Adobe Systems (NASDAQ: ADBE) is a graphics application and desktop publishing software company whose product portfolio includes several ubiquitous consumer technologies, including Flash for rich Internet applications and Acrobat for publishing documents. Adobe's strategy has been to gain nearly universal penetration by giving away software to consumers--to run Flash applications and read Acrobat documents, for example--while selling the software to enterprises, developers and other professionals who create content.
While the company has traditionally specialized in graphics and publishing offerings such as Photoshop, Adobe is particularly well-poised to take advantage of the growth of next-generation Internet applications. Its acquisition of Macromedia, which invented Flash, was particularly strategic in expanding into the web developer customer base. The company now bundles applications such as Illustrator, Photoshop and Flash in order to reach a broad array of creative professionals, "knowledge workers" (including programmers, researchers, systems analysts, and students), and enterprises. Internet advertising is an especially important industry, as it caters to professionals who design and create ads, as well as to websites that utilize its capabilities for "rich media" ads.
The company is also well-positioned to take advantage of the rise in digital media (e.g., photos, videos) and an increase in rich content on mobile phone platforms. As today's generation becomes more ingrained with digital formats of photography, video and sound, Adobe's suite of creative software products will benefit. On the mobile front, Adobe has partnered with providers to pre-install mobile versions of its popular applications, including Flash Lite and mobile Acrobat reader, onto mobile handsets.
Adobe Systems is an information technology company with a focus on creative products. Though it has traditionally specialized in graphic, photo, video, and publishing tools, its acquisition of Macromedia allowed the company to expand into the web design industry. Its products are used by graphics designers, artists, web designers, and advertisers as well as by publishers and professionals in nearly every industry (Adobe produces the ubiquitous Acrobat PDF file format).test
Second Quarter 2010 Results (ended June 4, 2010)
Adobe achieved record revenue of $943.0 million, compared to $704.7 million reported for the second quarter of fiscal 2009 and $858.7 million reported in the first quarter of fiscal 2010. This represents 34 percent year-over-year revenue growth. Record revenue and the company's strong Q2 financial performance were driven by the successful launch of Creative Suite 5 and the explosion of digital content across all media and devices.
Adobe’s GAAP diluted earnings per share for the second quarter of fiscal 2010 were $0.28, compared with GAAP diluted earnings per share of $0.24 reported in the second quarter of fiscal 2009. GAAP operating income was $227.3 million in the second quarter of fiscal 2010, compared to $161.4 million in the second quarter of fiscal 2009. GAAP net income was $148.6 million for the second quarter of fiscal 2010, compared to $126.1 million reported in the second quarter of fiscal 2009 and $127.2 million in the first quarter of fiscal 2010.
Adobe has evolved from a company that sold graphics, publishing and other software to one focused on building suites of tools and software used by publishing and graphics professionals as well as developers of websites. The company makes the vast majority of its revenue--96% in 2006--from selling software products and licenses. Adobe's business segments are the following:
Adobe's Creative Solutions segment focuses primarily on the needs of the creative professional customer. Creative professionals include graphic designers, production artists, Web designers and developers, user interface designers, writers, videographers, motion graphic artists, photographers and prepress professionals. Adobe’s software tools are used by creative professionals to create much of the printed and online information people see and read everyday, including newspapers, magazines, Websites, rich Internet applications (RIAs), catalogs, advertisements, brochures, product documentation, books, memos, reports and banners.
Adobe's media products and services enable broadcasters, events organizers and marketers to reach the audience through its Flash Platform. The products of this segment includes Adobe After Effects Professional, Adobe Audition, Adobe Creative Suite Design Premium, Adobe Creative Suite Design Standard, Adobe Creative Suite Master Collection, Adobe Creative Suite Production Premium, Adobe Creative Suite Web Premium, Adobe Creative Suite Web Standard, Adobe Dreamweaver, Adobe Encore, Adobe Fireworks, Adobe Flash Access, Adobe Flash Media Interactive Server, Adobe Flash Media Streaming Server, Adobe Flash Professional, Adobe Illustrator, Adobe InCopy, Adobe InDesign, Adobe InDesign Server, Adobe Photoshop, Adobe Photoshop Elements, Photoshop.com and Scene7 On-Demand.
