Company raises Digital Media net new ARR and EPS annual targets

Adobe (NASDAQ:ADBE) today reported financial results for its first quarter fiscal year 2023 ended March 3, 2023.

"Adobe drove record Q1 revenue and we are raising our annual targets based on the tremendous market opportunity and continued confidence in our execution," said Shantanu Narayen, chairman and CEO, Adobe. "Creative Cloud, Document Cloud and Experience Cloud are mission-critical in fueling the global digital economy."

"Our strong engine of innovation combined with world-class operational rigor drove profitable growth in Q1, setting us up to deliver another strong fiscal year," said Dan Durn, executive vice president and CFO, Adobe. "Adobe is better positioned today than we've ever been to serve our customers globally."

First Quarter Fiscal Year 2023 Financial Highlights

Adobe achieved revenue of $4.66 billion in its first quarter of fiscal year 2023, which represents 9 percent year-over-year growth or 13 percent in constant currency. Diluted earnings per share was $2.71 on a GAAP basis and $3.80 on a non-GAAP basis.
GAAP operating income in the first quarter was $1.59 billion and non-GAAP operating income was $2.13 billion. GAAP net income was $1.25 billion and non-GAAP net income was $1.75 billion.
Cash flows from operations were $1.69 billion.
Remaining Performance Obligations ("RPO") exiting the quarter were $15.21 billion.
Adobe repurchased approximately 5.0 million shares during the quarter.

First Quarter Fiscal Year 2023 Business Segment Highlights

Digital Media segment revenue was $3.40 billion, which represents 9 percent year-over-year growth or 14 percent in constant currency. Creative revenue grew to $2.76 billion, representing 8 percent year-over-year growth or 13 percent in constant currency. Document Cloud revenue was $634 million, representing 13 percent year-over-year growth or 16 percent in constant currency.
Net new Digital Media Annualized Recurring Revenue ("ARR") was $410 million, exiting the quarter with Digital Media ARR of $13.67 billion. Creative ARR grew to $11.28 billion and Document Cloud ARR grew to $2.39 billion.
Digital Experience segment revenue was $1.18 billion, representing 11 percent year-over-year growth or 14 percent in constant currency. Digital Experience subscription revenue was $1.04 billion, representing 12 percent year-over-year growth or 14 percent in constant currency.

Financial Targets

Adobe is providing second quarter targets and updated fiscal year 2023 targets for Digital Media net new ARR and earnings per share. These targets factor in current expectations for the macroeconomic and foreign exchange environments.

The following table summarizes Adobe's updated fiscal year 2023 targets:

Digital Media net new ARR		~$1.70 billion
Earnings per share¹		GAAP: $10.85 to $11.15		Non-GAAP: $15.30 to $15.60

The following table summarizes Adobe's second quarter fiscal year 2023 targets:

Total revenue	$4.75 billion to $4.78 billion
Digital Media net new ARR	~$420 million
Digital Media segment revenue	$3.45 billion to $3.47 billion
Digital Experience segment revenue	$1.21 billion to $1.23 billion
Digital Experience subscription revenue	$1.06 billion to $1.08 billion
Tax rate	GAAP: ~21.5%	Non-GAAP: ~18.5%
Earnings per share¹	GAAP: $2.65 to $2.70	Non-GAAP: $3.75 to $3.80
¹ Targets assume share count of ~458 million for second quarter fiscal year 2023 and ~456 million for fiscal year 2023.

Adobe to Host Conference Call

Adobe will webcast its first quarter fiscal year 2023 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 and an investor datasheet are posted to Adobe's investor relations website in advance of the conference call for reference.

Forward-Looking Statements, Non-GAAP and Other Disclosures

This press release contains forward-looking statements, including those related to business momentum, our market opportunity, market trends, current macroeconomic conditions, fluctuations in foreign currency exchange rates, strategic investments, customer success, revenue, operating margin, annualized recurring revenue, 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 compete effectively; failure to develop, acquire, market and offer products and services that meet customer requirements; introduction of new technology; failure to realize the anticipated benefits of past or future acquisitions; information security and privacy; potential interruptions or delays in hosted services provided by us or third parties; risks associated with cyber-attacks; complex sales cycles; failure to effectively manage critical strategic third-party business relationships; changes in accounting principles and tax regulations; fluctuations in subscription renewal rates; risks related to the timing of revenue recognition from our subscription offerings; uncertainty in the financial markets and economic conditions in the countries where we operate; geopolitical and macroeconomic conditions, including the Russia-Ukraine war; 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 2022 ended Dec. 2, 2022, and Adobe's Quarterly Reports on Form 10-Q issued in fiscal year 2023.

