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Adobe Soars on Cloud Optimism: What Wall Street's Saying

Posted
9/18/2013 9:55:00 AM
By: Chris Ciaccia
Referenced Stocks:ADBE

Adobe Systems (ADBE) shares surged in early Wednesday trading despite the company missing estimates, as its cloud subscription revenue and subscriptions came in better than forecast.

Adobe is transitioning from a software company into a cloud computing company, putting its Creative Cloud software in the cloud. On that front, Adobe beat Wall Street's estimates soundly, adding 331,000 subscriptions, well ahead of a Briefing.com estimate of 262,000 subscribers. At the end of the quarter, the San Jose-based Adobe said subscribers topped the 1 million mark.

“Our customers are overwhelmingly choosing subscriptions instead of perpetual model licenses which is accelerating our business model transition,” Adobe's executive vice president and CFO Mark Garrett said in a press release. “During Q3, 41 percent of our revenue was recurring and we exited the quarter with record deferred revenue on our balance sheet. These results are building a stronger, more predictable revenue model for Adobe which will drive higher long-term growth.”

However, for the fiscal third-quarter, Adobe earned 32 cents per share on $995.1 million in revenue, below analysts expectations of 34 cents per share on $1.01 billion in sales.

On the company's earnings call, Adobe said it expects earnings to be between 28 cents and 34 cents per share, with sales between $1 billion and $1.05 billion, while continuing to add to its Creative Cloud subscription numbers. Analysts surveyed by Thomson Reuters are looking for earnings of 35 cents per share on $1.05 billion in revenue for the fiscal fourth quarter.

In light of the continued strength in cloud subscription revenue and subscriber numbers, Wall Street analysts were largely positive on the stock. Here's what a few of them had to say.

Citi analyst Walter Pritchard (Buy, $56 PT)

"Net sub adds of 331K was well ahead of our 275K and street 263K was driven by uptake of Team edition, the discontinuation of the perpetual product and higher retention than originally assumed. Management raised FY subscriber guidance from 1.25M towards our 1.35M estimate with Q4 guide of “slightly up”. Enterprise annuity (ETLA) signings were strong helping to drive Creative ARR of $546M, ahead of our $512M. Revenue of $995M was below street $1.01B and more inline with our $997M as a result of the more pronounced transition. Digital marketing was strong @ $311 vs. our $291M (street $297M). Even excluding $6M from Neolane, the segment still outperformed. Lower revenue and slightly higher OpEx (Neolane) drove EPS of $0.32 vs. street $0.34. Management gave the stock a vote of confidence with $400M in buyback, well above recent $100-200M quarterly rate."

UBS analyst Brent Thill (Buy, $58 PT)

"ADBE’s subscription migration playbook is working better than expected. Q3 added 331K net new subs, beating our 255K est. & StreetAccount consensus 263K. While the subs base passed 1M users, it is still early as it represents <10% of the CS3-6 installed base of 12.8M users. Recurring rev mix reached 41% of total rev (vs. 26% in F4Q12), much earlier than initial goal (set in late ’11) of yr-end FY14. Over the L-T as subs migration deepens, recurring rev mix & visibility should increase significantly, while op mgns could rebound 1,000bp back to 30s%."

Lazard Capital Markets analyst Brett Fodero (Neutral)

"Revenues of $995M came in below our $1.017B and consensus $1.010B driven predominantly by a continued shift to subscription and ARR. Creative ARR came in at $545M vs our $498M as subscriber adds surprised to the upside at 331K vs our 250K. The FY14/15 top and bottom line come down and we expect acceleration in both revenue and earnings thereafter. Results continue to be choppy as the model transitions in both main businesses, and we believe shares already discount peak model earnings power."

Deutsche Bank analyst Nandan Amladi (Buy, $58 PT)

"Adobe delivered 3Q13 of $995m/$0.32, within guidance range but shy of estimate of $1,010/$0.34. As subscriptions built well ahead of plan adding 331K subs, the company trimmed rev/EPS guidance for the remaining quarter of this fiscal year to $1,025m/$0.31 at midpoint vs. estimates of $1071m/$0.40. Investors have looked past the lowered estimates and given the company credit for gains in deferred revenue and subscriber count, both of which have exceeded expectations. We reiterate our Buy rating on solid execution and a competitive defensibility that is strengthening with a sticky revenue base."