Adobe Comments on Performance of Its Business Units (ADBE)

Jun.16.06 | About: Adobe Systems (ADBE)

Adobe Systems (NASDAQ:ADBE) reported earnings last night that met analyst estimates of 20 cents a share, despite weaker than expected revenue performance. The company also lowered its forecast for the remainder of 2006, guiding to revenue of $2.54 billion to $2.6 billion, compared with March guidance of $2.7 billion. The stock dropped about 4% after hours.

From the Adobe conference call (emphasis added):

Shantanu Narayen - President and Chief Operating Officer

I’ll spend the next few minutes reviewing highlights in each of our major businesses, starting first with Creative Solutions. Our Creative Suite and Studio revenue was impacted in Q2, due to a decline in demand as we head into the next long cycle. One of the contributing factors was the drop in Mac-based revenue, which we attribute to customers waiting for MacTel support in our Creative applications. It also appears that demand for upgrades to the Suites and Studio are tailing off sooner than anticipated.

On the positive side, InDesign momentum continued. It was the best revenue quarter since we launched the product more than six years ago. We also continue to achieve key customer adoption with Creative Suite 2, and InDesign. For example, Rodale has switched its magazine, book page and layout processes to Adobe InDesign software and standardized its US-based publishing processes on Creative Suite. Rodale publishes Men’s Health, Prevention, Runner’s World and Women’s Health magazines and is also the largest independent book publisher in North America with a collection of titles, including the South Beach Diet.

Turning to our digital video solutions business, our new video [codex] that we launched in Q1 had a combined record revenue quarter in Q2. With Production Studio, our integrated video production offering platform, and the Flash Player for video playback, we are driving increased use of video on the web.

Production Studio continues to win accolades in the press. It received numerous awards at the annual NAB conference in Las Vegas in April, including a video award from CMP Entertainment Media, a Pick Hit award from Digital Content Producer and the Innovation and Media award for Content Creation, selected by NAB attendees.

In addition to the success of Production Studio, our Flash video technology is rapidly gaining ground with high profile media and Internet companies. Disney-ABC announced that it had served 3 million web video streams off its popular full length episodes encoded in Flash and streamed using our Flash media server.

NBC also announced the use of Flash for its TV 360 strategy, blending web video and large high quality ad space within a sophisticated Flash application. Internet sites ranging from MySpace to Google to uTube are also taking advantage of Flash video’s unique capabilities to enhance their brands and user experiences.

In our digital imaging business, Photoshop performance remains steady a year after the latest version shipped. In fact, full units of Photoshop grew year-over-year when factoring in sales of Photoshop, Creative Suites, the new bundles and Production Studio. Looking forward we continue to be on track to deliver the next version of Creative Suite in Q2 next year.

Turning to our Knowledge Worker Solutions business unit, Acrobat Desktop revenue was solid and in line with our expectations. In terms of mix, the ratio of Acrobat Professional to Acrobat Standard remained at approximately 1:1.

Breeze, our rich way of communication and conferencing solution, continues to be an exciting opportunity for Adobe, even though today it remains a small part of our business. In a recent Forrestor report [inaudible] that directory general for state modernization or DGME, a government ministry responsible for simplifying and modernizing public sector administration, which is using an Adobe Palm Solution for its e-forms portal.

Utilizing LiveCycle, DGME is creating XML enabled forms, enabling off-line capabilities through Adobe Reader, connecting forms to its back end data bases and securing these forms with time stamped and proof-of-sender capabilities.

EXA Belgium, part of the Global Financial Services entity AXA Group, which has utilized an Adobe Solution to streamline it’s entire small and medium business insurance contract workflow. This has reduced insurance sale cycles from four weeks to 24 hours dramatically decreasing paperwork, and increasing customer closing rates.

In South Africa’s Department of Foreign Affairs, which is responsible for the registration and provision of critical documents for the country’s citizens, the Department will locate self-service and manned kiosks in strategic sights around the country, including Department offices, hospitals and other venues to enable citizens to apply for and receive documents electronically.

In the future, this will allow the Department to collect biometric and demographic information in order to issue smart card enabled identification documents. Once the final solution is fully implemented, the Department anticipates processing approximately 100,000 documents and applications daily.

In addition, Dexia International Bank of Luxembourg has chosen our Flex Solution to develop a new front end for their private banking applications, which will provide greater performance, efficient collaboration and a superior user experience.

In total, the number of transactions in the quarter with licensing revenue greater than $50,000 for our server products, including LiveCycle, Flex, Breeze and Flash Media Server, was 97.

LiveCycle also continued its momentum with partners who are helping to drive Vertical Solutions based on Adobe software. In May we announced two milestones in this area. In agreement with Ricoh, a leading provider of digital office solutions to develop and core market document scanning, security and print solutions based on Adobe PDF. The integration of LiveCycle Policy Server, Adobe print and scan technologies, with Ricoh Document Solutions, and its multifunction and laser printing devices will transform the way Knowledge Workers can work paper processes into more secure digital workflows.

In cooperation with ACORD, the Association for Cooperative Operations Research and Development to deliver more than 150 ACORD insurance forms in Adobe PDF. Through new ACORD PDF fill able forms, insurance companies, agencies and vendors can automate and simplify customer communication, capture data more accurately and securely, and reducing reeking costs in errors associated with manual data entry.

In our Mobile and Device Solutions business, in early April we announced a strategic alliance with Verizon Wireless to start a mobile ecosystem built around Flash technology that will allow developers to create new interactive mobile content experiences for Verizon Wireless customers. Through this agreement, Verizon Wireless is expected the first wireless operator in North America to introduce Flash enabled handsets to deliver a customized user experience.

In addition, we announced that more than 2 million mobile phone subscribers have signed up in Japan for NTT DoCoMo’s ichannel news and information delivery service since it was launched in September of 2005. Ichannel is powered by our Flashcast technology, applied server solution that effectively delivers rich data experiences to mobile devices.

Finally, our other business segment includes revenue from our Platform business unit, as well as our Print and Classic Publishing business unit. The sequential increase in Q2 was driven by revenue earned through distribution of the Yahoo Toolbar with the Adobe Reader, Flash and Shockwave Players.

In addition Postscript revenue was up on both a quarter-over-quarter and year-over-year basis. We are getting strong customer reception to the Adobe PDF Print Engine helping to secure PDF workflows in the printing industry.