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Article by DailyStocks_admin    (12-22-08 07:35 AM)

The Daily Magic Formula Stock for MM/DD/YYYY is Adobe Systems Inc. According to the Magic Formula Investing Web Site, the ebit yield is 11% and the EBIT ROIC is >100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

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 and mobile software and services used by creative professionals, designers, knowledge workers, high-end consumers, original equipment manufacturer ("OEM") partners, developers and enterprises for creating, managing, delivering and engaging with compelling content and experiences across multiple operating systems, devices and media. We distribute our products through a network of distributors and dealers, value-added resellers ("VARs"), systems integrators, independent software vendors ("ISVs") and OEMs, direct to end users and through our own Web site 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 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 Web site at www.adobe.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC Web site at www.sec.gov.


BUSINESS OVERVIEW

For more than 25 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 and dynamic media production, and by delivering a technology platform, we help people express, share, manage 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, line of business managers and executives; high-end consumers—digital imaging and digital video hobbyists and enthusiasts; application developers and OEM partners such as 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 our technology platform which utilizes our universal Adobe Reader and Adobe Flash Player software and our new Adobe AIR software, formerly Adobe Integrated Runtime ("Adobe AIR") which enables developers to build and deploy rich Internet applications to the desktop. Our technology platform allows users of our products and technologies to ensure reliable, secure and rich application experiences across desktops, browsers and devices.


PRODUCTS AND SERVICES OVERVIEW

In fiscal 2007, we categorized our products and services into the following segments: Creative Solutions, Knowledge Worker Solutions, Enterprise and Developer Solutions, Mobile and Device Solutions and Other. Effective in the first quarter of fiscal 2008, we will combine Knowledge Worker Solutions and Enterprise and Developer Solutions to create a new segment called Business Productivity Solutions. As part of this realignment, we will move responsibility for Flex Builder, the Flex Software Development Kit ("SDK") and our ColdFusion product line to our Platform Business Unit. Accordingly, we have adjusted the categorization of our products and services into the following segments: Creative Solutions, Business Productivity Solutions, Mobile and Device Solutions and Other. Additionally, in the first quarter of fiscal 2008, we will rename Print and Classic Publishing Business Unit to Print Publishing Business Unit. This overview, organized by new segments, combines an explanation of our various market opportunities with a summary of our fiscal 2007 results and a discussion of our strategies to address our market opportunities in fiscal 2008 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, photographers and prepress professionals who 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, Web sites, 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, 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 a rich Flash platform.

As technology continues to improve, the market dynamics for these creative professionals continue to evolve. Due to the ever 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 and applications. 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.

Adobe's brand and customer loyalty in this market continues to be strong. Creative professional customers license upgrades and new units 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 units of these products when they buy new computers, or migrate to new or updated operating systems.

In addition, knowledge workers at work 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. Hobbyists use our tools to create distinctive online communications and photo albums, community newsletters, Web blogs, animations, videos and Web sites 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 Web site and mobile device content created by our customers to deliver impactful and compelling Web-based experiences for their constituents.

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, Internet broadband adoption makes the Web a viable platform for the delivery of rich media, especially digital video. In turn, the growth in the use of high definition ("HD") televisions and video is driving the need for HD-enhanced video tools to produce HD content for movies, and cable and commercial television, as well as the need to deliver or repurpose this content to be viewed on the Web.

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 Web sites that leverage the adoption of broadband. 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 2007, we maintained our focus on driving adoption of our creative products, particularly our Adobe Creative Suite family of products. During the year, we launched the largest product release in our history with the release of Adobe Creative Suite version 3 ("CS3"). CS3 incorporates Adobe technologies used by creative professionals into six Creative Suite editions, providing offerings for the various creative disciplines our customers desire.

The CS3 family of products includes enhanced features which allow users to work more efficiently, improve product integration among the various technologies within the Creative Suite products and integrate workflow and collaboration capabilities. The family of products also includes support for the newest operating systems and hardware platforms, including Microsoft's Vista operating system and Apple's new Macintosh hardware which utilize Intel-based processors.

During fiscal 2007, in addition to licensing our technologies as part of the six Creative Suite offerings, we continued to focus on adoption of our stand-alone products by delivering new versions of 13 individual creative products. In the second and third quarters of fiscal 2007, we delivered new versions of products such as Adobe After Effects, Adobe Contribute, Adobe Dreamweaver, Adobe Encore, Adobe Fireworks, Adobe Flash, Adobe InCopy, Adobe InDesign, Adobe Illustrator, Adobe Photoshop and Adobe Premiere Pro. We also released a new audio tool called Adobe Soundbooth.

With the initial launch of CS3 in our second quarter of fiscal 2007, we achieved record Creative Solutions revenue in successive quarters beginning with the launch quarter and continuing through the end of the fiscal year. This was achieved through broad adoption of our new offerings, driven by positive industry reviews and strong demand for the capabilities of the newly launched products.

As part of the CS3 launch, we maintained our focus during the year 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. The release of Adobe Photoshop CS3 in the second quarter of fiscal 2007 included many new desirable features and received positive industry reviews. At the same time, we also delivered a new, advanced version called Adobe Photoshop CS3 Extended Edition which added measurement and analysis tools, three-dimensional ("3D") visualization and texture editing and video feature capabilities to the product family.

Earlier in the year, we added another product to the Photoshop family called Adobe Photoshop Lightroom. Photoshop Lightroom version 1.0 was released in the first quarter of fiscal 2007, and quickly became the leading digital imaging solution targeted at professional photographers that delivers an efficient, powerful way to import, select, develop and showcase large volumes of digital images. Combined, Photoshop CS3, Photoshop CS3 Extended Edition and Photoshop Lightroom achieved strong market adoption and revenue results during the year.

