Summary
Adobe closed fiscal 2009 with a sharp contraction in fourth-quarter revenue and a swing to a net loss. Revenue for the quarter ended November 27, 2009, was $757.28 million, down 17.3% from the prior-year quarter. Gross profit fell 18.6% to $674.96 million, and gross margin slipped to 89.1%, down 1.4 percentage points. Operating income dropped 43.8% to $153.64 million, cutting operating margin to 20.3%, down 9.6 percentage points. The company reported a net loss of $32.04 million, a swing from profit in the prior-year quarter. Diluted EPS was -$0.06 for the quarter.
The full-year picture was similarly weak. Fiscal 2009 revenue was $2.95 billion, down 17.7% from fiscal 2008. Gross profit was $2.65 billion, down 17.7%, while operating income was $690.51 million, down 32.8%. Net income for the fiscal year was $386.51 million, down 55.7%, and diluted EPS was $0.73, down 54.1% from the prior-year period. Full-year gross margin was 89.9%, flat versus fiscal 2008, but operating margin fell to 23.4%, down 5.3 percentage points.
Cash generation weakened in the quarter. Operating cash flow was $253.82 million, down 25.0% from the prior-year quarter. Capital expenditures rose 49.9% to $34.93 million. Deferred revenue, current portion, increased 15.4% to $281.58 million. For the full year, operating cash flow was $1.12 billion, down 12.7%, while capital expenditures were $119.59 million, up 7.0%.
The quarter included the October 23, 2009, completion of the Omniture acquisition for approximately $1.8 billion. Adobe began including Omniture results on October 24, 2009, and created a new reportable segment. The Omniture deal is expected to have a significant impact on Adobe's consolidated financial position, results of operations, and cash flows. Adobe expects revenues, cost of revenues, and operating expenses to increase in the future, but it also anticipates revenue and cost-saving synergies. Management said the Omniture business appeared to stabilize during the fourth quarter as the general economy improved, with an increase in transaction volume on the network, stabilizing customer retention rates, and an increase in subscription services to existing customers. Product backlog at the end of the fourth quarter was approximately 9% of fourth-quarter revenue, compared with approximately 2% of third-quarter revenue. Adobe had minimal backlog at the end of the fourth quarter of fiscal 2008. The company also plans to move responsibility for Adobe Connect Pro from the Knowledge Worker segment to the Enterprise segment at the start of fiscal 2010.
Cost actions and integration work are central to the fiscal 2010 plan. On November 10, 2009, Adobe initiated a restructuring plan affecting up to approximately 630 full-time positions worldwide. In the fourth quarter, the company recorded charges for the elimination of approximately 340 of those positions. For the first quarter of fiscal 2010, Adobe expects additional restructuring charges of approximately $15 million to $18 million for facilities consolidation and up to approximately $26 million for severance for the remaining positions. The Omniture integration also included a restructuring plan for approximately 100 regular positions and duplicative facilities. Risks include the global economic recession, weak macro-economic conditions, reduced adoption of the CS4 family, lower Acrobat demand, the removal of Flash license fees from mobile devices under the OSP, foreign currency swings, and tax audits, including an IRS examination of fiscal 2005 through 2007 returns. The company also faces a credit facility covenant tied to a maximum leverage ratio. Adobe's effective tax rate increased in fiscal 2009, primarily due to a one-time charge related to the Omniture acquisition. The company believes its existing cash, cash equivalents, short-term investments, and cash generated from operations will be sufficient to meet working capital and operating resource expenditure requirements for the next twelve months.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q4 FY2009 | Q3 FY2009 | QoQ | Q4 FY2008 | YoY |
|---|---|---|---|---|---|
| Revenue | $757.3M | $697.5M | +8.6% | — | — |
| Gross profit | $675.0M | $632.5M | +6.7% | — | — |
| Gross margin | 89.1% | 90.7% | -1.5 pp | — | — |
| Sales & marketing | $257.9M | $231.3M | +11.5% | — | — |
| General & administrative | $74.3M | $79.6M | -6.7% | — | — |
| Total operating expenses | $521.3M | $464.9M | +12.1% | — | — |
| Operating income (loss) | $153.6M | $167.6M | -8.3% | — | — |
| Operating margin | 20.3% | 24.0% | -3.7 pp | — | — |
| Net income (loss) | -$32.0M | $136.0M | -123.6% | — | — |
| Net margin | -4.2% | 19.5% | -23.7 pp | — | — |
| Diluted EPS | -$0.06 | $0.26 | -$0.32 | — | — |
| Customers | 17 | — | — | — | — |
Risks
The ongoing economic downturn and credit market tightening could cause customers to delay or reduce technology, advertising and marketing spending, leading to continued sales reductions, longer sales cycles and increased price competition. MD&A attributes the weak fiscal 2009 results to the global economic recession, with FY2009 Q4 revenue down 17.3% versus the prior-year quarter and FY2009 Q4 net income at -$32.04M, swung to a loss.
