Add Adobe to Your Portfolio

Nitesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Adobe Systems Inc. (NASDAQ: ADBE), which offers a line of software used by professionals, marketers, enterprises, and consumers, recently reported its fourth quarter results for fiscal 2012. It achieved its Creative Cloud subscription goals and established the Adobe Marketing Cloud as the leader of Digital Marketing during fiscal 2012. Furthermore, it reported EPS of $0.61, and revenue of $1.153 billion, far above its target range of $1.075- $1.125 billion.

Financial Highlights

Adobe, maker of Photoshop and Acrobat software, posted better-than-expected fourth-quarter results by earning total revenue of $1.153 billion, which is up by 6.7% sequentially and 0.1% year over year. The two segments of Adobe, namely Digital Media Solutions and Digital Marketing, generated 70.3% and 29.7% of total fourth quarter revenue, respectively. On a GAAP basis, Adobe recorded net income of $222.3 million compared with $173.7 million in the same quarter a year ago. Furthermore, Adobe reported operating expenses of $720.7 million, which were 8.7% lower than the year-ago quarter’s. On the other hand, operating margin was 26.7%, which was higher than the year-ago quarter’s 21.4%.

Future Ahead

The adoption of Creative Cloud subscriptions continued to accelerate as the company added about 10,000 Creative Cloud subscriptions per week during the fourth quarter, compared over 8,000 per week in the third quarter. Adobe Creative Cloud is a membership-based service that provides users with unlimited access to download and install all Adobe Creative Suite, and hence in 2013, the company expects to offer Creative Cloud to enterprise customers. The company believes it will post revenue of $4.1 billion and EPS of $1.40 for fiscal year 2013.

What others are doing

Apple (NASDAQ: AAPL) recently launched the iPhone 5, and it didn’t do as well as the iPhone 4 in China due to weak shipments. Shares of Apple dropped below $500 for the first time since February as the demand for the iPhone5 slowed. Apple and Adobe have entered into agreements that have prevented the companies from directly soliciting each other’s employees, and thus restraining competition between them for highly skilled employees.

Apple has tons of patent disputes with many rivals all over the smart-phone space, and all these patent disputes have caused hesitation and confusion in the market. Android has taken advantage of this and snared 72% of the market in the third quarter, while Apple’s iOS software had just 14% market share. Apple's smart television will probably redefine the TV industry, as it is supposed to be launched by 2013; hopefully this will boost Apples share.

Microsoft (NASDAQ: MSFT), developer of software products worldwide, is trading just above its 52-week low at $25.44. Microsoft has a high trailing free cash flow margin at 33.8%, and its long-term estimated earnings growth rate of 9.6% is markedly above the average estimate of 7.9%. Furthermore, company has strong profitability and lower leverage compared to Adobe.

Bottom Line

Adobe’s fourth quarter results are quite impressive, as both earnings and revenues have shown incremental growth in comparison to the prior year figures. Strong adoption of Creative Cloud and Adobe Marketing Cloud helped the results even further. Solid adoption of Creative Cloud could serve as a potential catalyst in going forward. Adobe’s acquisition of Efficient Frontier will further enhance its Adobe Marketing Cloud.

Moreover, the company has announced that its Board of Directors has approved a new stock repurchase program granting the company authority to repurchase up to $2.0 billion in common stock until the end of fiscal 2015. This will help to return value to Adobe’s stockholders and minimize dilution from stock issuances. Therefore, including Adobe in your portfolio is a sound decision.


Niteshag has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple, Adobe Systems, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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