Technology > Tech Investor
Beating Bill Gates: Part 2
Adobe has survived competition from Microsoft in graphic software. Next up: document creation.
March 13, 2003: 5:00 PM EST
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - For some reason, I find myself interested in companies like Intuit and Adobe Systems, two software firms that have thumbed their nose at Microsoft and are still prospering.

They're tech's equivalent of John Cleese's hilarious Gallic (since French appears to be a dirty word in Congress' cafeterias these days ... glad to see the government has its priorities in order) taunter in "Monty Python and The Holy Grail."

"You don't frighten us...I blow my nose on you!"

Last month, I took a look at Intuit, the personal finance software developer that is thriving even though Microsoft tried to buy it nine years ago. In this column, the focus is on Adobe Systems, which makes graphic software Photoshop and Illustrator and the ubiquitous document reader, Acrobat.

Adobe, which reported its fiscal first-quarter results Thursday (more about that later), dominates the market for graphic software despite Microsoft's presence in this category. Microsoft's Picture It! software has failed to make major inroads on Photoshop.

Continued success in this area is crucial for Adobe since revenue from its graphics division, which includes Photoshop and Illustrator, accounted for 44 percent of the company's total sales in its last fiscal year.

A balancing act for Acrobat?

Still, there is some concern on Wall Street about Microsoft's upcoming assault on Acrobat. On Oct. 9, Microsoft announced it will include its own document-creating software, initially dubbed Xdocs and since renamed InfoPath, in the release of its latest version of Office, due out the middle of this year. That news sent shares of Adobe (ADBE: Research, Estimates) tumbling 9 percent that day.

Adobe's ePaper division, which includes Acrobat, is the company's second largest in revenue, accounting for 26 percent of sales last year. So the threat of Microsoft is significant. But Adobe should be able to hold its own.

Acrobat is pretty much the standard for turning files into easy-to-read and print forms, using Adobe's PDF (portable document format) technology. Steve Ashley, an analyst with Robert W. Baird, said Microsoft is hoping InfoPath can become the new standard, particularly with large corporate customers.

But Ashley said Adobe has a major technological advantage over Microsoft. With Adobe's latest version of Acrobat, users viewing a PDF file can enter data into it and e-mail it back to the sender. The sender will then be able to extract the data, store it in a central database and share it with others. Ashley said that function is something that InfoPath won't have in its initial release. He does not own the stock and his firm has no investment banking relationship with Adobe.

Solid bet for the long term

Investors have started to realize that Acrobat might not suffer the same fate as Netscape or WordPerfect. Shares of Adobe have bounced back since their early October drubbing and are up nearly 15 percent year to date.

As a result, the stock is currently trading at 28.5 times estimates for this fiscal year, ending in November. But Ashley said the company has set pretty low expectations that might be easy to beat. So estimates could head higher, which would make the stock's valuation not as pricey.

To that end, Adobe reported better than expected earnings per share, including an investment loss, of 23 cents a share, up from 20 cents a share a year ago. According to First Call, analysts were predicting that Adobe would earn 22 cents a share. Adobe's sales came in at $296.9 million, up 10.8 percent from a year ago and ahead of Wall Street's estimates of $284 million.

For the second quarter, Adobe gave guidance that was in-line with current estimates. The company said it expected earnings per share to be in a range of 24 cents to 27 cents (the estimate is 26 cents) and that revenues would be between $300 million and $315 million (the consensus is $309 million).

Ashley said new product releases could lead to stronger revenue gains. The company is expected to roll out new versions of Acrobat -- a premium version with lots of new bells and whistles, and a scaled back one for which Adobe hopes to sell bulk licenses to corporate users. An upgrade of Illustrator is expected as well.

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In addition, Ashley said Adobe is a way to play an eventual recovery in media, since many of the company's products are used by graphic designers who create ads. There has been a slow recovery in television ad spending that so far has yet to be followed by a major boost in print ad spending. But when the ad market does bounce back, Adobe should benefit.

Regardless of what happens in the next few months, Adobe still appears to be a solid long-term bet. The company has no debt, $618 million in cash (more than it had a year ago) and it even pays a dividend, albeit a tiny one, with a yield of 0.2 percent.

As for those wily folks in Redmond?

"You always have to watch Microsoft and be respectful of it," said Ashley. "But Adobe has proven that it can execute well for years and years. It has earned the benefit of the doubt."  Top of page

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