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Press release from Business Wire

Adobe Reports Third Quarter Fiscal 2012 Financial Results

<p> Creative Cloud Subscriptions Accelerate and Digital Marketing Suite Revenue Grows 40 Percent Year-Over-Year </p>

Wednesday, September 19, 2012

Adobe Reports Third Quarter Fiscal 2012 Financial Results16:03 EDT Wednesday, September 19, 2012 SAN JOSE, Calif. (Business Wire) -- Adobe Systems Incorporated (Nasdaq:ADBE) today reported financial results for its third quarter of fiscal year 2012 ended Aug. 31, 2012. Adobe achieved revenue in Q3 FY2012 of $1.081 billion, within its targeted range of $1.075 billion to $1.125 billion. During the quarter, the Company drove faster adoption of Creative Cloud subscriptions than originally projected. As Adobe customers migrate from a legacy Creative Suite perpetual licensing model to new Creative Cloud subscriptions, revenue is recognized over time as opposed to at the time of purchase. This overachievement in subscriptions during the third quarter effectively transitioned approximately $29 million more perpetual revenue than expected to Creative Cloud. In addition, the effect of currency impacted Q3 revenue negatively by approximately $9 million. Adjusting for these amounts in Adobe's reported results would have enabled the Company to achieve third quarter revenue towards the high-end of its targeted range. Other Third Quarter Financial Highlights Diluted earnings per share were $0.40 on a GAAP-basis, and $0.58 on a non-GAAP basis. Operating income was $278.3 million and net income was $201.4 million on a GAAP-basis. Operating income was $391.8 million and net income was $291.2 million on a non-GAAP basis. Cash flow from operations was $263.3 million. Adobe Creative Cloud paid subscriptions grew to approximately 200,000 in the third quarter. Adobe added approximately 8,000 Creative Cloud subscriptions per week during the quarter, exceeding the addition of 5,000 subscriptions per week that was assumed in its third quarter financial targets. Digital Marketing Suite achieved record quarterly revenue with 40 percent year-over-year growth. A reconciliation between GAAP and non-GAAP results is provided at the end of this press release. Executive Quotes “Customers globally are adopting our new Creative Cloud subscription offering more quickly than we projected," said Shantanu Narayen, president and CEO of Adobe. "We are the leader in the fast-growing Digital Marketing category with 40 percent year-over-year Digital Marketing Suite revenue growth this quarter.” “We're on a path to drive millions of subscribers to our Creative Cloud offering, as well as build a billion dollar SaaS business in Digital Marketing,” said Mark Garrett, executive vice president and CFO of Adobe. “This will drive higher long-term growth and create a large recurring revenue stream.” Financial Outlook Adobe provided financial targets for the fourth quarter of fiscal 2012. These targets reflect the effect of higher migration of customers to Creative Cloud than forecast earlier in the year. For the fourth 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 $0.34 to $0.39 on a GAAP basis, and $0.53 to $0.58 on a non-GAAP basis. These targeted ranges factor in the addition of 125,000 new Creative Cloud subscriptions in the quarter, which represents approximately $94 million in Q4 perpetual revenue which would effectively move to subscription and ratable monthly recognition. Adobe is targeting its Q4 share count to be between 500 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. A reconciliation between GAAP and non-GAAP financial targets is provided at the end of this press release. Adobe to Webcast Earnings Conference Call Adobe will webcast its third quarter fiscal year 2012 earnings conference call today at 2:00 p.m. Pacific Time from its investor relations website: www.adobe.com/ADBE. A copy of Adobe management's prepared remarks has been posted to the website in advance of the call for reference. Forward-Looking Statements Disclosure This press release contains forward-looking statements, including those related to revenue, additional Creative Cloud subscriptions and the resulting impact on revenue, growth in our Digital Marketing business, 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 products and services that meet customer requirements, introduction of new products and business models by competitors, failure to successfully