Adobe Systems Inc.

FOUNDED: 1982

Contact Information:

HEADQUARTERS: 1585 Charleston Rd.
Mountain View, CA 94039
PHONE: (415)961-4400
FAX: (415)961-4480
URL: http://www.adobe.com

OVERVIEW

Adobe Systems Inc. has a franchise position in graphics, printing and publishing technology, and applications. The company built its franchise on the PostScript printing language and utilizes that success to dominate market shares for illustration, image editing, and document publishing applications. In 1994 Adobe purchased Aldus Corporation, acquiring PageMaker, a page layout and document publishing tool, for approximately $440 million. In addition, they purchased rival Frame Technology Corporation in 1995 for $460 million and obtained ownership of FrameMaker, a high-end publishing application. Succeeded by Microsoft and Novell, Adobe continues to market a wide variety of computer software.

Adobe's selected products include: Acrobat (electronic document management software), Adobe Acrobat (document formatting software), Adobe ArtExplorer (painting and drawing software for children), Adobe Fetch (cataloging software), Adobe Gallery Effects (special-effects software), Adobe Illustrator (graphics software), Adobe PageMill (Web-page creation software), Adobe Persuasion (presentation software), Adobe PhotoDeluxe (personalized photo software), Adobe Photoshop (photographic image software), Adobe Premiere (film and video editing software), Adobe SiteMill (Internet link repair software), FrameMaker (document authoring software), PageMaker (page layout software), and PostScript (page description language interpreter). Adobe maintains a 40-percent market share in desktop publishing, which translates into about a 1.7 million user base.

COMPANY FINANCES

Adobe Systems Inc. reported first quarter earnings for 1998 (the 90-day period ending February 27, 1998) of $197.8 million, compared to $226.5 million in the first quarter of 1997. Of those revenues, applications product revenues accounted for $156 million, down from $175 million in the first quarter of 1997. Revenues derived from Windows applications did show an increase, up 18 percent from 1997, while Macintosh revenues declined 36 percent. Windows' share of total application revenues increased from 44 percent in first quarter 1997 to 59 percent in first quarter 1998. Licensing accounted for the remaining $41 million in first quarter revenues (compared to $51 million from licensing in first quarter 1997).

Net income for the first quarter of 1998 was $26.7 million, or $.38 per share, compared to $46.4 million in 1997. Adobe attributes the decrease in first quarter revenues for 1998 to 1997's exceptionally strong opening—Adobe Photoshop 4.0 and PageMaker 6.5 were both released in the first quarter of 1997. In comparison, no new releases or product upgrades took place in the first quarter of 1998.

Annual sales in 1997 reached $912 million, revenue growth of 16 percent over 1996 revenues of $786.6 million. Of the $912 million earned in 1997, revenue from applications products was a record $716 million, compared to $590 million in 1996. Revenues earned from licensing remained at the same level of $196 million each year. 1997 was also the first year that revenues from the Windows platform exceeded that of Macintosh—Windows products accounted for 51 percent of applications products revenue, leaving Macintosh with 49 percent. Net income for 1997 reached $187 million.

Adobe's stock price over a 52-week period ranged from a high of $53.12 to a low of $33.50 per share. As of May 1998, the price per share was consistently hovering near $50.00.

ANALYSTS' OPINIONS

Adobe Systems Inc. reported earnings of $.33 per share in the first quarter of 1998, performing below projected estimates of $.44 per share. The company again cited the lack of new product releases during the quarter as cause for the company's performance, as well as a weak Asian market. Adobe hopes new product releases through the remainder of 1998 will help to raise revenues. However, the shaky up/down performance of Adobe over the past couple of years, as well as its continued association with Apple, has caused analysts to regard Adobe as a fairly high risk for investors.

The general consensus by stock market analysts at Zacks Investment Research, Inc. was to grant Adobe Systems a "hold" rating, meaning investors should hold on to stock they currently own. Several were willing to place a "moderate buy" rating on the company. Those recommendations were based on such items as the company's growth rate—estimated at 15.0 percent over the past five years, in comparison to a 22.2-percent growth rate in the industry overall. Analysts forecast a negative growth rate of 1.3 percent for Adobe in 1998, but expect the company to see renewed growth of 23.8 percent in 1999. However, those figures are still below projected growth for the overall industry average (29.2 percent in 1998 and 34.4 percent in 1999).

HISTORY

In 1978 John Warnock and Charles Geschke, former Xerox executives, teamed up and developed a revolutionary innovation of a standard computer language and scalable-font called PostScript. When Xerox refused to market the product, the two left the company and founded Adobe Systems in 1982—they began marketing PostScript in 1985. PostScript is a high-level computer language that communicates precise descriptions of computer generated graphics, photos, and text to any output device with a PostScript interpreter.

In 1986, the company went public and in 1987 branched out into the European market with its Adobe Systems Europe subsidiary. In order to market its products in the Pacific Rim, the company started another subsidiary in 1989. By acquiring other software companies, Adobe continued growing during the early 1990s. In 1993, they began licensing Adobe software to printer manufacturers. That same year, they also began marketing Acrobat software. Adobe merged with Aldus in 1994, bringing sales to a new high.

