Adobe's 3Q Profit Beats Predictions

SAN FRANCISCO (AP) - Adobe Systems Inc. third-quarter profit more than doubled, setting a record and beating Wall Street expectations as the company comes off its biggest-ever software launch.

Net income for the three months ending August 31 was $205.2 million, or 34 cents a share, surging 117 percent from $94.4 million, or 16 cents a share, in the same quarter of last year.

Third-quarter sales were a record $851.7 million, up 41 percent from $602.2 million in the third quarter of 2006.

Excluding costs for expenses, such as stock-based compensation and restructuring charges related to the December 2005 acquisition of Macromedia Inc., profit was $269.4 million, or 45 cents per share, compared with $171.5 million, or 29 cents per share, in the year-ago quarter.

Analysts were expecting Adobe, maker of Acrobat and Photoshop, to earn $246.6 million, or 40 cents per share, on revenue of $789.3 million, according to a Thomson Financial survey.

"By any account, it was an extraordinary quarter," said Shantanu Narayen, Adobe's president and chief operating officer. "As long as the economy continues to perform, we believe we can be a double-digit growth company for many years to come."

Shares of San Jose, Calif.-based Adobe dropped 35 cents, or less than 1 percent, to close at $43.06 Thursday before the financial report. They surged another $1.65 in after-hours trading.

Adobe executives said Monday they expected fourth-quarter revenue of $860 million to $890 million. They expect net income to be 35 cents to 37 cents per share, or 46 cents to 48 cents per share excluding certain one-time expenses.

Even analysts who've followed Adobe for years said third-quarter results were a pleasant surprise.

"This kind of high upside doesn't happen too often with big-revenue companies," said analyst Gene Munster of Piper Jaffray & Co., who said much of the quarter's success can be traced back to strong early sales of Creative Suite 3, which Adobe launched in April and includes updates to some of the company's most popular programs, such as Photoshop and Illustrator.

"CS3 is a game-changing product," Munster said.

The company, which employs roughly 6,700 workers, had $559.3 million in cash at the end of last quarter.

Adobe is just coming off the most significant product launch in the company's 25-year history. Adobe is known for software that's both popular and expensive, and it enjoys cult status among creative professionals such as photographers, video editors and Web designers.

In June, Adobe unveiled its Visual Communicator 3 software, which is designed to create video broadcasts. The company also released its LiveCycle Enterprise Suite, which contains applications for automating processes.

And in July came Production Premium and Master Collection versions of its Creative Suite 3, which launched in April. Besides Photoshop and Illustrator, CS3 includes software titles such as OnLocation CS3 and Ultra CS3, which are for direct-to-disk recording and monitoring and chroma keying, respectively. The company also rolled out some non-English versions.

Adobe offers six versions of the full suite, with suggested retail prices from $1,599 to $2,499. Customers also may buy individual upgrades on 13 standalone applications.

Last month, Adobe introduced a beta update to its Flash Player 9, which includes support for the H.264 video standard used in Blu-ray and HD DVD high-definition DVDs and other satellite and cable TV set-top boxes. At the time, Adobe anticipated the final version of the update would be available in the fall.

Walter Pritchard, an analyst at Cowen and Company LLC, said Adobe's biggest challenge is staying ahead of competing products from Microsoft Corp. and of open-source software that rivals Adobe mainstays such as Flash.

To maintain its stock price, Pritchard said, the company must maintain scorching growth rates as the product launch tapers off.

"After May 2008, they run into tougher comparisons," Pritchard said. "The biggest challenge is then being able to continue this kind of momentum and not have investors think it has peaked."

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