Intrinsic value of Adobe Systems - ADBE

Previous Close

$153.00

  Intrinsic Value

$329.26

stock screener

  Rating & Target

str. buy

+115%

  Value-price divergence*

+72%

Previous close

$153.00

 
Intrinsic value

$329.26

 
Up/down potential

+115%

 
Rating

str. buy

 
Value-price divergence*

+72%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of ADBE stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 75.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  22.06
  26.70
  24.53
  22.58
  20.82
  19.24
  17.81
  16.53
  15.38
  14.34
  13.41
  12.57
  11.81
  11.13
  10.52
  9.96
  9.47
  9.02
  8.62
  8.26
  7.93
  7.64
  7.37
  7.14
  6.92
  6.73
  6.56
  6.40
  6.26
  6.14
  6.02
Revenue, $m
  5,854
  7,417
  9,236
  11,322
  13,679
  16,310
  19,216
  22,393
  25,836
  29,541
  33,502
  37,712
  42,166
  46,858
  51,786
  56,946
  62,337
  67,961
  73,818
  79,914
  86,252
  92,840
  99,686
  106,801
  114,195
  121,882
  129,874
  138,189
  146,842
  155,852
  165,237
Variable operating expenses, $m
 
  3,141
  3,779
  4,511
  5,337
  6,260
  7,279
  8,393
  9,600
  10,899
  12,288
  13,224
  14,786
  16,431
  18,159
  19,968
  21,859
  23,831
  25,885
  28,022
  30,244
  32,555
  34,955
  37,450
  40,043
  42,738
  45,541
  48,456
  51,491
  54,650
  57,941
Fixed operating expenses, $m
 
  1,855
  1,902
  1,949
  1,998
  2,048
  2,099
  2,152
  2,205
  2,260
  2,317
  2,375
  2,434
  2,495
  2,557
  2,621
  2,687
  2,754
  2,823
  2,894
  2,966
  3,040
  3,116
  3,194
  3,274
  3,356
  3,440
  3,526
  3,614
  3,704
  3,797
Total operating expenses, $m
  4,361
  4,996
  5,681
  6,460
  7,335
  8,308
  9,378
  10,545
  11,805
  13,159
  14,605
  15,599
  17,220
  18,926
  20,716
  22,589
  24,546
  26,585
  28,708
  30,916
  33,210
  35,595
  38,071
  40,644
  43,317
  46,094
  48,981
  51,982
  55,105
  58,354
  61,738
Operating income, $m
  1,494
  2,420
  3,555
  4,862
  6,344
  8,003
  9,838
  11,848
  14,031
  16,382
  18,897
  22,113
  24,946
  27,932
  31,069
  34,356
  37,792
  41,376
  45,111
  48,998
  53,042
  57,245
  61,615
  66,157
  70,878
  75,788
  80,894
  86,207
  91,738
  97,498
  103,500
EBITDA, $m
  1,826
  3,019
  4,168
  5,490
  6,991
  8,670
  10,528
  12,563
  14,772
  17,152
  19,698
  22,406
  25,273
  28,296
  31,472
  34,798
  38,276
  41,904
  45,684
  49,619
  53,711
  57,966
  62,389
  66,986
  71,765
  76,734
  81,903
  87,280
  92,878
  98,708
  104,783
Interest expense (income), $m
  66
  66
  116
  173
  239
  313
  396
  488
  588
  697
  813
  938
  1,071
  1,212
  1,360
  1,515
  1,678
  1,848
  2,025
  2,210
  2,402
  2,602
  2,810
  3,026
  3,250
  3,483
  3,726
  3,978
  4,240
  4,513
  4,797
Earnings before tax, $m
  1,435
  2,354
  3,440
  4,689
  6,105
  7,689
  9,442
  11,361
  13,443
  15,685
  18,084
  21,175
  23,875
  26,721
  29,710
  32,841
  36,114
  39,528
  43,086
  46,788
  50,640
  54,643
  58,805
  63,131
  67,628
  72,305
  77,168
  82,229
  87,498
  92,985
  98,703
Tax expense, $m
  266
  636
  929
  1,266
  1,648
  2,076
  2,549
  3,067
  3,630
  4,235
  4,883
  5,717
  6,446
  7,215
  8,022
  8,867
  9,751
  10,673
  11,633
  12,633
  13,673
  14,754
  15,877
  17,045
  18,260
  19,522
  20,835
  22,202
  23,624
  25,106
  26,650
Net income, $m
  1,169
  1,719
  2,511
  3,423
  4,457
  5,613
  6,893
  8,293
  9,813
  11,450
  13,201
  15,458
  17,429
  19,506
  21,688
  23,974
  26,363
  28,856
  31,453
  34,156
  36,967
  39,890
  42,928
  46,086
  49,369
  52,782
  56,333
  60,027
  63,874
  67,879
  72,053

