Adobe Systems’ (ADBE) earnings for the first quarter of fiscal year 2010, beat the Zacks Consensus Estimate by a penny. Revenue exceeded by 3.8%. However, shares were up 5.48% in pre-market trading, as investors responded positively to the strong guidance.
 
Revenue 

Total revenue was $858.7 million, up 13.4% sequentially and 9.2% year-over-year, exceeding management’s own expectations of around $800-850 million (up 5.6% to 12.2% sequentially). This was much better than the double-digit year-over-year declines witnessed in the three preceding quarters. The last quarter also benefited from an extra week of operations, which added an additional $35 million to revenue (this was included in the guidance provided by the company during the fourth quarter conference call). 

Products generated 93.1% of revenue, increasing 13.0% sequentially and 7.7% year over year. Services & Support brought in the remaining 6.9%, growing 18.5% sequentially and 34.1% year over year. The momentum in the business is indicative of a much stronger 2010 than was seen in 2009. Products and Services & Support usually generate gross margins of 90%+ and 65%+, respectively. Both areas saw gross margin expansion in the last quarter, although they were within the historical range. Management stated that the company was seeing much stronger demand for most key product lines. 

Revenue by Segment 

Revenue by operating segment was as follows—Creative Solutions 50% (up 0.6% sequentially), Knowledge Worker 19% (up 11.1%), Enterprise 9% (up 27.8%), Platform 5% (down 0.9%), Print and Publishing 5% (up 8.6%) and Omniture 10% (up 233.5%). The significant increase in Omniture revenue was because Omniture was acquired in November 2009, so the previous quarter results only included a single month’s contribution. 

Revenue by Geography 

The revenue increase was driven by all geographies, as both North America and Europe continued to stabilize, while Asia experienced typical seasonal strength. Around 48% of first quarter revenue originated in the Americas (up 6.3% sequentially), 32% in EMEA (up 14.8%) and 20% in Asia (up 31.4%). 

Margins 

The pro forma gross margin for the quarter was 91.7%, compared to 93.6% in the Nov 2009 quarter and 92.0% in the Feb quarter of 2008. The slight variation is mostly on account of the mix of services and support revenues versus the product revenue during the quarter. 

The Creative Solutions segment generated a gross margin of 94.7%, up 304 basis points sequentially), Knowledge Worker 97.2% (up 399 bps), Enterprise 81.0% (down 14 bps), Platform 95.3% (up 549 bps) and Print and Publishing 94.6% (up 419 bps). Omniture generated a gross margin of 52.0%, much lower than the rest of the company, due to difference in the business model. 

The operating expenses of $562.7 million were lower than the previous quarter’s $470.0 million. The operating margin was 26.1%, down 338 bps sequentially from 29.5%. The main reason for the decline was increase in R&D expenses (as a percentage of sales), although other operating expenses also increased slightly. 

Net income 

On a pro forma basis, Adobe generated a net income of $164.4 million, or a 19.1% net income margin compared to $165.1 million, or 21.8% in the previous quarter and net income of $202.1 million or 25.7% net income margin in the same quarter last year. The fully diluted pro forma earnings per share (EPS) was 31 cents, compared to 31 cents in the Nov quarter and 38 cents in the year-ago quarter. 

Our pro forma estimate excludes restructuring charges, amortization of intangibles, investment losses and tax adjustments, but includes deferred stock compensation. Our pro forma calculations may differ from management’s presentation due to the inclusion/exclusion of some items that were not considered by management. 

On a fully diluted GAAP basis, the company recorded a net loss of $127.2 million (24 cents per share) compared to net loss of $32.0 million (6 cents per share) in the previous quarter and profit of $156.4 million (30 cents per share) in the prior-year quarter. 

Balance Sheet 

The company ended with a cash and investments balance of $2.7 billion, an increase of $767.9 million during the quarter. Cash generated from operations was $260 million. Principal uses of cash during the quarter were $60 million spent on the repurchase of 1.7 million common shares and $25 million on capex. At quarter-end, Adobe had $1.49 billion in long term debt, amounting to a net cash balance of $1.18 billion. Including long term liabilities, the debt-cap ratio was a mere 26.6%. 

Guidance 

Management provided guidance for the first quarter on both GAAP and non-GAAP basis. 

Revenue is expected to come in at around $875-925 million (up 1.9% to 7.7% sequentially). Management expects the Creative segment to benefit from the CS-5 launch, which will therefore, increase in the second quarter. 

Since the first quarter benefited from an extra week, the Knowledge Worker and Enterprise businesses are expected to be flat sequentially. The Platform and Print and Publishing segments are also expected to be flat sequentially. Management also believes that the CS-5 will drive revenue increases across all geographies. 

The GAAP operating margin is expected to be 21-24.5%, non-operating expense $16-18 million, tax rate 25%, share count 531-535 million, yielding GAAP EPS of 23 cents to 30 cents. 

On a non-GAAP basis, operating margin is expected to be 33.5-35.5%, non-operating expense $16-18 million, tax rate 25%, share count 531-535 million, yielding a non-GAAP EPS of 39 cents to 44 cents.
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