Where Are We Now
Updated on: 12/16/2021
With Creative, Document, and Experience Cloud, Adobe remains a beneficiary of the world’s digitalization. This tells us Adobe has the perfect trifecta – a decent company valuation, great growth prospects, and a strong moat today that will protect it from new entrants.
We think investors today are placing far too much emphasis on a minimal 2022 sales and earnings guidance miss ($13.70 earnings per share estimated vs. $14.26 earnings per share expected by analysts; $17.9 billion in sales estimated vs. $18.16 billion expected by analysts).
Adobe achieved record revenue of over $4 billion in revenue last quarter, a new record for the company. This represents 20% growth versus last year thanks to the shift to the digital realm. Creative Cloud, Document Cloud, and Experience Cloud are gaining momentum as Adobe’s products become increasingly important.
Annualized recurring revenues ("ARR") are growing across all three of Adobe’s segments. Total ARR is over $24 billion, up 18% from last year.
Adobe’s Creative Cloud has demonstrated wildly impressive growth serving up a suite of software for Creators on a recurring revenue high margin subscription.
The business is benefitting from the digital creator economy with a wide-moat and huge market share for photographers, videographers, designers and more.
The Document Cloud segment is presented with a significant opportunity in document management as it already has wide distribution across most large enterprises with Adobe Acrobat.
Adobe’s digital services are very sticky with high switching costs for creators as the software suite can take years to master. The business will be able to capture the growth of the creator economy and digitization trends and continue to increase active users on its digital services software offerings.
Adobe operates two main segments or what Adobe calls, "growth areas": Digital Media and Digital Experience. The company also classifies some its legacy products and solutions under a third segment, Publishing & Advertising.
Adobe is a diversified software provider that provides end-to-end ("E2E") solutions for creators, students, enterprise customers, and general consumers. This extensive E2E portfolio helps creators and businesses enter the new digital way of doing things or digitally transform their operations.
Although Adobe classifies its operations under Digital Media, Digital Experience, or Publishing & Advertising, end consumers are attracted to Adobe for at least one of three separate, yet integrable, cloud product portfolios. These are:
Creative Cloud (Digital Media)
Document Cloud (Digital Media)
Experience Cloud (Digital Experience)
Creative Cloud is intended for the creators of the world — video editors, photographers, filmmakers, designers, marketers, social content creators, communicators, and other creative individuals and groups. Creative Cloud includes the popular Photoshop and Lightroom apps. However, the Creative Cloud is a lot more than just the Photoshop we know — it includes many other multi-surface, desktop, and mobile apps, as well as content, community, and teams cloud services. Creative individuals and enterprises use this comprehensive set of apps to:
create and advance creative content
democratize 3D and immersive content creation
collaborate with peers and co-workers
share and obtain knowledge with and from the creative community
Users can pay a monthly subscription to gain access to a single app. For a larger monthly fee, users can also gain access to every app.
Each subscription model grants users access to each app along with 1 TB of cloud storage.
Document Cloud is leading the revolution towards a paperless world. This suite of products is flexible and versatile. Students, consumers, and professionals boost document productivity with Document Cloud's myriad of document conversion, mark-up, editing, scanning, digital signature, API, and artificial intelligence ("AI") and machine learning ("ML") features. These features are available across Desktop, Web, and Mobile apps.
Document Cloud users can sign up for a monthly access to the services with options for individuals, students and teachers, teams, and enterprises. There are discounts for those that sign up to pay monthly with an annual commitment.
Experience Cloud is Adobe's customer experience management product suite. As the market penetration of e-commerce and the desire of businesses to "know" their customers better continue to rise rapidly, Experience Cloud is set to benefit substantially with its E2E offering.
Adobe's Real-Time CDP (customer data platform) is a key component of a customer experience management platform when coupled with predictive analytics, customer insights, audience management, commerce / e-commerce, campaign, engagement, and content management capabilities. Experience Cloud has it all.
To date, Adobe has helped analyze data from over a trillion sites for companies involved in retail and e-commerce.
The company also recently acquired Workfront, a productivity management tool for company workers. This acquisition helped to bring in workflow management and efficiency tools for marketing teams, to unify productivity across global teams, through the platform.
The Experience Cloud starts with customer and audience insights and ends with the marketing workflow, after which insights and inferences are drawn again. These insights allow marketers, advertisers, and managers monetize their content and campaigns effectively. As such, Experience Cloud mainly appeals to larger businesses with a digital presence.
This service is based on a recurring subscription model, varying in price depending on a company's specific needs.
Once upon a time, Adobe had much slower growth than it has today. In the early years of the 2010s, revenues were essentially last until they took off to where they are today.
Adobe did a great job pivoting its business model from selling perpetual licenses to its software to providing software-as-a-service ("SaaS") products. It's clear this was a genius strategic move on management's part in the first half of last decade — sales took off and now Adobe is primarily a SaaS business with robust recurring revenues and cash flows.
