Adobe Slows As Its Users Await Product Upgrades
BY PATRICK SEITZ
INVESTOR'S BUSINESS DAILY
Posted 5/26/2006
Adobe Systems' (ADBE) honeymoon with Wall Street following its acquisition of Macromedia hit a rough patch this month when the combined company said its sales would be at the low end of estimates for the quarter ending June 2.
Six months after Adobe bought Macromedia, Adobe is still in the early stages of realizing the potential of the combination, several analysts say. With Macromedia's products, Adobe now has dominant market share in electronic documents, graphic design and interactive Web design.
But sales may be starting to slow ahead of two major product upgrades — Acrobat 8 and Creative Suite 3. Acrobat 8, the newest version of Adobe's electronic document and work flow software, is due out this fall. Creative Suite 3, the graphic design suite that includes well-known products like Photoshop and Illustrator, is expected in early 2007.
Analysts say integrating products and technologies from the two companies will take some time. Adobe completed its purchase of Macromedia on Dec. 3.
"There might be some fits and starts while they integrate, but at the end of the day, they're in a really strong position," said Chris Swenson, an analyst with the NPD Group. "They literally have all the leading tools for graphic arts under one roof. Their prospects look really good."
One of the biggest projects on Adobe's plate is code-named "Apollo." It involves merging the Adobe Reader, Flash Player and HTML Internet language into a new technology platform.
"Combining those technologies, perhaps as early as next year, will only enhance the value of the software that generates revenue for Adobe, namely products like Acrobat, Creative Suite, Flash, Dreamweaver and so on," said Jay Vleeschhouwer, an analyst with Merrill Lynch. He rates the stock a "buy."
Adobe likely will produce a smaller version of the Apollo software for cell phones, Vleeschhouwer says. One of the big reasons Adobe bought Macromedia was to expand into mobile devices, where Macromedia's Flash has a foothold. Flash started as animation software and has expanded into software that makes it easy to fill out forms online and do other interactive tasks.
But software giant Microsoft (MSFT) has a similar vision and plans to go after Adobe's core businesses in electronic documents and graphic design.
Microsoft plans to introduce its Metro format to compete with Adobe's Portable Document Format. Microsoft also plans to offer PDF creation in its Office 2007 suite, which could reduce demand for the low-end version of Adobe's Acrobat product.
Those new products will debut late this year and early next when Microsoft rolls out its next-generation Windows Vista operating system and Office 2007 productivity software suite.
Microsoft's answer to Adobe's Apollo is called Windows Presentation Foundation Everywhere. It's expected to run on Windows as well as Apple Computer's (AAPL) Mac and open-source Linux operating systems. It will come with Windows Vista and be available as downloadable plug-in software. Microsoft also might ship it with Office 2007, Windows Media Player and other products to get it widely distributed, Swenson says.
Microsoft also is attacking Adobe's graphic design business with its Expression suite. "Over the long term, the threat from Microsoft is very serious in the Web development space," Swenson said.
Windows Presentation Foundation Everywhere could have advantages over Adobe's Apollo because it will have links to Microsoft's server and Web service products.
"Microsoft is clearly our largest competitor," Adobe President Shantanu Narayen said in an interview. "You can never take a company like that for granted."
Adobe is focused now on providing customers with what it calls an "engagement platform." Adobe has spent years focused on replacing paper-based processes with electronic documents and digital work flows. While business users have improved their internal operations with Adobe's software, the same can't be said of dealings with customers.
"There's always been this gap that exists between how you run your corporation and how you communicate to customers," Narayen said. "We're trying to bridge that gap."
In the more functional Web 2.0 age, Adobe is going to have to push innovation out to its customers faster than ever, Narayen says.
"Software nowadays is not these monolithic releases that are going to be many years apart," he said. "With Apollo, we are going to get it out to customers really quickly and we're going to get their feedback and we're going to iterate (upgrade products frequently)."
Adobe is set to report fiscal second-quarter earnings on June 15. Analysts polled by Thomson First Call now expect the company to earn 30 cents a share, up 7% from a year ago. That would be its slowest EPS growth in more than two years. |
