Summary
Adobe Systems reported first-quarter fiscal 2015 results for the period ended February 27, 2015. Revenue was $1.11 billion, up 10.9% from the prior-year quarter. Gross profit was $942.38 million, up 10.7%. Operating income was $173.02 million, up 119.7%. Net income was $84.89 million, up 80.4%. Diluted EPS was $0.17, up $0.08, or 88.9%. Gross margin slipped 0.2 percentage points to 85.0%. Operating margin expanded 7.7 percentage points to 15.6%. The quarter showed a business shifting toward subscriptions, with revenue growth and a much larger increase in operating income.
The company exited the quarter with 3.971 million paid Creative Cloud subscriptions, up 15% from 3.454 million at the end of fiscal 2014. Net new subscriptions added in Q1 fiscal 2015 grew 28% year-over-year. Creative ARR was $1.79 billion, up from $1.61 billion at the end of fiscal 2014. Document Services ARR was $297 million, up from $265 million. Total Digital Media ARR was $2.09 billion, up from $1.88 billion. Digital Media ARR increased by $214 million, or 11%, from $1.88 billion as of November 28, 2014. In March 2015, Adobe announced Adobe Document Cloud, including Acrobat DC, scheduled to be available in the second quarter of fiscal 2015. The company also acquired Fotolia in the first quarter of fiscal 2015. Management said perpetual revenue for older Creative products continued to decline and was immaterial for the quarter. The company said it continues to expect the subscription model to drive higher long-term revenue growth through a larger customer base and more recurring revenue.
Operating cash flow was $183.02 million, down 27.3% from the prior-year quarter. The MD&A attributes the decline to greater decreases in accrued expenses and lower increases in deferred revenue compared with the year-ago period, partially offset by higher net income. Capital expenditures were $35.55 million, up 20.9%. Deferred revenue, current portion, was $1.13 billion, up 35.9% from the prior-year quarter. The deferred revenue increase reflects more subscriptions for individual and team Creative Cloud offerings and growth in Digital Marketing and Digital Publishing hosted services. Adobe issued $1 billion of 3.25% senior notes due February 1, 2025, and used $600 million of the proceeds to repay the 2015 Notes. It also entered into a new $2.0 billion stock repurchase program through the end of fiscal 2017. During the quarter, it repurchased approximately 2.4 million shares at an average price of $72.39. The company said trade receivables declined due to improved collections, while accrued expenses decreased primarily due to payment of fiscal 2014 bonuses, commissions, and other incentive plans.
Foreign currency was a headwind. The U.S. Dollar strengthened against the Euro, British Pound, Japanese Yen and other Asian currencies, causing revenue in EMEA and APAC measured in U.S. Dollar equivalents to decrease. The filing quantifies a total revenue impact from foreign currency of $(25.9) million, with hedging impact of $23.7 million, for a total impact of $(2.2) million. The effective tax rate increased due to one-time tax costs associated with licensing acquired company assets, partially offset by tax benefits from the reinstatement of the U.S. Research and Development credit. The filing points to risk factors in Part II, Item 1A. On accounting, ASU No. 2014-09, Revenue from Contracts with Customers, is expected to become effective in the first quarter of fiscal 2018, and Adobe is still evaluating the effect. Management's forward-looking commentary centers on product plans such as Document Cloud and the subscription model rather than financial targets. The company said it does not anticipate paying any cash dividends in the foreseeable future and was in compliance with all covenants as of February 27, 2015.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q1 FY2015 | Q4 FY2014 | QoQ | Q1 FY2014 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.11B | $1.07B | +3.3% | $1.00B | +10.9% |
| Gross profit | $942.4M | $912.4M | +3.3% | $851.6M | +10.7% |
| Gross margin | 85.0% | 85.0% | -0.1 pp | 85.2% | -0.2 pp |
| Sales & marketing | $392.7M | $408.9M | -3.9% | $410.1M | -4.2% |
| General & administrative | $145.1M | $133.5M | +8.6% | $139.0M | +4.4% |
| Total operating expenses | $769.4M | $787.9M | -2.4% | $772.9M | -0.5% |
| Operating income (loss) | $173.0M | $124.5M | +39.0% | $78.7M | +119.7% |
| Operating margin | 15.6% | 11.6% | +4.0 pp | 7.9% | +7.7 pp |
| Net income (loss) | $84.9M | $88.1M | -3.7% | $47.0M | +80.4% |
| Net margin | 7.7% | 8.2% | -0.6 pp | 4.7% | +3.0 pp |
| Diluted EPS | $0.17 | $0.17 | ±$0.00 | $0.09 | +$0.08 |
Risks
The business is shifting from perpetual licenses to Creative Cloud subscriptions and ETLAs. MD&A reports subscription revenue rose to 64% of total revenue in Q1 FY2015 from 42% in the year-ago period, and the filing warns that if customers prefer perpetual licenses or point product subscriptions, subscription sales may lag expectations and promotional pricing could reduce average revenue per user.
Subscription and ETLA offerings create timing risks because a portion of reported subscription revenue comes from recognizing deferred revenue from prior quarters. Current deferred revenue was $1.13 billion, up 35.9% from the prior-year quarter, and operating cash flow decreased 27.3% to $183.02 million in Q1 FY2015 from $251.67 million in Q1 FY2014.
Adobe cannot accurately predict subscription renewal rates. The filing notes Creative Cloud agreements are generally month-to-month or one year, ETLAs are generally three years, and customers have no obligation to renew; renewal rates may decline due to satisfaction, uptime, pricing, security, competition, M&A, spending cuts, or economic downturns.
The filing discloses past breaches of data-security systems and past unauthorized access to source code. It warns that critical vulnerabilities in popular applications could let attackers take control of systems, lead to liability, reduce operating margins, and cause customers to delay or stop purchases.
MD&A reports the effective tax rate increased to 48% in Q1 FY2015 from 28% in the year-ago period, and the provision for income taxes rose 340%, primarily due to one-time tax costs from licensing acquired company assets. Adobe also faces an IRS examination of fiscal 2010, 2011 and 2012 tax returns focused on intercompany transfer pricing.
Adobe acquired Fotolia in Q1 FY2015. The filing warns acquisitions involve integration, retention, due diligence, and accounting risks, and Adobe may not realize anticipated benefits.
The filing warns that Adobe has senior notes outstanding and a revolving credit facility, and debt service may reduce cash available for capital expenditures and acquisitions. Covenants may also limit flexibility in planning for or reacting to changes in the business and industry.
Enterprise offerings such as Adobe Marketing Cloud and Digital Media ETLAs have long and complex sales cycles. The filing notes a higher percentage of quarterly sales occur in final weeks, making it difficult to predict when a sales cycle will close.
The markets for Adobe's products and services face intense competition, evolving standards, disruptive technology, price sensitivity, and new products from existing and new competitors. The filing specifically warns that digital application marketplaces often have exclusive distribution for certain platforms, which may make it harder to compete.
Increasing global privacy laws and regulatory scrutiny could affect Adobe's cloud and data-driven offerings. The filing notes compliance depends partly on customer adherence to privacy laws and representations, and that new laws could require additional compliance expense and increased liability.
The FASB's ASU No. 2014-09 on revenue from contracts with customers is expected to become effective for Adobe in the first quarter of fiscal 2018. Adobe has not selected a transition method and is evaluating the effect, which could require changes to systems, processes, and controls.
SaaS KPIs
All quarters →Total Digital Media ARR
Paid Creative Cloud Subscriptions
Document Services ARR
Total Creative ARR
Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q1 FY2015 (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.