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Adobe Reports Record Results

Adobe Systems Incorporated (Nasdaq:ADBE) today reported financial results for its third quarter of fiscal 2007 ended August 31, 2007. Adobe achieved record revenue of $851.7 million, compared to $602.2 million reported for the third quarter of fiscal 2006 and $745.6 million reported in the second quarter of fiscal 2007. This represents 41 percent year-over-year revenue growth. Adobes third quarter revenue target range was $760 to $800 million.

Our record results were driven by outstanding Creative Suite 3 adoption and continued Acrobat momentum, said Bruce Chizen, chief executive officer of Adobe. As we near the end of fiscal 2007, we remain well positioned for continued double digit revenue growth.

GAAP Results

Adobes GAAP diluted earnings per share for the third quarter of fiscal 2007 were $0.34, based on 597.3 million weighted average shares. This compares with GAAP diluted earnings per share of $0.16 reported in the third quarter of fiscal 2006 based on 600.9 million weighted average shares, and GAAP diluted earnings per share of $0.25 reported in the second quarter of fiscal 2007 based on 603.4 million weighted average shares. Adobes third quarter GAAP earnings per share target range was $0.28 to $0.31.

GAAP operating income was $255.0 million in the third quarter of fiscal 2007, compared to $110.0 million in the third quarter of fiscal 2006 and $180.4 million in the second quarter of fiscal 2007. As a percent of revenue, GAAP operating income in the third quarter of fiscal 2007 was 29.9 percent, compared to 18.3 percent in the third quarter of fiscal 2006 and 24.2 percent in the second quarter of fiscal 2007.

GAAP net income was $205.2 million for the third quarter of fiscal 2007, compared to $94.4 million reported in the third quarter of fiscal 2006, and $152.5 million in the second quarter of fiscal 2007.

Non-GAAP Results

Non-GAAP diluted earnings per share for the third quarter of fiscal 2007 were $0.45. This compares with non-GAAP diluted earnings per share of $0.29 reported in the third quarter of fiscal 2006, and non-GAAP diluted earnings per share of $0.37 reported in the second quarter of fiscal 2007. Adobes third quarter non-GAAP earnings per share target range was $0.39 to $0.41.

Adobes non-GAAP operating income was $340.9 million in the third quarter of fiscal 2007, compared to $207.2 million in the third quarter of fiscal 2006 and $282.1 million in the second quarter of fiscal 2007. As a percent of revenue, non-GAAP operating income in the third quarter of fiscal 2007 was 40.0 percent, compared to 34.4 percent in the third quarter of fiscal 2006 and 37.8 percent in the second quarter of fiscal 2007.

Non-GAAP net income was $269.4 million for the third quarter of fiscal 2007, compared to $171.5 million in the third quarter of fiscal 2006, and $223.2 million in the second quarter of fiscal 2007.

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

Adobe Provides Fourth Quarter Financial Targets

For the fourth quarter of fiscal 2007, Adobe announced it is targeting revenue of $860 million to $890 million. The Company also is targeting a GAAP operating margin of approximately 30 to 31 percent. On a non-GAAP basis, the Company is targeting an operating margin of approximately 41 percent.

In addition, Adobe is targeting its share count to be between 588 million and 590 million shares. The Company also is targeting other income to be approximately $16 million to $19 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 $0.35 to $0.37. On a non-GAAP basis, the Company is targeting earnings per share of approximately $0.46 to $0.48.

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 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 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 third quarter ended August 31, 2007, which the Company expects to file in October, 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

Nine Months Ended

August 31,

2007

September 1,

2006

August 31,

2007

September 1,

2006

Revenue:
Products $ 813,382 $ 579,185 $ 2,147,149 $ 1,830,905
Services and support 38,304 23,006 99,521 62,220
Total revenue 851,686 602,191 2,246,670 1,893,125
Total cost of revenue:
Products 69,002 53,308 193,532 165,426
Services and support 23,619 16,171 62,566 47,406
Total cost of revenue 92,621 69,479 256,098 212,832
Gross profit 759,065 532,712 1,990,572 1,680,293
Operating expenses:
Research and development 163,217 130,440 450,395 401,268
Sales and marketing 251,243 217,203 702,323 641,418
General and administrative 71,132 57,311 201,004 177,324
Restructuring and other charges 555 32 555 20,251
Amortization of purchased intangibles and incomplete technology

