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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
FORM 10-Q
(Mark One)
|
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 30, 2019
or
|
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-15175
ADOBE INC.
(Exact name of registrant as specified in its charter)
________________________________
|
| |
Delaware | 77-0019522 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
345 Park Avenue, San Jose, California 95110-2704
(Address of principal executive offices and zip code)
(408) 536-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $0.0001 par value per share | ADBE | NASDAQ |
________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer (Do not check if a smaller reporting company) | ☐ | Smaller reporting company | ☐ | 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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s common stock as of September 20, 2019 was 484,078,609.
ADOBE INC.
FORM 10-Q
TABLE OF CONTENTS
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| | |
| | Page No. |
PART I—FINANCIAL INFORMATION | |
Item 1. |
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Item 2. |
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Item 3. |
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Item 4. | | |
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PART II—OTHER INFORMATION | |
Item 1. |
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Item 1A. |
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Item 2. |
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Item 4. |
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Item 5. |
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Item 6. |
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PART I—FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ADOBE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
|
| | | | | | | |
| August 30, 2019 | | November 30, 2018 |
| (Unaudited) | | (*) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 2,209,047 |
| | $ | 1,642,775 |
|
Short-term investments | 1,441,741 |
| | 1,586,187 |
|
Trade receivables, net of allowances for doubtful accounts of $11,778 and $14,981, respectively | 1,371,697 |
| | 1,315,578 |
|
Prepaid expenses and other current assets | 727,611 |
| | 312,499 |
|
Total current assets | 5,750,096 |
| | 4,857,039 |
|
Property and equipment, net | 1,244,011 |
| | 1,075,072 |
|
Goodwill | 10,688,068 |
| | 10,581,048 |
|
Purchased and other intangibles, net | 1,815,625 |
| | 2,069,001 |
|
Other assets | 557,080 |
| | 186,522 |
|
Total assets | $ | 20,054,880 |
| | $ | 18,768,682 |
|
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | |
| | |
|
Trade payables | $ | 186,999 |
| | $ | 186,258 |
|
Accrued expenses | 1,302,753 |
| | 1,163,185 |
|
Debt | 3,148,587 |
| | — |
|
Deferred revenue | 3,120,186 |
| | 2,915,974 |
|
Income taxes payable | 44,441 |
| | 35,709 |
|
Total current liabilities | 7,802,966 |
| | 4,301,126 |
|
Long-term liabilities: | | | |
|
Debt | 988,429 |
| | 4,124,800 |
|
Deferred revenue | 135,750 |
| | 137,630 |
|
Income taxes payable | 585,774 |
| | 644,101 |
|
Deferred income taxes | 129,401 |
| | 46,702 |
|
Other liabilities | 169,787 |
| | 152,209 |
|
Total liabilities | 9,812,107 |
| | 9,406,568 |
|
Stockholders’ equity: | | | |
|
Preferred stock, $0.0001 par value; 2,000 shares authorized, none issued | — |
| | — |
|
Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 484,903 and 487,663 shares outstanding, respectively | 61 |
