Adobe 1999 Annual Report Download - page 29

In addition, we continue to expand into third-party distribution channels, including value-added
resellers and systems integrators, in our effort to further broaden our customer base. As a result, the
financial health of these third parties and our continuing relationships with them are becoming more
important to our success. Some of these companies are thinly capitalized and may be unable to withstand
changes in business conditions. Our business could be seriously harmed if the financial condition of some
of these third parties substantially weakens or if our relationships with them deteriorate. Also, as we seek
to further broaden our customer base in the corporate business and consumer markets, we may not
successfully adapt our application software distribution channels, which could cause our operating results
to suffer. We could experience decreases in average selling prices and some transitions in our distribution
channels that could seriously harm our business.
We currently rely on three manufacturers of our products, each located in a different region; one of
these has just been added in the first quarter of fiscal 2000. If a manufacturer terminates its relationship
with us or if our supply from a manufacturer is interrupted or terminated for any other reason, we may not
have enough time to replace the supply of products manufactured by that manufacturer to avoid harm to
our business.
Revenue from our OEM PostScript and Other segment experienced a 34% decline in fiscal 1999
compared to fiscal 1998, primarily as a result of a decline in revenue from the licensing of PostScript
technology. We expect this trend to continue and believe that our financial results could be harmed by it.
The weakness in the monochrome laser printer and Japanese markets were factors causing the revenue
decline. In addition, in the fall of fiscal 1997, HP began to ship a clone version of Adobe PostScript
technology in some printers, resulting in lower licensing revenue to us in fiscal 1999 and 1998. Even though
we continue to work with HP printer operations to incorporate Adobe PostScript and other technologies
into other HP products, we expect continued lower revenue in this segment from HP in fiscal 2000. If other
significant customers also decide to incorporate a clone version instead of Adobe PostScript technology, it
could seriously harm our business. Further, OEM customers 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.
From the end of fiscal 1997 through the first quarter of fiscal 1999, we experienced a decline in
revenue from the Japanese market due to a weak Japanese computer market and general economic
conditions in Japan. During the second, third, and fourth quarters of fiscal 1999, we experienced an
increase in application revenue from our Japanese operation but still continued to experience a decline in
OEM PostScript and Other revenue. In addition, at the end of fiscal 1997, inventory levels for application
products at our Japanese distributors remained higher than what we consider normal. During fiscal 1998,
we worked with our major distributors in Japan to reduce channel inventory to what we consider a
reasonable level. Despite the slight improvement in the Japanese economy in the second, third, and fourth
quarters of fiscal 1999, these adverse economic conditions may continue in the short term, and they may
continue to adversely affect our 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 our
revenue and thus have less impact on our operational results.
We recently implemented restructurings of our business in the second, third, and fourth quarters of
fiscal 1999, resulting in a workforce reduction of 9%. However, we plan to continue to invest in certain
areas, which will require us to hire additional employees. Competition for high-quality personnel, espe-
cially highly skilled engineers, is extremely intense. Our ability to effectively manage this growth will
require us to continue to improve our operational and financial controls and information management
systems and to attract, retain, motivate, and manage employees effectively; otherwise our business could be
seriously harmed.
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
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