Adobe Reports Record Quarterly and Annual Revenue

Forward-Looking Statements Disclosure

This press release contains forward-looking statements, including those related to the transition of our business as we migrate to a subscription model, increases in recurring revenue, long-term revenue growth and our ability to continue to innovate and execute against our strategy in our key growth areas and drive integration between those areas, which involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to: failure to develop, market and distribute products and services that meet customer requirements, introduction of new products and business models by competitors, failure to successfully manage transitions to new business models and markets, including our increased emphasis on a cloud and subscription strategy, fluctuations in subscription renewal or upgrade rates, continued uncertainty in economic conditions and the financial markets, difficulty in predicting revenue from new businesses and the potential impact on our financial results from changes in our business models, and failure to realize the anticipated benefits of past or future acquisitions.

For a discussion of these and other risks and uncertainties, please refer to Adobe’s Annual Report on Form 10-K for the fiscal year ended December 2, 2011 and its Quarterly Reports on Form 10-Q for the fiscal quarters ended March 2, 2012, June 1, 2012 and Aug. 31, 2012.

The financial information set forth in this press release reflects estimates based on information available at this time. These amounts could differ from actual reported amounts stated in Adobe’s Annual Report on Form 10-K for our year ended Nov. 30, 2012, which Adobe expects to file in Jan. 2013.

Adobe assumes no obligation to, and does not currently intend to, update these forward-looking statements.

About Adobe Systems Incorporated

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Condensed Consolidated Statements of Income (In thousands, except per share data; unaudited)

	Three Months Ended						Year Ended
	November 30, 2012			December 2, 2011			November 30, 2012			December 2, 2011
Revenue:
Products	$	852,843		$	931,895		$	3,342,843		$	3,416,483
Subscription	194,537			128,437			673,206			458,634
Services and support	106,048			91,829			387,628			341,141
Total revenue	1,153,428			1,152,161			4,403,677			4,216,258

Cost of revenue:
Products	28,687			34,048			121,663			125,640
Subscription	59,308			51,334			219,102			194,033
Services and support	36,983			30,997			143,017			118,200
Total cost of revenue	124,978			116,379			483,782			437,873

Gross profit	1,028,450			1,035,782			3,919,895			3,778,385

Operating expenses:
Research and development	195,047			195,403			742,823			738,053
Sales and marketing	402,181			368,330			1,516,159			1,385,822
General and administrative	111,449			119,586			434,982			414,605
Restructuring and other related charges	(275		)	94,502			(2,917		)	97,773
Amortization of purchased intangibles	12,283			11,830			48,657			42,833
Total operating expenses	720,685			789,651			2,739,704			2,679,086

Operating income	307,765			246,131			1,180,191			1,099,299

Non-operating income (expense):
Interest and other income (expense), net	(718		)	(1,351		)	(3,414		)	(2,974		)
Interest expense	(16,767		)	(16,774		)	(67,487		)	(66,952		)
Investment gains (losses), net	351			5,174			9,504			5,857
Total non-operating income (expense), net	(17,134		)	(12,951		)	(61,397		)	(64,069		)
Income before income taxes	290,631			233,180			1,118,794			1,035,230
Provision for income taxes	68,298			59,461			286,019			202,383
Net income	$	222,333		$	173,719		$	832,775		$	832,847
Basic net income per share	$	0.45		$	0.35		$	1.68		$	1.67
Shares used to compute basic net income per share	494,906			491,523			494,731			497,469
Diluted net income per share	$	0.44		$	0.35		$	1.66		$	1.65
Shares used to compute diluted net income per share	502,154			496,288			502,721			503,921

Condensed Consolidated Balance Sheets (In thousands, except par value; unaudited)

	November 30, 2012			December 2, 2011
ASSETS

Current assets:
Cash and cash equivalents	$	1,425,052		$	989,500
Short-term investments	2,113,301			1,922,192
Trade receivables, net of allowances for doubtful accounts of $12,643 and $15,080, respectively	617,233			634,373
Deferred income taxes	59,537			91,963
Prepaid expenses and other current assets	116,237			133,423
Total current assets	4,331,360			3,771,451

Property and equipment, net	664,302			527,828
Goodwill	4,133,259			3,849,217
Purchased and other intangibles, net	545,036			545,526
Investment in lease receivable	207,239			207,239
Other assets	93,327			89,922
Total assets	$	9,974,523		$	8,991,183

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Trade payables	$	49,759		$	86,660
Accrued expenses	590,140			554,941
Capital lease obligations	11,217			9,212
Accrued restructuring	9,287			80,930
Income taxes payable	49,886			42,634
Deferred revenue	561,463			476,402
Total current liabilities	1,271,752			1,250,779

Long-term liabilities:
Debt and capital lease obligations	1,496,938			1,505,096
Deferred revenue	58,102			55,303
Accrued restructuring	12,263			7,449
Income taxes payable	155,096			156,958
Deferred income taxes	265,106			181,602
Other liabilities	50,084			50,883
Total liabilities	3,309,341			3,208,070

