SYS-CON MEDIA Authors: Elizabeth White, Zakia Bouachraoui, Liz McMillan, Janakiram MSV, Carmen Gonzalez

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Adobe Reports Record Quarterly and Annual Revenue

Adobe (Nasdaq:ADBE) today reported financial results for its fourth quarter and fiscal year 2018 ended Nov. 30, 2018.

In its fourth quarter of fiscal year 2018, Adobe achieved record quarterly revenue of $2.46 billion, which represents 23 percent year-over-year growth. In fiscal year 2018, Adobe achieved record annual revenue of $9.03 billion, which represents 24 percent year-over-year growth.

"Adobe achieved record revenue of greater than $9 billion and delivered outstanding earnings performance in fiscal 2018," said Shantanu Narayen, president and CEO, Adobe. "In 2018 we made significant investments across our product portfolio, entered new markets, and made strategic acquisitions which we believe will fuel continued top and bottom-line performance.”

“We finished the year strong with record results across the board, meeting or exceeding all of our annual and quarterly targets which did not include Marketo,” said John Murphy, executive vice president and CFO, Adobe. “We’re excited to add Marketo and the expanded market opportunity it provides. We look forward to delivering strong revenue growth, accelerating earnings growth and healthy margin expansion during fiscal 2019.”

Adobe acquired Marketo, Inc. on Oct. 31, 2018, which added approximately $21 million of revenue in the fourth quarter. This press release provides key financial information with and without the impact of the Marketo transaction to enable evaluation of the Company’s performance based on financial targets provided before the acquisition.

Fourth Quarter Fiscal Year 2018 Financial Results

   

Q4 FY2018 Targets
excl. Marketo1

 

Q4 FY2018 Results
excl. Marketo2

 

Q4 FY2018 Results
As reported, incl. Marketo

Total revenue   $2.42 billion   $2.44 billion   $2.46 billion
GAAP EPS   $1.42   $1.48   $1.37
Non-GAAP EPS2   $1.87   $1.90   $1.83
Digital Media segment revenue   ~22 percent y/y growth   23 percent y/y growth   23 percent y/y growth
Digital Experience segment revenue   ~20 percent y/y growth   22 percent y/y growth   25 percent y/y growth
Net new Digital Media Annualized Recurring Revenue (“ARR”)   ~$385 million   $430 million   $430 million

1 Adobe provided Q4 FY2018 targets on Sept. 13, 2018 and reaffirmed them on Oct. 15, 2018, both of which preceded its acquisition of Marketo on Oct. 31, 2018

2 A reconciliation between GAAP and non-GAAP results is provided at the end of this press release and on Adobe’s website

 

Other financial highlights in the fourth quarter of fiscal 2018 include:

  • Operating income grew 11 percent and net income grew 35 percent year-over-year on a GAAP-basis; operating income grew 18 percent and net income grew 44 percent year-over-year on a non-GAAP basis.
  • Cash flow from operations was a record $1.11 billion.
  • Deferred revenue grew to $3.05 billion.
  • The company repurchased approximately 1.6 million shares during the quarter, returning $397 million of cash to stockholders.

Fiscal Year 2018 Financial Results

    FY2018 Targets
excl. Magento & Marketo1
 

FY2018 Results
As reported, incl. Magento & Marketo

Total revenue   $8.725 billion   $9.03 billion
Digital Media segment revenue   ~23 percent y/y growth   26 percent y/y growth
Digital Experience segment revenue   ~15 percent y/y growth   20 percent y/y growth
Adobe Experience Cloud subscription revenue2   ~20 percent y/y growth   26 percent y/y growth
Net new Digital Media Annualized Recurring Revenue (“ARR”)   ~$1.1 billion   $1.45 billion
GAAP EPS   $4.40   $5.20
Non-GAAP EPS3   $5.50   $6.76

1 Adobe provided annual FY2018 targets on Dec. 14, 2017

2 Includes revenue from SaaS, managed service and term offerings for Analytics Cloud, Marketing Cloud and Magento Commerce Cloud, as well as total revenue for Adobe Advertising Cloud

3 A reconciliation between GAAP and non-GAAP results is provided at the end of this press release and on Adobe’s website

 

Other financial highlights in fiscal year 2018 include:

  • Operating income grew 31 percent and net income grew 53 percent year-over-year on a GAAP-basis; operating income grew 31 percent and net income grew 56 percent year-over-year on a non-GAAP basis.
  • Adobe generated $4.03 billion in operating cash flow during the year.
  • The company repurchased 8.7 million shares during the year, returning $2.00 billion of cash to stockholders.

