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Adobe’s Cloud Solutions Fuel Strong Financial Results

Adobe (Nasdaq:ADBE) today reported financial results for its second quarter of fiscal year 2014 ended May 30, 2014.

Second Quarter Financial Highlights

  • Adobe achieved revenue of $1.07 billion, above the high end of its targeted range of $1.00 billion to $1.05 billion.
  • Adobe exited Q2 with 2 million 308 thousand paid Creative Cloud subscriptions, an increase of 464 thousand when compared to the number of subscriptions as of the end of Q1 fiscal year 2014.
  • Creative Annualized Recurring Revenue (“ARR”) grew to $1.20 billion, and total Digital Media ARR grew to $1.38 billion.
  • Adobe Marketing Cloud quarterly revenue was $283 million, representing 23 percent year-over-year growth.
  • Diluted earnings per share were $0.17 on a GAAP-basis, and $0.37 on a non-GAAP basis.
  • Cash flow from operations was $368 million and deferred revenue grew to a record $929 million.
  • 53 percent of Adobe’s Q2 revenue was from recurring sources such as Creative Cloud and Adobe Marketing Cloud.
  • The company repurchased approximately 2.6 million shares during the quarter, returning approximately $166 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 first-half upside was driven by accelerated adoption of Creative Cloud and Adobe Marketing Cloud,” said Shantanu Narayen, president and chief executive officer, Adobe. “We’re excited about our upcoming product pipeline and expect a strong second half of the year.”

“Our earnings performance in Q2 reflects the financial leverage we have in our model,” said Mark Garrett, executive vice president and chief financial officer, Adobe. “With Adobe’s Creative Cloud transformation behind us, our focus moving forward is to drive strong revenue and earnings growth with our market-leading cloud offerings.”

Adobe to Webcast Earnings Conference Call

Adobe will webcast its second quarter fiscal year 2014 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 future product releases, business momentum, the strength of our cloud business and growth of our revenue and earnings, 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, 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 rates, risks associated with cyber-attacks and information security, uncertainty in economic conditions and the financial markets, 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 2013 ended Nov. 29, 2013 and Adobe’s Quarterly Reports on Form 10-Q issued in fiscal year 2014.

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 30, 2014, which Adobe expects to file in June 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 www.adobe.com.

© 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   Six Months Ended
May 30,
  May 31,
May 30,
  May 31,
Products $ 479,247 $ 644,899 $ 950,701 $ 1,320,688
Subscription 476,694 254,521 900,257 478,787
Services and support 112,267   111,129   217,370   218,947  
Total revenue 1,068,208   1,010,549   2,068,328   2,018,422  
Cost of revenue:
Products 24,499 26,805 51,997 78,787
Subscription 84,147 66,527 160,879 129,107
Services and support 46,258   41,949   90,537   84,071  
Total cost of revenue 154,904   135,281   303,413   291,965  
Gross profit 913,304 875,268 1,764,915 1,726,457
Operating expenses:
Research and development 209,092 203,097 418,617 412,735
Sales and marketing 426,830 402,208 836,971 800,241
General and administrative 129,138 120,870 268,122 253,723
Restructuring and other charges (366 ) 24,992 297 24,994
Amortization of purchased intangibles 13,352   12,792   26,904   25,231  
Total operating expenses 778,046   763,959   1,550,911   1,516,924  
Operating income 135,258 111,309 214,004 209,533
Non-operating income (expense):
Interest and other income (expense), net 2,563 1,268 5,708 2,514
Interest expense (17,103 ) (17,205 ) (33,693 ) (34,039 )
Investment gains (losses), net 553   (4,245 ) 144   (3,397 )
Total non-operating income (expense), net (13,987 ) (20,182 ) (27,841 ) (34,922 )
Income before income taxes 121,271 91,127 186,163 174,611
Provision for income taxes 32,744   14,581   50,590   32,948  
Net income $ 88,527   $ 76,546   $ 135,573   $ 141,663  
Basic net income per share $ 0.18   $ 0.15   $ 0.27   $ 0.28  
Shares used to compute basic net income per share 497,931   503,384   497,439   500,996  
Diluted net income per share $ 0.17   $ 0.15   $ 0.27   $ 0.28  
Shares used to compute diluted net income per share 506,687   512,446   508,227   511,535  

