Adobe Systems’ (ADBE) earnings for the third quarter of fiscal year 2009 ended August 2009 beat consensus estimates by 2 cents. Revenue beat by 1.7%.
Revenue
Total revenue was $697.5 million, down 1.0% sequentially and 21.4% year over year. Revenue was within management’s guidance range of $665-715 million range (down 5.6% to up 1.5% sequentially).
Products generated 93.2% of revenue, declining 1.6% sequentially and 22.5% year over year. Services & Support brought in the remaining 6.8%, growing 6.8% sequentially and declining 1.7% year over year. The weakness is attributable to recession-driven slowdown, particularly in Europe.
Products and Services & Support usually generate gross margins in the 90% and 60% ranges, respectively. Both areas saw slight gross margin improvement in the last quarter.
Segment-wise results
Revenue by operating segment was as follows: Creative Solutions 57% (down 2.8% sequentially), Knowledge Worker 22% (down 1.0%), Enterprise 8% (up 3.4%), Platform 6% (up 21.9%) and Print and Publishing 6% (down 9.0%). The Creative Solutions segment generated a gross margin of 91.3%, (up 89 basis points sequentially), Knowledge Worker 93.6% (up 19.bps), Enterprise 80.2% (up 230 bps), Platform 89.1% (up 380 bps) and Print and Publishing 89.8% (up 25 bps).
Around 45% of third quarter revenue originated in the Americas (up 11.9% sequentially), 28% in EMEA (down 9.2%) and 21% in Asia (down 14.7%). Management stated that the underlying business in North America was stable in the last quarter, with education being particularly strong. Asia also performed better than management expectations, which partially offset the continued weakness in EMEA, particularly Europe.
Margins
The pro forma gross margin for the quarter was 90.8%, compared to 90.0% in the May 2009 quarter and 87.7% in the August quarter of 2008. The slight variation is mostly on account of the mix of services and support revenues versus the product revenue in the quarter.
The operating expenses of $409.9 million were lower than the previous quarter’s $412.3 million. The operating margin was 32.0%, up 53 bps sequentially from 31.5%. The increase in G&A expenses was more than offset by decrease in COGS, R&D and S&M expenses as a percentage of sales.
Net income
On a pro forma basis, ADBE generated a net income of $190.7 million, or a 27.3% net income margin compared to a $169.1 million, or 24.0% in the previous quarter and net income of $223.8 million or 25.2% net income margin in the same quarter last year.
The fully diluted pro forma earnings per share (EPS) was 36 cents, compared to 32 cents in the May quarter and 41 cents in the year-ago quarter. Our pro forma estimate excludes restructuring charges, deferred stock compensation and amortization of intangibles. 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 income of $136.0 million ($0.26 per share) compared to $126.1 million (24 cents per share) in the previous quarter and $191.6 million (35 cents per share) in the prior-year quarter.
Balance Sheet
The company ended with a cash and investments balance of $2.6 billion, a decrease of $107.7 million from the end of the previous quarter. Cash generated from operations was $237 million. Principal uses of cash during the quarter included $58 million on capital expenditure and $350 million on share repurchases.
At quarter-end, Adobe had $350 million in long term debt, amounting to a net cash balance of $2.2 billion. Including long term liabilities, the debt-cap ratio was a mere 12.2%.
Guidance
Management provided guidance for the fourth quarter on both GAAP and non-GAAP basis.
Revenue is expected to be in the $690-740 million range (down 1.1% to up 6.1% sequentially). Asia is expected to decline sequentially as a result of negative seasonality in Japan, Americas is expected to be flat to up slightly and Europe is expected to grow sequentially. The Creative, Knowledge Worker and Enterprise segments are expected to grow, with Platform declining.
The GAAP operating margin is expected to be 23-27%, non-operating income $1-3 million, tax rate 23%, share count 530-532 million, yielding GAAP EPS of $0.23-0.29.
On a non-GAAP basis, operating margin is expected to be 33-36%, non operating income $1-3 million, tax rate 23.5%, share count 530-532 million, yielding a non-GAAP EPS of $0.33-0.39.
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