• 9M24 revenue/adj. PATMI was in line with expectations at 74%/75% of our FY24e forecasts. 3Q24 adj. PATMI rose 11% YoY to US$2.1bn on higher operating leverage. 
• For 4Q24e, Adobe expects adj. EPS of US$4.66 (up 9% YoY) on revenue of US$5.5bn (up 9% YoY). Digital Media revenue is expected to grow by 10% YoY, driven by increased subscription sales for its Creative Cloud and Document Cloud apps. 
• Maintain REDUCE recommendation with an unchanged DCF target price of US$480 (WACC 7.3%, g 4%). We nudge lower our FY24e revenue estimates by 1% due to moderating client spend, while increasing our adj. PATMI by 1% to account for higher interest income. While momentum for GenAI solutions like Firefly and AI Assistant is building, they have yet to boost the topline. Rising competition from startups like Midjourney and OpenAI's DALL-E could also provide headwinds to Adobe's growth and AI monetisation plans.​

• 2Q24 revenue/adj. PATMI was in line with expectations at 49%/50% of our FY24e forecasts. In 2Q24, revenue grew 10% YoY to US$5.3bn led by higher subscription sales for its creative and document management solutions. Adj. PATMI rose 13% YoY to US$2bn on higher operating leverage. 
• For FY24e, Adobe expects its total revenue to grow by 10% YoY to US$21.45bn (FY23: 10% YoY), taking the midpoint. The company increased its net new Digital Media ARR forecast to US$1.95bn from US$1.9bn driven by subscriber growth and early traction around new product innovations such as Firefly and Acrobat AI assistant. Adj. EPS guidance also raised to US$18.10 from US$17.80 (FY23: US$16.07). 
• We maintain the REDUCE recommendation but raise our DCF target price to US$480.00 (prev. US$465.00), with an unchanged WACC of 7.3% and a terminal growth rate of 4%. Our FY24e revenue estimates remain unchanged while we nudge higher our adj. PATMI by 1% to account for lower expenses. While Adobe is witnessing strong demand trends for its new generative AI solutions, it needs to demonstrate accelerated revenu​e growth. In addition, the company faces tough competition across its markets by startups like Canva and OpenAI's DALL-E, which could provide headwinds to Adobe’s growth and monetization plans.

The Positives
+ Net new Digital Media ARR beat guidance. Digital Media segment revenue increased by 11% YoY to US$3.9bn. Net new Digital Media annualized recurring revenue, or ARR, was US$487mn for the quarter, exceeding the US$440mn company guidance, driven by subscriber growth and new product innovations (Express for Business, Firefly services, and Acrobat AI). Within the Digital Media segment, Creative Cloud revenue rose 10% YoY to US$3.1bn, and Document Cloud revenue jumped 19% YoY to US$782mn. The growth was mainly led by continued demand for its photography and video editing applications (Photoshop and Illustrator) as well as PDF and e-signature solutions. Acrobat Web’s free monthly active users grew by 60% YoY driven by an explosion of PDF consumption through Chrome and Edge extensions.

+ Operating margins expanded on higher operating leverage. Operating income grew 16% YoY to US$1.9bn as margins expanded by 180 basis points YoY. The margin improvement was mainly due to top-line upside and continuous improvements in cost efficiencies, as expense growth slowed to 8% YoY (2Q23: 13% YoY). General and Administrative expenses were down 1% YoY. We raise our FY24e adj. PATMI by 2% on higher operating leverage.

The Negative
- Creative Cloud segment faced pricing headwinds. In 2Q24, the net new Creative Cloud annualized recurring revenue dropped by about 9% YoY to US$322mn. We believe the drop is mainly because of tough comparisons as price increases over the last two years has started to roll-off. In addition, Adobe faces increasing competition from startups like Midjourney and OpenAI's DALL-E, which offer generative AI services similar to Adobe's Firefly, such as generating images from text prompts.

