BUY the Art and Science of Being Adobe
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December 14, 2020 Adobe BUY Company Update : Design Software The art and science of being Adobe Adobe’s 2020 analyst meeting, concurrent with 4Q20 results and FY21 guidance (reviewed separately in our Decemebr 11th, 2020 report), reaffirmed for us three longtime pillars of the Jay Vleeschhouwer Adobe franchises and our investment thesis. These are, first, the [email protected] distinctive product portfolio and depth of technology (i.e., Adobe 646-442-4251 has, for the decades we have been following this company, been clearly and consistently committed to deep development), second, Stock Symbol NASDAQ: ADBE the business model, which has been particularly enhanced by the implementation of the subscriptions model; and third, large Current Price $486.42 addressable markets (Adobe’s creative/design and Acrobat bases 12 mos. Target Price $597.00 were already large even before Creative Cloud and Document Investment Opinion Buy Cloud but each has been undergoing years of magnification). Market Cap $2,356,215.8 mln The output of this technology-business combination can be seen Shares O/S 484.4 mln in the growth of both deferred revenues (a 20% CAGR over the Avg Daily Vol. (3 mos.) 2,548,399 shs. past half-decade) and operating cash flow (a 31% CAGR over the 52-Week Price Low/High $255.13 - $536.88 past half-decade). EPS The CEO’s and CTO’s presentations in particular on the Adobe FY 21E FY 22E FY 23E portfolio, technology vision and roadmap were again especially important as substantiating the view of where Adobe will be Q1 (Feb) $2.80E $2.98E $3.39E heading over the next half-decade and more. Over the past Q2 (May) 2.68E 3.08E 3.47E decade-and-a-half Adobe underwent two major transformations, Q3 (Aug) 2.78E 3.15E 3.57E with, first, the Macromedia acquisition (which had years of lasting Q4 (Nov) 2.99E 3.36E 3.78E impact in the creative business) and, second, the creation of $11.25E $12.56E $14.21E the separate but closely related Digital Experience business. P/E 43.2x 38.7x 34.2x the technology synregy and “vision” presentations suggest that there ought to be lasting, extensible value in the current portfolio Price/Sales NMF NMF NMF of products and IP and in emerging “application services” and 600 “intelligent services”. 550 As we saw at Max, in Digital Media, there was again over the 500 past year a plethora of new product updates and introductions; 450 in Digital Experience, too, there have been important updates 400 and introductions (see too below) and multiple references in the presentation to the “mid-market” part of the DX TAM; and, in 350 Document Cloud, the company noted the ARR trajectory and PDF 300 services momentum. The integrations within the Digital Media and 250 Digital Experience segments, and now across all three segments, Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 including Document Cloud, are both a technological asset and a Adobe competitive advantage. 17 State Street, 3rd Floor, New York, NY 10004 • 212.509.9500 • www.griffinsecurities.com Please Review Disclosures on Page 27 of This Report Adobe December 14, 2020 HIGHLIGHTED QUOTES FROM THE PRESENTATION – AND OUR COMMENTS . “Being a product company at our core, we have always taken a long-term view of building deep technology platforms that are highly defensible and drive industry breakthroughs. … Now, a key aspect of our technology strategy is to develop a consistent architectural viewpoint across all of our products.”. The former comment is substantiated by history and the latter, more prospectively, is both logical and feasible. See too our October 12th, 2020 report, “A conversation with Adobe”; . “At the services tier, we are not only building an increasingly rich portfolio of services, but we are focused on three cross cutting themes. First, we are embedding collaboration deeply at the core of all our applications,… Second, using the shared content and data platforms, we are enabling unique cross-cloud use cases,… Lastly, we are increasingly focused on the API economy opportunity by exposing our services via open APIs to developers and ISVs in the ecosystem. You will see us aggressively focus on this new vector”. The reference to the API ecosystem “vector” ties to one of the original rationales for the Magento acquisition, namely its developer community – an important consideration given the “arms race” underway in the industry vis-à-vis software development. See too our May 21st, 2018 report, “Adding a “C” to DM²”. “We added greater collaboration capabilities to all of our leading applications…… We're focused on adding collaboration services because we can ensure that content can be seamlessly managed in the cloud and accessed from any device. And what this enables us to do on the business side is to increase engagement, but also to acquire new stakeholders and expand our