The Positives
+ Document Cloud continues to be Adobe’s fastest growing segment. Document Cloud revenue grew 17% YoY to US$562mn and Document Cloud ARR grew 29% YoY to US$2.0bn. Much of the Document Cloud revenue growth was supported by strong customer demand for Acrobat subscriptions; momentum in AdobeSign, with significant YoY increase in e-sign transactions within Acrobat; and high demand for PDF solutions on mobile devices.
+ Strong operating margins. Strong margins have been an important aspect of our Adobe investment thesis, and 1Q22 was no exception. The company posted operating margin of 37% in 1Q22, which was in line with 1Q21. Margins benefitted from lower travel/facilities costs amid a peak in Omicron cases in December and January.
+ Price increase for Creative Cloud products. Adobe has revealed its intention to increase pricing of its Digital Media products late in the second quarter. This could boost Creative Cloud revenues in 2H22 as price hikes take effect at renewal for existing customers and for new customers. Adobe believes that it has delivered significant value to customers by introducing several platform innovations and products, including mobile and web-based Creative Cloud Express offerings. While no specifics are available, the last price rise was announced in 2017.
The Negatives
– War in Russia and Ukraine impacts Digital Media segment. Adobe has stopped selling products and services in Russia and Belarus due to the ongoing Russia-Ukraine conflict. The company has announced that it is decreasing its Digital Media ARR balance by US$87mn, consisting of US$75mn relating to sales in the Russia/Belarus region and an additional US$12mn pertaining to Ukraine (although the company will continue to provide Digital Media services to the latter). Further, Adobe’s FY22 sales will be reduced by US$75mn due to these adjustments.
– Higher tax rate. In 1Q22, Adobe reported tax rate of 18% compared to the company’s guidance of 16%. This was mainly because of the lower-than-expected tax benefits related to stock-based compensation. Further, the tax rate outlook for 2Q22 increased to 20%. Assuming everything else is constant, the increased tax rate reduces EPS by US$0.06 each quarter.
Outlook
Adobe expects 2Q22 revenue of US$4.34bn and earnings of US$2.44 per share. The company expects Digital Media net new ARR of US$440mn. Additionally, Adobe anticipates revenue growth of 13% and 15% for the Digital Media and Digital Experience segments, respectively.
Adobe did not provide an update to its FY22 prior guidance. For FY22, Adobe expects earnings of US$10.25 per share on total revenue of US$17.9bn. Among the other guidance metrics are 14% as-reported revenue growth for Digital Media and Digital Experience segments.
Maintain BUY with lower TP of US$602.00 (prev. US$658.00)
We lower our FY22e PATMI by 2% to reflect an estimated US$75mn revenue hit from the business disruption associated with Russia’s invasion of Ukraine. Digital media creation tools and cloud document management systems are in high demand globally across several industries. Despite the war-based revenue reductions, we maintain BUY with a lower target price of US$602.00. Valuations based on DCF with a WACC of 6.4% and terminal growth of 4.0%.
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note: