Adobe Systems Inc
) reported third quarter 2012 earnings of 45 cents per share,
missing the Zacks Consensus Estimate of 47 cents. The adjusted
earnings per share exclude one-time items, but include stock-based
Adobe's total revenue was $1.081 billion, down 3.8% sequentially
but up 6.7% year over year. Reported revenue was towards the lower
end of the management's expectation range of $1.075 billion to
$1.125 billion. The sequential decline was due to increased
adoption of new and lower priced subscription-based models by
Products generated 75.0% of Adobe's revenue, which was down
0.18% sequentially Subscription revenue comprised 16.0%, up 50.9%
sequentially, and Services & Support brought in the balance,
increasing 12.1% year over year.
Revenue by Segment
Digital Media Solutions
, which remains Adobe's largest, generated 71.2% of revenue in the
quarter. Segment revenue was down 8.9% sequentially but up 3.1%
year over year at $769.1 million.
Within Digital Media, Document Services (includes Acrobat family
and the new cloud-based services such as EchoSign) revenue was
$185.5 million. The segment had a record quarter, thanks to
continued Acrobat adoption in the enterprise as well as continued
momentum in EchoSign and other related Acrobat cloud services.
The company added more than 100,000 net new subscriptions, and
ended the third quarter with approximately 200,000 total paid
subscriptions for the Creative Cloud software suite.
Management was quite optimistic about Creative Cloud adoption
and expects to build a healthy pipeline for potential Creative
Cloud paid subscribers through marketing programs, trial downloads
and free memberships.
was up 2.5% sequentially but down 18.5% year over year at $257.1
million. This segment accounted for 23.8% of total third quarter
revenue. Within the segment, Digital Marketing Suite revenue was up
40% from the year-ago quarter at 192.4 million, aided by increased
demand for mobile devices. Mobile transactions increased to 18%, up
from 17% in the last quarter.
Revenue by Geography
In the third quarter, the Americas remained the largest
contributor to Adobe's revenues, with a share of around 52%. Europe
accounted for another 27%, with the balance coming from Asia.
Stable demand in the U.S.and Asia was partially offset by some
softness in Europe.
Reported gross margin for the quarter was 88.9%, down 80 bps
from 89.7% 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 $682.7 million, which were
7.6% higher than the year-ago quarter's $634.4 million. Operating
margin was 63.2%, which was slightly up from 62.6% in the year-ago
quarter. As a percentage of sales, research and development
expenses declined, while sales and marketing, and general and
administrative expenses increased slightly.
On a fully diluted GAAP basis, Adobe recorded a net income of
$201.4 million (40 cents per share) compared with $195.1 million
(39 cents per share) in the year-ago quarter and $223.9 million (45
cents per share) in the previous quarter.
On a pro forma basis, Adobe generated net income of $224.9
million compared with $219.4 million in the year-ago comparable
quarter and 245.7 million in the previous quarter. Fully diluted
pro forma earnings per share came in at 45 cents, compared with 44
cents in the year-ago quarter and 49 cents in the previous
Adobe ended the third quarter with cash and investments balance
of $3.25 billion versus $2.99 billion in the previous quarter. Days
sales outstanding (DSO) was 48 days versus 50 days in the year-ago
quarter and 43 days in the last quarter. Deferred revenue was
$560.3 million, down by $32.5 million sequentially.
Cash generated from operations was $263.3 million and capital
expenditure was $77.4 million. The company also repurchased
approximately 2.4 million shares at a total cost of $76.1
For the fourth quarter, management expects revenue in the range
of $1.075 billion to $1.125 billion. Additionally, management
expects Digital Media segment to be down sequentially due to
continued momentum in Creative Cloud adoption. In the Digital
Marketing segment, management expects Digital Marketing Suite
revenue to grow sequentially, offset by a slight sequential decline
in legacy Enterpriseproducts.
Accordingly, based on a share count of 500-502 million, GAAP EPS
is expected at 34 cents to 39 cents, including stock-based
compensation of 17 cents, intangibles amortization charges of 6
cents, restructuring charges of 1 cent, and income tax adjustment
of 5 cents, excluding all of which, non GAAP EPS is expected to be
53-58 cents. Currently, the Zacks Consensus Estimate for the
upcoming quarter is pegged at 56 cents.
Also for the fourth quarter, non-operating expense is expected
in the range of $18-$20 million. The tax rate is expected to be
approximately 23.5% on a GAAP basis and 22.5% on a non-GAAP
We find Adobe's third quarter results lackluster, as both
earnings and revenues missed the Zacks Consensus Estimate. The new
subscription service will hurt Adobe's financial growth, at least
over the short term, as it brings in revenues on a monthly basis,
instead of a lump sum at the start.
However, we remain positive about Adobe's market position, its
compelling product lines (including CS cloud initiative and digital
media products), continued innovation and strong balance sheet.
We believe that solid adoption of Creative Cloud could serve as
a potential catalyst going forward. Adobe's acquisition of
Efficient Frontier will further enhance its Digital Marketing suite
by adding optimization capabilities for search and display
advertising while accelerating its entry into social
However, end-market recovery appears slow and a weak demand
environment in Europe remains a matter of concern. Additionally,
the company faces strong competition from
Adobe shares currently have a Zacks #3 Rank, implying a Hold
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