Adobe Systems Incorporated Earnings Justify ADBE’s Crazy Strength

Adobe stock - Adobe Systems Incorporated Earnings Justify ADBE’s Crazy Strength

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A handful of times late last year I touted Adobe Systems Incorporated (NASDAQ:ADBE), agreeing that Adobe stocks was overbought and overvalued, but convinced it just didn’t matter.

Looks like the market’s on board with the thesis. Despite the frothy valuation (even on a forward-looking basis) and the 86% gain it’s dished out over the course of the past twelve months, ADBE stock is up another 4% today in the wake of Thursday evening’s first-quarter report. Growth is at hand, and Adobe handily topped earnings and revenue estimates.

Better still, Adobe did so in the very way investors were hoping it would.

Adobe Earnings Recap

For the quarter ending in early March, Adobe turned record-breaking revenue of $2.08 billion into operating income of $1.55 per share. The top line was up 24% year-over-year, from the prior year’s tally of $1.68 billion. And per-share profits grew 65% from the prior year’s Q1 bottom line of 94 cents. Moreover, analysts were only calling for sales of $2.05 billion and earnings of $1.44 per share of Adobe stock.

On an absolute basis, net income grew from $398.5 million to $583.1 million.

CEO Shantanu Narayen commented on the results:

“Adobe’s outstanding growth is driven by enabling our customers to be more creative, work smarter and transform their businesses through our relentless focus on delivering innovation and intelligence across our solutions.”

A Tale of Two Products

Adobe first cultivated the use of the flexible PDF. But the company is so much more than that technology. It’s the name behind entire productivity and creativity software suites.

Its flagship platform is its Digital Media collection, which includes software like PhotoShop and Illustrator, saw revenue of $1.46 billion. Its newer Digital Experience platform produced revenue of $554 million, up 16% from year-ago levels.

The Digital Experience suite is a business-minded collection of tools that offers clients/users greater insight about their customers and allows for the customization of each customer’s experience with that organization. It competes with the likes of Microsoft Corporation (NASDAQ:MSFT) and Oracle Corporation (NYSE:ORCL), but there’s really no comparison.

Christopher Rossbach, chief investment officer of private investment firm J Stern, opined of the first quarter numbers:

“Adobe’s strong quarter strengthens our conviction that its two businesses can generate sustainable double-digit revenue growth, with even greater profit growth.”

Perhaps more important to current and would-be owners of Adobe stock, the company has gone the same route as its main competitors and moved toward recurring revenue, driven by “rented” access to cloud-based software.

Adobe’s annualized recurring revenue rate for its Digital Media tools is a healthy $5.72 billion, while the annualized recurring revenue for its Digital Experience product is $554 million. The former is up by $336 million from Q4’s pace, and the latter figure is up 16% year-over-year.

Recurring revenue is also generally more profitable, as it costs less to keep a customer than it does to gain a new one. Existing customers also make for relatively easy “upsells” to other services. As Narayen pointed out during the earnings call “Clearly, a lot of the new customer acquisition is a result of the Single App adoption.” Though without offering details, Narayen added that Adobe’s average revenue-per-user was indeed up for the quarter.

Looking Ahead for Adobe Stock

Adobe anticipates earning about $1.53 per share for the quarter currently underway, thanks to a revenue outlook of $2.15 billion.

Both outlooks are slightly better than analyst estimates for a profit of $1.50 per share of Adobe stock and sales of $2.13 billion. And, both would be well up from year-ago comparisons of $1.02 per share and a top line of $1.77 billion.

The company didn’t offer full-year guidance, but the pros are looking for sales of $8.77 billion and earnings of $6.28. Each is well up from fiscal 2017’s results.

Though ADBE stock is priced pretty richly at 36 times this year’s expected profits, somehow it’s difficult to blame the bulls for being excited enough to tack on even more gains.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.


Editor’s note: a previous version of this version made an error in the titled held by Christopher Rossbach.  He is the chief investment officer of J Stern, not the chief financial officer.

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