Adobe Reports Third Quarter Fiscal 2012 Financial Results

Adobe Reports Third Quarter Fiscal 2012 Financial Results

Creative Cloud Subscriptions Accelerate and Digital Marketing Suite Revenue Grows 40 Percent Year-Over-Year

SAN JOSE, Calif.--(BUSINESS WIRE)-- Adobe Systems Incorporated (NAS: ADBE) today reported financial results for its third quarter of fiscal year 2012 ended Aug. 31, 2012.

Adobe achieved revenue in Q3 FY2012 of $1.081 billion, within its targeted range of $1.075 billion to $1.125 billion. During the quarter, the Company drove faster adoption of Creative Cloud subscriptions than originally projected. As Adobe customers migrate from a legacy Creative Suite perpetual licensing model to new Creative Cloud subscriptions, revenue is recognized over time as opposed to at the time of purchase. This overachievement in subscriptions during the third quarter effectively transitioned approximately $29 million more perpetual revenue than expected to Creative Cloud.

In addition, the effect of currency impacted Q3 revenue negatively by approximately $9 million. Adjusting for these amounts in Adobe's reported results would have enabled the Company to achieve third quarter revenue towards the high-end of its targeted range.

Other Third Quarter Financial Highlights

  • Diluted earnings per share were $0.40 on a GAAP-basis, and $0.58 on a non-GAAP basis.
  • Operating income was $278.3 million and net income was $201.4 million on a GAAP-basis. Operating income was $391.8 million and net income was $291.2 million on a non-GAAP basis.
  • Cash flow from operations was $263.3 million.
  • Adobe Creative Cloud paid subscriptions grew to approximately 200,000 in the third quarter. Adobe added approximately 8,000 Creative Cloud subscriptions per week during the quarter, exceeding the addition of 5,000 subscriptions per week that was assumed in its third quarter financial targets.
  • Digital Marketing Suite achieved record quarterly revenue with 40 percent year-over-year growth.

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

Executive Quotes

"Customers globally are adopting our new Creative Cloud subscription offering more quickly than we projected," said Shantanu Narayen, president and CEO of Adobe. "We are the leader in the fast-growing Digital Marketing category with 40 percent year-over-year Digital Marketing Suite revenue growth this quarter."

"We're on a path to drive millions of subscribers to our Creative Cloud offering, as well as build a billion dollar SaaS business in Digital Marketing," said Mark Garrett, executive vice president and CFO of Adobe. "This will drive higher long-term growth and create a large recurring revenue stream."

Financial Outlook

Adobe provided financial targets for the fourth quarter of fiscal 2012. These targets reflect the effect of higher migration of customers to Creative Cloud than forecast earlier in the year.

For the fourth quarter of fiscal 2012, Adobe is targeting revenue of $1.075 billion to $1.125 billion. On a diluted earnings per share basis, the company is targeting a range of $0.34 to $0.39 on a GAAP basis, and $0.53 to $0.58 on a non-GAAP basis. These targeted ranges factor in the addition of 125,000 new Creative Cloud subscriptions in the quarter, which represents approximately $94 million in Q4 perpetual revenue which would effectively move to subscription and ratable monthly recognition.

Adobe is targeting its Q4 share count to be between 500 million and 502 million shares, and it is targeting non-operating expense between $18 million and $20 million. Adobe's tax rate is expected to be approximately 23.5 percent on a GAAP basis and 22.5 percent on a non-GAAP basis.

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

Adobe to Webcast Earnings Conference Call

Adobe will webcast its third quarter fiscal year 2012 earnings conference call today at 2:00 p.m. Pacific Time from its investor relations website: A copy of Adobe management's prepared remarks has been posted to the website in advance of the call for reference.

Forward-Looking Statements Disclosure

This press release contains forward-looking statements, including those related to revenue, additional Creative Cloud subscriptions and the resulting impact on revenue, growth in our Digital Marketing business, non-operating expense, tax rate, share count, earnings per share, increases in recurring revenue and our ability to execute against our strategy in our key growth areas, 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 Dec. 2, 2011 and its Quarterly Reports on Form 10-Q for the fiscal quarters ended March 2, 2012 and June 1, 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 Aug. 31, 2012, which Adobe expects to file in Oct. 2012.

