Editor's note: An earlier version of this article stated that Mark Garrett was Adobe's CEO. In actuality, Garrett is the company's CFO. We regret the error.

When most people think of Adobe (NASDAQ:ADBE), they think of the ubiquitous Acrobat .pdf files that are slowly taking the place of paper documents in our workday lives. But Adobe is actually much more than just Acrobat; the company operates in five different business segments. On Tuesday, after close of market, we'll hear about all of them when management reports its fiscal first-quarter 2007 earnings numbers.

What analysts say:

  • Buy, sell or waffle? Twenty-eight analysts follow Adobe. Twenty say buy, and the other eight hold.
  • Revenues. On average, they're looking for flat year-over-year sales of $655.3 million.
  • Earnings. Profits are predicted to fall 9% to $0.29 per share.

What management says:
Adobe reported mixed results last quarter, with sales up 34% year over year thanks to the acquisition of Macromedia, but profits down 3% -- thanks in part to stock dilution, in part to charges taken for amortizing the acquisition, and in part to restructuring. The full year's results were similar, but more so: sales up 31% year over year, profits down 31%.

Peering ahead into Wednesday's news, management said back in December that it is looking for $640 million to $670 million in sales (putting analyst "estimates" smack-dab in the middle of the company's own expectations), and $0.28 to $0.30 per share in pro forma profits (likewise). Incidentally, if you're as disillusioned as I am about the whole "pro forma" game, the company's prediction under GAAP was $0.17 to $0.20 per share.

In somewhat more recent news, Adobe got itself a new CFO this quarter, poaching EMC's (NYSE:EMC) Software Group CFO Mark Garrett. Garrett was supposed to take over the post in February, so we should be hearing from him next week.

What management does:
As bullish as analysts remain on this stock, it's got to be worth pointing out that thanks in part to the numerous charges associated with its Macromedia takeover, margins are deteriorating rapidly. The gross margin, which should be largely unaffected by "one-time" charges, has shed more than 500 basis points over the last year. Operating and net margins, where restructuring and other non-cash charges bite deepest, are doing even worse.

Margin

9/05

12/05

3/06

6/06

9/06

12/06

Gross

94.1%

94.3%

92.4%

91.4%

90.1%

89.0%

Operating

36.2%

37.0%

33.0%

33.4%

30.5%

28.8%

Net

29.7%

30.7%

25.9%

23.1%

19.9%

19.6%
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:
Continuing today's margins theme, here's how Adobe predicts fiscal 2007 will play out. Management targets an operating margin of roughly 20% for the first quarter -- so we'll see further deterioration in the table above on Wednesday. Look for the slide to abate later in the year, however, as the full-year operating margin is expected to stabilize somewhere in the mid- to upper 20s.

After reading all that, you probably think I hate the stock, right? Not exactly. Because as little respect as I give to pro forma accounting, I must admit that one thing pro forma gets right, is that it tries to clue in investors when a company is generating more cash profits than its GAAP numbers would suggest. Such is the case at Adobe, which last year generated more than $840 million in free cash flow compared to just $506 million in GAAP net profits.

Why is this important? With the firm only expecting to grow its sales 15% this year, I surely wouldn't call Adobe a bargain, trading as it is at 27 times trailing free cash flow. But the valuation isn't nearly as out of whack as its 47 trailing P/E would indicate. In fact, with a price-to-free-cash-flow-to-growth ratio of 1.8, the stock trades at about the same valuation as rival Microsoft (NASDAQ:MSFT).

For more on Adobe, check out:

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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.