6 Adobe Analysts React To Q2 Earnings Beat, Guidance Cut, Heightened Execution Risks

Adobe Inc ADBE shares traded slightly higher on Friday after the company's full-year guidance disappointed Wall Street.

On Thursday, Adobe reported adjusted fiscal second-quarter EPS of $3.35 on revenue of $4.39 billion. Both numbers exceeded consensus analyst estimates of $3.31 and $4.34, respectively. Revenue was up 14% from a year ago.

Digital Media revenue was up 15% to $3.2 billion in the quarter. Digital Experience revenue was up 17% to $1.1 billion.

Looking ahead, Adobe reduced its full-year adjusted EPS guidance from $13.70 to $13.50 and revenue from $17.90 to $17.65 billion. Analysts were anticipating EPS guidance of $13.66 and revenue guidance of $17.85 billion.

Related Link: 7 Coupa Software Analysts React To Q1 Earnings Beat: 'Lots Of Noise Around Billings'

Execution Risks: Piper Sandler analyst Brent Bracelin said Adobe is facing significant execution risks heading into the second half of its fiscal year.

"This heightens execution risk going into the 2H, particularly considering roughly 50% of the DM ARR segment is tied to consumer spending (prosumer segment)," Bracelin wrote.

Mizuho analyst Gregg Moskowitz said Adobe's fiscal fourth-quarter outlook is "perplexing."

"It's interesting that ADBE does expect a materially better 4Q, but in this environment, we would expect much skepticism until it proves otherwise," Moskowitz wrote.

JMP analyst Patrick Walravens says investors are concerned that by de-risking its fiscal Q3 guidance, Adobe has simply shifted that risk to Q4.

"Adobe seems to have several points in response to this concern including: 1) the visibility; 2) pricing increase; and 3) how the pricing increases kick in more on renewals and how there are more renewals in F4Q due to back-to-school and fiscal year-end," Walravens wrote.

Low Market Expectations: Wells Fargo analyst Michael Turrin said Adobe shares will likely remain range-bound for now, but the stock's current valuation is already quite pessimistic.

"With the rev/eps outlook modestly reduced (to $17.65Bn/$13.50 vs $17.9Bn/$13.70 prior…) and management holding onto targets for $1.9Bn in net new DM ARR, suggesting a steep FQ4 ramp — understandable given the seasonal profile of the business and expected benefits from a recent price increase, but still uncertain given increasing concerns around an economic downturn and Adobe's long tail of creative customers," Turrin wrote.

Credit Suisse analyst Phil Winslow said the light guidance overshadowed impressive net new Digital Media annual recurring revenue growth in the second quarter.

"While FQ2 was positive, FQ3 DM ARR guidance miss supports our thesis of peaking net new DM ARR, which we have believed would result in less forward upside to consensus estimates and drive decelerating revenue growth, which we anticipated will weigh on the stock’s performance," Winslow wrote.

Bank of America analyst Brad Sills says Adobe's margin outlook suggests the Ukraine conflict is not hurting profitability as much as feared.

"We are encouraged by the FY22 margin outlook of roughly 45%, suggesting an 80bps decline, which is solid given Russia and incremental FX headwinds," Sills wrote.

Ratings And Price Targets:

• Piper Sandler has an Overweight rating and a $430 target.
• Wells Fargo has an Overweight rating and a $425 target.
• Mizuho has a Buy rating and a $480 target.
• JMP has a Market Perform rating.
• Credit Suisse has a Neutral rating and a $425 target.
• Bank of America has a Buy rating and a $450 target.
• Photo: r.classen via Shutterstock