Adobe's Value Reassessed

Adobe's revenue and profits in the second quarter of the 2024 fiscal year exceeded expectations, and although its revenue guidance for the next quarter was slightly lower than expected, the company raised its full-year target above expectations, causing its stock price to surge after-hours.

According to the financial report, Adobe's total revenue in the second quarter reached a historic high, with a year-on-year growth of 10% to $5.31 billion, which was higher than the market's expected $5.29 billion. Adjusted EPS was $4.48 per share, exceeding the expected $4.40 per share.

In terms of business segments, the revenue of the main business segment, digital media, increased by 11% year-on-year to $3.91 billion, exceeding the upper limit of the company's previous guidance range. Among them, the revenue of digital media Creative family applications increased by 10% to $3.13 billion, and the revenue of the Document Cloud increased by 19% to $782 million.

At the same time, the revenue of the digital experience department, including commercial marketing and analysis software, increased by 9% year-on-year to $1.33 billion, which was within the upper limit of the company's previous guidance range. The subscription revenue of digital experience increased by 13% year-on-year to $1.2 billion, which was higher than the company's guidance.

In terms of indicators reflecting user growth, the "net new annualized recurring revenue" (ARR) of the digital media business was $487 million, higher than the expected $430 million, of which the new annualized ARR of the Document Cloud was $165 million, exceeding the expected $123 million.

This drove the overall recurring revenue of the digital media segment at the end of the second quarter on May 31st to $16.25 billion, of which the ARR of the Creative family of applications increased to $13.11 billion and the ARR of the Document Cloud increased to $3.15 billion.

Another indicator worth noting is the current remaining performance obligations (RPO), which has a contract value of $17.86 billion and can reflect some future revenue trends. Operating cash flow for the quarter was $1.94 billion, and the company repurchased about 4.6 million shares of stock.

Some analysts pointed out that the performance of Document Cloud was particularly strong, with the recent launch of an AI assistant to help analyze and understand documents such as PDFs. Adobe's self-developed AI model Firefly has been integrated into flagship products such as Photoshop and Illustrator and is currently being developed for video editing software Premiere with similar features, all of which have shown that the net new ARR indicators demonstrate "strong future sales for the creative product line".

It is expected that the adjusted EPS will be in the range of $18 to $18.20, and the revenue will be between $21.4 billion and $21.5 billion, higher than the market's expected full-year EPS of $18.02 and revenue of $21.46 billion. In March, the company expected adjusted EPS for the full year to be in the range of $17.60 to $18, and revenue to be between $21.3 billion and $21.5 billion.

The company's revenue guidance for the third quarter is expected to be between $5.33 billion and $5.38 billion, slightly behind the market's expected $5.4 billion, but the guidance for adjusted EPS for the quarter is expected to be between $4.50 and $4.55, higher than the market's expected $4.48.

The company expects revenue for the digital media business to be between $3.95 billion and $3.98 billion in the next quarter, with analysts expecting $3.99 billion. The net new ARR for digital media is expected to be around $460 million, and digital experience revenue is expected to be between $1.33 billion and $1.35 billion.

Adobe management stated that, thanks to the strong growth of Creative Cloud, Document Cloud, and Experience Cloud, the company achieved a new quarterly revenue high. "Our highly differentiated approach to artificial intelligence and innovative product delivery has attracted more and more customers," and therefore raised the annual target guidance for net new ARR of digital media, subscription revenue of digital experience, and EPS.