Adobe Reports Record Quarterly and Fiscal Year Revenue

Adobe Systems Incorporated (Nasdaq:ADBE) today reported financial results for its fourth quarter and fiscal year ended Nov. 30, 2007. In the fourth quarter of fiscal 2007, Adobe achieved record revenue of $911.2 million, compared to $682.2 million reported for the fourth quarter of fiscal 2006 and $851.7 million reported in the third quarter of fiscal 2007. This represents 34 percent year-over-year revenue growth. Adobe’s fourth quarter revenue target range was $860 to $890 million. "Driving our Q4 results were continued adoption of our Creative Suite 3 family of products, record revenue for Acrobat and strong momentum in our enterprise business,” said Shantanu Narayen, president and chief executive officer of Adobe. "As we enter fiscal 2008, we are performing exceptionally well and the Company is positioned to achieve a sixth consecutive year of double-digit growth.” Adobe Reports Record Annual Revenue in Fiscal Year 2007 In fiscal year 2007, Adobe achieved record revenue of $3.158 billion, compared to $2.575 billion in fiscal 2006. On a year-over-year basis, annual revenue grew 23 percent. Adobe’s annual GAAP net income was $723.8 million in fiscal 2007, compared to $505.8 million in fiscal 2006. Adobe’s annual non-GAAP net income was $965.8 million in fiscal 2007, compared to $757.3 million in fiscal 2006. GAAP diluted earnings per share for fiscal 2007 were $1.21, compared to $0.83 in fiscal 2006. Non-GAAP diluted earnings per share for fiscal 2007 were $1.61, compared to $1.24 in fiscal 2006. Fourth Quarter GAAP Results Adobe’s GAAP diluted earnings per share for the fourth quarter of fiscal 2007 were $0.38, based on 587.9 million weighted average shares. This compares with GAAP diluted earnings per share of $0.30 reported in the fourth quarter of fiscal 2006 based on 602.2 million weighted average shares, and GAAP diluted earnings per share of $0.34 reported in the third quarter of fiscal 2007 based on 597.3 million weighted average shares. Adobe’s fourth quarter GAAP earnings per share target range was $0.35 to $0.37. GAAP operating income was $275.8 million in the fourth quarter of fiscal 2007, compared to $163.4 million in the fourth quarter of fiscal 2006 and $255.0 million in the third quarter of fiscal 2007. As a percent of revenue, GAAP operating income in the fourth quarter of fiscal 2007 was 30.3 percent, compared to 23.9 percent in the fourth quarter of fiscal 2006 and 29.9 percent in the third quarter of fiscal 2007. GAAP net income was $222.2 million for the fourth quarter of fiscal 2007, compared to $183.2 million reported in the fourth quarter of fiscal 2006, and $205.2 million in the third quarter of fiscal 2007. Fourth Quarter Non-GAAP Results Non-GAAP diluted earnings per share for the fourth quarter of fiscal 2007 were $0.49. This compares with non-GAAP diluted earnings per share of $0.33 reported in the fourth quarter of fiscal 2006, and non-GAAP diluted earnings per share of $0.45 reported in the third quarter of fiscal 2007. Adobe’s fourth quarter non-GAAP earnings per share target range was $0.46 to $0.48. Adobe’s non-GAAP operating income was $362.2 million in the fourth quarter of fiscal 2007, compared to $256.4 million in the fourth quarter of fiscal 2006 and $340.9 million in the third quarter of fiscal 2007. As a percent of revenue, non-GAAP operating income in the fourth quarter of fiscal 2007 was 39.7 percent, compared to 37.6 percent in the fourth quarter of fiscal 2006 and 40.0 percent in the third quarter of fiscal 2007. Non-GAAP net income was $289.6 million for the fourth quarter of fiscal 2007, compared to $198.9 million in the fourth quarter of fiscal 2006, and $269.4 million in the third quarter of fiscal 2007. A reconciliation between GAAP and non-GAAP results is provided at the end of this press release. Adobe Provides First Quarter and Fiscal Year 2008 Financial Targets For the first quarter of fiscal 2008, Adobe announced it is targeting revenue of $855 million to $885 million. The Company is targeting a GAAP operating margin of 30 to 31 percent in the first quarter. On a non-GAAP basis, the