Current Price: $631 Price Target: $710
Position Size: 2.9% TTM Performance: +40%
Key Takeaways:
- Q3 results were only a slight beat which seemed to weigh on the stock after they reported. Results were impacted in part by some summer seasonality (see quote below). Despite that, it was a very strong quarter with positive commentary on the call.
- Long runway for growth – FY21 guidance of ~$15B implies only ~10% penetration on TAM expectations of $147B. That includes ~$85B for Digital Experience and ~$62B for Digital Media (~$41B for creative, ~$21B for document).
- Quotes from the call…
- “As anticipated, with regions beginning to reopen across the globe, we saw pronounced summer seasonality in Q3. This is consistent with the experience of businesses across industries, as evidenced by data from the Adobe Digital Index, which showed that June and July marked the highest consumer travel season in 2 years. This correlated with lower web traffic, while individuals enjoyed their summer holidays. We do see continued recovery in the SMB segment associated with the reopening.”
- “Creativity has always played a central role in the human experience. Over the last year, we have all witnessed the way creativity has sustained us. We’ve shared photographs with loved ones on different continents, taught art classes to students at their kitchen tables and launched entirely new businesses online. Building on decades of leadership, Adobe continues to pave the way in core creative categories, including photography and design, while pushing the boundaries across a wide range of emerging categories such as AR and 3D.”
- “Our offices are slowly reopening to fully vaccinated employees on a voluntary basis. As we look ahead to the future of work at Adobe, we will remain hybrid and flexible…”
- “return to business travel is expected to ramp slowly.”
- Digital Media segment ($2.87B, +23% YoY; ~71% of revenue): “unleashing creativity & accelerating document productivity”
- Comprised of Creative cloud (~60% of total revenue, +21% YoY) and Document Cloud (11% of total revenue, +31% YoY). Q4 total segment growth guided to +20%. Segment Annualized Recurring Revenue (“ARR”) grew to $11.67B w/ Creative ARR of $9.87 billion and Document Cloud ARR of $1.79 billion.
- Creative Cloud is benefiting from “exploding” content creation and consumption across phones, tables and desktops. Seeing strong retention and renewal across all Creative products and customer segments.
- Growth drivers in creative cloud – continuing to drive innovation and extending products to new surfaces with Illustrator on iPad and Fresco on iPhone. And increasing focus on new and emerging content creation categories including video, 3D, Virtual Reality and Augmented Reality.
- Document Cloud – “accelerating document productivity by powering the paper-to-digital revolution.” Using the power of AI with Adobe Sensei, Document Cloud is automating workflows across web, desktop and mobile. Going forward, Document Cloud will increasingly make up a larger mix of net new Digital Media ARR.
- Digital Experience segment (revenue was $985m, +26% YoY; ~29% of revenue): “powering digital businesses”
- Digital Experience subscription revenue was $864, +29% YoY. Q4 guided to +22%. Segment revenue includes: subscription revenue, professional services revenue, and “other”, which includes perpetual, OEM and support revenue.
- Key customer wins at Accor, the Australian Government, Bertelsmann, Capital One, CVS Pharmacy, Daimler AG, Facebook, Ford Motor Company, Fidelity Brokerage Services, Honeywell, Real Madrid and The Gap.
- Beneficiary of growing e-commerce penetration – Adobe offers a digital commerce platform (Magento) that competes w/ Shopify and BigCommerce which benefits from growing e-commerce spending.
- Named a 2021 “Leader” in the Gartner Magic Quadrant for Digital Commerce
- Q3 Experience Cloud highlights including new personalization capabilities to help customers move from third-party cookies to first-party data strategies.
- 2021 Guidance: indicated they are “clearly on track” to exceed fiscal 2021 guidance for revenue of ~$15.45B, +20% YoY. Street estimates are already ahead of that guidance.
- Adobe is a rare company w/ >90% recurring revenue, double digit top line growth and ~40% FCF margins. Accelerated secular tailwinds around digital transformation will be a long-term benefit.
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]