Adobe (ADBE:NASDAQ) shares fall as software company sees weaker sales in current quarter

Adobe (ADBE:NASDAQ) shares dropped in after-market trading on Thursday after the software company’s projections for the current quarter and full-year fell short of analysts’ expectations. The company’s shares fell by 3.3% in Thursday’s session and dropped another 5% in extended trading after the software maker gave full-year guidance that fell short of analysts’ expectations.

Earnings for the quarter came in at $3.35 per share, just beating the $3.31 per share expected by analysts. The quarter which ended June 3, saw Adobe’s revenue grow by 14% year over year to $4.39 billion in revenue, surpassing Wall Street’s forecast of $4.34 billion.

Adobe’s Digital Media segment, which includes Creative Cloud and Document Cloud products, reported $3.20 billion in revenue, up 15% and more than the StreetAccount consensus estimate of $3.16 billion.

The Digital Experience business, which includes Adobe’s Experience Cloud that companies use for marketing and commerce, contributed $1.10 billion, up 17% and above the $1.08 billion StreetAccount consensus.

During the quarter Adobe announced price hikes for certain Creative Cloud subscriptions, citing the launch of new applications. The company didn’t institute a larger price increase because it’s focused on adding new users, said David Wadhwani, President of the Digital Media business.

CEO Shantanu Narayen said that while Adobe doesn’t need to add anything to its portfolio, the company will be looking out for acquisition targets now that prices might be more reasonable than they were.

Adobe ended the quarter with $4.88 billion in deferred revenue, down from $5.02 billion three months earlier and below the StreetAccount consensus of $5.00 billion. It had over $5 billion in cash, cash equivalents, and short-term investments.

The sour note from the earnings came from the full fiscal year. Adobe reduced its guidance to $13.50 in adjusted earnings per share on $17.65 billion in revenue. Analysts had expected $13.66 in adjusted EPS and revenue of $17.85 billion. Adobe had initially set guidance for the 2022 fiscal year at $13.70 in adjusted EPS and $17.90 billion in revenue.

The company pointed to the war in Ukraine, a $175 million foreign-exchange headwind, and summer seasonality. Microsoft (MSFT:NASDAQ) and Salesforce (CRM:NYSE) also cited currency impact when they issued worse-than-expected projections in recent weeks. The U.S. dollar has gained strength against the euro, the Japanese yen, and other currencies as the Federal Reserve has pushed up interest rates to stave off inflation.

This has led to a decline in subscriptions and renewals because it is more expensive for foreigners whose currency is weaker against the dollar. Rising inflation has also reduced the number of subscriptions from within the United States, as consumers pinch pockets to make purchases, with necessities topping the shop list over more discretionary items like payments for cloud subscriptions.

Dan Durn, Adobe’s finance chief, said on a conference call with analysts. The economic environment in the quarter was “uncertain,”. His statements echo earlier comments from Tesla (TSLA:NASDAQ) CEO, Elon Musk who said he had a super bad feeling about the economy days after also JP Morgan (JPM:NYSE) Chairman and CEO, Jamie Dimon who warned investors to expect an economic hurricane.

Despite its strong fundamentals, Adobe has underperformed the broader market. Adobe shares are down about 36% since the start of the year, while the S&P 500 index is down 23% over the same period.

Its sector (technology) is at the epicentre of the market sell-out as investors anticipate a recession. The Fed Reserve earlier in the week raised interest rates by 75 basis points, its highest in 28 years. The market believes that the U.S. central bank is behind the curve in fighting inflation, and could be steering the economy into recession with its succession of rate hikes.

Stocks like Adobe are being battered as investors divest from risky assets like stocks. Earlier in the week, the stock received a new Wall Street-low price target from analysts at Citi Bank to $425 from $455 with a Neutral rating.

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