Summary
Adobe's fiscal 2018 third quarter showed growth across the income statement. Revenue was $2.29 billion, up 24.4% from the prior-year quarter. Gross profit was $2.00 billion, up 26.5%. Operating income was $718.61 million, up 31.7%. Net income was $666.29 million, up 58.8%. Diluted EPS was $1.34, up $0.50. Gross margin was 87.1%, up 1.4 percentage points. Operating margin was 31.4%, up 1.7 percentage points. Management tied the net income increase to higher subscription revenue and, to a lesser extent, a lower provision for income taxes.
The nine-month picture was similar. Revenue for the nine months ended August 31, 2018 was $6.57 billion, up 24.0%. Gross profit was $5.73 billion, up 25.8%. Operating income was $2.12 billion, up 39.6%. Net income was $1.91 billion, up 60.4%. Diluted EPS was $3.84, up $1.46. Gross margin was 87.3%, up 1.2 percentage points. Operating margin was 32.3%, up 3.6 percentage points.
Digital Media carried the quarter. Total Digital Media ARR was $6.40 billion at the end of the third quarter, up from $5.39 billion at the end of fiscal 2017, an increase of $1.02 billion, or 19%. Creative ARR was $5.66 billion, up from $4.77 billion. Document Cloud ARR was $744 million, up from $614 million. Creative revenue was $1.36 billion, up from $1.06 billion, representing 28% year-over-year growth. Document Cloud revenue was $248.9 million, up from $206.3 million. Digital Media segment revenue was $1.61 billion, up from $1.27 billion, representing 27% year-over-year growth. Adobe Experience Cloud revenue was $614.0 million, representing 21% year-over-year growth, and subscription revenue inside that segment was $494.6 million, up from $395.2 million, representing 25% year-over-year growth. Adobe said the Creative gain came mostly from subscription revenue across Creative Cloud offerings, while the Document Cloud gain came from subscription revenue as that business keeps shifting away from perpetual licenses. Revenue rose in every geographic region. Foreign currency changes lifted revenue by $27.7 million in the quarter and $114.7 million for the nine months, while hedging added $16.8 million and $18.2 million.
Cash generation stayed strong. Operating cash flow was $955.30 million in the third quarter, up 35.6%, and $2.92 billion for the nine months, up 40.5%. Adobe said the nine-month increase was primarily due to higher net income. Capital expenditures were $63.56 million in the quarter, up 17.2%, and $204.02 million for the nine months, up 45.3%. Deferred revenue, current portion, was $2.62 billion at quarter end, up 22.4% from the prior-year quarter. Adobe repurchased about 7.1 million shares at an average price of $225.15 during the nine months. As of August 31, 2018, $150 million remained under the $2.5 billion repurchase authority, and the $8 billion authority was undrawn. The company also holds a $1 billion senior unsecured revolving credit agreement through July 27, 2020, with no outstanding borrowings.
Adobe closed the Magento Commerce acquisition in June 2018 and began folding it into the Digital Experience business. In September 2018, the company signed a definitive agreement to acquire Marketo for approximately $4.75 billion, subject to regulatory approvals, with the deal expected to close in the fourth quarter of fiscal 2018. Management expects to fund the purchase with existing cash, newly issued debt, or drawings on the revolving credit agreement, and it believes existing cash, investments, and cash flows will be sufficient for the next twelve months. The Tax Act remains a source of uncertainty. Adobe recorded provisional amounts and warned that U.S. and foreign audit settlements could significantly affect the estimated transition tax. The credit facility carries a leverage covenant, and the company was in compliance as of August 31, 2018. Adobe also pointed to the risk factors in Part II, Item 1A of the 10-Q, which cover product plans, future growth, market opportunities, and strategic initiatives.
Forecast
No forward guidance in this quarter's filings.
