10-QPeriod: Q3 FY2013

ADOBE INC. Quarterly Report for Q3 Ended Aug 30, 2013

Filed October 3, 2013For Securities:ADBE

Summary

Adobe Systems Incorporated (ADBE) reported its third-quarter fiscal year 2013 financial results on October 3, 2013. The company is in a significant transition phase, shifting from a traditional perpetual license model to a subscription-based Software-as-a-Service (SaaS) model, primarily driven by the adoption of Creative Cloud and Adobe Marketing Cloud. This transition is impacting revenue recognition, with subscription and services revenue growing, while product revenue from perpetual licenses is declining. While total revenue saw a slight decrease year-over-year, the company is focused on the long-term benefits of recurring revenue and expanded customer base that the subscription model promises. Key financial metrics for the quarter include a decrease in total revenue to $995.1 million from $1,080.6 million in the prior year's quarter, largely due to the ongoing shift in the Digital Media segment. However, subscription revenue saw a substantial increase of 73% to $299.3 million, reflecting strong customer adoption of Creative Cloud. The company also reported a significant drop in net income to $83.0 million from $201.4 million, which is a direct consequence of the revenue model transition and associated costs. Adobe highlighted exceeding one million paid Creative Cloud subscriptions and achieving $655.0 million in Annualized Recurring Revenue (ARR) for Digital Media, demonstrating positive momentum in its strategic shift.

Financial Highlights

54 data points
Beta

Revenue

$995.12M

85.2% Gross Margin

Net Income

$83.00M

8.3% Net Margin

EPS (Diluted)

$0.16

Total Assets

$10.23B

Cash & Equivalents

$819.09M

Free Cash Flow

$421.63M

Financial Statements
Beta
Revenue$995.12M
Cost of Revenue$147.08M
Gross Profit$848.04M
Operating Expenses$737.69M
Operating Income$110.35M
Interest Expense$16.75M
Net Income$83.00M
EPS (Basic)$0.16
EPS (Diluted)$0.16
Shares Outstanding (Basic)504.12M
Shares Outstanding (Diluted)514.06M

Key Highlights

  • 1Total revenue for the third quarter of fiscal 2013 decreased by 8% to $995.1 million compared to $1,080.6 million in the prior year's quarter.
  • 2Subscription revenue surged by 73% to $299.3 million, indicating strong adoption of the Creative Cloud and other subscription services.
  • 3Net income decreased significantly by 59% to $83.0 million, from $201.4 million in the same period last year, largely due to the revenue model transition.
  • 4Adobe achieved over one million paid Creative Cloud subscriptions by the end of the quarter, with Digital Media ARR reaching $655.0 million.
  • 5Acquisition of Neolane for digital marketing and Behance for digital media were completed, strengthening Adobe's strategic growth areas.
  • 6Goodwill increased to $4.75 billion due to these acquisitions.
  • 7The company reported a cyber security incident in September 2013 involving illegal access to customer and product information, which it stated did not have a material adverse impact at the time of the filing.

Frequently Asked Questions

Adobe is transitioning from a perpetual license model to a subscription-based Software-as-a-Service (SaaS) model, primarily driven by the adoption of Creative Cloud and Adobe Marketing Cloud. This shift leads to a decline in traditional product revenue from perpetual licenses while subscription and services revenue are growing. Consequently, revenue recognition is becoming more ratable, impacting short-term revenue and net income figures, but is expected to lead to more predictable and recurring revenue streams in the long term.

The adoption of Creative Cloud is proceeding well, with Adobe exceeding one million paid subscriptions by the end of the third quarter of fiscal 2013. The company is closely monitoring key performance metrics such as the total number of current paid subscriptions and Annualized Recurring Revenue (ARR). Digital Media ARR reached $655.0 million by the end of the quarter, demonstrating significant progress in the subscription model.

Adobe completed the acquisitions of Neolane (digital marketing) and Behance (digital media) in the period. These acquisitions contributed to an increase in goodwill, which rose to $4.75 billion as of August 30, 2013. While the financial impact of these specific acquisitions was noted as not material to the Condensed Consolidated Financial Statements individually, they are part of Adobe's strategy to strengthen its Digital Marketing and Digital Media segments.

Adobe maintained a strong liquidity position with cash and cash equivalents of $819.1 million and short-term investments of $2,344.9 million as of August 30, 2013. The company generated $836.7 million in net cash from operating activities for the first nine months of fiscal 2013. Adobe also has a $1.0 billion senior unsecured revolving credit agreement available, with no outstanding borrowings as of the reporting date, indicating ample financial resources to meet its obligations and strategic investments.