Adobe Systems Incorporated (ADBE - Free Report) reported third-quarter fiscal 2018 non-GAAP earnings of $1.73 per share, beating the Zacks Consensus Estimate of $1.69. Also, the figure increased 4.2% sequentially and 57.3% on a year-over-year basis.
Adjusted revenues also increased 4.4% sequentially and 24% year over year to $2.29 billion, beating the Zacks Consensus Estimate of $2.25 billion.
The year-over-year growth was driven by strong demand for the company’s innovative solutions and products, strength across geographies, along with growing subscriptions for its cloud application.
Notably, shares of Adobe have returned 70.8% over a year, outperforming the industry’s rally of 35.6%.
Top Line in Detail
Adobe reports revenues in three categories — Subscription, product and services & support.
Subscription revenues came in at $2.02 billion (88.2% of the total revenues), up 28.7% on a year-over-year basis.
Product revenues totaled $149.1 million (6.5% of revenues), decreasing 6.2% year over year.
Services & support revenues came in at $120.4 million (5.3% of revenues), increasing 7.8% year over year.
The company operates in two reportable segments — Digital Media and Digital Experience.
Digital Media — This segment generated revenues of $1.61 billion, which increased 27% on a year-over-year basis. The segment comprises Creative Cloud and Document Cloud. Additionally, Digital Media ARR increased $339 million to $6.4billion, attributable to the transition made on Adobe.com from using U.S. dollar to local currency in certain markets.
Creative Cloud (CC) generated $1.36 billion of revenues, reflecting 28% year-over-year growth. Additionally, Creative ARR increased $289 million to $5.66 billion. The year-over-year growth was driven by robust performance of Adobe Stock, as well as Stock and collaboration services. Moreover, improving average revenue per user (ARPU) across key offerings and increasing net new subscriptions drove the top line of CC. Additionally, the company entered into various creative agreements in the reported quarter and most of them included service offering that drove the creative ARR.
Document Cloud (DC) generated $249 million of revenues, up 21% from the year-ago quarter. Moreover, Document ARR came in at $744 million. This was driven by strong performance of Adobe Sign and growing adoption of Acrobat. The company experienced robust growth in Acrobat units on a year-over-year basis.
Moreover, the company experienced robust bookings across various platforms such as Adobe Marketing Cloud, Adobe Analytics Cloud and Adobe Advertising Cloud.
Digital Experience — This segment generated revenues of $614 million, which increased 21% on a year-over-year basis. The segment includes Adobe Experience Cloud. The company recorded 25% growth in subscription revenues within the segment. Further, robust Analytics Cloud, Marketing Cloud and Advertising Cloud offerings, coupled with emerging solutions such as Audience Manager, Campaign, Target, and Media Optimizer solutions drove its top line.
Gross margin was 87.1% in the quarter, expanding 140 basis points (bps) on a year-over-year basis. The gross margin expansion was attributed to strong subscription revenues.
Adobe incurred operating expenses of $1.25 billion, reflecting an increase of 23.7% year over year. As a percentage of total revenues, sales & marketing as well as general & administrative expenses decreased, while research & development costs increased slightly.
Adjusted operating margin was 31.4%, reflecting an expansion of 180 bps year over year.
Balance Sheet & Cash Flow
As of Sep 30, 2018, cash and investments balance was $4.94 billion, down from $6.33 billion in the last reported quarter. Trade receivables were $1.04 billion, down from $1.07 billion recorded in the fiscal second quarter.
In the reported quarter, cash generated from operations was $955 million, down from $976.4 million in the last reported quarter.
During the quarter, Adobe repurchased approximately 2.9 million shares for $714 million.
For fourth-quarter fiscal 2018, the company projects total revenues of $2.42 billion. The Zacks Consensus Estimate for revenues is pegged at $2.25 billion.
Adobe expects year-over-year revenue growth of 22% and 20% from Digital Media and Digital Experience segments, respectively.
Based on a share count of 495 million, management expects GAAP earnings and non-GAAP earnings of $1.42 and $1.87 per share, respectively. The Zacks Consensus Estimate is pegged at $1.69 for the fourth quarter.
Zacks Rank & Stocks to Consider
Currently, Adobe carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Infineon Technologies AG (IFNNY - Free Report) , ON Semiconductor Corporation (ON - Free Report) and Rambus Inc. (RMBS - 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 for Infineon Technologies, ON Semiconductor and Rambus is currently projected to be 7.5%, 13.2% and 10%, respectively.
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