Adobe Posts Results Above Expectations

Updated from 5:44 p.m. EST

Adobe Systems ( ADBE) beat earnings and revenue expectations for its fourth quarter of 2002, the company announced Thursday.

As calculated by generally accepted accounting principles, net income for its fourth quarter of 2002, which ended Nov. 29, was $40.1 million, or 17 cents a diluted share. This compares with earnings per share of 14 cents in the year-ago quarter and 19 cents in the previous quarter.

Revenue was $294.7 million, well above the estimate of $290.4 million gathered by Thomson Financial/First Call. Excluding charges, Adobe earned 25 cents a share, compared with analysts' estimates of 23 cents per share. A year ago, the software firm notched a profit of 20 cents a share on sales of $264.5 million.

For the current quarter, the company said it expected to earn 21 cents to 23 cents on revenue of $275 million to $290 million. That's roughly in line with analyst estimates of 22 cents in earnings on $278 million in revenue.

For the full fiscal year 2002, Adobe achieved revenue of $1.165 billion, compared with $1.23 billion in fiscal 2001. Annual GAAP net income was $191.4 million in fiscal 2002, compared with $205.6 million in fiscal 2001.

Adobe shares ended today's session down 7 cents, or 0.3%, to $25.87. In after-hours trading, Adobe rose 13 cents, or 0.5%, to $26.

"We are pleased with our return to year-over-year quarterly revenue growth," said Bruce R. Chizen, president and chief executive officer of Adobe. "We are also excited about our strong product roadmap and the revenue growth we expect through the year."

The market has been cautious about Adobe's prospects for several months, with a 10-week moving average of $24.85.

Pro forma operating margins for the just-completed fiscal year were 28% and Chizen said he expects this year's margins to be about the same.

Operating margins in the just-completed quarter were 28.4%, but higher expenses due to increased staffing, anticipated increases in employee bonus payments and some seasonal decline in revenue will probably drop operating margins to 25% or 26% in the current quarter, he said.

Adobe, which is best known for products including PhotoShop and Acrobat, is moving aggressively to make its publishing products more central to enterprise business processes. The company began its server push early this year with the release of AlterCast image management software and followed up with this month's release of Adobe Document Server and Adobe Document Server for Reader Extensions.

The company also forged a partnership with e-business software giant SAP and acquired Accelio, a Canadian company that makes software for retrieving and sharing data submitted through electronic forms.

Chizen believes the document automation market could be as large as $4 billion, but doesn't expect Adobe to achieve significant revenue from the new products until 2003.

Joshua Duhl, a contributing analyst at the International Data Group, says the company is on the right track and that first releases of new products have been impressive.

However, the enterprise market poses significant challenges for Adobe, not the least of which is Microsoft's ( MSFT) announced attention to compete in a similar space with XDocs, electronic forms software based on the next release of Office desktop applications.

"We do not believe XDocs should hurt Adobe's sequential improvement story into 2Q03," UBS Warburg analyst Benjamin Reitzes said in a research note." Rather, the key question seems to be whether XDocs will impact the duration of the Acrobat cycle during the year." Microsoft says it will release XDocs in mid-2003. USB Warburg has done recent investment banking for Adobe.

Additionally, Adobe will need to beef up its support organization to serve demanding corporate clients, and build a direct sales force, says Duhl. And corporate buyers, still reluctant to spend money on new technologies, will have to be convinced that Adobe's enterprise products will produce a significant return on investment.

In fact, a recent Merrill Lynch survey of U.S. and European CIOs found that tech spending next year is likely to edge up by only 1%, and that software purchases ranked fourth as a priority for the surveyed companies.

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