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Adobe Systems Inc. (Nasdaq: ADBE) stock yesterday (Wednesday) plunged the most in eight years after forecasting a disappointing fourth quarter, triggering a slew of analyst downgrades and recommendations for investors to move to Adobe's tech rivals.
The software maker fell as much as 21% Wednesday, at one point hitting a new 52-week low of $25.81. It closed at $26.67, a 19.03% drop.
The company on Tuesday announced that it's predicting a flatter fourth quarter than investors and analysts had hoped due to fewer than expected sales of its core Creative Suite 5 software. The CS5 package includes popular Photoshop, Illustrator and Dreamweaver programs. The stock had already slipped 10% so far this year before Wednesday's trading.
Adobe's fiscal third quarter results were strong, with earnings of $230.1 million. Adjusted earnings of 54 cents a share beat analysts' predicted earnings of 49 cents a share, and net income was up 69% from the same period a year earlier.
Revenue was up 42% from the same quarter in 2009, climbing to $990.3 million from $697.5 million, and higher than analysts' estimates of $985 million.
But Adobe's software sales did not deliver as much as expected, and the company does not see a pick-up in the fourth quarter. Adobe expects fourth quarter revenue to be between $950 million and $1 billion, below analysts' estimates of $1.03 billion. Profit will be 48 cents to 54 cents a share, compared with the average estimate of 53 cents.
The news triggered a wave of analyst downgrades from Robert W. Baird & Co., ThinkEquity LLC, UBS AG (NYSE: UBS) and Credit Suisse Group AG (NYSE ADR: CS), among others, concerned over a lack of product offering to drive Adobe's sales going forward.
"We seem to have misplaced our growth," Credit Suisse analyst Philip Winslow wrote in a note.
Adobe is facing slower demand from the two biggest markets for its products: tightly budgeted U.S. schools and recession-strapped Japanese consumers. Education sales contribute to more than 10% of Adobe's revenue and Japan is Adobe's second-largest geographic market after the United States.
Adobe's division that includes Creative Suite makes up more than half of the company's total sales, and analysts fear the software's weaker performance will continue to limit Adobe's profits for the rest of the year.
"Although management is still bullish about CS5, we remain cautious about its ability to reach CS3 levels and feel Street expectations are overly optimistic," Oppenheimer analyst Brad Reback told The Wall Street Journal.
The company needed CS5 sales to far outperform the weakness of its Creative Suite 4 release in September 2008, when corporations cut technology spending due to the worsening financial crisis. So far CS5 sales are about 15% higher than its predecessor, but likely peaked last quarter.
"CS5's strong performance in its corporate market is a one-quarter event - something that is not sustainable," Yun Kim, an analyst at Gleacher & Co. (Nasdaq: BPSG), told Bloomberg.
Some analysts see Adobe's growth halted for at least a year, without another robust product to boost sales and customer interest.
"Adobe is in the "no man's land" in terms of historical trading patterns around Creative Suite cycles, and we expect Adobe to report massively decelerating revenue growth for the next four quarters," Credit Suisse analysts wrote Wednesday. "We believe that investors are better served owning other similarly or more-cheaply valued software companies."
Those companies include software maker Oracle Corp. (Nasdaq: ORCL), which is aiming to become a one-stop shop for business tech needs. Oracle posted sales of $26.8 billion last year and could hit $100 billion in revenue in 2011. Its stock is up over 11% this year.
Adobe got a small boost after a Sept. 9 decision by Apple Inc. (Nasdaq: AAPL) to allow developers to use Adobe's Flash video software when designing applications for the iPhone and iPad. Adobe stock jumped 12% since the day before the Apple announcement.
But the rally was short-lived and muted by the fact that Apple still didn't allow its products to run Flash-based Web sites, and Adobe has said it doesn't see Apple further easing Flash restrictions.
Some analysts were cautious to exit the stock too soon, saying the Adobe could still perform well long-term.
"Whenever there's a product cycle, everyone gets excited about Adobe, but when it's over, they throw it out," Jeff Gaggin, analyst with Avian Securties, told The Journal. "We're trying to be a little bit more longer-term oriented about the name."
Sasa Zorovic from Janney Capital Markets called the stock plunge a "little bit too much," saying that Adobe did well on its profit margins and is still disciplined in how it runs business. Zorovic recommends buying Adobe.
Analysts called Adobe's fourth quarter outlook a lesson other companies should heed when forecasting future performance.
"The same theme is going to come from the second quarter into the third: Who has revenue growth and what is their guidance?" Frank Ingarra, a fund manager at Hennessy Funds, told Reuters.
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