Adobe Reports Strong Second Quarter Financial Results

SAN JOSE, Calif.--()--Adobe Systems Incorporated (Nasdaq:ADBE) today reported financial results for its second quarter of fiscal year 2012 ended June 1, 2012.

Second Quarter Financial Highlights

  • Revenue in Q2 FY2012 was $1.124 billion, which represents 10 percent year-over-year growth.
  • Diluted earnings per share were $0.45 on a GAAP-basis, and $0.60 on a non-GAAP basis.
  • Operating income was $305.1 million and net income was $223.9 million on a GAAP-basis. Operating income was $404.4 million and net income was $299.6 million on a non-GAAP basis.
  • Deferred revenue grew by $43.9 million quarter-over-quarter to a total of $592.8 million.
  • Cash flow from operations was $448.2 million.

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

Executive Quotes

“Our strong Q2 results were driven by the successful launch of Creative Cloud and Creative Suite 6, strong Acrobat revenue and 35 percent year-over-year revenue growth in our Digital Marketing Suite business,” said Shantanu Narayen, president and CEO of Adobe. “These results demonstrate our leadership in the Digital Media and Digital Marketing markets.”

“The initial transition to Creative Cloud exceeded our targets, demonstrating that creative professionals see significant value in the new subscription-based offering,” said Mark Garrett, executive vice president and CFO of Adobe. “Over the long-term, this bodes well for our business, as it increases our recurring revenue and enables Adobe to interact more closely with our customers.”

Financial Outlook

Adobe provided financial targets for the third quarter of fiscal 2012 and updated its full year fiscal 2012 targets. These targets reflect a weaker demand forecast in Europe.

For the third quarter of fiscal 2012, Adobe is targeting revenue of $1.075 billion to $1.125 billion. On a diluted earnings per share basis, the company is targeting a range of $0.38 to $0.43 on a GAAP basis, and $0.56 to $0.61 on a non-GAAP basis.

Adobe is targeting its Q3 share count to be between 501 million and 502 million shares, and it is targeting non-operating expense between $18 million and $20 million. Adobe's tax rate is expected to be approximately 23.5 percent on a GAAP basis and 22.5 percent on a non-GAAP basis.

For fiscal year 2012, the company narrowed its annual revenue growth target to a range of six to seven percent, versus its prior target range of six to eight percent. Adobe also adjusted its annual GAAP diluted earnings per share target range to $1.69 to $1.76 from its prior targeted range of $1.63 to $1.73; and its non-GAAP diluted earnings per share target range to $2.40 to $2.46 from its prior targeted range of $2.38 to $2.48.

A reconciliation between 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, non-operating expense, tax rate, share count, earnings per share, increases in recurring revenue and our ability to execute against our strategy in our key growth areas, 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, including our increased emphasis on a cloud strategy, fluctuations in subscription renewal or upgrade rates, 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, 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, increasing regulatory focus on privacy issues, 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, Adobe’s ability to comply with new laws and regulations globally, and costs associated with such compliance, 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 1, 2012, which Adobe expects to file later in June 2012. 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.

© 2012 Adobe Systems Incorporated. All rights reserved. Adobe, Acrobat, Creative Cloud, 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,
2012
  June 3,
2011
  June 1,
2012
  June 3,
2011
Revenue:
Products $ 871,022 $ 829,979 $ 1,679,543 $ 1,672,668
Subscription 159,519 109,471 305,749 215,642
Services and support 93,908   83,729   184,377   162,575  
Total revenue 1,124,449   1,023,179   2,169,669   2,050,885  
 
Cost of revenue:
Products 40,074 34,666 65,742 65,383
Subscription 54,823 47,329 103,603 95,207
Services and support 36,021   27,206   69,838   56,250  
Total cost of revenue 130,918   109,201   239,183   216,840  
 
Gross profit 993,531 913,978 1,930,486 1,834,045
 
Operating expenses:
Research and development 180,903 183,211 358,631 361,611
Sales and marketing 386,459 348,690 745,422 676,768
General and administrative 110,603 95,547 213,284 196,526
Restructuring charges (2,191 ) (586 ) (5,016 ) (545 )
Amortization of purchased intangibles 12,614   10,392   24,043   20,627  
Total operating expenses 688,388   637,254   1,336,364   1,254,987  
 
