Adobe Creative Cloud Surpasses One Million Subscriptions in Q3

Adobe Marketing Cloud Achieves Year-Over-Year Revenue Growth of 28 Percent

SAN JOSE, Calif.--()--Adobe (NASDAQ:ADBE) today reported financial results for its third quarter of fiscal year 2013 ended Aug. 30, 2013.

Third Quarter Financial Highlights

  • Adobe achieved revenue of $995.1 million, within its targeted range of $975 million to $1.025 billion. The acquisition of Neolane during the quarter contributed approximately $6 million of revenue to third quarter results.
  • Diluted earnings per share were $0.16 on a GAAP-basis, and $0.32 on a non-GAAP basis.
  • Operating income was $110.4 million and net income was $83.0 million on a GAAP basis. Operating income was $223.0 million and net income was $164.4 million on a non-GAAP basis.
  • Cash flow from operations was $215.5 million.
  • Deferred revenue grew by $42.7 million to a record $734.0 million.
  • Adobe exited Q3 with 1 million 31 thousand paid Creative Cloud subscriptions, an increase of 331 thousand when compared to the number of subscriptions as of the end of Q2 fiscal year 2013, and enterprise adoption of Creative Cloud was stronger than expected.
  • Creative Annualized Recurring Revenue (“ARR”) grew to $546 million, and total Digital Media ARR grew to $655 million.
  • Including revenue from Neolane, Adobe Marketing Cloud quarterly revenue was $254.9 million, representing 28 percent year-over-year growth. Excluding revenue from Neolane, Adobe Marketing Cloud year-over-year growth was 25 percent.

A reconciliation between GAAP and non-GAAP results is provided at the end of this press release.

Executive Quotes

“We exceeded one million subscriptions during Q3, demonstrating that the transition to Creative Cloud is happening sooner than expected,” said Shantanu Narayen, president and chief executive officer, Adobe. “We successfully completed the acquisition of Neolane, adding a critical cross-channel campaign management solution to the Adobe Marketing Cloud, which will further extend our leadership position in digital marketing.”

“Our customers are overwhelmingly choosing subscriptions instead of perpetual model licenses which is accelerating our business model transition,” said Mark Garrett, executive vice president and chief financial officer, Adobe. “During Q3, 41 percent of our revenue was recurring and we exited the quarter with record deferred revenue on our balance sheet. These results are building a stronger, more predictable revenue model for Adobe which will drive higher long-term growth.”

Adobe to Webcast Earnings Conference Call

Adobe will webcast its third quarter fiscal year 2013 earnings conference call today at 2:00 p.m. Pacific Time from its investor relations website: www.adobe.com/ADBE. 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 the transition of our business as we migrate to a subscription model, adoption of Creative Cloud, growth in annualized recurring revenue and Adobe Marketing Cloud revenue and long-term revenue growth, 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, including our increased emphasis on a cloud and subscription strategy, fluctuations in subscription renewal or upgrade rates, continued uncertainty in economic conditions and the financial markets, 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 fiscal year 2012, and Adobe’s Quarterly Reports on Form 10-Q issued in fiscal year 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 Aug. 30, 2013, which Adobe expects to file in Sept. 2013.

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.

© 2013 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   Nine Months Ended

August 30,
2013

 

August 31,
2012

August 30,
2013
  August 31,
2012
Revenue:
Products $ 582,178 $ 810,457 $ 1,902,866 $ 2,490,000
Subscription 299,346 172,920 778,133 478,669
Services and support 113,595   97,203   332,542   281,580  
Total revenue 995,119   1,080,580   3,013,541   3,250,249  
 
Cost of revenue:
Products 32,564 27,234 111,351 92,976
Subscription 71,656 56,191 200,763 159,794
Services and support 42,856   36,196   126,927   106,034  
Total cost of revenue 147,076   119,621   439,041   358,804  
 
Gross profit 848,043 960,959 2,574,500 2,891,445
 
Operating expenses:
Research and development 208,700 189,145 621,435 547,776
Sales and marketing 388,673 368,556 1,188,914 1,113,978
General and administrative 128,043 110,249 381,766 323,533
Restructuring and other charges (791 ) 2,374 24,203 (2,642 )
Amortization of purchased intangibles 13,064   12,331   38,295   36,374  
Total operating expenses 737,689   682,655   2,254,613   2,019,019  
 
Operating income 110,354 278,304 319,887 872,426
 
Non-operating income (expense):
Interest and other income (expense), net 1,732 1,217 4,246 (2,696 )
Interest expense (16,747 ) (17,253 ) (50,786 ) (50,720 )
Investment gains (losses), net (2,079 ) 944   (5,476 ) 9,153  
Total non-operating income (expense), net (17,094 ) (15,092 ) (52,016 ) (44,263 )
Income before income taxes 93,260 263,212 267,871 828,163
Provision for income taxes 10,258   61,855   43,206   217,721  
Net income $ 83,002   $ 201,357   $ 224,665   $ 610,442  
Basic net income per share $ 0.16   $ 0.41   $ 0.45   $ 1.23  
Shares used to compute basic net income per share 504,116   494,051   502,039   494,672  
Diluted net income per share $ 0.16   $ 0.40   $ 0.44   $ 1.22  
Shares used to compute diluted net income per share 514,058   499,757   513,155   502,167  
 

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

 
  August 30,
2013
  November 30,
2012
ASSETS
 
Current assets:
Cash and cash equivalents $ 819,085 $ 1,425,052
Short-term investments 2,344,852 2,113,301
Trade receivables, net of allowances for doubtful accounts of $10,481 and $12,643, respectively 522,409 617,233
Deferred income taxes 47,710 59,537
Prepaid expenses and other current assets 128,495 116,237
Assets held for sale 23,573    
Total current assets 3,886,124 4,331,360
 
