8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (date of earliest event reported): June 17, 2014 (June 17, 2014)

Adobe Systems Incorporated

(Exact name of Registrant as specified in its charter)

Delaware	0-15175	77-0019522
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

345 Park Avenue

San Jose, California 95110-2704

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (408) 536-6000

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition.

On June 17, 2014, Adobe Systems Incorporated (“Adobe”) issued a press release announcing its financial results for its second fiscal quarter ended May 30, 2014. A copy of this press release is furnished and attached hereto as Exhibit 99.1 and is incorporated herein by reference.

The information in this report and the exhibit attached hereto are being furnished and shall not be deemed filed for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly stated by specific reference in such filing.

The attached press release includes non-GAAP operating income, non-GAAP net income, non-GAAP tax rate, and non-GAAP diluted net income per share.

These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.

For our internal budgeting and resource allocation process, we use non-GAAP financial measures, net of the related tax impacts, which exclude: (A) stock-based and deferred compensation expenses; (B) restructuring and other charges; (C) amortization of purchased intangibles; (D) investment gains and losses; (E) accrued loss contingencies; (F) income tax adjustments; and (G) the income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes.

Through the end of fiscal 2013, we made certain income tax adjustments to our non-GAAP financial measures to reflect the income tax effects of each item we excluded from our pre-tax non-GAAP financial measures, as well as certain discrete one-time income tax adjustments. This approach is consistent with how we evaluate operating performance and plan, forecast and analyze future periods. Beginning in the first quarter of fiscal 2014, we began using a long-term non-GAAP tax rate for evaluating operating performance, as well as planning, forecasting and analyzing future periods. This long-term non-GAAP tax rate eliminates the effects of non-recurring and period specific items which can vary in size and frequency. Based on our current long-term projections, a long-term non-GAAP tax rate of 21% has been applied to our non-GAAP financial results in fiscal 2014.

We use these non-GAAP financial measures in making operating decisions because we believe the measures provide meaningful supplemental information regarding our operational performance and give us a better understanding of how we should invest in research and development and fund infrastructure and go-to-market strategies. We use these measures to help us make budgeting decisions, for example, as between product development expenses and research and development, sales and marketing and general and administrative expenses and to facilitate our internal comparisons to our historical operating results. In addition, we believe these non-GAAP financial measures are useful because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. This allows institutional investors, the analyst community and others to better understand and evaluate our operating results and future prospects in the same manner as management and to compare operating results across accounting periods and to those of our peer companies.

As described above, we exclude the following items from one or more of our non-GAAP measures:

A.     Stock-based and deferred compensation expenses and related tax impact. Stock-based compensation expense consists of charges for employee restricted stock units, performance shares, stock options and employee stock purchases in accordance with current GAAP related to stock-based compensation including expense associated with stock-based compensation related to unvested options and restricted stock units assumed in connection with our acquisitions. As we apply current stock-based compensation standards, we believe that it is useful to investors to understand the impact of the application of these standards to our operational performance, liquidity and our ability to invest in research and development and fund acquisitions and capital expenditures. Although stock-based compensation expense is calculated in accordance with current GAAP and constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense that typically requires or will require cash settlement by us and because such expense is not used by us to assess the core profitability of our business operations. Deferred compensation expense consists of charges associated with movements in our liability related to our deferred compensation plan. Although deferred compensation expense constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense that typically requires current cash settlement

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by us and because such expense is not used by us to assess the core profitability of our business operations. We further believe these measures are useful to investors in that they allow for greater transparency to certain line items in our financial statements. In addition, excluding these items from various non-GAAP measures facilitates comparisons to our competitors’ operating results.

B.     Restructuring and other charges and related tax impact. During the past several years, we have initiated certain restructuring activities in order to align our costs in connection with both our operating plans and our business strategies based on then-current economic conditions. As a result, we recognized costs related to termination benefits for former Adobe employees whose positions were eliminated and the consolidation of leased facilities. Restructuring and other charges are excluded from non-GAAP results because such expense is not used by us to assess the core profitability of our business operations.