| | 61 |
|
Additional paid-in-capital | 6,334,612 |
| | 5,685,337 |
|
Retained earnings | 13,976,701 |
| | 11,815,597 |
|
Accumulated other comprehensive income (loss) | (193,949 | ) | | (148,130 | ) |
Treasury stock, at cost (115,931 and 113,171 shares, respectively), net of re-issuances | (9,874,652 | ) | | (7,990,751 | ) |
Total stockholders’ equity | 10,242,773 |
| | 9,362,114 |
|
Total liabilities and stockholders’ equity | $ | 20,054,880 |
| | $ | 18,768,682 |
|
_________________________________________
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| August 30, 2019 | | August 31, 2018 | | August 30, 2019 | | August 31, 2018 |
Revenue: | | | | | | | |
Subscription | $ | 2,546,571 |
| | $ | 2,021,505 |
| | $ | 7,307,635 |
| | $ | 5,737,994 |
|
Product | 157,321 |
| | 149,127 |
| | 480,691 |
| | 471,728 |
|
Services and support | 130,234 |
| | 120,444 |
| | 391,026 |
| | 355,661 |
|
Total revenue | 2,834,126 |
| | 2,291,076 |
| | 8,179,352 |
| | 6,565,383 |
|
Cost of revenue: | | | | | | | |
Subscription | 303,885 |
| | 199,157 |
| | 888,392 |
| | 550,197 |
|
Product | 9,146 |
| | 11,454 |
| | 30,596 |
| | 35,110 |
|
Services and support | 102,932 |
| | 84,881 |
| | 301,749 |
| | 250,431 |
|
Total cost of revenue | 415,963 |
| | 295,492 |
| | 1,220,737 |
| | 835,738 |
|
Gross profit | 2,418,163 |
| | 1,995,584 |
| | 6,958,615 |
| | 5,729,645 |
|
Operating expenses: | | | | | | | |
Research and development | 489,827 |
| | 398,957 |
| | 1,430,422 |
| | 1,121,854 |
|
Sales and marketing | 812,314 |
| | 670,084 |
| | 2,442,759 |
| | 1,897,256 |
|
General and administrative | 219,256 |
| | 184,063 |
| | 654,699 |
| | 532,543 |
|
Amortization of purchased intangibles | 42,954 |
| | 23,874 |
| | 132,546 |
| | 58,169 |
|
Total operating expenses | 1,564,351 |
| | 1,276,978 |
| | 4,660,426 |
| | 3,609,822 |
|
Operating income | 853,812 |
| | 718,606 |
| | 2,298,189 |
| | 2,119,823 |
|
Non-operating income (expense): | | | | | | | |
Interest and other income (expense), net | 16,552 |
| | 1,608 |
| | 23,376 |
| | 29,879 |
|
Interest expense | (39,529 | ) | | (21,107 | ) | | (120,699 | ) | | (61,369 | ) |
Investment gains (losses), net | 3,653 |
| | 2,251 |
| | 46,728 |
| | 6,326 |
|
Total non-operating income (expense), net | (19,324 | ) | | (17,248 | ) | | (50,595 | ) | | (25,164 | ) |
Income before income taxes | 834,488 |
| | 701,358 |
| | 2,247,594 |
| | 2,094,659 |
|
Provision for income taxes | 41,725 |
| | 35,067 |
| | 147,997 |
| | 182,125 |
|
Net income | $ | 792,763 |
| | $ | 666,291 |
| | $ | 2,099,597 |
| | $ | 1,912,534 |
|
Basic net income per share | $ | 1.63 |
| | $ | 1.36 |
| | $ | 4.31 |
| | $ | 3.89 |
|
Shares used to compute basic net income per share | 485,848 |
| | 490,025 |
| | 487,145 |
| | 491,336 |
|
Diluted net income per share | $ | 1.61 |
| | $ | 1.34 |
| | $ | 4.26 |
| | $ | 3.84 |
|
Shares used to compute diluted net income per share | 491,042 |
| | 496,866 |
| | 492,480 |
| | 498,587 |
|
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| August 30, 2019 | | August 31, 2018 | | August 30, 2019 | | August 31, 2018 |
| Increase/(Decrease) | | Increase/(Decrease) |
Net income | $ | 792,763 |
| | $ | 666,291 |
| | $ | 2,099,597 |
| | $ | 1,912,534 |
|
Other comprehensive income (loss), net of taxes: | | | | | | | |
Available-for-sale securities: | | | | | | | |
Unrealized gains / losses on available-for-sale securities | 6,867 |
| | 5,849 |
| | 29,178 |
| | (19,020 | ) |