Operating income 305,143 276,724 594,122 579,058
 
Non-operating income (expense):
Interest and other income (expense), net (1,128 ) (839 ) (3,913 ) (1,656 )
Interest expense (16,629 ) (16,727 ) (33,467 ) (33,747 )
Investment gains (losses), net 7,188   86   8,209   1,676  
Total non-operating income (expense), net (10,569 ) (17,480 ) (29,171 ) (33,727 )
Income before income taxes 294,574 259,244 564,951 545,331
Provision for income taxes 70,698   29,808   155,866   81,304  
Net income $ 223,876   $ 229,436   $ 409,085   $ 464,027  
Basic net income per share $ 0.45   $ 0.46   $ 0.83   $ 0.92  
Shares used to compute basic net income per share 495,950   499,686   494,983   501,910  
Diluted net income per share $ 0.45   $ 0.45   $ 0.81   $ 0.91  
Shares used to compute diluted net income per share 501,377   506,280   502,154   509,572  
 

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

   
June 1,
2012
December 2,
2011
ASSETS
 
Current assets:
Cash and cash equivalents $ 951,238 $ 989,500
Short-term investments 2,046,879 1,922,192

Trade receivables, net of allowances for doubtful accounts of $14,161 and $15,080, respectively

529,391 634,373
Deferred income taxes 79,360 91,963
Prepaid expenses and other current assets 163,939   133,423  
Total current assets 3,770,807 3,771,451
 
Property and equipment, net 573,566 527,828
Goodwill 4,122,813 3,849,217
Purchased and other intangibles, net 600,332 545,526
Investment in lease receivable 207,239 207,239
Other assets 91,075   89,922  
Total assets $ 9,365,832   $ 8,991,183  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
Trade payables $ 69,416 $ 86,660
Accrued expenses 555,024 554,941
Capital lease obligations 9,426 9,212
Accrued restructuring 18,337 80,930
Income taxes payable 58,326 42,634
Deferred revenue 535,115   476,402  
Total current liabilities 1,245,644 1,250,779
 
Long-term liabilities:
Debt and capital lease obligations 1,500,668 1,505,096
Deferred revenue 57,663 55,303
Accrued restructuring 12,148 7,449
Income taxes payable 151,671 156,958
Deferred income taxes 250,756 181,602
Other liabilities 47,636   50,883  
Total liabilities 3,266,186 3,208,070
 
Stockholders' equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized
Common stock, $0.0001 par value 61 61
Additional paid-in-capital 2,886,953 2,753,896
Retained earnings 6,671,230 6,528,735
Accumulated other comprehensive income 20,615 29,950
Treasury stock, at cost (106,847 and 109,294 shares, respectively), net of re-issuances (3,479,213 ) (3,529,529 )
Total stockholders' equity 6,099,646   5,783,113  
Total liabilities and stockholders' equity $ 9,365,832   $ 8,991,183  
 

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

 
Three Months Ended
June 1,
2012
  June 3,
2011
Cash flows from operating activities:
Net income $ 223,876 $ 229,436
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion 77,174 66,620
Stock-based compensation expense 62,959 73,403
Unrealized investment (gains) losses (4,235 ) 763
Changes in deferred revenue 43,814 38,629
Changes in other operating assets and liabilities 44,630   (19,520 )
Net cash provided by operating activities 448,218   389,331  
 
Cash flows from investing activities:
Purchases of short-term investments, net of sales and maturities (106,627 ) (61,166 )
Purchases of property and equipment (60,767 ) (37,501 )
Sales (purchases) of long-term investments, intangibles and other assets, net 19,134   (3,808 )
Net cash used for investing activities (148,260 ) (102,475 )
 
Cash flows from financing activities:
Purchases of treasury stock (225,000 ) (420,015 )
Re-issuance of treasury stock 75,871 46,732
Repayment of debt and capital lease obligations (2,290 ) (1,455 )
Excess tax benefits from stock-based compensation 2,684   8,778  
Net cash used for financing activities (148,735 ) (365,960 )
Effect of exchange rate changes on cash and cash equivalents (1,248 ) 6,423  
Net (decrease) increase in cash and cash equivalents 149,975 (72,681 )
Cash and cash equivalents at beginning of period 801,263   900,156  
Cash and cash equivalents at end of period $ 951,238   $ 827,475  
 

