ADBE Preview: Abandon All Hope?

Adobe Systems (ADBE - commentary - Cramer's Take) preannounced an earnings miss on Dec. 4, sending its forward earnings estimates into backwardation and confirming the total elimination of any hope for growth in the coming year.

Adobe Estimate Trend Aviance Capital Management

The guidance was not bad for this quarter, so the call tomorrow after the close will really key in on early 2009, which sounds like a disaster. The Street is currently looking for earnings of 58 cents per share on $918 million of revenue; which is modestly below the 59 cents to 60 cents per share on $930 billion consensus before the preannouncement. First-quarter 2009 earnings may come in at 43 cents to 46 cents per share on $800 million to $850 million, however, which is well below the original Street estimate of 51 cents per share on $931 million.

Clearly, Adobe is your classic software company, in which "disaster" means simply normal rather than super-normal profitability. Most companies simply struggle to maintain profits when sales decline 15% in a three-month period; Adobe on the other hand will still coin cash. The initial shipments of Creative Suite 4 (CS4) for Europe this quarter -- they were expected later this winter -- helped cushion the November quarter, since CS4 is where Adobe was otherwise seeing emerging weakness. Since the CS4 cycle is just starting, with the English version just released in October, Adobe results will be buffeted by the countervailing forces of product cycle positives and economic negatives.

Adobe is reacting to the environment, and analysts will probe for more detail on the call. The company cut 7% of headcount immediately after the preannouncement, indicating both management's willingness to act aggressively, and its pre-existing awareness of "fat" that was readily dismissed. Adobe saw smaller revenue declines in the 2002 downturn (5% year over year), yet the company drove painful margin contraction of nearly 500 basis points because management reacted too slowly to the changing environment. No so this time around.

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At the time of publication, Dvorchak was long Adobe Systems, although positions can change at any time.

Gary Dvorchak is a managing partner of Aviance Capital Management, a Sarasota, Fla.-based institutional asset manager that manages $200 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.