Adobe Systems Inc
. (
ADBE
) reported earnings of 42 cents for the first quarter ended
February 2012, missing the Zacks Consensus Estimate of 46 cents.
The results reflect weaker revenue across segments, with particular
weakness in Creative Suit and its significant exposure to the
European region. The GAAP tax rate was higher due to a one-time
charge related to the acquisition of Efficient Frontier.
Revenue
Adobe's total revenue was $1.045 billion, down 9.3%
sequentially, but up 1.7% year over year. The result was within
management's expectations of $1.025 billion to 1.075 billion. The
figure includes $9.6 million of revenue from the acquisition of
Efficient Frontier that closed in January 2012.
Excluding currency hedge gains of $10.3 million in the last
quarter, the positive impact of currency in the year-over-year
comparison was $7.7 million.
Products generated 77.4% of Adobe's revenue, down 13.7%
sequentially and 4.1% year over year. Subscription revenue
comprised 14% of revenue, up 18.5% sequentially and 37.7% from the
year-ago quarter. Services & Support brought in the balance,
decreasing 1.5% sequentially and increasing 14.7% year over
year.
Revenue by Segment
Digital Media Solutions
segment, which remains Adobe's largest, generated 69.9% of revenue
in the quarter. Segment revenue was down 11.7% sequentially and
4.0% from last year to $730.3 million. The CS family performance
was lower than expected in the quarter. However, management expects
demand to improve with the launch of Creative Suite and Creative
Cloud. Within the Digital Media segment, Document Services revenue
was $183.3 million, down 0.7% from the year-ago quarter and 10%
sequentially. Acrobat was in line with management expectations.
Digital Marketing segment
was down 3.6% sequentially but up 22.1% year over year at $259.9
million. This segment accounted for 24.8% of the total first
quarter revenue. Within the Digital Marketing segment, Digital
Marketing Suite revenue was up 33% from the year-ago quarter, aided
by the acquisition of Efficient Frontier. Excluding Efficient
Frontier, Digital Marketing Suite revenue grew 26% year over
year.
Print and Publishing
brought in the remaining 5.3% of revenue, down 0.2% sequentially
and up 2.4% from the prior-year quarter at $55.0 million.
Revenue by Geography
Adobe's business is fairly well diversified across geographical
regions, although the Americas remains the largest contributor to
its revenues, with a share of around 48%. Europe accounted for
another 32% in the reported quarter, with the balance coming from
Asia.
Margins
Reported gross margin for the quarter was 89.6%, up 10 bps from
89.5% in the comparable year-ago quarter. The gross margin is
typical of a software company and variations are generally related
to the mix of revenues between categories.
Adobe reported operating expenses of $648.0 million, which were
4.9% higher than the year-ago quarter's $617.7 million. Higher
expenses resulted in an operating margin of 27.7%, which was down
from 29.4% in the year-ago quarter. G&A came in flattish as a
percentage of sales, S&M increased slightly while R&D
declined.
Net Income
On a fully diluted GAAP basis, Adobe recorded a net income of
$185.2 million (37 cents per share) compared to $234.6 million (46
cents per share) in the year-ago quarter and $173.7 million (35
cents per share) in the previous quarter.
On a pro forma basis, Adobe generated a net income of $209.9
million compared to $250.8 million in the same quarter last year
and 270.6 million in the previous quarter. The fully diluted pro
forma earnings per share (
EPS
) came in at 42 cents, compared to 49 cents in the year-ago quarter
and 55 cents in the previous quarter.
Our pro forma estimate excludes restructuring gains,
amortization of intangibles, investments gain/loss and tax
adjustments, but includes stock-based and deferred compensation.
Our pro forma calculations may differ from management's
presentation due to the inclusion/exclusion of any item that was
not considered by management.
Balance Sheet
Adobe ended the first quarter with a cash and investments
balance of $2.77 billion versus $2.91 billion in the previous
quarter. Cash and investments were around 30% of total assets at
quarter-end. Cash generated from operations was $314.4 million.
Principal uses of cash during the quarter included $51.1 million on
capex and $353.2 million on acquisitions net of cash acquired.
At quarter-end, Adobe had $1.50 billion in long-term debt,
taking the net cash balance to $1.27 billion.
Guidance
Adobe provided guidance for both the second quarter and fiscal
2012 on both GAAP and non-GAAP basis.
For the second quarter, management expects revenue in the range
of $1.09 billion to $1.14 billion. Additionally, management expects
Digital Media revenue to grow sequentially with the launch of CS6.
In the Digital Marketing segment, management expects Digital
Marketing Suite revenue to grow sequentially with Efficient
Frontier contributing approximately $15 million. However,
management expects legacy Enterprise product revenue to decline
sequentially by approximately $30 million. Print and Publishing
segment is expected to be relatively flat.
Accordingly, based on a share count of 502-504 million, the GAAP
EPS is expected to be 37 centsto 43 cents, including stock-based
compensation of 18-16 cents, restructuring and other charges of 1
cents, intangibles amortization charges of 6 cents and income tax
adjustments of 5 cents, excluding all of which, the non GAAP EPS is
expected to be 57-61 cents. Currently, the Zacks Consensus Estimate
for the upcoming quarter is pegged at 48 cents.
For the year, Adobe expects GAAP earnings of $1.63 to $1.73 and
non GAAP earnings of $2.38 to $2.48 based on a share count of 502
million to 504 million shares.
Our Recommendation
We find Adobe's first quarter results unimpressive, as the
bottom line missed the Zacks Consensus Estimate. While we remain
positive about Adobe's market position, its compelling product
lines (CS cloud initiative and digital media products included),
continued innovation and strong balance sheet, the end market
recovery appears slow.
Also, we believe that the expected launch of Creative Suite 6 in
April and solid initial adoption of Creative Cloud could serve as
potential catalysts. Adobe's recent acquisition of Efficient
Frontier will enhance its Digital Marketing suite by adding
optimization capabilities for search and display advertising while
accelerating its entry into social advertising.
However, strong competition from
Apple Inc.
(
APPL
) and
Microsoft Corp.
(
MSFT
) remains a matter of concern.
Adobe shares currently have a Zacks Rank of #2, implying a
short-term Buy recommendation.
ADOBE SYSTEMS (
ADBE
): Free Stock Analysis Report
MICROSOFT CORP (
MSFT
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