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Adobe Reports Record Q2 Revenue

Adobe (Nasdaq:ADBE) today reported financial results for its second quarter fiscal year 2019 ended May 31, 2019.

Q2 FY2019 Financial Highlights

  • Adobe achieved record quarterly revenue of $2.74 billion in its second quarter of fiscal year 2019, which represents 25 percent year-over-year growth. Diluted earnings per share was $1.29 on a GAAP-basis, and $1.83 on a non-GAAP basis.
  • Digital Media segment revenue was $1.89 billion, which represents 22 percent year-over-year growth. Creative revenue grew to $1.59 billion and Document Cloud achieved revenue of $296 million. Digital Media Annualized Recurring Revenue (“ARR”) grew to $7.47 billion exiting the quarter, a quarter-over-quarter increase of $406 million. Creative ARR grew to $6.55 billion, and Document Cloud ARR grew to $921 million.
  • Digital Experience segment revenue was $784 million, representing 34 percent year-over-year growth.
  • GAAP operating income in the second quarter was $750 million, and non-GAAP operating income was $1.05 billion. GAAP net income was $633 million, and non-GAAP net income was $901 million.
  • Cash flow from operations was $1.11 billion.
  • Remaining Performance Obligation was $8.37 billion.
  • Adobe repurchased approximately 2.5 million shares during the quarter.

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 continued momentum is being fueled by the explosion of creativity across the globe and the widespread business transformation agenda to deliver engaging customer experiences," said Shantanu Narayen, president and CEO, Adobe. "With an innovative technology platform, exciting product roadmap and strong ecosystem of partners, we are well positioned for the second half of FY19 and beyond."

"Adobe delivered another record quarter in Q2," said John Murphy, executive vice president and CFO, Adobe. "Highlights include 25 percent year-over-year revenue growth, strong net new Digital Media ARR and operating cash flow of $1.11 billion."

Adobe Provides Third Quarter Fiscal Year 2019 Financial Targets

The following table summarizes Adobe’s third quarter fiscal year 2019 targets.

Adobe total Q3 fiscal year 2019 revenue ~$2.80 billion
Digital Media segment revenue ~20% year/year growth
Digital Experience segment revenue ~34% year/year growth
Net new Digital Media annualized recurring revenue (“ARR”) ~$360 million
Tax rate GAAP: ~11% Non-GAAP: ~11%
Share count ~491 million shares
Earnings per share GAAP: ~$1.40 Non-GAAP: ~$1.95

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

Adobe to Webcast Earnings Conference Call

Adobe will webcast its second quarter fiscal year 2019 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 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, market trends, customer success, revenue, operating margin, seasonality, 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 compete effectively, failure to develop, acquire, market and offer products and services that meet customer requirements, introduction of new technology, information security and privacy, potential interruptions or delays in hosted services provided by us or third parties, risks associated with cyber-attacks, complex sales cycles, risks related to the timing of revenue recognition from our subscription offerings, fluctuations in subscription renewal rates, failure to realize the anticipated benefits of past or future acquisitions, failure to effectively manage critical strategic third-party business relationships, changes in accounting principles and tax regulations, uncertainty in the financial markets and economic conditions in the countries where we operate, and other various risks associated with being a multinational corporation. 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 2018 ended November 30, 2018, and Adobe's Quarterly Reports on Form 10-Q issued in fiscal year 2019.

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 May 31, 2019, which Adobe expects to file in June 2019. Adobe assumes no obligation to, and does not currently intend to, update these forward-looking statements.

About Adobe

Adobe is changing the world through digital experiences. For more information, visit www.adobe.com.

