ADBE Adobe Inc

Q3 FY2015 Results Driven by Record Adobe Marketing Cloud Revenue and Strong Creative Cloud Adoption

Adobe (Nasdaq:ADBE) today reported financial results for its third quarter fiscal year 2015 ended Aug. 28, 2015.

Quarterly Financial Highlights

• Adobe achieved record quarterly revenue of $1.22 billion, representing year-over-year growth of 21 percent.
• Digital Media Annualized Recurring Revenue (“ARR”) grew to $2.65 billion exiting the quarter, driven by strong sequential growth in Creative ARR of $262 million.
• Adobe Marketing Cloud achieved record revenue of $368 million, representing year-over-year growth of 27 percent.
• Diluted earnings per share were $0.34 on a GAAP-basis, and $0.54 on a non-GAAP basis.
• Year-over-year, operating income grew 232 percent and net income grew 290 percent on a GAAP-basis; operating income grew 90 percent and net income grew 96 percent on a non-GAAP basis.
• Cash flow from operations was $360 million, and deferred revenue grew to a record $1.31 billion.
• The company repurchased approximately 1.6 million shares during the quarter, returning $132 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

"Our execution and momentum continued in Q3, resulting in record quarterly revenue with outstanding profit and earnings growth," said Shantanu Narayen, Adobe president and chief executive officer. "Content and data are the currency of business today. Adobe's industry-leading Creative Cloud, Adobe Document Cloud and Adobe Marketing Cloud solutions let customers deliver more valuable, personalized experiences that drive greater business impact.”

“Our record Q3 financial results set us up for a strong fiscal 2015,” said Mark Garrett, Adobe executive vice president and chief financial officer. “Our recurring revenue has reached 73 percent of total revenue, providing a strong foundation for long-term growth.”

Adobe to Webcast Earnings Conference Call

Adobe will webcast its third quarter fiscal year 2015 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, product adoption and innovation, recurring revenue and revenue, 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, potential interruptions or delays in hosted services provided by us or third parties, 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 2014 ended Nov. 28, 2014, and Adobe's Quarterly Reports on Form 10-Q issued in fiscal year 2015.

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. 28, 2015, which Adobe expects to file in Sept. 2015.

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.

© 2015 Adobe Systems Incorporated. All rights reserved. Adobe, the Adobe logo and Creative 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 28, 2015   August 29, 2014 August 28, 2015   August 29, 2014 Revenue: Subscription $ 829,065 $ 547,373 $ 2,316,470 $ 1,447,630 Products 275,338 349,151 840,650 1,299,852 Services and support 113,365   108,885   331,987   326,255   Total revenue 1,217,768   1,005,409   3,489,107   3,073,737     Cost of revenue: Subscription 103,605 86,670 302,826 247,549 Products 24,545 23,172 65,715 75,169 Services and support 62,835   47,882   174,415   138,419   Total cost of revenue 190,985   157,724   542,956   461,137     Gross profit 1,026,783 847,685 2,946,151 2,612,600   Operating expenses: Research and development 218,660 212,049 642,216 630,666 Sales and marketing 422,031 406,475 1,241,770 1,243,446 General and administrative 122,578 141,676 397,867 409,798 Restructuring and other charges (751 ) 201 1,038 498 Amortization of purchased intangibles 18,246   13,108   50,599   40,012   Total operating expenses 780,764   773,509   2,333,490   2,324,420     Operating income 246,019 74,176 612,661 288,180   Non-operating income (expense): Interest and other income (expense), net 4,433 1,454 11,510 7,162 Interest expense (16,519 ) (13,361 ) (47,669 ) (47,054 ) Investment gains (losses), net (1,314 ) 669   339   813   Total non-operating income (expense), net (13,400 ) (11,238 ) (35,820 ) (39,079 ) Income before income taxes 232,619 62,938 576,841 249,101 Provision for income taxes 58,154   18,252   169,995   68,842   Net income $ 174,465   $ 44,686   $ 406,846   $ 180,259   Basic net income per share $ 0.35   $ 0.09   $ 0.82   $ 0.36  

Shares used to compute basic net income per share

498,630   498,468   498,891   497,782   Diluted net income per share $ 0.34   $ 0.09   $ 0.80   $ 0.35  

Shares used to compute diluted net income per share

505,809   507,811   507,124   508,575    

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

    August 28, 2015 November 28, 2014 ASSETS   Current assets: Cash and cash equivalents $ 829,292 $ 1,117,400 Short-term investments 2,839,441 2,622,091

Trade receivables, net of allowances for doubtful accounts of $7,255 and $7,867, respectively

