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Adobe Reports Record Revenue

Adobe Systems Incorporated (Nasdaq:ADBE) today reported financial results for its second quarter of fiscal 2007 ended June 1, 2007. Adobe achieved record revenue of $745.6 million, compared to $635.5 million reported for the second quarter of fiscal 2006 and $649.4 million reported in the first quarter of fiscal 2007. This represents 17 percent year-over-year revenue growth. Adobes second quarter revenue target range was $700 to $740 million.

Q2 was a strong quarter, driven by the record performance of both our Creative Suite products and Acrobat, said Bruce Chizen, chief executive officer of Adobe. Assuming continued business momentum, we expect to exceed our original fiscal year revenue and profit targets.

GAAP Results

Adobes GAAP diluted earnings per share for the second quarter of fiscal 2007 were $0.25, based on 603.4 million weighted average shares. This compares with GAAP diluted earnings per share of $0.20 reported in the second quarter of fiscal 2006 based on 613.8 million weighted average shares, and GAAP diluted earnings per share of $0.24 reported in the first quarter of fiscal 2007 based on 604.2 million weighted average shares. Adobes second quarter GAAP earnings per share target range was $0.23 to $0.26.

GAAP operating income was $180.4 million in the second quarter of fiscal 2007, compared to $147.9 million in the second quarter of fiscal 2006 and $146.3 million in the first quarter of fiscal 2007. As a percent of revenue, GAAP operating income in the second quarter of fiscal 2007 was 24.2 percent, compared to 23.3 percent in the second quarter of fiscal 2006 and 22.5 percent in the first quarter of fiscal 2007.

GAAP net income was $152.5 million for the second quarter of fiscal 2007, compared to $123.1 million reported in the second quarter of fiscal 2006, and $143.9 million in the first quarter of fiscal 2007.

Non-GAAP Results

Non-GAAP diluted earnings per share for the second quarter of fiscal 2007 were $0.37. This compares with non-GAAP diluted earnings per share of $0.31 reported in the second quarter of fiscal 2006, and non-GAAP diluted earnings per share of $0.30 reported in the first quarter of fiscal 2007. Adobes second quarter non-GAAP earnings per share target range was $0.34 to $0.36.

Adobes non-GAAP operating income was $282.1 million in the second quarter of fiscal 2007, compared to $243.1 million in the second quarter of fiscal 2006 and $223.8 million in the first quarter of fiscal 2007. As a percent of revenue, non-GAAP operating income in the second quarter of fiscal 2007 was 37.8 percent, compared to 38.3 percent in the second quarter of fiscal 2006 and 34.5 percent in the first quarter of fiscal 2007.

Non-GAAP net income was $223.2 million for the second quarter of fiscal 2007, compared to $189.4 million in the second quarter of fiscal 2006, and $183.6 million in the first quarter of fiscal 2007.

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

Adobe Provides Third Quarter Financial Targets

For the third quarter of fiscal 2007, Adobe announced it is targeting revenue of $760 million to $800 million. The Company also is targeting a GAAP operating margin of approximately 27 to 28 percent. On a non-GAAP basis, the Company is targeting an operating margin of approximately 39 percent.

In addition, Adobe is targeting its share count to be between 607 million and 609 million shares. The Company also is targeting other income to be approximately $21 million to $22 million, with a GAAP tax rate of approximately 25 to 26 percent and a non-GAAP tax rate of approximately 26 to 27 percent.

These targets lead to a GAAP earnings per share target range of approximately $0.28 to $0.31. On a non-GAAP basis, the Company is targeting earnings per share of approximately $0.39 to $0.41.

A reconciliation between GAAP and non-GAAP 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 Adobes 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 in response to changes in demand for application software, computers, printers, or other non PC-devices, costs related to intellectual property acquisitions, disputes and litigation, inability to protect Adobes 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 Adobes distribution channel, disruption of Adobes 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 Adobes goodwill or intangible assets, unanticipated changes in, or interpretations of, Adobes effective tax rates, Adobes inability to attract and retain key personnel, market risks associated with Adobes equity investments, and interruptions or terminations in Adobes relationships with turnkey assemblers. For further discussion of these and other risks and uncertainties, individuals should refer to Adobes 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 Adobes Quarterly Report on Form 10-Q for the second quarter ended June 1, 2007, which the Company expects to file in July, 2007. 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, Acrobat, 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,

2007

June 2,

2006

June 1,

2007

June 2,

2006

Revenue:
Products $ 713,469  $ 614,895  $ 1,333,767  $ 1,251,721 
Services and support 32,108  20,561  61,217  39,213 
Total revenue 745,577  635,456  1,394,984  1,290,934 
Total cost of revenue:
Products 70,715  49,269  124,530  112,118 
Services and support 20,499  16,338  38,947  31,235 
Total cost of revenue 91,214  65,607  163,477  143,353 
Gross profit 654,363  569,849  1,231,507  1,147,581 
Operating expenses:
Research and development 150,049  133,285  287,178  270,828 
Sales and marketing 236,402  210,399  451,080  424,215 
General and administrative 68,597  59,716  129,872  120,013 
Restructuring and other charges

