Adobe’s quiet heading into the summer, but don’t be fooled
It seems wrong somehow: Adobe Systems (ADBE) turns in revenues and profits that top both its own projections and analyst expectations, thanks to strong early sales of its new version of Creative Suite, which includes tools for creating all sorts of digital content. Adobe gives a cautious but still sunny forecast for the current quarter that falls basically within the range of what analysts expected. The stock responds with a 2 percent dive.
In a way, this isn’t surprising, though. Wall Street is dealing with a lot of unknowns when it comes to Adobe. But there are also some powerful tailwinds coming later this year, courtesy of Apple and Microsoft, that should work in Adobe’s favor. (More on that below.)
This is the first time Adobe has sold bundles that include software from its acquisition of Macromedia, including Dreamweaver for Web design and Flash for dynamic content – analysts don’t have any easy models to follow that forecast how buyers will respond.
The economy is a question mark as we head into summer – many are wondering whether an increase in the cost of borrowing money will lead some companies to curtail big-ticket spending, and Adobe’s most expensive software bundle will carry a whopping $2,500 price tag.
And then there’s that cautious tone Adobe CEO Bruce Chizen took with analysts during the earnings call. He wouldn’t make any bold predictions about how the market would respond to Adobe’s top-dollar Master Suite, and he took pains to point out that the summer is a traditionally weak season for Adobe. On several occasions he said it wouldn’t be prudent for him to make predictions based on the first few weeks of strong sales.
I’ve followed Adobe for quite a while though, and I suspect that the Wall Street herd is falling for Adobe’s typical humble act.
The reality is, the strong early performance of Creative Suite 3 is probably a very big deal. The professionals who buy the products in these bundles pay a lot of attention to reviews, and the products are getting strong marks as worthy upgrades that work well together. Unless we see a serious economic slowdown that results in slashed marketing budgets, CS3 seems likely to gain momentum, not lose it.
Plus, Adobe clearly issued very conservative guidance for the summer quarter, because the company likes to meet its targets and retain Wall Street’s confidence. There is no precedent for Adobe selling a package of creative software this huge, so rather than offer analysts high revenue and profit numbers that they’ll probably meet, executives instead decided to offer a low number that they’ll easily meet.
After the summer quarter, assuming the economy holds up, things get even more exciting for Adobe. Apple’s (AAPL) OS X Leopard operating system will come out in October, and it’s likely to come with beefier Mac hardware for the professionals who are also the core customers for Adobe Creative Suite. When the pros buy new hardware, they often like to upgrade their software too, because the combination of speedier hardware and advanced software boosts productivity. That will be good for Adobe.
Then, don’t forget Microsoft’s (MSFT) Windows Vista. Though most of the press these days is pooh-poohing Vista as a flop, the truth is that the jury is still out. The real test of customer response to the new operating system will come this holiday season, when customers might buy as many (or more) PCs as they did during the rest of the year combined. And again, when they buy this new hardware, the pros are likely to take a look at Adobe software as well.
I don’t invest in individual tech stocks, so I have no personal stake in Adobe’s success or failure. But regardless, I have a hunch there’s more to Adobe’s strong quarter than meets the eye.