ADBE



|Adobe Systems Inc. |(ADBE - NASDAQ) |$226.96 |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 1Q18 Earnings Update

Prev. Ed.: Dec 27, 2017: 4Q17 Earnings Update

Brokers’ Recommendations: Positive: 69.6% (16 firms); Neutral: 30.4% (7 firms); Negative: 0.0% Prev. Ed: 18, 7, 0

Firms’ Target Price: $232.47 (↑$43.3 from last edition; 19 firms) Firms’ Avg. Expected Return: 2.4%

Note: Though dated Apr 12, 2018, the data in the tables below are as of Mar 21, 2018.

Note: A Flash Update on 1Q18 Earnings was done on Mar 16, 2018.

Note: The tables below (Revenues, Margins and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table are taken from reports that did not have accompanying spreadsheet model.

Portfolio Manager Executive Summary

Adobe Systems Inc. (ADBE) is a leading developer of design software and related technologies for creation, assembly as well as use and distribution of graphics/imaging content for print and electronic media, including web creation and dissemination.

Of the 24 firms covering the stock, 69.6% provided positive ratings while the remaining 30.4% gave neutral ratings. Target prices range from $157–$273, with the average being $232.47.

Bullish (Buy or equivalent outlook) – 16 analysts or 69.6% – These firms are encouraged by the fact that Adobe is a dominant player in most categories of digital media and publishing. They are optimistic on Adobe as it is well poised on increasing digitization of entertainment, advertisement and other content creation markets. They are also positive about the company’s increased investments in digital marketing and analytics suite that complements Adobe’s content creation products. Further, the firms are bullish on the subscription-based pricing model which accounts for more than half of the company’s revenues and helps it to grow organically. Additionally, Adobe’s geographic diversity and robust product portfolio remain positive for the top-line growth.

The firms are confident of the company’s leading position in the market as Adobe caters the entire computer market with free viewers like Adobe Acrobat PDF Reader. These firms believe that Adobe as a company is becoming increasingly valuable to marketers, given its strong position in digital marketing and analytics driven by growing relationships with marketers on the content creation front.

The firms are also encouraged by Adobe’s pace of building a digital-marketing and analytics suite to support its digital media business. Moreover, the firms are also bullish on the existence of cross selling opportunities in the analytics business. They believe that increasing complexity of publishing will ramp up demand to measure and analyze return on advertising dollars invested, thus offering significant growth opportunities to Adobe.

Cautious (Neutral or equivalent outlook) – 7 analysts or 30.4% – These firms believe that Adobe is benefiting from strong industry position, long-term demand for its compelling product lines, continued innovation and competitive strength. They believe that strategic changes in business model will drive Adobe’s long-term revenues and also increase recurring revenues. They are also of the opinion that Adobe will continue to gain momentum with its cloud management platform.

However, they are wary about the imminent challenges that the company is facing shifting its business to a subscription-based one. Further, future fluctuations in the subscription rates remain might pose a serious concern. They are increasingly cautious as Adobe enters the final stages of this multiyear transition. This period can perplex consumers, thereby affecting the company's financial results over the next few quarters. The firms also believe the introduction of new products by some of the major players in the industry might affect the competitive position of Adobe.

Long-Term Outlook: The firms remain optimistic about Adobe as its products target solid long-term growth markets. Even if competitors resort to aggressive pricing strategy, Adobe will have a competitive advantage due to its advanced products.

Apr 12, 2018

Overview

Key investment considerations as identified by the analysts are as follows:

|Key Positive Arguments |Key Negative Arguments |

|Adobe continues to perform well on the back of its strong product |The company is dependent on general global economic trends. |

|line-up. |The challenging technology spending environment could hamper Adobe’s |

|The company’s strong position in digital media design and publishing and |product sales. |

|ongoing investments in digital marketing and analytics continue to drive |Adobe faces competition from Microsoft and Apple on multiple fronts, |

|growth. |including Acrobat and Web design. |

|Adobe continues to benefit from its transition from packaged software | |

|model to subscription-based model. | |

|Adobe’s product development and marketing strategies are focused on | |

|increasing revenues in the core markets and additional addressable | |

|markets. | |

Based in San Jose, CA, Adobe Systems Inc. (ADBE) offers creative, business, mobile software, and services worldwide. It operates in three business segments: Digital Media Solutions (includes Creative family of products and Document Services products), Digital Marketing and Print and Publishing. Adobe’s customers include creative professionals, such as graphic designers, web designers, videographers, photographers and professional publishers; knowledge workers; enterprise users, including IT managers and executives; consumers, such as digital imaging and digital video hobbyists and enthusiasts and OEM partners. For more information on the company, please visit its website: .

