ADBE Adobe Inc

Creative Cloud and Adobe Marketing Cloud Adoption Accelerates

Adobe (Nasdaq:ADBE) today reported financial results for its third quarter of fiscal year 2014 ended Aug. 29, 2014.

Third Quarter Financial Highlights

• Adobe achieved revenue of $1.005 billion, within its targeted range of $975 million to $1.025 billion.
• Adobe exited Q3 with 2 million 810 thousand paid Creative Cloud subscriptions, an increase of 502 thousand when compared to the number of subscriptions as of the end of Q2 fiscal year 2014.
• Creative Annualized Recurring Revenue (“ARR”) grew to $1.40 billion, and total Digital Media ARR grew to $1.62 billion.
• Adobe Marketing Cloud quarterly revenue was $290 million with strong bookings growth.
• Diluted earnings per share were $0.09 on a GAAP-basis, and $0.28 on a non-GAAP basis.
• Cash flow from operations was $269 million and deferred revenue grew to a record $997 million.
• 63 percent of Adobe’s Q3 revenue was from recurring sources.
• The company repurchased approximately 1.9 million shares during the quarter, returning approximately $133 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

“Adoption of Creative Cloud and Adobe Marketing Cloud continues to accelerate,” said Shantanu Narayen, president and chief executive officer, Adobe. “We are the leader in both of these high-growth categories and have a rapidly growing pipeline, setting us up for a strong finish to the year in Q4.”

“In Q3, 63 percent of our revenue was recurring, demonstrating the continued success of our business model transformation,” said Mark Garrett, executive vice president and chief financial officer, Adobe. “In addition to momentum with Creative Cloud adoption, our team drove strong bookings growth with Adobe Marketing Cloud.”

Adobe to Webcast Earnings Conference Call

Adobe will webcast its third 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 business momentum, the strength of our cloud business and growth of our revenue, recurring revenue and bookings, 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 Aug. 29, 2014, which Adobe expects to file in Sept. 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 Nine Months Ended August 29, 2014   August 30, 2013 August 29, 2014   August 30, 2013 Revenue: Products $ 349,151 $ 582,178 $ 1,299,852 $ 1,902,866 Subscription 547,373 299,346 1,447,630 778,133 Services and support 108,885   113,595   326,255   332,542   Total revenue 1,005,409   995,119   3,073,737   3,013,541     Cost of revenue: Products 23,172 32,564 75,169 111,351 Subscription 86,670 71,656 247,549 200,763 Services and support 47,882   42,856   138,419   126,927  

Total cost of revenue

157,724   147,076   461,137   439,041     Gross profit 847,685 848,043 2,612,600 2,574,500   Operating expenses: Research and development 212,049 208,700 630,666 621,435 Sales and marketing 406,475 388,673 1,243,446 1,188,914 General and administrative 141,676 128,043 409,798 381,766 Restructuring and other charges 201 (791 ) 498 24,203 Amortization of purchased intangibles 13,108   13,064   40,012   38,295   Total operating expenses 773,509   737,689   2,324,420   2,254,613     Operating income 74,176 110,354 288,180 319,887   Non-operating income (expense): Interest and other income (expense), net 1,454 1,732 7,162 4,246 Interest expense (13,361 ) (16,747 ) (47,054 ) (50,786 ) Investment gains (losses), net 669   (2,079 ) 813   (5,476 ) Total non-operating income (expense), net (11,238 ) (17,094 ) (39,079 ) (52,016 ) Income before income taxes 62,938 93,260 249,101 267,871 Provision for income taxes 18,252   10,258   68,842   43,206   Net income $ 44,686   $ 83,002   $ 180,259   $ 224,665   Basic net income per share $ 0.09   $ 0.16   $ 0.36   $ 0.45   Shares used to compute basic net income per share 498,468   504,116   497,782   502,039   Diluted net income per share $ 0.09   $ 0.16   $ 0.35   $ 0.44   Shares used to compute diluted net income per share 507,811   514,058   508,575   513,155    

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

    August 29, 2014 November 29, 2013 ASSETS   Current assets: Cash and cash equivalents $ 903,329 $ 834,556 Short-term investments 2,616,868 2,339,196 Trade receivables, net of allowances for doubtful accounts of $7,879 and $10,228, respectively 528,331 599,820 Deferred income taxes 79,713 102,247 Prepaid expenses and other current assets 151,227   170,110  

