Digital media and marketing software firm Adobe on Thursday topped Wall Street's earnings target for its fiscal third quarter but sales were a tad below views. It also announced a deal to acquire Figma, a web-first collaborative design platform, for about $20 billion. ADBE stock fell by double digits on the news.
The San Jose, Calif.-based company earned an adjusted $3.40 a share on sales of $4.43 billion in the quarter ended Sept. 2. Analysts polled by FactSet expected Adobe earnings of $3.35 a share on sales of $4.44 billion. On a year-over-year basis, Adobe earnings rose 9% while sales increased 13%.
For the current quarter, Adobe forecast adjusted earnings of $3.50 a share on sales of $4.52 billion. Analysts were looking for earnings of $3.47 a share on sales of $4.6 billion in the fiscal fourth quarter. In the year-earlier period, Adobe earned $3.20 a share on sales of $4.11 billion.
Also, Adobe said it is buying Figma, which makes a design platform for teams who build products together. Adobe expects the cash-and-stock deal to close in 2023, pending regulatory approvals and other closing conditions.
ADBE Stock Drops
On the stock market today, ADBE stock tumbled 16.8% to close at 309.13. ADBE stock is now trading at its lowest level in more than two years.
"Fueled by our groundbreaking technology, track record of creating and leading categories and consistent execution, Adobe delivered another record quarter," Chief Executive Shantanu Narayen said in a news release. "With the announcement of our intent to acquire Figma, we believe we have a unique opportunity to usher in a new era of collaborative creativity."
Figma expects to double its annualized recurring revenue this year to over $400 million. Figma has positive operating cash flows and gross margins of about 90%, according to a news release.
Adobe ended its fiscal third quarter with annualized recurring revenue of $13.4 billion in its Digital Media business. Digital Media accounted for 73% of Adobe's sales in the period.
Figma Deal Overpriced?
Adobe's Figma acquisition "looks pricey," Jefferies analyst Brent Thill said in a note to clients. The deal will be earnings dilutive in the first two years and neutral in year three, he said. Thill rates ADBE stock as buy with a price target of 475.
"While Figma may prove transformative as in past deals (e.g., Macromedia), payback period is years out on a record investment," Thill said.
The Figma deal is Adobe's biggest acquisition ever. It is four times larger than the $4.75 billion it paid for Marketo in October 2018.
Adobe could face regulatory challenges and resistance from Figma customers, Scott Kessler, an analyst at research firm Third Bridge, said in a note to clients. "We'll see if there's any blowback," he said.
The combination of Figma and Adobe assets will lead to a "new era of creative productivity," Chief Financial Officer Dan Durn told IBD. "This is a game-changing transaction for us."
Adobe has been "deinvesting" in a competing product, Adobe XD, for the past 12 to 18 months, Durn said. XD is a desktop-based product vs. Figma's web-based product.
Adobe Stock Downgraded
Earlier this week, two Wall Street firms downgraded ADBE stock ahead of the company's earnings report. Mizuho Securities lowered its rating on Adobe to neutral from buy on Monday. And BMO Capital Markets downgraded Adobe to market perform, or neutral, from outperform, or buy.
Mizuho noted a difficult sales climate for Adobe. BMO cited survey results and sales channel feedback that showed weakness in Adobe's Creative Cloud business.
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