While higher-profile tech companies get all the glory, creative software maker Adobe (NASDAQ: ADBE) has quietly yet consistently topped the market, returning 1,275% over the past decade, more than five times the return of the S&P 500. That's not a fluke, either, as the stock saw a similar performance over the past year. The stock gains are underpinned by strength in the underlying business, and Adobe continues to add to its history of strong growth.
For the just-completed first quarter (which ended March 1), Adobe reported record revenue of $2.6 billion, up 25% year over year, easily surpassing management's forecast of $2.54 billion and analysts' consensus estimates of $2.55 billion. This resulted in adjusted earnings per share of $1.71, which also topped expectations of $1.62.
Deja vu -- all over again
Adobe saw strength across the board, producing broad-based sales growth. Revenue from the digital media segment grew to $1.78 billion, up 22% year over year, while the digital experience segment produced record revenue of $743 million, up 34% compared with the prior-year quarter. Both segments outpaced Adobe's guidance, which called for growth of 20% and 31%, respectively.
Digging a little deeper into the results illustrates the broad strength across the business. Within the digital media segment, both the Creative Cloud and Document Cloud shined. Revenue from the creative business grew to $1.49 billion, up 21% year over year, while the Document Cloud achieved a record $282 million, up 22% compared to the prior-year quarter. The digital experience segment did its part, generating a record $743 million, up 34% year over year.
Annualized recurring revenue (ARR) in the digital media segment grew to $7.07 billion, up $357 billion during the quarter. Creative ARR increased $292 million to $6.21 billion, and Document Cloud ARR added $65 million, increasing to $856 million. All told, 91% of the company's revenue during the quarter came from recurring sources.
Retention is the new growth
In response to a question from an analyst on the conference call, chairman and CEO Shantanu Narayen said, "I still continue to believe that retention is the new growth." The company is focusing on engagement when customers first come onboard and "understanding how people can get the value out of our products."
Adobe has produced increased engagement from users who join its Behance platform -- one that allows web designers to showcase their work. "The success that we're seeing from people that benefit from participating in a larger community, all of that is helping with the retention, and that'll just continue to be an ongoing focus for us," Narayen said. By ensuring that existing customers stick with Adobe, that's fewer new customers the company needs to acquire.
Disappointment about guidance
Even after better-than-expected results on both the top and bottom lines, Wall Street seemed focused on Adobe's forecast, which was lower than anticipated. For the second quarter, Adobe is guiding for revenue of $2.7 billion, up 23% year over year, and earnings per share of $1.77. Both were lower than analysts' expectations, which called for revenue of $2.72 billion and earnings per share of $1.88.
It's important to remember not to get too caught up in the quarter-to-quarter machinations of the market. Forecasting is more art than science and even though Adobe may have missed analysts' expectations, it only takes a quick look at its record to show that the company continues to perform over the longer term. Investors should stay focused on the long runway, rather than one quarterly forecast.
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