Add
ADBE to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| ADBE > SEC Filings for ADBE > Form 10-K on 22-Jan-2013 | All Recent SEC Filings |
22-Jan-2013
Annual Report
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 perpetual and time-based software
products, associated software maintenance and support plans, 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.
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, third-party evidence ("TPE") or best-estimated selling price ("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.
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.
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.
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.
In fiscal 2012, the Executive Compensation Committee of Adobe's Board of
Directors eliminated the use of stock option grants for all employees and stock
option grants to non-employee directors were minimal. In lieu of stock options,
we granted restricted stock units as the primary form of equity awards to
employees. Stock option grants prior to fiscal 2012 continue to vest over the
requisite service period and had a material impact to stock-based compensation
cost for fiscal 2012 and are expected to have a material impact to stock-based
compensation cost until the majority of stock options are fully vested.
We currently use the Black-Scholes option pricing model to determine the fair
value of employee stock purchase plan ("ESPP") shares. This fair value 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, the expected term of the
awards, the risk-free interest rate, estimated forfeitures and expected
dividends.
We use a 24-month expected term, which approximates our offering period. 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
for ESPP shares in future periods or if actual forfeitures differ materially
from our estimated forfeitures for both ESPP shares and existing stock option
grants that continue
to vest, 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:
• future expected cash flows from software license sales, subscriptions,
support agreements, consulting contracts and acquired developed
technologies and patents;
• expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed;
• 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
• 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 2012 and
determined there was no impairment. The results of our annual impairment test
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
There have been no new accounting pronouncements made effective during the year
ended November 30, 2012, that are of significance, or potential significance, to
us.
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
Overview of 2012
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 and 2010. See Note 18 of our
Notes to Consolidated Financial Statements for further segment and geographical
information. Prior year information below has been updated to reflect these
changes.
For 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 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 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.
We anticipate accelerated adoption of Creative Cloud in fiscal 2013, which we
expect will cause our traditional perpetual license revenue and, in turn, total
net revenues in fiscal 2013, to decline. During this transition we do not
anticipate a corresponding decrease in expenses, which we believe will adversely
affect our net income and operating margin in fiscal 2013. However, over time we
expect this business model transition will significantly increase our long-term
revenue growth rate by (1) attracting new users, (2) keeping our end user base
current and (3) thereby driving higher average revenue per user. Additionally,
our shift to a subscription model will increase the amount of our recurring
revenue that is ratably reported, driven by broader Creative Cloud adoption over
the next several years.
We plan to continue to offer the perpetual licensing model as we transition our
customers to this new subscription-based model.
To assist with the understanding of this transition and the related shift in
revenue described above, we have introduced the use of certain performance
metrics which we will use to assess the health and trajectory of our overall
Digital Media segment.
These metrics include the total number of paid, active subscribers and
. . .
|
|