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Adobe (ADBE) Q2 Earnings Surpass Estimates, Revenues Lag
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Adobe Inc. (ADBE - Free Report) reported second-quarter fiscal 2020 non-GAAP earnings of $2.45 per share, surpassing the Zacks Consensus Estimate of $2.35. The figure increased 7.9% sequentially and 28.4% on a year-over-year basis.
Adjusted revenues jumped 14.2% year over year to $3.13 billion. This upside was driven by strong demand for the company’s digital products.
However, revenues missed the Zacks Consensus Estimate by 1.5%.
Though the company’s fiscal second-quarter earnings surpassed expectations, its shares were down 4.71% due to lower-than-anticipated guidance for the fiscal third quarter.
Management said the shift to remote work has driven the demand for digital documents. This led to a 40% sequential increase in the use of web-based PDF services. Also, the number of documents shared in Acrobat increased 50% year over year. Increased mobile usage led to 43% year-over-year increase in Acrobat Reader installations and 66% growth in Adobe Scan installations.
However, the Advertising Cloud business was not able to realize $50 million of expected revenues in the quarter due to discontinuation of a low-margin product and an unfavorable macroeconomic environment.
Top Line in Detail
Adobe reports revenues in three categories — subscription, product, and services & support.
Subscription revenues came in at $2.87 billion (accounting for 91.9% of its total revenues), up 17% on a year-over-year basis.
Product revenues totaled $128 million (4.1% of revenues), down 16.3% year over year.
Services & support revenues came in at $126 million (4% of revenues), decreasing 6.7% year over year.
Adobe Systems Incorporated Price, Consensus and EPS Surprise
The company operates in two reportable segments — Digital Media and Digital Experience.
Digital Media - This segment generated revenues of $2.23 billion, which increased 18% on a year-over-year basis. The segment comprises Creative Cloud and Document Cloud. Digital Media annual recurring revenues (ARR) were up $443 million from the prior quarter to $9.17 billion. Strength in mobile and overall web traffic drove the Digital Media business.
Creative Cloud (CC) generated $1.87 billion in revenues, reflecting 17% year-over-year growth. In addition, Creative ARR was up $352 million from the prior-year quarter to $7.93 billion. Growth drivers in the quarter were strong net new subscriptions across user segments and geographies amid the work-from-home environment. 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 $360 million revenues, up 22% from the year-ago quarter. Moreover, Document ARR came in at $1.24 billion. This was driven by strength in Adobe.com across individual and SMB segments, increased pipeline, as well as improved execution in the government segment, particularly for the Sign solution, among others.
Digital Experience - This segment generated revenues of $826 million, up 5% on a year-over-year basis. Digital Experience subscription revenues were $707 million, up 8% year over year, while Digital Experience subscription revenues (excluding Advertising Cloud revenues) grew 18%.
Operating Details
Gross margin was 86.7%, which expanded 150 basis points (bps) on a year-over-year basis.
Adobe incurred operating expenses of $1.66 billion, reflecting a 7.3% year-over-year increase. As a percentage of total revenues, all three expenses — sales & marketing, research & development, and general & administrative costs — decreased from the prior-year quarter.
As a result, adjusted operating margin was 42.7%, reflecting an increase of 440 bps year over year.
Balance Sheet & Cash Flow
At fiscal second quarter-end, cash and short-term investment balance was $4.35 billion, slightly up from $4.17 billion in the prior quarter. Trade receivables were $1.37 billion, down from $1.39 billion recorded in the fiscal first quarter.
Cash generated from operations was $1.18 billion versus $1.32 billion in the fiscal first quarter. During the reported quarter, the company repurchased 2.6 million shares.
Guidance
For third-quarter fiscal 2020, Adobe projects total revenues to be $3.15 billion. The Zacks Consensus Estimate for revenues is pegged at $3.28 billion. Adobe expects year-over-year revenue growth of 16% from Digital Media. Digital Experience segment revenues are expected to remain flat on a year-over-year basis, while digital experience subscription revenues (including Advertising Cloud) are likely to decline 5%.
Based on a share count of 485 million, management expects GAAP and non-GAAP earnings of $1.78 and $2.40 per share, respectively. The Zacks Consensus Estimate for non-GAAP earnings for the quarter is pegged at $2.45 per share.
Zacks Rank & Stocks to Consider
Currently, Adobe carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader technology sector include Wayfair Inc. (W - Free Report) , eBay (EBAY - Free Report) and Inphi Corporation . While Wayfair and eBay sport a Zacks Rank #1 (Strong Buy), Inphi carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term earnings growth for Wayfair, eBay, and Inphi is currently projected at 23%, 12.4% and 37.7%, respectively.
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Adobe (ADBE) Q2 Earnings Surpass Estimates, Revenues Lag
Adobe Inc. (ADBE - Free Report) reported second-quarter fiscal 2020 non-GAAP earnings of $2.45 per share, surpassing the Zacks Consensus Estimate of $2.35. The figure increased 7.9% sequentially and 28.4% on a year-over-year basis.
