filings.toolsAdobe 10-Q 2022-09-02
Filed 2022-09-28. 8 sections, 279K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 2, 2022
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-15175
ADOBE INC.
(Exact name of registrant as specified in its charter)
| Delaware | 77-0019522 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
345 Park Avenue, San Jose, California 95110-2704
(Address of principal executive offices and zip code)
(408) 536-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
| Common Stock, $0.0001 par value per share | ADBE | NASDAQ |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer (Do not check if a smaller reporting company) | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of September 23, 2022, 464.9 million shares of the registrant’s common stock, $0.0001 par value per share, were issued and outstanding.
ADOBE INC.
FORM 10-Q
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ADOBE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except par value)
| September 2, 2022 | December 3, 2021 | ||||||||||
| (Unaudited) | (*) | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 3,870 | $ | 3,844 | |||||||
| Short-term investments | 1,894 | 1,954 | |||||||||
| Trade receivables, net of allowances for doubtful accounts of $24 and $16, respectively | 1,723 | 1,878 | |||||||||
| Prepaid expenses and other current assets | 1,002 | 993 | |||||||||
| Total current assets | 8,489 | 8,669 | |||||||||
| Property and equipment, net | 1,858 | 1,673 | |||||||||
| Operating lease right-of-use assets, net | 414 | 443 | |||||||||
| Goodwill | 12,756 | 12,668 | |||||||||
| Other intangibles, net | 1,548 | 1,820 | |||||||||
| Deferred income taxes | 799 | 1,085 | |||||||||
| Other assets | 880 | 883 | |||||||||
| Total assets | $ | 26,744 | $ | 27,241 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Trade payables | $ | 316 | $ | 312 | |||||||
| Accrued expenses | 1,629 | 1,736 | |||||||||
| Debt | 500 | — | |||||||||
| Deferred revenue | 4,829 | 4,733 | |||||||||
| Income taxes payable | 76 | 54 | |||||||||
| Operating lease liabilities | 88 | 97 | |||||||||
| Total current liabilities | 7,438 | 6,932 | |||||||||
| Long-term liabilities: | |||||||||||
| Debt | 3,627 | 4,123 | |||||||||
| Deferred revenue | 114 | 145 | |||||||||
| Income taxes payable | 510 | 534 | |||||||||
| Deferred income taxes | 3 | 5 | |||||||||
| Operating lease liabilities | 426 | 453 | |||||||||
| Other liabilities | 253 | 252 | |||||||||
| Total liabilities | 12,371 | 12,444 | |||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock, $0.0001 par value; 2 shares authorized; none issued | — | — | |||||||||
| Common stock, $0.0001 par value; 900 shares authorized; 601 shares issued; 467 and 475 shares outstanding, respectively | — | — | |||||||||
| Additional paid-in-capital | 9,548 | 8,428 | |||||||||
| Retained earnings | 27,158 | 23,905 | |||||||||
| Accumulated other comprehensive income (loss) | (224) | (137) | |||||||||
| Treasury stock, at cost (134 and 126 shares, respectively) | (22,109) | (17,399) | |||||||||
| Total stockholders’ equity | 14,373 | 14,797 | |||||||||
| Total liabilities and stockholders’ equity | $ | 26,744 | $ | 27,241 |
(*) The condensed consolidated balance sheet as of December 3, 2021 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 2, 2022 | September 3, 2021 | September 2, 2022 | September 3, 2021 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Subscription | $ | 4,128 | $ | 3,657 | $ | 12,156 | $ | 10,761 | |||||||||||||||
| Product | 126 | 119 | 417 | 427 | |||||||||||||||||||
| Services and other | 179 | 159 | 508 | 487 | |||||||||||||||||||
| Total revenue | 4,433 | 3,935 | 13,081 | 11,675 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Subscription | 413 | 344 | 1,216 | 996 | |||||||||||||||||||
| Product | 8 | 10 | 27 | 29 | |||||||||||||||||||
| Services and other | 125 | 113 | 354 | 333 | |||||||||||||||||||
| Total cost of revenue | 546 | 467 | 1,597 | 1,358 | |||||||||||||||||||
| Gross profit | 3,887 | 3,468 | 11,484 | 10,317 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 775 | 651 | 2,214 | 1,883 | |||||||||||||||||||
| Sales and marketing | 1,266 | 1,068 | 3,671 | 3,190 | |||||||||||||||||||
| General and administrative | 319 | 265 | 879 | 811 | |||||||||||||||||||
| Amortization of intangibles | 43 | 43 | 127 | 132 | |||||||||||||||||||
| Total operating expenses | 2,403 | 2,027 | 6,891 | 6,016 | |||||||||||||||||||
| Operating income | 1,484 | 1,441 | 4,593 | 4,301 | |||||||||||||||||||
| Non-operating income (expense): | |||||||||||||||||||||||
| Interest expense | (28) | (27) | (84) | (85) | |||||||||||||||||||