The Business Productivity Solutions business is focused on providing solutions which meet the needs of enterprises and governments. This segment leverages its client platforms that include Adobe Reader, Adobe Flash Player and Adobe AIR. Knowledge Worker products include Adobe Acrobat.com, Adobe Acrobat Standard, Adobe Acrobat Pro, Adobe Acrobat Pro Extended, Adobe Document Center and Create Adobe PDF Online.
Adobe’s Omniture Business segment provides Web analytics and online business optimization products and services, which it delivers through its Omniture line of products and Omniture Online Marketing Suite. Customers use its Omniture products and services to manage and enhance online, offline and multi-channel business initiatives. Customers who use Omniture solutions include marketing professionals, such as marketing managers, online marketing managers, search engine marketers, media managers, media buyers, marketing research analysts and the chief marketing officer. Customers also include Web content editors, Web analysts and Web production managers.
Adobe Flash Platform enables the development and delivery of applications, content and video. The Adobe Flash Platform includes client technologies, such as Adobe Flash Player, Adobe Flash Lite and Adobe AIR. It also includes developer tools and technologies, such as Adobe Flash Professional, Adobe Flash Builder, Adobe Flash Catalyst, Adobe Flash Platform Services and Adobe Flex. Its products include Adobe ColdFusion, Adobe ColdFusion in the Cloud, Adobe Flash Builder and Adobe Flex.
Adobe's Print and Publishing business segment contains several of the Company’s products and services, which address market opportunities ranging from the diverse publishing needs of technical and business publishing to its legacy type and OEM printing businesses. Its OEM PostScript products include Adobe PostScript and Adobe PDF Print Engine. The Company’s Print and Publishing Business Unit is focused on solutions, which address the needs in markets, such as technical document publishing and communication, business document publishing, compact disk-read only memory (CD-ROM) publishing, eLearning solutions, online help systems and typography. Print and Publishing products include Adobe Authorware, Adobe Captivate, Adobe Contribute, Adobe Director, Adobe Font Folio OpenType Edition, Adobe FrameMaker, Adobe Type Manager and FreeHand MX.
Creative Suites is a bundled product of Adobe with a focus on creativity. Specifically, Creative Suites contains software allowing users to design and edit photos, graphics, audio, video, and web pages. Adobe produces packages for Creative Suites and individual software titles for amateurs to use at home and professionals to use in the studio. The most well known applications within Creative Suites are Illustrator, Photoshop, and Dreamweaver.
Acrobat is the industry standard publishing tool launched in 1993. It is used to create documents by many businesses, as well as by average consumers. Acrobat uses the Adobe-designed file format "PDF" or Portable Document Format for all its applications; the format is widely used throughout businesses, schools, and government offices. Adobe's Acrobat PDF Reader is a free application that can be downloaded off their website and allows users to read and search through PDF files, but not to edit or create them. Acrobat has a host of different programs for sale that are for creating PDF word and 3D image files, as well as for converting large documents into searchable, published PDFs. Acrobat also has a line of communications software for corporate digital networking and web conferencing. Although Adobe faces similar dependence problems with Acrobat as with the Creative Suite (see above), these are on a slightly lesser scale.
Adobe made a sizeable splash into the web design industry with its acquisition of Macromedia in 2005. Macromedia has a number of powerful web-design and media-design tools that are found on many major website these days, and its products could become key to the future of next generation website design
In particular, Flash is a programming language and tool kit created by Macromedia that allows vector graphics and other graphic languages to be streamed together very quickly, creating simple animations and allowing for interactivity with those animations. Programmers must buy Flash tools from Adobe, but users can download flash players for free. The main competitor to Flash is Ajax, an industry-standard design technique that uses tools already available within most web browsers, thus allowing programmers to create moving graphics without purchasing Adobe tools.
