Transcription
Welcome back. My name is Arya and I don't waste your time. So, let's get straight into it. The most fun video of the quarter, ladies and gentlemen. Adobe earnings are out. The stock at the time of this recording is unfortunately not doing too hot. It is down an additional 7% after hours. It was down 6% during the day, another 7% in after hours. And yet, the earnings were to nobody's surprise absolutely fantastic. In fact, I don't think there was a single fault in the entire earnings report. I've already gone ahead and looked at the whole thing. I have a couple different quotes that I would like to take you through over on the earnings call. Without further ado, we'll get into it.
Quick shout out to Fiscal AI, by the way, for having these numbers literally in. It has been exactly 21 minutes since Adobe reported their earnings, and the numbers are already inside of the terminal. It is by far the fastest place on the internet to be able to gain access to fundamental data as soon as a company's earnings reports come out. Without further ado, revenue growth, would you look at that? Came in at 13%. Now, admittedly, a portion of this was inorganic. It's because they acquired this company called Seamrush, which I have mixed feelings about, but I still think strategically it could start to make sense. If you were to strip out Semrush's revenue addition within this quarter, which was only a measly $40 million, $40 million on a company that did $6.6 billion of revenue, the company would still be growing 12% organically on a year-over-year basis, which again, I'm going to remind you, is an acceleration compared to the period prior to that. If we take a look at the May quarter last year, it was growing at 11 maybe high yeah 10.6% and so 12% is still a meaningful acceleration.
On top of that, in terms of the gross margins of the business, there has been this sort of uh thesis of gross margins of just software companies broadly speaking will start to deteriorate as a result of extra AI consumption costs and stuff like that subsidizing that sort of thing. That hasn't really materialized at all. If we take a look at Adobe's gross margins, it's basically in line with what it's been historically. If we look at May of last year, in fact, it's actually expanded ever so slightly. It's up 0.1%. So that hasn't really materialized. If you look at the operating margins of the business, largely the same story on that front. The only reason for the actual dip here is again due to that acquisition. I would expect that this normalizes. You could see a similar sort of thing with the whole uh Figma acquisition. That's a termination. So it's slightly different, but nonetheless, company's operating margins have been healthily in the mid30s. I would expect that these return back to the mid to high 30s where they've historically been after this acquisition nonsense kind of goes through.
And then another super important metric that I know a lot of people care about is of course the buybacks and the buyback yield which now sits at just shy of 12%. We are now in PayPal range in terms of the buyback yield of this business. If we look at the total shares outstanding and look at that as a percentage change. It was a decline of negative 5% year-over-year. And they spent roughly $2 billion within the quarter on buybacks which has roughly been in line with the past handful of quarters that they've been investing. I would actually expect that this maybe potentially ramps up as they have now gone past the acquisition for Seamrush and so naturally they could potentially allocate a higher percentage of their free cash flows over to buybacks.
With that being said, before we jump over to the transcript reminder, you can get a twoe free trial, no card required for fiscal AI, this wonderful platform that's able to give us the numbers right away. With that being said, jumping over to the earnings call transcript, which actually the earnings call hasn't even happened yet, but they actually share their transcript ahead of time. One thing that I did forget to mention is that the earnings growth was 18% year-over-year. This is GAAP earnings for reference. By the way, you have a business which this is pre- earnings, but prior to the earnings report, this is actually even cheaper now, was trading below 12 times earnings, growing those earnings at 18% with zero signs of disruption. And I say zero signs of disruption because if you go through what they kind of reported on the AI side of things and the growth at their business, for example, with the increase in Acrobat and Express monthly active users, Express, by the way, for those who don't know, is the Canva competitor that Adobe has put out, which they have actually been taking market share and it's been growing faster than Canva. They kind of report these two things together. So obviously Acrobat is a massive asset in of itself, probably north of half a billion monthly active users. But nonetheless, the two of those things combined has now grown to 850 million users, up from 700 million last year, same quarter. You also noted that traffic for the business professional and consumer segment grew 35% year-over-year. Mind you, by the way, consumer is grouped in here. Supposedly, the consumer side of things is supposed to fall off for Adobe, but simply isn't showing up in the numbers.
Their Gen Studio product. I recommend I'm gonna actually link it in the description, but this is a enterprise product where essentially you put in one type of ad. Take for example, if you're Pepsi and like, you know, you're making an Instagram post, whatever, or like a banner ad, whatever the case is, you put that one ad in there and then it like immediately is able to generate a thousand different versions of the same ad with slightly different oriented versions of the Pepsi can inside of the ad, whole bunch of versions of it in different languages, different fonts, different colors, like all this different stuff. It's a super impressive product and obviously it's growing really, really fast. The ARR on that grew 25% year-over-year. This is one of Adobe's main AI products that they have. The other main AI product that they have is Firefly, which is a little bit further down here. Anyways, uh they mentioned that they had a 3x growth year-over-year in terms of AI first ARR. That is now $500 million for the business. We continue to target double digit total AR growth for Adobe, which now includes Semrush acquisition. We are pleased to raise our fiscal year of revenue. Sorry, forgot to mention that at the start of the video as well, but uh they raised the fullear guidance for revenue and as you just saw a second ago, they continue to believe that they can achieve double digit ARR growth.