©2019 Adobe Inc. All rights reserved. Adobe, Adobe Document Cloud, Adobe Experience Cloud, Creative Cloud and the Adobe logo are either registered trademarks or trademarks of Adobe Inc. (or one of its subsidiaries) 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 EndedSix Months Ended
May 31, 2019 (*)June 1, 2018May 31, 2019 (*)June 1, 2018
Revenue:
Subscription $ 2,456,097 $ 1,923,131 $ 4,761,064 $ 3,716,489
Product 152,816 150,993 323,370 322,601
Services and support 135,367 121,236 260,792 235,217
Total revenue 2,744,280 2,195,360 5,345,226 4,274,307
Cost of revenue:
Subscription 296,476 186,355 584,507 351,040
Product 9,345 10,779 21,450 23,656
Services and support 101,667 84,210 198,817 165,550
Total cost of revenue 407,488 281,344 804,774 540,246
Gross profit 2,336,792 1,914,016 4,540,452 3,734,061
Operating expenses:
Research and development 475,958 374,128 940,595 722,897
Sales and marketing 848,927 646,215 1,630,445 1,227,172
General and administrative 219,334 178,040 435,443 348,480
Amortization of purchased intangibles 43,026 17,149 89,592 34,295
Total operating expenses 1,587,245 1,215,532 3,096,075 2,332,844
Operating income 749,547 698,484 1,444,377 1,401,217
Non-operating income (expense):
Interest and other income (expense), net 2,558 11,599 6,824 28,271
Interest expense (40,577 ) (20,363 ) (81,170 ) (40,262 )
Investment gains (losses), net (756 ) 1,079 43,075 4,075
Total non-operating income (expense), net (38,775 ) (7,685 ) (31,271 ) (7,916 )
Income before income taxes 710,772 690,799 1,413,106 1,393,301
Provision for income taxes 78,179 27,632 106,272 147,058
Net income $ 632,593 $ 663,167 $ 1,306,834 $ 1,246,243
Basic net income per share $ 1.30 $ 1.35 $ 2.68 $ 2.53
Shares used to compute basic net income per share 487,535 491,914 487,795 491,993
Diluted net income per share $ 1.29 $ 1.33 $ 2.65 $ 2.50
Shares used to compute diluted net income per share 492,212 498,252 493,200 499,166

_________________________________________

*

Adobe adopted ASU No. 2014-09, Revenue from Contracts with Customers, using the modified retrospective method during the first quarter of fiscal 2019. Prior period results have not been restated to reflect this change in accounting standards. Refer to our Form 10-Q for the second quarter of fiscal year 2019 for additional information.

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

May 31, 2019 (*)November 30, 2018
ASSETS
Current assets:
Cash and cash equivalents $ 2,082,910 $ 1,642,775
Short-term investments 1,396,069 1,586,187
Trade receivables, net of allowances for doubtful accounts of $12,379 and $14,981, respectively 1,272,668 1,315,578
Prepaid expenses and other current assets 590,998 312,499
Total current assets 5,342,645 4,857,039
Property and equipment, net 1,205,020 1,075,072
Goodwill 10,697,874 10,581,048
Purchased and other intangibles, net 1,917,149 2,069,001
Other assets 503,221 186,522
Total assets $ 19,665,909 $ 18,768,682
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade payables $ 169,101 $ 186,258
Accrued expenses 1,314,998 1,163,185
Debt 3,145,668
Income taxes payable 45,778 35,709
Deferred revenue 3,011,552 2,915,974
Total current liabilities 7,687,097 4,301,126
Long-term liabilities:
Debt 987,938 4,124,800
Deferred revenue 122,522 137,630
Income taxes payable 637,733 644,101
Deferred income taxes 133,886 46,702
Other liabilities 165,040 152,209
Total liabilities 9,734,216 9,406,568
Stockholders’ equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized
Common stock, $0.0001 par value 61 61
Additional paid-in-capital 6,050,800 5,685,337
Retained earnings 13,183,938 11,815,597
Accumulated other comprehensive income (loss) (144,364 ) (148,130 )
Treasury stock, at cost (114,561 and 113,171, respectively), net of reissuances (9,158,742 ) (7,990,751 )
Total stockholders’ equity 9,931,693 9,362,114
Total liabilities and stockholders’ equity $ 19,665,909 $ 18,768,682

_________________________________________

*

Adobe adopted ASU No. 2014-09, Revenue from Contracts with Customers, using the modified retrospective method during the first quarter of fiscal 2019. Prior period results have not been restated to reflect this change in accounting standards. Refer to our Form 10-Q for the second quarter of fiscal year 2019 for additional information.

