Description
Filed with the SEC from April 12 to April 18:
Adobe Systems (ADBE)
ValueAct Capital disclosed that it now owns 30,303,362 shares (6.1%), after buying 5,681,700 shares from March 20 through April 11 at $32.64 to $33.50 apiece.
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 software and services used by creative professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing and engaging with compelling content and experiences across multiple operating systems, devices and media. We market and license our software directly to enterprise customers through our sales force and to end users through app stores and our own website at www.adobe.com. We also distribute our products through a network of distributors, value-added resellers (“VARs”), systems integrators, independent software vendors (“ISVs”), retailers and original equipment manufacturers (“OEMs”). In addition, we license our technology to hardware manufacturers, software developers and service providers for use in their products and solutions. We offer some of our products via a Software-as-a-Service (“SaaS”) model (also known as a hosted model or “cloud-based” model) as well as through term subscription and pay-per-use models. Our software runs on personal computers (“PCs”) and server-based computers, as well as on smartphones, tablets and other devices, depending on the product. We have operations in the Americas, Europe, Middle East and Africa (“EMEA”) and Asia.
Adobe was originally incorporated in California in October 1983 and was reincorporated in Delaware in May 1997. We maintain executive offices and principal facilities at 345 Park Avenue, San Jose, California 95110-2704. Our telephone number is 408-536-6000. We maintain a website at www.adobe.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC website at www.sec.gov.
BUSINESS OVERVIEW
For more than 29 years, innovation in Adobe software and technologies has transformed how individuals, businesses and governments communicate and interact with their constituents. Across the markets and customers we serve, Adobe helps its customers create and deliver the most compelling content and web applications in a streamlined workflow, and optimize those experiences and marketing activities for greater return on investment. Our solutions turn ordinary interactions into compelling and valuable digital experiences, across media and devices, anywhere, anytime.
While we continue to market and license a broad portfolio of products and solutions, we are focusing our greatest business investment in two strategic growth areas:
Digital Media—providing tools and solutions that enable individuals, small businesses and enterprises to create, publish, promote and monetize their content anywhere. Our customers include traditional content creators, web application developers and digital media professionals, as well as their management in marketing departments and agencies, companies and publishers. This is the core of what we have delivered for over 20 years, but we are evolving rapidly to provide these customers with more complete and integrated workflow to handle the plethora of new devices, formats and business models that are emerging.
Digital Marketing—providing solutions and services for how digital advertising and marketing are created, managed, executed, measured and optimized. Our customers include digital marketers, advertisers, publishers, merchandisers, web analysts, chief marketing officers and chief revenue officers. We process over a trillion web transactions a quarter via SaaS, helping our customers with analytics and reporting, multi-channel campaign execution, delivering personalized web experiences and media monetization. This complements our digital media franchise, bringing together the art of creating content with the science of measuring and optimizing it, enabling our customers to achieve optimal business outcomes.
To capitalize on the potential in these two market areas, we made several significant changes in key areas of our business during the past year. We have made investments to increase the deployment of some of our products through new SaaS models, and to augment how we license our software to include a new subscription model for our creative products. We believe these business model changes will allow us to target new users, as well as increase the amount of recurring revenue we generate as a percent of our total revenue—creating the potential for our business to be more predictable.
We have also invested in the development of new products that address emerging customer needs in these two market areas and represent new revenue sources. In addition, we made several acquisitions during the past year to broaden the scope of our solutions. We believe the new products we are bringing to market, combined with products and technologies we have acquired, will make our Digital Media and Digital Marketing solutions more compelling to our customers.
While we have increased our investments in some products areas, we have similarly reduced our focus on some of our products at the same time. The resulting saved costs from the reduced focus in some product areas is being redeployed as investments into research and development, and into sales and marketing to drive higher growth potential in our two market focus areas.
Because of this transformation we have undertaken, as we enter fiscal year 2012 we believe we are uniquely positioned to be a leader in the emerging Digital Media and Digital Marketing categories where our mission to change the world through digital experiences resonates well with customers.
PRODUCTS AND SERVICES OVERVIEW
Entering fiscal 2011, we organized our products and services into the following businesses: Creative and Interactive Solutions, Digital Media Solutions, Digital Enterprise Solutions, Omniture, and Print and Publishing. We reported our financial results based on these named businesses, with the exception of Digital Enterprise Solutions which we reported in two segments: Knowledge Worker and Enterprise.
Effective in the first quarter of fiscal 2012, we modified our segments due to changes we made in how we operate our business. We have combined our prior Creative and Interactive Solutions segment with our Digital Media Solutions segment and our Knowledge Worker segment, and named it Digital Media. We also renamed our Omniture segment to Digital Marketing and combined it with our prior Enterprise segment. These changes reflect our focus on the two strategic growth opportunities outlined above. Our Print and Publishing segment, which contains many of our more mature products and solutions, continues to be reported as it was in fiscal 2011.
Accordingly, our three fiscal 2012 reportable segments will be Digital Media, Digital Marketing, and Print and Publishing. We will adjust our reportable segments at the beginning of fiscal 2012 to reflect these changes.
The following overview begins with a discussion of our results organized by our fiscal 2011 reportable segments. It follows with an explanation of our market opportunities and a discussion of our strategies to address our market opportunities in fiscal 2012 and beyond, organized by our new fiscal 2012 reportable segments.
Fiscal 2011 Business Segments Results
Creative and Interactive Solutions Fiscal 2011 Business Summary
Our Creative Suite 5 (“CS5”) family of products, which first shipped in fiscal 2010, incorporates Adobe technologies used by creative professionals into five Creative Suite editions and thirteen individual creative products, providing tools for the various creative disciplines our customers desire. Entering fiscal 2011, the adoption of CS5 was greater than that of its predecessor, Creative Suite 4 (“CS4”), due to its new feature set as well as an improvement in the general macro-economic environment. This caused overall revenue for CS5 to be stronger than revenue achieved with CS4 for a comparable period of time since their respective release dates.
In the second quarter of fiscal 2011, we delivered Creative Suite 5.5 (“CS5.5”), the newest release of our creative toolset. This release marked the start of a plan to deliver annual releases for our Creative Suite family of products to address the needs of our customers on a more timely basis than our prior release cadence of eighteen to twenty months. CS5.5 provided numerous feature enhancements, particularly in the areas of digital publishing for tablets, mobile content creation, website creation with new HTML version 5 (“HTML5”) capabilities, and advanced video content creation capabilities.
The launch of CS5.5 also included the introduction of a new subscription offering to attract more price-sensitive customers to license Creative Suite products. We believe the subscription option is valued by customers who seek the flexibility and affordability of monthly payments. Adoption of the new CS5.5 subscription offering indicated it attracted new customers to the product, many of whom would otherwise not have licensed it, as well as enticed existing users of older versions of the product to upgrade to the latest version.
Based on the success of CS5.5, as of the end of fiscal 2011 we experienced an increase in combined revenue for CS5 and CS5.5 when compared to similar periods of availability for CS4 and its predecessor Creative Suite 3 (“CS3”). In addition, CS5.5 maintained the strong run-rate of the Creative Suite business that was established by CS5, achieving one of the goals of moving to annual releases with the product family. Adoption of CS5 and CS5.5 in the education market was also strong during the year, resulting in record education revenue and contributing to the success of these releases.
