Adobe Systems Inc., seeking to build on an unparalleled five-year run of success for its stock, is targeting a potential area of growth that will pit the software company against its biggest competitors.
The company has dominated in the field of digital media, the graphics and web-design software that generates about two-thirds of Adobe’s $4.8 billion in annual sales. Now it’s expanding its focus on marketing services -- where the company will compete directly with Salesforce.com Inc., Oracle Corp., Alphabet Inc. and International Business Machines Corp.
While the rivals may be bigger, Chief Executive Officer Shantanu Narayen is bolstering spending and looking for partnerships to drive the effort after showing Wall Street that Adobe could transform itself into a cloud company over the past several years. He’ll give investors the latest update on Thursday when the company announces quarterly results.
To gird for the sales fight, Adobe signed a deal in September with Microsoft Corp. making Adobe’s business marketing products the favored choice on Microsoft’s Azure cloud-computing service. “The marketing business is a very, very large opportunity,” said Mark Garret, Adobe’s chief financial officer. “Having a partner like Microsoft with the reach that they’ve got helps tremendously.”
Adobe was among the first software vendors to switch its sales approach from one-time licenses to subscriptions, which let customers use its products online through the cloud without having to install the software on their computers. The strategic change, credited to Narayen, gave Adobe the flexibility to update and improve its software quickly and is cited as a key reason the stock has increased 366 percent since a low of $22.69 in August 2011. The share rise is the third-biggest increase during the period in the 67-member S&P 500 Information Technology Sector Index, trailing only chipmakers Broadcom Ltd. and Nvidia Corp.
Narayen’s “vision of increasing creativity, technology, and the proliferation of screens meant more people were consuming more content in more places than ever before,” said Dan Rosensweig, CEO of the online educational company Chegg Inc. and an Adobe board member for eight years. “It meant getting rid of the old business model.”
Earnings Projections
Investors -- accustomed to the company topping expectations -- will be watching closely when Adobe announces fiscal fourth-quarter results. Analysts, on average, predict adjusted earnings per share to shoot up almost 40 percent from the year-ago period while sales should climb 22 percent.
The report will be the first update since early last month when the San Jose, California-based company issued a forecast for the new fiscal year that missed analyst’s estimates. Adobe projected sales of about $7 billion and adjusted earnings of about $3.75 a share, while analysts predicted $7.1 billion of revenue and adjusted earnings of $3.86.
The stock hit a record $110.81 at the close Oct. 24, and Wednesday closed at $105.81 in New York. Analysts are optimistic that Adobe will continue its success even against more formidable rivals, and have set an average target price of $121.04, according to data compiled by Bloomberg.
“I think Adobe’s products will remain highly competitive in the marketplace due to the company’s high level of innovation,” said Josh Olson, an analyst at Edward Jones.
Challenging Competition
Adobe sees marketing services as the next battleground while it strives to meet its forecast of 20 percent revenue growth through fiscal 2018. While its partnership with Microsoft may expand its potential reach, the company faces strong competition for the basic component products that make up its Marketing Cloud. These pieces of software, called solutions, are the different services Adobe offers, such as website analytics and simplifying customers’ interactions online as they engage with brands.
Adobe is investing beyond the Microsoft partnership. The company is increasing spending on engineering and sales -- helping boost operating costs by 13 percent in the latest quarterly report, compared with a gain of 3 percent in the previous fiscal year. It also announced early last month one of its larger acquisitions with a deal for TubeMogul, a video-advertising platform, for about $500 million. The purchase should benefit the company’s marketing cloud.
While Adobe’s value comes from its broad offering of products, companies such as Alphabet are competing fiercely by offering their own, sometimes free, basic options. To survive and expand, Adobe needs to focus on innovations at the solution level as well as its packaged Marketing Cloud, said Jay Vleeschhouwer, an analyst at Griffin Securities.
“It’s not enough to merely be integrated, it must be competitive within any given point,” Vleeschhouwer said of Adobe. “So they absolutely have to put money back into the solutions.”
Salesforce also poses a direct challenge to Adobe’s Marketing Cloud with its acquisition of marketing-software startup Krux and the continued expansion of its extensive marketing cloud. Adobe, recognizing the threat from competitors big and small, is continually trying to refine its services, said Brad Rencher, Adobe’s executive vice president and general manager for digital marketing.
“We are believers that only the paranoid survive,” Rencher said. “We are looking at what we can do to disrupt ourselves. If and when our business is disrupted, we want to be the one doing it. We want to make sure we are at the forefront of innovation.”
