Adobe Reports Record Revenue

Q3 Performance Driven by Strong Momentum with Creative Suite, Omniture and Enterprise Products

SAN JOSE, Calif.--()--Adobe Systems Incorporated (Nasdaq:ADBE) today reported strong financial results for its third quarter fiscal year 2010 ended Sept. 3, 2010.

In the third quarter of fiscal 2010, Adobe achieved record revenue of $990.3 million, compared to $697.5 million reported for the third quarter of fiscal 2009 and $943.0 million reported in the second quarter of fiscal 2010. This represents 42 percent year-over-year revenue growth. Adobe’s third quarter revenue target range was $950 million to $1 billion.

“Strong performance in each of our major businesses contributed to record revenue and strong earnings in Q3,” said Shantanu Narayen, president and CEO of Adobe. “We remain bullish about Adobe's long-term role in enabling the transformation of content and applications across industries.”

Third Quarter Fiscal 2010 GAAP Results

Adobe’s GAAP diluted earnings per share for the third quarter of fiscal 2010 were $0.44, based on 523.2 million weighted average shares. This compares with GAAP diluted earnings per share of $0.26 reported in the third quarter of fiscal 2009 based on 531.8 million weighted average shares, and GAAP diluted earnings per share of $0.28 reported in the second quarter of fiscal 2010 based on 533.3 million weighted average shares.

GAAP operating income was $302.0 million in the third quarter of fiscal 2010, compared to $167.6 million in the third quarter of fiscal 2009 and $227.3 million in the second quarter of fiscal 2010. As a percent of revenue, GAAP operating income in the third quarter of fiscal 2010 was 30.5 percent, compared to 24.0 percent in the third quarter of fiscal 2009 and 24.1 percent in the second quarter of fiscal 2010.

GAAP net income was $230.1 million for the third quarter of fiscal 2010, compared to $136.0 million reported in the third quarter of fiscal 2009 and $148.6 million in the second quarter of fiscal 2010.

Third Quarter Fiscal 2010 Non-GAAP Results

Adobe’s non-GAAP diluted earnings per share for the third quarter of fiscal 2010 were $0.54. This compares with non-GAAP diluted earnings per share of $0.35 reported in the third quarter of fiscal 2009 and non-GAAP diluted earnings per share of $0.44 reported in the second quarter of fiscal 2010.

Adobe’s non-GAAP operating income was $384.9 million in the third quarter of fiscal 2010, compared to $237.1 million in the third quarter of fiscal 2009 and $334.5 million in the second quarter of fiscal 2010. As a percent of revenue, non-GAAP operating income in the third quarter of fiscal 2010 was 38.9 percent, compared to 34.0 percent in the third quarter of fiscal 2009 and 35.5 percent in the second quarter of fiscal 2010.

Non-GAAP net income was $284.0 million for the third quarter of fiscal 2010, compared to $186.1 million in the third quarter of fiscal 2009 and $234.2 million in the second quarter of fiscal 2010.

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

Fourth Quarter Fiscal 2010 Financial Targets

For the fourth quarter of fiscal 2010, Adobe is targeting revenue of $950 million to $1 billion. The Company’s operating margin is targeted to be 27 percent to 30 percent on a GAAP basis, and 37 percent to 38 percent on a non-GAAP basis. In addition, the Company is targeting its share count to be between 516 million and 520 million shares, and it is targeting non-operating expense between $14 million and $19 million. Adobe’s GAAP and non-GAAP tax rate is expected to be approximately 24.5 percent.

These targets lead to a fourth quarter diluted earnings per share target range of $0.35 to $0.41 on a GAAP basis, and an earnings per share target range of $0.48 to $0.54 on a non-GAAP basis.

Reconciliation between these GAAP and non-GAAP financial 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, non-operating expense, tax rate, share count, earnings per share and 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: failure to develop, market and distribute new products and services or upgrades or enhancements to existing products and services that meet customer requirements, introduction of new products, services and business models by existing and new competitors, failure to successfully manage transitions to new business models and markets, continued uncertainty in economic conditions and the financial markets and other adverse changes in general political conditions in any of the major countries in which Adobe does business, difficulty in predicting revenue from new businesses, failure to realize the anticipated benefits of past or future acquisitions, and difficulty in integrating such acquisitions, costs related to intellectual property acquisitions, disputes and litigation, inability to protect Adobe’s intellectual property from third-party infringers, or unauthorized copying, use or disclosure, security vulnerabilities in our products and systems, interruptions or delays in our service or service from third-party service providers that host or deliver services, security or privacy breaches, or failure in data collection, failure to manage Adobe’s sales and distribution channels and third-party customer service and technical support providers effectively, disruption of Adobe’s business due to catastrophic events, risks associated with global operations, currency fluctuations, risks associated with our debt service obligations, changes in, or interpretations of, accounting principles, impairment of Adobe’s goodwill or amortizable intangible assets, changes in, or interpretations of, tax rules and regulations, Adobe’s inability to attract and retain key personnel, impairment of Adobe’s investment portfolio due to deterioration of the capital markets, and market risks associated with Adobe’s equity investments. 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 our third quarter ended Sept. 3, 2010, which Adobe expects to file in October 2010. 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.

