June 16, 2008 at 16:05 PM EDT
Adobe Reports Strong Second Quarter Results
Product Mix and Geographic Diversity Drive 19 Percent Year-Over-Year Revenue Growth

Adobe Systems Incorporated (Nasdaq:ADBE) today reported financial results for its second quarter ended May 30, 2008.

In the second quarter of fiscal 2008, Adobe achieved revenue of $886.9 million, compared to $745.6 million reported for the second quarter of fiscal 2007 and $890.4 million reported in the first quarter of fiscal 2008. This represents 19 percent year-over-year revenue growth. Adobes second quarter revenue target range was $855 to $885 million.

Our strong performance in Q2 was driven by the product mix and geographic diversity of our business, said Shantanu Narayen, president and chief executive officer. We continue to execute against our strategy, and are well positioned for solid financial performance in the second half of this year and beyond.

Second Quarter GAAP Results

Adobes GAAP diluted earnings per share for the second quarter of fiscal 2008 were $0.40, based on 542.4 million weighted average shares. This compares with GAAP diluted earnings per share of $0.25 reported in the second quarter of fiscal 2007 based on 603.4 million weighted average shares, and GAAP diluted earnings per share of $0.38 reported in the first quarter of fiscal 2008 based on 571.3 million weighted average shares. Adobes second quarter GAAP earnings per share target range was $0.35 to $0.37.

GAAP operating income was $260.2 million in the second quarter of fiscal 2008, compared to $180.4 million in the second quarter of fiscal 2007 and $275.4 million in the first quarter of fiscal 2008. As a percent of revenue, GAAP operating income in the second quarter of fiscal 2008 was 29.3 percent, compared to 24.2 percent in the second quarter of fiscal 2007 and 30.9 percent in the first quarter of fiscal 2008.

GAAP net income was $214.9 million for the second quarter of fiscal 2008, compared to $152.5 million reported in the second quarter of fiscal 2007, and $219.4 million in the first quarter of fiscal 2008.

Second Quarter Non-GAAP Results

Non-GAAP diluted earnings per share for the second quarter of fiscal 2008 were $0.50. This compares with non-GAAP diluted earnings per share of $0.37 reported in the second quarter of fiscal 2007, and non-GAAP diluted earnings per share of $0.48 reported in the first quarter of fiscal 2008. Adobes second quarter non-GAAP earnings per share target range was $0.45 to $0.47.

Adobes non-GAAP operating income was $349.6 million in the second quarter of fiscal 2008, compared to $282.1 million in the second quarter of fiscal 2007 and $359.0 million in the first quarter of fiscal 2008. As a percent of revenue, non-GAAP operating income in the second quarter of fiscal 2008 was 39.4 percent, compared to 37.8 percent in the second quarter of fiscal 2007 and 40.3 percent in the first quarter of fiscal 2008.

Non-GAAP net income was $272.7 million for the second quarter of fiscal 2008, compared to $223.2 million in the second quarter of fiscal 2007, and $273.0 million in the first quarter of fiscal 2008.

A reconciliation between GAAP and non-GAAP results is provided at the end of this press release.

Adobe Provides Third Quarter Financial Targets

For the third quarter of fiscal 2008, Adobe announced it is targeting revenue of $855 million to $885 million. The Company also stated it is targeting an operating margin of approximately 29 percent on a GAAP basis, and an operating margin of approximately 38.5 percent on a non-GAAP basis.

In addition, Adobe is targeting its share count to be between 544 million and 548 million shares in the third quarter. The Company also is targeting GAAP and non-GAAP non-operating income to be approximately $4 million. Adobes GAAP tax rate is expected to be approximately 25 percent, and its non-GAAP tax rate is expected to be approximately 26 percent.

These targets lead to a third quarter diluted earnings per share target range of $0.34 to $0.36 on a GAAP basis, and a earnings per share target range of $0.45 to $0.47 on a non-GAAP basis.

A reconciliation between these GAAP and non-GAAP financial targets is provided at the end of this press release.

