Summary
Adobe reported fiscal 2019 third-quarter revenue of $2.83 billion, up 23.7% from the prior-year quarter. Year-to-date revenue was $8.18 billion, up 24.6%. Gross profit was $2.42 billion, up 21.2%, but gross margin slipped to 85.3% from 87.1%, down 1.8 percentage points. Operating income was $853.81 million, up 18.8%, while operating margin fell to 30.1% from 31.4%, down 1.2 percentage points. Net income was $792.76 million, up 19.0%, and diluted EPS was $1.61, up $0.27 or 20.1%. The margin pressure reflects higher expenses, including amortization from the Marketo acquisition and headcount growth.
Creative ARR exiting the third quarter was $6.87 billion, up from $5.92 billion at the end of fiscal 2018. Document Cloud ARR was $993 million, up from $791 million. Total Digital Media ARR grew to $7.86 billion, up from $6.71 billion, an increase of $1.15 billion or 17%. Management said the ARR growth came primarily from stronger new user adoption of Creative Cloud and Document Cloud. Deferred revenue was $3.26 billion as of August 30, 2019. RPO was $8.77 billion. The MD&A notes that Digital Experience growth was driven by Marketo, Commerce Cloud, AEM and Campaign, though some customers are waiting for enhancements expected in the fourth quarter of fiscal 2019 and the first half of fiscal 2020.
Operating cash flow was $922.64 million in the quarter, down 3.4% from the prior-year quarter. Year-to-date operating cash flow was $3.05 billion, up 4.2%. Capital expenditures were $89.62 million in the quarter, up 41.0%, and $300.38 million year to date, up 47.2%. The MD&A reports a working capital deficit of $2.05 billion as of August 30, 2019, compared with a surplus of $555.9 million as of November 30, 2018. The swing was mainly due to reclassifying debt to current liabilities. Management intends to refinance the Term Loan and 2020 Notes on or before their due dates. The company had no outstanding borrowings under its $1 billion revolving credit agreement.
Foreign currency reduced revenue by $38.3 million in the quarter and $98.3 million year to date, partly offset by hedging gains of $10.8 million and $28.3 million. The MD&A also flags tax risks. The company faces ongoing tax examinations and potential changes in tax laws. It maintains a valuation allowance related to state and foreign credits. Purchase obligations include an incremental minimum commitment through May 2024. Management expects to continue investing in facilities and computer systems, and it does not anticipate paying cash dividends in the foreseeable future.
Management expects the addition of Marketo and continued demand across Adobe Experience Cloud to drive revenue growth in future years. It also expects enhancements to existing solutions and new innovations to become available in the fourth quarter of fiscal 2019 and into the first half of fiscal 2020. Some customers are waiting for those enhancements, which weighed on Digital Experience growth in the quarter. The company's ARR growth and deferred revenue balance suggest a healthy recurring revenue base, but margin pressure and foreign currency headwinds remain watch items.
Forecast
No forward guidance in this quarter's filings.
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2019 | Q2 FY2019 | QoQ | Q3 FY2018 | YoY |
|---|---|---|---|---|---|
| Revenue | $2.83B | $2.74B | +3.3% | $2.29B | +23.7% |
| Gross profit | $2.42B | $2.34B | +3.5% | $2.00B | +21.2% |
| Gross margin | 85.3% | 85.2% | +0.2 pp | 87.1% | -1.8 pp |
| Sales & marketing | $812.3M | $848.9M | -4.3% | $670.1M | +21.2% |
| General & administrative | $219.3M | $219.3M | -0.0% | $184.1M | +19.1% |
| Total operating expenses | $1.56B | $1.59B | -1.4% | $1.28B | +22.5% |
| Operating income (loss) | $853.8M | $749.5M | +13.9% | $718.6M | +18.8% |
| Operating margin | 30.1% | 27.3% | +2.8 pp | 31.4% | -1.2 pp |
| Net income (loss) | $792.8M | $632.6M | +25.3% | $666.3M | +19.0% |
| Net margin | 28.0% | 23.1% | +4.9 pp | 29.1% | -1.1 pp |
| Diluted EPS | $1.61 | $1.29 | +$0.32 | $1.34 | +$0.27 |
Risks
Adobe faces intense competition, new industry standards, limited barriers to entry, and alternatives with limited functionality at lower costs or free of charge, which could pressure pricing and gross margins. Gross margin was 85.3% in FY2019 Q3, down 1.8 pp from 87.1% in FY2018 Q3, and operating margin was 30.1%, down 1.2 pp.