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  4,765
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  12,697
  10,050
  12,515
  15,341
  18,535
  22,101
  26,038
  30,342
  35,008
  40,029
  45,396
  51,100
  57,135
  63,494
  70,171
  77,162
  84,468
  92,088
  100,025
  108,284
  116,873
  125,800
  135,076
  144,717
  154,736
  165,151
  175,981
  187,248
  198,973
  211,181
  223,899
Adjusted assets (=assets-cash), $m
  7,932
  10,050
  12,515
  15,341
  18,535
  22,101
  26,038
  30,342
  35,008
  40,029
  45,396
  51,100
  57,135
  63,494
  70,171
  77,162
  84,468
  92,088
  100,025
  108,284
  116,873
  125,800
  135,076
  144,717
  154,736
  165,151
  175,981
  187,248
  198,973
  211,181
  223,899
Revenue / Adjusted assets
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
Average production assets, $m
  856
  1,083
  1,349
  1,653
  1,997
  2,381
  2,805
  3,269
  3,772
  4,313
  4,891
  5,506
  6,156
  6,841
  7,561
  8,314
  9,101
  9,922
  10,777
  11,667
  12,593
  13,555
  14,554
  15,593
  16,672
  17,795
  18,962
  20,176
  21,439
  22,754
  24,125
Working capital, $m
  3,028
  -2,203
  -2,743
  -3,363
  -4,063
  -4,844
  -5,707
  -6,651
  -7,673
  -8,774
  -9,950
  -11,200
  -12,523
  -13,917
  -15,380
  -16,913
  -18,514
  -20,184
  -21,924
  -23,734
  -25,617
  -27,573
  -29,607
  -31,720
  -33,916
  -36,199
  -38,573
  -41,042
  -43,612
  -46,288
  -49,076
Total debt, $m
  1,892
  3,303
  4,943
  6,822
  8,946
  11,317
  13,935
  16,798
  19,901
  23,239
  26,808
  30,602
  34,615
  38,843
  43,283
  47,933
  52,791
  57,859
  63,137
  68,629
  74,340
  80,277
  86,446
  92,857
  99,519
  106,445
  113,648
  121,140
  128,937
  137,056
  145,513
Total liabilities, $m
  5,272
  6,683
  8,323
  10,202
  12,326
  14,697
  17,315
  20,178
  23,281
  26,619
  30,188
  33,982
  37,995
  42,223
  46,663
  51,313
  56,171
  61,239
  66,517
  72,009
  77,720
  83,657
  89,826
  96,237
  102,899
  109,825
  117,028
  124,520
  132,317
  140,436
  148,893
Total equity, $m
  7,425
  3,367
  4,193
  5,139
  6,209
  7,404
  8,723
  10,165
  11,728
  13,410
  15,208
  17,119
  19,140
  21,270
  23,507
  25,849
  28,297
  30,849
  33,508
  36,275
  39,152
  42,143
  45,251
  48,480
  51,837
  55,326
  58,954
  62,728
  66,656
  70,746
  75,006
Total liabilities and equity, $m
  12,697
  10,050
  12,516
  15,341
  18,535
  22,101
  26,038
  30,343
  35,009
  40,029
  45,396
  51,101
  57,135
  63,493
  70,170
  77,162
  84,468
  92,088
  100,025
  108,284
  116,872
  125,800
  135,077
  144,717
  154,736
  165,151
  175,982
  187,248
  198,973
  211,182
  223,899
Debt-to-equity ratio
  0.255
  0.980
  1.180
  1.330
  1.440
  1.530
  1.600
  1.650
  1.700
  1.730
  1.760
  1.790
  1.810
  1.830
  1.840
  1.850
  1.870
  1.880
  1.880
  1.890
  1.900
  1.900
  1.910
  1.920
  1.920
  1.920
  1.930
  1.930
  1.930
  1.940
  1.940
Adjusted equity ratio
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  1,169
  1,719
  2,511
  3,423
  4,457
  5,613
  6,893
  8,293
  9,813
  11,450
  13,201
  15,458
  17,429
  19,506
  21,688
  23,974
  26,363
  28,856
  31,453
  34,156
  36,967
  39,890
  42,928
  46,086
  49,369
  52,782
  56,333
  60,027
  63,874
  67,879
  72,053
Depreciation, amort., depletion, $m
  332
  598
  612
  629
  647
  667
  690
  714
  741
  770
  801
