Adobe's Cloud Solutions Fuel Strong Financial Results

SAN JOSE, Calif.--(BUSINESS WIRE)--

Adobe ADBE today reported financial results for its second quarter of fiscal year 2014 ended May 30, 2014.

Second Quarter Financial Highlights

• Adobe achieved revenue of $1.07 billion, above the high end of its targeted range of $1.00 billion to $1.05 billion.
• Adobe exited Q2 with 2 million 308 thousand paid Creative Cloud subscriptions, an increase of 464 thousand when compared to the number of subscriptions as of the end of Q1 fiscal year 2014.
• Creative Annualized Recurring Revenue (“ARR”) grew to $1.20 billion, and total Digital Media ARR grew to $1.38 billion.
• Adobe Marketing Cloud quarterly revenue was $283 million, representing 23 percent year-over-year growth.
• Diluted earnings per share were $0.17 on a GAAP-basis, and $0.37 on a non-GAAP basis.
• Cash flow from operations was $368 million and deferred revenue grew to a record $929 million.
• 53 percent of Adobe's Q2 revenue was from recurring sources such as Creative Cloud and Adobe Marketing Cloud.
• The company repurchased approximately 2.6 million shares during the quarter, returning approximately $166 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's first-half upside was driven by accelerated adoption of Creative Cloud and Adobe Marketing Cloud,” said Shantanu Narayen, president and chief executive officer, Adobe. “We're excited about our upcoming product pipeline and expect a strong second half of the year.”

“Our earnings performance in Q2 reflects the financial leverage we have in our model,” said Mark Garrett, executive vice president and chief financial officer, Adobe. “With Adobe's Creative Cloud transformation behind us, our focus moving forward is to drive strong revenue and earnings growth with our market-leading cloud offerings.”

Adobe to Webcast Earnings Conference Call

Adobe will webcast its second quarter fiscal year 2014 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 future product releases, business momentum, the strength of our cloud business and growth of our revenue and earnings, 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, market and distribute products and services that meet customer requirements, introduction of new products and business models by competitors, failure to successfully manage transitions to new business models and markets, fluctuations in subscription renewal rates, risks associated with cyber-attacks and information security, uncertainty in economic conditions and the financial markets, and failure to realize the anticipated benefits of past or future acquisitions.

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 2013 ended Nov. 29, 2013 and Adobe's Quarterly Reports on Form 10-Q issued in fiscal year 2014.

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 May 30, 2014, which Adobe expects to file in June 2014.

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

About Adobe Systems Incorporated

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

© 2014 Adobe Systems Incorporated. All rights reserved. Adobe, the Adobe logo, Creative Cloud and Adobe Marketing Cloud 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								Six Months Ended
		May 30, 2014				May 31, 2013				May 30, 2014				May 31, 2013
Revenue:
Products		$	479,247			$	644,899			$	950,701			$	1,320,688
Subscription		476,694				254,521				900,257				478,787
Services and support		112,267				111,129				217,370				218,947
Total revenue		1,068,208				1,010,549				2,068,328				2,018,422
Cost of revenue:
Products		24,499				26,805				51,997				78,787
Subscription		84,147				66,527				160,879				129,107
Services and support		46,258				41,949				90,537				84,071
Total cost of revenue		154,904				135,281				303,413				291,965
Gross profit		913,304				875,268				1,764,915				1,726,457
Operating expenses:
Research and development		209,092				203,097				418,617				412,735
Sales and marketing		426,830				402,208				836,971				800,241
General and administrative		129,138				120,870				268,122				253,723
Restructuring and other charges		(366		)		24,992				297				24,994
Amortization of purchased intangibles		13,352				12,792				26,904				25,231
Total operating expenses		778,046				763,959				1,550,911				1,516,924
Operating income		135,258				111,309				214,004				209,533
Non-operating income (expense):
Interest and other income (expense), net		2,563				1,268				5,708				2,514
Interest expense		(17,103		)		(17,205		)		(33,693		)		(34,039		)
Investment gains (losses), net		553				(4,245		)		144				(3,397		)
Total non-operating income (expense), net		(13,987		)		(20,182		)		(27,841		)		(34,922		)
Income before income taxes		121,271				91,127				186,163				174,611
Provision for income taxes		32,744				14,581				50,590				32,948
Net income		$	88,527			$	76,546			$	135,573			$	141,663
Basic net income per share		$	0.18			$	0.15			$	0.27			$	0.28
Shares used to compute basic net income per share		497,931				503,384				497,439				500,996
Diluted net income per share		$	0.17			$	0.15			$	0.27			$	0.28
Shares used to compute diluted net income per share		506,687				512,446				508,227				511,535

