01—Abstract
Summary
Summary of the 10-K filed February 21, 2002. Cited figures are marked; the original filing is the authoritative source.
Adobe Systems Incorporated's fiscal 2001 (ended November 30, 2001) was a year of top-line contraction and sharp investment losses.
Revenue fell 3% to $1,229.7 milliona from $1,266.4 million, driven by weak creative-professional spending in the U.S. and Europe, a 20% decline in OEM PostScript licensing, and a 10% drop in Web Publishing. The ePaper Solutions segment, anchored by Acrobat, was the bright spot, growing 40% to $291.9 million. Gross margin held at roughly 93%, but operating income declined to $378.5 million from $408.1 million, and net income fell 29% to $205.6 million, or $0.83 diluted EPS, from $1.13 a year earlier.
The largest drag on earnings was a $93.4 millionb net investment loss, driven by other-than-temporary writedowns on public equity holdings and losses from Adobe Ventures. Net income would have been materially higher without these charges: management's pro forma figures (excluding investment losses, restructuring and goodwill amortization) show $1.15 diluted EPS. Management also took a $12.1 million restructuring charge and cut 247 positions, with the savings intended to fund investment in digital imaging, digital video and ePaper products.
Capital deployment was aggressive. Adobe repurchased $485.1 millionc of treasury stock, which, together with dividends, drove cash, cash equivalents and short-term investments down 14% to $581.6 million and stockholders' equity down 18% to $617.0 million.
Management expects further declines in cash in fiscal 2002 given continued buybacks and acquisitions, including the pending Accelio deal (about $72 milliond in stock). For fiscal 2002, management targets revenue of about $1.3 billion, a 28% pre-tax pro forma operating margin and pro forma EPS of about $1.03, though these targets are subject to a slowing economy and the Accelio transaction.
02—Key points
Key Highlights
- Revenue declined 3% to $1,229.7 million (from $1,266.4 million), reflecting weakness in creative professional markets and the OEM PostScript business, partially offset by ePaper growth.
- ePaper Solutions revenue rose 40% to $291.9 million, driven by the release of Acrobat 5.0 and enterprise migration to electronic workflows; it is now Adobe's fastest-growing segment.
- Net income fell 29% to $205.6 million; diluted EPS was $0.83, versus $1.13 in fiscal 2000. Pro forma diluted EPS excluding investment losses, restructuring and goodwill amortization was $1.15.
- Investment loss of $93.4 million (from a gain of $14.3 million in fiscal 2000) significantly reduced pre-tax income, including $53.1 million in writedowns of marketable equity holdings.
- Adobe repurchased $485.1 million of its own stock in fiscal 2001 and paid $12.0 million in dividends, reducing cash, short-term investments and equity; stockholders' equity fell to $617.0 million.
- A restructuring program eliminated 247 positions ($12.1 million charge) to redirect resources toward digital imaging, digital video and ePaper products.
- Fiscal 2002 targets: revenue of about $1.3 billion, pro forma EPS of about $1.03, and a 28% pre-tax pro forma operating margin, lowered to 27% for the pending Accelio acquisition (targeted to close April 2002).
03—Questions
Frequently Asked Questions
Why did Adobe's revenue and earnings decline in fiscal 2001?
Revenue fell 3% because of weak economic conditions, particularly in the U.S., Europe and Japan. Photoshop and other creative-tool sales dropped as corporate marketing budgets were cut, the Macintosh platform declined 21%, and OEM PostScript royalties fell 20% due to printer-market weakness, renegotiated OEM pricing and outsourcing. Net income fell mainly because of a $93.4 million investment loss rather than operating deterioration; operating income declined about 7%.
How significant is the ePaper Solutions business to Adobe's future?
ePaper Solutions, built around Acrobat, grew 40% to $291.9 million, and Adobe reported that 400 million copies of Acrobat Reader have been distributed. It is now about 24% of revenue. Management expects continued growth from enterprise and government adoption of PDF workflows and is increasing ePaper investment in fiscal 2002, with the Accelio acquisition expanding its electronic forms offerings.
What risks does the investment portfolio pose to earnings?
Adobe holds public equity stakes (fair value $37.8 million, down 58% year over year) and has invested $194.9 million in Adobe Ventures and direct private investments. Further writedowns are possible: a 50% decline in the value of the public holdings would reduce their value by about $18.9 million. Investment gains and losses are unpredictable and have swung between gains of $88.9 million in fiscal 1999 and losses of $93.4 million in fiscal 2001.
How much cash will Adobe have after its share buybacks and acquisitions?
Cash, cash equivalents and short-term investments totaled $581.6 million at year-end, down $98.3 million. Management says balances may decline further in fiscal 2002 because of ongoing buybacks, acquisitions such as Accelio, and the pending Fotiva purchase. Adobe has about $84.0 million in potential put-warrant obligations and $63.3 million in call-option exposure due in fiscal 2002, and believes existing cash plus operating cash flow will cover its needs for the next 12 months. Cash flow from operations was $418.7 million in fiscal 2001.
What legal risks does Adobe face?
Adobe is in patent litigation with Macromedia. Adobe sued in August 2000 over tabbed-palette and rasterization patents; Macromedia countersued in September 2000 over three patents, and the case is in discovery with a trial date of April 29, 2002. Macromedia filed a separate suit in October 2001 alleging infringement of two web-editor patents. Management believes the claims lack merit and that the outcome will not materially affect its financial position or results of operations.
04—Continue