RealMoney Silver - Adobe Soars on Solid Earnings

Adobe Soars on Solid Earnings
By Gary Dvorchak
RealMoney Contributor
9/17/2007 7:30 PM EDT

Updated fom 9:48 a.m. EDT

Adobe (ADBE) stock is soaring in after-hours trading, up over 4% after the company reported blowout earnings on much-better-than-expected revenue. EPS of 45 cents whipped the consensus of 40 cents, as $851 million of sales blew out the Street's $789 million guess.

Management noted that Europe was just much better than they expected, the upside being notable because business usually lulls to a crawl during August. Perhaps the plunging dollar is helping? Management was coy about that and didn't attribute a lot of upside to F/X, but don't forget that they can take pricing action that won't show up in currency translation. But we'll give credit where it's due: The quarter was still strong and product cycles drove it. As important, the guidance was great. Management guided to EPS of 46 cents to 48 cents on $860 million to $890 million of sales, well ahead of the consensus 44 cents on $843 million.

As expected, the Creative Suite 3 cycle and ongoing Acrobat momentum drove results (although the actual strength was better than expected). CS3 grew a huge 65% year over year, with the Designer Premium version driving better sales at the higher price point. Intel-based Mac versions were solid, and Photoshop Extended version is starting to dominate Photoshop sales. Management believes the CS3 mix is very healthy due to effective customer segmentation, but they noted that independent module sales are still good.

The indie or stand-alone sales now mean the potential for future conversions to the full suite later. This and the need for customers to "communicate in a rich, engaging way across multiple platforms" should give CS3 a "fat tail," i.e., longevity in the upgrade cycle. Management noted a very healthy backlog, which is reflected in the forward guidance.

The knowledge worker segment, which is basically Acrobat, also performed well, with sales of $177 million, up 17%. The higher price point of Acrobat Professional has driven it to over half of sales. Management noted that large enterprise licenses are starting to dominate the revenue stream -- so be careful not to key off of NPD tracking of shrink-wrapped sales! Management is satisfied with a 17% growth rate, given the large size of the business, but does think this is sustainable for quite a while due to the low, steady ramp phenomenon that Acrobat typically exhibits. They declined to discuss when the next Acrobat upgrade cycle will be coming, but did note that you can look at the historical upgrade cycle to get a clue to the timing.

Between the strength in the large creative and knowledge segments, and solid growth in the smaller enterprise (Lifecycle) and mobile device segments, Adobe is positioned for attractive upside surprises at least for the next couple of quarters. After an extended period of consolidation, Adobe has laid the product and sales foundation for an attractive acceleration in growth.

Adobe Preview: Watch for Better Margins

Adobe Systems' (ADBE) stock spent most of the quarter treading water, trading between $40 and $44 -- not bad considering the market's volatility -- while investors tried to decode the effect of upcoming product cycles.

The Street is looking for EPS of 40 cents on $789 million in sales, spot-on with the company's guidance. Given Adobe's lack of meaningful upside surprises over the last couple of years, investors are unlikely to be "whispering" for any upside to estimates.

Nonetheless, the early-in-the-quarter release of Creative Suite with video, multi-language versions, and LiveCycle Enterprise should drive solid results. (The CS3 upgrade will be closely watched, because the suite contains former Macromedia products and will be a test of the synergies achievable by that acquisition.)

Acrobat was upgraded several quarters ago, but because it's a long upgrade cycle, it could still contribute to growth as well. Notably, because Adobe is emphasizing the higher priced professional products this quarter, margins should look better than usual as well.

The call starts at 5 p.m EDT.