Summary of ADOBE SYSTEMS INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto.
In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements, including statements regarding product plans, future growth and market opportunities, which involve risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Risk Factors" in Part II, Item 1A of this report. You should carefully review the risks described herein and in other documents we file from time to time with the Securities and Exchange Commission (the "SEC"), including our Annual Report on Form 10-K for fiscal 2011. When used in this report, the words "expects," "could," "would," "may," "anticipates," "intends," "plans," "believes," "seeks," "targets," "estimates," "looks for," "looks to" and similar expressions, as well as statements regarding our focus for the future, are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.
BUSINESS OVERVIEW Founded in 1982, Adobe Systems Incorporated is one of the largest and most diversified software companies in the world. We offer a line of 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-Pacific ("APAC").
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 third quarter and first nine months 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.
In May 2012, we launched Adobe Creative Suite 6 ("CS6") which is at the center of Adobe Creative Cloud, our new subscription-based model 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 Creative Suite ("CS") point products as well as four suite versions. Over time, we expect Creative Cloud to transform our business model and drive higher revenue growth 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. This model will drive our revenue to be more recurring and predictable since revenue is recognized ratably. We anticipate accelerated adoption of Creative Cloud, causing our traditional perpetual license revenue to decline. We will continue to offer the perpetual licensing model as we transition our customers to this new subscription-based model.

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Our Digital Media segment revenue increased 3% year-over-year during both the three and nine months ended August 31, 2012. The increase was primarily due to the continued momentum of the CS6 launch in the second quarter of fiscal 2012 partially offset by better than expected growth associated with Creative Cloud. Revenue in our Digital Marketing segment increased 21% and 20% year-over-year during the three and nine months ended August 31, 2012, respectively. Driving this success was continued growth of our Digital Marketing Suite, which increased 40% and 36% year-over-year during the three and nine months ended August 31, 2012, respectively, and includes our Adobe CQ Web Experience Management ("WEM") offerings and revenue generated from products associated with our recent acquisition of Efficient Frontier. We anticipate continued growth in revenue associated with our Digital Marketing Suite. Increases in Digital Marketing Suite revenue were offset in part by a decrease in revenue associated with our Adobe LiveCycle product offerings.
Revenue from Print and Publishing remained relatively stable during the three and nine months ended August 31, 2012 as compared to the three and nine months ended September 2, 2011 primarily due to decreases in legacy product revenue and increases in 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 nine months ended August 31, 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.

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                             RESULTS OF OPERATIONS
Revenue for the Three and Nine Months Ended August 31, 2012 and September 2,
2011 (dollars in millions)
                           Three Months                                 Nine Months
                       2012           2011         % Change         2012           2011         % Change
Product             $   810.5     $    811.9            *       $  2,490.0     $  2,484.6            *
Percentage of total
revenue                    75 %           80 %                          77 %           81 %
Subscription            172.9          114.6           51 %          478.7          330.2           45 %
Percentage of total
revenue                    16 %           11 %                          15 %           11 %
Services and
support                  97.2           86.7           12 %          281.5          249.3           13 %
Percentage of total
revenue                     9 %            9 %                           8 %            8 %
Total revenue       $ 1,080.6     $  1,013.2            7 %     $  3,250.2     $  3,064.1            6 %


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(*) Percentage is less than 1%.

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 subscription and hosted service offerings including our digital marketing services and Creative Cloud. We recognize subscription revenue 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. We also expect this to 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 digital marketing 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                                 Nine Months
                               2012          2011         % Change         2012          2011         % Change
Digital Media               $   769.1     $   745.9            3  %     $ 2,317.8     $ 2,261.1            3 %
Percentage of total revenue        71 %          74 %                          71 %          74 %
Digital Marketing               257.1         211.7           21  %         767.9         639.7           20 %
Percentage of total revenue        24 %          21 %                          24 %          21 %
Print and Publishing             54.4          55.6           (2 )%         164.5         163.3            1 %
Percentage of total revenue         5 %           5 %                           5 %           5 %
Total revenue               $ 1,080.6     $ 1,013.2            7  %     $ 3,250.2     $ 3,064.1            6 %

Digital Media

Revenue from Digital Media increased $23.2 million and $56.7 million during the three and nine months ended August 31, 2012, respectively, as compared to the three and nine months ended September 2, 2011.