1995 saw the integration of Acrobat's viewing technology into Netscape's Internet software. With Acrobat the company was moving to establish itself in the online publishing world. Also in 1995, Adobe acquired Frame Technology.

STRATEGY

Adobe has a comprehensive Internet/Intranet strategy that focuses on web site development tools, information distribution and printing, and graphics. With products like PageMill and SiteMill, and its Acrobat electronic document technology, Adobe is well positioned for growth in that market. By simultaneously releasing Windows and Mac versions of its software, the company is making important progress. Adobe also focuses on marketing new and upgraded products to meet new technological demands (e.g., the release of Adobe PostScript 3 to meet the needs of Internet-based printing environments).

In reference to PostScript, "People don't realize it," John Warnock explained, "but the technology that we developed in the early 80's and the desktop publishing revolution have really taken over printing and publishing. So every newspaper today, every magazine uses a piece of our technology, and uses our type library, and uses the graphic arts interface. Every cereal box on the shelf, the titling on a lot of television channels—they all use it."

Adobe began distributing its products to Europe and the Pacific Rim in 1987. A weaker European market (due primarily to weak FrameMaker and PageMaker sales) was offset by stronger sales growth in Japan, from which Adobe derives 20 percent or more of its revenue. By mid-1997 a new Japanese version of FrameMaker was released.

INFLUENCES

Adobe has seen incredible success with several of its most solid performers, such as PostScript. Another of its best performing products is PhotoDeluxe, which was recently ranked by Dataquest as the best selling consumer photo-editing software in the world. And in April of 1998, Adobe Illustrator 7.0 received the Software Publishers Association's Codie Award for Best Text or Graphics Business Program. Adobe attributes the success of these programs, and others, to its consistent attempts to address customer interests, according to group product manager Michael Hopwood.

The company has seen its share of disappointments, however. In the second half of fiscal year 1997, Hewlett-Packard discontinued using Adobe's PostScript technology in some of its laser printers. The estimated Hewlett-Packard-related PostScript revenues were about $41 million in 1996. However, Adobe established a new relationship to incorporate PostScript into IBM printers and released new technologies for the color ink jet printer and production printer markets. When Adobe purchased Frame Technology Corporation in 1995 to acquire FrameMaker, they expected to have about $100 million in sales in 1996. Adobe's hopes for a quick payoff from the Frame deal did not materialize. The company stumbled badly with the acquisition and, in the words of John Warnock, Adobe's CEO, we were "overconfident and complacent" about the deal. Revenue for the fourth quarter of 1995 and the first quarter of 1996 slumped, and earnings were hit hard. Adobe underestimated the importance of a direct sales effort for selling complex software like FrameMaker and discontinued Frame's telephone sales force in the United States. In short, Adobe was forced to absorb operating expenses without an increase in revenues.

CURRENT TRENDS

Adobe restructured and reorganized its businesses into five independent operating units, which allowed management to better focus on its printing and publishing products and also to concentrate on opportunities in the rapidly growing graphics and Internet markets. The company felt restructuring would help Adobe management meet revenue targets and keep future costs down. Also, the company rebuilt the international direct sales team and took a look at possible cost reductions.

Adobe also added key executives to its management team. Jack Bell, formerly of Connor Peripherals and American Airlines, joined Adobe as executive vice president, chief financial officer, and chief administrative officer. In 1996 Bob Roblin, formerly of IBM, joined as senior vice president of marketing. Adobe also announced that Ross Bott, formerly of Silicon Graphics, joined as senior vice president and general manager of the graphics division. One of the explicit aims that Roblin discussed involved solidifying the image of Adobe as the principle provider of graphics tools and software for the corporate and creative professional market.

PRODUCTS

In terms of product development 1997 was a good year for Adobe. The company launched Adobe PostScript 3, designed specifically for Internet-based environments. In a joint venture with IBM, the company offered the IBM InfoPrint 4000, a digital printing system that exceeded 1,000 pages per minute. In addition, Adobe's PrintGear, software architecture designed to improve low-cost printer performance, continued to perform well. Efforts in 1998 included its submission of a proposal to work with IBM, Netscape, and Sun Microsystems to create vector graphics software for Web content. This initiative was termed the Precision Graphics Markup Language (PGML), and is a two-dimensional graphics language that "provides precise control of layout, fonts, color and printing, which will result in Web pages with compelling text, images and graphics, as well as dynamic events and animation," according to an Adobe press release.

Late in 1996 Adobe shipped upgrades of five of its applications: Photoshop 4.0, PageMaker 6.5, Acrobat 3.0, PageMill 2.0, and Persuasian 4.0. The upgrades included a wide range of new key features and capabilities. In particular, PageMaker 6.5 was the initial professional page layout application to offer document-wide layers and automatic layout adjustment for creating print and web documents. PageMaker became the only application for designing documents with a fixed structure, such as magazines, catalogs, and newspapers. According to The Wall Street Journal, Adobe Systems, Apple Computer, and Netscape Communications announced that they would work to define font extensions for Hypertext Markup Language (HTML) to enable Type 1 and True-Type fonts on the Internet. In addition, IBM and Adobe demonstrated its first PostScript production printing based on Adobe's SUPRA architecture. This system offered commercial printing customers and corporate in-plant printers unlimited capabilities and business opportunities.