Adjusted revenues jumped 14.2% year over year to $3.13 billion. This upside was driven by strong demand for the company’s digital products.
However, revenues missed the Zacks Consensus Estimate by 1.5%.
Though the company’s fiscal second-quarter earnings surpassed expectations, its shares were down 4.71% due to lower-than-anticipated guidance for the fiscal third quarter.
Management said the shift to remote work has driven the demand for digital documents. This led to a 40% sequential increase in the use of web-based PDF services. Also, the number of documents shared in Acrobat increased 50% year over year. Increased mobile usage led to 43% year-over-year increase in Acrobat Reader installations and 66% growth in Adobe Scan installations.
However, the Advertising Cloud business was not able to realize $50 million of expected revenues in the quarter due to discontinuation of a low-margin product and an unfavorable macroeconomic environment.
Top Line in Detail
Adobe reports revenues in three categories — subscription, product, and services & support.
Subscription revenues came in at $2.87 billion (accounting for 91.9% of its total revenues), up 17% on a year-over-year basis.
Product revenues totaled $128 million (4.1% of revenues), down 16.3% year over year.
Services & support revenues came in at $126 million (4% of revenues), decreasing 6.7% year over year.
Adobe Systems Incorporated Price, Consensus and EPS Surprise
Adobe Systems Incorporated price-consensus-eps-surprise-chart | Adobe Systems Incorporated Quote
Segment Details
The company operates in two reportable segments — Digital Media and Digital Experience.
Digital Media - This segment generated revenues of $2.23 billion, which increased 18% on a year-over-year basis. The segment comprises Creative Cloud and Document Cloud. Digital Media annual recurring revenues (ARR) were up $443 million from the prior quarter to $9.17 billion. Strength in mobile and overall web traffic drove the Digital Media business.
Creative Cloud (CC) generated $1.87 billion in revenues, reflecting 17% year-over-year growth. In addition, Creative ARR was up $352 million from the prior-year quarter to $7.93 billion. Growth drivers in the quarter were strong net new subscriptions across user segments and geographies amid the work-from-home environment. 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 $360 million revenues, up 22% from the year-ago quarter. Moreover, Document ARR came in at $1.24 billion. This was driven by strength in Adobe.com across individual and SMB segments, increased pipeline, as well as improved execution in the government segment, particularly for the Sign solution, among others.
Digital Experience - This segment generated revenues of $826 million, up 5% on a year-over-year basis. Digital Experience subscription revenues were $707 million, up 8% year over year, while Digital Experience subscription revenues (excluding Advertising Cloud revenues) grew 18%.
Operating Details
Gross margin was 86.7%, which expanded 150 basis points (bps) on a year-over-year basis.
Adobe incurred operating expenses of $1.66 billion, reflecting a 7.3% year-over-year increase. As a percentage of total revenues, all three expenses — sales & marketing, research & development, and general & administrative costs — decreased from the prior-year quarter.
As a result, adjusted operating margin was 42.7%, reflecting an increase of 440 bps year over year.
Balance Sheet & Cash Flow
At fiscal second quarter-end, cash and short-term investment balance was $4.35 billion, slightly up from $4.17 billion in the prior quarter. Trade receivables were $1.37 billion, down from $1.39 billion recorded in the fiscal first quarter.
Cash generated from operations was $1.18 billion versus $1.32 billion in the fiscal first quarter. During the reported quarter, the company repurchased 2.6 million shares.
Guidance
For third-quarter fiscal 2020, Adobe projects total revenues to be $3.15 billion. The Zacks Consensus Estimate for revenues is pegged at $3.28 billion. Adobe expects year-over-year revenue growth of 16% from Digital Media. Digital Experience segment revenues are expected to remain flat on a year-over-year basis, while digital experience subscription revenues (including Advertising Cloud) are likely to decline 5%.
Based on a share count of 485 million, management expects GAAP and non-GAAP earnings of $1.78 and $2.40 per share, respectively. The Zacks Consensus Estimate for non-GAAP earnings for the quarter is pegged at $2.45 per share.
Zacks Rank & Stocks to Consider
Currently, Adobe carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader technology sector include Wayfair Inc. (W - Free Report) , eBay (EBAY - Free Report) and Inphi Corporation . While Wayfair and eBay sport a Zacks Rank #1 (Strong Buy), Inphi carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term earnings growth for Wayfair, eBay, and Inphi is currently projected at 23%, 12.4% and 37.7%, respectively.
Biggest Tech Breakthrough in a Generation
Be among the early investors in the new type of device that experts say could impact society as much as the discovery of electricity. Current technology will soon be outdated and replaced by these new devices. In the process, it’s expected to create 22 million jobs and generate $12.3 trillion in activity.
A select few stocks could skyrocket the most as rollout accelerates for this new tech. Early investors could see gains similar to buying Microsoft in the 1990s. Zacks’ just-released special report reveals 8 stocks to watch. The report is only available for a limited time.
See 8 breakthrough stocks now>>