Graphic design software vendor Adobe announced better-than-expected first-quarter earnings on March 15. After warning of disappointing sales earlier in the quarter, Adobe's bottom-line surprise points to its tremendous operating leverage: The company was able to prudently manage expenses despite slowing sales and post earnings that exceeded expectations.
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On March 15, Adobe reported earnings of $0.33 per share, ahead of the Street's expectation of $0.28 per share. Including venture capital investments, it had net income of $69.8 million, or $0.28 per share, compared to $64.6 million, or $0.26 per share, in the year-ago period. Revenues were $329 million, compared to $282 million in the year-ago period. The Motley Fool spoke with CEO Bruce Chizen the day after the company's announcement. TMF: It appears that the future of Adobe (Nasdaq: ADBE) is the ability to control relative costs in order to make strong earnings continue regardless of what sales might be. Can you comment on that? Chizen: We've worked really hard over the last two and a half years to bring together a great infrastructure to make sure that we are operating at a very high level. We have a great handle on our business, we have a clear understanding of our products, we know where our expenses are, and we are able to adjust accordingly. TMF: One of the themes in the conference call this quarter was reduced visibility. Everyone is talking about how visibility isn't as strong as it used to be. How do you gauge visibility? Beyond looking at things like deferred revenue, which is a clear numbers-oriented gauge, how far out can you normally see what demand is going to be like? Chizen: We take a guess at what revenues are going to look like over the three-year period based on what we think the market opportunities are based on the product road map. Realistically, we work off a rolling quarterly forecast that looks out four quarters. So internally, every quarter we update what we call our QRF (quarterly rolling forecast) and that is what we judge the business by. Obviously, the closer you get to the quarter, the more visibility you have because you can look at current run rates of a product, new product flow, and anticipate what revenue will be. The big unknown is really what's happening with the overall economy. We saw what happened in the U.S. and we saw the impact on our business. Europe and Asia have been doing well, particularly Asia with Japan. I didn't want to go out with any guidance for the second half of the year because of that uncertainty. TMF: We always find it interesting why anybody ventures some sort of visibility into the future. Warren Buffett recently commented that he doesn't know 30 days out what his companies are going to be doing. Chizen: If you look at our performance over the past two years in terms of guidance, we've been pretty close. Of course, not 100% because that's impossible, unless we were doing something illegal, but we've been pretty close. The reason we give guidance is because the sell-side analysts will be all over the place if you don't give them some indication of where things are going. And that puts a lot of instability into the price of the stock. At the end of the day, we want to satisfy our stockholders and make sure that we continue to attract new investors to Adobe. TMF: Everyone is very concerned with the economic slowdown and no one knows how long it's going to last. Looking for a silver lining, what do you see as the opportunity to strengthen your competitive positioning against the Macromedias (Nasdaq: MACR) out there? Chizen: There are a couple of things. Acrobat seems to be booming, despite the economic slowdown. It grew 42% year-over-year and that was with the older version. The new version ships next month. Even though companies are cutting back on their spending, they're all moving from paper-based to Web-based workflows. Acrobat is the best solution to accomplish that. When you look at our products, they tend to address multiple media types that are targeted at multiple platforms. I'm including paper as a platform. Six months ago, a lot of companies had teams dedicated to Web stuff, print stuff, wireless stuff, and so on. Now, we're entering what we call network publishing. Most organizations need to be sure that they're creating content so that it could be viewed anywhere, anytime, and on any device. Again, when I say device I'm including paper as a platform. That plays to Adobe's strength. Our competitors can't really touch us in that environment TMF: Because they're either too Web- or paper-centric? Chizen: Right. When you have economic challenges and you have to manage your company that way, it's a skill you either have or need to develop. If you don't have it, it takes a while to develop. We've made a lot of efforts developing that over the years and it's going to put us at a competitive advantage. TMF: You've formed some wireless partnerships. How do these partnerships enhance the value proposition for your customers? Chizen: The strategy is to make it easy for our customers to repurpose their content on any of those platforms. By working with someone like Nokia (NYSE: NOK) and doing Web design with GoLive [for example], you'll be able to see what your content will look like on a cell phone. In the case of Palm (Nasdaq: PALM), having Acrobat available to the Palm OS means that people that have Acrobat documents on their desktop will be able to view them with their Palm. TMF: Network publishing devices make more information available anytime, anywhere, but what steps are you taking to ensure the security of information? Chizen: We're making sure our products are built in such a way to incorporate the latest encryption technology. With the release of Acrobat next month, we'll support encryption up to 128 bit levels. We'll make our products in such a way to protect other people's content, but we won't be doing the actual encryption. I think there are a lot of other companies that can do a much better job in that area. TMF: The last time we talked, Adobe Ventures was a big positive for Adobe. This quarter with the stock market conditions being what they are, people are looking at that with a more jaded eye. Has that changed Adobe's strategy with regard to venture investments? Chizen: It's actually gotten a little bit easier because of the valuations of the companies. We're actually getting more companies coming to us than ever before and there are valuations or perceived valuations, and expectations are within the realm of reality. Our strategy hasn't changed. We just take a very prudent approach to writing off any impaired assets. When we look at the value of the stock market and the value of some of our holdings, we took a larger write-off this quarter than we have in the past. If you look at the Adobe Ventures program overall, we've invested something like $180 million plus, and we've already received $400 million in return. Plus, we have the strategic benefits of companies that help us with our own business. TMF: Thank you for taking time to speak with us today. Mike Trigg and Zeke Ashton sit next to each other at Fool HQ. Mike's holdings can be viewed in his personal profile. Zeke's holdings can also be viewed in his personal profile. The Motley Fool is investors writing for investors
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