Summary
Adobe's fiscal 2009 third quarter, ended August 28, 2009, reflected a weak macro economy. Revenue was $697.5 million, down 21.4% from the prior-year quarter. Year-to-date revenue was $2.19 billion, down 17.9%. Gross profit was $632.5 million, down 18.5%, while gross margin rose to 90.7%, up 3.2 percentage points. Year-to-date gross profit was $1.97 billion, down 17.3%, and year-to-date gross margin was 90.2%, up 0.6 percentage points. Operating income was $167.6 million, down 23.6%, and operating margin slipped to 24.0%, down 0.7 percentage points. Year-to-date operating income was $536.9 million, down 28.9%, and year-to-date operating margin was 24.5%, down 3.8 percentage points. Net income was $136.0 million, down 29.0%, and diluted EPS was $0.26, down $0.09 or 25.7%. For the nine months, net income was $418.6 million, down 33.1%, and diluted EPS was $0.79, down $0.34. Management said results were within the target ranges it had provided at the outset of the quarter.
Cash generation held up better than earnings. Operating cash flow was $236.7 million in the quarter and $864.0 million for the nine months, down 8.3% from the prior-year nine-month period. Capital expenditures were $58.4 million in the quarter and $84.7 million for the nine months, down 4.3%. Deferred revenue, current portion, stood at $188.3 million. The company continued to control costs, with lower compensation, marketing, and professional fees. It also worked through a restructuring program that began in the fourth quarter of fiscal 2008, cutting workforce and consolidating facilities. Those actions helped gross margin, but they could not offset the revenue decline. The primary working capital sources of cash were net income and decreases in trade receivables, prepaid expenses, and other current assets. The primary uses were decreases in deferred revenue, accrued expenses, accrued restructuring, and trade payables.
Operational trends remained difficult across segments. Creative Solutions faced weak demand for its CS4 family, which continued to fall behind the equivalent CS3 products. Knowledge Worker saw lower Acrobat demand and reduced corporate spending. Enterprise dealt with reduced spending by enterprise customers. Platform faced lower Flash Lite licensing by mobile handset and consumer electronics manufacturers. The Open Screen Project is expected to substantially reduce mobile and device revenue this fiscal year. Print and Publishing was hurt by weak end-user demand. Product backlog was approximately 2% of third quarter fiscal 2009 revenue, compared with approximately 4% of second quarter fiscal 2009 revenue. Foreign currency was a headwind in EMEA and a tailwind in Asia. The company said it will continue to make significant investments in research and development for desktop application and server-based software products.
Management offered a cautious outlook. It does not expect the market environment for creative products or Knowledge Worker to improve materially in the near term. The pending acquisition of Omniture for approximately $1.8 billion, or $21.50 per share in cash, is expected to close in the fourth quarter of fiscal 2009. Adobe expects the deal to have a significant impact on its consolidated financial position, results of operations, and cash flows. Risks include continued weak macro conditions, reduced corporate spending, foreign currency swings, the Open Screen Project's effect on mobile revenue, and integration of Omniture. The company also borrowed $350.0 million under its credit facility as of August 28, 2009, and borrowed an additional $650.0 million after the quarter. Management said it was in compliance with all covenants as of August 28, 2009. The company said it expects to finance the acquisition using existing cash, cash equivalents, short-term investments, and current availability under its credit facility. It believes existing balances and anticipated cash flows will be sufficient for working capital and operating resource expenditure requirements for the next twelve months.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2009 | Q2 FY2009 | QoQ | Q3 FY2008 | YoY |
|---|---|---|---|---|---|
| Revenue | $697.5M | $704.7M | -1.0% | — | — |
| Gross profit | $632.5M | $632.7M | -0.0% | — | — |
| Gross margin | 90.7% | 89.8% | +0.9 pp | — | — |
| Sales & marketing | $231.3M | $243.2M | -4.9% | — | — |
| General & administrative | $79.6M | $70.8M | +12.4% | — | — |
| Total operating expenses | $464.9M | $471.3M | -1.4% | — | — |
| Operating income (loss) | $167.6M | $161.4M | +3.9% | — | — |
| Operating margin | 24.0% | 22.9% | +1.1 pp | — | — |
| Net income (loss) | $136.0M | $126.1M | +7.9% | — | — |
| Net margin | 19.5% | 17.9% | +1.6 pp | — | — |
| Diluted EPS | $0.26 | $0.24 | +$0.02 | — | — |
Risks
MD&A states worldwide business continued to be impacted by weak macro-economic environment, with total revenue down 21.4% in FY2009 Q3 versus FY2008 Q3 and down 17.9% year to date. Creative Solutions revenue fell 19% and Knowledge Worker revenue fell 29% in the quarter, and Adobe does not expect the market environment for creative or knowledge worker products to improve materially in the near term.
