10-QPeriod: Q3 FY2019

ADOBE INC. Quarterly Report for Q3 Ended Aug 30, 2019

Filed September 26, 2019For Securities:ADBE

Summary

Adobe Inc. reported strong financial results for the third quarter and the first nine months of fiscal year 2019, demonstrating robust growth driven by its Digital Media and Digital Experience segments. Total revenue saw a significant increase of 24% year-over-year for the quarter and 25% for the nine-month period, largely propelled by a 26% and 27% rise in subscription revenue, respectively. The company continues its strategic shift towards a subscription-based model, which is reflected in the substantial growth of Annual Recurring Revenue (ARR) for both Creative Cloud and Document Cloud. Significant investments in research and development and sales and marketing underscore Adobe's commitment to innovation and market expansion. Despite increased operating expenses, largely due to headcount growth from acquisitions and ongoing investments, net income saw a healthy increase of 19% for the quarter, signaling effective operational management and strong revenue generation.

Financial Highlights

56 data points
Beta

Revenue

$2.83B

85.3% Gross Margin

Net Income

$793.00M

28.0% Net Margin

EPS (Diluted)

$1.61

Total Assets

$20.05B

Cash & Equivalents

$2.21B

Free Cash Flow

$1.80B

Financial Statements
Beta
Revenue$2.83B
Cost of Revenue$416.00M
Gross Profit$2.42B
Operating Expenses$1.56B
Operating Income$854.00M
Interest Expense$40.00M
Net Income$793.00M
EPS (Basic)$1.63
EPS (Diluted)$1.61
Shares Outstanding (Basic)485.80M
Shares Outstanding (Diluted)491.00M

Key Highlights

  • 1Total revenue increased by 24% year-over-year to $2.83 billion for the third quarter and by 25% to $8.18 billion for the first nine months of fiscal 2019.
  • 2Subscription revenue, the primary driver of growth, increased by 26% year-over-year for the quarter and 27% for the nine-month period.
  • 3Digital Media ARR grew 17% year-over-year to $7.86 billion, with Creative Cloud ARR up 16% and Document Cloud ARR up 25%.
  • 4Digital Experience segment revenue grew significantly by 34% year-over-year to $820.9 million in the third quarter, driven by subscription revenue and the Marketo acquisition.
  • 5Net income increased by 19% year-over-year to $792.8 million for the third quarter.
  • 6Net cash flow from operating activities increased by 4% year-over-year to $3.05 billion for the nine-month period, demonstrating strong operational cash generation.
  • 7Adobe successfully managed its debt, with plans to refinance its Term Loan and 2020 Notes, maintaining compliance with all covenants.

Frequently Asked Questions

Adobe's revenue growth is primarily driven by its subscription-based offerings, particularly within the Digital Media segment (Creative Cloud and Document Cloud) and the Digital Experience segment (Adobe Experience Cloud). The continued strong adoption of Creative Cloud and the successful integration and revenue contribution from the Marketo acquisition in the Digital Experience segment are key factors.

Adobe adopted ASC 606 using the modified retrospective method starting fiscal year 2019. This adoption resulted in changes to revenue recognition policies, including capitalization of contract acquisition costs and different revenue recognition for certain bundled offerings. While the reported financials reflect these changes, the company noted that the impact was not significant to overall results of operations and prior period results were not restated, limiting direct period-over-period comparability in some instances.

Adobe maintains a strong liquidity position with substantial cash and cash equivalents. The company generated strong operating cash flows and has an undrawn revolving credit facility. While a significant portion of debt has been reclassified to current liabilities with plans for refinancing, Adobe expects its existing cash, cash equivalents, investments, anticipated operating cash flows, and available credit facility to be sufficient to meet its working capital and operating expenditure requirements for the next twelve months.

Adobe has outstanding debt, including a Term Loan and Senior Notes, with upcoming maturities. The company has actively managed its debt, including entering into Treasury lock agreements to hedge interest rate risk in anticipation of refinancing the Term Loan and 2020 Notes. Adobe remains in compliance with all debt covenants and expects its liquidity and cash flow to support these obligations and future refinancing plans.