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. As part of the CS3 launch, we released new versions of our dynamic media products in the third quarter of fiscal 2007. A key part of this release was the delivery of our new Adobe Creative Suite Production Premium suite for both Windows and Macintosh platforms. In addition to various new features and ease-of-use improvements found in each of the new versions of the individual products, we improved support for output of video for the Flash Player ("FLV") in our family of digital video products to leverage the broad, increased adoption of FLV on the Web as a means to deliver compelling video content. These new features, combined with the enhanced FLV support and increased adoption of our Flash Media Server solution which customers use to stream FLV over the Web, helped drive record revenue and more than 19% year-over-year growth for our dynamic media business in fiscal 2007. Looking to continue this momentum, we announced Adobe Flash Media Server 3 in September 2007 and we expect it will be broadly available in 2008.

In the professional page layout market, we continued to drive market share gains during the year with our Adobe InDesign product. In addition to success with the stand-alone desktop version, we also saw the InDesign ecosystem grow in fiscal 2007—our software and systems integrator partners successfully deployed new innovative workflow solutions based on InDesign and InDesign Server within enterprise-class newspaper, magazine and book publishing systems. Similarly, in the Web layout and Web development markets, and in the illustration markets, we achieved strong revenue results driven respectively by the delivery of new versions of our Adobe Dreamweaver and Adobe Illustrator products. Our success in these areas contributed to record annual revenue in these product categories.

In the second quarter of fiscal 2007, we acquired Scene7 Inc. ("Scene7"), a leading provider of hosted, on-demand, rich media delivery services. Scene7 provides businesses an easy-to-use, Web-based system to upload, manage, enhance and publish dynamic rich content and Scene7 solutions are utilized by many online retailers such as Sears, Macy's, Levi Strauss & Co., Anthropologie, OTTO UK, Lands' End and QVC.

During the fourth quarter of fiscal 2007, we released version 6.0 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 4.0 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. These new hobbyist product releases helped to generate record revenue in this product category during the year, and contributed year-over-year revenue growth to our overall creative business.

Creative Solutions Business Strategy

In fiscal 2008, our Creative Solutions strategy will continue to 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 continue to market the benefits of our Creative Suite family of products while our engineering teams work on future product versions with a focus on improved integration between our products, as well as enhanced functionality, and more efficient collaboration and workflow capabilities.

We believe that, while many customers have made or will make the switch to our Creative Suite products from individual applications over time, there continues to exist an opportunity of upgrading existing individual users to newer versions of these products. In addition, we will market the benefits of newer versions of the Creative Suite to existing users to drive upgrades. We also will market the features of these products to new users of creative applications—those who aspire to be creative professionals, or those at home or at work who wish to use the professional-level capabilities of our solutions, but are not trained creative professionals.

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 plan to add new features to our InDesign product, 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 and Photoshop Extended product offerings to meet the evolving needs of professional photographers, creative professional customers (including graphic designers, Web designers, and video producers), imaging enthusiasts and users in new markets such as engineering and medical imaging 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. In addition, we continue to believe many customers will license the Photoshop product capabilities via our Creative Suite products as opposed to licensing the stand-alone versions.

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 Flash Media Server 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.

To further our initiatives in digital video and motion graphics, we are extending our leadership position in Web video by enabling the delivery of HD television quality and premium audio content through the Adobe Flash Player. With new support for H.264 standard video (the same standard deployed in Blu-Ray and HD-DVD high definition video players) and High Efficiency AAC audio support, as well as hardware accelerated, multi-core enhanced full screen video playback, we believe we can improve customer workflows by enabling the creation and repurpose of high-quality Web video content. We also intend to release a generally available version of our new Adobe Media Player which enables viewers of video to enjoy content from broadcast television and Web video providers, giving them control to watch their favorite shows both online and offline in an engaging, customized video experience. We plan to work closely with partners who will support and offer solutions based on the new player, that will help enable new ways to brand, distribute, monetize, protect and measure media. 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 and Adobe Premiere Express products 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 Scene7 will help Adobe build out a robust Internet infrastructure, allowing us to further develop Scene7's brand-name customer list 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 Professional, Adobe Dreamweaver, Adobe Flash Professional, Adobe Illustrator, Adobe InDesign and Adobe Photoshop Extended technologies with file management and integration technology called Version Cue, a navigational control center called Adobe Bridge, a new feature called Adobe Device Central which allows users to produce innovative and compelling content for a broad range of mobile phones and consumer electronics devices, 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 Professional, Adobe Illustrator, Adobe InDesign and Adobe Photoshop technologies with file management and integration technology called Version Cue, a navigational control center called Adobe Bridge, a new feature called Adobe Device Central which allows users to produce innovative and compelling content for a broad range of mobile phones and consumer electronics devices, 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 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 Web site assets, build Web experiences and efficiently maintain and update Web content; combines Adobe Acrobat Professional, Adobe Contribute, Adobe Dreamweaver, Adobe Fireworks, Adobe Flash Professional, Adobe Illustrator and Adobe Photoshop Extended technologies with file management and integration technology called Version Cue, a navigational control center called Adobe Bridge, a new feature called Adobe Device Central which allows users to produce innovative and compelling content for a broad range of mobile phones and consumer electronics devices, 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, and Adobe Dynamic Link which enables intermediate rendering for a smother workflow between video production tools.

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 with file management and integration technology called Version Cue, a navigational control center called Adobe Bridge, a new feature called Adobe Device Central which allows users to produce innovative and compelling content for a broad range of mobile phones and consumer electronics devices, 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 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 with a navigational control center called Adobe Bridge, a new feature called Adobe Device Central which allows users to produce innovative and compelling content for a broad range of mobile phones and consumer electronics devices, 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, and Adobe Dynamic Link which enables intermediate rendering for a smoother workflow between video production tools.

