The company is also bullish about its growth. Assuming continued business momentum we expect to exceed our original fiscal year revenue and profit targets, said an upbeat Adobe CEO, Bruce Chizen, last week.
But there’s more to Adobe’s strong quarter than meets the eye financially. Upon closer inspection much of Adobe’s second-quarter growth is down to the sweetening effect of Adobe’s new Creative Suite 3 (CS3) product that hit the market in mid-April.
CS3 took almost two years to develop – or pull together to be more exact – making it the most ambitious, and broad, product release by Adobe which has traditionally earned its bread-and-butter through selling point tools. The suite offers a set of software tools for creative professionals such as graphic artists, video editors, and print and Web designers.
CS3 was highly anticipated because it was the first set of products to integrate the assets of the former Web design software maker Macromedia, best known for its Flash animation and interactivity software, who Adobe acquired in December 2005.
The suite also includes products like Photoshop for photo editing, Dreamweaver for web design, Illustrator for print media and web graphics, and InDesign for publication layout.
Adobe said that sales of CS3 have been 30% higher than those of its predecessor CS2 over the same period of post-launch time. Bulk shipments of CS3 outside the US should begin this summer.
Hence pent-up demand for CS3 could have something to do with the product’s strong performance even though it was on the market for less than half the quarter.
Demand for CS3 also seems to driven on the growth of online advertising and Internet video. The software is also getting a boost from Apple Macintosh users as it is first of its kind designed for Macs running on Intel chips. And with Apple’s new OS X Leopard operating system due out in October, Mac professional customers of Adobe’s CS2 might be tempted to upgrade both their hardware and software to take full advantage.
Continued business momentum of Adobe’s staple Acrobat 8 family of document sharing products also helped boost Adobe’s second-quarter – revenue from the knowledge worker segment that includes Acrobat rose 15% in the quarter to $184.8m, which is a record figure.
Both CS3 and Acrobat now account for roughly 80% of Adobe’s revenue. But the buck doesn’t just stop with these two products.
In fact, the sharpest gain for any Adobe segment in the quarter came from its mobile and device products, which soared 60% year-over-year to $12.3m. Verizon Wireless is expected to deliver Adobe’s FlashCast software on its mobile phone devices later this year.
Adobe also said it was on-track to release a new Adobe Integrated Runtime (AIR) product, previously codenamed Apollo, later this year. AIR combines PC desktop and Internet applications into a single framework – i.e. it works both within and outside of Web browsers. AIR went into beta last week and has elements of open source-based built into it.
Adobe is proving to be one of the leaders in the so-called Web 2.0 movement with its Flash media player software, that already provides video animation and display for YouTube and MySpace, and its Flex software for interactive Internet applications.
However, the company is likely to face a much stiffer challenge from Microsoft after the Redmond, Washington-based software giant launched its Flash-competitor product called Silverlight in April. Silverlight, which is used for Web vide and interactive applications, has already drawn interest from Akamai and Netflix.
Microsoft already develops a PDF creation tool software for Office based on format called XPS that rivals Acrobat on publishing desktops. Additionally, Microsoft ships Expression Studio, a graphical suite of design tools that competes directly with Adobe’s Photoshop and Illustrator tools.
The emergence of new industry-standard technologies like Ajax are also a potential threat to Adobe. Admittedly Flash is far superior to Ajax as a platform for rich Web application delivery right now. But Ajax is sure to catch up.
Pricing for CS3, which Chizen refers to as Adobe’s uber suite, could also be an issue. With a tag of $2,500, there is no way to gauge how such a bundling will be received by customers in the market. This is the first time that Adobe has sold such a premium priced bundle of its software and there is no precedent for what targets it should set.
Going into the summer vacation months is not an ideal part of the product cycle, particularly for entering Europe. Summer has traditionally be a weak season for Adobe. Hence it’s likely that we’ll see a sales lull over the next few months followed by another surge in the autumn. But the momentum remains for long terms product growth.
Rather than getting overly excited by a few weeks of strong sales at the start of a cycle, Adobe, wisely, seems to be erring on the side of caution, and has pegged for lower-conservative revenue and profit guidance for the summer quarter. Remember this is a company that has built up a reputation for hitting its targets and keeping on the right of Wall Street confidence.
