Current Price: $431 Price Target: $650
Position Size: 2.9% TTM Performance: -2%
Key Takeaways:
- Q1 results were a slight beat, 2Q guidance disappointed slightly, but full year 2022 guidance maintained. They lapped an extra week in Q1 2021 which was a headwind to headline growth numbers. Demand commentary continues to be very positive.
- Russia/Ukraine impact – They halted new sales in Russia and Belarus and eliminated annual recurring revenue from these regions and from Ukraine – collectively it’s less than $100m in annual recurring revenue impact.
- Announced select price increases – they won’t meaningfully impact results until the second half of 2022. Price increases were already contemplated in previous 2022 guidance. They’ve had no meaningful price increase since 2018.
- No change in thesis – fundamentals continue to be strong. The recent sell off in the stock is all multiple contraction.
Additional highlights:
- Conference call quotes…
- CEO said…”I feel more positive about our business moving forward than I ever have.”
- “The acceleration to all things digital has made content and creativity more important than ever before. Everyone needs to express themselves digitally, from the individual on social media to the student creating a more compelling school project to the creative professional making the next marketing campaign”…”we’re building applications for every surface and every audience across web, mobile and desktop.”
- “We’re seeing tremendous interest for Substance 3D and our new 3D Modeler beta, as brands bring together the physical and digital worlds and begin their journeys to become “metaverse ready.” Substance is already being adopted by global brands like Coca-Cola, NASCAR and Nvidia for marketing and e-commerce.”
- Long runway for growth…
- Less than 10% penetration on 2024 TAM expectations of >$200B (updated in Dec). That includes ~$110B for Digital Experience and ~$95B for Digital Media (~$63B for creative ($25B creative professionals; $31B communicators; $7B consumers) and ~$32B for document cloud ($10B knowledge workers; $8B communicators; $14B document services/APIs)).
- Benefiting from secular growth driven by digital transformation, device proliferation, rising content creation and evolving content mediums including voice, augmented reality and virtual reality.
- Adobe is a rare company w/ >90% recurring revenue, double digit top line growth and ~40% FCF margins. Accelerated secular tailwinds around digital transformation, along w/ continued share buybacks, will be a long-term benefit and driver of them continuing to compound FCF/share double digits.
- Digital Media segment (+17% YoY adjusted for extra week in ’21; ~71% of revenue): “unleashing creativity & accelerating document productivity”
- Comprised of Creative cloud (~60% of total revenue, +16% YoY) and Document Cloud (11% of total revenue, +17% YoY). Q2 total segment growth guided to +14%. Segment Annualized Recurring Revenue (“ARR”) grew to $12.57B w/ Creative ARR of $10.54 billion and Document Cloud ARR of $2.03 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 – increasing focus on new and emerging content creation categories including video, 3D, Virtual Reality, Augmented Reality and immersive content for emerging metaverse platforms.
- Document Cloud – “powering the paper-to-digital revolution” “we’ll continue to gain significance as hybrid work becomes the standard.” 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 (+20% YoY adjusted for extra week in ’21; ~29% of revenue): “powering digital businesses”
- Digital Experience subscription revenue was $932, +22% YoY. Q2 guided to +18%. Segment revenue includes: subscription revenue, professional services revenue, and “other”, which includes perpetual, OEM and support revenue.
- 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
FCF estimates for FY 2022…increased last year and have remained steady
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]
BRK-2021-annual-letter.pdf
