Good quarter. Light guidance.
For its fiscal second quarter, Adobe ( ADBE) posted adjusted earnings of $3.35 per share (GAAP EPS: $2.49) on revenue of $4.39B. Both top-line and bottom-line performance beat Wall Street expectations, while the sales number was good enough for annual growth of 14% and a new company second-quarter record. The above mentioned adjustments were made primarily for stock-based and deferred compensation expenses and amortization of intangibles.
Segment Performance
Digital Media segment revenue increased 15% (16% in constant currency) to $3.2B.
-- Net new Digital Media ARR came to $464M to make $12.95B.
Creative Cloud unit revenue increased 12% (14% in constant currency) to $2.61B.
-- Creative Cloud ARR grew to $10.82B.
Document Cloud unit revenue increased 27% (28% in constant currency) to $595M.
-- Document Cloud ARR grew to $2.13B.
Digital Experience segment revenue increased 17% (18% in constant currency) to $1.1B.
--Digital Experience subscription revenue increased 18% to $961M.
Guidance
For the fiscal third quarter:
Adobe targets revenue of $4.43B, which is below the $4.51B that Wall Street had in mind. The company sees Digital Media growing 13% (16% in constant currency), Digital Experience growing 12% (14% in cc), Digital Experience subscription growing 13% (15% in cc), and Digital Media annualized recurring revenue of $430M in net additions.
The company also sees adjusted EPS of $3.33 (GAAP EPS: $2.35) versus consensus view of $3.40.
For the full year:
Adobe targets revenue of $17.65B, down from prior guidance of $17.9B, and below the $17.85B Wall Street consensus. The company sees Digital Media growing 12% (17% adjusted), Digital Experience growing 14% (17% adjusted), Digital Experience subscription growing 15% (19% adjusted), and Digital Media annualized recurring revenue of $1.9B in net additions. Adobe also sees adjusted EPS of $13.50 (GAAP EPS: $9.95) versus consensus view of $13.67, and down from prior guidance of $13.70.
The company cited higher taxes, negative impact from currency exchange rates, and Russia's invasion of Ukraine as factors in reducing forward guidance.
The CEO
From the press release, CEO Shantanu Narayen said optimistically, "We are winning in our established businesses and seeing significant momentum in new categories from content authoring for a broad base of creators to PDF functionality on the web to the leading real-time customer data platform for global enterprises."
From the conference call, Narayen added realistically, "Enterprise CEOs right now all recognize it's an uncertain time. And that's the conversation that we have. But despite that uncertain macroeconomic environment, the thing that all of them recognize is that Digital is a priority."
Balance Sheet
As of the quarter's end June 3, Adobe had a net cash position of $5.3B, with current assets of $7.908B, down about $700M from 12 months ago. Current liabilities amount to $7.385B, including the addition of $499B in short-term borrowings. This leaves the company with a current ratio of 1.07, which is acceptable, but not great.
Total assets add up to $26.326B. This includes $14.451B in "goodwill" and other intangibles. Really? You're telling me that 54.9% of the entire asset side of your balance sheet is made up of stuff that I can't walk into, sit on top of, look at, drop on my foot or even count? Just awesome.
Total liabilities less equity comes to $12.341, including $3.627B in long-term debt. Adobe can pay off the entire debt load out of cash and is in no danger of not meeting its short to medium-term obligations. That said, does anyone else notice that once "intangibles" are removed from this balance sheet, total liabilities outweigh total assets? I do not love this balance sheet. It passes for now, but it can be improved upon.
Wall Street
I can find 11 sell-side analysts who have both opined on Adobe Friday morning and are rated at a minimum of four stars (out of five) by TipRanks.
There are 10 "buy" ratings or buy equivalents among the 11. There is one "neutral" rating, which I consider to be a hold equivalent. The average price target across the 11 is $449.09, with a high of $520 (Derrick Wood of Cowen & Co.) and a low of $400, twice (Alex Zukin of Wolfe Research and Brian Schwartz of Oppenheimer). Interestingly, both Zukin and Schwartz are in the "buy" camp. The "hold," Karl Keirstad of UBS, has a target of $415.
Omitting the high and one of our lows, the average target among the other nine analysts would be $446.67.
ADBE closed on Thursday night at $365.08 and was 2% lower in Friday morning trading.
My Thoughts
The stock closed last night at 27x 12-month forward-looking earnings estimates. A little on the expensive side with the S&P 500 struggling to hold 15x, but you're paying for growth. That might fly if sales were growing 30% year over year every quarter, but they are not. As seen up above, we are talking about 14% growth this past quarter and 9% growth the quarter prior. In fact first-quarter 2021 was the last quarter where Adobe grew revenue by more than 25%.
If you've made it this far, then you already noticed that Adobe's balance sheet annoyed me. I recognize Adobe's place as true "Cloud King" and I generally like the stock as I have done well with this name in the past. However, I am not feeling the warm and fuzzy for ADBE these days. If I take this stock on, it would have to be at a discount.
Readers will see that these shares had been in a downtrend from November into April, and then tried to build a base. The gap down open Friday morning will break through what had been support and likely thrust the stock's Relative Strength, Full Stochastics Oscillator and daily Moving Average Convergence Divergence (MACD) into something close to a technically oversold condition.
I would not buy this dip in ADBE in front of a three-day weekend, in front of a triple-witching expiration, nor in front of next week's Russell rebalancing even though ADBE is not involved.
If I already owned the stock, those September $360 calls would look ripe for a sale if one can get $25 for them. That said, for those looking to get long something today, I would rather get long a July 15 $350/$365 bull call spread for a net debit of $6.50 than buy the equity.
