Adobe Reports Record Revenue

SAN JOSE, Calif.--(BUSINESS WIRE)--Adobe Systems Incorporated (Nasdaq:ADBE) today reported financial results for its second quarter of fiscal 2007 ended June 1, 2007. Adobe achieved record revenue of $745.6 million, compared to $635.5 million reported for the second quarter of fiscal 2006 and $649.4 million reported in the first quarter of fiscal 2007. This represents 17 percent year-over-year revenue growth. Adobe’s second quarter revenue target range was $700 to $740 million.

“Assuming continued business momentum, we expect to exceed our original fiscal year revenue and profit targets.”

“Q2 was a strong quarter, driven by the record performance of both our Creative Suite products and Acrobat,” said Bruce Chizen, chief executive officer of Adobe. “Assuming continued business momentum, we expect to exceed our original fiscal year revenue and profit targets.”

GAAP Results

Adobe’s GAAP diluted earnings per share for the second quarter of fiscal 2007 were $0.25, based on 603.4 million weighted average shares. This compares with GAAP diluted earnings per share of $0.20 reported in the second quarter of fiscal 2006 based on 613.8 million weighted average shares, and GAAP diluted earnings per share of $0.24 reported in the first quarter of fiscal 2007 based on 604.2 million weighted average shares. Adobe’s second quarter GAAP earnings per share target range was $0.23 to $0.26.

GAAP operating income was $180.4 million in the second quarter of fiscal 2007, compared to $147.9 million in the second quarter of fiscal 2006 and $146.3 million in the first quarter of fiscal 2007. As a percent of revenue, GAAP operating income in the second quarter of fiscal 2007 was 24.2 percent, compared to 23.3 percent in the second quarter of fiscal 2006 and 22.5 percent in the first quarter of fiscal 2007.

GAAP net income was $152.5 million for the second quarter of fiscal 2007, compared to $123.1 million reported in the second quarter of fiscal 2006, and $143.9 million in the first quarter of fiscal 2007.

Non-GAAP Results

Non-GAAP diluted earnings per share for the second quarter of fiscal 2007 were $0.37. This compares with non-GAAP diluted earnings per share of $0.31 reported in the second quarter of fiscal 2006, and non-GAAP diluted earnings per share of $0.30 reported in the first quarter of fiscal 2007. Adobe’s second quarter non-GAAP earnings per share target range was $0.34 to $0.36.

Adobe’s non-GAAP operating income was $282.1 million in the second quarter of fiscal 2007, compared to $243.1 million in the second quarter of fiscal 2006 and $223.8 million in the first quarter of fiscal 2007. As a percent of revenue, non-GAAP operating income in the second quarter of fiscal 2007 was 37.8 percent, compared to 38.3 percent in the second quarter of fiscal 2006 and 34.5 percent in the first quarter of fiscal 2007.

Non-GAAP net income was $223.2 million for the second quarter of fiscal 2007, compared to $189.4 million in the second quarter of fiscal 2006, and $183.6 million in the first quarter of fiscal 2007.

A reconciliation between GAAP and non-GAAP results is provided at the end of this press release.

Adobe Provides Third Quarter Financial Targets

For the third quarter of fiscal 2007, Adobe announced it is targeting revenue of $760 million to $800 million. The Company also is targeting a GAAP operating margin of approximately 27 to 28 percent. On a non-GAAP basis, the Company is targeting an operating margin of approximately 39 percent.

In addition, Adobe is targeting its share count to be between 607 million and 609 million shares. The Company also is targeting other income to be approximately $21 million to $22 million, with a GAAP tax rate of approximately 25 to 26 percent and a non-GAAP tax rate of approximately 26 to 27 percent.

These targets lead to a GAAP earnings per share target range of approximately $0.28 to $0.31. On a non-GAAP basis, the Company is targeting earnings per share of approximately $0.39 to $0.41.

A reconciliation between GAAP and non-GAAP targets is provided at the end of this press release.

