Intrinsic value of Adobe Systems - ADBE

Previous Close

$257.54

  Intrinsic Value

$199.05

stock screener

  Rating & Target

sell

-23%

Previous close

$257.54

 
Intrinsic value

$199.05

 
Up/down potential

-23%

 
Rating

sell

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 2017), $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 127.2

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   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
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  24.70
  22.73
  20.96
  19.36
  17.93
  16.63
  15.47
  14.42
  13.48
  12.63
  11.87
  11.18
  10.56
  10.01
  9.51
  9.06
  8.65
  8.29
  7.96
  7.66
  7.40
  7.16
  6.94
  6.75
  6.57
  6.41
  6.27
  6.15
  6.03
  5.93
Revenue, $m
  9,106
  11,175
  13,517
  16,134
  19,027
  22,191
  25,624
  29,320
  33,272
  37,475
  41,923
  46,611
  51,535
  56,692
  62,081
  67,704
  73,560
  79,655
  85,993
  92,581
  99,427
  106,542
  113,936
  121,622
  129,614
  137,928
  146,580
  155,588
  164,972
  174,751
Variable operating expenses, $m
  4,709
  5,638
  6,690
  7,865
  9,164
  10,584
  12,126
  13,785
  15,560
  17,447
  18,823
  20,928
  23,139
  25,454
  27,874
  30,399
  33,028
  35,765
  38,610
  41,569
  44,643
  47,837
  51,157
  54,608
  58,196
  61,929
  65,814
  69,859
  74,072
  78,463
Fixed operating expenses, $m
  1,291
  1,319
  1,348
  1,378
  1,408
  1,439
  1,471
  1,503
  1,536
  1,570
  1,605
  1,640
  1,676
  1,713
  1,751
  1,789
  1,828
  1,869
  1,910
  1,952
  1,995
  2,039
  2,083
  2,129
  2,176
  2,224
  2,273
  2,323
  2,374
  2,426
Total operating expenses, $m
  6,000
  6,957
  8,038
  9,243
  10,572
  12,023
  13,597
  15,288
  17,096
  19,017
  20,428
  22,568
  24,815
  27,167
  29,625
  32,188
  34,856
  37,634
  40,520
  43,521
  46,638
  49,876
  53,240
  56,737
  60,372
  64,153
  68,087
  72,182
  76,446
  80,889
Operating income, $m
  3,106
  4,218
  5,479
  6,892
  8,455
  10,168
  12,027
  14,031
  16,176
  18,458
  21,495
  24,043
  26,720
  29,525
  32,457
  35,516
  38,704
  42,022
  45,473
  49,061
  52,790
  56,667
  60,696
  64,885
  69,242
  73,775
  78,493
  83,407
  88,526
  93,863
EBITDA, $m
  4,586
  5,893
  7,376
  9,035
  10,872
  12,883
  15,067
  17,420
  19,938
  22,616
  25,453
  28,443
  31,585
  34,876
  38,317
  41,907
  45,648
  49,541
  53,591
  57,800
  62,176
  66,724
  71,451
  76,366
  81,478
  86,796
  92,331
  98,095
  104,100
  110,359
Interest expense (income), $m
  0
  102
  183
  276
  381
  499
  629
  771
  925
  1,091
  1,269
  1,458
  1,658
  1,868
  2,089
  2,321
  2,563
  2,816
  3,079
  3,353
  3,638
  3,934
  4,242
  4,561
  4,894
  5,239
  5,598
  5,972
  6,361
  6,766
  7,187
Earnings before tax, $m
  3,004
  4,035
  5,203
  6,511
  7,956
  9,539
  11,257
  13,106
  15,085
  17,189
  20,037
  22,385
  24,852
  27,435
  30,135
  32,952
  35,887
  38,942
  42,120
  45,423
  48,856
  52,425
  56,134
  59,991
  64,003
  68,177
  72,522
  77,046
  81,761
  86,675
Tax expense, $m
  811
  1,089
  1,405
  1,758
  2,148
  2,576
  3,039
  3,539
  4,073
  4,641
  5,410
  6,044
  6,710
  7,407
  8,137
  8,897
  9,690
  10,514
  11,372
  12,264
  13,191
  14,155
  15,156
  16,198
  17,281
  18,408
  19,581
  20,802
  22,075
  23,402
Net income, $m
  2,193
  2,946
  3,799
  4,753
  5,808
  6,963
  8,217
  9,568
  11,012
  12,548
  14,627
  16,341
  18,142
  20,028
  21,999
  24,055
  26,198
  28,428
  30,747
  33,159
  35,665
  38,270
  40,978
  43,794
  46,722
  49,769
  52,941
  56,244
  59,685
  63,273

