Is Adobe Poised To Beat Earnings Expectations With Record-High Revenue?

Adobe Systems (ADBE) is set to report second quarter earnings Tuesday after the closing bell. The Estimize EPS consensus is set at $0.47, 3 cents higher than both company issued guidance and Wall Street’s expectations. Revenue expectations of $1.17 billion also surpass the Street and company guidance marginally. These numbers would put Adobe’s year-over-year earnings growth at 2.7% and its revenue growth at 6%. Adobe stock is up 7.5% year-to-date versus the S&P at 1.1%, although recently the price has been stagnant.

Adobe develops digital marketing and media solutions. Looking to expand its foothold in the realm of 3D technology, Adobe recently acquired Mixamo, a 3D animation start-up, on June 1st. The incorporation of Mixamo into Photoshop should allow designers to operate 3D tools with greater ease.

Two and a half years ago, the software giant began its successful transition to Creative Cloud and a subscription-based model, which is now a major valuation driver.  A software as a service, Creative Cloud is a subscription based service that allows subscribers to download and install Adobe’s software over the internet. The 517,000 subscriptions added last quarter missed the sell-side analysts’ estimate of 575,000, and investors expect that number to jump this quarter. 

Photo Credit: Tomasz Tunguz

As Adobe completes its transition to a SaaS company, revenue from the Creative Cloud division will drive its growth. A look into Adobe’s price-to-sales ratio shows that the company is approaching its historical plateau. Typically, Adobe has experienced a peak P/S ratio around 8x. Beginning in 2012 with its transition to a SaaS model, Adobe’s P/S ratio, as well as its price, began to rapidly increase while year-over-year revenue growth failed to surpass 10%. 

With both company guidance and the Estimize consensus projecting FQ2 revenues to land at a record high of $1.15 billion and $1.17 respectively, Adobe might be able to achieve the revenue growth that it is seeking. This Tuesday’s earnings report will prove to be pivotal for Adobe as the company aims to complete its revenue model transformation.