Adobe (ADBE) Q2 Earnings & Revenues Beat Estimates, Rise Y/Y

Adobe Inc. ADBE reported second-quarter fiscal 2022 non-GAAP earnings of $3.35 per share, beating the Zacks Consensus Estimate by 1.5%. Further, the figure improved 10.6% on a year-over-year basis but down 0.6% sequentially.

Total revenues were $4.39 billion, which surpassed the Zacks Consensus Estimate of $4.34 billion. Further, the figure was up 14% from the year-ago quarter and 2.9% from the previous quarter.

Top-line growth was driven by the strong performance of Adobe Creative Cloud, Document Cloud and Experience Cloud. Accelerating subscription revenues further benefited the results.

Adobe Inc. Price, Consensus and EPS Surprise

Adobe Inc. price-consensus-eps-surprise-chart | Adobe Inc. Quote

Top Line in Detail

Adobe reports revenues under three categories — subscription, product, and services & support.

Subscription revenues were $4.1 billion (accounting for 92.8% of the total revenues), up 15.6% on a year-over-year basis.

Product revenues totaled $146 million (3.3% of revenues), down 4.6% year over year.

Services & support revenues were $170 million (3.9% of revenues), increasing 4.9% from the prior-year quarter.

Segmental Details

Digital Media: The segment generated revenues of $3.2 billion, which improved 15% on a year-over-year basis. The segment comprises Creative Cloud and Document Cloud. Notably, Digital Media’s annualized recurring revenues (ARR) increased to $12.95 billion, in which net new ARR was $464 million.

Creative Cloud generated $2.61 billion of revenues, up 12% year over year. Creative ARR was $10.82 billion. The rising demand for Premiere Pro, driven by the growing momentum in video production, contributed well. Further, solid traffic growth and increasing monthly active users (MAU) on the Adobe Express platform and the Frame.io acquisition’s benefits remained positives. Strength across Substance 3D, owing to the solid demand for metaverse-ready content, was another positive.

Document Cloud’s revenues were $595 million, up 27% from the prior-year quarter. Document ARR was $2.13 billion. Strong growth in MAU across desktop, mobile and web contributed well. Further, the solid momentum across the Acrobat ecosystem drove top-line growth. The strong adoption of Adobe Sign was a positive. The strong momentum in PDFs on Acrobat Mobile was beneficial. The well-performing Document Cloud enterprise business contributed well.

Digital Experience: The segment generated revenues of $1.1 billion, up 17% on a year-over-year basis. The segment comprises Adobe Experience Cloud. Experience Cloud subscription revenues were $961 million, which rose 18% from the year-ago quarter. Strong demand for professional service, strengthening momentum of Experience Cloud in the healthcare industry and the growing adoption of Adobe Experience Manager drove top-line growth for the segment.

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Operating Details

The gross margin was 87.7%, which contracted 70 basis points (bps) on a year-over-year basis.

Adobe incurred operating expenses of $2.3 billion, reflecting a 16.8% year-over-year increase. As a percentage of total revenues, the figure expanded 100 bps to 52.8%.

Notably, the adjusted operating margin was 45%, contracted 90 bps year over year.

Balance Sheet & Cash Flow

As of Jun 3, 2022, the cash and short-term investment balance was $5.3 billion, up from $4.7 billion as of Mar 4, 2022. Trade receivables were $1.6 billion, down from $1.7 billion recorded in the fiscal first quarter.

Long-term debt was $3.627 billion at the end of the fiscal second quarter compared with $3.626 billion at the end of the previous quarter.

Cash generated from operations was $2.04 billion in the fiscal second quarter versus $1.8 billion in the fiscal first quarter. In the reported quarter, the company repurchased 1.9 million shares.

Guidance

For third-quarter fiscal 2022, Adobe projects total revenues of $4.43 billion. The Zacks Consensus Estimate for revenues is pegged at $4.5 billion.

Adobe expects year-over-year revenue growth of 13% from Digital Media. The Digital Experience segment’s revenues are expected to grow 12% on a year-over-year basis.

Net new ARR in the Digital Media segment is projected at $430 million. Further, Digital Experience subscription revenues are likely to increase 13% year over year.

Management expects non-GAAP earnings of $3.33 per share. The Zacks Consensus Estimate for the same is pegged at $3.36 per share.

For fiscal 2022, Adobe projects total revenues of $17.65 billion. The Zacks Consensus Estimate for revenues is pegged at $17.83 billion.

Adobe expects year-over-year revenue growth of 12% from Digital Media. The Digital Experience segment’s revenues are expected to grow 14% on a year-over-year basis.

Net new ARR in the Digital Media segment for fiscal 2022 is projected at $1.9 billion. Further, Digital Experience subscription revenues are likely to increase 15% year over year.

Management expects non-GAAP earnings of $13.5 per share. The Zacks Consensus Estimate for the same is pegged at $13.59 per share.

We note that the above-mentioned guidance is inclusive of the impacts of the ongoing tensions between Russia and Ukraine, due to which Adobe has halted its sales of products and services in Russia and Belarus.

Further, a foreign exchange headwind of $175 million is likely to get reflected in revenues of the third and fourth quarters of fiscal 2022.

Additionally, the company expects summer seasonality to impact its fiscal third-quarter performance.

Zacks Rank & Stocks to Consider

Currently, Adobe carries a Zacks Rank #4 (Sell).

Investors interested in the broader Zacks Computer & Technology sector can consider some better-ranked stocks like Avnet AVT, Aspen Technology AZPN and Amdocs DOX. While Avnet and Aspen Technology currently sport a Zacks Rank #1 (Strong Buy), Amdocs carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Avnet has gained 7.9% in the year-to-date period. The long-term earnings growth rate for AVT is currently projected at 37.2%.

Aspen Technology has returned 21.1% in the year-to-date period. The long-term earnings growth rate for AZPN is currently projected at 18.4%.

Amdocs has gained 5.2% in the year-to-date period. The long-term earnings growth rate for DOX is currently projected at 10%.

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