Reclassification adjustment for recognized gains / losses on available-for-sale securities | (36 | ) | | 9,645 |
| | 157 |
| | 9,842 |
|
Net increase (decrease) from available-for-sale securities | 6,831 |
| | 15,494 |
| | 29,335 |
| | (9,178 | ) |
Derivatives designated as hedging instruments: | | | | | | | |
Unrealized gains / losses on derivative instruments | (27,031 | ) | | 17,524 |
| | (8,232 | ) | | 47,290 |
|
Reclassification adjustment for realized gains / losses on derivative instruments | (11,034 | ) | | (16,494 | ) | | (38,397 | ) | | (18,671 | ) |
Net increase (decrease) from derivatives designated as hedging instruments | (38,065 | ) | | 1,030 |
| | (46,629 | ) | | 28,619 |
|
Foreign currency translation adjustments | (18,351 | ) | | (15,342 | ) | | (28,525 | ) | | (35,668 | ) |
Other comprehensive income (loss), net of taxes | (49,585 | ) | | 1,182 |
| | (45,819 | ) | | (16,227 | ) |
Total comprehensive income, net of taxes | $ | 743,178 |
| | $ | 667,473 |
| | $ | 2,053,778 |
| | $ | 1,896,307 |
|
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended August 30, 2019 |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | |
| | Shares | | Amount | | | | | Shares | | Amount | | Total |
Balances at May 31, 2019 | | 600,834 |
| | $ | 61 |
| | $ | 6,050,800 |
| | $ | 13,183,938 |
| | $ | (144,364 | ) | | (114,561 | ) | | $ | (9,158,742 | ) | | $ | 9,931,693 |
|
Net income | | — |
| | — |
| | — |
| | 792,763 |
| | — |
| | — |
| | — |
| | 792,763 |
|
Other comprehensive income (losses), net of taxes | | — |
| | — |
| | — |
| | — |
| | (49,585 | ) | | — |
| | — |
| | (49,585 | ) |
Re-issuance of treasury stock under stock compensation plans | | — |
| | — |
| | 89,520 |
| | — |
| | — |
| | 1,222 |
| | 33,516 |
| | 123,036 |
|
Purchase of treasury stock | | — |
| | — |
| | — |
| | — |
| | — |
| | (2,592 | ) | | (750,000 | ) | | (750,000 | ) |
Stock-based compensation | | — |
| | — |
| | 194,292 |
| | — |
| | — |
| | — |
| | — |
| | 194,292 |
|
Value of shares in deferred compensation plan | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 574 |
| | 574 |
|
Balances at August 30, 2019 | | 600,834 |
| | $ | 61 |
| | $ | 6,334,612 |
| | $ | 13,976,701 |
| | $ | (193,949 | ) | | (115,931 | ) | | $ | (9,874,652 | ) | | $ | 10,242,773 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended August 31, 2018 |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | |
| | Shares | | Amount | | | | | Shares | | Amount | | Total |
Balances at June 1, 2018 | | 600,834 |
| | $ | 61 |
| | $ | 5,354,175 |
| | $ | 10,471,066 |
| | $ | (129,230 | ) | | (110,399 | ) | | $ | (6,990,489 | ) | | $ | 8,705,583 |
|
Net income | | — |
| | — |
| | — |
| | 666,291 |
| | — |
| | — |
| | — |
| | 666,291 |
|
Other comprehensive income (losses), net of taxes | | — |
| | — |
| | — |
| | — |
| | 1,182 |
| | — |
| | — |
| | 1,182 |
|
Re-issuance of treasury stock under stock compensation plans | | — |
| | — |
| | 37,050 |
| | — |
| | — |
| | 1,431 |
| | 41,606 |
| | 78,656 |
|
Purchase of treasury stock | | — |
| | — |
| | — |
| | — |
| | — |
| | (2,859 | ) | | (750,000 | ) | | (750,000 | ) |
Equity awards assumed for acquisition | | — |
| | — |
| | 2,784 |
| | — |
| | — |
| | — |
| | — |
| | 2,784 |
|
Stock-based compensation | | — |
| | — |
| | 155,313 |
| | — |
| | — |
| | — |
| | — |
| | 155,313 |
|
Value of shares in deferred compensation plan | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,116 |
| | 2,116 |
|
Balances at August 31, 2018 | | 600,834 |
| | $ | 61 |
| | $ | 5,549,322 |
