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Adobe Systems Inc: Is the Stock Still a Buy?

Adobe Systems (NASDAQ: ADBE  ) was in trouble last year when the company announced its Creative Cloud subscription. Customers were criticizing the company's web-based subscription services, and competitors such as Nuance Communications (NASDAQ: NUAN  ) were trying to take advantage by poaching Adobe customers.

However, things have changed for the better this year. Adobe shares are up by more than 20% so far in 2014. Moreover, the company's just-released second-quarter results suggest that it won't be running out of steam anytime soon. Let's take a closer look at Adobe's results and see why it is a good pick.

Robust results
Adobe reported revenue of $1.07 billion, exceeding its internal target of $1 billion-$1.05 billion, and a 16% year-over-year increase in earnings, driven by strong growth in subscription sales. The strong results were on the back of robust performance across key products, including Creative Cloud, Adobe Marketing Cloud, and document services. The company exited the quarter with more than 2.3 million Creative Cloud subscriptions, beating its own target for the quarter.

Adobe plans to expand the core Creative Cloud platform to target hobbyists and consumers, including former Photoshop Elements and Photoshop Lightroom customers. It is also targeting Creative Professionals and CS customers. This move will allow the company to address a larger market.

Digital publishing on a roll
Adobe's digital publishing solutions are gaining traction in the corporate market. Some of its new customers are Booz Allen Hamilton, Dow Jones & Co., Honeywell, and Procter & Gamble. Further, Samsung is willing to support Adobe's digital publishing as the publishing platform for its new magazine service, Papergarden.

Acrobat and Adobe's hosted document services also put in a solid performance. The company partnered with Progressive Insurance through EchoSign to distribute electronic signature solutions to more than 35,000 agencies in the U.S. This solution aims to enable agents to close business faster, easily, and securely.

So, Adobe has put the ghost of the Creative Cloud criticism behind it. The strong adoption of its document services suggests that Nuance and other competitors were unable to hurt Adobe substantially.

Nuance rolled out a campaign and received requests from several higher-education institutions who were unhappy with Adobe's shift from perpetual license to a subscription model. Nuance strengthened its portfolio by launching new products such as PDF Uncompromised. However, Adobe emerged stronger, and it is seeing robust adoption of its document services.

Marketing cloud on a roll
Adobe Marketing Cloud saw strong bookings in the second quarter, driven by Adobe Experience Manager. The company is trying to equip enterprises with the ability to replatform their web infrastructure to deliver personalized, relevant content to customers and provide a cutting-edge mobile experience.

It has created a robust pipeline for Adobe Marketing Cloud among its growing number of partners and direct enterprise customers through the introduction of new core services. Additionally, its focus on innovation in mobile solutions and integration across its Marketing Cloud offerings will make the solution more feature-rich, leading to customer growth. 

A key partnership
Adobe is already seeing success as a result of its product innovation. Recently, it announced a global agreement with SAP (NYSE: SAP  ) . Under this agreement, it will resell Adobe Marketing Cloud with SAP's HANA platform and the Hybris Commerce Suite into a base of 250,000 enterprise customers. In partnership with SAP, Adobe aims to achieve goals such as improved product and solution integration, sales enablement, and partner education. 

The SAP partnership opens up a big opportunity for Adobe. SAP is reporting strong growth in cloud on the back of its HANA platform. It is looking to disrupt the customer relationship management business after acquiring Hybris last year and expanding its e-commerce platform. The company now has more than 36 million subscribers to its cloud applications, and its focus on user-friendly, lightweight applications is clicking well with customers. 

The bottom line
Adobe's performance has been fantastic, and the company is progressing well on the path of improvement. In the next five years, Adobe's earnings are expected to grow at a compound annual rate of 12%, a tremendous improvement from the shrinking profits seen over the last five years. Considering the moves that Adobe is making, there is more headroom to grow and the company will continue its robust performance in the future.

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