- Adobe’s fiscal third-quarter results exceeded Wall Street estimates on both the top and bottom lines. The company reported adjusted earnings of $4.09, topping analyst estimates of $3.98. Revenue came in 10% higher (13% in constant currency) to $4.89 bn, beating expectations of $4.87 bn. Non-GAAP operating income reached $2.26 bn, and non-GAAP net income was $1.88 bn.
- Adobe’s focus on generative AI was highlighted, with CEO Shantanu Narayen suggesting it has heralded a new era of AI-enhanced creativity globally. The Digital Media segment revenue was $3.59 bn, reflecting 11% y/y growth (or 14% in constant currency). Creative revenue reached $2.91 bn, up 11% y/y (or 14% in constant currency). Document Cloud revenue came in at $685 m, which grew 13% y/y (or 15% in constant currency.)
Net new Digital Media Annualized Recurring Revenue (ARR) amounted to $464 m, suggesting a positive outlook for the company, and bringing total Digital Media ARR to $14.60 bn at the end of the quarter. Creative ARR expanded to $11.97 bn, and Document Cloud ARR increased to $2.63 bn. - The fourth-quarter earnings forecast was also better than anticipated, while the revenue outlook was in line with analyst’s projections. For the fourth quarter, Adobe expects non-GAAP EPS of $4.10 to $4.15 on revenue between $4.9 bn and $5.0 bn.
- Adobe is an incredible business with great products and sticky customers. Whilst we don’t have a problem with share options for employees in principle, to incentivise the best employees, we are concerned with the following two issues. Firstly, how Adobe accounts for this stock-based compensation. The company reports adjusted earnings, which removes stock-based compensation. We find this misleading as it boosts earnings. Secondly, and this is our main concern, is that once shares are issued to employees via these schemes, Adobe then repurchases shares in the open market to maintain equilibrium in shares outstanding, irrespective of the price or intrinsic value of the company at the time. This, in our option, is not optimal for shareholders, and could potentially destroys value over time. Adobe repurchased approximately 2.1m shares during the quarter.
By Lee Kern