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Adobe Shares Fall on Disappointing Guidance

Shares of Adobe Inc. (NASDAQ:ADBE) fell 2.72% in after-hours trading on Tuesday after posting third-quarter results.

For the third quarter, the San Jose, California-based software company posted earnings of $1.61 per share, topping estimates by 19 cents. Revenue grew 23.7% from the prior-year quarter to $2.83 billion, exceeding expectations by $10 million.

By segment, Digital Media sales grew 22% to $1.96 billion and Digital Experience revenue rose 34% to $821 million.

Adobe also recorded a 5.2% quarter-over-quarter increase in Digital Media annualized recurring revenue to $7.86 billion. Creative annualized recurring revenue, which contributed 87.4% to Digital Media ARR, was up nearly 5% to $6.87 billion and Document Cloud ARR, which made up 12.6% of Digital Media ARR, increased 7.8% to $993 million.

"Customers across every industry continue to rely on Adobe to run their businesses, transform how they work, and bring their creative ideas to life as reflected in our record Q3 results," President and CEO Shantanu Narayen said. "We're excited for the opportunities in front of us and confident in our ability to drive strong top-line and bottom-line growth."

Operating income grew 18.8% from the year-ago quarter to $853.8 million. In contrast, operating cash flow declined 3.5% to $922.1 million.

During the quarter, Adobe bought back approximately 2.6 million shares.

The balance sheet had $3.65 billion in cash on hand and short-term securities and $4.14 billion in total debt as of Aug. 30. Total equity was worth about $10.2 billion.

Despite recording strong earnings, investors were disenchanted by Adobe's outlook. For the fourth quarter, the company is guiding for pro forma earnings of $2.25 per share, below analysts' average estimate of $2.3. The company also projects revenue of $2.97 billion, below expectations of $3.03 billion. The company anticipates 20% year over year growth in Digital Media and 23% growth in Digital experience.

Shares closed at $284.62 on Tuesday for a market capitalization of $138.17 billion. The stock has gained 26% so far this year.

Adobe's closing share price was 39% above the 52-week low of $204.95 and 10% below the 52-week high of $313.11.

Sell-side analysts on Wall Street issued an overweight recommendation rating for the stock with an average price target of $314.54.

Disclosure: I have no positions in any securities mentioned.

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This article first appeared on GuruFocus.