Adobe Systems Inc.'s (ADBE) fiscal second-quarter earnings fell 2.4% as the company is transitioning to subscription services away from packaged software.
Adobe had been forecasting a quick start to 2012 after taking a $94 million charge at the end of last year linked to its shift to online applications and analytical services that make up its Creative Cloud. Now it has posted two quarters of declining earnings and reined in its full-year revenue target to growth of 6% to 7% from a previous range of 6% to 8%.
Management put some of the blame on softness in Europe, where the company generates about 29% of its revenue. Adobe also suffered from rapid adoption of subscription services that require the company to book some of the sale to deferred revenue to recognize in future quarters, not the current quarter.
"While there was some softness in Europe, we do not think that it impacts our competence both in our strategy as well as in our execution," Adobe President and Chief Executive Shantanu Narayen said on the earnings call.
The company ended the quarter with subscriptions running ahead of plan, which shifted about $10 million in revenue from the current quarter to future quarters.
"We overachieved our projection," said Mark Garrett, chief financial officer.
Shares were down 3.9% at $31.60 in late trading after closing up 26 cents at $32.89 on the Nasdaq Stock Market.
Product sales, which still represent the bulk of Adobe's revenue, rose 4.9%, while subscription revenue jumped 45.7%. Service and support revenue rose 12.1%.
"The more successful you are at converting your business to subscriptions, the more it hurts your near-term results," said analyst Pat Walravens of JMP Securities.
Adobe ended the quarter with more than 90,000 paid subscriptions. About 65% of subscribers purchased the entire suite of services, which includes popular tools such as PhotoShop. Subscriptions are available on a monthly or annual basis and the annual cost savings have led 75% of subscribers to choose it over the monthly option.
In addition to its Creative Suite, Adobe is looking to its Digital Marketing Suite for growth. Revenue in that business unit was up 35% to just under $190 million. But at the same time, revenue from two other products in the digital marketing segment--LiveCycle and Connect--trended down 18% to $61 million.
"That business is trending down pretty much as expected," said Mr. Garrett, and contrasted that with the Digital Marketing Suite that "continues to be a growth emphasis for the company." Most of the 500 employees Adobe added in the quarter are focused on sales and support of the Digital Marketing Suite, he said.
Success in selling all its subscription products increased deferred revenue to $592.8 million. About 23% of revenue Adobe posts in a quarter now comes from deferred revenue already on the balance sheet.
For the full fiscal year, Adobe narrowed its adjusted per-share earnings target to $2.40 to $2.46 from its prior view of $2.38 to $2.48.
For the current quarter, the software company forecast adjusted earnings of 56 cents to 61 cents a share on revenue of $1.08 billion to $1.13 billion. Analysts polled by Thomson Reuters predicted 61 cents and $1.13 billion, respectively.
Adobe said these targets reflect a weaker demand forecast in Europe.
Adobe is the maker of Photoshop and Illustrator design software for creative professionals and Web marketers. In November, Adobe said it would restructure its business to focus even more on digital media and digital-marketing software, resulting in the elimination of 750 jobs. These restructuring costs and other charges have weighed on Adobe's bottom line in recent quarters.
The latest quarter's results included a $70.7 million provision for income taxes, while the year-ago period's provision was $29.8 million.
For the quarter ended June 1, Adobe reported a profit of $223.9 million, down from $229.4 million in the comparable quarter a year earlier. On a per-share basis, earnings were unchanged at 45 cents. Excluding items such as stock-based compensation, amortization and income-tax adjustments, per-share earnings rose to 60 cents from 55 cents.
Revenue climbed 9.9% to $1.12 billion.
In March, the company projected a per-share profit between 57 cents and 61 cents and revenue between $1.09 billion and $1.14 billion.
Operating margin edged up to 27.1% from 27%.
Product sales, still the bulk of Adobe's revenue, climbed 4.9% while subscription revenue was up 46%. Revenue from services and support jumped 12%.
