Adobe Systems Inc. (
) reported first-quarter 2013 earnings of 22 cents per share,
beating the Zacks Consensus Estimate of 20 cents. Adjusted
earnings per share exclude one-time items but include stock-based
Adobe's total revenue was $1.008 billion, down 12.6%
sequentially and 3.6% year over year. However, reported revenues
were slightly above management's expectation range of $950
million to $1.0 billion attributable to increased adoption of
Adobe's Creative Cloud.
Products generated 67.0% of Adobe's revenues and were down
16.4% year over year. Subscription revenues comprised 22.0% of
total revenue, up 53.4% sequentially and Services & Support
brought in the balance, increasing 19.1% year over year.
Revenues by Segment
Digital Media Solutions
, which remains Adobe's largest, generated 68.3% of revenues in
the quarter. Segment revenues were down 17.8% sequentially to
$688.0 million. Within Digital Media, the two major components of
revenues are the Creative family of products and Document
In the Creative business, the adoption of Creative Cloud
subscriptions continued to accelerate. The company added
approximately 153,000 net new paid subscriptions with Creative
Cloud for individuals and teams offerings. As the end of the
first quarter, 92% of Creative Cloud subscribers were on an
annual plan versus month-to-month and 81% of subscribers licensed
to the full Creative Cloud versus point product subscriptions. As
announced earlier, the company continued to migrate enterprise
customers to Enterprise Term License Agreements or ETLAs. ETLAs
for enterprise customers are term based and give customers access
to ongoing technology updates and represent the first phase of
migrating enterprise customers to Creative Cloud.
Management was quite optimistic about Creative Cloud adoption
and expects to build a healthy pipeline for potential Creative
Cloud paid subscribers through marketing programs, trial
downloads and free memberships. Adobe expects to reach 1.25
million paid subscriptions by the end of this year.
In the Document Services (includes Acrobat family and new
cloud-based services such as EchoSign) business revenues were up
from the year-ago quarter. The segment had a record quarter,
thanks to continued Acrobat adoption in enterprise as well as
continued momentum in EchoSign and other related Acrobat cloud
segment accounted for 31.7% of total first quarter revenue.
Within the segment, Adobe Marketing Cloud is the first component.
Formerly, known as Digital Marketing Suite, its revenues were up
20% from the year-ago quarter to $215.0 million, aided by
increased demand for mobile devices. Mobile transactions
increased to 25% from 22% in the last quarter.
The second component, the LiveCycle and Connect businesses
generated revenues of $52 million, in line with management
Reported gross margin for the quarter was 84.5%, down 510 bps
from 89.6% in the comparable year-ago quarter. The gross margin
is typical of a software company and variations are related to
the mix of revenues between categories.
Adobe reported operating expenses of $740.5 million, which
were 15.8% higher than the year-ago quarter's $639.4 million.
Consequently, operating margin of 9.7% was down from 27.7% in the
year-ago quarter. As a percentage of sales, research and
development expenses, general and administrative expenses as well
as sales and marketing expenses increased from the year-ago
On a GAAP basis, Adobe recorded net income of $65.1 million
(13 cents per share) compared with $185.2 million (37 cents per
share) in the year-ago quarter.
On a pro forma basis, Adobe generated net income of $110.1
million compared with $210.2 million in the year-ago comparable
quarter. Pro forma earnings per share came in at 22 cents
compared with 42 cents in the year-ago quarter.
Adobe ended the first quarter with cash and investments
balance of $3.66 billion versus $3.54 billion in the previous
quarter. Days sales outstanding (DSO) were 44 days versus 45 days
in the year-ago quarter and 49 days in the last quarter. Deferred
revenues increased $80.5 million to a record $700.0 million.
In the first quarter, cash generated from operations was
$322.0 million and capital expenditure was $60.2 million. The
company also repurchased approximately 2.7 million shares at a
total cost of $100 million.
For the second quarter, management expects revenues in the
range of $975 million to $1.025 billion, up 110.5% sequentially
at the mid-point. Additionally, management expects Digital Media
to be down sequentially due to continued migration to Creative
Cloud subscription and term-based ETLAs as well as normal
In the Digital Marketing segment, management expects Adobe
Marketing Cloud revenues to increase 20% year over year.
Accordingly, based on a share count of 507-509 million, GAAP
earnings per share are expected in the range of 8-14 cents, while
non-GAAP earnings per share is expected in the range of 29-35
cents. Currently, the Zacks Consensus Estimate for the upcoming
quarter is pegged at 24 cents.
Also, for the second quarter, non-operating expense is
expected in the range of $17-$19 million. Tax rate is expected to
be approximately 22.5% on a GAAP basis and 21.0% on a non-GAAP
For the full year 2013, the company expects adjusted earnings
of about $1.45 versus its prior guidance of $1.40 and above
analysts' estimates of $1.41 per share. GAAP earnings per share
is expected to be 62 cents per share.
We find Adobe's first-quarter results decent with earnings
exceeding the Zacks Consensus Estimate. Additionally, both
revenues and earnings were above management expectations due to
strong adoption of Creative Cloud.
We remain positive about Adobe's market position, its
compelling product lines (including CS cloud initiative and
digital media products), continued innovation and strong balance
sheet. However, we believe that the new subscription service will
hurt Adobe's financial growth, at least over the short term, as
it brings in revenues on a monthly basis instead of a lump sum at
We believe that solid adoption of the Creative Cloud could
serve as a potential catalyst going forward. Adobe's acquisition
of Efficient Frontier will further enhance its Adobe Marketing
Cloud by adding optimization capabilities for search and display
advertising while accelerating its entry into social
However, end-market recovery appears slow and a weak demand
environment in Europe remains a matter of concern.
Currently, Adobe has a Zacks Rank #3 (Hold). Other stocks in
the sector that have been performing well and are worth a look
ACI Worldwide Inc.
Advent Software Inc.
), all carrying a Zacks Rank #1 (Strong Buy).
ACI WORLDWIDE (ACIW): Free Stock Analysis
ADOBE SYSTEMS (ADBE): Free Stock Analysis
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