BUY DM² Adds a New-Old Friend
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August 11, 2020 Adobe BUY Company Update : Design Software DM² adds a new-old friend Adobe, IBM and Red Hat have recently announced “a strategic partnership to help accelerate digital transformation and strengthen real-time data security for enterprises, with a focus on Jay Vleeschhouwer regulated industries”, such as financial services and healthcare [email protected] (the public sector could be an additional such industry, especially 646-442-4251 to the extent that the partnership would include Document Cloud, in addition to CX). Stock Symbol NASDAQ: ADBE Subsequent to the press release, Adobe and IBM hosted a joint Current Price $435.23 webcast, which provided some additional insights, including that 12 mos. Target Price $427.00 the partnership was likely to “broaden over time”, possibly to Market Cap $135,246.7 mln encompass other Adobe products in addition to AEM (Adobe Shares O/S 485.0 mln Experience Manager), the current centerpiece of the partnership (two such candidates we’d presume might be Adobe Campaign Avg Daily Vol. (3 mos.) 2,548,399 shs. and/or Commerce). In addition to the external selling and 52-Week Price Low/High $255.13 - $470.61 deliverables, IBM “will begin adopting Adobe Experience Cloud P/B 20.6x and its enterprise applications to transform its own global Price/ FCF 0.1x marketing” (this was already part of Adobe’s 2Q20 new business). Fiscal Year End Nov During the joint webcast (hosted by IBM’s general manager, ROE 36% global strategic partnerships; IBM’s global lead for the Adobe EPS partnership; and, Adobe’s director of AEM strategy and engineering), IBM noted a “long history of collaboration” with FY 20E FY 21E FY 22E Adobe, in part even predating the DX business itself. Adobe Q1 (Feb) $2.27A $2.48E $2.77E has been working with IBM services/iX (interactive experience Q2 (May) 2.45A 2.30E 2.84E services) consultancy since 2015 (as announced at Summit that Q3 (Aug) 2.41E 2.63E 2.91E year), and have “collaborated and co-delivered dozens of joint Q4 (Nov) 2.66E 2.76E 3.06E wins globally in a co-sell model”. The relationship has now evolved across “additional sectors of IBM’s global organization including $9.79E $10.17E $11.57E their IBM cloud offering and powered by Red Hat Open Shift”. Or, P/E 44.5x 42.8x 37.6x as IBM commented, IBM is “significantly scaling [our] go-to-market Price/Sales 10.6x 9.4x 8.6x and delivery capabilities…” 500 AEM is one of the most important brands within the Adobe Digital 450 Experience (DX) portfolio. We calculate that AEM revenues were more than $450 million in FY19; we’re estimating as much as 400 $530 million in FY20 (for perspective, in FY11, Adobe’s first 350 full year with the product following an acquisition, revenues were about $100 million). DX generally, including AEM, entails, 300 by Adobe standards, a considerable amount of services: DX 250 services account for a mid-teens percent of total DX revenues, 200 i.e., now over $400 million a year, and more than 80% of Adobe’s Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 total services revenue - which, it has consistently stated, Adobe Adobe does not wish to grow disproportionately, for obvious margin reasons, thereby leaving room and need for partners, such as IBM, Accenture, Deloitte, and Capgemini. 17 State Street, 3rd Floor, New York, NY 10004 • 212.509.9500 • www.griffinsecurities.com Please Review Disclosures on Page 13 of This Report Adobe August 11, 2020 It’s premature to say how much extra revenue this relationship might yield, but its objectives were defined well (and, besides, all else being equal, Adobe would want to find ways of compensating for the strategic de-emphasis of the Advertising Cloud business, as described on the 2Q20 conference call). For further detailed background on (re-architected) AEM specifically and on Adobe’s DX portfolio and roadmap more broadly, see too our April 15th, 2020 report, “On the views from the Summit”. The expanded partnership will initially entail: “deployment flexibility with hybrid cloud” (AEM 6.5 will be delivered on Red Hat Open Shift. AEM is of course delivered too on Azure and AWS); “Adobe enabled for financial services” (Adobe will be the “strategic partner providing CX solutions for the IBM Cloud for Financial Services”, a core market for IBM, and a longtime important market for Acrobat/Document Cloud); and, “Adobe and IBM Services” (“IBM iX, the business design arm of IBM Services, will extend their offerings across all of Adobe's core enterprise applications”, including Creative Cloud, Experience Cloud, and Document Cloud). During Adobe Max 2019, Adobe and IBM had announced the following: “Adobe and IBM iX, the business design arm of IBM Services, are announcing that they are