  293
  327
  364
  402
  442
  484
  528
  573
  621
  670
  721
  774
  829
  887
  947
  1,009
  1,073
  1,140
  1,210
  1,283
Funds from operations, $m
  2,520
  2,317
  3,123
  4,051
  5,104
  6,281
  7,582
  9,008
  10,555
  12,220
  14,002
  15,751
  17,756
  19,870
  22,090
  24,416
  26,847
  29,384
  32,026
  34,776
  37,637
  40,611
  43,702
  46,915
  50,256
  53,729
  57,342
  61,101
  65,014
  69,089
  73,336
Change in working capital, $m
  320
  -464
  -540
  -619
  -700
  -782
  -863
  -944
  -1,023
  -1,100
  -1,176
  -1,250
  -1,323
  -1,394
  -1,463
  -1,533
  -1,601
  -1,670
  -1,740
  -1,810
  -1,882
  -1,957
  -2,033
  -2,113
  -2,196
  -2,283
  -2,374
  -2,469
  -2,570
  -2,676
  -2,788
Cash from operations, $m
  2,200
  2,781
  3,664
  4,671
  5,804
  7,062
  8,445
  9,951
  11,577
  13,321
  15,178
  17,001
  19,079
  21,264
  23,554
  25,949
  28,449
  31,054
  33,766
  36,586
  39,519
  42,567
  45,735
  49,028
  52,452
  56,012
  59,715
  63,570
  67,584
  71,765
  76,124
Maintenance CAPEX, $m
  0
  -46
  -58
  -72
  -88
  -106
  -127
  -149
  -174
  -201
  -229
  -260
  -293
  -327
  -364
  -402
  -442
  -484
  -528
  -573
  -621
  -670
  -721
  -774
  -829
  -887
  -947
  -1,009
  -1,073
  -1,140
  -1,210
New CAPEX, $m
  -204
  -227
  -266
  -304
  -344
  -384
  -424
  -464
  -503
  -541
  -578
  -615
  -650
  -685
  -719
  -753
  -787
  -821
  -855
  -890
  -925
  -962
  -1,000
  -1,039
  -1,080
  -1,122
  -1,167
  -1,214
  -1,263
  -1,315
  -1,370
Cash from investing activities, $m
  -960
  -273
  -324
  -376
  -432
  -490
  -551
  -613
  -677
  -742
  -807
  -875
  -943
  -1,012
  -1,083
  -1,155
  -1,229
  -1,305
  -1,383
  -1,463
  -1,546
  -1,632
  -1,721
  -1,813
  -1,909
  -2,009
  -2,114
  -2,223
  -2,336
  -2,455
  -2,580
Free cash flow, $m
  1,240
  2,509
  3,341
  4,295
  5,372
  6,572
  7,894
  9,338
  10,901
  12,579
  14,370
  16,126
  18,136
  20,251
  22,471
  24,793
  27,219
  29,749
  32,383
  35,123
  37,973
  40,936
  44,015
  47,215
  50,543
  54,003
  57,602
  61,348
  65,247
  69,310
  73,543
Issuance/(repayment) of debt, $m
  0
  1,411
  1,639
  1,879
  2,124
  2,371
  2,618
  2,863
  3,103
  3,339
  3,569
  3,794
  4,013
  4,228
  4,440
  4,650
  4,858
  5,067
  5,278
  5,492
  5,711
  5,936
  6,169
  6,411
  6,663
  6,926
  7,202
  7,492
  7,797
  8,119
  8,457
Issuance/(repurchase) of shares, $m
  -1,166
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -1,091
  1,411
  1,639
  1,879
  2,124
  2,371
  2,618
  2,863
  3,103
  3,339
  3,569
  3,794
  4,013
  4,228
  4,440
  4,650
  4,858
  5,067
  5,278
  5,492
  5,711
  5,936
  6,169
  6,411
  6,663
  6,926
  7,202
  7,492
  7,797
  8,119
  8,457
Total cash flow (excl. dividends), $m
  135
  3,920
  4,980
  6,174
  7,495
  8,943
  10,513
  12,201
  14,004
  15,918
  17,939
  19,920
  22,149
  24,479
  26,911
  29,443
  32,077
  34,816
  37,661
  40,616
  43,684
  46,872
  50,184
  53,626
  57,205
  60,929
  64,804
  68,840
  73,045
  77,428
  82,000
Retained Cash Flow (-), $m
  -423
  -707
  -826
  -947
  -1,070
  -1,194
  -1,319
  -1,442
  -1,563
  -1,682
  -1,798
  -1,911
  -2,022
  -2,130
  -2,237
  -2,342
  -2,447
  -2,553
  -2,659
  -2,767
  -2,877
  -2,991
  -3,108
  -3,230
  -3,356
  -3,489
  -3,628
  -3,774
  -3,928
  -4,090
  -4,260
Prev. year cash balance distribution, $m
 
