Adobe Systems Inc. (ADBE, Financial) revealed its first quarter earnings report for fiscal 2015. The company logged its best quarterly earnings growth over the last four years, with profit surging on the back of the softwaremaker’s continued shift to the more predictable subscriptions-based business model. Adobe posted a 46% year-over-year growth in earnings to $0.44 a share for the first quarter, beating consensus estimates by 5 cents. However, a conservative outlook for the second quarter sent the Adobe stock sliding as much as 3.83% to $76.61 during after-hours trading following the results.
Shift in business model spurs revenues
Adobe Systems reported 11% year-over-year growth in revenues to $1.109 billion for the first quarter of fiscal 2015, beating the consensus estimate of $1.085 billion. The company’s GAAP earnings stood at $0.17 a share on net income of $848.8 million compared to $0.09 from the year-ago quarter. Adobe attributed the growth to the continued transition of its creative software business from a buy-and-own perpetual licensing model to an online Cloud-based model with users of its popular Illustrator and Photoshop software being able to use its Creative Cloud software on a monthly subscription basis. Adobe also reported a massive 80% growth in net income to nearly $85 million in the quarter.
During the first quarter, Adobe added 517,000 net new subscriptions to its Creative Cloud business, up 28% compared to new subscriptions added in the year-ago quarter, taking its overall subscription count to 3.97 million. Revenues from its Marketing Cloud business grew 17% compared to the year-ago quarter to $311 million. While Adobe’s revenue from subscription services grew from $423.6 million in the year-ago quarter to $713.4 million, revenue from sale of buy-and-own licensed products fell from the year-ago quarter’s $471.45 million to $290.77 million. Revenues from the company’s Services and Support division remained relatively flat year-over-year. Further, the company generated 70% of its Q1 revenue from recurring sources, compared to 52% in the prior-year quarter, with annualized recurring revenue of $2.09 billion at its digital media business and $1.79 billion at its creative software business.
Second quarter outlook
While Adobe already boasts two successful Cloud businesses including Creative Cloud and Adobe Marketing Cloud, the company recently launched its document-sharing software- Document Cloud. For the second quarter of fiscal 2015, the company, which competes with businesses such as Apple Inc. (AAPL, Financial) and Microsoft Corporation (MSFT, Financial) in the Application Software market, projected adjusted EPS of $0.44 per share on revenues of $1.15 billion, almost flat compared to the first quarter. The figure also falls short of consensus estimates that had projected EPS of $0.48 a share on revenues of $1.18 billion.
Final thoughts
Adobe reported upbeat Q1 earnings, indicating the success of the company’s shift from license-based to subscription based business model. The softwaremaker is also focused on adding new products to its stable that would enable it to reach a wider user base in the coming years. Although Adobe bought-back around 2.4 million shares and returned $174 million of cash to shareholders during the quarter, investors were slightly disappointed with the return on equity. However, with strengths such as rise in net income, revenue growth, good operational cash flow and robust stock performance, experts foresee the Adobe’s earnings growing at an average annual rate of 9%-13%, with a 102% earnings growth in fiscal 2015 compared to 2014. Consequently, the Adobe stock carries a "buy" guidance for the short and mid-term.
