Adobe Reports First Billion Dollar Quarter

Strong Momentum Across Major Businesses Drives Record Quarterly and Fiscal Year Revenue

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

In the fourth quarter of fiscal 2010, Adobe achieved record revenue of $1.008 billion, compared to $757.3 million reported for the fourth quarter of fiscal 2009 and $990.3 million reported in the third quarter of fiscal 2010. This represents 33 percent year-over-year revenue growth. Adobe’s fourth quarter revenue target range was $950 million to $1 billion.

The Company also reported record revenue of $3.800 billion in fiscal year 2010, compared to $2.946 billion in fiscal 2009. This represents 29 percent year-over-year revenue growth.

“We posted our first billion dollar quarter and record annual revenue in 2010, driven by outstanding performance across all of our major businesses,” said Shantanu Narayen, president and CEO of Adobe. “Adobe is transforming how the world is creating, measuring and delivering digital experiences. We are one of the most diversified software companies in the world and are entering 2011 with strong momentum.”

Fourth Quarter Fiscal 2010 GAAP Results

Adobe’s GAAP diluted earnings per share for the fourth quarter of fiscal 2010 were $0.53, based on 511.9 million weighted average shares. This compares with GAAP diluted loss per share of $0.06 reported in the fourth quarter of fiscal 2009 based on 532.0 million weighted average shares, and GAAP diluted earnings per share of $0.44 reported in the third quarter of fiscal 2010 based on 523.2 million weighted average shares.

GAAP operating income was $286.9 million in the fourth quarter of fiscal 2010, compared to $153.6 million in the fourth quarter of fiscal 2009 and $302.0 million in the third quarter of fiscal 2010. As a percent of revenue, GAAP operating income in the fourth quarter of fiscal 2010 was 28.5 percent, compared to 20.3 percent in the fourth quarter of fiscal 2009 and 30.5 percent in the third quarter of fiscal 2010.

GAAP net income was $268.9 million for the fourth quarter of fiscal 2010, compared to a GAAP net loss of $32.0 million reported in the fourth quarter of fiscal 2009 and GAAP net income of $230.1 million in the third quarter of fiscal 2010.

Fourth Quarter Fiscal 2010 Non-GAAP Results

Adobe’s non-GAAP diluted earnings per share for the fourth quarter of fiscal 2010 were $0.56. This compares with non-GAAP diluted earnings per share of $0.39 reported in the fourth quarter of fiscal 2009 and non-GAAP diluted earnings per share of $0.54 reported in the third quarter of fiscal 2010.

Adobe’s non-GAAP operating income was $384.0 million in the fourth quarter of fiscal 2010, compared to $265.2 million in the fourth quarter of fiscal 2009 and $384.9 million in the third quarter of fiscal 2010. As a percent of revenue, non-GAAP operating income in the fourth quarter of fiscal 2010 was 38.1 percent, compared to 35.0 percent in the fourth quarter of fiscal 2009 and 38.9 percent in the third quarter of fiscal 2010.

Non-GAAP net income was $285.7 million for the fourth quarter of fiscal 2010, compared to $206.8 million in the fourth quarter of fiscal 2009 and $284.0 million in the third quarter of fiscal 2010.

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

Fiscal Year 2010 Results

In fiscal year 2010, Adobe achieved annual revenue of $3.800 billion, compared to $2.946 billion in fiscal 2009. This represents 29 percent year-over-year revenue growth.

Adobe’s annual GAAP operating income in fiscal 2010 was $993.1 million, compared to $690.5 million in fiscal 2009. The annual GAAP operating margin was 26.1 percent in fiscal 2010, compared to 23.4 percent in fiscal 2009. Adobe’s annual non-GAAP operating income in fiscal 2010 was $1.393 billion, compared to $1.035 billion in fiscal 2009. The annual non-GAAP operating margin was 36.6 percent in fiscal 2010, compared to 35.1 percent in fiscal 2009.

The Company’s annual GAAP net income was $774.7 million in fiscal 2010, compared to $386.5 million in fiscal 2009. Adobe’s annual non-GAAP net income was $1.016 billion in fiscal 2010, compared to $814.7 million in fiscal 2009.

