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Jun 16, 2006

Adobe Q2 Results

Company Achieves Profitability Targets On Lower Than Expected Revenue

Press Release: SAN JOSE, Calif. — June 15, 2006 — Adobe Systems Incorporated (Nasdaq:ADBE) today reported record financial results for its second quarter ended June 2, 2006. The Company’s Q2 results reflect the acquisition of Macromedia in December, 2005, and are compared to pre-acquisition results of prior fiscal periods as applicable.

In the second quarter of fiscal 2006, Adobe achieved revenue of $635.5 million, compared to $496.0 million reported for the second quarter of fiscal 2005 and $655.5 million reported in the first quarter of fiscal 2006. On a year-over-year basis, this represents 28 percent revenue growth. Adobe’s second quarter revenue target range was $640 to $670 million.

“We are pleased we were able to deliver on our earnings targets in Q2 despite coming in slightly below our targeted revenue range,” said Bruce R. Chizen, Adobe chief executive officer. “Looking forward, as the explosion of digital content accelerates, we continue to be excited about our prospects for future growth.”

GAAP diluted earnings per share for the second quarter of fiscal 2006 were $0.20. Adobe’s second quarter GAAP EPS target range was $0.18 to $0.21.

Non-GAAP diluted earnings per share, which excludes amortization of purchased intangibles, amortization of Macromedia deferred compensation, restructuring charges related to the Macromedia acquisition, a charge for incomplete technology related to a small acquisition, SFAS 123R stock-based compensation, tax differences due to the timing and deductibility of the Macromedia acquisition-related charges and SFAS 123R stock-based compensation, and investment gains, were $0.31. Adobe’s second quarter non-GAAP EPS target range was $0.30 to $0.32.

GAAP net income was $123.1 million for the second quarter of fiscal 2006, compared to $149.8 million reported in the second quarter of fiscal 2005, and $105.1 million in the first quarter of fiscal 2006. Non-GAAP net income, which excludes, as applicable, amortization of purchased intangibles, amortization of Macromedia deferred compensation, restructuring charges related to the Macromedia acquisition, a charge for incomplete technology related to a small acquisition, SFAS 123R stock-based compensation, the net tax impact of the repatriation of certain foreign earnings, tax differences due to the timing and deductibility of the Macromedia acquisition-related charges and SFAS 123R stock-based compensation, and investment gains and losses, was $189.4 million for the second quarter of fiscal 2006, compared to $142.9 million in the second quarter of fiscal 2005, and $197.5 million in the first quarter of fiscal 2006.

GAAP diluted earnings per share for the second quarter of fiscal 2006 were $0.20 based on 613.8 million weighted average shares. This compares with GAAP diluted earnings per share of $0.29 reported in the second quarter of fiscal 2005, based on 508.2 million weighted average shares, and GAAP diluted earnings per share of $0.17 reported in the first quarter of fiscal 2006, based on 621.8 million weighted average shares.

Adobe’s GAAP operating income was $147.9 million in the second quarter of fiscal 2006, compared to $182.2 million in the second quarter of fiscal 2005 and $130.0 million in the first quarter of fiscal 2006. As a percent of revenue, GAAP operating income in the second quarter of fiscal 2006 was 23.3 percent, compared to 36.7 percent in the second quarter of fiscal 2005 and 19.8 percent in the first quarter of fiscal 2006.

Adobe’s non-GAAP operating income, which excludes, as applicable, amortization of purchased intangibles, amortization of Macromedia deferred compensation, restructuring charges related to the Macromedia acquisition, a charge for incomplete technology related to a small acquisition, and SFAS 123R stock-based compensation was $243.1 million in the second quarter of fiscal 2006, compared to $182.2 million in the second quarter of fiscal 2005 and $252.4 million in the first quarter of fiscal 2006. As a percent of revenue, non-GAAP operating income in the second quarter of fiscal 2006 was 38.3 percent, compared to 36.7 percent in the second quarter of fiscal 2005 and 38.5 percent in the first quarter of fiscal 2006.

Adobe Provides Third Quarter FY2006 Financial Targets
For the third quarter of fiscal 2006, Adobe announced it is targeting revenue of $580 million to $610 million. The Company also is targeting a GAAP operating margin of approximately 16 to 19 percent in the third quarter. On a non-GAAP basis, which excludes acquisition-related costs and SFAS 123R stock-based compensation, the Company is targeting a third quarter operating margin of approximately 33 to 35 percent.

In addition, Adobe is targeting its share count to be between 606 million and 608 million shares in the third quarter of fiscal 2006. The Company also is targeting other income in its third quarter to be approximately $13 million to $15 million, with a GAAP and non-GAAP tax rate of approximately 26 percent.

These targets lead to a third quarter GAAP earnings per share target range of approximately $0.13 to $0.16. On a non-GAAP basis, which excludes acquisition-related costs, SFAS 123R stock-based compensation, and tax differences related to the timing and deductibility of the Macromedia acquisition-related charges and SFAS 123R stock-based compensation, the Company is targeting earnings per share of approximately $0.25 to $0.27.
Adobe Updates FY2006 Targets

For fiscal year 2006, Adobe announced it is lowering its revenue target to a range of $2.54 to $2.60 billion, with a targeted GAAP earnings per share range of $0.70 to $0.76 and a targeted non-GAAP earnings per share range of $1.20 to $1.25. The Company’s prior annual targets were revenue of approximately $2.7 billion, with GAAP and non-GAAP earnings per share ranges of $0.74 to $0.82 and $1.26 to $1.30 respectively.

Forward Looking Statements Disclosure
This press release contains forward looking statements, including those related to revenue, operating margin, other income, tax rate, share count and earnings per share, which involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to: adverse changes in general economic or political conditions in any of the major countries in which Adobe does business, delays in development or shipment of Adobe’s new products or major new versions of existing products, introduction of new products by existing and new competitors, failure to successfully manage transitions to new business models and markets, difficulty in predicting revenue from new businesses, failure to anticipate and develop new products in response to changes in demand for application software, computers and printers, intellectual property disputes and litigation, inability to protect Adobe’s intellectual property from unauthorized copying, use, disclosure or malicious attack, failure to realize the anticipated benefits of past or future acquisitions and difficulty in integrating such acquisitions, changes to Adobe’s distribution channel, disruption of Adobe’s business due to catastrophic events, interruptions or terminations in Adobe’s relationships with turnkey assemblers, risks associated with international operations, fluctuations in foreign currency exchange rates, changes in, or interpretations of, accounting rules and regulations, impairment of Adobe’s goodwill or intangible assets, unanticipated changes in tax rates, Adobe’s inability to attract and retain key personnel, and market risks associated with Adobe’s equity investments. For further discussion of these and other risks and uncertainties, individuals should refer to Adobe’s SEC filings. Adobe does not undertake an obligation to update forward looking statements.

About Adobe Systems Incorporated
Adobe revolutionizes how the world engages with ideas and information – anytime, anywhere, and through any medium. For more information, visit www.adobe.com .

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