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Press release from Business Wire

Adobe Reports Record Quarterly and Annual Revenue

<p> <b>Strong Execution Against Digital Media and Digital Marketing Opportunities Drives Q4 and FY2011 Upside</b> </p>

Thursday, December 15, 2011

Adobe Reports Record Quarterly and Annual Revenue16:05 EST Thursday, December 15, 2011 SAN JOSE, Calif. (Business Wire) -- Adobe Systems Incorporated (Nasdaq:ADBE) today reported financial results for its fourth quarter and fiscal year ended Dec. 2, 2011. Fourth Quarter Financial Highlights Revenue was $1.152 billion, which exceeded the company's target range of $1.075 billion to $1.125 billion, and represents 14 percent year-over-year revenue growth. Diluted earnings per share were $0.35 on a GAAP-basis, and $0.67 on a non-GAAP basis. Operating income was $246.1 million, operating margin was 21.4 percent and net income was $173.7 million on a GAAP-basis. Operating income was $444.5 million, operating margin was 38.6 percent and net income was $332.6 million on a non-GAAP basis. Deferred revenue grew by $47.6 million to $531.7 million. Cash flow from operations was $496.8 million. A reconciliation between GAAP and non-GAAP results is provided at the end of this press release. Fiscal Year 2011 Financial Highlights Adobe achieved revenue of $4.216 billion, compared to $3.800 billion in fiscal 2010. This represents 11 percent year-over-year growth, and exceeded the company's target of ten percent growth provided at the outset of the year. GAAP diluted earnings per share for fiscal 2011 were $1.65, compared to $1.47 in fiscal 2010. Non-GAAP diluted earnings per share for fiscal 2011 were $2.35, compared to $1.93 in fiscal 2010. Operating income was $1.099 billion, operating margin was 26.1 and net income was $832.8 million on a GAAP-basis. Operating income was $1.587 billion, operating margin was 37.6 percent and net income was $1.183 billion on a non-GAAP basis. Adobe generated $1.5 billion in cash flow during the year. The company repurchased 21.8 million shares during the year, returning approximately $695 million to stockholders. A reconciliation between GAAP and non-GAAP results is provided at the end of this press release. Executive Quotes “Adobe's record results in Q4 and fiscal 2011 were driven by strong performance in our digital media and digital marketing businesses,” said Shantanu Narayen, president and CEO of Adobe. “We intend to be the market leader in these two large categories, which will drive strong revenue and earnings growth.” “Our outstanding Q4 finish enabled Adobe to beat the annual revenue growth target we provided at the outset of the year,” said Mark Garrett, executive vice president and CFO of Adobe. “We also drove $1.5 billion in cash flow during the year, and grew annual non-GAAP earnings per share by 22 percent.” Financial Outlook For the first quarter of fiscal 2012, Adobe is targeting revenue of $1.025 billion to $1.075 billion. On a diluted earnings per share basis, the company is targeting a range of $0.37 to $0.43 on a GAAP basis, and $0.54 to $0.59 on a non-GAAP basis. Adobe is targeting its share count to be between 500 million and 502 million shares, and it is targeting non-operating expense between $19 million and $22 million. Adobe's tax rate is expected to be approximately 23 percent on both a GAAP and non-GAAP basis. For fiscal year 2012, Adobe continues to target annual revenue growth of four to six percent. On a diluted earnings per share basis, the company is targeting a range of $1.70 to $1.83 on a GAAP basis, and $2.37 to $2.47 on a non-GAAP basis. These targets do not include the impact of Adobe's expected acquisition of Efficient Frontier, which the company expects to close later in Q1 fiscal 2012. 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 and our ability to align our business to successfully respond to changes in our industry, 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, 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 Annual Report on Form 10-K for our fiscal year ended Dec. 2, 2011, which Adobe expects to file in Jan. 