Pick of the Software Stocks – Niche Software Leaders: 2 buys, 1 hold

SYMANTEC CORP. $17.88 (Nasdaq symbol SYMC; SI Rating: Average) (1-408-517-8000; www.symantec.com; Shares outstanding: 846.4 million; Market cap: $15.1 billion) makes software that helps protect computers from viruses and electronic attacks. Its best known product is the top selling Norton Anti-Virus program.

Symantec continues to cut its reliance on sales to consumers by increasing its corporate operations. Security products and services for businesses also give it steadier revenue streams than consumer software sales.

As part of this strategy, Symantec spent $13.5 billion in 2005 to acquire Veritas Software Corp., which specializes in data storage products for businesses and corporate security products. The deal was one of the biggest software industry acquisitions ever.

To further expand its corporate offerings, Symantec acquired Altiris Inc. in April, 2007 for $1.05 billion. Altiris’s products let computer administrators easily install and manage software across a wide variety of computers attached to a network.

In December, 2007, Symantec bought Vontu Inc. for $350 million. Vontu’s software helps companies secure sensitive data. Symantec has worked with Vontu for several years, and its familiarity with Vontu’s products reduces the risk of this purchase.

Meanwhile, Symantec’s consumer business continues to do well, including benefiting from the new Microsoft Vista operating system.

In the three months ended December 31, 2007, Symantec’s sales rose 15.2%, to $1.5 billion from $1.3 billion a year earlier (all amounts in U.S. dollars). Earnings per share were unchanged up 15.4%, to $0.15 from $0.13. But excluding unusual items, earnings per share were $0.33 in the latest quarter, up 26.9% from $0.26 a year earlier.

In the latest quarter, earnings gained from strong sales in Europe and Asia, and from the success of its Norton 360 AntiVirus software, which now accounts for 25% of its consumer sales. Symantec’s consumer business, which represents 29% of the company’s total revenues, grew 8%. Revenues from Symantec’s services business (6% of revenues) grew 40%. Security and data management sales (29% of revenues) grew 9%, and data center management sales (29% of revenues) rose 11%.

Symantec also continues to invest heavily in research — spending $225.3 million in the latest quarter, or a high 15% of sales. This lets it maintain its lead in the competitive and rapidly changing virus protection, firewall, vulnerability management, security services and intrusion detection industries in which it operates.

Symantec is a buy.

ADOBE SYSTEMS INC. $35.05 $35.05 (Nasdaq symbol ADBE; SI Rating: Average) (408-536-6000; www.adobe.com; Shares outstanding: 569.0 million; Market cap: $19.9 billion) develops, sells and supports computer software products and technologies that let users create paper documents, and create and manipulate electronic documents. It’s a leader in graphic arts and desktop publishing software. Adobe’s two main software products are Acrobat (electronic documents) and PhotoShop (photo editing). Both products dominate their respective markets.

In the three months ended November 30, 2007, Adobe’s revenues rose 33.6%, to a record $911.2 million from $682.2 million. (All figures in U.S. dollars.) The increase came from strong sales of its Creative Suite 3 products and Acrobat software. Earnings per share excluding one-time items rose 48.5%, to $0.49 from $0.33.

Adobe is starting to realize some of the benefits of its 2005 acquisition of Macromedia Inc., the developer of Flash. This program lets web page creators add animation and other features that make their sites easier to use. Popular sites such as YouTube use Flash to play videos and other content.

Cellphones and other wireless devices that connect to the Internet represent a growing market for Flash. Adobe has licensed its mobile Flash technology to major cellphone makers such as Motorola and Samsung.

Adobe spends a high 19% of sales on research and development. It holds cash of $2 billion or $3.50 a share, and it has no long-term debt, so it has plenty of financing for new products. This includes its Acrobat Connect product, which offers Web conferencing capabilities.

Adobe now trades at 18.9 times next year’s forecast earnings of $1.85 a share. That’s reasonable in light of its growth prospects.

Adobe is now a buy.

AUTODESK, INC. $38.39 (Nasdaq symbol ADSK; SI Rating: Average) (515-507-5000; www.autodesk.com; Shares outstanding: 230.9 million; Market cap: $8.9 billion) makes AutoCAD, the world’s top-selling computer aided design program. About four million architects and engineers in over 100 countries use it to design and test new buildings and products. This business supplies nearly 90% of its revenue. The remainder comes from programs that filmmakers use to create special effects.

Revenues in the fiscal third quarter ended October 31, 2007 rose 17.8%, to a record $538.4 million from $456.8 million. Earnings per share excluding one-time items rose 40.0%, to $0.49 from $0.35.

Autodesk spends over 20% of its revenue on research. This helps it maintain its dominance in its niche markets. Heavy research spending is also helping helping Autodesk transform its software, from the traditional 2D models to 3D. That speeds up the design process and improves the quality of the final product.

Autodesk is also using acquisitions to strengthen its 3D expertise. In June 2007, it paid $29.1 million for UK-based 3D specialist NavisWorks.

Combined revenues from the company’s 3D products — Inventor, Revit, Civil 3D and NavisWorks software — increased 32% in the latest quarter to $130 million. 3D revenues now make up 24% of total revenues.

Autodesk is down from the all-time high of $51.32 it reached in October, 2007. The stock has dropped along with many other software makers on investor fears that corporations will cut spending if the U.S. economy slows down significantly. Even so, we still feel the company will need to continue to show substantial growth before it moves higher.

Autodesk is a hold.