Company is targeting a first quarter operating margin of approximately 40 percent. In addition, Adobe is targeting its share count to be between 586 million and 588 million shares in the first quarter of fiscal 2008. The Company also is targeting other income in its first quarter to be $15 million to $17 million, with a GAAP and non-GAAP tax rate of approximately 27 percent. These targets lead to a first quarter GAAP earnings per share target range of $0.34 to $0.36. On a non-GAAP basis, the Company is targeting earnings per share of $0.44 to $0.46. For fiscal year 2008, Adobe reaffirmed it is targeting annual revenue growth of approximately 13 percent. The Company is targeting a GAAP operating margin of approximately 30 percent, and a non-GAAP operating margin of approximately 39 percent. 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, operating margin, other income, tax rate, share count, earnings per share, and anticipated 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: delays in development or shipment of Adobe’s new products or major new versions of existing products, introduction of new products by existing and new competitors, failure to successfully manage transitions to new business models and markets, adverse changes in general economic or political conditions in any of the major countries in which Adobe does business, difficulty in predicting revenue from new businesses, failure to anticipate and develop new products and services in response to changes in demand for application software and software delivery, computers, printers, or other non PC-devices, costs related to intellectual property acquisitions, disputes and litigation, inability to protect Adobe’s intellectual property from unauthorized copying, use, disclosure or malicious attack, failure to realize the anticipated benefits of past or future acquisitions and difficulty in integrating such acquisitions, changes to Adobe’s distribution channel, disruption of Adobe’s business due to catastrophic events, risks associated with international operations, fluctuations in foreign currency exchange rates, changes in, or interpretations of, accounting principles, impairment of Adobe’s goodwill or intangible assets, unanticipated changes in, or interpretations of, Adobe’s effective tax rates, Adobe’s inability to attract and retain key personnel, market risks associated with Adobe’s equity investments, and interruptions or terminations in Adobe’s relationships with turnkey assemblers. 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 the fiscal year ended Nov. 30, 2007, which the Company expects to file in January 2008. Adobe does not undertake an obligation to update forward-looking statements. About Adobe Systems Incorporated Adobe revolutionizes how the world engages with ideas and information – anytime, anywhere and through any medium. For more information, visit www.adobe.com. © 2007 Adobe Systems Incorporated. All rights reserved. Adobe, the Adobe logo, Creative Suite and Acrobat 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 Ended November 30, 2007   December 1, 2006 November 30, 2007   December 1, 2006   Revenue: Products $ 872,375 $ 653,805 $ 3,019,524 $ 2,484,710 Services and support   38,836   28,370   138,357   90,590 Total revenue   911,211   682,175   3,157,881   2,575,300 Total cost of revenue: Products 77,286 61,080 270,818 226,506 Services and support   21,310   18,545   83,876   65,951 Total cost of revenue   98,596   79,625   354,694   292,457   Gross profit 812,615 602,550 2,803,187 2,282,843   Operating expenses: Research and development 162,847 138,416 613,242 539,684 Sales and marketing 282,065 225,727 984,388 867,145 General and administrative 73,978 57,273 274,982 234,597 Restructuring and other charges — — 555 20,251 Amortization of purchased intangibles and incomplete technology   17,893   17,762   72,435   69,873 Total operating expenses   536,783   439,178   1,945,602   1,731,550   Operating income 275,832 163,372 857,585 551,293   Non-operating income: Investment gain (loss) (1,935) 64,967 7,134 61,249 Interest and other income, net   16,780   19,622   82,471   67,185 