final adobe report for board - tippie college of...
TRANSCRIPT
Important)disclosures)appear)on)the)last)page)of)this)report.)
The$Henry$Fund$
$
Henry&B.&Tippie&School&of&Management&Christina&Erbe&(christina<[email protected])&& & &Adobe$Systems,$Inc.$ March&11,&2015&Information$Technology$$–$Design,$Editing$&$Rendering$Software$ Stock$Rating$ Sell$
Investment$Thesis$ Target$Price$ $70.00$H$$74.00$
&We&recommend&a&SELL& rating& for&Adobe&stock.&While&Adobe’s& recent&switch&to&a&subscription<based&model&and&strong&presence&in&the&new&digital& marketing& space& should& generate& a& higher,& more& consistent&revenue&stream& in& the& future,&we&believe& the&stock&has&become& fully&value&and&offers&no&further&upside&without&significant&downside&risk..&We&do¬&believe&that&Adobe&has&the&ability&to&capture&the&amount&of&market& share&and&number&of& subscribers& that&would&be&necessary& to&maintain& the& 5.75%<6%& CV& growth& needed& to& justify& the& current& 1yr&consensus&target&price&of&$84.&&$
Drivers$of$Thesis$
• Inadequate$ LongHTerm$ Growth$ Potential.& Adobe& needs& a& long<term&growth& rate&of&6%& to& justify& the&consensus&1yr&price&of&$84.&We&believe&there&is¬&enough&market&share&for&them&to&take&and&will&slow&down&to&a&CV&growth&rate&of&5%.&
• Low$ARPU.&Adobe’s&Average&Revenue&Per&User&has&dropped&from&$44.50& to& $37.50& in& the& last& 15&months& and& is& expected& to& keep&decreasing& as& the& number& of& single& app& users& is& forecasted& to&increase&in&the&next&two&year.&
Risks$to$Thesis$
• Digital$ Marketing$ platform.& Adobe& has& the& most& complete,& fully&integrated&digital&marketing&cloud&available&at&this&time&and&could&gain&more&market&share&than&our&forecasted&12.5%.&&
• Large$ subscriber$ base.& Adobe& could& attract& and& retain& more&subscribers& more& quickly& than& we& forecasted,& increasing& and&stabilizing& revenue& and& earnings& growth& at& a& higher& percentage&than&modeled,&causing&the&stock&price&to&shoot&higher.&&
Henry&Fund&DCF& $72.11&Henry&Fund&DDM& N/A&Relative&Multiple& $30.38&Price$Data$ &Current&Price& $74.64&52wk&Range& $57.15&–&80.30&Consensus&1yr&Target& $84.00&Key$Statistics$ $
Market&Cap&& $37.34B&Shares&Outstanding&& 500.9M&Institutional&Ownership& 91.6%&Beta&(Bloomberg)& 1.1&Dividend&Yield& 0.00%&Est.&5yr&Growth& 11.67%&Price/Earnings&(TTM)& 122.4&Price/Earnings&(FY1)& 79.7&Price/Sales&(TTM)& 8.7&Price/Book&(Mkt)& 5.6&Profitability$ $
Operating&Margin& 12.4%&Profit&Margin& 7.2%&Return&on&Equity&(TTM)& 4.6%&Data:)FactSet) &
&
Earnings$Estimate$
Year$ 2012$ 2013$ 2014$ 2015E$ 2016E$ 2017E$
EPS$ $1.68& $0.58& $0.54& $0.98& $1.36& $1.86&Growth$ 96.15%$ 965.57%) 96.64) 81.48%) 36.01%) 37.10%)
12$Month$Performance$ Company$Description$
&
Adobe& Systems,& Inc.& is& an& international&software&company.& It&offers&digital&products&through& three& business& segments:& Digital&media& sells& design& products,& including&Photoshop& and& Illustrator,& through& its&subscription<based& Creative& Cloud;& Digital&Marketing& provides& an& integrated& suite& of&tools& that& manage& analytics,& optimization,&web&content&and&data&management&on&one&platform.&The&Printing&&&Publishing&segment&licenses&printing&and&publishing&technologies&to&OEMs&and&publishing&businesses.&
4& 6.5&
33.8&
13.4& 11.1&15.8&
26.59&21.37&
0&
10&
20&
30&
40&
50&
P/E& ROE& Profit&Margin&
Adobe& Industry& Sector&122.4$
<20%&
<15%&
<10%&
<5%&
0%&
5%&
10%&
15%&
20%&
M& A& M& J& J& A& S& O& N& D& J& F&
Adobe& S&P&500&
Data:)MergentOnline)
& &&
&! Page!2! !! !
EXECUTIVE$SUMMARY$
Adobe&Systems,&Inc.&is&the&leader&in&the&creative&software&space,& as& well& as& a& strong& contender& in& the& new& digital&marketing&arena.&While&we&see&Adobe&emerging&from&its&recent&business&restructuring&and&on&the&path&to&revenue&growth,& we& believe& the& stock& has& reached& its& full& value.&We& have& forecasted& a& target& price& between& $70& and&$74.00.& As& of& April& 22,& 2015,& Adobe’s& stock& price& has&reached&a&high&of&$80.30&and&fallen&to&its¤t&price&of&$74.64.&We&believe&there&is&no&more&upside&to&this&stock&and& that& our& money& would& be& better& invested& in&something& that&has& the&potential& to&create&alpha& for& the&fund.&&
COMPANY$DESCRIPTION$AND$ANALYSIS$
Adobe&Systems,&Inc.&was&founded&in&1982&in&San&Jose,&CA.&Its& first& software& product&was& a& digital& image<processing&program&called&Photoshop.&Since&then,&it&has&become&the&market& leader& in& design& software& with& 16& programs& to&meet&the&needs&of&any&creative&professional1.&&
In& 2011,& Adobe& announced& it& was& restructuring& its&business&segments&and&embarking&on&a&new&high<growth&strategy& to& take& advantage& of& new& digital& media& and&digital& marketing& categories.13& Adobe& now& operates& in&three&business&segments:&Digital&Media,&Digital&Marketing&and&Print&&&Publishing.&&
No&longer&just&a&creative&software&company&–&Adobe&has&transitioned& into& a& company& that& provides& products& and&services& for& the& entire& content& lifecycle& from& content&creation& to& performance& analytics.& Adobe& characterizes&its&wide&breadth&of&products&as&“the&most&integrative&and&comprehensive& platform& for& the& modern& content&lifecycle.”& Its& products& allow& consumers& to& “make,&manage,&measure,&and&monetize.”15&
&
As& part& of& this& business& transition,& Adobe& began&introducing& subscription<based& products& and& services.&The&subscription<based&model&allow&Adobe&to&recognize&a&more®ular&revenue&stream&because&there&is¬&be&the&uncertainty& of& when& a& customer& will& buy& their& next&software& package.& The& customer& instead& pays& a& much&lower& regular&monthly& fee.& &However,& this& comes&with& a&negative& impact& to& Adobe’s& margins.& The& subscription&model& initially& lowers& Adobe’s& profit& per& customer& but&should& provide& a& higher& lifetime& value& per& customer.&While& we& do& not& have& any& information& on& the& current&margins& for& the& subscription& model,& from& their& recent&FY15&Q1&results,&however,&they&have¬&realized&Y<over<Y&revenue&growth&yet.&&
$Source:)Adobe)109k)
Digital$Media$
Adobe’s&Digital&Media&segment&is&home&to&all&of&its&legacy&creative& products& including& Photoshop,& Illustrator,&InDesign,& AfterEffects,& Premier& and& Lightroom.& These&products& are& used& by& content& creators,&web& developers,&advertising& agencies,& publishers,& and& other& creative&professionals.& Up& until& 2012,& these& products& could& be&purchased& under& individual& perpetual& licenses& or& as& a&package&called&the&Creative&Suite&(CS).&&
With& the& announcement& of& the& new&business& segments,&Adobe&also& introduced& the&Adobe&Creative&Cloud& (CC),& a&subscription<based&cloud&service.&CC&allows&subscribers&to&use& the& entire& collection& of& Adobe& Creative& software&through&its&Cloud&network.&Users&can&access&the&software&and& their& data& across&mobile& and& desktop& devices.& They&also& receive& real<time&updates& to& the&programs.& Initially,&CC& was& an& option& in& addition& to& the& traditional& CS&
Digital&Media&63%&
Digital&Markenng&
33%&
Prinnng&&&Publishing&
4%&
2014$Revenues$by$Segment$
Source:)Adobe)2014)109K)Report)
2.834&3.089& 3.128&
2.626& 2.603&2.735&
0.739&0.909&
1.058&1.229&
1.355&
1.7&
0.226& 0.218& 0.217& 0.2& 0.189& 0.183&
0&
0.5&
1&
1.5&
2&
2.5&
3&
3.5&
FY10& FY11& FY12& FY13& FY14& FY15E&
Revenue$in$Billions$
Revenue$by$Segment$
Digital&Media& Digital&Markenng& Prinnng&&&Publishing&
& &&
&! Page!3! !! !