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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
Total assets, $m
  15,278
  18,750
  22,680
  27,071
  31,924
  37,234
  42,993
  49,194
  55,825
  62,877
  70,340
  78,206
  86,467
  95,121
  104,163
  113,597
  123,423
  133,649
  144,284
  155,337
  166,825
  178,762
  191,168
  204,064
  217,474
  231,423
  245,940
  261,055
  276,799
  293,207
Adjusted assets (=assets-cash), $m
  15,278
  18,750
  22,680
  27,071
  31,924
  37,234
  42,993
  49,194
  55,825
  62,877
  70,340
  78,206
  86,467
  95,121
  104,163
  113,597
  123,423
  133,649
  144,284
  155,337
  166,825
  178,762
  191,168
  204,064
  217,474
  231,423
  245,940
  261,055
  276,799
  293,207
Revenue / Adjusted assets
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
  0.596
Average production assets, $m
  8,596
  10,549
  12,760
  15,231
  17,961
  20,948
  24,189
  27,678
  31,409
  35,376
  39,575
  44,000
  48,649
  53,517
  58,605
  63,912
  69,441
  75,194
  81,177
  87,397
  93,860
  100,576
  107,556
  114,811
  122,356
  130,204
  138,372
  146,876
  155,734
  164,965
Working capital, $m
  -146
  -179
  -216
  -258
  -304
  -355
  -410
  -469
  -532
  -600
  -671
  -746
  -825
  -907
  -993
  -1,083
  -1,177
  -1,274
  -1,376
  -1,481
  -1,591
  -1,705
  -1,823
  -1,946
  -2,074
  -2,207
  -2,345
  -2,489
  -2,640
  -2,796
Total debt, $m
  3,384
  5,106
  7,055
  9,233
  11,640
  14,274
  17,131
  20,206
  23,495
  26,993
  30,695
  34,596
  38,694
  42,986
  47,471
  52,150
  57,024
  62,096
  67,370
  72,853
  78,551
  84,472
  90,625
  97,022
  103,673
  110,592
  117,792
  125,289
  133,098
  141,237
Total liabilities, $m
  7,578
  9,300
  11,249
  13,427
  15,834
  18,468
  21,325
  24,400
  27,689
  31,187
  34,889
  38,790
  42,888
  47,180
  51,665
  56,344
  61,218
  66,290
  71,565
  77,047
  82,745
  88,666
  94,819
  101,216
  107,867
  114,786
  121,986
  129,483
  137,292
  145,431
Total equity, $m
  7,700
  9,450
  11,431
  13,644
  16,090
  18,766
  21,669
  24,794
  28,136
  31,690
  35,452
  39,416
  43,580
  47,941
  52,498
  57,253
  62,205
  67,359
  72,719
  78,290
  84,080
  90,096
  96,349
  102,848
  109,607
  116,637
  123,954
  131,571
  139,507
  147,776
Total liabilities and equity, $m
  15,278
  18,750
  22,680
  27,071
  31,924
  37,234
  42,994
  49,194
  55,825
  62,877
  70,341
  78,206
  86,468
  95,121
  104,163
  113,597
  123,423
  133,649
  144,284
  155,337
  166,825
  178,762
  191,168
  204,064
  217,474
  231,423
  245,940
  261,054
  276,799
  293,207
Debt-to-equity ratio
  0.440
  0.540
  0.620
  0.680
  0.720
  0.760
  0.790
  0.810
  0.840
  0.850
  0.870
  0.880
  0.890
  0.900
  0.900
  0.910
  0.920
  0.920
  0.930
  0.930
  0.930
  0.940
  0.940
  0.940
  0.950
  0.950
  0.950
  0.950
  0.950
  0.960
Adjusted equity ratio
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504
  0.504

