Adobe Inc. FY2019 10-K Summary
Business context and reporting period
Adobe reported for the 52-week fiscal year ended November 29, 2019. The company operates three reportable segments: Digital Media, Digital Experience and Publishing. Its strategy is centered on subscription and cloud offerings, including Creative Cloud, Document Cloud and Experience Cloud.
The filing also provides unaudited fourth-quarter data for the quarter ended November 29, 2019. Adobe adopted ASC Topic 606 revenue recognition on December 1, 2018 using the modified retrospective method; prior periods were not restated.
Key financial metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $11.171 billion | $9.030 billion | +24% |
| Gross profit | $9.499 billion | $7.835 billion | +21% |
| Gross margin | 85.0% | 86.8% | Down 1.8 points |
| Operating income | $3.268 billion | $2.840 billion | +15% |
| Operating margin | 29.2% | 31.5% | Down 2.3 points |
| Net income | $2.951 billion | $2.591 billion | +14% |
| Diluted EPS | $6.00 | $5.20 | +15% |
| Operating cash flow | $4.422 billion | $4.029 billion | +10% |
- Subscription revenue was $9.994 billion, representing 89% of total revenue and increasing 26% year over year.
- Digital Media revenue was $7.707 billion, up 22%; Digital Experience revenue was $3.206 billion, up 31%; Publishing revenue was $258 million, down 1%.
- Creative Cloud revenue was $6.482 billion, up 21%; Document Cloud revenue was $1.225 billion, up 25%.
- Digital Media annualized recurring revenue reached $8.40 billion, up 25% from $6.71 billion. Creative ARR was $7.31 billion and Document Cloud ARR was $1.09 billion.
- Fourth-quarter revenue was $2.992 billion, gross profit was $2.540 billion, net income was $852 million and diluted EPS was $1.74.
Liquidity, debt and capital allocation
- Cash, cash equivalents and short-term investments totaled $4.177 billion at year-end, including $2.650 billion of cash and cash equivalents and $1.527 billion of short-term investments.
- Net cash provided by operating activities was $4.422 billion. Investing cash outflow was $456 million, while financing cash outflow was $2.946 billion.
- Total debt carrying value was $4.138 billion, consisting primarily of a $2.25 billion term loan and $1.9 billion of senior notes.
- Debt classified as current totaled $3.149 billion because the term loan was due April 30, 2020 and $900 million of senior notes were due February 1, 2020. Adobe intended to refinance both obligations.
- The $1 billion revolving credit facility was undrawn and fully available at year-end. Management stated that existing liquidity, operating cash flow and available credit were sufficient for the next twelve months.
- Adobe repurchased approximately 9.9 million shares for $2.75 billion during fiscal 2019. Approximately $4.25 billion remained under the authorized repurchase program after a subsequent $850 million prepayment.
- Adobe does not anticipate paying cash dividends in the foreseeable future.
Material changes versus the prior comparable period
- Revenue growth accelerated through the continued shift to subscriptions, with subscription revenue rising from $7.922 billion to $9.994 billion.
- Digital Experience growth benefited materially from the inclusion of Marketo and Magento, acquired in fiscal 2018. Segment subscription revenue increased 37%.
- Cost of revenue increased 40%, and operating expenses increased 25%, reflecting higher amortization of acquired intangibles, hosting and data-center costs, headcount, stock-based compensation and marketing investment.
- Interest expense increased to $157 million from $89 million, primarily due to the term loan used to partially fund the Marketo acquisition.
- Cash and short-term investments increased from $3.229 billion to $4.177 billion, despite $2.75 billion of share repurchases.
- Working capital changed from a $556 million surplus to a $1.696 billion deficit, principally because near-term debt maturities were reclassified as current liabilities.
- Fiscal 2019 included a $42 million investment gain related to Adobe’s acquisition of the remaining interest in Allegorithmic, acquired for approximately $106 million in cash.
Guidance, outlook, commentary and risks
Management described fiscal 2019 results as strong and expects long-term growth to be driven by continued adoption of Creative Cloud, Document Cloud and Experience Cloud, expansion within existing customer accounts, new products and services, artificial intelligence and machine learning through Adobe Sensei, and mobile, 3D and augmented-reality offerings. The 10-K does not provide a specific fiscal 2020 revenue or earnings guidance figure.
- Key operating risks include intense competition, pricing pressure, changing technology and customer migration among devices and platforms.
- Cybersecurity, data-center outages, third-party hosting dependence, privacy regulation and cross-border data-transfer requirements could affect operations, reputation and financial results.
- Subscription renewals, customer attrition, extended enterprise sales cycles and the ratable recognition of subscription revenue may make results and forecasting less responsive to changes in demand.
- Foreign exchange movements affected fiscal 2019 revenue adversely by approximately $98 million after hedging.
- Tax law changes, international tax examinations and potential changes to Adobe’s international operating structure could increase future effective tax rates and cash taxes.
- Adobe faces refinancing risk related to the term loan and 2020 notes, although it had entered into Treasury lock agreements covering $1 billion of anticipated future debt issuance.
- Outstanding contractual obligations totaled $7.121 billion, including debt and interest, operating leases and purchase obligations. Legal proceedings, intellectual-property claims and indemnification exposures remain inherently unpredictable; no material accrual was required beyond amounts disclosed.
Important facts for investors to verify
- Reconcile fiscal 2019 growth with the non-restated fiscal 2018 comparison under ASC Topic 606.
- Assess the sustainability of Digital Media ARR growth and renewal, upsell and cross-sell trends.
- Evaluate Digital Experience organic growth separately from the contribution of Marketo and Magento.
- Confirm the refinancing and eventual repayment terms for the $2.25 billion term loan and $900 million 2020 notes.
- Monitor gross-margin pressure from hosting costs, media rebill costs and amortization of acquisition-related intangibles.
- Review the effect of stock repurchases and stock-based compensation on diluted share count and per-share results.
- Track foreign exchange, tax-law developments, privacy requirements and cybersecurity incidents that could affect cash flow or margins.