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Adobe Systems Incorporated Message Board

  • wbuffet2 wbuffet2 Aug 26, 1998 11:06 PM Flag

    Quark takeover comment

    I think the only strategy that makes sense is for
    Quark is to sell most of the pieces of Adobe and to use
    the cash for the purchase. Quark is probably only
    interested in a few pieces and by selling the rest of Adobe
    they can obtain those pieces at an attractive price.
    They feel they can manage these pieces better and grow
    their business. There is no way Quark can afford an all
    cash offer.

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    • markheff,

      #1) I don't have insider
      knowledge of what will be included in the restructuring
      charge, but generally the vast majority of such charges
      is the cost of the personnel layoff. This includes
      severance pay (generally tied to number of years of
      service), accrued vacation pay, COBRA coverage for medical,
      dental, life, etc. for some period, and some reserve for
      possible employee wrongful discharge lawsuits (you get
      these even if you do everything fairly).

      Other
      things that get put into restructuring charges are
      write-offs of assets that you no longer want to have on the
      books, depreciating (and thereby adding to expenses each
      quarter). These include any obsolete equipment,
      worstations, servers, intellectual property (i.e., the value
      of an asset such as an application program that you
      intend to discontinue), physical inventory that is being
      discarded or sold (old or discontinued apps etc.). You can
      also write off "in process" R&D costs that would
      otherwise be expensed on developments that you decide to
      cancel.

      The aim of a restructuring charge is to take all of
      your lumps at once, and get it over with, so that
      starting with the next quarter, your P&L are as free from
      unnecessary expenses as possible. This allows a company to
      come "shooting out of the starting gate" with a sudden
      increase in earnings, even if revenue is flat. In Adobe's
      case, this should translate to about a 10% improvement
      in earnings if all other things are
      equal.


      #2) Earnings growth should be strong with Acrobat
      (which as I recall was growing very fast), PostScript
      Extreme (a brand new product that started shipping last
      year - many more OEMs in the pipeline in this arena),
      the new page layout application called K2, and the
      moves Adobe is making to re-purpose technology for
      consumers (like they did with Photoshop, making it into
      PhotoDeluxe), as well as moving into enterprise solutions
      (e.g., headless Photoshop or FrameMaker or Acrobat etc.
      that can be integrated into a larger business intranet
      application). They also have a few other new unannounced (and
      not yet leaked) products in development, but I can't
      talk about those.

    • After I read your post (nice post - bye the
      way!), a few questions came to mind. Hopefully, you can
      provide some more details...

      #1 What are the Q3
      restructuring charges going to be for?

      #2 What ADBE
      products do you think will generate potential earnings
      growth?

    • I haven't heard anything other than the rumor
      here about the possibility of earnings being worse
      than expected for Q3 and the possibility of this being
      leaked. I assume they mean operating earnings excluding
      the extraordinary item - those are all that matter in
      this case.

      I doubt that the operating earnings
      outlook has changed however. For one thing, due to the
      way OEMs report PS licensing revenue, for example,
      they won't know the actual numbers for Q3 internally
      for a while, and this is a big part of overall
      earnings. Also, any estimates that were good a few weeks
      ago should still be on track. Maybe they decided to
      clean house more and toss more stuff into the
      restructuring charge, to be better able to show major
      improvements in Q4, but again this would be good for future
      quarters, and should not be important for Q3.

      If
      investors want to set the price of Adobe based on Q3
      operating or net earnings and completely ignore how they
      are positioned to perform in Q4 and later after
      restructuring, then that's their loss and my gain as far as I'm
      concerned - I can be patient. We'll see how a $1 invested
      in YHOO, AMZN, INTC or ADBE does over the next 6 to
      12 months - my bet is Adobe will outperform all of
      them, even if Adobe doesn't grow top-line
      revenues.

      The tape tells the story. The volume today was pretty
      low, and all the selling I saw were small lots -
      typically 100 to 1000 shares. ATS remained very small. So
      no large institutional selling was going on - just
      no buyers showed up to absorb the selling that was
      going on. Adobe didn't come close to making a new low,
      so support held as well.

      My take is that
      small investors are continuing to reallocate assets or
      get out of the market completely now, and people are
      generally moving to established blue chips that have no
      current problems as a safe haven. Also, I think small
      investors are increasingly internalizing the fact that it
      is unlikely that Quark will acquire Adobe (that
      possibility was adding a lot of support to the price for the
      last few days). With this support dwindling, the price
      should drift lower, and at least re-test support. Since
      both of those effects have nothing to do with the
      future earnings potential of the company, they are of no
      concern to me, and simply create a better short term
      buying oportunity.

    • TraderJim: What's your take re: ADBE's tank ?

    • Someone knows something about the earnings that we don't know?..

    • The RIPs that drive imagesetters, platesetters,
      and direct to press digital printers are entirely
      PostScript based today. Proprietary systems are almost
      completely dead - have been for many many years.


      PostScript, and the newest incarnations, PostScript 3 and
      PostScript Extreme, are controlled by Adobe. Adobe defines
      the language. Any vendor can implement an interpreter
      if they want to, but they don't control the
      standard. In the case of PostScript Extreme, Adobe has a
      multiprocessor implementation that is highly protected, and
      probably will not be cloned.

