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Adobe Sales Forecast Misses Estimates; Shares Plunge

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Sept. 21 (Bloomberg) -- Adobe Systems Inc., the top maker of graphic-design software, forecast sales that trailed estimates, citing slower demand from back-to-school shoppers and Japanese buyers. The shares tumbled as much as 16 percent.

Fourth-quarter revenue will be $950 million to $1 billion, San Jose, California-based Adobe said today in a statement. Analysts surveyed by Bloomberg on average had projected sales of $1.03 billion for the period, which lasts through November.

Adobe’s new Creative Suite 5 software, released in April, isn’t driving as much growth as analysts had predicted. Cash-strapped schools aren’t paying for as many copies of the product, which includes Photoshop and Illustrator, the company said. The sluggish economy in Japan, typically Adobe’s biggest Asian market, also is hampering sales.

“They’re anticipating more subdued growth in the November quarter,” said Jeff Gaggin, an analyst at Avian Securities Inc. in New York. He recommends buying Adobe shares, which he doesn’t own himself. There may not be pent-up demand for the new Creative Suite: Customers who were waiting to upgrade have probably already done so, Gaggin said.

Adobe slid as much as $5.34 to $27.60 in late trading following the report. Earlier, the shares fell 17 cents to close at $32.94 on the Nasdaq Stock Market.

‘Cautious Approach’

Profit in the current quarter will be 48 cents to 54 cents a share, compared with analysts’ average estimate of 53 cents.

“We’re taking a cautious approach to the guidance,” Chief Executive Officer Shantanu Narayen said on a conference call with analysts today. “The U.S. back-to-school environment this time was a little weaker overall.”

Education sales account for more than 10 percent of Adobe’s revenue, and sales to students and schools have been lower than expected “across the board,” Chief Financial Officer Mark Garrett said in an interview.

The Japanese economy, meanwhile, “hasn’t really come out of the recession yet,” he said. The company declined to specify how much revenue came from the country. Sales in Asia contributed a fifth of revenue in the third quarter, Adobe said.

Sales of Creative Suite 5 may have peaked last quarter, said Yun Kim, an analyst at Gleacher & Co. in New York.

‘Not Sustainable’

“CS5’s strong performance in its corporate market is a one-quarter event -- something that is not sustainable,” said Kim, who has a “neutral” rating on Adobe shares and doesn’t own any.

Net income in the third quarter, which ended Sept. 3, rose to $230.1 million, or 44 cents a share, from $136 million, or 26 cents, a year earlier. Sales increased to $990.3 million. Analysts had projected profit excluding costs of 49 cents on revenue of $985.4 million.

Operating expenses climbed 27 percent in the period, led by a 31 percent increase in sales and marketing costs.

The division that includes Creative Suite makes up more than half of total sales. The previous version, Creative Suite 4, came out in September 2008, just as the financial crisis deepened and corporations reined in technology spending.

Sales of CS5 are still about 15 percent higher than version 4 at a comparable point in its life, Garrett said.

“It’s nothing like what we saw with CS4,” he said. Sales are “much better than that.”

Apple Decision

In mobile-computing software, Adobe may benefit from a Sept. 9 decision by Apple Inc. to ease restrictions on creating applications for its iPhone and iPad devices. Apple had prevented developers from using Adobe’s Flash video software. Adobe shares had gained 12 percent since Sept. 8, the day before Apple’s announcement.

Still, the change doesn’t let Flash apps run inside the browser on Apple devices, and that’s a larger concern, Gaggin said. Apple, which dominates the market for mobile apps, is promoting an Internet standard called HTML5 instead.

“The Apple announcement is a step in the right direction, but it doesn’t solve the bigger problem for Flash,” he said.

(Adobe held a conference call at 5 p.m. New York time to discuss results. To hear a replay, go to {LIVE <GO>}.)

To contact the reporter on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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