Third quarter financial targets do not include the impact of a $90 million acquisition of intellectual property rights closed in June, which Adobe believes will not affect the Companys non-GAAP targets.

Forward-Looking Statements Disclosure

This press release contains forward-looking statements, including those related to revenue, operating margin, non-operating income, tax rate, share count, earnings per share, and business momentum which involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to: delays in development or shipment of Adobes new products or major new versions of existing products, introduction of new products and business models by existing and new competitors, failure to successfully manage transitions to new business models and markets, failure to anticipate and develop new products and services in response to changes in demand for application software and software delivery, computers, printers, or other non PC-devices, adverse changes in general economic or political conditions in any of the major countries in which Adobe does business, difficulty in predicting revenue from new businesses, costs related to intellectual property acquisitions, disputes and litigation, inability to protect Adobes intellectual property from third-party infringers, use, disclosure or malicious attack, failure to realize the anticipated benefits of past or future acquisitions and difficulty in integrating such acquisitions, changes to Adobes distribution channel, disruption of Adobes business due to catastrophic events, risks associated with international operations, fluctuations in foreign currency exchange rates, changes in, or interpretations of, accounting principles, impairment of Adobes goodwill or intangible assets, unanticipated changes in, or interpretations of, tax rules and regulations, Adobes inability to attract and retain key personnel, impairment of our investment portfolio due to further deterioration of the capital markets, market risks associated with Adobes equity investments, and interruptions or terminations in Adobes relationships with turnkey assemblers. For further discussion of these and other risks and uncertainties, individuals should refer to Adobes SEC filings.

The financial information set forth in this press release reflects estimates based on information available at this time. These amounts could differ from actual reported amounts stated in Adobes Quarterly Report on Form 10-Q for the second quarter ended May 30, 2008, which the Company expects to file in July 2008. Adobe does not undertake an obligation to update forward-looking statements.

About Adobe Systems Incorporated

Adobe revolutionizes how the world engages with ideas and information anytime, anywhere and through any medium. For more information, visit www.adobe.com.

© 2008 Adobe Systems Incorporated. All rights reserved. Adobe and the Adobe logo are either registered trademarks or trademarks of Adobe Systems Incorporated in the United States and/or other countries. All other trademarks are the property of their respective owners.

Condensed Consolidated Statements of Income

(In thousands, except per share data; unaudited)

Three Months EndedSix Months Ended
May 30,

2008

June 1,

2007

May 30,

2008

June 1,

2007

Revenue:
Products $ 841,301 $ 713,469 $ 1,693,263 $ 1,333,767
Services and support 45,585 32,108 84,068 61,217
Total revenue 886,886 745,577 1,777,331 1,394,984
Total cost of revenue:
Products 58,229 70,715 118,034 124,530
Services and support 24,637 20,499 47,307 38,947
Total cost of revenue 82,866 91,214 165,341 163,477
Gross profit 804,020 654,363 1,611,990 1,231,507
Operating expenses:
Research and development 170,300 150,049 338,785 287,178
Sales and marketing 279,365 236,402 541,960 451,080
General and administrative 77,078 68,597 160,007 129,872
Restructuring and other charges 1,431
Amortization of purchased intangibles and incomplete technology 17,099 18,924 34,198 36,649
Total operating expenses 543,842 473,972 1,076,381 904,779
Operating income 260,178 180,391 535,609 326,728
Non-operating income (expense):
Interest and other income, net 12,150 20,618 25,440 43,133
Interest expense (3,828 ) (55 ) (5,637 ) (106 )
Investment gains, net 9,506 4,162 18,238 9,763
Total non-operating income, net 17,828 24,725 38,041 52,790
Income before income taxes 278,006 205,116 573,650 379,518
Provision for income taxes 63,096 52,611 139,361 83,162
Net income $ 214,910 $ 152,505 $ 434,289 $ 296,356
Basic net income per share $ 0.40 $ 0.26 $ 0.79 $ 0.50
Shares used in computing basic net income per share

533,391

587,929

547,996

588,536

Diluted net income per share $ 0.40 $ 0.25 $ 0.78 $ 0.49
Shares used in computing diluted net income per share

