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Adobe Has a New CEO

Posted on Friday, Nov 23rd 2007

Adobe Systems Incorporated offers business and mobile software and services worldwide. Most famously known for its free Acrobat reader software, it is a mainstay in the desktop publishing and photo editing world, and popular among creative professionals.

On September 17, 2007, Adobe Systems (ADBE) announced Q3 earnings ending August 31, 2007, and Q3 2007 proved to be a record-setting quarter. Adobe profit more than doubled, and almost as an afterthought beat expectations. Q3 produced record revenue of $851.7 million versus $602.2 million YoY and $745.6 million reported Q2. all Street expected $790 million.

The record revenue was also seen in all of their geographic markets; percent of revenue produced were Americas, 47%; Europe, 33%; Asia, 20%. GAAP Q3 operating expenses totaled $504 million, compared to $474 million in Q2. Q3 Net income equaled $205.2 million, or 34 cents a share, surging 117 percent from $94.4 million YoY. Excluding costs for expenses, such as stock-based compensation and restructuring charges related to the December 2005 acquisition of Macromedia Inc., Adobe’s net Q3 profit was $269.4 million versus $171.5 million YoY.

Q3 net income more than doubled to $205.2 million ($0.34/share), up from $94.4 million $0.16/share a year ago, on strong sales of Creative Suite 3 and Adobe Acrobat. EPS were $0.45. Revenue jumped 41% to a record $851.7 million from $602.2 million. Analysts had predicted a more modest $0.40/share on revenue of $789.3 million.

Sales in the company’s Creative segment grew 16% YoY, driven by strong adoption of Creative Suite 3. Other areas were even stronger, with 17% growth in Acrobat revenues, 20% for the enterprise software segment, and 44% for mobile products.

Guidance from Shantanu Narayen now Adobe’s new CEO and past president and COO, was limited but described as a double-digit growth company as long as the economy stays strong. Unfortunately, the November tech fallout has wobbled this assumption. Narayen expects growth in each of the company’s segments on a sequential basis in the fiscal fourth quarter, noting Adobe will top $3 billion in revenue for the fiscal year, the highest total ever in the company’s 25 years history (no small feat). Operating margins are expected to remain at 38%, although Q4 may bump slightly to 39%.

The major wave in the Adobe pond is the abrupt November notice of departure of CEO Bruce Chizen, which he sums up as, “I’m at a point in my life that I’d like to take a step back and think about what I would like to do with the rest of my life.” Chizen still plans to be around through Q2 2008 and to continue as a strategic advisor through the fiscal end of 2008. I have known new CEO Shantanu Narayen for a long time, since he was a Director of Engineering at SGI. He is a really solid guy, and has been working side-by-side, being mentored and prepared for this job for a lot of years now. I am really happy to see that Shantanu got the job, and look forward to seeing what he does with the great platform from which he is now getting to operate.

Bruce Chizen leaves on a high note. Under his clock, Adobe purchased and integrated Macromedia in 2005, making it a leader in providing development/design tools for building rich internet applications (RIAs). The company also raised its industry profile, gaining Microsoft’s attention by maneuvering to provide infrastructure for this new wave of web-based applications.

And as a last Chizen salvo, Adobe has announced plans to move into online word processing by acquiring Virtual Ubiquity Inc., which offers a collaborative authoring platform service called Buzzword. Adobe will also unveil an online document-sharing service called Share. The services will be free, although Adobe may ultimately charge for extra features. Buzzword uses Adobe technology to offer some functions that are rare among Web-based document services, including the ability to wrap text around images, and preview how printed documents will look. In response, Microsoft is introducing Office Live Workspace, allowing corporate employees to share Microsoft product documents online for free.

Both moves highlight an industry-wide move to the Web, a trend still estimated to be in its infancy.

Will Adobe succeed? Its share price has basketball-dribbled between $37 and $47 for the year signaling the jury is still out. While happy with performance metrics, investors are still expecting more before raising the price. The challenge that Shantanu will be facing is increasing competition from Microsoft on one side, and from Apple from the other. Apple is the darling of the creative professionals, and under its rejuvinated market momentum, has launched some superb products for photographers, hobbyists and other creatives. As long as Apple and Adobe collaborated, the world looked different. But when Apple becomes its competitor, life will become tougher for Adobe.

Perhaps, these are the clouds hanging over Adobe’s stock price, that Shantanu Narayen would present a compelling roadmap to handle.

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