Few companies can boast a transformation as effective as Adobe's (ADBE 0.41%). The migration from selling its products to licensing them via the cloud, a strategy the company adopted in 2013, positioned Adobe for the success it enjoys today. Since that decision, Adobe stock has gained more than 400%, and shows no signs of slowing.
Adobe has consistently outperformed expectations recently, topping both its own guidance and analyst expectations in each of the previous four quarters.
Investors will be watching closely to see if the company can keep up its winning streak when Adobe releases its fourth-quarter and full-year fiscal 2018 results, after the market close on Thursday, Dec. 13. Let's take a look at the company's recent results, and see if they provide any clues as to what we can expect when Adobe reports its earnings.
A look back
For its fiscal third quarter (which ended Aug. 31), Adobe again produced record results, with revenue of $2.29 billion, up 24% year over year. This topped both the high end of management's forecast of $2.24 billion, and analysts' consensus estimates calling for $2.25 billion. This was the 16th consecutive quarter of sequentially higher revenue. Profitability was similarly robust, with adjusted earnings per share of $1.73, which also exceeded Adobe's guidance for $1.68 and investor expectations of $1.69.
The company's better-than-expected performance was the product of strong results in both of Adobe's operating segments. The digital media segment, comprising its Creative Cloud and Document Cloud, grew revenue 27% year over year. The digital experience business, which houses the Analytics Cloud, Marketing Cloud, and Advertising Cloud, grew 21% overall compared to the prior-year quarter.
Another key factor was subscription revenue, which has become the lifeblood of Adobe's financial success. The company added $339 million in annualized recurring revenue (ARR), which is now at $6.4 billion. Adobe also reported that 90% of its revenue now came from recurring sources, up from 89% in the prior-year quarter.
Adobe acquired e-commerce platform Magento Commerce earlier this year, in a deal valued at $1.68 billion. Magento provides the digital tools necessary to create and manage an online store, including handling purchases and returns, processing payments, and scheduling shipping. This move into the realm of e-commerce opens up a whole new opportunity for Adobe, filling in a noticeably missing piece in its offerings, and allowing the company to provide a wider range of tools from conception to sale. The company also said last quarter that it took lower-than-expected writedowns in Magento's recurring revenue, so expect Adobe to provide more details on that front.
What the quarter could hold
Adobe tends to be conservative in its guidance, so there's pretty good chance the company will surpass expectations yet again.
For the fourth quarter, Adobe is anticipating revenue of $2.42 billion, which would represent year-over-year growth of 20%. It also expects adjusted earnings per share of $1.87. Drilling down a bit, the company is guiding for sales in the digital media segment to increase 22% compared to the prior-year quarter, and revenue from the digital experience segment to climb 20% year over year.
To put that into the perspective of the overall feeling on Wall Street (though we shouldn't buy into any of its short-term mind-set), analysts' consensus estimates are for revenue of $2.43 billion, about $10 million higher than management forecast, and adjusted earnings per share of $1.88.
Adobe has had a strong year thus far, and that success has been reflected in its stock price, which has risen 37% compared to the essentially flat performance of all three major indexes. There isn't any reason to believe that Adobe won't end the year on a strong note.