  4,765
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  7,978
  4,154
  5,227
  6,425
  7,748
  9,194
  10,759
  12,441
  14,236
  16,141
  18,009
  20,127
  22,349
  24,674
  27,101
  29,630
  32,263
  35,002
  37,849
  40,807
  43,882
  47,076
  50,397
  53,849
  57,440
  61,176
  65,065
  69,117
  73,338
  77,740
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  7,649
  3,803
  4,549
  5,291
  6,006
  6,672
  7,268
  7,776
  8,178
  8,462
  8,552
  8,589
  8,498
  8,283
  7,956
  7,530
  7,020
  6,446
  5,828
  5,185
  4,539
  3,906
  3,303
  2,743
  2,234
  1,785
  1,396
  1,069
  801
  585
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Adobe Systems Incorporated is a software company. The Company offers products and services used by professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing and engaging with compelling content and experiences. It operates through three segments: Digital Media, Digital Marketing, and Print and Publishing. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses and enterprises to create, publish, promote and monetize their digital content. Its Digital Marketing segment provides solutions and services for how digital advertising and marketing are created, managed, executed, measured and optimized. Its Print and Publishing segment addresses market opportunities ranging from the diverse authoring and publishing needs of technical and business publishing to its legacy type and original equipment manufacturer (OEM) printing businesses.

