Adobe closes the year with strong results

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

The company also reiterated its full forecast for 2023.

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

Management also noted that the acquisition of Figma is under review by various regulatory authorities around the world and is progressing as planned.

We believe the deal will close in fiscal 2023.

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

Revenue results support our long-term guidance.

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

Digital Media revenue grew 14% year over year and Digital Experience or DX sales grew 16% year over year, the former slightly lower than our model and the latter slightly higher.

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’re impressed with the company’s ability to attract new users through Adobe Express and then convert them to full-fledged subscribers, and we believe the positive feedback on the call will help ease investor anxiety.

Margin performance is consistent with our long-term model.

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

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 $5.297 billion.

While management noted improved retention with free availability of Adobe Express to Creative Cloud full subscribers, we see continued slowdown in these other forward-looking growth metrics.

Given overall macroeconomic conditions, this does not represent a disconnect with revenue growth in our view and is expected to continue at least through the first half of FY2023.

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

Other key guiding elements have also been preserved.

Q1 guidance calls for total revenue of $4.60-4.64 billion, including $375 million in net ARR digital new media and non-GAAP EPS of $3.65-3.70.

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