Summary
Adobe's fiscal 2011 third quarter, ended September 2, 2011, showed a clear split between modest top-line growth and weaker profitability. Revenue rose 2.3% to $1.01 billion from the prior-year quarter. Gross profit increased 1.9% to $908.56 million. Gross margin slipped 0.3 percentage points to 89.7%. Operating income fell 9.2% to $274.11 million. Operating margin dropped 3.4 percentage points to 27.1%. Net income declined 15.2% to $195.10 million. Diluted EPS fell 11.4% to $0.39. The quarter absorbed higher operating expenses, especially in sales and marketing and research and development, which outweighed the revenue gain.
Year-to-date results through September 2, 2011 were much stronger. Revenue climbed 9.7% to $3.06 billion. Gross profit rose 9.9% to $2.74 billion. Operating income increased 20.8% to $853.17 million. Net income jumped 30.3% to $659.13 million. Diluted EPS advanced 36.8% to $1.30. Operating margin for the nine months expanded 2.6 percentage points to 27.8%. Gross margin edged up 0.1 percentage points to 89.5%. The prior-year first quarter contained an extra week, which makes year-over-year comparisons less clean. Even so, the nine-month period shows net income and operating income growing faster than revenue.
Operational highlights from the MD&A show uneven segment performance. Creative and Interactive Solutions segment growth remained relatively stable year over year in the quarter, while the segment achieved 9% year-over-year growth for the nine months. Digital Media Solutions revenue decreased 4% in the quarter because image editing products were not updated as part of the CS5.5 launch, but the segment grew 3% year to date. Knowledge Worker revenue grew 7% in the quarter and 11% year to date on demand for Acrobat X. Enterprise revenue grew 2% in the quarter and 22% year to date, helped by the Day acquisition. Omniture revenue grew 18% in the quarter and 20% year to date on the Adobe Online Marketing Suite. Print and Publishing revenue fell 7% in the quarter and 5% year to date due to a one-time large deal in the prior-year periods that did not repeat. Foreign currency fluctuations favorably impacted revenue.
Cash flow and deferred revenue provided some bright spots. Operating cash flow for the quarter was $325.13 million, up 11.6% from the prior-year quarter. Year-to-date operating cash flow reached $1.05 billion, up 30.4%. Capital expenditures were $65.48 million in the quarter, up 67.7%, and $135.40 million year to date, up 18.5%. Deferred revenue, current portion, stood at $439.69 million, up 17.0% from the prior-year quarter. The company continued its stock repurchase program during the nine months. The deferred revenue increase suggests that billed but unrecognized revenue is growing, which can support future periods.
Risks remain. The MD&A points to risk factors in Part II, Item 1A. Foreign currency fluctuations can affect revenue and expenses. Tax examinations are uncertain, and the company completed a Canadian income tax examination covering fiscal years 2005 through 2008. Restructuring plans remain active. The company also faces integration risks from acquisitions such as Day, Demdex, and EchoSign. Product transitions, such as the CS5.5 launch, can cause uneven segment performance. The company had no shippable backlog at the end of the second and third quarters of fiscal 2011. Management also notes that the actual amount of product backlog may not be a meaningful indicator of future business prospects.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2011 | Q2 FY2011 | QoQ | Q3 FY2010 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.01B | $1.02B | -1.0% | $990.3M | +2.3% |
| Gross profit | $908.6M | $914.0M | -0.6% | $891.2M | +1.9% |
| Gross margin | 89.7% | 89.3% | +0.3 pp | 90.0% | -0.3 pp |
| Sales & marketing | $340.7M | $348.7M | -2.3% | $303.2M | +12.4% |
| General & administrative | $98.5M | $95.5M | +3.1% | $102.2M | -3.6% |
| Total operating expenses | $634.4M | $637.3M | -0.4% | $589.2M | +7.7% |
| Operating income (loss) | $274.1M | $276.7M | -0.9% | $302.0M | -9.2% |
| Operating margin | 27.1% | 27.1% | ±0.0 pp | 30.5% | -3.4 pp |
| Net income (loss) | $195.1M | $229.4M | -15.0% | $230.1M | -15.2% |
| Net margin | 19.3% | 22.4% | -3.2 pp | 23.2% | -4.0 pp |
| Diluted EPS | $0.39 | $0.45 | -$0.06 | $0.44 | -$0.05 |
Risks
Adobe is implementing a subscription licensing model to augment perpetual licensing, and its Omniture SaaS agreements are generally one to three years with no obligation to renew. This makes revenue less predictable and license revenue may decline more quickly than anticipated; subscription revenue rose 13% year over year in the quarter per MD&A.
The markets for Adobe's products face intense competition, evolving business models, and disruptive technology, including mobile and non-PC devices. MD&A reported Digital Media Solutions revenue decreased 4% year over year in the quarter due to lower revenue from image editing products not updated in the CS5.5 launch.
Operating expenses grew 8% year over year in the quarter, driven by headcount growth and marketing, while operating income fell 9.2% and operating margin declined 3.4 percentage points in the quarter. This pressure could continue if revenue growth does not offset cost increases.
A significant amount of application product revenue comes from one distributor, Ingram Micro, which represented 13% of net revenue for the third quarter of fiscal 2011. A prolonged delay in replacing this distributor could negatively impact short-term results.
Adobe completed acquisitions including Omniture, Day, Demdex, and EchoSign, and may not realize anticipated benefits. The EchoSign acquisition caused a one-time tax charge that increased the effective tax rate by two percentage points in the quarter.
Uncertainty about economic and political conditions, sovereign debt crises, and financial institution consolidation could delay or reduce technology purchases and lengthen sales cycles. Foreign currency movements favorably impacted revenue by $37.6 million in the quarter, but EMEA revenue decreased 2% year over year in the quarter.
Adobe is subject to complex tax rules and ongoing IRS examinations, including fiscal 2008 and 2009 returns focused on intercompany transfer pricing. The effective tax rate decreased five percentage points year to date due to one-time state tax benefits and R&D credit reinstatement, but future changes could adversely affect results.
Adobe's hosted services, including Omniture and adobe.com, hold large amounts of customer data, and unauthorized access or privacy breaches could lead to liability, reputational harm, and lost customers. The risk is heightened as the business transitions to cloud-based models subject to more stringent data protection laws.
Adobe has $1.5 billion in senior unsecured notes and a $1.0 billion undrawn revolving credit facility, with interest expense up 25% year to date. Covenants and potential rating downgrades could restrict financing flexibility.
Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q3 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.