• 1Q24 revenue/adj. PATMI was in line with expectations at 24%/25% of our FY24e forecasts. Adj. PATMI increased 17% YoY to US$2bn due to higher operating leverage.
• For 2Q24e, Adobe expects adj. EPS of US$4.38 (up 12% YoY) on revenue of US$5.3bn (up 9% YoY). Digital Media segment revenue will grow 11% YoY led by higher subscription sales for its Creative Cloud and Document Cloud apps.
• Maintain REDUCE recommendation with an unchanged DCF target price of US$465 (WACC 7.3%, g 4%). No change to our forecasts, except for a one-off US$1bn termination fee related to the Figma deal. Adobe faces headwinds from increased competition and tough comparisons due to pricing actions. In addition, Firefly AI tools are unlikely to boost revenues until the end of this year as Adobe is currently focusing on enhancing customer engagement instead of immediately monetising generative tokens.

The Positives

+ Revenue beat top-end of guidance. In 1Q24, Adobe’s total revenue rose 11% YoY to US$5.2b, which came 1% ahead of the top end of company guidance. Revenue from the Digital Media segment grew 12% YoY to US$3.8bn, with Creative Cloud revenue growing to US$3.1bn (up 11% YoY) and Document Cloud growing to US$0.8bn (up 18% YoY). This growth was mainly fueled by continued demand for its photography and video editing applications (Photoshop and Illustrator) and Acrobat PDF and e-signature solutions. Management highlighted that Acrobat Web’s monthly active users, or MAUs, spiked 70% YoY and surpassed 100mn users in the quarter.

+ Margins continue to improve. Gross and adj. net profit margins expanded by 80bps and 200bps YoY, respectively. The margin improvement was mainly due to top-line upside and higher operating leverage, including careful sales and marketing spend. Adj. PATMI increased by 17% YoY to US$2bn.

The Negative

- Soft 2Q24e revenue guidance. For 2Q24e, Adobe expects total revenue to grow 9% YoY to US$5.3bn. Management highlighted that the slowdown is mainly because of tough comparisons as price increases over the last two years has started to roll-off. Meanwhile, the new pricing for Creative Cloud apps with Firefly AI tools would become a tailwind towards the end of FY24e as it hits larger customer base at renewals. In addition, Adobe faces increasing competition from startups such as Midjourney and OpenAI's Dall-E, which offer gen-AI services similar to Adobe’s Firefly like generating images from text prompts.

• 4Q23 results met our expectations. FY23 revenue/PATMI were at 100%/101% of our FY23e forecasts. 4Q23 PATMI increased 26% YoY to US$1.5bn driven by higher operating leverage, lower taxes, and higher interest income.
• For FY24e, Adobe expects adj. EPS to grow by 11% YoY to US$17.80 on total revenues of US$21.4bn, up 10% YoY. Management signaled that the AI-related boost and recent price hike for its Creative Cloud offerings would take longer to
• We maintain a REDUCE recommendation with a higher DCF target price of US$465 (WACC 7.3%, g 4%), up from US$441. We cut our FY24e revenue by 1% to account for lower-than-expected pricing impact, while increasing FY24e PATMI by 3% to reflect lower expenses. However, we believe ADBE valuations remain expensive as its market cap is up about 60% or US$100bn over the last six months on an annual incremental profit opportunity of US$4bn assuming Creative Cloud revenue doubles with its generative AI functionality Firefly.

The Positives

+ Revenue growth driven by Digital Media vertical. 4Q23 revenue grew 12% YoY to US$5.0bn, in line with the company guidance. Digital Media segment revenue rose 13% YoY to US$3.7bn led by higher subscription sales for its creative software applications. Adobe's Creative Cloud unit, which makes up 80% of Digital Media segment revenues, reported revenue growth of 12% YoY to US$3.0bn. The growth was mainly led by strong demand for its photography and video editing applications (Photoshop and Illustrator). Management highlighted that users have generated over 4.5bn images so far using its generative AI functionality Firefly compared with 3bn in October. Document Cloud revenue grew by 16% YoY to US$721mn (20% of Digital Media revenues) driven by continued demand for PDF and e-signature solutions. Management highlighted that Acrobat Web’s monthly active users, or MAUs, spiked 70% YoY while Acrobat Mobile surpassed 100mn MAUs in the quarter.

