Company Achieves 37 Percent Year-Over-Year Revenue Growth

In the first quarter of fiscal 2008, Adobe achieved revenue of $890.4 million, compared to $649.4 million reported for the first quarter of fiscal 2007 and $911.2 million reported in the fourth quarter of fiscal 2007. This represents 37 percent year-over-year revenue growth. Adobes first quarter revenue target range was $855 to $885 million.

Driving our strong performance in Q1 was continued demand for our Creative Suite 3 family of products, as well as another record quarter for our Acrobat product family, said Shantanu Narayen, president and chief executive officer of Adobe. As the proliferation of digital content accelerates, customers worldwide are looking to Adobe for solutions that enable the creation of rich, engaging experiences across a variety of media and devices. This trend will continue to drive our diverse business, and we are reaffirming our fiscal year financial targets.

During the first quarter, Adobe repurchased 33.3 million shares of its outstanding common stock, at a cost of $1.25 billion.

First Quarter GAAP Results

Adobes GAAP diluted earnings per share for the first quarter of fiscal 2008 were $0.38, based on 571.3 million weighted average shares. This compares with GAAP diluted earnings per share of $0.24 reported in the first quarter of fiscal 2007 based on 604.2 million weighted average shares, and GAAP diluted earnings per share of $0.38 reported in the fourth quarter of fiscal 2007 based on 587.9 million weighted average shares. Adobes first quarter GAAP earnings per share target range was $0.34 to $0.36.

GAAP operating income was $275.4 million in the first quarter of fiscal 2008, compared to $146.3 million in the first quarter of fiscal 2007 and $275.8 million in the fourth quarter of fiscal 2007. As a percent of revenue, GAAP operating income in the first quarter of fiscal 2008 was 30.9 percent, compared to 22.5 percent in the first quarter of fiscal 2007 and 30.3 percent in the fourth quarter of fiscal 2007.

GAAP net income was $219.4 million for the first quarter of fiscal 2008, compared to $143.9 million reported in the first quarter of fiscal 2007, and $222.2 million in the fourth quarter of fiscal 2007.

First Quarter Non-GAAP Results

Non-GAAP diluted earnings per share for the first quarter of fiscal 2008 were $0.48. This compares with non-GAAP diluted earnings per share of $0.30 reported in the first quarter of fiscal 2007, and non-GAAP diluted earnings per share of $0.49 reported in the fourth quarter of fiscal 2007. Adobes first quarter non-GAAP earnings per share target range was $0.44 to $0.46.

Adobes non-GAAP operating income was $359.0 million in the first quarter of fiscal 2008, compared to $223.8 million in the first quarter of fiscal 2007 and $362.2 million in the fourth quarter of fiscal 2007. As a percent of revenue, non-GAAP operating income in the first quarter of fiscal 2008 was 40.3 percent, compared to 34.5 percent in the first quarter of fiscal 2007 and 39.7 percent in the fourth quarter of fiscal 2007.

Non-GAAP net income was $273.0 million for the first quarter of fiscal 2008, compared to $183.6 million in the first quarter of fiscal 2007, and $289.6 million in the fourth quarter of fiscal 2007.

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

Adobe Provides Second Quarter Financial Targets and Reaffirms Fiscal Year 2008 Targets

For the second quarter of fiscal 2008, Adobe announced it is targeting revenue of $855 million to $885 million. The Company is targeting a GAAP operating margin of 29 to 30 percent in the second quarter. On a non-GAAP basis, the Company is targeting a second quarter operating margin of approximately 39 percent.

In addition, Adobe is targeting its share count to be between 546 million and 550 million shares in the second quarter of fiscal 2008. The Company also is targeting GAAP non-operating income to be $14 million to $16 million, and non-GAAP non-operating income to be $5 million to $7 million. Adobes GAAP and non-GAAP tax rate is expected to be approximately 27 percent.

These targets lead to a second quarter earnings per share target range of $0.35 to $0.37 on a GAAP basis, and a earnings per share target range of $0.45 to $0.47 on a non-GAAP basis.

For fiscal year 2008, Adobe reaffirmed it is targeting annual revenue growth of approximately 13 percent. The Company also reaffirmed it is targeting an annual GAAP operating margin of approximately 30 percent, and a non-GAAP operating margin of approximately 39 percent.

In addition, Adobe provided fiscal year 2008 earnings targets. On a GAAP basis, the Company is targeting earnings per share of $1.45 to $1.51. On a non-GAAP basis, the Company is targeting earnings per share of $1.86 to $1.92.

