Adobe Reports Strong Q1 Results

Tue Mar 19, 2013 4:02pm EDT

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Adobe Creative Cloud Adoption Accelerates and Adobe Marketing Cloud Achieves 20
Percent Annual Revenue Growth


SAN JOSE, Calif.--(Business Wire)--
Adobe Systems Incorporated (Nasdaq:ADBE) today reported financial results for
its first quarter of fiscal year 2013 ended March 1, 2013. 

Adobe achieved revenue of $1.008 billion, exceeding its targeted range of $950
million to $1 billion. During the quarter, the Company continued to accelerate
adoption of Adobe Creative Cloud as it migrates to a subscription model in its
Digital Media business. Adobe also achieved strong revenue growth with Adobe
Marketing Cloud solutions in its Digital Marketing business. 

First Quarter Financial Highlights

* Diluted earnings per share were $0.13 on a GAAP-basis, and $0.35 on a non-GAAP
basis. 
* Operating income was $98.2 million and net income was $65.1 million on a GAAP
basis. Operating income was $240.7 million and net income was $177.9 million on
a non-GAAP basis. 
* Cash flow from operations was $322.0 million. 
* Deferred revenue grew by $80.5 million to a record $700.0 million. 
* Adobe ended Q1 with 479 thousand paid Creative Cloud members, an increase of
153 thousand when compared to the number of members as of the end of Q4 fiscal
year 2012. 
* Adobe Marketing Cloud achieved quarterly revenue of $215.4 million, which
represents 20 percent year-over-year growth.

A reconciliation between GAAP and non-GAAP results is provided at the end of
this press release. 

Executive Quotes

"Creative Cloud is quickly becoming mainstream, with the overwhelming majority
of Creative purchases on Adobe.com now being Creative Cloud subscriptions," said
Shantanu Narayen, president and chief executive officer, Adobe. "With Adobe
Marketing Cloud, we are the partner of choice for Chief Marketing Officers as we
help our customers migrate their businesses online." 

"Adoption of Creative Cloud accelerated and we achieved strong Digital Marketing
revenue and bookings growth in Q1," said Mark Garrett, executive vice president
and chief financial officer, Adobe. "We're building a stronger, more predictable
recurring revenue model which will drive higher long-term growth." 

Adobe to Webcast Earnings Conference Call

Adobe will webcast its first quarter fiscal year 2013 earnings conference call
today at 2:00 p.m. Pacific Time from its investor relations website:
www.adobe.com/ADBE. A copy of Adobe management`s prepared remarks, including
financial targets and conference call slides, has been posted to Adobe`s
investor relations website in advance of the conference call for reference. 

A reconciliation between GAAP and non-GAAP financial targets is also provided on
the website. 

Forward-Looking Statements Disclosure

This press release contains forward-looking statements, including those related
to the transition of our business as we migrate to a subscription model,
adoption of Creative Cloud, increases in recurring revenue and long-term revenue
growth, 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, including our increased emphasis
on a cloud and subscription strategy, fluctuations in subscription renewal or
upgrade rates, continued uncertainty in economic conditions and the financial
markets, difficulty in predicting revenue from new businesses and the potential
impact on our financial results from changes in our business models, 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 the fiscal year ended Nov. 30, 2012. 

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 1, 2013, which Adobe expects to file in March 2013. 

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. 

© 2013 Adobe Systems Incorporated. All rights reserved. Adobe, the Adobe logo,
Adobe 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                               
                                                        March 1,                   March 2,              
                                                        2013                       2012                  
 Revenue:                                                                                                
 Products                                               $      675,789             $      808,521        
 Subscription                                           224,266                    146,230               
 Services and support                                   107,818                    90,469                
 Total revenue                                          1,007,873                  1,045,220             
                                                                                                         
 Cost of revenue:                                                                                        
 Products                                               51,982                     25,668                
 Subscription                                           62,580                     48,780                
 Services and support                                   42,122                     33,817                
 Total cost of revenue                                  156,684                    108,265               
                                                                                                         
 Gross profit                                           851,189                    936,955               
                                                                                                         
 Operating expenses:                                                                                     
 Research and development                               209,638                    177,728               
 Sales and marketing                                    398,033                    358,963               
 General and administrative                             132,853                    102,681               
 Restructuring charges                                  2                          (2,825          )     
 Amortization of purchased intangibles                  12,439                     11,429                
 Total operating expenses                               752,965                    647,976               
                                                                                                         
 Operating income                                       98,224                     288,979               
                                                                                                         
