UPDATED 19:23 EDT / MARCH 15 2018

CLOUD

Adobe shares hit a new high as subscription revenue surges

Adobe Systems Inc. once again blew the doors off analysts’ expectations, topping earnings estimates for its fiscal first quarter by nearly 10 percent.

Revenue shot up 24 percent from a year ago, to $2.08 billion, also beating consensus expectations of $2.05 billion. Profit before certain costs such as stock compensation hit $1.55 per share, 12 cents above expectations.

“We had an outstanding quarter, and we see significant tailwinds,” said Shantanu Narayen, Adobe’s president and chief executive (pictured). Investors agreed with him. Adobe’s shares traded up nearly 4 percent in after-hours trading to an all-time high. The stock has surged nearly 30 percent this year.

The company, which was one of the first software makers to transition from selling packaged to subscription software, saw its recurring revenue grow 6 percent from the previous quarter, to $5.72 billion on an annualized basis. Deferred revenue grew 25 percent over the same quarter a year ago to $2.57 billion. Chief Financial Officer Mark Garrett said a record 88 percent of revenue in the quarter came from recurring sources. These metrics are considered an important measure of revenue predictability and the overall stability of the business.

Cloud licensing is even helping grow the share of revenue that comes from the Asia/Pacific region, where piracy has been an ongoing problem for software companies. “People who were casual pirates are finding that the lower upfront price is an incentive to license Creative Cloud,” Narayen said. Asia now accounts for 16 percent of the company’s revenues, up from 14 percent a year ago.

Digital media, which comprises 70 percent of Adobe revenue, grew more than 20 percent. The Digital Experience line of production products grew 16 percent, while the traditional publishing business continued a long decline, falling about 3 percent.

Executives brushed off analysts’ concerns about potential declines in the advertising market as signaled by recent pullbacks by Procter & Gamble Co. and Unilever PLC. “The media and modalities that companies can use to tell their story has never been more exciting,” Narayen said. “It feels really good and we expect the momentum to continue.”

Adobe’s dominance in its core market of creative and marketing professionals was evident in its strengthening profit picture. The 24 percent revenue growth in the quarter was offset by less than 15 percent growth in expenses. Cash flows grew to $990 million in the quarter from $730 million a year ago and the company repurchased 1.6 million shares, prompting one analyst to characterize the growth in both revenue and shareholder returns as “amazing.”

Brian Wieser, an analyst with Pivotal Research Group, wrote in a note to clients that there may be a shift in the market coming that could benefit Adobe and other marketing technology companies.

“We think that an array of trends including Facebook’s recently announced changes to its algorithm and the looming introduction of GDPR in Europe reinforce the notion that web publishers (and brands) must increasingly control or otherwise improve their direct relationships with consumers,” he said. “This means increased investment in web experience, mobile app development, email marketing platforms and data management strategies. This should be positive for companies with software focused on marketing technology, including Adobe (along with Salesforce.com and scores of other smaller players in the sector).”

Executives were particularly bullish about the potential of the company’s Sensei artificial intelligence framework, which it is driving through its Creative Cloud, Document Cloud and Experience Cloud in the same way that Salesforce.com Inc. is infusing its Einstein AI technology throughout its product family. In the most recent quarter, Sensei was folded into the Adobe Scan mobile PDF application and is being leveraged in the Creative Cloud to make it easier for marketers to create content.

Adobe plans to unveil new Sensei-driven Experience Cloud capabilities later this month that use “new algorithms to simplify complex tasks,” Narayen said. “Digital experience is a $60 billion-plus opportunity and there is a significant amount of headroom for us.”

With reporting from Robert Hof

Image: Adobe/Twitter

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