Despite what one might think at first glance (and quite logically, given the share price trend), Adobe has published some rather good figures. The two main divisions reported comfortable growth. Digital Media, the division dedicated to creative software and Acrobat (three quarters of total sales), grew by 11%. Digital Experience, the online marketing solutions division, recorded growth of 9.3%.
Overall, at constant exchange rates, revenues climbed by 11% to $5.71bn. This growth is in line with what we are used to seeing in Adobe's figures: regularity and control thanks to the SaaS (Software as a Service) subscription model. The solidity of the business is accompanied by a record operating margin, at 47.5%, even though marketing and R&D expenditure remained very high. The company's strategy of returning cash to shareholders continues, with just over $3.25bn allocated to share buybacks in Q1, representing around 2% of its capitalization. Note that Adobe does not pay dividends and devotes the vast majority of its free cash flow (if not all) to share buybacks.
Quarterly growth in Adobe sales and operating margin
Performance was also very robust by user type, with a good breakdown in growth between creative and marketing professionals and consumers of simpler software.
Why did investors penalize the earnings report?
For many months now, Adobe has been eagerly awaited on the subject of artificial intelligence. Pressure on the stock had been heightened by the failure of the Figma acquisition (which resulted in a $1bn penalty last year) and accusations of deceptive business practices. But shareholders' main fears are focused on AI.
Adobe is facing increasingly fierce competition that is affecting all its business segments. There's Figma, of course, but also platforms that are gaining in popularity, such as Canva, and a host of new players offering advanced AI generation solutions. Adobe is, of course, present in this field with its Firefly creative services platform and AI tools integrated into its various software packages (Photoshop, Illustrator, InDesign, Acrobat). But not enough. In Q1, the inventor of the PDF file only reported $125m in bookings for AI products, a very small fraction of its annual sales (barely 1%). Adobe is optimistic that revenues from Firefly will double by the end of the year. But that's not enough. Even with a doubling, revenues from AI are struggling to take off sustainably.
Next week, the company will be hosting the "Adobe Summit". This is a major conference on the digital experience, where new features for Firefly, advances in advertising (notably with Coca-Cola), price optimization and new products could be announced. Analysts believe that this event, if successful, could be a catalyst for the coming months.
In the meantime, Adobe has reaffirmed its targets for this year and next. Sales should climb by $2bn year-on-year (as they have every year for the past decade, roughly speaking). Margins should remain close to current records (target operating margin of 46% in 2026).
Adobe is currently one of the least valued software companies on the market: 23x earnings this year, 14x EBITDA to enterprise value (capitalization + debt), 17x FCF. Above all, shareholders are looking for reassurance about the group's ability to innovate in the field of AI. But they understand that this will take time. It is this weariness and uncertainty that explains yesterday's fall, and the fact that a growth company like Adobe is currently trading at multiples well below its historical averages.
