ADBE
$449.57
Adobe Systems
($14.54)
(3.13%)
Earnings Details
2nd Quarter May 2020
Thursday, June 11, 2020 4:05:00 PM
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Summary

Adobe Systems Beats but Guides Lower

Adobe Systems (ADBE) reported 2nd Quarter May 2020 earnings of $2.51 per share on revenue of $3.1 billion. The consensus earnings estimate was $2.33 per share on revenue of $3.2 billion. The Earnings Whisper number was $2.39 per share. Revenue grew 14.0% on a year-over-year basis.

The company said it expects third quarter non-GAAP earnings of approximately $2.40 per share on revenue of approximately $3.15 billion. The current consensus earnings estimate is $2.46 per share on revenue of $3.28 billion for the quarter ending August 31, 2020.

Adobe Systems Inc offers a line of software and services used by creative professionals, marketers, developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing and engaging with compelling operating systems.

Results
Reported Earnings
$2.51
Earnings Whisper
$2.39
Consensus Estimate
$2.33
Reported Revenue
$3.13 Bil
Revenue Estimate
$3.17 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Adobe Reports Record Revenue

Strong Demand Across Creative Cloud and Document Cloud Drives Net New Digital Media ARR of $443 Million

SAN JOSE, Calif.--(BUSINESS WIRE)--Adobe (Nasdaq:ADBE) today reported financial results for its second quarter fiscal year 2020 ended May 29, 2020.­

Second Quarter Fiscal Year 2020 Financial Highlights

  • Adobe achieved record quarterly revenue of $3.13 billion in its second quarter of fiscal year 2020, which represents 14 percent year-over-year growth. Diluted earnings per share was $2.27 on a GAAP basis, and $2.45 on a non-GAAP basis.
  • Digital Media segment revenue was $2.23 billion, which represents 18 percent year-over-year growth. Creative revenue grew to $1.87 billion and Document Cloud revenue was $360 million. Digital Media Annualized Recurring Revenue (“ARR”) grew to $9.17 billion exiting the quarter, a quarter-over-quarter increase of $443 million. Creative ARR grew to $7.93 billion, and Document Cloud ARR grew to $1.24 billion.
  • Digital Experience segment revenue was $826 million, representing 5 percent year-over-year growth. Digital Experience subscription revenue was $707 million, representing 8 percent year-over-year growth. Digital Experience subscription revenue, excluding Advertising Cloud revenue, grew 18 percent year-over-year.
  • GAAP operating income in the second quarter was $1.02 billion, and non-GAAP operating income was $1.34 billion. GAAP net income was $1.10 billion, and non-GAAP net income was $1.19 billion.
  • Cash flows from operations was $1.18 billion.
  • Remaining Performance Obligation exiting the quarter was $9.92 billion.
  • Adobe repurchased approximately 2.6 million shares during the quarter.

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 strategy to empower customers to create the world’s content, automate critical document processes and enable enterprises to engage with their customers digitally, drove record revenue in Q2,” said Shantanu Narayen, president and CEO, Adobe. “The tectonic shift towards ‘all things digital’ across all customer segments globally will serve as a tailwind to our growth initiatives as we emerge from this crisis.”

"Adobe delivered another quarter of record revenue and expanding profitability despite the challenging environment, demonstrating the resiliency of our business model," said John Murphy, executive vice president and CFO, Adobe. “We drove record Digital Media net new ARR for Q2, highlighting how mission-critical creative and document solutions are in engaging remotely.”

Advertising Cloud Update

Adobe also announced that given the macroeconomic environment, it significantly accelerated in Q2 its previously stated strategy of eliminating low-margin Advertising Cloud transaction-driven offerings. The company will continue to offer its Advertising Cloud software solutions. The macroeconomic environment and this strategic shift impacted Advertising Cloud targeted revenue in Q2 by approximately $50 million.

Adobe Provides Third Quarter Financial Targets

Adobe today is providing third quarter financial targets factoring current macroeconomic conditions, continued impacts of the pandemic, typical Q3 summer seasonality and its updated strategy for Advertising Cloud.

The following table summarizes Adobe’s third quarter fiscal year 2020 targets.

