Adobe's (ADBE 1.43%) decision several years ago to move to a software-as-a-service (SaaS) model has served the company -- and investors -- well, as the transition to cloud computing continues en masse. The company, which is best known for its suite of creative software and its ubiquitous portable document format (PDF), has also made a habit of exceeding its own guidance as well as investor expectations, and this quarter was no different.
For the just-completed third quarter, Adobe reported record revenue of $2.29 billion, up 24% year over year, exceeding its forecast of $2.24 billion and analysts' consensus estimates of $2.25 billion. The company delivered GAAP earnings per share of $1.34 and adjusted earnings per share of $1.73. This easily surpassed Adobe's forecast for GAAP earnings per share of $1.27 and adjusted profits of $1.68 per share, while also exceeding Wall Street's expectations for adjusted earnings per share of $1.69.
Image source: Adobe.
Across-the-board strength
Adobe again achieved broad-based growth. Revenue in the digital media segment climbed to $1.61 billion, a record showing and up 27% year over year, and the digital experience segment also achieved record revenue of $614 million, up 21% compared to the prior-year quarter. Growth in both segments easily surpassed Adobe's guidance, which called for increases of 25% and 15%, respectively.
Within the digital media segment, revenue from the creative business hit a record $1.36 billion, up 28% year over year, while document cloud revenue also notched a record -- $249 million, up 21% over the prior-year quarter. Adobe saw strong net new subscriptions across user segments and geographies, as well as strong retention of trial users.
The digital experience segment also performed well. Adobe's experience cloud revenue grew to $614 million, up 21% year over year. Subscription revenue in the segment was strong, increasing 25%. Success during the quarter was driven by growth in the analytics cloud, marketing cloud, and advertising cloud.
Adobe added $339 million in net new digital media ARR (annualized recurring revenue), growing the total to $6.4 billion. The company also produced 90% of its revenue from recurring sources during the quarter, up from 89% last quarter.
The company continues to see significant opportunities in customer retention, new customer acquisition, and conversion from trials. Adobe also believes that its digital marketing campaigns, targeted promotions, and new product offerings will continue to drive additional growth.
Looking back at the quarter, Adobe CFO John Murphy said, "Our strong momentum continued into the second half of fiscal 2018 as Adobe delivered another quarter of sustained revenue growth, strong earnings, and cash flow of nearly $1 billion."
Adobe CEO Shantanu Narayen at Adobe Summit 2018. Image source: Adobe.
What the future holds
For the upcoming fourth quarter, Adobe projects revenue of approximately $2.42 billion, which would be an increase of 20% year over year, but also includes results from Magento, which the company acquired earlier this year. The company expects revenue in the digital media segment to jump 22% and the digital experience segment to increase 20%, both compared to the prior-year quarter. GAAP earnings per share are estimated to be about $1.42, while adjusted profits should come in at about $1.87 per share. Adobe is also anticipating annualized recurring revenue of $385 million. For comparison, analysts' consensus estimates were looking for $2.41 billion and adjusted earnings per share of $1.86.
Adobe continues to produce growth rates that are usually reserved for much-smaller companies. With its continued product innovation, ability to attract and retain customers, and a growing base of recurring revenue, Adobe is laying the foundation for an increasingly successful future.