Revenue derived from licensing of our Creative Suite editions equated to approximately 70% of the total revenue generated with the Creative Suite family of products. Licensing of individual Creative and Interactive products such as Dreamweaver, Flash Professional, Illustrator and InDesign also contributed to the success of CS5.5 in fiscal 2011.
In the fall of 2010 we introduced a beta of the Adobe Digital Publishing solution, an online, hosted publishing solution that works with InDesign and enables magazine and newspaper publishers to deliver engaging, branded reading experiences of their publications to mobile and tablet devices. In the Spring of 2011, we delivered an update to our Digital Publishing solution and made it generally available to all enterprise customers. Our Digital Publishing solution combines hosted services, flexible e-commerce models to sell single issues and subscriptions directly to consumers through mobile marketplaces, and analytics capabilities based on our Adobe Digital Marketing Suite. Content is created and enhanced through integration with CS5.5 to enable a complete workflow for the creation and delivery of content to mobile device users via our Content Viewer technology. As of the end of fiscal 2011, more than 1,200 published titles have been delivered to online app stores and newsstands, reflecting the success and strong adoption of Digital Publishing solution by our publishing customers. In the third quarter of fiscal 2011, we also delivered Digital Publishing Single Edition, which can be used by customers that want to publish their content as apps in app stores on an individual and ad hoc basis.
To help our customers create new content leveraging advancements in web standards, in the spring of 2011 we introduced a beta release of Adobe Edge, which is a new web motion and interaction design tool that allows designers to bring animated content to websites, using web standards like HTML5, JavaScript, and CSS3. We also delivered a beta release of Adobe Muse, which allows web designers to design and publish HTML websites without writing HTML code. Combined, more than 500,000 downloads of these pre-release tools occurred in fiscal 2011, indicating a strong desire of our customers to utilize these solutions and their capabilities.
At our Adobe MAX user conference in October 2011, we announced Adobe Creative Cloud, which is a comprehensive offering of creative services, Creative Suite desktop applications, new content creation touch-based apps for use on tablets, and community features that together, we believe, will redefine the content creation process. The full offering, marketed through a subscription model with attractive monthly pricing, is expected to be available in 2012 and is discussed later in the "Digital Media Market Opportunities and Strategies" section.
During fiscal 2011, we advanced the capabilities of our Adobe Flash Player with the release of Flash Player 11. Flash Player is a cross-platform, browser-based application runtime that provides viewing of expressive applications, content, and videos across most browsers and operating systems. New features in version 11 include 3D accelerated graphic support, native 64-bit operating system support, improved software encoding for cameras and protected HTTP dynamic streaming.
Adoption of Flash Player during the year remained strong on PC platforms as well as non-PC platforms where it is supported. Due to the frequent downloads of our client technologies such as Flash Player, we generate revenue through OEM relationships with companies where we include their technologies as part of the download offerings of our client technologies on PCs. In fiscal 2011, this download revenue grew when compared to fiscal 2010.
In fiscal 2011, we also broadened the reach of our cross-platform client technology named Adobe AIR. The AIR runtime enables developers to deploy standalone applications built with HTML, JavaScript, ActionScript, Flex, Flash Professional, and Flash Builder across platforms and devices - including Android, BlackBerry, iOS devices, personal computers, and televisions.
There have been approximately 500 million AIR downloads on PCs, with more than 12,000 apps built using AIR that are available on app stores such as Android Marketplace, Apple App Store, Blackberry App World and Amazon Appstore. In October, we extended the capabilities of AIR to mobile devices with the delivery of AIR version 3. AIR 3 enables 3D accelerated graphics rendering, native extensions for developers to utilize platform-specific features as part of their AIR code, and other platform-specific development features.
In the online video and rich media delivery market, we continued innovating to maintain and grow our market leadership position. During the year we achieved strong adoption of Adobe Flash Media Server (“FMS”) version 4.5 which now delivers media to multiple platforms including Apple iOS devices via RTMP and HTTP methods. Based on this adoption, we achieved strong year-over-year revenue for our family of media server products in fiscal 2011.
In the fourth quarter of fiscal 2011, we announced the acquisitions of TypeKit, for making expressive type available anywhere on the web, and Nitobi, the maker of PhoneGap. Nitobi is the creator and primary contributor to the open source PhoneGap framework, which allows developers to create device native mobile applications using HTML, CSS, and JavaScript. Both TypeKit and PhoneGap are planned to be integral parts of our Creative Cloud offering in fiscal 2012, which is discussed later in this section.
Digital Media Solutions Fiscal 2011Business Summary
Entering fiscal 2011, our Digital Media Solutions business, like our Creative and Interactive Solutions business, benefited from the strength of the CS5 release that occurred in fiscal 2010. In May of 2011, as noted earlier, we delivered CS5.5, the newest release of our creative toolset which included new versions of our video authoring products. Adoption of the new CS5.5 products in the second, third and fourth quarters of fiscal 2011, as well as ongoing adoption of our imaging products helped to drive year-over-year revenue growth in our Digital Media Solutions segment during the entire fiscal year.
Throughout fiscal 2011, we maintained our focus on making Photoshop the standard by which all other imaging products are measured. As an essential tool in most creative customer's workflow, many of our customers acquire its capabilities through the purchase of suites of our products, the management of which was handled by our Creative and Interactive Solutions business.
With our Photoshop family of products, including Photoshop Extended, Photoshop, and Photoshop Lightroom, we experienced year-over-year revenue growth during fiscal 2011. The new release of Lightroom version 3, used by professional and amateur photographers to manage, enhance and share their photographs, achieved strong adoption in its targeted market.
Similarly, our video authoring tools—including Adobe Premiere Pro, After Effects, Adobe Audition, and the suite containing them called Creative Suite Production Premium—achieved strong market share and revenue growth during the year due to new CS5.5 versions of the products and strong execution by our sales and marketing teams to position Adobe as a leader in the overall digital video solutions category.
During the fourth quarter of fiscal 2011, we released version 10 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 10 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 Photoshop Elements and Adobe Premiere Elements to target hobbyists who desire both applications in one affordable package. Adoption of these new releases helped to drive year-over-year revenue growth in this category during the fiscal year.
To capitalize on the increased use of smartphones and tablets, we released versions of applications which run on mobile devices, including Photoshop Express, which is a popular application and available for free on devices running Google Android OS and Apple iOS; Adobe Revel (formerly Adobe Carousel), which gives users access to their entire photo library from their Apple devices along with photo-processing features based on Lightroom; and Photoshop Touch—our newest tablet application leveraging the brand and capabilities of our popular Photoshop imaging franchise, which was made available for a fee on Android-based devices in the fall of 2011 and is expected to be released for Apple iOS-based devices in 2012.
In the fourth quarter of fiscal 2011 we announced our acquisition of Auditude, a video ad serving platform that increases the capabilities of our video product solution to enable our customers to deliver and monetize their media to PC, mobile, tablet and TV-screens that are connected to the internet. We believe the addition of Auditude strengthens our offering to help customers monetize their media assets on the web.
Knowledge Worker Fiscal 2011 Business Summary
In fiscal 2011, our Knowledge Worker revenue increased when compared to fiscal 2010 due to strong adoption of our Acrobat X release that launched in the fourth quarter of fiscal 2010. Helping to drive this performance was the success of our corporate and volume licensing programs, which allow customers who want to deploy Acrobat to many users to do so through convenient license acquisition and installation means. In addition, an increase in pricing resulted in an increase in the average selling price (“ASP”) of Acrobat during the year and helped to drive the revenue growth achieved.
