Adobe gains despite growth concerns

Shares are up markedly despite the company's warning that second-quarter growth will be less than expected.

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Adobe delivers the numbers
Bruce Chizen, CEO, Adobe
Adobe Systems shares jumped 14 percent on Friday despite a warning that company growth will be less than expected for the second quarter.

Analysts were surprised only by the good earnings news reported on Thursday and saw Adobe's tight cost controls as a good sign.

Adobe, which makes the Illustrator and Photoshop software, beat Wall Street estimates but lowered its outlook for the current quarter.

Citing a "challenging and uncertain economic environment," Adobe cut its current-quarter growth target to 15 percent over the same period last year. The San Jose, Calif.-based company also said it will not provide guidance for the third and fourth quarters of 2001.

That didn't seem to trouble analysts--perhaps because they had already lowered expectations for all of 2001 when the company warned of lower results for its first quarter in January.

Investors also shrugged off the reduction in estimates and bid shares up $3.50 to $28.50 in early morning trading on Friday.

The only thing that surprised analysts was the company's optimism. "As expected, Adobe revised its revenue growth outlook," UBS Warburg analyst Benjamin Reitzes wrote in a research note. While the company was cautious on the second half, especially overseas, "the outlook and tone were better than anticipated," he added.

Credit Suisse First Boston analyst Gibboney Huske even upgraded the stock to "buy" from "hold" and put an 18-month price target of $40 on it.

He was pleased the company had beaten earnings estimates, and he shrugged off its miss on revenue projections--earnings were 33 cents a share, above First Call's forecast of 28 cents a share, while revenue was $329 million, below First Call's number of $344 million.

Upside story
That's just a sign that cost controls are working, noted Huske. "The upside (earnings) surprise was driven by tight expense control, a lower tax rate, and a reduced share count," Huske wrote in a research note.

Merrill Lynch analyst Jay Vleeschhouwer reiterated a "buy" rating and maintained his revised forecast of 15 percent revenue growth for the second quarter of 2001, while modestly increasing his earnings estimate to reflect lower expenses, a more modest tax rate and fewer shares.

Prudential Securities analyst John P. McPeake maintained a "strong buy" and trimmed his price target from $65 to $45 on the stock, praising the company's ability to top estimates in difficult times.

"Overall, we view the earnings report as excellent execution in a difficult environment, and at 22 times our fiscal 2001 forecast we would be buyers of the shares," he wrote.

Morgan Stanley analyst Rebecca Runkle was more cautious on the stock. Though impressed by the company's ability to beat expectations, "the company faces tougher comparisons in (the) second half, and, while valuation has come down substantially, it's still not enough to offset these near-term risks," she said.

Runkle maintained a "neutral" rating and said she was "reluctant to get too bullish" ahead of the May 1 investor meeting.

Analysts overall also sounded a cautious note about overseas performance. The upside on earnings in this quarter was attributed to strong sales in Europe and Asia, and if the U.S. weakness widens, Adobe will lose that edge.

"We would not be surprised if Adobe's shares traded higher on this earnings report," but a major move depends on what happens overseas, said Reitzes. "Perhaps the biggest negative from the quarter is that Adobe's extremely strong performance overseas may not last--if woes in the U.S. spread," he added.

Photoshop sales also disappointed analysts. "The new Photoshop cycle lost momentum mid-quarter as customers deferred purchases," Reitzes said. But its new Acrobat 5.0 product should help performance in the second quarter in light of lowered expectations, he added.

Other near-term catalysts for the stock could include the company's May investor conference in New York, when it will give a midquarter update and some new long-term growth metrics.