17,893

17,693

54,542

52,111

Total operating expenses 504,040 422,679 1,408,819 1,292,372
Operating income 255,025 110,033 581,753 387,921
Non-operating income:
Investment gain (loss) (694 ) (5,113 ) 9,069 (3,718 )
Interest and other income, net 22,664 18,092 65,691 47,563
Total non-operating income 21,970 12,979 74,760 43,845
Income before income taxes 276,995 123,012 656,513 431,766
Provision for income taxes 71,752 28,616 154,914 109,201
Net income $ 205,243 $ 94,396 $ 501,599 $ 322,565
Basic net income per share $ 0.35 $ 0.16 $ 0.85 $ 0.54
Shares used in computing basic net income per share

583,670

586,433

587,141

594,023

Diluted net income per share $ 0.34 $ 0.16 $ 0.83 $ 0.53
Shares used in computing diluted net income per share

597,334

600,882

602,263

612,791

Condensed Consolidated Balance Sheets

(In thousands, except per share data; unaudited)

August 31,December 1,
20072006
ASSETS
Current assets:
Cash and cash equivalents $ 559,283 $ 772,500
Short-term investments 1,396,431 1,508,379

Trade receivables, net of allowances for doubtful accounts of $5,091 and $6,798, respectively

260,953 356,815
Other receivables 60,721 51,851
Deferred income taxes 168,783 155,613
Prepaid expenses and other assets 59,059 39,311
Total current assets 2,505,230 2,884,469
Property and equipment, net 278,722 227,197
Goodwill 2,153,093 2,149,494
Purchased and other intangibles, net 438,260 506,405
Investment in lease receivable 207,239 126,800
Other assets 83,917 68,183
$ 5,666,461 $ 5,962,548
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Trade and other payables $ 64,374 $ 55,031
Accrued expenses 349,263 303,550
Accrued restructuring 5,849 10,088
Income taxes payable 223,816 178,368
Deferred revenue 164,442 130,310
Total current liabilities 807,744 677,347
Long-term liabilities:
Deferred revenue 27,660 32,644
Deferred income taxes 60,777 70,715
Accrued restructuring 15,887 21,984
Other liabilities 21,393 7,982
Total liabilities 933,461 810,672
Stockholders equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized
Common stock, $0.0001 par value 61 61
Additional paid-in-capital 2,432,489 2,451,610
Retained earnings 3,819,384 3,317,785
Accumulated other comprehensive income 13,700 6,344

Treasury stock, at cost (25,153 and 13,608 shares, respectively), net of re-issuances

(1,532,634 ) (623,924 )
Total stockholders equity 4,733,000 5,151,876
$ 5,666,461 $ 5,962,548

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

Three Months Ended
August 31,

2007

September 1,

2006

Cash flows from operating activities:
Net income $ 205,243 $ 94,396

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation, amortization, and accretion 81,764 74,553
Stock-based compensation expense, net of tax 45,352 49,778
Net investment (gains) losses (911 ) 5,259
Changes in deferred revenue (16,834 ) 23,171
Changes in operating assets and liabilities 110,556 (55,741 )
Net cash provided by operating activities 425,170 191,416
Cash flows from investing activities:
Sales and maturities of short-term investments, net of purchases 29,356 57,619
Purchases of property and equipment (32,160 ) (18,852 )
Purchases of long term investments and other assets, net of sales (53,340 ) (3,866 )
Acquisitions, net of cash 639
Net cash (used for) provided by investing activities (55,505 ) 34,901
Cash flows from financing activities:
Purchases of treasury stock, net of reissuances (727,225 ) (35,291 )
Excess tax benefits from stock-based compensation 16,974 28,315
Net cash used for financing activities (710,251 ) (6,976 )
Effect of exchange rate changes on cash and cash equivalents (1,748 ) 20
Net (decrease) increase in cash and cash equivalents (342,334 ) 219,361
Cash and cash equivalents at beginning of period 901,617 425,393
Cash and cash equivalents at end of period $ 559,283 $ 644,754

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.