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. © 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   Year EndedDecember 2, 2011   December 3, 2010December 2, 2011   December 3,2010   Revenue: Products $ 936,958 $ 830,867 $ 3,424,472 $ 3,159,161 Subscription 123,374 100,387 450,645 386,805 Services and support   91,829     76,692     341,141     254,034   Total revenue   1,152,161     1,007,946     4,216,258     3,800,000     Cost of revenue: Products 34,048 35,151 125,640 127,453 Subscription 51,334 49,187 194,033 195,595 Services and support   30,997     22,879     118,200     80,454   Total cost of revenue   116,379     107,217     437,873     403,502     Gross profit 1,035,782 900,729 3,778,385 3,396,498   Operating expenses: Research and development 195,403 170,378 738,053 680,332 Sales and marketing 368,330 322,708 1,385,822 1,244,197 General and administrative 119,586 100,323 414,605 383,499 Restructuring and other charges 94,502 2,193 97,773 23,266 Amortization of purchased intangibles   11,830     18,184     42,833     72,130   Total operating expenses   789,651     613,786     2,679,086     2,403,424     Operating income 246,131 286,943 1,099,299 993,074   Non-operating income (expense): Interest and other income (expense), net (1,351 ) 11,234 (2,974 ) 13,139 Interest expense (16,774 ) (16,786 ) (66,952 ) (56,952 ) Investment gains (losses), net   5,174     4,620     5,857     (6,110 ) Total non-operating income (expense), net   (12,951 )   (932 )   (64,069 )   (49,923 ) Income before income taxes 233,180 286,011 1,035,230 943,151 Provision for income taxes   59,461     17,161     202,383     168,471   Net income $ 173,719   $ 268,850   $ 832,847   $ 774,680   Basic net income per share $ 0.35   $ 0.53   $ 1.67   $ 1.49   Shares used to compute basic net income per share   491,523     506,752     497,469     519,045   Diluted net income per share $ 0.35   $ 0.53   $ 1.65   $ 1.47   Shares used to compute diluted net income per share   496,288     511,923     503,921     525,824     Condensed Consolidated Balance Sheets (In thousands, except par value; unaudited) December 2,   December 3,   2011     2010     ASSETS   Current assets: Cash and cash equivalents $ 989,500 $ 749,891 Short-term investments 1,922,192 1,718,124 Trade receivables, net of allowances for doubtful accounts of $15,080 and $15,233, respectively 634,373 554,328 Deferred income taxes 91,963 83,247 Prepaid expenses and other current assets   133,423     110,460   Total current assets 3,771,451 3,216,050   Property and equipment, net 527,828 448,881 Goodwill 3,849,217 3,641,844 Purchased and other intangibles, net 545,526 528,784 Investment in lease receivable 207,239 207,239 Other assets   89,922     98,350   Total assets $ 8,991,183   $ 8,141,148     LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Trade payables $ 86,660 $ 52,432 Accrued expenses 554,941 564,275 Capital lease obligations 9,212 8,799 Accrued restructuring 80,930 8,119 Income taxes payable 42,634 53,715 Deferred revenue   476,402     380,748   Total current liabilities 1,250,779 1,068,088   Long-term liabilities: Debt and capital lease obligations 1,505,096 1,513,662 Deferred revenue 55,303 48,929 Accrued restructuring 7,449 8,254 Income taxes payable 156,958 164,713 Deferred income taxes 181,602 103,098 Other liabilities   50,883     42,017   Total liabilities 3,208,070 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 2,753,896 2,458,278 Retained earnings 6,528,735 5,980,914 Accumulated other comprehensive income 29,950 17,428 Treasury stock, at cost (109,294 and 98,937 shares, respectively), net of re-issuances   (3,529,529 )   (3,264,294 ) Total stockholders' equity   5,783,113     5,192,387   Total liabilities and stockholders' equity $ 8,991,183   $ 8,141,148     Condensed Consolidated Statements of Cash Flows (In thousands; unaudited) Three Months EndedDecember 2, 2011   December 3,2010 Cash flows from operating activities: Net income $ 173,719 $ 268,850 Adjustments to reconcile net income to net cash provided by operating activities:     Depreciation, amortization and accretion 73,290 76,097 Stock-based compensation expense 72,527 23,703 Unrealized investment (gains) losses (5,811 ) 2,751 Changes in deferred revenue 47,399 5,590 Changes in other operating assets and liabilities   135,629     (66,370 )   Net cash provided by operating activities   496,753     310,621     Cash flows from investing activities: Sales and maturities of short-term investments, net of purchases 18,826 34,326 Purchases of property and equipment (74,897 ) (55,427 ) (Purchases) sales of long-term investments, intangibles and other assets, net (51,684 ) 11,378 Business acquisitions, net of cash   (151,925 )   (193,281 )   Net cash used for investing activities   (259,680 )   (203,004 )   Cash flows from financing activities: Purchases of treasury stock — (200,000 ) Re-issuance of treasury stock 1,191 9,628 Repayment of debt (2,243 ) (2,148 ) Excess tax benefits from stock-based compensation   853     6,258     Net cash used for financing activities   (199 )   (186,262 )   Effect of exchange rate changes on cash and cash equivalents   (16,586 )   14,387   Net increase (decrease) in cash and cash