March 18th

Adobe Reports Strong Q1 Revenue and Earnings

Company Achieves 37 Percent Year-Over-Year Revenue Growth

Adobe Systems Incorporated (Nasdaq:ADBE - News) today reported financial results for its first quarter ended Feb. 29, 2008.

In the first quarter of fiscal 2008, Adobe achieved revenue of $890.4 million, compared to $649.4 million reported for the first quarter of fiscal 2007 and $911.2 million reported in the fourth quarter of fiscal 2007. This represents 37 percent year-over-year revenue growth. Adobe’s first quarter revenue target range was $855 to $885 million.

“Driving our strong performance in Q1 was continued demand for our Creative Suite 3 family of products, as well as another record quarter for our Acrobat product family,” said Shantanu Narayen, president and chief executive officer of Adobe. “As the proliferation of digital content accelerates, customers worldwide are looking to Adobe for solutions that enable the creation of rich, engaging experiences across a variety of media and devices. This trend will continue to drive our diverse business, and we are reaffirming our fiscal year financial targets.”

During the first quarter, Adobe repurchased 33.3 million shares of its outstanding common stock, at a cost of $1.25 billion.

First Quarter GAAP Results

Adobe’s GAAP diluted earnings per share for the first quarter of fiscal 2008 were $0.38, based on 571.3 million weighted average shares. This compares with GAAP diluted earnings per share of $0.24 reported in the first quarter of fiscal 2007 based on 604.2 million weighted average shares, and GAAP diluted earnings per share of $0.38 reported in the fourth quarter of fiscal 2007 based on 587.9 million weighted average shares. Adobe’s first quarter GAAP earnings per share target range was $0.34 to $0.36.

GAAP operating income was $275.4 million in the first quarter of fiscal 2008, compared to $146.3 million in the first quarter of fiscal 2007 and $275.8 million in the fourth quarter of fiscal 2007. As a percent of revenue, GAAP operating income in the first quarter of fiscal 2008 was 30.9 percent, compared to 22.5 percent in the first quarter of fiscal 2007 and 30.3 percent in the fourth quarter of fiscal 2007.

GAAP net income was $219.4 million for the first quarter of fiscal 2008, compared to $143.9 million reported in the first quarter of fiscal 2007, and $222.2 million in the fourth quarter of fiscal 2007.

First Quarter Non-GAAP Results

Non-GAAP diluted earnings per share for the first quarter of fiscal 2008 were $0.48. This compares with non-GAAP diluted earnings per share of $0.30 reported in the first quarter of fiscal 2007, and non-GAAP diluted earnings per share of $0.49 reported in the fourth quarter of fiscal 2007. Adobe’s first quarter non-GAAP earnings per share target range was $0.44 to $0.46.

Adobe’s non-GAAP operating income was $359.0 million in the first quarter of fiscal 2008, compared to $223.8 million in the first quarter of fiscal 2007 and $362.2 million in the fourth quarter of fiscal 2007. As a percent of revenue, non-GAAP operating income in the first quarter of fiscal 2008 was 40.3 percent, compared to 34.5 percent in the first quarter of fiscal 2007 and 39.7 percent in the fourth quarter of fiscal 2007.

Non-GAAP net income was $273.0 million for the first quarter of fiscal 2008, compared to $183.6 million in the first quarter of fiscal 2007, and $289.6 million in the fourth quarter of fiscal 2007.

A reconciliation between GAAP and non-GAAP results is provided at the end of this press release.

Adobe Provides Second Quarter Financial Targets and Reaffirms Fiscal Year 2008 Targets

For the second quarter of fiscal 2008, Adobe announced it is targeting revenue of $855 million to $885 million. The Company is targeting a GAAP operating margin of 29 to 30 percent in the second quarter. On a non-GAAP basis, the Company is targeting a second quarter operating margin of approximately 39 percent.

In addition, Adobe is targeting its share count to be between 546 million and 550 million shares in the second quarter of fiscal 2008. The Company also is targeting GAAP non-operating income to be $14 million to $16 million, and non-GAAP non-operating income to be $5 million to $7 million. Adobe’s GAAP and non-GAAP tax rate is expected to be approximately 27 percent.

