Computer software company Adobe Inc. (ADBE, Financial), maker of the iconic Adobe Creative Suite, reported earnings results for its second quarter of fiscal 2021 after the closing bell on June 18.
The company beat analyst estimates in terms of both earnings and revenue, sending the stock up in after-hours trading. On Friday, the stock gained more than 2% to trade around $564.74.
Earnings overview
For its second quarter of fiscal 2021, which ended on June 4, Adobe reported revenue of $3.84 billion, up 23% year over year, along with earnings per share of $2.32 on a GAAP basis and $3.03 on an adjusted basis. Analysts had been expecting revenue of $3.73 billion and adjusted earnings per share of $2.82.
By segment, digital media revenue grew 25% to $2.79 billion, creative revenue grew 24% to $2.32 billion and document cloud revenue grew 30% to $469 million. The digital media segment’s annualized recurring revenue increased $518 million quarter over quarter to $11.21 billion, while ARR for the creative segment grew to $9.53 billion and document cloud ARR grew to $1.68 billion.
Adobe’s strong growth was driven by increased demand for subscriptions, with the increase in global marketing campaigns greatly boosting the creative segment. Education and Adobe Stock subscription growth was strong, and Acrobat and Teams drove growth in the document cloud segment. All in all, the company continued to benefit from the increasing global shift to digital work, education and creative environments.
The operating margin for the quarter was 36.7%, an improvement from 32.5% in the year-ago quarter, but down from 37.2% in the previous quarter. Cash flows from operations set a new company record at $1.99 billion.
Shantanu Narayen, Adobe’s president and CEO, had the following to say:
“Adobe had an outstanding second quarter as Creative Cloud, Document Cloud and Experience Cloud continue to transform work, learn and play in a digital-first world… Our innovative product roadmap and unparalleled leadership in creativity, digital documents and customer experience management position us for continued success in 2021 and beyond.”
Adobe repurchased 2.1 million of its own shares in the quarter for a cost of $983 million. It has $15.1 billion remaining under its repurchase authorization.
The company ended the quarter with cash and short-term investments of $5.77 billion. Long-term debt was $4.12 billion.
Looking forward
For its fiscal third quarter, Adobe is guiding for revenue of $3.88 billion, GAAP earnings per share of $2.27 and adjusted earnings of $3.00. It is also aiming for a share count of approximately 480 million, which suggests the company is not planning any significant share repurchases next quarter and could perhaps be a net issuer of shares.
While Adobe continued to save on site expenses as employees worked from home during the second quarter, the company plans to return many employees to offices and business travel during the third quarter, which will increase its expenses related to facilities and travel.
Adobe said that it is pleased with its first-quarter momentum, and it expects that same momentum (approximately 20% to 25% growth) to continue in the second half of the fiscal year as well.
Valuation
With a price-earnings ratio of 48.95, well above the industry median of 32.05, shares of Adobe aren’t cheap. The GuruFocus Value chart rates the stock as modestly overvalued, with the stock’s intrinsic value not expected to catch up with its current price until 2023.
However, if the company can keep up its momentum, growing the top and bottom lines more than 20% for the second half of fiscal 2021 and the next couple of years, the stock might not necessarily be overvalued. The current multiple is below its 10-year median price-earnings ratio of 50.53, suggesting a reasonable valuation.
