Adobe’s Earnings Miss Expectations Without Buyback

SaaS firm’s EPS would have come in two cents below the consensus estimate without dual repurchases.

March 30, 2022

Without an aggressive share repurchase, Adobe’s (ADBE) 10% decline after reporting fiscal first quarter earnings might have been worse. In the quarter ending March 4, 2022, the company posted adjusted earnings per share (EPS) of $3.37 which beat the consensus estimate of $3.34.

In the footnotes of its latest 10-Q, Adobe revealed it used a structured share repurchase and an accelerated share repurchase (ASR) agreement that, according to our analysis, were key in beating Wall Street’s EPS forecast. The company repurchased 3.8 million shares via the structured agreement and another 3.2 million via the ASR.

Let’s look at each buyback’s impact individually:

The company calculated EPS in the quarter based on a share count of 475.4 million. If we add back only the 3.8 million shares Adobe repurchased— making the share count 479.2 million— Adobe earned an adjusted $3.343, in line with expectations. If we add back only shares repurchased via the ASR— making the share count 478.6 million— Adobe earned an adjusted $3.347, in line with expectations unless we round up.

Let’s look at the buybacks in tandem:

Together, adding back both buybacks brings the share count to 482.4 million, resulting in an adjusted EPS of $3.320, or two cents below expectations.

The repurchase activity in the quarter— 7 million shares— is 368% higher than the prior year’ quarter when Adobe repurchased 1.9 million shares.

There’s more to come.

If we assume an average share price of $550 in the quarter, we estimate $640 million of the $2.4 billion ASR remains. With a current share price of 459.99, approximately 1.39 million additional shares may be purchased under the ASR which doesn’t settle until the third quarter.

Additionally, after the quarter ended Adobe entered into another $1.2 billion structured stock repurchase agreement— the same type it used to repurchase shares this quarter— presumably to repurchase shares in the second quarter. Upon completion, $9.5 billion remains under Adobe’s repurchase authority.

Notably, Adobe disclosed it had repurchased shares at an average price of $635.15, or 38% higher than the current share price. In all, the company bought back approximately 1.45% of outstanding shares in the quarter.

Regardless of what you believe— that shares were being repurchased because they are undervalued, to manage earnings, or a bit of both— the action in the stock is a reminder that guidance trumps current quarter expectations. Shares sold off because Adobe cut its full year revenue forecast after halting sales to Russia.

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