Adobe (ADBE) 4th Quarter Earnings: What to Expect

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The word “execution” has become cliche in the stock market and the word is thrown a lot, particularly when assessing the managerial capabilities of certain companies. While beating on the top- and bottom lines in each earnings report often qualifies as “execution,” it goes (or should go) deeper than that.

No other company has lived up to my definition of “execution” more than Adobe (ADBE), which is set to report fourth quarter fiscal 2018 earnings results after the closing bell Thursday. The company has done what IBM (IBM) and Hewlett-Packard Enterprise (HPE) have struggled to do — adapt. With the launch of its Creative Cloud platform, the management has transitioned Adobe’s suite of creative products such as Photoshop, Illustrator and Premiere towards the cloud.

The company has completely moved away from selling software in a box to become a full-fledged cloud subscription service, operating three cloud computing segments: Creative Cloud, Marketing Cloud and Document Cloud. Adobe’s management team has strategically positioned the company as a leader in the Digital Media space, thanks to several secular trends and the qualities its cloud applications offer.

While larger companies such Oracle (ORCL) have entered the space, Adobe continues to deliver better-than-expected subscription adoption among government and educational institutions. This is because the Cloud service not only allows customers to more easily access its suite of applications across multiple platforms, it also makes it more affordable. In turn, this has buoyed the penetration rate of Adobe’s end markets.

And with some 90% of the company’s total revenues coming from subscriptions, Wall Street expect not only a top- and bottom-line beat Thursday, but also upside guidance.

For the quarter that ended November, Wall Street expect Adobe to earn $1.88 per share on revenue of $2.42 billion. This compares to the year-ago quarter when earnings came to $1.26 per share on revenue of $2.01 billion. For the full year, earnings are expected to rise 58% year over year to $6.81 per share, while full-year revenue of $8.99 billion would climb 23.2% year over year.

Owing to net-new subscribers and the growing adoption of its enterprise services, expectations are high for Adobe’s Creative Cloud segment, which is approaching annualized revenue of $6 billion. Elsewhere large Marketing Cloud customers such as Verizon (VZ), UPS (UPS) and Pandora (P), among others, should further boost the top line, which has grown at a compound annual rate of 20% over the past three years.

Beyond the headline numbers, analysts will look for strength in the company’s gross margins, which has been a strong indicator of not only the company’s pricing power, but also its operating efficiency. To the extent operating margin, which was 40.4% in Q3, come in at the higher end of guidance, this would quell fears about the high valuation of the stock.

But given Adobe’s qualities such as 20%+ revenue growth, combine with rising EPS and its expanding FCF — my definition of execution — Adobe will be on my watchlist as strong growth candidate for 2019.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Referenced Symbols: ADBE

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