ASC 606 Update

Adobe will report its financial results based on Accounting Standards Coding Topic 606 (“ASC 606”) in its fiscal year 2019, beginning in March 2019 with its first quarter earnings report. The financial targets Adobe is providing today remain based on ASC 605 as the Company integrates its acquisition of Marketo into its financial systems. Adobe continues to believe that moving to 606 in fiscal year 2019 reporting will not materially impact its revenue. However, the Company now expects there will be a slight improvement to earnings through fiscal year 2019 due to benefits from capitalization of sales commissions.

Adobe Updates Financial Targets for Fiscal Year 2019 to Include Marketo

Adobe provided preliminary fiscal year 2019 financial targets at its Financial Analyst Meeting on Oct. 15, 2018, before it had closed its acquisition of Marketo. The Company today is updating those targets and providing earnings per share targets to reflect the impact of:

  • The acquisition of Marketo, including revenue, operating expense and the write-down of deferred revenue due to purchase accounting, and higher other expense in order to fund the acquisition; and
  • Adverse changes in global currency rates since Sept. 2018, which was the time period used for spot currency rates as a basis for providing the preliminary fiscal year 2019 targets in mid-October.

The following table and subsequent commentary summarizes Adobe’s annual fiscal year 2019 targets:

Adobe total fiscal year 2019 revenue   ~$11.150 billion
Digital Media segment revenue   ~20 percent year-over-year growth
Digital Experience segment revenue   ~34 percent year-over-year growth
Digital Media annualized recurring revenue (“ARR”)   ~$1.450 billion of net new ARR
Digital Experience annual subscription bookings1   ~25 percent year-over-year growth
Tax rate   GAAP: ~10 percent   Non-GAAP: ~11 percent
Earnings per share   GAAP: ~$5.54   Non-GAAP: ~$7.75

1 Includes annualized subscription value of SaaS, managed service and term offerings under contract for Analytics Cloud, Marketing Cloud and Magento Commerce Cloud

 

During fiscal year 2019, after the first quarter Adobe expects revenue in each quarter to grow by approximately the same year-over-year growth percentage implied in its targeted revenue for the year. In addition, the Company expects net new Digital Media ARR in each quarter to be sequentially similar as that achieved in past fiscal years from quarter to quarter – with typical summer seasonality which can lead to sequentially lower net new ARR in the third quarter, as well as normal year-end sequential strength in fourth quarter net new ARR.

As the financial impact of lost deferred revenue from recent acquisitions due to purchase accounting tapers off during fiscal year 2019, after the first quarter Adobe expects quarterly operating margins and quarterly earnings per share growth rates to increase sequentially during the year.

A reconciliation between GAAP and non-GAAP targets is provided at the end of this press release and on Adobe’s website.

Adobe Provides First Quarter Fiscal Year 2019 Financial Targets

The following table summarizes Adobe’s first quarter fiscal year 2019 targets:

Adobe total Q1 fiscal year 2019 revenue   ~$2.540 billion
Digital Media segment revenue   ~20% year-over-year growth
Digital Experience segment revenue   ~31% year-over-year growth
Net non-operating other expense   ~$39 million
Tax rate   GAAP: ~3%   Non-GAAP: ~11%
Share count   ~495 million shares
Earnings per share   GAAP: ~$1.14   Non-GAAP: ~$1.60
Net new Digital Media annualized recurring revenue (“ARR”)   ~$330 million
 

A reconciliation between GAAP and non-GAAP targets is provided at the end of this press release and on Adobe’s website.

Adobe to Webcast Earnings Conference Call

Adobe will webcast its fourth quarter and fiscal year 2018 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, financial targets 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, our market opportunity, revenue, operating margin, the impact of new accounting standards, subscription bookings, 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, risks associated with cyber-attacks, potential interruptions or delays in hosted services provided by us or third parties, information security and privacy, 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, 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 2017 ended Dec. 1, 2017, and Adobe's Quarterly Reports on Form 10-Q issued in fiscal year 2018.

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 Annual Report on Form 10-K for our year ended Nov. 30, 2018, which Adobe expects to file in Jan. 2019.

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.

