Adobe Reports Strong Financial Results

SAN JOSE, Calif.--()--Adobe Systems Incorporated (Nasdaq:ADBE) today reported financial results for its second quarter fiscal year 2011 ended June 3, 2011.

Second Quarter Financial Highlights

  • Revenue grew 9 percent year-over-year to $1.023 billion. The Company’s targeted revenue range was $970 million to $1.020 billion.
  • GAAP diluted earnings per share grew 61 percent year-over-year to $0.45. Non-GAAP diluted earnings per share grew 25 percent year-over-year to $0.55.
  • GAAP operating income grew 22 percent year-over-year to $276.7 million. GAAP operating margin was 27.0 percent, compared to 24.1 percent in Q2 fiscal 2010. Non-GAAP operating income grew 13 percent year-over-year to $376.4 million. Non-GAAP operating margin was 36.8 percent, compared to 35.5 percent in Q2 fiscal 2010.
  • GAAP net income grew 54 percent year-over-year to $229.4 million. Non-GAAP net income grew 20 percent to $279.9 million.
  • Deferred revenue grew to $482.0 million, compared to $443.4 million as of the end of Q1 fiscal 2011.
  • Cash flow from operations was $389.3 million.
  • Adobe repurchased 13.7 million shares of stock during the quarter.

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

Executive Quotes

“Our strong Q2 performance demonstrates our strategy of enabling users to make, manage and measure great digital experiences is resonating with our customers,” said Shantanu Narayen, president and CEO of Adobe.

“Given our execution in Q2 against our large growth opportunities, we are reaffirming our 10 percent revenue growth objective in fiscal year 2011,” said Mark Garrett, executive vice president and CFO of Adobe.

Second Quarter Fiscal 2011 Product Highlights

  • In Content Authoring, Creative Suite 5.5 shipped during Q2, maintaining the strong revenue run-rate that Creative Suite 5 had established in the previous four quarters.
  • In Digital Marketing Optimization, Omniture achieved record revenue, along with year-over-year bookings growth in excess of 20 percent.
  • In Customer Experience Management, Enterprise segment revenue grew 34 percent year-over-year.
  • Acrobat achieved 17 percent year-over-year growth.

Financial Outlook

For the third quarter of fiscal 2011, Adobe is targeting revenue of $1 billion to $1.050 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 501 million and 503 million shares, and it is targeting non-operating expense between $17 million and $21 million. Adobe's GAAP and non-GAAP tax rates are expected to be approximately 22 percent.

These targets lead to a third quarter diluted earnings per share target range of $0.35 to $0.42 on a GAAP basis, and an earnings per share target range of $0.50 to $0.56 on a non-GAAP basis.

Adobe also reaffirmed it is targeting approximately 10 percent revenue growth in fiscal year 2011, and expects its full year operating margin to be approximately 27.5 percent on a GAAP basis, and approximately 37 percent 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, and impairment of Adobe’s investment portfolio due to deterioration of the capital markets. 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 June 3, 2011, which Adobe expects to file later in June 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 Six Months Ended
June 3,   June 4, June 3,   June 4,
2011 2010 2011 2010
 
Revenue:
Products $ 830,281 $ 795,260 $ 1,672,970 $ 1,499,198
Subscription 109,169 92,279 215,340 187,786
Services and support   83,729     55,496     162,575     114,751  
Total revenue   1,023,179     943,035     2,050,885     1,801,735  
 
Cost of revenue:
Products 34,666 39,645 65,383 63,155
Subscription 47,329 50,190 95,207 95,925
Services and support   27,206     17,998     56,250     38,121  
Total cost of revenue   109,201     107,833     216,840     197,201  
 
Gross profit 913,978 835,202 1,834,045 1,604,534
 
Operating expenses:
Research and development 183,211 167,318 361,611 341,658
Sales and marketing 348,690 320,976 676,768 618,270
General and administrative 95,547 89,953 196,526 180,999
Restructuring charges (586 ) 11,541 (545 ) 23,163
Amortization of purchased intangibles   10,392     18,129     20,627     36,326  
Total operating expenses   637,254     607,917     1,254,987     1,200,416  
 