C.     Amortization of purchased intangibles and related tax impact. We incur amortization of purchased intangibles in connection with our acquisitions. Purchased intangibles include (i) purchased technology, (ii) trademarks, (iii) customer contracts and relationships and (iv) other intangibles. We expect to amortize for accounting purposes the fair value of the purchased intangibles based on the pattern in which the economic benefits of the intangible assets will be consumed as revenue is generated. Although the intangible assets generate revenue for us, we exclude this item because this expense is non-cash in nature and because we believe the non-GAAP financial measures excluding this item provide meaningful supplemental information regarding our operational performance, liquidity and our ability to invest in research and development and fund acquisitions and capital expenditures. In addition, excluding this item from various non-GAAP measures facilitates our internal comparisons to our historical operating results and comparisons to our competitors’ operating results.

D.     Investment gains and losses and related tax impact. We incur investment gains and losses principally from realized gains or losses from the sale and exchange of marketable equity investments, other-than-temporary declines in the value of marketable and non-marketable equity securities, unrealized holding gains and losses associated with our deferred compensation plan assets (classified as trading securities) and gains and losses on the sale of equity securities held indirectly through investment partnerships. We do not actively trade publicly held securities nor do we rely on these securities positions for funding our ongoing operations. We exclude gains and losses and the related tax impact on these equity securities because these items are unrelated to our ongoing business and operating results.

E.        Accrued loss contingencies associated with one-time litigation events.  In connection with ongoing litigation or similar events, we accrue losses in the event such losses are determined to be both probable and estimable in accordance with Accounting Standards Codification (ASC) 450-20, Loss Contingencies. From time to time we exclude such losses and the related tax impact when they relate to one-time events that are unrelated to our ongoing business and operating results.

F.     Income Tax Adjustments. Our Income tax expense is based on our GAAP taxable income and actual tax rates in effect, which can differ significantly from the 21% long-term non-GAAP tax rate applied to our non-GAAP financial results effective in fiscal 2014. In arriving at our long-term non-GAAP tax rate, certain non-recurring and period specific income tax adjustments, such as a one-time tax charge in connection with an acquisition, reenactment of the Federal Research and Development tax credit and resolution of an income tax audit, are made to help us to assess the core profitability of our business operations. We intend to evaluate this long-term non-GAAP tax rate only on an annual basis. This long-term non-GAAP tax rate could be subject to change for a number of reasons including significant changes in our geographic earnings mix or fundamental tax law changes in major jurisdictions in which we operate.

G.     Income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes. Excluding the income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes assists investors in understanding the tax provision associated with those adjustments and the effective tax rate related to our ongoing operations.

We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our financial results as determined in accordance with GAAP and that these measures should only be used to evaluate our financial results in conjunction with the corresponding GAAP measures and that is why we qualify the use of non-GAAP financial information in a statement when non-GAAP information is presented.

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Item 9.01. Financial Statements and Exhibits.

(d) Exhibits

99.1 Press release issued on June 17, 2014 entitled “Adobe's Cloud Solutions Fuel Strong Financial Results”

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

ADOBE SYSTEMS INCORPORATED
By:	/s/ MARK GARRETT
	Mark Garrett
	Executive Vice President and Chief Financial Officer

Date: June 17, 2014

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EXHIBIT INDEX

Exhibit No.	Description
99.1	Press release issued on June 17, 2014 entitled “Adobe's Cloud Solutions Fuel Strong Financial Results”

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EX-99.1

Exhibit 99.1

Investor Relations Contact

Mike Saviage

Adobe Systems Incorporated

408-536-4416

ir@adobe.com

Public Relations Contact

Jodi Sorensen

Adobe Systems Incorporated

408-536-2084

jsorensen@adobe.com

FOR IMMEDIATE RELEASE

Adobe’s Cloud Solutions Fuel Strong Financial Results

Creative Cloud and Adobe Marketing Cloud Adoption Accelerates in Q2

SAN JOSE, Calif. - June 17, 2014- Adobe (Nasdaq:ADBE) today reported financial results for its second quarter of fiscal year 2014 ended May 30, 2014.

