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Adobe trades lower on concerns over Marketo acquisition

Key Points
  • Adobe beat expectations, leaving aside its recent Marketo acquisition.
  • Marketo delivered around $21 million in revenue in Adobe's fiscal fourth quarter, but would have sapped 7 cents fom non-GAAP earnings.
  • Adobe also noted a writedown of $75 million related to the acquisition in its 2019 guidance.
Shantanu Narayen, CEO, Adobe
Mark Neuling | CNBC

Adobe stock dropped more than 7 percent in a down market for tech stocks on Friday, a day after reporting better-than-expected earnings for the fourth quarter of its 2018 fiscal year. Investors are concerned about the $4.75 billion acquisition of Marketo diluting earnings, as well as a write-down of some assets from the deal.

The company beat expectations on the top and bottom lines, excluding the impact of Marketo. Adobe reported $1.90 in earnings per share, excluding certain items, on $2.46 billion in revenue. Analysts polled by Refinitiv had been looking for $1.88 in earnings per share, excluding certain items, on $2.43 billion in revenue in the fiscal fourth quarter, which ended on Nov. 30.

Marketo contributed around $21 million in revenue in the quarter, but would have knocked 7 cents from the quarter's non-GAAP EPS figure.

"The overall Marketo dilution likely came in higher than investors anticipated," Guggenheim Partners analysts led by Ken Wong wrote in a note distributed to clients on Friday.

Adobe's top two business segments, Digital Media and Digital Experience both came out ahead of expectations. Digital Media, which includes the Creative Cloud portfolio of software such as Photoshop and InDesign, barely surpassed the $1.70 billion consensus among analysts polled by FactSet, producing $1.71 billion in revenue. Adobe's Digital Experience segment, which contains Marketing Cloud and Analytics Cloud services, did $689.7 million in revenue, higher than the $660.2 million FactSet consensus estimate.

Adobe also issued guidance for next year that takes Marketo into account. Adobe expects $7.75 in earnings per share, excluding certain items, on $11.15 billion in revenue in its 2019 fiscal year.

The guidance takes into consideration a $75 million revenue cut for a write-down of deferred revenue for Marketo and another recent acquisition, Magento, in addition to a $35 million hit from foreign-exchange rates, Adobe's chief financial officer, John Murphy, said during the company's conference call with analysts on Thursday.

Following the report, Brian Wieser of Pivotal Research Group, who has a hold rating on Adobe stock, lowered his target price from $254 to $252.

"Revised 2019 guidance on first glance also had negative characteristics relative to our prior estimates and those of consensus, but on further review and with additional information from the company conveyed during the call, long-term trends appear to be on track," Wieser wrote in a note distributed to clients on Friday.

While Adobe stock is up about 35 percent since the beginning of 2018, Adobe was caught up in a wider technology sell-off in the past several weeks, and in the past three months its stock has declined almost 15 percent.

"Adobe executed very well in FY18 against its strategy of offering a digital experience management platform for both B2B and B2C, but, in our view, the challenge for FY19 will be effectively integrating the operations, technology, products, services and thousands of employees of Marketo and Magento," wrote JMP Securities analysts Patrick Walravens and Mathew Spencer in their Friday note.

WATCH: Adobe adjusts earnings outlook ahead of conference call

Adobe adjusts earnings outlook ahead of conference call