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): September 13, 2018 (September 13, 2018)

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))

Indicate by check mark whether the Registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company      □

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  □

Item 2.02. Results of Operations and Financial Condition.

On September 13, 2018, Adobe Systems Incorporated (“Adobe”) issued a press release announcing its financial results for its third fiscal quarter ended August 31, 2018. 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 expense; (B) restructuring and other charges; (C) amortization of purchased intangibles and technology license arrangements; (D) investment gains and losses; (E) income tax adjustments; and (F) the income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes.

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 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 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.

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C.     Amortization of purchased intangibles and technology license arrangements 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. Periodically, we also incur charges related to prior activity in connection with technology license arrangements. We exclude these items because these expenses are not reflective of ongoing operating results in the period incurred.

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.     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 non-GAAP tax rate applied to our non-GAAP financial results. In arriving at our 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, resolution of certain income tax audits and any significant financial impacts resulting from tax legislation (including the Tax Cuts and Jobs Act) are made to help us to assess the core profitability of our business operations. This non-GAAP tax rate could be subject to change for several reasons, including significant changes in our geographic earnings mix or fundamental tax law changes in major jurisdictions in which we operate.

F.     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 September 13, 2018 entitled “Adobe Reports Record Revenue”

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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/ JOHN MURPHY
	John Murphy
	Executive Vice President and Chief Financial Officer

Date: September 13, 2018

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EX-99.1

Exhibit 99.1

Investor Relations Contact

Mike Saviage

Adobe

408-536-4416

ir@adobe.com

Public Relations Contact

Dan Berthiaume

Adobe

408-536-2584

dberthia@adobe.com

FOR IMMEDIATE RELEASE

Adobe Reports Record Revenue

Digital Experience Subscription Revenue Grows 25 Percent Year-Over-Year in Q3

SAN JOSE, Calif. - September 13, 2018- Adobe (Nasdaq:ADBE) today reported strong financial results for its third quarter fiscal year 2018 ended August 31, 2018.

Financial Highlights

• Adobe achieved record quarterly revenue of $2.29 billion in its third quarter of fiscal year 2018, which represents 24 percent year-over-year revenue growth.

• Diluted earnings per share was $1.34 on a GAAP-basis, and $1.73 on a non-GAAP basis.

• Digital Media segment revenue was $1.61 billion, with Creative revenue growing to $1.36 billion and Document Cloud achieving record revenue of $249 million, which represents 21 percent year-over-year growth.

• Digital Media Annualized Recurring Revenue (“ARR”) grew to $6.40 billion exiting the quarter, a quarter-over-quarter increase of $339 million. Creative ARR grew to $5.66 billion, and Document Cloud ARR grew to $744 million.

• Digital Experience segment revenue was $614 million, which represents 21 percent year-over-year growth. Digital Experience subscription revenue grew 25 percent year-over-year in the quarter.

• Operating income grew 32 percent and net income grew 59 percent year-over-year on a GAAP-basis; operating income grew 32 percent and net income grew 57 percent year-over-year on a non-GAAP basis.

• Cash flow from operations was $955 million, and deferred revenue grew 23 percent year-over-year to approximately $2.71 billion.

• Adobe repurchased approximately 2.9 million shares during the quarter, returning $714 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 continues to inspire creativity and drive business transformation as reflected in our record Q3 results," said Shantanu Narayen, president and CEO, Adobe. "Students, creatives, enterprises and governments trust Creative Cloud, Document Cloud and Experience Cloud to create and deliver the transformative digital experiences required to compete today."

“Our strong momentum continued into the second half of fiscal 2018 as Adobe delivered another quarter of sustained revenue growth, strong earnings and cash flow of nearly $1 billion," said John Murphy, executive vice president and CFO, Adobe.