FINANCIAL RATIOS  of  Adobe Systems (ADBE)

Valuation Ratios
P/E Ratio 64.7
Price to Sales 12.9
Price to Book 10.2
Price to Tangible Book
Price to Cash Flow 34.4
Price to Free Cash Flow 37.9
Growth Rates
Sales Growth Rate 22.1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 10.3%
Cap. Spend. - 3 Yr. Gr. Rate 1.6%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 25.5%
Total Debt to Equity 25.5%
Interest Coverage 23
Management Effectiveness
Return On Assets 10%
Ret/ On Assets - 3 Yr. Avg. 6.3%
Return On Total Capital 12.8%
Ret/ On T. Cap. - 3 Yr. Avg. 7.8%
Return On Equity 16.2%
Return On Equity - 3 Yr. Avg. 9.8%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 86%
Gross Margin - 3 Yr. Avg. 85.2%
EBITDA Margin 31.3%
EBITDA Margin - 3 Yr. Avg. 25.2%
Operating Margin 25.5%
Oper. Margin - 3 Yr. Avg. 18.1%
Pre-Tax Margin 24.5%
Pre-Tax Margin - 3 Yr. Avg. 17.1%
Net Profit Margin 20%
Net Profit Margin - 3 Yr. Avg. 13.2%
Effective Tax Rate 18.5%
Eff/ Tax Rate - 3 Yr. Avg. 24.1%
Payout Ratio 0%

ADBE stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ADBE stock intrinsic value calculation we used $5854 million for the last fiscal year's total revenue generated by Adobe Systems. The default revenue input number comes from 2016 income statement of Adobe Systems. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ADBE stock valuation model: a) initial revenue growth rate of 26.7% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for ADBE is calculated based on our internal credit rating of Adobe Systems, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Adobe Systems.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ADBE stock the variable cost ratio is equal to 44.3%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $1810 million in the base year in the intrinsic value calculation for ADBE stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Adobe Systems.

Corporate tax rate of 27% is the nominal tax rate for Adobe Systems. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ADBE stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ADBE are equal to 14.6%.

Life of production assets of 18.8 years is the average useful life of capital assets used in Adobe Systems operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ADBE is equal to -29.7%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $7425 million for Adobe Systems - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 495.477 million for Adobe Systems is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Adobe Systems at the current share price and the inputted number of shares is $75.8 billion.

Management's discussion and analysis

ACQUISITIONS

During fiscal 2015, we completed our acquisition of privately held Fotolia, a leading marketplace for royalty-free photos, images, graphics and HD videos, for $807.5 million. During fiscal 2015, we integrated Fotolia into our Digital Media reportable segment.
We also completed other immaterial business acquisitions during the fiscal years presented. Pro forma information has not been presented for any of our fiscal 2016, 2015 and 2014 acquisitions as the impact to our Consolidated Financial Statements was not material.
Subsequent to December 2, 2016, we completed our acquisition of TubeMogul, a publicly held video advertising platform company, for approximately $549 million in cash consideration, as well as the assumption of certain employee equity awards. The initial purchase accounting for this transaction has not yet been completed given the short period of time between the acquisition date and the issuance of these financial statements. TubeMogul will be integrated into our Digital Marketing reportable segment for financial reporting purposes in the first quarter of fiscal 2017.

