Summary
Adobe's first quarter of fiscal 2013 showed the strain of its subscription transition. Revenue was $1.01 billion, down 3.6% year over year. Gross profit was $851.19 million, down 9.2%. Operating income was $98.22 million, down 66.0%. Net income was $65.12 million, down 64.8%. Diluted EPS was $0.13, down 64.9%. Gross margin was 84.5%, down 5.2 percentage points. Operating margin was 9.7%, down 17.9 percentage points. The profit decline came even as the top line held near the prior-year level. Management said the results were consistent with its plans for Digital Media and Digital Marketing, the two strategic growth areas.
Creative Cloud adoption accelerated. Subscription revenue as a percentage of total revenue increased to 22% from 14% in the year-ago period. Total Digital Media ARR was $297.0 million as of March 1, 2013, up $94.0 million, or 46%, from November 30, 2012. Current deferred revenue was $645.83 million, up 31.1% year over year. Operating cash flow was $322.03 million, up 2.4%. Capital expenditures were $60.19 million, up 17.8%. The company said net cash flow from operations remained relatively stable compared with the prior-year quarter. The increase in deferred revenue was driven by annual billing for Digital Marketing hosted services and growth in Creative Cloud subscriptions.
Segment performance was mixed. Digital Media revenue decreased, Digital Marketing revenue increased slightly, and Print and Publishing revenue decreased. Within Digital Media, creative professional products declined as customers adopted Creative Cloud subscriptions, while other creative products grew on Flash Player distribution, Digital Publishing Suite, and Lightroom 4 demand. Document Services revenue increased on Document Exchange Services and EchoSign, partly offset by a shift to enterprise term license agreements. Within Digital Marketing, Adobe Marketing Cloud revenue grew 20% year over year, but that gain was offset by a decline in Adobe LiveCycle products. The company moved its video server solutions products from Digital Media to Digital Marketing in the first quarter.
Costs rose faster than revenue. Cost of revenue and operating expenses increased year over year, driven by compensation and related benefits from additional headcount and a one-time charge related to technology licensing arrangements. Research and development, sales and marketing, and general and administrative expenses all increased. The company said expenses did not decline in correlation with the revenue shift, and it does not expect them to decline in fiscal 2013. That dynamic explains the sharp drop in operating income and net income despite stable operating cash flow. The tax line also helped. The effective tax rate decreased, primarily due to the reinstatement of the federal research and development tax credit and lower year-over-year tax costs associated with licensing intellectual property to Adobe's trading companies. A tax benefit for the credit relating to fiscal 2012 was reflected in the first quarter.
Guidance points to more pressure ahead. Management expects total net revenue in fiscal 2013 to decline as Creative Cloud adoption grows and perpetual license revenue falls. Expenses are not expected to decline in correlation with that revenue decline, which will adversely affect net income and operating margin throughout fiscal 2013. The company plans to keep offering perpetual licenses as it transitions customers to subscriptions. Over time, management expects the subscription model to increase long-term revenue growth by attracting new users, keeping the installed base current, and driving higher average revenue per user. It also expects more recurring revenue that is recognized ratably.
