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Tailwinds Kept Propelling Adobe Forward in Fiscal Q3

By Luis Sanchez CFA – Sep 30, 2020 at 9:00AM

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Demand has been growing at a rapid clip for the SaaS company's offerings as more of us work from home and seek entertainment online.

Adobe (ADBE -0.44%) recently reported earnings for its fiscal third quarter, which ended Aug. 28, and its shareholders had reason to be pleased. While many companies have been hit hard by the COVID-19 pandemic, the creative software giant is benefiting from and even thriving amidst the ongoing challenges of the current situation.

Finding growth during a pandemic

Adobe is having a record-breaking year in terms of its overall revenue and earnings, and all three of its key cloud-subscription products made significant gains.

Adobe Segment Revenue Q3 2019 Q3 2020 Growth
Creative Cloud $1.66 billion $1.96 billion 19%
Document Cloud $307 million $375 million 22%
Experience Cloud $821 million $838 million 2%
Total company $2.83 billion $3.23 billion 14%

Data Source: Adobe Financial Reports.

Creative Cloud is a software subscription bundle containing more than 20 of Adobe's iconic media-editing apps, including PhotoShop, Illustrator, and Premiere. Demand for it is booming thanks to explosive growth in both the creation and consumption of digital media. As the number of creators has increased in recent years and the quality of content has also risen, more of them are choosing to subscribe to Adobe's Creative Suite in order to get the tools necessary to meet the expectations of their audiences.

CEO Shantanu Narayen described this dynamic during the September earnings call:

We believe that everyone has a story to tell, and our goal is to give all creators, from students to social media influencers, business communicators and creative professionals, the ability to create and amplify their stories. Creation and consumption across phones, tablets, and desktops is exploding. Web content, mobile application creation, imaging, video, animation, screen design, AR [augmented reality], and 3D are all surging in this new era of digital storytelling and business transformation.

The Experience Cloud houses Adobe's digital marketing and advertising software. This suite is sold to enterprises for a host of use cases, such as designing marketing campaigns, purchasing digital advertising inventory, and tracking the results from campaigns. As companies become more sophisticated marketers, many have found that using a unified system to track all aspects of a campaign and customer engagement can improve outcomes. Furthermore, the pandemic has led to a greater emphasis on digital advertising, which plays right into Experience Cloud's sweet spot.

Finally, countless businesses have been forced to transform largely into work-from-home operations in 2020, creating massive new demand for software that allows them to edit, share, and sign documents remotely. Adobe's Document Cloud, which consists of tools for editing PDFs, storing documents online, and remotely sharing them with customers and coworkers, meets those needs.

Adobe's recent successes in each of those distinct business lines are further evidence that its investments in product development and acquisitions were funds well-spent.

person editing a photo on a computer

Image Source: Getty Images.

An acceleration in digitalization trends

The fact that more and more media is being produced and consumed on the digital plane should be shocking to no one. What might be a shock is how rapidly the trends in that direction have accelerated due to the pandemic.

The recent quarterly report is undeniable evidence of that. For Adobe, the fiscal third quarter is usually its slowest of the year, because it covers June, July, and August. During the summer in the U.S. and Europe, people are often taking vacations, meaning businesses and creators have less need for productivity software. But during this very different summer, Adobe booked record revenue as the pandemic created a rich environment for its digital offerings.

Whether these trends will be sustained at their current pace in the long term or the digitalization transition will slow back down after the threat of COVID-19 recedes, no one can truly predict. However, the fact that Adobe has been able to make itself such a key player in the digital space bodes well for its prospects regardless of which direction things go.

Looking ahead

Even though the pandemic has played into the company's strengths, Adobe's revenue growth rate has declined -- especially when compared to last year. Once the pandemic has run its course, investors will want to know how the company can sustain its momentum.

ADBE Revenue (Quarterly YoY Growth) Chart

Data by YCharts.

Investors will should be pleased with the way Adobe is setting itself up to take full advantage of its current situation and position itself for the future. CFO John Murphy said on the recent earnings call that the company plans to ramp up hiring in the current quarter and fiscal 2021 to capitalize on its large addressable market. In particular, Adobe will be adding staff to its research and development division -- an investment in improving its products and differentiating them from those offered by competitors.

Adobe's strong results thus far in 2020 demonstrate the company's resilience, and it has plenty of room for long-term growth as the shift toward a digital world is here to stay. What's more, as a subscription software company, Adobe is extremely profitable. This is a good recipe for success, one that will continue to be rewarded by the stock market as long as it persists.

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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