Adobe’s annual GAAP diluted earnings per share for fiscal 2010 were $1.47, compared to $0.73 in fiscal 2009. Non-GAAP diluted earnings per share for fiscal 2010 were $1.93, compared to $1.54 in fiscal 2009.

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

First Quarter Fiscal 2011 Financial Targets

For the first quarter of fiscal 2011, Adobe is targeting revenue of $1 billion to $1.05 billion. The Company’s operating margin is targeted to be 28 percent to 29.5 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 508 million and 510 million shares, and it is targeting non-operating expense between $16 million and $20 million. Adobe's GAAP and non-GAAP tax rates are expected to be approximately 15 percent and 22 percent, respectively.

These targets lead to a first quarter diluted earnings per share target range of $0.43 to $0.49 on a GAAP basis, and an earnings per share target range of $0.54 to $0.59 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 Annual Report on Form 10-K for our fiscal year ended Dec. 3, 2010, which Adobe expects to file in Jan. 2011. Adobe does not undertake an obligation to update forward-looking statements.

About Adobe Systems Incorporated

Adobe is changing the world through digital experiences. For more information, visit www.adobe.com.

© 2010 Adobe Systems Incorporated. All rights reserved. Adobe 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 Year Ended

December 3,
2010

     

November 27,
2009

 

December 3,
2010

     

November 27,
2009

 
Revenue:
Products $ 830,867 $ 670,397 $ 3,159,161 $ 2,684,789
Subscription 100,387 36,875 386,805 74,602
Services and support   76,692     50,011     254,034     186,462  
Total revenue   1,007,946     757,283     3,800,000     2,945,853  
 
Cost of revenue:
Products 35,151 40,744 127,453 180,611
Subscription 49,187 24,112 195,595 48,286
Services and support   22,879     17,468     80,454     67,835  
Total cost of revenue   107,217     82,324     403,502     296,732  
 
Gross profit 900,729 674,959 3,396,498 2,649,121
 
Operating expenses:
Research and development 170,378 137,852 680,332 565,141
Sales and marketing 322,708 257,883 1,244,197 981,903
General and administrative 100,323 74,287 383,499 298,749
Restructuring charges 2,193 25,394 23,266 41,260

Amortization of purchased intangibles and incomplete technology

  18,184     25,901     72,130     71,555  
Total operating expenses   613,786     521,317     2,403,424     1,958,608  
 
Operating income 286,943 153,642 993,074 690,513
 
Non-operating income (expense):
Interest and other income, net 11,234 6,627 13,139 31,380
Interest expense (16,786 ) (1,535 ) (56,952 ) (3,407 )
Investment gains (losses), net   4,620     1,478     (6,110 )   (16,966 )
Total non-operating income (expense), net   (932 )   6,570     (49,923 )   11,007  
Income before income taxes 286,011 160,212 943,151 701,520
Provision for income taxes   17,161     192,255     168,471     315,012  
Net income (loss) $ 268,850   $ (32,043 ) $ 774,680   $ 386,508  
Basic net income (loss) per share $ 0.53   $ (0.06 ) $ 1.49   $ 0.74  
 

Shares used to compute basic net income (loss) per share

  506,752     523,530     519,045     524,470  
Diluted net income (loss) per share $ 0.53   $ (0.06 ) $ 1.47   $ 0.73  
Shares used to compute diluted net income (loss) per share   511,923     531,961     525,824     530,610  
 
 

Condensed Consolidated Balance Sheets

             

(In thousands, except par value; unaudited)

December 3, November 27,
  2010       2009    
 
ASSETS
 
Current assets:
Cash and cash equivalents $ 749,891   $ 999,487  
Short-term investments 1,718,124 904,986
Trade receivables, net of allowances for doubtful accounts of $15,233 and $15,225 respectively

554,328

410,879

Deferred income taxes 83,247 77,417
Prepaid expenses and other current assets   110,460       80,855    
Total current assets 3,216,050 2,473,624
 
Property and equipment, net 448,881 388,132
Goodwill 3,641,844 3,494,589
Purchased and other intangibles, net 457,263 527,388
Investment in lease receivable 207,239 207,239
Other assets   169,871       191,265    
Total assets $ 8,141,148     $ 7,282,237    
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
Trade payables $ 52,432 $ 58,904
Accrued expenses 564,275 419,646
Current portion of capital lease obligation 8,799
Accrued restructuring 8,119 37,793
Income taxes payable 53,715 46,634
Deferred revenue   380,748       281,576    
Total current liabilities 1,068,088 844,553
 
