Adobe Reports Record Revenue in Q1 Fiscal 2011

SAN JOSE, Calif.--()--Adobe Systems Incorporated (Nasdaq:ADBE) today reported financial results for its first quarter ended March 4, 2011.

In the first quarter of fiscal 2011, Adobe achieved record revenue of $1.028 billion, compared to $858.7 million reported for the first quarter of fiscal 2010 and $1.008 billion reported in the fourth quarter of fiscal 2010. This represents 20 percent year-over-year revenue growth. Adobe’s first quarter revenue target range was $1 billion to $1.05 billion.

“Our record results in Q1 represent our sixth consecutive quarter of sequential revenue growth,” said Shantanu Narayen, president and CEO of Adobe. “Adobe’s vision for transforming how the world is creating, measuring and delivering digital experiences is resonating with our customers, and our solutions are enabling us to target large addressable markets that are fueling our growth.”

First Quarter Fiscal 2011 GAAP Results

Adobe’s GAAP diluted earnings per share for the first quarter of fiscal 2011 were $0.46, based on 511.3 million weighted average shares. This compares with GAAP diluted earnings per share of $0.24 reported in the first quarter of fiscal 2010 based on 532.6 million weighted average shares, and GAAP diluted earnings per share of $0.53 reported in the fourth quarter of fiscal 2010 based on 511.9 million weighted average shares.

GAAP operating income was $302.3 million in the first quarter of fiscal 2011, compared to $176.8 million in the first quarter of fiscal 2010 and $286.9 million in the fourth quarter of fiscal 2010. As a percent of revenue, GAAP operating income in the first quarter of fiscal 2011 was 29.4 percent, compared to 20.6 percent in the first quarter of fiscal 2010 and 28.5 percent in the fourth quarter of fiscal 2010.

GAAP net income was $234.6 million for the first quarter of fiscal 2011, compared to a GAAP net income of $127.2 million reported in the first quarter of fiscal 2010 and GAAP net income of $268.9 million in the fourth quarter of fiscal 2010.

First Quarter Fiscal 2011 Non-GAAP Results

Adobe’s non-GAAP diluted earnings per share for the first quarter of fiscal 2011 were $0.58. This compares with non-GAAP diluted earnings per share of $0.40 reported in the first quarter of fiscal 2010 and non-GAAP diluted earnings per share of $0.56 reported in the fourth quarter of fiscal 2010.

Adobe’s non-GAAP operating income was $400.1 million in the first quarter of fiscal 2011, compared to $289.3 million in the first quarter of fiscal 2010 and $384.0 million in the fourth quarter of fiscal 2010. As a percent of revenue, non-GAAP operating income in the first quarter of fiscal 2011 was 38.9 percent, compared to 33.7 percent in the first quarter of fiscal 2010 and 38.1 percent in the fourth quarter of fiscal 2010.

Non-GAAP net income was $298.1 million for the first quarter of fiscal 2011, compared to $211.7 million in the first quarter of fiscal 2010 and $285.7 million in the fourth quarter of fiscal 2010.

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

Second Quarter Fiscal 2011 Financial Targets

“Our hearts go out to everyone in Japan. Although Adobe has a very diversified business, Japan is our second largest country from a revenue perspective and March is typically our biggest revenue month of the year there due to fiscal year-end spending. Given the uncertain business environment in Japan, we are being prudent and have reduced our revenue expectation for our second quarter by $50 million — or roughly one-third of our original Q2 revenue expectation for Japan,” said Mark Garrett, executive vice president and CFO of Adobe.

For the second quarter of fiscal 2011, Adobe is now targeting revenue of $970 million to $1.02 billion.

The Company’s operating margin is targeted to be 24.5 percent to 27.5 percent on a GAAP basis, and 34 percent to 36 percent on a non-GAAP basis. In addition, the Company is targeting its share count to be between 510 million and 512 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 22 percent.

These targets lead to a second quarter diluted earnings per share target range of $0.33 to $0.40 on a GAAP basis, and an earnings per share target range of $0.47 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 or economic conditions in any of the major countries in which Adobe does business, including the impact of the earthquakes and related events in Japan on Adobe, its customers, suppliers and partners, 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 quarter ended March 4, 2011, which Adobe expects to file in April 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.