Acrobat X, the tenth major version of our Acrobat family of products, contains new and improved features that improve user productivity, streamline document reviews, collect data in fillable PDF forms, protect PDF documents and other content, and share PDF documents with others. The product also extends the value proposition for knowledge workers to communicate and collaborate more effectively. During the year, we further extended the value of PDF to mobile devices with the release of native Adobe Reader applications for Android and iOS. We also increased our focus on security to guard against malicious use of PDFs and Adobe Reader. This focus included the regular release of product updates to address new security threats that were identified throughout the year, and also increased awareness by our customers to stay more current with the latest release of our products.
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 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., a global online marketplace and as Chairman of the Board of KLA-Tencor Corporation, a provider of process control and yield management solutions. Mr. Barnholt holds a B.S. and a M.S. in Electrical Engineering from Stanford University. 68 2005
As the former President, Chief Executive Officer and Chairman of the Board of Agilent, as well as a former senior executive with Hewlett-Packard, Mr. Barnholt possesses significant leadership and operational experience, including on matters particularly relevant to companies with complex technology and international issues. As a board member of two other public companies, Mr. Barnholt also has strong corporate governance expertise and a global business perspective.
Michael R. Cannon
Mr. Cannon served as President, Global Operations of Dell Inc., a computer systems manufacturer and services provider, from February 2007 until his retirement in January 2009, and as a consultant to Dell from January 2009 until January 31, 2011. Prior to joining Dell, Mr. Cannon was the President and Chief Executive Officer of Solectron Corporation, an electronic manufacturing services company, from January 2003 until February 2007. From July 1996 until January 2003, Mr. Cannon served as the Chief Executive Officer of Maxtor Corporation, a disk drive and storage systems manufacturer. Prior to joining Maxtor, Mr. Cannon held senior management positions at IBM, a global services, software and systems company. Mr. Cannon also serves on the board of directors of Seagate Technology Public Limited Company, a disk drive and storage solutions company, Lam Research Corporation, a semiconductor wafer fabrication equipment company and Elster Group SE, a metering and smart grid technology company. Mr. Cannon studied mechanical engineering at Michigan State University and completed the Advanced Management Program at Harvard Business School.
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Mr. Cannon’s career spans 35 years in technology. As a result of his former senior executive positions at Dell, Solectron and Maxtor, Mr. Cannon possesses a significant amount of leadership and worldwide operational experience with companies in high technology industries. In addition, as Chief Executive Officer with financial oversight responsibilities at both Solectron and Maxtor, Mr. Cannon possesses extensive financial expertise. Also, from his service as a board member with three other public companies, Mr. Cannon offers our Board a deep understanding of corporate governance matters.
James E. Daley
Mr. Daley has been an independent consultant since his retirement in July 2003 from Electronic Data Systems Corporation (“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. Mr. Daley holds a B.B.A. from Ohio University. 70 2001
With more than 35 years of service with the international accounting firm Price Waterhouse, L.L.P., as well as his past service as the Chief Financial Officer of a publicly traded global technology company, Mr. Daley brings to the Board extensive financial expertise related to the business and financial issues facing large global technology corporations, as well as a comprehensive understanding of international business and corporate governance matters.
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. 72 1983
As a co-founder of Adobe and its former President and Chief Operating Officer, Dr. Geschke has experience growing Adobe from a start-up to a large publicly traded company. His nearly 20 years of executive and technological leadership at Adobe provides the Board with significant leadership, operations and technology experience, as well as important perspectives on innovation, management development, and global challenges and opportunities. As Chairman of the Board of Directors of Adobe, Dr. Geschke has a strong understanding of his role as a director and a broad perspective on key industry issues and corporate governance matters.
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 effective December 2007, he was appointed our Chief Executive Officer and joined our Board of Directors. Mr. Narayen serves on the board of directors of Dell Inc. Mr. Narayen holds a B.S. in Electronics Engineering from Osmania University in India, a M.S. in Computer Science from Bowling Green State University and an M.B.A. from the Haas School of Business, University of California, Berkeley. 48 2007
As our President and Chief Executive Officer and as an Adobe employee for well over a decade, Mr. Narayen brings to the Board extensive leadership and industry experience, including a deep knowledge and understanding of our business, operations and employees, the opportunities and risks faced by Adobe, and management’s current and future strategy and plans. As a member of the board of directors of Dell, he also has a strong understanding of his role as a director and a broad perspective on key industry issues and corporate governance matters.
Robert K. Burgess
Mr. Burgess has been an independent consultant since December 2005. He served as Chief Executive Officer of Macromedia, Inc., a provider of internet and multimedia software, from November 1996 to January 2005. He also served on the board of directors of Macromedia from November 1996 until December 2005, as Chairman of the Board of Macromedia from July 1998 until December 2005 and as Executive Chairman of Macromedia from January 2005 until December 2005, when Macromedia was acquired by Adobe. Prior to joining Macromedia, Mr. Burgess held key executive positions at Silicon Graphics, Inc., a graphics and computing company, and from 1991 to 1995 served as Chief Executive Officer and a member of the board of directors of Alias Research, Inc., a publicly traded 3D software company, prior to its acquisition by Silicon Graphics. Mr. Burgess currently serves on the board of IMRIS Inc., a provider of image guided therapy solutions, and NVIDIA Corporation, a provider of programmable graphics processing technologies. Mr. Burgess holds a B.Com. from McMaster University in Canada. 54 2005
As the former Executive Chairman, Chief Executive Officer and Chairman of the Board of Macromedia, as well as several other executive positions, Mr. Burgess has extensive executive leadership experience, as well as extensive knowledge of operational, financial and strategic issues. He also possesses significant experience with business issues in technology organizations as a result of his former executive roles. With more than 15 years experience as a board member of publicly traded companies, Mr. Burgess also has a broad understanding of the role and responsibilities of the board and valuable insight on a number of significant issues in the technology industry.
Daniel Rosensweig
Mr. Rosensweig is currently President, Chief Executive Officer and a member of the board of directors of Chegg.com, an online textbook rental company. Prior to joining Chegg.com in February 2010, Mr. Rosensweig served as President and Chief Executive Officer of RedOctane, a business unit of Activision Publishing, Inc., a developer, publisher and distributor of interactive entertainment and leisure products. Prior to joining RedOctane in March 2009, Mr. Rosensweig was an Operating Principal at the Quadrangle Group, a private investment firm. Prior to joining the Quadrangle Group in August 2007, Mr. Rosensweig served as Chief Operating Officer of Yahoo! Inc., an internet content and service provider, which he joined in April 2002. Prior to joining Yahoo!, Mr. Rosensweig was President of CNET Networks, Inc., an interactive media company, which he joined in October 2000. Mr. Rosensweig served for 18 years with Ziff-Davis, an integrated media and marketing services company, including roles as President and Chief Executive Officer of its subsidiary ZDNet, from 1997 until 2000 when ZDNet was acquired by CNET. Mr. Rosensweig holds a B.A. in Political Science from Hobart College.
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As a result of his current executive position at Chegg.com, as well as his former positions as a senior executive at global media and technology organizations, Mr. Rosensweig provides the Board with extensive and relevant executive leadership, worldwide operations and technology industry experience.
