Adobe Earnings Preview: EPS, Revenue Expected to Decline, Guidance Key

Software giant Adobe Systems ADBE is expected to report second third quarter results Tuesday after the bell. Earnings and revenue are expected to decline from the second quarter of 2012 while guidance for the third quarter and full year will be key.

Expectations

For the second quarter, Adobe is expected to report earnings per share of $0.34, well below the $0.60 earnings per share from the second quarter of 2012. Revenue is expected to decline to $1.01 billion from $1.12 billion a year ago.

Guidance Key

Analysts at Goldman Sachs highlighted that guidance will be key in the release. "For FY13 guidance, we expect management to reiterate its revenue forecast of $4.1bn. For F3Q13, we expect Adobe to guide top line to a range that brackets current consensus of $1.012bn (GSe: $1.015bn) at the high end, assuming F2Q13 revenue comes in at the midpoint of guidance of $975-1,025mn."

"Our expectation is based on average seasonality of +2% in F3Q and a roughly $45mn sequential headwind from the shift to subscription and a roughly $12mn currency tailwind."

Creative Cloud Push

Morgan Stanley noted the transition the company is currently undergoing as it seeks to fully roll out its creative cloud platform. "ADBE's decisions to discontinue further development on Creative Suite should put significant upward pressure on Creative Cloud subscriber count while potentially increasing risk to revenue near-term, but we see limited downside to FY13 as our checks point to CS6 sales still continuing apace."

"We think mgmt's target of 1.25M subs by the end of FY13 likely proves conservative, while our model already assumes a ~30% decline in CS6 perpetual revs. For FY14, our total rev. est. is inline with cons. of $4.50B, but still assumes ~$1B of perpetual CS license sales, which could hold downside if CS6 demand slows faster than we expect."

"Cons. also has op. margins up >200 bps YoY in FY14—which may be aggressive. We assume ADBE grows total expenses ~10% YoY with continued investments in Creative Cloud / Digital Marketing yielding EPS of $1.56 in FY14—below cons. of $1.75."

Market Set Up

Adobe shares rose 0.38 percent to $43.58 intraday ahead of earnings after briefly trading over $44 per share this morning. Shares are off about 7.6 percent from the 52-week high of $47.17 made in May.