Adobe Systems Inc. (ADBE) reported fourth-quarter fiscal 2014 earnings of 22 cents per share, beating the Zacks Consensus Estimate by 5 cents. Adjusted earnings per share exclude one-time items but include stock-based compensation expense.
Adobe reported revenues of $1.073 billion, up 6.8% sequentially and 3.0% year over year. Reported revenues were toward the higher end of management’s guided range of $1.025 billion to $1.075 billion and beat the Zacks Consensus Estimate of $1.062 billion.
Products generated 31% of Adobe’s revenues while Subscription comprised 59% of total revenue. Services & Support brought in the balance.
Revenues by Segment
Digital Media Solutions, Adobe’s largest segment, generated 61% of the revenues in the quarter. Segment revenues increased 4.5% sequentially to $649.0 million.
The two major revenue earners within the segment were the Creative family of products and Document Services products. In the Creative business, Creative Cloud subscriptions continued to accelerate.
Increased subscriptions and ETLA adoption helped drive Creative annualized recurring revenues or ARR to $1.68 billion, up $272 million sequentially.
Adoption across all Creative Cloud offerings grew quarter-on-quarter. The retention of Creative Cloud subscriptions, including renewals after the initial promotional pricing expiration, beat the company’s initial projections.
The adoption of Single Apps and the Creative Cloud Photography Plan worked in the company’s favor and expanded its market opportunity. The company expects the percentage of single app subscriptions to increase. This strategy is likely to drive ARR higher.
In the Document Services business (includes Acrobat family and the new cloud-based services such as EchoSign), revenues were $197.0 million, down 5.3% sequentially. Strong adoption of Acrobat ETLAs, subscriptions, and cloud services comprising EchoSign helped to grow Document Services ARR. The Document Services business grew to $271 million, up 25% sequentially.
The Digital Marketing segment accounted for 34.8% of fourth quarter revenues. Within the segment, Adobe Marketing Cloud revenues were up 13.8% sequentially to $330.0 million. Growth was driven by an increase in the size of transactions, number of solutions per customer, international expansion and growth in partner-driven business. Bookings also increased year over year in this segment.
LiveCycle and Connect businesses generated revenues of $44.0 million in the reported quarter, down 6.4% sequentially.
Print and Publishingrevenues were $50.0 million in the last quarter, up 6.4% sequentially.
Margins
Reported gross margin for the quarter was 85.0%, up 70 basis points from 84.3% in the comparable year-ago quarter. The gross margin is typical of a software company and variations are generally related to the mix of revenues between categories.
Adobe incurred operating expenses of $775.6 million. As a percentage of sales, research & development expenses were flat year over year. However, general & administrative as well as sales & marketing expenses decreased from the year-ago quarter. As a result, operating margin increased to 14.5% from 13.2% in the year-ago quarter.
Net Income
On a GAAP basis, Adobe recorded net income of $73.3 million (14 cents per share) compared with $65.3 million (13 cents) in the year-ago quarter.
On a pro-forma basis, Adobe generated net income of $113.8 million compared with $96.0 million in the year-ago quarter. Pro-forma earnings came in at 22 cents per share compared with 19 cents in the year-ago quarter.
Balance Sheet
Adobe ended the quarter with cash and investments balance of $3.73 billion versus $3.52 billion in the previous quarter. Deferred revenues were $1.155 billion.
In the fourth quarter, cash generated from operations was $399.9 million. Additionally, the company repurchased approximately 1.8 million shares for $127.0 million.
Guidance
For the first quarter of fiscal 2015, management expects revenues in the range of $1.050 to $1.100 billion. Analysts polled by Zacks expect revenues to be $1.108 billion. Additionally, management expects total Digital Media to increase sequentially. Management expects Creative ARR to grow sequentially but Document Services ARR to decline slightly sequentially.
In the Digital Marketing segment, management expects Adobe Marketing Cloud revenues to increase slightly year over year but decrease sequentially. Management expects LiveCycle and Connect revenues to decline sequentially. Print and Publishing revenues are expected to decline sequentially.
Accordingly, based on a share count of 508–510 million, GAAP earnings are expected in the range of 14–20 cents per share, while non-GAAP earnings are expected in the range of 34–40 cents. The Zacks Consensus Estimate is pegged at 29 cents per share, well below the non-GAAP earnings guidance provided by the company (note that the Zacks Consensus does not exclude SBC).
Also, for the first quarter, non-operating expense is expected within the $12–$14 million range and tax rate is expected to be within 25–27% on a GAAP basis and 21% on a non-GAAP basis.
Our Recommendation
Adobe reported solid fourth-quarter results with both the top and bottom lines surpassing our expectations. Our ESP model had suggested that there would be a positive surprise due to the right combination of the Zacks Rank and Earnings ESP.
We remain positive about Adobe’s market position, its compelling product lines (including CS cloud initiative and digital media products), continued innovation and strong balance sheet.
Also, we believe that the consistent adoption of the Adobe marketing cloud could serve as a potential catalyst, going forward. Due to Adobe’s acquisition of Fotolia, we expect noteworthy synergies over time.
Currently, Adobe has a Zacks Rank #3 (Hold). Better-ranked stocks in this industry include Geeknet, Inc. (GKNT), Mercadolibre, Inc. (MELI) and Overstock.com Solutions, Inc. (OSTK). All these stocks carry a Zacks Rank #2 (Buy).
