Where Are We Now
Updated on: 11/13/2021
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 Adobe today is more important to the world than ever before.
Adobe achieved nearly $4 billion in revenue last quarter, a new record for the company. This represents 22% 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 $23 billion, up 21% 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 they already have 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 their digital services software offerings.
Adobe reports financials in two segments, Digital Media and Digital Experience.
Digital Media breaks down into Adobe Creative Cloud and Documents Cloud, which are under the same family of software application services.
Creative Cloud is intended for the creators of the world. Having a library of over 56 various apps, the platform focuses on different aspects of digital art to support creators.
Whether it be Photoshop and Lightroom for photographers, Premier Pro and After Effects for videographers, or Illustrator and Spark for designers, the platform has something for everyone.
Adobe Inc. Revenue by Segment (Q3 2021)
Source: Adobe Investor Relations
Document Cloud on the other hand, is intended for professionals handling important documentation. Through Acrobat Pro DC, users can use specific tools for PDFs, whether it be signing or editing documents.
The platform is accessed on a recurring subscription model. Users can pay a monthly subscription to either gain access to a single app, or for a larger fee, gain access to every app.
Each subscription model gives access to the app(s) along with 1 TB of cloud storage.
Digital Experience is related to Adobe’s product: Experience Cloud. This family of software and services are intended for businesses and large-scale enterprises. These tools are meant to help monitor a company’s success through in depth analytics.
Through the cloud, the platform can track customer engagement, advertising, predictive intelligence and more.
This service is based on a recurring subscription model, varying in price as per company.
Creativity from Clay
The name Adobe came while 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. What was so special about the creek was that it was primarily made up of a clay called Adobe. 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 Corporation, the pair were able to develop a programming language called PostScript, to precisely describe the shape, size, and position of objects on a digital page through mathematical terms. The language allowed anyone to generate a representation of the page coded, on any device supported. Xerox Corporation did not approve the technology, thinking it would not do successful in the market; thus, the duo founded their own company, called Adobe Inc.
Adobe Inc.’s product, PostScript, started getting a lot more traction once the company started building algorithms to read online documents in different languages. By 1987, PostScript had become an industry-standard printing language in the office world, with nearly 400 third party softwares supporting the technology and licensing agreements with 19 different printing companies.
In 1986, Adobe filed for the NASDAQ Composite Index under ticker ADBE, trading for 22 cents a share.
As the years went on, Adobe went on to release more products such as Illustrator and Photoshop, digital object-oriented drawing programs 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.
To date, 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 front runner of digital art when it comes to serving creators. The wide selection of software, along with the various applications of each software, allow the platform to support any kind of creator. Statically, 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 has a unique distribution strategy.
They run discounted subscriptions to both team and education plans, emphasizing the idea of learning as a team.
Adobe Creative Cloud Annual Subscribers (M)
This is beneficial for short-term and long-term goals. In the short run, it brings in more subscribers as more users are involved in using the software, but in the long run, prioritizing students, and helping them learn, gives users the ability to familiarize themselves with the software.
This translates into a higher conversion rate once they decide to buy their own subscription. 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 will continue to explore new applications of the software.
A Dive into Documents
Aside from Creative Cloud, Adobe’s digital media segment also offers software to manage online documents. Due to the pandemic, the demand for Adobe Documents Cloud flew through the roof. More than 300 billion PDFs were opened, and 8 billion signatures were processed in 2020 through Adobe products.
The main competitor of Document Cloud is DocuSign. Despite a competitor leading the industry by a large margin, Adobe still has an advantage through its versatility.
Document Signing Market Share
When comparing both applications, they have very similar usage. DocuSign’s Agreement Cloud allows users to send documents for eSignatures which are safe and secure. Where they fall short is that the signature is the only part of their business. Adobe Document Cloud on the other hand, has much more application. Users can sign, scan, edit, and compress files all in one place.
The reason why DocuSign is leading the industry right now is because of first mover advantage in terms of signature specific software.
The company has been offering signing services since 2003, while Documents Cloud was only introduced in 2019. As time goes on, more users will become aware of Adobe’s products and realize how much more they can do with the software compared to DocuSign’s.
On top of that, Adobe’s advantage comes with its corporate relations. Being in the industry for nearly 4 decades, Adobe has agreements with most of the Fortune 100 companies, such as Microsoft, to use its products for document handling. As they continue to expand their documents service, and gain more exposure, they will continue to take market share from DocuSign.
The Creativity of Business
Adobe’s second business segment is with their platform, Adobe Experience Cloud. This service is meant for companies looking to expand their businesses through digital tools. From in depth analytics, to promotion management, the platform strives to be the hub for a company’s success. To date, Adobe has helped analyze data from over a trillion sites, to give accurate insights for companies’ retail and e-commerce initiatives.
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.
Software as a Service (SaaS) Margins
When it comes to margins, Software as a Service (SaaS) companies reign king.
Their businesses expenses are significantly lower than traditional companies, as their main cost is related to maintaining the software. When it comes to scalability, if a SaaS company decides to sell more products, the costs associated with it would not increase proportionately, as software services are not capital heavy. Lower expenses mean higher gross and EBITDA margins.
This is the concept of operating leverage and Adobe has lots of it.
Adobe Inc. Revenue ($M) (Q3 2021)
Adobe Inc. EBITDA ($M) (Q3 2021)
Focusing on the Future
Adobe’s main goal is to expand its reach to more consumers, while providing exceptional services to its current user base.
For Creative Cloud, there is a near $31 billion Total Addressable Market (TAM). The plan is to provide services to any kind of creator, regardless of expertise. Adobe intends on creating products for mobile creators, web designers, and explore the world of 3D and Augmented Reality.
For Document Cloud, there is a $21 billion TAM. Adobe’s main goal is to work on expanding document services while also prioritizing conversion rates for the products. As many people can use Acrobat for free, Adobe plans to revamp the free model to convince users to make the switch to Acrobat Pro DC. They also want to continue to expand their applicability to further take market share from competitors such as DocuSign.
For Experience Cloud, the main goal is to carry on momentum to expand into bigger enterprises and capitalize on the shift to e-commerce due to the pandemic. Their recent acquisition with Workfront helped to expand the platform’s versatility and the company plans to make more acquisitions in the future to give more applicability to the service.
Adobe may be a market leader right now, but their software may prove to be in a competitive landscape. Most of their applications require time and skill, to not only complete the task, but also learn it as well. Many users put hundreds of hours just to learn an application because of how complex it is.
While this does create a sticky product for Adobe, some customers would prefer simplicity depending on the type of work they are performing.
Once Canva and Figma were introduced to the market, many users who were trying to complete simple to intermediate tasks, made the switch because Photoshop and Spark were too complex for the task at hand. They would rather use web-based applications, due its simplicity and capabilities.
Adobe will still have a consistent user base, for those who complete complex projects and need extensive tools, but the future of web-based applications may be a problem. If these softwares continue to expand their capabilities, while maintaining simplicity, users may be inclined to make the switch.
Investors should keep an eye on the capabilities of these web-based tools disrupting the market. Should they continue to expand their businesses, these companies can easily take away market share from Adobe.
Adobe is an industry leader when it comes to digital services. Their emphasis on providing quality services for their creators is what sets them 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 their creative cloud segment, such as Canva and Figma, Adobe continues to be a market leader due to its consistent and growing user base. As they continue to get more recognition in the Document market, and expand their current capabilities on the platform, Document Cloud will continue to take market share from DocuSign.
These expansions will further help Adobe strengthen their position in the digital service market as they continue to unlock the creativity of creators.