Adobe (Nasdaq:ADBE): 4 Reasons Why Adobe Was Down

Upside revenue case, suddenly gone

Upside revenue case, suddenly gone. August-quarter revenue totaled $990m, +42% yr/yr versus +34% yr/yr in the prior quarter. The company is projecting flat to down revenue sequentially for the November quarter, which implies a yr/yr deceleration of roughly 1,000bp and then 7-8% yr/yr revenue growth in 1H-2011. Adobe management attributed the shortfall in the U.S. and Japan versus internal projections to macroeconomic factors. The dropoff in demand visibility largely explains the sharp 15% selloff in aftermarket trading following the press release and conference call on Tuesday after the close. Management indicated in June that November-quarter revenue was likely to be up over August-quarter revenue, thus the sudden downward adjustment to former visibility may linger with investors.

Margins strong for the August quarter. For the record, the $0.54 pro forma $0.05 upside surprise for the August quarter was $0.02-0.03 from better-than-expected cash operating margin, a penny from share buybacks, and a bit less than $0.01 contribution from a currency hedge. A strong 39% August quarter operating margin (+250bp versus our forecast), unfortunately, is a mixed signal absent a 3Q revenue upside and appearing with the weak 4Q revenue outlook.

Revising FY11 EPS to $2.10 from $2.20. We are reducing our FY11 revenue growth estimate to +7% from +11% and trimming our pro forma EPS estimate to $2.10 (+10% yr/yr) from $2.20 (+17% yr/yr), previously. In fact, share buybacks should help to cushion the impact of a quick CS5 peak and sharper deceleration than we were expecting. For the November quarter,many are cutting pf EPS estimate to $0.53 from $0.55, previously; revised estimate could prove optimistic, however, as Adobe is projecting a sizable 240bp sequential contraction in operating margin, larger than our 130bp decline. Whether or not the spotty revenue environment holds,you canexpect Adobe to defend margins, as perthe read on the August-quarter performance.

No paying up for uncertainty. Although the revenue challenges in the two markets cited by Adobe could turn out to be short term, we believe investors will continue to view the weak fiscal year-end outlook with some alarm (it is well out of Adobe's historical seasonal pattern) and as a reminder of Adobe's relatively mild (low 20s percent) overall contribution from recurring revenue sources, as compared to average enterprise software industry levels

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Adobe (Nasdaq:ADBE): 4 Reasons Why Adobe Was Down

By: Ronald Russo

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