products& but& in& 2012,& Adobe& announced& it& would& no&longer& be& updating& or& selling& CS& perpetual& licensed&products.&
In& 2012,& Adobe& began& to& transition& its& 12.8M& CS&customers&over& to& the&subscription<based&service.& In&our&forecast,& we& assumed& Adobe& will& be& able& to& transition&85%&of&those&users,&or&10.88&million,&to&subscription&users&because& of& Adobe’s& place& as& the& leader& in& the& market&place.& As& of& FY15& Q1,& Adobe& has& seen& its& CC& subscriber&base&grow&to&3.97&million&users.&We&project&this&number&to&grow&to&5.6&million&in&2015&and&to&over&8&million&by&the&end&of&2016.&We&also&assumed&that&Adobe&would&add&an&additional&20%&of&new&users&on&top&of&that&because&of&the&low& cost& of& using& the& single& app& subscription& as& well& as&the& expected& 4%& annualized& growth& for& the& design&software&industry&through&201924&for&a&total&of&13&million&users& for& the& CV& period.& From& there,& we& are& predicting&market& saturation& and& will& keep& the& subscriber& number&constant,&assuming&user&churn&will&equal&new&adopters.&&
&Source:)Adobe)10k,)Henry)Fund)forecast))
We& believe& Adobe& has& a& sustainable& competitive&advantage& in& this& segment& due& to& its& current& lead& in&market& share& and& the& strength& of& its& legacy& products.&However,& we& do& believe& there& is& a& limit& on& the& total&available& market,& which& will& affect& the& mix& of& digital&media&to&digital&marketing&revenue&in&the&long&run.&&
Adobe& is& measuring& the& Creative& Cloud’s& performance&using&a&metric&called&Average&Revenue&Per&User,&or&ARPU.&This& is& a& weighted& monthly& and& yearly& value& that& takes&into&account&the&different&price&points&of&the&CC&product&offerings&and&the&number&of&subscribers&to&each&product.&It& is& another& major& driver& of& Digital& Media& revenue.& As&showed&in&the&graph&above,&Digital&Media&revenues&have&remained&relatively& flat&even&though&the&subscriber&base&has&been& increasing.& This& is&due& to& the&decreasing&ARPU&that&we&have&seen&in&the&four&quarters.&In&FU14&Q1,&ARPU&
was& at& $44.50.& This& latest& quarter,& FY15& Q1,& ARPU& had&dropped& to&$37.50&because&of& the& increasing&number&of&subscribers& that& are& using& the& single& app& products& that&are&priced&between&$9.99<$29.99/month.&&&
&Source:)Adobe)FY14)109k)and)FY15)Q1)Earnings)call)
Last& year,& Adobe& generated& 63%& of& their& subscription&revenue,& or& $1.875& billion,& from& the& Creative& Cloud&packages.& Adobe& stated& in& its& last& earnings& call& that& it&expects&the&mix&between&complete&Cloud&users&and&single&app&users&to&eventually&settle&at&about&50/50.&They&have¬&stated&what&the¤t&mix&is&but&we&are&assuming&it&to&be&about&60/40,&which&allows&for&further&decreases&to&the& ARPU.& Assuming& the& average& complete& user& pay&$50/month& (the& average& price& of& a& complete& Cloud&subscription)& and& the& single& app& user& pays& $15/month&(the&average&price& for&a& single&app),&with&no&major&price&hikes&the&most&Adobe&can&make& in&the& long&term&off&the&digital& media& segment& with& 13M& subscribers& is& $5.07&billion&a&year.&&
We& believe& that& the& digital& media& segment& will& lead&Adobe’s& revenue& growth& over& the& next& three& years& but&will& eventually& stagnate& as& Adobe& finishes& transitioning&the& current& CS& customers& over& to& CC& and& saturates& the&remaining&design&software&market.&&
Digital$Marketing$
Adobe’s& Digital& Marketing& segment& is& comprised& of& the&Digital&Marketing&cloud&and&LiveCycle&products.&&Its&cloud&platform&provides&an& integrated& suite&of&eight& tools& that&allow& its& users& to& manage& site& analytics,& web&optimization,& data& and& web& content& management.& & It&strives&to&help&its&customers&gain&deep&insights&into&their&customers,& build& personalized& campaigns,& and& manage&their&content&and&assets.2&&
0& 0.3&1.4&
3.454&
5.6&
8&
10.1&11.8&12.5&
13&
0&
5&
10&
15&
FY11& FY12&&FY13&& FY14&FY15*&FY16*&FY17*&FY18*&FY19*&FY20*&
Number$in$M
illions$
Forecasted$Subscriber$Growth$
530&530& 530& 530& 530& 534& 535&520&
498&485&
451&
400&
420&
440&
460&
480&
500&
520&
540&
560&
Jul&'12&
Jan&'13&
Jul&'13&
Jan&'14&
Jul&'14&
Jan&'15&
Dollars$per$Year$
Average$Revenue$Per$User$$
& &&
&! Page!4! !! !
Adobe& has& grown& its& digital& marketing& segment& from&inception&in&2011&to&$1.7B,&or&33%&of&its&revenue&in&FY14.&With& the& current&digital&marketing& industry& valued&at& an&estimated& $20& billion,& we& believe& there& is& significant&growth&potential&for&Adobe.&We&have&forecasted&revenue&for& digital& marketing& to& grow& at& 25%& for& each& the& next&three&years&in&line&with&company&guidance&because&of&the&market& opportunity& for& new& customer& acquisition& and&Adobe’s& early& competitive& advantage&with& its& integrated&digital&marketing&technologies.&We&estimate&that&by&2020,&digital& marketing& will& contribute& 46%& of& Adobe’s& total&revenues.&
The& digital& marketing& segment& allows& Adobe& more&growth& opportunity& in& the& long& term& because& of& the¤t& lack& of& true& market& leadership& and& Adobe’s¤t&integrated&technology&offerings.&&
While& Adobe& currently& has& the&market& advantage& in& the&short&term&with&its&marketing&platform,&in&the&long&run&it&will& have& an& uphill& battle& when& it& comes& to& market&awareness.& Adobe& is& up& against& major& enterprise&software& providers& including& Oracle,& Salesforce.com& and&Hewlett<Packard.& Adobe’s& market& recognition& lies& in& a&very&small&niche&of&the&overall&software&industry&whereas&the& other& players& operate& in& much& bigger& markets&including& Customer& Relationship& Management& (CRM),&Point&of&Sale&(PoS)&and&Business&Intelligence&(BI)&systems.&They& already& have& the& brand& recognition& and& built<in&customer&base.&None&of& these&companies¤tly&have&the& breadth& of& integrated& technology& that& Adobe& does,&but&each&has&made&significant&acquisitions&in&the&last&two&years&to&enhance&their&product&lines&and&have&the&capital&to&continue&to&acquire& firms&with&products& that&will&help&them&build&out&their&solutions.&&
We&believe&that&the&strategic&partnership&that&Adobe&has&created&with&IBM&and&Accenture&will&give&Adobe&access&to&a& wider& customer& base.& We& have& forecasted& the& digital&marketing& revenue& growth& in& line& with& company&expectations& for& the& next& three& years& with& revenues&growing& to& nearly& $3.2& billion& by& FY18.& In& a& $20& billion+&market& with& no& clear& market& leader,& Adobe& should& be&able& to& maintain& its& 13<14%& market& share.& We& are&forecasting& slower& growth& of& 20%& and& 10%& for& the&following& two&years&because&of&our&expectation& that& the&market& leaders&will&start&to&shake&out&and&it&will&become&harder& to& acquire& new& customers,& especially& from&competitors&as&large&as&Oracle&and&HP.&&
In&2015,&we&estimate&that&Adobe’s&revenue&mix&between&Digital&Media&and&Digital&Marketing&will&be&approximately&61%&to&35%.&We&expect&that&these&numbers&will&continue&
to& converge& as& we& move& farther& out& in& our& forecast&eventually& landing& at& a& 52%/46%& mix& in& the& continuing&value&phase.&
Printing$&$Publishing$
Adobe’s& Printing& and& Publishing& segment& is& its’& smallest&division.& It& offers& services& including& technical& document&publishing,& web& application& development& and& high& end&printing& for& business& publishing& and& OEM& printing&businesses.&&This&segment&generates&revenue&by&licensing&Adobe’s& PostScript& and& PDF& technologies& to& OEMs& that&produce&workflow&software&and&printers3.&&
We& have& forecast& the& Printing& && Publishing& segment& to&slowly&decline& from&4%&of& total& revenue&to&1.7%& in&2020&due&to&growth& in&the&other&two&segments&as&well&as&real&decline& in& the& print& and& publishing& industry& as& paper&printing& is& taken& over& by& digital& content.& Although&management& has& not& made& any& comments& about& their&long<term&vision&for&this&segment,&we&believe&that&it&may&eventually& be& dropped& as& technology& and&market& needs&change.&&&
RECENT$DEVELOPMENTS$
Acquisition$of$Fotolia$
Adobe&closed&on&the&acquisition&of&Fotolia&on&January&28,&20152.& Fotolia& is& a& market& place& for& stock& photography&and& video& content& that& is& regularly& used& in& the& creative&industry.&&
&
Adobe& paid& $800& million& in& cash& for& the& stock& content&marketplace,&adding&it&to&14&other&acquisitions&they&have&made& since& announcing& the& new& business& strategy& and&restructuring&in&20114.&&
Fotolia& will& be& integrated& into& Adobe& Creative& Cloud,&offering&users&the&ability&to&access&and&purchase&over&35&millions& stock& photos& and& videos.& Adobe& will& also&maintain& Fotolia& as& a& stand<alone& service,& accessible& to&anyone&wanting&to&purchase&stock&content.&&
Fotolia& is& Adobe’s& latest& addition& to& their& “value<add”&services& within& the& Creative& Cloud15.& Adobe& has& stated&
& &&
&! Page!5! !! !