Second Quarter Financial Highlights

• Adobe achieved revenue of $1.07 billion, above the high end of its targeted range of $1.00 billion to $1.05 billion.

• Adobe exited Q2 with 2 million 308 thousand paid Creative Cloud subscriptions, an increase of 464 thousand when compared to the number of subscriptions as of the end of Q1 fiscal year 2014.

• Creative Annualized Recurring Revenue (“ARR”) grew to $1.20 billion, and total Digital Media ARR grew to $1.38 billion.

• Adobe Marketing Cloud quarterly revenue was $283 million, representing 23 percent year-over-year growth.

• Diluted earnings per share were $0.17 on a GAAP-basis, and $0.37 on a non-GAAP basis.

• Cash flow from operations was $368 million and deferred revenue grew to a record $929 million.

• 53 percent of Adobe’s Q2 revenue was from recurring sources such as Creative Cloud and Adobe Marketing Cloud.

• The company repurchased approximately 2.6 million shares during the quarter, returning approximately $166 million of cash to stockholders.

A reconciliation between GAAP and non-GAAP results is provided at the end of this press release and on Adobe’s website.

Executive Quotes

“Adobe’s first-half upside was driven by accelerated adoption of Creative Cloud and Adobe Marketing Cloud”, said Shantanu Narayen, president and chief executive officer, Adobe. “We’re excited about our upcoming product pipeline and expect a strong second half of the year.”

“Our earnings performance in Q2 reflects the financial leverage we have in our model,” said Mark Garrett, executive vice president and chief financial officer, Adobe. “With Adobe’s Creative Cloud transformation behind us, our focus moving forward is to drive strong revenue and earnings growth with our market-leading cloud offerings.”

Adobe to Webcast Earnings Conference Call

Adobe will webcast its second quarter fiscal year 2014 earnings conference call today at 2:00 p.m. Pacific Time from its investor relations website: www.adobe.com/ADBE. Earnings documents, including Adobe management’s prepared conference call remarks with slides, financial targets and an investor datasheet are posted to Adobe’s investor relations website in advance of the conference call for reference. A reconciliation between GAAP and non-GAAP earnings results and financial targets is also provided on the website.

Forward-Looking Statements Disclosure

This press release contains forward-looking statements, including those related to future product releases, business momentum, the strength of our cloud business and growth of our revenue and earnings, all of which involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to: failure to develop, market and distribute products and services that meet customer requirements, introduction of new products and business models by competitors, failure to successfully manage transitions to new business models and markets, fluctuations in subscription renewal rates, risks associated with cyber-attacks and information security, uncertainty in economic conditions and the financial markets, and failure to realize the anticipated benefits of past or future acquisitions.

For a discussion of these and other risks and uncertainties, please refer to Adobe’s Annual Report on Form 10-K for our fiscal year 2013 ended Nov. 29, 2013 and Adobe’s Quarterly Reports on Form 10-Q issued in fiscal year 2014.

The financial information set forth in this press release reflects estimates based on information available at this time. These amounts could differ from actual reported amounts stated in Adobe’s Quarterly Report on Form 10-Q for our quarter ended May 30, 2014, which Adobe expects to file in June 2014.

Adobe assumes no obligation to, and does not currently intend to, update these forward-looking statements.

About Adobe Systems Incorporated

Adobe is changing the world through digital experiences. For more information, visit www.adobe.com.

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© 2014 Adobe Systems Incorporated. All rights reserved. Adobe, the Adobe logo, Creative Cloud and Adobe Marketing Cloud are either registered trademarks or trademarks of Adobe Systems Incorporated in the United States and/or other countries. All other trademarks are the property of their respective owners.

