By Trevor Shackelford July 1, 2005 -- Adobe Systems Inc. (Nasdaq: ADBE) reported its second quarter results today. The company announced $496 million in revenues, up from $410.1 million in the same period last year. Net income for the Q2 was $149.8 million, or $0.29 per share, compared to $109.4 million or $0.22 per share a year ago. The 37% increase in profits was well received, but the conservative outlook for the typically slower Q3 was not up to the expectations of many investors. Topics of this Summary Quarter Highlights Segment Performance Guidance Raine Radar Q & A Quarter Highlights Adobe announced in April that it would acquire competitor Macromedia for approximately $3.4 billion in a stock transaction The company will start the second quarter with 4207 employees, up from 4016 at the end of last quarter. The increased headcount is going primarily to R & D and Sales/Marketing Global Revenues as a percentage of total Q2 revenue: Americas 49%, Europe 29%, Asia 22% Adobe ended the second quarter with $1.69 billion in cash and short term investments, up from $1.47 billion at the end of last quarter Segment Performance Creative Professional Segment Revenue for the second quarter was $184.4 million, up from $153.4 million in the same period last year and $160.7 million last quarter. The new Creative Suite release was the driving factor behind this growth. Digital Imaging and Video Segment Revenue for the second quarter was $115.9 million, down from $100.3 million last year and $106.6 million last quarter. Adobe cited the release of its latest version of Photoshop for the growth. OEM post goods and other segment revenue was $19.5 million compared to $20.3 million in the same period last year and $20.7 million last quarter. Intelligent Documents Segment Sales in the Intelligent Documents segment were $176.2 million in the second quarter, up from $136.1 million in the same period last year and $184.9 million last quarter. Revenue from the Intelligent Documents Desktop group grew 33% year over year to $149.8 million. The Server group posted second quarter revenues of $26.4 million. Guidance Adobe released its Q3 outlook, noting that the softness is due to a seasonal summer decrease in Europe and Japan. The company announced that it expects a third quarter revenue range of $470 to $490 million, gross margin of 94%, and operating margin in the 34% to 36% range. Adobe expects earnings of $0.25 to $0.27 per share for the third quarter. Raine Radar The acquisition of Macromedia will solidify Adobe’s web content creation market position and dominant market share. Adobe will move fast to incorporate the Macromedia suite and offer multiple bundles that will target customer segments where they have been historically weak. The company’s PDF standard is being bundled into phones straight from the factory, and as the latest version of cell phones (3G) make internet more and more ubiquitous, this becomes increasingly critical. Although the company has the right to be a little nervous about Microsoft’s Metro standard, there is plenty of time to posture and prepare before that releases sometime next year. After all, Adobe has demonstrated quarter after quarter they know how to make money on their content distribution products. The company continues to aggressively hire in its R&D department to further bolster its development efforts. The Q3 in Japan and Europe is typically slow, but the release of CS2 abroad should soften the decline given the success it has had so far in North America. Going down the list, there are certainly threats, but the news is overwhelmingly positive. Given these factors, most investor models showed higher revenue for the Q3 then the stated guidance. Is something wrong that the street doesn’t know about? Although it is possible such as hidden liabilities with the purchase of Macromedia, odds are Adobe is just playing very conservative. Low balling the seasonally slower Q3 takes that concern out of the picture and allows management to focus on merging two very large software companies. Q & A There are no recent economic changes in Europe and Japan that have led Adobe to overstate the summer slow down, despite some skepticism from investors. 3G phones are nearing release, and will have Adobe Reader imbedded into them. While it is too early to tell what the customer mix is for CS2, the run rate has been superior to the previous release. When Microsoft’s upcoming Metro product was brought up, Adobe seemed confident that of their position, but made it clear that they don’t underestimate the dominant player in computer operating systems and software. InDesign has become a very popular product within the new CS suite. As Apple transitions their Mac hardware to the Intel architecture, Adobe will have to work closely with Apple to make sure their products will be available. So far, Adobe is confidant that Apple is making the right decisions to create a smooth transition. The bulk of the revenue for the intelligent documents server business is government and financial services. New users, rather than upgrades, are driving the majority of Acrobat sales. Adobe is currently examining different ways to add and bundle Macromedia products to the current Adobe offerings, but is currently not at liberty to provide any specifics. The recent trend of hiring in R&D is expected to continue as the company’s revenue continues to grow and outperform expectations.