Software solutions provider Adobe Systems reported worse than expected earnings for the fiscal third-quarter results Thursday which highlighted continued deceleration in ADBE’s growth as it issued fourth-quarter revenue guidance that fell below Wall Street expectations, citing foreign-exchange challenges tied to the soaring U.S. dollar. The company announced also it bought privately held collaboration-software rival Figma for $20 billion in cash and stock in the company’s largest ever deal. The market priced the deal and earnings with concern with the stock closing at $309.13 down $62.39 or 16.79% today.
Adobe Inc NASDAQ: ADBE Reported Earnings After Close Thursday
$3.40 Beat $3.35 EPS Forecast And $4.433 Missed $4.44 Billion Forecast in Revenue.
Adobe Q3 2022 Earnings
Adobe reported fiscal third-quarter operating income of $1.48 billion compared to $1.44 billion, up only 2.8%. ADBE saw a significant increase in operating expenses of 18.5%, outpacing revenue growth for the quarter. As a result, diluted EPS also dipped 4% from $2.52 to $2.42.
- Adjusted $3.40 a share beat Consensus EPS Estimates: $3.35
- Revenue $4.433 billion, up 13% YoY (y/yr) from $3.9 billion Missed Consensus Revenue Estimates: $4.44B
- Operating cash flow was $1.7 billion, up 21.4% from $1.4 billion.
- The RPO at the end of the quarter was $14.1 billion, up 12% YoY.
- $3.9 billion in cash and only $3.6 billion in debt (prior to the acquisition).
- Digital media segment revenue was $3.2 billion, up 13%.
- Creative revenue accounted for $2.6 billion, up 11%
- Document cloud revenue accounted for $607 million, up 23%.
- The growth is largely driven by strong demand for photoshop and lightroom offerings, as well as video-related products.
- Adobe Sign continues to see strong traction, with new customer wins including Amazon (AMZN), Boeing (BA), ServiceNow (NOW), etc.
- On the experience cloud side, revenue for the quarter was $1.1 billion, up 15%. This is attributed to the strong momentum for Adobe Experience Platform and Adobe Commerce.
For the fourth quarter Adobe lowered guidance and projects earnings per share of around $2.44 and adjusted earnings per share of $3.50. Total revenue is expected to be around $4.52 billion.
On average, 23 analysts polled by Thomson Reuters expected earnings of $3.45 per share for the quarter on revenues of $4.58 billion. Analysts’ estimates typically exclude special items.
The Figma Deal
Adobe will pay $20 billion in roughly half cash, half stock. The price reflects a multiple of about 25 times what Figma’s annualized recurring revenue could hit next year if it keeps growing at its current rate. That compares with about 10 times forward revenue Adobe paid for Marketo. It also comes at a time when technology stocks have been selling sharply, accelerating lower after the latest CPI report.
Just last year, in the height of the bull market the smaller company was valued at $10 billion in a funding round and has been expected to surpass annual recurring revenue of $400 million for 2022. Adobe said Figma has gross profit margins of approximately 90% and positive operating cash flow.
During the earnings conference call Thursday morning, Adobe said around two-thirds of Figma’s users aren’t from the group of designers that make up Adobe’s core customer.
Adobe CEO Shantanu Narayen on CNBC said “Figma is actually one of these rare companies that has achieved incredible escape velocity,” said Narayen, Adobe’s CEO since 2007. “They have a fabulous product that appeals to millions of people, they have escape velocity as it relates to their financial performance and a profitable company, which is very rare, as you know, in software-as-a-service companies.”
Q2 Earnings Recap
Adobe in the second quarter of 2022 saw revenue reach a record $4.39 billion, which beat analyst expectations by $39.15 million, up by 15% year-over-year. This was driven by strong growth in the Digital Media Segment (Creative and Document Cloud), which increased to $3.2 billion, up 15% year over year. Document Cloud Revenue grew 27% to $595 million. Net New Digital Media Annualized Recurring Revenue (“ARR”) was $464 million, with total Digital media ARR $12.95 billion.
Management cut guidance for the third quarter of 2022. ADBE is forecasting Revenue of $17.65 billion, which is less than analyst consensus estimates of $17.85 billion. ADBE lowered adjusted EPS $13.50, which is less than analyst consensus estimates of $13.66. This lower guidance is driven by higher tax rates for stock-based compensation. Other headwinds include the company’s exit from Russia and an $175 million in FX losses across Q3 and Q4.
ADBE is a leader in the digital transformation happening across nearly every industry with a level of consistency in a very resilient business model. The largest impact has been inflation and a surging US dollar for its global customers.
ADBE largest segment is Digital Media (~73% of total revs). The biggest component of Digital Media is ADBE’s Creative business (~83% of Digital Media revs), made up of its cloud-based content creating products such as Photoshop, Illustrator, and Lightroom. These products are, for the most part, industry standards in video and photo editing that assist developers in creating augmented reality (AR) and 3D models which affectively keep Adobe moving forward. ADBE which derives ~92% of its revenue from subscription products.
Document Cloud, the other component of ADBE’s Digital Media segment, continues to grow as many small and medium-sized businesses (SMBs) have continued to turn to digital signature platforms. They have taken business away from DocuSign who reported last week. DocuSign reported billings of $647.7 million, up 9% from a year ago. DocuSign’s is in transition following the resignation of longtime CEO Dan Springer in June. Springer led the company through its initial public offering. $DOCO reported that its subscription revenue rose by 23% in the quarter, to $605.2 million. It will be interesting how this influences Adobe.
The company believes the Document Cloud industry will be worth ~$21 billion in 2023 and grow to $32 billion by 2024. Adobe believes this growth will be driven by the surge in knowledge/hybrid workers and business data standardization.
Adobe’s Digital Experience segment focuses on delivering data insights for businesses and are subscription-based, providing a steady revenue stream. Key end customers include CVS Pharmacy (CVS), Facebook (FB), and Ford (F). The Digital Experience offerings complement its Digital Media segment as these solutions allow content creators and companies’ marketing departments to edit, publish, and drive insights into different advertisements and forms of media.
Adobe Inc. (NASDAQ: ADBE) was founded in 1982 by John Warnock and Charles Geschke after leaving the legendary Xerox PARC, the company which pioneered the modern personal computer and many related technologies. Since then, Adobe has become an industry leader across creative software (Photoshop), marketing automation (Marketo), and even documents with its PDF file format.
Adobe completed its acquisition of Frame.io in October 2021, which finally solves the problem of collaborating on video edit projects with teams and clients.
Source: Adobe Inc, AlphaStreet
From The TradersCommunity Research Desk