Impact of New U.S. Tax Law Results in Higher Fiscal Year 2018 Earnings Per Share Targets
Adobe (Nasdaq:ADBE) today announced it is updating its financial targets
to include expected financial impacts of the Tax Cuts and Jobs Act (the
“Tax Act”), which was enacted into law during its first quarter of
fiscal year 2018. The updated targets are being provided in connection
with today’s filing of Adobe’s annual report on Form 10-K for fiscal
year 2017 with the U.S. Securities and Exchange Commission.
Among other provisions, the Tax Act reduces the U.S. corporate income
tax rate from 35 percent to 21 percent and imposes a 15.5 percent tax on
accumulated foreign earnings effective Jan. 1, 2018. Given Adobe’s
fiscal year 2018 began Dec. 2, 2017, the company will have a
partial-year impact due to these changes.
Adobe expects its fiscal year 2018 GAAP and non-GAAP effective tax rates
will decline substantially from rates in fiscal year 2017, as shown in
the table below. The company also expects fiscal year 2019 GAAP and
non-GAAP effective tax rates to stabilize at a rate of approximately 18
percent, below its fiscal year 2017 rate of approximately 21 percent.
“The new Tax Act is lowering Adobe’s effective tax rates, driving a
significant increase in our earnings per share targets," said Mark
Garrett, executive vice president and CFO, Adobe. “With ready access to
our offshore cash, we will continue to evaluate investment opportunities
to grow our business and we are actively expanding our campuses in the
Bay Area and Utah to accommodate the growth of our employee base.”
As of the end of its fiscal year 2017, Adobe had approximately $5.8
billion of cash and cash equivalents on its balance sheet, the majority
of which was held offshore. Adobe estimates its accumulated foreign
earnings tax obligation related to this will be offset against the
company’s previous accrual for the repatriation of prior year foreign
earnings. This amount, plus the amount the company expects to incur for
remeasuring deferred tax assets, will result in a tax charge of
approximately $85 million in Adobe’s first quarter fiscal year 2018
results and is factored into the GAAP effective tax rates provided in
the table below.
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Expected GAAP Effective Tax Rate
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Expected Non-GAAP Effective Tax Rate
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Q1 FY2018
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Q2 – Q4 FY2018
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Q1 FY2018
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Q2 – Q4 FY2018
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New target
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~17 percent
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~13 percent
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~11 percent
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~11 percent
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Previous target
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~9 percent
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~23 percent
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~21 percent
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~21 percent
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Adobe’s updated non-GAAP effective tax rate targets exclude a one-time
financial impact of the tax law, consistent with the company’s
long-standing practice of excluding large one-time items in its non-GAAP
results.
Updated Financial Targets
As part of today’s update, Adobe reaffirmed its financial targets
including revenue, annualized recurring revenue (“ARR”) and bookings
targets as applicable for both the first quarter and for fiscal year
2018. Based on financial impacts of the Tax Act, Adobe stated it is
adjusting its earnings targets as follows:
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In fiscal year 2018, Adobe expects to achieve diluted earnings per
share of approximately $4.72 on a GAAP-basis, and $6.20 on a non-GAAP
basis. The company’s prior targets were approximately $4.40 on a
GAAP-basis, and $5.50 on a non-GAAP basis.
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In the first quarter of fiscal year 2018, Adobe expects to achieve
diluted earnings per share of approximately $1.05 on a GAAP-basis, and
$1.43 on a non-GAAP basis. The company’s prior targets were
approximately $1.15 on a GAAP-basis, and $1.27 on a non-GAAP basis.
The company’s updated financial targets are summarized in tables below,
and replace targets provided in December 2017.
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Fiscal Year 2018 Annual Targets
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Adobe total revenue
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~$8.725 billion
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Digital Media segment revenue
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~23% year-over-year growth
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Adobe Experience Cloud subscription revenue1
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~20% year-over-year growth
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Adobe Experience Cloud total revenue
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~15% year-over-year growth
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Earnings per share
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GAAP: ~$4.72
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Non-GAAP: ~$6.20
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Net new Digital Media annualized recurring revenue (“ARR”)
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~$1.1 billion
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Adobe Experience Cloud subscription bookings2
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~20% year-over-year growth
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1 Includes revenue from SaaS, managed service and term
offerings for Adobe Analytics Cloud and Adobe Marketing Cloud, as
well as total revenue for Adobe Advertising Cloud
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2 Includes annualized subscription value of SaaS, managed
service and term offerings under contract for Adobe Analytics Cloud
and Adobe Marketing Cloud
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During fiscal year 2018, Adobe expects quarterly revenue, earnings per
share and Digital Media ARR results to follow similar seasonality as was
achieved in fiscal year 2017.
