A challenging hurdle to cross in 4Q
• 2QFY22 Digital Media’s new net ARR of USD464m was ~5% above expectations despite facing a tough YoY comparison
• Some conservatism embedded in 3QFY22 guidance; near-term risk-reward is more fairly balanced at this juncture, as 4QFY22 guidance might not be fully de-risked yet
• Fair value (FV) of USD420
In-line 2QFY22 – Adobe reported a broadly in-line set of results for the financial quarter ending in May
2022 (2QFY22). Revenue grew 14% year-on-year (YoY) to USD4.4b; Digital Media revenue grew 15% YoY against expectations of 13%. Document Cloud revenue grew 27% YoY, which was encouraging given that 1QFY22 saw a much slower growth rate of 17%; management noted strong growth in monthly active users across desktop, mobile and web. Digital Media’s new net annual recurring revenue (ARR) of USD464m was ~5% above expectations despite facing a tough YoY comparison, partially benefiting from the implementation of price increases in the last month of the quarter, which contributed to ~USD10m. Digital Experience revenue registered 17% YoY growth to USD1.1b, with the Adobe Experience Platform (AEP) and Workfront as bright spots. NonGAAP operating income was 1% above consensus, while Non-GAAP earnings per share (EPS) of USD3.35 came in 5 cents above guidance.
FV of USD420 – Management has guided for a more cautious 3QFY22, with Digital Media net new
ARR at USD430m, which was ~8% below consensus. Given that the full-year Digital Media net new ARR
target of USD1.9b remains unchanged, that would thus put pressure on Adobe’s ability to achieve the
implied USD588m in 4Q (or a 37% quarter-onquarter (QoQ) increase above management’s 3Q guidance). Management has noted that they expect 2HFY22 to show more pronounced summer seasonality in the enterprise business in 3Q with a strong sequential increase in 4Q. However, we remain concerned that such guidance could be at risk, given the more volatile environment, as well as uncertain contributions from price increases. At the same time, we also remain concerned about EPS resilience as headcount growth QoQ accelerated from 2% in 1QFY22 to 6% in 2QFY22 against an environment where many peers are tapping on the brakes in terms of hiring. Nonetheless, we think Adobe will remain watchful on costs, with management noting that they were focused in making disciplined investments to drive growth in
2QFY22. In our view, Adobe is still a digital content platform secular winner and their focus on content,
automation, and customer engagement are likely to continue to help entrench their competitive positioning in the industry. Still, we believe that the near-term risk-reward is more fairly balanced at this
juncture, as guidance might not be fully de-risked yet. Following adjustments as well as a target priceto-earnings (P/E) multiple of 25x while still maintaining our a 10% ESG premium, our FV reduces from USD525 to USD420.
ESG Updates
Adobe continues to lead industry peers on ESG key issues, with strong management programs to mitigate related risks. The company continues to undertake multiple acquisitions as part of its product suite diversification strategy; these may potentially add a layer of complexity to its human capital management. Research indicates Adobe employs leading human capital initiatives, including a suite of benefits, and diversity and inclusion programs—strategies that may help retention. HOLD. (Research Team)