that& they& want& to& continually& add& value& to& their&subscription&customers&by&integrating&more&features&and&services& into& the& Creative& Cloud& subscription& –& a&way& to&make& customers& feel& like& they& are& getting& their&money’s&worth.& Adobe& is& also& counting& on& purchases& made& in&Fotolia&to&increase&the&average&ARPU5.&
We& believe& Fotolia& will& improve& Adobe’s& competitive&advantage&and&offer&value&to&many&of&the&Creative&Cloud&customers.& It& also& has& the& potential& to& drive& major&revenue&growth.&Adobe&has& yet& to&publicly& comment&on&pricing&for&the&stock&content&in&Creative&Cloud&as&opposed&to&the&normal&Fotolia&website9&but&based&on&comparative&pricing& to& its& competitor& Shutterstock8& as& well& as&Shutterstock’s& publicly& available& information& on& cost& to&the&service&and&revenue&per&download7,&we&estimate&that&Adobe&will&be&making&an&average&of&$1.26&per&download.&Shutterstock& had& 125& million& downloads& in& 2014& with&over& 1.2& million& paying& users7.& If& we& assume& the& same&average& number& of& downloads& per& user& (104)& times&Adobe& current& subscriber& base& (3.45& million)& times& our&estimated& average& per& download& ($1.26),& Adobe& stands&to&make&$760&million&in&revenue&from&Fotolia.&That&would&increase& the& current& ARPU& from& $40.44& to& $58.81.& &We&have&no&way&of&estimating&costs&and&expenses&related&to&Fotolia& but& if& we& assume& Adobe’s& average& net& profit&margin& for& the& last& three& years& of& 10.8%,& it& could&potentially&increase&Adobe’s&bottom&line&by&15%.&&
Stock$Repurchase$Program$
In& January& 2015,& Adobe& announced& a& $2& billion& stock&buyback& program& through& the& end& of& FY2017.& & The& new&plan,& designed& to& “return& value& to& Adobe’s& stockholders&and&minimize&dilution&from&stock&issuances,”&replaces&the&previous&$2&billion&dollar&stock&buy<back&program,&which&was& exhausted& at& the& end& of& FY1414.& At& current& market&prices,&this&represents&a&purchase&of&approximately&5%&of&the¤tly&outstanding&stock.&&
We&believe&Adobe’s&stock&repurchase&program&may&be&an&attempt& to&boost& their& EPS& for&2015&and&2016.& They&are¤tly&projecting&ESP&in&2015&to&be&$1.20&and&in&2016&to& be& $2.05.6& Their& current& EPS& is& $0.54.& That& would& be&120%& growth& in& EPS& over& the& next& year.& Adobe& has&provided& guidance& of& overall& revenue& growth& of& 14.5%&with& an& increase& in& operating& expenses& and& COGS.&&Regardless& of& their& motives,& we& believe& Adobe& has& the&necessary& cash& flow& to& finance& this& repurchase& without&taking&on&more&debt&or&affecting&their&operating&budget.&
$
Strategic$Partnerships$
Adobe& announced& several& new& strategic& partnerships& at&its& Digital&Marketing& Summit& held& on&March& 9<11,& 2015.&They&have&joined&with&IBM&and&the&IBM&Digital&Experience&to& build& specialized& enterprise& consulting& capabilities& in&the& Adobe&Marketing& Cloud.& These& new& capabilities& will&allow& enterprises& to& “comprehensively& integrate& all& the&touch& points& of& a& consumer’s& journey22”& including&customer&journey&mapping&and&digital&marketing&strategy&using&big&data&and&analytics.&
Adobe& has& also& partnered& with& Accenture& to& launch& a&cloud<based& pay<per<use& digital&marketing& service& called&Accenture& Customer& Engagement.& Brands& will& have&access& to& Accenture& consultants& that&will& offer& solutions&the&use&the&Adobe&digital&marking&technologies23.&&
INDUSTRY$TRENDS$
The& application& software&publishing& industry& is& expected&to&see&strong&growth&in&the&next&five&years,&with&industry&revenues&forecasted&to&grow&3.4%&annually&to&$231.7B&by&2019& driven& by& growing& corporate& profits& and& increased&corporate& and& private& investment& in& computers& and&software.18&
Software$As$A$Service/Subscription$Pricing$
The& application& software& publishing& industry& is& seeing& a&shift& from& its& traditional& perpetual& licensing& model& with&irregular& revenues& and& physical& products& to& a&subscription<based&model&known&as&SaaS,&or&software&as&a& service,& where& revenues& are& more& consistent& and&products& are& accessed& through& the& cloud.& Instead& of&downloading&and&installing&a&piece&of&software&onto&their&personal& computers,& customers& access& and& use& SaaS&products& via& the& Internet.& Customers& pay& a& subscription&or&usage&fee,&usually&monthly&or&yearly,&for&access&to&the&services& or& applications& the& vendor& provides& and& the&vendors& house& and& maintain& the& hardware& and& servers&that& run& the& applications.& Typically,& customers’& data& is&also&stored&in&the&vendor’s&“cloud”&where&they&can&access&it&through&an&Internet&browser&or&an&app&installed&on&any&internet<capable&device.&&
SaaS& is& still& only& a& small& portion& of& the& applications&software&industry&because&of&security&and&data&ownership&concerns&with&but& is& growing&at&a&much& faster& rate& than&the&general&industry.&It&is&forecasted&to&grow&at&a&CAGR&of&21.3%& through&2018,& specifically&driven&by& the&packaged&software& category.& Package& software& includes& programs&
& &&
&! Page!6! !! !
that& focus& on& a& specific& process,& including& CRM,& HR&management& and& digital& marketing.& & Cloud<based&software& is& expected& to& account& for& 20%&of& all& software&sales&in&201821.&
Adobe&was& one& of& the& first& to&make& the& transition& from&traditional& software& publisher& to& a& digital& services&provider,& placing& it& in& an& excellent& position& to& take&advantage& of& the& industry& growth& as& more& enterprise&companies& choose& to& use& SaaS& and& cloud<based&enterprise&solutions.&However,&we&believe&the&market&has&already& factored&this&growth& into& the&stock&price&despite&the&revenue&lag.&As&Adobe&continues&to&grow&its&revenue&and&market&share,& its&EPS&will& increase&and&the&P/E&ratio&will& fall& but& there& will& be& no& new& value& for& the&stockholders.&
As& companies& switch& to& cloud<based& products,& they& are&changing& their& business& models& as& well.& Products& with&typical&perpetual&licenses&come&with&a&large&up<front&cost&to& customers& and& create& very& irregular& revenue& streams&for& companies&who& can’t& be& certain&when& someone&will&buy& the& next& piece& of& software.& The& subscription<based&model& offers& a& more& affordable& up<front& cost& to&customers&while& generating& a&more& predictable& revenue&stream&and&higher<V&per&customer&for&the&companies.&&
Adobe’s&revenue&has&suffered&the&last&two&years&because&of& the& change& in& business& model.& However,& they& are&starting&to&see&growth&as&they&switch&their&customer&base&over&to&subscription&plans.&&
Growth$Through$Acquisitions$
The&industry&has&seen&a&lot&of&acquisition&activity&recently&as& software& publishers& compete& with& each& other& and&external& competitors& to& quickly& expand& their& digital&capabilities& and& services.& The& larger& firms& have& been&purchasing&companies&with&niche&products&to&gain&instant&access& into& new& markets.& Companies& that& are& able& to&adopt&new&technology&quickly&have&a&distinct&competitive&advantage& and& acquisitions& are& a& much& faster& way& to&acquire&a&new&technology&than&organic&R&D.&&
Adobe& has& been& leading& the& charge& on& acquisitions& in&relation&to& its&peers.&As&the&first& to&publicly&announce& its&intention&to&restructure&the&business&to&take&advantage&of&the& new& digital& services& market,& Adobe& has& made& 14&acquisitions&since&20114&and&has&the&distinct&competitive&advantage& of& having& the& most& complete& and& fully&integrated& digital& marketing& platform& currently&available10.&&
MARKETS$AND$COMPETITION$
Peer$Comparisons$
Adobe& competes& against& two& very& different& peer& groups&with& its&Digital&Media&and&Digital&Marketing&segments&as&well& as& numerous& ancillary& products& from& external&competitors.& Its& closest& publically& traded& competitors& in&the& Digital& Media& are& Avid& and& Autodesk,& and& to& some°ree&Apple&with&its&iMovie&and&iPhoto&products.&In&the&Digital& Marketing& segment,& its& closest& competitors& are&Oracle,&IBM&and&Salesforce.com.&&
&
Compared&with&all& its&closest&competitors,&Adobe&has&an&extremely&high&P/E&ratio&with&a&very&low&ROE,&EPS&and&net&profit&margin.&Adobe’s& current&P/E& ratio&of&146.4& can&be&partially& explained& by& the& transition& from& perpetual&license&model& to& the& subscription<based& revenue&model.&Earnings&tend&to&lag&as&subscribers&are&transitioned&over.&However,& we& are& forecasting& Adobe& to& have& much&stronger& earnings& in& 2015& and& 2016,& $0.98& and& $1.36&respectively,&and&the&corresponding&P/E&ratios&of&79.2&and&56.9&are&still&extraordinarily&high.&&Design,$Editing$&$Rendering$Software$Industry$
Adobe& is& the& market& leader& in& the& creative& software&industry&as&illustrated&in&the&following&chart.&&&&
Stock Price P/E (TTM)
ROE (%)
EPS (TTM)
Profit Margin
Autodesk! $61.61& 176.03& 3.65& $1.29& 3.26%&Avid! $16.06& 42.17& .036& $1.33& 3.75%&SalesForce.com! $67.38& n/a& <7.49& $0.69& <4.89%&IBM! $164.26& 13.8& 90.89& $16.05& 16.97%&Oracle! $43.42& 18.14& 23.94& $2.96& 28.62%&Apple! $130.41& 15.6& 33.61& $8.53& 21.67%&Microsoft! $44.96& 17.8& 26.17& $2.47& 25.45%&Adobe! $74.$ 146.4$ 3.96$ $0.54$ 6.5%$
Source:(FactSet(
Adobe&13%&Autodesk&
7%&Dessault&
7%&Corel&5%&
Parametric&2%&
Avid&2%&
Other&64%&
Market$Share$of$Design$So`ware$Industry$
Source:)IBISWorld)
& &&
&! Page!7! !! !
&&Competition& is& high& and& the& barriers& to& entry& for& new&products& are& relatively& low.& With& Adobe’s& new&subscription<based& model,& there& is& the& possibility& for&customer& churn& to& less& expensive& or& perpetual& license&products.& & Companies& like& Apple& and& Corel& have& been&updating& their& products& and& are& still& offering& perpetual&licenses& for& their& design& software.& Digital& camera& and&other& device& manufacturers& are& also& including& software&for&free&with&their&devices.&However,&we&believe&that&the&breadth& of& products& and& name& recognition& of& Adobe’s&legacy&brands&give&it&a&sustainable&competitive&advantage&for&a&long&time&to&come.&
Digital$Marketing$Peers$
Adobe& has& significantly& different& competitors& when& it&comes& to& the& digital& marketing& technology& solutions&space.& The& chart& bellows& offers& a& brief& overview& of& the&market& leaders& and& their& product& options& for& each&category.$
Source:)thehubscomm.com$
Adobe&was&recently&ranked&as&one&of&the&top& leaders&for&Digital& Marketing& Hubs& by& Gartner,& Inc.,& which& rated&Adobe&as& the& company&with& the&most& complete&offering&of&integrated&tools&for&the&digital&marketing&hub10.&
While& Adobe& may& be& winning& accolades& for& its& product&breadth& and& integration,& industry& research& has& shown&that& customers&of&more& complex,& integrative& technology&tend& to& go& for&brands& they&are& familiar&with& rather& than&individual&products,&even& if& the&brand&does¬&offer&the&best& product& in& a& particular& category11.& Adobe& does& not&have&as&high&a&profile& in& the&enterprise& software&market&as& its& much& larger& competitors& who& already& offer& CRM,&PoS,& Business& Intelligence& and& other& enterprise<oriented&software&solutions.&&
&
Company! Market!Cap!
FY14!–Cloud!Sales!
Cloud!Sales!as!%!of!Total!revenue!
Adobe! 38.8B& 1.35B& 35%&Salesforce! 41.0B& 5.37B& 5.7%&Oracle! 182.8B& 1.12B& 2.88%&IBM! 157.9B& 5.76B& 6.2%&HP! 58.3B& 3.7B& 3.2%&
Source:) FactSet)&)Oracle,) Salesforce.com,) IBM,)HP) and)Adobe)FY14)109Ks))))
Adobe& is& actually& the& smallest& competitor& in& terms& of&market& cap& and& has& a& significant& disadvantage& to&Salesforce.com&and& IBM& in& terms&of& current&cloud<based&services& sales.& &The& industry& is& currently&estimated& to&be&about& $20& billion& dollars& so& Adobe& has& about& 6.75%&market&share.&&
&
ECONOMIC$OUTLOOK$
The& majority& of& Adobe’s& revenue& is& derived& from& other&companies& or& individuals& that& use& Adobe’s& products& in&their& own& workflows& and& businesses.& The& health& of& the&overall& economy,& corporate& profit& and& private& company&investment& in& technology& and& software& is& going& to&determine&Adobe’s&success&and&growth&in&the&future.&&
• We¤tly&expect&the&economy&to&stay&in&its¤t&growth&cycle,&with&GDP&growth&at&3.12%& for& the&next&six& months& and& 3.05%& for& the& next& two& years.&According&to&the&Bureau&of&Economic&Analysis,&private&company& investment& is& a& contributing& factor& to& the¤t& increase& in& real&GDP12.&Given&that&correlation,&we&expect&private&company&investment&to&continue&to&increase&over&the&next&two&years&&
• Corporate& profits& are& forecasted& to& grow& from& $2.17&trillion& to& $2.47& trillion& by& 202017.& Growing& corporate&profits& results& in& company& investment& in& technology&and& software.& Private& company& investment& in&computers& and& software& is& also& expected& to& grow& at&
Adobe&7%&
Salesforce&27%&
IBM&29%&
HP&18%&
Oracle&6%&
Other&13%&
Packaged$So`ware$Cloud$Compeators$
Source:)Rackspace.com)
& &&
&! Page!8! !! !
4.5%& CAGR& through& 2020& from& $652.2B& in& 2015& to&$812.1B&in&202018.&&
• Adobe&does&have&exposure&to&exchange&rates&from&its&business&in&Europe&and&Asia.&When&dollar&continues&to&strengthen&against&the&Euro&and&the&Yen&as&we&expect&it& will,& Adobe& will& record& losses.& However,& it& does&hedge& its& net& recognized& foreign& currency& assets& and&liabilities,& 81%& of& its& total& foreign& exposure,& with&forward&contracts.&Adobe&recorded&a&$6.6&million&loss&&due&to&exchange&rates&last&year3.&&&
&
CATALYSTS$FOR$GROWTH$
• As& the& economy& continues& to& improve,& private&company& spending& on& software& is& expected& to& grow&between&5<8.5%&per&year&over&the&next&five&years1.&&
• The& Internet& publishing& and& broadcasting& industry&continues&to&grow&at&an&estimated&11.9%&annualized&rate&over&the&next&five&years2.&Adobe,&with& its& legacy&products& including& Photoshop,& Illustrator& and&InDesign,& is& the& market& leader& in& software& for&creators& of& this& rich& media& and& video& content.& As&companies& continue& to& invest& in& their& online&presence,& the& Creative& Cloud& and& digital& media&segment&should&see&growth&in&subscribers&and&ARR.&
• Digital& Marketing& is& a& relatively& new& industry& with&very&high&growth.&Adobe¤tly&has&a&competitive&advantage& with& the&most& complete,& fully& integrated&Digital& Marketing& platform& out& there& to& take&advantage& of& the& estimated& $20B& digital& marketing&market3.&Their&Marketing&Cloud&is¤tly&the&most&complete&and&integrated&set&of&tools&available.&
• Adobe& has& the& potential& to& increase& their& TAM&with&the& development& of& their& mobile& apps& and& the&
marketing& of& the& low<cost& Creative& Cloud&Photography&package.&
• New& revenue&potentials& from& the&Fotolia& acquisition&could&dramatically&increase&the&ARPU.&
• Adobe’s&global&partnerships&with&Accenture&and&IBM&with& help& grow& its& market& share& in& the& Digital&Marketing&space.&&
INVESTMENT$POSITIVES$
•& Adobe’s& revenues& will& grow& and& become& more®ularly&recurring&over&the&next&two&years&as&it&sees&a&majority&of&its&CS&subscriber&base&transition&over&to&the&subscription<based&model.&&
• Adobe& has& enough& free& cash& flow& to& continue& to&acquire& companies& that& have& technology& that& Adobe&can&integrate&into&its¤t&products&to&provide&that&“continuing&value”&to&its&subscription&customers.&&
INVESTMENT$NEGATIVES$
• If&Adobe&is&unable&to&perform&to&market&expectations,&the&market&could&quickly&decide&to&readjust&its&price&to&be&more&in&line&with&Adobe’s&actual&market&value&and&there& could& be& a& lot& of& potential& downside& for&investors&who&bought&too&near&the&top.&&
• If& the&US&economy&gets&caught&up&with& the&economic&turmoil& in& the& rest& of& the& world,& the& current& growth&and& investment&that&we&believe&we&will&see&could&dry&up&and&Adobe’s&growth&prospects&could&really&be&hurt.&
• In& addition,& during& an& economic& downtown,& Adobe&users& may& chose& to& forgo& on& their& subscription& on&downgrade& to&a& single&user&app& to& save&on&expenses.&Adobe’s&new&model&has&allowed&it&to&become&more&of&an& operating& expense& and& less& of& a& capital&expenditure,&which&might&be&trimmed&back&to&save&on&the&budget.&
• It& is& hard& to& estimate& what& Adobe& subscriber&customers&will& actually& find& valuable& in& the& complete&CC& cloud& package.& If& Adobe& chooses& to& invest& in& the&wrong& types& of& add<ons& and& technology& upgrades,&they&could&lose&their&subscription&base&very&quickly.&&
• Adobe& is& facing& stronger& competition& from& external&competitors& for& digital& imaging& and& design& software.&Digital& cameras& and& other& device& manufacturers& are&including&software&for&free&with&their&devices&
Americas&58%&
EMEA&28%&
Asia/Pacific&14%&
Revenues$by$Geography$
Source:)Adobe)109k)
& &&
&! Page!9! !! !
• Companies& like& Apple& and& Corel& still& offer& perpetual&licenses& for&their&products&and&have&recently&updated&their&offerings.&This&may&reduce&Adobe’s&future&pricing&power&with&its&subscription<models.&
VALUATION$
We& have& forecasted& the& digital& media& segment& to& grow&according&to&subscriber&rates&of&70%&in&2015,&50%&in&2016&and&7.5%&annually&after&that&through&2020.&Our&estimates&are& based& on& the& average& length& a& CS& user& held& a&perpetual& license& and& the& amount& of& CS& licenses&purchased& through& 2014& when& Adobe& essentially&discontinued&them.&&
We& estimate& that& Adobe’s& COGS& will& continue& at& its’¤t&rate&of&15%&even&though&the&Products&segment&of&the&business&becomes&basically& insignificant.& In& the& FY14&earnings& call,& senior& management& alluded& to& increased&costs&in&the&next&few&years&due&to&the&necessary&build&out&and& increased& server& costs& to& host& the& increased& user&base.& We& assume& those& will& continue& to& grow&proportionately&to&the&revenue&growth.&&
We& forecasted& the& digital&marketing& growth& in& line&with&company& forecasts& of& 25%& for& the& next& three& years& and&then& a& decline& to& 20%& in& 2018& and& 10%& in& 2019& and&beyond.&&
We& forecasted& the& CV& NOPLAT& growth& rate& to& be& 5%&because&of&our&estimate&of&the&total&market&size&and&our&estimate& of& what& size& market& share& Adobe& could&reasonably& expect& to& take& with& regards& to& its& current&competitors& as& well& as& our& current& assumption& of& real&GDP&growth&of&3%&per&year.&&
Our&WACC&was& 7.72%.&Adobe&has& very& little& debt& and& is&very& strict& on& repayment& schedules.&We&used& a& risk<free&rate& of& 2.59%,& which& was& the& 30<year& treasury& yield& on&April& 21,& 2015.& As& a& group& we& are& using& a& market& risk&premium& of& 4.85%,& which& is& the& average& between& the&historical&average&and&the¤t&Damodaran&market&risk&premium&as&of&April&21,&2015.&&
Our& valuation& is& lower& than& the& consensus& estimate& of&$84.00.& After& analyzing& other& model& assumptions,& we&could¬&just&a&long<term&growth&rate&of&9<11%&based&on&our&estimates&of&the&overall&market&size.&&
KEYS$TO$MONITOR$
Adobe’s& stock&price& is&most&dependent&on& its&CV&growth&rate,& which& will& be& driven& primarily& by& the& share& of& the&
digital& marketing& market& Adobe& can& grab.&We& currently&have& forecasted& it& to& be& 5.27%,& which& is& well& below&consensus&of&6%.&&&
It&is&also&crucial&to&monitor&the&number&of&subscribers&and&their& corresponding& ARPU& metrics.& These& two& numbers&will& be& the& drivers& for& growth& in& the& Digital& Media&segment.&&If&Fotolia&ends&up&bringing&in&as&much&revenue&as& we& have& estimated& and& Adobe& is& successful& at&integrating& further&value<added&products& to& the&Creative&Cloud,& ARPU& could& increase& to& a& level& that& would& drive&further& revenue& growth& and& potential& value& for& the&shareholders.&
REFERENCES$
1. S&P&NetAdvantage,&“Adobe&Systems”&2. Adobe.com&&3. Adobe&10<k,&December&2014&4. FactSet&5. CNET&–&Adobe&buys&into&stock&art&business&6. Adobe&Q4&2014&Earnings&Call&7. Shutterfly&10<k,&February&2015&Revenue&per&download&8. Shutterfly.com&&Prices&and&content&fees&9. Fotolia.com&&prices&and&content&fees&10. Gartner,&Inc.&–&“Magic&Quandrant&for&digital&
marketing&hubs”&&11. IBISWorld&–&“Analytics&&&Enterprise&software&
publishing“&12. Bureau&of&Economic&Analysis&–&February&27,&2015&&13. Adobe&press&release&–&Adobe&to&Outline&Growth&
Strategy&at&Financial&Analyst&Meeting&14. Adobe.com&–&Adobe&announces&stock&buyback&&15. Adobe&Summit&Analyst&Briefing,&March&10,&2015&16. CNET&<&http://www.cnet.com/news/how<greedy<is<
adobes<creative<cloud<subscription<not<very/bg&17. IBISWorld&–&Corporate&profit&profile&18. IBISWorld&–&Private&Investment&in&Computers&and&
Software&profile&19. IBISWorld&–&Software&publishing&20. PWC&–&PwC&Global&Software&Leaders&2014&&21. IDC&<&Worldwise&Saas&and&Cloud&Software&2014<2018&
Forecast&http://www.idc.com/getdoc.jsp?containerId=249834&
22. BusinessWire&–&Adobe&and&IBM&Interactive&Experience&Announce&Global&Parnership&–&&
23. CMO&–&Adobe&announces&global&services&partnerships&24. IBISWorld&–&Design,&Editing&and&Rendering&Software&&
IMPORTANT$DISCLAIMER$
& &&
&! Page!10! !! !