Operating income 276,724 227,285 579,058 404,118
 
Non-operating income (expense):
Interest and other income (expense), net (839 ) (6,313 ) (1,656 ) (5,702 )
Interest expense (16,727 ) (16,076 ) (33,747 ) (23,771 )
Investment gains (losses), net   86     (10,723 )   1,676     (14,257 )
Total non-operating income (expense), net   (17,480 )   (33,112 )   (33,727 )   (43,730 )
Income before income taxes 259,244 194,173 545,331 360,388
Provision for income taxes   29,808     45,562     81,304     84,623  
Net income $ 229,436   $ 148,611   $ 464,027   $ 275,765  
Basic net income per share $ 0.46   $ 0.28   $ 0.92   $ 0.53  
Shares used to compute basic net income per share   499,686     526,148     501,910     525,124  
Diluted net income per share $ 0.45   $ 0.28   $ 0.91   $ 0.52  
Shares used to compute diluted net income per share   506,280     533,259     509,572     533,305  
 

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

   
June 3, December 3,
2011 2010
 
ASSETS
 
Current assets:
Cash and cash equivalents $ 827,475 $ 749,891
Short-term investments 1,798,045 1,718,124
Trade receivables, net of allowances for doubtful accounts of $14,603 and $15,233 respectively

568,570

554,328

Deferred income taxes 68,017 83,247
Prepaid expenses and other current assets   127,211     110,460  
Total current assets 3,389,318 3,216,050
 
Property and equipment, net 463,415 448,881
Goodwill 3,693,505 3,641,844
Purchased and other intangibles, net 424,199 457,263
Investment in lease receivable 207,239 207,239
Other assets   162,040     169,871  
Total assets $ 8,339,716   $ 8,141,148  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
Trade payables $ 60,533 $ 52,432
Accrued expenses 496,535 564,275
Capital lease obligations 9,003 8,799
Accrued restructuring 5,260 8,119
Income taxes payable 40,970 53,715
Deferred revenue   438,078     380,748  
Total current liabilities 1,050,379 1,068,088
 
Long-term liabilities:
Debt and capital lease obligations 1,509,428 1,513,662
Deferred revenue 43,949 48,929
Accrued restructuring 7,203 8,254
Income taxes payable 173,023 164,713
Deferred income taxes 121,996 103,098
Other liabilities   44,323     42,017  
Total liabilities 2,950,301 2,948,761
 
Stockholders’ equity:
Common stock, $0.0001 par value 61 61
Additional paid-in-capital 2,611,997 2,458,278
Retained earnings 6,228,574 5,980,914
Accumulated other comprehensive income 54,342 17,428
Treasury stock, at cost (107,071 and 98,937 shares, respectively), net of re-issuances  

(3,505,559

)

 

(3,264,294

)

Total stockholders’ equity   5,389,415     5,192,387  
Total liabilities and stockholders’ equity $ 8,339,716   $ 8,141,148  
 

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

 
Three Months Ended
June 3,   June 4,
2011 2010
Cash flows from operating activities:
Net income $ 229,436 $ 148,611
Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Depreciation, amortization and accretion 66,620 74,906
Stock-based compensation expense 73,403 61,804
Unrealized investment (gains) losses 763 9,891
Changes in deferred revenue 38,629 44,600
Changes in operating assets and liabilities   (19,520 )   (88,722 )
 
Net cash provided by operating activities   389,331     251,090  
 
Cash flows from investing activities:
Purchases of short-term investments, net of sales and maturities (61,166 ) (417,860 )
Purchases of property and equipment (37,501 ) (49,628 )
Purchases of long-term investments and other assets, net of sales   (3,808 )   (13,415 )
 
Net cash used for investing activities   (102,475 )   (480,903 )
 
Cash flows from financing activities:
Purchases of treasury stock (420,015 ) (250,000 )
Re-issuance of treasury stock 46,732 34,236
Repayment of debt (1,455 )
Payment of debt issuance costs (520 )
Excess tax benefits from stock-based compensation   8,778     1,427  
 
Net cash used for financing activities   (365,960 )   (214,857 )
 
Effect of exchange rate changes on cash and cash equivalents   6,423     (7,166 )
Net decrease in cash and cash equivalents (72,681 ) (451,836 )
Cash and cash equivalents at beginning of period   900,156     1,589,442  
Cash and cash equivalents at end of period $ 827,475   $ 1,137,606  
 

