Why Adobe's iPhone Fight Was a Flash in the Pan

NEW YORK ( TheStreet) - Four years ago many would have said Adobe ( ADBE) would be dead in the water if it's Flash Player wasn't a big part of blockbuster Apple ( AAPL) iPhone launches and an upstart Google ( GOOG)-Android ecosystem.

The Flash Player's days are now numbered on smartphones. Apple stopped carrying Flash in 2010 and in late 2011, the company said it would stop putting the player on mobile browsers and instead commit Flash software to PC browsing, mobile apps and its replacement, HTML5.

While Apple may have precipitated the death of the mobile Flash Player in the early innings of a smartphone boom, the move hasn't turned out to be the crucible for Adobe that many had predicted.

In fact, after reporting stronger-than-expected full-year earnings on Thursday, Adobe briefly traded at four year highs as the company shows signs that a multi-year software industry turnaround effort will yield strong earnings growth in coming years.

Adobe's non-iPhone revival is an important story in a technology sector riddled with the muddled turnaround efforts currently underway at the likes of Hewlett Packard ( HPQ), Dell ( DELL) and even Microsoft ( MSFT), as they try to adapt to a shift from personal computing to mobile devices. It's also a good example of the quiet work some companies are doing to come out of the so-called Great Recession with new growth prospects that could drive top-line earnings in coming years.

In the tech sector, Adobe's earnings raise the prospect that mergers and acquisitions can drive turnaround efforts, in spite of highly publicized multi-billion dollar write-offs at Hewlett Packard and Microsoft. Meanwhile, Adobe also shows that a post-financial crisis focus on building the foundation of earnings growth over cost cuts may pay off for investors.

In late April, Jeffrey Ubben, the head of ValueAct Capital detailed to the TheStreet why the hedge fund was betting on an Adobe turnaround at the company.

Ubben's argument boiled down to two crucial points:

Deals like a $1.5 billion acquisition of online publishing analytics specialist Omniture in 2009, once deemed as expensive, may actually pay big dividends in coming years as Adobe transitions from a software developer to a more full service provider of technology needs in digital publishing and cloud services. Meanwhile, companies bold enough to use the financial crisis to cut acquisitions and increase spending may put them in a unique position for growth as an economic recovery takes hold.

Ubben highlighted the wisdom of the Omniture acquisition and called the business a "crown jewel" within Adobe's portfolio of digital publishing, software and cloud businesses, which includes a still strong Acrobat, Flash and Photoshop products. Although neither Omniture nor Macromedia were yet to return much above their cost of capital, according to Ubben's comments, he added, "I'm much more tolerant of low return strategic deals than I ever have been because no one is doing it."

ValueAct Capital is Adobe's second-largest shareholder, with a 6.32% stake in the company's shares worth over $1 billion, according to Securities and Exchange Filings compiled by Bloomberg, as of Sept. 30.

Ubben's comments came at the IMN Active-Passive Investor Summit, and while the likes of Carl Icahn and Barry Rosenstein of Jana Partners rolled off stories of C-Suite excess, the hedge funder presented Adobe to a roomful of activist investors as a story of corporate turnaround. It was enough to cause some in the audience to shake their heads, amid skepticism Adobe is little more than a PC era dinosaur.

Thursday's earnings signal that Adobe's earnings picture is poised to improve materially in coming years, even if a real post-crisis share price recovery remains years off. JMP Securities analyst Patrick Walravens upgraded the company to 'market outperform' in the wake of Adobe's fourth-quarter earnings beat and noted that Adobe's 2013 earnings guidance puts a floor on how much the company's turnaround efforts hit margins.

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