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Adobe Reports Strong Q3 Financial Results

Adobe Systems Incorporated (Nasdaq:ADBE) today reported financial results for its third quarter ended Aug. 29, 2008.

In the third quarter of fiscal 2008, Adobe achieved revenue of $887.3 million, compared to $851.7 million reported for the third quarter of fiscal 2007 and $886.9 million reported in the second quarter of fiscal 2008. Adobes third quarter revenue target range was $855 to $885 million.

Our strong performance in Q3 was driven by record revenue for our Acrobat and LiveCycle products, as well as the overall diversity of our business, said Shantanu Narayen, president and chief executive officer. We continue to execute exceptionally well against our strategy, and we look forward to the launch of our flagship Creative Suite 4 product family next week.

Third Quarter GAAP Results

Adobes GAAP diluted earnings per share for the third quarter of fiscal 2008 were $0.35, based on 541.3 million weighted average shares. This compares with GAAP diluted earnings per share of $0.34 reported in the third quarter of fiscal 2007 based on 597.3 million weighted average shares, and GAAP diluted earnings per share of $0.40 reported in the second quarter of fiscal 2008 based on 542.4 million weighted average shares. Adobes third quarter GAAP earnings per share target range was $0.34 to $0.36.

GAAP operating income was $219.5 million in the third quarter of fiscal 2008, compared to $255.0 million in the third quarter of fiscal 2007 and $260.2 million in the second quarter of fiscal 2008. As a percent of revenue, GAAP operating income in the third quarter of fiscal 2008 was 24.7 percent, compared to 29.9 percent in the third quarter of fiscal 2007 and 29.3 percent in the second quarter of fiscal 2008.

GAAP net income was $191.6 million for the third quarter of fiscal 2008, compared to $205.2 million reported in the third quarter of fiscal 2007 and $214.9 million in the second quarter of fiscal 2008.

Third Quarter Non-GAAP Results

Non-GAAP diluted earnings per share for the third quarter of fiscal 2008 were $0.50. This compares with non-GAAP diluted earnings per share of $0.45 reported in the third quarter of fiscal 2007 and non-GAAP diluted earnings per share of $0.50 reported in the second quarter of fiscal 2008. Adobes third quarter non-GAAP earnings per share target range was $0.45 to $0.47.

Adobes non-GAAP operating income was $351.9 million in the third quarter of fiscal 2008, compared to $340.9 million in the third quarter of fiscal 2007 and $349.6 million in the second quarter of fiscal 2008. As a percent of revenue, non-GAAP operating income in the third quarter of fiscal 2008 was 39.7 percent, compared to 40.0 percent in the third quarter of fiscal 2007 and 39.4 percent in the second quarter of fiscal 2008.

Non-GAAP net income was $269.1 million for the third quarter of fiscal 2008, compared to $269.4 million in the third quarter of fiscal 2007, and $272.7 million in the second quarter of fiscal 2008.

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 2008, Adobe announced it is targeting revenue of $925 million to $955 million. The Company also stated it is targeting an operating margin of approximately 30.5 percent on a GAAP basis, and an operating margin of approximately 39.5 percent on a non-GAAP basis.

In addition, Adobe is targeting its share count to be between 544 million and 548 million shares in the fourth quarter. The Company also is targeting GAAP and non-GAAP non-operating income to be between $6 million and $7 million. Adobes GAAP and non-GAAP tax rates are expected to be approximately 25 percent.

These targets lead to a fourth quarter diluted earnings per share target range of $0.39 to $0.41 on a GAAP basis, and an earnings per share target range of $0.51 to $0.53 on a non-GAAP basis.

A reconciliation between these 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, non-operating income, tax rate, share count, earnings per share, and 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 and business models by existing and new competitors, failure to successfully manage transitions to new business models and markets, 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, 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, costs related to intellectual property acquisitions, disputes and litigation, inability to protect Adobes intellectual property from third-party infringers, use, disclosure or malicious attack, failure to realize the anticipated benefits of past or future acquisitions and difficulty in integrating such acquisitions, failure to manage Adobe's sales and distribution channels effectively, 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, tax rules and regulations, Adobes inability to attract and retain key personnel, impairment of Adobe's investment portfolio due to further deterioration of the capital markets, 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 29, 2008, which the Company expects to file in October 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.