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

  May 30,
  November 29,
Current assets:
Cash and cash equivalents $ 817,020 $ 834,556
Short-term investments 2,513,191 2,339,196
Trade receivables, net of allowances for doubtful accounts of $7,929 and $10,228, respectively 531,557 599,820
Deferred income taxes 72,489 102,247
Prepaid expenses and other current assets 180,086   170,110  
Total current assets 4,114,343 4,045,929
Property and equipment, net 642,450 659,774
Goodwill 4,773,798 4,771,981
Purchased and other intangibles, net 532,317 605,254
Investment in lease receivable 207,239 207,239
Other assets 102,052   90,121  
Total assets $ 10,372,199   $ 10,380,298  
Current liabilities:
Trade payables $ 54,858 $ 62,096
Accrued expenses 656,940 656,939
Debt and capital lease obligations 609,742 14,676
Accrued restructuring 3,627 6,171
Income taxes payable 13,696 10,222
Deferred revenue 879,109   775,544  
Total current liabilities 2,217,972 1,525,648
Long-term liabilities:
Debt and capital lease obligations 896,551 1,499,297
Deferred revenue 49,495 53,268
Accrued restructuring 6,099 7,717
Income taxes payable 139,870 132,545
Deferred income taxes 351,612 375,634
Other liabilities 73,712   61,555  
Total liabilities 3,735,311 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 3,562,682 3,392,696
Retained earnings 6,806,104 6,928,964
Accumulated other comprehensive income 46,642 46,103
Treasury stock, at cost (103,587 and 104,573 shares, respectively), net of reissuances (3,778,601 ) (3,643,190 )
Total stockholders' equity 6,636,888   6,724,634  
Total liabilities and stockholders' equity $ 10,372,199   $ 10,380,298  

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

  Three Months Ended
May 30,
  May 31,
Cash flows from operating activities:
Net income $ 88,527 $ 76,546
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion 77,653 80,950
Stock-based compensation expense 83,005 73,528
Asset impairment losses 23,838
Unrealized investment (gains) losses, net (352 ) 4,312
Changes in deferred revenue 47,517 (8,770 )
Changes in other operating assets and liabilities 71,186   48,744  
Net cash provided by operating activities 367,536   299,148  
Cash flows from investing activities:
Purchases, sales and maturities of short-term investments, net (117,967 ) (275,455 )
Purchases of property and equipment (27,198 ) (46,249 )
Purchases and sales of long-term investments, intangibles and other assets, net (2,767 ) (12,735 )
Net cash used for investing activities (147,932 ) (334,439 )
Cash flows from financing activities:
Purchases of treasury stock (150,000 ) (200,000 )
Proceeds from reissuance of treasury stock, net 12,824 184,655
Repayment of debt and capital lease obligations (3,626 ) (7,297 )
Excess tax benefits from stock-based compensation 4,875    
Net cash used for financing activities (135,927 ) (22,642 )
Effect of exchange rate changes on cash and cash equivalents (573 ) (2,039 )
Net increase (decrease) in cash and cash equivalents 83,104 (59,972 )
Cash and cash equivalents at beginning of period 733,916   1,306,382  
Cash and cash equivalents at end of period $ 817,020   $ 1,246,410  

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
May 30,
  May 31,
  February 28,
Operating income:
GAAP operating income $ 135,258 $ 111,309 $ 78,746
Stock-based and deferred compensation expense 83,600 79,624 83,549
Restructuring and other charges (366 ) 24,992 663
Amortization of purchased intangibles 31,835 31,359 32,054
Loss contingency     10,000  
Non-GAAP operating income $ 250,327   $ 247,284   $ 205,012  
Net income:
GAAP net income $ 88,527 $ 76,546 $ 47,046
Stock-based and deferred compensation expense 83,600 79,624 83,549
Restructuring and other charges (366 ) 24,992 663
Amortization of purchased intangibles 31,835 31,359 32,054
Investment (gains) losses (553 ) 4,245 409
Loss contingency 10,000
Income tax adjustments (16,771 ) (33,915 ) (22,383 )
Non-GAAP net income $ 186,272   $ 182,851   $ 151,338  
Diluted net income per share:
GAAP diluted net income per share $ 0.17 $ 0.15 $ 0.09
Stock-based and deferred compensation expense 0.16 0.16 0.16
Restructuring and other charges 0.05
Amortization of purchased intangibles 0.06 0.06 0.06
Investment (gains) losses 0.01
Loss contingency 0.02
Income tax adjustments (0.02 ) (0.07 ) (0.03 )
Non-GAAP diluted net income per share $ 0.37   $ 0.36   $ 0.30  
Shares used in computing diluted net income per share 506,687 512,446 508,340
  Three Months


May 30,
Effective income tax rate:
GAAP effective income tax rate 27.0 %
Stock-based and deferred compensation expense (3.2 )
Amortization of purchased intangibles (1.3 )
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. 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 that may include 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, 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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