Adobe Systems Inc. (ADBE - Free Report) reported adjusted third-quarter fiscal 2017 earnings of $1.10 per share, surpassing the Zacks Consensus Estimate of $1.0 per share.
The outperformance was backed by strong demand for the company’s Creative Cloud software, which added more subscribers. Also, continued growth of Adobe Document Cloud subscriptions and Adobe Experience Cloud aided earnings improvement.
Adobe has been making great efforts toward establishing its presence in cloud-related software areas such as documents and marketing. Adobe Experience Manager, which enables brands to offer a personalized experience, is also witnessing robust growth.
In this regard, the Adobe Experience Cloud was recently enhanced with new auto-focused analytics, personalization and advertising capacities. Using Adobe Experience Cloud and the Automotive Grade Linux project, companies can now introduce digital marketing in cars. Also, companies can now personalize audio as well as in-car screen ads based on behavioral patterns (like interactions with infotainment systems and song selections) of people behind the wheels.
The company’s shares have charted a solid trajectory, increasing 46.8% year to date and outperforming the industry’s gain of 25.5%.
We remain optimistic about Adobe’s market position, compelling product lines, continued innovation, strong cash flow generation and solid balance sheet. Also, the company’s expansion in growing markets such as artificial intelligence and machine-learning framework is a big positive.
Adobe’s revenues of $1.84 billion increased 3.9% sequentially and 25.8% year over year. Reported revenues surpassed both management’s guidance and the Zacks Consensus Estimate of $1.81 billion.
Subscription comprised 85% of Adobe’s total fiscal third-quarter revenues, up 34.4% from the year-ago period. Products declined 12.2% year over year and contributed 9% to revenues, while Services & Support declined 2.3% and brought in the rest.
Revenues by Segment
Revenues from Digital Media Solutions surged 28% year over year to $1.27 billion. Total Digital Media ARR (Annualized Recurring Revenue) grew to $4.87 billion at the end of the fiscal third quarter, reflecting an increase of $308 million and indicatingstrong growth in the Creative Cloud and Document Cloud business lines.
The two major revenue contributors within the segment were Creative Cloud (CC) and Document Cloud (DC).
Creative revenues touched $1.06 billion in the quarter, up 33% year over year. Also, Creative ARR increased $272 million to $4.32 billion. The growth was driven by net-new subscriptions, adoption of enterprise services, and focus on high-potential segments like education. The company’s Creative Cloud video solutions also witnessed strong growth.
DC revenues were $206 million, increasing 10% year over year. Also, DC ARR was $556 million at the end of the fiscal third quarter. Adobe Document Cloud ARR growth was driven by Adobe Sign, which is now Microsoft’s preferred e-signature solution across the company’s portfolio.
Notably, Acrobat units across Creative Cloud and Adobe Document Cloud combined witnessed robust growth, driven by a record number of new subscriptions in the quarter.
Within the Digital Marketing segment, Adobe Experience Cloudrevenues were up 26% year over year to $508 million. Adobe Experience Cloud includes Adobe Marketing Cloud, Adobe Analytics Cloud and Adobe Advertising Cloud. Mobile remains a key component for this business. Mobile data transactions increased to 57% of total Adobe Analytics’ transactions in the quarter.
The company has been making great progress in all the three spaces. It has announced new capabilities in Adobe Target to further enhance customer recommendations and targeting, optimize experiences and automate the delivery of personalized offers.
Pro forma gross margin was 85.7%, down 77 basis points (bps) sequentially and 43 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 $1013.1 million, reflecting an increase of 16.5% year over year. As a percentage of sales, research & development expenses increased, while general & administrative and sales & marketing expenses decreased from the year-ago quarter. As a result, adjusted operating margin was 38.0%, reflecting an increase of 450 basis points (bps) year over year.
On a GAAP basis, Adobe recorded net income of $419.6 million (84 cents per share) compared with $270.8 million (54 cents per share) in the year-ago quarter.
On a pro forma basis, Adobe generated net income of $549.1 million compared with $376.5 in the year-ago quarter.
Adobe ended the fiscal third quarter with a cash and investments balance of $5.37 billion compared with $4.93 billion in the previous quarter. Trade receivables were $1.0 billion, up from $901.5 million in the prior quarter. Deferred revenues were $2.1 billion compared with $2.0 billion in the prior quarter.
In the reported quarter, cash generated from operations was $704 million and capital expenditure was $54.2 million. Additionally, the company repurchased approximately 2.1 million shares for $298 million.
For the fourth quarter of fiscal 2017, management expects revenues of $1.950 billion. Analysts polled by Zacks expect revenues of $1.94 billion, below the guided figure.
Based on a share count of 500 million, management expects GAAP earnings per share of 86 cents and non-GAAP earnings of $1.15 per share. The Zacks Consensus Estimate is pegged at $1.07.
Zacks Rank & Stock to Consider
Adobe carries a Zacks Rank #4 (Sell). A few better-ranked stocks in the broader technology sector are Lam Research Corporation (LRCX - Free Report) and Stamps.com Inc. (STMP - Free Report) , both sporting a Zacks Rank #1 (Strong Buy), and Advanced Energy Industries, Inc. (AEIS - Free Report) with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Lam Research delivered a positive earnings surprise of 4.44%, on average, in the trailing four quarters.
Stamps.com Inc. delivered a positive earnings surprise of 30.64%, on average, in the last four quarters.
In the trailing four quarters, Advanced Energy Industries delivered an average positive earnings surprise of 13.69%.
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