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 fiscal quarter ended March 3, 2023, which Adobe expects to file in late March or early April 2023. Adobe assumes no obligation to, and does not currently intend to, update these forward- looking statements.

A reconciliation between GAAP and non-GAAP earnings results and financial targets is provided at the end of this press release and on Adobe's investor relations website.

About Adobe

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

©2023 Adobe. All rights reserved. Adobe, Creative Cloud, Document Cloud and the Adobe logo are either registered trademarks or trademarks of Adobe (or one of its subsidiaries) in the United States and/or other countries. All other trademarks are the property of their respective owners.

Condensed Consolidated Statements of Income
(In millions, except per share data; unaudited)

	Three Months Ended
	March 3, 2023			March 4, 2022
Revenue:
Subscription	$	4,373		$	3,958
Product		120			145
Services and other		162			159
Total revenue		4,655			4,262

Cost of revenue:
Subscription		434			393
Product		8			10
Services and other		126			109
Total cost of revenue		568			512

Gross profit		4,087			3,750

Operating expenses:
Research and development		827			701
Sales and marketing		1,301			1,158
General and administrative		331			269
Amortization of intangibles		42			42
Total operating expenses		2,501			2,170

Operating income		1,586			1,580

Non-operating income (expense):
Interest expense		(32	)		(28	)
Investment gains (losses), net		1			(9	)
Other income (expense), net		43			—
Total non-operating income (expense), net		12			(37	)
Income before income taxes		1,598			1,543
Provision for income taxes		351			277
Net income	$	1,247		$	1,266
Basic net income per share	$	2.72		$	2.68
Shares used to compute basic net income per share		459			473
Diluted net income per share	$	2.71		$	2.66
Shares used to compute diluted net income per share		460			475

Condensed Consolidated Balance Sheets
(In millions; unaudited)

	March 3, 2023			December 2, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	4,072		$	4,236
Short-term investments		1,581			1,860
Trade receivables, net of allowances for doubtful accounts of $17 and $23, respectively		1,801			2,065
Prepaid expenses and other current assets		888			835
Total current assets		8,342			8,996

Property and equipment, net		1,967			1,908
Operating lease right-of-use assets, net		402			407
Goodwill		12,792			12,787
Other intangibles, net		1,354			1,449
Deferred income taxes		826			777
Other assets		984			841
Total assets	$	26,667		$	27,165

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Trade payables	$	308		$	379
Accrued expenses		1,469			1,790
Debt		—			500
Deferred revenue		5,357			5,297
Income taxes payable		222			75
Operating lease liabilities		81			87
Total current liabilities		7,437			8,128

Long-term liabilities:
Debt		3,630			3,629
Deferred revenue		120			117
Income taxes payable		536			530
Operating lease liabilities		415			417
Other liabilities		323			293
Total liabilities		12,461			13,114

Stockholders' equity:
Preferred stock		—			—
Common stock		—			—
Additional paid-in-capital		10,284			9,868
Retained earnings		29,435			28,319
Accumulated other comprehensive income (loss)		(307	)		(293	)
Treasury stock, at cost		(25,206	)		(23,843	)
Total stockholders' equity		14,206			14,051
Total liabilities and stockholders' equity	$	26,667		$	27,165

Condensed Consolidated Statements of Cash Flows
(In millions; unaudited)

	Three Months Ended
	March 3, 2023			March 4, 2022
Cash flows from operating activities:
Net income	$	1,247		$	1,266
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		212			213
Stock-based compensation		416			322
Unrealized investment (gains) losses, net		3			17
Other non-cash adjustments		(33	)		153
Changes in deferred revenue		63			141
Changes in other operating assets and liabilities		(215	)		(343	)
Net cash provided by operating activities		1,693			1,769

Cash flows from investing activities:
Purchases, sales and maturities of short-term investments, net		287			(26	)
Purchases of property and equipment		(101	)		(100	)
Purchases and sales of long-term investments, intangibles and other assets, net		(30	)		(28	)
Acquisitions, net of cash acquired		—			(106	)
Net cash provided by (used for) investing activities		156			(260	)

