Adobe Waits for CS6
ADBE

March 20, 2012

Adobe (ADBE) yesterday reported a Q1, 2012 with only a slight increase in revenue over Q1 2011, with a decline in earnings per share (EPS). I use Adobe as a proxy for the computer software industry, but in this case special factors may have contributed to the poor showing, so the industry as a whole may do better in Q1. Adobe's fiscal Q1 2012 ended March 2, 2012, so it is a frontrunner to firms that report on a regular calendar basis (Q1's ending on March 31).

GAAP revenue was $1.045 billion, down 10% sequentially from $1.152 billion but up 2% from $1.027 billion year-earlier. Net income was $185.2 million, up 7% sequentially from $173.7 million but down 21% from $234.6 million year-earlier. Earnings per share (EPS) were $0.37, up 6% sequentially from $0.35 and down 20% from $0.46 year-earlier.

At the analyst conference call management claimed the poor showing was because of customers beginning to anticipate the future release of Creative Suite 6 (CS6). Creative Suite comes in a variety of flavors incorporating a number of Adobe software products such as the well-known Photoshop and Acrobat. Because the web is transitioning to include mobile devices and a new standard, HTML5, the products for web developers (including page layout, photo, animation, and video editing) are also changing rapidly.

Because of cost issues, developers sometimes do not upgrade to each new version. This was particularly true during the recession. If is possible that management is right in believing that the number of changes has become so great that CS6 will be a must-do upgrade even for customers that have CS5.5 or CS5, much less earlier versions.

The problem for web designers is that the design standards of 3 years ago, where they could count on a (well-designed) site appearing the same to viewers no matter which browser or operating system they used. Now every mobile device has a different screen size and many device users prefer apps, using a mobile web browser only as a last resort. What designers have had to do since the iPhone introduction is either write multiple web pages (one for desktop/notebook screens and one for each mobile device) or include programming on a single page that reformats that page for various screen configurations. Plus they

Given the endless complaining I have heard from fellow designers and programmers, I expect CS6 will be a big hit if it actually delivers the ability to design once and deploy, with minimal changes, to an assortment of devices. On the other hand if they think CS6 fails in that regard, they will probably cherry pick and only upgrade the Adobe software that work well for them.

The lower profits on flat revenues is attributable to up front investment in marketing and readying CS6 for deployment.

A number of pundits declared Adobe dead when Apple refused to support Flash animation on iPhones. So far Adobe is coping well with the new environment. It is the nature of IT things to see rapid die-offs and new growth.

Another area Adobe seems to be doing well in is helping its customers with dealing with another complex area, Internet advertising. A well-designed web page that does not generate ad revenue is not a good ROI. In January Adobe closed its acquisition of Efficient Frontier, which should help keep Adobe in the forefront of this area.

Today Adobe closed down $1.35 to $33.16. Its price to earnings ration was 29.5, which is pretty steep even if you buy the back-with-CS6 story. Adobe's lack of faith in its own future is shown by it's failure to pay a dividend. On the other hand it generated $314 million in free cash flow and ended with a cash balance of $2.8 billion.

CS6 is scheduled for release in late Q2, so probably in May. We will get a little bit of revenue feedback when Q2 results are announced in June.

Disclaimer: I don't have a position in Adobe. I do use some Adobe software, and I am long in a variety of technology stocks that might have relationships with Adobe.

See also: my Adobe Q1 2012 analyst call summary
www. adobe.com

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