Henry&Fund&reports&are&created&by&student&enrolled&in&the&Applied&Securities&Management&(Henry&Fund)&program&at&the& University& of& Iowa’s& Tippie& School& of& Management.&These& reports& are& intended& to& provide& potential&employers&and&other&interested&parties&an&example&of&the&analytical& skills,& investment& knowledge,& and&communication& abilities& of& Henry& Fund& students.& Henry&Fund& analysts& are& not& registered& investment& advisors,&brokers& or& officially& licensed& financial& professionals.& The&investment& opinion& contained& in& this& report& does& not&represent&an&offer&or&solicitation&to&buy&or&sell&any&of&the&aforementioned&securities.&Unless&otherwise¬ed,&facts&and& figures& included& in& this& report& are& from& publicly&available& sources.& This& report& is& not& a& complete&compilation& of& data,& and& its& accuracy& is& not& guaranteed.&From& time& to& time,& the& University& of& Iowa,& its& faculty,&staff,& students,& or& the& Henry& Fund& may& hold& a& financial&interest&in&the&companies&mentioned&in&this&report.&
AdobeRevenue&Decomposition
Fiscal&Years&Ending&Nov.&28 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Total*Revenue 4,403,677 4,055,240 4,147,065 ,,,,,4,852,066, ,,,,,5,968,041, ,,,,,6,863,247, ,,,,,7,755,470, ,,,,,8,531,017, ,,,,,9,256,153,,,,%,change,from,previous,year 4% ?8% 2% 15% 19% 13% 12% 9% 8%
Revenue*by*Business*SegmentProduct*(perpetual*license) 3,342,843 2,470,098 1,627,803 ,,,,,,,,388,165, ,,,,,,,,,,59,680, ,,?, ,,?, ,,?, ,,?,,,,%,change,from,previous,year ?2% ?26% ?34% ?76% ?85%Subscription 673,206 1,137,856 2,076,584 3,930,174,,,, 5,132,515,,,, 5,902,393,,,, 6,747,259,,,, 7,507,295,,,, 8,237,976,,,,,,,%,change,from,previous,year 49% 69% 82% 47% 31% 15% 14% 11% 10%Services*and*Support 387,628 447,286 442,678 533,727,,,,,,, 775,845,,,,,,, 960,855,,,,,,, 1,008,211,,,, 1,023,722,,,, 1,018,177,,,,,,,%,change,from,previous,year 14% 15% -1% 17% 45.36% 23.85% 4.93% 1.54% ?0.54%
Revenue*by*Product*CategoryDigital*Media 3,128,500,,,, 2,625,900,,,, 2,603,200,,,, 2,441,300,,,, 3,672,993,,,, 4,044,151,,,, 4,412,165,,,, 4,557,473,,,, 4,906,321,,,,,,,%,change,from,previous,year 1% ?15% ?1% ?7% 34% 9% 8% 3% 7%Digital*Marketing 1,085,000,,,, 1,228,800,,,, 1,355,200,,,, 1,694,000,,,, 2,117,500,,,, 2,646,875,,,, 3,176,250,,,, 3,811,500,,,, 4,192,650,,,,,,,%,change,from,previous,year 19% 13% 10% 25% 25% 25% 20% 20% 10%Print*and*Publishing 216,800,,,,,,, 200,500,,,,,,, 188,700,,,,,,, 183,039,,,,,,, 177,548,,,,,,, 172,221,,,,,,, 167,055,,,,,,, 162,043,,,,,,, 157,182,,,,,,,,,,%,change,from,previous,year ?1% ?8% ?6% ?3% ?3% ?3% ?3% ?3% ?3%
Revenue*by*GeographyAmericas 2,196,400,,,, 2,134,400,,,, 2,314,400,,,, 2,765,678,,,, 3,521,144,,,, 4,186,581,,,, 4,653,282,,,, 5,033,300,,,, 5,461,130,,,,,,,%,change,from,previous,year 7% ?3% 8% 19.50% 27.32% 18.90% 11.15% 8.17% 8.50%EMEA 1,294,600,,,, 1,129,200,,,, 1,179,900,,,, 1,407,099,,,, 1,730,732,,,, 1,990,342,,,, 2,249,086,,,, 2,388,685,,,, 2,499,161,,,,,,,%,change,from,previous,year ?2% ?13% 4% 19.26% 23.00% 15.00% 13.00% 6.21% 4.62%Asia 912,700,,,,,,, 791,600,,,,,,, 652,800,,,,,,, 679,289,,,,,,, 716,165,,,,,,, 686,325,,,,,,, 853,102,,,,,,, 1,109,032,,,, 1,295,861,,,,,,,%,change,from,previous,year 7% ?13% ?18% 4% 5% ?4% 24% 30% 17%
%*of*Total*Revenue*by*Business*SegmentProduct*(perpetual*license)** 76% 61% 39% 8% 1.0% ,? ,? ,?, ,?Subscription** 15% 28% 50% 81% 86.0% 86% 87% 88% 89%Services*&*Support 9% 11% 11% 11% 13.0% 14% 13% 12% 11%
%*of*Total*Revenue*by*Product*CategoryDigital*Media* 70% 65% 63% 50.3% 61.5% 58.9% 56.9% 53.4% 53.0%Digital*Marketing 25% 30% 33% 34.9% 35.5% 38.6% 41.0% 44.7% 45.3%Print*and*Publishing 5% 5% 4% 3.8% 3.0% 2.5% 2.2% 1.9% 1.7%
%*of*Total*Revenue**By*GeographyAmericas 50% 53% 56% 57% 59% 61% 60% 59% 59%EMEA 29% 28% 28% 29% 29% 29% 29% 28% 27%Asia 21% 19% 16% 14% 12% 10% 11% 13% 14%
AdobeIncome'Statement
Fiscal'Years'Ending'Nov.'28 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020ERevenueTotal revenue 4,403,677 4,055,240 4,147,065 4,852,066---- 5,968,041 6,863,247-------- 7,755,470---- 8,531,017---- 9,256,153----
Cost of Revenue Products 121,663 138,154 97,099 24,260---------- 29,840---------- .-------------------- .---------------- .---------------- .---------------- Subscription 219,102 278,077 335,432 436,686------- 537,124------- 617,692------------ 697,992------- 767,791------- 833,054------- Services & support 143,017 170,326 189,549 242,603------- 298,402------- 343,162------------ 387,773------- 426,551------- 462,808-------Total cost of revenue 483,782 586,557 622,080 727,810------- 895,206------- 1,029,487-------- 1,163,320---- 1,279,652---- 1,388,423----
Gross profit 3,919,895 3,468,683 3,524,985 4,124,256 5,072,835 5,833,760 6,592,149 7,251,364 7,867,730
Operating Expenses Research & development expenses 742,823 826,631 844,353 970,413------- 1,193,608---- 1,372,649-------- 1,551,094---- 1,706,203---- 1,851,231---- Sales & marketing expenses 1,516,159 1,620,454 1,652,308 1,698,223---- 2,088,814---- 2,402,137-------- 2,714,414---- 2,985,856---- 3,239,654---- General & administrative expenses 434,982 520,124 543,332 630,769------- 775,845------- 892,222------------ 1,008,211---- 1,109,032---- 1,203,300---- Amortization of purchased intangibles & incomplete technology 48,657 52,254 52,424 134,160------- 89,649---------- 72,446-------------- 54,489---------- 48,038---------- 70,880----------Total operating expenses 2,742,621 3,019,463 3,092,417 3,433,565---- 4,147,917---- 4,739,454-------- 5,328,208---- 5,849,129---- 6,365,064----Operating income 1,177,274 449,220 432,568 690,691 924,918 1,094,306 1,263,941 1,402,235 1,502,666
Non-Operating Income
Interest income (3,414) 4,941 7,267 8,720------------ 10,330---------- 11,468-------------- 13,431---------- 16,054---------- 18,879---------- Restructuring charges (2,917) 26,497 19,883 16,643---------- 1,643------------ 803-------------------- 803--------------- 803--------------- 803--------------- Interest expense 67,487 67,508 59,732 59,667---------- 64,355---------- 63,979-------------- 62,472---------- 61,027---------- 59,584---------- Investment gains (losses), net 9,504 (4,015) 1,156 4,852------------ 5,968------------ 6,863---------------- 7,755------------ 8,531------------ 9,256------------Total non-operating income (expense), net (58,480) (93,079) (71,192) (62,738) (49,700) (46,450) (42,088) (37,246) (32,252)
Income before income taxes 1,118,794 356,141 361,376 627,954 875,218 1,047,856 1,221,852 1,364,989 1,470,414 Provision for (benefit of) income taxes 286,019 66,156 92,981 153,849------- 214,428------- 256,725------------ 299,354------- 334,422------- 360,251-------Net income (loss) 832,775 289,985 268,395 474,105 660,790 791,131 922,499 1,030,567 1,110,163
Number of Shares Outstanding 494,731 501,372 497,867 491,223------- 484,580 477,936------------ 480,227------- 482,517------- 484,808-------Basic Earnings Per Share 1.68 0.58 0.54 0.97 1.36 1.66 1.92 2.14 2.29Annual-Dividends-Per-Share-(Stopped-paying-in-2005) 0 0 0 0 0 0 0 0 0
0.814814810.39959509 0.39842829 0.350.16868244 0.20384268 0.20360255 (6,644)---------- 0.36363479
0.098777 0.12825973 0.13101603
80.7438059
AdobeBalance'Sheet
Fiscal'Years'Ending'Nov.'28 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020EAssetsCurrent AssetsNormal Cash & cash equivalents 1,425,052 834,556 1,132,423 1,276,404------- 1,941,065---- 2,390,007---- 3,211,969---- 4,332,120---- 5,542,435----Short-term investments 2,113,301 2,339,196 2,622,091 2,687,339------- 2,754,211---- 2,822,747---- 2,892,988---- 2,964,978---- 3,038,758----Trade receivables, net 617,233 599,820 591,800 629,903---------- 847,492------- 974,584------- 1,101,289---- 1,211,973---- 1,314,774---- Allowances for doubtful accounts 12,643 10,228 7,867 9,219--------------- 11,339---------- 13,060---------- 14,735---------- 16,207---------- 17,587----------Prepaid expenses & other current assets 116,237 170,110 175,758 169,828---------- 208,887------- 240,220------- 271,453------- 298,574------- 323,990-------Total current assets 4,331,360 4,045,929 4,602,328 &&&&&&&4,834,233& &&&&&5,848,766& &&&&&6,543,308& &&&&&7,612,176& &&&&&8,957,620& &&10,381,645&
