When Adobe acquired Macromedia in a $3.4-billion, all-stock pairing last year, Corel, Microsoft, and Quark must have cringed.

For Adobe, the Macromedia merger ended years of competition between the two design rivals. With the merger, Adobe picked up Macromedia’s prowess in web development software, namely its Dreamweaver and Flash products. And the Macromedia product line benefits from linking up with Adobe’s strength in graphic software.

The combination seemed like a match made in heaven, but it also raised the question of whether Adobe Systems could reap financial benefits from the merger. Will the marriage work out, or will the happy couple require years of financial therapy at the expense of stockholders?

Last month, Adobe reported second-quarter net income fell to $123.1 million from $149.8 million a year earlier. However, excluding one-time items, earnings per share were $0.31, a penny better than Wall Street expected.

Sales rose to $635 million—shy of the company’s target range of $640 million to $670 million—from $496 million a year ago. For the third quarter, Adobe has set guidance for revenue of $580 million to $610 million.

Sales rose to $635 million—shy of the company’s target range of $640 million to $670 million—from $496 million a year ago. For the third quarter, Adobe has set guidance for revenue of $580 million to $610 million.

Atlantic Equities analyst Christopher Hickey wrote in a recent report that the lowered third-quarter guidance looks realistic, and that product releases show potential for Adobe. "We expect sentiment toward Adobe to improve ahead of the launch of Acrobat 8 in Q4 06 and Creative Suite 3 in spring 2007," Hickey wrote.

Atlantic Equities analyst Christopher Hickey wrote in a recent report that the lowered third-quarter guidance looks realistic, and that product releases show potential for Adobe. "We expect sentiment toward Adobe to improve ahead of the launch of Acrobat 8 in Q4 06 and Creative Suite 3 in spring 2007," Hickey wrote.

In the long term, Adobe's acquisition of Macromedia is a good purchase, Cowen and Company analyst Walter Pritchard said. He, too, said that the planned releases of Creative Suite 3 and Acrobat 8 in November and May, respectively, could provide some momentum for the company down the road.

In the long term, Adobe's acquisition of Macromedia is a good purchase, Cowen and Company analyst Walter Pritchard said. He, too, said that the planned releases of Creative Suite 3 and Acrobat 8 in November and May, respectively, could provide some momentum for the company down the road.

“Right now the numbers aren’t that exciting; they look pretty stagnant,” Mr. Pritchard said. “From an earnings perspective [the merger] has probably hindered them more than it’s helped them in the first few quarters. It’s typical in an acquisition like this; you take a penalty up front. [But] this is a deal that I think will yield a long-term benefit.”

“Right now the numbers aren’t that exciting; they look pretty stagnant,” Mr. Pritchard said. “From an earnings perspective [the merger] has probably hindered them more than it’s helped them in the first few quarters. It’s typical in an acquisition like this; you take a penalty up front. [But] this is a deal that I think will yield a long-term benefit.”

Flashing and FlexingA few days ago, Adobe took the next big step in integrating the two company's product lines and releasing significant updates of Macromedia-born Flex and Flash Player.

Flash Player, which enables delivery of animated, interactive web pages, has a new behind-the-scenes script in its Flash Player 9 release that’s available to download.

Released separately, Flex 2 is built on the Eclipse platform and is designed to help web developers create applications. While the tools of Flex’s earlier version have undergone makeovers, the most notable product tweak is its revamped price strategy.

Adobe is taking the free software route. Along with the Flex 2 release, Adobe is making its Software Development Kit available for free to encourage development of more Flash applications. The kit includes the tools required to compile hand-coded applications into a Flex file that can be played in the Flash Player.

The company hopes this will boost the number of Flex developers from several thousand to 1 million over the next five years.

The company hopes this will boost the number of Flex developers from several thousand to 1 million over the next five years.

It falls into a strategy of trying to entice developers into a tiered pricing system, one where developers might later be tempted by Flex Builder 2.0, a development tool that, like Dreamweaver, offers a visual editing window.

“Anytime you offer customers more choice in terms of bundles or tiering the pricing, if it’s done in a way that doesn’t cannibalize different segments of the product, it’s the right decision,” said Mr. Pritchard.

The next step up, Flex Builder software starts at $499. Additional features such as charting are available in a package for $749. And for $20,000 per installed seat, a company can purchase Adobe Flex Data Services 2.Befriending the EnemyOn another front, Flex-competing technology Ajax offers other options in back-end development. Developers say that both Ajax and Flex technologies have strengths and weaknesses. So Adobe has sought to bring Ajax users to Flex, creating a bridge that allows developers to use Ajax in Flex-built applications.

“Ajax, for some folks, is considered an alternative, but we see ourselves as complementary to Ajax,” said Sydney Sloan, Adobe Group product marketing manager. Yet developers seem to be lined up on both sides watching, unsure which company will take the lead.

Laura Arguello, a founder of Orange County-based Blue Instant, a company that created one of the winning applications in Adobe’s Flex Derby competition, sees such tools popping up all over the place.

Laura Arguello, a founder of Orange County-based Blue Instant, a company that created one of the winning applications in Adobe’s Flex Derby competition, sees such tools popping up all over the place.

“I think Flex has a lot of potential,” Ms. Arguello said. “I would really like to see it be successful, but there is so much going on, like Ajax. [Flex] will play a big role, but I don’t know who is going to win.”

Mobile AdobeBuying Macromedia’s web development tools also fits into Adobe’s plan to become a leader in creating interactive content for mobile technology.

In April, Adobe announced an alliance with Verizon Wireless to offer Flash-enabled handsets. Flash Lite 2, released earlier this year, is a Flash Player for non-PC devices. According to Adobe, more than 45 million Flash technology-enabled mobile phones and consumer electronics devices have shipped worldwide, including televisions, media players, set-top boxes, digital billboards, cameras, educational toys, and car navigation systems.

In April, Adobe announced an alliance with Verizon Wireless to offer Flash-enabled handsets. Flash Lite 2, released earlier this year, is a Flash Player for non-PC devices. According to Adobe, more than 45 million Flash technology-enabled mobile phones and consumer electronics devices have shipped worldwide, including televisions, media players, set-top boxes, digital billboards, cameras, educational toys, and car navigation systems.

Flex technology cannot yet be used for building applications to play on Flash players for mobile phones or devices. But look for that next.

Flex technology cannot yet be used for building applications to play on Flash players for mobile phones or devices. But look for that next.

Contact the writer:ADeMonte@RedHerring.com