©2018 Adobe Inc. All rights reserved. Adobe, Adobe Experience Cloud, Adobe Analytics Cloud, Adobe Marketing Cloud, Adobe Advertising Cloud, and the Adobe logo are either registered trademarks or trademarks of Adobe Inc. 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 Year Ended
November 30,
2018
  December 1,
2017
November 30,
2018
  December 1,
2017
Revenue:
Subscription $ 2,184,158 $ 1,695,987 $ 7,922,152 $ 6,133,869
Product 150,425 192,876 622,153 706,767
Services and support 130,042   117,732   485,703   460,869  
Total revenue 2,464,625   2,006,595   9,030,008   7,301,505  
 
Cost of revenue:
Subscription 257,024 170,218 807,221 623,048
Product 10,899 15,552 46,009 57,082
Services and support 91,338   85,102   341,769   330,361  
Total cost of revenue 359,261   270,872   1,194,999   1,010,491  
 
Gross profit 2,105,364 1,735,723 7,835,009 6,291,014
 
Operating expenses:
Research and development 415,958 324,026 1,537,812 1,224,059
Sales and marketing 723,573 574,104 2,620,829 2,197,592
General and administrative 212,355 169,567 744,898 624,706
Amortization of purchased intangibles 32,932   18,686   91,101   76,562  
Total operating expenses 1,384,818   1,086,383   4,994,640   4,122,919  
 
Operating income 720,546 649,340 2,840,369 2,168,095
 
Non-operating income (expense):
Interest and other income (expense), net 9,657 10,496 39,536 36,395
Interest expense (27,873 ) (19,116 ) (89,242 ) (74,402 )
Investment gains (losses), net (3,113 ) 2,292   3,213   7,553  
Total non-operating income (expense), net (21,329 ) (6,328 ) (46,493 ) (30,454 )
Income before income taxes 699,217 643,012 2,793,876 2,137,641
Provision for income taxes 20,977   141,463   203,102   443,687  
Net income $ 678,240   $ 501,549   $ 2,590,774   $ 1,693,954  
Basic net income per share $ 1.39   $ 1.02   $ 5.28   $ 3.43  
Shares used to compute basic net income per share 488,246   492,108   490,564   493,632  
Diluted net income per share $ 1.37   $ 1.00   $ 5.20   $ 3.38  
Shares used to compute diluted net income per share 495,118   500,060   497,843   501,123  
 

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

   
November 30,
2018
December 1,
2017
ASSETS
 
Current assets:
Cash and cash equivalents $ 1,642,775 $ 2,306,072
Short-term investments 1,586,187 3,513,702
Trade receivables, net of allowances for doubtful accounts of $14,980 and $9,151, respectively 1,315,578 1,217,968
Prepaid expenses and other current assets 312,499   210,071  
Total current assets 4,857,039 7,247,813
 
Property and equipment, net 1,075,072 936,976
Goodwill 10,581,048 5,821,561
Purchased and other intangibles, net 2,069,001 385,658
Other assets 186,522   143,548  
Total assets $ 18,768,682   $ 14,535,556  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
Trade payables $ 186,258 $ 113,538
Accrued expenses 1,163,185 993,773
Income taxes payable 35,709 14,196
Deferred revenue 2,915,974   2,405,950  
Total current liabilities 4,301,126 3,527,457
 
Long-term liabilities:
Debt 4,124,800 1,881,421
Deferred revenue 137,630 88,592
Income taxes payable 644,101 173,088
Deferred income taxes 46,702 279,941
Other liabilities 152,209   125,188  
Total liabilities 9,406,568 6,075,687
 
Stockholders’ equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized
Common stock, $0.0001 par value 61 61
Additional paid-in-capital 5,685,337 5,082,195
Retained earnings 11,815,597 9,573,870
Accumulated other comprehensive income (loss) (148,130 ) (111,821 )
Treasury stock, at cost (113,171 and 109,572, respectively), net of reissuances (7,990,751 ) (6,084,436 )
Total stockholders’ equity 9,362,114   8,459,869  
Total liabilities and stockholders’ equity $ 18,768,682   $ 14,535,556  
 

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

 
Three Months Ended
November 30,
2018
  December 1,
2017
Cash flows from operating activities:
Net income $ 678,240 $ 501,549
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion 106,720 81,234
Stock-based compensation 169,621 119,744
Unrealized investment (gains) losses, net 3,908 (2,251 )
Changes in deferred revenue 271,443 289,952
Changes in other operating assets and liabilities (121,939 ) (157,008 )
Net cash provided by operating activities 1,107,993   833,220  
 