Total revenue

Approximately $3.15 billion

Digital Media segment revenue

Approximately 16 percent year-over-year growth

Digital Media annualized recurring revenue (ARR)

Approximately $340 million of net new ARR

Digital Experience segment revenue

Flat year-over-year

Digital Experience subscription revenue

~5% year-over-year growth

~14% year-over-year growth
(excluding Advertising Cloud)

Tax rate

GAAP: ~10 percent

Non-GAAP: ~10 percent

Share count

~485 million shares

Earnings per share

GAAP: ~$1.78

Non-GAAP: ~$2.40

In light of the macroeconomic environment and the strategic shifts for Advertising Cloud, Adobe is withdrawing the annual fiscal 2020 targets provided in December 2019.

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

Adobe to Webcast Earnings Conference Call

Adobe will webcast its second quarter fiscal year 2020 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 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 business momentum, the effects of the COVID-19 pandemic on our business and results of operations, market trends, customer success, revenue, profitability, operating margin, seasonality, annualized recurring revenue, non-operating other expense, tax rate on a GAAP and non-GAAP basis, earnings per share on a GAAP and non-GAAP basis, and share count, 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 compete effectively, failure to develop, acquire, market and offer products and services that meet customer requirements, introduction of new technology, information security and privacy, potential interruptions or delays in hosted services provided by us or third parties, macroeconomic conditions and economic impact of the COVID-19 pandemic, risks associated with cyber-attacks, complex sales cycles, risks related to the timing of revenue recognition from our subscription offerings, fluctuations in subscription renewal rates, failure to realize the anticipated benefits of past or future acquisitions, failure to effectively manage critical strategic third-party business relationships, changes in accounting principles and tax regulations, uncertainty in the financial markets and economic conditions in the countries where we operate, and other various risks associated with being a multinational corporation. 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 2019 ended Nov. 29, 2019, and Adobe's Quarterly Reports on Form 10-Q issued in fiscal year 2020.

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 29, 2020, which Adobe expects to file in June 2020. Adobe assumes no obligation to, and does not currently intend to, update these forward-looking statements.

About Adobe

Adobe is changing the world through digital experiences. For more information, visit www.adobe.com.

©2020 Adobe. All rights reserved. Adobe and the Adobe logo are either registered trademarks or trademarks of Adobe (or one of its subsidiaries) in the United States and/or other countries. All other trademarks are the property of their respective owners.

Condensed Consolidated Statements of Income

(In millions, except per share data; unaudited)

 

 

Three Months Ended

 

Six Months Ended

 

May 29, 2020

 

May 31, 2019

 

May 29, 2020

 

May 31, 2019

Revenue:

 

 

 

 

 

 

 

Subscription

$

2,874

 

 

$

2,456

 

 

$

5,699

 

 

$

4,761

 

Product

 

128

 

 

 

153

 

 

 

271

 

 

 

323

 

Services and support

 

126

 

 

 

135

 

 

 

249

 

 

 

261

 

Total revenue

 

3,128

 

 

 

2,744

 

 

 

6,219

 

 

 

5,345

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

Subscription

 

317

 

 

 

296

 

 

 

672

 

 

 

585

 

Product

 

9

 

 

 

9

 

 

 

16

 

 

 

21

 

Services and support

 

89

 

 

 

102

 

 

 

179

 

 

 

199

 

Total cost of revenue

 

415

 

 

 

407

 

 

 

867

 

 

 

805

 

 

 

 

 

 

 

 

 

Gross profit

 

2,713

 

 

 

2,337

 

 

 

5,352

 

 

 

4,540

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

532

 

 

 

476

 

 

 

1,064

 

 

 

941

 

Sales and marketing

 

901

 

 

 

849

 

 

 

1,758

 

 

 

1,630

 

General and administrative

 

224

 

 

 

219

 

 

 

495

 

 

 

435

 

Amortization of intangibles

 

40

 

 

 

43

 

 

 

82

 

 

 

90

 

Total operating expenses

 

1,697

 

 

 

1,587

 

 

 

3,399

 

 

 

3,096

 

 

 

 

 

 

 

 

 

Operating income

 

1,016

 

 

 

750

 

 

 

1,953

 

 

 

1,444

 

 

 

 

 

 

 

 

 

Non-operating income (expense):

 

 

 

 

 

 

 

Interest expense

 

(28

)

 

 

(40

)

 

 

(61

)

 

 

(81

)

Investment gains (losses), net

 

 

 

 

(1

)

 

 

(3

)

 

 

43

 

Other income (expense), net

 

12

 

 

 

2

 

 

 

30

 

 

 

7

 

Total non-operating income (expense), net

 

(16

)

 

 

(39

)

 

 

(34

)