Robert Sedgewick
Dr. Sedgewick has been a Professor of Computer Science at Princeton University since 1985, where he was the founding Chairman of the Department of Computer Science and is now the William O. Baker Professor of Computer Science. From 1975 to 1985, he served on the faculty at Brown University. Dr. Sedgewick holds a Ph.D. in Computer Science from Stanford University. 65 1990
Professor Sedgewick has held visiting research positions at Xerox PARC in Palo Alto, Institute for Defense Analyses in Princeton and INRIA in Rocquencourt, France. He regularly serves on journal editorial boards and organizes program committees of conferences and workshops on data structures and the analysis of algorithms held throughout the world.
Professor Sedgewick’s research interests include mathematical analysis of algorithms, design of data structures and algorithms and program visualization. He has published widely in these areas and is the author of several books. His latest books are “An Introduction to Programming in Java - An Interdisciplinary Approach” (with Kevin Wayne), “Analytic Combinatorics” (with Philippe Flajolet) and a new fourth edition of “Algorithms,” the latest in a series that has sold over one-half million copies.
As a Professor and the founding Chairman of the Department of Computer Science, Dr. Sedgewick brings to the Board extensive leadership experience and expertise on technology issues in the software industry. Also, as the holder of a Ph.D. degree in Computer Science from Stanford University, and the author of numerous research papers and widely used series of textbooks on algorithms, Dr. Sedgewick offers relevant expertise on a broad range of technology issues. As a result of his membership on Adobe’s Board, Dr. Sedgewick also possesses experience with a range of corporate governance issues.
John E. Warnock
Dr. Warnock was a founder of Adobe and has been our Chairman of the Board since April 1989. Since September 1997, he has shared the position of Chairman with Charles M. Geschke. Dr. Warnock served as our Chief Executive Officer from 1982 until December 2000. From December 2000 until his retirement in March 2001, Dr. Warnock served as our Chief Technical Officer. Dr. Warnock currently serves as Chairman of the Board of Salon Media Group, Inc. Dr. Warnock holds a Ph.D. in Electrical Engineering from the University of Utah. 71 1983
As a co-founder of Adobe and its former Chief Executive Officer and Chief Technical Officer, Dr. Warnock has experience growing Adobe from a start-up to a large publicly traded company. His nearly 20 years of executive and technological leadership at Adobe provides the Board with significant leadership, operations and technology experience, as well as important perspectives on innovation, management development, and global challenges and opportunities. As Chairman of the Board of Directors of Adobe and Salon, Dr. Warnock has a strong understanding of his role as a director and a broad perspective on key industry issues and corporate governance matters.
MANAGEMENT DISCUSSION FROM LATEST 10K
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 software and services used by creative professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing and engaging with compelling content and experiences across multiple operating systems, devices and media. We market and license our software directly to enterprise customers through our sales force, and to end users through app stores and our own website at www.adobe.com. We also distribute our products through a network of distributors, value-added resellers (“VARs”), systems integrators, independent software vendors (“ISVs”), retailers and original equipment manufacturers (“OEMs”). In addition, we license our technology to hardware manufacturers, software developers and service providers for use in their products and solutions. We offer some of our products via a Software-as-a-Service (“SaaS”) model (also known as a hosted model or “cloud-based” model) as well as through term subscription and pay-per-use models. Our software runs on personal computers (“PCs”) and server-based computers, as well as on smartphones, tablets and other devices, depending on the product. We have operations in the Americas, Europe, Middle East and Africa (“EMEA”) and Asia.
ACQUISITIONS
On January 13, 2012 , we completed the acquisition of privately held Efficient Frontier, a multi-channel ad buying and optimization company. Efficient Frontier will be integrated into our Digital Marketing reportable segment for financial reporting purposes beginning in the first quarter of fiscal 2012 . See Note 2 and Note 21 of our Notes to Consolidated Financial Statements for further information regarding this acquisition.
During fiscal 2011 , we completed six business combinations and two asset acquisitions with aggregate purchase prices totaling approximately $328.3 million . We have included the financial results of the business combinations in our consolidated results of operations beginning on the respective acquisition dates however, the impact of these acquisitions was not material to our consolidated balance sheets and results of operations.
On October 28, 2010 , we completed the acquisition of Day, a provider of WEM, digital asset management and social collaboration solutions based in Basel, Switzerland and Boston, Massachusetts for approximately $248.3 million . We have included the financial results of Day in our consolidated results of operations beginning on the acquisition date however the impact of this acquisition was not material to our consolidated balance sheets and results of operations in fiscal 2010. Following the closing, we integrated Day as a product line within our Enterprise segment for financial reporting purposes.
On October 23, 2009 , we completed the acquisition of Omniture, an industry leader in web analytics and online business optimization based in Orem, Utah, for approximately $1.8 billion . Accordingly, we have included the results of the business operations acquired from Omniture in our consolidated results of operations beginning on October 24, 2009. Coinciding with the integration of Omniture, we created a new reportable segment for financial reporting purposes.
See Note 2 of our Notes to Consolidated Financial Statements for further information regarding these acquisitions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.
We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, stock-based compensation, business combinations, goodwill impairment and income taxes have the greatest potential impact on our consolidated financial statements. These areas are key components of our results of operations and are based on complex rules requiring us to make judgments and estimates, so we consider these to be our critical accounting policies.
Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.
Revenue Recognition
Our revenue is derived from the licensing of software products, associated software maintenance and support plans, custom software development, non-software related hosting services, consulting services, training and technical support.
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.
We enter into multiple element revenue arrangements in which a customer may purchase a combination of software, upgrades, maintenance and support, hosting services, and consulting.
For our software and software-related 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 the fair value of each undelivered element using vendor-specific objective evidence ("VSOE"), and (4) allocate the total price among the various elements. VSOE of fair value is used to allocate a portion of the price to the undelivered elements and the residual method is used to allocate the remaining portion to the delivered elements. Absent VSOE, revenue is deferred until the earlier of the point at which VSOE of fair value exists for any undelivered element or until all elements of the arrangement have been delivered. However, if the only undelivered element is maintenance and support, the entire arrangement fee is recognized ratably over the performance period. 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.
We determine VSOE for each element based on historical stand-alone sales to third parties or from the stated renewal rate for the elements contained in the initial arrangement. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range.
We have established VSOE for our software maintenance and support services, custom software development services, consulting services and training.
In October 2009, the FASB amended the accounting standards for certain multiple deliverable revenue arrangements to: 1)provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated; 2) require an entity to allocate revenue in an arrangement using best estimated selling price ("BESP") of deliverables if a vendor does not have VSOE of selling price or third-party evidence ("TPE") of selling price; and 3) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.
We elected to early adopt this accounting guidance at the beginning of our first quarter of fiscal 2010 on a prospective basis for applicable transactions originating or materially modified after November 27, 2009 . The application of these new accounting standards, if applied in the same manner to the year ended November 27, 2009 , would not have had a material impact on total net revenues for that fiscal year.
For multiple element arrangements containing our non-software services, we must (1) determine whether and when each element has been delivered; (2) determine fair value of each element using the selling price hierarchy of VSOE of fair value, TPE BESP, as applicable, and (3) allocate the total price among the various elements based on the relative selling price method.
For multiple-element arrangements that contain software and non-software elements such as our hosted offerings, we allocate revenue to software or software-related elements as a group and any non-software elements separately based on the selling price hierarchy. We determine the selling price for each deliverable using VSOE of selling price, if it exists, or TPE of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use its BESP for that deliverable. Once revenue is allocated to software or software-related elements as a group, it follows historic software accounting guidance. Revenue is then recognized when the basic revenue recognition criteria are met for each element.