+ Improvements in margins. Adobe reported an impressive gross margin of 87% as the company reports the bulk of its sales from recurring revenue. Operating margins expanded 120bps YoY driven by continued focus on operational discipline, including careful investments in research and development as well as sales and marketing. Net margins expanded 340bps YoY driven by higher operating leverage, lower tax expense, and a 2.5x increase in interest income. PATMI rose 26% YoY to US$1.5bn.

The Negative

- Soft FY24e revenue guidance. For FY24e, Adobe expects total revenue to grow 10% YoY to US$21.4bn at the midpoint, which was below our estimate of US$21.8bn. The soft guidance was primarily due to a lower-than-expected impact from the pricing changes. Management highlighted that the price increase in November would impact less than half of the Creative Cloud base and expects a material impact in 2H24e and beyond.

• 9M23 revenue/PATMI was in line with expectations at 74%/76% of our FY23e forecasts. In 3Q23, revenue grew 10% YoY to US$4.9bn led by higher subscription sales of its creative software applications. PATMI rose 24% YoY to US$1.4bn driven by higher operating leverage and lower tax rate.
• For 4Q23e, Adobe expects GAAP EPS of US$3.12 on revenue of US$5bn (up 10% YoY). Net new Digital Media annualized recurring revenue is expected to be US$520mn with a modest contribution from generative AI tools. Adobe plans to hike pricing for some Creative Cloud products (Photoshop and Premiere Pro) by about 10% starting Nov. 1.
• We maintain a REDUCE recommendation with a higher DCF target price of US$441 (WACC 7.3%, g 4%), up from US$435. Our FY24e revenue/PATMI has increased by 1%/2% to account for new pricing and AI-related tailwinds. However, we believe ADBE is priced at a premium as its market cap is up about 43% or US$74bn over the last four months on an annual incremental profit opportunity of US$4bn assuming Creative Cloud revenue doubles with Firefly.

The Positives

+ Creative Cloud momentum remained robust. Adobe’s Creative Cloud business comprises 81% of Digital Media segment revenues. Creative Cloud revenue grew 11% YoY to US$2.9bn (14% YoY in constant currency). Net New Creative Cloud annualized recurring revenue, or ARR, was US$332mn during the quarter, with a total Creative Cloud ARR of US$12bn. The growth was mainly led by strong demand for its photography and video editing applications due to a surge in both the creation and consumption of digital media. Management highlighted that the company has integrated its generative AI offering Firefly into flagship products Photoshop and Illustrator, with more than 3mn beta release downloads. Key customer wins for Creative Cloud in 3Q23 include Amazon, SAP, and Take-Two Interactive.

+ Continued strength in Document Cloud. Document Cloud sales grew 13% YoY to US$685mn, accounting for 19% of Digital Media revenues. Net new Document Cloud ARR was US$132mn, exiting the quarter with Document Cloud ARR of US$2.6bn. The growth was primarily driven by continued demand for Acrobat PDF solutions across computing devices and e-signature capabilities. Management highlighted that Acrobat Web monthly active users spiked by 70% YoY led by growth in documents opened through Chrome and Edge extensions. Key customer wins in 3Q23 include Citibank, GlaxoSmithKline, and Morgan Stanley.

The Negative

- FX impacted revenue growth. Adobe generates 40% of its total revenue from international markets. The company’s revenue was negatively impacted by the strengthening of the US dollar relative to most other currencies, including the Euro, British pound, and Japanese yen. In 3Q23, FX headwind to revenue was about US$125mn (~10% of PATMI).