Property & equipment, gross 1,398,675 1,447,738 1,699,157 1,920,047------- 2,169,654---- 2,451,709---- 2,770,431---- 3,130,587---- 3,537,563---- Less accumulated depreciation & amortization 734,373 787,964 914,034 1,126,429------- 1,366,435---- 1,637,641---- 1,944,105---- 2,290,409---- 2,681,732----Property & equipment, net 664,302 659,774 785,123 793,619---------- 803,219------- 814,067------- 826,326------- 840,178------- 855,831-------Goodwill 4,133,259 4,771,981 4,721,962 4,721,962------- 4,721,962---- 4,721,962---- 4,721,962---- 4,721,962---- 4,721,962----Purchased & other intangibles, net 545,036 605,254 469,662 410,954---------- 359,585 314,637 275,307 240,894 210,782 Investment in lease receivable 207,239 207,239 80,439 80,439 80,439 80,439 0 0 0Other assets 93,327 90,121 126,315 135,443---------- 167,105------- 192,171------- 217,153------- 238,868------- 259,172-------Total assets 9,974,523 10,380,298 10,785,829 10,976,650&&&& 11,981,076&& 12,666,584&& 13,652,925&& 14,999,523&& 16,429,392&&
Liabilities and Stockholders' EquityCurrent Liabilities Trade payables 49,759 62,096 68,377 77,633------------ 95,489---------- 109,812------- 124,088------- 136,496------- 148,098------- Accrued expenses 590,140 656,939 683,866 679,289---------- 835,526------- 960,855------- 1,085,766---- 1,194,342---- 1,295,861---- Debt & Capital lease obligations 11,217 14,676 603,229 29,483------------ 60,889---------- 58,918---------- 57,012---------- 55,167---------- 825,382------- Accrued restructuring 9,287 6,171 17,120 1,299--------------- 973.9 584.33---------- 584.33---------- 584.33---------- 584.33---------- Income taxes payable 49,886 10,222 23,920 37,693------------ 52,535---------- 62,898---------- 73,342---------- 81,933---------- 88,262---------- Deferred revenue 561,463 775,544 1,097,923 970,413---------- 1,193,608---- 1,372,649---- 1,551,094---- 1,706,203---- 1,851,231----Total current liabilities 1,271,752 1,525,648 2,494,435 1,795,810&&&&&&& 2,239,020&&&& 2,565,716&&&& 2,891,885&&&& 3,174,727&&&& 4,209,418&&&&
Long-term Liabilities Debt & capital lease obligations 1,496,938 1,499,297 911,086 1,881,603------- 1,820,715---- 1,761,796---- 1,704,785---- 1,649,618---- 824,236------- Deferred revenue 58,102 53,268 57,401 48,521------------ 59,680---------- 68,632---------- 77,555---------- 85,310---------- 92,562---------- Accrued restructuring 12,263 7,717 5,194 3,896--------------- 2,922------------ 2,337------------ 1,753------------ 1,169------------ 584--------------- Income taxes payable 155,096 132,545 125,746 116,156---------- 161,893------- 193,827------- 226,012------- 252,489------- 271,990------- Deferred tax liability, net 205,569------- 273,387------- 247,036--------- 276,164---------- 266,474------- 273,345------- 276,376------- 279,093------- 264,074------- Other liabilities 50,084 61,555 73,747 65,503------------ 80,569---------- 92,654---------- 104,699------- 115,169------- 124,958-------Total liabilities 3,309,341 3,655,664 4,009,924 4,249,191&&&&&&& 4,717,044&&&& 5,060,999&&&& 5,402,806&&&& 5,691,342&&&& 5,931,922&&&&
Shareholders' Equity Common stock 3,038,726 3,392,757 3,778,556 3,922,671------- 4,066,787---- 4,210,902---- 4,355,017---- 4,499,133---- 4,643,248---- Retained earnings 7,003,003 6,928,964 6,924,294 7,398,399------- 8,257,524---- 8,871,629---- 9,622,047---- 10,535,993-- 11,581,168-- Accumulated other comprehensive income (loss) 30,712 46,103 (8,094) (8,094)------------- (8,094)---------- (8,094)---------- (8,094)---------- (8,094)---------- (8,094)---------- Treasury stock, net of reissuances 3,407,259 3,643,190 3,918,851 4,585,518------- 5,052,184 5,468,851 5,718,851---- 5,718,851---- 5,718,851----Total stockholders' equity (deficit) 6,665,182 6,724,634 6,775,905&&&&& 6,727,459&&&&&&& 7,264,032&&&& 7,605,586&&&& 8,250,119&&&& 9,308,181&&&& 10,497,470&&
Total&Liabilities&&&Shareholders'&Equity 9,974,523&&&& 10,380,298&& 10,785,829&&& 10,976,650&&&& 11,981,076&& 12,666,584&& 13,652,925&& 14,999,523&& 16,429,392&&Net-deferred-taxes-(liab-=-asset)
AdobeCash%Flow%Statement
Fiscal%Years%Ending%Nov.%28 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020EOperating ActivitiesNet income 832,775 289,985 268,395 474,105 660,790 791,131 922,499 1,030,567 1,110,163 Adjustments to reconcile net income: Depreciation, amortization & accretion 299,766 321,227 313,590 450,571 546,574 655,056 777,642 916,163 1,072,693 Allowance for doubtful accounts 12,643 10,228 7,867 9,219 11,339 13,060 14,735 16,207 17,587 Prepaid expenses & other current assets 4,552 (55,509) (1,918) 5,930 (39,059) (31,332) (31,234) (27,120) (25,417) Trade payables (62,874) 7,132 6,211 (9,256) (17,856) (14,323) (14,276) (12,409) (11,602) Accrued expenses (7,770) 41,828 37,544 (4,577) 156,237 125,329 124,911 108,577 101,519 Accrued restructuring (66,047) (6,949) 8,871 (17,120) (1,299) (974) (584) (584) (584) Income taxes payable 10,041 (58,875) 11,006 4,183 60,580 42,296 42,629 35,069 25,829 Deferred revenue 87,340 209,247 326,512 (136,390) 234,355 187,993 187,367 162,865 152,279 Net cash flows from operating activities 1,499,580 1,151,686 1,287,482 767,690 1,384,382 1,648,016 1,900,015 2,121,366 2,324,646
Investing Activities(Increase) Decrease short-term investments (209,721) (247,612) (298,533) (65,248) (66,872) (68,536) (70,241) (71,989) (73,781) CapEx (271,076) (164,098) (148,332) (220,890) (249,606) (282,055) (318,722) (360,156) (406,976) Change in intangibles 490 (60,218) 135,592 58,708 51,369 44,948 39,330 34,413 30,112 Business Acquisitions (284,042) (638,722) 50,019 - (9,600) (10,848) (12,259) (13,852) (15,653) (Increase) Decrease L.T. investments/lease receivables (670) (61,504) (14,040) - - - (80,439) - - (Increase) Decrease other assets (3,405) 3,206 (36,194) (9,128) (31,662) (25,066) (24,982) (21,715) (20,304) Net cash flows from investing activities (834,662) (1,177,803) (490,707) (236,559) (306,371) (341,557) (467,314) (433,299) (486,602)
Financing ActivitiesStock repurchasing (405,000) (1,100,000) (600,000) (666,667) (466,667) (416,667) 0 0 0Proceeds from issuance of treasury stock 169,274 500,776 54,166 - 0 0 0 0 0Excess tax benefits from stock-based compensation 10,003 40,619 53,235 Proceeds (payment) of long-term debt (8,158) 2,359 (588,211) 970,517 (60,889) (58,918) (57,012) (55,167) (825,382) Proceeds from issuance (payment) of Notes payable.ST debt (36,901) 12,337 588,553 (573,746) 31,406 (1,970) (1,907) (1,845) 770,215 Debt issuance costs (2,297) (357) - (6,500) 0 0 0 0 0Net cash flows from financing activities (234,723) (559,138) (507,283) (276,396) (496,149) (477,555) (58,918) (57,012) (55,167)
change2in2cash 430,1952222222 (585,255)222222 289,4922222222 254,7352222222 581,8612222222 828,9042222222 1,373,7832222 1,631,0552222 1,782,8772222cash, beginning of the period 1,425,052 834,556 1,132,423 1,421,915 1,676,650 2,258,512 3,087,415 4,461,198 6,092,254 cash, end of the period 834,556 1,132,423 1,421,915 1,676,650 2,258,512 3,087,415 4,461,198 6,092,254 7,875,131
AdobeIncome'Statement
Fiscal'Years'Ending'Nov.'28 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020ESalesTotal sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of Goods Sold Products 2.76% 3.41% 2.34% 0.50% 0.50% 0.00% 0.00% 0.00% 0.00% Subscription 4.98% 6.86% 8.09% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% Services & support 3.25% 4.20% 4.57% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%Total cost of goods sold 10.99% 14.46% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%
Gross income 91.30% 88.14% 87.42% 85.00% 85.00% 85.00% 85.00% 85.00% 85.00%
Operating Expenses Research & development expenses 16.87% 20.38% 20.36% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% Sales & marketing expenses 34.43% 39.96% 39.84% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% General & administrative expenses 9.88% 12.83% 13.10% 13.00% 13.00% 13.00% 13.00% 13.00% 13.00% Amortization of purchased intangibles & incomplete technology 1.10% 1.29% 1.26% 2.77% 1.50% 1.06% 0.70% 0.56% 0.77%Total operating expenses 62.21% 75.11% 75.05% 70.77% 69.50% 69.06% 68.70% 68.56% 68.77%Operating income 29.09% 13.03% 12.37% 14.23% 15.50% 15.94% 16.30% 16.44% 16.23%