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/productio n, DVD titling and digital audio production; includes Adobe Acrobat Professional, 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.

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, ensuring a wide degree of playback compatibility.

Adobe Fireworks—a professional graphics design tool for building interactive Web graphics; gives professional designers and developers tools for creating images that can be deployed to Web browsers and the Adobe Flash Player; integrates with Adobe Flash and Adobe Dreamweaver.

Adobe Flash Media Interactive Server—a new 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 the Flash Player; 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 new, 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 GoLive—Web design and publishing software that provides innovative tools that Web authors use to design, layout, produce and maintain content for Web sites and wireless Web devices without the need for complex multimedia programming.

Adobe Graphics Server—imaging server software used to create and maintain digital graphics and images on frequently updated data-driven content, such as Web sites and printed catalogs, by automating the creation and the reuse of images; integrates with content management and e-commerce systems to automate workflows, and eliminates the tedious manual tasks of refining and reformatting images for specific purposes.

Adobe Illustrator—a vector-based illustration design tool used to create compelling graphic artwork for print publications and the Web.

Adobe InCopy—an editorial tool for collaboration between writers, editors and copy-fitters; Adobe InCopy is a companion to Adobe InDesign.

Adobe Kuler—a Web-hosted application designed to work as a stand-alone application, and, to complement Adobe Creative Suite by enabling color palette exploration, inspiration, experimentation and sharing.

Adobe InDesign—a page-layout application for publishing professionals; based on an open, object-oriented architecture it 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.

CEO BACKGROUND

Edward W. Barnholt Mr. Barnholt served as President and Chief Executive Officer of Agilent Technologies, Inc., a measurement company, from March 1999 to March 2005 and as its Chairman of the Board from November 2002 until his retirement in March 2005. From 1990 to 1999, Mr. Barnholt served in several executive positions at the Hewlett-Packard Company, a computer and electronics company, including serving as Executive Vice President and General Manager of its Measurements Organization. Mr. Barnholt currently serves on the Board of Directors of eBay Inc. and as Chairman of the Board of KLA-Tencor Corporation. Mr. Barnholt holds a B.S. and a M.S. in electrical engineering from Stanford University. 64 2005

Michael R. Cannon Mr. Cannon currently serves as President, Global Operations for Dell Inc., a computer systems manufacturer and services provider. Prior to joining Dell in February 2007, Mr. Cannon was the President and Chief Executive Officer, and served on the Board of Directors, of Solectron Corporation, an electronic manufacturing services company, which he joined in January 2003. From July 1996 until joining Solectron, Mr. Cannon served as the President and Chief Executive Officer of Maxtor Corporation, a disk drive manufacturer. During this time, Mr. Cannon also served on Maxtor's Board of Directors. He served on the Board of Directors of Seagate Technology, which acquired Maxtor in May 2006, until February 2007 when he resigned. Mr. Cannon studied mechanical engineering at Michigan State University and completed the Advanced Management Program at Harvard Business School. 55 2003

James E. Daley Mr. Daley has been an independent consultant since his retirement in July 2003 from Electronic Data Systems, or EDS, an information technology service company. Mr. Daley served as Executive Vice President and Chief Financial Officer of EDS from March 1999 to February 2003, and as its Executive Vice President of Client Solutions, Global Sales and Marketing from February 2003 to July 2003. From 1963 until his retirement in 1998, Mr. Daley was with Price Waterhouse, L.L.P., an accounting firm, where he served as Co-Chairman—Operations and Vice-Chairman—Internation al from 1988 to 1998. Mr. Daley currently serves on the Board of Directors of The Guardian Life Insurance Company of America, a mutual insurance company. Mr. Daley holds a B.B.A. from Ohio University. 66 2001

Charles M. Geschke Dr. Geschke was a founder of Adobe and has served as our Chairman of the Board since September 1997, sharing that office with John E. Warnock. He was our Chief Operating Officer from December 1986 until July 1994 and our President from April 1989 until his retirement in April 2000. Dr. Geschke holds a Ph.D. in Computer Science from Carnegie Mellon University. 68 1983

Shantanu Narayen Mr. Narayen currently serves as our President and Chief Executive Officer. He joined Adobe in January 1998 as Vice President and General Manager of our 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 our Chief Executive Officer and joined our Board of Directors. Mr. Narayen serves on the Board of Directors of Metavante Technologies, Inc. Mr. Narayen holds a bachelor's degree in electronics engineering from Osmania University in India, a master's degree in computer science from Bowling Green State University and a master's degree in Business Administration from the Haas School of Business. 44 2007

Delbert W. Yocam Mr. Yocam has been an independent consultant since his retirement as Chairman of the Board and Chief Executive Officer of Borland Software Corporation, a software delivery optimization company, where he served from December 1996 through April 1999. Prior to joining Borland, Mr. Yocam held positions at Tektronix, Inc., a provider of test, measurement and monitoring solutions and services, and Apple, Inc., a hardware and software company. Mr. Yocam holds an M.B.A. from California State University, Long Beach, and a B.A. in Business Administration from California State University, Fullerton. 64 1991

MANAGEMENT DISCUSSION FROM LATEST 10K

The following discussion (presented in millions, except where indicated) should be read in conjunction with our consolidated financial statements and notes thereto. The share and per share data below have been adjusted to give effect to our stock split as of May 23, 2005.

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 2008. 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.

ACQUISITION OF MACROMEDIA

On December 3, 2005, we completed the acquisition of Macromedia for approximately $3.5 billion. The discussions in this section of this Report for fiscal 2007, as well as the financial statements contained herein, reflect the impact of the acquisition.


