Foolish Forecast: Adobe Is a Brick House

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It's time for some color and movement among the somber Wall Street proceedings. On Monday night, we're getting a third-quarter report from Adobe Systems (Nasdaq: ADBE). Can the maker of creative production software follow up last quarter's success with a fresh blowout report? Let's find out.

What analysts say:

• Buy, sell, or waffle? A whopping 29 analyst firms cover Adobe these days, and they seem to like the stock just fine. There are 19 buy ratings, 10 holds, and nary a seller among them. In our own Motley Fool CAPS database, this is a solid four-star stock, based on 740 user ratings.
• Revenues. The Street consensus points to about $789 million, 31% above the year-ago quarter. The official guidance range goes from $760 million to $800 million.
• Earnings. Management tells us to expect between $0.39 and $0.41 in non-GAAP earnings per share, and the analysts have settled on $0.40 per share on average. That's up from $0.29 per share last year.

What management says:
In the last earnings call, President and COO Shantanu Narayen told us to expect continued strong sales of the updated Creativity Suite of software tools that was launched in April. And the higher-margin versions of Photoshop, Flash, Acrobat, and so on are outselling the entry-level packages.

"Version over version, we have experienced a 30% increase in revenue with our CS3 family of products for the same comparable CS2 time period," he said. "We've seen strong demand for Macintosh versions of the software which support the new Intel (Nasdaq: INTC) architecture."

Apple (Nasdaq: AAPL) systems have been the hardware of choice for creative professionals since, well, time immemorial, so no big surprise there.

What management does:
After picking up Macromedia in December 2005, Adobe has rejiggered its operating structure a bit, and the company keeps hiring more and more engineers. But what really matters are the bottom line and cash flows, and Adobe is expanding those margins of late. Add in the recent return of freewheeling revenue growth on the back of that creativity suite, and you have a recipe for near-term success.

Margins	3/2006	6/2006	9/2006	12/2006	3/2007	6/2007
Gross	92.4%	91.2%	89.9%	88.6%	88.8%	88.3%
Operating	32.9%	29.4%	25.0%	22.2%	22.1%	22.4%
Net	25.9%	23.1%	19.9%	19.6%	21.2%	21.4%
FCF/Revenue	33.6%	34.1%	32.7%	32.8%	35.0%	37.4%

Y-O-Y Growth	3/2006	6/2006	9/2006	12/2006	3/2007	6/2007
Revenue	25.2%	27.0%	27.5%	31.0%	19.6%	17.1%

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:
Adobe happens to know a little something about long-term success as well. You don't have to be a huge geek to recognize Photoshop, Flash, or the Acrobat reader, and these packages have become the de facto standard against which other image editors, rich media solutions, and document readers are measured.

And there's more. It would be a sorry Web developer who didn't know anything about Adobe Dreamweaver, and you should know by now that Flash is the technology behind video-sharing services like Google's (Nasdaq: GOOG) market-leading YouTube or Yahoo! (Nasdaq: YHOO) Video.

Both Fireworks and After Effects are standard issue in the special-effects and post-production departments of media powerhouses like Time Warner's (NYSE: TWX) Warner Brothers or News Corp.'s (NYSE: NWS) 20th Century Fox.

So Adobe is perfectly positioned to continue to profit from the online video explosion, as well as the ubiquity of computerized movie effects and the increasingly digital media world in general. The latest round of updated products was met with rave reviews and has only been on store shelves for about six months.

Analysts love the stock, and so do your fellow Foolish investors. In short, what's not to love about Adobe? Not much, I'd say.

Fool on:

• Fellow Fool Ryan Fuhrmann is less bullish on Adobe.
• Buy High, Sell Higher
• Today's Historic Bubble and the One Guarantee