ADOBE INC.
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________________
FORM 10-K
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(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the fiscal year ended November 27, 2009
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from
to
Commission
file number: 0-15175
ADOBE
SYSTEMS INCORPORATED
(Exact
name of registrant as specified in its charter)
__________________________
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Delaware
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77-0019522
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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345
Park Avenue, San Jose, California 95110-2704
(Address
of principal executive offices and zip code)
(408)
536-6000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, $0.0001 par value per share
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The
NASDAQ Stock Market LLC
(NASDAQ
Global Select Market)
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Securities
registered pursuant to Section 12(g) of the Act: None
___________________________
Indicate by checkmark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes
x
No
o
Indicate by checkmark if
the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes
o
No
x
Indicate by checkmark
whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes
x
No
o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes
x
No
o
Indicate by checkmark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
229.405 of this chapter) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller
reporting company)
Smaller
reporting company
o
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
o
No
x
The
aggregate market value of the registrant’s common stock, $0.0001 par value per
share, held by non-affiliates of the registrant on May 29, 2009, the last
business day of the registrant’s most recently completed second fiscal quarter,
was $12,843,687,113 (based on the closing sales price of the registrant’s common
stock on that date). Shares of the registrant’s common stock held by each
officer and director and each person who owns 5% or more of the outstanding
common stock of the registrant have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. As of January 15,
2010, 524,119,635 shares of the registrant’s common stock, $0.0001 par value per
share, were issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2010 Annual Meeting of Stockholders (the “Proxy
Statement”), to be filed within 120 days of the end of the fiscal year ended
November 27, 2009, are incorporated by reference in Part III hereof. Except
with respect to information specifically incorporated by reference in this
Form 10-K, the Proxy Statement is not deemed to be filed as part
hereof.
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PART I
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Item
1.
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3
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Item
1A.
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Item
1B.
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Item
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Item
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Item
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PART II
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Item
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Item
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Item
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Item
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Item
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Item
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Item
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PART III
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Item
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Item
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PART IV
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Forward-Looking
Statements
In
addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements, including statements regarding product
plans, future growth and market opportunities which involve risks and
uncertainties that could cause actual results to differ materially from these
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed under Item 1A, Risk
Factors. You should carefully review the risks described herein and in other
documents we file from time to time with the Securities and Exchange Commission
(“SEC”), including the Quarterly Reports on Form 10-Q to be filed in 2010.
When used in this report, the words “expects,” “could,” “would,” “may,”
“anticipates,” “intends,” “plans,” “believes,” “seeks,” “targets,” “estimates,”
“looks for,” “looks to” and similar expressions, as well as statements regarding
our focus for the future, are generally intended to identify forward-looking
statements. You should not place undue reliance on these forward-looking
statements which speak only as of the date of this Annual Report on
Form 10-K. We undertake no obligation to publicly release any revisions to
the forward-looking statements or reflect events or circumstances after the date
of this document.
Founded
in 1982, Adobe Systems Incorporated is one of the largest and most diversified
software companies in the world. We offer a line of creative, business, Web and
mobile software and services used by creative professionals, knowledge workers,
consumers, original equipment manufacturers (“OEMs”), developers and enterprises
for creating, managing, delivering, optimizing and engaging with compelling
content and experiences across multiple operating systems, devices and media. We
distribute our products through a network of distributors, value-added resellers
(“VARs”), systems integrators, independent software vendors (“ISVs”) and OEMs,
direct to end users and through our own Website at www.adobe.com. We also
license our technology to hardware manufacturers, software developers and
service providers, and we offer integrated software solutions to businesses of
all sizes. We have operations in the Americas, Europe, Middle East and Africa
(“EMEA”) and Asia. Our software runs on personal computers with Microsoft
Windows, Apple Mac OS, Linux, UNIX and various non-PC platforms, depending on
the product.
Adobe was
originally incorporated in California in October 1983 and was
reincorporated in Delaware in May 1997. We maintain executive offices and
principal facilities at 345 Park Avenue, San Jose, California 95110-2704. Our
telephone number is 408-536-6000. We maintain a Website at www.adobe.com.
Investors can obtain copies of our SEC filings from this site free of charge, as
well as from the SEC Website at www.sec.gov.
BUSINESS
OVERVIEW
For more
than 27 years, Adobe software and technologies have helped redefine how people
engage with ideas and information—anytime, anywhere and through any medium. The
impact of our solutions is evident across many industries and is felt by anyone
who creates, views and interacts with information.
Today,
through the delivery of powerful design, imaging and publishing software for
print, Web, mobile and dynamic media production, and by delivering a technology
platform, we help people express, share, manage, optimize and collaborate on
their ideas in imaginative and meaningful new ways.
Our
strategy is to address the needs of a variety of customers which include
creative professionals—graphic designers, Web designers, videographers,
photographers and professional publishers; knowledge workers—teams of workers
who share and collaborate on high-value information; enterprise users—IT
managers, Web analysts, marketing executives, line of business managers and
executives; high-end consumers—digital imaging and digital video hobbyists and
enthusiasts; application developers and OEMs—mobile device manufacturers,
printer manufacturers, Internet service providers and developers.
We
execute against this strategy by delivering products that support industry
standards and can be deployed across multiple computing environments. We also
leverage the broad reach of our ubiquitous client technologies including our
Adobe Reader, and our Adobe Flash Platform which enables the development of
products and solutions that dramatically improves how businesses and governments
engage with their customers, employees and constituents. Our Adobe Flash
Platform includes our broadly deployed Adobe Flash Player, and our Adobe AIR
software which enables developers to build and deploy rich media and Internet
applications to client devices. Together, these client technologies
allow users of our products and technologies to ensure reliable, secure and rich
application experiences across devices, browsers and operating
systems.
PRODUCTS
AND SERVICES OVERVIEW
In fiscal
2009, we categorized our products and services into the following businesses:
Creative Solutions, Business Productivity Solutions, Platform and Print and
Publishing. We further broke our Business Productivity Solutions business into
two reported segments: Knowledge Worker and Enterprise. With our acquisition of
Omniture, Inc.
(“Omniture”)
in the fourth quarter of fiscal 2009, we created and added a new segment
called Omniture for the purpose of reporting Omniture results.
Effective
in the first quarter of fiscal 2010, we modified our segment reporting. Our
Creative Solutions segment, our Platform segment, our Print and Publishing
segment, and our Omniture segment continue to be reported as they were in fiscal
2009. Our Business Productivity Solutions business that is reported
in two segments (Knowledge Worker and Enterprise), was modified to reflect a
change in how we develop, market and sell our Acrobat Connect Pro product
family. Previously, Acrobat Connect Pro results were reported in our
Knowledge Worker segment. In fiscal 2010, Acrobat Connect Pro results
will be reported as part of our Enterprise segment.
Accordingly,
our six fiscal 2010 business segments are as follows: Creative
Solutions, Knowledge Worker, Enterprise, Omniture, Platform, and Print and
Publishing. This overview, organized by these segments, combines an explanation
of our various market opportunities with a summary of our fiscal 2009 results
and a discussion of our strategies to address our market opportunities in fiscal
2010 and beyond.
Creative
Solutions Segment
Creative
Solutions Market Opportunity
Our
Creative Solutions segment focuses primarily on the needs of the creative
professional customer. Creative professionals include graphic designers,
production artists, Web designers and developers, user interface designers,
writers, videographers, motion graphic artists, photographers and prepress
professionals. They use and rely on Adobe’s solutions for professional
publishing, Web design and development, professional photography, video
production, animation and motion graphic production and printing visually rich
information.
Our
software tools are used by creative professionals to create much of the printed
and on-line information people see and read every day, including newspapers,
magazines, Websites, Rich Internet Applications (“RIAs”), catalogs,
advertisements, brochures, product documentation, books, memos, reports and
banners. Our tools are also used to create and enhance visually rich content,
including video, animation and mobile content, that is created by multimedia,
film, television, audio and video producers who work in advertising, Web design,
music, entertainment, corporate and marketing communications, product design,
user interface design, sales training, printing, architecture and fine arts.
Knowledge workers, educators, hobbyists and high end consumers are also
attracted to our creative products to create and deliver content that is of
creative professional quality.
Our
offerings in the Creative Solutions market extend to real-time rich media
solutions which give business users the control to upload, manage, enhance and
publish dynamic rich content with minimal IT support. Our offerings also extend
to the delivery of rich media through streaming media and a flexible development
environment for creating and delivering innovative, interactive media
applications. Our media products and services enable broadcasters,
events organizers and marketers to reach the broadest possible audience via our
rich Flash Platform.
As
technology continues to change and improve, the market dynamics for these
creative professionals continue to evolve. Due to the constantly changing ways
in which people choose to receive information, creative professionals look to
their software tools as a means to make their information impactful and to
repurpose content across a variety of media, applications and systems. They
desire greater efficiency from the software they use to streamline their
publishing and content creation workflows and to effectively manage their
assets. They also look for new and innovative ways to deliver their content and
information to hand-held devices such as mobile handsets and consumer electronic
devices.
Creative
professional customers license upgrades and new versions of our Creative
Solutions products due to the high degree of innovative new features and
significant productivity gained through their use. They also frequently purchase
license upgrades and new versions of these products when they buy new computers,
or migrate to new or updated operating systems.
In
addition, knowledge workers in enterprises, educators and students in schools
and universities, and hobbyists at home license our Creative Solutions
products. Knowledge workers desire professional-quality products to
accomplish tasks such as
creating
visually-rich sales presentations, engineering or architectural proposals, real
estate flyers and school year books. Educators utilize our solutions to educate
future creative professionals, as well as create their course content and online
eLearning-based lessons. Hobbyists use our tools to create
distinctive online communications and photo albums, community newsletters, Web
blogs, animations, videos and Websites for family, friends or community
organizations.
With the
increasing use of the Web as a means for marketing and advertising, we believe a
key driver of our Creative Solutions business will also be the growing amount of
Website content created by our customers to deliver impactful and compelling
Web-based experiences for their constituents across multiple screens, including
PCs, mobile devices, and Internet-connected living room electronics such as
televisions (“TVs”). We also believe those who manage Websites will want to
utilize Web analytic data and other Web usage metrics to optimize their Websites
and content to improve the overall experience of their sites.
Another
driver of our Creative Solutions business is the growth in the use of digital
devices such as digital cameras, digital video cameras, multimedia-enabled
computers, DVD players, scanners, Web-capable image and video-enabled handheld
devices, cellular phones, gaming consoles and other non-PC Internet-connected
devices. In addition, faster Internet broadband speeds have made the Web a
viable platform for the delivery of rich media, especially digital video. In
turn, the growth in the use of high definition TVs (“HD TVs”) and video is
driving the need for HD-enhanced video tools to produce HD content for movies
and commercial television, as well as the need to deliver or repurpose this
content to be viewed on the Web across PC and non-PC based devices.
As the
use of digital photography and digital videography grows, we believe creative
professionals and professional photographers throughout the world will continue
to require software solutions to edit, enhance and manage their digital
photographs and digital videos. Increasingly, we expect these users
to desire software solutions which leverage the Web as a platform to deliver the
capabilities of some or all of the features they desire in desktop software. In
addition, we believe creative professionals and Web developers are increasing
their use of digital video streams over the Web to create more compelling
Websites. We believe professional videographers are upgrading their systems to
support HD video content creation, enhancement and delivery. We also believe
hobbyists will use, with more frequency, digital imaging and digital video
software and online hosted software services as they purchase more affordable
digital cameras and digital video cameras.
Creative
Solutions Business Summary
In fiscal
2009, our creative business was adversely affected by the global economic
recession and the weak general macro-economic environment. This caused revenue
for our Creative Suite 4 (“CS4”) family of products to be more than 20 percent
weaker than revenue achieved with the prior version for a comparable period of
time since release. Despite this economy-driven weakness, we maintained our
focus on driving adoption of our creative products during the year—particularly
with large media companies and enterprise customers. Our CS4 family of products,
which first shipped in fiscal 2008, incorporate Adobe technologies used by
creative professionals into six Creative Suite editions and thirteen individual
creative products, providing offerings for the various creative disciplines our
customers desire. These disciplines include end-user markets such as interactive
design for print and Web, as well as rich media and digital video creation.
After significant weakness in the first two months of the fiscal year, licensing
of CS4 products remained stable through the remainder of the year despite the
uncertain global economic conditions in end-user creative professional
markets.
During
the year, we also maintained our focus on meeting the digital imaging and video
software needs of professional photographers, professional videographers,
business users and hobbyists. Adobe Photoshop is an essential tool in these
customers’ workflows and they rely on Adobe’s digital imaging and video editing
solutions to create and enhance many of the pictures and video we see everyday
in print, on television, in movies and on the Web. Despite
maintaining strong market share for our professional Photoshop products during
the year, revenue decreased significantly on a year-over-year basis due to the
macro-economic environment.
In the
dynamic media market, which includes users who require new and advanced digital
video and animation technologies, we continued to focus on driving adoption of
our new digital video-based technologies. We released Adobe Flash Media Server
3.5 (“FMS”) in the fourth quarter of fiscal 2009 which provides improved dynamic
streaming and HTTP delivery capabilities, performance improvements and enhanced
digital rights management capabilities for H.264 video and digital video
recorder functionality. The launch of FMS, which is licensed either directly by
our customers or licensed through our Flash Video Streaming Service via Content
Delivery Network (“CDN”) partners such as Akamai and Limelight, helped to
maintain the broad adoption of Flash Video (“FLV”), the video file
format compatible with Adobe Flash Player as
the
preferred format for delivery of digital video via the Web. Because of the broad
reach and ubiquity of our Flash client technologies, the growing adoption of our
authoring tools and our video delivery capabilities via our Flash Player, it is
estimated by the research agency comScore that more than 75% of worldwide video
watched online is now in FLV format.
To
further the monetization capabilities of video content owners who wish to
deliver engaging experiences utilizing their video assets, we also delivered
Open Source Media Framework (“OSMF”), a new framework for media player
development that can be used to create and deliver custom online media players.
OSMF enables developers using Flash technologies to quickly and easily add rich
functionality such as advertising, user measurement and tracking, and social
network integration into new custom video players that can be branded for
individual content owners.
In the
professional page layout market, despite the downturn in the economy and
the financial pressure facing traditional print media companies, we continued to
focus on gaining market share during the year with our Adobe InDesign
product. Similarly, in the Web layout and Web development markets,
and in the illustration market, while our revenues were adversely affected due
to the economy, we focused on maintaining market share leadership with our Adobe
Dreamweaver and Adobe Illustrator products.
Our
Scene7 business, which provides businesses with an easy-to-use Web-based system
to upload, manage, enhance and publish dynamic rich content, achieved
year-over-year growth in fiscal 2009 based on accelerated customer adoption of
our solution. During the year, we updated the capabilities of our Scene7 hosted
cross media platform with new features for e-commerce and multichannel marketing
companies to create improved, high-impact customer experiences. New Adobe Scene7
capabilities include more design control and enhanced workflow efficiencies with
new features such as mixed media set publishing and viewing capabilities; video
authoring and viewing capabilities that synchronize merchandising videos with
specific call-to-action links, as well as improved integration with Adobe
Creative Suite.
During
the fourth quarter of fiscal 2009, we released version 8 of our Adobe Photoshop
Elements software which is our digital imaging application targeted for amateur
photographers and digital imaging hobbyists. In the same quarter, we released
version 8 of Adobe Premiere Elements software which is our video editing
software that can be used by hobbyists to enhance and share their digital video
memories on DVDs. We also released a software bundle that includes the new
versions of Adobe Photoshop Elements and Adobe Premiere Elements to target
hobbyists who desire both applications in one affordable package. Despite
success with these new hobbyist product releases, overall revenue in the
hobbyist category declined year-over-year due to the economy.
Creative
Solutions Business Strategy
In fiscal
2010, our Creative Solutions strategy will focus on driving revenue growth and
increasing market share of our products through the delivery of comprehensive
software solutions that meet the evolving needs of our customers. To help drive
this strategy, we will deliver new versions of our Creative Suite family of
products during the year with a focus on improved integration between our
products, more efficient collaboration and workflow capabilities, and enhanced
functionality – particularly in areas related to interactivity and rich media
use related to Adobe Flash content creation, mobile and alternative device
content creation, and hosted cloud-based services which will augment the
capabilities of our desktop products. We will also utilize hardware improvements
such as 64-bit computing support and graphics processor unit acceleration to
significantly improve the performance of our products.
We
believe that, while many of our customers have made the switch to our Creative
Suite editions from individual creative products, there still remains a
large opportunity to migrate customers from individual products to Creative
Suite editions – particularly in emerging markets and other large geographic
markets outside the United States where our Creative Suite penetration is lower.
We also believe many customers who did not migrate to newer CS4 releases during
2009 due to economic factors could upgrade to new versions of our products in
2010, due to new and enhanced features, improved productivity gains, support for
the latest Microsoft and Apple operating systems that are being adopted by our
customers, new hardware purchases by our customers which could cause them to
update old versions of creative software, and the addition of features in some
of our creative products which will provide better integration with our Omniture
Web analytics and business optimization products.
To
increase the addressable market for our Creative Solutions business, and to
address the needs of customers creating interactive content and applications for
both PC and non-PC based environments, we intend to add Adobe Flash Catalyst and
Adobe Flash Builder to some of our Creative Suite configurations in
2010. We believe interactive designers, Web developers and other
creative professionals will benefit from the added features and integration of
these Platform Business Unit products with the other creative products they
regularly use to provide innovative ways to deliver improved Web-based content,
applications and experiences for both PC screens and non-PC screens such as
mobile device and TV screens.
We intend
to continue our efforts to be the recognized market leader in the professional
page layout, Web layout and illustration software markets. In page layout,
we will continue to add new features to our InDesign product with a focus on
cross-media publishing workflows, as well as continue to enhance its integration
with other products print professionals utilize in their workflows. In Web
layout, we strive to continue to redefine the Web experience by offering the
most feature-rich, market-leading solutions for Website design and development
with our Dreamweaver and Flash offerings. In illustration, we will continue to
innovate and develop new capabilities which we believe will preserve our
Illustrator product as a leading graphics creation solution.
We plan
to continue to work on enhancements for our Photoshop family of product
offerings to meet the evolving needs of professional photographers, creative
professional customers (including graphic designers, Web designers and video
producers) and imaging enthusiasts to drive upgrades and new user adoption. We
also plan to add new capabilities to Adobe Photoshop Lightroom, our digital
photography workflow tool for professional photographers and hobbyists. In
addition, we continue to believe many customers will license the Photoshop
product capabilities via our Creative Suite editions as opposed to
licensing individual Photoshop products.
With our
set of professional digital video and motion graphic products, we strive to
provide the market-leading, end-to-end digital video, motion graphic and
animation platform for our customers. To grow this business, we will continue to
market the advanced features, the cross-platform and cross-device capabilities,
and the workflow benefits of this platform to creative professionals and
videographers in the film, broadcast, corporate and event videography market
segments. We are also enhancing our FMS solution to deliver the
highest quality video streaming capability and we are working with partners to
deliver integrated video systems and video delivery services. With broad
adoption of Adobe Flash Player and its high-quality video playback features, we
will continue to work on advancing our seamless video authoring-to-playback
workflow capability for those wishing to provide a rich video experience on the
Web and to mobile devices. We will also work to integrate analytics
and optimization capabilities into our video solutions, leveraging our OSMF
effort and the capabilities of our Omniture offerings.
To
further our initiatives in digital video and motion graphics, we intend to
extend our leadership position in Web video by continuing to support and drive
the improvement of industry standards, as well as innovate and deliver advanced
content creation, protection, delivery and monetization capabilities in our
dynamic media streaming products, the Adobe Flash Player, our OSMF effort and
our Omniture solutions. By focusing on the end-to-end video workflow
needs and monetization goals of our customers, we believe we are uniquely
positioned to provide the best solution for the creation and delivery of
high-quality Web video content. In addition, as the number of hobbyists desiring
easy-to-use video editing solutions grows, we intend to enhance the video
editing and DVD creation capabilities of our Adobe Premiere Elements product for
the sharing of digital video memories.
With our
Scene7 solutions, we intend to market their capabilities to help customers
automate the production and availability of rich media experiences, including
zoom, dynamic sizing, personalization and interactive dynamic product catalogs.
In addition, we believe our Scene7 solutions will help Adobe build a more robust
Internet infrastructure for the delivery of software as a service (“SaaS”),
allowing us to further develop the brand-name customer list for our Scene7
solutions and accelerate the online availability of Adobe technologies used by
millions of creative professional and hobbyist users.
Creative
Solutions Products
Adobe
After Effects Professional—software used to create sophisticated animation,
motion graphics and visual effects found in television broadcast, film, DVD
authoring and the Web; provides 2D and 3D compositing, animation and visual
effects tools, as well as advanced features such as motion tracking and
stabilization, advanced keying and warping tools, more than 30 additional visual
effects and additional audio effects.
Adobe
Audition—a professional audio editing environment designed for demanding audio
and video professionals; provides advanced audio mixing, editing and effects
processing capabilities.
Adobe
Creative Suite Design Premium—an integrated software solution that creative
professionals can use as a platform for print, Web and mobile content
publishing; combines Adobe Acrobat Pro, Adobe Dreamweaver, Adobe Flash
Professional, Adobe Illustrator, Adobe InDesign and Adobe Photoshop Extended
technologies with file management and integration technology called Version Cue,
a file management and control center called Adobe Bridge, a tool used to produce
innovative and compelling content for a broad range of mobile phones and
consumer electronics devices called Adobe Device Central, and Adobe Acrobat
Connect Web conferencing software that enables users to instantly communicate
and collaborate through easy-to-use, easy-to-access online personal meeting
rooms.
Adobe
Creative Suite Design Standard—an integrated software solution that creative
professionals can utilize for professional design and print production, page
layout, image editing, illustration and Adobe PDF workflows; combines Adobe
Acrobat Pro, Adobe Illustrator, Adobe InDesign and Adobe Photoshop technologies,
Version Cue, Adobe Bridge, Adobe Device Central and Adobe Acrobat Connect Web
conferencing software.
Adobe
Creative Suite Master Collection—an integrated software solution which provides
all the tools creative professionals require to create content for every design
discipline in one offering; provides capabilities for professional page layout,
image editing, vector illustration, print production, Website
design/development, rich interactive content creation, visual effects and motion
graphics, video capture/editing/production, DVD titling and digital audio
production; includes Adobe Acrobat Pro, Adobe After Effects Professional, Adobe
Contribute, Adobe Dreamweaver, Adobe Encore, Adobe Fireworks, Adobe Flash
Professional, Adobe Illustrator, Adobe InDesign, Adobe Photoshop Extended, Adobe
Premiere Pro and Adobe Soundbooth technologies, Version Cue, Adobe Bridge, Adobe
Device Central, Adobe Acrobat Connect and Adobe Dynamic Link which enables
intermediate rendering for a smoother workflow between video production
tools.
Adobe
Creative Suite Production Premium—an integrated software solution that provides
creative professionals a complete post-production solution consisting of video,
audio and design tools that can be utilized to create and deliver content to
film, video, DVD, Blu-ray Disc, the Web and mobile devices; combines Adobe After
Effects Professional, Adobe Encore, Adobe Flash Professional, Adobe Illustrator,
Adobe Photoshop Extended, Adobe Premiere Pro and Adobe Soundbooth technologies,
Version Cue, Adobe Bridge, Adobe Device Central, Adobe Acrobat Connect Web
conferencing software and Adobe Dynamic Link.
Adobe
Creative Suite Web Premium—an integrated software solution that provides
creative professionals a complete solution for creating interactive Websites,
applications, user interfaces, presentations, mobile device content and other
digital experiences; allows users to prototype Web projects, design Website
assets, build Web experiences and efficiently maintain and update Web content;
combines Adobe Acrobat Pro, Adobe Contribute, Adobe Dreamweaver, Adobe
Fireworks, Adobe Flash Professional, Adobe Illustrator and Adobe Photoshop
Extended technologies, Version Cue, Adobe Bridge, Adobe Device Central, Adobe
Acrobat Connect Web conferencing software and Adobe Dynamic Link.
Adobe
Creative Suite Web Standard—an integrated software solution that provides a
basic toolkit for Web designers and developers to prototype, design, develop and
maintain Websites, Web applications, interactive Web experiences and mobile
content; combines Adobe Contribute, Adobe Dreamweaver, Adobe Fireworks and Adobe
Flash Professional technologies, Version Cue, Adobe Bridge, Adobe Device Central
and Adobe Acrobat Connect Web conferencing software.
Adobe
Dreamweaver—a professional software development application used by designers
and developers to create a broad range of Web solutions for publishing online
commerce, customer service and online educational content; includes capabilities
for visually designing HTML pages, coding HTML and application logic and working
with application server technologies.
Adobe
Encore—professional DVD authoring and creation software; provides a
comprehensive set of design tools and integration with other Adobe software to
create a streamlined DVD creation workflow; provides ability to output projects
to recordable DVD formats including Blu-ray, ensuring a wide degree of playback
compatibility.
Adobe
Fireworks—a professional graphics design tool that allows users to rapidly
prototype and design Websites and Web application interfaces while giving
professional designers and developers tools for creating images that can be
deployed to Web browsers, Adobe Flash Player and Adobe AIR; integrates with
Adobe Dreamweaver, Adobe Flash and Adobe Photoshop, and supports Adobe AIR
application development.
Adobe
Flash Access—a scalable, flexible content protection solution that enables the
distribution and monetization of premium video content delivered online;
previously known as Adobe Flash Media Rights Management Server.
Adobe
Flash Media Interactive Server—a configuration of our streaming media
capabilities to deliver secure, high-quality video on demand, video blogging and
messaging, Web conferencing and live video capabilities that can be viewed via
Adobe Flash Player and Adobe AIR; provides a flexible development environment
for creating and delivering interactive media applications; utilized by many
industries, including media and entertainment, telecommunications, advertising,
government and education.
Adobe
Flash Media Streaming Server—a lower-cost version of our streaming media
capabilities that can be used to deliver live streaming and video-on-demand
streaming; configured for lower volume streaming of content that is suitable for
small- and medium- size streaming needs.
Adobe
Flash Professional—provides an advanced development environment for creating
Internet applications which integrate animations, motion graphics, sound, text
and additional video functionality; solutions built with Adobe Flash
Professional are deployed via the Web to browsers and to devices that run Adobe
Flash Player.
Adobe
Illustrator—a vector-based illustration design tool used to create compelling
graphic artwork for print publications, Websites and video
production.
Adobe
InCopy—an editorial tool for collaboration between writers, editors and
copy-fitters; Adobe InCopy is a companion to Adobe InDesign.
Adobe
InDesign—a page-layout application for publishing professionals; based on an
open, object-oriented architecture that enables Adobe and its industry
partners to deliver powerful publishing solutions for magazine, newspaper
and other publishing applications.
Adobe
InDesign Server—technology for third-party systems integrators and developers to
use for building design-driven, server-based publishing solutions; brings the
innovative design and typography features of InDesign software to the server
platform and enables Adobe partners to provide new levels of automation and
efficiency in high-end editorial workflows, collateral creation, variable data
publishing and Web-based design solutions.
Adobe
Photoshop—provides photo design, enhancement and editing capabilities for print,
the Web and multi-media; used by graphic designers, professional photographers,
Web designers, professional publishers and video professionals, as well as
amateur photographers and digital imaging hobbyists.
Adobe
Photoshop Elements—offers powerful yet easy-to-use photo editing functionality
plus intuitive organizing, printing and sharing capabilities for amateur
photographers and hobbyists who want to create professional-quality images for
print and the Web.
Adobe
Photoshop Extended—provides the capabilities of Adobe Photoshop, plus additional
tools for editing 3D and motion-based content and performing image analysis;
targeted for: film, video and multimedia
professionals; graphic and Web designers using 3D and motion;
manufacturing professionals; medical professionals; architects and engineers;
and scientific researchers.
Adobe
Photoshop Lightroom—software designed for professional photographers and photo
hobbyists, it addresses their unique photography workflow needs by providing
more efficient and powerful ways to import, select, develop and showcase large
volumes of digital images.
Adobe
Premiere Elements—a powerful yet easy-to-use video-editing software for home
video editing; provides tools for hobbyists to quickly edit and enhance video
footage with fun effects and transitions and create custom DVDs for sharing
video with friends and family.
Adobe
Premiere Express—video remix and video editing software licensed to media
portals such as MTV.com, Photobucket and YouTube to provide consumers with
embedded access to industry leading Adobe video editing and enhancement
technologies.
Adobe
Premiere Pro—professional digital video-editing software used to create
broadcast-quality content for video, film, DVD, multimedia and streaming over
the Web.
Adobe
Soundbooth—an application that provides video editors, designers and others who
do not specialize in audio with the tools that they need to accomplish
audio-based tasks in their everyday work, such as removing noise from
recordings, polishing voiceovers and customizing music to fit a video or
animation production.
Adobe
Story—new online collaborative script development tool currently in beta release
and made available as a hosted service; can be used to begin the planning and
preproduction phase of video workflows and will be integrated with other Adobe
products, including future versions of the Adobe Creative Suite product family;
developed to create more efficient video production workflows while reducing
production costs, Adobe Story automatically turns content in scripts into
relevant metadata that can be used throughout the Adobe digital video
workflow.
Adobe
Visual Communicator—software used to create newscast-style video presentations
that can be delivered via e-mail, CD, DVD, PowerPoint or live over the
Internet.
Business
Catalyst—hosted software service which provides an all-in-one capability to
develop, maintain, and run a Website to implement marketing campaigns and sell
products online.
Flash
Video Streaming Service—via CDN partners, Adobe offers hosted services for
streaming on-demand video for the Adobe Flash Player runtime across
high-performance networks; built with Adobe Flash Media Server, Flash Video
Streaming Service provides an effective way to deliver FLV to large audiences
without the overhead of setting up and maintaining streaming server hardware and
network.
Open
Source Media Framework (OSMF)—new framework for media player development that
can be used to create and deliver custom online media players for content
owners; enables developers using Flash technologies to quickly and easily add
rich functionality such as advertising, user measurement and tracking, and
social network integration into new custom video players that can be branded for
individual content owners.
Ovation—software
which allows users to enhance Microsoft PowerPoint slides into a richer visual
experience to help deliver more impactful information, presentations and
messages.
Photoshop.com—an
online hosted service that provides customers with the ability to view, enhance
and share their photos; also provides photo backup services, the ability to
obtain seasonal artwork and other inspiring ideas that can be utilized to
enhance the photo viewing and sharing experience.
Scene7
On-Demand—provides an easy-to-use, Web-based system to upload, manage, enhance
and publish dynamic rich content; used by many leading online retail Websites to
automate the production and availability of rich media experiences, including
zoom, dynamic sizing, personalization and interactive dynamic product
catalogs.
Business
Productivity Solutions
The focus
of our Business Productivity Solutions business is to provide solutions which
meet the needs of enterprises and governments to improve their productivity,
help automate business processes, improve collaboration and reduce
time-to-market and costs. We believe there are several macro trends and specific
growth drivers that are creating opportunities for our Business Productivity
Solutions business:
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Paper-to-digital—eliminating
paper and moving to automated forms-based workflows continue to be key
challenges in the enterprise. Paper remains prevalent throughout
industries and governments, and there are goals to drive down operational
costs related to paper use and workflows involving paper-based documents.
During the past decade, there has been considerable progress made towards
moving away from paper-based workflows. However, we believe
there still remains a significant opportunity to deliver solutions which
focus on this opportunity.
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Collaboration—the
nature of business continues to become more social and collaborative, and
enterprises and governments are being forced to become more
transparent. Customers and government constituents desire that
their online interactions be friendly and effective. As such, we believe
weaving social, real-time interaction into every customer interaction is
becoming a key market opportunity, as well as a differentiation in the
marketplace.
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Transforming
customer interactions—as businesses increasingly move their customer
service and new customer acquisition activities online, they are facing a
completely different customer interaction model. We believe
more than half of the transactions in our Adobe LiveCycle enterprise
business during the past year relate to solutions oriented around
transforming business processes such that organizations can more easily
and cost-effectively acquire, service, and ultimately retain their
customers/constituents.
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Given
these market trends and growth drivers, we categorize our opportunities and our
results into two distinct businesses within our Business Productivity Solutions:
Knowledge Worker and Enterprise. Both businesses utilize industry standards and
leverage our client platforms that include Adobe Reader, Adobe Flash Player and
Adobe AIR.
Knowledge
Worker Market Opportunity
As part
of our Business Productivity Solutions focus, we address the needs of the
knowledge worker customer whom we define as someone working in document
intensive industries, focused on creating and disseminating high-value
information as part of their job on a regular basis. Knowledge workers include a
wide variety of job functions—such as accountants, attorneys, architects,
educators, engineers, graphic designers, insurance underwriters and stock
analysts. These jobs typically require the sharing of information either as a
static, published document or as a collaborative, interactive
document.
Knowledge
workers must create information and content from a variety of sources and
software applications, and be able to exchange this information within a
reliable format that ensures coworkers and constituents can reliably and
securely access the information. When appropriate, this information often needs
to be protected or securely managed and controlled.
Document-based
collaboration among knowledge workers can occur through face-to-face meetings,
via phone calls, through e-mail or through Web conferencing technologies.
Knowledge workers who participate in collaborations with their colleagues may be
located in offices next door to each other, or in different parts of the world.
These team members may change with every project and either be part of an
organization’s employee base, or be an external consultant or third-party
partner.
We
believe there is a significant opportunity to provide solutions which enable
knowledge workers to communicate and collaborate across technical, geographical
and social boundaries, both inside and outside of their companies. We believe
that with such solutions, users can collaborate and efficiently manage feedback
from their colleagues in both real time and on-demand, and control how, when and
by whom information is accessed.
Since the
early 1990s, our Acrobat family of products has provided for the reliable
creation and exchange of electronic documents, regardless of platform or
application source type. Users can collaborate on documents with electronic
comments and tailor the security of a file in order to distribute reliable Adobe
PDF documents that can be viewed, printed or interacted with utilizing the free
Adobe Reader. Available in different versions which target a variety of user
needs, Adobe Acrobat provides essential electronic document capabilities and
services to help knowledge workers accomplish a wide range of ad hoc tasks
involving digital documents ranging from simple publications to forms to mission
critical engineering and architectural plans. Although Acrobat has achieved
strong market adoption in document-intensive industries such as government,
financial services, pharmaceutical, legal, aerospace, insurance and technical
publishing, we believe there are tens of millions of users who need capabilities
such as those provided by Acrobat who have not yet licensed an Acrobat- based
solution.
Our
Acrobat.com service provides centralized online file sharing and storage
capabilities, as well as simple PDF creation, an online word processor,
spreadsheet and presentation authoring capabilities, and personal Web
conferencing services with Adobe ConnectNow that is based on our Acrobat Connect
Pro Web conferencing solution. In addition to complementing our
Acrobat desktop solutions, Acrobat.com also serves as an introductory service
for knowledge workers who wish to utilize PDF-creation capabilities and the
Adobe Reader, but have not yet licensed an Acrobat desktop
solution.
Knowledge
Worker Business Summary
In fiscal
2009, our Knowledge Worker business was adversely affected by the recession and
the weak general macro-economic environment. This caused revenue for our
Knowledge Worker products to be approximately 23% weaker than revenue achieved
in fiscal 2008. Despite this economy-driven weakness, we maintained our focus on
driving adoption of our Acrobat products during the year—particularly with
enterprise and government customers.
Our
Acrobat 9 family of products, which first shipped in August of 2008, offers
features that allow workgroups to manage a range of essential business
activities such as assembling documents from multiple sources, controlling
security and access to sensitive information, enabling the creation and filling
out of intelligent electronic forms and more effectively collaborating on
documents and projects. In addition, the Acrobat 9 family of products allows
users to unify a wide range of content into a PDF Portfolio. Users can assemble
documents, drawings, e-mail, spreadsheets and rich media—including audio, video,
3D and maps — in a single, compressed PDF Portfolio. Other version 9
features and enhancements included the ability to: create interactive, on-demand
presentations using Adobe Presenter software; easily share video in PDF using
FLV; improved security to help protect and control access to PDF documents;
permanently remove sensitive information through the use of redaction tools to
black out sensitive text, illustrations, or other information; easily create and
manage electronic forms; and enable anyone using the free Adobe Reader to
digitally sign documents, participate in shared document reviews and save forms
locally. These enhanced capabilities helped to continue the increase of our
penetration of Acrobat desktop licenses in enterprises.
During
the year, continued adoption of our Creative Suite products has also contributed
to broader adoption of Acrobat in the creative professional market. Acrobat Pro
is included in four of the six Creative Suite editions and utilization of
Acrobat prepress, printing and collaboration functionality is a critical
component of creative customer workflows. As such, adoption of Acrobat through
the Creative Suite family of products has resulted in a material amount of
Acrobat revenue being reported in our Creative Solutions Segment during the
year.
We also
continued to grow the usage of Acrobat.com during fiscal 2009. Since it was
first introduced in 2008, more than five million users have created accounts to
use Acrobat.com to create and share documents, communicate in real time, and
simplify working with others. In the fourth quarter of fiscal 2009, we enhanced
its capabilities with easier file sharing, improved remote access including
mobile device access, and the addition of new spreadsheet and presentation
authoring capabilities. We believe this compelling subscription-based service
will enhance the growth capabilities of the Acrobat family of products in the
coming years.
Knowledge
Worker Strategy
In fiscal
2010, we plan to continue to market the benefits of our knowledge worker
solutions to small and medium-sized businesses, large enterprises and government
institutions around the world. With our Acrobat family of products, we intend to
continue to increase our seat penetration in these markets through the
utilization of our corporate and volume licensing programs. We also intend to
increase our focus on marketing and licensing Acrobat in targeted vertical
markets such as education, financial services, telecommunications and
government, as well as expanding into emerging markets.
We also
plan to deliver a new version of the Acrobat family of products later in the
fiscal year. This new release will provide enhanced collaboration features as
well as add additional capabilities to transform how Acrobat users create and
deliver more dynamic experiences within PDF files. We believe this new version
will help to accelerate adoption of Acrobat in targeted markets when compared to
adoption and upgrade rates we experienced during fiscal 2009, which were
adversely affected by the macro-economic downturn. In addition, we intend to
update the capabilities of our hosted service, Acrobat.com, to increase the
value of the service to existing and new users. As the use of Acrobat.com grows,
we intend to target users of the free aspects of the service with paid-for
functionality that will enhance their use of the overall solution.
Knowledge
Worker Products
Adobe
Acrobat.com—provides centralized online file sharing and storage capabilities,
as well as simple PDF creation, an online word processor called Buzzword, an
online spreadsheet authoring tool called Tables, an online presentation creation
tool called Presentations, and personal Web conferencing services with Adobe
ConnectNow.
Adobe
Acrobat Standard—creates secure, reliable and compact Adobe PDF documents from
desktop authoring applications such as Microsoft Office software, graphics
applications and more; supports automated collaborative workflows with a rich
set of commenting tools and review tracking features; includes everything needed
to create and distribute rich electronic documents that can be viewed easily
within leading Web browsers or on computer desktops via the free Adobe
Reader.
Adobe
Acrobat Pro—in addition to all the capabilities of Acrobat Standard, Acrobat Pro
delivers specialized capabilities for creative professional and engineering
users, such as pre-flighting, color separation and measuring tools; also allows
users to insert FLV or H.264 video for direct playback in Adobe Acrobat and
Adobe Reader, create dynamic XML forms with Adobe LiveCycle Designer ES and
create PDF documents that enable Adobe Reader users to digitally sign PDF
documents.
Adobe
Acrobat Pro Extended—in addition to all the capabilities of Acrobat Pro, Acrobat
Pro Extended enables collaboration between extended teams of designers and
engineers to more securely and reliably communicate, visualize and document
architectural and manufacturing designs using 3D data; allows users to insert
and publish 3D designs from major CAD applications in Adobe PDF documents that
can easily be shared with suppliers, partners and customers using the free Adobe
Reader software; Acrobat Pro Extended also: allows users to easily
add audio, video and quizzes to PowerPoint slides to create rich, interactive
presentations with Adobe Presenter; enables conversion of a variety of video
formats to FLV for playback in PDF; and enables the creation of PDF
maps through the importing geospatial files that can retain metadata and
coordinates. Acrobat 9 Pro Extended includes Adobe LiveCycle Designer
ES, Adobe Presenter, Adobe 3D Reviewer and Adobe 3D Capture Utility for
UNIX.
Adobe
Document Center—a hosted service that enables businesses to secure and manage
Adobe PDF documents and other common business document files such as those in
Microsoft Office formats.
Create
Adobe PDF Online—a Web-based subscription service that provides for the easy
conversion of Microsoft Office documents and other application files to Adobe
PDF for the secure and reliable sharing of rich electronic documents that can be
viewed easily within leading Web browsers or on computer desktops via the free
Adobe Reader.
Enterprise
Market Opportunity
Enterprises
are under increasing pressure to save money, offer improved customer service,
adhere to regulatory requirements and leverage existing investments in core
systems. As a means to address these issues, a critical component of an
organization’s business processes is the need to interact with data stored in
enterprise applications. As this need expands beyond the core users of those
applications, adapting systems to accommodate a diverse group of users—including
those within and those external to the organization – has become an expensive
and time-consuming endeavor. The outcome is a proliferation of manual
workarounds that result in process inefficiencies, delays and poor quality of
information.
In
addition, enterprises have built Web applications which enjoy the reach of the
Web but often fail to deliver a user interface with the ease of use and richness
that users expect. This impedes utilization of these applications and increases
training costs, and reduces the overall return on investment (“ROI”) that
enterprises expect. Organizations are now looking to RIAs to boost their ROI for
these Web applications by combining a rich graphical application interface with
the universal reach of the Web.
We
believe significant opportunities exist to help enterprises address these issues
by making their business processes more efficient and their Web applications
more engaging. We also believe forward-thinking enterprises are actively
investing in disruptive processes to engage more meaningfully with customers,
and the employees and partners who serve them. Enterprises want to
leverage these dynamic human interactions to create a more effective customer
interaction model which accelerates acquisition and retention.
To
address these opportunities, we offer a platform for enterprises and governments
to build Customer Interaction Solutions (“CIS”) utilizing our Adobe LiveCycle
Enterprise Suite (“ES”) solutions to securely extend the reach of information,
processes and services to engage with customers and constituents. Our CIS
solutions leverage our Adobe Reader and the Adobe Flash Platform which help
businesses and government agencies inspire commitment in their customers and
constituents by engaging them — anywhere, anytime and in any medium through our
universal clients and application solutions.
Our Adobe
Flash Platform enables reliable, secure and rich application experiences across
browsers, desktops and devices. The platform provides developers with an RIA
programming model to integrate and optimize workflows and a server software
framework to simplify integration and leverage existing enterprise
infrastructures. We also offer CIS services and other software components to
accelerate the creation of compelling, relevant and actionable applications,
either through RIAs or through intelligent electronic documents based on Adobe
PDF.
To
improve their collaboration and communication capabilities, we believe
enterprises will increasingly utilize real-time communication to improve how
they train, market, sell and support their products and solutions to their
customers. For this reason, we now include our Adobe Acrobat Connect
Pro product line as part of our CIS offerings. Connect Pro provides
capabilities via Adobe Flash Player for live Web conferencing, as well as
delivering on-demand rich presentations through an on-premise server or as a
hosted service. By also offering Web conferencing services as part of our
LiveCycle family of products, we believe we can extend adoption of Web
conferencing to a broader potential market and grow the use of such technology
with an easy-to-adopt business model.
Although
our solutions address the needs of a diverse set of enterprise customers, we
focus primarily on two key vertical industries: financial services and
government. To a lesser extent, we also target vertical markets such as media
and entertainment, manufacturing, telecommunications and
healthcare. For all these customers, we offer comprehensive,
scalable, secure and reliable server products and tools to develop applications
tailored to their specific information and business process
requirements.
Enterprise
Business Summary
In fiscal
2009, revenue performance for our Enterprise products was better than Adobe’s
overall business. Despite the negative macro-economic backdrop, overall
LiveCycle revenue declined only slightly on a year-over-year basis. A
contributing factor to the year-over-year decline in our LiveCycle revenue was
our strategic decision to focus less on consulting services as a component of
overall LiveCycle revenue during the year. With increased consulting
support by systems integrators such as Cognizant, Deloitte and Tata Consulting,
we downsized our consulting organization and the revenue aspirations associated
with it as we entered fiscal 2009—and focused our revenue generation primarily
on the licensing of our LiveCycle solutions.
The
overall performance of our enterprise business benefitted from the release of
new versions of products during the year. In the fourth quarter of fiscal 2009,
we delivered Adobe LiveCycle Enterprise Suite 2 (“ES2”), which enables
businesses and governments to deliver personalized experiences to improve
employee productivity and the overall experience of their customers and
constituents.
LiveCycle
ES2 is an integrated J2EE server solution that blends data capture, process
management, information security, document generation and content services to
help create and deliver rich and engaging applications that reduce paperwork,
accelerate decision-making and help ensure regulatory compliance. It provides
developers the ability to build applications that improve interactions with
customers and constituents across devices and channels. Delivering significant
productivity improvements to IT and line-of-business managers, LiveCycle ES2
also provides an RIA framework for building customizable RIA workspaces, mobile
and desktop access to critical applications, and deployment as hosted
services.
New
features and enhancements to LiveCycle ES2 include expanded client and Web
browser support. We believe the extended mobile and desktop access to LiveCycle
ES2 will help organizations save time and costs by providing seamless end-user
access to processes and services that help them complete their work faster. As
part of LiveCycle ES2, we offer new capabilities such as LiveCycle Workspace ES2
Mobile—which enables access to LiveCycle ES2 from smartphones including iPhone,
Blackberry and Windows mobile devices, thereby increasing user productivity by
allowing access to tasks when users are away from their desks. We also offer
LiveCycle Launchpad ES2, which is an Adobe AIR application that provides easy
access on the desktop to initiate LiveCycle ES services such as PDF
creation.
Additional
LiveCycle ES2 capabilities included expanded RIA data services. Through closer
integration with the Adobe Flash Platform, LiveCycle ES2 enables Adobe Flex and
LiveCycle developers to create user-centric applications that are unique to
particular business needs. The new LiveCycle Mosaic ES2 capability is an RIA
framework for rapidly assembling and engaging activity-centric enterprise
applications, and provides knowledge workers with real-time, contextual
information from multiple sources in a single, personalized view. Developers can
extend existing applications by exposing their business logic and user
interfaces into application tiles that can be assembled to create unified
views.
In
addition, we provide LiveCycle Collaboration Service, which is a new hosted
service that provides developers and enterprises with a scalable solution to
easily build real-time, multi-user collaboration into existing or new RIAs.
LiveCycle ES2 also provides the option to deploy LiveCycle capabilities in the
cloud, hosted in the Amazon Web Services cloud computing environment. We believe
these capabilities provide organizations with a faster deployment path and lower
total cost of ownership. It also allows developers to stage multiple
applications before going live in production.
To make
it easy for enterprise designers and developers to automate enterprise business
processes, we provide tight integration of Adobe tools and solutions such as
LiveCycle ES2 Solution Accelerators—which help organizations launch project
planning and prototyping, and decrease development time. New LiveCycle ES2
Solution Accelerators include human capital management, eSubmissions,
correspondence management, new account enrollment and services and benefits
delivery. We also provide LiveCycle Workbench ES2, which is an integrated
development environment (“IDE”) that allows developers, designers, and business
analysts to work together collaboratively.
These
LiveCycle ES2 capabilities build upon advancements we have made with LiveCycle
ES that provided common services software for functionality such as forms
automation, PDF document creation, document security and process
management.
In fiscal
2009, we also increased our focus on the Web conferencing market opportunity
with our Acrobat Connect Pro product line, which is licensed by customers as
on-premise server-based software or as a hosted service. Revenue grew by more
than 20% in fiscal 2009 due to our increased focus on marketing and licensing
the product, as well as overall growth in the market opportunity.
Enterprise
Strategy
In fiscal
2010, we will continue to focus on offering more complete enterprise
server-based solutions targeting the needs of governments and enterprises
worldwide. We wish to help these customers develop and deliver self-service and
assisted-service Web-based applications that blend rich user interfaces and
documents with data capture, document collaboration, process management and
document generation capabilities that are easy to use. We strive to provide
solutions which are customer-centric and help the constituents of our customers
work together on complex processes and bridge the digital and paper-based
environments, and do so by providing capabilities that are accessible by anyone.
We intend to provide such solutions directly through our field organization, as
well as together with global and regional systems integrators we partner with
that deliver comprehensive solutions to their customers.
We will
continue to focus our go-to-market efforts on vertical markets such as financial
services and government. We intend to continue to build out our go-to-market
model to leverage sales and consulting delivery through systems integrator
partners. We will also work to enhance our solutions offerings through
investments in new SaaS, or on-demand, capabilities for our enterprise server
product family.
With our
Connect Pro product, we intend to increase awareness of our solution in markets
such as government and other regulated industries. We also intend to expand our
go-to-market opportunity by working with Conferencing Service Providers, and we
plan to deliver capabilities which allow developers to build
collaboration-enabled business processes utilizing Connect Pro functionality and
services.
Enterprise
Products
Collaboration
Adobe
Acrobat Connect Pro—a rich Web-based communication system which enables
organizations to reduce the costs of travel and increase the effectiveness of
online training, marketing events, sales meetings and collaborative Web
conferencing solutions which are instantly accessible by customers, partners and
employees using Adobe Flash Player; consists of a core Connect Events Server or
hosted service, and modules that provide specific application functionality,
including Connect Training and Connect Events; can be deployed with either some
or all of these components together; Connect Training allows organizations to
build a complete online training system with Microsoft PowerPoint presentations
that include surveys, analysis, course administration and content management;
Connect Events allows users to provide seminar and training sessions as well as
to conduct business presentations through the Web.
Data
Capture
Adobe
LiveCycle Barcoded Forms ES2—server-based software application which enables
organizations to accurately capture user-supplied information from
fill-and-print paper forms that uses proven and dynamic 2D barcode technology
online and offline to automate the extraction of data from paper forms and
deliver it to core systems for processing; dramatically reduces costs, errors
and time compared to manual data entry and solutions based on optical character
recognition; barcodes are initially set up through creation of the form with
Adobe’s Designer application; after the form is printed, signed and returned by
users of the form, the barcode on the form is scanned and decoded, and form data
obtained from the barcode is routed to the appropriate enterprise application
through Adobe’s LiveCycle server products.
Adobe
LiveCycle Data Services ES2—high-performance, scalable and flexible framework
that streamlines the development of RIAs using Adobe Flex and Adobe AIR;
abstracts the complexity required to create server push–based applications and
supports a rich set of features to create real-time solutions; utilizes powerful
data services and simplifies data management problems such as tracking changes,
synchronization, paging and conflict resolution; deployed as a standard J2EE Web
application, which enables customers to leverage their existing
infrastructure.
Adobe
LiveCycle Forms ES2—server-based software application that organizations can use
to cost-effectively and securely extend their core business processes beyond
their enterprise system; enables customers to create and deploy XML-based form
templates as PDF, SWF, or HTML for use with Adobe Reader or Adobe Flash Player
software, or with Web browsers; provides for the capture of data from submitted
forms and the transfer of the data directly into an organization’s core business
systems, thereby streamlining form-driven business processes and improving data
accuracy.
Adobe
LiveCycle Reader Extensions ES2—server-based software application which lets
enterprises easily share interactive Adobe PDF documents with external parties
without requiring recipients of the documents to purchase Acrobat software that
normally would be necessary to interact with the Adobe PDF documents they
receive; unlocks features on an individual Adobe PDF document
by document basis so that when such a file is opened in
the free Adobe Reader, users have
access to
tools that normally would not be available in Adobe Reader, such as reviewing
and commenting functions, digital signatures to electronically sign PDF
documents, embedding file attachments, enabling database and Web service
capabilities, and the ability to fill in form data, submit and save electronic
documents locally.
Information
Assurance
Adobe
LiveCycle Digital Signatures ES2—server-based software application that helps
organizations automate the processing of electronic documents by providing
batch-based capabilities to digitally sign and certify Adobe PDF documents,
validate digital signatures and encrypt/decrypt Adobe PDF documents; safeguards
information when it leaves a company’s network and integrates with existing
public key infrastructures.
Adobe
LiveCycle Rights Management ES2—server-based software application that helps
organizations manage information access securely with dynamic, persistent
document control; allows for access control and auditing of Adobe PDF, Microsoft
Word, Microsoft Excel, Microsoft PowerPoint, PTC Pro/ENGINEER, Dassault CATIA
and Lattice XVL CAD document usage inside or outside the firewall, online or
offline and across multiple document platforms; lets organizations know when a
document has been viewed, printed or altered and restricts access so that only
intended recipients can open, use and forward a document; allows for previously
granted document permissions and access to be revoked; leverages Adobe Acrobat
and Adobe Reader and other client plug-in software to author and view protected
documents.
Document
Output
Adobe
LiveCycle Output ES2—server-based solution which supports on-demand document
processes including the generation of documents such as correspondence,
confirmations, bids, or shipping labels; provides capabilities to merge XML data
from back-end systems with Adobe LiveCycle Designer ES templates to generate
documents in PDF, PDF/A, PostScript, PCL, or Zebra label formats; customers can
customize electronic document packages by combining newly generated PDF
documents with existing files from document repositories; customers can also
convert PDF documents to print or image file formats and then route them
automatically to support direct server-based printing or archiving
operations.
Adobe
LiveCycle PDF Generator ES2—server-based software which automates the creation,
assembly, distribution and archival of PDF documents in combination with
critical business processes; converts a wide range of native and standard file
formats, and can combine newly created PDF documents with existing files or
pages to assemble customized PDF packages; supports direct server-based PDF
printing or can convert PDF documents to a wide variety of formats, including
image formats and PDF/A.
Adobe
LiveCycle PDF Generator 3D ES2—server-based software which extends Adobe
LiveCycle PDF Generator ES with support for the conversion and integration of
complex 2D and 3D CAD design and engineering product data into a single PDF
document that can be shared using the Adobe Reader software without requiring a
CAD application or viewer.
Adobe
LiveCycle Production Print ES2—server-based solution that performs high-volume
jobs through efficient batch processes, generating documents such as statements,
invoices, contracts, or welcome kits; merges XML, ASCII or other data types from
back-end systems with Adobe LiveCycle Designer ES templates to generate
documents in a broad range of print or electronic formats to support high volume
production requirements; enables customers to print document packages by
collecting multiple jobs over time and then grouping them to minimize mailing
costs.
Process
Management
Adobe
LiveCycle Business Activity Monitoring ES2—software that allows administrators
and process participants to quickly identify bottlenecks, check progress and
view other process information related to business transactions; comes in two
versions: Adobe LiveCycle Business Activity Monitoring (“BAM”) ES
Standard, which allows for the monitoring of all LiveCycle processes with 16
out-of-the-box dashboards and, Adobe LiveCycle BAM ES Extended, which adds the
ability to extend Adobe LiveCycle BAM ES to other enterprise business systems so
that users can monitor business processes inside and outside the LiveCycle
environment.
Adobe
LiveCycle Process Management ES2—server-based process management application
that allows organizations to orchestrate people, systems, content and business
rules into streamlined, end-to-end processes that are accessible to process
participants through engaging user interfaces, online or offline; provides
out-of-box dashboards to help users gain insights into business operations in
real time and management tools to fix day-to-day operational problems and make
long-term process improvements.