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  2,193
  2,946
  3,799
  4,753
  5,808
  6,963
  8,217
  9,568
  11,012
  12,548
  14,627
  16,341
  18,142
  20,028
  21,999
  24,055
  26,198
  28,428
  30,747
  33,159
  35,665
  38,270
  40,978
  43,794
  46,722
  49,769
  52,941
  56,244
  59,685
  63,273
Depreciation, amort., depletion, $m
  1,480
  1,676
  1,897
  2,144
  2,417
  2,716
  3,040
  3,388
  3,762
  4,158
  3,958
  4,400
  4,865
  5,352
  5,860
  6,391
  6,944
  7,519
  8,118
  8,740
  9,386
  10,058
  10,756
  11,481
  12,236
  13,020
  13,837
  14,688
  15,573
  16,497
Funds from operations, $m
  3,673
  4,621
  5,695
  6,897
  8,225
  9,679
  11,257
  12,956
  14,774
  16,707
  18,585
  20,741
  23,007
  25,379
  27,859
  30,447
  33,142
  35,947
  38,865
  41,898
  45,051
  48,328
  51,734
  55,275
  58,958
  62,789
  66,778
  70,931
  75,259
  79,769
Change in working capital, $m
  -29
  -33
  -37
  -42
  -46
  -51
  -55
  -59
  -63
  -67
  -71
  -75
  -79
  -83
  -86
  -90
  -94
  -98
  -101
  -105
  -110
  -114
  -118
  -123
  -128
  -133
  -138
  -144
  -150
  -156
Cash from operations, $m
  3,702
  4,654
  5,733
  6,938
  8,271
  9,730
  11,312
  13,015
  14,837
  16,774
  18,656
  20,816
  23,085
  25,462
  27,946
  30,536
  33,236
  36,045
  38,966
  42,004
  45,161
  48,442
  51,852
  55,398
  59,086
  62,922
  66,916
  71,075
  75,409
  79,926
Maintenance CAPEX, $m
  -689
  -860
  -1,055
  -1,276
  -1,523
  -1,796
  -2,095
  -2,419
  -2,768
  -3,141
  -3,538
  -3,958
  -4,400
  -4,865
  -5,352
  -5,860
  -6,391
  -6,944
  -7,519
  -8,118
  -8,740
  -9,386
  -10,058
  -10,756
  -11,481
  -12,236
  -13,020
  -13,837
  -14,688
  -15,573
New CAPEX, $m
  -1,705
  -1,954
  -2,211
  -2,471
  -2,730
  -2,987
  -3,241
  -3,489
  -3,731
  -3,968
  -4,199
  -4,425
  -4,648
  -4,868
  -5,088
  -5,307
  -5,529
  -5,753
  -5,983
  -6,219
  -6,463
  -6,716
  -6,980
  -7,256
  -7,545
  -7,848
  -8,167
  -8,504
  -8,858
  -9,232
Cash from investing activities, $m
  -2,394
  -2,814
  -3,266
  -3,747
  -4,253
  -4,783
  -5,336
  -5,908
  -6,499
  -7,109
  -7,737
  -8,383
  -9,048
  -9,733
  -10,440
  -11,167
  -11,920
  -12,697
  -13,502
  -14,337
  -15,203
  -16,102
  -17,038
  -18,012
  -19,026
  -20,084
  -21,187
  -22,341
  -23,546
  -24,805
Free cash flow, $m
  1,308
  1,841
  2,467
  3,192
  4,018
  4,946
  5,976
  7,108
  8,338
  9,665
  10,920
  12,433
  14,037
  15,729
  17,506
  19,369
  21,316
  23,347
  25,464
  27,667
  29,958
  32,339
  34,814
  37,387
  40,060
  42,839
  45,728
  48,735
  51,863
  55,121
Issuance/(repayment) of debt, $m
  1,502
  1,722
  1,949
  2,178
  2,407
  2,634
  2,857
  3,076
  3,289
  3,498
  3,702
  3,901
  4,098
  4,292
  4,485
  4,679
  4,874
  5,072
  5,275
  5,483
  5,698
  5,921
  6,153
  6,397
  6,651
  6,919
  7,200
  7,497
  7,809
  8,139
Issuance/(repurchase) of shares, $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 from financing (excl. dividends), $m  
  1,502
  1,722
  1,949
  2,178
  2,407
  2,634
  2,857
  3,076
  3,289
  3,498
  3,702
  3,901
  4,098
  4,292
  4,485
  4,679
  4,874
  5,072
  5,275
  5,483
  5,698
  5,921
  6,153
  6,397
  6,651
  6,919
  7,200
  7,497
  7,809
  8,139
Total cash flow (excl. dividends), $m
  2,811
  3,563
  4,416
  5,370
  6,425
  7,580
  8,833
  10,183
  11,627
  13,163
