A Tale of Two Tech Stocks: Adobe and Oracle

I listened to two analyst conferences last week. Each was interesting in its own way. Adobe (ADBE) had its conference on March 17, 2009, for its 1st quarter of fiscal 2009, ending February 27, 2009. Oracle (ORCL) had its conference on the 18th, for its third quarter of fiscal 2009, ending February 28.

You can read my extensive notes on the conferences, including the questions asked by analysts, at:

Adobe analyst conference summary for Q1 2009
Oracle analyst conference summary for Q3 2009

Neither company was acting much like a growth stock in the latest quarter, but both did pretty well considering how the global economy has tanked. Oracle revenues were up 2% from the year-earlier quarter. But that flatness hides the fact that Oracle was doing better in mid 2008, so it appears to have come off the top of a wave.

Oracle management talked a lot about exchange rates, how they did really well in the quarter if you ignore the effects of exchange rates. They explained that they manage the company based on constant U.S. dollars. Which sounds something like fiction when the tale is told to an American investor. Maybe my memory is weak, but I don't recall them putting such emphasis on exchange rates when the dollar was low, and so caused them to have strong quarters from Euros and Yen being converted into dollars. The reality is if the Euro is low, they could compensate by jacking up prices in Europe. Probably it is better to keep the customers happy, that is what I would try to do, but I would not pretend I had a great quarter when my receipts from outside the U. S. were down so much, no matter what the cause.

Mind you, Oracle is a great company. When they saying they are taking market share from SAP, IBM, and Microsoft, they are not kidding. They have found a way to build on their success of their database products. No competitor has been able to match their strategy of buying companies that have technologies that can be sold as add ons to current Oracle customers. They claim there is much interest in new products like Fusion middleware and the Exadata system.

Adobe is another great company, but they have been hit harder by the economy than Oracle. Revenues were down 12% from a year ago despite the introduction of CS4, which in normal times would probably be selling far better.

Adobe has always charged a premium price for premium products. Enterprise demand remained strong, they said. But the little guys apparently decided that in these uncertain times Creative Suite 3 was good enough for now. The cost of buying Adobe products, or even of upgrading them, is significant for professionals. The software costs more than the computers that run it.

But you know what will happen. The amateurs may find a way to make do, but all the pros will want CS4. They know that if they don't pay to upgrade to CS4, eventually they will fall behind their competitors and lose their right to upgrade to CS5. To the extent that this economic shake out causes people to leave the computer graphics business, Adobe will be hurt. But the most likely scenario is that the need for graphics professionals will grow, and sooner or later they will budget the money for upgrades. So I expect that as soon as the economy shows some life, Adobe will recapture any money it did not make last quarter. The world can no longer live without Photoshop, Acrobat, and Flash.

Adobe (ADBE) CS4 Failure to Launch?

Adobe (ADBE) at its analyst conference yesterday reported that fiscal Q4 2008 revenues were barely above those of the year-earlier quarter. Profits increased due to cost cutting.

While other segments increased sales year-over-year, flagship Creative Suite 4, or CS4, revenues were down 11% from year-earlier. Management also commented that compared to the launch of CS3, sales were running 20% slower. Management claimed that this was entirely due to the poor external economy. During the question and answer period several analysts asked if CS4 sales might be lagging because it is not a compelling upgrade to CS3. Management insisted that it is the best productivity enhancer since the invention of computer graphics, that everyone loves CS4, they just are slow to upgrade because of the cost.

Management is probably right on this. There really aren't any good alternatives for professional graphics people. People hate the high price of Adobe products, and they hate being squeezed by the upgrade cycle, but they hate being at a professional disadvantage to those who have upgraded even more. If there is any problem for CS4, it is that in a recession a large number of graphics and Web designers will lose their jobs or their clients. With the newspaper industry threatening to disappear in its entirety, and CS4 making the remaining graphics humans so much more productive, it could be that the CS4 client base will shrink permanently.

Future growth may come from the numerous other Adobe web initiatives. This is a company that knows how to innovate and squeeze money out of its customers (I point that out only because so many highly innovative technology companies lately have not been able to figure out how to make their customers pay for innovation). Case to point is video delivery over the Internet. A few years ago this was done mainly through Apple and Microsoft products. Now it is mainly done with Adobe Flash.

I agree with management that when this recession is over, Adobe will do better, but then I could say that of every company in the world right now.

For a full report on the financials, see my Adobe analyst conference summary for fiscal Q4 2008.

I don't own stock in Adobe. I do use Adobe products. I sometimes work for Adobe competitors and in the past have worked on books about Adobe products.

More data:

www.adobe.com