Adobe Plunges Following Earnings: What Wall Street's Saying

NEW YORK (TheStreet) –– Adobe (ADBE) shares fell sharply after the company reported fiscal third-quarter results that were below Wall Street estimates, including the company's number of paid subscribers to its Creative Cloud suite, as it transitions to a software-as-a-service (SaaS) company.

The stock fell 2.4% in early trading Wednesday.

For the third quarter, Adobe earned 28 cents a share on a non-GAAP basis on sales of $1.01 billion in sales, as it added 502,000 paid subscribers to its Creative Cloud suite, which includes Photoshop, Illustrator and InDesign.

"Adoption of Creative Cloud and Adobe Marketing Cloud continues to accelerate," said CEO and President Shantanu Narayen in a statement. "We are the leader in both of these high-growth categories and have a rapidly growing pipeline, setting us up for a strong finish to the year in Q4."

Analysts surveyed by Thomson Reuters were expecting earnings of 26 cents a share on $1.015 billion in revenue.

Adobe is transitioning to be a SaaS company so that it can generate more predictable recurring revenue, something investors have favored. Over the past year, shares of Adobe have gained 48.1%, severely outpacing the 22.3% gain in the NASDAQ.

For the fiscal fourth quarter, which ends in November, Adobe said it expects to earn between 26 cents and 32 cents a share on an adjusted basis, with revenue expected to be between $1.03 billion and $1.08 billion. Analysts expect an adjusted profit of 31 cents a share and $1.09 billion in sales.

Following the quarter, analysts were largely positive on Adobe's future, as it continues to transition into a subscription business. Here's what a few analysts had to say:

Citigroup analyst Walt Pritchard (Buy, No PT)

"Subscriber additions and underlying drivers solid, but upside more muted - Adobe added 502K subscribers, ahead of our estimate of 481K and consensus of 495K. While the suite vs. point product mix was about as we modeled, management noted a slower start to reseller channel sales of Creative Cloud. This lag likely drove higher perpetual revenue and held back subscriber growth from where some expected it could come in. Management noted ARPU declined slightly Q/Q, although it was barely perceptible in our math."

Pacific Crest Securities analyst Brendan Barnicle (Outperform, $75 PT)

"While the focus of the quarter is likely to be on the changes in the Marketing Cloud, the company had 502,000 incremental Creative Cloud subscribers, above the consensus estimate of 495,000. ARR was $1.62 billion, slightly lower than consensus of $1.64 billion. The change to term licenses in Digital Marketing will result in lower estimates, but it is driving larger deals. The company had a 40% increase in Digital Marketing deals over $500,000. Adobe is successfully becoming the marketing platform of choice for CMOs."

JMP Securities analyst Patrick Walravens (Market Outperform, $82 PT)

"We maintain our Market Outperform rating and $82 price target on Adobe Systems after the company reported better than expected F3Q14 non-GAAP EPS of $0.28 (consensus of $0.26) on a slight revenue miss ($1.005 billion versus consensus of $1.010 billion), leading the stock to trade down 5% after hours. Adobe has seen an uptick in term-based bookings for its marketing cloud offerings, leading to less upfront revenue, and below consensus F4Q14 revenue guidance of $1.025-$1.075 billion (consensus of $1.09 billion), and to non-GAAP EPS of $0.26-$0.32 (consensus of $0.31). We would be buyers on any weakness as we think revenue accounting issues have temporarily masked the health of the underlying business during its transition to a subscription-based business, the transition is largely complete, and Adobe should begin to reap the benefits in the coming quarters with accelerating (and increasingly recurring) revenue growth. We increase our non-GAAP EPS estimate for FY14 to $1.25 from $1.23 (consensus of $1.23) and maintain our FY15 EPS estimate of $2.14 (consensus of $2.09). Our $82 price target represents a FY16E P/E of 23x, in line with our projected FY16 revenue growth rate."

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-- Written by Chris Ciaccia in New York

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