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Adobe (ADBE) Beats Earnings and Revenue Estimates in Q4

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Adobe Systems Inc. (ADBE - Free Report) reported fourth-quarter fiscal 2016 earnings of 83 cents per share, which beat the Zacks Consensus Estimate of 72 cents. Adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Following strong fiscal third-quarter earnings, the share price was up by 0.05% in the after-hours trading session.

Better-than-expected earnings were backed by strong Creative Cloud annualized recurring revenue, continued growth of Adobe Document Cloud subscriptions and strong bookings for Adobe Marketing Cloud.

Shares of Adobe have been steadily treading higher on a year-to-date basis. The stock generated a return of 11.88% compared with the Zacks Computer Software industry’s gain of 11.73%.

Revenues

Adobe’s revenues of $1.61 billion increased 9.9% sequentially and 23.1% year over year. Reported revenues surpassed management’s guided range of $1.55–$1.6 billion and were above the Zacks Consensus Estimate of $1.588 billion.

Subscription comprised 79% of Adobe’s total fourth-quarter revenues, up 39.1% from the year-ago period. Products declined 22.0% year over year and contributed 14.0% to revenues, while Services & Support saw an 8.5% improvement and brought in the rest.

Revenues by Segment

Revenues from Digital Media Solutions jumped 23% year over year to $1.08 billion. Total Digital Media ARR (Annualized Recurring Revenue) grew to $4.01 billion at the end of the fiscal fourth quarter, reflecting an increase of $316 million and pointing to 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 $886 million, up 33% year over year. Also, Creative ARR increased $283 million to $3.54 billion. DC revenues were $191 million, with DC ARR of $475 million at the end of the fiscal fourth quarter. The increase in DC ARR was driven by the adoption of Acrobat subscriptions and value-add 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, namely 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 32% year over year to $465 million. The improvement came on the back of an increase in the size of accelerated conversions, number of solutions per customer and international expansion. Mobile remains a key component for this business. Mobile data transactions grew to 55% of total Adobe Analytics’ transactions in the quarter.

Margins

Gross margin was 86.5%, up 38 basis points (bps) sequentially and 195 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 $888.7 million, reflecting an increase of 3.8% sequentially and 14.5% 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 31.3%, up 361 basis points (bps) sequentially and 613 bps year over year.

Net Income

On a GAAP basis, Adobe recorded net income of $399.6 million (80 cents per share) compared with $270.8 million (54 cents per share) in the previous quarter and $222.7 million (44 cents per share) in the year-ago quarter.

On a pro-forma basis, Adobe generated net income of $416.0 million compared with $302.4 million in the previous quarter and $237.8 in the year-ago quarter.

Balance Sheet

Adobe ended the fiscal fourth quarter with cash and investments balance of $4.76 billion compared with $4.45 billion in the previous quarter. Trade receivables were $833.0 million, up from $731.2 million in the prior quarter. Deferred revenues were $69.1 million compared with $52.7 million in the fiscal third quarter.

In the reported quarter, cash generated from operations was $695.6 million and capital expenditure was $48.6 million. Additionally, the company repurchased approximately 3.2 million shares for a total of $331 million. Adobe still has $500 million remaining under the current authority granted in Jan 2015.

Guidance

For the fiscal first quarter of fiscal 2017, management expects revenues of $1.625 billion. Analysts polled by Zacks expect revenues of $1.66 billion, higher than the guided figure.

Based on a share count of 501 million, management expects GAAP earnings per share of 71 cents and non-GAAP earnings of 87 cents. The Zacks Consensus Estimate is pegged at 71 cents, well below the guided range.

For fiscal 2017, management expects revenues in the range of $6.95 billion, representing a growth rate of 21% year over year. GAAP earnings and non-GAAP earnings are projected at $2.85 of $3.75 per share, respectively.

Our Recommendation

Adobe reported strong fiscal fourth-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.

We believe that 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 regard, the company has been introducing significant features and a number of updates to its Document Cloud.

In addition, 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.

Last month, the software giant announced that it will acquire TubeMogul , a video advertising platform for $540 million, net of cash and debt. TubeMogul will merge with Adobe’s Digital Marketing business with Brett Wilson continuing as its CEO. The deal is likely to close in the first quarter of Adobe’s fiscal 2017. The deal will help it to create the first end-to-end independent advertising and data management solution compatible with digital formats. Customers will get access to first-party data and measurement capacities leveraging on the combination of Adobe Marketing Cloud and TubeMogul’s video advertising platform.

ADOBE SYSTEMS Price, Consensus and EPS Surprise

 

ADOBE SYSTEMS Price, Consensus and EPS Surprise | ADOBE SYSTEMS Quote

Adobe carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry are Cognex Corporation (CGNX - Free Report) and Itron, Inc. (ITRI - Free Report) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cognex Corporation delivered a positive earnings surprise of 24.92% in the trailing four quarters.

Itron, Inc. delivered a positive earnings surprise of 30.55%, on average, in the trailing four quarters.

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