 (ended March 1).
The stock's drop is largely attributable to revenue guidance for the second quarter coming in lighter than Wall Street had expected.
On the positive side, the first quarter's top and bottom lines both beat the analyst consensus estimate. And in the neutral column, the second quarter's adjusted earnings guidance was essentially in line with the Street's projection.
Image source: Adobe.
Adobe's key numbers
| Metric | Fiscal Q1 2023 | Fiscal Q1 2024 | Change |
|---|---|---|---|
| Revenue | $4.66 billion | $5.18 billion | 11% |
| GAAP operating income | $1.59 billion | $907 million | (43%) |
| Adjusted operating income | $2.13 billion | $2.47 billion | 16% |
| GAAP net income | $1.25 billion | $620 million | (50%) |
| Adjusted net income | $1.75 billion | $2.05 billion | 17% |
| GAAP earnings per share (EPS) | $2.71 | $1.36 | (50%) |
| Adjusted EPS | $3.80 | $4.48 | 18% |
Data source: Adobe. GAAP = generally accepted accounting principles.
In constant currency, Adobe's revenue grew 12% year over year.
Investors should focus on the adjusted numbers, which exclude one-time items. The GAAP numbers include costs associated with Adobe's failed attempt to acquire Figma, a U.S.-based collaborative design platform operator. In December, the two companies terminated their previously announced deal, citing "no clear path to receive necessary regulatory approvals from the European Commission and the UK Competition and Markets Authority."
Wall Street was looking for adjusted EPS of $4.38 on revenue of $5.14 billion. So the company exceeded both expectations. It also topped its own guidance, which was for revenue of $5.1 billion to $5.15 billion, and adjusted EPS of $4.35 to $4.40.
Adobe generated cash of $1.17 billion running its operations during the quarter, down 31% from the year-ago period. It ended the quarter with $6.82 billion in cash, cash equivalents, and short-term investments, and $2.14 billion in long-term debt.
What happened with Adobe in the quarter?
- Digital media segment revenue grew 12% year over year to $3.82 billion, and digital experience segment revenue increased 10% to $1.29 billion.
- Within the digital media segment, creative revenue rose 11% to $3.07 billion, and document cloud revenue jumped 18% to $750 million.
- Digital media annual recurring revenue (ARR) was $15.76 billion exiting the quarter.
- Within the digital experience segment, subscription revenue grew 12% to $1.16 billion.
- Remaining performance obligations (RPO) exiting the quarter were $17.58 billion.
Share repurchase program
In fiscal Q1, Adobe repurchased approximately 3.1 million shares of its stock.
Moreover, on Thursday, the company announced that its "board of directors has approved a new stock repurchase authorization, granting the company authority to repurchase up to $25 billion in common stock through March 14, 2028."
What the CEO had to say
Here's CEO Shantanu Narayen's statement in the earnings release:
Adobe drove record Q1 revenue demonstrating strong momentum across Creative Cloud, Document Cloud and Experience Cloud. We've done an incredible job harnessing the power of generative AI [artificial intelligence] to deliver groundbreaking innovation across our product portfolio.
Generative AI has exploded in popularity since OpenAI's broad release of its chatbot, ChatGPT, in late 2022. In brief, this recently developed technology enables users to quickly generate new content using a wide range of input types.
Of course, generative AI can cut both ways. It can help Adobe "deliver groundbreaking innovation," as its CEO stated, but it's also likely to lead to increased competition.
Fiscal Q2 guidance
For the second quarter of fiscal 2024, management issued the following outlook:
- Revenue of $5.25 billion to $5.3 billion (midpoint of $5.275 billion), which translates to growth of about 8.9% to 10% year over year.
- Adjusted EPS of $4.35 to $4.40 (midpoint of $4.375), which translates to growth of 11% to 13% year over year.
Going into the report, Wall Street had been looking for Q2 revenue of $5.31 billion and adjusted EPS of $4.38. So at the midpoints of the company's guidance ranges, revenue was lighter than the analyst consensus estimate, while adjusted EPS was essentially in line with the expectation.
Let's put the weaker-than-expected revenue guidance in context: Wall Street was projecting Q2 revenue growth of exactly 10.2% year over year, while the midpoint of the company's revenue guidance translates to 9.4% growth. This minor guidance shortfall relative to the Street's expectation is no reason for long-term investors to be concerned.
In short, Adobe turned in a good Q1. And despite the somewhat lower-than-expected Q2 revenue guidance, overall, the Q2 outlook is still solid.
