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Adobe Has a Lot to Prove This Week -- 3 Things to Watch

By Danny Vena - Mar 9, 2020 at 9:00AM

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The company's record-breaking ways will likely continue, but will it be enough to lift the stock?

Adobe (ADBE -0.83%) performed admirably last year for a company with a market cap over $160 billion, as it gained nearly 46% in 2019, far exceeding the 29% gains of the S&P 500 and driving its stock to new all-time highs in the process.

What propelled Adobe to these lofty heights? The creative software leader delivered four consecutive quarters of record-breaking growth, closing out 2019 as its best year ever.

Investors will be watching closely to see if Adobe can continue its record performance when the company releases its first quarter 2020 results after the market close on Thursday, March 12. Let's look at three things investors will be watching when Adobe reports earnings.

Adobe headquarters with the company logo at the top of the building.

Image source: Adobe.

1. Record-breaking revenue growth

The single biggest factor that has contributed to Adobe's rapid rise has been its ability to continue its robust revenue growth, which has been especially impressive for a company its size. Even more telling is that Adobe has generated record revenue in every quarter going back to the third quarter of 2015, and delivering year-over-year revenue growth of more than 20% for 18 consecutive quarters.

The company will need to deliver more of the same in order to push its stock higher. For the fiscal first quarter, Adobe is guiding for revenue of about $3.04 billion, which would represent growth of 17% year over year. While the company has a long-standing practice of under-promising and over-delivering on its results, this would represent the slowest rate of growth in nearly five years. 

2. Robust recurring revenue

Strong recurring revenue is the lifeblood of any subscription-based business, and Adobe's software-as-a-service (SaaS) offerings are no different. It's also the reason Adobe has been able to put up quarter after quarter of record-breaking revenue. As more and more users sign up for ongoing subscriptions, the company is able to build a strong and ever-growing revenue base.

To close out the fourth quarter, annualized recurring revenue (ARR) in Adobe's digital media segment grew 25% year over year to $8.4 billion. ARR within the creative segment climbed to $7.31 billion, up 23%, and document cloud ARR grew even faster, up 38% to $1.09 billion.

Adobe is expecting more of the same for its fiscal first quarter with the digital media segment to deliver net new ARR of about $1.55 billion, though it doesn't provide guidance for the smaller segments.

3. A growing backlog

One of the defining characteristics of subscription-based businesses is the growing backlog of revenue, also known as remaining performance obligation (RPO) -- which consists of subscription revenue that is under contract but has not yet been recognized on the income statement.

Adobe ended the fourth quarter with RPO of $9.82 billion, which soared by $1.05 billion quarter over quarter. The company doesn't provide guidance for the growth of its RPO, as there are too many moving parts and the metric is reliant on how many contracts are signed during the quarter. That said, investors will be keeping a close eye on the figure as decelerating RPO growth could signal trouble ahead for the company.

It's inevitable

No business should be expected to continue to grow like a startup indefinitely, and Adobe is no exception. The frenetic pace of the company's growth has decelerated in recent quarters, and there's little doubt the law of large numbers will eventually kick in.

That said, Adobe has a long history of being conservative with its guidance, so it wouldn't be a surprise if the company were to deliver results that far exceed its forecasts. Stay tuned.

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