Revenue increases related to our CS point products during the three and nine months ended August 31, 2012 were driven by growth associated with the May 2012 release of new Photoshop point products for which the previous release occurred in fiscal 2010. Increased revenue associated with third-party toolbar distribution via Flash Player downloads as well as continued demand related to the May 2012 release of Adobe Lightroom 4 also contributed to the growth in revenue during the three and nine months ended August 31, 2012 as compared to the three and nine months ended September 2, 2011. These increases were offset in part by decreases due to large pre-paid OEM transactions associated with certain desktop products occurring in fiscal 2011 that did not recur in the current fiscal year as the market demand for software delivery transitions from PCs to cloud-based services.

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Suite revenue from our creative product offerings decreased slightly during the three and nine months ended August 31, 2012 as compared to the corresponding periods a year ago largely due to higher than expected customer adoption of Creative Cloud. We anticipate accelerated adoption of Creative Cloud, for which revenue is recognized over time, causing our traditional perpetual license revenue to decline. Subscription revenue associated with Creative Cloud contributed approximately $12.0 million since the launch in May 2012.

Within Digital Media, Document Services revenue, which includes our Acrobat product family, also increased during the three and nine months ended August 31, 2012 as compared to the three and nine months ended September 2, 2011 primarily due to large enterprise transactions during the second quarter of fiscal 2012 and increased Document Exchange Services revenue including revenue generated from our EchoSign eSignatures service.

For our creative offerings, the total number of units licensed increased while unit average selling prices, excluding subscriptions, decreased during both the three and nine months ended August 31, 2012 as compared to the same periods in the prior year. Within Document Services, both the number of units licensed and the unit average selling prices for our Acrobat offerings, excluding large enterprise license agreement deals, have remained relatively stable for the three and nine months ended August 31, 2012, as compared to the three and nine months ended September 2, 2011.

Digital Marketing

Revenue from Digital Marketing increased $45.4 million and $128.2 million during the three and nine months ended August 31, 2012, respectively, as compared to the three and nine months ended September 2, 2011. The increase during the three and nine months ended August 31, 2012 was primarily due to continued adoption of our Digital Marketing Suite including revenue generated from products associated with our WEM solution as well as our recent acquisition of Efficient Frontier. 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. Print and Publishing

Revenue from Print and Publishing remained relatively stable during the three and nine months ended August 31,2012 as compared to the three and nine months ended September 2, 2011 primarily due to decreases in legacy product revenue and increases in fees received for consulting services and royalties related to PostScript products.
Geographical Information (dollars in millions)

                           Three Months                                  Nine Months
                       2012           2011         % Change          2012           2011         % Change
Americas            $   558.3     $    507.6           10  %     $  1,612.7     $  1,489.7            8 %
Percentage of total
revenue                    52 %           50 %                           50 %           49 %
EMEA                    290.0          293.1           (1 )%          945.6          936.6            1 %
Percentage of total
revenue                    27 %           29 %                           29 %           31 %
APAC                    232.3          212.5            9  %          691.9          637.8            8 %
Percentage of total
revenue                    21 %           21 %                           21 %           20 %
Total revenue       $ 1,080.6     $  1,013.2            7  %     $  3,250.2     $  3,064.1            6 %

Overall revenue during the three and nine months ended August 31, 2012 as compared to the three and nine months ended September 2, 2011 increased in the Americas and APAC and remained relatively stable in EMEA. Revenue in the Americas increased during the three and nine months ended August 31, 2012 as compared to the three and nine months ended September 2, 2011 primarily due to revenue increases in Digital Media and Digital Marketing, offset slightly by a decline in Print and Publishing revenue. Despite the launch of CS6 in May 2012, the current economic conditions in Europe and the weakening of the Euro and the British Pound against the U.S. Dollar caused revenue in EMEA to remain fairly stable during the three and nine months ended August 31, 2012 compared with the comparable periods a year ago. Revenue in APAC increased across all reportable segments during the three and nine months ended August 31, 2012 as compared to the three and nine months ended September 2, 2011. Within each geographical region, the fluctuations in revenue by reportable segment were attributable to the factors noted in the segment information above.