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

Forward-Looking Statements Disclosure

This press release contains forward-looking statements, including those related to revenue, operating margin, other 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 unauthorized copying, 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, 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 first quarter ended Feb. 29, 2008, which the Company expects to file in April 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, the Adobe logo, Acrobat and Creative Suite 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 Ended


February 29,

2008

 

March 2,
2007




 
Revenue:


Products $ 851,962

$ 620,298
Services and support   38,483  
  29,109  
Total revenue   890,445  
  649,407  




Total cost of revenue:


Products
59,805


53,815
Services and support   22,670  
  18,448  
Total cost of revenue   82,475  
  72,263  



 
Gross profit
807,970


577,144



 
Operating expenses:


Research and development
168,485


137,129
Sales and marketing
262,595


214,678
General and administrative
82,929


61,275
Restructuring and other charges
1,431



Amortization of purchased intangibles   17,099  
  17,725  
Total operating expenses   532,539  
  430,807  



 
Operating income
275,431


146,337



 
Non-operating income:


Interest and other income, net
13,290


22,515
Interest expense
(1,809 )

(51 )
Investment gain   8,732  
  5,601  
Total non-operating income   20,213  
  28,065  
Income before income taxes
295,644


174,402
Provision for income taxes   76,265  
  30,551  
Net income $ 219,379  
$ 143,851  
Basic net income per share $ 0.39  
$ 0.24  

Shares used in computing basic net income per share

 

561,113

 
 

587,969

 
Diluted net income per share $ 0.38  
$ 0.24  
Shares used in computing diluted net income per share  

571,259

 
 

604,249

 

Condensed Consolidated Balance Sheets

(In thousands, except per share data; unaudited)



 

February 29,
November 30,

  2008  
  2007  
 
ASSETS





 
Current assets:


Cash and cash equivalents $ 1,032,733

$ 946,422
Short-term investments
682,511


1,047,432
Trade receivables, net of allowances for doubtful accounts of $4,271 and $4,398, respectively
293,266


318,145
Other receivables
38,839


44,666
Deferred income taxes
132,892


171,472
Prepaid expenses and other assets   46,031  
  44,840  
Total current assets
2,226,272


2,572,977



 
Property and equipment, net
297,522


289,758
Goodwill
2,144,368


2,148,102
Purchased and other intangibles, net
357,221


402,619
Investment in lease receivable
207,239


207,239
Other assets   108,279  
  92,984  

$ 5,340,901  
$ 5,713,679  



 
LIABILITIES AND STOCKHOLDERS EQUITY





 
Current liabilities:


Trade and other payables $ 62,019

$ 66,867
Accrued expenses
368,978


383,436
Accrued restructuring
5,956


3,731
Income taxes payable
40,931


215,058
Deferred revenue   191,662  
  183,318  
Total current liabilities
669,546


852,410



 
Long-term liabilities:


Deferred revenue
22,956


25,950
Deferred income taxes
146,344


148,943
Income taxes payable
197,741



Debt
450,000



Accrued restructuring
12,069


13,987
Other liabilities   28,095  
  22,407  
Total liabilities
1,526,751


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
2,317,582


2,340,969
Retained earnings
4,260,970


4,041,592
Accumulated other comprehensive income
26,215


27,948
Treasury stock, at cost (59,963 and 29,425 shares, respectively), net of reissuances   (2,790,678 )
  (1,760,588 )
Total stockholders equity   3,814,150  
  4,649,982  

$ 5,340,901  
$ 5,713,679  

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)


 

Three Months Ended

February 29,
2008

  March 2,

2007

Cash flows from operating activities:


Net income $ 219,379

$ 143,851

Adjustments to reconcile net income to net cash provided by operating activities:

  

 


 

Depreciation, amortization, and accretion
69,202


68,498
Stock-based compensation expense, net of tax
43,034


46,285
Net investment (gains)
(9,493 )

(5,835 )
Changes in deferred revenue
5,350


7,585
Changes in operating assets and liabilities   71,828  
  10,736  



 
Net cash provided by operating activities   399,300  
  271,120  



 
Cash flows from investing activities:


Sales and maturities of short-term investments, net of purchases
362,592


(249,540 )
Purchases of property and equipment
(26,268 )

(48,300 )
Purchases of long term investments and other assets, net of sales
(8,038 )

(9,517 )
Cash paid for acquisitions   485  
  (3,094 )



 
Net cash provided by (used for) investing activities   328,771  
  (310,451 )



 
Cash flows from financing activities:


Purchases of treasury stock
(1,150,022 )

(301,468 )
Reissuances of treasury stock
53,510


94,033
Proceeds from borrowings under credit facility
450,000



Excess tax benefits from stock-based compensation    
  1,556  



 
Net cash used for financing activities   (646,512 )
  (205,879 )



 
Effect of exchange rate changes on cash and cash equivalents   4,752  
  (1,260 )
Net increase (decrease) in cash and cash equivalents
86,311


(246,470 )
Cash and cash equivalents at beginning of period   946,422  
  772,500  
Cash and cash equivalents at end of period $ 1,032,733  
$ 526,030  

Non-GAAP Results

(In thousands, except per share data)

The following table shows the Companys non-GAAP results reconciled to GAAP results included in this release for the quarters ended February 29, 2008, March 2, 2007 and November 30, 2007.


