Tickers in this Article: ADBE, GOOG, AAPL, YHOO, ORCL
Creative software product provider Adobe Systems (Nasdaq:ADBE) closed the books on its fiscal year on Dec. 15, 2011, and returned to posting double-digit sales and profit growth. Its end markets have vast growth potential, and though competitive threats continue to loom from a number of archrivals, Adobe is proving that its customer base remains loyal to its products and services.

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Full Year Recap
Adobe's sales improved 11% to $4.2 billion to exceed the company's goal of 10% growth. Management cited "strong performance in our digital media and digital marketing businesses." In a recent investor presentation, Adobe estimated that the digital media opportunity, where it helps graphic and web designers develop digital content for games, publishing and mobile applications, is a $6 billion market opportunity. It also estimated that online video traffic will grow 51% annually between 2010 and 2014. Digital marketing is another $6 billion opportunity that is growing rapidly. This includes analytic and reporting functions, as well as social marketing.

Operating income also grew 11% to $1.1 billion, as costs increased at the same rate as the top line. Higher interest expense and income taxes slowed net income growth a bit to 7.5%, as net income reached $832.8 million. This represented a very impressive net margin of 19.8%. Including the benefit from share buybacks, earnings per diluted share advanced 12.2% to $1.65. Operating cash flow came in at $1.5 billion, though Adobe didn't detail annual capex levels to calculate free cash flow for the year. (To know more about income statements, read Understanding The Income Statement.)

For the coming year, Adobe expects sales growth between 4% and 6% and reported earnings between $1.70 and $1.83 per diluted share. Beyond fiscal 2012, it sees double-digit organic growth as digital marketing bookings should advance around 25% and digital media increased 10% annually.

The Bottom Line
At the current share price, Adobe trades at a somewhat reasonable forward P/E of just over 10. The stock rallied strongly on the solid close to the fiscal year, but is still down close to 12% so far in 2011. There is vast potential for the company to sell its software and capitalize on the explosive growth in digital content, but growth over the past decade has been more modest at roughly 10% annually.

Annual sales and profit growth has been even more modest at closer to 7% during the past three years, and could prove uneven, as Adobe shifts from selling software applications to a subscription model, where developers pay an annual or monthly fee for the software and related product support. Competition is also intense, with key rivals including Google (Nasdaq:GOOG), Apple (Nasdaq:AAPL) and Yahoo (Nasdaq:YHOO), as well as software giant Oracle (Nasdaq:ORCL), but so far Adobe has been able to maintain a loyal customer base and impressive profit levels. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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