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Warnock promised threat was no warning – here it is

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John Warnock, Adobe's chairman, delivered on the warning of lower profits for its third quarter ended 28 August. Net income was just $152,000 on revenue of $223 million, with earnings per share of $0.01. Restructuring costs associated with a 12 per cent reduction of staff were $37 million. Excluding non-recurring costs, the earnings would have been $0.37/share, enough to beat the First Call consensus by 2 cents. Prior to the profit warning, which resulted from a severe Japanese draft that clipped more than $25 million from the year-ago quarter, the First Call consensus had been 50 cents/share. Warnock said: "We have taken the necessary steps to position the company for growth and profitability." What he did not spell out was that Adobe had never undertaken a serious cost-control exercise, because of comfortable 30 per cent growth and profits. A bad quarter provided the excuse. The Adobe board decided to pay $0.05 per share in dividend, since there was some $443 million in cash and short-term investments in the kitty. Sales for the quarter were down about 3 per cent compared with the year-ago quarter. Part of the problem was that Adobe had not delivered any significant product or update in the quarter. A new version of Illustrator is expected this month. Tough competition has arrived from Microsoft's PictureIt, but as the graphics market is expanding, this is less of a problem. So far as the future is concerned, Adobe has increased R&D expenditure, and with its slimmer workforce, appears well-positioned to improve its performance, even if the Japanese market does not recover very quickly. ®

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