Content
Services
Adobe
LiveCycle Content Services ES2—offers a library of services that can be used
with other LiveCycle solution components to create content-rich engagement
applications whereby end users can share and collaborate on content development
in content spaces as part of a company’s business processes; supports
check-in/check-out capabilities, keeps a complete audit history of all document
actions and provides a fully integrated set of content services ranging from an
enterprise content repository to social collaboration tools such as enterprise
forums; also includes team collaboration capabilities such as forums and
discussions, and provides Microsoft Office plug-ins that enable users to
interact with the process engine and content repository using Microsoft Word and
Microsoft Excel.
Adobe
LiveCycle ES Connectors for ECM—solutions which enable Adobe LiveCycle customers
to connect their LiveCycle applications with other industry-leading enterprise
content management systems, such as EMC Documentum, IBM FileNet and IBM Content
Manager.
Other
Knowledge Worker and Enterprise Related Products
Adobe
Central Pro Output Server—a server-based software application for document
generation that allows organizations to create personalized, customer-facing
documents from any data source—including legacy, line-of-business, ERP or CRM
applications; merges data with an electronic document template using a powerful
processing engine to dynamically generate electronic documents such as purchase
orders, invoices, statements and checks for delivery via Adobe PDF, the Web,
e-mail, fax or print; works with Adobe Output Designer which is a companion tool
used to create sophisticated document templates.
Adobe
LiveCycle Designer ES2—desktop software application which simplifies the
creation and maintenance of intelligent XML based forms for deployment as Adobe
PDF forms, HTML applications and Flash based RIAs; provides an intuitive,
graphical design tool for creating XML templates that look exactly as the author
intended and previewing them before deployment; it also simplifies adding
intelligence to documents, such as business and routing logic, and binding form
fields to arbitrary XML schemes for seamless integration with enterprise
applications.
Adobe
Output Designer—a design tool that allows users to create electronic document
templates for use with Adobe solutions for document generation; aids in the
creation of electronic documents that exactly replicate existing paper
documents.
Adobe
Output Pak for mySAP.com—a SAP-certified server-based software application for
document generation that enables organizations to optimize their investment in
their SAP solution by creating personalized, professional-looking,
customer-facing documents; provides an easy, fast and cost-effective way to
create and maintain documents for the SAP environment; integrates directly with
an SAP system to extract information which is merged with a document template
that defines the layout and formatting of the document; output can be in a
variety of formats, including Adobe PDF, print, fax, e-mail and the
Web.
Adobe
Reader—software for reliable reviewing and printing of Adobe PDF documents on a
variety of hardware and operating system platforms; when used with certain Adobe
PDF documents created with Adobe LiveCycle Reader Extensions Server, Adobe
Acrobat Pro or Adobe Acrobat Pro Extended, Adobe Reader also can be used to
enable collaborative workflows through the addition of collaboration features
built into the Adobe PDF file; these features include review and markup tools
that normally are not present in the standard Adobe Reader product.
Adobe Web
Output Pak—a server-based software application for document generation; creates
documents in PDF and HTML for presentation on the Web and in Wireless Markup
Language for presentation to a wireless device; allows users to personalize and
control the look of documents based on the data the documents
contain.
Omniture
Segment
Omniture
Market Opportunity
Our
Omniture Business segment provides Web analytics and online business
optimization products and services, which we deliver through our Omniture line
of products and our Omniture Online Marketing Suite. Customers use our Omniture
products and services to manage and enhance online, offline and multi-channel
business initiatives.
Customers
who use our Omniture solutions include marketing professionals such as marketing
managers, online marketing managers, search engine marketers, media managers,
media buyers, marketing research analysts and the chief marketing officer.
Customers also include Web content editors, Web analysts and Web production
managers. These customers often are involved in workflows which utilize other
Adobe products, such as our creative professional tools and our Adobe Flash
Platform client technologies.
We
believe there are several key market trends creating opportunities for our
Omniture business:
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Broad
commercial utilization of the Internet — The Internet has fundamentally
altered the way businesses and consumers purchase and consumer goods and
services. It has also redefined many business processes and has created
opportunities for new online businesses, as well as for existing offline
businesses seeking to capitalize on online initiatives. Because of this,
businesses are investing in innovative online initiatives to increase
sales, improve customer service, enhance brand awareness, decrease
time-to-market for their offerings, reduce fulfillment costs and increase
operational efficiency. We expect that the scope and scale of
commercial Internet usage will continue to increase. The roll-out of
broadband networks and mobile networks, particularly in emerging
geographic markets, will contribute to the growth of Internet usage.
Internet commerce should also continue to grow. Proliferation of online
marketing and customer response channels—such as mobile, online video, and
social networks—will continue to generate interactions that need to be
measured and analyzed across
channels.
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Need
to measure and automate online business — In order to make informed
decisions about priorities and investments in online marketing and other
commercial initiatives, we believe businesses require timely and accurate
measurement of customer behavior. The proliferation of Internet usage and
the fact that nearly every user interaction on a Website (or other digital
medium such as mobile phone applications, set-top boxes, kiosks, point of
sale systems or any IP connected device) can be captured by the owner of
the Website, or other digital medium, have resulted in the creation of an
unprecedented amount of data about how a business’ customers interact and
transact business with it. Businesses are increasingly realizing the
benefit of using information gained from online and other digital customer
interactions to improve functional areas, such as sales, customer service,
product development, marketing, pricing, manufacturing and inventory
management. The interactive and measurable nature of Internet activity
also enables businesses to determine how customers arrived at their online
destinations, such as Web and mobile sites, and to what extent the costs
they incur to increase site traffic are generating
sales.
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Opportunity
to optimize online business — Measuring online behavior and automating the
capture and analysis of data are important for making informed business
decisions. Businesses also need to leverage data to optimize the results
of their online business activities. For example, businesses have
historically measured the success of their online marketing programs by
simple click-through rates or conversion rates, the latter being the
percentage of click-through users who make a purchase or otherwise engage
in the desired customer action during the online session. However, the
effectiveness of online marketing can be optimized by analyzing and acting
on deeper information, such as repeat visits, transactions generated,
registrations, traffic pathways (various paths of online visitor traffic
flow), time spent and quality of interaction (engagement), eventual
conversion (desired customer action taken in subsequent visits) or success
over time (lifetime value of customer) as well as comparing the relative
effectiveness of different marketing channels (attribution). Business
success metrics can also vary based on the industry or vertical market –
for example, media companies optimize subscriptions and online advertising
revenue, whereas retailers and ecommerce companies focus on registrations
and online purchases. Online businesses utilize a large and
growing number of complex and diverse communication channels to market to
customers, including display advertising, paid and natural search
advertising, e-mail, social media marketing, affiliate marketing, blogs,
podcasts, video, RIAs and comparison shopping engines, as well as
traditional offline initiatives. The emergence of multi-channel marketing
initiatives, which combine traditional offline marketing initiatives such
as television, print, magazine, newspapers, radio and catalog with online
marketing initiatives, makes the measurement and analysis of online
behavior more challenging, but presents additional opportunities to
optimize results. For example, businesses want to measure and understand
the impact of their advertising initiatives across all these channels, not
only to determine how much credit should be given to a particular channel
and to understand cross-promotional effectiveness, but more importantly to
optimize search spending, make adjustments in the way channels are
utilized and align the amount of resources that are allocated to each of
them.
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For many
years, Adobe has provided creative tools and ubiquitous clients via the Adobe
Flash Platform to help customers create and deliver engaging content and
experiences. Given the market trends described above, we believe the
combination of our tools and clients with Omniture’s capabilities will help
customers to more efficiently and effectively measure, analyze and
optimize those experiences—creating a complete feedback loop. With
this broad platform, we believe
there is
a unique opportunity for Adobe to deliver an end-to-end workflow that will allow
customers to create, deliver, monetize, and optimize the impact and business
results of their content and assets.
Omniture
Business Summary
We
acquired Omniture on October 23, 2009. As one of the largest businesses in
the SaaS industry, our Omniture business segment processed over one trillion
transactions during the period of Adobe’s fourth quarter in a hosted environment
for approximately 5,000 customers around the world.
Like the
rest of our business segments, Omniture revenue was adversely affected during
2009 and growth rates slowed compared to those achieved in 2008. However,
in a trend that began before our acquisition of Omniture in October 2009, the
Omniture business appeared to stabilize during the fourth quarter with the
improvement in the general economy, as indicated by an increase in the
transaction volume on our network. In addition, our customer retention
rates began stabilizing and we experienced an increase in sales of additional
subscription services into our existing customer base.
Omniture’s
flagship product, SiteCatalyst, anchors our analytics business, and represented
56% of the Omniture revenue reported in the fourth quarter of fiscal 2009. This
compares to revenue of 62% in the comparable year-ago period, and reflects
success against our effort to provide additional types of services beyond
analytics which integrate into our Online Marketing Suite. These additional
services represented 32% of Omniture’s revenue in the fourth quarter of fiscal
2009, and compares to 27% in the comparable year-ago period. Our Omniture
professional services, including training and consulting services, comprised the
remaining 12% of Omniture’s revenue in the fourth quarter of fiscal
2009.
Omniture
Strategy
In the
coming year, we hope to build upon the momentum Omniture achieved over the past
several years by enabling our customers to capture, store and analyze
information generated by their Websites and other sources and to gain critical
business insights into the performance and efficiency of marketing and sales
initiatives and other business processes. We intend to help our customers
utilize this information to automate the targeting and delivery of content and
marketing offers on a Website, as well as the broader Internet, and test site
design and navigational elements to optimize the user experience and revenue
opportunities for our customers. We also intend to enhance our services by
providing customers with real-time access to online business information, the
ability to integrate that information with a broad set of other data sources,
and generate flexible reports using real-time and historical data and the
ability to measure, automate and optimize critical online
processes.
With the
acquisition of Omniture in fiscal 2009, we believe we can help customers create
a complete feedback loop of creation, delivery, analysis, and optimization
around their creative and enterprise workflows. We expect to add capabilities to
many of our content creation and developer tools to enable improved trackability
of content in such workflows.
We also
believe we can accelerate the growth of our Omniture business by expanding the
Omniture go-to-market strategy to include new geographies and vertical markets
where Adobe has a strong presence.
Omniture
Products
We offer
the Omniture Online Marketing Suite, our suite of products and services used to
manage and enhance online, offline and multi-channel business initiatives, which
we host and deliver to our customers on-demand and also provide as an on-premise
solution for some products. Our Online Marketing Suite consists of an open
business analytics platform and an integrated set of optimization applications
for visitor acquisition, conversion, online analytics and multi-channel
analytics. These components and services are accessed primarily by a
Web browser, and are built on a scalable and flexible computing architecture. As
such, these components and services reduce the need for our customers to make
upfront investments in technology, implementation services or additional IT
personnel, thereby increasing customers’ flexibility in allocating their IT
capital investments.
The
components of our Online Marketing Suite, are described in more detail below and
are organized by four main components of our offering: Visitor Acquisition,
Conversion, Online Analytics and Multi-channel Analytics.
Omniture
Visitor Acquisition
Omniture
SearchCenter—hosted software which simplifies search marketing by providing a
common interface to manage search campaigns across multiple search engines,
integrate campaign metrics with web analytics, and optimize across marketing
programs; enables search marketing to occur in the context of a broader
marketing plan such that users such as online marketers can improve brand
engagement and online conversions.
Omniture
Conversion
Omniture
Test&Target—hosted software which provides users such as marketers the
capabilities to make their online content and offers more relevant to their
customers, yielding the potential for greater customer conversion; provides an
intuitive interface for rapidly designing and executing tests, creating audience
segments and targeting content.
Omniture
Survey—hosted software which helps organizations design, create and implement
online surveys to measure audience sentiment.
Omniture
SiteSearch—hosted software which gives users such as marketers the ability to
control and optimize the search results on their sites; enables control over the
search experience with presentation and navigation features designed to help
guide visitors to the most relevant information; integrated with Omniture
SiteCatalyst, SiteSearch dynamically promotes the most successful products,
services and content to the top of search results using analytics-derived
metrics such as revenue, conversion rates and page views.
Omniture
Recommendations—hosted software which enables businesses to promote products and
content online; utilizes flexible data and behavioral driven algorithms,
allowing customers to increase conversions on their Websites by ensuring
relevant choices are automatically presented to customers, either on Websites or
through email campaigns.
Omniture
Merchandising—hosted software which enables retailers to implement online
merchandising strategies that optimize marketing effectiveness through increased
conversions and average order value; helps retailers grow their online business
by improving shoppers’ ability to find and select products, as well as promoting
products based on business goals and metrics.
Omniture
Publish—an on-demand Web content management solution that enables business users
to easily create, manage and update Web content without the need of IT or Web
developers; enables content owners to easily publish and maintain content on
their Websites.
Omniture
Online Analytics
Omniture
SiteCatalyst—hosted software which provides customers and users such as
marketers the ability to capture, store and analyze information generated by
their Websites and other sources and to gain real-time business insights into
the performance and efficiency of marketing and sales initiatives and other
business processes; built on a scalable and flexible computing
architecture.
Omniture
Discover—hosted software which provides users such as Web analysts and online
marketers with real-time visitor information and insight; enables businesses to
understand a comprehensive, multi-dimensional view of their customers through
accurate and timely information such that they can make informed decisions to
improve the performance of their business.
Omniture
Multi-Channel Analytics
Omniture
Insight—on-premise software which enables organizations to quickly analyze large
volumes of rapidly evolving data in real-time; provides users with visualization
capabilities to assist them with making quick business decisions that can
improve overall business performance; accepts data from any source, including
data warehouses and business intelligence tools.
Omniture
Insight for Retail—on-premise software which provides organizations with rapid
customer insights using real-time analysis of large volumes of continuously
changing point-of-sale, kiosk and inventory data; helps users correlate data to
online interactions for a deeper understanding of customer responses across
multiple channels.
Omniture
Open Business Analytics Platform
Omniture
DataWarehouse—contains the information captured by Omniture SiteCatalyst, our
core Omniture product offering, and other Omniture applications.
Omniture
Genesis—contains application programming interfaces to integrate and augment
analytics data with relevant data from Internet and enterprise applications and
data from a growing number of online and offline channels to enable business
optimization.
Platform
Segment
Central
to our long-term strategy is our Adobe Flash Platform which enables the
development and delivery of applications, content and video which dramatically
improve how businesses engage with their customers and constituents. The Adobe
Flash Platform includes client technologies such as Adobe Flash Player, Adobe
Flash Lite and Adobe AIR. It also includes developer tools and
technologies such as Adobe Flash Professional, Adobe Flash Builder (formerly
Flex Builder), Adobe Flash Catalyst, Adobe Flash Platform Services and Adobe
Flex. In addition, server technologies such as Adobe FMS and Adobe
LiveCycle Data Services round out our Flash Platform offerings. Of
these products and services, Flash Professional, FMS and LiveCycle Data services
are managed and delivered in other Adobe business units, yet they remain core
components of our Flash Platform.
Platform
Market Opportunity, Business Summary and Strategy
Our
Platform Business Unit focuses on the development, marketing and licensing of
our Adobe Flash Platform technologies. We have achieved penetration
of Adobe Flash Player on more than 98% of Web-connected PCs – making it the most
widely distributed rich client software in the world. In addition, Adobe Flash
Lite, which is licensed by mobile handset and consumer electronic device
manufacturers, has been distributed on more than 1.2 billion devices as of the
Fall of 2009.
The broad
reach and rapid adoption of the newest versions of these Adobe Flash Platform
technologies allows us to rapidly innovate with our desktop and enterprise
server software which utilize these technologies – enabling our customers to
deliver new and more engaging experiences to their constituents that leverage
the latest advancements in operating systems, hardware and rich media
technologies.
Our most
recent major release of Adobe Flash Player for personal computers, version 10,
was delivered in the fall of 2008. Within ten months of availability, more than
93% of Web-connected PCs in mature markets had this latest version installed,
the fastest adoption ever for a new version of our Flash
Player. Building upon the success of Flash Player 10, we released a
beta version of Flash Player 10.1 in November of 2009. In concert
with the availability of new versions of our Flash server products, the newest
Flash Player adds improved video capabilities such as HTTP streaming, content
protection, peer-to-peer support, and enhanced digital video recorder
capabilities such as pause, instant replay, and slow motion.
Due to
the success and frequent electronic downloads of client technologies such as
Flash Player, we generate revenue through OEM relationships with companies such
as Google, where we include their technologies as part of the download offerings
of our client technologies. In fiscal 2009, this download revenue grew by more
than 40% when compared to fiscal 2008, and represented a significant part of the
overall revenue we reported in our Platform segment.
As
hundreds of millions of people around the world adopt Internet-connected
hand-held phones and devices as a means to communicate, collaborate and
entertain, as well as consumer electronic devices such as digital cameras, game
consoles, music players and electronic educational toys, we believe a
significant opportunity exists to offer our Adobe Flash Platform technologies
for these devices to provide for the creation and delivery of rich content, user
interfaces and data services which allow users to engage with information more
easily and effectively. This trend equally applies to categories such
as Netbooks and Internet-connected televisions, and the explosion in adoption of
such devices is creating a challenge for content owners and application
developers to deliver consistent experiences across multiple devices, operating
systems, Web browsers and screen sizes.
To
address this opportunity, we participate in the Open Screen Project (“OSP”),
which enables designer and developers to seamlessly publish content and
applications across connected devices that utilize Adobe Flash and AIR as a
technology foundation. Initially started in May 2008 with approximately twenty
other participating companies, momentum for OSP grew significantly in fiscal
2009 as the number of member companies supporting OSP grew to approximately
fifty by October of 2009. Newest OSP members include Google, RIM and
Palm, who join many other hardware manufacturers, mobile and television
technology providers and media companies.
Essential
to the momentum of OSP was our decision to eliminate licensing fees with our
Flash client technology, as well as progress towards our goal of delivering the
full Flash Player that currently runs on PCs to the smartphone platform. The
removal of Flash licensing fees due to OSP resulted in an expected decline in
Flash Lite mobile client revenue, with revenue in fiscal 2009 decreasing by more
than fifty percent when compared to revenue achieved in fiscal
2008.
To
address the opportunity of explosive growth in smartphone adoption, we made
significant technological progress during the year with the conversion of Flash
Player to run on non-PC devices. New Flash Player improvements include improved
graphics acceleration, audio/video decoding, battery
optimization, improved rendering speed and reduced
memory
consumption. In
addition, new features include developer support for multi-touch and gesture
user interfaces, accelerometer support and screen orientation adjustments, and
mobile text input mechanisms. Based on this progress, in October of 2009 we
demonstrated initial versions of the new Flash Player running on smartphones
systems using operating systems such as Google Android and Windows
Mobile. We expect to deliver beta versions of this software to
handset manufacturers using these operating systems as well as Palm WebOS, Nokia
S60 and RIM. We further expect handset manufacturers using these
platforms to begin shipping phones with Flash Player 10.1 installed on them
starting in the first half of 2010.
With the
delivery of Flash Player 10.1 in fiscal 2010 to OSP members, we believe nineteen
of the top twenty handset manufacturers have now committed to utilizing Adobe
Flash technologies for Web browsing, application creation and the delivery of
rich, consistent Internet experiences on their devices. Over time, we expect
this broad community to adopt Flash Player 10.1, increasing the need for Adobe’s
designer and developer tools used to create content and applications, as well as
broadening our Omniture and LiveCycle opportunities as Web and IT developers
extend the reach of their solutions to include mobile handsets as enterprise
clients.
Another
major focus of our Platform business unit is to broaden the reach and
capabilities of the Adobe Flash Platform through the delivery of our newest
cross-platform client named Adobe AIR. Based on Flash, PDF and HTML
technologies, Adobe AIR enables the creation and delivery of Web-enabled desktop
applications that run outside of a Web browser. Adobe AIR-based
applications extend today’s Web browser-based applications to have the power and
utility of desktop applications with capabilities such as access to the local
file system, alerts and notifications, and the ability to work offline and then
synchronize data when the application has online access
again. Developers of Adobe AIR applications are able to create
persistent, branded desktop experiences which can be developed using standard
Web technologies such as HTML, Ajax, Flash and PDF, as well as common audio and
video formats.
Adoption
of Adobe AIR has been substantial since first being made available in fiscal
2008. As of October 2009, there were more than 250 million AIR downloads, along
with more than one million downloads of the AIR developer tools used to create
these applications. Companies such as eBay, DirecTV, The NASDAQ Stock Market,
FOX News, Salesforce.com, The New York Times, AOL, Atlantic Records and the BBC
have already deployed commercial applications based on Adobe AIR.
As the
adoption of our Flash Platform grows, our Platform team also focuses on the
development and delivery of our developer solutions such as Flash Builder and
Flash Catalyst to leverage the latest innovations adopted by Flash Player users.
These solutions ensure reliable, secure and rich application experiences across
the broadest range of browsers, operating systems and devices. In fiscal 2010,
we expect to deliver new versions of Flash Builder and Flash Catalyst as
standalone products, as well as part of our Creative Suite family of products to
address the needs of designers and developers creating content and applications
for both PC and non-PC environments.
We also
anticipate that growth in sales of Internet-connected televisions from vendors
like Samsung and Vizio will continue to increase. Participation by these
partners and potentially others will extend our opportunity for Flash Player
distribution from mobile devices to Internet-connected consumer electronic
devices in the digital home. We expect this in turn will increase the need for
designer and developer solutions – ranging from our Creative Suite family of
products to previously mentioned developer tools and technologies which make up
the Adobe Flash Platform.
Our
ColdFusion product line also provides fast and easy ways to build and deploy
powerful Internet applications. Developers can extend or integrate ColdFusion
with Java or .NET applications, connect to enterprise data and applications,
create and interact via Web services, or interface with SMS on mobile devices or
instant messaging clients. ColdFusion can also be used for business reporting,
rich-forms generation, printable document generation, full-text search and
graphing and charting—enabling customers to more fully engage their constituents
with better Web experiences. Although our ColdFusion business was
affected by the economy in fiscal 2009, we continued to innovate and provide
ColdFusion developers with enhanced capabilities to support their evolving
needs.
Platform
Products
Adobe
AIR—desktop client software which allows developers to use existing Web
development skills (e.g. HTML, Ajax, Flash and Flex) to build and deploy RIAs on
the desktop and on non-PC devices.
Adobe
ColdFusion—provides a server-scripting environment and a set of features used by
organizations for building database-driven scalable applications that are
accessible through Web browsers, Adobe Flash Player and Adobe AIR; built on an
open Java technology architecture and can be deployed on third-party Java
application servers that support the J2EE specification.
Adobe
ColdFusion Builder—new development tool for building ColdFusion applications;
provides a unified, customizable and extensible development environment to code
applications, manage servers and deploy projects.
Adobe
ColdFusion in the Cloud—new hosted service available in beta release; enables
developers to build ColdFusion applications through the Amazon Web Services
environment with access to the capabilities of ColdFusion as a hosted
service.
Adobe
Flash Catalyst—an interaction design tool for prototyping RIAs and enabling
design and development workflows throughout the application development
cycle.
Adobe
Flash Lite—client software used in a wide range of non-PC devices including
mobile phones and consumer electronic devices; provides a subset of Adobe Flash
Player functionality for viewing and interacting with content designed for
mobile handsets, televisions and other types of devices.
Adobe
Flash Builder—an Eclipse-based IDE for developing RIAs with the Adobe Flex
framework for either Adobe Flash Player or Adobe AIR; developers utilize Flash
Builder to quickly build and deploy applications that are expressive, intuitive
and rich in interactivity.
Adobe
Flash Player—the most widely distributed rich client software on PCs and
consumer electronic devices, Adobe Flash Player provides a runtime environment
for text, graphics, animations, sound, video, application forms and two-way
communications.
Adobe
Flash Platform Services—new developer services that enable advertisers and
content publishers to promote, measure and monetize applications across social
networks, desktops and mobile devices.
Adobe
Flex—a free, open source framework, compiler and debugger for developing RIAs
targeting the Adobe Flash Platform; developers use Flex to compile and debug
MXML and ActionScript files into the SWF format that executes in Adobe Flash
Player and Adobe AIR.
Print
and Publishing Segment
Our Print
and Publishing business segment contains several of our products and services
which address market opportunities ranging from the diverse publishing needs of
technical and business publishing to our legacy type and OEM printing
businesses. These opportunities and the products we offer to address
them, are reviewed below in the following OEM PostScript and Print and
Publishing categories.
OEM
PostScript Opportunity and Strategy
Graphics
professionals and professional publishers require quality, reliability and
efficiency in production printing, and we believe our printing technology
provides advanced functionality to meet the sophisticated requirements of
this marketplace. As high-end printing systems evolve and transition to fully
digital, composite workflows, we believe we are uniquely positioned to be a
supplier of software and technology based on the Adobe PostScript and Adobe PDF
standards for use by this industry. We generate revenue by licensing our
technology to OEMs that manufacture workflow software, printers and other output
devices.
In fiscal
2009, we maintained our OEM PostScript revenue through continued innovation with
PostScript technologies. In 2010, we plan to continue to enhance
PostScript as well as utilize PDF enhancements to maintain these formats as
standards in publishing and printing work flows.
OEM
PostScript Products
Adobe
PostScript—a printing and imaging page description language that delivers high
quality output, cross-platform compatibility and top performance for
graphically-rich printing output from corporate desktop printers to high-end
publishing printers; gives users the power to create and print visually rich
documents with total precision; licensed to printing equipment and workflow
software manufacturers for integration into their printing
products.
Adobe PDF
Print Engine—a new, next-generation printing platform that enables complete,
end-to-end PDF-based workflows using common PDF technology to generate, preview
and print PDF documents; allows PDF documents to be rendered natively throughout
a workflow, providing performance benefits which include eliminating the need to
flatten transparent artwork.
Print
and Publishing Market Opportunity and Strategy
In
addition to the market opportunities and our businesses discussed previously, we
offer a variety of products and solutions which address many different and
unique publishing market needs. Our Print and Publishing Business Unit focuses
on these solutions which address the diverse customer needs in markets such as
technical document publishing and communication, business document publishing,
CD-ROM publishing, eLearning solutions, on-line help systems and
typography.
In fiscal
2009, we released version 11.5 of our Adobe Director software targeted at game
developers, multimedia authors, and e-learning professionals. The updated
release includes new features for creating immersive gaming and multimedia
applications, support for a new audio engine, HD video and advanced 3-D
features.
In fiscal
2010, we will continue to support these offerings to meet the diverse needs of
each product’s user base. In addition, we believe there to be an
opportunity to enhance some of our offerings, particularly in the technical
communication and eLearning markets, through a comprehensive offering of several
of our products to provide a complete end-to-end solution.
Print
and Publishing Products
Adobe
Authorware—a legacy rich media authoring tool used to develop caption based
eLearning on Windows and Macintosh based platforms; use of the product ranges
from creating Web-based tutorials to simulations incorporating audio and video;
applications developed with Adobe Authorware can be delivered on the Web, over
corporate networks or on CD-ROM.
Adobe
Captivate—enables users to rapidly create professional and engaging eLearning
content – including software simulation, quizzes, animation and
multi-media—and deliver the content in Adobe Flash and other formats; the
content can be created without any programming or multi-media skills and can be
published to CD/DVDs and Learning Management Systems used in training, sales,
marketing and customer support applications; often used in
combination with Acrobat Connect, Adobe Captivate provides a robust technology
solution to bring understanding and retention to end users of rapid training and
eLearning solutions.
Adobe
Contribute—an easy-to-use tool to update and publish Web content, designed for
non-technical business users who need to make minor changes to intranet and
Internet Websites that conform to the structure, style, layout and site
standards setup by a Website administrator; streamlines the Web content
maintenance process and provides Website administrators with a set of simple
content management functionality to manage and administer Websites; also
provides bloggers with a simple tool to create and update their
blogs.
Adobe
Director—a tool for creating professional multimedia content that combines
images, text, audio and video into presentations, interactive experiences and
prototypes; for Websites, it provides users with the ability to deliver
multimedia content that supports three dimensional content and animations for
use in various markets, including education, games and commerce; also enables
the creation of fixed-media content for CD titles and DVD titles in the
entertainment, education and corporate training markets.
Adobe
Font Folio OpenType Edition—contains more than 2,200 typefaces from the Adobe
Type Library in OpenType format, offering a complete type solution for print,
the Web, digital video or electronic documents.
Adobe
FrameMaker—an application for authoring and publishing long, structured,
content-rich documents including books, documentation, technical manuals
and reports; provides users a way to publish their content to multiple output
formats, including print, Adobe PDF, HTML, XML and Microsoft Word.
Adobe
JRun—a legacy application server solution based on the J2EE specification;
integrates with our development tool offerings and is used to deploy
applications for functions such as online banking and customer
service.
Adobe
PageMaker—software used to create high-quality documents simply and reliably
with robust page layout tools, templates and stock art.
Adobe
RoboHelp—an easy-to-use authoring tool used by developers and technical writers
to create professional help systems and documentation for desktop and Web-based
applications; utilizes support for HTML, PDF import/export, team authoring
capabilities, as well as JavaHelp.
Adobe
Shockwave Player—a rich media player used for deploying multimedia content for
use in Internet solutions including education, training, games and
commerce.
Adobe
Technical Communication Suite—includes Adobe Acrobat Pro Extended, Adobe
Captivate, Adobe FrameMaker and Adobe RoboHelp technologies; helps customers
improve their workflows, especially technical communicators who want a single
solution to meet their content creation and publishing needs.
Adobe
Type Library—includes Adobe’s best-selling typefaces, plus Adobe Type Manager;
makes it easy to create beautiful text for print, Web and video
projects.
Adobe
Type Classics for Learning—a low-cost, introductory font library designed for
students and educators.
Adobe
Type Manager—provides powerful, easy management of all PostScript Type 1,
OpenType and TrueType fonts.
Adobe
Type Sets—various collection packages of Adobe’s best-selling typefaces; makes
it easy to create beautiful text for print, Web and video projects.
FreeHand
MX—a professional vector graphics tool designers and illustrators use to create
high quality images that can be scaled; supports developing images for print,
the Web and Adobe Flash Player.
See
Note 20 of our Notes to Consolidated Financial Statements for further
information regarding our industry segments and geographic information. See risk
factor “We are subject to risks associated with global operations that may harm
our business” in Item 1A of this report for a discussion of risks related to our
foreign operations.
COMPETITION
The
markets for our products are characterized by intense competition, evolving
industry standards and business models, disruptive software and hardware
technology developments, frequent new product introductions, short product life
cycles, price cutting with resulting downward pressure on gross margins and
price sensitivity on the part of consumers. Our future success will depend on
our ability to enhance our existing products, introduce new products on a timely
and cost-effective basis, meet changing customer needs, extend our core
technology into new applications and anticipate and respond to emerging
standards, business models, software delivery methods and other technological
changes.
Creative
Solutions
In our
Creative Solutions segment, we offer the Adobe Creative Suite in multiple
editions which consist of combinations of several of our
technologies. In addition to offering the technologies within the
Creative Suite editions, we also offer them as individual software applications.
These products compete with those from many companies, including Apple, Corel,
Avid, Quark, Microsoft and others, as well as from various open source
initiatives.
With
respect to Microsoft, their Expression Studio competes with our Adobe Creative
Suite family of products as well as individual Creative Solutions segment
products. Expression Studio includes Microsoft Expression Design which competes
with our Adobe Illustrator, Adobe Photoshop, Adobe Photoshop Lightroom and Adobe
Fireworks products; Microsoft Expression Blend which competes with our Adobe
Flash Professional product; Microsoft Expression Web which competes with our
Adobe Dreamweaver product; and Microsoft Expression Media which provides digital
asset management, basic image editing and video encoding/compression
capabilities and competes with some aspects of our video and hobbyist-focused
products. To compete with Adobe Flash, Microsoft markets its Silverlight product
and technology which provides capabilities for the creation of media experiences
and interactive applications for the Web that incorporate video, animation,
interactivity and user interfaces.
We
believe our Adobe Creative Suite family of products competes favorably on
the basis of features and functionality, ease of use, product reliability, price
and performance characteristics. The individual technologies within the Creative
Suite editions also work well together, providing broader functionality and
shortened product training time for the individual who uses multiple
applications to complete a project.
We also
believe our individual Creative products compete favorably against those offered
by our competitors, as discussed below.
Drawing
and illustration products are characterized by feature-rich competition, brand
awareness and price sensitivity. In addition to competition with Microsoft’s
Expression Design product, our Adobe Illustrator product faces competition from
companies such as ACDsee, Corel, Mediascape, Xara and the open source product
called Karbon14. We believe our products compete favorably due to high customer
awareness of their rich features, especially the drawing and illustration
functionalities, the technical capabilities of the product and our ability to
leverage core technologies from our other established products.
The
demand for Web page layout and Web content creation tools is constantly evolving
and highly volatile. In addition to competition with Microsoft’s Expression
Blend and Web products, we believe Adobe Dreamweaver and Adobe Flash
Professional face direct and indirect competition from desktop software
companies such as Bare Bones Software and various proprietary and open source
Web authoring tools. We also face competition from Ajax and Microsoft Visual
Studio products, and other integrated development environments that enable
developers to create Web applications from companies such as BEA Systems (a
subsidiary of Oracle), Borland and IBM. We believe our products compare
favorably to these applications; however, our market share may be constrained by
Microsoft’s ability to target its Web software to users in markets it dominates.
These target customers include users of Microsoft Office, Microsoft Windows
operating system, the Microsoft Internet Explorer Web browser and Microsoft
Visual Studio.
The needs
of digital imaging and video editing software users are constantly evolving due
to rapid technology and hardware advancements in digital cameras, digital video
cameras, printers, personal computers, cellular phones and other new devices.
Our software offerings, including Adobe Photoshop, Adobe Photoshop Extended,
Adobe Photoshop Elements, Adobe Photoshop Lightroom, Adobe After Effects, Adobe
Audition, Adobe Soundbooth, Adobe Encore, Adobe Premiere Elements and Adobe
Premiere Pro, face competition from companies offering similar products. We also
continue to face competition from new emerging products, including online based
services which compete directly with our Photoshop.com offering, as well as any
new competitive products coming from the open source movement.
Our other
digital imaging and video editing offerings, including Adobe Photoshop Elements
and Adobe Premiere Elements, are subject to intense competition, including
customer price sensitivity, competitor brand awareness and competitor strength
in OEM bundling and retail distribution. We face direct and indirect competition
from a number of companies that market software which competes with ours,
including ACD Systems, AI Soft (Japan), Apple, ArcSoft, Corel, i4 (Japan),
Google, Kodak, Nova Development, Magix, Microsoft, Phase One, Photodex
Corporation, Sonic, Pinnacle, Sony and Yahoo. In addition, we face competition
from device, hardware and camera manufacturers such as Apple, Canon, Dell,
Hewlett-Packard, Nikon, Sony and others as they try to differentiate their
offerings by bundling, for free, their own digital imaging software, or those of
our competitors. Similarly, we face potential competition from operating system
manufacturers such as Apple and Microsoft as they integrate hobbyist-level
digital imaging and image management features into their operating systems.
Finally, we face potential competition from open source products, including Gimp
for Linux.
We
believe we compete favorably against other digital imaging, digital video and
consumer-focused image management software applications with our Adobe Photoshop
Elements and Adobe Premiere Elements products due to strong consumer awareness
of our brand in digital imaging and digital video, our relationships with
significant OEMs, positive recommendations for our products by market
influencers, our increased focus on the retail software channel and strong
feature sets.
In
professional digital imaging, software applications compete based on product
features, brand awareness and price sensitivity. In addition to competition with
Apple’s Aperture product and Microsoft’s Expression Design product, our Adobe
Photoshop and Adobe Photoshop Lightroom products face direct and indirect
competition from a number of companies including Corel. Our Adobe Photoshop
products compete favorably due to high customer awareness of the Photoshop brand
in digital imaging, the positive recommendations for our Photoshop product by
market influencers, the features and technical capabilities of the product and
our ability to leverage core features from our other established
products.
Our Adobe
InDesign product, used for professional page layout, faces significant
competition. The main competitor, Quark, has a competitive product, Quark
XPress, which has maintained a historically strong market share in the
professional page layout market. Quark also benefits from an established
industry infrastructure that has been built around the use of their XPress
product in print shops and service bureaus, and through the development of
third-party plug-in products. Barriers to the adoption of Adobe InDesign by
Quark XPress customers include this infrastructure, as well as the cost of
conversion, training and software/hardware procurement required to switch to
InDesign. We have seen an increase in the adoption of InDesign software and
we believe we will continue to see market share gains going forward due to a
product offering that contains new innovative features, improved integration
with our other products, our strong brand among users, positive reviews by
industry experts, adoption of InDesign by major accounts which are influencers
in their industries and improved infrastructure support by the industry for our
overall solution.
Applications
for digital video editing, motion graphics, special effects, audio creation and
DVD authoring face increasing competition as video professionals and hobbyists
migrate away from analog video and audio tools towards the use of digital
camcorders and digital video production on their computers and DVD systems for
rich media playback. Our Adobe After Effects, Adobe Audition, Adobe
Encore, Adobe Premiere Pro and Adobe Soundbooth software products, as
well as the
Adobe
Production Studio which contains these products, face competition from companies
such as Apple, Avid, Canopus, Sonic and Sony. Our Adobe Premiere Elements
software product which is targeted for use by hobbyists, faces competition from
companies such as Aist, Apple, ArcSoft, Avid, Broderbund, Corel, Cyberlink,
Magix, Microsoft, Muvee and Sony – as well as video editing capabilities found
in operating systems and other video editing solutions bundled by video
camcorder manufacturers with their hardware offerings.
Adobe
After Effects is a leader in professional compositing and visual effects due to
its strong feature set and its integration with our other products that helps
create a broad video editing platform for our customers. In professional digital
video editing, we are an industry leader with Adobe Premiere Pro and compete
favorably due to our strong feature set, our OEM relationships and the
integration with our other products to create a broad digital video publishing
platform for our customers.
Business
Productivity Solutions
With our
Adobe Acrobat business, we continue to face competition from Microsoft. Their
Windows operating system includes a proprietary digital rights management
technology and a document format, called XML Paper Specification (“XPS”), which
competes with Adobe PDF. In addition, Microsoft’s widely used Office product
offers a feature to save Microsoft Office documents as PDF documents. This PDF
feature in Office competes with Adobe Acrobat. Given Microsoft’s
market dominance, XPS, the PDF feature in Office and any other competitive
Microsoft product or technology that is bundled as part of its Office product or
operating system or made freely available, could harm our overall Adobe Acrobat
market opportunity.
Our Adobe
Acrobat product family also faces competition in the PDF file creation market
from many clone products marketed by companies such as AdLib, Active PDF, Apple,
Global Graphics, Nuance, Software995, Sourcenext and others. In addition, other
PDF creation solutions can be found at a low cost, or for free, on the
Web.
For
customers that use Adobe Acrobat as part of document collaboration and document
process management solutions, where electronic document delivery, exchange,
collaboration, security and archival needs exist, our Acrobat product family
faces competition from entrenched office applications such as Microsoft
Office and its integration with their SharePoint product. In the higher end of
the electronic document market, Acrobat Pro and Acrobat Pro Extended provide
features which compete with other creative professional PDF tool providers, such
as Enfocus, Dalim and Zinio. In addition, we are targeting the architecture,
engineering and construction electronic document collaboration market with our
Acrobat Pro Extended product.
To
address the threats from Microsoft and others, we are working to ensure our
Adobe Acrobat applications stay at the forefront of innovation in emerging
opportunities such as PDF document generation, document collaboration and
document process management.
Our Web
conferencing solution, Adobe Acrobat Connect Pro, faces competition from many
Web conferencing vendors, including Cisco WebEx, Microsoft Office Live Meeting,
IBM Lotus Sametime and Citrix GoToMeeting. Cisco WebEx is a market share leader
and Microsoft has steadily increased its marketing of Microsoft Office Live
Meeting. To address these and other smaller competitors in the Web conferencing
space, we focus on providing a differentiated and enhanced user experience
through our Adobe Flash Player.
The
markets we address with our Adobe LiveCycle Enterprise Suite are influenced by
evolving industry standards, rapid software and hardware technology
developments, and new product introductions from competitors such as Microsoft
and IBM.
Microsoft
has already brought to market new products and technologies to address many of
the emerging market needs we focus on with our Adobe LiveCycle family of
products. Microsoft continues to offer its eForms solution called InfoPath in
certain versions of Microsoft Office and has added Office Forms Services which
extends their forms to users as MS Outlook e-mail messages or to Web browsers
rather than the InfoPath client. They also continue to offer their
Windows Rights Management Services in their Windows Server product which is
designed to allow corporate networks to manage and enforce restrictions built
into documents.
As
discussed previously, Microsoft markets Windows and Office which include a
document format called XPS which competes with Adobe PDF. Certain Windows
operating systems also contains a proprietary digital rights management
technology which competes with Adobe LiveCycle Rights Management ES. In
addition, Microsoft’s most recent version of Office includes an updated version
of its SharePoint product which competes with certain aspects of our Adobe
LiveCycle products. Microsoft has also recently delivered technology called
Windows Presentation Foundation and Silverlight which offers an alternative to
building RIA applications within the Microsoft .NET framework.
In the
electronic forms solution market, in addition to competition from Microsoft
Infopath based solutions, we face competition from IBM through their eForms
solution recently rebranded as Lotus Workplace Forms. Similarly, we face
competition for document process management solutions from workflow solution
vendors such as PegaSystems, Lombardi, Nuance and Ultimus.
We
believe that our Adobe LiveCycle server product family competes favorably
against these companies and formats in terms of the combined benefits of
superior functionality, cross-platform visual page fidelity/reliability,
multi-platform capability, file compression, printing and security of documents
expressed using Adobe PDF. We also believe that Adobe PDF and its integration
with XML, combined with the broad distribution of Adobe Reader on all leading
hardware platforms, provide a universal multi-platform solution that is more
compelling than our competitors’ offerings.
Omniture
In our
Omniture segment, we compete primarily with Web analytics and business
optimization vendors whose software is provided on demand to customers,
generally through a Web browser. We also compete to a limited extent with
vendors whose software is installed by customers directly on their servers. In
addition, we compete at times with our customers’ or potential customers’
internally developed applications.
Our
current principal competitors include companies such as Coremetrics, Google,
Microsoft, Nedstat, Yahoo! and WebTrends that offer on-demand
services. We also compete with software vendors, such as Infor (which
owns Epiphany), Nielsen/NetRatings, a part of the Nielsen Online Unit of the
Nielsen Company, Unica Corporation (which acquired Sane Solutions) and SAS
Institute. In addition, we also compete with online marketing service
providers, such as Microsoft Advertising (formerly aQuantive when acquired by
Microsoft), DoubleClick (owned by Google) and 24/7 Real Media (acquired by
WPP).
Our
Omniture Test&Target products also compete with multivariate testing
providers, such as Optimost (owned by Autonomy), Memetrics (acquired by
Accenture), Kefta (acquired by Acxiom Digital) and [x + 1]. Our
Omniture SiteSearch products compete with intra-site search vendors, such as
Autonomy, Endeca Technologies, FAST Search and Transfer ASA (acquired by
Microsoft) and Google. Our Omniture Merchandising product competes
with merchandising solutions providers such as Endeca (ThanxMedia), Celebros,
SLI Systems, Nextopia Software and Fredhopper. Our Omniture InSight
products compete with channel analytics providers, such as Truviso, Clickfox,
Qliktech and AsterData. Our Omniture Recommendations product competes
with product recommendations providers, such as Aggregate Knowledge, Baynote,
Certona, Rich Relevance and Amadesa. Finally, our Omniture Survey
product competes with survey providers such as OpinionLab, iPerceptions and
Foresee Results.
Many of
the companies that offer Web analytics software offer other products or services
and as a result could also bundle their products or services, which may result
in these companies effectively selling their products or services at or below
market prices.
In
addition, large software, Internet and database management companies may enter
the market or enhance their Web analytics capabilities, either by developing
competing services or by acquiring existing competitors or strategic partners of
ours, and compete against us effectively as a result of their significant
resources and preexisting relationships with our current and potential
customers. For example, Google offers a Web analytics service free of charge,
and acquired DoubleClick, one of our strategic partners, in 2008. Also,
Microsoft offers a Web analytics service free of charge, and offers Microsoft
Advertising, which is based on their 2007 acquisition of aQuantive. In addition,
Yahoo! also offers a Web analytics service based on its acquisition of
IndexTools.
We
believe competitive factors in our markets include the proven performance,
security, scalability, flexibility and reliability of services; the strategic
relationships and integration with third-party applications; the intuitiveness
and visual appeal of services’ user interfaces; the low total cost of ownership
and demonstrable cost-effective benefits to customers; the ability of services
to provide N-dimensional segmentation of
information; pricing; the flexibility and adaptability of
services
to match
changing business demands; enterprise-level customer service and training;
perceived market leadership; the usability of services, including services being
easy to learn and remember, efficient and visually compelling; the real-time
availability of data and reporting; independence from portals and search
engines; the ability to deploy the services globally and to provide
multi-currency, multi-language and multi-character support and to have a local
presence in international markets; and success in educating customers in how to
utilize services effectively.
We
believe that we compete favorably with our competitors on the basis of these
factors. However, if we are not able to compete successfully against our current
and future competitors, it will be difficult to acquire and retain customers,
and we may experience revenue declines, reduced operating margins, loss of
market share and diminished value in our services.
Platform
Our Adobe
Flash Platform technologies, including Adobe Flash Player and Adobe AIR, face
competition from Microsoft Silverlight, as well as alternative approaches to
building RIAs – including Google Gears and JavaFX. Our Adobe
ColdFusion product family and our Adobe Flash Builder developer tool products
face competition from major vendors including Microsoft, IBM, BEA (a subsidiary
of Oracle) and Sun. Our ColdFusion products also compete with several
technologies available today at no cost including the PHP and PERL programming
environments that are available for the Apache Web server.
Beyond
the competitive threats from Microsoft previously discussed, vendors such as
Tibco, JackBe, Backbase and NexaWeb offer potentially competitive solutions in
the RIA market that we target with our open source Adobe Flex
solution. We also believe RIAs will make use of both open source Ajax
frameworks and the open source Flex framework to create hybrid RIAs in the
browser, and we anticipate increased adoption of AIR as a development platform
for Ajax developers. With our FMS solution, we face competition from Microsoft
with their Windows Media Server for Windows Media and Silverlight, as well as
Move Networks, Real Networks, Apple and others.
Version 5
of the Web markup language HTML (“HTML5”) is being developed by an industry
consortium that includes Adobe and leading browser manufacturers such as Apple,
Google and Microsoft. HTML5 will contain new features which will
compete with some of the features of Flash Player, such as the ability to play
video natively within the browser. We will work to implement support
for HTML5 in our Web authoring solutions. Yet, we believe the
competing interests of the browser developers, and the potential for
inconsistency in how each major browser implements HTML5 will create a
continuing demand for solutions such as Flash that provide a consistent
presentation capability that works across browsers, operating systems and
devices.
Our
mobile and device solutions are influenced by evolving industry standards, rapid
software and hardware technology developments and frequent new product and
technology introductions by companies or open-source initiatives targeting
similar opportunities. Technologies and products which compete with our Adobe
Flash Platform clients and solutions include Java, Brew, Scalable Vector
Graphics, Wireless Application Protocol, Apple Mac OS utilized on the Apple
iPhone, Microsoft Windows Mobile, as well as solutions from the open source
movement, vendors supplying clone versions of these products and technologies
and vendors which choose to exclude the use of our solutions and technologies on
their devices. With respect to the Apple iPhone, although our desire
is to work closely with Apple to deliver Adobe Flash Platform technologies on
their device similar to our approach with other mobile vendors, we are
prohibited from making advancements towards this goal until we have Apple’s
cooperation to do so.
We
believe our Adobe Flash Platform solution competes favorably against these
technologies and solutions due to the distribution of Adobe Flash Player
technology on a broad set of platforms, including PCs, mobile phones and
consumer electronic devices. We also believe our robust programming
model and developer tools used to create video output for the Flash Player, the
large Flash developer community and ecosystem which utilize our tools, and the
growth of companies who have joined the OSP to utilize the Flash Platform as a
basis for rich content and application delivery are key assets in our ability to
effectively compete in this market. Further, the rich expressiveness
of Flash which provides the capability to deliver audio, video, motion graphics,
vector graphics and visual effects resulting in rich user experiences and
interfaces on mobile devices, is a key differentiation when compared to the
capabilities of alternate solutions.
In the
past year, the mobile industry experienced many announcements and introductions
of new mobile devices and platforms—and we expect innovation and new
announcements such as those seen in 2009 to continue in 2010. We view
these ongoing developments from major mobile companies such as Google, Nokia,
Palm, Rim and others as opportunities to deploy our technologies and
solutions. Just as we maintain a philosophy of cross-platform support
in the personal computer desktop world for operating systems such as Microsoft
Windows, Apple Mac OS, Unix and Linux, we expect to continue to enhance our
support for a wide variety of mobile and consumer electronic platforms, and we
intend to make our products and services available on viable, new entrant
platforms as well.
Print
and Publishing
Our Print
and Publishing product line targets many markets. In technical authoring and
publishing, our Adobe FrameMaker product faces competition from large-scale
electronic publishing systems, XML-based publishing companies such as PTC, as
well as lower-end desktop publishing products such as Microsoft Word.
Competition is based on the quality and features of products, the level of
customization and integration with other publishing system components, the
number of hardware platforms supported, service and price. We believe we
can successfully compete based upon the quality and features of the Adobe
FrameMaker product and our extensive application programming
interface.
In
desktop publishing, our Adobe PageMaker product faces competition from other
software products, including Microsoft Publisher. Competition is based on
the quality and features of products, ease-of-use, printer service support and
price. We believe we have a strong product and can successfully compete with
these types of applications based upon the quality and features of the Adobe
PageMaker product, its strong brand among users and its widespread adoption
among printer service bureaus.
In
printing technologies, we believe the principal competitive factors for OEMs in
selecting a page description language or a printing technology are product
capabilities, market leadership, reliability, price, support and
engineering development assistance. We believe that our competitive
advantages include our technology competency, OEM customer relationships and our
intellectual property portfolio. Adobe PostScript faces competition from
Hewlett-Packard’s proprietary PCL page description language and from developers
of other page description languages based on the PostScript language
standard, including Global Graphics and Zoran. In addition, Microsoft’s XPS
document format competes with Adobe PDF and our Adobe PostScript technologies
and solutions.
In the
rapid eLearning authoring market, our Adobe Captivate product faces competition
from general content development tools such as Microsoft PowerPoint, screen
recording tools such as Techsmith’s Camtasia and more advanced eLearning and
software simulation solutions such as Firefly, Lectora and Articulate.
Competition in this market is based on speed of development and completeness of
the features of products, ease-of-use and price. We believe our product can
successfully compete based upon the strength of its broad range of features, its
strong brand among users and its widespread adoption among training
developers.
In Web
content management, our Adobe Contribute product faces competition from
solutions that provide for the simple creation of blogs and “Wikis,” as well as
basic content publishing products such as Microsoft Word, Microsoft FrontPage,
Microsoft Notepad, basic HTML editors like ezHTMLArea and ekTron, content
management tools like Microsoft SharePoint and, large-scale Web content
management systems from companies such as Interwoven, Vignette, IBM and Oracle.
Competition in this market is based on usability, quality and features of
products, the level of customization and integration with other Web content
management components, the integration with Web design tools, the number of
hardware platforms supported, service and price. We believe we can successfully
compete based upon the usability and price of Adobe Contribute, its strong brand
among users and integration with other Web content management
components.
In
multimedia content authoring, our Adobe Director product faces competition from
a variety of multimedia content authoring tools. Competition is based on the
quality and features of products, ease-of-use and price. We believe we have a
strong product and can successfully compete based upon the quality and features
of the Adobe Director product, its strong brand among users, its widespread
adoption among content developers and publishers and the widespread
proliferation of the Shockwave Player.
In
technical Web authoring and publishing, our Adobe RoboHelp product faces
competition from large-scale Web publishing systems, XML-based Web publishing
companies, as well as lower-end publishing products such as Microsoft Word.
Competition is based on the quality and features of products, the level of
customization and integration with other publishing system components, service
and price. We believe we can successfully compete based upon the quality and
features of the Adobe RoboHelp product.
OPERATIONS
Marketing
and Sales
We market
and distribute our products through sales channels, which include distributors,
retailers, software developers, systems integrators, ISVs and VARs, as well as
through OEM and hardware bundle customers. We also market and license our
products directly using our sales force and through our own Website at
www.adobe.com.
We
support our worldwide distribution network and end user customers with
international offices around the world, including locations in Australia,
Austria, Belgium, Brazil, Canada, China, Czech Republic, Denmark, Dubai,
Finland, France, Germany, India, Ireland, Italy, Japan, Korea, Mexico, Moldova,
the Netherlands, Norway, Poland, Portugal, Romania,
Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan,
Turkey and the United Kingdom.
We also
license software with maintenance and support, which includes rights to
upgrades, when and if available, support, updates and enhancements.
The table
below lists our significant customers, as a percentage of net revenue for fiscal
2009, 2008 and 2007. As listed, our significant customers are distributors who
sell products across our various segments.
|
2009
|
2008
|
2007
|
||||||||||
|
Ingram
Micro
|
15 | % | 18 | % | 21 | % | ||||||
|
Tech
Data
|
8 | % | 9 | % | 10 | % | ||||||
We have
multiple non-exclusive, independently negotiated distribution agreements with
Ingram Micro and Tech Data and their subsidiaries covering our arrangements in
specified countries and regions. Each of these contracts has an independent
duration, is independent of any other agreement (such as a master distribution
agreement) and any termination of one agreement does not affect the status of
any of the other agreements.
Receivables
from our significant distributors, as a percentage of gross trade receivables
for fiscal 2009 and 2008 were as follows:
|
2009
|
2008
|
|||||||
|
Ingram
Micro
|
16 | % | 18 | % | ||||
|
Tech
Data
|
6 | % | 8 | % | ||||
Order
Fulfillment for Physical Distribution
The
procurement of the various components of packaged products, including CDs and
printed materials, and the assembly of packages for retail and other
applications products is controlled by our Supply Chain Operations organization.
We outsource our production, inventory and fulfillment activities to third
parties in the United States, Europe, Asia and Japan.
To date,
we have not experienced significant difficulties in obtaining raw materials for
the manufacture of our products or in the replication of CDs, printing and
assembly of components.
The
backlog of orders from customers is comprised of unfulfilled orders, excluding
those associated with new product releases, those pending credit review and
those not shipped due to the application of our global inventory policy. The
backlog of orders from customers, as of January 15, 2010 and January 16, 2009,
were approximately $5.4 million and $6.4 million, respectively.
Services
and Support
We
provide professional services, technical support and customer service to a wide
variety of customers including consumers, creative professionals and business
users. Our service and support revenue consists primarily of consulting fees,
software maintenance and support fees and training fees.
Services
We have a
global Professional Services team dedicated to developing and implementing
solutions for enterprise customers in key vertical markets and to transfer
technical expertise to our solution partners. The Professional Services team
uses a comprehensive, customer-focused methodology to develop high quality
solutions, which in turn deliver a competitive advantage to our enterprise
customers. A portfolio of technical training courses is also available for
desktop and server-based products to meet the needs of our enterprise customers
and solution partners.
