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Adobe Looking At Acquisitions

Posted on Friday, Sep 24th 2010

This week Adobe (NASDAQ:ADBE) reported a strong quarter driven by the strong momentum for its flagship software Creative Suite 5 released in April as well as Omniture and Enterprise products. However, they missed the sales estimate and also gave a weak outlook. Early this month Apple announced that it will be easing restrictions for developing iPad and iPhone applications and allow developers to use Adobe’s Flash for iPhone apps. Steve Jobs in a blog in April cited Apple’s reasons for not opting for Flash Player.

Adobe’s Recent Financials
Third quarter revenue was up 42% to $943 million. Adobe had forecast Q3 revenue of $950 million to $1 billion. Net income was $230.1 million or $0.44 per share, compared to $136 million or $0.26 per share last year and $148.6 million or $0.28 per share last quarter. Non-GAAP EPS was $0.54. Analysts expected earnings of $0.49 per share on revenue of $985 million. It repurchases shares for $432.4 million during the quarter. Adobe ended the quarter with $2.6 billion in cash and short term investments. Q2 coverage is available here.

Creative Solutions segment revenue was $549.7 million compared to $400.4 million last year and $532.7 million last quarter. Two weak spots were its education business in the United States and its overall creative business in Japan.

Digital Enterprise Solutions revenue was $256.8 million compared to $210.0 million last year. Within Digital Enterprise Solutions, Knowledge Worker revenue was $162.6 million compared to $138.1 million last year. Enterprise revenue was $94.2 million compared to $71.9 million last year. In its Omniture segment, revenue was $91.0 million compared to $83.5 million last quarter. Platform revenue in Q3 was $40.7 million declining from $44.9 million last year due to lower toolbar distribution revenue. Print and Publishing segment revenue was $52.1 million compared to $42.2 million last year.

Adobe’s Weak Outlook Sends its Stock Plunging

For the fourth quarter, Adobe provided a weak outlook based on the weak demand Japan and the education market. Adobe expects Creative revenue in Q4 to be flat to slightly down from revenue achieved in Q3. It expects Enterprise and Omniture segments to grow sequentially in Q4. It expects Knowledge Worker and Platform to be flat sequentially and Prints and Publishing to decline slightly.

Adobe expects fourth quarter revenue of $950 million to $1 billion, GAAP EPS of $0.35 to $0.41 and non-GAAP EPS of $0.48 to $0.54. Analysts forecast EPS of $0.53 on revenue of $1.03 billion. Chief executive officer Shantanu Narayen said that the company is committed to its goal of hitting revenue of $5 billion by 2012, partly via acquisitions. Its annual revenue in 2009 was $2.95 billion. Adobe is currently trading around $27 with market cap of about $14 billion. The stock hit a 52-week low of 26.32 on June 30. The announcement from Apple early this month led to a pick up in its price but the weak outlook again sent its stock plunging.

Chart forAdobe Systems Inc. (ADBE)

Flash for Smartphones
Last quarter, Adobe released its Flash Player for smartphones running on the latest version of Android, Froyo. It is also working on versions for Palm WebOS, BlackBerry, and Windows Phone 7. All major smartphone vendors will be providing Flash on their devices with the exception of Apple. Apple prefers HTML5 for video and animation support. Steve Jobs said that Flash could reduce the battery life, reliability, and security of Apple’s iPhones, iPads, and iPods.

Tony Bradley of PC World reports about the vulnerabilities in Adobe Flash that extend to Adobe Flash on the Android mobile OS. Apple is perfectly justified and wise in not allowing the Flash on its devices. The recent easing of restrictions still does not allow Flash to run directly on iOS; it would only allow third-party developers to use Flash tools for developing applications for iOS. Adobe needs to work on its security vulnerabilities, especially for mobile computing, before Apple will allow Flash on its iOS.

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