| | $ | 11,137,357 |
| | $ | (128,048 | ) | | (111,827 | ) | | $ | (7,696,767 | ) | | $ | 8,861,925 |
|
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended August 30, 2019 |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | |
| | Shares | | Amount | | | | | Shares | | Amount | | Total |
Balances at November 30, 2018 | | 600,834 |
| | $ | 61 |
| | $ | 5,685,337 |
| | $ | 11,815,597 |
| | $ | (148,130 | ) | | (113,171 | ) | | $ | (7,990,751 | ) | | $ | 9,362,114 |
|
Impacts of ASC 606 adoption | | — |
| | — |
| | — |
| | 442,319 |
| | — |
| | — |
| | — |
| | 442,319 |
|
Net income | | — |
| | — |
| | — |
| | 2,099,597 |
| | — |
| | — |
| | — |
| | 2,099,597 |
|
Other comprehensive income (losses), net of taxes | | — |
| | — |
| | — |
| | — |
| | (45,819 | ) | | — |
| | — |
| | (45,819 | ) |
Re-issuance of treasury stock under stock compensation plans | | — |
| | — |
| | 81,512 |
| | (380,812 | ) | | — |
| | 4,357 |
| | 119,542 |
| | (179,758 | ) |
Purchase of treasury stock | | — |
| | — |
| | — |
| | — |
| | — |
| | (7,117 | ) | | (2,000,000 | ) | | (2,000,000 | ) |
Stock-based compensation | | — |
| | — |
| | 567,763 |
| | — |
| | — |
| | — |
| | — |
| | 567,763 |
|
Value of shares in deferred compensation plan | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,443 | ) | | (3,443 | ) |
Balances at August 30, 2019 | | 600,834 |
| | $ | 61 |
| | $ | 6,334,612 |
| | $ | 13,976,701 |
| | $ | (193,949 | ) | | (115,931 | ) | | $ | (9,874,652 | ) | | $ | 10,242,773 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended August 31, 2018 |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | |
| | Shares | | Amount | | | | | Shares | | Amount | | Total |
Balances at December 1, 2017 | | 600,834 |
| | $ | 61 |
| | $ | 5,082,195 |
| | $ | 9,573,870 |
| | $ | (111,821 | ) | | (109,572 | ) | | $ | (6,084,436 | ) | | $ | 8,459,869 |
|
Net income | | — |
| | — |
| | — |
| | 1,912,534 |
| | — |
| | — |
| | — |
| | 1,912,534 |
|
Other comprehensive income (losses), net of taxes | | — |
| | — |
| | — |
| | — |
| | (16,227 | ) | | — |
| | — |
| | (16,227 | ) |
Re-issuance of treasury stock under stock compensation plans | | — |
| | — |
| | 27,917 |
| | (348,729 | ) | | — |
| | 4,871 |
| | 141,645 |
| | (179,167 | ) |
Purchase of treasury stock | | — |
| | — |
| | — |
| | — |
| | — |
| | (7,126 | ) | | (1,750,000 | ) | | (1,750,000 | ) |
Equity awards assumed for acquisition | | — |
| | — |
| | 2,784 |
| | — |
| | — |
| | — |
| | — |
| | 2,784 |
|
Stock-based compensation | | — |
| | — |
| | 436,426 |
| | — |
| | — |
| | — |
| | — |
| | 436,426 |
|
Value of shares in deferred compensation plan | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,976 | ) | | (3,976 | ) |
Impacts of the U.S. Tax Cut and Jobs Act | | — |
| | — |
| | — |
| | (318 | ) | | — |
| | — |
| | — |
| | (318 | ) |
Balances at August 31, 2018 | | 600,834 |
| | $ | 61 |
| | $ | 5,549,322 |
| | $ | 11,137,357 |
| | $ | (128,048 | ) | | (111,827 | ) | | $ | (7,696,767 | ) | | $ | 8,861,925 |
|
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
| | | | | | | |
| Nine Months Ended |
| August 30, 2019 | | August 31, 2018 |
Cash flows from operating activities: | | | |
Net income | $ | 2,099,597 |
| | $ | 1,912,534 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
Depreciation, amortization and accretion | 441,057 |
| | 239,772 |
|
Stock-based compensation | 584,500 |
| | 439,941 |
|
Deferred income taxes | (1,747 | ) | | (418,114 | ) |