Total non-operating income   14,845   84,589   89,605   128,434 Income before income taxes 290,677 247,961 947,190 679,727 Provision for income taxes   68,469   64,717   223,383   173,918 Net income $ 222,208 $ 183,244 $ 723,807 $ 505,809 Basic net income per share $ 0.39 $ 0.31 $ 1.24 $ 0.85   Shares used in computing basic net income per share   574,716   584,798   584,203   593,750   Diluted net income per share $ 0.38 $ 0.30 $ 1.21 $ 0.83 Shares used in computing diluted net income per share   587,865   602,175   598,775   612,222 Condensed Consolidated Balance Sheets (In thousands, except per share data; unaudited)   November 30, December 1,   2007     2006     ASSETS   Current assets: Cash and cash equivalents $ 946,422 $ 772,500 Short-term investments 1,047,432 1,508,379 Trade receivables, net of allowances for doubtful accounts of $4,398 and $6,798, respectively 318,145 356,815 Other receivables 44,666 51,851 Deferred income taxes 171,472 155,613 Prepaid expenses and other assets   44,840     39,311   Total current assets 2,572,977 2,884,469   Property and equipment, net 289,758 227,197 Goodwill 2,148,102 2,149,494 Purchased and other intangibles, net 402,619 506,405 Investment in lease receivable 207,239 126,800 Other assets   92,984     68,183   $ 5,713,679   $ 5,962,548     LIABILITIES AND STOCKHOLDERS’ EQUITY   Current liabilities: Trade and other payables $ 66,867 $ 55,031 Accrued expenses 383,436 303,550 Accrued restructuring 3,731 10,088 Income taxes payable 215,058 178,368 Deferred revenue   183,318     130,310   Total current liabilities 852,410 677,347   Long-term liabilities: Deferred revenue 25,950 32,644 Deferred income taxes 148,943 70,715 Accrued restructuring 13,987 21,984 Other liabilities   22,407     7,982   Total liabilities 1,063,697 810,672   Stockholders’ equity: Preferred stock, $0.0001 par value; 2,000 shares authorized — — Common stock, $0.0001 par value 61 61 Additional paid-in-capital 2,340,969 2,451,610 Retained earnings 4,041,592 3,317,785 Accumulated other comprehensive income 27,948 6,344 Treasury stock, at cost (29,425 and 13,608 shares, respectively), net of re-issuances   (1,760,588 )   (623,924 ) Total stockholders’ equity   4,649,982     5,151,876   $ 5,713,679   $ 5,962,548   Condensed Consolidated Statements of Cash Flows (In thousands; unaudited) Three Months Ended November 30, 2007   December 1, 2006 Cash flows from operating activities: Net income $ 222,208 $ 183,244 Adjustments to reconcile net income to net cash provided by operating activities:     Depreciation, amortization, and accretion 78,190 75,276 (Tax related benefits), net of stock compensation expense (11,750 ) 69,340 Net investment (gains) losses 4,058 (75,648 ) Changes in deferred revenue 17,166 38,163 Changes in operating assets and liabilities   88,155     661     Net cash provided by operating activities   398,027     291,036     Cash flows from investing activities: Sales and maturities of short-term investments, net of (purchases) 358,572 (155,814 ) Purchases of property and equipment (28,131 ) (33,081 ) Purchases of long term investments and other assets, net of sales (25,002 ) 62,921 Acquisitions, net of cash   (8,798 )   (17,499 )   Net cash provided by (used for) investing activities   296,641     (143,473 )   Cash flows from financing activities: Purchases of treasury stock, net of re-issuances (338,378 ) (51,957 ) Excess tax benefits from stock-based compensation   30,654     31,702     Net cash used for financing activities (307,724 ) (20,255 )   Effect of exchange rate changes on cash and cash equivalents   195     438   Net increase in cash and cash equivalents 387,139 127,746 Cash and cash equivalents at beginning of period   559,283     644,754   Cash and cash equivalents at end of period $ 946,422   $ 772,500   Non-GAAP Results (In thousands, except per share data) The following table shows Adobe’s non-GAAP results reconciled to GAAP results included in this release.     