Market Overview

Adobe Reports Record Revenue

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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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