© 2010 Adobe Systems Incorporated. All rights reserved. Adobe, Creative Suite, Omniture 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 Nine Months Ended

September 3,
2010

 

August 28,
2009

September 3,
2010

 

August 28,
2009

 
Revenue:
Products $ 829,096 $ 636,546 $ 2,328,294 $ 2,014,392
Subscription 98,632 13,319 286,418 37,727
Services and support   62,591     47,642     177,342     136,451  
Total revenue   990,319     697,507     2,792,054     2,188,570  
 
Cost of revenue:
Products 29,147 40,754 92,302 139,867
Subscription 50,483 8,611 146,408 24,174
Services and support   19,454     15,682     57,575     50,367  
Total cost of revenue   99,084     65,047     296,285     214,408  
 
Gross profit 891,235 632,460 2,495,769 1,974,162
 
Operating expenses:
Research and development 168,296 138,902 509,954 427,289
Sales and marketing 303,219 231,320 921,489 724,020
General and administrative 102,177 79,593 283,176 224,462
Restructuring charges (2,090 ) 65 21,073 15,866
Amortization of purchased intangibles   17,620     14,978     53,946     45,654  
Total operating expenses   589,222     464,858     1,789,638     1,437,291  
 
Operating income 302,013 167,602 706,131 536,871
 
Non-operating income (expense):
Interest and other income, net 7,607 6,667 1,905 24,753
Interest expense (16,395 ) (460 ) (40,166 ) (1,872 )
Investment gains (losses), net   3,527     607     (10,730 )   (18,444 )
Total non-operating income (expense), net   (5,261 )   6,814     (48,991 )   4,437  
Income before income taxes 296,752 174,416 657,140 541,308
Provision for income taxes   66,687     38,371     151,310     122,757  
Net income $ 230,065   $ 136,045   $ 505,830   $ 418,551  
Basic net income per share $ 0.44   $ 0.26   $ 0.97   $ 0.79  

Shares used to compute basic net income per share

  518,710     525,911     523,039     528,015  
Diluted net income per share $ 0.44   $ 0.26   $ 0.95   $ 0.79  
Shares used to compute diluted net income per share   523,179     531,809     530,356     532,846  

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

 
  September 3,   November 27,
  2010     2009  
 
ASSETS
 
Current assets:
Cash and cash equivalents $ 814,149 $ 999,487
Short-term investments 1,764,125 904,986

Trade receivables, net of allowances for doubtful accounts

of $13,701 and $15,225 respectively

484,550

410,879

Deferred income taxes 76,765 77,417
Prepaid expenses and other current assets   96,826     80,855  
Total current assets 3,236,415 2,473,624
 
Property and equipment, net 422,920 388,132
Goodwill 3,489,938 3,494,589
Purchased and other intangibles, net 413,091 527,388
Investment in lease receivable 207,239 207,239
Other assets   177,426     191,265  
Total assets $ 7,947,029   $ 7,282,237  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
Trade payables $ 56,465 $ 58,904
Accrued expenses 468,477 419,646

Current portion of capital lease obligation

8,698

Accrued restructuring

9,222

37,793

Income taxes payable 48,413 46,634
Deferred revenue   375,927     281,576  
Total current liabilities 967,202 844,553
 
Long-term liabilities:
Debt and non-current portion of capital lease obligation 1,515,752 1,000,000
Deferred revenue 44,988 36,717
Accrued restructuring 7,831 6,921
Income taxes payable 221,736 223,528
Deferred income taxes 73,108 252,486
Other liabilities   31,554     27,464  
Total liabilities 2,862,171 2,391,669
 
Stockholders’ equity:

Preferred stock, $0.0001 par value; 2,000 shares authorized

Common stock, $0.0001 par value 61 61
Additional paid-in-capital 2,425,083 2,390,061
Retained earnings 5,738,864 5,299,914
Accumulated other comprehensive income 21,571 24,446
Treasury stock, at cost (87,777 and 78,177 shares, respectively), net of reissuances  

(3,100,721

)

 

(2,823,914

)

Total stockholders’ equity   5,084,858     4,890,568  
Total liabilities and stockholders’ equity $ 7,947,029   $ 7,282,237  

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

 
  Three Months Ended

September 3,
2010

 

August 28,
2009

Cash flows from operating activities:
Net income $ 230,065 $ 136,045
Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Depreciation, amortization and accretion 73,154 63,921
Stock-based compensation expense, net of tax 47,225 39,654
Unrealized investment losses (3,456 ) (3,190 )
Changes in deferred revenue 16,572 4,879
Changes in operating assets and liabilities   (72,089 )   (4,628 )
 
Net cash provided by operating activities   291,471     236,681  
 
Cash flows from investing activities:
Purchases of short-term investments, net of sales and maturities (258,789 ) 7,572
Purchases of property and equipment (6,889 ) (58,431 )
Purchases of long-term investments and other assets, net of sales   (990 )   (5,035 )
 
Net cash used for investing activities   (266,668 )   (55,894 )
 
