Adobe (ADBE) stock jumped nearly 15% after the company released its Q2 FY2024 earnings report last Thursday following market close. The digital media giant beat top- and bottom-line expectations, with results surpassing consensus estimates. The company reported strong growth across all its cloud categories: Document Cloud, Creative Cloud, and Experience Cloud. 

Adobe’s net new Digital Media annualized recurring revenue (ARR) of $487 million indicates strong subscription growth and sustained demand for its creative software products.

On the earnings call, David Wadhwani, president of the Adobe Digital Media unit, expressed optimism about the rapid pace of innovation in his business. He cited the successful integration and monetization of AI features across various products, including Firefly Services and Express. On the back of this momentum, Wadhwani said the company would raise its annual net-new ARR target for the Digitial Media business to $1.95 billion. He also hinted at more product developments coming in the second half of the year.

While summarizing the quarter’s success from a macro viewpoint, Shantanu Narayen, Adobe’s chair and CEO, emphasized the diversity of the company’s product portfolio and how important many of these products are “from individual consumers all the way to enterprises.” He continued, “At this scale, it’s all about execution. The business cycles will come and go, but we’re continuing to focus on execution and converting the pipeline and the interest and the awareness of AI into monetization. And so we just will be ruthlessly focused on continuing to execute against that.”

In response to an analyst question about net-new business, Narayen said, “I think what’s really driving the quarter, big picture, continues to be the innovation that we’re delivering. And the way AI is actually making our applications both more affordable [and] easy to onboard as well as, frankly, [attracting] higher-value users. New users are still a big driver of the growth that we continue to see in the business.”

Here’s an overview of the numbers.

Performance versus Expectations

• Q2 FY2024 Revenue: $5.31 billion, an 11% increase year-over-year (Expected: $5.29 billion)

• Q2 FY2024 non-GAAP EPS: $4.48, up 15% YoY (Expected: $4.40)

Other Key Q2 FY2024 Numbers

• Q2 FY2024 Digital Media segment revenue was $3.91 billion, a 12% YoY increase in constant currency. Of that amount, Creative Cloud revenue totaled $3.13 billion, up 10% YoY, with $322 million of net-new Creative Cloud ARR, and Document Cloud revenue reached $782 million, up 19% YoY; this included $165 million in net-new Document Cloud ARR, a record for any Q2.

• Q2 FY2024 Digital Experience segment revenue was $1.33 billion, up 9% YoY in constant currency. Subscription revenue for the segment totaled $1.2 billion, a 13% YoY increase.

• Remaining performance obligations (RPO) exiting Q2 FY2024 were $17.86 billion.

• Free Acrobat Web monthly active users (MAU) grew more than 60% YoY.

Analyst Notes

Within the Digital Media segment, Adobe’s Document Cloud growth was driven by strong demand for Acrobat subscriptions across various customer segments and regions. The company saw increased user acquisition from the growing Acrobat Reader MAU, successful monetization of its AI Assistant, and robust usage of Acrobat Web and Chrome and Edge browser integrations. Additionally, the company saw growth in Acrobat Teams subscriptions for SMBs as well as continued strength in enterprise solutions, reaffirming the importance of PDF as a crucial format for handling unstructured business data.

Adobe’s Creative Cloud segment also experienced substantial growth in Q2 2024, driven by increased demand for flagship applications such as Photoshop and Illustrator, new features including Generative Fill and Generative Expand in Photoshop, and the growing adoption of AI-powered tools such as its Firefly family of generative AI models and Adobe Express, the cloud-based design platform. The company’s focus on delivering new features and enhancing user onboarding seems to resonate with business users. Adobe’s expansion into mobile with the launch of Adobe Express on iOS and Android has also seen significant uptake, doubling monthly active users quarter-over-quarter. The company also reported strong growth in sales of single apps, including Photoshop and Illustrator, as well as migration of subscription customers to higher-revenue Creative Cloud plans that include Firefly.

