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Adobe Meets Lowered Expectations

The market's enthusiastic greeting for Acrobat 5.0 helped Adobe post relatively strong numbers, but the near future is looking increasingly grim.
Adobe Systems Inc., bouyed by the market's enthusiastic response to the latest incarnation of its popular Acrobat document-conversion software, met reduced expectations for its second fiscal quarter ended June 1, posting slowed but substantial revenue growth and raking in profits in line with last year. Sales of Acrobat 5.0, which lets companies preserve the formats of documents sent over the Internet, fueled a 67% increase in Adobe's E-paper product segment compared with last year, but Adobe execs aren't counting on maintaining that pace in the coming months.

During a conference call with analysts Thursday, CEO Bruce Chizen said that Acrobat 4 also was a runaway hit for the first few months after its February 1999 release, but sales cooled quarter to quarter thereafter. Thus, Chizen was understandably cautious about expectations for Acrobat 5.0, which was released in March. "It's hard for us to project what's going to happen in Q3," Chizen said. "We have to factor in some data with regard to what happened with the prior release."

Chizen and CFO Murray Demo cautioned that because they expect the economic woes to begin affecting the Asian market, revenue is projected to be flat for the third quarter compared with last year. For the recent quarter, Adobe posted a profit of $61.3 million, or 25 cents per diluted share, on revenue of $344.1 million, compared with a profit of $65.8 million, or 26 cents a share, on revenue of $300.1 million for the same period last year. Sales for the company's cross-media publishing and Web-publishing segments were up 8% and 6%, respectively. Geographically, revenue was down in the North American and European markets, while Asia showed strong growth.

Keith Gay, an analyst with Thomas Weisel Partners, says he expects most analysts to lower expectations because of the company's third-quarter guidance and evidence that the global economic slowdown will continue. Despite the momentum surrounding Acrobat 5.0, an upgrade of its PageMaker desktop-publishing software due this quarter and several unspecified major product upgrades planned for the following quarter, Gay says Adobe's short-term fate is largely out of its control. "I think it's less of a product issue and more of a geographic issue." He says it remains to be seen whether Adobe's new products can help it overcome the softness of the economy.