Stockholders' equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized	—			—
Common stock, $0.0001 par value	61			61
Additional paid-in-capital	3,038,665			2,753,896
Retained earnings	7,003,003			6,528,735
Accumulated other comprehensive income	30,712			29,950
Treasury stock, at cost (106,702 and 109,294 shares, respectively), net of reissuances	(3,407,259		)	(3,529,529		)
Total stockholders' equity	6,665,182			5,783,113
Total liabilities and stockholders' equity	$	9,974,523		$	8,991,183

Condensed Consolidated Statements of Cash Flows (In thousands; unaudited)

	Three Months Ended
	November 30, 2012			December 2, 2011
Cash flows from operating activities:
Net income	$	222,333		$	173,719
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	78,621			73,290
Stock-based compensation expense	73,535			72,527
Unrealized investment gains	(281		)	(5,811		)
Changes in deferred revenue	59,232			47,399
Changes in other operating assets and liabilities	40,219			135,629
Net cash provided by operating activities	473,659			496,753

Cash flows from investing activities:
Purchases, sales and maturities of short-term investments, net	(33,250		)	18,826
Purchases of property and equipment	(81,789		)	(74,897		)
Purchases of long-term investments, intangibles and other assets, net of sales	(14,436		)	(51,684		)
Acquisitions, net of cash	—			(151,925		)
Net cash used for investing activities	(129,475		)	(259,680		)

Cash flows from financing activities:
Purchases of treasury stock	(100,000		)	—
Reissuance of treasury stock	19,089			1,191
Repayment of debt and capital lease obligations	(2,985		)	(2,243		)
Excess tax benefits from stock-based compensation	3,477			853
Net cash used for financing activities	(80,419		)	(199		)
Effect of exchange rate changes on cash and cash equivalents	(1,093		)	(16,586		)
Net increase in cash and cash equivalents	262,672			220,288
Cash and cash equivalents at beginning of period	1,162,380			769,212
Cash and cash equivalents at end of period	$	1,425,052		$	989,500

Non-GAAP Results (In thousands, except per share data) The following tables show Adobe's GAAP results reconciled to non-GAAP results included in this release.

	Three Months Ended									Year Ended
	November 30, 2012			December 2, 2011			August 31, 2012			November 30, 2012			December 2, 2011
Operating income:

GAAP operating income	$	307,765		$	246,131		$	278,304		$	1,180,191		$	1,099,299
Stock-based and deferred compensation expense		76,248			75,450			80,682			300,277			286,048
Restructuring and other related charges		(275	)		94,502			2,374			(2,917	)		97,773
Amortization of purchased intangibles		30,912			28,444			30,410			119,890			104,005
Non-GAAP operating income	$	414,650		$	444,527		$	391,770		$	1,597,441		$	1,587,125

Net income:

GAAP net income	$	222,333		$	173,719		$	201,357		$	832,775		$	832,847
Stock-based and deferred compensation expense		76,248			75,450			80,682			300,277			286,048
Restructuring and other related charges		(275	)		94,502			2,374			(2,917	)		97,773
Amortization of purchased intangibles		30,912			28,444			30,410			119,890			104,005
Investment (gains) losses		(351	)		(5,174	)		(944	)		(9,504	)		(5,857	)
Income tax adjustments		(20,962	)		(34,347	)		(22,685	)		(57,290	)		(131,400	)
Non-GAAP net income	$	307,905		$	332,594		$	291,194		$	1,183,231		$	1,183,416

Diluted net income per share:

GAAP diluted net income per share	$	0.44		$	0.35		$	0.40		$	1.66		$	1.65
Stock-based and deferred compensation expense		0.15			0.15			0.16			0.60			0.57
Restructuring and other related charges		—			0.19			—			(0.01	)		0.19
Amortization of purchased intangibles		0.06			0.06			0.06			0.24			0.21
Investment (gains) losses		—			(0.01	)		—			(0.02	)		(0.01	)
Income tax adjustments		(0.04	)		(0.07	)		(0.04	)		(0.12	)		(0.26	)
Non-GAAP diluted net income per share	$	0.61		$	0.67		$	0.58		$	2.35		$	2.35

Shares used in computing diluted net income per share		502,154			496,288			499,757			502,721			503,921

Operating expenses:

GAAP operating expenses	$	720,685		$	789,651		$	682,655		$	2,739,704		$	2,679,086
Stock-based and deferred compensation expense		(70,658	)		(71,435	)		(75,762	)		(280,746	)		(270,268	)
Restructuring and other related charges		275			(94,502	)		(2,374	)		2,917			(97,773	)
Amortization of purchased intangibles		(12,283	)		(11,830	)		(12,331	)		(48,657	)		(42,833	)
Non-GAAP operating expenses	$	638,019		$	611,884		$	592,188		$	2,413,218		$	2,268,212

	Three Months Ended
	November 30, 2012
Effective income tax rate:

GAAP effective income tax rate	23.5	%
Stock-based and deferred compensation expense	(0.7	)
Amortization of purchased intangibles	(0.3	)
Non-GAAP effective income tax rate	22.5	%

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