Software provider Adobe Systems (Nasdaq:ADBE) reported third quarter earnings and a forward outlook that disappointed investors. The stock fell dramatically as a result and has pushed the valuation into very reasonable territory.
Third-Quarter Sales Review
Adobe’s total revenue increased 42% to $990.3 million. The sale of software products accounted for the vast majority of sales at 83.7%, and grew 30.2%. High-margin service and support revenue related to the maintenance of products sold grew 31.4% to account for 6.3% of sales. Subscription revenue jumped more than six-fold, rising to 10% of total sales.
The Creative Solutions segment sells software to help web designers and create online content, and also assists developers working with photography, video, and animation. It includes the valuable Adobe and Flash franchise. The segment saw revenue jump to $549.7 million. The other primary segment helps business clients improve productivity and is known as Enterprise, which saw a slight top-line increase to $94.2 million. Omniture, which provides web analytics software and was recently acquired, saw a 9% sales increase to $91 million.
Strong sales and expense controls sent operating income up 80.8% to $302 million. Higher interest expense tempered the net income increase to 69.1%, which was still impressive and led to net income of $230.1 million, or 44 cents per diluted share. Even more impressive was the net margin of 23.2%, demonstrating the profitability and scalability of Adobe’s software model.
Management said to expect fourth-quarter revenue between $950 million and $1 billion, and earnings in a range of 35 cents to 41 cents per share. For the full year, analysts project sales growth of 29% to $3.8 billion and earnings of $1.88 per share.
Investors were not pleased with Adobe’s outlook and sent its shares down as much as 22% the day after financial results were released. This has pushed the forward P/E into much more reasonable territory at 14.3. The space remains fiercely competitive, with firms including Apple (Nasdaq:AAPL), Google (Nasdaq:GOOG), Sony (NYSE:SNE), and Yahoo (Nasdaq:YHOO), and concerns remain about its growth, but the shares have a very favorable risk/reward tradeoff at current levels. (To learn more, see our article on Technology Sector Funds.)