Intrinsic value of Adobe Systems - ADBE

Previous Close

$245.03

  Intrinsic Value

$237.82

stock screener

  Rating & Target

hold

-3%

Previous close

$245.03

 
Intrinsic value

$237.82

 
Up/down potential

-3%

 
Rating

hold

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 0001), $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 120.7

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  23.90
  22.01
  20.31
  18.78
  17.40
  16.16
  15.04
  14.04
  13.14
  12.32
  11.59
  10.93
  10.34
  9.80
  9.32
  8.89
  8.50
  8.15
  7.84
  7.55
  7.30
  7.07
  6.86
  6.68
  6.51
  6.36
  6.22
  6.10
  5.99
  5.89
Revenue, $m
  9,047
  11,038
  13,279
  15,773
  18,518
  21,510
  24,746
  28,220
  31,927
  35,861
  40,018
  44,392
  48,981
  53,784
  58,798
  64,026
  69,470
  75,133
  81,021
  87,141
  93,500
  100,108
  106,977
  114,118
  121,544
  129,271
  137,313
  145,687
  154,413
  163,508
Variable operating expenses, $m
  4,683
  5,577
  6,583
  7,703
  8,935
  10,278
  11,731
  13,291
  14,956
  16,722
  17,967
  19,931
  21,992
  24,148
  26,400
  28,747
  31,191
  33,734
  36,377
  39,125
  41,980
  44,947
  48,031
  51,237
  54,572
  58,041
  61,652
  65,412
  69,329
  73,413
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
  5,974
  6,896
  7,931
  9,081
  10,343
  11,717
  13,202
  14,794
  16,492
  18,292
  19,572
  21,571
  23,668
  25,861
  28,151
  30,536
  33,019
  35,603
  38,287
  41,077
  43,975
  46,986
  50,114
  53,366
  56,748
  60,265
  63,925
  67,735
  71,703
  75,839
Operating income, $m
  3,073
  4,142
  5,348
  6,693
  8,174
  9,792
  11,544
  13,426
  15,435
  17,569
  20,446
  22,821
  25,313
  27,923
  30,648
  33,490
  36,450
  39,531
  42,734
  46,064
  49,525
  53,122
  56,862
  60,751
  64,796
  69,006
  73,388
  77,953
  82,709
  87,669
EBITDA, $m
  3,922
  5,041
  6,304
  7,711
  9,262
  10,955
  12,788
  14,758
  16,861
  19,094
  21,455
  23,940
  26,548
  29,279
  32,131
  35,104
  38,202
  41,425
  44,777
  48,261
  51,882
  55,647
  59,560
  63,629
  67,861
  72,265
  76,850
  81,626
  86,603
  91,791
Interest expense (income), $m
  0
  102
  180
  270
  370
  482
  606
  740
  886
  1,042
  1,208
  1,385
  1,572
  1,768
  1,975
  2,191
  2,416
  2,651
  2,895
  3,150
  3,415
  3,690
  3,975
  4,272
  4,581
  4,902
  5,236
  5,583
  5,944
  6,321
  6,713
Earnings before tax, $m
  2,972
  3,962
  5,079
  6,322
  7,692
  9,187
  10,804
  12,540
  14,394
  16,361
  19,061
  21,249
  23,545
  25,948
  28,458
  31,074
  33,800
  36,635
  39,584
  42,649
  45,835
  49,147
  52,590
  56,170
  59,894
  63,770
  67,805
  72,009
  76,389
  80,956
Tax expense, $m
  802
  1,070
  1,371
  1,707
  2,077
  2,480
  2,917
  3,386
  3,886
  4,417
  5,146
  5,737
  6,357
  7,006
  7,684
  8,390
  9,126
  9,891
  10,688
  11,515
  12,376
  13,270
  14,199
  15,166
  16,172
  17,218
  18,307
  19,442
  20,625
  21,858
Net income, $m
  2,169
  2,892
  3,707
  4,615
  5,615
  6,706
  7,887
  9,154
  10,507
  11,944
  13,914
  15,512
  17,188
  18,942
  20,774
  22,684
  24,674
  26,744
  28,896
  31,134
  33,460
  35,877
  38,391
  41,004
  43,723
  46,552
  49,498
  52,566
  55,764
  59,098