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2018 | Q2 FY2018 | QoQ | Q3 FY2017 | YoY |
|---|---|---|---|---|---|
| Revenue | $2.29B | $2.20B | +4.4% | $1.84B | +24.4% |
| Gross profit | $2.00B | $1.91B | +4.3% | $1.58B | +26.5% |
| Gross margin | 87.1% | 87.2% | -0.1 pp | 85.7% | +1.4 pp |
| Sales & marketing | $670.1M | $646.2M | +3.7% | $550.1M | +21.8% |
| General & administrative | $184.1M | $178.0M | +3.4% | $147.4M | +24.9% |
| Total operating expenses | $1.28B | $1.22B | +5.1% | $1.03B | +23.7% |
| Operating income (loss) | $718.6M | $698.5M | +2.9% | $545.7M | +31.7% |
| Operating margin | 31.4% | 31.8% | -0.4 pp | 29.6% | +1.7 pp |
| Net income (loss) | $666.3M | $663.2M | +0.5% | $419.6M | +58.8% |
| Net margin | 29.1% | 30.2% | -1.1 pp | 22.8% | +6.3 pp |
| Diluted EPS | $1.34 | $1.33 | +$0.01 | $0.84 | +$0.50 |
Risks
In Q3 fiscal 2018 Adobe acquired Magento and began integrating it into Digital Experience; in September 2018 it agreed to acquire Marketo for approximately $4.75 billion, expected to close in Q4 fiscal 2018. Integration may disrupt ongoing business, distract management, and fail to achieve financial and strategic goals.
The Tax Act required a provisional transition tax liability of $427 million as of August 31, 2018, and Adobe's effective tax rate decreased 18 percentage points for the three months ended August 31, 2018. Certain international provisions become effective in fiscal 2019 and could adversely affect Adobe's tax rate and cash flow.
GDPR and expanding global privacy laws, plus contested cross-border data transfer mechanisms and data localization proposals in countries such as India, may affect Adobe's ability to reach customers, respond to access and deletion requests, and implement business models. Non-compliance could lead to fines, litigation, and reputational harm.
Adobe has previously disclosed that certain parties breached and misused some of its systems and software to access end users' authentication and payment information. Critical vulnerabilities could crash applications or allow attacker control, leading to liability, notification costs, and customer loss.
Sales cycles for Adobe Experience Cloud and ETLAs in Digital Media are multi-phased and complex, and a higher percentage of a quarter's total sales historically occur in the final weeks. This makes it difficult to predict when a given sales cycle will close and can cause uneven results.
Adobe recognizes subscription revenue ratably over terms of 1 to 36 months, so most subscription revenue in each quarter comes from prior agreements. Customers have no obligation to renew, may renew at lower levels or cancel under certain circumstances, and renewal rates may decline due to satisfaction, reliability, pricing, security, or economic downturns.
Adobe faces intense competition, new industry standards, limited barriers to entry, short product life cycles, and customer price sensitivity, including alternatives with limited functionality at lower costs or free. Competitor consolidation and greater resources could cause loss of market share and pressure pricing and gross margins.
Adobe relies on data centers managed by Adobe and third parties, does not have redundancy for all systems, and many critical applications reside in only one data center. Interruptions, migration issues, or failures at hosting or content delivery providers could impair service delivery and harm reputation.
Competition for experienced information technology personnel is intense in many locations where Adobe employees work, and higher compensation costs may not be offset by improved productivity or increased sales. Loss of senior management or key personnel could harm the business.
Adobe has $1.9 billion in senior unsecured notes outstanding and a $1 billion senior unsecured revolving credit agreement that is currently undrawn. The Marketo acquisition may be financed with new debt or revolver drawings, increasing vulnerability to economic conditions and reducing cash flow flexibility.
Adobe loses significant revenue due to illegal use of its software, and unauthorized disclosure of source code through a security breach could cause loss of trade secret protection. This could make it easier for third parties to copy functionality and harm revenue and operating margins.
SaaS KPIs
All quarters →Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q3 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.