0000796343-16-000391.txt : 20160920 0000796343-16-000391.hdr.sgml : 20160920 20160920160633 ACCESSION NUMBER: 0000796343-16-000391 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20160920 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20160920 DATE AS OF CHANGE: 20160920 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADOBE SYSTEMS INC CENTRAL INDEX KEY: 0000796343 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770019522 STATE OF INCORPORATION: DE FISCAL YEAR END: 1202 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15175 FILM NUMBER: 161893985 BUSINESS ADDRESS: STREET 1: 345 PARK AVE CITY: SAN JOSE STATE: CA ZIP: 95110-2704 BUSINESS PHONE: 4085366000 MAIL ADDRESS: STREET 1: 345 PARK AVENUE CITY: SAN JOSE STATE: CA ZIP: 95110-2704 8-K 1 adbe8kq316.htm 8-K Document

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): September 20, 2016 (September 20, 2016)
Adobe Systems Incorporated
(Exact name of Registrant as specified in its charter)
Delaware
 
0-15175
 
77-0019522
(State or other jurisdiction of incorporation)
 
(Commission File Number)
 
(I.R.S. Employer Identification No.)

345 Park Avenue
San Jose, California 95110-2704
(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (408) 536-6000

Not Applicable
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 








Item 2.02. Results of Operations and Financial Condition.
On September 20, 2016, Adobe Systems Incorporated (“Adobe”) issued a press release announcing its financial results for its third fiscal quarter ended September 2, 2016. A copy of this press release is furnished and attached hereto as Exhibit 99.1 and is incorporated herein by reference.
The information in this report and the exhibit attached hereto are being furnished and shall not be deemed filed for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly stated by specific reference in such filing.
The attached press release includes non-GAAP operating income, non-GAAP net income, non-GAAP tax rate and non-GAAP diluted net income per share.
These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.
For our internal budgeting and resource allocation process, we use non-GAAP financial measures, net of the related tax impacts, which exclude: (A) stock-based and deferred compensation expenses; (B) restructuring and other charges; (C) amortization of purchased intangibles and technology license arrangements; (D) accrued loss contingencies associated with one-time litigation events; (E) investment gains and losses; (F) income tax adjustments; and (G) the income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes.
We use these non-GAAP financial measures in making operating decisions because we believe the measures provide meaningful supplemental information regarding our operational performance and give us a better understanding of how we should invest in research and development and fund infrastructure and go-to-market strategies. We use these measures to help us make budgeting decisions, for example, as between product development expenses and research and development, sales and marketing and general and administrative expenses and to facilitate our internal comparisons to our historical operating results. In addition, we believe these non-GAAP financial measures are useful because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. This allows institutional investors, the analyst community and others to better understand and evaluate our operating results and future prospects in the same manner as management and to compare operating results across accounting periods and to those of our peer companies.
As described above, we exclude the following items from one or more of our non-GAAP measures:
A.     Stock-based and deferred compensation expenses and related tax impact. Stock-based compensation expense consists of charges for employee restricted stock units, performance shares, stock options and employee stock purchases in accordance with current GAAP related to stock-based compensation including expense associated with stock-based compensation related to unvested options and restricted stock units assumed in connection with our acquisitions. As we apply current stock-based compensation standards, we believe that it is useful to investors to understand the impact of the application of these standards to our operational performance, liquidity and our ability to invest in research and development and fund acquisitions and capital expenditures. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense that typically requires or will require cash settlement by us and because such expense is not used by us to assess the core profitability of our business operations. Deferred compensation expense consists of charges associated with movements in our liability related to our deferred compensation plan. Although deferred compensation expense constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense that typically requires current cash settlement by us and because such expense is not used by us to assess the core profitability of our business operations. We further believe these measures are useful to investors in that they allow for greater transparency to certain line items in our financial statements. In addition, excluding these items from various non-GAAP measures facilitates comparisons to our competitors’ operating results.
B.     Restructuring and other charges and related tax impact. During the past several years, we have initiated certain restructuring activities in order to align our costs in connection with both our operating plans and our business strategies based on then-current economic conditions. As a result, we recognized costs related to termination benefits for former Adobe employees whose positions were eliminated and the consolidation of leased facilities. Restructuring and other charges are