© 2008 Adobe Systems Incorporated. All rights reserved. Adobe, Acrobat, Creative Suite, LiveCycle, 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 EndedNine Months Ended
August 29,

2008

August 31,

2007

August 29,

2008

August 31,

2007

Revenue:
Products $ 838,813 $ 813,382 $ 2,532,076 $ 2,147,149
Services and support 48,444 38,304 132,512 99,521
Total revenue 887,257 851,686 2,664,588 2,246,670
Total cost of revenue:
Products 84,623 69,002 202,657 193,532
Services and support 26,228 23,619 73,535 62,566
Total cost of revenue 110,851 92,621 276,192 256,098
Gross profit 776,406 759,065 2,388,396 1,990,572
Operating expenses:
Research and development 170,124 163,217 508,909 450,395
Sales and marketing 271,439 251,243 813,399 702,323
General and administrative 97,156 71,132 257,163 201,004
Restructuring and other charges 1,194 555 2,625 555
Amortization of purchased intangibles and incomplete technology 17,024 17,893 51,222 54,542
Total operating expenses 556,937 504,040 1,633,318 1,408,819
Operating income 219,469 255,025 755,078 581,753
Non-operating income (expense):
Interest and other income, net 9,338 22,733 34,778 65,866
Interest expense (2,390 ) (69 ) (8,027 ) (175 )
Investment gains (loss) 2,097 (694 ) 20,335 9,069
Total non-operating income, net 9,045 21,970 47,086 74,760
Income before income taxes 228,514 276,995 802,164 656,513
Provision for income taxes 36,906 71,752 176,267 154,914
Net income $ 191,608 $ 205,243 $ 625,897 $ 501,599
Basic net income per share $ 0.36 $ 0.35 $ 1.15 $ 0.85
Shares used in computing basic net income per share
531,060

583,670

542,624

587,141
Diluted net income per share $ 0.35 $ 0.34 $ 1.13 $ 0.83
Shares used in computing diluted net income per share
541,311

597,334

552,739

602,263

Condensed Consolidated Balance Sheets

(In thousands, except per share data; unaudited)

August 29,November 30,
20082007
ASSETS
Current assets:
Cash and cash equivalents $ 1,134,263 $ 946,422
Short-term investments 866,641 1,047,432
Trade receivables, net of allowances for doubtful accounts of $6,264 and $4,398, respectively 327,970 318,145
Other receivables 33,687 44,666
Deferred income taxes 94,500 171,472
Prepaid expenses and other assets 60,059 44,714
Total current assets 2,517,120 2,572,851
Property and equipment, net 317,071 289,758
Goodwill 2,134,032 2,148,102
Purchased and other intangibles, net 246,401 367,644
Investment in lease receivable 207,239 207,239
Other assets 216,887 128,085
$ 5,638,750 $ 5,713,679
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Trade and other payables $ 56,254 $ 66,867
Accrued expenses 356,408 383,436
Accrued restructuring 6,862 3,731
Income taxes payable 37,546 215,058
Deferred revenue 204,593 183,318
Total current liabilities 661,663 852,410
Long-term liabilities:
Debt 350,000
Deferred revenue 27,838 25,950
Accrued restructuring 8,096 13,987
Income taxes payable 99,636
Deferred income taxes 96,827 148,943
Other liabilities 23,248 22,407
Total liabilities 1,267,308 1,063,697
Stockholders equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized
Common stock, $0.0001 par value 61 61
Additional paid-in-capital 2,369,689 2,340,969
Retained earnings 4,667,489 4,041,592
Accumulated other comprehensive income 23,439 27,948
Treasury stock, at cost (69,359 and 29,425 shares, respectively), net of reissuances (2,689,236 ) (1,760,588 )
Total stockholders equity 4,371,442 4,649,982
$ 5,638,750 $ 5,713,679

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

Three Months Ended
August 29,

2008

August 31,

2007

Cash flows from operating activities:
Net income $ 191,608 $ 205,243
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation, amortization and accretion 62,679 81,727
Stock-based compensation expense, net of tax 106,297 45,490
Net investment gains (1,111 ) (911 )
Changes in deferred revenue 16,018 (16,834 )
Changes in operating assets and liabilities (163,720 ) 109,959
Net cash provided by operating activities 211,771 424,674
Cash flows from investing activities:
Purchases of short-term investments, net of sales and maturities (168,586 ) 29,356
Purchases of property and equipment (39,810 ) (32,160 )
Purchases of long term investments and other assets, net of sales (56,792 ) (52,738 )
Cash received from acquisitions 639
Net cash used for investing activities (265,188 ) (54,903 )
Cash flows from financing activities:
Purchases of treasury stock (122,552 ) (850,044 )
Reissuances of treasury stock 138,987 122,713
Excess tax benefits from stock-based compensation 14,306 16,974
Net cash provided by (used for) financing activities 30,741 (710,357 )
Effect of exchange rate changes on cash and cash equivalents (5,514 ) (1,748 )
Net decrease in cash and cash equivalents (28,190 ) (342,334 )
Cash and cash equivalents at beginning of period 1,162,453 901,617
Cash and cash equivalents at end of period $ 1,134,263 $ 559,283

