Summary
Adobe Systems reported a strong fiscal 2018 second quarter. Total revenue reached $2.20 billion, up 23.9% from the prior-year quarter. Year-to-date revenue was $4.27 billion, up 23.8% from the same period a year earlier. Gross profit rose to $1.91 billion, up 24.9%, and gross margin improved to 87.2%, up 0.7 percentage points. Operating income climbed to $698.48 million, up 38.6%, with operating margin at 31.8%, up 3.4 percentage points. Net income was $663.17 million, up 77.1%. Diluted earnings per share came in at $1.33, up $0.58 or 77.3%. Revenue growth outpaced expense growth, which lifted margins.
Digital Media annualized recurring revenue was $6.06 billion at the end of the second quarter, up from $5.39 billion at the end of fiscal 2017. Creative ARR reached $5.37 billion, up from $4.77 billion. Document Cloud ARR was $694 million, up from $614 million. Total Digital Media ARR increased by $679 million, or 13%, from December 1, 2017. Creative revenue grew 29% year over year, and Digital Media segment revenue grew 28%. Adobe Experience Cloud revenue grew 18%. Document Cloud revenue rose to $243.0 million from $199.9 million. In June 2018, Adobe completed its acquisition of Magento Commerce for approximately $1.68 billion in cash consideration, plus the assumption of certain employee equity awards. Management will integrate Magento into the Digital Experience business in the third quarter of fiscal 2018. The company expects the addition of Magento and continued demand across its Adobe Experience Cloud solutions to drive revenue growth in future years.
Cash generation remained robust. Operating cash flow for the quarter was $976.41 million, up 51.4% from the prior-year quarter. Year-to-date operating cash flow was $1.97 billion, up 43.0%. Capital expenditures were $45.32 million in the quarter, down 18.0% from the prior-year quarter, while year-to-date capital expenditures were $140.46 million, up 62.9%. Deferred revenue, current portion, stood at $2.54 billion, up 26.8% from the prior-year quarter. In May 2018, the board approved an additional $8 billion stock repurchase authority through the end of fiscal 2021. During the first six months, Adobe repurchased approximately 4.3 million shares at an average price of $208.69. Subsequent to June 1, 2018, the company entered into a $750 million structured stock repurchase agreement, leaving $150 million under its existing $2.5 billion authority.
Expenses grew alongside the business. Adobe reported higher research and development, sales and marketing, and general and administrative spending, driven mainly by stock-based compensation and base compensation costs from headcount growth. Amortization of purchased intangibles declined. The provision for income taxes reflected the Tax Act enacted in December 2017 and a change to the company's corporate tax structure. The Tax Act introduced provisional estimates that may change in future periods. Adobe recorded additional provisional transition tax expense and adjusted related liabilities during the quarter. The company also faces a range of estimated potential decreases in unrecognized tax benefits. Foreign currency movements affected revenue.
Management's discussion highlights several risks and forward-looking items. Integration of Magento poses execution risk. The MD&A notes that forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. Management expects Creative Cloud to drive sustained long-term revenue growth through customer base expansion and additional features. The company also plans to continue investing in research and development, sales and marketing, and facilities. Adobe's existing cash, cash equivalents and investment balances, along with anticipated cash flows from operations and available credit facility, are expected to meet working capital and operating resource expenditure requirements for the next twelve months.
Forecast
No forward guidance in this quarter's filings.
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2018 | Q1 FY2018 | QoQ | Q2 FY2017 | YoY |
|---|---|---|---|---|---|
| Revenue | $2.20B | $2.08B | +5.6% | $1.77B | +23.9% |
| Gross profit | $1.91B | $1.82B | +5.2% | $1.53B | +24.9% |
| Gross margin | 87.2% | 87.5% | -0.4 pp | 86.5% | +0.7 pp |
| Sales & marketing | $646.2M | $581.0M | +11.2% | $553.1M | +16.8% |
| General & administrative | $178.0M | $170.4M | +4.5% | $156.9M | +13.5% |
| Total operating expenses | $1.22B | $1.12B | +8.8% | $1.03B | +18.2% |
| Operating income (loss) | $698.5M | $702.7M | -0.6% | $504.1M | +38.6% |
| Operating margin | 31.8% | 33.8% | -2.0 pp | 28.4% | +3.4 pp |
| Net income (loss) | $663.2M | $583.1M | +13.7% | $374.4M | +77.1% |
| Net margin | 30.2% | 28.1% | +2.2 pp | 21.1% | +9.1 pp |
| Diluted EPS | $1.33 | $1.17 | +$0.16 | $0.75 | +$0.58 |
Risks
Adobe processes and stores significant employee and customer data, most of which is hosted by third-party service providers, and has previously disclosed breaches of its data security systems. A security incident could compromise the confidentiality, integrity, or availability of this data, leading to liability, regulatory investigations, fines, and reputational harm.
Much of Adobe's business relies on hardware and services hosted by Adobe or third parties, including Creative Cloud, Document Cloud, and Experience Cloud. Adobe does not have redundancy for all systems, many critical applications reside in only one data center, and data center migrations could cause unexpected interruptions or unplanned disruptions.
Increasing regulatory focus on privacy, including the EU's General Data Protection Regulation, and contested cross-border transfer mechanisms such as Privacy Shield and Model Clauses could affect Adobe's ability to reach customers, implement business models, and expose it to fines and reputational harm.
Adobe's Creative Cloud, Document Cloud, and Experience Cloud customers have no obligation to renew after the initial term and may cancel under certain circumstances. Renewal rates may decline due to satisfaction, competition, security, or economic downturns, and revenue is recognized ratably over 1 to 36 months, so declines may not appear until future periods.
Some enterprise offerings, including Adobe Experience Cloud solutions and ETLAs in Digital Media, have multi-phased and complex sales cycles. A higher percentage of a quarter's total sales occur in the final weeks, making it difficult to predict when a sales cycle will close.
Adobe's markets are characterized by intense competition, limited barriers to entry, customer price sensitivity, and alternatives with limited functionality available at lower costs or free. These factors could pressure pricing and gross margins and affect renewal, upsell, and cross-sell rates.
In June 2018 Adobe completed its acquisition of Magento Commerce for approximately $1.68 billion in cash and will begin integrating it into the Digital Experience business in the third quarter of fiscal 2018. Integration risks include failure to achieve financial and strategic goals, disruption of ongoing business, and inability to retain key personnel or customers.
The Tax Act enacted on December 22, 2017 transitions the U.S. to a territorial tax system, lowers the statutory corporate rate from 35% to 21%, and imposed a one-time transition tax. Adobe recorded a provisional transition tax liability adjusted to $489 million, and its effective tax rate decreased to 4% for the second quarter of fiscal 2018 from 24% in the prior-year quarter; future provisions effective fiscal 2019 could adversely affect its tax rate and cash flow.
Adobe's future success depends on senior management and highly skilled personnel, and competition for experienced information technology employees is intense in many locations where Adobe operates. Higher compensation costs to retain personnel may not be offset by improved productivity or increased sales.
Approximately 44% of Adobe's total revenue comes from sales outside the Americas, exposing it to foreign currency fluctuations, international economic and political conditions, tax laws, data flow restrictions, and other risks. If sales outside the Americas are reduced, delayed, or canceled, revenue may decline.
Adobe has $1.9 billion in senior unsecured notes outstanding and a $1 billion undrawn revolving credit agreement. The debt may increase vulnerability to adverse economic conditions, limit flexibility, and impose covenants; credit rating downgrades could increase borrowing costs.
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 FY2018 (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.