These targets lead to a second quarter earnings per share target range of $0.35 to $0.37 on a GAAP basis, and a earnings per share target range of $0.45 to $0.47 on a non-GAAP basis.

For fiscal year 2008, Adobe reaffirmed it is targeting annual revenue growth of approximately 13 percent. The Company also reaffirmed it is targeting an annual GAAP operating margin of approximately 30 percent, and a non-GAAP operating margin of approximately 39 percent.

In addition, Adobe provided fiscal year 2008 earnings targets. On a GAAP basis, the Company is targeting earnings per share of $1.45 to $1.51. On a non-GAAP basis, the Company is targeting earnings per share of $1.86 to $1.92.

A reconciliation between these GAAP and non-GAAP financial targets is provided at the end of this press release.

Forward-Looking Statements Disclosure

This press release contains forward-looking statements, including those related to revenue, operating margin, other income, tax rate, share count, earnings per share, and business momentum which involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to: delays in development or shipment of Adobe’s new products or major new versions of existing products, introduction of new products and business models by existing and new competitors, failure to successfully manage transitions to new business models and markets, failure to anticipate and develop new products and services in response to changes in demand for application software and software delivery, computers, printers, or other non PC-devices, adverse changes in general economic or political conditions in any of the major countries in which Adobe does business, difficulty in predicting revenue from new businesses, costs related to intellectual property acquisitions, disputes and litigation, inability to protect Adobe’s intellectual property from unauthorized copying, use, disclosure or malicious attack, failure to realize the anticipated benefits of past or future acquisitions and difficulty in integrating such acquisitions, changes to Adobe’s distribution channel, disruption of Adobe’s business due to catastrophic events, risks associated with international operations, fluctuations in foreign currency exchange rates, changes in, or interpretations of, accounting principles, impairment of Adobe’s goodwill or intangible assets, unanticipated changes in, or interpretations of, tax rules and regulations, Adobe’s inability to attract and retain key personnel, market risks associated with Adobe’s equity investments, and interruptions or terminations in Adobe’s relationships with turnkey assemblers. For further discussion of these and other risks and uncertainties, individuals should refer to Adobe’s SEC filings.

The financial information set forth in this press release reflects estimates based on information available at this time. These amounts could differ from actual reported amounts stated in Adobe’s Quarterly Report on Form 10-Q for the first quarter ended Feb. 29, 2008, which the Company expects to file in April 2008. Adobe does not undertake an obligation to update forward-looking statements.

About Adobe Systems Incorporated

Adobe revolutionizes how the world engages with ideas and information – anytime, anywhere and through any medium. For more information, visit www.adobe.com.

© 2008 Adobe Systems Incorporated. All rights reserved. Adobe, the Adobe logo, Acrobat and Creative Suite are either registered trademarks or trademarks of Adobe Systems Incorporated in the United States and/or other countries. All other trademarks are the property of their respective owners.

Condensed Consolidated Statements of Income
(In thousands, except per share data; unaudited)
	 
	

Three Months Ended
	February 29,

2008
	  	

March 2,
2007
			 
Revenue: 			
Products 	$ 	851,962 			$ 	620,298 	
Services and support 	  	38,483 	  		  	29,109 	 
Total revenue 	  	890,445 	  		  	649,407 	 
			
Total cost of revenue: 			
Products 		59,805 				53,815 	
Services and support 	  	22,670 	  		  	18,448 	 
Total cost of revenue 	  	82,475 	  		  	72,263 	 
			 
Gross profit 		807,970 				577,144 	
			 
Operating expenses: 			
Research and development 		168,485 				137,129 	
Sales and marketing 		262,595 				214,678 	
General and administrative 		82,929 				61,275 	
Restructuring and other charges 		1,431 				— 	
Amortization of purchased intangibles 	  	17,099 	  		  	17,725 	 
Total operating expenses 	  	532,539 	  		  	430,807 	 
			 
