Adobe Systems Incorporated — Fiscal 2009 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended August 28, 2009, compared with August 29, 2008. The filing was signed October 1, 2009. Adobe provides creative, document, enterprise, platform, mobile and publishing software and services globally.
Financial performance and liquidity
| Metric | Q3 2009 | Q3 2008 | Change | Nine months 2009 | Nine months 2008 | Change |
|---|---|---|---|---|---|---|
| Total revenue | $697.5 million | $887.3 million | (21%) | $2,188.6 million | $2,664.6 million | (18%) |
| Product revenue | $649.9 million | $838.8 million | (23%) | $2,052.1 million | $2,532.1 million | (19%) |
| Services and support revenue | $47.6 million | $48.4 million | (2%) | $136.5 million | $132.5 million | 3% |
| Gross profit | $632.5 million | $776.4 million | (19%) | $1,974.2 million | $2,388.4 million | (17%) |
| Operating income | $167.6 million | $219.5 million | (24%) | $536.9 million | $755.1 million | (29%) |
| Net income | $136.0 million | $191.6 million | (29%) | $418.6 million | $625.9 million | (33%) |
| Diluted EPS | $0.26 | $0.35 | (26%) | $0.79 | $1.13 | (30%) |
Margins: Q3 gross margin was approximately 90.7%, operating margin 24.0% and net margin 19.5%, compared with approximately 87.5%, 24.7% and 21.6%, respectively, in Q3 2008. Nine-month gross margin was approximately 90.2%, operating margin 24.5% and net margin 19.1%.
- Net cash provided by operating activities was $863.9 million for the nine months, versus $942.4 million in the prior-year period.
- Investing cash flow was an outflow of $405.2 million, primarily from purchases of short-term investments and property and equipment.
- Financing cash flow was an outflow of $227.7 million, including $350.0 million of treasury-stock purchases, partially offset by $122.2 million from treasury-stock issuances.
- Cash and cash equivalents increased to $1.132 billion from $886.5 million at November 28, 2008. Cash, cash equivalents and short-term investments totaled $2.557 billion, versus $2.019 billion at year-end.
- Working capital was $2.377 billion and stockholders’ equity was $4.695 billion at August 28, 2009.
- Debt was $350.0 million under a $1.0 billion revolving credit facility at quarter-end. Adobe subsequently borrowed an additional $650.0 million to fund part of the proposed Omniture acquisition.
Material changes versus the prior comparable period
- Weak macroeconomic conditions reduced demand for Creative Suite, Acrobat and other products. Creative Solutions revenue declined 19% in both Q3 and the nine-month period; Knowledge Worker revenue declined 29% and 23%, respectively.
- Platform revenue declined 24% in Q3 and 13% year to date, primarily because of lower licensing revenue from Flash Lite mobile-device OEM partners. Adobe expected the Open Screen Project to reduce mobile and device licensing revenue during fiscal 2009.
- Enterprise revenue declined 15% in Q3 but was approximately flat for the nine-month period. Print and Publishing revenue declined 17% in Q3 and 15% year to date.
- Revenue decreased across all geographic regions: Americas declined 17% in Q3, EMEA 34% and Asia 9%. Foreign currency movements materially affected reported EMEA and Asia revenue.
- Operating expenses declined as Adobe reduced compensation, incentive compensation, marketing and consulting spending. Research and development declined 18% in Q3, sales and marketing 15% and general and administrative 18%.
- Nine-month investment gains and losses changed from a $20.3 million gain in 2008 to an $18.4 million loss in 2009. The 2009 loss included a $13.9 million other-than-temporary impairment charge on certain cost-method investments.
- Adobe continued its fiscal 2008 restructuring program. Nine-month restructuring charges were $15.9 million, with approximately $6.3 million of related accrued obligations remaining at August 28, 2009. Additional Macromedia-related restructuring liabilities were approximately $6.9 million.
Outlook, commentary, risks and unusual items
- Management stated that U.S. conditions appeared to have stabilized from the first fiscal quarter, but end-user demand remained weaker than the comparable 2008 period. Adobe did not expect material near-term improvement in the creative, knowledge-worker or print-and-publishing markets.
- Management said cost controls allowed earnings per share and profit margins to remain within publicly provided target ranges; the filing text does not provide the specific quarterly numeric guidance ranges.
- In September 2009, Adobe agreed to acquire Omniture for approximately $1.8 billion, or $21.50 per share in cash. The transaction was subject to regulatory and other closing conditions and was expected to close in fiscal Q4 2009. The reported results do not include the acquisition.
- Adobe completed a separate, immaterial business combination after quarter-end for approximately $35.3 million in cash.
- Subsequent to quarter-end, Adobe borrowed $650.0 million under its credit facility. Management expected existing cash, investments, operating cash flow and available credit to fund the Omniture transaction and near-term requirements, but noted that reserves could decline materially because of the acquisition, integration costs or further economic weakness.
- Unrecognized tax benefits were $137.3 million, excluding interest and penalties. Adobe stated that the timing and ultimate resolution of tax examinations were uncertain.
- Material risks include prolonged economic weakness, competition from Microsoft, Google, Apple, open-source and HTML-based technologies, product-transition and business-model execution, foreign currency exposure, intellectual-property litigation, acquisition integration, distributor concentration, cybersecurity and potential goodwill or intangible-asset impairment.
- Adobe reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the quarter.
Facts investors should verify
- Whether the Omniture acquisition closed as planned, its final financing mix, purchase accounting, goodwill and intangible-asset additions, and integration costs.
- Post-acquisition debt, interest expense, leverage covenant compliance and remaining liquidity.
- Trends in Creative Suite, Acrobat, Knowledge Worker and mobile licensing demand, including whether macroeconomic weakness persisted.
- Revenue mix and performance by segment and geography, including the effects of foreign currency hedging.
- Operating cash conversion after the revenue decline and the cash impact of treasury-stock repurchases.
- Resolution of the Omniture shareholder litigation, tax examinations and other intellectual-property or commercial claims.
- Potential impairment of goodwill, purchased intangibles and private-company investments.