Adobe Inc. Fiscal 2009 Form 10-K Summary
Business context and reporting period
Adobe Systems Incorporated reported on the 52-week fiscal year ended November 27, 2009. The company provides creative, document, enterprise, platform, print and publishing, and Web analytics software and services worldwide. The filing includes fourth-quarter results and the October 23, 2009 acquisition of Omniture for approximately $1.8 billion.
Key financial metrics
| Metric | Fiscal 2009 | Fiscal 2008 | Change |
|---|---|---|---|
| Revenue | $2.946 billion | $3.580 billion | Down 18% |
| Gross profit | $2.649 billion | $3.217 billion | Down 18% |
| Gross margin | 90.0% | 89.9% | Broadly stable |
| Operating income | $690.5 million | $1.028 billion | Down 33% |
| Operating margin | 23.4% | 28.7% | Down 5.3 points |
| Net income | $386.5 million | $871.8 million | Down 56% |
| Diluted EPS | $0.73 | $1.59 | Down 54% |
| Net margin | 13.1% | 24.4% | Down 11.3 points |
| Operating cash flow | $1.118 billion | $1.281 billion | Down 13% |
Cash, cash equivalents and short-term investments totaled $1.904 billion at year-end, versus $2.019 billion in the prior year. Working capital was $1.629 billion. Adobe had $1.0 billion outstanding under its revolving credit facility, due February 16, 2013, and reported compliance with its covenants. Total assets were $7.282 billion and stockholders’ equity was $4.891 billion.
Revenue was 94% product revenue and 6% services and support revenue. Fiscal 2009 segment revenue included Creative Solutions of $1.702 billion, Knowledge Worker of $623.0 million, Enterprise of $235.5 million, Platform of $181.0 million, Print and Publishing of $178.0 million, and Omniture of $26.3 million. Omniture contributed only results from October 24 through year-end.
Material changes versus the prior comparable period
- Revenue declined 18% amid the global recession. Creative Solutions fell 18%, Knowledge Worker fell 23%, Platform fell 22%, Print and Publishing fell 16%, and Enterprise fell 7%.
- Creative Suite revenue declined 15% and Photoshop point-product revenue declined 27%. CS4 revenue was more than 20% below the comparable prior-version period.
- Operating expenses declined, but not enough to offset the revenue contraction. Research and development declined 15%, sales and marketing declined 10%, and general and administrative expenses declined 11%.
- The effective tax rate increased to 45% from 19%, primarily because of a one-time $161.7 million tax charge related to licensing Omniture technology to foreign subsidiaries.
- Omniture added $1.334 billion of preliminary goodwill, including approximately $1.1 billion allocated to the Omniture segment and $0.2 billion to Creative Solutions.
- Adobe borrowed an additional $650 million during fiscal 2009, increasing outstanding debt from $350 million to $1.0 billion.
- Fiscal 2009 investing cash outflows were $1.497 billion, primarily reflecting the Omniture acquisition. Financing cash flow was positive $477.7 million, largely due to the additional borrowing and lower stock repurchases.
- Adobe repurchased approximately 15.2 million shares for $424.9 million during fiscal 2009. No cash dividends were declared or paid.
Fourth-quarter results, outlook and unusual items
Fourth-quarter revenue was $757.3 million, compared with $915.3 million in the fourth quarter of fiscal 2008. Fourth-quarter gross profit was $675.0 million and pretax income was $160.2 million. The quarter reported a net loss of $32.0 million, or $0.06 per diluted share, primarily reflecting the Omniture-related tax charge and acquisition-related items.
Management expected fiscal 2010 to benefit from new Creative Suite products, greater integration of Creative, Flash and Omniture technologies, expansion of hosted and subscription offerings, and continued development of Flash Player 10.1, Flash Catalyst and Flash Builder. The company also planned to move Acrobat Connect Pro reporting from Knowledge Worker to Enterprise.
Adobe initiated a restructuring plan affecting up to approximately 630 positions. It recorded $25.5 million of fiscal 2009 termination charges for approximately 340 positions and expected additional fiscal 2010 charges of approximately $15 million to $18 million for facilities and up to $26 million for remaining severance. Omniture restructuring charges totaled approximately $10.9 million and were included in purchase accounting.
Key risks include prolonged economic weakness, intense competition from Microsoft, Google, Apple and open-source technologies, the transition to SaaS and subscription models, integration and goodwill impairment risk from Omniture, foreign currency exposure, distributor concentration, privacy and data-security obligations, intellectual-property litigation, tax examinations, and execution risk in mobile and device markets. Ingram Micro and Tech Data represented 15% and 8% of fiscal 2009 revenue, respectively.
Most important facts for investors to verify
- Whether Omniture integration produces the anticipated revenue growth, cost synergies and customer retention improvements.
- The sustainability of demand for Creative Suite, Acrobat and Photoshop following the recession-driven fiscal 2009 declines.
- The effect of the 45% fiscal 2009 tax rate and the resolution of open tax examinations and $218.0 million of unrecognized tax benefits.
- Debt repayment capacity and refinancing requirements for the $1.0 billion credit facility maturing in 2013.
- Potential goodwill or intangible-asset impairment, particularly the approximately $1.3 billion of Omniture goodwill.
- Actual restructuring cash costs, facility obligations and workforce reductions during fiscal 2010 and later periods.
- Exposure to distributor concentration, foreign exchange movements, hosted-service outages, privacy regulation and competitive pressure from free or bundled alternatives.