Can Adobe End 2018 On A High Note After Solid Fiscal Q3?

by Trefis Team
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Adobe (NASDAQ:ADBE) announced its Q3 FY’18 results on Thursday, September 13, reporting a solid 24% increase in net revenue to $2.3 billion. Adobe has reported strong growth in revenues and profits in the last few quarters, which has driven its stock rally in the last twelve months. Adobe’s stock price has increased from $155 to around $270 currently – a 70% increase. We expect the trend to continue through the end of the current year, particularly for Digital Experience and Digital Media offerings, according to Adobe’s management. We have created an interactive full year earnings forecast dashboard for Adobe where we have summarized our expectations for the company’s FY’18 results on our platform. You can change expected segment revenue and net margin figures for Adobe to gauge how changes will impact its value.

Key Growth Trends

Through the first three quarters of the fiscal year, Adobe has reported a nearly 30% y-o-y increase in subscription revenues to $5.7 billion, which at least in part was attributable to customers migrating from perpetual licenses to subscriptions. Management expects this trend to continue through the end of the year, albeit at a slower pace. The Digital Media segment includes revenues from Creative Cloud and Adobe Document Cloud. In recent years, Creative Cloud revenues have increased in high double digits, driven by increases in individual, team and enterprise subscriptions. Comparatively, product revenues were down 9-10% through the three quarters combined to $472 million. Services revenues were up by a modest 4% to $356 million. Going forward, Adobe’s subscription-based revenues from the Digital Media segment are likely to continue to grow rapidly and drive top-line growth. Adobe’s management expects net revenues to increase as rapidly to $2.4 billion in the fourth quarter, keeping up the growth spree.

We forecast full year revenues to increase almost 23-24% for the full year to $9 billion as well. In terms of margins, we forecast a 4 percentage point improvement in operating margins (non-GAAP) to 42% for the year, a trend consistent with the first three quarters. As a result of strong revenue growth, improving margins and lower taxes for 2018, Adobe has reported a nearly 60% increase in net income and EPS through the three quarters of the year. This should also continue for the December quarter based on prevalent trends and our expectations for the quarter.

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