  14,621
  16,335
  18,135
  20,021
  21,991
  24,048
  26,190
  28,419
  30,739
  33,150
  35,656
  38,260
  40,968
  43,783
  46,711
  49,758
  52,929
  56,231
  59,672
  63,259
Retained Cash Flow (-), $m
  -1,532
  -1,750
  -1,980
  -2,213
  -2,446
  -2,676
  -2,903
  -3,125
  -3,342
  -3,554
  -3,761
  -3,964
  -4,164
  -4,361
  -4,558
  -4,754
  -4,953
  -5,154
  -5,360
  -5,571
  -5,790
  -6,016
  -6,253
  -6,500
  -6,759
  -7,030
  -7,316
  -7,618
  -7,935
  -8,270
Prev. year cash balance distribution, $m
  2,292
  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
  453
  565
  693
  838
  1,000
  1,180
  1,376
  1,589
  1,818
  2,063
  2,323
  2,599
  2,890
  3,195
  3,515
  3,849
  4,198
  4,561
  4,939
  5,332
  5,740
  6,165
  6,606
  7,064
  7,541
  8,036
  8,552
  9,088
  9,646
  10,228
Cash available for distribution, $m
  3,570
  1,813
  2,435
  3,157
  3,979
  4,904
  5,930
  7,058
  8,285
  9,609
  10,860
  12,371
  13,971
  15,659
  17,434
  19,293
  21,237
  23,265
  25,379
  27,578
  29,866
  32,244
  34,715
  37,283
  39,952
  42,727
  45,612
  48,614
  51,737
  54,990
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
  3,423
  1,660
  2,120
  2,599
  3,084
  3,559
  4,006
  4,411
  4,759
  5,038
  5,157
  5,279
  5,312
  5,257
  5,118
  4,903
  4,621
  4,285
  3,908
  3,504
  3,089
  2,675
  2,275
  1,899
  1,554
  1,247
  979
  752
  565
  414
Current shareholders' claim on cash, %
  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 74.9
Price to Sales 17.4
Price to Book 15
Price to Tangible Book
Price to Cash Flow 43.6
Price to Free Cash Flow 46.4
Growth Rates
Sales Growth Rate 24.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -12.7%
Cap. Spend. - 3 Yr. Gr. Rate 3.8%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 22.2%
Total Debt to Equity 22.2%
Interest Coverage 0
Management Effectiveness
Return On Assets 12.4%
Ret/ On Assets - 3 Yr. Avg. 9.5%
Return On Total Capital 17.2%
Ret/ On T. Cap. - 3 Yr. Avg. 12.5%
Return On Equity 21.3%
Return On Equity - 3 Yr. Avg. 15.6%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 86.2%
Gross Margin - 3 Yr. Avg. 85.5%
EBITDA Margin 33.7%
EBITDA Margin - 3 Yr. Avg. 30.5%
Operating Margin 29.7%
Oper. Margin - 3 Yr. Avg. 24.7%
Pre-Tax Margin 29.3%
Pre-Tax Margin - 3 Yr. Avg. 24%
Net Profit Margin 23.2%
Net Profit Margin - 3 Yr. Avg. 18.8%
Effective Tax Rate 20.8%
Eff/ Tax Rate - 3 Yr. Avg. 22.4%
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 $7302 million for the last fiscal year's total revenue generated by Adobe Systems. The default revenue input number comes from 2017 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 24.7% 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 53.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $1263 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 5.4% 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 6.2%.

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 94.4%.

Life of production assets of 10 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 -1.6%. 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 - $8460 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 494 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 $127.2 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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