Adobe earnings preview

The stock price has been dragged down by broader tech sector moves, but can subscription
revenues prove a good source for a rebound?
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External vs Internal factors

Last quarter, Adobe managed to beat market expectations despite writing down its Russia and Belarus operations. However, that wasn't enough to push against the tide of tech stocks falling in the wake of tighter monetary policy. Adobe's P/E ratio remains around 36.

Part of the complicated scenario the company is facing is illustrated by the guidance that it issued last time: Cutting the top and bottom line, despite raising the midpoint of the expected returns on segment revenue. FX headwinds undermining financials despite double-digit growth.

Naturally, investors are going to be once again very keen on seeing if guidance is changed once again. More importantly, Adobe will guide towards its pivotal Q4 sales numbers, which is the key profitability quarter for the software firm.

Cloudy path forwards

With the shift towards the cloud that has provided strong results for other tech firms, investors are likely to be very interested in whether Adobe can keep capitalizing on the trend. Digital Media has been growing revenue at 15-18% recently and promises to provide more stability with subscriptions. Hence, Annual Recurring Revenue (ARR) is likely to be the main metric investors will keep a keen eye on, though the company isn't expected to provide guidance on it.

Revenue is expected to continue to grow, forecast at $4.4B this quarter. But earnings are expected to continue to show the pricing pressure on margins, with EPS expected to be unchanged quarter-over-quarter at $3.35.

ADBE: Sideways with a bias

Adobe has been trading in a wide range between $350 and $450, fluctuating around the 50-day average of $400. Below there, the short-term bias remains downward with a breach of the lower end of the range opening up the door to the $300 round support. If the share price moves past the 50 SMA, the 200-day average of $450 will be exposed, where there is a cluster of resistance including from $470.

Key takeaways

Adobe's stock dropped in the wake of a slow economy yet it managed to beat market expectations last quarter. The company’s guidance is complicated, with a mix of different challenges but it hopes to recover by cutting costs, despite raising midpoint expectations and FX headwinds undermining financials.

Investors will be looking to see if Adobe has changed its guidance or not. Digital Media has steadily been growing revenue and promises to provide more stability with subscriptions. Hence, ARR will be investors’ main metric of focus. Revenue is expected to increase, but profit margins to remain unchanged.