Adobe has strong presence in the creative and digital market
Adobe (ADBE), with a market cap of $35 billion, is a maker and provider of software solutions for network publishing, including web, print, video, wireless, and broadband applications. The company boasts of diversified presence in creative and digital software. As mentioned in the earlier part of the series, Adobe primarily generates its revenues from its Digital Media, Digital Marketing, and Print & Publishing operating segments.
Operating segments’ performance
As the above chart shows, the company’s revenue and margins are declining. Adobe has seen a huge decline in its margins from the higher end of 20% to less than 10% currently. The reason behind the fall in margins is the company’s increased investment in R&D (research and development) and SG&A (selling, general, and administrative expenses) due to its transition into the cloud.
Increase in recurring revenues
In 4Q14, Adobe reported 66% of revenues as recurring, compared to 63% in 3Q14. The percentage of recurring revenues is on a constant rise, which shows the stability and approaching success of the business model transition. But the improvement in margins remains a concern.
Cash, cash flows, and debt position
The company holds cash reserves worth $1.17 billion. It has a total debt of $1.514 billion. The company doesn’t pay dividends. In 4Q14, Adobe bought approximately 1.8 million shares, returning ~$127 million cash to its shareholders.
Cash flows and investment in research and development
As of November 28, 2014, Adobe generated a free cash flow (or FCF) of $914 million. Adobe’s cash flow from operations (or CFO) grew to $400 million. Adobe spends approximately 20% of its revenues on R&D. Its peer Salesforce.com (CRM) spends approximately 16% of its revenues on R&D. SAP AG (SAP) and Microsoft (MSFT) spend 13% to 14% and ~13% of their revenues on R&D, respectively. IBM (IBM) only spends 5% to 7% of its revenues on R&D.