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Friday, June 23, 2017

Amazing Adobe Earnings Beat Again

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Adobe reported QE May 2017 financial results on June 20


Summary
    • Adobe reported another earnings beat with an exceptional YoY increase in Non-GAAP earnings per share of +44%.
    • Total revenues were an all-time high of $1.77 billion which is a YoY increase of +27%.
    • ADBE stock has been in an extraordinary long-term uptrend and is about +37% YTD 2017 and +44% for the past 12 months.
    • I continue to consider ADBE a Buy and have a Positive outlook on Adobe’s future financial performance.

Earnings per Share

Adobe (ADBE) reported earnings for the quarter ending June 2, 2017 on Tuesday, June 20. CEO Shantanu Narayen reported another beat with a strong quarter including a YoY increase in Non-GAAP earnings per share (+44%) and a YoY increase in revenues (+27%). The analysts had estimated +34% and +24% while the Adobe management outlook was +32% and +24%, respectively.

“Adobe continues to execute well, with another quarter of record revenue and operating profit in Q2. We’re excited about the strong business momentum we have as we enter the second half of fiscal 2017 and remain confident in our ability to drive strong revenue and earnings growth in the future”, said CFO Mark Garrett.

The Non-GAAP earnings per share of $1.02 was a beat over the $0.95 projected by analysts and was well above the prior four-quarter average of $0.83. This is another all-time high. Non-GAAP earnings per share have been $1.02, $0.94, $0.90, $0.75 for the past four quarters, in reverse chronological order.


What is the Adobe Management Guidance for next quarter?
Estimated QE August 2017 Earnings per Share (Non-GAAP):
ADBE Estimate: $1.00
Prior Year $0.75 = +33% YoY
Prior Quarter $1.02 = -2% QoQ


Earnings per Share Year Over Year Growth Rate (%)

The Non-GAAP EPS was an impressive +44% increase year over year, from $0.71 to $1.02. The prior four-quarter average was also +44%. Adobe management is projecting a year over year growth rate of +33% for next quarter, which would be a slowing. However, Adobe has been beating the EPS estimates each quarter.


Revenues

Total revenues were a record $1.77 billion and a beat over the $1.73 billion projected. Revenues had previously averaged $1.54 billion for the prior four quarters reported.


What is the Adobe Management Guidance for next quarter?
Estimated QE August 2017 Total Revenues (GAAP & Non-GAAP):
ADBE Estimate: $1.815B
Prior Year $1.464B = +24% YoY
Prior Quarter $1.772B = +2% QoQ


Revenues by Segment

Quarterly revenues by segment are comprised of Digital Media (68%), Digital Marketing (29%), and Print and Publishing (3%). Adobe management continues their leadership in the digital transformation. CEO Shantanu Narayen stated in the most recent earnings call, “Digital transformation continues to be the burning agenda for creative professionals, enterprises, governments and educational institutions. Adobe is now the go-to company for creating world-class digital customer journeys from design to delivery to measurement and monetization.” As can be seen in the chart below, the Digital Media segment is driving the revenues, and earnings, upwards.


Revenues by Region

Quarterly revenues by region are comprised of the Americas (58%), Europe, Middle East, Africa (27%), and Asia Pacific (15%). As can be seen in the chart below, the Americas is driving the revenues, and earnings, upwards.


Return on Assets and Margins

Because Non-GAAP earnings are higher than GAAP earnings, the return on assets is also higher. For the QE May 2017, the annualized return on average assets was an improved +14.2% for Non-GAAP and +11.3% for GAAP. Both measures have been increasing as the overall profitability of Adobe has increased and reached new highs. For both Non-GAAP and GAAP, gross margin has remained relatively stable, with a slight improvement to 86%. Operating margins are 28% and 37% for GAAP and Non-GAAP, respectively. Net margins are now 21% and 29%, respectively. Both operating and net margins for both GAAP and Non-GAAP have improved overall in the long-term.

Conclusion

Financial Performance: Amazing Adobe continues to, well, amaze. Non-GAAP and GAAP financial performance has steadily increased and each quarter is a record quarter for total revenues and earnings per share.

Financial Position: Financial position is strong with a capital to assets ratio of 58%. Total assets of $13.4 billion are at a record high. Working capital of $3.0 billion is adequate. The current assets to total assets ratio is 45%, so there is liquidity. The total debt ratio, both short-term and long-term, is an acceptable 14% of total assets.

Dividends: Adobe does not pay dividends.

Stock Repurchases: Adobe repurchased $300 million of common stock in this most recent QE May 2017. The ongoing repurchases equal $1.2B for the past four quarters. The repurchases for the past four quarters have been $300M, $200M, $300M, $400M, in reverse chronological order.

Stock Price: ADBE stock has been in an exceptionally long-term upward trend. ADBE does have price support from stock repurchases and institutional buyers. The stock beta is a low 1.03, so this stock is steady and there normally is not much excess volatility

Stock Evaluation and Opinion: As an intermediate-term to long-term investor, and from that perspective, I consider Adobe stock to be a Buy, compared to Hold or Sell. I am Positive on Adobe stock, compared to Neutral or Negative. Both the revenues and earnings per share growth has been exceptional but may be slowing. Management projections for revenues and earnings per share for next quarter is mildly disappointing. However, Adobe management guidance tends to be low and set up for a beat each quarter. Even at a possible slowing financial performance growth rate, Adobe continues to be a top tech financial performer. (Graphs created by author using data from Adobe. Time frames generally are intermediate-term = 1-3 months and long-term = 3+ months for purposes of the above discussion.)

About Adobe

Adobe is changing the world through digital experiences. For more information, visit www.adobe.com.


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