Support
A
significant portion of our support revenue is composed of our extended
enterprise maintenance and support offerings, which entitles customers to the
right to receive product upgrades and enhancements during the term of the
maintenance and support period, which is typically one year. Regional Support
Centers are charged with providing timely, high quality technical expertise on
Enterprise and Knowledge Worker products and solutions to meet the growing needs
of our customers.
Our
support revenue also includes support for our desktop products. We offer a range
of support programs, from fee-based incidents to annual support contracts.
Additionally, we provide extensive self-help and online technical support
capabilities via the Web which allows customers quick and easy access to
possible solutions. We provide product support through a combination of
outsourced vendors and internal support centers.
We also
offer Developer Support to partners and developer organizations. The Adobe
Partner Connection Program focuses on providing developers with high-quality
tools, software development kits, information and services.
As a
registered owner of the current version of an Adobe desktop product, customers
are eligible to receive Getting Started support on certain matters. Support for
some products and in some countries may vary.
Training
We inform
customers about the use of our products through on-line informational services
on our Website (www.adobe.com) and through a growing series of how to books
published by Adobe Press pursuant to a joint publishing agreement with Peachpit
Press. In addition, we develop tests to certify independent trainers who teach
Adobe software classes. We sponsor workshops, work with professional
associations and user groups, and conduct regular beta testing
programs.
Investments
We own a
limited partnership interest in Adobe Ventures IV L.P. (“Adobe Ventures”) that
has invested in early stage companies with innovative technologies. We also make
direct investments in privately-held companies. We enter into these investments
with the intent of securing financial returns as well as for strategic purposes
as they often increase our knowledge of emerging markets and technologies, as
well as expand our opportunities to provide Adobe products and services. Adobe
Ventures is managed by Granite Ventures, an independent venture capital firm and
sole general partner of Adobe Ventures.
PRODUCT
DEVELOPMENT
As the
software industry is characterized by rapid technological change, a continuous
high level of investment is required for the enhancement of existing products
and services and the development of new products and services. We develop our
software internally as well as acquire products or technology developed by
others by purchasing the stock or assets of the business entity that held
ownership rights to the technology. In other instances, we have licensed or
purchased the intellectual property ownership rights of programs developed by
others with license or technology transfer agreements that may obligate us to
pay a flat license fee or royalties, typically based on a dollar amount per unit
shipped or a percentage of the revenue generated by those programs.
During
fiscal years ended November 27, 2009, November 28, 2008 and November 30, 2007,
our research and development expenses were $565.1 million, $662.1 million and
$613.2 million, respectively.
PRODUCT
PROTECTION
We regard
our software as proprietary and protect it under the laws of copyrights,
patents, trademarks and trade secrets. We protect the source code of our
software programs as trade secrets and make source code available to third
parties only under limited circumstances and specific security and
confidentiality constraints.
Our
products are generally licensed to end users on a “right to use” basis pursuant
to a license that restricts the use of the products to a designated number of
devices. We also rely on copyright laws and on “shrink wrap” and electronic
licenses that are not physically signed by the end user. Copyright protection
may be unavailable under the laws of certain countries and the enforceability of
“shrink wrap” and electronic licenses has not been conclusively determined in
all jurisdictions. We also offer many products under a SaaS or on-demand model,
where software is provided on demand to customers, generally through a Web
browser. The use of these products is generally governed by terms of
use associated with these products.
Policing
unauthorized use of computer software is difficult and software piracy is a
persistent problem for the software industry. This problem is particularly acute
in international markets. We conduct vigorous anti-piracy programs directly and
through certain external software associations. In addition, we have activation
technology in certain products to guard against illegal use and will continue to
do so in certain future products.
EMPLOYEES
As of
November 27, 2009, we employed 8,660 people. We have not experienced work
stoppages and believe our employee relations are good.
AVAILABLE
INFORMATION
Our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a)
and 15(d) of the Securities Exchange Act of 1934, as amended, are available free
of charge on our Investor Relations Website at www.adobe.com as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. The information posted on our Website is not
incorporated into this report.
EXECUTIVE
OFFICERS
Adobe’s
executive officers as of January 15, 2010 are as follows:
|
Name
|
Age
|
Positions
|
||
|
Shantanu
Narayen
|
46
|
President
and Chief Executive Officer
|
||
|
Mark
Garrett
|
52
|
Executive
Vice President, Chief Financial Officer
|
||
|
Karen O. Cottle
|
60
|
Senior
Vice President, General Counsel and Corporate Secretary
|
||
|
Joshua
G. James
|
36
|
Senior
Vice President, Omniture Business Unit
|
||
|
Johnny
Loiacono
|
48
|
Senior
Vice President, Creative Solutions Business Unit
|
||
|
Kevin
Lynch
|
43
|
Senior
Vice President, Chief Technology Officer
|
||
|
Rob
Tarkoff
|
41
|
Senior
Vice President, Business Productivity Business Unit
|
||
|
Matthew Thompson
|
51
|
Senior
Vice President, Worldwide Field Operations
|
||
|
Richard
T. Rowley
|
53
|
Vice
President, Principal Accounting
Officer
|
Mr.
Narayen currently serves as Adobe’s President and Chief Executive Officer. Mr.
Narayen joined Adobe in January 1998 as Vice President and General Manager of
Adobe’s engineering technology group. In January 1999, he was promoted to Senior
Vice President, Worldwide Products and in March 2001 he was promoted to
Executive Vice President, Worldwide Product Marketing and Development. In
January 2005, Mr. Narayen was promoted to President and Chief Operating Officer
and in December 2007, he was appointed Chief Executive Officer of Adobe and
joined the Adobe Board of Directors. Prior to joining Adobe, Mr. Narayen
co-founded Pictra Inc., a digital photo sharing software company, in 1996. He
was Director of Desktop and Collaboration products at Silicon Graphics Inc.
before founding Pictra. Mr. Narayen is also a director of Dell Inc.
Mr.
Garrett joined Adobe in February 2007 as Executive Vice President and Chief
Financial Officer. Mr. Garrett served as Senior Vice President and Chief
Financial Officer of the Software Group of EMC Corporation, a products, services
and solutions provider for information management and storage, from June 2004 to
January 2007, his most recent position since EMC’s acquisition of Documentum,
Inc., an enterprise content management company, in December 2003.
Mr. Garrett first joined Documentum as Executive Vice President and Chief
Financial Officer in 1997, holding that position through October 1999 and then
re-joining Documentum as Executive Vice President and Chief Financial Officer in
2002. Mr. Garrett is also a director of Informatica Corporation.
Ms.
Cottle joined Adobe in February 2002 as Senior Vice President, General Counsel
and Secretary. Prior to joining Adobe, Ms. Cottle served as General Counsel for
Vitria Technology, Inc., a service-oriented business application software
company from February 2000 to February 2002.
From 1996
to 1999, Ms. Cottle served as Vice President, General Counsel and Secretary of
Raychem Corporation.
Mr. James
joined Adobe upon the closing of the acquisition of Omniture in October 2009 as
Senior Vice President of the Omniture Business Unit. Prior to joining Adobe, Mr.
James was one of the founders of Omniture and served as a director
33
of
Omniture from 1998 to October 2009 and as its Chief Executive Officer or
President from 1996 to October 2009. From 1996 to 1998, Mr. James
co-founded and co-managed several entities that were Omniture predecessors.
Mr. James also served on the Brigham Young University eBusiness Advisory
Board and is a Platinum Founder of the BYU Center for Entrepreneurship. He has
lectured for numerous university classes and served on several other industry,
advisory and private company boards.
Mr.
Loiacono joined Adobe in April 2006 as Senior Vice President and General Manager
of the Creative Solutions Business Unit. Prior to joining Adobe, Mr.
Loiacono served as Executive Vice President of software at Sun Microsystems,
Inc., which he joined in 1987. During Mr. Loiacono's 19 year
tenure, he also served as General Manager of Sun Microsystems’s operating
platform group, as well as Chief Marketing Officer.
Mr. Lynch
currently serves as Adobe’s Chief Technology Officer and Senior Vice President
of the Experience & Technology Organization. Mr. Lynch joined Adobe as
Chief Software Architect and Senior Vice President for Adobe’s Platform Business
Unit through our acquisition of Macromedia, Inc. in December 2005. At
Macromedia, Mr. Lynch served as Chief Software Architect and President of
Product Development, where he led Macromedia in advancing Web software
including managing the initial development of Macromedia Dreamweaver and guiding
Flash to its current widespread adoption across the Web. Prior to
Macromedia, Mr. Lynch participated in a variety of technical and management
roles in startups including Frame Technology and General Magic.
Mr.
Tarkoff currently serves as Adobe’s Senior Vice President of the Business
Productivity Business Unit. Mr. Tarkoff joined Adobe in April 2007 as
Senior Vice President of Corporate Development. Prior to joining
Adobe, Mr. Tarkoff was Senior Vice President and General Manager of the Captiva
Software Division and Senior Vice President of Business Development and Channels
for the Software Group of EMC Corporation, a products, services and solutions
provider for information management and storage, from December 2003 to April
2007. Previously, Mr. Tarkoff was Executive Vice President and Chief
Strategy Officer for Documentum, Inc., an enterprise content management company
and Senior Vice President of Worldwide Business Development at Commerce One, a
provider of business-to-business e-commerce solutions.
Mr.
Thompson joined Adobe in January 2006 as Senior Vice President, Worldwide Field
Operations. Prior to joining Adobe, Mr. Thompson served as Senior Vice President
of Worldwide Sales at Borland Software Corporation, a software delivery
optimization solutions provider, from October 2003 to December 2006. Prior to
joining Borland, Mr. Thompson was Vice President of Worldwide Sales and Field
Operations for Marimba, Inc., a provider of products and services for software
change and configuration management, from February 2001 to January 2003. From
July 2000 to January 2001, Mr. Thompson was Vice President of Worldwide Sales
for Calico Commerce, Inc., a provider of eBusiness applications. Prior to
joining Calico, Mr. Thompson spent six years at Cadence Design Systems, Inc., a
provider of electronic design technologies. While at Cadence, from January 1998
to June 2000, Mr. Thompson served as Senior Vice President, Worldwide Sales and
Field Operations and from April 1994 to January 1998 as Vice President,
Worldwide Professional Services.
Mr.
Rowley joined Adobe in November 2006 as Vice President, Corporate Controller and
Principal Accounting Officer. Prior to joining Adobe, Mr. Rowley served as Vice
President, Corporate Controller, Treasurer and Principal Accounting Officer at
Synopsys, Inc., a semiconductor design software company, from December 2002 to
September 2005 and from 1999 to December 2002, Mr. Rowley served as Vice
President, Corporate Controller and Principal Accounting Officer. From 1994 to
1999, Mr. Rowley served in several finance-related positions at Synopsys. Mr.
Rowley is a certified public accountant.
As
previously discussed, our actual results could differ materially from our
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed below. These and
many other factors described in this report could adversely affect our
operations, performance and financial condition.
The
ongoing economic downturn and continued uncertainty in the financial markets and
other adverse changes in general economic or political conditions in any of the
major countries in which we do business could adversely affect our operating
results.
As our
business has grown, we have become increasingly subject to the risks arising
from adverse changes in domestic and global economic and political conditions.
Uncertainty about future economic and political conditions makes it difficult
for us to forecast operating results and to make decisions about future
investments. For example, the direction and relative strength of the global
economy continues to be uncertain due to softness in the real estate and
mortgage markets, volatility in
34
fuel and
other energy costs, difficulties in the financial services sector and credit
markets, continuing geopolitical uncertainties, increasing unemployment and
other macro-economic factors affecting spending behavior. If economic growth in
the U.S. and other countries continues to be slow and does not improve, many
customers may delay or reduce technology purchases, advertising spending or
marketing spending. This could result in continued reductions in sales of our
products and services, longer sales cycles, slower adoption of new technologies
and increased price competition.
The current
global financial crisis affecting the banking system and financial markets
and the possibility that financial institutions may consolidate or go out of
business have resulted in a tightening in the credit markets, a low level
of liquidity in many financial markets, and increased volatility in fixed
income, credit, currency and equity markets. There could be a number of
follow-on effects from the credit crisis on our business, including
insolvency of certain of our key distributors, resellers, OEMs, retailers and
systems integrators, ISVs and VARs (collectively referred to as “distributors”),
which could impair our distribution channels, inability of customers, including
our distributors, to obtain credit to finance purchases of our products and
services, and failure of derivative counterparties and other financial
institutions, which could negatively impact our treasury operations. Other
income and expense could also vary from expectations depending on gains or
losses realized on the sale or exchange of financial instruments,
impairment charges related to investment securities as well as equity and other
investments, interest rates, cash balances, and changes in fair value of
derivative instruments. Any of these events would likely harm our business,
results of operations and financial condition.
Political
instability in any of the major countries we do business in would also likely
harm our business, results of operations and financial condition.
If
we cannot continue to develop, market and distribute new products and services
or upgrades or enhancements to existing products and services that meet customer
requirements, our operating results could suffer.
The
process of developing new high technology products and services and enhancing
existing products and services is complex, costly and uncertain, and any failure
by us to anticipate customers’ changing needs and emerging technological trends
accurately could significantly harm our market share and results of operations.
We must make long-term investments, develop or obtain appropriate intellectual
property and commit significant resources before knowing whether our predictions
will accurately reflect customer demand for our products and services. Our
inability to extend our core technologies into new applications and new
platforms, including the mobile and embedded devices market, and to anticipate
or respond to technological changes could affect continued market acceptance of
our products and services and our ability to develop new products and services.
Additionally, any delay in the development, production, marketing or
distribution of a new product or service or upgrade or enhancement to an
existing product or service could cause a decline in our revenue, earnings or
stock price and could harm our competitive position. We maintain
strategic relationships with third parties with respect to the distribution of
certain of our technologies. If we are unsuccessful in establishing
or maintaining our strategic relationships with these third parties, our ability
to compete in the marketplace or to grow our revenues would be impaired and our
operating results would suffer.
We offer
our desktop application-based products primarily on Windows and Macintosh
platforms. We generally offer our server-based products on the Linux platform as
well as the Windows and UNIX platforms. To the extent that there is a slowdown
of customer purchases of personal computers on either the Windows or Macintosh
platform or in general, or to the extent that significant demand arises for our
products or competitive products on other platforms before we choose and are
able to offer our products on these platforms our business could be harmed.
Additionally, to the extent that we have difficulty transitioning product or
version releases to new Windows and Macintosh operating systems, or to the
extent new releases of operating systems or other third-party products make it
more difficult for our products to perform, our business could be
harmed.
Introduction
of new products, services and business models by existing and new competitors
could harm our competitive position and results of operations.
The
markets for our products and services are characterized by intense competition,
evolving industry standards and business models, disruptive software and
hardware technology developments, frequent new product and service
introductions, short product and service life cycles, price cutting, with
resulting downward pressure on gross margins, and price sensitivity on the part
of consumers. Our future success will depend on our ability to enhance our
existing products and services, introduce new products and services on a timely
and cost-effective basis, meet changing customer needs, extend our core
technology into new applications, and anticipate and respond to emerging
standards, business models, software delivery
35
methods
and other technological changes. For example, certain versions of
Microsoft Windows operating systems contain a
fixed
document format, XPS, which competes with Adobe PDF. Additionally, certain
versions of Microsoft Office offer a feature to save Microsoft Office documents
as PDF files, which competes with Adobe PDF creation. Microsoft Expression
Studio competes with our Adobe Creative Suite family of products and Microsoft
Silverlight and Visual Studio, Web development tools for RIAs, compete with
Adobe Flash, Adobe Flex and Adobe AIR. Google Gears and Sun’s JavaFX,
alternative approaches to deploying RIAs, compete with Adobe Flash and Adobe
AIR. Additionally, HTML5 specifies scripting application programming interfaces
which if broadly implemented in browsers could compete with Adobe Flash.
Companies, such as Google, Sun, Apple and Microsoft, may introduce competing
software offerings for free or open source vendors may introduce competitive
products. In addition, recent advances in computing and communications
technologies have made the SaaS, or on-demand, business model viable. SaaS
allows companies to provide applications, data and related services over the
Internet. Providers use primarily advertising or subscription-based revenue
models. We are developing and deploying our own SaaS strategies through various
business units, including our Omniture business unit, but there are significant
competitors in this area as well. For instance, our Omniture Online
Marketing Suite competes with Google Analytics, which Google offers free of
charge, and other competitive SaaS offerings from companies such as Coremetrics,
Yahoo! and WebTrends. If any competing products or services in these
areas achieve widespread acceptance, our operating results could suffer. In
addition, consolidation has occurred among some of the competitors in our
markets. Any further consolidations among our competitors may result
in stronger competitors and may therefore harm our results of operations. For
additional information regarding our competition and the risks arising out of
the competitive environment in which we operate, see the section entitled
“Competition” contained in Item 1 of this report.
If
we fail to successfully manage transitions to new business models and markets,
our results of operations could be negatively impacted.
We plan
to release numerous new product and service offerings and employ new software
delivery methods in connection with our transition to new business models. It is
uncertain whether these strategies will prove successful or that we will be able
to develop the infrastructure and business models as quickly as our competitors.
Market acceptance of these new product and service offerings will be dependent
on our ability to include functionality and usability in such releases that
address certain customer requirements with which we have limited prior
experience and operating history. Some of these new product and service
offerings could subject us to increased risk of legal liability related to the
provision of services as well as cause us to incur significant technical, legal
or other costs. For example, with our introduction of on-demand services, we are
entering a market that is at an early stage of development. Market acceptance of
such services is affected by a variety of factors, including security
reliability of on-demand services, customers concerns with entrusting a third
party to store and manage their data, public concerns regarding privacy and the
enactment of laws or regulations that restrict our ability to provide such
services to customers in the U.S. or internationally. As our business continues
to transition to new business models that may be more highly regulated for
privacy and data security, and to countries outside the U.S. that have more
strict data protection laws, our liability exposure, compliance requirements and
costs may increase. In addition, laws in the areas of privacy and behavioral
tracking and advertising are likely to be passed in the future, which could
result in significant limitations on or changes to the ways in which we can
collect, use, store or transmit the personal information of our customers or
employees, communicate with our customers, and deliver products and
services. Further, any perception of our practices as an invasion of
privacy, whether or not illegal, may subject us to public
criticism. Existing and potential future privacy laws, increased
risks related to unauthorized data disclosures and increasing sensitivity of
consumers to use of personal information may create negative public relations
related to our business practices.
Additionally,
customer requirements for open standards or open source products could impact
adoption or use with respect to some of our products or services. To the extent
we incorrectly estimate customer requirements for such products or services or
if there is a delay in market acceptance of such products or services, our
business could be harmed.
From time
to time we open source certain of our technology initiatives, provide broader
open access to certain of our technology, such as our OSP, and release selected
technology for industry standardization. These changes may have negative revenue
implications and make it easier for our competitors to produce products or
services similar to ours. If we are unable to respond to these competitive
threats, our business could be harmed.
We are
also devoting significant resources to the development of technologies and
service offerings in markets where we have a limited operating history,
including the enterprise, government and mobile and device markets. In the
enterprise and government markets, we intend to increase our focus on vertical
markets such as education, financial services, manufacturing, and the
architecture, engineering and construction markets and horizontal markets such
as training and marketing. These new offerings and markets require a
considerable investment of technical, financial and sales resources, and
a
scalable organization. Many of our competitors may have advantages over us due
to their larger presence, larger developer network, deeper experience in the
enterprise, government and mobile and device markets, and greater sales and
marketing resources. In the mobile and device markets, our intent is to partner
with device makers, manufacturers and telecommunications carriers to embed our
technology on their platforms, and in the enterprise and government market our
intent is to form strategic alliances with leading enterprise and government
solutions and service providers to provide additional resources to further
enable penetration of such markets. If we are unable to successfully enter into
strategic alliances with device makers, manufacturers, telecommunication
carriers and leading enterprise and government solutions and service providers,
or if they are not as productive as we anticipate, our market penetration may
not proceed as rapidly as we anticipate and our results of operations could be
negatively impacted.
Revenue
from our new businesses may be difficult to predict.
As
previously discussed, we are devoting significant resources to the development
of product and service offerings where we have a limited operating history. This
makes it difficult to predict revenue and revenue may decline quicker than
anticipated. Additionally, we have a limited history of licensing products and
offering services in certain markets such as the government and enterprise
market and may experience a number of factors that will make our revenue less
predictable, including longer than expected sales and implementation cycles,
decision to open source certain of our technology initiatives, potential
deferral of revenue due to multiple-element revenue arrangements and alternate
licensing arrangements. If any of our assumptions about revenue from our new
businesses prove incorrect, our actual results may vary materially from those
anticipated, estimated or projected.
For
instance, the SaaS business model we utilize in our Omniture business unit
typically involves selling services on a subscription basis pursuant to service
agreements that are generally one to three years in length. Although many of our
service agreements contain automatic renewal terms, our customers have no
obligation to renew their subscriptions for our services after the expiration of
their initial subscription period upon providing timely notice of non-renewal
and we cannot provide assurance that these subscriptions will be renewed at the
same or higher level of service, if at all. Moreover, under some circumstances,
some of our customers have the right to cancel their service agreements prior to
the expiration of the terms of their agreements. We cannot be assured that we
will be able to accurately predict future customer renewal rates. Our customers’
renewal rates may decline or fluctuate as a result of a number of factors,
including their satisfaction or dissatisfaction with our services, the prices of
our services, the prices of services offered by our competitors, mergers and
acquisitions affecting our customer base, reductions in our customers’ spending
levels, or declines in consumer Internet activity as a result of economic
downturns or uncertainty in financial markets. If our customers do not renew
their subscriptions for our services or if they renew on less favorable terms to
us, our revenues may decline.
We
may not realize the anticipated benefits of past or future acquisitions, and
integration of these acquisitions may disrupt our business and
management.
We have
in the past and may in the future acquire additional companies, products or
technologies. Most recently, we completed the acquisition of Omniture in October
2009. We may not realize the anticipated benefits of an acquisition and each
acquisition has numerous risks. These risks include:
|
|
·
|
difficulty
in assimilating the operations and personnel of the acquired
company;
|
|
|
·
|
difficulty
in effectively integrating the acquired technologies, products or services
with our current technologies, products or
services;
|
|
|
·
|
difficulty
in maintaining controls, procedures and policies during the transition and
integration;
|
|
·
|
entry
into markets in which we have no or limited direct prior experience and
where competitors in such markets have stronger market
positions;
|
|
|
·
|
disruption
of our ongoing business and distraction of our management and employees
from other opportunities and
challenges;
|
|
|
·
|
difficulty
integrating the acquired company’s accounting, management information,
human resources and other administrative
systems;
|
|
|
·
|
inability
to retain key technical and managerial personnel of the acquired
business;
|
|
|
·
|
inability
to retain key customers, distributors, vendors and other business partners
of the acquired business;
|
|
|
·
|
inability
to achieve the financial and strategic goals for the acquired and combined
businesses;
|
|
|
·
|
inability
to take advantage of anticipated tax benefits as a result of unforeseen
difficulties in our integration
activities;
|
|
|
·
|
incurring
acquisition-related costs or amortization costs for acquired intangible
assets that could impact our operating
results;
|
|
|
·
|
potential
additional exposure to fluctuations in currency exchange
rates;
|
|
|
·
|
potential
impairment of our relationships with employees, customers, partners,
distributors or third-party providers of our technologies, products or
services;
|
|
|
·
|
potential
failure of the due diligence processes to identify significant problems,
liabilities or other shortcomings or challenges of an acquired company or
technology, including but not limited to, issues with the acquired
company’s intellectual property, product quality or product architecture,
data back-up and security, revenue recognition or other accounting
practices, employee, customer or partner issues or legal and financial
contingencies;
|
|
|
·
|
exposure
to litigation or other claims in connection with, or inheritance of claims
or litigation risk as a result of, an acquisition, including but not
limited to, claims from terminated employees, customers, former
stockholders or other
third-parties;
|
|
|
·
|
incurring
significant exit charges if products or services acquired in business
combinations are unsuccessful;
|
|
|
·
|
potential
inability to assert that internal controls over financial reporting are
effective;
|
|
|
·
|
potential
inability to obtain, or obtain in a timely manner, approvals from
governmental authorities, which could delay or prevent such
acquisitions;
|
|
|
·
|
potential
delay in customer and distributor purchasing decisions due to uncertainty
about the direction of our product and service offerings;
and
|
|
|
·
|
potential
incompatibility of business
cultures.
|
Mergers
and acquisitions of high technology companies are inherently risky, and
ultimately, if we do not complete an announced acquisition transaction or
integrate an acquired business successfully and in a timely manner, we may not
realize the benefits of the acquisition to the extent anticipated.
We
may incur substantial costs enforcing or acquiring intellectual property rights
and defending against third-party claims as a result of litigation or other
proceedings.
In
connection with the enforcement of our own intellectual property rights, the
acquisition of third-party intellectual property rights, or disputes relating to
the validity or alleged infringement of third-party intellectual property
rights, including patent rights, we have been, are currently and may in the
future be subject to claims, negotiations or complex, protracted litigation.
Intellectual property disputes and litigation are typically very costly and can
be disruptive to our business operations by diverting the attention and energies
of management and key technical personnel. Although we have successfully
defended or resolved past litigation and disputes, we may not prevail in any
ongoing or future litigation and disputes. Third-party intellectual property
disputes could subject us to significant liabilities, require us to enter into
royalty and licensing arrangements on unfavorable terms, prevent us from
licensing certain of our products or offering certain of our services, subject
us to injunctions restricting our sale of products or services, cause severe
disruptions to our operations or the markets in which we compete, or require us
to satisfy indemnification commitments with our customers including contractual
38
provisions
under various license arrangements and service agreements. In addition, we may
incur significant costs in acquiring the necessary third-party intellectual
property rights for use in our products. Any of these could seriously harm our
business.
We
may not be able to protect our intellectual property rights, including our
source code, from third-party infringers, or unauthorized copying, use or
disclosure.
Although
we defend our intellectual property rights and combat unlicensed copying and use
of software and intellectual property rights through a variety of techniques,
preventing unauthorized use or infringement of our rights is inherently
difficult. We actively pursue software pirates as part of our enforcement of our
intellectual property rights, but we nonetheless lose significant revenue due to
illegal use of our software. If piracy activities increase, it may further harm
our business.
Additionally,
we take significant measures to protect the secrecy of our confidential
information and trade secrets, including our source code. If unauthorized
disclosure of our source code occurs, we could potentially lose future trade
secret protection for that source code. The loss of future trade secret
protection could make it easier for third-parties to compete with our products
by copying functionality, which could adversely affect our revenue and operating
margins. We also seek to protect our confidential information and trade secrets
through the use of non-disclosure agreements with our customers, contractors,
vendors, and partners. However there is a risk that our confidential information
and trade secrets may be disclosed or published without our authorization, and
in these situations it may be difficult and/or costly for us to enforce our
rights.
Security vulnerabilities in our
products and systems could lead to reduced revenues or to liability
claims.
Maintaining
the security of computers and computer networks is a critical issue for us and
our customers. Hackers develop and deploy viruses, worms, and other malicious
software programs that attack our products and systems. Although this is an
industry-wide problem that affects computers and products across all platforms,
it affects our products in particular because hackers tend to focus their
efforts on the most popular operating systems and programs and we expect them to
continue to do so. Critical vulnerabilities have been identified in certain of
our products. These vulnerabilities could cause the application to crash and
could potentially allow an attacker to take control of the affected
system.
We devote
significant resources to address security vulnerabilities through engineering
more secure products, enhancing security and reliability features in our
products and systems, code hardening, deploying security updates to address
security vulnerabilities and improving our incident response time. The cost of
these steps could reduce our operating margins. Despite these efforts, actual or
perceived security vulnerabilities in our products and systems may lead to
claims against us and harm our reputation, and could lead some customers to seek
to return products, to stop using certain services, to reduce or delay future
purchases of products or services, or to use competing products or services.
Customers may also increase their expenditures on protecting their existing
computer systems from attack, which could delay adoption of new technologies.
Any of these actions by customers could adversely affect our
revenue.
Some
of our businesses rely on us or third-party service providers to host and
deliver services, and any interruptions or delays in our service or service from
these third parties, security or privacy breaches, or failures in data
collection could expose us to liability and harm our business and
reputation.
Some of
our businesses, including our Omniture business unit, rely on hosted services
from us or third parties. Because we hold large amounts of customer data and
host certain of such data in third-party facilities, a security
incident may compromise the integrity or availability of customer data, or
customer data may be exposed to unauthorized access. Unauthorized access to
customer data may be obtained through break-ins, breach of our secure network by
an unauthorized party, employee theft or misuse, or other misconduct. It is also
possible that unauthorized access to customer data may be obtained through
inadequate use of security controls by customers. While strong password
controls, IP restriction and account controls are provided and supported, their
use is controlled by the customer. For example, this could allow accounts to be
created with weak passwords, which could result in allowing an attacker to gain
access to customer data. Additionally, failure by customers to remove accounts
of their own employees, or granting of accounts by the customer in an
uncontrolled manner, may allow for access by former or unauthorized customer
employees. If there were ever an inadvertent disclosure of personally
identifiable information, or if a third party were to gain unauthorized access
to the personally identifiable information we possess, our operations could be
disrupted, our reputation could be harmed and we could be subject to
claims
39
or other
liabilities. In addition, such perceived or actual unauthorized disclosure of
the information we collect or breach of our security could result in the loss of
customers and harm our business.
Because
of the large amount of data that we collect and manage on behalf of our
customers, it is possible that hardware failures or errors in our systems could
result in data loss or corruption or cause the information that we collect to be
incomplete or contain inaccuracies that our customers regard as significant.
Furthermore, our ability to collect and report data may be delayed or
interrupted by a number of factors, including access to the Internet, the
failure of our network or software systems, security breaches or significant
variability in visitor traffic on customer Websites. In addition, computer
viruses may harm our systems causing us to lose data, and the transmission of
computer viruses could expose us to litigation. We may also find, on occasion,
that we cannot deliver data and reports to our customers in near real time
because of a number of factors, including significant spikes in consumer
activity on their Websites or failures of our network or software. We may be
liable to our customers for damages they may incur resulting from these events,
such as loss of business, loss of future revenues, breach of contract or for the
loss of goodwill to their business. In addition to potential liability, if we
supply inaccurate information or experience interruptions in our ability to
capture, store and supply information in near real time or at all, our
reputation could be harmed and we could lose customers.
On behalf
of certain of our customers using our services, including those using services
offered by our Omniture business unit, we collect and use information derived
from the activities of Website visitors, which may include anonymous and/or
personal information. This enables us to provide such customers with reports on
aggregated anonymous or personal information from and about the visitors to
their Websites in the manner specifically directed by such customers. Federal,
state and foreign government bodies and agencies have adopted or are considering
adopting laws regarding the collection, use and disclosure of this information.
Therefore, our compliance with privacy laws and regulations and our reputation
among the public body of Website visitors depend on such customers’ adherence to
privacy laws and regulations and their use of our services in ways consistent
with such visitors’ expectations. We also rely on representations made to
us by customers that their own use of our services and the information we
provide to them via our services do not violate any applicable privacy laws,
rules and regulations or their own privacy policies. We ask customers to
represent to us that they provide their Website visitors the opportunity to
“opt-out” of the information collection associated with our services, as
applicable. We do not formally audit such customers to confirm compliance with
these representations. If these representations are false or if such customers
do not otherwise comply with applicable privacy laws, we could face potentially
adverse publicity and possible legal or other regulatory action.
Failure
to manage our sales and distribution channels and third-party customer service
and technical support providers effectively could result in a loss of revenue
and harm to our business.
A
significant amount of our revenue for application products is from two
distributors, Ingram Micro, Inc. and Tech Data Corporation, which represented
15% and 8% of our net revenue for fiscal 2009, respectively. We have multiple
non-exclusive, independently negotiated distribution agreements with Ingram
Micro and Tech Data and their subsidiaries covering our arrangements in
specified countries and regions. Each of these contracts has an independent
duration, is independent of any other agreement (such as a master distribution
agreement) and any termination of one agreement does not affect the status of
any of the other agreements. In fiscal 2009, no single agreement with these
distributors was responsible for over 10% of our total net revenue. If any one
of our agreements with these distributors were terminated, we believe we could
make arrangements with new or existing distributors to distribute our products
without a substantial disruption to our business; however, any prolonged delay
in securing a replacement distributor could have a negative short-term impact on
our results of operations.
Successfully
managing our indirect channel efforts to reach various potential customer
segments for our products and services is a complex process. Our distributors
are independent businesses that we do not control. Notwithstanding the
independence of our channel partners, we face potential legal risk from the
activities of these third parties including, but not limited to, export control
violations, corruption and anti-competitive behavior. Although we have
undertaken efforts to reduce these third-party risks, they remain present. We
cannot be certain that our distribution channel will continue to market or sell
our products effectively. If we are not successful, we may lose sales
opportunities, customers and revenues.
Our
distributors also sell our competitors’ products, and if they favor our
competitors’ products for any reason, they may fail to market our products as
effectively or to devote resources necessary to provide effective sales, which
would cause our results to suffer. We also distribute some products through our
OEM channel, and if our OEMs decide not to bundle our applications on their
devices, our results could suffer.
In
addition, the financial health of our distributors and our continuing
relationships with them are important to our success. Some of these distributors
may be unable to withstand adverse changes in current economic conditions, which
could result in insolvency of certain of our distributors and/or the inability
of our distributors to obtain credit to finance purchases of our products.
In addition, weakness in the end-user market could further negatively affect the
cash flow of our distributors who could, in turn, delay paying their obligations
to us, which would increase our credit risk exposure. Our business could be
harmed if the financial condition of some of these distributors substantially
weakens and we were unable to timely secure replacement
distributors.
We also
sell certain of our products and services through our direct sales force. Risks
associated with this sales channel include a longer sales cycle associated with
direct sales efforts, difficulty in hiring, retaining and motivating our direct
sales force, and substantial amounts of training for sales representatives,
including regular updates to cover new and upgraded products and services.
Moreover, our recent hires and sales personnel added through our recent business
acquisitions may not become as productive as we would like, as in most cases it
takes a significant period of time before they achieve full productivity. Our
business could be seriously harmed if these expansion efforts do not generate a
corresponding significant increase in revenues and we are unable to achieve the
efficiencies we anticipate.
We also
provide products and services, directly and indirectly, to a variety of
governmental entities, both domestically and internationally. The licensing and
sale of products and services to governmental entities may require
adherence to complex specific procurement regulations and other
requirements. While we believe we have adequate controls in this
area, failure to effectively manage this complexity and satisfy these
requirements could result in the potential assessment of penalties and fines,
harm to our reputation and lost sales opportunities to such governmental
entities.
We
outsource a substantial portion of our customer service and technical support
activities to third-party service providers. We rely heavily on these
third-party customer service and technical support representatives working on
our behalf and we expect to continue to rely heavily on third parties in the
future. This strategy provides us with lower operating costs and greater
flexibility, but also presents risks to our business, including the
possibilities that we may not be able to impact the quality of support that we
provide as directly as we would be able to do in our own company-run call
centers, and that our customers may react negatively to providing information
to, and receiving support from, third-party organizations, especially if based
overseas. If we encounter problems with our third-party customer service and
technical support providers, our reputation may be harmed and our revenue may be
adversely affected.
Catastrophic
events may disrupt our business.
We are a
highly automated business and rely on our network infrastructure and enterprise
applications, internal technology systems and our Website for our development,
marketing, operational, support, hosted services and sales activities. In
addition, some of our businesses rely on third-party hosted services and we do
not control the operation of third-party data center facilities serving our
customers from around the world, which increases our vulnerability. A
disruption, infiltration or failure of these systems or third party hosted
services in the event of a major earthquake, fire, power loss,
telecommunications failure, cyber attack, war, terrorist attack, or other
catastrophic event could cause system interruptions, reputational harm, loss of
intellectual property, delays in our product development, lengthy interruptions
in our services, breaches of data security and loss of critical data and could
prevent us from fulfilling our customers’ orders. Our corporate headquarters, a
significant portion of our research and development activities, certain of our
data centers, and certain other critical business operations are located in San
Jose, California, which is near major earthquake faults. We have developed
certain disaster recovery plans and certain backup systems to reduce the
potentially adverse effect of such events, but a catastrophic event that results
in the destruction or disruption of any of our data centers or our critical
business or information technology systems could severely affect our ability to
conduct normal business operations and, as a result, our future operating
results could be adversely affected.
Net
revenue, margin or earnings shortfalls or the volatility of the market generally
may cause the market price of our stock to decline.
The
market price for our common stock has experienced significant fluctuations and
may continue to fluctuate significantly. The market price for our common stock
may be affected by a number of factors, including shortfalls in our net revenue,
margins, earnings or key performance metrics, changes in estimates or
recommendations by securities analysts; the announcement of new
products, product enhancements or service introductions by us or our
competitors, seasonal variations
in the
demand for our products and services and the implementation cycles for our new
customers, the loss of a large customer or our inability to increase sales to
existing customers and attract new customers, quarterly variations in our or our
competitors’ results of operations, developments in our industry; unusual events
such as significant acquisitions, divestitures and litigation, general
socio-economic, regulatory, political or market conditions and other factors,
including factors unrelated to our operating performance.
We
are subject to risks associated with global operations which may harm our
business.
We are a
global business that generates over 50% of our total revenue from sales to
customers outside of the Americas. This subjects us to a number of risks,
including:
|
|
·
|
foreign
currency fluctuations;
|
|
|
·
|
changes
in government preferences for software
procurement;
|
|
|
·
|
international
economic, political and labor
conditions;
|
|
|
·
|
tax
laws (including U.S. taxes on foreign
subsidiaries);
|
|
|
·
|
increased
financial accounting and reporting burdens and
complexities;
|
|
|
·
|
unexpected
changes in, or impositions of, legislative or regulatory
requirements;
|
|
|
·
|
failure
of laws to protect our intellectual property rights
adequately;
|
|
|
·
|
inadequate
local infrastructure and difficulties in managing and staffing
international operations;
|
|
|
·
|
delays
resulting from difficulty in obtaining export licenses for certain
technology, tariffs, quotas and other trade barriers and
restrictions;
|
|
|
·
|
transportation
delays;
|
|
|
·
|
operating
in locations with a higher incidence of corruption and fraudulent business
practices; and
|
|
|
·
|
other
factors beyond our control, including terrorism, war, natural disasters
and diseases.
|
If sales
to any of our customers outside of the Americas are delayed or cancelled because
of any of the above factors, our revenue may be negatively
impacted.
In
addition, approximately 42% of our employees are located outside the U.S. This
means we have exposure to changes in foreign laws governing our relationships
with our employees, including wage and hour laws and regulations, fair labor
standards, unemployment tax rates, workers’ compensation rates, citizenship
requirements and payroll and other taxes, which likely would have a direct
impact on our operating costs. We also intend to continue expansion of our
international operations and international sales and marketing activities.
Expansion in international markets has required, and will continue to require,
significant management attention and resources. We may be unable to scale our
infrastructure effectively, or as quickly as our competitors, in these markets
and our revenues may not increase to offset these expected increases in costs
and operating expenses, which would cause our results to suffer.
Moreover,
as a global company, we are subject to varied and complex laws, regulations and
customs domestically and internationally. These laws and regulations relate to a
number of aspects of our business, including trade protection, import and export
control, data and transaction processing security, records management, gift
policies, employment and labor relations laws, securities regulations and other
regulatory requirements affecting trade and investment. The
application of these laws and regulations to our business is often unclear and
may at times conflict. Compliance with these laws and regulations may involve
significant costs or require changes in our business practices that result in
reduced revenue and profitability. Non-compliance could also result in fines,
damages, criminal sanctions against us, our officers, or our
employees, prohibitions on the conduct of our business, and damage to
our reputation. We incur additional legal compliance
costs
associated with our global operations and could become subject to legal
penalties in foreign countries if we do not comply with local laws and
regulations, which may be substantially different from those in the U.S. In many
foreign countries, particularly in those with developing economies, it is common
to engage in business practices that are prohibited by U.S. regulations
applicable to us such as the Foreign Corrupt Practices Act. Although we
implement policies and procedures designed to ensure compliance with these laws,
there can be no assurance that all of our employees, contractors and agents, as
well as those companies to which we outsource certain of our business
operations, including those based in or from countries where practices which
violate such U.S. laws may be customary, will not take actions in violation of
our internal policies. Any such violation, even if prohibited by our internal
policies, could have an adverse effect on our business.
We
may incur losses associated with currency fluctuations and may not be able to
effectively hedge our exposure.
Our
operating results are subject to fluctuations in foreign currency exchange
rates. We attempt to mitigate a portion of these risks through foreign currency
hedging, based on our judgment of the appropriate trade-offs among risk,
opportunity and expense. We have established a hedging program to partially
hedge our exposure to foreign currency exchange rate fluctuations primarily for
the Japanese Yen and the Euro. We regularly review our hedging program and make
adjustments as necessary based on the judgment factors discussed above. Our
hedging activities may not offset more than a portion of the adverse financial
impact resulting from unfavorable movement in foreign currency exchange rates,
which could adversely affect our financial condition or results of
operations.
Changes
in, or interpretations of, accounting principles could result in unfavorable
accounting charges.
We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). These
principles are subject to interpretation by the SEC and various bodies formed to
interpret and create appropriate accounting principles. A change in these
principles can have a significant effect on our reported results and may even
retroactively affect previously reported transactions. Our accounting principles
that recently have been or may be affected by changes in the accounting
principles are as follows:
|
|
·
|
software
and subscription revenue
recognition;
|
|
|
·
|
accounting
for stock-based compensation;
|
|
|
·
|
accounting
for income taxes; and
|
|
|
·
|
accounting
for business combinations and related
goodwill.
|
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued revised
standards for business combinations, which changes the accounting for business
combinations including timing of the measurement of acquirer shares issued in
consideration for a business combination, the timing of recognition and amount
of contingent consideration, the accounting for pre-acquisition gain and loss
contingencies, the recognition of capitalized in-process research and
development, the accounting for acquisition related restructuring liabilities,
the treatment of acquisition related transaction costs and the recognition of
changes in the acquirer’s income tax valuation allowance. The revised standards
for business combinations is effective for financial statements issued for
fiscal years beginning after December 15, 2008. The revised standards for
business combinations are effective for us beginning the first quarter of fiscal
2010. We currently believe that the adoption of the revised standards for
business combinations will result in the recognition of certain types of
expenses in our results of operations that we currently capitalize pursuant to
existing accounting standards.
If
our goodwill or amortizable intangible assets become impaired we may be required
to record a significant charge to earnings.
Under
GAAP, we review our goodwill and amortizable intangible assets for impairment
when events or changes in circumstances indicate the carrying value may not be
recoverable. Goodwill is required to be tested for impairment at least annually.
Factors that may be considered a change in circumstances indicating that the
carrying value of our goodwill or amortizable intangible assets may not be
recoverable include a decline in stock price and market capitalization, future
cash flows, and slower growth rates in our industry. We may be required to
record a significant charge to earnings in our financial statements during the
period in which any impairment of our goodwill or amortizable intangible assets
is determined, resulting in an impact on our results of operations. For example,
our Mobile and Device Solutions business, which is reported
as part
of our Platform segment in fiscal 2009, is in an emerging market with high
growth potential. In May 2008, we announced the OSP. As part of the project, we
will be removing the license fees on the next major releases of Adobe Flash
Player and Adobe AIR for devices. Revenue from this segment has begun to
decrease. Although we would expect this decrease to be offset in time by an
increased demand for tooling products, server technologies, hosted services and
applications, if future revenue or revenue forecasts for our Platform segment do
not meet our expectations, we may be required to record a charge to earnings
reflecting an impairment of recorded goodwill or intangible assets.
Changes
in, or interpretations of, tax rules and regulations may adversely affect our
effective tax rates.
We are a
U.S. based multinational company subject to tax in multiple U.S. and foreign tax
jurisdictions. Unanticipated changes in our tax rates could affect our future
results of operations. Our future effective tax rates could be unfavorably
affected by changes in, or interpretation of, tax rules and regulations in the
jurisdictions in which we do business, by unanticipated decreases in the amount
of revenue or earnings in countries with low statutory tax rates, by lapses of
the availability of the U.S. research and development tax credit, or by changes
in the valuation of our deferred tax assets and liabilities.
In
addition, we are subject to the continual examination of our income tax returns
by the IRS and other domestic and foreign tax authorities, including a current
examination by the IRS of our fiscal 2005, 2006 and 2007 tax returns. These
examinations are expected to focus on our intercompany transfer pricing
practices as well as other matters. We regularly assess the likelihood of
outcomes resulting from these examinations to determine the adequacy of our
provision for income taxes and have reserved for potential adjustments that may
result from the current examination. We believe such estimates to be reasonable;
however, there can be no assurance that the final determination of any of these
examinations will not have an adverse effect on our operating results and
financial position.
If
we are unable to recruit and retain key personnel our business may be
harmed.
Much of
our future success depends on the continued service and availability of our
senior management. These individuals have acquired specialized knowledge and
skills with respect to Adobe. The loss of any of these individuals could harm
our business. Our business is also dependent on our ability to retain, hire and
motivate talented, highly skilled personnel. Experienced personnel in the
information technology industry are in high demand and competition for their
talents is intense, especially in the Bay Area, where many of our employees are
located. We have relied on our ability to grant equity compensation as one
mechanism for recruiting and retaining such highly skilled personnel. Accounting
regulations requiring the expensing of equity compensation may impair our
ability to provide these incentives without incurring significant compensation
costs. Additionally, the recent significant adverse volatility in our stock
price has resulted in many employees’ stock option exercise prices exceeding the
underlying stock’s market value as well as deterioration in the value of
employees’ restricted stock units granted, thus lessening the effectiveness of
retaining employees through stock-based awards. If we are unable to continue to
successfully attract and retain key personnel, our business may be harmed.
Effective succession planning is also a key factor for our long-term success.
Our failure to enable the effective transfer of knowledge and facilitate smooth
transitions with regards to our key employees could adversely affect our
long-term strategic planning and execution.
We
believe that a critical contributor to our success to date has been our
corporate culture, which we believe fosters innovation and teamwork. As we grow,
including from the integration of employees and businesses acquired in
connection with our previous or future acquisitions, we may find it difficult to
maintain important aspects of our corporate culture which could negatively
affect our ability to retain and recruit personnel and otherwise adversely
affect our future success.
Our
investment portfolio may become impaired by deterioration of the capital
markets.
Our cash
equivalent and short-term investment portfolio as of November 27, 2009 consisted
of US treasury securities, bonds of government agencies, obligations of foreign
governments, corporate bonds and taxable money market mutual funds. We follow an
established investment policy and set of guidelines to monitor and help mitigate
our exposure to interest rate and credit risk. The policy sets forth credit
quality standards and limits our exposure to any one issuer, as well as our
maximum exposure to various asset classes.
As a
result of current adverse financial market conditions, investments in some
financial instruments may pose risks arising from recent market liquidity and
credit concerns. As of November 27, 2009, we had no material impairment charges
associated with our short-term investment portfolio relating to such adverse
financial market conditions. Although we believe
our
current investment portfolio has very little risk of material impairment, we
cannot predict future market conditions or market liquidity and can provide no
assurance that our investment portfolio will remain materially
unimpaired.
We
may suffer losses from our equity investments which could harm our
business.
We have
investments and plan to continue to make future investments in privately held
companies, many of which are considered in the start-up or development stages.
These investments are inherently risky, as the market for the technologies or
products these companies have under development is typically in the early stages
and may never materialize. Our investment activities can impact our net income.
Future price fluctuations in these securities and any significant long-term
declines in value of any of our investments could reduce our net income in
future periods.
We
rely on turnkey assemblers and any adverse change in our relationship with our
turnkey assemblers could result in a loss of revenue and harm our
business.
We
currently rely on seven turnkey assemblers of our products, with at least two
turnkeys located in each major region we serve. If any significant
turnkey assembler terminates its relationship with us, or if our supply from any
significant turnkey assembler is interrupted or terminated for any other reason,
we may not have enough time or be able to replace the supply of products
replicated by that turnkey assembler to avoid serious harm to our
business.
None.
The
following table sets forth the location, approximate square footage and use of
each of the principal properties used by Adobe during fiscal 2009. We lease or
sublease all of these properties with the exception of our property in India,
where we own the building and lease the land, and San Francisco on Townsend and
Waltham where we own the building and land. All properties are leased under
operating leases. Such leases expire at various times through 2028, with the
exception of the land lease that expires in 2091. The annual base rent expense
(including operating expenses, property taxes and assessments, as applicable)
for all facilities is currently approximately $84.8 million and is subject to
annual adjustments as well as changes in interest rates.
|
Location
|
Approximate
Square
Footage
|
Use
|
|||||||
|
North
America:
|
|||||||||
|
345
Park Avenue
San
Jose, CA 95110, USA
|
378,000
|
Research,
product development, sales and marketing, and
administration
|
|||||||
|
321
Park Avenue
San
Jose, CA 95110, USA
|
321,000
|
Research,
product development, sales and marketing
|
|||||||
|
151
Almaden Boulevard
San
Jose, CA 95110, USA
|
267,000
|
Product
development, sales and administration
|
|||||||
|
601
and 625 Townsend Street
San
Francisco, CA 94103, USA
|
272,000
|
*
|
Research,
product development, sales, marketing and
administration
|
||||||
|
801
N. 34
th
Street-Waterfront
Seattle,
WA 98103, USA
|
182,000
|
Product
development, sales, technical support and
administration
|
|||||||
|
550
East Timpanagos Circle
Orem,
UT 84097, USA
|
135,000
|
Research,
product development, sales, marketing and
administration
|
|||||||
|
10182
Telesis Court
San
Diego, CA 92121, USA
|
61,000
|
**
|
Product
development, sales and marketing
|
||||||
|
21
Hickory Drive
Waltham,
MA 02451, USA
|
108,000
|
Research,
product development, sales and marketing
|
|||||||
|
1-3
Riverside Center
275
Grove Street
Newton,
MA 02466, USA
|
63,000
|
***
|
Research,
product development, sales and marketing
|
||||||
|
250
Brannan Street
San
Francisco, CA 94107, USA
|
35,000
|
Product
development, sales and marketing
|
|||||||
|
13450
Sunrise Valley Drive
Herndon,
VA 20171,USA
|
29,000
|
Product
development, sales and marketing
|
|||||||
|
343
Preston Street
Ottawa,
Ontario K1S 5N4, Canada
|
122,000
|
Research,
product development, sales, marketing and
administration
|
|||||||
|
India:
|
|||||||||
|
Adobe
Towers, 1-1A, Sector 25A
Noida,
U.P.
|
191,000
|
Product
development
|
|||||||
|
Adobe
Towers, Plot #6, Sector
127
Expressway, Noida, U.P.
|
65,000
|
Product
development
|
|||||||
|
Salapuria
Infinity, 3rd Floor
#5,
Bannerghatta Road
Bangalore
|
94,000
|
Research
and product development
|
|||||||
|
Location
|
Approximate
Square
Footage
|
Use
|
|
Japan:
|
|||||||||
|
Gate
City Ohsaki East Tower
1-11-2
Osaki, Shinagawa-ku
Tokyo
|
56,000
|
Product
development, sales and marketing
|
|||||||
|
China:
|
|||||||||
|
Block
A, SP Tower, 21st & 22nd Floor
Block
D, SP Tower, 10th Floor
Tsinghua
Science Park, Yard 1
Zhongguancun
Donglu, Haidian District
Beijing
|
77,000
|
Research
and product development
|
|||||||
|
Germany:
|
|||||||||
|
Grosse
Elbstrasse 27
Hamburg
22767
|
36,000
|
Research
and product development
|
|||||||
|
Romania:
|
|||||||||
|
26
Z Timisoara Blvd, Anchor Plaza
Lujerului,
Sector 6
Bucharest
|
44,000
|
Research
and product development
|
|||||||
|
UK:
|
|||||||||
|
3
Roundwood Avenue
Stockley
Park, Heathrow
|
22,000
|
Product
development, sales, marketing and
administration
|
|||||||
_________________________________________
|
*
|
The
total square footage is 346,000, of which we occupy 272,000 square feet,
or approximately 79% of this facility; 74,000 square feet is unoccupied
basement space.
|
|
**
|
The
total square footage is 61,000, of which we occupy 21,000 square feet, or
approximately 34% of this facility. The remaining square
footage is subleased.
|
|
***
|
The
total square footage is 63,000, of which we occupy 49,000 square feet, or
approximately 78% of this facility. The remaining square
footage is subleased.
|
In
general, all facilities are in good condition and are operating at an average
capacity of approximately 80%.
On
September 23, 2009, Richard Miner on behalf of himself and all similarly
situated stockholders of Omniture, Inc. filed a class action lawsuit captioned
Miner v. Omniture, Inc.,
et. al.
,
Case No.
090403559
(the “Miner Lawsuit”) against Omniture, the members of
Omniture’s board of directors (collectively, the “Omniture Defendants”) and
Adobe in the United States Fourth Judicial District Court for Utah County, Provo
Department, State of Utah seeking to enjoin the proposed acquisition between
Omniture and Adobe. In the event the acquisition is consummated, the
plaintiff seeks to recover an unspecified amount of damages. The plaintiff
alleges that the members of Omniture’s board of directors breached their
fiduciary duties to Omniture’s stockholders by failing to seek the highest
possible price for Omniture and that Adobe induced or aided and abetted in the
alleged breach of such fiduciary duties. Also on September 23, 2009, Christopher
R. Barrell filed a substantially similar lawsuit to the Miner Lawsuit in the
United States Fourth Judicial District Court for Utah County, Provo Department,
State of Utah, captioned
Barrell v. Omniture, Inc. et. al.,
Case No. 090403560
(the “Barrell Lawsuit”). The Barrell Lawsuit names the
same defendants as the Miner Lawsuit, and also names Snowbird Acquisition
Corporation as an additional defendant. Subsequently, on September 24, 2009,
the plaintiff in the Barrell Lawsuit filed an amended complaint, which
added allegations that the Schedule 14D-9 Solicitation/Recommendation Statement
filed by Omniture on September 24, 2009 contained inadequate disclosures and was
materially misleading. On September 25, 2009, the Omniture Defendants
filed a motion requesting that the court consolidate the Barrell Lawsuit, Miner
Lawsuit and a substantially similar
lawsuit
captioned
Lodhia v. Omniture,
Inc.
et al.,
Case No. 090403499
(the
“Lodhia Lawsuit”) in which the Omniture Defendants, but not Adobe, were named.
Additionally, on September 30, 2009, the plaintiff in the Lodhia Lawsuit filed a
response to defendants’ motion to consolidate, agreeing consolidation is
appropriate, and also filed a motion seeking appointment as lead plaintiff in
the consolidated action. Omniture moved for an order consolidating
all three lawsuits. The plaintiffs in the three lawsuits filed a joint
motion seeking preliminary injunction barring the consummation of the proposed
acquisition and requiring additional disclosures by Omniture in its Schedule
14D-9. At a hearing on October 20, 2009, the court granted Omniture’s
motion to consolidate the three cases and denied the plaintiffs’ motion for a
preliminary injunction. On December 30, 2009, the plaintiffs served the
defendants with a consolidated amended complaint. Adobe intends to defend the
lawsuits vigorously.
