On September 14, Adobe announced a blowout third quarter, with record revenues of $328.9 million and net income of $78.3 million, or 37% growth over the previous year. Following Adobe's conference call, Zeke Ashton interviewed the president of Adobe, Bruce Chizen. The following is an excerpt from that interview.
Chizen: The first thing we have to do is that any product that we deliver with the Adobe brand on it has to be a great product, and I think we do a good job of that. The second thing we have to do is in those areas where we have strong product presence like in the case of Adobe Photoshop, we have to do a better job of communicating with the user who is already buying that product that there are other products that work in an integrated way with Photoshop.
Another thing that we are doing is that, unlike in the past, we now have a significant marketing budget. Because the operating efficiencies we now have allow us to spend more on the sales and marketing line, we've become more focused on aggressive advertising. And I think you have started to see evidence of that in the past six months or so, both in newspaper advertising and Web advertising, as well as other unique events like the sponsorship of the X games.
Yet another thing that we are doing is that in the past we've often licensed our technologies to partners and to OEMs [original equipment manufacturers], but they weren't necessarily branded. We've recently introduced a new branding campaign, called Clearly Adobe. Any of our OEMs that use our technology can use that brand to help differentiate their products, and at the same time help promote our overall brand presence.
TMF: Sounds very similar to the Intel Inside campaign.
Chizen: Yes, it is very similar.
TMF: One of the important product rollouts of the last year has been InDesign for page layouts. How is InDesign doing in terms of gaining market share on Quark and other page layout software packages?
Chizen: We are pleased with the progress, but it is going to take us a while to become the majority market share leader. We have announced some new customer adoptions, and in the U.S. alone there are probably 1,000 service providers and print bureaus that can take InDesign files today. This is a mission critical application, and people don't switch overnight. However, we believe that we are going to win this war, and we think its clear that InDesign is the future.
TMF: I noted in the conference call that Adobe is targeting 20% of sales to be allocated to R&D going forward. That's an amazing percentage when you have well over $1 billion in annual sales.
Chizen: We'll do about $1.3 billion in revenues this year, so that's about $260 million in R&D. Our R&D investment is larger than the annual revenues of most of our competitors, and we do think that gives us a competitive advantage. We've always been a very strong product and technology company, and we are very focused on developing our products and technology.
TMF: Another thing I found interesting about the call is that Adobe is extremely specific and targeted about income statement goals, but I didn't hear anything about cash flow and capital expenditures. Why is that?
Chizen: In terms of cash flow and capital expenditures, this isn't really a concern for the analysts. We generate lots of cash on an operating basis. When you look at this quarter's operating profit of 32%, that's an absurd amount of profit based on operating income. And when you look at the investments we've made over the years both through Adobe direct and through Adobe ventures, those have been very lucrative investments.
So cash is not an issue for us, and certainly our investors don't see it as an issue. And then also we're a software company, so in terms of capital investments, we buy CPUs and we have facilities, but at the end of the day its more about people and the intellectual property that we can create.
TMF: You mention that cash flow hasn't become an issue with the analysts, but I wonder why it isn't highlighted as more of a strength?
Chizen: It is a strength, and I think investors are seeing it as a strength. Especially with the challenges that many dot-coms have had, investors are starting to look at Adobe in the same way they look at a Cisco (Nasdaq: CSCO) or an Oracle (Nasdaq: ORCL) or a Sun (Nasdaq: SUNW). We've become a Web infrastructure player. And as such, we have high margins, and not a lot of capital equipment needs.
TMF: Venture capital activities seem to have become a huge trend among leading technology companies, with companies like Dell (Nasdaq: DELL), Intel (Nasdaq: INTC), and of course Adobe, all having large venture arms. Can you tell our readers a little about some of the less obvious advantages that Adobe has realized from the Adobe Ventures activities?
Chizen: Right, besides the great return on investments, it brings us a couple of things. One is that we get to see about 50 new deals a week. So we have a sense of what's going on in the Valley. When you get to be a big company like an Intel or Dell or Adobe, you're no longer as close to some of the Valley startup activities. Because of our venture capital activities, we get to see what's really going on, and what new startups are happening. And then we get to invest in companies that might not necessarily fit our business model, but could be very strategic to where we are driving.
So, I look at a company like Tumbleweed (Nasdaq: TMWD), which has done secure delivery of PDF. It's a very successful company, but their business model at the time wasn't appropriate for Adobe. The same is true of Digimarc (Nasdaq: DMRC), a company doing digital rights management for imaging. A great company, and a great investment for Adobe, and another company that went IPO. But again, not a model that made sense for us at the time. With our venture capital, we get to extend our brand, our products, and our services by investing in companies that can help us achieve those things without bearing the shift in business models.
TMF: Or bearing the additional research and development costs.
TMF: What are your thoughts on the recent trend towards the Application Service Providers, and how might this trend impact Adobe's business?
Chizen: I see it as an opportunity. It's a big opportunity, and there's a couple of things there. One is that, as we said in the conference call today, at the analyst meeting on November 6 we'll talk more about a pay-for-service on Adobes website. We are a very heavily trafficked website, with about 12 million unique visitors per month. And many of those customers are creative professionals. And we think that not only can we provide them information about Adobe and information about the community, but we can help them do their jobs better. So that's a big opportunity.
The other thing is that we do have some technologies that we think we can provide to other B2B players. And that's another area of opportunity in terms of the ASP model.
The other is that we recently announced the acquisition of Glassbook in the eBook space. With that acquisition we got some great server technology that allows us to deliver the infrastructure to help others deliver the electronic content of ebooks and college textbooks, etc. We can sell them the infrastructure and even in some cases become an ASP for them.
TMF: What do you feel are Adobes most important competitive advantages?
Chizen: Adobe can provide a complete integrated solution that no one else can provide.
TMF: Finally, in the corporate world, which companies do you most admire, and what are the qualities of those companies that you'd like to emulate with Adobe?
Chizen: I love Cisco. They are so efficient in the way that they do business. And they're aggressive. And I love Intel because they manage to reinvent themselves over and over and over again. Those are really the two that I'd really like Adobe to look like, in terms of operational efficiency and aggressiveness.
TMF: Of course, Cisco is best known for their ability to identify and rapidly integrate new acquisitions to fuel their growth. Do you feel like Adobe will have to go that route to achieve further growth going forward?
Chizen: Fortunately today, no. But I think over time we'll want to take advantage of our scale and do that. Though I certainly respect that about Cisco -- their ability to acquire companies. The thing that impresses me the most is how efficient they are in operating their business.
TMF: For example, their ability to close their books in one day?
Chizen: Exactly. We're down to two days!
TMF: That's impressive.
Chizen: Yeah. Were thrilled. In fact, our CFO has met with their finance people and their operations people, and we've gotten it down to two, but we'd really like to get it down to one day.
TMF: Thank you very much, and congratulations on your success at Adobe!
Chizen: Thank you.
The Rule Maker software series on Adobe and Macromedia:
Sizing Up Adobe, 4/14/00
Drilling Down on Adobe, 5/12/00
Adobe vs. Macromedia, 5/19/00
Zeroing In on Macromedia, 5/26/00
Adobe Tops Macromedia, 6/5/00