Adobe Inc. (ADBE – Free Report) reported non-GAAP earnings of $3.35 per share for the second quarter of fiscal 2022, beating Zacks’ consensus estimate by 1.5%. Additionally, the figure improved 10.6% year over year, but was down 0.6% sequentially.
Total revenue was $4.39 billion, which exceeded Zacks’ consensus estimate of $4.34 billion. Additionally, the figure was up 14% from the prior year quarter and 2.9% from the prior quarter.
Revenue growth was driven by strong performance from Adobe Creative Cloud, Document Cloud and Experience Cloud. Accelerating subscription revenue also benefited results.
Top Line in detail
Adobe reports revenue in three categories: subscription, product and services, and support.
Subscription revenue was $4.1 billion (representing 92.8% of total revenue), up 15.6% year-over-year.
Product revenue totaled $146 million (3.3% of revenue), down 4.6% year-over-year.
Services and support revenue was $170 million (3.9% of revenue), up 4.9% from the prior year quarter.
Details by segment
Digital media: The segment generated revenue of $3.2 billion, up 15% year-over-year. The segment includes Creative Cloud and Document Cloud. Notably, Digital Media’s annualized recurring revenue (ARR) increased to $12.95 billion, of which net new ARR was $464 million.
Creative Cloud generated $2.61 billion in revenue, up 12% year over year. Creative ARR was $10.82 billion. The growing demand for Premiere Pro, spurred by the growing momentum of video production, has helped a lot. Additionally, solid traffic growth and increased monthly active users (MAUs) on the Adobe Express platform and the benefits of the Frame.io acquisition remained positive. Another bright spot was the strength of Substance 3D, due to high demand for Metaverse-ready content.
Document Cloud revenue was $595 million, up 27% from the prior year quarter. The ARR document was $2.13 billion. The strong growth of MAUs on desktop, mobile and web has helped well. Additionally, the strong momentum of the Acrobat ecosystem drove revenue growth. The strong adoption of Adobe Sign has been positive. The strong PDF dynamics on Acrobat Mobile has been beneficial. The strong performing Document Cloud enterprise business contributed well.
Digital experience: The segment generated revenue of $1.1 billion, up 17% year-over-year. The segment includes Adobe Experience Cloud. Experience Cloud subscription revenue was $961 million, up 18% from the prior year quarter. Strong demand for professional services, strengthening Experience Cloud momentum in healthcare, and growing adoption of Adobe Experience Manager drove the segment’s revenue growth.
Gross margin was 87.7%, which contracted 70 basis points (bps) year-over-year.
Adobe incurred operating expenses of $2.3 billion, a year-over-year increase of 16.8%. As a percentage of total revenue, the figure rose 100 basis points to 52.8%.
Notably, the adjusted operating margin was 45%, down 90 basis points year-on-year.
Balance sheet and cash flow
As of June 3, 2022, the cash and short-term investments balance was $5.3 billion, compared to $4.7 billion as of March 4, 2022. Trade receivables were $1.6 billion dollars, down from the $1.7 billion recorded in the first quarter of the fiscal year.
Long-term debt was $3.627 billion at the end of the second fiscal quarter, compared to $3.626 billion at the end of the previous quarter.
Cash flow from operations was $2.04 billion in the second fiscal quarter compared to $1.8 billion in the first fiscal quarter. During the quarter under review, the company repurchased 1.9 million shares.
For the third quarter of fiscal 2022, Adobe forecasts total revenue of $4.43 billion. Zacks’ consensus estimate for revenue is pegged at $4.5 billion.
Adobe expects 13% year-over-year revenue growth from digital media. Revenue in the Digital Experience segment is expected to grow 12% year-over-year.
Net new ARR in the digital media segment is projected at $430 million. Additionally, digital experience subscription revenue is expected to grow 13% year-over-year.
Management expects non-GAAP earnings of $3.33 per share. Zacks consensus estimate for the same is pegged at $3.36 per share.
For fiscal year 2022, Adobe forecasts total revenue of $17.65 billion. Zacks’ consensus estimate for revenue is pegged at $17.83 billion.
Adobe expects 12% year-over-year revenue growth from digital media. Revenue in the Digital Experience segment is expected to grow 14% year-over-year.
Net new ARR in the digital media segment for fiscal year 2022 is forecast at $1.9 billion. Additionally, digital experience subscription revenue is expected to grow 15% year-over-year.
Management expects non-GAAP earnings of $13.5 per share. Zacks consensus estimate for the same is pegged at $13.59 per share.
We note that the above indications include the impacts of ongoing tensions between Russia and Ukraine, due to which Adobe has halted its sales of products and services in Russia and Belarus.
Additionally, a $175 million foreign exchange headwind is expected to be reflected in revenue for the third and fourth quarters of fiscal 2022.
Additionally, the company expects summer seasonality to impact its fiscal performance in the third quarter.
Zacks Ranking and Stocks to Consider
Currently, Adobe carries a Zacks Rank #4 (selling).
Investors interested in the broader Zacks Computer & Technology sector may consider some higher-ranked stocks like Avnet (AVT – free report), Aspen Technology (AZPN – free report) and Amdocs (DOX – free report). While Avnet and Aspen Technology currently sport a Zacks rank #1 (strong buy), Amdocs wears a Zacks rank #2 (buy). You can see the full list of today’s Zacks #1 Rank stocks here.
Avnet has gained 7.9% since the start of the year. AVT’s long-term earnings growth rate is currently projected at 37.2%.
Aspen Technology has returned 21.1% year-to-date. AZPN’s long-term earnings growth rate is currently projected at 18.4%.
Amdocs has gained 5.2% since the start of the year. The long-term earnings growth rate for DOX is currently projected at 10%.