542,376

603,417

557,703

604,373

Condensed Consolidated Balance Sheets

(In thousands, except per share data; unaudited)

May 30,November 30,
20082007
ASSETS
Current assets:
Cash and cash equivalents $ 1,162,453 $ 946,422
Short-term investments 702,283 1,047,432
Trade receivables, net of allowances for doubtful accounts of $4,026 and $4,398, respectively 321,150 318,145
Other receivables 46,980 44,666
Deferred income taxes 100,206 171,472
Prepaid expenses and other assets 48,397 44,840
Total current assets 2,381,469 2,572,977
Property and equipment, net 300,371 289,758
Goodwill 2,135,167 2,148,102
Purchased and other intangibles, net 313,245 402,619
Investment in lease receivable 207,239 207,239
Other assets 122,926 92,984
$ 5,460,417 $ 5,713,679
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Trade and other payables $ 60,961 $ 66,867
Accrued expenses 377,572 383,436
Accrued restructuring 5,573 3,731
Income taxes payable 37,065 215,058
Deferred revenue 191,594 183,318
Total current liabilities 672,765 852,410
Long-term liabilities:
Debt 350,000
Accrued restructuring 10,152 13,987
Income taxes payable 200,111
Deferred income taxes 137,852 148,943
Deferred revenue 24,819 25,950
Other liabilities 24,061 22,407
Total liabilities 1,419,760 1,063,697
Stockholders equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized
Common stock, $0.0001 par value 61 61
Additional paid-in-capital 2,308,054 2,340,969
Retained earnings 4,475,880 4,041,592
Accumulated other comprehensive income 21,301 27,948
Treasury stock, at cost (70,640 and 29,425 shares, respectively), net of reissuances (2,764,639 ) (1,760,588 )
Total stockholders equity 4,040,657 4,649,982
$ 5,460,417 $ 5,713,679

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

Three Months Ended

May 30,

2008

June 1,

2007

Cash flows from operating activities:
Net income $ 214,910 $ 152,505
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation, amortization and accretion 68,656 87,049
Stock-based compensation expense, net of tax 48,387 39,957
Net investment losses (gains) 914 (4,088 )
Changes in deferred revenue 1,795 35,220
Changes in operating assets and liabilities (2,871 ) 34,756
Net cash provided by operating activities 331,791 345,399
Cash flows from investing activities:
Purchases of short-term investments, net of sales and maturities (27,100 ) 332,651
Purchases of property and equipment (22,403 ) (23,484 )
Purchases of long term investments and other assets, net of sales (19,599 ) (12,446 )
Investment in lease receivable (80,439 )
Cash paid for acquisitions (64,275 )
Net cash (used for) provided by investing activities (69,102 ) 152,007
Cash flows from financing activities:
Purchases of treasury stock (150,161 ) (300,013 )
Reissuances of treasury stock 108,957 137,800
Repayment of borrowings under credit facility (100,000 )
Excess tax benefits from stock-based compensation 9,329 35,866
Net cash used for financing activities (131,875 ) (126,347 )
Effect of exchange rate changes on cash and cash equivalents (1,094 ) 4,528
Net increase in cash and cash equivalents 129,720 375,587
Cash and cash equivalents at beginning of period 1,032,733 526,030
Cash and cash equivalents at end of period $ 1,162,453 $ 901,617

Non-GAAP Results

(In thousands, except per share data)

The following tables show the Companys non-GAAP results reconciled to GAAP results included in this release for the quarters ended May 30, 2008, June 1, 2007 and February 29, 2008.

