Summary
Adobe Systems reported strong growth for the second quarter of fiscal 2017, which ended June 2, 2017. Revenue rose to $1.77 billion, up 26.7% from the prior-year quarter. Gross profit reached $1.53 billion, up 28.1%. Operating income climbed to $504.08 million, up 46.4%. Net income was $374.39 million, up 53.4%. Diluted earnings per share came in at $0.75, up 56.2%. Gross margin expanded to 86.5%, up 0.9 percentage points. Operating margin improved to 28.4%, up 3.8 percentage points. For the six months ended June 2, 2017, revenue was $3.45 billion, up 24.1%. Net income for the year-to-date period was $772.84 million, up 55.1%. Gross margin for the six months was 86.2%, up 0.6 percentage points. Operating margin for the six months was 28.2%, up 4.7 percentage points. These results reflect continued execution of the company's long-term plans for Digital Media and Digital Marketing.
Cash flow and recurring revenue metrics showed strength. Operating cash flow for the quarter was $644.83 million, up 31.9% from the prior-year quarter. For the six months, operating cash flow was $1.38 billion, up 39.4%. Capital expenditures were $55.30 million in the quarter, up 2.9%. For the six months, capital expenditures were $86.20 million, down 13.8%. Deferred revenue, current portion, stood at $2.01 billion at the end of the quarter, up 22.8% from the prior-year quarter. Digital Media annualized recurring revenue reached $4.56 billion at the end of the second quarter, up from $3.99 billion at the end of fiscal 2016. Creative ARR was $4.04 billion, up from $3.52 billion. Document Cloud ARR was $520 million, up from $472 million. The growth in ARR indicates that subscription adoption remains the primary driver of the business. Deferred revenue growth of 22.8% suggests that customers are committing to longer contracts. Operating cash flow growth of 39.4% for the six months shows that the business is converting revenue into cash efficiently. Capital expenditures decreased 13.8% for the six months, which may reflect lower spending on property and equipment.
Operationally, Adobe continued to expand its cloud offerings. The company migrated its Digital Marketing solutions under the Adobe Experience Cloud brand in March 2017. The acquisition of TubeMogul in the first quarter of fiscal 2017 added capabilities to the Advertising Cloud. Foreign currency movements reduced revenue by $19.2 million in the quarter and $31.2 million for the six months. Hedging gains offset $13.4 million in the quarter and $31.6 million for the six months. The company noted that it early adopted new accounting guidance for share-based payment accounting. This adoption resulted in the recognition of excess tax benefits. The company's Irish subsidiaries generate a significant portion of foreign earnings, and U.S. income taxes have not been provided on those earnings. Management's discussion focuses on long-term growth in Digital Media and Digital Marketing rather than providing quarterly guidance.
The company returned capital to shareholders through its stock repurchase program. During the six months ended June 2, 2017, Adobe repurchased approximately 4.3 million shares at an average price of $118. It entered into a $300 million structured stock repurchase agreement subsequent to the quarter, leaving $2.2 billion under its current authority. The credit facility has $1 billion available with no borrowings. Senior notes outstanding total $1.9 billion. Risks include foreign currency volatility, tax examination outcomes, and the need to invest heavily in research and development. The company expects to continue investing in short-term and long-term investments, venture capital, facilities expansion, and computer systems. The quarter demonstrated solid revenue growth, margin expansion, and strong cash generation. Management's discussion highlights the importance of Creative Cloud and Document Cloud for future growth.
Forecast
No forward guidance in this quarter's filings.
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2017 | Q1 FY2017 | QoQ | Q2 FY2016 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.77B | $1.68B | +5.4% | $1.40B | +26.7% |
| Gross profit | $1.53B | $1.44B | +6.1% | $1.20B | +28.1% |
| Gross margin | 86.5% | 85.9% | +0.6 pp | 85.5% | +0.9 pp |
| Sales & marketing | $553.1M | $520.3M | +6.3% | $462.8M | +19.5% |
| General & administrative | $156.9M | $150.8M | +4.1% | $138.6M | +13.2% |
| Total operating expenses | $1.03B | $975.3M | +5.5% | $852.4M | +20.7% |
| Operating income (loss) | $504.1M | $469.0M | +7.5% | $344.2M | +46.4% |
| Operating margin | 28.4% | 27.9% | +0.6 pp | 24.6% | +3.8 pp |
| Net income (loss) | $374.4M | $398.4M | -6.0% | $244.1M | +53.4% |
| Net margin | 21.1% | 23.7% | -2.6 pp | 17.4% | +3.7 pp |
| Diluted EPS | $0.75 | $0.80 | -$0.05 | $0.48 | +$0.27 |
Risks
Adobe's subscription model depends on renewal rates for Creative Cloud, Document Cloud and Adobe Experience Cloud; customers have no obligation to renew and some elect not to renew. MD&A highlights Total Digital Media ARR grew to $4.56 billion at the end of Q2 FY2017, up from $3.99 billion at the end of fiscal 2016, making renewal and upsell execution critical.
Adobe has previously disclosed breaches of data security systems and misuse of systems to access end users' authentication and payment information. It also relies on data centers with no redundancy for all systems and critical applications in only one data center.
Markets are characterized by intense competition, evolving standards, disruptive technology, short life cycles, price sensitivity, and alternatives with limited functionality at lower costs or free. Consolidation among competitors may increase pressure.
Adobe relies on data centers managed by Adobe and third parties; it does not have redundancy for all systems, many critical applications reside in only one data center, and disaster recovery planning may not account for all eventualities.
A portion of subscription revenue each quarter comes from recognition of deferred revenue from prior agreements, so a decline in new or renewed subscriptions may not immediately appear in reported results. Reported figures show deferred revenue (current portion) was $2.01 billion in Q2 FY2017, up 22.8% versus the prior-year quarter.
Enterprise offerings including Adobe Experience Cloud and ETLAs have multi-phased, complex sales cycles, with a higher percentage of quarterly sales occurring in final weeks. MD&A reports Adobe Experience Cloud revenue of $495.4 million in Q2 FY2017, up 29% year over year, increasing reliance on these enterprise sales.
Adobe acquired TubeMogul in Q1 FY2017 and MD&A attributes part of Adobe Advertising Cloud revenue growth to it. Integration risks include retaining key personnel and customers, integrating technology, and achieving financial and strategic goals.
Privacy and cross-border data transfer rules are expanding, including the General Data Protection Regulation in Europe. Adobe disclosed that in the last year at least one EU regulator determined it did not implement appropriate means quickly enough for certain EU employee data, resulting in a small fine.
SaaS KPIs
All quarters →Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q2 FY2017 (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.