In
connection with our anti-piracy efforts, conducted both internally and through
organizations such as the Business Software Alliance, from time to time we
undertake litigation against alleged copyright infringers. Such lawsuits may
lead to counter-claims alleging improper use of litigation or violation of other
local laws. We believe we have valid defenses with respect to such
counter-claims; however, it is possible that our consolidated financial
position, cash flows or results of operations could be affected in any
particular period by the resolution of one or more of these
counter-claims.
From time
to time, Adobe is subject to legal proceedings, claims and investigations in the
ordinary course of business, including claims of alleged infringement of
third-party patents and other intellectual property rights, commercial,
employment and other matters. In accordance with GAAP, Adobe makes a provision
for a liability when it is both probable that a liability has been incurred and
the amount of the loss can be reasonably estimated. These provisions are
reviewed at least quarterly and adjusted to reflect the impacts of negotiations,
settlements, rulings, advice of legal counsel and other information and events
pertaining to a particular case. Litigation is inherently unpredictable.
However, we believe that we have valid defenses with respect to the legal
matters pending against Adobe. It is possible, nevertheless, that our
consolidated financial position, cash flows or results of operations could be
negatively affected by an unfavorable resolution of one or more of such
proceedings, claims or investigations.
No
matters were submitted to a vote of security holders during the quarter ended
November 27, 2009.
Our
common stock is traded on the NASDAQ Global Select Market under the symbol
“ADBE.” According to the records of our transfer agent, there were 1,709 holders
of record of our common stock on January 15, 2010. Because many of
such shares are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of stockholders
represented by these record holders.
We did
not declare or pay any cash dividends on our common stock during fiscal 2009 or
fiscal 2008. Under the terms of our credit agreement and lease agreements, we
are not prohibited from paying cash dividends unless payment would trigger an
event of default or one currently exists. We do not anticipate paying any cash
dividends in the foreseeable future. The following table sets forth the high and
low sales price per share of our common stock for the periods
indicated.
| Price Range | ||||||||
|
High
|
Low
|
|||||||
|
Fiscal
2009:
|
||||||||
|
First
Quarter
|
$ | 24.29 | $ | 16.70 | ||||
|
Second
Quarter
|
$ | 28.18 | $ | 15.98 | ||||
|
Third
Quarter
|
$ | 33.43 | $ | 26.34 | ||||
|
Fourth
Quarter
|
$ | 36.90 | $ | 31.00 | ||||
|
Fiscal
Year
|
$ | 36.90 | $ | 15.98 | ||||
|
Fiscal
2008:
|
||||||||
|
First
Quarter
|
$ | 44.62 | $ | 32.62 | ||||
|
Second
Quarter
|
$ | 44.06 | $ | 30.79 | ||||
|
Third
Quarter
|
$ | 45.89 | $ | 38.23 | ||||
|
Fourth
Quarter
|
$ | 43.14 | $ | 20.75 | ||||
|
Fiscal
Year
|
$ | 45.89 | $ | 20.75 | ||||
Issuer
Purchases of Equity Securities
Below is
a summary of stock repurchases for the quarter ended November 27, 2009.
See Note 14 of our Notes to
Consolidated Financial Statements for information regarding our stock repurchase
programs.
|
Plan/Period
(1)
|
|
Shares
Repurchased
(2)
|
Average
Price
Per
Share
|
Maximum
Number
of
Shares that May
Yet
be Purchased
Under
the Plan
|
|||||||||
|
Stock
Repurchase Program I
|
|||||||||||||
|
Beginning
shares available to be repurchased as of August 28, 2009
|
131,855,184 | (3) | |||||||||||
|
August
29—September 25, 2009
|
|||||||||||||
|
Structured
repurchases
|
1,842,160 | $ | 31.62 | ||||||||||
|
September
26—October 23, 2009
|
|||||||||||||
|
Structured
repurchases
|
1,770,314 | $ | 32.73 | ||||||||||
|
October
24—November 27, 2009
|
|||||||||||||
|
From
employees
(4)
|
10 | $ | 34.78 | ||||||||||
|
Structured
repurchases
|
1,705,926 | $ | 33.88 | ||||||||||
|
Adjustments
to repurchase authority for net dilution
|
— | 5,840,221 | (5) | ||||||||||
|
Total
shares repurchased
|
5,318,410 | (5,318,410 | ) | ||||||||||
|
Ending
shares available to be repurchased under Program I as of November 27,
2009
|
132,376,995 | (6) | |||||||||||
________________________________________
|
(1)
|
In
December 1997, our Board of Directors authorized Stock Repurchase Program
I which is not subject to expiration. However, this repurchase program is
limited to covering net dilution from stock issuances and is subject to
business conditions and cash flow requirements as determined by our Board
of Directors from time to time.
|
|
(2)
|
All
shares were purchased as part of publicly announced
plans.
|
|
(3)
|
Additional
109.0 million shares were issued for the acquisition of Macromedia which
accounted for the majority of the repurchase
authorization.
|
|
(4)
|
The
repurchases from employees represent shares cancelled when surrendered in
lieu of cash payments for withholding taxes
due.
|
|
(5)
|
Adjustment
of authority to reflect changes in the dilution from outstanding shares
and options.
|
|
(6)
|
The
remaining authorization for the ongoing stock repurchase program is
determined by combining all stock issuances, net of any cancelled,
surrendered or exchanged shares less all stock repurchases under the
ongoing plan, beginning in the first quarter of fiscal
1998.
|
Stock
Performance Graph
(*)
Five-Year
Stockholder Return Comparison
The line
graph below compares the cumulative stockholder return on our common stock with
the cumulative total return of the Standard & Poor’s 500 Index (“S&P
500”) and the S&P 500 Software & Services Index for the five fiscal year
periods ending November 27, 2009. The stock price information shown on the graph
below is not necessarily indicative of future price performance.
The
following table and graph assume that $100.00 was invested on December 3, 2004
in our common stock, the S&P 500 Index and the S&P 500 Software &
Services Index, with reinvestment of dividends. For each reported year, our
reported dates are the last trading dates of our fiscal year which ends on the
Friday closest to November 30.
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
|||||||||||||||||||
|
Adobe
Systems
|
$ | 100.00 | $ | 111.13 | $ | 125.05 | $ | 133.91 | $ | 73.60 | $ | 112.43 | ||||||||||||
|
S&P
500 Index
|
$ | 100.00 | $ | 108.16 | $ | 121.69 | $ | 131.45 | $ | 81.83 | $ | 101.64 | ||||||||||||
|
S&P
500 Software & Services Index
|
$ | 100.00 | $ | 102.94 | $ | 107.51 | $ | 122.76 | $ | 70.42 | $ | 106.79 |
_________________________________________
|
(*)
|
The
material in this report is not deemed “filed” with the SEC and is not to
be incorporated by reference into any of our filings under the Securities
Act of 1933 or the Securities Exchange Act of 1934, whether made before or
after the date hereof and irrespective of any general incorporation
language in any such filings.
|
The
following selected consolidated financial data (presented in thousands, except
per share amounts and employee data) is derived from our consolidated financial
statements. This data should be read in conjunction with the consolidated
financial statements and notes thereto, and with Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
| Fiscal Years | ||||||||||||||||||||
|
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Operations:
|
||||||||||||||||||||
|
Revenue
|
$ | 2,945,853 | $ | 3,579,889 | $ | 3,157,881 | $ | 2,575,300 | $ | 1,966,321 | ||||||||||
|
Gross
profit
|
$ | 2,649,121 | $ | 3,217,259 | $ | 2,803,187 | $ | 2,282,843 | $ | 1,853,743 | ||||||||||
|
Income
before income taxes
|
$ | 701,520 | $ | 1,078,508 | $ | 947,190 | $ | 679,727 | $ | 765,776 | ||||||||||
|
Net
income
(1)
|
$ | 386,508 | $ | 871,814 | $ | 723,807 | $ | 505,809 | $ | 602,839 | ||||||||||
|
Net
income per share
(1),
(2)
|
||||||||||||||||||||
|
Basic
|
$ | 0.74 | $ | 1.62 | $ | 1.24 | $ | 0.85 | $ | 1.23 | ||||||||||
|
Diluted
|
$ | 0.73 | $ | 1.59 | $ | 1.21 | $ | 0.83 | $ | 1.19 | ||||||||||
|
Cash
dividends declared per common share
|
$ | — | $ | — | $ | — | $ | — | $ | 0.00625 | ||||||||||
|
Financial
position:
(3)
|
||||||||||||||||||||
|
Cash,
cash equivalents and short-term investments
|
$ | 1,904,473 | $ | 2,019,202 | $ | 1,993,854 | $ | 2,280,879 | $ | 1,700,834 | ||||||||||
|
Working
capital
|
$ | 1,629,071 | $ | 1,972,504 | $ | 1,720,441 | $ | 2,208,688 | $ | 1,528,915 | ||||||||||
|
Total
assets
|
$ | 7,282,237 | $ | 5,821,598 | $ | 5,713,679 | $ | 5,962,548 | $ | 2,440,315 | ||||||||||
|
Long-term
debt
|
$ | 1,000,000 | $ | 350,000 | $ | — | $ | — | $ | — | ||||||||||
|
Stockholders’
equity
|
$ | 4,890,568 | $ | 4,410,354 | $ | 4,649,982 | $ | 5,151,876 | $ | 1,865,164 | ||||||||||
|
Additional
data:
|
||||||||||||||||||||
|
Worldwide
employees
|
8,660 | 7,544 | 6,794 | 6,068 | 4,285 | |||||||||||||||
______________________________________
|
(1)
|
In
fiscal 2009, 2008, 2007 and 2006, net income and net income per share
includes the impact of stock-based compensation charges as well as the
integration of Macromedia into our operations in fiscal 2006, neither of
which were present in fiscal year 2005. Fiscal 2009, also includes the
integration of Omniture into our operations which was not present in the
prior years.
See Notes 2
and 13 of our Notes to Consolidated Financial Statements for information
regarding our Omniture and Macromedia acquisitions and stock-based
compensation, respectively.
|
|
(2)
|
On
March 16, 2005, our Board of Directors approved a two-for-one stock
split, in the form of a stock dividend, of our common stock payable on
May 23, 2005 to stockholders of record as of May 2, 2005. Per
share data, for all periods presented, have been adjusted to give effect
to this stock split.
|
|
(3)
|
Information
associated with our financial position is as of the Friday closest to
November 30 for the five fiscal periods through
2009.
|
The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto.
In
addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements, including statements regarding product
plans, future growth and market opportunities which involve risks and
uncertainties that could cause actual results to differ materially from these
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in the section
titled “Risk Factors” in Part 1, Item 1A of this report. You should carefully
review the risks described herein and in other documents we file from time to
time with the SEC, including the Quarterly Reports on Form 10-Q to be filed
in fiscal 2010. When used in this report, the words “expects,” “could,” “would,”
“may,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “targets,”
“estimates,” “looks for,” “looks to” and similar expressions, as well as
statements regarding our focus for the future, are generally intended to
identify forward-looking statements. You should not place undue reliance on
these forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K. We undertake no obligation to publicly release any
revisions to the forward-looking statements or reflect events or circumstances
after the date of this document.
BUSINESS
OVERVIEW
Founded
in 1982, Adobe Systems Incorporated is one of the largest and most diversified
software companies in the world. We offer a line of creative, business, Web and
mobile software and services used by creative professionals, knowledge workers,
consumers, OEMs, developers and enterprises for creating, managing, delivering,
optimizing and engaging with compelling content and experiences across multiple
operating systems, devices and media. We distribute our products through a
network of distributors, VARs, systems integrators, ISVs and OEMs, direct to end
users and through our own Website at www.adobe.com. We also license our
technology to hardware manufacturers, software developers and service providers,
and we offer integrated software solutions to businesses of all sizes. We have
operations in the Americas, Europe, EMEA and Asia. Our software runs on personal
computers with Microsoft Windows, Apple OS, Linux, UNIX and various non-PC
platforms, depending on the product.
ACQUISITION
OF OMNITURE
On
October 23, 2009, we completed the acquisition of Omniture, an industry leader
in Web analytics and online business optimization based in Orem, Utah, for
approximately $1.8 billion. Accordingly, we have included the results of the
business operations acquired from Omniture in our consolidated results of
operations beginning on October 24, 2009. We expect the acquisition to have a
significant impact on our consolidated financial position, results of operations
and cash flows. We expect our revenues, cost of revenues and operating expenses
to increase in the future, but we also anticipate both revenue and cost saving
synergies. Coinciding with the integration of Omniture, we created a new
reportable segment for financial reporting purposes.
See Note 2 of our Notes to
Consolidated Financial Statements for further information regarding this
acquisition
.
CRITICAL
ACCOUNTING
POLICIES AND ESTIMATES
In
preparing our consolidated financial statements in accordance with GAAP and
pursuant to the rules and regulations of the SEC, we make assumptions, judgments
and estimates that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosures of contingent assets and liabilities. We
base our assumptions, judgments and estimates on historical experience and
various other factors that we believe to be reasonable under the circumstances.
Actual results could differ materially from these estimates under different
assumptions or conditions. On a regular basis, we evaluate our assumptions,
judgments and estimates. We also discuss our critical accounting policies and
estimates with the Audit Committee of the Board of Directors.
We
believe that the assumptions, judgments and estimates involved in the accounting
for revenue recognition, stock-based compensation, business combinations,
goodwill impairment and income taxes have the greatest potential impact on our
consolidated financial statements. These areas are key components of our results
of operations and are based on complex rules which require us to make judgments
and estimates, so we consider these to be our critical accounting policies.
Historically, our assumptions, judgments and estimates relative to our critical
accounting policies have not differed materially from actual
results.
Revenue
Recognition
We
recognize revenue when all four revenue recognition criteria have been met:
persuasive evidence of an arrangement exists, we have delivered the product or
performed the service, the fee is fixed or determinable and collection is
probable. Determining whether and when some of these criteria have been
satisfied often involves assumptions and judgments that can have a significant
impact on the timing and amount of revenue we report. For example, for multiple
element arrangements, we must: (1) determine whether and when each element has
been delivered; (2) determine whether undelivered products or services are
essential to the functionality of the delivered products and services; (3)
determine whether vendor-specific objective evidence (“VSOE”) of fair value
exists for each undelivered element; and (4) allocate the total price among the
various elements we must deliver. Changes in assumptions or judgments or changes
to the elements in a software arrangement could cause a material increase or
decrease in the amount of revenue that we report in a particular
period.
In
addition, we must estimate certain royalty revenue amounts due to the timing of
securing information from our customers. While we believe we can make reliable
estimates regarding these matters, these estimates are inherently subjective.
Accordingly, our assumptions and judgments regarding future products and
services as well as our estimates of royalty revenue could differ from actual
events, thus materially impacting our financial position and results of
operations.
Product
revenue is recognized when the above criteria are met. We reduce the revenue
recognized for estimated future returns, price protection and rebates at the
time the related revenue is recorded. In determining our estimate for returns
and in accordance with our internal policy regarding global channel inventory
which is used to determine the level of product held by our distributors on
which we have recognized revenue, we rely upon historical data, the estimated
amount of product inventory in our distribution channel, the rate at which our
product sells through to the end user, product plans and other factors. Our
estimated provisions for returns can vary from what actually occurs. Product
returns may be more or less than what was estimated. The amount of inventory in
the channel could be different than what is estimated. Our estimate of the rate
of sell through for product in the channel could be different than what actually
occurs. There could be a delay in the release of our products. These factors and
unanticipated changes in the economic and industry environment could make our
return estimates differ from actual returns, thus materially impacting our
financial position and results of operations.
We offer
price protection to our distributors that allows for the right to a credit if we
permanently reduce the price of a software product. When evaluating the adequacy
of the price protection allowance, we analyze historical returns, current
sell-through of distributor and retailer inventory of our products, changes in
customer demand and acceptance of our products and other related factors. In
addition, we monitor the volume of sales to our channel partners and their
inventories. Changes to these assumptions or in the economic environment could
result in higher returns or higher price protection costs in subsequent
periods.
In the
future, actual returns and price protection may materially exceed our estimates
as unsold products in the distribution channels are exposed to rapid changes in
consumer preferences, market conditions or technological obsolescence due to new
platforms, product updates or competing products. While we believe we can make
reliable estimates regarding these matters, these estimates are inherently
subjective. Accordingly, if our estimates change, our returns and price
protection reserves would change, which would impact the total net revenue we
report.
We
recognize revenues for hosting services that are based on a committed number of
transactions, including implementation and set-up fees, ratably beginning on the
date the customer commences use of our services and continuing through the end
of the customer term. Over-usage fees, and fees billed based on the actual
number of transactions from which we capture data, are billed in accordance with
contract terms as these fees are incurred. We record amounts that have been
invoiced in accounts receivable and in deferred revenue or revenue, depending on
whether the revenue recognition criteria have been met.
Our
consulting revenue is primarily recognized using the proportionate performance
method and is measured monthly based on input measures, such as on hours
incurred to date compared to total estimated hours to complete, with
consideration given to output measures, such as contract milestones, when
applicable. Accordingly, our estimates of consulting revenue could differ from
actual events and may materially impact our financial position and results of
operations.
Stock-based
Compensation
Stock-based
compensation cost is measured at the grant date based on the fair value of the
award and is recognized as expense on a straight-line basis over the requisite
service period, which is generally the vesting period.
We
currently use the Black-Scholes option pricing model to determine the fair value
of stock options and employee stock purchase plan shares. The determination of
the fair value of stock-based awards on the date of grant using an option
pricing model is affected by our stock price as well as assumptions regarding a
number of complex and subjective variables. These variables include our expected
stock price volatility over the expected term of the awards, actual and
projected employee stock option exercise behaviors, the risk-free interest rate,
estimated forfeitures and expected dividends.
We
estimate the expected term of options granted by calculating the average term
from our historical stock option exercise experience. We estimate the volatility
of our common stock by using implied volatility in market traded options. Our
decision to use implied volatility was based upon the availability of actively
traded options on our common stock and our assessment that implied volatility is
more representative of future stock price trends than historical volatility. We
base the risk-free interest rate on zero-coupon yields implied from U.S.
Treasury issues with remaining terms similar to the expected term on the
options. We do not anticipate paying any cash dividends in the foreseeable
future and therefore use an expected dividend yield of zero in the option
pricing model. We are required to estimate forfeitures at the time of grant and
revise those estimates in subsequent periods if actual forfeitures differ from
those estimates. We use historical data to estimate pre-vesting option
forfeitures and record stock-based compensation expense only for those awards
that are expected to vest.
If we use
different assumptions for estimating stock-based compensation expense in future
periods or if actual forfeitures differ materially from our estimated
forfeitures, the change in our stock-based compensation expense could materially
affect our operating income, net income and net income per share.
Business
Combinations
We allocate
the purchase price of acquired companies to the tangible and intangible assets
acquired and liabilities assumed as well as to in-process research and
development based upon their estimated fair values at the acquisition date. The
purchase price allocation process requires management to make significant
estimates and assumptions, especially at acquisition date with respect to
intangible assets and deferred revenue obligations assumed.
Although we
believe the assumptions and estimates we have made are reasonable, they are
based in part on historical experience and information obtained from the
management of the acquired companies and are inherently uncertain. Examples of
critical estimates in valuing certain of the intangible assets we have acquired
or may acquire in the future include but are not limited to:
|
·
|
future
expected cash flows from software license sales, subscriptions, support
agreements, consulting contracts and acquired developed technologies and
patents;
|
|
·
|
expected
costs to develop the in-process research and development into commercially
viable products and estimated cash flows from the projects when
completed;
|
|
·
|
the
acquired company’s trade name and trademarks as well as assumptions about
the period of time the acquired trade name and trademarks will continue to
be used in the combined company’s product portfolio;
and
|
|
·
|
discount
rates.
|
In connection
with the purchase price allocations for our acquisitions, we estimate the fair
value of the deferred revenue obligations assumed. The estimated fair value of
the support obligations is determined utilizing a cost build-up approach. The
cost build-up approach determines fair value by estimating the costs related to
fulfilling the obligations plus a normal profit margin. The estimated costs to
fulfill the obligations are based on the historical costs related to fulfilling
the obligations.
Unanticipated
events and circumstances may occur which may affect the accuracy or validity of
such assumptions, estimates or actual results.
Goodwill
Impairment
We
complete our goodwill impairment test on an annual basis, during the second
quarter of our fiscal year, or more frequently, if changes in facts and
circumstances indicate that an impairment in the value of goodwill recorded on
our balance sheet may exist. In order to estimate the fair value of
goodwill, we typically estimate future revenue, consider market
factors
and
estimate our future cash flows. Based on these key assumptions, judgments and
estimates, we determine whether we need to record an impairment charge to reduce
the value of the asset carried on our balance sheet to its estimated fair value.
Assumptions, judgments and estimates about future values are complex and often
subjective. They can be affected by a variety of factors, including external
factors such as industry and economic trends, and internal factors such as
changes in our business strategy or our internal forecasts. Although we believe
the assumptions, judgments and estimates we have made in the past have been
reasonable and appropriate, different assumptions, judgments and estimates could
materially affect our reported financial results.
We
completed our annual impairment test in the second quarter of fiscal 2009 and
determined there was no impairment. We currently believe that there is no
significant risk of future material goodwill impairment in any of our reporting
units.
Accounting
for Income Taxes
We use
the asset and liability method of accounting for income taxes. Under this
method, income tax expense is recognized for the amount of taxes payable or
refundable for the current year. In addition, deferred tax assets and
liabilities are recognized for the expected future tax consequences of temporary
differences between the financial reporting and tax bases of assets and
liabilities, and for operating losses and tax credit carryforwards. Management
must make assumptions, judgments and estimates to determine our current
provision for income taxes and also our deferred tax assets and liabilities and
any valuation allowance to be recorded against a deferred tax
asset.
Our
assumptions, judgments and estimates relative to the current provision for
income taxes take into account current tax laws, our interpretation of current
tax laws and possible outcomes of current and future audits conducted by foreign
and domestic tax authorities. We have established reserves for income taxes to
address potential exposures involving tax positions that could be challenged by
tax authorities. In addition, we are subject to the continual examination of our
income tax returns by the IRS and other domestic and foreign tax authorities,
including a current examination by the IRS for our fiscal 2005, 2006 and 2007
tax returns. These examinations are expected to focus on our intercompany
transfer pricing practices as well as other matters. Although we believe our
assumptions, judgments and estimates are reasonable, changes in tax laws or our
interpretation of tax laws and the resolution of the current and any future tax
audits could significantly impact the amounts provided for income taxes in our
consolidated financial statements.
Our
assumptions, judgments and estimates relative to the value of a deferred tax
asset take into account predictions of the amount and category of future taxable
income, such as income from operations or capital gains income. Actual operating
results and the underlying amount and category of income in future years could
render our current assumptions, judgments and estimates of recoverable net
deferred taxes inaccurate. Any of the assumptions, judgments and estimates
mentioned above could cause our actual income tax obligations to differ from our
estimates, thus materially impacting our financial position and results of
operations.
RESULTS
OF OPERATIONS
Overview
of 2009
Effective
in the first quarter of fiscal 2009, our former Mobile and Devices Solutions
segment, which was integrated into our Platform business unit to better align
our engineering and marketing efforts, is now reported as part of the Platform
segment. Prior year information has been updated to reflect the integration of
these business units.
During
fiscal 2009, our business was broadly impacted by the global economic recession
and generally weak macro-economic environment. This resulted in a
significant year-over-year decline in our revenue and earnings
results.
In our
Creative Solutions segment, revenue decreased by 18% during fiscal 2009 as
compared to fiscal 2008. We attribute this decline to reduced adoption of our
CS4 family of products during the year, as the global financial crisis
significantly affected demand in the creative professional end user
market. All major creative product categories declined on a
year-over-year basis.
Our
Business Productivity Solutions business declined 19% in fiscal 2009 when
compared to fiscal 2008. A decline in demand primarily due to the
macro-economic environment with our Acrobat product family – which makes up the
majority of revenue in our Knowledge Worker segment – was the primary factor for
this decline. In our Enterprise business, our LiveCycle revenue
declined 7% when compared to revenue achieved in fiscal 2008. We attribute this
smaller percentage decline in comparison to our other segments to focused
execution by our sales teams and the large market opportunities these product
solutions address.
In our
Platform segment, revenue declined 22% on a year-over-year basis primarily due
to the impact of the OSP. The removal of license fees associated with our Flash
technologies on mobile devices commenced in fiscal 2009, and as such, OEM
revenue from device manufacturers began to decline from rates of revenue we
achieved in fiscal 2008. We continue to expect this decline to be
offset over time by an increased demand for tooling products, server
technologies, services and applications in many of our other business
segments.
In our
Print and Publishing segment, revenue was also impacted by the global
macroeconomic environment, resulting in a 16% year-over-year
decline.
The
Omniture business appeared to stabilize during the fourth quarter with the
improvement in the general economy, as indicated by an increase in the
transaction volume on our network. In addition, customer retention
rates began stabilizing and we experienced an increase in the number of
subscription services provided to our existing customers.
Revenue
(dollars in millions)
|
Fiscal
2009
|
% Change
2009 to 2008
|
Fiscal
2008
|
% Change
2008 to 2007
|
Fiscal
2007
|
||||||||||||||
|
Product
|
$ | 2,759.4 | (19 | )% | $ | 3,396.5 | 12 | % | $ | 3,019.5 | ||||||||
|
Percentage
of total revenue
|
94 | % | 95 | % | 96 | % | ||||||||||||
|
Services
and support
|
186.5 | 2 | % | 183.4 | 33 | % | 138.4 | |||||||||||
|
Percentage
of total revenue
|
6 | % | 5 | % | 4 | % | ||||||||||||
|
Total
revenue
|
$ | 2,945.9 | (18 | )% | $ | 3,579.9 | 13 | % | $ | 3,157.9 | ||||||||
In fiscal
2009, we categorized our products into the following segments: Creative
Solutions, Knowledge Worker, Enterprise, Platform, Print and Publishing and
Omniture products.
Our
Creative Solutions segment focuses on delivering a complete professional line of
integrated tools for a full range of creative and developer tasks to an extended
set of customers. Our Knowledge Worker segment focuses on the needs of knowledge
worker customers, providing essential applications and services to help them
reliably share information and collaborate effectively. This segment contains
revenue generated by the Adobe Acrobat family of products. Our Enterprise
segment provides server-based enterprise interaction solutions that automate
people-centric processes and contains revenue generated by our LiveCycle line of
products. The Platform segment provides developer solutions and technologies,
including Adobe Flash Player, Adobe AIR and Flash Builder which are used to
build rich application experiences in addition to solutions that create
compelling experiences through rich content, user interfaces and data services
on mobile and non-PC devices such as cellular phones, consumer devices and
Internet connected hand-held devices. The Print and Publishing segment addresses
market opportunities ranging from the diverse publishing needs of technical and
business publishing, to our legacy type and OEM printing businesses. Finally,
our Omniture segment provides Web analytics and online business optimization
products and services.
We will
adjust our reporting segments at the beginning of fiscal 2010 to reflect changes
in how we manage our business as we enter the new fiscal year. Specifically, we
are moving responsibility for our Adobe Connect Pro product line from our
Knowledge Worker segment to our Enterprise segment.
Our
services and support revenue is composed of consulting, training and maintenance
and support, primarily related to the licensing of our enterprise, developer and
platform products. Our support revenue also includes technical support and
developer support to partners and developer organizations related to our desktop
products. Our maintenance and support offerings which entitle customers to
receive product upgrades and enhancements or technical support, depending on the
offering, are recognized ratably over the term of the arrangement.
Segment
Information (dollars in millions)
|
Fiscal
2009
|
% Change
2009 to 2008
|
Fiscal
2008
|
% Change
2008 to 2007
|
Fiscal
2007
|
||||||||||||||
|
Creative
Solutions
|
$ | 1,702.1 | (18 | )% | $ | 2,072.8 | 9 | % | $ | 1,899.0 | ||||||||
|
Percentage
of total revenue
|
58 | % | 58 | % | 60 | % | ||||||||||||
|
Knowledge
Worker
|
623.0 | (23 | )% | 810.9 | 11 | % | 728.5 | |||||||||||
|
Percentage
of total revenue
|
21 | % | 23 | % | 23 | % | ||||||||||||
|
Enterprise
|
235.5 | (7 | )% | 253.0 | 32 | % | 191.3 | |||||||||||
|
Percentage
of total revenue
|
8 | % | 7 | % | 6 | % | ||||||||||||
|
Platform
|
181.0 | (22 | )% | 231.6 | 74 | % | 133.4 | |||||||||||
|
Percentage
of total revenue
|
6 | % | 6 | % | 4 | % | ||||||||||||
| Print and Publishing | 178.0 | (16 | )% | 211.6 | 3 | % | 205.7 | |||||||||||
|
Percentage
of total revenue
|
6 | % | 6 | % | 7 | % | ||||||||||||
|
Omniture
|
26.3 | * | % | — | — | % | — | |||||||||||
|
Percentage
of total revenue
|
1 | % | — | % | — | % | ||||||||||||
|
Total
revenue
|
$ | 2,945.9 | (18 | )% | $ | 3,579.9 | 13 | % | $ | 3,157.9 | ||||||||
_____________________________________
|
*
|
Percentage
is not meaningful.
|
Fiscal
2009 Revenue Compared to Fiscal 2008 Revenue
Revenue
from our Creative Solutions segment decreased $370.7 million during fiscal 2009
as compared to fiscal 2008 primarily due to reduced adoption of our CS family of
products because of the global recession and generally weak macro-economic
environment. The decrease was driven largely by a 15% decline in Creative Suites
related revenue and a decline of 27% in Photoshop point product revenue. Also
contributing to the decrease was an overall decline in the number of units
licensed. Average unit selling prices have remained relatively
consistent.
Revenue
in our Knowledge Worker segment decreased $187.9 million during fiscal 2009 as
compared to fiscal 2008 for similar reasons as Creative Solutions in addition to
a decrease in the licensing of our Acrobat family of products. We attribute the
decline in revenue to lower volume licensing by our enterprise customers, as
well as a decrease in the number of units sold through our shrink-wrap
distribution channel. Average unit selling prices have remained relatively
consistent.
Revenue
from our Enterprise segment decreased $17.5 million during fiscal 2009 as
compared to fiscal 2008 primarily due to the economic impact which resulted in
reduced spending by our enterprise customers.
Revenue
from our Platform segment decreased by $50.6 million during fiscal 2009 as
compared to fiscal 2008 due to the impact of the OSP which we announced on May
1, 2008, and involves the removal of certain licensing fees of our Flash Lite
client with OEMs.
Revenue
in our Print and Publishing business decreased by $33.6 million during fiscal
2009 as compared to fiscal 2008 due to reduced demand because of the global
macro-economic downturn.
We
acquired Omniture in the fourth quarter of fiscal 2009, and as such, there is no
prior fiscal 2008 period with which to compare Omniture fiscal 2009
revenue.
Fiscal
2008 Revenue Compared to Fiscal 2007 Revenue
Revenue
from our Creative Solutions segment increased $173.8 million during fiscal 2008
as compared to fiscal 2007 primarily due to ongoing adoption of our CS3 family
of products, as well as the launch of our CS4 family of products in the fourth
quarter of fiscal 2008. We also achieved solid growth in our Scene7 business and
with our hobbyist products. The increase was also driven by a 7% increase in
Creative Suites related revenue and an increase of 5% in Photoshop point product
revenue. Also contributing to the increase in fiscal 2008 as compared to fiscal
2007 was an increase in certain unit average selling prices. Units sold remained
relatively stable.
Revenue
in our Knowledge Worker segment increased $82.4 million during fiscal 2008 as
compared to fiscal 2007 primarily due to an increase in the licensing of our
Acrobat 8 and new Acrobat 9 family of products. An increase in the number of
units sold as well as a slight increase in certain unit average selling prices
also contributed to higher revenue as compared to fiscal 2007.
Revenue
from our Enterprise segment increased $61.7 million during fiscal 2008 as
compared to fiscal 2007 primarily due to an increased adoption of our LiveCycle
family of products and a larger number of enterprise solution transactions at a
higher average transaction size.
Revenue
from our Platform segment increased by $98.2 million during fiscal 2008 as
compared to fiscal 2007 due to continued adoption of Flash Lite by mobile and
non-PC device manufacturers, as well as increased revenue related to Flash
Player and the launch of Adobe AIR which resulted in increased revenue from our
developer tools.
Revenue
in our Print and Publishing business increased by $5.9 million during fiscal
2008 as compared to fiscal 2007, driven by ongoing adoption of our eLearning
solutions as well as some of our legacy print and publishing
products.
Geographic
Information (dollars in millions)
|
Fiscal
2009
|
% Change
2009 to 2008
|
Fiscal
2008
|
% Change
2008 to 2007
|
Fiscal
2007
|
||||||||||||||
|
Americas
|
$ | 1,382.6 | (15 | )% | $ | 1,632.8 | 8 | % | $ | 1,508.9 | ||||||||
|
Percentage
of total revenue
|
46 | % | 46 | % | 48 | % | ||||||||||||
|
EMEA
|
928.9 | (24 | )% | 1,229.2 | 20 | % | 1,026.4 | |||||||||||
|
Percentage
of total revenue
|
32 | % | 34 | % | 32 | % | ||||||||||||
|
Asia
|
634.4 | (12 | )% | 717.9 | 15 | % | 622.6 | |||||||||||
|
Percentage
of total revenue
|
22 | % | 20 | % | 20 | % | ||||||||||||
|
Total
revenue
|
$ | 2,945.9 | (18 | )% | $ | 3,579.9 | 13 | % | $ | 3,157.9 | ||||||||
Fiscal
2009 Revenue by Geography Compared to Fiscal 2008 Revenue by
Geography
Overall
revenue in each of the geographic segments for fiscal 2009 decreased compared to
fiscal 2008 primarily due to the global economic recession, which resulted in
reduced adoption of many of our major products.
Included
in the overall decrease in revenue were impacts associated with foreign
currency. Revenue in EMEA measured in U.S. dollars decreased approximately $47.1
million, due to the strength of the U.S. dollar against the Euro, as compared to
fiscal 2008. Our currency hedging program is used to mitigate a portion of the
foreign currency impact to revenue. During fiscal 2009, our currency hedging
program related to the Euro resulted in hedging gains of $25.8 million. Revenue
in Asia measured in U.S. dollars was favorably impacted by approximately
$32.8 million due to the strength of the Yen against the U.S. dollar as
compared to fiscal 2008. During fiscal 2009, our currency hedging program
related to the Yen resulted in hedging gains of $1.2 million.
Fiscal
2008 Revenue by Geography Compared to Fiscal 2007 Revenue by
Geography
Overall
revenue in each of the geographic segments for fiscal 2008 increased compared to
fiscal 2007 primarily due to the ongoing adoption of our CS3 family of products
during the first half of the year, the launch of our CS4 family of products in
the fourth quarter of the year, the launch of our Acrobat 9 family of products
in the third quarter of the year and strong growth in our enterprise
business.
Included
in the overall increase in revenue were impacts associated with foreign
currency. Revenue in EMEA measured in U.S. dollars was favorably impacted by
approximately $69.3 million during fiscal 2008 as compared to fiscal 2007
primarily due to the strength of the Euro against the U.S. dollar. Additionally,
during fiscal 2008 we had a hedging gain of $13.2 million. Revenue in Asia was
favorably impacted by approximately $39.6 million during fiscal 2008 as compared
to fiscal 2007 primarily due to the strength of the Yen against the U.S.
dollar.
See
Item 7A, Quantitative and Qualitative Disclosures About Market Risk regarding
foreign currency risks.
Product
Backlog
With
regard to our product backlog, the actual amount of backlog at any particular
time may not be a meaningful indicator of future business prospects. Backlog is
comprised of unfulfilled orders, excluding those associated with new product
releases, those pending credit review and those not shipped due to the
application of our global inventory policy. Our backlog for the fourth quarter
of fiscal 2009 was approximately 9% of fourth quarter fiscal 2009 revenue
compared with approximately 2% of third quarter fiscal 2009 revenue. We had
minimal backlog at the end of the fourth quarter of fiscal 2008.
Cost
of Revenue
(dollars in millions)
|
Fiscal
2009
|
% Change
2009 to 2008
|
Fiscal
2008
|
% Change
2008 to 2007
|
Fiscal
2007
|
||||||||||||||
|
Product
|
$ | 228.9 | (14 | )% | $ | 266.4 | (2 | )% | $ | 270.8 | ||||||||
|
Percentage
of total revenue
|
8 | % | 7 | % | 9 | % | ||||||||||||
|
Services
and support
|
67.8 | (30 | )% | 96.2 | 15 | % | 83.9 | |||||||||||
|
Percentage
of total revenue
|
2 | % | 3 | % | 3 | % | ||||||||||||
|
Total
cost of revenue
|
$ | 296.7 | (18 | )% | $ | 362.6 | 2 | % | $ | 354.7 | ||||||||
Product
Cost of
product revenue includes product packaging, third-party royalties, excess and
obsolete inventory, amortization related to localization costs and acquired
rights to use technology and the costs associated with the manufacturing of our
products.
Cost of
product revenue decreased due to the following:
|
% Change
2009 to 2008
|
% Change
2008
to 2007
|
|||||||
|
Amortization
of acquired rights to use technology
|
(8
|
)%
|
6
|
%
|
||||
|
Amortization
of purchased intangibles
|
(10
|
)
|
(10
|
)
|
||||
|
Royalty
cost
|
(1
|
)
|
3
|
|||||
|
Hosted
services
|
9
|
3
|
||||||
|
Various
individually insignificant items
|
(4
|
)
|
(4
|
)
|
||||
|
Total
change
|
(14
|
)%
|
(2
|
)%
|
||||
The
decrease in amortization of acquired rights to use technology primarily relates
to a charge for historical use of licensing rights associated with certain
technology licensing arrangements entered into in fiscal 2008 that did not recur
in fiscal 2009. Amortization of acquired rights to use technology increased in
fiscal 2008 as compared to fiscal 2007, primarily due to the fact that we
entered into certain technology licensing arrangements totaling $100.4 million
and $60.0 million during fiscal 2008 and fiscal 2007, respectively. Of this
cost, an estimated $56.4 million and $44.8 million during fiscal 2008 and fiscal
2007, respectively, was related to future licensing rights and has been
capitalized and will be amortized on a straight-line basis over the estimated
useful lives up to fifteen years. Of the remaining costs, we estimated that
approximately $27.2 million and $15.2 million was related to historical use of
licensing rights which was expensed as cost of sales and the residual of $16.8
million for fiscal 2008 was expensed as general and administrative costs.
In connection with these licensing arrangements, we have the ability to acquire
additional rights to use technology in the future.
Amortization
of purchased intangibles decreased during fiscal 2009 as compared to fiscal 2008
and decreased during fiscal 2008 as compared to fiscal 2007, due to a decrease
in amortization primarily associated with intangible assets purchased through
the Macromedia acquisition which were fully amortized during fiscal
2009.
The
increase in hosted service costs was primarily related to the amortization of
our investment in capitalized infrastructure costs related to our SaaS business
in fiscal 2009 as compared to fiscal 2008.
Services
and Support
Cost of
services and support revenue is primarily comprised of employee-related costs
and associated costs incurred to provide consulting services, training and
product support.
Cost of
services and support revenue decreased during fiscal 2009 as compared to fiscal
2008, due to decreases in compensation and related benefits driven by headcount
reductions as well as increased consulting support provided by third- party
systems integrators resulting in the downsizing of our consulting
organization.
Cost of
services and support revenue increased during fiscal 2008 as compared to fiscal
2007, primarily due to increases in compensation and related benefits driven by
increases in headcount related to product support and utilization by customers
of our consulting services.
Operating
Expenses
(dollars in millions)
Research
and Development, Sales and Marketing and General and Administrative
Expenses
The
decrease in research and development, sales and marketing and general and
administrative expenses in fiscal 2009 was primarily driven by decreases in
compensation expense and a decrease in the costs associated with acquired rights
to use technology. The decrease in compensation costs during fiscal 2009 as
compared to fiscal 2008 was primarily due to lower profit sharing and employee
bonuses based on company performance. The increase in compensation costs during
fiscal 2008 as compared to fiscal 2007 related to increases in headcount and
stock-based compensation offset by decreases in profit sharing and employee
bonuses based on company performance.
Research
and Development
|
Fiscal
2009
|
% Change
2009 to 2008
|
Fiscal
2008
|
% Change
2008 to 2007
|
Fiscal
2007
|
||||||||||||||
|
Expenses
|
$ | 565.1 | (15 | )% | $ | 662.1 | 8 | % | $ | 613.2 | ||||||||
|
Percentage
of total revenue
|
19 | % | 18 | % | 19 | % | ||||||||||||
Research
and development expenses consist primarily of salary and benefit expenses for
software developers, contracted development efforts, related facilities costs
and expenses associated with computer equipment used in software
development.
Research and
development expenses decreased due to the following:
|
% Change
2009 to 2008
|
% Change
2008
to 2007
|
|||||||
|
Compensation
and related benefits associated with headcount growth
|
1
|
%
|
7
|
%
|
||||
|
Compensation
associated with incentive compensation and stock-based
compensation
|
(13
|
)
|
—
|
|||||
|
Various
individually insignificant items
|
(3
|
)
|
1
|
|||||
|
Total
change
|
(15
|
)%
|
8
|
%
|
||||
We
believe that investments in research and development, including the recruiting
and hiring of software developers, are critical to remaining competitive in the
marketplace and are directly related to continued timely development of new and
enhanced products. We will continue to focus on long-term opportunities
available in our end markets and make significant investments in the development
of our desktop application and server-based software products.
Sales
and Marketing
|
Fiscal
2009
|
% Change
2009 to 2008
|
Fiscal
2008
|
% Change
2008
to 2007
|
Fiscal
2007
|
||||||||||||||
|
Expenses
|
$ | 981.9 | (10 | )% | $ | 1,089.3 | 11 | % | $ | 984.4 | ||||||||
|
Percentage
of total revenue
|
33 | % | 30 | % | 31 | % | ||||||||||||
Sales and
marketing expenses consist primarily of salary and benefit expenses, sales
commissions, travel expenses and related facilities costs for our sales,
marketing, order management and global supply chain management personnel. Sales
and marketing expenses also include the costs of programs aimed at increasing
revenue, such as advertising, trade shows, public relations and other market
development programs.
Sales and
marketing expenses decreased due to the following:
|
% Change
2009 to 2008
|
% Change
2008 to 2007
|
|||||||
|
Compensation
and related benefits associated with headcount growth
|
2
|
%
|
5
|
%
|
||||
|
Compensation
associated with incentive compensation and stock-based
compensation
|
(8
|
)
|
1
|
|||||
|
Marketing
spending related to product launches and overall marketing efforts to
further increase revenue
|
(1
|
)
|
4
|
|||||
|
Various
individually insignificant items
|
(3
|
)
|
1
|
|||||
|
Total
change
|
(10
|
)%
|
11
|
%
|
||||
General
and Administrative
|
Fiscal
2009
|
% Change
2009
to 2008
|
Fiscal
2008
|
% Change
2008 to 2007
|
Fiscal
2007
|
||||||||||||||
|
Expenses
|
$ | 298.7 | (11 | )% | $ | 337.3 | 23 | % | $ | 275.0 | ||||||||
|
Percentage
of total revenue
|
10 | % | 9 | % | 9 | % | ||||||||||||
General
and administrative expenses consist primarily of compensation and benefit
expenses, travel expenses and related facilities costs for our finance,
facilities, human resources, legal, information services and executive
personnel. General and administrative expenses also include outside legal and
accounting fees, provision for bad debts, expenses associated with computer
equipment and software used in the administration of the business, charitable
contributions and various forms of insurance.
|
|
General
and administrative expenses decreased due to the
following:
|
|
% Change
2009 to 2008
|
% Change
2008 to 2007
|
|||||||
|
Allocation
of costs associated with acquired rights to use technology
|
(5
|
)%
|
6
|
%
|
||||
|
Compensation
and related benefits associated with headcount growth
|
2
|
4
|
||||||
|
Compensation
associated with incentive compensation and stock-based
compensation
|
(8
|
)
|
2
|
|||||
|
Charitable
contributions
|
(3
|
)
|
4
|
|||||
|
Professional
and consulting fees
|
1
|
2
|
||||||
|
Provision
for bad debt
|
—
|
2
|
||||||
|
Depreciation
and amortization
|
1
|
1
|
||||||
|
Various
individually insignificant items
|
1
|
2
|
||||||
|
Total
change
|
(11
|
)%
|
23
|
%
|
||||
The
decrease in allocation of costs associated with acquired rights to use
technology in fiscal 2009 as compared to fiscal 2008 primarily relates to the
historical use of licensing rights associated with certain technology licensing
arrangements entered into in fiscal 2008 that did not recur in fiscal 2009.
Allocation of costs associated with acquired rights to use technology increased
in fiscal 2008 as compared to fiscal 2007 primarily due to the fact that we
entered into certain technology licensing arrangements totaling $100.4 million
and $60.0 million during fiscal 2008 and fiscal 2007, respectively. Of this
cost, an estimated $56.4 million and $44.8 million during fiscal 2008 and fiscal
2007, respectively, was related to future licensing rights and has been
capitalized and will be amortized on a straight-line basis over the estimated
useful lives up to fifteen years. Of the remaining costs, we estimated that
approximately $27.2 million and $15.2 million during fiscal 2008 and fiscal
2007, respectively, was related to historical use of licensing rights which was
expensed as cost of sales and the residual of $16.8 million for fiscal 2008 was
expensed as general and administrative costs. In connection with these licensing
arrangements, we have the ability to acquire additional rights to use technology
in the future.
Charitable
contributions represent funding of the Adobe Foundation which is a private
foundation created to leverage human, technological and financial resources to
drive social change and improve the communities in which we live and work. The
decrease in charitable contributions during fiscal 2009 as compared to fiscal
2008 and increase in fiscal 2008 as compared to fiscal 2007 reflects a change in
the timing of contributions to the Adobe Foundation.
Restructuring
Charges
|
Fiscal
2009
|
% Change
2009
to 2008
|
Fiscal
2008
|
% Change
2008 to 2007
|
Fiscal
2007
|
||||||||||||||
|
Expenses
|
$ | 41.3 | 29 | % | $ | 32.1 | * | % | $ | 0.6 | ||||||||
|
Percentage
of total revenue
|
1 | % | 1 | % | * | % | ||||||||||||
_____________________________________
|
*
|
Percentage
is not meaningful.
|
Fiscal
2009 Restructuring Charges
On
November 10, 2009, we initiated a restructuring plan to appropriately align our
costs in connection with our fiscal 2010 operating plan impacting up to
approximately 630 full-time positions worldwide. In connection with this
restructuring plan, in the fourth quarter of fiscal 2009, we recorded
restructuring charges of approximately $25.5 million related to
ongoing
termination
benefits for the elimination of approximately 340 of these full-time positions
worldwide. As of November 27, 2009, approximately $2.5 million was paid. The
remaining accrual associated with these ongoing termination benefits is expected
to be paid during fiscal 2010. The restructuring activities related to this
program affect only those employees and facilities that were associated with
Adobe prior to the acquisition of Omniture on October 23, 2009.
Beginning
in the first quarter of fiscal 2010, we expect to record additional
restructuring charges of approximately $15 million to $18 million primarily
related to the consolidation of leased facilities and up to approximately $26
million related to employee severance arrangements for the elimination of the
remaining full-time positions worldwide. We expect to accrue the facility
related liabilities beginning in the first quarter of fiscal 2010 and pay these
liabilities through fiscal 2021 based on current lease terms. Substantially all
of these charges will result in cash expenditures.
Omniture
Restructuring Charges
We completed
our acquisition of Omniture on October 23, 2009. In the fourth
quarter of fiscal 2009, we initiated a plan to restructure the pre-merger
operations of Omniture to eliminate certain duplicative activities, focus our
resources on future growth opportunities and reduce our cost structure. In
connection with this restructuring plan, we accrued a total of approximately
$10.6 million in costs related to termination benefits for the elimination of
approximately 100 regular positions and for the closure of duplicative
facilities. We also accrued approximately $0.2 million in costs related to the
cancellation of certain contracts associated with the wind-down of subsidiaries
and other service contracts held by Omniture. These costs were recorded as a
part of the purchase price allocation, as discussed in
Note 2 of our Notes to Consolidated
Financial Statements
, and have been accrued for as of November 27, 2009.
We expect to pay the termination benefits and facility related liabilities
through fiscal 2010 and fiscal 2013, respectively.
Additionally,
approximately $1.5 million of restructuring costs related to facilities were
included in the liabilities assumed by us upon our acquisition of Omniture on
October 23, 2009.
Fiscal
2008 Restructuring Charges
In the
fourth quarter of fiscal 2008, we initiated a restructuring program, consisting
of reductions in workforce of approximately 560 full-time positions globally and
the consolidation of facilities, in order to reduce our operating costs and
focus our resources on key strategic priorities. In connection with this
restructuring program, we recorded restructuring charges totaling $29.2 million
related to ongoing termination benefits for the elimination of approximately 460
of the 560 full-time positions globally. As of November 28, 2008, $0.4 million
was paid.
During
fiscal 2009, we continued to implement restructuring activities under this
program. We vacated approximately 89,000 square feet of research and development
and sales facilities in the U.S., the United Kingdom and Canada. We accrued $8.5
million for the fair value of our future contractual obligations under these
operating leases using our credit-adjusted risk-free interest rate, estimated at
approximately 6% as of the date we ceased to use the leased properties. This
amount is net of the fair value of future estimated sublease income of
approximately $4.4 million. We also recorded additional charges of $6.7 million
for termination benefits for the elimination of substantially all of the
remaining 100 full-time positions expected to be terminated.
We have
paid substantially all of the accrued termination benefits during fiscal 2009
and expect to pay the remaining amounts in fiscal 2010. We expect to pay
facilities-related liabilities through fiscal 2013.
Macromedia
Restructuring Charges
We
completed our acquisition of Macromedia on December 3, 2005. In connection
with this acquisition, we initiated plans to restructure both the pre-merger
operations of Adobe and Macromedia to eliminate certain duplicative activities,
focus our resources on future growth opportunities and reduce our cost
structure. In connection with the worldwide restructuring plan, we recognized
costs related to termination benefits for employee positions that were
eliminated and for the closure of duplicative facilities. We also recognized
costs related to the cancellation of certain contracts associated with the
wind-down of subsidiaries and other service contracts held by
Macromedia. Costs for termination benefits and contract cancellations
were completed during fiscal 2007. Total costs incurred were $27.0 million and
$3.2 million, respectively.
As of
November 27, 2009, accrued restructuring charges related to the 2009
restructuring program, 2008 restructuring program, Omniture acquisition, and
Macromedia acquisition totaled approximately $23.0 million, $4.4 million, $12.3
million, and $5.0 million respectively. We expect to pay the liabilities
associated with the 2009 and 2008 restructuring programs through fiscal 2021 and
2013, respectively. We expect to pay the restructuring liabilities associated
with the Omniture and Macromedia acquisitions through fiscal 2013 and fiscal
2012, respectively.
See
Note 11 of our Notes to Consolidated
Financial Statements for further information regarding our restructuring
charges.
Amortization
of Purchased Intangibles and Incomplete Technology
|
Fiscal
2009
|
% Change
2009
to 2008
|
Fiscal
2008
|
% Change
2008 to 2007
|
Fiscal
2007
|
||||||||||||||
|
Expenses
|
$ | 71.6 | 5 | % | $ | 68.2 | (6 | )% | $ | 72.4 | ||||||||
|
Percentage
of total revenue
|
2 | % | 2 | % | 2 | % | ||||||||||||
As a
result of our acquisition of Omniture in fiscal 2009, we acquired purchased
intangibles which are amortized over their estimated useful lives of one to
twelve years. In addition, as a result of our acquisition of Macromedia in
fiscal 2006, we acquired purchased intangibles which are amortized over their
estimated useful lives of two to four years. During fiscal 2009, we completed
one business combination, in addition to Omniture. During fiscal 2008 we
completed one business combination and during fiscal 2007, we completed two
business combinations and one asset acquisition. We acquired purchased
intangibles through these acquisitions which are amortized over their estimated
useful lives.
Amortization
expense increased during fiscal 2009 as compared to fiscal 2008, primarily due
to amortization expense associated with intangibles assets purchased through the
acquisition of Omniture.
Amortization
expense decreased during fiscal 2008 as compared to fiscal 2007, due to a
decrease in amortization expense associated with intangible assets purchased
through the Macromedia acquisition.
Non-Operating
Income
(Expense) (dollars in millions)
|
Fiscal
2009
|
% Change
2009
to 2008
|
Fiscal
2008
|
% Change
2008 to 2007
|
Fiscal
2007
|
||||||||||||||
|
Interest
and other income, net
|
$ | 31.4 | (28 | )% | $ | 43.8 | (47 | )% | $ | 82.7 | ||||||||
|
Percentage
of total revenue
|
1 | % | 1 | % | 3 | % | ||||||||||||
|
Interest
expense
|
(3.4 | ) | 66 | % | (10.0 | ) | * | (0.2 | ) | |||||||||
|
Percentage
of total revenue
|
* | * | * | |||||||||||||||
|
Investment
gains (losses), net
|
(17.0 | ) | (204 | )% | 16.4 | 131 | % | 7.1 | ||||||||||
|
Percentage
of total revenue
|
(1 | )% | * | % | * | |||||||||||||
|
Total
non-operating income (expense), net
|
$ | 11.0 | (78 | )% | $ | 50.2 | (44 | )% | $ | 89.6 | ||||||||
_________________________________________
|
*
|
Percentage
is not meaningful.
|
Interest
and Other Income, Net
Interest
and other income, net, consists primarily of interest earned on cash, cash
equivalents and short-term fixed income investments. Interest and other income,
net also includes foreign exchange gains and losses, including those from
hedging revenue transactions primarily denominated in Euro and Japanese Yen
currencies.
Interest
and other income, net, decreased during fiscal 2009 as compared to fiscal 2008
primarily due to lower interest rates, partially offset by lower average
invested balances, realized gains on sales of fixed income securities and lower
foreign exchange losses.
Interest and
other income, net, decreased during fiscal 2008 as compared to fiscal 2007
primarily as a result of lower average invested balances due to cash used for
our share repurchase programs, lower interest rates and increased hedging costs.
Additionally, during fiscal 2008, interest and other income, net included losses
on fixed income investments associated with a write-down for an
other-than-temporary impairment totaling approximately $1.3 million during the
second quarter of fiscal 2008.
Interest
Expense
Interest
expense for fiscal 2009 and 2008, primarily represents interest associated with
our credit facility. The outstanding balance as of November 27, 2009 was $1.0
billion. Interest due under the credit facility is paid upon expiration of the
London interbank offered rate (“LIBOR”) contract or at a minimum, quarterly. The
decline in interest expense was primarily due to lower interest
rates.
Investment
Gains (Losses), Net
Investment
gains (losses), net, consists principally of realized gains or losses from the
sale of marketable equity investments, other-than-temporary declines in the
value of marketable and non-marketable equity securities, unrealized holding
gains and losses associated with our deferred compensation plan assets
(classified as trading securities), and gains and losses of Adobe
Ventures.