 Non-operating income (expense):                                                                         
 Interest and other income (expense), net               1,246                      (2,785          )     
 Interest expense                                       (16,834         )          (16,838         )     
 Investment gains (losses), net                         848                        1,021                 
 Total non-operating income (expense), net              (14,740         )          (18,602         )     
 Income before income taxes                             83,484                     270,377               
 Provision for income taxes                             18,367                     85,168                
 Net income                                             $      65,117              $      185,209        
 Basic net income per share                             $      0.13                $      0.37           
 Shares used to compute basic net income per share      498,607                    494,016               
 Diluted net income per share                           $      0.13                $      0.37           
 Shares used to compute diluted net income per share    507,840                    500,378               
                                                                                                         


 Condensed Consolidated Balance Sheets                                                                                                                    
 
(In thousands, except par value; unaudited)                                                                                                             
                                                                                                                                                          
                                                                                                    March 1,                    November 30,              
                                                                                                    2013                        2012                      
 ASSETS                                                                                                                                                   
                                                                                                                                                          
 Current assets:                                                                                                                                          
 Cash and cash equivalents                                                                          $       1,306,382           $       1,425,052         
 Short-term investments                                                                             2,354,307                   2,113,301                 
 Trade receivables, net of allowances for doubtful accounts of $12,715 and $12,643, respectively    485,801                     617,233                   
 Deferred income taxes                                                                              64,930                      59,537                    
 Prepaid expenses and other current assets                                                          161,663                     116,237                   
 Total current assets                                                                               4,373,083                   4,331,360                 
                                                                                                                                                          
 Property and equipment, net                                                                        686,014                     664,302                   
 Goodwill                                                                                           4,221,487                   4,133,259                 
 Purchased and other intangibles, net                                                               580,568                     545,036                   
 Investment in lease receivable                                                                     207,239                     207,239                   
 Other assets                                                                                       97,320                      93,327                    
 Total assets                                                                                       $       10,165,711          $       9,974,523         
                                                                                                                                                          
 LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                     
                                                                                                                                                          
 Current liabilities:                                                                                                                                     
 Trade payables                                                                                     $       72,725              $       49,759            
 Accrued expenses                                                                                   505,465                     590,140                   
 Capital lease obligations                                                                          22,406                      11,217                    
 Accrued restructuring                                                                              6,767                       9,287                     
 Income taxes payable                                                                               11,126                      49,886                    
 Deferred revenue                                                                                   645,834                     561,463                   
 Total current liabilities                                                                          1,264,323                   1,271,752                 
                                                                                                                                                          
 Long-term liabilities:                                                                                                                                   
 Debt and capital lease obligations                                                                 1,509,003                   1,496,938                 
 Deferred revenue                                                                                   54,197                      58,102                    
 Accrued restructuring                                                                              10,053                      12,263                    
 Income taxes payable                                                                               159,859                     155,096                   
 Deferred income taxes                                                                              292,770                     265,106                   
 Other liabilities                                                                                  70,168                      50,084                    
 Total liabilities                                                                                  3,360,373                   3,309,341                 
                                                                                                                                                          
 Stockholders' equity:                                                                                                                                    
 Preferred stock, $0.0001 par value; 2,000 shares authorized                                        -                           -                         
 Common stock, $0.0001 par value                                                                    61                          61                        
 Additional paid-in-capital                                                                         3,116,471                   3,038,665                 
 Retained earnings                                                                                  6,808,489                   7,003,003                 
 Accumulated other comprehensive income                                                             40,110                      30,712                    
 Treasury stock, at cost (99,789 and 106,702 shares, respectively), net of re-issuances             (3,159,793          )       (3,407,259         )      
 Total stockholders' equity                                                                         6,805,338                   6,665,182                 
 Total liabilities and stockholders' equity                                                         $       10,165,711          $       9,974,523         
                                                                                                                                                          


 Condensed Consolidated Statements of Cash Flows                                                                                         
 
(In thousands; unaudited)                                                                                                              
                                                                                                                                         
                                                                                      Three Months Ended                                 
                                                                                      March 1,                     March 2,              
                                                                                      2013                         2012                  
 Cash flows from operating activities:                                                                                                   
 Net income                                                                           $      65,117                $      185,209        
 Adjustments to reconcile net income to net cash provided by operating activities:                                                       
 Depreciation, amortization and accretion                                             76,752                       69,861                
 Stock-based compensation expense                                                     77,282                       61,151                
 Unrealized investment (gains) losses                                                 (418              )          (3,168          )     
 Changes in deferred revenue                                                          79,514                       16,739                
 Changes in other operating assets and liabilities                                    23,784                       (15,429         )     
 Net cash provided by operating activities                                            322,031                      314,363               
                                                                                                                                         
