Adobe capitalises on accelerated digital shift

To analysts at Jefferies, second quarter results for US software giant Adobe (US:ADBE) were “one of the strongest we’ve seen ADBE deliver, as all three growth engines appear to be firing on all cylinders”.

With the pandemic accelerating the shift towards a more digital world, the three months to 4 June saw revenue jump by 23 per cent year-on-year to $3.84bn (£2.77bn) – ahead of the company’s guidance of $3.72bn – with subscriptions accounting for 92 per cent of total sales.

Momentum was led by the digital media business, which includes creative cloud software solutions such as Photoshop, and document cloud offerings such as Adobe Sign for e-signatures. On the back of new product innovations and increasing customer retention, revenue from this division leapt by a quarter year-on-year to $2.79bn. This includes the addition of more than $500m of annualised recurring revenue, reflecting higher sales of mobile and iPad applications.

The smaller digital experience business – which provides marketing tools and analytics – pulled in $938m of revenue, a 21 per cent increase versus a year earlier. The company says it saw “explosive” growth in bookings for the Adobe Experience Platform and associated services, with the order book now exceeding $100m.

Overall, Adobe’s operating profit surged by almost two-fifths year-on-year to $1.41bn, with the margin expanding by 4.3 percentage points to 36.7 per cent. The company generated an adjusted EPS of $3.03, exceeding consensus analyst expectations of $2.81.

Looking ahead, Adobe is guiding to $3.88bn of revenue in the third quarter. While it is projecting that adjusted EPS will tick down sequentially to $3.00, this is still higher than brokers had been anticipating.

Having announced its second quarter results after market close, the company’s shares climbed by 3 per cent in after-hours trading, and they have risen by almost 90 per cent from their ‘Corona crunch’ trough. There is no getting around the fact that the shares are expensive at 40 times consensus 2022 earnings. But Adobe offers impressive margins and a high degree of recurring revenue, and its growth should continue as economies open up and businesses continue to see the benefits of software investment. Buy.

Last IC View: Buy, $471, 17 Sep 2020