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

© 2012 Adobe Systems Incorporated. All rights reserved. Adobe, Creative Cloud, Creative Suite and the Adobe logo 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 Nine Months Ended

August 31,

 September 2,
August 31,
 September 2,
Services and support97,203 86,737 281,580 249,312 
Total revenue1,080,580 1,013,212 3,250,249 3,064,097 
Cost of revenue:
Services and support36,196 30,953 106,034 87,203 
Total cost of revenue119,621 104,654 358,804 321,494 
Gross profit960,959908,5582,891,4452,742,603
Operating expenses:
Research and development189,145181,039547,776542,650
Sales and marketing368,556340,7241,113,9781,017,492
General and administrative110,24998,493323,533295,019
Restructuring charges2,3743,816(2,642)3,271
Amortization of purchased intangibles12,331 10,376 36,374 31,003 
Total operating expenses682,655 634,448 2,019,019 1,889,435 
Operating income278,304274,110872,426853,168
Non-operating income (expense):
Interest and other income (expense), net1,21733(2,696)(1,623)
Interest expense(17,253)(16,431)(50,720)(50,178)
Investment gains (losses), net944 (993)9,153 683 
Total non-operating income (expense), net(15,092)(17,391)(44,263)(51,118)
Income before income taxes263,212256,719828,163802,050
Provision for income taxes61,855 61,618 217,721 142,922 
Net income$201,357 $195,101 $610,442 $659,128 
Basic net income per share$0.41 $0.39 $1.23 $1.32 
Shares used to compute basic net income per share494,051 494,537 494,672 499,451 
Diluted net income per share$0.40 $0.39 $1.22 $1.30 
Shares used to compute diluted net income per share499,757 498,741 502,167 506,334 

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

 August 31,
 December 2,
Current assets:
Cash and cash equivalents$1,162,380$989,500
Short-term investments2,084,9831,922,192
Trade receivables, net of allowances for doubtful accounts of $14,516 and $15,080, respectively566,671634,373
Deferred income taxes57,02491,963
Prepaid expenses and other current assets139,115 133,423 
Total current assets4,010,1733,771,451
Property and equipment, net619,392527,828
Purchased and other intangibles, net576,948545,526
Investment in lease receivable207,239207,239
Other assets89,713 89,922 
Total assets$9,630,013 $8,991,183 
Current liabilities:
Trade payables$58,446$86,660
Accrued expenses547,812554,941
Capital lease obligations11,0939,212
Accrued restructuring14,80380,930
Income taxes payable31,91042,634
Deferred revenue505,646 476,402 
Total current liabilities1,169,7101,250,779
Long-term liabilities:
Debt and capital lease obligations1,499,8811,505,096
Deferred revenue54,68755,303
Accrued restructuring12,7067,449
Income taxes payable151,946156,958
Deferred income taxes253,626181,602
Other liabilities48,764 50,883 
Total liabilities3,191,3203,208,070
Stockholders' equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized
Common stock, $0.0001 par value6161
Additional paid-in-capital2,961,7992,753,896
Retained earnings6,815,3756,528,735
Accumulated other comprehensive income22,51129,950
Treasury stock, at cost (106,102 and 109,294 shares, respectively), net of re-issuances(3,361,053)(3,529,529)
Total stockholders' equity6,438,693 5,783,113 
Total liabilities and stockholders' equity$9,630,013 $8,991,183 

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

 Three Months Ended
August 31,
 September 2,
Cash flows from operating activities:
Net income$201,357$195,101
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion74,11064,009
Stock-based compensation expense74,01368,800
Unrealized investment (gains) losses(851)2,029
Changes in deferred revenue(32,445)1,360
Changes in other operating assets and liabilities(52,844)(6,171)
Net cash provided by operating activities263,340 325,128 
Cash flows from investing activities:
Purchases of short-term investments, net of sales and maturities(37,426)(161,163)
Purchases of property and equipment(77,432)(65,475)
Purchases of long-term investments, intangibles and other assets, net(4,362)(2,935)
Acquisitions, net of cash (70,549)
Net cash used for investing activities(119,220)(300,122)
Cash flows from financing activities:
Purchases of treasury stock(150,000)
Re-issuance of treasury stock60,94856,180
Proceeds from debt and capital lease obligations3,152
Repayment of debt and capital lease obligations(2,316)(4,179)
Excess tax benefits from stock-based compensation1,172 318 
Net cash provided by (used for) financing activities62,956 (97,681)
Effect of exchange rate changes on cash and cash equivalents4,066 14,412 
Net increase (decrease) in cash and cash equivalents211,142(58,263)
Cash and cash equivalents at beginning of period
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