Cash flows from financing activities:
Purchases of treasury stock (400,000 ) (350,000 )
Reissuance of treasury stock 45,580 73,400
Repayment of debt (1,559 )
Excess tax benefits from stock-based compensation   1,687      
 
Net cash used for financing activities   (354,292 )   (276,600 )
 
Effect of exchange rate changes on cash and cash equivalents   6,032     1,177  
Net decrease in cash and cash equivalents (323,457 ) (94,636 )
Cash and cash equivalents at beginning of period   1,137,606     1,226,780  
Cash and cash equivalents at end of period $ 814,149   $ 1,132,144  

Non-GAAP Results

(In thousands, except per share data)

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

 
  Three Months Ended

September 3,
2010

 

August 28,
2009

 

June 4,
2010

 
Operating income:
 
GAAP operating income $ 302,013 $ 167,602 $ 227,285
Stock-based and deferred compensation expense 50,058 40,526 59,631
Restructuring charges (2,090 ) 65 11,541
Amortization of purchased intangibles   34,936     28,896     36,009  
Non-GAAP operating income $ 384,917   $ 237,089   $ 334,466  
 
Net income:
 
GAAP net income $ 230,065 $ 136,045 $ 148,611
Stock-based and deferred compensation expense 50,058 40,526 59,631
Restructuring charges (2,090 ) 65 11,541
Amortization of purchased intangibles 34,936 28,896 36,009
Investment (gains) losses, net (3,527 ) (607 ) 10,723
Income tax adjustments   (25,464 )   (18,804 )   (32,337 )
Non-GAAP net income . $ 283,978   $ 186,121   $ 234,178  
 
Diluted net income per share:
 
GAAP diluted net income per share $ 0.44 $ 0.26 $ 0.28
Stock-based and deferred compensation expense 0.10 0.08 0.11
Restructuring charges 0.02
Amortization of purchased intangibles 0.07 0.05 0.07
Investment (gains) losses, net (0.01 ) 0.02
Income tax adjustments   (0.06 )   (0.04 )   (0.06 )

Non-GAAP diluted net income per share

$

0.54

 

$

0.35

 

$

0.44

 
 
Shares used to compute diluted net income per share 523,179 531,809 533,259

Non-GAAP Results (continued)

(In thousands, except percentages)

 
  Three Months Ended
September 3,

2010

  August 28,

2009

  June 4,

2010

 
Operating expenses:
 
GAAP operating expenses $   589,222 $   464,858 $   607,917
Stock-based and deferred compensation expense (48,985 ) (39,899 ) (58,012 )
Restructuring charges 2,090 (65 ) (11,541 )
Amortization of purchased intangibles     (17,620 )     (14,978 )     (18,129 )
Non-GAAP operating expenses $   524,707   $   409,916   $   520,235  

 

Three Months Ended
September 3,

2010

August 28,

2009

June 4,

2010

 
Operating margin:
 
GAAP operating margin 30.5 % 24.0 % 24.1 %
Stock-based and deferred compensation expense 5.1 5.8 6.3
Restructuring charges (0.2 ) 1.2
Amortization of purchased intangibles     3.5       4.2       3.9  
Non-GAAP operating margin     38.9 %     34.0 %     35.5 %
 

Three Months
Ended

September 3,
2010
Effective income tax rate:
 
GAAP effective income tax rate 22.5 %
Stock-based and deferred compensation expense

1.3

Restructuring charges (0.1 )
Investment losses (0.1 )
Amortization of purchased intangibles 0.9  
Non-GAAP effective income tax rate 24.5 %

Fourth Quarter Non-GAAP Financial Targets

(In millions, except per share data and percentages)

The following tables show the Company’s fourth quarter fiscal year 2010 GAAP financial targets reconciled to non-GAAP financial targets included in this release.

  Fourth Quarter

Fiscal 2010

Low   High
Operating margin:  
 
GAAP operating margin 27.0 % 30.0 %
Stock-based and deferred compensation expense 6.7 5.0
Restructuring charges 0.1
Amortization of purchased intangibles   3.2       3.0  
Non-GAAP operating margin   37.0 %     38.0 %
 
Fourth Quarter

Fiscal 2010

Low   High
Diluted net income per share:
 
GAAP diluted net income per share $ 0.35 $ 0.41
Stock-based and deferred compensation expense 0.11 0.11
Amortization of purchased intangibles 0.06 0.06
Income tax adjustments   (0.04 )     (0.04 )
Non-GAAP diluted net income per share $ 0.48     $ 0.54  
 
Shares used to compute diluted net income per share   520.0       516.0  

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 and deferred compensation expenses, restructuring charges, amortization of purchased intangibles, investment gains and losses, and the related tax impact of all of these items, 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.

Contacts

Adobe Systems Incorporated
Mike Saviage, 408-536-4416 (Investor Relations)
ir@adobe.com
Holly Campbell, 408-536-6401 (Public Relations)
campbell@adobe.com

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Contacts

Adobe Systems Incorporated
Mike Saviage, 408-536-4416 (Investor Relations)
ir@adobe.com
Holly Campbell, 408-536-6401 (Public Relations)
campbell@adobe.com