Foolish Forecast: Adobe Serving Up a Fiesta

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Thursday night, digital media software powerhouse Adobe Systems (Nasdaq: ADBE) will report earnings for Q4 and fiscal 2006, and the Fool is here to draw a background for the event.

What analysts say:

• Buy, sell, or waffle? Twenty-nine Wall Street analyst firms follow Adobe these days. The sentiment among them is pretty positive, with 19 buy ratings, one sell, and nine hold. It's a three-star stock in Motley Fool CAPS, with 79 all-stars giving it a thumbs up and five of their peers turning the stock down.
  
  
• Revenues. Analysts expect $670 million in Q4 sales, up from $510 million one year ago. If you include recent acquisition Macromedia's results in the 2005 figures, there would have been a combined $638 million in revenues.
  
  
• Earnings. The average forecast calls for Q4 earnings of $0.33 per share, or roughly $193 million. Last year, Adobe managed a $0.30 EPS take on its own, or $156 million, while Macromedia raked in $20.3 million in net profit.

What management says:
CEO Bruce Chizen said in the latest earnings conference call that his company is entering a "very exciting time." Macromedia has largely been integrated into operations, and there's a host of new products to get excited about. That includes consumer versions of Photoshop -- the leading image editing software -- and video editing package Premiere, as well as updates to Acrobat and Flash that reach into the business world. Acrobat's PDF files have long been a favorite format for distributing official documents, and Macromedia's flagship Flash is moving from just an animation platform into a leading role in video distribution. Did you know that MySpace, YouTube, and Google (Nasdaq: GOOG) Video clips all run on a Flash applet in your browser?

What management does:
The Macromedia acquisition brought down margins a bit, but I'm inclined to forgive that faux pas. Adobe bought a very impressive product that should give a kick to the bottom line soon enough.

Margins	6/05	9/05	12/05	3/06	6/06	9/06
Gross	94.0%	94.1%	94.3%	92.4%	91.4%	90.1%
Oper.	35.5%	36.2%	37.0%	33.0%	33.4%	30.5%
Net	28.8%	29.7%	30.7%	25.9%	23.1%	19.9%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
The combination of Adobe and Macromedia makes for a powerful presence in digital media editing. It's not that there's a lack of competition -- it's just that Dreamweaver, Flash, Premiere, and Photoshop all are best-of-breed products with large and loyal user communities. Then again, the stock is priced to match that dominant market position, with a Google-esque P/E ratio of 47.6. Considering the roller coaster drawn up on the company's stock price charts, perhaps we should wait for some bad news before buying in. Will that happen this week? Not likely, since there were no interim warnings from the usually guidance-happy company. Stay tuned for the real-world numbers, though.

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Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure dominates every market it enters. The Cartoon Network hit Foster's Home For Imaginary Friends is the first cartoon series produced in Flash, you know.