| Investment gains (losses), net | (6) | 7 | (23) | 20 | |||||||||||||||||||
| Other income (expense), net | 6 | (3) | 5 | 1 | |||||||||||||||||||
| Total non-operating income (expense), net | (28) | (23) | (102) | (64) | |||||||||||||||||||
| Income before income taxes | 1,456 | 1,418 | 4,491 | 4,237 | |||||||||||||||||||
| Provision for income taxes | 320 | 206 | 911 | 648 | |||||||||||||||||||
| Net income | $ | 1,136 | $ | 1,212 | $ | 3,580 | $ | 3,589 | |||||||||||||||
| Basic net income per share | $ | 2.42 | $ | 2.54 | $ | 7.60 | $ | 7.51 | |||||||||||||||
| Shares used to compute basic net income per share | 469 | 477 | 471 | 478 | |||||||||||||||||||
| Diluted net income per share | $ | 2.42 | $ | 2.52 | $ | 7.57 | $ | 7.45 | |||||||||||||||
| Shares used to compute diluted net income per share | 469 | 481 | 473 | 481 | |||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
ADOBE INC.
**CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto.
In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements, including statements regarding product plans, future growth, market opportunities, fluctuations in foreign currency exchange rates, strategic investments, industry positioning, customer acquisition and retention, the amount of annualized recurring revenue, revenue growth and anticipated impacts on our business of the ongoing COVID-19 pandemic and related public health measures. In addition, when used in this report, the words “will,” “expects,” “could,” “would,” “may,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “targets,” “estimates,” “looks for,” “looks to,” “continues” and similar expressions, as well as statements regarding our focus for the future, are generally intended to identify forward-looking statements. Each of the forward-looking statements we make in this report involves risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” in Part II, Item 1A of this report. The risks described herein and in other documents we file from time to time with the U.S. Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for fiscal 2021, should be carefully reviewed. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document, except as required by law.
BUSINESS OVERVIEW
Founded in 1982, Adobe is one of the largest and most diversified software companies in the world. We offer a line of products and services used by creative professionals, including photographers, video editors, graphic and experience designers and game developers; communicators, including content creators, students, marketers and knowledge workers; businesses of all sizes; and consumers for creating, managing, delivering, measuring, optimizing, engaging and transacting with compelling content and experiences across personal computers, smartphones, other electronic devices and digital media formats.
We market our products and services directly to enterprise customers through our sales force and local field offices. We license our products to end users through app stores and our own website at www.adobe.com. We offer many of our products via a Software-as-a-Service (“SaaS”) model or a managed services model (both of which are referred to as hosted or cloud-based) as well as through term subscription and pay-per-use models. We also distribute certain products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, software developers and original equipment manufacturers (“OEMs”). In addition, we license our technology to hardware manufacturers, software developers and service providers for use in their products and solutions. Our products run on desktop and laptop computers, smartphones, tablets, other devices and the web, depending on the product. We have operations in the Americas; Europe, Middle East and Africa (“EMEA”); and Asia-Pacific (“APAC”).
Adobe was originally incorporated in California in October 1983 and was reincorporated in Delaware in May 1997. Our executive offices and principal facilities are located at 345 Park Avenue, San Jose, California 95110-2704. Our telephone number is 408-536-6000 and our website is www.adobe.com. Investors can obtain copies of our SEC filings from our website free of charge, as well as from the SEC website at www.sec.gov. The information posted to our website is not incorporated into this Quarterly Report on Form 10-Q.
OPERATIONS OVERVIEW
For our third quarter of fiscal 2022, we experienced strong demand across our Digital Media and Digital Experience offerings, driven by the ongoing shift towards a digital-first world. As we execute on our long-term growth initiatives, we have continued to experience growth in software-based subscription revenue across our portfolio of offerings.