Risks include economic weakness in Europe, currency headwinds from the Euro, British Pound, and Japanese Yen, and execution risk around the subscription transition. The company noted that meaningful Creative Cloud renewal rate data will not be available until later in fiscal 2013. Cash and capital returns remained part of the story. Adobe repurchased about 2.7 million shares at an average price of $37.32 during the quarter. It also entered a sale-leaseback agreement for equipment totaling $25.7 million. The company had $1.5 billion outstanding under its senior notes and no borrowings under its $1.0 billion credit line. Management believes existing cash, investments, and cash from operations will meet working capital and operating needs for the next twelve months.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q1 FY2013 | Q4 FY2012 | QoQ | Q1 FY2012 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.01B | $1.15B | -12.6% | $1.05B | -3.6% |
| Gross profit | $851.2M | $1.03B | -17.2% | $937.0M | -9.2% |
| Gross margin | 84.5% | 89.2% | -4.7 pp | 89.6% | -5.2 pp |
| Sales & marketing | $398.0M | $402.2M | -1.0% | $359.0M | +10.9% |
| General & administrative | $132.9M | $111.4M | +19.2% | $102.7M | +29.4% |
| Total operating expenses | $753.0M | $720.7M | +4.5% | $648.0M | +16.2% |
| Operating income (loss) | $98.2M | $307.8M | -68.1% | $289.0M | -66.0% |
| Operating margin | 9.8% | 26.7% | -16.9 pp | 27.6% | -17.9 pp |
| Net income (loss) | $65.1M | $222.3M | -70.7% | $185.2M | -64.8% |
| Net margin | 6.5% | 19.3% | -12.8 pp | 17.7% | -11.3 pp |
| Diluted EPS | $0.13 | $0.44 | -$0.31 | $0.37 | -$0.24 |
Risks
Adobe's shift to Creative Cloud subscription model is causing traditional perpetual license revenue and total net revenue to decline; Q1 FY2013 revenue fell 3.6% to $1.01B and operating income fell 66.0% to $98.22M versus the prior-year quarter, while subscription revenue rose to 22% of total from 14%. Management expects expenses not to decline in correlation, adversely affecting net income and operating margin throughout fiscal 2013.
Adobe cannot predict Creative Cloud subscription renewal or upgrade rates; most Creative Cloud subscriptions are annual and launched in May 2012, so meaningful renewal data will first become available later in fiscal 2013. Customers have no obligation to renew and some may cancel, which could cause revenues to decline.
Markets are intensely competitive with lower-cost or free limited-functionality alternatives, evolving digital application marketplaces with exclusive distribution, and consolidation among competitors, which may pressure pricing and gross margins and affect renewal and upgrade rates. Gross margin fell 5.2 pp to 84.5% in Q1 FY2013.
Security researchers and hackers have in the past penetrated certain Adobe systems and obtained limited access to certain source code; future breaches could lead to liability, lost customers, and loss of trade secret protection. The company devotes significant resources to security, which could reduce operating margins.
The subscription model defers revenue and cash, so a decline in new or renewed subscriptions may not be immediately reflected in reported results but may reduce future quarters. Total deferred revenue was $700.0M as of March 1, 2013, up $80.5M or 13% in Q1 FY2013, and current deferred revenue rose 31.1% versus the prior-year quarter.
Uncertain economic and political conditions, U.S. federal spending cuts, and European economic weakness could delay or reduce technology purchases; EMEA revenue declined 10% in Q1 FY2013 and foreign currency reduced total revenue by $5.6M. Deterioration could also impair collections on accounts receivable.
Ingram Micro represented 8% of net revenue for Q1 FY2013; if any distribution agreement were terminated, a prolonged delay in securing a replacement distributor could negatively impact short-term results. Channel partners also sell competitors' products and may not effectively sell Creative Cloud subscriptions.
Increasing global privacy and data protection regulation affects Adobe's new cloud and data-driven business models; compliance costs and liability exposure may increase, and perceived privacy invasions could lead to class actions, reputational harm, or regulatory claims.
Adobe may not realize benefits from acquisitions such as Behance in Q1 FY2013 and Efficient Frontier in Q1 FY2012; integration risks include retaining personnel and customers, disruption, and additional costs. Amortization of purchased intangibles increased 10% in Q1 FY2013.
Adobe is subject to IRS examination of fiscal 2008 and 2009 tax returns focusing on intercompany transfer pricing; unfavorable outcomes could adversely affect operating results. The effective tax rate decreased to 22.0% in Q1 FY2013 from 31.5%, partly due to the retroactive federal R&D credit.
Enterprise term license agreements and direct sales to enterprises and governments involve longer sales and implementation cycles, potential deferral of revenue, and hiring and training challenges for the direct sales force. If expansion efforts do not generate corresponding revenue increases, results could be harmed.
Adobe relies on third-party data centers and hosted services for Creative Cloud and Adobe Marketing Cloud; interruptions, security or privacy breaches, or data collection failures could expose it to liability and harm reputation. Customer data is hosted in third-party facilities, increasing vulnerability.
SaaS KPIs
All quarters →Total Digital Media ARR
Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q1 FY2013 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 8, 2026.