By Trevor Shackelford October 5, 2005 -- Adobe Systems Inc. (NASDAQ: ADBE) reported its third quarter results today. The company reported $487 million in revenues, up 21% from $403.7 million in the same period last year, and near the top of its Q3 target. Net income for the third quarter was $144.9 million, or $0.29 per share, up 37% from $105.6 million or $0.21 per share a year ago. Earnings per share results beat Adobe’s third quarter projections by $0.02. Results were driven by the continued adoption of Adobe Acrobat 7 and another record quarter for Creative Suite. Topics of this Summary Quarter Highlights Segment Performance Guidance Raine Radar Q & A Quarter Highlights The Adobe board voted “overwhelmingly” in favor of the proposed acquisition of Macromedia on August 24, 2005. The company reports that the integration planning is going well and the transaction should close in the Fall of 2005. The company will start the third quarter with 4286 employees, up from 4207 at the end of last quarter. The increased headcount is going primarily to R&D. Expenses as a percentage of revenue were: R&D 19.4%, sales & marketing 29.5%, general & administrative 7.7% Global Revenues as a percentage of total Q3 revenue: Americas 47%, Europe 31%, Asia 22% Adobe ended the third quarter with $1.893 billion in cash and short term investments, up from 1.69 billion at the end of last quarter Segment Performance Creative Professional Segment Third quarter revenue was $206.3 million, up from $150.4 million in the same period last year and $184.4 million last quarter. Creative Suite continues to drive this segment’s growth. The premium version is outselling the standard version of Creative Suite by 3 to 1. Digital Imaging and Video Segment Revenue for the third quarter was $95.6 million, down from $98.4 million last year and $115.9 million last quarter. The decline in this segment is actually driven by the success of Creative Suite (reported above), which contains Photoshop. OEM post goods and other segment revenue was $19.3 million compared to $19.4 million in the same period last year and $19.5 million last quarter. Intelligent Documents Segment Sales in the Intelligent Documents segment were $165.8 million in the third quarter, up from $135.5 million in the same period last year and $176.2 million last quarter. Revenue from the Intelligent Documents Desktop group grew 28% year-over-year to $135.5 million, but declined from last quarter due to normal seasonality. The Server group posted third quarter revenues of $30.3 million. Guidance Adobe expects Q4 revenue of between $490 million to $510 million, a 14-19% year-over-year growth. The company also provided a gross margin target of 94%, and operating margin target in the 35-36% range. Adobe expects earnings of $0.27 to $0.29 per share for the third quarter. This guidance does not factor in the upcoming acquisition of Macromedia. Raine Radar The accolades for CS2 have been great, and so far it appears that Adobe has been taking market share, especially from Quark. Quark grew too confidant in its entrenchment within the graphic designer workflow and stopped innovating. Adobe took advantage of that and has been eroding Quark’s position. Now Microsoft has announced its own entrance into the market with its Expression suite. Although Adobe is cross-platform, Windows will likely be very aggressive in its marketing and bundling. As with the XBOX, the company will be up for taking substantial losses in its opening year or two simply to attain a share of the market. Fortunately for Adobe, the company has learned first hand from the mistakes of Quark, and will likely be in a much better position to defend against Microsoft. In the end however, it will be the consumers who win as the three main players struggle to innovate and aggressively price their products. Q & A Economic improvement in Germany and Japan does seem to be improving sales in those markets. Adobe executives view the acquisition of Macromedia as being pro-competitive; especially as Microsoft gears up to aggressively compete in the layout and vector graphics design markets. General and Administrative expenses were lower due primarily to lower than expected legal expenses. Adobe is pleased with the sales of the CS2 Suite, as opposed to Photoshop by itself. Summer seasonality, especially in Europe and Japan, shifted the sales mix more towards licensing from retail sales. Adobe expects Acrobat, Server, and Hobbyist revenue to be up in the Q4 from the Q3. Although Microsoft Expressions was launched to their professional developer’s conference, it is clear to Adobe that this suite will target design professionals as well. Adobe is taking the threat from the resource-rich Microsoft very seriously, but is confidant that they are entrenched enough with the designer community that they will be tough to unseat. Adobe compared Photoshop and Creative Suite to Microsoft Excel and Microsoft Office as a means to explain why they are satisfied with the move from Photoshop as a standalone product to the suite. Adobe expects the “video revolution” along with the pervasiveness of broadband to drive the next big market need in this space, and although no announcements were made, it appears that Adobe has a product in the pipeline to satisfy this market need.