Adobe may beat Street

The graphics and desktop publishing software maker announces that results for its fourth-quarter may exceed analysts' expectations.

Shares of Adobe Systems jumped higher today after the company announced that results for its fourth quarter may exceed analysts' expectations.

The graphics and desktop publishing software maker said it may earn 60 cents to 65 cents per share, surpassing First Call's analysts' consensus of earnings of 56 cents per share for its 1998 fiscal fourth-quarter. The quarter will end November 27.

Based upon preliminary analysis of its fourth quarter results, Adobe said that revenue is likely to be in the range of $240 to $245 million, compared with $227.1 million reported in the fourth quarter of fiscal 1997.

Shares of Adobe closed 9.85 percent higher yesterday, rising 3.19 points to 35.56. The stock has traded as high as 52.82 and as low as 23.63 during the past 52 weeks.

The company said it has shipped, to date in the quarter, the English version of Adobe Illustrator 8.0, which it said had received "stellar reviews."

"Illustrator 8 came out this past month and is probably driving the majority of revenues for the current quarter," said Jonathan Geurkink, an analyst at Volpe Brown Whelan who attended Adobe's meeting with analysts yesterday. "Photoshop 5 came out in May and is still generating strong revenues."

The company will ship Illustrator 8 in other foreign language versions, including French, German, and Japanese, by the end of the quarter.

Adobe also shipped its new Web publishing tool, Adobe ImageStyler.

Many analysts have said recently that the company needs to introduce new technologies to counter the sales of upgrades in order to help Adobe grow because its current staple of upgrade is generating much lower revenues, stalling the company in recent quarters. The company in August announced that it planned to lay off 10 percent of its 3,000 employees, and has moved to dump some of its top managers.

Adobe took a $25 million hit in third-quarter revenues because of declining sales in Japan.

"We are pleased to have the recent restructuring behind us and to have shipped these two products," Adobe chairman and CEO John Warnock said in a statement. "However, we remain cautious about the overall, global, economic conditions particularly in Japan and other parts of Asia."

Adobe said it took a $25 million hit in third-quarter revenues because of declining sales in Japan. Geurkink said that the company reported at its meeting with analysts that the numbers for the year would be around $70 million in revenues lost essentially because of the Asian turmoil.

Geurkink added that at the meeting Adobe failed to mention Apple's role, with the iMac's phenomenal success, in Adobe's resurgence.

"I was surprised since Adobe has something like half of its revenues from the Mac platform," he said.

Still analysts are not convinced that the company is out of its recent doldrums.

"I wouldn't characterize [today's announcement] as a turnaround," said Geurkink.

The company needs to introduce new technologies to counter the sales of upgrades in order to help Adobe grow because its current staple of upgrade is generating much lower revenues, stalling the company in recent quarters, according to some analysts. The company in August announced that it planned to lay off 10 percent of its 3,000 employees, and has moved to dump some of its top managers.

"This company has had trouble with execution issues," said Geurkink. With the restructuring, they are "now clearing the deck but I think it will take a few quarters for people to really see if this is a new company or not."

Adobe will spend approximately $200 million in research and development but still does not have much to show for it, according to analysts.

"After spending all this money on R&D, it's surprising they haven't put out more new products," said Geurkink. "The last major new product was the Acrobat product that came out over five years ago."

Still, Geurkink does not think it has hurt Adobe too much.

"Adobe has bomb-proof professional products," said Geurkink. "I think Photoshop and Illustrator have been selling to new customers as well as to upgrading customers.

"But in terms of really getting out there on the edge and pushing innovation forward, it seems like that will come from other companies," said Geurkink.

At its meeting with analysts, the company also addressed Quark's attempt in August to acquire Adobe. Quark, a smaller competitor, had made an unsolicited bid that Adobe rejected.

"They chuckled about it and said it was pretty much out the blue," said Geurkink. He said the company added that it might have been a business tactic by Quark over concerns about a new Adobe product that is likely to compete in Quark's professional desktop publishing market. Geurkink said the product is code named K2 and will be released sometime in the first half of next year.

Full results for the quarter will be announced December 16, 1998.

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