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Adobe (ADBE) Up 11.7% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Adobe Systems (ADBE). Shares have added about 11.7% 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 recent earnings report in order to get a better handle on the important drivers.

Adobe Q1 Earnings and Revenues Surpass Estimates

Adobe reported first-quarter fiscal 2021 non-GAAP earnings of $3.14 per share, beating the Zacks Consensus Estimate by 12.5%. Further, the figure improved 11.7% sequentially and 38% on a year-over-year basis.

Total revenues were $3.91 billion, up 26% from the year-ago quarter and 14% from the previous quarter. The figure surpassed the Zacks Consensus Estimate of $3.77 billion.

The strong performance of Adobe Creative Cloud, Document Cloud and Experience Cloud drove year-over-year growth. Further, accelerating subscription revenues contributed to the results.

Top Line in Detail

Adobe reports revenues in three categories — subscription, product, and services & support.

Subscription revenues were $3.6 billion (accounting for 91.8% of its total revenues), up 31.2% on a year-over-year basis.

Product revenues totaled $155 million (4% of revenues), up 8.4% year over year.

Services & support revenues were $166 million (4.2% of revenues), declining 23.1% from the prior-year quarter.

Segment Details

Digital Media: The segment generated revenues of $2.9 billion, which improved 32% on a year-over-year basis. The segment comprises Creative Cloud and Document Cloud. Notably, Digital Media annualized recurring revenues (ARR) increased to $10.7BILLION.

Creative Cloud generated $2.4 billion of revenues, up 31% year over year. Additionally, Creative ARR came in at $9.1 billion, with a net new ARR of $337 million. The strong performance of core creative categories, including Adobe Lightroom and Photoshop, contributed to the segment’s revenues. Moreover, growth in creative mobile applications was a tailwind. Further, solid momentum across the company’s student and Team offerings remained positive. Further, an uptick in the demand for Premiere Pro and Adobe Stock aided creative revenue growth.

Document Cloud’s revenues were $480 million, up 37% from the prior-year quarter. Moreover, Document ARR came in at $1.6 billion, with a net new ARR of $98 million. The growing adoption rate of Acrobat subscription and solid traffic growth in the Acrobat Web experience remained positives.Further, the rising demand for Acrobat Mobile and Adobe Scan apps contributed well. Also, strength across Adobe Sign drove top-line growth.

Digital Experience: This segment generated revenues of $934 million, up 24% on a year-over-year basis. The segment is comprisedof Adobe Experience Cloud. Experience Cloud subscription revenues were $812 million, which rose 27% from the year-ago quarter. Strong momentum across Adobe Experience Platform contributed well. Further, the growing demand for the company’s commerce offerings remained a major positive. Additionally, benefits from Workfront buyout were tailwinds.

Operating Details

Gross margin was 88.6%, which expanded 320 basis points (bps) on a year-over-year basis.

Adobe incurred operating expenses of $2 billion, reflecting a 17.7% year-over-year increase. As a percentage of total revenues, research & development, sales & marketing,and general & administrative expenses contracted 130 bps, 80 bps and 140 bps from the prior-year quarter to 15.9%, 26.9% and 7.4%, respectively.

As a result, adjusted operating margin was 46.8%, expanding 650 bps year over year.

Balance Sheet & Cash Flow

As of Mar 5, 2021, cash and short-term investment balance was $4.96 billion, down from $5.99 billion as of Nov 27, 2020. Trade receivables were $1.5 billion, up from $1.4 billion recorded in the fiscal fourth quarter.

Cash generated from operations was $1.77 billion in the fiscal first quarter versus $1.78 billion in the fiscal fourth quarter. In the reported quarter, the company repurchased 1.9 million shares.

Guidance

For second-quarter fiscal 2021, Adobe projects total revenues of $3.72 billion.

Adobe expects year-over-year revenue growth of 21% from Digital Media. The Digital Experience segment’s revenues are expected to grow 18% on a year-over-year basis, while Digital Experience subscription revenues are likely to increase 20%.

Further, management expects non-GAAP earnings of $2.81 per share.

For fiscal 2021, Adobe projects total revenues of $15.45 billion.

Adobe expects year-over-year revenue growth of 22% from Digital Media. The Digital Experience segment revenues are expected to grow 20% on a year-over-year basis, while Digital Experience subscription revenues are likely to increase 23%.

Further, management expects non-GAAP earnings of $11.85 per share.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

Currently, Adobe has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Adobe has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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