"Adobe is at the center of 3 massive market opportunities across creativity, digital documents, and customer experience management, which will fuel growth in the near and long term. Businesses must transform to deliver a personalized digital relationship with every customer. The paper-to-digital revolution continues. Creativity and design have never been more relevant." - Shantanu Narayen Adobe Inc. – Chairman, President & CEO (Q1 2020 Adobe Inc Earnings Call)
Adobe is a 38 year old technology company founded by John Warnock and Charles Geschke best known for photo editing software Photoshop, illustrating software Illustrator, and the portable document format (PDF). Today, led by CEO Shantanu Narayen, Adobe's products are essential to the design and creative world. With Creative Cloud, Adobe offers software for photo editing, graphic design, video, illustration, user interface & user experience design, 3D & AR, and social media. Document Cloud contains products for converting paperwork to PDF and for digital signatures. Adobe's largest opportunity comes from Experience Cloud, which includes tools for customer experience insights, engagement, and content.
What makes Adobe's business so strong? The company has large scale advantages in the digital world. PDF, for example, is an international standard for digital file format. In the creative field, as a student, Adobe is the dominant software ecosystem taught in schools. Then, when these students enter their professions, they continue to use Adobe products, so everyone ends up using Adobe across the world. When it comes time to collaborate with other creatives, one will need Adobe to successfully work with others. Having compatible file formats and libraries is essential in the collaboration process. If a designer, for example, attempts to use alternative or competing software, that software will create roadblocks, and working with others becomes very difficult and time consuming. Together, this creates a strong platform that is widely supported worldwide.
Adobe believes its largest addressable market is digital experience. Over the last decade, and now accelerated by the pandemic, every company is going through a digital transformation. Companies need to engage with customers digitally, which Experience Cloud enables through products geared towards analytics, customer data, business intelligence, content management, digital commerce, and marketing campaigns. To support this large opportunity, Adobe acquired numerous companies over the last decade to bolster its position in the space to compete with first-movers like Salesforce.com. The largest acquisition was Marketo, a marketing automation software company, in 2018 for $4.8B.
These competitive advantages make Adobe a GPM Grade Company, which we define as a high-quality, US-based business with sustainable growth. Adobe has a track record of delivering rewarding long-term growth in sales, earnings, cash flow, and ultimately stock prices. We believe the 20% pullback of its share price at the beginning of 2021 presented a long-term buying opportunity of an exceptional business. In Adobe's latest quarter (Q2 FY21), the company grew its top line by over 20% and posted operating margin of 46%. Total Digital Media Annualized Recurring Revenue exited Q2 at $11.21B. Experience Cloud subscription revenue grew 25% to $817M. FCF grew 74% y/y to $1.9B in the quarter.