Operating income 		275,431 				146,337 	
			 
Non-operating income: 			
Interest and other income, net 		13,290 				22,515 	
Interest expense 		(1,809 	) 			(51 	)
Investment gain 	  	8,732 	  		  	5,601 	 
Total non-operating income 	  	20,213 	  		  	28,065 	 
Income before income taxes 		295,644 				174,402 	
Provision for income taxes 	  	76,265 	  		  	30,551 	 
Net income 	$ 	219,379 	  		$ 	143,851 	 
Basic net income per share 	$ 	0.39 	  		$ 	0.24 	 

Shares used in computing basic net income per share
	  	

561,113
	  		  	

587,969
	 
Diluted net income per share 	$ 	0.38 	  		$ 	0.24 	 
Shares used in computing diluted net income per share 	  	

571,259
	  		  	

604,249
	 

Condensed Consolidated Balance Sheets

(In thousands, except per share data; unaudited)
		  	
	February 29, 		November 30,
	  	2008 	  		  	2007 	 
 
ASSETS 			
			 
Current assets: 			
Cash and cash equivalents 	$ 	1,032,733 			$ 	946,422 	
Short-term investments 		682,511 				1,047,432 	
Trade receivables, net of allowances for doubtful accounts of $4,271 and $4,398, respectively 		293,266 				318,145 	
Other receivables 		38,839 				44,666 	
Deferred income taxes 		132,892 				171,472 	
Prepaid expenses and other assets 	  	46,031 	  		  	44,840 	 
Total current assets 		2,226,272 				2,572,977 	
			 
Property and equipment, net 		297,522 				289,758 	
Goodwill 		2,144,368 				2,148,102 	
Purchased and other intangibles, net 		357,221 				402,619 	
Investment in lease receivable 		207,239 				207,239 	
Other assets 	  	108,279 	  		  	92,984 	 
	$ 	5,340,901 	  		$ 	5,713,679 	 
			 
LIABILITIES AND STOCKHOLDERS’ EQUITY 			
			 
Current liabilities: 			
Trade and other payables 	$ 	62,019 			$ 	66,867 	
Accrued expenses 		368,978 				383,436 	
Accrued restructuring 		5,956 				3,731 	
Income taxes payable 		40,931 				215,058 	
Deferred revenue 	  	191,662 	  		  	183,318 	 
Total current liabilities 		669,546 				852,410 	
			 
Long-term liabilities: 			
Deferred revenue 		22,956 				25,950 	
Deferred income taxes 		146,344 				148,943 	
Income taxes payable 		197,741 				— 	
Debt 		450,000 				— 	
Accrued restructuring 		12,069 				13,987 	
Other liabilities 	  	28,095 	  		  	22,407 	 
Total liabilities 		1,526,751 				1,063,697 	
			 
Stockholders’ equity: 			
Preferred stock, $0.0001 par value; 2,000 shares authorized 		— 				— 	
Common stock, $0.0001 par value 		61 				61 	
Additional paid-in-capital 		2,317,582 				2,340,969 	
Retained earnings 		4,260,970 				4,041,592 	
Accumulated other comprehensive income 		26,215 				27,948 	
Treasury stock, at cost (59,963 and 29,425 shares, respectively), net of reissuances 	  	(2,790,678 	) 		  	(1,760,588 	)
Total stockholders’ equity 	  	3,814,150 	  		  	4,649,982 	 
	$ 	5,340,901 	  		$ 	5,713,679 	 

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)
	 
	Three Months Ended
	

February 29,
2008
	  	March 2,

2007
Cash flows from operating activities: 			
Net income 	$ 	219,379 			$ 	143,851 	

Adjustments to reconcile net income to net cash provided by operating activities:
	

 
		

 
Depreciation, amortization, and accretion 		69,202 				68,498 	
Stock-based compensation expense, net of tax 		43,034 				46,285 	
Net investment (gains) 		(9,493 	) 			(5,835 	)
Changes in deferred revenue 		5,350 				7,585 	
Changes in operating assets and liabilities 	  	71,828 	  		  	10,736 	 
			 
