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Adobe (ADBE) Q3 Earnings and Revenues Surpass Estimates

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Adobe Inc. (ADBE - Free Report) reported third-quarter fiscal 2020 non-GAAP earnings of $2.57 per share, which surpassed the Zacks Consensus Estimate of $2.40. The figure increased 4.9% sequentially and 25.4% on a year-over-year basis.

Adjusted revenues jumped 13.8% year over year to $3.23 billion. This upside was driven by strong demand for the company’s digital and creative products.

Also, revenues surpassed the Zacks Consensus Estimate by 2.3%.

Following the company’s strong fiscal third-quarter earnings results, its shares were up 2.4%.

Top Line in Detail

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

Subscription revenues came in at $3 billion (accounting for 93% of its total revenues), up 17.8% on a year-over-year basis.

Product revenues totaled $109 million (3.4% of revenues), down 30.6% year over year.

Services & support revenues came in at $116 million (3.6% of revenues), decreasing 10.8% year over year.

Adobe Systems Incorporated Price, Consensus and EPS Surprise

Adobe Systems Incorporated Price, Consensus and EPS Surprise

Adobe Systems Incorporated price-consensus-eps-surprise-chart | Adobe Systems Incorporated Quote

Segment Details

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

Digital Media - This segment generated revenues of $2.34 billion, which increased 19% on a year-over-year basis. The segment comprises Creative Cloud and Document Cloud. Digital Media annual recurring revenues (ARR) were up $458 million from the prior quarter to $9.63 billion. Strength in mobile and overall web traffic drove the Digital Media business.

Creative Cloud (CC) generated $1.96 billion in revenues, reflecting 19% year-over-year growth. In addition, Creative ARR was up $360 million from the prior-year quarter to $8.29 billion. Growth drivers for the quarter were strong net new subscriptions across user segments and geographies amid the work-from-home environment. Product introductions, growth in emerging markets, solid demand for online video creation and improving average revenue per user across key offerings were other positives. Also, strong performance of the education segment across students, educators and institutions led to the growth.

Document Cloud (DC) generated $375 million revenues, up 22% from the year-ago quarter. Moreover, Document ARR came in at $1.34 billion. This was driven by strength in Adobe.com across individual and SMB segments, increased pipeline, as well as improved execution in the government segment, particularly for the Adobe Sign solution, among others.

Digital Experience - This segment generated revenues of $838 million, up 2% on a year-over-year basis. Digital Experience subscription revenues were $729 million, up 7% year over year, while Digital Experience subscription revenues (excluding Advertising Cloud revenues) grew 14%.

Operating Details

Gross margin was 86.8%, which expanded 150 basis points (bps) on a year-over-year basis.

Adobe incurred operating expenses of $1.69 billion, reflecting an 11% year-over-year increase. As a percentage of total revenues, research & development expenses increased from the prior-year quarter, while sales & marketing and general & administrative costs decreased.

As a result, adjusted operating margin was 43.5%, reflecting an increase of 280 bps year over year.

Balance Sheet & Cash Flow

At fiscal third quarter-end, cash and short-term investment balance was $5.26 billion, up from $4.35 billion in the prior quarter. Trade receivables were $1.32 billion, down from $1.37 billion recorded in the fiscal second quarter.

Cash generated from operations was $1.44 billion versus $1.18 billion in the fiscal second quarter. During the reported quarter, the company repurchased 1.5 million shares.

Guidance

For fourth-quarter fiscal 2020, Adobe projects total revenues to be $3.35 billion. The Zacks Consensus Estimate for revenues is pegged at $3.34 billion. Adobe expects year-over-year revenue growth of 18% from Digital Media. Digital Experience segment revenues are expected to remain flat on a year-over-year basis, while digital experience subscription revenues (including Advertising Cloud) are likely to increase 1%.

Based on a share count of 485 million, management expects GAAP and non-GAAP earnings of $4.29 and $2.64 per share, respectively. The Zacks Consensus Estimate for non-GAAP earnings for the quarter is pegged at $2.61 per share.

Zacks Rank & Stocks to Consider

Currently, Adobe carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader technology sector include Dropbox (DBX - Free Report) , Etsy, Inc. (ETSY - Free Report) and Intuit Inc. (INTU - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth rate of Dropbox, Etsy and Intuit is pegged at 34.4%, 26.5% and 12.3%, respectively.

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