Today’s news: Adobe Systems (ADBE) reports strong second-quarter results.
Digital media leader Adobe Systems (ADBE) reported second-quarter results yesterday afternoon (November year end). Record revenue of $2.74 billion beat the consensus estimate of $2.70 billion, and non-GAAP EPS of $1.83 beat the expected $1.78. Adobe Creative Cloud, Adobe Document Cloud and Adobe Experience Cloud all performed with strength.
Analysts were especially pleased that digital media annualized recurring revenue (ARR) grew to $7.47 billion, a quarter-over-quarter increase of $406 million when Wall Street was expecting a gain of $371 million. (The $35 million difference seems small, but it was repeatedly lauded in news reports. Wall Street loved that number!) As such, analysts’ full-year revenue estimates will probably increase in the coming days.
Operating margins came in higher than analysts had expected, and Adobe management indicated on the conference call that margins should continue to grow sequentially in the third and fourth quarters, which is more bullish than Wall Street had expected.
Wall Street reacted with cheers, as ten investment firms raised their price targets this morning to a range of $290-$340. Reuters reported that JPMorgan “expects Adobe to settle into a phase of solid compounding returns. Baird says Adobe is well positioned to leverage its dominance to grow its marketing business.” CFO John Murphy commented, “Highlights include 25% year-over-year revenue growth, strong net new Digital Media ARR and operating cash flow of $1.11 billion.” Read more in Adobe’s earnings press release.
The company guided Wall Street down to $1.95 on expected third quarter EPS vs. the consensus $2.05, and to $2.80 billion revenue vs. the consensus $2.83 billion, attributed to normal third quarter seasonal weakness, while remaining very bullish on expected fourth-quarter and future revenue and operating margin growth.
Adobe repurchased approximately 2.5 million shares during the quarter, with $6.6 billion remaining in the repurchase authorization.
As a reminder, I maintain a Buy recommendation on ADBE, rather than a Strong Buy, because the price/earnings ratio (P/E) is very high on the stock (although not high in comparison to many software stocks). It’s just a cautionary warning so that investors who prefer low-P/E stocks will think twice before deciding to own shares of this excellent large-cap stock. Risk-tolerant growth stock investors and traders should buy ADBE now. I expect immediate share price growth that could continue for an extended period of time during the current growth phase at Adobe Systems. Buy.