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
  15,179
  18,520
  22,281
  26,465
  31,070
  36,091
  41,520
  47,350
  53,569
  60,170
  67,144
  74,483
  82,183
  90,241
  98,655
  107,426
  116,560
  126,062
  135,941
  146,209
  156,879
  167,967
  179,492
  191,473
  203,933
  216,897
  230,391
  244,442
  259,082
  274,343
Adjusted assets (=assets-cash), $m
  15,179
  18,520
  22,281
  26,465
  31,070
  36,091
  41,520
  47,350
  53,569
  60,170
  67,144
  74,483
  82,183
  90,241
  98,655
  107,426
  116,560
  126,062
  135,941
  146,209
  156,879
  167,967
  179,492
  191,473
  203,933
  216,897
  230,391
  244,442
  259,082
  274,343
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
  4,813
  5,872
  7,065
  8,391
  9,851
  11,443
  13,165
  15,013
  16,985
  19,078
  21,289
  23,617
  26,058
  28,613
  31,281
  34,062
  36,958
  39,971
  43,103
  46,359
  49,742
  53,258
  56,912
  60,711
  64,662
  68,772
  73,050
  77,506
  82,148
  86,986
Working capital, $m
  -2,605
  -3,179
  -3,824
  -4,543
  -5,333
  -6,195
  -7,127
  -8,127
  -9,195
  -10,328
  -11,525
  -12,785
  -14,107
  -15,490
  -16,934
  -18,440
  -20,007
  -21,638
  -23,334
  -25,096
  -26,928
  -28,831
  -30,809
  -32,866
  -35,005
  -37,230
  -39,546
  -41,958
  -44,471
  -47,090
Total debt, $m
  3,334
  4,991
  6,857
  8,932
  11,216
  13,707
  16,400
  19,291
  22,376
  25,650
  29,109
  32,750
  36,569
  40,565
  44,738
  49,089
  53,619
  58,332
  63,233
  68,325
  73,618
  79,117
  84,834
  90,776
  96,957
  103,387
  110,079
  117,049
  124,310
  131,880
Total liabilities, $m
  7,529
  9,186
  11,051
  13,127
  15,411
  17,901
  20,594
  23,485
  26,570
  29,844
  33,303
  36,944
  40,763
  44,759
  48,933
  53,283
  57,814
  62,527
  67,427
  72,520
  77,812
  83,312
  89,028
  94,971
  101,151
  107,581
  114,274
  121,243
  128,505
  136,074
Total equity, $m
  7,650
  9,334
  11,230
  13,338
  15,659
  18,190
  20,926
  23,864
  26,999
  30,326
  33,841
  37,540
  41,420
  45,481
  49,722
  54,143
  58,746
  63,535
  68,514
  73,689
  79,067
  84,655
  90,464
  96,502
  102,782
  109,316
  116,117
  123,199
  130,577
  138,269
Total liabilities and equity, $m
  15,179
  18,520
  22,281
  26,465
  31,070
  36,091
  41,520
  47,349
  53,569
  60,170
  67,144
  74,484
  82,183
  90,240
  98,655
  107,426
  116,560
  126,062
  135,941
  146,209
  156,879
  167,967
  179,492
  191,473
  203,933
  216,897
  230,391
  244,442
  259,082
  274,343
Debt-to-equity ratio
  0.440
  0.530
  0.610
  0.670
  0.720
  0.750
  0.780
  0.810
  0.830
  0.850
  0.860
  0.870
  0.880
  0.890
  0.900
  0.910
  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
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
  2,169
  2,892
  3,707
  4,615
  5,615
  6,706
  7,887
  9,154
  10,507
  11,944
  13,914
  15,512
  17,188
  18,942
  20,774
  22,684
  24,674
  26,744
  28,896
  31,134
  33,460
  35,877
  38,391
  41,004
  43,723
  46,552
  49,498
  52,566
  55,764
  59,098
Depreciation, amort., depletion, $m
  849
  899
  956
  1,018
  1,088
  1,163
  1,245
  1,332
  1,426
  1,525
  1,009
  1,119
  1,235
  1,356
  1,482
  1,614
  1,752
  1,894
  2,043
  2,197
  2,357
  2,524
  2,697
  2,877
  3,065
  3,259
  3,462
  3,673
  3,893
  4,123
Funds from operations, $m
  3,018
  3,791
  4,663
  5,634
  6,703
  7,869
  9,131
  10,487
  11,933
  13,468
  14,923
  16,631
  18,423
  20,298
  22,256
  24,299
  26,425
  28,638
  30,939
  33,331
  35,817
  38,401
  41,088
  43,882
  46,787
  49,812
  52,960
  56,239
  59,657
  63,221
Change in working capital, $m
  -503
  -573
  -646
  -718
  -790
  -862
  -932
  -1,001
  -1,068
  -1,133
  -1,197
  -1,260
  -1,322
  -1,383
  -1,444
  -1,506
  -1,568
  -1,631
  -1,696
  -1,762
  -1,831
  -1,903
  -1,978
  -2,057
  -2,139
  -2,225
  -2,316
  -2,412
  -2,513
  -2,619
Cash from operations, $m
  3,521
  4,365
  5,309
  6,352
  7,493
  8,731
  10,063
  11,487
  13,001
  14,601
  16,120
  17,891
  19,744
  21,681
  23,701
  25,804
  27,993
