Six short months ago, it looked like old gray mare Adobe (NASDAQ:ADBE) wasn't what she used to be. In the last two quarters, though, the software maker has been acting again like a young colt. The creator of the ubiquitous Acrobat Reader is proving nimble at reinventing its wares and finding new markets for them -- and its maneuvers are being amply rewarded.

Buoyed by 40% growth in Acrobat sales, the company yesterday reported revenue 22% higher than the year-ago period, and earnings that doubled to $0.34 cents a share. Fiscal 2003 will see an 11% sales hike to $1.3 billion and a 39% jump in earnings to $1.10 a share. Looking ahead to 2004, management is aiming for a revenue target of $1.4 billion, up almost 10%, with an impressive 30% net margin.

Before we wax too enthusiastic about the latest numbers, let's not forget that these were easy comparisons with the prior years' poor performance. Last year, top-line growth declined by 5%, accompanied by a 6% drop in earnings. For the past three years, although sales grew by almost 5%, earnings declined by 5%. The real story isn't in the growth rates, but in the way management has turned around performance.

Adobe has proven masterful at uncovering new markets for its mature products. Historic sales have come from "shrink-wrapped" software sold out of the box to retail customers. This past year, though, saw an expansion into the profitable corporate market with a retooled version of the popular Acrobat -- the gold standard for reading and creating electronic documents. This strategy leverages the more than 500 million downloaded copies of the free Acrobat Reader. Proof that it's paying off can be seen by the 42% growth in 2003 sales in this so-called ePaper business, which now accounts for more than a third of revenue.

At the same time, retail customers are migrating to new versions of the company's graphic software, in part because the products are updated and bundled together as the Creative Suite. Finally, taking a cue from chief competitor Microsoft (NASDAQ:MSFT), Adobe hopes to capture the digital photography market with its free download of a scaled-down Photoshop Album.

The market likes what it sees and has been steadily pushing shares higher. With estimated earnings of $1.27 next year and the stock trading at about 30 times that, Adobe isn't cheap. But its strong recovery and creative growth strategies should be convincing evidence that it will be the lead horse in a pack of software makers.

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