Non-Operating Income
Interest income 0.56% 0.54% 0.51% 0.18% 0.17% 0.17% 0.17% 0.19% 0.20%Restructuring charges -0.07% 0.65% 0.48% 0.34% 0.03% 0.01% 0.01% 0.01% 0.01%Interest expense 1.53% 1.66% 1.44% 1.23% 1.08% 0.93% 0.81% 0.72% 0.64%Investment gains (losses), net 0.22% -0.10% 0.03% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10%Total non-operating income (expense), net -1.39% -1.64% -1.24% .1.29% .0.83% .0.68% .0.54% .0.44% .0.35%Income before income taxes 25.41% 8.78% 8.71% 12.94% 14.67% 15.27% 15.75% 16.00% 15.89%Provision for (benefit of) income taxes 6.50% 1.63% 2.24% 3.17% 3.59% 3.74% 3.86% 3.92% 3.89%Net income (loss) 21.20% 9.76% 8.89% 9.77% 11.07% 11.53% 11.89% 12.08% 11.99%
AdobeBalance'Sheet
Fiscal'Years'Ending'Nov.'28 2013 2013 2014 2015E 2016E 2017E 2018E 2019E 2020EAssets 4055240Current AssetsCash & cash equivalents 33.80% 18.95% 27.92% 26.31% 32.52% 34.82% 41.42% 50.78% 59.88%Short-term investments 50.12% 53.12% 64.66% 55.39% 46.15% 41.13% 37.30% 34.76% 32.83%Trade receivables, net 14.64% 13.62% 14.59% 12.98% 14.20% 14.20% 14.20% 14.21% 14.20% Allowances for doubtful accounts 0.30% 0.23% 0.19% 0.19% 0.19% 0.19% 0.19% 0.19% 0.19%Deferred income taxes 1.41% 2.32% 2.35% 1.27% 1.44% 1.50% 1.54% 1.57% 1.56%Prepaid expenses & other current assets 2.76% 3.86% 4.33% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%Total current assets 102.73% 91.88% 113.49% 99.63% 98.00% 95.34% 98.15% 105.00% 112.16%
Property & equipment, gross 33.17% 32.88% 41.90% 39.57% 36.35% 35.72% 35.72% 36.70% 38.22% Less accumulated depreciation & amortization 17.42% 17.89% 22.54% 23.22% 22.90% 23.86% 25.07% 26.85% 28.97%
Property & equipment, net 15.76% 14.98% 19.36% 16.36% 13.46% 11.86% 10.65% 9.85% 9.25%Goodwill 98.03% 108.36% 116.44% 97.32% 79.12% 68.80% 60.89% 55.35% 51.01%Purchased & other intangibles, net 12.93% 13.74% 11.58% 8.47% 6.03% 4.58% 3.55% 2.82% 2.28%Investment in lease receivable 4.92% 4.71% 1.98% 1.66% 1.35% 1.17% 0.00% 0.00% 0.00%Other assets 2.21% 2.05% 3.11% 2.79% 2.80% 2.80% 2.80% 2.80% 2.80%Total assets 236.57% 235.72% 265.97% 226.23% 200.75% 184.56% 176.04% 175.82% 177.50%
Liabilities and Stockholders' EquityCurrent Liabilities Trade payables 1.18% 1.41% 1.69% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% Accrued expenses 14.00% 14.92% 16.86% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% Debt & Capital lease obligations 0.27% 0.33% 14.88% 0.61% 1.02% 0.86% 0.74% 0.65% 8.92% Accrued restructuring 0.22% 0.14% 0.42% 0.03% 0.02% 0.01% 0.01% 0.01% 0.01% Income taxes payable 1.18% 0.23% 0.59% 0.78% 0.88% 0.92% 0.95% 0.96% 0.95% Deferred revenue 13.32% 17.61% 27.07% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00%Total current liabilities 30.16% 34.64% 61.51% 37.01% 37.52% 37.38% 37.29% 37.21% 45.48%
Long-term Liabilities Debt & capital lease obligations 35.50% 34.05% 22.47% 38.78% 30.51% 25.67% 21.98% 19.34% 8.90% Deferred revenue 1.38% 1.21% 1.42% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Accrued restructuring 0.29% 0.18% 0.13% 0.08% 0.05% 0.03% 0.02% 0.01% 0.01% Income taxes payable 3.68% 3.01% 3.10% 2.39% 2.71% 2.82% 2.91% 2.96% 2.94% Deferred income taxes 6.29% 8.53% 8.44% 6.96% 5.90% 5.48% 5.11% 4.84% 4.41% Deferred tax liability, net 4.88% 6.21% 6.09% 5.69% 4.47% 3.98% 3.56% 3.27% 2.85% Other liabilities 1.19% 1.40% 1.82% 1.35% 1.35% 1.35% 1.35% 1.35% 1.35%
Total liabilities 78.49% 83.01% 98.88% 87.57% 79.04% 73.74% 69.66% 66.71% 64.09%Shareholders' Equity Common stock 72.07% 77.04% 93.18% 80.85% 68.14% 61.35% 56.15% 52.74% 50.16% Retained earnings 166.10% 157.34% 170.75% 152.48% 138.36% 129.26% 124.07% 123.50% 125.12% Accumulated other comprehensive income (loss) 0.73% 1.05% -0.20% .0.17% .0.14% .0.12% .0.10% .0.09% .0.09% Treasury stock, net of reissuances 80.81% 82.73% 96.64% 94.51% 84.65% 79.68% 73.74% 67.04% 61.78%Total stockholders' equity (deficit) 158.08% 152.70% 167.09% 138.65% 121.72% 110.82% 106.38% 109.11% 113.41%
Total6Liabilities6&6Shareholders'6Equity 236.57% 235.72% 265.97% 226.23% 200.75% 184.56% 176.04% 175.82% 177.50%
AdobeValue&Driver&Estimation
Fiscal&Years&Ending&Nov.&28 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020ECalculation*of*NOPLATEBITA
Revenue 4,403,677 4,055,240 4,147,065 111114,852,0661 111115,968,0411 111116,863,2471 111117,755,4701 111118,531,0171 111119,256,15311131Cost1of1Goods1Sold1(includes1dep/amort) 483,782 586,557 622,080 11111111727,8101 11111111895,2061 111111,029,4871 111111,163,3201 111111,279,6521 111111,388,42311131SG&A1 111111,951,1411 111112,140,5781 111112,195,6401 111112,328,9921 111112,864,6601 111113,294,3591 111113,722,6251 111114,094,8881 111114,442,95311131Research1and1development 742,823 826,631 844,353 11111111970,4131 111111,193,6081 111111,372,6491 111111,551,0941 111111,706,2031 111111,851,231111+1Implied1Interest1on1Operating1Leases 14,3401111111111 15,4251111111111 13,8741111111111 13,642 13,805 13,989 14,197 14,431 14,695 EBITA 1,240,2710000 516,8990000000 498,8660000000 838,4940000000 1,028,3720000 1,180,7410000 1,332,6270000 1,464,7040000 1,588,2410000
Marginal0Tax0Rate 26% 19% 26% 24.5% 24.5% 24.5% 24.5% 24.5% 24.5%146200 156900 152700
Less:&Adjusted&Taxes
Income1Tax1Provision 286,019 66,156 92,981 153,849 214,428 256,725 299,354 334,422 360,251 11+1Tax1shield1on1Interest1expense 17,5471111111111 12,8271111111111 15,5301111111111 15,5141111111111 16,7321111111111 16,6341111111111 16,2431111111111 15,8671111111111 15,49211111111111131Tax1on1Interest1income (888)11111111111111 939111111111111111 1,889111111111111 (2,267)1111111111 (2,686)1111111111 (2,982)1111111111 (3,492)1111111111 (4,174)1111111111 (4,908)11111111111131Tax1on1investment1income 2,471111111111111 301111111111111111 (1,262)1111111111 (1,552)1111111111 (1,784)1111111111 (2,016)1111111111 (2,218)1111111111 (2,407)111111111111+1Tax1shield1on1restructuring1charges (758)11111111111111 5,034111111111111 5,170111111111111 4,327111111111111 427111111111111111 209111111111111111 209111111111111111 209111111111111111 20911111111111111111+1Tax1shield1on1amortized1goodwill 38,0121111111111 29,8111111111111 39,7021111111111 31111111111111111 31111111111111111 31111111111111111 31111111111111111 31111111111111111 3111111111111111111+1Tax1shield1on1any1non3operating1losses 15,2051111111111 17,6851111111111 18,5101111111111 15,3711111111111 12,1761111111111 11,3801111111111 10,3121111111111 9,125111111111111 7,902111111111111Total0adjusted0taxes 354,4410000000 130,5740000000 169,7030000000 185,5310000000 239,5270000000 280,1820000000 320,6090000000 353,2310000000 376,5390000000
Plus:&Change&in&Deferred&Taxes
DT1Liabilities 265,106 375,634 342,315 00E 00E 00E 00E 00E 00EDT1Assets 59,537 102,247 95,279 00E 00E 00E 00E 00E 00ENet1Deferred1Taxes1 205,5691111111 273,3871111111 247,0361111111 276,1641111111 266,4741111111 273,3451111111 276,3761111111 279,0931111111 264,0741111111Change0in0Deferred0Taxes 115,9300000000 67,8180000000000 (26,351)00000000 29,1280000000000 (9,690)0000000000 6,871000000000000 3,030000000000000 2,717000000000000 (15,019)00000000
NOPLAT 1,001,7600000 454,1430000000 302,8120000000 682,0910000000 779,1550000000 907,4310000000 1,015,0490000 1,114,1890000 1,196,6830000
Calculation*of*Invested*CapitalOperating&Current&Assets
Normal1Cash 1,425,052 834,556 1,132,423 1,260,0821111 1,549,9001111 1,782,3851111 2,014,0951111 2,215,5051111 2,403,8231111Accounts1Receivable 617,233 599,820 591,800 629,9031111111 847,4921111111 974,5841111111 1,101,2891111 1,211,9731111 1,314,7741111Prepaid1expenses1&1other1assets 116,237 170,110 175,758 169,8281111111 208,8871111111 240,2201111111 271,4531111111 298,5741111111 323,9901111111Current00Operating0Assets 000002,158,5220 000001,604,4860 000001,899,9810 000002,059,8130 000002,606,2800 000002,997,1890 000003,386,8380 000003,726,0520 000004,042,5870NonHInterest&Bearing&Current&Liabilities