When we are unable to establish selling prices using VSOE or TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We are generally unable to establish VSOE or TPE for non-software elements and as such, we use BESP. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings.
We determine BESP for a product or service by considering multiple factors including, but not limited to major product groupings, geographies, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. Significant pricing practices taken into consideration include historic contractually stated prices, volume discounts where applicable and our price lists.
Given the nature of our transactions, which are primarily software and software-related, our go-to-market strategies and our pricing practices, total net revenue as reported during the year ended December 2, 2011 is materially consistent with total net revenue that would have been reported if the transactions entered into or materially modified after November 27, 2009 were subject to previous accounting guidance.
In addition to multiple element arrangements, we must estimate certain royalty revenue amounts due to the timing of securing information from our customers. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, our assumptions and judgments regarding future products and services as well as our estimates of royalty revenue could differ from actual events, thus materially impacting our financial position and results of operations.
Product revenue is recognized when the above criteria are met. We reduce the revenue recognized for estimated future returns, price protection and rebates at the time the related revenue is recorded. In determining our estimate for returns and in accordance with our internal policy regarding global channel inventory which is used to determine the level of product held by our distributors on which we have recognized revenue, we rely upon historical data, the estimated amount of product inventory in our distribution channel, the rate at which our product sells through to the end user, product plans and other factors. Our estimated provisions for returns can vary from what actually occurs. Product returns may be more or less than what was estimated. The amount of inventory in the channel could be different than what is estimated. Our estimate of the rate of sell through for product in the channel could be different than what actually occurs. There could be a delay in the release of our products. These factors and unanticipated changes in the economic and industry environment could make our return estimates differ from actual returns, thus materially impacting our financial position and results of operations.
We offer price protection to our distributors that allows for the right to a credit if we permanently reduce the price of a software product. When evaluating the adequacy of the price protection allowance, we analyze historical returns, current sell-through of distributor and retailer inventory of our products, changes in customer demand and acceptance of our products and other related factors. In addition, we monitor the volume of sales to our channel partners and their inventories. Changes to these assumptions or in the economic environment could result in higher returns or higher price protection costs in subsequent periods.
In the future, actual returns and price protection may materially exceed our estimates as unsold products in the distribution channels are exposed to rapid changes in consumer preferences, market conditions or technological obsolescence due to new platforms, product updates or competing products. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, if our estimates change, our returns and price protection reserves would change, which would impact the total net revenue we report.
We recognize revenues for hosting services that are based on a committed number of transactions ratably beginning on the date the customer commences use of our services and continuing through the end of the customer term. Over-usage fees, and fees billed based on the actual number of transactions from which we capture data, are billed in accordance with contract terms as these fees are incurred. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Our consulting revenue is recognized on a time and materials basis 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.
Stock-based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.
For our ongoing traditional employee equity awards, we currently use the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan (“ESPP”) shares. The determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest rate, estimated forfeitures and expected dividends.
We estimate the expected term of options granted by calculating the average term from our historical stock option exercise experience. We estimate the volatility of our common stock by using implied volatility in market traded options. Our decision to use implied volatility was based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. We base the risk-free interest rate on zero-coupon yields implied from U.S. Treasury issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option pricing model. We estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
If we use different assumptions for estimating stock-based compensation expense in future periods or if actual forfeitures differ materially from our estimated forfeitures, the change in our stock-based compensation expense could materially affect our operating income, net income and net income per share.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, assumed equity awards, as well as to in-process research and development based upon their estimated fair values at the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, deferred revenue obligations and equity assumed.
Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
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future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and acquired developed technologies and patents;
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expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed;
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the acquired company’s trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company’s product portfolio; and
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discount rates.
In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the deferred revenue obligations assumed. The estimated fair value of the support obligations is determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. The estimated costs to fulfill the obligations are based on the historical costs related to fulfilling the obligations.
In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the equity awards assumed. The estimated fair value is determined utilizing a modified binomial option pricing model which assumes employees exercise their stock options when the share price exceeds the strike price by a certain dollar threshold. If the acquired company has significant historical data on their employee’s exercise behavior, then this threshold is determined based upon the acquired company’s history. Otherwise, our historical exercise experience is used to determine the exercise threshold. Zero coupon yields implied by U.S. Treasury issuances, implied volatility for our common stock and our historical forfeiture rate are other inputs to the binomial model.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
Goodwill Impairment
We complete our goodwill impairment test on an annual basis, during the second quarter of our fiscal year, or more frequently, if changes in facts and circumstances indicate that an impairment in the value of goodwill recorded on our balance sheet may exist. In order to estimate the fair value of goodwill, we typically estimate future revenue, consider market factors and estimate our future cash flows. Based on these key assumptions, judgments and estimates, we determine whether we need to record an impairment charge to reduce the value of the asset carried on our balance sheet to its estimated fair value. Assumptions, judgments and estimates about future values are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy or our internal forecasts. Although we believe the assumptions, judgments and estimates we have made in the past have been reasonable and appropriate, different assumptions, judgments and estimates could materially affect our reported financial results.
We completed our annual impairment test in the second quarter of fiscal 2011 and determined there was no impairment. In the fourth quarter of fiscal 2011, we announced changes to in our business strategy which resulted in a reduction of forecasted revenue for certain of our products. We performed an update to our goodwill impairment test for the Enterprise reporting unit and determined there was no impairment.. The results of our annual impairment test and our update in the fourth quarter for our Enterprise reporting unit indicate there is no significant risk of future material goodwill impairment in any of our reporting units.
Accounting for Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset.
Our assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. In addition, we are subject to the continual examination of our income tax returns by the IRS and other domestic and foreign tax authorities, including a current examination by the IRS for our fiscal 2008 and 2009 tax returns. These examinations are expected to focus on our intercompany transfer pricing practices as well as other matters. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of the current and any future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.
Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.
We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. In addition to providing for U.S. income taxes on earnings from the U.S., we provide for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries' earnings are considered permanently reinvested outside the U.S. While we do not anticipate changing our intention regarding permanently reinvested earnings, if certain foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings.
Our income tax expense has differed from the tax computed at the U.S. federal statutory income tax rate due primarily to discrete items and to earnings considered as permanently reinvested in foreign operations. Our future effective tax rates could be unfavorably affected by changes in the tax rates in jurisdictions where our income is earned, by changes in, or our interpretation of, tax rules and regulations in the jurisdictions in which we do business, by unanticipated decreases in the amount of earnings in countries with low statutory tax rates, by lapses of the availability of the U.S. research and development tax credit, or by changes in the valuation of our deferred tax assets and liabilities.
Recent Accounting Pronouncements
See Note 1 of our Notes to Consolidated Financial Statements for information regarding the effect of new accounting pronouncements on our financial statements.
Recent Accounting Pronouncements Not Yet Effective
There have been no new accounting pronouncements not yet effective that have significance, or potential significance, to our consolidated financial statements.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
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 software and services used by creative professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing and engaging with compelling content and experiences across multiple operating systems, devices and media. We market and license our software directly to enterprise customers through our sales force, and to end users through app stores and our own website at www.adobe.com. We also distribute our products through a network of distributors, value-added resellers (“VARs”), systems integrators, independent software vendors (“ISVs”), retailers and original equipment manufacturers (“OEMs”). In addition, we license our technology to hardware manufacturers, software developers and service providers for use in their products and solutions. We offer some of our products via a Software-as-a-Service (“SaaS”) model (also known as a hosted model or “cloud-based” model) as well as through term subscription and pay-per-use models. Our software runs on personal computers (“PCs”) and server-based computers, as well as on smartphones, tablets and other devices, depending on the product. We have operations in the Americas, Europe, Middle East and Africa (“EMEA”) and Asia.
