ADOBE INC. Q4 FY2023 earnings

Adobe closed fiscal 2023 with its first $5 billion revenue quarter. Q4 revenue was $5.05 billion, up 11.6% from the prior-year quarter, and fiscal 2023 revenue was $19.41 billion, up 10.2% from fiscal 2022. Q4 gross profit was $4.41 billion, up 11.5%, and gross margin was 87.4%, flat with last year. GAAP operating income in Q4 was $1.74 billion, up 15.8%, while GAAP net income was $1.48 billion, up 26.1%. The Q4 operating margin was 34.5%, up 1.3 percentage points. For the full year, GAAP diluted EPS was $11.82, up 17.0%. Cash generation was softer. Q4 operating cash flow was $1.60 billion, down 31.3%, and full-year operating cash flow was $7.30 billion, down 6.8%. Q4 capital expenditures were $47 million, down 48.4%.

Operationally, Adobe ended fiscal 2023 with Digital Media ARR of $15.17 billion. Creative ARR was $12.37 billion and Document Cloud ARR was $2.81 billion. Net new Digital Media ARR in Q4 was $569 million. Remaining performance obligations exiting the quarter were $17.22 billion, up 13.4% from a year earlier, and deferred revenue was $5.95 billion, up 10.0%. The company repurchased about 1.8 million shares in the quarter and 11.5 million shares during the fiscal year. Management pointed to momentum across Creative Cloud, Document Cloud, and Experience Cloud, and to generative AI features such as Adobe Firefly and Adobe Express. On a non-GAAP basis, Q4 operating income was $2.34 billion and Q4 net income was $1.96 billion. Those non-GAAP figures exclude stock-based compensation, amortization, acquisition-related expenses, and a loss contingency tied to an IP litigation matter. Q4 non-GAAP diluted EPS was $4.27, and full-year non-GAAP diluted EPS was $16.07.

Guidance covers both the next quarter and the full fiscal year. For fiscal 2024, Adobe targets Digital Media net new ARR of $1.90 billion. For the first quarter of fiscal 2024, the company targets Digital Media net new ARR of $410 million. Targets are framed around current expectations for the macroeconomic and foreign exchange environments, and as is customary they do not reflect the planned acquisition of Figma. Foreign exchange moves added $160 million to the Digital Media ARR balance entering fiscal 2024. Revalued at new rates, Digital Media ARR at the end of fiscal 2023 would be $15.33 billion instead of the $15.17 billion reported. Adobe also told investors that ARR is forecast each year at currency rates set in December and then held constant for measurement purposes, with year-end balances revalued in December for the following year. Those mechanics matter for how the fiscal 2024 ARR target should be read against the reported base.

Risks remain varied. Adobe cites macroeconomic conditions, inflation and interest rates, foreign currency fluctuations, potential economic slowdowns or recessions, geopolitical pressures, and changing trade regulations. The company also lists competition, AI development and use, security incidents, and changes in tax laws. On December 17, 2023, Adobe terminated its proposed Figma merger and paid a $1 billion termination fee on December 20, 2023 using cash on hand. The delayed draw term loan agreement was terminated. As of December 1, 2023, non-cancellable purchase obligations were $4.93 billion, and subsequent agreements increased minimum purchase obligations by $2.3 billion through December 2028. Adobe flagged that U.S. tax rules requiring capitalization and amortization of R&D costs will keep pressuring its effective tax rate and cash flows if unchanged. The company also said unrecognized tax benefits could decrease by up to $60 million over the next 12 months. After quarter end, Adobe entered a $2 billion accelerated share repurchase agreement and received an initial delivery of 2.5 million shares. Adobe also has a commercial paper program of up to $3 billion and a $1.5 billion revolving credit agreement, with no outstanding borrowings under either as of December 1, 2023.