Adobe Systems (NASDAQ:ADBE) is no Flash in the pan.
Last night's second-quarter report shows how the digital media expert relies on a business model with plenty of long-term support and service contracts that makes it less susceptible to short-term swings in demand for its products.
Total net sales came in at $704.7 million, about 21% below the year-ago period's $886.9 million. Pro forma earnings landed at $185 million, or $0.35 per share, down from $0.50 per share a year ago. These results were on the high end of management's own guidance -- despite an unexpected swoon in the European market.
Adobe's product sales contributed most of the sales drop while services and support lost only 2% of its sales. Factor in tighter cost controls, and that department increased operating profits by 35%.
In the mold of many other smart high-tech businesses like Hewlett-Packard (NYSE:HPQ), Adobe has moved away from pure product sales and into long-term support contracts and training classes in recent years. In 2005, only 2.3% of Adobe's sales came from services; this quarter, it was a much fatter 6.3%.
The company is doing its best to stay relevant and encourage more of those long-term commitments to its technologies. Adobe sees lots of promise in the booming smartphone market and is working hard to get its Flash players deployed on all of them. The company has already sent early versions of its new Flash Player 10 to partners. Palm's (NASDAQ:PALM) WebOS, Microsoft's (NASDAQ:MSFT) Windows Mobile, Nokia's (NYSE:NOK) Symbian, and Google's (NASDAQ:GOOG) Android will all support Web browsing with the newest Flash player.
Conspicuously missing from that august list is Apple (NASDAQ:AAPL) and its iPhone. "We continue to work with Apple," says CEO Shantanu Narayen, asking for more programming interfaces and documentation from Cupertino.
Keep plugging away, Adobe. Whether or not you get full iPhone support this year, the market is exploding with compelling options that you already have full access to. That should entice lots of new applications developers to sign up for Flash training and licenses. I see plenty of new locked-in support contracts in your near future -- and their revenues will stick around for years to come.
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