Adobe Earnings: A New Growth Strategy

Here's our initial take on Adobe's (NASDAQ: ADBE) financial report.

Key Metrics

Focusing on Customers and AI

Adobe beat analyst expectations in the first quarter, delivering 10% revenue growth and much improved operating cash-flow generation. With the creative software industry at risk of disruption from artificial intelligence (AI), Adobe laid out its two-part plan to drive sustainable long-term growth.

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First, Adobe is embracing AI across its product portfolio. The company has already generated more than $125 million in bookings from its AI-based stand-alone products and AI add-on products, which include its Firefly app and Acrobat AI Assistant. Users are embracing AI features within Adobe's existing product lineup, with about 35% of monthly active users of Photoshop using generative AI features. Adobe plans to roll out new Firefly web app subscriptions and support additional third-party AI models.

Second, the company is splitting its customer base in two as it aims to deliver new tailored solutions. Adobe will now report subscription revenue for its "Business Professionals and Consumers" and "Creative and Marketing Professionals" customer groups separately. Here are the numbers for the first quarter:

• Business Professionals and Consumers Group: Revenue of $1.53 billion, up 15% year over year.
• Creative and Marketing Professionals Group: Revenue of $3.92 billion, up 10% year over year.

Adobe will disclose more about its new customer-focused strategy at its Investor meeting next week.

Immediate Market Reaction

Shares of Adobe were down about 3% in early after-hours trading soon after the company reported its first-quarter results. While Adobe's results were better than expected, its outlook fell slightly short of expectations. Adobe's report also comes at a volatile time for the stock market, and investors are no doubt concerned about the impact on demand for Adobe's products due to growing economic uncertainty.

What to Watch

For the second quarter, Adobe expects to produce revenue between $5.77 billion and $5.82 billion and adjusted earnings per share between $4.95 and $5. The midpoints of both guidance ranges were a bit below the consensus analyst estimates of $5.8 billion and $5, respectively.

The guidance miss was minor, but investors may still be concerned about the disruptive potential of AI on Adobe's business. The new strategy of creating solutions tailored for different customer groups appears promising, but it will take time for those solutions to hit the market. Adobe will likely delve deeper into its long-term growth plan during its investor meeting next week.

Helpful Resources

• Full earnings report
• Investor relations page

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe. The Motley Fool has a disclosure policy.