Accounts1payable 49,759 62,096 68,377 111111111177,6331 111111111195,4891 11111111109,8121 11111111124,0881 11111111136,4961 11111111148,0981Accrued1expenses 590,140 656,939 683,866 11111111679,2891 11111111835,5261 11111111960,8551 111111,085,7661 111111,194,3421 111111,295,8611Deferred1revenue 561,463 775,544 1,097,923 970,4131111111 1,193,6081111 1,372,6491111 1,551,0941111 1,706,2031111 1,851,2311111Income1taxes1payable 155,096 132,545 125,746 37,6931111111111 52,5351111111111 62,8981111111111 73,3421111111111 81,9331111111111 88,2621111111111Current0Operating0Liabilities 1,356,4580000 1,627,1240000 1,975,9120000 1,765,0280000 2,177,1580000 2,506,2140000 2,834,2890000 3,118,9750000 3,383,4520000
Net0Operating0Working0Capital 802,0640000000 (22,638)00000000 (75,931)00000000 294,7850000000 429,1220000000 490,9760000000 552,5490000000 607,0770000000 659,1350000000
Plus:0Net0Property,0Plant,0&0Equipment 664,302 659,774 785,123 793,6190000000 803,2190000000 814,0670000000 826,3260000000 840,1780000000 855,8310000000
Intangible1Assets,1net 545,036 605,254 469,662 410,9541111111 359,5851111111 314,6371111111 275,3071111111 240,8941111111 210,7821111111Capitalized1PV1of1Operating1Leases 220,3581111111 198,2031111111 192,8261111111 194,8901111111 197,2191111111 199,8471111111 202,8121111111 206,1561111111 209,9261111111Other1operating1assets 93,327 90,121 126,315 135,4431111111 167,1051111111 192,1711111111 217,1531111111 238,8681111111 259,1721111111Plus:0Other0Operating0Assets,0net0depreciation 858,7210000000 893,5780000000 788,8030000000 741,2870000000 723,9090000000 706,6550000000 695,2720000000 685,9180000000 679,8810000000
LT1Income1Tax1Payable 155,096 132,545 125,746 116,1561111111 161,8931111111 193,8271111111 226,0121111111 252,4891111111 271,9901111111Deferred1LT1revenue 58,102 53,268 57,401 48,5211111111111 59,6801111111111 68,6321111111111 77,5551111111111 85,3101111111111 92,5621111111111Other1LT1liabilities 50,084 61,555 73,747 65,5031111111111 80,5691111111111 92,6541111111111 104,6991111111 115,1691111111 124,9581111111Less:0Other0Operating0Liabilities 263,2820000000 247,3680000000 256,8940000000 230,1790000000 302,1420000000 355,1130000000 408,2660000000 452,9680000000 489,5090000000
Invested0Capital 2,061,8050000 1,283,3460000 1,241,1010000 1,599,5110000 1,654,1080000 1,656,5850000 1,665,8810000 1,680,2050000 1,705,3370000
Value*DriversNOPLAT 1,001,7601111 454,1431111111 302,8121111111 682,0911111111 779,1551111111 907,4311111111 1,015,0491111 1,114,1891111 1,196,6831111Beginning1Invested1Capital 4,814,0761111 2,061,8051111 1,283,3461111 1,241,1011111 1,599,5111111 1,654,1081111 1,656,5851111 1,665,8811111 1,680,2051111Return0on0Invested0Capital0(ROIC) 20.81% 22.03% 23.60% 54.96% 48.71% 54.86% 61.27% 66.88% 71.22%
NOPLAT 1,001,7601111 454,1431111111 302,8121111111 682,0911111111 779,1551111111 907,4311111111 1,015,0491111 1,114,1891111 1,196,6831111IC1Current1Year 2,061,8051111 1,283,3461111 1,241,1011111 1,599,5111111 1,654,1081111 1,656,5851111 1,665,8811111 1,680,2051111 1,705,3371111IC1Previous1Year 4,814,0761111 2,061,8051111 1,283,3461111 1,241,1011111 1,599,5111111 1,654,1081111 1,656,5851111 1,665,8811111 1,680,2051111Free0Cash0Flow0(FCF) 3,754,0310000 1,232,6010000 345,0580000000 323,6800000000 724,5590000000 904,9540000000 1,005,7520000 1,099,8660000 1,171,5510000
NOPLAT 1,001,7601111 454,1431111111 302,8121111111 682,0911111111 779,1551111111 907,4311111111 1,015,0491111 1,114,1891111 1,196,6831111Beginning1Invested1Capital 4,814,0761111 2,061,8051111 1,283,3461111 1,241,1011111 1,599,5111111 1,654,1081111 1,656,5851111 1,665,8811111 1,680,2051111WACC 7.74% 7.74% 7.74% 7.74% 7.74% 7.74% 7.74% 7.74% 7.74%Economic0Profit0(EP) 629,0320000000 294,5080000000 203,4500000000 585,9990000000 655,3140000000 779,3620000000 886,7880000000 985,2090000000 1,066,5940000
AdobeDiscounted+Cash+Flow+(DCF)+and+Economic+Profit+(EP)+Valuation+Models
Key$Inputs:$$$$$CV$Growth 5.27%$$$$$CV$ROIC 71.23%$$$$$WACC 7.74%$$$$$Cost$of$Equity 7.93%
Fiscal+Years+Ending+Nov.+28 2015E 2016E 2017E 2018E 2019E 2020E
DCF)ModelFree$Cash$Flow $$$$$$$$$$$$264,590$ $$$$$$$$783,378$ $$$$$$$$904,367$ $$$$$1,005,546$ $$$$$1,100,341$ $$$$$$$$$$$$$1,171,300$Periods$to$discount 1 2 3 4 5 5CV$of$FCF $$$$$$$$$$$44,815,005$Discounted$DCF $$$$$$$$$$$$245,576$ $$$$$$$$674,835$ $$$$$$$$723,076$ $$$$$$$$746,199$ $$$$$$$$757,867$ $$$$$$$$$$$30,866,617$
Sum$of$DCF's 34,014,170$$$$$$$$$$$$$
Plus:$Short$Term$investments 2,622,091$$$$$$$$$$$$$$$Plus:$LongVterm$investments 80,439$$$$$$$$$$$$$$$$$$$$Less:$PV$of$Op$Leases (192,826))))))))))))))))))Less:$ESOP (170,918))))))))))))))))))Less:$Debt (1,514,315))))))))))))))Value$of$Equity 34,838,642))))))))))))Shares$outstanding 497,867))))))))))))))))))
Share)price 69.98$))))))))))))))))))))Price$Today 72.11$$$$$$$$$$$$$$$$$$$$$
EP)ModelInvested$Capital 1,241,101$$$$$$$$$$$$$$$EP 585,999$$$$$$$$$$$ 650,602$$$$$$$ 779,030$$$$$$$ 886,421$$$$$$$ 984,979$$$$$$$ 1,066,501$$$$$$$$$$$$Periods$to$discount 1 2 3 4 5 5CV$of$EP 43,135,216$$$$$$$$$$Discounted$EP 543,889$$$$$$$$$$$ 560,456$$$$$$$ 622,864$$$$$$$ 657,798$$$$$$$ 678,411$$$$$$$ 29,709,652$$$$$$$$$$
Sum$of$EP 32,773,069$$$$$$$$$$$$$Beginning$Invested$Capital 1,241,101$$$$$$$$$$$$$$$Plus:$Excess$Cash D)))))))))))))))))))))))))))Plus:$Short$Term$investments 2,622,091$$$$$$$$$$$$$$$Plus:$LongVterm$investments 80,439$$$$$$$$$$$$$$$$$$$$Less:$PV$of$Op$Leases (192,826)$$$$$$$$$$$$$$$$$Less:$ESOP (170,918))))))))))))))))))Less:$Debt (1,514,315))))))))))))))Value$of$Equity 34,838,642$$$$$$$$$$$$$Shares)Outstanding 497,867))))))))))))))))))
Share$Price 69.98$$$$$$$$$$$$$$$$$$$$$Price$Today 72.11$$$$$$$$$$$$$$$$$$$$$
AdobeWeighted(Average(Cost(of(Capital((WACC)(Estimation
WACC()(Re(E/V)(+(Rd(1)t)(D/V)(+(Rpdf(PDF/V)
Cost(of(Equity((Re)Risk%free%rate 2.59%Market%Premium 4.85%Equity%Beta%of%Firm%(from%Bloomberg) 1.1Cost%of%Equity%(Re) 7.93%
Cost(of(Debt((Rd)Cost%of%debt 3.77%
Weight(of(EquityMV%of%Common%Stock 74.62Shares%Outstanding 497,867,000%%%%%%%%%%%%%%%%%MV%of%Equity 37,150,835,540%%%%%%%%%%%%Weight%of%Equity 95.61%
Weight(of(DebtPV%of%Operating%Leases 192,826,000%%%%%%%%%%%%%%%%%MV%of%debt%(short%&%long%term) 1,514,315,000%%%%%%%%%%%%%%MV%of%TOTAL%debt 1,707,141,000%%%%%%%%%%%%%%Weight%of%Debt 4.39%
MV(of(Total(Capital 38,857,976,540%%%%%%%%%%%%
WACC 7.742%
AdobeRelative(Valuation(Models
EPS EPSTicker Company Price 2015E 2016E P/E715 P/E716
AAPL Apple $126.91 $8.697 $9.377 15.67777777777 14.37777777777MSFT Microsoft $42.63 $2.377 $2.867 18.07777777777 14.97777777777ADSK Autodesk $61.61 $1.177 $1.437 52.77777777777 43.17777777777CRM Salesforce.com $67.38 $0.697 $0.917 97.77777777777 74.07777777777IBM IBM $164.26 $15.857 $16.397 10.47777777777 10.07777777777AVID Avid $16.06 $1.477 $1.847 10.97777777777 8.7777777777777ORCL Oracle $43.42 $2.877 $3.017 15.17777777777 14.47777777777
Average 31.5********** 25.6**********
ADBE Adobe $74.62 $0.977 $1.367 77.37777777777 54.87777777777
Implied*Value:***Relative*P/E*(EPS15) *$*****30.38****Relative*P/E*(EPS16) 34.94$*****
AdobeKey$Management$Ratios
Fiscal$Years$Ending$Nov.$28 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Liquidity(RatiosCurrent2Ratio2(current2assets/current2liabilities) 340.6% 265.2% 184.5% 269.2% 261.2% 255.0% 263.2% 282.2% 246.6%
Operating2Cash2Flow2ratio2(Op.2CF/Current2Liabilities) 117.9% 75.5% 51.6% 42.7% 61.8% 64.2% 65.7% 66.8% 55.2%
Activity(or(Asset2Management(RatiosReceivable2Turnover2(Sales/Accounts2Receivable) 7.13 6.76 7.01 7.70 7.04 7.04 7.04 7.04 7.04
Total2Asset2Turnover2(Sales/Total2Assets) 0.44 0.39 0.38 0.44 0.50 0.54 0.57 0.57 0.56
Financial(Leverage(RatiosDebt/Equity2(Total2liabilities/total2equity) 0.50 0.54 0.59 0.63 0.65 0.67 0.65 0.61 0.57
Debt2Ratio2(Total2liabilities/total2assets) 33.18% 35.22% 37.18% 38.71% 39.37% 39.96% 39.57% 37.94% 36.11%
Equity2Ratio2(Shareholders'2equity/Total2assets) 66.82% 64.78% 62.82% 61.29% 60.63% 60.04% 60.43% 62.06% 63.89%
Profitability(RatiosGross2Margin22(RevenueRCOGS/Revenue) 89.01% 85.54% 85.00% 85.00% 85.00% 85.00% 85.00% 85.00% 85.00%
Net2Profit2Margin22(Net2Income/Net2Sales) 18.91% 7.15% 6.47% 9.77% 11.07% 11.53% 11.89% 12.08% 11.99%
Return2on2Assets2(Net2Income/Total2assets) 8.35% 2.79% 2.49% 4.32% 5.52% 6.25% 6.76% 6.87% 6.76%
Return2on2Equity22(Net2Income/Total2equity) 12.49% 4.31% 3.96% 7.05% 9.10% 10.40% 11.18% 11.07% 10.58%
Payout(RatioAdobe2does2not2pay2out2dividends
Total2Payout2(Dividends2+2Repurchases)/Net2Income