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 1,
2012
  June 3,
2011
  March 2,
2012
Operating income:
 
GAAP operating income $ 305,143 $ 276,724 $ 288,979
Stock-based and deferred compensation expense 70,714 74,869 72,633
Restructuring charges (2,191 ) (586 ) (2,825 )
Amortization of purchased intangibles 30,704   25,372   27,864  
Non-GAAP operating income $ 404,370   $ 376,379   $ 386,651  
 
Net income:
 
GAAP net income $ 223,876 $ 229,436 $ 185,209
Stock-based and deferred compensation expense 70,714 74,869 72,633
Restructuring charges (2,191 ) (586 ) (2,825 )
Amortization of purchased intangibles 30,704 25,372 27,864
Investment (gains) losses (7,188 ) (86 ) (1,021 )
Income tax adjustments (16,290 ) (49,131 ) 2,647  
Non-GAAP net income $ 299,625   $ 279,874   $ 284,507  
 
Diluted net income per share:
 
GAAP diluted net income per share $ 0.45 $ 0.45 $ 0.37
Stock-based and deferred compensation expense 0.14 0.15 0.15
Restructuring charges (0.01 )
Amortization of purchased intangibles 0.06 0.05 0.06
Investment (gains) losses (0.01 )
Income tax adjustments (0.04 ) (0.10 )  
Non-GAAP diluted net income per share $ 0.60   $ 0.55   $ 0.57  
 
Shares used in computing diluted net income per share 501,377 506,280 500,378
 

Non-GAAP Results

(In thousands, except percentages)

 
Three Months Ended
June 1,
2012
  June 3,
2011
  March 2,
2012
 
Operating expenses:
 
GAAP operating expenses $ 688,388 $ 637,254 $ 647,976
Stock-based and deferred compensation expense (66,224 ) (70,707 ) (68,102 )
Restructuring charges 2,191 586 2,825
Amortization of purchased intangibles (12,614 ) (10,392 ) (11,429 )
Non-GAAP operating expenses $ 611,741   $ 556,741   $ 571,270  
 
 

Three Months
Ended

June 1,
2012
Effective income tax rate:
 
GAAP effective income tax rate 24.0%
Stock-based and deferred compensation expense (1.2)%
Investment (gains) losses 0.1%
Amortization of purchased intangibles (0.4)%
Non-GAAP effective income tax rate 22.5%
 

Non-GAAP Financial Targets

(In millions, except per share data)

The following tables show Adobe's third quarter and fiscal year 2012 GAAP financial targets reconciled to non-GAAP financial targets included in this release.

  Third Quarter
Fiscal 2012
Low   High
Diluted net income per share:
 
GAAP diluted net income per share $ 0.38 $ 0.43
Stock-based and deferred compensation expense 0.16 0.16
Amortization of purchased intangibles 0.06 0.06
Income tax adjustments (0.04 ) (0.04 )
Non-GAAP diluted net income per share $ 0.56   $ 0.61  
 
Shares used to compute diluted net income per share 502.0   501.0  
 
 

Three Months

Ended

August 31,
2012
Effective income tax rate:
 
GAAP effective income tax rate 23.5 %
Stock-based and deferred compensation expense (1.0 )
Non-GAAP effective income tax rate 22.5 %
 
  Fiscal 2012

Previous Targets

  Fiscal 2012

Adjusted Targets

Low   High   Low   High
Diluted net income per share:
 
GAAP diluted net income per share $ 1.63 $ 1.73 $ 1.69 $ 1.76
Stock-based and deferred compensation expense 0.65 0.64 0.60 0.59
Amortization of purchased intangibles 0.24 0.24 0.24 0.24
Income tax adjustments (0.14 ) (0.13 ) (0.12 ) (0.12 )
Restructuring charges     (0.01 ) (0.01 )
Non-GAAP diluted net income per share $ 2.38   $ 2.48   $ 2.40   $ 2.46  
 
Shares used to compute diluted net income per share 504.0   502.0   501.0   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

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

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Contacts

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