Recently, Adobe has entered the mobile software market, producing Flash Lite players for pocket PCs, PDAs, and cellular phones. Adobe has also produced an Acrobat reader that is mobile compatible. It appears that the company is betting on the growth of the mobile platform by expanding its product line to take advantage of the predicted growth. Telecom industry continues to upgrade cellular networks and more users have internet access on their phone.
Adobe's products are very popular among professionals in the advertising and publishing industries, both online and print. Creative professionals use Adobe's software to lay out printed magazines and newspapers, as well as create the advertisements for these media channels. Revenues of the printing and publishing industries are typically correlated with Adobe's revenues for its creative products.
One competitive advantage for Adobe is the learning curve needed for its creative products. Adobe's professional editing products require significant training for its professional users, making the proposition of switching products expensive.
Rich Internet applications are driving the next generation of the Web (including the so-called Web 2.0), which focuses on interactive media. Google's YouTube is an example of a popular site that utilizes Adobe's Flash technology for its videos; the stock chart on the Wikinvest home page also uses Flash. The company is very well poised to take advantage of the increased growth in the next generation Internet with products such as the aforementioned Flash as well as its Flex technology and ubiquitous Acrobat publishing format.
Interestingly, Adobe is also leveraging its dominant position in rich Internet applications with Flash to gain penetration onto various computing platforms. The company has introduced its Apollo product so developers can build "light" software applications for the desktop, mobile, etc.
Internet advertising is growing at the fastest rate of all major channels--often at the expense of traditional media such as print. Continued strong growth in Internet advertising will benefit Adobe, especially as rich media functionality has evolved online advertising. Many advertisers seeking greater interactivity with consumers are flocking to rich web media, especially compared to print or television media, because of advertising that allows users to interact with the ads. For example, users change the color of a car in a side-bar advertisement powered by Adobe's Flash technology.
The digital native segment is defined by the younger generation, children and teenagers who have grown up in a constantly evolving environment of new technologies. While Adobe's core audience has been publishing and graphics professionals, increased demand for their products may come from the generation of digital natives as older technologies such as photography, video, and sound become increasingly digital. Amateurs looking to manipulate digital media may increasingly demand Adobe's editing applications such as Photoshop and Illustrator.
As with most technological products--hardware or software--Adobe's offerings face a constant threat of obsolescence. The company must keep pace with cheaper and more powerful computers and faster Internet bandwidth in order to stay relevant with customers' needs. As a result, development of software upgrades to include new functions and features remains crucial to their growth and market share. Adobe has faced cyclicality for its products in the past when sales slow dramatically as customers await the release of new upgrades. Adobe's diversification of offerings beyond creative products for publishing and graphics will also smooth product cycle volatility that occurs with software cyclicality.
Adobe has made a significant bet on the growth of the mobile platform by releasing mobile versions of its popular applications, including Flash Lite, Flash Cast and mobile Acrobat reader. Adobe partners with handset manufacturers to pre-install Flash and Acrobat software into a phone. If the mobile industry continues to expand and the growth of technologies such as 3G continue to accelerate, Adobe could be well-placed to take advantage of said industry trends.
In February 2009, Adobe released to developers a test version of its upcoming Flash Player 10.1, which is designed to run well on smartphones and other mobile devices. According to a Strategy Analytics analysis from January 2010, more than 250 million smartphones that support the full Flash Player are expected ship by the end of 2012.
However, Adobe Flash is facing an onslaught of up-and-coming alternatives that threaten to displace the former's dominant status as the de facto rich-media platform online. The launch of Apple's iPad, which does not support Flash, has also heated up the debate on whether the Adobe platform is in danger of losing market share to competing alternatives.
