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| ADBE > SEC Filings for ADBE > Form 10-Q on 27-Jun-2012 | All Recent SEC Filings |
27-Jun-2012
Quarterly Report
Our Print and Publishing business segment revenue increased 2% year-over-year
during both the three and six months ended June 1, 2012 primarily due to fees
received for consulting services and royalties related to PostScript products
and an increase in revenue associated with Adobe Captivate.
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 six months ended June 1, 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.
Goodwill Impairment
During the second quarter of fiscal 2012, we completed our annual goodwill
impairment test associated with our three reporting units - Digital Marketing,
Digital Media and Print and Publishing - and determined there was no impairment
of goodwill. There is no significant risk of material goodwill impairment in any
of our reporting units, based upon the results of our annual goodwill impairment
test.
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.
RESULTS OF OPERATIONS
Revenue for the Three and Six Months Ended June 1, 2012 and June 3, 2011
(dollars in millions)
Three Months Six Months
2012 2011 % Change 2012 2011 % Change
Product $ 871.0 $ 830.0 5 % $ 1,679.5 $ 1,672.7 *
Percentage of total
revenue 78 % 81 % 78 % 82 %
Subscription 159.5 109.5 46 % 305.8 215.6 42 %
Percentage of total
revenue 14 % 11 % 14 % 10 %
Services and
support 93.9 83.7 12 % 184.4 162.6 13 %
Percentage of total
revenue 8 % 8 % 8 % 8 %
Total revenue $ 1,124.4 $ 1,023.2 10 % $ 2,169.7 $ 2,050.9 6 %
_________________________________________
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As described in Note 15 of our Notes to Condensed Consolidated Financial Statements, we have the following segments: Digital Media, Digital Marketing and Print and Publishing.
Our subscription revenue is comprised primarily of fees we charge for our hosted
service offerings including our hosted online business optimization services. We
recognize subscription revenues ratably over the term of agreements with our
customers, beginning on the commencement of the service. We expect our
subscription revenue will continue to increase as a result of our investments in
new SaaS and subscription models such as our recently released Adobe Creative
Cloud ("Creative Cloud") offering that 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.
Our services and support revenue is comprised of consulting, training and
maintenance and support, primarily related to the licensing of our enterprise,
developer and platform products and the sale of our hosted online business
optimization services. Our support revenue also includes technical support and
developer support to partners and developer organizations related to our desktop
products. Our maintenance and support offerings, which entitle customers to
receive product upgrades and enhancements or technical support, depending on the
offering, are recognized ratably over the term of the arrangement.
Segment Information (dollars in millions)
Three Months Six Months
2012 2011 % Change 2012 2011 % Change
Digital Media $ 818.5 $ 754.1 9 % $ 1,548.8 $ 1,515.2 2 %
Percentage of total revenue 73 % 74 % 71 % 74 %
Digital Marketing 250.9 215.1 17 % 510.8 428.0 19 %
Percentage of total revenue 22 % 21 % 24 % 21 %
Print and Publishing 55.0 54.0 2 % 110.1 107.7 2 %
Percentage of total revenue 5 % 5 % 5 % 5 %
Total revenue $ 1,124.4 $ 1,023.2 10 % $ 2,169.7 $ 2,050.9 6 %
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Revenue from Digital Media increased $64.4 million and $33.5 million during the three and six months ended June 1, 2012, respectively, as compared to the three and six months ended June 3, 2011. In May 2012, we launched CS6 which is at the center of Creative Cloud, our new subscription-based offering for creating and publishing content and applications that was also released in May 2012. The launch of CS6 included major updates to all of our core CS point products as well as four suite versions. With regard to our CS point products, the revenue increase during the three and six months ended June 1, 2012 was driven by growth associated with the release of new Photoshop point products for which the previous release occurred in fiscal 2010. Strong demand related to the release of Adobe Lightroom 4 also contributed to the growth in revenue during the three and six months ended June 1, 2012 as compared to the three and six months ended June 3, 2011. Suite revenue from our creative product offerings increased slightly during the three months ended June 1, 2012, though declined slightly during the six month period ended June 1, 2012 compared with the corresponding periods a year ago largely due to a shift in product mix to the lower priced suite product offerings. Within Digital Media, Document Services revenue, which includes our Acrobat product family, also increased during the three and six months ended June 1, 2012 as compared to the three and six months ended June 3, 2011 primarily due to large enterprise transactions during the second quarter of fiscal 2012 and increased Document Exchange Services revenue including EchoSign eSignatures service. There was an increase in the number of units licensed for our creative offerings during both the three and six months ended June 1, 2012 as compared to the same periods in the prior year. Creative point product and suite unit average selling prices declined during the three months ended June 1, 2012 though remained relatively stable during the six months ended June 1, 2012. Within Document Services, both the number of units licensed and the unit average selling prices for our Acrobat offerings, excluding large enterprise license agreement ("ELA") deals, have remained relatively stable for the three and six months ended June 1, 2012, as compared to the three and six months ended June 3, 2011.