Three Months Ended Year Ended Nov. 30, 2007   Dec. 1, 2006   Aug. 31, 2007 Nov. 30, 2007   Dec. 1, 2006   GAAP operating income $ 275,832 $ 163,372 $ 255,025 $ 857,585 $ 551,293 SFAS 123R stock-based compensation 35,078 30,006 32,805 125,964 106,845 Amortization of Macromedia stock-based compensation 4,713 9,505 5,902 24,023 63,686 Restructuring and other charges — — 555 555 20,251 Amortization of purchased intangibles and incomplete technology   46,570   53,484     46,570   200,810     217,007   Non-GAAP operating income $ 362,193 $ 256,367   $ 340,857 $ 1,208,937   $ 959,082     GAAP net income $ 222,208 $ 183,244 $ 205,243 $ 723,807 $ 505,809 SFAS 123R stock-based compensation, net of tax 26,800 17,133 24,307 92,537 74,925 Amortization of Macromedia stock-based compensation, net of tax 3,601 5,427 4,373 17,720 45,308 Restructuring and other charges, net of tax tax — — 411 411 14,900 Amortization of purchased intangibles and incomplete technology, net of tax 35,524 30,539 34,521 147,986 150,915 R&D tax benefit, net of tax — — — (12,330 ) — Investment (gain) loss, net of tax   1,478   (37,450 )   514   (4,312 )   (34,596 ) Non-GAAP net income $ 289,611 $ 198,893   $ 269,369 $ 965,819   $ 757,261     Diluted net income per share:   GAAP net income $ 0.38 $ 0.30 $ 0.34 $ 1.21 $ 0.83 SFAS 123R stock-based compensation, net of tax 0.05 0.03 0.04 0.15 0.12 Amortization of Macromedia stock-based compensation, net of tax 0.01 0.01 0.01 0.03 0.07 Restructuring and other charges, net of tax — — — — 0.02 Amortization of purchased intangibles and incomplete technology, net of tax 0.05 0.05 0.06 0.25 0.26 R&D tax benefit, net of tax — — — (0.02 ) — Investment (gain) loss, net of tax   —   (0.06 )   —   (0.01 )   (0.06 ) Non-GAAP net income $ 0.49 $ 0.33   $ 0.45 $ 1.61   $ 1.24     Shares used computing diluted net income per share   587,865   602,175     597,334   598,775     612,222   The following table shows the Company’s reconciliation of non-GAAP to GAAP operating expense.     Three Months Ended November 30, 2007 August 31, 2007   GAAP operating expenses $ 536,783 $ 504,040 SFAS 123R stock-based compensation (34,414 ) (31,952 ) Amortization of Macromedia stock-based compensation (4,163 ) (5,214 ) Restructuring and other charges — (555 ) Amortization of purchased intangibles and incomplete technology   (17,893 )   (17,893 ) Non-GAAP operating expenses $ 480,313   $ 448,426   The following table shows the Company’s reconciliation of non-GAAP to GAAP operating margin.     Three Months Ended Year Ended Nov. 30, 2007   Dec. 1, 2006   Aug. 31, 2007 Nov. 30, 2007 Dec. 1, 2006     GAAP operating margin 30.3 % 24.0 % 29.9 % 27.2 % 21.4 % SFAS 123R stock-based compensation 3.8 4.4 3.9 4.0 4.1 Amortization of Macromedia stock-based compensation 0.5 1.4 0.7 0.8 2.5 Restructuring and other charges — — 0.1 — 0.8 Amortization of purchased intangibles and incomplete technology 5.1     7.8     5.4   6.3   8.4   Non-GAAP operating margin 39.7 %   37.6 %   40.0 % 38.3 % 37.2 % First Quarter and Fiscal Year 2008 Non-GAAP Financial Targets   The following tables show Adobe's First Quarter and Fiscal Year 2008 non-GAAP financial targets reconciled to GAAP financial targets included in this release.   First Quarter Fiscal 2008   Fiscal Year Low   High 2008     GAAP operating margin 30.0 % 31.0 % 30.0 % SFAS 123R stock-based compensation 5.3 4.6 4.8 Amortization of purchased intangibles and incomplete technology   4.7     4.4   4.2   Non-GAAP operating margin   40.0 % 40.0 % 39.0 %         First Quarter Fiscal 2008 Low High   GAAP net income per share $ 0.34 $ 0.36 SFAS 123R stock-based compensation, net of tax 0.06 0.05 Amortization of purchased intangibles and incomplete technology, net of tax   0.04   0.05   Non-GAAP net income per share $ 0.44   $ 0.46     Shares used in computing diluted net income per share   588.0   586.0   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 compensation impact of SFAS 123R and related tax impact, amortization of Macromedia stock-based compensation and related tax impact, restructuring and other charges and related tax impact, amortization of purchased intangibles and incomplete technology and related tax impact, investment gains and losses and related tax impact, the net tax impact of the R&D tax benefit, 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.