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Digital Transformation Keeps Adobe Afloat Again During Summer 2020

Like many other software companies right now, Adobe (NASDAQ: ADBE) was flying high ahead of its summer quarter earnings report. The creative software platform's stock is up 47% in 2020 to-date on optimism that the economic lockdown is creating plenty of new demand, and the financial results didn't disappoint. Faced with challenging times that require reliance on the digital world like never before, many organizations continue to turn to Adobe for help.  

Cashing in on its digital transformation

During the fiscal 2020 third quarter (the three months ended Aug. 28, 2020), Adobe hauled in revenue and net income of $3.23 billion and $955 million, respectively, generating year-over-year increases of 14% and 20%. Earnings per share increased 22%, getting an additional boost as Adobe continued to use its high profit margins to repurchase shares during the period.  

Three office workers gathered around a computer.

Image source: Getty Images.

It was an impressive quarter considering the circumstances. And even though parts of the business suffered due to effects of the pandemic (more on that in a second), gross profit margin (86.8%) and net profit margin (29.6%) both increased from a year ago as lots of new customers signed up for Adobe's myriad of services. Paired with the first half of the year, Adobe is having another landmark year in spite of COVID-19. 

Metric

Nine Months Ended Aug. 28, 2020

Nine Months Ended Aug. 30, 2019

Change

Revenue

$9.44 billion

$8.18 billion

15%

Gross profit margin

86.3%

85.1%

1.2 pp

Net income

$3.01 billion

$2.10 billion

43%

Data source: Adobe. Pp = percentage point. 

Within the total, Adobe's largest segment, Digital Media, grew sales 19% from a year ago, driven by a 19% increase in its creative software suite to $1.96 billion. Adobe's Document Cloud (which includes its e-signature service) grew 22% to $375 million. It's not putting up growth numbers like DocuSign (NASDAQ: DOCU) is, but it nonetheless did quite well during the quarter.  

And then there is the Digital Experience segment, which includes things like e-commerce management and customer analytics. Digital Experience weighed down overall results with 2% year-over-year growth to $838 million. However, excluding the cloud advertising business -- which suffered from lower ad sales rates and many organizations still migrating from traditional ads over the summer months -- the segment posted 14% growth.  

Adobe's steady expansion is far from over

Along with other cloud-based software companies (chief among them Adobe's rival salesforce.com (NYSE: CRM)), this software giant is fueling the world's transition to a more modern (and profitable) type of business operation. The last quarter is a testament to how important the digital world has become, and even as the effects of the pandemic and the ensuing economic lockdown start to ease, Adobe is showing few signs of slowing. 

For the final quarter of its 2020 fiscal year, management said it could see an acceleration in results -- typical for the company as it often sees increased customer activity in the months leading up to the busy holiday season. As for the specific outlook, though, revenue is expected to increase 12% year over year to $3.35 billion, driven by an 18% increase in Digital Media and a 1% increase in Digital Experience (or 12% excluding advertising). That should equate to an earnings-per-share increase of 147% (or an increase of 15% when adjusted for one-time items that affect comparability).

With $5.26 billion in cash and equivalents, only $4.12 billion in debt on the books, and expansion continuing in spite of a challenging year, Adobe remains a core part of the digital transformation movement and a top way to invest in an ever-growing digital economy.

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Nicholas Rossolillo owns shares of Adobe Systems and Salesforce.com. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Adobe Systems, DocuSign, and Salesforce.com. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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