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 and mobile software and services used by creative professionals, designers, knowledge workers, high-end consumers, OEM partners, developers and enterprises for creating, managing, delivering and engaging with compelling content and experiences across multiple operating systems, devices and media. We distribute our products through a network of distributors and dealers, VARs, systems integrators, ISVs and OEMs, direct to end users and through our own Web site 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, 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.


CRITICAL ACCOUNTING ESTIMATES

In preparing our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America 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 estimates with the Audit Committee of the Board of Directors. These accounting estimates, critical to understanding our results of operations, are as follows:

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.

Our consulting revenue is 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, thus materially impacting our financial position and results of operations.

Stock-based Compensation

We account for stock-based compensation in accordance with SFAS 123R. Under the fair value recognition provisions of this statement, 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, restricted stock 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, 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.

See Note 11 of our Notes to Consolidated Financial Statements for information regarding the SFAS 123R disclosures.

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.

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. We are currently under examination by the Internal Revenue Service for our fiscal 2001, 2002 and 2003 tax returns, primarily related to our intercompany transfer pricing. 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 2007

During fiscal 2007, our software and technologies continued to redefine how people engage with ideas and information—anytime, anywhere and through any medium. Our solutions drove strong revenue and earnings growth during the year.

In our Creative Solutions segment, we generated strong year-over-year growth based on the release of our new Creative Suite version 3 family of products. Consisting of six new Creative Suite products and thirteen individual applications, our Creative Suite 3 product launch during the year was the largest in our 25-year history. In addition, we achieved solid growth in digital imaging and digital video hobbyist markets with the introduction of new versions of our Adobe Photoshop Elements and Adobe Premiere Elements products.

In our Knowledge Worker segment, we achieved solid year-over-year growth based on continued adoption of our Acrobat 8 family of products. We also continued to grow our Acrobat Connect business which provides real-time collaboration capabilities via the Web utilizing our Adobe Flash Player.

Our Enterprise and Developer segment also achieved solid results in 2007, generating record revenue and gaining broad market acceptance in the categories of Document Services and RIAs with our LiveCycle and Flex technologies.

Our Mobile and Device business achieved strong year-over-year growth due to the ongoing success we have had targeting mobile operators, handset manufacturers and consumer electronic device manufactures with our Flash Lite and Flash Cast technologies.

In our Other segments, revenue decreased slightly compared to fiscal 2006 due primarily to lower revenue associated with some of our legacy products in our Print and Classic Publishing segment. Our PostScript printing technology, a key part of our Other segment revenue, generated year-over-year growth.

MANAGEMENT DISCUSSION FOR LATEST QUARTER


The following discussion (unaudited and presented in millions, except share and per share amounts) should be read in conjunction with the condensed consolidated financial statements and notes thereto.

In addition to historical information, this Quarterly Report on Form 10-Q 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 entitled “Risk Factors” in Part II, Item 1A. You should carefully review the risks described herein and in other documents we file from time to time with the SEC, including the Annual Report on Form 10-K for fiscal 2007 and the other Quarterly Reports on Form 10-Q filed by us in fiscal 2008. 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 Quarterly Report on Form 10-Q. 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 and mobile software and services used by creative professionals, designers, knowledge workers, high-end consumers, OEM partners, developers and enterprises for creating, managing, delivering and engaging with compelling content and experiences across multiple operating systems, devices and media. We distribute our products through a network of distributors and dealers, value-added resellers (“VARs”), systems integrators, independent software vendors (“ISVs”) and OEMs, direct to end users and through our Web site 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, the Middle East and Africa (“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.

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 Web site at www.adobe.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC Web site at www.sec.gov.

OPERATIONS OVERVIEW

Effective in the first quarter of fiscal 2008, to better align our engineering and marketing efforts, we merged our Knowledge Worker Solutions segment with our Enterprise Solutions segment to form our new Business Productivity Solutions business unit. However, under the requirements of SFAS 131, Knowledge Worker Solutions and Enterprise Solutions are separate reportable segments. In addition, we moved responsibility for Flex Builder, Flex SDK and our ColdFusion product line to our Platform segment from our Enterprise Solutions segment. The prior year information has been updated to reflect this product movement.

During the third quarter of fiscal 2008, we continued to focus on driving revenue growth and increasing market share of our products through the continued delivery of comprehensive software and technology solutions that meet the evolving needs of our customers.

In our Knowledge Worker Solutions segment, we achieved a fourth consecutive quarter of record revenue with our Acrobat family of products in the third quarter of fiscal 2008. Helping drive this achievement was the successful launch of version 9 of our Acrobat family of products in major languages across the world.

In our Enterprise Solutions segment, we also achieved record revenue and 29% year-over-year growth as we continued to focus on delivering innovative products and solutions for our enterprise customers.

In our Creative Solutions segment, revenue declined year-over-year due to the timing of the release of new product versions. In the third quarter of fiscal 2007, we completed the release of many new versions of our Creative Suite 3 (“CS3”)

family of products. In the third quarter of fiscal 2008, we began preparing for the next launch of our creative professional products, including the pre-release of newer versions of some of these products. We achieved solid results with our hobbyist
products, Photoshop Elements and Premiere Elements, and we also had strong results with our Scene7 business in the third quarter of fiscal 2008.