In the Digital Experience segment, Adobe aims to empower businesses to create tailored customer experiences through its Adobe Experience Platform (AEP) and connected tools. AEP has seen significant growth and is on track to become a billion-dollar business. Adobe is actively expanding AEP’s capabilities with new features such as AEP AI Assistant, Adobe Journey Optimizer B2B Edition, Federated Audience Composition, and Real-Time CDP Collaboration, catering to both B2B and B2C customers.

One highlight was Adobe GenStudio, which aims to address the growing need for efficient content creation and management, leveraging generative AI from ideation to measurement. With GenStudio, Adobe is making strides in streamlining and accelerating the content supply chain. By natively integrating with other products such as Adobe Experience Manager and Workfront, GenStudio can be extended for teams to add depth and governance, allowing them to collaborate across key shared services without switching applications. Adobe has recorded multiple new customer wins for GenStudio this quarter, including Mercedes-Benz, ServiceNow, and the U.S. Department of the Treasury. These new logos show the company’s appeal to a broad customer base with complex and varying needs.

AI: A Key Growth Driver

The company has shown a commitment to AI integration and innovation with its strategic partnerships and product enhancements. Notably, Adobe has deepened its collaboration with NVIDIA to leverage the chipmaker’s AI and graphics processing expertise. Adobe has integrated NVIDIA’s AI Enterprise software and Omniverse Cloud APIs into Adobe solutions. It also uses third-party AI models in Document Cloud and Digital Experience products and is exploring the addition of non-Adobe AI models throughout Creative Cloud. Adobe’s open ecosystem approach further strengthens its position in the AI-powered content creation space.

The company’s AI advancements, combined with Adobe’s ongoing innovation in its flagship applications including Photoshop, Illustrator, and Premiere Pro, position it to capitalize on the growing demand for engaging and personalized content across many different platforms and channels.

Where There’s AI, There Could Be Misinformation

Adobe has made it clear that it aims to lead the industry in content authenticity. Ironically, the company that revolutionized digital image manipulation with Photoshop is now at the forefront of combating misinformation and deepfakes. Adobe’s proactive moves to promote content authenticity, such as the Content Authenticity Initiative and integrated product features, should bolster trust in its brand—and likely contributed to its positive Q2 performance by meeting the increasing demand for transparency and accountability in the digital landscape.

Adobe’s Pressures

• Adobe must convince enterprises to adopt AI-powered tools on a cycle that is quicker than usual. Typically, larger companies tend to be more cautious and deliberate in their technology adoption processes.

• Fairly or not, creative software and marketing solutions are often considered nice-to-haves rather than must-haves in enterprise budgets. In that context, any negative economic trends could impact spending on these categories more than some other areas of enterprise software.

• The creative software and digital experience markets are highly competitive, with new entrants such as Canva and evolving technologies including Midjourney and Stability AI constantly emerging.

• Just this week, the FTC has sued Adobe over what it alleges are hard-to-cancel subscriptions and fees. The strength of the FTC’s case and its potential implications for Adobe are still unclear. (Unsurprisingly, Adobe defends its practices and plans to contest the FTC action in court.)

• Maintaining user trust and transparency poses an ongoing challenge for Adobe, especially as it navigates the rapidly evolving landscape of generative AI technologies with their inherent legal, ethical, and technical complexities.

Looking Forward

The company set its full-year 2024 revenue guidance at $21.4 billion to $21.5 billion, compared with its previous guidance of $21.3 billion to $21.5 billion. The company expects adjusted per-share earnings of $18.00 to $18.20, up from its earlier outlook of $17.60 to $18.00 per share. Analysts polled by FactSet are expecting $18.00 a share.

Adobe’s strong financial performance seems to be easing investor concerns about its ability to compete in the evolving AI landscape. The company’s revenue growth and raised guidance, especially compared to lowered forecasts from companies such as Salesforce, demonstrate its resilience in the market. Adobe’s strategic focus on AI integration appears to be paying off, effectively mitigating investor fears regarding competition and macroeconomic headwinds.

It’s still too early to determine the full impact of AI on Adobe’s business. The long-term potential looks promising, especially with Adobe’s large installed base and the growing demand for AI-powered solutions in the enterprise market. As the company continues to innovate and add AI features that attract new enterprise logos, I am hopeful we will see the company begin to break out AI-specific software revenue.