Adobe Systems (NASDAQ:ADBE) announced strong fiscal first-quarter 2019 results on Thursday after the market closed, detailing its ongoing shift toward recurring revenue sources as its cloud-based products continue to gain steam. The creative software leader also modestly increased its full-year earnings outlook.

With shares down slightly in after-hours trading right now, let's pan in for a more detailed look at how Adobe kicked off its new fiscal year.

Adobe front desk with large illuminated its logo on the wall


Adobe Systems results: The raw numbers

Metric Fiscal Q1 2019* Fiscal Q1 2018 Year-Over-Year Growth
Revenue $2.60 billion $2.08 billion 25%
GAAP net income $674.2 million $583.1 million 15.6%
GAAP earnings per share (diluted) $1.36 $1.17 16.2%


What happened with Adobe Systems this quarter?

  • Adobe adopted new ASC 606 accounting standards at the start of this fiscal year. Based on the previous (ASC 605) standard, revenue was a company-record $2.58 billion, well above guidance provided in December for $2.54 billion.
  • Adjusted for items like stock-based compensation and acquisition expenses, Adobe's (non-GAAP) net income was $844 million, or $1.71 per share -- or $1.65 per share under the previous accounting standard -- well above its $1.60-per-share target.
  • Digital media segment revenue increased 22% to $1.78 billion, above guidance for 20% growth, including Creative revenue of $1.49 billion and Document Cloud sales of $282 million.
  • Ninety-one percent of Adobe's revenue this quarter came from recurring sources, up from 90% last quarter.
  • Digital media annualized recurring revenue (ARR) rose $357 million sequentially from last quarter to $7.07 billion.
  • Digital experience segment sales increased 34% to $743 million, above guidance for 31% growth.
  • Deferred revenue jumped 25% year over year to $3.22 billion.
  • Adobe generated operating cash flow of $1.01 billion, and repurchased 2.1 million shares for $491 million during the quarter.

Check out the latest earnings call transcript for Adobe Systems.

What management had to say

"Adobe is fueling the creative economy, driving the paper-to-digital revolution and enabling businesses to transform through our leadership in customer experience management," stated Adobe CEO Shantanu Narayen. "Our results in Q1 reflect continued momentum across Adobe Creative Cloud, Document Cloud and Experience Cloud."

Looking forward

For the second quarter of fiscal 2019, Adobe expects revenue of roughly $2.7 billion, assuming a 20% increase in the digital media segment revenue and 32% growth from its digital experience business. That should translate to quarterly adjusted earnings per share of $1.77. Adobe was quick to point out, however, that this guidance includes the negative impact of lost deferred revenue and costs related to its recent acquisitions of Magento Commerce and Marketo -- so operating margin should improve in the second half of the year. Nonetheless -- and though we don't usually pay close attention to Wall Street's demands -- most analysts were modeling higher fiscal Q2 earnings of $1.88 per share on revenue of $2.72 billion.

Finally, Adobe revised the preliminary annual guidance it provided during last quarter's call; the company reiterated its target for full fiscal-year 2019 revenue of $11.15 billion (including 20% growth in Digital Media revenue and 34% growth in Digital Experience segment sales), and increased its outlook for GAAP earnings per share to be $5.59 (up from $5.54 previously), with adjusted earnings per share of $7.80 (up from $7.75 previously).

To be clear, some investors might balk at Adobe's seemingly light near-term guidance. But after coupling that news with its relative outperformance to start the year -- which effectively reminds us of Adobe's propensity for underpromising and overdelivering -- this report offers no reason for patient investors to doubt its long-term vision.

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