Our Mobile and Device Solutions segment achieved record revenue in the third quarter of fiscal 2008 due to the success we have had targeting mobile operators, handset manufacturers and consumer electronic device manufactures with our Flash Lite and Flash Cast technologies. On May 1, 2008, we announced the Open Screen Project. The project aims to enable a consistent runtime environment that will remove barriers for developers and designers as they publish content and applications across desktops and consumer devices, including phones, mobile internet devices (“MIDs”) and set top boxes. As part of the project, we will be removing some restrictions on the use of some of our technology specifications and publishing several technology protocols. We will also be removing the license fees on the next major releases of Adobe Flash Player and Adobe AIR for devices. Accordingly, we expect revenue from Mobile and Device Solutions to decrease in the fourth quarter of fiscal 2008 as well as to continue to decrease following the next major release of these products scheduled for fiscal 2009. We would expect this decrease to be offset in time by an increased demand for tooling products, server technologies, hosted services and applications.

Our Platform business performed strongly, resulting in significant year-over-year revenue growth and our Print Publishing business segment also achieved modest year-over-year revenue growth.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our condensed 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, goodwill impairment and income taxes have the greatest potential impact on our condensed 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.

With the exception of our adoption of FIN 48, there have been no other significant changes in our critical accounting policies and estimates during the nine months ended August 29, 2008 as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended November 30, 2007.

Revenue from Creative Solutions decreased $51.9 million during the three months ended August 29, 2008 as compared to the three months ended August 31, 2007. This decrease was driven largely by a 15% decline in Creative Suites related revenue, offset in part by an increase of approximately 10% in Photoshop revenue. Revenue from Creative Solutions increased $235.8 million during the nine months ended August 29, 2008 as compared to the nine months ended August 31, 2007. This increase resulted from a 15% increase in Creative Suites revenue and a 23% increase in Photoshop revenue.

The year-over-year decrease in Creative Solutions revenue in the third quarter of fiscal 2008 was due primarily to the timing of the release of new product versions. The year-over-year increase in Creative Solutions revenue during the first three quarters of fiscal 2008 was due to an increase in certain unit average selling prices offset by a slight decrease in the number of units sold as compared to the first three quarters of fiscal 2007.

Revenue from Knowledge Worker Solutions increased $41.2 million and $75.5 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007, primarily due to the successful launch of our Acrobat 9 family of products in the third quarter of fiscal 2008. Additionally, revenue increased due to an increase in volume licensing by enterprise customers as well as increases in certain unit average selling prices and in the number of units sold for the three and nine months ended August 29, 2008 as compared to the three and nine months ended August 31, 2007.

Revenue from Enterprise Solutions increased $14.9 million and $37.0 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007. The increase was primarily due to a larger number of enterprise solution transactions at a higher average transaction size during both the three and nine months ended August 29, 2008 compared with the corresponding periods is in the prior fiscal year.

Revenue from Mobile and Device Solutions increased $14.5 million and $25.9 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007. The increase was primarily due to increased revenue from Flash Lite OEM licensing due to continued strong adoption of Flash enabled devices. On May 1, 2008, we announced the Open Screen Project. The project aims to enable a consistent runtime environment that will remove barriers for developers and designers as they publish content and applications across desktops and consumer devices, including phones, MIDs and set top boxes. As part of the project, we will be removing some restrictions on the use of some of our technology specifications and publishing several technology protocols. We will also be removing the license fees on the next major releases of Adobe Flash Player and Adobe AIR for devices. Accordingly, we expect revenue from Mobile and Device Solutions to decrease in the fourth quarter of fiscal 2008 as well as to continue to decrease following the next major release of these products scheduled for fiscal 2009. We would expect this decrease to be offset in time by an increased demand for tooling products, server technologies, services and applications.

Revenue from Platform increased $12.9 million and $36.7 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007. The increase was primarily due to increased revenue from our Flex Builder, Flash Player and ColdFusion products.

Overall revenue for the three and nine months ended August 29, 2008 increased when compared to the three and nine months ended August 31, 2007 primarily due to continued adoption of our CS3 and LiveCycle families of products and continued licensing of our Acrobat family of products – including the launch of our new Acrobat 9 products in the third quarter of fiscal 2008. Licensing of our Mobile and Device products and Platform products also contributed to the increase.

Revenue in the Americas increased $28.9 million and $127.8 million during the three and nine months ended August 29, 2008, compared to the three months and nine months ended August 31, 2007, due to solid demand, as well as strong licensing of our products in the education market and the Acrobat 9 product launch in the third quarter of fiscal 2008.

Revenue in EMEA increased $14.5 million and $206.4 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007. Additionally, revenue in EMEA measured in U.S. dollars increased approximately $28.7 million and $83.2 million during the three and nine months ended August 29, 2008, respectively, over the same reporting periods last year. Fluctuations in EMEA revenue during the three and nine months ended August 29, 2008 as compared to the same periods in fiscal 2007, were primarily attributable to favorable foreign exchange, a decline in CS revenue due primarily to the timing of the release of new product versions with our CS family of products and normal seasonal weakness in Europe during the third quarter of fiscal 2008.

Revenue in Asia decreased $7.8 million during the three months ended August 29, 2008 compared to the three months ended August 31, 2007, due primarily to the timing of the release of new product versions with our CS family of products and, to a lesser extent, normal seasonal weakness in Asia during the third quarter of fiscal 2008. Revenue in Asia increased $83.7 million during the nine months ended August 29, 2008 compared to the nine months ended August 31, 2007. The increase primarily resulted from licensing of our CS family of products, our LiveCycle products, and our Platform products. Additionally, revenue in Asia measured in U.S. dollars increased approximately $10.1 million and $32.0 million during the three and nine months ended August 29, 2008, respectively, over the same reporting periods last year.

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. We had minimal backlog at the end of the third quarter of fiscal 2008. The comparable backlog at the end of the second quarter of fiscal 2008 was approximately 4% of second quarter fiscal 2008 revenue.

