Adobe Achieves Record Revenue

Adobe (Nasdaq:ADBE) today reported strong financial results for its first quarter fiscal year 2018 ended March 2, 2018.

Financial Highlights

• Adobe achieved record quarterly revenue of $2.08 billion in its first quarter of fiscal year 2018, which represents 24 percent year-over-year revenue growth.
• Diluted earnings per share was $1.17 on a GAAP-basis, and $1.55 on a non-GAAP basis.
• Digital Media segment revenue was $1.46 billion, with Creative revenue growing to $1.23 billion and Document Cloud achieving revenue of $231 million.
• Digital Media Annualized Recurring Revenue (“ARR”) grew to $5.72 billion exiting the quarter, a quarter-over-quarter increase of $336 million. Creative ARR grew to $5.07 billion, and Document Cloud ARR grew to $647 million.
• Digital Experience segment revenue was $554 million, which represents 16 percent year-over-year growth.
• Operating income grew 50 percent and net income grew 46 percent year-over-year on a GAAP-basis; operating income grew 43 percent and net income grew 64 percent year-over-year on a non-GAAP basis.
• Cash flow from operations was $990 million, and deferred revenue grew 25 percent year-over-year to approximately $2.57 billion.
• Adobe repurchased approximately 1.6 million shares during the quarter, returning $301 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 outstanding growth is driven by enabling our customers to be more creative, work smarter and transform their businesses through our relentless focus on delivering innovation and intelligence across our solutions,” said Shantanu Narayen, president and CEO, Adobe.

“Our leadership in the large addressable markets we created, combined with Adobe’s leveraged operating model, contributed to another record quarter in Q1," said Mark Garrett, executive vice president and CFO, Adobe.

Adobe to Webcast Earnings Conference Call

Adobe will webcast its first quarter fiscal year 2018 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 customer success, product innovation, business momentum, our addressable market, revenue, 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 develop, acquire, market and offer products and services that meet customer requirements, failure to compete effectively, introduction of new technology, complex sales cycles, risks related to the timing of revenue recognition from our subscription offerings, fluctuations in subscription renewal rates, potential interruptions or delays in hosted services provided by us or third parties, risks associated with cyber-attacks, information security and privacy, failure to realize the anticipated benefits of past or future acquisitions, 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 2017 ended Dec. 1, 2017, and Adobe's Quarterly Reports on Form 10-Q issued in fiscal year 2018.

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 March 2, 2018, which Adobe expects to file in March 2018.

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.

© 2018 Adobe Systems Incorporated. All rights reserved. Adobe and the Adobe logo 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
			March 2, 2018				March 3, 2017
Revenue:
Subscription			$	1,793,358			$	1,383,856
Product			171,608				183,385
Services and support			113,981				114,405
Total revenue			2,078,947				1,681,646
Cost of revenue:
Subscription			164,685				141,181
Product			12,877				14,333
Services and support			81,340				81,823
Total cost of revenue			258,902				237,337
Gross profit			1,820,045				1,444,309
Operating expenses:
Research and development			348,769				285,077
Sales and marketing			580,957				520,297
General and administrative			170,440				150,808
Amortization of purchased intangibles			17,146				19,128
Total operating expenses			1,117,312				975,310
Operating income			702,733				468,999
Non-operating income (expense):
Interest and other income (expense), net			16,672				7,206
Interest expense			(19,899		)		(18,130		)
Investment gains (losses), net			2,996				2,557
Total non-operating income (expense), net			(231		)		(8,367		)
Income before income taxes			702,502				460,632
Provision for income taxes			119,426				62,186
Net income			$	583,076			$	398,446
Basic net income per share			$	1.18			$	0.81
Shares used to compute basic net income per share			492,061				494,612
Diluted net income per share			$	1.17			$	0.80
Shares used to compute diluted net income per share			499,433				500,861

Condensed Consolidated Balance Sheets (In thousands, except par value; unaudited)
			March 2, 2018				December 1, 2017
ASSETS
Current assets:
Cash and cash equivalents			$	2,666,981			$	2,306,072
Short-term investments			3,480,989				3,513,702
Trade receivables, net of allowances for doubtful accounts of $9,284 and $9,151, respectively			1,062,690				1,217,968
Prepaid expenses and other current assets			270,154				210,071
Total current assets			7,480,814				7,247,813
Property and equipment, net			991,674				936,976
Goodwill			5,843,899				5,821,561
Purchased and other intangibles, net			353,740				385,658
Deferred income taxes			149,710				—
Other assets			153,648				143,548
Total assets			$	14,973,485			$	14,535,556
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade payables			$	131,090			$	113,538
Accrued expenses			911,044				993,773
Income taxes payable			10,591				14,196
Deferred revenue			2,483,744				2,405,950
Total current liabilities			3,536,469				3,527,457
Long-term liabilities:
Debt			1,874,794				1,881,421
Deferred revenue			88,460				88,592
Income taxes payable			690,468				173,088
Deferred income taxes			—				279,941
Other liabilities			149,266				125,188
Total liabilities			6,339,457				6,075,687
Stockholders’ equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized			—				—
Common stock, $0.0001 par value			61				61
Additional paid-in-capital			5,208,588				5,082,195
Retained earnings			9,830,399				9,573,870
Accumulated other comprehensive income (loss)			(109,939		)		(111,821		)
Treasury stock, at cost (107,954 and 109,572, respectively), net of reissuances			(6,295,081		)		(6,084,436		)
Total stockholders’ equity			8,634,028				8,459,869
Total liabilities and stockholders’ equity			$	14,973,485			$	14,535,556