Investment
gains and (losses), net fluctuated due to the following (in
millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Net
gains (losses) related to our investments in Adobe Ventures and cost
method investments
|
$ | (16.7 | ) | $ | 15.9 | $ | 6.9 | |||||
|
Gains
from sale of equity investments
|
— | 5.4 | 0.2 | |||||||||
|
Write-downs
due to other-than-temporary declines in value of our marketable equity
securities
|
(0.3 | ) | (4.9 | ) | — | |||||||
|
Total
investment gains (losses), net
|
$ | (17.0 | ) | $ | 16.4 | $ | 7.1 |
During
fiscal 2009, investment gains (losses), net decreased as compared to fiscal 2008
primarily due to net unrealized losses related to our Adobe Ventures and direct
investments.
During
fiscal 2008, investment gains (losses), net increased as compared to fiscal 2007
due primarily to investment gains from our direct and Adobe Ventures
investments. Additionally, during fiscal 2008, we received cash and
recognized a gain resulting from the expiration of the escrow period related to
the sale of our investment in Atom Entertainment, Inc. that occurred during the
fourth quarter of fiscal 2006.
Provision
for Income Tax
es (dollars in millions)
|
Fiscal
2009
|
% Change
2009 to 2008
|
Fiscal
2008
|
% Change
2008 to 2007
|
Fiscal
2007
|
||||||||||||||
|
Provision
|
$ | 315.0 | 52 | % | $ | 206.7 | (7 | )% | $ | 223.4 | ||||||||
|
Percentage
of total revenue
|
11 | % | 6 | % | 7 | % | ||||||||||||
|
Effective
tax rate
|
45 | % | 19 | % | 24 | % | ||||||||||||
Our
effective tax rate increased approximately twenty-six percentage points during
fiscal 2009 as compared to fiscal 2008. The increase was primarily due to a
one-time charge that was related to our acquisition of Omniture. The
charge was the tax cost of inter-company transactions necessary to license
certain Omniture assets to Adobe’s trading companies, so that Omniture’s
services can be offered to customers from Adobe companies.
Our
effective tax rate decreased approximately five percentage points during fiscal
2008 as compared to fiscal 2007. The decrease was primarily related to the
completion in the third quarter of fiscal 2008 of a U.S. income tax examination
covering our fiscal years 2001 through 2004, a refund of foreign taxes from our
fiscal years 2000 through 2002 following a foreign tax court judgment and
stronger international profits for fiscal 2008 offset in part by an increase due
to the tax benefit for the reinstatement of the research and development credit
relating to fiscal 2006 in the first quarter of fiscal
2007.
LIQUIDITY
AND CAPITAL RESOURCES
This data
should be read in conjunction with the Consolidated Statements of Cash
Flows.
|
(in
millions)
|
Fiscal
2009
|
Fiscal
2008
|
||||||
|
Cash,
cash equivalents and short-term investments
|
$ | 1,904.5 | $ | 2,019.2 | ||||
|
Working
capital
|
$ | 1,629.1 | $ | 1,972.5 | ||||
|
Stockholders’
equity
|
$ | 4,890.6 | $ | 4,410.4 |
Summary of
our cash flows is as follows (in millions):
|
Fiscal
2009
|
Fiscal
2008
|
Fiscal
2007
|
||||||||||
|
Net
cash provided by operating activities
|
$ | 1,117.7 | $ | 1,280.7 | $ | 1,441.1 | ||||||
|
Net
cash (used for) provided by investing activities
|
(1,497.1 | ) | (304.7 | ) | 81.5 | |||||||
|
Net
cash provided by (used for) financing activities
|
477.7 | (1,021.6 | ) | (1,350.4 | ) | |||||||
|
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
14.7 | (14.4 | ) | 1.7 | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
$ | 113.0 | $ | (60.0 | ) | $ | 173.9 |
Our
primary source of cash is receipts from revenue. The primary uses of cash are
payroll related expenses; general operating expenses including marketing, travel
and office rent; and cost of product revenue. Another source of cash is proceeds
from the exercise of employee options and participation in the employee stock
purchase plan (“ESPP”). Another use of cash is our stock repurchase program,
which is described below.
Cash
flows from operating activities
Net cash
provided by operating activities of $1.1 billion for fiscal 2009, was
primarily comprised of net income plus the net effect of non-cash expenses. The
primary working capital sources of cash were net income coupled with decreases
in trade receivables, prepaid expenses and other current assets and increases in
income taxes payable. Trade receivables decreased primarily from CS4 revenue
that was shipped in the latter half of the fourth quarter of fiscal 2008 and
collected during the first quarter of fiscal 2009, in addition to lower overall
gross revenue and improved collections.
The
primary working capital uses of cash were decreases in accrued expenses,
deferred revenue, trade payables and accrued restructuring. Accrued expenses
decreased primarily due to payments for employee bonuses and commissions related
to fiscal 2008. Decreases in deferred revenue related primarily to deferred
revenue that was recognized in the first quarter of fiscal 2009 associated with
our free of charge upgrades for CS4 and Adobe Photoshop Lightroom products, as
well as declines in maintenance and support orders. Accrued restructuring
decreased primarily due to payments related to the 2008 restructuring program
that was initiated in the fourth quarter of fiscal 2008, offset in part by new
charges related to our 2009 restructuring program and acquisition of
Omniture.
Net cash
provided by operating activities of $1.3 billion for fiscal 2008, was primarily
comprised of net income plus the net effect of non-cash expenses. The primary
working capital sources of cash were increases in net income, deferred revenue,
accrued restructuring and trade payables. Increases in deferred revenue related
to maintenance and support and free of charge upgrade plan purchases which
offset in part, decreases in deferred revenue related to royalties. Accrued
restructuring costs increased due to the restructuring program initiated in the
fourth quarter of fiscal 2008 offset in part by payments of facility costs
during fiscal 2008 associated with the Macromedia acquisition.
See Note 11 of our Notes to
Consolidated Financial Statements for information regarding our restructuring
charges.
The
primary working capital uses of cash were increases in trade receivables and
prepaid expenses and other current assets coupled with decreases in income taxes
payable and accrued expenses. Trade receivables increased primarily as a result
of high sales of our CS4 family of products at the end of fiscal
2008. Income taxes payable decreased primarily due to payments made
as the result of the completion of a U.S. income tax examination covering our
fiscal years 2001 through 2004. Accrued expenses decreased primarily due to
payments for employee bonuses and profit sharing offset in part by increases in
royalty accruals and charitable contributions.
Net cash
provided by operating activities of $1.4 billion for fiscal 2007, was primarily
comprised of net income, net of non-cash related expenses.
The
primary working capital sources of cash for fiscal 2007 were increases in net
income, accrued expenses, income taxes payable, deferred revenue and trade
payables coupled with decreases in trade receivables and prepaid expenses and
other current assets. Net changes in accrued expenses was primarily attributable
to increases in accrued bonuses and accrued localization costs related to the
localization of our CS3 family of products during fiscal 2007. Income taxes
payable increased due to overall increased taxable income. Increases to deferred
revenue related primarily to deferred maintenance and service revenue due to
strong upgrade plan sales in the fourth quarter of fiscal 2007 for our CS3
family of products and related individual creative products. The decrease in
trade receivables was due to collections in the first quarter of fiscal 2007
related to high Acrobat 8 sales at the end of fiscal 2006 and strong collections
during the third quarter of fiscal 2007 resulting from shipments of our CS3
family of products.
The
primary working capital use of cash in fiscal 2007 was a decrease in accrued
restructuring costs which was primarily due to payments for facility and
severance costs for fiscal 2007.
Cash
flows from investing activities
Net cash
used for investing activities of $1.5 billion for fiscal 2009, was primarily due
to the acquisition of Omniture, purchases of short-term investments and property
and equipment, offset in part by maturities and sales of short-term investments.
Purchases of long-term investments and other assets during fiscal 2009 were less
than fiscal 2008 primarily due to $56.0 million paid in the third quarter of
fiscal 2008 for future licensing rights acquired through certain technology
licensing arrangements which did not recur in fiscal 2009.
Net cash
from investing activities changed from cash provided for fiscal 2007 of $81.5
million to cash used in fiscal 2008 of $304.7 million primarily due to purchases
of short-term investments offset in part by maturities and sales of short-term
investments. Other uses of cash during fiscal 2008 represented purchases of
property and equipment, long-term investments and other assets and one business
combination offset in part by proceeds from the sale of other investments in
equity securities. The uses associated with the purchase of long-term
investments and other assets related primarily to cash paid for future licensing
rights acquired through certain technology licensing arrangements totaling $56.0
million in fiscal 2008.
The
primary sources of cash from investment activities during fiscal 2007 were sales
and maturities of short-term investments offset in part by purchases of
short-term investments. The proceeds from the sales of short-term investments
were primarily used for stock repurchases. Uses of cash during fiscal 2007
included purchases of property and equipment, purchases of long-term investments
and other assets which related primarily to the technology licensing
arrangements that occurred during the second quarter of fiscal 2007, the
completion of two business combinations and one asset acquisition in fiscal
2007, and the purchase of a portion of the lease receivable totaling $80.4
million associated with our lease extension for the Almaden tower
lease.
See Note 17
of our Notes to Consolidated Financial Statements for further information
regarding this lease extension.
Cash
flows from financing activities
Net cash
from financing activities changed from cash used in fiscal 2008 of $1.0 billion
to cash provided for fiscal 2009 of $477.7 million, primarily due to additional
borrowing under our credit agreement of $650.0 million and lower purchases of
treasury stock, offset in part by proceeds related to the issuance of treasury
stock
(See sections entitled
“Stock Repurchase Program I” and “Stock Repurchase Program II” discussed
below).
Net cash
used for financing activities decreased $328.8 million for a total of
$1.0 billion in fiscal 2008 as compared to fiscal 2007, primarily due to
net borrowings under our credit agreement of $350.0 million. Additionally, we
had lower purchases of treasury stock when compared to the prior year
(See sections entitled “Stock
Repurchase Program I” and “Stock Repurchase Program II” discussed below),
offset in part by lower proceeds related to the issuance of treasury
stock.
We expect
to continue our investing activities, including short-term and long-term
investments, venture capital, facilities expansion and purchases of computer
systems for research and development, sales and marketing, product support and
administrative staff. Furthermore, cash reserves may be used to repurchase stock
under our stock repurchase programs and strategically acquire software
companies, products or technologies that are complementary to our business. The
Board of Directors has approved a facilities expansion for our operations in
India, which may include the purchase of land and buildings.
Acquisition
of Omniture
On
October 23, 2009, we completed the acquisition of Omniture, an industry
leader in Web analytics and online business optimization based in Orem, Utah for
approximately $1.8 billion. Under the terms of the agreement, we completed
our tender offer to acquire all of the outstanding shares of Omniture common
stock at a price of $21.50 per share, net to the seller in cash, without
interest. We expect to incur significant incremental costs, such as direct costs
related to the acquisition and costs associated with restructuring our
operations. We believe that our existing cash and cash equivalents, short-term
investments and cash generated from operations will be sufficient to meet these
cash outlays.
Restructuring
On
November 10, 2009, we initiated a restructuring plan to appropriately align
our costs in connection with our fiscal 2010 operating plan impacting up to
approximately 630 full-time positions worldwide. In connection with this
restructuring plan, in the fourth quarter of fiscal 2009, we recorded
restructuring charges of approximately $25.5 million related to ongoing
termination benefits for the elimination of approximately 340 of these full-time
positions worldwide. As of November 27, 2009, approximately $2.5 million was
paid. The remaining accrual associated with these ongoing termination benefits
is expected to be paid during fiscal 2010. The restructuring activities related
to this program are only to those employees and facilities that were associated
with Adobe prior to the acquisition of Omniture on October 23,
2009.
Beginning
in the first quarter of fiscal 2010, we expect to record approximately $15
million to $18 million primarily related to the consolidation of leased
facilities and up to approximately $26 million related to employee severance
arrangements for the elimination of the remaining full-time positions worldwide.
We expect to accrue the facility related liabilities beginning in the first
quarter of fiscal 2010 and pay these liabilities through fiscal 2021 based on
current lease terms. Substantially all of these charges will result in cash
expenditures.
We completed
our acquisition of Omniture on October 23, 2009. In the fourth
quarter of fiscal 2009, we initiated a plan to restructure the pre-merger
operations of Omniture to eliminate certain duplicative activities, focus our
resources on future growth opportunities and reduce our cost structure. In
connection with this restructuring plan, we accrued a total of approximately
$10.6 million in costs related to termination benefits for the elimination of
approximately 100 regular positions and for the closure of duplicative
facilities. We also accrued approximately $0.2 million in costs related to the
cancellation of certain contracts associated with the wind-down of subsidiaries
and other service contracts held by Omniture. These costs were recorded as a
part of the purchase price allocation, as discussed in
Note 2 of our Notes to Consolidated
Financial Statements
, and have been accrued for as of November 27, 2009.
We expect to pay the termination benefits and facility related liabilities
through fiscal 2010 and fiscal 2013, respectively.
Additionally,
approximately $1.5 million of restructuring costs related to facilities were
included in the liabilities assumed by us upon acquisition of Omniture on
October 23, 2009.
In the
fourth quarter of fiscal 2008, we initiated a restructuring program, consisting
of reductions in workforce of approximately 560 full-time positions globally and
the consolidation of facilities, in order to reduce our operating costs and
focus our resources on key strategic priorities. In connection with this
restructuring program, we recorded restructuring charges in the fourth quarter
of fiscal 2008 totaling $29.2 million related to termination benefits for the
elimination of approximately 460 of the 560 full-time positions
globally.
During
fiscal 2009, we continued to implement restructuring activities under this
program. We vacated approximately 89,000 square feet of research and development
and sales facilities in the U.S., the United Kingdom and Canada. We
accrued $8.5 million for the fair value of our future contractual obligations
under these operating leases using our credit-adjusted risk-free interest rate,
estimated at approximately 6% as of the date we ceased to use the leased
properties. This amount is net of the fair value of future estimated sublease
income of approximately $4.4 million. We also recorded charges of $6.7 million
for ongoing termination benefits for the elimination of substantially all of the
remaining 100 full-time positions expected to be terminated. We have paid
substantially all of the accrued termination benefits during fiscal 2009 with
and expect to pay the remaining amounts in fiscal 2010. We expect to pay
facilities-related liabilities through fiscal 2013.
We believe
that our existing cash and cash equivalents, short-term investments and cash
generated from operations will be sufficient to meet the cash outlays for the
restructuring changes described above.
Other Liquidity and Capital Resources
Considerations
Our existing
cash, cash equivalents and investment balances may further decline during fiscal
2010 in the event of a further weakening of the economy or changes in our
planned cash outlay, including changes in incremental costs such as direct and
integration costs related to the acquisition. Cash from operations could also be
affected by various risks and uncertainties, including, but not limited to the
risks detailed in Part I, Item 1A titled “Risk Factors.” However,
based on our current business plan and revenue prospects, we believe that our
existing balances and our anticipated cash flows from operations will be
sufficient to meet our working capital and operating resource expenditure
requirements for the next twelve months. At November 27, 2009, our existing
credit facility is $1.0 billion and we have borrowed against the entire amount.
See Note 18 of our Notes to
Consolidated Financial Statements for further information regarding our credit
agreement.
We use
professional investment management firms to manage a large portion of our
invested cash. External investment firms managed, on average, 50% of our
consolidated invested balances during the fourth quarter of fiscal 2009. Within
the U.S., the portfolio is invested primarily in money market funds for working
capital purposes. Outside of the U.S., our fixed income portfolio is primarily
invested in U.S. Treasury securities.
Stock
Repurchase Program I
To
facilitate our stock repurchase program, designed to return value to our
stockholders and minimize dilution from stock issuances, we repurchase shares in
the open market and also enter into structured repurchases with
third-parties.
Authorization
to repurchase shares to cover on-going dilution is not subject to expiration.
However, this repurchase program is limited to covering net dilution from stock
issuances and is subject to business conditions and cash flow requirements as
determined by our Board of Directors from time to time.
During
fiscal 2009, 2008 and 2007 we entered into several structured repurchase
agreements with large financial institutions, whereupon we provided the
financial institutions with prepayments of $350.0 million, $525.0 million and
$1.1 billion, respectively. We entered into these agreements in order to take
advantage of repurchasing shares at a guaranteed discount to the Volume Weighted
Average Price (“VWAP”) of our common stock over a specified period of time. We
only enter into such transactions when the discount that we receive is higher
than the foregone return on our cash prepayments to the financial institutions.
There were no explicit commissions or fees on these structured repurchases.
Under the terms of the agreements, there is no requirement for the financial
institutions to return any portion of the prepayment to us.
The
financial institutions agree to deliver shares to us at monthly intervals during
the contract term. The parameters used to calculate the number of shares
deliverable are: the total notional amount of the contract, the number of
trading days in the contract, the number of trading days in the interval, and
the average VWAP of our stock during the interval less the agreed upon discount.
During fiscal 2009, we repurchased approximately 15.2 million shares at an
average price per share of $27.89 through structured repurchase agreements
entered into during fiscal 2008 and fiscal 2009. During fiscal 2008, we
repurchased 22.4 million shares at an average price of $36.26 through
structured repurchase agreements which included prepayments from fiscal 2007.
During fiscal 2007, we repurchased 22.0 million shares at an average price of
$40.04 through structured repurchase agreements which included prepayments from
fiscal 2006.
During
fiscal 2008, we also repurchased 3.6 million shares at an average price of
$36.41 in open market transactions.
For
fiscal 2009, 2008 and 2007, the prepayments were classified as treasury stock on
our Consolidated Balance Sheets at the payment date, though only shares
physically delivered to us by November 27, 2009, November 28, 2008 and
November 30, 2007 were excluded from the denominator in the computation of
earnings per share. As of November 27, 2009 and November 28, 2008, approximately
$59.9 million and $134.7 million, respectively, of up-front payments
remained under the agreements.
See Item 5, Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities,
for
share repurchases during the quarter ended November 27,
2009.
Stock
Repurchase Program II
Under
this stock repurchase program, we had authorization to repurchase an aggregate
of 50.0 million shares of our common stock. From the inception of the 50.0
million share authorization under this program, we provided prepayments of
$1.9 billion under structured share repurchase agreements to large
financial institutions. During the third quarter of fiscal 2008, the remaining
authorized number of shares were repurchased.
During
fiscal 2008, we provided prepayments of $1.0 billion and repurchased 31.9
million shares under these structured agreements at an average price of $37.15.
During fiscal 2007, we provided prepayments of $850.0 million under structured
share repurchase agreements to large financial institutions. During fiscal 2007,
we repurchased 17.7 million shares under these structured agreements at an
average price of $40.50 and approximately $133.7 million of up-front payments
remained under these agreements as of November 30, 2007.
During
fiscal 2008, we also repurchased 0.5 million shares at an average price of
$39.79 in open market transactions.
Summary
of Stock Repurchases for fiscal 2009, 2008 and 2007
(in
thousands, except average amounts)
|
Board Approval
|
Repurchases
|
2009 | 2008 | 2007 | ||||||||||||||||||||
|
Date
|
Under the Plan
|
Shares
|
Average
|
Shares
|
Average
|
Shares
|
Average
|
|||||||||||||||||
|
December 1997
|
From
employees
(1)
|
1 | $ | 24.00 | 5 | $ | 34.89 | 39 | $ | 39.24 | ||||||||||||||
|
Open
market
|
— | $ | — | 3,554 | $ | 36.41 | — | $ | — | |||||||||||||||
|
Structured
repurchases
(2)
|
15,231 | $ | 27.89 | 22,418 | $ | 36.26 | 22,012 | $ | 40.04 | |||||||||||||||
|
April
2007
|
Structured
repurchases
(2)
|
— | $ | — | 31,859 | $ | 37.15 | 17,684 | $ | 40.50 | ||||||||||||||
|
Open
market
|
— | $ | — | 456 | $ | 39.79 | — | $ | — | |||||||||||||||
|
Total
shares
|
15,232 | $ | 27.89 | 58,292 | $ | 36.79 | 39,735 | $ | 40.25 | |||||||||||||||
|
Total
cost
|
$ | 424,851 | $ | 2,144,400 | $ | 1,599,214 | ||||||||||||||||||
|
(1)
|
The
repurchases from employees represent shares cancelled when surrendered in
lieu of cash payments for the option exercise price or withholding taxes
due.
|
|
(2)
|
Stock
repurchase agreements executed with large financial institutions. See
“Stock Repurchase Program I” and “Stock Repurchase Program II”
above.
|
Off-Balance
Sheet Arrangements and Aggregate Contractual Obligations
Our
principal commitments as of November 27, 2009, consist of obligations under
operating leases, royalty agreements and various service agreements.
See Note 17 of our Notes to
Consolidated Financial Statements for additional information regarding our
contractual commitments
.
Contractual
Obligations
The
following table summarizes our contractual obligations as of November 27, 2009
(in millions):
| Payment Due by Period | ||||||||||||||||||||
|
Total
|
Less than
1 year
|
1-3 years
|
3-5 years
|
More
than
5
years
|
||||||||||||||||
|
Operating
leases
|
$ | 249.3 | $ | 53.2 | $ | 74.7 | $ | 44.8 | $ | 76.6 | ||||||||||
|
Purchase
obligations
|
210.5 | 165.5 | 26.0 | 6.0 | 13.0 | |||||||||||||||
|
Debt
|
1,000.0 | — | — | 1,000.0 | — | |||||||||||||||
|
Total
|
$ | 1,459.8 | $ | 218.7 | $ | 100.7 | $ | 1,050.8 | $ | 89.6 | ||||||||||
As of
November 27, 2009, the principal outstanding under the credit agreement was
$1.0 billion which is due in full no later than February 16, 2013.
Interest associated with this agreement cannot be estimated with certainty by
period throughout the term since it is based on a fluctuating interest rate
calculation. Our credit facility contains a financial covenant requiring us not
to exceed a certain maximum leverage ratio.
Our
leases for the East and West Towers and the Almaden Tower are both subject to
standard covenants including certain financial ratios as defined in the lease
agreements that are reported to the lessors quarterly. As of November 27, 2009,
we were in compliance with all of our covenants. We believe these covenants will
not impact our credit or cash in the coming fiscal year or restrict our ability
to execute our business plan.
Under the
terms of our credit agreement and lease agreements, we are not prohibited from
paying cash dividends unless payment would trigger an event of default or one
currently exists.
The gross
liability for unrecognized tax benefits at November 27, 2009 was
$218.0 million, exclusive of interest and penalties. The timing of the
resolution of income tax examinations is highly uncertain as are the amounts and
timing of tax payments that are part of any audit settlement process. These
events could cause large fluctuations in the balance sheet classification of
current and non-current assets and liabilities. We believe that before the end
of fiscal 2010, it is reasonably possible that either certain audits will
conclude or statutes of limitations on certain income tax examination periods
will expire, or both. Given the uncertainties described above, we can only
determine a range of estimated potential decreases in underlying unrecognized
tax benefits equal to $0 to approximately $10.0 million. These
amounts would decrease income tax expense under accounting for income taxes and
as a result of the revised accounting guidance for business combinations
in fiscal 2010.
See Note 1 of our Notes to
Consolidated Financial Statements.
Under the revised accounting guidance
for business combinations, adjustments to acquired income tax liabilities
(including adjustments for acquisitions completed prior to the effective date)
that are recorded subsequent to the acquisition date will be recognized in
income from continuing operations, with certain exceptions, if such changes
occur after the measurement period.
Royalties
We have
certain royalty commitments associated with the shipment and licensing of
certain products. Royalty expense is generally based on a dollar amount per unit
shipped or a percentage of the underlying revenue.
Guarantees
The lease
agreements for our corporate headquarters provide for residual value guarantees.
The fair value of a residual value guarantee in lease agreements entered into
after December 31, 2002, must be recognized as a liability on our
Consolidated Balance Sheets. As such, we recognized $5.2 million and $3.0
million in liabilities, related to the extended East and West Towers and Almaden
Tower leases, respectively. These liabilities are recorded in other long-term
liabilities with the offsetting entry recorded as prepaid rent in other assets.
The balance will be amortized to our Consolidated Statements of Income over the
life of the leases. As of November 27, 2009, the unamortized portion of the fair
value of the residual value guarantees remaining in other long-term liabilities
and prepaid rent was $1.3 million.
Indemnifications
In the
normal course of business, we provide indemnifications of varying scope to
customers against claims of intellectual property infringement made by
third-parties arising from the use of our products. Historically, costs related
to these indemnification provisions have not been significant and we are unable
to estimate the maximum potential impact of these indemnification provisions on
our future results of operations.
To the
extent permitted under Delaware law, we have agreements whereby we indemnify our
directors and officers for certain events or occurrences while the director or
officer is, or was serving, at our request in such capacity. The indemnification
period covers all pertinent events and occurrences during the director’s or
officer’s lifetime. The maximum potential amount of future payments we could be
required to make under these indemnification agreements is unlimited; however,
we have director and officer insurance coverage that limits our exposure and
enables us to recover a portion of any future amounts paid. We believe the
estimated fair value of these indemnification agreements in excess of applicable
insurance coverage is minimal.
As part
of our limited partnership interests in Adobe Ventures, we have provided a
general indemnification to Granite Ventures, an independent venture capital firm
and sole general partner of Adobe Ventures, for certain events or occurrences
while Granite Ventures is, or was serving, at our request in such capacity
provided that Granite Ventures acts in good faith on behalf of the partnership.
We are unable to develop an estimate of the maximum potential amount of future
payments that could potentially result from any hypothetical future claim, but
believe the risk of having to make any payments under this general
indemnification to be remote.
Recent
Accounting Pronouncements
See
Note 1 of our Notes to Consolidated Financial Statements for information
regarding the effect of new accounting pronouncements on our financial
statements.
All
market risk sensitive instruments were entered into for non-trading
purposes.
Foreign
Currency Risk
Foreign
Currency Hedging Instruments
In
countries outside the U.S., we transact business, in U.S. dollars and in various
other currencies. In Europe and Japan, transactions that are denominated in Euro
and Yen, respectively, are subject to exposure from movements in exchange rates.
We hedge our net recognized foreign currency assets and liabilities with foreign
exchange forward contracts to reduce the risk that our earnings and cash flows
will be adversely affected by changes in exchange rates. We may use foreign
exchange option or forward contracts for Euro- or Yen-denominated
revenue.
In fiscal
2009, 2008 and 2007, our revenue exposures were 504.3 million Euros, 628.2
million Euros and 595.5 million Euros, respectively. In fiscal 2009, 2008 and
2007, our revenue exposures were 30.3 billion Yen, 36.8 billion Yen and 35.5
billion Yen, respectively.
Our
European operating expenses are primarily in Euro and our Japanese operating
expenses are in Yen, which mitigates a portion of the exposure related to Euro
and Yen denominated product revenue. In addition, we hedge firmly committed
transactions using forward contracts. These contracts do subject us to risk of
accounting gains and losses; however, the gains and losses on these contracts
largely offset gains and losses on the assets, liabilities and transactions
being hedged. We also hedge a percentage of forecasted international revenue
with purchased option contracts and forward contracts. Our revenue hedging
policy is intended to help mitigate the impact on our forecasted revenue due to
foreign currency exchange rate movements. As of November 27, 2009, total
outstanding contracts were $510.4 million which included the notional equivalent
of $283.9 million in Euro, 182.1 million in Yen and $44.4 million in other
foreign currencies. These hedges are foreign currency forward exchange contracts
which hedged our balance sheet exposures and purchased put option contracts
which hedged our forecasted revenue. As of November 27, 2009, all contracts were
set to expire at various times through July 2010. The bank counterparties in
these contracts expose us to credit-related losses in the event of their
nonperformance. However, to mitigate that risk, we only contract with
counterparties who meet our minimum requirements under our counterparty risk
assessment process. In addition, our hedging policy establishes maximum limits
for each counterparty.
In
addition, we also have long-term investment exposures consisting of the
capitalization and retained earnings in our non-USD functional currency foreign
subsidiaries. As of November 27, 2009 and November 28, 2008, this long-term
investment exposure totaled a notional equivalent of $228.8 million and $149.1
million, respectively. At this time, we do not hedge these long-term investment
exposures.
Economic
Hedging—Hedges of Forecasted Transactions
We may
use foreign exchange option contracts or forward contracts to hedge certain
operational (“cash flow”) exposures resulting from changes in foreign currency
exchange rates. These foreign exchange contracts, carried at fair value, may
have maturities between one and twelve months. Such cash flow exposures result
from portions of our forecasted revenue denominated in currencies other than the
U.S. dollar, primarily the Euro and the Japanese Yen. We enter into these
foreign exchange contracts to hedge forecasted product licensing revenue in the
normal course of business and accordingly, they are not speculative in
nature.
We record
changes in the intrinsic value of these cash flow hedges in accumulated other
comprehensive income, until the forecasted transaction occurs. When the
forecasted transaction occurs, we reclassify the related gain or loss on the
cash flow hedge to revenue. In the event the underlying forecasted transaction
does not occur, or it becomes probable that it will not occur, we reclassify the
gain or loss on the related cash flow hedge from accumulated other comprehensive
income to interest and other income, net on our Consolidated Statements of
Income at that time. For the fiscal year ended November 27, 2009, there were no
such net gains or losses recognized in other income relating to hedges of
forecasted transactions that did not occur.
See
Note 5 of our Notes to Consolidated Financial Statements for information
regarding our hedging activities.
Balance
Sheet Hedging—Hedging of Foreign Currency Assets and Liabilities
We hedge
our net recognized foreign currency assets and liabilities with foreign exchange
forward contracts to reduce the risk that our earnings and cash flows will be
adversely affected by changes in foreign currency exchange rates. These
derivative instruments hedge assets and liabilities that are denominated in
foreign currencies and are carried at fair value with
changes
in the fair value recorded as interest and other income, net. These derivative
instruments do not subject us to material balance sheet risk due to exchange
rate movements because gains and losses on these derivatives are intended to
offset gains and losses on the assets and liabilities being hedged. At November
27, 2009, the outstanding balance sheet hedging derivatives had maturities of 90
days or less.
A sensitivity
analysis was performed on all of our foreign exchange derivatives as of November
27, 2009. This sensitivity analysis was based on a modeling technique that
measures the hypothetical market value resulting from a 10% shift in the value
of exchange rates relative to the U.S. dollar. For option contracts, the
Black-Scholes equation model was used. For forward contracts, duration modeling
was used where hypothetical changes are made to the spot rates of the currency.
A 10% increase in the value of the U.S. dollar (and a corresponding decrease in
the value of the hedged foreign currency asset) would lead to an increase in the
fair value of our financial hedging instruments by $22.2 million. Conversely, a
10% decrease in the value of the U.S. dollar would result in a decrease in the
fair value of these financial instruments by $12.9 million.
We do not
use derivative financial instruments for speculative trading purposes, nor do we
hedge our foreign currency exposure in a manner that entirely offsets the
effects of changes in foreign exchange rates.
As a
general rule, we do not use financial instruments to hedge local currency
denominated operating expenses in countries where a natural hedge exists. For
example, in many countries, revenue from the local currency product licenses
substantially offsets the local currency denominated operating expenses. We
assess the need to utilize financial instruments to hedge currency exposures,
primarily related to operating expenses, on an ongoing basis.
We
regularly review our hedging program and may as part of this review determine to
change our hedging program.
See
Note 5 of our Notes to Consolidated Financial Statements for information
regarding our hedging activities.
Interest
Rate Risk
Short-Term
Investments and Fixed Income Securities
At
November 27, 2009, we had debt securities classified as short-term investments
of $900.0 million. Changes in interest rates could adversely affect the market
value of these investments. The following table separates these investments,
based on stated maturities, to show the approximate exposure to interest rates
(in millions):
|
Due
within one year
|
$ | 387.6 | ||
|
Due
within two years
|
249.9 | |||
|
Due
within three years
|
218.6 | |||
|
Due
after three years
|
43.9 | |||
|
Total
|
$ | 900.0 |
A
sensitivity analysis was performed on our investment portfolio as of November
27, 2009. The analysis is based on an estimate of the hypothetical changes in
market value of the portfolio that would result from an immediate parallel shift
in the yield curve of various magnitudes.
The
following tables present the hypothetical fair values of our debt securities
classified as short-term investments assuming immediate parallel shifts in the
yield curve of 50 basis points (“BPS”), 100 BPS and 150 BPS. The
analysis is shown as of November 27, 2009 and November 28, 2008 (dollars in
millions):
|
-150
BPS
|
-100
BPS
|
-50
BPS
|
Fair
Value 11/27/2009
|
+50
BPS
|
+100
BPS
|
+150
BPS
|
|
910.8
|
909.2
|
905.4
|
900.0
|
893.9
|
888.0
|
882.2
|
|
-150
BPS
|
-100
BPS
|
-50
BPS
|
Fair
Value 11/28/2008
|
+50
BPS
|
+100
BPS
|
+150
BPS
|
|
1,145.8
|
1,142.3
|
1,136.4
|
1,129.7
|
1,123.0
|
1,116.4
|
1,109.9
|
Other
Market Risk
Privately
Held Long-Term Investments
The privately
held companies in which we invest, can still be considered in the start-up or
development stages which are inherently risky. The technologies or products
these companies have under development are typically in the early stages and may
never materialize, which could result in a loss of a substantial part of our
initial investment in these companies. The evaluation of privately held
companies is based on information that we request from these companies which is
not subject to the same disclosure regulations as U.S. publicly traded companies
and as such, the basis for these evaluations is subject to the timing and
accuracy of the data received from these companies.
See
Note 4 and Note 8 of our Notes to Consolidated Financial Statements for
information regarding our limited partnership interest in Adobe
Ventures.
Short-Term
Investments and Marketable Equity Securities
We are
exposed to equity price risk on our portfolio of marketable equity securities.
As of November 27, 2009, our total equity holdings in publicly traded companies
were valued at $5.0 million compared to $3.0 million at November 28, 2008. The
increase was primarily due to the change in the fair value of our equity
holdings during fiscal 2009.
The
following table represents the potential decrease in fair values of our
marketable equity securities as of November 27, 2009, that are sensitive to
changes in the stock market. Fair value deteriorations of 50%, 35% and 15% were
selected for illustrative purposes because none is more likely to occur than
another.
|
(in
millions)
|
50% | 35% | 15% | |||||||||
|
Marketable
equity securities
|
$ | (2.5 | ) | $ | (1.7 | ) | $ | (0.8 | ) |
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
||
|
76
|
||
|
77
|
||
|
78
|
||
|
79
|
||
|
80
|
||
|
122
|
All
financial statement schedules have been omitted, since the required information
is not applicable or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in the
Consolidated Financial Statements and Notes thereto.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except par value)
|
November
27,
|
November 28,
|
|||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 999,487 | $ | 886,450 | ||||
|
Short-term
investments
|
904,986 | 1,132,752 | ||||||
|
Trade
receivables, net of allowances for doubtful accounts of $15,225 and
$4,128, respectively
|
410,879 | 467,234 | ||||||
|
Deferred
income taxes
|
77,417 | 110,713 | ||||||
|
Prepaid
expenses and other current assets
|
80,855 | 137,954 | ||||||
|
Total
current assets
|
2,473,624 | 2,735,103 | ||||||
|
Property
and equipment, net
|
388,132 | 313,037 | ||||||
|
Goodwill
|
3,494,589 | 2,134,730 | ||||||
|
Purchased
and other intangibles, net
|
527,388 | 214,960 | ||||||
|
Investment
in lease receivable
|
207,239 | 207,239 | ||||||
|
Other
assets
|
191,265 | 216,529 | ||||||
|
Total
assets
|
$ | 7,282,237 | $ | 5,821,598 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Trade
payables
|
$ | 58,904 | $ | 55,840 | ||||
|
Accrued
expenses
|
419,646 | 399,969 | ||||||
|
Accrued
restructuring
|
37,793 | 35,690 | ||||||
|
Income
taxes payable
|
46,634 | 27,136 | ||||||
|
Deferred
revenue
|
281,576 | 243,964 | ||||||
|
Total
current liabilities
|
844,553 | 762,599 | ||||||
|
Long-term
liabilities:
|
||||||||
|
Debt
|
1,000,000 | 350,000 | ||||||
|
Deferred
revenue
|
36,717 | 31,356 | ||||||
|
Accrued
restructuring
|
6,921 | 6,214 | ||||||
|
Income
taxes payable
|
223,528 | 123,182 | ||||||
|
Deferred
income taxes
|
252,486 | 117,328 | ||||||
|
Other
liabilities
|
27,464 | 20,565 | ||||||
|
Total
liabilities
|
2,391,669 | 1,411,244 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock, $0.0001 par value; 2,000 shares authorized; none
issued
|
— | — | ||||||
|
Common
stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares
issued; 522,657 and 526,111shares outstanding,
respectively
|
61 | 61 | ||||||
|
Additional
paid-in-capital
|
2,390,061 | 2,396,819 | ||||||
|
Retained
earnings
|
5,299,914 | 4,913,406 | ||||||
|
Accumulated
other comprehensive income
|
24,446 | 57,222 | ||||||
|
Treasury
stock, at cost (78,177 and 74,723 shares, respectively), net of
re-issuances
|
(2,823,914 | ) | (2,957,154 | ) | ||||
|
Total
stockholders’ equity
|
4,890,568 | 4,410,354 | ||||||
|
Total
liabilities and stockholders’
equity
|
$ | 7,282,237 | $ | 5,821,598 |
See
accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share data)
| Years Ended | ||||||||||||
|
November
27,
2009
|
November
28,
2008
|
November
30,
2007
|
||||||||||
|
Revenue:
|
||||||||||||
|
Products
|
$ | 2,759,391 | $ | 3,396,542 | $ | 3,019,524 | ||||||
|
Services
and support
|
186,462 | 183,347 | 138,357 | |||||||||
|
Total
revenue
|
2,945,853 | 3,579,889 | 3,157,881 | |||||||||
|
Cost
of revenue:
|
||||||||||||
|
Products
|
228,897 | 266,389 | 270,818 | |||||||||
|
Services
and support
|
67,835 | 96,241 | 83,876 | |||||||||
|
Total
cost of revenue
|
296,732 | 362,630 | 354,694 | |||||||||
|
Gross
profit
|
2,649,121 | 3,217,259 | 2,803,187 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development
|
565,141 | 662,057 | 613,242 | |||||||||
|
Sales
and marketing
|
981,903 | 1,089,341 | 984,388 | |||||||||
|
General
and administrative
|
298,749 | 337,291 | 274,982 | |||||||||
|
Restructuring
charges
|
41,260 | 32,053 | 555 | |||||||||
|
Amortization
of purchased intangibles and incomplete technology
|
71,555 | 68,246 | 72,435 | |||||||||
|
Total
operating expenses
|
1,958,608 | 2,188,988 | 1,945,602 | |||||||||
|
Operating
income
|
690,513 | 1,028,271 | 857,585 | |||||||||
|
Non-operating
income (expense):
|
||||||||||||
|
Interest
and other income, net
|
31,380 | 43,847 | 82,724 | |||||||||
|
Interest
expense
|
(3,407 | ) | (10,019 | ) | (253 | ) | ||||||
|
Investment
gains (losses), net
|
(16,966 | ) | 16,409 | 7,134 | ||||||||
|
Total
non-operating income (expense), net
|
11,007 | 50,237 | 89,605 | |||||||||
|
Income
before income taxes
|
701,520 | 1,078,508 | 947,190 | |||||||||
|
Provision
for income taxes
|
315,012 | 206,694 | 223,383 | |||||||||
|
Net
income
|
$ | 386,508 | $ | 871,814 | $ | 723,807 | ||||||
|
Basic
net income per share
|
$ | 0.74 | $ | 1.62 | $ | 1.24 | ||||||
|
Shares
used in computing basic income per share
|
524,470 | 539,373 | 584,203 | |||||||||
|
Diluted
net income per share
|
$ | 0.73 | $ | 1.59 | $ | 1.21 | ||||||
|
Shares
used in computing diluted income per share
|
530,610 | 548,553 | 598,775 | |||||||||
See
accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(In
thousands)
|
Common Stock
|
Additional
Paid-In
|
Retained
|
Accumulated
Other
Comprehensive
|
Treasury Stock
|
||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
|
Shares
|
Amount
|
Total
|
|||||||||||||
|
Balances
at December 1, 2006
|
600,834
|
$
|
61
|
$
|
2,451,610
|
$
|
3,317,785
|
$
|
6,344
|
(13,608
|
)
|
$
|
(623,924
|
)
|
$
|
5,151,876
|
||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
723,807
|
—
|
—
|
—
|
723,807
|
||||||||||||
|
Other
comprehensive income,
net
of taxes
|
—
|
—
|
—
|
—
|
21,604
|
—
|
—
|
21,604
|
||||||||||||
|
Total
comprehensive income,
net
of taxes
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
745,411
|
||||||||||||
|
Re-issuance
of treasury stock under stock compensation plans
|
—
|
—
|
(298,776
|
)
|
—
|
—
|
23,918
|
814,863
|
516,087
|
|||||||||||
|
Tax
benefit from employee stock option plans
|
—
|
—
|
66,966
|
—
|
—
|
—
|
—
|
66,966
|
||||||||||||
|
Purchase
of treasury stock
|
—
|
—
|
—
|
—
|
—
|
(39,735
|
)
|
(1,951,527
|
)
|
(1,951,527
|
)
|
|||||||||
|
Stock-based
compensation
|
—
|
—
|
149,987
|
—
|
—
|
—
|
—
|
149,987
|
||||||||||||
|
Adjustment
to the valuation of Macromedia assumed options
|
—
|
—
|
(28,818
|
)
|
—
|
—
|
—
|
—
|
(28,818
|
)
|
||||||||||
|
Balances
at November 30, 2007
|
600,834
|
$
|
61
|
$
|
2,340,969
|
$
|
4,041,592
|
$
|
27,948
|
(29,425
|
)
|
$
|
(1,760,588
|
)
|
$
|
4,649,982
|
||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
871,814
|
—
|
—
|
—
|
871,814
|
||||||||||||
|
Other
comprehensive income,
net
of taxes
|
—
|
—
|
—
|
—
|
29,274
|
—
|
—
|
29,274
|
||||||||||||
|
Total
comprehensive income,
net
of taxes
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
901,088
|
||||||||||||
|
Re-issuance
of treasury stock under stock compensation plans
|
—
|
—
|
(206,984
|
)
|
—
|
—
|
12,994
|
526,149
|
319,165
|
|||||||||||
|
Tax
benefit from employee stock option plans
|
—
|
—
|
90,360
|
—
|
—
|
—
|
—
|
90,360
|
||||||||||||
|
Purchase
of treasury stock
|
—
|
—
|
—
|
—
|
—
|
(58,292
|
)
|
(1,722,715
|
)
|
(1,722,715
|
)
|
|||||||||
|
Stock-based
compensation
|
—
|
—
|
172,474
|
—
|
—
|
—
|
—
|
172,474
|
||||||||||||
|
Balances
at November 28, 2008
|
600,834
|
$
|
61
|
$
|
2,396,819
|
$
|
4,913,406
|
$
|
57,222
|
(74,723
|
)
|
$
|
(2,957,154
|
)
|
$
|
4,410,354
|
||||
|
Comprehensive
income:
|
||||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
386,508
|
—
|
—
|
—
|
386,508
|
||||||||||||
|
Other
comprehensive income,
net
of taxes
|
—
|
—
|
—
|
—
|
(32,776)
|
—
|
—
|
(32,776)
|
||||||||||||
|
Total
comprehensive income, net of taxes
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
353,732
|
||||||||||||
|
Re-issuance
of treasury stock under stock compensation plans
|
—
|
—
|
(303,688
|
)
|
—
|
—
|
11,777
|
483,254
|
179,566
|
|||||||||||
|
Tax
benefit from employee stock option plans
|
—
|
—
|
44,381
|
—
|
—
|
—
|
—
|
44,381
|
||||||||||||
|
Purchase
of treasury stock
|
—
|
—
|
—
|
—
|
—
|
(15,231
|
)
|
(350,014
|
)
|
(350,014
|
)
|
|||||||||
|
Equity
awards assumed for acquisition
|
—
|
—
|
84,968
|
—
|
—
|
—
|
—
|
84,968
|
||||||||||||
|
Stock-based
compensation
|
—
|
—
|
167,581
|
—
|
—
|
—
|
—
|
167,581
|
||||||||||||
|
Balances
at November 27, 2009
|
600,834
|
$
|
61
|
$
|
2,390,061
|
$
|
5,299,914
|
$
|
24,446
|
(78,177
|
)
|
$
|
(2,823,914
|
)
|
$
|
4,890,568
|
||||
See
accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
| Years Ended | ||||||||||||
|
November
27, 2009
|
November
28, 2008
|
November
30, 2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 386,508 | $ | 871,814 | $ | 723,807 | ||||||
|
Adjustments
to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Depreciation,
amortization and accretion
|
282,423 | 270,269 | 315,464 | |||||||||
|
Stock-based
compensation
|
167,581 | 172,474 | 149,987 | |||||||||
|
Deferred
income taxes
|
49,590 | 46,584 | 58,385 | |||||||||
|
Unrealized
losses (gains) on investments
|
11,623 | (17,377 | ) | (6,776 | ) | |||||||
|
Tax
benefit from employee stock option plans
|
44,381 | 90,360 | 55,074 | |||||||||
|
Other
non-cash items
|
4,434 | 4,784 | (176 | ) | ||||||||
|
Excess
tax benefits from stock-based compensation
|
(11,980 | ) | (31,983 | ) | (85,050 | ) | ||||||
|
Changes
in operating assets and liabilities, net of acquired assets
and assumed liabilities:
|
||||||||||||
|
Trade
receivables, net
|
172,287 | (153,386 | ) | 46,332 | ||||||||
|
Prepaid
expenses and other current assets
|
21,814 | (5,584 | ) | 6,418 | ||||||||
|
Trade
payables
|
(13,601 | ) | 14,078 | 3,518 | ||||||||
|
Accrued
expenses
|
(53,320 | ) | (13,904 | ) | 83,281 | |||||||
|
Accrued
restructuring
|
(8,446 | ) | 24,330 | (13,796 | ) | |||||||
|
Income
taxes payable
|
109,620 | (57,656 | ) | 61,448 | ||||||||
|
Deferred
revenue
|
(45,142 | ) | 65,879 | 43,137 | ||||||||
|
Net
cash provided by operating activities
|
1,117,772 | 1,280,682 | 1,441,053 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of short-term investments
|
(1,307,366 | ) | (2,381,533 | ) | (2,503,147 | ) | ||||||
|
Maturities
of short-term investments
|
464,031 | 1,568,874 | 516,839 | |||||||||
|
Proceeds
from sales of short-term investments
|
1,057,176 | 717,076 | 2,457,347 | |||||||||
|
Purchases
of property and equipment
|
(119,592 | ) | (111,792 | ) | (132,075 | ) | ||||||
|
Acquisitions,
net of cash acquired
|
(1,582,669 | ) | (3,584 | ) | (75,528 | ) | ||||||
|
Purchases
of long-term investments and other assets
|
(29,143 | ) | (124,469 | ) | (111,939 | ) | ||||||
|
Investment
in lease receivable
|
— | — | (80,439 | ) | ||||||||
|
Issuance
costs for credit
facility
|
— | — | (856 | ) | ||||||||
|
Proceeds
from sale of long-term
investments
|
17,696 | 30,747 | 11,342 | |||||||||
|
Other
|
2,771 | — | — | |||||||||
|
Net
cash (used for) provided by investing activities
|
(1,497,096 | ) | (304,681 | ) | 81,544 | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Purchases
of treasury stock
|
(350,013 | ) | (1,722,715 | ) | (1,951,527 | ) | ||||||
|
Proceeds
from issuance of treasury stock
|
179,566 | 319,165 | 516,087 | |||||||||
|
Excess
tax benefits from stock-based compensation
|
11,980 | 31,983 | 85,050 | |||||||||
|
Proceeds
from borrowings on credit facility
|
650,000 | 800,000 | — | |||||||||
|
Repayments
of borrowings on credit facility
|
— | (450,000 | ) | — | ||||||||
|
Repayments
of acquired debt
|
(13,875 | ) | — | — | ||||||||
|
Net
cash provided by (used for) financing activities
|
477,658 | (1,021,567 | ) | (1,350,390 | ) | |||||||
|
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
14,703 | (14,406 | ) | 1,715 | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
113,037 | (59,972 | ) | 173,922 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
886,450 | 946,422 | 772,500 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 999,487 | $ | 886,450 | $ | 946,422 | ||||||
|
Supplemental
disclosures:
|
||||||||||||
|
Cash
paid for income taxes, net of refunds
|
$ | 105,158 | $ | 126,299 | $ | 55,236 | ||||||
|
Cash
paid for interest
|
$ | 2,088 | $ | 9,604 | $ | — | ||||||
|
Non-cash
investing activities:
|
||||||||||||
|
Issuance
of common stock and stock awards assumed in business
acquisitions
|
$ | 84,968 | $ | — | $ | — | ||||||
See
accompanying Notes to Consolidated Financial Statements.
Operations
Founded
in 1982, Adobe Systems Incorporated is one of the largest and most diversified
software companies in the world. We offer a line of creative, business, Web and
mobile software and services used by creative professionals, knowledge workers,
consumers, original equipment manufacturers (“OEMs”), developers and enterprises
for creating, managing, delivering, optimizing and engaging with compelling
content and experiences across multiple operating systems, devices and media. We
distribute our products through a network of distributors, value-added resellers
(“VARs”), systems integrators, independent software vendors (“ISVs”) and OEMs,
direct to end users and through our own Website at www.adobe.com. We also
license our technology to hardware manufacturers, software developers and
service providers, and we offer integrated software solutions to businesses of
all sizes. We have operations in the Americas, Europe, Middle East and Africa
(“EMEA”) and Asia. Our software runs on personal computers with Microsoft
Windows, Apple Mac OS, Linux, UNIX and various non-PC platforms, depending on
the product.
Basis
of Presentation
The
accompanying Consolidated Financial Statements include those of Adobe and its
subsidiaries, after elimination of all intercompany accounts and transactions.
We have prepared the accompanying Consolidated Financial Statements in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”) and pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”).
|
Use
of Estimates
|
In
preparation of consolidated financial statements and related disclosures in
conformity with GAAP and pursuant to the rules and regulations of the SEC, we
must make estimates and judgments that affect the amounts reported in
the Consolidated Financial Statements and accompanying notes. Estimates are used
for, but not limited to sales allowances and programs, bad debts, stock-based
compensation, allocation of purchase price allocations, excess inventory and
purchase commitments, restructuring costs, facilities lease losses, impairment
of goodwill and intangible assets, litigation, income taxes and investments.
Actual results may differ materially from these estimates.
|
Fiscal
Year
|
Our
fiscal year is a 52- or 53-week year that ends on the Friday closest to
November 30. Fiscal years 2009, 2008 and 2007 were all 52
weeks.
Reclassification
Certain
prior year amounts have been reclassified to conform to current year
presentation in the Consolidated Statements of Cash Flows. The previously
reported classifications of net cash provided by (used for) operating
activities, investing activities and financing activities for any period
presented were not affected by these reclassifications.
Allowance
for Doubtful Accounts
We
maintain an allowance for doubtful accounts which reflects our best estimate of
potentially uncollectible trade receivables. We regularly review our trade
receivables allowances by considering such factors as historical experience,
credit-worthiness, the age of the trade receivable balances and current economic
conditions that may affect a customer’s ability to pay and we specifically
reserve for those deemed uncollectible.
|
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Beginning
balance
|
$ | 4,128 | $ | 4,398 | $ | 6,798 | ||||||
|
Increase
due to acquisition
|
9,421 | — | — | |||||||||
|
Charged
(credited) to operating expenses
|
2,841 | 4,414 | (1,367 | ) | ||||||||
|
Preference
claim, credited to operating expense
|
(1,000 | ) | (2,000 | ) | — | |||||||
|
Deductions
(*)
|
(165 | ) | (2,684 | ) | (1,033 | ) | ||||||
|
Ending
balance
|
$ | 15,225 | $ | 4,128 | $ | 4,398 |
|
|
_________________________________________
|
|
(*)
|
Deductions
related to the allowance for doubtful accounts represent amounts written
off against the allowance, less
recoveries.
|
80
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign
Currency Translation
We
translate assets and liabilities of foreign subsidiaries, whose functional
currency is their local currency, at exchange rates in effect at the balance
sheet date. We translate revenue and expenses at the monthly average exchange
rates. We include accumulated net translation adjustments in stockholders’
equity as a component of accumulated other comprehensive income.
Property
and Equipment
We record
property and equipment at cost less accumulated depreciation and amortization.
Property and equipment are depreciated using the straight-line method over their
estimated useful lives ranging from 1 to 5 years for computers and equipment, 1
to 6 years for furniture and fixtures and up to 35 years for buildings.
Leasehold improvements are amortized using the straight-line method over the
lesser of the remaining respective lease term or useful lives.
Goodwill,
Purchased Intangibles and Other Long-Lived Assets
We review
our goodwill for impairment annually, or more frequently, if facts and
circumstances warrant a review. We completed our annual impairment test in the
second quarter of fiscal 2009 and determined that there was no
impairment.
Goodwill
is assigned to one or more reporting segments on the date of acquisition. We
evaluate goodwill for impairment by comparing the fair value of each of our
reporting segments to its carrying value, including the associated goodwill. To
determine the fair values, we use the market approach based on comparable
publicly traded companies in similar lines of businesses and the income approach
based on estimated discounted future cash flows. Our cash flow assumptions
consider historical and forecasted revenue, operating costs and other relevant
factors.
We
amortize intangible assets with finite lives over their estimated useful lives
and review them for impairment whenever an impairment indicator exists. We
continually monitor events and changes in circumstances that could indicate
carrying amounts of our long-lived assets, including our intangible assets may
not be recoverable. When such events or changes in circumstances occur, we
assess recoverability by determining whether the carrying value of such assets
will be recovered through the undiscounted expected future cash flows. If the
future undiscounted cash flows are less than the carrying amount of these
assets, we recognize an impairment loss based on the excess of the carrying
amount over the fair value of the assets. We did not recognize any intangible
asset impairment charges in fiscal 2009, 2008 or 2007.
Our
intangible assets are amortized over their estimated useful lives of 1 to 13
years as shown in the table below. Amortization is based on the pattern in which
the economic benefits of the intangible asset will be consumed.
|
Weighted
Average Useful Life (years
)
|
||||
|
Purchased
technology
|
7 | |||
|
Localization
|
1 | |||
|
Trademarks
|
7 | |||
|
Customer
contracts and relationships
|
10 | |||
|
Other
intangibles
|
2 | |||
Software
Development Costs
Capitalization
of software development costs for software to be sold, leased, or otherwise
marketed begins upon the establishment of technological feasibility, which is
generally the completion of a working prototype that has been certified as
having no critical bugs and is a release candidate. Amortization begins once the
software is ready for its intended use, generally based on the pattern in which
the economic benefits will be consumed. To date, software development costs
incurred between completion of a working prototype and general availability of
the related product have not been material.
Revenue
Recognition
Our
revenue is derived from the licensing of software products, consulting, hosting
services and maintenance and support. Primarily, we recognize revenue when
persuasive evidence of an arrangement exists, we have delivered the product or
performed the service, the fee is fixed or determinable and collection is
probable.
