ADBE Adobe Inc

Momentum Continues with Accelerated Creative Cloud and Adobe Marketing Cloud Adoption

Adobe (Nasdaq:ADBE) today reported financial results for its fourth quarter and fiscal year 2014 ended Nov. 28, 2014.

Fourth Quarter Financial Highlights

• Adobe achieved revenue of $1.073 billion, near the high end of the targeted range of $1.025 billion to $1.075 billion.
• Adobe added 644 thousand net new Creative Cloud subscriptions in the quarter.
• Creative Annualized Recurring Revenue (“ARR”) grew to $1.676 billion, and total Digital Media ARR grew to $1.947 billion.
• Adobe Marketing Cloud revenue was $330 million with record bookings in the quarter.
• Diluted earnings per share were $0.14 on a GAAP-basis, and $0.36 on a non-GAAP basis.
• Cash flow from operations was $400 million.
• Deferred revenue grew to a record $1.155 billion, and unbilled backlog grew to approximately $1.7 billion.
• 66 percent of Adobe’s Q4 revenue was from recurring sources, compared to 44 percent of Q4 revenue in fiscal 2013.
• The company repurchased approximately 1.8 million shares during the quarter, returning $127 million of cash to stockholders.

Fiscal Year 2014 Financial Highlights

• Adobe achieved revenue of $4.147 billion and generated $1.288 billion in operating cash flow during the year.
• The company reported annual GAAP earnings per share of $0.50 and non-GAAP earnings per share of $1.29.
• Creative Cloud subscriptions grew by more than two million to 3.454 million. In addition, Adobe grew net new Digital Media ARR by more than $1 billion during the year.
• Adobe Marketing Cloud achieved a record $1.170 billion in annual revenue, with record annual bookings that is above the company’s target of 30 percent.
• The company repurchased 10.9 million shares during the year, returning approximately $689 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.

Adobe to Acquire Fotolia

Adobe today announced it has entered into a definitive agreement to acquire privately-held Fotolia, a leading marketplace for stock content. Fotolia will be integrated into Adobe Creative Cloud, providing current and future Creative Cloud members with the ability to access and purchase over 34 million images and videos, significantly simplifying and accelerating the design process. The acquisition of Fotolia cements Creative Cloud’s role as a vibrant marketplace for creatives to buy and sell assets and services as well as showcase their talent to a worldwide audience. Adobe also plans to continue to operate Fotolia as a standalone stock service, accessible to anyone. Additional information is available in a separate press release.

Executive Quotes

"Adobe had an outstanding 2014. Creative Cloud adoption outpaced expectations and the acquisition of Fotolia will add a vibrant marketplace for our customers. Adobe Marketing Cloud, the leader in the explosive digital marketing category, continued to drive strong bookings at the world's biggest brands, agencies and media companies,” said Shantanu Narayen, Adobe president and chief executive officer.

“2014 was a pivotal year for Adobe as we completed our business model transition,” said Mark Garrett, Adobe executive vice president and chief financial officer. “In 2015 we expect revenue and earnings to grow sequentially every quarter during the year.”

Adobe to Webcast Earnings Conference Call

Adobe will webcast its fourth quarter and 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 bookings, revenue and earnings, and our ability to complete and integrate the acquisition of Fotolia, 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 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 Annual Report on Form 10-K for our year ended Nov. 28, 2014, which Adobe expects to file in Jan. 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.

© 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 Year Ended November 28, 2014   November 29, 2013 November 28, 2014   November 29, 2013 Revenue: Products $ 327,951 $ 567,232 $ 1,627,803 $ 2,470,098 Subscription 628,954 359,723 2,076,584 1,137,856 Services and support 116,423   114,744   442,678   447,286   Total revenue 1,073,328   1,041,699   4,147,065   4,055,240     Cost of revenue: Products 21,930 26,803 97,099 138,154 Subscription 87,883 77,314 335,432 278,077 Services and support 51,130   43,399   189,549   170,326   Total cost of revenue 160,943   147,516   622,080   586,557     Gross profit 912,385 894,183 3,524,985 3,468,683   Operating expenses: Research and development 213,687 205,196 844,353 826,631 Sales and marketing 428,362 431,540 1,671,808 1,620,454 General and administrative 133,534 138,358 543,332 520,124 Restructuring and other charges 19,385 2,294 19,883 26,497 Amortization of purchased intangibles 12,412   13,959   52,424   52,254   Total operating expenses 807,380   791,347   3,131,800   3,045,960     Operating income 105,005 102,836 393,185 422,723   Non-operating income (expense): Interest and other income (expense), net 105 695 7,267 4,941 Interest expense (12,678 ) (16,722 ) (59,732 ) (67,508 ) Investment gains (losses), net 343   1,461   1,156   (4,015 ) Total non-operating income (expense), net (12,230 ) (14,566 ) (51,309 ) (66,582 ) Income before income taxes 92,775 88,270 341,876 356,141 Provision for income taxes 19,483   22,950   88,325   66,156   Net income $ 73,292   $ 65,320   $ 253,551   $ 289,985   Basic net income per share $ 0.15   $ 0.13   $ 0.51   $ 0.58   Shares used to compute basic net income per share 498,124   499,363   497,867   501,372   Diluted net income per share $ 0.14   $ 0.13   $ 0.50   $ 0.56   Shares used to compute diluted net income per share 507,451   511,082   508,480   513,476    

