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Adobe Systems Inc. (ADBE - Analyst Report) is scheduled to report its fiscal fourth quarter 2012 earnings on December 13, 2012. In the run up to the earnings release, we see one upward movement in analyst estimates.

Prior-Quarter Synopsis

Adobe’s third quarter earnings of 45 cents missed the Zacks Consensus Estimate of 47 cents due to lower revenue and its significant exposure to the European region.

Adobe’s total revenue was $1.081 billion, down 3.8% sequentially but up 6.7% year over year. The sequential decline was due to increased adoption of new and lower priced subscription-based models by customers.

Products generated 75.0% of revenue, down 0.18% sequentially while Subscription revenue comprised 16.0% of revenue, up 50.9% sequentially. Services & Support brought in the balance, increasing 12.1% sequentially.

Gross margin was 88.9%, down 80 bps from 89.7% in the comparable year-ago quarter due to unfavorable mix. However, operating margin was slightly up from 62.6% in the year-ago period due to lower-than-expected expenses in the quarter.

Management Guidance

For the fourth quarter, Adobe expects revenue in a range of $1.075 billion to $1.125 billion.

GAAP EPS is expected to be 34 cents to 39 cents, including stock-based compensation of 17 cents, intangibles amortization charges of 6 cents, restructuring charges of 1 cent, and income tax adjustment of 5 cents. Excluding all of these, non GAAP EPS is expected to be 53–58 cents. Currently, the Zacks Consensus Estimate for the upcoming quarter is pegged at 46 cents.

(Detailed earnings results can be viewed in the blog titled: Adobe Reports Weak 3Q

Agreement of Analysts

Over the last 30 days, only 1 out of the 10 analysts providing estimates for the fourth quarter made an upward revision. For fiscal 2012 also, 1 out of 11 analysts made an upward revision. There were no downward revisions for either the fourth quarter or fiscal 2012.

A few analysts believe that the company will report strong revenue driven by strength in Digital Marketing and strong response to Creative Suite 6 and Creative Cloud.

On the contrary, others believe that though subscription had a good pick-up last quarter and could add approximately185k subscribers in the fourth quarter, above the guidance of 125k, a strong move to subscription will likely impact near-term revenue recognition. Additionally, they believe that global economic slowdown and negative foreign currency movement will act as headwinds.

Also, the analysts do not expect strong operating margin expansion due to the company’s huge growth investments and continued hiring.

Magnitude of Estimate Revisions

In the last 30 days, the Zacks Consensus Estimate was up by a penny to 46 cents for the fourth quarter but remain unchanged for fiscal year 2012 at $1.91.

Over the 90-day period, the Zacks Consensus Estimate decreased by 10 cents to 46 cents for the fourth quarter and by 7 cents to $1.91 for fiscal 2012.

Recommendation

We believe Adobe will come out with decent fourth quarter results owing to increasing revenue visibility, solid CS6 adoption, cost cutting efforts, improved execution and an expanding customer base. We believe the company’s dominance in the Creative category and the integration of Creative products with digital marketing apps will provide a competitive edge.

However, to some extent, we believe that thenew subscription service could hurt Adobe's overall financial growth, at least over the short term, as it brings in revenues on a monthly basis, instead of a lump sum at the start.

Additionally, Adobe’s acquisition of Efficient Frontier will enhance its Digital Marketing suite by adding optimization capabilities for search and display advertising while accelerating its entry into social advertising.

Aweak demand environment in Europeand strong competition from Apple Inc. (AAPL - Analyst Report) and Microsoft Corp. (MSFT - Analyst Report) remain a matter of concern.

Currently, Adobe shares have a Zacks #3 Rank (Hold).

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