-- 

1,235 

-- 

20,219 

Amortization of purchased intangibles and incomplete technology

18,924 

17,306 

36,649 

34,418 

Total operating expenses 473,972  421,941  904,779  869,693 
Operating income 180,391  147,908  326,728  277,888 
Non-operating income:
Investment gain 4,162  2,660  9,763  1,395 
Interest and other income, net 20,563  13,929  43,027  29,471 
Total non-operating income 24,725  16,589  52,790  30,866 
Income before income taxes 205,116  164,497  379,518  308,754 
Provision for income taxes 52,611  41,400  83,162  80,585 
Net income $ 152,505  $ 123,097  $ 296,356  $ 228,169 
Basic net income per share $ 0.26  $ 0.21  $ 0.50  $ 0.38 
Shares used in computing basic net income per share

587,929 

595,284 

588,536 

597,679 

Diluted net income per share $ 0.25  $ 0.20  $ 0.49  $ 0.37 
Shares used in computing diluted net income per share

603,417 

613,804 

604,373 

618,582 

Condensed Consolidated Balance Sheets

(In thousands, except per share data; unaudited)

June 1,December 1,
20072006
ASSETS
Current assets:
Cash and cash equivalents $ 901,617  $ 772,500 
Short-term investments 1,422,208  1,508,379 
Trade receivables, net of allowances for doubtful accounts of $7,055 and $6,798, respectively 318,090  356,815 
Other receivables 53,367  51,851 
Deferred income taxes 196,098  155,613 
Prepaid expenses and other assets 61,141  39,311 
Total current assets 2,952,521  2,884,469 
Property and equipment, net 266,395  227,197 
Goodwill 2,147,034  2,149,494 
Purchased and other intangibles, net 476,978  506,405 
Investment in lease receivable 207,239  126,800 
Other assets 85,782  68,183 
$ 6,135,949  $ 5,962,548 
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Trade and other payables $ 55,038  $ 55,031 
Accrued expenses 369,264  303,550 
Accrued restructuring 6,558  10,088 
Income taxes payable 168,890  178,368 
Deferred revenue 179,331  130,310 
Total current liabilities 779,081  677,347 
Long-term liabilities:
Deferred revenue 29,465  32,644 
Deferred income taxes 97,970  70,715 
Accrued restructuring 17,021  21,984 
Other liabilities 16,700  7,982 
Total liabilities 940,237  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 2,452,639  2,451,610 
Retained earnings 3,614,142  3,317,785 
Accumulated other comprehensive income 16,755  6,344 
Treasury stock, at cost (12,980 and 13,608 shares, respectively), net of re-issuances (887,885) (623,924)
Total stockholders equity 5,195,712  5,151,876 
$ 6,135,949  $ 5,962,548 

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

Three Months Ended
June 1,

2007

June 2,

2006

Cash flows from operating activities:
Net income $ 152,505  $ 123,097 
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation, amortization, and accretion 87,022  77,388 
Stock-based compensation expense, net of tax 39,935  35,931 
Net investment (gains) losses (4,088) 5,486 
Changes in deferred revenue 35,220  6,093 
Changes in operating assets and liabilities 34,805  (7,871)
Net cash provided by operating activities 345,399  240,124 
Cash flows from investing activities:
Sales and maturities of short-term investments, net of purchases 332,651  63,924 
Purchases of property and equipment (23,484) (19,683)
Purchases of long term investments and other assets, net of sales (12,446) (1,017)
Investment in lease receivable (80,439)
Acquisitions, net of cash (64,275) (26,477)
Net cash provided by investing activities 152,007  16,747 
Cash flows from financing activities:
Purchases of treasury stock, net of reissuances (162,213) (497,860)
Excess tax benefits from stock-based compensation 35,866  28,684 
Net cash used for financing activities (126,347) (469,176)
Effect of exchange rate changes on cash and cash equivalents 4,528  2,512 
Net increase (decrease) in cash and cash equivalents 375,587  (209,793)
Cash and cash equivalents at beginning of period 526,030  635,186 
Cash and cash equivalents at end of period $ 901,617  $ 425,393 

Non-GAAP Results

(In thousands, except per share data)

The following table shows Adobes non-GAAP results reconciled to GAAP results included in this release.

