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Tickers in this Article: ADBE, AAPL, MSFT, GOOG, RIMM, NOK, PALM
Software companies inevitably sow the seeds of their own destruction. If a company develops a good product and "proves" that a market is lucrative, competition is sure to come running. Worse still, big companies are by their very nature not as nimble or risk-tolerant as start-ups, so there is always a host of wannabes nipping at the heels of successful companies.

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Despite all of that, Adobe (Nasdaq:ADBE) has managed to become the acknowledged top dog in a market segment that is still poised for strong growth. Better still, the company seems to be navigating the latest prophecies of doom pretty skillfully.

The Quarter That Was
Adobe delivered better-than-expected revenue for the May quarter, with revenue of $943 million versus the Wall Street guess of $906 million. Even excluding the acquisition of Omniture, Adobe delivered growth in excess of 20% - not bad at all for a company that has been delivering in excess of $1 billion in revenue for well over a decade.

There was less good news, however, below the top line. Gross margin dropped more than 100 basis points from the year-ago level, and operating margin fell about 120 basis points. This does not exactly fit a trend, as the company's margins have bounced around quite a bit from year to year, but it is nevertheless something that institutional investors will almost certainly focus on for the near-term. (For related reading, see The Bottom Line On Margins)

Great Businesses, Huge Competitors
There is no question that Adobe has some fantastic fortress businesses - Creative Suite (including Photoshop) and Acrobat are both dominant in their respective fields. The question in front of management now, though, is whether they can maintain Flash in the face of competition from HTML5 and whether they can play a significant role in mobile devices.

Apple (Nasdaq:AAPL) has been working hard to keep Adobe off its platforms, and Microsoft (Nasdaq:MSFT) would certainly like to get the lion's share of whatever Apple leaves behind. Now, Apple's decision could ultimate run afoul of antitrust laws (the Federal Trade Commission is supposedly investigating) and Apple may also find that it is turning too many former friends into enemies - competing simultaneously with Google (Nasdaq:GOOG) and Adobe is not likely to be high on the list of suggestions from Harvard case studies. In addition to all of that, Adobe is not just sitting by the phone waiting for Apple to change its mind - the company's Flash works with Google's Android, and companies like Research In Motion (Nasdaq:RIMM), Samsung, Nokia (NYSE:NOK) and Palm (Nasdaq:PALM) are still in the Adobe camp.

To Reap Or To Sow?
Apart from the kurfuffle with Apple, I think Adobe has a more serious issue to resolve with respect to its corporate future. Does Adobe want to continue to aim for growth and market share (which suggests aggressive pricing and heavy R&D investment), or is it looking to reap the rewards of great market share and harvest excellent margins by turning the levers on pricing and maximizing profitability?

Considering how much growth has appeared in digital media and portable media in just the last five years, I think Adobe would be unwise to focus on maximizing margins right now. There is a whole world of mobile devices that could become Adobe strongholds just like the workstations of web designers and graphics professionals have become strongholds due to Creative Suite. That, in turn, could be worth a fortune down the road as the market continues to grow rapidly around the world. (For related reading, see 3 Secrets Of Successful Companies.)

In the meantime, Adobe is by no means the cheapest stock around, but it is the sort of stock that almost never trades at a bargain valuation. Strict value-oriented investors probably cannot get comfortable with this one, but it is certainly not a bad idea for investors looking for high-quality growth at a reasonable price.

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