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ADOBE INC. Annual Report, Year Ended Nov 27, 1998

Filing Date
Filed February 17, 1999
Period End
November 27, 1998
Security
ADBE
In the record · 2016–202610-K1110-Q338-K104

ADBE filed 11 annual reports (10-K), 33 quarterly reports (10-Q) and 104 current reports (8-K) between 2016 and 2026.

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01—Abstract

Summary

Summary of the 10-K filed February 17, 1999. Cited figures are marked; the original filing is the authoritative source.

Adobe's fiscal 1998 (year ended November 27, 1998) was a year of revenue contraction and restructuring.

Total revenue fell 2% to $894.8 milliona from $911.9 million, driven by weakness in Japan and a 16% decline in OEM PostScript licensing revenue, which dropped to $164.1 million as Hewlett-Packard shipped a clone PostScript product. Application products, the core growth engine, rose 2% to $730.6 million, helped by Photoshop 5.0, Illustrator 8.0, Acrobat 3.0 and new Web tools, though the Windows platform (58% of application revenue) grew 21% while Macintosh fell 10%. Profitability deteriorated sharply.

Operating income fell to $125.3 millionb from $230.8 million, and net income dropped 44% to $105.1 million, or $1.55 diluted EPS, versus $2.52 a year earlier. Operating expenses rose 19%, led by R&D (up 21% to $207.3 million) and G&A (up 27%, including costs tied to an unsolicited acquisition proposal). Management responded in the third quarter with a restructuring program that eliminated 364 positions and recorded $38.2 million in charges, with estimated annualized savings of $60 million.

The balance sheet shows a deliberate capital return strategy with a cost. Adobe repurchased about 10.5 million shares for $379.2 millionc, and stockholders' equity fell 28% to $516.4 million as treasury stock grew.

Cash and short-term investments declined to $272.5 milliond from $503.0 million. Management guided to a 15% revenue growth target and a 25% operating margin target for fiscal 1999, while also flagging risks from Japanese economic weakness, Microsoft's planned entry into digital imaging, Macintosh softness, Year 2000 readiness, and pending patent litigation.

02—Key points

Key Highlights

  1. Revenue declined 2% to $894.8 million, as Japanese market weakness and a 16% drop in PostScript licensing revenue (to $164.1 million) offset 2% growth in application products ($730.6 million).
  2. Operating income fell 46% to $125.3 million, and net income fell 44% to $105.1 million ($1.55 diluted EPS vs. $2.52 in fiscal 1997).
  3. A third-quarter restructuring eliminated 364 positions and produced $38.2 million in charges, with management projecting $60.0 million in annualized pre-tax savings.
  4. Adobe bought back about 10.5 million shares for $379.2 million, reducing cash and short-term investments to $272.5 million from $503.0 million and cutting stockholders' equity to $516.4 million.
  5. Windows now accounts for 58% of application products revenue (up from 51%), while Macintosh application revenue declined 10%, reflecting a continuing platform shift.
  6. Management targets 15% revenue growth and a 25% operating margin for fiscal 1999, but expects licensing revenue to decline further due to HP's clone PostScript and Japanese market conditions.
  7. Pending litigation includes a securities class action over a 1995 stock price drop and a patent suit from Heidelberger Druckmaschinen, though management does not expect a material impact on financial results.

03—Questions

Frequently Asked Questions

  1. Why did Adobe's profits fall so sharply in fiscal 1998?

    Net income fell 44% to $105.1 million. Several factors contributed: revenue declined 2%, the PostScript licensing business dropped 16% due to Japanese weakness and HP's clone product, operating expenses rose 19% (led by R&D and G&A), and $38.2 million in restructuring and other charges were recorded. Lower investment gains ($15.0 million vs. $34.3 million) and lower interest income also reduced the bottom line.

  2. What is the outlook for licensing revenue?

    Management was cautious and said the OEM licensing business is likely to decline in fiscal 1999. Drivers include Japanese market conditions, the timing of OEM product releases, the full impact of HP's monochrome laser printer clone, and possible royalty renegotiations. Growth is expected only in the longer term, from digital copiers.

  3. How is Adobe returning capital to shareholders?

    Adobe repurchased about 10.5 million shares for $379.2 million in fiscal 1998 under a program authorizing up to 15 million shares over two years, with about 836,000 shares remaining. It also paid a $0.05 quarterly cash dividend ($0.20 annually, about $16.3 million in total cash paid) and used put warrants and call options to manage repurchases. Some of these repurchases were funded from cash reserves, which reduced interest income.

  4. What are the main risks investors should monitor?

    Key risks include continued weakness in Japan and other Asian markets, the shift from Macintosh to Windows, competition from Microsoft's planned entry into digital imaging by mid-1999, HP's clone PostScript, and dependence on a small number of OEM customers. Other risks include foreign currency exposure (mainly the yen), Year 2000 readiness (with an estimated cost of about $3.0 million), the euro transition, and the outcome of ongoing securities and patent litigation.

04—Continue

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