Adobe Begins to Turn the Tide

Adobe's headquarters in San Jose, California.
Adobe's headquarters in San Jose, California.

This has been a difficult few quarters for Adobe .

Not financially, but technically.

At least if you believe the folks at Apple, particularly Steve Jobs who put a very public face on what he says are Adobe's severe technical shortcomings when it comes to Flash.

Adobe is on the way toward turning public opinion around on this delicate, exceedingly important issue, with a barrage of news this week, not the least of which is the company's earnings report tonight after the bell.

First, some news: Adobe has stepped forward to say that Google, Dell, Time Warner and Viacom, among many others are supporting Adobe's Flash software for mobile video on smart phones. It's a shot directly at Apple and Steve Jobs, claiming in the media over the past few months that Flash is a woeful underperformer, chock full of security bugs, and so unstable that Jobs doesn't feel his high quality Apple products should have to stoop to Adobe's level by including Flash on things like iPad and iPod Touch. Jobs has said he prefers the far better performing HTML 5 standard. Trouble for consumers is that Flash runs something like 90-plus percent of the video on line and iPad and iPod Touch users are stuck if they access a site using Adobe's software.

Adobe though is on the offensive.

The company said yesterdaythat Sony Pictures and CBS Interactive are also supporting Adobe's mobile flash player 10.1. Oh, and there's Microsoft, Research in Motion, Intel and nVidia too. Adobe says 3 million Flash designers are ready to take advantage of the new software.

That's number 1. Number 2: Adobe will be a key participant in a major Droid announcement tomorrow in New York City, at which time Motorola and Google and Verizon will be unveiling the latest devices running Android. It'll be a very public love-fest for the Adobe mobile Flash software as well. The new Droid phones will join the Droid Eris and Droid Incredible, both from HTC, and Motorola's Devour, as well as LG's Ally.

Tonight after the bell, Adobe will also report its second quarter earnings. The Street anticipates 42 cents a share on $905.13 million, both categories up nicely from the same period a year ago. And while the increases are anticipated, there's a healthy amount of optimism that Adobe should be able to beat expectations, as the company has done for the last three quarters straight. Incidentally, Adobe guided EPS of 39 cents to 44 cents on revenue of between $875 million and $925 million.

Key areas to watch in tonight's report: The company's Creative business should come in around $485 million; Business productivity, $241 million; Knowledge, $157 million; Enterprise, $84 million. The Street expects non-GAAP operating margin of 35.2 percent. And guidance is always important. Analysts expect 48 cents a share on $961 million.

There's been a lot of discussions, obviously, about the controversy surrounding Flash, but Adobe has also seen nice growth in its Creative Suite 5, which includes Dreamweaver and Photoshop, in addition to Flash.

Still, that controversy has taken its toll on Adobe's overall momentum in the market, at least as far as investors are concerned. Sure, this company continues to outpace expectations, but its stock is off 10 percent this year, even as the Nasdaq has been up. Adobe has been a surprising underperformer, bitten by the Steve Jobs attack, and a PR derailment that the company just couldn't right. The company is clearly taking key steps this week in trying to get its train back on momentum's track.

Some on Wall Street seem to get the value proposition here. Jefferies has a $38 target on Adobe shares; Citi has a $42 target, letting its clients know that "demand should be sustained for several quarters" when it comes to CS5, despite the ongoing vitriol with Apple.

Meantime, Apple says just this morning that iPad has sold 3 millionunits in its first 80 days on the market. So much focus on the Apple versus Adobe row, and yet developers keep developing using Flash, and consumers keep shelling out big bucks for a device that doesn't include it. Consumers don't seem to care, and Adobe is doing what it can to turn this tide of investor opinion, that its software is somehow subpar. Millions of developers continue on the Adobe platform.

When it comes to mobile, there's still plenty of room for plenty of winners. This isn't about "winner take all." At least today, it's more about "all the winners," and it's pretty clear that Adobe is one of them, will be one of them, for the foreseeable future, with or without Jobs and his opinions otherwise.

Questions? Comments?