Unrealized losses (gains) on investments, net | (43,456 | ) | | (3,115 | ) |
Other non-cash items | 2,756 |
| | 4,844 |
|
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities: | | | |
Trade receivables, net | (14,050 | ) | | 199,002 |
|
Prepaid expenses and other assets | (289,957 | ) | | (89,823 | ) |
Trade payables | 629 |
| | 25,362 |
|
Accrued expenses | 53,074 |
| | 4,099 |
|
Income taxes payable | (39,171 | ) | | 433,559 |
|
Deferred revenue | 252,182 |
| | 173,250 |
|
Net cash provided by operating activities | 3,045,414 |
| | 2,921,311 |
|
Cash flows from investing activities: | |
| | |
|
Purchases of short-term investments | (373,057 | ) | | (541,878 | ) |
Maturities of short-term investments | 477,840 |
| | 606,594 |
|
Proceeds from sales of short-term investments | 66,463 |
| | 238,303 |
|
Acquisitions, net of cash acquired | (99,817 | ) | | (1,633,041 | ) |
Purchases of property and equipment | (300,384 | ) | | (204,016 | ) |
Purchases of long-term investments, intangibles and other assets | (59,894 | ) | | (15,288 | ) |
Proceeds from sale of long-term investments and other assets | 1,674 |
| | 2,909 |
|
Net cash used for investing activities | (287,175 | ) | | (1,546,417 | ) |
Cash flows from financing activities: | |
| | |
|
Purchases of treasury stock | (2,000,000 | ) | | (1,750,000 | ) |
Proceeds from re-issuance of treasury stock | 232,240 |
| | 189,743 |
|
Taxes paid related to net share settlement of equity awards | (411,998 | ) | | (368,910 | ) |
Other financing activities, net | (626 | ) | | (1,132 | ) |
Net cash used for financing activities | (2,180,384 | ) | | (1,930,299 | ) |
Effect of foreign currency exchange rates on cash and cash equivalents | (11,583 | ) | | (3,523 | ) |
Net increase (decrease) in cash and cash equivalents | 566,272 |
| | (558,928 | ) |
Cash and cash equivalents at beginning of period | 1,642,775 |
| | 2,306,072 |
|
Cash and cash equivalents at end of period | $ | 2,209,047 |
| | $ | 1,747,144 |
|
Supplemental disclosures: | |
| | |
Cash paid for income taxes, net of refunds | $ | 231,813 |
| | $ | 141,674 |
|
Cash paid for interest | $ | 124,599 |
| | $ | 61,754 |
|
Non-cash investing activities: | | | |
Issuance of stock awards assumed in business acquisitions | $ | — |
| | $ | 2,784 |
|
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended November 30, 2018 on file with the SEC (our “Annual Report”).
Reclassification
Certain immaterial prior year amounts have been reclassified to conform to current year presentation in the notes to the condensed consolidated financial statements.
Recently Adopted Accounting Guidance
On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, Topic 606 (“ASC 606”), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new revenue standard replaces most existing revenue recognition guidance in GAAP and permits the use of either the full retrospective or modified retrospective transition method.
On December 1, 2018, the beginning of our fiscal year 2019, we adopted the requirements of the new revenue standard utilizing the modified retrospective method of transition. Prior period information has not been restated and continues to be reported under the accounting standard in effect for those periods. We applied the new revenue standard to contracts that were not completed as of the adoption date, consistent with the transition guidance. Further, adoption of the new revenue standard resulted in changes to our accounting policies for revenue recognition and sales commissions as detailed below.
