Acrobat only bright spot in Adobe's Q3 Earnings Report
Maintains 45 percent growth while company profits, revenues are down

19 September 2001

By Kurt Foss, Planet PDF Editor

Not only did Adobe Systems report a fiscal third-quarter profits and revenues decline from a year ago, but executives cautioned during today's conference with analysts and financial press that its fourth-quarter results are likely to fall below expectations.

Had it not been for Acrobat, there might have been no good news at all.

"Our e-Paper business had another impressive quarter," says Bruce Chizen, Adobe President and CEO, citing Acrobat's continued year-over-year growth of 45 percent. Chizen pointed to a steady increase in "large account adoption" of Acrobat, mentioning a variety of corporations and government agencies that purchased enterprise licenses for more than 1,000 users during Q3.

Governments in a number of countries, Chizen said, are committing to Acrobat and PDF as the core technologies for converting from paper-based to Web-based workflows.

However, the rest of Adobe's products apparently have not fared as well overseas -- or at home -- as of late, due primarily to the difficult economic times, according to Chizen and several other executives who participated in the Q3 2001 earnings conference call. A decline in Asia, particularly Japan, contributed significantly to Adobe's lower-then-expected results for the past quarter, which ended August 31. One potentially optimistic note: "It appears that Europe has stabilized for us," says Murray Demo, Adobe's Chief Financial Officer (CFO).

In the U.S., Adobe continues to see deferred spending by creative graphics professionals -- one of its key customer groups -- caused by the country's lingering economic troubles. Adobe's warning of lowered Q4 expectations don't take into account the potential impact of recent terrorist attacks in the country, which Chizen acknowledges is totally unpredictable at this time. [News release: Adobe commits $250,000 to Red Cross disaster relief efforts]

Neither Adobe nor any of the participating analysts referred to any detectable impact of the "Boycott Adobe" movement that resulted in considerable bad press during July for the company's role in the arrest by the FBI of Russian software programmer Dmitry Sklyarov, on charges of violating the U.S. Digital Millennium Copyright Act law for cracking the security protection of Adobe's PDF-based eBooks. While Adobe eventually withdrew its support for the government's criminal complaint against Sklyarov and thus quieted most of the backlash, the company recently published an FAQ on the ElcomSoft/Sklyarov situation stating it "will cooperate fully with the government [on the criminal prosecution] as required by law." The U.S. government has indicted Sklyarov and his employer on multiple counts of circumventing copyright protection technologies.

On the encouraging side, Adobe enters a major product upgrade cycle in the fourth quarter. Likewise, the executive team foresees a continued strong showing by Acrobat, even though version 5.0 was released in April. In the past quarter, Acrobat accounted for 25 percent of Adobe's revenue, Chizen says. If the impact of terrorism or other forces continue to negatively impact the U.S. economy, Chizen believes Acrobat's sphere of influence could further expand as it offers greater productivity and efficiency.

Acrobat "is now 25 percent of our business," Chizen says. "A potentially $300M business growing at 45 percent or greater is something we're very excited about."

"We continue to focus our marketing and sales efforts toward document-intensive enterprise markets which can see a cost benefit associated with a movement away from paper-based workflows to Web-based workflows," he says. In the legal industry, for example, Chizen says Acrobat and PDF are "making significant progress and seeing increased adoption by US courts and the legal community."

During the past quarter, Adobe introduced Acrobat Approval, a PDF Forms-oriented product intended as an enterprise solution for organizations of all sizes. In the coming quarters, the company will continue to "deliver new Acrobat products that will help Adobe address its single largest opportunity," Chizen says.

Another target market for Adobe and PDF is government, already a significant adopter. "Our e-government initiatives are just beginning," says Chizen, calling it a multi-billion dollar opportunity for Adobe and its number one priority.

Several analysts queried the Adobe management group on the status of and future prospects for InDesign, a page-layout application Adobe has hailed as a worthy match -- and even replacement -- for QuarkXPress, a long-time leader in that product niche. "We're absolutely confident we're going to beat QuarkXPress and become the Number One marketshare leader," says Chizen. Though declining to set a specific timetable, Chizen suggests that recent -- and near-future -- announcements will show why Adobe's preferred outcome "is clear."

During the third quarter, Adobe continued hiring new employees "unlike many other high-tech companies," Chizen says, pointing to the company's ability to manage expenses and to hold down costs in other ways. One of the latter examples was the company-wide shutdown during the week of July 4.

An archived copy of the live Webcast of today's conference call will be available from Adobe's Investor Relations area on Adobe.com.

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