ADBE Adobe Inc

Strong Adoption of Cloud Solutions Drives 20 Percent Year-over-year Revenue Growth

Adobe (Nasdaq:ADBE) today reported financial results for its second quarter fiscal year 2016 ended June 3, 2016.

Second Quarter Financial Highlights

• Adobe achieved record quarterly revenue of $1.40 billion, representing year-over-year growth of 20 percent.
• Diluted earnings per share were $0.48 on a GAAP-basis, and $0.71 on a non-GAAP basis.
• Digital Media segment revenue grew by 26 percent year-over-year to a record $943 million, with Creative revenue growing 37 percent year-over-year to a record $755 million.
• Strong Creative Cloud and Document Cloud adoption drove Digital Media Annualized Recurring Revenue (“ARR”) to $3.41 billion exiting the quarter, a quarter-over-quarter increase of $285 million.
• Adobe Marketing Cloud achieved record revenue of $385 million that represents year-over-year growth of 18 percent.
• Year-over-year operating income grew 78 percent and net income grew 66 percent on a GAAP-basis; operating income grew 45 percent and net income grew 48 percent on a non-GAAP basis.
• Cash flow from operations was $489 million, and deferred revenue grew to $1.68 billion.
• The company repurchased approximately 2.2 million shares during the quarter, returning $205 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 cloud solutions are powering digital transformation at the world's biggest brands, educational institutions and government agencies," said Shantanu Narayen, Adobe president and chief executive officer. "Our record revenue reflects our market leadership and the exploding demand for digital experience solutions.”

“Record revenue with strong profit and cash flow highlight our second quarter results," said Mark Garrett, Adobe executive vice president and chief financial officer. “Based on our first half performance and momentum, we’re on track to meet or exceed all of our annual fiscal year 2016 targets.”

Adobe to Webcast Earnings Conference Call

Adobe will webcast its second quarter fiscal year 2016 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 product adoption and innovation, business momentum, revenue, profit, annualized recurring revenue, bookings, earnings per share and operating cash flow, 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 offer products and services that meet customer requirements, introduction of new products, services and business models by competitors, failure to successfully manage transitions to new business models and markets, risks associated with the timing of revenue recognition, uncertainty in economic conditions and the financial markets, risks associated with our cloud strategy, 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, 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 2015 ended Nov. 27, 2015, and Adobe's Quarterly Reports on Form 10-Q issued in fiscal year 2016.

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 June 3, 2016, which Adobe expects to file in June 2016.

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.

© 2016 Adobe Systems Incorporated. All rights reserved. Adobe, 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   Six Months Ended June 3,   May 29, June 3,   May 29, 2016 2015 2016 2015 Revenue: Subscription $ 1,083,708 $ 773,963 $ 2,153,958 $ 1,487,405 Product 196,500 274,538 397,612 565,312 Services and support 118,501   113,657   230,474   218,622   Total revenue 1,398,709   1,162,158   2,782,044   2,271,339     Cost of revenue: Subscription 115,399 103,694 222,674 199,221 Product 15,756 21,467 36,055 41,170 Services and support 70,924   60,012   141,922   111,580   Total cost of revenue 202,079   185,173   400,651   351,971     Gross profit 1,196,630 976,985 2,381,393 1,919,368   Operating expenses: Research and development 232,484 208,047 469,688 423,556 Sales and marketing 462,789 426,998 937,680 819,739 General and administrative 138,596 130,208 285,531 275,289 Restructuring and other charges (466 ) 34 (885 ) 1,789 Amortization of purchased intangibles 18,988   18,081   37,382   32,353   Total operating expenses 852,391   783,368   1,729,396   1,552,726     Operating income 344,239 193,617 651,997 366,642   Non-operating income (expense): Interest and other income (expense), net 6,083 3,739 10,270 7,077 Interest expense (17,174 ) (16,605 ) (35,643 ) (31,150 ) Investment gains (losses), net (3,318 ) 223   (4,487 ) 1,653   Total non-operating income (expense), net (14,409 ) (12,643 ) (29,860 ) (22,420 ) Income before income taxes 329,830 180,974 622,137 344,222 Provision for income taxes 85,756   33,481   123,756   111,841   Net income $ 244,074   $ 147,493   $ 498,381   $ 232,381   Basic net income per share $ 0.49   $ 0.30   $ 1.00   $ 0.47   Shares used to compute basic net income per share 499,974   499,290   499,534   499,022   Diluted net income per share $ 0.48   $ 0.29   $ 0.99   $ 0.46   Shares used to compute diluted net income per share 504,725   505,582   505,666   507,061     Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

