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Adobe Plunges After Sales Forecast Misses Estimates

Adobe Forecast Exceeds Estimates
Adobe Systems Inc.'s headquarters building in San Jose, California. Photographer: Chip Chipman/Bloomberg

Adobe Systems Inc., the graphic- design software maker, fell the most in eight years in Nasdaq trading after forecasting sales that trailed estimates, citing slower demand from back-to-school shoppers and Japanese buyers.

Fourth-quarter revenue will be $950 million to $1 billion, San Jose, California-based Adobe said yesterday in a statement. Analysts surveyed by Bloomberg had projected sales of $1.03 billion on average 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.

“The market’s pretty unforgiving of any squishiness, whether it be in results or in guidance,” said Walter Pritchard, an analyst at Citigroup Inc. He recommends buying Adobe shares and doesn’t own them.

Adobe slumped $6.27, or 19 percent, to $26.67 at 4 p.m. New York time in Nasdaq Stock Market trading, the biggest drop since August 2002. The shares have declined 27 percent this year.

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

‘Cautious Approach’

“We’re taking a cautious approach to the guidance,” Chief Executive Officer Shantanu Narayen said on a conference call with analysts yesterday. “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 orders by 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. 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.

“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.

Third Quarter

Net income in the fiscal third quarter, which ended Sept. 3, rose 69 percent to $230.1 million, or 44 cents a share, from $136 million, or 26 cents, a year earlier. Excluding some costs, earnings were 54 cents. Sales increased 42 percent to $990.3 million. Analysts had projected earnings 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.”

Investors may be selling shares too aggressively following the conservative outlook from the company, said Sasa Zorovic, an analyst at Janney Montgomery Scott LLC in Boston. He recommends buying Adobe shares, which he doesn’t own personally.

“The market is overreacting,” he said.

Flash Squabble

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, said Jeff Gaggin, an analyst at Avian Securities Inc. in New York. 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,” Gaggin said. He recommends buying Adobe shares, which he doesn’t own himself.

Adobe’s Garrett said Apple’s Flash announcement is positive, though he doesn’t foresee fewer restrictions on the software.

“We’re not holding out much hope for that,” he said.

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