Adobe (ADBE) Beats Earnings and Revenue Estimates in Q1
Zacks Equity Research
Updated
Adobe Systems Inc. ADBE reported first-quarter fiscal 2017 earnings of 78 cents per share, beating the Zacks Consensus Estimate by 6 cents. Adjusted earnings per share exclude one-time items but include stock-based compensation expense.
Following strong fiscal first-quarter earnings, the share price was up 4% in the after-hours trading session.
Better-than-expected earnings were backed by strong demand for the company’s Creative Cloud software tools like Photoshop, which added more subscribers. Also, continued growth of Adobe Document Cloud subscriptions and strong bookings for Adobe Marketing Cloud aided the earnings growth.
Shares of Adobe have been steadily treading higher on a year-to-date basis. The stock returned 41.46% compared with the Zacks Computer Software industry’s gain of 19.78%.
Revenues
Adobe’s revenues of $1.68 billion increased 4.6% sequentially and 21.6% year over year. Reported revenues surpassed management’s guidance of $1.625 billion and were above the Zacks Consensus Estimate of $1.641 billion.
Subscription comprised 82% of Adobe’s total fiscal first-quarter revenues, up 29.3% from the year-ago period. Products declined 8.8% year over year and contributed 11% to revenues, while Services & Support saw a 2.2% improvement and brought in the rest.
Revenues by Segment
Revenues from Digital Media Solutions jumped 22% year over year to $1.14 billion. TotalDigital Media ARR (Annualized Recurring Revenue) grew to $4.25 billion at the end of the fiscal first quarter, reflecting an increase of $265 million and indicating strong growth in the Creative Cloud and Document Cloud businesses.
The two major revenue contributors within the segment were Creative Cloud (CC) and Document Cloud (DC).
Creative revenues were $942 million, up 29% year over year. Also, Creative ARR increased $244 million to $3.76 billion. DC revenues were $196 million, with DC ARR of $493 million at the end of the fiscal first quarter. The increase in DC ARR was driven by the adoption of Acrobat subscriptions and value-added services such as Adobe Sign.
Management is optimistic about CC adoption and expects to build a strong pipeline for its potential paid subscribers through marketing programs, trial downloads and free memberships. Management expects growth to be fueled by three initiatives –– by migrating the Creative Suite installed base, drawing new clients and driving ARPU higher through cloud services like Adobe Stock. Also, CC mobile apps are continuously driving customer traffic and strengthening customer adoption.
Within the Digital Marketing segment, Adobe Marketing Cloud revenues were up 26% year over year to $477 million. The improvement came on the back of strong contribution from TubeMogul acquisition, an increase in the size of accelerated conversions and international expansion. Mobile remains a key component for this business. Mobile data transactions grew to 56% of total Adobe Analytics’ transactions in the quarter.
Margins
Gross margin was 85.9%, down 65 basis points (bps) sequentially but up 24 bps year over year. Gross margin is typical of a software company and variations are generally related to the mix of revenues between categories.
Adobe incurred adjusted operating expenses of $939.8 million, reflecting an increase of 5.8% sequentially and 11.7% year over year. As a percentage of sales, research & development, general & administrative and sales & marketing expenses decreased from the year-ago quarter. As a result, adjusted operating margin was 30%, down 128 basis points (bps) sequentially but up 516 bps year over year.
Net Income
On a GAAP basis, Adobe recorded net income of $398.4 million (80 cents per share) compared with $254.3 million (50 cents per share) in the year-ago quarter.
On a pro forma basis, Adobe generated net income of $390.7 million compared with $263 million in the year-ago quarter.
Balance Sheet
Adobe ended the fiscal first quarter with cash and investments balance of $4.65 billion compared with $4.76 billion in the previous quarter. Trade receivables were $850.8 million, up from $833 million in the prior quarter. Deferred revenues were $2 billion compared with $69.1 million in the fiscal fourth quarter.
In the reported quarter, cash generated from operations was $730.4 million and capital expenditure was $30.9 million. Additionally, the company repurchased approximately 2.2 million shares for $238 million. Adobe still has $300 million remaining under the current authority granted in Jan 2015.
Guidance
For the second quarter of fiscal 2017, management expects revenues of $1.73 billion. Analysts polled by Zacks expect revenues of $1.72 billion, lower than the guided figure.
Based on a share count of 499 million, management expects GAAP earnings per share of 66 cents and non-GAAP earnings of 94 cents. The Zacks Consensus Estimate is pegged at 74 cents, well below the guided range.
Our Recommendation
Adobe reported strong fiscal first-quarter results wherein both earnings and revenues beat the respective Zacks Consensus Estimate.
We remain positive on Adobe’s market position, compelling product lines, continued innovation and strong balance sheet.
The company is being driven by continued innovation in its Creative Cloud, Document Cloud and Marketing Cloud businesses.
After the successful transition from traditional license to subscription-based services, Adobe wants to establish its presence in cloud-related software areas like documents and marketing. In this context, the company has been introducing significant features and a number of updates to its Document Cloud.
Additionally, we believe that the constant adoption of Adobe Marketing Could serves as a catalyst. Moreover, the solid adoption of Document Cloud, a new subscription package that enables users to sign documents on the cloud, should boost revenues.
In December, the software giant completed its acquisition of TubeMogul, a video advertising platform for $540 million, net of cash and debt. The company achieved strong revenue contribution from TubeMogul acquisition and expects successful integration with its Adobe Media Optimizer solution.
Adobe Systems Incorporated Price, Consensus and EPS Surprise
Adobe Systems Incorporated Price, Consensus and EPS Surprise | Adobe Systems Incorporated Quote
Adobe carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry are Texas Instruments TXN, sporting a Zacks Rank #1 (Strong Buy) and Xcerra Corporation XCRA and Internap Corporation INAP, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Texas Instruments delivered a positive earnings surprise of 7.09%, on average, in the trailing four quarters.
Xcerra Corporation delivered a positive earnings surprise of 187.5%, on average, in the trailing four quarters.
Internap Corporation delivered a positive earnings surprise of 10.88%, on average, in the trailing four quarters.
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