Overview of 2016

For fiscal 2016, we reported strong financial results consistent with the continued execution of our long-term plans for our two strategic growth areas, Digital Media and Digital Marketing, while continuing to market and license a broad portfolio of products and solutions.
In our Digital Media segment, we are a market leader with Adobe Creative Cloud, our subscription-based offering for creating and publishing content and applications. Creative Cloud delivers value through frequent product updates, storage and access to user files stored in the cloud with syncing of files across users' machines, access to marketplace, social and community-
based features with our Adobe Stock and Behance services, app creation capabilities and affordable point pricing for cost-sensitive customers.
We offer Creative Cloud for individuals, students, teams and enterprises. These Creative Cloud offerings address the multiple routes to market we use to license our creative software to targeted customers. Adoption of Creative Cloud has transformed our business model, and we continue to expect this to drive higher long-term revenue growth through an expansion of our customer base by acquiring new users through a lower cost of entry and delivery of additional features and value, as well as keeping existing customers current on our latest release. We have also built out a marketplace for Creative Cloud subscribers to enable the delivery and purchase of stock content in our Adobe Stock service. Overall, our strategy with Creative Cloud is designed to enable us to increase our revenue with users, attract more new customers, and grow a recurring and predictable revenue stream that is recognized ratably.
We continue to implement strategies that will accelerate awareness, consideration and purchase of subscriptions to our Creative Cloud offerings. These strategies include increasing the value Creative Cloud users receive, such as offering new mobile applications, as well as targeted promotions and offers that attract past customers and potential users to try out and ultimately subscribe to Creative Cloud. Because of the shift towards Creative Cloud subscriptions and Enterprise Term License Agreements (“ETLAs”), revenue from perpetual licensing of our Creative products is now immaterial to our business.
We are also a market leader with our Adobe Document Cloud offerings built around our Acrobat family of products, the Adobe Reader and a set of integrated cloud-based document services, including Adobe Sign. Adobe Acrobat provides reliable creation and exchange of electronic documents, regardless of platform or application source type. Adobe Document Cloud, which we believe enhances the way people manage critical documents at home, in the office and across devices, includes Adobe Acrobat DC and Adobe Sign, and a set of integrated services enables users to create, review, approve, sign and track documents whether on a desktop or mobile device. Adobe Acrobat DC, with a touch-enabled user interface, is offered both through subscription and perpetual licenses.
Annualized Recurring Revenue (“ARR”) is currently the key performance metric our management uses to assess the health and trajectory of our overall Digital Media segment. ARR should be viewed independently of revenue, deferred revenue and unbilled deferred revenue as ARR is a performance metric and is not intended to be combined with any of these items. We adjust our reported ARR on an annual basis to reflect any material exchange rates changes. Our reported ARR results in fiscal 2016 are based on currency rates set at the start of fiscal 2016 and held constant throughout the year. We calculate ARR as follows:
Creative ARR
Annual Value of Creative Cloud Subscriptions and Services
+
Annual Digital Publishing Suite Contract Value
+
Annual Creative ETLA Contract Value
Document Cloud ARR
Annual Value of Document Cloud Subscriptions and Services
+
Annual Document Cloud ETLA Contract Value
Digital Media ARR
Creative ARR
+
Document Cloud ARR
Creative ARR exiting fiscal 2016 was $3.54 billion, up from $2.50 billion at the end of fiscal 2015. Document Cloud ARR exiting fiscal 2016 was $475 million, up from $385 million at the end of fiscal 2015. Total Digital Media ARR grew to $4.01 billion at the end of fiscal 2016, up from $2.88 billion at the end of fiscal 2015. Revaluing our ending ARR for fiscal 2016 using currency rates at the beginning of fiscal 2017, our Digital Media ARR at the end of fiscal 2016 would be $3.99 billion or approximately $27 million lower than the ARR reported above.
Our success in driving growth in ARR has positively affected our revenue growth. Creative revenue in fiscal 2016 was $3.18 billion, up from $2.30 billion in fiscal 2015 and representing 38% year-over-year growth. Document Cloud revenue in fiscal 2016 was $764.9 million, slightly down from $792.3 million in fiscal 2015 as we continue to transition Document Cloud to a subscription-based model. Total Digital Media segment revenue grew to $3.94 billion in fiscal 2016, up from $3.10 billion in fiscal 2015 and representing 27% year-over-year growth.
We are a market leader in the fast-growing category addressed by our Digital Marketing segment. Our Digital Marketing business provides comprehensive solutions that include analytics, social marketing, targeting, media optimization, digital experience management, cross-channel campaign management, audience management, premium video delivery and monetization. We deliver these capabilities through our Adobe Marketing Cloud, an integrated offering enabling marketers to measure, personalize and optimize marketing campaigns and digital experiences across channels for optimal marketing performance. With its broad set of solutions, including Adobe Analytics, Adobe Target, Adobe Social, Adobe Media Optimizer, Adobe Experience Manager, Adobe Campaign, Adobe Audience Manager and Adobe Primetime, as well as real-time dashboards and a collaborative interface, customers of Adobe Marketing Cloud are able to combine data, insights and digital content to deliver a personalized, relevant experience to their constituents.
In addition to chief marketing officers and digital marketers, users of our Adobe Marketing Cloud solutions include marketing professionals such as search engine marketers, media managers, media buyers and marketing research analysts. Customers also include web content editors, web analysts and web marketing managers. These customers often are involved in workflows that utilize other Adobe products, such as our Digital Media offerings and our video workflow and delivery technologies. By combining the creativity of our Digital Media business with the science of our Digital Marketing business, we help our customers to more efficiently and effectively make, manage, measure and monetize their content across every channel with an end-to-end workflow and feedback loop.
We utilize a direct salesforce to market and license our Adobe Marketing Cloud solutions, as well as an extensive ecosystem of partners including marketing agencies, systems integrators and developers that help license and deploy our solutions to their customers. We have made significant investments to broaden the scale and size of all of these routes to market, and our recent financial results reflect the success of these investments. In fiscal 2016, we achieved record Marketing Cloud revenue of $1.63 billion, which represents 20% year-over-year revenue growth. In December 2016, we acquired TubeMogul and we will integrate TubeMogul in our Digital Marketing business in the first quarter of fiscal 2017. We expect that the addition of TubeMogul and sustained demand across our portfolio of Marketing Cloud solutions will drive revenue growth in future years.
Financial Performance Summary for Fiscal 2016
   