81
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Multiple
Element Arrangements
We enter
into multiple element revenue arrangements in which a customer may purchase a
combination of software, upgrades, hosting services, maintenance and support,
and consulting (multiple-element arrangements). When vendor specific objective
evidence (“VSOE”) of fair value does not exist for all delivered elements, we
allocate and defer revenue for the undelivered items based on VSOE of fair value
of the undelivered elements and recognize the difference between the total
arrangement fee and the amount deferred for the undelivered items as license
revenue.
VSOE of
fair value for each element is based on the price for which the element is sold
separately. We determine the VSOE of fair value of each element based on
historical evidence of our stand-alone sales of these elements to third-parties
or from the stated renewal rate for the elements contained in the initial
software license arrangement. When VSOE of fair value does not exist for any
undelivered element, revenue is deferred until the earlier of the point at which
such VSOE of fair value exists or until all elements of the arrangement have
been delivered. The only exception to this guidance is when the only undelivered
element is maintenance and support or other services, then the entire
arrangement fee is recognized ratably over the performance period.
Product
Revenue
We
recognize our product revenue upon shipment, provided all other revenue
recognition criteria have been met. Our desktop application products’ revenue
from distributors is subject to agreements allowing limited rights of return,
rebates and price protection. Our direct sales and OEM sales are also subject to
limited rights of return. Accordingly, we reduce revenue recognized for
estimated future returns, price protection and rebates at the time the related
revenue is recorded. The estimates for returns are adjusted periodically based
upon historical rates of returns, inventory levels in the distribution channel
and other related factors.
We record
the estimated costs of providing free technical phone support to customers for
our software products.
We
recognize OEM licensing revenue, primarily royalties, when OEMs ship products
incorporating our software, provided collection of such revenue is deemed
probable. For certain OEM customers, we must estimate royalty revenue due to the
timing of securing customer information. This estimate is based on a combination
of our generated forecasts and actual historical reporting by our OEM customers.
To substantiate our ability to estimate revenue, we review license royalty
revenue reports ultimately received from our significant OEM customers in
comparison to the amounts estimated in the prior period.
Our
product-related deferred revenue includes maintenance upgrade revenue and
customer advances under OEM license agreements. Our maintenance upgrade revenue
for our desktop application products is included in our product revenue line
item as the maintenance primarily entitles customers to receive product
upgrades. In cases where we provide a specified free upgrade to an existing
product, we defer the fair value for the specified upgrade right until the
future obligation is fulfilled or when the right to the specified free upgrade
expires.
Services
and Support Revenue
Our
services and support revenue is composed of consulting, training and maintenance
and support, primarily related to the licensing of our Enterprise and Mobile and
Device Solutions products. Our support revenue also includes technical support
and developer support to partners and developer organizations related to our
desktop products.
We
recognize revenue for hosting services that are based on a committed number of
transactions, including implementation and set-up fees, ratably beginning on the
date the customer commences use of our services and continuing through the end
of the customer term. Over-usage fees, and fees billed based on the actual
number of transactions from which we capture data, are billed in accordance with
contract terms as these fees are incurred. We record amounts that have been
invoiced in accounts receivable and in deferred revenue or revenue, depending on
whether the revenue recognition criteria have been met.
Our
consulting revenue is primarily recognized using the proportionate performance
method and is measured monthly based on input measures, such as hours incurred
to date compared to total estimated hours to complete, with consideration given
to output measures, such as contract milestones when applicable. Our maintenance
and support offerings, which entitle customers to receive product upgrades and
enhancements or technical support, depending on the offering, are recognized
ratably over the performance period of the arrangement.
82
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Rights
of Return, Rebates and Price Protection
As
discussed above, we offer limited rights of return, rebates and price protection
of our products under various policies and programs with our distributors,
resellers and/or end-user customers. We estimate and record reserves for these
programs as an offset to revenue. Below is a summary of each of the general
provisions in our contracts:
|
|
·
|
Distributors
are allowed limited rights of return of products purchased during the
previous quarter. In addition, distributors are allowed to return products
that have reached the end of their lives and products that are being
replaced by new versions.
|
|
|
·
|
We
offer rebates to our distributors, resellers and/or end user customers.
The amount of revenue that is reduced for distributor and reseller rebates
is based on actual performance against objectives set forth by us for a
particular reporting period (volume, timely reporting, etc.). If mail-in
or other promotional rebates are offered, the amount of revenue reduced is
based on the dollar amount of the rebate, taking into consideration an
estimated redemption rate calculated using historical
trends.
|
|
|
·
|
From
time to time, we may offer price protection to our distributors that allow
for the right to a credit if we permanently reduce the price of a software
product. The amount of revenue that is reduced for price protection is
calculated as the difference between the old and new price of a software
product on inventory held by the distributor prior to the effective date
of the decrease.
|
Although
our subscription contracts are generally non-cancelable, a limited number of
customers have the right to cancel their contracts by providing prior written
notice to us of their intent to cancel the remainder of the contract term. In
the event a customer cancels its contract, they are not entitled to a refund for
prior services we have provided to them.
On a
quarterly basis, the amount of revenue that is reserved for future returns is
calculated based on our historical trends and data specific to each reporting
period. We review the actual returns evidenced in prior quarters as a percent of
revenue to determine a historical returns rate. We then apply the historical
rate to the current period revenue as a basis for estimating future returns.
When necessary, we also provide a specific returns reserve for product in the
distribution channel in excess of estimated requirements. This estimate can be
affected by the amount of a particular product in the channel, the rate of
sell-through, product plans and other factors.
Revenue
Reserve
Revenue
reserve rollforward (in thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Beginning
balance
|
$ | 50,943 | $ | 43,532 | $ | 55,526 | ||||||
|
Increase
due to acquisition
|
6,566 | — | — | |||||||||
|
Amount
charged to revenue
|
113,009 | 153,129 | 156,761 | |||||||||
|
Actual
returns
|
(136,117 | ) | (145,718 | ) | (168,755 | ) | ||||||
|
Ending
balance
|
$ | 34,401 | $ | 50,943 | $ | 43,532 |
Deferred
Revenue
Deferred
revenue consist of billings or payments received in advance of revenue
recognition for our products and services described above. We recognize deferred
revenue as revenue only when the revenue recognition criteria are
met.
Taxes
Collected from Customers
We net
taxes collected from customers against those remitted to government authorities
in our financial statements. Accordingly, taxes collected from customers are not
reported as revenue.
Advertising
Expenses
Advertising
costs are expensed as incurred. Advertising expenses for fiscal 2009, 2008 and
2007 were $67.0 million, $67.1 million and $45.3 million,
respectively.
83
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
Foreign
Currency and Other Hedging
Instruments
|
In
countries outside the United States (“U.S.”), we transact business in U.S.
dollars and in various other currencies. In Europe and Japan, transactions that
are denominated in Euro and Yen are subject to exposure from movements in
exchange rates. We hedge our net recognized foreign currency assets and
liabilities with foreign exchange forward contracts to reduce the risk that our
earnings and cash flows will be adversely affected by changes in exchange rates.
We use foreign exchange option and forward contracts for Euro- and
Yen-denominated revenue.
We
account for our derivative instruments as either assets or liabilities on the
balance sheet and measure them at fair value. Gains and losses resulting from
changes in fair value are accounted for depending on the use of the derivative
and whether it is designated and qualifies for hedge
accounting. Derivatives that do not qualify for hedge accounting are
adjusted to fair value through earnings.
See Note 5 for information regarding
our hedging activities.
Gains and
losses from foreign exchange forward contracts which hedge certain balance sheet
positions, primarily non-functional currency denominated assets and liabilities
(e.g., trade receivables and accounts payable) are recorded each period as a
component of interest and other income, net in our Consolidated Statements of
Income. Foreign exchange forward and option contracts hedging forecasted
non-functional currency product licensing revenue, are designated as cash flow
hedges under accounting for derivative instruments and hedging activities, with
gains and losses recorded net of tax, as a component of other comprehensive
income in stockholders’ equity and reclassified into revenue at the time the
forecasted transactions occur.
Income
Taxes
We use
the asset and liability method of accounting for income taxes. Under this
method, income tax expense is recognized for the amount of taxes payable or
refundable for the current year. In addition, deferred tax assets and
liabilities are recognized for expected future tax consequences of temporary
differences between the financial reporting and tax bases of assets and
liabilities, and for operating losses and tax credit carryforwards. We record a
valuation allowance to reduce deferred tax assets to an amount for which
realization is more likely than not.
Recent
Accounting Pronouncements
In
October 2009, the Financial Accounting Standards Board (“FASB”) issued new
revenue recognition standards for arrangements with multiple deliverables, where
certain of those deliverables are non-software related. The new standards permit
entities to initially use management’s best estimate of selling price to value
individual deliverables when those deliverables do not have VSOE of fair value
or when third-party evidence is not available. Additionally, these new standards
modify the manner in which the transaction consideration is allocated across the
separately identified deliverables by no longer permitting the residual method
of allocating arrangement consideration. These new standards are effective for
annual periods ending after June 15, 2010 and are effective for us
beginning in the first quarter of fiscal 2011, however early adoption is
permitted. We are currently evaluating the impact of adopting these new
standards on our consolidated financial position, results of operations and cash
flows, including possible early adoption.
In June
2009, the FASB issued the FASB Accounting Standards Codification
(the
“Codification”) for financial statements issued for interim and annual periods
ending after September 15, 2009, which was effective for us beginning in the
fourth quarter of fiscal 2009. The Codification became the single authoritative
source for GAAP. Accordingly, previous references to GAAP accounting standards
are no longer used in our disclosures, including these Notes to the Consolidated
Financial Statements. The Codification does not affect our consolidated
financial position, cash flows, or results of operations.
In June
2009, the FASB issued amended standards for determining whether to consolidate a
variable interest entity. These new standards amend the
evaluation criteria to identify the primary beneficiary of a variable interest
entity and requires ongoing reassessment of whether an enterprise is the primary
beneficiary of the variable interest entity. The provisions of the new standards
are effective for annual reporting periods beginning after November 15, 2009 and
interim periods within those fiscal years. These standards will be effective for
us beginning in the first quarter of fiscal 2010. The adoption of the new
standards will not have an impact on our consolidated financial position,
results of operations and cash flows.
84
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In May
2009, the FASB issued new standards for subsequent events, which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. The new standards are effective for interim and annual
reporting periods ending after June 15, 2009. We adopted the new standards
during the third quarter of fiscal 2009 and, as the pronouncement only requires
additional disclosures, the adoption did not have an impact on our consolidated
financial position, results of operations or cash flows. We have evaluated
subsequent events through January 22, 2010, the date that these financial
statements were issued.
In April
2009, the FASB issued new standards for the recognition and measurement of
other-than-temporary impairments for debt securities which replaced the
pre-existing “intent and ability” indicator. These new standards specify that if
the fair value of a debt security is less than its amortized cost basis, an
other-than-temporary impairment is triggered in circumstances where
(1) an entity has an intent to sell the security, (2) it is more likely than not
that the entity will be required to sell the security before recovery of its
amortized cost basis, or (3) the entity does not expect to recover the entire
amortized cost basis of the security (that is, a credit loss exists).
Other-than-temporary impairments are separated into amounts representing credit
losses which are recognized in earnings and amounts related to all other factors
which are recognized in other comprehensive income (loss). We adopted these
standards in the third quarter of fiscal 2009 and they did not have a material
effect on our consolidated financial position, results of operations or cash
flows.
In April
2009, the FASB issued new standards which provide guidance on how to determine
the fair value of assets and liabilities when the volume and level of activity
for the asset or liability has significantly decreased. These new standards also
provide guidance on identifying circumstances that indicate a transaction is not
orderly. In addition, we are required to disclose in interim as well as annual
reporting periods the inputs and valuation techniques used to measure fair value
and discussion of changes in valuation techniques. We adopted these standards in
the third quarter of fiscal 2009 and they did not have a material effect on our
consolidated financial position, results of operations or cash
flows.
In September
2008, the FASB issued additional guidance which requires additional disclosures
by sellers of credit derivatives, including credit derivatives embedded in
hybrid instruments. This new guidance also amends previous guidance
related to accounting for guarantees to require additional disclosure about the
current status of the payment/performance risk of a guarantee. These
new provisions are effective for reporting periods ending after November 15,
2008. These provisions further clarify the effective date of new disclosure
requirements regarding derivative instruments and hedging activities. We adopted
these disclosures requirements in the first quarter of fiscal 2009. Since the
new guidance only required additional disclosures, the adoption did not impact
our consolidated financial position, results of operations or cash
flows.
In April
2008, the FASB issued new standards which provided guidance on how to determine
the useful life of intangible assets by amending the factors an entity should
consider in developing renewal or extension assumptions used in determining the
useful life of recognized intangible assets. This new guidance applies
prospectively to intangible assets that are acquired individually or with a
group of other assets in business combinations and asset acquisitions. These
standards are effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods within those fiscal years
and is effective for us beginning in the first quarter of fiscal 2010. Early
adoption is not permitted. As this guidance is to be applied prospectively, on
adoption, there will be no impact to our current consolidated financial
statements.
In March
2008, the FASB issued new standards which requires companies with derivative
instruments to disclose information that should enable financial statement users
to understand how and why a company uses derivative instruments, how derivative
instruments and related hedged items are accounted for and how derivative
instruments and related hedged items affect a company’s financial position,
financial performance and cash flows. We adopted these new standards in the
first quarter of fiscal 2009. Since the new standards only required additional
disclosure, the adoption did not impact our consolidated financial position,
results of operations or cash flows.
See Note 5 for further information
regarding derivative instruments and related hedged items.
In
December 2007, the FASB revised their guidance for business combinations and
non-controlling interests. The new standards will change how business
acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. The changes also impact the
accounting and reporting for minority interests, which will be recharacterized
as non-controlling interests and classified as a component of equity. The new
standards are effective for us beginning in the first quarter of fiscal 2010.
Early adoption is not permitted. We are currently evaluating the impact the new
standards will have on our consolidated financial statements however, we
currently believe that depending on the size and frequency of acquisitions, the
adoption of these standards may have a material effect on our future
consolidated financial statements as more costs associated with acquisitions
will be required to be expensed rather than accounted for as part of the
purchase price.
85
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal
2009 Acquisitions
On
October 23, 2009, we completed the acquisition of Omniture, Inc. (“Omniture”),
an industry leader in Web analytics and online business optimization based in
Orem, Utah, for approximately $1.8 billion. Under the terms of the agreement, we
completed our tender offer to acquire all of the outstanding shares of Omniture
common stock at a price of $21.50 per share, net to the seller in cash, without
interest. Acquiring Omniture accelerates our strategy of delivering more
effective solutions for assembling, delivering, targeting and optimizing Web
content and applications. The transaction was accounted for using the purchase
method of accounting. We have included the financial results of Omniture in our
Consolidated Financial Statements beginning on the acquisition date. Following
the closing, we integrated Omniture as a new reportable segment for financial
reporting purposes.
Assets
acquired and liabilities assumed were recorded at their fair values as of
October 23, 2009. The total $1.8 billion purchase price was comprised of the
following (in thousands):
|
Acquisition
of approximately 79 million shares of outstanding common stock of Omniture
at $21.50 per share in cash
|
$ | 1,698,926 | ||
|
Estimated
fair value of earned stock options and restricted stock units assumed and
converted
|
84,968 | |||
|
Estimated
direct transaction costs
|
13,964 | |||
|
Total
purchase price
|
$ | 1,797,858 |
In
connection with the acquisition, each Omniture stock option that was outstanding
and unexercised was assumed and converted into an option to purchase Adobe
common stock based on one of two conversion ratios, dependent on which plan the
award was granted under. The conversion ratio was either 0.6182, which was
calculated as the consideration price of $21.50 divided by the closing price on
the date of acquisition, or 0.6083 calculated as the consideration price of
$21.50 divided by the average closing price from October 16, 2009 to October 22,
2009. We assumed the stock options in accordance with the terms of the
applicable Omniture stock option plan and terms of the stock option agreement
relating to that Omniture stock option. Based on Omniture’s stock options
outstanding at October 23, 2009, we converted options to purchase approximately
8.9 million shares of Omniture common stock into options to purchase
approximately 5.5 million shares of Adobe common stock. We also assumed and
converted approximately 2.5 million shares of outstanding Omniture restricted
stock units into approximately 1.6 million shares of Adobe restricted stock
units, using the same conversion ratios stated above. The estimated value of the
stock options and restricted stock units assumed and converted that is included
in the preliminary purchase price equals the fair value of the options to
purchase approximately 5.5 million of Adobe common stock and the 1.6 million
shares of Adobe restricted stock units, reduced by the portion of the respective
values considered unearned compensation.
The
estimated fair value of the stock options assumed was determined to be
approximately $97.1 million using a Binomial option valuation model with the
following assumptions: volatility of 33.6-35.4%; weighted average risk-free
interest rate of 0.20-3.64%; dividend yield of 0%; early exercise threshold of
$14.20; and post vesting cancellation rate of 1.89%. The underlying stock price
used in valuing the options was $34.33, which was the average of closing prices
for a range of trading days from September 11, 2009 through September 17, 2009,
comprising two days before through two days after the date the acquisition was
announced. The value of stock options considered unearned compensation was
determined to be approximately $34.9 million, net of estimated forfeitures, also
using a Binomial option valuation model with the following assumptions:
volatility of 36.5-37.0%; weighted average risk-free interest rate of
0.24%-3.25%; dividend yield of 0%; early exercise threshold of $14.20; and post
vesting cancellation rate of 1.89%. The underlying stock price used in valuing
the options for which a portion was considered unearned compensation was $34.78,
which was the closing price on October 23, 2009. The fair value of the converted
restricted stock units was determined to be approximately $55.6 million based on
Adobe’s average stock price of $34.33, as discussed above. This amount was
reduced by the fair value of the restricted stock units considered unearned
compensation of approximately $32.8 million, net of estimated forfeitures, based
on the $34.78 stock price referred to above. $67.7 million in unearned
compensation will be recorded as an expense on a straight-line basis over the
remaining service periods of the respective awards. The recognition of expense
associated with the portion of the assumed and converted stock options and
restricted stock units that are subject to future service requirements, which
are not included in the purchase accounting, have not been included in the
pro forma statements of income.
86
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Direct
transaction costs of approximately $14.0 million include estimated investment
banking, legal and accounting fees, and other external costs directly related to
the acquisition. As of November 27, 2009, substantially all costs for
accounting, legal, and other professional services have been paid.
Preliminary
Purchase Price Allocation
Under the
purchase accounting method,
the total preliminary
purchase price was allocated to Omniture’s net tangible and intangible assets
based upon their estimated fair values as of October 23, 2009. The excess
purchase price over the value of the net tangible and identifiable intangible
assets was recorded as goodwill.
The table
below represents the allocation of the preliminary purchase price to the
acquired net assets of Omniture based on their estimated fair values as of
October 23, 2009 and the associated estimated useful lives at that date. The
preliminary allocation of the purchase price was based upon a preliminary
valuation and our estimates and assumptions are subject to change within the
purchase price allocation period as valuations are
finalized.
|
(in
thousands)
|
Amount
|
Weighted
Average
Useful Life
(years)
|
||||||
|
Net
tangible assets
|
$ | 31,138 | N/A | |||||
|
Identifiable
intangible assets:
|
||||||||
|
Existing
technology
|
176,100 | 6 | ||||||
|
Customer
contracts and relationships
|
167,900 | 11 | ||||||
|
Contract
backlog
|
52,100 | 2 | ||||||
|
Non-competition
agreements
|
900 | 2 | ||||||
|
Trademarks
|
41,000 | 8 | ||||||
|
In-process
research and development
|
4,600 | N/A | ||||||
|
Goodwill
|
1,334,980 | N/A | ||||||
|
Restructuring
liability
|
(10,860 | ) | N/A | |||||
|
Total
estimated purchase price allocation
|
$ | 1,797,858 | ||||||
Net tangible
assets
—
Omniture’s tangible assets
and liabilities as of October 23, 2009 were reviewed and adjusted to their fair
value as necessary. Among the net tangible assets assumed were $137.4 million in
cash and cash equivalents, $119.1 million in trade receivables, $40.9 million in
property, plant and equipment, $46.0 million in accrued expenses and $110.9
million in deferred tax liabilities.
Deferred
revenue—
Included in net tangible assets is Omniture’s deferred revenue
which represents advance payments from customers related to subscription
contracts and professional services. We estimated our obligation related to the
deferred revenue using the cost build-up approach. The cost build-up approach
determines fair value by estimating the costs relating to supporting the
obligation plus an assumed profit. The sum of the costs and assumed profit
approximates, in theory, the amount that we would be required to pay a third
party to assume the obligation. The estimated costs to fulfill the obligation
were based on the near-term projected cost structure for subscription and
professional services. As a result, we recorded an adjustment to reduce
Omniture’s carrying value of deferred revenue by $39.7 million to $87.4 million,
which represents our estimate of the fair value of the contractual obligations
assumed based on a preliminary valuation.
Identifiable
intangible assets
—
Existing technology acquired
primarily consists of Omniture’s SiteCatalyst Web analytics, Omniture Test &
Target, and HBX subscription service offerings and also consists of Omniture
SiteSearch, Omniture Merchandising and Omniture Insight products and
subscription services. The preliminary estimated fair value of the
existing technology was determined based on the present value of the expected
cash flows to be generated by each existing technology. Customer
relationships consist of Omniture’s contractual relationships and customer
loyalty related to their enterprise and mid-market customers as well as partner
customers that resell Omniture’s services to end users. Contract backlog relates
to subscription contracts and professional services. We will amortize the fair
value of the contract backlog based on the pattern in which the
economic benefits will be consumed. Trademarks include the Omniture
trade name as well
87
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
as
SiteCatalyst, Omniture SearchCenter, Omniture Discover, Omniture Genesis, and
HBX product names. Non-compete agreements include agreements with key Omniture
employees that preclude them from competing against Omniture for a period of two
years. With the exception of contract backlog, we expect to amortize
the fair value of these intangible assets on a straight-line basis over their
respective estimated useful lives.
In-process research
and development
—
In-process research and
development (“IPR&D”) was expensed to amortization of purchased intangibles
and incomplete technology in our Consolidated Statements of Income upon
acquisition as it represents incomplete Omniture research and development
projects that had not reached technological feasibility and had no alternative
future use as of the date of the acquisition. Technological feasibility is
established when an enterprise has completed all planning, designing, coding,
and testing activities that are necessary to establish that a product can be
produced to meet its design specifications including functions, features, and
technical performance requirements. The estimated fair value of $4.6 million was
determined by estimating the net cash flows expected to be generated from the
project and discounting the net cash flows to their present value.
Goodwill
—
Approximately
$1.3 billion has been allocated to goodwill. Goodwill represents the excess
of the purchase price over the fair value of the underlying acquired net
tangible and intangible assets. The factors that contributed to the recognition
of goodwill included securing buyer-specific synergies that increase revenue and
profits and are not otherwise available to a marketplace participant, acquiring
a talented workforce, and cost savings opportunities. The preliminary goodwill
recorded in connection with Omniture has been allocated to the Omniture and
Creative Solutions reportable segments of $1.1 billion and $0.2 billion,
respectively, based on expected revenue and cost synergies to be gained as a
result of the acquisition.
Restructuring—
$10.9
million in restructuring related primarily to costs for severance and associated
benefits, outplacement services, and cost of redundant facilities.
See Note 11 for further details of
the amounts accrued during 2009.
Taxes—
As part
of our accounting for the Omniture acquisition, a portion of the overall
purchase price was allocated to goodwill and acquired intangible assets.
Amortization expense associated with acquired intangible assets is not
deductible for tax purposes. Thus, approximately $174.4 million, included in the
net tangible assets, was established as a deferred tax liability for the future
amortization of the intangible assets.
Any
impairment charges made in the future associated with goodwill will not be tax
deductible and will result in an increased effective income tax rate in the
quarter the impairment is recorded.
Pro
Forma Results
The financial
information in the table below summarizes the combined results of operations of
Adobe and Omniture, on a pro forma basis, as though the companies had been
combined as of the beginning of the periods presented. The pro forma financial
information is presented for informational purposes only and is not indicative
of the results of operations that would have been achieved if the acquisition
had taken place on November 29, 2008 and December 1, 2007 or of results that may
occur in the future.
The following
pro forma financial information for fiscal 2009 and 2008 combines the historical
results for Adobe for the years ended November 27, 2009 and November 28, 2008
and the historical results of Omniture for the period January 1, 2009 through
October 23, 2009 and the year ended December 31, 2008 (in
thousands):
|
2009
|
2008
|
|||||||
|
Net
revenues
|
$ | 3,168,731 | $ | 3,835,799 | ||||
|
Net
income
|
$ | 308,904 | $ | 742,749 | ||||
|
Basic
net income per share
|
$ | 0.59 | $ | 1.38 | ||||
| Shares used in computing basic net income per share | 524,470 | 539,373 | ||||||
| Diluted net income per share | $ | 0.58 | $ | 1.35 | ||||
| Shares used in computing diluted net income per share | 531,293 | 549,883 |
88
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition to the acquisition of Omniture, we acquired one other company during
fiscal 2009 for cash consideration of approximately $35.3 million. The impact of
this acquisition was not material to our consolidated balance sheets and results
of operations.
Fiscal
2008 Acquisition
During
fiscal 2008, we completed one business combination for cash consideration of
approximately $4.3 million. This acquisition was not material to our
consolidated balance sheets and results of operations.
Fiscal
2007 Acquisitions
During
fiscal 2007, we completed two business combinations and one asset acquisition
for cash consideration of $77.0 million. Both individually and in the aggregate,
these acquisitions were not material to our consolidated balance sheets and
results of operations.
See
Note 7 for information regarding goodwill and purchased and other
intangibles.
Cash
equivalents consist of instruments with remaining maturities of three months or
less at the date of purchase. We classify all of our cash equivalents and
short-term investments as “available-for-sale.” These investments are free of
trading restrictions. We carry these investments at fair value, based on quoted
market prices or other readily available market information. Unrealized gains
and losses, net of taxes, are included in accumulated other comprehensive
income, which is reflected as a separate component of stockholders’ equity in
our Consolidated Balance Sheets. Gains are recognized when realized in our
Consolidated Statements of Income. Losses are recognized as realized. When we
have determined that an other-than-temporary decline in fair value has occurred
the amount of the decline that is related to a credit loss is recognized in
earnings. Gains and losses are determined using the specific identification
method.
Cash,
cash equivalents and short-term investments consisted of the following as of
November 27, 2009 (in thousands):
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Estimated
Fair Value
|
|||||||||||||
|
Current
assets:
|
||||||||||||||||
|
Cash
|
$ | 75,110 | $ | — | $ | — | $ | 75,110 | ||||||||
|
Cash
equivalents:
|
||||||||||||||||
|
Money
market mutual funds
|
884,240 | — | — | 884,240 | ||||||||||||
|
Bank
deposits
|
40,137 | — | — | 40,137 | ||||||||||||
|
Total
cash equivalents
|
924,377 | — | — | 924,377 | ||||||||||||
|
Total
cash and cash equivalents
|
999,487 | — | — | 999,487 | ||||||||||||
|
Short-term
investments:
|
||||||||||||||||
|
United
States treasury notes
|
373,180 | 3,199 | (1 | ) | 376,378 | |||||||||||
|
United
States government agency bonds
|
59,447 | 273 | — | 59,720 | ||||||||||||
|
Government
guaranteed bonds
|
221,730 | 3,409 | (1 | ) | 225,138 | |||||||||||
|
Corporate
bonds
|
185,735 | 4,702 | — | 190,437 | ||||||||||||
|
Obligations
of foreign governments
|
23,022 | 397 | — | 23,419 | ||||||||||||
|
Bonds
of multi-lateral government agencies
|
24,598 | 269 | — | 24,867 | ||||||||||||
|
Subtotal
|
887,712 | 12,249 | (2 | ) | 899,959 | |||||||||||
|
Other
marketable equity securities
|
2,527 | 2,500 | — | 5,027 | ||||||||||||
|
Total
short-term investments
|
890,239 | 14,749 | (2 | ) | 904,986 | |||||||||||
|
Total
cash, cash equivalents and short-term investments
|
$ | 1,889,726 | $ | 14,749 | $ | (2 | ) | $ | 1,904,473 | |||||||
89
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash,
cash equivalents and short-term investments consisted of the following as of
November 28, 2008 (in thousands):
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Estimated
Fair Value
|
|||||||||||||
|
Current
assets:
|
||||||||||||||||
|
Cash
|
$ | 117,681 | $ | — | $ | — | $ | 117,681 | ||||||||
|
Cash
equivalents:
|
||||||||||||||||
|
Money
market mutual funds
|
682,148 | — | — | 682,148 | ||||||||||||
|
Bank
deposits
|
40,594 | — | — | 40,594 | ||||||||||||
|
United
States treasury notes
|
35,992 | 7 | — | 35,999 | ||||||||||||
|
Corporate
bonds
|
10,028 | — | — | 10,028 | ||||||||||||
|
Total
cash equivalents
|
768,762 | 7 | — | 768,769 | ||||||||||||
|
Total
cash and cash equivalents
|
886,443 | 7 | — | 886,450 | ||||||||||||
|
Short-term
investments:
|
||||||||||||||||
|
United
States treasury notes
|
863,772 | 14,384 | (1 | ) | 878,155 | |||||||||||
|
Corporate
bonds
|
109,415 | 219 | (997 | ) | 108,637 | |||||||||||
|
Obligations
of foreign governments
|
115,316 | 811 | (33 | ) | 116,094 | |||||||||||
|
Bonds
of multi-lateral government agencies
|
26,559 | 260 | — | 26,819 | ||||||||||||
|
Subtotal
|
1,115,062 | 15,674 | (1,031 | ) | 1,129,705 | |||||||||||
|
Other
marketable equity securities
|
2,773 | 274 | — | 3,047 | ||||||||||||
|
Total
short-term investments
|
1,117,835 | 15,948 | (1,031 | ) | 1,132,752 | |||||||||||
|
Total
cash, cash equivalents and short-term investments
|
$ | 2,004,278 | $ | 15,955 | $ | (1,031 | ) | $ | 2,019,202 | |||||||
See
Note 4 for further information regarding the fair value of our financial
instruments.
The following
table summarizes the fair value and gross unrealized losses related to
available-for-sale securities, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, at November 27, 2009 (in thousands):
| Less Than 12 Months | Total | |||||||||||||||
|
Fair Value
|
Gross
Unrealized
Losses
|
Fair Value
|
Gross
Unrealized
Losses
|
|||||||||||||
|
United
States treasury notes and agency bonds
|
$ | 11,179 | $ | (1 | ) | $ | 11,179 | $ | (1 | ) | ||||||
|
Government
guaranteed bonds
|
5,041 | (1 | ) | 5,041 | (1 | ) | ||||||||||
|
Total
|
$ | 16,220 | $ | (2 | ) | $ | 16,220 | $ | (2 | ) | ||||||
As of
November 27, 2009, there were no securities in a continuous unrealized loss
position for more than twelve months. There were 4 securities that were in an
unrealized loss position at November 27, 2009.
The
following table summarizes the fair value and gross unrealized losses related to
available-for-sale securities, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, at November 28, 2008 (in thousands):
| Less Than 12 Months | Total | |||||||||||||||
|
Fair Value
|
Gross
Unrealized
Losses
|
Fair Value
|
Gross
Unrealized
Losses
|
|||||||||||||
|
United
States treasury notes
|
$ | 37,400 | $ | (1 | ) | $ | 37,400 | $ | (1 | ) | ||||||
|
Corporate
bonds
|
67,606 | (997 | ) | 67,606 | (997 | ) | ||||||||||
|
Obligations
of foreign governments
|
28,033 | (33 | ) | 28,033 | (33 | ) | ||||||||||
|
Total
|
$ | 133,039 | $ | (1,031 | ) | $ | 133,039 | $ | (1,031 | ) | ||||||
As of
November 28, 2008, there were no securities in a continuous unrealized loss
position for more than twelve months. There were 33 securities that were in an
unrealized loss position at November 28, 2008.
90
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following table summarizes the cost and estimated fair value of debt securities
classified as short-term investments based on stated maturities as of November
27, 2009 (in thousands):
|
Amortized
Cost
|
Estimated
Fair Value
|
|||||||
|
Due
within one year
|
$ | 385,828 | $ | 387,572 | ||||
|
Due
within two years
|
246,169 | 249,882 | ||||||
|
Due
within three years
|
214,108 | 218,621 | ||||||
|
Due
after three years
|
41,607 | 43,884 | ||||||
|
Total
|
$ | 887,712 | $ | 899,959 |
We review
our debt and marketable equity securities classified as short-term investments
on a regular basis to evaluate whether or not any security has experienced an
other-than-temporary decline in fair value. We consider factors such as the
length of time and extent to which the market value has been less than the cost,
the financial condition and near-term prospects of the issuer and our intent to
sell, or whether it is more likely than not we will be required to sell, the
investment before recovery of the investment’s amortized cost basis. If we
believe that an other-than-temporary decline exists in one of these securities,
we write down these investments to fair value. For debt securities, the portion
of the write-down related to credit loss would be recorded to interest and other
income, net in our Consolidated Statements of Income. Any portion not related to
credit loss would be recorded to accumulated other comprehensive income, which
is reflected as a separate component of stockholders’ equity in our Consolidated
Balance Sheets. For equity securities, the write-down would be recorded to
investment gains (losses), net in our Consolidated Statements of Income. As of
November 27, 2009, we do not consider any of our investments to be
other-than-temporarily impaired.
We
measure certain financial assets and liabilities at fair value on a recurring
basis. The fair value of these financial assets and liabilities was determined
using the following inputs at November 27, 2009 (in thousands):
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
||||||||||||||
|
Total
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
|
Current
assets:
|
||||||||||||||||
|
Money
market funds and overnight deposits
(1)
|
$ | 924,378 | $ | 924,378 | $ | — | $ | — | ||||||||
|
Fixed
income available-for-sale securities
(2)
|
899,960 | — | 899,960 | — | ||||||||||||
|
Available-for-sale
equity securities
(3)
|
5,026 | 5,026 | — | — | ||||||||||||
|
Total
current assets
|
1,829,364 | 929,404 | 899,960 | — | ||||||||||||
|
Non-current
assets:
|
||||||||||||||||
|
Investments
of limited partnership
(4)
|
37,121 | — | — | 37,121 | ||||||||||||
|
Foreign
currency derivatives
(5)
|
4,307 | — | 4,307 | — | ||||||||||||
|
Deferred
compensation plan assets
(4)
:
|
||||||||||||||||
|
Money
market funds
|
717 | 717 | — | — | ||||||||||||
|
Equity
and fixed income mutual funds
|
8,328 | — | 8,328 | — | ||||||||||||
|
Subtotal
for deferred compensation plan assets
|
9,045 | 717 | 8,328 | — | ||||||||||||
|
Total
non-current assets
|
50,473 | 717 | 12,635 | 37,121 | ||||||||||||
|
Total
assets
|
$ | 1,879,837 | $ | 930,121 | $ | 912,595 | $ | 37,121 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Foreign
currency derivatives
(6)
|
$ | 1,589 | $ | — | $ | 1,589 | $ | — | ||||||||
|
Total
liabilities
|
$ | 1,589 | $ | — | $ | 1,589 | $ | — | ||||||||
91
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair
value of these financial assets and liabilities was determined using the
following inputs at November 28, 2008 (in thousands):
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
||||||||||||||
|
Total
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
|
Current
assets:
|
||||||||||||||||
|
Money
market funds and overnight deposits
(1)
|
$ | 722,742 | $ | 722,742 | $ | — | $ | — | ||||||||
|
Fixed
income available-for-sale securities
(2)
|
1,175,732 | — | 1,175,732 | — | ||||||||||||
|
Available-for-sale
equity securities
(3)
|
3,047 | 3,047 | — | — | ||||||||||||
|
Total
current assets
|
1,901,521 | 725,789 | 1,175,732 | — | ||||||||||||
|
Non-current
assets:
|
||||||||||||||||
|
Investments
of limited partnership
(4)
|
39,004 | 251 | — | 38,753 | ||||||||||||
|
Foreign
currency derivatives
(5)
|
49,848 | — | 49,848 | — | ||||||||||||
|
Deferred
compensation plan assets
(4)
:
|
||||||||||||||||
|
Money
market funds
|
704 | 704 | — | — | ||||||||||||
|
Equity
and fixed income mutual funds
|
6,856 | — | 6,856 | — | ||||||||||||
|
Subtotal
for deferred compensation plan assets
|
7,560 | 704 | 6,856 | — | ||||||||||||
|
Total
non-current assets
|
96,412 | 955 | 56,704 | 38,753 | ||||||||||||
|
Total
assets
|
$ | 1,997,933 | $ | 726,744 | $ | 1,232,436 | $ | 38,753 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Foreign
currency derivatives
(6)
|
$ | 1,739 | $ | — | $ | 1,739 | $ | — | ||||||||
|
Total
liabilities
|
$ | 1,739 | $ | — | $ | 1,739 | $ | — | ||||||||
_________________________________________
|
(1)
|
Included
in cash and cash equivalents on our Consolidated Balance
Sheets.
|
|
(2)
|
Included
in either cash and cash equivalents or short-term investments on our
Consolidated Balance Sheets.
|
|
(3)
|
Included
in short-term investments on our Consolidated Balance
Sheets.
|
|
(4)
|
Included
in other assets on our Consolidated Balance
Sheets.
|
|
(5)
|
Included
in prepaid expenses and other current assets on our Consolidated Balance
Sheets.
|
|
(6)
|
Included
in accrued expenses on our Consolidated Balance
Sheets.
|
See
Note 3 for further information regarding the fair value of our financial
instruments.
Fixed
income available-for-sale securities include U.S. treasury securities, Agency or
U.S. government guaranteed securities (70% of total), corporate bonds (21% of
total), obligations of foreign governments and their agencies (6% of total), and
obligations of multi-lateral government agencies (3% of total) at November 27,
2009 and U.S. treasury securities, Agency or U.S. government guaranteed
securities (78% of total), corporate bonds (10% of total), obligations of
foreign governments and their agencies (10% of total), and obligations of
multi-lateral government agencies (2% of total) at November 28, 2008. These are
all high quality, investment grade securities with a minimum credit rating of A-
and a weighted average credit rating better than AA+. We value these securities
based on pricing from pricing vendors, who may use quoted prices in active
markets for identical assets (Level 1 inputs) or inputs other than quoted prices
that are observable either directly or indirectly (Level 2 inputs) in
determining fair value. However, we classify all of our fixed income
available-for-sale securities as having Level 2 inputs. Our procedures include
controls to ensure that appropriate fair values are recorded such as comparing
prices obtained from multiple independent sources.
92
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
investments of limited partnership relate to our interest in Adobe Ventures IV
L.P. (“Adobe Ventures”), which are consolidated in our Consolidated Financial
Statements. The Level 1 investments of limited partnership relate to investments
in publicly-traded companies and the Level 3 investments consist of investments
in privately-held companies. These investments are remeasured at fair value each
period with any gains or losses recognized in investment gains (losses), net in
our Consolidated Statements of Income. We estimated fair value of the Level 3
investments by considering available information such as pricing in recent
rounds of financing, current cash positions, earnings and cash flow forecasts,
recent operational performance and any other readily available market
data.
A
reconciliation of the beginning and ending balances for investments of limited
partnership using significant unobservable inputs (Level 3) as of November 27,
2009 and November 28, 2008 was as follows (in thousands):
|
Balance
as of November 30, 2007
|
$ | 30,647 | ||
|
Purchases
and sales of investments, net
|
363 | |||
|
Unrealized
net investment gains included in earnings
|
7,743 | |||
|
Balance
as of November 28, 2008
|
38,753 | |||
|
Purchases
and sales of investments, net
|
1,921 | |||
|
Unrealized
net investment losses included in earnings
|
(3,553 | ) | ||
|
Balance
as of November 27, 2009
|
$ | 37,121 |
We also
have direct investments in privately-held companies accounted for under the cost
method, which are periodically assessed for other-than-temporary
impairment. If we determine that an other-than-temporary impairment has
occurred, we write-down the investment to its fair value. We estimated fair
value of our cost method investments considering available information such as
pricing in recent rounds of financing, current cash positions, earnings and cash
flow forecasts, recent operational performance and any other readily available
market data. During fiscal 2009, we determined that certain of our cost method
investments were other-than-temporarily impaired which resulted in a charge of
$13.9 million, included in investment gains (losses), net in our Consolidated
Statements of Income. The fair value of cost method investments that were
impaired was estimated using Level 3 inputs.
See
Note 8 for further information regarding our limited partnership interest in
Adobe Ventures and our cost method investments.
Hedge
Accounting
We
recognize derivative instruments and hedging activities as either assets or
liabilities in our Consolidated Balance Sheets and measure them at fair value.
Gains and losses resulting from changes in fair value are accounted for
depending on the use of the derivative and whether it is designated and
qualifies for hedge accounting.
Economic
Hedging—Hedges of Forecasted Transactions
In
countries outside the U.S., we transact business in U.S. dollars and in various
other currencies. In Europe and Japan, transactions that are denominated in Euro
and Yen are subject to exposure from movements in exchange rates. We may use
foreign exchange option contracts or forward contracts to hedge certain
operational (“cash flow”) exposures resulting from changes in foreign currency
exchange rates. These foreign exchange contracts, carried at fair value, may
have maturities between one and twelve months. The maximum original duration of
any contract is twelve months. We enter into these foreign exchange contracts to
hedge a portion of our forecasted foreign currency denominated revenue in the
normal course of business and accordingly, they are not speculative in
nature.
To
receive hedge accounting treatment, all hedging relationships are formally
documented at the inception of the hedge, and the hedges must be highly
effective in offsetting changes to future cash flows on hedged transactions. We
record changes in the intrinsic value of these cash flow hedges in accumulated
other comprehensive income in our Consolidated Balance Sheets, until the
forecasted transaction occurs. When the forecasted transaction occurs, we
reclassify the related gain or loss on the cash flow hedge to
revenue. In the event the underlying
forecasted transaction does not occur, or it becomes
probable
93
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that it
will not occur, we reclassify the gain or loss on the related cash flow hedge
from accumulated other comprehensive income to interest and other income, net in
our Consolidated Statements of Income at that time. For fiscal 2009, 2008 and
2007 there were no such gains or losses recognized in interest and other income,
net relating to hedges of forecasted transactions that did not
occur.
We
evaluate hedge effectiveness at the inception of the hedge prospectively as well
as retrospectively and record any ineffective portion of the hedging instruments
in interest and other income, net on our Consolidated Statements of Income. The
net gain (loss) recognized in interest and other income, net for cash flow
hedges due to hedge ineffectiveness was insignificant for fiscal 2009, 2008 and
2007. The time value of purchased derivative instruments is recorded in interest
and other income, net in our Consolidated Statements of Income.
The
effect of derivative instruments designated as cash flow hedges and of
derivative instruments not designated as hedges in our Consolidated Statements
of Income for fiscal 2009 was as follows (in thousands):
| 2009 | ||||||||
|
Foreign
Exchange
Option
Contracts
|
Foreign
Exchange
Forward
Contracts
|
|||||||
|
Derivatives
in cash flow hedging relationships:
|
||||||||
|
Net
gain (loss) recognized in OCI, net of tax
(1)
|
$ | (14,618 | ) | $ | — | |||
|
Net
gain (loss) reclassified from accumulated OCI into income, net of tax
(2)
|
$ | 27,138 | $ | — | ||||
|
Net gain (loss) recognized in
income
(3)
|
$ | (18,027 | ) | $ | — | |||
|
Derivatives
not designated as hedging relationships:
|
||||||||
|
Net gain (loss) recognized in
income
(4)
|
$ | — | $ | (14,407 | ) | |||
_________________________________________
|
(1)
|
Net
change in the fair value of the effective portion classified in other
comprehensive income (“OCI”).
|
|
(2)
|
Effective
portion classified as revenue.
|
|
(3)
|
Ineffective
portion and amount excluded from effectiveness testing classified in
interest and other income, net.
|
|
(4)
|
Classified
in interest and other income, net.
|
Balance
Sheet Hedging - Hedging of Foreign Currency Assets and Liabilities
We also
hedge our net recognized foreign currency assets and liabilities with foreign
exchange forward contracts to reduce the risk that our earnings and cash flows
will be adversely affected by changes in exchange rates. These derivative
instruments hedge assets and liabilities that are denominated in foreign
currencies and are carried at fair value with changes in the fair value recorded
to interest and other income, net in our Consolidated Statements of Income.
These derivative instruments do not subject us to material balance sheet risk
due to exchange rate movements because gains and losses on these derivatives are
intended to offset gains and losses on the assets and liabilities being hedged.
As of November 27, 2009, total notional amounts of outstanding contracts were
$154.9 million which included the notional equivalent of $87.6 million in Euro,
$22.9 million in Yen and $44.4 million in other foreign currencies. At November
27, 2009, the outstanding balance sheet hedging derivatives had maturities of 90
days or less.
94
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair
value of derivative instruments in our Consolidated Balance Sheets as of
November 27, 2009 were as follows (in thousands):
|
Fair
Values of Derivative Instruments
|
||||||||||
|
Asset
Derivatives
|
Liability
Derivatives
|
|||||||||
|
Balance
Sheet
Location
|
Fair
Value
|
Balance
Sheet
Location
|
Fair
Value
|
|||||||
| Derivatives designated as hedging instruments: | ||||||||||
|
Foreign exchange option
contracts
(*)
|
Prepaid
expense
and
other
current
assets
|
$ | 4,175 |
Accrued
expenses
|
$ | — | ||||
| Derivatives not designated as hedging instruments: | ||||||||||
|
Foreign exchange forward
contracts
|
Prepaid
expense
and
other
current
assets
|
132 |
Accrued
expenses
|
1,589 | ||||||
|
Total
derivatives
|
$ | 4,307 | $ | 1,589 | ||||||
_________________________________________
(*)
Hedging
effectiveness expected to be recognized to income within the next twelve
months.
Net gains
(losses) recognized in interest and other income, net relating to balance sheet
hedging for fiscal 2009, 2008 and 2007 were as follows (in
thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Gain
(loss) on foreign currency assets and liabilities:
|
||||||||||||
|
Net
realized gain (loss) recognized in other income
|
$ | 25,384 | $ | (7,738 | ) | $ | 13,388 | |||||
|
Net
unrealized (loss) gain recognized in other income related to instruments
outstanding
|
(6,390 | ) | 5,223 | (4,035 | ) | |||||||
| 18,994 | (2,515 | ) | 9,353 | |||||||||
|
(Loss)
gain on hedges of foreign currency assets and liabilities:
|
||||||||||||
|
Net
realized loss recognized in other income
|
(11,872 | ) | (3,255 | ) | (8,394 | ) | ||||||
|
Net
unrealized (loss) gain recognized in other income
|
(2,535 | ) | 3,920 | 1,887 | ||||||||
| (14,407 | ) | 665 | (6,507 | ) | ||||||||
| Net gain (loss) recognized in other income | $ | 4,587 | $ | (1,850 | ) | $ | 2,846 |
Concentration
of Risk
Financial
instruments that potentially subject us to concentrations of credit risk are
short-term investments, primarily fixed-income securities, structured repurchase
transactions, derivatives, hedging foreign currency and interest rate risk and
trade receivables.
Our
investment portfolio consists of investment-grade securities diversified among
security types, industries and issuers. Our cash and investments are held and
managed by recognized financial institutions that follow our investment policy.
Our policy limits the amount of credit exposure to any one security issue or
issuer and we believe no significant concentration of credit risk exists with
respect to these investments.
We
mitigate concentration of risk related to foreign currency hedges through a
policy that establishes counterparty limits. The bank counterparties in these
contracts expose us to credit-related losses in the event of their
nonperformance. However, to mitigate that risk, we only contract with
counterparties who meet our minimum requirements under our counterparty risk
assessment process. In addition, our hedging policy establishes maximum limits
for each counterparty. We monitor ratings, credit spreads and potential
downgrades on at least a quarterly basis. Based on our on-going assessment of
counterparty risk, we will adjust our exposure to various
counterparties.
95
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
aggregate fair value of derivative instruments in net asset positions as of
November 27, 2009 was $4.3 million. This amount represents the maximum exposure
to loss at the reporting date as a result of all of the counterparties failing
to perform as contracted. This exposure could be reduced by up to $1.6 million
of liabilities included in master netting arrangements with those same
counterparties.
Credit
risk in receivables is limited to OEMs, dealers and distributors of hardware and
software products to the retail market, and to customers to whom we license
software directly. A credit review is completed for our new distributors,
dealers and OEMs. We also perform ongoing credit evaluations of our customers’
financial condition and require letters of credit or other guarantees, whenever
deemed necessary. The credit limit given to the customer is based on our risk
assessment of their ability to pay, country risk and other factors and is not
contingent on the resale of the product or on the collection of payments from
their customers. We also purchase credit insurance to mitigate credit risk in
some foreign markets where we believe it is warranted. If we license our
software to a customer where we have a reason to believe the customer’s ability
to pay is not probable, due to country risk or credit risk, we will not
recognize the revenue. We will revert to recognizing the revenue on a cash
basis, assuming all other criteria for revenue recognition has been met.
See Note 20 for information
regarding our significant customers.
We derive
a significant portion of our OEM PostScript and Other licensing revenue from a
small number of OEMs. Our OEMs on occasion seek to renegotiate their royalty
arrangements. We evaluate these requests on a case-by-case basis. If an
agreement is not reached, a customer may decide to pursue other options, which
could result in lower licensing revenue for us.
Property
and equipment, net consisted of the following as of November 27, 2009 and
November 28, 2008 (in thousands):
|
2009
|
2008
|
|||||||
|
Computers
and equipment
|
$ | 409,595 | $ | 331,235 | ||||
|
Furniture
and fixtures
|
62,786 | 56,253 | ||||||
|
Capital
projects in-progress
|
19,931 | 7,273 | ||||||
|
Leasehold
improvements
|
152,200 | 133,571 | ||||||
|
Land
|
86,493 | 74,835 | ||||||
|
Buildings
|
99,845 | 62,464 | ||||||
|
Total
|
830,850 | 665,631 | ||||||
|
Less
accumulated depreciation and amortization.
|
(442,718 | ) | (352,594 | ) | ||||
|
Property
and equipment, net.
|
$ | 388,132 | $ | 313,037 |
Depreciation
and amortization expense of property and equipment for fiscal 2009, 2008 and
2007 was $95.9 million, $83.3 million and $73.2 million,
respectively.
Goodwill
by reportable segment, as of November 27, 2009 was as follows (in
thousands):
|
2008
|
Acquisitions
|
Other
(*)
|
2009
|
|||||||||||||
|
Creative
Solutions
|
$ | 956,011 | $ | 253,463 | $ | 1,126 | $ | 1,210,600 | ||||||||
|
Knowledge
Worker
|
408,318 | — | 2,255 | 410,573 | ||||||||||||
|
Enterprise
|
298,039 | — | (4,310 | ) | 293,729 | |||||||||||
|
Platform
|
265,518 | — | (398 | ) | 265,120 | |||||||||||
|
Print
and Publishing
|
206,844 | — | (311 | ) | 206,533 | |||||||||||
|
Omniture
|
— | 1,108,034 | — | 1,108,034 | ||||||||||||
|
Goodwill
|
$ | 2,134,730 | $ | 1,361,497 | $ | (1,638 | ) | $ | 3,494,589 |
_________________________________________
|
(*)
|
Includes
net reductions in goodwill of $5.2 million for tax related obligations
associated with our acquisitions of Macromedia and Accelio in addition to
a facility lease obligation adjustment of $1.7 million related to
Macromedia, offset in part by foreign currency translation adjustments and
other individually insignificant tax
items.
|
96
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
See Note 2
for further information regarding our acquisitions.
Purchased and
other intangible assets, net by reportable segment as of November 27, 2009 and
November 28, 2008 were as follows (in thousands):
|
2009
|
2008
|
|||||||
|
Creative
Solutions
|
$ | 124,178 | $ | 107,526 | ||||
|
Knowledge
Worker
|
23,041 | 48,851 | ||||||
|
Enterprise
|
6,588 | 13,146 | ||||||
|
Platform
|
9,159 | 26,248 | ||||||
|
Print
and Publishing
|
6,218 | 19,189 | ||||||
|
Omniture
|
358,204 | — | ||||||
|
Purchased
and other intangible assets, net
|
$ | 527,388 | $ | 214,960 |
Purchased and
other intangible assets subject to amortization as of November 27, 2009 were as
follows (in thousands):
|
Cost
|
Accumulated
Amortization
|
Net
|
||||||||||
|
Purchased
technology
|
$ | 586,952 | $ | (387,731 | ) | $ | 199,221 | |||||
|
Localization
|
$ | 20,284 | $ | (15,222 | ) | $ | 5,062 | |||||
|
Trademarks
|
172,030 | (104,953 | ) | 67,077 | ||||||||
|
Customer
contracts and relationships
|
363,922 | (159,450 | ) | 204,472 | ||||||||
|
Other
intangibles
|
54,535 | (2,979 | ) | 51,556 | ||||||||
|
Total
other intangible assets
|
$ | 610,771 | $ | (282,604 | ) | $ | 328,167 | |||||
|
Purchased
and other intangible assets
|
$ | 1,197,723 | $ | (670,335 | ) | $ | 527,388 |
Purchased
and other intangible assets subject to amortization as of November 28, 2008 were
as follows (in thousands):
|
Cost
|
Accumulated
Amortization
|
Net
|
||||||||||
|
Purchased
technology
|
$ | 411,408 | $ | (338,608 | ) | $ | 72,800 | |||||
|
Localization
|
$ | 23,751 | $ | (6,156 | ) | $ | 17,595 | |||||
|
Trademarks
|
130,925 | (78,181 | ) | 52,744 | ||||||||
|
Customer
contracts and relationships
|
198,891 | (127,520 | ) | 71,371 | ||||||||
|
Other
intangibles
|
800 | (350 | ) | 450 | ||||||||
|
Total
other intangible assets
|
$ | 354,367 | $ | (212,207 | ) | $ | 142,160 | |||||
|
Purchased
and other intangible assets
|
$ | 765,775 | $ | (550,815 | ) | $ | 214,960 |
Amortization
expense related to purchased and other intangible assets was $151.3 million,
$184.4 million and $216.3 million for fiscal 2009, 2008 and 2007, respectively.
Of these amounts, for fiscal 2009, 2008 and 2007, $88.3 million, $116.1 million
and $145.4 million, respectively, was included in cost of sales.
