Press release

Adobe Reports Record Revenue

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Adobe (Nasdaq:ADBE) today reported financial results for its first quarter fiscal year 2020 ended Feb. 28, 2020.

First Quarter Fiscal Year 2020 Financial Highlights

  • Adobe achieved record quarterly revenue of $3.09 billion in its first quarter of fiscal year 2020, which represents 19 percent year-over-year growth. Diluted earnings per share was $1.96 on a GAAP basis, and $2.27 on a non-GAAP basis. Adobe’s earnings per share results factor an expense charge related to the cancellation of corporate events including Adobe Summit due to the COVID-19 situation, which impacted both GAAP and non-GAAP earnings per share by $0.07 in the quarter.
  • Digital Media segment revenue was $2.17 billion, which represents 22 percent year-over-year growth. Creative revenue grew to $1.82 billion and Document Cloud revenue was $351 million. Digital Media Annualized Recurring Revenue (“ARR”) grew to $8.73 billion exiting the quarter, a quarter-over-quarter increase of $400 million. Creative ARR grew to $7.58 billion, and Document Cloud ARR grew to $1.15 billion.
  • Digital Experience segment revenue was $858 million, representing 15 percent year-over-year growth.
  • GAAP operating income in the first quarter was $937 million, and non-GAAP operating income was $1.25 billion. GAAP net income was $955 million, and non-GAAP net income was $1.11 billion.
  • Cash flow from operations was $1.32 billion.
  • Remaining Performance Obligation exiting the quarter was $9.91 billion.
  • Adobe repurchased approximately 2.4 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

“We delivered a record Q1 and our first $3 billion quarter,” said Shantanu Narayen, president and CEO, Adobe. “Our strategy in light of the COVID-19 situation has been to ensure the well-being of our employees, serve our customers and focus on our long-term opportunity.”

“Adobe delivered strong revenue, earnings and cash flow in our first quarter,” said John Murphy, executive vice president and CFO, Adobe. “Our recurring revenue model and the real-time visibility we have into our business uniquely positions Adobe to manage through an uncertain environment.”

Adobe Provides Second Quarter Fiscal Year 2020 Financial Targets

Adobe today is providing second quarter financial targets that factor the expected impact of the global uncertainty caused by the COVID-19 situation based on the latest data and information available. While the company’s revenue and earnings are relatively predictable as a result of its subscription-based business model, Adobe expects it will be impacted in the following areas:

  • Enterprises deferring bookings decisions, delaying consulting services implementations and reducing marketing spend;
  • Consumers reducing spending in countries more adversely impacted by the COVID-19 situation; and
  • Software license revenue driven by channel partners.

These impacts are expected to be more prominent in countries and industries most affected by the crisis.

The following table summarizes Adobe’s second quarter fiscal year 2020 targets.

Total revenue

Approximately $3.175 billion

Digital Media segment revenue

Approximately 19 percent year-over-year growth

Digital Media annualized recurring revenue (ARR)

Approximately $385 million of net new ARR

Digital Experience segment revenue

Approximately 12 percent year-over-year growth

Tax rate

GAAP: ~(10) percent

Non-GAAP: ~10 percent

Share count

~486 million shares

Earnings per share

GAAP: ~$2.10

Non-GAAP: ~$2.35

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 first quarter fiscal year 2020 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, the effects of the outbreak of COVID-19 on our business and results of operations, 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, macroeconomic conditions and economic impact of the COVID-19 epidemic, 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 2019 ended Nov. 29, 2019, and Adobe’s Quarterly Reports on Form 10-Q issued in fiscal year 2020.

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, 2020, which Adobe expects to file in March 2020. 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.

©2020 Adobe Inc. All rights reserved. Adobe 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 millions, except per share data; unaudited)

 

Three Months Ended

 

February 28,

2020

 

March 1,

2019

Revenue:

 

 

 

Subscription

$

2,825

 

 

$

2,305

 

Product

143

 

 

171

 

Services and support

123

 

 

125

 

Total revenue

3,091

 

 

2,601

 

 

 

 

 

Cost of revenue:

 

 

 

Subscription

355

 

 

288

 

Product

7

 

 

12

 

Services and support

90

 

 

97

 

Total cost of revenue

452

 

 

397

 

 

 

 

 

Gross profit

2,639

 

 

2,204

 

 

 