  30,269
  32,635
  35,094
  37,649
  40,305
  43,066
  45,938
  48,926
  52,037
  55,276
  58,651
  62,170
  65,840
Maintenance CAPEX, $m
  -184
  -228
  -278
  -335
  -398
  -467
  -542
  -624
  -712
  -805
  -904
  -1,009
  -1,119
  -1,235
  -1,356
  -1,482
  -1,614
  -1,752
  -1,894
  -2,043
  -2,197
  -2,357
  -2,524
  -2,697
  -2,877
  -3,065
  -3,259
  -3,462
  -3,673
  -3,893
New CAPEX, $m
  -929
  -1,059
  -1,193
  -1,327
  -1,460
  -1,592
  -1,722
  -1,848
  -1,972
  -2,093
  -2,211
  -2,327
  -2,441
  -2,555
  -2,668
  -2,781
  -2,896
  -3,013
  -3,132
  -3,256
  -3,383
  -3,516
  -3,654
  -3,799
  -3,951
  -4,110
  -4,278
  -4,455
  -4,642
  -4,839
Cash from investing activities, $m
  -1,113
  -1,287
  -1,471
  -1,662
  -1,858
  -2,059
  -2,264
  -2,472
  -2,684
  -2,898
  -3,115
  -3,336
  -3,560
  -3,790
  -4,024
  -4,263
  -4,510
  -4,765
  -5,026
  -5,299
  -5,580
  -5,873
  -6,178
  -6,496
  -6,828
  -7,175
  -7,537
  -7,917
  -8,315
  -8,732
Free cash flow, $m
  2,408
  3,077
  3,838
  4,690
  5,636
  6,672
  7,799
  9,015
  10,317
  11,704
  13,005
  14,555
  16,184
  17,891
  19,677
  21,540
  23,483
  25,505
  27,608
  29,795
  32,068
  34,432
  36,888
  39,442
  42,098
  44,862
  47,738
  50,734
  53,855
  57,108
Issuance/(repayment) of debt, $m
  1,453
  1,657
  1,866
  2,075
  2,284
  2,490
  2,693
  2,891
  3,085
  3,274
  3,459
  3,640
  3,819
  3,996
  4,173
  4,351
  4,530
  4,713
  4,900
  5,093
  5,292
  5,500
  5,716
  5,943
  6,180
  6,430
  6,693
  6,970
  7,261
  7,569
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  
  1,453
  1,657
  1,866
  2,075
  2,284
  2,490
  2,693
  2,891
  3,085
  3,274
  3,459
  3,640
  3,819
  3,996
  4,173
  4,351
  4,530
  4,713
  4,900
  5,093
  5,292
  5,500
  5,716
  5,943
  6,180
  6,430
  6,693
  6,970
  7,261
  7,569
Total cash flow (excl. dividends), $m
  3,861
  4,734
  5,703
  6,766
  7,920
  9,163
  10,492
  11,906
  13,402
  14,978
  16,464
  18,195
  20,003
  21,888
  23,850
  25,891
  28,013
  30,218
  32,508
  34,888
  37,361
  39,931
  42,604
  45,385
  48,278
  51,292
  54,431
  57,704
  61,116
  64,677
Retained Cash Flow (-), $m
  -1,483
  -1,684
  -1,896
  -2,109
  -2,321
  -2,531
  -2,736
  -2,938
  -3,135
  -3,327
  -3,515
  -3,699
  -3,881
  -4,061
  -4,241
  -4,421
  -4,603
  -4,789
  -4,979
  -5,175
  -5,378
  -5,588
  -5,808
  -6,039
  -6,280
  -6,534
  -6,801
  -7,082
  -7,379
  -7,691
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
  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
  4,670
  3,051
  3,808
  4,657
  5,599
  6,632
  7,756
  8,968
  10,267
  11,651
  12,949
  14,496
  16,122
  17,827
  19,610
  21,470
  23,410
  25,429
  27,529
  29,713
  31,983
  34,343
  36,796
  39,346
  41,998
  44,758
  47,630
  50,622
  53,738
  56,986
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
  4,478
  2,793
  3,314
  3,835
  4,340
  4,813
  5,240
  5,605
  5,898
  6,108
  6,149
  6,186
  6,130
  5,985
  5,757
  5,456
  5,094
  4,683
  4,239
  3,776
  3,308
  2,850
  2,412
  2,004
  1,634
  1,306
  1,022
  783
  587
  429
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 71.3
Price to Sales 16.5
Price to Book 14.3
Price to Tangible Book
Price to Cash Flow 41.5
Price to Free Cash Flow 44.2
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 $7301.505 million for the last fiscal year's total revenue generated by Adobe Systems. The default revenue input number comes from 0001 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 23.9% 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 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 53.2%.

Life of production assets of 21.1 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 -28.8%. 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 - $8459.869 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 492.47 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 $120.7 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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