manage transitions to new business models and markets, including our increased emphasis on a cloud and subscription strategy, fluctuations in subscription renewal or upgrade rates, continued uncertainty in economic conditions and the financial markets, difficulty in predicting revenue from new businesses and the potential impact on our financial results from changes in our business models, and failure to realize the anticipated benefits of past or future acquisitions. For a discussion of these and other risks and uncertainties, please refer to Adobe's Annual Report on Form 10-K for the fiscal year ended Dec. 2, 2011 and its Quarterly Reports on Form 10-Q for the fiscal quarters ended March 2, 2012 and June 1, 2012. 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 Aug. 31, 2012, which Adobe expects to file in Oct. 2012. Adobe assumes no obligation to, and does not currently intend to, update these 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, 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   Nine Months EndedAugust 31, 2012   September 2, 2011August 31, 2012   September 2, 2011 Revenue: Products $ 810,457 $ 811,920 $ 2,490,000 $ 2,484,588 Subscription 172,920 114,555 478,669 330,197 Services and support 97,203   86,737   281,580   249,312   Total revenue 1,080,580   1,013,212   3,250,249   3,064,097     Cost of revenue: Products 27,234 26,209 92,976 91,592 Subscription 56,191 47,492 159,794 142,699 Services and support 36,196   30,953   106,034   87,203   Total cost of revenue 119,621   104,654   358,804   321,494     Gross profit 960,959 908,558 2,891,445 2,742,603   Operating expenses: Research and development 189,145 181,039 547,776 542,650 Sales and marketing 368,556 340,724 1,113,978 1,017,492 General and administrative 110,249 98,493 323,533 295,019 Restructuring charges 2,374 3,816 (2,642 ) 3,271 Amortization of purchased intangibles 12,331   10,376   36,374   31,003   Total operating expenses 682,655   634,448   2,019,019   1,889,435     Operating income 278,304 274,110 872,426 853,168   Non-operating income (expense): Interest and other income (expense), net 1,217 33 (2,696 ) (1,623 ) Interest expense (17,253 ) (16,431 ) (50,720 ) (50,178 ) Investment gains (losses), net 944   (993 ) 9,153   683   Total non-operating income (expense), net (15,092 ) (17,391 ) (44,263 ) (51,118 ) Income before income taxes 263,212 256,719 828,163 802,050 Provision for income taxes 61,855   61,618   217,721   142,922   Net income $ 201,357   $ 195,101   $ 610,442   $ 659,128   Basic net income per share $ 0.41   $ 0.39   $ 1.23   $ 1.32   Shares used to compute basic net income per share 494,051   494,537   494,672   499,451   Diluted net income per share $ 0.40   $ 0.39   $ 1.22   $ 1.30   Shares used to compute diluted net income per share 499,757   498,741   502,167   506,334     Condensed Consolidated Balance Sheets (In thousands, except par value; unaudited)     August 31, 2012   December 2, 2011 ASSETS   Current assets: Cash and cash equivalents $ 1,162,380 $ 989,500 Short-term investments 2,084,983 1,922,192 Trade receivables, net of allowances for doubtful accounts of $14,516 and $15,080, respectively 566,671 634,373 Deferred income taxes 57,024 91,963 Prepaid expenses and other current assets 139,115   133,423   Total current assets 4,010,173 3,771,451   Property and equipment, net 619,392 527,828 Goodwill 4,126,548 3,849,217 Purchased and other intangibles, net 576,948 545,526 Investment in lease receivable 207,239 207,239 Other assets 89,713   89,922   Total assets $ 9,630,013   $ 8,991,183     LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Trade payables $ 58,446 $ 86,660 Accrued expenses 547,812 554,941 Capital lease obligations 11,093 9,212 Accrued restructuring 14,803 80,930 Income taxes payable 31,910 42,634 Deferred revenue 505,646   476,402   Total current liabilities 1,169,710 1,250,779   Long-term liabilities: Debt and capital lease obligations 1,499,881 1,505,096 Deferred revenue 54,687 55,303 Accrued restructuring 12,706 7,449 Income taxes payable 151,946 156,958 Deferred income taxes 253,626 181,602 Other liabilities 48,764   50,883   Total liabilities 3,191,320 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 2,961,799 2,753,896 Retained earnings 6,815,375 6,528,735 Accumulated other comprehensive income 22,511 29,950 Treasury stock, at cost (106,102 and 109,294 shares, respectively), net of re-issuances (3,361,053 ) (3,529,529 ) Total