Summary
Adobe Systems reported fiscal 2012 second-quarter revenue of $1.12 billion, up 9.9% from the prior-year quarter. Year-to-date revenue was $2.17 billion, up 5.8%. Gross profit was $993.53 million, up 8.7%, and operating income was $305.14 million, up 10.3%. Net income fell 2.4% to $223.88 million. Diluted EPS was $0.45, flat year over year. Year-to-date diluted EPS was $0.81, down 11.0%. The bottom line pressure came from a higher effective tax rate. The company pointed to a favorable state income tax ruling in the prior-year period and the expiration of the U.S. research and development credit on December 31, 2011.
Gross margin was 88.4%, down 1.0 percentage point from the prior-year quarter. Operating margin was 27.1%, flat versus the prior-year quarter. Year-to-date gross margin was 89.0%, down 0.5 percentage points, and year-to-date operating margin was 27.4%, down 0.9 percentage points. Operating cash flow was $448.22 million in the quarter, up 15.1%. Year-to-date operating cash flow was $762.58 million, up 5.7%. Capital expenditures were $60.77 million in the quarter, up 62.0%, and $111.86 million year to date, up 60.0%. Deferred revenue was $535.12 million, up 22.2% from the prior-year quarter.
Adobe launched Creative Suite 6 and Creative Cloud in May 2012. The CS6 launch included major updates to all of the company's core CS point products as well as four suite versions. Digital Media revenue increased 9% in the quarter and 2% in the first six months. Digital Marketing revenue increased 17% in the quarter and 19% in the first six months. The Digital Marketing Suite grew 35% year over year, helped by the Efficient Frontier acquisition and CQ Web Experience Management offerings. Subscription revenue rose in both periods. Print and Publishing revenue increased 2% in both periods. LiveCycle revenue declined as the company shifted focus to the Digital Marketing Suite. Revenue increased in the Americas and APAC and remained relatively stable in EMEA. Economic conditions in Europe held back EMEA despite the CS6 launch. Foreign currency movements reduced revenue in the quarter, and hedging gains partly offset that impact.
Management expects subscription revenue to continue increasing as Adobe invests in SaaS and subscription models, including Creative Cloud. The company expects to continue investing in short-term and long-term investments, venture capital, facilities expansion, and computer systems. It believes existing cash, short-term investments, and cash from operations will be sufficient for the next twelve months. Adobe does not anticipate paying cash dividends in the foreseeable future. Risks include economic weakness in Europe, foreign exchange fluctuations, and tax uncertainties. The gross liability for unrecognized tax benefits was $157.2 million at June 1, 2012. If recognized, $145.5 million would decrease the effective tax rate. The company estimates a possible decrease in unrecognized tax benefits of $0 to approximately $15 million within the next 12 months.
Restructuring remains a factor. Adobe recorded net favorable restructuring adjustments of $5.3 million in the quarter and $19.4 million in the first six months. It also completed its annual goodwill impairment test with no impairment. Cash and cash equivalents were $951.2 million at June 1, 2012, compared with $989.5 million at December 2, 2011. Short-term investments were $2,046.9 million, compared with $1,922.2 million. Working capital was $2,525.2 million, and stockholders' equity was $6,099.6 million. For the first six months, net cash used for investing activities was $586.0 million, and net cash used for financing activities was $217.3 million. The net decrease in cash and cash equivalents was $38.3 million. Adobe repurchased approximately 7.1 million shares at an average price of $32.38 during the first six months. In April 2012, the board approved a new $2.0 billion stock repurchase program through the end of fiscal 2015. The company had $1.5 billion outstanding under its senior notes and a $1.0 billion revolving credit agreement with no outstanding borrowings as of June 1, 2012.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2012 | Q1 FY2012 | QoQ | Q2 FY2011 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.12B | $1.05B | +7.6% | $1.02B | +9.9% |
| Gross profit | $993.5M | $937.0M | +6.0% | $914.0M | +8.7% |
| Gross margin | 88.4% | 89.6% | -1.3 pp | 89.3% | -1.0 pp |
| Sales & marketing | $386.5M | $359.0M | +7.7% | $348.7M | +10.8% |
| General & administrative | $110.6M | $102.7M | +7.7% | $95.5M | +15.8% |
| Total operating expenses | $688.4M | $648.0M | +6.2% | $637.3M | +8.0% |
| Operating income (loss) | $305.1M | $289.0M | +5.6% | $276.7M | +10.3% |
| Operating margin | 27.1% | 27.6% | -0.5 pp | 27.1% | +0.1 pp |
| Net income (loss) | $223.9M | $185.2M | +20.9% | $229.4M | -2.4% |
| Net margin | 19.9% | 17.7% | +2.2 pp | 22.4% | -2.5 pp |
| Diluted EPS | $0.45 | $0.37 | +$0.08 | $0.45 | ±$0.00 |
Risks
Launched subscription-based Creative Cloud in May 2012 and expects an increasing portion of revenues from subscriptions, which shifts from perpetual licenses and will cause deferral of revenues and cash received. Risks include customers desiring only perpetual licenses, concerns among the installed base, damaged reseller relationships, revenue decline, and higher than forecasted cloud operations costs.
SaaS Digital Marketing agreements are generally one to three years and Creative Cloud agreements are generally month to month or one year, with no obligation to renew. Renewal rates may decline or fluctuate due to satisfaction, pricing, competitor offerings, M&A, customer spending cuts, or economic downturns, and a decline in new or renewed subscriptions may not be immediately reflected in current period revenue.
Uncertainty about economic and political conditions, especially in Europe, could delay or reduce technology purchases and lengthen sales cycles. MD&A states current economic conditions in Europe caused EMEA revenue to remain fairly stable despite the CS6 launch, and foreign currency reduced EMEA revenue by $15.3 million in Q2 FY2012 and $16.8 million YTD.
Markets are characterized by intense competition, evolving standards, disruptive technology, and short product life cycles, with downward pressure on pricing and gross margins. The company must extend core technologies to mobile, tablet, and other non-PC devices, where competitors may have larger presence, developer networks, and cloud experience.
Ingram Micro represented 12% of net revenue for the second quarter of fiscal 2012. A termination of any distributor agreement or prolonged delay in securing a replacement distributor could have a negative short-term impact on results of operations.
Transitioning to new business models that are more highly regulated for privacy and data security, and expanding in countries with stricter data protection laws. New laws may require explicit consent to collect or use consumer data, affecting ability to reach consumers and implement new business models, and increasing compliance costs and liability exposure.
Recently acquired Efficient Frontier in January 2012, Day Software in October 2010, and Omniture in October 2009, with integration risks including difficulty integrating operations and personnel, retaining key technical and managerial personnel, and achieving financial and strategic goals. MD&A notes Efficient Frontier contributed to Digital Marketing revenue growth, increasing the importance of successful integration.
Effective tax rate increased to 24.0% for Q2 FY2012 from 11.5% in Q2 FY2011, and to 27.6% YTD from 14.9%, primarily due to a favorable state income tax ruling in the prior year and expiration of the U.S. research and development credit. Future effective tax rates could be unfavorably affected by changes in tax rates, tax rules, or the valuation of deferred tax assets and liabilities.
Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q2 FY2012 (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.