Summary
Adobe reported strong fiscal 2016 third quarter results. Total revenue reached $1.46 billion, up 20.2% from the prior-year quarter. Gross profit was $1.26 billion, up 22.8%. Operating income rose to $369.32 million, up 50.1%. Net income climbed to $270.79 million, up 55.2%. Diluted earnings per share were $0.54, up from $0.34. Gross margin expanded to 86.2%, up 1.8 percentage points. Operating margin improved to 25.2%, up 5.0 percentage points. Year to date, revenue was $4.25 billion, up 21.7%. Gross profit for the nine months was $3.64 billion, up 23.6%. Operating income for the nine months was $1.02 billion, up 66.7%. Net income for the nine months was $769.17 million, up 89.1%. Diluted earnings per share for the nine months were $1.52, up from $0.80. Gross margin for the nine months was 85.8%, up 1.4 percentage points. Operating margin for the nine months was 24.1%, up 6.5 percentage points.
The company's subscription transition continues to drive growth. Creative ARR exiting the third quarter was $3.26 billion, up from $2.50 billion at the end of fiscal 2015. Document Cloud ARR was $442 million, up from $385 million. Total Digital Media ARR grew to $3.70 billion, up from $2.88 billion. Digital Media ARR increased by $816 million, or 28%, from $2.88 billion as of November 27, 2015. Management attributes the ARR gains to more paid Creative Cloud and Document Cloud subscriptions and continued adoption of enterprise term license agreements. The company also notes that revenue for the nine months benefited from an extra week in the first quarter of fiscal 2016 because fiscal 2016 is a 53-week year, while fiscal 2015 was a 52-week year.
Segment performance was mixed. Digital Media segment revenue grew 29% year over year. Creative revenue grew 39%. Document Cloud revenue declined slightly as the company transitions that business to subscriptions. Marketing Cloud revenue grew 10% and reached a record level. The company expects continued demand for Marketing Cloud solutions to benefit revenue growth in future quarters. Subscription revenue now represents the vast majority of total revenue. The company continues to invest in research and development, sales and marketing, and general and administrative functions to support long-term growth.
Cash generation remained robust. Operating cash flow for the quarter was $517.88 million, up 43.7% from the prior-year quarter. For the nine months, operating cash flow was $1.50 billion, up 48.2%. Capital expenditures were $55.21 million in the quarter, up 12.7%. For the nine months, capital expenditures were $155.17 million, up 29.0%. Deferred revenue was $1.75 billion, up 38.5% from $1.26 billion in the prior-year quarter. The company's cash flow benefited from higher net income and an increase in deferred revenue.
Risks include foreign currency headwinds. The relative strength of the U.S. dollar against EMEA currencies reduced revenue by $14.2 million in the quarter and $84.0 million for the nine months. Hedging gains offset $3.9 million and $10.7 million of those impacts, respectively. The Document Cloud transition to subscriptions caused a slight revenue decline, and the company expects continued declines in perpetual creative and Acrobat perpetual offerings. Management also points to risks detailed in Part II, Item 1A of the filing. The company repurchased approximately 7.3 million shares at an average price of $93.87 during the nine months, and it entered into a $300 million structured stock repurchase agreement after the quarter ended.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2016 | Q2 FY2016 | QoQ | Q3 FY2015 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.46B | $1.40B | +4.7% | $1.22B | +20.2% |
| Gross profit | $1.26B | $1.20B | +5.4% | $1.03B | +22.8% |
| Gross margin | 86.2% | 85.5% | +0.6 pp | 84.3% | +1.8 pp |
| Sales & marketing | $477.5M | $462.8M | +3.2% | $422.0M | +13.1% |
| General & administrative | $143.7M | $138.6M | +3.7% | $122.6M | +17.2% |
| Total operating expenses | $891.9M | $852.4M | +4.6% | $780.8M | +14.2% |
| Operating income (loss) | $369.3M | $344.2M | +7.3% | $246.0M | +50.1% |
| Operating margin | 25.2% | 24.6% | +0.6 pp | 20.2% | +5.0 pp |
| Net income (loss) | $270.8M | $244.1M | +10.9% | $174.5M | +55.2% |
| Net margin | 18.5% | 17.4% | +1.1 pp | 14.3% | +4.2 pp |
| Diluted EPS | $0.54 | $0.48 | +$0.06 | $0.34 | +$0.20 |
Risks
The invalidation of the U.S.-EU and U.S.-Swiss Safe Harbor frameworks has forced Adobe to establish alternate means for transferring EU personal data, and at least one regulator determined that Adobe did not implement those means quickly enough for a small number of vendors processing EU employee data, resulting in a fine. Ongoing uncertainty around Privacy Shield and EU data transfer requirements could increase compliance costs and liability.
