Adobe Systems (ADBE)

Shares Buyback. Company continues to buy back shares aggressively. The management repurchased 17 million shares in Q3 2007, 4 million from its prior share repurchase program and 13 million from its recently announced 20 million repurchase program. We anticipate this pace to continue in the coming quarters.

Adobe Systems Inc. (ADBE) managed to beat Wall Street analyst expectations despite a slip in fiscal third-quarter profit. Net income for the San Jose, Calif.-based software maker for the period ended Aug. 29 dropped to $191.6 million, or 35 cents a share, compared with $205.2 million, or 34 cents a share, in the same period a year prior, MarketWatch reported. "We’re particularly impressed with Adobe’s profitability levels, which were higher than expected," said Edward Jones analyst Andy Miedler.

For 2nd Qtr 2008

Adobe Systems Inc.'s profit rose 41 percent in the second quarter because of strong sales and booming demand in international markets.

For the three months ended May 30, the maker of Photoshop design software and the Acrobat publishing tool reported Monday that it earned $214.9 million, or 40 cents per share, compared to $152.5 million, or 25 cents per share, in the same quarter a year ago.

Excluding special items, the software maker reported income of $272.7 million, or 50 cents a share, compared to $223.2 million, or 37 cents a share in the same quarter a year ago.

On that same basis, analysts polled by Thomson Financial had predicted, on average, earnings per share of 46 cents on revenue of $880 million.

Actual revenue beat those expectations at $886.9 million, up 19 percent from $745.6 million a year ago.

Sales in foreign markets with stronger currencies than the dollar translated into more dollars for Adobe. About 5 percent of second-quarter revenue, or $44 million, came as a result of positive foreign exchange rates, Chief Financial Officer Mark Garrett told investors in a conference call.

More than half Adobe's sales some from overseas.

Trying to deliver rich content effectively to the stubbornly heterogeneous end-user device tiers has produced more tears than triumphs. Adobe (ADBE) is aiming to fix that with the ambitious and inclusive Open Screen Project, which now throws adobe's considerable installed base weight behind an industry-collaboration movement to standardize interface delivery.

By leveraging Adobe's ubiquitous Flash Player and soon Adobe AIR, the project's ambition is to allow ease in creating rich content -- including video -- and delivering it consistently to televisions, personal computers, mobile devices, and consumer electronics. The means is a consistent runtime environment for content, applications and services to present well across a variety of "screens," from cell phones to mobile Internet devices (MIDs) and home entertainment set top boxes.

Adobe's efforts will provide a significant counter-punch to the Microsoft Silverlight/Live Mesh move to accomplish similar values using the market presence muscle and developer allegiance to the Windows, .NET and Visual Studio world.

May the best means to get the job done in a way that aids developers while protecting the choice of consumers -- and being acceptable to the content, network, and device makers -- win. The Adobe-Microsoft (MSFT) tussle on this front may be just what's needed to break a moribund app delivery solutions field apart, and to get the job done ... finally.

The announcement builds on Adobe's earlier forays into open source adoption drivers for Flash. Adobe's newest moves may even force Microsoft to be more open with its technologies, always a welcome development in the market. That's because the Open Screen Project includes:

• Removing restrictions on use of the SWF and FLV/F4V specifications
• Publishing the device porting layer APIs for Adobe Flash Player
• Publishing the Adobe Flash¨ Cast protocol and the AMF protocol for robust data services
• Removing licensing fees
• Making next major releases of Adobe Flash Player and Adobe AIR for devices free.

This is an exciting development. I hope it's open enough to both assuage the "Adobe lock-in" critics and force more openness generally in this market. The de facto accepted standard is needed.

Enterprises ought to take a hard look at this as a potential way of delivering via RIAs content, services and applications from SOAs to many devices and types of consumers in a common approach. Very powerful.

Creative suite winner in the quarter. The Creative Solutions segment reported revenues of $546 million, significantly higher than our $480 million estimate. The August quarter marks the first full quarter since the CS3 product release and also the first quarter (though not full) with all international versions shipping. In addition, all bundles (in particular the master collection) are now shipping as well. Specifically, the company benefited from customer migration to higher-end bundles (e.g., master collection—with the design premium remaining the highest seller), pent-up demand, especially from its Apple user base, strong demand internationally, and particularly in Europe (where, we note, August quarter tends to be seasonally slower, due to the summer vacation period in most of the continent).

Raising estimates. Goldman Sachs has increased the revenue estimates across the board as the CS3 product cycle, one which we believe is the strongest in the company’s history, begins to hit its stride.

F4Q - Goldman Sachs increased the revenue estimate to $885 million from $837 million (guidance: $860 million to $890 million; prior consensus: $843 million), pro forma EPS estimates (including ESOs) to $0.44 from $0.38, and pro forma EPS estimates (ex-ESOs) to $0.48 from $0.44 (guidance: $0.46-$0.48; prior consensus: $0.44).

F2007 - Goldman Sachs also increased the full year revenue estimates to $3,132 million from $3,025 million (prior consensus: $3,027 million), pro forma EPS estimates (including ESOs) to $1.45 from $1.38, and pro forma EPS estimates (ex-ESOs) to $1.60 from $1.51 (guidance: $0.46-$0.48; prior consensus: $0.44).

Cash is king, and Adobe’s free cash flow over the last four quarters is about $1.25 billion, giving the company a free cash flow yield north of 5%. Even if the $100 million provided by a reduction in accounts receivable is excluded (as being non-recurring) the yield is still nearly 5%. That cash flow has grown at a double digit pace in each of the last four years and, while it may slow in 2008 due to the product cycle it seems likely to resume at a similar clip in the years following. With a cash flow yield already north of Treasuries, double-digit growth provides a healthy cash on cash return potential.[1]