Adobe Q3
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Adobe Q3
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
ADOBE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADBE)") else Response.Write("(NASDAQ: ADBE)") end if %> UNION CITY, Ca., September 25, 1996/FOOLWIRE/ --- Adobe Systems released Q3 1996 earnings after the market close today. Revenue for the third quarter was $180.9 million. This compares to $183.1 million for Q3 last year and $204.3 million for Q2 1996. Net income for the quarter was $29.8 million, compared to $33.9 million for the previous quarter and $22 million for the year ago quarter. Earnings per share were $0.40. Excluding a $6.6 million gain from Adobe Venture Investments, the normalized earnings per share were $0.35. That compares to $0.44 per share for the year ago quarter and $0.45 for Q2.
For the 9 month period, revenue was $578.9 million compared to $561.5 million last year. Net income was $85.5 million and earnings per share were $1.13. That compares to $105.3 million in earnings a year ago and earnings per share of $1.41.
Licensing revenue was reported at $50.4 million compared to $45.1 million a year ago and $49.3 million last quarter. Application product sales came in at $130.5 million for the quarter, compared to $138.1 million a year ago and $155.1 million for the previous quarter.
Gross margin was 81.4% and was in the corporate target range of 81-83%. Their operating expenses for the quarter were almost 7% lower than the preceeding quarter, reflecting their ability to manage costs in light of lower than expected revenue. For the quarter, however, operating income as a percentage of revenue declined 4% to 19.3%, due primarily to the lower revenues and lower gross margin.
R&D expenses were 20% of revenue compared to 18% of revenue for the previous quarter. Sales and marketing expenses were 34% of revenue compared to 32% of revenue for the previous quarter. General and administrative expenses were 8% of revenue, flat compared to the prior quarter.
Their non-operating income was $13.8 million and they have broken out interest and other income from investment gains and losses this quarter in their reports. The line item "investment gains and losses" includes the market valuation of Adobe Venture Investments as well as any realized gain from the direct investments they have made. The normal expected tax rate remained at 37.5% and they anticipate it to continue at this level for Q4 as well. The R&D tax credit has been reactivated on a prospective basis, so they believe they will see a modest positive impact for their 1997 fiscal tax rate.
The balance sheet shows a decrease of $81 million due to stock repurchases and current market valuations for their investment. Cash and short-term investments decreased by $33.8 million due primarily to stock repurchases. Receivables decreased by $8.8 million due to the decline in revenue from the previous quarter. The $15 million increase in property and equipment is mostly due to improvements associated with their move to their new headquarters in San Jose.
Other assets were lower this quarter by $50.5 million primarily due to the decreased valuation of their Netscape investment. There was an $88.6 million net increase in put warrants during the quarter. These put warrants or options are part of a systematic stock repurchase activity to offset future dilution from expected issuances. These warrants are reclassified out of equity when they are issued. The net effect of these transactions was a decline in shareholder equity of $128.1 million. To summarize the stock repurchase activity during Q3, they bought 1.3 million shares of Adobe stock and sold 3.7 million put warrants which expire over the next 3 quarters. The actual outstanding shares of common stock at the end of the quarter were 72.1 million shares.
During the Summer, which is already Adobe's slowest quarter due to seasonal factors, they experienced mixed results in their product lines across all platforms. In particular, their were delays in product shipments and a slowdown in customer purchases of Macintosh software. Comparing results from Q2 to Q3, sales declined for most of their product lines. Macintosh related products in particular were off 28%. Windows based application sales were essentially flat quarter to quarter.
The geographical mix for Q3 was 60% North America and 40% international. Geographically, North American sales were up quarter to quarter and therefore contributed a higher than usual percentage of their worldwide sales. European sales were down 42%, sales in Japan were down 16%, and the rest of the international sales were up 8%.
However, comparing their Q3 results to the same quarter last year, the results are somewhat different. For the year Macintosh products were down 11% with Windows sales up 35%. North America sales year-over-year were down 13% while sales in Europe were up 23%, sales in Japan were up 26%, and sales in the rest of the world were up 16%.
Some of these anomalies are attributable to timing of localized releases for their international product markets. At quarter end the percentage of business from Windows products increased to 44% from a level of 34% a year ago. Based on their product sales for products where they have both Macintosh and Windows versions, in Q1 they were at 32% and Q2 36% on Windows. So there certainly is compelling growth in the Windows market for their product. They think the growth is mostly new customers rather than current Apple customers changing. There is probably some of that and certainly the Windows NT platform offers some compelling performance advantages for them. They are going to continue to solidly support both the Macintosh and Windows platforms and will see where the growth takes them. But, based on these trends, some time next year it is likely that more than half of their products will be selling on the Windows platform.
They would characterize the Mac market right now as "wait and see." There is a lot of uncertainty in their marketplace about the Macintosh and they think their customers have a lot of equipment investments in the Macintosh and are waiting to see how Apple fares in all of this. So they think that some of the slowness they are seeing is due to customers waiting and seeing. Customers don't want to make new investments, they want to watch the markets and make do with the investments they have right now. There are also some clone manufacturers emerging who may, in fact, keep the Mac OS more viable than it may have otherwise been.
