Adobe (ADBE) remains one of the best execution stories in our software coverage, as the firm delivered strong first-quarter results that once again surpassed our high expectations. The firm continues to assert itself as a cloud vendor with subscription sales eclipsing 80% of the consolidated top line for the first time. We think Adobe’s dominant status in the creative realm remains a key foundation for our unchanged wide moat rating, while the firm continues to establish a leadership position in digital marketing. We are raising our fair value estimate to $130 as we incorporate modestly greater revenue and operating leverage, though shares appear close to full value.
First-quarter revenue rose 22% versus the prior-year period to $1.68 billion, modestly ahead of our expectations. Subscription revenues rose 29% year over year to $1.38 billion as the company continues to migrate legacy Creative Suite users to Creative Cloud. Creative revenue rose 29% to $942 million, while Digital Marketing achieved a $2 billion annualized run rate in the quarter as sales grew 23% to $501 million. Adobe closed its acquisition of TubeMogul, which will allow the firm to offer a programmatic ad buying solution on top of an already-broad digital marketing platform. Despite integrating an acquisition and maintaining 20%-plus top-line growth, Adobe delivered roughly 450 basis points in non-GAAP operating margin expansion to 36%.
Management continues to see strength across the entire product portfolio, and newer solutions such as Stock and Adobe’s AI engine Sensei continue to drive incremental adoption. Further, the company’s marketing cloud processed over 100 trillion transactions over the trailing 12 months, and the platform has clearly become a destination for enterprises with omnichannel campaigns, in our view. We continue to think investors should keep Adobe near the top of shopping lists on pullbacks, which have been hard to come by during the firm’s cloud transition.
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