Adobe (ADBE) stock has declined this year; despite the company benefiting from the massive secular digitization trend, the company has been punished amid the recent correction in technology stocks.
Investors want to know if Adobe can regain its momentum. The digital cloud giant giant is set to report third quarter fiscal 2022 earnings results after the closing bell Thursday. Having successfully transformed its business from selling desktop software into cloud-based subscription services, Adobe has emerged stronger and more profitable, which are two features that are poised to improve over the next two years.
Thanks to its diversified software offering, Adobe extracts roughly 90% of its revenue from subscription products, namely its two main operating segments: Digital Media and Digital Experience. Meanwhile, the company has executed impressively, producing strong earnings for the second quarter, including record revenue of $4.39 billion, which beat analyst expectations by nearly $40 million. The company continues to benefit from strong new user adoption and subscription revenue. Despite the solid quarter, the management was cautious with its guidance.
For the second quarter, the company forecasted revenue of $17.65 billion, which is lower than the $17.85 billion analysts forecasted. Adobe's flat year over year revenue projection disappointed investors. But slower digital marketing spending which was noticeable in the past two quarters is expected to pressure revenue. But the stock is cheap, following the near 50% pullback from all-time highs. Plus, Adobe's free cash flow yield is now close to 4.5% near a five-year high. Now’s the time bet on a recovery.
For the quarter that ended August, Wall Street expect the San Jose, Calif.-based company to earn $3.35 per share on revenue of $4.44 billion. This compares to the year-ago quarter when earnings came to $3.11 per share on revenue of $3.94 billion. For the full year, ending October, earnings are expected to rise 8.33% year over year to $13.52 per share, while full-year revenue of $17.67 billion would climb 11.9% year over year.
One of the benefits of the company’s transition has been Adobe’s profit margins, which have steadily risen as the subscription business in both its Digital Media and Digital Experience segments have grown. The latter segment, accounting for more than 70% of its total revenues, remains the driving force behind Adobe’s growth trajectory, particularly due to growing adoption of its enterprise services which is bringing in more customers.
Meanwhile, the Creative Cloud segment, which prior to the pandemic was growing at an annualized rate of $7 billion, has also seen a growth acceleration. In the second quarter, the company beat on both the top and bottom lines, with adjusted EPS rising 11% year over year to $3.35 per share, while Q3 revenue rose 14% to nearly $4.39 billion. Notably, during the quarter, Adobe's Digital Media segment, which includes Creative Cloud and Document Cloud products, delivered revenue of $3.2 billion, up 15%, despite currency headwinds.
The management has forecasted for the Document Cloud industry to grow to $21 billion in 2023 and then to $32 billion by 2024. This means there is still a massive opportunity for the Adobe to grow its revenue. What’s more, Adobe ended the quarter more than $5 billion in cash. As noted, the company continues to produced solid growth in each key business segment, despite competition from rivals like Salesforce (CRM) and Oracle (ORCL), among others. The company on Thursday must nonetheless guide confidently to remove doubt about its growth potential.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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