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5 Things Adobe Systems Management Wants You to Know

By Steve Symington – Jun 26, 2019 at 9:00AM

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Read on for invaluable insight into the creative software leader's latest quarter.

When Adobe Systems (ADBE -3.29%) released its latest better-than-expected quarterly report last week, shares of the creative software specialist understandably surged to fresh all-time highs in response. After all, revenue soared 25% year over year, to $2.744 billion, above guidance for an even $2.7 billion, while adjusted earnings per share climbed 10% to $1.83, $0.06 per share above its target.

Adobe CEO Shantanu Narayen credited an "explosion of creativity across the globe," adding that the company remains well positioned for the second half given its "innovative technology platform, exciting product roadmap, and strong ecosystem of partners."

Now that the digital ink has dried, it's a great time to dig deeper to better understand what's driving Adobe today, as well as what we should be watching in the coming quarters.

To that end, here are five important points management raised during their subsequent conference call with analysts.

Adobe CEO Shantanu Narayen standing in the company's contemporary office space.

Adobe CEO Shantanu Narayen. Image source: Adobe Systems.

1. On Adobe's (many) strategic growth drivers

Notable growth drivers in Q2 across conversion, upsell and retention included new user growth driven by numerous global initiatives to generate demand, including targeted campaigns and promotions, leveraging the funnel of users coming to Creative Cloud through mobile apps and online engagement; and continued focus on new categories including immersive media and new segments such as social media creators; Creative Cloud Photography plan subscriptions; Adobe Premiere Pro single app subscriptions in the video category; Creative Cloud enterprise, including customer acquisition, seat expansion and services adoption; and adoption of Adobe Stock, where revenue and subscription growth rates remain strong.

-- CFO John Murphy

Here, Murphy was specifically describing growth drivers from within Adobe's burgeoning digital media segment, where revenue soared 22% year over year, to $1.89 billion, representing nearly 69% of Adobe's total sales. Given Adobe's unrivaled digital-media product portfolio and deliberate, multifaceted strategy for driving sales, it's hardly surprising Digital Media segment revenue growth outpaced guidance for a 20% gain.

2. On the value of recent acquisitions

The acquisitions of Magento and Marketo have significantly increased our value to existing customers, helped us attract new logos, and expanded Adobe's addressable opportunity. Magento adds to our Experience Cloud vision by allowing us to make every moment personal, and every experience shoppable in addition to attracting a large and vibrant developer community to Adobe. [...] With the addition of Marketo, Adobe provides the leading marketing engagement platform for both B2B and B2C customers. We've deepened the integration between Adobe Marketing Cloud and Marketo Engage.

-- Chairman and CEO Shantanu Narayen

For perspective, Adobe announced its agreement to acquire digital commerce leader Magento for $1.68 billion almost exactly a year ago, a move Narayen explained at the time would make Adobe the "only company with leadership in content creation, marketing, advertising, analytics, and now commerce." Then it followed last October by spending $4.75 billion to acquire business-to-business (B2B) company Marketo, results from which are now included under its Digital Experience segment.

In any case, it's clear at this stage that Adobe has wasted no time deeply integrating both Magento's and Marketo's platforms into its own workflows, extending its reach as a one-stop creative shop in the process.

3. On social media, app initiatives

We've expanded our vision of platforms to include social media channels like Facebook, Instagram and YouTube. Premiere Rush is rapidly becoming the solution of choice for YouTubers and social video creators. Premiere Rush is now available on Android in addition to iOS, Mac and Windows. Experience design is one of the most explosive creative categories, and we continue to innovate in this space with Adobe XD, our design system for UX and UI. We released a major update to Adobe XD in May, enabling teams to create and share designs to enhance both productivity and collaboration.

-- Shantanu Narayen

Perhaps no digital channels have enjoyed such meteoric growth -- or fueled the "explosion in creativity" Narayen described above -- as much as social media or web and mobile apps in recent years. And while Adobe is best known for its flagship Photoshop imaging and photo editing software, it has astutely positioned itself with Premier Rush and Adobe XD as the central enabler of video content and web/app user interface creators.

4. On the blip in deferred revenue

Deferred revenue exiting Q2 was $3.13 billion. The sequential decline in deferred revenue was a result of timing rather than business performance due to fewer billing cycles in our second quarter. The impact was more than offset by an increase in unbilled backlog.

-- John Murphy

Adobe's deferred revenue -- a key metric to help calculate its future revenue growth -- declined around $90 million sequentially from $3.22 billion last quarter. Though this might normally be cause for concern as a sign of stalling momentum from Adobe's subscriber base, Murphy was quick to point out it was simply a matter of billing-cycle timing this quarter, which will likely mean a future quarter of slightly more exaggerated deferred revenue growth.

5. On that light forward guidance

In Q3 FY19, we are targeting revenue of approximately $2,800 million [...] and non-GAAP earnings per share of approximately $1.95. As usual, we are not updating annual targets at this time of the year. We are pleased with our first half performance and we expect our first half momentum to continue in the second half, with typical seasonality in Q3 and strength in Q4. We continue to expect sequential operating margin growth as we move through the second half of the year. 

-- John Murphy

We don't normally pay close attention to Wall Street's targets, but heading into last week's report, most analysts were anticipating slightly higher fiscal third-quarter 2019 revenue of $2.83 billion with adjusted (non-GAAP) earnings of $2.05 per share.

But here again, Adobe didn't update its full fiscal year 2019 outlook (it's worth noting it usually doesn't at this time of the year). Coupled with Murphy's indication that they're "pleased" with their first-half results and expect to end the year strong with continued momentum, it seems the company is betting on a big second half to close that gap.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool recommends Adobe Systems. The Motley Fool has a disclosure policy.

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