ADBE Adobe Inc

Digital Experience Subscription Revenue Grows 25 Percent Year-Over-Year in Q3

Adobe (Nasdaq:ADBE) today reported strong financial results for its third quarter fiscal year 2018 ended August 31, 2018.

Financial Highlights

• Adobe achieved record quarterly revenue of $2.29 billion in its third quarter of fiscal year 2018, which represents 24 percent year-over-year revenue growth.
• Diluted earnings per share was $1.34 on a GAAP-basis, and $1.73 on a non-GAAP basis.
• Digital Media segment revenue was $1.61 billion, with Creative revenue growing to $1.36 billion and Document Cloud achieving record revenue of $249 million, which represents 21 percent year-over-year growth.
• Digital Media Annualized Recurring Revenue (“ARR”) grew to $6.40 billion exiting the quarter, a quarter-over-quarter increase of $339 million. Creative ARR grew to $5.66 billion, and Document Cloud ARR grew to $744 million.
• Digital Experience segment revenue was $614 million, which represents 21 percent year-over-year growth. Digital Experience subscription revenue grew 25 percent year-over-year in the quarter.
• Operating income grew 32 percent and net income grew 59 percent year-over-year on a GAAP-basis; operating income grew 32 percent and net income grew 57 percent year-over-year on a non-GAAP basis.
• Cash flow from operations was $955 million, and deferred revenue grew 23 percent year-over-year to approximately $2.71 billion.
• Adobe repurchased approximately 2.9 million shares during the quarter, returning $714 million of cash to stockholders.

A reconciliation between GAAP and non-GAAP results is provided at the end of this press release and on Adobe’s website.

Executive Quotes

"Adobe continues to inspire creativity and drive business transformation as reflected in our record Q3 results," said Shantanu Narayen, president and CEO, Adobe. "Students, creatives, enterprises and governments trust Creative Cloud, Document Cloud and Experience Cloud to create and deliver the transformative digital experiences required to compete today."

“Our strong momentum continued into the second half of fiscal 2018 as Adobe delivered another quarter of sustained revenue growth, strong earnings and cash flow of nearly $1 billion," said John Murphy, executive vice president and CFO, Adobe.

Adobe to Webcast Earnings Conference Call

Adobe will webcast its third quarter fiscal year 2018 earnings conference call today at 2:00 p.m. Pacific Time from its investor relations website: www.adobe.com/ADBE. Earnings documents, including Adobe management’s prepared conference call remarks with slides, financial targets and an investor datasheet are posted to Adobe’s investor relations website in advance of the conference call for reference. A reconciliation between GAAP and non-GAAP earnings results and financial targets is also provided on the website.

Forward-Looking Statements Disclosure

This press release contains forward-looking statements, including those related to business momentum, our market opportunity, revenue, annualized recurring revenue, non-operating other expense, tax rate on a GAAP and non-GAAP basis, earnings per share on a GAAP and non-GAAP basis, and share count, all of which involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to: failure to develop, acquire, market and offer products and services that meet customer requirements, failure to compete effectively, introduction of new technology, complex sales cycles, risks related to the timing of revenue recognition from our subscription offerings, fluctuations in subscription renewal rates, risks associated with cyber-attacks, potential interruptions or delays in hosted services provided by us or third parties, information security and privacy, failure to realize the anticipated benefits of past or future acquisitions, changes in accounting principles and tax regulations, uncertainty in the financial markets and economic conditions in the countries where we operate, and other various risks associated with being a multinational corporation. For a discussion of these and other risks and uncertainties, please refer to Adobe’s Annual Report on Form 10-K for our fiscal year 2017 ended Dec. 1, 2017, and Adobe's Quarterly Reports on Form 10-Q issued in fiscal year 2018.

The financial information set forth in this press release reflects estimates based on information available at this time. These amounts could differ from actual reported amounts stated in Adobe’s Quarterly Report on Form 10-Q for our quarter ended August 31, 2018, which Adobe expects to file in September 2018.

Adobe assumes no obligation to, and does not currently intend to, update these forward-looking statements.

About Adobe

Adobe is changing the world through digital experiences. For more information, visit www.adobe.com.

