In its third-quarter conference call, Adobe Systems (NASDAQ:ADBE) outlined the sources of its latest growth spurt -- and explained why the company has barely begun to tap its core markets' potential.
Gimme the premium suite!
Adobe sent a slew of product updates onto store shelves in April, and found its Creative Suite 3 (CS3) enthusiastically received. The high-end bundles are outselling entry-level packages, which is good for both margins and revenue, and at this point, the buyers are mainly smallish businesses and hordes of creative professionals with no corporate affiliation.
Larger operations tend to wait a bit before springing for major software upgrades like this one, so they can test out the new tools and validate them for the company's needs. Just ask Microsoft (NASDAQ:MSFT) how many Fortune 500 businesses went for wholesale Windows Vista upgrades in the first couple of quarters of its existence, or check out the upgrade cycles for Oracle (NASDAQ:ORCL) databases.
It's not uncommon for mission-critical applications to stay a generation or two behind the bleeding update edge; you don't mess with a winning concept. So a big part of the CS3 payoff hasn't even started yet.
On the move
CS3 includes software packages like Photoshop, Premiere, Acrobat, and Flash -- all of the above and much more, if you spring for the $2,500 Master Collection. All of these products lead their respective markets, and some enjoy almost zero competition.
That doesn't mean Adobe can lean back on its accolades and open a cold one, though. Competitors like Microsoft, Corel (NASDAQ:CREL), Apple (NASDAQ:AAPL), and even Google (NASDAQ:GOOG) are surely working hard to catch up. Witness Microsoft Silverlight, for example -- a direct threat to the dominance of Flash-based online video services.
So Adobe keeps updating this flagship offering, adding high-def H.264 video decoding to the latest version. There's also a soon-to-be-released media-server component that will deliver video to PCs and mobile handsets in a standardized manner. That's another huge opportunity for you, right? Management said that every cell phone sold in Japan these days has a royalty-generating Flash player installed, and it hopes to extend that market share to the rest of the world, too. (The technology's certainly come a long way from dancing badger clips.)
The big picture
CEO Bruce Chizen even handed out a guide to the macroeconomic factors Adobe considers when trying to estimate future growth rates. One is the amount of online and offline advertising spending flowing through the economy; healthy and optimistic businesses advertise more, and then they invest in infrastructure upgrades like new software. And don't forget that Adobe software assisted in producing a lot of those ads to begin with.
Another indicator is overall IT spending, which goes hand-in-hand with the marketing hints. And thirdly, Adobe likes to look at high-end consumer spending, as judged by classy proxies like Nordstrom (NYSE:JWN) and Tiffany. Free-flowing luxury spending is always a sign of a strong economic environment, which again feeds into marketing and corporate IT investments.
And of course, Adobe looks at "the number of new websites that are being created, the richness of those websites, the amount of video on those websites, because that all means good things for Adobe."
It would have been even more helpful if Chizen had told us what these signs look like from his perspective today, but given the raised guidance and the optimistic tone of this call, chances are that they look all right.
What's it all mean?
That's a lot of ways to express the same thing: The coming quarters should make this one look feeble by comparison. If you haven't thought about investing in Adobe before, now could be a good time -- despite the nearly record-high share price. Your mileage may vary, of course, so do your homework first. Just don't blame this Fool if you miss out on a spectacular year or two, standing on the sidelines and eating Adobe's dust.
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