Adobe Revenue by Segment (Q4 2021)
Source: Adobe Investor Relations
Adobe Revenue ($M) (Q4 2021)
Adobe Inc. Annual Recurring Revenue by Segment ($M) (Q4 2021)
Source: Adobe Inc. Investor Relations
Adobe Inc. EBITDA ($M) (Q4 2021)
When it comes to margins, SaaS companies reign king.
Their businesses' expenses are significantly lower than those of traditional companies, as their main costs are related to maintaining the software. If a SaaS company decides it wants to scale, the costs associated with taking on more customers would not increase proportionately. Software is "built once, sold twice". Therefore, SaaS companies, like Adobe, can lower expenses as a percentage of revenue over time. This means higher gross and EBITDA margins over time.
This is the concept of operating leverage and Adobe has lots of it. Since pivoting to its SaaS business model. EBITDA margins have taken off and now exceed 40% while gross margins float just under a whopping 90%.
Creativity from Clay
The name "Adobe" came while its founders, John Warnock and Charles Geschke, were working out of a garage. There was a creek that ran behind Warnock’s house called "Adobe Creek" because of the "Adobe" clay making up the bed of the creek. Reflecting the creative nature of the software built, the pair decided to name the company Adobe.
John Warnock and Charles Geschke were computer scientists based out of Palo Alto, California. While working for Xerox, the pair were able to develop a programming language called PostScript. This language was able to precisely describe the shape, size, and position of objects on a digital page using mathematical terms. The language allowed anyone to generate a representation of the page in code on any supported device. Xerox did not approve the technology, thinking it would not be successful in the market. The duo took their talents and their language to found their own company, Adobe Inc.
Adobe's product, PostScript, started gaining more traction once the company started to build algorithms that read online documents in different coding languages. By 1987, PostScript had become an industry-standard printing language in the office world, with nearly 400 third party software products supporting the technology and licensing agreements with 19 different printing companies.
One year earlier in 1986, Adobe filed for the NASDAQ Composite Index under ticker ADBE, trading for 22 cents a share.
As years went by, Adobe released more products, such as Illustrator and Photoshop. These were digital object-oriented drawing programs developed for the Apple Macintosh. Most notably, the company also invented the Portable Document Format, or PDF, to read, edit, and distribute online documents without disrupting its resolution or formatting.
To this day, John Warnock and Charles Geshke are known as the pioneers of graphics and digital publishing.
Buy One, Get Creativity Free
Adobe’s Creative Cloud is the frontrunner to digital art when it comes to serving creators. The wide selection of software and various applications of each software allow the platform to support any creator in any industry. Today, around 90% of all digital professionals use Adobe Photoshop in some way for their work.
With about 22 million monthly active paid subscribers, the user base continues to grow.
Adobe's success can be attributed to its unique distribution strategy — the company runs discounted subscriptions for team and education subscribers, emphasizing the idea of "learning as a team".
Adobe Creative Cloud Annual Subscribers (M)
Sources: Statista (2013 - 2020), ProDesignTools.com (2021E)
This has positive implications for the company over any time horizon. In the short run, it brings in more subscribers as more users are involved in using the software. In the long run, prioritizing students and helping them learn gives them the ability to familiarize themselves with the software prior to starting their professional careers.
This translates into a higher conversion rate once they decide to buy their own subscription. In a corporate or enterprise environment, purchasing Adobe subscriptions is a no-brainer as new graduates are highly likely to be trained on the Adobe platform, lowering training costs.
Adobe’s initiative to focus on building a community and emphasize learning not only brings in more customers, but also keeps churn low. As users explore new applications within the Adobe ecosystem, users are more and more likely to stick given the compatibility, E2E nature, and integration of each app.
The Ecosystem Advantage
Adobe's advantage over industry specialists in digital media, document and signature services, and customer experience management lies in the breadth of its service offerings and the integration between them.
Adobe's broad focus and ecosystem-type approach to each of its growth areas have won it lots of market share and brand recognition across each category. Adobe's digital media solutions are the gold standard (who hasn't used Photoshop?), and Document Cloud and Experience Cloud provide the depth and breadth users need to get work done. Again, the E2E nature of each of the three major platforms Adobe provides is an enormous benefit to users.
The result is strong corporate relations and ease-of-use stemming from the non-siloed nature of its offerings. For example, DocuSign holds most of the document signing market share today due to first-mover advantage. However, DocuSign's only business is enabling the sending of safe and secure digital signatures. Adobe has eSignature capabilities intertwined with its Document Cloud offering — users can sign, scan, edit, and compress files all in one place.
We think Adobe's solutions will be much more attractive to enterprises due to the convenience and integration with the company's already widely used digital media and document services.
Document Signing Market Share
Graphics & Photo Editing Software Market Share
Adobe has been building a moat in documents, digital media, and customer experience management solutions while also fostering a financial fortress. The company has more cash than total financial debt and leases, and it continues to add value to users with minimal capital expenditures.
As a result, the company is a free cash flow fiend. With all the extra cash, low debt, and well-rounded balance sheet as a whole, Adobe can partake in value-creating endeavours, like share buybacks, critical acquisitions, and growth investments. Over the years, Adobe has spent several billions each year to conduct such activities.
