01—Abstract
Summary
Summary of the 10-K filed January 27, 2011. Cited figures are marked; the original filing is the authoritative source.
Adobe's fiscal 2010 10-K (fiscal year ended December 3, 2010) reports record revenue of $3.80 billiona, up 29% from $2.95 billion in fiscal 2009, driven by strong adoption of Creative Suite 5 (launched May 2010), growth in the Omniture web analytics business (acquired October 2009 for about $1.8 billion), and recovery in Knowledge Worker (Acrobat) and Enterprise (LiveCycle, Connect) segments.
Net income rose to $774.7 millionb (diluted EPS $1.47) from $386.5 million (diluted EPS $0.73) a year earlier, though the prior year was depressed by a one-time $161.7 million tax charge tied to licensing Omniture technology to foreign subsidiaries. Gross margin was about 89%, and operating income climbed to $993 million from $691 million. Balance sheet and capital allocation shifted meaningfully.
Adobe issued $1.5 billionc of senior notes in February 2010 (3.25% due 2015 and 4.75% due 2020) and repaid its $1.0 billion credit facility, leaving $1.0 billion of revolver capacity undrawn. Cash, cash equivalents and short-term investments totaled $2.47 billion. The company repurchased $850 million of stock during fiscal 2010 and, as of year-end, had a $1.6 billion time-constrained buyback authority running through fiscal 2012, with $875 million remaining after a subsequent $125 million prepayment.
Stockholders' equity rose to $5.19 billiond, and no cash dividends were paid. Key risks flagged in the filing include Apple's restriction on bringing Flash Player to iOS devices, competitive pressure from Microsoft (Silverlight, Office PDF features, Expression), HTML5 eroding some Flash advantages, dependence on Ingram Micro (15% of net revenue), piracy, an open IRS examination of fiscal 2008-2009 transfer pricing, and integration risk from the October 2010 Day Software acquisition (about $248 million) and the Omniture deal. Management also signaled a shift toward subscription licensing, which the company noted could make revenue harder to predict.
02—Key points
Key Highlights
- Record fiscal 2010 revenue of $3.80 billion, up 29% year over year, with the first quarter exceeding $1 billion in revenue for the company's history
- Diluted EPS of $1.47 versus $0.73 in fiscal 2009; fiscal 2009 was depressed by a one-time tax charge of about $161.7 million related to Omniture technology licensing
- Creative Solutions revenue rose to $2.06 billion (up about 21%), driven by CS5 adoption; Omniture contributed $360.6 million, mostly subscription revenue
- Financed growth with $1.5 billion of senior notes issued in February 2010 and repaid the $1.0 billion credit facility; the revolver remains undrawn
- Returned capital through $850 million of share repurchases in fiscal 2010 and established a $1.6 billion buyback authority through fiscal 2012; no dividends paid
- Adobe's largest distributor, Ingram Micro, accounted for 15% of net revenue, and over 50% of revenue came from outside the Americas
- Strategic shift toward subscription licensing, SaaS, and mobile/non-PC platforms introduces revenue predictability risk and dependence on new business models
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Adobe Inc. kept $0.20.
- Revenue$3.80B100.0%
- Cost of revenue−$403.5M10.6%
- Gross profit$3.40B89.4%
- Operating costs−$2.40B63.2%
- Operating income$993.1M26.1%
- Interest, other & tax−$218.4M5.7%
- Net income$774.7M20.4%
Where FY2010 revenue went
$3.80B- Operating costs: $2.40B, 63% of revenue
- Net income: $774.7M, 20% of revenue
- Cost of revenue: $403.5M, 11% of revenue
- Interest, other & tax: $218.4M, 5.7% of revenue
Kept 20% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed January 27, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $3.80B$2.95B | +29.0% |
| Cost of Revenue | $403.50M$296.73M | +36.0% |
| Gross Profit | $3.40B$2.65B | +28.2% |
| Operating Expenses | $2.40B$1.96B | +22.7% |
| Operating Income | $993.07M$690.51M | +43.8% |
| Interest Expense | $56.95M$3.41M | +1571.6% |
| Net Income | $774.68M$386.51M | +100.4% |
| EPS (Basic) | $1.49$0.74 | +101.4% |
| EPS (Diluted) | $1.47$0.73 | +101.4% |
| Shares Outstanding (Basic) | 519.04M524.47M | −1.0% |
| Shares Outstanding (Diluted) | 525.82M530.61M | −0.9% |
05—Questions
Frequently Asked Questions
What drove Adobe's revenue growth in fiscal 2010?
Revenue grew from $2.95 billion to $3.80 billion, primarily from strong adoption of Creative Suite 5, which launched in May 2010 and drove a 23% increase in units licensed for Creative Suites and Photoshop. The Omniture acquisition added $334 million of revenue, and Knowledge Worker (Acrobat, up 17%) and Enterprise (up 18%) also grew. Fiscal 2010 was a 53-week year, which added roughly one extra week of revenue.
Why did net income more than double in fiscal 2010?
Net income rose to $774.7 million from $386.5 million. Fiscal 2009 was weighed down by a one-time tax charge of about $161.7 million tied to licensing Omniture technology to foreign subsidiaries, and its effective tax rate was about 45%. Fiscal 2010 also benefited from a $39 million tax benefit from closing a U.S. IRS examination for fiscal 2005-2007, along with higher operating income of $993 million versus $691 million.
How much debt does Adobe carry and is it a concern?
Adobe had about $1.5 billion of senior unsecured notes outstanding at year-end (3.25% due 2015 and 4.75% due 2020), with semi-annual interest payments of roughly $31 million. The notes carry no financial maintenance covenants, though they include limits on liens and sale-leasebacks. Against $2.47 billion in cash and short-term investments, leverage appears manageable, but the company explicitly notes that the debt reduces cash available for other uses and that rating downgrades could raise borrowing costs.
What are the biggest risks investors should watch?
Key risks include competition from Microsoft (Silverlight, Office PDF features) and HTML5 reducing the need for Flash; Apple's restrictions on Flash Player for iOS devices; reliance on Ingram Micro for 15% of revenue; intellectual property litigation, including the Eolas patent suit; currency exposure, since over 50% of revenue is outside the Americas; and integration risk from the Omniture and Day Software acquisitions. Management also flagged that the shift to subscription licensing could make revenue less predictable.
How is Adobe returning capital to shareholders?
Adobe repurchased $850 million of stock in fiscal 2010, mostly through structured repurchase agreements with financial institutions that lock in a discount to VWAP. It has a $1.6 billion dollar-based authority running through fiscal 2012, with $875 million remaining after a $125 million prepayment made after year-end. Adobe paid no cash dividends in fiscal 2010 or 2009 and said it does not anticipate paying them in the foreseeable future.
06—Continue