Adobe Systems Inc. (ADBE) is scheduled to announce its first quarter fiscal 2012 results on March 19, 2012, and we notice no movement in analyst estimates so far.
Prior-Quarter Synopsis
Adobe’s fourth quarter earnings per share (EPS) of 55 cents exceeded the Zacks Consensus Estimate of 50 cents, driven by stronger revenue across segments, solid cost management and a resurgent Europe.
Adobe’s total revenue was $1.152 billion, up 13.7% sequentially, on the strength in revenue segments and solid growth across both the CS and Acrobat product lines.
Margins increased sequentially on account of cost savings and a favorable mix. The product gross margin, which is the primary reason for Adobe’s high-margin profile, shrunk 42 basis points sequentially, while both subscription and services & support gross margin expanded sequentially.
Management Guidance
For the first quarter, Adobe expects revenue to come in at around $1.025 billion to $1.075 billion.
GAAP EPS is expected to be 37 cents to 43 cents, including stock-based compensation of 13–14 cents, restructuring and other charges of 3 cents, intangibles amortization charges of 5 cents and income tax adjustments of 5 cents, excluding all of which, the non-GAAP EPS is expected to be 54–59 cents. The Zacks Consensus Estimate for the quarter is currently pegged at 46 cents.
Agreement of Analysts
None of the 11 analysts covering the stock revised the estimate in the last 30 days. Even for fiscal 2012, there were no revisions in the last 30 days.
Most of the analysts expect earnings to be on the high end of the management guidance range on continued cost control measures. They expect revenue growth to pick up from the second quarter following the release of CS6 and the introduction of subscription pricing.
The release of CS6 in April 2012 is expected to have long-term beneficial effects in terms of growth, cash flow and profitability. Additionally, Adobe’s plans to introduce a set of tablet-based and cloud-connected apps should serve as an incremental revenue stream, according to analysts.
However, the analysts do not expect strong total operating margin expansion due to the company’s huge growth investments and continued hiring.
Magnitude of Estimate Revisions
In the past 30 days, there was no change in the Zacks Consensus Estimate for the fourth quarter and fiscal year 2012.
Over the 90-day period, the Zacks Consensus Estimate dropped a penny to 46 cents for the first quarter and decreased by 2 cents to $1.98 for fiscal 2012.
Foreign exchange headwinds and the high European exposure could be the reason for the decrease in estimates.
Recommendation
We believe that Adobe will come out with decent first quarter results owing to its cost cutting efforts, improved execution, expanding customer base and increasing revenue visibility. The company’s compelling product lines (including the CS cloud initiative and digital media products), continued innovation and strong balance sheet will provide a competitive edge.
Additionally, the ramp up of Creative Suite 6 and the solid initial adoption of Creative Cloud should be 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. (AAPL) and Microsoft Corp. (MSFT) remains a matter of concern.
Adobe shares currently have a Zacks Rank of #3, implying a short-term Hold recommendation.
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