Condensed Consolidated Balance Sheets (In thousands, except par value; unaudited)
		May 30, 2014				November 29, 2013
ASSETS
Current assets:
Cash and cash equivalents		$	817,020			$	834,556
Short-term investments		2,513,191				2,339,196
Trade receivables, net of allowances for doubtful accounts of $7,929 and $10,228, respectively		531,557				599,820
Deferred income taxes		72,489				102,247
Prepaid expenses and other current assets		180,086				170,110
Total current assets		4,114,343				4,045,929
Property and equipment, net		642,450				659,774
Goodwill		4,773,798				4,771,981
Purchased and other intangibles, net		532,317				605,254
Investment in lease receivable		207,239				207,239
Other assets		102,052				90,121
Total assets		$	10,372,199			$	10,380,298
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables		$	54,858			$	62,096
Accrued expenses		656,940				656,939
Debt and capital lease obligations		609,742				14,676
Accrued restructuring		3,627				6,171
Income taxes payable		13,696				10,222
Deferred revenue		879,109				775,544
Total current liabilities		2,217,972				1,525,648
Long-term liabilities:
Debt and capital lease obligations		896,551				1,499,297
Deferred revenue		49,495				53,268
Accrued restructuring		6,099				7,717
Income taxes payable		139,870				132,545
Deferred income taxes		351,612				375,634
Other liabilities		73,712				61,555
Total liabilities		3,735,311				3,655,664
Stockholders' equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized		—				—
Common stock, $0.0001 par value		61				61
Additional paid-in-capital		3,562,682				3,392,696
Retained earnings		6,806,104				6,928,964
Accumulated other comprehensive income		46,642				46,103
Treasury stock, at cost (103,587 and 104,573 shares, respectively), net of reissuances		(3,778,601		)		(3,643,190		)
Total stockholders' equity		6,636,888				6,724,634
Total liabilities and stockholders' equity		$	10,372,199			$	10,380,298

Condensed Consolidated Statements of Cash Flows (In thousands; unaudited)
		Three Months Ended
		May 30, 2014				May 31, 2013
Cash flows from operating activities:
Net income		$	88,527			$	76,546
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		77,653				80,950
Stock-based compensation expense		83,005				73,528
Asset impairment losses		—				23,838
Unrealized investment (gains) losses, net		(352		)		4,312
Changes in deferred revenue		47,517				(8,770		)
Changes in other operating assets and liabilities		71,186				48,744
Net cash provided by operating activities		367,536				299,148
Cash flows from investing activities:
Purchases, sales and maturities of short-term investments, net		(117,967		)		(275,455		)
Purchases of property and equipment		(27,198		)		(46,249		)
Purchases and sales of long-term investments, intangibles and other assets, net		(2,767		)		(12,735		)
Net cash used for investing activities		(147,932		)		(334,439		)
Cash flows from financing activities:
Purchases of treasury stock		(150,000		)		(200,000		)
Proceeds from reissuance of treasury stock, net		12,824				184,655
Repayment of debt and capital lease obligations		(3,626		)		(7,297		)
Excess tax benefits from stock-based compensation		4,875				—
Net cash used for financing activities		(135,927		)		(22,642		)
Effect of exchange rate changes on cash and cash equivalents		(573		)		(2,039		)
Net increase (decrease) in cash and cash equivalents		83,104				(59,972		)
Cash and cash equivalents at beginning of period		733,916				1,306,382
Cash and cash equivalents at end of period		$	817,020			$	1,246,410

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
		May 30, 2014				May 31, 2013				February 28, 2014
Operating income:
GAAP operating income		$	135,258			$	111,309			$	78,746
Stock-based and deferred compensation expense		83,600				79,624				83,549
Restructuring and other charges		(366		)		24,992				663
Amortization of purchased intangibles		31,835				31,359				32,054
Loss contingency		—				—				10,000
Non-GAAP operating income		$	250,327			$	247,284			$	205,012
Net income:
GAAP net income		$	88,527			$	76,546			$	47,046
Stock-based and deferred compensation expense		83,600				79,624				83,549
Restructuring and other charges		(366		)		24,992				663
Amortization of purchased intangibles		31,835				31,359				32,054
Investment (gains) losses		(553		)		4,245				409
Loss contingency		—				—				10,000
Income tax adjustments		(16,771		)		(33,915		)		(22,383		)
Non-GAAP net income		$	186,272			$	182,851			$	151,338
Diluted net income per share:
GAAP diluted net income per share		$	0.17			$	0.15			$	0.09
Stock-based and deferred compensation expense		0.16				0.16				0.16
Restructuring and other charges		—				0.05				—
Amortization of purchased intangibles		0.06				0.06				0.06
Investment (gains) losses		—				0.01				—
Loss contingency		—				—				0.02
Income tax adjustments		(0.02		)		(0.07		)		(0.03		)
Non-GAAP diluted net income per share		$	0.37			$	0.36			$	0.30
Shares used in computing diluted net income per share		506,687				512,446				508,340

		Three Months Ended
		May 30, 2014
Effective income tax rate:
GAAP effective income tax rate		27.0	%
Stock-based and deferred compensation expense		(3.2	)
Amortization of purchased intangibles		(1.3	)
Income tax adjustments		(1.5	)
Non-GAAP effective income tax rate		21.0	%

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 that may include 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, loss contingencies and the related tax impact of all of these items, income tax adjustments, the income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes, and the non-GAAP measures that exclude such information in order to assess the performance of Adobe's business and for planning and forecasting in subsequent periods. Whenever Adobe uses such a non-GAAP financial measure, it 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.