Adobe Systems Reports Solid Q3; Oppenheimer Waiting For Better Entry Point On Fairly Valued Shares

Better-than-expected third-quarter results from Adobe Systems Incorporated ADBE is not enough for Oppenheimer to become constructive on the stock; it remains on the sidelines waiting for a better entry point.

Oppenheimer maintains its Perform rating on Adobe, saying the shares are "fairly valued."

Adobe raised the high-end of FY16 revenue guidance by $50 million to about $5.80 billion–$5.85 billion (+21 percent year-over-year), and the midpoint is slightly above the $5.81 billion consensus. PF EPS guidance is raised to $2.94–3.00 and is above the $2.87 consensus.

Related Link: Analysts Mixed On Adobe Following Q3 Results, Outlook

Lead analyst Brian Schwartz pointed out the management's muted FY2017 and FY2018 EPS guidance update of "don't change EPS forecasts" despite about $0.14–$0.20 EPS raise to FY2016 guidance.

Schwartz said this "raises some concerns on sales efficiency trends, but this is more likely management setting numbers properly to reduce estimate risks."

Nevertheless, It Was A Killer Quarter

That said, one cannot overlook the strong quarterly numbers from Adobe. Revenue and EPS were ahead of consensus. Total revenue of $1.46 billion was about $10 million above consensus, and PF EPS of $0.75 was $0.03 above consensus.

Among others, Creative Cloud ARR in constant currency was $3.256 billion, versus $2.289 billion in the year-ago quarter. Digital Media ARR in constant currency also grew to $3.698 billion from $2.646 billion last year.

In addition, subscription revenue increased 41 percent to $1.169 billion. Billings rose 22 percent to $1.58 billion, and total deferred revenue advanced 38 percent to $1.798 billion.

On the balance sheet front, free cash flow increased 49 percent to $463 million. The company ended the quarter with approximately $4.45 billion in cash ($5.02/net cash per share) and $1.92 billion in debt.

On the flip side, Adobe hinted that EPS growth could decelerate the next two years given investment requirements to support strong growth. Further, the quarterly PF operating margin was 33.5 percent (+390bps year-over-year), "which displays the slowest operating margin expansion in seven quarters."

Looking Ahead

For the fourth quarter, Adobe sees total revenue of $1.55 billion–$1.60 billion, which is in line with the $1.58 billion consensus, while PF EPS guidance of $0.83–$0.89 is above the $0.78 consensus.

"There are few large-cap software companies generating consistently strong growth rates with improving operating margins, similar to Adobe's 3Q results, and this scarcity, along with management's continuing ability to deliver good execution and EPS upside in quarterly reported results, lends support to its premium stock valuation," Schwartz wrote in a note.

At time of writing, shares of Adobe rose 6.81 percent to $107.48 after touching a 52-week high of $108.19.

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