Adobe Gains as Creative Cloud Strength Overshadows Ad Pressures

Though Adobe missed revenue estimates, its Creative Cloud and Document Cloud businesses turned in strong quarter.
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Though Adobe’s  (ADBE) - Get Report advertising software business is struggling right now, markets are pleased with how well its media and document software businesses are holding up.

On Thursday afternoon, Adobe reported May quarter (fiscal second quarter) revenue of $3.13 billion (up 14% annually) and GAAP EPS of $2.27 and non-GAAP EPS of $2.45. With the help of controlled spending growth and $850 million worth of stock buybacks, the EPS numbers respectively beat FactSet consensus estimates of $2.13 and $2.32. However, revenue missed a $3.16 billion consensus.

Adobe also guided for August quarter revenue of $3.15 billion (up 11%), GAAP EPS of $1.78 and non-GAAP EPS of $2.40. Those figures are respectively below consensus estimates of $3.26 billion, $1.99 and $2.46.

And citing both the macro environment and “strategic shifts” in its Advertising Cloud business, Adobe withdrew the fiscal 2020 (ends in Nov. 2020) targets it issued last December.

Nonetheless, Adobe’s stock rose 4.2% in after-hours trading to $404.00, putting the company’s market cap back above $190 billion. Shares made a new all-time high of $409.98 on Wednesday, before dropping 4.7% in regular trading on Thursday thanks to a broad market selloff.

Digital Media Strength

Why is Adobe trading higher post-earnings? The performance of its bread-and-butter Digital Media segment, which covers its Creative and Document Cloud businesses, appears to be playing a major role.

In spite of the COVID-19 pandemic’s impact on deal activity, Digital Media revenue rose 18% annually to $2.23 billion -- a slowdown from the February quarter’s 22% growth but nearly matching Adobe’s guidance for 19% growth.

And the company’s closely-watched Digital Media annualized recurring revenue (ARR) grew by $443 million sequentially to $9.17, beating guidance of $385 million. Creative ARR, which is driven by the Creative Cloud media/content-creation software platform, grew by $350 million to $7.93 billion. Document Cloud ARR, which is driven by Adobe Acrobat and the Adobe Sign e-signature software platform, grew by $90 million to $1.24 billion.

Adobe also guided for Digital Media revenue to be up 16% annually in the August quarter, and for Digital Media ARR to grow by $340 million. On Adobe’s earnings call, CEO Shantanu Narayen said that “historic highs” were hit Creative Cloud and Document Cloud web traffic, and that greater remote work activity led usage of web-based PDF services to grow nearly 40% sequentially.

Advertising Software/Services Pressures

While Digital Media revenue kept growing strongly last quarter, Adobe’s Digital Experience segment -- it covers a number of marketing, advertising and content management software and services offerings, had a rougher time.

Digital Experience revenue rose just 5% annually to $826 million, missing guidance for 12% growth. And Adobe forecast the segment’s revenue would be flat in the August quarter.

Adobe’s Advertising Cloud software and services platform, which competes against the likes of Google  (GOOG) - Get Report and The Trade Desk  (TTD) - Get Report, is currently a major headwind for Digital Experience revenue. Along with a weak online ad market, Advertising Cloud revenue is being pressured by Adobe’s decision to phase out sales of low-margin offerings tied to ad transactions by clients.

The company estimates Advertising Cloud revenue saw a $50 million May quarter hit from this strategy change and macro pressures, and notes that its Digital Experience subscription revenue (up 8% to $707 million) was up 18% excluding Advertising Cloud. CFO John Murphy said that Adobe now expects just $200 million worth of Advertising Cloud revenue in fiscal 2020, down from $360 million in fiscal 2019.

Narayen promised that Adobe will continue supporting Advertising Cloud’s software offerings, while asserting that his company is uniquely positioned to give CMOs “a single source of reporting and attribution for their advertising investments.” However, he also said that Advertising Cloud “will not be an area of growth moving forward.”

Ups and Downs for Deal Activity

Echoing many other software execs, Narayen said that Adobe “saw anticipated delays in enterprise bookings and consulting services implementations as companies prioritize employee and financial well-being.” Also in line with peers, he mentioned that demand from small and mid-sized businesses (SMBs) has softened.

At the same time, Murphy said that Document Cloud benefited from shortened enterprise deal cycles, as companies moved to better support remote workers. He also mentioned that Adobe saw strong demand for its professional video offerings, including standalone Premiere Pro subscriptions, and that mobile subscription sign-ups grew strongly.

And when asked about August quarter Digital Media activity, Narayen indicated that subscriber growth has remained strong so far, and that Adobe “probably overestimated” how much of an impact COVID-19 would have on consumer demand.

“I think we're factoring in normal seasonality,” Narayen said about Adobe’s August quarter Digital Media ARR guidance. “We're not assuming that things will get better as it relates to [SMBs]. But overall, whether it's the Document Cloud or the Creative Cloud, we continue to feel good.”