Adobe Systems Incorporated (ADBE +3.17%) announced better-than-expected fiscal third-quarter 2017 results on Tuesday after the market closed, punctuated by healthy cash flow and another company revenue record on sustained momentum for its cloud-based subscription products.
But while Adobe also offered encouraging forward guidance -- and keeping in mind shares are up more than 50% so far in 2017 -- Adobe stock is down a modest 3% in after-hours trading as of this writing. Let's zoom in for a closer look at what the creative software company accomplished in its latest quarter and what investors can expect going forward.
IMAGE SOURCE: ADOBE SYSTEMS.
Adobe Systems results: The raw numbers
| Metric |
Fiscal Q3 2017* |
Fiscal Q3 2016 |
Year-Over-Year Growth |
|---|---|---|---|
|
Revenue |
$1.841 billion |
$1.464 billion |
25.8% |
|
GAAP net income |
$419.6 million |
$270.8 million |
54.9% |
|
GAAP earnings per share (diluted) |
$0.84 |
$0.54 |
55.6% |
Data source: Adobe Systems. *For the quarter ended Sept. 1, 2017.
What happened with Adobe Systems this quarter?
- On an adjusted (non-GAAP) basis, which excludes items like stock-based compensation, net income per share climbed 46.7% to $1.10.
- By comparison, Adobe in June told investors to expect lower revenue of of $1.815 billion, GAAP earnings of $0.72 per share, and adjusted earnings of $1.00 per share.
- Digital media segment revenue climbed 28% year over year to $1.27 billion, above guidance for 26% growth. Adobe Experience Cloud revenue also increased 26% to $508 million, above guidance for 25% growth.
- Digital media annualized recurring revenue (ARR) increased $308 million sequentially from fiscal Q2, to $4.87 billion exiting the quarter.
- Generated strong cash flow from operations of $704 million, while deferred revenue increased 23% to roughly $2.2 billion, driven by strength in digital media.
- Adobe repurchased 2.1 million shares during the quarter for $298 million, leaving roughly $2.2 billion remaining under its existing repurchase authorization.
What management had to say
"Adobe delivered another record quarter with stellar year-over-year revenue growth of 26 percent," stated CEO Shantanu Narayen. "The imperative to deliver intelligent, intuitive and effective customer experiences is key to the C-suite agenda of digital transformation, and Adobe's Cloud offerings are critical to that business mandate."
CFO Mark Garrett added, "Our results in Q3 once again reflect the leverage of our financial model, with record revenue driven by our cloud-based subscription offerings, strong earnings and cash flow from operations."
Looking forward
For the fiscal fourth quarter of 2017, Adobe expects revenue of roughly $1.95 billion, assuming digital media segment revenue growth of 25% and Adobe Experience Cloud marketing revenue growth of 17%. For perspective on the latter deceleration, note that Experience Cloud revenue growth will face a difficult comparison given a material amount of perpetual license revenue Adobe recognized in the same year-ago period.
On the bottom line, that should translate to GAAP earnings per share of $0.86 and adjusted earnings per share of $1.15. By comparison -- and though we don't usually pay close attention to Wall Street's demands -- consensus estimates were less optimistic, calling for lower fiscal Q4 earnings of $1.10 per share on roughly the same revenue.
In the end, there was little not to like about this quarter from an investor's perspective. Adobe's cloud solutions effectively maintained their momentum, which means more predictable revenue from quarter to quarter as the company leaves its older perpetual licensing model in the rearview mirror. So while the initial share price decline might indicate otherwise, I think Adobe shareholders should be pleased with their company's continued outperformance.