Note: Adobe’s fiscal year ends on Nov 30.

Apr 12, 2018

Long-Term Growth

Firms believe that the markets, in which Adobe participates, are attractive with high long-term growth potential driven by growing demand for content creation. Adobe has handled the transition expertly and embraced the new standard of delivery.

Adobe has completely shifted its most important product, Creative Solutions platform, to the cloud. Cloud not only contributes significant revenues but also generates high margins. They believe that subscription-based pricing model will continue to generate long term recurring revenues. Adobe is a market leader with its creative solutions products, where the marketing strategy is focused on improved ROI for customers. With Adobe shifting from licensed software to subscription cloud-based software, creative files can be stored, synced and shared, via Creative Cloud, on Mac OS, Windows, iOS and Android.

The firms believe that with the transition, the company’s revenues and earnings growth power will increase. The move to the cloud has improved sales since it spreads the cost for the customer and therefore they can buy more expensive products. Also, the cloud-based model has led to a more stable revenue stream for Adobe. The firms are positive about the untapped market share gain in Enterprise Cloud which in turn will the Creative Cloud growth.

Through the acquisition of Day Software and Omniture, Adobe has added web-analytics and marketing tools to its existing content creation product portfolio and this in turn is expected to enable the company to offer the most comprehensive portfolio in the digital content space. Similarly, the acquisition of TubeMogul is expected to create an end-to-end independent advertising and data management solution compatible with digital formats. It will enable advertisers to capitalize on online video campaigns, thereby expanding Adobe’s offerings.

Apr 12, 2018

Target Price/Valuation

Provided below is a summary of target price and rating as compiled by Zacks Research Digest:

|Rating Distribution |

|Positive |69.6%↓ |

|Neutral |30.4%↑ |

|Negative |0.0% |

|Digest High |$273.00↑ |

|Digest Low |$157.00↑ |

|Avg. Target Price |$232.47↑ |

| No. of Brokers with Target Price/Total |19/23 |

Like all software companies, Adobe faces risks in achieving its target price, which include the following:

• The timing of product releases

• Transition of the business model from license-based to subscription-based

• Customer adoption of new versions of core applications

• Management of direct sales force and server products

• Management of channel inventories, especially during product introductions

• Economic and currency headwinds

• Continuous investments in marketing, which might not reap expected returns

• Disruption in relationships with the channel partners

Recent Events

On Apr 9, 2018, Adobe announced that K-12 and higher education students will have access to Spark for Education with premium features and additional functionality for free.

On Apr 5, 2018, Adobe announced John Murphy to be its new Executive Vice President and Chief Financial Officer. He will be looking into Adobe’s accounting, business operations and pricing, financial planning and analysis, financial reporting, investor relations, internal audit, payroll, procurement, SEC reporting, tax and treasury functions.

On Apr 3, 2018, Adobe unveiled an update in Adobe Creative Cloud, which will assist video professionals to automate and expedite time-consuming production tasks without sacrificing creative control.

On Mar 28, 2018, Adobe launched Adobe Experience Cloud Device Co-op which allows various brands to work together in order to engage consumers across devices and digital touch points. The product also provides transparency and privacy protection.

On Mar 28, 2018, Adobe teamed up with NVIDIA to expand its the Sensei ecosystem making Sensei API more accessible to developers, data scientists and partners. NVIDIA will also leverage Adobe Sensei AI and machine learning framework for its GPUs.

On Mar 15, 2018, Adobe announced fiscal 1Q17 results. Highlights are as follows:

• Total revenues were $2.04 billion, up 3.4% q/q and 23.8% y/y.

• Non-GAAP EPS was $1.55, which increased 23% q/q and 64.9% y/y.

Revenues

According to the press release, Adobe’s adjusted revenues were $2.04 billion in 1Q18, up 3.4% q/q and 23.8% y/y. The top-line growth was driven by strong demand for the company’s innovative solutions and products, strength across geographies and growing subscriptions for its cloud application.

Subscription revenues (86% of Adobe’s total revenues) came in $1.79 billion, up 5.9% q/q and 29.7% from the year-ago period. Products revenues (8.2% of revenues) came in $171.6 million, which decreased 10.9% q/q and 6.3% y/y. Services & support revenues (5.5% of revenues) came in $113.9 million, down 3.2% sequentially and 0.4% y/y.

Provided below is a summary of revenues as compiled by Zacks Research Digest:

|Total Revenues ($ in million) |1Q17A |

|Copy Editor |Subhojoy Ghosh |

|Content Ed. |Shalu Saraf |

|Reason for Update |1Q18 Earnings Update |

|Lead Analyst |Shalu Saraf |

|QCA |Aniruddha Ganguly |

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April 12, 2018

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