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Adobe (ADBE) Beats Earnings and Revenue Estimates in Q2

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Adobe Systems Incorporated (ADBE - Free Report) reported second-quarter fiscal 2019 non-GAAP earnings of $1.83 per share, surpassing the Zacks Consensus Estimate of $1.78. Also, the figure increased 7% sequentially and 10% on a year-over-year basis.

Adjusted revenues also jumped 25% year over year to $2.74 billion, beating the Zacks Consensus Estimate of $2.7 billion.

This upside was driven by strong demand for the company’s Adobe Document Cloud and Adobe Experience Cloud products, along with growing subscription for cloud application.

Following the strong fiscal second-quarter results, its shares were up 4.3%. However, shares of Adobe have returned 13.3% in the past year, underperforming the industry’s 23.3% rally.

Top Line in Detail

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

Subscription revenues came in at $2.5 billion (accounting for 89.5% of its total revenues), up 27.7% on a year-over-year basis.

Product revenues totaled $152.8 million (5.6% of revenues), up 1.2% year over year.

Services & support revenues came in at $135.4 million (4.9% of revenues), increasing 11.7% year over year.

Segment Details

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

Digital Media — This segment generated revenues of $1.89 billion, which increased 22% on a year-over-year basis. The segment comprises Creative Cloud and Document Cloud. Digital Media ARR increased to $7.47 billion. Strength in mobile drove the Digital Media business.

Creative Cloud (CC) generated $1.59 billion in revenues, reflecting 22% year-over-year growth. In addition, Creative ARR was up $341 million to $6.55 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 $296 million in revenues, up 22% from the year-ago quarter. Moreover, Document ARR came in at $921 million. This was driven by continued strength in Acrobat subscription adoption.

Digital Experience — This segment generated revenues of $784 million, up 34% on a year-over-year basis. The segment includes Adobe Experience Cloud. Experience Cloud subscription revenues were $654 million in the fiscal second quarter. In addition to the contribution from Magento acquisition, the Experience Cloud performance was driven by success across many offerings, with strength in Adobe Campaign and Adobe Experience Manager.

Adobe Systems Incorporated Price, Consensus and EPS Surprise

 

Adobe Systems Incorporated Price, Consensus and EPS Surprise

Adobe Systems Incorporated price-consensus-eps-surprise-chart | Adobe Systems Incorporated Quote

Operating Details

Gross margin was 85.2% in the quarter, contracting 200 basis points (bps) on a year-over-year basis.

Adobe incurred operating expenses of $1.54 billion, reflecting a 28.9% year-over-year increase. As a percentage of total revenues, sales & marketing as well as research & development costs flared up, while general & administrative expenses decreased from the prior-year quarter.

As a result, adjusted operating margin was 38.3%, reflecting a contraction of 170 bps year over year.

Balance Sheet & Cash Flow

At the end of the fiscal second quarter, cash and short-term investments balance was $3.48 billion. Trade receivables were $1.27 billion, down from $1.30 billion recorded in the fiscal first quarter.

Cash generated from operations was $1.11 billion versus $1.01 billion in the fiscal first quarter. During the reported quarter, the company repurchased approximately 2.5 million shares.

Guidance

For third-quarter fiscal 2019, Adobe projects total revenues to be $2.8 billion. The Zacks Consensus Estimate for revenues is pegged at $2.82 billion.

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

Based on a share count of 491 million, management expects GAAP and non-GAAP earnings of $1.40 and $1.95 per share, respectively. The Zacks Consensus Estimate for the quarter is pegged at $2.04.

Zacks Rank & Stocks to Consider

Currently, Adobe carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector include Intuit Inc. (INTU - Free Report) , Microsoft Corporation (MSFT - Free Report) and Cadence Design Systems, Inc. (CDNS - Free Report) . You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth rate for Intuit, Microsoft and Cadence Design Systems is projected at 16.1%, 12.4% and 11%, respectively.

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