Total Digital Media ARR of approximately $4.01 billion as of December 2, 2016 increased by $1.13 billion, or 39%, from $2.88 billion as of November 27, 2015. The change in our Digital Media ARR was primarily due to increases in the number of paid Creative Cloud and Document Cloud subscriptions, and continued adoption of our ETLAs.
   
Creative revenue of $3.18 billion increased by $873.2 million, or 38%, during fiscal 2016, from $2.30 billion in fiscal 2015. The increase was primarily due to the increase in subscription revenue associated with our Creative Cloud offerings, and to a lesser extent, increases in revenue associated with our Creative Cloud Photography Plan subscription offering.
   
Adobe Marketing Cloud revenue of $1.63 billion increased by $272.7 million, or 20%, during fiscal 2016, from $1.36 billion in fiscal 2015. The increase was primarily due to continued adoption of our Adobe Experience Manager (“AEM”) offering and increases in Adobe Analytics and Adobe Campaign revenue.
   
Our total deferred revenue of $2.01 billion as of December 2, 2016 increased by $529.5 million, or 36%, from $1.49 billion as of November 27, 2015. The increase was primarily due to increases in Creative Cloud individual and team subscriptions, ETLAs and new contracts and renewals for our Adobe Marketing Cloud solutions.
   
Cost of revenue of $819.9 million increased by $75.6 million, or 10%, during fiscal 2016, from $744.3 million in fiscal 2015. The increase was primarily due to increases in costs associated with compensation and related benefits driven by additional headcount and increases in data center costs.
   
Operating expenses of $3.54 billion increased by $392.8 million, or 12%, during fiscal 2016, from $3.15 billion in fiscal 2015. The increase was primarily due to higher costs associated with compensation and related benefits driven by additional headcount.
   
Net income of $1.17 billion increased by $539.2 million, or 86%, during fiscal 2016 from $629.6 million in fiscal 2015 primarily due to subscription revenue growth.
   
Net cash flow from operations of $2.20 billion during fiscal 2016 increased by $730.2 million, or 50%, from $1.47 billion during fiscal 2015 primarily due to higher net income and the increase in deferred revenue.

[Source: Form 10-K dated 2017-01-20]

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Financial statements of ADBE
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