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
June 3,   June 4,   March 4,
2011 2010 2011
 
Operating income:
 
GAAP operating income $ 276,724 $ 227,285 $ 302,334
Stock-based and deferred compensation expense 74,869 59,631 71,614
Restructuring charges (586 ) 11,541 41
Amortization of purchased intangibles   25,372     36,009     26,086  
Non-GAAP operating income $ 376,379   $ 334,466   $ 400,075  
 
Net income:
 
GAAP net income $ 229,436 $ 148,611 $ 234,591
Stock-based and deferred compensation expense 74,869 59,631 71,614
Restructuring charges (586 ) 11,541 41
Amortization of purchased intangibles 25,372 36,009 26,086
Investment (gains) losses (86 ) 10,723 (1,590 )
Income tax adjustments   (49,131 )   (32,337 )   (32,596 )
Non-GAAP net income $ 279,874   $ 234,178   $ 298,146  
 
Diluted net income per share:
 
GAAP diluted net income per share $ 0.45 $ 0.28 $ 0.46
Stock-based and deferred compensation expense 0.15 0.11 0.14
Restructuring charges 0.02
Amortization of purchased intangibles 0.05 0.07 0.05
Investment (gains) losses 0.02
Income tax adjustments   (0.10 )   (0.06 )   (0.07 )
Non-GAAP diluted net income per share $ 0.55   $ 0.44   $ 0.58  
 
Shares used in computing diluted net income per share 506,280 533,259 511,345
 

Non-GAAP Results (continued)

(In thousands, except percentages)

 
Three Months Ended
June 3,   June 4,   March 4,
2011 2010 2011
 
Operating expenses:
 
GAAP operating expenses $ 637,254 $ 607,917 $ 617,733
Stock-based and deferred compensation expense (70,707 ) (58,012 ) (67,931 )
Restructuring charges 586 (11,541 ) (41 )
Amortization of purchased intangibles   (10,392 )   (18,129 )   (10,235 )
Non-GAAP operating expenses $ 556,741   $ 520,235   $ 539,526  

 

Three Months Ended
June 3, June 4, March 4,
2011 2010 2011
 
Operating margin:
 
GAAP operating margin 27.0 % 24.1 % 29.4 %
Stock-based and deferred compensation expense 7.3 6.3 7.0
Restructuring charges (0.1 ) 1.2
Amortization of purchased intangibles   2.6     3.9     2.5  
Non-GAAP operating margin   36.8 %   35.5 %   38.9 %
 
  Three Months Ended
June 3,
2011
Effective income tax rate:
 
GAAP effective income tax rate 11.5 %
Impact of state income tax ruling 10.5  
Non-GAAP effective income tax rate 22.0 %
 

Third Quarter Non-GAAP Financial Targets

(In millions, except per share data and percentages)
The following tables show Adobe’s third quarter fiscal year 2011 GAAP financial targets reconciled to non-GAAP financial targets included in this release.
 

  Third Quarter  

 

Fiscal 2011

Fiscal

Low   High   2011
Operating margin:  
 
GAAP operating margin 24.5 % 27.5 % 27.5 %
Stock-based and deferred compensation expense 6.9 6.2 7.1
Amortization of purchased intangibles   2.6       2.3     2.4  
Non-GAAP operating margin   34.0 %     36.0 %   37.0 %
 
Third Quarter
Fiscal 2011
Low   High
Diluted net income per share:
 
GAAP diluted net income per share $ 0.35 $ 0.42
Stock-based and deferred compensation expense 0.14 0.13
Amortization of purchased intangibles 0.05 0.05
Income tax adjustments   (0.04 )     (0.04 )
Non-GAAP diluted net income per share $ 0.50     $ 0.56  
 
Shares used to compute diluted net income per share   503.0       501.0  
 

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, income tax adjustments, 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

Investor Relations:
Adobe Systems Incorporated
Mike Saviage, 408-536-4416
ir@adobe.com
or
Public Relations:
Adobe Systems Incorporated
Jodi Sorensen, 408-536-2084
jsorensen@adobe.com

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Contacts

Investor Relations:
Adobe Systems Incorporated
Mike Saviage, 408-536-4416
ir@adobe.com
or
Public Relations:
Adobe Systems Incorporated
Jodi Sorensen, 408-536-2084
jsorensen@adobe.com