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Adobe’s Fiscal 1Q16 Results Beat Analysts’ Expectations

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Adobe continued its double-digit growth

As scheduled, Adobe (ADBE) reported its fiscal 1Q16 earnings on March 17, 2016. For fiscal 1Q16, Adobe posted revenue and non-GAAP (generally accepted accounting principles) EPS (earnings per share) of $1.38 billion and $0.66, respectively. It beat analysts’ expectations by $40 million and $0.05, respectively.

Adobe surpassed analysts’ expectations. It also exceeded its own guidance for fiscal 1Q16. For 1Q16, Adobe expected its revenue and EPS (earnings per share) to be $1.3 billion–$1.35 billion and $0.56–$0.62, respectively, as we highlighted in our Adobe’s pre-earnings fiscal 1Q16 series. Oracle (ORCL), another company in the enterprise software space, announced its fiscal 3Q16 earnings on March 15, 2016. On a YoY (year-over-year) basis, Adobe’s fiscal 1Q16 revenue and EPS grew by 24% and 50%, respectively.

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Customer migration and addition continued to boost Adobe subscriptions

Looking at Adobe’s continued growth including its recently announced fiscal 1Q16 results, it appears that Adobe is transitioning well from the traditional licensed software business to the increasingly favored web-based subscription model. The subscription model is preferred because it leads to more predictable recurring revenue.

The above chart shows the contribution of subscriptions toward the overall revenue in fiscal 1Q16. Subscriptions’ contribution surged to 77%—compared to 64% in fiscal 1Q15. Adobe stated that 81% of its revenue in fiscal 1Q16 was recurring.

Adobe’s subscription growth caused the deferred revenue balance to grow 36% on YoY basis to $1.61 billion. Adobe’s subscription includes software, selected services for file sharing and publishing, and access to Apple (AAPL) iOS and Google (GOOG) (GOOGL) Android apps.

You could consider investing in the PowerShares QQQ Trust, Series 1 ETF (QQQ) to gain exposure to Adobe. The company accounts for 0.84% of QQQ. Investors who would like application software exposure could also consider this ETF. Application software accounts for ~24% of QQQ.

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