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Condensed Consolidated Statements of Income

(In thousands, except per share data; unaudited)

	Three Months Ended						Six Months Ended
	May 30, 2014			May 31, 2013			May 30, 2014			May 31, 2013
Revenue:
Products	$	479,247		$	644,899		$	950,701		$	1,320,688
Subscription	476,694			254,521			900,257			478,787
Services and support	112,267			111,129			217,370			218,947
Total revenue	1,068,208			1,010,549			2,068,328			2,018,422
Cost of revenue:
Products	24,499			26,805			51,997			78,787
Subscription	84,147			66,527			160,879			129,107
Services and support	46,258			41,949			90,537			84,071
Total cost of revenue	154,904			135,281			303,413			291,965
Gross profit	913,304			875,268			1,764,915			1,726,457
Operating expenses:
Research and development	209,092			203,097			418,617			412,735
Sales and marketing	426,830			402,208			836,971			800,241
General and administrative	129,138			120,870			268,122			253,723
Restructuring and other charges	(366		)	24,992			297			24,994
Amortization of purchased intangibles	13,352			12,792			26,904			25,231
Total operating expenses	778,046			763,959			1,550,911			1,516,924
Operating income	135,258			111,309			214,004			209,533
Non-operating income (expense):
Interest and other income (expense), net	2,563			1,268			5,708			2,514
Interest expense	(17,103		)	(17,205		)	(33,693		)	(34,039		)
Investment gains (losses), net	553			(4,245		)	144			(3,397		)
Total non-operating income (expense), net	(13,987		)	(20,182		)	(27,841		)	(34,922		)
Income before income taxes	121,271			91,127			186,163			174,611
Provision for income taxes	32,744			14,581			50,590			32,948
Net income	$	88,527		$	76,546		$	135,573		$	141,663
Basic net income per share	$	0.18		$	0.15		$	0.27		$	0.28
Shares used to compute basic net income per share	497,931			503,384			497,439			500,996
Diluted net income per share	$	0.17		$	0.15		$	0.27		$	0.28
Shares used to compute diluted net income per share	506,687			512,446			508,227			511,535

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Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

	May 30, 2014			November 29, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	817,020		$	834,556
Short-term investments	2,513,191			2,339,196
Trade receivables, net of allowances for doubtful accounts of $7,929 and $10,228, respectively	531,557			599,820
Deferred income taxes	72,489			102,247
Prepaid expenses and other current assets	180,086			170,110
Total current assets	4,114,343			4,045,929
Property and equipment, net	642,450			659,774
Goodwill	4,773,798			4,771,981
Purchased and other intangibles, net	532,317			605,254
Investment in lease receivable	207,239			207,239
Other assets	102,052			90,121
Total assets	$	10,372,199		$	10,380,298
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables	$	54,858		$	62,096
Accrued expenses	656,940			656,939
Debt and capital lease obligations	609,742			14,676
Accrued restructuring	3,627			6,171
Income taxes payable	13,696			10,222
Deferred revenue	879,109			775,544
Total current liabilities	2,217,972			1,525,648
Long-term liabilities:
Debt and capital lease obligations	896,551			1,499,297
Deferred revenue	49,495			53,268
Accrued restructuring	6,099			7,717
Income taxes payable	139,870			132,545
Deferred income taxes	351,612			375,634
Other liabilities	73,712			61,555
Total liabilities	3,735,311			3,655,664
Stockholders' equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized	—			—
Common stock, $0.0001 par value	61			61
Additional paid-in-capital	3,562,682			3,392,696
Retained earnings	6,806,104			6,928,964
Accumulated other comprehensive income	46,642			46,103
Treasury stock, at cost (103,587 and 104,573 shares, respectively), net of reissuances	(3,778,601		)	(3,643,190		)
Total stockholders' equity	6,636,888			6,724,634
Total liabilities and stockholders' equity	$	10,372,199		$	10,380,298

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Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

