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Adobe Systems (ADBE): A Surprise in Q3 Earnings Release?


Adobe Systems Inc. ADBE is slated to report third-quarter fiscal 2016 results on Sep 20. Last quarter, the company recorded a positive earnings surprise of 3.77%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Adobe is being driven by continuous innovation in the Creative Cloud and Marketing Cloud businesses.

The Creative business under the Digital Media Solutions segment is seeing acceleration in Creative Cloud subscriptions. Also, the conversion of enterprise customers to Enterprise Term License Agreements (ETLAs) is resulting in higher adoption of its enterprise Creative Cloud offering.

Increased subscription as well as ETLA and digital publishing suite adoption should drive Creative’s annualized recurring revenues.

We are also positive on Adobe’s market position, compelling product lines and balance sheet strength. In addition, we believe that continued adoption of the Adobe marketing cloud could serve as a catalyst in the to-be-reported quarter.

Adobe posted strong fiscal second-quarter results with both earnings and revenues beating the Zacks Consensus Estimate. Revenues were up 1.1% sequentially and 20.4% year over year on the back of strong adoption of Creative Cloud.

However, lower end-market demand, increasing competition from Microsoft MSFT and Apple and significant exposure to the economically troubled Europe could be matters of concern.

For fiscal third quarter, Adobe expects revenues in the range of $1.420–$1.470 billion. Based on a share count of 504–506 million, GAAP earnings are expected within 46–52 cents per share. Non-GAAP earnings are projected in the range of 69–75 cents.

Earnings Whispers

Our proven model does not conclusively show that Adobe will beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 58 cents. Hence, the difference is 0.00%.

Zacks Rank: Adobe has a Zacks Rank #3, which increases the predictive power of ESP. However, a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

ADOBE SYSTEMS Price and Consensus

ADOBE SYSTEMS Price and Consensus | ADOBE SYSTEMS Quote

Stocks to Consider

Better-ranked stocks include Avid Technology AVID and Infoblox BLOX, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

See our video article on Adobes's expected Q3 earnings here

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