    June 3,   November 27, 2016 2015 ASSETS   Current assets: Cash and cash equivalents $ 886,379 $ 876,560 Short-term investments 3,432,029 3,111,524 Trade receivables, net of allowances for doubtful accounts of $5,723 and $7,293, respectively 666,736 672,006 Prepaid expenses and other current assets 253,420   161,802   Total current assets 5,238,564 4,821,892   Property and equipment, net 796,077 787,421 Goodwill 5,444,556 5,366,881 Purchased and other intangibles, net 494,193 510,007 Investment in lease receivable 80,439 80,439 Other assets 162,954   159,832   Total assets $ 12,216,783   $ 11,726,472     LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Trade payables $ 75,582 $ 93,307 Accrued expenses 661,013 679,884 Income taxes payable 15,774 6,165 Deferred revenue 1,633,221   1,434,200   Total current liabilities 2,385,590 2,213,556   Long-term liabilities: Debt 1,918,389 1,907,231 Deferred revenue 48,411 51,094 Income taxes payable 273,221 256,129 Deferred income taxes 245,611 208,209 Other liabilities 96,950   88,673   Total liabilities 4,968,172 4,724,892   Stockholders' equity: Preferred stock, $0.0001 par value; 2,000 shares authorized — — Common stock, $0.0001 par value 61 61 Additional paid-in-capital 4,428,270 4,184,883 Retained earnings 7,444,115 7,253,431 Accumulated other comprehensive income (loss) (133,047 ) (169,080 ) Treasury stock, at cost (101,862 and 103,025 shares, respectively), net of reissuances (4,490,788 ) (4,267,715 ) Total stockholders' equity 7,248,611   7,001,580   Total liabilities and stockholders' equity $ 12,216,783   $ 11,726,472     Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

    Three Months Ended June 3,   May 29, 2016 2015 Cash flows from operating activities: Net income $ 244,074 $ 147,493 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 84,461 85,929 Stock-based compensation expense 85,570 84,649 Unrealized investment losses (gains), net 3,340 (276 ) Changes in deferred revenue 68,356 44,772 Changes in other operating assets and liabilities 2,914   108,917   Net cash provided by operating activities 488,715   471,484     Cash flows from investing activities: Purchases, sales and maturities of short-term investments, net (148,797 ) 3,541 Purchases of property and equipment (53,759 ) (35,730 ) Purchases and sales of long-term investments, intangibles and other assets, net (522 ) (1,083 ) Acquisitions, net of cash (48,427 ) (5,637 ) Net cash used for investing activities (251,505 ) (38,909 )   Cash flows from financing activities: Purchases of treasury stock (225,000 ) (200,000 ) Proceeds from (cost of) issuance of treasury stock, net (6,297 ) 2,911 Repayment of capital lease obligations (21 ) — Debt issuance costs — (153 ) Excess tax benefits from stock-based compensation 50,430   11,140   Net cash used for financing activities (180,888 ) (186,102 ) Effect of exchange rate changes on cash and cash equivalents (639 ) (3,210 ) Net increase in cash and cash equivalents 55,683 243,263 Cash and cash equivalents at beginning of period 830,696   712,884   Cash and cash equivalents at end of period $ 886,379   $ 956,147     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 June 3,   May 29,   March 4, 2016 2015 2016 Operating income:   GAAP operating income $ 344,239 $ 193,617 $ 307,758 Stock-based and deferred compensation expense 87,209 85,374 91,690 Restructuring and other charges (466 ) 34 (419 )

Amortization of purchased intangibles and technology license arrangements

32,567   40,080   36,264   Non-GAAP operating income $ 463,549   $ 319,105   $ 435,293     Net income:   GAAP net income $ 244,074 $ 147,493 $ 254,307 Stock-based and deferred compensation expense 87,209 85,374 91,690 Restructuring and other charges (466 ) 34 (419 )

Amortization of purchased intangibles and technology license arrangements

32,567 40,080 36,264 Investment (gains) losses, net 3,318 (223 ) 1,169 Income tax adjustments (9,260 ) (30,829 ) (50,403 ) Non-GAAP net income $ 357,442   $ 241,929   $ 332,608     Diluted net income per share:   GAAP diluted net income per share $ 0.48 $ 0.29 $ 0.50 Stock-based and deferred compensation expense 0.17 0.17 0.18

Amortization of purchased intangibles and technology license arrangements

0.06 0.08 0.07 Investment (gains) losses 0.01 — — Income tax adjustments (0.01 ) (0.06 ) (0.09 ) Non-GAAP diluted net income per share $ 0.71   $ 0.48   $ 0.66     Shares used in computing diluted net income per share 504,725 505,582 505,676  

Three MonthsEnded

June 3, 2016 Effective income tax rate:   GAAP effective income tax rate 26.0 % Stock-based and deferred compensation expense (3.6 ) Amortization of purchased intangibles (1.4 ) 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 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