Shares of Adobe Systems Incorporated (NASDAQ:ADBE) ended the week 9.5 % higher for the week and outperformed the market (NASDAQ rose 1.4% for the week) by a wide margin as investors in the company continued to believe in the company’s turnaround story. Technology peer Oracle Corporation (NYSE:ORCL) also announced its results this week., see our recent post Earnings Analysis for Oracle Corporation (NYSE:ORCL) — Fading Growth?
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Adobe Systems Incorporated (NASDAQ:ADBE) Earnings Analysis
Our earnings analysis is peer relative (see the end of this post for the peer list we used) and looks at what’s driving the company’s current valuation and its growth and investment strategy. For full transcript see: Adobe Systems Incorporated Q3 2013 earnings discussion. The table below shows the preliminary results along with the recent trend for revenues, net income and returns for Adobe Systems Incorporated for the quarter ended 2013-08-31.
| Quarterly (USD million) | 2013-08-31 | 2013-05-31 | 2013-02-28 | 2012-11-30 | 2012-08-31 |
|---|---|---|---|---|---|
| Revenues | 995.1 | 995.3 | 1,000.8 | 1,153.4 | 1,072.9 |
| Revenue Growth % | (0.0) | (0.6) | (13.2) | 7.5 | (3.7) |
| Net Income | 83.0 | 76.5 | 65.1 | 222.3 | 201.4 |
| Net Income Growth % | 8.4 | 17.6 | (70.7) | 10.4 | (10.1) |
| Net Margin % | 8.3 | 7.7 | 6.5 | 19.3 | 18.8 |
| ROE % (Annualized) | 4.8 | 4.5 | 3.9 | 13.6 | 12.8 |
| ROA % (Annualized) | 3.2 | 3.0 | 2.6 | 9.1 | 8.5 |
Turnaround in Adobe
Adobe Systems Inc’s current Price/Book of 3.8 is about median in its peer group but the market expects the company to grow faster than its peers and this is reflected in its relatively high P/E ratio of 58.9 compared to peer median of 23.2. The gradual improvement of Adobe’s operations is expected to boost its return on equity (ROE) from its current 6.7% which is below its peer median of 25.4%. Effectively, the market is looking forward to a turnaround in Adobe’s current performance.
Indeed, there is enough room for improvement, as evident from its low net profit margins (currently 10.8% vs. peer median of 19.7%) and poor asset turns (currently 0.4x compared to peer median of 0.6x). We currently classify this operating model as problematic relative to its peers. ADBEs net margin is its lowest relative to the last five years and compares to a high of 24.4% in 2008.
Superior Growth Prospects
Adobe has grown its revenues faster than its peers (14.7% vs. 11.5% respectively for the past three years). The market also sees relatively higher long-term growth prospects for the company, giving it a better than peer median PE ratio of 58.9. Overall, we classify the company’s growth prospects as superior relative to its peers.
The company’s annualized rate of change in capital of 11.5% over the past three years is around its peer median of 11.6%. This investment has generated a less than peer median return on capital of 11.6% averaged over the same three years. The below median return implies that the company is yet to reap the benefits of its investments.
Revenue Trends
Peers Used for Analysis
We compared the following companies to Adobe Systems Incorporated (NASDAQ:ADBE) in our analysis: Oracle Corporation (NYSE:ORCL) SAP AG (NYSE:SAP), Intuit Inc. (NASDAQ:INTU) and Microsoft Corporation (NASDAQ:MSFT).