We recognized the following cumulative effects of initially applying the new revenue standard as of December 1, 2018:
|
| | | | | | | | | | | |
(in thousands) | As of November 30, 2018 | | ASC 606 Adoption Adjustments | | As of December 1, 2018 |
Assets | | | | | |
Trade receivables, net of allowances for doubtful accounts | $ | 1,315,578 |
| | $ | 43,028 |
| | $ | 1,358,606 |
|
Prepaid expenses and other current assets | 312,499 |
| | 186,220 |
| | 498,719 |
|
Other assets | 186,522 |
| | 273,421 |
| | 459,943 |
|
Liabilities and Stockholders’ Equity | | | | | |
Accrued expenses | 1,163,185 |
| | 30,358 |
| | 1,193,543 |
|
Deferred revenue, current | 2,915,974 |
| | (52,842 | ) | | 2,863,132 |
|
Deferred income taxes | 46,702 |
| | 82,834 |
| | 129,536 |
|
Retained earnings | $ | 11,815,597 |
| | $ | 442,319 |
| | $ | 12,257,916 |
|
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Below is a summary of the adoption impacts of the new revenue standard:
| |
• | We capitalized $413.2 million of contract acquisition costs comprised of sales and partner commission costs at adoption date (included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion), with a corresponding adjustment to retained earnings. We are amortizing these costs over their respective expected period of benefit. |
| |
• | Revenue for certain contracts that were previously deferred would have been recognized in periods prior to adoption under the new standard. Upon adoption, we recorded the following adjustments to our beginning balances to reflect the amount of revenue that will no longer be recognized in future periods for such contracts: an increase in unbilled receivables (included in trade receivables, net) of $24.8 million, an increase in contract assets (included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion) of $46.4 million and a decrease in deferred revenue of $52.8 million, with corresponding adjustments to retained earnings. |
| |
• | We recorded an increase to our opening deferred income tax liability of $82.8 million, with a corresponding adjustment to retained earnings, to record the tax effect of the above adjustments. |
| |
• | Further, we had other impacts to various accounts which resulted to an immaterial net reduction to our retained earnings. |
Adoption of the new revenue standard impacted our condensed consolidated statement of income for the three months ended August 30, 2019 as follows:
|
| | | | | | | | | | | |
(in thousands, except per share amounts) | As reported | | Adjustments | | Balances without ASC 606 adoption impact |
Revenue | | | | | |
Subscription | $ | 2,546,571 |
| | $ | 825 |
| | $ | 2,547,396 |
|
Product | 157,321 |
| | (32,908 | ) | | 124,413 |
|
Services and support | 130,234 |
| | (3,499 | ) | | 126,735 |
|
Total revenue | 2,834,126 |
| | (35,582 | ) | | 2,798,544 |
|
Operating expenses | | | | | |
Sales and marketing | 812,314 |
| | 7,211 |
| | 819,525 |
|
Provision for income taxes | 41,725 |
| | (2,140 | ) | | 39,585 |
|
Net income | $ | 792,763 |
| | $ | (40,653 | ) | | $ | 752,110 |
|
Basic net income per share | $ | 1.63 |
| | $ | (0.08 | ) | | $ | 1.55 |
|
Diluted net income per share | $ | 1.61 |
| | $ | (0.08 | ) | | $ | 1.53 |
|
ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Adoption of the new revenue standard impacted our condensed consolidated statement of income for the nine months ended August 30, 2019 as follows:
|
| | | | | | | | | | | |
(in thousands, except per share amounts) | As reported | | Adjustments | | Balances without ASC 606 adoption impact |
Revenue | | | | | |
Subscription | $ | 7,307,635 |
| | $ | (3,412 | ) | | $ | 7,304,223 |
|
Product | 480,691 |
| | (74,936 | ) | | 405,755 |
|
Services and support | 391,026 |
| | (4,574 | ) | | 386,452 |
|
Total revenue | 8,179,352 |
| | (82,922 | ) | | 8,096,430 |
|
Operating expenses | | | | | |
Sales and marketing | 2,442,759 |
| | 24,147 |
| |