Adobe Systems Inc.
) reported second quarter 2013 earnings of 24 cents per share,
beating the Zacks Consensus Estimate of 21 cents. Adjusted
earnings per share exclude one-time items but include stock-based
compensation expense. Following the earnings release, share price
rose 5.21% in after-hours trading.
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Adobe's total revenue was $1.011 billion, up 0.3% sequentially
but down 10.1% year over year. Reported revenues were within
management's guided range of $975.0 million to $1.025 billion.
The sequential increase was attributable to increased adoption of
Adobe's Creative Cloud.
Products generated 64.0% of Adobe's revenues but were down 26.0%
year over year. Subscription comprised 25.0% of total revenue, up
59.6% year over year while Services & Support brought in the
balance, increasing 18.3% year over year.
Revenues by Segment
Digital Media Solutions
, which remains Adobe's largest, generated 66.3% of revenues in
the quarter. Segment revenues were down 2.6% sequentially to
$670.0 million. Within Digital Media, the two major components of
revenues are the Creative family of products and Document
In the Creative business, Creative Cloud subscriptions continued
to accelerate. The company ended the second quarter with
approximately 700,000 paid subscriptions with Creative Cloud for
individuals and teams. At the end of the second quarter, 93% of
Creative Cloud subscribers were on an annual plan versus the
monthly plan and 81% of subscribers licensed to the full Creative
Cloud versus point product subscriptions. As announced in the
last quarter, the company started to convert enterprise customers
to Enterprise Term License Agreements or ETLAs and saw increased
adoption of its enterprise Creative Cloud offering through 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 is 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
business (includes Acrobat family and new cloud-based services
such as EchoSign), revenues were $199.3 million, 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 services.
segment accounted for 33.7% of total second quarter revenue.
Within the segment, Adobe Marketing Cloud is the first component.
Formerly known as Digital Marketing Suite, its revenues were up
17% from the year-ago quarter to $229.6 million, aided by
increased demand for mobile devices. Mobile transactions
increased to 26% from 25% in the last quarter.
The second component, the LiveCycle and Connect businesses
generated revenues of $55.8 million, in line with management
Print and Publishing
revenues were essentially flat sequentially.
Reported gross margin for the quarter was 86.6%, down 180 bps
from 88.4% in the comparable year-ago quarter. The gross margin
is typical of a software company and variations are generally
related to the mix of revenues between categories.
Adobe incurred operating expenses of $726.2 million, up 7.1% from
the year-ago quarter's $678.0 million. As a result, operating
margin plummeted to 11.0% from 27.1% 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 quarter.
On a GAAP basis, Adobe recorded net income of $76.5 million (15
cents per share) compared with $223.9 million (45 cents per
share) in the year-ago quarter.
On a pro forma basis, Adobe generated net income of $122.5
million compared with $245.7 million in the year-ago comparable
quarter. Pro forma earnings per share came in at 24 cents
compared with 49 cents in the year-ago quarter.
Adobe ended the second quarter with cash and investments balance
of $3.87 billion versus $3.66 billion in the previous quarter.
Days sales outstanding (DSO) were 42 days versus 43 days in the
year-ago quarter and 44 days in the last quarter. Deferred
revenues decreased $61.1 million to $638.9 million.
In the second quarter, cash generated from operations was $299.1
million and capital expenditure was $46.2 million. Additionally,
the company repurchased approximately 3.9 million shares for a
total cost of $172 million in the quarter.
For the third quarter, management expects revenues in the range
of $975 million to $1.025 billion, down 1.1% 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.
In the Digital Marketing segment, management expects Adobe
Marketing Cloud revenues to increase 20% year over year. Within
the Digital Marketing segment, management expects LiveCycle and
Connect revenues to be relatively flat and Print and Publishing
to decline sequentially.
Accordingly, based on a share count of 511-513 million, GAAP
earnings per share are expected in the range of 10-16 cents,
while non-GAAP earnings per share are expected in the range of
29-35 cents. Currently, the Zacks Consensus Estimate for the
upcoming quarter is pegged at 22 cents.
Moreover, for the third 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
We find Adobe's second quarter results decent with earnings
exceeding the Zacks Consensus Estimate due to strong adoption of
the 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 in the short term, as it
generates 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 advertising.
However, management expects revenues to decline sequentially,
indicating slow-end market recovery. Also a weak demand
environment in Europe remains a matter of concern.
Currently, Adobe has a Zacks Rank #5 (Strong Sell). Other stocks
in the sector that have been performing well and are worth a look
Aspen Tech Inc.
), all carrying a Zacks Rank #1 (Strong Buy).