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Adobe Systems Offers Another Earnings Beat

Steve Symington, The Motley Fool

Adobe Systems (NASDAQ: ADBE) released stronger-than-expected fiscal second-quarter 2019 results on Tuesday after the market close. The creative software specialist credited its expanding product portfolio and a global "explosion in creativity" for driving record revenue -- though it certainly helps that more of that revenue is coming from Adobe's recurring cloud-based subscriptions with each passing quarter.

With shares up around 4% in after-hours trading as of this writing, let's take a closer look at what Adobe Systems had to say.

The Adobe logo on Adobe's headquarters' office building.

IMAGE SOURCE: ADOBE SYSTEMS.

Adobe Systems results: The raw numbers

Metric Fiscal Q2 2019* Fiscal Q2 2018 Year-Over-Year Growth
Revenue $2.744 billion $2.195 billion 25%
GAAP net income $632.6 million $663.2 million (4.6%)
GAAP earnings per share (diluted) $1.29 $1.33 (3%)

DATA SOURCE: ADOBE SYSTEMS. *FOR THE PERIOD ENDED May 31, 2019. 

What happened with Adobe Systems this quarter?

  • On an adjusted (non-GAAP) basis, which excludes items like acquisition costs and stock-based compensation, net income was $900.6 million, or $1.83 per share, up from $825.4 million, or $1.66 per share in the same year-ago period.
  • By comparison, Adobe's guidance from March called for lower adjusted earnings of $1.77 per share on revenue of $2.7 billion.
  • Digital media segment revenue grew 22% year over year to $1.89 billion -- also above guidance for 20% growth -- including Creative revenue of $1.59 billion and Document Cloud revenue of $296 million.
  • Digital experience segment revenue grew 34% to $784 million, above guidance for 32% growth.
  • 91% of Adobe's revenue this quarter came from recurring sources, consistent with last quarter.
  • Digital media annualized recurring revenue (ARR) grew $406 million sequentially from last quarter to $7.47 billion, including Creative ARR of $6.55 billion and Document Cloud ARR of $921 million.
  • Deferred revenue declined sequentially to $3.13 billion from $3.22 billion last quarter, driven by timing with fewer billing cycles in Adobe's fiscal second quarter.
  • The company generated operating cash flow of $1.11 billion, and repurchased 2.5 million shares this quarter for $659 million. That left $6.6 billion remaining of Adobe's original $8 billion repurchase program (authorized just over a year ago), which is valid through 2021.

What management had to say

"Adobe's continued momentum is being fueled by the explosion of creativity across the globe and the widespread business transformation agenda to deliver engaging customer experiences," stated Adobe Systems CEO Shantanu Narayen. "With an innovative technology platform, exciting product roadmap and strong ecosystem of partners, we are well positioned for the second half of FY19 and beyond."

Looking forward

For the current (fiscal third) quarter, Adobe sees revenue arriving at approximately $2.8 billion, assuming steady 20% growth in digital media segment revenue and 34% growth from the digital experience side. The company also expects net new digital media ARR of $360 million. On the bottom line, Adobe expects adjusted earnings of roughly $1.95 per share.

By comparison -- and while we don't lend much credence to Wall Street's demands -- consensus predictions called for higher fiscal third-quarter 2019 earnings of $2.05 per share on revenue closer to $2.83 billion.

Adobe also opted not to update its annual guidance (though management typically doesn't do so at this point in the year), which most recently contained targets for full fiscal-year 2019 revenue of $11.15 billion, and adjusted earnings per share of $7.80.

Rather, during the subsequent conference call, CFO John Murphy clarified that the company expects its "first-half momentum to continue in the second half, with typical seasonality in Q3 and strength in Q4."

Fair enough. Besides, if the market's initial positive reaction to this report is any indication -- and given Adobe's habit of under-promising and over-delivering -- it seems investors are astutely seeing through the noise of Adobe's seemingly light near-term outlook.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends Adobe Systems. The Motley Fool has a disclosure policy.