Three Months Ended

May 30,
2008

June 1,
2007

February 29,
2008

Operating income:
GAAP operating income $ 260,178 $ 180,391 $ 275,431
Stock-based compensation 48,388 39,637 43,034
Restructuring and other charges 1,431
Amortization of purchased intangibles and incomplete technology

41,071

62,026

39,071

Non-GAAP operating income $ 349,637 $ 282,054 $ 358,967
Net income:
GAAP net income $ 214,910 $ 152,505 $ 219,379
Stock-based compensation, net of tax 34,998 28,087 30,859
Restructuring and other charges, net of tax 1,026
Amortization of purchased intangibles and incomplete technology, net of tax

29,705

45,335

28,018

Investment gain, net of tax (6,875 ) (2,712 ) (6,262 )
Non-GAAP net income $ 272,738 $ 223,215 $ 273,020
Diluted net income per share:
GAAP net income $ 0.40 $ 0.25 $ 0.38
Stock-based compensation, net of tax 0.07 0.05 0.06
Restructuring and other charges, net of tax
Amortization of purchased intangibles and incomplete technology, net of tax

0.05

0.07

0.05

Investment gain, net of tax (0.02 ) (0.01 )
Non-GAAP net income $ 0.50 $ 0.37 $ 0.48
Shares used computing diluted net income per share 542,376 603,417 571,259
Three Months

May 30,
2008

June 1,
2007

February 29,
2008

Operating expenses:
GAAP operating expenses $ 543,842 $ 473,972 $ 532,539
Stock-based compensation (47,200 ) (38,098 ) (42,190 )
Restructuring and other charges (1,431 )
Amortization of purchased intangibles and incomplete technology

(17,099

)

(18,924

)

(17,099

)

Non-GAAP operating expenses $ 479,543 $ 416,950 $ 471,819
Operating margin:
GAAP operating margin 29.3 % 24.2 % 30.9 %
Stock-based compensation 5.5 5.3 4.8
Restructuring and other charges 0.2
Amortization of purchased intangibles and incomplete technology

4.6

8.3

4.4

Non-GAAP operating margin 39.4 % 37.8 % 40.3 %
Effective income tax rate:
GAAP effective income tax rate 22.7 %
Stock-based compensation 0.7
Amortization of purchased intangibles and incomplete technology

0.5

Investment gain (0.1 )
Non-GAAP effective income tax rate 23.8 %

Third Quarter Fiscal Year 2008 Non-GAAP Financial Targets

(In millions, except per share data)

The following tables show the Companys third quarter fiscal year 2008 non-GAAP financial targets reconciled to GAAP financial targets included in this release.

Third Quarter
Fiscal 2008

Operating margin:
GAAP operating margin 29.0%
Stock-based compensation 5.0
Amortization of purchased intangibles and incomplete technology

4.5

Non-GAAP operating margin 38.5%

Third Quarter
Fiscal 2008

LowHigh
Diluted net income per share:
GAAP net income per share $ 0.34 $ 0.36
Stock-based compensation, net of tax 0.06 0.06
Amortization of purchased intangibles and incomplete technology, net of tax

0.05

0.05

Non-GAAP net income per share $ 0.45 $ 0.47
Shares used in computing diluted net income per share 548.0 544.0

Third Quarter
Fiscal 2008

GAAP effective income tax rate 25.0%
Stock-based compensation 0.5
Amortization of purchased intangibles and incomplete technology 0.5
Non-GAAP effective income tax rate 26.0%

Adobe continues to provide all information required in accordance with GAAP, but believes evaluating its ongoing operating results may not be as useful if an investor is limited to reviewing only GAAP financial measures. Accordingly, Adobe uses non-GAAP financial information to evaluate its ongoing operations and for internal planning and forecasting purposes. Adobes management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Adobe presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate Adobes operating results in a manner that focuses on what Adobe believes to be its ongoing business operations. Adobes management believes it is useful for itself and investors to review, as applicable, both GAAP information that includes the stock-based compensation impact of SFAS 123R, restructuring and other charges, amortization of purchased intangibles and incomplete technology, investment gains and losses and the related tax impact of these items, the income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes, and the non-GAAP measures that exclude such information in order to assess the performance of Adobes business and for planning and forecasting in subsequent periods. Whenever Adobe uses such a non-GAAP financial measure, it provides a reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above.

Contacts:

Adobe Systems Incorporated
Mike Saviage, 408-536-4416 (Investor Relations)
ir@adobe.com
Holly Campbell, 408-536-6401 (Public Relations)
campbell@adobe.com
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