Adobe Posts Strong 2Q Results, But 3Q Outlook Is Light

| About: Adobe Systems (ADBE)

Software giant Adobe (NASDAQ:ADBE), best known for hit products like Photoshop, reported its fiscal year 2012 second quarter results on Tuesday. Earnings came in at $0.60, a penny north of consensus, while the top-line grew to $1.12 billion, $10 million above consensus. For the quarter, the company's products segment grew 5% to $871 million, while subscriptions grew 45% to $159.5 million and service revenues grew 12% to $93 million. The firm attributed the strong results to success with the launch of its Creative Cloud and Creative Suite 6. The company also noted robust growth in its Digital Marketing Suite, which ticked up 35% compared to the same period a year ago.

The firm also pointed out that, though Creative Cloud wasn't launched long ago, it has signed up 90,000 subscribers, of which 65% have opted for the full-range of services offered within the product. The current weekly run-rate for the product is about 5,000 net-new subscribers. Adobe hopes to have 800,000 Creative Cloud subscribers by 2015. However, management also noted that this may be a result of promotional pricing for existing customers.

After reviewing the conference call, akin to what we've been seeing from other firms lately, we think some of the weakness in guidance is due to soft demand in Europe and the negative effects of exchange rates. Adobe expects earnings of $0.56-$0.61 for its fiscal third quarter relative to the $0.61 the Street was looking for on revenue of $1.075-$1.125 billion, just shy of the consensus estimate of $1.13 billion. We aren't overly concerned, given that we think this conservative guidance is a result of European head winds. The firm still hasn't rolled out Creative Cloud to the enterprise market, and we think there is room for upside in the Creative Suite refresh cycle. The firm also narrowed its guidance range for revenue (up 6-7%) and non-GAAP earnings per share ($2.40-$2.46) for fiscal year 2012. This implies strong growth for the fourth quarter and suggests that spending on its products will actually accelerate near the end of the fiscal year.

Though Adobe looks attractive on a relative-value basis versus its peers, we believe its shares are fairly valued based on our discounted cash-flow assessment (click here for our DCF valuation model template). Simply put, we aren't very interested in Adobe at this time based on the firm's score on our Buying Index (click here for more info on how to understand our VBI). We have long preferred Microsoft (NASDAQ:MSFT) in the software space and continue to do so, which registers a higher score on our stock-selection scale.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: MSFT is included in the portfolio of our Dividend Growth Newsletter.

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