Cash flows from investing activities:
Purchases, sales and maturities of short-term investments, net 1,606,237 62,199
Purchases of property and equipment (62,563 ) (37,684 )
Purchases and sales of long-term investments, intangibles and other assets, net (1,211 ) (4,149 )
Acquisitions, net of cash acquired (4,681,341 )  
Net cash provided by (used for) investing activities (3,138,878 ) 20,366  
 
Cash flows from financing activities:
Purchases of treasury stock (300,000 ) (300,000 )
Taxes paid related to net share settlement of equity awards, net of proceeds from treasury stock reissuances (23,036 ) (18,877 )
Proceeds from debt issuance, net 2,248,342
Repayment of capital lease obligations (575 ) (632 )
Net cash provided by (used for) financing activities 1,924,731   (319,509 )
Effect of exchange rate changes on cash and cash equivalents 1,785   (2,555 )
Net increase (decrease) in cash and cash equivalents (104,369 ) 531,522
Cash and cash equivalents at beginning of period 1,747,144   1,774,550  
Cash and cash equivalents at end of period $ 1,642,775   $ 2,306,072  
 
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 Year Ended
November 30,
2018
  December 1,
2017
  August 31,
2018
November 30,
2018
  December 1,
2017
Operating income:
 
GAAP operating income $ 720,546 $ 649,340 $ 718,606 $ 2,840,369 $ 2,168,095
Stock-based and deferred compensation expense 166,504 122,180 161,094 610,785 462,317
Restructuring and other charges (359 ) (456 )
Amortization of purchased intangibles 65,397   34,817   44,815   174,294   143,492  
Non-GAAP operating income $ 952,447   $ 805,978   $ 924,515   $ 3,625,448   $ 2,773,448  
 
Net income:
 
GAAP net income $ 678,240 $ 501,549 $ 666,291 $ 2,590,774 $ 1,693,954
Stock-based and deferred compensation expense 166,504 122,180 161,094 610,785 462,317
Restructuring and other charges (359 ) (456 )
Amortization of purchased intangibles 65,397 34,817 44,815 174,294 143,492
Investment (gains) losses, net 3,113 (2,292 ) (2,251 ) (3,213 ) (7,553 )
Income tax adjustments (7,051 ) (25,982 ) (10,185 ) (9,060 ) (130,756 )
Non-GAAP net income $ 906,203   $ 629,913   $ 859,764   $ 3,363,580   $ 2,160,998  
 
Diluted net income per share:
 
GAAP diluted net income per share $ 1.37 $ 1.00 $ 1.34 $ 5.20 $ 3.38
Stock-based and deferred compensation expense 0.34 0.24 0.32 1.23 0.92
Amortization of purchased intangibles 0.13 0.07 0.09 0.35 0.29
Investment (gains) losses, net 0.01 (0.01 ) (0.02 )
Income tax adjustments (0.02 ) (0.05 ) (0.02 ) (0.01 ) (0.26 )
Non-GAAP diluted net income per share $ 1.83   $ 1.26   $ 1.73   $ 6.76   $ 4.31  
 
Shares used in computing diluted net income per share 495,118 500,060 496,866 497,843 501,123
 

Reconciliation of GAAP to Non-GAAP Financial Targets

(In millions, except per share data)

The following table shows Adobe's fourth quarter fiscal year 2018 earnings per share target reconciled to the non-GAAP financial target, which Adobe provided on Sept. 13, 2018 and reaffirmed on Oct. 15, 2018, included in this document.

  Fourth Quarter

Fiscal Year 2018

Diluted net income per share:
 
GAAP diluted net income per share $ 1.42
Stock-based and deferred compensation expense 0.36
Amortization of purchased intangibles 0.10
Income tax adjustments (0.01 )
Non-GAAP diluted net income per share $ 1.87  
 
Shares used to compute diluted net income per share 495.0  
 

The following table shows Adobe's fourth quarter fiscal year 2018 earnings per share with and without Marketo reconciled to the non-GAAP earnings per share included in this document.