Adobe's primary competition comes from Microsoft (MSFT) and Apple (AAPL). Both companies produce mainstream operating systems, and as a result, both have designed digital media software specifically for their operating systems that compete directly with Adobe's digital media software.
Trying to deliver rich content effectively to the stubbornly heterogeneous end-user device tiers has produced more tears than triumphs. Adobe (ADBE) is aiming to fix that with the ambitious and inclusive Open Screen Project, which now throws Adobe's considerable installed base weight behind an industry-collaboration movement to standardize interface delivery.
By leveraging Adobe's ubiquitous Flash Player and soon Adobe AIR, the project's ambition is to allow ease in creating content -- including video -- and delivering it consistently to televisions, personal computers, mobile devices, and consumer electronics. The means is a consistent runtime environment for content, applications and services to present well across a variety of "screens," from cell phones to mobile Internet devices (MIDs) and home entertainment set top boxes. the Open Screen Project includes:
Adobe's efforts will provide a significant counter-punch to the Microsoft Silverlight/Live Mesh move to accomplish similar values using the market presence muscle and developer allegiance to the Windows, .NET and Visual Studio world.
Microsoft has made a direct challenge to Adobe in its release of Windows Vista and Office 2007 by releasing XPS, a competing format to Adobe's PDF. Because PDF is portable across a number of operating systems--mobile included--the success of XPS will depend on whether or not it becomes a mainstream format for non-Windows users. Additionally, Microsoft ships Expression Studio, a graphical suite of design tools that competes directly with Adobe's Photoshop and Illustrator tools.
Macromedia Flash also faces competition from Ajax and other rich internet application technologies that are publicly available for any web development applications. Ajax continues to be refined by independent programmers worldwide and pose a threat to the already refined Flash platform. Ajax is used in several major applications, including Google Maps, and continued growth is likely given that it is free and no software player needs to be downloaded to view Ajax applications.
These figures below illustrate Adobe's significant installed base for PC users, which may drive web developers to continue using Flash development tools. Ajax, on the other hand, runs in an Internet browser and does not come with tools, requiring more technical know-how to program.
|Media Player||Percent of PCs Worldwide with the Player Installed|
|Adobe Flash Player||98.7|
|Microsoft Windows Media Player||83.7|
Source: Company information
Adobe will lose luster as it becomes easier and easier to develop websites and alter graphics for free.
The growing functionality of the Wordpress Platform, responsible for countless websites across the internet, is making leaps and bounds in its implementation of CSS styling and complex plug-ins that would normally require a professional web designer. Wordpress is currently the #11 site on the internet, with over 194 million people visiting its sites each month.
The widely used Thesis Theme for Wordpress, and other flexible layout systems like Weebly.com make it easy to apply something called "dynamic CSS styling". This allows users to quickly create professional looking websites without using Adobe products. Wordpress' young founder, Matt Mullenweg, has publicly criticized the Thesis theme and other pay-per-use website design services as violations of Wordpress' open API. Free, flexible and easy to use Wordpress themes, like atahualpa, have already been released in Beta form, to wide community support.
While Wordpress developers frequently use the Adobe suite to create new themes and templates for public use, the growing trend towards easily editable, free, flexible themes will reduce the need for products like Dreamweaver.
Gimp.org has also released a free software package for editing photos and replicating a large number of Photoshop functions. Primo PDF, Sourceforge.net and many others have developed software which replicates Adobe Acrobat for free, or for a fraction of the Adobe price point.
Unscrupulous would-be designers can find illegal torrents of the entire $1,500 Professional Adobe CS-4 Suite on sites like demonoid.com and the Pirate Bay. Torrent sites are likely here to stay, with The Pirate Party winning actual seats in the Swedish parliament in 2009.
To maintain its high price point, Adobe will have to continuously innovate and focus on developers instead of the mass market who will increasingly use free services.
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