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Adobe strikes gold on the Web

Internet companies are not the only ones capitalizing on the Web. At least one old-time software company, Adobe Systems, has been resuscitated thanks to the Net's popularity.

Internet companies are not the only ones capitalizing on the Web. At least one old-time software company, Adobe Systems, has been resuscitated thanks to the Net's popularity.

After suffering a series of blows earlier this decade, Adobe's sales are booming and its stock is soaring, largely due to the Internet's popularity, Apple's recent comeback, and efforts to appeal to Microsoft Windows users.

The company that helped create the desktop publishing industry in the 1980s and climbed to prominence with the popularity of the Apple Macintosh, suffered a series of financial setbacks in the mid-'90s as interest in Apple waned and the graphics software market became saturated.

To turn things around, the company restructured, staved off an unwanted buyout attempt by Quark, and focused its efforts on the Net.

Wall Street has taken notice: The graphics and publishing software firm's stock has quadrupled in the past year, from 25 to nearly 100 per share.

"Adobe has won the whole desktop publishing and graphics manipulation space, but in recent years market growth slowed tremendously. Now it's picking up as people use digital cameras and publish content on the Internet," said analyst Greg Vogel, of Banc of America Securities. "The Internet is creating new demand for products in a market that Adobe has already won."

Adobe has shipped a suite of Web-based tools, such as GoLive Web site design software, to augment its popular Pagemaker, Photoshop, and Illustrator software. Adobe Acrobat, which now makes up 10 percent of the company's revenue, has become more popular as businesses use the tool to exchange documents via email and the Web.

"The Internet more than anything else has increased the use of Acrobat, increased the use of Photoshop and Illustrator, which are frequently used to build Web site graphics," Vogel said.

In the mid-1990s, Adobe suffered when Macintosh sales declined. Revenue growth during that period declined from 15 percent to about 5 percent, Vogel said.

So the company started catering more to the dominant Windows operating system. Adobe released new versions of its software on Windows and Mac platforms at the same time, when in the past it released products on the Mac first.

Now Windows sales make up 60 percent of revenue, while Mac sales make up 40 percent. In the mid-1990s, it was the exact opposite, Vogel said.

"It was a difficult transition for them. It caught them by surprise," he said.

The company has spent the last year restructuring, cutting jobs and re-investing into its Internet commerce and marketing initiatives. The strategy is working: After only making about $30 million in profit in each of the first two quarters of 1998, the company has rebounded with a net income of $50.3 million, $38.3 million, and $46.3 in the last three quarters.

"It's taken some time, and it wasn't without pain, but things are starting to come together for Adobe," said Vogel, who rates the company's stock as a "buy." He predicts the stock will rise to $117 in 12 months and that the company will earn $168.3 million this fiscal year on $1 billion of revenue.

Sizing up the competition
Analysts say Adobe's primary competition is Macromedia. Both sell Web-design and graphics-creation tools. But Macromedia concentrates on interactive media, while Adobe focuses on technologies for building static pages.

Next week, Adobe will enter a new market by launching its InDesign professional publishing system to compete head-on against Quark, which sells a well-regarded publishing system.

Analyst Rob Enderle of Giga Information Group believes the InDesign product will do well in a tight market.

"Publishing has been their core area, so it's critical to their survival," Enderle said. "They're a known quantity, and the publishing industry in particular relies on them for tools."

Adobe is in good shape in the short term, but Enderle believes the company, like other software firms, will eventually have to address the move toward application hosting and allow customers to rent its software over the Web.

"They've made a run at the Internet, and they're executing well with their Internet strategy," Enderle said. "But the way the Internet is evolving is not only common tools for horizontal markets but tools targeting certain vertical segments."

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