Intro | To Our Stockholders | Adobe Is Innovating | Adobe Is Inspiring | Adobe Is Leading The Way | Facts | Financial Report EVERYWHERE YOU LOOK 2001 ANNUAL REPORT bc Home | Intro | To Our Stockholders | Adobe Is Innovating | Adobe Is Inspiring | Adobe Is Leading The Way | Facts | Financial Report At a New York City subway kiosk, commuters snap up newspapers and magazines published in a dizzying array of languages. In the conference room of a multinational enterprise, a sales director applies her digital signature to a contract delivered in Adobe Portable Document Format (PDF). From his home-based production studio, a motion graphics designer adds special effects to a corporate training film shot on digital video. And on their personal computer, grandparents view digital photos of a new addition to the family. Adobe Systems is in each of these places—and in countless others—helping people stay informed, streamline business processes, sell products, entertain audiences, and keep in touch. Spanning nearly every medium of human communication—print, ePaper®, dynamic media, wireless messaging, and the World Wide Web—Adobe Systems provides the innovative Network Publishing software solutions that help people create, manage, and deliver visually rich content. Whether it’s through the efficiency-enhancing capabilities of Adobe® Acrobat® software or the constantly evolving power of our groundbreaking graphics software, we inspire legions of customers worldwide to communicate in ways that are as creative, diverse, and visionary as they are. We’re leading the Network Publishing revolution. We’re in front of the technological curve. We’re behind our customers’ greatest inspirations. We’re everywhere you look. Home | Intro | To Our Stockholders | Adobe Is Innovating | Adobe Is Inspiring | Adobe Is Leading The Way | Facts | Financial Report left to right: John E. Warnock Chairman of the Board Charles M. Geschke Chairman of the Board Bruce R. Chizen Adobe Business Segments President and Chief Executive Officer Graphics ePaper Solutions Adobe® After Effects® Adobe Acrobat To Our Stockholders AlterCast™ Acrobat Approval Atmosphere™ Acrobat Capture® During fiscal 2001, Adobe Systems assumed a leadership role in turning the promise of Network Publishing into Digital Video Collection Acrobat Distiller® Server reality. Working closely with our partners, we delivered powerful software tools that help our customers publish Illustrator® Acrobat Messenger™ anything, anywhere, on any device. We listened closely to our customers to discover how Network Publishing is LiveMotion™ Acrobat Reader® unfolding in today’s changing communications environment. We introduced technologies that enable the Photoshop® Acrobat Reader for Palm OS® Photoshop Elements Acrobat Reader for Pocket PC delivery of highly personalized, visually rich content—and the industry took notice. Communications from both Premiere® OEM PostScript and Other our partners and competitors echoed our vision and are helping to establish Network Publishing as the model Cross-media Publishing Adobe PostScript® for the next wave of publishing. Just as important, Adobe ePaper Solutions made further strides into the Acrobat eBook Reader™ PostScript 3™ enterprise, and Adobe PDF has provided a foundation for streamlined corporate and government electronic Adobe Studio™ document workflows worldwide. Content Server Design Collection Even with these successes, Adobe Systems, like many technology leaders, experienced a difficult fiscal 2001. Our FrameMaker® diluted earnings per share decreased from $1.13 to $0.83 year over year, and our operating profit decreased by GoLive® 7% year over year. One of the greatest factors contributing to these results was the widespread decision by InCopy™ enterprises to defer capital investments, including software purchases. And creative professionals—our core InDesign® customers—were hit particularly hard as corporations spent less on marketing and advertising programs. As PageMaker® Adobe tracks these and other trends, we are working toward meeting our customers’ changing needs. Publishing Collection Type Web Collection Letter page 1 Home | Intro | To Our Stockholders | Adobe Is Innovating | Adobe Is Inspiring | Adobe Is Leading The Way | Facts | Financial Report Adobe Executive Team top, left to right: Bruce R. Chizen President and Chief Executive Officer Murray J. Demo Senior Vice President and Chief Financial Officer Shantanu Narayen Executive Vice President of Worldwide Products Melissa Dyrdahl Senior Vice President of Corporate Marketing and Communications bottom, left to right: Jim Stephens Senior Vice President of Worldwide Sales, Customer Care, and Field Marketing Theresa Townsley Senior Vice President of Human Resources Bryan Lamkin Senior Vice President of Graphics