Adobe Systems Inc.ADBE reported fourth-quarter fiscal 2015 earnings of 47 cents per share, which beat the Zacks Consensus Estimate of 45 cents backed by strong adoption of creative cloud that led to a record sequential Creative Cloud ARR (Annualized Recurring Revenue) growth and record Creative product family quarterly revenues.
Adjusted earnings per share exclude one-time items but include stock-based compensation expense.
Revenues
Adobe’s revenues of $1.31 billion increased 7.3% sequentially and 21.7% year over year. Reported revenues were toward the higher end of management’s guided range of $1.275–$1.325 billion and matched the Zacks Consensus Estimate.
Subscription comprised 69% of Adobe’s total fourth-quarter revenue, up a significant 134% from the year-ago period. Products declined 13% year over year and contributed 22% to revenues, while Services & Support, down 2%, accounted for the balance.
Revenues by Segment
Digital Media Solutions, Adobe’s largest segment, generated 67% of total revenue. Revenues from this segment went up 14% sequentially to $875.3 million.
The two major revenue earners within the segment were the Creative Cloud and Document Cloud. In the Creative business, Creative Cloud subscriptions continued to accelerate. At the end of the quarter, the company had around 6.2 million Creative Cloud subscriptions, with net new subscriptions increasing 833k.
The increased subscription, Enterprise Term License Agreements or ETLA adoption and digital publishing suite adoption drove Creative annualized recurring revenues or ARR to $2.6 billion, up $310 million. ARR in Document Cloud business increased to $397 million, up 11% sequentially.
Management is optimistic about Creative Cloud adoption and expects to build a strong pipeline for potential Creative Cloud paid subscribers through marketing programs, trial downloads and free memberships. Management expects growth will be fueled by three initiatives — migrating the Creative Suite installed base; drawing new clients and driving higher ARPU through cloud services like Adobe Stock.
The Digital Marketing segment accounted for 29% of total revenue. Within the segment, Adobe Marketing Cloud revenues were down 4% sequentially to $352.2 million. The improvement was supported by increase in the size of transactions, number of solutions per customer, international expansion and growth in partner-driven business. Moreover, multi-solution adoption is growing the size of customer engagements. Bookings in this segment also increased on a year-over-year basis.
LiveCycle and Connect businesses generated revenues of $30.5 million, down 11% sequentially.
Print and Publishing revenues accounted for the remaining $48.4 million, up 6% from the last quarter.
Margins
Gross margin was 84.6%, up 27 basis points (bps) sequentially but down 218 bps year over year. The gross margin is typical of a software company and variations are generally related to the mix of revenues between categories.
Adobe incurred adjusted operating expenses of $776.4 million, up 3.5% sequentially and 2.7% year over year. As a percentage of sales, research & development, general & administrative and sales & marketing expenses decreased from the year-ago quarter. As a result, adjusted operating margin increased to 25.2% from 16.3% last year.
Net Income
On a GAAP basis, Adobe recorded net income of 222.7 million (44 cents per share) compared with $174.5 million (34 cents) in the previous quarter.
On a pro-forma basis, Adobe generated net income of $237.4 million compared with $200.6 million in the previous quarter.
Balance Sheet
Adobe ended the quarter with cash and investments balance of $3.99 billion as against $3.67 billion in the previous quarter. Days sales outstanding (DSO) were 47 days, up from 44 days in the last quarter. Deferred revenues were $1.49 billion compared with $1.26 billion in the third quarter.
In the fourth quarter, cash generated from operations was $455.0 million. Additionally, the company repurchased approximately 1.4 million shares for $122.0 million.
Guidance
For the first quarter of fiscal 2016, management expects revenues in the range of $1.300–$1.350 billion. Analysts polled by Zacks expect revenues to be $1.330 billion, higher than the guided range at the mid-point.
Based on a share count of 506–508 million, GAAP earnings per share are expected in the range of 33–39 cents, and non-GAAP earnings within 56–62 cents. The Zacks Consensus Estimate is pegged at 48 cents, well below the guided range. Also, non-operating expense is expected within the $14–$16 million range and tax rate is likely to be 25% on a GAAP basis and 21% on a non-GAAP basis.
Our Recommendation
Adobe reported decent fourth-quarter results wherein earnings beat the Zacks Consensus Estimate, while revenues matched the same.
We remain positive about Adobe’s market position, compelling product lines (including CS cloud initiative and digital media products), continued innovation and strong balance sheet.
We believe that the company is being driven by continuous innovation in its Creative Cloud and Marketing Cloud businesses.
After the successful transition from traditional license to subscription-based services, Adobe wants to establish its presence in cloud-related software areas like documents and marketing. In this regard, the company recently introduced significant features and a number of updates for its Document Cloud (DC).
In October, the company announced a partnership with Dropbox Inc., a file backup service that offers cloud-based file management, storage systems and client software.
The integration of Dropbox into DC will make it easier for people and organizations to work with files on the go. With more than 18 billion PDF files stored in Dropbox, the alliance will enable Adobe Acrobat DC and Adobe Acrobat Reader users to easily access and work on files stored on Dropbox Basic, Pro and Business accounts from Adobe apps.
In addition, we believe that the consistent adoption of the Adobe marketing cloud could serve as a potential catalyst, going forward. We expect significant synergies over the long term from the integration of the Fotolia acquisition. Moreover, the solid adoption of Document Cloud, a new subscription package to enable users to sign documents on the cloud, will boost revenues.
Adobe carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the technology sector are Stamps.com Inc. STMP, Travelport Worldwide Limited TVPT and Amazon.com Inc. AMZN. While Stamps.com sports a Zacks Rank #1 (Strong Buy), Travelport and Amazon carry a Zacks Rank #2 (Buy).
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