Net cash provided by operating activities 	  	399,300 	  		  	271,120 	 
			 
Cash flows from investing activities: 			
Sales and maturities of short-term investments, net of purchases 		362,592 				(249,540 	)
Purchases of property and equipment 		(26,268 	) 			(48,300 	)
Purchases of long term investments and other assets, net of sales 		(8,038 	) 			(9,517 	)
Cash paid for acquisitions 	  	485 	  		  	(3,094 	)
			 
Net cash provided by (used for) investing activities 	  	328,771 	  		  	(310,451 	)
			 
Cash flows from financing activities: 			
Purchases of treasury stock 		(1,150,022 	) 			(301,468 	)
Reissuances of treasury stock 		53,510 				94,033 	
Proceeds from borrowings under credit facility 		450,000 				— 	
Excess tax benefits from stock-based compensation 	  	— 	  		  	1,556 	 
			 
Net cash used for financing activities 	  	(646,512 	) 		  	(205,879 	)
			 
Effect of exchange rate changes on cash and cash equivalents 	  	4,752 	  		  	(1,260 	)
Net increase (decrease) in cash and cash equivalents 		86,311 				(246,470 	)
Cash and cash equivalents at beginning of period 	  	946,422 	  		  	772,500 	 
Cash and cash equivalents at end of period 	$ 	1,032,733 	  		$ 	526,030 	 

Non-GAAP Results

(In thousands, except per share data)

The following table shows the Company’s non-GAAP results reconciled to GAAP results included in this release for the quarters ended February 29, 2008, March 2, 2007 and November 30, 2007.
	 
	Three Months Ended
	

February 29,
2008
	  	March 2,

2007
	  	

November 30,
2007
					 

GAAP operating income
	$ 	275,431 			$ 	146,337 			$ 	275,832
Stock-based compensation 		43,034 				31,852 				39,791
Restructuring and other charges 		1,431 				— 				—
Amortization of purchased intangibles 	  	39,071 	  		  	45,644 	  		  	46,570

Non-GAAP operating income
	$ 	358,967 	  		$ 	223,833 	  		$ 	362,193
					 

GAAP net income
	$ 	219,379 			$ 	143,851 			$ 	222,208
Stock-based compensation, net of tax 		30,859 				23,089 				30,401
Restructuring and other charges, net of tax 		1,026 				— 				—

Amortization of purchased intangibles, net of tax
		28,018 				32,606 				35,524
R&D tax benefit, net of tax 		— 				(12,330 	) 			—
Investment (gain) loss, net of tax 	  	(6,262 	) 		  	(3,592 	) 		  	1,478

Non-GAAP net income
	$ 	273,020 	  		$ 	183,624 	  		$ 	289,611
					 
Diluted net income per share: 					
					 

GAAP net income
	$ 	0.38 			$ 	0.24 			$ 	0.38
Stock-based compensation, net of tax 		0.06 				0.04 				0.05
Restructuring and other charges, net of tax 		— 				— 				—

Amortization of purchased intangibles, net of tax
		0.05 				0.05 				0.06
R&D tax benefit, net of tax 		— 				(0.02 	) 			—
Investment gain, net of tax 	  	(0.01 	) 		  	(0.01 	) 		  	—

Non-GAAP net income
	$ 	0.48 	  		$ 	0.30 	  		$ 	0.49
					 
Shares used computing diluted net income per share 	  	571,259 	  		  	604,249 	  		  	587,865

The following tables show the Company’s reconciliation of non-GAAP to GAAP operating expense and operating margin for the quarters ended February 29, 2008, March 2, 2007 and November 30, 2007.