 

 

Operating expenses:

 

 

 

Research and development

532

 

 

465

 

Sales and marketing

857

 

 

781

 

General and administrative

271

 

 

216

 

Amortization of intangibles

42

 

 

47

 

Total operating expenses

1,702

 

 

1,509

 

 

 

 

 

Operating income

937

 

 

695

 

 

 

 

 

Non-operating income (expense):

 

 

 

Interest expense

(33

)

 

(41

)

Investment gains (losses), net

(3

)

 

44

 

Other income (expense), net

18

 

 

4

 

Total non-operating income (expense), net

(18

)

 

7

 

Income before income taxes

919

 

 

702

 

Provision for (benefit from) income taxes

(36

)

 

28

 

Net income

$

955

 

 

$

674

 

Basic net income per share

$

1.98

 

 

$

1.38

 

Shares used to compute basic net income per share

482

 

 

488

 

Diluted net income per share

$

1.96

 

 

$

1.36

 

Shares used to compute diluted net income per share

488

 

 

494

 

Condensed Consolidated Balance Sheets

(In millions, unaudited)

 

February 28,

2020

 

November 29,

2019

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

2,688

 

 

$

2,650

 

Short-term investments

1,483

 

 

1,527

 

Trade receivables, net of allowances for doubtful accounts of $9 and $10, respectively

1,389

 

 

1,535

 

Prepaid expenses and other current assets

895

 

 

783

 

Total current assets

6,455

 

 

6,495

 

 

 

 

 

Property and equipment, net

1,340

 

 

1,293

 

Operating lease right-of-use assets, net

504

 

 

 

Goodwill

10,691

 

 

10,691

 

Other intangibles, net

1,626

 

 

1,721

 

Other assets

598

 

 

562

 

Total assets

$

21,214

 

 

$

20,762

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

Trade payables

$

265

 

 

$

209

 

Accrued expenses

1,241

 

 

1,399

 

Debt

 

 

3,149

 

Deferred revenue

3,489

 

 

3,378

 

Income taxes payable

149

 

 

56

 

Operating lease liabilities

84

 

 

 

Total current liabilities

5,228

 

 

8,191

 

 

 

 

 

Long-term liabilities:

 

 

 

Debt

4,113

 

 

989

 

Deferred revenue

125

 

 

123

 

Income taxes payable

530

 

 

616

 

Deferred income taxes

48

 

 

140

 

Operating lease liabilities

514

 

 

 

Other liabilities

191

 

 

173

 

Total liabilities

10,749

 

 

10,232

 

 

 

 

 

Stockholders’ equity:

 

 

 

Preferred stock

 

 

 

Common stock

 

 

 

Additional paid-in-capital

6,665

 

 

6,504

 

Retained earnings

15,390

 

 

14,829

 

Accumulated other comprehensive income (loss)

(189

)

 

(188

)

Treasury stock, at cost

(11,401

)

 

(10,615

)

Total stockholders’ equity

10,465

 

 

10,530

 

Total liabilities and stockholders’ equity

$

21,214

 

 

$

20,762

 

Condensed Consolidated Statements of Cash Flows

(In millions, unaudited)

 

Three Months Ended

 

February 28,

2020

 

March 1,

2019

Cash flows from operating activities:

 

 

 

Net income

$

955

 

 

$

674

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

Depreciation, amortization and accretion

188

 

 

186

 

Stock-based compensation

217

 

 

185

 

Unrealized investment (gains) losses, net

6

 

 

(42

)

Other non-cash adjustments

(70

)

 

(18

)

Changes in deferred revenue

114

 

 

166

 

Changes in other operating assets and liabilities

(85

)

 

(138

)

Net cash provided by operating activities

1,325

 

 

1,013

 

 

 

 

 

Cash flows from investing activities:

 

 

 

Purchases, sales and maturities of short-term investments, net

48

 

 

111

 

Purchases of property and equipment

(94

)

 

(65

)

Purchases and sales of long-term investments, intangibles and other assets, net

(2

)

 

(78

)

Acquisitions, net of cash acquired

 

 

(100

)

Net cash used for investing activities

(48

)

 

(132

)

 

 

 

 

Cash flows from financing activities:

 

 

 

Purchases of treasury stock

(850

)

 

(500

)

Taxes paid related to net share settlement of equity awards, net of proceeds from treasury stock re-issuances

