Adobe and Apple: Kiss And Make Up?

The year 2010 has been eventful for Adobe (NASDAQ:ADBE). It released its flagship software Creative Suite 5, the momentum of which led to its crossing the $1 billion milestone in quarterly revenue. But it was also a year with controversy surrounding Adobe’s Flash Player 10.1 for smartphones. Let’s take a closer look.

Apple CEO Steve Jobs initially banned Flash for its mobile devices, saying that it is made for the PC era and it could reduce the battery life, reliability, and security of Apple’s iPhones, iPads, and iPods. However, Apple later eased the restrictions a little by allowing third-party developers to use Flash tools for iPhone apps. Apple is in favor of using HTML5 for video and animation on its mobile devices. Adobe in October announced that it was offering a widget that enables creation of HTML5 videos using the Kaltura HTML5 media library, which allows browsers that don’t have HTML5 support to fall back on Flash. Adobe CEO Shantanu Narayen during its recent earnings call said:

“We have not seen any impact on our revenue from Apple’s choice. In fact, given the explosion of smartphones and tablets, the need for a rich cross-platform runtime has become even more important. Because of this, multiple partners are using Flash and AIR as the cornerstone of their developer strategy.”

Although Google, HP, HTC, Motorola, RIM, and Samsung have announced or introduced Flash Player 10.1 as part of their new smartphone and tablet offerings, Adobe should not be complacent but keep up its good work. It should work on its security vulnerabilities and try to win over Apple.

There was a time when Apple and Adobe had a strong partnership, but that relationship has soured and their products have started competing with each other. Apple’s Aperture competes directly with Lightroom. After Apple came up with the video integration feature in the Aperture 3 upgrade in February, Adobe upgraded Lightroom3 in March to give users the ability to import and organize video files. This competition with Apple is proving to be a treat for consumers.

Let’s now take a look at Adobe’s financials.

Adobe’s Recent Financials
Fourth quarter revenue was $1.008 billion, up 33%. Adobe had forecast Q4 revenue of $950 million to $1 billion. Revenue for fiscal year 2010 was $3.8 billion compared to $2.946 billion in 2009. Net income was $268.9 million or $0.53 per share, compared to a net loss of $32 million or $0.06 per share last year and $230.1 million or $0.44 per share last quarter. Non-GAAP EPS was $0.56 versus analyst estimates of $0.52 per share on revenue of $992 million.

Adobe repurchased shares for $333 million during the quarter and ended the quarter with $2.5 billion in cash and short term investments. Adobe completed its $240 million acquisition of content management system vendor Day Software on October 29. Adobe expects the acquisition to help it provide comprehensive web content management, rich media delivery capabilities, and social collaboration as part of its customer experience management offering. Day Software will be operating as a new product line within Adobe’s Digital Enterprise Solutions Business Unit.

Creative Solutions segment revenue was $542.1 million compared to $429.3 million last year and $549.7 million last quarter. Digital Enterprise Solutions revenue in the fourth quarter was $274.1 million compared to $211.8 million last year. Within Digital Enterprise Solutions, Knowledge Worker revenue was $169.9 million. Enterprise revenue was $104.2 million including $5.4 million from Day Software. In the Omniture segment, revenue was $98.4 million. Platform revenue was $46.1 million, while Print and Publishing segment revenue was $47.3 million. Creative Solutions segment revenue was $542.1 million compared to $429.3 million last year and $549.7 million last quarter.

For the first quarter, Adobe expects revenue of $1 billion to $1.05 billion versus analyst estimates of $992 million. EPS is expected to be $0.54 to $0.59 versus analyst estimates of $0.51. The company is targeting at least 10% revenue growth in fiscal 2011. Adobe is trading around $31 with market cap of about $16 billion, recovering from a 52-week low of 25.56 on October 4.