  Q4 FY2018

As reported, incl. Marketo

  Q4 FY2018

excl. Marketo

GAAP EPS $ 1.37 1.48
Non-GAAP EPS 1.83 1.90
 

Adobe is providing estimated results excluding the impact of its acquisition of Marketo. These Marketo acquisition costs include the results of Marketo’s operations, financing costs related to the acquisition, integration costs and direct acquisition costs. We believe this enables the evaluation of the Company's performance against its original targets which excluded Marketo. GAAP EPS excl. Marketo, excludes the Marketo acquisition costs in the fourth quarter of 2018 of $54 million, or $0.11 diluted earnings per share. Non-GAAP EPS excl. Marketo excludes the Marketo acquisition costs in the fourth quarter of 2018 on a non-GAAP basis of $36 million, or $0.07 diluted earnings per share, driven by the GAAP net loss of $54 million offset by the add back of amortization of purchased intangibles of $18 million, or $0.04 diluted earnings per share.

The following table shows Adobe's fourth quarter fiscal year 2018 earnings per share excluding Marketo reconciled to the non-GAAP financial measure included in this document.

  Fourth Quarter

Fiscal Year 2018

excl. Marketo

Diluted net income per share:
 
GAAP diluted net income per share $ 1.48
Stock-based and deferred compensation expense 0.34
Amortization of purchased intangibles 0.09
Investment (Gain)/Loss 0.01
Income tax adjustments (0.02 )
Non-GAAP diluted net income per share $ 1.90  
 
Shares used to compute diluted net income per share 495.0  
 

The following table shows Adobe's annual fiscal year 2018 earnings per share target reconciled to the non-GAAP financial target, which Adobe provided on Dec. 14, 2017, included in this document.

  Fiscal Year 2018
Diluted net income per share:
 
GAAP diluted net income per share $ 4.40
Stock-based and deferred compensation expense 1.21
Amortization of purchased intangibles 0.27
Income tax adjustments (0.38 )
Non-GAAP diluted net income per share $ 5.50  
 
Shares used to compute diluted net income per share 500.0  
 

The following tables show Adobe's annual fiscal year 2019 GAAP earnings per share target and GAAP tax rate reconciled to the non-GAAP financial targets included in this document.

  Fiscal Year 2019
Diluted net income per share:
 
GAAP diluted net income per share $ 5.54
Stock-based and deferred compensation expense 1.77
Amortization of purchased intangibles 0.78
Income tax adjustments (0.34 )
Non-GAAP diluted net income per share $ 7.75  
 
Shares used to compute diluted net income per share 493.0  
 
  Fiscal Year 2019
Effective income tax rate:
 
GAAP effective income tax rate 10.0 %
Stock-based and deferred compensation expense (4.9 )
Amortization of purchased intangibles (2.1 )
Income tax adjustments 8.0  
Non-GAAP effective income tax rate 11.0 %
 

The following tables show Adobe's first quarter fiscal year 2019 financial targets reconciled to non-GAAP financial targets included in this document.

  First Quarter

Fiscal 2019

Diluted net income per share:
 
GAAP diluted net income per share $ 1.14
Stock-based and deferred compensation expense 0.42
Amortization of purchased intangibles 0.20
Income tax adjustments (0.16 )
Non-GAAP diluted net income per share $ 1.60  
 
Shares used to compute diluted net income per share 495.0  
 
  First Quarter
Fiscal 2019
Effective income tax rate:
 
GAAP effective income tax rate 3.0 %
Stock-based and deferred compensation expense (3.4 )
Amortization of purchased intangibles (1.6 )
Income tax adjustments 13.0  
Non-GAAP effective income tax rate 11.0 %
 

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 purchased intangibles and certain activity in connection with technology license arrangements, 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.

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The widespread success of cloud computing is driving the DevOps revolution in enterprise IT. Now as never before, development teams must communicate and collaborate in a dynamic, 24/7/365 environment. There is no time to wait for long development cycles that produce software that is obsolete at launch. DevOps may be disruptive, but it is essential. DevOpsSUMMIT at CloudEXPO expands the DevOps community, enable a wide sharing of knowledge, and educate delegates and technology providers alike.
Public clouds dominate IT conversations but the next phase of cloud evolutions are "multi" hybrid cloud environments. The winners in the cloud services industry will be those organizations that understand how to leverage these technologies as complete service solutions for specific customer verticals. In turn, both business and IT actors throughout the enterprise will need to increase their engagement with multi-cloud deployments today while planning a technology strategy that will constitute a ...