Adobe Is Like a Broken Record

FAN Editor

While flashier names in technology seem to get all the press lately, software-as-a-service provider Adobe (NASDAQ: ADBE) has quietly thumped the market. The company’s expanding roster of products that span creativity and design, marketing and analytics, and e-commerce offers a one-stop shop to the creative community, while its integration of artificial intelligence (AI) helps make its products and services more intuitive and useful.

Adobe reported its fiscal 2018 fourth-quarter and full-year results on Dec. 13, and even in the wake of Wall Street’s disappointment with the quarter, the company has still gained 31% so far in 2018, while the S&P 500 is struggling to get to breakeven.

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A lot to like

For the just-completed fiscal fourth quarter (which ended Nov. 30), Adobe reported record revenue of $2.46 billion, up 23% year over year, and marking its 15th consecutive quarter of revenue gains. The results easily topped both Adobe’s forecast of $2.42 billion and analysts’ consensus estimates of $2.43 billion. The company delivered GAAP earnings per share of $1.37 and adjusted earnings per share of $1.90, excluding the results of recent acquisition Marketo. This exceeded Adobe’s guidance for adjusted earnings per share of $1.87 and Wall Street’s expectations of $1.88.

Adobe saw strength across its array of products, producing broad-based sales growth. Revenue within the digital media segment grew to $1.71 billion, up 23% year over year, while the digital experience segment produced revenue of $690 million, up 25% compared with the prior-year quarter. Both segments outpaced Adobe’s guidance, which called for growth of 22% and 20%, respectively.

Breaking down the results further, both segments in the digital media segment had a record-setting quarter. This included Creative Cloud revenue of $1.45 billion, up 26% compared with the prior-year quarter, and Document Cloud revenue of $259 million, an increase of 10% year over year. Adobe said net new subscriptions were strong across user segments and geographies, the result of heavy seasonal traffic and robust customer adoption.

Within the digital experience segment, Experience Cloud achieved a record $690 million top line, up 25% year over year, while subscription revenue grew 30% compared with the prior-year quarter.

Adobe’s subscription model continues to pay dividends. The company added a record net new digital media annualized recurring revenue (ARR) of $430 million, exiting the year with $6.83 billion of digital media ARR. After adjustments of $123 million for currency exchange rates at year-end, the balance dropped to $6.71 billion. The growth shows that more and more customers are signing up for Adobe’s subscription offerings.

A growing ecosystem

The acquisition of Marketo, the leader in business-to-business (B2B) marketing engagement, closed in October, and Adobe said it’s off to a great start, adding $21 million in revenue for the quarter. Another new purchase, Magento — an e-commerce business facilitator — topped the $30 million sales target Adobe set for it for the three-month period. The integrated commerce capabilities gained with Magento help Adobe in both the B2B and B2C (business-to-consumer) aspects of its business.

It’s these newer snap-on businesses that should have Adobe investors particularly excited. Acquisitions such as these serve two purposes. First, Adobe can market the new products to its existing customer base, thereby growing revenue. Second, Adobe can expand its relationship with Magento’s and Marketo’s customers, and introduce them to the full line of Adobe products.

These additions also bring new capabilities, in the realm of B2B and e-commerce, both of which augment Adobe’s existing offerings. I’m particularly enthusiastic about e-commerce, as it’s becoming an increasingly important component of the worldwide economy. Online purchases accounted for just 10% of overall retail in 2017 but increased 25% compared with the prior year. With the rising adoption of digital commerce, online sales are projected to grow by more than 23% in 2018.

What the future could hold

Adobe’s full-year 2019 forecast calls for revenue of $11.15 billion, which represents growth of 23% compared with 2018. Adobe expects its digital media segment to expand by 20% and its digital experience segment to increase by 34%, both compared with the prior year.

For the upcoming quarter, Adobe is anticipating revenue of $2.54 billion, which would equal year-over-year growth of 22%. Breaking that down a bit, the company expects revenue from its digital media segment to grow 20% and its digital experience segment to increase 31%, both year over year. The company is projecting GAAP earnings per share of $1.14 and adjusted earnings per share of $1.60. Adobe is also projecting net new digital media ARR of $330 million.

To put this into the perspective of the broader market’s outlook for Adobe, analysts’ consensus estimates are calling for revenue of $2.52 billion, up 21.2% year over year, and adjusted earnings per share of $1.88.

Fifteen consecutive quarters of revenue growth show that Adobe’s strategy of pursuing subscription revenue is still on track. The company now boasts more than 88% of its revenue from recurring sources, up from 84% in the prior-year quarter.

When a vinyl record gets scratched, it tends to play the same bit over and over — much like Adobe’s ability to break records quarter after quarter. With an improving percentage of recurring revenue and an expanding ecosystem of businesses, it appears Adobe could continue to grow like this for years to come.

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Danny Vena owns shares of Adobe Systems. The Motley Fool owns shares of and recommends Adobe Systems. The Motley Fool has a disclosure policy.

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