ADBE report by 2E612M


									Buy Report
March 24, 2009

                                                                Ticker         ADBE

                                                                Price          $20.46

                                                                Industry       Software

                                                                Sector         Technology

                                                                 Adobe Systems Incorporated is one of
                                                                 the largest and most diversified
                                                                 software companies in the world with
                                                                 a portfolio of almost 100 products.
                                                                 Fiscal year 2008 showed record
    Stock Price History               Valuation Measures         revenue in the creative solutions,
52 Week High          $46.44    Market Cap          11.58 B      business productivity, and platform
52 Week Low           $15.70    Curernt P/E              13.7    segments of the company.
52 Week Change       -37.15%    Trailing P/E            14.65
52 Week Change                  PEG Ratio                0.96
(S&P 500)            -39.04%    EV/ Revenue (ttm)        2.84
                                EV/ EBITDA (ttm)         7.74                  Growth
Beta                     1.69
                                                                   Revenues 2008        $3,579.90
                                                                   Revenues 2007        $3,157.90
                                                                              Growth       13.36%
                                                                   Net Income 2008        $871.80
                                                                   Net Income 2007        $723.80
                                                                             Growth        20.44%
                                                                   EPS 2008                 $1.59
                                                                   EPS 2007                 $1.21
                                                                              Growth       31.40%

Recommendation: Buy 1000 Shares of ADBE

Ali Kaiser, Marcie Lou, Kate Wright
Table of Contents
Company Overview                 3

Recent News                      3

Management                       4

Competitors                      5

Segments                         5

Revenues by Segment              7

Revenues by Geographic Region    7

Industry Outlook                 8

Macro Economic Outlook           8

SWOT Analysis                    9

Ownership Information           10

Analyst Opinion                 11

Investor Relations              12

Ratio Analysis                  12

Pro Forma Income Statement      15

Relative Valuations             16

Discounted Cash Flows           17

Recommendation                  18

Income Statement                19

Balance Sheet                   20

Statement of Cash Flows         21

Valueline                       23

Company Overview1
Adobe Systems Incorporated is one of the largest and most diversified software companies in the world
with a portfolio of almost 100 products. Since their start in 1982, Adobe has focused on helping people
“express, share, manage and collaborate on their ideas in imaginative and meaningful ways.” By using
distributors, value-added resellers, systems integrators, independent software vendors and original
equipment manufacturers, Adobe products are able to reach creative professionals, knowledge workers,
enterprise users, high-end consumers, and application developers. Adobe products run on Microsoft
Windows, Apple Mac OS, Linux, UNIX and other platforms making the software available to individuals
and companies around the world. With their 7.544 employees, Adobe runs operations in 31 countries in
the Americas, Europe, Middle East, Africa, and Asia. Fiscal year 2008 showed record revenue in the
creative solutions, business productivity, and platform segments of the company. For the first quarter of
fiscal year 2009, Adobe announced revenues of $786.4 million2.

Recent News3
March 3, 2009: ADBE and three Time Warner Inc. companies announced an alliance to promote
development of next generation video and media experiences.
February 16, 2009: ADBE and Nokia announced the $10 million Open Screen Project to help create
applications and services for mobile, desktop, and consumer electronic devices using the Adobe Flash
January 29, 2009: ADBE announced Adobe AIR and Adobe Flash Player 10 software are being installed in
record numbers. In less than a year from its initial release there have been more than 100 million
installations of Adobe AIR. In just 2 months, Adobe Flash was installed on more than 55% of computers
January 23, 2009: ADBE was named one of the “100 Best Companies to Work For.”
January 20, 2009: ADBE announced the eLearning Suite software which creates learning experiences via
the web.

  Adobe Systems Incorporated 2008 Annual Report
  Adobe Q1 FY2009 earnings press release

Shantanu Narayen- President and Chief Executive Officer
Narayen has been the Chief Executive Officer of Adobe since December 2007. He joined Adobe in 1998
after founding his own digital photo sharing software company in 1996. In addition, he has held
numerous positions within Apple Inc and Silicon Graphics Inc, giving him ample experience in the
software and technology industry.

Mark Garrett- Executive Vice President, Chief Financial Officer
Before joining Adobe as Executive Vice President and Chief Financial Officer in February 2007, Garrett
spent ample time in software and technology companies, especially companies dealing with information
management and storage. In addition, he services as a director of Informatica Corporation which deals
with enterprise data integration software services.

Karen O. Cottle- Senior Vice President, General Counsel and Corporate Secretary
Cottle has been with Adobe since stepping into the position of Senior Vice President and General
Counsel and Secretary in 2002. Before joining Adobe she was general counsel for Vitria Technology, Inc,
a business application software company.

Kevin Lynch- Senior Vice President, Chief Technology Officer
Lynch joined Adobe in December 2005 as part of the acquisition of Macromedia, Inc. During his time at
Macromedia, Lynch led Flash and Dreamweaver from their initial development to widespread use.