Total current assets

4,279,468 4,045,929   Property and equipment, net 785,856 659,774 Goodwill 4,746,781 4,771,981 Purchased and other intangibles, net 490,839 605,254 Investment in lease receivable 80,439 207,239 Other assets 110,297   90,121   Total assets $ 10,493,680   $ 10,380,298     LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Trade payables $ 53,791 $ 62,096 Accrued expenses 630,679 656,939 Debt and capital lease obligations 606,426 14,676 Accrued restructuring 2,351 6,171 Income taxes payable 4,438 10,222 Deferred revenue 947,563   775,544   Total current liabilities 2,245,248 1,525,648   Long-term liabilities: Debt and capital lease obligations 901,830 1,499,297 Deferred revenue 48,975 53,268 Accrued restructuring 5,776 7,717 Income taxes payable 141,473 132,545 Deferred income taxes 344,715 375,634 Other liabilities 74,403   61,555   Total liabilities 3,762,420 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 3,675,629 3,392,696 Retained earnings 6,850,790 6,928,964 Accumulated other comprehensive income 20,067 46,103   Treasury stock, at cost (102,235 and 104,573 shares, respectively), net of reissuances (3,815,287 ) (3,643,190 ) Total stockholders' equity 6,731,260   6,724,634   Total liabilities and stockholders' equity $ 10,493,680   $ 10,380,298    

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

  Three Months Ended August 29, 2014   August 30, 2013 Cash flows from operating activities: Net income $ 44,686 $ 83,002 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 80,154 82,175 Stock-based compensation expense 82,986 76,094 Unrealized investment (gains) losses, net (576 ) 2,825 Changes in deferred revenue 67,934 35,885 Changes in other operating assets and liabilities (6,664 ) (64,456 ) Net cash provided by operating activities 268,520   215,525     Cash flows from investing activities: Purchases, sales and maturities of short-term investments, net (110,346 ) 262,478 Purchases of property and equipment (54,966 ) (46,798 ) Purchases and sales of long-term investments, intangibles and other assets, net (5,082 ) (4,896 ) Acquisitions, net of cash —   (608,019 ) Net cash used for investing activities (170,394 ) (397,235 )   Cash flows from financing activities: Purchases of treasury stock (125,000 ) (400,000 ) Proceeds from reissuance of treasury stock, net 91,500 162,663 Repayment of debt and capital lease obligations (3,372 ) (10,034 ) Excess tax benefits from stock-based compensation 27,078   —   Net cash used for financing activities (9,794 ) (247,371 ) Effect of exchange rate changes on cash and cash equivalents (2,027 ) 1,756   Net increase (decrease) in cash and cash equivalents 86,305 (427,325 ) Cash and cash equivalents at beginning of period 817,020   1,246,410   Cash and cash equivalents at end of period $ 903,325   $ 819,085    

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 29, 2014   August 30, 2013   May 30, 2014 Operating income:   GAAP operating income $ 74,176 $ 110,354 $ 135,258 Stock-based and deferred compensation expense 83,682 81,111 83,600 Restructuring and other charges 201 (791 ) (366 ) Amortization of purchased intangibles 31,780   32,315   31,835   Non-GAAP operating income $ 189,839   $ 222,989   $ 250,327     Net income:   GAAP net income $ 44,686 $ 83,002 $ 88,527 Stock-based and deferred compensation expense 83,682 81,111 83,600 Restructuring and other charges 201 (791 ) (366 ) Amortization of purchased intangibles 31,780 32,315 31,835 Investment (gains) losses (669 ) 2,079 (553 ) Income tax adjustments (19,114 ) (33,336 ) (16,771 ) Non-GAAP net income $ 140,566   $ 164,380   $ 186,272     Diluted net income per share:   GAAP diluted net income per share $ 0.09 $ 0.16 $ 0.17 Stock-based and deferred compensation expense 0.16 0.16 0.16 Amortization of purchased intangibles 0.06 0.06 0.06 Income tax adjustments (0.03 ) (0.06 ) (0.02 ) Non-GAAP diluted net income per share $ 0.28   $ 0.32   $ 0.37     Shares used in computing diluted net income per share 507,811 514,058 506,687     Three Months

Ended

August 29, 2014 Effective income tax rate:   GAAP effective income tax rate 29.0 % Stock-based and deferred compensation expense (4.5 ) Amortization of purchased intangibles (1.7 ) Income tax adjustments (1.8 ) 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.

Adobe Systems IncorporatedMike Saviage, 408-536-4416 (Investor Relations)ir@adobe.comColleen Rodriguez, 408-536-6803 (Public Relations)corodrig@adobe.com