On Thursday evening after a day of Fed/macroeconomic-driven carnage on Wall Street, Adobe Inc. (ADBE) released its fiscal fourth-quarter results. They were solid. Parts of the guidance provided were solid, too. As equities continued to sell off overnight, Adobe rallied. This is that story.
For the three-month period ended Dec. 2, Adobe posted adjusted earnings per share of 3.60 (GAAP EPS: $2.53) on revenue of $4.525 billion. These numbers met top-line expectations while beating the street on the adjusted bottom line. The adjustments made were mostly for stock-based compensation. with a sizable portion also for amortization of intangibles.
Cash flow from operations ran at $2.33 billion, which is a new record. RPO (Remaining Performance Obligation reached $15.19 billion.
Segment Performance
*Digital Media generated segment revenue of $3.3 billion (+10% year over year, 14% in constant currency, or CC)
Perhaps the No. 1 reason for the stock's positive performance overnight was the print for new Digital Media annualized recurring revenue, or ARR. This number hit the tape at $576 million crushing estimates for a rough $550 million. Digital Media ARR finished the quarter totaling $13.97 billion.
- Creative Cloud generated revenue of $2.68 billion (+8%, +13% in CC)
Creative ARR grew to $11.6B
- Document Cloud generated revenue of $619 million (+16%, +19% in CC)
Document Cloud ARR grew to $2.37 billion.
*Digital Experience generated segment revenue of $1.15 billion (+14% year over year,16% in CC)
- Subscription generated revenue of $1.01 billion (+14%, +16% in CC)
Guidance/Targets
For the current quarter, Adobe is targeting
- Total revenue of $4.6 billion to $4.65 billion (the street is at $4.64 billion on this number) .
- Digital Media net new ARR of roughly $375 million.
- Digital Media segment revenue of $3.35 billion to $3.375 billion.
- Digital Experience segment revenue of $1.16B billion to $1.18 billion.
- GAAP EPS of $2.60 to $2.65.
- Adjusted EPS of $3.65 to $3.70 (the street is at $3.64).
For full fiscal 2023, Adobe is targeting
- Total revenue of $19.1 billion to $19.3 billion (the street is at $19.4 billion on this number).
- Digital Media net new ARR of roughly $1.65 billion.
- Digital Media segment revenue of $13.39 billion to $14 billion.
- Digital Experience segment revenue of $4.925 billion to $5.025 billion.
- GAAP EPS of $10.75 to $11.05.
- Adjusted EPS of $15.15 to $15.45 (the street is at $15.45),
Balance Sheet
Adobe ended the quarter with a net cash position of $6.096 billion and current assets of $8.996 billion. Current liabilities add up to $8.128 billion for a current ratio of 1.11. The liability side is largely composed of deferred revenue ($5.297 billion), which is more a liability of work and services owed rather than a financial hurdle.
Total assets amount to $27.165 billion. That does include $14.236 billion in goodwill and other intangibles. At 52% of total assets, I have trouble accepting that headline number. Total liabilities less equity comes to $13.114 billion, including a debt load of $3.629 billion. Adobe could pay off its debt in its entirety out of pocket. This is a solid balance sheet. The valuation placed on intangles is a little goofy, but the balance sheet is fine.
Wall Street
I have found seven sell-side analysts who are rated at four or five stars at TipRanks and have opined on ADBE since Thursday night. Among those seven, there are five "hold" of hold-equivalent ratings and two "buy" or buy-equivalent ratings. One of the "holds" did not set a target price. The average target price across the other six is $387.83, with a high of $430 (Brad Zelnick of Deutsche Bank) and a low of $340 (Saket Kalia of Barclays). Sans the high and low as outliers, the average of the other four targets is $389.25.
My Thoughts
Performance is solid. Guidance is solid, but more or less in line with expectations. The stock trades at a below-market 15x forward earnings. Adobe does not pay a dividend, but did repurchase 5 million shares over the course of the quarter reported.
Readers will see that the shares are down from a high of $699 (-53%) a year ago. They need to trade at $436 to complete a 38.2% Fibonacci retracement. Support has been found at the 21-day exponential moving average (EMA). The target now becomes the 200-day simple moving average (SMA) at $377. Let's zoom in.
The stock needs $365 to fill the gap created in September. I see that as perhaps likely. I don't know about too much more than that, however, unless both monetary and macroeconomic environments improve. That said, fourth-quarter earnings season begins close to Jan. 13. My idea would be to sell (write) Feb. 17 $375 calls at or close to $11 and purchase a like amount of Feb. 17 $385 calls for roughly $8. Purchasing the protection cuts significantly into potential profit here, but I think with this stock that I would not want to try to short equity or write naked calls without it. Remember, we're just trying to get base hits in late 2022/ early 2023.
