Adobe guidance spooks investors, but long-term outlook is strong

Profile picture for user ddpreez By Derek du Preez December 17, 2021 Audio mode
Summary:
Investors once again struggle to look beyond the next quarter, as Adobe’s underlying business looks incredibly promising.

Shantanu Narayen CEO Adobe - screengrab from Adobe Summit 2021
(screengrab from Adobe Summit 2021)

Wall Street is once again failing to grasp that whilst there has been a suppression of sales compared to the frenzied buying we saw at the start of the COVID-19 pandemic, this does not mean that there are not continued long-term growth opportunities for SaaS businesses. Adobe's solid Q4 results, and the subsequent 10% dip in its share price, are evidence of investor's continued shortsightedness. 

Adobe delivered an impressive Q4, with the company seeing $4.11 billion in revenue, up 20% year-over-year, and its FY figures coming in at $15.7 billion, up 23% year-over-year. Net income for Q4 stood at $1.23 billion. 

It's also worth noting that In Q4 Adobe Experience Cloud hit $1 billion revenue for the first time. 

But forecasts for next year didn't quite meet analyst expectations, with the company estimating that it will grow by roughly 13% to $17.9 billion revenue. Projections were approximately $18.2 billion, which is likely what sent shares sliding downwards. 

However, Adobe laid out its vision for the next decade and said that its total addressable market is approximately $205 billion, which it broke down into the following segments: 

  • $63B for Creative Cloud TAM, supported by Creative Professionals, Communicators, and Consumers

  • $32B for Document Cloud TAM from Knowledge Workers, Communicators, and Document Services & API

  • $110B for Experience Cloud TAM from Data Insights & Audiences, Content & Commerce, Customer Journeys, and Marketing Workflow

Commenting on the results and the company's future plans, Adobe CEO Shantanu Narayen, said: 

When you look at our financial results, it puts us in an incredibly rare position in the industry. Not many companies can drive the top line and bottom line growth with an impressive margin the way we do. 

While 2021 was awesome, I'm actually most excited about what's to come for 2022 and beyond. We have this immense market opportunity. We have an incredible technology innovation roadmap and the best leadership team of any company on the planet.

Today is really sharing about Adobe's tremendous growth story and how we're going to be driving the next decade of growth, because that's really what underpins our growing over $200 billion addressable market opportunity. 

The important shift we continue to make from building applications to enabling new business models, apps, services, artificial intelligence and platforms, that's paying dividends. And last but not least, an incredible global ecosystem of partners that spans the entire customer lifecycle from experience creation and marketing to delivery and ongoing support.

Future growth

Despite stock market jitters, Adobe is looking beyond the next quarter, or even next year, as it eyes its addressable market and potential for growth. 

Dan Durn, Adobe's Chief Financial Officer, said: 

As impressive as this company's track record is, I believe there's even more growth ahead of us. I fundamentally believe there's a trillion-dollar market cap opportunity in Adobe's future, having crossed the $15 billion mark in revenue, what does the path to $30 billion look like? And then from there, how are we going to get to $45 billion? 

It starts with an estimated $205 billion TAM, and a huge ecosystem that we built around our market leading products and services. How are we going to get there? We're going to continue to broaden our appeal to a wider universe of customers, engage and retain our current customers across all geographies. 

We're also going to grow by innovating and investing to enter new categories that further complement and expand our growth trajectory and better enable our customers in the digital era. When we execute on that strategy over the next decade, our scale and success, we'll put Adobe in a class that only a few software companies have achieved.

A sign of a solid underpinning of Adobe's business is that the leadership team said that it had seen "significant growth" in annual recurring revenue across all of its top accounts. 

For example, General Manager of Digital Experience Business and Worldwide Field Operations at Adobe, Anil Chakravarthy, said; 

The changes in the tailwinds that we have seen during the pandemic are here to stay. And this has contributed to a strong momentum in our Digital Experience business…we've seen strong growth across all accounts greater than a million dollars in ARR and all of our customers are building long-term partnerships with us. 

As an example, the combined total contract value of our Top 10 accounts is $760 million, which is three times higher than what it was at the end of FY'19. When we think about customer experience management, it is imperative for every company today to deliver personalization at scale to millions of customers.

CEO Narayen was also keen to downplay any concerns and focus on the future opportunity. He said: 

I'm incredibly excited about Adobe's future and our ability to not only lead, but also create new categories. I think if you zoom out a little bit and think about it from a macro perspective, all over the world, it's clear that digital is empowering individuals, transforming businesses and connecting communities. 

And frankly, digital is going to play a much bigger role in work, life and entertainment going forward. We've seen the rise of the creator economy and the democratization of creativity. Work and education are now hybrid and here to stay in that form. Cloud and web technology advances are powering unprecedented levels of real time collaboration. Document workflows are increasingly going to be automated.

And the most important mandate for a digital business is more urgent than ever before, as customers now expect digital first experiences that are both contextual as well as personalized. E-commerce growth is building on the record highs achieved during the pandemic. From a technology base, artificial intelligence and machine learning have become indispensable facilitators of our daily lives. And so I think in short, digital technologies are enabling more people to create, collaborate, learn, work, be productive, and make a living than ever before.

We're incredibly well positioned to drive meaningful impact across every aspect of society and that'll benefit billions of people around the world for years to come. As we think about the company at Adobe, we believe it's not just what we do, but it's also how you do that that really matters.

My take

Investors will always focus on the short term and be swayed by small changes in expectations, often ignoring the long-term sustainability and prospects of a company. From where I'm sitting Adobe continues to structurally see gains in the key areas of the digital economy that matter - and it has plenty of bases covered. Projections may be marginally lower than expected, but I expect we will see a lot of this over the coming quarters from a variety of companies, as the Vaccine Economy continues to even out and as buyers think more strategically about what they need over the next few years.