💻 Is Adobe A Victim Of Circumstances?

Cruise CEO quits; Oracle nears largest deal.

Hey Global Investor! Here’s what you need to know before the US markets open.

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💻 Adobe: Is It Business Or Circumstances?

Computer software company Adobe Inc. (ADBE) had its second-worst single-day drop in a decade on Thursday. The company just about met expectations in Q4. But it was the guidance for the future that unnerved investors even as the management put up a brave face. (Tweet This)

Domino Effect?

Adobe’s Q4 results were in-line with street estimates. The digital design software maker seems to be facing greater competition and slowing demand.

Key Stats From Q4: 

  • Revenue: $4.11B Vs $4.09B expected
  • EPS: $3.20 Vs $3.20 expected

Annual Recurring Revenue (ARR) is a new age term that captures all the subscriptions a company has managed to attract and annualizes them since subscriptions renew annually for the most part. When Adobe had launched Creative Cloud in 2013, it had close to $200M in Annualized Recurring Revenue (ARR). In the next eight years, that business had grown to $12.24B.

As companies turned to digitize their business processes, demand for digital experience tools skyrocketed. Adobe’s Digital Media Segment, of which Creative Cloud is a big part, saw its first-ever quarter of revenue over $3B.

The Digital Experience division too crossed the $1B revenue mark for the first time in Q4. For the fiscal year 2021, the company’s revenue stood at a record $15.79B. Operating cash flows for the full year were at a record $7.23B.

Adobe also offers contract-management software and allows for e-signatures. In that sense, this part of its business is a direct competitor to DocuSign. Our recent story on the latter focused on the drubbing it received from investors when it offered underwhelming guidance. That day, Adobe suffered collateral damage, with its market cap falling $26B.

That knee-jerk reaction took center stage when it was Adobe’s turn to declare results since the investors were already focused on the future and couldn’t care less about record revenues in the year gone by.

Things Beyond Its Control?

For the current quarter, which is Q1 FY2022 for Adobe, the company expects $4.23B in revenue, falling short of analysts’ $4.34B forecasts. The company projected $17.9B revenue for the year, again below street estimates of $18.16B.

CEO Shantanu Narayen stressed that the weak guidance does not point to underlying issues with the business. If anything, the problem, according to the company, lies in the strengthening US Dollar compared to other foreign currencies. Since 43% of Adobe’s revenue comes from overseas customers, the company is disproportionately impacted due to a strong dollar.

Timespan is also an issue since Q1 2022 is 13 weeks long rather than Q1 2021, which was 14 weeks long. The company insists that all three of its businesses – Creative Cloud, Digital Cloud, and Experience Cloud- are doing well. It now intends to expand its product offerings for marketing and analytics.

All that bravado apart, analysts were skeptical, even terming Adobe “a distant runner-up to Salesforce” having a product set that is already commoditized out there. Unfortunately, it didn’t help that JPMorgan analysts downgraded many cloud companies, including Adobe, citing expensive valuations.

There are also worries that as the Federal Reserve takes an aggressive stance against inflation, rising interest rates might impact the cash flows of companies such as Adobe, which will affect its valuation.

Thursday was Adobe’s second-worst day in a decade, with the stock down 20% from the peak of $699.54 set last month. The company would love to photoshop happy investors, but there’s a lot more that it needs to get right before the investors can come back and be happy campers!

Market Reaction
ADBE ended at $556.64, down 1.67%. Shares are up 15% this year.

Company Snapshot 📈

ADBE $556.64 -9.45 (1.67%)

Analyst Ratings (31 Analysts) BUY 84%  HOLD 16%  SELL 0%

Newsworthy 📰

Differences: GM President hints at strategy disagreement with departed Cruise CEO Dan Ammann (GM -5.52%)

Beginning: FedEx gets first of 500 electric trucks from GM’s EV unit in step towards green logistics (FDX +4.95%)

Deal: Oracle nears deal to buy health IT company Cerner for $30B (CERN +12.93%)

Later Today 🕒

  • Nike Inc. Earnings (NKE)
  • Micron Technology Earnings (MU)
  • Braze Inc. Earnings (BRZE)
  • Blade Air Mobility Inc. Earnings (BLDE)
  • Ark Restaurants Corp. Earnings (ARKR)
  • 8:30 PM IST: Leading Economic Indicators

Today’s Market Terminology: Rolling Settlements

A rolling settlement implies that all trades have to be settled by the end of the day. The entire transaction, where the buyer pays for securities purchased and seller delivers the shares sold, have to be completed in a day

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