customer base with these new monetization opportunities”. The term “collaboration” appears 17 times in the slide presentation (Adobe’s technical and market have a way of hiding in plain sight….); another, separate and indicative term that appears multiple times (7) is “3D”, which too has been noticeably an important part of the Digital Media strategy and roadmap. See too our October 21st, 2020 and November 6th, 2019 reports on the Max 2020 and 2019 “sneak peeks”; . ”PDF continues to be the lingua franca for how things happen on the Internet…. strategically as we think about the opportunity, the first is to expand what we call our Sensei-powered Acrobat verbs and it's to enable all document actions, editing, sharing, scanning and signing…. The other aspect of our Document Cloud strategy is to deliver a unified Document Cloud platform. This includes Acrobat, AEM Forms and Adobe Sign…”. And later, during Q&A, Adobe’s CEO commented that, “I think the Document side is probably going to see the biggest tailwinds as it relates to what happens” (i.e., digital trasnformatin)…… . ”Our strategy is to deliver a comprehensive set of applications and services grouped in solution areas such as content and commerce, customer journey management, customer data and insights. And now with the closing of our Workfront acquisition, work management”. Modeling the contribution from Workfront will be a work in process; for now, we’re assuming $140 million for FY21 and more than $200 million for FY23. It will be very interesting to see if it ends up having a large, highly incremental “re-platforming” effect similar to what happened as the Day Software acquisition (a.k.a. AEM) evolved. It was interesting to us that during Q&A the company tied the rationale (or a rationale) for Workfront to the concept of “content velocity”, a term Adobe introduced a number of years ago; Griffin Securities Equity Research 2 Adobe December 14, 2020 . ” Creative ARR growth drivers include acquisition of new users across all geographies and segments, single app and CC complete subscriptions and strong performance in the imaging, video and Stock categories”. We calculate that Stock might have exited FY20 with a more than $300 million revenue run-rate (as compared with less than $100 million in 2015, when Fotolia was acquired. “The growth drivers for Experience Cloud in Q4 included accelerating adoption of Adobe Experience Cloud platform and app services, content and commerce momentum, particularly with our AEM cloud service offering and continued recovery in the mid-market segment, as well as success signing up deals of greater than $1 million in annual deal value”. We calculate that AEM was a more than $500 million business in FY20. Regarding FY21 guidance, “In terms of OpEx growth, we will be investing in top line growth opportunities and our hiring is expected to return to an ordinary pace, particularly for R&D and sales and marketing roles. And we expect T&E and facilities expenses to ramp in the second half as things open back up”. The hiring commentary is corroborated by the open jobs data we showed in our December 4th, 2020 company report, plus the spot check in our Decemebr 11th, 2020 report (including references in the “special assignments” section to positions having to do with the development of specific “next-generation” technology, e.g., “next-generation Adobe Sign service offerings”, “next- generation of Content and Commerce AI services”, “next generation of services for Adobe’s Experience Platform Identity Services”. Griffin Securities Equity Research 3 Adobe December 14, 2020 Chart A1. Adobe, “growth drivers”, 2020 analyst meeting Source: Adobe 2020 analyst meeting Charts A1-A2 comments. The 2020 version of the growth drivers (or “growth vectors” in the 2019 presentation) are fundamentally about the same things: there have long been, and will continue to be, multiple ways to build upon and leverage the company’s foundational technologies, combined with its operational execution and large addressable markets. A critical element here is the commitment to engineering and product development (the evidence for which includes the annual “sneak peeks” at Max and Summit). Griffin Securities Equity Research 4 Adobe December 14, 2020 Chart A2. Adobe, “growth drivers”, 2019 analyst meeting Source: Adobe Griffin Securities Equity Research 5 Adobe December 14, 2020 Chart B1. Adobe, the art & science of cloud ³ Source: Adobe 2020 analyst meeting Chart B1 comments. Adobe has leveraged what we have for some time called “DM²” – the connection of Digital Media with what used to be Digital Marketing - and is building upon that with the connection of Document Cloud to the other Adobe clouds – even as each individual cloud has its own growth dynamics (curiously, Adobe did not refer to this as “UPA”). This combination remains in our view a material competitive differentiator and growth catalyst.