As their business moves more toward the Windows platform, the mix of their distribution channels will change somewhat and they expect that it will make increasing sense to have more direct Windows accounts and a smaller portion of their business might go through what they're currently more used to in the catalog sales. They are keeping a very close attention to the movement of their products and customers and the channels they sell products through.
They expect a number of new product releases to ship in Q4. At this time, since the majority of these products are expected to ship late in the quarter, they are not expecting any significant international revenue from them until Q1 1997. Their new release of Photoshop will ship simultaneously on both Windows and Mac. Pagemaker will ship first on Windows, with the Mac version to follow in approximately a month. Currently Pagemaker is most at risk for Q4 shipment. Going forward, their new divisional structure will be focused on insuring accountability for correlating the timing of product introductions along with their revenue plan. Both products are in the final beta stages and on the bug fixing count. Photoshop is just a little further ahead and closer to a golden master release.
Acrobat was down quarter to quarter and they attribute all of that being down to the fact that they announced Acrobat 3.0 in June and won't be shipping it until this quarter, at least that is the current projection. They think that the demand is there, however, because they have downloaded more than 500,000 Acrobat betas of Exchange and have downloaded more than 1.2 million overall Acrobat Readers, so they see a huge amount of Acrobat activity out there and they expect that all of the customers they have are waiting for Acrobat 3.0.
They expect to ship PageMill 2.0 later this quarter. The Mac version is probably going to ship first and the Windows version is more likely to ship in the December/January timeframe. It is really important for them to get the Windows version on the market since they don't have a version there yet, but it will be the 2.0 version. They have a lot of active beta sites, are taking a lot of user input from it, and feel they have a very exciting product once they get it to market. Since they have active beta sites and a new release coming, the demand for the current product is somewhat lower. Since July 1st they have had about 80,000 downloads of the beta.
They are still evaluating what SiteMill needs to be and that will be in Q1 most likely. If it is going to be a different product or have a different strategy behind it they will announce that.
They announced PostScript level 3 a couple of weeks ago at Seybold. They have very strong support from OEMs for that product and that technology. PostScript Level 3 is being rolled into their Supra technology that they announced 4-5 months ago. The end result is that next year they will get a significant number of Level 3 products that will be shipping. While they expect some of the OEM business to increase, they certainly expect their business to increase on the Supra side. Whether that compensates completely for the HP shortfall, they do not know yet. CPSI contributed about 39% of their PostScript revenue for the quarter.
Due to product launches and some additional planned headcount, they expect expenses for Q4 to increase over Q3 levels, but they will continue to closely monitor their spending levels. They are in the final stages of their search for a new CFO for the company and hope to have an announcement on that in the very near future.
Adobe is in a major transition. To increase the rate of growth of their company they are focusing on two major opportunities. First they are working quickly to capitalize on new opportunities in the Windows market, particularly focusing on existing and new users of Windows NT. They plan to capitalize on new Windows hardware and software functionality such as the MMX processor from Intel and symmetrical multiprocessing computers for the Windows market as well. They also expect to achieve higher levels of awareness through advertising and channel promotions that exploit the features available on these platforms with a compelling value proposition for their customers.
Secondly they are going to target Internet opportunities that leverage Adobe's expertise. This includes driving Internet functionality into essentially all of their products as well as introducing new products tailored to specific Internet market opportunities. As an example, they are among the first software vendors to support cascading style sheets, a new feature that improves authoring efficiency for Web-destined information. With their products they are probably 75% of where the state of the art of the Web is at this current time and, as the Web changes, they have to track on a fairly real-time basis. They just introduced the new Pagemaker at the Seybold show and they got a lot of very favorable comments around the Web orientation -- the improvement they made in the HTML translation of Pagemaker documents and also a lot about the Repurposing feature where you can take a layout that is made for, say, 8.5 x 11 and convert it to screen layout almost completely automatically with this minor adjustment. They are definitely trying to get 75-80%, which is probably as much as you can do in a release, on all of their new products. In Photoshop there are a lot of production oriented features that will be very welcome additions to the production-oriented people who have to build Web sites. The feature sets are well thought out and these are very solid releases. The reviews so far have been extremely positive.
Their intention is to execute on these opportunities quickly so they can return the company to a level of growth that is more in line with their corporate objectives. They still see basic desktop publishing growth related to the Web in the 15% range. What customers are looking for in their market is new tools to allow them to create content that can be purposed both for paper and electronic distribution. So, they have seen a lot of interest in all of their products where you can redirect the output to various media types. Going to the Web is very important and going to paper is still very important. They think that, overall, because of the distribution costs on the Web and electronically are so much less than the distribution costs associated with paper, they believe their will be a basic growth in design activity and creative output activity. They are very optimistic about the overall number of people who will be participating in content creation. They think a fundamental growth factor for their long-term success is making sure that the products are easy enough to use so that more people can participate in that basic growth of creating content for much cheaper distribution media. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |