Date:20/12/11

Adobe Q4 profit falls 35%

Adobe Systems Inc. fiscal fourth-quarter earnings fell 35% on restructuring charges, but the software company's adjusted profit returned to growth on higher sales.

The maker of Photoshop and Illustrator design software took a $94 million restructuring charge in the quarter as it converts itself into a provider of cloud-based software and analytic services for creative professionals and Web marketers, and sheds its image as a provider of desktop software.

Analysts were concerned clients would delay purchases in advance of the broad launch of cloud services next year, but there was no sign of that in the fourth-quarter performance.

"The digital marketing opportunity is exciting not only because of strong performance this year but also for its strategic value as a software service business," Adobe President and Chief Executive Shantanu Narayen said on the earnings call."We believe we are in the sweet spot for growth as the demands on marketers have gained urgency and complexity."

Shares were up 4.7% at $27.70 after hours. Through the close, the stock has fallen 14% so far this year, underperforming the wider market.In the latest period, adjusted earnings rose 16% to $332.6 million, after they fell in the third quarter for the first time in more than a year.

The results come at the end of a rocky year for the San Jose, Calif.-based company, which has seen its shares drop more than 13% to under $30. In November, it capitulated to Apple Inc., in a battle over technologies shaping the evolution of websites and mobile devices, by announcing it would no longer promote its Flash video format for smartphones and tablet computers. Adobe will increase its support of HTML5 format favored by Apple.

Last month, Adobe said it would restructure its business to focus even more on digital media and digital-marketing software, resulting in 750 job cuts and slower-than-expected revenue growth next year.

Because of the restructuring, the company predicted slower revenue growth in 2012 when it unveiled the plans in November, though it expected growth to return to a higher range within a year.

"We have successfully transformed Adobe several times in the past, and I speak for the entire management team and employees when I say we are completely energized by this next chapter for the company," Narayen told analysts on the call.

The November job cuts were necessary to refocus the business around digital creative and marketing technologies to create and manage digital businesses, said Chief Financial Officer Mark Garrett in an interview after the call.

The goal is to make Adobe a strategic vendor to the chief marketing officer in the same way a provider of enterprise resource planning technology is a strategic vendor to the CFO.

Delivering that service over a "full blown cloud" won't occur until the second quarter of 2012, but already 40% of subscribers to the emerging service offerings are new to Adobe. Recurring revenue was 20% of total revenue in fiscal 2011, a figure Garrett expects to double in three years.

There is no indication that revenue will decline as legacy customers shift to the cloud.We firmly believe that we are attracting so many new users to our subscription offering, we will actually increase revenue over time," he said.

Adobe's goal is to build a software-as-a-service business that generates $1 billion in revenue annually.
In the fourth quarter, currency exchange contributed $15 million to revenue, including $3.6 million in hedge gains.

Expiration of the R&D tax credit is likely to add 1 percentage point to Adobe's tax rate in 2012. And although there has been widespread fear of recession in Europe, Garrett said sales were strong.

"We did exceptionally well in all vertical markets and all geographies," he said.The company predicted current-quarter earnings of 54 cents to 59 cents a share on revenue of $1.03 billion to $1.08 billion. Analysts surveyed by Thomson Reuters forecast 58 cents and $1.05 billion, respectively.

For the full year, it expects to post a $2.37 to $2.47 profit per share. Analysts were predicting $2.44. It reiterated its previous outlook for revenue growth to range from 4% to 6%.

For the quarter ended Dec. 2, the company posted a profit of $173.7 million, or 35 cents a share, from $268.9 million, or 53 cents a share, a year earlier. Excluding items such as stock-based compensation and restructuring charges, among other items, earnings rose to 67 cents a share from 56 cents.
Revenue increased 14% to $1.15 billion.

In September, Adobe forecast earnings of 57 cents to 64 cents a share on revenue of $1.08 billion to $1.13 billion. Operating margin fell to 21.4% from 28.5%.Product sales, the lion's share of Adobe's revenue, were up 13%. Subscription revenue grew 23%, and revenue from services and support was up 20%.

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