When most people think of Adobe (NASDAQ:ADBE), they think of the ubiquitous PDF files that seem to be slowly taking the place of paper documents in our workday lives. But Adobe is much more than just Acrobat; the company operates in five different business segments. Tomorrow after the market closes, we'll hear about all of them when the company reports its fiscal Q1 2006 earnings numbers.

Wall Street Wisdom:

  • General consensus. Of the 21 analysts tracking Adobe, a full dozen rate the stock a buy. Eight more give it a hold rating, and only one says the stock is a sell.
  • Revenues. Analysts expect the company to report a 38% rise in quarterly revenue tomorrow, to $650.3 million. Much of this growth, one would think, derives from Adobe's acquisition of Macromedia, which was completed in December 2005.
  • Earnings. Per-share profits, however, are expected to rise by only 7%, to $0.29 per share.

Margin watch:
Fools drool over Adobe's margins. With a gross margin consistently in the 90s, operating margins in the mid-30s (and improving), and net margins in the upper 20s (also improving, and breaking the 30% barrier on a rolling basis just last quarter), this company is practically printing money.

Margins %

9/04

12/04

3/05

6/05

9/05

12/05

Gross

93.7

93.7

93.8

94

94.1

94.3

Op.

35.1

35.5

34.9

35.5

36.2

37

Net

26.3

27

27.9

28.8

29.7

30.7
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish lookout:
Or at least it was, until this quarter. There are several things you need to keep in mind if you're to make sense of tomorrow's numbers -- and the market's reaction thereto -- and all of them are related to the Macromedia acquisition:

  • First, profits. The $0.29 that analysts are looking for is a "non-GAAP" number, excluding certain costs, chief among which will be costs and non-cash charges related to buying Macromedia. Under generally accepted accounting principles, Adobe itself expects to earn only $0.13 to $0.16 per share.
  • Likewise with margins. Non-GAAP, Adobe's looking to post a 35% or 36% operating margin. Under GAAP, the operating margin should fall below 20%.
  • Adobe's per-share earnings will decline substantially as a result of share dilution. Shares outstanding are expected to rise from about 486 million last year, to about 618 million tomorrow.

Competitors:
Adobe runs with the big dogs. Its chief competitors are Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), a Motley Fool Inside Value recommendation.

Fool contributorRich Smithhas no interest, short or long, in any company named above.