Adobe (ADBE) Earnings, Revenues Beat Estimates In Q1

Adobe Systems Incorporated (NASDAQ:ADBE) reported first-quarter fiscal 2018 non-GAAP earnings of $1.55 per share, which came ahead of the Zacks Consensus Estimate of $1.43. The figure increased 23% sequentially and 64.9% on a year-over-year basis.

Adjusted revenues increased 3.4% sequentially and 23.8% year over year to $2.08 billion beating the Zacks Consensus Estimate of $2.04 billion.

The year-over-year growth was driven by strong demand for the company’s innovative solutions and products, strength across geographies and growing subscriptions for its cloud application.

Following the earnings results, its share price gained 3.76% in after-hours trading. Shares have returned 78.3% over a year, outperforming the industry’s rally of 35.7%.

Top Line in Detail

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

Subscription revenues came in $1.79 billion (86% of total revenues), up 29.7% on a year-over-year basis and 5.9% sequentially.

Product revenues came in $171.6 million (8.2% of revenues), decreased 6.3% year over year and 10.9% sequentially.

Services & support revenues came in $113.9 million (5.5% of revenues), which also dipped 0.4% year over year and 3.2% sequentially.

Segment Details

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

Digital Media — This segment generated revenues of $1.46 billion (70.1% of total revenues), which increased 28.1% on a year-over-year basis and 5% sequentially. The segment comprises Creative Cloud and Document Cloud. The company witnessed 34.6% growth in annualized recurring revenue (ARR) within this segment. This was attributed to the transition made on Adobe.com from using US dollar to local currency in certain markets.

Creative Cloud (CC) generated $1.23 billion of revenues, reflecting 30.6% year-over-year growth. Additionally, Creative ARR increased by $303 million to $5.07 billion. The year-over-year growth was driven by robust performance of Adobe Stock and Stock and collaboration services.

Moreover, improving average revenue per user (ARPU) across the key offerings and increasing net new subscriptions drove the top line of CC. Additionally, the company entered into various creative agreements in the reported quarter and most of them included service offering which drove the creative ARR.

Document Cloud (DC) generated $231 million of revenues, up 18% from the year-ago quarter. Moreover, Document ARR came in $647 million. This was driven by strong performance of Adobe Sign and growing adoption of Acrobat. The company also experienced a robust growth in Acrobat units on a year-over-year basis.

Moreover, the company experienced robust bookings across various platforms such as — Adobe Marketing Cloud, Adobe Analytics Cloud and Adobe Advertising Cloud.

Digital Experience — This segment generated revenues of $554 million (26.6% of revenues), which increased 16% on a year-over-year basis and 0.7% sequentially. The segment includes Adobe Experience Cloud. The company witnessed 22% growth in subscription revenues within the segment. Further, robust Analytics Cloud, Marketing Cloud and Advertising Cloud offerings coupled with emerging solutions such as Audience Manager, Campaign, Target and Media Optimizer solutions drove the top line.

Operating Details

Gross margin was 87.5%, expanding 100 basis points (bps) sequentially and 180 bps on a year-over-year basis. Gross margin expansion was attributed to strong subscription revenues.

Adjusted operating margin was 41.9%, reflecting an expansion of 580 bps year over year. This was attributed to almost flat year-over-year growth in research & development, general & administrative and sales & marketing expenses as a percentage of total revenues.

Adobe incurred operating expenses of $1.17 billion, reflecting an increase of 14.5% year over year.

Balance Sheet & Cash Flow

As of Mar 2, 2018, cash and investments balance of $6.14 billion, up from $5.82 billion as of Dec 1, 2017.

Trade receivables were $1.06 billion, down from $1.2 billion in the previous quarter. Deferred revenues were $2.6 billion, increased from the quarter-ago figure of $2.4 billion.

In the reported quarter, cash generated from operations was $989.6 million, up from $833.2 million in the previous quarter.

During the quarter, Adobe repurchased approximately 1.6 million worth $301 million.

Guidance

For second-quarter fiscal 2018, the company projects total revenues of $2.15 billion. The Zacks Consensus Estimate for revenues is pegged at $2.13 billion.

Further, Adobe expects year-over-year growth in revenues of 25% and 15% from Digital Media and Digital Experience segment, respectively.

Additionally, the company expects $330 million of net new Digital Media ARR.

Based on a share count of 499 million, management expects GAAP earnings and non-GAAP earnings of $1.16 and $1.53 per share, respectively. The Zacks Consensus Estimate is pegged at $1.49 for the upcoming quarter.

Zacks Rank & Other Stocks to Consider

Adobe carries a Zacks Rank #2 (Buy).

A few other top-ranked stocks in the broader technology sector are ManTech International (NASDAQ:MANT) , DST Systems (NYSE:DST) and CGI Group (NYSE:GIB) . While ManTech International and DST Systems sport a Zacks Rank #1 (Strong Buy), CGI Group carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for ManTech International, DST Systems and CGI Group is pegged at 8%, 10% and 9%, respectively.

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