On Wednesday evening, Adobe Inc (ADBE) released the firm's fiscal first quarter financial results.
For the three month period ended March 3rd, Adobe posted an adjusted EPS of $3.80 (GAAP EPS: $2.71) on revenue of $4.655B. These results were good enough to beat expectations for both the top and bottom lines as that revenue print showed year over year growth of 9.4%. This lion's share of the adjustment ($0.91 per share) was attributed to $417M in stock-based compensation expense.
Total cost of revenue came to $568M (+10.9%), resulting in gross profit of $4.087B (+9%), which amounted to 87.8% of revenue. That was down from an even 88% for the one year ago comp. Operating expenses increased 15.3% to $2.501B, leaving operating income at $1.586 (+0.4%). On a GAAP basis, as a percentage of revenue, operating income fell from 37.1% one year ago to 34.1% for this quarter. Net income (after taxes) actually dropped 1.5% to $1.247B.
Segment Performance
Digital Media generated $3.4B in segment revenue (+9%, +14% in constant currency)
- Creative revenue increased 8% or 13% in cc to $2.76B.
- Document Cloud revenue increased 13% or 16% in cc to $634M.
- Net new Digital Media segment annualized recurring revenue (ARR) came to $410M, exiting the quarter at a total ARR of $13.67B.
- Creative ARR grew to $11.28B
- Document Cloud ARR grew to $2.39B.
Digital Experience generated $1.18B in segment revenue (+11%, +14% in cc)
- Digital Experience subscription revenue increased 12% or 14% to $1.04B.
Guidance
For the current quarter, Adobe expects to see total revenue of $4.75B to $4.78B, which envelops the $4.76B that Wall Street had in mind. This will include Digital Media segment revenue of $3.45B to $3.47B as that segment brings in a rough $420M in net new ARR. This also includes Digital Experience segment revenue of $1.21B to $1.23B, of which $1.06B to $1.08B will be subscription based.
For the quarter, the firm expects to generate adjusted EPS of $3.75 to $3.80 and GAAP EPS of $2.65 to $2.70. Wall Street was looking for $3.76 for the adjusted number, so this is seen as a slightly better than expected outlook.
Fundamentals
For the quarter, Adobe drove operating cash flow of $1.693 (-4.3%). After accounting for purchases of property and equipment that were almost unchanged from a year ago at $101M, the firm was left with free cash flow of $1.592B (-4.6%), so Adobe is still a cash flow machine. Out of that number, the firm repurchased about 5M shares of common stock for roughly $1.4B.
Turning to the balance sheet, at quarter's end Adobe had a cash position of $5.653B and current assets of $8.342B. With current liabilities of $7.437B (no short-term debt), the firm stands with a current ratio of 1.12, which is a passable result. Now, when one considers that among those current liabilities are $5.357B in deferred revenue, which is not a financial liability but a liability of service or labor, and one's perception of Adobe's current situation improves exponentially.
Total assets amount to $26.667B. Included in that number is $14.146B in "goodwill" and other intangibles. At 53% of total assets, I do think that a bit much. Total liabilities less equity came to $12.461B. This includes longer-term debt of $3.63B, which is something that the firm could handle out of pocket if necessary. This balance sheet is in good shape.
Wall Street
Since these results were released on Wednesday evening, I have found seven sell-side analysts that are both rated at four stars or better by TipRanks and have opined on ADBE. After allowing for changes, there is one "outperform" rating which we consider to be a "buy-equivalent" rating and six "hold" or hold-equivalent ratings. One of the "holds" chose not to set a target price, so we are dealing with just six targets.
The average target price across these six analysts is $395 with a high of 420 (Alex Zukin of Wolfe Research) and a low of $380 (Mark Murphy of JP Morgan). Once omitting these two as potential outliers, the average target across the other four analysts is $392.50.
My Thoughts
I see the stock was trading up about 4% in early Thursday trade. That's a $347 handle after closing on Wednesday night at $333.61. Were the earnings that good? They remain solid. Free cash flow through weakening year over year remains strong. That's surely a positive in this environment. The balance sheet is solid too. That's also important these days.
That said, this is not a growth stock anymore. This quarter's 9% growth in sales was preceded by growth of 10%, 13%, and 14% for the three quarters prior. Adobe has not seen 20% growth since the November quarter of 2021. The stock is not crazy expensive at 22 times, but it is expensive for the environment provided.
While I like tech... heck tech has been what has been saving my portfolio of late. Thanks more to the semis than software. I don't dislike ADBE. I just think that the stock will have a problem taking and holding its 50 day SMA (simple moving average)($352) and 200 day SMA ($355) on this pop.
This is not a long-term call. This is a trade. My feeling is that ADBE can be shorted this morning in small to less than medium size up to those moving averages. This is no time to play games. Should this stock take the 200 day line, it's okay to "panic" and buy the shares back at a loss of less than 2%. The target to the downside will be the 21 day EMA at $341.
