Opinion ID: 653198
Heading Depth: 3
Heading Rank: 2

Heading: The Second Apple Computer Condition

Text: 20 As to the second Apple Computer condition, the plaintiff contends Nakao had no reasonable basis for the $2.10 per share earnings estimate. 21 In Apple Computer, we held that no reasonable basis existed for the speaker to believe the truth of a prediction if the source of the optimism was unrealistic, and not merely uncertain. Apple Computer, 886 F.2d at 1117. The question, therefore, is whether there was a realistic basis for Nakao's $2.10 prediction. 22 Historically, Adobe's earnings had increased incrementally each quarter after the first quarter in a fiscal year. The first had always been Adobe's weakest quarter. In 1987, the year-end earnings were 5.4 times greater than the first quarter; in 1988 they were 5.8 times greater; in 1989 they were 4.8 times greater. Based on these growth patterns, the year-end earnings for fiscal 1990 would have been, respectively, $2.59, $2.78 and $2.30 per share--all higher than Nakao's projection of $2.10. 2 23 The plaintiff contends that Nakao and the defendants had no reason to believe that the historical pattern would hold in 1990. The defendants, however, present four facts which show they had reason to believe that earnings in subsequent quarters would increase and, therefore, Nakao's $2.10 figure was not unrealistic. 24
25 Adobe's 1990 Q1 results were its best ever. Based on quarterly earnings patterns, it was realistic for Nakao to believe that Q2 earnings would be higher than the results for Q1, and that the last two quarters would be even higher. The plaintiff challenges this on the basis that increased costs for the fiscal year would undercut earnings. He points out that Adobe expected to hire new employees during the year, anticipated higher marketing and advertising expenses, and knew there would be higher costs associated with anticipated growth in direct sales revenues. 26 We reject these contentions. They do not demonstrate that Nakao's $2.10 projection was unrealistic. Costs associated with Q1 results were not abnormally low compared to the actual costs of the previous six quarters--all came to about 56% of total revenue. The expected increased hiring did not occur, deferred marketing expenses amounted to only $.02 a share, and it was not unrealistic to assume that expenses attributable to increased direct sales would have the increased sales to offset the higher costs. 27 Even assuming, however, that Adobe was aware higher than usual costs would be incurred for the fiscal year ending November 1990, the following three bases for the belief that the $2.10 projection was reasonable establish, beyond any genuine dispute of a material fact, that the projection was realistic. 28
29 Adobe had reason to believe the Q1 figure of $0.48 would increase in the following quarters because HP became a new customer in Q1. The undisputed facts reveal that there was a major untapped market for HP printers, and the PostScript interpreter performed many more functions than HP's own interpreter. Adobe's optimism about HP was borne out: HP generated additional revenue of over $7 million for fiscal 1990, and one year later Apple and HP were Adobe's largest customers. Nakao could realistically expect higher revenues for Adobe given the new relationship with HP. 3 30
31 It was reasonable for the defendants to believe that IBM's announcement that Adobe's PostScript would be standard in all IBM systems would cause Adobe's product to be increasingly viewed as the industry standard. Given this circumstance, it was not unrealistic to believe that fiscal 1990 earnings would increase as Adobe's product was adopted by more OEMs. The reasonableness of this belief was supported by an analyst's report from Shearson Lehman Hutton and the market's response to IBM's announcement--the six-point surge in the stock price the following day, at the outset of the class period. 32 The plaintiff argues that the failure to quantify expressly the effect of IBM's announcement on revenues rendered the use of the IBM endorsement in a specific earnings projection unreasonable, or at least requires a trial to resolve the question. We reject this argument. There is no authority requiring such quantification. Indeed, Apple Computer holds that the basis for the prediction need not be certain, but only realistic. Apple Computer, 886 F.2d at 1117. 33
34 Adobe had launched four new products that would produce additional revenues in the last three quarters of fiscal 1990. No evidence in the record shows that Adobe did not reasonably believe its new products would generate higher earnings. See Hanon, 976 F.2d at 501. Optimism for the earning potential of these new products was later substantiated by the profits they generated in fiscal 1990. Adobe Photoshop generated $6.5 million; Adobe Type Manager Windows Version generated $1.5 million; Adobe Illustrator 1990 Revision generated $5 million; and a PostScript cartridge available to consumers owning the HP LaserJet II printer generated $3 million. 35 In sum, any one of the three undisputed facts showing Adobe's revenues would increase in fiscal 1990 provide a reasonable and realistic basis for Nakao's $2.10 earnings estimate. These facts render any factual dispute about the alleged understatement of Adobe's costs in Q1 immaterial. Adobe's implied factual assertion that there was a reasonable basis for the $2.10 estimate was not inaccurate. See Hanon, 976 F.2d at 501. 36 We conclude that the plaintiff has failed to present a genuine issue of a material fact to dispute that there was a reasonable basis for Nakao's belief in his $2.10 per share earnings estimate.