Summary
Adobe Systems reported a sharp decline in GAAP results for FY2013 Q3 as the company continued its shift to subscription pricing. Revenue was $995.1 million, down 7.9% from the prior-year quarter. Gross profit was $848.0 million, down 11.8%. Operating income was $110.4 million, down 60.3%. Net income was $83.0 million, down 58.8%. Diluted EPS was $0.16, down 60.0%. Gross margin was 85.2%, down 3.7 percentage points. Operating margin was 11.1%, down 14.7 percentage points. The year-to-date picture is similar. Revenue for the nine months was $3.01 billion, down 7.3%. Gross profit was $2.57 billion, down 11.0%. Operating income was $319.9 million, down 63.3%. Net income was $224.7 million, down 63.2%. Diluted EPS was $0.44, down 63.9%. Gross margin was 85.4%, down 3.5 percentage points. Operating margin was 10.6%, down 16.2 percentage points. Management attributes the pressure to the ratable recognition of subscription revenue and the decline in perpetual license revenue.
Operational metrics show the transition is gaining traction. Adobe exceeded one million paid Creative Cloud subscriptions in the quarter, exiting with one million thirty one thousand subscriptions. Total Creative ARR was $655.0 million, up from $440.0 million exiting the second quarter of fiscal 2013. Digital Media ARR rose from approximately $203.0 million as of November 30, 2012 to approximately $297.0 million as of March 1, 2013, to $440.0 million as of May 31, 2013, and to $655.0 million as of August 30, 2013. That is an increase of approximately $452.0 million, or 223%, from November 30, 2012. Adobe Marketing Cloud revenue increased 28% in the quarter and 22% year to date. The Neolane acquisition added Adobe Campaign, a cross-channel campaign management tool. AEM remains the fastest growing digital marketing solution, but the company warned that a shift toward managed services for AEM will move revenue to recurring recognition and may affect AEM and Adobe Marketing Cloud growth rates.
Cash generation and deferred revenue provide some offset. Operating cash flow for the nine months was $836.7 million, down 18.4% from the prior-year period. Operating cash flow for the quarter was $215.5 million, down 18.2%. Capital expenditures for the nine months were $153.2 million, down 19.0%. Capital expenditures for the quarter were $46.8 million, down 39.6%. Deferred revenue, current portion, was $683.1 million, up 35.1% from the prior-year quarter. The company said the increase in deferred revenue was driven by subscription and ETLA activity for Creative Cloud and growth in Digital Marketing hosted services. Foreign currency reduced revenue by $7.5 million in the quarter and $18.7 million year to date.
Guidance context centers on the subscription transition. Management expects subscription revenue to keep increasing and perpetual license revenue to keep declining. Expenses are not expected to decline in correlation with revenue, which will adversely affect net income and operating margin throughout fiscal 2013. Over time, Adobe expects the model to drive higher revenue growth, increase the amount of recurring revenue, and make the business more predictable. Risks are material. In September 2013, Adobe's security team discovered sophisticated attacks on its network involving illegal access to certain customer and product information. The company is investigating and does not currently believe the attacks will have a material adverse impact, but it acknowledges the incident could have various adverse effects. Other risks include the decline of CS6 perpetual license revenue, the AEM managed services migration, foreign currency swings, and the challenge of keeping expenses aligned with a ratable revenue model.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2013 | Q2 FY2013 | QoQ | Q3 FY2012 | YoY |
|---|---|---|---|---|---|
| Revenue | $995.1M | $1.01B | -1.5% | $1.08B | -7.9% |
| Gross profit | $848.0M | $875.3M | -3.1% | $961.0M | -11.8% |
| Gross margin | 85.2% | 86.6% | -1.4 pp | 88.9% | -3.7 pp |
| Sales & marketing | $388.7M | $402.2M | -3.4% | $368.6M | +5.5% |
| General & administrative | $128.0M | $120.9M | +5.9% | $110.2M | +16.1% |
| Total operating expenses | $737.7M | $764.0M | -3.4% | $682.7M | +8.1% |
| Operating income (loss) | $110.4M | $111.3M | -0.9% | $278.3M | -60.3% |
| Operating margin | 11.1% | 11.0% | +0.1 pp | 25.8% | -14.7 pp |
| Net income (loss) | $83.0M | $76.5M | +8.4% | $201.4M | -58.8% |
| Net margin | 8.3% | 7.6% | +0.8 pp | 18.6% | -10.3 pp |
| Diluted EPS | $0.16 | $0.15 | +$0.01 | $0.40 | -$0.24 |
Risks
Adobe announced in May 2013 that it would discontinue future development of perpetually licensed Creative Suite products and focus on Creative Cloud. MD&A states this has caused and will continue to cause traditional perpetual license revenue and total net revenue in fiscal 2013 to decline, while expenses are not expected to decline in correlation, adversely affecting net income and operating margin. Q3 FY2013 revenue was down 7.9% and operating income was down 60.3% versus the prior-year quarter.
The subscription model defers revenue and cash received from customers, making reported results less immediately reflective of sales trends. Current deferred revenue was up 35.1% to $683.1 million versus the prior-year quarter, and MD&A notes total deferred revenue increased 18% from November 30, 2012. A decline in new or renewed subscriptions may not be immediately reflected but could reduce future revenue.
In September 2013, Adobe discovered sophisticated attacks on its network involving illegal access to certain customer and product information, and the investigation is ongoing. Risk factors note that actual or perceived security vulnerabilities could lead to claims, reputational harm, customer loss, and margin pressure.
Risk factors cite intense competition, evolving industry standards, lower-cost or free alternatives, and digital application marketplaces with exclusive distribution for certain platforms. Consolidation among competitors may also increase competitive pressures and harm results of operations.
Ingram Micro represented 9% of net revenue for Q3 FY2013, and no single agreement with that distributor exceeded 5% of total net revenue. A prolonged delay in securing a replacement distributor after termination could have a negative short-term impact on results of operations.
Risk factors state that competition for experienced information technology personnel is intense and that failure to retain key personnel or maintain corporate culture could harm long-term strategic planning and execution.
Expanding global privacy and data protection laws affect Adobe's cloud and data-driven offerings, increasing compliance costs and liability exposure. Customer misuse of services or inaccurate representations about privacy compliance could lead to regulatory action and reputational harm.
Economic or political uncertainty, including U.S. federal spending cuts and European recession risk, could delay technology purchases, lengthen sales cycles, and reduce government purchases. Q3 FY2013 revenue declined across all geographies compared with the prior-year period.
Adobe acquired Neolane in Q3 FY2013 and Behance in Q1 FY2013. Integration risks include difficulty retaining personnel and customers, disruption of ongoing business, and failure to achieve anticipated financial and strategic benefits.
Enterprise sales, Enterprise Term License Agreements, and direct sales efforts involve longer sales and implementation cycles, potential revenue deferral, and challenges in hiring, training, and retaining sales representatives. Government sales add longer cycles and complex procurement requirements.
SaaS KPIs
All quarters →Total Digital Media ARR
Total Creative ARR
Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q3 FY2013 (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.