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First Quarter Fiscal Year 2018 Targets
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Adobe total revenue
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~$2.040 billion
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Digital Media segment revenue
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~25% year-over-year growth
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Adobe Experience Cloud total revenue
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~15% year-over-year growth
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Net non-operating other expense
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~$6 million
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Effective tax rate
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GAAP: ~17%
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Non-GAAP: ~11%
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Share count
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~500 million shares
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Earnings per share
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GAAP: ~$1.05
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Non-GAAP: ~$1.43
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Net new Digital Media annualized recurring revenue (“ARR”)
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~$275 million
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A reconciliation between GAAP and non-GAAP targets is provided at the
end of this press release.
Forward-Looking Statements Disclosure
This press release contains forward-looking statements, including those
related to revenue, ARR, bookings, net non-operating expense, share
count, tax rates, and earnings per share on a GAAP and non-GAAP basis,
which involve estimates, assumptions, and interpretations. The final
impact of the Tax Act may differ from these estimates, possibly
materially, due to, among other things, changes in interpretations and
assumptions made, additional guidance that may be issued, unexpected
negative changes in business and market conditions that could reduce
certain tax benefits, and actions taken by Adobe as a result of the Tax
Act. Many of the tax provisions noted above that become effective in our
fiscal year 2019 will likely increase our effective tax rates. Further,
the percentages above are provisional and based on estimates that may
change as we continue to evaluate the impact of the Tax Act on our
financial results and as we consider any new guidance the Financial
Accounting Standards Board is expected to issue with regard to the
accounting treatment for various new tax provisions. We anticipate
providing additional information during our earnings call, including the
impact to our earnings per share, when we announce our first quarter of
fiscal year 2018 earnings. Additionally, other risks and uncertainties
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, introduction of new technology, complex
sales cycles, fluctuations in subscription renewal rates, our ability to
predict such renewals and risks related to the timing of revenue
recognition from our subscription offerings, potential interruptions or
delays in hosted services provided by us or third parties, risks
associated with cyber-attacks, information security and privacy, failure
to realize the anticipated benefits of past or future acquisitions,
changes in accounting principles and tax regulations, and uncertainty in
the financial markets and economic conditions in the countries we
operate as 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.
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.
© 2018 Adobe Systems Incorporated. All rights reserved. Adobe 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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Reconciliation of GAAP to Non-GAAP Financial Targets
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(In millions, except per share data)
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The following table shows Adobe's annual fiscal year 2018 earnings
per share target reconciled to the non-GAAP target included in this
document.
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Fiscal Year 2018
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Diluted net income per share:
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GAAP diluted net income per share
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$
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4.72
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Stock-based and deferred compensation expense
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1.21
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Amortization of purchased intangibles
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0.27
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Impacts of the Tax Act
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0.17
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Other income tax adjustments
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(0.17
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)
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Non-GAAP diluted net income per share
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$
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6.20
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Shares used to compute diluted net income per share
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500.0
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The following table shows Adobe's first quarter fiscal year 2018
earnings per share and tax rate targets reconciled to non-GAAP
targets included in this document.
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First Quarter
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Fiscal 2018
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Diluted earnings per share:
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GAAP diluted net income per share
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$
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1.05
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Stock-based and deferred compensation expense
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0.27
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Amortization of purchased intangibles
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0.07
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Impacts of the Tax Act
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0.17
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Other income tax adjustments
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(0.13
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)
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Non-GAAP diluted net income per share
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$
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1.43
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Shares used to compute diluted net income per share
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500.0
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Effective income tax rate:
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GAAP effective income tax rate
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17.0
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%
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Stock-based and deferred compensation expense
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(0.8
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)
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Amortization of purchased intangibles
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(0.2
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Impacts of the Tax Act
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(13.0
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)
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Other income tax adjustments
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8.0
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Non-GAAP effective income tax rate
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11.0
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%
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The following table shows Adobe's second to fourth quarter fiscal
year 2018 tax rate targets reconciled to non-GAAP targets included
in this document.
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Second to Fourth
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Quarter
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Fiscal 2018
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Effective income tax rate:
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GAAP effective income tax rate
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13.0
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%
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Stock-based and deferred compensation expense
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(0.8
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Amortization of purchased intangibles
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(0.2
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Other income tax adjustments
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(1.0
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)
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Non-GAAP effective income tax rate
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11.0
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%
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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-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.
Calculating Annualized Recurring Revenue (“ARR”)
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Creative ARR
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Annual Value of Creative Cloud Subscriptions and Services + Annual
Digital Publishing Suite Contract Value + Annual
Creative ETLA Contract Value
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Document Cloud ARR
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Annual Value of Document Cloud Subscriptions and Services + Annual
Document Cloud ETLA Contract Value
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Digital Media ARR
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Creative ARR + Document Cloud ARR
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Note: ARR targets and results are adjusted for constant currency based
on exchange rates in December each year.
Adobe
Investor Relations Contact
Mike Saviage, 408-536-4416
ir@adobe.com
or
Public Relations Contact
Dan Berthiaume, 408-536-2584
dberthia@adobe.com