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Adobe Shares Fall After Profit Forecast Misses Estimates

Adobe Systems Inc.’s shares fell in late trading after its profit forecast missed some estimates, as the company steps up spending on sales and marketing and adopts a subscription-pricing approach.

Excluding some costs, profit will be 57 cents to 61 cents a share in the second quarter, San Jose, California-based Adobe said yesterday in a statement. The midpoint of that range -- 59 cents -- missed the 60 cents predicted by analysts, according to data compiled by Bloomberg. Sales will be $1.09 billion to $1.14 billion, compared with a $1.11 billion average estimate.

Adobe, the largest maker of graphic design software, is boosting its marketing budget as it prepares to release Creative Suite 6 around April. The product line, which includes Photoshop and Dreamweaver, will add cloud-computing features, letting users rent the software over the Web for a monthly subscription fee. While that approach is unproven ground for Adobe, it could eventually make the company’s revenue more predictable.

“The main story for 2012 is how they transition to this subscription pricing,” said Josh Olson, an analyst at Edward Jones & Co. in Des Peres, Missouri, who has a hold rating on the shares. “It’s been a stock that’s moved a lot with the product cycles. Long term, they need to get more recurring revenue.”

Adobe shares declined as much as 6.2 percent to $32.36 in extended trading yesterday following the report. The stock had climbed 22 percent this year before today.

Timing of Release

Investors also are concerned that Creative Suite 6 won’t arrive in April, the month Adobe typically releases new versions of the software, Olson said. He expects it in May, which may crimp sales in the current quarter.

Adobe Chief Financial Officer Mark Garrett declined to say when the software would be released, though he did indicate it might be later than the typical Creative Suite debut. The software will include the first major update to Adobe’s popular Photoshop software in two years. The company also is synchronizing online and desktop versions of the suite, making the development process longer than usual, he said.

Sales of Adobe’s digital media products, which include Creative Suite, declined 4 percent to $730.3 million in the first quarter -- a sign customers are holding off on purchases until the new version arrives, Garrett said.

“The more we went through the quarter and talked about CS6, we saw people waiting,” he said.

Sales and marketing expenses, meanwhile, climbed 9.4 percent in the first quarter to almost $359 million.

Pricing Change

Only some customers will adopt the subscription pricing. Still, it will be a big change for Adobe, which is accustomed to large upfront payments, Olson said. In the short term, that could mean the new software brings in less revenue.

“What would have been a $1,400 upgrade is a now a $50 or $60 a month subscription,” he said. “That’s going to mute revenue growth.”

Chief Executive Officer Shantanu Narayen has been counting on the new Creative Suite to cement Adobe’s comeback, following a slump characterized by slow sales, job cuts and a feud with Apple Inc. The company is relying more heavily on the HTML5 programming language, rather than its Flash software, after Apple refused to include Flash in its mobile devices.

First-quarter net income declined to $185.2 million, or 37 cents a share, from $234.6 million, or 46 cents, a year earlier. Sales rose 1.7 percent to $1.05 billion in the period, which ended March 2.

Adobe said in November it would eliminate 750 jobs and shift investment to programs for digital publishing and Web advertising. The company plans to discuss a separate set of software programs for online advertising at its Digital Marketing Summit in Salt Lake City later this week.

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