Current Price: $480 Price Target: $520 (raised from $494)
Position Size: 3% TTM Performance: +63% since inception (3/18)
Key Takeaways:
· Adobe beat highest estimates on revenue and EPS and guided in-line for Q4. Full year 2020 total revenue and EPS guidance are ahead of pre-pandemic targets.
· Digital Media segment continues to be stronger than Digital Experience segment. Current environment is causing tailwinds for Digital Media as it benefits from the mission critical aspect of their creative and document cloud solutions in a remote work environment. While Digital Experience is seeing headwinds from a weak advertising market.
· CEO Shantanu Narayen said…”Content creation and consumption are exploding in a world where connecting visually has become even more essential…our strategy of unleashing creativity for all, accelerating document productivity and powering digital businesses is more relevant than ever and driving our strong performance across every geography and audience.”
Additional Highlights:
· ADBE reported 3Q total revenue growth of 14%. EPS was $2.57 vs. consensus $2.41. This compares to guidance of $3.15B and $2.40, respectively. Operating margin was 44%, up ~280bps vs. last year and above consensus of ~42%.
· Some sequential improvement, but overall till seeing some headwinds w/ SMB’s.
· “Students are adapting to learning remotely instead of in a classroom. Entire industries from media and entertainment to pharma, retail, automotive and financial services, have had to pivot overnight to digital operations to engage with customers and ensure business continuity. Electronic workflows and signatures are the only way to efficiently complete business transactions. The world has changed in a way that none of us could have foreseen. This reality has created new tailwinds for Adobe.”
· Digital Media segment ($2.23B, +19% YoY; ~71% of revenue):
o Comprised of Creative cloud (84% of segment revenue, +19% YoY) and Document Cloud (16% of segment revenue, +22% YoY).
o Segment Annualized Recurring Revenue (“ARR”) grew to $9.6B exiting the quarter. With Creative ARR of ~$8.3 billion, and Document Cloud ARR of $1.3 billion.
o Creative Cloud is benefiting from “exploding” content creation and consumption across phones, tables and desktops. “Web content, mobile application creation, imaging, video, animation, screen design, AR and 3D are all surging in this new era of digital storytelling and business transformation.”
o Saw improvement in retention driven by increased engagement and product usage among individuals, teams and enterprises.
o Document Cloud is key in the remote work environment as the imperative to translate paper processes to digital accelerates across the globe. Acrobat Mobile installs up 33% year-to-date; significant momentum with Adobe Sign. Key customer wins include Citi, PwC, Pepsi, HSBC, Merkle and J-Power.
· Digital Experience segment (revenue was $838m, +2% YoY; ~29% of revenue):
o Digital Experience subscription revenue was +7% or +14% YoY excluding ad cloud. Segment revenue includes: subscription revenue, professional services revenue, and “other”, which includes perpetual, OEM and support revenue.
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 include Eli Lilly, Truist, Nike, Lowe’s, Shell, Lloyds and the US Department of Commerce;
o Started a partnership with IBM and Red Hat to enable Experience Cloud deployment in hybrid cloud environments that further strengthens real-time data security for enterprises in regulated industries
o Recognition as a leader in six Gartner Magic Quadrant and Forrester Wave reports. In the Gartner Magic Quadrant for CRM Lead Management, Adobe was the leader, achieving the best scores across Ability to Execute and Completeness of Vision.
· Guidance: Total revenue ~$3.35B w/ Digital Media segment revenue +18 percent YoY ($540m net new ARR) and flat Digital Experience segment revenue (subscription rev +1% YoY; +12% excluding Advertising Cloud). Adj. EPS ~$2.64. Overall, in line with the street and ahead of pre-pandemic full year targets.
· 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.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$ADBE.US
[tag ADBE]
[category earnings]