ADBE Adobe Inc

Strong Cash Flow and Earnings Highlight Third Quarter Results

Adobe (Nasdaq:ADBE) today reported financial results for its third quarter fiscal year 2017 ended Sept. 1, 2017.

Financial Highlights

• Adobe achieved record quarterly revenue of $1.84 billion in its third quarter of fiscal year 2017, which represents 26 percent year-over-year revenue growth.
• Diluted earnings per share was $0.84 on a GAAP-basis, and $1.10 on a non-GAAP basis.
• Digital Media segment revenue was $1.27 billion, with Creative revenue growing to $1.06 billion.
• Digital Media Annualized Recurring Revenue (“ARR”) grew to $4.87 billion exiting the quarter, a quarter-over-quarter increase of $308 million.
• Adobe Experience Cloud achieved revenue of $508 million, which represents 26 percent year-over-year growth.
• Operating income grew 48 percent and net income grew 55 percent year-over-year on a GAAP-basis; operating income grew 43 percent and net income grew 46 percent year-over-year on a non-GAAP basis.
• Cash flow from operations was $704 million, and deferred revenue grew to approximately $2.20 billion.
• The company repurchased approximately 2.1 million shares during the quarter, returning $298 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 delivered another record quarter with stellar year-over-year revenue growth of 26 percent,” said Shantanu Narayen, president and CEO, Adobe. “The imperative to deliver intelligent, intuitive and effective customer experiences is key to the C-suite agenda of digital transformation, and Adobe’s cloud offerings are critical to that business mandate.”

“Our results in Q3 once again reflect the leverage of our financial model, with record revenue driven by our cloud-based subscription offerings, strong earnings and cash flow from operations," said Mark Garrett, executive vice president and CFO, Adobe.

Adobe to Webcast Earnings Conference Call

Adobe will webcast its third quarter fiscal year 2017 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 the importance of our products to our customers, product adoption, 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, market and offer products and services that meet customer requirements, introduction of new products, services and business models by competitors, fluctuations in subscription renewal rates, our ability to predict such renewals and risks related to the timing of revenue recognition from our subscription offerings and ETLAs, complex and unpredictable sales cycles for some enterprise offerings, failure to successfully manage transitions to new business models and markets, uncertainty in economic conditions and the financial markets, risks associated with cyber-attacks and information security, potential interruptions or delays in hosted services provided by us or third parties, changes in accounting principles, 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 2016 ended Dec. 2, 2016, and Adobe's Quarterly Reports on Form 10-Q issued in fiscal year 2017.

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 Sept. 1, 2017, which Adobe expects to file in Sept. 2017.

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.

© 2017 Adobe Systems Incorporated. All rights reserved. Adobe 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 September 1,   September 2, September 1,   September 2, 2017* 2016 2017* 2016 Revenue: Subscription $ 1,570,336 $ 1,168,602 $ 4,437,882 $ 3,322,560 Product 158,961 180,960 513,891 578,572 Services and support 111,777   114,405   343,137   344,879   Total revenue 1,841,074   1,463,967   5,294,910   4,246,011     Cost of revenue: Subscription 168,915 116,990 452,830 339,664 Product 11,709 15,435 41,530 51,490 Services and support 82,298   70,276   245,259   212,198   Total cost of revenue 262,922   202,701   739,619   603,352     Gross profit 1,578,152 1,261,266 4,555,291 3,642,659   Operating expenses: Research and development 315,555 248,450 900,033 718,138 Sales and marketing 550,093 477,475 1,623,488 1,415,155 General and administrative 147,402 143,364 455,139 428,010 Amortization of purchased intangibles 19,428   22,652   57,876   60,034   Total operating expenses 1,032,478   891,941   3,036,536   2,621,337     Operating income 545,674 369,325 1,518,755 1,021,322   Non-operating income (expense): Interest and other income (expense), net 13,539 2,725 25,899 12,995 Interest expense (18,809 ) (17,281 ) (55,286 ) (52,924 ) Investment gains (losses), net 975   1,532   5,261   (2,955 ) Total non-operating income (expense), net (4,295 ) (13,024 ) (24,126 ) (42,884 ) Income before income taxes 541,379 356,301 1,494,629 978,438 Provision for income taxes 121,810   85,513   302,224   209,269   Net income $ 419,569   $ 270,788   $ 1,192,405   $ 769,169   Basic net income per share $ 0.85   $ 0.54   $ 2.41   $ 1.54   Shares used to compute basic net income per share 493,426   498,584   494,138   499,224   Diluted net income per share $ 0.84   $ 0.54   $ 2.38   $ 1.52   Shares used to compute diluted net income per share 500,398   503,669   501,060   505,135         ____________________      

*

We early adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, during the first quarter of fiscal 2017. As required by the standard, excess tax benefits recognized on stock-based compensation expense were reflected in our provision for income taxes rather than paid-in capital on a prospective basis. We recorded excess tax benefits within our provision for income taxes, rather than paid-in capital, starting the first quarter of fiscal 2017.

  Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

    September 1,   December 2, 2017 2016 ASSETS   Current assets: Cash and cash equivalents $ 1,774,550 $ 1,011,315 Short-term investments 3,593,936 3,749,985 Trade receivables, net of allowances for doubtful accounts of $9,112 and $6,214, respectively 1,006,187 833,033 Prepaid expenses and other current assets 206,384   245,441   Total current assets 6,581,057 5,839,774   Property and equipment, net 939,809 816,264 Goodwill 5,820,656 5,406,474 Purchased and other intangibles, net 420,667 414,405 Investment in lease receivable — 80,439 Other assets 144,626   139,890   Total assets $ 13,906,815   $ 12,697,246     LIABILITIES AND STOCKHOLDERS’ EQUITY   Current liabilities: Trade payables $ 90,327 $ 88,024 Accrued expenses 932,292 739,630 Income taxes payable 56,754 38,362 Deferred revenue 2,136,771   1,945,619   Total current liabilities 3,216,144 2,811,635   Long-term liabilities: Debt 1,889,218 1,892,200 Deferred revenue 68,093 69,131 Income taxes payable 173,023 184,381 Deferred income taxes 276,271 217,660 Other liabilities 113,632   97,404   Total liabilities 5,736,381 5,272,411   Stockholders’ equity: Preferred stock, $0.0001 par value; 2,000 shares authorized — — Common stock, $0.0001 par value 61 61 Additional paid-in-capital 4,988,491 4,616,331 Retained earnings 9,072,321 8,114,517 Accumulated other comprehensive income (loss) (98,630 ) (173,602 ) Treasury stock, at cost (107,960 and 106,580 shares, respectively), net of reissuances (5,791,809 ) (5,132,472 ) Total stockholders’ equity 8,170,434   7,424,835   Total liabilities and stockholders’ equity $ 13,906,815   $ 12,697,246     Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

    Three Months Ended September 1,   September 2, 2017* 2016 Cash flows from operating activities: Net income $ 419,569 $ 270,788 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 82,319 84,014 Stock-based compensation expense 117,042 84,503 Unrealized investment (gains) losses, net (643 ) (1,471 ) Changes in deferred revenue 129,872 116,353 Changes in other operating assets and liabilities (43,723 ) (36,302 ) Net cash provided by operating activities 704,436   517,885     Cash flows from investing activities: Purchases, sales and maturities of short-term investments, net 21,215 (247,601 ) Purchases of property and equipment (54,238 ) (55,213 ) Purchases and sales of long-term investments, intangibles and other assets, net (3,791 ) (3,774 ) Net cash used for investing activities (36,814 ) (306,588 )   Cash flows from financing activities: Purchases of treasury stock (300,000 ) (400,000 ) Proceeds from treasury stock reissuances, net of taxes paid related to net share settlement of equity awards 82,117 71,128 Repayment of capital lease obligations (416 ) (65 ) Excess tax benefits from stock-based compensation —   3,980   Net cash used for financing activities (218,299 ) (324,957 ) Effect of exchange rate changes on cash and cash equivalents 8,277   (5,047 ) Net increase (decrease) in cash and cash equivalents 457,600 (118,707 ) Cash and cash equivalents at beginning of period 1,316,950   886,379   Cash and cash equivalents at end of period $ 1,774,550   $ 767,672         ____________________       *

We early adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, during the first quarter of fiscal 2017. As required by the standard, excess tax benefits recognized on stock-based compensation expense were reflected in our provision for income taxes rather than paid-in capital on a prospective basis. We also elected to prospectively apply the change in presentation of excess tax benefits wherein excess tax benefits recognized on stock-based compensation expense were classified as operating activities in our condensed consolidated statements of cash flows starting the first quarter of fiscal 2017. Prior period classification of cash flows related to excess tax benefits was not adjusted.

  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 September 1,   September 2,   June 2, 2017 2016 2017 Operating income:   GAAP operating income $ 545,674 $ 369,325 $ 504,082 Stock-based and deferred compensation expense 117,968 86,070 118,591 Restructuring and other charges — (338 ) (97 ) Amortization of purchased intangibles 36,655   36,082   36,556   Non-GAAP operating income $ 700,297   $ 491,139   $ 659,132     Net income:   GAAP net income* $ 419,569 $ 270,788 $ 374,390 Stock-based and deferred compensation expense 117,968 86,070 118,591 Restructuring and other charges — (338 ) (97 ) Amortization of purchased intangibles 36,655 36,082 36,556 Investment (gains) losses, net (975 ) (1,532 ) (1,729 ) Income tax adjustments (24,146 ) (14,569 ) (17,419 ) Non-GAAP net income $ 549,071   $ 376,501   $ 510,292     Diluted net income per share:   GAAP diluted net income per share* $ 0.84 $ 0.54 $ 0.75 Stock-based and deferred compensation expense 0.24 0.17 0.23 Amortization of purchased intangibles 0.07 0.07 0.07 Income tax adjustments (0.05 ) (0.03 ) (0.03 ) Non-GAAP diluted net income per share $ 1.10   $ 0.75   $ 1.02     Shares used in computing diluted net income per share 500,398 503,669 500,351     Three Months Ended September 1, 2017 Effective income tax rate:   GAAP effective income tax rate* 22.5 % Stock-based and deferred compensation expense (0.4 ) Amortization of purchased intangibles (0.1 ) Income tax adjustments (1.0 ) Non-GAAP effective income tax rate** 21.0 %       ____________________       *

We early adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, during the first quarter of fiscal 2017. As required by the standard, excess tax benefits recognized on stock-based compensation expense were reflected in our provision for income taxes rather than paid-in capital on a prospective basis. We recorded excess tax benefits within our provision for income taxes, rather than paid-in capital, starting the first quarter of fiscal 2017.

** Our non-GAAP effective income tax rate of 21% is an annualized rate based on estimates for the entire fiscal year, whereas the GAAP effective income tax rate of 22.5% is the rate for the quarter based on tax events within the quarter. Income tax adjustments, which are included in both GAAP and non-GAAP earnings, will fluctuate from quarter-to-quarter but will normalize over the fiscal year due to the timing of tax events including the timing of recognition of excess tax benefits within each quarter.  

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.

View source version on businesswire.com: http://www.businesswire.com/news/home/20170919006560/en/

Investor Relations ContactAdobeMike Saviage, 408-536-4416ir@adobe.comorPublic Relations ContactAdobeDan Berthiaume, 408-536-2584dberthia@adobe.com