Adobe 2001 Annual Report Download - page 35

direct sales efforts will eventually improve our business by decreasing discounts or rebate programs
provided to distributors, decreasing product returns, and shortening inventory cycles, these changes could
instead seriously harm our business.
We currently rely on five turnkey assemblers of our products, located in each major region we serve. If
any turnkey assembler terminates its relationship with us, or if our supply from any turnkey is interrupted
or terminated for any other reason, we may not have enough time or be able to replace the supply of
products manufactured by that turnkey assembler to avoid serious harm to our business.
Revenue from our OEM PostScript and Other segment experienced a 20% decline in fiscal 2001
compared to fiscal 2000, primarily as a result of a decline in the print business. We expect this segment to
continue to decline in fiscal 2002 relative to fiscal 2001, which may harm our business if the magnitude of
the decline significantly exceeds our expectations. The continuing weakness in the economy is contributing
to the decrease in revenue for the monochrome laser printers market in addition to the decline in average
selling prices of monochrome laser printers and the increasing use of inkjet printers. In addition, customer
transition from paper-based processes to electronic workflows, renegotiated pricing with certain OEM
customers, and the outsourcing of certain OEM accounts to a third party solution provider contributed to
the decline in revenue in this segment. If another major customer also decided to incorporate a clone
version instead of Adobe PostScript technology, it could seriously harm our business. Further, OEM
partners on occasion seek to renegotiate their royalty arrangements. We evaluate 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 us.
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 communication 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 still developing. Standards defining Web
graphics have not yet been fully 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.
We intend to increase our investment in e-business and enhanced marketing activities in an effort to
achieve revenue growth, but we can provide no assurance that increased investment in this new market will
result in increased revenue.
We derive a significant portion of our revenue and operating income from our customers located in
Europe, Japan, Asia Pacific, and Latin America. We generally experience lower revenue from our
European operations in the third quarter because many customers reduce their purchasing activities in the
summer months. Additionally, we are uncertain whether the recent weakness experienced in Europe, 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 our European
subsidiaries had in the past been denominated in U.S. dollars, we now denominate revenue in euros in
certain European countries. In addition, the majority of our revenue derived from Japan is denominated in
yen, and the majority of all our subsidiaries’ operating expenses are denominated in their local currencies.
As a result, our operating results are subject to fluctuations in foreign currency exchange rates. To date, the
financial impact of such fluctuations has not been significant. Our hedging policy attempts to mitigate
some of these risks, based on our best judgment of the appropriate trade-offs among risk, opportunity, and
expense. We have established a hedging program to hedge our exposure to foreign currency exchange rate
fluctuations, primarily of the Japanese yen and the euro. We regularly review our hedging program and will
make adjustments based on our best judgment. Our hedging activities may not offset more than a portion
of the adverse financial impact resulting from unfavorable movement in foreign currency exchange rates.
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