Forward Looking Statements Disclosure

This press release contains forward looking statements, including those related to revenue, operating margin, other income, tax rate, share count, earnings per share, and anticipated business momentum which involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to: delays in development or shipment of Adobe’s new products or major new versions of existing products, introduction of new products by existing and new competitors, failure to successfully manage transitions to new business models and markets, adverse changes in general economic or political conditions in any of the major countries in which Adobe does business, difficulty in predicting revenue from new businesses, failure to anticipate and develop new products in response to changes in demand for application software, computers, printers, or other non PC-devices, costs related to intellectual property acquisitions, disputes and litigation, inability to protect Adobe’s intellectual property from unauthorized copying, use, disclosure or malicious attack, failure to realize the anticipated benefits of past or future acquisitions and difficulty in integrating such acquisitions, changes to Adobe’s distribution channel, disruption of Adobe’s business due to catastrophic events, risks associated with international operations, fluctuations in foreign currency exchange rates, changes in, or interpretations of, accounting principles, impairment of Adobe’s goodwill or intangible assets, unanticipated changes in, or interpretations of, Adobe’s effective tax rates, Adobe’s inability to attract and retain key personnel, market risks associated with Adobe’s equity investments, and interruptions or terminations in Adobe’s relationships with turnkey assemblers. For further discussion of these and other risks and uncertainties, individuals should refer to Adobe’s SEC filings. The financial information set forth in this press release reflects estimates based on information available at this time. These amounts could differ from actual reported amounts stated in Adobe’s Quarterly Report on Form 10-Q for the second quarter ended June 1, 2007, which the Company expects to file in July, 2007. Adobe does not undertake an obligation to update forward looking statements.

About Adobe Systems Incorporated

Adobe revolutionizes how the world engages with ideas and information – anytime, anywhere, and through any medium. For more information, visit www.adobe.com.

© 2007 Adobe Systems Incorporated. All rights reserved. Adobe, Acrobat, Creative Suite and the Adobe logo are either registered trademarks or trademarks of Adobe Systems Incorporated in the United States and/or other countries. All other trademarks are the property of their respective owners.

Condensed Consolidated Statements of Income
(In thousands, except per share data; unaudited)

	Three Months Ended				Six Months Ended
	June 1, 2007		June 2, 2006		June 1, 2007		June 2, 2006

Revenue:
Products	$	713,469	$	614,895	$	1,333,767	$	1,251,721
Services and support		32,108		20,561		61,217		39,213
Total revenue		745,577		635,456		1,394,984		1,290,934

Total cost of revenue:
Products		70,715		49,269		124,530		112,118
Services and support		20,499		16,338		38,947		31,235
Total cost of revenue		91,214		65,607		163,477		143,353

Gross profit		654,363		569,849		1,231,507		1,147,581

Operating expenses:
Research and development		150,049		133,285		287,178		270,828
Sales and marketing		236,402		210,399		451,080		424,215
General and administrative		68,597		59,716		129,872		120,013
Restructuring and other charges	--			1,235	--			20,219
Amortization of purchased intangibles and incomplete technology		18,924		17,306		36,649		34,418
Total operating expenses		473,972		421,941		904,779		869,693

Operating income		180,391		147,908		326,728		277,888

Non-operating income:
Investment gain		4,162		2,660		9,763		1,395
Interest and other income, net		20,563		13,929		43,027		29,471
Total non-operating income		24,725		16,589		52,790		30,866
Income before income taxes		205,116		164,497		379,518		308,754
Provision for income taxes		52,611		41,400		83,162		80,585
Net income	$	152,505	$	123,097	$	296,356	$	228,169
Basic net income per share	$	0.26	$	0.21	$	0.50	$	0.38
Shares used in computing basic net income per share		587,929		595,284		588,536		597,679
Diluted net income per share	$	0.25	$	0.20	$	0.49	$	0.37
Shares used in computing diluted net income per share		603,417		613,804		604,373		618,582

Condensed Consolidated Balance Sheets
(In thousands, except per share data; unaudited)

	June 1,		December 1,
		2007		2006

ASSETS

Current assets:
Cash and cash equivalents	$	901,617	$	772,500
Short-term investments		1,422,208		1,508,379
Trade receivables, net of allowances for doubtful accounts of $7,055 and $6,798, respectively		318,090		356,815
Other receivables		53,367		51,851
Deferred income taxes		196,098		155,613
Prepaid expenses and other assets		61,141		39,311
Total current assets		2,952,521		2,884,469
Property and equipment, net		266,395		227,197
Goodwill		2,147,034		2,149,494
Purchased and other intangibles, net		476,978		506,405
Investment in lease receivable		207,239		126,800
Other assets		85,782		68,183
	$	6,135,949	$	5,962,548

