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Can Adobe Unbox?
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Thu Mar 29, 2007 6:45 am Reply and quote this post
This week, the company unveiled its biggest software package ever, and initial reactions are positive. For the event, Chizen and executives traveled from their San Jose, Calif., headquarters to Manhattan, renting an airy SoHo gallery space to show off their new products to creative professionals and Wall Street analysts.

But are cellphones and ad revenue among the long-term growth engines his investors are seeking beyond Adobe's (nasdaq: ADBE - news - people ) core creative software?

On display in SoHo was Adobe's Creative Suite 3, or CS3, software that ties together its hugely popular graphic-design titles like Photoshop and Illustrator with the animation and Web design products like Flash and Dreamweaver that it acquired as part of its $3.4 billion deal for Macromedia in 2005. CS3 is also important because it's the first version with real support for Apple's (nasdaq: AAPL - news - people ) newest Macintosh computers using Intel (nasdaq: INTC - news - people ) microprocessors and Microsoft's (nasdaq: MSFT - news - people ) latest Windows operating system, Vista.

The new software will probably be a big hit for Adobe. Creative software accounted for $1.4 billion of revenue last year, about 55% of its $2.58 billion total sales. And both company executives and observers expect it to drive the company's sales this year. Adobe projects it will report second-quarter sales between $700 million and $740 million, which would represent year-over-year growth of about 15% for the quarter, and a nearly 50% increase from the same period in 2005.

Since its 52-week low last July, Adobe's stock has jumped some 60% to close Wednesday at $41.58. And Piper Jafrey analyst Gene Munster wrote to clients Wednesday that he expects CS3 sales will exceed expectations and that Adobe's second-quarter revenue guidance "could prove to be conservative."

But what's next? Many investors still see Adobe as a company driven by its Creative Suite product cycles. Following the past three major, shrink-wrapped software release cycles, Adobe shares have "traditionally taken a breather," with its multiple falling 17% three months after the software release and 15% after six months, Munster said in a note last December. So Adobe spent much of its financial analyst conference Wednesday talking about new projects it hopes will provide steady, year-round revenue streams.

One of the company's biggest targets is cellphones, which are becoming more powerful and more prevalent. Research firms predict more than 1.2 billion will be sold worldwide this year. Adobe makes two main products for cellphones: Flash Lite, a portable version of its Flash software that can be used to power games, videos and even the entire user interface, and FlashCast, a server product to stream data to cellphones. Adobe makes money from selling licenses to cellphone makers like LG and shares revenue from FlashCast data services. Last year, Adobe's mobile and device division kicked in $37.5 million of revenue, about 1.5% of the company's total sales.

Flash is the leading animation format for the Web, and Flash video's market share has grown from nearly nothing a few years ago to almost 100% of "user-submitted" video sites like Google's (nasdaq: GOOG - news - people ) YouTube, stealing share from Microsoft, RealNetworks (nasdaq: RNWK - news - people ) and Apple. So it seems that Flash would be a natural fit for cellphones, especially as carriers look to make money selling music, ringtones and TV subscriptions to pad their profits.

But even if mobile data services are a nascent market, Adobe faces a lot of competition, ranging from rival phone operating systems like Microsoft's Windows Mobile to other mobile-video broadcast outfits like Qualcomm's (nasdaq: QCOM - news - people ) MediaFlo, which powers Verizon (nyse: VZ - news - people ) Wireless' new VCast TV service, and MobiTV, which Adobe has invested in.

Currently about 60% of Adobe's mobile business is in Japan, but Wednesday the company announced that Verizon Wireless, the second-largest U.S. mobile carrier, will start selling FlashCast data services in the second half of this year. Adobe doesn't expect any meaningful revenue from the deal this year, but expects sales to pick up in 2008 and 2009. Adobe estimates that Japanese carrier NTT DoCoMo (nyse: DCM - news - people ) sold about $600 million worth of FlashCast services last year.

Fully hosted, Web-based software services could also provide a boost for Adobe. For businesses, it hopes to sell more hosted video-conferencing services to compete with rivals like WebEx, which Cisco (nasdaq: CSCO - news - people ) bought this month for $3.2 billion.

Ad-supported Web tools for consumers are also in Adobe's plans. Earlier this week, the company launched a free, Flash-based video-editing tool with partner Photobucket, one of the Web's largest photo-sharing sites. Instead of paying for or downloading complex video-editing software, people can use the service to produce small video clips and make photo slide shows that can be quickly viewed and shared on the Web. At Wednesday's investor meeting, Adobe showed off a version of the tool that can be easily customized with its partner's graphical branding--and ads. Adobe can take a share of that revenue.

The company also has big hopes for a new software framework called Apollo, which it also showed off on Wednesday. Apollo lets software developers make self-contained, offline copies of their Web-based applications, Flash creations and more. Users can effectively run Internet applications without a Web browser, and can use a computer's fast processor and local resources to run Internet applications better. Some Apollo-based software the company demonstrated taps into e-commerce sites like eBay (nasdaq: EBAY - news - people ) and (nasdaq: AMZN - news - people ) with a customized interface--and no Web browser. Users can publish photos to their eBay listings directly from a Web cam, instead of importing photos, uploading them to the Web, and then adding them to eBay.

Since Adobe released a preview version of Apollo last week, 40,000 people have downloaded the software and 30,000 people have downloaded its development tools, the company says. If Apollo takes off, Adobe could make money off more people using its creative tools in CS3 to design applications and graphics. While Apollo won't have a significant impact on Adobe's revenue this year, RBC Capital Markets analyst Robert Breza said in a March 21 note that selling developer tools for Apollo is likely to add to Adobe's 2008 revenue.

Contributed by Vinod_javas, iVirtua Participating Member
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