(379

)

 

(281

)

Proceeds from issuance of debt

3,144

 

 

 

Repayment of debt

(3,150

)

 

 

Other financing activities, net

2

 

 

(3

)

Net cash used for financing activities

(1,233

)

 

(784

)

Effect of exchange rate changes on cash and cash equivalents

(6

)

 

(1

)

Net increase in cash and cash equivalents

38

 

 

96

 

Cash and cash equivalents at beginning of period

2,650

 

 

1,643

 

Cash and cash equivalents at end of period

$

2,688

 

 

$

1,739

 

Non-GAAP Results

(In millions, except per share data)

 

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

 

Three Months Ended

 

February 28,

2020

 

March 1,

2019

 

November 29,

2019

Operating income:

 

 

 

 

 

 

 

 

 

 

 

GAAP operating income

$

937

 

 

$

695

 

 

$

970

 

Stock-based and deferred compensation expense

214

 

 

187

 

 

208

 

Amortization of intangibles

94

 

 

103

 

 

96

 

Non-GAAP operating income

$

1,245

 

 

$

985

 

 

$

1,274

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

GAAP net income

$

955

 

 

$

674

 

 

$

852

 

Stock-based and deferred compensation expense

214

 

 

187

 

 

208

 

Amortization of intangibles

94

 

 

103

 

 

96

 

Investment (gains) losses, net

3

 

 

(44

)

 

(5

)

Income tax adjustments

(159

)

 

(76

)

 

(33

)

Non-GAAP net income

$

1,107

 

 

$

844

 

 

$

1,118

 

 

 

 

 

 

 

Diluted net income per share:

 

 

 

 

 

 

 

 

 

 

 

GAAP diluted net income per share

$

1.96

 

 

$

1.36

 

 

$

1.74

 

Stock-based and deferred compensation expense

0.44

 

 

0.38

 

 

0.43

 

Amortization of intangibles

0.19

 

 

0.21

 

 

0.20

 

Investment (gains) losses, net

0.01

 

 

(0.09

)

 

(0.01

)

Income tax adjustments

(0.33

)

 

(0.15

)

 

(0.07

)

Non-GAAP diluted net income per share

$

2.27

 

 

$

1.71

 

 

$

2.29

 

 

 

 

 

 

 

Shares used in computing diluted net income per share

488

 

 

494

 

 

489

 

The following table shows Adobe’s first quarter fiscal year 2020 GAAP tax rate reconciled to the non-GAAP tax rate included in this release.

 

 

First Quarter

Fiscal 2020

Effective income tax rate:

 

 

 

 

 

GAAP effective income tax rate

 

(4.0

) %

Income tax adjustments

 

15.0

 

Resolution of income tax examinations

 

1.0

 

Stock-based and deferred compensation expense

 

(1.4

)

Amortization of intangibles

 

(0.6

)

Non-GAAP effective income tax rate

 

10.0

  %

Reconciliation of GAAP to Non-GAAP Financial Targets

(Shares in millions)

The following table shows Adobe’s second quarter fiscal year 2020 GAAP earnings per share target reconciled to the non-GAAP financial target included in this release.

 

Second Quarter

Fiscal 2020

Diluted net income per share:

 

 

 

GAAP diluted net income per share

$

2.10

 

Stock-based and deferred compensation expense

 

0.51

 

Amortization of intangibles

 

0.19

 

Income tax adjustments

 

(0.45

)

Non-GAAP diluted net income per share

$

2.35

 

 

 

Shares used to compute diluted net income per share

486

 

The following table shows Adobe’s second and fourth quarter fiscal year 2020 GAAP tax rate targets reconciled to the non-GAAP targets included in this release.

 

 

Second Quarter

Fiscal 2020

 

Fourth Quarter

Fiscal 2020

Effective income tax rate:

 

 

 

 

 

 

 

 

 

GAAP effective income tax rate

 

(10.0

) %

 

(85.0

) %

Trading structure change

 

20.0

 

 

95.0

 

Income tax adjustments

 

2.0

 

 

2.0

 

Stock-based and deferred compensation expense

 

(1.8

)

 

(1.5

)

Amortization of intangibles

 

(0.2

)

 

(0.5

)

Non-GAAP effective income tax rate

 

10.0

  %

 

10.0

  %

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 intangibles, 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.