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Adobe (ADBE) Earnings and Revenues Beat Estimates in Q3

Zacks Equity Research

Adobe Systems Incorporated ADBE reported third-quarter fiscal 2019 non-GAAP earnings of $2.05 per share, beating the Zacks Consensus Estimate by 8 cents. Further, the figure improved 12% sequentially and 18.5% on a year-over-year basis.

Total revenues came in $2.83 billion, up 24% from the year-ago quarter and 3.3% from the previous quarter. The figure surpassed the Zacks Consensus Estimate of $2.81 billion.

Strong performance of Adobe Creative Cloud, Document Cloud and Experience Cloud drove year-over-year growth. Further, accelerating subscriptions revenues contributed to the results.

However, shares of Adobe plunged 2.7% in the after-hours trade owing to weaker-than-expected guidance for fourth-quarter fiscal 2019. Further, the stock has returned 25.8% on a year-to-date basis, underperforming the industry’s rally of 29.5%.

Nevertheless, the company remains optimistic about market prospects and ongoing digitization globally. Further, its expanding product portfolio remains a major positive. During the reported quarter, the company rolled out a drawing and painting app called Adobe Fresco in order to capitalize on the growing demand for digital painting.

Additionally, expanding clientele will continue to drive the top line in the near term. In the fiscal third quarter, Document Cloud segment acquired clients, which includes Deutsche Bank, Saudi Aramco, Dell and the U.S. Department of Veteran Affairs. Moreover, Experience Cloud won customers like Delta Airlines, T-Mobile, Capital One and Best Western.



Top Line in Detail

Adobe reports revenues in three categories — subscription, product and services & support.

Subscription revenues came in at $2.55 billion (accounting for 89.8% of its total revenues), up 26% on a year-over-year basis.

Product revenues totaled $157.3 million (5.6% of revenues), up 5.5% year over year.

Services & support revenues came in at $130.2 million (4.6% of revenues), improving 8.1% from the prior-year quarter.

Segment Details

The company operates in two reportable segments — Digital Media and Digital Experience.

Digital Media — This segment generated revenues of $1.96 billion, which improved 22% on a year-over-year basis. The segment comprises Creative Cloud and Document Cloud. Digital Media ARR increased to $7.86 billion. Robust strength in mobile remains a tailwind.

Creative Cloud (CC) generated $1.65 billion of revenues (84% of Digital Media revenues), up 22% year over year. Additionally, Creative ARR came in $6.87 billion. Strong performance of Adobe Lightroom, which exhibited year-over-year growth of 130% in its monthly active user base, contributed to the segment’s revenues. Further, solid momentum across the company’s mobile apps remained positive. The number of new Adobe IDs created from these apps increased 40% from the year-ago quarter.

Document Cloud’s (DC) revenues were $307 million (16%), up 24% from the prior-year quarter. Moreover, Document ARR came in at $993 million. Growing adoption rate of Acrobat subscription and DC mobile apps drove the segment’s top line. Further, rising number of downloads with Adobe Scan contributed to the results. Also, growing momentum of Adobe Reader on mobile devices remained positive.

Digital Experience — This segment generated revenues of $821 million, up 34% on a year-over-year basis. The segment includes Adobe Experience Cloud. Experience Cloud subscription revenues were $679 million in the fiscal third quarter, which surged 37% from the year-ago quarter. Growth in bookings due to benefits from Magento acquisition contributed to the segment’s results. Also, expanding client base remained a positive. Further, growing momentum in Adobe Campaign is a tailwind.

Adobe Systems Incorporated Price, Consensus and EPS Surprise

Adobe Systems Incorporated Price, Consensus and EPS Surprise

Adobe Systems Incorporated price-consensus-eps-surprise-chart | Adobe Systems Incorporated Quote

Operating Details

Gross margin was 85.3% in the quarter, contracting 180 bps on a year-over-year basis.

Adobe incurred operating expenses of $1.56 billion, reflecting a year-over-year improvement of 22.5%. However, as a percentage of total revenues, the figure contracted 50 bps from the prior-year quarter.

Consequently, adjusted operating margin expanded 40 bps year over year to 40.7% in the reported quarter.

Balance Sheet & Cash Flow

As of Aug 30, 2019, cash and investments balance of $3.65 billion, up from $3.48 billion as of May 31, 2019. Trade receivables were $1.37 billion in the fiscal third quarter, up from $1.27 billion recorded in the fiscal second quarter.
Cash generated from operations was $922 million compared with $1.11 billion in the previous quarter. During the reported quarter, the company repurchased approximately 2.6 million shares.

Guidance

For fourth-quarter fiscal 2019, Adobe projects non-GAAP earnings at $2.25 per share. The Zacks Consensus Estimate for EPS is pegged at $1.88.

Further, the company expects total revenues of $2.97 billion in the fiscal fourth quarter. The Zacks Consensus Estimate for revenues is pegged at $3.02 billion.

Adobe anticipates year-over-year revenue growth of 20% and 23% from Digital Media and Digital Experience segments, respectively.

Zacks Rank & Stocks to Consider

Adobe carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Anixter International Inc. AXE, Alphabet Inc. GOOGL and Cadence Design Systems, Inc. CDNS. While Anixter sports a Zacks Rank #1 (Strong Buy), Alphabet and Cadence carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Anixter, Alphabet and Cadence is pegged at 8%, 17.5% and 10%, respectively.

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