2


excluded from non-GAAP results because such expense is not used by us to assess the core profitability of our business operations.
C.     Amortization of purchased intangibles and technology license arrangements and related tax impact. We incur amortization of purchased intangibles in connection with our acquisitions. Purchased intangibles include (i) purchased technology, (ii) trademarks, (iii) customer contracts and relationships and (iv) other intangibles. We expect to amortize for accounting purposes the fair value of the purchased intangibles based on the pattern in which the economic benefits of the intangible assets will be consumed as revenue is generated. Although the intangible assets generate revenue for us, we exclude this item because this expense is non-cash in nature and because we believe the non-GAAP financial measures excluding this item provide meaningful supplemental information regarding our operational performance, liquidity and our ability to invest in research and development and fund acquisitions and capital expenditures. In addition, excluding this item from various non-GAAP measures facilitates our internal comparisons to our historical operating results and comparisons to our competitors’ operating results. Periodically, we also incur charges related to prior activity in connection with technology license arrangements. We exclude these items because these expenses are not reflective of ongoing operating results in the period incurred.
D.        Accrued loss contingencies associated with one-time litigation events.  In connection with ongoing litigation or similar events, we accrue losses in the event such losses are determined to be both probable and estimable in accordance with Accounting Standards Codification (ASC) 450-20, Loss Contingencies. Upon resolution of the litigation or event, we adjust the accrual to reflect final resolution. From time to time we exclude such activity and the related tax impact when they relate to one-time events that are unrelated to our ongoing business and operating results.

E.     Investment gains and losses and related tax impact. We incur investment gains and losses principally from realized gains or losses from the sale and exchange of marketable equity investments, other-than-temporary declines in the value of marketable and non-marketable equity securities, unrealized holding gains and losses associated with our deferred compensation plan assets (classified as trading securities) and gains and losses on the sale of equity securities held indirectly through investment partnerships. We do not actively trade publicly held securities nor do we rely on these securities positions for funding our ongoing operations. We exclude gains and losses and the related tax impact on these equity securities because these items are unrelated to our ongoing business and operating results.
F.     Income tax adjustments. Our income tax expense is based on our GAAP taxable income and actual tax rates in effect, which can differ significantly from the long-term non-GAAP tax rate applied to our non-GAAP financial results. In arriving at our long-term non-GAAP tax rate, certain non-recurring and period specific income tax adjustments, such as a one-time tax charge in connection with an acquisition, reenactment of the Federal Research and Development tax credit and resolution of an income tax audit, are made to help us to assess the core profitability of our business operations. We evaluate this long-term non-GAAP tax rate only on an annual basis. This long-term non-GAAP tax rate could be subject to change for a number of reasons including significant changes in our geographic earnings mix or fundamental tax law changes in major jurisdictions in which we operate. Based on our long-term projections, a long-term non-GAAP tax rate of 21% has been applied to our non-GAAP financial results in both fiscal 2015 and fiscal 2016.
G.     Income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes. Excluding the income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes assists investors in understanding the tax provision associated with those adjustments and the effective tax rate related to our ongoing operations.
We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our financial results as determined in accordance with GAAP and that these measures should only be used to evaluate our financial results in conjunction with the corresponding GAAP measures and that is why we qualify the use of non-GAAP financial information in a statement when non-GAAP information is presented.



3



Item 9.01. Financial Statements and Exhibits.
(d) Exhibits
99.1 Press release issued on September 20, 2016 entitled “Adobe Reports Record Revenue”



4


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
ADOBE SYSTEMS INCORPORATED
 
 
 
By:
/s/ MARK GARRETT
 
 
Mark Garrett
 
 
Executive Vice President and Chief Financial Officer

Date: September 20, 2016






5



EXHIBIT INDEX
Exhibit No.
 
Description
99.1
 
Press release issued on September 20, 2016 entitled “Adobe Reports Record Revenue”


6
EX-99.1 2 adbeex991q316.htm EXHIBIT 99.1 Exhibit

Exhibit 99.1
graphica03a01a01a05.jpg
Investor Relations Contact
Mike Saviage
Adobe
408-536-4416
ir@adobe.com
Public Relations Contact
Dan Berthiaume
Adobe
408-536-2584
dberthia@adobe.com





FOR IMMEDIATE RELEASE
Adobe Reports Record Revenue
Strong Revenue and Earnings Growth Highlight Third Quarter Results

