Tickers in this Article: ADBE, GOOG, SNE, ORCL, AAPL
Application software firm Adobe Systems (Nasdaq:ADBE) reported modest sales growth and a decline in earnings during its third quarter. However, the results masked what should still be strong full-year trends and profit growth by the company's estimations. It also appears to be successfully introducing cloud-based services by which users pay for its software on a subscription basis. Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Third Quarter Recap
Revenues advanced 2.3% to $1 billion. Product revenue fell 1.8% and accounted for just over 80% of total quarterly sales. However, subscription and services revenue saw strong trends and reported revenue growth of 13.5 and 38.6%, respectively. Management relayed that a third of new subscribers for Adobe products had never used any Adobe products before, demonstrating that cloud computing could serve to enhance its traditional business model of selling software that is downloaded to computers. It also cited strong trends in the education segment, digital video products, digital marketing and the Adobe franchise. Finally, Omniture, which was acquired in October 2009 to diversify Adobe's revenue stream and provides web analytics services, saw sales grow 18.4% to $118.2 million.

Reported operating income fell 9.2% to $274.1 million. Costs of revenue increased 5.6% and operating expense growth of 7.7%, meaning negative sales leverage as both outpaced the sales increase. Net income fell 15.2% to $195.1 million but the repurchase of 3.6 million shares for $150 million in stock helped temper the per-share decline to 11.4% as earnings fell to 39 cents per diluted share. The company's estimate of operating earnings was 55 cents per diluted share, or a penny above last year's third quarter. This figure also beat analyst projections by a penny. (For related reading on projections, see Revenue Projections Show Profit Potential.)

Despite the uneven third quarter trends, Adobe's management still expects to report full-year revenue growth of 10% and earnings growth of 20%. Analysts currently project full-year sales growth of 9%, total sales of $4.2 billion, and earnings of $2.26 per share. (For related reading, see How To Evaluate The Quality Of EPS.)

The Bottom Line
At the current share price, Adobe trades at a forward P/E of 10.1. It's trailing free cash flow multiple is less compelling at almost 14, but both multiples offer a reasonable entry point for a firm that is very capable of growing sales and profits in the low double digits going forward. Competition is fierce, with firms including Apple (Nasdaq:AAPL), Oracle (Nasdaq:ORCL), Google (Nasdaq:GOOG) and even Sony (NYSE:SNE) after Adobe's committed user base of graphic designers, web developers, and other creative professionals. But so far, Adobe has successfully fended off the advances of rivals and appears to be succeeding in the latest market segment of cloud computing.

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