10-QPeriod: Q2 FY2013

ADOBE INC. Quarterly Report for Q2 Ended Mar 1, 2013

Filed March 28, 2013For Securities:ADBE

Summary

Adobe Inc.'s (ADBE) 10-Q filing for the period ending February 28, 2013, reveals a company navigating a significant business model transition towards a subscription-based revenue stream with its Creative Cloud offering. While total revenue saw a slight decline of 4% year-over-year to $1,007.9 million, this was largely driven by a strategic shift away from perpetual licenses, a trend expected to continue and impact short-term revenue and margins. However, the growth in subscription revenue (up 53% to $224.3 million) and Digital Media ARR (up 46% to $297.0 million) indicates positive momentum in this new direction. The company's financial health remains robust, with substantial cash and investments totaling over $3.6 billion, and stable operating cash flows. Management anticipates that this transition will drive long-term revenue growth and predictability through a more recurring revenue model, despite short-term profitability pressures. Key financial highlights include a decrease in net income by 65% year-over-year to $65.1 million, largely due to increased operating expenses and the impact of the business model shift, offset partially by tax benefits. The company continued its share repurchase program, demonstrating a commitment to returning value to shareholders. Acquisitions, notably Behance, are being integrated, with their financial impact not deemed material to the overall consolidated statements.

Financial Highlights

54 data points
Beta

Revenue

$1.01B

84.5% Gross Margin

Net Income

$65.12M

6.5% Net Margin

EPS (Diluted)

$0.13

Total Assets

$10.28B

Cash & Equivalents

$1.25B

Free Cash Flow

$261.84M

Financial Statements
Beta
Revenue$1.01B
Cost of Revenue$135.28M
Gross Profit$851.19M
Operating Expenses$763.96M
Operating Income$111.31M
Interest Expense$17.20M
Net Income$65.12M
EPS (Basic)$0.13
EPS (Diluted)$0.13
Shares Outstanding (Basic)503.38M
Shares Outstanding (Diluted)512.45M

Key Highlights

  • 1Total revenue decreased 4% year-over-year to $1,007.9 million, primarily due to a strategic shift from perpetual licenses to subscription models.
  • 2Subscription revenue significantly increased by 53% to $224.3 million, representing 22% of total revenue, up from 14% in the prior year.
  • 3Digital Media Annual Recurring Revenue (ARR) grew by 46% to $297.0 million, driven by increased Creative Cloud subscribers.
  • 4Net income decreased by 65% year-over-year to $65.1 million ($0.13 per diluted share), impacted by increased operating expenses and the business model transition.
  • 5Cash and cash equivalents, along with short-term investments, totaled $3.66 billion, providing strong liquidity.
  • 6The company continued its stock repurchase program, authorizing up to $2.0 billion through fiscal 2015.

Frequently Asked Questions

The primary driver is Adobe's strategic transition from a traditional perpetual license software model to a subscription-based model, exemplified by the Creative Cloud offering. This shift is causing a decline in perpetual license revenue while subscription revenue is growing robustly. This transition is impacting short-term revenue and profitability due to increased operating expenses that do not immediately scale down with declining perpetual license revenue.

Adobe maintains a strong liquidity position with approximately $3.66 billion in cash, cash equivalents, and short-term investments as of March 1, 2013. The company generated stable net cash from operating activities of $322.0 million during the quarter and has a $1.0 billion revolving credit facility available. Adobe is also actively engaged in a stock repurchase program, demonstrating its commitment to returning capital to shareholders.

Adobe completed the acquisition of Behance in December 2012 and Efficient Frontier in January 2012. The financial results of these acquisitions are included in the consolidated statements. The company states that the impact of these acquisitions was not material to the condensed consolidated financial statements.

Adobe expects the Creative Cloud subscription model to transform its business by expanding its customer base through a lower cost of entry and keeping existing customers current. While this transition is expected to cause traditional perpetual license revenue and total net revenue to decline in fiscal 2013, management anticipates it will significantly increase the long-term revenue growth rate and predictability due to a more recurring revenue stream recognized ratably over time.