593,554 591,800 Deferred income taxes 82,438 95,279 Prepaid expenses and other current assets 181,163   175,758   Total current assets 4,525,888 4,602,328   Property and equipment, net 797,464 785,123 Goodwill 5,402,159 4,721,962 Purchased and other intangibles, net 556,810 469,662 Investment in lease receivable 80,439 80,439 Other assets 145,635   126,315   Total assets $ 11,508,395   $ 10,785,829     LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Trade payables $ 69,823 $ 68,377 Accrued expenses 658,342 683,866 Debt and capital lease obligations — 603,229 Accrued restructuring 1,450 17,120 Income taxes payable 71,487 23,920 Deferred revenue 1,259,712   1,097,923   Total current liabilities 2,060,814 2,494,435   Long-term liabilities: Debt 1,906,094 911,086 Deferred revenue 46,317 57,401 Accrued restructuring 3,142 5,194 Income taxes payable 250,569 125,746 Deferred income taxes 316,142 342,315 Other liabilities 83,985   73,747   Total liabilities 4,667,063 4,009,924   Stockholders' equity: Preferred stock, $0.0001 par value; 2,000 shares authorized — — Common stock, $0.0001 par value 61 61 Additional paid-in-capital 4,094,133 3,778,495 Retained earnings 7,049,629 6,924,294 Accumulated other comprehensive income (loss) (140,831 ) (8,094 )

Treasury stock, at cost (102,129 and 103,350 shares, respectively), net of reissuances

(4,161,660 ) (3,918,851 ) Total stockholders' equity 6,841,332   6,775,905   Total liabilities and stockholders' equity $ 11,508,395   $ 10,785,829    

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

  Three Months Ended August 28, 2015   August 29, 2014 Cash flows from operating activities: Net income $ 174,465 $ 44,686 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 87,550 80,154 Stock-based compensation expense 85,975 82,986 Unrealized investment losses (gains), net 1,415 (576 ) Changes in deferred revenue 77,720 67,934 Changes in other operating assets and liabilities (66,637 ) (6,664 ) Net cash provided by operating activities 360,488   268,520     Cash flows from investing activities: Purchases, sales and maturities of short-term investments, net (394,944 ) (110,346 ) Purchases of property and equipment (48,984 ) (54,966 ) Purchases and sales of long-term investments, intangibles and other assets, net (1,138 ) (5,082 ) Acquisitions, net of cash (20,025 ) —   Net cash used for investing activities (465,091 ) (170,394 )   Cash flows from financing activities: Purchases of treasury stock (100,000 ) (125,000 ) Proceeds from reissuance of treasury stock, net 68,641 91,500 Repayment of debt and capital lease obligations — (3,372 ) Debt issuance costs (957 ) — Excess tax benefits from stock-based compensation 13,606   27,078   Net cash used for financing activities (18,710 ) (9,794 ) Effect of exchange rate changes on cash and cash equivalents (3,542 ) (2,027 ) Net (decrease) increase in cash and cash equivalents (126,855 ) 86,305 Cash and cash equivalents at beginning of period 956,147   817,020   Cash and cash equivalents at end of period $ 829,292   $ 903,325    

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 28, 2015   August 29, 2014   May 29, 2015 Operating income:   GAAP operating income $ 246,019 $ 74,176 $ 193,617 Stock-based and deferred compensation expense 84,371 83,682 85,374 Restructuring and other charges (751 ) 201 34 Amortization of purchased intangibles 41,041 31,780 40,080 Loss contingency reversal   (10,000 )   —     —   Non-GAAP operating income $ 360,680   $ 189,839   $ 319,105     Net income:   GAAP net income $ 174,465 $ 44,686 $ 147,493 Stock-based and deferred compensation expense 84,371 83,682 85,374 Restructuring and other charges (751 ) 201 34 Amortization of purchased intangibles 41,041 31,780 40,080 Loss contingency reversal (10,000 ) — — Investment (gains) losses 1,314 (669 ) (223 ) Income tax adjustments (15,051 ) (19,114 ) (30,829 ) Non-GAAP net income $ 275,389   $ 140,566   $ 241,929     Diluted net income per share:   GAAP diluted net income per share $ 0.34 $ 0.09 $ 0.29 Stock-based and deferred compensation expense 0.17 0.16 0.17 Amortization of purchased intangibles 0.08 0.06 0.08 Loss contingency reversal (0.02 ) — — Income tax adjustments (0.03 ) (0.03 ) (0.06 ) Non-GAAP diluted net income per share $ 0.54   $ 0.28   $ 0.48     Shares used in computing diluted net income per share 505,809 507,811 505,582    

Three MonthsEnded

August 28, 2015 Effective income tax rate:   GAAP effective income tax rate 25.0 % Stock-based and deferred compensation expense (1.7 ) Amortization of purchased intangibles (0.8 ) 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.

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Investor Relations ContactAdobeMike Saviage, 408-536-4416ir@adobe.comorPublic Relations ContactAdobeEdie Kissko, 408-536-3034kissko@adobe.com