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Adobe blames Europe for flat revenue forecast

European sluggishness will keep Adobe Systems' third-quarter revenue roughly the same as it was a year ago, the company predicts.

    European sluggishness will keep Adobe Systems' third-quarter revenue roughly the same as it was a year ago, the company said Thursday.

    During a conference call with analysts, executives for the maker of graphics and publishing software said third-quarter sales would be comparable to the year-ago period, when the company reported revenue of $328.9 million.

    According to earnings tracking company First Call, analyst estimates for Adobe's third-quarter revenue ranged as high as $380 million, which would represent a 15.5 percent gain year over year.

    Shares of Adobe traded at $39.16 in after-hours activity on the Island ECN immediately after the company's report. Adobe fell $1.17 to $39.01 in Thursday's regular trading ahead of the news.

    Lower-than-expected demand in Europe and the United States has forced Adobe to lower its expectations for the third quarter, said Murray J. Demo, chief financial officer at Adobe. European demand steadily declined in April and May, Demo said.

    Europe has been "more of a gradual ramp down, as opposed to the U.S., which has kind of been a hard drop, and then bounced around a little bit from that point," he said.

    Although Adobe's Asian business was stronger than expected in recent months, the economic weakness in other parts of the world could hurt Adobe's business in the Asia-Pacific region, executives said.

    "I was surprised at management's cautious tone on Asia," said Tonia Lee, analyst with Dain Rauscher Wessels. "That was shocking."

    Adobe Systems
    Stock price from June 2000 to present.  
    Source: Prophet Finance

    Adobe predicted an operating profit margin of 31 percent in the third and fourth quarters, total shares of 252 million to 254 million in the third quarter, and a tax rate of 33 percent for the rest of the fiscal year. Those numbers, assuming quarterly revenue will be the same as the same period a year ago, translate into third-quarter earnings in the high 20s, on a cents per share basis, Lee said.

    Analyst consensus currently predicts a third-quarter profit of 30 cents per share for Adobe, with individual estimates ranging from 23 cents to 33 cents per share.

    Historically, Adobe profits exceed consensus estimates by about 5 cents per share, Lee said. The Dain Rauscher analyst characterized the company's third-quarter revenue forecast as prudent, but added that Adobe can exceed earnings expectations by keeping costs down. "The sense I'm getting is that they're being overly cautious about earnings for the third quarter," Lee said.

    Fourth-quarter sales should improve from the previous year as Adobe introduces product upgrades, Demo said.

    "That's possible, but it's difficult to say definitively that the fourth quarter will be better than the third," said Gibboney Huske, analyst with CS First Boston.

    Second-quarter results
    Adobe beat estimates in the second quarter. The company reported second-quarter net income of $61.3 million, or 25 cents per share. Excluding nonoperating gains and losses, Adobe earned $121.5 million, or 34 cents per share, for its fiscal second quarter ended June 1. First Call consensus predicted second-quarter earnings of 29 cents per share.

    Analysts' earnings estimates typically exclude nonoperating items.

    Second-quarter revenue increased 15 percent year over year to $344.1 million. First Call consensus called for second-quarter sales of $339.7 million.

    Much of the gain was driven by the company's recently upgraded Acrobat software for putting documents online. Adobe's ePaper division, which includes Acrobat, boosted second-quarter revenue to $90 million, up 67 percent year over year and an improvement of 46 percent from the first quarter.

    "The biggest highlight of the second quarter was the release of Acrobat 5," said Bruce Chizen, president and CEO of Adobe.

    Revenue from the company's Cross Media Publishing division, which oversees Adobe Illustrator, rose 8 percent year over year to $88.1 million. Web publishing, including Photoshop, generated sales of $137.3 million, a gain of 6 percent from a year ago.

    Adobe's ability to top second-quarter expectations comes as little surprise. The company in May said it was comfortable with analysts' second-quarter estimates, and those estimates haven't changed much since then. "Adobe continued to manage expenses well," Huske said.

    About 71 percent of Adobe's second-quarter revenue came from Windows products. Software for Apple's Mac OS contributed about 29 percent of revenue, down from 34 percent in the first quarter and 36 percent in the second quarter of fiscal 2000. Reliance on Windows software increased mainly because Adobe has improved sales to large corporations and other enterprises, Chizen said.

    Also Thursday, Adobe said it settled a class action lawsuit filed in 1996 after the company acquired Frame Technology. The confidential settlement won't affect earnings, Adobe said.