Adobe‘s (NASDAQ: ADBE) fiscal third-quarter financial report, released on Tuesday, was another strong showing as the company beat analyst expectations for both revenue and earnings.
The software developer, whose best-known product is Photoshop, reported profit of $792.8 million, or $1.63 a share, on sales of $2.83 billion, up from $2.29 billion a year ago. After adjusting for stock-based compensation and other costs, the company claimed earnings of $2.05 a share, up from $1.73 a share a year ago. Analysts were expecting adjusted earnings of $1.97 a share.
But good numbers are often overshadowed by forward projections and investors were a little unimpressed with management’s Q4 guidance, which came in below analyst expectations.
Here are three metrics that stood out in Adobe’s third-quarter results.
1. Sales growth of more than 20% yet again
Although investors may be a bit disappointed in Adobe’s forecast, solid sales growth is still impressive, and something that many companies would love to be able to achieve. Adobe projects that revenue from its digital media segment — which includes key products such as Photoshop and Acrobat — will rise by 20% year over year in Q4. The digital experience unit, which centers on solutions for analytics and marketing, is expected to see even stronger growth of 23%.
Those growth numbers are a bit smaller than the 24% year-over-year sales growth that Adobe saw in Q3. However, the company has achieved similar results in recent years. In 2018, revenue was also up around 24%, while in 2017 it rose by 25% and was up 22% in 2016.
This is par for the course for Adobe, and investors shouldn’t be disappointed with sales growth near 20% — they should expect it. The one area where Adobe has excelled recently has been the digital experience segment. Revenue for the unit climbed 34% this past quarter after seeing similar growth in Q2. However, digital media still remains the company’s bread and butter, accounting for more than two-thirds of Adobe’s total sales.
2. Operating margin of 30% — slightly down from last year
One number that’s always important to look at, perhaps more so than net income, is the company’s operating margin, because it factors out a lot of the noise coming from other non-recurring items. Adobe generated operating income of $854 million in Q3, which was an improvement of about 19% from the prior year. The one minor blemish on the income statement was that this figure was just 30% of revenue this quarter, compared to 31% a year ago. However, it’s still a solid showing that puts the company in a strong financial position. Barring some big surprises in the company’s operating expenses, investors should expect to see this figure remain intact.
3. Strong cash flow, with $922 million generated from operating activities
Adobe’s cash flow continues to look good. There was some noise in its working capital that forced changes in other operating assets and liabilities and drained its cash flow by $335 million, but the company was still only $33 million shy of the amount it generated a year ago. And with no big acquisitions this quarter, and just $165 million spent on capital expenditures and investments, Adobe had ample room to buy back more shares. It repurchased 2.6 million shares, to the tune of $750 million.
Key takeaways
The third quarter was consistent with Adobe’s recent results. The company is even consistent when it comes to beating earnings expectations: It has now beaten Zacks’ estimates in nine of the past 10 reporting periods.
Unfortunately, that steadiness has arguably prevented the stock from seeing big jumps in stock price when it announces earnings. Investors have simply become accustomed to it.
However, Adobe is still a good growth stock, and although it may not have astronomical growth rates, that doesn’t mean it still can’t add value for investors. In the past five years, its share price has risen by 318%. Although the stock has been a bit unexciting of late, Adobe still makes for a very good, reliable investment that investors can hold for years.
