Adobe Reports Strong Q1 FY2014 Results

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

First Quarter Financial Highlights
  • Adobe achieved revenue of $1.0 billion, at the high end of its targeted range of $950 million to $1.0 billion.
  • Adobe exited Q1 with 1 million 844 thousand paid Creative Cloud subscriptions, an increase of 405 thousand when compared to the number of subscriptions as of the end of Q4 fiscal year 2013.
  • Creative Annualized Recurring Revenue (“ARR”) grew to $987 million, and total Digital Media ARR grew to $1.15 billion.
  • Adobe Marketing Cloud quarterly revenue was $267 million, representing 24 percent year-over-year growth.
  • Diluted earnings per share were $0.09 on a GAAP-basis, and $0.30 on a non-GAAP basis.
  • Cash flow from operations was $252 million.
  • Deferred revenue grew by $52 million to a record $881 million.
  • More than half of Adobe’s Q1 revenue was from recurring sources such as Creative Cloud subscriptions and Adobe Marketing Cloud.
  • The company repurchased 4.5 million shares during the quarter, returning approximately $263 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 Q1 momentum was driven by strong adoption of Creative Cloud and Adobe Marketing Cloud,” said Shantanu Narayen, president and chief executive officer, Adobe. “We have an amazing pipeline of innovation that we will deliver in the coming months, as well as plans to differentiate ourselves by further integrating our Cloud businesses.”

“We achieved a significant milestone with our transition to the Cloud in our first quarter with more than half of Adobe’s total revenue coming from recurring sources such as Creative Cloud subscriptions and Adobe Marketing Cloud adoption,” said Mark Garrett, executive vice president and chief financial officer, Adobe. “In our Creative business, reported revenue from subscriptions exceeded revenue from legacy perpetual licenses for the first time.”

Adobe to Webcast Earnings Conference Call

Adobe will webcast its first quarter fiscal year 2014 earnings conference call today at 2:00 p.m. Pacific Time from its investor relations website: A copy of Adobe management’s prepared remarks, including financial targets and conference call slides, has been posted to Adobe’s investor relations website in advance of the conference call for reference.

A reconciliation between GAAP and non-GAAP 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, innovation in our products, future product features and updates, and growth in recurring revenue, 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 or upgrade rates, uncertainty in economic conditions and the financial markets, risks associated with cyber-attacks and information security, difficulty in predicting revenue from new businesses and the potential impact on our financial results from changes in our business models, 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 ended Nov. 29, 2013.

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 Feb. 28, 2014, which Adobe expects to file in March 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

© 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

February 28, 2014
  March 1, 2013
Products $ 471,454 $ 675,789
Subscription 423,563 224,266
Services and support 105,103   107,818  
Total revenue 1,000,120   1,007,873  
Cost of revenue:
Products 27,498 51,982
Subscription 76,732 62,580
Services and support 44,279   42,122  
Total cost of revenue 148,509   156,684  
Gross profit 851,611 851,189
Operating expenses:
Research and development 209,525 209,638
Sales and marketing 410,141 398,033
General and administrative 138,984 132,853
Restructuring and other charges 663 2
Amortization of purchased intangibles 13,552   12,439  
Total operating expenses 772,865   752,965  
Operating income 78,746 98,224
Non-operating income (expense):
Interest and other income (expense), net 3,145 1,246
Interest expense (16,590 ) (16,834 )
Investment gains (losses), net (409 ) 848  
Total non-operating income (expense), net (13,854 ) (14,740 )
Income before income taxes 64,892 83,484
Provision for income taxes 17,846   18,367  
Net income $ 47,046   $ 65,117  
Basic net income per share $ 0.09   $ 0.13  
Shares used to compute basic net income per share 496,948   498,607  
Diluted net income per share $ 0.09   $ 0.13  
Shares used to compute diluted net income per share 508,340   507,840  