We maintain executive offices and principal facilities at 345 Park Avenue, San Jose, California 95110-2704. Our telephone number is 408-536-6000. We maintain a website at www.adobe.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC website at www.sec.gov.
OPERATIONS OVERVIEW
Effective in the first quarter of fiscal 2012, we modified our segments due to changes in how we operate our business. We combined our Creative and Interactive Solutions segment with our Digital Media Solutions segment and our Knowledge Worker segment, and named it Digital Media. We also renamed our Omniture segment to Digital Marketing and combined it with our Enterprise segment. These changes reflect our focus on our two strategic growth opportunities. Our Print and Publishing segment, which contains many of our mature products and solutions, continues to be reported as it was in fiscal 2011. See Note 15 of our Notes to Condensed Consolidated Financial Statements for further information. Prior year information has been updated to reflect these changes.
For our first quarter of fiscal 2012, we reported solid financial results and executed against our two strategic growth areas, Digital Media and Digital Marketing, while continuing to market and license a broad portfolio of products and solutions.
Our Digital Media segment revenue decreased 4% year-over-year during the three months ended March 2, 2012 . The decrease was primarily due to a slowdown in our Creative business as customers appear to be delaying purchasing in anticipation of our upcoming Creative Suite 6 (“CS6”) launch.
Revenue in our Digital Marketing segment increased 22% year-over-year during the three months ended March 2, 2012 . Driving this success was continued adoption of our Digital Marketing Suite which includes our CQ Web Experience Management (“WEM”) offerings, coupled with revenue generated from products associated with our recent acquisition of Efficient Frontier.
Our Print and Publishing business segment revenue increased 2% year-over-year during the three months ended March 2, 2012 , primarily due to fees received for consulting services and royalties related to PostScript products.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.
We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, stock-based compensation, business combinations, goodwill impairment and income taxes have the greatest potential impact on our Condensed Consolidated Financial Statements. These areas are key components of our results of operations and are based on complex rules requiring 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.
There have been no significant changes in our critical accounting policies and estimates during the three months ended March 2, 2012 , 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 December 2, 2011 .
Localization costs decreased during the three months ended March 2, 2012 as compared to the three months March 4, 2011 primarily due to Acrobat X products that were fully amortized at the end of fiscal 2011 and Creative Suite 5 professional products that were fully amortized at the end of the third quarter of fiscal 2011. This decrease was offset in part by the launch of Creative Suite 5.5 products during the second quarter of fiscal 2011.
Cost of sales decreased during the three months ended March 2, 2012 as compared to the three months March 4, 2011 primarily due to a decrease in shrink-wrap revenue from our Creative Suite products.
Subscription
Cost of subscription revenue consists of expenses related to operating our network infrastructure, including depreciation expenses and operating lease payments associated with computer equipment, data center costs, salaries and related expenses of network operations, implementation, account management and technical support personnel, amortization of intangible assets and allocated overhead. We enter into contracts with third-parties for the use of their data center facilities and our data center costs largely consist of the amounts we pay to these third-parties for rack space, power and similar items.
Cost of subscription revenue increased during the three months ended March 2, 2012 as compared to the three months ended March 4, 2011 primarily due to increases in compensation and related benefits driven by additional headcount from our acquisition of Efficient Frontier as well as higher data center costs associated with our fiscal 2011 acquisitions.
Cash Flows from Investing Activities
Net cash used for investing activities of $437.7 million for the three months ended March 2, 2012 was primarily due to our acquisition of Efficient Frontier. Other uses of cash during the three months ended March 2, 2012 represented purchases of property and equipment and short-term investments, offset in part by sales and maturities of short-term investments.
Cash Flows from Financing Activities
Net cash used for financing activities of $68.5 million for the three months ended March 2, 2012 was primarily due to treasury stock repurchases offset in part by proceeds from our treasury stock issuances. See the section titled “Stock Repurchase Program” discussed below.
We expect to continue our investing activities, including short-term and long-term investments, venture capital, facilities expansion and purchases of computer systems for research and development, sales and marketing, product support and administrative staff. Furthermore, cash reserves may be used to repurchase stock under our stock repurchase program and to strategically acquire companies, products or technologies that are complementary to our business.
Other Liquidity and Capital Resources Considerations
Our existing cash, cash equivalents and investment balances may fluctuate during fiscal 2012 due to changes in our planned cash outlay, including changes in incremental costs such as direct and integration costs related to our acquisitions. Our intent is to permanently reinvest a significant portion of our earnings from foreign operations, and current plans do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. In the event funds from foreign operations are needed to fund operations in the United States and if U.S. tax has not already been previously provided, we would provide for and pay additional U.S. taxes in connection with repatriating these funds.
Cash from operations could also be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part II, Item 1A titled “Risk Factors”. However, based on our current business plan and revenue prospects, we believe that our existing balances, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for the next twelve months.
As of March 2, 2012 , the amount outstanding under the Notes was $1.5 billion . On March 2, 2012, we entered into a five-year $1.0 billion senior unsecured revolving credit agreement (the “Credit Agreement”), providing for loans to us and certain of our subsidiaries. As of March 2, 2012, there were no outstanding borrowings under this Credit Agreement and the entire $1.0 billion credit line remains available for borrowing. In connection with entering into the Credit Agreement, we have terminated and paid off all obligations under our previous credit agreement, dated as of February 16, 2007.
We use professional investment management firms to manage a large portion of our invested cash. External investment firms managed, on average, 76% of our consolidated invested balances during the first quarter of fiscal 2012 . The fixed income portfolio is primarily invested in corporate bonds and commercial paper, foreign government securities, money market mutual funds and repurchase agreements, municipal securities, U.S. agency securities and U.S. Treasury securities.
Stock Repurchase Program
We currently have authority granted by our Board of Directors to repurchase up to $1.6 billion in common stock through the end of fiscal 2012.
During the three months ended March 2, 2012 and March 4, 2011 , we entered into a structured stock repurchase agreement with a large financial institution, whereupon we provided them with a prepayment of $80.0 million and $125.0 million , respectively. We enter into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.
The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval and the average VWAP of our stock during the interval less the agreed upon discount. During the three months ended March 2, 2012 , we repurchased approximately 1.8 million shares at an average price of $30.07 through structured repurchase agreements entered into during the three months ended March 2, 2012 . During the three months ended March 4, 2011 , we repurchased approximately 2.5 million shares at an average price of $32.84 through structured repurchase agreements entered into during the three months ended March 4, 2011 .
Subsequent to March 2, 2012 , as part of our $1.6 billion stock repurchase program, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $225.0 million . This amount will be classified as treasury stock on our Condensed Consolidated Balance Sheets. Upon completion of the $225.0 million stock repurchase agreement, there is no remaining balance under our current authority, although the Board of Directors could grant additional authority in the future. See Note 10 and Note 16 of our Notes to Condensed Consolidated Financial Statements for further discussion of our stock repurchase program.
Refer to Part II, Item 2 in this report for share repurchases during the quarter ended March 2, 2012 .
