Adobe Systems Incorporated

 

Adobe, the provider of Adobe Acrobat Reader which is free, must be a horrible investment.  Not so, Adobe is so much more, their 2017 revenues were about $7.3 billion up from $5.8 billion in 2016. Adobe is simply focused on digital media and digital marketing.  They have put up very strong growth and the stock has done very well. While they have a strong balance sheet with net cash, it’s immaterial relative to their market cap and thus does not materially affect the valuation. 

 

Ests:     4Q18   1Q19   FY18    FY19

Revs    2.43     2.52     8.99     10.80

EPS      1.88     1.88     6.82     7.98     +17%

 

P=248.08, Gross Cash=3.2bn, D/C=8.7% but 30% incl def revs, TTM EPS=6.76, P/E=37X, FY19 P/E=32X on guidance

Exited position on Dec 14. following results. Being cautious in this environment, the company is still very well positioned however acquired companies are currently a drag on earnings so EPS growth is lower than we have seen and in this environment I’m concerned that investors might not feel this supports their valuation for the near term.  

4Q18   1.83 vs 1.26, w 3% tax rate, +45% est 1.88, FY18 EPS 6.76 vs 4.31, +56.8%

  • Dec 13, 2018, P=248.08, TTM EPS=6.76, P/E=37X, FY19 P/E=32X on guidance

  • EPS ex Marketo would have been 1.90

  • Revs +23% to 2.46bn, OM 38.6% vs 40.1%, OpInc +18%, NI +44%

  • Def Revs 3.05bn vs 2.5bn, CFO 1.1bn, 4.03bn for FY18, debt of 4bn can be quickly reduced.

  • 1Q19 Guidance: Revs 2.54bn, EPS +3% to 1.60 (est 1.88) due to Marketo drag

  • FY19 Guidance incl Marketo: Revs +23.4% to 11.15bn (est 10.8bn), EPS 7.75 +14.6%, est 7.98 (includes ~.13 drag from fx, another .13 drag from Marketo and Magento write down of deferred revenue due to purchase accounting mostly on 1H, expect earnings growth to improve in 2H as growth refills revenue.)

  • Mgmt outlined their conviction that if the economy weakens, customers will still have high expectations for how they interact with businesses and the move to digital will not change. Also they are one of the few technology companies that doesn’t have an alternative in China.

  • Solid results however EPS slightly missed due to Magento drag, 1Q EPS guidance is weak also due to Marketo and FY19 EPS Guidance is not only light but for only 15% growth as there will be a step up in interest expense and the drag from Marketo but mgmt. expects EPS growth to improve as the year progresses as the impact from the lost deferred revenue diminishes

Mid Quarter Update

  • October 15, 2018

  • Adobe confirms its 4Q18 guidance and provides preliminary targets for 2019 not including Marketo, expects Revs +20% (est +19%), will update and include Marketo when they report 4Q18 in December.

Mid Quarter Update

  • September 20, 2018

  • Following recent speculation, Adobe confirms purchase of Marketo for $4.8bn which extends Adobe’s reach into cloud-based business marketing (planning, engagement, measurement)

3Q18   1.73 vs 1.10, +57%, est 1.69 up from 1.61

  • Sept 13, 2018, P=268.52, TTM EPS=6.19, P/E=43X, FY19 P/E=35X

  • Revs +24% to 2.29bn, OM 40.3% vs 38.0%, OpInc +32%, CFO +35%

  • Def Revs +23% to 2.71bn

  • Closed acquisition of Magento Commerce for 1.7bn

  • Interestingly, Facebook is a new Digital Media customer which supports my notion that Adobe is a potential solution to issues with privacy and security of digital platforms and 0 analysts asked about it.

  • 4Q18 Outlook: Revs 2.42bn (+25.4%), EPS 1.87 (+48%, est 1.86)

  • Solid results, growth incrementally slowing especially excluding due to lower tax rate.  Company is still well positioned. 

2Q18   1.66 vs 1.02, est 1.55

  • Revs +23.9% to 2.2bn, OM 39.9% vs 37.2%, OpInc +33%, CFO +51% to 976m

  • Def revs +27% to 2.63bn

  • Management discussed the new GDPR (General Data Protection Regulation) in Europe, saying it’s not just a checklist but also new ways of conducting business, feels they are best in class and their capabilities will be more important in this environment leading to opportunities.

  • 3Q Outlook: Revs 2.24bn (+21.7%, est 2.22bn), EPS 1.68 (+52.7%, est 1.61), do not reflect pending acquisition

  • Solid results, glad to see the company address GDPR, eases my concern that they could come under fire, looking more likely that they are a solution rather than part of the problem. Interestingly recent IPO of Docusign has got a lot of hype, it’s Price/Sales ratio exceeds ADBE and while their growth is higher, they are barely profitable compared to solid profit margins from ADBE with very solid growth, I’d take ADBE. Over half of Fortune 100 companies use Adobe Sign which is also being integrated into Microsoft Office 365.

1Q18   1.55 vs .94, est 1.44 up from 1.24

  • Revs +24% to 2.08bn, OpInc +43%, OM 41.9% vs 36.2%

  • “Strong net new subscriptions across user segments and geographies, spanning from creative professionals to consumers and students” in addition to increased uptake on services.

  • Mgmt addressed a question about companies reducing digital advertising/marketing spend highlighting that Adobe isn’t just for digital advertising/marketing, businesses are using it for content presentation/delivery, customer segmentation, to deliver personalized experience and get analytics to better understand their customers through AI.

  • Def revs +25% to 2.57bn

  • 2Q Outlook: Revs ~2.15bn (est 2.14bn), EPS 1.53 (est 1.51)

4Q17   1.26 vs .90, est 1.16, FY17 4.31 vs 3.01

  • Revs +25% to 2.01bn, (FY17 7.3bn), OpInc +37%, OM 40.2% vs 36.7%

  • Strong trends continue across their business.

  • Raised FY Rev guidance to 8.725bn, 1Q18 Revs 2.04bn, EPS ~1.27 (est 1.24)

MidQ Update

  • Provided preliminary FY18 guidance

  • Total Revs ~8.7bn, +20% (est 8.64bn), EPS 5.50 (est 5.10), comes on the heels of some downgrades due to concerns of full valuation and stagnating growth.

3Q17   1.10 vs .75, est .1.01 up from 97

  • Revs +26% to 1.84bn, OM 38% vs 33.5%, OpInc +42.5%

  • Def Revs 2.2bn

  • Interest in Adobe Experience Cloud is strong, customers increasingly adopting multiple Adobe solutions, leading to larger deal sizes and longer sales cycles, did not hit their 3Q bookings goal and no longer on track to hit 30% net new bookings growth for FY17, expect >20% organic growth.

  • 4Q Outlook: Revs ~1.95bn vs 1.61, est 1.95, EPS 1.15 vs .90, est 1.10

2Q17   1.02 vs .71. est .95

  • Revs +26.7% to 1.77bn, OM 37.2% vs 33.1%, OpInc +42.2%, adj NI +42.8%

  • Recurring Revs 86% of total, Deferred Revs +22% to 2.0bn

  • 3Q17 Outlook: Revs 1.815bn, EPS $1.00, FY17 Revs +23%

  • Continued solid results and strong growth.