Cloud Lifts Adobe Systems But Guidance Hits Stock

Adobe Systems saw sales and earnings growth accelerate in the third quarter as its business transition to the Internet cloud took hold. Adobe (ADBE) late Thursday said it earned 54 cents a share excluding items in its fiscal third quarter of 2015, beating Wall Street's target by 4 cents. Revenue also beat views at $1.22 billion, vs. the $1.21 billion predicted by analysts polled by Thomson Reuters.

Adjusted earnings per share rose 93% year over year in the quarter ended Aug. 28, vs. a 30% gain in Q2 and 47% in Q1.

Sales rose 21% year over year in Q3, vs. 9% in Q2 and 11% in Q1.

Adobe said the results were driven by strong Creative Cloud adoption and record Marketing Cloud products and services revenue.

On a GAAP basis, including stock-based compensation and other items, it earned 34 cents a share, vs. 9 cents a year earlier.

But Adobe management offered guidance for the current quarter below Wall Street targets.

For the fiscal fourth quarter, Adobe expects to earn 59 cents a share minus items, up 64% year over year, on sales of $1.3 billion, up 21%, based on the midpoint of its guidance. Analysts were modeling for EPS of 64 cents a share ex items on sales of $1.36 billion.

Adobe stock fell about 3% in after-hours trading. In the regular session Thursday, Adobe dipped a fraction to 80.31.

"Our record Q3 financial results set us up for a strong fiscal 2015," Adobe Chief Financial Officer Mark Garrett said in a statement. "Our recurring revenue has reached 73% of total revenue, providing a strong foundation for long-term growth.

Adobe has been moving its businesses from perpetual software licenses to subscriptions and cloud-based services. Adobe has three cloud computing businesses: Creative Cloud, Marketing Cloud and Document Cloud.

Creative Cloud includes well-known products for creative professionals such as Photoshop, Illustrator and InDesign. Marketing Cloud provides online marketing and advertising services. Document Cloud expands on Adobe's popular online document-sharing product Acrobat and its ubiquitous PDF format.

Adobe added 684,000 net new subscribers to its Creative Cloud business in Q3, bringing its total to over 5.33 million subscribers.

Annualized recurring revenue in its digital media units (Creative Cloud and Document Cloud) grew to $2.65 billion. Creative Cloud accounted for $2.3 billion.

On a conference call, Garrett said Adobe's overall business remains strong across key product segments and geographies.

"We continue to drive large portions of our legacy perpetual businesses to a recurring model, and this shift has improved the overall, long-term health of our business," Garrett said.

Adobe continues to perform well and its guidance was likely overly cautious, Edward Jones analyst Josh Olson told IBD.

He rates Adobe stock as hold, seeing the firm as fairly valued.

"They continue to execute pretty flawlessly," he said. "The guidance was a little light. But in terms of the current quarter, the continued cloud adoption is very strong and that was above our expectations in subscriber counts and recurring revenue.

Adobe stock has lifted as investors have gravitated to the company's compelling cloud business transition. Olson said he is looking for the next catalyst to drive the stock, which could be its Marketing Cloud business.

Adobe stock has risen 245% since the company first announced its Creative Cloud initiative on Oct. 3, 2011. The company holds an IBD Composite Rating of 83 out of a possible 99.