• 1H23 revenue/PATMI was in line with expectations at 49%/50% of our FY23e forecasts. In 2Q23, revenue grew 10% YoY to US$4.8bn led by higher subscription sales associated with its Digital Media and Digital Experience offerings. Adj. PATMI, which primarily excludes stock-based compensation expense, grew 13% YoY to US$1.8bn.
• For FY23e, Adobe raised its revenue guidance to US$19.3bn (vs US$19.2bn prior) and GAAP EPS guidance to US$11.20 (vs US$11.00 prior) taking the midpoint. The management raised its outlook on optimism that generative AI tools (Firefly) will increase demand for its creative software.
• Market cap is up about 30% or US$52bn over the last month on an annual incremental profit opportunity of US$3bn assuming Creative Cloud revenue doubles with Firefly. We downgrade to REDUCE from ACCUMULATE recommendation after the recent jump in its stock price. We increase our DCF target price to US$435.00 (prev. US$402.00) with a WACC of 7.3% and terminal growth of 4%. Our FY23e revenue/PATMI is increased by 1%/2% due to rising digital content creation and a shift to electronic document processes.

The Positives

+ Firefly beta adoption was robust. Creative Cloud sales grew 9% YoY to US$2.9bn (14% YoY in constant currency) led by booming content demand. Net new Creative Cloud annualized recurring revenue (ARR) was US$354mn, exiting the quarter with Creative Cloud ARR of US$11.6bn. In 2Q23, Adobe released a beta version of Firefly, its generative AI offering for creating content using text prompts. Management noted that Firefly-powered capabilities integrated into Photoshop and Illustrator have generated 500mn digital assets so far. While the focus remains on driving broad-based adoption, Adobe plans to publish additional information regarding AI monetization later this year. Key customer wins for Creative Cloud in 2Q23 include NVIDIA and Ernst & Young.

+ Strong momentum in Document Cloud. Document Cloud revenue was US$659mn, up 11% YoY (14% YoY in constant currency). Document Cloud ARR grew by 17% YoY to US$2.5bn, adding US$116mn during the quarter. The growth was mainly due to strong demand for Acrobat with integrated Sign capabilities across the web, desktop and mobile. Management noted that Acrobat web monthly active users grew by 50% YoY driven by an explosion of PDF consumption through Chrome and Edge extensions. Key customer wins in 2Q23 include Boston Consulting Group, Novartis, and T-Mobile.

The Negative

- Negative impact of FX. Adobe’s revenue was negatively impacted due to the strengthening of the dollar against several key foreign currencies, including the Euro, British pound, and Japanese yen. In 2Q23, FX headwind to revenue was about US$150mn (~12% of PATMI).

Outlook

For FY23e, Adobe now expects GAAP EPS of US$11.20 on total revenue of US$19.3bn (prev. GAAP EPS of US$11.00 on revenue of US$19.2bn) taking the midpoint (Figure 1). The company also bumped its net new Digital Media ARR forecast to US$1.75bn from US$1.70bn driven by product-led growth initiatives, including Adobe Express and generative AI tools. Notably, we expect AI-driven revenues to be modest in 2H23e given they are still in the early stages. Meanwhile, the company lowered its Digital Experience segment revenue forecast to US$4.88bn (prev. US$4.98bn) due to cautious enterprise buying behaviour resulting in an elongated sales cycle, additional deal approval layers and deal size compression.

For 3Q23e, Adobe is guiding for revenue of US$4.85bn, up 10% YoY, and GAAP EPS of US$2.85, both at the midpoint of its guidance. Management also guided Digital Media and Digital Experience segment revenues to be US$3.56bn and US$1.22bn, respectively.

Adobe reiterated its belief that its pending US$20bn acquisition deal of design startup Figma should close by the end of FY23e. Cash flow generation continues to be strong, with the company generating about US$2bn in Free Cash Flow in 2Q23, ending the quarter with US$5.5bn in cash and cash equivalents.

