If you own a computer, chances are good you’ve heard of or used Adobe Systems Incorporated (NASDAQ:ADBE), which is most well-known for popular consumer programs such as Acrobat Reader, Flash Player and Photoshop. However, the company actually earns most of its money as an enterprise software giant that helps customers create and deliver content across any device.
Adobe has expanded its capabilities and enhanced growth prospects in recent years through acquisitions, with the most significant coming from marketing software developer Neolane in 2013 for $600 million.
In 2015, ADBE also bought Fotolia, which had a library of stock images and videos available for online advertising, for $800 million. And just this past month, management agreed to acquire TubeMogul, a dealer in video advertising, for $540 million of debt and cash.
Adobe by the Numbers
Adobe’s growth has been defined by its decision to switch to a subscription-based licensing model in 2012. This caused revenue to fall from $4.4 billion in fiscal 2012 to $4.05 billion in the November 2013 fiscal year. However, revenue growth resumed as the company got past the year-over-year comparisons of lost license sales and added more subscriptions. After a relatively flat $4.1 billion in fiscal 2014, sales jumped 17% to $4.8 billion in fiscal 2015 and 22% to $5.85 billion in fiscal 2016.
The Digital Media and Digital Marketing segments were especially strong performers, driven by increased adaptation of the Creative Cloud for Digital Media and Adobe Marketing for the latter, as well as gains in Adobe Campaign, Adobe Analytics and Adobe Target.
There is also a lot of positive operating leverage in the company’s financial model as it gains scale, and this drove an outstanding 45% EPS growth from $2.08 2015 to $3.01 in fiscal 2016. And even better, management was able to hit these numbers while still investing in the future, with research and development (R&D) and sales in marketing expenditures up double digits for the year.
Bottom Line on ADBE Stock
I am confident that the strong growth trends will continue for the longer term, which is one of the reasons I currently recommend ADBE stock in my GameChangers service.
Subscription revenue accounted for 78.5% of the total in fiscal 2016, up from 69.4% in 2015, and declining one-time license sales will be less of a drag on the company going forward. Digital Media ARR (annualized recurring revenue) was up 39.2% to $4.01 billion in fiscal 2016, giving the company a solid base for future growth.
As a powerhouse company for imaging in the digital and e-commerce age, expansion for ADBE should continue to be strong for at least another two years.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.