$ADBE Fiscal Q1 Earnings Preview

by Dan March 19, 2013 1:32 pm • Commentary

EVENT:  ADBE will report their fiscal Q1 earnings report tonight after the close, the options market is implying about a 4.5% move vs the 4 qtr avg of about the same.  

SENTIMENT:  Wall Street analysts are fairly mixed on the stock with 10 Buys, 14 Holds and 2 Sells with an avg 12 month price target of $41.61.  Short interest sits at about 2% of the float.

OPTION OPEN INTEREST:   Total open interest is slightly skewed towards puts with ~34k to ~31k calls.  The largest single lines are ~5k of the Apr 37 puts , ~4k of the April 40 calls, ~3500 of the Jan14 30 puts and ~3k of the Apr 42 calls.

VOL SNAPSHOT:   While the implied move for earnings is essentially in line with the recent avg, 30 day implied vol has had a substantial move off of the 2 yr lows (far greater than the prior 2 qtrs), despite realized vol being at or near 2 yr lows.

[caption id="attachment_23851" align="aligncenter" width="589"]ADBE 2 yr chart of implied vs Realized vol from Bloomberg ADBE 2 yr chart of implied vs Realized vol from Bloomberg[/caption]


TECHNICALS / PRICE ACTION:  The 5 year chart below tells the whole story from where I am sitting, the breakout above $35 to 52 week highs in December on strong Q4 earnings, confirmed by large volume.  The late 2012 break was confirmed by the 2 month consolidation that followed, before once again breaking out to multi-year highs earlier this month.  The $35 level should serve as significant support on stock specific news or broad market weakness.

[caption id="attachment_23852" align="aligncenter" width="589"]ADBE 5 yr chart from Bloomberg ADBE 5 yr chart from Bloomberg[/caption]


FUNDAMENTALS:  Not a ton has changed aside from the price action since I previewed their Q4 back on Dec 13th, this is what I said then:

ADBE is in the process of transitioning from a pure licensing model for some of their core products to a subscription model that they call Creative Cloud.  As customers have begun to adopt this new model over the last couple quarters, the company has been able to demonstrate better than expected results for subscriptions, but some bears in the name remain cautious on the impact of their Digital Media segment that accounts for almost 75% of their overall revenue.

In a note to clients dated March 14th, Sanford Bernstein analyst Mark Moerdler (who rates the stock a Buy with a $48 12 month price target) had the following to say in front of the quarter:

We view the move to subscription as positive for the company, as it drives higher recurring revenue, potential for lower piracy, and a more direct customer relationship. The move to subscription could drive a higher multiple in the out years. In addition, we believe Adobe is well-positioned to capitalize on the secular trend in mobile computing, as the company’s cross platform development tools help developers deal with the complexity of writing for various disparate platforms, likely leading to market share gains. Its Digital Marketing Cloud, we believe, now offers the most complete marketing solution spanning display, search and social marketing. In the CRM marketing market specifically, Adobe’s digital marketing solution is better positioned than social only centric solutions, offering a multichannel approach to managing digital marketing. Adobe is integrating its digital marketing solutions into its creative offering, which will streamline the marketing / creative process and drive attach for both products. We rate Adobe outperform.



           Revenue     EPS     Op Margin

Q1       $986m      .31         25.1%

Q2       $1,042b   .34         26%

FY13  $4,113b   1.41       25.8%


MY VIEW:  I have no strong opinion on ADBE’s current fundamental state, but I would suggest that given the stock’s ytd performance, and its nearly 30% gains off of the 52 week lows, the stock  could be vulnerable to a pull back to the $38 range if there is a hint of weakness in their forward guidance.  A meaningful break to the previous highs would require a huge beat and raise which could be difficult in an earnings environment that could display poor visibility.