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Adobe to Webcast Earnings Conference Call

Adobe will webcast its third quarter fiscal year 2018 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 business momentum, our market opportunity, revenue, annualized recurring revenue, non-operating other expense, tax rate on a GAAP and non-GAAP basis, earnings per share on a GAAP and non-GAAP basis, and share count, 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, acquire, market and offer products and services that meet customer requirements, failure to compete effectively, introduction of new technology, complex sales cycles, risks related to the timing of revenue recognition from our subscription offerings, fluctuations in subscription renewal rates, risks associated with cyber-attacks, potential interruptions or delays in hosted services provided by us or third parties, information security and privacy, failure to realize the anticipated benefits of past or future acquisitions, changes in accounting principles and tax regulations, uncertainty in the financial markets and economic conditions in the countries where we operate, and other various risks associated with being a multinational corporation. 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 2017 ended Dec. 1, 2017, and Adobe's Quarterly Reports on Form 10-Q issued in fiscal year 2018.

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 August 31, 2018, which Adobe expects to file in September 2018.

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

About Adobe

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

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© 2018 Adobe Systems Incorporated. All rights reserved. Adobe, Adobe Document Cloud, Adobe Experience Cloud, Creative Cloud, and the Adobe logo 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						Nine Months Ended
	August 31, 2018			September 1, 2017			August 31, 2018			September 1, 2017
Revenue:
Subscription	$	2,021,505		$	1,570,336		$	5,737,994		$	4,437,882
Product	149,127			158,961			471,728			513,891
Services and support	120,444			111,777			355,661			343,137
Total revenue	2,291,076			1,841,074			6,565,383			5,294,910
Cost of revenue:
Subscription	199,157			168,915			550,197			452,830
Product	11,454			11,709			35,110			41,530
Services and support	84,881			82,298			250,431			245,259
Total cost of revenue	295,492			262,922			835,738			739,619
Gross profit	1,995,584			1,578,152			5,729,645			4,555,291
Operating expenses:
Research and development	398,957			315,555			1,121,854			900,033
Sales and marketing	670,084			550,093			1,897,256			1,623,488
General and administrative	184,063			147,402			532,543			455,139
Amortization of purchased intangibles	23,874			19,428			58,169			57,876
Total operating expenses	1,276,978			1,032,478			3,609,822			3,036,536
Operating income	718,606			545,674			2,119,823			1,518,755
Non-operating income (expense):
Interest and other income (expense), net	1,608			13,539			29,879			25,899
Interest expense	(21,107		)	(18,809		)	(61,369		)	(55,286		)
Investment gains (losses), net	2,251			975			6,326			5,261
Total non-operating income (expense), net	(17,248		)	(4,295		)	(25,164		)	(24,126		)
Income before income taxes	701,358			541,379			2,094,659			1,494,629
Provision for income taxes	35,067			121,810			182,125			302,224
Net income	$	666,291		$	419,569		$	1,912,534		$	1,192,405
Basic net income per share	$	1.36		$	0.85		$	3.89		$	2.41
Shares used to compute basic net income per share	490,025			493,426			491,336			494,138
Diluted net income per share	$	1.34		$	0.84		$	3.84		$	2.38
Shares used to compute diluted net income per share	496,866			500,398			498,587			501,060

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Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

