Steady growth from Adobe in FY23 Q1 earnings, generative AI on deck for next week's Summit

Adobe kicked off the new financial year by reporting a strong Q1 this week and raised its earnings per share guidance for the full year, pleasing the stock market. Revenue for the quarter ended March 3rd 2023 came to $4.66 billion, up 9% on the same quarter a year ago, or 13% before the impact of currency fluctuations. Shantanu Narayan, CEO, attributes the continuing strength of the business to the ongoing pressure on all companies to go digital, along with Adobe's breadth of offering. He says:

When we look at the macro economic situation, and you can see strong companies actually refer to this across the board, whether it's consumers, whether it's small and medium businesses, whether it's enterprises globally, I think the reality is that digital for them is an imperative. And really, for companies that have innovative solutions, [that] is a tailwind.

The earnings report set the scene for next week's Adobe Summit in Las Vegas, including some pointers towards how Adobe will harness generative AI technology in announcements planned for the event. In the earnings call with Wall Street analysts, David Wadhwani, President of the Digital Media Business, highlighted three themes:

The model that we're focused on is around output quality. It's about best-of-breed generative AI, but combining that with the Adobe magic that we've talked about over the years, and all the technology we have that takes images and makes them better. And so the output quality we think is going to be differentiated.

The second thing is around commercial reuse. There's a lot of complex questions here around copyrights, around diversity and inclusion, about harmful content that's being created. That's something we take very seriously. We're embedding that into everything we do.

The third thing is really about workflow integration. Creating an image is just the start. It's not the end. Adobe is the only player that has a full end-to-end workflow, not just within the products and the tools that we have in the digital media business, but also everything that Anil [Chakravarthy, President of the Digital Experience (DX) Business,] is doing around the content workflow and the content supply chain, out to the point of distribution.

Product-led growth

Back to the earnings, and CEO Narayan attributed the continuing growth of the business to a strong focus on Product-Led Growth (PLG), where he said Wadhwani has been taking a lead:

He's really focused on, 'How are we acquiring [customers]? How are we engaging them? What's the usage? How do we make sure they're getting value for the product? How do we continuously tell them about what's new?'

As David has come in and introduced the notion of PLG, I think that part has also really started to reflect in making sure that customers know that we're building products and features that are relevant for the pain points that they have.

So I would say the underlying business, while there are the digital imperatives, I wouldn't underestimate the incredible execution that the team continues to do on that or in DX. How do you look at the solutions we're selling? How do you understand cross-sell? How do you understand upsell? I think the hours and hours of work that goes in is sometimes not appreciated.

Wadhwani cited examples of product-led growth such as outbound marketing that connects back to product landing pages, having a strong onboarding experience, developing "growth loops" such as enabling customers to share content to external stakeholders for review, along with partnerships such as the recently announced link-up with Microsoft to make Acrobat Reader the default PDF experience on Edge. He summed up:

It's a cacophony of these activities that ultimately results in strong top-of-funnel. And then as we talked about, it's really about the hard work and the data to drive personalized experiences at scale, leveraging a lot of Anil [Chakravarthy]'s DX businesses and products to drive users all the way through to conversion.

Platform breadth

Chakravarthy added that the breadth of the Adobe platform also gives the company an advantage over competitors who only focus on specific products or functions. He said that in the current economic climate, customers are looking to combine revenue growth with improved cost efficiencies, explaining:

How do you keep growing through your digital channels, and you get the revenue growth, but you also get the benefit of getting efficiency through consolidation? That's where we believe we really shine, as customers are looking at the overall stack, similar to what they've done in other aspects of their IT enterprise architecture, they are looking at, 'Who is my go-to platform that I can really standardize on, and I'll build around?' We are getting the benefit of that choice.

On that note, Narayan confirmed that the company remains committed to its pending acquisition of Figma, which is stalled while competition regulators investigate the implications of bringing the collaborative design tool under Adobe's control. He said:

Adobe remains confident in the facts underlying the case, and based on current process timing, we believe the transaction continues to be on track for a close by the end of 2023.

Wadhwani added:

Everyone from Adobe employees to Figma employees to our customers can't wait for this to close so we can actually get moving on all this.

On the numbers, Dan Durn, CFO, cited the following highlights:

• GAAP diluted earnings per share of $2.71 and non-GAAP diluted earnings per share of $3.80;
• Digital Media revenue of $3.40 billion, up 9% year-over-year, or 14% in constant currency;
• Net new Digital Media ARR of $410 million, exited the quarter with $13.67 billion Annual Recurring Revenue (ARR);
• Net new Creative ARR of $307 million in the quarter, creative revenue of $2.76 billion, up 8% year-over-year, or 13% in constant currency.
• Net new Document Cloud ARR of $103 million in the quarter, revenue of $634 million, up 13% year-over-year, or 16% in constant currency;
• Digital Experience revenue of $1.18 billion and subscription revenue of $1.04 billion, up 12% year-over-year, or 14% in constant currency;
• Cash flows from operations of $1.69 billion;
• Remaining Performance Obligations (RPO) of $15.21 billion exiting the quarter; and
• Repurchasing approximately 5.0 million shares of stock during the quarter.

Revised targets for fiscal 2023 are:

• Digital Media net new ARR of approximately $1.70 billion;
• GAAP earnings per share of $10.85 to $11.15; and
• Non-GAAP earnings per share of $15.30 to $15.60.

My take

Steady onward progress at Adobe, reflecting continued investment in digital assets and customer engagement by businesses even while costs and revenue remain under pressure. Next week's Adobe Summit promises some interesting further announcements on generative AI and other product news. I'll be there on the ground for diginomica — follow us for in-depth reporting and analysis.