Summary
Adobe reported strong fiscal 2016 second quarter results. Revenue for the quarter ended June 3, 2016 was $1.40 billion, up 20.4% from the prior-year quarter. Gross profit rose 22.5% to $1.20 billion. Operating income climbed 77.8% to $344.24 million. Net income increased 65.5% to $244.07 million. Diluted EPS was $0.48, up from $0.29 in the prior-year quarter. Gross margin expanded to 85.6% from 84.1%, and operating margin improved to 24.6% from 16.7%. For the first six months of fiscal 2016, revenue was $2.78 billion, up 22.5% year over year. Net income for the six months was $498.38 million, up 114.5%, and diluted EPS was $0.99, up 115.2%. The company noted that fiscal 2016 is a 53-week year, which added an extra week to the first quarter.
The subscription transition continued to drive the business. Creative ARR exiting the second quarter was $3.00 billion, up from $2.50 billion at the end of fiscal 2015. Document Cloud ARR was $415 million, up from $385 million. Total Digital Media ARR reached $3.41 billion, up from $2.88 billion at the end of fiscal 2015. Management said the increase in ARR came primarily from more paid Creative Cloud and Document Cloud subscriptions. The company said subscription revenue as a percentage of total revenue increased compared to the year-ago period. The shift to subscriptions continued to pressure perpetual revenue, and revenue from perpetual licensing of older Creative products was immaterial in the quarter. Digital Media revenue grew on the strength of Creative Cloud subscriptions. Document Cloud revenue decreased slightly due to expected declines in perpetual license offerings, partially offset by increases in subscription and Adobe Sign revenue. Digital Marketing revenue increased, driven by adoption of Adobe Experience Manager and growth in Adobe Campaign and Adobe Analytics. Print and Publishing revenue declined.
The company said it continues to expect the Creative Cloud strategy to drive higher long-term revenue growth. It also expects subscription revenue to continue increasing. Strong demand for Marketing Cloud solutions is expected to benefit revenue growth in future quarters. The company said it will continue to invest in research and development, including hiring software developers, to remain competitive and develop new offerings. It also plans to continue investing in its network and data center infrastructure to support subscription and hosted services growth. The company said it expects its investments in new SaaS and subscription models to continue to increase subscription revenue.
Risks include foreign currency headwinds. The relative strength of the U.S. dollar against EMEA currencies reduced revenue by $21.7 million in the quarter and $69.8 million in the first six months. Hedging gains partially offset these impacts. The company also faces expected declines in perpetual revenue as customers move to subscriptions. Tax uncertainties remain, and the company said the timing of income tax examinations is highly uncertain. It noted that a significant portion of foreign earnings is permanently reinvested outside the United States. The company also noted that its effective tax rate increased for the quarter and decreased for the six months. Competition in creative and marketing software remains intense, and the company must continue to innovate to retain customers.
Cash flow and capital allocation were also in focus. Operating cash flow for the first six months was $986.24 million, up 50.7% from $654.50 million in the prior-year period. Capital expenditures were $99.96 million, up 40.2%. Deferred revenue, current portion, was $1.63 billion at June 3, 2016, up 38.9% from the prior-year quarter. The company repurchased about 3.7 million shares at an average price of $90.61 during the first six months. It also entered into a structured stock repurchase agreement for $400 million subsequent to quarter end. Management said it expects existing cash, investments, and cash flows to meet working capital needs for the next twelve months. The company had no outstanding borrowings under its $1 billion revolving credit agreement as of June 3, 2016. The company's primary source of cash is receipts from revenue, and primary uses include payroll, marketing, and cost of revenue.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2016 | Q1 FY2016 | QoQ | Q2 FY2015 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.40B | $1.11B | +26.1% | $1.16B | +20.4% |
| Gross profit | $1.20B | $942.4M | +27.0% | $977.0M | +22.5% |
| Gross margin | 85.5% | 85.0% | +0.6 pp | 84.1% | +1.5 pp |
| Sales & marketing | $462.8M | $392.7M | +17.8% | $427.0M | +8.4% |
| General & administrative | $138.6M | $145.1M | -4.5% | $130.2M | +6.4% |
| Total operating expenses | $852.4M | $769.4M | +10.8% | $783.4M | +8.8% |
| Operating income (loss) | $344.2M | $173.0M | +99.0% | $193.6M | +77.8% |
| Operating margin | 24.6% | 15.6% | +9.0 pp | 16.7% | +7.9 pp |
| Net income (loss) | $244.1M | $84.9M | +187.5% | $147.5M | +65.5% |
| Net margin | 17.4% | 7.7% | +9.8 pp | 12.7% | +4.8 pp |
| Diluted EPS | $0.48 | $0.17 | +$0.31 | $0.29 | +$0.19 |
Risks
Adobe's shift to subscription and cloud models creates revenue recognition timing risk. MD&A notes subscription revenue as a percentage of total revenue increased to 78% in Q2 FY2016 compared to 67% in the year-ago period, and risk factors state a decline in new or renewed subscriptions may not be immediately reflected in reported results but could reduce future revenue.
Adobe may be unable to predict subscription renewal rates. Risk factors note Creative Cloud and Document Cloud agreements are generally month-to-month or one year, Marketing Cloud agreements are one to three years, and ETLAs are generally three years, with customers under no obligation to renew and some able to cancel early.
Cloud strategy risks include customers wanting perpetual licenses, concerns about pricing, service availability, security, and offline access, and possible reliance on promotional rates that could reduce average revenue per user. MD&A highlights Creative ARR of $3.00 billion, up from $2.50 billion at the end of fiscal 2015, and total Digital Media ARR of $3.41 billion, up from $2.88 billion.
Competition risk is expanded by digital application marketplaces with exclusive distribution for certain platforms, consolidation among competitors, and alternatives with limited functionality at lower cost or free. Risk factors warn these factors could pressure pricing and gross margins and affect renewal and upgrade rates.
Security vulnerabilities risk is specific: Adobe has previously disclosed breaches of data security systems and misuse of systems to access end users' authentication and payment information, and hackers have accessed certain source code. Risk factors warn actual or perceived vulnerabilities may lead to claims, customer loss, and margin pressure.
Privacy regulation risk is specific: invalidation of U.S.-EU and U.S.-Swiss Safe Harbor frameworks created uncertainty, and at least one regulator fined Adobe for not implementing alternate data transfer means quickly enough for a small number of vendors processing EU employee data. Privacy Shield and other requirements may increase obligations and sanctions.
Enterprise offerings such as Adobe Marketing Cloud and Digital Media ETLAs have extended and complex sales cycles, with a higher percentage of quarterly sales occurring in the final weeks. Risk factors state this makes it difficult to predict when a given sales cycle will close.
Adobe depends on senior management and highly skilled personnel, and competition for talent is intense in many locations where employees are located. Risk factors also note approximately 52% of employees are outside the United States, increasing exposure to varied employment laws.
Tax risk is specific: a significant portion of foreign earnings for the current fiscal year were earned by Irish subsidiaries, and the IRS is examining fiscal 2010, 2011, and 2012 tax returns with focus on intercompany transfer pricing. Changes in tax rules or examinations could adversely affect the effective tax rate.
Adobe has senior unsecured notes outstanding and a senior unsecured revolving credit agreement that is currently undrawn. Risk factors state this debt may limit flexibility and require cash flow dedication, and covenant breaches could accelerate repayment.
SaaS KPIs
All quarters →Creative ARR
Document Cloud ARR
Total Digital Media ARR
Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q2 FY2016 (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.