CORPORATE CITIZENSHIP

In 1997, at the request of the Federal Bureau of Investigation (FBI), Adobe assisted in the "national takedown" of eight bulletin board systems across the country by the FBI in an operation code-named "Cyber Strike." The bulletin board systems were involved in an organized scheme of trafficking illegal copies of software from Adobe and other vendors. The software industry has lost revenue every year to piracy. The revenue lost has a direct effect on job opportunity and research and development for a sector that is critical to our nation's economy.

Adobe is a philanthropic institution committed to supporting programs that improve the quality of life for everyone. Adobe specifically supported non-profit health and human service organizations that: service disadvantaged youth, the homeless, minorities, and victims of abuse; provide disaster relief, medical and hospice care, and meal services; and organizations that support human rights. They also support the arts, environmental organizations, educational programs, and animal rights.

GLOBAL PRESENCE

Adobe's European and international headquarters are located in the United Kingdom, Japan, and Australia. Japan is the leader in sales growth, contributing 20 percent or more of Adobe's revenue. In 1996 Adobe announced its support of the proposed final Information Technology Agreement reached at the World Trade Organization Ministerial in Singapore. The Information Technology Agreement provides for the elimination of tariffs on hardware, software, and other information technology in participating countries. This benefits all participating member countries by making information technology products more widely available at a lower cost to consumers.

EMPLOYMENT

Adobe Systems Inc. is an equal opportunity/affirmative action employer offering a wide range of employment opportunities. Positions include: legal, administration, human resources, engineering, finance, information services, marketing, operations, sales and support, software quality assurance, and technical support/customer service.

SOURCES OF INFORMATION

Bibliography

"Adobe Illustrator Honored with Software Publishers Association's Codie Award." Adobe Systems Inc. Press Release, 6 April 1998. Available at http://www.adobe.com/aboutadobe/publicrelations/HTML/9804/980406.codie.html. "Adobe Is World Leader in Consumer Photo-Editing Software." Adobe Systems Inc. Press Release, 8 April 1998. Available at http://www.adobe.com/aboutadobe/publicrelations/HTML/9804/980408.leader.html.

"Adobe Products and Application Index," 20 February 1997. Available at http://www.adobe.com/prodindex/main.html.

"Adobe Products for Internet Publishing Overview," 23 February 1997. Available at http://www.adobe.com/internet/overview.html.

"Adobe Submits Proposal to Improve Quality of Web Graphics with IBM, Netscape, and Sun." Adobe Systems Inc. Press Release, 13 April 1998. Available at http://www.adobe.com/aboutadobe/publicrelations/HTML/9804/980413.pgml.html.

"Adobe Systems Announces Adobe PageMaker 6.5," 6 March 1997. Available at http://www.mv.us.adobe.com/aboutadobe/publicrelations/HTML/9609/960909.pm65ann.html.

"Adobe Systems Earnings Miss Their Mark." The Online Investor, 27 March 1998. Available at http://www.investhelp.com.

"Adobe Systems Inc." Hoover's Online, May 1998. Available at http://www.hoovers.com.

"Adobe Systems Inc." Microsoft Investor, May 1998. Available at http://investor.msn.com.

"Adobe Systems Reports First Quarter 1998 Results," 26 March 1998. Available at http://www.adobe.com/aboutadobe/invrelations/PDFS/9803/980326.adbeq1.pdf.

"Adobe Systems Reports Fourth Quarter Results," 23 February 1997. Available at http://www.adobe.com/aboutadobe/publicrelations/HTML/9701/970107.adbeq4.html.

"Adobe's Offices and Phones," 20 February 1997. Available at http://www.adobe.com/aboutadobe/phones.html.

"Employment Opportunities at Adobe Systems," May 1998. Available at http://www.adobe.com/aboutadobe/employmentopp/main.html.

Gable, Gene. "Inside Report." Publish, September 1995.

"Letter to Stakeholders," May 1998. Available at http://www.adobe.com/aboutadobe/invrelations/PDFS/stkletter.pdf.

"Software Maker's Net Beats Most Analysts' Forecasts." The Wall Street Journal, 8 January 1997.

"Three Firms Team Up to Develop New Fonts for Use on the Internet." The Wall Street Journal, 27 February 1996.

For an annual report:

on the Internet at: http://www.adobe.com/aboutadobe/invrelations/main.html or telephone: (800)536-4700

For additional industry research:

Investigate companies by their Standard Industrial Classification Codes, also known as SICs. Adobe's primary SICs are:

3651 Household Audio & Video Equipment

3861 Photographic Equipment & Supplies

7372 Prepackaged Software

7379 Computer Related Services, NEC