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Why Is Adobe (ADBE) Up 11.1% 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 11.1% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Adobe Beats Earnings and Revenue Estimates in Q4

Adobe Inc. reported fourth-quarter fiscal 2019 non-GAAP earnings of $2.29 per share, surpassing the Zacks Consensus Estimate of $2.26. Also, the figure increased 11.7% sequentially and 25.1% on a year-over-year basis.

Adjusted revenues also jumped 21.5% year over year to $2.99 billion, beating the Zacks Consensus Estimate by 0.8%.

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.

Top Line in Detail

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

Subscription revenues came in at $2.69 billion (accounting for 89.8% of its total revenues), up 23% on a year-over-year basis.

Product revenues totaled $167.1 million (5.6% of revenues), up 11.1% year over year.

Services & support revenues came in at $138 million (4.6% of revenues), increasing 6.1% year over year.

Segment Details

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

Digital Media -This segment generated revenues of $2.08 billion, which increased 22% on a year-over-year basis. The segment comprises Creative Cloud and Document Cloud. Digital Media ARR came in at $8.40 billion. Strength in mobile and overall web traffic drove the Digital Media business.

Creative Cloud (CC) generated $1.74 billion in revenues, reflecting 20% year-over-year growth. In addition, Creative ARR was up $445 million from the prior-year quarter to $7.31 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 across key offerings were other positives.

Document Cloud (DC) generated $339 million revenues, up 31% from the year-ago quarter. Moreover, Document ARR came in at $1.09 billion. This was driven by continued strength in Acrobat subscription adoption.
Digital Experience -This segment generated revenues of $859 million, up 24% on a year-over-year basis. The segment includes Adobe Experience Cloud. Experience Cloud subscription revenues were $726 million in the fiscal fourth quarter, up 31% year over year.

Operating Details

Gross margin was 84.9%, which contracted 50 basis points (bps) on a year-over-year basis.

Adobe incurred operating expenses of $1.53 billion, reflecting a 13% year-over-year increase. As a percentage of total revenues, sales & marketing, research & development, as well as general & administrative expenses decreased from the prior-year quarter.

As a result, adjusted operating margin was 42.6%, reflecting an increaseof 400 bps year over year.

Balance Sheet & Cash Flow

At the end of the fiscal fourth quarter, cash and short-term investment balance was $4.18 billion, up from $3.65 billion in the prior quarter. Trade receivables were $1.53 billion, up from $1.37 billion recorded in the fiscal third quarter.

Cash generated from operations was $1.38 billion versus $922 million in the fiscal third quarter. During the reported quarter, the company repurchased approximately 2.8 million shares.

Guidance

For first-quarter fiscal 2020, Adobe projects total revenues to be $3.04 billion. Adobe expects year-over-year revenue growth of 19% and 15% from Digital Media and Digital Experience segments, respectively.

Based on a share count of 489 million, management expects GAAP and non-GAAP earnings of $1.76 and $2.23 per share, respectively. 

For fiscal 2020, Adobe projects total revenues to be $13.15 billion. The company expects year-over-year revenue growth of 19% and 16% from Digital Media and Digital Experience segments, respectively.

Based on a share count of 486 million, management expects GAAP and non-GAAP earnings of $7.40 and $9.75 per share, respectively. 

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

At this time, Adobe has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. 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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