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Why Is Adobe (ADBE) Up 1.6% 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 1.6% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Adobe Beats Earnings and Revenue Estimates in Q1

Adobe Systems Incorporated reported first-quarter fiscal 2019 non-GAAP earnings of $1.71 per share, surpassing the Zacks Consensus Estimate of $1.61. However, the figure decreased 6.6% sequentially, but increased 10.3% on a year-over-year basis.

Adjusted revenues also jumped 25.1% year over year to $2.60 billion, beating the Zacks Consensus Estimate of $2.54 billion.

This upside was driven by strong demand for the company’s innovative solutions and products, strength across geographies, along with growing subscriptions for its cloud application.

Top Line in Detail

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

Subscription revenues came in at $2.3 billion (88.6% of its total revenues), up 28.5% on a year-over-year basis.

Product revenues totaled $170.6 million (6.6% of revenues), down0.6% year over year.

Services & support revenues came in at $125.4 million (4.8% of revenues), increasing 10% year over year.

Segment Details

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

Digital Media — This segment generated revenues in$1.78 billion, which increased 22% on a year-over-year basis. The segment comprises Creative Cloud and Document Cloud. Additionally, Digital Media ARR was up $357 million to $7.07billion.

Creative Cloud (CC) generated $1.49 billion in revenues, reflecting 22% year-over-year growth. In addition, Creative ARR was up $292 million to $6.21 billion. Growth drivers in the quarter were strong net new subscriptions across user segments and geographies. Moreover, product introductions, growth in emerging markets, solid demand for online video creation and improving average revenue per user (ARPU) across key offerings were other positives.

Document Cloud (DC) generated $282 million in revenues, up 22% from the year-ago quarter. Moreover, Document ARR came in at $856 million. This was supported by solid enterprise adoption of Acrobat and Document Cloud services and strong performance ofAdobe Sign.

Digital Experience — This segment generated revenues of $743 million, up 34% on a year-over-year basis. The segment includes Adobe Experience Cloud. In addition to the contribution from the Magento and Marketo acquisitions, the Experience Cloud performance was driven by success across many offerings, with strength in Adobe Campaign and Adobe Experience Manager.

Operating Details

Gross margin was 80.9% in the quarter, contracting 260 basis points (bps) on a year-over-year basis.

Adobe incurred operating expenses of $1.46 billion, reflecting an increase of 32.9% year over year. As a percentage of total revenues, sales & marketing, general & administrative, as well as research & development costs flared up.

Adjusted operating margin was 37.9%, reflecting a contraction of 400 bps year over year.

Balance Sheet & Cash Flow

At the end of the fiscal first quarter, cash and short-term investments balance was $3.23 billion. Trade receivables were $1.30 billion, down from $1.32 billion recorded in the fiscal fourth quarter.

In the reported quarter, cash generated from operations was $1.01 billion versus $1.1 billion in the fiscal fourth quarter. In addition, during the reported quarter, the company repurchased approximately 2.1 million shares.

Guidance

For second-quarter fiscal 2019, the company projects total revenues of $2.7 billion. 

Adobe expects year-over-year revenue growth of 20% and 32% from Digital Media and Digital Experience segment, respectively.

Based on a share count of 495 million, management expects GAAP and non-GAAP earnings of $1.20 and $1.77 per share, respectively. 

The company has updated its guidance for fiscal 2019. Adobe projects total revenues of $11.150 billion. 

Adobe expects year-over-year revenue growth of 20% and 34% from Digital Media and Digital Experience segment, respectively.

Management expects GAAP and non-GAAP earnings of $5.59 and $7.80 per share, respectively. 

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -7.25% due to these changes.

VGM Scores

At this time, Adobe has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, 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

Adobe has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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