Long-term liabilities:
Debt and non-current portion of capital lease obligation 1,513,662 1,000,000
Deferred revenue 48,929 36,717
Accrued restructuring 8,254 6,921
Income taxes payable 164,713 223,528
Deferred income taxes 103,098 252,486
Other liabilities   42,017       27,464    
Total liabilities 2,948,761 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 2,458,278 2,390,061
Retained earnings 5,980,914 5,299,914
Accumulated other comprehensive income 17,428 24,446

Treasury stock, at cost (98,937 and 78,177 shares, respectively), net of reissuances

 

(3,264,294)

 

 

 

(2,823,914)

 

 

Total stockholders’ equity   5,192,387       4,890,568    
Total liabilities and stockholders’ equity $ 8,141,148     $ 7,282,237    
 
 

Condensed Consolidated Statements of Cash Flows

     

(In thousands; unaudited)

Three Months Ended

December 3,
2010

       

November 27,
2009

Cash flows from operating activities:
Net income (loss) $ 268,850 $ (32,043 )
Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Depreciation, amortization and accretion 76,097 85,037
Stock-based compensation expense, net of tax 23,703 71,124
Unrealized investment losses (gains) 2,751 (1,685 )
Changes in deferred revenue 5,590 11,984
Changes in operating assets and liabilities   (66,370 )   119,424  
 
Net cash provided by operating activities   310,621     253,841  
 
Cash flows from investing activities:
Sales and maturities of short-term investments, net of purchases 34,326 517,679
Purchases of property and equipment (55,427 ) (34,933 )
Sales of long-term investments and other assets, net of purchases 11,378 8,035
Acquisitions, net of cash acquired   (193,281 )   (1,582,669 )
 
Net cash used for investing activities   (203,004 )   (1,091,888 )
 
Cash flows from financing activities:
Purchases of treasury stock (200,000 )
Reissuance of treasury stock 9,628 57,347
Proceeds from borrowings under line of credit 650,000
Repayment of debt (2,148 ) (13,897 )
Excess tax benefits from stock-based compensation   6,258     11,896  
 
Net cash (used for) provided by financing activities   (186,262 )   705,346  
 
Effect of exchange rate changes on cash and cash equivalents   14,387     44  
Net decrease in cash and cash equivalents (64,258 ) (132,657 )
Cash and cash equivalents at beginning of period   814,149     1,132,144  
Cash and cash equivalents at end of period $ 749,891   $ 999,487  
 
 

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             Year Ended

December 3,
2010

   

November 27,
2009

   

September 3,
2010

December 3,
2010

   

November 27,
2009

 
Operating income:
 
GAAP operating income $ 286,943 $ 153,642 $ 302,013 $ 993,074 $ 690,513
Stock-based and deferred compensation expense 59,736 41,689 50,058 234,311 170,506
Restructuring charges 2,193 25,394 (2,090 ) 23,266 41,260
Amortization of purchased intangibles and incomplete technology   35,082     44,461     34,936     142,020     132,667
Non-GAAP operating income $ 383,954   $ 265,186   $ 384,917   $ 1,392,671   $ 1,034,946
 
Net income:
 
GAAP net income (loss) $ 268,850 $ (32,043 ) $ 230,065 $ 774,680 $ 386,508
Stock-based and deferred compensation expense 59,736 41,689 50,058 234,311 170,506
Restructuring charges 2,193 25,394 (2,090 ) 23,266 41,260
Amortization of purchased intangibles and incomplete technology 35,082 44,461 34,936 142,020 132,667
Resolution of an income tax audit (39,574 ) (39,574 )
Investment (gains) losses (4,620 ) (1,478 ) (3,527 ) 6,110 16,966
Income tax adjustments   (35,973 )   128,740     (25,464 )   (125,276 )   66,764
Non-GAAP net income $ 285,694   $ 206,763   $ 283,978   $ 1,015,537   $ 814,671
 
Diluted net income per share:
 
