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Why the Recession Can't Stop Adobe System's Growth

By Luis Sanchez CFA – Sep 15, 2020 at 9:59AM

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Adobe financial metrics have shown little to no signs of weakness during what has been a recessionary year.

This has been a good year for investors trying to separate the wheat from the chaff when it comes to companies worth buying stock in. Several companies with poor financial positions were caught with their pants down this year, and their stock prices are suffering as a result. But Adobe Systems (ADBE) was not one of them.

Adobe is one of the largest software companies in the world and it has positioned itself well to thrive in the new economic paradigm created by the COVID-19 pandemic. The company sells software used to create digital media and marketing campaigns. It also provides cloud document storage solutions. This product catalog helps power remote workers and digital initiatives -- it's no wonder Adobe is doing well.

Growth across all business segments

Adobe is best known for its creative suite software package which includes photo-editing software standard Photoshop, but Adobe offers a lot more than just image-editing software. The company reports revenue in three segments (as seen in the table below). Every segment has continued to see growth in 2020 despite the macroeconomic turmoil.

Adobe financial metrics Q2 2020 Q2 2019 YOY growth %
Creative Cloud revenue $1.87 billion $1.59 billion 17%
Experience Cloud revenue $0.83 billion $0.78 billion 5%
Document Cloud revenue $0.36 billion $0.29 billion 22%
Totals $3.13 billion $2.74 billion 14%

Data source: Adobe. YOY = year over year.

Creative Cloud is Adobe's flagship software suite, which includes software such as Photoshop, Premiere, and Illustrator. Creative professionals have continued to subscribe to Adobe's Creative suite because they still need the software to do their work from home. Some additional use cases have also boosted subscriber numbers. One prime example has been the shift toward learning from home. Adobe provided 30 million students with Creative Cloud at home and has provided teachers with distance learning support.

The Experience Cloud segment sells digital marketing software for orchestrating marketing campaigns and tracking the reach of advertisements. Because COVID-19 shifted work and leisure activities online, digital marketing and advertising have been booming and Adobe has been a direct beneficiary of that shift. And that's despite the fact that some companies that were negatively impacted by the pandemic -- live events companies, for example -- reduced advertising spend. There were some puts and takes, but the Experience Cloud was a net beneficiary, managing to show 5% revenue growth in the quarter.

Finally, the Document Cloud is another promising area of growth for the company and likely benefited the most from the pandemic. The Document Cloud sells PDF software as well as document digitization and storage solutions. For example, Adobe Sign allows businesses to get contracts signed digitally and securely. Q2 saw a record revenue for the company's Document Cloud, which, like Adobe Cloud, is aiding remote work.

Overall, Adobe turned in a strong quarter despite a tough economic climate. Some of these shifts may be temporary. For example, will some of the document storage business go away or will companies continue to use the cloud to store important contacts? It's tough to say how Adobe's business will adjust when things normalize.

Piggy Bank Wearing A Surgical Mask

Image source: Getty Images.

Stability of a subscription business model

A key factor in Adobe's success has been its transition to a subscription software model across the company's portfolio of products. Selling software as a subscription has kept more users consistently paying for products, boosting the company's revenue run rate as measured by its annualized recurring revenue (ARR). Adobe has put quite a bit of emphasis on its ARR metric, noting that ARR is most indicative of the health of its creative software business and a good proxy for overall growth.

A subscription business model is also attractive to have during a recession because as long as Adobe retains most of its customers, it has a stable flow of cash coming in and it doesn't have to spend as much money on marketing to bring new customers in. Subscription businesses have been widely viewed as the gold standard of a business model for their robustness and many other software companies have shifted to this model in recent years.

This all adds up to Adobe being a very strong business, even during a recession. The company has demonstrated flexibility in enabling its customers to work from home and has managed to attract many new customers at the same time. Furthermore, Adobe plays in several different parts of the software industry from media editing to digital advertising. This provides some diversification in case one market segment becomes weak.

It remains to be seen how Adobe will perform when the broader economy normalizes. Will its new work-from-home customers stay on or will they go back to what they were using before 2020? It is tough to say, but regardless, Adobe will be fine and will likely find additional avenues for future growth.

Luis Sanchez CFA owns shares of Adobe Systems. The Motley Fool owns shares of and recommends Adobe Systems. The Motley Fool has a disclosure policy.

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