Intrinsic value of Adobe Systems - ADBE

Previous Close

$147.97

  Intrinsic Value

$236.12

stock screener

  Rating & Target

str. buy

+60%

  Value-price divergence*

-25%

Previous close

$147.97

 
Intrinsic value

$236.12

 
Up/down potential

+60%

 
Rating

str. buy

 
Value-price divergence*

-25%

*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 72.8

 

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
  22.10
  20.39
  18.85
  17.47
  16.22
  15.10
  14.09
  13.18
  12.36
  11.62
  10.96
  10.37
  9.83
  9.35
  8.91
  8.52
  8.17
  7.85
  7.57
  7.31
  7.08
  6.87
  6.68
  6.52
  6.36
  6.23
  6.10
  5.99
  5.89
  5.81
Revenue, $m
  5,854
  7,148
  8,605
  10,227
  12,014
  13,962
  16,070
  18,334
  20,750
  23,315
  26,025
  28,878
  31,872
  35,005
  38,277
  41,688
  45,240
  48,935
  52,778
  56,771
  60,921
  65,234
  69,716
  74,376
  79,222
  84,264
  89,511
  94,976
  100,669
  106,603
  112,792
Variable operating expenses, $m
 
  3,047
  3,558
  4,127
  4,753
  5,436
  6,176
  6,969
  7,817
  8,716
  9,666
  10,126
  11,176
  12,275
  13,422
  14,618
  15,864
  17,159
  18,507
  19,907
  21,362
  22,874
  24,446
  26,080
  27,779
  29,547
  31,387
  33,303
  35,300
  37,381
  39,551
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
  4,902
  5,460
  6,076
  6,751
  7,484
  8,275
  9,121
  10,022
  10,976
  11,983
  12,501
  13,610
  14,770
  15,979
  17,239
  18,551
  19,913
  21,330
  22,801
  24,328
  25,914
  27,562
  29,274
  31,053
  32,903
  34,827
  36,829
  38,914
  41,085
  43,348
Operating income, $m
  1,494
  2,246
  3,146
  4,151
  5,263
  6,478
  7,795
  9,213
  10,728
  12,339
  14,042
  16,377
  18,262
  20,235
  22,297
  24,448
  26,689
  29,022
  31,448
  33,971
  36,593
  39,319
  42,154
  45,102
  48,169
  51,361
  54,684
  58,147
  61,755
  65,518
  69,445
EBITDA, $m
  1,826
  2,842
  3,753
  4,771
  5,896
  7,127
  8,461
  9,896
  11,430
  13,060
  14,785
  16,602
  18,509
  20,507
  22,595
  24,772
  27,041
  29,402
  31,858
  34,412
  37,066
  39,826
  42,695
  45,679
  48,784
  52,015
  55,379
  58,884
  62,537
  66,346
  70,320
Interest expense (income), $m
  66
  66
  107
  153
  204
  261
  322
  389
  460
  536
  617
  702
  792
  887
  986
  1,089
  1,196
  1,308
  1,425
  1,546
  1,672
  1,803
  1,939
  2,080
  2,227
  2,380
  2,539
  2,705
  2,877
  3,057
  3,244
Earnings before tax, $m
  1,435
  2,179
  3,038
  3,998
  5,058
  6,217
  7,473
  8,824
  10,268
  11,802
  13,425
  15,675
  17,469
  19,348
  21,312
  23,360
  25,493
  27,713
  30,023
  32,424
  34,921
  37,516
  40,215
  43,021
  45,941
  48,980
  52,145
  55,442
  58,878
  62,462
  66,201
Tax expense, $m
  266
  588
  820
  1,080
  1,366
  1,679
  2,018
  2,383
  2,772
  3,187
  3,625
  4,232
  4,717
  5,224
  5,754
  6,307
  6,883
  7,483
  8,106
  8,755
  9,429
  10,129
  10,858
  11,616
  12,404
  13,225
  14,079
  14,969
  15,897
  16,865
  17,874
Net income, $m
  1,169
  1,591
  2,218
  2,919
  3,693
  4,539
  5,456
  6,442
  7,496
  8,616
  9,800
  11,443
  12,753
  14,124
  15,558
  17,053
  18,610
  20,231
  21,917
  23,670
  25,492
  27,387
  29,357
  31,406
  33,537
  35,756
  38,066
  40,473
  42,981
  45,597
  48,327

