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Adobe Makes A Conciliatory Move

Posted on Friday, Mar 25th 2011

Adobe (NASDAQ:ADBE) this week reported an 84% increase in its profit but gave a conservative outlook due to the recent tragedy in Japan, which accounts for 10% to 15% of revenue. Meanwhile, Adobe appears to be changing its strategy around Flash and HTML with the launch of a new Flash-to-HTML converter last month. It also plans to release an update to its Creative Suite software that will make it easier for designers to build websites using the HTML5 Internet standard. This is a practical move from Adobe, which last year clashed with Apple and Apple’s decision to ban Flash on iPhones, iPads, and iPods and go for HTML 5 for video and animation.

Adobe recently released Flash Player 10.2 for the Android market. It had released Flash Player 10.1 for smartphones last year, and Larry Dignan on ZDNet says that “overall, Flash works pretty well on mobile devices. Videos and ads delivered a full Web experience.”

However, there were a few issues with some gaming and video sites. Adobe says the Flash Player 10.2 brings improved performance and a full Web browsing experience, including video games and other interactive content. But it remains to be seen if it is received well. Research firm Strategy Analytics forecasts that more than 132 million smart phones, or 36% of all smart phones, will support Flash player in 2011.

In part because of Apple’s decision to ban Flash on its devices, Flash Player hasn’t been able to replicate its success with desktops to smartphones. The Flash to HTML5 converter still can’t handle complex Flash objects such as games or applications, but it opens the door to Flash advertising on Apple’s mobile devices.

Adobe says it is focused on three significant growth opportunities: content offering, customer experience management, and online marketing optimization. Adobe’s recent acquisition of DemDex, behavioral data management platform, sharpens its focus on online marketing. DemDex is a startup launched in 2009 that has raised $7.5 million in funding, and with this acquisition, Adobe is targeting the $109 billion online ad market by offering ad optimization. Adobe in 2009 had acquired Omniture, the SaaS industry leader in Web analytics and online business optimization, for about $1.8 billion.

Adobe’s Recent Financials
First-quarter revenue was $1.028 billion, up 20%. Adobe had forecast first quarter revenue of $1 billion to $1.05 billion. Net income was $234.6 million or $0.46 per share, compared to $127.2 million or $0.24 per share last year and $268.9 million or $0.53 per share last quarter. Non-GAAP EPS was $0.58 versus analyst estimates of $0.57 per share.

Creative and Interactive Solutions segment revenue was $428.8 million compared to $332.6 million last year and $404.8 million last quarter. Digital Media Solutions revenue was $151.7 million compared to $130.6 million last year. Digital Enterprise Solutions revenue was $286.6 million compared to $244.8 million last year and $273.3 million last quarter. Within Digital Enterprise Solutions, Knowledge Worker revenue was $181.8 million, up 10% y-o-y due to enterprise adoption of the Acrobat 10 release.

Enterprise segment revenue was $104.8 million compared to $78.9 million last year and $103.4 million last quarter. In the Omniture segment, revenue was $110.9 million compared to $96 million reported last year and $109 million last quarter. Print and Publishing revenue was $53.7 million compared to $54.7 million last year and $55 million last quarter.

Adobe has lowered its revenue forecast by $50 million because of the uncertain business environment in Japan. It now expects second-quarter revenue in the range of $970 million to $1.02 billion. EPS is expected to be $0.47 to $0.54 versus analyst estimates of $0.56 on revenue of $1.03 billion. The company expects Omniture and Enterprise to grow sequentially and all other business segments to decline sequentially due to the impact of Japan.

Adobe repurchased 2.5 million shares for $83.4 million during the quarter and ended the quarter with $2.6 billion in cash and short-term investments. Its annual revenue in 2010 was $3.8 billion. The stock is trading around $32.59 with market cap of about $16.5 billion. Its 52-week range is $25.56 to $37.30.

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