Johnny Loiacono- Senior Vice President, Creative Solutions Business Unit
Loiacono joined Adobe in April 2006 after spending 19 years with Sun Microsystems. While with Sun,
Loiacono was responsible for software technologies including Java, the Java Enterprise System suites
and the Solaris operating system.

Rob Tarkoff- Senior Vice President, Business Productivity Solutions
Tarkoff brings his experience with information management and storage and business-to-business e-
commerce to Adobe’s management team. He has been Senior Vice President of Business Productivity
Solutions since April 2007.

Matthew Thompson- Senior Vice President, Worldwide Field Operations
Thompson has been involved with design technologies since 1994. Prior to joining Adobe in 2006,
Thompson was Senior Vice President of World Wide Sales at Borland Software Corporation, a software
delivery optimization solutions provider.

    Adobe Systems Incorporated 2008 Annual Report

                      Microsoft develops, manufactures, licenses, and supports a wide range of
                      software products for computing devices. They operate in five segments: Client,
                      Server and Tools, the Online Services Business, the Microsoft Business Division,
                      and the Entertainment and Devices Division. Microsoft also provides consulting
                      and product support services, and trains and certifies computer system
                      integrators and developers. They sell a number of games including Xbox 360
and a number of PC games along with a couple online offerings, such as, Windows Live.

                 Apple designs and manufactures computers, mobile devices, portable music players, and
                 sells related software and accessories. They operate in three divisions, software products,
                 computer products, and communication products. They sell their products worldwide
                 through online stores, retail stores, direct sales force, and third-party wholesalers. As of
                 December 28, 2008, Apple had 251 retail stores and sells its products to consumers, small
                 and mid-sized businesses, education, enterprise, and the government.

                        Oracle manufactures, distributes, services, and markets databases, middleware,
                        and application software worldwide. They operate in 4 areas: New Software
                        Licensing, Consulting, On Demand, and Education. They have a New Software
                        Licenses segment that provides licensing for databases and middle software.
                        Their Consulting segment designs, implements, installs, and upgrades databases,
middleware, and software. Its On Demand segment provides multi-feature software and hardware
management and maintenance services. The company’s Education segment offers online courses and
self paced media training. They distribute products and services to resellers, consultants, education
providers, network integrators, and independent software vendors.

Creative Solutions
Adobe’s creative solutions segment focuses on meeting the needs of the creative professional through
38 creative solutions products. Graphic designers, production artists, web designers, user interface
designers, videographers, photographers and prepress professionals turn to Adobe’s products for
“professional publishing, Web design and development, professional photography, video production,
animation and motion graphic production and printing visually rich information”. Consumers use the

    Adobe Systems Incorporated 2008 Annual Report

creative solutions products to assist in creating on-line and print information such as newspapers,
magazines, catalogs, books, reports, and advertisements. Creative solutions products also attract the
attention of hobbyists and high end consumers who desire the professional quality of the software for
their projects. Adobe’s software products help customers become more efficient when publishing and
creating content.

Business Productivity Solutions
The business productivity solutions segment provides means for enterprises and governments to
improve their productivity, automate business processes, improve collaboration and reduce time-to-
market and basic costs. The main products in this 28 product portfolio are Adobe Reader, Adobe Flash
Player and Adobe AIR. This line of products targets knowledge workers, including accountants,
attorneys, architects and educators, and entire enterprises that need to be able to create and share
information at low costs. In addition, these users look for an interface that is easy to use yet provides a
variety of features. The business productivity solutions segment caters to vertical industries where
Adobe can provide comprehensive, scalable, secure and reliable server products that can be adapted to
fit each enterprise’s individual needs.

The platform segment of Adobe contains seven products that allow for the development and solution of
products which improve interactions between Web developers, businesses, and their customers. This
segment focuses on the Adobe Flash Platform technologies which have reached 98 percent of personal
computers. Adobe Flash Player version 10, released in 2008 features the added capabilities for creating
special effects, native 3D transformations and animations. As of FY 2008, the platform segment also
includes the development and marketing of mobile client solutions which extends Adobe Flash Platform
technologies to game consoles, cell phones, digital cameras and other devices with internet connections.
Through this segment, Adobe has created strong relationships with reputable companies such as
Comcast, Nokia, MTV Networks, and Sony PlayStation.

Print and Publishing
Adobe’s print and publishing segment contains 18 products that address a range of publishing needs
from CD-ROM publishing to on-line help systems to visually rich documents.

Revenue by Segment

Over the past three fiscal years, more than half of Adobe’s total revenues have been generated from the
creative solutions segment. Business productivity solutions produce around one third of Adobe’s total
revenues followed by print and publishing and then platform. The platform segment could see an
increase in percentage of total revenues due to the growth in mobile and device solutions which last
year saw growth of 115%.

Revenue by Geographic Region

Over the last three fiscal years, Adobe maintained strong revenues from the Americas, Europe, Middle
East and Africa and Asia. The company has slightly reduced the amount of revenue that is earned from
the Americas, while at the same time increasing the amount of revenue earned from the EMEA region.