Purchased
and other intangible assets are amortized over their estimated useful lives of 1
to 13 years. As of November 27, 2009, we expect amortization expense in future
periods to be as follows (in thousands):
|
Fiscal Year
|
|
Purchased
Technology
|
Other Intangible
Assets
|
||||||
|
2010
|
$ | 35,830 | $ | 100,403 | |||||
|
2011
|
32,446 | 58,494 | |||||||
|
2012
|
30,840 | 22,068 | |||||||
|
2013
|
26,867 | 21,447 | |||||||
|
2014
|
25,110 | 21,046 | |||||||
|
Thereafter
|
48,128 | 104,709 | |||||||
|
Total
expected amortization expense
|
$ | 199,221 | $ | 328,167 | |||||
97
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other
assets as of November 27, 2009 and November 28, 2008 consisted of the following
(in thousands):
|
2009
|
2008
|
|||||||
|
Acquired
rights to use technology
|
$ | 84,313 | $ | 90,643 | ||||
|
Investments
|
63,526 | 76,589 | ||||||
|
Security
and other deposits
|
11,692 | 16,087 | ||||||
|
Prepaid
royalties
|
12,059 | 9,026 | ||||||
|
Deferred
compensation plan assets
|
9,045 | 7,560 | ||||||
|
Restricted
cash
|
4,650 | 7,361 | ||||||
|
Prepaid
land lease
|
3,209 | 3,185 | ||||||
|
Prepaid
rent
|
1,377 | 2,658 | ||||||
|
Other
|
1,394 | 3,420 | ||||||
|
Other
assets
|
$ | 191,265 | $ | 216,529 |
Acquired
rights to use technology purchased during fiscal 2009 and fiscal 2008 was $6.0
million and $100.4 million, respectively. Of the cost for fiscal 2008, an
estimated $56.4 million was related to future licensing rights and has been
capitalized and is being amortized on a straight-line basis over the estimated
useful lives up to fifteen years. Of the remaining costs for fiscal 2008, we
estimated that $27.2 million was related to historical use of licensing rights
which was expensed as cost of sales and the residual of $16.8 million for fiscal
2008 was expensed as general and administrative costs. In connection with these
licensing arrangements, we have the ability to acquire additional rights to use
technology in the future.
See Note 17 for further information
regarding our contractual commitments.
In
general, acquired rights to use technology are amortized over their estimated
useful lives of 3 to 15 years.
Included
in investments are our indirect investments through our limited partnership
interest in Adobe Ventures of approximately $37.1 million and $39.0 million as
of November 27, 2009 and November 28, 2008, respectively, which is consolidated
in accordance with the provisions for consolidating variable interest entities.
The partnership is controlled by Granite Ventures, an independent venture
capital firm and sole general partner of Adobe Ventures. We are the primary
beneficiary of Adobe Ventures and bear virtually all of the risks and rewards
related to our ownership
.
Our
investment in Adobe
Ventures does not have a significant impact on our consolidated financial
position, results of operations or cash flows.
Adobe
Ventures carries its investments in equity securities at estimated fair value
and investment gains and losses are included in our Consolidated Statements of
Income. Substantially all of the investments held by Adobe Ventures at November
27, 2009 and November 28, 2008 are not publicly traded and, therefore, there is
no established market for these securities. In order to determine the fair value
of these investments, we use the most recent round of financing involving new
non-strategic investors or estimates of current market value made by Granite
Ventures. It is our policy to evaluate the fair value of these investments held
by Adobe Ventures, as well as our direct investments, on a regular basis. This
evaluation includes, but is not limited to, reviewing each company’s cash
position, financing needs, earnings and revenue outlook, operational
performance, management and ownership changes and competition. In the case of
privately-held companies, this evaluation is based on information that we
request from these companies. This information is not subject to the same
disclosure regulations as U.S. publicly traded companies and as such, the basis
for these evaluations is subject to the timing and the accuracy of the data
received from these companies. See
Note 4 for further information
regarding Adobe Ventures.
Also
included in investments are our direct investments in privately-held companies
of approximately $26.4 million and $37.6 million as of November 27, 2009 and
November 28, 2008, respectively, which are accounted for based on the cost
method. We assess these investments for impairment in value as
circumstances dictate.
See
Note 4 for further information
regarding our cost method investments.
We
entered into a Purchase and Sale Agreement, effective May 12, 2008, for the
acquisition of real property located in Waltham, Massachusetts. We purchased the
property upon completion of construction of an office building shell and core,
parking structure, and site improvements. The purchase price for the property
was $44.7 million and closed on June 16, 2009. We made an initial deposit of
$7.0 million which was included in security and other deposits as of November
28, 2008 and the remaining balance was paid at closing. This deposit was held in
escrow until closing and then applied to the purchase price.
98
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other
assets include the fair value, at inception, of the residual value guarantee
associated with our leases on the buildings we occupy as part of our corporate
headquarters. The lease agreements for our corporate headquarters provide for
residual value guarantees. The fair value of a residual value guarantee in lease
agreements entered into after December 31, 2002, must be recognized as a
liability on our Consolidated Balance Sheets. As such, we recognized $5.2
million and $3.0 million in liabilities, related to the extended East and West
Towers and Almaden Tower leases, respectively. These liabilities are recorded in
other long-term liabilities with the offsetting entry recorded as prepaid rent
in other assets. The balance is being amortized to the Consolidated Statements
of Income over the life of the leases. As of November 27, 2009 and November 28,
2008, the unamortized portion of the fair value of the residual value guarantees
remaining in other long-term liabilities and prepaid rent was $1.3 million and
$2.6 million, respectively.
Accrued
expenses as of November 27, 2009 and November 28, 2008 consisted of the
following (in thousands):
|
2009
|
2008
|
|||||||
|
Accrued
compensation and benefits
|
$ | 164,352 | $ | 177,760 | ||||
|
Taxes
payable
|
11,879 | 21,760 | ||||||
|
Sales
and marketing allowances
|
32,774 | 28,127 | ||||||
|
Other
|
210,641 | 172,322 | ||||||
|
Accrued
expenses
|
$ | 419,646 | $ | 399,969 |
Other
primarily includes general corporate accruals for corporate marketing programs,
local and regional expenses, and technical support. Other is also comprised of
deferred rent related to office locations with rent escalations, accrued
royalties, foreign currency derivatives and accrued interest on the credit
facility.
Income
before income taxes includes income from foreign operations of $422.4 million,
$740.3 million and $453.2 million for fiscal 2009, 2008 and 2007,
respectively.
The
provision for income taxes for fiscal 2009, 2008 and 2007 consisted of the
following (in thousands):
|
2009
|
2008
|
2007 (*) | ||||||||||
|
Current:
|
||||||||||||
|
United
States federal
|
$ | 152,840 | $ | 24,179 | $ | 36,614 | ||||||
|
Foreign
|
36,794 | 27,680 | 55,536 | |||||||||
|
State
and local
|
25,427 | 6,972 | 4,100 | |||||||||
|
Total
current
|
215,061 | 58,831 | 96,250 | |||||||||
|
Deferred:
|
||||||||||||
|
United
States federal
|
50,376 | 41,678 | 50,640 | |||||||||
|
Foreign
|
559 | (9,693 | ) | (13,480 | ) | |||||||
|
State
and local
|
4,635 | 25,518 | 23,007 | |||||||||
|
Total
deferred
|
55,570 | 57,503 | 60,167 | |||||||||
|
Tax
expense attributable to employee stock plans
|
44,381 | 90,360 | 66,966 | |||||||||
|
Provision
for income taxes
|
$ | 315,012 | $ | 206,694 | $ | 223,383 |
_________________________________________
|
(*)
|
Certain
employee stock plan benefits in fiscal 2007 associated with the
acquisition of Macromedia reduced goodwill.
See Note 7 for further
information regarding our
goodwill
.
|
99
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total
income tax expense differs from the expected tax expense (computed by
multiplying the U.S. federal statutory rate of 35% by income before income
taxes) as a result of the following (in thousands):
|
2009
|
2008 | 2007 | ||||||||||
|
Computed
“expected” tax expense
|
$ | 245,532 | $ | 377,478 | $ | 331,516 | ||||||
|
State
tax expense, net of federal benefit
|
7,799 | 12,700 | 8,938 | |||||||||
|
Tax-exempt
income
|
— | (342 | ) | (11,123 | ) | |||||||
|
Tax
credits
|
(14,127 | ) | (12,873 | ) | (23,341 | ) | ||||||
|
Differences
between statutory rate and foreign effective tax rate
|
(91,262 | ) | (132,470 | ) | (84,740 | ) | ||||||
|
Change
in deferred tax asset valuation allowance
|
2,759 | (1,105 | ) | 1,694 | ||||||||
|
Stock-based
compensation (net of tax deduction)
|
6,085 | 5,457 | 2,587 | |||||||||
|
Resolution
of U.S. income tax exam for fiscal 2001 - 2004 years
|
— | (20,712 | ) | — | ||||||||
|
Foreign
tax refund for fiscal 2000 - 2002
|
— | (16,351 | ) | — | ||||||||
|
Domestic
manufacturing deduction benefit
|
(7,525 | ) | (6,300 | ) | (4,419 | ) | ||||||
|
Tax
charge for licensing Omniture’s technology to foreign
subsidiaries
|
161,701 | — | — | |||||||||
|
Other,
net
|
4,050 | 1,212 | 2,271 | |||||||||
|
Provision
for income taxes
|
$ | 315,012 | $ | 206,694 | $ | 223,383 |
Deferred
Tax Assets and Liabilities
The tax
effects of the temporary differences that gave rise to significant portions of
the deferred tax assets and liabilities as of November 28, 2008 and November 27,
2009 are presented below (in thousands):
|
2009
|
2008
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Acquired
technology
|
$ | 937 | $ | 4,497 | ||||
|
Reserves
and accruals
|
68,472 | 71,174 | ||||||
|
Deferred
revenue
|
17,441 | 46,200 | ||||||
|
Unrealized
losses on investments
|
15,263 | 10,350 | ||||||
|
Stock-based
compensation
|
56,541 | 50,329 | ||||||
|
Net
operating loss of acquired companies
|
56,138 | 7,621 | ||||||
|
Credits
|
12,205 | 19,130 | ||||||
|
Capitalized
expenses
|
5,701 | 5,688 | ||||||
|
Other
|
11,603 | 3,538 | ||||||
|
Total
gross deferred tax assets
|
244,301 | 218,527 | ||||||
|
Deferred
tax asset valuation allowance
|
(4,283 | ) | (1,524 | ) | ||||
|
Total
deferred tax assets
|
240,018 | 217,003 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Depreciation
and amortization
|
(11,975 | ) | (3,113 | ) | ||||
|
Undistributed
earnings of foreign subsidiaries
|
(210,619 | ) | (167,760 | ) | ||||
|
Acquired
intangible assets
|
(192,493 | ) | (52,745 | ) | ||||
|
Total
deferred tax liabilities
|
(415,087 | ) | (223,618 | ) | ||||
|
Net
deferred tax (liabilities) assets
|
$ | (175,069 | ) | $ | (6,615 | ) |
The
deferred tax assets and liabilities for fiscal 2009 and fiscal 2008 include
amounts related to various acquisitions. The total change in deferred
tax assets and liabilities in fiscal 2009 includes changes that are recorded to
other comprehensive income, additional paid-in capital, goodwill and retained
earnings.
We
provide U.S. income taxes on the earnings of foreign subsidiaries unless the
subsidiaries’ earnings are considered permanently reinvested outside the U.S. To
the extent that the foreign earnings previously treated as permanently
reinvested are repatriated, the related U.S. tax liability may be reduced by any
foreign income taxes paid on these earnings. As of November 27, 2009,
the cumulative amount of earnings upon which U.S. income taxes have not been
provided is approximately $1.5 billion. The unrecognized deferred tax liability
for these earnings is approximately $420.9 million.
100
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of
November 27, 2009, we have net operating loss carryforward assets of
approximately $135.0 million for federal, $56.2 million for state and $1.6
million related to foreign net operating losses. We also have federal and state
tax credit carryforwards of approximately $2.9 million and $13.8 million,
respectively. The net operating loss carryforward assets, federal tax credits
and foreign tax credits will expire in various years from fiscal 2014 through
2029. The state tax credit carryforwards can be carried forward
indefinitely. The net operating loss carryforward assets and certain
credits are subject to an annual limitation under Internal Revenue Code Section
382, but are expected to be fully realized.
In
addition, we have been tracking certain deferred tax attributes of $82.8 million
which have not been recorded in the financial statements pursuant to accounting
standards related to stock-based compensation. These amounts are no longer
included in our gross or net deferred tax assets. Pursuant to these standards,
the benefit of these deferred tax assets will be recorded to equity when they
reduce taxes payable.
A
valuation allowance has been established for certain deferred tax assets related
to the impairment of investments. At the end of fiscal 2009, our valuation
allowance was $4.3 million.
Accounting
for Uncertainty in Income Taxes
On
December 1, 2007, we adopted new standards related to how tax benefits for
uncertain tax positions are to be recognized, measured, and derecognized in the
financial statements. These standards also specify how liabilities for uncertain
tax positions should be classified on the balance sheet. The adoption of these
standards resulted in an increase of $3.9 million to both assets and
unrecognized tax benefits in our Consolidated Balance Sheets as of the beginning
of fiscal 2008. Upon adoption, the gross liability for unrecognized tax benefits
at December 1, 2007 was $218.4 million, exclusive of interest and
penalties.
Prior to
the adoption of this new accounting standard, we presented our estimated
liability for unrecognized tax benefits as a current liability. These new
standards require liabilities for unrecognized tax benefits to be classified
based on whether a payment is expected to be made within the next
12 months. That is, amounts expected to be paid within the next
12 months are to be classified as a current liability and all other amounts
are to be classified as a non-current liability. As a result of adopting these
standards, we reclassified $197.7 million from current income taxes payable
to long-term income taxes payable, including accrued interest in our
Consolidated Balance Sheets.
Prior to
the adoption of this new accounting standard, we presented our estimated state,
local and interest liabilities net of the estimated benefit we expect to receive
from deducting such payments on future tax returns (i.e., on a “net”
basis). These standards require this estimated benefit to be classified as a
deferred tax asset instead of a reduction of the overall liability
(i.e., on a “gross” basis). Accordingly, we recognized additional deferred
income tax assets of $3.9 million to present the unrecognized tax benefits
as gross amounts in our Consolidated Balance Sheets.
We
classify interest and penalties on unrecognized tax benefits as income tax
expense. As of December 1, 2007, the combined amount of accrued interest
and penalties related to tax positions taken on our tax returns and included in
non-current income taxes payable was approximately
$42.8 million.
During
fiscal 2009 and 2008, our aggregate changes in our total gross amount of
unrecognized tax benefits are summarized as follows (in thousands):
| 2009 | 2008 | |||||||
|
Beginning
balance
|
$ | 139,549 | $ | 201,808 | ||||
|
Gross
increases in unrecognized tax benefits – prior year tax positions
|
43,173 | 14,009 | ||||||
|
Gross
increases in unrecognized tax benefits – current year tax positions
|
42,422 | 11,350 | ||||||
|
Settlements
with taxing authorities
|
(429 | ) | (81,213 | ) | ||||
|
Lapse
of statute of limitations
|
(12,585 | ) | (3,512 | ) | ||||
|
Foreign
exchange gains and losses
|
5,910 | (2,893 | ) | |||||
|
Ending
balance
|
$ | 218,040 | $ | 139,549 |
As of
November 27, 2009, the combined amount of accrued interest and penalties related
to tax positions taken on our tax returns and included in non-current income
taxes payable was approximately $16.6 million.
101
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We file
income tax returns in the U.S. on a federal basis and in many U.S. state and
foreign jurisdictions. We are subject to the continual examination of our income
tax returns by the IRS and other domestic and foreign tax authorities. Our major
tax jurisdictions are the U.S., Ireland and California. For California, Ireland
and the U.S., the earliest fiscal years open for examination are 2001, 2004 and
2005, respectively. We regularly assess the likelihood of outcomes resulting
from these examinations to determine the adequacy of our provision for income
taxes and have reserved for potential adjustments that may result from the
current examination. We believe such estimates to be reasonable; however, there
can be no assurance that the final determination of any of these examinations
will not have an adverse effect on our operating results and financial
position.
The
timing of the resolution of income tax examinations is highly uncertain as are
the amounts and timing of tax payments that are part of any audit settlement
process. These events could cause large fluctuations in the balance sheet
classification of current and non-current assets and liabilities. The Company
believes that before the end of fiscal 2010, it is reasonably possible that
either certain audits will conclude or statutes of limitations on certain income
tax examination periods will expire, or both. Given the uncertainties described
above, we can only determine a range of estimated potential decreases in
underlying unrecognized tax benefits equal to $0 to approximately
$10 million. These amounts would decrease income tax expense under
current GAAP related to income taxes and as a result of our adoption of new
accounting standards related to business combinations
in fiscal 2010 (
see Note 1
). Under the
new guidance related to business combinations, adjustments to acquired income
tax liabilities (including adjustments for acquisitions completed prior to the
effective date) that are recorded subsequent to the acquisition date will be
recognized in income from continuing operations, with certain exceptions, if
such changes occur after the measurement period.
2009
Restructuring Plan Charges
On
November 10, 2009, we initiated a restructuring plan to appropriately align
our costs in connection with our fiscal 2010 operating plan impacting up to
approximately 630 full-time positions worldwide. In connection with this
restructuring plan, in the fourth quarter of fiscal 2009, we recorded
restructuring charges of approximately $25.5 million related to ongoing
termination benefits for the elimination of approximately 340 of these full-time
positions worldwide. As of November 27, 2009, approximately $2.5 million was
paid. The remaining accrual associated with these ongoing termination benefits
is expected to be paid during fiscal 2010. The restructuring activities related
to this program affect only those employees that were associated with Adobe
prior to the acquisition of Omniture, Inc. on October 23,
2009.
Beginning
in the first quarter of fiscal 2010, we expect to incur up to approximately $18
million related to the consolidation of leased facilities.
The
following table sets forth a summary of Adobe restructuring activities during
fiscal 2009 (in thousands):
|
November
28,
2008
|
Costs
Incurred
|
Cash
Payments
|
Other
Adjustments
|
November
27,
2009
|
||||||||||||||||
|
Termination
benefits
|
$ | — | $ | 25,521 | $ | (2,537 | ) | $ | — | $ | 22,984 |
Accrued
restructuring charges of approximately $23.0 million at November 27, 2009 is
recorded in accrued restructuring, current in our Consolidated Balance
Sheets.
Omniture
Restructuring Charges
We completed
our acquisition of Omniture on October 23, 2009. In the fourth
quarter of fiscal 2009, we initiated a plan to restructure the pre-merger
operations of Omniture to eliminate certain duplicative activities, focus our
resources on future growth opportunities and reduce our cost structure. In
connection with this restructuring plan, we accrued a total of approximately
$10.6 million in costs related to termination benefits for the elimination of
approximately 100 regular positions and for the closure of duplicative
facilities. We also accrued approximately $0.2 million in costs related to the
cancellation of certain contracts associated with the wind-down of subsidiaries
and other service contracts held by Omniture. Restructuring charges related to
the Omniture acquisition were recorded as a part of the purchase price
allocation, as discussed in
Note 2
and have been accrued
for as of November 27, 2009.
102
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following table sets forth a summary of preliminary restructuring activities
during fiscal 2009 (in thousands):
|
November
28,
2008
|
Costs
Recorded
|
Cash
Payments
|
Other
Adjustments
|
November
27,
2009
|
||||||||||||||||
|
Termination
benefits
|
$ | — | $ | 6,704 | $ | — | $ | 8 | $ | 6,712 | ||||||||||
|
Cost
of closing redundant facilities
|
— | 3,914 | — | 19 | 3,933 | |||||||||||||||
|
Contract
termination
|
— | 242 | — | — | 242 | |||||||||||||||
|
Total
|
$ | — | $ | 10,860 | $ | — | $ | 27 | $ | 10,887 |
Accrued
restructuring charges of approximately $10.9 million at November 27, 2009
include $8.6 million recorded in accrued restructuring, current and $2.3 million
related to long-term facilities obligations recorded in accrued restructuring,
non-current in our Consolidated Balance Sheets. We expect to pay accrued
termination benefits during fiscal 2010. We expect to pay facilities-related
liabilities through fiscal 2013. Included in the other adjustments column are
foreign currency translation adjustments.
Additionally,
approximately $1.5 million of restructuring costs related to facilities were
included in the liabilities assumed by us upon acquisition of Omniture on
October 23, 2009 for which subsequent payments of $0.1 million were made
during the fourth quarter of fiscal 2009. Restructuring costs related to these
facilities were approximately $1.4 million at November 27, 2009 with $1.2
million recorded in accrued restructuring, current and $0.2 million related to
long-term facilities obligations recorded in accrued restructuring, non-current
in our Consolidated Balance Sheets. We expect to pay these facilities-related
liabilities through fiscal 2013.
2008
Restructuring Plan Charges
In the
fourth quarter of fiscal 2008, we initiated a restructuring program, consisting
of reductions in workforce of approximately 560 full-time positions globally and
the consolidation of facilities, in order to reduce our operating costs and
focus our resources on key strategic priorities. In connection with this
restructuring program, we recorded restructuring charges in the fourth quarter
of fiscal 2008 totaling $29.2 million related to ongoing termination benefits
for the elimination of approximately 460 of the 560 full-time positions
globally. As of November 28, 2008, $0.4 million was paid.
During
fiscal 2009, we continued to implement restructuring activities under this
program. We vacated approximately 89,000 square feet of research and development
and sales facilities in the U.S., the United Kingdom and Canada. We accrued $8.5
million for the fair value of our future contractual obligations under these
operating leases using our credit-adjusted risk-free interest rate, estimated at
approximately 6% as of the date we ceased to use the leased properties. This
amount is net of the fair value of future estimated sublease income of
approximately $4.4 million. We also recorded additional charges of $6.7 million
for termination benefits for the elimination of substantially all of the
remaining 100 full-time positions expected to be terminated.
The
following table sets forth a summary of Adobe restructuring activities during
fiscal 2009 (in thousands):
|
November
28,
2008
|
Costs
Incurred
|
Cash
Payments
|
Other
Adjustments
|
November
27,
2009
|
||||||||||||||||
|
Termination
benefits
|
$ | 28,759 | $ | 6,722 | $ | (34,191 | ) | $ | (233 | ) | $ | 1,057 | ||||||||
|
Cost
of closing redundant facilities
|
— | 8,514 | (5,380 | ) | 248 | 3,382 | ||||||||||||||
|
Total
|
$ | 28,759 | $ | 15,236 | $ | (39,571 | ) | $ | 15 | $ | 4,439 |
Accrued
restructuring charges of approximately $4.4 million at November 27, 2009 include
$1.9 million recorded in accrued restructuring, current and $2.5 million related
to long-term facilities obligations recorded in accrued restructuring,
non-current in our Consolidated Balance Sheets. Total costs incurred to date and
expected to be incurred for closing redundant facilities are $44.5 million and
$44.7 million, respectively. We have substantially paid all of the accrued
termination benefits during fiscal 2009. We expect to pay facilities-related
liabilities through fiscal 2013.
Included
in the other adjustments column are foreign currency translation adjustments of
$0.6 million and small changes to previous estimates.
103
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Macromedia
Merger Restructuring Charges
We
completed our acquisition of Macromedia on December 3, 2005. In connection
with this acquisition, we initiated plans to restructure both the pre-merger
operations of Adobe and Macromedia to eliminate certain duplicative activities,
focus our resources on future growth opportunities and reduce our cost
structure. In connection with the worldwide restructuring plan, we recognized
costs related to termination benefits for employee positions that were
eliminated and for the closure of duplicative facilities. We also recognized
costs related to the cancellation of certain contracts associated with the
wind-down of subsidiaries and other service contracts held by Macromedia. Costs
for termination benefits and contract terminations were completed during fiscal
2007. Total costs incurred were $27.0 million and $3.2 million,
respectively.
The
following table sets forth a summary of Macromedia restructuring activities
during fiscal 2009 (in thousands):
|
November
28,
2008
|
Cash
Payments
|
Other
Adjustments
|
November
27,
2009
|
|||||||||||||
|
Cost
of closing redundant facilities
|
$ | 12,168 | $ | (6,675 | ) | $ | (487 | ) | $ | 5,006 | ||||||
|
Other
|
977 | (889 | ) | (80 | ) | 8 | ||||||||||
|
Total
|
$ | 13,145 | $ | (7,564 | ) | $ | (567 | ) | $ | 5,014 |
Accrued
restructuring charges of approximately $5.0 million at November 27, 2009 related
to facilities obligations include $3.1 million recorded in accrued
restructuring, current and $1.9 million recorded in accrued restructuring,
non-current in our Consolidated Balance Sheets. We expect to pay these
liabilities through fiscal 2012.
Included
in the other adjustments column is a change to previous estimates of $0.6
million offset in part by small foreign currency translation adjustments.
Included in the change in previous estimates of $0.6 million is an adjustment of
$1.7 million associated with an accrual for a leased facility that was included
in the purchase price of Macromedia as an assumed liability. During the third
quarter of fiscal 2009, adjustments were made to the liability for this lease
facility that were recorded as a reduction to Macromedia goodwill. Accordingly,
during fiscal 2009, $1.1 million represents adjustments recorded as an increase
to restructuring charges.
The
following table sets forth a summary of Macromedia restructuring activities
during fiscal 2008 (in thousands):
|
November
30,
2007
|
Cash
Payments
|
Other
Adjustments
|
November
28,
2008
|
|||||||||||||
|
Cost
of closing redundant facilities
|
$ | 16,283 | $ | (7,187 | ) | $ | 3,072 | $ | 12,168 | |||||||
| Other | 1,435 | (147 | ) | (311 | ) | 977 | ||||||||||
| Total | $ | 17,718 | $ | (7,334 | ) | $ | 2,761 | $ | 13,145 |
Accrued
restructuring charges of $13.1 million at November 28, 2008 includes $6.9
million recorded in accrued restructuring, current and $6.2 million, related to
long-term facilities obligations, recorded in accrued restructuring, non-current
in our Consolidated Balance Sheets. Included in the other adjustments column is
a change to previous estimates, recorded as a current period expense, associated
with closing redundant facilities as a result of the Macromedia acquisition as
well as the net effect of foreign currency changes.
Retirement
Savings Plan
In 1987,
we adopted an Employee Investment Plan, qualified under
Section 401(k) of the Internal Revenue Code, which is a retirement
savings plan covering substantially all of our U.S. employees, now referred to
as the Adobe 401(k) Retirement Savings Plan. Under the plan, eligible employees
may contribute up to 65% of their pretax or after-tax salary, subject to the
Internal Revenue Service annual contribution limits. In fiscal 2009, we matched
50% of the first 6% of the employee’s eligible compensation. We contributed
$15.1 million, $16.6 million and $14.5 million in fiscal 2009, 2008 and 2007,
respectively. We can terminate matching contributions at our
discretion.
104
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Profit
Sharing Plan
We have a
profit sharing plan that provides for profit sharing payments to all eligible
employees following each quarter in which we achieve at least 75% of our
budgeted earnings for the quarter for fiscal 2009 and 80% of our budgeted
earnings for the quarter for fiscal years 2008 and 2007. The plan, as well as
the annual operating budget on which the plan is based, is approved by our Board
of Directors. We contributed $13.3 million, $73.8 million and $67.6 million to
the plan in fiscal 2009, 2008 and 2007, respectively. The profit sharing plan
has been discontinued effective for fiscal 2010.
Deferred
Compensation Plan
On
September 21, 2006, the Board of Directors approved the Adobe Systems
Incorporated Deferred Compensation Plan, effective December 2, 2006 (the
“Deferred Compensation Plan”). The Deferred Compensation Plan is an unfunded,
non-qualified, deferred compensation arrangement under which certain executives
and members of the Board of Directors are able to defer a portion of their
annual compensation. Participants may elect to contribute up to 75% of their
base salary and 100% of other specified compensation, including commissions,
bonuses, performance-based and time-based restricted stock units, and directors’
fees. Participants are able to elect the payment of benefits to begin on a
specified date at least three years after the end of the plan year in which the
election is made in the form of a lump sum or annual installments over five, ten
or fifteen years. Upon termination of a participant’s employment with Adobe,
such participant will receive a distribution in the form of a lump sum payment.
All distributions will be made in cash, except for deferred performance-based
and time-based restricted stock units which will be settled in stock. As of
November 27, 2009 and November 28, 2008, the invested amounts under the Deferred
Compensation Plan total $9.0 million and $7.6 million, respectively and were
recorded as other assets on our Consolidated Balance Sheets. As of November 27,
2009 and November 28, 2008, $9.0 million and $7.6 million, respectively, was
recorded as long-term liabilities to recognize undistributed deferred
compensation due to employees.
We have the
following stock-based compensation plans and programs:
Stock
Option Plans
Our stock
option program is a long-term retention program that is intended to attract,
retain and provide incentives for talented employees, officers and directors,
and to align stockholder and employee interests. Currently, we grant options
from the (i) 2003 Equity Incentive Plan, as amended (“2003 Plan”), and the
2005 Equity Incentive Assumption Plan (“2005 Assumption Plan”). These plans are
collectively referred to in the following discussion as “the Plans.” Under the
Plans, options can be granted to all employees, including executive officers,
outside consultants and non-employee directors. The Plans will continue until
the earlier of (i) termination by the Board or (ii) the date on which
all of the shares available for issuance under the plan have been issued and
restrictions on issued shares have lapsed. Option vesting periods are generally
four years for all of the Plans. Options granted under the Plans generally
expire seven years from the effective date of grant.
As of
November 27, 2009, we had reserved 110.3 million and 4.0 million shares of
common stock for issuance under our 2003 Plan and 2005 Assumption Plan,
respectively. As of November 27, 2009, we had 42.7 million and 2.9 million
shares available for grant under our 2003 Plan and 2005 Assumption Plan,
respectively.
Employee
Stock Purchase Plan
Our 1997
Employee Stock Purchase Plan (“ESPP”) allows eligible employee participants to
purchase shares of our common stock at a discount through payroll deductions.
The ESPP consists of a twenty-four month offering period with four six-month
purchase periods in each offering period. Employees purchase shares in each
purchase period at 85% of the market value of our common stock at either the
beginning of the offering period or the end of the purchase period, whichever
price is lower. The ESPP will continue until the earlier of (i) termination
by the Board or (ii) the date on which all of the shares available for
issuance under the plan have been issued.
As of
November 27, 2009, we had reserved 76.0 million shares of our common stock for
issuance under the ESPP and approximately 12.3 million shares remain available
for future issuance.
105
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted
Stock Plan
We grant
restricted stock awards and performance awards to officers and key employees
under our Amended 1994 Performance and Restricted Stock Plan (“Restricted Stock
Plan”). We can also grant restricted stock units to all eligible employees under
the Restricted Stock Plan and the 2003 Plan. Restricted stock awards issued
under these plans vest annually over three years. Performance awards and
restricted stock units issued under these plans generally vest over four years,
the majority of which vest 25% annually; certain other restricted stock units
vest 50% on the second anniversary and 25% on each of the third and fourth
anniversaries.
As of
November 27, 2009, we had reserved 16.0 million shares of our common stock for
issuance under the Restricted Stock Plan and approximately 0.3 million shares
were available for grant.
Performance
Share Programs
Effective
January 26, 2009, the Executive Compensation Committee adopted the 2009
Performance Share Program (the “2009 Program”). The purpose of the 2009 Program
is to align key management and senior leadership with stockholders’ interests
and to retain key employees. The measurement period for the 2009 Program is our
fiscal 2009 year. All members of our executive management and other key
senior leaders are participating in the 2009 Program. Awards granted under the
2009 Program were granted in the form of performance shares pursuant to the
terms of our 2003 Equity Incentive Plan. If pre-determined performance goals are
met, shares of stock will be granted to the recipient, with 25% vesting on the
later of the date of certification of achievement or the first anniversary date
of the grant, and the remaining 75% vesting evenly on the following three annual
anniversary dates of the grant, contingent upon the recipient’s continued
service to Adobe. Participants in the 2009 Program have the ability to receive
up to 115% of the target number of shares originally granted.
Issuance
of Shares
Upon
exercise of stock options, vesting of restricted stock and performance shares,
and purchases of shares under the ESPP, we will issue treasury stock. If
treasury stock is not available, common stock will be issued. In order to
minimize the impact of on-going dilution from exercises of stock options and
vesting of restricted stock and performance shares, we instituted a stock
repurchase program.
See Note
14 for information regarding our stock repurchase programs.
Valuation
of Stock-Based Compensation
Stock-based
compensation cost is measured at the grant date based on the fair value of the
award. We currently use the Black-Scholes option pricing model to determine the
fair value of stock options and ESPP shares. The determination of the fair value
of stock-based payment awards on the date of grant using an option pricing model
is affected by our stock price as well as assumptions regarding a number of
complex and subjective variables. These variables include our expected stock
price volatility over the expected term of the awards, actual and projected
employee stock option exercise behaviors, a risk-free interest rate and any
expected dividends.
We
estimate the expected term of options granted by calculating the average term
from our historical stock option exercise experience. We estimate the volatility
of our common stock by using implied volatility in market traded options. Our
decision to use implied volatility was based upon the availability of actively
traded options on our common stock and our assessment that implied volatility is
more representative of future stock price trends than historical volatility. We
base the risk-free interest rate that we use in the option valuation model on
zero-coupon yields implied by U.S. Treasury issues with remaining terms similar
to the expected term on the options. We do not anticipate paying any cash
dividends in the foreseeable future and therefore use an expected dividend yield
of zero in the option valuation model. We are required to estimate forfeitures
at the time of grant and revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. We use historical data to estimate
pre-vesting option forfeitures and record stock-based compensation expense only
for those awards that are expected to vest.
The assumptions used to value our
option grants were as follows:
|
Fiscal Years
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Expected
term (in years)
|
3.0 – 4.1 | 2.3 – 4.7 | 3.5 – 4.8 | |||||||||
|
Volatility
|
34 – 57 | % | 32 – 60 | % | 30 – 39 | % | ||||||
|
Risk-free
interest rate
|
1.16 – 2.24 | % | 1.70 – 3.50 | % | 3.60 – 5.10 | % | ||||||
106
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
expected term of ESPP shares is the average of the remaining purchase periods
under each offering period. The assumptions used to value employee stock
purchase rights were as follows:
|
Fiscal Years
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Expected
term (in years)
|
0.5 – 2.0 | 0.5 – 2.0 | 0.5 – 2.0 | |||||||||
|
Volatility
|
40 – 57 | % | 30 – 36 | % | 30 – 33 | % | ||||||
|
Risk-free
interest rate
|
0.27 – 1.05 | % | 2.12 – 3.29 | % | 4.79 – 5.11 | % | ||||||
We
recognize the estimated compensation cost of restricted stock awards and
restricted stock units, net of estimated forfeitures, over the vesting term. The
estimated compensation cost is based on the fair value of our common stock on
the date of grant.
We
recognize the estimated compensation cost of performance shares, net of
estimated forfeitures. The awards are earned upon attainment of identified
performance goals, some of which contain discretionary metrics. As such, these
awards are re-valued based on our traded stock price at the end of each
reporting period. If the discretion is removed, the award will be classified as
a fixed equity award. The fair value of the awards will be based on the
measurement date, which is the date the award becomes fixed. The awards will be
subsequently amortized over the remaining performance period.
Summary
of Stock Options
Option
activity under our stock option program for fiscal years 2009, 2008 and 2007 was
as follows (shares in thousands):
| Outstanding Options | ||||||||
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
|
|||||||
|
December
1, 2006
|
61,731 | $ | 24.19 | |||||
|
Granted
|
10,084 | 40.36 | ||||||
|
Exercised
|
(21,368 | ) | 21.18 | |||||
|
Cancelled
|
(2,705 | ) | 33.18 | |||||
|
November
30, 2007
|
47,742 | $ | 28.47 | |||||
|
Granted
|
5,462 | 35.08 | ||||||
|
Exercised
|
(9,983 | ) | 25.45 | |||||
|
Cancelled
|
(2,517 | ) | 35.34 | |||||
|
November
28, 2008
|
40,704 | $ | 29.67 | |||||
|
Granted
|
5,758 | 22.90 | ||||||
|
Exercised
|
(7,560 | ) | 17.15 | |||||
|
Cancelled
|
(3,160 | ) | 33.57 | |||||
|
Increase
due to acquisition
|
5,509 | 20.15 | ||||||
|
November
27, 2009
|
41,251 | $ | 29.45 | |||||
The
weighted average fair values of options granted during fiscal 2009, 2008 and
2007 were $8.39, $10.32 and $12.37, respectively.
The total
intrinsic value of options exercised during fiscal 2009, 2008 and 2007 was $91.8
million, $142.4 million and $463.6 million, respectively. The intrinsic value is
calculated as the difference between the market value on the date of exercise
and the exercise price of the shares.
107
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information
regarding the stock options outstanding at November 27, 2009, November 28, 2008
and November 30, 2007 is summarized below:
|
Number
of
Shares
(thousands)
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
Aggregate
Intrinsic
Value
(*)
(millions)
|
|||||||||||||
|
As
of November 27, 2009
|
||||||||||||||||
|
Options
outstanding
|
41,251 | $ | 29.45 | 4.33 | $ | 295.8 | ||||||||||
|
Options
vested and expected to vest
|
39,322 | $ | 29.54 | 4.24 | $ | 279.1 | ||||||||||
|
Options
exercisable
|
26,677 | $ | 29.85 | 3.54 | $ | 181.7 | ||||||||||
|
As
of November 28, 2008
|
||||||||||||||||
|
Options
outstanding
|
40,704 | $ | 29.67 | 4.00 | $ | 76.1 | ||||||||||
|
Options
vested and expected to vest
|
38,975 | $ | 29.36 | 3.87 | $ | 76.1 | ||||||||||
|
Options
exercisable
|
28,034 | $ | 26.61 | 3.28 | $ | 76.1 | ||||||||||
|
As
of November 30, 2007
|
||||||||||||||||
|
Options
outstanding
|
47,742 | $ | 28.47 | 4.36 | $ | 654.2 | ||||||||||
|
Options
vested and expected to vest
|
43,067 | $ | 27.68 | 4.19 | $ | 623.8 | ||||||||||
|
Options
exercisable
|
29,387 | $ | 23.77 | 3.38 | $ | 539.8 |
_________________________________________
|
(*)
|
The
intrinsic value is calculated as the difference between the market value
as of end of the fiscal year and the exercise price of the shares. As
reported by the NASDAQ Global Select Market, the market values as of
November 27, 2009, November 28, 2008 and November 30, 2007 were $35.38,
$23.16 and $42.14, respectively.
|
All stock
options granted to current executive officers are made after a review by and
with the approval of the Executive Compensation Committee of the Board of
Directors.
Summary
of Employee Stock Purchase Plan Shares
The
weighted average subscription date fair value of shares under the ESPP during
fiscal 2009, 2008 and 2007 were $5.43, $9.56 and $12.03, respectively. Employees
purchased 3.2 million shares at an average price of $19.04, 2.4 million shares
at an average price of $30.40, and 2.6 million shares at an average price of
$25.24, respectively, for fiscal 2009, 2008 and 2007. The intrinsic value of
shares purchased during fiscal 2009, 2008 and 2007 was $21.7 million, $25.0
million and $39.8 million, respectively. The intrinsic value is calculated as
the difference between the market value on the date of purchase and the purchase
price of the shares.
Summary
of Restricted Stock
Restricted
stock award activity for fiscal 2009, 2008 and 2007 was as follows (shares in
thousands):
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
|
Non-vested
Shares
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested
Shares
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested
Shares
|
Weighted
Average
Grant Date
Fair Value
|
|||||||||||||||||||
|
Beginning
outstanding balance
|
4 | $ | 39.31 | 21 | $ | 36.41 | 501 | $ | 9.17 | |||||||||||||||
|
Awarded
|
— | — | — | — | 5 | 40.03 | ||||||||||||||||||
|
Released
|
(1 | ) | 38.22 | (15 | ) | 34.94 | (92 | ) | 29.32 | |||||||||||||||
|
Forfeited
|
— | — | (2 | ) | 39.95 | (393 | ) | 4.77 | ||||||||||||||||
|
Ending
outstanding balance
|
3 | $ | 40.01 | 4 | $ | 39.31 | 21 | $ | 36.41 | |||||||||||||||
108
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The total
fair value of restricted stock awards vested during fiscal 2009, 2008 and 2007
was $39.4 thousand, $0.5 million and $0.7 million, respectively.
Restricted
stock awards are considered outstanding at the time of grant, as the stock award
holders are entitled to dividends and voting rights. Unvested restricted stock
awards are not considered outstanding in the computation of basic earnings per
share.
Restricted
stock unit activity for fiscal years 2009, 2008 and 2007 was as follows (in
thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Beginning
outstanding balance
|
4,261 | 1,701 | — | |||||||||
|
Awarded
|
6,176 | 3,177 | 1,771 | |||||||||
|
Released
|
(1,162 | ) | (422 | ) | — | |||||||
|
Forfeited
|
(401 | ) | (195 | ) | (70 | ) | ||||||
|
Increase
due to acquisition
|
1,559 | — | — | |||||||||
|
Ending
outstanding balance
|
10,433 | 4,261 | 1,701 | |||||||||
The
weighted average grant date fair values of restricted stock units granted during
fiscal 2009, 2008 and 2007 were $27.74, $33.55 and $39.67, respectively.The
total fair value of restricted stock units vested during fiscal 2009 and 2008
was $27.1 million and $14.4 million, respectively.
Information
regarding restricted stock units outstanding at the end of fiscal 2009, 2008 and
2007 is summarized below:
|
Number
of
Shares
(thousands)
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
Aggregate
Intrinsic
Value
(*)
(millions)
|
||||||||||
|
2009
|
||||||||||||
|
Restricted
stock units
outstanding
|
10,433 | 1.82 | $ | 369.1 | ||||||||
|
Restricted
stock units vested and expected to vest
|
8,078 | 1.63 | $ | 285.7 | ||||||||
|
2008
|
||||||||||||
|
Restricted
stock units
outstanding
|
4,261 | 1.73 | $ | 98.7 | ||||||||
|
Restricted
stock units vested and expected to vest
|
3,351 | 1.52 | $ | 77.6 | ||||||||
|
2007
|
||||||||||||
|
Restricted
stock units outstanding
|
1,701 | 1.88 | $ | 71.7 | ||||||||
|
Restricted
stock units vested and expected to vest
|
1,309 | 1.65 | $ | 55.2 | ||||||||
_________________________________________
|
(*)
|
The
intrinsic value is calculated as the market value as of end of the fiscal
year. As reported by the NASDAQ Global Select Market, the market values as
of November 27, 2009, November 28, 2008 and November 30, 2007 were $35.38,
$23.16 and $42.14, respectively.
|
109
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary
of Performance Shares
The
following table sets forth the summary of performance share activity under our
2009 Program for fiscal 2009 (in thousands):
|
Shares
Granted
|
Maximum
Shares
Eligible
to
Receive
|
|||||||
|
Beginning
outstanding balance
|
— | — | ||||||
|
Awarded
|
559 | 643 | ||||||
|
Forfeited
|
(7 | ) | (8 | ) | ||||
|
Ending
outstanding balance
|
552 | 635 | ||||||
However,
the performance metrics under the 2009 program were not achieved and therefore
no shares will be awarded under the grants noted above.
In the
first quarter of fiscal 2009, the Executive Compensation Committee certified the
actual performance achievement of participants in the 2008 Performance Share
Program (the “2008 Program”). Based upon the achievement of goals outlined in
the 2008 Program, participants had the ability to receive up to 200% of the
target number of shares originally granted. Actual performance resulted in
participants achieving approximately 124% of target or approximately 1.0 million
shares for the 2008 Program. Shares under the 2008 Program vested 25% in the
first quarter of fiscal 2009, and the remaining 75% vest evenly on the following
three annual anniversary dates of the grant, contingent upon the recipient’s
continued service to Adobe.
The following
table sets forth the summary of performance share activity under our 2006
through 2008 programs, based upon share awards actually achieved, for fiscal
2009 and fiscal 2008 (in thousands):
|
2009
|
2008
|
|||||||
|
Beginning
outstanding balance
|
383 | — | ||||||
|
Achieved
|
1,022 | 993 | ||||||
|
Released
|
(382 | ) | (480 | ) | ||||
|
Forfeited
|
(73 | ) | (130 | ) | ||||
|
Ending
outstanding balance
|
950 | 383 | ||||||
The total
fair value of performance awards vested during fiscal 2009 and 2008 was $7.7
million and $16.7 million, respectively.
Information
regarding performance shares outstanding at November 27, 2009 and November 28,
2008 is summarized below:
|
Number
of
Shares
(thousands)
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
Aggregate
Intrinsic
Value
(*)
(millions)
|
||||||||||
|
2009
|
||||||||||||
|
Performance
shares
outstanding
|
950 | 1.05 | $ | 33.6 | ||||||||
|
Performance
shares vested and expected to vest
|
818 | 0.97 | $ | 28.8 | ||||||||
|
2008
|
||||||||||||
|
Performance
shares outstanding
|
383 | 1.20 | $ | 8.9 | ||||||||
|
Performance
shares vested and expected to vest
|
323 | 1.10 | $ | 7.4 | ||||||||
_________________________________________
110
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
(*)
|
The
intrinsic value is calculated as the market value as of end of the fiscal
year. As reported by the NASDAQ Global Select Market, the market value as
of November 27, 2009 and November 28, 2008 was $35.38 and $23.16,
respectively.
|
Grants
to Non-Employee Directors
The
Directors Plan (and starting in fiscal 2008, the 2003 Plan) provides for the
granting of nonqualified stock options to non-employee directors. Prior to
fiscal 2009, option grants were limited to 25,000 shares per person in each
fiscal year, except for a new non-employee director to whom 50,000 shares were
granted upon election as a director. Options granted before November 29, 2008
vest over four years: 25% on the day preceding each of our next four annual
meetings and have a ten-year term. Starting in fiscal 2009, the initial equity
grant to a new non-employee director is a restricted stock unit award having an
aggregate value of $0.5 million as based on the average stock price over the 30
calendar days ending on the day before the date of grant. The initial equity
award vests over 2 years, 50% on the day preceding each of our next 2 annual
meetings. For the annual equity grant, a non-employee director can elect to
receive 100% options, 100% restricted stock units or 50% of each and shall have
an aggregate value of $0.2 million as based on the average stock price over the
30 calendar days ending on the day before the date of grant. The target grant
value of restricted stock units to stock options will be based on a 3:1
conversion ratio. Annual equity awards granted on or after November 29, 2008
vest 100% on the day preceding the next annual meeting. Options granted on or
after November 29, 2008 have a seven-year term. The exercise price of the
options that are issued is equal to the fair market value of our common stock on
the date of grant.
Options
granted to directors for fiscal 2009, 2008 and 2007 are as follows (shares in
thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Options
granted to existing directors
|
175 | 250 | 250 | |||||||||
|
Exercise
price
|
$ | 23.28 | $ | 37.09 | $ | 42.61 |
Restricted
stock units granted to directors for fiscal 2009 are as follows (shares in
thousands):
|
2009
|
||||
|
Restricted
stock units granted to existing directors
|
27 | |||
|
Restricted
stock units granted to new directors
|
20 | |||
Compensation
Costs
With the
exception of performance shares, stock-based compensation expense is recognized
on a straight-line basis over the requisite service period of the entire award,
which is generally the vesting period. For performance shares, expense is
recognized on a straight-line basis over the requisite service period for each
vesting portion of the award.
As of
November 27, 2009, there was $305.0 million of unrecognized compensation cost,
adjusted for estimated forfeitures, related to non-vested stock-based awards
which will be recognized over a weighted average period of 2.4 years. Total
unrecognized compensation cost will be adjusted for future changes in estimated
forfeitures.
111
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total
stock-based compensation costs that have been included in our Consolidated
Statements of Income for fiscal 2009, 2008 and 2007 were as follows (in
thousands):
| Income Statement Classifications | ||||||||||||||||||||
|
Cost
of
Revenue
–
Services
and
Support
|
Research
and Development
|
Sales
and
Marketing
|
General
and Administrative
|
Total
|
||||||||||||||||
|
|
||||||||||||||||||||
|
Option Grants and
Stock Purchase Rights
(*)
|
||||||||||||||||||||
|
Fiscal
2009
|
$ | 1,906 | $ | 45,535 | $ | 38,790 | $ | 24,595 | $ | 110,826 | ||||||||||
|
Fiscal
2008
|
$ | 3,728 | $ | 55,653 | $ | 41,326 | $ | 24,521 | $ | 125,228 | ||||||||||
|
Fiscal
2007
|
$ | 5,152 | $ | 58,579 | $ | 41,801 | $ | 24,467 | $ | 129,999 | ||||||||||
|
Restricted Stock and
Performance Share Awards
(*)
|
||||||||||||||||||||
|
Fiscal
2009
|
$ | 639 | $ | 27,931 | $ | 19,818 | $ | 9,274 | $ | 57,662 | ||||||||||
|
Fiscal
2008
|
$ | 570 | $ | 20,835 | $ | 17,928 | $ | 10,810 | $ | 50,143 | ||||||||||
|
Fiscal
2007
|
$ | 346 | $ | 9,518 | $ | 6,084 | $ | 4,040 | $ | 19,988 | ||||||||||
_________________________________________
|
(*)
|
During
fiscal 2009 and 2008, we recorded $0.9 million and $2.9 million,
respectively, associated with cash recoveries of fringe benefit tax from
employees in India.
|
Stockholder
Rights Plan
Our
Stockholder Rights Plan is intended to protect stockholders from unfair or
coercive takeover practices. In accordance with this plan, the Board of
Directors declared a dividend distribution of one common stock purchase right on
each outstanding share of our common stock held as of July 24, 1990 and on
each share of common stock issued by Adobe thereafter. In July 2000, the
Stockholder Rights Plan was amended to extend it for ten years so that each
right entitles the holder to purchase one unit of Series A Preferred Stock,
which is equal to 1/1000 share of Series A Preferred Stock, par value
$0.0001 per share, at a price of $700 per unit. As adjusted for our 2000 and
2005 stock splits each in the form of a dividend, each share of common stock now
entitles the holder to one-quarter of such a purchase right. Each whole right
still entitles the registered holder to purchase from Adobe a unit of preferred
stock at $700. The rights become exercisable in certain circumstances, including
upon an entity’s acquiring or announcing the intention to acquire beneficial
ownership of 15% or more of our common stock without the approval of the Board
of Directors or upon our being acquired by any person in a merger or business
combination transaction. The rights are redeemable by Adobe prior to exercise at
$0.01 per right and expire on July 23, 2010.
Stock
Repurchase Program I
To
facilitate our stock repurchase program, designed to return value to our
stockholders and minimize dilution from stock issuances, we repurchase shares in
the open market and also enter into structured repurchases with
third-parties.
Authorization
to repurchase shares to cover on-going dilution is not subject to expiration.
However, this repurchase program is limited to covering net dilution from stock
issuances and is subject to business conditions and cash flow requirements as
determined by our Board of Directors from time to time.
During fiscal
2009, 2008 and 2007 we entered into several structured repurchase agreements
with large financial institutions, whereupon we provided the financial
institutions with prepayments of $350.0 million, $525.0 million and $1.1
billion, respectively. We entered into these agreements in order to take
advantage of repurchasing shares at a guaranteed discount to the Volume Weighted
Average Price (“VWAP”) of our common stock over a specified period of time. We
only enter into such transactions when the discount that we receive is higher
than the foregone return on our cash prepayments to the financial institutions.
There were no explicit commissions or fees on these structured repurchases.
Under the terms of the agreements, there is no requirement for the financial
institutions to return any portion of the prepayment to us.
112
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
financial institutions agree to deliver shares to us at monthly intervals during
the contract term. The parameters used to calculate the number of shares
deliverable are: the total notional amount of the contract, the number of
trading days in the contract, the number of trading days in the interval and the
average VWAP of our stock during the interval less the agreed upon discount.
During fiscal 2009, we repurchased approximately 15.2 million shares at an
average price per share of $27.89 through structured repurchase agreements
entered into during fiscal 2008 and fiscal 2009. During fiscal 2008, we
repurchased 22.4 million shares at an average price of $36.26 through
structured repurchase agreements which included prepayments from fiscal 2007.
During fiscal 2007, we repurchased 22.0 million shares at an average price of
$40.04 through structured repurchase agreements which included prepayments from
fiscal 2006.
During
fiscal 2008, we also repurchased 3.6 million shares at an average price of
$36.41 in open market transactions.
For
fiscal 2009, 2008 and 2007, the prepayments were classified as treasury stock on
our Consolidated Balance Sheets at the payment date, though only shares
physically delivered to us by November 27, 2009, November 28, 2008 and
November 30, 2007 were excluded from the denominator in the computation of
earnings per share. As of November 27, 2009 and November 28, 2008, approximately
$59.9 million and $134.7 million, respectively, of up-front payments
remained under the agreements.
Stock
Repurchase Program II
Under
this stock repurchase program, we had authorization to repurchase an aggregate
of 50.0 million shares of our common stock. During the third quarter of
fiscal 2008, the remaining authorized number of shares were repurchased. From
the inception of the 50.0 million share authorization under this program, we
provided prepayments of $1.9 billion under structured share repurchase
agreements to large financial institutions. During the third quarter of fiscal
2008, the remaining authorized number of shares were repurchased.
During
fiscal 2008, we provided prepayments of $1.0 billion and repurchased 31.9
million shares under these structured agreements at an average price of $37.15.
During fiscal 2007, we provided prepayments of $850.0 million under structured
share repurchase agreements to large financial institutions. During fiscal 2007,
we repurchased 17.7 million shares under these structured agreements at an
average price of $40.50 and approximately $133.7 million of up-front payments
remained under these agreements as of November 30, 2007.
During
fiscal 2008, we also repurchased 0.5 million shares at an average price of
$39.79 in open market transactions.
The following table sets forth the
activity for each component of comprehensive income, net of related taxes, for
fiscal 2009, 2008 and 2007 (in thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income
|
$ | 386,508 | $ | 871,814 | $ | 723,807 | ||||||
|
Other
comprehensive income (loss):
|
||||||||||||
|
Available-for-sale
securities:
|
||||||||||||
|
Unrealized
gains (losses) on available-for-sale securities, net of
taxes
|
6,661 | (3,102 | ) | 14,570 | ||||||||
|
Reclassification
adjustment for (gains) losses on available-for-sale securities recognized
during the period
|
(8,752 | ) | 1,559 | 2,000 | ||||||||
|
Subtotal
available-for-sale
securities
|
(2,091 | ) | (1,543 | ) | 16,570 | |||||||
|
Derivative
instruments:
|
||||||||||||
|
Unrealized
(losses) gains on derivative instruments
|
(14,618 | ) | 54,967 | 4,974 | ||||||||
|
Reclassification
adjustment for gains on derivative instruments recognized
during
the
period
|
(27,138 | ) | (13,248 | ) | (5,510 | ) | ||||||
|
Subtotal
derivative
instruments
|
(41,756 | ) | 41,719 | (536 | ) | |||||||
|
Foreign
currency translation
adjustments
|
11,071 | (10,902 | ) | 5,570 | ||||||||
|
Other
comprehensive income (loss)
|
(32,776 | ) | 29,274 | 21,604 | ||||||||
|
Total
comprehensive income, net of taxes
|
$ | 353,732 | $ | 901,088 | $ | 745,411 |
113
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following
table sets forth the taxes related for each component of other comprehensive
income for fiscal 2009, 2008 and 2007 (in thousands):
|
2009
|
2008
|
2007
|
||||||||
|
Available-for-sale
securities
|
$ |
931
|
$ |
(988
|
)
|
$ |
2,382
|
|||
|
Foreign
currency translation
adjustments
|
$ |
1,411
|
$ |
(4,860
|
)
|
$ |
3,699
|
Taxes
related to derivative instruments were zero for all fiscal years.