Joe Eschbach Vice President of ePaper Solutions As enterprises and governments worldwide streamlined their processes to more fully leverage their Internet-based infrastructures, we delivered Adobe ePaper Solutions, such as Adobe Acrobat, to drive this evolution from paper-based to digital workflows. In April, we shipped Adobe Acrobat 5.0, which has garnered excellent reviews and impressive revenue. In fact, despite the difficult economic environment, revenue from Acrobat software grew more than 40% over fiscal 2000 and now represents 24% of Adobe’s total revenue. For large organizations implementing Web-based electronic forms solutions, we introduced Adobe Acrobat Approval software. And newly released versions of Acrobat Reader for Palm OS and Pocket PC devices allowed publishers to deliver Adobe PDF files to millions of handheld device users. Letter page 4 Home | Intro | To Our Stockholders | Adobe Is Innovating | Adobe Is Inspiring | Adobe Is Leading The Way | Facts | Financial Report Looking at the coming year, we are inspired by the opportunities that lie ahead. As publishers, advertising agencies, and creative professionals adopt Network Publishing workflows, Adobe will provide the tools they need to create, manage, and deliver visually rich communications. Surging sales of digital cameras and digital video recorders are opening a huge opportunity for Adobe’s market- leading imaging software. And the continued streamlining of corporate business processes means an even greater opportunity for Adobe ePaper Solutions, our fastest growing market segment. Leveraging these trends, our strong cash position, and continued operational excellence, we will ensure that Adobe continues to be everywhere our stockholders, partners, and customers look. Total Revenue Diluted Earnings Per Share Net Income Revenue by Operating Segment 1300 2.50 500 700 600 1200 2.00 400 500 1100 1.50 300 400 1000 dollars 1.00 200 300 200 millions of dollars millions of dollars 900 0.50 millions of dollars 100 100 800 0.00 0 0 98 99 00 01 98 99 00 01 98 99 00 01 99 00 01 In fiscal 2001, Adobe achieved revenue of $1.230 billion. This represents a 3% decrease compared with fiscal Graphics ePaper Solutions Cross-media OEM PostScript 2000. Reported net income reached a level of $205.6 million, a 29% decrease compared with fiscal 2000. Publishing and Other Operating profit was $378.5 million in fiscal 2001, a decrease of 7% compared to fiscal 2000. Based on our new The numbers above reflect our new business operating segments, Adobe’s Graphics revenue was $543.4 million, a 10% decrease from fiscal 2000. Cross-media segments, which have been restated for fiscal Publishing revenue was $289.6 million, an 11% decrease. Revenue from our OEM PostScript and Other segment 2001 and the prior two years historically. declined in 2001, from $131.5 million to $104.8 million, a drop-off of 20%. And robust licensing of Adobe Acrobat For information on our former method of software and related products pushed Adobe ePaper Solutions revenue from $207.6 million to $291.9 million, an segment reporting, please see Note 16 of increase of 41% over 2000. (For further information on our former and new business segments, please refer to the 2001 Form 10-K. our Form 10-K.) Letter page 2 Home | Intro | To Our Stockholders | Adobe Is Innovating | Adobe Is Inspiring | Adobe Is Leading The Way | Facts | Financial Report Despite the difficult economic environment of fiscal 2001, we showed that we can tightly manage our business. We minimized direct costs, resulting in gross margins of 93.4%, compared with 93.1% in fiscal 2000. Additionally, soon after the economy began to affect our business during the year, we swiftly exercised company-wide operational expense reductions, which enabled us to deliver respectable bottom-line results. Adobe continues to be a highly profitable company, and we are operating from a strong financial position. On a GAAP basis, our operating profit margin was 31% in fiscal 2001. On a pro forma basis, our operating profit margin (which excludes restructuring and other charges, acquired in-process research and development, and amortization of goodwill) was 33%. Cash, cash equivalents, and short-term investments totaled $581.6 million as of November 30, 2001. And although we reduced our overall expenses during the year, we continued to increase research and development headcount. In fiscal 2001, Adobe spent nearly a quarter of a billion dollars on R&D. This investment will help position us for long-term growth and success. While some of Adobe’s competitors focused their efforts on developing either Web- or print-only publishing tools, we believed our customers would want to communicate both onscreen and on the printed page, and we developed our software solutions accordingly.