Adobe Systems Incorporated 10-Q Summary
Business Context and Reporting Period
Adobe Systems Incorporated, a software and services company serving creative professionals, knowledge workers, enterprises, developers, OEMs and consumers, reported results for the three months ended February 27, 2009. The comparable period ended February 29, 2008. The filing reflects the global financial crisis and weaker customer demand, particularly for Creative Suite and Acrobat products. Mobile and Devices Solutions was integrated into the Platform segment.
Financial Highlights
| Metric | Q1 FY2009 | Q1 FY2008 | Change |
|---|---|---|---|
| Total revenue | $786.4 million | $890.4 million | Down 12% |
| Gross profit | $709.0 million | $808.0 million | Down 12% |
| Gross margin | 90.2% | 90.7% | Down 0.5 percentage points |
| Operating income | $207.9 million | $275.4 million | Down 25% |
| Operating margin | 26.4% | 30.9% | Down 4.5 percentage points |
| Net income | $156.4 million | $219.4 million | Down 29% |
| Diluted EPS | $0.30 | $0.38 | Down $0.08 |
| Operating cash flow | $365.7 million | $399.3 million | Down 8% |
- Product revenue declined to $742.2 million from $852.0 million, while services and support revenue increased to $44.2 million from $38.5 million.
- Segment revenue changes were: Creative Solutions down 15% to $460.7 million; Knowledge Worker down 17% to $163.1 million; Enterprise up 18% to $63.9 million; Platform up 21% to $52.3 million; and Print and Publishing down 14% to $46.4 million.
- Cash, cash equivalents and short-term investments totaled $2.384 billion at February 27, 2009, compared with $2.019 billion at November 28, 2008. Working capital was $2.232 billion.
- Cash and cash equivalents increased by $262.5 million during the quarter to $1.149 billion.
- Adobe had $350.0 million outstanding under a $1.0 billion senior unsecured revolving credit facility, leaving $650.0 million of stated capacity before considering any other restrictions.
- Total assets were $5.888 billion and stockholders’ equity was $4.611 billion at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of weaker adoption and licensing of CS4 and Acrobat products amid reduced corporate and creative-market spending. CS4 revenue lagged comparable CS3 revenue by more than 20% for the comparable period.
- Creative Suite-related revenue declined 17%, Photoshop revenue declined 12%, and unit volumes generally decreased, although average selling prices remained relatively stable.
- Operating expenses declined overall, but restructuring charges increased to $12.3 million from $1.4 million. Research and development declined 11%, sales and marketing declined 5%, and general and administrative expenses declined 11%.
- Investment losses of $17.2 million replaced investment gains of $8.7 million in the prior-year quarter. The losses included a $10.6 million other-than-temporary impairment charge on certain cost-method investments and unrealized losses related to Adobe Ventures and other investments.
- The effective tax rate decreased to approximately 23% from 26%, primarily due to availability of the U.S. research and development credit and stronger forecasted international profits.
- Net cash provided by operating activities decreased, but cash generation remained strong. Investing cash flow changed to an outflow of $131.6 million, primarily due to increased purchases of short-term investments.
- Adobe repurchased approximately 5.0 million shares at an average price of $22.79 through structured repurchase agreements entered into during fiscal 2008. The remaining upfront payments under those agreements were approximately $19.7 million at quarter-end; the agreements expired March 19, 2009.
Guidance, Outlook, Risks and Unusual Items
- Management stated that revenue was below its expectations, but expense management allowed earnings per share and profit margins to remain within the target ranges publicly provided at the beginning of the quarter. The filing does not provide the specific target ranges.
- Management did not expect near-term improvement in the creative-products or knowledge-worker markets and expected weakness in Print and Publishing to continue.
- Enterprise and Platform were relative growth areas. Enterprise revenue grew 18%, while Platform revenue grew 21%, driven partly by Mobile Client and OEM licensing.
- The Open Screen Project is expected to substantially reduce mobile and device licensing revenue during fiscal 2009 because future major releases of Flash Platform technologies for devices will not carry licensing fees. Adobe expects potential longer-term benefits from tooling, server technologies, hosted services and applications, but the filing warns that Platform goodwill or intangible assets could become impaired if forecasts weaken.
- Adobe recorded $11.9 million of restructuring costs in the quarter, including $8.5 million for facility obligations and $3.4 million for termination benefits. The 2008 restructuring program involved approximately 560 planned global position reductions and the vacating of approximately 89,000 square feet of facilities.
- Accrued restructuring liabilities totaled $13.6 million for the 2008 program and $11.7 million for the Macromedia-related program. Payments are expected through fiscal 2013 and fiscal 2011, respectively.
- Management believed existing cash, operating cash flows and available credit would be sufficient for working capital and operating requirements for the next twelve months, while noting that further economic deterioration or changes in planned spending could reduce cash and investments.
- Key risks include global economic weakness, reduced technology and advertising spending, distributor and financial-counterparty failures, competition from Microsoft, Google, Apple, Sun and open-source providers, foreign-exchange volatility, intellectual-property litigation, security breaches, acquisition integration, impairment of goodwill and investments, tax examinations and international operating risks.
- Adobe was in compliance with its credit-facility and lease financial covenants at February 27, 2009. The filing identifies ongoing legal proceedings and intellectual-property claims but does not provide a clear estimate of potential losses.
- Unrecognized tax benefits totaled $140.8 million, excluding interest and penalties, with approximately $15.1 million of accrued interest and penalties. The timing and ultimate resolution of tax examinations remain uncertain.
Most Important Facts for Investors to Verify
- Whether weakness in Creative Suite and Acrobat demand continued beyond the first quarter and whether CS4 adoption improved.
- The specific revenue, EPS and margin guidance ranges referenced by management but not reproduced in the filing.
- The sustainability of Enterprise and Platform growth, particularly as Open Screen Project changes eliminate future mobile-device licensing fees.
- The valuation and impairment exposure associated with Adobe Ventures, direct private-company investments, goodwill and acquired intangible assets.
- Progress and total cash cost of the restructuring programs, including facility obligations extending through fiscal 2013.
- Liquidity after the $350 million credit-facility borrowing, stock repurchases, investments and the planned $44.7 million Waltham, Massachusetts property acquisition.
- Developments in tax examinations, intellectual-property litigation, distributor concentration and counterparty exposure.