BUY on Adobe's Essentialness: Content, Data
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June 18, 2021 Adobe BUY Company Update : Design Software On Adobe's essentialness: content, data, cash flow and RPO We are raising our FY21-FY24 estimates and reiterating our Jay Vleeschhouwer recommendation as Adobe continues to execute financially [email protected] and technologically. We are raising our price objective to 646-442-4251 $620 from $597 commensurate with our assumptions for cash flow, coupled with our longtime strategic, competitive and technological assessments. Stock Symbol NASDAQ: ADBE Current Price $551.36 We estimate that revenues will surpass $21 billion by FY24 12 mos. Target Price $620.00 (as compared with less than $1 billion when we began our Investment Opinion Buy coverage) and the art and science of being Adobe will continue to beget a steep trajectory for cash flow. Market Cap $265,204.2 mln Shares O/S 481.0 mln Adobe’s 2Q21 revenues and earnings were above our Avg Daily Vol. (3 mos.) 2,548,399 shs. estimates, including upside in Creative and DX revenues. 52-Week Price Low/High $416.03 - $561.36 Creative Cloud continued to show strong momentum across the various offerings and DX showed margin improvement from EPS its revenue scaling and the Ad Cloud reclassification. Adobe cited strong bookings in “enterprise” (including for Adobe FY 21E FY 22E FY 23E Experience Platform and Acrobat) and “accelerated recovery” Q1 (Feb) $3.14A $3.14E $3.57E in SMB) – reflected in strong growth for RPO. Q2 (May) 3.03A 3.23E 3.71E Q3 (Aug) 2.98E 3.32E 3.85E Operating cash flow increased by 68% year/year to $1.988 billion, and we’re estimating over $7.6 billion for FY21. In Q4 (Nov) 3.10E 3.55E 4.08E addition, we estimate that operating cashflow could approach $12.25E $13.24E $15.20E $10 billion by FY24. P/E 45.0x 41.6x 36.3x We include below our updated compilation of the open jobs Price/Sales 16.9x 15.4x 13.8x data: the reopening of the hiring aperture has been in all 600 regions and in R&D and sales. There are multiple product, technology and market investment 550 initiatives to sustain growth and addressable market expansion, i.e., Adobe’s “future creative stack”; Project Firefly 500 (the API strategy); Commerce merchant services; video, 3D and immersive; Stock, and documents; and, “marketing system 450 of record”. These will cumulatively further build upon the “DM³” strategy. This is an essential aspect of the culture and strategy: 400 reinvesting in core and new businesses. Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Adobe We maintain our longtime view that given Adobe’s predominance in its three segments, portfolio breadth and integrations (i.e., within and across the segments), and regular enhancements of DM, DX, and DC and operational execution; continued subscriber growth (we calculate that the cumulative CC base has more than doubled over the past four years); addressable markets; investments in sales and engineering capacity (plus priority initiatives, such as retention) -- all of which are ultimately comprehended in ARR, RPO and cash flow – there will continue to be attractive appreciation potential. 17 State Street, 3rd Floor, New York, NY 10004 • 212.509.9500 • www.griffinsecurities.com Please Review Disclosures on Page 26 of This Report Adobe June 18, 2021 REVISED FY21-FY24 ESTIMATES . For 3Q21, we are revising our estimate to $3.877 billion, up 20%, and $2.98 a share, from a prior $$3.814 billion, and $2.84 a share. We expect that Digital Media will be about $2.844 billion, up 22% year/year, including Document Cloud revenues of $489 million, up 30%. In addition, we’re estimating a $439 million addition to Digital Media ARR. The company is guiding to about ≈$3.88 billion and ≈$3.00 a share; . For FY21, we’re revising our estimate to $15.662 billion, up almost 22%, and $12.25 a share, from a prior $15.457 billion and $11.83 a share, including 24% growth in Digital Media and 22% growth for Digital Experience. We’re estimating a more than $2.0 billion addition to Digital Media ARR for the year. We’re estimating a non-GAAP operating margin of 46%, up 340bp, including a 190bp improvement in the gross margin (including a nearly 200bp DX improvement). We estimate the 2H21 non-GAAP margin will be about 45.7%, up ≈160bp year/year (even with higher headcount and rebuilding of certain expenses with reopenings, such as travel; Adobe’s events, such as Summit, may resume being real in 2022). The company did not update its FY21 revenue guidance of about $15.45 billion. Workfront is expected now to do better than the original “$140-$150 million” of GAAP