• 1Q23 revenue/PATMI was within expectation at 24% of our FY23e forecasts. Total revenue grew 9% YoY to US$4.7bn, primarily driven by a 9% rise in digital media and 11% increase in the digital experience divisions. Adj. PATMI, which excludes its stock-based compensation and acquisition-related expenses, grew 9% YoY to US$1.7bn.
• For FY23e, Adobe raised its EPS forecast to US$11.00 (vs US$10.90 prior) and maintained its revenue guidance of US$19.2bn at the midpoint. The guidance was slightly below our initial forecast of EPS of US$11.38 on revenue of US$19.3bn.
• We downgrade to ACCUMULATE from BUY with a reduced DCF target price of US$402 (prev. US$408), a WACC of 7.5%, and a terminal growth rate of 4.0%. Our FY23e revenue was nudged lower by 0.4% to reflect ongoing macro challenges as cost-cutting customers delay software license purchases, while PATMI was cut by 3% due to higher expenses. Overall, Adobe enjoys long-term tailwinds from digital transformation of paper-based processes, explosion in digital content creation and continued shift to the cloud.

The Positives

+ Demand for Creative Cloud remains resilient. Creative Cloud revenue was US$2.8bn, up 8% YoY (13% YoY in constant currency). Creative Cloud annualized recurring revenue (ARR) grew by 8% YoY to US$11.3bn, adding US$307mn during the quarter. The growth was primarily driven by continued demand for its photography, imaging and video applications due to the surge in digital content creation. Key customer wins in 1Q23 include Accenture, Disney, BBC, and Nintendo.

+ Document Cloud strength continues. Document Cloud sales grew 13% YoY to US$634mn (16% YoY in constant currency) – the fastest growth of any segment in the quarter. Net new Document Cloud ARR was US$103mn, exiting the quarter with Document Cloud ARR of US$2.4bn. The growth was mainly due to its PDF capabilities and growth in e-signature transactions within Acrobat. Management noted that Acrobat is now the default PDF viewer in Microsoft Edge, which has an estimated 1bn users. Key customer wins in 1Q23 include HP, JPMorgan Chase, Samsung, and Verizon.

The Negative

- Pressure from foreign exchange rates. Adobe’s revenue was negatively impacted due to the strengthening of the dollar against several key foreign currencies, including the Euro, British pound, and Japanese yen. In 1Q23, the unfavorable foreign exchange rate movement negatively impacted revenue by approximately US$200mn (or ~16% of PATMI).

• 4Q22 results were in line with expectations. FY22 revenue/PATMI was at 100% of our forecasts.
• Creative Cloud sales rose 8% YoY to US$2.7bn, driven by continued demand for its creative design software tools. Document Cloud sales grew 16% YoY to US$619mn due to its PDF capabilities and growth in e-signature transactions within Acrobat.
• We lower our FY23e revenue/PATMI by 4%/6% due to macroeconomic uncertainty and FX headwinds. We maintain a BUY recommendation with a reduced DCF target price of US$408 (prev. US$420), a WACC of 7.1%, and a terminal growth rate of 4.0%. Adobe enjoys tailwinds from digital transformation of paper-based processes, explosion in digital content creation and continued shift to the cloud.

The Positives

+ Strong growth across business segments. In 4Q22, revenue grew 10% YoY (14% in constant currency) to US$4.5bn, which was in line with our estimates. The growth was driven by 10%/14% YoY increases in Digital Media and Digital Experience revenues to US$3.3bn and US$1.2bn, respectively. In the Digital Media segment, Creative Cloud revenue grew 8% YoY to US$2.7bn driven by strong demand for its design software tools (Photoshop, Adobe Express, and Frame.io) from creative professionals and smaller and medium-sized enterprises. Document Cloud revenue grew 16% YoY to US$619mn due to its PDF capabilities and growth in e-signature transactions within Acrobat. Digital Experience revenue, which includes analytics and marketing software, increased by 14% YoY to US$1.2bn. Key customer wins include Meta, Deloitte, and Delta Air Lines.

+ Maintained high margins. In 4Q22, Adobe reported an impressive gross margin of 87%. This is mainly because the company generates the majority of its sales (>90%) from recurring subscription revenue. Adj. operating margin (excluding stock-based compensation expense and amortization of intangibles) was 45%, which was in line with 4Q21. Adobe generated US$2.2bn in free cash flow in 4Q22. This translates to a 49% free cash flow margin.

