Morningstar

Adobe Earnings: Good, but More Freemium Users Mean Less Near-Term ARR

The firm is also replacing both its CEO and CFO.

The Adobe Systems Inc. logo and signage is displayed outside its company headquarters.
Aaron M. Sprecher via AP
Securities in This Article
Adobe Inc
(ADBE)

Key Morningstar Metrics for Adobe

  • Fair Value Estimate
    : $380.00
  • Morningstar Rating
    : ★★★★★
  • Morningstar Economic Moat Rating
    : Narrow
  • Morningstar Uncertainty Rating
    : High

What We Thought of Adobe’s Earnings

Adobe’s ADBE second-quarter revenue grew by 12.7% year over year to $6.62 billion, while non-GAAP operating margin was 44.5%. Revenue was better than expected, while non-GAAP operating margin was in line with guidance. The annual outlook was generally increased, with some offsets.

Why it matters: Results and guidance are distorted by the Semrush acquisition, which closed on April 28 and added $40 million to revenue in the quarter and $280 million to the revenue outlook for the year. An extension of the freemium model offset good results and Semrush.

  • Capturing more freemium users makes strategic sense, but it counterbalances what should have been several hundred million in new annual recurring revenue from planned pricing actions. The expanded freemium program largely offsets the increase in ARR from the addition of Semrush.
  • Adobe also announced CFO Dan Durn was leaving to become the CFO of Marvell, returning to his semiconductor roots. The timing of this could not be much worse, as it immediately follows Adobe’s ongoing CEO transition. During the artificial intelligence transformation, the firm is replacing both its CEO and CFO.

The bottom line: We keep our $380 fair value estimate for narrow-moat Adobe and view shares as attractively valued for patient and risk-tolerant investors. While we made minor adjustments to reflect near-term guidance, our long-term assumptions remain relatively steady.

  • We recognize the sentiment around software, but we see no signs of the bear case unfolding for the industry in terms of AI disruption. Quarterly performance continues to underscore this notion. Still, heightened uncertainty from the AI threat drove our March moat rating downgrade.

Coming up: Third-quarter guidance was ahead of our expectations, including sales of $6.67 billion-$6.72 billion and a non-GAAP operating margin of 44%. Adobe raised its full-year outlook for revenue and non-GAAP EPS, while holding non-GAAP operating margin and ARR growth steady.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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