Why Is Adobe’s Creative Solutions Business Slowing?

Adobe Systems Inc (ADBE), the publishing and design software maker, announced its Q3 results yesterday, beating analysts’ expectations. Revenues for the quarter grew to $887.3 million compared with $851.7 million the year before, reporting 4% growth over the year while remaining flat sequentially. The Street was looking for revenues of $877 million in the quarter.  

By segment, Creative Solutions segment revenue dropped 10% over the year to $493.6 million. Business productivity solutions revenue grew 25% to $283.5 million while Mobile and device revenue grew from $13 million in the previous year to $27.5 million. Other segment revenue was $82.7 million, compared with $65.8 million the previous year. The drop in Creative Solutions revenue is a red flag. Is Apple taking market share away from Adobe with its own comprehensive portfolio of products and ardent fan base?

By region, the Americas contributed 48%, European markets brought in 33%, and Asia contributed the balance 19% to overall revenue.  

EPS grew 11% over the year to $0.50 and also remained flat sequentially. The market was expecting EPS of $0.46 in the quarter. 

During the quarter, Adobe repurchased 3.7 million shares at a total cost of $147.7 million.

The company gave revenue outlook of $925-$955 million with EPS of $0.51-$0.53. 

Earlier this week, they had also announced the acquisition of YaWah ApS, a Denmark-based imaging software provider. Adobe expects to utilize YaWah’s “market knowledge and technology to ensure that European companies have immediate access to hosted media solutions.” 

They made significant advancements in most of their businesses in the quarter. Their Flash-based media service continued to expand its user base in the quarter. A Comscore study reported that 82% of online video views in the US and 73% worldwide used Adobe Flash technology. During the quarter, Adobe tied up with CCTV International Networks and National Football League for the video streaming of the Beijing Olympic Games and NBC’s Sunday Night Football games.  

The company also announced the launch of the latest version of its Creative Suite software, CS4, due for release next week. CS4 is a suite for graphical designers including photo editing software, the 3-D computer drawing program Illustrator, Dreamweaver for designing Web sites and Soundbooth for audio editing. 

I continue to be concerned about the company vis-a-vis Apple. The stock rose 4.6% in the after-hours session to $39.91.