Non-GAAP Results

(In thousands, except per share data)

The following tables show the Companys non-GAAP results reconciled to GAAP results included in this release for the quarters ended August 29, 2008, August 31, 2007 and May 30, 2008.

Three Months Ended
August 29,

2008

August 31,

2007

May 30,

2008

Operating income:
GAAP operating income $ 219,469 $ 255,025 $ 260,178
Stock-based compensation 48,260 38,707 48,388
Restructuring and other charges 1,194 555
Amortization of purchased intangibles, technology license arrangements and incomplete technology

82,996

46,570

41,071

Non-GAAP operating income $ 351,919 $ 340,857 $ 349,637
Net income:
GAAP net income $ 191,608 $ 205,243 $ 214,910
Stock-based compensation, net of tax 36,339 28,680 34,998
Restructuring and other charges, net of tax 899 411
Amortization of purchased intangibles, technology license arrangements and incomplete technology, net of tax

61,829

34,521

29,705

Resolution of an income tax audit (20,712 )
Investment (gain) loss, net of tax (913 ) 514 (6,875 )
Non-GAAP net income $ 269,050 $ 269,369 $ 272,738
Diluted net income per share:
GAAP net income $ 0.35 $ 0.34 $ 0.40
Stock-based compensation, net of tax 0.08 0.05 0.07
Restructuring and other charges, net of tax
Amortization of purchased intangibles, technology license arrangements and incomplete technology, net of tax

0.11

0.06

0.05

Resolution of an income tax audit (0.04 )
Investment gain, net of tax (0.02 )
Non-GAAP net income $ 0.50 $ 0.45 $ 0.50
Shares used computing diluted net income per share 541,311 597,334 542,376
Three Months
August 29,

2008

May 30,

2008

Operating expenses:
GAAP operating expenses $ 556,937 $ 543,842
Stock-based compensation (46,841 ) (47,200 )
Restructuring and other charges (1,194 )
Amortization of purchased intangibles, technology license arrangements and incomplete technology

(33,802

)

(17,099

)

Non-GAAP operating expenses $ 475,100 $ 479,543
Three Months
August 29,
2008
August 31,
2007
May 30,
2008
Operating margin:
GAAP operating margin 24.7 % 29.9 % 29.3 %
Stock-based compensation 5.4 4.6 5.5
Restructuring and other charges 0.1 0.1
Amortization of purchased intangibles, technology license arrangements and incomplete technology

9.5

5.4

4.6

Non-GAAP operating margin 39.7 % 40.0 % 39.4 %
Three Months
August 29,
2008
Effective income tax rate:
GAAP effective income tax rate 16.2 %
Stock-based compensation 0.1
Amortization of purchased intangibles, technology license arrangements and incomplete technology

0.1

Resolution of an income tax audit 8.6
Non-GAAP effective income tax rate 25.0 %

Fourth Quarter Fiscal Year 2008 Non-GAAP Financial Targets

(In millions, except per share data)

The following tables show the Companys fourth quarter fiscal year 2008 non-GAAP financial targets reconciled to GAAP financial targets included in this release.

Fourth Quarter

Fiscal 2008

Operating margin:
GAAP operating margin 30.5 %
Stock-based compensation 4.7
Amortization of purchased intangibles and incomplete technology

4.3

Non-GAAP operating margin 39.5 %
Fourth Quarter

Fiscal 2008

LowHigh
Diluted net income per share:
GAAP net income per share $ 0.39 $ 0.41
Stock-based compensation, net of tax 0.07 0.07
Amortization of purchased intangibles and incomplete technology, net of tax

0.05

0.05

Non-GAAP net income per share $ 0.51 $ 0.53
Shares used in computing diluted net income per share 548.0 544.0

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, restructuring and other charges, amortization of purchased intangibles, technology license arrangements and incomplete technology, investment gains and losses and the related tax impact of these items, the resolution of an income tax audit, 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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