Adobe Shares Fall as Strategy Shift Raises Growth Concerns

Adobe Systems Inc. (ADBE) fell the most in three months after the company said it plans to stop making Flash technology for mobile devices, raising concern that new programs for digital publishing will be slow to boost revenue.

The company, which is holding a meeting for analysts today in New York to discuss strategy, yesterday said it would cut 750 jobs as it shifts investment to software for Web publishing and advertising. Instead of Flash, Adobe is focusing on tools that can generate code in the newer HTML5 language, supported by rivals Apple Inc. (AAPL), Google Inc. and Microsoft Corp.

Adobe, the largest maker of graphic-design software, pared its sales forecast for the next fiscal year as it shifts to new products. Apple’s dominance in mobile computing, the faster evolution of Web standards like HTML5, and the popularity of smartphones and tablets required Adobe to embrace newer technology, said Al Hilwa, an analyst at market researcher IDC.

“Adobe had to transition, but it’s taking some lumps,” Hilwa said. “Adobe grew when the Internet needed certain kinds of proprietary software to move forward, because the standards weren’t moving fast enough. The market has changed.”

Shares fell 7.7 percent to $28.08 at the close in New York, their biggest drop since Aug. 10. The stock has declined 8.8 percent this year.

Digital Media

San Jose, California-based Adobe is channeling research, sales and marketing investments into digital media and marketing in the next fiscal year, and expects less licensing revenue from software for corporate servers. As a result, sales will increase 4 percent to 6 percent next year, the company said in a statement yesterday. Analysts surveyed by Bloomberg had expected sales to increase 9 percent to $4.53 billion.

The company will stop developing the Flash Player for mobile devices and instead emphasize the Air software, which will work with online application stores, Danny Winokur, an Adobe vice president, said in a company blog post today.

“It really is time for a new generation of creative tools,” Chief Executive Officer Shantanu Narayen told analysts at the meeting. The company will step up efforts to build HTML5 technology into its flagship Creative Suite products and emphasize sales to digital publishers and advertisers, he said. “This is a big, massive opportunity and we think we’re uniquely positioned to win.”

Job Cuts

The job cuts, mostly in North America and Europe, will cost $87 million to $94 million before taxes. That includes as much as $78 million of charges in the fiscal fourth quarter ending Dec. 2, Adobe said. After the costs, net income will be 30 cents to 38 cents a share, compared with a previous forecast of 41 cents to 50 cents.

The company is also overhauling the way it sells its most popular software, called Creative Suite, to spur more frequent purchases of programs like Photoshop and Dreamweaver. As more customers seek to buy and use software over the Internet, Adobe plans to release a software package called Creative Cloud early next year.

Tablets, Subscriptions

Adobe plans to release more tablet-computer software and “aggressive” subscription pricing plans starting at $50 a month, designed to attract new customers, executives said. The company yesterday said it anticipates “double-digit revenue growth,” with more sales coming from recurring sources like subscriptions, after fiscal 2012.

“Skeptics will point to double-digit growth that is perpetually a year out, and management will have to refute this,” Walter Pritchard, an analyst at Citigroup Inc. who recommends buying the shares, said in a research note yesterday.

Adobe’s software-as-a-service business -- programs delivered over the Internet through so-called cloud computing -- may reach $1 billion over time, Narayen said.

“Billions of dollars are shifting to digital” publishing, Narayen said. “We’re looking to deliver all these solutions in the cloud.”

Meanwhile, Adobe also reiterated its fourth-quarter forecast for sales and profit before certain costs. Revenue will be $1.08 billion to $1.13 billion, and profit excluding some items will be 57 cents to 64 cents a share, Adobe said.

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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