Adobe Systems Incorporated: ADBE Stock Tanks on Record Earnings, Poor Guidance

Adobe Systems Incorporated (ADBE) just reported earnings, sending shares of ADBE down nearly 5% in aftermarket trading. Despite the slump, this marks the eleventh straight quarter Adobe has beaten earnings.

Adobe Systems Incorporated: ADBE Stock Tanks on Record Earnings, Poor GuidancePer-share earnings clocked in at 71 cents against the market consensus for 68 cents, while sales met the median target of $1.4 billion — still, that’s record quarterly revenue for Adobe.

But that’s not all — Adobe’s digital media segment grew revenue by 26% year-over-year, also setting a record at $943 million, and creative revenue grew 37% to a record $755 million.

ADBE also saw strong adoption and retention in the cloud, with new customers including Southwest Airlines Co (LUV), eBay Inc (EBAY), FedEx Corporation (FDX), Logitech (LOGI) and more. Creative Cloud and Document Cloud carried digital media annualized recurring revenue to $3.41 billion, while Adobe Marketing Cloud hit a record $385 million for 18% YoY growth.

From Adobe Chief Financial Officer Mark Garrett:

“Record revenue with strong profit and cash flow highlight our second quarter results. Based on our first half performance and momentum, we’re on track to meet or exceed all of our annual fiscal year 2016 targets.”

So why the heck did ADBE drop so sharply after reporting such impressive results? It did everything right, including submitting to the almighty “shareholder value” gods and buying back 2.2 million shares and returning $205 million in cash to ADBE stock holders. Adobe even released a new Creative Cloud update for Photoshop and Adobe Stock.

Yup, it did everything right, but flunked on the third-quarter guidance.

The company forecast Q3 revenue between $1.42 and $1.47 billion and per-share earnings between 69 cents to 75 cents, missing the average sales consensus for $1.47 billion, while beating the earnings consensus of 71 cents by a penny.

Sure, it’s not by much, if it misses at all, but investors like ADBE stock because the company’s subscription model is supposed to deliver smooth, predictable sales, not the kind of on-again, off-again sales seen by selling packaged licenses.

As far as investors are concerned, Q3 could mark the start of slowing momentum for Adobe.

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