01—Abstract
Summary
Summary of the 10-K filed February 26, 2003. Cited figures are marked; the original filing is the authoritative source.
Adobe's fiscal 2002 10-K (fiscal year ended November 29, 2002) shows a company under pressure from a weak global economy, with total revenue down 5% to $1,164.8 milliona from $1,229.7 million, and GAAP net income falling 7% to $191.4 million, or $0.79 diluted EPS, from $205.6 million and $0.83.
Products revenue declined 6%, driven by weakness in Graphics (down 7%), Cross-media Publishing (down 10%), and OEM PostScript (down 15%). The ePaper Solutions segment was the only major growth engine, rising 3% to $300.9 millionb, helped by the April 2002 Accelio acquisition, which added about $21.5 million of revenue. Management is positioning the company around ePaper enterprise solutions and a new Creative Professional business unit as it realigns segments for fiscal 2003.
Profitability was mixed. Gross margin held at about 91%, and operating expenses fell as sales and marketing dropped 6% and G&A dropped 7%. However, operating income declined to $287.0 millionc from $378.5 million, reflecting lower revenue and higher amortization and impairment charges of $21.0 million.
Nonoperating results were hurt by $17.2 milliond of investment losses, which turned pre-tax income into a $284.7 million figure. Cash generation weakened, with operating cash flow falling to $329.3 million from $418.7 million.
The company repurchased $293.2 million of treasury stock, and it continued quarterly dividends of $0.0125 per share. The filing also flags several risks for investors: pending litigation with Agfa Monotype and International Typeface Corporation over font software licensing and the DMCA, Microsoft's expanding presence in PDF and electronic forms, a concentration of revenue with distributors Ingram Micro (27%) and Tech Data (14%), and ongoing investment volatility tied to Adobe Ventures and public equity holdings.
02—Key points
Key Highlights
- Total revenue fell 5% to $1,164.8 million, with products revenue down 6% to $1,153.2 million, reflecting weak demand across Asia, Europe, and the U.S.
- ePaper Solutions was the sole growth segment, up 3% to $300.9 million, aided by Acrobat strength in the U.S. and $21.5 million from the Accelio acquisition.
- GAAP diluted EPS was $0.79, down from $0.83, while operating income fell 24% to $287.0 million from $378.5 million.
- Investment losses of $17.2 million (versus $93.4 million in fiscal 2001) hit nonoperating results, including $11.3 million of other-than-temporary write-downs on public equity holdings.
- Operating cash flow declined to $329.3 million from $418.7 million, and the company spent $293.2 million repurchasing treasury stock.
- Management announced a segment realignment for fiscal 2003, creating a Creative Professional segment and a Digital Imaging and Video segment, and is focusing investment on enterprise ePaper.
- Significant legal exposure includes AMT/ITC font litigation, a DMCA suit over Acrobat 5.0, and a patent suit (Dufresne) naming Adobe alongside Microsoft and Macromedia.
03—Questions
Frequently Asked Questions
Why did Adobe's revenue decline in fiscal 2002?
The decline was driven primarily by the global economic slowdown, which reduced marketing and ad spending by creative professionals who are core Adobe customers. Revenue fell in Graphics (down 7%), Cross-media Publishing (down 10%), and OEM PostScript and Other (down 15%), with Web-focused products like GoLive down 35% and illustration software down 13%. Weakness in Japan also contributed to the decline in Asia, where revenue fell about 16%.
What is driving growth in Adobe's business?
Growth came from the ePaper Solutions segment, which rose 3% to $300.9 million. Acrobat revenue in the U.S. increased 5%, and the newly acquired Accelio electronic forms business contributed $21.5 million. Management is also investing in the professional layout products (InDesign and Creative Suite), which grew 42% in fiscal 2002.
How did Adobe's profitability change, and what affected net income?
Gross margin remained high at about 91%, and operating expenses declined as sales and marketing fell 6% and G&A fell 7%. However, operating income fell to $287.0 million from $378.5 million because of lower revenue. Net income dropped to $191.4 million from $205.6 million, with investment losses of $17.2 million and a tax rate of 32.8% also weighing on results.
What are the main risks investors should watch?
Key risks include continued economic weakness in the U.S., Europe, and Japan; competition from Microsoft, which is planning electronic forms and PDF-like functionality; and the concentration of application revenue among distributors such as Ingram Micro (27% of revenue) and Tech Data (14%). Adobe also faces litigation with AMT and ITC over font licensing, which management says could have a material adverse effect if resolved unfavorably. Future investment gains or losses tied to Adobe Ventures and public equity holdings remain volatile.
04—Continue