Condensed Consolidated Statements of Cash Flows (In thousands; unaudited)
			Three Months Ended
			March 2, 2018				March 3, 2017
Cash flows from operating activities:
Net income			$	583,076			$	398,446
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion			76,522				80,809
Stock-based compensation expense			130,488				98,310
Unrealized investment (gains) losses, net			(929		)		(1,021		)
Changes in deferred revenue			77,662				40,832
Changes in other operating assets and liabilities			122,782				112,994
Net cash provided by operating activities			989,601				730,370
Cash flows from investing activities:
Purchases, sales and maturities of short-term investments, net			7,894				169,320
Purchases of property and equipment			(95,142		)		(30,903		)
Purchases and sales of long-term investments, intangibles and other assets, net			(6,514		)		(17,673		)
Acquisitions, net of cash			—				(459,626		)
Net cash used for investing activities			(93,762		)		(338,882		)
Cash flows from financing activities:
Purchases of treasury stock			(300,000		)		(200,000		)
Taxes paid related to net share settlement of equity awards, net of proceeds from treasury stock reissuances			(240,969		)		(131,227		)
Repayment of capital lease obligations			(304		)		(268		)
Net cash used for financing activities			(541,273		)		(331,495		)
Effect of exchange rate changes on cash and cash equivalents			6,343				(2,412		)
Net increase in cash and cash equivalents			360,909				57,581
Cash and cash equivalents at beginning of period			2,306,072				1,011,315
Cash and cash equivalents at end of period			$	2,666,981			$	1,068,896

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
			March 2, 2018				March 3, 2017				December 1, 2017
Operating income:
GAAP operating income			$	702,733			$	468,999			$	649,340
Stock-based and deferred compensation expense			136,414				103,578				122,180
Restructuring and other charges			—				—				(359		)
Amortization of purchased intangibles			31,704				35,464				34,817
Non-GAAP operating income			$	870,851			$	608,041			$	805,978
Net income:
GAAP net income			$	583,076			$	398,446			$	501,549
Stock-based and deferred compensation expense			136,414				103,578				122,180
Restructuring and other charges			—				—				(359		)
Amortization of purchased intangibles			31,704				35,464				34,817
Investment (gains) losses, net			(2,996		)		(2,557		)		(2,292		)
Income tax adjustments*			23,987				(63,209		)		(25,982		)
Non-GAAP net income			$	772,185			$	471,722			$	629,913
Diluted net income per share:
GAAP diluted net income per share			$	1.17			$	0.80			$	1.00
Stock-based and deferred compensation expense			0.27				0.21				0.24
Amortization of purchased intangibles			0.06				0.07				0.07
Investment (gains) losses, net			—				(0.01		)		—
Income tax adjustments*			0.05				(0.13		)		(0.05		)
Non-GAAP diluted net income per share			$	1.55			$	0.94			$	1.26
Shares used in computing diluted net income per share			499,433				500,861				500,060

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^* During the first quarter of fiscal 2018, the $24 million GAAP to non-GAAP income tax adjustment includes a provisional tax charge relating to the enactment of the Tax Cuts and Jobs Act that was excluded from non-GAAP earnings. The Company has recorded a provisional tax expense of $118 million, which is comprised of $86 million for fiscal year 2018 plus other ancillary effects recorded in the first fiscal quarter, related to the U.S. mandatory one-time transition tax on accumulated non-U.S. earnings. The company also recorded $10 million related to the remeasurement of deferred taxes. The amounts are provisional based on the Securities and Exchange Commission Staff Accounting Bulletin No. 118. The remaining $104 million was related to other tax matters that are included in the annual non-GAAP tax rate.

					Three Months Ended
					March 2, 2018
Effective income tax rate:
GAAP effective income tax rate					17.0	%
Resolution of income tax examinations					2.0
Income tax adjustments					9.0
Impacts of the Tax Act					(17.0	)
Non-GAAP effective income tax rate**					11.0	%

^{_________________________________________}

^** The GAAP effective income tax rate of 17% is the rate for the quarter based on tax events within the quarter. Income tax adjustments, which are included in both GAAP and non-GAAP earnings, will fluctuate from quarter-to-quarter but will normalize over the fiscal year due to the timing of tax events including the timing of recognition of excess tax benefits within each quarter.

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.

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