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Trade and other payables	$	55,038	$	55,031
Accrued expenses		369,264		303,550
Accrued restructuring		6,558		10,088
Income taxes payable		168,890		178,368
Deferred revenue		179,331		130,310
Total current liabilities		779,081		677,347

Long-term liabilities:
Deferred revenue		29,465		32,644
Deferred income taxes		97,970		70,715
Accrued restructuring		17,021		21,984
Other liabilities		16,700		7,982
Total liabilities		940,237		810,672

Stockholders’ equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized	--		--
Common stock, $0.0001 par value		61		61
Additional paid-in-capital		2,452,639		2,451,610
Retained earnings		3,614,142		3,317,785
Accumulated other comprehensive income		16,755		6,344
Treasury stock, at cost (12,980 and 13,608 shares, respectively), net of re-issuances		(887,885)		(623,924)
Total stockholders’ equity		5,195,712		5,151,876
	$	6,135,949	$	5,962,548

Condensed Consolidated Statements of Cash Flows
(In thousands; unaudited)

	Three Months Ended
	June 1, 2007		June 2, 2006
Cash flows from operating activities:
Net income	$	152,505	$	123,097
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion		87,022		77,388
Stock-based compensation expense, net of tax		39,935		35,931
Net investment (gains) losses		(4,088)		5,486
Changes in deferred revenue		35,220		6,093
Changes in operating assets and liabilities		34,805		(7,871)

Net cash provided by operating activities		345,399		240,124

Cash flows from investing activities:
Sales and maturities of short-term investments, net of purchases		332,651		63,924
Purchases of property and equipment		(23,484)		(19,683)
Purchases of long term investments and other assets, net of sales		(12,446)		(1,017)
Investment in lease receivable		(80,439)		—
Acquisitions, net of cash		(64,275)		(26,477)

Net cash provided by investing activities		152,007		16,747

Cash flows from financing activities:
Purchases of treasury stock, net of reissuances		(162,213)		(497,860)
Excess tax benefits from stock-based compensation		35,866		28,684

Net cash used for financing activities		(126,347)		(469,176)
Effect of exchange rate changes on cash and cash equivalents		4,528		2,512

Net increase (decrease) in cash and cash equivalents		375,587		(209,793)

Cash and cash equivalents at beginning of period		526,030		635,186

Cash and cash equivalents at end of period	$	901,617	$	425,393

Non-GAAP Results
(In thousands, except per share data)

The following table shows Adobe’s non-GAAP results reconciled to GAAP results included in this release.

	June 1, 2007		June 2, 2006		March 2, 2007

GAAP operating income	$	180,391	$	147,908	$	146,337
SFAS 123R stock-based compensation		33,146		26,622		24,935
Amortization of Macromedia stock-based compensation		6,491		15,259		6,917
Restructuring and other charges		—		1,235		—
Amortization of purchased intangibles and incomplete technology		62,026		52,041		45,644
Non-GAAP operating income	$	282,054	$	243,065	$	223,833

GAAP net income	$	152,505	$	123,097	$	143,851
SFAS 123R stock-based compensation, net of tax		23,355		19,085		18,075
Amortization of Macromedia stock-based compensation, net of tax		4,732		10,939		5,014
Restructuring and other charges, net of tax		—		885		—
Amortization of purchased intangibles and incomplete technology, net of tax		45,335		37,308		32,606
R&D tax benefit, net of tax		—		—		(12,330)
Investment gain, net of tax		(2,712)		(1,909)		(3,592)
Non-GAAP net income	$	223,215	$	189,405	$	183,624

Diluted net income per share:

GAAP net income	$	0.25	$	0.20	$	0.24
SFAS 123R stock-based compensation, net of tax		0.04		0.03		0.03
Amortization of Macromedia stock-based compensation, net of tax		0.01		0.02		0.01
Restructuring and other charges, net of tax		—		—		—
Amortization of purchased intangibles and incomplete technology, net of tax		0.07		0.06		0.05
R&D tax benefit, net of tax		—		—		(0.02)
Investment gain, net of tax		—		—		(0.01)
Non-GAAP net income	$	0.37	$	0.31	$	0.30

Shares used computing diluted net income per share		603,417		613,804		604,249

The following table shows the Company’s reconciliation of non-GAAP to GAAP operating expense for the quarters ended June 1, 2007, June 2, 2006, and March 2, 2007.

