Adobe (ADBE) reported poor fiscal first-quarter 2012 results after the close Monday that disappointed most investors. Though we plan to update our valuation model on the firm, we don’t expect to make a material change to Adobe’s fair value at this time.
The company’s revenue advanced a modest 1.7% in its fiscal first quarter as subscription and services-and-support sales expansion offset weakness in its products segment, which fell over 4% from the same period a year ago. Adobe’s gross margin, however, improved to 89.6% from 89.5% in last year’s quarter. Operating income fell 4.4% from the year-ago quarter, as sales and marketing expenses surged. There was nothing concerning in the firm’s below-the-line items, though the company did suffer from a higher tax rate in the quarter (31.5% versus 18% in last year’s period). Diluted net income per share fell to $0.37 from $0.46 in the same period a year ago, capping off what we’d describe to be a disappointing quarter overall, in our opinion. On a non-GAAP basis net earnings per share came in at $0.57 (matching consensus estimates), cash flow from operations was $314.4 million in the quarter, and free cash flow was a solid $263.3 million, or 1.42 times net income (representing excellent cash-flow conversion). Free cash flow as a percentage of sales was a whopping 25%+ in the quarter, among the best free-cash-flow margin we’ve seen from any company.
Looking ahead, the Photoshop and Acrobat developer is targeting revenue in the range of $1.09 billion to $1.14 billion for the second quarter of its fiscal 2012. On a GAAP basis, the company is looking for first-quarter net earnings to come in the range of $0.37 to $0.43 and the range of $0.57 to $0.61 on a non-GAAP basis (the midpoint slightly below consensus, which was at $0.60 per share). On a full-year basis, Adobe is targeting revenue growth of 6% to 8% (up from 4% to 6% previously) and adjusted diluted earnings per share to come in the range of $1.63 to $1.73 on a GAAP basis and $2.38 to $2.48 per share on a non-GAAP basis. We are optimistic that the company’s upcoming release of its Creative Suite and Creative Cloud offerings will drive top-line expansion and are very impressed with Adobe’s continued free-cash-flow generating prowess. However, we remain on the sidelines based on valuation.