Multimedia software provider Adobe Systems (Nasdaq:ADBE) reported some near-term sales challenges in Japan and parts of Europe during its second quarter, but managed to post impressive profit growth that came in ahead of analyst projections. The quarter demonstrated the appeal and scalability of Adobe's business model, and growth trends going forward should accelerate on a number of product upgrades and the inability of rivals to eat into its graphic-design leadership position. (To learn more about earnings, check out Everything Investors Need To Know About Earnings.)

TUTORIAL: Earnings Quality

Second Quarter Recap
Revenue advanced a respectable 9% and reached just over $1 billion. Adobe breaks its results into four primary operating units. The creative solutions segment accounted for just over 42% of total revenue and grew only a couple of percent as the new Creative Suite 5 graphic-design software application was just released. Digital media solutions targets similar customers to creative solutions but emphasizes professional imaging and video markets. This segment made up more than 13% of total sales and reported a 1.9% decrease in sales.

Digital enterprise solutions targets larger enterprises and governments to help them with digital content creation. It weighed in at almost 28% of total sales and reported robust 22.3% growth. Finally, web analytics provider, Omniture, accounted for just over 11% of sales and experienced stellar 26.1% growth on a number of sizable new sales wins.

Healthy Margins
Gross profits rose 9.4% to $914 million for an extremely healthy gross margin of 89.3% of sales. Management also held operating expenses in check as they grew only 4.8%. As a result, operating income improved nearly 22% and reached $276.7 million, or 27% of sales. Lower income tax expense helped send net income up sharply - 54.4% to $229.4 million. Share buybacks helped boost earnings by more than 64% to 45 cents per diluted share. This came in ahead of analyst projections. (To further help identify what earnings mean, read Earnings: Quality Means Everything.)

Analysts currently project full-year sales growth just north of 8% and total sales of more than $4 billion. They expect earnings of $2.22 per share for year-over-year growth of close to 50%. For some time now, Adobe has managed to fend off the competitive advances of large tech rivals that include Apple (Nasdaq:AAPL), Google (Nasdaq:GOOG), SAP (NYSE:SAP) and Yahoo (Nasdaq:YHOO). Its software solutions qualify as necessities for web and graphic designers while its web analytics division is racking up some big wins with Fortune 500 businesses.

Bottom Line
Total company growth has slowed in recent years and over the past decade annual sales and profit growth has averaged just over 10%. Top-line trends could accelerate on the new creative suite product releases while a foray into software as a service and a subscription model - versus a hefty upfront cost to buy Adobe software - could lead to smoother sales levels over time. The forward P/E multiple is quite reasonable at about 12. The trailing free cash flow multiple of under 17 is a bit higher, but could also prove quite reasonable if the company manages to grow free cash in the double digits over the next few years. (To learn more on why earnings plays such an important role in share price, read Can Earnings Guidance Accurately Predict The Future?)

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