Adobe raises estimate after 1Q surge

Adobe Systems Inc. executives are raising profit guidance after the company easily exceeded Wall Street expectations with a 37 percent surge in first-quarter profit.

But on the cusp of the biggest product launch in the company's history, some analysts sounded notes of caution, saying the pace of change in the volatile software industry makes it hard to predict Adobe's long-term fortune.

Adobe shares rose nearly 4 percent in Wednesday's early Nasdaq trading, rising $1.56 to $42.30 on the heels of the update, which came after Tuesday's close.

The quarterly report showed that net income for the three months ended March 2 was $143.9 million, or 24 cents a share, up from $105.1 million, or 17 cents a share, in the same period last year.

Sales in the first quarter were $649.4 million, down less than 1 percent from $655.5 million in the same period of 2006.

Excluding costs for expenses, such as restructuring charges related to the December 2005 acquisition of Macromedia Inc., profit was $182.3 million, or 30 cents per share.

On that basis, analysts were expecting Adobe to earn $172.4 million, or 29 cents per share, on revenue of $655.6 million, according to a Thomson Financial survey.

"It was a solid quarter all around," President and Chief Operating Officer Shantanu Narayen said in a phone interview.

Although it's long been popular with artists, photographers and Web designers, a growing number of general-interest consumers are coming to know Adobe. Click on nearly any online video, and it's likely running Adobe's Flash Player.

Creative software _ the historical core of Adobe, with its flagship Photoshop _ took in $346.4 million last quarter. Knowledge worker software, which includes Acrobat and other titles used to create and read digital documents, took in $174.8 million. Enterprise software for corporate servers took in $50.9 million. Mobile devices took in $13.7 million and is expected to become a hot-growth sector for the company, which is reaching out to telecommunications clients in Asia.

Adobe sold $135.4 million in products throughout Asia last quarter, up marginally from $134.8 million in the year-ago period. In the Americas, it sold $298.3 million in products, down nearly 5 percent from $313.7 million in the year-ago period.

Adobe is beginning its biggest product launch since 1982, when it was founded.

On Monday, it began online distribution of the first public alpha version of Apollo, corporate software for Web developers that is already in use at eBay Inc. and elsewhere.

Next week it will begin selling Creative Suite 3, and it will roll out numerous foreign-language versions later in the year. Later this spring, it will launch two editions of Photoshop.

Launching upgrades is usually a precarious time for software companies; buyers often delay new purchases and make do with older software to save money and wait for bugs to be spotted and fixed. It's hard for executives to predict the percentage of users who will upgrade.

It's also unclear how long Adobe _ which has online hosted software for video editing _ can continue to rely primarily on so-called off-the-shelf sales of Photoshop, Creative Suite and other lucrative titles. Instead of selling shrink-wrapped boxes of software to bricks-and-mortar retailers and e-commerce companies, many software companies are distributing code online, updating it quarterly or nearly continuously instead of annually.

"The question on investors minds is, How could Adobe transcend to the next phase?" said analyst Trip Chowdhry of Global Equities Research. "This is probably the last traditional product cycle story Adobe will put out."

Executives expressed confidence Tuesday that customers would keep buying shrink-wrapped upgrades. Adobe customers _ particularly graphic and video artists with deep-pocketed corporate clients _ spend money relatively liberally compared with average software buyers, Chief Executive Bruce Chizen said.

"Our customer is not typically price sensitive," Chizen said during a conference call Tuesday. "The cost of the tool isn't what's critical _ it's the productivity and what their output can be. They want to pay for value as long as we deliver innovative features that allow them to be more productive and creative."

Adobe said it expects to earn 23 cents to 26 cents per share on revenue of $700 million to $740 million in the second quarter. Excluding certain expenses, the company expects to earn 34 cents to 36 cents per share.

The San Jose-based company, which employs 6,100 people, reaffirmed its annual revenue growth target of 15 percent.

Mark Garrett _ who became chief financial officer in January _ said the company would provide more details next week about a stock buyback later this year. The company has $526 million in cash and more than $5 billion in total assets.

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On the Net:

Adobe Systems Inc.: http://www.adobe.com