SAN JOSE, Calif. - Sept. 20, 2016 - Adobe (Nasdaq:ADBE) today reported financial results for its third quarter fiscal year 2016 ended Sept. 2, 2016.
Third Quarter Financial Highlights
Adobe achieved record quarterly revenue of $1.46 billion, representing year-over-year growth of 20 percent.
Diluted earnings per share were $0.54 on a GAAP-basis, and $0.75 on a non-GAAP basis.
Digital Media segment revenue was a record $990 million, with Creative revenue growing 39 percent year-over-year to a record $803 million.
Strong Creative Cloud and Document Cloud adoption drove Digital Media Annualized Recurring Revenue (“ARR”) to $3.70 billion exiting the quarter, a quarter-over-quarter increase of $285 million.
Adobe Marketing Cloud achieved record revenue of $404 million.
Year-over-year operating income grew 50 percent and net income grew 55 percent on a GAAP-basis; operating income grew 36 percent and net income grew 37 percent on a non-GAAP basis.
Cash flow from operations was a record $518 million, and deferred revenue grew to a record $1.80 billion.
The company repurchased approximately 3.5 million shares during the quarter, returning $344 million of cash to stockholders.
A reconciliation between GAAP and non-GAAP results is provided at the end of this press release and on Adobe’s website.
Executive Quotes
“We drove strong revenue and earnings performance in Q3, further distancing ourselves from our competitors,” said Shantanu Narayen, Adobe president and chief executive officer. “Our leadership in cloud-based content and data platforms make us a mission critical partner to the world's biggest brands as they transform how they engage with their customers.”
“Fiscal 2016 is shaping up to be another great year and Adobe's record results in Q3 reflect both our market leadership and strong execution,” said Mark Garrett, Adobe executive vice president and chief financial officer. “We are expecting another record quarter in Q4, and the leverage in our operating model is reflected in our increase to earnings targets for the year.”





Adobe to Webcast Earnings Conference Call
Adobe will webcast its third quarter fiscal year 2016 earnings conference call today at 2:00 p.m. Pacific Time from its investor relations website: www.adobe.com/ADBE. Earnings documents, including Adobe management’s prepared conference call remarks with slides, financial targets and an investor datasheet are posted to Adobe’s investor relations website in advance of the conference call for reference. A reconciliation between GAAP and non-GAAP earnings results and financial targets is also provided on the website.
Forward-Looking Statements Disclosure
This press release contains forward-looking statements, including those related to product adoption and innovation, business momentum, the importance of our products and services to our customers, revenue, annualized recurring revenue, bookings, earnings per share and operating cash flow, all of 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: failure to develop, market and offer products and services that meet customer requirements, introduction of new products, services and business models by competitors, failure to successfully manage transitions to new business models and markets, risks associated with the timing of revenue recognition, uncertainty in economic conditions and the financial markets, risks associated with our cloud strategy, fluctuations in subscription renewal rates, risks associated with cyber-attacks and information security, potential interruptions or delays in hosted services provided by us or third parties, and failure to realize the anticipated benefits of past or future acquisitions. For a discussion of these and other risks and uncertainties, please refer to Adobe’s Annual Report on Form 10-K for our fiscal year 2015 ended Nov. 27, 2015, and Adobe's Quarterly Reports on Form 10-Q issued in fiscal year 2016.
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 our quarter ended Sept. 2, 2016, which Adobe expects to file in Sept. 2016.
Adobe assumes no obligation to, and does not currently intend to, update these forward-looking statements.
About Adobe Systems Incorporated

Adobe is changing the world through digital experiences. For more information, visit www.adobe.com.
###
© 2016 Adobe Systems Incorporated. All rights reserved. Adobe, the Adobe logo and Creative Cloud 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.








2



Condensed Consolidated Statements of Income
(In thousands, except per share data; unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 2,
2016
 
August 28,
2015
 
September 2,
2016
 
August 28,
2015
Revenue:
 
 
 
 
 
 
 
Subscription
$
1,168,602

 
$
829,065

 
$
3,322,560

 
$
2,316,470

Product
180,960

 
275,338

 
578,572

 
840,650

Services and support
114,405

 
113,365

 
344,879

 
331,987

Total revenue
1,463,967

 
1,217,768

 
4,246,011

 
3,489,107

 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
Subscription
116,990

 
103,605

 
339,664

 
302,826

Product
15,435

 
24,545

 
51,490

 
65,715

Services and support
70,276

 
62,835

 
212,198

 
174,415

Total cost of revenue
202,701

 
190,985

 
603,352

 
542,956

 
 
 
 
 
 
