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Adobe: Thriving Without Apple?


Facing down the Apple juggernaut and still remaining a viable tech firm is quite a challenge, but this company may very well have found a way.


Adobe's (ADBE) latest quarterly numbers are out, and while the market reaction has been distinctly negative (the stock plunged 4% mere minutes after numbers were released), I think it's possible the market has missed the bigger picture.

The company's total revenue for the quarter ending March 2 was $1.045 billion, up from $1.027 billion for the same quarter last year. Operating income was $288.9 million, versus $302.3 million for the same period a year ago, with the drop coming because of higher operating expenses (mostly relating to sales and marketing) in Q1 of fiscal 2012.

Net income saw an unpleasant 21% year-over-year drop, to $185.2 million for Q1 of 2012 compared to $234.6 million for Q1 of last year. Diluted net income per share came in at $0.37 for the quarter (versus $0.46 for Q1 of 2011).

Analysts and pundits seized on the net income drop as evidence of a slowdown in Creative Suite sales ahead of the much-anticipated release of CS6 later this quarter. Some also tried to read into this a decline in Document Services business and/or deceleration in LiveCycle business. (In truth, Doc Services is flat, but not down.)

Where things get tricky, of course, is in trying to extrapolate from the current state of Adobe's business to the state of the business, say, six months from now. Let's just go ahead and run through the bear case first, then follow up with the bull case, and finally, my own take.

The Bear Case
Bears like to point to the following factors:

  • LiveCycle business is decreasing. The company has, in fact, expressed downward guidance on LiveCycle to the tune of possibly as much as $150 million in fiscal 2012 (although in the conference call, it was noted that LiveCycle business is actually doing better than expected, and will most likely not be down a full $150 million on the year).
  • CS6 could be late, and meanwhile customers have put purchases on hold pending the release of CS6 (5.5 is already seen as "last year's version").
  • Even if CS6 is not late, Adobe is trying to transition customers from a perpetual-license model to a recurring-charge (subscription-based) model, and this could represent a difficult transition.
  • Revenues will decelerate if customers start paying by subscription (month to month) instead of buying a single Photoshop (or other product) license all at once.
  • Because of Flash, Adobe may not be able to participate fully in Apple (AAPL) platform success.
  • The company is making a big bet on its Creative Cloud strategy, and the payoff from that may take longer than expected.

The Bull Case
The bullish case for Adobe starts with pent-up demand for CS6. It's always possible that CS6 could be late (just as any software release can be late), but with as much riding on CS6 as there is, you can bet Adobe won't let schedules slip if it can be avoided.

Bulls will point out that the transition to a subscription-based model is not likely to be terribly disruptive because Adobe in fact plans to continue to offer perpetual licenses in parallel with its subscription business, so that customers can choose whichever payment mode they want.

And while it's true Adobe will lose a certain amount of "revenue front-loading" if people suddenly move to the subscription model, this will likely be offset by the availability of new customers who otherwise couldn't afford (or don't want) the big bite of a full Photoshop purchase.

Likewise, although it's true that Flash has no future in mobile devices (something Adobe acknowledged back in November 2011), Adobe does have a big investment in HTML5 technology, which should clear the way for greater involvement with the iOS platform.

Editor's Note: This article was written by Kas Thomas of assertTrue().

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