 Cash flows from investing activities:                                                                                                   
 Purchases, sales and maturities of short-term investments, net                       (245,775          )          (32,418         )     
 Purchases of property and equipment                                                  (60,190           )          (51,088         )     
 Purchases of long-term investments, intangibles and other assets, net of sales       (43,793           )          (1,017          )     
 Acquisitions, net of cash                                                            (96,356           )          (353,184        )     
 Net cash used for investing activities                                               (446,114          )          (437,707        )     
                                                                                                                                         
 Cash flows from financing activities:                                                                                                   
 Purchases of treasury stock                                                          (100,000          )          (80,000         )     
 Re-issuance of treasury stock                                                        88,566                       13,366                
 Proceeds from debt and capital lease obligations                                     25,703                       -                     
 Repayment of debt and capital lease obligations                                      (2,507            )          (2,264          )     
 Debt issuance costs                                                                  (357              )          (2,297          )     
 Excess tax benefits from stock-based compensation                                    -                            2,670                 
 Net cash provided by (used for) financing activities                                 11,405                       (68,525         )     
 Effect of exchange rate changes on cash and cash equivalents                         (5,992            )          3,632                 
 Net decrease in cash and cash equivalents                                            (118,670          )          (188,237        )     
 Cash and cash equivalents at beginning of period                                     1,425,052                    989,500               
 Cash and cash equivalents at end of period                                           $      1,306,382             $      801,263        
                                                                                                                                         


 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 1,                 March 2,                 November 30,           
                                                                            2013                     2012                     2012                   
 Operating income:                                                                                                                                   
                                                                                                                                                     
 GAAP operating income                                                      $     98,224             $     288,979            $      307,765         
 Stock-based and deferred compensation expense                              85,086                   72,633                   76,248                 
 Restructuring charges                                                      2                        (2,825         )         (275            )      
 Amortization of purchased intangibles & technology license arrangements    57,377                   27,864                   30,912                 
 Non-GAAP operating income                                                  $     240,689            $     386,651            $      414,650         
                                                                                                                                                     
 Net income:                                                                                                                                         
                                                                                                                                                     
 GAAP net income                                                            $     65,117             $     185,209            $      222,333         
 Stock-based and deferred compensation expense                              85,086                   72,633                   76,248                 
 Restructuring charges                                                      2                        (2,825         )         (275            )      
 Amortization of purchased intangibles & technology license arrangements    57,377                   27,864                   30,912                 
 Investment (gains) losses                                                  (848           )         (1,021         )         (351            )      
 Income tax adjustments                                                     (28,840        )         2,647                    (20,962         )      
 Non-GAAP net income                                                        $     177,894            $     284,507            $      307,905         
                                                                                                                                                     
 Diluted net income per share:                                                                                                                       
                                                                                                                                                     
 GAAP diluted net income per share                                          $     0.13               $     0.37               $      0.44            
 Stock-based and deferred compensation expense                              0.17                     0.15                     0.15                   
 Restructuring charges                                                      -                        (0.01          )         -                      
 Amortization of purchased intangibles & technology license arrangements    0.11                     0.06                     0.06                   
 Income tax adjustments                                                     (0.06          )         -                        (0.04           )      
 Non-GAAP diluted net income per share                                      $     0.35               $     0.57               $      0.61            
                                                                                                                                                     
 Shares used in computing diluted net income per share                      507,840                  500,378                  502,154                
                                                                                                                                                     


                                                                            Three Months      
                                                                            Ended             
                                                                            March 1,          
                                                                            2013              
 Effective income tax rate:                                                                   
                                                                                              
 GAAP effective income tax rate                                             22.0     %        
 Stock-based and deferred compensation expense                              (0.6     )        
 Amortization of purchased intangibles & technology license arrangements    (0.4     )        
 R&D tax benefit for carryover of 2012 tax benefit                          0.5               
 One-time charge related to acquisition                                     (0.5     )        
 Non-GAAP effective income tax rate                                         21.0     %        


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. Accordingly,
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 in a manner that
focuses on what Adobe believes to be its ongoing business operations. Adobe's
management believes it is useful for itself and investors to review, as
applicable, both GAAP information that includes the stock-based and deferred
compensation expenses, restructuring charges, amortization of purchased
intangibles and prior activity in connection with technology license agreements,
investment gains and losses 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.

Adobe Systems Incorporated
Mike Saviage, 408-536-4416 (Investor Relations)
ir@adobe.com
Jodi Sorensen, 408-536-2084 (Public Relations)
jsorensen@adobe.com



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