Adobe: solid quarter, but prospects…

Adobe (“Wide Moat”) reported strong second quarter results with strong new digital annual net recurring revenue (ARR).

The outlook for the year was lowered, however, and the third quarter forecast was below our expectations, due to more pronounced seasonality, the war in Ukraine, worsening exchange rates and a higher tax.

Despite these issues, we remain confident in Adobe’s ability to execute on its strategy, evidenced by its unchanged ARR goals.

Given the near-term outlook and rising macroeconomic pressures, we have lowered our growth expectations over our 10-year forecast and thus lowered our fair value estimate from $615 to $500 per share.

We see increased sensitivity to a potential slowdown in advertising.

However, we view equities as attractive for long-term investors.

Good result

Second-quarter revenue rose 15% year-over-year in constant currency to $4.39 billion, compared with the forecast and FactSet consensus of $4.34 billion.

Digital media revenue increased 16% year-over-year, while digital experience, or DX, increased 18% year-over-year, with both segments growing ahead of our model.

Publishing and advertising fell 17% year over year, which is not a concern as this segment is not core.

Adobe saw strong demand throughout the quarter from consumers, SMBs and enterprises as Adobe expands its portfolio for digital media and DX.

We remain impressed with Adobe’s ability to grow its user base and achieve retention rates above pre-pandemic levels.

Non-GAAP operating margin was 45%, compared to 45.9% last year and 46.8% last quarter, representing continued operating efficiency.

The residual performance obligation (RPO) increased 13% year-over-year to $13.82 billion, while current deferred revenue increased 15% year-over-year to reach $4.75 billion.

Given the headwinds, we believe these metrics indicate healthy fundamentals for Adobe.

A solid model

As indicated by the reduction in our growth estimates, we believe there is risk to Adobe’s outlook for the full year.

Although we lowered our growth assumptions, we made only minor adjustments to our profitability estimates.

For the third quarter of fiscal 2022, the revenue forecast of $4.43 billion was below the FactSet consensus of $4.51 billion, while the non-GAAP EPS forecast of $3.33 was also below market expectations.

Adobe updated its full-year outlook, with revenue guidance of $17.65 billion, down from $17.90 billion, and non-GAAP EPS of $13.50, down from $13.70. dollars.

Despite continued macroeconomic headwinds, Adobe remains confident in the company’s performance and reaffirmed its full-year ARR target of $1.90 billion, expecting to see a year-end rebound, but revised the forecast downward from sequential changes from the second to the third quarter.

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