Summary
Adobe reported fiscal 2019 second quarter revenue of $2.74 billion, up 25.0% from the prior-year quarter. Gross profit was $2.34 billion, up 22.1%. Operating income rose 7.3% to $749.55 million. Net income fell 4.6% to $632.59 million, and diluted EPS declined 3.0% to $1.29. Gross margin was 85.2%, down 2.0 percentage points. Operating margin was 27.3%, down 4.5 percentage points. For the first six months of fiscal 2019, revenue was $5.35 billion, up 25.1%. Gross profit was $4.54 billion, up 21.6%. Operating income was $1.44 billion, up 3.1%. Net income was $1.31 billion, up 4.9%, and diluted EPS was $2.65, up 6.0%. Gross margin for the six months was 84.9%, down 2.4 percentage points. Operating margin was 27.0%, down 5.8 percentage points.
The Digital Media segment ended the quarter with total ARR of $7.47 billion, up from $6.71 billion at the end of fiscal 2018. That is an increase of $763 million, or 11%. Creative ARR was $6.55 billion, up from $5.92 billion. Document Cloud ARR was $921 million, up from $791 million. Management attributed the ARR growth to stronger new user adoption of Creative Cloud and Document Cloud. Creative revenue grew 22% year over year, and Digital Media segment revenue also grew 22%. Adobe Experience Cloud revenue grew 34% year over year. The company also pointed to Marketo and Magento, acquired in the later part of fiscal 2018, as contributors to Digital Experience subscription revenue growth. Foreign currency reduced revenue by $45.3 million in the quarter, while hedging gains offset $9.0 million of that impact.
Cash generation improved. Operating cash flow for the quarter was $1.11 billion, up 13.6% from the prior-year quarter. For the six months, operating cash flow was $2.12 billion, up 8.0%. Capital expenditures were $145.49 million in the quarter, up 221.1%, and $210.76 million for the six months, up 50.1%. Deferred revenue stood at $3.13 billion as of May 31, 2019. Remaining performance obligations were $8.37 billion. Working capital shifted to a $2.34 billion deficit from a $555.9 million surplus at November 30, 2018. The company said the decrease was primarily due to the reclassification of debt to current liabilities. It intends to refinance its Term Loan and 2020 Notes on or before the due dates.
The MD&A highlights several risks. Foreign currency fluctuations remain a headwind. The company faces potential changes in tax laws and ongoing tax examinations. It has a $1.74 billion incremental minimum purchase commitment through May 2024. The Term Loan and senior notes contain a leverage covenant, and the company was in compliance as of May 31, 2019. Subsequent to quarter end, Adobe entered into interest rate lock agreements for an aggregate notional amount of $1 billion. The company repurchased about 4.5 million shares at an average price of $254.19 during the six months, and after quarter end entered a $750 million structured stock repurchase agreement. The company also noted that it continues to evaluate the impact of proposed U.S. Treasury regulations related to international tax provisions.
The quarter showed solid top-line growth but margin pressure. Net income declined even as revenue rose, due to higher taxes and interest expense. The company continues to invest in Digital Media and Digital Experience. ARR growth and cash flow remain strong. The balance sheet carries a working capital deficit after debt reclassifications.
Forecast
No forward guidance in this quarter's filings.
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2019 | Q1 FY2019 | QoQ | Q2 FY2018 | YoY |
|---|---|---|---|---|---|
| Revenue | $2.74B | $2.60B | +5.5% | $2.20B | +25.0% |
| Gross profit | $2.34B | $2.20B | +6.0% | $1.91B | +22.1% |
| Gross margin | 85.2% | 84.7% | +0.4 pp | 87.2% | -2.0 pp |
| Sales & marketing | $848.9M | $781.5M | +8.6% | $646.2M | +31.4% |
| General & administrative | $219.3M | $216.1M | +1.5% | $178.0M | +23.2% |
| Total operating expenses | $1.59B | $1.51B | +5.2% | $1.22B | +30.6% |
| Operating income (loss) | $749.5M | $694.8M | +7.9% | $698.5M | +7.3% |
| Operating margin | 27.3% | 26.7% | +0.6 pp | 31.8% | -4.5 pp |
| Net income (loss) | $632.6M | $674.2M | -6.2% | $663.2M | -4.6% |
| Net margin | 23.1% | 25.9% | -2.9 pp | 30.2% | -7.2 pp |
| Diluted EPS | $1.29 | $1.36 | -$0.07 | $1.33 | -$0.04 |
Risks
Intense competition, including alternatives with limited functionality at lower costs or free, could create downward pressure on pricing and gross margins. Gross margin decreased 2.0 percentage points in FY2019 Q2 and 2.4 percentage points year to date, while operating margin decreased 4.5 percentage points in the quarter and 5.8 percentage points year to date.
Integration of Marketo and Magento, acquired in the later part of fiscal 2018, contributed to revenue growth but also increased amortization of purchased intangibles, hosting costs, and operating expenses. Cost of revenue increased 45% in FY2019 Q2 and 49% year to date, and operating expenses increased 31% in the quarter and 33% year to date.
Changes in tax rules, including Tax Cuts and Jobs Act international provisions effective in fiscal 2019, may adversely affect the effective tax rate. The effective tax rate increased 7 percentage points in FY2019 Q2 to 11%, and the provision for income taxes increased 183% in the quarter.
Outstanding debt includes $1.9 billion of notes and a $2.25 billion term loan, with $3.15 billion reclassified to current liabilities, producing a working capital deficit of $2.34 billion as of May 31, 2019. Interest expense increased 99% in FY2019 Q2 and 101% year to date, and the company intends to refinance the term loan and 2020 notes.
Security breaches in Adobe-managed or third-party data centers may compromise employee and customer data, and the company has previously disclosed breaches and misuse of systems and software to access end users' authentication and payment information. Such incidents could lead to liability, regulatory fines, and reputational harm.
Adobe relies on its own and third-party data centers to host and deliver Creative Cloud, Document Cloud, and Experience Cloud, and it does not have redundancy for all systems, with many critical applications residing in only one data center. Hosting services and data center costs increased, contributing to the 45% increase in cost of revenue in FY2019 Q2.
Expanding global data privacy and security laws, including GDPR, NISD, the California Consumer Privacy Act, and contested cross-border transfer mechanisms such as Privacy Shield and Model Clauses, may affect Adobe's ability to reach customers and implement business models, including for AI and machine learning. Noncompliance could result in public criticism, class action lawsuits, reputational harm, or regulatory investigations.
Some enterprise offerings, including Adobe Experience Cloud solutions and ETLAs in Digital Media, have extended and complex sales cycles, and a higher percentage of a quarter's total sales historically occurs in the final weeks of each quarter. This makes it difficult to predict when a given sales cycle will close and can cause uneven results.
Competition for experienced information technology personnel is intense, and Adobe may face higher compensation costs to retain senior management and skilled employees. Operating expenses increased 31% in FY2019 Q2 and 33% year to date, partly due to base compensation and stock-based compensation associated with headcount growth.
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 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.