 

 

(31

)

Income before income taxes

 

1,000

 

 

 

711

 

 

 

1,919

 

 

 

1,413

 

Provision for (benefit from) income taxes

 

(100

)

 

 

78

 

 

 

(136

)

 

 

106

 

Net income

$

1,100

 

 

$

633

 

 

$

2,055

 

 

$

1,307

 

Basic net income per share

$

2.28

 

 

$

1.30

 

 

$

4.26

 

 

$

2.68

 

Shares used to compute basic net income per share

 

481

 

 

 

488

 

 

 

482

 

 

 

488

 

Diluted net income per share

$

2.27

 

 

$

1.29

 

 

$

4.23

 

 

$

2.65

 

Shares used to compute diluted net income per share

 

485

 

 

 

492

 

 

 

486

 

 

 

493

 

Condensed Consolidated Balance Sheets

(In millions; unaudited)

 

 

May 29, 2020

 

November 29, 2019

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

3,044

 

 

$

2,650

 

Short-term investments

 

1,307

 

 

 

1,527

 

Trade receivables, net of allowances for doubtful accounts of $22 and $10, respectively

 

1,366

 

 

 

1,535

 

Prepaid expenses and other current assets

 

932

 

 

 

783

 

Total current assets

 

6,649

 

 

 

6,495

 

 

 

 

 

Property and equipment, net

 

1,387

 

 

 

1,293

 

Operating lease right-of-use assets, net

 

489

 

 

 

 

Goodwill

 

10,695

 

 

 

10,691

 

Other intangibles, net

 

1,535

 

 

 

1,721

 

Deferred income taxes

 

231

 

 

 

 

Other assets

 

617

 

 

 

562

 

Total assets

$

21,603

 

 

$

20,762

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

Trade payables

$

289

 

 

$

209

 

Accrued expenses

 

1,303

 

 

 

1,399

 

Debt

 

 

 

 

3,149

 

Deferred revenue

 

3,321

 

 

 

3,378

 

Income taxes payable

 

166

 

 

 

56

 

Operating lease liabilities

 

85

 

 

 

 

Total current liabilities

 

5,164

 

 

 

8,191

 

 

 

 

 

Long-term liabilities:

 

 

 

Debt

 

4,114

 

 

 

989

 

Deferred revenue

 

140

 

 

 

123

 

Income taxes payable

 

503

 

 

 

616

 

Deferred income taxes

 

107

 

 

 

140

 

Operating lease liabilities

 

498

 

 

 

 

Other liabilities

 

196

 

 

 

173

 

Total liabilities

 

10,722

 

 

 

10,232

 

 

 

 

 

Stockholders’ equity:

 

 

 

Preferred stock

 

 

 

 

 

Common stock

 

 

 

 

 

Additional paid-in-capital

 

6,892

 

 

 

6,504

 

Retained earnings

 

16,428

 

 

 

14,829

 

Accumulated other comprehensive income (loss)

 

(195

)

 

 

(188

)

Treasury stock, at cost

 

(12,244

)

 

 

(10,615

)

Total stockholders’ equity

 

10,881

 

 

 

10,530

 

Total liabilities and stockholders’ equity

$

21,603

 

 

$

20,762

 

Condensed Consolidated Statements of Cash Flows

(In millions; unaudited)

 

 

Three Months Ended

 

May 29, 2020

 

May 31, 2019

Cash flows from operating activities:

 

 

 

Net income

$

1,100

 

 

$

633

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

Depreciation, amortization and accretion

 

188

 

 

 

188

 

Stock-based compensation

 

227

 

 

 

204

 

Unrealized investment (gains) losses, net

 

(1

)

 

 

2

 

Other non-cash adjustments

 

(137

)

 

 

9

 

Changes in deferred revenue

 

(154

)

 

 

(84

)

Changes in other operating assets and liabilities

 

(39

)

 

 

157

 

Net cash provided by operating activities

 

1,184

 

 

 

1,109

 

 

 

 

 

Cash flows from investing activities:

 

 

 

Purchases, sales and maturities of short-term investments, net

 

176

 

 

 

100

 

Purchases of property and equipment

 

(96

)

 

 

(85

)

Purchases and sales of long-term investments, intangibles and other assets, net

 

 

 

 

(5

)

Net cash provided by investing activities

 

80

 

 

 

10

 

 

 

 

 

Cash flows from financing activities:

 

 

 

Purchases of treasury stock

 

(850

)

