Business Context and Reporting Period
Company: Adobe Systems Incorporated
Filing Type: Form 10-K (Annual Report)
Period Ended: November 29, 2002
Business Overview: Adobe provides software for consumers, businesses, and creative professionals to create, manage, and deliver visually rich content. The company operates in four segments: Digital Imaging and Video (formerly Graphics), Creative Professional (formerly Cross-media Publishing), ePaper Solutions, and OEM PostScript and Other. In fiscal 2002, Adobe acquired Accelio Corporation to expand its ePaper and electronic forms capabilities.
Key Financial Metrics
| Metric (in millions) | Fiscal 2002 | Fiscal 2001 | Fiscal 2000 |
|---|---|---|---|
| Total Revenue | $1,164.8 | $1,229.7 | $1,266.4 |
| Gross Profit | $1,060.5 | $1,148.3 | $1,179.1 |
| Gross Margin | 91.0% | 93.4% | 93.1% |
| Operating Income | $287.0 | $378.5 | $408.1 |
| Net Income | $191.4 | $205.6 | $287.8 |
| Diluted EPS | $0.79 | $0.83 | $1.13 |
| Cash from Operations | $329.3 | $418.7 | $444.6 |
| Cash & Short-term Investments | $617.7 | $581.6 | $679.9 |
| Working Capital | $436.9 | $453.7 | $563.3 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 5% to $1,164.8 million, driven by a 6% drop in product revenue. This was attributed to global economic weakness, particularly in Asia, Europe, and the U.S.
- Segment Performance:
- Graphics (Digital Imaging & Video): Revenue fell 7% due to declines in illustration and digital video software.
- Cross-media Publishing (Creative Professional): Revenue fell 10%, impacted by a 35% drop in Web publishing products and a 23% drop in business publishing.
- OEM PostScript: Revenue declined 15% due to weakness in the print business and lower average selling prices.
- ePaper Solutions: Revenue increased 3% to $300.9 million, aided by the acquisition of Accelio and growth in Acrobat revenue.
- Investment Losses: The company recorded a net investment loss of $17.2 million in 2002, compared to $93.4 million in 2001. This included writedowns of marketable equity securities.
- Restructuring: Incurred $12.1 million in restructuring charges, primarily for severance and facility closures to realign resources for the ePaper enterprise business.
- Acquisitions: Acquired Accelio for $70.2 million (stock and cash) and Fotiva for $5.4 million (cash), with significant portions allocated to in-process R&D and goodwill.
Guidance, Outlook, and Risks
- Outlook: Management expects continued economic weakness in the U.S., Europe, and Japan to adversely affect revenue and earnings in the short term. The company plans to increase focus on the Creative Professional and ePaper enterprise markets.
- Strategic Shifts: Beginning in fiscal 2003, segments were realigned to "Digital Imaging and Video" and "Creative Professional." The company aims to increase product usage among creative professionals and expand ePaper solutions for document generation and process management.
- Key Risks:
- Competition: Intense competition from Microsoft (particularly in ePaper and digital imaging), Macromedia, and Quark. Microsoft's potential integration of PDF-like functionality into Office is a specific concern.
- Legal Proceedings: Significant litigation with International Typeface Corporation (ITC) and Agfa Monotype Corporation (AMT) regarding font licensing and DMCA violations. Outcomes could materially affect operations.
- Market Volatility: Equity investments in private and public companies are subject to market fluctuations, impacting net income.
- Customer Concentration: Significant revenue reliance on two major distributors (Ingram Micro and Tech Data), accounting for 41% of total revenue in 2002.
Investor Verification Checklist
- Segment Realignment: Verify the impact of the new segment reporting structure (Digital Imaging/Video and Creative Professional) on future performance comparisons.
- Legal Exposure: Monitor the status of the ITC/AMT litigation regarding font embedding rights and potential DMCA damages.
- Microsoft Competition: Assess the competitive threat posed by Microsoft's upcoming .NET and Office initiatives in the document management space.
- Investment Portfolio: Review the valuation of Adobe's venture capital investments (Adobe Ventures) and marketable securities for potential future writedowns.
- Accelio Integration: Evaluate the success of integrating Accelio's electronic forms technology into the ePaper suite and its contribution to enterprise revenue growth.
- Stock Repurchases: Note the active stock repurchase programs and the expiration of put/call options in late 2002, which may affect share count and EPS.