The Negatives

- FX continues to be a headwind. Adobe’s revenue was negatively impacted due to the strengthening of the dollar against several key foreign currencies, including the Euro, British pound, and Japanese yen. In 4Q22, FX headwind to revenue was about US$175mn (15% of PATMI). Adobe projects nearly US$750mn headwind from FX in FY23e.

• 3Q22 results were in line with expectations. 9M22 revenue/PATMI was at 74%/75% of our FY22e forecasts. Total revenue grew 13% YoY to US$4.4bn, driven by 13%/14% YoY increases in Digital Media and Digital Experience revenues.
• Adobe agreed to acquire collaborative design software firm Figma in a cash-and-stock deal worth US$20bn. The company is acquiring Figma for 50x its FY22e annual recurring revenue (ARR) of US$400mn. The transaction is expected to close in FY23e and aims to expand tools for creative professionals. We believe that the deal would take out an emerging competitor as Figma poses a potential threat standalone.
• We nudge lower our FY22e revenue/PATMI by 1% due to macroeconomic uncertainty and FX headwinds. On a standalone basis, we maintain a BUY recommendation on ADBE with a lowered DCF target price of US$420.00 (prev. US$549.00), with an increased WACC of 7.1% and unchanged terminal growth rate of 4.0%. Overall, we believe that Adobe’s long-term secular tailwinds remain intact, including paperless workflows, explosion in digital content creation and continued shift to the cloud. Completion of the Figma transaction will cause a 7% downgrade to our target price due to operating margin dilution and additional shares in the diluted share count.

The Positives

+ Document Cloud strength continues. Document Cloud revenue grew 23% YoY to US$607mn and Document Cloud annual recurring revenue (ARR) grew 26% YoY to US$2.2bn. The main growth drivers include strong demand for PDF solutions across computing devices and momentum in AdobeSign. Key customer wins in 3Q22 include Amazon, Boeing, and ServiceNow. Document Cloud is accelerating document productivity and workflows with over 300bn PDFs opened and nearly 8bn e-signatures processed each year. Adobe also announced enhancements to Acrobat web experience such as High Contrast and Read Out Loud.

+ Demand for Creative Cloud remains robust. Creative Cloud revenue was US$2.6bn, up 11% YoY. Adobe added US$330mn of net new Creative Cloud ARR in 3Q22. Much of the Creative Cloud revenue growth was supported by significant growth in new users (particularly in Creative Cloud Express) and continued momentum in growth initiatives such as Frame.io and Substance. The demand for its photography, imaging and video applications was strong due to the surge in digital content creation.

+ Resilient Digital Experience. Digital Experience revenue grew 14% YoY to US$1.1bn driven by strength in the enterprise segment with large deal wins and continued momentum for Adobe Experience Platform applications. Workfront remained strong as well with revenue growing above 35% YoY. Key customer wins include T-Mobile, Morgan Stanley, and Qualcomm.

The Negatives

- Acquisition of Figma is expensive and dilutive. Adobe has signed a definitive merger agreement to acquire collaborative design software firm Figma for US$20bn. The deal values Figma at almost 50x its FY22e ARR of US$400mn. Adobe noted it could lower margins by 100-200 bps over the next two years. Management also expects the deal to be accretive to adjusted EPS only at the end of year three (FY26). The transaction will be funded by 50% cash and 50% stock, and is expected to close in FY23, subject to regulatory and shareholder approval.

Outlook

For 4Q22e, Adobe expects GAAP EPS of US$2.44 (adj. EPS of US$3.50) on total revenue of US$4.52bn. Adobe also expects Digital Media net new ARR of US$550mn for 4Q22e driven by price increases at renewals in both Creative and Document Cloud segments. Additionally, the company expects revenue growth of 10%/13% YoY in the Digital Media and Digital Experience segments. While acquiring fast-growing Figma may boost Adobe’s growth rate and give it a competitive advantage, the huge acquisition price is expected to have an impact on profitability.

