June 20 (Bloomberg) -- Adobe Systems Inc., the largest maker of graphic-design software, declined after it forecast sales and profit that trailed estimates as it began selling its products via subscriptions.
Fiscal third quarter earnings excluding some items will be 56 cents to 61 cents a share, San Jose, California-based Adobe said in a statement yesterday, citing weaker demand in Europe. Analysts predicted 61 cents, the average of data compiled by Bloomberg. Sales for the period ending in August will be $1.08 billion to $1.13 billion, less than the $1.14 billion estimated.
By adding a subscriptions line, Adobe is attempting to make sales growth more predictable, avoiding the revenue shortfalls and stock declines that occur in between updates of its Creative Suite software. It started the move in April with the release of software called Creative Cloud, which lets users rent Photoshop and other graphics programs over the Web for monthly fees.
The strategy carries risks. It would take the company more than four years to collect as much from a subscriber as it generates from a single sale of the desktop version of the top-end Master Collection software package, which includes applications like Photoshop and Illustrator.
Adobe reduced the high end of its annual sales growth forecast range to 7 percent from 8 percent, which is “anemic” for a technology company, said Barbara Coffey, an analyst with National Securities in New York.
“No one really was expecting the narrowing of that range to the low end,” said Coffey, who said the revision is a result of the shift to subscriptions. Coffey has a sell rating on the shares.
Adobe declined 2.7 percent to $31.99 at the close in New York. The stock has climbed 16 percent this year through yesterday.
“This was always meant to be a transition year,” Chief Financial Officer Mark Garrett said in an interview yesterday.
Moving to a subscription-based model will mean about $10 million will be erased from quarterly sales for the foreseeable future, Garrett said.
Still, Adobe has 90,000 paying online subscribers to cloud-computing versions of its software and is adding 5,000 net subscribers a week, Garrett said.
“It bodes well for the long-term prospects of the company,” he said.
Second-quarter net income fell 2.4 percent to $223.9 million, or 45 cents a share, from $229.4 million, or 45 cents, a year earlier. Sales increased 9.8 percent to $1.12 billion, compared with $1.02 billion in the year-earlier quarter.
Profit excluding some items was 60 cents, topping the average 59-cent estimate compiled by Bloomberg. The number excludes items such as stock-based and deferred compensation expenses, restructuring charges, amortization of purchased intangibles, and investment gains and losses.
Garrett also said the impending arrival of Microsoft Corp.’s Surface tablet computer will showcase Adobe software such as its Lightroom photo editing app. Microsoft showed Lightroom running on Surface at an event in Los Angeles earlier this week. The software isn’t available for Apple Inc.’s iPad.
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