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Adobe (ADBE -12%) is heading a good bit lower following its Q1 (Feb) earnings report last night. This digital document giant reported its third consecutive double-digit EPS beat, although it was a bit smaller than the prior two quarters. Revenue rose 10.3% yr/yr to $5.71 bln, which was a bit better than expected. The guidance was decent with an in-line Q2 (May) outlook and it reaffirmed full year guidance.

• Its Digital Media segment performed well with revenue rising 11% yr/yr (+12% CC) to $4.23 bln, which was above prior guidance of $4.17-4.20 bln. DM is by far Adobe's larger segment, so people watch it closely. Adobe's other major segment is Digital Experience, which allows businesses to manage/track customer experiences using analytics. DE segment revenue grew 10% yr/yr (+10% CC) to $1.41 bln, which was above its $1.38-1.40 bln prior guidance, with strong subscription revenue growth.
• Adobe exited the quarter with $17.63 bln of Digital Media ARR, up 12.6% yr/yr. Adobe continues to see healthy performance in both Creative Cloud and Document Cloud. Creative growth was driven by broad-based adoption with particular strength in new offerings like Firefly Services (AI) and an increasing number of One Adobe deals coupled with a growing base of web and mobile users. Document Cloud continues to see strong organic demand and free-to-paid conversions.
• Adobe explained that we live in a visual-first world where creative expression has become pervasive in every facet of life, which includes both business professionals and consumers. Going forward, Adobe sees an incredible opportunity to serve customers with audience-specific offerings fueled by AI technology. Adobe says features like AI Assistant in Acrobat and Reader have been game-changers for everyone from sales teams to students.
• Adobe addressed the difficult macro environment in the Q&A. Adobe explained that it has a diverse business and a seasoned management team that will navigate it. Also, things like tariffs do not really impact Adobe the way they impact other businesses. In terms of advertising activity and consumer spending trends in the wake of some choppy results from multiple airlines and retailers, Adobe believes that digital is going to continue to be a fundamental part of the economy.

Overall, this was a decent quarter for Adobe. However, perhaps investors are disappointed that Adobe only reaffirmed its full year outlook despite Q1 upside. Also, we would like to see more in terms of AI monetization. Adobe has built AI features into different parts of its offering, but investors want to see it move the needle in terms of the financials. An analyst asked about this directly on the call. Finally, this is the second earnings report in a row where the stock gapped lower, which is a troubling trend for what was once a powerhouse growth story a few years ago. There just does not seem to be a lot of excitement for the stock right now, plus the AI landscape is getting very competitive.