© 2018 Adobe Systems Incorporated. All rights reserved. Adobe, Adobe Document Cloud, Adobe Experience Cloud, Creative Cloud and the Adobe logo are either registered trademarks or trademarks of Adobe Systems Incorporated in the United States and/or other countries. All other trademarks are the property of their respective owners.

   

Condensed Consolidated Statements of Income

(In thousands, except per share data; unaudited)

  Three Months Ended Nine Months Ended August 31, 2018   September 1, 2017 August 31, 2018   September 1, 2017 Revenue: Subscription $ 2,021,505 $ 1,570,336 $ 5,737,994 $ 4,437,882 Product 149,127 158,961 471,728 513,891 Services and support 120,444   111,777   355,661   343,137   Total revenue 2,291,076   1,841,074   6,565,383   5,294,910     Cost of revenue: Subscription 199,157 168,915 550,197 452,830 Product 11,454 11,709 35,110 41,530 Services and support 84,881   82,298   250,431   245,259   Total cost of revenue 295,492   262,922   835,738   739,619     Gross profit 1,995,584 1,578,152 5,729,645 4,555,291   Operating expenses: Research and development 398,957 315,555 1,121,854 900,033 Sales and marketing 670,084 550,093 1,897,256 1,623,488 General and administrative 184,063 147,402 532,543 455,139 Amortization of purchased intangibles 23,874   19,428   58,169   57,876   Total operating expenses 1,276,978   1,032,478   3,609,822   3,036,536     Operating income 718,606 545,674 2,119,823 1,518,755   Non-operating income (expense): Interest and other income (expense), net 1,608 13,539 29,879 25,899 Interest expense (21,107 ) (18,809 ) (61,369 ) (55,286 ) Investment gains (losses), net 2,251   975   6,326   5,261   Total non-operating income (expense), net (17,248 ) (4,295 ) (25,164 ) (24,126 ) Income before income taxes 701,358 541,379 2,094,659 1,494,629 Provision for income taxes 35,067   121,810   182,125   302,224   Net income $ 666,291   $ 419,569   $ 1,912,534   $ 1,192,405   Basic net income per share $ 1.36   $ 0.85   $ 3.89   $ 2.41   Shares used to compute basic net income per share 490,025   493,426   491,336   494,138   Diluted net income per share $ 1.34   $ 0.84   $ 3.84   $ 2.38   Shares used to compute diluted net income per share 496,866   500,398   498,587   501,060        

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

  August 31, 2018 December 1, 2017 ASSETS   Current assets: Cash and cash equivalents $ 1,747,144 $ 2,306,072 Short-term investments 3,197,326 3,513,702 Trade receivables, net of allowances for doubtful accounts of $12,034 and $9,151, respectively 1,044,507 1,217,968 Prepaid expenses and other current assets 311,936   210,071  

Total current assets

6,300,913 7,247,813   Property and equipment, net 1,019,260 936,976 Goodwill 7,136,853 5,821,561 Purchased and other intangibles, net 669,476 385,658 Deferred income taxes 85,297 — Other assets 183,821   143,548   Total assets $ 15,395,620   $ 14,535,556     LIABILITIES AND STOCKHOLDERS’ EQUITY   Current liabilities: Trade payables $ 145,566 $ 113,538 Accrued expenses 1,020,047 993,773 Income taxes payable 11,222 14,196 Deferred revenue 2,615,192   2,405,950   Total current liabilities 3,792,027 3,527,457   Long-term liabilities: Debt 1,874,654 1,881,421 Deferred revenue 92,182 88,592 Income taxes payable 622,411 173,088 Deferred income taxes — 279,941 Other liabilities 152,421   125,188   Total liabilities 6,533,695 6,075,687   Stockholders’ equity: Preferred stock, $0.0001 par value; 2,000 shares authorized — — Common stock, $0.0001 par value 61 61 Additional paid-in-capital 5,549,322 5,082,195 Retained earnings 11,137,357 9,573,870 Accumulated other comprehensive income (loss) (128,048 ) (111,821 ) Treasury stock, at cost (111,827 and 109,572, respectively), net of reissuances (7,696,767 ) (6,084,436 ) Total stockholders’ equity 8,861,925   8,459,869   Total liabilities and stockholders’ equity $ 15,395,620   $ 14,535,556      