Revenue from Digital Marketing increased $35.8 million and $82.8 million during
the three and six months ended June 1, 2012, respectively, as compared to the
three and six months ended June 3, 2011. The increase during the three and six
months ended June 1, 2012 was primarily due to continued adoption of our Digital
Marketing Suite including revenue generated from products associated with our
recent acquisition of Efficient Frontier as well as from our WEM solution. Also
contributing to the growth in revenue was our Adobe Connect hosted offering. As
expected, increases were offset in part by a decrease in revenue associated with
Adobe LiveCycle product offerings as we continue to shift our focus to our
Digital Marketing Suite including our WEM solution.
Revenue from Print and Publishing increased $1.1 million and $2.4 million during
the three and six months ended June 1, 2012, respectively, as compared to the
three and six months ended June 3, 2011. The increase during the three and six
months ended June 1, 2012 was primarily due to fees received for consulting
services and royalties related to PostScript products and an increase in revenue
associated with Adobe Captivate, our e-learning authoring software.
Geographical Information (dollars in millions)
Three Months Six Months
2012 2011 % Change 2012 2011 % Change
Americas $ 551.3 $ 492.5 12 % $ 1,054.4 $ 982.1 7 %
Percentage of total
revenue 49 % 48 % 49 % 48 %
EMEA 325.0 311.7 4 % 655.7 643.5 2 %
Percentage of total
revenue 29 % 30 % 30 % 31 %
APAC 248.1 219.0 13 % 459.6 425.3 8 %
Percentage of total
revenue 22 % 22 % 21 % 21 %
Total revenue $ 1,124.4 $ 1,023.2 10 % $ 2,169.7 $ 2,050.9 6 %
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Overall revenue during the three and six months ended June 1, 2012 as compared
to the three and six months ended June 3, 2011 increased in the Americas and
APAC and remained relatively stable in EMEA. Revenue in the Americas increased
during the three and six months ended June 1, 2012 as compared to the three and
six months ended June 3, 2011 primarily due to revenue increases in Digital
Marketing and Digital Media, offset slightly by a decline in Print and
Publishing revenue. Despite the launch of CS6, the current economic conditions
in Europe caused revenue in EMEA to remain fairly stable during the three and
six months ended June 1, 2012 compared with the comparable periods a year ago.
Revenue in APAC increased across all reportable segments during the three and
six months ended June 1, 2012 as compared to the three and six months ended
June 3, 2011. Within each geographical region, the fluctuations in revenue by
reportable segment were attributable to the factors noted above.
Included in the overall increase in revenue for the three and six months ended
June 1, 2012 as compared to the three and six months ended June 3, 2011 were
impacts associated with foreign currency as shown below.
(in millions) Three Months Six Months
Revenue impact: Increase/(Decrease)
EMEA:
Euro $ (13.8 ) $ (16.2 ) British Pound (1.2 ) (0.5 ) Other currencies (0.3 ) (0.1 ) Total EMEA (15.3 ) (16.8 ) Japanese Yen 0.9 7.9 Other currencies (0.1 ) 2.1 Total revenue impact (14.5 ) (6.8 ) Hedging impact: EMEA 5.4 15.6 Japanese Yen 5.3 5.4 Total hedging impact 10.7 21.0 Total impact $ (3.8 ) $ 14.2 |
During the three and six months ended June 1, 2012, the U.S. Dollar strengthened against the Euro and British Pound causing revenue in EMEA measured in U.S. Dollar equivalents to decrease compared with the same reporting period last year. During the three months ended June 1, 2012, revenue measured in the Japanese Yen was favorably impacted as the U.S. Dollar weakened against this currency. This increase was offset in part by the U.S. Dollar strengthening against other currencies. During the six months ended June 1, 2012, revenue measured in both the Japanese Yen and other currencies were favorably impacted as the U.S. Dollar weakened against these currencies. Our EMEA and Yen currency hedging programs resulted in hedging gains during the three and six months ended June 1, 2012 as noted in the table above.
Cost of Revenue for the Three and Six Months Ended June 1, 2012 and June 3, 2011
(dollars in millions)
Three Months Six Months
2012 2011 % Change 2012 2011 % Change
Product $ 40.1 $ 34.7 16 % $ 65.8 $ 65.4 *
Percentage of total revenue 4 % 3 % 3 % 3 %
Subscription 54.8 47.3 16 % 103.6 95.2 9 %
Percentage of total revenue 5 % 5 % 5 % 5 %
Services and support 36.0 27.2 32 % 69.8 56.2 24 %
Percentage of total revenue 3 % 3 % 3 % 3 %
Total cost of revenue $ 130.9 $ 109.2 20 % $ 239.2 $ 216.8 10 %
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Product
Cost of product revenue includes product packaging, third-party royalties,
excess and obsolete inventory, amortization related to localization costs,
purchased intangibles and acquired rights to use technology and the costs
associated with the manufacturing of our products.