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
We presented our contractual obligations in our Annual Report on Form 10-K for the fiscal year ended December 2, 2011 . Our principal commitments as of March 2, 2012 consist of obligations under operating leases, capital leases, royalty agreements and various service agreements. There have been no significant changes in those obligations during the three months ended March 2, 2012 . See Notes 12 and 13 of our Notes to Condensed Consolidated Financial Statements for more detailed information.
Notes
Interest on our Notes is payable semi-annually, in arrears on February 1 and August 1. At March 2, 2012 , our maximum commitment for interest payments under the Notes was $400.5 million for the remaining duration of the Notes.
Covenants
Our credit facility contains a financial covenant requiring us not to exceed a maximum leverage ratio. Our Almaden Tower lease includes certain financial ratios as defined in the lease agreements that are reported to the lessors quarterly. As of March 2, 2012 , we were in compliance with all of our covenants. Our Notes do not contain any financial covenants. We believe these covenants will not impact our credit or cash in the coming fiscal year or restrict our ability to execute our business plan.
Under the terms of our credit agreement and lease agreements, we are not prohibited from paying cash dividends unless payment would trigger an event of default or one currently exists. We do not anticipate paying any cash dividends in the foreseeable future.
Royalties
We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue.
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 first quarter fiscal year 2012 financial results. By now, you should have a copy of our earnings press release, which crossed the wire approximately 1 hour ago. If you need a copy of the press release, you can go to Adobe.com under the Company and Newsroom 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 model targets and our forward-looking product plans, is based on information as of today, March 19, 2012, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For 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 2 is available in today's earnings release and on our Investor Relations website in the investor data sheet. Call participants are advised that the audio of this conference call is being broadcast live over the Internet in Adobe Connect and is also being recorded for playback purposes. An archive of the call will be made available on Adobe's Investor Relations website for approximately 45 days and is the property of Adobe Systems. The audio and archive may not be rerecorded 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. Q1 revenue was within our targeted range for the quarter. We also achieved solid Q1 non-GAAP earnings per share as well as strong cash flow and growth in deferred revenue. At the outset of this year, we outlined our strategy to double down in 2 fast-growing markets, Digital Media and Digital Marketing.
In our Digital Media business, our strategy is to help customers create, publish and monetize their content on any device. Demand is building for our upcoming Creative Suite and Creative Cloud launches. And as a result, Creative Suite revenue was lower than expected in Q1.
In our Digital Marketing business, our strategy is to help marketers measure, manage and optimize their marketing investments for maximum return. Momentum continued with our Digital Marketing Suite during Q1 with year-over-year revenue growth exceeding 30%.
In our Digital Media business, recent research shows our customers are excited about our upcoming launch of Creative Suite and the Creative Cloud. Among Creative professional customers and students, we found that over 40% of those surveyed are waiting for the new release to upgrade. Our upcoming Creative Suite release will include major updates to all of the core CS products, including Photoshop, Premiere Pro, After Effects, InDesign, Illustrator and Dreamweaver. We have created significant anticipation for the release through a series of sneak peeks of great new features. One sneak featured a breakthrough Photoshop innovation called Content-Aware Move, which has driven more than 1 million online viewers on the YouTube Photoshop channel.
The upcoming CS release will also advance our HTML5 and mobile content creation and app development offerings where we see strong interest to help our customers deal with the complexity they face. All of this is on track for delivery late in Q2.
We continue to extend the creative process for tablets. We recently announced availability of Adobe Photoshop Touch for the iPad. Photoshop Touch, which is also available on Android tablets, offers core Photoshop features as well as new capabilities for creating and sharing images in an app custom built for tablets. Photoshop Touch is a central component of the Adobe Touch Apps, joining other popular iOS apps such as Adobe Revel and Adobe Ideas. New and updated versions of our 6 touch apps will be coming throughout this year.
In conjunction with our upcoming Creative Suite release, we will launch Adobe Creative Cloud, which will transform the creative process. Creative Cloud includes all of our key CS desktop products, web services such as online storage, Typekit for online fonts, Business Catalyst for website hosting e-commerce, connectivity with our new touch apps and powerful collaboration and social community features. With the subscription model, Creative Cloud users will also get frequent product updates and access to new, innovative solutions, such as Edge and Muse, for HTML5 content creation.
We believe Creative Cloud will transform our business model and drive higher revenue growth over time. This will happen through an expansion of our customer base by acquiring new users through a lower cost of entry as well as keeping existing customers current on our latest release. Success with this model will drive our revenue to be more recurring and predictable. We will continue to offer the perpetual licensing model as we transition our customers to this new subscription model.
Our Digital Publishing solution continued its strong momentum. As of Q1, approximately 600 publishers have delivered more than 1,500 applications for devices like the iPad, generating 16 million downloads of their apps. Using our analytics capabilities that help publishers understand the use of their apps, we recently announced that time spent by users of these digital publications has increased 70% over the last 6 months. We attribute this growth to the more sophisticated and engaging content publishers are delivering, as well as the continued adoption of tablets. We expect this growth to continue, particularly with the inclusion of the Single Edition of Digital Publishing in our Creative Cloud offering later this year and the upcoming release of InDesign with its innovative liquid layout capabilities.
In February, we announced the industry's first fully integrated digital video solution to power TV-like experiences for ad-driven videos via the Web. Code-named Project Primetime, this new solution delivers premium video and ad content consistently across all major platforms, including Apple iOS, Google Android, desktop operating systems and connected TVs.
Primetime is an end-to-end workflow that interconnects Adobe's streaming technologies, content protection, analytics and optimization with our recently acquired Auditude video advertising platform. For Adobe, it places us in the center of helping move premium video content and ad dollars online and represents a larger opportunity across many of our business areas.
Earlier this month, we introduced Lightroom 4, a major release of our digital photography workflow solution, helping amateur and professional photographers quickly import, manage, enhance and showcase their images. We lowered the price to broaden the potential user base for this market-leading product, and feedback and reviews and social commentary for the new release has been outstanding.
On Adobe Labs, we recently introduced Adobe Shadow for web designers and developers working on mobile projects. This new product enables easy pairing, synchronous browsing and efficient multi-device preview during mobile content creation and mobile app development. Adobe Shadow demonstrates our ongoing HTML5 innovation effort and leadership in the web community and addresses a critical need of designers and developers dealing with the complexity of digital media on multiscreens.
In Digital Marketing, we closed the acquisition of Efficient Frontier in January. This is a significant milestone as we continue to build out the value we are providing to digital marketers. Efficient Frontier predictably optimizes how to spend marketing dollars across search, display and social media platforms. It provides an ad buying capability for Facebook, offers real-time bidding for display advertising and expands our Digital Marketing Suite with a social marketing engagement platform to help customers manage their brand presence across the social Web. In Q1, customer acquisition momentum continued with our Digital Marketing Suite. Key customer wins included Fox, J. Crew, Electronic Arts, Samsung, British Petroleum, Citibank and Kohl's.
This week, we are hosting our Annual Digital Marketing Summit in Salt Lake City to an audience of approximately 4,000, nearly double the attendance last year. We will present our strategy and announce new solutions to lead in the fast-growing categories of social marketing, multichannel campaign execution, analytics and personalized experiences.
Later, I'll have some closing comments. Now I'll turn it over to Mark for a more detailed discussion of our Q1 results. Mark?
Mark Garrett
Thanks, Shantanu. In the first quarter of fiscal 2012, Adobe achieved revenue of $1,045,000,000. This compares to $1,028,000,000 reported in Q1 fiscal 2011 and $1,152,000,000 reported last quarter. In mid-January, we closed the acquisition of Efficient Frontier, and our Q1 results include $9.6 million in Efficient Frontier revenue.
