Adobe closes the year with strong results

Adobe (“Wide Moat”) reported strong fourth quarter results, including revenue and non-GAAP operating income in line with our expectations.

The company also reiterated its overall outlook for 2023.

Overall, we consider this a win for Adobe and investors, although other than easing currency pressure, we’re not ready to assume that the rest of our software coverage will follow a similarly favorable pattern next month.

Management also noted that the acquisition of Figma is being reviewed by various regulatory bodies around the world and is progressing according to plan.

We continue to believe the deal will close in fiscal 2023.

With the outlook remaining unchanged and the environment relatively stable, we maintain our fair value estimate of $425 ($) and view the stock as attractive to long-term investors, although we see increased sensitivity to possible weakening of the advertising space in the event of a possible recession in 2023.

Earnings results support our long-term guidance.

Fourth-quarter revenue rose 14% year-over-year in constant currency to $4.525 billion, in line with FactSet estimates and consensus estimates.

Digital Media revenue grew 14% year-over-year while Digital Experience, or DX, grew 16% year-over-year, the former slightly less than our model while the latter slightly more high.

Adobe added $576 million in new annual net recurring revenue, or ARR, compared with a forecast of $550 million.

The company noted generally strong demand across all products and geographies, with no significant deterioration in purchasing habits.

We are impressed with the company’s ability to attract new users through Adobe Express and then convert them to full subscribers and believe the positive feedback on the call will help ease investor concerns.

Margin performance is consistent with our long-term model.

Non-GAAP operating margin was 44.7%, compared to 45.2% last year and 44.1% last quarter, representing a continued return to more normal pre-lockdown operating conditions.

The remaining performance obligation, or RPO, increased 9% year-over-year to $15.190 billion, while current deferred revenue increased 12% year-over-year to reach $5.297 billion.

While management noted improved retention in the free availability of Adobe Express to full Creative Cloud subscribers, we see continued deceleration in these other growth metrics as expected.

Given the overall macroeconomic conditions, this does not in our view represent a disconnect from revenue growth and is expected to continue through at least the first half of fiscal 2023.

The best news of the quarter was that management reiterated its outlook for fiscal 2023, including revenue of $19.1 billion to $19.3 billion and non-GAAP EPS of 15.15 to 15.45. dollars.

Other key elements of the guide have also been retained.

For the first quarter, the forecast calls for total revenue of $4.60-4.64 billion, with $375 million of net ARR digital new media and $3.65-3.70 of non-GAAP EPS.

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