Adobe’s Enterprise Strategy

Last week, Adobe (NASDAQ:ADBE) announced third quarter results and its plans to buy Omniture, the SaaS industry leader in web analytics and online business optimization, for about $1.8 billion. It looks as though Adobe is going towards an enterprise software strategy and steering away from creative professionals, where Apple (NASDAQ:AAPL) looms as a major threat. In that direction, a legitimate portfolio would include not only analytics for web sites, but also content management software/SaaS. Let’s take a closer look.

Even in the face of a tough economy, the content management software market, which includes document management, web content management, enterprise content management, and digital asset management, grew 9.5% in 2008 as per IDC. According to WinterGreen Research, the web content management market was at $372 million in 2007 and was expected to reach $2 billion by 2014 while the enterprise content management market, at $3.4 billion in 2007, was expected to triple to $9.3 billion by 2014.

It is a diverse market with many fields and as many vendors. A vendor map from CMS Watch gives a fair idea of the major players in the diverse fields. Microsoft, Oracle, IBM, EMC, and Open Text are the major players in content management while Adobe, situated at the far end of the map, might move in closer with this acquisition. There have been quite a few acquisitions in the space and more are to follow: Open Text (NASDAQ:OTEX) acquired Vignette in May and Autonomy (LSE:AU) acquired Interwoven in January this year. Major deals in the past include EMC/Documentum in 2003, IBM/Filenet in 2006, and Oracle/Stellent also in 2006. Both Open Text and Autonomy are major independent vendors and could prove to be good acquisition targets. An interesting read on the sector is available here.

With the Omniture acquisition, Adobe says it positions the company “to provide an end-to-end platform with the power to transform digital media and advertising.” Omniture is one of the few SaaS companies that has turned profitable (non-GAAP), and Adobe would also be benefiting from Omniture’s successful SaaS business model. Also, closer tie-ins between analytics and web design is likely to create strong synergies. The price Adobe paid for Omniture was high, though.

Now a look at Adobe’s financials. Q3 revenue was $687.5 million, down from $887 million last year and $704 million last quarter. Net income was $136 million or $0.26 per share compared to $191.6 million or $0.35 per share last year. Non-GAAP EPS was $0.35 per share. Q2 coverage is available here.

By segment, Creative Solutions revenue was $400.4 million, down from $493.6 million last year. Business Productivity solutions revenue was $210 million, down from $283.5 million last year with Knowledge Worker revenue down 29% to $154.5 million and Enterprise revenue down 15% to $55.5 million. Platform revenue was $44.9 million down from $59.1 million last year but up from $36.8 million last quarter. Print and Publishing revenue was $42.2 million, down from $51.1 million last year.

Adobe ended the quarter with cash and short-term investment position of $2.6 billion compared to $2.7 billion at the end of last quarter. It repurchased 4 million shares for about $116.1 million.

For Q4, Adobe expects revenue of $690 million to $740 million and EPS of $0.23 to $0.29. This outlook does not include the impact of the Omniture acquisition. The stock is currently trading around $33 with market cap of about $17.5 billion. It hit a 52-week high of $35.29 on September 14, one day before its announcement. On the 16, Jefferies and Co downgraded it from Buy to Hold.

In summary, Adobe’s move towards enterprise software/SaaS needs to be bold and sure, not tentative. What they have kicked off with Omniture needs to be followed by other synergistic acquisitions to be able to successfully mitigate the threat that Apple poses to Adobe’s core Creative Professionals business. That business is worth about $2 billion annually, and if Apple decides to go after it as yet another billion-dollar business to dominate, I believe they can do so successfully. Adobe better watch out!