Property and equipment, net 659,747 664,302
Goodwill 4,752,315 4,133,259
Purchased and other intangibles, net 637,957 545,036
Investment in lease receivable 207,239 207,239
Other assets 90,774   93,327  
Total assets $ 10,234,156   $ 9,974,523  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
Trade payables $ 71,070 $ 49,759
Accrued expenses 547,997 590,140
Capital lease obligations 17,462 11,217
Accrued restructuring 4,841 9,287
Income taxes payable 4,604 49,886
Deferred revenue 683,143   561,463  
Total current liabilities 1,329,117 1,271,752
 
Long-term liabilities:
Debt and capital lease obligations 1,502,369 1,496,938
Deferred revenue 50,932 58,102
Accrued restructuring 7,242 12,263
Income taxes payable 120,525 155,096
Deferred income taxes 328,310 265,106
Other liabilities 60,902   50,084  
Total liabilities 3,399,397 3,309,341
 
Stockholders' equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized
Common stock, $0.0001 par value 61 61
Additional paid-in-capital 3,266,170 3,038,665
Retained earnings 6,878,216 7,003,003
Accumulated other comprehensive income 12,966 30,712
Treasury stock, at cost (99,028 and 106,702 shares, respectively), net of re-issuances (3,322,654 ) (3,407,259 )
Total stockholders' equity 6,834,759   6,665,182  
Total liabilities and stockholders' equity $ 10,234,156   $ 9,974,523  
 

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

 
  Three Months Ended
August 30,
2013
  August 31,
2012
Cash flows from operating activities:
Net income $ 83,002 $ 201,357
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion 82,175 74,110
Stock-based compensation expense 76,094 74,013
Unrealized investment (gains) losses 2,825 (851 )
Changes in deferred revenue 35,885 (32,445 )
Changes in other operating assets and liabilities (64,456 ) (52,844 )
Net cash provided by operating activities 215,525   263,340  
 
Cash flows from investing activities:
Purchases, sales and maturities of short-term investments, net 262,478 (37,426 )
Purchases of property and equipment (46,798 ) (77,432 )
Purchases of long-term investments, intangibles and other assets, net of sales (4,896 ) (4,362 )
Acquisitions, net of cash (608,019 )  
Net cash used for investing activities (397,235 ) (119,220 )
 
Cash flows from financing activities:
Purchases of treasury stock (400,000 )
Re-issuance of treasury stock 162,663 60,948
Proceeds from debt and capital lease obligations 3,152
Repayment of debt and capital lease obligations (10,034 ) (2,316 )
Excess tax benefits from stock-based compensation   1,172  
Net cash (used for) provided by financing activities (247,371 ) 62,956  
Effect of exchange rate changes on cash and cash equivalents 1,756   4,066  
Net (decrease) increase in cash and cash equivalents (427,325 ) 211,142
Cash and cash equivalents at beginning of period 1,246,410   951,238  
Cash and cash equivalents at end of period $ 819,085   $ 1,162,380  
 

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 30,
2013
  August 31,
2012
  May 31,
2013
Operating income:
 
GAAP operating income $ 110,354 $ 278,304 $ 111,309
Stock-based and deferred compensation expense 81,111 80,682 79,624
Restructuring and other charges (791 ) 2,374 24,992
Amortization of purchased intangibles & technology license arrangements 32,315   30,410   31,359  
Non-GAAP operating income $ 222,989   $ 391,770   $ 247,284  
 
Net income:
 
GAAP net income $ 83,002 $ 201,357 $ 76,546
Stock-based and deferred compensation expense 81,111 80,682 79,624
Restructuring and other charges (791 ) 2,374 24,992
Amortization of purchased intangibles & technology license arrangements 32,315 30,410 31,359
Investment (gains) losses 2,079 (944 ) 4,245
Resolution of income tax examinations 9,527
Income tax adjustments (42,863 ) (22,685 ) (33,915 )
Non-GAAP net income $ 164,380   $ 291,194   $ 182,851  
 
Diluted net income per share:
 
GAAP diluted net income per share $ 0.16 $ 0.40 $ 0.15
Stock-based and deferred compensation expense 0.16 0.16 0.16
Restructuring and other charges 0.05
Amortization of purchased intangibles & technology license arrangements 0.06 0.06 0.06
Investment (gains) losses 0.01
Resolution of income tax examinations 0.02
Income tax adjustments (0.08 ) (0.04 ) (0.07 )
Non-GAAP diluted net income per share $ 0.32   $ 0.58   $ 0.36  
 
Shares used in computing diluted net income per share 514,058 499,757 512,446
 
 

Three Months

Ended

August 30,
2013

 

Effective income tax rate:

 

 

GAAP effective income tax rate

11.0

%

Stock-based and deferred compensation expense

(1.0

)

Resolution of income tax examinations

11.0

 

Non-GAAP effective income tax rate

21.0

%

 

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 includes the stock-based and deferred compensation expenses, restructuring and other charges, amortization of purchased intangibles, investment gains and losses, resolution of income tax examinations and the related tax impact of all of these items, income tax adjustments including 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.

Contacts

Adobe Systems Incorporated
Mike Saviage, 408-536-4416 (Investor Relations)
ir@adobe.com
Jodi Sorensen, 408-536-2084 (Public Relations)
jsorensen@adobe.com

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Contacts

Adobe Systems Incorporated
Mike Saviage, 408-536-4416 (Investor Relations)
ir@adobe.com
Jodi Sorensen, 408-536-2084 (Public Relations)
jsorensen@adobe.com