© 2011 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
March 4,

2011

  March 5,

2010

 
Revenue:
Products $ 842,689 $ 703,938
Subscription 106,171 95,507
Services and support   78,846     59,255  
Total revenue   1,027,706     858,700  
 
Cost of revenue:
Products 30,717 23,510
Subscription 47,878 45,735
Services and support   29,044     20,123  
Total cost of revenue   107,639     89,368  
 
Gross profit 920,067 769,332
 
Operating expenses:
Research and development 178,400 174,340
Sales and marketing 328,078 297,294
General and administrative 100,979 91,046
Restructuring charges 41 11,622
Amortization of purchased intangibles   10,235     18,197  
Total operating expenses   617,733     592,499  
 
Operating income 302,334 176,833
 
Non-operating income (expense):
Interest and other income (expense), net (817 ) 611
Interest expense (17,020 ) (7,695 )
Investment gains (losses), net   1,590     (3,534 )
Total non-operating income (expense), net   (16,247 )   (10,618 )
Income before income taxes 286,087 166,215
Provision for income taxes   51,496     39,061  
Net income $ 234,591   $ 127,154  
Basic net income per share $ 0.47   $ 0.24  
Shares used to compute basic net income per share   504,134     524,173  
Diluted net income per share $ 0.46   $ 0.24  
Shares used to compute diluted net income per share   511,345     532,645  
 

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

   
March 4, December 3,
  2011     2010  
 
ASSETS
 
Current assets:
Cash and cash equivalents $ 900,156 $ 749,891
Short-term investments 1,736,679 1,718,124

Trade receivables, net of allowances for doubtful
accounts of $15,575 and $15,233 respectively

533,353

554,328

Deferred income taxes 66,928 83,247
Prepaid expenses and other current assets   113,682     110,460  
Total current assets 3,350,798 3,216,050
 
Property and equipment, net 453,497 448,881
Goodwill 3,686,073 3,641,844
Purchased and other intangibles, net 447,616 457,263
Investment in lease receivable 207,239 207,239
Other assets   164,801     169,871  
Total assets $ 8,310,024   $ 8,141,148  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
Trade payables $ 54,742 $ 52,432
Accrued expenses 458,463 564,275
Capital lease obligations 8,900 8,799
Accrued restructuring 6,759 8,119
Income taxes payable 57,096 53,715
Deferred revenue   399,572     380,748  
Total current liabilities 985,532 1,068,088
 
Long-term liabilities:
Debt and capital lease obligations 1,511,553 1,513,662
Deferred revenue 43,826 48,929
Accrued restructuring 7,307 8,254
Income taxes payable 170,721 164,713
Deferred income taxes 120,756 103,098
Other liabilities   44,922     42,017  
Total liabilities 2,884,617 2,948,761
 
Stockholders’ equity:
Preferred stock, $0.0001 par value; 2,000 shares

authorized

Common stock, $0.0001 par value 61 61
Additional paid-in-capital 2,529,789 2,458,278
Retained earnings 6,045,631 5,980,914
Accumulated other comprehensive income 28,695 17,428

Treasury stock, at cost (95,847 and 98,937 shares,
respectively), net of re-issuances

 

(3,178,769

)

 

(3,264,294

)

Total stockholders’ equity   5,425,407     5,192,387  
Total liabilities and stockholders’ equity $ 8,310,024   $ 8,141,148  
 

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

 
Three Months Ended
March 4,

2011

  March 5,

2010

Cash flows from operating activities:
Net income $ 234,591 $ 127,154

Adjustments to reconcile net income to net cash provided by
operating activities:

 

 

Depreciation, amortization and accretion 66,286 68,581
Stock-based compensation expense 70,992 93,031
Unrealized investment (gains) losses (1,330 ) 2,331
Changes in deferred revenue 13,721 42,586
Changes in operating assets and liabilities   (52,158 )   (73,822 )
 
Net cash provided by operating activities   332,102     259,861  
 
Cash flows from investing activities:
Purchases of short-term investments, net of sales and maturities (23,374 ) (180,485 )
Purchases of property and equipment (32,421 ) (25,547 )
Purchases of long-term investments and other assets, net of sales (2,758 ) (2,687 )
Acquisitions, net of cash acquired   (36,572 )    
 
Net cash used for investing activities   (95,125 )   (208,719 )
 
Cash flows from financing activities:
Purchases of treasury stock (125,000 ) (20 )
Re-issuance of treasury stock 40,651 49,824
Proceeds from debt 1,493,439
Repayment of debt (2,169 ) (1,000,058 )
Payment of debt issuance costs (10,142 )
Excess tax benefits from stock-based compensation       7,058  
 
