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Adobe Financials Q1 2013

by May 22, 2013

Adobe Financials Q1 2013
Earnings and financial results

From cash cow to dog: milking the digital cash

The champion of digital publishing is fully milking the glory of owning the top web and desktop publishing platforms.
Some me-too innovation in licensing model (subscription instead of license acquisition).
Significant innovation lacking, sales are down, costs are up, and margins eroded fast. In real terms, inflation-adjusted, revenues are going down even faster.
Adobe looks like being in a slow transition from a cash cow to a dog. Gone are the times when the company used to be a rising star.
Detailed revenues and costs indicate some interesting issues:
1. Almost 40% of revenues got eaten up by sales and marketing expense. Being the top dog in publishing is costly.
2. Research and development expense increased, 209 million is an impressive figure indeed, something really innovative should come out of that work hopefully.
3. Running such a declining business must be costly, as Adobe bumped up general and administrative expenditures from 111 to 133 million in one quarter.
4. It may be that customers might just not like transitioning from buying products to paying software subscriptions, as subscription revenue goes up much slower that product sales are lost. Or, as we suspect, some customers may just try subscribing to cheaper or open-source alternatives, and defecting en-masse from Adobe. Subscription model may have such a side effect of making easier for Adobe customers to defect.
In any case we just do not like what we see in this chart. We hope we are wrong, for the sake of Adobe investors.
5. We have a gut feeling that operating cash flow figure is somehow manipulated, and the true figure should be much lower.
We may investigate the above issues further provided we get such feedback from you readers.

Adobe Financial statements analysis

All charts are interactive. Mouse over them, disable/enable legend items to see the magic.

Adobe financials for Q1 2013
Placeholder for chart showing: sales, cost of sales, gross margin.

Click for larger Adobe Gross profit margin from sales , Q1 2013
Adobe sales down, cost of sales up, gross margin hit as percentage. Adobe still has enough room to sustain further margin erosion, albeit it looks like slowly transitioning from a cash cow to a dog.

Adobe financials for Q1 2013
Placeholder for chart showing: sales, cost of sales, operating expenses, operating income.

Click for larger Adobe Operating income from sales , Q1 2013
Even if sales are down, cost of sales is up. To add injury to insult, operating expenses increased as well. Naturally, operating income took a big hit and is at a three-year minimum.

Adobe financials for Q1 2013
Placeholder for chart showing: gross margin, operating expenses, non-operating expenses, income taxes, exceptional expenses, preferred distributions, net income.

Click for larger Adobe Net income overview , Q1 2013
Should be no surprise that net income is at a record minimum. We just hope Adobe is not going doggy so fast.

Adobe financials for Q1 2013
Placeholder for chart showing: detailed revenues and costs.

Click for larger Adobe Detailed revenues and costs , Q1 2013
Detailed revenues and costs shows some interesting issues:
1. Almost 40% of revenues got eaten up by sales and marketing expense. Being the top dog in publishing is costly.
2. Research and development expense increased, 209 million is an impressive figure indeed, something really innovative should come out of that work hopefully.
3. Running such a declining business must be costly, as Adobe bumped up general and administrative expenditures from 111 to 133 million in one quarter.
4. It may be that customers might just not like transitioning from buying products to paying software subscriptions, as subscription revenue goes up much slower that product sales are lost. Or, as we suspect, some customers may just try subscribing to cheaper or open-source alternatives, and defecting en-masse from Adobe. Subscription model may have such a side effect of making easier for Adobe customers to defect.
In any case we just do not like what we see in this chart. We hope we are wrong, for the sake of Adobe investors.

Adobe financials for Q1 2013
Placeholder for chart showing: balance sheet: current assets, long term assets, current liabilities, long-term liabilities, equity.

Click for larger Adobe Balance sheet overview , Q1 2013
So far all fine in balance sheet.

Adobe financials for Q1 2013
Placeholder for chart showing: current assets details: cash, investments, accounts receivable, inventory, deferred tax, others.

Click for larger Adobe Detailed current assets , Q1 2013
But current assets show a decline in receivables, apparently associated with transition towards the subscription model.

Adobe financials for Q1 2013
Placeholder for chart showing: property plant and equipment, equity, goodwill, intangibles, others.

Click for larger Adobe Detailed long term assets , Q1 2013
Goodwill and intangibles up, we are not sure this is a good thing.

Adobe financials for Q1 2013
Placeholder for chart showing: current liabilities: payables, debt, taxes, others.

Click for larger Adobe Detailed current liabilities , Q1 2013
Deferred revenue not great compared to sales, apparently Adobe is not getting much prepaid subscription currently.

Adobe financials for Q1 2013
Placeholder for chart showing: long term liabilities: debt, taxes, others.

Click for larger Adobe Detailed long term liabilities , Q1 2013
And debt is going up a bit.

Adobe financials for Q1 2013
Placeholder for chart showing: equity components: stock, earnings, others.

Click for larger Adobe Detailed equity components , Q1 2013
We see nothing special here.

Adobe financials for Q1 2013
Placeholder for chart showing: cash flows overview: net cash flow, operating, financing, investment cash flow.

Click for larger Adobe Cash flows overview , Q1 2013
Operating cash flow still ok, despite lackluster income statement and balance sheet.

Adobe financials for Q1 2013
Placeholder for chart showing: operating cash flows details: net income, adjustments, accounts payable, accounts receivable, inventory.

Click for larger Adobe Detailed operating cash flows , Q1 2013
But nice operating cash flow may be a temporary effect of collecting remaining remaining receivables.

Adobe financials for Q1 2013
Placeholder for chart showing: non cash adjustements of operating cash flows.

Click for larger Adobe Detailed non-cash adjustements , Q1 2013
And the nice operating cash flow is also a result of adjustment with stock compensation. That stock compensation reached an impressive 86 million figure. We believe that compensation should be classified as a real expense and operating cash flows shall not be adjusted.
We have a gut feeling that operating cash flow figure is somehow manipulated, and the true figure should be much lower. We may investigate the issue a bit further provided we get such requests from readers.

Adobe financials for Q1 2013
Placeholder for chart showing: financing cash flows details: debt, stock, dividend.

Click for larger Adobe Detailed financing cash flows , Q1 2013
Adobe buys back lots of shares, but strangely treasury stock position declined (see the detailed equity chart). That is because such stocks were given as compensation. And such compensation is not accounted properly in the operating cash flow (this is just our opinion, like in all comments here). Take care.

Adobe financials for Q1 2013
Placeholder for chart showing: investment cash flows details: property plant and equipment, investments, securities.

Click for larger Adobe Detailed investment cash flows , Q1 2013
If you see anything special in this chart please let us know.
More ideas on Adobe financials for Q1 2013 may come later.
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Data sources: Our an analysis is based on Adobe quarterly and annual reports as filed to SEC EDGAR or reported by Adobe. All data is thoroughly processed by our analysts to assure consistent and comparable figures across many quarters. In case you spot any error or inconsistency, please let us know.

Simple Finanz is an independent investment research, publishing and distribution firm. The analysts and company adhere to the CFA Institute ethics standards. The reports are submitted solely for investment information purposes, and are not a service to the researched companies. We did not received any compensation for the investment reports and analyses published here, either from the subject companies or their affiliates. We do not inform any company in advance of any details of our analysts' reports. These investment reports, analyses, and related research, are not offers or solicitations to buy or sell any securities. The analysts do not own equity or debt securities of the analyzed companies.
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