We believe Adobe will continue and even accelerate such investments as it continues to gain share, generate tons of cash, and grow.
Adobe's Capital Allocation ($M) (Q4 2021)
Adobe lays out a clear growth strategy with several avenues it could take with each major growth area. At the highest level, the company is investing money to create and lead the market in new categories, expand its customer base, host exceptional technology platforms, innovate business models, and scale via partnerships.
The foundation of this strategy is the strong belief that we now live in a "digital first" world. E-commerce is taking off, the creator economy is real, AI & ML underpins new software, and the way we work has been redefined in the blink of an eye.
A Dive into Documents
Adobe’s digital media segment is in high demand, and that demand skyrocketed during the pandemic. The pandemic effectively accelerated digital transformation and the paper-to-digital revolution. In 2020 alone, more than 300 billion PDFs were opened, and 8 billion signatures were processed using Adobe products.
Although it may seem like this is the apex for the document cloud business, Adobe (and we) believe the company is just getting started.
Adobe sees digital documents as the "future of work". To ensure the Document Cloud continues to lead this market, Adobe is integrating:
AI & ML-backed document intelligence;
expanded usage of eSignatures across all platforms and devices;
more efficient business workflows through APIs; and
partnered services to increase customer reach and overall value proposition
The 2023 Document Cloud total addressable market ("TAM") is about $21 billion and will grow to $32 billion by 2024.
Adobe is mainly targeting knowledge workers, communicators, and document services & APIs to grab more share in the market.
Helping Businesses Manage Customer Experience
The customer experience management market is growing and rooted in the fact that each business is connected to the digital world in some way. Even some of the largest brick-and-mortar retail stores in the world have massive omni-channel presence.
Adobe's AI-based customer experience platform is already trusted by many, and it will probably get better over time. Adobe plans on building the best real-time customer platform that hosts a large, unified, and integrated ecosystem.
In simpler terms, businesses using Adobe's Digital Experience Cloud platform will feel greater control over their target markets, how customers behave, and the best ways that this target audience can be reached. By understanding the customer better, businesses using the platform could market to customers better.
The 2023 TAM is about $85 billion and should grow to a whopping $110 billion in 2024. Adobe sees the main opportunities within content & commerce, data insights & audiences, customer journeys, and marketing workflow.
The key to success will be to host a well-integrated, versatile platform. We believe Adobe has one today. As long as Adobe continues to invest in this platform, we think it will continue to have a high value proposition to Adobe's customers.
The Creative Cloud Strategy
The creator economy is here and it is real. The usefulness of Adobe's Creative Cloud services have gained prominence during the pandemic as the demand and market for such services is growing exponentially.
Adobe's $41 billion targeted 2023 TAM and $63 billion 2024 TAM will mainly target creative professionals and communicators.
Creative job openings are growing at rapid rates as the creator and digital economies expand. Other applications such as 3D and immersive content are also gaining traction. Adobe plans to be there to support these professionals in delivering superb content.
The mission is similar for communicators — provide them with the tools they need to explore new use cases, make them easy to use, and empower young professionals and students to learn how to make creative assets within Adobe.
If Adobe continues to be the most durable, flexible, and effective creative platform of choice, we believe Creative Cloud could hold and expand on its large chunk of the growing TAM.
Main Risk: Your Margin is my Opportunity
Although Adobe may capture a lot of market share today, it may face stronger competition, particularly from businesses that strive to make their products and solutions simple and accessible.
Let's face it — Photoshop is not that easy to use. Many customers today would prefer simpler creativity tools depending on the type of work they are performing.
Canva and Figma offer customers with easier and more accessible tools for simple and intermediate-level creativity tasks. As a result, many users ditched Photoshop and Spark for these easier-to-use services.
If these services create a powerful ecosystem similar to Adobe's, Adobe may face serious competition that threatens its near-monopoly and high-margin business in digital media.
Outside of digital media, we see similar risks. DocuSign dominates the eSignature market and the digital experience market is also highly saturated with players like Google, Oracle, SAP, SAS, Shopify, and others.
Adobe is not a pure-play of any one particular segment. It is a combination of several great businesses that seem to complement each other. While its product offerings are broad and comprehensive, its competition is also broad and may be difficult to track. With that, it may be possible that Adobe invests dollars or targets markets ineffectively to keep up with all its competitors in the future.
Adobe is an industry leader when it comes to digital services. Its emphasis on providing quality services for its creators is what sets the brand apart from competitors. The company’s successful business model brings in year-over-year growth through recurring revenue and strong margins.
Despite having competitors in its creative cloud segment, such as Canva and Figma, Adobe continues to be a market leader due to its consistent and growing user base. As it continues to gain more recognition in the document market and expand its current platform capabilities, Document Cloud should continue to take market share from DocuSign.
Adobe's efforts in these growth areas should further help Adobe strengthen its position in the digital service market as it continues to unlock the creativity of creators and serve individuals and enterprises with document management and customer experience tools.