Adobe Systems Inc. ADBE reported first-quarter fiscal 2015 earnings of 27 cents per share, in line with the Zacks Consensus Estimate. Adjusted earnings per share exclude one-time items but include stock-based compensation expense.
Following the earnings release, share price declined 3.84% in after-hours trading due to weaker-than-expected cloud subscriber additions.
Revenues
Adobe’s revenues of $1.11 billion increased 10.3% sequentially and 10.9% year over year. Reported revenues were slightly above management’s guided range of $1.05 to $1.10 billion and beat the Zacks Consensus Estimate of $1.076 billion.
Subscription comprised 64.3% of Adobe’s total first-quarter revenue, up a significant 68.4% year over year. Products generated 26.2% of revenues but were down 38.3% year over year, while Services & Support brought in the balance, which also declined 0.1% from the year-ago period.
Revenues by Segment
Digital Media Solutions, Adobe’s largest segment, generated 63% of total revenue. Revenues in this segment increased 13% sequentially to $703.0 million.
The two major revenue earners within the segment were the Creative family of products and Document Services products. In the Creative business, Creative Cloud subscriptions continued to accelerate. At quarter-end, the company had approximately 3.97 million paid Creative Cloud subscriptions, a sequential increase of 517K.
The increased subscription, Enterprise Term License Agreements or ETLA adoption and digital publishing suite adoption helped drive Creative annualized recurring revenues or ARR to $1.79 billion, up $180 million sequentially.
Management is quite optimistic about Creative Cloud adoption and expects to build a healthy pipeline for potential Creative Cloud paid subscribers through marketing programs, trial downloads and free memberships. The company’s Photoshop Lightroom offering — rebranded as the Creative Cloud Photography Program in June — helps Adobe acquire new customers as well as convert those who originally licensed Photoshop Elements and Photoshop Lightroom.
In the Document Services business (includes Acrobat family and the new cloud-based services such as EchoSign), revenues were $193.0 million, down 7% sequentially. The segment performed well driven by continued Acrobat adoption in enterprise as well as continued momentum in EchoSign and other related Acrobat cloud services. ARR in Document Services business grew to $297 million, up 36% sequentially.
The Digital Marketing segment accounted for 32% of total revenue. Within the segment, Adobe Marketing Cloud revenues were up 7% sequentially to $311.0 million. The improvement was driven by an increase in the size of transactions, number of solutions per customer, international expansion and growth in partner-driven business. Bookings also increased year over year in this segment.
LiveCycle and Connect businesses generated revenues of $46.0 million, down 2% sequentially.
Print and Publishing revenues were $49.0 million, up 4% sequentially.
Margins
Reported gross margin was 85%, down 20 basis points from 85.2% in the comparable year-ago quarter. The gross margin is typical of a software company and variations are generally related to the mix of revenues between categories.
Adobe incurred operating expenses of $753.3 million, down 0.7% from the year-ago quarter’s $758.7 million. As a percentage of sales, research & development expenses, general & administrative as well as sales & marketing expenses decreased from the year-ago quarter. As a result, operating margin increased to 14.7% from 6.5% in the year-ago quarter.
Net Income
On a GAAP basis, Adobe recorded net income of $84.9 million (17 cents per share) compared with $47.0 million (9 cents) in the year-ago quarter.
On a pro-forma basis, Adobe generated net income of $124.2 million compared with $86.4 million in the year-ago quarter. Pro-forma earnings came in at 27 cents compared with 17 cents a year ago.
Balance Sheet
Adobe ended the quarter with cash and investments balance of $3.18 billion versus $3.52 billion in the previous quarter. Days sales outstanding (DSO) were 44 days, down from 48 days in the last quarter. Deferred revenues were $1.18 billion versus $997.0 million in the prior quarter.
In the first quarter, cash generated from operations was $183.0 million and capital expenditure was $35.5 million. Additionally, the company repurchased approximately 2.4 million shares for $174.0 million.
Guidance
For the second quarter, management expects revenues in the range of $1.125 to $1.175 billion. Analysts polled by Zacks expect revenues to be $1.169 billion, at the higher end of the guided range. Additionally, management expects total Digital Media revenue to increase sequentially.
In this segment, management expects Adobe Marketing Cloud revenues to increase sequentially but LiveCycle and Connect revenues to remain flat. Print and Publishing revenues are also expected to be relatively flat on a sequential basis.
Accordingly, based on a share count of 508–510 million, GAAP earnings per share are expected in the range of 20–25 cents, while non-GAAP earnings are expected in the range of 41–47 cents. The Zacks Consensus Estimate is pegged at 34 cents, well below the guided range.
Also, for the second quarter, non-operating expense is expected within the $15–$17 million range and tax rate is expected to be 24% on a GAAP basis and 21% on a non-GAAP basis.
Our Recommendation
Adobe reported decent first-quarter results with earnings matching our expectations but the top line exceeding the same.
We remain positive about Adobe’s market position, its compelling product lines (including CS cloud initiative and digital media products), continued innovation and strong balance sheet.
In addition, we believe that the consistent adoption of the Adobe marketing cloud could serve as a potential catalyst, going forward. Due to Adobe’s acquisition of Fotolia, we expect noteworthy synergies over time. In the first quarter, Fotolia contributed $7 million to revenues. Moreover, the recent launch of Document Cloud, a new subscription package to enable users to sign documents on the cloud, will help the company to boost revenues.
Currently, Adobe has a Zacks Rank #3 (Hold). Some better-ranked stocks that are performing well at current levels include Aspen Technology, Inc. AZPN, DST Systems Inc. DST and Interactive Intelligence Group Inc. ININ. All these stocks sport a Zacks Rank #1 (Strong Buy).
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