The one negative that I guess you could argue with the reports was that Dan Durn, the CFO of the company, who has a wonderful track record of capital allocation and buybacks. He used to be the CFO over at Applied Materials, averaged something like north of a 20% kar with his buybacks. He is leaving the company to pursue a different professional opportunity. He didn't reveal which professional opportunity and instead we have this guy Steve Day who was the senior vice president if I recall that correctly. He's been at Adobe for 20 years. He's going to be the interim CFO upon Dan's departure on June 15th which is actually in a couple days. So that's not ideal but at the same time not necessarily a thesis breaker for me personally but you don't always love to see seuite churn.
Uh another point that people kind of bring up as a negative but I actually view it as a positive and I'll explain that in a second here. There's a longer quote that says, "Given products like Adobe Firefly Express and Acrobat AI Assistant have friction-free onboarding and significant adoption, we can now rebalance our journeys to better serve this new generation of users. Rather than send them predominantly to direct to paid journeys, the shift will come at the cost of short-term AR, but will accelerate user acquisition and monthly active user while building the foundation for long-term growth by removing friction from user onboarding." Essentially, what they're saying is um they went from a model of you need to enter your credit card first in order to even gain access to a free trial for the Adobe software. They've removed that. So, you can just sign up for Express and you gain access to a free tier. And if you want to put your credit card in, like the way Canva does it, it's like a premium versus a paid trial, if you will. Not really paid, but like you put your card in to get the free trial. It's just like you get a free version, right? So, the reason they're doing this is in my eyes to essentially avoid the scenario where sure you have like the Photoshop wizard who's been using it for 20 years. That guy's not going to ever leave Photoshop. Like, that's not their worry. Their worry is the 20-year-old such as myself who comes up in the creative world and is only using Canva and never even touches an Adobe product. They want to create some sort of relationship with that 20-year-old, create a premium tier and get him involved in the Adobe suite of products to then at a later date potentially be able to upsell and cross-ell that 20-year-old over to other different Adobe products and maintain that low-end consumer as a form of top offunnel user acquisition for the entire ecosystem of Adobe. So, that's kind of their goal with that. And that comes at a cost of short-term ARR de acceleration because of course you're bringing on a whole bunch of free users and not charging them for it, right? So, your AR would go would grow slower than your monthly active users, right?
Couple other things. I mean, we'll kind of bang out through these, but like again, this really speaks to that uh they're addressing the Canva quote unquote risk and additionally addressing the AI risk. You have Acrobat AI assistant, which grew 150% year-over-year. Express, which grew 20% quarter over-arter. That is so unbelievably impressive. I think Canvas growing 30% year-over-year. So, Express on a quarter- quarter basis. That's uh really, really massive growth on that front. You have Acrobat student spaces which launched this quarter. Express Premium through schools has grown more than 60%. This is kind of like the uh Microsoft strategy all over again or the Google strategy kind of of just like get them while they're in school. And so once they use your products in their creative classes and whatever because you know it's super cheap and the universities are willing to essentially for like basically the same product instead of going with Canva they'll just go with uh Express because it's significantly cheaper. it kind of becomes like the default and the standard and people learn how to use it inside of their classes and when they go into the professional world they end up using the same tools, right? Excel's done it with Microsoft and Google's done it with their whole suite of products age-old strategy and Adobe's able to fund stuff like that, right? Because they essentially don't need to make money on Express because they are banking on customer lifetime value and being and getting these people integrated into the Adobe family of apps. And so with that being said, what am I going to be doing with my portfolio and my Adobe position? I am going to continue to hold it. I'm not adding to it. I'm not getting rid of it. I'm going to continue to hold it. Obviously, as evident by the price action in the stock over the past couple months and today, despite reporting unbelievable numbers, the company or I should say the stock refuses to move. And so, I don't want to add to something with bad momentum and poor sentiment like that. But at the same time, I'm perfectly happy to continue to hold on to that stock given that my thesis is still not broken. The fundamentals are actually literally improving. The revenue growth is improving. the operating margins technically didn't improve this quarter, but I I'm sure if we take out those acquisition costs, it would be flat or slightly improving, whatever the case is, right? You're looking at they're addressing the threat with AI and all the integrated features that they've rolled out. Their AI first revenues are growing and, you know, tripling year-over-year. You have Gen Studio, which is also growing massively. And if somehow it was that, you know, the stock price was invisible, if you were to objectively look at this company just based off of the fundamentals that they've put out, you would say that this company is executing on every single level. Sure, you have, you know, CEO leaving and CFO leaving. Now, CEO is retiring, so I would say that's a little bit different. I think a slight yellow flag is that the CFO is leaving on pretty short notice that you can maybe argue with me, but across the board, if you net everything out, objectively speaking, the thesis is still perfectly intact. I'm perfectly happy taking a loss on stocks. I've taken losses on stocks in the past, but I'm willing to take a loss on the stock if and when the thesis is broken. And at the moment, that's simply not the case with Adobe. Hence why I'm going to continue to hold on to it. If you're curious to see whether or not I'm going to be adding to this at a later date, there is a link for Blossom in the description down below where you're able to see my complete portfolio completely for free. Also, be sure to pin it in the comment section down below. And other than that, thank you very much for watching and have a great.