As I scribble this, I happen to be sitting in a building containing dozens of image processing computers, every one of which runs a half dozen Adobe Systems
Life is good for the makers of Photoshop, Acrobat, etc., as evidenced by yesterday's press release. The third quarter brought in $407 million to the top line, a 27% increase from the prior year. Investors will want to keep in mind that $10 million of the increase was "photoshopped" in via an accounting change that reclassified revenue to a daily basis from the previous monthly recording scheme. Still, the bottom line grew a healthy 55% for shareholders, reaching $0.42 per share.
How did Adobe do it? How about 94.2% gross margins, for starters? That's not only huge, it's 1.1% better than the year before. Operating income was up to 34.8% from 28.9%.
The conference call (transcript provided by CCBN Street Events) was a doozy. CEO Bruce Chizen waxed so enthusiastic about future prospects that management felt it necessary to release a retraction. It's easy to understand Chizen's excitement. With a return on equity better than 30%, this company gets great mileage out of its earnings.
The only question for prospective shareholders is, "How much should I pay?" That's tougher to answer. The firm has put up $435 million in free cash flow so far this year, meaning the run rate for the full year could approach $560 million. Shedding the firm's $1 billion in cash and short-term equivalents yields an enterprise value-to-free cash flow ratio near 24.
That seems pricey for a mature company, even one growing at Adobe's rate. It might help explain why shares are only now beginning to climb above the high $40s reached nearly a year ago. But the so-called tech slowdown hasn't blurred the firm's focus, so interested investors with a long time frame may want to consider a position even at these levels.
For related Foolishness:
- Does Adobe help people trash their Xerox
- See how the firm may capitalize on digital video.
- Check out Adobe's prior cash bash.
Seth Jayson still wonders why Indesign chokes on his old Quark Xpress files, but at the time of publication, he had no position in any firm mentioned.
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