Adobe Q2 2024 Earnings Review

$ADBE Q2'24 Results:

Financial Results:

↗️$5,309.0M rev (+10.2% YoY, +11.3% LQ) beat est by 0.4%

↗️GM* (90.1%, +0.3%pp YoY)🟢

↗️Operating Margin* (46.0%, +0.7%pp YoY)

↗️Net Margin (29.6%, +2.7%pp YoY)

↗️EPS* $4.48 beat est by 2.1%🟢

*non-GAAP

Segment Revenue

↗️Digital Media $3,908M rev (+11.3% YoY, 95.4% Gross Margin)

➡️Creative $3,126M rev (+9.6% YoY)🟡

↗️Document Cloud $782M rev (+18.7% YoY)🟢

➡️Digital Experience  $1,327M rev (+8.6% YoY, 70.2% Gross Margin)🟡

↗️Digital Experience Subscription $1,204M rev (+12.5% YoY)🟢

↘️Publishing and Advertising $74M rev (-10.8% YoY, 70.3% Gross Margin)🟡

Key Metrics

↗️RPO $17.86B (+17.4% YoY)🟢

↗️Creative ARR $13.11B (+12.6% YoY, +322 net new ARR)🟢

↗️Document Cloud ARR $3.15B (+25.7% YoY, +165 net new ARR)

↗️Total Digital Media ARR $16.25B (+14.9% YoY, +487 net new ARR)🟢

Operating expenses

↗️S&M/Revenue 27.2% (26.1% LQ)

↗️R&D/Revenue 18.5% (18.1% LQ)

↘️G&A/Revenue 6.7% (6.8% LQ)

Dilution

↘️SBC/rev 9%, -0.2%pp QoQ

↘️Basic shares down -2.2% YoY, -0.9%pp QoQ🟢

↘️Diluted shares down -1.7% YoY, -0.9%pp QoQ🟢

Headcount

↗️31,020 Total Headcount (+3.0% YoY, +944 added)

Guidance

↘️Q3'24 $5,330.0 - $5,380.0M guide (+9.5% YoY) missed est by -0.8%🔴

➡️$21,400.0 - $21,500.0M FY guide (+10.5% YoY) in line with est

Key points from Adobe’s First Quarter 2024 Earnings Call:

Financial Performance:

Adobe reported a strong quarter with $5.31 billion in revenue, an 11% year-over-year growth. GAAP earnings per share were $3.49, while non-GAAP earnings per share stood at $4.48, reflecting a 15% year-over-year growth.

Product and Innovation

Creative Cloud Innovations:

Adobe has deeply integrated AI into its flagship products, including Photoshop, Illustrator, Lightroom, and Premiere, primarily through its proprietary AI, Firefly.

New AI-driven features such as Generative Fill in Photoshop and Text to Vector in Illustrator are enhancing user capabilities.

The introduction of Generative Remove in Adobe Lightroom allows users to remove unwanted objects from photos seamlessly, enhancing photo editing capabilities.

Document Cloud Enhancements:

The Acrobat AI Assistant was highlighted as a key innovation, significantly enhancing how users interact with PDF documents. It enables users to engage in conversations with documents for summarization, insight extraction, and content sharing.

This feature has been extended beyond PDFs to include other document types like enterprise documents and transcripts.

Experience Cloud Developments:

Adobe marked the five-year anniversary of the Adobe Experience Platform (AEP), celebrating its evolution towards becoming a billion-dollar business.

The introduction of AEP AI Assistant facilitates more efficient marketing practices by automating tasks and generating new customer segments and journeys.

Adobe GenStudio was introduced to streamline the content creation and management process across Adobe’s suite, integrating products from Creative Cloud, Adobe Experience Manager, and Adobe Express for Business.

Expansion of AI Capabilities:

Adobe has been aggressive in integrating AI across all its product offerings. The company is focused on enhancing productivity and creativity by assisting human ingenuity with AI.

Firefly, Adobe’s AI model, has seen substantial use, generating over 9 billion images, which underscores its integration success and acceptance among users.

Adobe Express Innovations:

Adobe Express has been reimagined as an AI-first application to simplify design and content creation across web and mobile platforms.

Customers:

Adobe reported key enterprise customer wins across different segments, reflecting the wide application and robustness of its solutions. Notable new clients include AstraZeneca, Chevron, the State Government of Florida, State of Illinois, United Healthcare Services, and Wells Fargo.

Expansion in Global Markets:

Adobe's initiatives, particularly around AI and mobile platforms, have led to significant growth in emerging markets. The company’s focus on making its products more accessible and efficient has resulted in increased adoption globally, contributing to overall market expansion.

Sector-Specific Applications:

The development and general availability of specialized applications, such as Acrobat AI Assistant for different document types and Adobe GenStudio for enterprise content management, illustrate Adobe’s strategy to tailor solutions for specific market needs and sectors.

Strengthening Customer Relationships:

Long-term engagements with existing customers, like Marriott International, which expanded its use of Adobe Experience Cloud for personalized guest experiences, highlight Adobe's capability to grow and evolve with its clients.

Future Outlook:

Adobe is optimistic about the second half of the fiscal year and has raised its targets for Digital Media net new Annualized Recurring Revenue (ARR), Digital Experience subscription revenue, and EPS.

Adobe plans to continue its deep integration of AI across all product offerings, enhancing user experience and operational efficiency. The company plans to continue developing its ecosystem by integrating third-party AI models and partnering with other technology leaders.

Management comments on the earnings call.

Product Innovations

David Wadhwani, President of Digital Media: "In Creative Cloud, we have invested in training our Firefly family of creative generative AI models with a proprietary data set and delivering AI functionality within our flagship products including Photoshop, Illustrator, Lightroom, and Premiere."

Shantanu Narayen, Chair & CEO: "Adobe's highly differentiated approach to AI is rooted in the belief that creativity is a uniquely human trait and that AI has the power to assist and amplify human ingenuity and enhance productivity."

Shantanu Narayen, Chair & CEO: "Our success is driven by growing customer value through an innovative product roadmap. The advances we are delivering across Creative Cloud, Document Cloud, and Experience Cloud are enabling us to attract an expanding universe of users."

Customers

David Wadhwani, President of Digital Media: "Creative professionals are leading the global charge to meet the ever-increasing demand for engaging content across a variety of platforms and channels. Enterprises rely on creative professionals to produce differentiated content to drive increasingly personalized marketing campaigns."

Anil Chakravarthy, President of Digital Experience: "Enterprise customers, both B2C and B2B, view customer experience management and personalization at scale as key areas of differentiation, making it a priority investment for Chief Marketing Officers, Chief Information Officers, and Chief Digital Officers."

Future Outlook

Shantanu Narayen, Chair & CEO: "Given this rich product roadmap, focus on execution, and customer demand in the first half of the year, we are pleased to raise our annual Digital Media net new ARR, Digital Experience subscription revenue, and EPS targets."