Operating Expenses for the Three and Nine Months Ended August 29, 2008 and August 31, 2007

Research and Development, Sales and Marketing and General and Administrative Expenses

The increase in compensation costs for the three months ended August 29, 2008 is due to increased headcount in all functions. This increase is offset in part by a decrease in profit sharing and employee bonuses based on company performance to date, when compared to the three months ended August 31, 2007.

CONF CALL

Mike Saviage

Good afternoon and thank you for joining us today. Joining me on the call are Adobe's President and CEO, Shantanu Narayen, as well as Mark Garrett, Executive Vice President and CFO.

In the call today, we’ll discuss Adobe's fourth quarter and fiscal year 2008 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately one hour ago. If you need a copy of the press release, you can go to adobe.com under the company and press links to find an electronic copy.

Before we get started, I want to emphasize that some of the information discussed in this call, particularly our revenue and operating mile targets and our forward-looking product plans, is based on information as of today, December 16, 2008, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued today, as well as Adobe's SEC filings.

During this call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is available in our earnings release and on our investor relations website.

Call participants are advised that the audio of this conference call is being broadcast live over the Internet in Acrobat Connect Pro and is also being recorded for playback purposes. An archive of the call will be made available in Acrobat Connect Pro under Adobe's investor relations website for approximately 45 days and is the property of Adobe Systems. The audio and archive may not be re-recorded or otherwise reproduced or distributed without prior written permission from Adobe Systems.

I will now turn the call over to Shantanu.

Shantanu Narayen

Thanks, Mike and good afternoon. Today we are reporting fourth quarter revenue of $915.3 million, and annual revenue of $3.58 billion. Despite a difficult economic environment in 2008, we were able to achieve record revenue and double-digit growth for the sixth consecutive year.

Looking at 2008 as a whole, and knowing now that we were in the midst of a recession that spanned our entire fiscal year, it is clear that we executed well and achieved some notable results.

First, our creative business had a solid year, as we delivered the largest and most innovative product release in Adobe's history with CS4. We grew our leadership position in the creative tools market and diversified by establishing growth businesses in the areas of dynamic media with Flash-based video and hosted services with our Scene 7 business.

In business productivity solutions, Acrobat had a good year, with double-digit revenue growth and the launch of Acrobat 9. Our LiveCycle enterprise business had a great year, achieving more than a quarter of a billion dollars in revenue with 32% annual growth.

We established the Adobe Flash platform as the standard for how the world engages with ideas and information across platforms, devices, and operating systems. Our ubiquitous client technologies, including Flash player, Air, and Reader uniquely position Adobe as a technology leader in a world in which the explosion of rich digital content is accelerating.

These accomplishments helped us to meet our goal of 13% revenue growth in fiscal 2008 and our operational focus allowed us to greatly exceed our profit targets for the year. In a few minutes, I will comment on Q4 highlights in more detail but first I will turn it over to Mark for a review of our financial results.

Mark Garrett

Thanks, Shantanu. I will first comment on our full year fiscal 2008 results. Adobe achieved record revenue of $3.580 billion in the year compared to $3.158 billion in fiscal 2007. This represents 13% year-over-year revenue growth, consistent with the target we provided at the outset of the year. GAAP operating income in fiscal 2008 was $1.028 billion, compared to $858 million in fiscal 2007. GAAP operating margin for the year was 28.7% compared to 27.2% in fiscal 2007. Non-GAAP operating income in fiscal 2008 was $1.435 billion, compared to $1.209 billion in fiscal 2007, and representing 19% year-over-year growth.

Our non-GAAP operating margin was 40.1% in fiscal 2008, compared to 38.3% in fiscal 2007, and exceeding our original target for the year.

Adobe's annual GAAP net income was $872 million in fiscal 2008 compared to $724 million in fiscal 2007. Adobe's annual non-GAAP net income was $1.136 billion in fiscal 2008 compared to $966 million in fiscal 2007. GAAP diluted earnings per share in fiscal 2008 were $1.59 compared to $1.21 in fiscal 2007. Non-GAAP diluted earnings per share were $2.07 in fiscal 2008 compared to $1.61 in fiscal 2007.

Given the economic environment throughout the year, including the year-long recession in the U.S., we are pleased that our execution and cost controls helped to deliver strong growth in profitability and an expansion in our operating margin.

Looking at our businesses in fiscal 2008, we achieved revenue growth in every segment. Our Creative Solutions business achieved revenue of $2.07 billion, which represents 9% growth when compared to fiscal 2007. Revenue for our business productivity business grew to $1.06 billion, which represents 16% year-over-year growth. Within our business productivity segment, Knowledge Worker revenue was $810.9 million, representing 11% year-over-year growth, and enterprise revenue was $253.1 million in fiscal ’08, which represents 32% year-over-year growth.

Our mobile business achieved revenue of $113.1 million, which represents 115% year-over-year growth. Other revenue was $329.8 million, which was 15% higher than last year. Within other segment revenue, our platform business achieved $118.5 million in revenue, which was growth of 46%, and print and publishing revenue was $211.3 million, with growth of 3%.

Now I would like to discuss our quarterly results. For the fourth quarter of fiscal 2008, Adobe achieved revenue of $915.3 million. This compares to $911.2 million reported for the fourth quarter of fiscal 2007 and $887.3 million reported last quarter.

GAAP operating expenses for the fourth quarter of fiscal 2008 were $555.7 million compared to $556.9 million last quarter. Non-GAAP operating expenses were $476.8 million compared to $475.1 million last quarter.

GAAP operating income for the fourth quarter of fiscal 2008 was $273.2 million, or 29.8% of revenue. This compares to GAAP operating income of $275.8 million, or 30.3% of revenue in the fourth quarter of fiscal 2007, and $219.5 million, or 24.7% of revenue last quarter.