• 2Q22 results were in line with expectations. 1H22 revenue/PATMI was at 48% of our FY22e forecasts. Total revenue grew 14% YoY to US$4.4bn, due to 15%/17% YoY increases in Digital Media and Digital Experience revenues.
• Creative Cloud sales rose 12% YoY to US$2.6bn, driven by continued demand for video content production. Document Cloud sales grew 27% YoY to $595mn due to strong adoption of Acrobat with integrated Sign capabilities within companies of all sizes and significant demand for PDF solutions on mobile devices.
• We maintain a BUY recommendation with a lower DCF target price from US$602 to US$549.00 (WACC 6.5%, g 4%). This is mainly because we reduced our FY22e revenue/PATMI by 1%/6% to account for the projected US$175mn incremental foreign exchange headwinds, US$75mn revenue hit due to the Ukraine conflict and higher tax rates. We believe that Adobe enjoys tailwinds from increased pricing, digitalization of document workflows, explosion in digital content creation and cloud migration trends

The Positives

+ Adobe reports record 2Q revenue with solid demand for its products. Revenue grew 14% YoY to US$4.4bn, beating consensus estimates for its top line by 1%, and was in line with our estimates. The growth was driven by 15%/17% YoY increases in Digital Media and Digital Experience revenues to US$3.2bn and US$1.1bn, respectively. In the Digital Media segment, Creative Cloud revenue grew by 12% YoY to US$2.6bn (Creative Cloud annual recurring revenue (ARR) grew 14% YoY to US$10.8bn), while Document Cloud sales grew 27% YoY to US$595mn (Document Cloud ARR grew 26% YoY to US$2.1bn) – the fastest growth of any segment in the quarter. The growth primarily came from new user acquisition and healthy retention. In 2Q22, Acrobat Web surpassed 50mn monthly active users, and doubled YoY. Additionally, Document Cloud revenue was driven by strong adoption of Acrobat with integrated Sign capabilities within companies of all sizes and significant demand for PDF solutions on mobile devices.

+ Maintained strong margins. Adobe reported an impressive gross margin of 88% as the company reports the bulk of its sales from recurring revenue. Operating income was 35% of sales compared with 37% a year ago. Non-GAAP operating margin, which excludes stock-based and deferred compensation expense and amortization of intangibles, was 45% compared with 46% a year ago. Adobe has stable operating margins despite the macroeconomic headwinds, representing a disciplined spending approach and a higher focus on profitability.

+ Creative Cloud price increases. In April, Adobe increased its subscription fees for certain Creative Cloud plans for the first time in five years. The new pricing was in effect for roughly a month but generated about US$10mn in additional revenue, in line with the management’s expectations. Meanwhile, the impact of the price increases is expected to be higher in 4Q22 as significant enterprise deals will be up for renewal.

The Negatives

- FX headwinds impacting revenue growth. Adobe is factoring in an incremental FX headwind of US$175mn across 2H22 revenue. This year, the US dollar has gained strength against the Euro, the Japanese yen, and other currencies as the Federal Reserve has raised interest rates to combat inflation. Adobe generates about 40% of its revenues from international markets.

Outlook

For FY22, Adobe now expects earnings of US$9.95 per share on total revenue of US$17.65bn (prev. EPS of US$10.25 on revenue of US$17.9bn). Non-GAAP EPS is expected to be US$13.50 compared with the prior forecast of US$13.70. This guidance reduction was driven by the projected US$175mn incremental foreign exchange headwinds, US$75mn revenue hit due to the ongoing Ukraine conflict, increased tax rates, and summer seasonality in 3Q22.

Adobe expects Digital Media net new ARR of US$1.9bn for FY22. Additionally, the company expects revenue growth of 12%/14% YoY in the Digital Media and Digital Experience segments.

Cash flow generation continues to be strong, with the company generating about US$1.9bn in Free Cash Flow, ending 2Q22 with US$3.4bn in cash and cash equivalents.