Current Price: $399 Price Target: $458 (raised from $368)
Position Size: 2.7% TTM Performance: +35% since inception (3/18)
Key Takeaways:
· Adobe beat on EPS with adj. EPS of $2.45 vs. estimate of $2.34 (range $2.29 to $2.37). 2Q revenue was $3.13 billion, +14% YoY. This was slightly below estimate $3.16B (range $2.97B to $3.19B).
· Not immune to Covid impact, but seeing some remote working tailwinds. Covid led to weakness in their Digital Experience segment (26% of revenue, +5% YoY), while their Digital Media segment (74% of revenue, +18% YoY) saw record Q2 results.
· Digital Experience results were weighed down by a weak advertising market, while Digital Media benefited from the mission critical aspect of their creative and document cloud solutions in a remote work environment.
· CEO Shantanu Narayen said…”Despite the short-term challenges, the mandate to digitally transform has taken on heightened urgency”…this “tectonic shift towards ‘all things digital’ across all customer segments globally will serve as a tailwind to our growth initiatives as we emerge from this crisis.”
Additional Highlights:
· Subscription revenue at 92% of total revenue for the quarter (up from 90% in 2Q19).
· Non-GAAP operating margin was 42.7%, +440bps vs. last year, and above consensus of ~41%.
· Like other companies, mgmt. specifically talked about demand weakness with small and mid-sized businesses as a result of the pandemic.
· “While it was difficult to imagine only conducting business with CMOs and CIOs virtually, a side benefit of everyone working at home is that we are able to schedule and engage with far more customers across multiple continents. In all these discussions with business leaders it is clear that investments in digital and specifically customer experience are more important than ever.”
· Digital Media segment ($2.23B, +18% YoY; ~71% of revenue):
o Comprised of Creative cloud (84% of segment revenue, +17% YoY) and Document Cloud (16% of segment revenue, +22% YoY).
o Segment Annualized Recurring Revenue (“ARR”) grew to $9.2B exiting the quarter. With Creative ARR of ~$8 billion, and Document Cloud ARR of $1.2 billion.
o Document Cloud is key in the remote work environment as the imperative to translate paper processes to digital accelerates across the globe.
o They saw a surge in demand for digital documents, with use of web-based PDF services up nearly 40% QoQ and the number of documents shared in Acrobat increasing 50% YoY.
o Adobe Sign (their cloud-based electronic signature solution) usage increased 175% since the start of their fiscal year. Mobile usage exploded with Acrobat Reader – installations increased 43% YoY and Adobe Scan installations increased 66%.
· Digital Experience segment (revenue was $826m, +5% YoY; ~29% of revenue):
o Digital Experience subscription revenue was $707m, +8% YoY growth. Segment revenue includes: subscription revenue (which includes revenues from Advertising Cloud), Professional services revenue, and “other”, which includes perpetual, OEM and support revenue. Excluding Advertising Cloud revenue, subscription grew 18% YoY.
o As they outlined on their last earnings call, they anticipated delays in enterprise bookings as companies prioritized employee and financial well-being. In particular, they saw an impact w/ small and medium sized businesses.
o Advertising Cloud revs were impacted by the global decline in ad spend and the discontinuation of a low-margin product which helped clients conduct advertising transactions.
o Key customer wins in the quarter included IBM, Walgreens, Safeway, Astellas Pharma, and Allianz.
· Guidance: Total revenue ~$3.15B w/ Digital Media segment revenue +16 percent YoY ($344m net new ARR) and flat Digital Experience segment revenue (subscription rev +5% YoY; +14% excluding Advertising Cloud). Adj. EPS ~$2.40. Overall, despite being below the street, Q3 guidance was re-assuring – some estimates were stale and Digital Media ARR guidance of ~$340M was better than expected. Similar to most companies, they withdrew full year guidance.
· Adobe is a rare company w/ >90% recurring revenue, double digit top line growth and ~40% FCF margins. Additionally, the headwinds from Covid (like lower global ad spending and weak SMB demand) should abate, while the accelerated secular tailwinds around digital transformation will persist.
$ADBE.US
[tag ADBE]
[category earnings]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109