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Included in the overall increase in revenue for the three and nine months ended August 31, 2012 as compared to the three and nine months ended September 2, 2011 were impacts associated with foreign currency as shown below. (in millions) Three Months Nine Months Revenue impact: Increase/(Decrease) EMEA:

Euro                 $      (18.5 )   $     (34.7 )
British Pound                (1.9 )          (2.4 )
Other currencies             (0.6 )          (0.7 )
Total EMEA                  (21.0 )         (37.8 )
Japanese Yen                  0.5             8.4
Other currencies             (1.3 )           0.8
Total revenue impact        (21.8 )         (28.6 )
Hedging impact:
EMEA                          6.0            21.6
Japanese Yen                  1.7             7.1
Total hedging impact          7.7            28.7
Total impact         $      (14.1 )   $       0.1

During the three and nine months ended August 31, 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 August 31, 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 nine months ended August 31, 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 nine months ended August 31, 2012 as noted in the table above.
Cost of Revenue for the Three and Nine Months Ended August 31, 2012 and September 2, 2011 (dollars in millions)

                                Three Months                          Nine Months
                              2012        2011       % Change      2012        2011       % Change
Product                     $  27.2     $  26.2          4 %     $  93.0     $  91.6          2 %
Percentage of total revenue       3 %         3 %                      3 %         3 %
Subscription                   56.2        47.5         18 %       159.8       142.7         12 %
Percentage of total revenue       5 %         5 %                      5 %         5 %
Services and support           36.2        31.0         17 %       106.0        87.2         22 %
Percentage of total revenue       3 %         3 %                      3 %         3 %
Total cost of revenue       $ 119.6     $ 104.7         14 %     $ 358.8     $ 321.5         12 %

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.

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Cost of product revenue increased during the three and nine months ended August 31, 2012 as compared to the three and nine months ended September 2, 2011 due to the following:

                                          % Change      % Change
                                          2012-2011     2012-2011
                                             QTD           YTD
Royalty cost                                 8  %          3  %
Cost of sales                               (6 )          (3 )
Excess and obsolete inventory                3             3
Various individually insignificant items    (1 )          (1 )
Total change                                 4  %          2  %

Royalty costs increased during the three and nine months ended August 31, 2012 as compared to the three and nine months ended September 2, 2011 due to an increase in obligations to key vendors.
Cost of sales decreased during the three and nine months ended August 31, 2012 as compared to the three and nine months ended September 2, 2011 primarily due to a decrease in packaging costs associated with our CS6 products. Excess and obsolete inventory increased during the three and the nine months ended August 31, 2012 as compared to the three and nine months ended September 2, 2011 due to increased reserve requirements for Adobe Creative Suite 5 and Adobe Creative Suite 5.5 products necessitated by the launch of CS6 in the second quarter of fiscal 2012.
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 nine months ended August 31, 2012 as compared to the three and nine months ended September 2, 2011 due to the following:

                                       % Change     % Change
                                      2012-2011    2012-2011
                                         QTD          YTD
Amortization of purchased intangibles     10 %          6 %
Hosted server costs                        8 %          6 %
Total change                              18 %         12 %

Amortization of purchase intangibles increased during the three and nine months ended August 31, 2012 as compared to the three and nine months ended September 2, 2011 primarily due to increased amortization of intangible assets associated with our fiscal 2011 and 2012 acquisitions.
Hosted server costs increased during the three and nine months ended August 31, 2012 as compared to the three and nine months ended September 2, 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, higher data center costs associated with our fiscal 2011 and 2012 acquisitions and an increase in hosting expenses associated with the launch of our Creative Cloud services 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 nine months ended August 31, 2012 as compared to the three and nine months ended September 2, 2011 primarily due to increases in compensation and related benefits and additional headcount.

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Operating Expenses for the Three and Nine Months Ended August 31, 2012 and
September 2, 2011 (dollars in millions)
                           Three Months                                 Nine Months
                       2012           2011         % Change         2012           2011         % Change
Research and
development         $   189.1     $    181.0            4 %     $    547.8     $    542.6            1 %
Percentage of total
revenue                    18 %           18 %                          17 %           18 %
Sales and marketing     368.6          340.7            8 %        1,114.0        1,017.5            9 %
Percentage of total
revenue                    34 %           34 %                          34 %           33 %
General and
administrative          110.2           98.5           12 %          323.5          295.0           10 %
Percentage of total
revenue                    10 %           10 %                          10 %           10 %
Restructuring
charges                   2.4            3.8           **             (2.6 )          3.3           **
Percentage of total
revenue                     *              *                             *              *
Amortization of
purchased
   intangibles           12.3           10.4           18 %           36.3           31.0           17 %
Percentage of total
revenue                     1 %            1 %                           1 %            1 %
Total operating
expenses            $   682.6     $    634.4            8 %     $  2,019.0     $  1,889.4            7 %

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