equivalents 220,288 (64,258 ) Cash and cash equivalents at beginning of period   769,212     814,149   Cash and cash equivalents at end of period $ 989,500   $ 749,891     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 EndedYear EndedDecember 2,2011   December 3,2010   September 2, 2011December 2,2011   December 3, 2010   Operating income:   GAAP operating income $ 246,131 $ 286,943 $ 274,110 $ 1,099,299 $ 993,074 Stock-based and deferred compensation expense 75,450 59,736 64,115 286,048 234,311 Restructuring and other charges 94,502 2,193 3,816 97,773 23,266 Amortization of purchased intangibles   28,444     35,082     24,103     104,005     142,020   Non-GAAP operating income $ 444,527   $ 383,954   $ 366,144   $ 1,587,125   $ 1,392,671     Net income:   GAAP net income $ 173,719 $ 268,850 $ 195,101 $ 832,847 $ 774,680 Stock-based and deferred compensation expense 75,450 59,736 64,115 286,048 234,311 Restructuring and other charges 94,502 2,193 3,816 97,773 23,266 Amortization of purchased intangibles 28,444 35,082 24,103 104,005 142,020 Resolution of an income tax audit — (39,574 ) — — (39,574 ) Investment (gains) losses (5,174 ) (4,620 ) 993 (5,857 ) 6,110 Income tax adjustments   (34,347 )   (35,973 )   (15,326 )   (131,400 )   (125,276 ) Non-GAAP net income $ 332,594   $ 285,694   $ 272,802   $ 1,183,416   $ 1,015,537     Diluted net income per share:   GAAP diluted net income per share $ 0.35 $ 0.53 $ 0.39 $ 1.65 $ 1.47 Stock-based and deferred compensation expense 0.15 0.12 0.13 0.57 0.45 Restructuring and other charges 0.19 — 0.01 0.19 0.04 Amortization of purchased intangibles 0.06 0.07 0.05 0.21 0.27 Resolution of an income tax audit — (0.08 ) — — (0.08 ) Investment (gains) losses (0.01 ) (0.01 ) — (0.01 ) 0.01 Income tax adjustments   (0.07 )   (0.07 )   (0.03 )   (0.26 )   (0.23 ) Non-GAAP diluted net income per share $ 0.67   $ 0.56   $ 0.55   $ 2.35   $ 1.93     Shares used in computing diluted net income per share 496,288 511,923 498,741 503,921 525,824     Three Months Ended   Year EndedDecember 2,2011   December 3,2010   September 2,2011December 2,2011   December 3,2010   Operating expenses:   GAAP operating expenses $ 789,651 $ 613,786 $ 634,448 $ 2,679,086 $ 2,403,424 Stock-based and deferred compensation expense (71,435 ) (58,373 ) (60,195 ) (270,268 ) (229,308 ) Restructuring and other charges (94,502 ) (2,193 ) (3,816 ) (97,773 ) (23,266 ) Amortization of purchased intangibles   (11,830 )   (18,184 )   (10,376 )   (42,833 )   (72,130 ) Non-GAAP operating expenses $ 611,884   $ 535,036   $ 560,061   $ 2,268,212   $ 2,078,720     Three Months EndedYear EndedDecember 2,2011December 3,2010September 2,2011December 2,2011December 3,2010   Operating margin:   GAAP operating margin 21.4 % 28.5 % 27.1 % 26.1 % 26.1 % Stock-based and deferred compensation expense 6.5 5.9 6.3 6.8 6.2 Restructuring and other charges 8.2 0.2 0.4 2.3 0.6 Amortization of purchased intangibles   2.5     3.5     2.3     2.4     3.7   Non-GAAP operating margin   38.6 %   38.1 %   36.1 %   37.6 %   36.6 %   Three MonthsEnded   December 2,2011   Effective income tax rate:       GAAP effective income tax rate 25.5%     One-time charges related to acquisitions (3.5)     Non-GAAP effective income tax rate 22.0%       Non-GAAP Financial Targets (In millions, except per share data) The following tables show Adobe's first quarter and fiscal year 2012 GAAP financial targets reconciled to non-GAAPfinancial targets included in this release. First QuarterFiscal 2012LowHigh Diluted net income per share:   GAAP diluted net income per share $ 0.37 $ 0.43 Stock-based and deferred compensation expense 0.14 0.13 Restructuring and other charges 0.03 0.03 Amortization of purchased intangibles 0.05 0.05 Income tax adjustments   (0.05 )   (0.05 ) Non-GAAP diluted net income per share $ 0.54   $ 0.59     Shares used to compute diluted net income per share   502.0     500.0       Fiscal 2012LowHigh Diluted net income per share:   GAAP diluted net income per share $ 1.70 $ 1.83 Stock-based and deferred compensation expense 0.62 0.59 Restructuring and other charges 0.05 0.04 Amortization of purchased intangibles 0.20 0.20 Income tax adjustments   (0.20 )   (0.19 ) Non-GAAP diluted net income per share $ 2.37   $ 2.47     Shares used to compute diluted net income per share   504.0     500.0   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 and other charges, amortization of purchased intangibles, resolution of an income tax audit, 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. Adobe Systems IncorporatedMike Saviage, 408-536-4416 (Investor Relations)ir@adobe.comJodi Sorensen, 408-536-2084 (Public Relations)jsorensen@adobe.com