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Why Is Adobe (ADBE) Up 7.2% Since Last Earnings Report?

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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 7.2% in that time frame, outperforming 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 catalysts.

Adobe Q1 Earnings and Revenues Surpass Estimates

Adobe released first-quarter fiscal 2023 non-GAAP earnings of $3.80 per share, beating the Zacks Consensus Estimate by 3.8%. The figure improved 12.8% on a year-over-year basis.

Total revenues were $4.66 billion, which beat the Zacks Consensus Estimate of $4.61 billion. The figure was up 9% on a reported basis and 13% on a constant currency basis from the year-ago quarter.

Top line growth was driven by the strong performance of Adobe Creative Cloud, Document Cloud and Experience Cloud. Further, accelerating subscription revenues contributed well.

Top Line in Detail

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

Subscription revenues were $4.4 billion (accounting for 93.9% of total revenues), up 10.5% on a year-over-year basis.

Product revenues totaled $120 million (2.6% of total revenues), down 17.2% year over year.

Services & support revenues were $162 million (3.5% of total revenues), increasing 1.9% from the prior-year quarter.

Segmental Details

Digital Media: The segment generated revenues of $3.4 billion, which improved 9% on a year-over-year basis. The segment comprises Creative Cloud and Document Cloud. Notably, Digital Media’s annualized recurring revenues (ARR) increased to $13.67 billion, of which the net new ARR was $410 million.

Creative Cloud generated $2.76 billion in revenues, up 8% year over year. Creative ARR was $11.3 billion. The rising demand for Photoshop, Lightroom and Premier Pro contributed well. Solid momentum across Adobe Express platform remained a positive. Strong growth in top-of-funnel traffic also contributed well. Strengthening Adobe Stock business on the back of growing demand for imaging, vector, video and 3D content was another positive. Strength across Substance 3D and Frame.io was a tailwind.

Document Cloud’s revenues were $634 million, up 13% from the prior-year quarter. Document ARR was $2.4 billion. Growing demand for PDF capabilities in the browser was a tailwind. Solid momentum across the Acrobat ecosystem drove top-line growth. Rising monthly active users for Acrobat Web remained a positive. Further, strength in Adobe Sign also contributed well.

Digital Experience: The segment generated revenues of $1.18 billion, up 11% on a year-over-year basis. The segment comprises Adobe Experience Cloud. Experience Cloud subscription revenues were $1.04 billion, which rose 12% from the year-ago quarter. Strong momentum across the Experience Cloud platform drove top-line growth for the segment. Strength in Workfront contributed well. Further, strong momentum in applications like Real-Time CDP, Adobe Journey Optimizer and Consumer Journey Analytics was another positive.

Operating Details

The gross margin was 87.8%, which contracted 10 basis points (bps) on a year-over-year basis.

Adobe incurred operating expenses of $2.5 billion, reflecting a 15.2% year-over-year increase. As a percentage of the total revenues, the figure expanded 280 bps to 53.7%.

The adjusted operating margin was 45.8%, contracting 100 bps year over year.

Balance Sheet & Cash Flow

As of Mar 3, 2023, the cash and short-term investment balance was $5.6 billion, up from $6.1 billion as of Dec 2, 2022. Trade receivables were $1.8 billion, up from $2.1 billion recorded in the fiscal fourth quarter.

Long-term debt was $3.63 billion at the end of the fiscal first quarter compared to $3.629 billion at the end of the fiscal fourth quarter.

Cash generated from operations was $1.7 billion in the fiscal first quarter versus $2.3 billion in the fiscal fourth quarter. In the reported quarter, the company repurchased 5 million shares.

Guidance

For second-quarter fiscal 2023, Adobe projects total revenues between $4.75-$4.78 billion.

Adobe expects Digital Media revenues between $3.45-$3.47 billion. The Digital Experience segment’s revenues are expected to be between $1.21 and $1.23 billion.

Net new ARR in the Digital Media segment is projected at $420 million. Subscription revenues of Digital Experience are anticipated to be within $1.06-$1.08 billion.

Management expects non-GAAP earnings between $3.75 and $3.80 per share.

For fiscal 2023, Adobe projects net new ARR in the Digital Media segment at $1.7 billion.

Management expects non-GAAP earnings between $15.30 and $15.60 per share.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

VGM Scores

Currently, Adobe has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Estimates have been broadly 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.

Performance of an Industry Player

Adobe belongs to the Zacks Computer - Software industry. Another stock from the same industry, Salesforce.com (CRM - Free Report) , has gained 3.6% over the past month. More than a month has passed since the company reported results for the quarter ended January 2023.

Salesforce.com reported revenues of $8.38 billion in the last reported quarter, representing a year-over-year change of +14.4%. EPS of $1.68 for the same period compares with $0.84 a year ago.

Salesforce.com is expected to post earnings of $1.61 per share for the current quarter, representing a year-over-year change of +64.3%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.1%.

Salesforce.com has a Zacks Rank #1 (Strong Buy) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of D.


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