What A Difference A Year Makes

In mid-August 1998 the company was the subject of an unwelcome takeover bid by Quark Inc. At that time, conventional wisdom said Adobe relied too much on PostScript license fees and did not understand the Web. In addition, Adobe was squarely in the crosshairs of Microsoft Corp., which already had waged a font war with the company and was coming after the low end of the publishing market.

The buyout offer came days after Adobe Co-chairman John Warnock warned analysts that the third quarter of 1998 would disappoint and announced a 12 percent layoff. Warnock told CRN a few weeks later that his reaction to the letter from Quark founder and Chairman Tim Gill was: "I don't need this now."

The buyout attempt quickly fizzled, and so did interest in Adobe, known for its fascination with fonts and dedication to bringing the finer points of graphics and typography to the market.

For all of Adobe's size,one of the top 10 PC software companies for years,the company does not get a lot of respect, analysts said.

Flash forward: Two weeks ago Adobe posted record revenue and profits for its third fiscal quarter, logging an impressive $260.9 million in revenue, compared with $222.9 million for the year-ago period, and profit of $72 million, compared with a loss of $6.1 million. And its operating margin was 29.3 percent, compared with 15 percent a year earlier. Adobe shares have soared, trading at more than three times last year's price.

Finally, Adobe released its long-awaited response to the Quark Publishing System, InDesign, on time in August, and it appears the momentum of Adobe Photoshop and Illustrator has made the company "hot on the Web," analysts said.

Meanwhile, Adobe Acrobat has become a popular format for storing and viewing documents, with more than 100 million Acrobat readers out there. Adobe Co-chairman Charles Geschke said this figure outdoes both Microsoft's and Netscape Communication Corp.'s browsers.

One reason for the growth is Web designers, who, much like their print counterparts, use Adobe products to design graphics and illustrations, analysts said.

About 70 percent of Web designers use Photoshop and more than 60 percent use Illustrator, said Robert Fagin, analyst at Bear Stearns & Co. Inc., New York. And Geschke said 70 percent of new Photoshop customers buy it for Web-related uses. Not bad for an old-world company.

"People are so focused on growth and products that are designed for the Web. The truth is all of our products have gotten an uptick [since the Internet boom]. Surprise, surprise: If you [do commerce or marketing over the Web], you need to put your best foot forward on your site, and that means good graphics," Geschke said.

The company's decision some years back to move more to the Wintel platform now is seen as a successful transition. After all, Adobe was one of the ISVs on which Apple Computer Inc. built its business. When Apple went into a decline, Adobe moved to Wintel, which now accounts for more than half of its revenue.

Financial analysts could not be happier. "Adobe had an amazing year," said Fagin. Wall Street credits Adobe Chief Financial Officer Harold Covert for improving investor relations. Covert joined Adobe in April 1998 and assumed his current post last August, right around the time of the layoffs that were viewed by many as an overdue belt tightening.

"They cut those people after years of neglecting the cost structure," said Jay Vleeschhouwer, vice president of Merrill Lynch & Co. Inc., New York.

Starting with those cuts, Adobe made several key moves to improve management while retaining the vision and status of the company's co-founders, Warnock and Geschke, analysts said.

Still, Adobe faces challenges. With InDesign, it has the unenviable task of unseating an entrenched competitor, the Quark Publishing System, which leads the market in high-end page-layout systems.

But even there, Adobe has advantages unusual for an underdog.

First, the bulk of Quark customers already use Adobe Photoshop and Illustrator. Second, Adobe is seen as being far more customer-friendly than Quark.

Quark customer support is something of an oxymoron, said one longtime Quark user.

"All Quark users are Adobe users, but that is not true the other way around," said one insider.

Longer term, Adobe must look north,to Redmond, Wash.-based Microsoft. "You would probably want to take my pulse if I said I wasn't worried about Microsoft," Geschke said.

Microsoft managed to cut Adobe's legs out from under it in the early 1990s with its TrueType alliance with Apple. While TrueType fonts were seen as inferior to PostScript fonts, they were basically free, and as one cynic said, "It's hard to beat free."

Now Microsoft is backing ClearType, which promises to make even tiny laptop screens more readable by evening out the jagged edges around curved fonts.

At the same time, Microsoft is coming after Adobe at the low end of the publishing spectrum with Microsoft Publish and in photo editing with PhotoDeluxe 2000. Adobe has responded by moving PageMaker, acquired along with Aldus Corp. in 1994, down market.

One big question is whether Microsoft will jump into high-end publishing. Some observers dismiss the notion, arguing Microsoft has its hands full just getting Windows 2000 out the door.

"Microsoft, for the most part, is not interested in these markets, even the InDesign market. . . . We think InDesign next year will do $120 million in revenue. Put that against what Microsoft is doing, [and] it's hard to believe Microsoft would care," said Bear Stearns' Fagin.

Adobe also faces competition against Acrobat, its hard-to-describe technology that enables compound documents to retain their look, feel and content regardless of the platform on which they are created or viewed. Adobe has done a good job entrenching Acrobat at corporations, but some observers said they see the new industry push toward XML as a threat.

"You can use both [XML and Acrobat], but they are effectively mutually exclusive. This is a battle for device-independent electronic documents and XML documents created by Microsoft Office is option No. 1 and the new Acrobat is option No. 2," said Jeffrey Tarter, editor of SoftLetter, Watertown, Mass.

For past news on Adobe, go to: www.crn.com/business