 

Three Months Ended

February 29,
2008

  March 2,

2007

 

November 30,
2007






 

GAAP operating income

$ 275,431

$ 146,337

$ 275,832
Stock-based compensation
43,034


31,852


39,791
Restructuring and other charges
1,431





Amortization of purchased intangibles   39,071  
  45,644  
  46,570

Non-GAAP operating income

$ 358,967  
$ 223,833  
$ 362,193





 

GAAP net income

$ 219,379

$ 143,851

$ 222,208
Stock-based compensation, net of tax
30,859


23,089


30,401
Restructuring and other charges, net of tax
1,026





Amortization of purchased intangibles, net of tax


28,018


32,606


35,524
R&D tax benefit, net of tax



(12,330 )

Investment (gain) loss, net of tax   (6,262 )
  (3,592 )
  1,478

Non-GAAP net income

$ 273,020  
$ 183,624  
$ 289,611





 
Diluted net income per share:









 

GAAP net income

$ 0.38

$ 0.24

$ 0.38
Stock-based compensation, net of tax
0.06


0.04


0.05
Restructuring and other charges, net of tax






Amortization of purchased intangibles, net of tax


0.05


0.05


0.06
R&D tax benefit, net of tax



(0.02 )

Investment gain, net of tax   (0.01 )
  (0.01 )
 

Non-GAAP net income

$ 0.48  
$ 0.30  
$ 0.49





 
Shares used computing diluted net income per share   571,259  
  604,249  
  587,865

The following tables show the Companys reconciliation of non-GAAP to GAAP operating expense and operating margin for the quarters ended February 29, 2008, March 2, 2007 and November 30, 2007.


Three Months Ended

February 29,

2008

March 2,

2007

November 30,
2007




 
GAAP operating expenses $ 532,539
$ 430,807
$ 536,783
Stock-based compensation
(42,190 )
(30,648 )
(38,577 )
Restructuring and other charges
(1,431 )



Amortization of purchased intangibles   (17,099 )   (17,725 )   (17,893 )
Non-GAAP operating expenses $ 471,819   $ 382,434   $ 480,313  

Three Months Ended

February 29,
2008

March 2,
2007

November 30,
2007




 
GAAP operating margin 30.9 % 22.5 % 30.3 %
Stock-based compensation 4.8
4.9
4.4
Restructuring and other charges 0.2


Amortization of purchased intangibles 4.4   7.1   5.0  
Non-GAAP operating margin 40.3 % 34.5 % 39.7 %

The following table shows the Companys reconciliation of non-GAAP to GAAP effective tax rate for the quarter ended February 29, 2008.


February 29,
2008


 
GAAP effective income tax rate 25.8 %
Stock-based compensation 0.3
Amortization of purchased intangibles 0.3
Investment gain (0.1 )
Non-GAAP effective income tax rate 26.3 %

Second Quarter and Fiscal Year 2008 Non-GAAP Financial Targets

(In millions, except per share data)

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


Second Quarter

Fiscal 2008

 

 


Low   High
Fiscal 2008





 
GAAP operating margin 29.0 %
30.0 %
30.0 %
Stock-based compensation 5.3

4.7

4.7
Amortization of purchased intangibles 4.7  
4.3  
4.3  
Non-GAAP operating margin 39.0 %
39.0 %
39.0 %

Second Quarter

Fiscal 2008


Low   High
Non-operating income:





 
GAAP non-operating income $ 14.0

$ 16.0
Investment gain   (9.0 )
  (9.0 )
Non-GAAP non-operating income $ 5.0  
$ 7.0  

Second Quarter

Fiscal 2008

Fiscal 2008


Low   High Low   High
Diluted net income per share:
 









 
GAAP net income per share $ 0.35

$ 0.37
$ 1.45

$ 1.51
Stock-based compensation, net of tax
0.06


0.06

0.22


0.22

Amortization of purchased intangibles, net of tax


0.05


0.05

0.20


0.20
Investment gain, net of tax   (0.01 )     (0.01 )   (0.01 )
  (0.01 )
Non-GAAP net income per share $ 0.45     $ 0.47   $ 1.86  
$ 1.92  






 
Shares used in computing diluted net income per share   550.0       546.0     555.0  
  551.0  

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 net tax impact of the R&D tax benefit, 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.


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

Source: Adobe Systems Incorporated