Summary
Adobe Systems reported record revenue for its fiscal 2011 first quarter. Revenue reached $1.03 billion, up 19.7% from $858.70 million in the prior-year quarter. Gross profit was $920.07 million, up 19.6%. Operating income climbed to $302.33 million, up 71.0% from $176.83 million. Net income was $234.59 million, up 84.5% from $127.15 million. Diluted earnings per share came in at $0.46, up from $0.24. Gross margin was 89.5%, flat compared with 89.6%. Operating margin expanded to 29.4%, up 8.8 percentage points from 20.6%. The prior-year quarter benefited from an extra week because fiscal 2010 was a 53-week year, so the year-over-year comparisons are not perfectly clean.
The quarter included a segment reorganization. Adobe split its prior Creative Solutions segment into Creative and Interactive Solutions and Digital Media Solutions. It also merged the former Platform segment into Creative and Interactive Solutions. Broad adoption of Creative Suite 5 drove the Creative and Interactive Solutions segment. Digital Media Solutions benefited from CS5 image editing and video authoring products. Knowledge Worker saw continued demand for Acrobat X, which shipped in the fourth quarter of fiscal 2010. Enterprise was helped by the Day Software acquisition and customer adoption of the CEM offering. Omniture maintained momentum, with 1.38 trillion user transactions in the quarter, up 12% year over year. Print and Publishing declined because of the timing of Coldfusion product releases. Shippable backlog was zero at the end of the quarter, compared with approximately 5% of fourth quarter fiscal 2010 revenue.
Cash generation was solid. Operating cash flow was $332.10 million, up 27.8% from $259.86 million. Capital expenditures were $32.42 million, up 26.9% from $25.55 million. Deferred revenue was $399.57 million, up 24.7% from $320.54 million. The company said operating cash flow came from net income plus non-cash items, decreases in trade receivables, and increases in deferred revenue. During the quarter, Adobe prepaid $125.0 million under a structured stock repurchase agreement and repurchased approximately 2.5 million shares at an average price of $32.84. In the prior-year quarter, it repurchased approximately 1.7 million shares at an average price of $36.21. After the quarter, it entered another structured repurchase agreement with a $420.0 million prepayment, leaving $455.0 million under its time-constrained authority.
Several risks and moving parts deserve attention. Foreign currency reduced total revenue by $5.9 million in the quarter. A stronger U.S. dollar against the Euro and British Pound hurt EMEA revenue, while a weaker dollar against the Japanese Yen and other currencies provided a partial offset. The Euro impact was a negative $16.0 million, the British Pound impact was a negative $0.9 million, the Japanese Yen impact was a positive $8.4 million, and other currencies added $2.4 million. Hedging produced no gains. The earthquakes in Japan after the quarter-end are expected to adversely impact operating results in Japan in the near term. Adobe has four active restructuring plans. The effective tax rate decreased, helped by the reinstatement of the federal research and development tax credit and stronger forecasted international profits, but a one-time charge related to the Demdex acquisition partly offset that benefit. Interest expense increased because of the notes issued in February 2010. Investment gains turned positive from gains on direct and equity investments, while the prior-year quarter had losses from Adobe Ventures. Critical accounting policies were unchanged from the annual report. The company plans to adopt new goodwill impairment guidance in fiscal 2012 and new business combination disclosure guidance in the second quarter of fiscal 2011. Management believes existing cash, investments, and cash from operations will be sufficient for working capital and operating needs over the next twelve months.
Forecast
No forward guidance in this quarter's filings.
Reported figures
GAAP, from SEC filings| Metric | Q1 FY2011 | Q4 FY2010 | QoQ | Q1 FY2010 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.03B | $1.01B | +2.0% | $786.4M | +30.7% |
| Gross profit | $920.1M | $900.7M | +2.1% | $709.0M | +29.8% |
| Gross margin | 89.5% | 89.4% | +0.2 pp | 90.2% | -0.6 pp |
| Sales & marketing | $328.1M | $322.7M | +1.7% | $249.5M | +31.5% |
| General & administrative | $101.0M | $100.3M | +0.7% | $74.1M | +36.4% |
| Total operating expenses | $617.7M | $613.8M | +0.6% | $501.1M | +23.3% |
| Operating income (loss) | $302.3M | $286.9M | +5.4% | $207.9M | +45.4% |
| Operating margin | 29.4% | 28.5% | +1.0 pp | 26.4% | +3.0 pp |
| Net income (loss) | $234.6M | $268.9M | -12.7% | $156.4M | +50.0% |
| Net margin | 22.8% | 26.7% | -3.8 pp | 19.9% | +2.9 pp |
| Diluted EPS | $0.46 | $0.51 | -$0.05 | $0.30 | +$0.16 |
Risks
MD&A states that as a result of the earthquakes and related events in Japan after March 4, 2011, Adobe believes operating results in Japan will be adversely impacted in the near term. The risk factor also cites uncertainty about future economic and political conditions, including the Japan impact, making forecasting difficult.
Adobe is moving toward subscription and on-demand offerings, including Omniture SaaS, and states that this makes revenue difficult to predict and that license revenue may decline more quickly than anticipated. Omniture service agreements are generally one to three years and customers have no obligation to renew, so renewal rates may decline or fluctuate.
Risk factors emphasize intense competition, evolving business models, and the need to extend core technologies into mobile and non-PC devices. Failure to anticipate customer needs or delays in new product releases could harm market share and results.
Adobe completed the Day acquisition in October 2010 and the Demdex acquisition in Q1 fiscal 2011, and risk factors list numerous integration risks including retaining key personnel and customers, achieving financial goals, and potential impairment of relationships. MD&A attributes Enterprise segment growth of 33% partly to Day, increasing integration importance.
Ingram Micro represented 14% of Adobe's net revenue for the first quarter of fiscal 2011. A prolonged delay in replacing this distributor if an agreement were terminated could have a negative short-term impact on results.
Adobe has $1.5 billion of senior unsecured notes outstanding and a $1.0 billion undrawn revolving credit facility. Interest expense increased 121% to $17.0 million in the three months ended March 4, 2011, and the notes and credit facility impose covenants that could restrict flexibility.
Adobe is subject to IRS examination of fiscal 2008 and 2009 tax returns focusing on intercompany transfer pricing, and has $163.5 million gross unrecognized tax benefits at March 4, 2011. The effective tax rate decreased to 18.0% in Q1 fiscal 2011 from 23.5% in the prior-year quarter, partly due to a retroactive R&D tax credit.
Omniture collects and stores website visitor data, and Adobe relies on customer representations about privacy compliance without auditing them. Increasing privacy laws and public sensitivity could lead to regulatory action, reputational harm, and limits on how data can be collected or used.
Risk factors state that critical vulnerabilities have been identified in certain Adobe products, and actual or perceived security vulnerabilities could lead to claims, harm reputation, and cause customers to delay or reduce purchases.
Adobe depends on senior management and highly skilled personnel, especially in the San Francisco Bay Area, and equity compensation expensing may impair its ability to provide incentives. Failure to retain key personnel could harm long-term strategic planning.
Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q1 FY2011 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 8, 2026.