Cash flows from financing activities:
Repurchases of common stock		(1,400	)		(2,400	)
Taxes paid related to net share settlement of equity awards, net of proceeds from treasury stock re-issuances		(95	)		(175	)
Other financing activities, net		(19	)		(29	)
Net cash used for financing activities		(2,014	)		(2,604	)
Effect of exchange rate changes on cash and cash equivalents		1			(10	)
Net change in cash and cash equivalents		(164	)		(1,105	)
Cash and cash equivalents at beginning of period		4,236			3,844
Cash and cash equivalents at end of period	$	4,072		$	2,739

Non-GAAP Results
The following table shows Adobe's GAAP results reconciled to non-GAAP results included in this release.
(In millions, except per share data)	Three Months Ended
	March 3, 2023			March 4, 2022			December 2, 2022
Operating income:

GAAP operating income	$	1,586		$	1,580		$	1,505
Stock-based and deferred compensation expense		417			312			392
Amortization of intangibles		95			101			100
Acquisition-related expenses^(*)		33			—			26
Non-GAAP operating income	$	2,131		$	1,993		$	2,023

Net income:

GAAP net income	$	1,247		$	1,266		$	1,176
Stock-based and deferred compensation expense		417			312			392
Amortization of intangibles		95			101			100
Acquisition-related expenses^(*)		33			—			26
Investment (gains) losses, net		(1	)		9			(4	)
Income tax adjustments		(45	)		(86	)		(15	)
Non-GAAP net income	$	1,746		$	1,602		$	1,675

Diluted net income per share:

GAAP diluted net income per share	$	2.71		$	2.66		$	2.53
Stock-based and deferred compensation expense		0.91			0.66			0.84
Amortization of intangibles		0.21			0.21			0.21
Acquisition-related expenses^(*)		0.07			—			0.06
Investment (gains) losses, net		—			0.02			(0.01	)
Income tax adjustments		(0.10	)		(0.18	)		(0.03	)
Non-GAAP diluted net income per share	$	3.80		$	3.37		$	3.60

Shares used in computing diluted net income per share		460			475			466

The following table shows Adobe's first quarter fiscal year 2023 GAAP tax rate reconciled to the non-GAAP tax rate included in this release.
	First Quarter Fiscal 2023
Effective income tax rate:
GAAP effective income tax rate	22.0	%
Income tax adjustments	0.5
Stock-based and deferred compensation expense	(3.0	)
Amortization of intangibles	(0.7	)
Acquisition-related expenses ^(*)	(0.3	)
Non-GAAP effective income tax rate ^(**)	18.5	%
^(*) Includes deal costs and certain professional fees associated with the planned acquisition of Figma
^(**) Represents Adobe's fixed long-term non-GAAP tax rate based on three-year projections and currently available information

Reconciliation of GAAP to Non-GAAP Financial Targets
The following tables show Adobe's updated annual fiscal year 2023 financial targets reconciled to non-GAAP financial targets included in this release.
(Shares in millions)
	Fiscal Year 2023
	Low			High
Diluted net income per share:
GAAP diluted net income per share	$	10.85		$	11.15
Stock-based and deferred compensation expense		3.96			3.94
Amortization of intangibles		0.82			0.82
Acquisition-related expenses ^(*)		0.15			0.15
Income tax adjustments		(0.48	)		(0.46	)
Non-GAAP diluted net income per share	$	15.30		$	15.60

Shares used to compute diluted net income per share		456			456

The following tables show Adobe's second quarter fiscal year 2023 financial targets reconciled to non-GAAP financial targets included in this release.
(Shares in millions)
	Second Quarter Fiscal 2023
	Low			High
Diluted net income per share:
GAAP diluted net income per share	$	2.65		$	2.70
Stock-based and deferred compensation expense		0.97			0.96
Amortization of intangibles		0.21			0.21
Acquisition-related expenses ^(*)		0.05			0.05
Income tax adjustments		(0.13	)		(0.12	)
Non-GAAP diluted net income per share	$	3.75		$	3.80

Shares used to compute diluted net income per share		458			458

	Second Quarter Fiscal 2023
Effective income tax rate:

GAAP effective income tax rate	21.5	%
Stock-based and deferred compensation expense	(3.1	)
Amortization of intangibles	(0.7	)
Acquisition-related expenses ^(*)	(0.2	)
Income tax adjustments	1.0
Non-GAAP effective income tax rate ^(**)	18.5	%
^(*) Includes deal costs and certain professional fees associated with the planned acquisition of Figma
^(**) Represents Adobe's fixed long-term projected non-GAAP tax rate based on three-year projections and currently available information

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, amortization of intangibles, 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-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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