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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. Adobes 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.

Adobes annual GAAP net income was $723.8 million in fiscal 2007, compared to $505.8 million in fiscal 2006. Adobes 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

Adobes 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. Adobes 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. Adobes fourth quarter non-GAAP earnings per share target range was $0.46 to $0.48.

Adobes 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 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 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,
20072006
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 Adobes non-GAAP results reconciled to GAAP results included in this release.

Three Months EndedYear 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 Companys 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 Companys reconciliation of non-GAAP to GAAP operating margin.

Three Months EndedYear 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 2008Fiscal Year
LowHigh2008
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
LowHigh
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. 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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