	Three Months Ended
	

February 29,

2008
	March 2,

2007
	

November 30,
2007
			 
GAAP operating expenses 	$ 	532,539 		$ 	430,807 		$ 	536,783 	
Stock-based compensation 		(42,190 	) 		(30,648 	) 		(38,577 	)
Restructuring and other charges 		(1,431 	) 		— 			— 	
Amortization of purchased intangibles 	  	(17,099 	) 	  	(17,725 	) 	  	(17,893 	)
Non-GAAP operating expenses 	$ 	471,819 	  	$ 	382,434 	  	$ 	480,313 	 
	Three Months Ended
	

February 29,
2008
	

March 2,
2007
	

November 30,
2007
			 
GAAP operating margin 	30.9 	% 	22.5 	% 	30.3 	%
Stock-based compensation 	4.8 		4.9 		4.4 	
Restructuring and other charges 	0.2 		— 		— 	
Amortization of purchased intangibles 	4.4 	  	7.1 	  	5.0 	 
Non-GAAP operating margin 	40.3 	% 	34.5 	% 	39.7 	%

The following table shows the Company’s reconciliation of non-GAAP to GAAP effective tax rate for the quarter ended February 29, 2008.

	

February 29,
2008
	 
GAAP effective income tax rate 	25.8 	%
Stock-based compensation 	0.3 	
Amortization of purchased intangibles 	0.3 	
Investment gain 	(0.1 	)
Non-GAAP effective income tax rate 	26.3 	%

Second Quarter and Fiscal Year 2008 Non-GAAP Financial Targets

(In millions, except per share data)

The following tables show the Company’s second quarter and fiscal year 2008 non-GAAP financial targets reconciled to GAAP financial targets included in this release.

	Second Quarter

Fiscal 2008
	  	

 
	Low 	  	High 		Fiscal 2008
					 
GAAP operating margin 	29.0 	% 		30.0 	% 		30.0 	%
Stock-based compensation 	5.3 			4.7 			4.7 	
Amortization of purchased intangibles 	4.7 	  		4.3 	  		4.3 	 
Non-GAAP operating margin 	39.0 	% 		39.0 	% 		39.0 	%
	Second Quarter

Fiscal 2008
	Low 	  	High
Non-operating income: 			
			 
GAAP non-operating income 	$ 	14.0 			$ 	16.0 	
Investment gain 	  	(9.0 	) 		  	(9.0 	)
Non-GAAP non-operating income 	$ 	5.0 	  		$ 	7.0 	 
	Second Quarter

Fiscal 2008
	

Fiscal 2008
	Low 	  	High 	Low 	  	High
Diluted net income per share: 		  				
						 
GAAP net income per share 	$ 	0.35 			$ 	0.37 		$ 	1.45 			$ 	1.51 	
Stock-based compensation, net of tax 		0.06 				0.06 			0.22 				0.22 	

Amortization of purchased intangibles, net of tax
		0.05 				0.05 			0.20 				0.20 	
Investment gain, net of tax 	  	(0.01 	) 	  	  	(0.01 	) 	  	(0.01 	) 		  	(0.01 	)
Non-GAAP net income per share 	$ 	0.45 	  	  	$ 	0.47 	  	$ 	1.86 	  		$ 	1.92 	 
						 
Shares used in computing diluted net income per share 	  	550.0 	  	  	  	546.0 	  	  	555.0 	  		  	551.0 	 

Adobe continues to provide all information required in accordance with GAAP, but believes evaluating its ongoing operating results may not be as useful if an investor is limited to reviewing only GAAP financial measures. Accordingly, Adobe uses non-GAAP financial information to evaluate its ongoing operations and for internal planning and forecasting purposes. Adobe’s management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Adobe presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate Adobe’s operating results in a manner that focuses on what Adobe believes to be its ongoing business operations. Adobe’s management believes it is useful for itself and investors to review, as applicable, both GAAP information that includes the stock-based compensation impact of SFAS 123R, restructuring and other charges, amortization of purchased intangibles and incomplete technology, investment gains and losses and the related tax impact of these items, the net tax impact of the R&D tax benefit, the income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes, and the non-GAAP measures that exclude such information in order to assess the performance of Adobe’s business and for planning and forecasting in subsequent periods. Whenever Adobe uses such a non-GAAP financial measure, it provides a reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above.

Contact:

Adobe Systems Incorporated
Mike Saviage, 408-536-4416 (Investor Relations)
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Holly Campbell, 408-536-6401 (Public Relations)
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