It has been about a month since the last earnings report for Adobe Systems (ADBE). Shares have added about 20.3% 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 its most recent earnings report in order to get a better handle on the important drivers.
Adobe Q2 Earnings Surpass Estimates, Revenues Lag
Adobe Inc. 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%.
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.
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%.
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.
For third-quarter fiscal 2020, Adobe projects total revenues to be $3.15 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.
How Have Estimates Been Moving Since Then?
Estimates review followed a downward path over the past two months.
Currently, Adobe has a strong Growth Score of A, though it is lagging a lot 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
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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