Adobe Systems Inc.
(ADBE) reported first-quarter 2014 earnings of 16 cents per share,
exceeding the Zacks Consensus Estimate by 4 cents. Adjusted
earnings per share exclude one-time items but include stock-based
compensation expense.
Revenues
Adobe reported revenues of $1.0
billion, down 4.0% sequentially and 0.8% year over year. Reported
revenues were at the higher end of management’s guided range of
$950.0 million to $1.0 billion and above the Zacks Consensus
Estimate of $971.0 million driven by accelerated adoption of
creative cloud subscription pricing model.
Products generated 47.1% of Adobe’s
revenues but were down 30.2% year over year. Subscription comprised
42.4% of total revenue, up 88.9% year over year while Services
& Support brought in the balance, down 2.5% year over year.
Revenues by
Segment
Digital Media
Solutions, Adobe’s largest segment, generated 64.1% of the
revenues in the quarter. Segment revenues were up 1.6% sequentially
to $641.0 million. The two major revenue earners within the segment
are the Creative family of products and Document Services
products.
In the Creative business, Creative
Cloud subscriptions continued to accelerate. The company ended the
first quarter with approximately 1844,000 paid subscriptions with
Creative Cloud for individuals and teams, an increase of 405K in
the quarter.
As announced earlier, the company
started to convert enterprise customers to Enterprise Term License
Agreements or ETLAs which led to increased adoption of its
enterprise Creative Cloud offering through ETLAs. ETLAs for
enterprise customers are term-based and allow customers to access
ongoing technology updates and represent the first phase of
migrating enterprise customers to Creative Cloud.
The increased subscription and ETLA
adoption helped to drive creative annualized recurring revenues or
ARR to a total of $987.0 million, up $186.0 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.
In the Document Services business
(includes Acrobat family and new cloud-based services such as
EchoSign), revenues were $194.0 million, down 2.0% 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 $164 million, up 14.7% sequentially.
The Digital
Marketing segment accounted for 31.3% of total
first-quarter revenue. Within the segment, Adobe Marketing Cloud is
the first component. Formerly known as Digital Marketing Suite, its
revenues were up 24% from the year-ago quarter to $267.0 million,
aided by increased demand for mobile devices. Mobile transactions
increased to 36% from 33% in the last quarter.
The second component, LiveCycle and
Connect businesses, generated revenues of $47.0 million in the
reported quarter. Management expects LiveCycle revenues to decline
further, but Connect revenues to remain relatively flat in the
upcoming quarter.
Print and
Publishing revenues were $45.0 million in the last
quarter.
Margins
Reported gross margin for the
quarter was 85.2%, up 70 basis points from 84.5% 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 $772.9 million, up 2.6% from the year-ago quarter’s $753.0
million. As a percentage of sales, research and development,
general and administrative as well as sales and marketing expenses
increased from the year-ago quarter. As a result, operating margin
plummeted to 7.9% from 9.7% in the year-ago quarter.
Net Income
On a GAAP basis, Adobe recorded net
income of $47.0 million (9 cents per share) compared with $65.1
million (13 cents) in the year-ago quarter.
On a pro-forma basis, Adobe
generated net income of $82.6 million compared with $110.1 million
in the year-ago quarter. Pro-forma earnings came in at 16 cents per
share compared with 22 cents in the year-ago quarter.
Balance Sheet
Adobe ended the quarter with cash
and investments balance of $3.13 billion versus $3.17 billion in
the previous quarter. Days sales outstanding (DSO) were 46 days
versus 44 days in the year-ago quarter and 52 days in the last
quarter. Deferred revenues increased $55.6 million to $831.1
million.
In the first quarter, cash
generated from operations was $251.7 million and capital
expenditure was $29.4 million. Additionally, the company
repurchased approximately 4.5 million shares for a total cost of
$263.0 million.
Guidance
For the second quarter, management
expects revenues in the range of $1.0 billion to $1.05 billion, up
2.5% sequentially at the mid-point. Additionally, management
expects total Digital Media to improve
sequentially.
In Digital
Marketing segment, management expects
Adobe Marketing Cloud revenues to increase sequentially but
LiveCycle and Connect revenues to decline sequentially.
Print and Publishing revenues are expected to be
relatively flat sequentially.
Accordingly, based on a share count
of 508–510 million, GAAP earnings are expected in the range of 6–12
cents per share, while non-GAAP earnings are expected in the range
of 26–32 cents per share. Analysts polled by Zacks expect non-GAAP
earnings of 12 cents, well below the mid-point of the guided
range.
Also, for the second quarter,
non-operating expense is expected in the range of $16–$18 million
and tax rate is expected to be approximately in the range of 28–29%
on a GAAP basis and 21% on a non-GAAP basis.
For fiscal 2014, Adobe maintains
its total revenue guidance to be flat year over year. GAAP earnings
are expected to be 27 cents per share and non-GAAP earnings to be
$1.10 per share.
Our
Recommendation
We find Adobe’s first-quarter
results decent with earnings and revenues exceeding the Zacks
Consensus Estimate. Management expects revenues to increase
sequentially in the upcoming quarter due to strong adoption of the
Creative Cloud.
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.
Also, we believe solid adoption of
the Creative Cloud could serve as a potential catalyst, going
forward. Adobe’s acquisition of Neolane will further enhance its
Adobe Marketing Cloud by integrating online and offline marketing
data and accelerating its entry into social advertising.
Currently, Adobe has a Zacks Rank
#2 (Buy). Other better-ranked stocks that are performing well at
current levels include Dealertrack Technologies
(TRAK), Open Text Corporation (OTEX) and
Pegasystems (PEGA). All these stocks sport a Zacks
Rank #1 (Strong Buy).
ADOBE SYSTEMS (ADBE): Free Stock Analysis Report
OPEN TEXT CORP (OTEX): Free Stock Analysis Report
PEGASYSTEMS INC (PEGA): Free Stock Analysis Report
DEALERTRACK HLD (TRAK): Free Stock Analysis Report
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