Summary
Adobe's fiscal 2019 first quarter revenue rose 25.1% to $2.60 billion from the prior-year quarter. Gross profit climbed 21.1% to $2.20 billion. The top line benefited from broad demand across Digital Media and Digital Experience, but operating income slipped 1.1% to $694.83 million. Net income still rose 15.6% to $674.24 million, and diluted EPS increased $0.19 to $1.36. The gap between revenue growth and operating income reflects heavy spending on acquisitions, hosting, and headcount.
Margins tell the same story. Gross margin fell 2.8 percentage points to 84.7%, while operating margin dropped 7.1 percentage points to 26.7%. Cost of revenue and operating expenses grew faster than revenue. The MD&A attributes the cost of revenue increase to amortization of purchased intangibles and hosting services and data center costs. Operating expense growth came from base compensation, related benefits, and stock-based compensation tied to headcount growth. Those pressures held operating income below the year-ago level even as revenue expanded at a double-digit pace.
Operational momentum remains strong. Total Digital Media ARR reached $7.07 billion at the end of the first quarter, up from $6.71 billion at the end of fiscal 2018. Creative ARR was $6.21 billion, up from $5.92 billion. Document Cloud ARR was $856 million, up from $791 million. The ARR total includes an approximately $20 million adjustment from adoption of the new revenue standard. Management points to Creative Cloud and Document Cloud adoption as the main drivers. The Digital Experience business also contributed, with Adobe Experience Cloud revenue growing 34% year over year. Subscription revenue across the company also rose, helped by the Marketo and Magento acquisitions completed in fiscal 2018.
Cash generation was steady. Operating cash flow was $1.01 billion, up 2.4% from the prior-year quarter. Capital expenditures fell 31.4% to $65.27 million. Deferred revenue stood at $3.22 billion, and remaining performance obligations were $8.13 billion. The company returned capital through repurchases. It bought back 2.1 million shares at an average price of $237.13 during the quarter and prepaid $500 million under structured repurchase agreements. After quarter end, it entered a new $750 million structured repurchase agreement, leaving $6.60 billion under its May 2018 authority. Working capital swung to a deficit, largely because Adobe reclassified its 2020 notes to current liabilities and plans to refinance them.
Management's forward-looking commentary centers on recurring revenue and the integration of Marketo and Magento. It expects those acquisitions and continued demand across Adobe Experience Cloud to drive future growth. Creative Cloud remains the core long-term growth engine. Risks are familiar but material. Foreign currency reduced revenue by $14.7 million, with hedging offsetting $8.5 million. The company faces ongoing tax examinations, including transfer pricing matters, and it carries a valuation allowance related to state and foreign credits. The Term Loan and revolving credit agreement include a leverage covenant, though Adobe says it is in compliance. The 2020 notes refinancing and the working capital deficit add balance sheet watch items. The quarter shows a company still growing quickly, but the margin compression and rising cost base are the key items to monitor.
Forecast
No forward guidance in this quarter's filings.
Reported figures
GAAP, from SEC filings| Metric | Q1 FY2019 | Q4 FY2018 | QoQ | Q1 FY2018 | YoY |
|---|---|---|---|---|---|
| Revenue | $2.60B | $2.46B | +5.5% | $2.08B | +25.1% |
| Gross profit | $2.20B | $2.11B | +4.7% | $1.82B | +21.1% |
| Gross margin | 84.7% | 85.4% | -0.7 pp | 87.5% | -2.8 pp |
| Sales & marketing | $781.5M | $723.6M | +8.0% | $581.0M | +34.5% |
| General & administrative | $216.1M | $212.4M | +1.8% | $170.4M | +26.8% |
| Total operating expenses | $1.51B | $1.38B | +9.0% | $1.12B | +35.0% |
| Operating income (loss) | $694.8M | $720.5M | -3.6% | $702.7M | -1.1% |
| Operating margin | 26.7% | 29.2% | -2.5 pp | 33.8% | -7.1 pp |
| Net income (loss) | $674.2M | $678.2M | -0.6% | $583.1M | +15.6% |
| Net margin | 25.9% | 27.5% | -1.6 pp | 28.1% | -2.1 pp |
| Diluted EPS | $1.36 | $1.36 | ±$0.00 | $1.17 | +$0.19 |
Risks
Adobe has $1.9 billion of senior notes and a $2.25 billion term loan outstanding. Interest expense increased 104% in the quarter ended March 1, 2019 versus the prior-year quarter, and working capital shifted to a $180.0 million deficit as of March 1, 2019 from a $555.9 million surplus as of November 30, 2018, primarily due to reclassifying $898.7 million of 2020 Notes to current liabilities. Covenants and refinancing risk could affect financial flexibility.
Magento and Marketo, acquired in fiscal 2018, are driving higher amortization of purchased intangibles, hosting services and data center costs, and operating expenses. MD&A reports cost of revenue up 53% and operating expenses up 35% in the quarter ended March 1, 2019 versus the prior-year quarter. The filing warns that integration may disrupt the business and that goodwill or amortizable intangible assets could be impaired, requiring a significant charge to earnings.
Competition and product mix are pressuring profitability. Gross margin declined 2.8 percentage points to 84.7% and operating margin declined 7.1 percentage points to 26.7% in the quarter ended March 1, 2019 versus the prior-year quarter, while operating income decreased 1.1% despite revenue increasing 25.1%. The filing cites intense competition and downward pressure on pricing and gross margins.
Some enterprise offerings, including Adobe Experience Cloud and ETLAs in Digital Media, have multi-phased and complex sales cycles. Adobe notes that a higher percentage of a quarter's total sales occur in the final weeks of each quarter, making it difficult to predict when a given sales cycle will close.
Subscription revenue is recognized ratably over terms of 1 to 36 months, so most revenue reported in a quarter comes from agreements entered into in prior quarters. Adobe states that customers have no obligation to renew and that declines in new or renewed subscriptions may not be reflected in revenue until later periods.
Adobe faces expanding global privacy and security laws, including GDPR, NISD, and the California Consumer Privacy Act, plus contested cross-border data transfer mechanisms. The filing states these requirements may affect Adobe's ability to reach customers, implement business models, and develop emerging technologies such as artificial intelligence and machine learning.
Adobe is subject to changing tax rules, including Tax Cuts and Jobs Act international provisions effective in fiscal 2019 and examinations of intercompany transfer pricing. The effective tax rate was 4% in the quarter ended March 1, 2019 versus 17% in the prior-year quarter, and future changes could adversely affect the tax rate and cash flow.
Adobe depends on senior management and highly skilled personnel, and competition for technology talent is intense. MD&A attributes increases in research and development, sales and marketing, and general and administrative expenses to headcount growth and stock-based compensation, which could raise costs if retention pressures continue.
SaaS KPIs
All quarters →Creative ARR
Document Cloud ARR
Digital Media ARR
Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q1 FY2019 (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 12, 2026.