Adobe's Outlook May Be Light, but That's No Cause for Concern

NEW YORK (TheStreet) -- Software giant Adobe Systems (ADBE), known for its popular Acrobat PDF reader and Photoshop graphics software, didn't excite investors Tuesday with its outlook for the fiscal third quarter. But the San Jose, Calif.-based software company did say one thing investors have wanted to hear for quite some time: Its business transition is over.

The company's former business model of selling software licenses upfront via a CD that comes in a box is "largely behind us," said Chief Financial Officer Mark Garrett in the earnings release. "We are driving more profit, earnings per share, cash flow and deferred revenue and unbilled backlog," Garrett added.

So, while Adobe's fiscal third-quarter revenue guidance range of $1.17 billion to $1.22 billion (below analysts' consensus figure of $1.25 billion) didn't inspire confidence, it's no reason for dismay either. The outlook for the quarter ending in August still implies revenue growth of 16% to 21%.

As for earnings per share, Adobe's fiscal third quarter range of 45 cents to 51 cents forecasts growth of at least 61%. Assuming the company only reaches the mid-range of its forecast, say, 48 cents per share, earnings would have surged some 71%.

And with the company having beaten Wall Street's average earnings estimates for six consecutive quarters, there's a strong chance Adobe will either meet or exceed the high end of its EPS range of 51 cents, which implies year-over-year earnings per share growth of 82%. All of this applies for Adobe's full-year fiscal 2015 outlook for the quarter ending November, which -- by the way -- was also seen as "light."

From my vantage point, patience is still the best play with Adobe stock. As Garrett noted, Adobe, which has embraced a focus on its Creative Cloud subscription model and Cloud Services, is firing on all cylinders in the metrics that matter the most. And this was evident in its second-quarter results.

For the quarter that ended in May, its profits surged 67% to $147.5 million, or 29 cents per share. On an adjusted basis, when excluding one-time gains and costs, Adobe earned 48 cents per share, coming in 3 cents ahead of the average analyst estimate. Likewise, revenue of $1.16 billion, up 9%, topped estimates, buoyed by a 62% surge in subscription revenue.

The company added 639,000 new subscribers to its Creative Cloud platform, marking a 38% year over year surge. This brings Adobe's total number of Creative Cloud subscribers to 4.61 million. And here's the thing, Adobe, which generated 517,000 Creative Cloud subscribers in the first quarter -- an almost 30% increase year over year -- has set a 2015 goal to reach 6 million total subscribers.

This means Adobe will have to add 1.39 million more subscribers in the final two quarters of fiscal 2015, which ends in November -- 695,000 per quarter. So, as impressive its second-quarter additions of 639,000 might appear, Adobe must raise the bar by some 9% for each of the next two quarters.

In other words, while its outlook for the second half of the year might appear "light," Adobe still has tons of pressure to perform. And that the company didn't lower its full-year Creative Cloud subscriber goal -- where its bread and butter is -- implies real confidence. Accordingly, ADBE stock should be held until real weakness emerges. And that may not become visible for several years.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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