Morningstar | ADBE: Digital Media Still Going Strong; Guidance Light but Conservative; FVE Unchanged at $296
Wide-moat Adobe reported solid results for its fiscal second quarter, providing upside versus our and street expectations for revenue and EPS. Adobe continues to attract new users and benefited modestly from further pricing actions, which combined drove Digital Media strength. Adobe maintained its annual revenue and EPS targets, but provided guidance that fell short of investor expectations for the third quarter on these measures. Management attributed this to seasonality, which we think is mostly fair given that the investment community is still fine-tuning their models to account for the Magento and Marketo acquisitions. We believe this is this mainly noise and management has a history of conservative guidance. We have made minor adjustments to our model based on management’s commentary and new guidance measures, which result in no change to our fair value estimate of $296. We think Adobe’s results affirm our investment case that Adobe dominates the creative segment and the acquisition of Magento and Marketo in 2018 solidified Adobe as a digital marketing platform leader. However, software stocks are generally expensive in our view, including limited upside for ADBE shares.Second-quarter revenue grew 25% year over year to $2.74 billion, driven by the strength in Digital Media. Adobe said all three product segments were strong during the quarter. By segment, Digital Media grew 22%, Digital Experience grew 34%, and Publishing grew 12%. Adobe has made great strides with the integration of the Magento and Marketo acquisitions on the product, technology, and go-to-market fronts. Higher revenues fell through to the bottom line, with the non-GAAP operating margin 160 basis points better than our model, resulting in $1.83 in non-GAAP EPS, which was up 10% year over year, and $0.11 ahead of our model. From a new business momentum perspective, net new Digital Media annualized recurring revenue (ARR) was $405 million, compared with guidance of $360 million.
Adobe is a software company. The company provides a line of products and services used for creating, managing, delivering, measuring, optimizing, engaging and transacting with content across personal computers, devices and media. The company's segments are: Digital Media, which provides products, services and solutions that enable individuals, teams and enterprises to create, publish and promote their content; Digital Experience, which provides a platform and set of applications and services through Adobe Experience Cloud; and Publishing, which contains products and services that address market opportunities including eLearning solutions, web conferencing, web application development and printing.
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