Industry Outlook7
The industry is expected to see slower growth as the economy continues to slow. However, due to
maintenance contracts that already exist, the corporate spending on software is expected to slowly
grow. Although sales cycles for license deals have lengthened and sales are expected to decline or slow,
maintenance renewals are expected to remain high. Because companies are trying to cut down on costs,
companies within this industry are facing pricing pressures and intense competition. Above average
growth is expected for analytical software that help companies make informed decisions. Although the
economy continues to slow, the dependence on the internet is making applications for such a platform
very attractive. In order to attract new customers and to maintain their current customers, software
vendors are assuming more risks that are correlated with investment in software.

Macroeconomic Outlook8
The economy continues to loom in a recession, and consumers continue to speculate when the
economic situation will turn around. Existing home sales figures were released showing an increase of
5.1%. While this is a positive sign, this does not mean there will be a long run recovery on existing home

Global trading is expected to fall 9% this year. A forecast of 2.8% released in January by the
International Monetary Fund, this new figure may suggest just how fast the economy is slowing.
Developed countries and their exports are expected to decline by 10%, while trade-dependent countries
are expected to see exports decline 2-3%.

Meanwhile, since the government has announced it will buy troubled assets back in an attempt to
stabilize the banking system, the value of the dollar was mixed against rival currencies. The new plan
the government has set in action aims to purchase $500 billion of existing assets and loans. This will
hopefully clean the balance sheets of some of the nation’s largest banks and to help get credit flowing
once again. As the dollar fluctuates, this could be a possible opportunity for Adobe. Foreign companies
may decide to invest in new products with a weaker dollar. Also, as mentioned in the industry outlook,
it is expected that companies within the software industry will be more competitive with their pricing,
which could also possibly attract more customers. Many times the dollar tends to fall when stock prices
increase because investors are willing to invest in more risky assets. This is due to the fact that
currencies like the British Pound and Euro are seen as higher yielding and the dollar to be more of a safe


SWOT Analysis9
Customer Base: Professionals and hobbyists alike continue to turn to Adobe for license upgrades and
new Adobe products because they can count on high degrees of innovation and increasing their
productivity by using the product.
Record Revenues: During fiscal year 2008, Adobe achieved record revenues in the creative solutions,
business productivity solutions and platform segments of its business.
Software with Benefits: In today’s economy, companies and looking for ways to cut costs and become
more efficient when it comes to running their business. Adobe software can help companies cut their
costs and help them run their businesses with greater efficiency. Companies are also becoming more
reliant on the internet to run their business and Adobe software can assist in making web pages easy to
use and engaging.
Vertical Industries: Adobe targets clients who work in vertical industries, such as governments,
telecommunications and life sciences, because their software can easily be scaled and tailored to meet
the needs of the company.
Easy to Use: The programs distributed by Adobe are noted for their simplicity and ease of use. Once
someone learns to use the software, they can easily adapt to any new and improved versions of the
software. This results in new subscriptions and renewal fees for Adobe over time.
PC Penetration: Adobe Flash Player is now found on more than 98 percent of personal computers that
are connected to the web.
Restructuring Program: In the fourth quarter of FY 2008, Adobe initiated a restructuring program to
reduce their operating costs and aligned their resources with their key priorities.

Distributors: About 30% of Adobe’s products are distributed by two companies, Ingram Micro and Tech
Data, which could pose a problem if one of the companies goes under or form strong relationships with
one of Adobe’s competitors.
Windows and Macintosh Platforms: Adobe products are primarily Windows and Macintosh based and
therefore reliant on the persistence of these two operating systems.

Growth in Digital Devices: The growing use of digital devices such as digital camera, cell phones, gaming
consoles and digital video cameras provide an expanding market for Adobe’s products.
Hobbyists: Purchases by hobbyists who wish to use the same professional products that professionals
use continue to generate revenue and foster growth for the company.
New Markets: Emerging markets and large geographic markets outside the United States which have
low penetration of Adobe products leave room for more subscriptions to the software.

    Adobe Systems Incorporated 2008 Annual Report

Web Conferencing: Acrobat Connect Pro provides its customers with a hosted service where they can
host meetings and lets participants who have Adobe Flash Player join the meeting for free. With
businesses going more global this could turn to a huge strength for Adobe.
Open Screen Project: Adobe is partnering with industry giants such as MTV Networks, Nokia, NBC
Universal and others to create a highly effective internet experience for non-PC devices such as game
consoles and cell phones. The goal is to widen the reach of the Adobe’s Flash Platform technologies and
to provide improved web browsing.
Adobe Ventures: Adobe owns a limited partnership which invests in early stage companies with
innovative technologies as well as direct investments in privately-held companies. These investments
turn into new technologies that add to the Adobe portfolio of products.

Financial Crisis: Due to the global financial crisis and the macro environment, demand for new software,
like CS4, did not reach Adobe’s expectations. In addition, the economic situation could lead to longer
sales cycles, slower adaptation of new technologies and increased price competition.
Competition: The software and technology industries are highly competitive by nature. Due to short
product life cycles, price competition, changing technology and ever changing business models, Adobe
must continue to look for the newest trend to stay a major player.
Windows Vista: The new Windows Vista operating system has a management technology and document
format, XML Paper Specification, which is in direct competition with Adobe PDF. This could harm the
market opportunity for Adobe Acrobat.
Intellectual Property Disputes: Due to the amount of research and design necessary in this industry it is
not uncommon for Adobe to be involved in disputes that could potentially result in the royalty payments
and licensing arrangements.
Acquisitions: While in the past Adobe has seen great benefits from acquisitions, there is always the
possibility that they could have difficulty merging the acquired company within their operations or more
importantly they could miss the boat on a technology owned by the acquired company.

Ownership Information10
Shares Outstanding                                                                          524.00 Mil

Institutional Ownership                                                                     76.37%

Top 10 Institutions                                                                         28.80%

Mutual Fund Ownership                                                                       2.63%


5% Insider Ownership                                                                           .03%

Float                                                                                          99.97%

Analyst Opinion
                                 No. of Ratings % of Total 1 Mo. Prior 3 Mos. Prior
                 Buy                            3       12            3              3
                 Buy/Hold                       8       33            6              7
                 Hold                          13       54           11             13
                 Weak Hold                      0        0            2              2
                 Sell                           0        0            1              0    11

                 Total                         24      100           23             25

Morgan Stanley: Adobe represents a better “recovery stock” and is attractive for longer-term
investments. Quarter 1 was in line with its pre-announced cash flow and the Creative Suite did better
than expected. Adobe has good cash flow, has been able to control expenses, and has been able to
hedge offset currency. Their demand in February has stabilized while Creative Solutions has made a
positive impact for the company. 12
Gartner: They have ranked Adobe a strong positive in Ajax Technology and RIA platforms. They believe
that Adobe has a good reputation with a product line that is modern as well as mature. They are not too
small where they are not vulnerable to downturns in a single product but are not too large so that they
can meet dynamic market requirements. Adobe’s technology is not to heavy so that it is able to fit inside
a browser and not too large but is more powerful than Ajax. All in all, Adobe has dominant market share
along with a good reputation. (Gartner is the world’s leading information technology research and
advisory company.)13

                                     Strong                                    Strong
                                    Negative   Caution Promising Positive      Positive
                        Adobe                                                     x
                        Google                               x
                        IBM                                  x
                        Microsoft                                      x
                        Oracle                               x
                        Yahoo                                          x

   Standard and Poors
   Morgan Stanley

Investor Relations
After multiple attempts to contact Adobe’s corporate headquarters in San Jose, California we were
finally able to set up an interview with Vice President of Investor Relations, Mike Savage on Wednesday,
March 25th at 9am pacific time due to his schedule. We intend to provide SMF with the results of our
interview before our presentation.
How will you offset current economic conditions?
Which segment do you predict the greatest revenue growth?
Which segment do you rely on most for revenue?
How do you explain the inconsistent growth rates in 2002, it appears to range from 10-23%?
Do you have any new major products in the pipeline?
Who are your biggest consumer groups?
How do you afford to allow for free downloads of your software?
Who is your biggest competition?
Do you see any acquisitions in the near future?
What do you see as Adobe’s competitive advantage?
Why did Adobe take on debt in 2008?
What is Adobe’s expected growth in sales for 2009?
Why was there a negative change in NWC in 2007?

Ratio Analysis
                                       Profitability Trends
                                             FY 2008    FY 2007     FY 2006
                       Operating Margin        61.15%     27.16%      20.36%
                       Profit Margin           24.35%     22.92%      19.64%
                       Return on Assets        14.98%     12.67%       8.48%
                       Return on Equity        19.77%     15.57%       9.82%

                               Comparative Profitability Analysis
                                Average ADBE       MSFT       AAPL             ORCL
            Operating Margin       38.17%      61.15%     37.23%      19.32%     34.97%
            Profit Margin          23.28%      24.35%     29.26%      14.88%     24.61%
            Return on Assets       15.79%      14.98%     24.29%      12.22%     11.68%
            Return on Equity       28.87%      19.77%     48.73%      22.99%     23.98%

Over the past three years profitability trends have increased. ADBE strongly beats the competition in
operating margin and is above the average in profit margin. ADBE is slightly below the average in ROA
and ROE.
                                        Profitability Analysis: Strong


                                         FY 2008       FY 2007     FY 2006
                         Current Ratio         3.59         3.02         4.26
                         Quick Ratio           3.59         3.02         4.26

                                   Comparative Liquidity Analysis
                                 Average ADBE      MSFT      AAPL                  ORCL
                Current Ratio         2.42       3.59           1.45        2.81          1.81
                Quick Ratio           2.31       3.59           1.41        2.43          1.81

ADBE is well above the peer average for both current ratio and quick. They use their cash efficiently and
have no inventory costs. ADBE is readily able to meet their current obligations. Between 2006 and 2007
there was a significant decrease; however, they were still well above the average and were able to begin
a rebound in 2008.
                                     Liquidity Analysis: Very Strong
Debt Management

                                       Debt Management Trends
                                                      FY 2008     FY 2007       FY 2006
                     Debt-to-Total Cap.                   0.07 NA       NA
                     Debt-to-Equity                       0.08 NA       NA
                     Times Interest Earned              102.63 3,389.66 5,625.44
                     Average Payment Period              56.20    42.94    68.68

                                Comparative Debt Management Analysis
                                       Average    ADBE MSFT       AAPL                       ORCL
            Debt-to-Total Cap.                 0.07        0.07 NA              NA           Na
            Debt-to-Equity                     0.08        0.08 NA              NA           NA
            Times Interest Earned            61.27       102.63 NA              NA                19.91
            Average Payment Period           78.17        56.20        126.95        94.44        35.09

Prior to 2008, ADBE did not have any debt, as is the case with their competitors. As a result ADBE has
very little interest and is readily able to meet its payments. Their average payment period is below the
average but is still high. However, it above their average collection period meaning they are receiving
money before they make payments.
                                    Debt Management Analysis: Very Strong
Asset Management
                                            Asset Management
                                                     Fy 2008      FY 2007     FY 2006
                      Total Asset Turnover                 0.61        0.55       0.43
                      Fixed Asset Turnover                11.44       10.90      11.34
                      Average Collection Period           47.64       36.77      50.57

                                 Comparative Asset Management Analysis
                                         Average ADBE     MSFT      AAPL                       ORCL
            Total Asset Turnover                  0.68       0.61        0.83        0.82         0.47
            Fixed Asset Turnover                 11.91      11.44        9.68       13.23        13.29
            Average Collection Period            60.10      47.64       82.09       27.22        83.43

ADBE stays in line with its competitors when it comes to generating sales from assets. The company
surpasses its peers when it comes to collections. Over the past three years they have improved their
turnover rates.
                                   Asset Management Analysis: Strong

Extended DuPont Analysis

                                     ROE             PM             TATO           EM
                     ADBE FY '08      19.77% =      24.35% *           0.61 *           1.32
                        FY 2007       15.57% =      22.92% *           0.55 *           1.23
                        FY 2006        9.82% =      19.64% *           0.43 *           1.16

                           MSFT       48.73% =      29.26% *           0.83 *           2.01
                           AAPL       22.99% =      14.88% *           0.82 *           1.88
                           ORCL       23.98% =      24.61% *           0.47 *           2.05

ADBE has steadily increased their ROE over the past three years. Their growth can be contributed to
increase in profit margin in each of these three years, as well as small increases in the total asset
turnover and equity multiplier. ADBE’s ROE is much lower than its competitors due to lower numbers in
each area.

              Pro Forma Income Statement
                                       2006             2007             2008            2009E           2010E            2011E             2012E

Total Revenue                 $ 2,575,300.23   $ 3,157,881.18   $ 3,579,889.11   $ 3,973,676.91   $ 4,510,123.30   $ 5,209,192.41    $ 6,120,801.08
% change of Revenue                  23.65%           18.45%           11.79%           11.00%           13.50%           15.50%            17.50%
Total cost of revenue:

Total cost of revenue:        $ 292,457.09     $ 354,694.09     $ 362,630.07     $   433,528.15   $ 492,054.45     $ 568,322.89      $ 667,779.40
                                   11.36%           11.23%           10.13%             10.91%         10.91%           10.91%            10.91%

Gross Profit                  $ 2,282,843.14   $ 2,803,187.09   $ 3,217,259.04   $ 3,540,148.76   $ 4,018,068.84   $ 4,640,869.52    $ 5,453,021.68
Other expenses:

Total operating expenses      $ 1,731,550.00   $ 1,945,602.00   $ 2,188,988.00   $ 2,516,590.86   $ 2,856,330.62   $ 3,299,061.87    $ 3,876,397.70
                                     67.24%           61.61%           61.15%           63.33%           63.33%           63.33%            63.33%

Operating income              $ 551,293.14     $ 857,585.09     $ 1,028,271.04   $ 1,023,557.90   $ 1,161,738.22   $ 1,341,807.64    $ 1,576,623.98
Total non-operating income,
net                           $ 128,434.00     $   89,605.00    $   50,237.00    $   122,389.25   $ 138,911.80     $ 160,443.13      $ 188,520.67
                                    4.99%             2.84%            1.40%             3.08%          3.08%            3.08%             3.08%

EBT                           $ 679,727.14     $ 947,190.09     $ 1,078,508.04   $ 1,145,947.15   $ 1,300,650.02   $ 1,502,250.77    $ 1,765,144.66

Provision for income taxes    $ 173,918.00     $ 223,383.00     $ 206,694.00     $   263,567.85   $ 299,149.50     $ 345,517.68      $ 405,983.27
                                   25.59%           23.58%           19.16%             23.00%         23.00%           23.00%            23.00%

Net Income                    $ 505,809.14     $ 723,807.09     $ 871,814.04     $   882,379.31   $ 1,001,500.51   $ 1,156,733.09    $ 1,359,161.39

Basic NI/share                $         0.85   $         1.24   $         1.62   $        1.64    $         1.86   $         2.14    $         2.52
Shares used in computing             593750           584203           539373           539373           539373           539373            539373

Diluted NI/share              $         0.83   $         1.21   $         1.59   $        1.61    $         1.83   $         2.11    $         2.48
Shares used in computing             612222           598775           548553           548553           548553           548553            548553

              Due to economic uncertainty, we kept our forecasts for expected revenue growth very conservative.
              Although over the last 7 years, Adobe has averaged a revenue growth rate of roughly 16% and over the
              last 3 years a growth rate of roughly 17%, we decided to choose an 11% growth rate for 2009. This is
              also in line with ValueLine’s expectations for the coming years. However, for the years following 2009
              we chose growth rates that are more in line with historical growth because we foresee the company
              being in line with the economy. We chose growth rates of 13.5%, 15.5%, and 17.5%, and still they fall
              below the average growth rate for the past three years. Although there is no definite point in time
              when we can predict that the economy will turn around, many Americans have expressed they expect to

see a positive change by the end of 2009.14 With higher consumer confidence we expect to see higher
revenue growth for Adobe.

In order to forecast costs of revenue, operating expenses, and non-operating income, we averaged the
percent of revenue for the past three years. We only averaged these years because between 2005 and
2006, Adobe invested in property, plant, and equipment which increased many of their expenses. To
forecast taxes, we took the tax provision as a percent of EBT for 2006 through 2008 and averaged them

Relative Valuations
                                               Historical P/S
                                                        Projected       Pro Forma
                     Current      5 yr. Avg                P/S         Sales/ Share
                           3.08        4.23                     4.23              7.24
                                                 Target Price                   $30.63
                                               Potential Upside                 49.23%

                                               Historical P/E
                                                          Projected        Pro Forma
                     Current      5 yr. Avg                  P/E              EPS
                           13.7        30.54                      30.54           1.61
                                                   Target Price                $49.17
                                                Potential Upside               140.32%

                                            Historical P/BV
                                                        Projected          Pro Forma
                     Current      5 yr. Avg               P/BV             BV/ Share
                           2.33         3.19                        3.19          9.75
                                                   Target Price                $31.10
                                                Potential Upside               52.00%


                                                                   Historical P/CF
                                                                              Projected              Pro Forma
                                   Current         5 yr. Avg                     P/CF                CF/ Share
                                            9.97           13.2                             13.2               2.00
                                                                         Target Price                      $26.40
                                                                      Potential Upside                     29.03%

                Based on historical P/S, P/E, P/BV, and P/CF values, Adobe is currently undervalued and an investment
                by SMF could see potential upside returns ranging from 29.03% to 140.32%.

                Discounted Cash Flow
                                2006                2007                2008            2009E               2010E             2011E             2012E

Total Revenue          $ 2,575,300.23   $ 3,157,881.18      $ 3,579,889.11      $ 3,973,676.91   $    4,510,123.30    $ 5,209,192.41    $ 6,120,801.08
Growth                        23.65%           18.45%              11.79%              11.00%              13.50%            15.50%            17.50%

EBIT                   $   551,293.23   $    857,585.18     $ 1,028,271.11      $ 1,023,557.90   $    1,161,738.22    $ 1,341,807.64    $ 1,576,623.98
Tax Rate                      25.59%            23.58%             19.16%              23.00%              23.00%            23.00%            23.00%

EBIT(1 - Tax)          $   410,217.29   $    655,366.59     $     831,254.37    $ 788,139.59     $     894,538.43     $ 1,033,191.89    $ 1,214,000.47

Depreciation           $   307,822.00   $    315,464.00     $     270,269.00    $ 266,225.45     $     302,165.89     $ 349,001.60      $ 410,076.88

(FCInv)               $ (123,648.00)    $    (62,561.00)    $     (23,279.00)   $   (4,939.76)   $     (42,926.86)    $   (55,940.06)   $ (72,947.64)

(WCInv)               $ (341,246.00)    $    673,910.00     $ (326,151.00)      $ (407,840.00)   $    (209,214.09)    $ (272,636.95)    $ (355,527.38)

FCFF                   $   129,497.41   $ 1,643,266.69      $     791,375.44    $ 641,585.35     $     944,563.36     $ 1,053,616.47    $ 1,195,602.32

PV of FCFF                                                                      $ 580,620.23     $     773,582.33     $ 780,900.53      $ 801,932.17
Total of PV of FCFF                                                             $ 2,937,035.26

                                                           PV 09-12                                             $ 2,937,035.26
                                                           PV of TV                                             $ 10,268,692.15
       PV of Terminal Value                                Total                                                $ 13,205,727.41
       V=(FCFF*(1+g))/(WACC-g)                             Cash                                                 $ 886,450.00
       $          15,309,614.18                            Debt                                                 $ (350,000.00)
                                                           PV of Equity                                         $ 13,742,177.41
       PV of TV                                            Shares outstanding                                                            524210
       $          10,268,692.15                                                                                 $           26.22
                                                           Upside Potential                                                                  22%
                For our discounted cash flow we used the same growth rates we used in the pro forma income
                statement. Discussion there explains why we chose the rates we did. For our terminal growth rate we
                used 5% as we feel this is an appropriate rate for long-term growth. In order to forecast fixed capital
                investment and working capital investment we predicted the future figures and used it as a percent of

revenue. We then proceeded to average them and use the average to help us forecast. Depreciation
was forecasted by using historical data and taking the figures as a percent of revenue and averaging
them to forecast future depreciation figures. Our discounted cash flow shows and upside potential of
22%, giving us a target price of $26.22. We used a WACC of 10.5% which we consider a conservative
measure. In order to account for the cost of debt, Adobe uses either one, three, or six month LIBOR rate
plus a .2-.475 margin. We put our cost of debt at 5.5%, which is higher than a rate that could be
calculated using Adobe’s method.

We recommend buying 1000 shares of Adobe. It is a strong company that has dominant market share,
with more than half of their revenue coming from abroad. Once people begin using Adobe products,
they become reliant on the software and continually buy the latest version. The latest version of the
Creative Suite has been widely accepted and Adobe should see a jump in revenues as a result. Adobe
has a history of smart mergers and acquisitions which result in products that come out ahead of the
technology curve. They have a strong cash position which will aid them in this economic recession. The
company ended the first quarter of FY 2009 with about $4 per share in net cash and new steps to
control costs should only help in this matter.

                                       ADOBE SYSTEMS INCORPORATED
                                    CONSOLIDATED STATEMENTS OF INCOME
                                        In thousands, except per share data)

                                                                                        Years Ended
                                                                       November         November
                                                                          28,              30,      December 1,
                                                                         2008             2007         2006
R Revenues:
Pro Products                                                           $ 3,396,542 $ 3,019,524 $       2,484,710
     Services and support                                                  183,347     138,357            90,590
To tot al revenue                                                        3,579,889   3,157,881         2,575,300
     Total cost of revenue:
     Products                                                               266,389        270,818      226,506
     Services and support                                                    96,241         83,876       65,951
    Total cost of revenue                                                    362,630       354,694       292,457
    Gross profit                                                           3,217,259     2,803,187     2,282,843
    Operating expenses:
    Research and development                                                 662,057       613,242      539,684
S    Sales and marketing                                                   1,089,341       984,388      867,145
    General and administrative                                               337,291       274,982      234,597
    Restructuring charges                                                     32,053           555       20,251
    Amortization of purchased intangibles and incomplete technology           68,246        72,435       69,873
     Total operating expenses                                              2,188,988     1,945,602     1,731,550
     Operating income                                                      1,028,271       857,585       551,293
     Non-operating income (expense):
I    Interest and other income, net                                           43,847        82,724       67,283
I    Interest expense                                                        (10,019)         (253)         (98)
     Investment gains and (losses), net                                       16,409         7,134       61,249
    Total non-operating income, net                                           50,237        89,605      128,434
    Income before income taxes                                             1,078,508       947,190      679,727
    Provision for income taxes                                               206,694       223,383      173,918
N    Net income                                                        $    871,814 $      723,807 $    505,809
     Basic net income per share                                        $        1.62 $        1.24 $        0.85
    Shares used in computing basic income per share                         539,373        584,203      593,750
D   Diluted net income per share                                       $        1.59 $        1.21 $        0.83
     Shares used in computing diluted income per share                      548,553        598,775      612,222

                                         ADOBE SYSTEMS INCORPORATED
                                         CONSOLIDATED BALANCE SHEETS
                                          (In thousands, except per share data)

                                                                                               28,   November 30,
                                                                                              2008       2007
    Current assets:
     Cash and cash equivalents                                                              $     886,450 $     946,422
    Short-term investments                                                                      1,132,752     1,047,432
     Trade receivables, net of allowances for doubtful accounts of $4,128 and $4,398,
    respectively                                                                                467,234         318,145
     Deferred income taxes                                                                      110,713         171,472
     Prepaid expenses and other assets                                                          137,954          89,380
T   Total current assets                                                                      2,735,103       2,572,851
     Property and equipment, net                                                                313,037         289,758
    Goodwill                                                                                  2,134,730       2,148,102
     Purchased and other intangibles, net                                                       214,960         367,644
     Investment in lease receivable                                                             207,239         207,239
     Other assets                                                                               216,529         128,085
         Total assets                                                                       $ 5,821,598 $     5,713,679

     Current liabilities:
    Trade payables                                                                          $     55,840 $       41,724
     Accrued expenses                                                                            399,969        408,579
     Accrued restructuring                                                                        35,690          3,731
     Income taxes payable                                                                         27,136        215,058
     Deferred revenue                                                                            243,964        183,318
     Total current liabilities                                                                   762,599        852,410
    Long-term liabilities:
     Debt                                                                                         350,000            —
     Deferred revenue                                                                              31,356        25,950
     Accrued restructuring                                                                          6,214        13,987
    Income taxes payable                                                                          123,182            —
    Deferred income taxes                                                                         117,328       148,943
    Other liabilities                                                                              20,565        22,407
    Total liabilities                                                                           1,411,244     1,063,697
    Commitments and contingencies
S    Stockholders’ equity:
P    Preferred stock, $0.0001 par value; 2,000 shares authorized; none issued                         —              —
     Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issue
    d; 526,111 and 571,409 shares outstanding, respectively                                          61               61
     Additional paid-in-capital                                                               2,396,819        2,340,969
    Retained earnings                                                                         4,913,406        4,041,592
     Accumulated other comprehensive income                                                      57,222           27,948
    Treasury stock, at cost (74,723 and 29,425 shares, respectively), net of re-issuances    (2,957,154)      (1,760,588)
    Total stockholders’ equity                                                                4,410,354        4,649,982
         Total liabilities and stockholders’ equity                                         $ 5,821,598 $      5,713,679

                                    ADOBE SYSTEMS INCORPORATED
                               CONSOLIDATED STATEMENTS OF CASH FLOWS
                                             (In thousands)

                                                                                            Years Ended
                                                                           November         November December 1,
                                                                            28, 2008         30, 2007   2006
    Cash flows from operating activities:
N     Net income                                                           $    871,814 $      723,807 $     505,809
     Adjustments to reconcile net income to net cash provided by
    operating activities:
     Depreciation, amortization and accretion                                   270,269        315,464       307,822
     Stock-based compensation                                                   172,474        149,987       170,534
T     Tax benefit from employee stock option plans                               90,360         55,074       143,118
    Deferred income taxes                                                        46,584         58,385        (4,264)
    Other non-cash items                                                          4,784           (176)        1,874
     Gains on sales of investments, net of impairments                          (17,377)        (6,776)      (63,593)
    Excess tax benefits from stock-based compensation                           (31,983)       (85,050)     (107,524)
    Changes in operating assets and liabilities, net of acquired assets
    and assumed liabilities:
    Trade receivables                                                           (153,386)       46,332       (92,498)
     Prepaid expenses and other current assets                                    (5,584)        6,418        (7,917)
    Trade payables                                                                14,078         3,518         8,253
    Accrued expenses                                                             (13,904)       83,281       (27,515)
    Accrued restructuring                                                         24,330       (13,796)      (41,091)
     Income taxes payable                                                        (57,656)       61,448        27,247
    Deferred revenue                                                              65,879        43,137        79,690
N Net cash provided by operating activities                                    1,280,682     1,441,053       899,945
     Cash flows from investing activities:
     Purchases of short-term investments                                    (2,381,533) (2,503,147)        (1,596,442)
    Maturities of short-term investments                                     1,568,874     516,839            357,775
     Proceeds from sales of short-term investments                             717,076   2,457,347          1,010,284
    Purchases of property and equipment                                       (111,792)   (132,075)           (83,250)
    Purchases of long-term investments and other assets                       (124,469)   (111,939)           (28,381)
     Investment in lease receivable                                                 —      (80,439)                —
    Cash received from acquisitions                                                674       1,676            492,758
    Cash paid for acquisitions                                                  (4,258)    (77,204)           (48,351)
    Issuance costs for credit facility                                              —         (856)                —
    Proceeds from sale of other investments                                     30,747      11,342             90,793
N Net cash (used for) provided by investing activities                        (304,681)     81,544            195,186
    Cash flows from financing activities:
    Purchase of treasury stock                                              (1,722,715) (1,951,527) (1,364,412)
    Proceeds from issuance of treasury stock                                   319,165     516,087     509,506
    Excess tax benefits from stock-based compensation                           31,983      85,050     107,524
    Proceeds from borrowings on credit facility                                800,000          —           —
    Repayments of borrowings on credit facility                               (450,000)         —           —
N Net cash used for financing activities                                    (1,021,567) (1,350,390)   (747,382)
E Affect of foreign currency exchange rates on cash and cash equivalents       (14,406)      1,715       3,933
  N Net (decrease) increase in cash and cash equivalents                       (59,972)    173,922     351,682
     Cash and cash equivalents at beginning of year                            946,422     772,500     420,818
      Cash and cash equivalents at end of year                             $ 886,450 $ 946,422 $       772,500

Supplemental disclosures:
Cash paid for interest                                           $     9,604 $      — $        —
Cash paid for income taxes, net of refunds                       $   126,299 $   55,236 $   36,632
Non-cash investing and financing activities:
Common and treasury stock issued and stock options assumed for
Macromedia                                                       $       — $        — $ 3,436,725


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