01—Abstract
Summary
Summary of the 10-K filed February 21, 1997. Cited figures are marked; the original filing is the authoritative source.
Adobe Systems Incorporated closed fiscal 1996 (ended November 29, 1996) with revenue of $786.6 milliona, up 3% from $762.3 million in 1995, and net income of $153.3 million ($2.04 per share), up 64% from $93.5 million.
The headline earnings gain is flattered by non-operating items: a $68.9 millionb investment gain, driven mainly by partial sale of its Netscape stake, which contributed roughly $0.67 per share. Excluding one-time charges and gains, Adobe's net income per share was about $1.71, versus $1.80 in 1995 on the same basis, so underlying profitability was flat to slightly down. Operating income rose to $146.8 million from $134.6 million, supported by lower restructuring and merger costs but pressured by rising research and development spending (up 10% to $152.9 million).
The revenue picture is mixed. Licensing revenue from PostScript royalties grew 7% to $196.7 millionc, but management warned that Hewlett-Packard plans to ship non-Adobe PostScript clone products in its corporate printers beginning in mid-1997, a material risk to this high-margin stream. Application products grew only 2% to $589.9 million, with Photoshop, Illustrator, and Acrobat offsetting weakness in FrameMaker and PageMaker.
The company remains financially strong, with $564.1 milliond in cash and short-term investments, no long-term debt, and $506.1 million of working capital. Management repurchased 3.3 million shares for $124.5 million during the year.
Key items for investors include ongoing litigation (a Quantel patent suit against Photoshop and a securities class action tied to the early 1996 stock drop), a $71.3 million put warrant obligation outstanding, and the expected rise in tax rate to about 36% in fiscal 1997. Management also flagged dependence on Macintosh high-end sales, increasing Windows growth, and volatility in quarterly results.
02—Key points
Key Highlights
- Revenue rose 3% to $786.6 million; licensing grew 7% to $196.7 million while application products grew 2% to $589.9 million.
- Reported net income of $153.3 million ($2.04 per share) was up 64%, but a $68.9 million investment gain (largely Netscape) inflated results; excluding one-time items, EPS was about $1.71.
- Hewlett-Packard plans to ship non-Adobe PostScript clone printers in its corporate enterprise line by July 1997, a meaningful threat to royalty revenue.
- Operating income increased to $146.8 million from $134.6 million, while R&D spending rose 10% to $152.9 million (19.4% of revenue).
- Strong balance sheet with $564.1 million in cash and short-term investments, no long-term debt, and $706.5 million in shareholders' equity.
- Repurchased 3.3 million shares for $124.5 million and paid $0.20 per share in dividends during fiscal 1996.
- Pending legal matters include a Quantel patent infringement suit over Photoshop and a California securities class action, both in discovery; management views the outcome as immaterial.
03—Questions
Frequently Asked Questions
Why did net income jump 64% if revenue grew only 3%?
Most of the increase came from non-operating investment gains of $68.9 million, including about $43.6 million from selling part of the Netscape stake and $13.9 million from an Adobe Ventures holding. Operating income rose a more modest 9%, and the prior year included larger one-time merger and restructuring charges. On an adjusted basis, EPS was about $1.71 versus $1.80 in 1995.
How serious is the Hewlett-Packard risk to PostScript licensing?
It is a significant concern. HP, one of Adobe's largest PostScript customers, plans to begin shipping corporate enterprise LaserJet products using a non-Adobe clone PostScript interpreter around July 1997. Licensing revenue was $196.7 million in 1996, or 25% of total revenue, so losing part of HP's volume could meaningfully reduce royalties. Management said these factors may affect its ability to sustain growth in this area.
Is Adobe carrying any debt or facing liquidity concerns?
No. Adobe reports no long-term debt and $564.1 million in cash and short-term investments against $230.6 million in current liabilities. Operating cash flow was $198.1 million. The main obligations are operating leases, a real estate development arrangement with a $57.3 million and $64.3 million potential purchase exposure for two facilities, and about $71.3 million in put warrants that expire through April 1997.
What are the main litigation risks?
Quantel Limited alleges that Photoshop infringes five U.S. patents and seeks an injunction and unspecified damages. A separate California securities class action, filed February 1996 after a stock drop, alleges misrepresentation involving Adobe and Frame. Both cases are in discovery. Management believes it has adequate defenses and that neither will have a material effect on financial position or results.
What does the outlook for fiscal 1997 look like?
Management expects R&D spending to rise in absolute dollars but hold steady as a share of revenue, and sales and marketing spending to increase in dollars but decline as a percentage of revenue. The effective tax rate is expected to be about 36%, up from 37.4% in 1996. Application product gross margins are expected to improve slightly as more products shift to CD-ROM. Management also cautioned that growth may be constrained by the HP clone PostScript risk and by reliance on the Macintosh high-end market.
04—Continue