The
following table sets forth the components of accumulated other comprehensive
income, net of related taxes, for fiscal 2009 and 2008 (in
thousands):
|
2009
|
2008
|
|||||||
|
Net
unrealized gains on available-for-sale securities:
|
||||||||
|
Unrealized
gains on available-for-sale securities
|
$ | 13,818 | $ | 16,062 | ||||
|
Unrealized
losses on available-for-sale securities
|
(2 | ) | (155 | ) | ||||
|
Total
net unrealized gains on available-for-sale securities
|
13,816 | 15,907 | ||||||
|
Net
unrealized gains on derivative instruments
|
(5 | ) | 41,750 | |||||
|
Cumulative
foreign currency translation adjustments
|
10,635 | (435 | ) | |||||
|
Total
accumulated other comprehensive income, net of taxes
|
$ | 24,446 | $ | 57,222 |
The
following table sets forth the components of foreign currency translation
adjustments for fiscal 2009, 2008 and 2007 (in thousands):
|
2009
|
2008
|
2007
|
||||||||||
| Beginning balance | $ | (4 31 | ) | $ | 10,471 | $ | 4,901 | |||||
|
Foreign
currency translation adjustments
|
17,343 | (19,461 | ) | 9,269 | ||||||||
|
Income
tax effect relating to translation adjustments for undistributed foreign
earnings
|
(6,272 | ) | 8,559 | (3,699 | ) | |||||||
|
Ending
balance
|
$ | 10,640 | $ | (431 | ) | $ | 10,471 |
Basic net
income per share is computed using the weighted average number of common shares
outstanding for the period, excluding unvested restricted stock. Diluted net
income per share is based upon the weighted average common shares outstanding
for the period plus dilutive potential common shares, including unvested
restricted stock and stock options using the treasury stock method.
The following
table sets forth the computation of basic and diluted net income per share for
fiscal 2009, 2008 and 2007 (in thousands, except per share data):
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income
|
$ | 386,508 | $ | 871,814 | $ | 723,807 | ||||||
| Shares used to compute basic net income per share | 524,470 | 539,373 | 584,203 | |||||||||
| Dilutive potential common shares: | ||||||||||||
|
Unvested
restricted stock and performance share awards
|
2,130 | 1,107 | 13 | |||||||||
| Stock options | 4,010 | 8,073 | 14,559 | |||||||||
|
Shares
used to compute diluted net income per share
|
530,610 | 548,553 | 598,775 | |||||||||
|
Basic
net income per share
|
$ | 0.74 | $ | 1.62 | $ | 1.24 | ||||||
|
Diluted
net income per share
|
$ | 0.73 | $ | 1.59 | $ | 1.21 |
114
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For
fiscal 2009, 2008 and 2007, options to purchase approximately 27.0 million, 16.5
million and 10.4 million shares, respectively, of common stock with exercise
prices greater than the annual average fair market value of our stock of $27.30,
$37.07 and $41.77, respectively, were not included in the calculation because
the effect would have been anti-dilutive.
Lease
Commitments
We lease
certain of our facilities and some of our equipment under non-cancellable
operating lease arrangements that expire at various dates through 2028. We also
have one land lease that expires in 2091. Rent expense includes base contractual
rent and variable costs such as building expenses, utilities, taxes, insurance
and equipment rental. Rent expense and sublease income for these leases for
fiscal 2007 through fiscal 2009 were as follows (in thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Rent
expense
|
$ | 93,921 | $ | 101,202 | $ | 90,553 | ||||||
|
Less:
sublease income
|
5,563 | 11,421 | 9,406 | |||||||||
|
Net
rent
expense
|
$ | 88,358 | $ | 89,781 | $ | 81,147 |
We occupy
three office buildings in San Jose, California where our corporate headquarters
are located. We reference these office buildings as the Almaden Tower and the
East and West Towers.
In
August 2004, we extended the lease agreement for our East and West Towers
for an additional five years with an option to extend for an additional five
years solely at our election. In June 2009, we submitted notice to the lessor
that we intended to exercise
our
option to renew this agreement for an additional five years
effective
August 2009. As stated in the original lease agreement, in conjunction with the
lease renewal, we were required to obtain a standby letter of credit for
approximately $16.5 million which enabled us to secure a lower interest rate and
reduce the number of covenants. As defined in the lease agreement, the standby
letter of credit primarily represents the lease investment balance equity which
is callable in the event of default. In March 2007, the Almaden Tower lease
was extended for five years, with a renewal option for an additional five years
solely at our election. As part of the lease extensions, we purchased the lease
receivable from the lessor of the East and West Towers for $126.8 million and a
portion of the lease receivable from the lessor of the Almaden Tower for $80.4
million, both of which are recorded as investments in lease receivables on our
Consolidated Balance Sheets. This purchase may be credited against the residual
value guarantee if we purchase the properties or will be repaid from the sale
proceeds if the properties are sold to third parties. Under the agreement for
the East and West Towers and the agreement for the Almaden Tower, we have the
option to purchase the buildings at anytime during the lease term for
approximately $143.2 million and $103.6 million, respectively. The residual
value guarantees under the East and West Towers and the Almaden Tower
obligations are $126.8 million and $89.4 million, respectively.
These two
leases are both subject to standard covenants including certain financial ratios
that are reported to the lessors quarterly. As of November 27, 2009, we were in
compliance with all covenants. In the case of a default, the lessor may demand
we purchase the buildings for an amount equal to the lease balance, or require
that we remarket or relinquish the buildings. Both leases qualify for operating
lease accounting treatment and, as such, the buildings and the related
obligations are not included on our consolidated balance sheet. We utilized this
type of financing in order to access bank-provided funding at the most favorable
rates and to provide the lowest total cost of occupancy for the headquarter
buildings. At the end of the lease term, we can extend the lease for an
additional five year term, purchase the buildings for the lease balance,
remarket or relinquish the buildings. If we choose to remarket or are required
to do so upon relinquishing the buildings, we are bound to arrange the sale of
the buildings to an unrelated party and will be required to pay the lessor any
shortfall between the net remarketing proceeds and the lease balance, up to the
residual value guarantee amount.
115
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following are our future minimum lease payments under
non-cancellable
operating leases and future minimum sublease income under non-cancellable
subleases for each of the next five years and thereafter as of November 27, 2009
(in thousands):
|
Fiscal Year
|
|
Future
Minimum
Lease
Payments
|
Future
Minimum
Sublease
Income
|
||||||
|
2010
|
$ | 53,244 | $ | 3,970 | |||||
|
2011
|
41,328 | 3,323 | |||||||
|
2012
|
33,391 | 2,008 | |||||||
|
2013
|
24,780 | 404 | |||||||
|
2014
|
19,964 | — | |||||||
|
Thereafter
|
76,548 | — | |||||||
|
Total
|
$ | 249,255 | $ | 9,705 | |||||
The table
above includes commitments related to our restructured facilities.
See Note 11 for information
regarding our restructuring charges.
Guarantees
The lease
agreements for our corporate headquarters provide for residual value guarantees
as noted above. The fair value of a residual value guarantee in lease agreements
entered into after December 31, 2002, must be recognized as a liability on
our Consolidated Balance Sheets. As such, we recognized $5.2 million and $3.0
million in liabilities, related to the extended East and West Towers and Almaden
Tower leases, respectively. These liabilities are recorded in other long-term
liabilities with the offsetting entry recorded as prepaid rent in other assets.
The balance will be amortized to the income statement over the life of the
leases. As of November 27, 2009 and November 28, 2008, the unamortized portion
of the fair value of the residual value guarantees, for both leases, remaining
in other long-term liabilities and prepaid rent was $1.3 million and $2.6
million, respectively.
Royalties
We have
royalty commitments associated with the shipment and licensing of certain
products. Royalty expense is generally based on a dollar amount per unit shipped
or a percentage of the underlying revenue. Royalty expense, which was recorded
under our cost of products revenue on our Consolidated Statements of Income, was
approximately $43.0 million, $47.8 million and $37.4 million in fiscal 2009,
2008 and 2007, respectively.
Indemnifications
In the
normal course of business, we provide indemnifications of varying scope to
customers against claims of intellectual property infringement made by
third-parties arising from the use of our products. Historically, costs related
to these indemnification provisions have not been significant and we are unable
to estimate the maximum potential impact of these indemnification provisions on
our future results of operations.
To the
extent permitted under Delaware law, we have agreements whereby we indemnify our
officers and directors for certain events or occurrences while the officer or
director is, or was serving, at our request in such capacity. The
indemnification period covers all pertinent events and occurrences during the
officer’s or director’s lifetime. The maximum potential amount of future
payments we could be required to make under these indemnification agreements is
unlimited; however, we have director and officer insurance coverage that reduces
our exposure and enables us to recover a portion of any future amounts paid. We
believe the estimated fair value of these indemnification agreements in excess
of applicable insurance coverage is minimal.
As part
of our limited partnership interests in Adobe Ventures, we have provided a
general indemnification to Granite Ventures, an independent venture capital firm
and sole general partner of Adobe Ventures, for certain events or occurrences
while Granite Ventures is, or was serving, at our request in such capacity
provided that Granite Ventures acts in good faith on behalf of the partnership.
We are unable to develop an estimate of the maximum potential amount of future
payments that could potentially result from any hypothetical future claim, but
believe the risk of having to make any payments under this general
indemnification to be remote.
116
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Legal
Proceedings
On
September 23, 2009, Richard Miner on behalf of himself and all similarly
situated stockholders of Omniture, Inc. filed a class action lawsuit captioned
Miner v. Omniture, Inc.,
et. al.
,
Case No.
090403559
(the “Miner Lawsuit”) against Omniture, the members of
Omniture’s board of directors (collectively, the “Omniture Defendants”) and
Adobe in the United States Fourth Judicial District Court for Utah County, Provo
Department, State of Utah seeking to enjoin the proposed acquisition between
Omniture and Adobe. In the event the acquisition is consummated, the
plaintiff seeks to recover an unspecified amount of damages. The plaintiff
alleges that the members of Omniture’s board of directors breached their
fiduciary duties to Omniture’s stockholders by failing to seek the highest
possible price for Omniture and that Adobe induced or aided and abetted in the
alleged breach of such fiduciary duties. Also on September 23, 2009, Christopher
R. Barrell filed a substantially similar lawsuit to the Miner Lawsuit in the
United States Fourth Judicial District Court for Utah County, Provo Department,
State of Utah, captioned
Barrell v. Omniture, Inc. et. al.,
Case No. 090403560
(the “Barrell Lawsuit”). The Barrell Lawsuit names the
same defendants as the Miner Lawsuit, and also names Snowbird Acquisition
Corporation as an additional defendant. Subsequently, on September 24, 2009,
the plaintiff in the Barrell Lawsuit filed an amended complaint, which
added allegations that the Schedule 14D-9 Solicitation/Recommendation Statement
filed by Omniture on September 24, 2009 contained inadequate disclosures and was
materially misleading. On September 25, 2009, the Omniture Defendants filed a
motion requesting that the court consolidate the Barrell Lawsuit, Miner Lawsuit
and a substantially similar lawsuit captioned
Lodhia v. Omniture, Inc.
et al.,
Case No. 090403499
(the
“Lodhia Lawsuit”) in which the Omniture Defendants, but not Adobe, were named.
Additionally, on September 30, 2009, the plaintiff in the Lodhia Lawsuit filed a
response to defendants’ motion to consolidate, agreeing consolidation is
appropriate, and also filed a motion seeking appointment as lead plaintiff in
the consolidated action. Omniture moved for an order consolidating
all three lawsuits. The plaintiffs in the three lawsuits filed a joint
motion seeking preliminary injunction barring the consummation of the proposed
acquisition and requiring additional disclosures by Omniture in its Schedule
14D-9. At a hearing on October 20, 2009, the court granted Omniture’s
motion to consolidate the three cases and denied the plaintiffs’ motion for a
preliminary injunction. On December 30, 2009, the plaintiffs served the
defendants with a consolidated amended complaint. Adobe intends to defend the
lawsuits vigorously. As of November 27, 2009, no amounts have been accrued as a
loss is not probable.
In
connection with our anti-piracy efforts, conducted both internally and through
organizations such as the Business Software Alliance, from time to time we
undertake litigation against alleged copyright infringers. Such lawsuits may
lead to counter-claims alleging improper use of litigation or violation of other
local laws. We believe we have valid defenses with respect to such
counter-claims; however, it is possible that our consolidated financial
position, cash flows or results of operations could be affected in any
particular period by the resolution of one or more of these
counter-claims.
From time
to time, Adobe is subject to legal proceedings, claims and investigations in the
ordinary course of business, including claims of alleged infringement of
third-party patents and other intellectual property rights, commercial,
employment and other matters. Adobe makes a provision for a liability when it is
both probable that a liability has been incurred and the amount of the loss can
be reasonably estimated. These provisions are reviewed at least quarterly and
adjusted to reflect the impacts of negotiations, settlements, rulings, advice of
legal counsel and other information and events pertaining to a particular case.
Litigation is inherently unpredictable. However, we believe that we have valid
defenses with respect to the legal matters pending against Adobe. It is
possible, nevertheless, that our consolidated financial position, cash flows or
results of operations could be negatively affected by an unfavorable resolution
of one or more of such proceedings, claims or investigations.
In August
2007, we entered into the Amendment to our Credit Agreement dated February 2007
(the “Amendment”), which increased the total senior unsecured revolving facility
from $500.0 million to $1.0 billion. The Amendment also permits us to request
one-year extensions effective on each anniversary of the closing date of the
original agreement, subject to the majority consent of the lenders. We also
retain an option to request an additional $500.0 million in commitments,
for a maximum aggregate facility of $1.5 billion.
In
February 2008, we entered into the Second Amendment to the Credit Agreement
dated February 26, 2008, which extended the maturity date of the facility by one
year to February 16, 2013. The facility would terminate at this date if no
additional extensions have been requested and granted. All other terms and
conditions remain the same.
117
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
facility contains a financial covenant requiring us not to exceed a certain
maximum leverage ratio. At our option, borrowings under the facility accrue
interest based on either the London interbank offered rate (“LIBOR”) for one,
two, three or six months, or longer periods with bank consent, plus a margin
according to a pricing grid tied to this financial covenant, or a base rate. The
margin is set at rates between 0.20% and 0.475%. Commitment fees are payable on
the facility at rates between 0.05% and 0.15% per year based on the same pricing
grid. The facility is available to provide loans to us and certain of our
subsidiaries for general corporate purposes. As of November 28, 2008, the amount
outstanding under this credit facility was $350.0 million. On September 22, 2009
we borrowed an additional $650.0 million under the credit facility. As of
November 27, 2009, the amount outstanding under this credit facility was $1.0
billion which is included in long-term liabilities on our Consolidated Balance
Sheets. The carrying value of the outstanding liability approximates fair value.
As of November 27, 2009, we were in compliance with all of the
covenants.
Non-operating
income (expense) for fiscal 2009, 2008 and 2007 included the following (in
thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Interest
and other income, net:
|
||||||||||||
|
Interest
income
|
$ | 34,978 | $ | 57,588 | $ | 92,794 | ||||||
|
Foreign
exchange losses
|
(13,420 | ) | (17,494 | ) | (9,264 | ) | ||||||
|
Realized
gains on fixed income investment
|
8,753 | 3,161 | 934 | |||||||||
|
Realized
losses on fixed income investment
|
(1 | ) | (1,501 | ) | (3,510 | ) | ||||||
|
Other
|
1,070 | 2,093 | 1,770 | |||||||||
|
Interest
and other income, net
|
$ | 31,380 | $ | 43,847 | $ | 82,724 | ||||||
|
Interest
expense
|
$ | (3,407 | ) | $ | (10,019 | ) | $ | (253 | ) | |||
|
Investment
gains (losses), net:
|
||||||||||||
|
Realized
investment gains
|
$ | 52 | $ | 18,398 | $ | 9,308 | ||||||
|
Unrealized
investment gains
(*)
|
7,950 | 7,803 | 5,265 | |||||||||
|
Realized
investment losses
|
(9,019 | ) | (1,417 | ) | (2,236 | ) | ||||||
|
Unrealized
investment losses
|
(15,949 | ) | (8,375 | ) | (5,203 | ) | ||||||
|
Investment
gains (losses), net
|
$ | (16,966 | ) | $ | 16,409 | $ | 7,134 | |||||
|
Non-operating
income (expense), net
|
$ | 11,007 | $ | 50,237 | $ | 89,605 |
_________________________________________
|
(*)
|
During
fiscal 2009, we recorded $3.0 million in unrealized holding gains and
losses associated with our deferred compensation plan assets (classified
as trading securities).
|
For
substantially all of fiscal 2009, we had the following reportable segments:
Creative Solutions, Knowledge Worker, Enterprise, Platform and Print and
Publishing. Coinciding with the integration of Omniture in the fourth quarter of
fiscal 2009, we created a new reportable segment for financial reporting
purposes. Our Creative Solutions segment focuses on delivering a complete
professional line of integrated tools for a full range of creative and developer
tasks to an extended set of customers. The Knowledge Worker segment focuses on
the needs of knowledge worker customers, providing essential applications and
services to help them share information and collaborate. This segment contains
revenue generated by Acrobat Connect and our Acrobat family of products. Our
Enterprise segment provides server-based enterprise interaction solutions that
automate people-centric processes and contains revenue generated by our
LiveCycle line of products. The Platform segment includes client and developer
technologies, such as Adobe Flash Player, Adobe Flash Lite, Adobe AIR, Adobe
Flex and Adobe Flash Builder, and also encompasses products and technologies
created and managed in other Adobe segments. The Print and Publishing segment
addresses market opportunities ranging from the diverse publishing needs of
technical and business publishing, to our legacy type and OEM printing
businesses. Finally, our Omniture segment provides web analytics and online
business optimization products and services to manage and enhance online,
offline and multi-channel business initiatives.
118
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Effective
in the first quarter of fiscal 2009, our former Mobile and Devices Solutions
segment, was integrated into our Platform business unit to better align our
engineering and marketing efforts and is now reported as part of the Platform
segment. Prior year information in the table below has been reclassified to
reflect the integration of these business units.
To better
align our marketing efforts and go-to-market strategies, in fiscal 2010 we plan
to move responsibility for the Connect Solutions product line from our Knowledge
Worker segment to our Enterprise segment. We will adjust our reportable segments
at the beginning of fiscal 2010 to reflect changes for how we manage our
business as we enter the new fiscal year.
We report
segment information based on the “management” approach. The management approach
designates the internal reporting used by management for making decisions and
assessing performance as the source of our reportable segments.
Our chief
operating decision maker reviews revenue and gross margin information for each
of our reportable segments. Operating expenses are not reviewed on a segment by
segment basis. In addition, with the exception of goodwill and intangible
assets, we do not identify or allocate our assets by the reportable
segments.
Our
segment results for fiscal 2009, 2008 and 2007 were as follows (dollars in
thousands):
|
Creative
Solutions
|
Knowledge
Worker
|
Enterprise
|
Platform
(1)
|
Print
and
Publishing
|
Omniture
(2)
|
Total
|
||||||||||||||||||||||
|
Fiscal
2009
|
||||||||||||||||||||||||||||
|
Revenue
|
$ | 1,702,110 | $ | 622,970 | $ | 235,498 | $ | 181,033 | $ | 177,970 | $ | 26,272 | $ | 2,945,853 | ||||||||||||||
|
Cost
of revenue
|
152,909 | 40,155 | 47,991 | 21,174 | 18,674 | 15,829 | 296,732 | |||||||||||||||||||||
|
Gross
profit
|
$ | 1,549,201 | $ | 582,815 | $ | 187,507 | $ | 159,859 | $ | 159,296 | $ | 10,443 | $ | 2,649,121 | ||||||||||||||
|
Gross
profit as a percentage of revenue
|
91 | % | 94 | % | 80 | % | 88 | % | 90 | % | 40 | % | 90 | % | ||||||||||||||
|
Fiscal
2008
|
||||||||||||||||||||||||||||
|
Revenue
|
$ | 2,072,835 | $ | 810,883 | $ | 252,976 | $ | 231,558 | $ | 211,637 | $ | — | $ | 3,579,889 | ||||||||||||||
|
Cost
of revenue
|
160,560 | 53,282 | 75,539 | 44,344 | 28,905 | — | 362,630 | |||||||||||||||||||||
|
Gross
profit
|
$ | 1,912,275 | $ | 757,601 | $ | 177,437 | $ | 187,214 | $ | 182,732 | $ | — | $ | 3,217,259 | ||||||||||||||
|
Gross
profit as a percentage of revenue
|
92 | % | 93 | % | 70 | % | 81 | % | 86 | % | — | 90 | % | |||||||||||||||
|
Fiscal
2007
|
||||||||||||||||||||||||||||
|
Revenue
|
$ | 1,898,924 | $ | 728,528 | $ | 191,317 | $ | 133,380 | $ | 205,732 | $ | — | $ | 3,157,881 | ||||||||||||||
|
Cost
of revenue
|
147,161 | 57,683 | 68,932 | 44,087 | 36,831 | — | 354,694 | |||||||||||||||||||||
|
Gross
profit
|
$ | 1,751,763 | $ | 670,845 | $ | 122,385 | $ | 89,293 | $ | 168,901 | $ | — | $ | 2,803,187 | ||||||||||||||
|
Gross
profit as a percentage of revenue
|
92 | % | 92 | % | 64 | % | 67 | % | 82 | % | — | 89 | % |
_________________________________________
|
(1)
|
Platform
revenue includes revenue related to our Mobile client products of $51.3
million, $113.1 million and $52.5 million for fiscal 2009, 2008 and 2007,
respectively, or 28%, 49% and 39% of Platform revenues,
respectively.
|
|
(2)
|
Fiscal
2009 includes the integration of Omniture as a new reportable segment in
the fourth quarter. Fiscal 2008 and 2007 do not include the impact of our
acquisition of Omniture.
|
119
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tables
below list our revenue and property and equipment, net, by geographic area for
fiscal 2009, 2008 and 2007 (in thousands). With the exception of property and
equipment, we do not identify or allocate our assets by geographic
area.
|
Revenue
|
|
2009
|
2008
|
2007
|
|||||||||
|
Americas:
|
|||||||||||||
|
United
States
|
$ | 1,244,631 | $ | 1,473,319 | $ | 1,379,028 | |||||||
|
Other
|
137,940 | 159,507 | 129,776 | ||||||||||
|
Total
Americas
|
1,382,571 | 1,632,826 | 1,508,804 | ||||||||||
|
EMEA
|
928,857 | 1,229,161 | 1,026,455 | ||||||||||
|
Asia:
|
|||||||||||||
|
Japan
|
410,055 | 450,799 | 407,344 | ||||||||||
|
Other
|
224,370 | 267,103 | 215,278 | ||||||||||
|
Total
Asia
|
634,425 | 717,902 | 622,622 | ||||||||||
|
Revenue
|
$ | 2,945,853 | $ | 3,579,889 | $ | 3,157,881 | |||||||
|
Property and Equipment
|
|
2009
|
2008
|
||||||
|
Americas:
|
|||||||||
|
United
States
|
$ | 336,303 | $ | 252,434 | |||||
|
Other
|
5,806 | 9,154 | |||||||
|
Total
Americas
|
342,109 | 261,588 | |||||||
|
EMEA
|
23,729 | 29,887 | |||||||
|
Asia:
|
|||||||||
|
India
|
14,625 | 15,242 | |||||||
|
Other
|
7,669 | 6,320 | |||||||
|
Total
Asia
|
22,294 | 21,562 | |||||||
|
Property
and equipment,
net
|
$ | 388,132 | $ | 313,037 | |||||
Significant
Customers
As
listed, our significant customers are distributors who sell products across our
various segments. Our significant customers, as a percentage of net revenue for
fiscal 2009, 2008 and 2007 were as follows:
|
2009
|
2008
|
2007
|
||||||||||
|
Ingram
Micro
|
15 | % | 18 | % | 21 | % | ||||||
|
Tech
Data
|
8 | % | 9 | % | 10 | % | ||||||
Receivables
from our significant customers, as a percentage of gross trade receivables for
fiscal 2009 and 2008 were as follows:
|
2009
|
2008
|
|||||||
|
Ingram
Micro
|
16 | % | 18 | % | ||||
|
Tech
Data
|
6 | % | 8 | % | ||||
120
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 2009 | ||||||||||||||||
|
(in
thousands, except per share data)
|
Quarter Ended | |||||||||||||||
|
February
27
|
May
29
|
August
28
|
November
27
|
|||||||||||||
|
Revenue
|
$ | 786,390 | $ | 704,673 | $ | 697,507 | $ | 757,283 | ||||||||
|
Gross
profit
|
$ | 709,037 | $ | 632,665 | $ | 632,460 | $ | 674,959 | ||||||||
|
Income
before income taxes
|
$ | 203,162 | $ | 163,730 | $ | 174,416 | $ | 160,212 | ||||||||
|
Net
income (loss)
|
$ | 156,435 | $ | 126,071 | $ | 136,045 | $ | (32,043 | ) | |||||||
|
Basic
net income (loss) per share
|
$ | 0.30 | $ | 0.24 | $ | 0.26 | $ | (0.06 | ) | |||||||
|
Diluted
net income (loss) per share
|
$ | 0.30 | $ | 0.24 | $ | 0.26 | $ | (0.06 | ) | |||||||
| 2008 | ||||||||||||||||
|
(in
thousands, except per share data)
|
Quarter Ended | |||||||||||||||
|
February
29
|
May
30
|
August
29
|
November
28
|
|||||||||||||
|
Revenue
|
$ | 890,445 | $ | 886,886 | $ | 887,257 | $ | 915,301 | ||||||||
|
Gross
profit
|
$ | 807,970 | $ | 804,020 | $ | 776,406 | $ | 828,863 | ||||||||
|
Income
before income taxes
|
$ | 295,644 | $ | 278,006 | $ | 228,514 | $ | 276,344 | ||||||||
|
Net
income
|
$ | 219,379 | $ | 214,910 | $ | 191,608 | $ | 245,917 | ||||||||
|
Basic
net income per share
|
$ | 0.39 | $ | 0.40 | $ | 0.36 | $ | 0.47 | ||||||||
|
Diluted
net income per share
|
$ | 0.38 | $ | 0.40 | $ | 0.35 | $ | 0.46 | ||||||||
Our
fiscal year is a 52- or 53-week year. Each of the fiscal quarters presented were
comprised of 13 weeks.
The Board
of Directors and Stockholders
Adobe
Systems Incorporated:
We have
audited the accompanying consolidated balance sheets of Adobe Systems
Incorporated and subsidiaries as of November 27, 2009 and November 28,
2008, and the related consolidated statements of income, stockholders’ equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended November 27, 2009. We have also audited Adobe Systems
Incorporated’s internal control over financial reporting as of November 27,
2009, based on criteria established in
Internal Control – Integrated
Framework
, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO)
.
Adobe System Incorporated’s management is responsible for these
consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Annual Report on Internal Control over Financial Reporting
appearing under Item 9A. Our responsibility is to express an opinion on these
consolidated financial statements and an opinion on Adobe Systems Incorporated’s
internal control over financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Adobe
Systems Incorporated acquired Omniture, Inc. during fiscal 2009, and management
excluded from its assessment of the effectiveness of Adobe Systems
Incorporated’s internal control over financial reporting as of November 27,
2009, Omniture, Inc.’s internal control over financial reporting associated with
total assets of $195.5 million and total revenues of $26.3 million included in
the consolidated financial statements of Adobe Systems Incorporated and
subsidiaries as of and for the year ended November 27, 2009. Our audit of
internal control over financial reporting of Adobe Systems Incorporated also
excluded an evaluation of the internal control over financial reporting of
Omniture, Inc.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Adobe Systems Incorporated
and subsidiaries as of November 27, 2009 and November 28, 2008, and
the results of their operations and their cash flows for each of the years in
the three-year period ended November 27, 2009, in conformity with
U.S. generally accepted accounting principles. Also in our opinion, Adobe
Systems Incorporated maintained, in all material respects, effective internal
control over financial reporting as of November 27, 2009, based on criteria
established in
Internal
Control – Integrated Framework
, issued by COSO
.
As
discussed in Note 10 to the consolidated financial statements, Adobe Systems
Incorporated changed its method of accounting for uncertainty in income taxes in
fiscal 2008 resulting from the adoption of new accounting
pronouncements.
/s/KPMG
LLP
Mountain
View, California
January
22, 2010
None.
Disclosure
Controls and Procedures
Our
management has evaluated, under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer, the effectiveness of
our disclosure controls and procedures as of November 27, 2009. Based on their
evaluation as of November 27, 2009, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended) were effective at the reasonable assurance level to ensure
that the information required to be disclosed by us in this Annual Report on
Form 10-K was (i) recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and regulations and (ii) accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, to allow timely decisions regarding required
disclosure.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls over financial reporting will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within Adobe have been
detected.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under
the Securities Exchange Act of 1934, as amended). Our management assessed the
effectiveness of our internal control over financial reporting as of November
27, 2009. In making this assessment, our management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
in
Internal Control-Integrated
Framework
. Our management has concluded that, as of November 27, 2009,
our internal control over financial reporting is effective based on these
criteria.
Our
management’s evaluation excluded Omniture, from which we acquired certain assets
on October 23, 2009. At November 27, 2009, Omniture had $ 195.5 million and
$40.4 million of total assets and net assets, respectively. For the year ended
November 27, 2009, our Consolidated Statement of Income included total revenue
associated with Omniture of $26.3 million. In accordance with guidance issued by
the SEC, companies are allowed to exclude acquisitions from their assessment of
internal controls over financial reporting during the first year subsequent to
the acquisition while integrating the acquired operations.
KPMG LLP,
the independent registered public accounting firm that audited our financial
statements included in this Annual Report on Form 10-K, has issued an
attestation report on our internal control over financial reporting, which is
included herein.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting during the
quarter ended November 27, 2009 that have materially affected, or are reasonably
likely to materially affect our internal control over financial
reporting.
None.
The
information required by Item 10 of Form 10-K with respect to Item 401 of
Regulation S-K regarding our directors is incorporated herein by reference from
the information contained in the section entitled “Proposal 1 – Election of
Directors” in our definitive Proxy Statement we will deliver to our stockholders
in connection with our Annual Meeting of Stockholders to be held on April 16,
2010. For information with respect to our executive officers, see “Executive
Officers” at the end of Part I, Item 1 of this report.
The
information required by Item 10 of Form 10-K with respect to Item 405 of
Regulation S-K regarding section 16(a) beneficial ownership compliance is
incorporated by reference from the information contained in the section entitled
“Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive
Proxy Statement we will deliver to our stockholders in connection with our
Annual Meeting of Stockholders to be held on April 16, 2010.
The
information required by Item 10 of Form 10-K with respect to Item 406 of
Regulation S-K regarding code of ethics is incorporated by reference from the
information contained in the section entitled “Code of Ethics” in our definitive
Proxy Statement we will deliver to our stockholders in connection with our
Annual Meeting of Stockholders to be held on April 16, 2010.
The
information required by Item 10 of Form 10-K with respect to Item 407(c)(3),
407(d)(4) and 407(d)(5) is incorporated by reference from the information
contained in the sections entitled “Proposal 1- Election of Directors” and
report of the “Audit Committee” in our definitive Proxy Statement we will
deliver to our stockholders in connection with our Annual Meeting of
Stockholders to be held on April 16, 2010.
You will
find this information in the sections captioned “Compensation Discussion and
Analysis,” “Executive Compensation Committee Report,” “Executive Compensation,”
“Director Compensation” and “Compensation Committee Interlocks and Insider
Participation” in the Proxy Statement we will deliver to our stockholders in
connection with our Annual Meeting of Stockholders to be held on April 16, 2010.
We are incorporating the information contained in that section of our Proxy
Statement here by reference.
You will
find this information in the sections captioned “Security Ownership of Certain
Beneficial Owners and Management” and “Equity Compensation Plan Information” in
the Proxy Statement we will deliver to our stockholders in connection with our
Annual Meeting of Stockholders to be held on April 16, 2010. We are
incorporating the information contained in that section here by
reference.
You will
find this information in the sections captioned “Transactions with Related
Persons” and “Proposal 1—Election of Directors—Independence of Directors” in the
Proxy Statement we will deliver to our stockholders in connection with our
Annual Meeting of Stockholders to be held on April 16, 2010. We are
incorporating the information contained in that section here by
reference.
You will
find this information in the sections captioned “Principal Accounting Fees and
Services” and “Audit Committee Pre-Approval of Services Performed by Our
Independent Registered Public Accountants” in the Proxy Statement we will
deliver to our stockholders in connection with our Annual Meeting of
Stockholders to be held on April 16, 2010. We are incorporating the
information contained in that section here by reference.
|
1.
|
Financial
Statements. See “Index to Consolidated Financial Statements” in
Part II, Item 8 of this Form 10-K.
|
|
2.
|
Exhibits.
The exhibits listed in the accompanying “Index to Exhibits” are filed or
incorporated by reference as part of this Form
10-K.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on January 22, 2010.
|
ADOBE
SYSTEMS INCORPORATED
|
||||
|
By:
|
/s/
Mark
Garrett
|
|||
|
Mark
Garrett,
Executive
Vice President and
Chief
Financial Officer
(Principal
Financial Officer)
|
||||
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Shantanu Narayen and Mark Garrett, and each or any one
of them, his or her lawful attorneys-in-fact and agents, for such person in any
and all capacities, to sign any and all amendments to this report and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that either of said attorneys-in-fact and agent, or substitute or substitutes,
may do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
John E.
Warnock
|
January
22, 2010
|
|||
|
John
E. Warnock
|
Chairman
of the Board of Directors
|
|||
|
/s/
Charles M.
Geschke
|
January
22, 2010
|
|||
|
Charles
M. Geschke
|
Chairman
of the Board of Directors
|
|||
|
/s/
Shantanu
narayen
|
January
22, 2010
|
|||
|
Shantanu
Narayen
|
Director,
President and Chief Executive Officer
(Principal
Executive Officer)
|
|||
|
/s/
Mark
Garrett
|
January
22, 2010
|
|||
|
Mark
Garrett
|
Executive
Vice President and Chief Financial Officer (Principal Financial
Officer)
|
|||
|
/s/
Richard T.
Rowley
|
January
22, 2010
|
|||
|
Richard
T. Rowley
|
Vice
President and Principal Accounting Officer
|
|||
|
/s/
Edward W.
Barnholt
|
January
22, 2010
|
|||
|
Edward
W. Barnholt
|
Director
|
|||
|
/s/
Robert K.
Burgess
|
January
22, 2010
|
|||
|
Robert
K. Burgess
|
Director
|
|
Signature
|
Title
|
Date
|
||
|
/s/
Michael R.
Cannon
|
January
22, 2010
|
|||
|
Michael
R. Cannon
|
Director
|
|||
|
s/
James E.
Daley
|
January
22, 2010
|
|||
|
James
E. Daley
|
Director
|
|||
|
/s
/ Carol
Mills
|
January
22, 2010
|
|||
|
Carol
Mills
|
Director
|
|||
|
/s/
Daniel L.
Rosensweig
|
January
22, 2010
|
|||
|
Daniel
L. Rosensweig
|
Director
|
|||
|
/s/
Robert
Sedgewick
|
January
22, 2010
|
|||
|
Robert
Sedgewick
|
Director
|
The
following trademarks of Adobe Systems Incorporated or its subsidiaries, which
may be registered in the United States and/or other countries, are referenced in
this Form 10-K:
Adobe
Acrobat
Acrobat
Connect
ActionScript
Adobe
AIR
Adobe
Audition
Adobe
Premiere
Adobe
Type Manager
After
Effects
AIR
Authorware
BusinessCatalyst
Buzzword
Captivate
ColdFusion
ColdFusion
Builder
Contribute
Creative
Suite
Director
Dreamweaver
Encore
Fireworks
Flash
Flash
Access
Flash
Builder
Flash
Cast
Flash
Catalyst
Flash
Lite
Flex
Font
Folio
FrameMaker
FreeHand
HBX
Illustrator
InCopy
InDesign
JRun
Lightroom
LiveCycle
Macromedia
MXML
Omniture
Omniture
DataWarehouse
Omniture
Discover
Omniture
Genesis
Omniture
Insight
Omniture
SearchCenter
Open
Screen Project
Ovation
PageMaker
Photoshop
PostScript
Reader
RoboHelp
Scene7
Shockwave
SiteCatalyst
Soundbooth
Version
Cue
SUMMARY
OF TRADEMARKS (Continued)
Visual
Communicator
All other
trademarks are the property of their respective owners.
|
Exhibit
|
Incorporated
by Reference**
|
Filed
|
||||||||
|
Number
|
Exhibit
Description
|
Form
|
Date
|
Number
|
Herewith
|
|||||
|
3.1
|
Amended
and Restated Bylaws
|
8-K
|
1/13/09
|
3.1
|
||||||
|
3.2
|
Restated
Certificate of Incorporation of Adobe Systems Incorporated
|
10-Q
|
7/16/01
|
3.6
|
||||||
|
3.2.1
|
Certificate
of Correction of Restated Certificate of Incorporation of Adobe Systems
Incorporated
|
10-Q
|
4/11/03
|
3.6.1
|
||||||
|
3.3
|
Certificate
of Designation of Series A Preferred Stock of Adobe Systems
Incorporated
|
10-Q
|
7/08/03
|
3.3
|
||||||
|
4.1
|
Fourth
Amended and Restated Rights Agreement between Adobe Systems Incorporated
and Computershare Investor Services, LLC
|
8-K
|
7/03/00
|
1
|
||||||
|
4.1.1
|
Amendment
No. 1 to Fourth Amended and Restated Rights Agreement between Adobe
Systems Incorporated and Computershare Investor
Services, LLC
|
8-A/2G/A
|
5/23/03
|
7
|
||||||
|
4.2
|
Specimen
Common Stock Certificate
|
S-3 | 1/15/2010 | 4.3 |
|
|||||
|
10.1
|
Amended
1994 Performance and Restricted Stock Plan*
|
10-Q
|
4/4/08
|
10.2
|
||||||
|
10.2
|
Form
of Restricted Stock Agreement used in connection with the Amended 1994
Performance and Restricted Stock Plan*
|
10-K
|
1/23/09
|
10.3
|
||||||
|
10.3
|
1997
Employee Stock Purchase Plan, as amended*
|
10-K
|
1/24/08
|
10.5
|
||||||
|
10.4
|
1996
Outside Directors Stock Option Plan, as amended*
|
10-Q
|
4/12/06
|
10.6
|
||||||
|
Exhibit
|
Incorporated
by Reference**
|
Filed
|
||||||||
|
Number
|
Exhibit
Description
|
Form
|
Date
|
Number
|
Herewith
|
|||||
|
10.5
|
Forms
of Stock Option Agreements used in connection with the 1996 Outside
Directors Stock Option Plan*
|
S-8
|
6/16/00
|
4.8
|
||||||
|
10.6
|
1999
Nonstatutory Stock Option Plan, as amended*
|
S-8
|
10/29/01
|
4.6
|
||||||
|
10.7
|
1999
Equity Incentive Plan, as amended*
|
10-K
|
2/26/03
|
10.37
|
||||||
|
10.8
|
2003
Equity Incentive Plan, as amended and restated*
|
DEF 14A
|
2/20/09
|
Appendix A
|
||||||
|
10.9
|
Form
of Stock Option Agreement used in connection with the 2003 Equity
Incentive Plan*
|
10-Q
|
4/4/08
|
10.11
|
||||||
|
10.10
|
Form
of Indemnity Agreement*
|
10-Q
|
6/26/09
|
10.12
|
||||||
|
10.11
|
Forms
of Retention Agreement*
|
10-K
|
11/28/97
|
10.44
|
||||||
|
10.12
|
Second
Amended and Restated Master Lease of Land and Improvements by and between
SMBC Leasing and Finance, Inc. and Adobe Systems
Incorporated
|
10-Q
|
10/07/04
|
10.14
|
||||||
|
10.13
|
Lease
between Adobe Systems Incorporated and Selco Service Corporation, dated
March 26, 2007
|
8-K
|
3/28/07
|
10.1
|
||||||
|
10.14
|
Participation
Agreement among Adobe Systems Incorporated, Selco Service Corporation, et
al. dated March 26, 2007
|
8-K
|
3/28/07
|
10.2
|
||||||
|
10.15
|
Form
of Restricted Stock Unit Agreement used in connection with the Amended
1994 Performance and Restricted Stock Plan*
|
10-K
|
1/23/09
|
10.19
|
|
Exhibit
|
Incorporated
by Reference**
|
Filed
|
||||||||
|
Number
|
Exhibit
Description
|
Form
|
Date
|
Number
|
Herewith
|
|||||
|
10.16
|
Form
of Restricted Stock Unit Agreement used in connection with the 2003 Equity
Incentive Plan*
|
10-K
|
1/23/09
|
10.20
|
||||||
|
10.17
|
Form
of Restricted Stock Agreement used in connection with the 2003 Equity
Incentive Plan*
|
10-Q
|
10/07/04
|
10.11
|
||||||
|
10.18
|
2008
Executive Officer Annual Incentive Plan*
|
8-K
|
1/30/08
|
10.4
|
||||||
|
10.19
|
2005
Equity Incentive Assumption Plan, as amended and restated*
|
X
|
||||||||
|
10.20
|
Form
of Stock Option Agreement used in connection with the 2005 Equity
Incentive Assumption Plan*
|
10-Q
|
4/4/08
|
10.24
|
||||||
|
10.21
|
Allaire
Corporation 1997 Stock Incentive Plan*
|
S-8
|
03/27/01
|
4.06
|
||||||
|
10.22
|
Allaire
Corporation 1998 Stock Incentive Plan*
|
S-8
|
03/27/01
|
4.07
|
||||||
|
10.23
|
Allaire
Corporation 2000 Stock Incentive Plan*
|
S-8
|
03/27/01
|
4.08
|
||||||
|
10.24
|
Andromedia, Inc.
1999 Stock Plan*
|
S-8
|
12/07/99
|
4.09
|
||||||
|
10.25
|
Blue
Sky Software Corporation 1996 Stock Option Plan*
|
S-8
|
12/29/03
|
4.07
|
||||||
|
10.26
|
Macromedia, Inc.
1999 Stock Option Plan*
|
S-8
|
08/17/00
|
4.07
|
||||||
|
10.27
|
Macromedia, Inc.
1992 Equity Incentive Plan*
|
10-Q
|
08/03/01
|
10.01
|
||||||
|
10.28
|
Macromedia, Inc.
2002 Equity Incentive Plan*
|
S-8
|
08/10/05
|
4.08
|
||||||
|
10.29
|
Form
of Macromedia, Inc. Stock Option Agreement*
|
S-8
|
08/10/05
|
4.09
|
||||||
|
10.30
|
Middlesoft, Inc.
1999 Stock Option Plan*
|
S-8
|
08/17/00
|
4.09
|
|
Exhibit
|
Incorporated
by Reference**
|
Filed
|
||||||||
|
Number
|
Exhibit
Description
|
Form
|
Date
|
Number
|
Herewith
|
|||||
|
10.31
|
Form
of Macromedia, Inc. Revised Non-Plan Stock Option
Agreement*
|
S-8
|
11/23/04
|
4.10
|
||||||
|
10.32
|
Form
of Macromedia, Inc. Restricted Stock Purchase
Agreement*
|
10-Q
|
2/08/05
|
10.01
|
||||||
|
10.33
|
Adobe
Systems Incorporated Form of Performance Share Program pursuant to the
2003 Equity Incentive Plan*
|
8-K
|
1/30/08
|
10.1
|
||||||
|
10.34
|
Form
of Award Grant Notice and Performance Share Award Agreement used in
connection with grants under the Adobe Systems Incorporated 2008
Performance Share Program pursuant to the 2003 Equity Incentive
Plan*
|
8-K
|
1/30/08
|
10.2
|
||||||
|
10.35
|
2008
Award Calculation Methodology Exhibit A to the 2008 Performance Share
Program pursuant to the 2003 Equity Incentive Plan*
|
8-K
|
1/30/08
|
10.3
|
||||||
|
10.36
|
Adobe
Systems Incorporated Deferred Compensation Plan*
|
10-K
|
1/24/08
|
10.52
|
||||||
|
10.37
|
Adobe
Systems Incorporated 2007 Performance Share Program pursuant to the 2003
Equity Incentive Plan*
|
8-K
|
1/30/07
|
10.1
|
||||||
|
10.38
|
Form
of Award Grant Notice and Performance Share Award Agreement used in
connection with grants under the Adobe Systems Incorporated 2007
Performance Share Program pursuant to the 2003 Equity Incentive
Plan*
|
8-K
|
1/30/07
|
10.2
|
|
Exhibit
|
Incorporated
by Reference**
|
Filed
|
||||||||
|
Number
|
Exhibit
Description
|
Form
|
Date
|
Number
|
Herewith
|
|||||
|
10.39
|
Adobe
Systems Incorporated 2007 Performance Share Program pursuant to the
Amended 1994 Performance and Restricted Stock Plan*
|
8-K
|
1/30/07
|
10.3
|
||||||
|
10.40
|
Form
of Award Grant Notice and Performance Share Award Agreement used in
connection with grants under the Adobe Systems Incorporated 2007
Performance Share Program pursuant to the Amended 1994 Performance and
Restricted Stock Plan*
|
8-K
|
1/30/07
|
10.4
|
||||||
|
10.41
|
Adobe
Systems Incorporated Executive Cash Bonus Plan*
|
DEF 14A
|
2/24/06
|
Appendix B
|
||||||
|
10.42
|
First
Amendment to Retention Agreement between Adobe Systems Incorporated and
Shantanu Narayen, effective as of February 11, 2008*
|
8-K
|
2/13/08
|
10.1
|
||||||
|
10.43
|
Adobe
Systems Incorporated Executive Severance Plan in the Event of a Change of
Control*
|
8-K
|
2/13/08
|
10.2
|
||||||
|
10.44
|
Employment
offer letter between Adobe Systems Incorporated and Richard Rowley, dated
October 30, 2006*
|
8-K
|
11/16/06
|
10.1
|
||||||
|
10.45
|
Employment
offer letter between Adobe Systems Incorporated and Mark Garrett dated
January 5, 2007*
|
8-K
|
1/26/07
|
10.1
|
|
Exhibit
|
Incorporated
by Reference**
|
Filed
|
||||||||
|
Number
|
Exhibit
Description
|
Form
|
Date
|
Number
|
Herewith
|
|||||
|
10.46
|
Credit
Agreement, dated as of February 16, 2007, among Adobe Systems
Incorporated and Certain Subsidiaries as Borrowers; BNP Paribas, Keybank
National Association, and UBS Loan Finance LLC as Co-Documentation
Agents; JPMorgan Chase Bank, N.A. as Syndication Agent; Bank of America,
N.A. as Administrative Agent and Swing Line Lender; the Other Lenders
Party Thereto; and Banc of America Securities LLC and J.P. Morgan
Securities Inc. as Joint Lead Arrangers and Joint Book
Managers
|
8-K
|
8/16/07
|
10.1
|
||||||
|
10.47
|
Amendment
to Credit Agreement, dated as of August 13, 2007, among Adobe Systems
Incorporated, as Borrower; each Lender from time to time party to the
Credit Agreement; and Bank of America, N.A. as Administrative
Agent
|
8-K
|
8/16/07
|
10.2
|
||||||
|
10.48
|
Second
Amendment to Credit Agreement, dated as of February 26, 2008, among
Adobe Systems Incorporated, as Borrower; each Lender from time to time
party to the Credit Agreement; and Bank of America, N.A. as Administrative
Agent
|
8-K
|
2/29/08
|
10.1
|
||||||
|
10.49
|
Purchase
and Sale Agreement, by and between NP Normandy Overlook, LLC, as Seller
and Adobe Systems Incorporated as Buyer, effective as of May 12,
2008
|
8-K
|
5/15/08
|
10.1
|
|
Exhibit
|
Incorporated
by Reference**
|
Filed
|
||||||||
|
Number
|
Exhibit
Description
|
Form
|
Date
|
Number
|
Herewith
|
|||||
|
10.50
|
Form
of Director Annual Grant Stock Option Agreement used in connection with
the 2003 Equity Incentive Plan*
|
10-K
|
1/23/09
|
10.60
|
||||||
|
10.51
|
Form
of Director Initial Grant Restricted Stock Unit Agreement in connection
with the 2003 Equity Incentive Plan*
|
10-K
|
1/23/09
|
10.61
|
||||||
|
10.52
|
Form
of Director Annual Grant Restricted Stock Unit Agreement in connection
with the 2003 Equity Incentive Plan*
|
10-K
|
1/23/09
|
10.62
|
||||||
|
10.53
|
Description
of 2009 Director Compensation*
|
10-K
|
1/23/09
|
10.63
|
||||||
|
10.54
|
2009
Performance Share Program Award Calculation Methodology*
|
8-K
|
1/29/09
|
10.3
|
||||||
|
10.55
|
2009
Executive Annual Incentive Plan*
|
8-K
|
1/29/09
|
10.4
|
||||||
|
10.56
|
Omniture, Inc.
1999 Equity Incentive Plan, as amended (the “Omniture 1999
Plan”)*
|
S-1
|
4/4/06
|
10.2A
|
||||||
|
10.57
|
Forms
of Stock Option Agreement under the Omniture 1999 Plan*
|
S-1
|
4/4/06
|
10.2B
|
||||||
|
10.58
|
Form of
Stock Option Agreement under the Omniture 1999 Plan used for Named
Executive Officers and Non-Employee Directors*
|
S-1
|
6/9/06
|
10.2C
|
||||||
|
10.59
|
Omniture, Inc.
2006 Equity Incentive Plan and related forms*
|
10-Q
|
08/06/09
|
10.3
|
||||||
|
10.60
|
Omniture, Inc.
2007 Equity Incentive Plan and related forms*
|
10-K
|
2/27/09
|
10.9
|
|
Exhibit
|
Incorporated
by Reference**
|
Filed
|
||||||||
|
Number
|
Exhibit
Description
|
Form
|
Date
|
Number
|
Herewith
|
|||||
|
10.61
|
Omniture, Inc.
2008 Equity Incentive Plan and related forms*
|
10-K
|
2/27/09
|
10.10
|
||||||
|
10.62
|
Visual
Sciences, Inc. (formerly, WebSideStory, Inc.) Amended and
Restated 2000 Equity Incentive Plan*
|
10-K
|
2/29/08
|
10.5
|
||||||
|
10.63
|
Visual
Sciences, Inc. (formerly, WebSideStory, Inc.) 2004 Equity
Incentive Award Plan (the “VS 2004 Plan”) and Form of Option Grant
Agreement*
|
10-K
|
2/29/08
|
10.6
|
||||||
|
10.64
|
Form of
Restricted Stock Award Grant Notice and Restricted Stock Award Agreement
under the VS 2004 Plan*
|
10-K
|
2/29/08
|
10.6A
|
||||||
|
10.65
|
Visual
Sciences, Inc. (formerly, WebSideStory, Inc.) 2006 Employment
Commencement Equity Incentive Award Plan and Form of Option Grant
Agreement*
|
10-K
|
2/29/08
|
10.8
|
||||||
|
10.66
|
Avivo
Corporation 1999 Equity Incentive Plan and Form of Option Grant
Agreement*
|
10-K
|
2/29/08
|
10.7
|
||||||
|
10.67
|
The
Touch Clarity Limited Enterprise Management Incentives Share Option Plan
2002*
|
S-8
|
3/16/07
|
99.5
|
||||||
|
10.68
|
Forms
of Agreements under The Touch Clarity Limited Enterprise Management
Incentives Share Option Plan 2002*
|
S-8
|
3/16/07
|
99.6
|
||||||
|
10.69
|
Touch
Clarity Limited 2006 U.S. Stock Plan*
|
S-8
|
3/16/07
|
99.7
|
|
Exhibit
|
Incorporated
by Reference**
|
Filed
|
||||||||
|
Number
|
Exhibit
Description
|
Form
|
Date
|
Number
|
Herewith
|
|||||
|
10.70
|
Form of
Stock Option Agreement under Touch Clarity Limited 2006 U.S. Stock
Plan*
|
S-8
|
3/16/07
|
99.8
|
||||||
|
10.71
|
Description
of 2010 Director Compensation*
|
X
|
||||||||
|
21
|
Subsidiaries
of the Registrant
|
X
|
||||||||
|
23.1
|
Consent
of Independent Registered Public Accounting Firm, KPMG LLP
|
X
|
||||||||
|
24.1
|
Power
of Attorney (set forth on the signature page to this Annual Report on Form
10-K)
|
X
|
||||||||
|
31.1
|
Certification
of Chief Executive Officer, as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934
|
X
|
||||||||
|
31.2
|
Certification
of Chief Financial Officer, as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934
|
X
|
||||||||
|
32.1
|
Certification
of Chief Executive Officer, as required by Rule 13a-14(b) of the
Securities Exchange Act of 1934†
|
X
|
||||||||
|
32.2
|
Certification
of Chief Financial Officer, as required by Rule 13a-14(b) of the
Securities Exchange Act of 1934†
|
X
|
||||||||
|
101.INS
|
XBRL
Instance††
|
X
|
||||||||
|
101.SCH
|
XBRL
Taxonomy Extension Schema††
|
X
|
||||||||
|
101.CAL
|
XBRL
Taxonomy Extension Calculation††
|
X
|
|
Exhibit
|
Incorporated
by Reference**
|
Filed
|
||||||||
|
Number
|
Exhibit
Description
|
Form
|
Date
|
Number
|
Herewith
|
|||||
|
101.LAB
|
XBRL
Taxonomy Extension Labels††
|
X
|
||||||||
|
101.PRE
|
XBRL
Taxonomy Extension Presentation††
|
X
|
||||||||
|
101.DEF
|
XBRL
Taxonomy Extension Definition††
|
X
|
_________________________________________
|
*
|
Compensatory
plan or arrangement.
|
|
**
|
References
to Exhibits 10.21 through 10.32 are to filings made by
Macromedia, Inc.
|
|
***
|
References
to Exhibits 10.56 through 10.70 are to filings made by
Omniture, Inc.
|
|
†
|
The
certifications attached as Exhibits 32.1 and 32.2 that accompany this
Annual Report on Form 10-K, are not deemed filed with the Securities
and Exchange Commission and are not to be incorporated by reference into
any filing of Adobe Systems Incorporated under the Securities Act of 1933,
as amended, or the Securities Exchange Act of 1934, as amended, whether
made before or after the date of this Form 10-K, irrespective of any
general incorporation language contained in such
filing.
|
|
††
|
Furnished,
not filed.
|
139
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsNote 2 Of Our Notes To Consolidated Financial StatementsNote 11 Of Our Notes To Consolidated Financial Statements For Further Information Regarding Our Restructuring ChargesItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1. Significant Accounting PoliciesNote 2. AcquisitionsNote 3. Cash, Cash Equivalents and Short-term InvestmentsNote 4. Fair Value MeasurementsNote 5. Financial InstrumentsNote 6. Property and EquipmentNote 7. Goodwill and Purchased and Other IntangiblesNote 8. Other AssetsNote 4 For Further Information Regarding Adobe VenturesNote 4 For Further Information Regarding Our Cost Method InvestmentsNote 9. Accrued ExpensesNote 10. Income TaxesNote 11. RestructuringNote 12. Benefit PlansNote 13. Stock-based CompensationNote 14. Stockholders EquityNote 15. Comprehensive IncomeNote 16. Net Income Per ShareNote 17. Commitments and ContingenciesNote 18. Credit AgreementNote 19. Non-operating Income (expense)Note 20. Industry Segment, Geographic Information and Significant CustomersNote 21. Selected Quarterly Financial Data (unaudited)Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules