Adobe 1998 Annual Report Download - page 23

The Company’s printing revenue experienced a 16% decline in fiscal 1998 compared to fiscal 1997.
Product transitions, as the Company transitions its customers from Adobe PostScript Level 2 to Adobe
PostScript 3 and PostScript Extreme, along with weakness in the Japanese market, primarily caused the
revenue decline. If this trend continues, the Company’s financial results could be adversely affected. In
addition, in the fall of fiscal 1997, HP began to ship a clone version of Adobe PostScript in some printers,
resulting in lower licensing revenue to the Company in fiscal 1998, even though the Company continues to
work with HP printer operations to incorporate Adobe PostScript and other technologies in other HP
products. The Company expects lower licensing revenue from HP in fiscal 1999. Further, OEM customers
on occasion seek to renegotiate their royalty arrangements. The Company evaluates these requests on a
case-by-case basis. If an agreement is not reached, a customer may decide to pursue other options, which
could result in lower licensing revenue for the Company.
During late fiscal 1997 and throughout fiscal 1998, the Company experienced a decline in both
application and licensing revenue from the Japanese market due to a weak Japanese computer market and
general economic conditions in Japan. In addition, at the end of fiscal 1997, inventory levels for application
products at the Company’s Japanese distributors remained higher than what the Company considers
normal. During fiscal 1998, the Company worked with its major distributors in Japan to reduce channel
inventory to what the Company considers a reasonable level. The Company expects these adverse
economic conditions to continue in the short term, and they may continue to adversely affect the
Company’s revenue and earnings. Although there are also adverse conditions in other Asian and Latin
American economies, the countries affected represent a much smaller portion of the Company’s revenue
and thus have less impact on the Company’s operational results.
The Company has recently implemented a restructuring of its business and reduced its workforce by
more than 10%. However, the Company plans to continue to invest in certain areas, which will require it to
hire additional employees. Competition for high quality personnel, especially highly skilled engineers, is
extremely intense. The Company’s ability to effectively manage its growth will require it to continue to
improve its operational and financial controls and information management systems, and to attract, retain,
motivate, and manage employees effectively. The failure of the Company to effectively manage growth and
transition in multiple areas of its business could have a material adverse effect on its results of operations.
The Internet market is rapidly evolving and is characterized by an increasing number of market
entrants that have introduced or developed products addressing authoring and communications over the
Internet. As is typical in the case of a new and evolving industry, demand and market acceptance for
recently introduced products and services are subject to a high level of uncertainty. The software industry
addressing authoring and communications over the Internet is young and has few proven products.
Standards defining web graphics have not yet been finally adopted. In addition, new models for licensing
software will be needed to accommodate new information delivery practices. Moreover, critical issues
concerning the commercial use of the Internet (including security, reliability, ease of use and access, cost,
and quality of service) remain unresolved and may affect the growth of Internet use, together with the
software standards and electronic media employed in such markets.
The Company derives a significant portion of its revenue and operating income from its subsidiaries
located in Europe, Japan, and Asia Pacific and Latin America. The Company generally experiences lower
revenue from its European operations in the third quarter because many customers reduce their purchas-
ing activities in the summer months. Additionally, the Company is uncertain whether the recent weakness
experienced in the Japan and Asia Pacific and Latin America markets will continue in the foreseeable
future due to possible currency devaluation and liquidity problems in these regions. While most of the
revenue of the European subsidiaries is denominated in U.S. dollars, the majority of revenue derived from
Japan is denominated in yen and the majority of all subsidiaries’ operating expenses are denominated in
their local currencies. As a result, the Company’s operating results are subject to fluctuations in foreign
currency exchange rates. To date, the accounting impact of such fluctuations has been insignificant. The
Company’s hedging policy attempts to mitigate some of these risks, based on management’s best judgment
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