Adobe Systems Incorporated 2010 Form 10-K Summary
Business context and reporting period
Adobe develops and licenses creative, document, enterprise, Web, mobile and online marketing software and services. The filing covers the 53-week fiscal year ended December 3, 2010, compared primarily with the 52-week fiscal year ended November 27, 2009. Adobe operated through Creative Solutions, Knowledge Worker, Enterprise, Omniture, Platform, and Print and Publishing segments during fiscal 2010; it announced a revised segment structure for fiscal 2011.
Financial performance and liquidity
| Metric | Fiscal 2010 | Fiscal 2009 | Change |
|---|---|---|---|
| Revenue | $3.800 billion | $2.946 billion | 29% |
| Gross profit | $3.396 billion | $2.649 billion | 28% |
| Gross margin | 89.4% | 89.9% | Down 0.5 percentage points |
| Operating income | $993.1 million | $690.5 million | 44% |
| Operating margin | 26.1% | 23.4% | Up 2.7 percentage points |
| Net income | $774.7 million | $386.5 million | 100% |
| Diluted EPS | $1.47 | $0.73 | 101% |
| Operating cash flow | $1.113 billion | $1.118 billion | Flat |
- Revenue mix shifted toward recurring businesses: product revenue was $3.159 billion, subscription revenue was $386.8 million, and services and support revenue was $254.0 million. Subscription revenue increased from $74.6 million in 2009, primarily due to Omniture.
- Segment revenue included Creative Solutions of $2.057 billion, Knowledge Worker of $654.3 million, Enterprise of $355.0 million, Omniture of $360.6 million, Platform of $178.9 million, and Print and Publishing of $194.6 million.
- Cash, cash equivalents and short-term investments totaled $2.468 billion at year-end, including $749.9 million of cash and cash equivalents and $1.718 billion of short-term investments. Working capital was $2.148 billion.
- Fiscal 2010 investing cash outflow was $1.159 billion, including purchases of short-term investments, capital expenditures and the Day acquisition. Financing cash outflow was $215.3 million, principally reflecting debt repayment and share repurchases.
- Adobe reported $1.522 billion of total debt and capital lease obligations, including $1.494 billion of senior notes and $28.5 million of capital lease obligations. The $1.0 billion revolving credit facility was undrawn and fully available at year-end.
- Fiscal 2010 included $23.3 million of restructuring charges, $72.1 million of amortization of purchased intangibles and incomplete technology, and $231.1 million of stock-based compensation expense.
Material changes versus the prior comparable period
- CS5, launched in May 2010, drove strong Creative Solutions performance. CS5 revenue was approximately 21% higher than CS4 over a comparable availability period, and Creative Solutions revenue increased 21% year over year.
- Knowledge Worker revenue increased 17%, supported by enterprise and volume licensing of Acrobat. Enterprise revenue increased 18%, driven by LiveCycle and Connect adoption.
- Omniture revenue increased to $360.6 million from $26.3 million because fiscal 2009 included only a partial post-acquisition period. Omniture processed 5.07 trillion user transactions during fiscal 2010, up 12%.
- Platform revenue declined 1%, primarily because some developer tools were included in CS5 suites and OEM-related revenue was lower in portions of the business.
- Adobe acquired Day Software Holding AG in October 2010 for approximately $248.3 million. Day contributed approximately $5.4 million of fiscal 2010 revenue and was included in the Enterprise segment.
- Adobe issued $1.5 billion of senior notes in February 2010 and used $1.0 billion of the proceeds to repay its revolving credit facility.
- The effective tax rate declined to approximately 18% from 45%, primarily due to a $39 million fourth-quarter tax benefit from the resolution of a U.S. tax examination and stronger international profits. This benefit materially increased year-over-year net income comparability.
- Adobe repurchased approximately 31.2 million shares for $909.9 million during fiscal 2010 and had $1.0 billion of remaining repurchase authority at December 3, 2010. No cash dividends were declared or paid.
Outlook, commentary, risks and unusual items
Management emphasized continued investment in Creative Suite, digital media, customer experience management, online marketing, cloud-based services, mobile and multiscreen technologies, HTML5, Flash, subscriptions and enterprise solutions. The filing does not provide a clear numerical fiscal 2011 revenue or earnings guidance range.
- Management expected growth from subscriptions, hosted services, Omniture integration, Day’s Web content management products, mobile and tablet adoption, and increased enterprise and government demand.
- Key risks include intense competition; rapid changes in software delivery models and standards; competition from HTML5, mobile-native applications and large technology platforms; product execution and operating-system dependence; piracy; privacy, data-security and service-availability obligations; and the integration of acquisitions.
- International operations generated more than 50% of revenue, exposing Adobe to foreign-currency, political, regulatory, tax and economic risks. Adobe hedged portions of its currency exposure but did not fully offset these risks.
- Ingram Micro accounted for 15% of fiscal 2010 revenue and 14% of gross trade receivables, creating distributor concentration risk.
- The gross liability for unrecognized tax benefits was $156.9 million, plus $15.4 million of interest and penalties. Management estimated that potential decreases in underlying unrecognized tax benefits through fiscal 2011 could range from zero to approximately $5 million.
- Adobe disclosed an Eolas patent infringement lawsuit for which no loss was accrued because a loss was not considered probable or estimable. The Omniture shareholder litigation was dismissed with prejudice.
- Contractual obligations totaled $2.513 billion, including $1.994 billion of notes, $273.8 million of operating leases, $30.6 million of capital lease obligations and $214.5 million of purchase obligations.
- Subsequent to year-end, Adobe prepaid $125 million under its stock repurchase program and acquired Demdex; management stated the Demdex acquisition was not material to consolidated results.
Important facts for investors to verify
- Separate the underlying operating improvement from the $39 million tax benefit and the extra week in fiscal 2010.
- Assess the sustainability and profitability of subscription and Omniture revenue, including renewal rates, deferred revenue and hosting costs.
- Review the effect of the Day acquisition and the planned fiscal 2011 segment realignment on reported growth comparisons.
- Monitor leverage, interest expense, debt maturities, covenant compliance and the availability of the $1.0 billion revolving credit facility.
- Evaluate exposure to HTML5, mobile platforms, online alternatives, piracy, privacy regulation and cybersecurity incidents.
- Review the unrecognized tax benefits, pending intellectual-property claims, lease guarantees and other contractual commitments.
- Confirm cash conversion, stock-based compensation, share repurchases and dilution from equity awards against future filings.