revenues that Adobe had assume at the time of the acquisition in early FY21 (Adobe, commendably, doesn’t speak about “non- GAAP revenues” vis-à-vis acquisitions accounting); . For FY22, we’re revising our estimate to $17.190 billion, up 10%, and $13.24 a share, from a prior $16.961 billion and $12.84 a share, including 9% growth in Digital Media (11%, if we exclude the extra week in 1Q21, but perhaps still too conservative) and 14% growth for Digital Experience subscriptions. We’re estimating a non-GAAP operating margin of 46%, about flat with FY21; . For FY23, we’re revising our estimate to $19.256 billion, up 12%, and $15.20 a share, from a prior $18.883 billion and $14.61 a share, including 12% growth in Digital Media (perhaps too conservative) and 14% growth in Digital Experience. We’re estimating a non-GAAP operating margin of about 47%, up 100bp, and operating cash flow of more than $8.8 billion. For FY24, we’re revising our estimate to $21.457 billion, up 11%, and $17.20 a share, from a prior $20.919 billion and $16.48 a share, including 11% growth in Digital Media and 12% growth in Digital Experience. We’re estimating a non-GAAP operating margin of more than 48%, up ≈100bp, and operating cash flow of about $9.8 billion. Griffin Securities Equity Research 2 Adobe June 18, 2021 2Q21 DETAILED REVIEW The Creative ARR of $9.526 billion compared with our $9.448 billion estimate, an increase of $1.592 billion, or 20% year/year. We’re estimating a Creative ARR of $10.38 billion, up $1.6 billion, or 18%, by the end of 3Q21, and $16.5 billion by the end of FY24 (implying an FY19-FY24 CAGR of ≈18%). The Document Cloud ARR increased to $1.685 billion, vs. our estimate of $1.694 billion, $1.572 billion in 1Q21, $1.474 billion in 4Q20, $1.339 billion in 3Q20, and $1.241 billion in 2Q20. The $113 million sequential increase in Document Cloud ARR was above the $105 million average sequential increase over the prior four quarters. Therefore, the total Digital Media ARR was $11.221 billion, vs. our estimate of $11.142 billion, up $318 million from the prior quarter and up $2.036 billion, or 22%, over the past year. The company anticipates a further sequential increase of about $440 million in 3Q21, vs. our prior estimated increase of $387 million. In 2Q21, total revenues of $3.835 billion, up 23%, were well above our $3.719 billion estimate and earnings of $3.03 a share exceeded our estimate of $2.81 a share. The revenue upside was largely in Digital Media. The non-GAAP operating margin of 45.9% increased 340bp year/year and exceeded our 44.9% estimate. we’re estimating an increase of 340bp in FY21 (including an improved gross margin in DX) to 46.1% and more than 48% by FY24. Subscription revenues were $3.520 billion, up 24% year/year from $2.831 billion in 2Q20, vs. our estimate of $3.502 billion (2Q20 subscriptions revenues were originally reported as $2.874 billion, the difference due to the adjustment for Ad Cloud). Product revenues (i.e., perpetual) were $153 million, up 20% year/year. Services & support revenues (including Ad Cloud pursuant to the reclassification last year) were $162 million, down 4%, from $169 million in 2Q20 (which was reclassified from $126 million as originally reported for 2Q20). Digital Media revenues were $2.787 billion, up 25% year/year, vs. our estimate of $2.694 billion. [Adobe has announced the return of David Wadhwani to the company as executive vice president and chief business officer for the Digital Media segment. As with Adobe’s products for customers, being a part of senior management is clearly compelling]. Document Cloud revenues of $469 million, up 23% year/year compared with our estimate of $479 million. Document Cloud TTM subscriptions revenues were almost $1.52 billion, up 36%; we’re estimating more than $1.7 billion for FY21, up 33% and that Document Cloud TTM subscriptions revenues could surpass $2 billion by mid-FY23. As for Document Cloud, we have long viewed the Acrobat business as the third major opportunity – in addition to Media and Marketing – for building material incremental recurring revenues, and this has been clearly underway for the past few years. Acrobat had historically been Adobe’s highest new license volume brand (once upon a time this was disclosed), and it has had the largest base of licenses. We infer that Creative Cloud individual/team GAAP revenues were in the neighborhood of $1.75 billion, Griffin Securities Equity Research 3 Adobe June 18, 2021 about three-fourths of Creative revenues, plus the revenues from Creative ETLAs/CCE and Stock (with an annual revenue rate approaching $400 million, if not more).