Adobe seeks silver lining

Adobe Systems has been a pioneer in helping San Jose reclaim its position as the capital of Silicon Valley.

Instead of remaining in an outlying suburb as Apple or Netscape did, Adobe moved into a gleaming high-rise building with the Adobe logo plastered on the side, in revitalized downtown San Jose.

But among Silicon Valley giants, Adobe is struggling.

Two weeks ago, the software maker said it would not meet Wall Street's quarterly profit expectations, it would let go of some top executives--including the CFO--and would lay off up to 10 percent of its workforce.

Adobe's stock continued sliding on that news. The depth of its problems were underscored late yesterday, when Quark, a smaller competitor, made an unsolicited bid for the software maker. Adobe rejected the bid, but Quark said it still may continue to pursue an alliance with the company.

In a statement issued today, Adobe said that Quark failed to state any material terms that would constitute a firm and bonafide offer, including price, and that Quark has itself acknowledged the significant anticompetitive effects of any deal. Adobe said it believes any transaction between itself and Quark ultimately would be harmful to its customers.

Adobe said also that it has advised Quark that it is not interested in pursuing discussions with Quark because it is committed to revitalizing its business.

In fact, Adobe chief executive John Warnock recently resigned

John Warnock

from his board seats at companies such as Netscape to focus on turning the company around.

But can he pull it off?

While Adobe remains the dominant force in computer graphics software, the company faces several hurdles, including gloomy sales in Asia, and little room for growth domestically in a market nearly saturated with its products.

One of the greatest challenges the company faces is rolling out new products to counter the sales of upgrades, which tend to generate much lower revenues.

"You have to remember that when a tech company is smaller, it is going to have much better growth prospects as the market is embracing its products," said Aaron Scott, an analyst at Sands Brothers. "Adobe is now a mature company, and while I wouldn't say the market is saturated with its products, it's getting to that point."

Adobe recently launched the latest version of its illustration software package, which features tighter integration with Microsoft Windows while adding more designing tools for artists and business users alike. In an attempt to increase its user base and make its products more accessible, Adobe Illustrator 8.0 is designed to bring together tools that are common throughout the Adobe family of software applications.

The company also recently introduced an upgrade of its photo-manipulation application, PhotoShop, but Scott said Adobe cannot rely on new sales of these products to take off.

"High growth for Adobe must come from other products," said Scott, pointing to Adobe's Acrobat software, which allows document-sharing across different platforms and from the Web. "I think they have had about 20 million downloads for the [free] Acrobat Reader, and sales of the Acrobat software that formats the files now makes up about 5 percent of their sales and is growing fast."

The Asian crisis also has had a major impact on Adobe, as well as other tech firms who were relying on the region for growth.

"Part of the strategy was to exploit the huge, developing markets in Asia where they would have had new sales rather than upgrades," said Ulysses Yannas, an analyst at Mercer, Bokert, Buckman & Reid. "Any slowdown in the region was bound to hurt Adobe."

But analysts also agree that Adobe cannot do much to change the state of Asia's economy and must look for silver lining elsewhere.

"[Adobe] is making great strides onto the Windows side," said Scott, adding that, three years ago, its sales were primarily to Macintosh users. "[Adobe] could get a boost from Windows sales; [It's] now about 60 percent Windows-based and 40 percent Mac-based."

The recent surge in sales of Apple's new iMacs also could serve as a much-needed shot in the arm for Adobe.

"What's good for Apple, is good for Adobe," Scott concluded.