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ValueAct lowers stake in Adobe Systems

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ValueAct and Adobe Systems

ValueAct Capital has filed a Form 4 with the U.S. Securities and Exchange Commission on Adobe Systems Inc. (ADBE) revealing that the fund owns 16,300,000 shares in the company. The position has been lowered from 23,860,116, according to the fund’s 3Q14 filing in November. Adobe accounted for 11.1% of the fund’s total portfolio in 3Q14.

ValueAct acquired a 5% stake in multimedia specialist Adobe Systems in 2011 and increased that stake to about 6.3%. In December 2012, Adobe announced a “standstill agreement” to add ValueAct partner Kelly Barlow to Adobe’s board and limit its purchase of shares in the software maker. Adobe said its management has “talked frequently” with ValueAct and found “their input on business and strategy to be helpful.”

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Overview of Adobe

Adobe Systems Inc. (ADBE), founded in 1982, is a diversified computer software company that makes software solutions for network publishing including web, print, video, wireless, and broadband applications. Adobe has a highly varied base owing to its diversified presence in creative and digital software. These are its business segments:

  • Digital Media – This segment provides tools and solutions that enable individuals, businesses, and enterprises to create, publish, promote, and consequently monetize their digital content anywhere.
  • Digital Marketing –This segment provides solutions and services for creating, managing, and executing advertising and marketing initiatives.

Adobe sees contraction in operating margins

Adobe has benefited from a shift to a monthly subscription sales model to offer Creative Cloud and Marketing Cloud. More customers adopt products that can be easily acquired over the Web or cloud. Other vendors, such as Microsoft Corporation, Oracle Corporation, and SAP AG, have also moved to the cloud in the face of competition from companies such as Workday and Salesforce.com.

While subscription revenues have grown, margins have declined due to increased investment in R&D (research and development) and SG&A (selling, general, and administrative costs) involved with its transition to the cloud.

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Latest 4Q14 results announced in December beat estimates. The company reported revenue of $1.073 billion, near the high end of the targeted range of $1.025 billion to $1.075 billion. It added 644,000 net new Creative Cloud subscriptions in the quarter. Its net income grew slightly to $73.3 million, or $0.14 per share, from $65.3 million, or $0.13 per share, a year earlier. In fiscal 2014, revenue grew around 2% to $4.15 billion.

Adobe acquires Fotolia

Adobe announced the acquisition of privately held Fotolia, a leading marketplace for stock content. A release said Fotolia will be integrated into Adobe Creative Cloud. It will provide current and future Creative Cloud members with the ability to access and purchase over 34 million images and videos, significantly simplifying and accelerating the design process.

ValueAct’s quarterly filings

The fund’s latest 13D amendments include MSCI Inc. (MSCI), Allison Transmission Holdings (ALSN), Armstrong World Industries (AWI), and Rockwell Collins (COL).

The fund also updated its positions in Adobe Systems Inc. (ADBE) and Valeant Pharmaceuticals (VRX) via a Form 4 filed with the U.S. Securities and Exchange Commission. Notable new positions in 3Q were Agrium (AGU) and 21st Century Fox (FOXA). The fund exited a position in Dresser-Rand Group (DRC).

The next part of the series will review the fund’s 3Q14 13F filing, beginning with a new position in 21st Century Fox (FOXA).

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