Cost of product revenue increased during the three months ended June 1, 2012 as
compared to the three months ended June 3, 2011 due to the following:
% Change 2012-2011
QTD
Royalty cost 9 %
Excess and obsolete inventory 4
Localization costs related to our product launches 2
Cost of sales (2 )
Various individually insignificant items 3
Total change 16 %
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Royalty costs increased during the three months ended June 1, 2012 as compared
to the three months ended June 3, 2011 primarily due to higher payments to key
vendors associated with the launch of CS6 and Lightroom 4 during the second
quarter of fiscal 2012.
Excess and obsolete inventory increased during the three months ended June 1,
2012 as compared to the three months ended June 3, 2011 due to increased reserve
requirements for Adobe Creative Suite 5.5 ("CS5.5") products necessitated by the
launch of CS6 in the second quarter of fiscal 2012.
Localization costs increased during the three months ended June 1, 2012 as
compared to the three months ended June 3, 2011 primarily due to the launch of
CS6, a milestone product release, in the second quarter of fiscal 2012 as
compared to the launch of CS5.5, a mid-cycle product release, in the second
quarter of fiscal 2011.
Cost of sales decreased during the three months ended June 1, 2012 as compared
to the three months ended June 3, 2011 primarily due to a decrease in packaging
costs associated with our CS6 products, offset in part by an increase in costs
associated with higher shrink-wrap sales of our creative product offerings.
Cost of product revenue remained relatively stable during the six months ended
June 1, 2012 as compared to the six months ended June 3, 2011.
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 and six months ended
June 1, 2012 as compared to the three and six months ended June 3, 2011
primarily due to increases in compensation and related benefits driven by
additional headcount from our acquisition of Efficient Frontier in the first
quarter of fiscal 2012, an increase in amortization of intangible assets and
higher data center costs associated with our fiscal 2011 and 2012 acquisitions
and hosting expenses associated with the launch of the Creative Cloud in the
second quarter of fiscal 2012.
Services and Support
Cost of services and support revenue is primarily comprised of employee-related
costs and associated costs incurred to provide consulting services, training and
product support.
Cost of services and support revenue increased during the three and six months
ended June 1, 2012 as compared to the three and six months ended June 3, 2011
primarily due to increases in compensation and related benefits and additional
headcount.
Operating Expenses for the Three and Six Months Ended June 1, 2012 and June 3,
2011 (dollars in millions)
Three Months Six Months
2012 2011 % Change 2012 2011 % Change
Research and
development $ 180.9 $ 183.2 (1 )% $ 358.7 $ 361.6 (1 )%
Percentage of total
revenue 16 % 18 % 17 % 18 %
Sales and marketing 386.5 348.7 11 % 745.4 676.8 10 %
Percentage of total
revenue 34 % 34 % 34 % 33 %
General and
administrative 110.6 95.6 16 % 213.3 196.5 9 %
Percentage of total
revenue 10 % 9 % 10 % 10 %
Restructuring
charges (2.2 ) (0.6 ) ** (5.0 ) (0.5 ) **
Percentage of total
revenue * * * *
Amortization of
purchased
intangibles 12.6 10.4 21 % 24.0 20.6 17 %
Percentage of total
revenue 1 % 1 % 1 % 1 %
Total operating
expenses $ 688.4 $ 637.3 8 % $ 1,336.4 $ 1,255.0 6 %
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(**) Percentage is not meaningful.
Research and Development
Research and development expenses consist primarily of salary and benefit
expenses for software developers, contracted development efforts, related
facilities costs and expenses associated with computer equipment used in
software development. Research and development expenses during the three and six
months ended June 1, 2012 remained relatively stable as compared to the three
and six months ended June 3, 2011.
We believe that investments in research and development, including the
recruiting and hiring of software developers, are critical to remain competitive
in the marketplace and are directly related to continued timely development of
new and enhanced products. We will continue to focus on long-term opportunities
available in our end markets and make significant investments in the development
of our application, tool and service offerings.
Sales and Marketing
Sales and marketing expenses consist primarily of salary and benefit expenses,
sales commissions, travel expenses and related facilities costs for our sales,
marketing, order management and global supply chain management personnel. Sales
and marketing expenses also include the costs of programs aimed at increasing
revenue, such as advertising, trade shows, public relations and other market
development programs.
Sales and marketing expenses increased due to the following:
% Change % Change
2012-2011 2012-2011
QTD YTD
. . .
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