Adobe’s opportunities for margin expansion

Adobe’s opportunities for margin expansion

For this series I asked the team at Polen Capital to describe each of the companies currently in the portfolio. Today, we look at global creative software distributor Adobe.

In March Montgomery Investment Management introduced the Polen Capital Global Growth Fund to Australian investors. We believe Polen Capital offers focused and consistent characteristics rarely seen in other global funds available in Australia and we are delighted to have been selected to distribute their Polen Capital Global Growth Fund and why I am delighted to have personally invested in the fund myself.

In this series of articles, which have included Autodesk, AdidasAbbott LaboratoriesAccenture and Tencent, the team at Polen Capital describe each of the companies currently in the portfolio.

Based in San Jose California, Adobe (NASDAQ:ADBE) develops software for creative professionals and hobbyists through its Digital Media segment. The Digital Media business generates about 70 per cent of Adobe’s revenues. Adobe offers Software as a Service (SaaS) based digital marketing solutions for enterprises, which generates the other almost 30 per cent of revenues.

The Digital Media segment offers creative cloud services, which allow members to download and install the latest versions of products, such as Adobe Photoshop, Adobe Illustrator, and Adobe InDesign, as well as utilise other tools, such as Adobe Acrobat.

In 2011 Adobe began undergoing a business model transition from perpetual license sales to one of a subscription-based sales. Its leadership has transformed the IT sector with cloud-based subscriptions becoming the preferred revenue model for software companies transitioning to the cloud.

Adobe’s media products are truly “industry standard” with longstanding market dominance and the business is a monopoly.

Adobe enjoys a revenue growth rate of greater than 20 per cent (except COVID), with more than 90 per cent of the revenue recurring. In fiscal year 2020, Adobe achieved record annual revenue of $12.87 billion, which represents 15 per cent year-over-year growth with a massive $5.73 billion in cash flows from operations.

In the latest quarterly results call, Adobe reported record quarterly revenue of $3.91 billion in its first quarter of fiscal year 2021, which represents 26 per cent year-over-year growth. Digital Media segment revenue was $2.86 billion, which represents 32 percent year-over-year growth, tracking favourable to meet the company objective of surpassing $15 billion in revenue for FY21.

The team at Polen Capital believe its Total Addressable Market is underpenetrated (currently quoted to be $147 billion), there are multiple opportunities for growth and the company enjoys abundant levels of free cash flow generation with growth of 25 – 30 per cent over the next 3-5 years.

Adobe is in a good position – its digital media products help sell its digital marketing products, because they work together seamlessly. Keep in mind the secular shift from traditional to digital marketing, which of course is driving growth in digital media.

Adobe also made two large acquisitions in 2019: Marketo – a B2B marketing services provider (US$4.75 billion) and Magento – an open source e-commerce platform. Both fill gaps providing Adobe with the full suite offering.

If you would like to learn more about the Polen Capital Global Growth Fund, visit the fund’s web page:

The Polen Capital Global Growth Fund owns shares in Adobe. This article was prepared 17 June 2021 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Adobe you should seek financial advice.


Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. I cede to your greater knowledge, Roger & Co, and all I can tell you is my experiences with this company.

    And, it’s been awful. Their customer service is so bad they are driving many to look for alternatives to all their products. I had problems with their video and photographic apps some years ago, and when I contacted them their answer was”we’ll give you a month free”. When I mentioned that that wasn’t what I was after, and just wanted it fixed, they offered me two months. I insisted and they offered three. Not only were they not fixing the problem, they were giving away revenue unnecessarily. They proved, at least at the customer service level, to be completely idiotic.

    I’ve long since cancelled Adobe subscription, and if anyone reading this does the same, I challenge you to successfully remove all the software. It’s a bloody nightmare.

    You’ve obviously seen things in that company that are not obvious to the public, and I know I’m not alone with this view. I wouldn’t mind making some of that wasted money back, though.

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