Ukraine Weighs on Adobe; Lowering Fair Value to $615

Wide-moat Adobe (ADBE) reported solid first-quarter results, including upside to revenue, net new digital annually recurring revenue, or ARR, and non-GAAP EPS. Guidance was slightly light compared with Street expectations and was driven by a modest impact from the conflict in Ukraine.

Given an expected $75 million revenue impact for the year along with a slightly higher tax rate, we are modestly lowering our fair value estimate to $615 per share, from $630, and see shares as attractive after believing they were overvalued for much of 2021. Despite investor concerns about competition at the low end, we see Adobe's dominance as unencumbered and view the recent price increases as warranted given the expanding portfolio.

Quarterly revenue grew 9% year over year, or 17% on an adjusted basis, to $4.262 billion, versus guidance of $4.230 billion and FactSet consensus of $4.231 billion. Digital media revenue grew 9% year over year while digital experience, or DX, sales grew 13% year over year, with both segments modestly ahead of our own expectations. Publishing and advertising declined 15% year over year, which while light, is not considered important to core Adobe at just 2% of revenue. Document cloud, contained within creative, saw continued strength in the quarter with revenue up 17% year over year. Adobe noted solid demand throughout the quarter from individuals, SMB, teams, and enterprise customers, with some weakness in the last two weeks of the quarter, corresponding to the Russian invasion of Ukraine. Retention was stronger than prepandemic levels. We remain impressed by Adobe’s ability to drive new users in digital media and we are encouraged by solid results in DX, both of which we think continue in 2022.

Non-GAAP operating margin was 46.8%, compared with 46.8% a year ago and 45.2% last quarter. Revenue upside with continued expense management as offices slowly reopen drove profitability, which we expect to remain a strong suit for the company in the long term.

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