June 1,

2007

June 2,

2006

March 2,

2007

GAAP operating income

$ 180,391  $ 147,908  $ 146,337 
SFAS 123R stock-based compensation 33,146  26,622  24,935 
Amortization of Macromedia stock-based compensation

6,491 

15,259  6,917 
Restructuring and other charges 1,235 
Amortization of purchased intangibles and incomplete technology

62,026 

52,041  45,644 

Non-GAAP operating income

$ 282,054  $ 243,065  $ 223,833 

GAAP net income

$ 152,505  $ 123,097  $ 143,851 
SFAS 123R stock-based compensation, net of tax 23,355  19,085  18,075 
Amortization of Macromedia stock-based compensation, net of tax 4,732  10,939  5,014 
Restructuring and other charges, net of tax 885 
Amortization of purchased intangibles and incomplete technology, net of tax 45,335  37,308  32,606 
R&D tax benefit, net of tax (12,330)
Investment gain, net of tax (2,712) (1,909) (3,592)

Non-GAAP net income

$ 223,215  $ 189,405  $ 183,624 
Diluted net income per share:

GAAP net income

$ 0.25  $ 0.20  $ 0.24 
SFAS 123R stock-based compensation, net of tax

0.04 

0.03  0.03 
Amortization of Macromedia stock-based compensation, net of tax

0.01 

0.02  0.01 
Restructuring and other charges, net of tax
Amortization of purchased intangibles and incomplete technology, net of tax 0.07  0.06  0.05 
R&D tax benefit, net of tax (0.02)
Investment gain, net of tax (0.01)

Non-GAAP net income

$ 0.37  $ 0.31  $ 0.30 
Shares used computing diluted net income per share

603,417 

613,804 

604,249 

The following table shows the Companys reconciliation of non-GAAP to GAAP operating expense for the quarters ended June 1, 2007, June 2, 2006, and March 2, 2007.

June 1,

2007

June 2,

2006

March 2,
2007

GAAP operating expenses $ 473,972  $ 421,941  $ 430,807 
SFAS 123R stock-based compensation (32,364) (25,945) (24,454)
Amortization of Macromedia stock-based compensation

(5,734)

(13,510)

(6,194)

Restructuring and other charges (1,235)
Amortization of purchased intangibles and incomplete technology

(18,924)

(17,806)

(17,725)

Non-GAAP operating expenses $ 416,950  $ 363,445  $ 382,434 

The following table shows the Companys reconciliation of non-GAAP to GAAP operating margin for the quarter ended June 1, 2007, June 2, 2006, and March 2, 2007.

June 1,

2007

June 2,

2006

March 2,

2007

GAAP operating margin 24.2% 23.3% 22.5%
SFAS 123R stock-based compensation 4.4  4.2  3.8 
Amortization of Macromedia stock-based compensation

0.9 

2.4 

1.1 

Restructuring and other charges 0.2 
Amortization of purchased intangibles and incomplete technology

8.3 

8.2 

7.1 

Non-GAAP operating margin 37.8% 38.3% 34.5%

The following table shows the Companys reconciliation of non-GAAP to GAAP effective tax rate for the quarter ended June 1, 2007.

June 1,

2007

GAAP effective income tax rate 25.6%
SFAS 123R stock-based compensation 0.3 
Amortization of Macromedia stock-based compensation 0.1 
Investment gain (0.1)
Amortization of purchased intangibles and incomplete technology 0.3 
Non-GAAP effective income tax rate 26.2%

Third Quarter Fiscal Year 2007 Non-GAAP Financial Targets

The following tables show Adobes non-GAAP financial targets reconciled to GAAP financial targets included in this release.

Third Quarter

Fiscal 2007

Low High
GAAP operating margin 27.0% 28.0%
SFAS 123R stock-based compensation 5.0  4.4 
Amortization of Macromedia stock-based compensation 0.8  0.8 
Amortization of purchased intangibles and incomplete technology

6.2 

5.8 

Non-GAAP operating margin 39.0% 39.0%
Diluted net income per share:
GAAP net income per share $ 0.28  $ 0.31 
SFAS 123R stock-based compensation, net of tax 0.04  0.04 
Amortization of Macromedia stock-based compensation, net of tax

0.01 

0.01 

Amortization of purchased intangibles and incomplete technology, net of tax

0.06 

0.05 

Non-GAAP net income per share $ 0.39  $ 0.41 
Shares used in computing diluted net income per share 609.0  607.0 
GAAP effective income tax rate 25.0% 26.0%
SFAS 123R stock-based compensation 0.5  0.5 
Amortization of Macromedia stock-based compensation 0.1  0.1 
Amortization of purchased intangibles and incomplete technology

0.5 

0.5 

Investment gain (0.1) (0.1)
Non-GAAP effective income tax rate

26.0%

27.0%

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. Adobes 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 Adobes operating results in a manner that focuses on what Adobe believes to be its ongoing business operations. Adobes 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 Adobes 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.

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