Risk factors highlight intense competition and specific threats: Microsoft Windows Vista XPS competes with Adobe PDF, Microsoft Office 2007 can save documents as PDF, Microsoft Expression Studio competes with Creative Suite, and Microsoft Silverlight, Google Gears, Sun JavaFX and HTML 5 compete with Flash, Flex and AIR. Widespread acceptance of these competing products could harm operating results.
Adobe is devoting significant resources to new business models and markets with limited operating history, including SaaS, enterprise, government, mobile and device markets, and warns revenue may be difficult to predict and may decline quicker than anticipated. The Open Screen Project is expected to substantially reduce mobile and device revenue this fiscal year due to removal of licensing fees for Flash Platform technologies.
Adobe announced an agreement in September 2009 to acquire Omniture for approximately $1.8 billion, or $21.50 per share in cash, expected to close in Q4 FY2009 and be integrated as a new reportable segment. Risks include difficulty assimilating operations and personnel, retaining key technical and managerial personnel and customers, and potential disruption of ongoing business.
Adobe generates almost 50% of total revenue from customers outside the Americas and approximately 46% of employees are located outside the U.S., exposing it to foreign currency fluctuations, international economic and political conditions, tax laws, data protection laws and FCPA compliance. EMEA revenue decreased 34% in Q3 FY2009 versus prior-year quarter, partly due to U.S. dollar strength against the Euro.
A significant amount of application product revenue comes from two distributors: Ingram Micro represented 16% and Tech Data represented 7% of net revenue for Q3 FY2009. Termination of distributor agreements, distributor insolvency, or inability to obtain credit could impair distribution channels and harm results.
Adobe may be required to record a significant charge if goodwill or amortizable intangible assets become impaired. The Platform segment, which includes the former Mobile and Device Solutions business, has begun to see revenue decrease, and if future revenue or forecasts do not meet expectations, an impairment charge could result.
Adobe depends on senior management and highly skilled personnel, and competition for talent is intense especially in the Bay Area. Recent adverse volatility in Adobe's stock price has resulted in many employee stock options being underwater and deterioration in restricted stock unit value, lessening retention effectiveness.
Adobe is subject to costly and disruptive intellectual property disputes and litigation, and may be unable to protect source code and trade secrets from unauthorized disclosure or piracy. Loss of trade secret protection could make it easier for third parties to copy functionality and adversely affect revenue and operating margins.
Adobe is subject to continual IRS and foreign tax examinations, including a current IRS examination for fiscal 2005, 2006 and 2007 tax returns focused on intercompany transfer pricing. Changes in tax rules or unfavorable examination outcomes could adversely affect its effective tax rate and operating results.
Adobe's cash equivalent and short-term investment portfolio may become impaired by deterioration of capital markets. As of August 28, 2009, it had no material impairment charges associated with adverse financial market conditions, but cannot predict future market conditions or liquidity.
Adobe relies on six turnkey assemblers of its products, with at least two in each major region. If a significant turnkey assembler terminates or supply is interrupted, Adobe may not be able to replace supply in time and could suffer serious harm.
Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q3 FY2009 (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.