      PostScript Extreme has
      been adopted by almost all the major (based on size,
      in units) RIP vendors I know, and is the big thing
      right now. Check out Seybold this week and see for
      yourself. Market share in the high end RIP business for
      Adobe is in the range of 80%. I call that control.

    • Exactly how I have felt - Adobe needs to better
      leverage their monopoly they enjoy with Photoshop just as
      Microsoft did with their operating system. Hopefully PDF
      and this new Postcript will help them gain even more
      leverage to encourage users to buy the whole product line.
      Perhaps Adobe will offer nice discounts to Quark users to
      switch in order to gain market share, and then enjoy the
      upgrade revenues later! with good marketing and
      leveraging, Adove should put a dent into Quirk, I mean Quark.

    • I couldn't have said it better!! But there is
      some merit in creating a bundled product like K-2.
      Like Microsoft office, it makes individual products
      like Quark obsolete. I think this may be what is
      worrying Quark. Now, it Adobe could just capitalize on it.

    • Remember also that Adobe controls the publishing
      back-end RIPs, which are increasingly based on PDF
      workflows and will soon be almost exclusively based on
      PostScript Extreme (also PDF based). The integration of page
      layout with imposition, trapping, PDF preflighting,
      editing, and color management will be extremely attractive
      for many graphics users and publishing
      shops.

      ************************************************************

      Adobe hardly "controls" the RIP market. They are one of
      several vendors in a market place primarily dominated by
      proprietary systems. While the PDF market has improved
      slightly in the past year it will take 10 years for Adobe
      to make back what they've invested in the
      technology. As far as I know there are only a couple of
      vendors committed to the Extreme technology, which is
      mostly the fault of the marketing and sales
      folks.

      The future of K2 is hardly as rosy as you paint it.
      I've heard it has some great technology inside it,
      will Adobe know how to get 3rd party developers
      working on plug-ins or will they try and do it all
      themselves? Will it be another failure to turn technology
      into product?

      I was working at a company that
      wanted to bundle in the new PDF library instead of using
      some kludge like DDE to fire up distiller, we were one
      of the first companies to try and use the library.
      Technically it worked great, then we tried to talk turkey
      about costs. Adobe wanted to charge us over 30% of the
      cost of our product to include the PDF library. We
      passed. As usual Adobe's sales & marketing staff failed
      to turn a technology into a product, priced where it
      made sense.

      The core problem with Adobe
      continues to be John & Chuck. They are the only people in
      the company empowered to make product decisions. They
      have never enabled the management under them to make
      the decisions needed to turn a technology into a
      product. Frankly, it's amazing that 2 guys that left Xerox
      because of its inability to turn technology into products
      have developed the same flaw.

      I heard once that
      Adobe only make 3% of its money on new products
      internally developed since 1994. Everything has either been
      upgrades or purchases of companies since
      then.

      They've never shown an ability to manage Wall Street
      expectations.

      Now that most of the Frame people are
      gone what do they have to show for their $500
      million?

      It's time the board kicked them out and turned the
      company over to a businessman. I'd love to see George
      Klaus (ex Frame CEO) get the first whack at it.


      Will Quark buy Adobe? I doubt it unless the stock
      holders let them use Adobe's money to purchase itself,
      but I won't be investing in it until the Chuck & John
      show moves out of town.

    • It's true that PageMaker withered to some degree
      under Aldus, and lost market share to Quark due to lack
      of features, particularly the lack of good plug-in
      feature set. This is largely the result of an old, crusty
      code base, that was designed a long time ago, without
      the benefit of modern application architectures. They
      didn't intentionally design a closed system, as has been
      suggested - it was the difficulty of retrofitting a plug-in
      architecture to the design that was the problem, once that
      type of design became the rage in recent
      years.

      K2 fixes all of that - it's all new from the ground
      up. Once in a while you have to undertake such
      projects, and build a new infrastructure, in order to be
      able to move forward at all. These are huge, complex
      multi-year projects, and that's why a separate team
      continued to work on PageMaker upgrades in
      parallel.

      It would be a grave mistake to underestimate Adobe's
      ability to release a first-class page layout application
      that goes far beyond the abilities of PageMaker and
      Quark, offers far more plug-in functionality than Quark,
      and which integrates closely with Photoshop,
      Illustrator, Acrobat, and PostScript Extreme. Combined with
      Adobe's market clout and brand name, K2 can be a very
      significant threat to Quark. Every Quark user out there is
      going to want to test-drive it, and if they can switch
      relatively painlessly, they have many motivations to do
      so.

      Remember also that Adobe controls the publishing back-end
      RIPs, which are increasingly based on PDF workflows and
      will soon be almost exclusively based on PostScript
      Extreme (also PDF based). The integration of page layout
      with imposition, trapping, PDF preflighting, editing,
      and color management will be extremely attractive for
      many graphics users and publishing
      shops.

      Realistically, Quark won't be crushed anytime soon, and if
      people convert to K2, it will happen over time. But it
      could be a significant conversion in the end, and this
      is what Quark Inc. is concerned about.

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