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
  9,685
  11,660
  13,858
  16,279
  18,919
  21,775
  24,843
  28,117
  31,592
  35,265
  39,131
  43,187
  47,432
  51,865
  56,488
  61,301
  66,308
  71,515
  76,926
  82,549
  88,393
  94,466
  100,780
  107,347
  114,178
  121,289
  128,693
  136,408
  144,449
  152,835
Adjusted assets (=assets-cash), $m
  7,932
  9,685
  11,660
  13,858
  16,279
  18,919
  21,775
  24,843
  28,117
  31,592
  35,265
  39,131
  43,187
  47,432
  51,865
  56,488
  61,301
  66,308
  71,515
  76,926
  82,549
  88,393
  94,466
  100,780
  107,347
  114,178
  121,289
  128,693
  136,408
  144,449
  152,835
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
  1,044
  1,256
  1,493
  1,754
  2,038
  2,346
  2,677
  3,030
  3,404
  3,800
  4,216
  4,653
  5,111
  5,588
  6,086
  6,605
  7,145
  7,706
  8,289
  8,894
  9,524
  10,179
  10,859
  11,566
  12,302
  13,069
  13,866
  14,698
  15,564
  16,468
Working capital, $m
  3,028
  -715
  -861
  -1,023
  -1,201
  -1,396
  -1,607
  -1,833
  -2,075
  -2,332
  -2,603
  -2,888
  -3,187
  -3,500
  -3,828
  -4,169
  -4,524
  -4,894
  -5,278
  -5,677
  -6,092
  -6,523
  -6,972
  -7,438
  -7,922
  -8,426
  -8,951
  -9,498
  -10,067
  -10,660
  -11,279
Total debt, $m
  1,892
  3,061
  4,374
  5,836
  7,445
  9,201
  11,100
  13,140
  15,318
  17,629
  20,071
  22,642
  25,339
  28,162
  31,110
  34,184
  37,385
  40,715
  44,177
  47,776
  51,515
  55,401
  59,440
  63,639
  68,006
  72,549
  77,277
  82,201
  87,331
  92,678
  98,255
Total liabilities, $m
  5,272
  6,441
  7,754
  9,216
  10,825
  12,581
  14,480
  16,520
  18,698
  21,009
  23,451
  26,022
  28,719
  31,542
  34,490
  37,564
  40,765
  44,095
  47,557
  51,156
  54,895
  58,781
  62,820
  67,019
  71,386
  75,929
  80,657
  85,581
  90,711
  96,058
  101,635
Total equity, $m
  7,425
  3,245
  3,906
  4,642
  5,453
  6,338
  7,295
  8,322
  9,419
  10,583
  11,814
  13,109
  14,468
  15,890
  17,375
  18,923
  20,536
  22,213
  23,957
  25,770
  27,654
  29,612
  31,646
  33,761
  35,961
  38,250
  40,632
  43,112
  45,697
  48,390
  51,200
Total liabilities and equity, $m
  12,697
  9,686
  11,660
  13,858
  16,278
  18,919
  21,775
  24,842
  28,117
  31,592
  35,265
  39,131
  43,187
  47,432
  51,865
  56,487
  61,301
  66,308
  71,514
  76,926
  82,549
  88,393
  94,466
  100,780
  107,347
  114,179
  121,289
  128,693
  136,408
  144,448
  152,835
Debt-to-equity ratio
  0.255
  0.940
  1.120
  1.260
  1.370
  1.450
  1.520
  1.580
  1.630
  1.670
  1.700
  1.730
  1.750
  1.770
  1.790
  1.810
  1.820
  1.830
  1.840
  1.850
  1.860
  1.870
  1.880
  1.880
  1.890
  1.900
  1.900
  1.910
  1.910
  1.920
  1.920
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
  1,591
  2,218
  2,919
  3,693
  4,539
  5,456
  6,442
  7,496
  8,616
  9,800
  11,443
  12,753
  14,124
  15,558
  17,053
  18,610
  20,231
  21,917
  23,670
  25,492
  27,387
  29,357
  31,406
  33,537
  35,756
  38,066
  40,473
  42,981
  45,597
  48,327
Depreciation, amort., depletion, $m
  332
  596
  607
  620
  634
  649
  665
  683
  702
  722
  743
  224
  248
  272
  297
  324
  351
  380
  410
  441
  473
  507
  541
  578
  615
  654
  695
  738
  782
  828
  876
Funds from operations, $m
  2,520
  2,187
  2,825
  3,539
  4,326
  5,188
  6,121
  7,125
  8,198
  9,337
  10,543
  11,667
  13,000
  14,396
  15,855
  17,376
  18,961
  20,611
  22,327
  24,111
  25,965
  27,894
  29,898
  31,983
  34,152
  36,410
  38,761
  41,210
  43,763
  46,425
  49,203
Change in working capital, $m
  320
  -129
  -146
  -162
  -179
  -195
  -211
  -226
  -242
  -256
  -271
  -285
  -299
  -313
  -327
  -341
  -355
  -370
  -384
  -399
  -415
  -431
  -448
  -466
  -485
  -504
  -525
  -546
  -569
  -593
  -619
Cash from operations, $m
  2,200
  2,316
  2,971
  3,701
  4,505
  5,382
  6,332
  7,351
  8,439
  9,594
  10,814
  11,952
  13,299
  14,709
  16,182
  17,717
  19,316
  20,980
  22,711
  24,510
  26,380
  28,325
  30,346
  32,449
  34,637
  36,914
  39,286
  41,757
  44,332
  47,018
  49,821
Maintenance CAPEX, $m
  0
  -46
  -56
  -67
  -79
  -93
  -108
  -125
  -142
  -161
  -181
  -202
  -224
  -248
  -272
  -297
  -324
  -351
  -380
  -410
  -441
  -473
  -507
  -541
  -578
  -615
  -654
  -695
  -738
  -782
  -828
New CAPEX, $m
  -204
  -188
  -213
  -237
  -261
  -284
  -308
  -331
  -353
  -374
  -396
  -417
  -437
  -457
  -478
  -498
  -519
  -540
  -561
  -583
  -606
  -630
  -654
  -680
  -708
  -736
  -766
  -798
  -831
  -866
  -904
Cash from investing activities, $m
  -960
  -234
  -269
  -304
  -340
  -377
  -416
  -456
  -495
  -535
  -577
  -619
  -661
  -705
  -750
  -795
  -843
  -891
  -941
  -993
  -1,047
  -1,103
  -1,161
  -1,221
  -1,286
  -1,351
  -1,420
  -1,493
  -1,569
  -1,648
  -1,732
Free cash flow, $m
  1,240
  2,083
  2,703
  3,397
  4,165
  5,005
  5,916
  6,896
  7,944
  9,058
  10,237
  11,333
  12,638
  14,005
  15,432
  16,922
  18,474
  20,090
  21,770
  23,517
  25,334
  27,222
  29,185
  31,227
  33,352
  35,563
  37,865
  40,264
  42,764
  45,370
  48,090
Issuance/(repayment) of debt, $m
  0
  1,169
  1,313
  1,462
  1,610
  1,756
  1,899
  2,040
  2,177
  2,311
  2,442
  2,571
  2,697
  2,823
  2,948
  3,074
  3,201
  3,330
  3,462
  3,598
  3,739
  3,886
  4,039
  4,199
  4,367
  4,543
  4,729
  4,924
  5,130
  5,347
  5,577
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
  1,169
  1,313
  1,462
  1,610
  1,756
  1,899
  2,040
  2,177
  2,311
  2,442
  2,571
  2,697
  2,823
  2,948
  3,074
  3,201
  3,330
  3,462
  3,598
  3,739
  3,886
  4,039
  4,199
  4,367
  4,543
  4,729
  4,924
  5,130
  5,347
  5,577
Total cash flow (excl. dividends), $m
  135
  3,252
  4,016
  4,859
  5,774
  6,760
  7,815
  8,936
  10,121
  11,370
  12,679
  13,904
  15,336
  16,827
  18,381
  19,996
  21,675
  23,420
  25,232
  27,116
  29,073
  31,108
  33,224
  35,426
  37,719
  40,106
  42,594
  45,188
  47,894
  50,718
  53,667
Retained Cash Flow (-), $m
  -423
  -585
  -662
  -736
  -811
  -884
  -957
  -1,028
  -1,097
  -1,164
  -1,230
  -1,295
  -1,359
  -1,422
  -1,485
  -1,548
  -1,612
  -1,677
  -1,744
  -1,813
  -1,884
  -1,958
  -2,035
  -2,115
  -2,200
  -2,289
  -2,382
  -2,481
  -2,584
  -2,694
  -2,809
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
 
  7,432
  3,355
  4,123
  4,964
  5,876
  6,858
  7,908
  9,024
  10,205
  11,449
  12,609
  13,977
  15,405
  16,895
  18,447
  20,062
  21,742
  23,488
  25,303
  27,189
  29,150
  31,190
  33,311
  35,519
  37,817
  40,212
  42,707
  45,309
  48,024
  50,857
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
 
  7,126
  3,071
  3,588
  4,087
  4,555
  4,977
  5,343
  5,640
  5,862
  6,002
  5,988
  5,964
  5,857
  5,672
  5,416
  5,098
  4,731
  4,326
  3,896
  3,455
  3,015
  2,588
  2,183
  1,809
  1,471
  1,173
  917
  701
  524
  383
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 operates as a diversified software company worldwide. 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. This segment’s flagship product is Creative Cloud, a subscription service that allows customers to download and install the latest versions of its creative products. This segment serves traditional content creators, Web application developers, and digital media professionals, as well as their management in marketing departments and agencies, companies, and publishers. The company’s Digital Marketing segment offers solutions for how digital advertising and marketing are created, managed, executed, measured, and optimized. This segment provides analytics, social marketing, targeting, advertising and media optimization, digital experience management, cross-channel campaign management, and audience management solutions, as well as video delivery and monetization to digital marketers, advertisers, publishers, merchandisers, Web analysts, chief marketing officers, chief information officers, and chief revenue officers. Its Print and Publishing segment offers products and services, such as eLearning solutions, technical document publishing, Web application development, and high-end printing, as well as publishing needs of technical and business, and original equipment manufacturers (OEMs) printing businesses. The company markets and licenses its products and services directly to enterprise customers through its sales force, as well as to end-users through app stores and through its Website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, and OEMs. The company was founded in 1982 and is headquartered in San Jose, California.

FINANCIAL RATIOS  of  Adobe Systems (ADBE)

Valuation Ratios
P/E Ratio 62.6
Price to Sales 12.5
Price to Book 9.8
Price to Tangible Book
Price to Cash Flow 33.2
Price to Free Cash Flow 36.6
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 22.1% 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 -10%. 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 492.231 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 $72.8 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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Stock chart of ADBE Financial statements of ADBE
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