The tepid reaction to Adobe’s (ADBE) good 2Q revenue and earnings results on June 14 (traded down after hours according to SeekingAlpha) is a result of taking the longer view. And I don’t mean the 3Q outlook. Those looking back at the trailing 12 months saw only 5–6% revenue growth adjusted for the late 2005 Macromedia acquisition, about the same as or a little below the software market average. Those looking ahead don’t see a Software as a Service (SaaS) strategy for Adobe. And the very buzzword dependent didn’t hear the words “service oriented architecture (SOA)†at all during the quarterly conference call.
Here’s Adobe’s challenge: It’s longtime bread and butter, the “creative professional,†is a dinosaur. Adobe’s doing all it can and doing it well to keep a high penetration of the desktop publishing market but the people count is shrinking. But not to worry. Seeing this and similar trends related to its Acrobat business, Adobe is rightly moving to emphasize what it calls “enterprise solutions.†It acquired Macromedia (with Allaire built in) and companies such as Accellio before that to help build a business process management (BPM) middleware capability. Both Acrobat and Flash are a key part of that capability. Last month Adobe announced the first truly integrated version of Livecycle, bringing this story to life.
But the question is, “What to do with the capability?†Adobe is a key part of the IT industry supply chain and knows its role and its strengths. It will gradually replace the creative professional with the professional developer as its key audience. The announcement a month ago that Flex would go open source is one example of this strategy. It has recently completed a revamping of its direct sales force to support this strategy and is beefing up partner programs such as the agreement with SAP. As another example, Adobe talked about the MISMO mortgage banker arrangement during the conference call. It talked about it while discussing the information worker segment, but MSMO is a BPM story long-term. Of course, Adobe can’t come out and say all of this because enterprise solutions are only 20% or less of the action at this point.
We conduct most of our research and analysis by first putting software suppliers into one of two buckets: technology providers and services providers. We think Adobe wants to be a technology provider so no SaaS strategy is needed. Adobe can make money putting its user and middleware technology into other suppliers’ SaaS services. This characterization is the kiss of death in Silicon Valley. It’s kind of like being in a windowless plant in Fort Wayne instead of in the pit at Monte Carlo. But it’s profitable in a good old Fort Wayne sort of way. The comparison with Microsoft’s and Google’s margins at similar revenue levels demonstrates their heads-down approach.
For those waiting for an IBM (IBM) bid, I can think of a few reasons why IBM would not do it. One, IBM wants its software group to contribute 50% of EPS by 2011. An Adobe acquisition—with the creative-professional-dominant revenue stream and related earnings for the next five years—would make that harder to accomplish. Two, IBM acquisitions are strategically as much about supporting business transformation services and whatever IBM calls IGS these days with BPM technology than they are about software. Although Adobe’s BPM technology is good, IBM already has more BPM technology to integrate than it can handle. On the other hand, I didn’t understand the IBM MRO acquisition at all.
And for those who want an SOA story, there is one in Adobe’s enterprise solutions but given its heritage, Adobe speaks to users not to technologists.
–Dennis Byron
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