Why Is Adobe’s Creative Solutions Business Slowing?

Adobe Systems Inc (ADBE), the publishing and design software maker, announced its Q3 results on Tuesday, and beat analysts’ expectations. Revenues for the quarter grew to $887.3 million compared with $851.7 million the year before, reporting 4% growth over the year while remaining flat sequentially. The Street was looking for revenues of $877 million in the quarter.  

By segment, Creative Solutions segment revenue dropped 10% over the year to $493.6 million. Business productivity solutions revenue grew 25% to $283.5 million while Mobile and device revenue grew from $13 million in the previous year to $27.5 million. Other segment revenue was $82.7 million, compared with $65.8 million the previous year. The drop in Creative Solutions revenue is a red flag. Is Apple (AAPL) taking market share away from Adobe with its own comprehensive portfolio of products and ardent fan base?

By region, the Americas contributed 48%, European markets brought in 33%, and Asia contributed the balance 19% to overall revenue.  

EPS grew 11% over the year to $0.50 and sequentially, also remained flat. The market was expecting EPS of $0.46 in the quarter. 

During the quarter, Adobe repurchased 3.7 million shares at a total cost of $147.7 million.

The company gave revenue outlook of $925-$955 million with EPS of $0.51-$0.53. 

Earlier this week, the company had also announced the acquisition of YaWah ApS, a Denmark-based imaging software provider. Adobe expects to utilize YaWah’s “market knowledge and technology to ensure that European companies have immediate access to hosted media solutions.” 

The company made significant advancements in most of its businesses in the quarter. Its Flash-based media service continued to expand its user base in the quarter. A Comscore study reported that 82% of online video views in the U.S. and 73% worldwide used Adobe Flash technology. During the quarter, Adobe tied up with CCTV International Networks and National Football League for the video streaming of the Beijing Olympic Games and NBC’s Sunday Night Football games.  

The company also announced the launch of the latest version of its Creative Suite software, CS4, due for release next week. CS4 is a suite for graphical designers including photo-editing software, the 3-D computer-drawing program Illustrator, Dreamweaver for designing Web sites and Soundbooth for audio editing. 

I continue to be concerned about the company vis-à-vis Apple. The stock rose 4.6% in Tuesday's after-hours session to $39.91.

  

Disclosure: None

Comments

[daveybrown:]

It is clear that the downturn is due to the upcoming CS4 launch. Last year at this time, CS3 was still relatively new, and early in the upgrade cycle. Boxed software, especially CS always has a sagging tail at the end of the product cycle. CS3 is almost 18 months old, and with CS4 about to come out (within days) who in their right mind would spend the money to upgrade to CS3, only to have to spend again to upgrade to CS4 in the future, especially when CS1 and CS2 to CS 4 upgrades are supported.

2008 Sep 18 11:48 AM

[daveybrown:]

There shouldn't be a red flag here. The downturn in the Creative Solutions revenue is clearly tied to the product being at the end of its cycle. Boxed software, and especially those products geared towards creatives who want the latest and greatest, typically have a sagging tail at the end of the product cycle as customers who will upgrade already have done so. CS3 has already been out for nearly 18 months. Last year at this time, the product was still within 6 months of its initial release, so this dropoff makes total sense as customers wait for the next version.

Who in their right mind would pay at this point (with CS4 days away) to upgrade to CS3 when that means you'd have to pay again to upgrade to CS4 down the line? Especially when upgrades from earlier versions of CS to CS4 are fully supported.

2008 Sep 18 11:53 AM