Integration of Magento and Marketo may not achieve anticipated benefits and could disrupt operations. MD&A attributes increases in amortization of purchased intangibles and headcount-related costs partly to these acquisitions, and deferred revenue was $3.26 billion as of August 30, 2019.
Adobe has $1.9 billion of senior notes and a $2.25 billion term loan, with the term loan and 2020 notes reclassified to current liabilities, causing a working capital deficit of $2.05 billion as of August 30, 2019. The company intends to refinance on or before due dates, and covenants require compliance with a maximum leverage ratio.
Customers have no obligation to renew subscriptions and may cancel under certain circumstances, and renewal rates may decline due to satisfaction, pricing, competition, or economic downturns. Adobe cannot precisely forecast renewal rates given its varied customer base and flexible subscription lengths.
Expanding privacy and security laws, including GDPR, NISD, and the California Consumer Privacy Act, plus contested cross-border transfer mechanisms such as Privacy Shield and Model Clauses, could increase compliance obligations and liability. These laws may affect Adobe's ability to reach customers and implement business models, including for AI and machine learning.
Adobe processes and stores significant employee and customer data, much hosted by third parties, and has previously experienced breaches and misuse of systems and software. Weak or recycled passwords, failure to remove former employee accounts, and third-party data center incidents could lead to data loss, regulatory fines, and customer loss.
Tax Cuts and Jobs Act international provisions effective fiscal 2019, significant foreign earnings in Irish subsidiaries, and transfer pricing examinations could adversely affect the effective tax rate. The effective tax rate decreased two percentage points for the nine months ended August 30, 2019 compared to the prior-year period, but future changes are uncertain.
Approximately 42% of total revenue comes from outside the Americas, exposing Adobe to currency fluctuations. Foreign currency decreased revenue by $38.3 million in FY2019 Q3 and $98.3 million year to date, partially offset by hedging gains of $10.8 million and $28.3 million, respectively.
Enterprise offerings such as Adobe Experience Cloud and ETLAs have multi-phased, complex sales cycles, with a higher percentage of quarterly sales occurring in the final weeks. Digital Experience revenue growth was offset in part by customers awaiting enhancements and new innovations expected in FY2019 Q4 and first half of FY2020.
Subscription revenue is recognized ratably over terms of 1 to 36 months, so reductions in new or renewed subscriptions may not be reflected in revenue until later quarters. This timing risk is material because subscription revenue was 90% of total revenue in FY2019 Q3.
Adobe relies on data centers managed by itself and third parties, with no redundancy for all systems and many critical applications in only one data center. Termination or disruption of hosting or content delivery services could impair delivery of Creative Cloud, Document Cloud, and Experience Cloud and subject Adobe to notification requirements and liabilities.
Adobe depends on senior management and highly skilled personnel, and competition for technology talent is intense in many locations. Higher compensation costs to retain employees may not be offset by improved productivity or increased sales.
Goodwill and amortizable intangible assets are tested for impairment, and declines in stock price, market capitalization, cash flows, or slower industry growth could require a significant charge to earnings. The company has grown through acquisitions including Magento and Marketo, increasing intangible assets subject to impairment.
Adobe's headquarters, significant R&D, certain data centers, and critical operations are in the San Francisco Bay Area and Salt Lake Valley Area, both near major earthquake faults. A catastrophic event could disrupt normal business operations and future operating results.
Some products rely on third-party cookies for advertising, performance measurement, and fraud detection. Browsers increasingly block third-party cookies by default or users employ ad-blocking software, which could harm Adobe's advertising-related business.
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 Q3 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.