Non-GAAP operating income in the fourth quarter of fiscal 2008 was $374.9 million, or 41% of revenue. This compares to non-GAAP operating income of $362.2 million, or 39.7% of revenue in the fourth quarter of fiscal 2007, and $351.9 million, or 39.7% of revenue last quarter.

Adobe's effective GAAP tax rate for the quarter was 11% and our non-GAAP tax rate was 16%. Our fourth quarter GAAP and non-GAAP tax rates benefited from two favorable items -- a current quarter catch-up related to the reinstatement of the United States research and development credit and a favorable tax court settlement.

GAAP net income for the fourth quarter of fiscal 2008 was $245.9 million, compared to $222.2 million reported in the fourth quarter of fiscal 2007, and $191.6 million last quarter.

Non-GAAP net income was $320.9 million, compared to $289.6 million reported in the fourth quarter of fiscal 2007 and $269.1 million last quarter.

GAAP diluted earnings per share for the fourth quarter of fiscal 2008 were $0.46 based on 534.9 million weighted average shares. This compares with GAAP diluted earnings per share of $0.38 reported in the fourth quarter of fiscal 2007 based on 587.9 million weighted average shares, and GAAP diluted earnings per share of $0.35 reported last quarter, based on 541.3 million weighted average shares.

Non-GAAP diluted earnings per share for the fourth quarter of fiscal 2008 were $0.60. This compares with non-GAAP diluted earnings per share of $0.49 in the fourth quarter of fiscal 2007, and $0.50 reported last quarter.

I will now discuss Adobe's revenue in Q4 by business segment.

Creative Solutions segment revenue was $508.7 million, compared to $570.5 million in Q4 of fiscal 2007 and $493.6 million last quarter. On a year-over-year basis, this represents a decline of 11% as demand for our new CS4 products was impacted by the global economic crisis.

Business Productivity solutions segment revenue was $278 million, compared to $246.4 million in Q4 of fiscal 2007, and $283.5 million last quarter. On a year-over-year basis, this represents 13% growth.

Within Business Productivity Solutions, our Knowledge Worker revenue was $199 million in Q4 of fiscal 2008, compared to $192.1 million in Q4 of fiscal 2007 and $218 million last quarter. On a year-over-year basis, this represents 4% growth.

The other component of our business productivity segment is our enterprise business. In Q4, enterprise revenue was a record $79 million compared to $54.3 million in Q4 of fiscal 2007 and $65.5 million last quarter. On a year-over-year basis, this represents 45% growth.

Mobile and device segment revenue was $48.2 million compared to $13.5 million in Q4 of fiscal 2007 and $27.5 million last quarter. Revenue in mobile and device was strong due to demand for Flash Lite and renewal of several agreements with major OEMs.

Finally, other segment revenue was $80.4 million, compared to $80.8 million in Q4 of fiscal 2007 and $82.7 million last quarter.

Turning to our geographic segments, results on a percent of revenue basis were as follows: the Americas, 46%; Europe, 34%; and Asia, 20%. The global economic situation affected demand for our products in all geographies, particularly North America and Europe.

Employees at the end of the fourth quarter totaled 7,544 versus 7,623 at the end of the third quarter. The reason for the decline was due to the departure of summer interns. The recently announced reduction of approximately 600 employees, or 8% of our global workforce, occurring in fiscal 2009 will begin to affect our headcount and operating expenses run-rate in Q1.

Our trade DSO in the fourth quarter of fiscal 2008 was 46 days. This compares to 32 days in Q4 of fiscal 2007 and 34 days last quarter. DSO was higher in Q4 than in recent quarters due to the shipment of CS4 in the second half of the quarter.

In regard to our global channel inventory position, we ended the quarter within company policy.

During the quarter, cash flow from operations was $338 million. Our ending cash and short-term investment position was $2 billion, the same as the end of last quarter.

In Q4, we repurchased a total of 6.2 million shares at a total cost of $206.3 million. During the fiscal year, we repurchased a total of 58.3 million shares at a total cost of $2.14 billion. We will continue to utilize this program to return excess cash to shareholders and offset dilution from employee stock programs.

This concludes my discussion of our financial results. I would now like to comment on our financial targets for the first quarter of fiscal 2009.

We are targeting a Q1 revenue range of $800 million to $850 million. Given the current economic climate and normal seasonality, we expect revenue in each of our business segments to decline sequentially. In our mobile business, we expect revenue of approximately $10 million to $12 million, due primarily to the transition to the open screen project. In addition, we are targeting a GAAP operating margin range of 26% to 28% and a non-GAAP operating margin range of 37% to 38%. These margin targets reflect the cost-savings and impact of our restructuring activities, as applicable.

We are targeting our Q1 share count to be 530 million to 534 million shares. For non-operating income, we are targeting a range of $3 million to $5 million on both a GAAP and non-GAAP basis. For our GAAP and non-GAAP effective tax rates, with the reinstatement of the R&D tax credit, we are targeting approximately 24%.

These targets lead to a GAAP earnings per share range of $0.30 to $0.35 per share and a non-GAAP earnings per share range of $0.43 to $0.47.

As a reminder, all of our targets assume a baseline of existing economic and currency conditions in our major markets. This concludes my section. I would now like to turn the call back over to Shantanu.

Shantanu Narayen

Thanks, Mark. I will spend the next few minutes reviewing highlights from Q4. During the quarter, we shipped a new Creative Suite 4 product family in English, French, and German. CS4 is a milestone release of our industry-leading design and development software for virtually every creative workflow and represents our most comprehensive software release ever.