	August 31, 2018			December 1, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	1,747,144		$	2,306,072
Short-term investments	3,197,326			3,513,702
Trade receivables, net of allowances for doubtful accounts of $12,034 and $9,151, respectively	1,044,507			1,217,968
Prepaid expenses and other current assets	311,936			210,071
Total current assets	6,300,913			7,247,813
Property and equipment, net	1,019,260			936,976
Goodwill	7,136,853			5,821,561
Purchased and other intangibles, net	669,476			385,658
Deferred income taxes	85,297			—
Other assets	183,821			143,548
Total assets	$	15,395,620		$	14,535,556
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade payables	$	145,566		$	113,538
Accrued expenses	1,020,047			993,773
Income taxes payable	11,222			14,196
Deferred revenue	2,615,192			2,405,950
Total current liabilities	3,792,027			3,527,457
Long-term liabilities:
Debt	1,874,654			1,881,421
Deferred revenue	92,182			88,592
Income taxes payable	622,411			173,088
Deferred income taxes	—			279,941
Other liabilities	152,421			125,188
Total liabilities	6,533,695			6,075,687
Stockholders’ equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized	—			—
Common stock, $0.0001 par value	61			61
Additional paid-in-capital	5,549,322			5,082,195
Retained earnings	11,137,357			9,573,870
Accumulated other comprehensive income (loss)	(128,048		)	(111,821		)
Treasury stock, at cost (111,827 and 109,572, respectively), net of reissuances	(7,696,767		)	(6,084,436		)
Total stockholders’ equity	8,861,925			8,459,869
Total liabilities and stockholders’ equity	$	15,395,620		$	14,535,556

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Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

	Three Months Ended
	August 31, 2018			September 1, 2017
Cash flows from operating activities:
Net income	$	666,291		$	419,569
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	86,890			82,319
Stock-based compensation	159,039			117,042
Unrealized investment (gains) losses, net	(1,613		)	(643		)
Changes in deferred revenue	33,525			129,872
Changes in other operating assets and liabilities	11,172			(43,723		)
Net cash provided by operating activities	955,304			704,436
Cash flows from investing activities:
Purchases, sales and maturities of short-term investments, net	163,229			21,215
Purchases of property and equipment	(63,558		)	(54,238		)
Purchases and sales of long-term investments, intangibles and other assets, net	(1,578		)	(3,791		)
Acquisitions, net of cash	(1,618,427		)	—
Net cash used for investing activities	(1,520,334		)	(36,814		)
Cash flows from financing activities:
Purchases of treasury stock	(750,000		)	(300,000		)
Proceeds from treasury stock reissuances, net of taxes paid related to net share settlement of equity awards	78,656			82,117
Repayment of capital lease obligations	(317		)	(416		)
Net cash used for financing activities	(671,661		)	(218,299		)
Effect of exchange rate changes on cash and cash equivalents	(4,151		)	8,277
Net increase (decrease) in cash and cash equivalents	(1,240,842		)	457,600
Cash and cash equivalents at beginning of period	2,987,986			1,316,950
Cash and cash equivalents at end of period	$	1,747,144		$	1,774,550

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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
	August 31, 2018			September 1, 2017			June 1, 2018
Operating income:
GAAP operating income	$	718,606		$	545,674		$	698,484
Stock-based and deferred compensation expense	161,094			117,968			146,773
Amortization of purchased intangibles	44,815			36,655			32,378
Non-GAAP operating income	$	924,515		$	700,297		$	877,635
Net income:
GAAP net income	$	666,291		$	419,569		$	663,167
Stock-based and deferred compensation expense	161,094			117,968			146,773
Amortization of purchased intangibles	44,815			36,655			32,378
Investment (gains) losses, net	(2,251		)	(975		)	(1,079		)
Income tax adjustments	(10,185		)	(24,146		)	(15,812		)
Non-GAAP net income	$	859,764		$	549,071		$	825,427
Diluted net income per share:
GAAP diluted net income per share	$	1.34		$	0.84		$	1.33
Stock-based and deferred compensation expense	0.32			0.24			0.29
Amortization of purchased intangibles	0.09			0.07			0.06
Income tax adjustments	(0.02		)	(0.05		)	(0.02		)
Non-GAAP diluted net income per share	$	1.73		$	1.10		$	1.66
Shares used in computing diluted net income per share	496,866			500,398			498,252

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 as well as non-GAAP measures, which may exclude 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, the related tax impact of all of these items, income tax adjustments, and the income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes. Adobe uses these non-GAAP measures in order to assess the performance of Adobe’s business and for planning and forecasting in subsequent periods. Whenever such a non-

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GAAP measure is used, Adobe 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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