 
 
Gross profit
1,261,266

 
1,026,783

 
3,642,659

 
2,946,151

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Research and development
248,450

 
218,660

 
718,138

 
642,216

Sales and marketing
477,475

 
422,031

 
1,415,155

 
1,241,770

General and administrative
143,702

 
122,578

 
429,233

 
397,867

Restructuring and other charges
(338
)
 
(751
)
 
(1,223
)
 
1,038

Amortization of purchased intangibles
22,652

 
18,246

 
60,034

 
50,599

Total operating expenses
891,941

 
780,764

 
2,621,337

 
2,333,490

 
 
 
 
 
 
 
 
Operating income
369,325

 
246,019

 
1,021,322

 
612,661

 
 
 
 
 
 
 
 
Non-operating income (expense):
 
 
 
 
 
 
 
Interest and other income (expense), net
2,725

 
4,433

 
12,995

 
11,510

Interest expense
(17,281
)
 
(16,519
)
 
(52,924
)
 
(47,669
)
Investment gains (losses), net
1,532

 
(1,314
)
 
(2,955
)
 
339

Total non-operating income (expense), net
(13,024
)
 
(13,400
)
 
(42,884
)
 
(35,820
)
Income before income taxes
356,301

 
232,619

 
978,438

 
576,841

Provision for income taxes
85,513

 
58,154

 
209,269

 
169,995

Net income
$
270,788

 
$
174,465

 
$
769,169

 
$
406,846

Basic net income per share
$
0.54

 
$
0.35

 
$
1.54

 
$
0.82

Shares used to compute basic net income per share
498,584

 
498,630

 
499,224

 
498,891

Diluted net income per share
$
0.54

 
$
0.34

 
$
1.52

 
$
0.80

Shares used to compute diluted net income per share
503,669

 
505,809

 
505,135

 
507,124


3



Condensed Consolidated Balance Sheets
(In thousands, except par value; unaudited)
 
September 2,
2016
 
November 27,
2015
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
767,672

 
$
876,560

Short-term investments
3,678,726

 
3,111,524

Trade receivables, net of allowances for doubtful accounts of $6,066 and $7,293, respectively
731,166

 
672,006

Prepaid expenses and other current assets
241,146

 
161,802

Total current assets
5,418,710

 
4,821,892

 
 
 
 
Property and equipment, net
811,524

 
787,421

Goodwill
5,433,180

 
5,366,881

Purchased and other intangibles, net
454,230

 
510,007

Investment in lease receivable
80,439

 
80,439

Other assets
169,358

 
159,832

Total assets
$
12,367,441

 
$
11,726,472

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
Trade payables
$
83,444

 
$
93,307

Accrued expenses
666,278

 
679,884

Income taxes payable
10,662

 
6,165

Deferred revenue
1,745,282

 
1,434,200

Total current liabilities
2,505,666

 
2,213,556

 
 
 
 
Long-term liabilities:
 
 
 
Debt
1,916,591

 
1,907,231

Deferred revenue
52,703

 
51,094

Income taxes payable
276,131

 
256,129

Deferred income taxes
238,459

 
208,209

Other liabilities
99,945

 
88,673

Total liabilities
5,089,495

 
4,724,892

 
 
 
 
Stockholders' equity:
 
 
 
Preferred stock, $0.0001 par value; 2,000 shares authorized

 

Common stock, $0.0001 par value
61

 
61

Additional paid-in-capital
4,541,798

 
4,184,883

Retained earnings
7,714,904

 
7,253,431

Accumulated other comprehensive income (loss)
(134,111
)
 
(169,080
)
Treasury stock, at cost (103,809 and 103,025 shares, respectively), net of reissuances
(4,844,706
)
 
(4,267,715
)
Total stockholders' equity
7,277,946

 
7,001,580

Total liabilities and stockholders' equity
$
12,367,441

 
$
11,726,472



4



Condensed Consolidated Statements of Cash Flows
(In thousands; unaudited)
 
Three Months Ended
 
September 2,
2016
 
August 28,
2015
Cash flows from operating activities:
 
 
 
Net income
$
270,788

 
$
174,465

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization and accretion
84,014

 
87,550

Stock-based compensation expense
84,503

 
85,975

Unrealized investment losses (gains), net
(1,471
)
 
1,415

Changes in deferred revenue
116,353

 
77,720

Changes in other operating assets and liabilities
(36,302
)
 
