Where is Adobe Going vis-à-vis Apple?

Adobe (ADBE) has been around for more than 25 years now and a significant part of that period is marked by its successful symbiotic relationship with Apple (AAPL). However, over the past few years, this relationship has turned sour with their products competing with each other (e.g. Final Cut and Aperture from Apple).

Adobe on its part has released products in Windows-only versions to add fuel to the fire. Its upgraded products like Lightroom improve on Aperture’s innovative features. Apple has increasingly sought to create software that fill gaps in existing software and its competition with Adobe seems to be a big treat for the consumers. An interesting post looking at the comprehensive creative software that Apple has been developing is available here.

However, the sore point is not having Flash on the iPhone and is missing out on an amazing web browsing experience. In Adobe’s Q2 earnings conference this week, CEO Shantanu Narayen said that Adobe is working on Flash for the iPhone and have a working version on the iPhone emulator that is part of the iPhone SDK. However, apparently, Steve Jobs wants an exclusive version for the iPhone.

As for the financials, Adobe had a strong second quarter that beat estimates. Revenue grew 19% y-o-y to $886.9 million and profit grew 41% to $214.9 million driven by strong international sales and product mix. Non-GAAP EPS was $0.50 compared to $0.37 in Q2 2007. Analysts expected EPS of $0.46 on revenue of $880 million.

Segment-wise, Creative Solutions segment grew 21% to $527.2 million. Business productivity solutions segment grew 10% to $252.8 million in revenue. Mobile and device segment revenue was $22.2 million, up 80%. It is focusing strongly on dynamic media and in March launched an Adobe Flash Media rights management server for broadcast and media companies. It also launched Adobe Media Player based on Adobe Air.

Region-wise, Americas revenue was flat y-o-y while it did well in Europe and Japan. Americas accounted for 43%, Europe 33%, and Asia 24% of total revenue.

For Q3, Adobe expects EPS of $0.45 to $0.47 cents on revenue of $855 to $885 million, versus analyst estimates of $0.45 on revenue of $878 million. In Q2, it repurchased shares for $543 million. It is currently trading around $41 with a market cap of about $22 billion.

I have always liked Adobe as a company. However, as the market landscape changes, and Apple gains momentum, Adobe’s creative professionals market is one that I believe will be under maximum threat. In addition, the iPhone turf war is one that Adobe had better not lose either.

Disclosure: None

Comments

[WhatMeWorry]

The problems started when Chizen, a marketing guy, took over from the founders who were technical guys that understood the graphics/publishing business. Chizen saw macs as a shrinking minority compared to wintels and so focused Adobe's products on Windows versions first and mac versions as later follow ons.

This worked initially, as window users started buying such mainatays as Photoshop and Acrobat (a product that Chizen saw as the future of Adobe). Given the number of Wintels vs Macs the company seemed on a roll.

The problem that Chizen overlooked is that the vast majority of Window users were graphic/publishing amateurs who after buying the first version saw no reason to upgrade (given the high cost of this software), compared to the Mac professional users. As a result the windows sales fell off and because mac software got second class attention and did not keep up with OSX innovation, mac sales lagged.

Jobs understood that he needed professional as well as amateur graphic software so got Apple to do it. He learned from MS Office that you can't rely on on others for compelling software that sells products.