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Adobe's Failure To Launch

Posted: Jun 22, 2009 10:41 AM by Eugene Bukoveczky

Tickers in this Article: AAPL, ADBE, IBM, MSFT

If you're in the software business, your primary business strategy is to pull repeat business out of your existing client base by continuously putting newer versions of the software that have enough new bells and whistles to make it a compelling buy. That's a well-worn strategy that has consistently generated sales for companies like Microsoft (Nasdaq: MSFT), Apple (Nasdaq: AAPL) and IBM (NYSE:IBM).

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Weak Product and Bad Timing
Unfortunately for graphic design software maker Abode (Nasdaq:ADBE) the current version of its flagship product, Creative Suite, apparently lacked enough "wow factor" to generate the upgrade order flow that the company had been counting on. Tough times in the advertising market was another factor holding back sales as total U.S. ad spending fell 14% during the first quarter.

As a result, the year-over-year revenue and earnings comps in the company's recently released quarterly results were down significantly, although the revenue number was slightly better than what some analysts had feared. For the three months ending May 29, revenues were down 21%, while earnings per share tumbled 40% to 24 cents down from 40 cents for the same period a year earlier.

Cost Cuts Fail To Offset Sales Slump
The more sizable dip in the company's bottom line reveals how the company's recent efforts at trimming costs by laying off staff and cutting expenses have so far failed to offset the sharp deceleration in orders. So far, head count has be reduced by 8% and expenses reduced by 13%. Despite these measures, Adobe's profit margin fell to a three-year low of 33.7%, down from 39.4% a year earlier.

Graphic design professionals have so far given a big "thumbs down" to Creative Suite 4. The software, which includes Photoshop and Illustrator and accounts for 60% of revenues, has seen its sales track at more than 20% below the revenue trajectory achieved by the previous version 3 at this point in the cycle.

Analysts have concluded that most of Adobe's customers are now likely to by-pass version 4 altogether in favor of version 5. But that's not expected to be released until the middle of next year at the earliest. Perhaps because this glimmer of hope for a meaningful sales revival most analysts continue to rate the company a "Hold" with a price target in line with the current price. (Read our article Great Expectations: Forecasting Sales Growth to learn more about predicting sales)

The Bottom Line
Despite the failure to launch on the latest version of Creative Suite, Adobe still basically owns the graphic software space and its Acrobat document format remains the defacto standard on the internet. That makes it a quality operation and potentially of interest to a host of other players in tech space keen on upping their game in the fast-growing market for digital content creation.

By Eugene Bukoveczky

Eugene Bukoveczky is a freelance writer and investment researcher. He holds a CFA designation and has spent several decades working in the investment business in places like Toronto, New York, London and Dubai. He currently resides in Nova Scotia, where, when not writing, he devotes his time to chopping wood, growing his own vegetables, riding his bike to the store, and thinking about other ways to reduce his carbon footprint.

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