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)
February 28, 2014 November 29, 2013
Current assets:
Cash and cash equivalents $ 733,916 $ 834,556
Short-term investments 2,398,176 2,339,196
Trade receivables, net of allowances for doubtful accounts of $8,637 and $10,228, respectively 510,507 599,820
Deferred income taxes 91,149 102,247
Prepaid expenses and other current assets 208,643   170,110  
Total current assets 3,942,391 4,045,929
Property and equipment, net 651,083 659,774
Goodwill 4,782,448 4,771,981
Purchased and other intangibles, net 570,171 605,254
Investment in lease receivable 207,239 207,239
Other assets 92,550   90,121  
Total assets $ 10,245,882   $ 10,380,298  
Current liabilities:
Trade payables $ 64,508 $ 62,096
Accrued expenses 584,273 656,939
Debt and capital lease obligations 613,310 14,676
Accrued restructuring 6,193 6,171
Income taxes payable 12,986 10,222
Deferred revenue 831,077   775,544  
Total current liabilities 2,112,347 1,525,648
Long-term liabilities:
Debt and capital lease obligations 896,418 1,499,297
Deferred revenue 50,010 53,268
Accrued restructuring 6,992 7,717
Income taxes payable 135,202 132,545
Deferred income taxes 362,859 375,634
Other liabilities 71,171   61,555  
Total liabilities 3,634,999 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 3,475,186 3,392,696
Retained earnings 6,734,701 6,928,964
Accumulated other comprehensive income 56,592 46,103
Treasury stock, at cost (102,333 and 104,573 shares, respectively), net of reissuances (3,655,657 ) (3,643,190 )
Total stockholders' equity 6,610,883   6,724,634  
Total liabilities and stockholders' equity $ 10,245,882   $ 10,380,298  

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)
  Three Months Ended
February 28, 2014   March 1, 2013
Cash flows from operating activities:
Net income $ 47,046 $ 65,117
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion 77,636 76,752
Stock-based compensation expense 82,750 77,282
Unrealized investment (gains) losses, net 975 (418 )
Changes in deferred revenue 52,275 79,514
Changes in other operating assets and liabilities (9,009 ) 23,784  
Net cash provided by operating activities 251,673   322,031  
Cash flows from investing activities:
Purchases, sales and maturities of short-term investments, net (61,746 ) (245,775 )
Purchases of property and equipment (29,393 ) (60,190 )
Purchases and sales of long-term investments, intangibles and other assets, net (3,283 ) (43,793 )
Acquisitions, net of cash   (96,356 )
Net cash used for investing activities (94,422 ) (446,114 )
Cash flows from financing activities:
Purchases of treasury stock (200,000 ) (100,000 )
Proceeds from (cost of) reissuance of treasury stock, net (53,776 ) 88,566
Proceeds from debt and capital lease obligations 25,703
Repayment of debt and capital lease obligations (4,433 ) (2,507 )
Debt issuance costs   (357 )
Net cash (used for) provided by financing activities (258,209 ) 11,405  
Effect of exchange rate changes on cash and cash equivalents 318   (5,992 )
Net decrease in cash and cash equivalents (100,640 ) (118,670 )
Cash and cash equivalents at beginning of period 834,556   1,425,052  
Cash and cash equivalents at end of period $ 733,916   $ 1,306,382  

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
February 28, 2014   March 1, 2013   November 29, 2013
Operating income:
GAAP operating income $ 78,746 $ 98,224 $ 102,836
Stock-based and deferred compensation expense 83,549 85,086 86,468
Restructuring and other charges 663 2 2,294
Amortization of purchased intangibles & technology license arrangements 32,054 57,377 32,789
Loss contingency 10,000      
Non-GAAP operating income $ 205,012   $ 240,689   $ 224,387  
Net income:
GAAP net income $ 47,046 $ 65,117 $ 65,320
Stock-based and deferred compensation expense 83,549 85,086 86,468
Restructuring and other charges 663 2 2,294
Amortization of purchased intangibles & technology license arrangements 32,054 57,377 32,789
Investment (gains) losses 409 (848 ) (1,461 )
Loss contingency 10,000
Income tax adjustments (22,383 ) (28,840 ) (20,806 )
Non-GAAP net income $ 151,338   $ 177,894   $ 164,604  
Diluted net income per share:
GAAP diluted net income per share $ 0.09 $ 0.13 $ 0.13
Stock-based and deferred compensation expense 0.16 0.17 0.17
Amortization of purchased intangibles & technology license arrangements 0.06 0.11 0.06
Loss contingency 0.02
Income tax adjustments (0.03 ) (0.06 ) (0.04 )
Non-GAAP diluted net income per share $ 0.30   $ 0.35   $ 0.32  
Shares used in computing diluted net income per share 508,340 507,840 511,082
      Three Months

February 28, 2014
Effective income tax rate:
GAAP effective income tax rate 27.5 %
Stock-based and deferred compensation expense (5.3 )
Amortization of purchased intangibles (2.1 )
Loss contingency (0.6 )
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. Accordingly, 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 in a manner that focuses on what Adobe believes to be its ongoing business operations.

Adobe's management believes it is useful for itself and investors to review, as applicable, both GAAP information that may include 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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