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

    November 28, 2014 November 29, 2013 ASSETS   Current assets: Cash and cash equivalents $ 1,117,400 $ 834,556 Short-term investments 2,622,091 2,339,196 Trade receivables, net of allowances for doubtful accounts of $7,867 and $10,228, respectively 591,800 599,820 Deferred income taxes 95,586 102,247 Prepaid expenses and other current assets 175,758   170,110   Total current assets 4,602,635 4,045,929   Property and equipment, net 785,123 659,774 Goodwill 4,721,962 4,771,981 Purchased and other intangibles, net 469,662 605,254 Investment in lease receivable 80,439 207,239 Other assets 126,315   90,121   Total assets $ 10,786,136   $ 10,380,298     LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Trade payables $ 68,377 $ 62,096 Accrued expenses 703,365 656,939 Debt and capital lease obligations 603,229 14,676 Accrued restructuring 17,120 6,171 Income taxes payable 20,456 10,222 Deferred revenue 1,097,923   775,544   Total current liabilities 2,510,470 1,525,648   Long-term liabilities: Debt and capital lease obligations 911,086 1,499,297 Deferred revenue 57,401 53,268 Accrued restructuring 5,194 7,717 Income taxes payable 125,746 132,545 Deferred income taxes 341,610 375,634 Other liabilities 73,748   61,555   Total liabilities 4,025,255 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 3,778,314 3,392,696 Retained earnings 6,909,451 6,928,964 Accumulated other comprehensive income (loss) (8,094 ) 46,103 Treasury stock, at cost (103,350 and 104,573 shares, respectively), net of reissuances (3,918,851 ) (3,643,190 ) Total stockholders' equity 6,760,881   6,724,634   Total liabilities and stockholders' equity $ 10,786,136   $ 10,380,298    

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

  Three Months Ended November 28, 2014   November 29, 2013 Cash flows from operating activities: Net income $ 73,292 $ 65,320 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 78,147 81,350 Stock-based compensation expense 84,949 86,754 Unrealized investment gains, net (121 ) (1,741 ) Changes in deferred revenue 158,712 94,737 Changes in other operating assets and liabilities 4,953   (11,438 ) Net cash provided by operating activities 399,932   314,982     Cash flows from investing activities: Purchases, sales and maturities of short-term investments, net (8,474 ) 11,140 Purchases of property and equipment (36,775 ) (35,121 ) Proceeds from the sale of property and equipment — 24,260 Purchases and sales of long-term investments, intangibles and other assets, net (2,908 ) (294 ) Acquisitions, net of cash (29,802 ) —   Net cash used for investing activities (77,959 ) (15 )   Cash flows from financing activities: Purchases of treasury stock (125,000 ) (400,000 ) Proceeds from reissuance of treasury stock, net 3,619 64,892 Repayment of debt and capital lease obligations (3,253 ) (6,041 ) Excess tax benefits from stock-based compensation 21,102   40,619   Net cash used for financing activities (103,532 ) (300,530 ) Effect of exchange rate changes on cash and cash equivalents (4,370 ) 1,034   Net increase in cash and cash equivalents 214,071 15,471 Cash and cash equivalents at beginning of period 903,329   819,085   Cash and cash equivalents at end of period $ 1,117,400   $ 834,556    

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 Year Ended November 28, 2014   November 29, 2013   August 29, 2014 November 28, 2014   November 29, 2013 Operating income:   GAAP operating income $ 105,005 $ 102,836 $ 74,176 $ 393,185 $ 422,723 Stock-based and deferred compensation expense 85,025 86,468 83,682 335,856 332,289 Restructuring and other charges 19,385 2,294 201 19,883 26,497 Amortization of purchased intangibles & technology license arrangements 31,331 32,789 31,780 127,000 153,840 Loss contingency —   —   —   10,000   —   Non-GAAP operating income $ 240,746   $ 224,387   $ 189,839   $ 885,924   $ 935,349     Net income:   GAAP net income $ 73,292 $ 65,320 $ 44,686 $ 253,551 $ 289,985 Stock-based and deferred compensation expense 85,025 86,468 83,682 335,856 332,289 Restructuring and other charges 19,385 2,294 201 19,883 26,497 Amortization of purchased intangibles & technology license arrangements 31,331 32,789 31,780 127,000 153,840 Investment (gains) losses (343 ) (1,461 ) (669 ) (1,156 ) 4,015 Loss contingency — — — 10,000 — Income tax adjustments (28,433 ) (20,806 ) (19,114 ) (86,701 ) (116,897 ) Non-GAAP net income $ 180,257   $ 164,604   $ 140,566   $ 658,433   $ 689,729     Diluted net income per share:   GAAP diluted net income per share $ 0.14 $ 0.13 $ 0.09 $ 0.50 $ 0.56 Stock-based and deferred compensation expense 0.17 0.17 0.16 0.66 0.65 Restructuring and other charges 0.04 — — 0.04 0.05 Amortization of purchased intangibles & technology license arrangements 0.06 0.06 0.06 0.25 0.30 Investment (gains) losses — — — — 0.01 Loss contingency — — — 0.02 — Income tax adjustments (0.05 ) (0.04 ) (0.03 ) (0.18 ) (0.23 ) Non-GAAP diluted net income per share $ 0.36   $ 0.32   $ 0.28   $ 1.29   $ 1.34     Shares used in computing diluted net income per share 507,451 511,082 507,811 508,480 513,476  

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.

Investor Relations ContactAdobeMike Saviage, 408-536-4416ir@adobe.comorPublic Relations ContactAdobeColleen Rodriguez, 408-536-6803corodrig@adobe.com