Competition from Microsoft, Google, Apple, Sun and open source or SaaS offerings could harm Adobe's pricing and market share. Specific examples include Microsoft XPS and Office PDF features competing with Adobe PDF, Microsoft Expression Studio competing with Creative Suite, and Google Analytics competing with the Omniture Online Marketing Suite.
Revenue from new businesses and the Omniture SaaS subscription model is difficult to predict because Adobe has limited operating history in these markets. Risks include longer than expected sales and implementation cycles, potential deferral of revenue, and customer renewal rates that may decline or fluctuate; Omniture service agreements are generally one to three years and customers may cancel under some circumstances.
Adobe completed the Omniture acquisition on October 23, 2009 for approximately $1.8 billion, and integration risks include assimilating operations and personnel, retaining key technical and managerial personnel and customers, integrating accounting and IT systems, and achieving anticipated financial and strategic goals. MD&A states Omniture results are included from October 24, 2009 and expects the acquisition to significantly affect financial position, results of operations and cash flows.
Omniture and other hosted services collect and manage large amounts of customer data and website visitor information, so a security incident, unauthorized access, data loss or privacy law noncompliance could expose Adobe to liability, harm its reputation and cause customer loss. Adobe also notes that future privacy and behavioral tracking laws could significantly limit how it collects, uses, stores or transmits personal information.
A significant amount of application product revenue comes from two distributors, Ingram Micro and Tech Data, which represented 15% and 8% of net revenue for fiscal 2009, respectively. Termination of distributor agreements, financial weakness or insolvency of distributors, or their favoring competitors' products could disrupt distribution and reduce revenue.
Platform segment revenue declined 22% year over year in fiscal 2009 primarily due to the OSP removal of Flash license fees on mobile devices. If future revenue or forecasts for the Platform segment do not meet expectations, Adobe may be required to record a charge for impairment of recorded goodwill or intangible assets.
Adobe's effective tax rate increased to 45% in fiscal 2009 from 19% in fiscal 2008, primarily due to a one-time tax charge related to the Omniture acquisition. The IRS is examining fiscal 2005, 2006 and 2007 tax returns, focusing on intercompany transfer pricing, and an adverse outcome could affect operating results and financial position.
In November 2009 Adobe initiated a restructuring plan impacting up to approximately 630 full-time positions worldwide and recorded approximately $25.5 million of restructuring charges in FY2009 Q4. It expects additional charges of approximately $15 million to $18 million for facilities and up to approximately $26 million for severance in fiscal 2010, and the Omniture restructuring accrued approximately $10.6 million.
At November 27, 2009, Adobe's credit facility is $1.0 billion and the entire amount is borrowed, with principal due in full no later than February 16, 2013. Existing cash, cash equivalents and investment balances may decline during fiscal 2010 if the economy weakens further or planned cash outlays, including Omniture integration costs, change.
Adobe depends on retaining and motivating highly skilled personnel, and competition is intense, especially in the Bay Area. Recent significant adverse volatility in Adobe's stock price has left many employee stock options with exercise prices above market value and reduced the value of restricted stock units, lessening the effectiveness of stock-based awards for retention.
Adobe generates over 50% of total revenue from outside the Americas, exposing it to foreign currency fluctuations, international economic and political conditions, tax laws and regulatory requirements. In fiscal 2009, EMEA revenue decreased 24% and was negatively impacted by approximately $47.1 million due to the stronger U.S. dollar against the Euro.
Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q4 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.