Summary
Adobe Systems reported fiscal 2014 second-quarter revenue of $1.07 billion, up 5.7% from the prior-year quarter. Gross profit was $913.30 million, up 4.3%. Operating income was $135.26 million, up 21.5%. Net income was $88.53 million, up 15.7%. Diluted EPS was $0.17, up $0.02. Gross margin was 85.5%, down 1.1 percentage points. Operating margin was 12.7%, up 1.6 percentage points. Operating cash flow was $367.54 million, up 22.9%. Capital expenditures were $27.20 million, down 41.2%. Deferred revenue, current portion, was $879.11 million, up 37.6%. For the six months, operating cash flow was $619.21 million, flat.
The quarter showed continued progress in the subscription transition. Adobe exited the second quarter with 2.308 million paid Creative Cloud subscriptions, up 60% from 1.439 million at the end of fiscal 2013. Creative ARR was $1.20 billion, up from $801 million at the end of fiscal 2013. Total Digital Media ARR reached $1.38 billion, up from $444 million at the end of the second quarter of fiscal 2013. Document Services ARR was $183 million, up from $82 million at the end of the second quarter of fiscal 2013. The company said subscriptions made up 45% of total revenue, up from 25% in the year-ago period. The mix shift is intentional, but it changes the timing of revenue recognition. The company said the increase in Digital Media was driven by Creative Cloud and ETLAs, partly offset by declines in CS point products and Creative Suite editions. Document Services was relatively stable, with Acrobat cloud services offsetting declines in Acrobat desktop and EchoSign. Print and Publishing decreased, primarily due to a nonrecurring font licensing transaction in the prior-year quarter and lower legacy product revenue.
Management expects perpetual licensing revenue from creative professional products to be immaterial in the second half of fiscal 2014. The company also expects subscription revenue to continue to increase. For Adobe Marketing Cloud, management expects continued adoption of the newer managed services offering for AEM, which will migrate AEM revenue to recurring recognition. That trend may impact Adobe Marketing Cloud reported revenue growth in the near term. The second quarter included a final surge of CS6 perpetual purchases because it was the last quarter of broad volume licensing through channel resellers. That surge helped Digital Media in the quarter but is not expected to repeat. The company expects the benefit of ETLAs to improve its growth potential over time.
Risks center on the transition and on foreign exchange. The shift to Creative Cloud and Enterprise Term License Agreements moves more revenue to ratable recognition, which can defer revenue and pressure reported growth. Foreign currency movements affected the quarter. A stronger U.S. dollar against the Japanese Yen reduced APAC revenue, while a weaker dollar against the Euro and British Pound helped EMEA. The company's international operations expose it to currency fluctuations, and a significant portion of foreign earnings is earned by Irish subsidiaries. The effective tax rate increased, driven by the expiration of the federal research and development tax credit and weaker forecasted international profits. The company also noted risks in Part II, Item 1A of the filing that could cause actual results to differ materially.
Operating cash flow benefited from net income and increases in deferred revenue, partly offset by increases in prepaid expenses and decreases in trade payables. Capital expenditures decreased, reflecting lower purchases of property and equipment. The company continued its stock repurchase program. Management believes existing cash, short-term investments and cash from operations will be sufficient to meet working capital and operating resource expenditure requirements for the next twelve months. The company also expects to continue investing in short-term and long-term investments, facilities expansion and computer systems. It intends to refinance the current portion of its debt on or before the due date.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2014 | Q1 FY2014 | QoQ | Q2 FY2013 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.07B | $1.00B | +6.8% | $1.01B | +5.7% |
| Gross profit | $913.3M | $851.6M | +7.2% | $875.3M | +4.3% |
| Gross margin | 85.5% | 85.2% | +0.3 pp | 86.6% | -1.1 pp |
| Sales & marketing | $426.8M | $410.1M | +4.1% | $402.2M | +6.1% |
| General & administrative | $129.1M | $139.0M | -7.1% | $120.9M | +6.8% |
| Total operating expenses | $778.0M | $772.9M | +0.7% | $764.0M | +1.8% |
| Operating income (loss) | $135.3M | $78.7M | +71.8% | $111.3M | +21.5% |
| Operating margin | 12.7% | 7.9% | +4.8 pp | 11.0% | +1.7 pp |
| Net income (loss) | $88.5M | $47.0M | +88.2% | $76.5M | +15.7% |
| Net margin | 8.3% | 4.7% | +3.6 pp | 7.6% | +0.7 pp |
| Diluted EPS | $0.17 | $0.09 | +$0.08 | $0.15 | +$0.02 |
Risks
Adobe discontinued future development of perpetually licensed Creative Suite products and announced removal of general availability of CS6 on a perpetual licensing basis from legacy shrinkwrap and volume licensing channels in Q2 fiscal 2014. MD&A states this could further reduce revenues in the short term as the business shifts to subscription revenue recognized ratably, and expects perpetual licensing of creative professional products to be immaterial in the second half of fiscal 2014.
Subscription and ETLA offerings create timing risks because a portion of subscription revenue each quarter comes from recognition of deferred revenue from prior agreements. A decline in new or renewed subscriptions may not be immediately reflected in reported results but could reduce future revenue. The current portion of deferred revenue was $879.11 million in Q2 fiscal 2014, up 37.6% from Q2 fiscal 2013.
Adobe cannot accurately predict subscription renewal rates. Creative Cloud individual agreements are generally month-to-month or one year, ETLAs generally three years, and customers have no obligation to renew. MD&A reports 2.308 million paid Creative Cloud subscriptions exiting Q2 fiscal 2014, up 60% from 1.439 million at the end of fiscal 2013, but nonrenewal or less favorable renewal terms could cause revenues to decline.
Adobe has previously disclosed that certain parties breached data-security systems and misused systems and software to access end users' authentication and payment information, and hackers have accessed certain source code in the past. The filing says these problems affect Adobe because cyber-attackers focus on popular offerings, and actual or perceived vulnerabilities could lead to claims, customer loss, and reduced revenues or margins.
Markets are characterized by intense competition, evolving standards, disruptive technology, price sensitivity, and frequent new product introductions, including lower-cost or free alternatives. Digital application marketplaces often have exclusive distribution for certain platforms, and consolidation among competitors may increase competitive pressures.
Increasing regulatory focus on privacy and expanding laws could impact new business models and expose Adobe to increased liability. Adobe collects and stores anonymous and personal information on behalf of customers, relies on customer representations about opt-out and compliance, and does not formally audit those customers, which could lead to adverse publicity or regulatory action.
Changes in tax rules and regulations could adversely affect Adobe's effective tax rate. MD&A attributes a higher effective tax rate in Q2 fiscal 2014 to expiration of the federal research and development tax credit in December 2013 and weaker forecasted international profits. Adobe is also under IRS examination of fiscal 2010, 2011, and 2012 tax returns, focusing on intercompany transfer pricing.
Adobe has $1.5 billion in senior unsecured notes outstanding and a $1.0 billion undrawn revolving credit facility. The notes and facility impose restrictions and covenants; a breach could cause outstanding indebtedness to be declared immediately due and payable, and rating downgrades could increase costs or restrict financing.
SaaS KPIs
All quarters →Creative ARR
Total Digital Media ARR
Paid Creative Cloud Subscriptions
Document Services ARR
Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q2 FY2014 (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.