Adobe discloses that certain parties have in the past breached its data security systems and misused systems and software to access end users' authentication and payment information, and that hackers have accessed certain source code. These incidents could lead to litigation, fines, loss of customer confidence, and loss of trade secret protection.
Adobe's shift from perpetual licenses to subscription and hosted offerings requires continued investment and may face customer resistance, pricing pressure, delayed sales cycles, and higher-than-forecast cloud operation costs. MD&A notes the Document Cloud transition to a subscription-based model.
Digital Media ARR grew to $3.70 billion at the end of Q3 FY2016, up from $2.88 billion at the end of fiscal 2015, but Adobe cannot accurately predict renewal rates, and customers have no obligation to renew after the initial term, with some able to cancel early. Renewal rates may decline due to satisfaction, feature cadence, service reliability, pricing, security concerns, competition, or economic downturns, which could reduce future revenue.
Enterprise offerings such as Adobe Marketing Cloud and Digital Media ETLAs have multi-phased, complex sales cycles, and a higher percentage of quarterly sales historically occur in the final weeks of the quarter. This makes timing of revenue recognition and quarterly results difficult to predict.
Adobe faces intense competition, evolving standards, disruptive technologies, and lower-cost or free alternatives, including digital application marketplaces that are exclusive distributors for certain platforms. Consolidation among competitors may increase competitive pressure and harm pricing and gross margins.
Approximately 42% of total revenue comes from outside the Americas, and MD&A reports that the relative strength of the U.S. Dollar against EMEA currencies reduced revenue, with total revenue impact negative $14.2 million in Q3 FY2016 and negative $84.0 million for the nine months ended September 2, 2016, partially offset by hedging gains.
Adobe is subject to multiple tax jurisdictions, with significant foreign earnings in Irish subsidiaries, and is under IRS examination for fiscal 2010, 2011, and 2012 tax returns focused on intercompany transfer pricing. Changes in tax rules or adverse examination outcomes could increase its effective tax rate.
Adobe depends on senior management and highly skilled personnel in a competitive information technology labor market, and approximately 52% of employees are located outside the United States. Failure to attract or retain key personnel could harm long-term strategy and execution.
Adobe has $1.9 billion in senior unsecured notes outstanding and a $1 billion undrawn revolving credit facility with covenants, including a maximum leverage ratio. Breach of covenants or credit rating downgrades could restrict financing and increase borrowing costs.
Some Adobe services rely on data centers with no redundancy for all systems, and many critical applications reside in only one data center. Interruptions or failures at Adobe or third-party hosting providers could cause reputational harm, customer loss, and revenue reduction.
Adobe loses significant revenue to software piracy and has faced unauthorized access to source code, which could erode trade secret protection and make it easier for competitors to copy functionality. IP litigation and third-party claims could also be costly and disruptive.
Uncertainty about economic and political conditions could cause customers to delay or reduce technology, advertising, or marketing spending, extend sales cycles, and increase price competition. Government spending cuts could also reduce revenue from government entities.
Adobe may not realize anticipated benefits from acquisitions due to integration difficulties, retention of key personnel and customers, and potential exposure to unknown liabilities. MD&A notes an immaterial acquisition during the nine months ended September 2, 2016.
Adobe's major sites in California and India are vulnerable to prolonged droughts due to climate change, and natural disasters could disrupt operations or increase costs. This is a newer risk factor in the filing.
SaaS KPIs
All quarters →Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q3 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 12, 2026.