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Adobe (ADBE) Up 1% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Adobe Systems (ADBE - Free Report) . Shares have added about 1% 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 Q3 Earnings and Revenues Surpass Estimates

Adobe reported third-quarter fiscal 2021 non-GAAP earnings of $3.11 per share, beating the Zacks Consensus Estimate by 3.7%. Further, the figure improved 21% on a year-over-year basis and 2.6% sequentially.

Total revenues were $3.94 billion, which surpassed the Zacks Consensus Estimate of $3.89 billion. Further, the figure was up 22% from the year-ago quarter and 2.6% from the previous quarter.

Solid momentum across Adobe Creative Cloud, Document Cloud and Experience Cloud drove top-line growth. Accelerating subscription revenues benefited the results further.

Top Line in Detail

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

Subscription revenues were $3.7 billion (accounting for 93% of its total revenues), up 24.1% on a year-over-year basis.

Product revenues totaled $119 million (3% of revenues), up 9.2% year over year.

Services & support revenues were $159 million (4% of revenues), declining 5.3% from the prior-year quarter.

Segmental Details

Digital Media: The segment generated revenues of $2.9 billion, which improved 23% on a year-over-year basis. The segment comprises Creative Cloud and Document Cloud. Notably, Digital Media annualized recurring revenues (ARR) increased to $11.7 billion.

Creative Cloud generated $2.4 billion of revenues, up 21% year over year. Additionally, Creative ARR was $9.9 billion. Growing momentum across Adobe Lightroom, owing to AI-based advancements in the company’s photography offerings, contributed well. Moreover, growth in creative mobile applications was a tailwind. Further, the company witnessed strong customer acquisition, which remained positive.

Document Cloud’s revenues were $493 million, up 31% from the prior-year quarter. Moreover, Document ARR was $1.8 billion. The growing uptake Adobe Sign in Acrobat, and solid momentum across Acrobat Web and frictionless PDF remained positives. Further, the rising demand for Acrobat, Scan and Sign contributed well. The
company gained strong traction across Liquid Mode. Strong customer wins were other tailwinds.

Digital Experience: The segment generated revenues of $985 million, up 26% on a year-over-year basis. The segment is comprised of Adobe Experience Cloud. Experience Cloud subscription revenues were $864 million, which rose 29% from the year-ago quarter. Strong Workfront momentum, the growing adoption of Adobe Sensei, product innovations and key customer wins drove top-line growth for the segment.

Operating Details

The gross margin was 88.1%, which expanded 140 basis points (bps) on a year-over-year basis.

Adobe incurred operating expenses of $2.03 billion, reflecting a 17.2% year-over-year increase. As a percentage of total revenues, the figure contracted to 210 bps to 51.5%.

As a result, the adjusted operating margin was 46%, expanding 250 bps year over year.

Balance Sheet & Cash Flow

As of Sep 3, 2021, cash and short-term investment balance was $6.2 billion, up from $5.8 billion as of Jun 4, 2021. Trade receivables were $1.54 billion, up from $1.47 billion recorded in the fiscal second quarter.

Cash generated from operations was $1.4 billion in the fiscal third quarter versus $1.9 billion in the fiscal second quarter. In the reported quarter, the company repurchased 1.7 million shares.

Guidance

For fourth-quarter fiscal 2021, Adobe projects total revenues of $4.07 billion.

Adobe expects year-over-year revenue growth of 20% from Digital Media. The Digital Experience segment’s revenues are expected to grow 22% on a year-over-year basis. Digital Experience subscription revenues are likely to increase 26%.

Management expects non-GAAP earnings of $3.18 per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 8.48% due to these changes.

VGM Scores

At this time, Adobe has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, 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. It comes with little surprise Adobe has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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