Adobe upbeat despite adversity

CHICAGO--It's been a tough month for Adobe Systems. The graphics and publishing software firm has laid off 10 percent of its 3,000 employees, dumped some top managers, warned Wall Street that its earnings report wouldn't be up to expectations, and took a $25 million hit in third-quarter revenues in Japan.

Then rival Quark made an unsolicited and unusual bid to take over much larger Adobe--without naming a price, according to chief executive John Warnock, who admits Adobe has experienced a rough patch. [Late today, Quark announced it would not pursue a buyout of Adobe.]

But Warnock remains upbeat about Adobe's future, predicting a return to 15 percent revenue growth. He sees opportunity as the Internet reshapes how corporations design, store, and use documents.

"Most companies have separate authoring [systems] for paper and for the Web, and they haven't figured out how they can come together," Warnock told the Software Publishers Association annual conference in a keynote address yesterday. He estimates that for every dollar spent to create paper documents, companies spend $50 to $75 to process and store them--an estimated $640 billion per year in the United States.

After his speech, Warnock talked with CNET News.com about the firm's August layoffs and management shake-up, the rejection of Quark's buy-out bid, and last week's underwhelming earnings report.

News.com: You reported earnings on Friday, beating Wall Street's revised expectations after you warned that revenues and profits would be down. What happened last quarter?
John Warnock: Our Japan business fell off dramatically--it was a difference of about $25 million [compared to the comparable 1997 period], and it all went to the bottom line. In some sense, that was a wake-up call for the rest of the business.

The new management structure is much leaner, more streamlined, and much more effective at making quick decisions. We had too many managers, [so] we took out layers of management. The highest percentage in our reduction in force was managers.

What happened in Asia?
Obviously we saw the effect as soon as the first quarter of last year, and it continued. What we didn't do was reset our expense structure to compensate. We said, "Japan is bad, but the rest is great." [Eventually] we decided, "We can't predict when Japan will come out of it," so we went into the expense of restructuring.

Why was it a surprise?
It wasn't easy to get decisions to make the change. Expenses were actually going up instead of down, and the structure wasn't there to make a crystal-clear process.

What about the August bid from Quark? Was it considered seriously?
They didn't put down a price. The grand total of communication is in the three letters posted on their Web site. Our letter said we're not interested. I think it's a bad fit. I believe there are fundamental Federal Trade Commission problems that can't be overcome.

But Quark said it would sell off some pieces for antitrust reasons.
The way Adobe products are built is around a core technology. If you sold a product [line] from Adobe, you would divest all the value of the company.

You talked in your keynote about unifying how documents are handled so they can be managed from one point. How will you do that?
The current Web authoring solutions don't make it. They really don't address the asset management part of the problem. Customers really want a single asset management system with consistent authoring paradigms. The goal is so Web authoring can be farmed out rather than going through a Webmaster. Even Adobe has that problem with our Web site. There's a better way to do it.

What is Adobe's solution?
We would like to build a way to build sophisticated template structures and have that marry to a simple authoring paradigm so you can deliver content with it. For us, that solution will entail buying some things from outside (probably pieces of technology rather than companies), using some of our own technology, and inventing other things. We hope to do so in 1999.

Last week the San Jose Mercury News' business gossip column said you might drop developing for the Macintosh and maybe drop Page Mill, your consumer Web authoring tool.
That's stupid--we support Apple, all our applications run on iMacs. We told [the Mercury News] it's flat-out wrong. We have cut back on some engineering projects in the consumer space [Photo Deluxe photo editing software], but that has nothing to do with the iMac. I think the iMac will be wildly successful, especially in Japan. Now it's light on peripherals, but that will change.

What about Page Mill?
It's a great low-level Web authoring tool and we are doing Mac versions, but it's a consumer authoring tool. Where Adobe will put more energy is into the professional space. I would much prefer to own the authoring space for big sites.

What are Adobe's opportunities going forward?
In the transition from paper-based to electronic documents, the Acrobat technology is just huge. In the document management space, we have a lot of partners. In presentation software, we don't have competition. There used to be Envoy Tumbleweed but now Tumbleweed is a venture capital investment of ours.

Talk about how your venture fund fits into Adobe's strategy.
We have invested on the order of $82 million, and we have returned a current value of $192 million to shareholders. We try to invest in companies that we can help and can help us.

Who do you regard as your competitors?
Any workflow collaboration companies are both partners and competitors, depending on how far they get into the space. That covers Documentum, PCDox, and IBM Lotus Notes. I think workflow for the immediate term will be focused on publishers.

What about Microsoft?
They'll continue to compete with us whenever they choose to, but we've been successful through a couple of competitions like Photo Deluxe and the great type wars--we're more together in type now.

What new products can we expect from Adobe?
[Today] we're announcing a new product called ImageStyler. ImageStyler is a cool product to build rich graphical Web sites for small businesses. ImageStyler goes into beta today and will be delivered in October.

What are Adobe's prospects once you get past this rough patch?
The rough patch was because we didn't adjust expenses for the Japanese downturn. We can get back into normal growth--15 percent revenue growth at least and 25 percent for pretax profits--starting next quarter. That's our plan.