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What to Watch When Adobe Reports Q1 Earnings

By Danny Vena – Updated Apr 12, 2019 at 6:07PM

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There's a reason the company continues to outperform expectations.

Over the past several years, Adobe Systems (ADBE -3.29%) has been remarkably consistent in beating the S&P 500, accomplishing this feat every year since 2012. That was the same year Adobe switched from selling cellophane-wrapped software and moved its business to the cloud, making its record all the more impressive.

Shareholders will be looking to see if the company keeps up its impressive streak, as Adobe is scheduled to release the financial results of its recently completed first quarter after the market close on Thursday, March 14. Let's recap the company's fourth-quarter report and look at recent news to see if it provides any insight into what investors can expect when the company reports earnings.

A multistory building with the Adobe logo at the top.

Image source: Adobe.

Like a broken record

For its fiscal fourth quarter (which ended Nov. 30), Adobe reported record revenue of $2.46 billion, up 23% year over year. This was the 15th successive quarter of increasing revenue. This performance easily exceeded both analysts' consensus estimates and management's forecast of $2.43 billion and $2.42 billion, respectively. This flowed to the bottom line with adjusted earnings per share of $1.90, which also easily topped expectations. 

Adobe saw strong growth across its product portfolio, as revenue in the digital media segment grew 23% year over year to $1.71 billion, while the digital experience segment produced revenue of $690 million, up 25% compared to the prior-year quarter. Both segments exceeded managements growth forecast of 22% and 20%, respectively.

Recurring revenue is the foundation upon which Adobe is building its future growth. The company achieved a record net new digital media annualized recurring revenue (ARR) of $430 million, and after adjusting for year-end currency fluctuations, Adobe closed out the year with $6.71 billion in ARR. Building on its base of recurring revenue is one of the largest contributors to Adobe consistently exceeding expectations.

Check out the latest earnings call transcript for Adobe Systems.

Feel the magic

Adobe recently announced that Gartner had named the company as a leader in its Magic Quadrant for Digital Experience Platforms for the second consecutive year. The company was also ranked highest for its "completeness of vision" among its peers. While this industry accolade won't necessarily translate directly to increased revenue or profit, it does speak to the quality of Adobe's platform. It will provide potential customers with one additional data point to consider when assessing the suitability of Adobe's products and services.

Earlier this year, Adobe announced that it had acquired Allegorithmic, maker of a 3D design tool that helps create the textures used by video game creators, visual effects artists, animators, and designers. Adobe had previously invested in the company and the product is already integrated with Adobe Dimension. This is yet another example of a snap-on acquisition that will expand Adobe's existing ecosystem.  

What the quarter could hold

For the first quarter, Adobe forecast revenue of $2.54 billion, which would represent year-over-year growth of 22%. Within the company's various segments, management is expecting revenue from the digital media segment to grow 20% and its digital experience segment to increase 31%, both year over year. The company is anticipating GAAP earnings per share of $1.14 and adjusted earnings per share of $1.60. Adobe is also expecting net new digital media ARR of $330 million. 

To put that into perspective of the broader market's sentiment toward the company, analysts' consensus estimates are calling for revenue of $2.55 billion, up 22.5%, with adjusted earnings per share clocking in at $1.62, with both edging out management's forecast. 

With a stellar track record for increasing its recurring revenue and beating the broader market, this quarter likely won't be any different. We'll have all the details when Adobe reports earnings after the market close on Thursday, March 14.

Danny Vena owns shares of Adobe Systems. The Motley Fool owns shares of and recommends Adobe Systems. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

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