	June 1, 2007		June 2, 2006		March 2, 2007

GAAP operating expenses	$	473,972	$	421,941	$	430,807
SFAS 123R stock-based compensation		(32,364)		(25,945)		(24,454)
Amortization of Macromedia stock-based compensation		(5,734)		(13,510)		(6,194)
Restructuring and other charges		—		(1,235)		—
Amortization of purchased intangibles and incomplete technology		(18,924)		(17,806)		(17,725)
Non-GAAP operating expenses	$	416,950	$	363,445	$	382,434

The following table shows the Company’s reconciliation of non-GAAP to GAAP operating margin for the quarter ended June 1, 2007, June 2, 2006, and March 2, 2007.

	June 1, 2007	June 2, 2006	March 2, 2007

GAAP operating margin	24.2%	23.3%	22.5%
SFAS 123R stock-based compensation	4.4	4.2	3.8
Amortization of Macromedia stock-based compensation	0.9	2.4	1.1
Restructuring and other charges	—	0.2	—
Amortization of purchased intangibles and incomplete technology	8.3	8.2	7.1
Non-GAAP operating margin	37.8%	38.3%	34.5%

The following table shows the Company’s reconciliation of non-GAAP to GAAP effective tax rate for the quarter ended June 1, 2007.

		June 1, 2007

GAAP effective income tax rate		25.6%
SFAS 123R stock-based compensation		0.3
Amortization of Macromedia stock-based compensation		0.1
Investment gain		(0.1)
Amortization of purchased intangibles and incomplete technology		0.3
Non-GAAP effective income tax rate		26.2%

Third Quarter Fiscal Year 2007 Non-GAAP Financial Targets

The following tables show Adobe’s non-GAAP financial targets reconciled to GAAP financial targets included in this release.

	Third Quarter Fiscal 2007
	Low		High

GAAP operating margin		27.0%		28.0%
SFAS 123R stock-based compensation		5.0		4.4
Amortization of Macromedia stock-based compensation		0.8		0.8
Amortization of purchased intangibles and incomplete technology		6.2		5.8
Non-GAAP operating margin		39.0%		39.0%

Diluted net income per share:

GAAP net income per share	$	0.28	$	0.31
SFAS 123R stock-based compensation, net of tax		0.04		0.04
Amortization of Macromedia stock-based compensation, net of tax		0.01		0.01
Amortization of purchased intangibles and incomplete technology, net of tax		0.06		0.05
Non-GAAP net income per share	$	0.39	$	0.41

Shares used in computing diluted net income per share		609.0		607.0

GAAP effective income tax rate		25.0%		26.0%
SFAS 123R stock-based compensation		0.5		0.5
Amortization of Macromedia stock-based compensation		0.1		0.1
Amortization of purchased intangibles and incomplete technology		0.5		0.5
Investment gain		(0.1)		(0.1)
Non-GAAP effective income tax rate		26.0%		27.0%

Adobe continues to provide all information required in accordance with GAAP, but believes evaluating its ongoing operating results may not be as useful if an investor is limited to reviewing only GAAP financial measures. Accordingly, Adobe uses non-GAAP financial information to evaluate its ongoing operations and for internal planning and forecasting purposes. Adobe’s management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Adobe presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate Adobe’s operating results in a manner that focuses on what Adobe believes to be its ongoing business operations. Adobe’s management believes it is useful for itself and investors to review, as applicable, both GAAP information that includes the stock-based compensation impact of SFAS 123R and related tax impact, amortization of Macromedia stock-based compensation and related tax impact, restructuring and other charges and related tax impact, amortization of purchased intangibles and incomplete technology and related tax impact, investment gains and losses and related tax impact, the net tax impact of the R&D tax benefit, the income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes, and the non-GAAP measures that exclude such information in order to assess the performance of Adobe’s business and for planning and forecasting in subsequent periods. Whenever Adobe uses such a non-GAAP financial measure, it provides a reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above.