GAAP diluted net income (loss) per share $ 0.53 $ (0.06 ) $ 0.44 $ 1.47 $ 0.73
Stock-based and deferred compensation expense 0.12 0.08 0.10 0.45 0.32
Restructuring charges 0.05 0.04 0.08
Amortization of purchased intangibles and incomplete technology 0.07 0.08 0.07 0.27 0.25
Resolution of an income tax audit (0.08 ) (0.08 )
Investment (gains) losses (0.01 ) (0.01 ) 0.01 0.03
Income tax adjustments   (0.07 )   0.24     (0.06 )   (0.23 )   0.13
Non-GAAP diluted net income per share

$

0.56

 

$

0.39

 

$

0.54

 

$

1.93

 

$

1.54

 
Shares used in computing diluted net income per share 511,923 531,961 523,179 525,824 530,610
 

 

               
Three Months Ended Year Ended

December 3,
2010

   

November 27,
2009

   

September 3,
2010

December 3,
2010

   

November 27,
2009

 
Operating expenses:
 
GAAP operating expenses $ 613,786 $ 521,317 $ 589,222 $ 2,403,424 $ 1,958,608
Stock-based and deferred compensation expense (58,373 ) (41,266 ) (48,985 ) (229,308 ) (167,961 )
Restructuring charges (2,193 ) (25,394 ) 2,090 (23,266 ) (41,260 )
Amortization of purchased intangibles and incomplete technology   (18,184 )   (25,901 )   (17,620 )   (72,130 )   (71,555 )
Non-GAAP operating expenses $ 535,036   $ 428,756   $ 524,707   $ 2,078,720   $ 1,677,832  

 

Three Months Ended Year Ended

December 3,
2010

November 27,
2009

September 3,
2010

December 3,
2010

November 27,
2009

 
GAAP operating margin 28.5 % 20.3 % 30.5 % 26.1 % 23.4 %
Stock-based and deferred compensation expense 5.9 5.5 5.1 6.2 5.8
Restructuring charges 0.2 3.4 (0.2 ) 0.6 1.4
Amortization of purchased intangibles and incomplete technology   3.5     5.8     3.5     3.7     4.5  
Non-GAAP operating margin   38.1 %   35.0 %   38.9 %   36.6 %   35.1 %
 
 
 
     

Three Months Ended

December 3,
2010
Effective income tax rate:
 
GAAP effective income tax rate 6.0 %
Stock-based and deferred compensation expense

8.4

Restructuring charges 0.3
Investment gains (0.6 )
Amortization of purchased intangibles 4.9
Resolution of an income tax audit 5.5  
Non-GAAP effective income tax rate 24.5 %

 

 

First Quarter Non-GAAP Financial Targets

     

(In millions, except per share data and percentages)

The following tables show Adobe’s first quarter
fiscal year 2011 GAAP financial targets
reconciled to non-GAAP financial targets included
in this release.

First Quarter
Fiscal 2011

Low         High
Operating margin:        
 
GAAP operating margin 28.0 % 29.5 %
Stock-based and deferred compensation expense 6.0 5.6
Restructuring charges 0.4 0.4
Amortization of purchased intangibles 2.6           2.5  
Non-GAAP operating margin 37.0 %         38.0 %
 
 
     

First Quarter
Fiscal 2011

Low     High
Diluted net income per share:    
 
GAAP diluted net income per share $ 0.43 $ 0.49
Stock-based and deferred compensation expense 0.13 0.12
Restructuring charges 0.01 0.01
Amortization of purchased intangibles 0.05 0.05
Income tax adjustments   (0.08 )       (0.08 )
Non-GAAP diluted net income per share $ 0.54       $ 0.59  
 
Shares used to compute diluted net income per share   510.0         508.0  
 
 
      First Quarter
Fiscal 2011
Effective income tax rate:
 
GAAP effective income tax rate 15.0 %
Impacts of retroactive application to FY2010 of the R&D tax credit

7.0

 
Non-GAAP effective income tax rate 22.0 %
 
 

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 and incomplete technology, the resolution of an income tax audit, investment gains and losses, the R&D tax benefit, 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
Investor Relations
Mike Saviage, 408-536-4416
ir@adobe.com
or
Adobe Systems Incorporated
Public Relations
Holly Campbell, 408-536-6401
campbell@adobe.com

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Contacts

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