Adobe 2012 Annual Report Download - page 60

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we expect Creative Cloud to transform our business model and drive higher revenue growth through an expansion of our customer
base by acquiring new users through a lower cost of entry, as well as keeping existing customers current on our latest release.
We anticipate accelerated adoption of Creative Cloud in fiscal 2013, which we expect will cause our traditional perpetual
license revenue and, in turn, total net revenues in fiscal 2013, to decline. During this transition we do not anticipate a corresponding
decrease in expenses, which we believe will adversely affect our net income and operating margin in fiscal 2013. However, over
time we expect this business model transition will significantly increase our long-term revenue growth rate by (1) attracting new
users, (2) keeping our end user base current and (3) thereby driving higher average revenue per user. Additionally, our shift to a
subscription model will increase the amount of our recurring revenue that is ratably reported, driven by broader Creative Cloud
adoption over the next several years.
We plan to continue to offer the perpetual licensing model as we transition our customers to this new subscription-based
model.
To assist with the understanding of this transition and the related shift in revenue described above, we have introduced the
use of certain performance metrics which we will use to assess the health and trajectory of our overall Digital Media segment.
These metrics include the total number of paid, active subscribers and Annualized Recurring Revenue (“ARR”). We define
ARR as the sum of:
• the number of paid, active subscribers, multiplied by the average subscription price paid per user per month, multiplied
by twelve months; plus,
• twelve months of contract value of Enterprise Term License Agreements (“ETLAs”) where the revenue is ratably
recognized over the life of the contract.
In addition, we expect renewal rates associated with Creative Cloud, and potentially other subscription offerings, will
become key metrics used to measure their performance. Because the majority of Creative Cloud subscriptions have been annual
and the Creative Cloud launched in May 2012, we have not yet reached the first anniversary of these annual subscriptions and,
therefore, we anticipate that meaningful data regarding subscription renewal rates will first become available later in fiscal year
2013.
Financial Performance Summary for Fiscal 2012
• We continue to derive the majority of our revenue from perpetual licenses. However, our subscription revenue, as a
percentage of total revenue, has increased to 15% in fiscal 2012 from approximately 11% and 10% in fiscal 2011 and
fiscal 2010, respectively, as we transition more of our business to a subscription-based model.
• Our total revenue of $4.4 billion increased $187.4 million and $603.7 million, or 4% and 11%, from $4.2 billion and
$3.8 billion in fiscal 2011 and fiscal 2010, respectively. The increase is primarily due to the continued success of our
Adobe Marketing Cloud and Creative Suite family of products.
• Cost of revenue and operating expenses of $3.2 billion increased by $106.5 million and $416.6 million, or 3% and
15%, from $3.1 billion and $2.8 billion in fiscal 2011 and 2010, respectively. These increases are primarily due to
increases in costs associated with compensation and related benefits driven by additional headcount.
• Income before income taxes of $1.1 billion increased by $83.6 million and $175.6 million, or 8% and 19%, from $1.0
billion and $943.2 million in fiscal 2011 and 2010, respectively.
• Net income of $832.8 million remained stable compared to fiscal 2011 and increased $58.1 million, or 7%, from $774.7
million in fiscal 2010.
• Net cash flow from operations of $1.5 billion remained stable compared to fiscal 2011 and increased $386.6 million,
or 35%, from $1.1 billion in fiscal 2010 primarily due to increases in net income and deferred revenue and decreases
in trade receivables from increased cash collections.
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