Through the close Tuesday, the stock has climbed 16% since the start of the year.
Adobe had been forecasting a quick start to 2012 after taking a $94 million charge at the end of last year linked to its shift to online applications and analytical services that make up its Creative Cloud. Now it has posted two quarters of declining earnings and reined in its full-year revenue target to growth of 6% to 7% from a previous range of 6% to 8%.
Management put some of the blame on softness in Europe, where the company generates about 29% of its revenue. Adobe also suffered from rapid adoption of subscription services that require the company to book some of the sale to deferred revenue to recognize in future quarters, not the current quarter.
"While there was some softness in Europe, we do not think that it impacts our competence both in our strategy as well as in our execution," Adobe President and Chief Executive Shantanu Narayen said on the earnings call.
The company ended the quarter with subscriptions running ahead of plan, which shifted about $10 million in revenue from the current quarter to future quarters.
"We overachieved our projection," said Mark Garrett, chief financial officer.
Shares were down 3.9% at $31.60 in late trading after closing up 26 cents at $32.89 on the Nasdaq Stock Market.
Product sales, which still represent the bulk of Adobe's revenue, rose 4.9%, while subscription revenue jumped 45.7%. Service and support revenue rose 12.1%.
"The more successful you are at converting your business to subscriptions, the more it hurts your near-term results," said analyst Pat Walravens of JMP Securities.
Adobe ended the quarter with more than 90,000 paid subscriptions. About 65% of subscribers purchased the entire suite of services, which includes popular tools such as PhotoShop. Subscriptions are available on a monthly or annual basis and the annual cost savings have led 75% of subscribers to choose it over the monthly option.
In addition to its Creative Suite, Adobe is looking to its Digital Marketing Suite for growth. Revenue in that business unit was up 35% to just under $190 million. But at the same time, revenue from two other products in the digital marketing segment--LiveCycle and Connect--trended down 18% to $61 million.
"That business is trending down pretty much as expected," said Mr. Garrett, and contrasted that with the Digital Marketing Suite that "continues to be a growth emphasis for the company." Most of the 500 employees Adobe added in the quarter are focused on sales and support of the Digital Marketing Suite, he said.
Success in selling all its subscription products increased deferred revenue to $592.8 million. About 23% of revenue Adobe posts in a quarter now comes from deferred revenue already on the balance sheet.
For the full fiscal year, Adobe narrowed its adjusted per-share earnings target to $2.40 to $2.46 from its prior view of $2.38 to $2.48.
For the current quarter, the software company forecast adjusted earnings of 56 cents to 61 cents a share on revenue of $1.08 billion to $1.13 billion. Analysts polled by Thomson Reuters predicted 61 cents and $1.13 billion, respectively.
Adobe said these targets reflect a weaker demand forecast in Europe.
Adobe is the maker of Photoshop and Illustrator design software for creative professionals and Web marketers. In November, Adobe said it would restructure its business to focus even more on digital media and digital-marketing software, resulting in the elimination of 750 jobs. These restructuring costs and other charges have weighed on Adobe's bottom line in recent quarters.
The latest quarter's results included a $70.7 million provision for income taxes, while the year-ago period's provision was $29.8 million.
For the quarter ended June 1, Adobe reported a profit of $223.9 million, down from $229.4 million in the comparable quarter a year earlier. On a per-share basis, earnings were unchanged at 45 cents. Excluding items such as stock-based compensation, amortization and income-tax adjustments, per-share earnings rose to 60 cents from 55 cents.
Revenue climbed 9.9% to $1.12 billion.
In March, the company projected a per-share profit between 57 cents and 61 cents and revenue between $1.09 billion and $1.14 billion.
Operating margin edged up to 27.1% from 27%.
Product sales, still the bulk of Adobe's revenue, climbed 4.9% while subscription revenue was up 46%. Revenue from services and support jumped 12%.
Through the close Tuesday, the stock has climbed 16% since the start of the year.
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