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Adobe (ADBE) Up 1.7% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Adobe Systems (ADBE - Free Report) . Shares have added about 1.7% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Adobe due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Adobe Q4 Earnings and Revenues Surpass Estimates

Adobe Inc. reported fourth-quarter fiscal 2020 non-GAAP earnings of $2.81 per share, which surpassed the Zacks Consensus Estimate of $2.65. The figure increased 9.3% sequentially and 22.7% on a year-over-year basis.

Adjusted revenues jumped 14% year over year to $3.42 billion. This upside was driven by strong demand for the company’s digital and creative software tools.

Also, revenues surpassed the Zacks Consensus Estimate by 1.9%.

Top Line in Detail

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

Subscription revenues came in at $3.1 billion (accounting for 91% of its total revenues), up 20.8% on a year-over-year basis.

Product revenues totaled $127 million (3.7% of revenues), down 24% year over year.

Services & other revenues came in at $182 million (5.3% of revenues), decreasing 26% year over year.

Segment Details

During the fourth quarter, the company created a new segment - Publishing and Advertising. This new segment merged Advertising Cloud with the existing Publishing segment.

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

Digital Media - This segment generated revenues of $2.50 billion, which increased 20% on a year-over-year basis. The segment comprises Creative Cloud and Document Cloud. Digital Media annual recurring revenues (ARR) were up $548 million from the prior quarter to $10.18 billion. Strength in mobile and overall web traffic drove the Digital Media business.

Creative Cloud (CC) generated $2.08 billion in revenues, reflecting 20% year-over-year growth. In addition, Creative ARR was up $425 million from the prior-year quarter to $8.72 billion. Growth drivers for the quarter were strong net new subscriptions across user segments and geographies amid the work-from-home environment. Also, strong performance in the imaging, video and stock category led to creative ARR growth.

Document Cloud (DC) generated $411 million revenues, up 21% from the year-ago quarter. Moreover, Document ARR came in at $1.46 billion. This was driven by strong demand for Acrobat subscriptions and demand, mainly through the Reader funnel. Also, significant momentum in Sign aided growth.

Digital Experience - This segment generated revenues of $819 million, up 10% on a year-over-year basis. Digital Experience subscription revenues were $696 million, up 14% year over year. The increase was driven by accelerating adoption of the Adobe Experience Cloud platform and app services, content, and commerce momentum.

Operating Details

Gross margin was 87.5%, which expanded 260 basis points (bps) on a year-over-year basis.

Adobe incurred operating expenses of $1.74 billion, reflecting a 14.1% year-over-year increase. As a percentage of total revenues, research & development, and general & administrative expenses decreased from the prior-year quarter, while sales & marketing and costs increased.

As a result, adjusted operating margin was 44.9%, reflecting an increase of 230 bps year over year.

Balance Sheet & Cash Flow

At fiscal fourth quarter-end, cash and short-term investment balance was $5.99 billion, up from $5.26 billion in the prior quarter. Trade receivables were $1.4 billion, up from $1.32 billion recorded in the fiscal third quarter.

Cash generated from operations was $1.78 billion versus $1.44 billion in the fiscal third quarter. During the reported quarter, the company repurchased 1.6 million shares.

Guidance

For first-quarter fiscal 2021, Adobe projects total revenues to be $3.75 billion. Adobe expects year-over-year revenue growth of 26% from Digital Media. Digital Experience segment revenues are expected to grow 19% on a year-over-year basis, while Digital Experience subscription revenues are likely to increase 22%.

Based on a share count of 484 million, management expects GAAP and non-GAAP earnings of $2.19 and $2.78 per share, respectively.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 5.85% due to these changes.

VGM Scores

Currently, Adobe has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Adobe has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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