Net cash (used for) provided by financing activities   (86,518 )   540,101  
 
Effect of exchange rate changes on cash and cash equivalents   (194 )   (1,288 )
Net increase in cash and cash equivalents 150,265 589,955
Cash and cash equivalents at beginning of period   749,891     999,487  
Cash and cash equivalents at end of period $ 900,156   $ 1,589,442  
 

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

    March 4,    

2011

    March 5,    

2010

December 3,

2010

 
Operating income:
 
GAAP operating income $ 302,334 $ 176,833 $ 286,943
Stock-based and deferred compensation expense 71,614 64,886 59,736
Restructuring charges 41 11,622 2,193
Amortization of purchased intangibles 26,086   35,993   35,082  
Non-GAAP operating income $ 400,075   $ 289,334   $ 383,954  
 
Net income:
 
GAAP net income $ 234,591 $ 127,154 $ 268,850
Stock-based and deferred compensation expense 71,614 64,886 59,736
Restructuring charges 41 11,622 2,193
Amortization of purchased intangibles 26,086 35,993 35,082
Resolution of an income tax audit (39,574 )
Investment (gains) losses (1,590 ) 3,534 (4,620 )
Income tax adjustments (32,596 ) (31,502 ) (35,973 )
Non-GAAP net income $ 298,146   $ 211,687   $ 285,694  
 
Diluted net income per share:
 
GAAP diluted net income per share $ 0.46 $ 0.24 $ 0.53
Stock-based and deferred compensation expense 0.14 0.12 0.12
Restructuring charges 0.02
Amortization of purchased intangibles 0.05 0.07 0.07
Resolution of an income tax audit (0.08 )

Investment (gains) losses

0.01 (0.01 )
Income tax adjustments (0.07 ) (0.06 ) (0.07 )
Non-GAAP diluted net income per share

$ 0.58

 

$ 0.40

 

$ 0.56

 
 
Shares used in computing diluted net income per share 511,345 532,645 511,923
 
Three Months Ended
March 4,

2011

  March 5,

2010

  December 3,

2010

 
Operating expenses:
 
GAAP operating expenses $ 617,733 $ 592,499 $ 613,786
Stock-based and deferred compensation expense (67,931 ) (63,938 ) (58,373 )
Restructuring charges (41 ) (11,622 ) (2,193 )
Amortization of purchased intangibles (10,235 ) (18,197 )   (18,184 )
Non-GAAP operating expenses $ 539,526   $ 498,742   $ 535,036  

 

Three Months Ended
March 4,

2011

March 5,

2010

December 3,

2010

 
Operating margin:
 
GAAP operating margin 29.4 % 20.6 % 28.5 %
Stock-based and deferred compensation expense 7.0 7.6 5.9
Restructuring charges 1.4 0.2
Amortization of purchased intangibles 2.5   4.1     3.5  
Non-GAAP operating margin 38.9 % 33.7 %   38.1 %
               
Three Months Ended
March 4,
2011
Effective income tax rate:
 
GAAP effective income tax rate 18.0 %
R&D tax benefit for carryover of 2010 tax benefit

7.0

One-time charge related to acquisition (3.0 )
Non-GAAP effective income tax rate 22.0 %
 

Second Quarter Non-GAAP Financial Targets

(In millions, except per share data and percentages)

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

   
Second Quarter

Fiscal 2011

Low   High
Operating margin:  
 
GAAP operating margin 24.5 % 27.5 %
Stock-based and deferred compensation expense 6.8 6.1
Amortization of purchased intangibles   2.7       2.4  
Non-GAAP operating margin   34.0 %     36.0 %
 
Second Quarter

Fiscal 2011

Low   High
Diluted net income per share:
 
GAAP diluted net income per share $ 0.33 $ 0.40
Stock-based and deferred compensation expense 0.13 0.13
Amortization of purchased intangibles 0.05 0.05
Income tax adjustments   (0.04 )     (0.04 )
Non-GAAP diluted net income per share $ 0.47     $ 0.54  
 
Shares used to compute diluted net income per share   512.0       510.0  
 

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, resolution of an income tax audit, investment gains and losses, the net tax impact of the R&D tax benefit, the net tax impact of a one-time acquisition related charge, 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