Thursday will be the last report by virtual paper king Adobe (NASDAQ:ADBE) before its merger with Flash creator Macromedia. That deal closed Dec. 2, but not before Adobe closed out its fiscal fourth quarter of 2005.

Not that Adobe will need Macromedia's help tomorrow. Analyst projections suggest that Adobe will hit very near the top of its September guidance of $490 million to $510 million in revenues for the quarter. They predict it will achieve 32% earnings growth to post $0.29 in per-share, diluted profits (that one's at the very top of the company's earnings guidance).

Now here's the interesting thing on the earnings front. So far this year, Adobe has already posted $0.88 per share in profits (according to Capital IQ). Add $0.29 to that number for the quarter just ended, and the company looks likely to surpass analysts' target of $1.12 per share in profits for this fiscal year.

By all accounts, the company's firing on all cylinders. And as far as I can tell, there's only one real issue with its numbers that investors might want to hone in on Thursday afternoon. That's the divergence between free cash flow and net profits -- or rather, the lack thereof.

Over the past three quarters, you see, free cash flow and net earnings have been roughly equal. Ordinarily, that would be a good thing, but in Adobe's case, it's a relative bad thing. You see, prior to this year, in every single quarter through the beginning of 2003, Adobe generated considerably more free cash flow than it posted as GAAP net earnings. That began to change in mid-fiscal 2005, as the company's accounts receivable (A/R) growth began to outpace its sales gains as follows:

  • 44% A/R growth vs. 20% sales gains in fiscal Q3.
  • 45% vs. 21% in fiscal Q2.
  • Just 7% vs. 12% in fiscal Q1.

Mind you, this isn't what we'd call a "red flag" yet. The company still generates a bit more free cash than it does "accounting profits" ($471 million to $447 million, year to date). But the trend is moving in the wrong direction as Adobe lets its uncollected accounts pile up.

The good news: If Adobe gets a bit tougher with its customers and begins demanding that they pay up a bit faster, its free cash flow could surge.

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Fool contributor Rich Smith has no position, long or short, in Adobe.