	Three Months Ended
	May 30, 2014			May 31, 2013
Cash flows from operating activities:
Net income	$	88,527		$	76,546
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	77,653			80,950
Stock-based compensation expense	83,005			73,528
Asset impairment losses	—			23,838
Unrealized investment (gains) losses, net	(352		)	4,312
Changes in deferred revenue	47,517			(8,770		)
Changes in other operating assets and liabilities	71,186			48,744
Net cash provided by operating activities	367,536			299,148
Cash flows from investing activities:
Purchases, sales and maturities of short-term investments, net	(117,967		)	(275,455		)
Purchases of property and equipment	(27,198		)	(46,249		)
Purchases and sales of long-term investments, intangibles and other assets, net	(2,767		)	(12,735		)
Net cash used for investing activities	(147,932		)	(334,439		)
Cash flows from financing activities:
Purchases of treasury stock	(150,000		)	(200,000		)
Proceeds from reissuance of treasury stock, net	12,824			184,655
Repayment of debt and capital lease obligations	(3,626		)	(7,297		)
Excess tax benefits from stock-based compensation	4,875			—
Net cash used for financing activities	(135,927		)	(22,642		)
Effect of exchange rate changes on cash and cash equivalents	(573		)	(2,039		)
Net increase (decrease) in cash and cash equivalents	83,104			(59,972		)
Cash and cash equivalents at beginning of period	733,916			1,306,382
Cash and cash equivalents at end of period	$	817,020		$	1,246,410

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Non-GAAP Results

(In thousands, except per share data)

The following tables show Adobe's GAAP results reconciled to non-GAAP results included in this release.

	Three Months Ended
	May 30, 2014			May 31, 2013			February 28, 2014
Operating income:
GAAP operating income	$	135,258		$	111,309		$	78,746
Stock-based and deferred compensation expense	83,600			79,624			83,549
Restructuring and other charges	(366		)	24,992			663
Amortization of purchased intangibles	31,835			31,359			32,054
Loss contingency	—			—			10,000
Non-GAAP operating income	$	250,327		$	247,284		$	205,012
Net income:
GAAP net income	$	88,527		$	76,546		$	47,046
Stock-based and deferred compensation expense	83,600			79,624			83,549
Restructuring and other charges	(366		)	24,992			663
Amortization of purchased intangibles	31,835			31,359			32,054
Investment (gains) losses	(553		)	4,245			409
Loss contingency	—			—			10,000
Income tax adjustments	(16,771		)	(33,915		)	(22,383		)
Non-GAAP net income	$	186,272		$	182,851		$	151,338
Diluted net income per share:
GAAP diluted net income per share	$	0.17		$	0.15		$	0.09
Stock-based and deferred compensation expense	0.16			0.16			0.16
Restructuring and other charges	—			0.05			—
Amortization of purchased intangibles	0.06			0.06			0.06
Investment (gains) losses	—			0.01			—
Loss contingency	—			—			0.02
Income tax adjustments	(0.02		)	(0.07		)	(0.03		)
Non-GAAP diluted net income per share	$	0.37		$	0.36		$	0.30
Shares used in computing diluted net income per share	506,687			512,446			508,340

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Non-GAAP Results (continued)

	Three Months Ended
	May 30, 2014
Effective income tax rate:
GAAP effective income tax rate	27.0	%
Stock-based and deferred compensation expense	(3.2	)
Amortization of purchased intangibles	(1.3	)
Income tax adjustments	(1.5	)
Non-GAAP effective income tax rate	21.0	%

Use of Non-GAAP Financial Information

Adobe continues to provide all information required in accordance with GAAP, but believes evaluating its ongoing operating results may not be as useful if an investor is limited to reviewing only GAAP financial measures. Adobe uses non-GAAP financial information to evaluate its ongoing operations and for internal planning and forecasting purposes. Adobe's management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Adobe presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate Adobe's operating results. Adobe believes these non-GAAP financial measures are useful because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. This allows institutional investors, the analyst community and others to better understand and evaluate our operating results and future prospects in the same manner as management.

Adobe's management believes it is useful for itself and investors to review, as applicable, both GAAP information that may include items such as stock-based and deferred compensation expenses, restructuring and other charges, amortization of purchased intangibles and certain activity in connection with technology license arrangements, investment gains and losses, loss contingencies and the related tax impact of all of these items, income tax adjustments, the income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes, and the non-GAAP measures that exclude such information in order to assess the performance of Adobe's business and for planning and forecasting in subsequent periods. Whenever Adobe uses such a non-GAAP financial measure, it provides a reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above.

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