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Shares of Adobe Systems Incorporated (NASDAQ:ADBE) fell by 1% in after-hours trading on Wednesday. The software company, offering products for marketers, application developers and enterprises, reported its third quarter results after the close.

Third Quarter Results

Adobe reported third quarter revenues of $1.08 billion, up 6.6% from last year's $1.01 billion. Revenues came in at the low end of the previously guided range of $1.075-$1.125 billion. Analysts expected Adobe to report revenues of $1.11 billion.

Revenues were impacted by the adverse effects of a strong dollar. Furthermore, Creative Cloud subscriptions will spread out revenues in the future. At the moment, it recognizes revenues as a lump-sum up front.

Adobe reported a net income of $201.4 million during the quarter. GAAP earnings per share came in at $0.40, up a penny from last year when the company earned $195.1 million. On average, analysts expected Adobe to earn $0.47 per share. Earnings came in at $0.58 per share on a non-GAAP basis. The number of Creative Cloud subscriptions grew to 200,000.

CEO Shantanu Narayen commented on the results:

"Customers globally are adopting our new Creative Cloud subscription offering more quickly than we projected. We are the leader in the fast-growing Digital Marketing category with 40 percent year-on-year Digital Marketing Suite revenue growth this quarter."

Outlook

For the final quarter of 2012, Adobe anticipates revenues of $1.075-$1.125 billion. The company anticipates to earn $0.34-$0.39 per share on a GAAP basis, and $0.53-$0.58 on a non-GAAP basis. The company anticipates to add 125,000 new Creative Cloud subscriptions, which will generate $94 million in perpetual revenues.

The final quarter outlook implies full year revenues of around $4.35 billion. The company is expected to earn $1.56-$1.61 per diluted share.

Valuation

Adobe Systems ended its third quarter with $3.25 billion in cash, equivalents and short-term investments. Adobe operates with $1.5 billion in short- and long-term debt, for a net cash position of $1.75 billion. For the first nine months of 2012, Adobe generated revenues of $3.25 billion. The company net earned $610 million, or $1.22 per diluted share.

Adobe is currently valued at around $16 billion. Excluding the net cash position, operating assets are valued around $14 billion. Based on the full year outlook, Adobe is valued at 4.3 times annual revenues and 18 times annual earnings.

Currently, Adobe does not pay a dividend.

Investment Thesis

Year to date, shares of Adobe have gained some 17%. Shares rallied in January from levels around $28, to trade within a $30-$34 trading range for most of the rest of the year.

Over the past five years, shares have lost roughly a quarter of their value. Shares fell from levels around $45 in 2008 to lows of $15 in 2009. From that point in time, shares have traded within a $20-$35 trading range.

In the meantime, Adobe expanded its revenues from $3.6 billion in 2008 to an expected $4.3 billion in 2012. Net income fell from $870 million in 2008, to an expected $800 million this year. Earnings per share remained unchanged around $1.60 per share, as Adobe retired 10% of its shares outstanding.

Despite the fact that Adobe missed on both earnings and revenues, investors are not punishing the company. Revenues are depressed as a result of the success of the Creative Cloud subscriptions, which bring in revenues on a monthly basis, instead of a lump-sum at the start.

Despite the strong financial condition and future improved earnings visibility as a result of Creative Cloud, shares offer little appeal. Low growth and the fact that the company does not pay a dividend, makes me hesitant to pick up some shares.

Source: Adobe Systems: Strong Creative Cloud Performance Should Improve Future Visibility