extending their current partnership by introducing IBM iX’s first Design Systems as a Service offering using Adobe XD, Adobe’s experience design platform”; the DSaaS includes “design system setup”; a “modular construction kit” (“developed by IBM iX and built with Adobe XD”); and a dedicated design and development support team. The IBM and Microsoft (MSFT, $203.38, Buy) partnerships are similar in the sense that each entails co-selling, with the Microsoft relationship perhaps being “broader” vis-à-vis the goal of selling Azure implementations. In a blog post statement during Max that well coincides with our DM² concept, “with the introduction of the new Design Systems as a Service, Adobe and IBM iX will ultimately unite distributed marketing and design teams with a shared set of principles and guidelines, removing ambiguity and providing a single source of truth for creative assets globally. Additionally, the partnership allows customers to plug into other applications across Adobe Experience Cloud to quickly activate creative assets across all marketing channels and customer touchpoints”. DM², as used above in the title, is our longtime designation for the confluence or integrations of Digital Media and what was once Digital Marketing (now DX): these connections have been, and remain in our view, a unique competitive differentiator for Adobe. Griffin Securities Equity Research 2 Adobe August 11, 2020 Chart 1. Adobe Systems, AEM TTM revenues, FY10-FY23E $1,000.000 $975.000 $950.000 $925.000 $900.000 $875.000 $850.000 $825.000 $800.000 $775.000 $750.000 $725.000 $700.000 $675.000 $650.000 $625.000 $600.000 $575.000 $550.000 $525.000 $500.000 $475.000 $450.000 $425.000 $400.000 $375.000 $350.000 $325.000 $300.000 $275.000 $250.000 $225.000 $200.000 $175.000 $150.000 $125.000 $100.000 $75.000 $50.000 $25.000 $0.000 Experience Manager - TTM Source: Adobe Systems, Griffin Securities. Chart 2. Adobe Systems, DX services revenues, FY09-2Q20 $150,000 $145,000 $140,000 Total services & support $135,000 $130,000 $125,000 Experience Cloud services $120,000 $115,000 $110,000 $105,000 $100,000 $95,000 $90,000 $85,000 $80,000 $75,000 $70,000 $65,000 $60,000 $55,000 $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Source: Adobe Systems, Griffin Securities. Griffin Securities Equity Research 3 Adobe August 11, 2020 ADOBE SYSTEMS RESEARCH LIBRARY (COMPANY REPORTS #1-#143, ET AL) # Date Subject 1 6/3/2011 Initiation of coverage 2 6/22/2011 Review of 2Q11 results & outlook 3 7/5/2011 Review of 2Q11 10-Q new data 7/7/2011 Announced an upgrade program for customers of competing Mac-based digital video products 7/15/2011 Analysis of Adobe’s Mac-based software business Announced acquisition of EchoSign, plus technology updates of AIR 3 beta and Flash Player 11 7/22/2011 beta 8/3/2011 Announced a public preview of Adobe Edge, a new HTML5 web motion and interaction design tool 8/17/2011 Awarded an expanded contract from the U.S. Department of Defense for its “Connect” service 9/8/2011 Review of enterprise content authoring and consumer digital imaging announcements 4 9/21/2011 Review of 3Q11 results & outlook 9/26/2011 Analysis of Adobe’s consumer business and seasonal importance to 4Q revenues 5 10/6/2011 Review of annual Adobe Max conference 6 10/12/2011 Review of 3Q11 10-Q new data 11/2/2011 Acquisition of privately-held Auditude, to complement and extend digital video applications 11/8/2011 Preview of annual analyst meeting 7 11/10/2011 Review of annual analyst meeting 11/21/2011 Sequel to November 10th analyst meeting report, plus update on Adobe Labs technology updates 12/8/2011 Acquisition of Efficient Frontier 8 12/16/2011 Review of 4Q11 results & outlook 1/19/2012 Comments on transition to subscriptions model 9 1/27/2012 Review of FY11 10-K new data 2/1/2012 Review of new segments ADBE will be reporting as of 1Q12, vs. prior segments 2/21/2012 Review of Griffin-hosted call with management of Digital Marketing segment 2/29/2012 Comments on Photoshop Touch for iPad and Project Primetime for video 3/6/2012 Comment on Photoshop Lightroom and LeanPrint 3/12/2012 Earnings preview & Adobe Labs update 10 3/20/2012 Review of 1Q12 results & outlook Griffin Securities Equity Research 4 Adobe August 11, 2020 11 3/26/2012 Review of Digital Marketing Summit (part 1) 3/27/2012 Review of Digital Marketing Summit (part 2) 12 3/30/2012 Review of 1Q12 10-Q new data 4/17/2012 Comment on pending CS6 launch 13 4/24/2012 Comment on CS6/Creative Cloud announcement 5/9/2012 Comments on CS6/Creative Cloud availability, and Creative Suite revenues 5/15/2012 Update on Digital Publishing Suite, "CQ", ColdFusion, and Adobe Labs 5/22/2012 Comment on new video products announcements 6/13/2012 Earnings preview & Connect 9 announcement 14 6/20/2012 Review of 2Q12 results & outlook