 

 

(750

)

Taxes paid related to net share settlement of equity awards, net of proceeds from treasury stock re-issuances

 

(53

)

 

 

(22

)

Other financing activities, net

 

2

 

 

 

 

Net cash used for financing activities

 

(901

)

 

 

(772

)

Effect of exchange rate changes on cash and cash equivalents

 

(7

)

 

 

(3

)

Net increase in cash and cash equivalents

 

356

 

 

 

344

 

Cash and cash equivalents at beginning of period

 

2,688

 

 

 

1,739

 

Cash and cash equivalents at end of period

$

3,044

 

 

$

2,083

 

Non-GAAP Results

(In millions, except per share data)

The following table shows Adobe’s GAAP results reconciled to non-GAAP results included in this release.

 

 

Three Months Ended

 

May 29, 2020

 

May 31, 2019

 

February 28, 2020

Operating income:

 

 

 

 

 

 

 

 

 

 

 

GAAP operating income

$

1,016

 

 

$

750

 

 

$

937

 

Stock-based and deferred compensation expense

 

227

 

 

 

204

 

 

 

214

 

Amortization of intangibles

 

92

 

 

 

96

 

 

 

94

 

Non-GAAP operating income

$

1,335

 

 

$

1,050

 

 

$

1,245

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

GAAP net income

$

1,100

 

 

$

633

 

 

$

955

 

Stock-based and deferred compensation expense

 

227

 

 

 

204

 

 

 

214

 

Amortization of intangibles

 

92

 

 

 

96

 

 

 

94

 

Investment (gains) losses, net

 

 

 

 

1

 

 

 

3

 

Income tax adjustments

 

(232

)

 

 

(33

)

 

 

(159

)

Non-GAAP net income

$

1,187

 

 

$

901

 

 

$

1,107

 

 

 

 

 

 

 

Diluted net income per share:

 

 

 

 

 

 

 

 

 

 

 

GAAP diluted net income per share

$

2.27

 

 

$

1.29

 

 

$

1.96

 

Stock-based and deferred compensation expense

 

0.47

 

 

 

0.41

 

 

 

0.44

 

Amortization of intangibles

 

0.19

 

 

 

0.20

 

 

 

0.19

 

Investment (gains) losses, net

 

 

 

 

 

 

 

0.01

 

Income tax adjustments

 

(0.48

)

 

 

(0.07

)

 

 

(0.33

)

Non-GAAP diluted net income per share

$

2.45

 

 

$

1.83

 

 

$

2.27

 

 

 

 

 

 

 

Shares used in computing diluted net income per share

 

485

 

 

 

492

 

 

 

488

 

The following table shows Adobe's second quarter fiscal year 2020 GAAP tax rate reconciled to the non-GAAP tax rate included in this release.

 

Second Quarter
Fiscal 2020

Effective income tax rate:

 

 

 

GAAP effective income tax rate

 

(10.0

)

%

Trading structure change

 

22.5

 

 

Income tax adjustments

 

(1.0

)

 

Stock-based and deferred compensation expense

 

(1.1

)

 

Amortization of intangibles

 

(0.4

)

 

Non-GAAP effective income tax rate

 

10.0

 

%

Reconciliation of GAAP to Non-GAAP Financial Targets
(Shares in millions)

The following table shows Adobe's third quarter fiscal year 2020 GAAP earnings per share target reconciled to the non-GAAP financial target included in this release.

 

Third Quarter
Fiscal 2020

Diluted net income per share:

 

 

 

GAAP diluted net income per share

$

1.78

 

 

Stock-based and deferred compensation expense

 

0.50

 

 

Amortization of intangibles

 

0.19

 

 

Income tax adjustments

 

(0.07

)

 

Non-GAAP diluted net income per share

$

2.40

 

 

 

 

Shares used to compute diluted net income per share

485

 

 

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 as well as non-GAAP measures, which may exclude items such as stock-based and deferred compensation expenses, restructuring and other charges, amortization of intangibles, investment gains and losses, the related tax impact of all of these items, income tax adjustments, and the income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes. Adobe uses these non-GAAP measures in order to assess the performance of Adobe's business and for planning and forecasting in subsequent periods. Whenever such a non-GAAP measure is used, Adobe 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.

Investor Relations Contact
Jonathan Vaas
Adobe
ir@adobe.com

Public Relations Contact
Lea Anna Cardwell
Adobe
cardwell@adobe.com

Source: Adobe