Digital Media
In our Digital Media segment, we are a market leader with Creative Cloud, our subscription-based offering which provides desktop tools, mobile apps and cloud-based services for designing, creating and publishing rich content and immersive 3D experiences. Starting in December 2021, Creative Cloud includes Adobe Express, a web and mobile application designed to enable a broad spectrum of users, including novice content creators, communicators and creative professionals, to create, edit and customize content quickly and easily with content-first, task-based solutions. Creative Cloud delivers value with deep, cross-product integration, frequent product updates and feature enhancements, cloud-enabled services including storage and syncing of files across users’ machines, machine learning and artificial intelligence, access to marketplace, social and
community-based features with our Adobe Stock and Behance services, app creation capabilities, tools which assist with enterprise deployments and team collaboration, and affordable pricing for cost-sensitive customers.
We offer Creative Cloud for individuals, students, teams and enterprises. We expect Creative Cloud will drive sustained long-term revenue growth through a continued expansion of our customer base by attracting new users with new features and products like Adobe Express that make creative tools accessible to first-time creators and communicators, continuing to acquire users with low cost of entry and delivery of additional features and value to Creative Cloud, and delivering new features and technologies to existing customers with our latest releases. We have also built out a marketplace for Creative Cloud subscribers to enable the delivery and purchase of stock content in our Adobe Stock service. Overall, our strategy with Creative Cloud is designed to enable us to increase our revenue with users, attract more new customers, and grow our recurring and predictable revenue stream that is recognized ratably.
We continue to implement strategies that are designed to accelerate awareness, consideration and purchase of subscriptions to our Creative Cloud offerings. These strategies include increasing the value Creative Cloud users receive, such as offering new desktop and mobile applications, as well as targeted promotions and offers that attract past customers and potential users to experience and ultimately subscribe to Creative Cloud. Because of the shift towards Creative Cloud subscriptions and Enterprise Term License Agreements (“ETLAs”), revenue from perpetual licensing of our Creative products has been immaterial to our business.
We are also a market leader with our Document Cloud offerings built around our Adobe Acrobat family of products, with a set of integrated mobile apps and cloud-based document services which enable users to create, review, approve, sign and track documents regardless of platform or application source type. Document Cloud, which enhances the way people manage critical documents at home, in the office and across devices, includes Adobe Acrobat, Adobe Acrobat Sign and Adobe Scan. Adobe Acrobat is offered both through subscription and perpetual licenses.
As part of our Creative Cloud and Document Cloud strategies, we utilize a data-driven operating model (“DDOM”) and our Adobe Experience Cloud solutions to raise awareness of our products, drive new customer acquisition, engagement and retention, and optimize customer journeys, and it continues to contribu
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk exposures for the nine months ended September 2, 2022, as compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended December 3, 2021.
Item 4. CONTROLS AND PROCEDURES
Based on their evaluation as of September 2, 2022, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting during the quarter ended September 2, 2022 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Adobe have been detected.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Item 1A. RISK FACTORS
As previously discussed, our actual results could differ materially from our forward-looking statements. Below we discuss some of the factors that could cause these differences. These and many other factors described in this report could adversely affect our operations, performance and financial condition.
Risks Related to Our Ability to Grow Our Business
The effects of the COVID-19 pandemic have materially affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.
The COVID-19 pandemic and related public health measures have materially affected how we and our customers are operating our businesses and have in the past materially affected our operating results; the extent to which this will impact our future results remains uncertain. Due to our subscription-based business model, the effect of the pandemic may not be fully reflected in our results of operations until future periods. If the pandemic has a substantial impact on our employees’, partners’ or customers’ businesses and productivity, our results of operations and overall financial performance may be harmed. The global macroeconomic effects of the pandemic may persist for an indefinite period, including in specific regions of the world or sectors of the economy, even after the pandemic has subsided.
The spread of COVID-19 has caused us to modify our business practices, including implementing prolonged closures of certain Adobe offices and restricting employee travel. We have since re-opened our offices and encouraged employees to return to the office on a voluntary basis. The reopening of our U.S. offices has created and may continue to create additional risks and operational challenges and may require us to make additional investments in the design, implementation and enforcement of new workplace health and safety protocols. Even if we follow what we believe to be best practices, our efforts to reopen our offices safely may not be successful and could expose our employees, partners and customers to health risks, and us to associated liability. Furthermore, additional governmental restrictions, new regulations or other changing conditions could cause us to temporarily re-close certain offices. We have offered, and plan to continue to offer, a significant percentage of our employees flexibility in the amount of time they work in an office, which may adversely impact the productivity of certain employees and harm our business, including our future operating results. This may also present risks for our real estate portfolio and strategy and may present operational, cybersecurity and workplace culture challenges that may adversely affect our business.