Q1 GAAP operating expenses were $648 million compared to $617.7 million reported in Q1 fiscal 2011 and $789.7 million last quarter. Non-GAAP operating expenses in Q1 were $571.3 million compared to $539.5 million reported for Q1 fiscal 2011 and $611.9 million last quarter.
In Q1, Adobe's effective tax rate was 31.5% on a GAAP basis and 22.5% on a non-GAAP basis. The GAAP tax rate was higher than our targeted rate primarily due to a onetime charge related to our acquisition of Efficient Frontier. Offsetting this charge were tax benefits related to an extension of a favorable state tax ruling and the resolution of some audits in our favor in Q1. The non-GAAP tax rate was lower than targeted due to the state ruling.
GAAP diluted earnings per share for Q1 fiscal 2012 were $0.37. This compares with GAAP diluted earnings per share of $0.46 reported in Q1 fiscal 2011 and GAAP diluted earnings per share of $0.35 reported last quarter. Non-GAAP diluted earnings per share for Q1 fiscal 2012 were $0.57. This compares with non-GAAP diluted earnings per share of $0.58 in Q1 fiscal 2011 and $0.67 reported last quarter. The mid-quarter addition of Efficient Frontier revenue and costs did not have a material impact on Q1 non-GAAP earnings per share results.
I will now discuss Adobe's results in Q1 by business segment. As a reminder, we adjusted our business segments effective with the beginning of our 2012 fiscal year. Our FY 2011 10-K and the updated investor data sheet we provided in January reflect the segment changes.
Digital Media segment revenue in Q1 was $730.3 million compared to $761.1 million in Q1 fiscal 2011 and $827.3 million last quarter. Creative Suite revenue was lower than expected in Q1 with demand building for our Q2 launch of Creative Suite and Creative Cloud.
Within the Digital Media segment, Document Services revenue was up $183.3 million compared to $184.6 million in Q1 fiscal 2011 and $203.7 million last quarter. Acrobat was in line with our expectations.
Digital Marketing segment revenue in Q1 was $259.9 million compared to $212.9 million in Q1 fiscal 2011 and $269.8 million last quarter. Within the Digital Marketing segment, Digital Marketing Suite revenue grew 33% year-over-year, helped by the mid-quarter addition of Efficient Frontier, which contributed $9.6 million of revenue in Q1. Excluding Efficient Frontier, Digital Marketing Suite revenue grew 26% year-over-year. LiveCycle and Connect performed better than expected, contributing $85.6 million to Q1 revenue.
Finally, Print and Publishing segment revenue was $55 million compared to $53.7 million in Q1 fiscal 2011 and $55.1 million last quarter.
Turning to our geographic segments in Q1, results on a percent of revenue basis were as follows: the Americas, 48%; Europe, 32%; Asia, 20%. The demand environment remained stable in all of our major geographies.
From a year-over-year currency perspective, FX increased revenue by $7.7 million. We had $10.3 million in hedge gains in Q1 FY '12 versus no hedge gains in Q1 FY '11. Thus, the net year-over-year currency increase to revenue, considering hedging gains, was $18 million.
From a quarter-over-quarter perspective, FX decreased revenue by $5.2 million. We had $10.3 million in hedge gains in Q1 FY '12 versus a $3.6 million hedge gain in Q4 FY '11. Thus, the net sequential currency increase to revenue, considering hedging gains, was $1.5 million.
Employees at the end of Q1 totaled 9,963 versus 9,925 at the end of last quarter. Our trade DSO was 45 days, which compares to 47 days in the year-ago quarter and 50 days last quarter.
During the quarter, cash flow from operations was $314.4 million. Our ending cash and short-term investment position was $2.8 billion compared to $2.9 billion at the end of Q4. The decline was primarily due to our acquisition of Efficient Frontier. Our ending deferred revenue balance increased by $17 million to $549 million.
In Q1, we repurchased approximately 1.8 million shares at a total cost of $53 million. Entering Q2, $225 million of stock repurchase authority remains against the $1.6 billion stock repurchase authorization announced in July of 2010.
This concludes my discussion of our results. I would now to like to discuss our financial targets.
In Q2, we are targeting a revenue range between $1,090,000,000 and $1,140,000,000. This factors a full quarter of Efficient Frontier revenue, the revenue tail for CS5.5 in advance of CS6 and delivery of CS6 and Creative Cloud late in Q2.
At the midpoint of the Q2 targeted range, we expect our Digital Media segment to grow sequentially with the launch. In our Digital Marketing segment, we expect Digital Marketing Suite revenue to grow sequentially with Efficient Frontier contributing approximately $15 million in Q2 and legacy Enterprise product revenue declining sequentially by approximately $30 million. We expect Print and Publishing to be relatively flat.
We are targeting a Q2 GAAP earnings per share range of $0.37 to $0.43 per share and a Q2 non-GAAP earnings per share range of $0.57 to $0.61. In addition, we are targeting our Q2 share count to be 502 million to 504 million shares. We are targeting nonoperating expense to be between $19 million and $21 million on both a GAAP and non-GAAP basis. We are targeting a Q2 GAAP tax rate of 23.5% and a non-GAAP tax rate of 22.5%.
For the full year, we are increasing our annual revenue growth target to a range of 6% to 8% to reflect the addition of Efficient Frontier and approximately $60 million to $80 million of revenue. By quarter, we expect Q3 revenue to increase sequentially from Q2 due to a full quarter benefit from the Creative products, which shipped late in Q2. We would also expect Q4 revenue to increase sequentially from Q3 due to normal Q4 seasonality.
With the acquisition of Efficient Frontier, our full year GAAP diluted earnings per share targeted range moves to $1.63 to $1.73, and our non-GAAP EPS diluted earnings per share targeted range increases to $2.38 to $2.48.
This concludes my section. I'd now like to turn the call back over to Shantanu.
Shantanu Narayen
Thanks, Mark. Our vision at Adobe is to change the world through digital experiences. In Digital Media, we believe our upcoming CS and Creative Cloud releases will transform the creative process and create a new inflection point for revenue growth for the next several years. In Digital Marketing, we're building the foundation for a high-growth SaaS business with the most compelling value proposition in the industry. We continue to execute well against our objectives in this space, and the next few days, at our Digital Marketing Summit in Utah, will be another proof point that this business will positively impact our growth. Adobe is well positioned in these 2 large markets, and we are confident in our ability to execute against that strategy.
Thank you for joining us today. Now I'll turn the call back over to Mike.
Mike Saviage
Thanks, Shantanu. Before we start Q&A, I want to remind everyone about the Adobe Digital Marketing Summit this week. We look forward to seeing all those who signed up to attend our annual conference, the largest of its kind for digital marketers. The first day general session keynote will occur on Wednesday and via webcast on summit.adobe.com for those unable to attend.
In regard to today's earnings report, we have posted several documents on our Investor Relations website, including a copy of the script containing our prepared remarks for today's call. To access these documents and the other investor-related information, go to www.adobe.com/ADBE. For those who wish to listen to a playback of today's conference call, a web-based Adobe 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 6660442. International callers should dial (719) 457-0820. The phone playback service will be available beginning at 4:00 p.m. Pacific Time today and ending at 4:00 p.m. Pacific Time on Thursday, March 22, 2012.
We will now be happy to take your questions. Operator?
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