Industry and press response to CS4 has been excellent. Design Premium and Master Collection suites both received excellent ratings from CNET and Photoshop received a perfect five out of five rating, and an Editor’s Choice award from PC Magazine.

We believe CS4 is a stellar release, with new product innovations, time-saving features, and workflow enhancements that will improve productivity. These capabilities will generate opportunities for Adobe to up-sell and cross-sell in our existing customer base and expand our reach to new customer segments and markets.

While customer feedback has been positive, given the current economic climate, we believe CS4 adoption in the short-term will be muted when compared to prior cycles. This is reflected in our early results, with CS4 revenue down more than 20% when compared to the equivalent CS3 period.

In Q1, we will be shipping the Japanese version as well as many of the other languages. We will be focusing on enhanced demand generation programs to drive awareness and adoption in 2009.

Dynamic media continues to be a key growth focus for Adobe. In November, we announced Version 3.5 of Flash Media Server. This new release, combined with the latest advancements in Flash Player and our CS4 authoring tools, are helping to deliver breakthrough interactive content, applications, and video on the web.

Recent high profile wins include Disney.com, the number one ranked kids entertainment and family community destination on the web, which is leveraging Adobe video solutions to create and deliver rich, interactive experiences. Over the past several months, Disney.com has experienced record online traffic levels, as viewers logged on to watch full-length movies delivered via the Adobe Flash platform.

Telecom Italia, which has chosen the Cisco content delivery system with Internet streaming platform, powered by Adobe Flash streaming technology to deliver live television channels and on-demand content through it’s web portal.

And MLB.com, the official website of Major League Baseball, which has selected the Flash Platform to deliver all of its live and on-demand video offerings for two years beginning in 2009. In addition, MLB.com will provide a downloadable rich Internet application built using Adobe Air, so baseball fans can access additional features outside the web browser.

In our hobbyist business, we shipped version 7 of Photoshop Elements and Premiere Elements in Q4, updates to the world’s best-selling consumer photo-editing and video-editing software products.

In our business productivity solutions segment, our year-over-year growth was driven by solid performance in both our Knowledge Worker business and our enterprise business. LiveCycle achieved record revenue with 45% year-over-year growth. Our engagement value proposition is resonating with our enterprise customers, even in this tough spending environment.

In our mobile business, we announced that OpenTV, a leading provider of advanced television services, will integrate Flash as an additional application environment, further enhancing web browsing capabilities in the living room and strengthening the development of rich applications and user interfaces.

In our platform business, we released Flash Player 10 in October. Interactive designers and developers can leverage new expressive features and visual performance improvements to deliver the most compelling web applications, interactive content and high quality video to users across multiple browsers in all major operating systems.

In November, we held our annual MAX conference in San Francisco, followed by MAX Europe in early December. MAX was an enormous success with record attendance. We made several exciting announcements related to the Adobe Flash platform. These include Adobe Flash Catalyst in a technology collaboration to optimize and enable Flash Player and Adobe Air for [inaudible] powered devices.

As the breadth of our solutions increases, we are rapidly becoming a strategic partner to larger enterprise customers. This is enabling Adobe to drive more revenue per customer across their organizations. For example, BBC in the U.K. signed a broad agreement with Adobe that includes LiveCycle for finance and production process and rights management, Flash and Air for its next generation online video content, creative tools and services for content development and production, and Acrobat Connect integration for training, support, and collaboration. Our field organization will continue to drive these strategic enterprise level agreements as part of our go-to-market strategy.

In closing, as we enter fiscal 2009, we will continue to make strategic investments that will position us well for the future while managing our business to ensure consistent profitability. Our strategic priorities are advancing the Adobe Flash platform as the preferred solution for how the world engages with ideas and information; investing in our core businesses, including Creative Suite and Acrobat, to maintain our leadership position through innovation and continue our expansion into new customer segments and geographical markets; and focusing on our growth businesses, which include LiveCycle, Connect Pro, Scene 7, and Dynamic Media as areas we believe have significant potential for future growth.

While 2009 will be a challenging year because of the macroeconomic environment, we believe the key market trends driving our business remain intact. By continuing to innovate and deliver through solid execution, we believe Adobe is well-positioned for future growth.

Thank you for joining us today. Now I will turn the call back over to Mike.

Mike Saviage

Thanks, Shantanu. Before we get to Q&A, we wanted to update you on some changes being made to our business segments as we enter fiscal year 2009. We are breaking out our former other segment into two separate segments called platform and print and publishing. We are also combining our former mobile and device solutions segment with our newly named platform segment. These segment reporting changes reflect changes we have made internally in terms of how we manage these businesses.

We will continue to report our creative solutions business as we have in the past, and we will continue to report our business productivity solutions business into two distinct segments, knowledge worker and enterprise, as we have done in the past. Our investor data sheet will reflect these changes starting with our Q1 FY2009 earnings report in March, and we’ll show adjusted segment revenue for prior reported periods.

In regard to today’s earnings report, we have posted several new documents on our investor relations webpage today. They include today’s earnings release and our updated investor data sheet, which also includes a listing of the new fiscal 2009 segment classifications by product area. To access these documents and other investor relation information, you can go to our website at www.adobe.com/adbe. For those who wish to listen to a play-back of today’s conference call, a web-based Acrobat Connect archive of the call will be available from the IR page on Adobe.com later today. Alternatively, you can listen to a phone replay by calling 888-203-1112. Use conference ID number 1394828. Again, that phone number is 888-203-1112, with ID number 1394828. International callers should dial 719-457-0820. The phone play-back service will be available beginning at 4:00 p.m. Pacific Time today and ending at 4:00 p.m. Pacific Time on Friday, December 19, 2008.





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