Three Months Ended
August 31,

2007

September 1,

2006

June 1,

2007

GAAP operating income

$ 255,025 $ 110,033 $ 180,391
SFAS 123R stock-based compensation 32,805 27,186 33,146
Amortization of Macromedia stock-based compensation 5,902 15,471 6,491
Restructuring and other charges 555 32
Amortization of purchased intangibles and incomplete technology

46,570

54,527

62,026

Non-GAAP operating income

$ 340,857 $ 207,249 $ 282,054

GAAP net income

$ 205,243 $ 94,396 $ 152,505
SFAS 123R stock-based compensation, net of tax 24,307 20,487 23,355
Amortization of Macromedia stock-based compensation, net of tax 4,373 11,659 4,732
Restructuring and other charges, net of tax 411 24
Amortization of purchased intangibles and incomplete technology, net of tax 34,521 41,092 45,335
Investment (gain) loss, net of tax 514 3,831 (2,712 )

Non-GAAP net income

$ 269,369 $ 171,489 $ 223,215
Diluted net income per share:

GAAP net income

$ 0.34 $ 0.16 $ 0.25
SFAS 123R stock-based compensation, net of tax 0.04 0.03 0.04
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

0.06

0.07 0.07
Investment (gain) loss, net of tax 0.01

Non-GAAP net income

$ 0.45 $ 0.29 $ 0.37
Shares used computing diluted net income per share 597,334 600,882 603,417

The following table shows the Companys reconciliation of non-GAAP to GAAP operating expense for the quarters ended August 31, 2007, September 1, 2006, and June 1, 2007.

Three Months Ended
August 31,

2007

September 1,

2006

June 1, 2007
GAAP operating expenses $ 504,040 $ 422,679 $ 473,972
SFAS 123R stock-based compensation (31,952 ) (26,617 ) (32,364 )
Amortization of Macromedia stock-based compensation

(5,214

)

(15,222

)

(5,734

)

Restructuring and other charges (555 ) (32 )
Amortization of purchased intangibles and incomplete technology

(17,893

)

(19,993

)

(18,924

)

Non-GAAP operating expenses $ 448,426 $ 360,815 $ 416,950

The following table shows the Companys reconciliation of non-GAAP to GAAP operating margin for the quarter ended August 31, 2007, September 1, 2006, and June 1, 2007.

Three Months Ended
August 31,

2007

September 1,

2006

June 1,

2007

GAAP operating margin 29.9 % 18.3 % 24.2 %
SFAS 123R stock-based compensation 3.9 4.5 4.4
Amortization of Macromedia stock-based compensation

0.7

2.6

0.9

Restructuring and other charges 0.1
Amortization of purchased intangibles and incomplete technology

5.4

9.0

8.3

Non-GAAP operating margin 40.0 % 34.4 % 37.8 %

Fourth 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.

Fourth Quarter

Fiscal 2007

LowHigh
GAAP operating margin 30.0 % 31.0 %
SFAS 123R stock-based compensation 5.1 4.1
Amortization of Macromedia stock-based compensation 0.5 0.5
Amortization of purchased intangibles and incomplete technology

5.4

5.4

Non-GAAP operating margin 41.0 % 41.0 %
Diluted net income per share:
GAAP net income per share $ 0.35 $ 0.37
SFAS 123R stock-based compensation, net of tax 0.05 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

0.05

0.06

Non-GAAP net income per share $ 0.46 $ 0.48
Shares used in computing diluted net income per share 590.0 588.0
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.

Contacts:

Adobe Systems Incorporated
Mike Saviage, 408-536-4416 (Investor Relations)
ir@adobe.com
Holly Campbell, 408-536-6401 (Public Relations)
campbell@adobe.com

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