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Adobe earnings beat estimates

The maker of graphics software edges past expectations, reporting quarterly profit and revenue that were way down from a year ago but a slight improvement sequentially.

Software maker Adobe Systems edged past expectations Thursday, reporting quarterly profit and revenue that were way down from a year ago but a slight improvement sequentially.

Adobe reported diluted earnings of $49.8 million, or 20 cents a share, for its first quarter, ended March 1. That compares with $69.8 million and 28 cents a share in the same period a year ago and $34.3 million and 14 cents a share in the previous quarter.

Adobe, which mainly makes software for electronic and print publishing, has been hit hard by the advertising downturn. But the release of a new version of Photoshop, the company's flagship graphics product, is expected to boost earnings this year.

"It's clearly a compelling upgrade," CEO Bruce Chizen said during a conference call with financial analysts following the announcement. "All the data indicates there are many customers who have held off updating to Mac OS X (the current Apple operating system) waiting for the new Photoshop."

Chizen said in an interview that the company plans to expand the Photoshop franchise and take better advantage of the digital-photography boom with a new product that would give photo hobbyists an easier way to create and organize electronic photo albums. He said he expects the as-yet-unnamed product to be ready late this year or early next.

"We're talking about a product that would allow people to manage their photo albums much better," Chizen said. "For somebody who has hundreds and thousands of photographs...we think there's a great opportunity there to complement Photoshop."

Excluding one-time charges, first-quarter earnings came in at 22 cents a share. On that basis, analysts polled by financial-research company First Call expected earnings of 20 cents a share.

First-quarter revenue came in at $267.9 million, compared with $329 million a year ago and $264.5 million in the previous quarter.

The company said in a statement that it expects revenue to rise significantly for the second quarter, setting a range of $305 million to $325 million. Per-share earnings were projected to between 24 cents and 27 cents.

Chizen declined to elaborate on financial goals for the second half of the year, saying it's too early to tell how much Photoshop and other new products will boost revenue. He said he's fairly confident, however, that general economic conditions and the advertising market in particular have been through the worst.

"Right now, we're assuming things are stabilized; that's what we're experiencing," Chizen said.

Besides the new version of Photoshop, the quarter was marked by a push into server software and services. In January, Adobe released AlterCast, server software for managing images across a network. A month later, the company announced a $72 million bid to acquire Accelio, a small Canadian company specializing in server software for routing and storing data submitted by people filling out electronic forms.

Chizen also said he was confident Adobe was making headway in the market for Web authoring and animation software, where Adobe's GoLive and LiveMotion have had a tough time wooing customers from competitor Macromedia's market-leading Dreamweaver and Flash packages. Adobe's presence in print and Web publishing will help the company gain ground, he maintained.

"The reality is our customers are telling us it's no longer economically efficient to focus on Web-only" products, Chizen said during the conference call. "They have to look at all platforms."

Chizen conceded, however, that LiveMotion has become an add-on to Flash, rather than a replacement for it.

"It's clear Macromedia has done a good job in creating a standard with Flash," Chizen said in the interview. "Am I happy about that--no. But I'm a pragmatist."

Several investment analysts tempered their outlooks for Adobe this week. William J. Lennan of WR Hambrecht downgraded the company to "market under-perform," saying the stock's high price isn't justified by current revenue growth. Credit Suisse First Boston analyst Gibboney Huske kept her "buy" rating but said she expects the company to lower revenue guidance for the full year, owing to a continuing advertising slump that is limiting demand for Adobe's publishing software.