Foolish Forecast: Adobe Sparkles in High-Def

Digital media creation comes naturally to Adobe Systems (Nasdaq: ADBE). Come Monday evening, we'll see whether profits come just as easily. Have a look at last quarter's outstanding numbers and a synopsis of the earnings call. When you're done, there will be a Fool waiting for you with an updated business outlook.

What Fools say:
Here's how Adobe's Motley Fool CAPS scoring rates against some of its peers and competitors:

	Market Cap (millions)	Trailing P/E Ratio	CAPS Rating
Apple (Nasdaq: AAPL)	$166,910	48.50	****
Adobe	$24,710	38.00	*****
Autodesk (Nasdaq: ADSK)	$11,510	34.00	****
Nuance Communications (Nasdaq: NUAN)	$3,690	N/A	****
Avid Technology (Nasdaq: AVID)	$1,070	N/A	*

Data taken from Motley Fool CAPS on 12/14/2007.

There's plenty of love to go around for companies in the digital media space. Even so, Adobe stands out from the pack with an unbeatable five-star CAPS rating. The bearish crowd thinks that it's a brilliant company with an overpriced stock, while the bulls simply stick with the dominant market position in sectors like desktop publishing, video editing, and graphic design. And did you know that Adobe's Flash product powers Google's (Nasdaq: GOOG) YouTube video player? Our CAPS players know, and they love it.

What management says:
Longtime CEO Bruce Chizen is out, retiring at the tender age of 52. His replacement is former COO and president Shantanu Narayen, who recently told Businessweek that Adobe's CEO position is his dream job. "We are one of three or four companies in the world who can make the Web experience better than it is today," he said.

What management does:
This is fun to follow. Down, sideways, down go the margins, until POP! Last quarter happened. Over the summer, Adobe released fresh versions of nearly every major software package it sells, and the release of pent-up demand really shows. Management expects that momentum to carry over comfortably into this quarter.

Margins	6/2006	9/2006	12/2006	3/2007	6/2007	8/2007
Gross	91.2%	89.9%	88.6%	88.8%	88.3%	88.5%
Operating	29.4%	25.0%	22.2%	22.1%	22.4%	25.4%
Net	23.1%	19.9%	19.6%	21.2%	21.4%	23.4%
FCF/Revenue	34.1%	33.2%	32.8%	35.0%	37.4%	41.7%

Growth (YOY)	6/2006	9/2006	12/2006	3/2007	6/2007	8/2007
Revenue	27.0%	27.5%	31.0%	19.6%	17.1%	21.9%
Earnings	1.9%	(14.5%)	(16.1%)	(2.1%)	8.4%	43.0%

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:
New management can sometimes be a headache, but not when the new CEO has been COO for two years already. Narayen knows the business like the back of his eyelids, and should hit the ground running. In any case, Chizen left with only a couple of weeks remaining in the quarter, so any changes in the company's direction shouldn't have an impact quite yet.

So it comes down to whether Adobe's updated software stands the test of time, and if sales can meet the steep expectations that were set up by last quarter's rocking results. If mighty Cisco (Nasdaq: CSCO) had to slow down because its customers weren't into upgrading their technology assets in these uncertain financial times, then surely Adobe faces the same concerns. And the writers guild strike means less new production going on in Hollywood and Rockefeller Center, so the video tools in major studios might not get upgraded right now.

Then again, the Web is always growing and screaming for more and better-looking content. Hello DreamWeaver, Photoshop, Acrobat, and Flash! All in all, I don't see any reason to panic. Adobe is looking as strong as ever.

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