Stock of the Day (Archive)
Mar 27, 1998
Adobe Systems (Nasdaq:ADBE - news) just reported earnings after the close on Thursday and the software company missed
its number by a country mile, earning $0.33 per share vs the consensus estimate of $0.44. Adobe blamed continuing weakness
in Asia, a drop in Macintosh-platform revenues, a slowdown in North America, and a lack of new products last quarter. They
forgot to mention El Nino and the lunar eclipse, but otherwise they covered it pretty well.
The stock traded up 3-5/8 on Thursday prior to the news, but in after-hours trading Adobe fell more the 5 points. Now it will
be interesting to see if shareholders are tiring of Adobe's bumpy ride of the past two years or instead are looking for signs that
all the bad news is priced in.
Adobe helped launch the desktop publishing boom of the eighties and now it is trying to harness the bucking bronco of the
nineties - online publishing. Online publishing is a bucking bronco because it's powerful and exciting, but no one seems able to
ride it for more than eight seconds.
As the third largest software vendor, Adobe Systems makes products that "help people express and use information in more
imaginative and meaningful ways, across all print and electronic media," so say the press releases. The essence of that fancy
statement is Adobe products turn computer files into sharp-looking print and online documents. Adobe's PostScript was the
homerun of desktop publishing. Adobe Photoshop and Illustrator are graphics editing software that bridge the print and online
media. Adobe PageMill and SiteMill are for the creation and maintenance of web sites, and Adobe Acrobat is software that
formats and displays electronic documents (tax forms, as an example) for applications such as the web.
Adobe's dominance in desktop publishing made it well positioned to establish a strong market position in the online publishing
arena, but a few stumbles coinciding with the near-demise of Apple have made for a rough couple of years. The troubles which
emerged in late-1995 included a botched acquisition of Frame Technology, which hurt profits and tarnished Adobe's
reputation with investors for delivering on expectations. There was also some disappointment that Adobe's Acrobat reader
didn't establish a ubiquitous presence on the Web. Although Acrobat is a plug-in application for Netscape's Navigator web
browser, it is not being used to the extent that proponents had hoped.
The company has such a prominent position in desktop publishing and its products are so familiar to Macintosh users that
many investors figure it will eventually establish a strong presence in Internet software and across all platforms. Last year the
company outlined its Internet strategy "to provide tools for creating web content, delivering web content, and viewing web
content" and made important strides in hitting Windows-based PC users by releasing new versions of software simultaneously
for both platforms. In fact, sales of Windows-based products surpassed Mac products for the first time last year. As of this
latest quarter, sales of Windows products rose 18% to account for 59% of platform-dependent revenues. Sales on the Mac
side plunged 36% and accounted for just 41% of revenues.
Adobe says it plans a series of new product releases throughout the rest of the year, which should get revenues back on track.
The growth outlook for Adobe Systems hinges greatly on whether its Internet products become a hit. If they do, the size of the
market is expected to be so huge that it could easily return the company to its glory days. The difference between a hit and a
miss is vast, though. Adobe will also have to prove that its association with Apple isn't a bad thing, assuming it continues, and
that its products can continue to make headway in the Windows market where its brand is not well-established. All this gives
the stock a relatively high risk/reward profile for investors to consider. |
