Adobe's Strong Foundation: Fool by Numbers

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On Dec. 17, digital media expert Adobe Systems (Nasdaq: ADBE) released fourth-quarter earnings for the period ended Nov. 30.

• Sales and GAAP net income this quarter were both the highest ever reported for one Adobe quarter. Curiously, the company highlighted the revenue record every chance it got, but not so for the income mark. Que pasa, amigos?
• Management expects the operating margin to stay right around 30% throughout the next fiscal year. It's a hefty improvement over 2006, and one of the fattest operating margins you'll find in a software company not named Microsoft (Nasdaq: MSFT), Google (Nasdaq: GOOG), or Oracle (Nasdaq: ORCL).
• Adobe spent $338 million on share buybacks this quarter, nearly exhausting its authorization allotment. So the board slapped another 30 million shares onto the program, or about $1.2 billion at today's share price.

(Figures in millions, except per-share data)

Income Statement Highlights

	Q4 2007	Q4 2006	Change
Sales	$911	$682	33.6%
Net Profit	$222	$183	21.3%
EPS	$0.38	$0.30	26.7%
Diluted Shares	588	602	(2.4%)

Get back to basics with the income statement.

Margin Checkup

	Q4 2007	Q4 2006	Change*
Gross Margin	89.2%	88.3%	0.9
Operating Margin	30.3%	24%	6.3
Net Margin	24.4%	26.9%	(2.5)

*Expressed in percentage points.

Margins are the earnings engine.

Balance Sheet Highlights

Assets	Q4 2007	Q4 2006	Change
Cash + ST Invest.	$1,994	$2,281	(12.6%)
Accounts Rec.	$318	$357	(10.8%)

Liabilities	Q4 2007	Q4 2006	Change
Accounts Payable	$66.9	$55.0	21.5%
Long-Term Debt	$0	$0	N/A

The balance sheet reflects the company's health.

Cash Flow Highlights

	Q4 2007	Q4 2006	Change
Cash From Ops.	$398	$291	36.8%
Capital Expenditures	$28.1	$33.1	(15%)
Free Cash Flow	$370	$258	43.4%
Owner Earnings	$272	$225	20.8%

Free cash flow is a Fool's best friend.

Competitive Context

	Market Cap	Trailing P/E Ratio	CAPS Rating
Microsoft	$323,560	22.7	***
Apple (Nasdaq: AAPL)	$160,780	46.7	****
Adobe	$24,150	37.2	*****
Autodesk (Nasdaq: ADSK)	$11,480	33.9	****
Avid Technology (Nasdaq: AVID)	$1,040	N/A	*

Using the latest reported numbers from Capital IQ.

Keep your partners close and the competition in your vest pocket.

Related Foolishness:

• Foolish Forecast: Adobe Sparkles in High-Def
• The Acrobat and the Ads
• Foolish Fundamentals: Margins

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