Halloween and Adobe (NASDAQ:ADBE) go hand-in-hand. How else could you turn pictures of your spouse into a vampire or view all the spooky Flash animations that flood the Web? Yet while we all get lost in the Halloween mayhem of buying candy and finding costumes, there may be another treat in store (one that doesn't have you wandering among cobwebs, plastic cauldrons, and fake teeth accessories): a strength potion called Adobe.

In the software realm, Adobe is a force to be reckoned with, offering an expansive array of software catering to creative professionals, consumers, enterprises, and beyond. And throw the recently acquired Macromedia into the mix and sparks are flying. The products you are most familiar with are Acrobat, Flash, and Photoshop.

The "good" candy
Adobe's financial statements are anything but frightful. According to Capital IQ, sales have grown 19% annually over the last three fiscal years. Net income increased even faster at 47% during the same period of time. On top of that, the company has never held debt on their balance sheet . ever! Not howling at the moon yet? Well consider that Adobe has generated tremendous free cash flow. Over the past five years, free cash flow has been the following (dollars in millions):

FY 2001

FY 2002

FY 2003

FY 2004

FY 2005






Source: Capital IQ, a division of Standard & Poor's.

What's even better is that these free cash flow numbers make up anywhere from 26%-37% of total revenue. Talk about wicked positioning! Free cash flow for 2006 is right on track, with $549.1 million accumulated during the first three quarters.

A bubbling cauldron of ideas
Adobe's strategy is to diversify and conquer. Two of its major initiatives focus on areas that have not traditionally been identified with Adobe products: the video realm and publishing to non-PC devices. As witnessed by the recent Google (NASDAQ:GOOG) buyout of YouTube, the online video marketplace is booming and Adobe is well positioned with their Flash multimedia player. Many websites (including YouTube) are using Flash players over Apple's (NASDAQ:AAPL) QuickTime or Microsoft's (NASDAQ:MSFT) Windows Media Player.

During Adobe's 2006's Q3 conference call, Adobe discusses how they are well positioned to benefit from this video phenomena through video editing software and server technology. A Jupiter report referenced during the conference call finds that advertisers will increase their spending on video content by a CAGR of 27%. It is this video explosion and Adobe's influence on the video industry that helped grow Adobe's digital imaging and video 39% year over year in Q3. Adobe also recently announced the acquisition of Serious Magic, which "strengthens Adobe's leadership position in video software -- for both video professionals and consumers." If this is any indication of what Adobe will be capable of, well, video on!

Adobe has also been making strides for non-PC devices, especially mobile phones. By purchasing vector graphics software developed by Actimagine, Adobe hopes to "extend the reach of Adobe mobile technologies, including Adobe Flash Lite, to high-volume, mass market devices." And it's done just that. Here in the U.S., Verizon Wireless is the first cell phone carrier to offer phones with Flash enabled mobile applications.

Overseas it is witnessing tremendous success with NTT DoCoMo's i-channel, powered by Adobe FlashCast, to the tune of more than 200 million subscribers as of April. Samsung's next generation of phones will also be integrated with uGo Active, a home screen based on Adobe Flashlight 2 technology. Clearly, phone trends are leaning toward Flash and with the mobile and device solutions segment currently only contributing 1% of total revenue, there may be great potential for Adobe in the mobile market.

Adobe has also set the stage for the "killer release" (as worded by CEO Bruce Chizen) of Creative Suite 3.0 (CS3) slated for spring of 2007. Since over 50% of Adobe's revenue comes from Creative Solution products, the release of this powerhouse bundle is important. Adobe has already noted the anticipated lag in sales of their other Creative Solutions software in the following quarters as many await this release. CS3 will mark the first merged collection of Adobe and Macromedia products that are also Mactell compatible. The functionality of crossing the two design camps and creating compatible file formats should allow consumers to work in more mediums, which is another reason why Adobe is increasing its video and non-PC device capabilities.

So who invited Microsoft to the party?
There has been speculation that Microsoft's launch of Vista will harm Adobe's business, especially with the rumored ability to create PDF files with Microsoft Office 2007 software. While this may occur, Adobe points out that their software has many additional features that would give them a significant edge -- capabilities like a digital signature, highlighting, and annotations. And with the available information that Microsoft has provided, Adobe states there that the "current version of the Adobe products will work just fine in a Vista environment." Stay tuned for the news on this, as McAfee (NYSE:MFE) has already cried foul on Microsoft.

Adobe, carve away
Adobe's growth has been profound. It has captured users from every software audience, acquired other companies to create a stronger presence, and strategically diversified into other digital markets and mediums. And its products are worthy of the spotlight. Earlier this year, Adobe's stock price dropped nearly 40%. But with anticipated releases and innovations, the stock has recovered much of its losses and should have the ability to climb past its previous highs. Who knows? Maybe by next Halloween, you could take that Michael Jackson Thriller zombie picture, animate it into an embarrassing Flash video of your friends as zombies, and send it to every contact on your cell phone. If you do, please send me a copy!

Microsoft is a Motley Fool Inside Value recommendation, and McAfee is a former Stock Advisor selection.

Foolish contributor Katrina Chan has her costume lined up for Halloween and has been known to create personalized humorous birthday cards using Adobe products. She does not own shares in any company mentioned, but has given Adobe the thumbs up in CAPS. The Motley Fool has a disclosure policy that even a werewolf would howl at.

The Motley Ghoul's Tricks or Treats represents the opinions of each Fool only and should in no way be taken as the opinion of either The Motley Fool, Inc., or any company in question, or as representative of anyone or anything other than that specific Fool's thoughts. So do your homework, and review The Motley Fool's disclosure policy .