Adobe Still Fending Off Its Rivals

By Ryan C. Fuhrmann | January 04, 2011 AAA

Creative software provider Adobe Systems (Nasdaq:ADBE) reported fourth quarter results on recently that saw sales top $1 billion for the first time. New software releases continued to boost sales, along with the lucrative subscriber and service revenues that go along with the software product sales. The shares also continue to look appealing given the growth prospects and reasonable earnings multiple.

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Fourth Quarter Update
Total revenues jumped 33% to $1 billion and exceeded the billion dollar mark for the first time. The top line jumped strongly in all three operating segments, consisting of a 23.9% jump in product sales (82.4% of total quarterly sales), 172% jump in subscription sales (10% of sales), and 53.5% jump in service and support revenues (7.6% of sales).

During the earnings conference call management detailed that Adobe is a "leader in providing solutions that enable customers to create, manage, deliver and optimize digital experiences."

Adobe's product line includes specific products such as Creative Suite 5, Digital Publishing Suite and Flash Player 10.1, and judging by the fourth quarter results, these products continue to resonate with customers that include "creative professionals" such as web developers, graphic designers, photographers and publishers.

Gross profit jumped just over 33% as costs of sales increased more or less in line with the top line increase. Demonstrating the scalability of the software business model, the jump in sales did not require a corresponding increase in operating expenses, which increased only 17.7%. As a result, operating income shot ahead by 86.7% to $286.9 million. Net income reached $268.9 million, or $0.53 per diluted share, which was compared to a loss in last year's fourth quarter. This came in ahead of analyst projections.

Full Year Recap Outlook
Full-year trends were also impressive. Revenue jumped 17% to $3.16 billion, operating income jumped 43.8% to $993.1 million and earnings improved to $1.47 per diluted share.

For the fiscal first quarter, management expects just over $1 billion in sales and earnings between $0.43 and $0.49 per diluted share. For the full year, analysts are projecting sales growth of just under 8% and total sales of just over $4 billion. Expectations currently call for $2.20 in earnings per share.

The Bottom Line
Adobe also detailed during its conference call that it is among the largest providers of cloud-based software as a service, or SaaS for short. Competition is fierce, with Google (Nasdaq:GOOG), Apple (Nasdaq:AAPL), SAP (NYSE:SAP) and even Amazon (Nasdaq:AMZN) trying to muscle in on the space. For now, Adobe remains unique as few have been able to successfully match its creative software capabilities or steal its loyal customer base.

Adobe's forward P/E has increased slightly as the stock is up since the strong earnings report, but at only 12.3 represents a reasonable entry point as Adobe should continue to grow sales and profits at a very healthy clip. (For additional stock analysis, see Is Salesforce.com's P/E Ratio Justified?)

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