Adobe rises despite warning

Adobe shares flew up 14 percent despite the company's warning that growth would be less than expected in its second quarter, and its refusal to play fortune-teller for third- and fourth-quarter results. Analysts were only surprised by the company's good news, and saw its tight cost controls as a good sign.

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

Citing "challenging and uncertain economic environment," Adobe cut its current quarter growth target to 15 percent over the same period last year. The 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 about lower results for its first quarter back in January. Investors also shrugged off the reduction to estimates and bid shares up $3.50 to $28.50 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 about the second half, especially overseas, "the outlook and tone were better than anticipated," he said.

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 enthused that the company had beat 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.

That's just a sign that cost controls are working, Huske noted. "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 earnings estimate to reflect lower expenses, a lower tax rate and fewer shares.

Prudential Securities analyst John P. McPeake maintained a "strong buy" recommendation and trimmed his price target on the stock from $65 to $45, praising its 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.

"We would not be surprised if Adobe's shares traded higher on this earnings report," but a major move depends on what happens overseas, Reitzes said. "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 investor conference May 1 in New York, when it will give a mid-quarter update and some new long-term growth metrics.