We have continued to host hybrid and virtual-only customer experiences, and we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. Our virtual or hybrid customer, employee and industry events may not be as successful as in-person events. Moreover, the conditions caused by the pandemic has affected the rate of IT spending and may in the future adversely affect our customers’ ability or willingness to purchase our offerings. We have seen and may continue to see these conditions delay prospective customers’ purchasing decisions, adversely impact our ability to provide on-site consulting services to our customers, result in extended payment terms, reduce the value or duration of their subscription contracts, or affect attrition rates, all of which could adversely affect our future sales, operating results and overall financial performance.
Our operations have also been negatively affected by a range of external factors related to the pandemic that are not within our control, and COVID-19 cases (including the emergence and spread of more transmissible variants) continue to surge in certain parts of the world, including the United States. Vaccines for COVID-19 continue to be administered in the United States and other countries around the world, but the extent and rate of vaccine adoption, the long-term efficacy of these vaccines and other factors remain uncertain. Authorities throughout the world have from time to time implemented measures to contain or mitigate the spread of the virus, including physical distancing, travel bans and restrictions, closure of non-essential businesses, quarantines, work-from-home directives, mask requirements, shelter-in-place orders and vaccination programs. These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide, which have impacted our business and results of operations, may delay the provisioning of our offerings and may impact our employees. As long as the pandemic continues, our employees will continue to be exposed to health risks, and we could be negatively impacted in the future if a significant number of our employees, or employees who perform critical functions, become ill, quarantine as a result of exposure to COVID-19 or do not comply with vaccination programs. As we
continue to monitor the situation and public health guidance throughout the world, we may adjust our current policies and practices, and existing and new precautionary measures could negatively affect our operations.
The extent of the impact from the pandemic depends on future developments that cannot be accurately predicted at this time, such as the duration and spread of the pandemic, future waves of COVID-19 infections (including the spread of variants or mutant strains) resulting in additional preventive measures to contain or mitigate the spread of the virus, the extent and effectiveness of containment actions, the administration, adoption and efficacy of vaccination programs and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.
Finally, to the extent that the pandemic harms our business and results of operations, many of the other risks described in this “Risk Factors” section may be heightened.
Our competitive position and results of operations could be harmed if we do not compete effectively.
The markets for our products and services are characterized by intense competition, new industry standards, evolving distribution models, limited barriers to entry, disruptive technology developments, short product life cycles, customer price sensitivity, global market conditions and frequent product introductions (including alternatives with limited functionality available at lower costs or free of charge). Any of these factors could create downward pressure on pricing and gross margins and could adversely affect our renewal and upsell and cross-sell rates, as well as our ability to attract new customers. Our future success will depend on our continued ability to enhance and integrate our existing products and services, introduce new products and services in a timely and cost-effective manner, meet changing customer expectations and needs, extend our core technology into new applications, and anticipate emerging standards, business models, software delivery methods and other technological developments. Furthermore, some of our competitors and potential competitors enjoy competitive advantages such as greater financial, technical, sales, marketing and other resources, broader brand awareness and access to larger customer bases. As a result of these advantages, potential and current customers might select the products and services of our competitors, causing a loss of our market share. In addition, consolidation has occurred among some of our competitors. Further consolidations in these markets may subject us to increased competitive pressures and may harm our results of opera
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Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
INDEX TO EXHIBITS
| † | The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Adobe Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ADOBE INC. | ||||||||
| By: | /s/ DANIEL DURN | |||||||
| Daniel Durn | ||||||||
| Executive Vice President and | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) |
Date: September 28, 2022
SUMMARY OF TRADEMARKS
The following trademarks of Adobe Inc. or its subsidiaries, which may be registered in the United States and/or other countries, are referenced in this Form 10-Q:
Acrobat
Acrobat Scan
Acrobat Sign
Adobe
Adobe Campaign
Adobe Commerce
Adobe Experience Cloud
Adobe Express
Adobe Stock
Adobe Target
Behance
Creative Cloud
Document Cloud
Frame.io
Journey Optimizer
Marketo
Workfront
All other trademarks are the property of their respective owners.