stockholders' equity 6,438,693   5,783,113   Total liabilities and stockholders' equity $ 9,630,013   $ 8,991,183     Condensed Consolidated Statements of Cash Flows (In thousands; unaudited)     Three Months EndedAugust 31, 2012   September 2, 2011 Cash flows from operating activities: Net income $ 201,357 $ 195,101 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 74,110 64,009 Stock-based compensation expense 74,013 68,800 Unrealized investment (gains) losses (851 ) 2,029 Changes in deferred revenue (32,445 ) 1,360 Changes in other operating assets and liabilities (52,844 ) (6,171 ) Net cash provided by operating activities 263,340   325,128     Cash flows from investing activities: Purchases of short-term investments, net of sales and maturities (37,426 ) (161,163 ) Purchases of property and equipment (77,432 ) (65,475 ) Purchases of long-term investments, intangibles and other assets, net (4,362 ) (2,935 ) Acquisitions, net of cash —   (70,549 ) Net cash used for investing activities (119,220 ) (300,122 )   Cash flows from financing activities: Purchases of treasury stock — (150,000 ) Re-issuance of treasury stock 60,948 56,180 Proceeds from debt and capital lease obligations 3,152 — Repayment of debt and capital lease obligations (2,316 ) (4,179 ) Excess tax benefits from stock-based compensation 1,172   318   Net cash provided by (used for) financing activities 62,956   (97,681 ) Effect of exchange rate changes on cash and cash equivalents 4,066   14,412   Net increase (decrease) in cash and cash equivalents 211,142 (58,263 ) Cash and cash equivalents at beginning of period 951,238   827,475   Cash and cash equivalents at end of period $ 1,162,380   $ 769,212     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 EndedAugust 31, 2012   September 2, 2011   June 1, 2012 Operating income:   GAAP operating income $ 278,304 $ 274,110 $ 305,143 Stock-based and deferred compensation expense 80,682 64,115 70,714 Restructuring charges 2,374 3,816 (2,191 ) Amortization of purchased intangibles 30,410   24,103   30,704   Non-GAAP operating income $ 391,770   $ 366,144   $ 404,370     Net income:   GAAP net income $ 201,357 $ 195,101 $ 223,876 Stock-based and deferred compensation expense 80,682 64,115 70,714 Restructuring charges 2,374 3,816 (2,191 ) Amortization of purchased intangibles 30,410 24,103 30,704 Investment (gains) losses (944 ) 993 (7,188 ) Income tax adjustments (22,685 ) (15,326 ) (16,290 ) Non-GAAP net income $ 291,194   $ 272,802   $ 299,625     Diluted net income per share:   GAAP diluted net income per share $ 0.40 $ 0.39 $ 0.45 Stock-based and deferred compensation expense 0.16 0.13 0.14 Restructuring charges — 0.01 — Amortization of purchased intangibles 0.06 0.05 0.06 Investment (gains) losses — — (0.01 ) Income tax adjustments (0.04 ) (0.03 ) (0.04 ) Non-GAAP diluted net income per share $ 0.58   $ 0.55   $ 0.60     Shares used in computing diluted net income per share 499,757   498,741 501,377   Operating expenses:   GAAP operating expenses $ 682,655 $ 634,448 $ 688,388 Stock-based and deferred compensation expense (75,762 ) (60,195 ) (66,224 ) Restructuring charges (2,374 ) (3,816 ) 2,191 Amortization of purchased intangibles (12,331 ) (10,376 ) (12,614 ) Non-GAAP operating expenses $ 592,188   $ 560,061   $ 611,741       Three MonthsEndedAugust 31,2012 Effective income tax rate:   GAAP effective income tax rate 23.5 % Stock-based and deferred compensation expense (0.7 ) Amortization of purchased intangibles (0.3 ) Non-GAAP effective income tax rate 22.5 %   Non-GAAP Financial Targets(In millions, except per share data) The following tables show Adobe's fourth quarter fiscal 2012 financial targets reconciled to non-GAAP financial targets included in this release.   Fourth QuarterFiscal 2012Low   High Diluted net income per share:   GAAP diluted net income per share $ 0.34 $ 0.39 Stock-based and deferred compensation expense 0.17 0.17 Amortization of purchased intangibles 0.06 0.06 Income tax adjustments (0.05 ) (0.05 ) Restructuring charges 0.01   0.01   Non-GAAP diluted net income per share $ 0.53   $ 0.58     Shares used to compute diluted net income per share 502.0   500.0       Three MonthsEndedNovember 30, 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 % 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. Adobe Systems IncorporatedMike Saviage, 408-536-4416 (Investor Relations)ir@adobe.comJodi Sorensen, 408-536-2084 (Public Relations)jsorensen@adobe.com