A month has gone by since the las t earnings report for Adobe Systems (ADBE). Shares have added about 6.2% 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 recen t earnings report in order to get a better handle on the important catalysts.
Adobe Beats Earnings and Revenue Estimates in Q2
Adobe Systems Incorporated 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.
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.
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 $7.47billion.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 $296million 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.
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 a28.9% 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.
For third-quarter fiscal 2019, Adobe projects total revenues to be $2.8 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.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Adobe has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, 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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