Analyst Conference Summary

Adobe Systems

conference date: June 18, 2013 @ 2:00 PM Pacific Time
for quarter ending: May 31, 2013 (Q2, second quarter fiscal 2013)

Overview: Lack of revenue and profit growth due to new subscription model.

Basic data (GAAP) :

Revenue was 1.011 billion, up slightly sequentially from $1.008 billion, but down 10% from $1.124 billion in the year-earlier quarter.

Net income was $76.5 million, up 18% sequentially from $65.1 million but down 66% from $223.9 million year-earlier.

Earnings per share (EPS) were $0.15, up 15% sequentially from $0.13 but down 67% from $0.45 year-earlier.


Fiscal Q3 2013 targets are: revenue between $975 and $1.025 billion; GAAP EPS $0.10 to $0.16; non-GAAP EPS $0.29 to $0.35. Sequential revenue decline in Digital Media segment expeced due to continued shift to subscriptions and ETLAs.

Remains comfortable with announced annual targets.

Conference Highlights:

Believes executed well against fiscal Q2 agenda. Short term decline in average revenue per customer should be compensated in long term by higher recurring revenue.

Paid Creative Cloud subscriptions increased 221 thousand in the quarter to 700 thousand. Goal is 1.25 million by end of the fiscal year.

Non-GAAP numbers: net income $182.9 million, up 3% sequentially from $177.9 million but down 39% from $299.6 million year-earlier. EPS $0.36, up 3% sequentially from $0.35, but down 42% from $0.60 year-earlier.

Digital Media: $670 million revenue. Continues to release new features on Creative Cloud, which is displacig CS6. Annualized Recurring Revenue ended at $440 million. Document Services had $199.3 million in revenue.

Digital Marketing: Adobe Marketing Cloud revenue was $229.6 million, while bookings grew over 25%.

LiveCycle + Web Conferencing segment revenue was $61 million.

Deferred revenue ended $691.3 million.

Cash and equivalents ended $3.87 billion. Cash flow from operations ws $299.1 million. Repurchased 3.9 million shares in the quarter.

Demand was stable across major geographic regions.

Cost of revenue was $135.3 million, leaving gross profit of $875.3 million. Operating expenses of $764.0 million included: $203.1 million for research and development; $402.2 million sales and marketing; $120.9 million general and administrative; $25.0 million restructuring; $12.8 million amortization. Leaving operating income of $111.3 million. Interest and other expense was $20.2 million. Income taxes $14.6 million.


Customers resistant to moving to Creative Cloud? Results so far show our execution has been outstanding. We look for tweeks, but remain confident in ability to hit announced metrics.

Revenue per customer? Remains in the ballpark of the number we gave last Q3. We remain focussed on driving subscribers to drive ARR (Annualized Recurring Revenue).

Discrepancy between announced and bookings marketing number? In Adobe Web Experience Manager we host our customer's infrastructure, which gives us a chance to cross-sell, but it is invoiced over a long period rather than paid for upfront. This business is performing exceedingly well and will benefit our long-term shareholders.

Subscriber additions trajectory during quarter? Linearity was good. The new offerings did help Team offerings. We expect the subscriber ramp to accelerate in Q3 and Q4. The free trials are helping to build the subscription rate.

Q4 down sequentially implied in guidance? No.

Education market response to subscriptions? We are doing well in education, including both individual subscribers and ETLAs.

How quickly will perpetual license revenue drop away? We believe it will be minimal in FY 2015, but continue to sell CS6 at this point.

Are some new subscribers also new to Adobe, and what type of customer are you seeing? The low cost of entry is attracting new Adobe customers, and the ratio of professionals and home vs. work seems to be about the same. Adoption is going faster in North America than in other regions.

Will you add email marketing, like Salesforce did? We will continue to fill out our marketing cloud, but our advantage is Web analytics.

ARR does not show up in deferred. For Creative Cloud we bill monthly. Deferred revenue is from other segments.

About 80% of CC take the full suite, about 20% to specific products, which is better than with the Creative Suite legacy products.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2013 William P. Meyers