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

  Three Months Ended August 31, 2018   September 1, 2017 Cash flows from operating activities: Net income $ 666,291 $ 419,569 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 86,890 82,319 Stock-based compensation 159,039 117,042 Unrealized investment (gains) losses, net (1,613 ) (643 ) Changes in deferred revenue 33,525 129,872 Changes in other operating assets and liabilities 11,172   (43,723 ) Net cash provided by operating activities 955,304   704,436     Cash flows from investing activities: Purchases, sales and maturities of short-term investments, net 163,229 21,215 Purchases of property and equipment (63,558 ) (54,238 ) Purchases and sales of long-term investments, intangibles and other assets, net (1,578 ) (3,791 ) Acquisitions, net of cash (1,618,427 ) —   Net cash used for investing activities (1,520,334 ) (36,814 )   Cash flows from financing activities: Purchases of treasury stock (750,000 ) (300,000 ) Proceeds from treasury stock reissuances, net of taxes paid related to net share settlement of equity awards 78,656 82,117 Repayment of capital lease obligations (317 ) (416 ) Net cash used for financing activities (671,661 ) (218,299 ) Effect of exchange rate changes on cash and cash equivalents (4,151 ) 8,277   Net increase (decrease) in cash and cash equivalents (1,240,842 ) 457,600 Cash and cash equivalents at beginning of period 2,987,986   1,316,950   Cash and cash equivalents at end of period $ 1,747,144   $ 1,774,550      

Non-GAAP Results

(In thousands, except per share data)

 

The following tables show Adobe's GAAP results reconciled to non-GAAP results included in this release.

  Three Months Ended August 31, 2018   September 1, 2017   June 1, 2018 Operating income:   GAAP operating income $ 718,606 $ 545,674 $ 698,484 Stock-based and deferred compensation expense 161,094 117,968 146,773 Amortization of purchased intangibles 44,815   36,655   32,378   Non-GAAP operating income $ 924,515   $ 700,297   $ 877,635     Net income:   GAAP net income $ 666,291 $ 419,569 $ 663,167 Stock-based and deferred compensation expense 161,094 117,968 146,773 Amortization of purchased intangibles 44,815 36,655 32,378 Investment (gains) losses, net (2,251 ) (975 ) (1,079 ) Income tax adjustments (10,185 ) (24,146 ) (15,812 ) Non-GAAP net income $ 859,764   $ 549,071   $ 825,427     Diluted net income per share:   GAAP diluted net income per share $ 1.34 $ 0.84 $ 1.33 Stock-based and deferred compensation expense 0.32 0.24 0.29 Amortization of purchased intangibles 0.09 0.07 0.06 Income tax adjustments (0.02 ) (0.05 ) (0.02 ) Non-GAAP diluted net income per share $ 1.73   $ 1.10   $ 1.66     Shares used in computing diluted net income per share 496,866 500,398 498,252  

Use of Non-GAAP Financial Information

Adobe continues to provide all information required in accordance with GAAP, but believes evaluating its ongoing operating results may not be as useful if an investor is limited to reviewing only GAAP financial measures. Adobe uses non-GAAP financial information to evaluate its ongoing operations and for internal planning and forecasting purposes. Adobe's management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Adobe presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate Adobe's operating results. Adobe believes these non-GAAP financial measures are useful because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. This allows institutional investors, the analyst community and others to better understand and evaluate our operating results and future prospects in the same manner as management.

Adobe's management believes it is useful for itself and investors to review, as applicable, both GAAP information as well as non-GAAP measures, which may exclude items such as stock-based and deferred compensation expenses, restructuring and other charges, amortization of purchased intangibles and certain activity in connection with technology license arrangements, investment gains and losses, the related tax impact of all of these items, income tax adjustments, and the income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes. Adobe uses these non-GAAP measures in order to assess the performance of Adobe's business and for planning and forecasting in subsequent periods. Whenever such a non-GAAP measure is used, Adobe provides a reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above.

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AdobeInvestor Relations ContactMike Saviage, 408-536-4416ir@adobe.comorPublic Relations ContactDan Berthiaume, 408-536-2584dberthia@adobe.com