March 26, 2008 - Painful as they are, market shakeouts make it easier to separate the pretenders from the long-term powerhouses. Judging by its latest quarterly results and comments from the CEO, Adobe Systems (Nasdaq:ADBE) is definitely in the latter camp.

Adobe posted 37% revenue growth in its fiscal first quarter, racking up sales of $890 million. Earnings of $0.48 per share beat the analyst consensus by three cents. The company did not raise its guidance for 2008, sticking with a revenue growth outlook of 13%, but Adobe is notoriously conservative. EPS is expected to be in a range of $1.86 to $1.92, also mid-teens growth, but the business would really have to unravel to get to there, according to several analysts who remain upbeat on this stock.

Adobe's ability to weather this storm hitting the U.S. economy stems from diversity -- not only geographic, but end market and product. Adobe makes software used for creating, publishing and distributing content in Web and print form. It made a name for itself with graphic design programs like Photoshop and Illustrator, not to mention PageMaker--the icon of desktop publishing. These products are used not only by graphic artists, web designers, and professional publishers, but also corporate marketing departments and just about any other document producing organization of all shapes and sizes.

Last year, the company released Creative Suite 3, a new version of its popular software bundle that includes Photoshop and several design and management tools for web sites and digital media. Adobe's acquisition of Macromedia two years ago not only added another jewel to the crown but also solidified its dominance in the creation, distribution, and management of digital information. Dreamweaver is now one of the components of the CS package.

Even if Adobe only hits its growth targets (it has a history of exceeding), the company is on track for revenue of $3.5 billion in the fiscal year ending in November, 2008. The consensus is for FY08 earnings of $1.88/share and $2.14 in FY09 on revenue of $4 billion.

Adobe's growth prospects over the next several years are intriguing, as are its strong balance sheet, diverse end markets and a multi-faceted business model. Simply put, Adobe Systems is a unique software company that makes solid profits even through tough times and is positioned to dominate when corporate spending on software trends up.

Market diversity helped Adobe survive the tech sector washout a few years ago. Even the ubiquitous Adobe Acrobat has gained traction as a revenue-generating product. The Reader is distributed without cost and has an installed base of several hundred million. Businesses are increasingly licensing the tools to create content in Acrobat format because of its unique features such as the ability to lock in the look of a page (which most HTML-based Web content cannot do), and its ease of integration with Web content. Acrobat's features cater not only to web publishing, but also to the growing interest from enterprise customers to transmit business forms and documents electronically.

Adobe is also aiming for the enterprise market with server and business process-oriented products. This strategy runs into competition from heavyweights like Microsoft, but Adobe is forging partnerships with SAP and others as well as using acquisitions to fill product gaps.

Adobe's product lines are ever expanding to cover animation, video, streaming media, and other digital imaging applications. As a result of its product breadth and diverse end-markets, this company has managed to keep the ship sailing fairly smoothly and not get blindsided by a hit to one industry or type of end user. The stock has taken a hit in recent months, so ADBE is at valuation levels not seen for years. At $36.54 currently, the stock trades at just 17 times this year's conservative earnings estimates and less than 6 times sales. This is a special franchise and clearly Adobe is more than surviving even in these challenging times for most other companies.

- James C. Hale