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

Three Months Ended
May 31, 2019June 1, 2018
Cash flows from operating activities:
Net income $ 632,593 $ 663,167
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion 145,609 76,360
Stock-based compensation 204,300 145,376
Unrealized investment (gains) losses, net 1,700 (573 )
Changes in deferred revenue (84,118 ) 62,063
Changes in other operating assets and liabilities 209,242 30,013
Net cash provided by operating activities 1,109,326 976,406
Cash flows from investing activities:
Purchases, sales and maturities of short-term investments, net 100,486 131,896
Purchases of property and equipment (85,492 ) (45,316 )
Purchases and sales of long-term investments, intangibles and other assets, net (4,921 ) (4,287 )
Acquisitions, net of cash acquired (14,614 )
Net cash provided by investing activities 10,073 67,679
Cash flows from financing activities:
Purchases of treasury stock (750,000 ) (700,000 )
Taxes paid related to net share settlement of equity awards, net of proceeds from treasury stock reissuances (21,813 ) (16,854 )
Repayment of capital lease obligations (288 ) (511 )
Net cash used for financing activities (772,101 ) (717,365 )
Effect of exchange rate changes on cash and cash equivalents (3,234 ) (5,715 )
Net increase in cash and cash equivalents 344,064 321,005
Cash and cash equivalents at beginning of period 1,738,846 2,666,981
Cash and cash equivalents at end of period $ 2,082,910 $ 2,987,986

Non-GAAP Results

(In thousands, except per share data)

The following table shows Adobe's GAAP results reconciled to non-GAAP results included in this release.

Three Months Ended
May 31, 2019 (*)June 1, 2018March 1, 2019 (*)
Operating income:
GAAP operating income $ 749,547 $ 698,484 $ 694,830
Stock-based and deferred compensation expense 203,673 146,773 187,115
Amortization of purchased intangibles 96,714 32,378 102,690
Non-GAAP operating income $ 1,049,934 $ 877,635 $ 984,635
Net income:
GAAP net income $ 632,593 $ 663,167 $ 674,241
Stock-based and deferred compensation expense 203,673 146,773 187,115
Amortization of purchased intangibles 96,714 32,378 102,690
Investment (gains) losses, net 756 (1,079 ) (43,831 )
Income tax adjustments (33,132 ) (15,812 ) (76,221 )
Non-GAAP net income $ 900,604 $ 825,427 $ 843,994
Diluted net income per share:
GAAP diluted net income per share $ 1.29 $ 1.33 $ 1.36
Stock-based and deferred compensation expense 0.41 0.29 0.38
Amortization of purchased intangibles 0.20 0.06 0.21
Investment (gains) losses, net (0.09 )
Income tax adjustments (0.07 ) (0.02 ) (0.15 )
Non-GAAP diluted net income per share $ 1.83 $ 1.66 $ 1.71
Shares used in computing diluted net income per share 492,212 498,252 494,188

_________________________________________

*

Adobe adopted ASU No. 2014-09, Revenue from Contracts with Customers, using the modified retrospective method during the first quarter of fiscal 2019. Prior period results have not been restated to reflect this change in accounting standards. Refer to our Form 10-Q for the second quarter of fiscal year 2019 for additional information.

Reconciliation of GAAP to Non-GAAP Financial Targets

The following table shows Adobe's third quarter fiscal year 2019 GAAP earnings per share target reconciled to the non-GAAP financial target included in this release.

Third Quarter

Fiscal 2019

Diluted net income per share:
GAAP diluted net income per share $ 1.40
Stock-based and deferred compensation expense 0.42
Amortization of purchased intangibles 0.20
Income tax adjustments (0.07 )
Non-GAAP diluted net income per share $ 1.95
Shares used to compute diluted net income per share 491.0

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.

Contacts:

Investor Relations Contact

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