Adobe Q1 tops estimates on strong Creative Cloud momentum

The Photoshop maker was facing criticism over promotional activity late in the first quarter.

Adobe's solid Q1 financial report on Thursday helped dispel analyst concerns over the company's late-in-the-quarter promotional activity. As analysts noted on Adobe's conference call with executives, the software giant offered Creative Cloud promos toward the end of the first quarter, leading some to speculate whether sales of Adobe's core brand were lagging.

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Adobe CEO Shantanu Narayen said the promotions were nothing more than a common tactic to acquire new customers.

"We're very aware of what is the activity that enables us to attract [new customers], and how we can make it a compelling event, if you look at our success that we've had associated with attracting new customers to the platform, upselling them," Narayen said.

As for the numbers, Adobe reported fiscal first quarter earnings of $674 million, or $1.36 a share. Non-GAAP earnings in the quarter were $1.71 a share on revenue of $2.6 billion. Wall Street was looking for earnings of $1.62 a share on revenue of $2.55 billion.

The Photoshop maker said subscription revenue was $2.3 billion, product revenue was $170 million, and that services and support revenue reached $125 million.

Revenue from Adobe's Digital Media unit overall was $1.78 billion and Digital Experience segment revenue was $743 million. Broken out, Creative Cloud revenue reached $1.49 billion in Q1, while Document Cloud was $282 million. Meanwhile, Adobe said annualized recurring revenue in its Digital Media unit grew to $7.07 billion, a quarter-over-quarter increase of $357 million.

For the current quarter, analysts are looking for earnings of at least $1.88 a share on revenue of $2.72 billion. Adobe responded on the low end, with a revenue estimate of $2.70 billion with non-GAAP earnings of $1.77. For the fiscal year, Adobe expects revenue of $11.15 billion, in-line with analyst estimates for revenue of $11.16 billion. 

Narayen addressed the light guidance on the call with analysts, noting that the company typically sees this kind of backtrack between the first and second quarters. He also pointed out that Adobe is spending more on advertising as it works to shift Acrobat customers over to a subscription model.

"In addition to new customer acquisition, there's a very significant installed base that exists with the perpetual version of Acrobat as we move them to the subscription offering," Narayen said. "That's part of the reason why we are spending money in advertising and awareness of the new Document Cloud features. And this is a traditional December slowing a little bit as it relates to the Creative, you start to see the momentum in the business. So nothing different from what we've seen in past years."