(66,637
)
Net cash provided by operating activities
517,885

 
360,488

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases, sales and maturities of short-term investments, net
(247,601
)
 
(394,944
)
Purchases of property and equipment
(55,213
)
 
(48,984
)
Purchases and sales of long-term investments, intangibles and other assets, net
(3,774
)
 
(1,138
)
Acquisitions, net of cash

 
(20,025
)
Net cash used for investing activities
(306,588
)
 
(465,091
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Purchases of treasury stock
(400,000
)
 
(100,000
)
Proceeds from issuance of treasury stock, net
71,128

 
68,641

Repayment of capital lease obligations
(65
)
 

Debt issuance costs

 
(957
)
Excess tax benefits from stock-based compensation
3,980

 
13,606

Net cash used for financing activities
(324,957
)
 
(18,710
)
Effect of exchange rate changes on cash and cash equivalents
(5,047
)
 
(3,542
)
Net decrease in cash and cash equivalents
(118,707
)
 
(126,855
)
Cash and cash equivalents at beginning of period
886,379

 
956,147

Cash and cash equivalents at end of period
$
767,672

 
$
829,292


5



Non-GAAP Results
(In thousands, except per share data)
The following tables show Adobe's GAAP results reconciled to non-GAAP results included in this release.
 
Three Months Ended
 
September 2,
2016
 
August 28,
2015
 
June 3,
2016
Operating income:
 
 
 
 
 
 
 
 
 
 
 
GAAP operating income
$
369,325

 
$
246,019

 
$
344,239

Stock-based and deferred compensation expense
86,070

 
84,371

 
87,209

Restructuring and other charges
(338
)
 
(751
)
 
(466
)
Amortization of purchased intangibles
36,082

 
41,041

 
32,567

Loss contingency reversal

 
(10,000
)
 

Non-GAAP operating income
$
491,139

 
$
360,680

 
$
463,549

 
 
 
 
 
 
Net income:
 
 
 
 
 
 
 
 
 
 
 
GAAP net income
$
270,788

 
$
174,465

 
$
244,074

Stock-based and deferred compensation expense
86,070

 
84,371

 
87,209

Restructuring and other charges
(338
)
 
(751
)
 
(466
)
Amortization of purchased intangibles
36,082

 
41,041

 
32,567

Investment (gains) losses, net
(1,532
)
 
1,314

 
3,318

Loss contingency reversal

 
(10,000
)
 

Income tax adjustments
(14,569
)
 
(15,051
)
 
(9,260
)
Non-GAAP net income
$
376,501

 
$
275,389

 
$
357,442

 
 
 
 
 
 
Diluted net income per share:
 
 
 
 
 
 
 
 
 
 
 
GAAP diluted net income per share
$
0.54

 
$
0.34

 
$
0.48

Stock-based and deferred compensation expense
0.17

 
0.17

 
0.17

Amortization of purchased intangibles
0.07

 
0.08

 
0.06

Investment (gains) losses, net

 

 
0.01

Loss contingency reversal

 
(0.02
)
 

Income tax adjustments
(0.03
)
 
(0.03
)
 
(0.01
)
Non-GAAP diluted net income per share
$
0.75

 
$
0.54

 
$
0.71

 
 
 
 
 
 
Shares used in computing diluted net income per share
503,669

 
505,809

 
504,725






6



Non-GAAP Results (continued)


 
Three Months
Ended
 
September 2,
2016
Effective income tax rate:
 
 
 
GAAP effective income tax rate
24.0
 %
Stock-based and deferred compensation expense
(2.1
)
Amortization of purchased intangibles
(0.9
)
Non-GAAP effective income tax rate
21.0
 %


Use of Non-GAAP Financial Information

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. 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. Adobe believes these non-GAAP financial measures are useful because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. This allows institutional investors, the analyst community and others to better understand and evaluate our operating results and future prospects in the same manner as management.

Adobe's management believes it is useful for itself and investors to review, as applicable, both GAAP information as well as non-GAAP measures, which may exclude items such as stock-based and deferred compensation expenses, restructuring and other charges, amortization of purchased intangibles and certain activity in connection with technology license arrangements, investment gains and losses, the related tax impact of all of these items, income tax adjustments, and the income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes. Adobe uses these non-GAAP measures in order to assess the performance of Adobe's business and for planning and forecasting in subsequent periods. Whenever such a non-GAAP measure is used, Adobe 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.









7
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